<PAGE> 1
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 March 31, 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 APRIL 26, 1996 - 15,678,780 shares
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C> <C> <C>
PART I. Financial Information PAGE NO.
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995 2
and March 31, 1996 (Unaudited)
Consolidated Statements of Operations (Unaudited) for 3
the Quarters Ended April 2, 1995 and March 31, 1996
Consolidated Statements of Cash Flows (Unaudited) for 4
the Quarters Ended April 2, 1995 and March 31, 1996
Notes to Consolidated Financial Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II. Other Information 20
ITEM 1. Legal Proceedings 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,494 $ 2,768
Investments 4,933 -
Royalties receivable, including $483 and $684 from related parties at
December 31, 1995 and March 31, 1996, respectively, net of a
reserve for doubtful accounts of $922 and $1,031 at December 31, 1995
and March 31, 1996, respectively 818 1,141
Accounts and other receivables, including $296 from related parties at
March 31, 1996, net of reserve for doubtful accounts of $453 and
$315 at December 31, 1995 and March 31, 1996, respectively 2,131 1,904
Inventory, at lower of cost or market 1,056 908
Current portion of notes receivable, including $10 from related parties
at December 31, 1995, net of a reserve for doubtful accounts of
$109 at December 31, 1995 and March 31, 1996 113 98
Prepaid expenses and other current assets 1,131 1,194
Assets held for sale 2,506 205
-------- --------
Total current assets 22,182 8,218
Assets held for sale 3,517 3,125
Property and equipment, at historical cost, less accumulated depreciation
of $33,391 and $34,774 at December 31, 1995 and March 31, 1996,
respectively 78,683 75,996
Notes receivable, less current portion, including $165 from related parties
at December 31, 1995, net of a reserve for doubtful accounts of $433
at December 31, 1995 and March 31, 1996, respectively 676 489
Intangible and other assets, less accumulated amortization of $6,888 and
$6,380 at December 31, 1995 and March 31, 1996, respectively 32,334 31,595
-------- --------
Total assets $137,392 $119,423
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,773 $ 7,717
Accrued liabilities 15,959 17,418
Notes payable - 500
Current maturities of long-term debt and obligations under capital leases 17,544 5,124
-------- --------
Total current liabilities 42,276 30,759
Senior notes, net of discount of $768 and $544 at December 31, 1995
and March 31, 1996, respectively 69,034 62,456
Long-term debt, less current maturities 5,749 5,427
Obligations under capital leases, less current maturities 5,631 5,674
Other liabilities 8,030 7,583
-------- --------
Total liabilities 130,720 111,899
-------- --------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock, $.10 par value, 50,000,000 shares authorized, 15,927,000
and 15,936,000 shares issued at December 31, 1995 and March 31, 1996,
respectively 1,593 1,594
Additional paid-in capital 60,804 60,817
Less: Treasury shares, 273,000 at December 31, 1995 and March 31, 1996,
respectively (2,108) (2,108)
Retained deficit (53,617) (52,779)
-------- --------
Total shareholders' equity 6,672 7,524
-------- --------
Total liabilities and shareholders' equity $137,392 $119,423
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
2
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except shares and per share amounts)
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------
APRIL 2, MARCH 31,
1995 1996
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<S> <C> <C>
REVENUES:
Restaurant sales $40,734 $40,508
Franchise revenues and fees 1,736 1,404
------- -------
Total revenues 42,470 41,912
------- -------
COSTS AND EXPENSES:
Restaurant costs of sales 13,954 14,801
Restaurant operating expenses exclusive of
depreciation and amortization and other
operating expenses shown separately below 18,849 20,129
General and administrative expenses 4,427 4,083
Advertising and promotion expenses 2,802 2,848
Depreciation and amortization 3,431 2,688
Other charges - 732
------- -------
Total costs and expenses 43,463 45,281
------- -------
Loss from operations (993) (3,369)
------- -------
OTHER INCOME (EXPENSE):
Interest expense (2,591) (2,313)
Interest income 94 345
Other 41 (29)
------- -------
Total other (expense) (2,456) (1,997)
------- -------
Net loss before tax and extraordinary items (3,449) (5,366)
PROVISION (BENEFIT) FOR INCOME TAXES 60 (1,682)
------- -------
Net loss before extraordinary items (3,509) (3,684)
EXTRAORDINARY ITEMS (net of tax of $1,817) - 4,522
------- -------
Net income (loss) $(3,509) $ 838
======= =======
Income (loss) per common share:
Income (loss) before extraordinary item $ (.22) $ (.24)
Extraordinary item - .29
------- -------
Net income (loss) $ (.22) $ .05
======= =======
Weighted average shares outstanding 15,612 15,670
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
3
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 4)
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------
APRIL 2, MARCH 31,
1995 1996
------- -------
<S> <C> <C>
CASH FLOWS PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $(3,509) $ 838
