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 23, 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.)
Barnett Bank Building
600 Cleveland Street, Eighth Floor
Clearwater, FL 33755
(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 73,411,112 shares of Common Stock, par value
$.001 per share, outstanding as of April 15, 1998.
This document contains 22 pages. Exhibit Index appears at page 21.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 23, 1998 and December 29, 1997......................................................................3
Condensed Consolidated Statements of Operations
Quarter ended March 23, 1998 and March 24, 1997...........................................................5
Condensed Consolidated Statements of Cash Flows
Quarter ended March 23, 1998 and March 24, 1997...........................................................6
Notes to 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......................................................................................19
Item 3 Defaults Upon Senior Securities............................................................................19
Item 4 Submission of Matters to a Vote of Security Holders .......................................................19
Item 5 Other Information..........................................................................................19
Item 6 Exhibits and Reports on Form 8-K...........................................................................19
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FINANCIAL STATEMENTS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 23, December 29,
1998 1997
--------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents:
Restricted $ 1,405 $ 2,555
Unrestricted 2,462 1,366
Accounts receivable 2,183 1,175
Notes receivable 272 265
Inventory 2,114 2,222
Assets held for sale 3,796 4,332
Deferred loan costs 1,786 1,648
Prepaid expenses and other current assets 644 309
-------------------------------
Total current assets 14,662 13,872
Property and equipment at cost, net of accumulated depreciation
and amortization 86,181 87,889
Intangibles, net of accumulated amortization 11,286 11,520
Deferred loan costs - less current portion 549 1,099
Notes receivable-long term portion 372 381
Deposits and other non-current assets 626 640
-------------------------------
$ 113,676 $ 115,401
===============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
March 23, December 29,
1998 1997
-------------------------------
<S> <C> <C>
Current Liabilities:
Current installments of long-term debt $ 2,816 $ 3,484
Accounts payable 6,637 8,186
Accrued wages, salaries and benefits 3,266 2,528
Reserves for restaurant relocation and abandoned sites 1,718 2,159
Other accrued liabilities 10,785 11,408
Deferred income-current 320 260
----------------------------
Total current liabilities 25,542 28,025
Long-term debt, less current installments 28,894 29,401
Deferred income 565 346
Long-term reserves for Restaurant relocations and abandoned sites 893 581
Minority interests in joint ventures 885 966
Other noncurrent liabilities 6,068 5,710
----------------------------
Total liabilities 62,847 65,029
Stockholders' Equity:
Preferred stock, $.001 par value, authorized 2,000,000 shares, no shares
outstanding - -
Common stock, $.001 par value, authorized 100,000,000 shares, issued and
outstanding 72,755,031 at December 29, 1997 and 73,411,112 at
March 23, 1998 73 73
Additional paid-in capital 112,599 112,536
Warrants 9,463 9,463
Retained deficit (70,906) (71,300)
----------------------------
51,229 50,772
Less treasury stock, at cost, 578,904 shares 400 400
----------------------------
Net stockholders' equity 50,829 50,372
----------------------------
$ 113,676 $ 115,401
============================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(UNAUDITED)
Quarter Ended
-----------------------
March 23, March 24,
1998 1997
-----------------------
<S> <C> <C>
REVENUES:
Restaurant sales $ 35,107 $ 32,448
Franchise revenues and fees 1,844 1,612
Modular restaurant packages 52 97
------------------------
Total revenues
$ 37,003 $ 34,157
COSTS AND EXPENSES:
Restaurant food and paper costs 11,389 11,105
Restaurant labor costs 10,691 11,338
Restaurant occupancy expense 2,863 2,725
Restaurant depreciation and amortization 1,874 1,928
Advertising expense 1,876 1,645
Other restaurant operating expense 3,097 3,246
Cost of modular restaurant package revenue 70 76
Other depreciation and amortization 515 519
General and administrative expenses 2,941 3,393
Losses on assets to be disposed of 63 -
------------------------
Total costs and expenses 35,379 35,975
------------------------
Operating income (loss)
1,624 (1,818)
OTHER INCOME (EXPENSE):
Interest income 79 78
Interest expense (954) (1,342)
Interest - loan cost amortization (415) (2,170)
------------------------
Income (loss) before minority interests and income
tax expense 334 (5,252)
Minority interests (60) (71)
------------------------
Income (loss) before income tax expense 394 (5,181)
Income tax expense - -
------------------------
Net income (loss) $ 394 $ (5,181)
========================
Comprehensive income (loss) $ 394 $ (5,181)
========================
