SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 8, 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 70,132,472 shares of Common Stock, par value $.001
per share, outstanding as of October 15, 1997.
This document contains 25 pages. Exhibit Index appears at page 24.
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TABLE OF CONTENTS
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PAGE
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 8, 1997 and December 30, 1996...............................3
Condensed Consolidated Statements of Operations
Quarter ended September 8, 1997 and September 9, 1996
and Three Quarters ended September 8, 1997 and September 9, 1996......5
Condensed Consolidated Statements of Cash Flows
Three Quarters ended September 8, 1997 and September 9, 1996..........6
Notes to Consolidated Financial Statements................................8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................14
PART II OTHER INFORMATION
Item 1 Legal Proceedings...........................................................20
Item 2 Changes in Securities .....................................................20
Item 4 Submission of Matters to a Vote of Security Holders.........................21
Item 5 Other Information...........................................................21
Item 6 Exhibits and Reports on Form 8-K............................................22
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
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<CAPTION>
(Unaudited)
September 8, December 30,
1997 1996
------------------------------
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Current Assets:
Cash and cash equivalents:
Restricted $ 2,557 $ 1,505
Unrestricted 1,164 1,551
Accounts receivable 1,810 1,544
Notes receivable 617 214
Inventory 2,045 2,261
Property and equipment held for sale 5,860 7,608
Income taxes receivable -- 3,514
Deferred loan costs 1,625 2,452
Prepaid expenses and other current assets 1,046 306
------------------------------
Total current assets 16,724 20,955
Property and equipment, at cost, net of accumulated depreciation
and amortization 89,964 98,188
Intangibles, net of accumulated amortization 12,278 12,284
Deferred loan costs - less current portion 1,671 3,900
Deposits and other non-current assets 663 783
------------------------------
$121,300 $136,110
==============================
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See Notes to Condensed Consolidated Financial Statements
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
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<CAPTION>
(Unaudited)
September 8, December 30,
1997 1996
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Current Liabilities:
Short term debt $ -- $ 2,500
Current installments of long-term debt 7,274 9,589
Accounts payable 8,741 15,142
Accrued wages, salaries and benefits 2,286 2,528
Reserves for restaurant relocations and abandoned sites 2,412 3,800
Other accrued liabilities 10,130 13,784
Deferred income 391 337
-----------------------------
Total current liabilities 31,234 47,680
Long-term debt, less current installments 30,136 39,906
Deferred franchise fee income 421 466
Minority interests in joint ventures 1,021 1,455
Other long-term liabilities 7,118 6,263
-----------------------------
Total liabilities 69,930 95,770
Stockholders' Equity:
Preferred stock, $.001 par value, authorized 2,000,000 shares, no
shares outstanding -- --
Common stock, $.001 par value, authorized 150,000,000 shares, issued
and outstanding 70,132,472 at September 8, 1997 and 51,768,480 at
December 30, 1996 70 52
Additional paid-in capital 110,435 90,339
Warrants 9,463 9,463
Retained earnings (68,198) (59,114)
-----------------------------
51,770 40,740
Less treasury stock, at cost, 578,904 shares 400 400
-----------------------------
Net stockholders' equity 51,370 40,340
-----------------------------
$121,300 $136,110
=============================
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See Notes to Condensed Consolidated Financial Statements
4
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(UNAUDITED)
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Quarter Ended Three Quarters Ended
Sept. 8, 1997 Sept. 9, 1996 Sept. 8, 1997 Sept. 9, 1996
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REVENUES:
Net restaurant sales $ 30,786 $ 34,875 $ 94,987 $ 107,193
Franchise revenues and fees 1,797 1,966 5,122 6,075
Modular restaurant packages 150 247 494 893
---------------------------------------------------------------
Total revenues 32,733 37,088 100,603 114,161
---------------------------------------------------------------
COSTS AND EXPENSES:
Restaurant food and paper costs 9,715 12,417 31,223 37,080
Restaurant labor costs 9,887 13,139 31,017 38,341
Restaurant occupancy expense 2,798 3,171 8,029 8,827
Restaurant depreciation and amortization 1,904 2,064 5,732 6,023
Advertising expense 1,588 1,490 4,828 3,597
Other restaurant operating expense 3,100 3,716 9,533 9,954
Costs of modular restaurant package revenues 150 382 439 1,380
Other depreciation and amortization 518 1,053 1,546 2,720
General and administrative expenses 3,377 6,289 10,276 13,585
Impairment of long-lived assets -- 8,468 -- 8,468
Losses on assets to be disposed of -- 5,702 -- 5,702
Loss provisions -- 500 -- 500
---------------------------------------------------------------
Total costs and expenses 33,037 58,391 102,623 136,177
---------------------------------------------------------------
Operating (loss) income (304) (21,303) (2,020) (22,016)
---------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 57 126 238 622
Interest expense (1,046) (1,338) (3,566) (3,854)
Interest - loan cost amortization (445) (69) (3,100) (159)
---------------------------------------------------------------
Loss before minority interests and income
tax expense (1,738) (22,584) (8,448) (25,407)
Minority interests (0) (56) (60) 10
---------------------------------------------------------------
Loss before income tax expense (1,738) (22,528) (8,388) (25,417)
Income tax expense -- 1,715 -- 626
---------------------------------------------------------------
Net loss $ (1,738) $ (24,243) $ (8,388) $ (26,043)
===============================================================
Preferred dividends 696 -- 696 --
---------------------------------------------------------------
Net loss to common shareholders ($2,434) ($24,243) ($9,084) ($26,043)
===============================================================
Net loss per common share $(0.04) $(0.47) $(0.15) $(0.50)
===============================================================
Weighted average number of common shares
outstanding 65,548 51,768 60,163 51,722
===============================================================
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
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Three Quarters Ended
September 8, September 9,
1997 1996
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Cash flows from operating activities:
