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 JUNE 15, 1998
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.)
14255 49TH STREET NORTH, BUILDING 1
SUITE 101
CLEARWATER, FL 33762
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (727) 519-2000
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 73,411,092 shares of Common Stock, par value $.001
per share, outstanding as of July 15, 1998.
This document contains 24 pages. Exhibit Index appears at page 21.
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION PAGE
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
June 15, 1998 and December 29, 1997............................3
Condensed Consolidated Statements of Operations Quarter ended
June 15, 1998 and June 16, 1997
and Two Quarters ended June 15, 1998 and June 16, 1997........5
Condensed Consolidated Statements of Cash Flows
Two Quarters ended June 15, 1998 and June 16, 1997.............6
Notes to Condensed Consolidated Financial Statements.............7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............................................11
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS.....................................................18
ITEM 2 CHANGES IN SECURITIES.................................................20
ITEM 3 DEFAULTS UPON SENIOR SECURITIES.......................................20
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................20
ITEM 5 OTHER INFORMATION.....................................................20
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K......................................21
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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
(UNAUDITED)
JUNE 15, DECEMBER 29,
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents:
Restricted $ 1,405 $ 2,555
Unrestricted 1,599 1,366
Accounts receivable 936 1,175
Notes receivable-current 236 265
Inventory 2,025 2,222
Assets held for sale 3,232 4,332
Deferred loan costs-current 1,786 1,648
Prepaid expenses and other current assets 899 309
-------- --------
Total current assets 12,118 13,872
Property and equipment, net 84,040 87,889
Intangibles, net of accumulated amortization 11,052 11,520
Deferred loan costs - less current portion 137 1,099
Notes receivable - long term portion 359 381
Deposits and other non-current assets 625 640
-------- --------
$108,331 $115,401
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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
(UNAUDITED)
JUNE 15, DECEMBER 29,
1998 1997
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CURRENT LIABILITIES:
Current installments of long-term debt and capital lease obligations $ 1,550 $ 3,484
Accounts payable 5,890 8,186
Accrued wages, salaries and benefits 2,448 2,528
Reserves for Restaurant relocation and abandoned sites 1,789 2,159
Other accrued liabilities 9,334 11,408
Deferred income-current 203 260
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Total current liabilities 21,214 28,025
Long-term debt and capital lease obligations, less current installments 28,427 29,401
Deferred income 581 346
Long-term reserves for Restaurant relocations and abandoned sites 519 581
Minority interests in joint ventures 898 966
Other noncurrent liabilities 6,086 5,710
--------- ---------
Total liabilities 57,725 65,029
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized 2,000,000 shares, no shares
outstanding -- --
Common stock, $.001 par value, authorized 150,000,000 shares, issued
and outstanding 72,755,031 at December 29, 1997 and 73,411,092 at
June 15, 1998 73 73
Additional paid-in capital 112,583 112,536
Warrants 9,463 9,463
Retained deficit (71,113) (71,300)
--------- ---------
51,006 50,772
Less treasury stock, at cost, 578,904 shares 400 400
--------- ---------
Net stockholders' equity 50,606 50,372
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$ 108,331 $ 115,401
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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)
QUARTER ENDED TWO QUARTERS ENDED
---------------------- ----------------------
JUNE 15, JUNE 16, JUNE 15, JUNE 16,
1998 1997 1998 1997
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REVENUES:
Restaurant sales $ 33,003 $ 31,753 $ 68,110 $ 64,201
Franchise revenues and fees 1,756 1,714 3,600 3,325
Modular restaurant packages 67 246 119 344
-------- -------- -------- --------
Total revenues $ 34,826 $ 33,713 $ 71,829 $ 67,870
COSTS AND EXPENSES:
Restaurant food and paper costs 10,343 10,404 21,732 21,509
Restaurant labor costs 10,818 9,792 21,509 21,130
Restaurant occupancy expense 2,582 2,270 5,219 4,804
Restaurant depreciation and amortization 1,641 1,899 3,515 3,827
Other restaurant operating expense 3,329 3,186 6,426 6,432
Advertising expense 1,587 1,596 3,463 3,240
Cost of modular restaurant package revenues 113 213 183 289
Other depreciation and amortization 518 509 1,033 1,029
General and administrative expenses 3,268 3,742 6,435 7,327
Loss provisions (437) -- (374) --
-------- -------- -------- --------
Total costs and expenses 33,762 33,611 69,141 69,587
-------- -------- -------- --------
Operating income (loss) 1,064 102 2,688 (1,717)
OTHER INCOME (EXPENSE):
Interest income 64 102 143 181
Interest expense (879) (1,177) (1,833) (2,519)
Interest - loan cost amortization (414) (485) (829) (2,655)
-------- -------- -------- --------
(Loss) income before minority interests and income
tax expense (165) (1,458) 169 (6,710)
Minority interests 42 11 (18) (60)
-------- -------- -------- --------
(Loss) income before income tax expense (207) (1,469) 187 (6,650)
Income tax expense -- -- -- --
-------- -------- -------- --------
Net (loss) income $ (207) $ (1,469) $ 187 $ (6,650)
======== ======== ======== ========
Comprehensive (loss) income $ (207) $ (1,469) $ 187 $ (6,650)
======== ======== ======== ========
Net (loss) income per common share - basic $ -- $ (0.02) $ -- $ (0.11)
======== ======== ======== ========
Net (loss) income per common share - diluted $ -- $ (0.02) $ -- $ (0.11)
======== ======== ======== ========
Weighted average number of common shares - basic 73,411 60,750 73,362 57,970
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Weighted average number of common shares - diluted 73,411 60,750 74,777 57,970
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
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CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
TWO QUARTERS ENDED
----------------------
JUNE 15, JUNE 16,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 187 $ (6,650)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,548 4,856
Provision for losses on assets to be disposed of 126 --
Reverse sales tax audit provision (500) --
Deferred loan cost amortization 829 2,655
Provision for bad debt 322 201
Gain on debt extinguishment (141) --
Gain on disposal of property & equipment (7) (8)
Minority interests in (losses) earnings (18) (60)
Changes in assets and liabilities:
Increase in accounts receivable (304) (995)
Decrease in notes receivable 22 40
Decrease in inventory 197 378
Decrease in income taxes receivable -- 3,514
Increase in prepaid expenses and other current assets (594) (530)
Decrease in deposits and other 15 95
Decrease in accounts payable (2,263) (6,991)
Decrease in accrued liabilities (1,693) (3,898)
Increase in deferred income 179 107
-------- --------
Net cash provided by (used in) operating activities 905 (7,286)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (539) (756)
Proceeds from sale of assets 1,461 2,827
Cash paid on business purchases -- (70)
-------- --------
Net cash provided by investing activities 922 2,001
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on short term debt -- (2,500)
Principal payments on long-term debt (2,694) (10,776)
Net proceeds from private placement -- 19,450
Distributions to minority interests (50) (33)
-------- --------
Net cash (used in) provided by financing activities (2,744) 6,141
-------- --------
Net (decrease) increase in cash (917) 856
CASH AT BEGINNING OF PERIOD 3,921 3,056
-------- --------
CASH AT END OF PERIOD $ 3,004 $ 3,912
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION---
Interest paid $ 1,932 $ 3,003
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 two quarters ended June 15, 1998, are
not necessarily an indication of the results that may be expected for the fiscal
year ending December 28, 1998. 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 29, 1997. Therefore, it is suggested that the
accompanying financial statements be read in conjunction with the Company's
December 29, 1997 consolidated financial statements.
