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Checkers Drive-In Restaurants, Inc.
[CHECKERS LOGO]
1996 Annual Report
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LETTER TO THE STOCKHOLDERS
I would like to introduce you to an exciting new phase in the life of
Checkers Drive-In Restaurants, Inc. Before we look forward, and as you will see
in the accompanying report, 1996 was a challenging year for Checkers. Declining
sales, along with the lack of anticipated results from certain marketing and
cost cutting programs implemented in the beginning of 1996, contributed to our
fiscal 1996 net loss.
The L.A. Mex dual brand test, although successful in increasing sales,
also increased food and labor costs to the point that there was nominal
improvement in profits. Additionally, speed of service in these dual brand test
restaurants was adversely affected by the increased number of menu items.
Because of this, we have terminated the test in all but a handful of
restaurants during the first quarter of fiscal 1997.
Checkers' franchise community has been a bright spot during 1996. They
continue to outperform company stores with higher average sales volumes and
better margins. Another positive event was the November 1996 restructuring of
the Company's primary debt facility. The increased liquidity created by the
debt restructure will give Checkers more flexibility in managing its future.
Looking forward into 1997, Checkers has something today it has never
had before; a focus on improving restaurant margins and new top management with
in depth restaurant operating experience. Including Rick Fortman, our new
president, Joe Stein, our new chief administrative officer, and myself, we have
over 65 years of experience in the quick serve restaurant industry.
A major focus for fiscal 1997 is to improve restaurant margins,
specifically food, paper, labor, and related benefits costs. Rick, Joe and the
rest of the Checkers corporate and restaurant management team are working
diligently on various programs to bring profits back to the restaurants.
Another important task is to find the solution to declining sales.
Checkers has historically been known as the low price leader. It is very easy
for our competitors to lower prices and many have done so. We are in the
process of selecting a new advertising agency to support us in developing our
marketing strategy for the future. We expect to draw on a Checkers strength
that many of its competitors simply can not match; that is, the quality of
Checkers' burgers, fries and drinks.
The road ahead of us is strewn with opportunities and the Checkers
team is working on delivering value not only to our restaurant customers, but
to our stockholders as well. We look forward to rebuilding Checkers' name
around what it is known for: superior restaurant design, speedy service, and
great tasting food at a fair price.
Sincerely,
/s/ C. Thomas Thompson
C. Thomas Thompson
Vice Chairman and Chief Executive Officer
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CHECKERS DRIVE-IN RESTAURANTS, INC.
1996 ANNUAL REPORT*
TABLE OF CONTENTS
<TABLE>
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BUSINESS................................................................................................................... 2
PROPERTIES................................................................................................................. 9
SELECTED FINANCIAL DATA.................................................................................................... 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................................................................... 11
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 24, 1997.................................................................... 49
CORPORATE AND STOCKHOLDER INFORMATION...................................................................................... 72
</TABLE>
* This document is comprised of selected information from the Form 10-K
filed with the SEC. We have taken this approach to reduce costs and
judicially use management's time. The information has been rearranged
for clarity of presentation.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS ANNUAL REPORT "BUSINESS," AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
ELSEWHERE IN THIS ANNUAL REPORT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF THE SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF
1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE, OR ACHIEVEMENTS OF CHECKERS DRIVE-IN RESTAURANTS, INC. ("CHECKERS"
AND COLLECTIVELY WITH ITS SUBSIDIARIES AND VARIOUS JOINT VENTURE PARTNERSHIPS
CONTROLLED BY CHECKERS, THE "COMPANY") TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
GENERAL ECONOMIC AND BUSINESS CONDITIONS; THE IMPACT OF COMPETITIVE PRODUCTS
AND PRICING; SUCCESS OF OPERATING INITIATIVES; DEVELOPMENT AND OPERATING COSTS;
ADVERTISING AND PROMOTIONAL EFFORTS; ADVERSE PUBLICITY; ACCEPTANCE OF NEW
PRODUCT OFFERINGS; CONSUMER TRIAL AND FREQUENCY; AVAILABILITY, LOCATIONS, AND
TERMS OF SITES FOR RESTAURANT DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR
DEVELOPMENT PLANS; QUALITY OF MANAGEMENT; AVAILABILITY, TERMS AND DEPLOYMENT OF
CAPITAL; THE RESULTS OF FINANCING EFFORTS; BUSINESS ABILITIES AND JUDGMENT OF
PERSONNEL; AVAILABILITY OF QUALIFIED PERSONNEL; FOOD, LABOR AND EMPLOYEE
BENEFIT COSTS; CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENT
REGULATIONS; WEATHER CONDITIONS; CONSTRUCTION SCHEDULES; AND OTHER FACTORS
REFERENCED IN THIS ANNUAL REPORT.
BUSINESS.
INTRODUCTION
Unless the context requires otherwise, references in this Report
to the "Company" or the "Registrant" means Checkers Drive-In Restaurants, Inc.,
its wholly-owned subsidiaries and the 10.55% to 65.83% owned joint venture
partnerships controlled by the Company.
The Company develops, produces, owns, operates and franchises
quick-service "double drive-thru" restaurants under the name "Checkers(R)" (the
"Restaurants"). The Restaurants are designed to provide fast and efficient
automobile-oriented service incorporating a 1950's diner and art deco theme
with a highly visible, distinctive and uniform look that is intended to appeal
to customers of all ages. The Restaurants feature a limited menu of high
quality hamburgers, cheeseburgers and bacon cheeseburgers, specially seasoned
french fries, hot dogs, and chicken sandwiches, as well as related items such
as soft drinks and old fashioned premium milk shakes.
As of December 30, 1996, there were 478 Restaurants operating in
the States of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New
York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Virginia,
West Virginia, Wisconsin, Washington D.C. and in Puerto Rico (232
Company-operated (including 14 joint ventured) and 246 franchised).
As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a fiscal year which will generally
end on the Monday closest to December 31st. Each quarter consists of three
4-week periods, with the exception of the fourth quarter which consists of four
4-week periods.
RESTAURANT DEVELOPMENT AND ACQUISITION ACTIVITIES
During 1996, the Company opened five Restaurants, acquired 18
Restaurants and partnership interests in an additional nine Restaurants from
franchisees, sold or leased 15 Restaurants to franchisees and closed 27
Restaurants for a net reduction of ten Company-operated Restaurants in 1996.
Franchisees opened 25 Restaurants, acquired or leased 15
Restaurants from the Company, sold or transferred 27 Restaurants to the Company
and closed 24 Restaurants for a net reduction of 11 franchisee-operated
Restaurants in 1996.
During 1996, the Company focused its efforts on existing
operating markets of highest market penetration ("Core Markets"). It is the
Company's intent in the near future to continue that focus and to grow only in
its Core Markets through acquisitions or new Restaurant openings. The Company
will continue to seek to expand through existing and new franchisees.
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From time to time, the Company may close or sell additional
Restaurants when determined by management and the Board of Directors to be in
the best interests of the Company.
Franchisees operated 246, or 51%, of the total Restaurants
open at December 30, 1996. The Company's long-term strategy is for 60% to 65%
of its Restaurants to be operated by franchisees. Because of the Company's
limited capital resources, it will rely on franchisees for a larger portion of
chain expansion to continue market penetration. The inability for franchisees
to obtain sufficient financing capital on a timely basis may have a materially
adverse effect on expansion efforts.
On March 25, 1997, Checkers agreed in principle to a merger
transaction pursuant to which Rally's Hamburgers, Inc., a Delaware corporation
("Rally's"), will become a wholly-owned subsidiary of Checkers. Rally's,
together with its franchisees, operates approximately 471 double drive-thru
hamburger restaurants primarily in the midwestern United States. Under the
terms of the letter of intent executed by Checkers and Rally's, each share of
Rally's common stock will be converted into three shares of Checkers' Common
Stock upon consummation of the merger. The transaction is subject to
negotiation of definitive agreements, receipt of fairness opinions by each
party, receipt of stockholder and other required approvals and other customary
conditions.
RESTAURANT OPERATIONS
Concept. The Company's operating concept includes: (i)
offering a limited menu to permit the maximum attention to quality and speed of
preparation; (ii) utilizing a distinctive Restaurant design that features a
"double drive-thru" concept, projects a uniform image and creates significant
curb appeal; (iii) providing fast service using a "double drive-thru" design
for its Restaurants and a computerized point-of-sale system that expedites the
ordering and preparation process; and (iv) great tasting quality food and
drinks at a fair price.
Restaurant Locations. As of December 30, 1996, there were 232
Restaurants owned and operated by the Company in 11 states and the District of
Columbia (including 14 Restaurants owned by partnerships in which the Company
has interests ranging from 10.55% to 65.83%) and 246 Restaurants operated by
the Company's franchisees in 20 States, the District of Columbia and Puerto
Rico. The following table sets forth the locations of such Restaurants.
<TABLE>
<CAPTION>
COMPANY-OPERATED
(232 RESTAURANTS)
<S> <C> <C>
Florida (136) Missouri (6) Kansas (2)
Georgia (38) Mississippi (5) Delaware (1)
Pennsylvania (13) Tennessee (2) New Jersey (4)
Alabama (12) Washington D.C. (1)
Illinois (12)
<CAPTION>
FRANCHISED
(246 RESTAURANTS)
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Florida (56) Texas (9) Wisconsin (3)
Illinois (25) Maryland (11) New York (3)
Georgia (47) New Jersey (8) Puerto Rico (2)
Alabama (18) Tennessee (8) West Virginia (2)
North Carolina (17) Virginia (5) Missouri (2)
South Carolina (11) Indiana (3) Iowa (2)
Louisiana (9) Michigan (3) Mississippi (1)
Washington D.C. (1)
</TABLE>
Of these Restaurants, 30 were opened in 1996 (five
Company-operated and 25 franchised), 12 of which included fully equipped
manufactured modular buildings, "Modular Restaurant Packages" ("MRP's"),
produced by the Company and nine of which included MRP's which were relocated
from other sites. The Company currently expects approximately 30 additional
Restaurants to be opened in 1997 (primarily by franchisees) with substantially
all of these Restaurants to include MRP's relocated from closed sites. If
either the Company or the franchisee(s) are unable to obtain sufficient capital
on a timely basis, the Company's ability to achieve its 1997 expansion plans
may be materially adversely affected. The Company's growth strategy for the
next two years is to focus on the controlled development of additional
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franchised and Company-operated Restaurants primarily in its existing Core
Markets and to further penetrate markets currently under development by
franchisees, including select international markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Site Selection. The Company believes that the location of a
Restaurant is critical to its success. Management inspects and approves each
potential Restaurant site prior to final selection of the site. In evaluating
particular sites, the Company considers various factors including traffic
count, speed of traffic, convenience of access, size and configuration,
demographics and density of population, visibility and cost. The Company also
reviews competition and the sales and traffic counts of national and regional
chain Restaurants operating in the area. Approximately 84% of Company-operated
Restaurants are located on leased land and the Company intends to continue to
use leased sites where possible. The Company believes that the use of the
Modular Restaurant Package provides the Company and its franchisees with
additional flexibility in the size, control and location of sites.
Restaurant Design and Service. The Restaurants are built to
Company-approved specifications as to size, interior and exterior decor,
equipment, fixtures, furnishings, signs, parking and site improvements. The
Restaurants have a highly visible, distinctive and uniform look that is
intended to appeal to customers of all ages. The Restaurants are less than
one-fourth the size of the typical Restaurants of the four largest fast food
hamburger chains (generally 760 to 980 sq. ft.) and require approximately
one-third to one-half the land area (approximately 18,000 to 25,000 square
feet). Substantially all of the Restaurants consist of MRP's produced and
installed by the Company. Prior to February 15, 1994, the MRP's were produced
and installed by Champion Modular Restaurant Company, Inc., a Florida
corporation ("Champion") and wholly-owned subsidiary of the Company. Champion
was merged with and into the Company effective February 15, 1994. The Company
believes that utilization of a modular Restaurant building generally costs less
than comparably built Restaurants using conventional, on-site construction
methods.
The Company's standard Restaurant is designed around a 1950's
diner and art deco theme with the use of white and black tile in a checkerboard
motif, glass block corners, a protective drive-thru cover on each side of the
Restaurant supported by red aluminum columns piped with white neon lights and a
wide stainless steel band piped with red neon lights that wraps around the
Restaurant as part of the exterior decor. All Restaurants utilize a "double
drive-thru" concept that permits simultaneous service of two automobiles from
opposite sides of the Restaurant. Although a substantial proportion of the
Company's sales are made through its drive-thru windows, service is also
available through walk-up windows. While the Restaurants do not have an
interior dining area, most have parking and a patio for outdoor eating. The
patios contain canopy tables and benches, are well landscaped and have outside
music in order to create an attractive and "fun" eating experience. Although
each sandwich is made-to-order, the Company's objective is to serve customers
within 30 seconds of their arrival at the drive-thru window. Each Restaurant
has a computerized point-of-sale system which displays each individual item
ordered on a monitor in front of the food and drink preparers. This enables the
preparers to begin filling an order before the order is completed and totaled
and thereby increases the speed of service to the customer and the opportunity
of increasing sales per hour, provides better inventory and labor costs control
and permits the monitoring of sales volumes and product utilization. The
Restaurants are generally open from 12 to 15 hours per day, seven days a week,
for lunch, dinner and late-night snacks and meals. Operational enhancements are
being implemented to facilitate product delivery with reduced overhead costs.
Restaurant Development Costs. During the fiscal years ended
December 30, 1996 and January 1, 1996 the average cost of opening a
Company-operated Restaurant (exclusive of land costs) utilizing an MRP was
$424,000 which included modular building costs, fixtures, equipment and signage
costs, site improvement costs and various soft costs (e.g., engineering and
permit fees). This average dropped 37.5% from 1994 due to the use of used MRP's
in 1995 and 1996. Future costs, after all remaining used MRP's are relocated,
may be more consistent with that of prior years. During 1995 and 1996, there
were no land acquisitions. The Company believes that utilization of MRP's
generally costs less than comparably built Restaurants using conventional,
on-site construction methods.
Menu. The menu of a Restaurant includes hamburgers,
cheeseburgers and bacon cheeseburgers, chicken, grilled chicken, hot dogs and
deluxe chili dogs and specially seasoned french fries, as well as related items
such as soft drinks, old fashioned premium milk shakes and apple nuggets. The
menu is designed to present a limited number of selections to permit the
greatest attention to quality, taste and speed of service. The Company is
engaged in product development research and seeks to enhance the variety
offered to consumers from time to time without substantially expanding the
limited menu. In 1996, the Company and various franchise restaurants conducted
a test of the Company's proprietary L.A. Mex Mexican brand. The Company has
decided to discontinue the test in the majority of test units.
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Supplies. The Company and its franchisees purchase their
food, beverages and supplies from Company-approved suppliers. All products must
meet standards and specifications set by the Company. Management constantly
monitors the quality of the food, beverages and supplies provided to the
Restaurants. The Company has been successful in negotiating price concessions
from suppliers for bulk purchases of food and paper supplies by the
Restaurants. The Company believes that its continued efforts over time have
achieved cost savings, improved food quality and consistency and helped
decrease volatility of food and supply costs for the Restaurants. All essential
food and beverage products are available or, upon short notice, could be made
available from alternate qualified suppliers. Among other factors, the
Company's profitability is depended upon its ability to anticipate and react to
changes in food costs. Various factors beyond the Company's control, such as
climate changes and adverse weather conditions, may affect food costs.
Management and Employees. Each Company-operated Restaurant
employs an average of approximately 20 hourly employees, many of whom work
part-time on various shifts. The management staff of a typical Restaurant
operated by the Company consists of a general manager, one assistant manager
and a shift manager. The Company has an incentive compensation program for
store managers that provides the store managers with a quarterly bonus based
upon the achievement of certain defined goals. A Restaurant general manager is
generally required to have prior Restaurant management experience, preferably
within the fast food industry, and reports directly to a market manager. The
market manager typically has responsibility for eight to twelve Restaurants.
Supervision and Training. The Company requires each
franchisee and Restaurant manager to attend a comprehensive training program of
both classroom and in-store training. The program was developed by the Company
to enhance consistency of Restaurant operations and is considered by management
as an important step in operating a successful Restaurant. During this program,
the attendees are taught certain basic elements that the Company believes are
vital to the Company's operations and are provided with a complete operations
manual, together with training aids designed as references to guide and assist
in the day-to-day operations. In addition, hands-on experience is incorporated
into the program by requiring each attendee, prior to completion of the
training course, to work in and eventually manage an existing Company-operated
Restaurant. After a Restaurant is opened, the Company continues to monitor the
operations of both franchised and Company-operated Restaurants to assist in the
consistency and uniformity of operation.
Advertising and Promotion. The Company communicates with its
customers using several different methods at the store level. Menuboards, value
meal extender cards, pole banners and the readerboards are all utilized in
tandem to present a simple, unified, coherent message to the customers. Outdoor
billboards and radio commercials are used to reach customers at the critical
time when they are making their purchase decisions. As of December 30, 1996,
the Company and its franchisees had five active advertising co-ops covering 216
restaurants. The Company requires franchisees to spend a minimum of 4% of gross
sales on marketing their restaurant which includes a combination of local store
marketing, co-op advertising and other advertising. In addition, each Company
and franchise restaurant pays into a National Production Fund that provides
broadcast creative and Point of Purchase materials for each promotion. Ongoing
consumer research is utilized to track attitudes, awareness and market share of
not only Checkers' customers, but also of its major competitor's customers as
well. In addition, customer Focus Groups and Sensory Panels are conducted in
the Company's Core Markets to provide both qualitative and quantitative data.
This research data is vital to better understand the Company's customers for
building both short and long-term marketing strategies.
Restaurant Reporting. Each Company-operated Restaurant has a
computerized point-of-sale system coupled with a back office computer. With
this system, management is able to monitor sales, labor and food costs,
customer counts and other pertinent information. This information allows
management to better control labor utilization, inventories and operating
costs. Each system at Company-operated Restaurants is polled daily by a
computer at the principal offices of the Company.
Joint Venture Restaurants. As of December 30, 1996, there
were 14 Restaurants owned by 12 separate general and limited partnerships in
which the Company owns general and limited partnership interests ranging from
10.55% to 65.83%, with other parties owning the remaining interests (the "Joint
Venture Restaurants").
The Company is the managing partner of 13 of the 14 Joint
Venture Restaurants, and in 12 of those Joint Venture Restaurants the Company
receives a fee for such services of 1% to 2.5% of gross sales. All of the Joint
Venture Restaurants pay the standard royalty fee of 4% of gross sales. The
agreements for four of the 13 (excluding Illinois partnerships) Joint Venture
Restaurants in which the Company is the managing partner are terminable through
a procedure whereby the initiating party sets a price for the interest in the
joint venture and the other party must elect either to sell its interest in the
joint venture or purchase the initiating party's interest at such price. Some,
but not all of the partnership agreements also contain the right of the
partnership to acquire a deceased individual partner's interest at the fair
market value
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thereof based upon a defined formula set forth in the agreement. None of these
partnerships have been granted area development agreements.
Inflation. The Company does not believe inflation has had a
material impact on earnings during the past three years. 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, competitive market conditions and weather related events. While
certain quarters can be stronger, or weaker, for Restaurant sales when compared
to other quarters, there is no predominant pattern.
FRANCHISE OPERATIONS
Strategy. In addition to the acquisition and development of
additional Company-operated Restaurants, the Company encourages controlled
development of franchised Restaurants in its existing markets as well as in
certain additional states. The primary criteria considered by the Company in
the selection, review and approval of prospective franchisees are the
availability of adequate capital to open and operate the number of Restaurants
franchised and prior experience in operating fast food Restaurants. Franchisees
operated 246, or 51%, of the total Restaurants open at December 30, 1996. The
Company has acquired and sold, and may in the future acquire or sell,
Restaurants from and to franchisees when the Company believes it to be in its
best interests to do so. In the future, the Company's success will continue to
be dependent upon its franchisees and the manner in which they operate and
develop their Restaurants to promote and develop the Checkers concept and its
reputation for quality and speed of service. Although the Company has
established criteria to evaluate prospective franchisees, there can be no
assurance that franchisees will have the business abilities or access to
financial resources necessary to open the number of Restaurants the Company and
the franchisees currently anticipate to be opened in 1997 or that the
franchisees will successfully develop or operate Restaurants in their franchise
areas in a manner consistent with the Company's concepts and standards.
As a result of inquiries concerning international
development, the Company may develop a limited number of international markets
and has begun the process of registering its trademarks in various foreign
countries. The most likely format for international development is through the
issuance of master franchise agreements and/or joint venture agreements. The
terms and conditions of these agreements may vary from the standard Area
Development Agreement and Franchise Agreement in order to comply with laws and
customs different from those of the United States.
Franchisee Support Services. The Company maintains a staff of
well-trained and experienced Restaurant operations personnel whose primary
responsibilities are to help train and assist franchisees in opening new
Restaurants and to monitor the operations of existing Restaurants. These
services are provided as part of the Company's franchise program. Upon the
opening of a new franchised Restaurant by a new franchisee, the Company
typically sends a Restaurant team to the Restaurant to assist the franchisee
during the first four days that the Restaurant is open. This team works in the
Restaurant to monitor compliance with the Company's standards as to quality of
product and speed of service. In addition, the team provides on-site training
of all Restaurant personnel. This training is in addition to the training
provided to the franchisee and the franchisee's management team described under
"Restaurant Operations - Supervision and Training" above. The Company also
employs Franchise Business Consultants ("FBCs"), who have been fully trained by
the Company to assist franchisees in implementing the operating procedures and
policies of the Company once a Restaurant is open. As part of these services,
the FBC rates the Restaurant's hospitality, food quality, speed of service,
cleanliness and maintenance of facilities. The franchisees receive a written
report of the FBC's findings and, if any deficiencies are noted, recommended
procedures to correct such deficiencies.
The Company also provides site development and construction
support services to its franchisees. All sites and site plans are submitted to
the Company for its review prior to construction. These plans include
information detailing building location, internal traffic patterns and curb
cuts, location of utilities, walkways, driveways, signs and parking lots and a
complete landscape plan. The Company's construction personnel also visit the
site at least once during construction to meet with the franchisee's site
contractor and to review construction standards.
Franchise Agreements. The Unit Franchise Agreement grants to
the franchisee an exclusive license at a specified location to operate a
Restaurant in accordance with the Checkers(R) system and to utilize the
Company's trademarks, service marks and other rights of the Company relating to
the sale of its menu items. The term of the current Unit Franchise Agreement is
generally 20 years. Upon expiration of a Unit Franchise Agreement, the
franchisee will be entitled to acquire
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a successor franchise for the Restaurants on the terms and conditions of the
Company's then current form of Unit Franchise Agreement if the franchisee
remains in compliance with the Unit Franchise Agreement throughout its term and
if certain other conditions are met (including the payment of a $5,000 renewal
fee).
In some instances, the Company grants to the franchisee the
right to develop and open a specified number of Restaurants within a limited
period of time and in a defined geographic area (the "Franchised Area") and
thereafter to operate each Restaurant in accordance with the terms and
conditions of a Unit Franchise Agreement. In that event, the franchisee
ordinarily signs two agreements, an Area Development Agreement and a Unit
Franchise Agreement. Each Area Development Agreement establishes the number of
Restaurants the franchisee is to construct and open in the Franchised Area
during the term of the Area Development Agreement (normally a maximum of five
Restaurants) after considering many factors, including the residential,
commercial and industrial characteristics of the area, geographic factors,
population of the area and the previous experience of the franchisee. The
franchisee's development schedule for the Restaurants is set forth in the Area
Development Agreement. Of the 246 franchised Restaurants at December 30, 1996,
222 were being operated by multiple unit operators and 24 were being operated
by single unit operators. The Company may terminate the Area Development
Agreement of any franchisee that fails to meet its development schedule.
The Unit Franchise Agreement and Area Development Agreement
require that the franchisee select proposed sites for Restaurants within the
Franchised Area and submit information regarding such sites to the Company for
its review, although final site selection is at the discretion of the
franchisee. The Company does not arrange or make any provisions for financing
the development of Restaurants by its franchisees. The Company does offer the
franchisees an opportunity to buy a Modular Restaurant Package from the Company
in those geographic areas where the Modular Restaurant Package can be installed
in compliance with applicable laws. Each franchisee is required to purchase all
fixtures, equipment, inventory, products, ingredients, materials and other
supplies used in the operation of its Restaurants from approved suppliers, all
in accordance with the Company's specifications. The Company provides a
training program for management personnel of its franchisees at its corporate
offices. Under the terms of the Unit Franchise Agreement, the Company has
adopted standards of quality, service and food preparation for franchised
Restaurants. Each franchisee is required to comply with all of the standards
for Restaurant operations as published from time to time in the Company's
operations manual.
The Company may terminate a Unit Franchise Agreement for
several reasons including the franchisee's bankruptcy or insolvency, default in
the payment of indebtedness to the Company or suppliers, failure to maintain
standards set forth in the Unit Franchise Agreement or operations manual,
material continued violation of any safety, health or sanitation law, ordinance
or governmental rule or regulation or cessation of business. In such event, the
Company may also elect to terminate the franchisee's Area Development
Agreement.
Franchise Fees and Royalties. Under the current Unit
Franchise Agreement, a franchisee is generally required to pay a Franchise Fee
of $30,000 for each Restaurant opened by the franchisee. If a franchisee is
awarded the right to develop an area pursuant to an Area Development Agreement,
the franchisee typically pays the Company a $5,000 Development Fee per store
which will be applied to the Franchisee Fee as each Restaurant is developed.
