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 30, 1997
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to ________
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COMMISSION FILE NUMBER 0-17980
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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 MAY 5, 1997 - 20,826,002 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 29, 1996 and March 30,
1997 (Unaudited) 2
Consolidated Statements of Operations (Unaudited) for the
Quarters Ended March 31, 1996 and March 30, 1997 3
Consolidated Statements of Cash Flows (Unaudited) for the
Quarters Ended March 31, 1996 and March 30, 1997 4
Notes to Consolidated Financial Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. Other Information
ITEM 1. Legal Proceedings 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT 27 Financial Data Schedule (for SEC use only) 19
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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 29, 1996 AND MARCH 30,1997
(In thousands, except shares and per share amounts)
(UNAUDITED)
DECEMBER 29, MARCH 30,
1996 1997
---------------- -----------------
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ASSETS
Current assets:
Cash and cash equivalents $ 2,285 $ 3,244
Restricted cash 1,649 1,413
Investments 1,958 1,790
Royalties receivable, net of reserve for doubtful accounts of $1,405 and $1,563
at December 29, 1996 and March 30, 1997, respectively 437 421
Accounts and other receivables, including $565 and $831 from related parties at
December 29, 1996 and March 30, 1997, respectively, net of reserve for doubtful
accounts of $301 and $299 at December 29, 1996 and March 30, 1997, respectively 1,698 1,790
Inventory, at lower of cost or market 794 787
Current portion of notes receivable, including $40 from related parties at
December 29, 1996 and March 30, 1997, net of reserve for doubtful accounts of
$130 and $83 at December 29, 1996 and March 30, 1997, respectively 76 90
Prepaid expenses and other current assets 999 1,016
Assets held for sale 596 244
---------------- -----------------
Total current assets 10,492 10,795
Assets held for sale 1,426 1,176
Property and equipment, at historical cost, less accumulated depreciation of $39,188
and $40,465 at December 29, 1996 and March 30, 1997, respectively 69,806 69,673
Notes receivable, less current portion, including $87 and $79 from related parties
at December 29, 1996 and March 30, 1997, respectively, net of reserve for doubtful
accounts of $723 and $423 at December 29, 1996 and March 30, 1997, respectively 697 596
Goodwill, less accumulated amortization of $2,243 and $2,386 at December 29, 1996
and March 30, 1997, respectively 10,482 10,339
Reacquired franchise and territory rights, less accumulated amortization of $1,984
and $2,204 at December 29, 1996 and March 30, 1997, respectively 11,439 11,219
Other intangibles, less accumulated amortization of $2,459 and $2,579 at
December 29, 1996 and March 30, 1997, respectively 4,769 4,649
Other assets, less accumulated amortization of $1,101 and $1,176 at December 29,
1996 and March 30, 1997, respectively 3,147 2,871
---------------- -----------------
Total assets $ 112,258 $ 111,318
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 4,884 $ 5,166
Accrued liabilities 13,600 13,834
Current maturities of long-term debt and obligations under capital leases 1,484 1,350
---------------- -----------------
Total current liabilities 19,968 20,350
Senior notes, net of discount of $429 and $403 at December 29, 1996 and
March 30, 1997, respectively 57,897 57,923
Long-term debt, less current maturities 4,775 4,562
Obligations under capital leases, less current maturities 5,408 5,280
Other liabilities 4,845 4,511
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Total liabilities 92,893 92,626
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Commitments and contingencies (Note 5)
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, 20,788,000 and
20,820,214 shares issued at December 29, 1996 and March 30, 1997, respectively 2,079 2,082
Additional paid-in capital 71,023 71,299
Less: Treasury shares, 273,000 at December 29, 1996 and March 30, 1997 (2,108) (2,108)
Retained deficit (51,629) (52,581)
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Total shareholders' equity 19,365 18,692
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Total liabilities and shareholders' equity $ 112,258 $ 111,318
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<FN>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
</FN>
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2
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
QUARTERS ENDED
MARCH 31, MARCH 30,
1996 1997
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REVENUES:
Restaurant sales $ 40,508 $ 31,250
Franchise revenues and fees 1,404 1,135
Owner fee income - 210
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-------------- --------------
Total revenues 41,912 32,595
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COSTS AND EXPENSES:
Restaurant cost of sales 14,801 9,936
Restaurant operating expenses, exclusive of
depreciation and amortization and advertising