Net income (loss) per common share - basic $ 0.01 $ (0.09)
========================
Net income (loss) per common share - diluted $ 0.01 $ (0.09)
========================
Weighted average number of common shares - basic 73,313 55,110
========================
Weighted average number of common shares - diluted 73,314 55,110
========================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Quarter Ended
------------------------
March 23, March 24,
1998 1997
------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 394 $ (5,181)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: - -
Depreciation and amortization 2,389 2,448
Provision for losses on assets to be disposed of 63
Deferred loan cost amortization 412 2,170
Provision for bad debt 116 90
Gain on disposal of property & equipment (3) (4)
Minority interests in (losses) earnings (60) (71)
Changes in assets and liabilities:
Increase in receivables (1,123) (445)
(Increase) Decrease in notes receivable (16) 31
Decrease in inventory 108 220
Decrease in income taxes receivable - 136
Increase in prepaid expenses and other (335) (136)
Decrease in deposits and other 14 106
Decrease in accounts payable (1,515) (6,687)
Increase (Decrease) in accrued liabilities 58 (1,392)
Increase in deferred income 279 60
-------------------------
Net cash provided by (used in) operating activities 781 (8,655)
-------------------------
Cash flows from investing activities:
Capital expenditures (127) (291)
Proceeds from sale of assets 273 2,214
-------------------------
Net cash provided by investing activities 146 1,923
-------------------------
Cash flows from financing activities:
Repayments on short term debt - (2,500)
Principal payments in long-term debt (961) (9,813)
Net proceeds from private placement - 19,450
Distributions to minority interests (20) (10)
-------------------------
Net cash (used in) provided by financing activities (981) 7,127
-------------------------
Net increase in cash (54) 395
Cash at beginning of period 3,921 3,056
-------------------------
Cash at end of period $ 3,867 $ 3,451
=========================
Supplemental disclosure of cash flow information--
Interest paid $ 946 $ 1,540
=========================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
CHECKERS DRIVE-IN RESTUARANTS, 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 23, 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 March 23, 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, receivables from the sale of modular
restaurant packages and advances to the National Production Fund which provides
broadcast creative production for use by the Company and its franchisees.
Allowances for doubtful receivables were $2.0 million at March 23, 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.
7
<PAGE>
(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) Property and Equipment - Property and equipment (P & E) are
stated at cost except for P & E that have been impaired, for which the carrying
amount is reduced to estimated fair value. Property and equipment under capital
leases are stated at their fair value at the inception of the lease.
Depreciation and amortization are computed on straight-line method over the
estimated useful lives of the assets.
(i) Impairment of Long Lived Assets - 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.
(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 23, 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) New Accounting Standards - 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.
8
<PAGE>
(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 then 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 the costs are incurred.
(r) Reclassifications - Certain amounts in the 1997 financial
statements have been reclassified to conform to the 1998 presentation.
Note 2 Long Term Debt
<TABLE>
<CAPTION>
Long-term debt consists of the following:
(Dollars in thousands) March 23, December 29,
1998 1997
-----------------------------
<S> <C> <C>
Notes payable under Loan Agreement $ 25,962 $ 26,077
Notes payable due at various dates, secured by building and equipment, with
interest at rates primarily ranging from 9.0% to 15.83%, payable monthly 4,454 5,441
Other 1,294 1,367
-----------------------------
Total long-term debt 31,710 32,885
Less current installments 2,816 3,484
-----------------------------
Long-term debt less current installments $ 28,894 $ 29,401
=============================
</TABLE>
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 owes $57,000 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. The Restated
Credit Agreement with the CKE Group contains restrictive covenants which include
the consolidated EBITDA covenant as defined. As of December 29, 1997, the
Company was in violation of the consolidated EBITDA covenant. The Company
received a waiver for period 13 of fiscal 1997, and for periods one and two of
fiscal 1998. The violation was due to the Company recording certain accounting
charges and loss provisions during period 13 of fiscal 1997. The Company is in
compliance for period three of 1998 due to the effect of period 13 of fiscal
1997 no longer impacting the trailing three period reporting calculation.