Each franchisee is also generally required to pay the Company a semi-monthly
royalty of 4% of the Restaurant's gross sales (as defined) and to expend
certain amounts for advertising and promotion.
MANUFACTURING OPERATIONS
Strategy. The Company believes that the integration of its
Restaurant operations with its production of Modular Restaurant Packages for
use by the Company and sale to its franchisees provides it with a competitive
advantage over fast food companies that use conventional, on-site construction
methods. These advantages include more efficient construction time, direct
control of the quality, consistency and uniformity of the Restaurant image as
well as having standard Restaurant operating systems. In addition, the Company
believes the ability to relocate a Modular Restaurant Package provides greater
economies and flexibility than alternative methods. Due to the number of
Modular Restaurant Packages currently available for relocation from closed
Restaurant sites, it is not anticipated that any significant new construction
of Modular Restaurant Packages will occur during fiscal year 1997. In the short
term, the Company's construction facility located in Largo, Florida will be
utilized to store and refurbish used Modular Restaurant Packages for sale to
franchisees or others and use by the Company. The facility will also be
utilized for construction of modular convenience store units on a very limited
basis pursuant to an existing agreement with a third party convenience store
chain. Administrative personnel of the construction facility have been reduced
to a total of five as of March 1997, and substantially all of the labor in the
manufacturing and refurbishment process is done through independent
contractors, the number of which may be increased or decreased with demand.
7
<PAGE> 10
Construction. The Company has the ability to produce a
complete Modular Restaurant Package ready for delivery and installation at a
Restaurant site. The Modular Restaurant Packages are built and refurbished in a
Company-owned facility in Largo, Florida, using assembly line techniques and a
fully integrated and complete production system. Each Modular Restaurant
Package consists of a modular building complete with all mechanical, electrical
and plumbing systems (except roof top systems which are installed at the site),
along with all Restaurant equipment. The modular building is a complete
operating Restaurant when sited, attached to its foundation and all utilities
are connected. All Modular Restaurant Packages are constructed in accordance
with plans and specifications approved by the appropriate governmental agencies
and are typically available in approximately eight (8) weeks after an executed
agreement.
Capacity. As of December 30, 1996, the Company had seven (7)
substantially completed new Modular Restaurant Packages in inventory, one of
which is under contract for sale to a franchisee. Additionally, the Company has
contracted with a third party convenience store chain for the construction of
modular convenience store units. The Company has two (2) modular convenience
store units in various stages of construction. As of December 30, 1996, the
Company had thirty-four (34) used Modular Restaurant Packages available for
relocation to new sites, seven (7) of which have been moved to the Champion
production facility for refurbishment, and twenty-seven (27) of which are at
closed sites. Although the Company does not require a franchisee to use a
Modular Restaurant Package, because of the expected benefits associated
therewith, the Company anticipates that substantially all of the Restaurants
developed by it or its franchisees will include Modular Restaurant Packages
produced by the Company, or relocated from other sites. Modular Restaurant
Packages from closed sites are being marketed at various prices depending upon
age and condition.
Transportation and Installation. Once all site work has been
completed to the satisfaction of the Company and all necessary governmental
approvals have been obtained for installation of the Modular Restaurant Package
on a specified site, the Modular Restaurant Package is transported to such site
by an independent trucking contractor. All transportation costs are charged to
the customer. Once on the site, the Modular Restaurant Package is installed by
independent contractors hired by the Company or franchisee, in accordance with
procedures specified by the Company. The Company's personnel inspect all
mechanical, plumbing and electrical systems to make sure they are in good
working order, and inspect and approve all site improvements on new Modular
Restaurant Packages sold by the Company. Used Modular Restaurant Packages are
typically sold without warranties. Once a Modular Restaurant Package has been
delivered to a site, it takes generally three (3) to four (4) weeks before the
Restaurant is in full operation.
COMPETITION
The Company's Restaurant operations compete in the fast food
industry, which is highly competitive with respect to price, concept, quality
and speed of service, Restaurant location, attractiveness of facilities,
customer recognition, convenience and food quality and variety. The industry
includes many fast food chains, including national chains which have
significantly greater resources than the Company that can be devoted to
advertising, product development and new Restaurants. In certain markets, the
Company will also compete with other quick-service double drive-thru hamburger
chains with operating concepts similar to the Company. The fast food industry
is often significantly affected by many factors, including changes in local,
regional or national economic conditions affecting consumer spending habits,
demographic trends and traffic patterns, changes in consumer taste, consumer
concerns about the nutritional quality of quick-service food and increases in
the number, type and location of competing quick-service Restaurants. The
Company competes primarily on the basis of speed of service, price, value, food
quality and taste. In addition, with respect to selling franchises, the Company
competes with many franchisors of Restaurants and other business concepts. All
of the major chains have increasingly offered selected food items and
combination meals, including hamburgers, at temporarily or permanently
discounted prices. Beginning generally in the summer of 1993, the major fast
food hamburger chains began to intensify the promotion of value priced meals,
many specifically targeting the 99c. price point at which the Company sells its
quarter pound "Champ Burger(R)". This promotional activity has continued at
increasing levels, and management believes that it has had a negative impact on
the Company's sales and earnings. Increased competition, additional discounting
and changes in marketing strategies by one or more of these competitors could
have an adverse effect on the Company's sales and earnings in the affected
markets.
With respect to its Modular Restaurant Packages, the Company
competes primarily on the basis of price and speed of construction with other
modular construction companies as well as traditional construction companies,
many of which have significantly greater resources than the Company.
EMPLOYEES
As of December 30, 1996, the Company employed approximately
6,500 persons in its Restaurant operations, approximately 800 of whom are
Restaurant management and supervisory personnel and the remainder of whom are
hourly
8
<PAGE> 11
Restaurant personnel. Of the approximately 160 corporate employees, excluding
manufacturing operations, approximately nine are in management positions and
the remainder are professional and administrative or office employees.
As of December 30, 1996, the Company employed approximately
16 persons in its manufacturing operations, nine of whom were corporate
personnel and seven of whom were production personnel, including welders and
warehouse personnel. Of the nine corporate employees, three were in management
positions and six were administrative or office employees. As of March 1997,
the Company had reduced the number of persons employed in its manufacturing
operations to five. Substantially all of the labor performed in the
manufacturing operations is being done through independent contractors.
The Company considers its employee relations to be good. Most
employees, other than management and corporate personnel, are paid on an hourly
basis. The Company believes that it provides working conditions and wages that
compare favorably with those of its competition. None of the Company's
employees is covered by a collective bargaining agreement.
TRADEMARKS AND SERVICE MARKS
The Company believes its trademarks and service marks have
significant value and are important to its marketing efforts. The Company has
registered certain trademarks and service marks (including the name "Checkers",
"Checkers BurgersoFriesoColas" and "Champ Burger" and the design of the
Restaurant building) in the United States Patent and Trademark office. The
Company has also registered the service mark "Checkers" individually and/or
with a rectangular checkerboard logo of contiguous alternating colors to be
used with Restaurant services in the states where it presently does, or
anticipates doing, business. The Company has various other trademark and
service mark registration applications pending. It is the Company's policy to
pursue registration of its marks whenever possible and to oppose any
infringement of its marks.
GOVERNMENT REGULATIONS
The Company has no material contracts with the United States
government or any of its agencies.
The restaurant industry generally, and each Company-operated
and franchised Restaurant specifically, are subject to numerous federal, state
and local government regulations, including those relating to the preparation
and sale of food and those relating to building, zoning, health, accommodations
for disabled members of the public, sanitation, safety, fire, environmental and
land use requirements. The Company and its franchisees are also subject to laws
governing their relationship with employees, including minimum wage
requirements, accommodation for disabilities, overtime, working and safety
conditions and citizenship requirements. The Company is also subject to
regulation by the FTC and certain laws of States and foreign countries which
govern the offer and sale of franchises, several of which are highly
restrictive. Many State franchise laws impose substantive requirements on the
franchise agreement, including limitations on noncompetition provisions and on
provisions concerning the termination or nonrenewal of a franchise. Some States
require that certain materials be registered before franchises can be offered
or sold in that state. The failure to obtain or retain food licenses or
approvals to sell franchises, or an increase in the minimum wage rate, employee
benefit costs (including costs associated with mandated health insurance
coverage) or other costs associated with employees could adversely affect the
Company and its franchisees. A mandated increase in the minimum wage rate was
implemented in 1996 and current federal law requires an additional increase in
1997.
The Company's construction, transportation and placement of
Modular Restaurant Packages is subject to a number of federal, state and local
laws governing all aspects of the manufacturing process, movement, end use and
location of the building. Many states require approval through state agencies
set up to govern the modular construction industry, other states have
provisions for approval at the local level. The transportation of the Company's
Modular Restaurant Package is subject to state, federal and local highway use
laws and regulations which may prescribe size, weight, road use limitations and
various other requirements. The descriptions and the substance of the Company's
warranties are also subject to a variety of state laws and regulations.
PROPERTIES.
Of the 232 Restaurants which were operated by the Company as
of December 30, 1996, the Company held ground leases for 194 Restaurants and
owned the land for 38 Restaurants. The Company's leases are generally written
for a term of from five to twenty years with one or more five year renewal
options. Some leases require the payment of additional rent equal to a
percentage of annual revenues in excess of specified amounts. Ground leases are
treated as
9
<PAGE> 12
operating leases. Leasehold improvements made by the Company generally become
the property of the landlord upon expiration or earlier termination of the
lease; however, in most instances, if the Company is not in default under the
lease, the building, equipment and signs remain the property of the Company and
can be removed from the site upon expiration of the lease. In the future, the
Company intends, whenever practicable, to lease land for its Restaurants. For
further information with respect to the Company's Restaurants, see "Restaurant
Operations" under Item 1 of this Report.
The Company has 15 owned parcels of land and 40 leased
parcels of land which are available for sale or sub-lease. Of these parcels, 30
are related to Restaurant closings as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The other parcels
primarily represent surplus land available from multi-user sites where the
Company developed a portion for a Restaurant, and undeveloped sites which the
Company ultimately decided it would not develop.
The Company's executive offices are located in approximately
19,600 square feet of leased space in the Barnett Bank Building, Clearwater,
Florida. The Company's lease will expire on April 30, 1998.
The Company owns a 89,850 square foot facility in Largo,
Florida. This includes a 70,850 square foot fabricated metal building for use
in its Modular Restaurant manufacturing operations, and two buildings totalling
19,000 square feet for its office and warehouse operations. See "Manufacturing
Operations" under Item 1 of this Report.
The Company also leases approximately 8,000 aggregate square
feet in two regional offices and one training center.
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The selected historical consolidated Statement of Operations
data presented for each of the fiscal years in the three-year period ended
December 30, 1996 and Balance Sheet data as of December 30, 1996, and as of
January 1, 1996, were derived from, and should be read in conjunction with, the
audited financial statements and related notes of Checkers Drive-In
Restaurants, Inc. and subsidiaries included elsewhere herein. The Statement of
Operations data for the year ended December 31, 1993 and December 31, 1992 and
Balance Sheet data as of January 2, 1995, December 31, 1993 and December 31,
1992 were derived from audited financial statements not included herein.
The information provided below has also been adjusted to
reflect income tax expense as if Champion was not an S Corporation from
inception (May 1990) through its acquisition by the Company (November 1991).
Also, the Company declared a three-for-two stock split, a two-for-one stock
split and a three-for-two stock split payable in the form of stock dividends
effective February 20, 1992, September 3, 1992, and June 30, 1993,
respectively. All share and per share information has been retroactively
restated to reflect the splits. In 1993, the Company completed a number of
acquisitions, five of which (for a total of 20 Restaurants) were accounted for
as poolings of interests. The information provided below has been restated to
reflect the retroactive combination of the entities involved in the
acquisitions accounted for as poolings of interests and to provide pro forma
income taxes for all S Corporations involved.
As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a fiscal year which will generally
end on the Monday closest to December 31st. Each quarter consists of three
4-week periods, with the exception of the fourth quarter which consists of four
4-week periods.
10
<PAGE> 13
<TABLE>
<CAPTION>
----------------------------------------------------------
DEC. 30, JAN. 1, JAN. 2, DEC. 31, DEC. 31,
1996 1996 1995 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Operating Revenue $ 164,960 $ 190,305 $ 215,115 $184,027 $102,137
Restaurant Operating Costs 156,548 167,836 173,087 124,384 63,774
Cost of Modular Restaurant Package
Revenues 1,704 4,854 10,485 20,208 11,899
Other Depreciation and Amortization 4,326 4,044 2,796 1,325 511
Selling, General and Administrative Expense 20,190 24,215 21,875 14,048 7,988
Accounting Charges and Loss Provisions 24,405 26,572 14,771 -- --
Interest Expense 6,233 5,724 3,564 556 706
Interest Income 678 674 326 273 1,266
Minority Interests in Income (Loss) (1,509) (192) 185 342 400
Income from Continuing Operations (Pretax) $ (46,258) $ (42,074) $ (11,324) $ 23,437 $ 18,125
Income from Continuing Operations
(Pretax) per Common Share $ (0.89) $ (0.83) $ (0.23) $ 0.49 $ 0.40
Total Assets $ 136,110 $ 166,819 $ 196,770 $179,950 $101,526
Long-Term Obligations and Redeemable
Preferred Stock $ 39,906 $ 38,090 $ 38,341 $ 36,572 $ 4,162
Cash Dividends Declared per Common Share $ -- $ -- $ -- $ -- $ --
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
INTRODUCTION
The Company commenced operations on August 1, 1987, to operate
and franchise Checkers double drive-thru Restaurants. As of December 30, 1996,
the Company had an ownership interest in 232 Company-operated Restaurants and
an additional 246 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 December 30, 1996, there
were 218 such Restaurants) and (ii) the Company owns a 10.55% or 65.83%
interest in a partnership which owns the Restaurant (a "Joint Venture
Restaurant") (as of December 30, 1996, there were 14 such Joint Venture
Restaurants). (See "Business - Restaurant Operations - Joint Venture
Restaurants" in Item 1 of this Report.)
The Company did not realize the anticipated results expected from
the introduction of certain cost cutting and efficiency enhancing programs
implemented into the restaurants in fiscal 1996. Restaurant margins decreased
from 6.1% to (0.7)%, primarily as a result of high labor costs. The continued
decrease in comparable sales likewise adversely affected programs designed to
improve restaurant margins. The Company has implemented aggressive programs in
the beginning of fiscal year 1997 that are designed to improve food, paper and
labor costs in the restaurants. These programs include closure of one drive
thru lane during slow periods, adjusting the salaried manager complement and
establishing a labor matrix that guides the general managers to an acceptable
amount of labor hours for different sales volume levels.
As of March 1996, the Company had 53 Company and franchise
Restaurants testing its proprietary L.A. Mex Mexican brand. Although initial
sales were encouraging, the sales increases resulted in little or no
contribution to the profitability of the test units. Additionally, speed of
service was adversely impacted by the addition of the L.A. Mex products. As a
result, the Company closed 13 of the 53 tests in February 1997 and expects to
close a majority of the tests in the first two quarters of fiscal year 1997.
In July 1996, the company's primary credit facility was acquired
from the then existing bank lending group by a new group of lenders led by DDJ
Capital Management LLC (collectively, the "DDJ Group"). In November 1996, CKE
Restaurants, Inc. ("CKE") and other investors, including certain members of the
DDJ Group (collectively the "CKE Group") acquired the credit facility from the
DDJ Group. The credit facility was restructured in late November 1996. The
Company negotiated the deferment of principal payments, reduction in interest
rate, extension of the maturity date by one year, and the elimination or
relaxation of all financial performance and ratio covenants. The restructuring
required the Company to issue to the CKE Group warrants to purchase 20 million
shares of the Company's common stock at $.75 per share. Additionally, the
restructured loan agreement required the Company to elect three members
selected by the CKE Group to the Company's Board of Directors resulting in a
seven member Board. The new members elected to the Company's Board
11
<PAGE> 14
of Directors pursuant to the restructured loan agreement were William P. Foley,
II, Terry N. Christensen and C. Thomas Thompson.
Significant management changes have occurred since the end of the
third quarter of fiscal year 1996. Effective December 17, 1996, Albert J.
DiMarco resigned as the Company's Chief Executive Officer and President. Mr.
DiMarco simultaneously resigned as a member of the Company's Board of
Directors. On that same date, C. Thomas Thompson was elected to serve as Vice
Chairman of the Board of Directors and as Chief Executive Officer. On January
6, 1997, Richard E. Fortman was elected to serve as President and Chief
Operating Officer of the Company and Joseph N. Stein was elected to serve as
Executive Vice President and Chief Administrative Officer of the Company.
Effective January 21, 1997, Michael E. Dew resigned as Vice President of
Company Operations. Effective that same date, Michael T. Welch, Vice President
of Operations, Marketing, Restaurant Support Services and Research &
Development assumed the additional duties of Vice President of Company
Operations. On January 24, 1997, James T. Holder, Chief Financial Officer and
Secretary of the Company was promoted to Senior Vice President, General Counsel
and Secretary of the Company and Joseph N. Stein assumed the additional duties
of Chief Financial Officer. Messrs. Thompson and Fortman respectively bring
over 25 and 27 years of experience in the operation of quick service
restaurants to the Company.
During fiscal 1996, the Company applied a marketing strategy that
consisted of strategic limited time offer ("LTO") products supported by radio
and outdoor advertising. The majority of these LTO products carried a low price
point and were designed to be introduced for a four to eight week period.
Comparable store sales continued to decline during fiscal year 1996. The
Company is therefore evaluating alternative marketing strategies, including a
greater emphasis on the quality of the burgers and fries that Checkers offers,
and an increased emphasis on combo meals. The Company plans to test a new
marketing strategy in selected markets during fiscal year 1997.
In fiscal year 1996, the Company, along with its franchisees,
experienced a net reduction of 21 operating restaurants. In 1997, the franchise
community expects to open up to 30 new units and the Company intends to close
fewer restaurants focusing on improving Restaurant margins. The franchise group
as a whole continues to experience higher average per store sales than Company
stores.
The Company receives revenues from Restaurant sales, franchise
fees, royalties and sales of fully-equipped manufactured MRP's. 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 MRP's 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 MRP
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. MRP revenues are directly affected by the number of new franchise
Restaurant openings and the number of new MRP's produced or used MRP's
refurbished for sale in connection with 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
DEC. 30, JAN. 1, JAN. 2,
1996 1996 1995
----------------------------------------
<S> <C> <C> <C>
Revenues:
Gross Restaurant Sales 96.8 96.4 93.4
Coupons & Discounts 2.6 2.5 2.8
----------------------------------------
Net Restaurant Sales 94.2 93.9 90.6
Royalties 4.5 4.0 3.2
Franchise Fees 0.6 0.5 0.9
Modular Restaurant Packages 0.7 1.6 5.3
----------------------------------------
Total Revenues 100.0% 100.0% 100.%
----------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
DEC. 30, JAN. 1, JAN. 2,
1996 1996 1995
----------------------------------------
<S> <C> <C> <C>
Costs and Expenses:
Restaurant Food and Paper Cost(1) 34.2 34.7 34.4
Restaurant Labor Costs(1) 35.9 31.8 29.3
Restaurant Occupancy Expense(1) 8.1 6.3 4.9
Restaurant Depreciation and Amortization(1) 5.5 5.8 6.1
Advertising Expense(1) 4.6 4.4 3.9
Other Restaurant Operating Expenses(1) 9.6 8.5 7.5
Cost of Modular Restaurant Package Revenues(2) 141.8 162.1 92.0
Other Depreciation and Amortization 2.6 2.1 1.3
Selling, General and Administrative Expenses 12.2 12.7 10.2
Impairment of Long-lived Assets 9.3 9.9 0.0
Losses on Assets to be Disposed of 4.3 1.7 4.2
Loss provisions 1.2 2.3 2.6
Operating Loss (25.6)% (19.6)% (3.7)%
Other Income (Expense): 0.4 0.4 0.4
Interest Income (3.8) (3.0) (1.7)
Interest Expense (0.9) (0.1) 0.1
----------------------------------------
Minority Interest in Earnings
Loss Before Income Tax Expense (Benefit) (28.0)% (22.1)% (5.2)%
Income Tax Expense (Benefit) 0.1 % (4.6)% (2.1)%
----------------------------------------
Net Loss (28.1)% (17.5)% (3.1)%
========================================
Operating Data:
System Wide Restaurant Sales (in 000's)
Company Operated $ 155,392 $ 178,744 $ 194,922
Franchise $ 172,566 $ 190,151 $ 180,977
----------------------------------------
Total $ 327,958 $ 368,895 $ 375,899
========================================
Average Annual Net Sales Per Restaurant Open For A Full
Year (in 000's) (3):
Company Operated $ 651 $ 721 $ 815
Franchised 755 814 840
----------------------------------------
System Wide $ 699 $ 765 $ 827
----------------------------------------
Number of Restaurants (4)
Company Operated 232 242 261
Franchised 246 257 235
----------------------------------------
Total 478 499 496
========================================
</TABLE>
(1) As a percent of gross Restaurant sales.
(2) As a percent of Modular Restaurant Package revenues.
(3) Includes sales for Restaurants open for entire trailing 13 periods,
and stores expected to be closed in the following year.
(4) Number of Restaurants open at end of period.
13
<PAGE> 16
COMPARISON OF HISTORICAL RESULTS - FISCAL YEARS 1996 AND 1995
Revenues. Total revenues decreased 13.3% to $165.0 million in
1996 compared to $190.3 million in 1995. Company-operated net restaurant sales
decreased 13.1% to $155.4 million in 1996 from $178.7 million in 1995. The
decrease resulted partially from a net reduction of 10 Company-operated
Restaurants since January 1, 1996. Comparable Company-operated Restaurant sales
for the year ended December 30, 1996, decreased 9.7% as compared to the year
ended January 1, 1996, which includes those Restaurants open at least 13
periods. These decreases in net restaurant sales and comparable Restaurant
sales is primarily attributable to continuing sales pressure from competitor
discounting, severe weather in January and February of 1996 and the inability
of the Company to effect a competitive advertising campaign during fiscal 1996.
Royalties decreased 2.2% to $7.4 million in 1996 from $7.6
million in 1995 due primarily to a net reduction of 11 franchised Restaurants
since January 1, 1996. Comparable franchised Restaurant sales for Restaurants
open at least 12 months for the year ended December 30, 1996, decreased
approximately 7.2% as compared to the year ended January 1, 1996. The Company
believes that the decline in sales experienced by franchisees can be attributed
primarily to the same factors noted above, but that these factors may have been
mitigated to some extent by the location in many instances of franchise
restaurants in less competitive markets.
Franchise fees decreased 3.2% to approximately $930,000 in
1996 from approximately $961,000 in 1995. An actual decrease of $421,000 as a
direct result of fewer franchised Restaurants opened as well as certain
discounting of fees on non-standard Restaurant openings, offset by the effect
of recording $390,000 of revenue from terminations of Area Development
Agreements during the year ended December 30, 1996, generated the net decrease
of $31,000. 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.
MRP revenues decreased 59.9% to $1.2 million in 1996 compared
to $3.0 million in 1995 due to decreased sales volume of MRP's to the Company's
franchisees which is a result of a slow down in franchisee Restaurant opening
activity. Also, the Company made a concerted effort to refurbish and sell its
inventory of used MRP's from previously opened sites. These efforts have been
successful, however, these sales have negatively impacted the new building
revenues. MRP revenues are recognized on the percentage of completion method
during the construction process; therefore, a substantial portion of MRP
revenues are recognized prior to the opening of a Restaurant.
Costs and expenses. Restaurant food ($49.5 million) and paper
($5.2 million) costs totalled $54.7 million or 34.2% of gross restaurant sales
for 1996, compared to $63.7 million ($57.6 million food costs; $6.1 million,
paper costs) or 34.7% of gross restaurant sales for 1995. The decrease in food
and paper costs as a percentage of gross restaurant sales was due primarily to
decreases in beef costs and paper costs experienced by the Company during
fiscal 1996, partially offset by various promotional discounts in the final two
quarters of 1996.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totalled $57.3 million or 35.9% of
gross restaurant sales for 1996, compared to $58.2 million or 31.8% of gross
restaurant sales for 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 semi-variable nature of these
costs; a high level of turnover in the regional management positions, which
caused inconsistencies in the management of labor costs in the Restaurants;
increase in labor costs resulting from the L.A. Mex dual brand test; and
increase in the federal minimum wage rate. The decrease in actual expense was
caused by a reduction in the variable portion of labor expenses as sales
declined.
Restaurant occupancy expense, which includes rent, property
taxes, licenses and insurance, totalled $12.9 million or 8.1% of gross
restaurant sales for 1996, compared to $11.6 million or 6.3% of gross
restaurant sales for 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 nature of these expenses
and also higher average occupancy costs resulting from the acquisition of
interests in 12 Restaurants in Chicago, Illinois.
Restaurant depreciation and amortization decreased 16.9% to
$8.8 million for 1996, from $10.6 million for 1995, due primarily to late 1995
and 1996 impairments recorded under Statement of Financial Accounting Standards
No. 121 which was adopted as of January 1, 1996.
Advertising decreased to $7.4 million or 4.6% of restaurant
sales for 1996 which did not materially differ from the $8.1 million or 4.4% of
restaurant sales spent for advertising in 1995.
