SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
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 September 9, 1996
OR
[ ] 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 0-19649
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 October 24, 1996.
This document contains 33 pages. Exhibit Index appears at page 32.
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 9, 1996 and January 1, 1996...............................3
Condensed Consolidated Statements of Operations
Quarter ended September 9, 1996 and September 11, 1995 and
Three Quarters ended September 9, 1996 and September 11, 1995.......5
Condensed Consolidated Statements of Cash Flows
Three Quarters ended September 9, 1996 and September 11, 1995.......6
Notes to Consolidated Financial Statements..............................8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................15
PART II OTHER INFORMATION
Item 1 Legal Proceedings.........................................................28
Item 2 Changes in Securities.....................................................29
Item 3 Defaults Upon Senior Securities...........................................29
Item 4 Submission of Matters to a Vote of Security Holders ......................29
Item 5 Other Information.........................................................29
Item 6 Exhibits and Reports on Form 8-K..........................................30
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (Unaudited)
September 9, January 1,
1996 1996
-----------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents:
Restricted $ 3,200,617 $ 687,500
Unrestricted 2,124,553 2,676,296
Accounts receivable 2,235,111 1,942,544
Notes receivable 235,428 2,885,962
Inventory 2,362,341 3,161,996
Property and equipment held for resale 9,430,110 4,338,964
Costs and earnings in excess of (less than) billings on
uncompleted contracts 82,632 (6,262)
Income taxes receivable 447,630 3,272,594
Deferred income taxes - current 2,952,370 --
Prepaid expenses and other current assets 1,321,893 1,374,794
-----------------------------
Total current assets 24,392,685 20,334,388
Property and equipment, at cost, net of accumulated depreciation
and amortization 107,224,051 119,949,100
Notes receivable from related parties -- 5,182,355
Goodwill and non-compete agreements, net of accumulated amortization
of $3,995,949 at September 9 and $3,211,665 at January 1 13,551,431 17,019,078
Deferred income taxes - noncurrent -- 3,358,000
Deposits and other noncurrent assets 4,632,211 975,996
-----------------------------
$ 149,800,378 $ 166,818,917
=============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
September 9, January 1,
1996 1996
------------------------------
<S> <C> <C>
Current Liabilities:
Short term debt -- $ 1,000,000
Current installments of long-term debt $ 9,298,472 13,170,619
Accounts payable 14,022,670 10,536,745
Accrued wages, salaries and benefits 2,684,463 2,637,830
Reserves for restructuring, restaurant relocations and abandoned sites 5,071,001 2,290,223
Accrued liabilities 10,371,410 13,652,230
Deferred income 572,699 300,000
------------------------------
Total current liabilities 42,020,715 43,587,647
Long-term debt, less current installments 44,659,427 38,090,278
Deferred franchise fee income 595,500 763,000
Minority interests in joint ventures 2,491,917 549,255
Other noncurrent liabilities 5,830,528 3,852,729
------------------------------
Total liabilities 95,598,087 86,842,909
Stockholders' Equity:
Preferred stock, $.001 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
51,768,480 at September 9, 1996 51,768 51,528
Additional paid-in capital 90,298,598 90,029,213
Warrants to be issued in settlement of litigation 3,000,000 3,000,000
Retained earnings (38,748,075) (12,704,733)
------------------------------
54,602,291 80,376,008
Less treasury stock, at cost, 578,904 shares 400,000 400,000
------------------------------
Net stockholders' equity 54,202,291 79,976,008
------------------------------
$149,800,378 $166,818,917
==============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
September 9, September 11, September 9, September 11,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
REVENUES:
Net restaurant sales $ 34,875,320 $ 41,210,771 $ 107,193,134 $ 129,841,574
Royalties 1,869,299 1,938,899 5,394,605 5,187,205
Franchise fees 96,806 220,000 679,662 581,250
Modular restaurant packages 246,575 81,818 893,307 2,808,789
----------------------------------------------------------------
Total revenues 37,088,000 43,451,488 114,160,708 138,418,818
----------------------------------------------------------------
COSTS AND EXPENSES:
Restaurant food and paper cost 12,417,171 14,503,036 37,080,333 46,490,656
Restaurant labor costs 13,139,079 14,854,113 38,341,282 42,523,123
Restaurant occupancy expense 3,170,873 2,859,833 8,827,327 8,638,776
Restaurant depreciation and amortization 2,064,464 2,254,296 6,022,873 7,717,781
Advertising expense 1,490,032 1,932,466 3,596,959 6,165,166
Other restaurant operating expense 3,716,185 3,655,663 9,954,279 10,930,410
Costs of modular restaurant package revenues 381,541 616,580 1,379,920 3,897,224
Other depreciation and amortization 1,053,361 1,015,994 2,719,771 2,750,311
Selling, general and administrative expenses 5,442,298 8,094,221 12,738,827 17,948,967
Impairment of long-lived assets 8,468,036 -- 8,468,036 --
Losses on assets to be disposed of 5,701,741 3,192,000 5,701,741 3,192,000
Refinancing costs 845,775 344,000 845,775 344,000
Provision for inventory obsolescence 500,000 645,000 500,000 645,000
----------------------------------------------------------------
Total costs and expenses 58,390,556 53,967,202 136,177,123 151,243,414
----------------------------------------------------------------
Operating Loss (21,302,556) (10,515,714) (22,016,415) (12,824,596)
----------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest Income 125,852 126,805 621,725 360,858
Interest Expense (1,407,270) (1,403,748) (4,012,518) (4,050,628)
----------------------------------------------------------------
Loss before minority interests and income
tax expense (benefit) (22,583,974) (11,792,657) (25,407,208) (16,514,366)
Minority interests (55,907) (293,034) 10,475 (221,073)
----------------------------------------------------------------
Loss before income tax expense (benefit) (22,528,067) (11,499,623) (25,417,683) (16,293,293)
Income tax expense (benefit) 1,714,659 (4,188,000) 625,659 (6,058,000)
----------------------------------------------------------------
Net loss $ (24,242,726) $ (7,311,623) $ (26,043,342) $ (10,235,293)
================================================================
Net loss per common share $ (0.47) $ (0.14) $ (0.50) $ (0.20)
================================================================
Weighted average number of common shares
outstanding 51,768,480 51,275,146 51,722,448 50,622,826
================================================================
</TABLE>
5
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Quarters Ended
September 9, September 11,
1996 1995
----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(26,043,342) $(10,235,293)
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 8,742,644 10,468,092
Loss on sale of property and equipment 165,248 72,231
Losses on assets to be disposed of 5,701,741 3,192,000
Impairment of long-lived assets 8,468,036 --
Provisions for bad debt, inventory obsolescence and
sales taxes 1,749,644 1,913,000
Refinancing costs 845,775 344,000
Minority interests in earnings 10,475 (221,073)
Change in assets and liabilities:
Decrease (Increase) in receivables 2,959,428 (319,900)
Decrease in inventory 299,655 552,814
Increase in costs and earnings in excess of
billings on uncompleted contracts (88,894) (1,556,892)
Decrease (Increase) in income taxes receivable 2,824,964 (745,141)
Increase in prepaid expenses and other (955,720) (450,246)
Increase (Decrease) in deferred income taxes 405,630 (4,297,000)
Increase in deposits and other (8,605) (309,073)
Increase (Decrease) in accounts payable 3,167,683 (1,662,352)
(Decrease) Increase in accrued liabilities (1,000,209) 5,342,413
Increase in deferred income 105,199 357,000
----------------------------
Net cash provided (used) by operating activities 7,349,352 2,444,580
Cash flows from investing activities:
Capital expenditures (2,963,263) (1,601,057)
Proceeds from sale of assets 1,468,974 5,279,592
Acquisition of stores, net cash paid (200,000) (88,823)
----------------------------
Net cash provided (used) in investing activities (1,694,289) 3,589,712
----------------------------
Cash flows from financing activities:
Proceeds from borrowings of short-term debt -- 1,000,000
Proceeds from borrowings of long-term debt -- 4,183,195
Principal payments on long-term debt (3,825,873) (8,957,979)
Proceeds from investment by minority interests 285,000 --
Distributions to minority interests (152,816) (131,571)
----------------------------
Net cash used by financing activities (3,693,689) (3,906,355)
----------------------------
</TABLE>
6
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<TABLE>
<CAPTION>
Three Quarters Ended
September 9, September 11,
1996 1995
----------------------------
<S> <C> <C>
Net increase (decrease) in cash 1,961,374 2,127,937
Cash at beginning of period 3,363,796 3,511,525
----------------------------
Cash at end of period $ 5,325,170 $ 5,639,462
============================
Supplemental disclosures of cash flows information --
Interest paid $ 3,957,317 $ 3,072,005
Income taxes paid $ -- $ 182,121
Capital lease obligations incurred $ 225,000 $ 5,000,000
Schedule of noncash investing and financing activities --
Acquisitions: $ 8,195,438 $ 3,071,861
Fair value of assets acquired (4,973,758) --
Receivables forgiven 1,421,517 --
Reversal of deferred gain (4,443,197) (2,245,105)
Liabilities assumed -- (737,933)
Stock issued
----------------------------
Total cash paid for net assets acquired $ 200,000 $ 88,823
============================
</TABLE>
7
<PAGE>
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 necessary to
present fairly the information set forth therein have been included. The
operating results for the three quarters ended September 9, 1996, are not
necessarily an indication of the results that may be expected for the fiscal
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 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
September 9, 1996, there were 505 Restaurants operating in 23 different states
and the District of Columbia. Of those Restaurants, 255 were Company-operated
(including 14 stores operated by joint ventures owned at various percentages
ranging from 10.55% to 75%) and 250 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.