(b) PURPOSE AND ORGANIZATION - The principal business of Checkers
Drive-In Restaurants, Inc. (the "Company") is the operation and franchising of
Checkers Restaurants. At June 15, 1998, there were 483 Checkers Restaurants
operating in 23 different states, the District of Columbia, Puerto Rico and West
Bank, Israel. Of those Restaurants, 230 were Company-operated (including 12
joint venture restaurants) and 253 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. 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. In January 1998, $1.2 million in restricted cash balances were
released for the Company's use as the funds have been guaranteed by a letter of
credit from a bank.
(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 $2.3
million at June 15, 1998 and $2.1 million at December 29, 1997.
(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. During the
quarter ended March 24, 1997, the Company expensed an additional $1.6 million of
deferred loan costs due to unscheduled principal reductions.
(h) IMPAIRMENT OF LONG LIVED ASSETS - The Company accounts for tangible
property and intangibles under 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 in cases where
undiscounted cash flow projected does not exceed the book value of the related
assets.
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(i) PROPERTY AND EQUIPMENT - Property and equipment (P & E) are stated
at cost except for P & E that have been impaired, for which the carrying amount
is reduced to estimated fair value. Property and equipment under capital leases
are stated at their fair value at the inception of the lease. Depreciation and
amortization are computed on straight-line method over the estimated useful
lives of the assets.
(j) GOODWILL AND NON-COMPETE AGREEMENTS - Goodwill and non-compete
agreements are being amortized over 20 years and 3 to 7 years, respectively, on
a straight-line basis.
(k) INCOME TAXES - The Company accounts for income taxes under the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date (see Note 6).
(l) USE OF ESTIMATES - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
(m) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The
balance sheets as of June 15, 1998 and December 29, 1997 reflect the fair value
amounts which have been determined using available market information and
appropriate valuation methodologies. However, considerable judgement is 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. The carrying amounts of cash and
cash equivalents, receivables, accounts payable, and long-term debt are a
reasonable estimate of their fair value. 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) EARNINGS PER SHARE - The Company calculates basic and diluted
earnings (loss) per share in accordance with the Statement of Financial
Accounting Standard No. 128, "Earnings per Share", which is effective for
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.
(o) STOCK OPTIONS - As discussed in Note 3, the Company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation".
(p) COMPREHENSIVE INCOME - 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 is required under SFAS 130.
(q) YEAR 2000- In January 1997, the Company developed a plan to deal
with the Year 2000 problem and began converting its computer systems to be Year
2000 compliant. The plan provides for the conversion efforts to be completed by
the end of 1999. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. The
total cost of the project is estimated to be $100,000 and will be funded through
operating cash flows. The Company anticipates expensing all costs associated
with these systems changes as costs are incurred.
(r) RECLASSIFICATIONS - Certain amounts in the 1997 financial
statements have been reclassified to conform to the 1998 presentation.
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NOTE 2 LONG TERM DEBT
Long-term debt consists of the following:
(Dollars in thousands) JUNE 15, DECEMBER 29,
1998 1997
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Notes payable under Restated Credit Agreement $25,609 $26,077
Notes payable and obligations under capital lease, due at various dates
secured by building and equipment with interest rates primarily ranging
from 9.0% to 15.83%, payable monthly 3,149 5,441
Other 1,219 1,367
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Total long-term debt 29,977 32,885
Less current installments 1,550 3,484
------- -------
Long-term debt, less current installments $28,427 $29,401
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At November 13, 1997, the effective date of the registration
statements filed on Form S-4, the Company had outstanding promissory notes in
the aggregate principal amount of approximately $3.2 million, (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 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 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 was to be determined by the market price of
the Company's stock. Consummation of the Rall-Folks, RDG, and NTDT purchases
occurred on November 24, December 5, and November 24, 1997, respectively.
During December 1997, the Company issued an aggregate of 2,622,559
shares of common stock in payment of $2.9 million of principal and accrued
interest relating to the Notes. In early 1998, the Company issued an additional
359,129 shares of common stock to NTDT. Additionally, in January 1998, the
Company issued 12,064 shares of common stock to RDG in payment of accrued
interest, 279,868 shares of common stock and paid $86,000 in cash to Rall-Folks
in full settlement of all remaining amounts owed in relation to debt principal,
accrued interest, and purchase price protection. After these issuances, the
remaining amount owed in relation to these Notes was $22,000 payable to NTDT. It
is currently estimated that the Company may owe approximately $70,000 in
additional cash payments to NTDT for accrued interest and purchase price
protection. The Company currently has available an additional 103,000 registered
shares which may be issued to RDG as purchase price protection and does not
expect any significant financial commitments beyond such shares necessary to
settle the Notes.
The Company's primary credit facility (the "Restated Credit Agreement") is held
by an investor group led by CKE Restaurants, Inc.. Also participating is KCC
Delaware, a wholly owned subsidiary of GIANT GROUP, LTD which is a controlling
shareholder of Rally's Hamburgers, Inc.
