SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 29, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ________
--------------------
COMMISSION FILE NUMBER 0-17980
--------------------
RALLY'S HAMBURGERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1210077
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
10002 Shelbyville Road, Suite 150, Louisville, Kentucky 40223
Registrant's telephone number, including area code: 502/245-8900
Indicate by check mark whether 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 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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
CLASS - Common stock, Par value $.10 per share
OUTSTANDING AT November 6, 1996 - 20,521,840 shares
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
INDEX
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PART I. Financial Information PAGE NO.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995 and
September 29, 1996 (Unaudited) 2
Consolidated Statements of Operations (Unaudited) for the
Quarters and Nine Months Ended October 1, 1995 and September 29, 3
1996
Consolidated Statements of Shareholders' Equity (Unaudited) for
the Nine Months Ended September 29, 1996 4
Consolidated Statements of Cash Flows (Unaudited) for the Nine
Months Ended October 1, 1995 and September 29, 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II. Other Information
ITEM 1. Legal Proceedings 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT 3.1 Restated Certificate of Incorporation, as amended 23
EXHIBIT 11 Calculation of Earnings Per Share 26
EXHIBIT 27 Financial Data Schedule (for SEC use only) 27
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND SEPTEMBER 29,1996
(In thousands, except shares and per share amounts)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 29,
1995 1996
--------------------------------
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ASSETS
Current assets:
Cash and cash equivalents $ 8,811 $ 9,300
Restricted cash 683 669
Investments 4,933 --
Royalties receivable, including $483 and $126 from related parties at December 31, 1995 and
September 29, 1996, respectively, net of a reserve for doubtful accounts of $922 and $1,350 at
December 31, 1995 and September 29, 1996, respectively 818 407
Accounts and other receivables, including $555 from related parties at September 29, 1996, net of
reserve for doubtful accounts of $453 and $315 at December 31, 1995 and September 29, 1996, 2,131 2,679
respectively
Inventory, at lower of cost or market 1,056 771
Current portion of notes receivable, including $10 from related parties at December 31, 1995, net
of a reserve for doubtful accounts of $109 and $269 at December 31, 1995 and September 29, 1996, 113 44
respectively
Prepaid expenses and other current assets 1,131 1,029
Assets held for sale 2,506 287
------------------------------
Total current assets 22,182 15,186
Assets held for sale 3,517 2,345
Property and equipment, at historical cost, less accumulated depreciation of $33,391 and $36,765 at
December 31, 1995 and September 29, 1996, respectively 78,683 70,893
Notes receivable, less current portion, including $165 from related parties at December 31, 1995, net
of a reserve for doubtful accounts of $433 and $305 at December 31, 1995 and September 29, 1996, 676 718
respectively
Intangible and other assets, less accumulated amortization of $6,888 and $7,326 at December 31, 1995
and September 29, 1996, respectively 32,334 30,417
-------------------------------
Total assets $ 137,392 $ 119,559
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 8,773 $ 4,759
Accrued liabilities 15,959 15,494
Current maturities of long-term debt and obligations under capital leases 17,544 1,676
-------------------------------
Total current liabilities 42,276 21,929
Senior notes, net of discount of $768 and $489 at December 31, 1995 and September 29, 1996, 69,034 62,511
respectively
Long-term debt, less current maturities 5,749 4,958
Obligations under capital leases, less current maturities 5,631 5,500
Other liabilities 8,030 6,184
--------------------------------
Total liabilities 130,720 101,082
--------------------------------
Commitments and contingencies (Note 6)
Shareholders' equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized, no shares issued -- --
Common stock, $.10 par value, 50,000,000 shares authorized, 15,927,000 and 20,773,000 shares issued at
December 31, 1995 and September 29, 1996, respectively 1,593 2,077
Additional paid-in capital 60,804 70,762
Less: Treasury shares, 273,000 at December 31, 1995 and September 29, 1996, respectively (2,108) (2,108)
Retained deficit (53,617) (52,254)
--------------------------------
Total shareholders' equity 6,672 18,477
--------------------------------
Total liabilities and shareholders' equity $ 137,392 $ 119,559
================================
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated balance sheets.
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2
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except shares and per share amounts)
QUARTERS ENDED NINE MONTHS ENDED
------------------------------------------------------------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
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REVENUES:
Restaurant sales $ 47,916 $ 37,081 $ 136,511 $ 123,360
Franchise revenues and fees 1,935 1,489 5,653 4,479
Owner fee income -- 211 -- 211
------------------------------------------------------------------------------
Total revenues 49,851 38,781 142,164 128,050
------------------------------------------------------------------------------
COSTS AND EXPENSES:
Restaurant cost of sales 17,536 12,188 47,617 43,053
Restaurant operating expenses, exclusive of
depreciation and amortization and other
operating expenses shown separately below 22,315 16,707 61,946 57,096
General and administrative expenses 5,284 3,394 14,296 11,394
Advertising and promotion expenses 3,286 1,465 9,659 6,380
Depreciation and amortization 3,294 2,318 10,298 7,620
Owner expenses -- 322 -- 322
Other charges (credits) 12,939 (245) 12,939 509
------------------------------------------------------------------------------
Total costs and expenses 64,654 36,149 156,755 126,374
------------------------------------------------------------------------------
Income (loss) from operations (14,803) 2,632 (14,591) 1,676
------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (2,753) (2,053) (8,028) (6,512)
Interest income 188 23 481 402
Other 51 12 188 (21)
------------------------------------------------------------------------------
Total other (expense) (2,514) (2,018) (7,359) (6,131)
------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary items (17,317) 614 (21,950) (4,455)
PROVISION (BENEFIT) FOR INCOME TAXES (1) 502 119 (994)
------------------------------------------------------------------------------
Income (loss) before extraordinary items (17,316) 112 (22,069) (3,461)
EXTRAORDINARY ITEMS (net of tax benefit of $302
and tax expense of $1,515 for the 1996 quarter -- 302 -- 4,824
and nine months ended, respectively)
------------------------------------------------------------------------------
Net income (loss) $ (17,316) $ 414 $ (22,069) $ 1,363
================ ================== ============== ====================
Income (loss) per common share:
Income (loss) before extraordinary item $ (1.11) $ 0.01 $ (1.41) $ (0.22)
Extraordinary item -- 0.02 -- 0.31
---------------- ------------------ -------------- --------------------
Net income (loss) $ (1.11) $ 0.03 $ (1.41) $ 0.09
================ ================== ============== ====================
Weighted average shares outstanding 15,631 15,896 15,611 15,833
================ ================== ============== ====================
The accompanying notes to consolidated financial
statements are an integral part of these
financial statements.
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3
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
Treasury Stock and
Preferred Stock Common Stock Contingent Shares
--------------------------- --------------------------- -------------------
Additional Retained
Shares Shares Shares Shares Paid-In Earnings Total
Authorized Issued Amount Authorized Issued Amount Shares Amount Capital (Deficit) Equity
---------- ------ ------ ---------- ------ ------ ------ ------ ------- --------- ------
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Balances at
December 31, 1995 -- -- -- 50,000 15,927 1,593 (273) (2,108) 60,804 (53,617) 6,672
Amendment to the
Charter (B) 5,000 -- -- -- -- -- -- -- -- -- --
Issuance of common
stock -- -- -- -- 4,846 484 -- -- 9,958 -- 10,442
Net loss -- -- -- -- -- -- -- -- -- 1,363 1,363
----------------------------------------------------------------------------------------------------------------
Balances at
September 29, 1996 5,000 -- -- 50,000 20,773 $ 2,077 (273) $ (2,108) $ 70,762 (52,254) $ 18,477
========== ===== ======== =========== ====== ========= ======= ======== ========== ========== =========
(A) On May 13, 1995, stockholders of the Company approved a proposal to
amend the Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 25,000,000 shares to
50,000,000.