Net loss (8,388) (26,043)
Adjustments to reconcile net earning to net cash (used in)
provided by operating activities:
Depreciation and amortization 7,278 8,742
Impairment of long-lived assets -- 8,468
Losses on assets to be disposed of -- 5,702
Refinancing costs -- 846
Deferred loan cost amortization 3,100 159
provision for bad debt, inventory obsolescence and sales tax 323 1,750
(Gain) loss on disposal of property & equipment 81 165
Minority interests in (losses) earnings (60) 10
Change in assets and liabilities:
(Increase), Decrease in accounts receivable (1,351) 2,959
Decrease in notes receivable 78 --
Decrease in inventory 260 300
Decrease, (Increase) in costs and earnings in excess of
billings on uncompleted contracts 238 (90)
Decrease in income taxes receivable 3,514 2,825
Increase in prepaid expenses and other (773) (1,115)
Decrease in deferred income tax assets -- 406
Decrease, (Increase) in deposits and other long-term assets 119 (8)
(Decrease), Increase in accounts payable (6,205) 3,168
Decrease in accrued liabilities (3,960) (1,000)
Increase in deferred income 10 105
--------------------------------
Net cash (used in) provided by operating activities (5,736) 7,349
--------------------------------
Cash flows from investing activities:
Capital expenditures (1,198) (2,963)
Proceeds from sale of assets 3,280 1,469
Cash paid for business purchases (155) (200)
--------------------------------
Net cash provided by (used in) investing activities 1,927 (1,694)
--------------------------------
Cash flows from financing activities:
Repayments on short term debt (2,500) --
Principal payments on long-term debt (12,423) (3,826)
Net proceeds from private placement 19,450 --
Proceeds from investment by minority interests -- 285
Distributions to minority interests (53) (153)
--------------------------------
Net cash provided by (used in) financing activities 4,474 (3,694)
--------------------------------
Net increase in cash 665 1,961
Cash at beginning of period 3,056 3,364
--------------------------------
Cash at end of period $ 3,721 $ 5,325
================================
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Supplemental disclosures of cash flow information --
Interest paid $ 4,071 $ 3,957
Capital lease obligations incurred -- 225
===================================
Schedule of noncash investing activities -- Acquisitions:
Fair value of tangible assets acquired $ 45 $ 7,994
Receivables forgiven (38) (5,429)
Intangibles recorded 699 1,908
Reversal of deferred gain -- 1,422
Liabilities assumed (433) (3,354)
Assets transferred (438) --
Minority interests dissolved (recorded) 320 (2,341)
-----------------------------------
Total cash paid for net assets acquired $ 155 $ 200
===================================
SCHEDULE OF NONCASH FINANCING ACTIVITIES --
On August 6, 1997, in connection with the Company's February 21, 1997 private placement which
included the issuance of 87,719 shares of the Company's Series A preferred stock (the "Private
Placement"), the 87,719 shares of preferred stock were converted into 8,771,900 shares of the
company's common stock, valued at $9,999,966. In accordance with the agreement underlying the
Private Placement (the "Private Placement Agreement"), the company also issued 610,524 shares of
common stock as a dividend pursuant to the liquidation preference provisions of the Private
Placement Agreement, valued at $696,000 to the holders of the preferred stock issued in the Private
Placement.
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
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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
and the two quarters ended September 8, 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. The Company's calendar
reporting year ends 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 September 8, 1997,
there were 480 Checkers Restaurants operating in 23 different states, the District of Columbia, and
Puerto Rico. Of those Restaurants, 232 were Company-operated (including thirteen joint venture
Restaurants) and 248 were operated by franchisees. The accounts of the joint ventures have been
included with those of the Company in these consolidated financial statements. Champion Modular
Restaurant Company, a division of the Company, ("Champion") manufactures Modular Restaurant Packages
("MRP's") primarily for the Company and franchisees.
The consolidated financial statements also include the accounts of all of the Company's
subsidiaries. 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 non-refundable. 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. Restricted
cash consists of cash on deposit with various financial institutions as collateral to support the
Company's obligation to the States of Florida and Georgia for potential Workers' Compensation
claims. This cash is not available for the Company's use until such time that the respective states
permit its release.
(e) RECEIVABLES - Receivables consist primarily of franchise fees, royalties and notes due
from franchisees, and receivables from the sale of modular restaurant packages. Allowances for
doubtful receivables were $1.9 million at September 8, 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 of $6.9 million incurred in connection with
8
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the Company's November 22, 1996 restructure of its primary credit facility (see Note 2) are being
amortized on the effective interest method.
(h) PROPERTY AND EQUIPMENT AND PROPERTY AND EQUIPMENT HELD FOR RESALE - 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. Property and equipment held for resale is
carried at fair market value, adjusted for new market conditions on a quarterly basis. 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
September 9, 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) NEW ACCOUNTING STANDARDS - In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128") which
is effective for reporting periods ending after December 15, 1997. SFAS 128 replaces the
presentation of primary earnings per share and fully diluted earnings per share previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB 15") with basic earnings per
share and diluted earnings per share. Due to the net losses for each of the periods ended September
8, 1997 and September 9, 1996, the inclusion of options and warrants would result in an antidilutive
per share amount. Therefore, for all periods presented, such options and warrants are excluded from
earnings per share calculations under both APB 15 and, on a proforma basis, SFAS 128.
In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events and circumstances from nonowner
sources. This statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of the Company's financial statements for earlier periods provided for comparative
purposes will be required. The Company believes that this standard will not have a material adverse
effect on the Company's financial statements.
