SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 29, 1996
Commission File Number 0-20040
THE KRYSTAL COMPANY
(Exact name of registrant as specified in its charter)
Tennessee 62-0264140
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
One Union Square, Chattanooga, Tennessee 37402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 757-1550
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, without par value NASDAQ National Market System
Securities registered pursuant to Section 12 (b) of the Act:
None
----
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 to Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ] .
As of March 20, 1997, 7,478,568 shares of the registrant's Common Stock
were issued and outstanding, and the aggregate market value of such shares
held by non-affiliates of the Registrant on such date was $15,358,245 (based
on the closing price on that date of $5.25 per share).
DOCUMENTS INCORPORATED BY REFERENCE:
Specific portions of the 1997 Proxy Statement of the registrant (to be
filed with the Securities and Exchange Commission within 120 days after the
fiscal year ended December 29, 1996) are incorporated by reference in Part III
hereof. Only specific portions so incorporated are to be deemed filed as part
of this Form 10-K. Other documents incorporated by reference in this report
are listed in the Exhibit Index.
PART I
Item 1. Business
(A) General Development of Business
On December 15, 1995, the Company filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code for the purpose of completely and finally
resolving various claims filed against the Company by current and former
employees alleging violations of the Fair Labor Standards Act. The Company
has been operating as a debtor-in-possession since that date. On January 17,
1997, the Company announced the settlement, subject to court approval, of the
wage claim litigation for approximately $13 million. There have been no other
significant changes to the Company's corporate structure during fiscal 1996.
(B) Financial Information about Industry Segments
Incorporated by reference from Part II, Item 7 Results of Operations.
(C) Narrative Description of Business
The Company develops, operates and franchises full-size KRYSTAL and smaller
"double drive-thru" KRYSTAL KWIK quick-service hamburger restaurants. In
1995, the Company began to develop and franchise smaller KRYSTAL restaurants
located in non-traditional locations such as convenience stores. The Company
has been in the fast food restaurant business since 1932, and believes it is
among the first fast food restaurant chains in the country. At December 29,
1996, the Company owned 238 KRYSTAL restaurants and 11 KRYSTAL KWIK restaurants
in eight states in the southeastern United States. The Company began to
franchise KRYSTAL KWIK restaurants in 1990 and KRYSTAL restaurants in 1991.
Franchisees operated 40 KRYSTAL restaurants, 34 KRYSTAL KWIK restaurants and
15 KRYSTAL restaurants in non-traditional locations as of December 29, 1996.
The Company also owns one and leases 28 restaurant sites in the Baltimore,
Washington, D.C. and St. Louis metropolitan areas which it in turn
subleases or leases to Davco Restaurants, Inc. ("Davco"), a Wendy's
International, Inc. franchisee and former affiliate of the Company.
Through subsidiary companies, the Company began operating a fixed base hangar
and airplane fueling operation in 1977 and managing the leasing of airplanes
in 1989.
Products --
KRYSTAL restaurants offer a substantially uniform menu consisting of the well
known KRYSTAL hamburger, a regular size hamburger, french fries, "Chili Pups",
"Corn Pups", chili, a chicken sandwich, chocolate shakes, soft drinks and hot
beverages, pies and doughnuts and breakfast items during certain morning hours.
KRYSTAL KWIK restaurants feature a more limited menu, including KRYSTAL
hamburgers, french fries, Chili Pups and soft drinks. From time to time the
Company test markets new products.
The Company and its franchisees purchase their food, beverages and supplies
from Company approved independent suppliers. All products must meet standards
and specifications set by the Company. Management constantly monitors the
quality of the food, beverages and supplies provided to the restaurants. The
restaurants prepare, assemble and package these products using specially
designed production techniques and equipment to obtain uniform standards of
quality.
Sources of raw materials --
The Company and its franchisees purchase food, supplies, restaurant equipment,
signs and modular KRYSTAL and KRYSTAL KWIK restaurants from Company approved
suppliers. Alternate suppliers are available or can be made available.
Trademarks and patents --
The Company has registered "Krystal", "Krystal Kwik" and variations of each,
as well as certain product names, with the United States Patent and Trademark
office. The Company is not aware of any infringing uses that could materially
affect its business or any prior claim to these service marks that would
prevent the Company from using or licensing the use thereof for restaurants in
any area of the United States. The Company's policy is to pursue registration
of its marks whenever possible and oppose vigorously any infringement of its
marks.
Seasonal operations --
The Company does not consider its operations to be seasonal to any material
degree. Revenues during its first fiscal quarter, comprising the months of
January, February and March, will, however, generally be lower than its other
quarters due to consumer shopping habits and the climate in the location of a
number of its restaurants.
Working capital practice --
Incorporated by reference from Part II, Item 7 Liquidity and Capital
Resources.
Customers --
No material part of the business of the Company is dependent upon a single
customer or a small number of customers.
Backlog --
Company operated restaurants have no backlog.
Government contracts --
No material portion of the business of the Company is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
U.S. Government.
Competition --
The fast food restaurant industry is a highly competitive business dominated
by major chains with substantially greater financial resources than the
Company. The Company competes primarily on the basis of food quality, price
and speed of service. A significant change in pricing or other marketing
strategies by one or more of these competitors could have an adverse impact
on the Company's sales, earnings and growth. In addition, with respect to
the sale of franchises, the Company competes with many franchisors of
restaurants and other business concepts.
Research and development --
The Company operates a research and development laboratory in Chattanooga,
Tennessee. While research and development activities are important to the
business of the Company, expenditures for these operations are not material.
Environmental matters --
While the Company is not aware of any federal, state or local environmental
regulations which will materially affect its operations or competitive
position, or result in material capital expenditures, it cannot predict the
effect on its operations from possible future legislation or regulation.
During 1996, other than normal equipment expenditures, there were no
material capital expenditures for environmental control facilities and no
such material expenditures are anticipated.
Number of employees --
During 1996, the Company's average number of employees was approximately 8,800.
(D) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company owns one and leases 28 restaurant sites in the Baltimore,
Washington, D.C. and St. Louis metropolitan areas which it in turn subleases
to Davco Restaurants, Inc. Revenue from this operation is less than 10% of
the Company's total revenue. All other operations of the Company are in the
southeastern United States and the Company has no export sales.
Item 2. Properties
Incorporated by reference from Notes 4 and 10 of the Company's Consolidated
Financial Statements.
Item 3. Legal Proceedings
On December 15, 1995, the Company filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United States Bankruptcy Court
for the Eastern District of Tennessee, for the purpose of completely and
finally resolving the various claims filed against the Company by current and
former employees alleging violations of the Fair Labor Standards Act of 1938
(FLSA). The Company is a debtor-in-possession for purposes of the bankruptcy
case. An agreement was reached in January 1997 to settle the various wage
claims for approximately $13,000,000, subject to Court approval. The Company
expects that its plan of reorganization incorporating the terms of the FLSA
settlement will be approved by the bankruptcy court early in the second
quarter of 1997 and that shortly thereafter it will emerge from Chapter 11
proceedings.
The Company is party to other various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material
adverse effect on the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
(a) Price Range of Common Stock. The Company's Common Stock trades over-
the-counter on the NASDAQ National Market System under the symbol KRYSQ.
The following table sets forth the high and low closing sales prices per share
of the Company's common stock as reported by the NASDAQ National Market System
for the periods indicated:
High Low
------ -----
1995
First Quarter $10.75 $7.75
Second Quarter 8.25 5.625
Third Quarter 8.25 5.625
Fourth Quarter 7.50 3.75
High Low
------ -----
1996
First Quarter $ 5.375 $4.00
Second Quarter 5.25 4.125
Third Quarter 5.75 4.75
Fourth Quarter 6.375 5.25
(b) Holders. As of March 20, 1997, the Company's common stock was held by
approximately 580 holders of record. The last reported sale price of the
Company's common stock as reported on the NASDAQ National Market System on
March 20, 1997 was $5.25 per share.
