FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-20040
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THE KRYSTAL COMPANY
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-0264140
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) Number)
One Union Square, Chattanooga, TN 37402
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(Address of principal executive offices, including zip code)
(423) 757-1550
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(Registrant's telephone number, including area code)
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 Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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THE KRYSTAL COMPANY
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September 28, 1997
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PART I. FINANCIAL INFORMATION
------------------------------
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial
statements should be read in conjunction with the Company's latest
annual report on Form 10-K. In the opinion of management of the
Company, all adjustments necessary to present fairly (1) the financial
position of The Krystal Company and Subsidiary as of September 28, 1997
and December 29, 1996, and (2) the results of their operations, their
changes in shareholders' equity and their cash flows for the nine
months ended September 28, 1997 and September 29, 1996, and (3)the
results of their operations for the three months ended September 28, 1997
and September 29, 1996 have been included. The results of operations for
the interim period ended September 28, 1997 are not necessarily indicative
of the results for the full year.
<TABLE>
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
<CAPTION>
September 28, December 29,
1997 1996
-------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
- -----------------
CURRENT ASSETS:
Cash and temporary investments $ 5,926 $ 28,765
Receivables, net 4,012 2,566
Income tax receivable 4,524 -
Net investment in direct financing
leases-current portion 305 562
Inventories 1,890 2,156
Deferred tax asset 2,844 8,327
Prepayments and other 1,075 1,980
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Total current assets 20,576 44,356
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NET INVESTMENT IN DIRECT FINANCING
LEASES, excluding current portion 100 305
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PROPERTY, BUILDINGS, AND EQUIPMENT, net 88,525 91,173
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LEASED PROPERTIES, net 1,509 1,653
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OTHER ASSETS:
Cash surrender value of life insurance 6,121 5,638
Other 2,299 745
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Total other assets 8,420 6,383
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TOTAL ASSETS $119,130 $143,870
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<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(In thousands)
<CAPTION>
September 28, December 29,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY ------- ---------
- ------------------------------------ (Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 4,756 $ 4,535
Accrued liabilities 18,257 17,986
Current portion of long-term debt 2,053 967
Current portion of capital
lease obligations 270 454
Income taxes payable - 822
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Total current liabilities 25,336 24,764
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LIABILITIES SUBJECT TO COMPROMISE,
excluding current portion - 58,317
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LONG-TERM DEBT, excluding current portion 34,573 3,090
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CAPITAL LEASE OBLIGATIONS, excluding
current portion 2,077 2,278
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DEFERRED INCOME TAXES 1,838 2,286
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OTHER LONG-TERM LIABILITIES 9,027 8,447
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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, 7,476,088 shares
at September 28, 1997, and 7,491,768
shares at December 29, 1996 40,363 40,556
Retained earnings 7,318 5,873
Deferred compensation (1,402) (1,741)
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Total shareholders' equity 46,279 44,688
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TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $119,130 $143,870
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<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In thousands, except per share data)(Unaudited)
<CAPTION>
For The Three For The Nine
Months Ended, Months Ended,
------------------ -------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales $ 60,331 $ 60,658 $178,815 $175,401
Franchise fees 40 49 219 171
Royalties 758 713 2,232 2,021
Other revenues 1,118 1,012 3,469 3,409
------- ------- ------- -------
62,247 62,432 184,735 181,002
------- ------- ------- -------
COST AND OTHER EXPENSES:
Cost of restaurant sales 50,878 50,607 148,393 145,847
