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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 25, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19649
Checkers Drive-In Restaurants, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 58-1654960
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Barnett Bank Building
600 Cleveland Street, Eighth Floor
Clearwater, FL 34615
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 441-3500
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
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 [ ]
The Registrant had 51,768,480 shares of Common Stock, par value $.001
per share, outstanding as of May 1, 1996.
This document contains 30 pages. There is no Exhibit Index.
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION PAGE
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Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 25, 1996 and January 1, 1996 3
Condensed Consolidated Statements of Operations
Quarters ended March 25, 1996 and March 27, 1995 5
Condensed Consolidated Statements of Cash Flows
Quarters ended March 25, 1996 and March 27, 1995 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 26
Item 2 Changes in Securities 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 29
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
ASSETS March 25, January l,
1996 1996
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Current Assets:
Cash and cash equivalents $ 3,836,537 $ 3,363,796
Accounts receivable 2,326,177 1,924,544
Notes receivable - current portion 3,476,110 3,320,589
Inventory 3,167,676 3,155,734
Property and equipment held for resale 4,149,520 4,338,964
Income taxes receivable 4,037,000 3,272,594
Prepaid expenses and other current assets 1,392,808 958,167
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Total current assets 22,385,828 20,334,388
Property and equipment, at costs, net of accumulated depreciation
and amortization 118,358,049 119,949,100
Notes receivable, long-term portion 4,823,639 --
Notes receivable from related parties 200,000 5,182,355
Goodwill and non-compete agreements, net of accumulated amortization
of $3,211,665 at January 1, 1996 and $3,429,116 at March 25, 1996 16,719,762 17,019,078
Deferred income taxes 2,687,000 3,358,000
Deposits and other noncurrent assets 983,702 975,996
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$166,157,980 $166,818,917
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
LIABILITIES AND STOCKHOLDERS EQUITY March 25, January l,
1996 1996
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Current Liabilities:
Short term debt $ 1,000,000 $ 1,000,000
Current installments of long-term debt 14,796,754 13,170,619
Accounts payable 10,666,310 10,536,745
Accrued wages, salaries and benefits 4,380,013 2,637,830
Reserves for restructuring, restaurant relocations and abandoned sites 2,826,028 2,290,223
Accrued liabilities 12,307,972 13,652,230
Deferred franchise fee income 300,000 300,000
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Total current liabilities 46,277,077 43,587,647
Long-term debt, less current installments 35,173,029 38,090,278
Deferred franchise fee income 418,000 763,000
Minority interests in joint ventures 829,966 549,255
Other noncurrent liabilities 3,736,243 3,852,729
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Total liabilities $ 86,434,315 86,842,909
Stockholders Equity:
Preferred stock, $.OO1 par value. Authorized 2,000,000 shares, no
shares outstanding.
Common stock, $.001 par value, authorized 100,000,000 shares, issued
and outstanding 51,528,480 at January 1, 1996 and March 25, 1996 51,528 51,528
Additional paid-in capital 90,029,213 90,029,213
Warrants to be issued in settlement of litigation 3,000,000 3,000,000
Retained earnings (12,957,076) (12,704,733)
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80,123,665 80,376,008
Less treasury stock, at cost, 578,904 shares 400,000 400,000
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Net stockholders' equity 79,723,665 79,976,008
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$166,157,980 $166,818,917
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</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
Quarter Ended Quarter Ended
March 25, 1996 March 27, 1995
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Revenues:
Restaurant sales $ 37,840,713 $ 45,172,340
Royalties 1,648,275 1,560,066
Franchise fees 450,336 130,000
Modular restaurant packages 114,681 601,361
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Total revenues 40,054,005 47,463,767
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Costs and expenses:
Costs of restaurant sales 12,382,687 15,840,335
Other restaurant operating expenses 20,599,785 21,921,862
Costs of modular restaurant package revenues 309,867 988,597
Depreciation and amortization 2,795,699 3,710,186
Selling, general and administrative expenses 2,440,032 4,548,268
Advertising 811,318 2,072,664
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Total costs and expenses 39,339,388 49,081,912
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Operating income (loss) 714,617 (1,618,145)
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Other income (expense):
Interest income 156,524 94,473
Interest expense (1,252,358) (1,215,416)
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Loss before minority interests and income tax
benefit (381,217) (2,739,088)
Minority interests in earnings 25,788 37,688
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Loss before income tax benefit (407,005) (2,776,776)
Income tax benefit (154,662) (1,084,000)
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Net loss $ (252,343) $(1,692,776)
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Pro forma net loss per common share $ -- $(.03)
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Weighted average number of common shares
outstanding 51,528,480 50,188,970
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</TABLE>
5
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
Quarter Ended Quarter Ended
March 25, 1996 March 27, 1995
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Cash flows from operating activities:
Net loss $ (252,343) $(1,692,776)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 2,795,699 3,710,186
Loss on sale of equipment 78,671 2,692
Minority interests in earnings 25,788 37,688
Change in assets and liabilities:
(Increase) decrease in receivables (398,438) 541,670
(Increase) decrease in inventory (11,942) 220,567
Increase in income taxes receivable (764,406) (634,581)
(Increase) decrease in prepaid expenses and other (498,415) 369,340
Increase in deposits and other (7,706) (98,653)
Increase (decrease) in accounts payable 129,565 (4,959,892)
Increase (decrease) in accrued liabilities 696,033 (706,075)
(Decrease) increase in deferred franchise fee income (345,000) 85,000
Increase (decrease) in deferred income taxes 671,000 (385,000)
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Net cash provided (used) by operating activities 2,118,506 (3,509,834)
Cash flows from investing activities:
Capital expenditures (1,434,510) (682,336)
Proceeds from sale of assets 824,936 4,880,324
Increase in goodwill and noncompete agreements -- (21,923)
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Net cash provided (used) in investing activities (609,574) 4,176,065
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Cash flows from financing activities:
Proceeds from borrowings of long-term debt -- 4,183,195
Principal payments on long-term debt (1,291,114) (4,215,700)
Proceeds from investment by minority interests 285,000 --
Distributions to minority interests (30,077) (47,283)
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Net cash used by financing activities (1,036,191) (79,788)
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Net increase in cash 472,741 586,443
Cash at beginning of period 3,363,796 3,511,525
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Cash at end of period $3,836,537 $4,097,968
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6
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<TABLE>
<CAPTION>
Supplemental disclosures of cash flows information --
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Interest paid $1,313,922 $ 930,832
Income taxes paid -- $ 12,811
Capital lease obligations incurred -- $4,641,034
</TABLE>
7
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CHECKERS DRIVE-IN RESTAURANTS, 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
(consisting only of normal recurring accruals) necessary to present fairly the
information set forth therein have been included. The operating results for
the quarter ended March 25, 1996, are not necessarily an indication of the
results that may be expected for the year ending December 30, 1996. 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 January 1, 1996.
Therefore, it is suggested that the accompanying financial statements be read
in conjunction with the Company's January 1, 1996 consolidated financial
statements. As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a year which will generally end on
the Monday closest to December 31. Each quarter consists of three 4-week
periods with the exception of the fourth quarter which consists of four 4-week
periods.
(b) Purpose of Organization - The principal business of the Company is
the operation and franchising of Checkers restaurants (the "Restaurants"). At
March 25, 1996, there were 501 Restaurants operating in 23 different states
and the District of Columbia. Of those Restaurants, 247 were Company-operated
(including three 50%-owned and one 75%-owned joint ventures) and 254 were
operated by franchisees. The accounts of the joint ventures have been
included with those of the Company in these consolidated financial statements.
On February 15, 1994, one of the Company's former subsidiaries,
Champion Modular Restaurant Company, was merged into and with the Company and
currently exists as a division of the Company.
Intercompany balances and transactions have been eliminated in
consolidation and minority interests have been established for the outside
joint venture partners' interests.
(c) Revenue Recognition - Franchise fees are generated from the sale
of rights to develop, own and operate Restaurants. Such fees are based on the
number of potential Restaurants in a specific area which the franchisee agrees
to develop pursuant to the terms of the franchise agreement between the
Company and the franchisee and are recognized as income on a pro rata basis
when substantially all of the Company's obligations per location are
satisfied, generally at the opening of the Restaurant. Franchise fees are
nonrefundable.
The Company receives royalty fees from franchisees based on a
percentage of each restaurant's gross revenues. Royalty fees are recognized
as earned.
Champion recognizes revenues on the percentage-of-completion
method, measured by the percentage of costs incurred to the estimated total
costs of the contract.