14
<PAGE> 17
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 $15.3 million or 9.6% of gross restaurant sales for 1996
compared to $15.6 million or 8.5% of gross restaurant sales for 1995. The
increase for 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 MRP revenues totalled $1.7 million or 141.8% of MRP
revenues for 1996, compared to $4.9 million or 162.1% of such revenues for
1995. The decrease in these expenses as a percentage of MRP revenues was
attributable to a third quarter 1995 accounting charge of $500,000 to
write-down excess work in process buildup and a reduction in direct and
indirect labor in early 1996.
Selling, general and administrative expenses decreased to
$20.2 million or 12.2% of total revenues in 1996 from $24.2 million or 12.7% of
total revenues in 1995. The decrease in these expenses was primarily
attributable to a decrease in corporate overhead costs as a result of the
Company's restructuring during 1995 and early 1996.
Accounting Charges and Loss Provisions. The Company recorded
accounting charges and loss provisions of $16.8 million during the third
quarter of 1996, $1.2 million of which consisted of various selling, general
and administrative expenses including refinancing costs of $850,000 to expense
capitalized costs incurred in connection with the Company's previous lending
arrangements with its bank group. Provisions totalling $14.2 million 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
impairment charges related to an additional 28 under-performing Restaurants
were recorded. A loss provision of $500,000 was also recorded to reserve for
obsolescence in Champion's finished buildings inventory.
Additional accounting charges and loss provisions of $11.1
million were recorded during the fourth quarter of 1996, $1.5 million of which
consisted of various selling, general and administrative expenses (including
severance, employee relocations, bad debt provisions and other charges).
Provisions totalling $6.4 million including $1.4 million for additional losses
on assets to be disposed of, $4.6 million for impairment charges related to 9
under-performing Restaurants received by the Company through a July 1996
franchisee bankruptcy action and $400,000 for other impairment charges were
also recorded. Additionally, in the fourth quarter of 1996, a $1.1 million
provision for loss on the disposal of the L.A. Mex product line, workers
compensation accruals of $1.1 (included in Restaurant labor costs), adjustments
to goodwill of approximately $510,000 (included in other depreciation and
amortization) and approximately a $450,000 charge for the assumption of
minority interests in losses on joint-venture operations as a result of the
receipt by the Company of certain assets from the above mentioned CDDT
bankruptcy.
Third quarter 1995 accounting charges and loss provisions of
$8.8 million consisted of $2.8 million 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); $3.2 million 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; $1.5 million for workers
compensation exposure included in Restaurant labor costs and $260,000 in other
charges, net, including the $500,000 write-down of excess inventory and a
minority interest adjustment.
Fourth quarter 1995 accounting charges included $3.0 million
for warrants to be issued in settlement of litigation (see Item 3 - Lopez, et
al vs. Checkers) and to accrue approximately $800,000 for legal fees in
connection with the settlement and continued defense of various litigation
matters. Additionally, during the fourth quarter of 1995, the Company early
adopted Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS
121) which requires a write-down of certain intangibles and property related to
under performing sites. The effect of adopting SFAS 121 was a total charge to
earnings for 1995 of $18.9 million, consisting of a $5.9 million write-down of
goodwill and a $13.1 million write-down of property and equipment.
Interest expense. Interest expense increased to $6.2 million
or 3.8% of total revenues in 1996 from $5.7 million or 3.0% of total revenues
in 1995. This increase was due to the Company's 1996 debt restructuring and
related amortization of deferred loan costs.
Income tax expense (benefit). Due to the loss for 1996, the
Company recorded an income tax benefit of $18.0 million or 38.9% of the loss
before income taxes and recorded a deferred income tax valuation allowance of
$18.1 million, resulting in a net tax expense of $151,000 for 1996, as compared
to an income tax benefit of $16.5 million or 39.1% of earnings before income
taxes and recorded a deferred income tax valuation allowance of $7.6 million
resulting in a net
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tax benefit of $8.9 million for 1995. The effective tax rates differ from the
expected federal tax rate of 35.0% due primarily to state income taxes.
Net loss. Earnings were significantly impacted by the loss
provisions and the write-downs associated with SFAS 121 in 1996 and in 1995.
Net loss before tax and the provisions (provisions totalled $27.9 million in
1996 and $31.6 million in 1995) was $18.4 million or $.36 per share for 1996
and $10.5 million or $.21 per share for 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.
COMPARISON OF HISTORICAL RESULTS - FISCAL YEARS 1995 AND 1994
Revenues. Total revenues decreased 11.5% to $190.3 million in
1995 compared to $215.1 million in 1994. Company-operated Restaurant sales
decreased 8.3% to $178.7 million in 1995 from $194.9 million in 1994. The
decrease resulted primarily from a net reduction of 19 Company-operated
Restaurants since January 2, 1995, partially offset by a full year of
operations for Company-operated Restaurants opened in 1994. Comparable
Company-operated Restaurant sales for the year ended January 1, 1996, decreased
11.5% as compared to the year ended January 2, 1995. This includes those
Restaurants open at least 13 periods. The decrease in comparable Restaurant
sales is primarily attributable to increased sales pressure from competitor
discounting and the severe weather in various parts of the United States.
Royalties increased 10.0% to $7.6 million in 1995 from $6.9
million in 1994 due primarily to a 5.1% increase in franchised Restaurant sales
and a net addition of 22 franchised Restaurants since January 2, 1995.
Comparable franchised Restaurant sales for Restaurants open at least 12 months
for the year ended January 1, 1996, decreased approximately 3.1% as compared to
the year ended January 2, 1995. The Company believes that the decline in sales
experienced by franchisees can be attributed primarily to the same factors
noted above, but that these factors may have been mitigated to some extent by
the location in many instances of franchise restaurants in less competitive
markets.
Franchise fees decreased 48.8% to approximately $961,000 in
1995 from $1.9 million in 1994. This was a direct result of opening fewer
franchised Restaurants during the year ended January 1, 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 73.7% to $3.0
million in 1995 compared to $11.4 million in 1994 due to decreased sales volume
of Modular Restaurant Packages to the Company's franchisees which is a result
of a slow down in franchisee Restaurant opening activity. Also, the Company
made a concerted effort to refurbish and sell its inventory of used Modular
Restaurant Packages from previously opened sites which has negatively impacted
the new building revenues. Modular Restaurant Package revenues are recognized
on the percentage of completion method during the construction process;
therefore, a substantial portion of Modular Restaurant Package revenues are
recognized prior to the opening of a Restaurant.
Costs and expenses. Restaurant food ($57.6 million) and paper
($6.1 million) costs totalled $63.7 million or 34.7% of gross restaurant sales
for 1995, compared to $69.2 million ($63.4 million, food costs; $5.8 million,
paper costs) or 34.4% of gross restaurant sales for 1994.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totalled $58.2 million or 31.8% of
gross restaurant sales for 1995, compared to $58.8 or 29.3% of gross restaurant
sales for 1994. 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 and a
provision of $1.5 million for workers compensation exposure in the third
quarter of 1995.
Restaurant occupancy expense, which includes rent, property
taxes, licenses and insurance, totalled $11.6 or 6.3% of gross restaurant sales
for 1995, compared to $9.7 or 4.9% of gross restaurant sales for 1994. This
increase in restaurant occupancy costs as a percentage of gross restaurant
sales was due partially to the decline in average gross restaurant sales
relative to the fixed and semi-variable nature of these expenses while the
increase in the actual expense resulted from increases in utilities, property
taxes and insurance.
Restaurant depreciation and amortization decreased 13.7% to
$10.6 million for 1995, from $12.3 for 1994, due primarily to the net reduction
of 19 Company-operated Restaurants since January 2, 1995.
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Advertising increased to $8.1 million or 4.4% of of gross
restaurant sales in 1995 from $7.9 million or 3.9% of of gross restaurant sales
1994. The increase in this expense was due to increased expenditures for
broadcast advertising.
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 $15.6 million or 8.5% of gross restaurant sales for 1995
compared to $15.1 or 7.5% of gross restaurant sales for 1994. The increase 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.
Cost of Modular Restaurant Packages totalled $4.9 million or
162.1% of Modular Restaurant Package revenues in 1995 compared to $10.5 million
or 92.0% of such revenues in 1994. The increase in these expenses as a
percentage of Modular Restaurant Package revenues was attributable to the
decline in the number of units produced relative to the fixed and semi-variable
nature of many expenses. The total number of units declined in 1995, not only
because of the decline in the number of units produced for franchisees, but
also because the Company opened fewer Restaurants in 1995 than 1994, and also
used relocated Company units for certain 1995 Restaurant openings. The Company
also incurred costs associated with the reduction in volume.
Selling, general and administrative expenses increased to
$24.2 million or 12.7% of total revenues in 1995 from $21.9 million or 10.2% of
total revenues in 1994. The increase in these expenses was primarily
attributable to third quarter 1995 accounting charges of $3.6 million as
discussed below, partially offset by a decrease in corporate overhead costs as
a result of the Company's restructuring.
Accounting Charges and Loss Provisions. The Company recorded
accounting charges and loss provisions totalling $8.8 million during the
quarter ended September 11, 1995. There was no comparable charge for the
quarter ended September 12, 1994. These charges include a provision of $3.2
million for Restaurant relocations and abandoned site costs. The provision for
Restaurant relocations and abandoned site costs consists of a $1.2 million
charge to write down 21 relocated Modular Restaurant Packages to net realizable
value and a charge of $2.0 million to adjust existing reserves necessary to
expense site improvements, settle leases, and provide for other costs
associated with the abandonment of under performing Restaurant sites and to
provide for the closure of four additional Restaurants.
Of the above provision totalling $3.2 million approximately
$2.3 million represents accounting charges primarily for the write-off of site
costs to originally open the Restaurants and cash expenditures to be made to
settle lease liabilities over the remaining lives (up to fourteen years) of the
underlying leases. These payments are expected to be funded out of operating
cash flows.
In addition to the provision of $3.2 million discussed above,
the Company recorded charges of $3.6 million to (i) write-off uncollectible
receivables related primarily to the Champion division; (ii) write down
obsolete inventory and menu boards; (iii) expense costs associated with the
hiring of new employees, including recruiting fees and relocation costs; (iv)
provide for severance pay; (v) write-off loan origination fees incurred in
connection with the Company's credit facility, which has been substantially
renegotiated; (vi) dispose of a subsidiary which distributes promotional
apparel; (vii) reserve for the settlement of litigation arising in the ordinary
course of business and accrue for legal fees. These charges are included in
selling, general and administrative expenses.
Other third quarter accounting charges included a $1.5
million charge to reserve for future workers compensation claims exposure in
connection with the Company's self-insured plan, which was included in other
Restaurant operating expenses; a $721,000 charge for the Champion division to
write-off previously capitalized costs which are no longer expected to provide
any future benefit and to write down obsolete equipment inventories, which was
included in cost of Modular Restaurant Packages; a $314,000 recovery of
minority interests in losses which had been previously reserved by the Company,
which was included in minority interests in earnings (losses); and a $101,000
charge to reserve for state income tax assessments, which was reflected in
income tax expense (benefit).
Fourth quarter 1995 accounting charges included $3.0 million
for warrants to be issued in settlement of litigation (see Item 3 - Lopez, et
al vs. Checkers) and to accrue approximately $800,000 for legal fees in
connection with the settlement and continued defense of various litigation
matters. Additionally, during the fourth quarter of 1995, the Company early
adopted Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS
121) which requires a write-down of certain intangibles and property related to
under performing sites. The effect of adopting SFAS 121 was a total charge to
earnings for 1995 of $18.9 million, consisting of a $5.9 million write-down of
goodwill and a $13.1 million write-down of property and equipment.
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<PAGE> 20
Comparatively, in 1994 the Company recorded provisions
totalling $4.5 million in the first quarter and $11.4 million in the fourth
quarter of 1994. The first quarter $4.5 million provision included $1.8 million
to provide for the write-off of site costs and the other costs to originally
open Restaurants and $1.7 million for lease liability settlements related to
the 21 closed or underperforming Restaurants. The fourth quarter 1994
provisions totalling $11.4 million included a $1.7 million charge to settle
leases and expense site costs and $3.0 million in other costs to originally
open Restaurants for the 12 under performing Restaurants to be relocated. These
charges, along with the first quarter $4.5 million charge described above are
combined, and the total $9.1 million was reflected in the Company's 1994
Consolidated Statement of Operations. A restructuring charge of $5.6 million
was included in the fourth quarter 1994 provisions to provide for the Company's
reorganization due to its inability to find sufficient capital on acceptable
terms to maintain its growth rate and the resultant downsizing of staff and
offices and the write-off of costs associated with sites which will not be
developed and new Restaurant openings which have been delayed. The charge
consisted of severance costs, closed office expense, and loss on sale of the
Company plane totaling $680,000, and site costs and other costs to open
previously anticipated new Restaurants of $5.0 million. Other fourth quarter
1994 provisions included $850,000 for legal costs and an allowance for royalty
receivables due from a franchisee involved in a bankruptcy, and $275,000 for
settlement of real estate title claims, both of which were included in 1994
selling, general and administrative expenses. Of the 1994 provisions which
total $15.9 million, approximately $11.0 million represents non-cash charges
primarily for the write-off of site costs and other costs to originally open
the Restaurants. The remaining $4.9 million primarily represents cash
expenditures to be made to settle lease liabilities over the remaining lives of
the underlying leases.
Interest expense. Interest expense increased to $5.7 million
or 2.9% of total revenues in 1995 from $3.6 million or 1.6% of total revenues
in 1994. This increase was due to the Company's 1995 debt issuances in
connection with Restaurant acquisitions and capitalized leases resulting from
sale-leaseback transactions.
Income tax expense (benefit). Due to the loss for the year
ended January 1, 1996, the Company recorded an income tax benefit of $8.9
million or 21.0% of the loss before income taxes for the year ended January 1,
1996, as compared to income tax benefit of $4.6 million (after giving effect to
pro forma income taxes for merged entities during their S Corporation status),
or 40.4% of earnings before income taxes for the year ended January 2, 1995.
The effective tax rates of 21.0% in 1995 and 40.4% in 1994 (after giving effect
to pro forma income taxes for merged entities during their S corporation
periods) differed from the expected federal tax rate of 35% primarily due to
state income taxes, tax-free investment income, job tax credits and the
implementation of SFAS 121 in 1995.
Net Loss. Earnings were significantly impacted by the loss
provisions which were recorded in 1995 and the write-downs associated with
implementation of SFAS 121. Net loss before the provisions, which totalled
$31.5 million, was $1.7 million or $.03 per share, which resulted primarily
from a decrease in the average net Restaurant sales and margins, a decrease in
franchise fees, a decrease in modular Restaurant package revenues and margins,
increased advertising and interest expense offset by a significant decrease in
selling, general and administrative expenses. The provisions net of tax benefit
represent a charge of $26.7 million or $.53 per share, resulting in an overall
net loss of $33.2 million or $.65 per share for the year ended January 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
On October 28, 1993, the Company entered into a loan
agreement (the "Loan Agreement") with a group of banks ("Bank Group") providing
for an unsecured, revolving credit facility. The Company borrowed approximately
$50 million under this facility primarily to open new Restaurants and pay off
approximately $4 million of previouslyexisting debt. The Company subsequently
arranged for the Loan Agreement to be converted to a term loan and
collateralized the term loan and a revolving line of credit ranging from $1
million to $2 million (the "Credit Line") with substantially all of the
Company's assets.
On July 29, 1996, the debt under the Loan Agreement and
Credit Line was acquired from the Bank Group by an investor group led by an
affiliate of DDJ Capital Management, LLC (collectively, "DDJ"). On November 14,
1996, the debt under the Loan Agreement and Credit Line was acquired from DDJ
by a group of entities and individuals, most of whom are engaged in the fast
food restaurant business. This investor group (the "CKE Group") was led by CKE
Restaurants, Inc., the parent of Carl Karcher Enterprises, Inc., Casa Bonita,
Inc., and Summit Family Restaurants, Inc. Also participating were most members
of the DDJ Group, as well as KCC Delaware Company, a wholly-owned subsidiary of
GIANT GROUP, LTD., which is a controlling shareholder of Rally's Hamburgers,
Inc.
On November 22, 1996, the Company and the CKE Group executed
an Amended and Restated Credit Agreement (the "Restated Credit Agreement")
thereby completing a restructuring of the debt under the Loan Agreement.
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The Restated Credit Agreement consolidated all of the debt under the Loan
Agreement and the Credit Line into a single obligation. At the time of the
restructuring, the outstanding principal balance under the Loan Agreement and
the Credit Line was $35.8 million. Pursuant to the terms of the Restated Credit
Agreement, the term of the debt was extended by one (1) year until July 31,
1999, and the interest rate on the indebtedness was reduced to a fixed rate of
13%. In addition, all principal payments were deferred until May 19, 1997, and
the CKE Group agreed to eliminate certain financial covenants, to relax others
and to eliminate approximately $6 million in restructuring fees and charges.
The Restated Credit Agreement also provided that certain members of the CKE
Group agreed to provide to the Company a short term revolving line of credit of
up to $2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit
Line"). In consideration for the restructuring, the Restated Credit Agreement
required the Company to issue to the members of the CKE Group warrants to
purchase an aggregate of 20 million shares of the Companys' common stock at an
exercise price of $.75 per share, which was the approximate market price of the
common stock prior to the announcement of the debt transfer. Since November 22,
1996, the Company has reduced the principal balance under the Restated Credit
Agreement by $9.1 million and has repaid the Secondary Credit Line in full. A
portion of the funds utilized to make these principal reduction payments were
obtained by the Company from the sale of certain closed restaurant sites to
third parties. Additionally, the Company utilized $10.5 million of the proceeds
from the February 21, 1997, private placement which is described later in this
section. Pursuant to the Restated Credit Agreement, the prepayments of
principal made in 1996 and early in 1997 will relieve the Company of the
requirement to make any of the regularly scheduled principal payments under the
Restructured Credit Agreement which would have otherwise become due in fiscal
year 1997.
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"). Pursuant to the Rall-Folks Agreement, the Company is to
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 "RallFolks Purchase
Price"). The total amount of principal outstanding under the Rall-Folks Notes
was approximately $1.8 million as of March 1, 1997. The Rall-Folks Notes are
fully subordinated to the Company's existing bank debt.
Under the terms of the Rall-folks Agreement, the Company
guaranteed that if Rall-Folks sells all of the Common Stock issued for the
Rall-folks Notes in a reasonably prompt manner (subject to certain limitations
described below) Rall-Folks will receive net proceeds from the sale of such
stock equal to the Rall-Folks Purchase Price. If Rall-Folks receives less than
such amount, the Company will issue to Rall-Folks, at the option of Rall-Folks,
either (i) additional shares of Common Stock, to be sold by Rall-Folks, until
Rall-Folks receives an amount equal to the Rall-Folks Purchase Price, or (ii) a
six-month promissory note bearing interest at 11%, with all principal and
accrued interest due at maturity, and subordinated to the Company's bank debt
pursuant to the same subordination provisions, equal to the difference between
the Rall-Folks Purchase Price and the net amount received by Rall-Folks from
the sale of the Common Stock.
On August 3, 1995, the Company entered into a purchase
agreement (as amended in October 1995 and April 1996, the "RDG Agreement") with
Restaurant Development Group, Inc. ("RDG") pursuant to which the Company agreed
to issue shares of its Common Stock in exchange for and in complete
satisfaction of a promissory note of the Company held by RDG (the "RDG Note").
The total amount of principal outstanding under the RDG Note was approximately
$1.7 million as of March 1, 1997. The RDG Note is fully subordinated to the
Company's existing bank debt. In partial consideration of the transfer of the
RDG Note to the Company, the Company will deliver to RDG shares of Common Stock
with a value equal to the sum of (i) the outstanding balance due under the RDG
Note on the closing date and (ii) $10,000 (being the estimated legal expenses
of RDG to be incurred in connection with the registration of the Common Stock)
(the "RDG Purchase Price").
As further consideration for the transfer of the RDG Note to
the Company, the Company agreed to issue RDG a warrant (the "Warrant") for the
purchase of 120,000 shares of Common Stock at a price equal to the average
closing sale price of the Common Stock for the ten full trading days ending on
the third business day immediately preceding the closing date (such price is
referred to a the "Average Closing Price"); however, in the event that the
average closing price of the Common Stock for the 90 day period after the
closing date is less than the Average Closing Price, the purchase price for the
Common Stock under the Warrant will be changed on the 91st day after the
closing date to the average closing price for such 90 day period. The Warrant
will be exercisable at any time within five years after the closing date.
Under the terms of the RDG Agreement, the Company has
guaranteed that if RDG sells all of such Common Stock issued for the RDG Note
in a reasonably prompt manner (subject to certain limitations described below),
RDG will receive net proceeds from the sale of such stock equal to at least 80%
of the RDG Purchase Price. If RDG receives
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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 negotiations with the various investor groups during
fiscal 1996 concerning the restructure of the Company's debt. Each of the
parties 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
RallFolks do not approve the transaction, the term of the Rall-Folks Notes was
to have been 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 was to have been
extended approximately one year. The Company intends to attempt to negotiate a
further extension of these notes. No assurance can be given that the Company
will be successful in any attempted negotiations.
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 11, 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"). Pursuant to the
NTDT Agreement, the Company is to issue shares of Common Stock to NTDT in
blocks of two hundred thousand shares each 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
Common 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 total amount of principal outstanding under the NTDT
Note was approximately $1,354,000 as of March 1, 1997. The NTDT Note is fully
subordinated to the Company's existing bank debt. The term of the NTDT Note was
to have been extended until May 31, 1997, if the Company was in compliance with
its obligations under the NTDT Agreement and NTDT had received at least $1.0
million from the sale of the Common Stock by January 31, 1997. The Company did
not meet these obligations and the Note, therefore, was not extended. Such
dates were to be extended if NTDT failed to make a commercially reasonable
attempt to sell an average of 10,000 shares of Common Stock per day on each
trading day that a registration statement covering unsold shares held by NTDT
is in effect prior to such dates, or if the Company is delayed in filing a
registration statement (or an amendment or supplement thereto) due to the
failure of NTDT to provide information required to be provided to the Company
under the NTDT Agreement. In the event that the Company files a voluntary
bankruptcy petition,
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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. The Company has not
complied with its obligations under the NTDT Agreement to date.
If these transactions are consumated, it is anticipated that
approximately 4,000,000 shares of Common Stock will be issued by the Company
(representing approximately 6.2% of the shares outstanding after such issuance)
as consideration for various assets, primarily the Rall-Folks Notes, the RDG
Note and the NTDT Note (the "Notes") described above. The number of shares to
be issued will be determined by dividing the outstanding balance due under the
Notes (approximately $4.8 million as of March 1, 1997) or the purchase price
for the assets (approximately $300,000) by the average of the closing sale
price per share of the Common Stock for a set number of days prior to the
closing date for each transaction. The shares will either be available for
immediate sale by the persons and entities to whom they are issued, or the
Company will be required to register them for sale under the federal and state
securities laws. 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
negotiated the following limits on the sales that may be made by Rall-Folks,
RDG and NTDT: (i) each may sell not more than 50,000 shares of Common Stock per
week (150,000 in the aggregate) and (ii) each may sell not more than 25,000
shares in any one day (75,000 shares in the aggregate); provided that each may
sell additional shares in excess of such limits if such additional shares are
sold at a price higher than the lowest then current bid price for the Common
Stock. While it is anticipated that the foregoing limits, if the agreements
containing such limits remain in effect, 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. The individuals or
entities having registration rights for Common Stock to be issued upon the
exercise of the warrants under the Restated Credit Agreement, (or any other
individuals or entities having piggyback registration rights thereto) will be
entitled to sell such stock upon exercise of the warrants subject to any
limitations under federal securities laws resulting from their relationship to
the Company. The individuals or entities having registration rights for Common
Stock issued in connection with the Private Placement may be sold in the open
market only after the expiration of one year from the date of issuance, also
subject to any applicable federal securities laws. There can be no assurance
that any of these sales will not have an adverse effect on the market price for
the Common Stock.
The consumation of the transaction with each of Rall-Folks,
RDG and NTDT has been delayed by the negotiations with the various investor
groups during fiscal 1996 concerning the restructure of the Company's debt.
Pursuant to the terms of the Restated Credit Agreement, the Company is
obligated to purchase or repay the Rall-Folks Notes, the RDG Note and the NTDT
Note using Common Stock, or may repay them in cash.
The Company currently does not have significant development
plans for additional Company Restaurants during fiscal 1997.
On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of the Company's common
stock, $.001 par value, and 87,719 shares of the Company's Series A preferred
stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private
Placement. The Company received approximately $20 million in proceeds from the
Private Placement. The Company used $8 million of the Private Placement
proceeds to reduce the principal balance due under the Restated Credit
Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3
million was utilized to pay outstanding balances to various key food and paper
distributors; and the remaining amount was used primarily to pay down
outstanding balances due certain other vendors. The reduction of the debt under
the Restated Credit Agreement and the Secondary Credit Line, both of which
carry a 13% interest rate will reduce the Company's interest expense by more
than $1.3 million annually.
