-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SCj+RvF+s0S1ASCZ/FGgMRrMTFPSY4tiEOK48S8zMiz75N21BIgHx0x1GNdR3wGP QFQCn2P2qDxeenCXHVoarA== 0000949459-97-000493.txt : 19971024 0000949459-97-000493.hdr.sgml : 19971024 ACCESSION NUMBER: 0000949459-97-000493 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970908 FILED AS OF DATE: 19971023 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHECKERS DRIVE IN RESTAURANTS INC /DE CENTRAL INDEX KEY: 0000879554 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 581654960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19649 FILM NUMBER: 97699581 BUSINESS ADDRESS: STREET 1: 600 CLEVELAND ST 8TH FL STREET 2: STE 1050 CITY: CLEARWATER STATE: FL ZIP: 34615 BUSINESS PHONE: 8134413500 10-Q 1 CHECKERS DRIVE-IN RESTAURANTS FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________ FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 8, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission file number 0-19649 Checkers Drive-In Restaurants, Inc. (Exact name of Registrant as specified in its charter) Delaware 58-1654960 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) Barnett Bank Building 600 Cleveland Street, Eighth Floor Clearwater, FL 34615 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (813) 441-3500 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The Registrant had 70,132,472 shares of Common Stock, par value $.001 per share, outstanding as of October 15, 1997. This document contains 25 pages. Exhibit Index appears at page 24. TABLE OF CONTENTS
PAGE PART I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Condensed Consolidated Balance Sheets September 8, 1997 and December 30, 1996...............................3 Condensed Consolidated Statements of Operations Quarter ended September 8, 1997 and September 9, 1996 and Three Quarters ended September 8, 1997 and September 9, 1996......5 Condensed Consolidated Statements of Cash Flows Three Quarters ended September 8, 1997 and September 9, 1996..........6 Notes to Consolidated Financial Statements................................8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................14 PART II OTHER INFORMATION Item 1 Legal Proceedings...........................................................20 Item 2 Changes in Securities .....................................................20 Item 4 Submission of Matters to a Vote of Security Holders.........................21 Item 5 Other Information...........................................................21 Item 6 Exhibits and Reports on Form 8-K............................................22
2 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) September 8, December 30, 1997 1996 ------------------------------ Current Assets: Cash and cash equivalents: Restricted $ 2,557 $ 1,505 Unrestricted 1,164 1,551 Accounts receivable 1,810 1,544 Notes receivable 617 214 Inventory 2,045 2,261 Property and equipment held for sale 5,860 7,608 Income taxes receivable -- 3,514 Deferred loan costs 1,625 2,452 Prepaid expenses and other current assets 1,046 306 ------------------------------ Total current assets 16,724 20,955 Property and equipment, at cost, net of accumulated depreciation and amortization 89,964 98,188 Intangibles, net of accumulated amortization 12,278 12,284 Deferred loan costs - less current portion 1,671 3,900 Deposits and other non-current assets 663 783 ------------------------------ $121,300 $136,110 ==============================
See Notes to Condensed Consolidated Financial Statements 3 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited) September 8, December 30, 1997 1996 ---------------------------- Current Liabilities: Short term debt $ -- $ 2,500 Current installments of long-term debt 7,274 9,589 Accounts payable 8,741 15,142 Accrued wages, salaries and benefits 2,286 2,528 Reserves for restaurant relocations and abandoned sites 2,412 3,800 Other accrued liabilities 10,130 13,784 Deferred income 391 337 ----------------------------- Total current liabilities 31,234 47,680 Long-term debt, less current installments 30,136 39,906 Deferred franchise fee income 421 466 Minority interests in joint ventures 1,021 1,455 Other long-term liabilities 7,118 6,263 ----------------------------- Total liabilities 69,930 95,770 Stockholders' Equity: Preferred stock, $.001 par value, authorized 2,000,000 shares, no shares outstanding -- -- Common stock, $.001 par value, authorized 150,000,000 shares, issued and outstanding 70,132,472 at September 8, 1997 and 51,768,480 at December 30, 1996 70 52 Additional paid-in capital 110,435 90,339 Warrants 9,463 9,463 Retained earnings (68,198) (59,114) ----------------------------- 51,770 40,740 Less treasury stock, at cost, 578,904 shares 400 400 ----------------------------- Net stockholders' equity 51,370 40,340 ----------------------------- $121,300 $136,110 =============================
See Notes to Condensed Consolidated Financial Statements 4 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share amounts) (UNAUDITED)