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,431 2,688
Other charges - 732
Provision for losses on receivables 256 159
Extraordinary gain, before tax expense of $1,817 - (6,339)
Other 352 351
Changes in assets and liabilities, net of effects from business
combinations:
(Increase) decrease in assets:
Receivables 142 (212)
Inventory 105 148
Prepaid expenses and other current assets (272) (116)
Increase (decrease) in liabilities:
Accounts payable, accrued interest and other accrued liabilities 4,238 607
Accrued income taxes 76 (111)
Other liabilities (246) (340)
------- -------
Net cash provided by (used in) operating activities 4,573 (1,595)
------- -------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
(Increase) decrease in investments (3,023) 4,926
Notes receivable 29 204
Preopening costs (25) (1)
Capital expenditures (1,417) (311)
Proceeds from the sale of property and equipment and assets held
for sale 236 2,621
(Increase) in other assets (238) (259)
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 (3,639) 7,180
------- -------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Net borrowings on line of credit - 500
Principal payments of debt (336) (1,624)
Debt retirement - (11,053)
Proceeds from the issuance of common stock, net of costs of issuance 23 14
Principal payments on capital lease obligations (161) (148)
------- -------
Net cash used in financing activities (474) (12,311)
------- -------
Net increase (decrease) in cash 460 (6,726)
CASH AND CASH EQUIVALENTS, beginning of period 2,707 9,494
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 3,167 $ 2,768
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are
an integral part of these consolidated financial statements.
4
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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 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 April 26, 1996, the Rally's system included 482
restaurants in 19 states, primarily in the Midwest and the Sunbelt,
comprised of 237 Company-owned and 245 franchised restaurants. The
Company's restaurants offer high quality fast food served quickly and at
everyday prices generally below the regular prices of the four largest
hamburger chains. The Company serves the drive-thru and take-out segments
of the quick-service restaurant market. 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 acquiring 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 manufacturing 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 value
less costs to sell of long-lived assets held for sale, fair value of
long-lived assets held for use, future net occupancy
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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 March 31, 1996 and
the results of its operations for the quarters ended April 2, 1995 and
March 31, 1996 and cash flows for the quarters ended April 2, 1995 and
March 31, 1996. The results of operations for such interim periods are not
necessarily indicative of the results to be expected for the full year.
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 and the remainder will be paid over the next 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
area. 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.
6
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3. INVESTMENTS
Excess funds have been 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 and March 31, 1996. Provisions for declines in market
value are made for losses considered to be other than temporary. No such
provision was necessary for any period presented. 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 March 31, 1996. The carrying value and market
value of investments at December 31, 1995 was as follows:
<TABLE>
<CAPTION>
GROSS GAINS
UNREALIZED UNREALIZED
CARRYING HOLDING HOLDING MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
United States
government and its
agencies $ 4,933 $ - $ - $ 4,933
======== ======== ======== ========
</TABLE>
The proceeds from the sale of investments and related gross gains and
losses for the quarters ended April 2, 1995 and March 31, 1996 were as
follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------
APRIL 2, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Proceeds from the sale of investments $ 1,480 $ 4,933
Gross gains realized - -
Gross losses realized - -
</TABLE>
4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------
APRIL 2, MARCH 31,
1995 1996
-------- ---------
<S> <C> <C>
Interest paid (net of amount capitalized) $ 491 $ 847
Income taxes paid 18 238
Capital lease obligations incurred 1,263 111
</TABLE>
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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:
<TABLE>
<CAPTION>
QUARTER ENDED
-------------
APRIL 2, 1995
-------------
<S> <C>
Fair value of assets acquired $ 9,133
Cash paid (2,125)
---------
Liabilities assumed $ 7,008
=========
</TABLE>
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%. As a
result of the repurchase of Senior Notes discussed in Note 8, the Company
recorded a $4.1 million short-term note payable to GIANT. 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.