and promotion expenses shown separately below 19,552 13,767
General and administrative expenses 4,660 3,952
Advertising and promotion expenses 2,848 1,354
Depreciation and amortization 2,688 2,288
Owner expense - 300
Provision for restaurant closures and other 732 (17)
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Total costs and expenses 45,281 31,580
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Income (loss) from operations (3,369) 1,015
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OTHER INCOME (EXPENSE):
Interest expense (2,313) (1,880)
Interest income 345 103
Other (29) (40)
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Total other (expense) (1,997) (1,817)
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Loss before income taxes and
extraordinary items (5,366) (802)
PROVISION (BENEFIT) FOR INCOME TAXES (1,682) 150
-------------- --------------
Loss before extraordinary items (3,684) (952)
EXTRAORDINARY ITEM (net of tax expense of $1,817) 4,522 -
-------------- --------------
Net income (loss) $ 838 $ (952)
============== ==============
Earnings (loss) per common share:
Loss before extraordinary item $ (.24) $ (.05)
Extraordinary item .29 -
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Earnings (loss) per common share $ .05 $ (.05)
============== ==============
Weighted average shares outstanding 15,670 20,538
============== ==============
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
</FN>
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3
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RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 4)
(Unaudited)
(In thousands)
QUARTERS ENDED
MARCH 31, MARCH 30,
1996 1997
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CASH FLOWS PROVIDED FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 838 $ (952)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,688 2,597
Provision for restaurant closures and other 732 (17)
Provision for losses on receivables 159 (43)
Extraordinary items, before tax expense of $1,817 (6,339) --
--------------
Other 351 276
Changes in assets and liabilities, net of effects from business combinations:
(Increase) decrease in assets:
Receivables (212) (791)
Inventory 148 7
Prepaid expenses and other current assets (116) (35)
Other assets (259) 221
Increase (decrease) in liabilities:
Accounts payable, accrued interest and other accrued liabilities 600 476
Accrued income taxes (111) (57)
Other liabilities (340) (334)
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Net cash provided by (used in) operating activities (1,861) 1,348
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CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Decrease in investments 4,933 168
Notes receivable 204 297
Pre-opening costs (1) (55)
Capital expenditures (311) (1,073)
Proceeds from the sale of property and equipment and assets held for sale 2,621 481
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Net cash provided by (used in) investing activities 7,446 (182)
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CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
Decrease in restricted cash -- 236
Net borrowings on line of credit 500 --
Principal payments of debt (1,624) (376)
Senior notes retirement (11,053) --
Proceeds from the issuance of common stock, net of costs of issuance 14 32
Principal payments on capital lease obligations (148) (99)
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Net cash used in financing activities (12,311) (207)
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Net increase (decrease) in cash (6,726) 959
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CASH AND CASH EQUIVALENTS, beginning of period 9,494 2,285
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CASH AND CASH EQUIVALENTS, end of period $ 2,768 $ 3,244
============ ===========
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated financial statements.
</FN>
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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 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 29, 1996 ("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. On March 25,
1997, the Company entered into a letter of intent to merge with Checkers
Drive-In Restaurants. See Note 9.
Rally's is one of the largest chains of double drive-thru restaurants in
the United States. At March 30, 1997, the Rally's system included 469
restaurants in 19 states, primarily in the Midwest and the Sunbelt,
comprised of 214 Company-owned and operated, 229 franchised restaurants and
26 Company-owned restaurants in Western markets which are operated as
Rally's restaurants by CKE Restaurants, Inc. ("CKE"), a significant
shareholder of the Company, under an operating agreement which began July
1996. Two additional Company-owned stores covered by the operating
agreement have been converted to the Carl's Jr. format and are not included
in the above store count. The Company's restaurants offer high quality fast
food. 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 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 and is currently inactive. The manufacturing business was sold in
January 1995.
