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 22, 1999
[ ] 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
incorporation or organization) Identification No.)
14255 49TH STREET NORTH, BUILDING 1, SUITE 101
CLEARWATER, FLORIDA 33762
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 727/519-2000
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 20, 1999 - 29,335,243 shares
<PAGE>
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 22, 1999 AND DECEMBER 28, 1998..........................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME QUARTERS ENDED MARCH 22, 1999 AND MARCH 22, 1998 ......5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 22, 1999 AND MARCH 22, 1998 .............6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..............7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. .....17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................17
ITEM 2. CHANGES IN SECURITIES ...........................................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............19
ITEM 5. OTHER INFORMATION................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................19
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 22, DECEMBER 28,
1999 1998
--------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,729 $ 4,601
Restricted cash 1,242 1,880
Investments 95 47
Accounts receivable, net 2,596 2,597
Notes receivable, net - current portion 120 153
Inventory 872 1,017
Prepaid expenses and other current assets 538 310
Assets held for sale 1,131 1,131
-------- --------
Total current assets 13,323 11,736
Property and equipment, net 60,290 61,914
Investment in affiliate, net of accumulated amortization 22,567 23,001
Notes receivable, net - less current portion 344 375
Goodwill, net of accumulated amortization 8,318 8,477
Reacquired franchise and territory rights, net of accumulated amortization 11,358 11,620
Other intangibles, net of accumulated amortization 3,726 3,783
Other assets, net of accumulated amortization 2,276 2,400
-------- --------
$122,202 $123,306
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 22, DECEMBER 28,
1999 1998
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,595 $ 3,686
Reserves for restaurant relocations and abandoned sites 3,180 3,148
Accrued liabilities 8,910 7,541
Current maturities of long-term debt and obligations under capital lease 1,519 1,490
--------- ---------
Total current liabilities 19,204 15,865
Senior notes, net of discounts 53,543 55,768
Long-term debt, less current maturities 7,629 7,819
Obligations under capital lease, less current maturities 4,959 5,230
Long-term reserves for restaurant relocations and adandoned sites 2,077 2,275
Other noncurrent liabilities 1,874 1,830
--------- ---------
Total liabilities 89,286 88,787
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value, authorized 5,000,000 shares, no shares
outstanding -- --
Common stock, $.10 par value, authorized 50,000,000 shares,
issued 29,608,688 at March 22, 1999 and
at December 28, 1998 2,961 2,961
Additional paid-in capital 97,346 97,346
Retained deficit (65,283) (63,680)
--------- ---------
35,024 36,627
Less treasury stock, at cost, 273,445 shares (2,108) (2,108)
--------- ---------
Net stockholders' equity 32,916 34,519
--------- ---------
$ 122,202 $ 123,306
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------
MARCH 22, MARCH 22,
1999 1998
--------- ---------
<S> <C> <C>
REVENUES:
Restaurant sales $ 29,040 $ 30,962
Franchise revenues and fees 916 1,043
Owner fee income 163 159
-------- --------
Total revenues $ 30,119 $ 32,164
-------- --------
COSTS AND EXPENSES:
Restaurant food and paper costs 8,568 10,047
Restaurant labor costs 9,420 9,708
Restaurant occupancy expense 1,770 1,552
Restaurant depreciation and amortization 1,624 1,676
Other restaurant operating expense 2,824 2,663
Advertising expense 1,801 1,644
Owner depreciation 352 135
Other depreciation and amortization 570 627
General and administrative expenses 3,081 3,482
Losses on assets to be disposed of -- 31
-------- --------
Total costs and expenses 30,010 31,565
-------- --------
Operating income 109 599
OTHER INCOME (EXPENSE):
Interest income 188 77
Gains on bond repurchases 256 --
Loss on investment in affiliate (434) (42)
Interest expense (1,685) (1,690)
-------- --------
Loss before income tax expense (1,566) (1,056)
Income tax expense 37 26
-------- --------
Net loss $ (1,603) $ (1,082)
======== ========
Comprehensive loss $ (1,603) $ (1,082)
Net loss per common share - (basic and diluted) $ (0.05) $ (0.04)
======== ========
Weighted average number of common shares - (basic and diluted) 29,335 24,568
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------
MARCH 22, MARCH 22,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,603) $(1,082)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,547 2,438
Provision for losses on assets to be disposed of -- 31
Gains on bond repurchases (256) --
Deferred loan costs amortization 99 94
Provision for bad debt 165 35
Loss, net of amortization on investment in affilate 434 42
Changes in assets and liabilities:
Increase in accounts receivable (139) (1,033)
Decrease in notes receivable 39 --
Decrease (increase) in inventory 145 (55)
(Increase) decrease in prepaid expenses and other current assets (234) 7
Decrease (increase) in deposits and other 34 (23)
Increase in accounts payable 1,909 1,008
Increase (decrease) in accrued liabilities 1,223 (1,967)
------- -------
Net cash provided by operating activities 4,363 (505)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (408) (623)
Cash paid on business purchases -- (32)
(Increase) decrease in investments (48) 102
Proceeds from sale of assets -- 119
------- -------
Net cash used in investing activities (456) (434)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash 638 --
Proceeds from (repayments of) senior notes (1,985) --
Principal payments on long-term debt and capital lease obligations (432) (275)
------- -------
Net cash used in financing activities (1,779) (275)
------- -------
Net increase (decrease) in cash 2,128 (1,214)
CASH AT BEGINNING OF PERIOD 4,601 4,008
------- -------
CASH AT END OF PERIOD $ 6,729 $ 2,794
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION---
Interest paid, net $ 390 $ 267
======= =======
Income taxes paid $ -- $ 21
======= =======
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION - The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary to
present fairly the information set forth therein have been included. The
operating results for the quarter ended March 22, 1999, are not necessarily an
indication of the results that may be expected for the fiscal year ending
January 03, 2000. 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 Company's Annual Report on Form 10-K for the year
ended December 28, 1998. Therefore it is suggested that the accompanying
financial statements be read in conjunction with the Company's December 28, 1998
consolidated financial statements. As of December 29, 1997 the Company changed
from a 13 week quarter to a 12 week quarter with the exception of the fourth
quarter which will generally consist of sixteen weeks. The fiscal year will end
on the Monday closest to December 31st. The Company's 1999 fiscal year will
include a 53rd week, thereby increasing the fourth quarter to seventeen weeks.