5. 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 certain
violations of the Securities Exchange Act of 1934, among other claims, with
respect to Rally's common stock and seek unspecified damages, including
punitive 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 purported conflict of interest allegedly
arising from the representation of multiple defendants as well as Ms.
Glaser's position as both a director of Rally's and a partner in
Christensen, White. Defendants filed an opposition to the motion. That
motion is currently pending. 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 Company and GIANT deny all wrongdoing
and intend to defend themselves vigorously in this matter. Because these
matters are in a preliminary stage, the Company is unable to determine
whether a
8
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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. Under the
terms of the agreement, the Company made certain payments to Red Line to
facilitate this conversion to the Rally's brand. The Company believes that
Red Line is in default of certain terms of its lease obligations arising
out of the agreement and, on June 20, 1995, 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 Company also
believes that Red Line has committed events of default under the terms of
all of its existing Franchise Agreements with the Company. 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 Agreement and
its failure to pay monies owed under certain promissory notes. The Company
also seeks accountability for the 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 and in connection
with such proceeding, Rally's actions against Red Line have been stayed.
In February 1996, Harbor Finance Partners ("Harbor") commenced a derivative
action, purportedly on behalf of Rally's against GIANT, Burt Sugarman,
David Gotterer, and certain of Rally's other 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. 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.
9
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Co-Branding Agreement With Green Burrito
In April 1996, the Company and GB Foods Corporation announced an agreement
to end their test of co-branding Rally's and Green Burrito. The Company
will have 24 months to convert the 14 restaurants currently offering the
Green Burrito menu to either Rally's only or another co-branded format.
The agreement's termination is not expected to have a material effect on
the Company's financial statements.
Construction Commitments
The estimated cost of completing capital projects in process at March 31,
1996 was approximately $200,000.
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.
6. ASSETS HELD FOR SALE
Assets held for sale include land and modular buildings idled by 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 taken certain other charges
more fully discussed in its 1995 filing on Form 10-K.
7. 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."
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<PAGE> 12
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.
During the first quarter of 1996, two additional restaurants, due to their
continued poor operating performance, were determined to be impaired
resulting in a charge of approximately $732,000 reflected 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.
8. 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. 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 first of these installments ($1.1 million) was paid on
March 29, 1996 together with accrued interest thereon. This note bears
interest at the highest publicly announced reference rate of interest
maintained by a large banking institution for commercial loans of
short-term maturities to its most credit-worthy large corporate borrowers.
The repurchase resulted in an extraordinary gain, net of tax, of $4.5
million or $.29 per share. The remaining outstanding Notes are publicly
traded and at March 31, 1996 had a market value of $45.6 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, net of interest expense incurred on the
short-term note. 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.
9. GIANT GROUP, LTD. CREDIT FACILITY AND LETTERS OF CREDIT
In early February 1996, GIANT entered into a one-year credit facility with
the Company. Such credit facility is evidenced by a note payable to GIANT
for up to $2 million. Any monies advanced under said note agreement shall
bear interest at the highest publicly announced reference rate of interest
maintained by a large banking institution for commercial loans of
short-term maturities to its most credit-worthy large corporate
borrowers. Interest is payable monthly. The facility is renewable for one
or more years at the discretion of GIANT. GIANT is not obligated to make
any advance under this agreement. At March 31, 1996, approximately
$500,000 was outstanding under this facility. The
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<PAGE> 13
interest rate in effect at that date was 8.25%. As of April 26, 1996, the
Company has paid off that amount and there are no outstanding amounts under
this facility.
In addition, GIANT has 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 first
quarter 1996, such letters of credit are approximately $800,000. Such
letters of credit replaced similar letters of credit previously issued by
the Company which had been secured by certificates of deposit. Such
certificates have been liquidated to improve the overall liquidity of the
Company.
10. SUBSEQUENT EVENTS
Termination of Exchange Offer for Additional Shares by Significant
Shareholder
On April 22, 1996, the Company announced that the exchange offer proposed
by GIANT in January 1996, had been terminated. The Company's Board of
Directors, after extensive discussions between a Special Committee of the
Board and the Company's President and Chief Executive Officer, requested
that GIANT discontinue the proposed exchange offer. GIANT has agreed to
this request and has terminated the proposed exchange offering.