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(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.
(e) Receivables - Receivables consist primarily of franchise fees and
royalties due from franchisees, and receivables from the sale of modular
restaurant packages. The allowance for doubtful receivables was $1,357,938 at
January 1, 1996 and $1,291,522 at March 25, 1996.
(f) Inventory - Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market.
(g) Pre-Opening Costs - Labor costs and costs of hiring and training
personnel relating to opening new restaurants are capitalized and amortized
over 13 periods. Such costs totalled $161,234 at January 1, 1996 and $146,859
at March 31, 1996.
(h) Property and Equipment - Property and equipment (P & E) are stated
at cost except for P & E that have been impaired, for which the carrying
amount is reduced to estimated fair value. Property and equipment under
capital leases are stated at their fair value at the inception of the lease.
Depreciation and amortization are computed on straight-line method over the
estimated useful lives of the assets.
(i) Impairment of Long Lived Assets - During the fourth quarter of
1995, the Company early adopted 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.
(j) Goodwill and Non-Compete Agreements - Goodwill and non-compete
agreements are being amortized over 20 years and 3 to 7 years, respectively,
on a straight-line basis.
(k) Income Taxes - The Company accounts for income taxes under the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(l) 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.
(m) Stock Splits - The Company declared a three-for-two stock split,
payable in the form of stock dividends effective June 30, 1993. All share
information and per share information in these financial statements has been
retroactively restated to reflect the split.
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(n) Reclassifications - Certain amounts in the 1995 financial
statements have been reclassified to conform to the 1996 presentation.
Note 2 Long-Term Debt
Long-term debt consists of the following:
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<CAPTION>
March 25, 1996 January 1, 1996
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Notes payable under Loan Agreement $ 36,247,540 $ 37,021,241
Notes payable due at various dates, secured by buildings and equipment, with
interest at rates primarily ranging from 9.0% to 11.35%, payable monthly 10,163,952 10,578,069
Unsecured notes payable, bearing interest at rates ranging from prime to 12% 3,480,852 3,580,852
Other 77,439 80,735
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Total long-term debt 49,969,783 51,260,897
Less current installments 14,796,754 13,170,619
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Long-term debt, less current installments $ 35,173,029 $ 38,090,278
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</TABLE>
On October 28, 1993, the Company entered into a loan agreement
with a group of banks ("Loan Agreement") providing for an unsecured, revolving
credit facility. The Company borrowed approximately $50,000,000 under this
facility primarily to open new Restaurants and pay off approximately
$4,000,000 of previously existing debt.
The Company subsequently arranged for this Loan Agreement to be
converted to a term loan and collateralized the loan with substantially all of
the Company's assets. The outstanding balance was $36,247,540 at March 25,
1996. The term loan requires monthly principal reductions continuing through
July 1998. Beginning in the fifth period of 1996, principal payments are the
greater of fixed monthly amounts or a formula based on Cash Flow as defined
under the Loan Agreement. The remaining aggregate minimum principal
repayments are $5,600,000 in 1996, $7,800,000 in 1997, $4,200,000 for the
period January through July 1998 and a balloon payment of $18,647,540 due July
31, 1998. Interest is payable monthly at the prime rate plus 2.5% Dividends
are prohibited and the Company is required to maintain certain financial
ratios under the Loan Agreement. The Company is in compliance with all such
requirements.
On March 15, 1996, the bank group agreed to advance an additional
sum of up to $1,700,000 to be used by the Company for the payment of various
property taxes ("the Property Tax Loan"). On March 27, 1996, $1,572,737 was
advanced to the Company under the Property Tax Loan. Interest accrues on the
Property Tax Loan at the prime rate plus 2.5% and is secured by existing
collateral. The Property Tax Loan is to be repaid in full by July 1, 1996.
The anticipated source of funds for retirement of the Property Tax Loan is a
portion of an income tax refund due the Company. The Company also has a line
of credit with the bank group of up to $1,000,000 through April 1997. The
outstanding balance was $1,000,000 on March 25, 1996. Interest is payable
monthly at the prime rate plus 2.5%. The line of credit has financial
covenants and other requirements.
On August 2, 1995, the Company entered into a purchase agreement
(as amended in October 1995 and April 1996, the "Rall-Folks Agreement") with
Rall-Folks, Inc. ("Rall-Folks") pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of
three promissory notes of the Company held by Rall-Folks (the "Rall-Folks
Notes"). On the closing date, the Company will deliver to Rall-Folks shares
of its Common Stock with a value equal to the then outstanding balance due
under the Rall-Folks Notes (the "Rall-Folks Purchase Price"). The total
amount of principal outstanding under the Rall-Folks Notes was approximately
1
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$1,888,000 as of January 1, 1996 and $1,788,000 as of March 25, 1996. The
Rall-Folks Notes are fully subordinated to the Company's existing bank debt.
Under the terms of the Rall-Folks Agreement, the Company
guaranteed that if Rall-Folks sells all of the Common Stock issued for the
Rall-Folks Notes in a reasonably prompt manner (subject to certain limitations
described below) Rall-Folks will receive net proceeds from the sale of such
stock equal to the Rall-Folks Purchase Price. If Rall-Folks receives less
than such amount, the Company will issue to Rall-Folks, at the option of Rall-
Folks, either (i) additional shares of Common Stock, to be sold by Rall-Folks,
until Rall-Folks receives an amount equal to the Rall-Folks Purchase Price, or
(ii) a six-month promissory note bearing interest at 11%, with all principal
and accrued interest due at maturity, and subordinated to the Company's bank
debt pursuant to the same subordination provisions, equal to the difference
between the Rall-Folks Purchase Price and the net amount received by Rall-
Folks from the sale of the Common Stock.
On August 3, 1995, the Company entered into a purchase agreement
(as amended in October 1995 and April 1996, the "RDG Agreement") with
Restaurant Development Group, Inc. ("RDG") pursuant to which the Company
agreed to issue shares of its Common Stock in exchange for and in complete
satisfaction of a promissory note of the Company held by RDG (the "RDG Note").
The total amount of principal outstanding under the RDG Note was
approximately $1,693,000 as of January 1, 1996 and as of March 25, 1996. The
RDG Note is fully subordinated to the Company's existing bank debt. In
partial consideration of the transfer of the RDG Note to the Company, the
Company will deliver to RDG shares of Common Stock with a value equal to the
sum of (i) the outstanding balance due under the RDG Note on the closing date
and (ii) $10,000 (being the estimated legal expenses of RDG to be incurred in
connection with the registration of the Common Stock) (the "RDG Purchase
Price").
As further consideration for the transfer of the RDG Note to the
Company, the Company agreed to issue RDG a warrant (the "Warrant") for the
purchase of 120,000 shares of Common Stock at a price equal to the average
closing sale price of the Common Stock for the ten full trading days ending on
the third business day immediately preceding the closing date (such price is
referred to a the "Average Closing Price"); however, in the event that the
average closing price of the Common Stock for the 90 day period after the
closing date is less than the Average Closing Price, the purchase price for
the Common Stock under the Warrant will be changed on the 91st day after the
closing date to the average closing price for such 90 day period. The Warrant
will be exercisable at any time within five years after the closing date.
Under the terms of the RDG Agreement, the Company has guaranteed
that if RDG sells all of such Common Stock issued for the RDG note in a
reasonably prompt manner (subject to certain limitations described below), RDG
will receive net proceeds from the sale of such stock equal to at least 80% of
the RDG Purchase Price. If RDG receives less than such amount, the Company
will issue additional shares of Common Stock to RDG, to be sold by RDG, until
RDG receives an amount equal to 80% of the Purchase Price.
The Rall-Folks Notes and the RDG Notes were due on August 4, 1995.
Pursuant to the Rall-Folks Agreement and the RDG Agreement, the Rall-Folks
Notes and the RDG Note were to be acquired by the Company in exchange for
Common Stock on or before September 30, 1995. The Company and Rall-folks and
RDG amended the Rall-Folks Agreement and the RDG Agreement, respectively, to
allow for a closing in May 1996 (subject to extension in the event closing is
delayed due to review by the Securities and Exchange Commission of the
registration statement covering the Common Stock to be issued in the
transaction). Each of the parties has the right to terminate their respective
1
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Agreement if the closing has not occurred on or before such time (as
extended). Pursuant to the Rall-Folks Agreement and the RDG Agreement, the
term of the Notes will be extended until the earlier of the closing of the
repurchase of the Notes or until approximately one month after the termination
of the applicable Agreement by a party in accordance with its terms. Closing
is contingent upon a number of conditions, including the prior registration
under the federal and state securities laws of the Common Stock to be issued
and the subsequent approval of the transaction by the stockholders of Rall-
Folks and RDG of their respective transactions. In the event the Company
complies with all of its obligations under the Rall-Folks Agreement and the
stockholders of Rall-Folks do not approve the transaction, the term of the
Rall-Folks Notes will be extended until December 1996. In the event the
Company complies with all of its obligations under the RDG Agreement and the
stockholders of RDG do not approve the transaction, the term of the RDG Note
will be extended approximately one year.