5
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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 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, when read in conjunction with the 10-K, the Company's
financial position as of March 30, 1997 and the results of its operations
for the fiscal quarters ended March 31, 1996 and March 30, 1997, and cash
flows for the fiscal quarters ended March 31, 1996 and March 30, 1997. The
results of operations for such interim periods are not necessarily
indicative of the results to be expected for the full year.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128")
which is effective for both interim and annual periods ending after
December 15, 1997. SFAS 128 replaces the standards for computing earnings
per share previously found in Accounting Principles Board Opinion No. 15,
"Earnings Per Share" ("APB 15"). Due to the existence of a loss from
operations for the quarters ended March 31, 1996 and March 30, 1997, the
inclusion of options and warrants result in an antidilutive per share
amount. Therefore, for all periods presented, such options and warrants
would be excluded from earnings per share calculations under both APB 15
and, on a proforma basis, SFAS 128.
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. RESTRICTED CASH
Restricted cash consists of amounts held in various Certificates of Deposit
as collateral for Letters of Credit and Automated Clearing House ("ACH")
transactions.
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 29, 1996 and March 30, 1997. 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
6
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prices for these investments. Realized gains or losses from the sale of
investments are based on the specific identification method.
The carrying value is equal to the market value of investments at December
29, 1996 and March 30, 1997 and consists of the following:
December 29, 1996
-----------------
United States government and its agencies $ 500
Corporate debt instruments 1,458
=============
Total $ 1,958
=============
March 30, 1997
--------------
United States government and its agencies $ 500
Corporate debt instruments 1,290
=============
Total $ 1,790
=============
The proceeds from the sale of investments and related gross gains and
losses for the quarters ended March 31, 1996 and March 30, 1997 were as
follows:
QUARTERS ENDED
----------------------------
MARCH 31, MARCH 30,
1996 1997
------------ ------------
Proceeds from the sale of investments $ 4,933 $ 168
Gross gains realized -- --
Gross losses realized -- --
4. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
QUARTERS ENDED
----------------------------
MARCH 31, MARCH 30,
1996 1997
------------ -------------
Interest paid (net of amount capitalized) $ 847 $ 330
Income taxes paid 238 173
Capital lease obligations incurred 111 --
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.
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.
7
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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 Group, Ltd. ("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, certifying a class from July 20, 1992 to
September 29, 1993. In October 1995, the plaintiffs filed a motion to
disqualify Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP
("Christensen, Miller") 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 former director of
Rally's and a partner in Christensen, Miller. Defendants filed an
opposition to the motion, and the motion to disqualify Christensen, Miller
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. Fact discovery is now set to
be completed in late May 1997. No trial date has been scheduled yet.
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. An estimate of defense costs
reimbursable under the Company's directors' and officers' insurance is
included in "Other Assets" in the accompanying consolidated financial
statements.
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 Court. Harbor
named Rally's as a nominal defendant. Harbor claims that the directors and
officers of both Rally's and GIANT, along with GIANT, breached their
fiduciary duties to the public shareholders of Rally's by causing Rally's
to repurchase from GIANT certain Rally's Senior Notes at an inflated price.
Harbor seeks "millions of dollars in damages", along with rescission of the
repurchase transaction. In the fall of 1996, all defendants moved to
dismiss the action. On April 3, 1997, the Chancery Court denied defendants'
motions. The Company denies all wrongdoing and intends to vigorously defend
the action. It is not possible to predict the outcome of this action at
this time.
Rally's filed a lawsuit on August 12, 1996 against Arkansas Investment
Group, Inc. ("AIGI"), a franchisee that currently operates ten Rally's
restaurants located in Arkansas. The lawsuit seeks to recover royalties and
contributions to the Rally's National Advertising Fund owed by AIGI
pursuant to the applicable franchise agreements, which total approximately
$540,000 with accrued
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interest as of March 30, 1997. After falling in arrears on its royalties
and advertising fund contributions, Rally's and AIGI negotiated a written
agreement to allow AIGI to make payments under a revised payment schedule.