Consequently the debt obligation has been classified as a long-term obligation
as of December 29, 1997 and March 23, 1998.
9
<PAGE>
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.
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. 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.
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 first quarter of 1997 and the first quarter of 1998 consistent
with the provisions of SFAS No. 123, and the Company's net income (loss) would
have been reduced by approximately $680,000 and $72,000 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 the first quarter of fiscal 1997
and the first quarter of 1998, respectively: divided yield of zero percent for
both periods: expected volatility of 81 and 88 percent, risk-free interest rates
of 6.0 and 5.7 percent, and expected lives of 2 years, for both periods. 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
<PAGE>
administrative expenses ($913,000 in the first quarter of 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.
10
<PAGE>
Note 5: Income Taxes
The Company recorded income tax expense of $150,000 for the
quarter ended March 23, 1998 and income tax benefits of $2.0 million for the
quarter ended March 24, 1997, or 38.0% of the respective income and loss before
income taxes. The Company then recorded a valuation allowance of $2.0 million
against deferred income tax assets as of March 24, 1997 and reversed tax
valuation allowances of $150,000 previously recorded against deferred tax assets
as of March 23, 1998. The Company's total valuation allowances of $30.2 million
as of March 23, 1998, 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.
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 23, 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 March 23, 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 first quarter of fiscal 1998, the Company realized an
8.2% increase in restaurant sales which were up $2.7 million over the first
quarter of fiscal 1997. Comparable store sales increased 8.9% during the same
period.
Early in fiscal 1997, the Company applied a marketing strategy
that included a greater emphasis on the quality of the burgers and fries that
the Company offers, and an increased emphasis on combo meals. The Company
introduced a new advertising campaign in several Company-operated markets, as
well as the Tampa co-op television markets in the fall of 1997. The campaign was
based on strategic research, which confirmed the consumer belief in the freshly
prepared quality of the products. The new creative, which features a "commercial
within a commercial" focus, invites a customer to make his/her own commercial,
since "we make everything fresh here at Checkers". Created by the Company's new
advertising agency, Crispin, Porter and Bogusky out of Miami, Florida, the
Company believes that these fun and engaging spots communicate the core belief
of the consumer, and dovetail nicely into the broader strategic position of the
best burger in the fast food industry. In 1998, television remains the primary
advertising medium in the Company's core markets, while radio, outdoor and
direct mail print provide the primary coverage in other, less efficient markets.
The Company continues to realize reductions in food, paper and
labor costs during the first quarter of 1998. These costs totaled 62.9% of
restaurant revenues in 1998 versus 69.1% in the first quarter of 1997.
Management's efforts to improve food, paper, and labor 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.
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.
Significant management changes have occurred since the end of
fiscal year 1997. Effective January 5, 1998 Richard A. Peabody was appointed
Vice President and Chief Financial Officer, assuming the financial
responsibilities previously held by Mr. Joseph N. Stein who retained his
position as Executive Vice President and Chief Administrative Officer. On
January 26, 1998 David M. Bunch was appointed Sr. Vice President of Real Estate
Development. On February 23, 1998, Harvey Fattig was appointed Executive Vice
President and Chief Operating Officer of the Company and of Rally's.
11
<PAGE>
In the first quarter of fiscal 1998, the Company, along with its
franchisees, experienced a net increase of eight operating restaurants. In 1998,
the franchise community has indicated an intent to open up to 30 new units and
the Company intends to close fewer restaurants focusing on improving Restaurant
margins. The franchise group as a whole continues to experience higher average
per store sales than Company stores.
The Company receives revenues from Restaurant sales, franchise
fees, royalties and sales of fully-equipped manufactured MRP's. Cost of
Restaurant sales relates to food and paper costs. Other Restaurant expenses
include labor and all other Restaurant costs for Company-operated Restaurants,
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 produced or used MRP's
refurbished for sale in connection with those openings.
Results of Operations
The following table sets forth the percentage relationship to
total revenues of the listed items included in the Company's Consolidated
Statements of Operations. Certain items are shown as a percentage of Restaurant
sales and Modular Restaurant Package revenue. The table also sets forth certain
selected restaurant operating data.