Depreciation and amortization
expenses 2,921 2,845 8,216 8,447
General and administrative
expenses 5,825 6,578 19,656 19,567
Other expenses, net 776 791 2,444 2,742
------- ------- ------- -------
60,400 60,821 178,709 176,603
------- ------- ------- -------
OPERATING INCOME 1,847 1,611 6,026 4,399
REORGANIZATION ITEM:
Professional fees and
other expenses ( 156) ( 776) ( 1,218) ( 2,288)
INTEREST EXPENSE:
Contractual rate interest ( 884) ( 989) ( 2,828) ( 3,002)
Interest related to certain
pre-petition liabilities, net - ( 145) 96 ( 459)
INTEREST INCOME 73 280 517 820
------- ------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR
(BENEFIT FROM) INCOME TAXES AND
EXTRAORDINARY ITEM 880 ( 19) 2,593 ( 530)
PROVISION FOR (BENEFIT FROM)
INCOME TAXES 279 ( 8) 928 ( 199)
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INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 601 ( 11) 1,665 ( 331)
EXTRAORDINARY ITEM:
Loss on early extinguishment of
debt, net of applicable income
tax benefit of $134,000 in 1997 - - ( 220) -
------- ------- ------- -------
NET INCOME (LOSS) $ 601 $( 11) $ 1,445 $( 331)
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE $ 0.08 $ 0.00 $ 0.19 $( 0.04)
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 7,476 7,492 7,480 7,502
======= ======= ======= =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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FOR THE NINE MONTHS ENDED
--------------------------
SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
-----------------------------------------
(In thousands)
(Unaudited)
<CAPTION>
Common Retained Deferred
Stock Earnings Compensation
------ -------- ------------
<S> <C> <C> <C>
BALANCE, December 29, 1996 $40,556 $ 5,873 $(1,741)
Net income - 1,445 -
Issuance of 720 common shares to
management and non-employee
director under restricted
stock plan 4 - ( 4)
Forfeiture of 16,400 restricted
shares ( 197) - 197
Amortization of deferred
compensation - - 146
------ ------ ------
BALANCE, September 28, 1997 $40,363 $ 7,318 $(1,402)
====== ====== ======
BALANCE, December 31, 1995 $40,830 $ 8,195 $(2,378)
Net loss - ( 331) -
Issuance of 960 common shares to
management and non-employee
director under restricted
stock plan 4 - ( 4)
Forfeiture of 36,000 restricted
shares ( 278) - 278
Amortization of deferred
compensation - - 272
------ ------ ------
BALANCE, September 29, 1996 $40,556 $ 7,864 $(1,832)
====== ====== ======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
<CAPTION>
For The Nine Months Ended,
--------------------------
September 28, September 29,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income(loss) $ 1,445 $( 331)
Adjustments to reconcile net income(loss)
to net cash provided by operating
activities-
Depreciation and amortization 8,216 8,447
Decrease in deferred tax asset 5,483 -
(Decrease) in deferred taxes ( 448) -
Loss on early extinguishment of debt 354 -
(Increase) in receivables ( 1,446) ( 31)
(Increase) in income tax receivable ( 4,524) ( 594)
Decrease in inventories 266 294
(Increase)decrease in prepayments and other 905 ( 252)
Increase in accounts payable 221 2,104
(Decrease) in income taxes payable ( 822) -
Increase in accrued liabilities 271 6,235
Other ( 2,136) ( 131)
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Net cash provided by operating activities
before reorganization activities 7,785 15,741
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Changes in liabilities from reorganization
activities:
(Decrease) in accounts payable ( 7,920) ( 11)
(Decrease) in accrued liabilities (14,397) (3,023)
-------- --------
Net cash provided by (used in)
operating activities (14,532) 12,707
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INVESTING ACTIVITIES:
Additions to property, buildings,
and equipment ( 5,507) (4,149)
Proceeds from sale of property,
buildings, and equipment 554 2,083
Payments received on net investment in
direct financing leases 462 643
-------- --------
Net cash used in investing activities ( 4,491) (1,423)
-------- --------
FINANCING ACTIVITIES:
Decrease in debt from reorganization
activities (36,000) -
Proceeds from borrowing 36,320 -
Repayments of long-term debt ( 3,751) ( 41)
Principal payments of capital
lease obligations ( 385) ( 512)
-------- --------
Net cash used in financing activities ( 3,816) ( 553)
-------- --------
NET INCREASE(DECREASE) IN CASH AND
TEMPORARY INVESTMENTS (22,839) 10,731
CASH AND TEMPORARY INVESTMENTS,
beginning of period 28,765 13,713
-------- --------
CASH AND TEMPORARY INVESTMENTS,
end of period $ 5,926 $24,444
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 6,928 $ 513
Income taxes 1,159 637
Reorganization item: professional fees
and other expenses 2,531 618
======== =======
<FN>
See accompanying notes to consolidated condensed financial statements.
</TABLE>
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
On December 15, 1995, Krystal 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). Four pending lawsuits filed against
Krystal under the FLSA were 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.