Under the terms of the Rall-Folks Agreement and the RDG Agreement,
if the transaction contemplated therein is consummated, so long as Rall-Folks
and RDG, respectively, is attempting to sell the Common Stock issued to it in
a reasonably prompt manner (subject to the limitations described below), the
Company is obligated to pay to it in cash an amount each quarter equal to 2.5%
of the value of the Common Stock held by it on such date (such value being
based upon the value of the Common Stock when issued to it).
On April 12, 1996, the Company entered into a Note Repayment
Agreement (the "NTDT Agreement") with Nashville Twin Drive-Thru Partners, L.P.
("NTDT") pursuant to which the Company may issue shares of its Common Stock in
exchange for and in complete satisfaction of a promissory note of the Company
held by NTDT which matured on April 30, 1996 (the "NTDT Note"). The Company
will issue shares of Common Stock to NTDT in blocks of two hundred thousand
shares each, which will be valued at the closing price of the Common Stock on
the day prior to the date they are delivered to NTDT (such date is hereinafter
referred to as the "Delivery Date" and the value of the Common Stock on such
date is hereinafter referred to as the "Fair Value"). The amount outstanding
under the NTDT Note will be reduced by the Fair Value of the stock delivered
to NTDT on each Delivery Date. The Company is obligated to register each
block of Common Stock for resale by NTDT under the federal and state
securities laws, and to keep such registration effective for a sufficient
length of time to allow the sale of the block of Common Stock, subject to
limitations on sales imposed by the Company described below. As each block of
Common Stock is sold, the Company will issue another block, to be registered
for resale and sold by NTDT, until NTDT receives net proceeds from the sale of
such Common Stock equal to the balance due under the NTDT Note. The Company
will continue to pay interest in cash on the outstanding principal balance due
under the NTDT Note through the date on which NTDT receives net proceeds from
the sale of Common Stock sufficient to repay the principal balance of the NTDT
Note. On each Delivery Date and on the same day of each month thereafter if
NTDT holds on such subsequent date any unsold shares of Common Stock, the
Company will also pay to NTDT in cash an amount equal to .833% of the Fair
Value of the shares of Common Stock issued to NTDT as part of such Block of
Stock and held by NTDT on such date. Once the NTDT Note has been repaid in
full, NTDT is obligated to return any excess proceeds or shares of Common
Stock to the Company. The Company delivered the first block of 200,000 shares
with a fair value of $228,125 to NTDT on April 18, 1996. The total amount of
principal outstanding under the NTDT Note was approximately $1,354,000 as of
January 1, 1996 and March 25, 1996. The NTDT Note is fully subordinated to
the Company's existing bank debt. The term of the NTDT Note will be extended
until May 31, 1997, so long as the Company is complying with its obligations
under the NTDT Agreement and NTDT has received at least $1,000,000 from the
sale of the Common Stock by January 31, 1997. Such dates will be extended if
1
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NTDT fails to make a commercially reasonable attempt to sell an average of
10,000 shares of Common Stock per day on each trading day that a registration
statement covering unsold shares held by NTDT is in effect prior to such
dates, or if the Company is delayed in filing a registration statement (or an
amendment or supplement thereto) due to the failure of NTDT to provide
information required to be provided to the Company under the NTDT Agreement.
In the event that the Company files a voluntary bankruptcy petition, an
involuntary bankruptcy petition is filed against the Company and not dismissed
within 60 days, a receiver or trustee is appointed for the Company's assets,
the Company makes an assignment of substantially all of its assets for the
benefit of its creditors, trading in the Common Stock is suspended for more
than 14 days, or the Company fails to comply with its obligations under the
NTDT Agreement, the outstanding balance due under the NTDT Note will become
due and NTDT may thereafter seek to enforce the NTDT Note.
In order to promote an orderly distribution of the Common Stock to
be issued to and sold by Rall-Folks, RDG and NTDT, the Company has imposed the
following limits on the sales that may be made by Rall-Folks, RDG and NTDT:
(i) each may sell not more than 50,000 shares of Common Stock per week
(150,000 in the aggregate) and (ii) each may sell not more than 25,000 shares
in any one day (75,000 shares in the aggregate), provided that each may sell
additional shares in excess of such limits if such additional shares are sold
at a price higher than the lowest then current bid price for the Common Stock.
While the Company intends to consummate in the immediate future
the purchase of the Rall-Folks Notes and the RDG Note using Common Stock,
there can be no assurance that the Company will be able to do so. Pursuant to
the terms of the Loan Agreement, the Company is obligated to purchase or repay
the Rall-Folks Notes, the RDG Note and the NTDT Note using Common Stock, and
may not repay them in cash. Therefore, if the Company is unable to consummate
the purchase of the Rall-Folks Notes and the RDG Note in exchange for Common
Stock, or if NTDT is unable to sell sufficient Common Stock in a timely manner
to be able to receive the required amounts under the NTDT Agreement, and the
Company is unable to reach some other arrangements with Rall-Folks, RDG or
NTDT, the Company will likely default in its payment obligations under such
Note or Notes, and will likely be put into default under the terms of the Loan
Agreement.
1
<PAGE>
Note 3: Stock Option Plan and Warrants
In August 1991, the Company adopted a stock option plan whereby
incentive stock options, nonqualified stock options, stock appreciation rights
and restricted shares can be granted to eligible salaried individuals. All
options expire no later than 10 years from the date of grant. The Company has
reserved 3,500,000 shares for issuance under the plan. At March 25, 1996, the
Company had outstanding nonqualified options at per share prices to purchase
common shares which vest as follows:
<TABLE>
<CAPTION>
Exercise Year Vested
Prices
1994 1995 1996 1997 1998 1999 Total
- -------- --------- --------- --------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$1.09 305 305 305 915
$1.25 3,333 3,333 3,334 10,000
$1.31 2,666 2,667 2,667 8,000
$1.38 1,666 1,667 1,667 5,000
$1.75 10,000 3,333 3,333 3,334 20,000
$1.91 1,000 1,000 1,000 3,000
$1.95 7,346 7,345 7,346 3,970 26,007
$2.13 1,565 1,565 1,565 4,695
$2.16 666 667 55,667 57,000
$2.19 35,000 35,000
$2.28 100,000 34,210 34,211 34,211 202,632
$2.50 1,333 1,333 1,334 4,000
$2.63 168,500 161,335 161,335 161,335 652,505
$3.00 100,000 100,000
$3.55 32,400 90,000 274,500 396,900
$5.13 173,027 382,923 247,462 9,175 6,418 819,005
$11.63 263,390 3,966 2,986 2,992 334 273,668
$12.33 25,425 5,062 3,238 1,250 500 35,475
$19.00 475 475 250 1,200
- -------- --------- --------- --------- -------- -------- ------- ---------
Total
Shares 494,242 760,926 686,084 232,428 316,017 165,305 2,655,002
======== ========= ========= ========= ======== ======== ======= =========
</TABLE>
In August 1994, employees granted $11.50, $11.63, $12.33 and
$19.00 options were given the opportunity to forfeit those options and be
granted an option to purchase a share at $5.13 for every two option shares
retired. As a result of this offer, options for 662,228 shares were forfeited
in return for options for 331,114 shares at $5.13 per share, and these changes
are reflected in the above table.
On March 31, 1995, the Company agreed to issue 150,000 warrants to
a group of banks under an agreement described in note 3. The warrants will be
priced at market and will vest one-third on each of the following dates:
April 30, 1996, October 31, 1996 and April 30, 1997.
As partial consideration for the transfer of a promissory note of
the Company (the "Note") back to the Company, the Company is obligated to
deliver to the holder of the Note a warrant (the "Warrant") for the purchase
of 120,000 shares of Common Stock at a price equal to the average closing sale
price of the Common Stock for the ten full trading days ending on the third
business day immediately preceding the closing date (such price is referred to
as the "Average Closing Price"); however, in the event that the average
closing price of the Common Stock for the ninety day period after the closing
date is less than the Average Closing Price, the purchase price for the Common
Stock under the Warrant will be changed on the 91st day after the closing date
to the average closing price for such ninety day period. The Warrant will be
exercisable at any time within five years after the closing date. The Company
is obligated to register the stock acquired by the holders of the Note under
the Warrant. It is anticipated that the transaction will close in the second
quarter of 1996.