(b) PURPOSE AND ORGANIZATION - The principal business of Rally's Hamburgers,
Inc. (the "Company", "Rally's") is the operation and franchising of Rally's
restaurants. Rally's is one of the largest chains of double drive-thru
restaurants in the United States. At March 22, 1999, the Rally's system included
469 restaurants in 18 states located primarily in the Midwest and the Sunbelt
and are comprised of 225 Company-owned and operated, 244 franchised restaurants,
including 25 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 in 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. The consolidated financial
statements include Rally's Hamburgers, Inc. and its wholly owned subsidiaries.
Rally's Hamburgers, Inc. and its subsidiaries are collectively referred to
herein, as the context requires as "Rally's" or the "Company". All significant
inter-company accounts and transactions have been eliminated. The investment in
affiliate, which is 26.06% owned, represents an investment in Checkers Drive-In
Restaurants, Inc. ("Checkers") and is recorded under the equity method.
(c) REVENUE RECOGNITION - The Company recognizes franchise fees as income on the
date a restaurant is opened, at which time the Company has performed its
obligations relating to such fees. Area development fees are generated from the
awarding of exclusive rights to develop, own and operate Rally's restaurants in
certain geographic areas pursuant to an Area Development Agreement. Such fees
are recognized as income on a pro rata basis as the restaurants are opened or
upon the cancellation or expiration of an Area Development Agreement. Both
franchise fees and area development fees are non-refundable. The Company also
receives royalty fees from franchisees typically in the amount of 4% of each
franchised restaurant's gross revenues, as defined in the Franchise Agreement.
Royalty fees are recognized as earned.
(d) CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
instruments purchased with an original maturity of less than three months to be
cash equivalents. Restricted Cash consists of cash on deposit with various
financial institutions as collateral to support the Company's obligations to
certain states for potential workers' compensation claims. This cash is not
available for the Company's use until such time that the respective states
permit its release.
(e) RECEIVABLES - Receivables consist primarily of franchise fees, royalties and
notes due from franchisees and owner fee income and advances to the National
Advertising Fund which provides broadcast creative production for use by the
Company and its franchisees. Allowances for doubtful receivables were $1.1
million at March 22, 1999 and $969,000 at December 28, 1998.
(f) INVENTORY - Inventory is valued at latest invoice cost, which approximates
the lower of first-in, first-out cost or market.
(g) IMPAIRMENT OF LONG LIVED ASSETS - The Company accounts for tangible property
and intangibles under the 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), which requires the write-down of certain intangibles
and tangible property associated with under performing sites to the level
supported by the forecasted discounted cash flow in cases where undiscounted
cash flow projected does not exceed the book value of the related assets.
7
<PAGE>
(h) PROPERTY AND EQUIPMENT - Property and equipment are depreciated using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. The estimated useful lives for financial reporting
purposes are the shorter of 20 years or the lease life plus available renewal
options for buildings and property held under capital leases, eight years for
furniture and equipment, five years for software and computer systems and the
life of the lease for leasehold improvements. Expenditures for major renewals
and betterments are capitalized while expenditures for maintenance and repairs
are expensed as incurred. Property and equipment held for sale includes various
excess restaurant facilities and land. The aggregate carrying value of property
and equipment held for sale is periodically reviewed and adjusted downward to
market value, when appropriate.
(i) USE OF ESTIMATES - 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
(j) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The balance sheets
as of March 22, 1999 and December 28, 1998 reflect the fair value amounts which
have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The carrying amounts of cash and
cash equivalents, receivables, accounts payable, and long-term debt are a
reasonable estimate of their fair value. Interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for debt issues that are not quoted
on an exchange.
(k) EARNINGS (LOSS) PER COMMON SHARE - Basic and diluted earnings (loss) per
share are calculated in accordance with the Statement of Financial Accounting
Standard No. 128, "Earnings per Share". Potentially dilutive common stock
warrants and options have no effect, as they are anti-dilutive for all periods
presented.
(l) OWNER FEE INCOME AND DEPRECIATION - Revenue received as a result of the
operating agreement with CKE is referred to as owner fee income in the
accompanying consolidated financial statements. Depreciation expenses related to
the ongoing investment in the CKE-operated restaurants are referred to as owner
depreciation in the accompanying consolidated financial statements.
(m) ADVERTISING COSTS - It is the Company's policy to expense advertising costs
as incurred.
(n) RECLASSIFICATIONS - 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.
NOTE 2: LIQUIDITY
The Company has a working capital deficit of $5.9 million at March 22,
1999. It is anticipated that the Company will continue to have a working capital
deficit since approximately 89% of the Company's assets are long-term (primarily
property, equipment, investment in affiliate and intangibles), and since all
operating trade payables, accrued expenses, and property and equipment payables
are current liabilities of the Company. At March 22, 1999, a significant portion
($53.5 million) of the Company's long-term liabilities relate to the Company's
Senior Notes that mature in June, 2000.
The Company is currently evaluating alternatives for refinancing or
repaying the outstanding Senior Notes that mature in June 2000. These
alternatives include a sale-leaseback transaction or additional mortgage
financing. Other options include the sale of certain company-owned markets to
current or new franchisees in transactions that would provide immediate funds to
reduce debt and would also provide a continued source of income through future
royalties. There can be no assurance that the Company will be able to satisfy
the entire principal balance of the Senior Notes on the maturity date of
June 15, 2000.