<TABLE>
<CAPTION>
Quarter Ended
(Unaudited)
--------------------------
March 23, March 24,
1998 1997
--------------------------
<S> <C> <C>
Revenues
Net restaurant sales 94.9% 95.0%
Franchise revenues and fees 5.0% 4.7%
Modular restaurant packages 0.1% 0.3%
-------------------------
Total revenues 100% 100%
Costs and expenses
Restaurant food and paper costs (1) 32.4% 34.2%
Restaurant labor costs (1) 30.5% 34.9%
Restaurant occupancy expense (1) 8.2% 8.4%
Restaurant depreciation and amortization (1) 5.3% 5.9%
Advertising expense (1) 5.3% 5.1%
Other restaurant operating expense (1) 8.8% 10.0%
Costs of modular restaurant package revenues (2) 134.6% 78.4%
Other depreciation and amortization 1.4% 1.5%
General and administrative expense 7.9% 9.9%
Losses on assets to be disposed of 0.2% 0%
-------------------------
Operating income (loss) 4.4% (5.3)%
-------------------------
Other income (expense)
Interest income 0.2% 0.2%
Interest expense (2.6)% (3.2)%
Interest - loan cost amortization (1.1)% (6.4)%
Minority interests 0.2% 0.2%
-------------------------
Income (loss) before income tax expense 1.1% (15.2)%
Income tax expense (benefit) 0.0% 0.0%
-------------------------
Net income (loss) 1.1% (15.2)%
=========================
</TABLE>
(1) As percent of Restaurant sales.
(2) As a percent of Modular restaurant package revenues.
12
<PAGE>
Results of Operations
Quarter Ended
(Unaudited)
--------------------------
March 22, March 24,
1998 1997
-------------------------
Operating data:
System - wide restaurant sales (in 000's) (3):
Company - operated $35,107 $ 32,448
Franchised 47,715 39,598
-----------------------
Total $82,822 $ 72,046
=======================
Average annual net sales per restaurant open for a full year (in 000's) (3):
Company - operated $ 599 $ 634
Franchised $ 730 $ 763
System - wide $ 664 $ 698
------------------------
Number of Restaurants (4)
Company - operated 230 232
Franchised 253 245
------------------------
Total 483 477
========================
(3) Includes sales of restuarants open for entire trailing 13 period year
including stores expected to be closed in the following year.
(4) Number of restuarants open at end of period.
Comparison of Historical Results - Quarter Ended March 23, 1998 and Quarter
Ended March 24, 1997
Revenues. Total revenues increased 7.7% to $37 million for the
quarter ended March 23, 1998, compared to $34.2 million for the quarter ended
March 24, 1997. Company-operated Restaurant sales increased 8.2% to $35.1
million for the quarter ended March 23, 1998, from $32.4 million for the quarter
ended March 24, 1997. Restaurant sales for comparable Company-owned Restaurants
for the quarter ended March 23, 1998, increased 8.9% compared to the quarter
ended March 24, 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
utilization of television advertising during the first quarter of 1998 versus
less effective radio advertising during the first quarter of 1997.
Franchise revenues and fees increased 14.4% to $1.8 million for
the quarter ended March 23, 1998, from $1.6 million for the quarter ended March
24, 1997. This was a result of a net increase of eight franchised restaurants
since March 24, 1997, and opening six franchised restaurants during the quarter
ended March 23, 1998 versus one in the first 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 revenues decreased 46.4% to $52,000 for
the quarter ended March 23, 1998, from $97,000 and for the quarter ended March
24, 1997. 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
and include amounts charged to franchises for the refurbishment of used MRP's.
13
<PAGE>
Costs and expenses. Restaurant food and paper costs totalled $11.4
million or 32.4% of Restaurant sales for the quarter ended March 23, 1998,
compared to $11.1 million or 34.2% of Restaurant sales for the quarter ended
March 24, 1997. The actual increase in food and paper costs was due primarily to
the increase in Restaurant sales while the decrease in these costs as a
percentage of Restaurant sales was due to new purchasing contracts negotiated in
early 1997.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totalled $10.7 million or 30.5% of
Restaurant sales for the quarter ended March 23, 1998, compared to $11.3 million
or 34.9% of Restaurant sales for the quarter ended March 24, 1997. The decrease
in Restaurant labor costs as a percentage of Restaurant sales was due to the
increase in comparable store sales and other Restaurant level initiatives
implemented in the first quarter of 1997 partially offset by the 1997 increase
in the federal minimum wage rate.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totalled $2.9 million or 8.2% of Restaurant sales for
the quarter ended March 23, 1998 compared to $2.7 million or 8.4% of Restaurant
sales for the quarter ended March 24, 1997. This decrease in restaurant
occupancy costs as a percentage of Restaurant sales was due primarily to the
increase in average Restaurant sales relative to the fixed and semi-variable
nature of these expenses.