(B) On July 10, 1996, stockholders of the Company approved a proposal to
amend the Certificate of Incorporation to authorize 5,000,000 shares
of Preferred Stock, $.10 par value per share.
The accompanying notes to consolidated financial
statements are an integral part of these
financial statements.
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4
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 5)
(Unaudited)
(In thousands)
NINE MONTHS ENDED
----------------------------------
OCTOBER 1, SEPTEMBER 29,
1995 1996
----------------------------------
CASH FLOWS PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
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Net income (loss) $ (22,069) $ 1,363
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 10,298 7,940
Other charges 12,939 509
Provision for losses on receivables 1,220 548
Stock grants 126 --
Extraordinary items, before tax expense of $1,515 -- (6,339)
Other 1,627 913
Changes in assets and liabilities, net of effects from business combinations:
(Increase) decrease in assets:
Receivables (1,613) (597)
Inventory (90) 285
Prepaid expenses and other current assets 27 69
Increase (decrease) in liabilities:
Accounts payable, accrued interest and other accrued liabilities 7,765 (4,391)
Deferred income taxes (13) --
Accrued income taxes -- 57
Other liabilities (218) (1,080)
----------------------------------
Net cash provided by (used in) operating activities 9,999 (723)
----------------------------------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
(Increase) decrease in investments (2,970) 4,933
Notes receivable 124 362
Pre-opening costs (45) (74)
Capital expenditures (2,907) (1,321)
Proceeds from the sale of property and equipment and assets held for sale 3,616 3,903
(Increase) in other assets (671) (157)
Acquisition of businesses, net of cash acquired (1,931) --
Proceeds from the sale of a business 2,730 --
-----------------------------------
Net cash provided by (used in) investing activities (2,054) 7,646
-----------------------------------
CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Decrease in restricted cash -- 14
Principal payments of debt (1,742) (5,436)
Senior Notes retirement -- (11,053)
Proceeds from the issuance of common stock, net of costs of issuance 61 10,442
Principal payments on capital lease obligations (472) (401)
-----------------------------------
Net cash used in financing activities (2,153) (6,434)
-----------------------------------
Net increase in cash 5,792 489
CASH AND CASH EQUIVALENTS, beginning of period 2,707 8,811
-----------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 8,499 $ 9,300
============== ==================
The accompanying notes to consolidated financial
statements are an integral part of these
financial statements.
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5
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7
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular dollars in thousands, except per share amounts)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for interim financial information. Accordingly,
they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. Therefore, it is suggested that the accompanying financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's annual report on Form 10-K for the
fiscal year ended December 31, 1995 ("10-K"). Except as disclosed herein,
there has been no material change in the information disclosed in the
notes to the consolidated financial statements included in the 10-K.
Forward looking statements contained herein should be read in conjunction
with the cautionary statements contained in the 10-K.
The consolidated financial statements include Rally's Hamburgers, Inc.
and its wholly-owned subsidiaries, each of which is described below.
Rally's Hamburgers, Inc. and its subsidiaries are collectively referred
to herein as the context requires as "Rally's" or the "Company". All
significant intercompany accounts and transactions have been eliminated.
Rally's is one of the largest chains of double drive-thru restaurants in
the United States. At October 31, 1996, the Rally's system included 474
restaurants in 19 states, primarily in the Midwest and the Sunbelt,
comprised of 235 Company-owned and 239 franchised restaurants.
Twenty-eight of the Company-owned restaurants in Western markets are
operated by CKE Restaurants, Inc. ("CKE"), a significant shareholder of
the Company, under an operating agreement which began July, 1996. The
Company's restaurants offer high quality fast food served quickly. The
Company primarily serves the drive-thru and take-out segments of the
quick-service restaurant industry. The Company opened its first
restaurant in January 1985 and began offering franchises in November
1986.
Rally's Hamburgers, Inc., Rally's of Ohio, Inc., Self Service Drive
Thru, Inc. and Hampton Roads Foods, Inc. own and operate Rally's
restaurants in various states. Additionally, Rally's Hamburgers, Inc.
operates as franchisor of the Rally's brand. Rally's Management, Inc.
provides overall corporate management of the Company's businesses.
Rally's Finance, Inc. was organized for the purpose of making loans to
Rally's franchisees to finance the acquisition of restaurant equipment
and modular buildings. RAR, Inc. was organized for the purpose of acquir-
ing and operating a corporate airplane and is currently inactive. The
Company's wholly-owned subsidiary, ZDT Corporation, was formed to own
the Zipps brand and franchise system. MAC I was organized for the
purpose of acquiring a manufacturer of modular buildings. The manufactur-
ing business was sold in January 1995 (see Note 2).
The preparation of the 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 disclosures 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, when actual transactions anticipated are consummated. In
addition, despite management diligence, changes in estimates do and will
continue to occur due to changes in available relevant data and
consummation of the events and transactions. The statements are prepared
on a going concern basis. Certain of the most significant estimates
include useful lives assigned to depreciable/amortizable assets, fair
6
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value less costs to sell of long-lived assets held for sale, fair value
of long-lived assets held for use, future net occupancy costs related to
closed/disposable properties, accruals for the Company's self-insured and
high deductible insurance programs and disclosures regarding commitments
and contingencies.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments considered necessary to
present fairly the Company's financial position as of September 29, 1996
and the results of its operations for the quarter and nine months ended
October 1, 1995 and September 29, 1996, cash flows for the nine months
ended October 1, 1995 and September 29, 1996 and the related changes in
shareholders' equity for the nine months ended September 29, 1996. The
results of operations for such interim periods are not necessarily
indicative of the results to be expected for the full year.
Revenue received as a result of the operating agreement with CKE is
referred to as Owner fee income in the accompanying consolidated
financial statements. Expenses related to the ongoing investment in the
CKE-operated restaurants consist primarily of depreciation and
amortization and are referred to as Owner expenses in the accompanying
consolidated financial statements.
It is the Company's policy to expense advertising costs as incurred.
Certain items have been reclassified in the accompanying consolidated
financial statements for prior periods in order to be comparable with the
classification adopted for the current period. Such reclassifications had
no effect on previously reported net income.
2. ACQUISITION AND DISPOSITION
On February 13, 1995, the Company acquired all of the shares of common
stock of Hampton Roads Foods, Inc. (a Louisiana corporation) and certain
of the assets of HRF, Inc. (a Virginia corporation), collectively
referred to as "HRF", for approximately $7.2 million, of which
approximately $2.1 million was paid in cash with the remainder to be paid
over the ensuing six years pursuant to a secured promissory note, bearing
interest at 9%. In addition, the Company assumed approximately $654,000
of notes payable and other liabilities and HRF's lease obligations,
including capital lease obligations of approximately $1.3 million. HRF
owned and operated a total of ten Rally's restaurants and owned the
exclusive right to develop additional Rally's restaurants in the Hampton
Roads and Norfolk, Virginia areas. The acquisition of HRF was accounted
for as a purchase.