The Private Placement purchase agreement requires that the
Company submit to its shareholders for vote at its 1997 Annual Shareholders'
Meeting the conversion of the Preferred Stock into 8,771,900 shares of the
Company's common stock. If the shareholders do not vote in favor of the
conversion, the Preferred Stock will remain outstanding with the rights and
preferences set forth in the Certificate of Designation of Series A Preferred
Stock of the Company (the "Certificate", a copy of which is an Exhibit hereto),
including (i) a dividend preference, (ii) a voting preference, (iii) a
liquidation preference and (iv) a redemption requirement. If the conversion of
the Preferred Stock into common stock is not approved by the Company's
shareholders at the 1997 Annual Meeting, the Preferred Stock will have the
right to receive cash
21
<PAGE> 24
dividends equal to $16.53 per share per annum payable on a quarterly basis
beginning August 19, 1997. Such dividends are cumulative and must be paid in
full prior to any dividends being declared or paid with respect to the
Company's common stock. If the Company is in default with respect to any
dividends on the Preferred Stock, then no cash dividends can be declared or
paid with respect to the Company's common stock. If the Company fails to pay
any two required dividends on the Preferred Stock, then the number of seats on
the Company's Board of Directors will be increased by two and the holders of
the Preferred Stock will have the right, voting as a separate class, to elect
the Directors to fill those two new seats, which new Directors will continue in
office until the holders of the Preferred Stock have elected successors or the
dividend default has been cured. In the event of any liquidation, dissolution
or winding up, but not including any consolidation or merger of the Company,
the holders of the Preferred Stock will be entitled to receive a liquidation
preference of $114 per share plus any accrued but unpaid dividends (the
"Liquidation Preference"). In the event the stockholders do not approve the
conversion of the Preferred Stock and the Company subsequently completes a
consolidation or merger and the result is a change in control of the Company,
then each share of the Preferred Stock will be automatically redeemed for an
amount equal to the Liquidation Preference. The Company is required to redeem
the Preferred Stock for an amount equal to the Liquidation Preference on or
before February 12, 1999. If the redemption does not occur as required, the
dividend rate will increase from $16.53 per share to $20.52 per share.
Additionally, if there are not then Directors serving which were elected by the
holders of the Preferred Stock, the number of directors constituting the
Company's Board of Directors will be increased by two and the holders of the
Preferred Stock voting as a class will be entitled to elect the Directors to
fill the created vacancies.
In the fiscal year ended December 30, 1996, the Company
raised approximately $1.8 million from the sale of various of its assets to
third parties, including both personal and excess real property from closed or
undeveloped Restaurant locations. Under the terms of the Loan Agreement and the
Restated Credit Agreement, approximately 50% of those sales proceeds were
utilized to reduce outstanding principal. The Company also received $3.5
million in connection with the reduction of a note receivable which funds were
generally used to supplement working capital. As of December 30, 1996, the
Company owns or leases approximately 47 parcels of excess real property which
it intends to continue to agressively market to third parties, and has an
inventory of approximately 36 used MRP's which it intends to continue to
agressively market to franchisees and third parties. There can be no assurance
that the Company will be successful in disposing of these assets, and 50% of
the proceeds from the sale of excess real property must be used to reduce the
principal balance under the Restated Credit Agreement.
The Company has previously had significant working capital
due to the proceeds from its two public stock offerings. As of December 31,
1993, these proceeds had been utilized to purchase long-term property and
equipment. The Company has negative working capital of $26.7 million at
December 30, 1996 (determined by subtracting current liabilities from current
assets). It is anticipated that the Company will continue to have negative
working capital since approximately 85% of the Company's assets are long-term
(property, equipment, and intangibles), 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 aggressive programs at the
beginning of fiscal year 1997 designed to improve food, paper and labor costs
in the Restaurants. The Company also reduced the corporate and regional staff
by 32 employees in the beginning of fiscal year 1997. Overall, the Company
believes fundamental steps have been taken to improve the Company's
profitability, but there can be no assurance that it will be able to do so.
Management believes that cash flows generated from operations and the Private
Placement should allow the Company to meet its financial obligations and to pay
operating expenses in fiscal year 1997. The Company must, however, also
successfully consummate the purchase of the Rall-Folks Notes, the RDG Note and
the NTDT Note for Common Stock. If the Company is unable to consummate one or
more of those transactions, and if the Company is thereafter unable to reach
some other arrangements with Rall Folks, RDG or NTDT, the Company may default
under the terms of the Restated Credit Agreement. In that event, the Company
would seek financing from one or more of its current lenders or other third
parties to satisfy its obligations to Rall-Folks, RDG and NTDT, although no
assurance can be given that the Company would be successful in those efforts.
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: uncertainties related to the
general economy; competition; costs of food and labor; the Company's ability to
obtain adequate capital and to continue to lease or buy successful sites and
construct new Restaurants; and the Company's ability to locate capable
franchisees. The price of the Company's common stock can be affected by the
above. Additionally, any shortfall in revenue or earnings from levels expected
by securities analysts could have an immediate and significant adverse effect
on the trading price of the Company's common stock in a given period.
22
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Checkers Drive-In Restaurants, Inc. and Subsidiaries:
We have audited the consolidated financial statements of Checkers Drive-In
Restaurants, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in Item 14. These
consolidated financial statements and financial schedule are the responsibility
of the company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Checkers Drive-In
Restaurants, Inc. and subsidiaries as of December 30, 1996 and January 1, 1996,
and the results of their operations and their cash flow for each of the years
in the three-year period ended December 30, 1996, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
Tampa, Florida
March 3, 1997
23
<PAGE> 26
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 1,
1996 1996
--------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents
Restricted $ 1,505,000 $ 687,500
Unrestricted 1,551,493 2,676,296
Accounts receivable 1,544,137 1,942,544
Notes receivable 214,063 2,885,962
Inventory 2,260,945 3,161,996
Property and equipment held for resale 7,607,879 4,338,964
Income taxes receivable 3,514,188 3,272,594
Deferred loan costs (note 1) 2,451,551 --
Prepaid expenses and other current assets 305,721 1,368,532
--------------------------------
Total Current Assets 20,954,977 20,334,388
Property and equipment, at cost, net of
accumulated depreciation and
amortization (note 2) 98,188,550 119,949,100
Note receivable from related party (note 6) -- 5,182,355
Goodwill and non-compete
agreements, net of accumulated
amortization of $4,186,132 in 1996 and
$3,211,665 in 1995 (note 6) 12,283,789 17,019,078
Deferred income taxes (note 4) -- 3,358,000
Deferred loan costs - less current portion (note 1) 3,899,820 --
Deposits and other noncurrent assets 782,694 975,996
--------------------------------
$136,109,830 $166,818,917
================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 1,
1996 1996
-----------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Short term debt (note 3) $ 2,500,000 $ 1,000,000
Current installments of long term debt (note 3) 9,589,233 13,170,619
Accounts payable 15,142,249 10,536,745
Accrued wages, salaries, and benefits 2,527,993 2,637,830
Reserve for restructuring, Restaurant relocations and
abandoned sites (note 8) 3,799,770 2,290,223
Accrued liabilities 13,784,309 13,652,230
Deferred franchise fee income 336,919 300,000
-----------------------------------
Total current liabilities 47,680,473 43,587,647
Long-term debt, less current installments (note 3) 39,905,987 38,090,278
Deferred franchise fee income 465,500 763,000
Minority interests in joint ventures 1,454,672 549,255
Other noncurrent liabilities 6,262,813 3,852,729
-----------------------------------
Total liabilities 95,769,445 86,842,909
-----------------------------------
STOCKHOLDERS' EQUITY (NOTE 7):
Preferred stock, $.001 par value, Authorized
2,000,000 shares, no shares outstanding -- --
Common stock, $.001 par value, authorized
100,000,000 shares, 51,768,480 issued and
outstanding at December 30, 1996 and
51,528,480 at January 1, 1996 51,768 51,528
Additional paid-in capital 90,339,098 90,029,213
Warrants (notes 7 and 10) 9,463,132 3,000,000
Retained (deficit) earnings (59,113,613) (12,704,733)
-----------------------------------
40,740,385 80,376,008
Less treasury stock, at cost, 578,904 shares 400,000 400,000
-----------------------------------
Net stockholders' equity 40,340,385 79,976,008
-----------------------------------
Commitments and related party transactions (notes 5 and 9)
$ 136,109,830 $ 166,818,917
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
1996 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
REVENUES:
Net Restaurant sales 155,392,311 178,744,335 194,921,500
Royalties 7,436,720 7,606,060 6,917,688
Franchise fees 929,662 960,769 1,876,750
Modular restaurant packages 1,201,624 2,994,285 11,398,642
-----------------------------------------------
Total revenues 164,960,317 190,305,449 215,114,580
-----------------------------------------------
COSTS AND EXPENSES:
Restaurant food and paper costs 54,706,940 63,726,528 69,171,769
Restaurant labor costs 57,301,817 58,245,114 58,771,755
Restaurant occupancy expenses 12,926,386 11,562,191 9,743,089
Restaurant depreciation and amortization 8,847,663 10,649,982 12,334,119
Advertising expense 7,420,414 8,086,874 7,932,986
Other restaurant operating expenses 15,345,252 15,565,453 15,133,639
Cost of modular restaurant package revenues 1,703,623 4,853,502 10,484,926
Other Deprecation and amortization 4,325,517 4,044,290 2,796,088
Selling general and administrative expenses 20,189,965 24,215,251 21,875,325
Impairment of long-lived assets (notes 1 and 8) 15,281,745 18,935,190 --
Losses on assets to be disposed of (note 8) 7,131,639 3,192,000 9,140,000
Loss Provisions (note 8) 1,991,295 4,445,000 5,631,000
-----------------------------------------------
Total cost and expenses 207,172,256 227,521,375 223,014,696
-----------------------------------------------
Operating loss (42,211,939) (37,215,926) (7,900,116)
-----------------------------------------------
Other income (expense)
Interest income 677,995 674,119 325,614
Interest expense (6,232,761) (5,724,242) (3,564,454)
-----------------------------------------------
Loss before minority interest, and
income tax expense (benefit) (47,766,705) (42,266,049) (11,138,956)
Minority interest in (losses) earnings (1,508,825) (191,575) 185,298
-----------------------------------------------
Loss before income tax expense (benefit) (46,257,880) (42,074,474) (11,324,254)
Income tax expense (benefit) (note 4) 151,000 (8,855,000) (4,573,000)
-----------------------------------------------
Net Loss $ (46,408,880) $ (33,219,474) $ (6,751,254)
===============================================
Net loss per common share $ (.90) $ (.65) $ (.14)
===============================================
Weighted average number of common shares
outstanding 51,698,480 50,903,238 49,464,023
===============================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
Additional
Common Paid-In
Stock Capital Warrants
--------------------------------------
<S> <C> <C> <C>
Balance at, December 31, 1993 $48,641 $83,356,420 --
Issuance of 884,208 shares of common stock at
$5.77 to $6.28 per share to acquire Restaurants 884 5,427,998 --
Issuance of 664,045 shares of common stock as
consideration for Restaurant acquisitions (note 6) 664 237,238 --
Net loss -- -- --
--------------------------------------
Balance at, January 2, 1995 50,189 89,021,656 0
Issuance of 178,273 shares of common stock
at $2.24 per share to acquire territory
rights 178 399,822 --
Issuance of 118,740 shares of common stock at
$2.20 per share to acquire a promotional apparel
company 119 260,590 --
Issuance of 126,375 shares of common stock at
$2.19 per share to acquire a Restaurant 126 276,347 --
Issuance of 907,745 shares of common stock as
consideration for Restaurant acquisition (note 6) 908 54,806 --
Issuance of 8,377 shares of common stock at
$1.91 per share to pay consulting fees 8 15,992 --
Warrants issued in settlement of
litigation -- -- 3,000,000
Net loss -- -- --
--------------------------------------
Balance at, January 1, 1996 51,528 90,029,213 3,000,000
Issuance of 200,000 shares of common stock at
$1.14 as payment on long-term debt 200 221,925 --
Issuance of 40,000 shares of common stock at
$1.19 per share to pay consulting fees 40 47,460 --
Warrants issued to investor group -- -- 6,463,132
Employee stock options vested upon severance -- 40,500 --
Net loss -- -- --
--------------------------------------
Balance at, December 30, 1996 $51,768 $90,339,098 $ 9,463,132
======================================
</TABLE>
<TABLE>
<CAPTION>
Net
Retained Treasury Stockholders
Earnings Stock Equity
-----------------------------------------------
<S> <C> <C> <C>
Balance at, December 31, 1993 $ 27,265,995 $ (400,000) $ 110,271,056
Issuance of 884,208 shares of common stock at
$5.77 to $6.28 per share to acquire Restaurants -- -- 5,428,882
Issuance of 664,045 shares of common stock as
consideration for Restaurant acquisitions (note 6) -- -- 237,902
Net loss (6,751,254) -- (6,751,254)
-----------------------------------------------
Balance at, January 2, 1995 20,514,741 (400,000) 109,186,586
Issuance of 178,273 shares of common stock
at $2.24 per share to acquire territory
rights -- -- 400,000
Issuance of 118,740 shares of common stock at
$2.20 per share to acquire a promotional apparel
company -- -- 260,709
Issuance of 126,375 shares of common stock at
$2.19 per share to acquire a Restaurant -- -- 276,473
Issuance of 907,745 shares of common stock as
consideration for Restaurant acquisition (note 6) -- -- 55,714
Issuance of 8,377 shares of common stock at
$1.91 per share to pay consulting fees -- -- 16,000
Warrants issued in settlement of
litigation -- -- 3,000,000
Net loss (33,219,474) -- (33,219,474)
-----------------------------------------------
Balance at, January 1, 1996 (12,704,733) (400,000) 79,976,008
Issuance of 200,000 shares of common stock at
$1.14 as payment on long-term debt -- -- 222,125
Issuance of 40,000 shares of common stock at
$1.19 per share to pay consulting fees -- -- 47,500
Warrants issued to investor group -- -- 6,463,132
Employee stock options vested upon severance -- -- 40,500
Net loss (46,408,880) -- (46,408,880)
-----------------------------------------------
Balance at, December 30, 1996 $(59,113,613) $ (400,000) $ 40,340,385
===============================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
1996 1996 1995
----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings (Loss) $(46,408,880) $(33,219,474) $ (6,751,254)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Deprecation and amortization 13,173,180 14,694,273 15,130,208
Impairment of long-lived assets 15,281,745 18,935,190 --
Provision for losses on assets to be disposed of 7,131,639 3,192,000 9,140,000
Provision for bad debt 1,310,818 2,261,196 846,521
Deferred loan cost amortization 1,300,081 -- --
Loss Provisions 1,991,295 3,800,000 4,669,847
(Gain) loss on sale of property & equipment (74,580) 125,816 68,375
Minority interests in (losses) earnings (1,508,825) (191,575) 185,298
Other -- -- 237,902
Change in assets and liabilities:
Increase in receivables (474,386) (1,125,719) (592,568)
Decrease in notes receivables 3,011,825 -- --
Decrease (Increase) in inventory 370,590 (588,445) (524,328)
(Increase) Decrease in costs and earnings in excess
of billings on uncompleted contracts (24,793) 1,041,847 70,872
Increase in income tax receivable (241,594) (1,712,595) (423,671)
Decrease (Increase) in deferred income tax assets 3,358,000 (3,358,000) --
(Increase) decrease in prepaid expenses (89,972) 447,445 (4,477,970)
Increase in deposits and other noncurrent assets (309,088) (103,203) (1,248,738)
Increase (decrease) in accounts payable 4,272,963 (2,810,879) (3,339,470)
Increase in accrued liabilities 2,526,157 4,457,293 3,483,562
(Decrease) increase in deferred income (260,581) 205,500 (448,000)
Decrease in deferred income taxes liabilities -- (2,540,000) (3,701,000)
----------------------------------------------
Net cash provided by operating activities 4,335,594 3,510,670 12,325,586
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,240,449) (2,876,491) (34,763,515)
Proceeds from sale of assets 1,812,625 5,502,347 15,372,000
Increase in goodwill and noncompete agreements (3,875) -- (156,206)
Acquisitions of companies, net cash paid (200,000) (64,389) (1,085,054)
----------------------------------------------
Net cash provided by (used in) investing
activities $ (2,631,699) $ 2,561,467 $(20,632,775)
==============================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
1996 1996 1995
------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt-net 1,500,000 1,000,000 --
Proceeds from issuance of long-term debt -- 4,183,195 --
Borrowing on notes note payable to banks -- -- 18,000,000
Repayments on notes payable to banks -- -- (7,250,000)
Principal payments on long-term debt (3,584,309) (11,239,365) (2,097,525)
Proceeds from investment by minority interest 285,000 -- --
Distributions to minority interest (211,889) (163,696) (273,240)
-----------------------------------------------
Net cash provided by (used in) financing activities (2,011,198) (6,219,866) 8,379,235
-----------------------------------------------
Net increase (decrease) in cash (307,303) (147,729) 72,046
CASH AT BEGINNING OF PERIOD 3,363,796 3,511,525 3,439,479
-----------------------------------------------
CASH AT END OF PERIOD $ 3,056,493 $ 3,363,796 $ 3,511,525
===============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 5,842,109 $ 5,065,292 $ 3,662,963
Income taxes paid -- $ 182,121 $ 242,000
Note received on sale of assets -- $ 4,982,355 --
Capital lease obligations incurred $ 225,000 $ 5,000,000 $ 887,048
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Acquisitions of companies:
Fair value of assets acquired $ 9,902,452 $ 3,045,758 $ 12,637,201
Receivables forgiven (5,429,459) -- --
Reversal of deferred gain 1,421,517 -- --
Liabilities assumed (5,694,510) (1,988,476) (6,123,265)
Stock issued -- (992,893) (5,428,882)
-----------------------------------------------
Total cash paid for the net assets acquired $ 200,000 $ 64,389 $ 1,085,054
===============================================
Stock issued for repayment of debt $ 228,125 $ -- $ --
===============================================
Stock issued for payment of consulting fees $ 47,500 $ -- $ --
===============================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1996, JANUARY 1, 1996, AND JANUARY 2, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PURPOSE AND ORGANIZATION - The principal business of Checkers Drive-In
Restaurants, Inc. (the "Company") is the operation and franchising of Checkers
Restaurants. At December 30, 1996, there were 478 Checkers Restaurants
operating in 23 different states, the District of Columbia, and Puerto Rico. Of
those Restaurants, 232 were Company-operated (including thirteen joint
ventures) and 246 were operated by franchisees. The accounts of the joint
ventures have been included with those of the Company in these consolidated
financial statements.
The consolidated financial statements also include the
accounts of all of the Company's subsidiaries, including Champion Modular
Restaurant Company, Inc. ("Champion"). Champion manufactures Modular Restaurant
Packages primarily for the Company and franchisees. Effective February 15,
1994, Champion was merged into the Company and is currently operated as a
division. Intercompany balances and transactions have been eliminated in
consolidation and minority interests have been established for the outside
partners' interests.
As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a fiscal year which will generally
end on the Monday closest to December 31st. Each quarter consists of three
4-week periods with the exception of the fourth quarter which consists of four
4-week periods.
b) ACCOUNTING CHANGE - As discussed in Note 7, the Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation".
c) REVENUE RECOGNITION - Franchise fees and area development franchise fees are
generated from the sale of rights to develop, own and operate Checkers
Restaurants. Area development franchise 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 Area Development 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 a Restaurant). Both franchise fees and area
development franchise fees are non-refundable. Franchise fees and area
development franchises fees received prior to the substantial completion of the
Company's obligations are deferred.
The Company receives royalty fees from franchisees, generally
in the amount of 4% of each Restaurant's 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 a maturity of less than three months to be cash
equivalents.
e) RECEIVABLES - Receivables consist primarily of royalties due from
franchisees and receivables from the sale of Modular Restaurant Packages.
Allowances for doubtful receivables was $2,216,836 at December 30, 1996 and
$1,357,938 at January 1, 1996.
f) INVENTORY - Inventories are stated at the lower of cost (first-in, first-out
(FIFO) method) or market.
g) PRE-OPENING COSTS - Pre-opening costs are deferred and amortized over 12
months commencing with a Restaurant's opening. Such costs totalled $14,133 at
December 30,1996 and $161,234 at January 1, 1996.
h) DEFERRED LOAN COSTS - Deferred loan costs of $6,805,677 incurred in
connection with the Company's November 22, 1996 restructure of its primary
credit facility (see Notes 3 and 10) are being amortized on the effective
interest method.
30
<PAGE> 33
i) 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.
j) 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. In applying SFAS
No. 121 during 1995 and in 1996, the Company reviewed all stores that recorded
losses in the applicable fiscal years and performed a discounted cash flow
analysis where indicated for each store based upon such results projected over
a ten or fifteen year period. This period of time was selected based upon the
lease term and the age of the building, which the Company believes is
appropriate based upon its limited operating history and the estimated useful
life of its modular restaurants.
The Company recorded significant SFAS No. 121 impairment
losses in 1995 and again in 1996 because sales continued to decline in both
fiscal years, in spite of several marketing programs, which necessitated a
review of the carrying value of its assets. The effect of applying SFAS No. 121
resulted in a reduction of property and equipment and goodwill of $15,281,745
in 1996 and $18,935,190 in 1995.
k) 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 (SFAS 121 impairments of goodwill were $4,631,742 in 1996
and $5,850,447 in 1995).
l) 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.
m) 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.
n) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The balance sheets
as of December 30, 1996, and January 1, 1996, reflect the fair value amounts
which have been determined, using available market information and appropriate
valuation methodologies. However, considerable judgement is necessarily
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and cash equivalents, receivables, accounts payable, and
short-term debt - The carrying amounts of these items are a reasonable estimate
of their fair value.
Long-term debt - Interest rates that are currently available
to the Company for issuance of debt with similar terms and remaining maturities
are used to estimate fair value for debt issues that are not quoted on an
exchange.
o) STOCK SPLITS - The Company declared a three-for-two stock split, payable in
the form of stock dividends effective June 30, 1993. All share information and
per share information in these financial statements has been retroactively
restated to reflect the split.
p) RECLASSIFICATIONS - Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform to the 1996 presentation.
31
<PAGE> 34
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 30, January 1, Useful Life in
1996 1996 Years
--------------------------------------------
<S> <C> <C> <C>
Land and improvements $ 56,544,488 $ 59,534,146 15
Buildings 29,282,034 43,879,310 20-31.5
Equipment and fixtures 46,285,823 41,980,907 5-10
Construction-in-progress -- 1,162,652
----------------------------
132,112,345 146,557,015
Less accumulated
depreciation and
amortization 33,923,796 26,607,915
----------------------------
$ 98,188,550 $119,949,100
============================
</TABLE>
Capitalized interest totalled approximately $328,000 for 1994
(none in 1995 or 1996).
Note 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 30, January 1,
1996 1996
------------------------------------
<S> <C> <C>
Notes payable under Loan Agreement $ 35,818,099 $ 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 8,962,991 10,578,069
Unsecured notes payable, bearing interest at rates ranging from prime to 12% 3,480,852 3,580,852
Other 1,233,278 80,735
------------------------------------
Total long-term debt 49,495,220 51,260,897
Less current installments 9,589,233 13,170,619
------------------------------------
Long-term debt, less current installments $ 39,905,987 $ 38,090,278
====================================
</TABLE>
Aggregate maturities under the existing terms of long-term
debt agreements for each of the succeeding five years are as follows:
<TABLE>
<S> <C>
1997 $9,589,233
1998 7,217,865
1999 31,391,670
2000 1,000,145
2001 234,618
Thereafter 61,689
</TABLE>
On October 28, 1993, the Company entered into a loan
agreement (the "Loan Agreement") with a group of banks ("Bank Group") providing
for an unsecured, revolving credit facility. The Company borrowed approximately
$50 million under this facility primarily to open new Restaurants and pay off
approximately $4 million of previously-existing debt. The Company subsequently
arranged for the Loan Agreement to be converted to a term loan and
collateralized the term loan and a revolving line of credit ranging from $1
million to $2 million (the "Credit Line") with substantially all of the
Company's assets. On March 15, 1996, the Bank Group advanced an additional sum
of approximately $1.5 million to the Company which funds were used for the
payment of various property taxes (the "Property Tax Loan"). The Property Tax
Loan, together with all accrued interest, was repaid in full on June 12, 1996,
from proceeds of an income tax refund to the Company.
32
<PAGE> 35
On July 29, 1996, the debt under the Loan Agreement and
Credit Line was acquired from the Bank Group by an investor group led by an
affiliate of DDJ Capital Management, LLC (collectively, "DDJ"). The Company and
DDJ began negotiations for restructuring of the debt. On November 14, 1996, and
prior to consummation of a formal debt restructuring with DDJ, the debt under
the Loan Agreement and Credit Line was acquired from DDJ by a group of entities
and individuals, most of whom are engaged in the fast food restaurant business.
This investor group (the "CKE Group") was led by CKE Restaurants, Inc., the
parent of Carl Karcher Enterprises, Inc., Casa Bonita, Inc., and Summit Family
Restaurants, Inc. Also participating were most members of the DDJ Group, as
well as KCC Delaware, a wholly-owned subsidiary of Giant Group, Ltd., which is
a controlling shareholder of Rally's Hamburgers, Inc. Waivers of all defaults
under the Loan Agreement and Credit Line were granted through November 22,
1996, to provide a period of time during which the Company and the CKE Group
could negotiate an agreement on debt restructuring.