Restaurant depreciation and amortization decreased by $54,000 or
2.8% for the quarter ended March 23, 1998, as compared to the quarter ended
March 24, 1997, due primarily to a net decrease of two Company-operated
restaurants from March 24, 1997 to March 23, 1998.
Advertising expense increased to $1.9 million or 5.3% of
Restaurant sales for the quarter ended March 23, 1998, from $1.6 million or 5.1%
of restaurant sales for the quarter ended March 24, 1997. The increase in this
expense was due to the utilization of television advertising during the first
quarter of 1998 versus less expensive radio advertising during the first quarter
of 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 $3.1 million or 8.8% of Restaurant sales for the
quarter ended March 23, 1998, compared to $3.2 million or 10.0% of Restaurant
sales for the quarter ended March 24, 1997. The decrease in the quarter ended
March 23, 1998, as a percentage of Restaurant sales was primarily related to the
increase in average Restaurant sales relative to the fixed and semi-variable
nature of these expenses. The decrease in the actual expense by 4.6% was
primarily due to tighter spending controls implemented in early second quarter
of 1997.
Costs of modular restaurant package revenues totalled $70,000 or
134.6% of modular restaurant package revenues for the quarter ended March 23,
1998, compared to $76,000 or 78.4% of such revenues for the quarter ended March
24, 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 $2.9 million or 7.9% of
total revenues, for the quarter ended March 23, 1998, compared to $3.4 million
or 9.9% of total revenues for the quarter ended March 24, 1997. The decrease in
these expenses of $452,000 was primarily due to the sharing of expenses under
the November 1997 Management Services Agreement with Rally's Hamburgers, Inc..
Interest expense. Interest expense other than loan cost
amortization decreased to $954,000 or 2.6% of total revenues for the quarter
ended March 23,1998 from $1.3 million or 3.9% of total revenues for the quarter
ended March 24, 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 $415,000 in 1998 from $2.2 million for
the quarter ended March 24, 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. Due to the loss for the quarter, the Company
recorded an income tax benefit of $150,000 or 35.0% of the loss before income
taxes which was completely offset by the reversal of deferred income tax
valuation allowances of $150,000 for the quarter ended March 23, 1998, as
compared to an income tax benefit of $2.0 million or 38.0% of earnings before
income taxes offset by deferred income tax valuation allowances of $2.0 million
for the quarter ended March 24, 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 $2.2 million in deferred loan costs in the quarter ended March 24,
1997, including $1.6 million required as a result of principal payments of $9.1
million on
14
<PAGE>
the Company's primary credit facility, versus $415,000 in deferred
loan cost amortization in 1998. Net income (loss) before tax and the deferred
loan cost amortization was $809,000 and or $.01 per share for the quarter ended
March 23, 1998 and ($3.0 million) or ($.05) per share for the quarter ended
March 24, 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, for the first quarter since September, 1994, has
reported a profit for the quarter ended March 23, 1998,. Although Management of
the Company is encouraged with the positive results of the current quarter, it
makes no assurances that such results will be reported in future quarters.
The Company's primary credit facility (the "Restated Credit
Agreement") is held by an investor group (the "CKE Group") including among
others 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. The Restated Credit Agreement with the CKE Group contains
restrictive covenants which include the consolidated EBITDA covenant as defined.
As of December 29, 1997, the Company was in violation of the consolidated EBITDA
covenant. The Company received a waiver for period 13 of fiscal 1997, and for
periods one and two of fiscal 1998. The violation was due to the Company
recording certain accounting charges and loss provisions during period 13 of
fiscal 1997 The Company is in compliance for period three of 1998 due to the
effect of period 13 of fiscal 1997 no longer impacting the trailing three period
reporting calculation. Consequently the debt obligation has been classified as a
long-term obligation as of March 23, 1998 and December 29, 1997.