The total purchase price of approximately $9.1 million has been allocated
in the accompanying 1995 balance sheet as net property and equipment
(approximately $2.1 million) and as intangible and other assets
(approximately $6.7 million). The remainder of the purchase price,
approximately $319,000, was allocated to various current assets. The
intangible and other asset amounts include a noncompete (approximately
$150,000) which is being amortized over five years and reacquired
franchise and territory rights (approximately $6.6 million) which are
being amortized over 15 years.
The impact on operations of this acquisition was not significant for any
of the periods presented, and therefore, proforma amounts are not
presented giving effect to this acquisition.
On January 30, 1995, the Company sold all of the shares of common stock
of Beaman Corporation, its wholly-owned modular building subsidiary, for
approximately $3.1 million, of which approximately $2.7 million was paid
in cash, and the remainder will be paid pursuant to a non-interest
bearing, unsecured promissory note with equal payments due on January 30,
1997 and 1998.
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3. RESTRICTED CASH
Restricted cash consists primarily of a $600,000 restricted deposit held
as a compensating balance for daily Automated Clearing House ("ACH")
transactions.
4. INVESTMENTS
As of December 31, 1995, excess funds were invested in U.S. Treasury
and investment grade corporate debt securities. These securities are
deemed as "available-for-sale" under SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities" and are reported at fair
value. Unrealized holding gains and losses, excluding those losses
considered to be other than temporary, are reported as a net amount in a
separate component of shareholders' equity. There were no unrealized
holding gains or losses at December 31, 1995. Provisions for declines in
market value are made for losses considered to be other than temporary.
No such provision was necessary for the period ended December 31, 1995.
The market value of the portfolio was determined based on quoted market
prices for these investments. Realized gains or losses from the sale of
investments are based on the specific identification method.
There were no investments at September 29, 1996. The carrying value and
market value of investments at December 31, 1995 were as follows:
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GROSS GAINS
UNREALIZED UNREALIZED
CARRYING HOLDING HOLDING MARKET
VALUE GAINS LOSSES VALUE
--------------- ------------------- ------------------------------
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DECEMBER 31, 1995
United States government and its agencies $ 4,933 $ -- $ -- $ 4,933
=============== ================= ================= ============
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The proceeds from the sale of investments and related gross gains and
losses for the quarter and nine months ended October 1, 1996 and
September 29, 1996 were as follows:
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QUARTERS ENDED NINE MONTHS ENDED
--------------------------------------------------------------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
------------------ -------------------------------------------------------------
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Proceeds from the sale of investments $ 1,991 $ -- $ 7,595 $ 4,933
Gross gains realized 7 -- 56 --
Gross losses realized -- -- -- --
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5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
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NINE MONTHS ENDED
----------------------------------------------
OCTOBER 1, SEPTEMBER 29,
1995 1996
------------------ -----------------------
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Interest paid (net of amount capitalized) $ 5,930 $ 5,052
Income taxes paid 45 463
Capital lease obligations incurred 1,616 111
</TABLE>
Interest incurred during the construction of restaurants is capitalized
as a component of the cost of the restaurants and is amortized on a
straight-line basis over the estimated useful lives of the restaurants.
The amount of interest capitalized in all quarters was insignificant.
The purchase of HRF, described in Note 2, was recorded as follows:
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NINE MONTHS ENDED
-------------------------------
OCTOBER 1, 1995
-------------------------------
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Fair value of assets acquired $9,133
Cash paid (2,125)
---------
Liabilities assumed $7,008
=========
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As a result of the sale of Beaman, discussed in Note 2, the Company
recorded a note receivable of approximately $347,000, discounted at
12.5%. The Company recorded $547,000 in notes receivable primarily as the
result of the sale of five of its restaurants. These non-cash
transactions have been excluded from the consolidated statement of cash
flows.
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months
or less at the date of purchase to be cash equivalents.
6. COMMITMENTS AND CONTINGENCIES
Litigation
In January and February 1994, two putative class action lawsuits were
filed, purportedly on behalf of the stockholders of Rally's in the United
States District Court for the Western District of Kentucky, against
Rally's, Burt Sugarman and GIANT and certain of Rally's present and
former officers and directors and its auditors. The complaints allege
defendants violated the Securities Exchange Act of 1934, among other
claims, by issuing inaccurate public statements about the Company in
order to arbitrarily inflate the price of its common stock. The
plaintiffs seek unspecified damages. On April 15, 1994, Rally's filed a
motion to dismiss and a motion to strike. On April 5, 1995, the Court
struck certain provisions of the complaint but otherwise denied Rally's
motion to dismiss. In addition, the Court denied plaintiffs' motion for
class certification; the plaintiffs renewed this motion, and despite
opposition by the defendants, the Court granted such motion for class
certification on April 16, 1996. In October 1995, the plaintiffs filed a
motion to disqualify Christensen, White, Miller, Fink, Jacobs, Glaser,
Shapiro, LLP ("Christensen, White") as counsel for defendants based on a
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purported conflict of interest allegedly arising from the representation
of multiple defendants as well as Ms. Glaser's position as both a former
director of Rally's and a partner in Christensen, White. Defendants filed
an opposition to the motion, and the motion to disqualify Christensen,
White was denied. The action was stayed between May 30 and July 31, 1996
to facilitate settlement discussions. One settlement conference has been
conducted; no others are currently scheduled. Management is unable to
predict the outcome of this matter at the present time or whether or not
certain available insurance coverages will apply. The defendants deny
all wrongdoing and intend to defend themselves vigorously in this matter.
Discovery is proceeding. Because these matters are in a preliminary
stage, the Company is unable to determine whether a resolution adverse
to the Company will have a material effect on its results of operations
or financial condition. Accordingly, no provisions for any liabilities
that may result upon adjudication have been made in the accompanying
financial statements.
In July 1994, the Company entered into an agreement with Red Line
Burgers, Inc. ("Red Line") whereby Red Line leased from the Company all
of its assets being operated as Rally's restaurants in Houston, Texas.
Additionally, the agreement called for Red Line to convert Red Line's
eight competing units in the Houston market to the Rally's brand. Red
Line failed to make certain lease payments and on June 20, 1995, the
Company filed an action in the United States District Court for the
Southern District of Texas, Galveston Division, seeking recovery of
damages from Red Line for its breach of the leases and subleases entered
into with the Company. The action alleges that Red Line also committed
events of default under the terms of all of its Franchise Agreements with
the Company. As a result of such defaults, the Company terminated such
Franchise Agreements, and on August 3, 1995, the Company filed suit in
the United States District Court, Western District of Kentucky, alleging
breach of contract due to Red Line's failure to pay royalties and other
payments required by the Franchise Agreements and its failure to pay
approximately $400,000 plus interest owed on certain promissory notes
issued to the Company in lieu of such payments. The Company also seeks
accountability for $660,000 in conversion costs paid by the Company for
conversion of Red Line's Houston restaurants. Subsequent to the
commencement of the foregoing actions, Red Line filed for reorganization
under Chapter 11 of the United States Bankruptcy Code. In connection with
such proceedings, the Company's actions against Red Line have been
stayed. In October, 1996, Red Line filed a Disclosure Statement and Plan
of Reorganization (the "Plan") which disputes Red Line's obligation to
pay the Company any of the foregoing monies. The Company intends to
vigorously oppose the Plan.