NOTE 3: STOCK OPTION PLANS
In August 1991, the Company adopted the 1991 Stock Option Plan (the
1991 Stock Option Plan), as amended for employees whereby incentive stock
options, nonqualified stock options, stock appreciation rights and restrictive
shares can be granted to eligible salaried individuals. The plan was amended on
August 6, 1997 to increase the number of shares subject to the Plan from
3,500,000 to 5,000,000 and again June 11, 1998 to increase the number of shares
subject to the plan to 9,500,000.
In 1994, the Company adopted a Stock Option Plan for Non-Employee
Directors, in 1994, 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 and provides for the automatic grant to each non-employee director
upon election to the Board of Directors 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.
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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 options grant to 20,000 shares and (iii) the grant of an option to
purchase 300,000 shares each to each Non-Employee Directors who was a Director
both immediately prior to and following the effective date of the amendment.
Options granted to Non-Employee Directors on or after August 6, 1997 are
exercisable immediately upon grant.
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 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.
Pursuant to the Directors' Plan, the Company issued options to
purchase 1,400,000 shares at an exercise price of $0.9375 to the existing
Directors of the Company on February 12, 1998 and issued options to purchase
100,000 shares at an exercise price of $1.375 to a new Director on June 11,
1998. Additionally, on April 27, 1998, pursuant to the 1991 Stock Option Plan,
the Company issued options to purchase 3,003,000 shares at an exercise price of
$1.00.
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 the second quarter of 1998 and in the second quarter of 1997
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
would have been reduced to approximately ($645,000) and ($1.5 million),
respectively, on a pro forma basis. Similarly, net income (loss) would have been
reduced to ($538,000) and ($7.5 million) for the two quarters ended June 15,
1998 and June 16, 1997 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 the first two
quarters of fiscal 1998 and for 1997, respectively: dividend yield of zero
percent for both periods: expected volatility of 85.1, 85.1 and 81.0 percent,
risk-free interest rates of 5.45, 5.77 and 6.0 percent, and expected lives of 4
years, 4 years 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 4: RELATED PARTIES
Effective November 30, 1997 the Company entered into a Management
Services Agreement with Rally's, whereby the Company is providing accounting,
technology, and other functional and management services to predominantly all of
the operations of Rally's. The Management Services Agreement carries a term of
seven years, terminable upon the mutual consent of the parties. The Company will
receive fees from Rally's relative to the shared departmental costs times the
respective store ratio. The Company has increased its corporate and regional
staff in late 1997 and early 1998 in order to meet the demands of the agreement,
but management believes that sharing of administrative expenses ($1.1 million in
the second quarter of 1998 and $2.0 million for the two quarters ended June 15,
1998) under the terms of this agreement will enable the Company to attract the
management staff with expertise necessary to more successfully manage and
operate both Rally's and the Company at significantly reduced costs to both
entities. Although the number of Company employees has grown to handle the
increased workload, the costs of each department are equitably allocated between
the Company and Rally's in accordance with the Management Services Agreement.
NOTE 5: LOSS PROVISIONS
During the second quarter of 1998, the Company recorded a reversal of
$500,000 of previously accrued state sales tax audit provisions due to the
successful completion of certain state sales tax audits. Additionally, during
the first and second quarters of 1998, the Company recorded losses on assets to
be disposed of in the amounts of $63,000 each quarter in order to lower the net
realizable value on certain of its inventories of used Modular Restaurant
Packages ("MRPs").
NOTE 6: INCOME TAXES
The Company recorded an income tax benefit of $79,000 for the quarter
ended June 15, 1998 and income tax benefits of $558,000 for the quarter ended
June 16, 1997, or 38.0% of the respective losses before income taxes. The
Company then recorded a valuation allowance of $79,000 against deferred income
tax assets as of June 15, 1998 and $558,000 as of June 16, 1997. The Company's
total valuation allowances of $30.3 million as of June 15, 1998, is maintained
on deferred tax assets which the
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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.
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 June 15, 1998, the
Company had an ownership interest in 230 Company-operated Restaurants and an
additional 253 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 June 15, 1998, 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 23, 1998, there were 12 such Joint Venture Restaurants).
During the second quarter of fiscal 1998, the Company realized a 3.9%
increase in Restaurant sales which were up $1.3 million over the second quarter
of fiscal 1997. Comparable store sales increased 4.6% during the same period.
During the second quarter, the Company continued to apply a marketing
strategy in major markets relying primarily on television advertising that
focused on the quality and freshness of the menu items the Company offers. With
the goal of enhancing menu flexibility, the Company also initiated a test during
the quarter that will evaluate the utilization of two sizes of hamburger patties
rather than the standard quarter pound patty that is currently in use. The
Company also completed its menu board design revision during the quarter and
will initiate a test in a selected market during the third quarter to determine
the expected impact of a system-wide introduction of the menu boards.
The Company continues to realize reductions in food and paper costs
during the second quarter of 1998. Restaurant food and paper costs were 31.3% of
restaurant sales for the quarter versus 32.8% of restaurant sales during the
same quarter of the prior year. Management's efforts to improve food and paper
costs by implementing tighter operational controls was supplemented by cost of
sales reductions realized by cooperating with CKE Restaurants, Inc. and Rally's
Hamburgers, Inc. (Rally's) to leverage the purchasing power of the three
entities to negotiate improved terms for their respective contracts with
suppliers. Labor costs increased during the second quarter of 1998 to 32.8% of
Restaurant sales compared with 31.6% of Restaurant sales for the same quarter of
the prior year. This increase was due to higher bonus and group insurance costs
and to the increased staffing necessary to accelerate the speed with which our
customers are served.
Effective November 30, 1997 the Company entered into a Management
Services Agreement with Rally's, whereby the Company is providing accounting,
information technology, and other functional and management services to
predominantly all of the operations of Rally's. The Management Services
Agreement carries a term of seven years, terminable upon the mutual consent of
the parties. The Company will receive fees from Rally's relative to the shared
departmental costs times the respective store ratio. The Company has increased
its corporate and regional staff in late 1997 and early 1998 in order to meet
the demands of the agreement, but management believes that sharing of
administrative expenses under the terms of this agreement will enable the
Company to attract the management staff with expertise necessary to more
successfully manage and operate both Rally's and the Company at significantly
reduced costs to both entities.