(o) RECLASSIFICATIONS - Certain amounts in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
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NOTE 2 LONG-TERM DEBT
Long-term debt consists of the following:
(Dollars in thousands)
September 8, December 30,
1997 1996
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Notes payable under Loan Agreement $ 26,347 $ 35,818
Notes payable due at various dates, secured by buildings and equipment, with
interest at rates primarily ranging from 9.0% to 18.0%, payable monthly 6,735 8,963
Unsecured notes payable, bearing interest at rates ranging from prime to 12.0% 2,881 3,481
Other, at interest rates ranging from 7.0% to 10.0% 1,447 1,233
----------------------------
Total long-term debt 37,410 49,495
Less current installments 7,274 9,589
----------------------------
Long-term debt, less current installments $ 30,136 $ 39,906
============================
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 Company, a
wholly-owned subsidiary of Giant Group, Ltd., which is a principal 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 payable to the CKE Group on the indebtedness was
reduced to a fixed rate of 13% (the effective interest rate on this obligation including the
amortization of $6.9 million in deferred loan costs is 20.1%). 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 $4.3 million in cash loan fees under the Loan
Agreement. 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 September 8, 1997, the Company has reduced the principal balance under the Restated
Credit Agreement by $9.4 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 for these principal reduction payments. 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 through maturity. 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
approximately $3.8 million at September 8, 1997 and $3.5 million at October 9, 1997 (the "Notes")
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payable to Rall-Folks, Inc. ("Rall-Folks"), Restaurant Development Group, Inc. ("RDG") and Nashville
Twin Drive-Through Partners, L.P. ("N.T.D.T."). The Company had agreed to acquire the Notes issued
to Rall-Folks and RDG in consideration of the issuance of an aggregate of approximately 1.9 million
shares of Common Stock and the Note issued to NTDT in exchange for a convertible note in the same
principal amount and convertible into approximately 614,000 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 originally scheduled. Pursuant to the most
recent amendment, consummation of the Rall-Folks, RDG and NTDT purchases is to occur prior to
December 16, November 25, and November 15, 1997, respectively, subject to extension in certain
cases. The Company does not currently have sufficient cash available to pay one or more of these
notes if required to do so.
NOTE 3: STOCKHOLDERS' EQUITY
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 $19.5
million in net proceeds from the Private Placement.
On August 6, 1997, the 87,719 shares of preferred stock were converted into 8,771,900
shares of the company's common stock, valued at $9,999,966. In accordance with the agreement
underlying the Private Placement (the "Private Placement Agreement"), the company also issued
610,514 shares of common stock as a dividend pursuant to the liquidation preference provisions of
the Private Placement Agreement, valued at $696,000 to the holders of the preferred stock used in
the Private Placement.
At the Company's Annual Meeting of Stockholders held on August 6, 1997, stockholders
approved an amendment to the Company's Certificate of Incorporation increasing the number of
authorized shares of common stock from 100,000,000 to 150,000,000 shares.
NOTE 4: STOCK OPTION PLANS
In August 1991, the Company adopted the 1991 stock option plan, as amended, for
employees whereby incentive stock options, non-qualified stock options, stock appreciation rights
and restrictive shares can be granted to eligible salaried individuals. The plan was amended on
August 6, 1997 by the approval of the stockholders to increase the number of shares subject to the
plan from 3,500,000 to 5,000,000.
In 1994, the Company adopted the 1994 stock option plan for non-employee directors, as
amended (The "Directors Plan"). The Directors Plan was amended on August 6, 1997 by the approval of
the Company's stockholders to increase the number of shares subject to the Directors plan from
200,000 to 5,000,000. The Directors Plan provided 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
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 additional shares of common stock. 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. Each non-employee director
serving on the Board as of July 26, 1994 received options to purchase 12,000 shares. Each new
non-employee director elected or appointed subsequent to that date also received options to purchase
12,000 shares. Each non-employee director has also received additional options to purchase 3,000
shares of common stock on the first day of each fiscal year. On August 6, 1997 the Directors Plan
was amended to provide: (i) an increase in the option grant to new non-employee directors to 100,000
shares, (ii) an increase in the annual option grant to 20,000 shares and (iii) the grant of an
option to purchase 300,000 shares to each non-employee director who was a Director both immediately
prior to and following the effective date of the amendment.
Both the 1991 Stock Option Plan and the Directors Plan provide that the shares granted
come from the Company's authorized but unissued or reacquired common stock. The exercise price of
the options granted pursuant to these plans will not be less than 100 percent of the fair market
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value of the shares on the date of grant. An option may vest and be exercisable immediately as of
the date of the grant and no option will be exercisable and will expire after ten years from the
date granted.
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 and 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. During the quarter ended June 16, 1997, 12,000 options were granted pursuant to the
terms of the Directors Plan and during the quarter ended September 8, 1997, 1.6 million options were
granted pursuant to the terms of the Directors 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 option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the grant date for awards in
fiscal 1996 and each of the first three quarters 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, $680,000, $43,000 and $1.0 million, 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 three quarters
of fiscal 1997, respectively: dividend yield of zero percent for all periods; expected volatility of
64, 81, and 89 percent, risk-free interest rates of 6.5, 6.0, and 5.9 percent, and expected lives of
3.5, 2, 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 $660,000 for the quarter ended September 8,
1997 and $8.6 million for the quarter ended September 8, 1996, or 38.0% of the losses before income
taxes. The Company then recorded valuation allowances of $660,000 and $10.3 million against deferred
income tax assets as of September 8, 1997 and September 9, 1996 respectively. The Company's total
valuation allowances of $30.0 million as of September 8, 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: LOSS PROVISIONS
The Company recorded accounting charges and loss provisions of $16.8 million during the
third quarter of 1996, $2.1 million of which consisted of various selling, general and
administrative expenses. Provisions totalling $14.2 million to close 27 Restaurants, relocate 22 of
them ($4.2 million), settle 16 leases on real property underlying these stores ($1.2 million) and
sell land underlying the other 11 Restaurants ($307,000), and impairment charges related to an
additional 28 under-performing Restaurants ($8.5 million) were recorded. Included in general and
administrative expenses in the third quarter of 1996 are refinancing costs of $845,775 recorded to
expense capitalized loan costs incurred in connection with the Company's previous lending
arrangements with its bank group, $499,644 in unusual bad debt provisions, and $750,000 in
provisions for state sales tax audits. A loss provision of $500,000 was also recorded to adjust
Champion's finished buildings inventory to fair market value.