In February 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's against GIANT and
certain of Rally's officers and directors before the Delaware Chancery
Courts. Harbor named Rally's as a nominal defendant. Harbor claims that
the directors and officers of Rally's, along with GIANT, breached their
fiduciary duties to the public stockholders of Rally's by causing Rally's
to repurchase from GIANT certain Rally's Senior Notes at an inflated
price. Harbor seeks unspecified damages, along with rescission of the
repurchase transaction. All defendants have moved to dismiss the action,
and a hearing has been scheduled for November 26, 1996. Management does
not believe that this litigation will have a material effect on the
Company's results of operations or financial condition.
The Company is involved in other litigation matters incidental to its
business. With respect to such other suits, management does not believe
the litigation in which it is involved will have a material effect upon
its results of operation or financial condition.
Other Commitments
The Company is contingently liable on certain franchisee lease/loan
commitments totaling approximately $400,000.
The Company, from time to time, negotiates purchase contracts for certain
items used in its restaurants in the normal course of business. Although
some of these contracts contain minimum purchase quantities, such
quantities do not exceed expected usage over the term of such agreements.
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7. ASSETS HELD FOR SALE
Assets held for sale include land and modular buildings idled by the
prior years' slowdowns in the Company's expansion plans and land
associated with the closure of stores. The Company has recorded
significant charges resulting from restructurings, other restaurant
closings and certain other charges more fully discussed in the 10-K.
8. IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed of" (SFAS 121), at the beginning of the fourth quarter,
1995. This Statement establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used, and for long-lived assets
and certain identifiable intangibles to be disposed of. SFAS 121 requires
that impairment for long-lived assets and identifiable intangibles to be
held and used, if any, be based on the fair value of the assets.
Long-Lived assets and certain identifiable intangibles to be disposed of
are to be reported at the lower of carrying amount or fair value less
cost to sell. For purposes of applying this Statement, the Company
determines fair value utilizing the present value of expected future cash
flows using a discount rate commensurate with the risks involved.
Long-Lived assets considered for impairment under SFAS 121 are required
to be grouped at the "lowest level for which there are identifiable cash
flows that are largely independent of the cash flows of other groups."
The Company believes the most correct application of this standard is
obtained by examining individual restaurants where circumstances indicate
that an impairment issue may exist. In addition, if an asset being tested
for recoverability was acquired in a business combination accounted for
using the purchase method, the goodwill that arose in that transaction is
included as part of the asset being evaluated and in determining the
amount of any impairment.
During the first quarter of 1996, two additional restaurants, due to
their continued poor operating performance, were determined to be
impaired, resulting in charges of approximately $754,000 included in the
caption, Other charges. As required by the Standard, the Company will
continue to periodically review its assets for impairment where
circumstances indicate that such impairment may exist.
9. REPURCHASE OF SENIOR NOTES
On January 29, 1996, the Company repurchased, in two transactions, at a
price of $678.75 per $1,000 principal amount, $22 million face value of
its 9 7/8% Senior Notes due in the year 2000 from GIANT GROUP, LTD.
("GIANT"). The price paid in each transaction represented the market
closing price on January 26, 1996. The first transaction involved the
repurchase of $16 million face value of the Notes for $11.1 million in
cash. The second transaction involved the purchase of $6 million face
value of Notes in exchange for a $4.1 million short-term note, due in
three installments of principal and interest, issued by Rally's. The
Company paid the final installment on this note, together with accrued
interest thereon, on September 27, 1996. The repurchase resulted in an
extraordinary gain, net of tax, of $4.8 million or $.31 per share. The
remaining outstanding Notes are publicly traded and at September 29, 1996
had a market value of $54.5 million based on the quoted market price for
such notes.
The purchases were approved by a majority of the independent Directors of
the Company. Prior to the purchases, the Company's independent Directors
had received an opinion as to the fairness of the transactions, from a
financial point of view, from an investment banking firm of national
standing.
These purchases reduced total interest expense by approximately $329,000
for the first quarter of 1996, approximately $513,000 for the second
quarter of 1996 and approximately $537,000 for the third quarter of 1996,
11
<PAGE>
net of interest expense incurred on the short-term note discussed above.
Such reduction is expected to be approximately $1.9 million for the full
year 1996, net of interest expense incurred on the short-term note
discussed above.
10. GIANT GROUP, LTD. CREDIT FACILITY AND LETTERS OF CREDIT
In early February 1996, GIANT entered into a one-year credit facility
with the Company. Concurrent with the completion of its Rights Offering
on September 20,1996, this credit facility was terminated by agreement of
the parties.
In addition, GIANT had issued certain irrevocable letters of credit to
secure the obligation of the Company under its large deductible workers'
compensation insurance program and to secure certain surety bonds
previously issued by the Company. In total, at the end of the third
quarter 1996, such letters of credit were approximately $800,000.
Subsequent to September 29, 1996, the Company replaced those irrevocable
letters of credit with letters of credit secured by certificates of
deposit purchased by the Company.
11. SHAREHOLDER RIGHTS OFFERING
A Shareholder Rights Offering (the "Offering") was completed on September
20, 1996. The Company distributed to holders of record of its Common
Stock, as of the close of business on July 31, 1996 (the "Record Date"),
transferable subscription rights ("Right(s)") to purchase Units
consisting of one share of Common Stock and one Warrant to purchase an
additional share of Common Stock. Stockholders received one Right for
each share of Common Stock held on the Record Date. For each 3.25 Rights
held, a holder had the right to purchase one Unit for $2.25 each. The
Offering consisted of 4,825,805 Units. Each Warrant may be exercised to
acquire an additional share of Common Stock at an exercise price of $2.25
per share and expires on September 26, 2000. The Company may redeem the
Warrants, at $.01 per Warrant, upon 30 days' prior written notice in the
event the closing price of the Common Stock equals or exceeds $6.00 per
share for 20 out of 30 consecutive trading days ending not more than 30
days preceding the date of the notice of redemption. The Offering was
fully subscribed and raised over $10.8 million in gross proceeds offset
by legal and other issuance costs of approximately $437,000. In addition
to the $10.8 million provided by the Rights Offering, the Warrants issued
could provide an additional $10.8 million for the Company's future
growth. The Company had 15,683,869 shares of Common Stock outstanding on
the Record Date. Immediately after the Offering, 20,509,674 shares of
Common Stock and 4,825,805 Warrants were outstanding.
12. SUBSEQUENT EVENT
Bondholder Consent
On September 5, 1996 by Consent Solicitation Statement, the Company
solicited consent of its bondholders whereby the beneficial ownership of
35% or more of the voting stock of the Company by GIANT, Fidelity
National Financial, Inc., CKE and/or any of their affiliates would not
constitute a change of control for purposes of Section 4.14 of the
Indenture. On October 21, 1996, the bondholder consent was approved by a
majority of the holders of record as of the date of the Consent
Solicitation.
12
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company reported net income of $414,000 or $.03 per share for the third
quarter of 1996 compared with a net loss of $17.3 million or $1.11 per share for
the same period of the prior year. For the nine months ended September 29, 1996,
the Company reported net income of $1.4 million or $.09 per share compared with
a net loss of $22.1 million or $1.41 per share for the prior year period. Year
to date results were favorably impacted by an extraordinary gain, net of tax, of
$4.8 million or $.31 per share from the early extinguishment of debt during the
first quarter of 1996. Prior year quarter and year to date results were impacted
by significant other charges of $12.9 million related to the closure of certain
restaurants and to writedowns related to assets held for sale. Current year
results included $245,000 in income and $509,000 in expense for the quarter and
year to date, respectively, related to the writedown and sale of assets.