1
<PAGE>
The Company expects to issue warrants valued at $3,000,000 in
settlement of certain litigation.
During the first quarter of 1996, the Board of Directors approved
a plan to offer existing employees of the Company (excluding executive
officers) the option of cancelling existing stock options granted to them in
1993 and 1994 with exercise prices in excess of $2.75 in exchange for a new
option grant for a lesser number of shares at an exercise price of $1.95,
representing a 25% premium over the market price of the Company's common stock
on the date the plan was approved. The plan provides that existing options
with an exercise price in excess of $11.49 could be cancelled in exchange for
new options on a four for one basis. Options with an exercise price between
$11.49 and $2.75 could be cancelled in exchange for new options on a three for
one basis on the date the plan was approved. Eligible employees held options
for 36,566 shares granted in 1993 and 1994 shares with exercise prices in
excess of $11.49, and 365,400 shares with exercise prices between $11.49 and
$2.75. The plan required employees to accept the offer by April 30, 1996. As
of the acceptance deadline, eligible employees had surrendered options for
27,320 shares with an exercise price in excess of $11.49 and 27,071 shares
with exercise prices between $11.49 and $2.75, and new options for 15,877
shares with an exercise price of $1.95 have been issued therefore.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The principal business of the Company is the operation and
franchising of Checkers Restaurants. As of March 25, 1996, the Company had an
ownership interest in 247 Company-operated Restaurants and an additional 254
Restaurants were operated by franchisees. The Company's ownership interest in
the Company-operated Restaurants is in one of two forms: (i) the Company owns
100% of the Restaurant (as of March 25, 1996, there were 243 such Restaurants)
and (ii) the Company owns a 50% or 75% interest in a partnership which owns
the Restaurant (a "Joint Venture Restaurant") while the remaining 50% or 25%,
respectively, is owned by a joint venture partner (as of March 25, 1996, there
were 4 such Joint Venture Restaurants).
The Financial Statements of the Company include the accounts of the
Joint Venture Restaurants and all of the Company's subsidiaries. On February
15, 1994, one of the Company's former subsidiaries, Champion Modular
Restaurant Company (Champion) was merged into and with the Company and
currently exists as a division of the Company.
The Company receives revenues from restaurant sales, franchise fees,
royalties and sales of fully-equipped manufactured modular restaurant
buildings ("Modular Restaurant Packages"). Cost of restaurant sales relates
to food and paper costs. Other restaurant expenses include labor and all
other restaurant costs for Company-operated Restaurants. Cost of Modular
Restaurant Packages relates to all restaurant equipment and building
materials, labor and other direct and indirect costs of production. Other
expenses, such as depreciation and amortization, and selling, general and
administrative expenses, relate both to Company-operated Restaurant operations
and Modular Restaurant Package revenues as well as the Company's franchise
sales and support functions. The Company's revenues and expenses are affected
by the number and timing of additional Restaurant openings and the sales
volumes of both existing and new Restaurants. Modular Restaurant Package
revenues are directly affected by the number of new franchise Restaurant
openings and the number of packages produced for those openings.
Results of Operations
The following table sets forth the percentage relationship to total
revenues of the listed items included in the Company's Consolidated Statements
of Operations. Certain items are shown as a percentage of restaurant sales
and modular restaurant package revenue. The table also sets forth certain
selected restaurant operating data.
16
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
March 25, 1996 March 27, 1995
-------------- --------------
<S> <C> <C>
Revenues:
Restaurant Sales 94.5% 95.1%
Royalties 4.1 3.3
Franchise fees 1.1 .3
Modular restaurant packages .3 1.3
-------------- --------------
Total revenues 100.0 100.0
Costs and expenses:
Cost of restaurant sales (1) 32.7 35.1
Other restaurant operating expenses (1) 54.4 48.5
Costs of modular restaurant packages (2) 270.2 164.4
Depreciation and amortization 6.8 7.8
Selling, general and administrative expenses 6.1 9.6
Advertising expense (1) 2.1 4.6
Provision for restaurant relocations and
abandoned sites -- --
Operating loss 1.8 (3.4)
Other (income) expense
Interest income (.4) (.2)
Interest expense 3.1 2.6
Minority interests in earnings .1 .1
-------------- --------------
Loss before income tax benefit (1.0) (5.9)
Income tax benefit (.4) (2.3)
-------------- --------------
Net income (loss) (.6)% (3.6)%
============== ==============
Operating data:
System-wide restaurant sales (in 000's):
Company-operated $37,841 $45,172
Franchised 42,029 43,648
-------------- --------------
Total $79,870 $88,820
Average annual net sales per restaurant open for a full year (in 000's) (3):
Company-operated
Franchised $690 $784
System-wide $797 $810
$743 $796
-------------- --------------
Number of restaurants (4);
Company-operated 247 250
Franchised 254 238
-------------- --------------
Total 501 488
============== ==============
- ----------------------------------------
(1) As a percent of restaurant sales.
(2) As a percent of Modular Restaurant Package revenues.
(3) Includes sales of Restaurants open for entire trailing 13 period year and stores expected to be closed
in the following year.
(4) Number of Restaurants open at end of period.
</TABLE>
17
<PAGE>
Comparison of Historical Results - Quarter ended March 25, 1996 and Quarter
Ended March 27, 1995
Revenues. Total revenues decreased 15.6% to $40,054,005 for the
quarter ended March 25, 1996 compared to $47,463,767 for the quarter ended
March 27, 1995. Company-operated restaurant sales decreased 16.2% to
$37,840,713 for the quarter ended March 25, 1996 from $45,172,340 for the
quarter ended March 27, 1995. Comparable Company-operated restaurant sales
for the quarter ended March 25, 1996 decreased 12.0% compared to the quarter
ended March 27, 1996. Comparable restaurants are those open at least 13
periods. These decreases in restaurant sales are primarily attributable to
continuing sales pressure from competitors and severe weather conditions in
January and February of 1996. In addition, Company-operated restaurant sales
were negatively impacted by a net decrease of three Company-operated
restaurants from March 27, 1995 to March 25, 1996.
Royalties increased 11.1% to $1,648,275 for the quarter ended
March 25, 1996, from $1,560,066 for the quarter ended March 27, 1995, due
primarily to an increase in franchised Restaurant sales. This increase
resulted from a net addition of 16 franchised restaurants since March 27,
1995. Comparable franchised restaurant sales for restaurants open at least 13
periods for the quarter ended March 25, 1996 decreased 1.6% as compared to the
quarter ended March 27, 1995, primarily for the reasons outlined above.
Franchise fees increased 246.4% to $450,336 for the quarter ended
March 25, 1996 from $130,000 for the quarter ended March 27, 1995. This was a
result of recording $390,000 of revenue (related costs included in selling,
general and administrative expenses as discussed below) from terminations of
Area Development Agreements net of the impact from opening fewer franchised
Restaurants during the quarter ended March 25, 1996. The Company recognizes
franchise fees as revenues when the Company has substantially completed its
obligations under the franchise agreement, usually at the opening of the
franchised restaurant.
Modular Restaurant Package revenues decreased 80.9% to $114,681
for the quarter ended March 25, 1996 from $601,361 for the quarter ended March
27, 1995 due to decreased sales volume of Modular Restaurant Packages to the
Company's franchisees and the utilization of available used Modular Restaurant
Packages to satisfy orders. Modular Restaurant Package revenues are
recognized on the percentage of completion method during the construction
process; therefore, a substantial portion of the Modular Restaurant Package
revenues are recognized prior to the opening of a Restaurant.
COSTS AND EXPENSES. Costs of restaurant sales consists of food
and paper costs. These expenses totalled $12,382,687 or 32.7% of restaurant
sales for the quarter ended March 25, 1996, compared to $15,840,355 or 35.1%
of restaurant sales for the quarter ended March 27, 1995. The decrease in food
and paper costs as a percentage of restaurant sales was due primarily to the
Company's decrease in beef costs and paper costs, as a percentage of sales.
Other restaurant expenses includes all other restaurant level operating
expenses other than food and paper costs which includes labor, supplies,
utilities, rent and other costs. These expenses totalled $20,599,785 or 54.4%
of restaurant sales for the quarter ended March 25, 1996 compared to
$21,921,862 or 48.5% of restaurant sales for the quarter ended March 27, 1995.