12
<PAGE>
NOTE 7: SUBSEQUENT EVENT
In October 1997, the Company and Rally's Hamburgers, Inc. ("Rally's") entered into an
employment agreement with James J. Gillespie, effective November 10, 1997, pursuant to which he is
to serve as Chief Executive Officer of the Company and Rally's. Mr. Gillespie is also to serve as a
director of the Company and Rally's. The term of employment is for two years, subject to automatic
renewal by the Company and Rally's for one-year periods thereafter, at an annual base salary of
$282,500. Mr. Gillespie is also entitled to participate in the incentive bonus plans of the Company
and Rally's. Upon execution of the employment agreement, Mr. Gillespie was granted an option to
purchase 300,000 shares of Rally's common stock, $.10 par value per share, and is entitled to
receive, on November 10, 1997, a signing bonus of $50,000. The option vests in three equal annual
installments commencing on November 10, 1998; provided, that if the term of the agreement is not
extended to November 10, 2000, the option shall become fully vested on November 10, 1999. Mr.
Gillespie is entitled to choose to participate in either the Company's or Rally's employee benefit
plans and programs and is entitled to reimbursement of his reasonable moving expenses and a
relocation fee of $5,000. The agreement may be terminated at any time for cause. If Mr. Gillespie is
terminated without cause, he will be entitled to receive his base annual salary, and any earned
unpaid bonus, through the unexpired term of the agreement, payable in a lump sum or as directed by
Mr. Gillespie. Mr. Gillespie has agreed to keep confidential all non-public information about the
Company and Rally's during the term of his employment and for a two-year period thereafter. In
addition, Mr. Gillespie has agreed that he will not, during his employment, engage in any business
which is competitive with either the Company or Rally's. The Company and Rally's intend to share the
costs associated with this agreement.
13
<PAGE>
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 September 8, 1997, the Company had an ownership interest in 232
Company-operated Restaurants and an additional 248 Restaurants were operated by franchisees. The
Company's ownership interest in the Company-operated Restaurants is in one of two forms: (i) the
Company owns 100% of the Restaurant (as of September 8, 1997, there were 219 such Restaurants) and
(ii) the Company owns a 10.55% to 65.83% interest in a partnership which owns the Restaurant (a
"Joint Venture Restaurant") (as of September 8, 1997, there were 13 such Joint Venture Restaurants).
The Company continues 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%, 63.6% and 63.7% of net restaurant revenues in the first second and third quarters 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. These improvements in costs were achieved despite a 6.4%
decrease in Company owned same store sales in the third quarter of 1997 as compared to the third
quarter of the prior year.
The Company was able to reduce food and paper costs by cooperating with CKE Restaurants,
Inc. and Rally's Hamburgers, Inc. to leverage the purchasing power of the three entities to
negotiate improved terms for their respective contracts with suppliers. The Company has achieved
annualized saving in excess of $5.0 million.
The Company has also implemented over 15 changes in restaurant operations in order to
lower labor and benefits costs. These changes include adjusting the number of salaried managers per
store, creating an incentive program targeting profit, closing one drive thru lane during slow
periods and creating a labor matrix that guides the managers on proper staffing levels.
In an effort to improve sales, the Company is in the process of creating a new brand
identify that will appeal to the heavy fast food users. The Company has recently selected a new
advertising agency that is working with management to create a new marketing program that will
emphasize the quality of the Company's product while distinguishing it from its competitors. The
first advertising campaign using this strategy began on October 6, 1997.
In addition, the Company is seeking to improve sales by enhancing the experience of the
customer when visiting a Checkers Restaurant. The Company and a franchisee are currently testing
in-restaurant dining areas in certain restaurants. The Company has also reintroduced the "mystery
shop" program which enables the Company to evaluate quality, service and cleanliness of its
restaurants through a service which provides customers to perform such evaluations.
The Company does not believe that its debt has a significant impact on current operating
results.
Although the Company's Restaurant operating margins for the first three quarters of 1997
were 37.2% higher than the Restaurant operating margins for the first three quarters of 1996, the
Company intends to continue to implement programs to further improve those margins.
In the third quarter of fiscal 1997, the Company, along with its franchisees,
experienced a net increase of two operating Restaurants, compared to a net decrease of two operating
Restaurants in the third 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 to focus
on improving Restaurant margins.
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 any sales growth resulting
from the Company's current and future remodeling of restaurants and other operating strategies could
be sustained.
14
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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.