(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. Included in cash and cash equivalents are $1,355,000 in
restricted funds held for workers compensation self-insurance purposes and
$1,845,617 held in escrow by the Company's new Investor Group (see Note 2) at
September 9, 1996 and $687,500 held for workers compensation self-insurance
purposes at January 1, 1996.
(e) RECEIVABLES - Receivables consist primarily of franchise fees, royalties and
notes due from franchisees, and receivables from the sale of modular restaurant
packages. The allowance for doubtful receivables was $1,876,193 at September 9,
1996 and $1,357,938 at January 1, 1996.
8
<PAGE>
(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 $50,542 at
September 9, 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 (see Note 5).
(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 (see Note 6).
(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) 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:
<TABLE>
<CAPTION>
September 9, January 1,
1996 1996
--------------------------------
<S> <C> <C>
Notes payable and restructuring fee under Loan Agreement $ 39,818,099 $ 37,021,241
Notes payable due at various dates, secured by buildings and equipment, with
interest at rates primarily ranging from 9.0% to 15.83%, payable monthly 9,937,693 10,658,804
Unsecured notes payable, bearing interest at rates ranging from prime to 12% 3,480,852 3,580,852
Notes payable to the Internal Revenue Service and the State of Illinois
Department of Revenue, with interest at 9.125%, payable quarterly
through June 2001. 700,000 --
Other 21,255 --
--------------------------------
Total long-term debt 53,957,899 51,260,897
Less current installments 9,298,472 13,170,619
--------------------------------
Long-term debt, less current installments $ 44,659,427 $ 38,090,278
================================
</TABLE>
9
<PAGE>
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 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 $18,218,099 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.
In early July 1996, DDJ Capital Management LLC ("DDJ") began
negotiating with the bank group for an assignment to it of all of the bank
group's rights under the Loan Agreement. Anticipating the transfer of the Loan
Agreement and the debt thereunder, and due to impairment of its current cash
flow, the Company did not make the $500,000 principal payment due under the Loan
Agreement on July 15, 1996. On July 29, 1996, the Company and the bank group
entered into an amendment to the Loan Agreement providing for the assignment of
all of the rights of the bank group under the Loan Agreement to The Galileo
Fund, L.P. of Boston, Massachusetts ("Galileo Fund"), an affiliate of DDJ. The
amendment also provided for a temporary waiver of all defaults (the July 15
payment default and failure to meet certain financial covenants at the end of
the second fiscal quarter) by the Company under the Loan Agreement. Upon the
assignment of the Loan Agreement, Galileo Fund immediately assigned a portion of
its interests in the Loan Agreement and the amounts due thereunder to Foothill
Capital Corporation of Los Angeles, California, Pearl Street L.P. (a division of
Goldman, Sachs & Company) of New York, New York and Canpartners Investments IV,
LLC of Los Angeles, California (collectively, with Galileo Fund, the "Investor
Group").
On September 17, 1996, the Company reached an agreement in principle
on debt restructuring with the Investor Group. Pursuant to such agreement, if
consummated, the term of the credit facility will be extended by one year until
July 31, 1999. The agreement provides that no principal payments are scheduled
through the first reporting period of 1997. In reporting periods 2 through 8 of
1997, the Company will be scheduled to make minimum principal reduction payments
of $200,000 per period. Those payments will increase to $275,000 in reporting
periods 9 through 13 in 1997, and to $350,000 until July 31, 1999. The Company
has agreed to a fixed interest rate of 13.75% per annum. Additionally, the
agreement provides for a restructuring fee of $4.0 million payable at maturity,
which can be converted into common stock at the option of the Company and/or the
Investor Group under certain specified circumstances. The September 17 agreement
in principle contains financial covenants that the Company is currently unable
to meet. Management has attempted to renegotiate these financial covenants and
obtain definitive documentation from the Investor Group, but has been
unsuccessful to date in this effort. The Investor Group has recently informed
the Company that they are considering selling the Company's debt to other third
parties, which include companies with affiliates in the restaurant business, and
management believes that this potential sale has caused the Investor Group to
delay finalizing a restructuring of the debt. The Investor Group has granted an
extension of their waiver of the Company's defaults under the Loan Agreement
through November 8, 1996. Although management intends to continue to seek a
restructuring of the Company's debt with the Investor Group and/or any
subsequent purchaser of the debt, as well as financing from other third parties,
there can be no assurance that a restructuring basically on the terms set forth
in the agreement in principle (with appropriate modifications to the financial
covenants), or on other terms acceptable to the Company, will be consummated, or
that the Company will be able to obtain any other financing source. The Company
does not currently have the ability to cure the payment defaults or financial
covenant defaults that have occurred and been waived to date. The Company is
currently in active discussions with several third parties concerning a variety
of potential strategic transactions. There can be no assurance that any of these
discussions will result in the consummation of any particular transaction or
what form the transaction might take; however, the Company's current focus is on
a transaction that would provide the Company with additional liquidity and an
opportunity for future growth, without a change in control of the Company.
10
<PAGE>
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 $1,888,000 as
of January 1, 1996 and $1,788,000 as of September 9, 1996. The Rall-Folks Notes
are fully subordinated to the Company's existing debt with the Investor Group.
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 September 9, 1996. The RDG Note is fully subordinated
to the Company's existing debt with the Investor Group. 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). The transactions
with Rall-Folks and RDG have been delayed due to the Company's continuing
negotiations with the Investor Group concerning the restructuring of the
Company's debt. Each of the parties currently has the right to terminate their
respective Agreement (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
11
<PAGE>
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 $1,126,162 as of
September 9, 1996. The NTDT Note is fully subordinated to the Company's existing
debt with the Investor Group. Pursuant to the terms of the NTDT Agreement, 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. Due to the delay in registering the Common Stock issued to NTDT caused by
the renegotiation of the Company's debt with the Investor Group, it is doubtful
that $1,000,000 could be received by NTDT from the sale of Common Stock under
the terms of the NTDT Agreement by January 31, 1997. There can be no assurance
as to what action, if any, NTDT will take as a result. 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 any 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.