The increase in the quarter ended March 25, 1996 as a percentage of sales,
was primarily related to increases in labor and benefits, utilities, and rent
as a percentage of sales. A portion of the increase (as a percentage of sales)
is a result of the decline in average restaurant sales relative to the fixed
and semi-variable nature of many expenses.
18
<PAGE>
Costs of Modular Restaurant Package revenues totalled $309,867 or
270.2% of Modular Restaurant Package revenues for the quarter ended March 25,
1996, compared to $988,597 or 164.4% of such revenues for the quarter ended
March 27, 1995. The increase in these expenses as a percentage of Modular
Restaurant Package revenues was attributable to the decline in the number of
units produced relative to the fixed and semi-variable nature of many
expenses. The Company and franchisees opened fewer restaurants for the
quarter ended March 25, 1996 than in the comparable quarter of 1995.
Selling, general and administrative expenses decreased to
$2,440,032 or 6.1% of total revenues, for the quarter ended March 25, 1996,
from $4,548,268 or 9.6% of total revenues for the quarter ended March 27,
1995. The decrease in these expenses was primarily attributable to the
reduction of corporate personnel and related costs partially offset by the
recognition to expense of previously deferred franchise costs of $115,657
associated with the above mentioned $390,000 of income from terminations of
Area Development Agreements
Advertising decreased to $811,318 or 2.1% of restaurant sales for
the quarter ended March 25, 1996, from $2,072,664 or 4.6% of restaurant sales
for the quarter ended March 27, 1995. The decrease in this expense was due to
decreased expenditures for broadcast advertising.
INTEREST EXPENSE. Interest expense increased to $1,252,358 or
3.1% of total revenues for the quarter ended March 25, 1996, from $1,215,416
or 2.6% of total revenues for the quarter ended March 27, 1995. This increase
was due to an increase in the Company's effective interest rates and
capitalized leases resulting from sale leaseback transactions in 1995.
MINORITY INTEREST IN EARNINGS (LOSS). The Company recorded
minority interest in earnings of $25,788 for the quarter ended March 25, 1996,
as compared to minority interest in earnings of $37,688 for the quarter ended
March 27, 1995. The decrease in minority interest in earnings for the quarter
ended March 25, 1996 is due primarily to the lower number of joint venture
Restaurants at March 25, 1996.
INCOME TAX EXPENSE (BENEFIT). Due to the loss for the quarter,
the Company recorded an income tax benefit of $154,662, or 38.0% of the loss
before income taxes for the quarter ended March 25, 1996, as compared to an
income tax benefit of $1,084,000, or 39.0% of earnings before income taxes for
the quarter ended March 27, 1995. The effective tax rates differ from the
expected federal tax rate of 35.0% due to state income taxes and job tax
credits.
NET LOSS. The decrease in the net loss for the quarter ended
March 25, 1996, when compared to the net loss for the quarter ended March 27,
1995, is due primarily to a decrease in depreciation and amortization,
selling, general and administrative expenses, and advertising partially offset
by a decrease in the average net restaurant sales and margins, a decrease in
franchise store openings, a decrease in Modular Restaurant Package revenues
and margins, and increased interest expense.
Liquidity and Capital Resources
Prior to the IPO in November 1991, the primary sources of the
Company's liquidity and capital resources were cash flows from operations and
bank financing, as well as capital and operating leases. Following the IPO,
until approximately late 1993, the Company utilized the proceeds of the IPO
and its second public stock offering in May 1992, in addition to cash flows
from operations, to provide funds for operations and capital expenditures.
19
<PAGE>
Beginning in late 1993, the proceeds from the two stock offerings had been
fully utilized, and the Company negotiated a credit facility with a group of
banks, described below, to provide additional funds primarily for the
development of new Restaurants.
On October 28, 1993, the Company entered into a loan agreement
with a group of banks ("Loan Agreement") providing for an unsecured, revolving
credit facility. The Company borrowed approximately $50,000,000 under this
facility primarily to open new Restaurants and pay off approximately
$4,000,000 of previously existing debt.
The Company subsequently arranged for this Loan Agreement to be
converted to a term loan and collateralized the loan with substantially all of
the Company's assets. The outstanding balance was $36,247,540 at March 25,
1996. The term loan requires monthly principal reductions continuing through
July 1998. Beginning in the fifth period of 1996, principal payments are the
greater of fixed monthly amounts or a formula based on Cash Flow as defined
under the Loan Agreement. The remaining aggregate minimum principal
repayments are $5,600,000 in 1996, $7,800,000 in 1997, $4,200,000 for the
period January through July 1998 and a balloon payment of $18,647,540 due July
31, 1998. Interest is payable monthly at the prime rate plus 2.5%. Dividends
are prohibited, and the Company is required to maintain certain financial
ratios under the Loan Agreement. The Company is in compliance with all such
requirements.
On March 15, 1996 the bank group agreed to advance an additional
sum of up to $1,700,000 to be used by the Company for the payment of various
property taxes (the "Property Tax Loan") On March 27, 1996, $1,572,737 was
advanced to the Company under the Property Tax Loan. Interest accrues on the
Property Tax Loan at the prime rate plus 2.5% and is secured by the existing
collateral. The Property Tax Loan is to be repaid in full by July 1, 1996.
The anticipated source of funds for retirement of the Property Tax Loan is a
portion of an income tax refund due the Company. The Company also has a line
of credit with the bank group of up to $1,000,000 through April 1997. The
outstanding balance was $1,000,000 on March 25, 1996. Interest is payable
monthly at the prime rate plus 2.5%. The line of credit has financial
covenants and other requirements.
On August 2, 1995, the Company entered into a purchase agreement
(as amended in October 1995 and April 1996, the "Rall-Folks Agreement") with
Rall-Folks, Inc. ("Rall-Folks") pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of
three promissory notes of the Company held by Rall-Folks (the "Rall-Folks
Notes"). On the closing date, the Company will deliver to Rall-Folks shares
of its Common Stock with a value equal to the then outstanding balance due
under the Rall-Folks Notes (the "Rall-Folks Purchase Price"). The total
amount of principal outstanding under the Rall-Folks Notes was approximately
$1,788,000 as of March 25, 1996. The Rall-Folks Notes are fully subordinated
to the Company's existing bank debt.
Under the terms of the Rall-Folks Agreement, the Company
guaranteed that if Rall-Folks sells all of the Common Stock issued for the
Rall-Folks Notes in a reasonably prompt manner (subject to certain limitations
described below) Rall-Folks will receive net proceeds from the sale of such
stock equal to the Rall-Folks Purchase Price. If Rall-Folks receives less
than such amount, the Company will issue to Rall-Folks, at the option of Rall-
Folks, either (i) additional shares of Common Stock, to be sold by Rall-Folks,
until Rall-Folks receives an amount equal to the Rall-Folks Purchase Price, or
(ii) a six-month promissory note bearing interest at 11%, with all principal
and accrued interest due at maturity, and subordinated to the Company's bank
debt pursuant to the same subordination provisions, equal to the difference
20
<PAGE>
between the Rall-Folks Purchase Price and the net amount received by Rall-
Folks from the sale of the Common Stock.
On August 3, 1995, the Company entered into a purchase agreement
(as amended in October 1995 and April 1996, the "RDG Agreement") with
Restaurant Development Group, Inc. ("RDG") pursuant to which the Company
agreed to issue shares of its Common Stock in exchange for and in complete
satisfaction of a promissory note of the Company held by RDG (the "RDG Note").
The total amount of principal outstanding under the RDG Note was
approximately $1,693,000 as of March 25, 1996. The RDG Note is fully
subordinated to the Company's existing bank debt. In partial consideration of
the transfer of the RDG Note to the Company, the Company will deliver to RDG
shares of Common Stock with a value equal to the sum of (i) the outstanding
balance due under the RDG Note on the closing date and (ii) $10,000 (being the
estimated legal expenses of RDG to be incurred in connection with the
registration of the Common Stock) (the "RDG Purchase Price").
As further consideration for the transfer of the RDG Note to the
Company, the Company agreed to issue RDG a warrant (the "Warrant") for the
purchase of 120,000 shares of Common Stock at a price equal to the average
closing sale price of the Common Stock for the ten full trading days ending on
the third business day immediately preceding the closing date (such price is
referred to a the "Average Closing Price"); however, in the event that the
average closing price of the Common Stock for the 90 day period after the
closing date is less than the Average Closing Price, the purchase price for
the Common Stock under the Warrant will be changed on the 91st day after the
closing date to the average closing price for such 90 day period. The Warrant
will be exercisable at any time within five years after the closing date.