AIGI also defaulted on that written obligation. AIGI has filed an Answer
and Counterclaim in which it alleges it does not owe the royalties and
advertising contributions due to its alleged disagreement with operational
and marketing decisions of Rally's and Rally's alleged failure to rebate
sums obtained from suppliers. AIGI has asserted causes of action for breach
of contract, violation of the Arkansas Franchise Practices Act, unjust
enrichment and fraud. The Counterclaim alleges that AIGI has been damaged
in excess of approximately $75,000 (the minimum jurisdictional amount for
federal court), but no specific amount of damages is identified in the
Counterclaim. Rally's denies AIGI's allegations and intends to vigorously
defend the Counterclaim. Because the litigation is 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 December 1994, Rally's entered into two franchise agreements with Kader
Investments, Inc. ("Kader") for the development and operation of Rally's
Hamburgers restaurants in Anaheim, California and Tustin, California.
Rally's assisted the franchisee in developing and opening the restaurants.
On November 27, 1996, Kader filed a six-count Complaint against Rally's in
the California Superior Court for Orange County (Case No. 772257) alleging
material misrepresentation, respondent superior, breach of contract, breach
of the implied covenant of good faith and fair dealing, fraud and unfair
competition. These claims arise out of allegations concerning Rally's offer
and sale of two franchises (under a two-store development agreement), and
Rally's actions during the term of the agreements. The Complaint seeks as
relief rescission of the parties' franchise and development agreements;
general damages of at least $1,494,277 and $1,400,000 for the material
misrepresentation and fraud counts, respectively; general damages in
unspecified amounts as to the other counts; punitive damages in unspecified
amounts; and attorneys' fees. Rally's filed an Answer, and intends to file
a Cross-Complaint alleging breach of contract. The court has permitted the
parties to hold discovery in abeyance for a short period pending settlement
discussions. Rally's is currently attempting to settle the claim. However,
the outcome of such settlement discussion is uncertain at this time. Should
discussions not result in a settlement, Rally's intends to vigorously
defend against the claims. Because the litigation is 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.
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 $350,000.
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.
9
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6. 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.
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." 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,
Provision for restaurant closures and other. No additional long-lived
assets have been determined to be impaired in the first quarter of 1997. 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 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 $4.5 million
or $.29 per share. An additional $4.7 million face amount of the Senior
Notes were retired during the fourth quarter, 1996 at an aggregate gain of
$200,000. The
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remaining outstanding Notes are publicly traded and at March 30, 1997 had a
market value of $53.5 million based on the quoted market price for such
notes.
These purchases reduced total interest expense by approximately $329,000
for the first quarter of 1996 and $703,000 for the first quarter of 1997.
9. PROPOSED MERGER
On March 25, 1997, the Company announced that it had agreed in principle to
a merger transaction pursuant to which the Company will become a wholly
owned subsidiary of Checkers Drive-In Restaurants, Inc. ("Checkers"). Under
the terms of the letter of intent, each share of Rally's common stock will
be converted into three shares of Checkers' common stock upon consummation
of the merger. The transaction is subject to negotiation of definitive
agreements, receipt of fairness opinions by each party, receipt of
stockholder and other required approvals and customary conditions. The
Company continues to work through certain conditions that are a requirement
of the letter of intent.
11
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company reported a net loss of $952,000 or $.05 per share for the first
quarter of 1997, which represents a 74% improvement over the Loss before
extraordinary item of $3.7 million or $.24 per share in the prior year first
quarter. Net income for the prior year quarter of $838,000 or $.05 per share was
attributable to an extraordinary gain, net of tax, of $4.5 million or $.29 per
share from the early extinguishment of debt during the quarter, offset by the
operating loss noted above.
Total revenues declined 22% quarter to quarter due to fewer Company units in
operation, lower same store sales and lower franchise revenues, somewhat offset
by the impact of new stores and re-openings. The agreement with CKE Restaurants
for operation of the Company's 28 West Coast restaurants was the primary reason
for the decline in the number of Company units in operation.