8
<PAGE>
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 22, DECEMBER 28,
1999 1998
--------- ------------
<S> <C> <C>
Mortgages payable to FFCA Acquisition Corporation secured by eight
Company owned restaurants payable in 240 aggregate monthly installments
of $40,082, including interest at 9.5%. The Company is required to utilize the
net proceeds of the loan to retire Senior Notes (See Note 2: "Liquidity") $ 4,288 $ 4,300
Notes payable to former franchise owners for acquisition of market,
secured by common stock of Hampton Road Foods, maturing March 13,
2001, bearing interest of 9%. The notes are payable in monthly principal
and interest installments ranging from $4,742 to $50,211 3,891 4,022
Notes payable to banks, maturing at various dates through November 10,
2001, secured by property and/or equipment, bearing interest ranging from
1/2% above prime to 9.25%. The notes are payable in monthly principal and
interest installments ranging from $1,531 to $13,333. Interest is payable
monthly 244 323
Secured notes payable to a bank used to finance equipment and/or modular
buildings for franchisees (the Franchisee Loans), maturing at various dates
through July 15, 2000, bearing interest at prime plus 1/2%. The notes are
payable in monthly principal installments of $4,875. Interest is payable
monthly 63 78
------- -------
8,486 8,723
Less current portion (857) (904)
------- -------
$ 7,629 $ 7,819
======= =======
</TABLE>
NOTE 4: RELATED PARTY TRANSACTION
Effective November 30, 1997, the Company entered into a Management
Services Agreement, pursuant to which the management of Checkers is providing
key services to the Company, including executive management, financial planning
and accounting, franchise administration, purchasing and human resources. In
addition, the Company and Checkers share their executive officers, including
Chief Executive Officer and the Chief Operating Officer. The total cost of these
services was $1.7 million and $913,000 during the quarters ended March 22, 1999
and March 22, 1998. Effective April 6, 1999, the Company began sharing the
services of the Chief Financial Officer with Checker's.
NOTE 5: MERGER
On January 29, 1999, Rally's and Checkers announced the signing of a
definitive merger agreement pursuant to which both companies would merge in an
all stock transaction, (the "Merger"). The Merger agreement provides that each
outstanding share of Rally's stock will be exchanged for 1.99 shares of Checkers
stock. Immediately following the Merger, the Checkers common stock will undergo
a one-for-twelve reverse split resulting in total common shares outstanding of
approximately 9,387,859. In addition, each of Rally's outstanding stock options
(5.6 million at March 22, 1999) will be exchanged for Checkers options at an
exchange rate of 1 to 1.99. The approximate 19.1 million shares of Checkers
common stock which Rally's owns will be retired following the Merger. Checkers
and Rally's have each received investment bankers' opinions as to the fairness
of the exchange rate used in the Merger. The transaction is subject to certain
approvals, including but not limited to approval by the shareholders of Checkers
and Rally's and the holders of Rally's Senior Notes and is expected to close in
the third quarter of fiscal year 1999.
At March 22, 1999, Rally's owned 19,130,930 shares (26.06 percent) of
the outstanding common stock of Checkers and public shareholders owned the
remaining 54,277,177 shares of Checkers common stock. Checkers will issue
58,377,134 shares of its common stock to Rally's shareholders in exchange for
all the outstanding common stock of Rally's (29,335,243 outstanding shares) at a
1 to 1.99 exchange ratio. After the transaction, Rally's shareholders will own
58,377,134 shares (51.8 percent of the outstanding common stock of the new
Checkers) and the remaining 54,277,117 shares (48.2 percent of Checkers common
stock) will then be held by then current shareholders of Checkers.
9
<PAGE>
The Merger transaction will be accounted for under the purchase method
of accounting and will be treated as a reverse acquisition as the stockholders
of Rally's will receive the larger portion of the voting interests in the
combined enterprise. Accordingly, Rally's is considered the acquirer for
accounting purposes and therefore, Checkers' assets and liabilities will be
recorded based upon their fair market value .
The following pro forma condensed consolidated financial data sets
forth certain pro forma financial information giving effect to the Merger. The
pro forma financial information is based on, and should be read in conjunction
with the historical consolidated financial statements of each of the companies
and the notes related thereto.
The pro forma condensed consolidating balance sheet gives effect to the
issuance of 58,377,134 shares of Checkers common stock in exchange for
29,335,243 shares of Rally's common stock, based upon the per share price of
Checkers common shares at $0.531 and a one-for twelve reverse split, assuming
the Merger had occurred March 22, 1999:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CHECKERS RALLY'S
MARCH 22, MARCH 22, PRO FORMA
1999 1999 ADJUSTMENTS MERGED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Total current assets 11,861 13,323 -- 25,184
Property and equipment, net 77,162 60,290 137,452
Investment in affiliate, including net goodwill --
of $11,717 after accumulated amortization -- 22,567 A) (22,567) --
Intangibles, net of accumulated amortization 9,916 23,402 G) 19,391 52,709
Other assets, net of accumulated amortization 1,232 2,620 -- 3,852
--------- --------- -------- ---------
$ 100,171 $ 122,202 $ (3,176) $ 219,197
========= ========= ======== =========
CURRENT LIABILITIES:
Current liabilities 18,824 19,204 B) 1,500 39,528
Senior notes, net of discount, less current maturities -- 53,543 53,543
Long-term debt and capital lease obligations, less --
current maturities 28,853 12,588 41,441
Minority interests in joint ventures 674 -- 674
Other long-term liabilities 8,323 3,951 12,274
--------- --------- -------- ---------
Total liabilities 56,674 89,286 1,500 147,460
STOCKHOLDERS' EQUITY:
Preferred stock -- -- -- --
Common stock 73 2,961 C) (3,025) 9
Additional paid-in capital 121,579 97,346 D) (81,914) 137,011
Retained deficit (77,755) (65,283) E) 77,755 (65,283)
--------- --------- -------- ---------
43,897 35,024 (7,184) 71,737
Less treasury stock, at cost (400) (2,108) F) 2,508 -
--------- --------- -------- ---------
Net stockholders' equity 43,497 32,916 (4,676) 71,737
--------- --------- -------- ---------
$ 100,171 $ 122,202 $ (3,176) $ 219,197
========= ========= ======== =========
</TABLE>
A) Pro forma adjustment to record the elimination of Rally's original
investment of $10,850 in Checkers common stock and the reclassification to
intangibles of $11,717 of goodwill associated with Rally's investment in
Checkers.