In 1998, the franchise community has indicated an intent to open up to
25 new units. The Company will continue to focus on improving existing
Restaurant sales and margins. The franchise group as a whole continues to
experience higher average per store sales than Company stores.
The Company receives revenues from Restaurant sales, franchise fees,
royalties and sales of fully-equipped manufactured MRPs. Cost of Restaurant
sales relates to food and paper costs. Other Restaurant expenses include labor
and all other Restaurant costs for Company-operated Restaurants, except
advertising. Cost of MRP's relates to all Restaurant equipment and building
materials, labor and other direct and indirect costs of production. Other
expenses, such as depreciation and amortization, and general and administrative
expenses, relate both to Company-operated Restaurant operations and MRP revenues
as well as the Company's franchise sales and support functions. The Company's
revenues and expenses are affected by the number and timing of additional
Restaurant openings and the sales volumes of both existing and new Restaurants.
MRP revenues are directly affected by the number of new franchise Restaurant
openings and the number of new MRP's completed or used MRP's refurbished for
sale in connection with those openings.
11
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of the listed items included in the Company's Condensed Consolidated
Statements of Operations. Certain items are shown as a percentage of Restaurant
sales and Modular Restaurant Package revenue. The table also sets forth certain
selected restaurant operating data.
<TABLE>
<CAPTION>
QUARTER ENDED TWO QUARTERS ENDED
(UNAUDITED) (UNAUDITED)
-------------------- --------------------
JUNE 15, JUNE 16, JUNE 15, JUNE 16,
REVENUES 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Restaurant sales 94.8% 94.2% 94.8% 94.6%
Franchise revenues and fees 5.0% 5.1% 5.0% 4.9%
Modular restaurant packages 0.2% 0.7% 0.2% 0.5%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES
Restaurant food and paper costs (1) 31.3% 32.8% 31.9% 33.5%
Restaurant labor costs (1) 32.8% 30.8% 31.6% 32.9%
Restaurant occupancy expense (1) 7.8% 7.1% 7.7% 7.5%
Restaurant depreciation and amortization (1) 5.0% 6.0% 5.2% 6.0%
Other restaurant operating expense (1) 10.1% 10.0% 9.4% 10.0%
Advertising expense (1) 4.8% 5.0% 5.1% 5.0%
Costs of modular restaurant package revenues (2) 168.7% 86.6% 153.8% 84.0%
Other depreciation and amortization 1.5% 1.5% 1.4% 1.5%
General and administrative expense 9.4% 11.1% 9.0% 10.8%
Loss provisions (1.3)% 0.0% (0.5)% 0.0%
----- ----- ----- -----
Operating income (loss) 3.1% 0.3% 3.7% (2.5)%
----- ----- ----- -----
OTHER INCOME (EXPENSE)
Interest income 0.2% 0.3% 0.2% 0.3%
Interest expense (2.5)% (3.5)% (2.6)% (3.7)%
Interest - loan cost amortization (1.2)% (1.4)% (1.2)% (3.9)%
Minority interests in earnings (losses) 0.1% 0.0% 0.0% (0.1)%
----- ----- ----- -----
(Loss) income before income tax expense (0.6)% (4.4)% 0.3% (9.8)%
Income tax expense (benefit) 0.0% 0.0% 0.0% 0.0%
Net (loss) income (0.6)% (4.4)% 0.3% (9.8)%
===== ===== ===== ====
<FN>
- ----------
(1) As percent of Restaurant sales.
(2) As a percent of Modular restaurant package revenues.
</FN>
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED TWO QUARTERS ENDED
(UNAUDITED) (UNAUDITED)
------------------- --------------------
JUNE 15, JUNE 16, JUNE 15, JUNE 16,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating data:
System - wide restaurant sales (in 000's) (3):
Company - operated $ 33,003 $ 31,753 $ 68,110 $ 64,201
Franchised 42,989 41,255 85,669 81,259
-------- -------- -------- --------
Total $ 75,992 $ 73,008 $153,779 $145,460
======== ======== ======== ========
Average annual sales per restaurant open for a full year
(in 000's) (3): 1998 1997
-------- --------
Company - operated $ 605 $ 619
Franchised $ 714 $ 762
System - wide $ 660 $ 690
-------- --------
Number of Restaurants (4)
Company - operated 230 233
Franchised 253 247
-------- --------
Total 483 480
======== ========
<FN>
- ----------
(3) Includes sales of restaurants open for entire previous 52 weeks including
stores expected to be closed in the following year.
(4) Number of restaurants open at end of period.
</FN>
</TABLE>
COMPARISON OF HISTORICAL RESULTS - QUARTER ENDED JUNE 15, 1998 AND QUARTER ENDED
JUNE 16, 1997
REVENUES. Total revenues increased 3.3% to $34.8 million for the
quarter ended June 15, 1998, compared to $33.7 million for the quarter ended
June 16, 1997. Company-operated Restaurant sales increased 3.9% to $33.0 million
for the quarter ended June 15, 1998, from $31.8 million for the quarter ended
June 16, 1997. Restaurant sales for comparable Company-owned Restaurants for the
quarter ended June 15, 1998, increased 4.6% compared to the quarter ended June
16, 1997. Comparable Company-owned Restaurants are those continuously open
during both reporting periods. These increases in Restaurant sales and
comparable Restaurant sales are primarily attributable to the successful
introduction of the Spicy Chicken Sandwich in 1998 and the brand positioning
advertising featuring the "Fresh, because we just made it" tag line that focuses
on the quality of the Company's products.
Franchise revenues and fees increased 2.5% to $1.8 million for the
quarter ended June 15, 1998, from $1.7 million for the quarter ended June 16,
1997. This was a result of a 4.2% increase in franchise restaurant sales for the
second quarter of 1998 versus the second quarter of 1997. 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 ("MRP") revenues decreased 72.8% to $67,000
for the quarter ended June 15, 1998, from $246,000 and for the quarter ended
June 16, 1997. Modular restaurant package revenues except service work orders
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 and include amounts charged to
franchisees for the refurbishment of used MRP's.