The Company attributes the improved performance over the prior year's first
quarter to its sustained reductions in store level costs which were an integral
part of its overall turnaround plan. Many of such reductions were initially
implemented in the last half of 1996. This improvement was somewhat offset by
lower average unit volumes, which decreased leverage of fixed and semivariable
costs. Store level profits grew from $619,000 last year to almost $4 million
this year, and profit margins improved by 11 percentage points. Additional
detail of quarterly comparatives is provided below.
Historically, the Company's first quarter is its lowest volume quarter. The
Company's primary challenge continues to be one of improving same store sales
trends. The Company's new advertising of its newly adopted brand positioning did
not begin in all Company markets until the ninth week of the thirteen-week
quarter. Prior to the full rollout, the Company initiated the campaign in three
of its markets in December 1996. Management believes that the five weeks
"on-air" in the quarter were insufficient to significantly alter the same store
sales trends, which remained essentially unchanged from the fourth quarter
trends. Company-operated units declined 14% during the quarter, while franchised
same store sales declined 8%. Same store sales in the three markets rolled out
in December have performed 8% better than the aggregate of all other markets.
Management believes this is partially attributable to the timing of the recent
increase in price point advertising by major competitors and to the Company's
prolonged "off-air" hiatus during the fourth quarter. Management believes that
this new positioning provides the best opportunity for the Company to create and
defend a profitable brand in a very competitive environment. The Company cannot
outspend its much larger competitors who are expected to continue their
aggressive price promotions; however, the Company will continue to utilize
television advertising of this new positioning on a continuous basis as it makes
tactical refinements to stimulate increased consumer trial of its new, higher
quality burger products.
As more fully discussed in Note 9 to the accompanying consolidated financial
statements, on March 25, 1997, the Company announced that it had agreed in
principle to a merger transaction pursuant to which the Company will become a
wholly owned subsidiary of Checkers Drive-In Restaurants, Inc. ("Checkers").
During the quarter, the Company opened 5 units, including one unit reopened
based on the Company's attainment of improved store level economics. Franchisees
have opened 3 units during the quarter and closed 6 units. For 1997, management
expects to open a total of 18 Company units, including 3 reopenings, and 20
franchised units.
12
<PAGE>
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 (including
CKE-operated). 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 and operated restaurants. General
and administrative expenses relate to both Company-owned and operated
restaurants and franchise operations. Owner expenses relate to CKE-operated
restaurants and consist primarily of depreciation and amortization.
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
-------------------------------
MARCH 31, MARCH 30,
1996 1997
------------- ---------------
<S> <C> <C>
Restaurant sales 96.7% 95.9%
Franchise revenues and fees 3.3 3.5
Owner fee income 0.0 .6
------------- ---------------
100.0% 100.0%
============= ===============
Costs and expenses
Restaurant cost of sales (1) 36.5% 31.8%
Restaurant operating expenses (1) 48.3 44.1
General and administrative expenses 11.1 12.1
Advertising and promotion
expenses (1) 7.0 4.3
Depreciation and amortization (1) 6.6 7.3
Owner expense (2) -- 142.8%
Provision for restaurant closures and other 1.8 (0.1)
Income (loss) from operations (8.0) 3.1
Total other (expense) (4.8) (5.6)
------------- ---------------
Net loss before income taxes and extraordinary items (12.8) (2.5)
Net income (loss) 2.0% (2.9)%
============= ===============
Number of restaurants:
Restaurants open at the beginning of period 481 467
------------- ---------------
Company restaurants opened (closed or transferred), net during period (1) 5
Franchised restaurants opened (closed or transferred), net during period 2 (3)
------------- ---------------
Total restaurants opened (closed or transferred), net during period 1 2
------------- ---------------
Total restaurants open at end of period 482 469
============= ===============
(1) As a percentage of restaurant sales.
(2) As a percentage of owner fee income.