B) Pro forma adjustment to accrue estimated transaction costs related to the
Merger.
C) Pro forma adjustments to record the issuance of 58,377 shares of Checkers
common stock in exchange for Rally's outstanding shares, $58; to eliminate
the previous common stock account of Rally's, ($2,961); to eliminate the
par value associated with Rally's investment in Checkers common stock,
($19); and to effect a one-for-twelve reverse split, ($103).
D) Pro forma adjustments, in accordance with reverse acquisition accounting,
to record the fair value of the outstanding 54,277 shares of common stock
of Checkers valued at $0.531 per share, $28,767 which is net of related par
value; eliminate the previous treasury stock of Rally's, ($2,108);
eliminate the previous additional paid-in capital account of Checkers,
($121,579); to reduce additional paid in capital for the par value of the
58,377 shares issued to Rally's shareholders, ($58); to eliminate the
previous common stock account of Rally's, $2,961; to attribute a $10,000
estimated fair value to the outstanding Checkers stock options and
warrants, and effect a one-for-twelve reverse split, $103.
E) Pro forma adjustments to record the elimination of the retained deficit
account of Checkers.
F) Pro forma adjustment to eliminate the previous treasury stock of Checkers,
$400, as well as the treasury stock of Rally's, $2,108 which is cancelled
as a result of the Merger.
G) Pro forma adjustment to record goodwill of $7,674 associated with the
Merger and the reclassification of $11,717 of goodwill associated with
Rally's original investment in Checkers (see A).
NOTE: The final adjustments to value the outstanding Checkers options and
warrants as well as final adjustments to the fair value of assets and
liabilities as a result of the Merger will not be known until the Merger is
completed.
10
<PAGE>
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1998:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CHECKERS RALLY'S
TWELVE WEEKS TWELVE WEEKS
ENDED ENDED
MARCH 22, MARCH 22, PRO FORMA
1999 1999 ADJUSTMENTS MERGED
------------ ------------ ----------- --------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 31,713 $ 30,119 $ 61,832
-------- -------- -------- --------
COSTS AND EXPENSES:
Restaurant operating costs 26,434 24,206 50,640
Advertising expense 1,912 1,801 3,713
Other expenses 98 352 450
Other depreciation and amortization 454 570 H) 200 1,224
General and administrative expense 2,917 3,081 I) (88) 5,910
-------- -------- -------- --------
Total cost and expenses 31,815 30,010 112 61,937
-------- -------- -------- --------
Operating (loss) income (102) 109 (112) (105)
Other income (expense):
Interest income 58 188 246
Gains on bond repurchases -- 256 256
Loss on investment in affiliate -- (434) J) 434 -
Interest expense (1,181) (1,685) (2,866)
-------- -------- -------- --------
Loss before minority interest, income taxes (1,225) (1,566) 322 (2,469)
Minority interests in (losses) earnings (114) -- (114)
-------- -------- -------- --------
Loss before income taxes (1,111) (1,566) 322 (2,355)
Income taxes -- 37 37
-------- -------- -------- --------
Net (loss) earnings $ (1,111) $ (1,603) $ 322 $ (2,392)
======== ======== ======== ========
Comprehensive (loss) earnings $ (1,111) $ (1,603) $ 322 $ (2,392)
======== ======== ======== ========
Net (loss) income per common share (basic and diluted) ($0.02) ($0.05) ($0.25)
======== ======== ========
Weighted average number of common shares
(basic and diluted) 73,408 29,335 K) 9,388
======== ======== ========
</TABLE>
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded
on Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment
in Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
11
<PAGE>
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CHECKERS RALLY'S
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
TOTAL REVENUES $145,708 $144,952 $ 290,660
-------- -------- ------- ---------
COSTS AND EXPENSES:
Restaurant operating costs 119,416 113,782 233,198
Advertising expense 6,921 9,853 16,774
Other expenses 516 647 1,163
Other depreciation and amortization 2,275 2,503 H) 842 5,620
General and administrative expense 13,309 13,404 I) (380) 26,333
SFAS 121 provisions 2,953 3,362 6,315
-------- -------- ------- ---------
Total cost and expenses 145,390 143,551 462 289,403
-------- -------- ------- ---------
Operating income (loss) 318 1,401 (462) 1,257
Other income (expense):
Interest income 272 480 752
Loss on investment in affiliate -- (2,019) J) 2,019 --
Interest expense (6,007) (7,145) -- (13,152)
-------- -------- ------- ---------
Loss before minority interest and income tax
expense (benefit) (5,417) (7,283) 1,557 (11,143)
Minority interests in operations of joint ventures (73) -- (73)
-------- -------- ------- ---------
Loss before income tax expense (benefit) (5,344) (7,283) 1,557 (11,070)
Income tax expense (benefit) -- 252 252
-------- -------- ------- ---------
Net (loss) earnings (5,344) (7,535) 1,557 (11,322)
======== ======== ======= =========
Comprehensive (loss) earnings $ (5,344) $ (7,535) $ 1,557 $ (11,322)
======== ======== ======= =========
Net loss per common share (basic and diluted) ($0.07) ($0.28) ($1.21)
======== ======== =========
Weighted average number of common shares
(basic and diluted) 73,388 27,170 K) 9,388
======== ======== =========
</TABLE>
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded
on Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment
in Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The principal business of Rally's Hamburgers, Inc. (the "Company",
"Rally's") is the operation and franchising of Rally's restaurants. At March 22,
1999, the Rally's system included 469 restaurants, comprised of 225
Company-owned and operated, 244 franchised restaurants, including 25
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 in 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.
On January 29, 1999, Rally's and Checkers Drive-In Restauraunt Drive-In
Restaurants, Inc. ("Checkers") announced the signing of a definitive merger
agreement pursuant to which both companies would merge in an all stock
transaction (the "Merger"). The Merger agreement provides that each outstanding
share of Rally's stock will be exchanged for 1.99 shares of Checkers stock. The
approximate 19.1 million shares of Checkers common stock which Rally's owns will
be retired following the Merger. The companies are continuing with the
regulatory process necessary to submit the proposed merger to a vote of the
shareholders and expect to complete the Merger in the third quarter of fiscal
year 1999. See Note 5 to the condensed consolidated financial statements.