Item 6. Selected Financial Data
The selected financial data presented on the following page for each of the
years in the five year period ended December 29, 1996 was derived from the
audited consolidated financial statements of the Company. The selected
financial data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and Notes thereto included elsewhere in
this report.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
Jan. 3, Jan. 2, Jan. 1, Dec. 31, Dec. 29,
1993 1994 1995 1995 1996
------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations data:
Revenues:
Restaurant sales $226,302 $228,468 $239,104 $239,376 $236,470
Franchise fees 487 533 796 618 349
Royalties 774 1,157 1,880 2,420 2,778
Other revenue 4,562 6,575 6,542 5,614 4,671
------------------------------------------------
232,125 236,733 248,322 248,028 244,268
------------------------------------------------
Cost and expenses:
Cost of restaurant sales 178,543 182,530 192,256 197,031 195,733
Depreciation and
amortization expense 8,823 9,881 11,213 12,311 11,378
General and administrative
expenses 25,166 24,781 25,775 25,770 25,422
Other expenses, net 4,111 5,651 4,946 4,417 3,809
Provision for loss on
restaurant closings and
other property write-downs - - - 3,911 -
Special charge - - 2,000 10,000 4,000
------------------------------------------------
216,643 222,843 236,190 253,440 240,342
------------------------------------------------
Operating income (loss) 15,482 13,890 12,132 ( 5,412) 3,926
Reorganization expense - - - ( 184) ( 3,846)
Interest expense:
Contractual rate interest ( 5,177) ( 3,494) ( 3,801) ( 4,134) ( 4,005)
Interest related to certain
pre-petition liabilities,
net - - - - ( 791)
Interest income 1,092 842 820 718 814
------------------------------------------------
Income (loss) before provision
for (benefit from) income
taxes and cumulative effect
of changes in accounting
principles 11,397 11,238 9,151 ( 9,012) ( 3,902)
Provision for (benefit from)
income taxes 4,391 3,772 2,962 ( 3,688) ( 1,480)
------------------------------------------------
Income (loss) before cumulative
effect of accounting changes 7,006 7,466 6,189 ( 5,324) ( 2,422)
Cumulative effect of
accounting changes - 123 - - -
------------------------------------------------
Net income (loss) $ 7,006 $ 7,589 $ 6,189 $( 5,324) $( 2,422)
================================================
Per Common Share Data:
Net income (loss) $ 1.07 $ 1.01 $ 0.82 $( 0.71) $( 0.32)
Weighted average number of
shares outstanding
(in thousands) 6,554 7,499 7,512 7,517 7,500
Balance Sheet Data:
Working capital (deficit) $ 2,222 $ (7,323) $ (1,353) $ 13,442 $ 19,592
Property owned and leased,net 66,974 85,761 100,888 100,409 92,826
Total assets 98,657 105,972 130,786 132,695 143,780
Long term debt, net of
current portion 28,136 25,512 40,053 3,621 3,090
Long term debt subject
to compromise - - - 36,000 36,000
Capital lease obligations,
net of current portion 4,696 4,093 3,438 2,754 2,278
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General --
The Company's revenues are derived primarily from sales by Company-owned
restaurants. Total Company-owned restaurants decreased from 256 at the end
of 1995 to 249 at the end of 1996. Royalties and franchise fees from
franchisees have been a small portion of the Company's revenues to date, but
those sources of revenues are anticipated to increase significantly in future
years as the Company continues to develop its franchised restaurants. The
total number of franchised restaurants grew by 11% in 1996 to 89 from 80.
The Company expects its franchisees to develop 18 new restaurants during
fiscal 1997. The Company operates a fixed based airport hangar operation in
Chattanooga, Tennessee, although revenues from this operation in each of the
last three years were less than 3.0% of the Company's total revenues.
The Company is deferring capital outlays for new restaurant development and
is concentrating on building same restaurant sales to the levels experienced
in the early 1990's.
The Company's fiscal year ends on the Sunday nearest December 31.
Consequently, the Company will occasionally have a 53 week fiscal year.
The years ended January 1, 1995, December 31, 1995 and December 29,1996
were 52 week fiscal years.
Cost of restaurant sales relates to food and paper costs, labor and all other
restaurant costs for Company-owned restaurants. Other expenses, such as
depreciation and amortization and general and administrative expenses, relate
primarily to Company-owned restaurants and to the Company's franchise sales
and support functions.
Bankruptcy Filing --
In July 1994, the Company was named a defendant in a suit filed in the United
States District Court for the Middle District of Tennessee, in which 41
plaintiffs, who were current and former employees of the Company, alleged
violations of the Fair Labor Standards Act of 1938 (FLSA) and sought back
wages, liquidated damages, costs and attorneys' fees. The suit alleged that
the plaintiffs were uncompensated for time which they worked on the Company's
behalf. In February 1995, ten additional plaintiffs, also current and former
employees of the Company, filed a separate suit in the same Court containing
essentially the same allegations. As a result, the Company established a
reserve of $2,000,000 to cover the claims of the plaintiffs in the two suits,
the costs associated therewith, and the claims of any other employees and the
costs associated therewith. Since the February 1995 action was originally
filed, approximately 300 additional plaintiffs joined that suit.
On April 18, 1995, the Company settled the July 1994 case by agreeing to pay
$840,000 to the plaintiffs and their counsel. By order dated August 28, 1995,
the Court in the February 1995 case provisionally granted the plaintiffs
motion for court-supervised notice of the pendency of that action to
prospective class members from among current and former employees of the
Company for the past three years.
In the third quarter of 1995, a total of 17 additional current and former
employees of the Company filed three new suits in the United States District
Courts for the Northern District of Georgia, the Northern District of Alabama
and the Middle District of Florida, containing essentially the same
allegations as set forth in the July 1994 and February 1995 suits.
In light of the three new suits filed against the Company during the third
quarter of 1995 and the order entered in the February 1995 suit provisionally
granting the plaintiffs motion for court-supervised notice of the pendency of
that action, the Company established an additional $10,000,000 reserve to
cover an estimate of the exposure resulting from (i) the claims of the
plaintiffs in the four pending suits, (ii) the potential for additional
claims of other current and former employees, (iii) related claims, and
(iv) the costs associated therewith.
On December 15, 1995, the Company filed a voluntary petition under Chapter 11
of the United States Bankruptcy Code with the United States Bankruptcy Court
for the Eastern District of Tennessee for the purpose of completely and
finally resolving the various claims filed against the Company by current and
former employees alleging violations of the FLSA. The Company is a debtor-in-
possession for purposes of the bankruptcy case. Approximately 8,000 current
or former employees filed claims by the June 6, 1996 bar date in unspecified
amounts alleging that they worked time for which they were not compensated.
An agreement, subject to court approval, was reached in January 1997 to settle
the various wage claims for approximately $13,000,000. In 1996, the Company
added $4,000,000 to the reserve for settlement of the wage claims, associated
payroll taxes, and related expenses, the balance of which was $13,875,000 at
December 29, 1996.
The Company has filed a plan of reorganization with the bankruptcy court
which incorporates the terms of the wage claim settlement and provides for the
payment in full of all valid pre-petition obligations of the Company. The
Company expects this plan will be approved by creditors early in the second
quarter of 1997 and that shortly thereafter the Company will emerge from
Chapter 11 proceedings.
Results of Operations --
The following table sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items from the Company's statements of
operations. The table also sets forth certain restaurant operating data for
the periods indicated.
Fiscal Year Ended
--------------------------------------
January 1, December 31, December 29,
1995 1995 1996
--------------------------------------
Revenues:
Restaurant sales 96.3% 96.5% 96.8%
Franchise fees 0.3 0.2 0.2
Royalties 0.8 1.0 1.1
Other revenue 2.6 2.3 1.9
--------------------------------------
100.0 100.0 100.0
--------------------------------------
Costs and expenses:
Cost of restaurant sales 77.4 79.4 80.1
Depreciation and amortization 4.5 5.0 4.7
General and administrative
expenses 10.4 10.4 10.4
Other expenses, net 2.0 1.8 1.6
Provision for loss on restaurant
closings and other property
write-downs - 1.6 -
Special charge 0.8 4.0 1.6
--------------------------------------
95.1 102.2 98.4
--------------------------------------
Operating income (loss) 4.9 (2.2) 1.6
Reorganization expense - (0.1) (1.6)
Interest expense:
Contractual rate interest (1.5) (1.6) (1.6)
Interest related to certain
pre-petition liabilities, net - - (0.3)
Interest income 0.3 0.3 0.3
--------------------------------------
Income (loss) before provision
for income taxes 3.7 (3.6) (1.6)
Provision for (benefit from)
income taxes 1.2 (1.5) (0.6)
--------------------------------------
Net income (loss) 2.5% (2.1)% (1.0)%
======================================
Fiscal Year Ended
--------------------------------------
January 1, December 31, December 29,
1995 1995 1996
--------------------------------------
(Dollars in thousands)
Restaurant Operating Data:
Number of restaurants at
end of period:
Company-owned 252 256 249
Franchised 65 80 89
--------------------------------------
Total 317 336 338
======================================
Average sales per Company-owned
restaurant:
Full-size $987 $956 $956
Kwik 487 534 521
Combined 960 939 937
Average sales increase (decrease)
per Company-owned restaurant vs.
prior year:
Full-size (1.5)% (3.1)% 0.0%
Kwik 0.2 9.7 (2.4)
Combined (1.2) (2.2) (0.2)
Company-owned same restaurant
sales (decrease) vs. prior year:
Full-size (1.8)% (2.9)% (0.4)%
Kwik (0.6) (5.7) (1.1)
Combined (1.7) (2.9) (0.4)
Comparison of Fiscal 1996 to Fiscal 1995 --
Total revenues decreased 1.5% to $244.3 million in 1996 compared to $248.0
million in 1995. Restaurant sales decreased $2.9 million to $236.5 million in
1996 from 1995. Fiscal 1996 and fiscal 1995 were both 52 week years. Average
sales per Company-owned restaurant decreased by 0.2% to $937,000 from $939,000
in 1995. The Company closed seven full size restaurants in 1996. Franchise
fees decreased $269,000 and royalties increased $358,000 in 1996 as the
Company's franchise system grew to 89 restaurants at the end of 1996 from 80
restaurants at the end of 1995. The Company recognizes franchise fees as
revenues upon the opening of a franchised restaurant.
Same restaurant sales declined 0.4% in 1996 versus 1995. The principal cause
of this decrease was a 3.9% decrease in average customer count per restaurant
day to 714 in 1996 from 743 in 1995. Product prices increased approximately
2.2% in 1996 over 1995. The average customer check in 1996 was $3.59 for
Company-owned KRYSTAL restaurants and $3.90 for Company-owned KRYSTAL KWIK
restaurants as compared to $3.46 and $3.80, respectively, in 1995, an increase
of approximately 3.8% and 2.6%, respectively. The Company's management
believes that the major national chains deep discounting and heavy advertising
combined with the over-expansion within the industry have limited the
Company's opportunities for increasing market share. Given the competitive
environment, the Company is deferring capital outlays for new restaurant
development and will concentrate on building same restaurant sales to the
levels experienced in the early 1990's.
