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.
This document contains 25 pages. Exhibit Index appears at page 24.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 24, 1997 and December 30, 1996..........................3
Condensed Consolidated Statements of Operations
Quarter ended March 24, 1997 and March 25, 1996...............5
Condensed Consolidated Statements of Cash Flows
Quarter ended March 24, 1997 and March 25, 1996...............6
Notes to Consolidated Financial Statements......................7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................12
PART II OTHER INFORMATION
Item 1 Legal Proceedings.................................................20
Item 2 Changes in Securities.............................................21
Item 3 Defaults Upon Senior Securities...................................21
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
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(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
==============================
7</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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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
4
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(UNAUDITED)
Quarter Ended
March 24, March 25,
1997 1996
-----------------------------
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
=============================
3
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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>
6
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION - The accompanying unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
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.
(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
7
<PAGE>
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>
8
<PAGE>
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
"Certificate", a copy of which is an Exhibit hereto), including (i) a dividend
9
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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.
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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 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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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.
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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 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.
Quarter Ended
(Unaudited)
---------------------------
March 24, March 25,
1997 1996
---------------------------
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) 34.2% 34.2%
Restaurant labor costs (1) 34.9% 34.4%
Restaurant occupancy expense (1) 8.4% 7.4%
Restaurant depreciation and amortization (1) 5.9% 5.5%
Advertising expense (1) 5.1% 2.4%
Other restaurant operating expense (1) 10.0% 7.8%
Costs of modular restaurant package 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
===========================
Average annual net sales per restaurant open for a full year (in 000's) (3):
1997 1996
----------------------------
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
============================
(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 aggressively market
to franchisees and third parties. There can be no assurance that the Company
17
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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 99(cent) 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.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any
material litigation and is not aware of any threatened material litigation:
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.
20
<PAGE>
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 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
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on 8-K:
The following reports on Form 8-K were filed during the quarter
covered by this report:
The Company filed a Report on Form 8-K with the Commission
dated 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.
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: May 5, 1997
By: /s/ Joseph N. Stein
-----------------------------------------
Joseph N. Stein
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer
23
<PAGE>
March 24, 1997 FORM 10-Q
CHECKERS DRIVE-IN RESTAURANTS, INC.
EXHIBIT INDEX
Exhibit # Exhibit Description
--------- -------------------
27 Financial Data Schedule (included in electronic filing only).
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 March 24, 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> MAR-24-1997
<CASH> 3,451
<SECURITIES> 0
<RECEIVABLES> 5,640
<ALLOWANCES> 0
<INVENTORY> 2,004
<CURRENT-ASSETS> 19,556
<PP&E> 131,532
<DEPRECIATION> 36,067
<TOTAL-ASSETS> 130,075
<CURRENT-LIABILITIES> 34,854
<BONDS> 39,862
0
0
<COMMON> 61
<OTHER-SE> 54,548
<TOTAL-LIABILITY-AND-EQUITY> 130,075
<SALES> 32,605
<TOTAL-REVENUES> 34,157
<CGS> 32,063
<TOTAL-COSTS> 35,975
<OTHER-EXPENSES> 149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,512
<INCOME-PRETAX> (5,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,181)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> .00
<FN>
Footnote: Receivables consist of -
Accounts receivable (net) $ 1,900
Notes receivable 362
Income taxes receivable 3,378
--------
$ 5,640
========
25
</FN>
</TABLE>