A plan of reorganization, as amended (the "Plan") was formally filed on
February 24, 1997. On April 10, 1997, the Bankruptcy Court confirmed the
Company's plan of reorganization and on April 23, 1997, the Plan became
effective.
On September 26, 1997(effective September 29, 1997 for accounting purposes),
pursuant to an Agreement and Plan of Merger (the "Merger Agreement") by
and among the Company, Port Royal Holdings, Inc. ("Port Royal") and TKC
Acquisition Corp. ("Merger Sub") dated July 3, 1997, Port Royal acquired
the Company for an aggregate purchase price equal to $108,403,276
(the "Acquisition"). At the closing of the Acquisition, the Merger Sub
was merged with and into the Company with the Company as the surviving
corporation (the "Merger"). As a result of the Merger, each share of the
Company's issued and outstanding stock prior to the Merger was converted
into the right to receive $14.50 cash, and the Company became a 100%
wholly-owned subsidiary of Port Royal.
The purchase price for the acquisition was funded through (i) a $35 million
equity contribution from Port Royal funded by a private equity placement,
(ii) borrowings under a revolving credit facility of $25 million with SunTrust
Bank, Atlanta, N.A., as agent and (iii) the sale of the Company's 10.25%
senior notes due 2007 in the aggregate principal amount of $100 million.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Comparison of the Three Months Ended September 28, 1997
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to the Three Months Ended September 29, 1996
--------------------------------------------
Total revenues decreased 0.3% to $62.2 million for the third quarter of
1997 compared to $62.4 million for the same period of 1996. Restaurant
sales decreased $327,000 in the third quarter of 1997 compared to
the same period in 1996, although for the 249 units open the third
quarter 1997 and 1996 restaurant sales increased $115,000 during the third
quarter 1997 compared to the same period of 1996. This increase was offset
by the closing of one restaurant at the end of the third quarter 1996 and a
second restaurant at year end 1996 for which combined sales for the third
quarter 1996 were $442,000. Company-owned average same restaurant sales were
$242,000 for the third quarter of 1997 and for the same period in 1996.
Price increases, new advertising and promotional programs and continuing
improvements in operations at the restaurant level helped to offset this
decline in the number of restaurants. The Company had 249 restaurants open
at the end of the third quarter of 1997 compared to 250 at the end of the
third quarter of 1996.
Franchise fees and royalties increased $36,000 to $798,000 in the third
quarter of 1997 versus the same period in 1996. The franchise system
had 95 restaurants open at the end of the third quarter of 1997
compared to 83 open at the end of the third quarter of 1996. This
increase in franchise fees and royalties is a result of the increase in
franchised restaurants.
Other revenue, which comes from the Company's aviation subsidiary, was
$1.1 million in the third quarter of 1997 compared to $1.0 million in
the third quarter of 1996. This increase was a result of increased fuel
sales and lease operation revenue.
The average customer check for Company-owned restaurants (both full service
and double drive-thru) in the third quarter of 1997 was $3.83 as compared to
$3.65 in the same period of 1996, an increase of 4.9%. The changes in
average customer check are due to product prices increasing approximately
4.0% in the third quarter of 1997 over the same period in 1996, and
introducing promotional products and menu combinations which increased the
average customer check. Customer counts per restaurant day decreased to 690
in the third quarter of 1997 compared to 721 in the same period of 1996, a
decrease of 4.3%. The customer count decline is partly attributable to a
new cash register being installed throughout the system which counts a
customer with each sale registered rather than each time the cash drawer is
opened as the prior register system did. Conversion was completed in 208
restaurants at September 28, 1997, and management believes this change
has reduced reported customer counts by approximately 1.6%, but produces a
more accurate customer count.
Cost of restaurant sales increased $271,000, approximately 0.5%, to
$50.9 million in the third quarter of 1997, from $50.6 million in the
same period of 1996. Cost of restaurant sales as a percentage of
restaurant sales increased to 84.3% in the third quarter of 1997 from
83.4% in the same period of 1996. Total food and paper costs were $19.6
million in the third quarter of 1997 as compared to $20.1 million in the
third quarter of 1996. Food and paper costs as a percentage of restaurant
sales decreased to 32.5% in the third quarter of 1997 as compared to 33.1%
in the same period of 1996. Direct labor cost increased $305,000 in the
third quarter of 1997, approximately 2.3%, to 22.5% of restaurant sales in
the third quarter of 1997 as compared to 21.9% in the third quarter of 1996.