Cost of restaurant sales decreased $1.3 million, approximately 0.7%, to
$195.7 million in 1996 from $197.0 million in 1995. Cost of restaurant sales
as a percentage of restaurant sales increased to 82.8% in 1996 from 82.3% in
1995. Total food and paper costs increased $1.2 million, approximately 1.5%,
and increased as a percentage of restaurant sales to 32.2% in 1996 as
compared to 31.3% in 1995. Direct labor cost decreased $1.2 million,
approximately 2.2%, and decreased as a percent of restaurant sales to 22.3%
in 1996 versus 22.5% in 1995, due to the reduction of the number of
restaurants open in 1996 and the institution of a program to reduce direct
labor staffing and increase assistant manager staffing to improve training
and operations. Assistant restaurant manager labor cost increased $694,000,
approximately 7.0%, and increased as a percentage of restaurant sales to 4.5%
in 1996 compared to 4.1% in 1995 due to the aforementioned program and
average salary increases. Restaurant manager labor cost increased $79,000,
approximately 1.1%, due to average salary increases net of seven restaurant
closings during 1996.
Depreciation and amortization expense decreased $933,000, approximately 7.6%,
to $11.4 million in 1996 as compared to $12.3 million in 1995. The
decrease in 1996 was primarily due to certain assets being fully depreciated
in late 1995 and during 1996.
General and administrative expenses decreased $348,000, approximately 1.4%, to
$25.4 million in 1996 versus $25.8 million in 1995. Advertising expense
increased $18,000 to $9.9 million in 1996 from $9.8 million in 1995.
Advertising expense as a percentage of restaurant sales was 4.2% in 1996
compared to 4.1% in 1995. Salaries increased $478,000, approximately
6.9%, to $7.7 million in 1996 from $7.2 million in 1995. The increase in
salaries was primarily the result of normal cost of living increases given to
staff employees and the addition of key management personnel during 1995.
Professional fees, other than professional fees and expenses related to the
Chapter 11 proceedings, decreased $1.1 million, approximately 53.4%, to
$933,000 in 1996 as compared to $2.0 million in 1995.
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 as discussed in Note 4
to Consolidated Financial Statements.
A special charge of $4.0 million was recorded in 1996, in addition to $10.0
million that was recorded in 1995, in connection with the compensation of
hourly employees as discussed in Note 11 to Consolidated Financial Statements.
Professional fees and expenses related to the Chapter 11 proceedings have
increased $3.7 million to $3.8 million in 1996 compared to $184,000 in 1995.
The Company has operated under Chapter 11 all of 1996 versus 16 days in 1995.
Contractual rate interest decreased $129,000 to $4.0 million in 1996 compared
to $4.1 million in 1995 due to reductions in principal in 1995 before the
Chapter 11 filing stayed further principal payments.
Interest related to certain pre-petition liabilities is intended to compensate
creditors for the loss of use of funds during the Chapter 11 period.
$1,200,000 was recorded for this expense in 1996, net of approximately
$375,000 of interest income from the investment of funds which, except for the
Chapter 11 restrictions, would have paid vendors' accounts.
Benefit from income taxes was $1.5 million in 1996 versus $3.7 million
in 1995. The Company's effective income tax rates in 1996 and 1995
were 38.0% and 40.9%, respectively, as compared to the approximate combined
statutory federal and state income tax rates of 38.0%. The increased
effective benefit rate for 1995 resulted from utilization of tax credits
which were not available for most of 1996.
Comparison of Fiscal 1995 to Fiscal 1994 --
Total revenues decreased 0.1% to $248.0 million in 1995 compared to $248.3
million in 1994. Restaurant sales increased $272,000 to $239.4 million in
1995 from 1994. Fiscal 1995 and fiscal 1994 were both fifty-two week years.
Average sales per Company-owned restaurant decreased by 2.2% to $939,000 from
$960,000 in 1994. The Company opened six new full size restaurants and
purchased a full size restaurant and a Kwik from a franchisee and closed four
full size restaurants in 1995. Franchise fees decreased $178,000 and
royalties increased $540,000 in 1995 as the Company's franchise system grew
to 80 restaurants at the end of 1995 from 65 restaurants at the end of 1994.
The Company recognizes franchise fees as revenues upon the opening of a
franchised restaurant.
Same restaurant sales declined 2.9% in 1995 versus 1994. The principal cause
of this decrease was a decrease in average customer count per restaurant day
to 743 in 1995 from 778 in 1994, a decrease of 4.5%. Product prices increased
approximately 1.0% in 1995 over 1994. The average customer check in 1995 was
$3.46 for Company-owned KRYSTAL restaurants and $3.80 for Company-owned
KRYSTAL KWIK restaurants as compared to $3.37 and $3.65, respectively, in
1994, an increase of approximately 2.7% and 4.1%, respectively. The Company's
management believes that the major national chains deep discounting and heavy
advertising combined with the over-expansion within the industry have limited
the Company's opportunities for increasing market share.
Cost of restaurant sales increased $4.8 million, approximately 2.5%, to
$197.0 million in 1995 from $192.3 million in 1994. Cost of restaurant sales
as a percentage of restaurant sales increased to 82.3% in 1995 from 80.4% in
1994. Total food and paper costs increased $539,000, approximately 0.7% and
increased as a percentage of restaurant sales to 31.3% in 1995 as compared to
31.2% in 1994. Direct labor cost increased $2.7 million, approximately 5.4%,
to 22.5% of restaurant sales in 1995 versus 21.4% in 1994, due to average
hourly rate increases and additional staffing for new restaurants. Assistant
restaurant manager labor cost decreased $683,000, approximately 6.5% and
decreased as a percentage of restaurant sales to 4.1% in 1995 compared to
4.4% in 1994. Restaurant manager labor cost increased $308,000, approximately
4.3%, due to average salary increases and additional staffing for new
restaurants.
Depreciation and amortization expense increased $1.1 million, approximately
9.8%, to $12.3 million in 1995 as compared to $11.2 million in 1994. The
increase in 1995 was primarily due to new restaurants, restaurant remodeling
and various equipment replacements.
General and administrative expenses for 1995 were approximately $25.8 million,
unchanged from 1994. Advertising expense increased to $9.8 million in 1995
from $9.7 million in 1994. Advertising expense as a percentage of restaurant
sales was 4.1% in 1995 and 1994. Salaries increased $155,000, approximately
2.2%, to $7.2 million in 1995 from $7.1 million in 1994. Employees' benefit
expenses decreased by $641,000, approximately 25.3%, to $1.9 million in 1995
as compared to $2.5 million in 1994, primarily due to a decrease in net
pension expense as reported in the Notes to Consolidated Financial Statements
included elsewhere herein and a decrease in net deferred compensation expense.
Professional fees increased by $177,000, approximately 9.6%, to $2.0 million
in 1995 as compared to $1.8 million in 1994 due to various consultations in
actuarial, architectural, legal and tax services.
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 as discussed in Note 4
to Consolidated Financial Statements. This provision primarily relates to
the Company's estimated losses to be incurred associated with decisions to
close specific restaurants.
A special charge of $10.0 million was recorded in 1995 in connection with the
compensation of hourly employees as discussed in Note 11 to Consolidated
Financial Statements.
Interest expense increased by $333,000, approximately 8.8%, to $4.1 million
from $3.8 million in 1994. The increase in interest expense from 1994 was
due to the issuance of $20.0 million of senior notes in two tranches of
$10.0 million each on May 2, 1994 and August 2, 1994, as reported in the
Notes to Consolidated Financial Statements.
Benefit from income taxes was $3.7 million in 1995 versus a $3.0 million
provision in 1994. The Company's effective income tax rates in 1995 and 1994
were 40.9% and 32.4%, respectively, as compared to the approximate combined
statutory federal and state income tax rates of 38.0%. The increased
effective benefit rate for 1995 and the lower effective tax rate for 1994
primarily result from utilization of tax credits.
Liquidity and Capital Resources --
The filing of the voluntary Chapter 11 petition on December 15, 1995 had a
significant impact on the Company's liquidity. The filing stayed payment of
pre-petition outstanding obligations as of December 15, 1995, resulting in a
one-time cash benefit of approximately $7.0 million to the Company. The
Bankruptcy Court stayed payment of principal and interest of pre-petition long
term obligations, thus accumulating an additional $7.5 million cash benefit in
1996. The Company has not opened or acquired any new restaurants since
November, 1995. The cost of reorganization items in 1996 was $3.8 million.
The overall effect of these occurrences, along with normal operations,
resulted in an increase in cash of $15.1 million. To the extent cash
generated from operations exceeds capital expenditures, working capital
requirements, payments approved by the Bankruptcy Court and administrative
expenses of the reorganization, the Company will continue to accumulate cash.
The Company does not maintain significant inventory or accounts receivable
since substantially all of its restaurants' sales are for cash. The Company's
receivables from franchisees are closely monitored and collected weekly.