Matters Concerning Significant Shareholder
On April 29, 1996, GIANT and Fidelity National Financial, Inc. ("Fidelity")
announced the settlement of all litigation between them. Under the
settlement, GIANT will acquire from Fidelity 705,489 shares of GIANT common
stock for cash. Fidelity will acquire from GIANT a 4.9% ownership in
Rally's for cash and CKE Restaurants, Inc. ("CKE"), the parent company of
Carl's Jr., will acquire from GIANT a 15% stake in Rally's for cash.
Fidelity and CKE will have options to buy a total of an additional 15% of
Rally's stock from GIANT.
Rally's will appoint to its Board of Directors, William P. Foley, II, CKE's
and Fidelity's Chairman and Chief Executive Officer and C. Thomas Thompson,
President of Carl's Jr.
12
<PAGE> 14
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company reported net income of $838,000 or $.05 per share for the first
quarter of 1996 compared with a loss of $3.5 million or $.22 per share for the
same period of the prior year. This profit resulted from a $4.5 million
extraordinary gain or $.29 per share from the early extinguishment of debt, as
discussed below and in Note 8 to the accompanying consolidated financial
statements, partially offset by a loss from operations.
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
or $.29 per share. In addition to the extraordinary gain, the repurchase has
two significant positive impacts on the Company. First, the repurchase
decreases the Company's annual interest expense by approximately $2.2 million
($1.9 million for 1996, net of interest expense incurred on the short-term note
which is expected to be paid off by the end of 1996). Second, the repurchase
reduces the Company's 1999 33 1/3% sinking fund indenture requirement to
approximately $6.3 million. Prior to consummation, the Board of Directors and
management obtained a fairness opinion as to the price paid. Management
believes that the above described benefits outweigh the temporary decline in
the Company's liquidity. See "Liquidity and Capital Resources" for further
discussion.
The Company reported a net loss of $3.7 million or $.24 per share from
continuing operations. The Company's operations continue to be adversely
affected by high food, paper, labor and repairs and maintenance costs. Labor
for the first quarter was higher than the comparable quarter of the prior year
due primarily to the implementation of the new service management compensation
plan in the first quarter, 1996. Since quarter end, the Company has
implemented specific cost reduction strategies in the food and paper, labor and
repair and maintenance areas that should benefit subsequent quarters. In
addition, the Company is initiating a variety of tests to further reduce these
costs in the future.
In April 1996, the Company announced its agreement with GB Foods Corporation to
discontinue further development of The Green Burrito co-branding concept.
Under the revised agreement, the Company will not add the Green Burrito menu to
any additional locations, and the fourteen locations currently serving Green
Burrito products will be converted over the next 24 months to either a Rally's
only or another co-branded format.
The Company closed one unit during the quarter. Franchise operators opened six
units during the quarter and closed four units.
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
13
<PAGE> 15
franchised restaurants. Restaurant cost of sales, restaurant operating
expenses, depreciation and amortization, and advertising and promotion relate
directly to Company-owned restaurants. Restaurant level margins represent
Company-owned restaurant sales less these expenses expressed as a percentage of
such sales. General and administrative expenses relate to both Company-owned
restaurants and franchise operations.
14
<PAGE> 16
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> Quarters Ended
April 2, March 31,
1995 1996
-------- ---------
<S> <C> <C>
Revenues
Restaurant sales 95.9% 96.7%
Franchise revenues and fees 4.1 3.3
------ ------
100.0% 100.0%
====== ======
Costs and expenses
Restaurant cost of sales (1) 34.3% 36.5%
Restaurant operating expenses (1) 46.3 49.7
General and administrative expenses 10.4 9.7
Advertising and promotion expenses (1) 6.9 7.0
Depreciation and amortization (1) 8.4 6.6
Other charges - 1.8
Loss from operations (2.3) (8.0)
Net interest (expense) (5.8) (4.8)
------ ------
Loss before income taxes and
extraordinary items (8.1)% (12.8)%
====== ======
Number of restaurants
Restaurants open at the beginning of
period 542 481
------ ------
Company restaurants opened (closed or
transferred), net during period 4 (1)
Franchised restaurants opened (closed
or transferred), net during period (8) 2
------ ------
Total restaurants opened (closed or
transferred), net during period (4) 1
------ ------
Total restaurants open at end of period 538 482
====== ======
</TABLE>
(1) As a percentage of restaurant sales.