COSTS AND EXPENSES. Restaurant food and paper costs totalled $10.3
million or 31.3% of Restaurant sales for the quarter ended June 15, 1998,
compared to $10.4 million or 32.8% of Restaurant sales for the quarter ended
June 16, 1997. The decrease in these costs as a percentage of Restaurant sales
was due to new purchasing contracts negotiated in 1997.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes, totalled $10.8 million or 32.8% of Restaurant
sales for the quarter ended June 15, 1998, compared to $9.8 million or 30.8% of
Restaurant sales for the quarter ended June 16, 1997. The increase in Restaurant
labor costs as a percentage of Restaurant sales was due to increased bonus
expense and group insurance costs and increased staffing levels at the
restaurants necessary to accelerate the speed with which customers are served.
13
<PAGE>
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totalled $2.6 million or 7.8% of Restaurant sales for
the quarter ended June 15, 1998 compared to $2.3 million or 7.1% of Restaurant
sales for the quarter ended June 16, 1997. This increase in restaurant occupancy
costs was due primarily to increases in property taxes and rent expense
partially offset by the operation of three fewer Restaurants at June 15, 1998.
Restaurant depreciation and amortization decreased by $258,000 or
13.6% for the quarter ended June 15, 1998, as compared to the quarter ended June
16, 1997, due primarily to a net decrease of three Company-operated restaurants
from June 16, 1997 to June 15, 1998 and certain assets becoming fully
depreciated since June 16, 1997.
Other restaurant operating expenses include 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 $3.3 million or 10.1% of Restaurant sales for the
quarter ended June 15, 1998, compared to $3.2 million or 10.0% of Restaurant
sales for the quarter ended June 16, 1997. The increased expense is due
primarily to higher repairs and maintenance expenditures during the quarter
partially offset by the impact of three fewer Restaurants operating during the
quarter ended June 15, 1998 versus the second quarter of the prior year.
Advertising expense decreased as a percentage sales to 4.8% Restaurant
sales for the quarter ended June 15, 1998, from 5.0% of Restaurant sales for the
quarter ended June 16, 1997. The actual decrease in this expense was $9,000.
Costs of modular restaurant package revenues totalled $113,000 or
168.7% of modular restaurant package revenues for the quarter ended June 15,
1998, compared to $213,000 or 86.6% of such revenues for the quarter ended June
16, 1997. The increase in these expenses as a percentage of modular restaurant
package revenues was attributable to the decline in MRP revenues relative to the
fixed and semi-variable nature of these costs.
General and administrative expenses were $3.3 million or 9.4% of total
revenues, for the quarter ended June 15, 1998, compared to $3.7 million or 11.1%
of total revenues for the quarter ended June 16, 1997. The decrease in these
expenses of $474,000 was primarily due to terminated merger costs recorded
during the second quarter of 1997 of $350,000 and the continued savings
associated with the management services agreement between the Company and
Rally's Hamburgers, Inc. pursuant to which Checkers is providing the majority of
the administrative functions for Rally's.
LOSS PROVISIONS. During the second quarter of 1998, the Company
recorded a reversal of $500,000 of previously accrued state sales tax audit
provisions due to the successful completion of certain state sales tax audits.
Additionally, during the second quarter of 1998, the Company recorded losses on
assets to be disposed of in the amount of $63,000 in order to lower the net
realizable value on certain of its inventories of used MRPs.
INTEREST EXPENSE. Interest expense other than loan cost amortization
decreased to $879,000 or 2.5% of total revenues for the quarter ended June 15,
1998 from $1.2 million or 3.5% of total revenues for the quarter ended June 16,
1997. This decrease was due to a reduction in the weighted average balance of
debt outstanding during the respective periods. Loan cost amortization decreased
by $71,000 to $414,000 for the quarter ended June 15, 1998 from $485,000 for the
quarter ended June 16, 1997 due to the accelerated amortization of deferred loan
costs due to certain unscheduled principal reductions in 1997.
INCOME TAX EXPENSE. Due to the loss for the quarter, the Company
recorded an income tax benefit of $79,000 or 38.0% of the loss before income
taxes which was completely offset by deferred income tax valuation allowances of
$79,000 for the quarter ended June 15, 1998, as compared to an income tax
benefit of $558,000 or 38.0% of earnings before income taxes offset by deferred
income tax valuation allowances of $558,000 for the quarter ended June 16, 1997.
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
$485,000 in deferred loan costs and $350,000 in terminated merger costs in the
quarter ended June 16, 1997, versus $414,000 in deferred loan cost amortization
and a credit of $500,000 for reversed sales tax audit provisions in 1998. Net
income (loss) before tax and the deferred loan cost amortization, terminated
merger costs and reversed sales tax audit provisions was ($293,000) or ($.00)
per share for the quarter ended June 15, 1998 and ($634,000) or ($.01) per share
for the quarter ended June 16, 1997. This improvement was primarily the result
of an increase in the average Restaurant sales and margins, an increase in
royalties and franchise fees, a decrease in general and administrative expenses
and a reduction in interest expense.
14
<PAGE>
COMPARISON OF HISTORICAL RESULTS - TWO QUARTERS ENDED JUNE 15, 1998 AND TWO
QUARTERS ENDED JUNE 15, 1997
REVENUES. Total revenues increased 5.8% to $71.8 million for the two
quarters ended June 15, 1998, compared to $67.9 million for the quarter ended
June 16, 1997. Company-operated Restaurant sales increased 6.1% to $68.1 million
for the two quarters ended June 15, 1998, from $64.2 million for the two
quarters ended June 16, 1997. Restaurant sales for comparable Company-owned
Restaurants for the two quarters ended June 15, 1998, increased 7.5% compared to
the two quarters ended June 16, 1997. Comparable Company-owned Restaurants are
those continuously open during both reporting periods. These increases in
Restaurant sales and comparable Restaurant sales are primarily attributable to
the successful introduction of the Spicy Chicken Sandwich in 1998 and the brand
positioning advertising featuring the "Fresh, because we just made it" tag line
that focuses on the quality of the Company's products.