Quarter Ended Three Quarters Ended
(Unaudited) (Unaudited)
------------------------------------------------------------------
September 8, September 9, September 8, September 9,
1997 1996 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net restaurant sales 94.1% 94.0% 94.4% 93.9%
Franchise revenues and fees 5.4% 5.3% 5.1% 5.3%
Modular restaurant packages 0.5% 0.7% 0.5% 0.8%
------------------------------------------------------------------
Total revenue 100% 100% 100% 100%
Costs and Expenses:
Restaurant food and paper costs (1) 31.6% 35.6% 32.9% 34.6%
Restaurant labor costs (1) 32.1% 37.7% 32.7% 35.8%
Restaurant occupancy expense (1) 9.1% 9.1% 8.5% 8.2%
Restaurant depreciation and amortization (1) 6.2% 5.9% 6.0% 5.6%
Advertising expense (1) 5.2% 4.3% 5.1% 3.4%
Other restaurant operating expense (1) 10.1% 10.7% 10.0% 9.3%
Costs of modular restaurant package revenues(2) 99.8% 154.7% 88.8% 154.5%
Other depreciation and amortization 1.6% 2.8% 1.5% 2.4%
Selling, general and administrative expense 10.3% 17.0% 10.2% 11.9%
Impairment of long-lived assets 0.0% 22.8% 0.0% 7.4%
Losses on assets to be disposed of 0.0% 15.4% 0.0% 5.0%
Loss provision 0.0% 1.3% 0.0% 0.4%
------------------------------------------------------------------
Operating (loss) income (0.9%) (57.4%) (2.0%) (19.3%)
------------------------------------------------------------------
Other income (expense):
Interest income 0.2% 0.3% 0.2% 0.5%
Interest expense (3.2%) (3.6%) (3.5%) (3.4%)
Interest - loan cost amortization (1.4%) (0.2%) (3.1%) (0.1%)
Minority interests (0.0%) (0.2%) (0.1%) 0.0%
------------------------------------------------------------------
Loss before income tax benefit (5.3%) (60.7%) (8.3%) (22.3%)
Income tax expense (benefit) 0.0% (4.6%) 0.0% 0.5%
------------------------------------------------------------------
Net loss (5.3%) (65.4%) (8.3%) (22.8%)
==================================================================
Preferred dividends 2.1% 0.0% 0.7% 0.0%
------------------------------------------------------------------
Net loss to common shareholders (7.4%) (65.4%) (9.0%) (22.8%)
==================================================================
Operating data:
System-wide restaurant sales (in 000's):
Company-operated $ 30,786 $ 34,875 $ 94,987 $ 107,193
Franchised 43,226 44,491 124,485 133,788
------------------------------------------------------------------
Total $ 74,012 79,366 $219,472 $ 240,981
==================================================================
1997 1996
---------------------------
Average annual net sales per restaurant open for a full year (in 000's) (3):
Company-operated $612 $633
Franchised $742 $787
System-wide $677 $706
---------------------------
Number of Restaurants (4)
Company-operated 232 255
Franchised 248 250
---------------------------
Total 480 505
===========================
(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 closes in the
following year.
(4) Number of Restaurants open at end of period.
15
<PAGE>
COMPARISON OF HISTORICAL RESULTS - QUARTER ENDED SEPTEMBER 8, 1997 AND QUARTER ENDED SEPTEMBER 9,
1996
REVENUES. Total revenues decreased 11.7% to $32.7 million for the quarter ended
September 8, 1997, compared to $37.1 million for the quarter ended September 9, 1996.
Company-operated net restaurant sales decreased 11.7% to $30.8 million for the quarter ended
September 8, 1997, from $34.9 million for the quarter ended September 9, 1996. Net restaurant sales
for comparable Company-owned Restaurants for the quarter ended September 8, 1997, decreased 6.4%
compared to the quarter ended September 9, 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 a highly competitive environment
during the third quarter of 1997 and the Company's 1997 focus on reducing Restaurants costs of
sales.
Franchise revenues and fees decreased 8.6% to $1.8 million for the quarter ended
September 8, 1997, from $2.0 million for the quarter ended September 9, 1996. This was a result of a
net decrease of two franchised restaurants and a decline in average franchise restaurant sales since
September 9, 1996. The Company recognizes franchise fees as revenues when the Company has
substantially completed its obligations under the franchise agreement, usually at the opening of the
franchised restaurant.
Modular restaurant package revenues decreased 39.1% to $150,000 for the quarter ended
September 8, 1997, from $247,000 for the quarter ended September 9, 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 $9.7 million or 31.6% of
net Restaurant sales for the quarter ended September 8, 1997, compared to $12.4 million or 35.6% of
net restaurant sales for the quarter ended September 9, 1996. The actual decrease in food and paper
costs was due primarily to the decrease in net restaurant sales while the decrease in these costs as
a percentage of net restaurant sales was due to new purchasing contracts negotiated in the first
quarter of 1997.
Restaurant labor costs, which includes restaurant employees' salaries, wages, benefits
and related taxes, totalled $9.9 million or 32.1% of net restaurant sales for the quarter ended
September 8, 1997, compared to $13.1 million or 37.7% of net restaurant sales for the quarter ended
September 9, 1996. The decrease in restaurant labor costs as a percentage of net restaurant sales
was due primarily to various Restaurant level initiatives implemented in the first quarter of 1997.
Restaurant occupancy expense, which includes rent, property taxes, licenses and
insurance, totalled $2.8 million or 9.1% of net restaurant sales for the quarter ended September 8,
1997, compared to $3.2 million or 9.1% of net restaurant sales for the quarter ended September 9,
1996. This decrease in restaurant occupancy costs was due primarily to a net reduction of 23
Company-operated Restaurants since September 9, 1996.
Restaurant depreciation and amortization decreased 7.8% to $1.9 million for the quarter
ended September 8, 1997, from $2.1 million for the quarter ended September 9, 1996, due primarily to
fourth quarter 1996 impairments under the Statement of Financial Accounting Standards No. 121 and a
net decrease of 23 Company-operated restaurants from September 9, 1996, to September 8, 1997.
However, as percentage of net restaurant sales, these expenses increased to 6.2% for the quarter
ended September 8, 1997 from 5.9% for the quarter ended September 9, 1996 because of the greater
relative decline in sales.
Advertising expense increased to $1.6 million or 5.2% of net restaurant sales for the
quarter ended September 8, 1997, from $1.5 million or 4.3% of net restaurant sales for the quarter
ended September 9, 1996. The percentage increase was due to higher sales volume in the third quarter
of 1996 driven by a $.99 chicken sandwich promotion.
Other restaurant expenses includes all other Restaurant level operating expenses other
than food and paper costs, labor costs, and occupancy expenses which includes supplies, utilities,
maintenance and other costs. These expenses totalled $3.1 million or 10.1% of net restaurant sales
for the quarter ended September 8, 1997, compared to $3.7 million or 10.7% of net restaurant sales
for the quarter ended September 9, 1996. The actual decrease in these expenses as well as the
decrease as a percentage of net restaurant sales was primarily related to tighter spending controls
implemented in the second quarter of 1997.