Most of this increase is due to the increase in the minimum wage in the last
month of the third quarter of 1997. Assistant restaurant manager labor cost
increased $78,000, approximately 3.0%, in the third quarter of 1997 compared
to the third quarter of 1996. Assistant restaurant manager labor cost as a
percentage of restaurant sales increased to 4.5% in the third quarter of 1997
from 4.3% in the same period of 1996. Restaurant manager labor cost increased
$57,000, approximately 3.1%, due to average salary increases for the third
quarter of 1997.
Depreciation and amortization expenses increased $76,000, approximately
2.7%, to $2.9 million in the third quarter of 1997 as compared to $2.8
million for the same period in 1996. This increase in the third
quarter of 1997 is due to some assets being fully depreciated in 1996 and
new assets added in 1996 and 1997 having depreciation expense in the third
quarter of 1997 and having none in the third quarter of 1996.
General and administrative expenses were approximately $5.8 million in
the third quarter of 1997 as compared to $6.6 million for the same period
in 1996. Advertising expense was approximately $2.5 million in the third
quarter compared to $2.6 million in the same period of 1996. Advertising
expense as a percentage of restaurant sales was 4.2% in the third quarter
of 1997 compared to 4.3% in the same period of 1996. Salaries were $1.9
million in the third quarter of 1997 and 1996. Cash value of life insurance
on certain executives reduced premium expenses by $189,000 in the third
quarter of 1997 compared to a reduction of $30,000 in the same period of
1996. Pension expense decreased $359,000 to income of $200,000 in the third
quarter of 1997 from an expense of $159,000 in the same period of 1996. The
improvements in cash value of life insurance and pension expense in 1997
are due to increased investment returns in 1997 compared to 1996.
In accordance with Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, issued by the
American Institute of Certified Public Accountants, the Company is
expensing Reorganization Items as incurred. The total of such
professional fees and expenses during the third quarter of 1997 was
$156,000 as compared to $776,000 for the same period in 1996.
Contractual rate interest expense decreased $105,000 during the third quarter
of 1997 compared to the same period in 1996, primarily due to a $3.0 million
reduction to a $37.0 million average of outstanding long-term debt in the
third quarter of 1997 compared to $40.0 million during the same period of 1996.
There was no interest expense related to certain pre-petition liabilities in
the third quarter of 1997 compared to $145,000 in the same period of 1996.
Interest income was down $207,000 because less cash was available for
investments in the third quarter of 1997 compared to same period of 1996.
Provision for income taxes increased to $279,000 in the third quarter
of 1997 from a tax benefit of $8,000 in the same period of 1996. The
effective tax rate of 32.0% reflects the statutory income tax rates,
reduced by immaterial adjustments to the Company's deferred tax accounts.
Comparison of the Nine Months Ended September 28, 1997
------------------------------------------------------
to the Nine Months Ended September 29, 1996
-------------------------------------------
Total revenues increased 2.1% to $184.7 million for the first nine months of
1997 compared to $181.0 million for the same period of 1996. Restaurant
sales accounted for $3.4 million of this $3.7 million increase. Restaurant
sales for 249 units open the first nine months of 1997 and 1996 increased
$5.4 million during the first nine months of 1997 compared to the same period
in 1996 but were partially offset by the closing of seven restaurants at
various times during 1996 whose combined sales were $2.0 million during the
same period of 1996. Company-owned average same restaurant sales for the
first nine months of 1997 were $721,000 compared to $699,000 for the same
period in 1996, an increase of 3.1%. The Company's management believes the
1997 first nine months sales increase can be attributed to several factors,
including price increases, new advertising and promotional programs,
continuing improvements in operations at the restaurant level and the mild
weather in the southeast in the first quarter 1997 as compared to the same
period in 1996. The Company had 249 restaurants open at the end of the
first nine months of 1997 compared to 250 at the end of the first nine
months of 1996.
Franchise fees and royalties increased $259,000 to $2.5 million in the
first nine months of 1997 versus the same period in 1996. The franchise
system had 95 restaurants open at the end of the first nine months of 1997
compared to 83 open at the end of the same period in 1996. This increase in
franchise fees and royalties is a result of the increase in franchised
restaurants.