Total revenues decreased to $38.8 million in the quarter from $49.9 million in
the third quarter of the prior year. Total revenues for the nine month period
decreased to $128.1 million in 1996 compared with $142.2 million in 1995. This
decrease in revenues for the quarter and for the first nine months of the year
is primarily attributable to (i) a year-over-year decrease in the number of
Company units operating during the periods, (ii) the Company's operating
agreement with CKE, which took effect in July, 1996, whereby CKE assumed
operating responsibility for 28 Company-owned units in the Company's Western
markets, (iii) Company same store sales declines for the quarter and for the
first nine months, and (iv) lower royalties from franchisees. See discussion
under Liquidity and Capital Resources.
The third quarter of 1996 is the Company's second consecutive profitable
quarter, excluding extraordinary gains, after the Company posted eleven
consecutive quarterly losses dating back to the third quarter of 1993.
Management attributes the continued profitability in a period of negative same
store sales to (i) reduced fixed costs resulting from the prior closure or
writedown of underperforming stores, (ii) reduced interest expense resulting
from the first quarter retirement of certain of the Senior Notes, and (iii)
continued implementation of controllable cost reduction programs impacting
advertising, general and administrative expenses and store level costs (e.g.
food, paper, labor, controllables) discussed in more detail below. Management
had anticipated a significant decrease in revenues during the third quarter,
1996 as compared to the prior year third quarter due to its decision to less
aggressively discount its product in the current year. However, management
recognizes the necessity of increasing revenues on an ongoing basis. Management
expects the new advertising campaigns and enhanced menu offerings that will be
introduced in the Company's fourth quarter offer the best opportunity to reverse
current same store sales growth trends. The anticipated actions reflect a
significant repositioning of the Company's brand and are expected, therefore, to
require coordination of new menu items, new menu boards, a new advertising
campaign and effective store level operations execution. Management currently
anticipates that the Company-wide rollout of the repositioning can be completed
during the first quarter of 1997. Management also expects continued effort
focused on further reduction in costs and currently plans to continue testing
and implementing cost saving strategies in its stores.
On January 29, 1996, the Company repurchased $22.0 million face value of its 9
7/8% Senior Notes for $11.1 million in cash and a $4.1 million short term note.
The repurchase resulted in an extraordinary gain, net of tax, of $4.5 million,
subsequently revised to $4.8 million in the third quarter to reflect a change in
the available tax benefit on book losses before extraordinary items, due to net
income in subsequent quarters. In addition to the extraordinary gain, the
repurchase had two significant impacts on the Company. First, the repurchase
decreased the Company's annual interest expense by approximately $2.0 million.
Second, the repurchase reduced the Company's 1999 33 1/3% sinking fund indenture
requirement to approximately $6 million, from $28 million.
13
<PAGE>
The Company's liquidity was favorably impacted by the completion of its Rights
Offering (the "Offering") in September, 1996. The Offering raised $10.8 million
in new capital before approximately $437,000 in offering costs and will raise an
additional $10.8 million in new capital if the related common stock warrants are
exercised over their four year life. The Company may redeem the warrants, at
$.01 per warrant, upon 30 days' prior written notice in the event the closing
price of the common stock equals or exceeds $6.00 per share for 20 out of 30
consecutive trading days ending not more than 30 days preceding the date of the
notice of redemption. The additional cash flows generated from the Offering will
allow the Company to modestly accelerate new store development as well as fund
other important initiatives. See Note 11 for further discussion of the Rights
Offering.
The Company opened two units, closed six units, and transferred operational
responsibility to CKE for 28 units during the quarter. Five of the six units
closed were poor performing units located in Montgomery, Alabama, the assets of
which were sold to a non-affiliated restaurant operator during the third
quarter. Franchise operators opened three units during the quarter and closed
seven units. By the end of the year, the Company expects to open at least three
additional units, two of which were under construction as of September 29, 1996.
The Company may open several additional units which would be conversions of
existing restaurants if lease negotiations are completed in the near term. The
Company also anticipates several additional franchised new store openings over
the balance of the year.
Results of Operations
Rally's revenues are derived primarily from Company-owned restaurant sales and
royalty fees from franchisees. The Company also receives revenues from the award
of exclusive rights to develop Rally's restaurants in certain geographic areas
(area development fees) and the award of licenses to use the Rally's brand and
confidential operating system (franchise fees). Systemwide sales consist of
aggregate revenues of Company-owned and franchised restaurants. Company revenue
also includes payments resulting from an operating agreement with CKE, referred
to as Owner fee income in the accompanying consolidated financial statements.
Restaurant cost of sales, restaurant operating expenses, depreciation and
amortization, and advertising and promotion relate directly to Company-owned
restaurants. General and administrative expenses relate to both Company-owned
restaurants and franchise operations. Owner expenses relate to CKE-operated
restaurants and consist primarily of depreciation and amortization.
14
<PAGE>
The table below sets forth the percentage relationship to total revenues, unless
otherwise indicated, of certain items included in the Company's consolidated
statements of operations and operating data for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Restaurant sales 96.1% 95.6% 96.0% 96.3%
Franchise revenues and fees 3.9 3.8 4.0 3.5
Owner fee income -- .6 -- .2
----------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0%
================= ==================== ================ =================
Costs and expenses
Restaurant cost of sales (1) 36.6% 32.9% 34.9% 34.9
Restaurant operating expenses (1) 46.6 45.1 45.4 46.3
General and administrative expenses 10.6 8.8 10.0 8.9
Advertising and promotion
expenses (1) 6.9 4.0 7.1 5.2
Depreciation and amortization (1) 6.9 6.3 7.5 6.2
Owner expenses (2) -- 152.6 -- 152.6
Other charges (credits) 26.0 (.6) 9.1 .4
Income (loss) from operations (29.7) 6.8 (10.3) 1.3
Total other (expense) (5.0) (5.2) (5.2) (4.8)
Net income (loss) before income taxes and
extraordinary items (34.7)% 1.6% (15.5)% (3.5)%
================= ==================== ================ =================
Number of restaurants:
Restaurants open at the beginning of period 526 485 542 481
----------------------------------------------------------------------------
Company restaurants opened (closed or
transferred), net during period 1 (4) 5 (4)
Franchised restaurants opened (closed or
transferred), net during period (29) (4) (49) 0
----------------------------------------------------------------------------
Total restaurants opened (closed or transferred),
net during period (28) (8) (44) (4)
----------------------------------------------------------------------------
Total restaurants open at end of period 498 477 498 477
================= ==================== ================ =================
</TABLE>
(1) As a percentage of restaurant sales.
(2) As a percentage of owner fee income.
15
<PAGE>
Three Months Ended October 1, 1995 Compared with Three Months Ended September
29, 1996.
Systemwide sales decreased 15% to $81.3 million for the quarter compared with
$96.0 million a year ago. This decrease is primarily attributable to 21 fewer
restaurants being in operation at the end of the third quarter and to systemwide
same store sales declines of 10%. As previously discussed, management had
anticipated significant same store declines due to its decisions (i) not to
match the deep discount offers which greatly impacted store margins in the prior
year and (ii) to limit media spending until work with the new advertising agency
on new creative and brand positioning was completed. The new advertising
campaigns and enhanced menu will begin late in the Company's fourth quarter and
are not expected to significantly improve same store sales until 1997.