The consummation of the transaction with each of RDG, Rall-Folks and
NTDT has been delayed by the assignment of the Loan Agreement to the Investor
Group and the renegotiation of the Loan Agreement. Pursuant to the terms of the
current Loan Agreement, the Company is obligated to purchase or repay the
12
<PAGE>
Rall-Folks Notes, the RDG Note and the NTDT Note using Common Stock, and may not
repay them or make arrangements to repay them in cash. The Company is unable to
predict at this time what arrangements may be negotiated with the Investor Group
with respect to the Company's obligations under the agreements and notes with
RDG, Rall-Folks and NTDT. In the event that the Company is unable to negotiate
an amendment to the Loan Agreement that is mutually acceptable to the Company
and the Investor Group, the Company will likely default under the Loan Agreement
and be unable to consummate the currently contemplated transactions with RDG,
Rall-Folks and NTDT and will, therefore, likely default under the RDG Note, the
Rall-Folks Notes and the NTDT Note.
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 September 9, 1996, the
Company had outstanding nonqualified options at per share prices ranging from
$.75 to $19.00 to purchase 3,337,371 common shares which vest in years through
1999.
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.
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.
On July 12, 1996, the Company issued incentive stock options to
purchase 934,679 shares at $1.53 per share which vest ratably, 25% on July 12,
1996 and an additional 25% on each July 12th through 1999, to certain employees
of the Company. Options to purchase 87,479 shares from this issuance were
cancelled during the quarter ended September 9, 1996. During the quarter ended
September 9, 1996, the Company issued incentive stock options to purchase 12,000
shares at $.75 per share, which vest ratably in years through 1999, to certain
new employees of the Company.
On March 31, 1995, the Company agreed to issue 150,000 warrants to
the bank group under the loan agreement described in Note 3. The exercise price
of the warrants was $2.69 per share. The warrants vested in one-third increments
on April 30, 1996, October 30, 1996 and April 30, 1997. These warrants were
transferred to the Investor Group. It is anticipated that in connection with the
restructuring of the Company's debt with the Investor Group that the warrants
will be amended to provide for an exercise price of $.001 per share and will
become fully vested immediately.
As partial consideration for the transfer of a promissory note of
the Company (the "Note") back to the Company, the Company will be 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 Warrant. See Note
2.
13
<PAGE>
The Company expects to issue warrants to purchase 5,100,000 shares
of Common Stock at an exercise price of $1.375 per share in settlement of that
certain litigation entitled Lopez et al. v. Checkers Drive-In Restaurants, Inc.,
Case No. 94-282-CIV-T-17C. These warrants have been valued by the Company at
$3,000,000.
Note 4: ACQUISITION
As of the close of business July 1, 1996, the Company acquired
certain general and limited partnership interests in nine Checkers restaurants
in the Chicago area, three wholly-owned Checkers Restaurants and other assets
and liabilities as a result of the bankruptcy of Chicago Double Drive-Thru, Inc.
("CDDT"). These assets were received in lieu of past due royalties, notes
receivable and accrued interest, from CDDT which totalled, net of reserves,
$2,877,313. Assets of approximately $7,000,000 and liabilities of approximately
$2,350,000 were consolidated into the balance sheet of the Company as of the
acquisition date. The Company has not received, from the bankruptcy trustee,
closing financial statements for these partnerships and therefore, the resulting
minority interests of approximately $1,770,000 along with certain of the
above-mentioned assets and liabilities are subject to adjustment.
At September 9, 1996, long-term debt includes $1,322,255 of
obligations assumed as a result of the acquisition of the assets of CDDT,
including an obligation to the Internal Revenue Service of $545,000 and an
obligation to the State of Illinois Department of Revenue of $155,000, each
subject to interest at 9.125% per year. The remaining acquired notes ($622,255)
are payable to a Bank and other parties with interest at rates ranging from
8.11% to 10.139%. Non-interest bearing notes payable and permitted encumbrances
of $663,481 related to this acquisition are included in short-term accrued
liabilities of the Company as of September 9, 1996. Other accounts payable and
accrued liabilities incurred by CDDT and its partnerships in the normal course
of business amounting to approximately $350,000 were also recorded in connection
with this acquisition.
On August 16, 1996, the Company received $3,500,000 and a Checkers
Restaurant in Washington, D.C., valued at $659,547, in settlement of a note
receivable of $4,982,355, accrued interest of $319,924, and other receivables of
$278,785. This transaction resulted in a non-cash loss to the Company of
$1,421,517 which was offset completely in the Company's Consolidated Statement
of Operations by the elimination of a deferred (unrecognized) gain which had
been previously recorded as a liability upon the sale of three Checkers
Restaurants located in Baltimore, Maryland on July 28, 1995 when the $4,982,355
note receivable was generated.
Note 5: ACCOUNTING CHARGES AND LOSS PROVISIONS
The Company recorded accounting charges and loss provisions of
$16,765,552 during the third quarter of 1996, $1,249,644 of which consisted of
various selling, general and administrative expenses. Provisions totalling
$14,169,777 to close 27 Restaurants, relocate 22 of them, settle 16 leases on
real property underlying these stores and sell land underlying the other 11
Restaurants, and to record impairment charges related to an additional 28
under-performing Restaurants. Refinancing costs of $845,775 were also recorded
to expense capitalized costs incurred in connection with the Company's previous
lending arrangements with its bank group. A provision of $500,000 was also
recorded to reserve for obsolescence in Champion's finished buildings inventory.
Third quarter 1995 accounting charges and loss provisions of $8,800,000
consisted of $2,833,000 in various selling, general and administrative expenses
(write-off of receivables, accruals for recruiting fees, relocation costs,
severance pay, reserves for legal settlements and the accrual of legal fees);
$3,192,000 to provide for Restaurant relocation costs, write-downs and abandoned
site costs; $344,000 to expense refinancing costs; $645,000 to provide for
inventory obsolescence; $1,500,000 for workers compensation exposure included in
Restaurant labor costs and $259,000 in other charges, net, including the
$499,000 write-down of excess inventory and a minority interest adjustment.
Note 6: INCOME TAXES
The Company recorded income tax benefits of $8,561,000 for the
quarter ended September 9, 1996, and $9,659,000 for the three quarters ended
September 9, 1996, respectively, or 38.0% of the losses before income taxes. The
Company then recorded a valuation allowance of $10,284,659 against deferred
income tax assets as of September 9, 1996, resulting in a net tax expense of
$1,714,659 for the quarter ended September 9, 1996, and resulting in a net tax
expense of $625,659 for the three quarters ended September 9, 1996. The
Company's total valuation allowances of $17,900,659 as of September 9, 1996, is
maintained on deferred tax assets which the Company has not determined to be
14
<PAGE>
more likely than not realizable at this time. A deferred tax asset in the amount
of $2,952,370 is maintained as anticipated operating losses for the current year
will be carried back to obtain a refund of alternative minimum tax paid in prior
years and is therefore more likely than not realizable at this time. Subject to
a review of the tax assets, these valuation allowances will be reversed during
periods in the future in which the Company records pre-tax income, in amounts
necessary to offset any then recorded income tax expenses attributable to such
future periods.
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 September 9, 1996, the Company had an ownership
interest in 255 Company-operated Restaurants and an additional 250 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 September 9, 1996, there were 241 such Restaurants) and
(ii) the Company owns a percentage (10.55% to 75%) interest in a partnership
which owns the Restaurant (a "Joint Venture Restaurant") while the remaining
percentage is owned by a joint venture partner (as of September 9, 1996, there
were 14 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.