Quarter Ended Three Quarters Ended Sept. 8, 1997 Sept. 9, 1996 Sept. 8, 1997 Sept. 9, 1996 ---------------------------------------------------------------- REVENUES: Net restaurant sales $ 30,786 $ 34,875 $ 94,987 $ 107,193 Franchise revenues and fees 1,797 1,966 5,122 6,075 Modular restaurant packages 150 247 494 893 --------------------------------------------------------------- Total revenues 32,733 37,088 100,603 114,161 --------------------------------------------------------------- COSTS AND EXPENSES: Restaurant food and paper costs 9,715 12,417 31,223 37,080 Restaurant labor costs 9,887 13,139 31,017 38,341 Restaurant occupancy expense 2,798 3,171 8,029 8,827 Restaurant depreciation and amortization 1,904 2,064 5,732 6,023 Advertising expense 1,588 1,490 4,828 3,597 Other restaurant operating expense 3,100 3,716 9,533 9,954 Costs of modular restaurant package revenues 150 382 439 1,380 Other depreciation and amortization 518 1,053 1,546 2,720 General and administrative expenses 3,377 6,289 10,276 13,585 Impairment of long-lived assets -- 8,468 -- 8,468 Losses on assets to be disposed of -- 5,702 -- 5,702 Loss provisions -- 500 -- 500 --------------------------------------------------------------- Total costs and expenses 33,037 58,391 102,623 136,177 --------------------------------------------------------------- Operating (loss) income (304) (21,303) (2,020) (22,016) --------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest income 57 126 238 622 Interest expense (1,046) (1,338) (3,566) (3,854) Interest - loan cost amortization (445) (69) (3,100) (159) --------------------------------------------------------------- Loss before minority interests and income tax expense (1,738) (22,584) (8,448) (25,407) Minority interests (0) (56) (60) 10 --------------------------------------------------------------- Loss before income tax expense (1,738) (22,528) (8,388) (25,417) Income tax expense -- 1,715 -- 626 --------------------------------------------------------------- Net loss $ (1,738) $ (24,243) $ (8,388) $ (26,043) =============================================================== Preferred dividends 696 -- 696 -- --------------------------------------------------------------- Net loss to common shareholders ($2,434) ($24,243) ($9,084) ($26,043) =============================================================== Net loss per common share $(0.04) $(0.47) $(0.15) $(0.50) =============================================================== Weighted average number of common shares outstanding 65,548 51,768 60,163 51,722 ===============================================================
5 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED)
Three Quarters Ended September 8, September 9, 1997 1996 ---------------------------- Cash flows from operating activities: Net loss (8,388) (26,043) Adjustments to reconcile net earning to net cash (used in) provided by operating activities: Depreciation and amortization 7,278 8,742 Impairment of long-lived assets -- 8,468 Losses on assets to be disposed of -- 5,702 Refinancing costs -- 846 Deferred loan cost amortization 3,100 159 provision for bad debt, inventory obsolescence and sales tax 323 1,750 (Gain) loss on disposal of property & equipment 81 165 Minority interests in (losses) earnings (60) 10 Change in assets and liabilities: (Increase), Decrease in accounts receivable (1,351) 2,959 Decrease in notes receivable 78 -- Decrease in inventory 260 300 Decrease, (Increase) in costs and earnings in excess of billings on uncompleted contracts 238 (90) Decrease in income taxes receivable 3,514 2,825 Increase in prepaid expenses and other (773) (1,115) Decrease in deferred income tax assets -- 406 Decrease, (Increase) in deposits and other long-term assets 119 (8) (Decrease), Increase in accounts payable (6,205) 3,168 Decrease in accrued liabilities (3,960) (1,000) Increase in deferred income 10 105 -------------------------------- Net cash (used in) provided by operating activities (5,736) 7,349 -------------------------------- Cash flows from investing activities: Capital expenditures (1,198) (2,963) Proceeds from sale of assets 3,280 1,469 Cash paid for business purchases (155) (200) -------------------------------- Net cash provided by (used in) investing activities 1,927 (1,694) -------------------------------- Cash flows from financing activities: Repayments on short term debt (2,500) -- Principal payments on long-term debt (12,423) (3,826) Net proceeds from private placement 19,450 -- Proceeds from investment by minority interests -- 285 Distributions to minority interests (53) (153) -------------------------------- Net cash provided by (used in) financing activities 4,474 (3,694) -------------------------------- Net increase in cash 665 1,961 Cash at beginning of period 3,056 3,364 -------------------------------- Cash at end of period $ 3,721 $ 5,325 ================================ 6 Supplemental disclosures of cash flow information -- Interest paid $ 4,071 $ 3,957 Capital lease obligations incurred -- 225 =================================== Schedule of noncash investing activities -- Acquisitions: Fair value of tangible assets acquired $ 45 $ 7,994 Receivables forgiven (38) (5,429) Intangibles recorded 699 1,908 Reversal of deferred gain -- 1,422 Liabilities assumed (433) (3,354) Assets transferred (438) -- Minority interests dissolved (recorded) 320 (2,341) ----------------------------------- Total cash paid for net assets acquired $ 155 $ 200 =================================== SCHEDULE OF NONCASH FINANCING ACTIVITIES -- On August 6, 1997, in connection with the Company's February 21, 1997 private placement which included the issuance of 87,719 shares of the Company's Series A preferred stock (the "Private Placement"), the 87,719 shares of preferred stock were converted into 8,771,900 shares of the company's common stock, valued at $9,999,966. In accordance with the agreement underlying the Private Placement (the "Private Placement Agreement"), the company also issued 610,524 shares of common stock as a dividend pursuant to the liquidation preference provisions of the Private Placement Agreement, valued at $696,000 to the holders of the preferred stock issued in the Private Placement.