Other revenue, which comes from the Company's aviation subsidiary, was
$3.5 million in the first nine months of 1997 compared to $3.4 million in
the same period of 1996.
The average customer check for Company-owned restaurants (both full size and
double drive-thru) in the first nine months of 1997 was $3.78 as compared
to $3.55 in the same period of 1996, an increase of 6.5%. The changes in
average customer check are due to product prices increasing approximately
3.7% in the first nine months of 1997 over the same period in 1996, and
introducing promotional products and menu combinations which increased the
average customer check. Customer counts per restaurant day decreased to
691 in the first nine months of 1997 compared to 709 in the same period
of 1996, a decrease of 2.5%. The customer count decline is partly
attributable to a new cash register being installed throughout the system
which counts a customer with each sale registered rather than each time the
cash drawer is opened as the prior register system did. Conversion was
completed in 208 restaurants at September 28, 1997, and management believes
this change has reduced reported customer counts by approximately 1.7%, but
produces a more accurate customer count.
Cost of restaurant sales increased $2.5 million, approximately 1.8%, to
$148.4 million in the first nine months of 1997, from $145.8 million in the
same period of 1996. Cost of restaurant sales as a percentage of restaurant
sales decreased to 83.0% in the first nine months of 1997 from 83.2% in the
same period of 1996. Total food and paper costs were $57.7 million in the
first nine months of 1997 as compared to $56.2 million in the same period of
1996. Food and paper costs as a percentage of restaurant sales increased to
32.3% in the first nine months of 1997 as compared to 32.0% in the same
period of 1996. Direct labor cost increased $522,000 in the first nine
months of 1997, approximately 1.3%, to 22.3% of restaurant sales in the
first nine months of 1997, versus 22.4% in the same period of 1996.
Assistant restaurant manager labor cost increased $494,000, approximately
6.3%. Assistant restaurant manager labor cost as a percentage of restaurant
sales increased to 4.7% in the first nine months of 1997 from 4.5% in the
same period of 1996. Restaurant manager labor cost increased $90,000,
approximately 1.6%, due to average salary increases for the first nine
months of 1997.
Depreciation and amortization expenses decreased $231,000, approximately
2.7%, to $8.2 million in the first nine months of 1997 as compared to $8.4
million for the same period in 1996. This decrease in the first nine months
of 1997 is due to certain assets being fully depreciated in late 1996.
General and administrative expenses increased by $89,000, approximately
0.5%, to $19.7 million in the first nine months of 1997 versus $19.6 million
in the same period of 1996. Advertising expense was approximately $7.5
million in the first nine months of 1997, down from $7.6 million in the same
period of 1996. Advertising expense as a percentage of restaurant sales was
4.2% in the first nine months of 1997 compared to 4.4% in the same period of
1996. Salaries increased $287,000, approximately 5.0%, to $6.0 million in
the first nine months of 1997 from $5.7 million in the same period of 1996.
This increase in salaries was primarily the result of accruing $226,000 for
profit incentive bonuses in 1997; no accrual was made in 1996 as there was a
year-to-date net loss.
In accordance with Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, issued by the
American Institute of Certified Public Accountants, the Company is
expensing Reorganization Items as incurred. The total of such
professional fees and expenses during the first nine months of 1997 was
$1.2 million as compared to $2.3 million in the same period of 1996.
A reducing adjustment of $331,000 in interest related to certain pre-petition
liabilities, net, resulted in $96,000 of income during the first nine months of
1997 compared to expense of $459,000 in the same period of 1996. Interest
income decreased $303,000 for the first nine months of 1997 compared to the
same period in 1996 due to the reduction in cash and temporary investments
from 1996.
Provision for income taxes increased to $928,000 in the first nine months of
1997 as compared to an income tax benefit of $199,000 for the same period in
1996, when the Company recorded a net loss for the period. The effective tax
rate of 36.0% approximates the combined statutory federal and state income
tax rates.
The write-off of unamortized financing costs in conjunction with
extinguishment of debt of $334,000 pre-tax was recorded in the first
nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The terms and provisions of the Company's reorganization plan were approved
by the Bankruptcy Court on April 10, 1997 and became effective April 23, 1997.