On November 30, 1997, a Management Services Agreement was established
between Rally's and Checkers pursuant to which Checkers is providing accounting,
information technology and other management services to Rally's. At the same
time, a new management team was hired to provide the operational and functional
expertise necessary to explore the opportunities and potential synergies
available to both companies. The relationship between Rally's and Checkers
provided reductions in general and administrative expenses for both companies.
Rally's corporate office in Louisville, Kentucky was closed in January 1998 as
were various regional offices of both companies. The Management Services
Agreement also provided for the supervision of both Checkers and Rally's
operations by a single Regional Vice President, which increased spans of control
with fewer personnel. Rally's general and administrative expenses during the
quarter were approximately $401,000 below the same quarter of the prior year.
The number of markets that contain both Checkers and Rally's units is limited
and no markets in which either company utilizes broadcast media is shared.
Therefore, the companies combined their advertising creative and media buying
with one agency in August of 1998 which resulted in similar commercials running
for both companies with savings of agency fees and production costs. Although
both companies have benefited greatly by participating in the purchasing
cooperative with CKE, further savings were realized during the year as product
specifications were matched where possible.
Comparable store sales at Rally's were 6.1% below the same quarter of the
prior year. Rally's sales were negatively impacted by severe weather in January
and increased discounting by the Company's competitors. The Company continues to
benefit from the introduction of a two-patty platform that has enabled the
Company to offer a lower priced burger to the price conscious consumer while
also offering the new Super Rallyburger to customers desiring a premium product.
Offering a lower priced burger with a smaller patty has enabled the Company to
remain competitive at the $0.99 price point while controlling food and labor
costs at the same time.
Critical to the success of these and other menu offerings was the
operational and marketing focus on serving fresh food. The transition to a new
advertising agency resulted in the utilization of a new positioning statement
"Fresh, because we just made it" to emphasize the commitment to serve fresh hot
food to every customer. This message was primarily communicated to consumers via
television advertising.
The Company is currently evaluating alternatives for refinancing or
repaying the outstanding Senior Notes that mature in June 2000. These
alternatives include a sale-leaseback transaction or additional mortgage
financing. Other options include the sale of certain Company-owned markets to
current or new franchisees in transactions that would provide immediate funds to
reduce debt and would also provide a continued source of income through future
royalties.
The Company's revenues are derived primarily from Company-owned restaurant
sales and royalty fees from franchisees. Rally's 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). 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 expenses relate directly to
Company-owned restaurants. General and administrative expenses relate to both
Company-owned restaurants and franchise operations. Owner expenses relate to
CKE-operated restaurants and consist primarily of depreciation and amortization.
13
<PAGE>
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the Company's
condensed consolidated statements of operations and operating data for the
periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
----------------------
MARCH 22, MARCH 22,
1999 1998
--------- ---------
<S> <C> <C>
REVENUES
Restaurant sales 96.4% 96.3%
Franchise revenues and fees 3.0% 3.2%
Owner fee income 0.5% 0.5%
--------- ---------
Total revenues 100% 100%
--------- ---------
COSTS AND EXPENSES
Restaurant food and paper costs (1) 29.5% 32.4%
Restaurant labor costs (1) 32.4% 31.4%
Restaurant occupancy expense (1) 6.1% 5.0%
Restaurant depreciation and amortization (1) 5.6% 5.4%
Other restaurant operating expenses 6.2% 8.6%
Advertising expense (1) 9.7% 5.3%
Owner depreciation (2) 216.1% 85.0%
Other depreciation and amortization 1.9% 1.9%
General and administrative expense 10.2% 10.8%
Losses on assets to be disposed of -- 0.1%
--------- ---------
Operating income 0.4% 1.6%
--------- ---------
OTHER INCOME (EXPENSE)
Interest income 0.6% 0.2%
Gains on bond repurchases 0.8% --
Loss on investment in affiliate (1.4)% (0.1)%
Interest expense (5.6)% (5.3)%
--------- ---------
Loss before income tax expense (5.2)% (3.3)%
Income tax expense 0.1% 0.1%
--------- ---------
Net loss (5.3)% (3.4)%
========= =========
(1) As a percent of restaurant sales.
(2) As a percent of Owner fee income
Number of restaurants (system-wide):
Restaurants open at the beginning of period 475 477
--------- ---------
Company restaurants opened (closed or transferred),
net during period (1) --
Franchised restaurants opened (closed or transferred),
net during period (5) 1
--------- ---------
Total restaurants opened (closed or transferred), net during period (6) 1
--------- ---------
Total restaurants open at end of period 469 478
========= =========
</TABLE>
14
<PAGE>
COMPARISON OF HISTORICAL RESULTS - QUARTER ENDED MARCH 22, 1999 AND QUARTER
ENDED MARCH 22, 1998
REVENUES. Total revenue for the quarter ended March 22, 1999 of $30.1
million reflects a decrease of $2.0 million from the revenue of $32.2 million
that was recognized for the quarter ended March 22, 1998. Comparable store sales
for Company-owned restaurants decreased 6.1% compared to the same twelve weeks
of the prior year. Comparable Company-owned restaurants are those continuously
open during both reporting periods. Restaurants sales were negatively impacted
during the quarter by severe weather in January and increased discounting by our
competitors.
COSTS AND EXPENSES. Restaurant food and paper cost decreased to 29.5%
of restaurant sales in the quarter ended March 22, 1999 compared to 32.4% of
restaurant sales in the quarter ended March 22, 1998. The decrease is due
primarily to the introduction of the two-patty platform that utilizes a smaller
hamburger patty for the value conscious customer.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes increased to 32.4% of restaurant sales for the
quarter ended March 22, 1999 compared to 31.4% of restaurant sales for the
quarter ended March 22, 1998. This increase is due primarily to the impact of
operating at a lower sales volume.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $1.8 million or 6.1% of restaurant sales for the
quarter ended March 22, 1999 compared to $1.6 million or 5.0% of restaurant
sales for the quarter ended March 22, 1998. The dollar increase is due primarily
to increased insurance and rental costs.