15
<PAGE> 17
Three Months Ended March 31, 1996 Compared with Three Months Ended April 2,
1995.
Systemwide sales decreased 7% to $76.6 million for the quarter compared with
$82.7 million a year ago. This decrease is attributable to 10% or 56 fewer
restaurants being in operation at the end of the current quarter and to
essentially flat systemwide same store sales.
Total Company revenue decreased 1% to $41.9 million for the quarter compared
with $42.5 million a year ago. Company-owned restaurant sales decreased
slightly to $40.5 million due to fewer Company units in operation during the
quarter, partially offset by a same store sales increase of 2% in the first
quarter of 1996. Franchise revenues and fees decreased 19% in 1996 primarily
attributable to 40 fewer units in operation during the quarter and a decline in
franchise same store sales of approximately 3% during the quarter. During the
quarter, the Company closed one unit while franchisees opened six units and
closed four units.
Restaurant cost of sales, as a percentage of sales, increased to 36.5% for 1996
compared with 34.3% for the comparable quarter of the prior year. This
increase was driven by higher food and paper cost as a percentage of sales.
The increase in food cost resulted primarily from the shift of product mix
sold, reflecting the impact of our Big Buford TM sandwich. 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. Since the quarter end, the Company has implemented specific
cost reduction strategies in the food and paper area to reduce these costs in
the future.
Restaurant operating expenses were 49.7% of sales compared with 46.3% for the
comparable quarter of the prior year. This increase as a percentage of sales
is primarily attributable to higher labor costs and repairs and maintenance
costs. Increased labor costs were due primarily to the implementation of the
new service manager compensation plan in the first quarter of 1996. Repairs
and maintenance costs increased primarily because of additional costs incurred
in the replacement of two stores and the cost of relocating surplus modular
buildings and equipment, and additional costs of maintaining the store base.
General and administrative expenses in the first quarter of 1996, on both a
dollar and a percentage of sales basis, were lower than 1995. This decrease is
caused primarily by reductions and vacancies in the corporate staff, partially
offset by higher legal fees.
Depreciation and amortization decreased approximately $700,000 in the first
quarter of 1996 compared to the same quarter, 1995. This decrease is primarily
due to decreases in the number of properties in operation and asset writedowns
associated with the adoption of SFAS 121 at the beginning of the fourth
quarter, 1995.
Interest expense decreased 12% in the first quarter of 1996 to $2.3 million as
compared to $2.6 million in 1995 primarily due to the early extinguishment of
debt as previously discussed. See "Liquidity and Capital Resources" and Note 8
to the accompanying consolidated financial statements, for further discussion.
16
<PAGE> 18
Interest income was higher in the first quarter of 1996 compared with the
comparable quarter a year ago due primarily to the recognition of interest
earned on certain cash deposits related to the Company's large deductible
insurance programs included in the balance sheet caption "Intangible and other
assets."
The Company's decrease in Other is due primarily to the realization of losses
on the disposal of assets and to storage costs related to excess modular
buildings.
In total, including the tax provision of $1.8 million associated with the
extraordinary gain, the net provision for the period was $135,000. This
provision is reflective of the Company's anticipated full year tax rate.
Liquidity and Capital Resources
The Company's cash flow used in operating activities was approximately $1.6
million for the first quarter of 1996 compared with cash flow provided by
operating activities of approximately $4.6 million for the same period in the
prior year. This decrease resulted primarily from lower net income from
operations in 1996 and working capital changes primarily attributable to a
buildup in accrued advertising at the end of the first quarter of 1995 combined
with a reduction in accrued advertising at the end of the first quarter of
1996.
Capital expenditures of approximately $311,000 for the first quarter of 1996
were funded primarily through sales of surplus properties and existing cash
balances. Approximately half of these expenditures were the cash outlays 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 increasing maintenance costs in
these units given the low cash outflow necessary to utilize certain of the
surplus modular buildings. The Company had two new units under construction at
quarter end. Remaining capital expenditures were for the purchase and
installation of certain replacement equipment.
No units were opened during the first quarter of 1996. Approximately ten units
are expected to be opened or under construction by the end of the current year.