On February 21, 1997, the Company completed a private placement
(the "Private Placement") of 8,771,929 shares of the Company's common stock,
$.001 par value, and 87,719 shares of the Company's Series A preferred stock,
$114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private Placement.
The Company received approximately $19.5 million in proceeds 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 it's 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 has also completed the sale of all of the Company's
Common Stock issued to it pursuant to the terms of it's Note re-purchase
agreement with the Company. The Company owes approximately $57,000 to NTDT in
accrued interest and to cover the deficiency pursuant to the price protection
provisions of it's Note re-purchase agreement with the Company. The Company
intends to satisfy all of its obligations in connection with the NTDT
transactions prior to April 30, 1998. RDG has not yet completed the sale of all
of the Company's Common Stock issued to it in December 1997 and January 1998.
Based upon the closing price of the Company's stock on March 25, 1998, upon the
issuance and sale of the remaining Common Stock available to be issued to RDG
pursuant to the registration statement, the Company does not
15
<PAGE>
anticipate that any amounts required to be paid to satisfy it's obligations to
RDG under it's 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 $10.9 million at March
23, 1998 (determined by subtracting current liabilities from current assets). It
is anticipated that the Company will continue to have negative working capital
since approximately 87% 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 now reported its first profit for any quarter since
September 1994. 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 the first quarter of 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 62.9% of Restaurant revenues
the first quarter of 1998 compared to 69.1% of Restaurant revenues in first
quarter of 1997. These costs decreased $363,000 in total while Restaurant sales
increased $2.7 million or 8.2%.
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 cents 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.
16
<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.
17
<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 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 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
18
<PAGE>
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. The Adversary Complaint seeks a temporary and permanent injunction
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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on 8-K:
There were no reports on Form 8-K filed during the quarter covered
by this report.
19
<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 6, 1998
By: /s/ Richard A. Peabody
------------------------------
Richard A. Peabody
Vice President, and Chief Financial Officer
(Principle Accounting Officer)
20
<PAGE>
March 23, 1998 FORM 10-Q CHECKERS
DRIVE-IN RESTAURANTS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Exhibit Description Page
--------- ------------------- ----
<S> <C> <C>
27 Financial Data Schedule (included in electronic filing only). 22
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial infor7nation extracted from the
financial statements of Checkers Drive-in Restaurants, Inc., for the quarterly
periods ended March 23, 1998 and March 24, 1997, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> Dec-28-1998 Dec-29-1997
<PERIOD-START> Dec-30-1997 Dec-31-1996
<PERIOD-END> Mar-23-1998 Mar-24-1997
<CASH> 3,867 3,451
<SECURITIES> 0 0
<RECEIVABLES> 2,827<F1> 5,640<F1>
<ALLOWANCES> 0 0
<INVENTORY> 2,114 2,004
<CURRENT-ASSETS> 14,662 19,556
<PP&E> 86,181<F2> 95,465<F2>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 113,676 130,075
<CURRENT-LIABILITIES> 25,542 34,844
<BONDS> 28,894 32,020
0 0
0 0
<COMMON> 73 61
<OTHER-SE> 50,756 54,548
<TOTAL-LIABILITY-AND-EQUITY> 113,676 130,075
<SALES> 35,159 32,545
<TOTAL-REVENUES> 37,003 34,157
<CGS> 31,860 32,063
<TOTAL-COSTS> 35,379 35,975
<OTHER-EXPENSES> (139) (149)
<LOSS-PROVISION> 63 0
<INTEREST-EXPENSE> 1,369 3,512
<INCOME-PRETAX> 394 (5,181)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 394 (5,181)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 394 (5,181)
<EPS-PRIMARY> 0.01 (0.09)
<EPS-DILUTED> 0.01 (0.09)
<FN>
(1) Receivables consist of --
Accounts Receivable - net $ 2,183 $ 1,900
Notes Receivable 644 362
Income taxes Receivable. 0 3,378
---------------------------------------
$ 2,827 $ 5,640
=======================================
(2) PP&E is net of accumulated depreciation and amortization of $44,445 and
$36,067 respectively.
</FN>
</TABLE>