15
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
(unaudited) (unaudited)
---------------------------------------------------------
Sept. 9, Sept. 11, Sept. 9, Sept. 11,
1996 1995 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Gross restaurant sales 96.8% 96.8% 96.9% 96.2%
Coupons and discounts 2.8% 2.0% 3.0% 2.4%
---------------------------------------------------------
Net restaurant sales 94.1% 94.9% 93.9% 93.8%
Royalties 5.0% 4.5% 4.7% 3.8%
Franchise fees 0.3% 0.5% 0.6% 0.4%
Modular restaurant packages 0.7% 0.2% 0.8% 2.0%
---------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Restaurant food and paper costs (1) 34.6% 34.5% 33.5% 34.9%
Restaurant labor costs (1) 36.6% 35.3% 34.7% 31.9%
Restaurant occupancy expense (1) 8.8% 6.8% 8.0% 6.5%
Restaurant depreciation and amortization (1) 5.7% 5.4% 5.4% 5.8%
Advertising expense (1) 4.1% 4.6% 3.3% 4.6%
Other restaurant operating expense (1) 10.3% 8.7% 9.0% 8.2%
Costs of modular restaurant package revenues(2) 154.7% 753.6% 154.5% 138.8%
Other depreciation and amortization 2.8% 2.3% 2.4% 2.0%
Selling, general and administrative expense 14.7% 18.6% 11.2% 13.0%
Impairment of long-lived assets 22.8% 0.0% 7.4% 0.0%
Losses on assets to be disposed of 2312.4% 3901.3% 638.3% 113.6%
Refinancing costs 2.3% 0.8% 0.7% 0.2%
Provisions for inventory obsolescence 1.3% 1.5% 0.4% 0.5%
---------------------------------------------------------
Operating loss -57.4% -24.2% -19.3% -9.3%
---------------------------------------------------------
Other income (expense):
Interest income 0.3% 0.3% 0.5% 0.3%
Interest expense -3.8% -3.2% -3.5% -2.9%
Minority interests 0.2% 0.7% 0.0% 0.2%
---------------------------------------------------------
Loss before income tax benefit -60.8% -26.5% -22.3% -11.8%
Income tax expense (benefit) 4.6% -9.6% 0.5% -4.4%
---------------------------------------------------------
Net loss -65.4% -16.8% -22.8% -7.4%
=========================================================
Operating data:
System-wide restaurant sales (in 000's):
Company-operated $ 34,875 $ 41,211 $ 107,201 $ 129,964
Franchised 44,491 49,207 133,788 139,752
---------------------------------------------------------
Total $ 79,366 $ 90,418 $ 240,989 $ 269,716
=========================================================
Average annual net sales per restaurant open for a full year (in 000's) (3): 1996 1995
---------------------------
Company-operated $633 $746
Franchised $787 $818
System-wide $706 $780
---------------------------
Number of Restaurants (4)
Company-operated 255 244
Franchised 250 256
---------------------------
Total 505 500
===========================
(1) As a percent of gross 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>
16
<PAGE>
COMPARISON OF HISTORICAL RESULTS - QUARTER ENDED SEPTEMBER 9, 1996 AND QUARTER
ENDED SEPTEMBER 11, 1995
REVENUES. Total revenues decreased 14.7% to $37,088,000 for the
quarter ended September 9, 1996 compared to $43,451,488 for the quarter ended
September 11, 1995. Company-operated net restaurant sales decreased 15.4% to
$34,875,320 for the quarter ended September 9, 1996 from $41,210,771 for the
quarter ended September 11, 1995. Net restaurant sales for comparable
Company-owned Restaurants for the quarter ended September 9, 1996 decreased
18.1% compared to the quarter ended September 11, 1995. Comparable Company-owned
Restaurants are those open at least 13 periods. These decreases in net
restaurant sales are primarily attributable to continuing sales pressure from
competitors and the inability of the Company to fund a competitive advertising
campaign during the period.
Royalties decreased 3.6% to $1,869,299 for the quarter ended
September 9, 1996, from $1,938,899 for the quarter ended September 11, 1995, due
primarily to a decrease in franchised restaurant sales. This decrease resulted
from a net reduction of six franchised Restaurants since September 11, 1995. Net
restaurant sales for franchised Restaurants open at least 13 periods for the
quarter ended September 9, 1996 decreased 14.7% as compared to the quarter ended
September 11, 1995.
Franchise fees decreased 56.0% to $96,806 for the quarter ended
September 9, 1996 from $220,000 for the quarter ended September 11, 1995. This
was a result of opening fewer franchised Restaurants during the quarter ended
September 9, 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 increased 201.4% to $246,575 for
the quarter ended September 9, 1996 from $81,818 for the quarter ended September
11, 1995 due to increased sales volume of modular buildings to a convenience
store operator. 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 and costs are
recognized prior to the opening of a Restaurant or shipment to a convenience
store operator.
COSTS AND EXPENSES. Restaurant food and paper costs totalled
$12,417,171 or 34.6% of gross restaurant sales for the quarter ended September
9, 1996, compared to $14,503,036 or 34.5% of gross restaurant sales for the
quarter ended September 11, 1995. The increase in food and paper costs as a
percentage of gross restaurant sales was due primarily to various third quarter
1996 promotions, mostly offset by the Company's decrease in beef costs and paper
costs.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totalled $13,139,079 or 36.6% of
gross restaurant sales for the quarter ended September 9, 1996, compared to
$14,854,113 or 35.3% of gross restaurant sales for the quarter ended September
11, 1995. The increase in restaurant labor costs as a percentage of gross
restaurant sales was due primarily to the decline in average gross restaurant
sales relative to the fixed and semi-variable nature of these costs. The
decrease in actual expenses was caused by a provision of $1,500,000 for workers
compensation exposure in the third quarter of 1995.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totalled $3,170,873 or 8.8% of gross restaurant sales
for the quarter ended September 9, 1996, compared to $2,859,833 or 6.8% of gross
restaurant sales for the quarter ended September 11, 1995. This increase in
restaurant occupancy costs as a percentage of gross restaurant sales was due
primarily to the decline in average gross restaurant sales relative to the fixed
and semi- variable nature of these expenses and also the acquisition of
interests in 12 Restaurants in Chicago.
Restaurant depreciation and amortization decreased 8.4% to
$2,064,464 for the quarter ended September 9, 1996, from $2,254,296 for the
quarter ended September 11, 1995, due primarily to the adoption of Statement of
Financial Accounting Standards No. 121 as of January 1, 1996, partially offset
by a net increase of 11 Company-operated restaurants from September 11, 1995 to
September 9, 1996.
Advertising expense decreased to $1,490,032 or 4.1% of gross
restaurant sales for the quarter ended September 9, 1996, from $1,932,466 or
4.6% of gross restaurant sales for the quarter ended September 11, 1995. The
decrease in this expense was due to decreased expenditures for advertising.
Other restaurant expenses includes all other Restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other occupancy costs which include utilities, maintenance and other costs.
17
<PAGE>
These expenses totalled $3,716,185 or 10.3% of gross restaurant sales for the
quarter ended September 9, 1996 compared to $3,655,683 or 8.7% of gross
restaurant sales for the quarter ended September 11, 1995. The increase in the
quarter ended September 9, 1996 as a percentage of gross restaurant sales was
primarily related to the decline in average net restaurant sales relative to the
fixed and semi-variable nature of these expenses, partially offset by reduced
repairs and maintenance expenditures.