</TABLE>
13
<PAGE>
Quarter Ended March 31, 1996 Compared with Quarter Ended March 30, 1997
Systemwide sales decreased 11% to $68.2 million for the quarter compared with
$76.6 million a year ago. This decrease is primarily attributable to systemwide
same store sales declines of 12%. The decline in same store sales is primarily
due to lower quarter to quarter media spending as a result of the timing of the
launch of the advertising of the Company's newly adopted Bigger, Better Burgers
positioning and the Company's decision not to match the deep discount offers
which greatly impacted store margins in the prior year. In the fall of 1996,
management decided to limit media spending until work with its new advertising
agency on new creative and brand positioning was completed. The new advertising
campaigns and enhanced menu offering started in most markets at the end of
February, as previously discussed.
Total Company revenues decreased 22% to $32.6 million for the quarter compared
with $41.9 million a year ago. Company-owned and operated restaurant sales
decreased $9.3 million to $31.3 million due to a 14% decline in same store sales
during the quarter and to a decline in revenues of approximately $5 million
attributable to the Company's operating agreement with CKE, as discussed in Note
1 to the accompanying consolidated financial statements.
Restaurant cost of sales, as a percentage of sales, decreased to 31.8% for 1997
compared with 36.5% for the comparable quarter of the prior year. This decline
is primarily due to the impact of implemented cost reduction strategies and to
reduced levels of discounting in the current year quarter. These cost reduction
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 44.1% of sales compared with 48.3% 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 operated by the Company during the current year quarter,
primarily the result of the CKE operating agreement covering certain high fixed
cost restaurants in Western markets. 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 expected increases in the minimum wage.
General and administrative expenses were approximately $700,000 lower than the
prior year quarter but represented 12.1% of total revenues compared with 11.1%
for the comparable quarter of the prior year due to the lower overall revenue
levels. This dollar decrease was primarily attributable to the transfer of
operational responsibility for certain restaurants in Western markets to CKE, to
a reduction in non-restaurant staffing levels, lower levels of bad debts and to
a reduction in bonuses payable for the quarter.
Advertising expenses decreased approximately $1.5 million, or 2.7 percentage
points, in the first quarter of 1997 compared to the same quarter of 1996 due
primarily to fewer weeks "on air" in the current year quarter. The new Bigger,
Better Burgers campaign started in most markets at the end of February, ending a
lengthy "off-air" period in those markets.
Depreciation and amortization decreased approximately $400,000 in the first
quarter of 1997 compared to the same quarter of 1996. This decrease is primarily
due to a segregation into Owner expense of depreciation and amortization
associated with the CKE-operated properties. See Note 1 to the accompanying
consolidated financial statements, for further discussion.
14
<PAGE>
Owner expenses of $300,000 in the first quarter of 1997 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.
Provision for restaurant closures and other of $732,000 in the first quarter of
1996 primarily relates to a charge in the prior year quarter for the estimated
impairment of two restaurants under SFAS 121. No additional long-lived assets
have been determined to be impaired in the first quarter of 1997.
Interest expense decreased 19% in the first quarter of 1997 to $1.9 million
compared to $2.3 million in 1996 primarily due to the early extinguishment of
debt during 1996. See Note 8 to the accompanying consolidated financial
statements, for further discussion.
Interest income decreased 70% in the first quarter of 1997 to $103,000 compared
to $345,000 in 1996, due to lower interest earned on self insurance and other
security deposits.
The Company's net tax provision was essentially flat between years and
represents state taxes expected to be payable for both years. The Company has
continued not recording a benefit for the currently recordable book losses due
to uncertainty of their ultimate realizability.
The extraordinary item in the first quarter of 1996 represents the gain
recognized, net of taxes, on the early retirement of debt. See Note 8 to the
accompanying consolidated financial statements, for further discussion.
Liquidity and Capital Resources
The Company's cash flow provided from operating activities was approximately
$1.3 million for the first quarter of 1997 compared with cash flow used in
operating activities of approximately $1.9 million for the same period in the
prior year. This increase resulted primarily from the higher net income from
operations in 1997, adjusted for depreciation, amortization and other non-cash
items.