On November 22, 1996, the Company and the CKE Group executed
an Amended and Restated Credit Agreement (the "Restated Credit Agreement")
thereby completing a restructuring of the debt under the Loan Agreement. The
Restated Credit Agreement consolidated all of the debt under the Loan Agreement
and the Credit Line into a single obligation. At the time of the restructuring,
the outstanding principal balance under the Loan Agreement and the Credit Line
was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the
term of the debt was extended by one (1) year until July 31, 1999, and the
interest rate on the indebtedness was reduced to a fixed rate of 13%. In
addition, all principal payments were deferred until May 19, 1997, and the CKE
Group agreed to eliminate certain financial covenants, to relax others and to
eliminate approximately $6 million in restructuring fees and charges. The
Restated Credit Agreement also provided that certain members of the CKE Group
agreed to provide to the Company a short term revolving line of credit of up to
$2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit
Line"). In consideration for the restructuring, the Restated Credit Agreement
required the Company to issue to the CKE Group warrants to purchase an
aggregate of 20 million shares of the Companys' common stock at an exercise
price of $.75 per share, which was the approximate market price of the common
stock prior to the announcement of the debt transfer. As of February 27, 1997,
the Company has reduced the principal balance under the Restated Credit
Agreement by $9.1 million and has repaid the Secondary Credit Line in full. A
portion of the funds utilized to make these principal reduction payments were
obtained by the Company from the sale of certain closed restaurant sites to
third parties. Additionally, the Company utilized $10.5 million of the proceeds
from the February 21, 1997, private placement which is described later in this
section. Pursuant to the Restated Credit Agreement, the prepayments of
principal made in 1996 and early in 1997 will relieve the Company of the
requirement to make any of the regularly scheduled principal payments under the
Restructured Credit Agreement which would have otherwise become due in fiscal
year 1997. The Amended and Restated Credit Agreement provides however, that 50%
of any future asset sales must be utilized to prepay principal.
On August 2, 1995, the Company entered into a purchase
agreement (as amended in October 1995 and April 1996 the "RallFolks 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"). Pursuant to the Rall-Folks Agreement, the Company is to deliver to
Rall-Folks shares of its Common Stock with a value equal to the 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 December
30, 1996. The Rall-Folks Notes are fully subordinated to the Company's existing
bank debt.
Under the terms of the Rall-folks Agreement, the Company
guaranteed that if Rall-Folks sells all of the Common Stock issued for the
Rall-folks Notes in a reasonably prompt manner (subject to certain limitations
described below) RallFolks 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 December 30, 1996. The RDG Note is
fully subordinated to the Company's existing bank debt. In partial
consideration of the transfer of the RDG Note to the Company, the Company will
deliver to RDG shares of Common Stock with a value equal to the sum of (i) the
outstanding balance due under the RDG Note on
33
<PAGE> 36
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 negotiations with the various investor groups during
fiscal 1996 concerning the restructure of the Company's debt. Each of the
parties 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 was
to have been 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 was to have been
extended approximately one year. The Company intends to attempt to negotiate a
further extension of these notes. No assurance can be given that the Company
will be successful in any attempted negotiations.
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 11, 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"). Pursuant to the
NTDT Agreement, the Company is to issue shares of Common Stock to NTDT in
blocks of two hundred thousand shares each 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
34
<PAGE> 37
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 Common 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 total amount of principal outstanding under the NTDT Note was
approximately $1,354,000 as of December 30, 1996. The NTDT Note is fully
subordinated to the Company's existing bank debt. The term of the NTDT Note was
to have been extended until May 31, 1997, if the Company was in compliance with
its obligations under the NTDT Agreement and NTDT had received at least $1.0
million from the sale of the Common Stock by January 31, 1997. The Company did
not meet these obligations and the Note, therefore, was not extended. Such
dates were to be extended if NTDT failed to make a commercially reasonable
attempt to sell an average of 10,000 shares of Common Stock per day on each
trading day that a registration statement covering unsold shares held by NTDT
is in effect prior to such dates, or if the Company is delayed in filing a
registration statement (or an amendment or supplement thereto) due to the
failure of NTDT to provide information required to be provided to the Company
under the NTDT Agreement. In the event that the Company files a voluntary
bankruptcy petition, an involuntary bankruptcy petition is filed against the
Company and not dismissed within 60 days, a receiver or trustee is appointed
for the Company's assets, the Company makes an assignment of substantially all
of its assets for the benefit of its creditors, trading in the Common Stock is
suspended for more than 14 days, or the Company fails to comply with its
obligations under the NTDT Agreement, the outstanding balance due under the
NTDT Note will become due and NTDT may thereafter seek to enforce the NTDT
Note. The Company has not complied with its obligations under the NTDT
Agreement to date.
If these transactions are consummated, it is anticipated that
approximately 4,000,000 shares of Common Stock will be issued by the Company
(representing approximately 6.2% of the shares outstanding after such issuance)
as consideration for various assets, primarily the Rall-Folks Notes, the RDG
Note and the NTDT Note (the "Notes") described above. The number of shares to
be issued will be determined by dividing the outstanding balance due under the
Notes (approximately $4.8 million as of March 1, 1997) or the purchase price
for the assets (approximately $300,000) by the average of the closing sale
price per share of the Common Stock for a set number of days prior to the
closing date for each transaction. The shares will either be available for
immediate sale by the persons and entities to whom they are issued,or the
Company will be required to register them for sale under the federal and state
securities laws. 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
negotiated the following limits on the sales that may be made by Rall-Folks,
RDG and NTDT: (i) each may sell not more than 50,000 shares of Common Stock per
week (150,000 in the aggregate) and (ii) each may sell not more than 25,000
shares in any one day (75,000 shares in the aggregate); provided that each may
sell additional shares in excess of such limits if such additional shares are
sold at a price higher than the lowest then current bid price for the Common
Stock. While it is anticipated that the foregoing limits, if the agreements
containing such limits remain in effect, 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. The individuals or
entities having registration rights for Common Stock to be issued upon the
exercise of the warrants under the Restated Credit Agreement, (or any other
individuals or entities having piggyback registration rights thereto) will be
entitled to sell such stock upon exercise of the warrants subject to any
limitations under federal securities laws resulting from their relationship to
the Company. The individuals or entities having registration rights for Common
Stock issued in connection with the Private Placement may be sold in the open
market only after the expiration of one year from the date of issuance, also
subject to any applicable federal securities laws. There can be no assurance
that any of these sales will not have an adverse effect on the market price for
the Common Stock.
The consummation of the transaction with each of Rall-Folks,
RDG and NTDT has been delayed by the negotiations with the various investor
groups during fiscal 1996 concerning the restructure of the Company's debt.
Pursuant to the terms of the Restated Credit Agreement, the Company is
obligated to purchase or repay the Rall-Folks Notes, the RDG Note and the NTDT
Note using Common Stock, or may repay them in cash.
On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of the Company's common
stock, $.001 par value, and 87,719 shares of the Company's Series A preferred
stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private
Placement. The Company received approximately $20 million in proceeds from the
Private Placement. The Company used $8 million of the Private Placement
proceeds to reduce the principal balance due under the Restated Credit
Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3
million was utilized to pay outstanding balances to various key food and paper
distributors; and the remaining amount
35
<PAGE> 38
was used primarily to pay down outstanding balances due certain other vendors.
The reduction of the debt under the Restated Credit Agreement and the Secondary
Credit Line, both of which carry a 13% interest rate will reduce the Company's
interest expense by more than $1.3 million annually.
NOTE 4: INCOME TAXES
Income tax expense (benefit) from continuing operations in
fiscal years 1996, 1995 and 1994 amounted to $151,000, ($8,855,000), and
($4,573,000) respectively.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Current Deferred Total
--------------------------------------------
<S> <C> <C> <C>
1996
Federal $(3,397,000) $ 3,397,000 $ --
State 190,000 (39,000) 151,000
--------------------------------------------
$(3,207,000) $ 3,358,000 $ 151,000
============================================
1995
Federal $(2,957,000) $(4,523,000) $(7,480,000)
State -- (1,375,000) (1,375,000)
--------------------------------------------
$(2,957,000) $(5,898,000) $(8,855,000)
============================================
1994
Federal $ (773,000) $(3,094,000) $(3,867,000)
State (99,000) (607,000) (706,000)
--------------------------------------------
$ (872,000) $(3,701,000) $(4,573,000)
============================================
</TABLE>
Actual expense differs from the expected expense by applying
the federal income tax rate of 35% to earnings before income tax as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
Dec 30, Jan. 1, Jan 2,
1996 1996 1995
---------------------------------------------
<S> <C> <C> <C>
"Expected" tax (benefit) expense $(16,190,000) $(14,726,000) $(3,963,000)
State taxes, net of federal benefit (1,802,000) (1,632,000) (459,000)
Change in valuation allowance for deferred tax asset
allocated to income tax expense 18,125,000 7,616,000 --
Adjustments to deferred taxes for enacted change
in federal tax rate -- -- --
Other, Net 18,000 (113,000) (151,000)
---------------------------------------------
Actual tax expense (benefit) $ 151,000 $ (8,855,000) $(4,573,000)
=============================================
</TABLE>
36
<PAGE> 39
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities, are represented below:
<TABLE>
<CAPTION>
December 30, January 1,
1996 1996
-----------------------------
<S> <C> <C>
Deferred Tax Assets:
Impairment of long-lived assets under SFAS 121 $ 16,085,000 $ 7,365,000
Accrued expenses and provisions for restructuring and Restaurant
relocations and abandoned sites, principally due to deferral for
income tax purposes 8,581,000 6,156,000
Federal net operating losses and credits 13,878,000 7,733,000
State net operating losses and credits 2,210,000 1,275,000
Deferral of franchise income and costs associated with franchise
openings in progress 100,000 337,000
Other 284,000 995,000
-----------------------------
Total gross deferred tax assets 41,138,000 23,861,000
Valuation allowance (25,741,000) (7,616,000)
-----------------------------
Net deferred tax assets $ 15,397,000 $ 16,245,000
-----------------------------
Deferred Tax Liabilities:
Property and equipment, principally due to differences in depreciation 15,276,000 12,824,000
Pre-opening expense 121,000 63,000
-----------------------------
Total gross deferred tax liabilities 15,397,000 12,887,000
-----------------------------
Net deferred tax assets $ -- $ 3,358,000
=============================
</TABLE>
The net change in the valuation allowance in the year ended
December 30, 1996 was an increase of $18,125,000. The total valuation allowance
of $25,741,000 is maintained on deferred tax assets which the Company has not
determined to be more likely than not realizable at this time. The Company will
continue to review the valuation allowance on a quarterly basis and make
adjustments as appropriate.
The current year federal net operating loss was carried back
for federal tax purposes. This resulted in an unused portion of the net
operating loss and alternative tax net operating loss available for
carryforward which are both reflected in Federal net operating losses and
credits.
At December 30, 1996 the Company has net operating loss
carryforwards for Federal income tax purposes of $31,513,000 which are
available to offset future taxable income, if any, through 2011. The Company
also has alternative minimum tax credit carryforwards of approximately
$1,131,000 which are available to reduce future regular income taxes, if any,
over an indefinite period as well as Targeted Jobs Tax Credit carryforwards in
the amount of $446,000 which are available to reduce future regular income
taxes, if any, through 2011.
The Company was examined by the Internal Revenue Service
(IRS) for 1991 and 1992 and received tax deficiency notices on February 23,
1995. The IRS challenged the life used for depreciation purposes by the Company
for its modular restaurant buildings. The amount of the assessment for 1991 and
1992 was $579,551, before any related interest. The Company successfully
appealed the tax deficiency notices and was notified by the IRS, and concurred
with by the Joint Committee on Taxation, that the returns for the audited years
be accepted as filed.
NOTE 5: RELATED PARTIES
In May 1989 and March 1990, the Company entered into joint
ventures with related parties to operate two Restaurants. The joint venture
agreements require royalty fees of 2 to 4% and one of the agreements requires a
management fee of 2.5% be paid to the Company. Total fees received by the
Company were $102,835 and $111,725 respectively during 1995 and 1994.
37
<PAGE> 40
In December 1993, the Company sold its 50% partnership
interest in one of the above joint ventures back to the joint venture partner
for $422,000 and recognized a gain of $200,218. This joint venture partner has
an additional franchise Restaurant. Royalties paid by these Restaurants to the
Company, for the time periods in which the Restaurants were owned 100% by the
joint venture partner, were $67,935, and $62,222 in 1995 and 1994,
respectively.
In February 1990, the Company entered into a joint venture as
a 50% partner with an unaffiliated Florida corporation to own and operate a
Restaurant. In May, 1990, a related party leased to the partnership the land on
which the Restaurant is located. Rent paid by the partnership in 1993 and 1994
was $43,656, and $43,656, respectively.
In September 1991, the Company entered into a unit franchise
agreement for the operation of a single restaurant in Dania, Florida, with a
related party. The unit franchise agreement provided for payment to the Company
of a standard $25,000 franchise fee and a standard royalty fee of 4% of sales.
In connection with the transaction, the related party and his wife executed a
continuing guaranty, which guaranty provides for the personal guaranty of both
of the individuals of all obligations of the franchisee under the franchise
agreement. Total sums received by the Company in royalty fees in fiscal years
1995 and 1994 pursuant to the unit franchise agreement were $31,286, and
$32,827, respectively.
In January 1992, the Company entered into a unit franchise
agreement for the operation of a single restaurant in the Clearwater, Florida
area with three related parties, which agreement provided for payment to the
Company of a standard $25,000 franchise fee and a standard royalty fee of 4% of
sales. In connection with the transaction, the related parties executed a
continuing guaranty, which guaranty provides for the personal guaranty of each
of the individuals of all obligations of the franchisee under the franchise
agreement. Total sums received by the Company in royalty fees in fiscal years
1995 and 1994 pursuant to the unit franchise agreement were $17,932 and $33,296
respectively.
In February 1992, a general partnership was formed between a
Director and an unaffiliated Florida corporation, for the purpose of developing
a shopping center in Ocala, Florida. In July, 1992, the partnership leased to
the Company land on which a Restaurant was built. In October, 1994, the
partnership sold the land the Company was leasing to an unaffiliated entity.
Total rent paid during 1994 was $21,730.
In March 1993, a general partnership among certain related
parties leased to the Company under a triple net lease a parcel of land on
which a Checkers restaurant was to be built. The term of the lease was for five
years, with five five-year option periods and monthly rent payments of $4,167
during the initial term. Due to the reductions in the Company's development
plans, no restaurant was ever built on the property and the lease was
terminated in 1994, with no rent ever having been paid by the Company. The
Company did pay approximately $72,000 in development related fees to third
parties in connection with its efforts to develop the property, approximately
$30,000 of which were reimbursed to the Company by the partnership.
In July 1993, the Company entered into an Area Development
Agreement with two related parties. The Agreement provides for the payment to
the Company of the standard development fee, a standard franchise fee per
restaurant and payment of standard royalty fees. Six unit franchise agreements
have been granted pursuant to the Agreement in the names of various entities in
which the related parties each hold a fifty (50%) ownership interest. Total
royalty fees received by the Company in fiscal years 1995 and 1994 and pursuant
to the unit franchise agreements were $193,582 and $187,143 respectively.
In December 1993, the Company sold one of its Restaurants in
Ft. Lauderdale, Florida, to a related party, The sales price was $905,000 and
the Company received $705,000 in cash and a promissory note for $200,000. A
gain of approximately $470,000 was recognized by the Company. The term of the
promissory note was for two years bearing interest at prime + 2% with interest
only payments due quarterly and one balloon principal payment due on or before
December 31, 1995. The related party is currently negotiating for the sale of
the Restaurant to another franchisee. The Company has agreed to extend the term
of the Note to the earlier of May 31, 1996 or the date the Restaurant is sold.
The note is secured by property in Broward County, Florida. Total royalty fees
received by the Company in fiscal years 1995 and 1994 pursuant to the unit
franchise agreement for the Restaurant were $31,378 and $32,599 respectively.
In September 1993, the Company acquired 13 Restaurants from a
Director of the Company and a group of five partnerships (see note 6). The
Company also entered into a joint venture agreement with an affiliate of the
Director in September 1993, whereby the Director's affiliate served as the
operating general partner and owned 25% interest in the joint venture. The
agreement gave the Company the right to purchase, and gave the Director the
right to require the Company to purchase, the Director's 25% interest in the
joint venture at December 31, 1995 based on a formula price. The Director
received compensation and distributions totalling approximately $179,916 in
1995 and $265,000 in 1994 from the
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<PAGE> 41
joint venture. The joint venture also paid development fees of $200,000 in 1994
(none in 1995) to the Director and an affiliate of the Director. The joint
venture subleased its office space in Atlanta from an affiliate of the Director
in 1995 and 1994 . Rent paid by the joint venture in 1995 and 1994 was $86,595
and $124,905 respectively. Total franchise fees received from the Director and
his affiliate and recognized as income was and $96,250 in 1995 (none in 1994).
The Company purchased the interest of the Director and his affiliations in the
joint venture and sold three of these Restaurants to an affiliate of the
Director in August 1995 (see Note 6 relating to InnerCityFoods).
On July 17, 1995, Checkers of Raleigh, a North Carolina
corporation ("C of R") in which a Director is the principal officer and
shareholder, took possession of an under performing Company Restaurant pursuant
to a verbal agreement, and entered into a franchise agreement which provided
for waiver of the initial franchise fee but required the payment to the Company
of a royalty fee of 1%, 2% and 3% during the first, second and third years,
respectively, and 4% thereafter. On January 1, 1996, C of R entered into leases
for this Restaurant for a term of three years for (i) the building and
equipment at a monthly rental of 1.5%, 3% and 4.5% of gross sales during the
first, second and third years respectively, and (ii) the land at a monthly
rental of 3% of gross sales for the first year and 4% of gross sales
thereafter. Total sums received by the Company in fiscal year 1995 for this
Restaurant were: (a) $2,037 in royalty fees pursuant to the unit franchise
agreement, and (b) -0- in rent. All sums due and owing to the Company under the
leases as of December 30, 1996 were required to be paid on or before March 31,
1997. The Director executed a continuing guaranty, which provides for the
personal guaranty of all of the obligations of the franchisee under the
franchise agreement. Pursuant to an Option for Asset Purchase dated January 1,
1996, C of R was granted the option to purchase this Restaurant for the greater
of (a) 50% of its sales for the prior year, or (b) $350,000. On July 17, 1995,
C of R took possession of another under performing Company Restaurant pursuant
to a verbal agreement, and entered into a franchise agreement which provided
for waiver of the initial franchise fee but required the payment to the Company
of a royalty fee of 1%, 2% and 3% during the first, second and third years,
respectively, and 4% thereafter. On January 1, 1996, C of R entered into leases
for this Restaurant for a term of three years for (i) the building and
equipment at a monthly rental of 1.5%, 3% and 4.5% of gross sales during the
first, second and third years, respectively, and (ii) the land at a monthly
rental of 3% of gross sales for the first year and 4% of gross sales
thereafter. Total sums received by the Company in fiscal year 1995 for this
Restaurant were: (a) $1,392 in royalty fees pursuant to the unit franchise
agreement, and (b) -0- in rent. All sums due and owing to the Company under the
leases as of January 1, 1996, were required to be paid on or before March 31,
1996. The Director executed a continuing guaranty, which provides for the
personal guaranty of all of the obligations of the franchisee under the
franchise agreement. Pursuant to an Option for Asset Purchase dated January 1,
1996, C of R was granted the option to purchase this Restaurant for the greater
of (a) 50% of its sales for the prior year, or (b) $350,000.
On December 5, 1995, Checkers of Asheville, a North Carolina
corporation ("C of A") in which a Director is the principal officer and
shareholder, took possession of an under performing Company Restaurant pursuant
to a verbal agreement, and entered into a unit franchise agreement which
provided for waiver of the initial franchise fee but required the payment to
the Company of the standard royalty fee. On January 1, 1996, C of A entered
into leases for this Restaurant for a term of three years for the land,
building and equipment at a monthly rental of 4% of gross sales during the
first year, 6% of gross sales the second year, and a direct pass through of
land rent during the third year. The Director executed a continuing guaranty,
which provides for the personal guaranty of all of the obligations of the
franchisee under the franchise agreement. Pursuant to an Option for Asset
Purchase dated January 1, 1996, C of A was granted the option to purchase this
Restaurant for the greater of (a) 50% of its sales for the prior year, or (b)
$350,000. On December 5, 1995, C of A took possession of another under
performing Company Restaurant pursuant to a verbal agreement, and entered into
a franchise agreement which provided for waiver of (i) the initial franchise
fee, and (ii) royalties during the first three months, but requires the payment
to the Company of the standard royalty fee thereafter. On January 1, 1996, C of
A entered into leases for this Restaurant for a term of three years for the
building and equipment at a monthly rental of 1% of gross sales payable from
and after the fourth month of the lease. The Director executed a continuing
guaranty, which provides for the personal guaranty of all of the obligations of
the franchisee under the franchise agreement. Pursuant to an Option for Asset
Purchase dated January 1, 1996, C of A was granted the option to purchase this
Restaurant for the greater of (a) 50% of its sales for the prior year, or (b)
$300,000. On December 5, 1995, C of A took possession of another under
performing Company Restaurant pursuant to a verbal agreement and entered into a
franchise agreement which provided for waiver of the initial franchise fee but
required the payment to the Company of the standard royalty fee. On January 1,
1996, C of A entered into leases for this Restaurant for a term of three years
for the land, building and equipment at a monthly rental of 3% of gross sales.
The Director executed a continuing guaranty, which provides for the personal
guaranty of all of the obligations of the franchisee under the franchise
agreement. Pursuant to an Option for Asset Purchase dated January 1, 1996, C of
A was granted the option to purchase this Restaurant for the greater of (a) 50%
of its sales for the prior year, or (b) $300,000.
In January 1996, the Company entered into an Agreement for
Lease with Option for Asset Purchase ("Agreement") with a Director in which the
Company was granted certain rights for three years in and to a Restaurant in
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<PAGE> 42
Clearwater, Florida. Checkers (a) entered into a sublease for the real property
and an equipment lease for the fixed assets at a combined monthly rental of
$3,000, and (b) agreed to purchase the inventory located at the Restaurant. In
March 1996, the Company exercised its option to purchase this Restaurant for a
purchase price of $300,000. All amounts owed to the Company by C of R and C of
A (totalling $116,547) were offset against the purchase price.
The Company incurred approximately $166,000 and $334,000 in
legal fees for 1995 and 1994, respectively, from a law firm in which a Director
of the Company, at the time, was a partner.
Management believes that all of the above transactions were
completed on terms comparable to those which could have been negotiated with
independent third parties.
NOTE 6: ACQUISITIONS AND DISPOSITIONS
In May 1994, the Company completed an exchange agreement with
Rally's Hamburgers, Inc. ("Rally's") in which the Company acquired or leased
three Atlanta, Georgia Restaurant sites directly from Rally's and leased,
assigned existing leases for, or sold 18 Checkers Restaurant sites to Rally's.
Also in May 1994, the Company acquired eight Restaurant properties in Atlanta,
Georgia from two Rally's franchisees, and nine Restaurant properties in Miami,
Florida from a third Rally's franchisee. The aggregate purchase price for these
acquisitions was approximately $9,708,000 (676,761 shares of Common Stock,
$177,000 in cash, and approximately $5,295,000 in subordinated promissory notes
and assumed liabilities). Goodwill of $5,760,814 resulted from these
transactions.
The Company acquired five additional Restaurants from three
franchisees during 1994, for an aggregate of 207,457 shares of Common Stock,
$908,000 in cash, and $828,000 in assumption of liabilities. Goodwill of
$729,249 resulted from these transactions.
On March 31, 1995, the Company re-acquired certain rights
relating to the development and operation of Checkers Restaurants in the cities
of Flint and Saginaw, Michigan. The purchase price was $400,000 payable by the
delivery of 178,273 shares of Common Stock.
Effective as of July 28, 1995, an Asset Purchase Agreement
(the "Agreement") was entered into by and among InnerCityFoods, a Georgia
general partnership ("ICF"), InnerCityFoods Joint Venture company, a Delaware
corporation and wholly owned subsidiary of the Registrant ("ICF JVC"),
InnercityFoods Leasing Company, a Delaware corporation and wholly owned
subsidiary of the Company ("Leasing"), The La-Van Hawkins Group, Inc., a
Georgia corporation ("Hawkins Group"), La-Van Hawkins InnerCityFoods, LLC, a
Maryland limited liability company ("LHICF"), and La-Van Hawkins, an individual
who was the President of ICF and a Director of the Company from August 1994 to
January 1996 ("Hawkins"). For purposes of the disclosure in this term, ICF JVC,
Leasing and the Company are collectively referred to as the "Checkers Parties"
and Hawkins Group, LHICF and Hawkins are collectively referred to as the
"Hawkins Parties".
ICF was a joint venture between the Hawkins Group and ICF
JVC, of which the Hawkins Group was the Operating Partner. The Hawkins Group is
controlled by Hawkins. ICF was engaged in the operation of seven Checkers
Restaurants in Atlanta, Georgia, six Checkers Restaurants in Philadelphia,
Pennsylvania, and three Checkers Restaurants in Baltimore, Maryland. ICF JVC
owned a 75% interest in ICF and the Hawkins Group owned a 25% interest in ICF.
The physical assets comprising the Restaurants operated by ICF were owned by
Leasing and leased to ICF.
The Agreement consisted of two separate transactions. The
first transaction was the purchase by the Company of all of the rights, titles,
and interest of Hawkins Group in and to ICF for a purchase price of $1,250,000,
plus an amount based on ICF's earnings times 1.25, minus all amounts owed by
the Hawkins Parties to the Checkers Parties in connection with the operation of
ICF. The component of the purchase price based upon the earnings of ICF was
zero, and the amounts owed by the Hawkins Parties to the Checkers Parties was
in excess of $1,250,000. Accordingly, there was no net purchase price payable
to the Hawkins Parties by the Company for Hawkins Group's interest in ICF.