Costs of modular restaurant package revenues totalled $150,000 or 99.8% of modular
restaurant package revenues for the quarter ended September 8, 1997, compared to $382,000 or 154.7%
of such revenues for the quarter ended September 9, 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 10.3% of total revenues, for
the quarter ended September 8, 1997, compared to $6.3 million or 17.0% of total revenues for the
16
<PAGE>
quarter ended September 9, 1996. Third quarter 1996 general and administrative expenses were
increased by accounting charges of $2.1 million consisting of $499,644 in unusual bad debt expenses,
$750,000 provision for state sales tax audits and $845,775 write-off of capitalized costs incurred
in connection with the Company's previous lending arrangements with its bank group. The actual
decrease in normal recurring general and administrative expenses of $816,000 was mostly attributable
to a reduction in corporate staffing early in 1997.
OTHER ACCOUNTING CHARGES AND LOSS PROVISIONS. The Company recorded accounting charges
and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which
consisted of various selling, general and administrative expenses. Provisions totalling $14.2
million to close 27 Restaurants, relocate 22 of them ($4.2 million), settle 16 leases on real
property underlying these stores ($1.2 million) and sell land underlying the other 11 Restaurants
($307,000), and impairment charges related to an additional 28 under-performing Restaurants ($8.5
million) were recorded. A loss provision of $500,000 was also recorded to adjust Champion's finished
buildings inventory to fair market value.
INTEREST EXPENSE. Interest expense other than loan cost amortization decreased to $1.0
million or 3.2% of total revenues for the quarter ended September 8, 1997, from $1.3 million or 3.6%
of total revenues for the quarter ended September 9, 1996. This decrease was due to 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 $660,000 or 38.0% of the loss before income taxes which was completely offset by a
deferred income tax valuation allowance of $660,000 for the quarter ended September 8, 1997, as
compared to an income tax benefit of $8.6 million or 38.0% of earnings before income taxes, offset
by a deferred income tax allowance of $10.3 million resulting in a net tax expense of $1.7 million
for the quarter ended September 9, 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. The net loss for the quarter was $1.7 million. The net loss to common
shareholders was $2.4 million or $.04 per share after deducting preferred dividends. This net loss
was impacted by the expensing of $445,000 in deferred loan costs in the quarter ended September 8,
1997. Net loss before tax, impairment of long-lived assets, losses on assets to be disposed of,
accounting charges and loss provisions and deferred loan cost amortization was $1.3 million or $.02
per share for the quarter ended September 8, 1997, and $5.7 million or $.11 per share for the
quarter ended September 9, 1996, which resulted primarily from an increase in the average Restaurant
margins, decreases in general and administrative expenses and interest expense other than loan cost
amortization, partially offset by a decrease in royalties and franchise fees.
COMPARISON OF HISTORICAL RESULTS - THREE QUARTERS ENDED SEPTEMBER 8, 1997 AND THREE QUARTERS ENDED
SEPTEMBER 9, 1996
REVENUES. Total revenues decreased 11.9% to $100.6 million for the three quarters ended
September 8, 1997, compared to $114.2 million for the three quarters ended September 9, 1996.
Company-operated net restaurant sales decreased 11.4% to $95.0 million for the three quarters ended
September 8, 1997, from $107.2 million for the three quarters ended September 9, 1996. Net
restaurant sales for comparable Company-owned Restaurants for the three quarters ended September 8,
1997, decreased 9.5% compared to the three quarters ended September 9, 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 a highly
competitive environment during the first three quarters 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 15.7% to $5.1 million for the three quarters ended
September 8, 1997, from $6.1 million for the three quarters ended September 9, 1996. This was a
result of a net decrease of two franchised restaurants and a decline in average franchise restaurant
sales since September 9, 1996. The Company recognizes franchise fees as revenues when the Company
has substantially completed its obligations under the franchise agreement, usually at the opening of
the franchised Restaurant.
Modular restaurant package revenues decreased 44.7% to $494,000 for the three quarters
ended September 8, 1997, from $893,000 for the three quarters ended September 9, 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 $31.2 million or 32.9% of
net Restaurant sales for the three quarters ended September 8, 1997, compared to $37.1 million or
34.6% of net restaurant sales for the three quarters ended September 9, 1996. The actual decrease in
food and paper costs was due primarily to the decrease in net restaurant sales while the decrease in
these costs as a percentage of net restaurant sales was due to new purchasing contracts negotiated
in the first two quarters of 1997.
Restaurant labor costs, which includes restaurant employees' salaries, wages, benefits
and related taxes, totalled $31.0 million or 32.7% of net restaurant sales for the three quarters
ended September 8, 1997, compared to $38.3 million or 35.8% of net restaurant sales for the three
quarters ended September 9, 1996. The decrease in restaurant labor costs as a percentage of net
restaurant sales was due primarily to various Restaurant level initiatives implemented in the first
quarter of 1997.
17
<PAGE>
Restaurant occupancy expense, which includes rent, property taxes, licenses and
insurance, totalled $8.0 million or 8.5% of net restaurant sales for the three quarters ended
September 8, 1997, compared to $8.8 million or 8.2% of net restaurant sales for the three quarters
ended September 9, 1996. This increase in restaurant occupancy costs as a percentage of net
restaurant sales was due primarily to the decline in average net 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 third quarter of 1996.
Restaurant depreciation and amortization decreased 4.8% to $5.7 million for the three
quarters ended September 8, 1997, from $6.0 million for the three quarters ended September 8, 1996,
due primarily to fourth quarter 1996 impairments under the Statement of Financial Accounting
Standards No. 121 and a net decrease of 23 Company-operated restaurants from September 8, 1996, to
September 8, 1997. However, as percentage of net restaurant sales, these expenses increased to 6.0%
for the quarter ended September 8, 1997 from 5.6% for the quarter ended September 9, 1996 because of
the greater relative decline in sales.
Advertising expense increased to $4.8 million or 5.1% of net restaurant sales for the
three quarters ended September 8, 1997, from $3.6 million or 3.4% of net restaurant sales for the
three quarters ended September 9, 1996. The increase in this expense was due to decreased
utilization of coupons in lieu of advertising dollars in 1997 and the first and second quarter 1996
capitalization of television production costs that were expensed later in 1996.