Total Company revenues decreased 22% to $38.8 million for the quarter compared
with $49.9 million a year ago. Company-owned restaurant sales decreased $10.8
million to $37.1 million primarily due to 48 fewer Company units in operation
and an 11.9% decline in same store sales during the quarter. Over $5 million of
the decline is due to the transfer of operating responsibility for 28
restaurants in the Company's Western markets to CKE under an operating agreement
which took effect July, 1996. Under the operating agreement, CKE is responsible
for all operations of the restaurants and pays the Company a percentage of the
sales of the restaurants which is separately reported as Owner fee income. For
the first half of the current year and all of the prior year, the revenues and
operating expenses of these units were included in the Company's financial
statements. Franchise revenues and fees decreased by 23% in the third quarter
primarily because there were 14 fewer equivalent franchised units in operation
for the quarter and franchise same store sales declined by 9%. Units closed by
the Company from October, 1995 through June, 1996 had aggregate sales of $1.9
million for the prior year quarter.
Restaurant cost of sales, as a percentage of sales, decreased to 32.9% for 1996
compared with 36.6% for the comparable quarter of the prior year. This
significant decline is primarily due to reduced levels of discounting in the
current year quarter, discussed above, and to the impact of implemented cost
reduction strategies. These strategies include selective changes in some product
and packaging specifications as well as renegotiation of purchase terms and
selection of alternative vendors. Management intends to continue to consumer
test and implement such cost savings strategies in its stores, where
appropriate.
Restaurant operating expenses were 45.1% of sales compared with 46.6% for the
comparable quarter of the prior year. The reduction is primarily due to
management's cost reduction actions in the labor area and better fixed cost
coverage in stores open during the current year quarter. This better fixed cost
coverage is the result of closing poorer performing units and of transferring
operational responsibility for certain higher fixed cost restaurants in Western
markets to CKE. The identified and implemented changes in staffing levels and
labor deployment in certain stores are yielding savings in management and crew
labor. Management believes that these cost reduction actions should favorably
influence ongoing operating expense performance; however, their impact may be
partially offset by recent increases in the minimum wage.
General and administrative expenses in the third quarter of 1996, on both a
dollar and percentage of sales basis, were lower than 1995. This decrease was
primarily due to lower levels of bad debt expense, reduction in real estate
project write-offs related to development slowdowns in the prior year and
reductions in the corporate and field operation staffs.
Advertising expenses decreased approximately $1.8 million in the third quarter
of 1996 compared to the same quarter of 1995 due primarily to lower levels of
television and other media advertising. Management expects to continue
conservative levels of spending until the new creative and enhanced menu work
can be implemented.
Depreciation and amortization decreased approximately $980,000 in the third
quarter of 1996 compared to the same quarter of 1995. This decrease is primarily
due to asset writedowns associated with the adoption of SFAS 121 at the
beginning of the fourth quarter, 1995, to a decrease in the number of properties
being operated by the Company, and to a segregation to Owner expense of
depreciation and amortization associated with CKE-operated properties.
16
<PAGE>
Owner expenses of $322,000 in the third quarter of 1996 represent the Company's
segregated ownership cost related to the 28 units operated by CKE. These
expenses consist primarily of depreciation and amortization associated with the
properties.
Other charges were expenses of $12.9 million in the third quarter of 1995 and
income of $245,000 in the current year. The prior year charges related primarily
to asset writedowns and expected future occupancy costs on 25 units targeted for
closure and writedowns on assets held for sale. The income for the current year
quarter is primarily attributable to a $232,000 favorable change in estimate
associated with the sale of the assets of the Company's 5 store Montgomery
market during the quarter.
Interest expense decreased 25% in the third quarter of 1996 to $2.1 million
compared to $2.8 million in 1995 primarily due to the early extinguishment of
debt, as previously discussed. See "Liquidity and Capital Resources" and Note 9
to the accompanying consolidated financial statements, for further discussion.
Interest income was lower in the third quarter of 1996 compared with the
comparable quarter a year ago due to decreases in the average daily invested
amounts.
The net tax provision of $200,000 in the current quarter (obtained by adding the
tax provision line to the reduction in tax applicable to the current year
extraordinary item reflected on the extraordinary item line) is related to state
taxes expected to be payable. The reported total provision for the quarter was
$502,000. This amount consist of the state taxes plus the $302,000 decrease in
previously recorded tax benefit available due to the extraordinary gain recorded
in the Company's first quarter. There is no impact on net income in the quarter
arising from the $302,000, as a corresponding increase in the gain on
extraordinary item (actually a reduction of the estimated tax impact on the
extraordinary item) has also been recorded. Given our current expected tax
position, the tax expense on the extraordinary item is limited to the lesser of
tax at a normal tax rate on the extraordinary item or the total available tax
benefit on our annual loss before income taxes and extraordinary items
calculated at the Company's effective tax rate. Since net income has been
generated in ensuing quarters of the current year, the available book losses
have declined creating the adjustment to the provision and to the net of tax
extraordinary item, which had first been recorded in the Company's first
quarter.
Nine Months Ended October 1, 1995 Compared with Nine Months Ended September 29,
1996.
Systemwide sales declined 7% for the first nine months of 1996 to $254.7 million
compared with $275.1 million a year ago. This decrease is attributable to 21
fewer restaurants being in operation at the end of the third quarter of the
current year of which 17 were closed in the fourth quarter, 1995 and first
quarter, 1996 and to same store sales declines of 6% systemwide. Systemwide same
store sales were essentially flat in the first quarter, showed a 3% decline for
the first six months and showed a larger decline for the nine months due to the
rollover of the prior year's 10th anniversary deep discount promotion.
Total Company revenues decreased 10% to $128.1 million in 1996 compared with
$142.2 in 1995. Company-owned restaurant sales decreased 10% to $123.4 million
due primarily to fewer Company units in operation, a 4.5% decline in same store
sales and an over $5 million decline due to the Company's operating agreement
with CKE, as previously discussed. The Company units closed subsequent to the
third quarter of 1995 and prior to the beginning of the third quarter of 1996
had aggregate sales of $5.7 million for the nine month period ended October 1,
1995. Company-owned same store sales increased slightly in the first quarter,
were essentially flat for the first six months, and showed a larger decline for
the nine months, for the reasons discussed above. Franchise revenues and fees
decreased by 21% for the year primarily because there were fewer equivalents
franchised units in operation for the nine months and franchise same store sales
declined by 7%. For the year-to-date, the Company opened four units, closed
eight units and transferred operational responsibility to CKE for 28 units.
Franchisees opened 14 units and closed 14 units.
17
<PAGE>
Restaurant cost of sales, as a percentage of sales, of 34.9% for the first nine
months was negatively impacted by higher food and paper costs as a percentage of
sales in the first six months of 1996, offset by lower cost of sales in the
third quarter, as explained previously. Essentially these factors resulted in
flat cost of sales when compared with the same nine month period of 1995. The
increase in food cost in the first six months resulted primarily from the shift
of product mix sold, reflecting the impact of a larger percent of Big Buford(TM)
sandwich sales in the second quarter of 1996 compared to the same quarter, 1995.