The second transaction under the Agreement was the sale by
the Checkers Parties of all of their respective rights, titles and interests in
the three Checkers Restaurants located in Baltimore, Maryland, to LHICF for a
purchase price of $4,800,000. The purchase price was paid by the delivery of a
promissory note in the amount of $4,982,355, which amount includes the purchase
price for the three Restaurants, the approximately $107,355 owed by the Hawkins
Parties to the Checkers Parties in connection with the operation of ICF that
was not offset by the $1,250,000 purchase price for Hawkins Group's interest in
ICF and an advance of $75,000 to Hawkins that was used primarily to pay closing
costs related to the
40
<PAGE> 43
transaction. The note bears interest at a floating rate which is the lesser of
(i) .25% above the current borrowing rate of the Company under its Loan
Agreement and (ii) 10.5%. Interest only is payable for the first six months
with principal and interest being payable thereafter based on a 15 year
amortization rate with the final payment of principal and interest due August
2002. The note is secured by a pledge of all the assets sold. Royalty fees for
the three Restaurants are at standard rates provided that the Company will
receive an additional royalty fee of 4% on all sales in excess of $1,800,000
per Restaurant.
In addition to the two transactions described above, the
Agreement also provided for the Hawkins Parties to be granted, and such parties
were granted on the closing date, development rights for Checkers Restaurants
in certain defined areas of Baltimore, Maryland, Washington, D.C., Bronx, New
York, and Harlem, New York, as well as a right of first refusal for certain
territories in California and Virginia. Franchise fees and royalty rates for
all Restaurants developed under such development rights will be at standard
rates provided that the Company will receive an additional royalty fee of 4% on
all sales in excess of $1,800,000 per Restaurant.
The Agreement also provides that the Agreement supersedes all
other prior agreements, understandings and letters related to the transactions
contemplated by the Agreement including, but not limited to, the Joint Venture
Agreement, dated as of August 10, 1993 and the Management Agreement, Engagement
Agreement and Buy/Sell Agreement, each dated as of September 7, 1993, by and
among certain of the Hawkins Parties and their affiliates and the Checkers
Parties; provided, however, that any provisions of such agreements that would
survive the termination of such agreements according to the terms of such
agreements are deemed to have survived the termination of such agreements
pursuant to the terms of the Agreement.
The Company purchased two Checkers Restaurants in Nashville,
Tennessee in March 1995 from a franchisee. Consideration consisted of
approximately $50,000 in cash at closing, secured, subordinated promissory
notes for approximately $1,550,000 and future cash payments of up to $800,000
consisting of $200,000 for a noncompete agreement ($40,000 per year for five
years) and up to $600,000 through an earnout provision.
In April 1995, the Company acquired the remaining 50% share
of a joint venture Restaurant in St. Petersburg, Florida. Pursuant to the terms
of the Assignment Agreement by and among the Company and the other partners of
the joint venture, the Company acquired the one-half interest for 126,375
shares of Common Stock valued at approximately $280,000.
In April 1995, the Company acquired substantially all of the
assets of a promotional apparel distributor ("the Distributor") for a purchase
price including (a) $67,400, payable in shares of Common Stock, and (b) the
assumption of approximately $238,000 of liabilities, approximately $196,000 of
which was represented by promissory notes payable to certain stockholders of
the Distributor (the "Noteholders"). The Company issued a total of 118,740
shares of Common Stock to the Distributor in payment of the $67,400 purchase
price and to the Noteholders in payment of their notes.
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, $3,333,014. Assets of $8,892,905 ($7,038,011 tangible and
$1,854,894 intangible) and liabilities of approximately $3,018,760 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 $2,341,131 recorded as of July 1, 1996, along with
certain of the above-mentioned assets and liabilities are subject to
adjustment.
Long-term debt of $1,621,757 was 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 $(921,757) are payable to a Bank and other parties
with interest at rates ranging from 8.11% to 10.139%. Non-interest bearing
notes payable, certain accrued liabilities and permitted encumbrances of
$1,064,462 related to this acquisition were assumed by the Company. Accounts
payable incurred by CDDT and its partnerships in the normal course of business
amounting to $332,541 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 an elimination of a
deferred gain of $1,421,517 which had been previously recorded
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<PAGE> 44
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.
The operations of these acquisitions are included in these
financial statements from the date of purchase. The impact of the 1994, 1995
and 1996 acquisitions on the consolidated results of operations for the period
prior to acquisitions is immaterial.
NOTE 7: STOCK OPTION PLANS
In August 1991, the Company adopted a stock option plan for
employees whereby incentive stock options, nonqualified stock options, stock
appreciation rights and restrictive shares can be granted to eligible salaried
individuals. An option may vest immediately as of the date of grant and no
option will be exercisable after ten years from the date of the grant. 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. In 1994, the Company
adopted a stock option plan for non-employee directors, which provides for the
automatic grant to each non-employee director upon election to the Board of
Directors of a non-qualified, ten-year option to acquire 12,000 shares of the
Company's common stock, with the subsequent automatic grant on the first day of
each fiscal year thereafter during the time such person is serving as a
non-employee director of a non-qualified ten-year option to acquire an
additional 3,000 shares of common stock. The Company has reserved 200,000
shares for issuance under this plan. All such options have an exercise price
equal to the closing sale price of the common stock on the date of grant.
One-fifth of the shares of common stock subject to each initial option grant
become exercisable on a cumulative basis on each of the first five
anniversaries of the grant of such option. One-third of the shares of common
stock subject to each subsequent option grant become exercisable on a
cumulative basis on each of the first three anniversaries of the date of the
grant of such option. As of December 30, 1996, there were 111,600 options
outstanding with a weighted average exercise price of $2.93 per share. The
plans provide that shares granted come from the Company's authorized but
unissued or reacquired common stock. The price of the options granted pursuant
to these plans will not be less than 100 percent of the fair market value of
the shares on the date of the grant.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation." Accordingly, no compensation cost has been recognized for
the stock option plans. Had compensation cost for the Company's stock option
plan for employees been determined based on the fair value at the grant date
for awards in fiscal 1994, 1995, and 1996 consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
1996 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) As Reported $ (46,408,880) $(33,219,474) $(6,751,254)
Pro Forma $ (47,828,734) $(33,706,928) $(7,136,711)
Net Earnings (Loss) As Reported $ (0.90) $ (0.65) $ (0.14)
Per Common Share Pro Forma $ (0.93) $ (0.66) $ (0.14)
</TABLE>
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1994, 1995 and 1996,
respectively: dividend yield of zero percent for all years; expected volatility
of 57, 60 and 64 percent, risk-free interest rates of 7.1, 6.2 and 6.5 percent,
and expected lives of 4.7, 5.1 and 3.5 years. The compensation cost disclosed
above may not be representative of the effects on reported income in future
years, for example, because options vest over several years and additional
awards are made each year. Information regarding the employee option plan for
1996, 1995 and 1994 is as follows.
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<PAGE> 45
SUMMARY OF THE STATUS OF THE COMPANY'S STOCK OPTION PLANS
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------------------------------
SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the
beginning of the year 2,579,484 $ 4.75 2,915,074 $ 5.44 2,119,000 $ 9.95
Granted (exercise price
equals market) 24,100 1.00 500,182 2.37 1,855,376 3.85
Granted (exercise price
exceeds market) 953,056 1.54 -- --
Exercised -- -- --
Forfeited (336,010) 2.07 (835,772) 4.00 (1,059,302) 5.09
------------ ---------- -------------
Outstanding at the
end of the year 3,220,630 3.94 2,579,484 4.75 2,915,074 5.44
============ ========== =============
Options Exercisable at
year end 2,165,934 1,147,650 572,124
------------ ---------- -------------
Weighted -average fair
value of options
granted during the
year $ 0.39(1) $ 1.08 $ 2.01
</TABLE>
(1). The weighted-average fair value of options granted whose exercise price
exceeds market was also $0.39.
SUMMARY OF COMPANY STOCK OPTION PLAN'S PRICES
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE AT EXERCISE PRICE
EXERCISE PRICES 12/30/96 (YRS.) 12/30/96
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 to $ 2.00 816,069 9.5 1.52 206,204 1.53
$2.01 to $ 3.00 896,840 4.7 2.59 470,701 2.56
$3.01 to $ 4.00 388,125 2.2 3.55 388,125 3.55
$4.01 to $ 5.00 -- -- -- -- --
$5.01 to $ 6.00 816,001 2.6 5.13 801,097 5.13
$6.01 to $20.00 303,595 6.9 11.72 299,807 11.71
- -------------------------------------------------------------------------------------------------------------------------------
$0.75 to $20.00 3,220,630 5.3 3.94 2,165,934 4.86
===============================================================================================================================
</TABLE>
In August 1994, employees granted $11.50, $11.63, $12.33 and
$19.00 options were given the opportunity to forfeit those options and be
granted an option to purchase a share at $5.13 for every two option shares
retired. As a result of this offer, options for 662,228 shares were forfeited
in return for options for 331,114 shares at $5.13 per share, and these changes
are reflected in the above table.
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<PAGE> 46
In February 1996, employees (excluding executive officers)
granted options in 1993 and 1994 with exercise prices in excess of $2.75 were
offered the opportunity to exchange for a new option grant for a lesser number
of shares at an exercise price of $1.95, which represented a 25% premium over
the market price of the Company's common stock on the date the plan was
approved. Existing options with an exercise price in excess of $11.49 could be
cancelled in exchange for new options on a four to 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. The offer to employees expired April 30, 1996
and, as a result of this offer, options for 49,028 shares were forfeited in
return for options for 15,877 shares at the $1.95 exercise price. These changes
are reflected in the tables above.
NOTE 8: 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 impairment charges related to an additional 28
under-performing Restaurants were recorded. 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.
Additional accounting charges and loss provisions of
$11,136,453 were recorded during the fourth quarter of 1996, $1,128,652 of
which consisted of various selling, general and administrative expenses
($578,810 for severance, $346,000 for employee relocations, bad debt provisions
of $366,078, and $203,842 for other charges). Provisions totalling $6,441,001
including $1,428,898 for additional losses on assets to be disposed of,
$4,618,139 for impairment charges related to 9 under-performing Restaurants
received by the Company as a result of the CDDT bankruptcy in July 1996 and
$392,964 for other impairment charges were also recorded. Additionally, in the
fourth quarter of 1996, a $1,140,746 provision for loss on the disposal of the
L.A. Mex product line, workers compensation accruals of $1,093,000 (included in
Restaurant labor costs), adjustments to goodwill of $513,676 (included in other
depreciation and amortization) and a $453,300 charge for the assumption of
minority interests in losses on joint-venture operations as a result of the
receipt by the Company of certain assets from the above mentioned CDDT
bankruptcy.
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.
Fourth quarter 1995 accounting charges included $3,000,000
for warrants to be issued in settlement of litigation (see Note 9 (b) - Lopez,
et al vs. Checkers) to accrue approximately $800,000 for legal fees in
connection with the settlement and continued defense of various litigation
matters. Additionally, during the fourth quarter of 1995, the Company adopted
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS
121) which required a write-down of certain intangibles and property related to
under performing sites. The effect of adopting SFAS 121 was a total charge to
earnings for 1995 of $18,935,190, consisting of a $5,850,447 write-down of
goodwill and a $13,084,743 write-down of property and equipment.
The significant loss provisions discussed above during 1995
and 1996 were caused by declining sales and a corresponding decline in cash
flows which impacted the Company's ability to support its net assets as
reviewed under SFAS No. 121. The result of declining sales and cash flows also
necessitated the recording of additional provisions to account for reductions
in corporate staffing and other overhead expenses associated with the
restructuring required to bring the Company's corporate and support activities
in line with the lower levels of sales and cash flows.
In 1994 the Company recorded provisions totalling $4,500,000
in the first quarter and $11,396,000 in the fourth quarter of 1994. The first
quarter $4,500,000 provision included $1,753,000 to provide for the write-off
of site costs and the other costs to originally open Restaurants and $1,728,000
in lease liability settlements for the 21 underperforming or closed
Restaurants. The fourth quarter 1994 provisions totalling $11,396,000 included
a $1,690,000 charge to settle leases and $2,950,000 to expense site costs and
other costs to originally open Restaurants for 12 under performing Restaurants
to be relocated. These charges, along with the first quarter $4,500,000 charge
described above are combined, and the total $9,140,000 was reflected in the
Company's 1994 statement of operations. A restructuring charge of $5,631,000
was included
44
<PAGE> 47
in the fourth quarter 1994 provisions to provide for the Company's
reorganization due to its inability to find sufficient capital on acceptable
terms to maintain its growth rate and the resultant downsizing of staff and
offices and the write-off of costs associated with sites which will not be
developed and new Restaurant openings which have been delayed. The charge
consisted of severance costs, closed office expense, and loss on sale of the
Company plane totalling $680,000, and site costs and other costs to open
previously anticipated new Restaurants of $4,951,000. Other fourth quarter 1994
provisions included $850,000 for legal costs and an allowance for royalty
receivables due from a franchisee involved in a bankruptcy, and $275,000 for
settlement of real estate title claims, both of which were included in 1994
selling, general and administrative expenses. Of the 1994 provisions which
total $15,896,000, approximately $11,000,000 represents non-cash charges
primarily for the write-off of site costs and other costs to originally open
the Restaurants. The remaining $4,900,000 primarily represents cash
expenditures to be made to settle lease liabilities (approximately $4,100,000)
over the remaining lives (up to fourteen years) of the underlying leases.
Lease payments, other cash charges and asset write-offs in
1996 and 1995 reduced the Reserve for restaurant relocations and abandoned
sites and the Reserve for restructuring were $6,259,944 and $3,334,946,
respectively.
NOTE 9: COMMITMENTS AND CONTINGENCIES
a) LEASE COMMITMENTS - The Company leases Restaurant properties
and office space under operating lease agreements. These operating leases
generally have five to ten-year terms with options to renew. Base rent expense
on these properties was approximately $8,015,000 in 1996, $9,773,000 in 1995,
and $7,800,000 in 1994.
Future minimum lease payments under noncancelable operating
leases as of December 30, 1996 are approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31 LEASES
---------------------------------------
<S> <C>
1997 8,245,000
1998 7,328,000
1999 7,165,000
2000 7,349,000
2001 6,999,000
Thereafter 53,599,000
</TABLE>
b) LITIGATION - Except as described below, the Company is not a
party to any material litigation and is not aware of any threatened material
litigation:
In re Checkers Securities Litigation, Master File No.
93-1749-Civ-T-17A. On October 13, 1993, a class action complaint was filed in
the United States District Court for the Middle District of Florida, Tampa
Division, by a stockholder against the Company, certain of its officers and
directors, including Herbert G. Brown, Paul C. Campbell, George W. Cook, Jared
D. Brown, Harry S. Cline, James M. Roche, N. John Simmons, Jr. and James F.
White, Jr., and KPMG Peat Marwick, the Company's auditors. 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 Section 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 Champion. The plaintiffs seek to represent a
class of all purchasers of the Company's Common Stock between November 22, 1991
and October 8, 1993, 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 one of the Company's director and officer liability insurance
carriers and another party to contribute to a fund for the purpose of paying
claims on a claims-made basis up to a total of $950,000. The Company has agreed
to contribute ten percent (10%) of claims made in excess of $475,000 for a
total potential liability of $47,500. The settlement is subject to the
execution of an appropriate stipulation of settlement and other documentation
as may be required or appropriate to obtain approval of the settlement by the
Court, notice to the class of pendency of the action and proposed settlement,
and final court approval of the settlements.
45
<PAGE> 48
Lopez et al. v. Checkers Drive-In Restaurants, Inc. et al.,
Case No. 94-282-Civ-T-17C. On February 18, 1994, a class action complaint was
filed by four stockholders against the Company, Herbert G. Brown and James
Mattei, former officers and directors, 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 for the settlement of this
class action. The agreement for settlement provides for various 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 common stock at a price of $1.4375 per share.
The warrants will be exercisable for a period of four (4) years after the
effective date of the settlement. At a hearing held on November 22, 1996, the
Court determined that the proposed settlement is fair, reasonable and adequate.
The settlement has been implemented and the lawsuit has been dismissed.
Greenfelder et al. v. White, ,Jr., et al. On August 10, 1995,
a state court complaint was filed in the Circuit Court of the Sixth Judicial
Circuit 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-C1-21. 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 to enter into various agreements and personal guarantees with the
Company based upon misrepresentations by the Company and its officers and 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 as follows: damages in an
unspecified amount in excess of $2,500,000 in connection with the claim of
intentional infliction of emotional distress; $3,000,000 or the return of all
monies invested by the plaintiffs in Checkers franchises in connection with the
misrepresentation of claims; punitive damages; attorneys' fees; and such other
relief as the court may deem appropriate. The Court has granted, in whole or in
part, three (3) motions to dismiss the plaintiff's complaint, as amended,
including an order entered on February 14, 1997, which dismissed the
plaintiffs' claim of intentional infliction of emotional distress, with
prejudice, but granted the plaintiffs leave to file an amended pleading with
respect to the remaining claims set forth in their amended complaint. The
Company believes that this lawsuit is unfounded and without merit, and intends
to continue to defend it vigorously. No estimate of any possible loss or range
of loss resulting from the lawsuit can be made at this time.
Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food
Services, Inc., et al. 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 has filed a motion to dismiss the amended
counterclaim. The Company believes that this lawsuit is unfounded and without
merit, and intends to continue to defend it vigorously. No estimate of any
possible loss or range of loss resulting from the lawsuit can be made at this
time.
c) PURCHASE COMMITMENTS - The Checkers Drive-In Restaurant
chain, which includes both the Company and franchisee-owned stores together,
has purchase agreements with various suppliers extending beyond one year.
Subject
46
<PAGE> 49
to the supplier's quality and performance, the purchases covered by these
agreements aggregate approximately $9 million in 1997, $11 million in 1998, $8
million in 1999 and $5 million in 2000.
NOTE 10: WARRANTS
As partial consideration for the transfer of a promissory
note of the Company (the "Note") back to the Company, the Company is obligated
to deliver to the holder of the Note a warrant (the "Warrant") for the purchase
of 120,000 shares of Common Stock at a price equal to the average closing sale
price of the Common Stock for the ten full trading days ending on the third
business day immediately preceding the closing date (such price is referred to
as the "Average Closing Price"); however, in the event that the average closing
price of the Common Stock for the ninety day period after the closing date is
less than the Average Closing Price, the purchase price for the Common Stock
under the Warrant will be changed on the 91st day after the closing date to the
average closing price for such ninety day period. The Warrant will be
exercisable at any time within five years after the closing date. The Company
is obligated to register the stock acquired by the holders of the Note under
the Warrant. It is anticipated that the transaction will close in the second
quarter of 1996.
The Company issued warrants for the purchase of 5,100,000
shares of the Company's Common Stock at a price of $1.4375 per share. These
warrants, valued at $3,000,000, were issued in settlement of certain litigation
(note 9 (b) - Lopez, et al vs. v.Checkers), and will be exercisable for a
period of four years after the effective date of the settlement.
On November 22, 1996, the Company issued warrants to purchase
20 million shares of Common Stock of the Company to the members of the new
lender group (see Note 3) at an exercise price of $0.75 per share which was the
approximate market price of the common stock prior to the announcement of the
transfer of the debt. These warrants were valued at $6,463,132, the value of
the concessions given as consideration for the warrants. The warrants are
exercisable at any time until November 22, 2002. Checkers is obligated to
register the common stock issuable under the warrants within six months and to
maintain such registration for the life of the warrants. The holders of the
warrants also have other registration rights relating to the common stock to be
issued under the warrants. The warrants contain customary antidilution
provisions. The warrants to purchase 150,000 shares of Checkers common stock
for $2.69 per share, which were issued in April 1995 to Checkers' prior bank
lending group under the prior loan agreement, were cancelled.
NOTE 11: UNAUDITED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial data for the periods
indicated (in 000's, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------
<S> <C> <C> <C> <C>
1996
- ----
Net revenues $ 38,423 $ 38,650 $ 37,088 $ 50,799
Impairment of long-lived assets -- -- 8,468 6,814
Losses on assets to be disposed of -- -- 5,702 1,430
Loss provisions -- -- 500 1,491
Loss from operations 714 (1,428) (21,303) (20,195)
Net loss (252) (1,548) (24,243) (20,366)
Earnings per share $ (.00) $ (.02) $ (.47) $ (.39)
1995
- ----
Net revenues $ 46,044 $ 48,923 $ 43,451 $ 51,887
Impairment of long-lived assets -- -- -- 18,935
Losses on assets to be disposed of -- -- 3,192 --
Loss provisions -- -- 645 3,800
Loss from operations (1,618) (691) (10,516) (24,391)
Net loss (1,693) (1,231) (7,312) (22,983)
Earnings per share $ (.03) $ (.02) $ (.14) $ (.45)
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------
<S> <C> <C> <C> <C>
1994
- ----
Net revenues $ 51,735 $ 47,157 $ 50,789 $ 65,434
Losses on assets to be disposed of 4,500 -- -- 4,640
Loss provisions -- -- -- 5,631
Loss from operations (2,367) 2,661 1,328 (9,522)
Net loss (1,758) 1,265 387 (6,646)
Earnings per share $ (.04) $ .03 $ .01 $ (.13)
</TABLE>
NOTE 12: UNAUDITED SUBSEQUENT EVENT
On March 25, 1997, Checkers agreed in principle to a merger
transaction pursuant to which Rally's Hamburgers, Inc., a Delaware corporation
("Rally's"), will become a wholly-owned subsidiary of Checkers. Rally's,
together with its franchisees, operates approximately 471 double drive-thru
hamburger restaurants primarily in the midwestern United States. Under the
terms of the letter of intent executed by Checkers and Rally's, each share of
Rally's common stock will be converted into three shares of Checkers' Common
Stock upon consummation of the merger. The transaction is subject to
negotiation of definitive agreements, receipt of fairness opinions by each
party, receipt of stockholder and other required approvals and other customary
conditions.
48
<PAGE> 51
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 MARCH 24, 1997
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 60,540,409 shares of Common Stock, par
value $.001 per share, outstanding as of April 30, 1997.