Costs of Modular Restaurant Package revenues totalled $381,541 or
154.7% of Modular Restaurant Package revenues for the quarter ended September 9,
1996, compared to $616,580 or 753.6% of such revenues for the quarter ended
September 11, 1995. Included in the third quarter of 1995 was a $499,000
accounting charge to write-down excess inventories. The remaining increase in
these expenses as a percentage of Modular Restaurant Package revenues was
attributable to the number of units produced relative to the fixed and
semi-variable nature of many expenses.
Selling, general and administrative expenses decreased to $5,442,298
or 14.7% of total revenues, for the quarter ended September 9, 1996, from
$8,094,221 or 18.6% of total revenues for the quarter ended September 11, 1995.
The decrease in these expenses was primarily attributable to the third quarter
1995 accounting charges of $2,833,000, a reduction in corporate personnel and
related costs since September 11, 1995, partially offset by a third quarter 1996
bad debt provision of $499,644 and a sales tax audit provision of $750,000.
ACCOUNTING CHARGES AND LOSS PROVISIONS. The Company recorded
accounting charges and loss provisions of $16,765,196 during the third quarter
of 1996, $1,249,644 of which is included in selling, general and administrative
expenses as discussed above. Provisions totalling $14,169,777 were recorded to
close 27 Restaurants, relocate 22 of them, settle 16 leases on real property for
these stores and sell land underlying the other 11 Restaurants and to record
impairment charges related to an additional 28 under-performing Restaurants.
Refinancing costs of $845,775 were recorded to expense the capitalized costs
incurred in connection with its previous lending arrangements and a provision of
$500,000 was recorded to reserve for obsolescence within Champion's finished
buildings inventory in the third quarter of 1996.
Third quarter 1995 accounting charges and loss provisions of
$8,800,000 consisted of $2,833,000 in various selling, general and
administrative expenses (write-off of receivables, accruals for recruiting fees,
relocation costs, severance pay, reserves for legal settlements and the accrual
of legal fees); $3,192,000 to provide for Restaurant relocation costs,
write-downs and abandoned site costs; $344,000 to expense refinancing costs;
$645,000 to provide for inventory obsolescence; $1,500,000 for workers
compensation exposure included in Restaurant labor costs and $259,000 in other
charges, net, including the $499,000 write-down of excess inventory and a
minority interest adjustment.
INTEREST EXPENSE. Interest expense increased to $1,407,270 or 3.8%
of total revenues for the quarter ended September 9, 1996, from $1,403,748 or
3.2% of total revenues for the quarter ended September 11, 1995. This increase
was due to an increase in the Company's effective interest rates.
MINORITY INTEREST IN EARNINGS. The Company recorded minority
interest in earnings (losses) of ($55,907) for the quarter ended September 9,
1996, as compared to minority interest in earnings (losses) of ($293,034) for
the quarter ended September 11, 1995. The change in minority interest in
earnings (losses) for the quarter ended September 9, 1996 is due primarily to
the third quarter 1995 accounting charges and loss provisions.
INCOME TAX BENEFIT. Due to the loss for the quarter, the Company
recorded an income tax benefit of $8,561,000 or 38.0% of the loss before income
taxes and recorded a deferred income tax valuation allowance of $10,275,659
resulting in a net tax expense of $1,714,659 for the quarter ended September 9,
1996, as compared to an income tax benefit of $4,188,000 or 36.4% of earnings
before income taxes for the quarter ended September 11, 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. Earnings were significantly impacted by the loss
provisions which were recorded in the third quarters of 1996 and 1995 and the
write-downs associated with SFAS 121 in the third quarter of 1996. Net loss
before tax and the provisions (provisions totalled $16,765,196 in the third
quarter of 1996 and $8,800,000 in the third quarter of 1995) was $5,762,871 or
$.11 per share for the quarter ended September 9, 1996 and $2,699,623 or $.05
per share for the quarter ended September 11, 1995, which resulted primarily
from a decrease in the average net restaurant sales and margins, and a decrease
in royalties and franchise fees, offset by a decrease in depreciation and
amortization and selling, general and administrative expenses.
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COMPARISON OF HISTORICAL RESULTS - THREE QUARTERS ENDED SEPTEMBER 9, 1996 AND
THREE QUARTERS ENDED SEPTEMBER 11, 1995
Revenues. Total revenues decreased 17.5% to $114,160,708 for the
three quarters ended September 9, 1996 compared to $138,418,818 for the three
quarters ended September 11, 1995. Company-operated net restaurant sales
decreased 17.4% to $107,193,134 for the quarters ended September 9, 1996 from
$129,841,574 for the three quarters ended September 11, 1995. Comparable
Company-operated restaurant sales for the three quarters ended September 9, 1996
decreased 16.4% compared to the three quarters ended September 11, 1995.
Comparable restaurants are those open at least 13 periods. These decreases in
net restaurant sales are primarily attributable to continuing sales pressure
from competitors and severe weather conditions in January and February of 1996
and the inability of the Company to fund a competitive advertising campaign
during the second quarter of 1996.
Royalties increased 4.0% to $5,394,605 for the quarters ended
September 9, 1996, from $5,187,205 for the quarters ended September 11, 1995,
due primarily to an increase in franchised restaurant sales. This increase was
partially offset by a net reduction of six franchised Restaurants since
September 11, 1995. Comparable franchised restaurant sales for Restaurants open
at least 13 periods for the three quarters ended September 9, 1996 decreased
13.3% as compared to the three quarters ended September 11, 1995.
Franchise fees increased 16.9% to $679,662 for the three quarters
ended September 9, 1996 from $581,250 for the three quarters ended September 11,
1995. This was a result of recording $390,000 of revenue (related costs are
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 three quarters ended September 9, 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 68.2% to $893,307 for
the three quarters ended September 9, 1996 from $2,808,789 for the three
quarters ended September 11, 1995 due to decreased sales volume of Modular
Restaurant Package 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. Restaurant food and paper costs totalled
$37,080,333 or 33.5% of gross restaurant sales for the three quarters ended
September 9, 1996, compared to $46,490,656 or 34.9% of gross restaurant sales
for the three quarters ended September 11, 1995. The decrease in food and paper
costs as a percentage of gross restaurant sales was due primarily to the
Company's decrease in beef costs and paper costs, partially offset by various
promotions during the third quarter of 1996.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totalled $38,341,282 or 34.7% of
gross restaurant sales for the three quarters ended September 9, 1996, compared
to $42,523,123 or 31.9% of gross restaurant sales for the three quarters ended
September 11, 1995. The increase in restaurant labor costs as a percentage of
gross restaurant sales was due primarily to the decline in average gross
restaurant sales relative to the fixed and semi-variable nature of these costs.
The decrease in actual expense was caused by a provision of $1,500,000 for
workers compensation exposure in the third quarter of 1995 and a reduction in
the variable portion of labor expenses as sales declined.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totalled $8,827,327 or 8.0% of gross restaurant sales
for the three quarters ended September 9, 1996, compared to $8,638,776 or 6.5%
of gross restaurant sales for the three quarters ended September 11, 1995. This
increase in restaurant occupancy costs as a percentage of gross restaurant sales
was due primarily to the decline in average gross restaurant sales relative to
the fixed and semi-variable nature of these expenses and also the acquisition of
interests in 12 Restaurants in Chicago.
Restaurant depreciation and amortization decreased 22.0% to
$6,022,873 for the three quarters ended September 9, 1996, from $7,717,781 for
the three quarters ended September 11, 1995, due primarily to the adoption of
Statement of Financial Accounting Standards No. 121 as of January 1, 1996.
Advertising decreased to $3,596,959 or 3.3% of restaurant sales for
the three quarters ended September 9, 1996, from $6,165,166 or 4.6% of
restaurant sales for the quarter ended September 11, 1995. The decrease in this
expense was due to decreased expenditures for advertising.