While this product carries a significantly higher dollar profit per unit, it
does carry a higher food cost percentage than did the products formerly
comprising its share of the total product mix.
Restaurant operating expenses expressed as a percentage of sales increased to
46.3% for the first nine months of 1996 compared with 45.4% for 1995. This
increase as a percentage of sales is primarily attributable to increased bonus
costs associated with service manager compensation during the first half of 1996
offset by third quarter decreases discussed in the quarterly results. The bonus
plan was revised in the third quarter to reward improvements in controllable
profit, year over year. Management believes the implemented changes have
improved accountability, as well as reduced overall bonus costs.
General and administrative expenses on a year-to-date basis are lower than 1995,
on both a dollar and a percentage of Company revenues basis. This decrease is
caused primarily by reductions in the corporate and field operation staffs, in
bad debt expense and in real estate project write-offs related to development
slowdowns in the prior year, partially offset by higher legal fees.
Advertising expenses decreased approximately $3.3 million for the first nine
months of 1996 compared to the same period in 1995 due primarily to decreases in
levels of radio advertising, outdoor advertising, and television advertising.
Depreciation and amortization on a year-to-date basis decreased to $7.6 million
as compared to $10.3 million for the same period in the prior year, primarily
related to asset writedowns associated with SFAS 121, a decrease in the number
of properties and to a reclass to Owner expense, as previously discussed in the
quarterly results.
See earlier discussion of Owner expenses and Other charges as the year-to-date
trends are consistent with the quarterly results.
Interest expense decreased 19% on a year-to-date basis to $6.5 million as
compared to $8.0 million for the same period in the prior year, due primarily to
the January, 1996 reduction in Senior Notes outstanding.
Interest income was lower on a year-to-date basis for 1996 as compared to
the same period in the prior year, consistent with the quarterly results.
The Company's decrease in Other is due primarily to lower gains on investments
and to the current year storage costs related to excess modular buildings.
The Company's net tax provision on a year to date basis is $521,000 (obtained by
adding the tax provision line to the tax expense of $1,515,000 which has been
netted against the extraordinary gain) and is related to state taxes expected to
be payable. See earlier discussion above concerning the tax treatment of the
extraordinary item.
18
<PAGE>
Liquidity and Capital Resources
The Company's cash flow used in operating activities was approximately $723,000
for the first nine months of 1996 compared with cash flow provided by operating
activities of $10.0 million for the same period in the prior year. This decrease
resulted primarily from unfavorable changes in working capital which more than
offset higher net income in 1996. The change in working capital related
primarily to decreased balances in accounts payable in 1996 due to decreased
food and paper costs as a percentage of sales, decreased overall sales volumes
and due to the timing of cash transfers between accounts. The decreased overall
sales volumes are attributed to the factors discussed above in the nine month
comparison.
Capital expenditures of approximately $1,321,000 for the first nine months of
1996 were funded primarily through sales of surplus properties and existing cash
balances. Approximately $678,000 of these expenditures were for the construction
of new stores. Four of these stores opened in the first nine months of 1996 and
two stores were under construction at September 29, 1996. The Company expects to
open a total of at least seven units this year. The Company may open several
additional units which would be conversions of existing restaurants if lease
negotiations are completed in the near term. The Company spent approximately
$220,000 for the replacement of three existing store buildings, constructed in
the late eighties, with surplus modular buildings. Such actions were taken to
provide increased operational flexibility and to reduce maintenance costs in
these units given the low cash outflow necessary to utilize certain of the
surplus modular buildings. Remaining capital expenditures were primarily for the
purchase and installation of certain replacement equipment. Full year capital
expenditures are expected to be approximately $2.4 million, inclusive of
replacement capital.
In January 1996, the Company repurchased, in two transactions, $22 million face
value of its 9 7/8% Senior Notes due in the year 2000. The Notes were purchased
from GIANT GROUP, LTD. ("GIANT") at a price of $678.75 per $1,000 principal
amount, representing the market closing price on the last business day prior to
the repurchase date. The first transaction involved the repurchase of $16
million face value of the Notes for $11.1 million in cash. The second
transaction involved the purchase of $6 million face value of the Notes in
exchange for a $4.1 million short-term note due in three installments of
principal and interest, bearing interest at prime. The Company paid the final
installment together with accrued interest on this note on September 27,1996.
Prior to the Senior Notes repurchases, the Company's Board of Directors had
received an independent opinion from an investment banking firm as to the
fairness of the transactions. As a result of these debt repurchases, the
annualized ongoing interest payments on the Senior Notes have been reduced by
approximately $2.2 million per year to approximately $6.2 million.
Principal payments of debt and capital leases totaled approximately $18.5
million during the first nine months of 1996, inclusive of the $11.1 million in
cash and the $4.1 million short-term note related to the Senior Notes
repurchased in the first quarter, as discussed above. The Company is required to
make a mandatory sinking fund payment on June 15, 1999 calculated to retire 33
1/3% in aggregate principal amount of the Senior Notes issued with the balance
maturing on June 15, 2000. The repurchase discussed above reduces such sinking
fund requirement to approximately $6 million from approximately $28 million.
In February 1996, the Company obtained a one-year credit facility from GIANT.
Concurrent with the completion of its Rights Offering on September 20, 1996,
this credit facility was terminated by agreement of the parties.
The Company is actively marketing the assets included in the caption Assets held
for sale, in the accompanying consolidated balance sheet and expects realization
in cash over the next 3 to 24 months, although actual timing of such cash flows
cannot be predicted. The remaining balances consist primarily of modular
restaurant buildings and land which the Company is actively marketing. The
assets contained in this caption are recorded at management's current estimate
of fair market value less costs to sell. There can be no assurances that these
values will be realized. Approximately $3.5 million was generated during the
first nine months of 1996 from the sale of land and buildings.
19
<PAGE>
During the first nine months of the year, the Company received funds ($90,000)
on land contracts which are the subject of an aggregate amount of $1.8 million
of sale/leaseback financing. The interest rate on such facility is approximately
12.5%. The holder of such contracts has been unable to complete contractual
requirements to fund such transactions. The Company has notified the holder of
default under this agreement. The Company continues to consider alternatives
offered by the holder including substitution of a different buyer or extension
of time available to fund the agreements.
On July 1, 1996, the Company entered into a ten-year operating agreement with
Carl Karcher Enterprises, Inc., a subsidiary of CKE. Pursuant to the agreement,
28 Rally's-owned restaurants located in California and Arizona are being
operated by CKE. The Company retains ownership of the restaurants and receives
from CKE a percentage of gross revenues referred to in the financial statements
as Owner fee income. This income is offset by the Company's segregated ownership
costs related to these units, referred to as Owner expenses in the financial
statements, consisting primarily of noncash expenses of depreciation and
amortization. The agreement has improved profitability and cash flow, generating
approximately $209,000 cash flow in the quarter.
The Company completed its Shareholder Rights Offering on September 20, 1996. The
Offering raised over $10.8 million in gross proceeds, offset by legal and other
issuance costs of approximately $437,000. In addition to the $10.8 million of
gross proceeds provided by the Offering, the Warrants issued could provide an
additional $10.8 million for the Company's future growth. The proceeds from the
Offering have been used to pay off debt of approximately $2.1 million and the
remainder will be used for new store construction, refurbishment of some
existing restaurants and for other general corporate purposes, including
possible further debt reduction.