Approximately $30.8 million of liabilities classified as Liabilities Subject
to Compromise after the Chapter 11 filing would otherwise be classified as
Current Liabilities at December 29, 1996, and $23.9 million at December 31,
1995. The Company normally operates with working capital deficits (current
liabilities exceeding current assets),however, as a result of the
reclassification of pre-petition Current Liabilities to Liabilities Subject
to Compromise, the Company had working capital surpluses of $19.6 million at
December 29, 1996, and $13.4 million at December 31, 1995.
Capital expenditures totaled approximately $6.5 million in 1996, compared to
$16.3 million in 1995. The Company closed seven restaurants in 1996. In 1995,
the Company opened six new restaurants and acquired two restaurants from
franchisees. Approximately $7.6 million is budgeted for capital expenditures
in 1997 for refurbishing of certain restaurants and on-going capital
improvements. The Company owns approximately 53.8% of its restaurant
locations and leases the remainder.
The Company has received a commitment from a financial institution providing
for a $23,000,000, five-year revolving credit facility, a $10,000,000 term
loan due in equal quarterly installments over five years, and a $20,000,000
term loan due in quarterly installments in the third through the fifth year
following completion of the financing. Funding of this commitment is
subject to fulfillment of certain conditions and requirements. Funds from
this debt along with existing cash balances will be utilized to retire
certain debt and meet the Company's obligations under the plan of
reorganization.
Budgeted Capital Expenditures --
Management believes that existing cash and cash flow from operations will be
sufficient to meet its anticipated capital expenditures and other obligations
for the next 12 months.
Impact of Inflation --
Although increases in labor, food and other operating costs could adversely
affect the Company's operations, management does not believe that inflation
has had a material effect on income during the past several years.
Seasonality --
The Company does not expect seasonality to affect its operations in a
materially adverse manner. The Company's revenues during its first fiscal
quarter, comprising the months of January, February and March, will, however,
generally be lower than its other quarters due to consumer shopping habits
and the climate in the location of a number of its restaurants.
Item 8. Financial Statements and Supplementary Data
(commencing on the following page)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Krystal Company:
We have audited the accompanying consolidated balance sheets of The Krystal
Company (a Tennessee corporation) and subsidiary as of December 31, 1995 and
December 29, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Krystal Company and
subsidiary as of December 31, 1995 and December 29, 1996, and the results of
their operations and their cash flows for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Chattanooga, Tennessee
February 13, 1997 (except
with respect to the matter
discussed in Note 3 as to
which the date is March 3, 1997)
The Krystal Company And Subsidiary
----------------------------------
Consolidated Balance Sheets
---------------------------
(In thousands of dollars)
December 31, December 29,
1995 1996
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and temporary investments $ 13,713 $ 28,765
Receivables, net 1,752 2,566
Income tax receivable 609 --
Net investment in direct financing
leases-current portion 856 562
Inventories 2,322 2,156
Deferred tax asset 5,553 8,327
Prepayments and other 830 1,980
------- -------
Total current assets 25,635 44,356
------- -------
NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion 867 305
------- -------
PROPERTY, BUILDINGS AND EQUIPMENT, net
of accumulated depreciation of $74,370
at December 31, 1995 and $82,370 at
December 29, 1996 98,546 91,173
------- -------
LEASED PROPERTIES, net of accumulated
amortization of $2,952 at December 31,
1995 and $3,162 at December 29, 1996 1,863 1,653
------- -------
OTHER ASSETS:
Cash surrender value of life insurance 5,117 5,638
Other 667 745
------- -------
Total other assets 5,784 6,383
------- -------
$132,695 $143,870
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,681 $ 4,535
Accrued liabilities 9,427 17,986
Current portion of long-term debt 432 967
Current portion of capital
lease obligations 653 454
Income taxes payable -- 822
------- -------
Total current liabilities 12,193 24,764
------- -------
LIABILITIES SUBJECT TO COMPROMISE
(Notes 3 and 7) 56,909 58,317
------- -------
LONG-TERM DEBT, excluding current portion 3,621 3,090
------- -------
CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,754 2,278
------- -------
DEFERRED INCOME TAXES 2,719 2,286
------- -------
OTHER LONG-TERM LIABILITIES 7,852 8,447
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
SHAREHOLDERS' EQUITY:
Preferred stock, without par value;
5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, without par value;
15,000,000 shares authorized;
issued and outstanding, 7,526,808 shares
at December 31, 1995, and 7,491,768
shares at December 29, 1996 40,830 40,556
Retained earnings 8,195 5,873
Deferred compensation (2,378) (1,741)
------- -------
Total shareholders' equity 46,647 44,688
------- -------
$132,695 $143,870
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Operations
-------------------------------------
(In thousands, except per share amounts)
Fiscal Year Ended
------------------------------------
January 1, December 31, December 29,
1995 1995 1996
--------- ----------- -----------
REVENUES:
Restaurant sales $239,104 $239,376 $236,470
Franchise fees 796 618 349
Royalties 1,880 2,420 2,778
Other revenues 6,542 5,614 4,671
------- ------- -------
248,322 248,028 244,268
------- ------- -------
COST AND EXPENSES:
Cost of restaurant sales 192,256 197,031 195,733
Depreciation and amortization
expense 11,213 12,311 11,378
General and administrative
expenses 25,775 25,770 25,422
Other expenses, net 4,946 4,417 3,809
Provision for loss on restaurant
closings and other property
write-downs (Note 4) -- 3,911 --
Special charge (Note 11) 2,000 10,000 4,000
------- ------- --------
236,190 253,440 240,342
------- ------- --------
OPERATING INCOME(LOSS) 12,132 (5,412) 3,926
REORGANIZATION ITEM (Note 3) -- (184) (3,846)
INTEREST EXPENSE:
Contractual rate interest (3,801) (4,134) (4,005)
Interest related to certain
pre-petition liabilities -- -- (791)
INTEREST INCOME 820 718 814
------- ------- --------
INCOME(LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES 9,151 (9,012) (3,902)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES 2,962 (3,688) (1,480)
------- ------- --------
NET INCOME(LOSS) $ 6,189 $ (5,324) $ (2,422)
======= ======== ========
EARNINGS(LOSS) PER COMMON SHARE:
Earnings (loss) per common share $ 0.82 $ (0.71) $ ( 0.32)
======= ======= ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 7,512 7,517 7,500
======= ======= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
Common Retained Deferred
Stock Earnings Compensation
------ -------- ------------
BALANCE, January 2, 1994 $40,911 $ 6,976 $(3,159)
Issuance of 1,440 common shares
under restricted stock plans 20 -- (20)
Forfeiture of 8,000 restricted
shares (22) -- 22
Net income -- 6,189 --
Amortization of deferred
compensation -- -- 446
Tax benefit of restricted
stock vested -- 273 --
------ ------ ------
BALANCE, January 1, 1995 40,909 13,438 (2,711)
Issuance of 73,440 common shares
under restricted stock plans 567 -- (567)
Forfeiture of 56,480 restricted
shares (646) -- 646
Net loss -- (5,324) --
Amortization of deferred
compensation -- -- 254
Tax benefit of restricted
stock vested -- 81 --
------- ------- -------
BALANCE, December 31, 1995 40,830 8,195 (2,378)
Issuance of 960 common shares
under restricted stock plan 4 -- (4)
Forfeiture of 36,000 restricted
shares (278) -- 278
Net loss -- (2,422) --
Amortization of deferred
compensation -- -- 363
Tax benefit of restricted
stock vested -- 100 --
------- ------- -------
BALANCE, December 29, 1996 $40,556 $ 5,873 $(1,741)
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
The Krystal Company and Subsidiary
----------------------------------
Consolidated Statements of Cash Flows
-------------------------------------
(In thousands)
Fiscal Year Ended
-----------------------------------
January 1, December 31, December 29,
1995 1995 1996
--------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(loss) $ 6,189 $ (5,324) $ (2,422)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities-
Depreciation and amortization 11,213 12,221 11,378
Deferred income taxes (1,568) (5,011) ( 3,207)
Provision for loss on restaurant
closings and other property
write-downs -- 3,911 --
(Increase) decrease in receivables, net (270) 406 (814)
(Increase) decrease in income tax
receivable -- (609) 609
(Increase) decrease in inventories 47 (185) 166
(Increase) decrease in prepayments
and other 222 (49) (1,150)
Increase (decrease) in accounts payable 692 (5,423) 2,854
Increase (decrease) in income taxes
payable (643) (318) 822
Increase (decrease) in accrued
liabilities 2,670 (3,376) 8,559
Other, net 1,068 523 (64)
Increase in liabilities from
reorganization activities -- 20,909 1,408
------- ------- -------
Net cash provided by
operating activities 19,620 17,675 18,139
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, buildings
and equipment (26,653) (16,307) (6,457)
Proceeds from sale of property,
buildings and equipment 793 908 3,282
Payments received on net investment in
direct financing leases 673 766 856
------- ------- -------
Net cash used in investing
activities (25,187) (14,633) (2,319)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 20,218 -- --
Repayments of long-term debt (4,657) (3,472) (53)
Principal payments of capital
lease obligations (593) (652) (675)
Other (413) (9) (40)
------- ------- -------
Net cash provided by (used in)
financing activities 14,555 (4,133) (768)
-------- ------- -------
NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS 8,988 (1,091) 15,052
CASH AND TEMPORARY INVESTMENTS,
beginning of period 5,816 14,804 13,713
------- ------- -------
CASH AND TEMPORARY INVESTMENTS,
end of period $14,804 $13,713 $28,765
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest, net of amount capitalized $ 3,600 $ 4,005 $ 648
======= ======= =======
Income taxes $ 4,176 $ 1,819 $ 917
======= ======= =======
Reorganization item $ -- $ 184 $ 1,092
======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
THE KRYSTAL COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS ACTIVITIES
The Krystal Company (a Tennessee corporation) is engaged primarily in the
development, operation and franchising of fast food restaurants in the
southeastern United States. Krystal's wholly-owned subsidiary, Krystal
Aviation Co. ("Aviation") operates a fixed base airport hangar operation
in Chattanooga, Tennessee. Aviation's revenues in each of the last three
years were less than 3% of the Company's total revenues. As discussed in
Note 3, on December 15, 1995, Krystal filed a petition for relief under
Chapter 11 of the federal bankruptcy laws.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation --
The accompanying consolidated financial statements include the accounts of
The Krystal Company ("Krystal") and Aviation (referred to collectively as the
"Company"). All significant intercompany balances and transactions have been
eliminated.