Other restaurant expenses includes all other Restaurant level operating expenses other
than food and paper costs, labor costs, rent and occupancy expenses which include supplies,
utilities, maintenance and other costs. These expenses totalled $9.5 million or 10.0% of net
restaurant sales for the three quarters ended September 8, 1997, compared to $10.0 million or 9.3%
of net restaurant sales for the three quarters ended September 9, 1996. The increase in the three
quarters ended September 8, 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, and increased spending on repair and maintenance as part of a program to improve the
visual appeal of the restaurants.
Costs of modular restaurant package revenues totalled $439,000 or 88.8% of modular
restaurant package revenues for the three quarters ended September 8, 1997, compared to $1.4 million
or 154.7% of such revenues for the three quarters ended September 9, 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 $10.3 million or 10.2% of total revenues, for
the three quarters ended September 8, 1997, compared to $13.6 million or 11.9% of total revenues for
the three quarters ended September 9, 1996. Third quarter 1996 general and administrative expenses
were increased by accounting charges of $2.1 million consisting of $499,644 in unusual bad debt
expenses, $750,000 provision for state sales tax audits and $845,775 write-off of capitalized costs
incurred in connection with the Company's previous lending arrangements with its bank group. The
actual decrease in normal recurring general and administrative expenses of $1.6 million was mostly
attributable to a reduction in corporate staffing early in 1997. This reduction was partially offset
by $350,000 of costs incurred as a result of terminated merger negotiations with Rally's Hamburgers,
Inc., resulting in a reported decrease of $1.2 million before 1996 accounting charges.
OTHER ACCOUNTING CHARGES AND LOSS PROVISIONS. The Company recorded accounting charges
and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which
consisted of various selling, general and administrative expenses. Provisions totalling $14.2
million to close 27 Restaurants, relocate 22 of them ($4.2 million), settle 16 leases on real
property underlying these stores ($1.2 million) and sell land underlying the other 11 Restaurants
($307,000), and impairment charges related to an additional 28 under-performing Restaurants ($8.5
million) were recorded. A loss provision of $500,000 was also recorded to adjust Champion's finished
buildings inventory to fair market value.
INTEREST EXPENSE. Interest expense other than loan cost amortization was $3.6 million or
3.5% of total revenues for the three quarters ended September 8, 1997, and $3.9 million or 3.4% of
total revenues for the three quarters ended September 9, 1996. This decrease was due to a reduction
in the weighted average balance of debt outstanding during the respective periods, partially offset
by an increase in the Company's effective interest rates since the second quarter of 1996.
INCOME TAX BENEFIT. Due to the loss for the three quarters, the Company recorded an
income tax benefit of $3.2 million or 38.0% of the loss before income taxes which was completely
offset by a deferred income tax valuation allowance of $3.2 million for the three quarters ended
September 8, 1997, as compared to an income tax benefit of $1.1 million or 38.0% of earnings before
income taxes, offset a deferred income tax valuation allowance of $10.3 million resulting in a net
tax expense of $626,000 for the three quarters ended September 9, 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. The net loss for the three quarters was $8.4 million. The net loss to common
shareholders was $9.1 million or $0.15 per share after deducting preferred dividends. This net loss
was significantly impacted by the expensing of $3.1 million in deferred loan costs and $350,000 in
terminated merger costs in the three quarters ended September 8, 1997. Net loss before tax, deferred
loan cost amortization, terminated merger cost s and accounting charges and loss provisions was
18
<PAGE>
$4.9 million or $.08 per share for the three quarters ended September 8, 1997, and $8.5 million or
$.16 per share for the three quarters ended September 9, 1996. This decrease in net loss before tax
and other above mentioned charges was primarily attributable to an increase in average Restaurant
margins and a decline in general and administrative expenses and interest expense other than loan
cost amortization, partially offset by lower levels of net Restaurant sales 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
principal 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 payable to the CKE Group 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 $4.3 million in cash loan fees under the Loan Agreement. 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 September 8, 1997, the Company has reduced the principal balance under the Restated Credit
Agreement by $9.4 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 through maturity. 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 and interest
amount of approximately $3.5 million as of October 9, 1997 (the "Notes") payable to Rall-Folks, Inc.
("Rall-Folks"), Restaurant Development Group, Inc. ("RDG") and Nashville Twin Drive-Through
Partners, L.P. ("N.T.D.T."). The Company had agreed to acquire the Notes issued to Rall-Folks and
RDG in consideration of the issuance of an aggregate of approximately 1.9 million shares of Common
Stock and the Note issued to NTDT in exchange for a convertible note in the same principal amount
and convertible into approximately 614,000 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 originally scheduled. Pursuant to the most recent amendment,
consummation of the Rall-Folks, RDG and NTDT purchases is to occur prior to December 16, November
25, and November 15, 1997, respectively, subject to extension in certain cases. The Company does not
currently have sufficient cash available to pay one or more of these notes if required to do so.
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 $19.5
million in net 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.
19
<PAGE>
On August 6, 1997, the 87,719 shares of preferred stock were converted into 8,771,900
shares of the Company's common stock valued at $9,999,966. In accordance with the agreement
underlying the Private Placement (the "Private Placement Agreement"), the Company also issued
610,524 shares of common stock as a dividend pursuant to the liquidation preference provisions of
the Private Placement Agreement, valued at $696,000 to the holders of the preferred stock issued in
the Private Placement.
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. During the first
three quarters of 1997, the Company sold nine parcels of excess real property and ten MRP's
resulting in net proceeds to the Company of $3.1 million. As of September 8, 1997 the Company owns
or leases approximately 39 parcels of excess real property which it intends to continue to
aggressively market to third parties, and has an inventory of approximately 32 used MRP's which it
intends to continue to 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 $14.5 million at September 8, 1997
(determined by subtracting current liabilities from current assets). It is anticipated that the
Company will continue to have negative working capital since approximately 86.2% 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 currently does not have significant development plans for additional Company
Restaurants during fiscal 1997.