Restaurant depreciation and amortization decreased to $1.6 million for
the quarter ended March 22, 1999 compared to $1.7 million for the quarter ended
March 22, 1998. This decrease was due to certain assets becoming fully
depreciated since the end of the quarter ended March 22, 1998 and the net
reduction of two units since that time period.
Other restaurant operating expenses include all other restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other occupancy costs and specifically includes utilities, maintenance and other
costs. These expenses increased to $2.8 million or 9.7% of restaurant sales for
the quarter ended March 22, 1999 compared to $2.7 million or 8.6% of restaurant
sales during the quarter ended March 22, 1998, due to increased repair and
maintenance expenditures.
Advertising expense increased to $1.8 million or 6.2% of restaurant
sales for the quarter ended March 22, 1999 compared to $1.6 million or 5.3% of
restaurant sales for the quarter ended March 22, 1998. The increase is due to an
expanded schedule of television advertising, into additional markets as well as
in those already using television, during the current fiscal quarter as compared
to the comparable first quarter in the prior year.
Owner expenses of $352,000 for the quarter ended March 22, 1999
represent the Company's segregated ownership cost related to the 25 units
operated by CKE. These expenses consist primarily of depreciation and
amortization associated with the properties, which have increased by $217,000
from the quarter ended March 22, 1998 due to a reduction in the estimated lives
of the underlying assets.
The loss on investment in affiliate of $434,000 for the quarter ended
March 22, 1999 and $42,000 for the quarter ended March 22, 1998 represents the
Company's share of the income (loss) of Checkers and the amortization of related
goodwill.
General and administrative expenses were $3.1 million for the quarter
ended March 22, 1999 compared to $3.5 million for the quarter ended March 22,
1998. This reduction is due to additional savings associated with the Management
Services Agreement with Checkers which gained the most significant effect in the
middle of the first quarter of 1998.
INTEREST EXPENSE. Interest expense remained consistent at $1.7 million
for the quarter ended March 22, 1999 and $1.7 million for the quarter ended
March 22, 1998.
INTEREST INCOME. Interest income increased by $112,000 for the quarter
ended March 22, 1999 to $188,000 compared to $77,000 for the quarter ended March
22, 1998 due to increases in the average investments.
INCOME TAX. The Company's net tax provision for both quarters
represents estimated state income taxes expected to be payable for both years.
The Company has continued not recording a net tax benefit for the current book
losses due to uncertainty of their ultimate realization.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Rally's cash flow from operating activities was approximately $4.4
million for the first quarter of 1999 compared with ($505,000) for the first
quarter of the prior year. The notable increase from 1998 to 1999 resulted
primarily from increased balances in accounts payable and accrued liabilities
compared to the prior year.
Capital expenditures of approximately $408,000 for the first quarter of
1999 were funded primarily through cash flow from operations. Approximately
$185,000 of these expenditures were for the construction or conversion of new
stores in 1999. Additionally, in 1999, $96,000 was spent to add dining rooms to
test units. Remaining capital expenditures in 1999 of $127,000 were primarily
for the purchase and installation of certain replacement equipment.
During 1998 and prior to December 18, 1998, Rally's repurchased on the
open market approximately $1.7 million face value of its Senior Notes at an
average price of $887.90 per $1,000 principal amount. During the third quarter
of 1998, the Company completed the required mandatory sinking fund payment due
June 15, 1999 calculated to retire 33 1/3% in aggregate original principal
amount of the Senior Notes. On December 18, 1998, Rally's entered into a $4.3
million mortgage transaction with FFCA Acquisition Corporation pursuant to which
eight fee-owned properties were mortgaged. The terms of the transaction include
a stated interest rate of 9.5% on the unpaid balance over a 20 year term with
monthly payments totaling approximately $40,000. Rally's is required to utilize
the entire net proceeds to reduce the Senior Notes. Purchases on the open market
were initiated immediately after the mortgage was finalized and will be
completed as they become available on the open market. As of March 22, 1999, the
Company had utilized $2.7 million of the proceeds to repurchase $3.1 million
face value of the Senior Notes.
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 12 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 fair market value less costs to
sell. There can be no assurances that these values will ultimately be realized.
On July 1, 1996, Rally's entered into a ten-year operating agreement
with Carl Karcher Enterprises, Inc., a subsidiary of CKE Restaurants, Inc.
(collectively referred to as "CKE"). Pursuant to the agreement, 27 (2 of which
have been converted to a Carl's Jr. format) Rally's-owned restaurants located in
California and Arizona are being operated by CKE. The Company retains ownership
in the restaurants and receives from CKE a percentage of gross revenues referred
to in the financial statements as owner fee income. This income is offset by the
Company's segregated ownership costs related to these units, referred to as
owner depreciation in the financial statements and consists primarily of noncash
expenses of depreciation and amortization. The agreement has improved cash flow,
generating approximately $714,000 in 1998 and $163,000 in the first quarter of
1999.
On January 29, 1999, Rally's and Checkers Drive-In Restauraunt Drive-In
Restaurants, Inc. ("Checkers") announced the signing of a definitive merger
agreement pursuant to which both companies would merge in an all stock
transaction (the "Merger"). The Merger agreement provides that each outstanding
share of Rally's stock will be exchanged for 1.99 shares of Checkers stock. The
approximate 19.1 million shares of Checkers common stock which Rally's owns will
be retired following the Merger. The companies are continuing with the
regulatory process necessary to submit the proposed merger to a vote of the
shareholders and expect to complete the Merger in the third quarter of fiscal
year 1999. See Note 5 to the condensed consolidated financial statements.
Management has plans in place to improve profitability and cash flows
from operations. The Company believes existing cash balances and cash flow from
operations should be sufficient to fund its current operations and obligations
for the remainder of fiscal year 1999. 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.