Under the terms of the RDG Agreement, the Company has guaranteed
that if RDG sells all of such Common Stock issued for the RDG Note in a
reasonably prompt manner (subject to certain limitations described below), RDG
will receive net proceeds from the sale of such stock equal to at least 80% of
the RDG Purchase Price. If RDG receives less than such amount, the Company
will issue additional shares of Common Stock to RDG, to be sold by RDG, until
RDG receives an amount equal to 80% of the Purchase Price.
The Rall-Folks Notes and the RDG Notes were due on August 4, 1995.
Pursuant to the Rall-Folks Agreement and the RDG Agreement, the Rall-Folks
Notes and the RDG Note were to be acquired by the Company in exchange for
Common Stock on or before September 30, 1995. The Company and Rall-folks and
RDG amended the Rall-Folks Agreement and the RDG Agreement, respectively, to
allow for a closing in May 1996 (subject to extension in the event closing is
delayed due to review by the Securities and Exchange Commission of the
registration statement covering the Common Stock to be issued in the
transaction). Each of the parties has the right to terminate their respective
Agreement if the closing has not occurred on or before such time (as
extended). Pursuant to the Rall-Folks Agreement and the RDG Agreement, the
term of the Notes will be extended until the earlier of the closing of the
repurchase of the Notes or until approximately one month after the termination
of the applicable Agreement by a party in accordance with its terms. Closing
is contingent upon a number of conditions, including the prior registration
under the federal and state securities laws of the Common Stock to be issued
and the subsequent approval of the transaction by the stockholders of Rall-
Folks and RDG of their respective transactions. In the event the Company
complies with all of its obligations under the Rall-Folks Agreement and the
stockholders of Rall-Folks do not approve the transaction, the term of the
Rall-Folks Notes will be extended until December 1996. In the event the
Company complies with all of its obligations under the RDG Agreement and the
stockholders of RDG do not approve the transaction, the term of the RDG Note
will be extended approximately one year.
21
<PAGE>
Under the terms of the Rall-Folks Agreement and the RDG Agreement,
if the transaction contemplated therein is consummated, so long as Rall-Folks
and RDG, respectively, is attempting to sell the Common Stock issued to it in
a reasonably prompt manner (subject to the limitations described below), the
Company is obligated to pay to it in cash an amount each quarter equal to 2.5%
of the value of the Common Stock held by it on such date (such value being
based upon the value of the Common Stock when issued to it).
On April 12, 1996, the Company entered into a Note Repayment
Agreement (the "NTDT Agreement") with Nashville Twin Drive-Thru Partners, L.P.
("NTDT") pursuant to which the Company may issue shares of its Common Stock in
exchange for and in complete satisfaction of a promissory note of the Company
held by NTDT which matured on April 30, 1996 (the "NTDT Note"). The Company
will issue shares of Common Stock to NTDT in blocks of two hundred thousand
shares each, which will be valued at the closing price of the Common Stock on
the day prior to the date they are delivered to NTDT (such date is hereinafter
referred to as the "Delivery Date" and the value of the Common Stock on such
date is hereinafter referred to as the "Fair Value"). The amount outstanding
under the NTDT Note will be reduced by the Fair Value of the stock delivered
to NTDT on each Delivery Date. The Company is obligated to register each
block of Common Stock for resale by NTDT under the federal and state
securities laws, and to keep such registration effective for a sufficient
length of time to allow the sale of the block of Common Stock, subject to
limitations on sales imposed by the Company described below. As each block of
Common Stock is sold, the Company will issue another block, to be registered
for resale and sold by NTDT, until NTDT receives net proceeds from the sale of
such Common Stock equal to the balance due under the NTDT Note. The Company
will continue to pay interest in cash on the outstanding principal balance due
under the NTDT Note through the date on which NTDT receives net proceeds from
the sale of Common Stock sufficient to repay the principal balance of the NTDT
Note. On each Delivery Date and on the same day of each month thereafter if
NTDT holds on such subsequent date any unsold shares of Common Stock, the
Company will also pay to NTDT in cash an amount equal to .833% of the Fair
Value of the shares of Common Stock issued to NTDT as part of such Block of
Stock and held by NTDT on such date. Once the NTDT Note has been repaid in
full, NTDT is obligated to return any excess proceeds or shares of Common
Stock to the Company. The Company delivered the first block of 200,000 shares
with a fair value of $228,125 to NTDT on April 18, 1996. The total amount of
principal outstanding under the NTDT Note was approximately $1,354,000 as of
March 25, 1996. The NTDT Note is fully subordinated to the Company's existing
bank debt. The term of the NTDT Note will be extended until May 31, 1997, so
long as the Company is complying with its obligations under the NTDT Agreement
and NTDT has received at least $1,000,000 from the sale of the Common Stock by
January 31, 1997. Such dates will be extended if NTDT fails to make a
commercially reasonable attempt to sell an average of 10,000 shares of Common
Stock per day on each trading day that a registration statement covering
unsold shares held by NTDT is in effect prior to such dates, or if the Company
is delayed in filing a registration statement (or an amendment or supplement
thereto) due to the failure of NTDT to provide information required to be
provided to the Company under the NTDT Agreement. In the event that the
Company files a voluntary bankruptcy petition, an involuntary bankruptcy
petition is filed against the Company and not dismissed within 60 days, a
receiver or trustee is appointed for the Company's assets, the Company makes
an assignment of substantially all of its assets for the benefit of its
creditors, trading in the Common Stock is suspended for more than 14 days, or
the Company fails to comply with its obligations under the NTDT Agreement, the
outstanding balance due under the NTDT Note will become due and NTDT may
thereafter seek to enforce the NTDT Note.
22
<PAGE>
In order to promote an orderly distribution of the Common Stock to
be issued to and sold by Rall-Folks, RDG and NTDT, the Company has imposed the
following limits on the sales that may be made by Rall-Folks, RDG and NTDT:
(i) each may sell not more than 50,000 shares of Common Stock per week
(150,000 in the aggregate) and (ii) each may sell not more than 25,000 shares
in any one day (75,000 shares in the aggregate), provided that each may sell
additional shares in excess of such limits if such additional shares are sold
at a price higher than the lowest then current bid price for the Common Stock.
See "Risk Factors" below for a discussion of certain risks associated with
the proposed sales of such Common Stock by Rall-Folks, RDG and NTDT.
While the Company intends to consummate in the immediate future
the purchase of the Rall-Folks Notes and the RDG Note using Common Stock,
there can be no assurance that the Company will be able to do so. Pursuant to
the terms of the Loan Agreement, the Company is obligated to purchase or repay
the Rall-Folks Notes, the RDG Note and the NTDT Note using Common Stock, and
may not repay them in cash. Therefore, if the Company is unable to consummate
the purchase of the Rall-Folks Notes and the RDG Note in exchange for Common
Stock, or if NTDT is unable to sell sufficient Common Stock in a timely manner
to be able to receive the required amounts under the NTDT Agreement, and the
Company is unable to reach some other arrangements with Rall-Folks, RDG or
NTDT, the Company will likely default in its payment obligations under such
Note or Notes, and will likely be put into default under the terms of the Loan
Agreement.
During 1995, the Company opened and acquired eight Restaurants and
total capital expenditures were approximately $2,900,000. The Company expects
that from five to ten Company-operated Restaurants and 35 to 45 franchised
Restaurants will be opened in 1996. The Company anticipates that minimal
capital expenditures on its part will be required to open its five to ten
Restaurants since eight Modular Restaurant Packages were substantially
complete as of March 25, 1996, and some Restaurants may be opened under joint
venture arrangements whereby the Company redeploys Modular Restaurant Packages
available from previously closed sites and utilizes contributions from joint
venture partners to fund site improvements. The Company expects that all
planned capital expenditures for 1996 will approximate $3,000,000. The Loan
Agreement allows $3,000,000 of Capital Expenditures, as defined by such
agreement, per year. Any contributions of joint venture partners and non-cash
transactions are excluded from the definition of Capital Expenditures.