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Other restaurant expenses includes all other Restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other costs which includes utilities, maintenance and other costs. These
expenses totalled $9,954,279 or 9.0% of gross restaurant sales for the three
quarters ended September 9, 1996 compared to $10,930,410 or 8.2% of gross
restaurant sales for the three quarters ended September 11, 1995. The increase
in the three quarters ended September 9, 1996 as a percentage of gross
restaurant sales, was primarily related to the decline in average gross
restaurant sales relative to the fixed and semi-variable nature of many
expenses.
Costs of Modular Restaurant Package revenues totalled $1,379,920 or
154.5% of Modular Restaurant Package revenues for the three quarters ended
September 9, 1996, compared to $3,897,224 or 138.8% of such revenues for the
three quarters ended September 11, 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 partially offset by a third quarter 1995 accounting
charge of $499,000 to write-down excess inventories. The Company and franchisees
opened fewer restaurants for the three quarters ended September 9, 1996 than in
the comparable period of 1995.
Selling, general and administrative expenses decreased to
$12,738,827 or 11.2% of total revenues, for the quarter ended September 9, 1996,
from $17,948,967 or 13.0% of total revenues for the three quarters ended
September 11, 1995. The decrease in these expenses was primarily attributable to
third quarter 1995 accounting charges and loss provisions of $2,833,000, the
reduction in 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 and third quarter 1996 accounting charges of $1,249,644
included in this category.
ACCOUNTING CHARGES AND LOSS PROVISIONS. The Company recorded
accounting charges and loss provisions of $16,765,552 during the third quarter
of 1996, $1,249,644 of which is included in selling, general and administrative
expenses as discussed above. Provisions totalling $14,169,777 were recorded to
close 27 Restaurants, relocate 22 of them, settle 16 leases on real property for
these stores and sell land underlying the other 11 Restaurants, and to record
impairment charges related to an additional 28 under-performing Restaurants.
Refinancing costs of $845,775 were also recorded to expense the capitalized
costs incurred in connection with its previous lending arrangements and a
provision of $500,000 was recorded to reserve for obsolescence within Champion's
finished buildings inventory in the third quarter of 1996.
Third quarter 1995 accounting charges and loss provisions of
$8,800,000 consisted of $2,833,000 in various selling, general and
administrative expenses (write-off of receivables, accruals for recruiting fees,
relocation costs, severance pay, reserves for legal settlements and the accrual
of legal fees); $3,192,000 to provide for Restaurant relocation costs,
write-downs and abandoned site costs; $344,000 to expense refinancing costs;
$645,000 to provide for inventory obsolescence; $1,500,000 for workers
compensation exposure included in Restaurant labor costs and $259,000 in other
charges, net, including the $499,000 write-down of excess inventory and a
minority interest adjustment.
INTEREST EXPENSE. Interest expense decreased to $4,012,518 or 3.5%
of total revenues for the three quarters ended September 9, 1996, from
$4,050,628 or 2.9% of total revenues for the three quarters ended September 11,
1995. This decrease was due to a lower average debt principal balance
outstanding during the three quarters ended September 9, 1996 than in the
comparable quarter of 1995, partially offset by an increase in the Company's
effective interest rates.
MINORITY INTEREST IN EARNINGS. The Company recorded minority
interest in earnings of $10,475 for the three quarters ended September 9, 1996,
as compared to minority interest in earnings (losses) of ($221,073) for the
three quarters ended September 11, 1995. The increase in minority interest in
earnings for the quarter ended September 9, 1996 is due primarily to the
increase in the number of joint venture Restaurants at September 9, 1996 and the
third quarter 1995 accounting charges and loss provisions.
INCOME TAX BENEFIT. Due to the loss for the three quarters, the
Company recorded an income tax benefit of $9,659,000 or 38.0% of the loss before
income taxes and recorded a deferred income tax valuation allowance of
$10,284,659, resulting in a net tax expense of $625,659 for the three quarters
ended September 9, 1996, as compared to an income tax benefit of $6,058,000 or
37.2% of earnings before income taxes for the three quarters ended September 11,
1995. The effective tax rates differ from the expected federal tax rate of 35.0%
due to state income taxes and job tax credits.
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NET LOSS. Earnings were significantly impacted by the loss
provisions which were recorded in the third quarters of 1996 and 1995 and the
write-downs associated with SFAS 121 in the third quarter of 1996. Net loss
before tax and the provisions (provisions totalled $16,765,196 in the third
quarter of 1996 and $8,800,000 in the third quarter of 1995) was $8,652,487 or
$.17 per share for the three quarters ended September 9, 1996 and $7,493,293 or
$.15 per share for the three quarters ended September 11, 1995, which resulted
primarily from a decrease in the average net Restaurant sales and margins, and a
decrease in royalties and franchise fees, offset by a decrease in depreciation
and amortization and selling, general and administrative expenses.
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. 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 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 $18,218,099 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.
In early July 1996, DDJ Capital Management LLC ("DDJ") began
negotiating with the bank group for an assignment to it of all of the bank
group's rights under the Loan Agreement. Anticipating the transfer of the Loan
Agreement and the debt thereunder, and due to impairment of its current cash
flow due to reduced sales revenues, the Company did not make the $500,000
principal payment due under the Loan Agreement on July 15, 1996. On July 29,
1996, the Company and the bank group entered into an amendment to the Loan
Agreement providing for the assignment of all the rights of the bank group under
the loan Agreement to The Galileo Fund, L.P. of Boston, Massachusetts ("Galileo
Fund"), an affiliate of DDJ. The amendment also provided for a temporary waiver
of all defaults (the July 15 payment default and failure to meet certain
financial covenants at the end of the second fiscal quarter) by the Company
under the Loan Agreement. Upon the assignment of the Loan Agreement to it,
Galileo Fund immediately assigned a portion of its interests in the Loan
Agreement and the amounts due thereunder to Foothill Capital Corporation of Los
Angeles, California, Pearl Street L.P. (a division of Goldman, Sachs & Company)
of New York, New York and Canpartners Investments IV, LLC of Los Angeles,
California (collectively, with Galileo Fund, the "Investor Group").
On September 17, 1996, the Company reached an agreement in principal
on debt restructuring with the Investor Group. Pursuant to such agreement, if
consummated, the term of the credit facility will be extended by one year until
July 31, 1999. The agreement provides that no principal payments are scheduled
through the first reporting period of 1997. In reporting periods 2 through 8 of
1997, the Company is scheduled to make minimum principal reduction payments of
$200,000 per period. Those payments increase to $275,000 in reporting periods 9
through 13 in 1997, and to $350,000 until July 31, 1999. The Company has agreed
to a fixed interest rate of 13.75% per annum. Additionally, the agreement
provides for a restructuring fee of $4.0 million payable at maturity, which can
be converted into common stock at the option of the Company and/or the Investor
Group under certain specified circumstances. The September 17 agreement in
principle contains financial covenants that the Company is currently unable to
meet. Management has attempted to renegotiate these financial covenants and
obtain definitive documentation from the Investor Group, but has been
unsuccessful to date in this effort. The Investor Group has recently informed
the Company that they are considering selling the Company's debt to other third
parties, which include companies with affiliates in the restaurant business, and
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management believes that this potential sale has caused the Investor Group to
delay finalizing a restructuring of the debt. The Investor Group has granted an
extension of their waiver of the Company's defaults under the Loan Agreement
through November 8, 1996. Although management intends to continue to seek a
restructuring of the Company's debt with the Investor Group and/or any
subsequent purchaser of the debt, as well as financing from other third parties,
there can be no assurance that a restructuring basically on the terms set forth
in the agreement in principle (with appropriate modifications to the financial
covenants), or on other terms acceptable to the Company, will be consummated, or
that the Company will be able to obtain any other financing source. The Company
does not currently have the ability to cure the payment defaults or financial
covenant defaults that have occurred and been waived to date. The Company is
currently in active discussions with several third parties concerning a variety
of potential strategic transactions. There can be no assurance that any of these
discussions will result in the consummation of any particular transaction or
what form the transaction might take; however, the Company's current focus is on
a transaction that would provide the Company with additional liquidity and an
opportunity for future growth, without a change in control of the Company.