Fiscal Year End --
The Company's fiscal year ends on the Sunday nearest December 31.
Consequently, the Company will occasionally have a 53 week fiscal year. The
years ended January 1, 1995, December 31, 1995 and December 29, 1996 were 52
week fiscal years.
Cash and Temporary Investments --
For purposes of the consolidated statements of cash flows, the Company
considers repurchase agreements and other temporary cash investments with a
maturity of three months or less to be temporary investments. As of
December 29, 1996, Krystal was holding $23,913,000 in certificates of
deposits which are included in cash and temporary investments in the
accompanying consolidated balance sheet.
Inventories --
Inventories are stated at cost and consist primarily of food, paper products
and other supplies. The Company uses the last-in, first-out (LIFO) method of
accounting for a substantial portion of its inventories. If the first-in,
first-out (FIFO) method had been used instead of LIFO, inventories at
December 31, 1995 and December 29, 1996, would have been approximately
$2,485,000 and $2,310,000, respectively.
Property, Buildings and Equipment --
Property, buildings and equipment are stated at cost. Expenditures which
materially increase useful lives are capitalized, whereas ordinary maintenance
and repairs are expensed as incurred. All significant properties are reviewed
periodically for operational suitability, and, if such properties are
determined to be unsuitable for future operations, reserves are provided to
reduce the properties to estimated realizable values.
Depreciation of fixed assets is computed using the straight-line method for
financial reporting purposes and accelerated methods for tax purposes over
the estimated useful lives of the related assets as follows:
Buildings and improvements 10 - 39 years
Equipment 3 - 10 years
Leaseholds Life of lease up to 20 years
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 on accounting for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill related to assets to be held and used. SFAS No. 121 also
establishes accounting standards for long-lived assets and certain
identifiable intangibles to be disposed of. The Company adopted SFAS
No. 121 effective the beginning of fiscal 1996. The adoption of SFAS 121
did not have a significant impact on the Company's consolidated financial
position and results of operations.
Income Taxes --
Under SFAS No. 109, "Accounting for Income Taxes", deferred tax assets and
liabilities are computed based on the difference between the financial
statement and income tax bases of assets and liabilities using the enacted
tax rate. Deferred income tax expenses or benefits are based on the changes
in the asset or liability from period to period. Tax benefits are recognized
in the financial statements in the period in which they are generated.
Franchise and License Agreements --
Franchise or license agreements are available for single and multi-unit
restaurants. The multi-unit agreement establishes the number of restaurants
the franchisee or licensee is to construct and open in the franchised area
during the term of the agreement. At December 31, 1995, there were 80
franchised or licensed restaurants of which 50 restaurants were operated under
multi-unit agreements. At December 29, 1996, there were 89 franchised or
licensed restaurants of which 57 restaurants were operated under multi-unit
agreements.
Franchisees and licensees are required to pay the Company a franchise or
license fee and a weekly royalty and service fee of either 4.5% or 6.0%,
depending on the duration of the franchise agreement, of the restaurants'
gross receipts. Unit franchise and license fees are recorded as income as
related restaurants begin operations. Royalty and service fees, which are
based on restaurant sales of franchisees and licensees, are accrued as earned.
Franchise fees received prior to the opening of the restaurant are deferred
and included in accrued liabilities on the consolidated balance sheets. At
December 31, 1995 and December 29, 1996, total deferred franchise and license
fees were approximately $715,000 and $682,000, respectively.
Earnings Per Common Share --
Earnings per common share is based on the weighted average number of common
shares outstanding.
Stock-Based Compensation --
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB NO. 25). Effective in 1996, the Company adopted the disclosure option of
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123
requires companies that do not choose to account for stock-based compensation
as prescribed by the statement to disclose the pro forma effects on net income
and earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock-based
compensation and the assumptions used to determine the pro forma effects of
SFAS No. 123.
Use of Estimates --
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications --
Certain reclassifications have been made in the fiscal 1995 financial
statements to conform with the 1996 presentation.
3. PETITION FOR RELIEF UNDER CHAPTER 11
On December 15, 1995 (the "petition date"), Krystal filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code
with the United States Bankruptcy Court for the Eastern District of Tennessee
in Chattanooga, Tennessee (the "Court"), for the purpose of completely and
finally resolving the various claims filed against the Company by current and
former employees alleging violations of the Fair Labor Standards Act of 1938
("FLSA"). Under Chapter 11, enforcement of certain pre-petition unsecured
claims were stayed, while Krystal continues operations in the ordinary course
of business as a debtor-in-possession. These unsecured stayed claims are
reflected in the accompanying December 31, 1995 and December 29, 1996
consolidated balance sheets as liabilities subject to compromise (Notes 6, 7
and 11). Claims secured by Krystal's assets ("secured claims") were also
stayed, although the holders of such claims have the right on motion to the
Court for relief from the stay. Secured claims are secured primarily by liens
on some of Krystal's real property and buildings. Any additional claims that
have arisen subsequent to the petition date which include amounts determined
by the Court as allowable claims for contingencies and other disputed amounts
have been included in liabilities subject to compromise at December 29, 1996.
Krystal's wholly-owned subsidiary, Aviation, did not file a petition for
relief under Chapter 11 with the Court. Separate condensed financial
statements of Krystal have not been presented as the operations of Krystal
represent substantially all of the operations of the Company.
A plan of reorganization, as amended (the "Plan") was formally filed on
February 24, 1997. The terms of the Plan provide for full payment of all
administrative expenses, tax claims, priority claims and secured claims.
The Plan also provides for full payment of unsecured claims which includes
trade and financial creditors. The Plan further provides for interest of 8.5%
per annum or a market rate determined to be appropriate by the Court for
unsecured trade creditors. Interest will be paid from the later of the
petition date or the date at which the obligation became due. The Plan also
provides for the payment of 1.3% per annum penalty interest on the unsecured
senior notes held by financial creditors.
The Court has approved the distribution of the Plan which must be accepted
by at least two-thirds in amount and by more than one-half in number of the
voting unsecured creditors. The Court has set a confirmation hearing date for
the Plan on April 9, 1997 at which time the Plan will be granted or denied by
the Court (the "Confirmation Order"). The Plan states that as a condition to
the Confirmation Order, Krystal must present to the Court the settlement of
the FLSA class suit (Note 11) and the successful consummation of a loan
transaction whereby Krystal will borrow at least $45,000,000 from a commercial
lending institution on or before the distribution date of the Plan. On
March 3, 1997, Krystal received a commitment from a financial institution to
provide the financing required by the Plan. The commitment provides for a
$23,000,000 five year revolving credit facility, a $10,000,000 term loan due
in equal quarterly installments over five years and a $20,000,000 term loan
due in quarterly installments in the third through the fifth year following
completion of the financing. The revolving credit facility and term loans are
to be secured by substantially all of the Company's assets. Funding of this
commitment is subject to fulfillment of certain conditions and requirements.
In 1995, Krystal received approval from the Court to pay or otherwise honor
certain of its pre-petition obligations, including employee wages and benefits;
and, accordingly, these amounts have been paid or are included in the
appropriate liability captions on the accompanying consolidated balance sheet
at December 31, 1995. In 1996, Krystal received approval from the Court to
pay certain pre-petition obligations including state sales taxes, real and
business personalty taxes; and accordingly, these amounts have been paid and
are excluded as liabilities subject to compromise on the accompanying
consolidated balance sheets at December 29, 1996. Krystal paid $3,024,000 in
pre-petition obligations in 1996.
Interest income of approximately $375,000 earned on excess cash due to the
bankruptcy has been recorded as a reduction in interest expense related to
certain pre-petition liabilities which include the 1.3% penalty interest on
the senior notes and the 8.5% interest expense associated with the unsecured
pre-petition trade payables. All other interest income and contractual
interest expense incurred in the ordinary course of business has been
reported separately in the accompanying consolidated statement of operations
for the year ended December 29, 1996.
Professional and other fees of $184,000 and $3,846,000 incurred as a result
of Krystal's Chapter 11 filing have been segregated from expenses related to
ordinary operations and reported as a reorganization item in the accompanying
consolidated statements of operations for the years ended December 31, 1995
and December 29, 1996, respectively.
4. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment at December 31, 1995 and December 29, 1996,
consisted of the following:
December 31, December 29,
1995 1996
----------- -----------
(In thousands)
Land $ 35,102 $ 33,803
Buildings and improvements 48,905 49,044
Equipment 67,328 69,467
Leaseholds 20,228 20,333
Construction in progress 1,353 896
--------- ---------
172,916 173,543
Accumulated depreciation
and amortization (74,370) (82,370)
--------- ---------
$ 98,546 $ 91,173
========= =========
In December 1995, the Company recorded a provision for loss on restaurant
closings and other property write-downs of $3,911,000 which is reflected in
the accompanying consolidated statement of operations for the year ended
December 31, 1995. This provision primarily relates to the Company's
estimated losses to be incurred associated with decisions to close certain
restaurants.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and December 29, 1996, consisted of
the following:
December 31, December 29,
1995 1996
------------ -----------
(In thousands)
Salaries, wages and vacation pay $ 3,442 $ 3,477
Workers' compensation 3,295 3,753
State sales taxes 774 1,321
Deferred franchise fees 715 682
Accrued interest 234 4,178
Accrued reorganization expenses -- 2,286
Other 967 2,289
-------- --------
$ 9,427 $ 17,986
======== ========
6. INDEBTEDNESS
Long-term debt at December 31, 1995 and December 29, 1996, consisted of the
following:
December 31, December 29,
1995 1996
----------- -----------
(In thousands)
7.6% senior notes, payable
in annual installments
beginning in May 1997 and
balance due May 2004 $ 20,000 $ 20,000
11.16% senior notes, payable
in annual installments and
balance due May 1999 16,000 16,000
10.5% mortgage bonds, payable
in monthly installments
through October 2001 2,884 2,884
Other 1,169 1,173
-------- --------
40,053 40,057
Less--
Current maturities (432) (967)
Liabilities subject to
compromise (36,000) (36,000)
-------- --------
$ 3,621 $ 3,090
======== ========
Unsecured debt included in liabilities subject to compromise at
December 31, 1995 and December 29, 1996 consisted of the $20,000,000
senior notes and the $16,000,000 senior notes.
On December 29, 1996, outstanding letters of credit not reflected in the
accompanying financial statements aggregated approximately $3,461,000.
Letters of credit issued in 1996 of $800,000 are collateralized by the
Company with certificates of deposit which are included in cash and temporary
investments on the balance sheet.
Property and buildings with a net book value of $3,181,000 at
December 29, 1996, are pledged as collateral on the 10.5% mortgage bonds.
Maturities of long-term debt not subject to compromise subsequent to
December 29, 1996, are as follows (in thousands):
1997 $ 967
1998 514
1999 566
2000 611
2001 527
Thereafter 872
The Company's debt agreements contain restrictive covenants including, but not
limited to: (a) the Company's required maintenance of minimum levels of
tangible net worth; (b) limitations regarding additional indebtedness;
(c) the Company's required maintenance of a minimum amount of fixed charges
coverage; and (d) limitations regarding liens on assets. Due to the
Chapter 11 proceedings, the Company was not in compliance with certain
restrictive covenants of the Company's debt agreements at December 29, 1996.
Such debt is classified as liabilities subject to compromise in the
accompanying consolidated balance sheet at December 29, 1996.
Due to the extenuating circumstances involving both secured and unsecured
long-term debt as a result of the Chapter 11 filing, it is not practicable
to estimate the fair value of long-term debt at December 31, 1995 and at
December 29, 1996.
7. LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise at December 31, 1995 and December 29, 1996,
consisted of the following:
December 31, December 29,
1995 1996
----------- -----------
(In thousands)
Unsecured long-term debt $36,000 $36,000
Accounts payable 7,542 7,920
Special charge reserve 9,849 13,875
State sales taxes 1,657 --
Real estate and business
personalty taxes 1,349 10
Other 512 512
------- -------
$56,909 $58,317
======= =======
8. BENEFIT PLANS
Retirement Plans --
The Company has a noncontributory, defined benefit pension plan covering
substantially all operating and salaried employees. The plan provides
benefits of stated amounts based on years of service and the employee's
compensation. The Company's funding policy is consistent with the requirements
of the Employee Retirement Income Security Act of 1974. Plan assets at
December 31, 1995 and December 29, 1996, are invested primarily in equity
securities, managed international equity and bond index funds and U.S.
government securities.
Net pension expense included the following components:
January 1, December 31, December 29,
1995 1995 1996
--------- ----------- -----------
(In thousands)
Service cost (benefits earned
during the period) $1,451 $1,182 $1,594
Interest cost on projected
benefit obligation 1,493 1,575 1,728
Actual return on plan assets (646) (5,254) (4,224)
Net amortization and deferral (1,368) 3,253 1,868
------ ------ ------
Net pension expense $ 930 $ 756 $ 966
====== ====== ======
The following table sets forth the status of the plan as of December 31, 1995
and December 29, 1996:
December 31, December 29,
1995 1996
----------- -----------
(In thousands)
Actuarial present value of
accumulated benefit obligations:
Vested benefit obligation $ 19,401 $ 19,884
Nonvested benefit obligation 822 767
------ ------
Accumulated benefit obligation $ 20,223 $ 20,651
====== ======
Projected benefit obligation $(22,613) $(24,112)
Plan assets at fair value 24,819 27,936
------ ------
Plan assets in excess of
projected benefit obligation 2,206 3,824
Unrecognized net gain ( 4,196) ( 6,893)
Unrecognized initial asset ( 1,450) ( 1,160)
Unrecognized prior service cost 577 400
------ ------
Pension liability recognized in the
consolidated balance sheets $( 2,863) $( 3,829)
====== ======
Unrecognized prior service cost resulted from plan amendments providing an
accelerated vesting schedule and increased benefits for certain participants
based on services rendered in prior periods. This amount is being amortized
over the average future service of employees expected to receive benefits
from the plan.
The projected benefit obligation was determined using a discount rate of
8.5% , 7.5% and 8.0% at, January 1, 1995, December 31, 1995 and
December 29, 1996, respectively. The assumed rate of compensation increase
was 4%, 3% and 3% in 1994, 1995 and 1996 respectively. The expected
long-term rate of return on plan assets was 9% in 1994, 1995 and 1996.
The Company also has a supplemental executive retirement plan for certain
officers. The plan provides additional benefits upon retirement. The
supplemental retirement benefit shall be paid over the officers' lifetime
but for no less than a period of 10 years following retirement. The Company
provides an annual amount necessary to amortize the total cost of the
estimated deferred compensation at retirement. Total deferred compensation
accrued for this plan at December 31, 1995 and December 29, 1996, was
$2,609,000 and $2,876,000, respectively.
The Company is the beneficiary of life insurance policies with a face amount
of $7,722,000 at December 29, 1996. Total cash surrender value of such life
insurance at December 31, 1995 and December 29, 1996 was $5,117,000 and
$5,638,000, respectively.
Postretirement Health Care and Dental Benefits --
Employees retiring from the Company on or after attaining age 55 that meet
certain eligibility requirements are entitled to postretirement health care
and dental benefit coverage. These benefits vary for hourly and salaried
employees and are subject to deductibles, copayment provisions and other
limitations. The Company may amend or change the plan periodically. Retirees
contribute at a fixed rate per month toward the cost of the plan.
Net periodic postretirement health care benefits cost included the following
components:
January 1, December 31, December 29,
1995 1995 1996
--------- ----------- -----------
(In thousands)
Service cost (benefits earned
during the period) $ 96 $ 74 $ 78
Interest cost on accumulated
postretirement health care
benefits obligation 66 68 67
---- ---- ----
Net periodic postretirement
health care benefits cost $ 162 $ 142 $ 145
==== ==== ====
The following table sets forth the funded status of the plan, reconciled
to the accrued postretirement health care benefits recognized in the
Company's consolidated balance sheets at December 31, 1995 and
December 29, 1996:
December 31, December 29,
1995 1996
----------- -----------
(In thousands)
Accumulated postretirement health
care benefits obligation:
Retirees $171 $ 146
Employees fully eligible 232 270
Other active participants 540 553
----- -----
Total 943 969
Unrecognized net gain (loss) (15) 36
----- -----
Accrued postretirement health
care benefits cost $928 $1,005
===== =====
In 1995, a 12.0% annual rate of increase in the per capita cost of covered
health care benefits was assumed for measurement purposes, reducing to an 8%
annual rate of increase after two years. In 1996, a 6.0% annual rate of
increase was assumed for all periods. The effect of a one percentage point
increase in the health care cost trend assumption would not have a significant
effect on the accumulated postretirement benefits obligation as of
December 29, 1996 and the periodic postretirement health care benefit cost
for the year then ended. The weighted-average discount rate used in
determining the accumulated postretirement health care benefits obligation
was 7.5% and 8.0% at December 31, 1995 and December 29, 1996, respectively.