The confirmed plan, which was substantially executed during the second
quarter of 1997, provided for the following:
- --term loans of $10.0 million and $20.0 million and a revolving loan of
$23.0 million effective April 23, 1997, and maturing April 23, 2002;
- --the payment of senior debt and secured debt totaling about $38.6 million
along with all past due interest and additional interest at 1.3% per annum;
- --the settlement of FLSA claims represented by class action suits and
totaling about $12.6 million with pro se claims settled for approximately
$100,000;
- --the payment of holders of about $7.6 million of trade claims of 100%
of their claims with interest at 8.5% per annum for the period
December 15, 1995 - April 23, 1997.
The Company does not maintain significant inventory or accounts receivables
since substantially all of its restaurants' sales are for cash. Like many
restaurant businesses, the Company receives several weeks of trade credit in
purchasing food and supplies. The Company's receivables from franchisees are
closely monitored and collected weekly. The Company normally operates with
working capital deficits (current liabilities exceeding current assets), and,
had a working capital deficit of $4.8 million at September 28, 1997 compared
to a working capital surplus of $15.9 million at September 29, 1996. At
September 29, 1996, approximately $26.4 million of liabilities classified as
Liabilities Subject to Compromise during Chapter 11 status, would otherwise
have been classified as Current Liabilities.
Capital expenditures totaled approximately $5.5 million in the first nine
months of 1997 compared to $4.1 million for the same period in 1996. The
Company opened no new restaurants during the first nine months of 1997
or the same period in 1996. Approximately $7.6 million is budgeted for
capital expenditures in 1997 for refurbishing of certain restaurants and
ongoing capital improvements. The Company owns approximately 53.8% of its
restaurant sites and leases the remainder.
On September 26, 1997 (effective September 29, 1997 for accounting purposes),
the Company was acquired by Port Royal Holdings as described in Notes to
Consolidated Financial Statements. The transaction was funded through (i) a
$35 million equity contribution from Port Royal funded by a private equity
placement, (ii) borrowings under a revolving credit facility of $25 million
with SunTrust Bank, Atlanta, N.A., as agent and (iii) the sale of the
Company's 10.25% senior notes due 2007 in the aggregate principal amount of
$100 million.
The senior notes bear interest at 10.25% per annum and mature
October 1, 2007. Interest on the notes is payable semi-annually on
April 1 and October 1 of each year commencing April 1, 1998. The notes are
redeemable in whole or in part on or after April 1, 2002, at the option of
the Company at prescribed prices. In addition, prior to April 2000 the
Company may, subject to certain conditions, redeem up to 35% of the senior
notes with the net proceeds of one or more equity offerings at a redemption
price equal to 110.25%. The notes are guaranteed by the Company's
subsidiary but are unsecured.
The Senior Secured Revolving Credit Facility is with a group of banks and
accrues interest at 0.0% to 0.5% over base rate or 1.0% to 2.5% over
Eurodollar rates based on the Company's Funded Debt Coverage Ratio.
The facility matures August 26, 2000, and is secured by all the tangible
and intangible assets of the Company.
After acquisition of the Company's common stock, refinancing existing debt
and payment at closing of $6.3 million of transaction costs and fees, the
Company had available cash of approximately $5.9 million and an available
revolving loan facility of $9.5 million of which approximately $4.0 million
was used for letters of credit. Management believes funds from operations,
existing cash and the available credit facility will be sufficient to meet
its operating requirements, anticipated capital expenditures and other
obligations for the foreseeable future.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-
Exhibit-27 Financial Data Schedule is filed with this 10-Q.
Computation of per share earnings is shown on the Registrant's
Consolidated Statements of Operations.
(b) Reports on Form 8-K-
A Form 8-K was filed on July 14, 1997 by the Registrant regarding the
entering of the Agreement and Plan of Merger with Port Royal Holdings.
Subsequent to the end of the third quarter, a Form 8-K was filed on
October 10, 1997 by the Registrant announcing the consummation of the
merger with Port Royal Holdings.
THE KRYSTAL COMPANY AND SUBSIDIARY
----------------------------------
SIGNATURES
----------
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
thereunto duly authorized.
THE KRYSTAL COMPANY
(Registrant)
Dated: 11/12/97 /s/Clay H. Buckner, Jr.
- -------------- ------------------------
Clay H. Buckner, Jr.
(Treasurer, Controller and Principal
Accounting Officer)
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