Franchise revenues and fees increased 8.3% to $3.6 million for the two
quarters ended June 15, 1998, from $3.3 million for the two quarters ended June
16, 1997. This was a result of a 5.4% increase in franchise restaurant sales for
the first two quarters of 1998 versus the first two quarters of 1997, and the
opening of more franchised restaurants during the first two quarters of 1998
versus the first two quarters of 1997. 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 65.4% to $119,000 for
the two quarters ended June 15, 1998, from $344,000 and for the two quarters
ended June 16, 1997. Modular restaurant package revenues except service work
orders 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 and include amounts charged to
franchisees for the refurbishment of used MRPs.
COSTS AND EXPENSES. Restaurant food and paper costs totalled $21.7
million or 31.9% of Restaurant sales for the two quarters ended June 15, 1998,
compared to $21.5 million or 33.5% of Restaurant sales for the two quarters
ended June 16, 1997. The decrease in these costs as a percentage of Restaurant
sales was due to new purchasing contracts negotiated in 1997.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes, totaled $21.5 million or 31.6% of Restaurant
sales for the two quarters ended June 15, 1998, compared to $21.1 million or
32.9% of Restaurant sales for the two quarters ended June 16, 1997. The increase
in Restaurant labor costs as a percentage of Restaurant sales was due to
increased bonus expense and group insurance costs and increased staffing levels
at the restaurants necessary to accelerate the speed with which customers are
served.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totaled $5.2 million or 7.7% of Restaurant sales for the
two quarters ended June 15, 1998 compared to $4.8 million or 7.5% of Restaurant
sales for the two quarters ended June 16, 1997. This increase in restaurant
occupancy costs was due primarily to increases in property taxes and rent
expense partially offset by the operation of three fewer Restaurants at June 15,
1998.
Restaurant depreciation and amortization decreased by $312,000 or 8.2%
for the two quarters ended June 15, 1998, as compared to the two quarters ended
June 16, 1997, due primarily to a net decrease of three Company-operated
restaurants from June 16, 1997 to June 15, 1998 and certain assets becoming
fully depreciated since June 16, 1997.
Other restaurant operating expenses include 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 totaled $6.4 million or 9.4% of Restaurant sales for the two
quarters ended June 15, 1998, compared to $6.4 million or 10.0% of Restaurant
sales for the two quarters ended June 16, 1997. The decrease in these costs as a
percentage of sales was primarily related to the increase in average Restaurant
sales relative to the fixed and semi-variable nature of these expenses.
Increased repair and maintenance expenditures offset the impact of a net
decrease of three Company-operated Restaurants from June 16, 1997 to June 15,
1998.
Advertising expense increased by $223,000 to 5.1% of Restaurant sales
for the two quarters ended June 15, 1998, from 5.0% of Restaurant sales for the
two quarters ended June 16, 1997. The increase in this expense was due to
utilization of television advertising during 1998 versus less expensive radio
advertising during 1997.
Costs of modular restaurant package revenues totaled $183,000 or
153.8% of modular restaurant package revenues for the two quarters ended June
15, 1998, compared to $289,000 or 84.0% of such revenues for the two quarters
ended June 16, 1997. The increase in these expenses as a percentage of modular
restaurant package revenues was attributable to the decline in MRP revenues
relative to the fixed and semi-variable nature of these costs.
General and administrative expenses were $6.4 million or 9.0% of total
revenues, for the two quarters ended June 15, 1998, compared to $7.3 million or
10.8% of total revenues for the quarter ended June 16, 1997. The decrease in
these expenses of $892,000 was primarily due to terminated merger costs recorded
during the second quarter of 1997 of $350,000 and the continued savings
associated
15
<PAGE>
with the management services agreement between the Company and Rally's
Hamburgers, Inc. pursuant to which Checkers is providing the majority of the
administrative functions for Rally's.
LOSS PROVISIONS. During the second quarter of 1998, the Company
recorded a reversal of $500,000 of previously accrued state sales tax audit
provisions due to the successful completion of certain state sales tax audits.
Additionally, during the first and second quarters of 1998, the Company recorded
losses on assets to be disposed of in the amounts of $63,000 each quarter in
order to lower the net realizable value on certain of its inventories of used
MRPs.
INTEREST EXPENSE. Interest expense other than loan cost amortization
decreased to $1.8 million or 2.6% of total revenues for the two quarters ended
June 15, 1998 from $2.5 million or 3.7% of total revenues for the quarter ended
June 16, 1997. This decrease was due to a reduction in the weighted average
balance of debt outstanding during the respective periods. Loan cost
amortization decreased by $1.8 million to $829,000 in 1998 from $2.7 million for
the two quarters ended June 16, 1997 due to the accelerated amortization of
deferred loan costs due to $9.7 million in unscheduled principal reductions in
early 1997.
INCOME TAX EXPENSE. During 1998, the Company recorded income tax
expense of $71,000 or 38.0% of the net income before income taxes which was
completely offset by the reversal of deferred income tax valuation allowances of
$71,000 for the two quarters ended June 15, 1998, as compared to an income tax
benefit of $2.5 million or 38.0% of earnings before income taxes offset by
deferred income tax valuation allowances of $2.5 million for the two quarters
ended June 16, 1997. The effective tax rates differ from the expected federal
tax rate of 35.0% due to state income taxes and job tax credits.
NET INCOME (LOSS). Earnings were significantly impacted by the
expensing of $2.7 million in deferred loan costs and $350,000 in terminated
merger costs in the two quarters ended June 16, 1997, versus $829,000 in
deferred loan cost amortization and $500,000 in reversed sales tax audit
provisions in 1998. Net income (loss) before tax, the deferred loan cost
amortization and the reversal of sales tax audit provisions was $516,000 and or
$.01 share for the two quarters ended June 15, 1998 and ($3.6 million) or ($.06)
per share for the two quarters ended June 16, 1997, which resulted primarily
from an increase in the average Restaurant sales and margins, an increase in
royalties and franchise fees, a decrease in general and administrative expenses
and a reduction in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company, while recording a loss for the second quarter of 1998
continues to show net income on a year-to-date basis. Although Management of the
Company is encouraged with 1998 results, it makes no assurances that such
results will be reported for the fiscal year ended December 28, 1998.