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 September 9, 1996. The Rall-Folks Notes are fully subordinated to the
Company's existing debt with the Investor Group.
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
September 9, 1996. The RDG Note is fully subordinated to the Company's existing
debt with the Investor Group. 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.
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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). The transactions
with Rall-Folks and RDG have been delayed due to the Company's continuing
negotiations with the Investor Group concerning the restructuring of the
Company's debt. Each of the parties currently has the right to terminate their
respective Agreement.
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 $1,126,162 as of September 9, 1996. The NTDT Note is
fully subordinated to the Company's existing debt with the Investor Group. 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. Due to the delay in registering the Common Stock issued to NTDT caused by
the renegotiation of the Company's debt with the Investor Group, it is doubtful
that $1,000,000 could be received by NTDT from the sale of Common Stock under
the terms of the NTDT Agreement by January 31, 1997. There can be no assurance
as to what action, if any, NTDT will take as a result. 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,
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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 any 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.
The consummation of the transaction with each of RDG, Rall-Folks and
NTDT has been delayed by the assignment of the Loan Agreement to the Investor
Group and the renegotiation of the Loan Agreement. Pursuant to the terms of the
current 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 or make arrangements to repay them in cash. The Company is unable to
predict at this time what arrangements may be negotiated with the Investor Group
with respect to the Company's obligations under the agreements and notes with
RDG, Rall-Folks and NTDT. In the event that the Company is unable to negotiate
an amendment to the Loan Agreement that is mutually acceptable to the Company
and the Investor Group, the Company will likely default under the Loan Agreement
and be unable to consummate the currently contemplated transactions with RDG,
Rall-Folks, and NTDT and will, therefore, likely default under the RDG Note, the
Rall-Folks Notes and the NTDT Note.
The Company currently has no plans to develop additional Company
Restaurants, although the joint venture of Restaurants through the Company's
contribution of closed Restaurant buildings remains an expansion alternative.
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 had negative working capital of $17,628,030 at September 9, 1996
(determined by subtracting current liabilities from current assets). It is
anticipated that negative working capital for the Company will continue to be
the case since approximately 83.7% 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. The focus was to create strategic alliances in several key
purchasing and service areas along with leveraging system wide service contracts
for Company Restaurants. Overall, the Company believes fundamental steps have
been taken to improve the Company's performance, as evidenced by the decline in
selling, general and administrative expenses from $5,261,221 in the quarter
ended September 11, 1995, (after adjusting for accounting charges of $2,833,000)
to $4,192,654 in the quarter ended September 9, 1996 (after adjusting for
accounting charges of $1,249,644). This represents a decline from 12.1% of total
revenue in last year's third quarter to 11.3% in the current period. On a
year-to-date basis, selling, general and administrative expenses also declined
from $15,115,967 after adjusting for the above-mentioned account charges to
$11,373,526 after adjusting for the above-mentioned accounting charges taken in
the current period and $115,657 taken earlier this fiscal year. This also
represents a decline from 10.9% of total revenue for the three quarters ended
September 11, 1995, to 10.0% of total revenue for the three quarters ended
September 9, 1996.
In light of the current level of revenues, management believes that
cash flows from operations would be sufficient to allow the Company to pay its
operating expenses and the reductions currently required to be made in 1996 and
1997 under the agreement in principle reached with the Investor Group on
September 17, 1996, relating to the restructuring of the Company's debt under
the Loan Agreement, and the Company's other long-term debt obligations. However,
the September 17 agreement in principle contains financial covenants that the
Company is currently unable to meet. Management has attempted to renegotiate
these financial covenants and obtain definitive documentation from the Investor
Group, but has been unsuccessful to date in this effort. The Investor Group has
recently informed the Company that they are considering selling the Company's
debt to other third parties, which include companies with affiliates in the
restaurant business, and management believes that this potential sale has caused
the Investor Group to delay finalizing a restructuring of the debt. The Investor
Group has granted an extension of their waiver of the Company's defaults under
24
<PAGE>
the Loan Agreement through November 8, 1996. Although management intends to
continue to seek a restructuring of the Company's debt with the Investor Group
and/or any subsequent purchaser of the debt, as well as financing from other
third parties, there can be no assurance that a restructuring basically on the
terms set forth in the agreement in principle (with appropriate modifications to
the financial covenants), or on other terms acceptable to the Company, will be
consummated, or that the Company will be able to obtain any other financing
source. The Company does not currently have the ability to cure the payment
defaults or financial covenant defaults that have occurred and been waived to
date. The Company is currently in active discussions with several third parties
concerning a variety of potential strategic transactions. There can be no
assurance that any of these discussions will result in the consummation of any
particular transaction or what form the transaction might take; however, the
Company's current focus is on a transaction that would provide the Company with
additional liquidity and an opportunity for future growth, without a change in
control of the Company.
Management also believes that without additional funds for
advertising and maintenance, revenues will continue to be adversely affected,
further decreasing the ability of the Company to pay its obligations. Management
is, therefore, also seeking to improve its current liquidity by selling assets
and seeking additional funds from the Investor Group or the purchasers, if any,
of the credit facility. Following any successful renegotiation of the terms of
the Loan Agreement, the Company must also successfully consummate the purchase
of the Rall-Folks Notes, the RDG Note and the NTDT Note for Common Stock. There
can be no assurance that the Company will be able to do so and if it cannot, and
if 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.
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.
SAFE HARBOR STATEMENT
Except for historical information, statements in this Report
constitute forward-looking statements within the meaning of Section 27A of the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements appear in a number of places in this Report and
include statements regarding the intent, belief or current expectations of the
Company, its Directors or its Officers with respect to, among other things: (i)
the Company's financing plans and contingencies relating to the restructuring of
its existing debt; (ii) trends affecting the Company's business, financial
condition or results of operation; and (iii) the Company's growth strategy and
operating strategy. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. The
information set forth above under Management's Discussion and Analysis of
Financial Condition and Results of Operation, as well as the factors discussed
below, identify important factors that could cause such differences.
GENERAL
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: the Company's ability to effect a restructuring of
the Company's primary debt facility on terms acceptable to the Company;
uncertainties related to the general economy; industry factors such as
competition and the costs of food and labor; the Company's ability to obtain
adequate capital on a timely basis 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 Common Stock can be affected by all the above
factors. 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 Common Stock in a given period.
THE FAST FOOD RESTAURANT INDUSTRY
The fast food restaurant industry is highly competitive and can be
25
<PAGE>
significantly affected by many factors, including changers in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular locations of, competing quick- services restaurants. Factors
such as inflation, increases in food, labor and energy costs, the availability
and cost of suitable sites, fluctuating interest and insurance rates, state and
local regulations and licensing requirements and the availability of an adequate
number of hourly-paid employees can also adversely affect the fast food
restaurant industry. In addition, other fast food chains with greater financial
resources than the Company have similar or competing operating concepts to that
of the Company. Major chains, which also have substantially greater financial
resources and longer operating histories than the Company, dominate the fast
food restaurant industry. The Company competes primarily on the basis of food
quality, price and speed of service. A significant change in pricing or other
marketing strategies by one or more of these competitors could have an adverse
impact on the Company's sales, earnings and growth. In addition, with respect to
the sale of franchises, the Company competes with many franchisors of
restaurants and other business concepts, many of which have greater financial
resources than the Company.