On October 21, 1996, the Company was notified by the indenture trustee that the
bondholder consent it had been soliciting had been approved by the required
majority of the holders of record of its 9 7/8% Senior Notes due 2000. The
consent will allow two of the Company's current stockholders, CKE and Fidelity
National Financial, Inc. and/or their affiliates, to acquire 35% or more of the
outstanding shares of the Company's common stock without triggering "Change in
control" provisions requiring the Company to offer to purchase the Senior Notes
at 101% of their face value. This gives the Company greater flexibility to raise
capital in the future, and it gives two of its largest stockholders the ability
to increase their investment in the Company.
The third quarter of 1996 is the Company's third consecutive profitable quarter
and second quarter of profitability before extraordinary items since the third
quarter of 1993. The Company believes existing cash balances and cash flow from
operations should be sufficient to fund its current operations and obligations.
The ability of the Company to satisfy its obligations under the Senior Notes,
however, continues to be dependent upon the Company, among other factors,
successfully increasing revenues and profits.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - See Note 6 to the financial statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
On September 5, 1996 by Consent Solicitation Statement, the
Company solicited consent of its bondholders whereby the
beneficial ownership of 35% or more of the voting stock of the
Company by GIANT, Fidelity National Financial, Inc., CKE and/or
any of their affiliates would not constitute a change of control
for purposes of Section 4.14 of the Indenture. On October 21,
1996, the bondholder consent was approved by a majority of the
holders of record as of the date of the Consent Solicitation.
Results of the voting (in bond dollars held) were as follows:
For Against Abstained/Unvoted/Other
32,941,000 2,743,000 27,316,000
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER
DESCRIPTION OF DOCUMENT
-------------------- ------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation
4.5 Other Debt Instruments - Copies of debt instruments for which the related debt
is less than 10% of the Company's total assets will be furnished to the
Commission upon request.
11 Calculation of Earnings Per Share.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
July 24, 1996
September 20, 1996
</TABLE>
21
<PAGE>
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
undersigned thereunto duly authorized.
RALLY'S HAMBURGERS, INC.
Date: 11/13/96 By: /s/ Donald E. Doyle
------------------------------------------------
Donald E. Doyle
President and Chief Executive Officer
Date: 11/13/96 By: /s/ Michael E. Foss
-------------------------------------------------
Michael E. Foss
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
22
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
RALLY'S, INC.
1. The Corporation's name shall be Rally's, Inc.
2. The Corporation's duration shall be perpetual.
3. The Corporation shall be for profit.
4. The Corporation's purposes shall be to engage in the food and
restaurant business and any and all other lawful acts or activities for which
corporations may be organized under the General Corporation Law of Delaware.
5. Authorized Shares. 1) The total number of shares of all classes of
stock which the Corporation shall have authority to issue is $55,000,000 shares,
of which 5,000,000 shares are to be Preferred Stock, $.10 par value per share
("Preferred Stock"), and 50,000,000 shares are to be Common Stock, $.10 par
value per share ("Common Stock"). Holders of Common Stock shall have the right
to cast one vote for each share held of record on all matters submitted to a
vote of the holders of Common Stock.
(2) The Preferred Stock may be created and issued from time to
time in one or more series with such designations, preferences, limitations,
conversion rights, cumulative, relative, participating, optional or other
rights, including voting rights, qualifications, limitations or restrictions
thereof as determined by the Board of Directors, or the Executive Committee
thereof, and shall be set forth in duly adopted resolutions in accordance with
the Delaware General Corporation Law, as amended.
6. The address of the Corporation's initial registered office
shall be
229 South State Street
Dover, Kent County, Delaware 19901
The name of the Corporation's initial registered agent at that address shall be
The Prentice-Hall Corporation System, Inc.
23
<PAGE>
7. The number of directors constituting the Corporation's initial
Board of Directors shall be one. The member of the initial Board of Directors
shall be
Richard F. Sherman
10000 Shelbyville Road
Louisville, Kentucky 40223
8. Any action required or permitted to be taken at any meeting of the
Board of Directors may be taken without a meeting if all of the members of the
Board of Directors consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors.
9. No stockholder shall have any preemptive right to subscribe
to an additional issue of stock or to any security convertible into stock.
10. (Reserved).
11. If any stockholder or stockholders shall enter into with any
stockholder or stockholders or with the Corporation any agreement imposing any
restrictions upon the transfer of shares of capital stock of the Corporation and
shall deliver a copy of the agreement to the Secretary to be kept on file at the
Corporation's registered office, then the shares subject to such restrictions
shall be transferable only in accordance with such agreement and may be
transferred on the stock transfer books of the Corporation only in accordance
with such agreement.
12. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
13. The name and address of the incorporator are C. Edward
Glasscock, 1600 Citizens Plaza, Louisville, Kentucky 40202.
14. The powers of the incorporator shall terminate upon the
filing of the Certificate of Incorporation.
15. The Board of Directors shall have the power to adopt, amend
or repeal the by-laws of the Corporation.
16. (a) Current and former directors and officers of the Corporation
(and their heirs, executors and administrators) shall be indemnified to the
maximum extent permitted or mandated by, and in accordance with, the Delaware
General Corporation Law, as amended from time to time. The indemnification
24
<PAGE>
provided by this Article shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
(b) The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director or officer of the Corporation, or
who while a director or officer of the Corporation, is or was serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
or agent of another foreign or domestic corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against any liability asserted
against him and incurred by him in any such capacity or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of this Article.
25
Exhibit 11
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CALCULATIONS OF EARNINGS PER SHARE
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
------------------- ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (17,316) $ 414 $ (22,069) $ 1,363
================= =================== =============== ===================
Average shares of common stock and common stock equivalents outstanding:
Average common shares outstanding 15,631 15,896 15,611 15,748
Common stock equivalents - dilutive
options - - - 85
------------------ ------------------- ---------------- ----------------------
Average shares of common stock and common
stock equivalents outstanding
15,631 15,896 15,611 15,833
================== ===================== ================ ====================
Earnings (loss) per share:
Earnings (loss) before extraordinary
item $ (1.11) $ 0.01 $ (1.41) $ (0.22)
Extraordinary item - 0.02 - 0.31
================== ===================== ================ =====================
Earnings (loss) per share $ (1.11) $ 0.03 $ (1.41) $ 0.09
================== ===================== ================ =====================
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 9/29/96 and the Consolidated Statement of
Operations for the 9 months ended 9/29/96.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-29-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-29-1996
<EXCHANGE-RATE> 1
<CASH> 9,969
<SECURITIES> 0
<RECEIVABLES> 3,848 <F1>
<ALLOWANCES> 0
<INVENTORY> 771
<CURRENT-ASSETS> 15,186
<PP&E> 70,893 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,559
<CURRENT-LIABILITIES> 21,929
<BONDS> 72,969
0
0
<COMMON> 2,077
<OTHER-SE> 16,400
<TOTAL-LIABILITY-AND-EQUITY> 119,559
<SALES> 123,360
<TOTAL-REVENUES> 128,050
<CGS> 43,053
<TOTAL-COSTS> 126,374
<OTHER-EXPENSES> 21
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,512
<INCOME-PRETAX> (4,455)
<INCOME-TAX> (994)
<INCOME-CONTINUING> (3,461)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,824
<CHANGES> 0
<NET-INCOME> 1,363
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<FN>
<F1> The asset values for receivables and PP&E represent net amounts.
</FN>
</TABLE>