9. INCOME TAXES
The provision for (benefit from) income taxes included the following
components:
January 1, December 31, December 29,
1995 1995 1996
--------- ----------- -----------
(In thousands)
Current tax provision:
Federal $3,940 $ 1,176 $ 1,459
State 590 147 268
------ ------ ------
4,530 1,323 1,727
Deferred income taxes (1,568) (5,011) (3,207)
------ ------ ------
Provision for (benefit from)
income taxes $2,962 $(3,688) $(1,480)
====== ====== ======
The income tax effects of temporary differences that give rise to the current
deferred tax asset and the noncurrent net deferred tax liability as of
December 31, 1995 and December 29, 1996, were as follows:
December 31, December 29,
1995 1996
----------- -----------
(In thousands)
Current deferred tax asset:
Special charge reserve $ 3,673 $ 5,273
Workers' compensation 1,176 1,426
Deferred franchise fees 272 259
Miscellaneous payables 272 703
Accrued interest -- 242
Other 160 424
------- ------
Current deferred tax asset $ 5,553 $ 8,327
======= ======
Noncurrent net deferred tax liability:
Noncurrent deferred tax asset:
Deferred compensation $ 1,779 $ 2,019
Accrued pension cost 1,239 1,465
Accrued postretirement benefit cost 389 445
Other 189 286
------- -------
Noncurrent deferred tax asset 3,596 4,215
------- -------
Noncurrent deferred tax liability:
Property, buildings and equipment (6,258) (6,501)
Other (57) --
------- -------
Noncurrent deferred tax liability (6,315) (6,501)
------- -------
Noncurrent net deferred tax liability $(2,719) $(2,286)
======= =======
The difference between the reported income tax provision and the "expected"
tax provision (benefit) based on the current statutory federal income tax
rate is as follows:
January 1, December 31, December 29,
1995 1995 1996
--------- ----------- -----------
(In thousands)
Computed "expected" tax
provision (benefit) $3,111 $(3,122) $(1,327)
Targeted jobs tax credits (444) (137) --
State income taxes (net of
federal income tax effect) 257 (340) (99)
Other, net 38 (89) (54)
------ ------- -------
Reported tax provision (benefit) $2,962 $(3,688) $(1,480)
====== ======= =======
10. LEASES
The Company leases certain buildings and equipment and a number of restaurants
(land and/or building) under noncancellable lease agreements, some of which
are subleased to third parties. The restaurant lease terms are normally for a
period of 20 years with options that permit renewals for additional periods.
Certain leases provide for additional contingent rentals based on sales.
Generally, the building portions of the restaurant leases have been recorded
as capital leases, while the land portions have been recorded as operating
leases.
The future minimum lease payments under capital and operating leases, together
with the present value of such minimum lease payments as of December 29, 1996,
are summarized as follows:
Capital Operating
Leases Leases
------- ---------
Year (In thousands)
1997 $ 720 $ 3,854
1998 463 3,074
1999 364 2,458
2000 364 1,949
2001 364 1,507
Thereafter 1,873 5,217
------ -------
Total minimum lease payments 4,148 $18,059
=======
Less amount representing
interest 1,416
------
Present value of minimum
lease payments including
current portion $2,732
======
Rental expense under operating leases was $4,666,000, $4,715,000 and
$5,212,000 in 1994, 1995 and 1996, respectively.
Rental expense includes contingent rentals of $156,000, $117,000 and $110,000
in 1994, 1995 and 1996, respectively.
Direct Financing and Operating Leases/Subleases with Third Parties --
The Company owns or leases from outside parties certain land and buildings
which are leased/subleased to third parties. Generally, the building portions
of the leases/subleases are treated as direct financing leases while the land
portions of the leases/subleases are treated as operating leases.
The following summarizes the components of the net investment in direct
financing leases and the minimum future rentals on operating leases/subleases
as of December 29, 1996:
Direct
Financing Operating
Leases Leases
--------- ---------
Year (In thousands)
1997 $ 633 $ 627
1998 268 458
1999 56 343
2000 6 314
2001 244
Thereafter 3
------ ------
Total minimum lease
payments to be received 963 $1,989
======
Less unearned income (96)
------
Net investment in direct
financing leases including
current portion $ 867
======
Rental income under operating leases was $629,000, $626,000 and $557,000 in
1994, 1995 and 1996, respectively.
11. CONTINGENCIES
In July 1994, Krystal was named a defendant in a suit filed in the United
States District Court for the Middle District of Tennessee, in which 41
plaintiffs, who were current and former employees of Krystal, alleged
violations of the FLSA and sought back wages, liquidated damages, costs and
attorney's fees. The suit alleged that the plaintiffs were uncompensated for
time which they worked on Krystal's behalf. In February 1995, ten additional
plaintiffs, also current and former employees of Krystal, filed a separate
suit in the same court containing essentially the same allegations. As a
result, Krystal established a reserve of $2,000,000 in 1994 to cover the
claims of the plaintiffs in the two suits, the costs associated therewith,
and the claims of any other employees and the costs associated therewith.
On April 18, 1995, Krystal settled the July 1994 case by agreeing to pay
$840,000 to the plaintiffs and their counsel. By order dated August 28, 1995,
the Court in the February 1995 case provisionally granted the plaintiffs
motion for court-supervised notice of the pendency of that action to
prospective class members from among current and former employees of Krystal
for the past three years.
In the third quarter of 1995, a total of 17 additional current and former
employees of Krystal filed three additional suits in the United States
District Courts for the Northern District of Georgia, the Northern District
of Alabama and the Middle District of Florida, containing essentially the same
allegations as set forth in the July 1994 and February 1995 suits.
In light of the three suits filed against Krystal during the third quarter
of 1995 and the order entered in the February 1995 suit provisionally granting
the plaintiffs motion for court-supervised notice of the pendency of that
action, Krystal established an additional $10,000,000 reserve to cover an
estimate of the exposure resulting from (i) the claims of the plaintiffs in
the four pending suits, (ii) the potential for additional claims of other
current and former employees, (iii) related claims, and (iv) the costs
associated therewith.
On December 15, 1995, Krystal filed a voluntary petition under Chapter 11 of
the United States Bankruptcy Code with the Court for the purpose of completely
and finally resolving the various claims filed against the Company by current
and former employees alleging violations of the FLSA. The four pending
lawsuits filed against Krystal under the FLSA have been stayed by the
bankruptcy filing.
Subsequent to December 29, 1996, Krystal and the majority of the FLSA
plaintiffs reached a settlement providing for the payment of approximately
$13,000,000 for the FLSA claims and related legal costs. At December 29, 1996,
the Company established an additional $4,000,000 reserve related to the FLSA
claim. Management believes the accrual for employee claims of $13,875,000 at
December 29, 1996 is adequate to meet its ultimate obligation for the FLSA
claims.
The Company is party to other various legal proceedings incidental to its
business. The ultimate disposition of these matters is not presently
determinable but will not, in the opinion of management, have a material
adverse effect on the Company's financial condition or results of operations.
12. RESTRICTED STOCK AND STOCK OWNERSHIP PLANS
The Company's 1990 Restricted Stock Plan ("Restricted Stock Plan") provides
for the granting of shares of common stock to certain directors and key
employees of the Company. The number of shares that may be issued under the
Restricted Stock Plan may not exceed 1,100,000 shares. The shares issued
under the Restricted Stock Plan when issued are restricted and subject to
forfeiture under certain circumstances.
Restricted stock may not be sold or otherwise transferred, and, if employment
of the restricted stockholder terminates for any reason other than death,
normal retirement, total disability, approved early retirement, or other
approved termination, the restricted stock will be forfeited. Restricted
stock which has been forfeited may be reissued under the Restricted Stock
Plan. As to restricted stock issued before April 14, 1992, restrictions
generally lapse 15% each year. As to restricted stock issued on or after
April 14, 1992, restrictions will generally lapse as to 10% of the restricted
stock between the second and third anniversary of the date of grant and then
10% per year thereafter. However, restrictions on 430,000 shares granted to
two officers of the Company will only lapse in the event of death, normal
retirement, total disability, approved early retirement, or other approved
termination. Restrictions also terminate on the occurrence of certain events
including dissolution or change in control of the Company. The Restricted
Stock Plan provides for the issuance of additional shares to each restricted
stockholder in the event annual lapsing of the restrictions is waived. The
additional shares issued to the restricted stockholder each year is limited to
10% of the number of restricted shares for which the annual lapsing is waived.
Restricted stock has the same dividend and voting rights as other outstanding
common stock.
During 1992, the Company adopted a restricted stock plan ("Non-Employee
Director Plan") which provides for the issuance of 8,000 shares of restricted
stock to each existing non-employee director who has not previously been
awarded restricted stock. This plan provides for the issuance of an
additional 800 shares of restricted stock to each non-employee director in
the event annual lapsing of the restrictions is waived. The restrictions
generally lapse 15% each year beginning two years after the date of grant.
A summary of the Company's restricted stock activity is as follows:
Restricted Non-Employee
Stock Plan Director Plan
---------- -------------
(Number of shares)
Issued at January 2, 1994 958,000 16,000
Issued at an average market
value of $14.00 per share 1,200 240
Forfeitures (8,000) --
------- ------
Issued at January 1, 1995 951,200 16,240
Issued at an average market
value of $7.75 per share 73,200 240
Forfeitures (40,000) (16,480)
------- ------
Issued at December 31, 1995 984,400 --
Issued at an average market
value of $4.63 per share 960 --
Forfeitures (36,000) --
------- ------
Issued at December 29, 1996 949,360 --
======= ======
Deferred compensation related to the restricted stock awards is recorded based
on the market value of the Company's common stock at the date of grant and
such deferred compensation is amortized to expense over the period the
restrictions lapse. Compensation expense related to the restricted stock
plans was $445,624, $254,203, and $363,688, in 1994, 1995, and 1996,
respectively. During 1994, the Company adopted a stock option plan which
provides for the issuance of up to 1,100,000 common stock options (less the
number of shares of common stock that are at any time issued and outstanding
under the Restricted Stock Plan) to key employees and non-employee directors.
At December 29, 1996, no options had been granted under this stock option
plan.