In addition, the Company is evaluating other alternatives for the repayment and
refinancing of the Senior Notes. If the Company is unable to refinance the debt
in full, management of the Company is evaluating a series of sale-leaseback or
mortgage transactions and the possibility of selling Company-owned stores in
certain markets to existing and potentially new franchisees. Management also
anticipates that further debt reductions may also be accomplished by completing
a private placement of preferred or common stock during the twelve months
preceding the maturity date of the Senior Notes. There can be no assurance that
the Company will be able to satisfy the entire principal balance of the Senior
Notes on the maturity date of June 15, 2000.
YEAR 2000
The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19". Pursuant
to the terms of the Management Services Agreement that exists between Rally's
and Checkers, the information technology department of Checkers has completed an
assessment of all known internal Information Technology (IT) systems of Rally's
and Checkers to document the state of readiness.
Administrative services such as accounting and payroll are provided to
Rally's by Checkers. Checkers utilizes accounting software packages such as
Lawson (general ledger/accounts payable) and Cyborg (payroll) that require
periodic upgrades to benefit from the latest modifications to the programs.
Typically, all releases of such upgrades must be implemented, eliminating a
company's ability to move directly to the most recent release. During 1998,
Checkers successfully implemented all required releases of both Lawson and
Cyborg that preceded the Year 2000 compliant release.
16
<PAGE>
The consulting and training required for the next Lawson and Cyborg upgrades are
underway with targeted implementation dates during the third quarter of 1999 at
a total cost to Rally's of approximately $50,000. Costs of replacing certain
desktop computers and other required modifications at the corporate office are
not expected to exceed $70,000. Pursuant to the Management Services Agreement
that exists between Rally's and Checkers, the costs of compliance of shared
corporate office systems are allocated between the two companies.
An assessment of the computer systems utilized at the store level has
also been completed. While the cash registers that are used for each transaction
are Year 2000 compliant, the back-office computer and related software is not.
The back-office computer is utilized for capturing and controlling such items as
payroll and food cost and is required to sustain communication of this and other
data to the corporate office. The Company has scheduled the purchase of new
computer systems and the installation of the software currently utilized by the
Checkers restaurants. Final testing of this software will be complete during the
second quarter of 1999 and completion of the rollout is expected by August 31,
1999. The estimated cost of the project is approximately $500,000.
Rally's is continuing to identify third parties that must be Year 2000
compliant to ensure the continued success of our operations. Letters were
drafted to send to companies that provide financial services, utilities,
inventory preparation and distribution and other key services. This
communication was initiated during the first quarter of 1999 and will be
completed during the second quarter of 1999. Rally's has not been notified of
any anticipated Year 2000 related failures by these third parties but it can not
be assured that all such entities will be operable on January 1, 2000.
Although the Company's systems are not currently fully Year 2000
compliant, management feels that risk in this area is minimal. The most
significant exposure exists in the planned rollout of a back-office computer
system at the store level. Failure to complete this project in a timely manner
would require the temporary installation of a manual payroll system at the store
level and the food cost controls that are provided by the current and proposed
systems would be lost resulting in higher cost of sales. As the cash registers
would remain operable, the Company's restaurants would remain open for business.
If Checkers is unable to implement the upgrade to the payroll system,
Rally's would be able to utilize a third party to process payroll at a cost of
approximately $125,000 per year. Contingency plans related to the accounting
software package are still under development.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION - JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET
AL. (Case NO. C-94-0039-L-CS). 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, Louisville division, against Rally's, Burt Sugarman and GIANT and
certain of Rally's present and former officers and directors and its auditors.
The cases were subsequently consolidated under the case name Jonathan Mittman et
al vs. Rally's Hamburgers, Inc., et al, case number C-94-0039-L (CS). 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. A settlement conference
occurred on December 7, 1998, but was unsuccessful. Fact discovery is not yet
complete, but it is anticipated that a deadline for completion of fact discovery
will be set during 1999. No trial date has been set. 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. 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
17
<PAGE>
defense costs reimbursable under the Company's directors' and officers'
insurance is included in "Other Assets" in the accompanying consolidated
financial statements.
HARBOR FINANCE PARTNERS V. GIANT GROUP, LTD. ET AL. (Civ. Act. No.
14834). 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. The Chancery Court
conducted a hearing on November 26, 1996 and denied the motions to dismiss on
April 3, 1997. Discovery is underway. No trial date has been set. 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.
FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN V.
CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative class
action was filed on September 29, 1998, in the Delaware Chancery Court in and
for New Castle County, Delaware by an alleged stockholder of 500 shares of the
common stock of Checkers. The complaint names the Company and certain of its
current and former officers and directors as defendants including William P.
Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, James T. Holder,
Terry N. Christensen, Burt Sugarman and C. Thomas Thompson. The Complaint also
names Checkers and GIANT as defendants. The complaint arises out of the proposed
merger announced on September 28, 1998 between Rally's, Checkers and GIANT (the
"Proposed Merger") and alleges generally, that certain of the defendants engaged
in an unlawful scheme and plan to permit Rally's to acquire the public shares of
the common stock of Checkers in a "going-private" transaction for grossly
inadequate consideration and in breach of the defendants' fiduciary duties. The
plaintiff allegedly initiated the Complaint on behalf of all stockholders of
Checkers as of September 28, 1998, and seeks INTER ALIA, certain declaratory and
injunctive relief against the consummation of the Proposed Merger, or in the
event the Proposed Merger is consummated, recision of the Proposed Merger and
costs and disbursements incurred in connection with bringing the action,
including attorney's fees, and such other relief as the Court may deem just and
proper. In view of a decision by Rally's, GIANT and Checkers not to implement
the transaction that had been announced on September 28, 1998, plaintiffs have
agreed to provide the Company and all other defendants with an open extension of
time to respond to the complaint. Plaintiffs have indicated that they will
likely file an amended complaint in the event of the consummation of a merger
between Rally's and Checkers. The Company believes the lawsuit is without merit
and intends to defend it vigorously. No estimate of possible loss or range of
loss resulting from the lawsuit can be made at this time.
DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF
OF THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. Case
No. 16680. This putative class action was filed on October 2, 1998, in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified number
of shares of the common stock of Checkers. The complaint names the Company and
certain of its current and former officers and directors as defendants including
William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, James
T. Holder, Terry N. Christensen, Burt Sugarman and C. Thomas Thompson. The
Complaint also names Checkers and GIANT as defendants. As with the FIRST ALBANY
complaint described above, this complaint arises out of the proposed merger
announced on September 28, 1998 between the Rally's, Checkers and GIANT (the
"Proposed Merger") and alleges generally, that certain of the defendants engaged
in an unlawful scheme and plan to permit Rally's to acquire the public shares of
the Checkers' common stock in a "going-private" transaction for grossly
inadequate consideration and in breach of the defendant's fiduciary duties. The
plaintiffs allegedly initiated the Complaint on behalf of all stockholders of
Checkers as of September 28, 1998, and seeks INTER ALIA, certain declaratory and
injunctive relief against the consummation of the Proposed Merger, or in the
event the Proposed Merger is consummated, recision of the Proposed Merger and
costs and disbursements incurred in connection with bringing the action,
including attorneys' fees, and such other relief as the Court may deem just and
proper. For the reasons stated above in the description of the FIRST ALBANY
action, plaintiffs have agreed to provide the Company and all other defendants
with an open extension of time to respond to the complaint. Plaintiffs have
indicated that they will likely file an amended complaint in the event of the
consummation of a merger between Rally's and Checkers. The Company believes the
lawsuit is without merit and intends to defend it vigorously. No estimate of
possible loss or range of loss resulting from the lawsuit can be made at this
time.
The Company is involved in other litigation matters incidental to its
business. With respect to such other lawsuits, management does not believe the
litigation in which it is involved will have a material effect upon its results
of operation or financial condition.
18
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
NASDAQ MINIMUM REQUIREMENTS-SHARE PRICE UNDER $1.00
In November, 1998, Rally's received notice from NASDAQ that delisting
could occur on February 22, 1999 if the Company's common stock failed to
maintain a closing bid greater than or equal to $1.00 for ten consecutive
trading days during the subsequent 90 day period. The Company's common stock
price did not meet that criteria and management requested and was granted an
oral hearing to present a plan of action to NASDAQ to regain compliance with
this standard. The plan of action included the Merger with Checker's Drive-In
Restaurants, Inc. and a subsequent one-for-twelve reverse stock split of the new
stock. The Company has maintained its listing status beyond the April 23, 1999
hearing date and through the date of this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.18 Agreement and Plan of Merger, dated as of January 28, 1999, by
and between the Company and Checkers Drive-In Restaurants, Inc.
(incorporated by reference to Exhibit 10.18 to the Annual Report
on form 10-K of the Company for the fiscal year ended
December 28, 1998).
27 Financial Data Schedule
(b) Reports on 8-K:
The following reports on Form 8-K were filed during the quarter ended
March 22, 1999:
The Company filed a report on Form 8-K with the Securities and Exchange
Commission dated January 29, 1999, reporting under Item 5, the signing of the
Agreement and Plan of Merger, dated as of January 28, 1999, pursuant to which
Checkers will acquire all of the Company's stock in an all stock transaction. It
was also reported that Checker's Drive-In Restaurants, Inc. will effect a
one-for-twelve reverse stock split immediately following the merger.
The Company filed a report on Form 8-K with the Securities and Exchange
Commission dated April 6, 1999, reporting under Item 5, the appointment of
Richard A. Peabody as Senior Vice President and Chief Financial Officer of
Rally's and the resignation of Joseph N. Stein as Executive Vice President and
Chief Financial Officer of Rally's and as Executive Vice President and Chief
Administrative Officer of Checkers Drive-In Restaurants, Inc.
19
<PAGE>
SIGNATURE
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.
(Registrant)
Date: May 5, 1999 By: /s/ RICHARD A. PEABODY
-----------------------
Richard A. Peabody
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
MARCH 22, 1999 FORM 10-Q
RALLY'S HAMBURGERS, INC.
EXHIBIT INDEX
EXHIBIT # EXHIBIT DESCRIPTION
- --------- -------------------
10.18 Agreement and Plan of Merger, dated as of January 28, 1999, by
and between the Company and Checkers Drive-In Restaurants, Inc.
(incorporated by reference to Exhibit 10.18 to the Annual Report
on form 10-K of the Company for the fiscal year ended
December 28, 1998).
27 Financial Data Schedule (included in electronic filing only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Rally's Hamburgers, Inc., for the quarterly periods
ended March 22, 1999 and March 22, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-03-2000 DEC-28-1998
<PERIOD-START> DEC-29-1998 DEC-29-1997
<PERIOD-END> MAR-22-1999 MAR-22-1998
<CASH> 7,971 4,174
<SECURITIES> 22,662 25,323
<RECEIVABLES> 3,060<F1> 3,819<F1>
<ALLOWANCES> 0 0
<INVENTORY> 872 1,158
<CURRENT-ASSETS> 13,323 10,647
<PP&E> 60,290 66,523
<DEPRECIATION> 53,992 46,721
<TOTAL-ASSETS> 122,202 131,816
<CURRENT-LIABILITIES> 19,204 21,196
<BONDS> 61,172 61,877
0 0
0 5
<COMMON> 2,961 2,484
<OTHER-SE> 29,955 37,934
<TOTAL-LIABILITY-AND-EQUITY> 122,202 131,816
<SALES> 29,040 30,962
<TOTAL-REVENUES> 30,119 32,164
<CGS> 26,007 27,290
<TOTAL-COSTS> 30,010 31,565
<OTHER-EXPENSES> (10) (35)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,685 1,690
<INCOME-PRETAX> (1,566) (1,056)
<INCOME-TAX> (1,603) 26
<INCOME-CONTINUING> (1,603) (1,082)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,603) (1,082)
<EPS-PRIMARY> (0.05) (0.04)
<EPS-DILUTED> (0.05) (0.04)
<FN>
<F1> Receivables consist of --
Accounts Receivable - net $ 2,596 $ 3,003
Notes Receivable - net 464 816
----------- ----------
Total $ 3,060 $ 3,819
=========== ==========
</FN>
</TABLE>