Full year capital expenditures are expected to be approximately $2 million to
$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 first
of these installments ($1.1 million) was paid on March 29, 1996, together with
accrued interest thereon. Prior to the purchases, 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
17
<PAGE> 19
of these debt repurchases, the annualized 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 $13.9
million during the first quarter of 1996, inclusive of the $11.1 million and
the $1.1 million related to the Senior Notes repurchased, 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 $6.3
million.
In February 1996, the Company obtained a one-year credit facility from GIANT
evidenced by a note payable for up to $2 million. The facility is renewable
for one or more years at the discretion of GIANT. GIANT is not obligated to
make any advance under this agreement. As of March 31, 1996, approximately
$500,000 was outstanding under this facility, currently bearing interest at
8.25%. As of April 26, 1996, this amount has been paid off and there are no
outstanding amounts under this facility. The maximum amount previously
advanced under this facility was $1.6 million. The note's interest rate
fluctuates with the highest publicly announced reference rate of interest
maintained by a large banking institution for commercial loans of short-term
maturities to its most credit-worthy large corporate borrowers.
The Company is actively marketing the assets included in the caption "Assets
Held for Sale" in the accompanying consolidated balance sheets and expects
realization in cash over the next 15 to 21 months, although actual timing of
such cash flows cannot be predicted. The assets contained in this caption are
recorded at management's current estimate of net realizable value. There can
be no assurances that these values will be realized. Approximately $1.9
million was generated during the first quarter of 1996 from the closing of the
sales of eleven properties auctioned in the fourth quarter 1995. The proceeds
of the future sale of a property will be required to liquidate the related
remaining outstanding balances of certain secured indebtedness with a current
balance of approximately $200,000. The Company is in default of certain
covenants of this indebtedness and has classified it in current liabilities in
the accompanying balance sheets. The debt instruments are not accelerated by
the defaults although proceeds of the secured assets must be applied against
the debt.
During the first quarter, the Company continued to receive funds ($90,000
during the first quarter 1996) on land contracts covering four fee properties
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
Company may seek to obtain additional such financing from the lender although
there is no binding commitment between the parties at this time.
Until this quarter, the Company has not reported a profit in any quarter since
the quarter ended June 1993. The profit reported in the first quarter of 1996
was due to the extraordinary gain from the early extinguishment of debt, as
discussed above. This gain was substantially offset by a significant loss from
operations. Although the Company believes existing cash balances, cash flow
from operations, cash flow from the sale of assets and available tax refunds
should be sufficient to fund its operations and
18
<PAGE> 20
obligations for 1996, the ability of the Company to satisfy its obligations
under the Senior Notes will be dependent on the Company, among other factors,
successfully increasing revenues and returning the Company to operational
profitability.
19
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - See Note 5 to the financial statements.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- --------------------------------------------------------
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.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
On January 29, 1996, the Company filed a Current Report on Form
8-K to report the repurchase of $22 million face value of its
9.875% Senior Notes.
20
<PAGE> 22
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: May 10, 1996 By: /s/ Donald E. Doyle
-------------------------------
Donald E. Doyle
President and Chief Executive Officer
Date: May 10, 1996 By: /s/ Michael E. Foss
-------------------------------------
Michael E. Foss
Senior Vice President and Chief Financial
Officer
(Principal Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,768
<SECURITIES> 0
<RECEIVABLES> 3,632<F1>
<ALLOWANCES> 0
<INVENTORY> 908
<CURRENT-ASSETS> 8,218
<PP&E> 75,996<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 119,423
<CURRENT-LIABILITIES> 30,759
<BONDS> 79,181
0
0
<COMMON> 1,594
<OTHER-SE> 5,930
<TOTAL-LIABILITY-AND-EQUITY> 119,423
<SALES> 40,508
<TOTAL-REVENUES> 41,912
<CGS> 14,801
<TOTAL-COSTS> 45,281
<OTHER-EXPENSES> 29
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,313
<INCOME-PRETAX> (5,366)
<INCOME-TAX> (1,682)
<INCOME-CONTINUING> (3,684)
<DISCONTINUED> 0
<EXTRAORDINARY> 4,522
<CHANGES> 0
<NET-INCOME> 838
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<FN>
<F1>THE ASSET VALUES FOR RECEIVABLES AND PP&E REPRESENT NET AMOUNTS.
</FN>
</TABLE>