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 63.6% and
63.7% of net restaurant revenues in the second and third quarters of 1997, respectively, compared to
72.1% of net restaurant revenues in fiscal 1996, despite a 6.4% decrease in Company owned same store
sales in the third quarter of 1997 as compared to the third 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 many of the fundamental steps have been taken to improve the Company's
initiative toward profitability, but there can be no assurance that it will be able to do so.
Management believes that cash flows generated from operations, asset sales and the Private Placement
should allow the Company to continue to meet its financial obligations and to pay operating
expenses. 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.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
None, except as previously reported in the Company's Form 10-Q for the quarter ended
March 24, 1997.
ITEM 2. CHANGES IN SECURITIES
On August 6, 1997, the Shareholders of the Company approved the conversion of all 87,719
outstanding shares of Series A Preferred Stock. Upon such approval, the Series A Preferred Stock
converted to 9,382,414 shares of the Company's common stock pursuant to the terms of the Certificate
of Designation of Series A Preferred Stock of the Company filed with the Secretary of State of the
State of Delaware on February 18, 1997. The Company claimed an exemption under Section 4(2) of the
Securities Act of 1933.
20
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Annual Meeting of Stockholders of the Company was held on August 6, 1997. At the
meeting, the following actions were taken by the stockholders:
1. Burt Sugarman and Jean Giles-Wittner were elected as Directors to serve until the Annual
Meeting in the year 2000 and until their successors are elected and qualified or until their
resignation, removal from office or death. The votes cast for and against each were as follows:
Name For Against
Burt Sugarman 47,610,065 703,792
Jean Giles-Wittner 47,596,208 717,649
2. A proposal to amend the Company's Certificate of Incorporation to increase the authorized
shares of the Company's Common Stock by 50,000,000 shares was approved. The voting on the proposal
was as follows:
For: 46,247,839
Against: 1,815,931
Abstain: 250,087
3. The Company's capital restructuring, including the conversion os Series A Preferred Stock in
Common Stock was ratified. The voting on the proposal was as follows:
For: 17,975,302
Against: 1,044,709
Abstain: 336,594
4. A proposal to amend the Company's 1991 Stock Option Plan (the "Plan") to increase the number
of shares of Common Stock subject to the Plan by 1,500,000 shares was approved. The voting on the
proposal was as follows:
For: 16,424,783
Against: 2,428,224
Abstain: 503,598
5. A proposal to amend the Company's 1994 Stock Option Plan for non-employee Directors (the
"Directors Plan") to increase the number of shares of Common Stock subject to the Director's Plan by
4,800,000, to specify certain additional automatic grants to non-employee Directors, to provide that
future options granted under the Director's Plan will vest immediately and to provide that, in
general, options granted under the Director's Plan do not terminate if the grantee ceases to be a
non-employee Director was approved. The voting in the proposal was as follows:
For: 16,635,907
Against: 2,268,045
Abstain: 452,653
6. The appointment of KPMG Peat Marwick as the Company's independent auditors for the year 1997
was ratified and approved. The voting on the proposal was as follows:
For: 47,742,739
Against: 295,187
Abstain: 275,931
ITEM 5. OTHER INFORMATION:
In October 1997, the Company and Rally's Hamburgers, Inc. ("Rally's") entered into an
employment agreement with James J. Gillespie, whereby, effective November 10, 1997, Mr. Gillespie
will serve as Chief Executive Officer, and on the Boards of Directors, of the Company and Rally's.
Mr. Gillespie served as President of the Applebee's Division of Apple South, Inc., franchisee of 254
Applebee restaurants from January to October 1997. Prior thereto, Mr. Gillespie served since 1976 in
various capacities with Long John Silver's Inc., operator and franchisor of Long John Silver's
restaurants, including as Senior Vice President - Franchise Operations and, prior to that position,
as Divisional Vice President, Southwest Division. Checkers and Rally's intend to share the costs
related to Mr. Gillespie's employment.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (included in electronic filing only).
(b) Reports on 8-K:
There were no reports on Form 8-K filed during the quarter covered by this report.
22
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Checkers Drive-In Restaurants, Inc.
-----------------------------------
(Registrant)
Date: October 22, 1997
By: /s/ Joseph N. Stein
-------------------------------------------------
Joseph N. Stein
Executive Vice President, Chief Financial Officer
and Chief Accounting Officer
23
<PAGE>
September 8, 1997 FORM 10-Q
CHECKERS DRIVE-IN RESTAURANTS, INC.
EXHIBIT INDEX
Exhibit # Exhibit Description
--------- -------------------
27 Financial Data Schedule (included in electronic filing only).
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Checkers Drive-in Restaurants, Inc., for the quarterly
period ended September 8, 1997, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-29-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> SEP-08-1997
<CASH> 3,721
<SECURITIES> 0
<RECEIVABLES> 2,427
<ALLOWANCES> 0
<INVENTORY> 2,045
<CURRENT-ASSETS> 16,724
<PP&E> 132,180
<DEPRECIATION> 42,216
<TOTAL-ASSETS> 121,300
<CURRENT-LIABILITIES> 31,234
<BONDS> 38,507
0
0
<COMMON> 70
<OTHER-SE> 51,300
<TOTAL-LIABILITY-AND-EQUITY> 121,300
<SALES> 95,481
<TOTAL-REVENUES> 100,603
<CGS> 90,800
<TOTAL-COSTS> 102,623
<OTHER-EXPENSES> (298)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,666
<INCOME-PRETAX> (8,388)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,388)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,388)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
<FN>
Footnote (1):
Receivables consist of --
Accounts Receivable - net $1,810
Notes Receivable 617
---------
$2,427
=========
25
</FN>
</TABLE>