49
<PAGE> 52
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 24, 1997 and December 30, 1996........................................................51
Condensed Consolidated Statements of Operations
Quarter ended March 24, 1997 and March 25, 1996.............................................53
Condensed Consolidated Statements of Cash Flows
Quarter ended March 24, 1997 and March 25, 1996.............................................54
Notes to Consolidated Financial Statements......................................................55
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................................60
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................................................................................68
Item 2 Changes in Securities..............................................................................69
Item 3 Defaults Upon Senior Securities....................................................................69
Item 4 Submission of Matters to a Vote of Security Holders ...............................................69
Item 5 Other Information..................................................................................69
Item 6 Exhibits and Reports on Form 8-K...................................................................69
</TABLE>
50
<PAGE> 53
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 24, DECEMBER 30,
1997 1996
---------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents:
Restricted $ 1,859 $ 1,505
Unrestricted 1,592 1,551
Accounts receivable 1,900 1,544
Notes receivable 362 214
Inventory 2,004 2,261
Property and equipment held for sale 6,143 7,608
Income taxes receivable 3,378 3,514
Deferred loan costs 1,854 2,452
Prepaid expenses and other current assets 464 306
--------------------------------
Total current assets 19,556 20,955
Property and equipment, at cost, net of accumulated depreciation
and amortization 95,465 98,188
Intangibles, net of accumulated amortization 12,050 12,284
Deferred loan costs - less current portion 2,327 3,900
Deposits and other non-current assets 677 783
--------------------------------
$ 130,075 $136,110
================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
51
<PAGE> 54
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 24, DECEMBER 30,
1997 1996
-------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Short term debt $ -- $ 2,500
Current installments of long-term debt 7,662 9,589
Accounts payable 8,354 15,142
Accrued wages, salaries and benefits 2,238 2,528
Reserves for restructuring, restaurant relocations and abandoned sites 3,688 3,800
Other Accrued liabilities 12,525 13,784
Deferred income 377 337
------------------------------------
Total current liabilities 34,844 47,680
Long-term debt, less current installments 32,020 39,906
Deferred franchise fee income 486 466
Minority interests in joint ventures 1,373 1,455
Other noncurrent liabilities 6,743 6,263
------------------------------------
Total liabilities 75,466 95,770
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized 2,000,000 shares, issued and
outstanding 87,719 at March 24, 1997 (none at December 30, 1996) 0 --
Common stock, $.001 par value, authorized 100,000,000 shares, issued
and outstanding 60,540,409 at March 24, 1997 and 51,768,480 at
December 30, 1996 61 52
Additional paid-in capital 109,780 90,339
Warrants to be issued in settlement of litigation 9,463 9,463
Retained earnings (64,295) (59,114)
------------------------------------
55,009 40,740
Less treasury stock, at cost, 578,904 shares 400 400
------------------------------------
Net stockholders' equity 54,609 40,340
------------------------------------
$ 130,075 $ 136,110
====================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
52
<PAGE> 55
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 24, MARCH 25,
1997 1996
-----------------------
<S> <C> <C>
REVENUES:
Net restaurant sales $ 32,448 $ 36,209
Franchise revenues and fees 1,612 2,099
Modular restaurant packages 97 115
-----------------------
Total revenues 34,157 38,423
-----------------------
COSTS AND EXPENSES:
Restaurant food and paper costs 11,105 12,383
Restaurant labor costs 11,338 12,451
Restaurant occupancy expense 2,725 2,663
Restaurant depreciation and amortization 1,928 2,002
Advertising expense 1,645 861
Other restaurant operating expense 3,246 2,820
Costs of modular restaurant package revenues 76 349
Other depreciation and amortization 519 794
General and administrative expenses 3,393 3,385
-----------------------
Total costs and expenses 35,975 37,708
-----------------------
Operating (loss) income (1,818) 715
-----------------------
OTHER INCOME (EXPENSE):
Interest income 78 156
Interest expense (1,342) (1,217)
Interest - loan cost amortization (2,170) (35)
-----------------------
Loss before minority interests and income
tax expense (benefit) (5,252) (381)
Minority interests (71) 26
-----------------------
Loss before income tax benefit (5,181) (407)
Income tax benefit -- (155)
-----------------------
Net loss $ (5,181) $ (252)
=======================
Net loss per common share $ (0.09) $ (0.00)
=======================
Weighted average number of common shares
outstanding 55,110 51,528
=======================
</TABLE>
53
<PAGE> 56
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 24, 1997 MARCH 25, 1996
----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,181) $ (252)
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,448 2,796
Deferred loan cost amortization 2,170 35
Provision for bad debt 90 66
(Gain) loss on sale of property & equipment (4) 79
Minority interests in (losses) earnings (71) 26
Change in assets and liabilities:
Increase in receivables (445) (468)
Decrease in notes receivable 31 3
Decrease, (Increase) in inventory 257 (58)
(Increase), Decrease in costs and earnings in excess of
billings on uncompleted contracts (37) 46
Decrease, (Increase) in income taxes receivable 136 (764)
Increase in prepaid expenses and other (136) (498)
(Increase), Decrease in deferred income tax assets -- 671
Decrease, (Increase) in deposits and other noncurrent assets 106 (43)
(Decrease), Increase in accounts payable (6,687) 129
(Decrease), Increase in accrued liabilities (1,392) 696
Increase, (Decrease) in deferred income 60 (345)
------------------------------
Net cash (used in) provided by operating activities (8,655) 2,119
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (291) (1,435)
Proceeds from sale of assets 2,214 825
------------------------------
Net cash provided by (used in) investing activities 1,923 (610)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on short term debt (2,500) --
Principal payments on long-term debt (9,813) (1,291)
Net proceeds from private placement 19,450 --
Proceeds from investment by minority interests -- 285
Distributions to minority interests (10) (30)
------------------------------
Net cash provided by (used in) financing activities 7,127 (1,036)
------------------------------
Net increase in cash 395 473
CASH AT BEGINNING OF PERIOD 3,056 3,364
------------------------------
CASH AT END OF PERIOD $ 3,451 $ 3,837
==============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Interest paid $ 1,540 $ 1,314
==============================
</TABLE>
54
<PAGE> 57
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 quarter ended March 24, 1997, are not necessarily an
indication of the results that may be expected for the fiscal year ending
December 29, 1997. Except as disclosed herein, there has been no material
change in the information disclosed in the notes to the consolidated financial
statements included in the Company's Annual Report on form 10-K for the year
ended December 30, 1996. Therefore, it is suggested that the accompanying
financial statements be read in conjunction with the Company's December 30,
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 AND ORGANIZATION - The principal business of Checkers Drive-In
Restaurants, Inc. (the "Company") is the operation and franchising of Checkers
Restaurants. At March 24, 1997, there were 477 Checkers Restaurants operating
in 23 different states, the District of Columbia, and Puerto Rico. Of those
Restaurants, 232 were Company-operated (including thirteen joint ventures) and
245 were operated by franchisees. The accounts of the joint ventures have been
included with those of the Company in these consolidated financial statements.
The consolidated financial statements also include the
accounts of all of the Company's subsidiaries, including Champion Modular
Restaurant Company, Inc. ("Champion"). Champion manufactures Modular Restaurant
Packages ("MRP's") primarily for the Company and franchisees. Effective
February 15, 1994, Champion was merged into the Company and is currently
operated as a division. Intercompany balances and transactions have been
eliminated in consolidation and minority interests have been established for
the outside 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.
(e) RECEIVABLES - Receivables consist primarily of franchise fees, royalties
and notes due from franchisees, and receivables from the sale of modular
restaurant packages. Allowances for doubtful receivables were $1.8 million at
March 24, 1997 and $2.2 million at December 30, 1996.
(f) INVENTORY - Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market.
(g) DEFERRED LOAN COSTS - Deferred loan costs incurred in connection with the
Company's November 22, 1996 restructure of its primary credit facility (see
Note 2) are being amortized on the effective interest method.
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<PAGE> 58
(h) PROPERTY AND EQUIPMENT - Property and equipment (P & E) are stated at cost
except for P & E that have been impaired, for which the carrying amount is
reduced to estimated fair value. Property and equipment under capital leases
are stated at their fair value at the inception of the lease. Depreciation and
amortization are computed on straight-line method over the estimated useful
lives of the assets.
(i) IMPAIRMENT OF LONG LIVED ASSETS - During the fourth quarter of 1995, the
Company early adopted the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" (SFAS 121) which requires the write-down of certain intangibles
and tangible property associated with under performing sites to the level
supported by the forecasted discounted cash flow.
(j) Goodwill and Non-Compete Agreements - Goodwill and non-compete agreements
are being amortized over 20 years and 3 to 7 years, respectively, on a
straight-line basis.
(k) INCOME TAXES - The Company accounts for income taxes under the Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the asset or liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date (see Note 4).
(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) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The balance sheets
as of March 24, 1997 and December 30, 1996, reflect the fair value amounts
which have been determined, using available market information and appropriate
valuation methodologies. However, considerable judgement is necessarily
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
Cash and cash equivalents, receivables, accounts payable, and
short-term debt - The carrying amounts of these items are a reasonable estimate
of their fair value.
Long-term debt - Interest rates that are currently available
to the Company for issuance of debt with similar terms and remaining maturities
are used to estimate fair value for debt issues that are not quoted on an
exchange.
(n) RECLASSIFICATIONS - Certain amounts in the 1996 financial statements have
been reclassified to conform to the 1997 presentation.
NOTE 2 LONG-TERM DEBT
Long-term debt consists of the following:
(Dollars in thousands)
<TABLE>
<CAPTION>
March 24, December 30,
1997 1996
---------------------------------
<S> <C> <C>
Notes payable under Loan Agreement $ 26,734 $ 35,818
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 8,269 8,963
Unsecured notes payable, bearing interest at rates ranging from prime to 12% 3,481 3,481
Other 1,198 1,233
---------------------------------
Total long-term debt 39,682 49,495
Less current installments 7,662 9,589
---------------------------------
Long-term debt, less current installments $ 32,020 $ 39,906
=================================
</TABLE>
56
<PAGE> 59
On July 29, 1996, the debt under the Company's prior bank
loan agreement (the "Loan Agreement") and credit line ("Credit Line") was
acquired from a bank group by an investor group led by an affiliate of DDJ
Capital Management, LLC (collectively, "DDJ"). The Company and DDJ began
negotiations for restructuring of the debt. On November 14, 1996, and prior to
consummation of a formal debt restructuring with DDJ, the debt under the Loan
Agreement and Credit Line was acquired from DDJ by a group of entities and
individuals, most of whom are engaged in the fast food restaurant business.
This investor group (the "CKE Group") was led by CKE Restaurants, Inc., the
parent of Carl Karcher Enterprises, Inc., Casa Bonita, Inc., and Summit Family
Restaurants, Inc. Also participating were most members of the DDJ Group, as
well as KCC Delaware, a wholly-owned subsidiary of Giant Group, Ltd., which is
a controlling shareholder of Rally's Hamburgers, Inc. Waivers of all defaults
under the Loan Agreement and Credit Line were granted through November 22,
1996, to provide a period of time during which the Company and the CKE Group
could negotiate an agreement on debt restructuring.
On November 22, 1996, the Company and the CKE Group executed
an Amended and Restated Credit Agreement (the "Restated Credit Agreement")
thereby completing a restructuring of the debt under the Loan Agreement. The
Restated Credit Agreement consolidated all of the debt under the Loan Agreement
and the Credit Line into a single obligation. At the time of the restructuring,
the outstanding principal balance under the Loan Agreement and the Credit Line
was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the
term of the debt was extended by one (1) year until July 31, 1999, and the
interest rate on the indebtedness was reduced to a fixed rate of 13%. In
addition, all principal payments were deferred until May 19, 1997, and the CKE
Group agreed to eliminate certain financial covenants, to relax others and to
eliminate approximately $6 million in restructuring fees and charges. The
Restated Credit Agreement also provided that certain members of the CKE Group
agreed to provide to the Company a short term revolving line of credit of up to
$2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit
Line"). In consideration for the restructuring, the Restated Credit Agreement
required the Company to issue to the CKE Group warrants to purchase an
aggregate of 20 million shares of the Companys' common stock at an exercise
price of $.75 per share, which was the approximate market price of the common
stock prior to the announcement of the debt transfer. As of March 24, 1997, the
Company reduced the principal balance under the Restated Credit Agreement by
$9.1 million and has repaid the Secondary Credit Line in full. A portion of the
funds utilized to make these principal reduction payments were obtained by the
Company from the sale of certain closed restaurant sites to third parties.
Additionally, the Company utilized $10.5 million of the proceeds from the
February 21, 1997, private placement which is described later in this section.
Pursuant to the Restated Credit Agreement, the prepayments of principal made in
1996 and early in 1997 will relieve the Company of the requirement to make any
of the regularly scheduled principal payments under the Restructured Credit
Agreement which would have otherwise become due in fiscal year 1997. The
Amended and Restated Credit Agreement provides however, that 50% of any future
asset sales must be utilized to prepay principal.
The Company has outstanding promissory notes in the aggregate
principal amount of $4.6 million (the "Notes") payable to Rall-Folks, Inc.,
Restaurant Development Group, Inc. and Nashville Twin Drive-Through Partners,
L.P. The Company had agreed to acquire the Notes in consideration of the
issuance of an aggregate of approximately 4,000,000 shares of Common Stock
pursuant to purchase agreements entered into in 1995 and subsequently amended.
All three of the parties received varying degrees of protection on the purchase
price of the promissory notes. Accordingly, the actual number of shares to be
issued will be determined by the market price of the Company's stock. The
Company was not able to consummate these transactions as scheduled. All three
of the Notes are now past due and management is attempting to negotiate new
terms for the repayment. The Company does not currently have sufficient cash
available to pay one or more of these notes if required to do so.
NOTE 3: PRIVATE PLACEMENT
On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of the Company's common
stock, $.001 par value, and 87,719 shares of the Company's Series A preferred
stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private
Placement. The Company received approximately $20 million in proceeds from the
Private Placement. The reduction of the debt under the Restated Credit
Agreement and the Secondary Credit Line, both of which carry a 13% interest
rate will reduce the Company's interest expense by more than $1.3 million
annually.
The Private Placement purchase agreement requires that the
Company submit to its shareholders for vote at its 1997 Annual Shareholders'
Meeting the conversion of the Preferred Stock into 8,771,900 shares of the
Company's common stock. If the shareholders do not vote in favor of the
conversion, the Preferred Stock will remain outstanding with the rights and
preferences set forth in the Certificate of Designation of Series A Preferred
Stock of the Company (the
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<PAGE> 60
"Certificate", a copy of which is an Exhibit hereto), including (i) a dividend
preference, (ii) a voting preference, (iii) a liquidation preference and (iv) a
redemption requirement. If the conversion of the Preferred Stock into common
stock is not approved by the Company's shareholders at the 1997 Annual Meeting,
the Preferred Stock will have the right to receive cash dividends equal to
$16.53 per share per annum payable on a quarterly basis beginning August 19,
1997. Such dividends are cumulative and must be paid in full prior to any
dividends being declared or paid with respect to the Company's common stock. If
the Company is in default with respect to any dividends on the Preferred Stock,
then no cash dividends can be declared or paid with respect to the Company's
common stock. If the Company fails to pay any two required dividends on the
Preferred Stock, then the number of seats on the Company's Board of Directors
will be increased by two and the holders of the Preferred Stock will have the
right, voting as a separate class, to elect the Directors to fill those two new
seats, which new Directors will continue in office until the holders of the
Preferred Stock have elected successors or the dividend default has been cured.
In the event of any liquidation, dissolution or winding up, but not including
any consolidation or merger of the Company, the holders of the Preferred Stock
will be entitled to receive a liquidation preference of $114 per share plus any
accrued but unpaid dividends (the "Liquidation Preference"). In the event the
stockholders do not approve the conversion of the Preferred Stock and the
Company subsequently completes a consolidation or merger and the result is a
change in control of the Company, then each share of the Preferred Stock will
be automatically redeemed for an amount equal to the Liquidation Preference.
The Company is required to redeem the Preferred Stock for an amount equal to
the Liquidation Preference on or before February 12, 1999. If the redemption
does not occur as required, the dividend rate will increase from $16.53 per
share to $20.52 per share. Additionally, if there are not then Directors
serving which were elected by the holders of the Preferred Stock, the number of
directors constituting the Company's Board of Directors will be increased by
two and the holders of the Preferred Stock voting as a class will be entitled
to elect the Directors to fill the created vacancies.
NOTE 4: STOCK OPTION PLANS
In August 1991, the Company adopted a stock option plan for
employees whereby incentive stock options, nonqualified stock options, stock
appreciation rights and restrictive shares can be granted to eligible salaried
individuals. An option may vest immediately as of the date of grant and no
option will be exercisable after ten years from the date of the grant. 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. In 1994, the Company
adopted a stock option plan for non-employee directors, which provides for the
automatic grant to each non-employee director upon election to the Board of
Directors of a non-qualified, ten-year option to acquire 12,000 shares of the
Company's common stock, with the subsequent automatic grant on the first day of
each fiscal year thereafter during the time such person is serving as a
non-employee director of a non-qualified ten-year option to acquire an
additional 3,000 shares of common stock. The Company has reserved 200,000
shares for issuance under this plan. All such options have an exercise price
equal to the closing sale price of the common stock on the date of grant.
One-fifth of the shares of common stock subject to each initial option grant
become exercisable on a cumulative basis on each of the first five
anniversaries of the grant of such option. One-third of the shares of common
stock subject to each subsequent option grant become exercisable on a
cumulative basis on each of the first three anniversaries of the date of the
grant of such option. The plans provide that shares granted come from the
Company's authorized but unissued or reacquired common stock. The price of the
options granted pursuant to these plans will not be less than 100 percent of
the fair market value of the shares on the date of the grant. 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.
In February 1996, employees (excluding executive officers)
granted options in 1993 and 1994 with exercise prices in excess of $2.75 were
offered the opportunity to exchange for a new option grant for a lesser number
of shares at an exercise price of $1.95, which represented a 25% premium over
the market price of the Company's common stock on the date the plan was
approved. Existing options with an exercise price in excess of $11.49 could be
cancelled in exchange for new options on a four to 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. The offer to employees expired April 30, 1996
and, as a result of this offer, options for 49,028 shares were forfeited in
return for options for 15,877 shares at the $1.95 exercise price.
During the quarter ended March 24, 1997, the Company granted
285,000 options pursuant to the terms of the 1991 Employee Stock Option Plan
referenced above. In addition, the Company granted options to purchase a total
of 500,000 shares of its common stock as part of compensation packages for two
new executive officers, which options were not granted pursuant to the terms of
the 1991 Employee Stock Option Plan.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation." Accordingly, no compensation cost has been recognized for
the stock
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<PAGE> 61
option plans. Had compensation cost for the Company's stock option plan for
employees been determined based on the fair value at the grant date for awards
in fiscal 1996 and the first quarter of 1997 consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would have been
reduced by approximately $1.4 million and $680 thousand, respectively, on a pro
forma basis. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and the first quarter of
fiscal 1997, respectively: dividend yield of zero percent for both periods;
expected volatility of 64 and 81 percent, risk-free interest rates of 6.5 and
6.0 percent, and expected lives of 3.5 and 2 years, respectively. The
compensation cost disclosed above may not be representative of the effects on
reported income in future quarters, for example, because options vest over
several years and additional awards are made each year.
NOTE 5: INCOME TAXES
The Company recorded income tax benefits of $2.0 million for
the quarter ended March 24, 1997 and $155 thousand for the quarter ended March
25, 1996, or 38.0% of the losses before income taxes. The Company then recorded
a valuation allowance of $2.0 million against deferred income tax assets as of
March 24, 1997. The Company's total valuation allowances of $28.8 million as of
March 24, 1997, is maintained on deferred tax assets which the Company has not
determined to be 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.
NOTE 6: SUBSEQUENT EVENT
On March 25, 1997, Checkers agreed in principle to a merger
transaction pursuant to which Rally's Hamburgers, Inc., a Delaware corporation
("Rally's"), will become a wholly-owned subsidiary of Checkers. Rally's,
together with its franchisees, operates approximately 471 double drive-thru
hamburger restaurants primarily in the midwestern United States. Under the
terms of the letter of intent executed by Checkers and Rally's, each share of
Rally's common stock will be converted into three shares of Checkers' Common
Stock upon consummation of the merger. The transaction is subject to
negotiation of definitive agreements, receipt of fairness opinions by each
party, receipt of stockholder and other required approvals and other customary
conditions.
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<PAGE> 62
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
The Company commenced operations on August 1, 1987, to
operate and franchise Checkers double drive-thru Restaurants. As of March 24,
1997, the Company had an ownership interest in 232 Company-operated Restaurants
and an additional 245 Restaurants were operated by franchisees. The Company's
ownership interest in the Company-operated Restaurants is in one of two forms:
(i) the Company owns 100% of the Restaurant (as of March 24, 1997, there were
218 such Restaurants) and (ii) the Company owns a 10.55% or 65.83% interest in
a partnership which owns the Restaurant (a "Joint Venture Restaurant") (as of
March 24, 1997, there were 14 such Joint Venture Restaurants). (See "Business -
Restaurant Operations - Joint Venture Restaurants" in Item 1 of this Report.)
The Company has begun to see the positive effects of
aggressive programs implemented at the beginning of fiscal 1997 that are
designed to improve food, paper and labor costs. These costs totalled 69.2% of
net restaurant revenues in the first quarter of 1997, compared to 65.6%, 69.3%,
73.3% and 75.9% of net restaurant revenues in the first, second, third and
fourth quarters of fiscal 1996, despite an 8.8% decrease in Company owned same
store sales in the first quarter of 1997 as compared to the first quarter of
the prior year. Even more significantly, the costs of sales trended downward
during each of the three four week periods of the first quarter of fiscal 1997.
We expect to see further reductions in the cost of sales percentage in the
second quarter of 1997. Although the Company's operating margins for the first
quarter of 1997 were better than the annualized margins for fiscal year 1996,
the Company intends to continue to implement programs to further improve those
margins. However, since Company owned average Restaurant sales for the first
quarter of 1997 decreased 8.8% from comparable Company owned average Restaurant
sales in the first quarter of 1996, the Company is also devising programs
intended to improve sales. Plans are being developed to test a new marketing
strategy in July 1997 in one or two of our regions. On a current basis, new
product introduction and fresh advertising campaigns, along with a continued
focus on guest service, are all part of the Company's sales improvement
programs.
As of March 1996, the Company had 53 Company and franchise
Restaurants testing its proprietary L.A. Mex Mexican brand. Although initial
sales were encouraging, the sales increases resulted in little or no
contribution to the profitability of the test units. Additionally, speed of
service was adversely impacted by the addition of the L.A. Mex products. As a
result, the Company closed a majority of the tests in early fiscal 1997.
In February 1997, the Company completed a private placement
(the "Private Placement") of 8,771,929 shares of the Company's common stock,
$.001 par value, and 87,719 shares of the Company's Series A preferred stock,
$.001 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private
Placement. The Company received approximately $20 million in proceeds from the
Private Placement. The Company used $8 million of the Private Placement
proceeds to reduce the principal balance due under the Restated Credit
Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3
million was utilized to pay outstanding balances to various key food and paper
distributors; and the remaining amount was used primarily to pay down
outstanding balances due certain other vendors. The reduction of the debt under
the Restated Credit Agreement and the Secondary Credit Line, both of which
carry a 13% interest rate will reduce the Company's interest expense by more
than $1.3 million annually.
Significant management changes have occurred since the end of
fiscal year 1996. On January 6, 1997, Richard E. Fortman was elected to serve
as President and Chief Operating Officer of the Company and Joseph N. Stein was
elected to serve as Executive Vice President and Chief Administrative Officer
of the Company. Effective January 21, 1997, Michael E. Dew resigned as Vice
President of Company Operations. Effective that same date, Michael T. Welch,
Vice President of Operations, Marketing, Restaurant Support Services and
Research & Development assumed the additional duties of Vice President of
Company Operations. On January 24, 1997, James T. Holder, Chief Financial
Officer and Secretary of the Company was promoted to Senior Vice President,
General Counsel and Secretary of the Company and Joseph N. Stein assumed the
additional duties of Chief Financial Officer. Mr. Fortman brings over 27 years
of experience in the operation of quick service restaurants to the Company.
In the first quarter of fiscal 1997, the Company, along with
its franchisees, experienced a net reduction of one (1) operating Restaurant,
compared to a net increase of two (2) operating Restaurants in the first
quarter of fiscal 1996. Based on information obtained from the Company's
franchisees, in 1997, the franchise community expects to open approximately 30
new units. The Company does not currently expect significant further Restaurant
closures, choosing instead
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to focus on improving Restaurant margins. The Company's franchisees as a whole
continue to experience higher average per store sales than Company Restaurants.
This Quarterly Report on Form 10-Q contains forward looking
statements, which are subject to known and unknown risks, uncertainties and
other factors which may cause the actual results, performance, or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; the impact of competitive products and pricing; success of
operating initiatives; advertising and promotional effort; adverse publicity;
availability, changes in business strategy or development plans; quality of
management; availability, terms and deployment of capital; the results of
financing efforts; food, labor, and employee benefit costs; changes in, or the
failure to comply with, government regulations; weather conditions;
construction schedules; and risks that sales growth resulting from the
Company's current and future remodeling and dual-branding of restaurants and
other operating strategies can be sustained at the current levels experienced.
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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.
<TABLE>
<CAPTION>
QUARTER ENDED
(UNAUDITED)
---------------------------
MARCH 24, MARCH 25,
1997 1996
---------------------------
<S> <C> <C>
Revenues:
Net restaurant sales 95.0% 94.2%
Franchise revenues and fees 4.7% 5.5%
Modular restaurant packages 0.3% 0.3%
--------------------------
Total revenue
100% 100%
Costs and Expenses:
Restaurant food and paper costs (1)
Restaurant labor costs (1) 34.2% 34.2%
Restaurant occupancy expense (1) 34.9% 34.4%
Restaurant depreciation and amortization (1) 8.4% 7.4%
Advertising expense (1) 5.9% 5.5%
Other restaurant operating expense (1) 5.1% 2.4%
Costs of modular restaurant package 10.0% 7.8%
revenues(2) 77.7% 304.5%
Other depreciation and amortization 1.5% 2.1%
Selling, general and administrative expense 9.9% 8.8%
--------------------------
Operating (loss) income (5.3%) 1.9%
--------------------------
Other income (expense):
Interest income 0.2% 0.4%
Interest expense (3.9%) (3.2%)
Interest - loan cost amortization (6.4%) (0.1%)
Minority interests 0.2% (0.1%)
--------------------------
Loss before income tax benefit (15.2%) (1.1%)
Income tax expense (benefit) 0.0% (0.4%)
--------------------------
Net loss (15.2%) (0.7%)
==========================
Operating data:
System-wide restaurant sales (in 000's):
Company-operated $ 32,448 $ 36,209
Franchised 39,598 41,292
--------------------------
Total $ 72,046 $ 77,501
==========================
</TABLE>
<TABLE>
<CAPTION>
Average annual net sales per restaurant open for a full year (in 000's) (3): 1997 1996
------------------------
<S> <C> <C>
Company-operated $634 $693
Franchised $767 $793
System-wide $699 $742
------------------------
Number of Restaurants (4)
Company-operated 232 247
Franchised 245 254
------------------------
Total
477 501
========================
</TABLE>
(1) As a percent of net restaurant sales.
(2) As a percent of Modular restaurant package revenues.
(3) Includes sales of Restaurants open for entire trailing 13 period year
including stores expected to be closed in the following year.
(4) Number of Restaurants open at end of period.
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COMPARISON OF HISTORICAL RESULTS - QUARTER ENDED MARCH 24, 1997 AND QUARTER
ENDED MARCH 25, 1996
Revenues. Total revenues decreased 11.1% to $34.2 million for
the quarter ended March 24, 1997, compared to $38.4 million for the quarter
ended March 25, 1996. Company-operated net restaurant sales decreased 10.4% to
$32.4 million for the quarter ended March 24, 1997, from $36.2 million for the
quarter ended March 25, 1996. Net restaurant sales for comparable Company-owned
Restaurants for the quarter ended March 24, 1997, decreased 8.8% compared to
the quarter ended March 25, 1996. Comparable Company-owned Restaurants are
those continuously open during both reporting periods. These decreases in net
restaurant sales and comparable net restaurant sales are primarily attributable
to fewer discounting and television promotions in the first quarter of 1997 and
the Company's 1997 focus on cutting costs and developing a new advertising
campaign for the remainder of 1997.