In the fiscal year ended January 1, 1996, the Company raised
approximately $5,000,000 of net proceeds from sale-leaseback transactions
whereby the Company sold and leased back certain Restaurant sites. A majority
of these proceeds have been used to reduce the outstanding balance under the
Loan Agreement. Under the terms of the Loan Agreement, a majority of the
proceeds of any future sale-leasebacks or similar securitizations of the
Company's assets must be paid to the bank group to reduce principal on the
loan. The Company continues to investigate other financing sources. However,
there can be no assurance that any such financing sources can be obtained on
terms satisfactory to the Company and the inability to obtain additional
capital would have a material adverse effect on the Company's ability to
expand its number of Company-operated Restaurants beyond the range indicated
above.
The Company has previously had significant working capital due to
the proceeds from its two public stock offerings. As of December 31, 1993,
these proceeds had been utilized to purchase long-term property and equipment.
The Company has negative working capital of $23,891,249 at March 25, 1996
(determined by subtracting current liabilities from current assets). It is
23
<PAGE>
anticipated that negative working capital for the Company will continue to be
the case since approximately 86.5% of the Company's assets are long-term
(property, equipment, goodwill and other), and since all operating trade
payables, accrued expenses, and property and equipment payables are current
liabilities of the Company. The Company has not reported a profit for any
quarter since September 1994.
The Company has implemented numerous cost cutting and efficiency
enhancing programs into the Restaurants. The focus was to create strategic
alliances in several key purchasing and service areas along with leveraging
system wide service contracts for Company stores. Overall, the Company
believes fundamental steps have been taken to improve the Company's
profitability, but there can be no assurance that it will be able to do so.
Management believes that cash flows from 1996 operations and the terms of the
Loan Agreement with its bank group should allow the Company to achieve its
1996 development plans and to pay operating expenses and the reductions
required in 1996 under the Loan Agreement and the Company's other long-term
debt obligations provided that the Company is successful in consummating the
purchase of the Rall-Folks Notes, the RDG Note and the NTDT Note for Common
Stock.
Inflation
The Company does not believe inflation has had a material impact
on earnings. Substantial increases in costs could have a significant impact
on the Company and the industry. If operating expenses increase, management
believes it can recover increased costs by increasing prices to the extent
deemed advisable considering competition.
Seasonality
The seasonality of restaurant sales due to consumer spending
habits can be significantly affected by the timing of advertising and
competitive market conditions. While certain quarters can be stronger, or
weaker, for restaurant sales when compared to other quarters, there is no
predominant pattern.
Government Regulations
The Company is subject to state and federal labor laws that govern
its relationships with its employees, such as requirements for minimum wage,
overtime, working conditions and health insurance. Significant numbers of the
food service personnel in the fast food industry are paid at rates related to
the federal minimum wage. Accordingly, increases in the federal minimum wage
would increase the Company's labor costs. Additionally, significant numbers
of food personnel are not covered by employer sponsored health insurance.
Implementation of federal or state laws or regulations requiring employers
such as the Company to provide health benefits to all employees would also
increase the Company's labor costs. The extent, timing and effect of any
possible legislation in these areas is not reasonably estimable at this time.
Risk Factors
The Company's prior operating results are not necessarily
indicative of future results. The Company's future operating results may be
affected by a number of factors, including: continued average restaurant sales
declines; uncertainties related to the general economy; competition; costs of
food and labor; the Company's ability to obtain adequate capital and to
continue to lease or buy successful sites and construct new restaurants; and
the Company's ability to locate capable franchisees. The price of the
24
<PAGE>
Company's Common Stock can be affected by the above. Additionally, any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's Common Stock.
Shares Eligible for Future Sale
The Company is currently engaged in various transactions in which
it is anticipated that approximately 4,000,000 shares of Common Stock will be
issued by the Company (representing approximately 7% of the shares outstanding
after such issuance) as consideration for various assets, primarily the Rall-
Folks Notes, the RDG Note and the NTDT Note (the "Notes") described above
under "Liquidity and Capital Resources." The number of shares to be issued
will be determined by dividing the outstanding balance due under the Notes
(approximately $4,835,000 as of March 25, 1996) or the purchase price for the
assets ($301,000) by the average of the closing sale price per share of the
Common Stock for a set number of days prior to the closing date for each
transaction. The shares will either be available for immediate sale by the
persons and entities to whom they are issued, or the Company will be required
to immediately register them for sale under the federal and state securities
laws.
Further, in connection with each of the transactions described
above, the Company agreed to certain price protection provisions in the
various purchase agreements which guarantee that the persons and entities to
whom such Common Stock is issued will receive a set amount, generally 100%, of
the amount due to them at closing from the sale of the Common Stock issued to
them. If they receive less, the Company is obligated to issue additional
shares of Common Stock to them which they may sell until such time as they
have received the full amount guaranteed to be received by them. The Company
is unable to predict the prices at which the Common Stock will be sold and
whether it will be sold under circumstances which will require the Company to
issue additional shares.
In addition to the foregoing, the Company has previously issued
shares of Common Stock in acquisition transactions with various franchisees
and others and, in connection therewith, has granted registration rights to
such persons for such stock. As a result of the exercise of such rights by
such persons, the Company currently has an obligation to register for resale
by such persons approximately 300,000 shares of Common Stock, with
approximately 700,000 additional shares being subject to registration for
resale upon demand.
As described above under "Liquidity and Capital Resources," in
order to promote an orderly distribution of the Common Stock to be issued to
and sold by Rall-Folks, RDG and NTDT, the Company has imposed the following
limits on the sales that may be made by Rall-Folks, RDG and NTDT: (i) each may
sell not more than 50,000 shares of Common Stock per week (150,000 in the
aggregate) and (ii) each may sell not more than 25,000 shares in any one day
(75,000 shares in the aggregate), provided that each may sell additional
shares in excess of such limits if such additional shares are sold at a price
higher than the lowest then current bid price for the Common Stock ("on an
uptick"). While it is anticipated that the foregoing limits will allow an
orderly distribution of the Common Stock to be issued to and sold by Rall-
Folks, RDG and NTDT, the effect of a continuous offering of an average of
30,000 shares per day by Rall-Folks, RDG and NTDT is undeterminable at this
time. There can be no assurance that the same will not have an adverse effect
on the market price for the Common Stock.
25
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, the Company is not a party to any
material litigation and is not aware of any threatened material litigation:
The Company, its directors, certain of its officers and its
outside auditors are defendants in a proceeding styled IN RE CHECKERS
SECURITIES LITIGATION, Master File No. 93-1749-CIV-T-17A, in the United States
District Court for the Middle District of Florida, Tampa Division. The
complaint alleges, generally, that the Company issued materially false and
misleading financial statements which were not prepared in accordance with
generally accepted accounting principles, in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and
Florida common law and statute. The allegations, including an allegation that
the Company inappropriately selected the percentage of completion method of
accounting for sales of modular Restaurant buildings, are primarily directed
to certain accounting principles followed by a Checkers' division, Champion
Modular Restaurant Company, a producer of modular Restaurant building packages
for use by Checkers and its franchisees. The plaintiffs seek to represent a
class of all purchasers of the Company's common stock between November 22,
1991 and October 3, 1993, and seek an unspecified amount of damages. The
Company believes that this lawsuit is unfounded and without merit, and intends
to defend it vigorously. No estimate of any possible loss or range of loss
resulting from the lawsuit can be made at this time.
The Company, one of its directors and a former officer/director
are defendants in a proceeding styled LOPEZ, ET AL. V. CHECKERS DRIVE-IN
RESTAURANTS, INC., Case No. 94-282-CIV-T-17C, in the United States District
Court for the Middle District of Florida, Tampa Division. The complaint
alleges, generally, that the defendants made certain materially false and
misleading public statements concerning the pricing practices of competitors
and analysts' projections of the Company's earnings for the year ended
December 31, 1993, in violation of Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiffs seek to
represent a class of all purchasers of the Company's common stock between
August 26, 1993 and March 15, 1994, and seek an unspecified amount of damages.
Although the Company believes this lawsuit is unfounded and without merit, in
order to avoid further expenses of litigation, the parties have reached an
agreement in principle for the settlement of this class action. The agreement
for settlement provides for various of the Director and Officer liability
insurance carriers to pay $8,175,000 cash and for the Company to issue
warrants, valued at approximately $3,000,000, for the purchase of 5,100,000
shares of the Company's common stock at a price of $1.4375 per share. The
warrants will be exercisable for a period of four years after the effective
date of the settlement. The settlement is subject to the execution of an
appropriate stipulation of settlement and other documentation as may be
required or appropriate to obtain approval of the settlement by the court,
notice to the class of pendency of the action and proposed settlement, and
final court approval of the settlement.