Effective March 1, 1994, all employees of the Company (excluding those who own
restricted stock of the Company) who have attained age eighteen and who have
been employed for one year are eligible to participate in the Company's
employee stock purchase plan (the "ESPP"). The ESPP provides that each
participant may authorize the Company to deduct up to $3,600 of their annual
earnings and deposit such amounts with an independent custodian. The Company
will contribute an additional 15% to the first $1,800 of the participant's
deduction and deposit such amount with the custodian. The custodian causes
to be purchased, as nominee for the participants, common stock of the Company
at prevailing market prices and distributes the shares purchased to the
participants upon request. The Company's contributions under the ESPP, which
were charged to expense, were not significant in 1995 or 1996.
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock-based compensation plans described above. Had compensation cost
for these plans been determined based on the provisions of SFAS No. 123,
the effect on the Company's net income and earning per share would not be
significant in 1995 or 1996.
13. QUARTERLY INFORMATION (unaudited)
(In thousands of dollars, except per share amounts)
Fiscal 1995
Earnings
Operating Net (Loss) Per
Income Income Common
Revenues (Loss) (Loss) Share(1)
-------- --------- ------ ---------
Quarter Ended:
April 2 $ 58,196 $ 1,356 $ 327 $ 0.04
July 2 63,501 2,818 1,215 0.16
October 1 (2) 62,508 (8,365) (5,731) (0.76)
December 31 (3) 63,823 (1,221) (1,135) (0.15)
-------- ------- ------- ------
Total $248,028 $(5,412) $(5,324) $(0.71)
======== ======= ======= ======
Fiscal 1996
Earnings
Operating Net (Loss) Per
Income Income Common
Revenues (Loss) (Loss) Share
-------- --------- ------ ---------
Quarter Ended:
March 31 $ 57,667 $ 693 $ (746) $(0.10)
June 30 60,903 2,095 426 0.06
September 29 62,432 1,611 (11) 0.00
December 29 (4) 63,266 (473) (2,091) (0.28)
-------- ------- -------- ------
Total $244,268 $ 3,926 $(2,422) $ (.32)
======== ======= ======== ======
(1) The sum of quarterly earnings per share amounts may differ from annual
earnings per share because of the differences in the weighted average number
of common shares in the quarterly and annual computations.
(2) The third quarter of 1995 includes a special charge for litigation
(Note 11) of $10,000,000 before income tax benefit ($6,200,000 after income
tax benefit, or $0.83 per common share).
(3) The fourth quarter of 1995 includes the provision for loss on
restaurant closings and other property write-downs of $3,911,000 before
income tax benefit ($2,425,000 after income tax benefit, or $0.32 per common
share).
(4) The fourth quarter of 1996 includes a special charge for litigation
(Note 11) of $4,000,000 before income tax benefit ($2,480,000 after income
tax benefit, or $0.33 per common share).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
The identification of directors under the heading Election of Directors in
the Registrant's 1997 Proxy Statement is hereby incorporated by reference.
The Company's executive officers are as follows:
Carl D. Long, Chairman of the Board of Directors, Chief Executive Officer
and Director, age 65. Mr. Long has served as Chairman and Chief Executive
Officer since 1990 and as a Director since 1981. He served as President from
1981 to 1992 and as Vice President - Finance from 1977 to 1981. He also is a
director of First Tennessee Bank, N.A. of Chattanooga. Prior to joining the
Company, Mr. Long was employed as Group Vice President and Chief Financial
Officer of Ramada Inns, and Vice President and Chief Financial Officer of
Informatics, Inc.
R. B. Davenport, IV, President, Chief Operating Officer and Director, age 44.
Mr. Davenport, IV, has served as President and Chief Operating Officer since
1992 and as a Director since 1985. He served as Vice President - Operations
from 1988 until 1992 and as Vice President - Assistant to the President from
1986 to 1988. Prior to that he served in various capacities with the Company
since 1976, including district, area and restaurant manager. Mr. Davenport
is the son of R. B. Davenport, III, Chairman of the Executive Committee of
the Board of Directors and Director and a first cousin of Gordon L.
Davenport, Jr., Vice President - Marketing and Development of the Company.
He is also a director of First Tennessee Bank, N.A. of Chattanooga.
Camden B. Scearce, Vice President, Chief Financial Officer, Secretary,
Treasurer and Director, age 51. Mr. Scearce has served as a Director since
1991, as Chief Financial Officer and Treasurer since 1990, as Vice President
since 1981, as Secretary since 1978, and as Controller from 1974 to 1994.
Prior to that, he was an accountant with Arthur Andersen LLP. Mr. Scearce is
a certified public accountant.
Michael C. Bass, Vice President - Administration, age 50. Mr. Bass has served
as Vice President - Administration since 1981. He has served in various
capacities with the Company since 1979, including Director of Purchasing and
Director of Administration. From 1969 to 1979, he held various management
positions with Marriott Corporation.
Gordon L. Davenport, Jr., Vice President - Marketing and Development,
age 37. Mr. Davenport was employed as Vice President - New Business and
Strategic Planning in August 1995. He became Vice President-Marketing and
New Business in November 1995. In February, 1997 he assumed responsibility
for the development group and became Vice President - Marketing and
Development. From 1986 to 1995, he served in various marketing and sales
management positions with Warner Lambert Company. Mr. Davenport is a nephew
of R. B. Davenport, III, Chairman of the Executive Committee of the Board of
Directors and Director, and a first cousin of R. B. Davenport, IV, President,
Chief Operating Officer and Director of the Company.
Paul J. Frankenberg, Vice President - Product Development and Quality
Assurance, age 46. Mr. Frankenberg has served as Vice President - Product
Development and Quality Assurance since April 1990. He served as Director -
Product Development and Quality Assurance from 1985 to 1990. From 1984 to
1985 he served as Director - Product Development for Godfather's Pizza, Inc.
From 1981 to 1984, he served as Director - Product Development and Quality
Assurance for Perkins Restaurants, Inc.
Phillip E. McNeely, Vice President - Franchising and Real Estate, age 44.
Mr. McNeely has served as Vice President - Franchising and Real Estate since
February 1997. He served as Vice President - Real Estate/Construction from
June 1992 until February 1997, and from 1989 to June 1992 he served as
Vice President - Franchising. From 1984 to 1989, he served as Director
of Real Estate. He served as Administrator of Real Estate Development from
1981 to 1984. From 1978 through 1981, he served in various financial and
real estate management positions with Burger Chef Systems, Inc., and prior to
that, was an accountant with Price Waterhouse & Co.
Larry J. Reeher, Vice President - Human Resources, age 49. Mr. Reeher has
served as Vice President - Human Resources since August 1995. From 1988 to
1995, he was Executive Vice President - Human Resources for Gardner Merchant
Food Services, Inc.
Jerry N. Scott, Vice President - Company Operations, age 56. Mr. Scott became
Vice President - Company Operations in April 1996. He had served as Vice
President - South Region since 1986. From 1982 to 1986, he was Director of
Operations of Hardee's Food Systems, Inc. From 1970 to 1982, he held various
positions in company and franchised operations of Burger Chef Systems, Inc.
John Alan Walker, Vice President - Franchise Operations, age 37. Mr. Walker
became Vice President - Franchise Operations in October 1996. He had served
as Vice President - North Region since October 1992. Mr. Walker began his
career with the Company in 1982 as a management trainee and has served the
Company in various operations positions.
Item 11. Executive Compensation
Incorporated herein by reference from the section entitled Executive
Compensation and Other Information in the Company's 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference from the section entitled Security Ownership
in the Company's 1997 Proxy Statement.
Item 13. Certain Relationships and Related Transaction
Incorporated herein by reference from the section entitled Certain
Transactions in the Company's 1997 Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial statements
The financial statements are included herein by reference.
2. Financial statement schedules
All schedules are omitted because the information is either not
required or is included in the financial statements or notes thereto.
3. Exhibits
See the Exhibit Index.
(b) Reports on Form 8-K -
The Registrant did not file any reports on Form 8-K during the
fourth quarter of the fiscal year ended December 29, 1996.
Signatures --
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE KRYSTAL COMPANY
Dated: March 21, 1997 BY: /s/Carl D. Long
--------------------
Carl D. Long, Chairman of
the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Signature Title Date
/s/R. B. Davenport, III
- ----------------------- Director March 21, 1997
R. B. Davenport, III
/s/Carl D. Long Chairman of the Board of
- ----------------------- Directors and Chief Executive
Carl D. Long Officer and Director March 21, 1997
/s/R. B. Davenport, IV
- ----------------------- President, Chief Operating
R. B. Davenport, IV Officer and Director March 21, 1997
Vice President and Chief
/s/Camden B. Scearce Financial Officer and Director
- ----------------------- (principal financial and
Camden B. Scearce accounting officer) March 21, 1997
/s/J. Guy Beatty, Jr.
- -----------------------
J. Guy Beatty, Jr. Director March 21, 1997
THE KRYSTAL COMPANY AND SUBSIDIARY
EXHIBIT INDEX
Exhibit
Number Description
3.1* Amended and Restated By-Laws of the Company
3.2* Second Amended and Restated Charter of the Company
21* List of current subsidiaries of the Company
23 Consent of Independent Public Accountants
27 Financial Data Schedule for year 1996
*Incorporated by reference from the Company's Registration Statement on
Form S-1 filed on May 8, 1992. (File No. 33-46878)
EXHIBIT-23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
S-8 Registration Statement File No. 33-79140.
Arthur Andersen LLP
Chattanooga, Tennessee
March 21, 1997
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