Franchise revenues and fees decreased 23.2% to $1.6 million
for the quarter ended March 24, 1997, from $2.1 million for the quarter ended
March 25, 1996. This was a result of a net reduction of nine franchised
restaurants since March 25, 1996, and opening fewer franchised Restaurants
during the quarter ended March 24, 1997, than in the first quarter of 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 15.2% to $97
thousand for the quarter ended March 24, 1997, from $115 thousand for the
quarter ended March 25, 1996. 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 $11.1 million or 34.2% of net Restaurant sales for the
quarter ended March 24, 1997, compared to $12.4 million or 34.2% of net
restaurant sales for the quarter ended March 25, 1996. The actual decrease in
food and paper costs was due primarily to the decrease in net restaurant sales.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totalled $11.3 million or 34.9% of
net restaurant sales for the quarter ended March 24, 1997, compared to $12.5
million or 34.4% of net restaurant sales for the quarter ended March 25, 1996.
The increase in restaurant labor costs as a percentage of net restaurant sales
was due primarily to the decline in average gross restaurant sales relative to
the fixed and semi-variable nature of these costs and the increase in the
federal minimum wage rate.
Restaurant occupancy expense, which includes rent, property
taxes, licenses and insurance, totalled $2.7 million or 8.4% of net restaurant
sales for the quarter ended March 24, 1997, compared to $2.7 million or 7.4% of
net restaurant sales for the quarter ended March 25, 1996. This increase in
restaurant occupancy costs as a percentage of net 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 the acquisition of
interests in 12 Restaurants in the high cost Chicago market in the second
quarter of 1996.
Restaurant depreciation and amortization decreased 3.7% to
$1.9 million for the quarter ended March 24, 1997, from $2.0 million for the
quarter ended March 25, 1996, due primarily to fourth quarter 1996 impairments
under the Statement of Financial Accounting Standards No. 121 and a net
decrease of 15 Company-operated restaurants from March 25, 1996, to March 24,
1997.
Advertising expense increased to $1.6 million or 5.1% of net
restaurant sales for the quarter ended March 24, 1997, from $862 thousand or
2.4% of net restaurant sales for the quarter ended March 25, 1996. The increase
in this expense was due to decreased utilization of coupons in lieu of
advertising dollars in 1997 and the first quarter 1996 capitalization of
television production costs that were later written off in 1996.
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.
These expenses totalled $3.2 million or 10.0% of net restaurant sales for the
quarter ended March 24, 1997, compared to $2.8 million or 7.8% of gross
restaurant sales for the quarter ended March 25, 1996. The increase in the
quarter ended March 24, 1997, as a percentage of net restaurant sales was
primarily related to the decline in average net restaurant sales relative to
the fixed and semi-variable nature of these expenses. The increase in the
actual expense by 15.1% was primarily due to certain one-time credits recorded
in the first quarter of 1996.
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Costs of modular restaurant package revenues totalled $75
thousand or 77.7% of modular restaurant package revenues for the quarter ended
March 24, 1997, compared to $349 thousand or 304.5% of such revenues for the
quarter ended March 25, 1996. The decrease in these expenses as a percentage of
modular restaurant package revenues was attributable to the elimination of
various excess fixed costs in the first quarter of 1997.
General and administrative expenses were $3.4 million or 9.9%
of total revenues, for the quarter ended March 24, 1997, compared to $3.4
million or 8.8% of total revenues for the quarter ended March 25, 1996.
Interest expense. Interest expense increased to $1.3 million
or 3.9% of total revenues for the quarter ended March 24, 1997, from $1.2
million or 3.2% of total revenues for the quarter ended March 25, 1996. This
increase was due to an increase in the Company's effective interest rates since
the first quarter of 1996, partially offset by a reduction in the weighted
average balance of debt outstanding during the respective periods.
Income tax benefit. Due to the loss for the quarter, the
Company recorded an income tax benefit of $1,967,000 or 38.0% of the loss
before income taxes which was completely offset by a deferred income tax
valuation allowance of $1,967,000 for the quarter ended March 24, 1997, as
compared to an income tax benefit of $155 thousand or 38.0% of earnings before
income taxes for the quarter ended March 25, 1996. 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
expensing of $2.2 million in deferred loan costs in the quarter ended March 24,
1997, required as a result of principal payments of $9.1 million on the
Company's primary credit facility. Net loss before tax and the deferred loan
cost amortization was $3.0 million or $.05 per share for the quarter ended
March 24, 1997, and $372,000 or $.01 per share for the quarter ended March 25,
1996, which resulted primarily from a decrease in the average net restaurant
sales and margins, and a decrease in royalties and franchise fees.
LIQUIDITY AND CAPITAL RESOURCES
On July 29, 1996, the debt under the Company's prior bank
loan agreement (the "Loan Agreement") and credit line ("Credit Line") was
acquired from a Bank Group by an investor group led by an affiliate of DDJ
Capital Management, LLC (collectively, "DDJ"). On November 14, 1996, the debt
under the Loan Agreement and Credit Line was acquired from DDJ by a group of
entities and individuals, most of whom are engaged in the fast food restaurant
business. This investor group (the "CKE Group") was led by CKE Restaurants,
Inc., the parent of Carl Karcher Enterprises, Inc., Casa Bonita, Inc., and
Summit Family Restaurants, Inc. Also participating were most members of the DDJ
Group, as well as KCC Delaware Company, a wholly-owned subsidiary of GIANT
GROUP, LTD., which is a controlling shareholder of Rally's Hamburgers, Inc.
On November 22, 1996, the Company and the CKE Group executed
an Amended and Restated Credit Agreement (the "Restated Credit Agreement")
thereby completing a restructuring of the debt under the Loan Agreement. The
Restated Credit Agreement consolidated all of the debt under the Loan Agreement
and the Credit Line into a single obligation. At the time of the restructuring,
the outstanding principal balance under the Loan Agreement and the Credit Line
was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the
term of the debt was extended by one (1) year until July 31, 1999, and the
interest rate on the indebtedness was reduced to a fixed rate of 13%. In
addition, all principal payments were deferred until May 19, 1997, and the CKE
Group agreed to eliminate certain financial covenants, to relax others and to
eliminate approximately $6 million in restructuring fees and charges. The
Restated Credit Agreement also provided that certain members of the CKE Group
agreed to provide to the Company a short term revolving line of credit of up to
$2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit
Line"). In consideration for the restructuring, the Restated Credit Agreement
required the Company to issue to the members of the CKE Group warrants to
purchase an aggregate of 20 million shares of the Companys' common stock at an
exercise price of $.75 per share, which was the approximate market price of the
common stock prior to the announcement of the debt transfer. As of March 24,
1997, the Company has reduced the principal balance under the Restated Credit
Agreement by $9.1 million and has repaid the Secondary Credit Line in full. A
portion of the funds utilized to make these principal reduction payments were
obtained by the Company from the sale of certain closed restaurant sites to
third parties. Additionally, the Company utilized $10.5 million of the proceeds
from the February 21, 1997, private placement which is described later in this
section. Pursuant to the Restated Credit Agreement, the prepayments of
principal made in 1996 and early in 1997 will relieve the Company of the
requirement to make any of the regularly scheduled principal payments under the
Restructured Credit Agreement which would have otherwise become due in fiscal
year 1997.
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The Company has outstanding promissory notes in the aggregate
principal amount of $4.6 million (the "Notes") payable to Rall-Folks, Inc.,
Restaurant Development Group, Inc. and Nashville Twin Drive-Through Partners,
L.P. The Company had agreed to acquire the Notes in consideration of the
issuance of an aggregate of approximately 4,000,000 shares of Common Stock
pursuant to purchase agreements entered into in 1995 and subsequently amended.
All three of the parties received varying degrees of protection on the purchase
price of the promissory notes. Accordingly, the actual number of shares to be
issued will be determined by the market price of the Company's stock. All three
of these transactions are complicated and have been disclosed in detail in
prior filings, and copies of all of the agreements are on file with the
Securities and Exchange Commission. The Company was not able to consummate
these transactions as scheduled. All three of the Notes are now past due and
management is attempting to negotiate new terms for the repayment. The Company
does not currently have sufficient cash available to pay one or more of these
notes if required to do so.
The Company currently does not have significant development
plans for additional Company Restaurants during fiscal 1997.
On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of the Company's common
stock, $.001 par value, and 87,719 shares of the Company's Series A preferred
stock, $.001 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private
Placement. The Company received approximately $20 million in proceeds from the
Private Placement. The Company used $8 million of the Private Placement
proceeds to reduce the principal balance due under the Restated Credit
Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3
million was utilized to pay outstanding balances to various key food and paper
distributors; and the remaining amount was used primarily to pay down
outstanding balances due certain other vendors. The reduction of the debt under
the Restated Credit Agreement and the Secondary Credit Line, both of which
carry a 13% interest rate will reduce the Company's interest expense by more
than $1.3 million annually.
The Private Placement purchase agreement requires that the
Company submit to its shareholders for vote at its 1997 Annual Shareholders'
Meeting the conversion of the Preferred Stock into 8,771,900 shares of the
Company's common stock. If the shareholders do not vote in favor of the
conversion, the Preferred Stock will remain outstanding with the rights and
preferences set forth in the Certificate of Designation of Series A Preferred
Stock of the Company (the "Certificate", a copy of which is an Exhibit hereto),
including (i) a dividend preference, (ii) a voting preference, (iii) a
liquidation preference and (iv) a redemption requirement. If the conversion of
the Preferred Stock into common stock is not approved by the Company's
shareholders at the 1997 Annual Meeting, the Preferred Stock will have the
right to receive cash dividends equal to $16.53 per share per annum payable on
a quarterly basis beginning August 19, 1997. Such dividends are cumulative and
must be paid in full prior to any dividends being declared or paid with respect
to the Company's common stock. If the Company is in default with respect to any
dividends on the Preferred Stock, then no cash dividends can be declared or
paid with respect to the Company's common stock. If the Company fails to pay
any two required dividends on the Preferred Stock, then the number of seats on
the Company's Board of Directors will be increased by two and the holders of
the Preferred Stock will have the right, voting as a separate class, to elect
the Directors to fill those two new seats, which new Directors will continue in
office until the holders of the Preferred Stock have elected successors or the
dividend default has been cured. In the event of any liquidation, dissolution
or winding up, but not including any consolidation or merger of the Company,
the holders of the Preferred Stock will be entitled to receive a liquidation
preference of $114 per share plus any accrued but unpaid dividends (the
"Liquidation Preference"). In the event the stockholders do not approve the
conversion of the Preferred Stock and the Company subsequently completes a
consolidation or merger and the result is a change in control of the Company,
then each share of the Preferred Stock will be automatically redeemed for an
amount equal to the Liquidation Preference. The Company is required to redeem
the Preferred Stock for an amount equal to the Liquidation Preference on or
before February 12, 1999. If the redemption does not occur as required, the
dividend rate will increase from $16.53 per share to $20.52 per share.
Additionally, if there are not then Directors serving which were elected by the
holders of the Preferred Stock, the number of directors constituting the
Company's Board of Directors will be increased by two and the holders of the
Preferred Stock voting as a class will be entitled to elect the Directors to
fill the created vacancies.
In the fiscal year ended December 30, 1996, the Company
raised approximately $1.8 million from the sale of various of its assets to
third parties, including both personal and excess real property from closed or
undeveloped Restaurant locations. Under the terms of the Loan Agreement and the
Restated Credit Agreement, approximately 50% of those sales proceeds were
utilized to reduce outstanding principal. The Company also received $3.5
million in connection with the reduction of a note receivable which funds were
generally used to supplement working capital. As of December 30, 1996, the
Company owns or leases approximately 47 parcels of excess real property which
it intends to continue to aggressively market to third parties, and has an
inventory of approximately 36 used MRP's which it intends to continue to
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aggressively market to franchisees and third parties. There can be no assurance
that the Company will be successful in disposing of these assets, and 50% of
the proceeds from the sale of excess real property must be used to reduce the
principal balance under the Restated Credit Agreement.
The Company has negative working capital of $15.3 million at
March 24, 1997 (determined by subtracting current liabilities from current
assets). It is anticipated that the Company will continue to have negative
working capital since approximately 85% of the Company's assets are long-term
(property, equipment, and intangibles), 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 implemented aggressive programs at the beginning
of fiscal year 1997 designed to improve food, paper and labor costs in the
Restaurants. These costs totalled 69.2% of net restaurant revenues in the first
quarter of 1997, compared to 72.1% of net restaurant revenues in fiscal 1996,
despite an 8.8% decrease in Company owned same store sales in the first quarter
of 1997 as compared to the first quarter of the prior year. The Company also
reduced the corporate and regional staff by 32 employees in the beginning of
fiscal year 1997. Overall, the Company believes fundamental steps have been
taken to improve the Company's profitability, but there can be no assurance
that it will be able to do so. Management believes that cash flows generated
from operations and the Private Placement should allow the Company to meet its
financial obligations and to pay operating expenses in fiscal year 1997. The
Company must, however, also successfully consummate the purchase of the
Rall-Folks Notes, the RDG Note and the NTDT Note for Common Stock. If the
Company is unable to consummate one or more of those transactions, and if the
Company is thereafter unable to reach some other arrangements with Rall Folks,
RDG or NTDT, the Company may default under the terms of the Restated Credit
Agreement. In that event, the Company would seek financing from one or more of
its current lenders or other third parties to satisfy its obligations to
Rall-Folks, RDG and NTDT, although no assurance can be given that the Company
would be successful in those efforts.
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: uncertainties related to the
general economy; competition; costs of food and labor; the Company's ability to
obtain adequate capital and to continue to lease or buy successful sites and
construct new Restaurants; and the Company's ability to locate capable
franchisees. The price of the Company's common stock can be affected by the
above. Additionally, any shortfall in revenue or earnings from levels expected
by securities analysts could have an immediate and significant adverse effect
on the trading price of the Company's common stock in a given period.
COMPETITION
The Company's Restaurant operations compete in the fast food
industry, which is highly competitive with respect to price, concept, quality
and speed of service, Restaurant location, attractiveness of facilities,
customer recognition, convenience and food quality and variety. The industry
includes many fast food chains, including national chains which have
significantly greater resources than the Company that can be devoted to
advertising, product development and new Restaurants. In certain markets, the
Company will also compete with other quick-service double drive-thru hamburger
chains with operating concepts similar to the Company. The fast food industry
is often significantly affected by many factors, including changes in local,
regional or national economic conditions affecting consumer spending habits,
demographic trends and traffic patterns, changes in consumer taste, consumer
concerns about the nutritional quality of quick-service food and increases in
the number, type and location of competing quick-service Restaurants. The
Company competes primarily on the basis of speed of service, price, value, food
quality and taste. In addition, with respect to selling franchises, the Company
competes with many franchisors of Restaurants and other business concepts. All
of the major chains have increasingly offered selected food items and
combination meals, including hamburgers, at temporarily or permanently
discounted prices. Beginning generally in the summer of 1993, the major fast
food hamburger chains began to intensify the promotion of value priced meals,
many specifically targeting the 99c. price point at which the Company sells its
quarter pound "Champ Burger(R)". This promotional activity has continued at
increasing levels, and management believes that it has had a negative impact on
the Company's sales and earnings. Increased competition, additional discounting
and changes in marketing strategies by one or more of these competitors could
have an adverse effect on the Company's sales and earnings in the affected
markets.
With respect to its Modular Restaurant Packages, the Company
competes primarily on the basis of price and speed of construction with other
modular construction companies as well as traditional construction companies,
many of which have significantly greater resources than the Company.
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SFAS 121
The Company must 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 during 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.
GOVERNMENT REGULATIONS
The Company has no material contracts with the United States
government or any of its agencies.
The restaurant industry generally, and each Company-operated
and franchised Restaurant specifically, are subject to numerous federal, state
and local government regulations, including those relating to the preparation
and sale of food and those relating to building, zoning, health, accommodations
for disabled members of the public, sanitation, safety, fire, environmental and
land use requirements. The Company and its franchisees are also subject to laws
governing their relationship with employees, including minimum wage
requirements, accommodation for disabilities, overtime, working and safety
conditions and citizenship requirements. The Company is also subject to
regulation by the FTC and certain laws of States and foreign countries which
govern the offer and sale of franchises, several of which are highly
restrictive. Many State franchise laws impose substantive requirements on the
franchise agreement, including limitations on noncompetition provisions and on
provisions concerning the termination or nonrenewal of a franchise. Some States
require that certain materials be registered before franchises can be offered
or sold in that state. The failure to obtain or retain food licenses or
approvals to sell franchises, or an increase in the minimum wage rate, employee
benefit costs (including costs associated with mandated health insurance
coverage) or other costs associated with employees could adversely affect the
Company and its franchisees. A mandated increase in the minimum wage rate was
implemented in 1996 and current federal law requires an additional increase in
1997.
The Company's construction, transportation and placement of
Modular Restaurant Packages is subject to a number of federal, state and local
laws governing all aspects of the manufacturing process, movement, end use and
location of the building. Many states require approval through state agencies
set up to govern the modular construction industry, other states have
provisions for approval at the local level. The transportation of the Company's
Modular Restaurant Package is subject to state, federal and local highway use
laws and regulations which may prescribe size, weight, road use limitations and
various other requirements. The descriptions and the substance of the Company's
warranties are also subject to a variety of state laws and regulations.
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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:
In re Checkers Securities Litigation, Master File No.
93-1749-Civ-T-17A. On October 13, 1993, a class action complaint was filed in
the United States District Court for the Middle District of Florida, Tampa
Division, by a stockholder against the Company, certain of its officers and
directors, including Herbert G. Brown, Paul C. Campbell, George W. Cook, Jared
D. Brown, Harry S. Cline, James M. Roche, N. John Simmons, Jr. and James F.
White, Jr., and KPMG Peat Marwick, the Company's auditors. 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 Section 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 Champion. The plaintiffs seek to represent a
class of all purchasers of the Company's Common Stock between November 22, 1991
and October 8, 1993, 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 one of the Company's director and officer liability insurance
carriers and another party to contribute to a fund for the purpose of paying
claims on a claims-made basis up to a total of $950,000. The Company has agreed
to contribute ten percent (10%) of claims made in excess of $475,000 for a
total potential liability of $47,500. The settlement is subject to the
execution of an appropriate stipulation of settlement and other documentation
as may be required or appropriate to obtain approval of the settlement by the
Court, notice to the class of pendency of the action and proposed settlement,
and final court approval of the settlements.
Greenfelder et al. v. White, ,Jr., et al. On August 10, 1995,
a state court complaint was filed in the Circuit Court of the Sixth Judicial
Circuit 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-C1-21. 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 to enter into various agreements and personal guarantees with the
Company based upon misrepresentations by the Company and its officers and 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 as follows: damages in an
unspecified amount in excess of $2,500,000 in connection with the claim of
intentional infliction of emotional distress; $3,000,000 or the return of all
monies invested by the plaintiffs in Checkers franchises in connection with the
misrepresentation of claims; punitive damages; attorneys' fees; and such other
relief as the court may deem appropriate. The Court has granted, in whole or in
part, three (3) motions to dismiss the plaintiff's complaint, as amended,
including an order entered on February 14, 1997, which dismissed the
plaintiffs' claim of intentional infliction of emotional distress, with
prejudice, but granted the plaintiff's leave to file an amended pleading with
respect to the remaining claims set forth in their amended complaint and an
answer to the amended pleading has been filed and discovery is being conducted.
The Company believes that this lawsuit is unfounded and without merit, and
intends to continue to defend it vigorously. No estimate of any possible loss
or range of loss resulting from the lawsuit can be made at this time.
Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food
Services, Inc., et al. 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
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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 has filed an answer to the amended
counterclaim and discovery is being conducted. The Company believes that this
lawsuit is unfounded and without merit, and intends to continue 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
On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of the Company's common
stock, $.001 par value, and 87,719 shares of the Company's Series A preferred
stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private
Placement. The Company received approximately $20 million in proceeds from the
Private Placement. The Company used $8 million of the Private Placement
proceeds to reduce the principal balance due under the Restated Credit
Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3
million was utilized to pay outstanding balances to various key food and paper
distributors; and the remaining amount was used primarily to pay down
outstanding balances due certain other vendors. The reduction of the debt under
the Restated Credit Agreement and the Secondary Credit Line, both of which
carry a 13% interest rate will reduce the Company's interest expense by more
than $1.3 million annually.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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 January 6, 1997, reporting under Item 5, the
appointments of Richard E. Fortman as president and chief
operating officer and Joseph N. Stein as executive president
and chief administrative officer of the Company.
The Company filed a Report on Form 8-K with the Commission
dated January 24, 1997, reporting under Item 5, the
preliminary results for the fourth quarter of fiscal 1996,
the appointments of James T. Holder as senior vice president
and general counsel, Joseph N. Stein to the additional role
of chief financial officer and Michael T. Welch as vice
president of operations of the Company. The Company also
announced that it was continuing to work on the $20 million
private placement of the Company's stock.
The Company filed a Report on Form 8-K with the Commission
dated February 19, 1997, reporting under Item 5, the
Company's receipt of $20 million in a private placement of
the Company's common stock and Series A preferred stock.
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CORPORATE AND STOCKHOLDER INFORMATION
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
CORPORATE OFFICE
Barnett Bank Building
600 Cleveland Street
Eighth Floor
Clearwater, Florida 33755
Telephone: (813) 441-3500
Facsimile: (813) 461-0136
INVESTOR INQUIRIES. Stockholders, security analysts, portfolio managers and
others who have questions or need additional information concerning the Company
are encouraged to contact Investor Relations, at the corporate address.
ANNUAL MEETING. The 1997 Annual Meeting of Stockholders of the Company will be
held on August 6, 1997 at 10:00 a.m.
TRANSFER AGENT AND REGISTRAR. Inquiries about Checkers stock transactions,
consolidation of accounts, address corrections, changes of registration and
stock certificate holdings should be addressed to: Chase Mellon Shareholder
Services, L.L.C., Overpeck Centre, 85 Challenger Road, Ridgefield Park, New
Jersey 07660.
INDEPENDENT AUDITORS. The financial statements included in this report have
been audited by the independent accounting firm of KPMG Peat Marwick, LLP,
St. Petersburg, Florida.
1995 FORM 10-K ANNUAL REPORT. The 1996 Form 10-K Annual Report to the
Securities and Exchange Commission will be sent without charge upon written
request to Investor Relations, at the corporate address. Electronic filings
made through the Electronic Data Gathering Analysis and Retrieval System are
publicly available through the Commission's Web Site (http://www.sec.gov).
COMPANY OWNERSHIP. Checkers Drive-In Restaurants, Inc. is a publicly owned
corporation registered in Delaware. As of July 11, 1997, the Company had
60,537,489 shares of Common Stock outstanding, held by 7,292 stockholders of
record.
STOCK LISTING. The Common Stock of the Company began trading publicly in the
Nasdaq Stock Market's National Market System on November 15, 1991, under the
symbol CHKR.
STOCK DIVIDENDS. Dividends are not allowed under the terms of the Company's
major debt agreement. The Company has not paid or declared cash distributions
(other than the payment of cash in lieu of factional shares in connection with
its stock splits). Any future cash dividends will be determined by the Board of
Directors based on the Company's earnings, financial conditions, capital
requirements and other relevant factors.
PRICE RANGE OF COMMON STOCK
<TABLE>
<CAPTION>
========================================================
MARKET PRICES
QUARTER HIGH LOW
- --------------------------------------------------------
<S> <C> <C>
1996
First $ 1.75 $ 1.19
Second $ 1.50 $ 1.13
Third $ 1.25 $ .75
Fourth $ 1.97 $ .75
- --------------------------------------------------------
1995
First $ 4.06 $ 1.88
Second $ 2.81 $ 1.81
Third $ 3.25 $ 1.72
Fourth $ 1.97 $ .92
- --------------------------------------------------------
========================================================
</TABLE>
71
<PAGE> 74
DIRECTORS AND OFFICERS
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
(As of July 1, 1997)
DIRECTORS
WILLIAM P. FOLEY, II
Chairman of the Board
C. THOMAS THOMPSON
Chief Executive Officer/Vice Chairman
TERRY N. CHRISTENSEN
Partner of the law firm of Christensen, Miller,
Fink, Jacobs, Glaser, Weil & Shapiro, LLP
of Los Angeles, California
FREDERICK E. FISHER
Former Vice Chairman and
Chief Financial Officer of
U.S. Home Corporation
ANDREW H. HINES, JR.
Former Chairman of the Board and
Chief Executive Officer of
Florida Power Corporation and
Florida Progress Corporation
CLARENCE V. MCKEE
Former Chairman of the Board of
Florida Association of Broadcasters
BURT SUGARMAN
Chairman of the Board of
Rally's Hamburgers, Inc. and
GIANT GROUP, LTD.
OFFICERS
C. THOMAS THOMPSON
Chief Executive Officer/Vice Chairman
RICHARD E. FORTMAN
President/Chief Operating Officer
JOSEPH N. STEIN
Executive Vice President/
Chief Administrative Officer/
Chief Financial Officer
JAMES T. HOLDER
Senior Vice President/General Counsel/
Secretary
WENDY A. BECK
Vice President, Finance/Treasurer
DAVID D. MILLER
Vice President, Franchise Operations, Sales
and Development
MICHAEL T. WELCH
Vice President, Company Operations, Marketing,
Restaurant Support Services and
Research & Development