On August 10, 1995, a state court complaint was filed in the
Circuit Court of the Sixth Judicial Circuit in and for Pinellas County,
Florida, Civil Division, entitled GAIL P. GREENFELDER AND POWERS BURGERS, INC.
V. JAMES F. WHITE, JR., CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN,
JAMES E. MATTEI, JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK, Case No.
95-4644-CI-21. The original complaint alleged, generally, that certain
officers of the Company intentionally inflicted severe emotional distress upon
26
<PAGE>
Ms. Greenfelder, who is the sole stockholder, president and director of Powers
Burgers, a Checkers franchisee. The original complaint further alleged that
Ms. Greenfelder and Powers Burgers were induced into entering into various
agreements and personal guarantees with the Company based upon
misrepresentations by the Company and its officers and that the Company
violated provisions of Florida's Franchise Act and Florida's Deceptive and
Unfair Trade Practices Act. The original complaint alleged that the Company
is liable for all damages caused to the plaintiffs. The plaintiffs seek
damages in an unspecified amount in excess of $2,500,000 in connection with
the claim of intentional infliction of emotional distress, $3,000,000 or the
return of all monies invested by the plaintiffs in Checkers franchises in
connection with the misrepresentation of claims, punitive damages, attorneys'
fees and such other relief as the court may deem appropriate. On November 27,
1995 the court granted the Company's motion to dismiss the plaintiff's claims
of intentional infliction of emotional distress. The plaintiffs subsequently
filed an amended complaint with additional allegations that, generally,
certain officers negligently inflicted emotional distress upon Ms. Greenfelder
and tortiously interfered with various contracts and business relationships,
and that the Company negligently retained various officers in the Company's
employ and breached various covenants of good faith and fair dealing in
connection with franchise agreements between the parties. On March 26, 1996
the court dismissed each of those claims. The Company believes that this
lawsuit is unfounded and without merit, and intends to defend it vigorously.
No estimate of any possible loss or range of loss resulting from the lawsuit
can be made at this time.
On August 10, 1995, a state court counterclaim and third party
complaint was filed in the Circuit Court of the thirteenth Judicial Circuit in
and for Hillsborough County, Florida, Civil Division, entitled TAMPA CHECKMATE
FOOD SERVICES, INC., CHECKMATE FOOD SERVICES, INC. AND ROBERT H. GAGNE V.
CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JAMES
F. WHITE, JR., JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK, Case No.
95-3869. In the original action, filed by the Company in July 1995 against
Mr. Gagne and Tampa Checkmate Food Services, Inc. a company controlled by Mr.
Gagne, the Company is seeking to collect on a promissory note and foreclose on
a mortgage securing the promissory note issued by Tampa Checkmate and Mr.
Gagne, and obtain declaratory relief regarding the rights of the respective
parties under Tampa Checkmate's franchise agreement with the Company. The
counterclaim and third party complaint allege, generally, that Mr. Gagne,
Tampa Checkmate and Checkmate Food Services, Inc. were induced into entering
into various franchise agreements with and personal guarantees to the Company
based upon misrepresentations by the Company. The counterclaim and third
party complaint seeks damages in the amount of $3,000,000 or the return of all
monies invested by Checkmate, Tampa Checkmate and Gagne in Checkers
franchises, punitive damages, attorneys' fees and such other relief as the
court may deem appropriate. The counterclaim was dismissed by the court on
January 26, 1996 with the right to amend. On February 12, 1996 the
counterclaimants filed an amended counterclaim alleging violations of
Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act,
and breaches of implied duties of "good faith and fair dealings" in connection
with a settlement agreement and franchise agreement between various of the
parties. The amended counterclaim seeks a judgement for damages in an
unspecified amount, punitive damages, attorneys' fees and such other relief as
the court may deem appropriate. The Company intends to vigorously prosecute
its complaint in the original action. The Company believes the amended
counterclaim by the counterclaimants is unfounded and without merit, and
intends to defend it vigorously. No estimate of any possible loss or range of
loss resulting from the lawsuit can be made at this time.
27
<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
Herbert G. Brown, Chairman of the Board of Directors of the
Company, resigned as Chairman of the Board and as a Director of the Company on
April 23, 1996. Mr. Brown cited his age and his desire to spend more time
with his family as the reasons for his resignation.
Jared D. Brown and George W. Cook, Directors of the Company whose
terms will expire at the 1996 Annual Meeting of Stockholders, have announced
that they will not stand for reelection at that Meeting. In addition, Mr.
Harry C. Cline, a Director of the Company, has announced that he will resign
from the Board of Directors effective as of the end of the 1996 Annual meeting
of Stockholders.
The Board of Directors intends to nominate Messrs. Clarence V.
McKee and Barry M. Alpert to stand for election at the 1996 Annual Meeting to
fill the seats being vacated by messrs. Jared D. Brown and George W. Cook.
Mr. McKee has served as the President and Chief Executive Officer of McKee
Communications, Inc., a Tampa, Florida based company engaged in the
acquisition and management of communications companies, since October 1992.
From 1987 to October 1992, Mr. McKee was the co-owner, Chairman and Chief
Executive Officer of WTVT-Inc., the licensee of television channel 13 in
Tampa, Florida. Mr. McKee is a member of the Boards of Directors of the
Florida Progress Corporation and its subsidiary, Florida Power Corporation,
and Barnett Banks, Inc. He is a former chairman of the Florida Association of
Broadcasters.
Barry M. Alpert serves as Senior Vice President Investment Banking
for Robert W. Baird & Co. Incorporated, a registered broker dealer, where he
has been employed since October 1991. From April 1991 to October 1991, Mr.
Alpert served as Chairman of the Board of Alpert Financial Group, Inc., a
private investment company in Seminole, Florida. From 1989 to April 1991, Mr.
Alpert served as President of Pioneer Western Corporation, a financial
services corporation in Largo, Florida. Mr. Alpert has been involved in the
financial services industry for almost 20 years, and has served on the Boards
of Directors of numerous financial institutions and insurance companies during
that time. Mr. Alpert currently serves as a member of the Board of Directors
of Reptron Electronics, Inc., a manufacturer of electronic parts and equipment
in Tampa, Florida, and is a Member/Commissioner of the Florida Real Estate
Commission.
The Board of Directors reduced the number of seats on the Board to
seven following the resignation of Mr. Herbert G. Brown, and will reduce the
number to six following the resignation of Mr. Cline at the close of the 1996
Annual Meeting.
28
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27: Financial Data Schedule
(b) Reports on 8-K:
The following reports on Form 8-K were filed during the quarter
covered by this report:
The Company filed a Report on Form 8-K with the Commission
dated January 12, 1996, reporting under Item 5 the engagement
of Raymond James and Associates, Inc. as financial consultants
to the Company.
The Company filed a Report on Form 8-K with the Commission
dated January 25, 1996 reporting under Item 5 the resignations
of La-Van Hawkins and Richard C. Postle from the Company's
Board of Directors.
The Company filed a Report on Form 8-K with the Commission
dated March 18, 1996 reporting under Item 5 the announcement of
operating results for the fourth quarter of 1995 and for the
fiscal year ended January 1, 1996.
29
<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.
Checkers Drive-In Restaurants, Inc.
-----------------------------------
(Registrant)
Date: May 8, 1996
/s/ Albert J. DiMarco
-----------------------------------
Albert J. DiMarco
President and Chief Executive Officer
Date: May 8, 1996
/s/ Keith J. Kinsey
------------------------------------
Keith J. Kinsey
Executive Vice President, Chief
Operating Officer, Chief Financial
Officer and Principal Accounting
Officer
30
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHECKERS DRIVE-IN RESTAURANTS, FOR THE QUARTERLY PERIOD
ENDED MARCH 25, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> MAR-25-1996
<CASH> 3,837
<SECURITIES> 0
<RECEIVABLES> 12,118
<ALLOWANCES> 1,292
<INVENTORY> 3,168
<CURRENT-ASSETS> 22,386
<PP&E> 147,389
<DEPRECIATION> 29,031
<TOTAL-ASSETS> 166,158
<CURRENT-LIABILITIES> 46,277
<BONDS> 0
<COMMON> 52
0
0
<OTHER-SE> 93,029
<TOTAL-LIABILITY-AND-EQUITY> 166,158
<SALES> 37,955
<TOTAL-REVENUES> 40,054
<CGS> 12,693
<TOTAL-COSTS> 39,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,252
<INCOME-PRETAX> (407)
<INCOME-TAX> (155)
<INCOME-CONTINUING> (252)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (252)
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