Capital expenditures of approximately $1.1 million for the first quarter of 1997
were funded primarily through operating activities, sales of surplus properties
and existing cash balances. Approximately $760,000 of these expenditures were
for the construction or conversion of new stores and for the reopening of three
units previously closed. Five of these stores opened in the first quarter of
1997, including one unit reopened. Seven additional stores were under
construction at March 30, 1997, including two units which were previously
closed. Remaining capital expenditures were primarily for the purchase and
installation of certain replacement equipment.
The Company plans to open 15 new units in 1997 and reopen 3 units previously
closed. Full year capital expenditures are expected to be in the range of
approximately $6 million to $8 million, inclusive of replacement capital.
Principal payments of debt and capital leases totaled approximately $475,000
during the first quarter of 1997. The Company is required to make a mandatory
sinking fund payment on June 15, 1999 calculated to retire 33 1/3% in aggregate
original principal amount of the Senior Notes issued with the balance maturing
on June 15, 2000. Such sinking fund requirement, due to debt repurchases in the
prior year, is now approximately $1.6 million.
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,
15
<PAGE>
although actual timing of such cash flows cannot be predicted. 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 ultimately realized. Approximately $481,000 was generated during the
first quarter of 1997 from the sale of such assets.
During the first quarter, the Company continued to receive funds (approximately
$100,000) on land contracts which are the subject of an aggregate amount of
approximately $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, since the end of the quarter, to complete contractual requirements to
fund such transactions. Such inability by the holder to fulfill the contracts is
not anticipated to impact the Company's overall liquidity in any material
respect.
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 approximate $10.8
million of gross proceeds provided by the Offering, the Warrants issued as part
of the Offering could provide approximately $10.8 million for the Company's
future growth. As of March 30, 1997, 4,816,835 Warrants were outstanding. Any
proceeds generated from the exercise of such warrants may be used for new store
construction, refurbishment of some existing restaurants and for other general
corporate purposes, including possible further debt reduction.
On December 20, 1996, the Company issued warrants to purchase an aggregate of
1,500,000 restricted shares of its Common Stock to CKE and Fidelity National
Financial, Inc. These warrants have a three-year term and are not exercisable
until December 20, 1997. The exercise price is $4.375 per share, the closing
price of the Common Stock on December 20, 1996. The underlying shares of Common
Stock have not been registered with the Securities and Exchange Commission and,
therefore, are not freely tradable. If these warrants are exercised, the Company
will receive approximately $6.6 million in additional capital.
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, among other factors, the Company successfully increasing
revenues and profits.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - See Note 5 to Part I, Item 1 which is
incorporated herein by reference.
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:
There were no Form 8-K reports filed during the first quarter of 1997.
17
<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: May 14, 1997 By: /s/ Donald E. Doyle
-----------------------------------------------
Donald E. Doyle
President and Chief Executive Officer
Date: May 14, 1997 By: /s/ Mark A. Noltemeyer
-----------------------------------------------
Mark A. Noltemeyer
Senior Vice President, Finance
(Principal Financial and Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 3/30/97 and the Consolidated Statement of
Operations for the 3 months ended 3/30/97.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-28-1997
<PERIOD-START> Dec-30-1996
<PERIOD-END> Mar-30-1997
<EXCHANGE-RATE> 1
<CASH> 4,657
<SECURITIES> 1,790
<RECEIVABLES> 2,897 <F1>
<ALLOWANCES> 0
<INVENTORY> 787
<CURRENT-ASSETS> 10,795
<PP&E> 69,673 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 111,318
<CURRENT-LIABILITIES> 20,350
<BONDS> 67,765
0
0
<COMMON> 2,082
<OTHER-SE> 16,610
<TOTAL-LIABILITY-AND-EQUITY> 111,318
<SALES> 31,250
<TOTAL-REVENUES> 32,595
<CGS> 9,936
<TOTAL-COSTS> 31,580
<OTHER-EXPENSES> 40
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,880
<INCOME-PRETAX> (802)
<INCOME-TAX> 150
<INCOME-CONTINUING> (952)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (952)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
<FN>
<F1> The asset values for receivables and PP&E represent net amounts.
</FN>
</TABLE>