DECREASING RESTAURANT SALES
Average annual net sales per Company-owned Restaurant open for a
full year have been declining each quarter beginning with the second quarter of
1993, being approximately $1,021,000 per Restaurant for the 12-month period
ended March 31, 1993, and $633,000 per Restaurant for the 12-month period ended
September 9, 1996. Management believes that the decrease in comparable
Restaurant sales over this time period is primarily attributable to increased
sales pressure from competitor discounting and, to a lesser extent, the effect
of the Company's cannibalization of certain markets. All of the major chains
have increasingly offered selected food items and combination meals at
discounted prices. Beginning generally in the summer of 1993, the major fast
food hamburger chains began to intensify their promotions of value priced meals,
many specifically targeting the $.99 price point at which the Company sells its
"Champ Burger(R)." This increased promotional activity has been sustained, and
management believes that it has had a negative impact on the Company's sales.
While the Company cannot predict the duration of this promotional activity or
the extent to which this pricing may become more or less competitive, such
pricing could have a continued adverse effect on the Company's sales and
earnings. Cannibalization results from the addition of Restaurants in existing
markets in an attempt to gain market share, reduce the possibility of entry by
other double drive-thru concepts, provide a sufficient sales base to support
broadcast media advertising and provide for customer convenience. Through
cannibalization, the Company has diluted the sales of certain of its
Restaurants.
SFAS 121
The Company must continually examine its assets for potential
impairment where circumstances indicate that such impairment may exist, in
accordance with Generally Accepted Accounting Principles and 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"). As a
retailer, the Company believes such examination requires the operations and
store level economics of individual restaurants be evaluated for potential
impairment. The Company recorded significant write-downs of its assets in the
fourth quarter of fiscal year 1995 and the third quarter of fiscal year 1996
pursuant to SFAS 121. No assurance can be given that even an overall return to
profitability will preclude the write-down of assets associated with the
operation of an individual restaurant or restaurants in the future.
SHARES ELIGIBLE FOR FUTURE SALE
The Company is currently engaged in various transactions in which it
is anticipated that approximately 5,000,000 shares of Common Stock will be
issued by the Company as consideration for various assets, primarily the Rall-
Folks Notes, the 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 $4,600,000 as of September 9, 1996) 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 from the sale of the Common Stock issued to
them at least a specified percentage (100% in the case of Rall-Folks and NTDT,
26
<PAGE>
80% in the case of RDG) of the amount due to them at closing under their note or
notes. 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 100,000 shares of Common Stock, with approximately 700,000
additional shares being subject to registration for resale upon demand. None of
such shares are covered by any price protection provisions.
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.
GOVERNMENT REGULATIONS
The restaurant business is subject to extensive federal, state and
local government regulations relating to the development and operations of the
Restaurants, including regulations relating to building, parking, ingress and
egress and zoning requirements and the preparation and sale of food and laws
that govern the Company's relationship with its employees, such as minimum wage
requirements, overtime and working conditions and citizenship requirements. The
failure to obtain or retain food licenses or substantial increases in the
minimum wage could adversely affect the operations of the Restaurants. The
Company is also subject to federal regulation and certain state laws which
regulate the offer and sale of franchises to its franchisees.
The Company's production, use and sale of Modular Restaurant
Packages are subject to compliance with a number of federal, state and local
laws and requirements affecting the construction, equipping and installation
thereof (including laws that require pre-approval of all plans and
specifications, licensing and periodic independent inspections of the
construction process). In addition, the movement and use of the Modular
Restaurant Packages are subject to various federal, state and local highway use
laws, ordinances and regulations. Such regulations may prescribe size and road
use limitations and impose lower than normal speed limits and various other
requirements.
27
<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, filed on October 13, 1993 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. Although the Company
believes that this lawsuit is unfounded and without merit, in order to avoid
further expenses of litigation, the parties have reached an agreement in
principal for the settlement of this class action. The agreement for settlement
provides for a "claims made" settlement of $950,000, of which the first $375,000
will be paid by one of the Director and Officer Liability Insurance carriers and
an unaffiliated third party defendant. The first $100,000 and ninety percent
(90%) of the remaining claims made will be paid by one of the Director and
Officer Liability Insurance carriers and the remaining ten percent (10%) of the
claims made will be paid by the Company, resulting in a maximum exposure for the
Company of $47,500. The settlement is subject to the execution of an appropriate
stipulation of settlement and other documents 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.
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, filed on February 18, 1994 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 $1.375 per share. The warrants will be
exercisable for a period of four years after the effective date of the
settlement. The parties filed a Stipulation and Agreement of Settlement with the
Court on August 23, 1996, and a Notice of Pendency of Class Action, Proposed
Settlement Thereof, Settlement Hearing and Right to Share in Settlement Funds
was mailed to class members on September 20, 1996 and a hearing to determine
whether the proposed settlement is fair, reasonable and adequate will be held on
November 22, 1996.
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 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
28
<PAGE>
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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
The Company is not currently in compliance with the terms of its
primary credit facility, although a waiver thereof has been granted
by the lenders through November 8, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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 June 26, 1996, reporting under Item 5, the resignation
of Keith J. Kinsey as a Director of the Company, effective
June 6, 1996.
The Company filed a Report on Form 8-K with the Commission
dated July 19, 1996, reporting under Item 5 that a capital
management firm was negotiating with Checkers and its bank
syndicate to acquire the outstanding debt of Checkers under
its credit facility and reporting under Item 5 the resignation
of Barry M. Alpert as a Director of the Company, effective
immediately.
The Company filed a Report on Form 8-K with the Commission
dated August 16, 1996, reporting under Item 5, the
announcement that a capital management firm has successfully
consummated the acquisition of the Company's debt under its
credit facility and that default waivers had been extended
through August 30, 1996.
The Company filed a Report on Form 8-K with the Commission
dated August 30, 1996, reporting under Item 5 that the
negotiations on restructuring the debt with the new lending
group continue and that the default waivers were intended
through September 10, 1996.
30
<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: October 31, 1996
/s/ James T. Holder
------------------------------------------------
James T. Holder
Chief Financial Officer and Principal Accounting
Officer
31
<PAGE>
SEPTEMBER 9, 1996 FORM 10-Q
CHECKERS DRIVE-IN RESTAURANTS, INC.
EXHIBIT INDEX
Exhibit # Exhibit Description
--------- -------------------
27 Financial Data Schedule
32
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHECKERS DRIVE-IN RESTAURANTS, INC. FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 9, 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> SEP-09-1996
<CASH> 5,325
<SECURITIES> 0
<RECEIVABLES> 2,918
<ALLOWANCES> 0
<INVENTORY> 2,362
<CURRENT-ASSETS> 28,393
<PP&E> 107,227
<DEPRECIATION> 0
<TOTAL-ASSETS> 149,800
<CURRENT-LIABILITIES> 42,021
<BONDS> 44,659
0
0
<COMMON> 52
<OTHER-SE> 54,151
<TOTAL-LIABILITY-AND-EQUITY> 149,800
<SALES> 108,766
<TOTAL-REVENUES> 114,161
<CGS> 105,203
<TOTAL-COSTS> 121,507
<OTHER-EXPENSES> 10
<LOSS-PROVISION> 14,670
<INTEREST-EXPENSE> 4,013
<INCOME-PRETAX> (25,418)
<INCOME-TAX> 626
<INCOME-CONTINUING> (26,043)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,043)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> .00
<FN>
Footnotes: (1) Receivables consist of -
Accounts Receivable $ 2,235
Notes receivable 235
Income taxes receivable 448
--------
$ 2,918
========
(2) PP&E is net of accumulated depreciation of $30,527.
33
</FN>
</TABLE>