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 $19.5 million in net proceeds after $500,000 of issuance costs
from the Private Placement. The Company used $8.0 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
carried a 13% interest rate reduced the Company's interest payments by more than
$1.3 million on an annualized basis.
At November 14, 1997, the effective date of the Company's Registration
Statements on Forms S-4, the Company had outstanding promissory notes in the
aggregate principal amount of approximately $3.2 million (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 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 series of convertible notes in the
same aggregate principal amount and convertible into approximately 614,000
shares of Common Stock pursuant to 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 was to be determined by the market price of
the Company's stock. Consummation of the Rall-Folks, RDG, and NTDT purchases
occurred on November 24, and December 5, and November 24, 1997, respectively.
During December 1997 and January 1998, the Company issued an aggregate
of 2,943,752 shares of Common Stock to Rall-Folks, RDG and NTDT in payment of
$3.2 million of principal and accrued interest relating to the Note. In January
1998, the Company issued 279,868 share of Common Stock to Rall-Folks pursuant to
the purchase price protection provisions of its Note re-purchase agreement with
the Company. Rall-Folks has completed the sale of all of the Company's Common
Stock issued to it and on March 6, 1998 the Company paid $86,000 in cash to
Rall-Folks in full settlement of all obligations of the Company to Rall-Folks.
NTDT and RDG have also
16
<PAGE>
completed the sale of all of the Company's Common Stock issued to them pursuant
to the terms of their agreements with the Company. The Company may owe
approximately $70,000 to NTDT in accrued interest and to cover the deficiency
pursuant to the price protection provisions of its Note re-purchase agreement
with the Company. The Company does not anticipate that any amounts required to
be paid to satisfy its obligations to RDG under its Note re-purchase agreement
will have a material financial impact to the Company.
The Company currently does not have significant development plans for
additional Company Restaurants during fiscal 1998.
The Company has negative working capital of $9.1 million at June 15,
1998 (determined by subtracting current liabilities from current assets). It is
anticipated that the Company will continue to have negative working capital
since approximately 88.8% 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. In January 1998, $1.2 million in restricted cash balances were released
for the Company's use as the funds have been guaranteed by a letter of credit
from a bank.
During fiscal 1997, the Company was in the process of implementing
aggressive programs designed to improve food, paper and labor costs in the
Restaurants. These costs totaled 63.5% of Restaurant revenues the first two
quarters of 1998 compared to 66.4% of Restaurant revenues in the first two
quarters of 1997. These costs decreased $602,000 in total while Restaurant sales
increased $3.9 million or 6.1%.
Additionally, effective November 30, 1997, the Company entered into a
Management Services Agreement with Rally's whereby the Company is providing
accounting, technology, and other functional and management services to
predominantly all of the operations of Rally's. The Management Services
Agreement carries a term of seven years, terminable upon the mutual consent of
the parties. The Company will receive fees from Rally's relative to the shared
departmental costs times the respective store ratio. The Company has increased
its corporate and regional staff in late 1997 and early 1998 in order to meet
the demands of the agreement, but management believes that sharing of
administrative expenses under the terms of this agreement will enable the
Company to attract the management staff with expertise necessary to more
successfully manage and operate both Rally's and the Company at significantly
reduced costs to both entities.
Overall, the Company believes many of the 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 asset sales should allow the Company to continue to meet its
financial obligations and to pay operating expenses.
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 "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.
17
<PAGE>
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.
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. Mandated increases in the minimum wage rate were implemented in
1996 and 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.
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 sought to represent a
class of all purchasers of the Company's Common Stock between November 22, 1991
and October 8, 1993, and an unspecified amount of damages. Although the Company
believed this lawsuit was unfounded and without merit, in order to avoid further
expenses of litigation, the parties 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
18
<PAGE>
agreed to contribute ten percent (10%) of claims made in excess of $475,000 for
a total potential liability of $47,500. The settlement was approved by the Court
on January 30, 1998.
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 in
and for Pinellas County, Florida, Civil Division, entitled GAIL P. GREENFELDER
AND POWERS BURGERS, INC. V. JAMES F. WHITE, JR., CHECKERS DRIVE-IN RESTAURANTS,
INC., HERBERT G. BROWN, JAMES E. MATTEI, JARED D. BROWN, ROBERT G. BROWN AND
GEORGE W. COOK, Case No. 95-4644-CI-21 (hereinafter the "Power Burgers
Litigation"). 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, Inc. (hereinafter "Powers Burgers") a Checkers franchisee. The original
Complaint further alleged that Ms. Greenfelder and Powers Burgers were induced
into entering into various agreements and personal guarantees with the Company
based upon misrepresentations by the Company and its officers and that the
Company violated provisions of Florida's Franchise Act and Florida's Deceptive
and Unfair Trade Practices Act. The original Complaint alleged that the Company
is liable for all damages caused to the Plaintiffs. The Plaintiffs seek damages
in an unspecified amount in excess of $2,500,000 in connection with the claim of
intentional infliction of emotional distress, $3,000,000 or the return of all
monies invested by the Plaintiffs in Checkers' franchises in connection with the
misrepresentation of claims, punitive damages, attorneys' fees and such other
relief as the court may deem appropriate. The Court has granted, in whole or in
part, three (3) Motions to Dismiss the Plaintiffs' Complaint, as amended,
including an Order entered on February 14, 1997, which dismissed the Plaintiffs'
claim of intentional infliction of emotional distress, with prejudice, but
granted the Plaintiffs leave to file an amended pleading with respect to the
remaining claims set forth in their Amended Complaint. A third Amended Complaint
has been filed and an Answer, Affirmative Defenses, and a Counterclaim to
recover unpaid royalties and advertising fund contributions has been filed by
the Company. In response to the Court's dismissal of certain claims in the Power
Burgers Litigation, on May 21, 1997, a companion action was filed in the Circuit
Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, Civil
Division, entitled GAIL P. GREENFELDER, POWERS BURGERS OF AVON PARK, INC., AND
POWER BURGERS OF SEBRING, 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. 97-3565-CI, asserting, in relevant part, the
same causes of action as asserted in the Power Burgers Litigation. An Answer,
Affirmative Defenses, and a Counterclaim to recover unpaid royalties and
advertising fund contributions have been filed by the Company. On February 4,
1998, the Company terminated Power Burgers, Inc.'s, Power Burgers of Avon Park,
Inc.'s and Power Burgers of Sebring, Inc.'s franchise agreements and thereafter
filed two Complaints in the United States District Court for the Middle District
of Florida, Tampa Division, styled CHECKERS DRIVE-IN RESTAURANTS, INC. V. POWER
BURGERS OF AVON PARK, INC., Case No. 98-409-CIV-T-17A and CHECKERS DRIVE-IN
RESTAURANTS, INC. V. POWERS BURGERS, INC, Case No. 98-410-CIV-T-26E. The
Complaint seeks, INTER ALIA, a temporary and permanent injunction enjoining
Power Burgers, Inc. and Power Burgers of Avon Park, Inc.'s continued use of
Checkers' Marks and trade dress. A Motion to Stay the foregoing actions are
currently pending. The Company believes the lawsuits initiated against the
Company are without merit, and intends to continue to defend them vigorously. No
estimate of any possible loss or range of loss resulting from the lawsuit can be
made at this time.
CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES,
INC., ET AL. On August 10, 1995, a state court Counterclaim and Third Party
Complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in
and for Hillsborough County, Florida, Civil Division, entitled TAMPA CHECKMATE
FOOD SERVICES, INC., CHECKMATE FOOD SERVICES, INC. AND ROBERT H. GAGNE V.
CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JAMES F.
WHITE, JR., JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK, Case No.
95-3869. In the original action filed by the Company in July 1995, against Mr.
Gagne and Tampa Checkmate Food Services, Inc., (hereinafter "Tampa Checkmate") 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. (hereinafter
"Checkmate") 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 seek damages in the amount
of $3,000,000 or the return of all monies invested by Checkmate, Tampa Checkmate
and Mr. 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 judgment 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 Complaint. On or about
July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the United States
Bankruptcy Court for the Middle District of Florida, Tampa Division entitled IN
RE: TAMPA CHECKMATE FOOD SERVICES, INC., and numbered as 97-11616-8G-1 on the
docket of said Court. On July 25, 1997, Checkers filed an Adversary Complaint in
the Tampa Checkmate bankruptcy proceedings entitled CHECKERS DRIVE-IN
RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES, INC. and numbered as Case
No. 97-738. Following a hearing on Checkers' motion for Preliminary Injunction
on July 22, 1998, the Court entered an order enjoining Tampa Checkmate's
continued use of Checkers' Marks and trade dress notwithstanding the termination
of its Franchise Agreement on April 8, 1997. The Company believes that the
lawsuit is without merit and intends to continue to defend it vigorously. No
estimate of possible loss or range of loss resulting from the lawsuit can be
made at this time.
19
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting Of Stockholders of the Company was held on June 11,
1998. At the meeting, the following actions were taken by the stockholders:
Terry N. Christensen, James J. Gillespie and Peter C. O'Hara were
elected as Directors to serve until the Annual Meeting in the year 2001 and
until their successors are elected and qualified or until their resignation,
removal from office or death. The results of the voting were as follows:
Name For Withheld
---- --- --------
Terry N. Christensen 67,923,925 692,612
James J. Gillespie 67,914,252 702,285
Peter C. O'Hara 67,925,480 691,057
A proposal to grant options to purchase 200,000 shares of Common Stock
at a price of $0.938 to each of the Company's Non-Employee directors was
ratified. The voting on the proposal was as follows:
For: 32,213,944
Against: 2,134,028
Abstain: 411,023
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
4,500,000 shares was approved. The voting was as follows:
For: 31,789,068
Against: 2,530,405
Abstain: 439,521
The appointment of KPMG Peat Marwick LLP as the Company's independent
auditors for the year 1998 was ratified and approved. The voting on the proposal
was as follows:
For: 68,121,664
Against: 264,100
Abstain: 230,773
ITEM 5. OTHER INFORMATION
None
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on 8-K:
There were no reports on Form 8-K filed during the quarter covered by
this report.
21
<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: July 29, 1998 By: /s/ RICHARD A. PEABODY
--------------------------
Richard A. Peabody
Vice President, and Chief Financial Officer
(Principle Accounting Officer)
22
<PAGE>
MARCH 23, 1998 FORM 10-Q
CHECKERS DRIVE-IN RESTAURANTS, INC.
EXHIBIT INDEX
EXHIBIT # EXHIBIT DESCRIPTION PAGE
- --------- ------------------- ----
27 Financial Data Schedule (included in electronic
filing only). 24
23
<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
periods ended June 15, 1998 and June 16, 1997, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-28-1998 DEC-29-1997
<PERIOD-START> DEC-30-1998 DEC-31-1996
<PERIOD-END> JUN-15-1998 JUN-16-1997
<CASH> 3,004 3,912
<SECURITIES> 0 0
<RECEIVABLES> 1,531 <F1> 2,652 <F1>
<ALLOWANCES> 0 0
<INVENTORY> 2,025 2,157
<CURRENT-ASSETS> 12,118 16,670
<PP&E> 130,260 132,039
<DEPRECIATION> 46,220 38,235
<TOTAL-ASSETS> 108,331 124,914
<CURRENT-LIABILITIES> 21,214 32,866
<BONDS> 28,427 30,494
0 0
0 0
<COMMON> 73 61
<OTHER-SE> 50,533 53,047
<TOTAL-LIABILITY-AND-EQUITY> 108,331 124,914
<SALES> 68,229 64,515
<TOTAL-REVENUES> 71,829 67,870
<CGS> 62,047 61,231
<TOTAL-COSTS> 69,141 69,587
<OTHER-EXPENSES> (161) (241)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,662 5,174
<INCOME-PRETAX> 187 (6,650)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 187 (6,650)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 187 (6,650)
<EPS-PRIMARY> 0.00 (0.11)
<EPS-DILUTED> 0.00 (0.11)
<FN>
<F1> Receivables consist of --
Accounts Receivable - net $ 936 $ 2,299
Notes Receivable 595 353
------- -------
Total $ 1,531 $ 2,652
======= =======
</FN>
</TABLE>