7
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) BASIS OF PRESENTATION - The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary to present fairly the information set forth therein have been included. The operating results for the quarter and the two quarters ended September 8, 1997, are not necessarily an indication of the results that may be expected for the fiscal year ending December 29, 1997. Except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the Company's Annual Report on form 10-K for the year ended December 30, 1996. Therefore, it is suggested that the accompanying financial statements be read in conjunction with the Company's December 30, 1996 consolidated financial statements. The Company's calendar reporting year ends on the Monday closest to December 31. Each quarter consists of three 4-week periods with the exception of the fourth quarter which consists of four 4-week periods. (b) PURPOSE AND ORGANIZATION - The principal business of Checkers Drive-In Restaurants, Inc. (the "Company") is the operation and franchising of Checkers Restaurants. At September 8, 1997, there were 480 Checkers Restaurants operating in 23 different states, the District of Columbia, and Puerto Rico. Of those Restaurants, 232 were Company-operated (including thirteen joint venture Restaurants) and 248 were operated by franchisees. The accounts of the joint ventures have been included with those of the Company in these consolidated financial statements. Champion Modular Restaurant Company, a division of the Company, ("Champion") manufactures Modular Restaurant Packages ("MRP's") primarily for the Company and franchisees. The consolidated financial statements also include the accounts of all of the Company's subsidiaries. Intercompany balances and transactions have been eliminated in consolidation and minority interests have been established for the outside partners' interests. (c) REVENUE RECOGNITION - Franchise fees are generated from the sale of rights to develop, own and operate Restaurants. Such fees are based on the number of potential Restaurants in a specific area which the franchisee agrees to develop pursuant to the terms of the franchise agreement between the Company and the franchisee and are recognized as income on a pro rata basis when substantially all of the Company's obligations per location are satisfied, generally at the opening of the Restaurant. Franchise fees are non-refundable. The Company receives royalty fees from franchisees based on a percentage of each restaurant's gross revenues. Royalty fees are recognized as earned. Champion recognizes revenues on the percentage-of-completion method, measured by the percentage of costs incurred to the estimated total costs of the contract. (d) CASH, AND CASH EQUIVALENTS - The Company considers all highly liquid instruments purchased with an original maturity of less than three months to be cash equivalents. Restricted cash consists of cash on deposit with various financial institutions as collateral to support the Company's obligation to the States of Florida and Georgia for potential Workers' Compensation claims. This cash is not available for the Company's use until such time that the respective states permit its release. (e) RECEIVABLES - Receivables consist primarily of franchise fees, royalties and notes due from franchisees, and receivables from the sale of modular restaurant packages. Allowances for doubtful receivables were $1.9 million at September 8, 1997 and $2.2 million at December 30, 1996. (f) INVENTORY - Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market. (g) DEFERRED LOAN COSTS - Deferred loan costs of $6.9 million incurred in connection with 8 the Company's November 22, 1996 restructure of its primary credit facility (see Note 2) are being amortized on the effective interest method. (h) PROPERTY AND EQUIPMENT AND PROPERTY AND EQUIPMENT HELD FOR RESALE - Property and equipment (P & E) are stated at cost except for P & E that have been impaired, for which the carrying amount is reduced to estimated fair value. Property and equipment under capital leases are stated at their fair value at the inception of the lease. Property and equipment held for resale is carried at fair market value, adjusted for new market conditions on a quarterly basis. Depreciation and amortization are computed on straight-line method over the estimated useful lives of the assets. (i) IMPAIRMENT OF LONG LIVED ASSETS - During the fourth quarter of 1995, the Company early adopted the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121) which requires the write-down of certain intangibles and tangible property associated with under performing sites to the level supported by the forecasted discounted cash flow. (j) GOODWILL AND NON-COMPETE AGREEMENTS - Goodwill and non-compete agreements are being amortized over 20 years and 3 to 7 years, respectively, on a straight-line basis. (k) INCOME TAXES - The Company accounts for income taxes under the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date (see Note 4). (l) USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. (m) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The balance sheets as of September 9, 1997 and December 30, 1996, reflect the fair value amounts which have been determined, using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents, receivables, accounts payable, and short-term debt - The carrying amounts of these items are a reasonable estimate of their fair value. Long-term debt - Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. (n) NEW ACCOUNTING STANDARDS - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS 128") which is effective for reporting periods ending after December 15, 1997. SFAS 128 replaces the presentation of primary earnings per share and fully diluted earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB 15") with basic earnings per share and diluted earnings per share. Due to the net losses for each of the periods ended September 8, 1997 and September 9, 1996, the inclusion of options and warrants would result in an antidilutive per share amount. Therefore, for all periods presented, such options and warrants are excluded from earnings per share calculations under both APB 15 and, on a proforma basis, SFAS 128. In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. This statement is effective for fiscal years beginning after December 15, 1997. Reclassification of the Company's financial statements for earlier periods provided for comparative purposes will be required. The Company believes that this standard will not have a material adverse effect on the Company's financial statements. (o) RECLASSIFICATIONS - Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 presentation. 9 NOTE 2 LONG-TERM DEBT Long-term debt consists of the following: (Dollars in thousands) September 8, December 30, 1997 1996 ---------------------------- Notes payable under Loan Agreement $ 26,347 $ 35,818 Notes payable due at various dates, secured by buildings and equipment, with interest at rates primarily ranging from 9.0% to 18.0%, payable monthly 6,735 8,963 Unsecured notes payable, bearing interest at rates ranging from prime to 12.0% 2,881 3,481 Other, at interest rates ranging from 7.0% to 10.0% 1,447 1,233 ---------------------------- Total long-term debt 37,410 49,495 Less current installments 7,274 9,589 ---------------------------- Long-term debt, less current installments $ 30,136 $ 39,906 ============================ On July 29, 1996, the debt under the Company's prior bank loan agreement (the "Loan Agreement") and credit line ("Credit Line") was acquired from a bank group by an investor group led by an affiliate of DDJ Capital Management, LLC (collectively, "DDJ"). The Company and DDJ began negotiations for restructuring of the debt. On November 14, 1996, and prior to consummation of a formal debt restructuring with DDJ, the debt under the Loan Agreement and Credit Line was acquired from DDJ by a group of entities and individuals, most of whom are engaged in the fast food restaurant business. This investor group (the "CKE Group") was led by CKE Restaurants, Inc., the parent of Carl Karcher Enterprises, Inc., Casa Bonita, Inc., and Summit Family Restaurants, Inc. Also participating were most members of the DDJ Group, as well as KCC Delaware Company, a wholly-owned subsidiary of Giant Group, Ltd., which is a principal shareholder of Rally's Hamburgers, Inc. Waivers of all defaults under the Loan Agreement and Credit Line were granted through November 22, 1996, to provide a period of time during which the Company and the CKE Group could negotiate an agreement on debt restructuring. On November 22, 1996, the Company and the CKE Group executed an Amended and Restated Credit Agreement (the "Restated Credit Agreement") thereby completing a restructuring of the debt under the Loan Agreement. The Restated Credit Agreement consolidated all of the debt under the Loan Agreement and the Credit Line into a single obligation. At the time of the restructuring, the outstanding principal balance under the Loan Agreement and the Credit Line was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the term of the debt was extended by one (1) year until July 31, 1999, and the interest rate payable to the CKE Group on the indebtedness was reduced to a fixed rate of 13% (the effective interest rate on this obligation including the amortization of $6.9 million in deferred loan costs is 20.1%). In addition, all principal payments were deferred until May 19, 1997, and the CKE Group agreed to eliminate certain financial covenants, to relax others and to eliminate approximately $4.3 million in cash loan fees under the Loan Agreement. The Restated Credit Agreement also provided that certain members of the CKE Group agreed to provide to the Company a short term revolving line of credit of up to $2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit Line"). In consideration for the restructuring, the Restated Credit Agreement required the Company to issue to the CKE Group warrants to purchase an aggregate of 20 million shares of the Companys' common stock at an exercise price of $.75 per share, which was the approximate market price of the common stock prior to the announcement of the debt transfer. As of September 8, 1997, the Company has reduced the principal balance under the Restated Credit Agreement by $9.4 million and has repaid the Secondary Credit Line in full. A portion of the funds utilized to make these principal reduction payments were obtained by the Company from the sale of certain closed restaurant sites to third parties. Additionally, the Company utilized $10.5 million of the proceeds from the February 21, 1997, private placement which is described later in this section for these principal reduction payments. Pursuant to the Restated Credit Agreement, the prepayments of principal made in 1996 and early in 1997 will relieve the Company of the requirement to make any of the regularly scheduled principal payments under the Restructured Credit Agreement which would have otherwise become due in fiscal year 1997 through maturity. The Amended and Restated Credit Agreement provides however, that 50% of any future asset sales must be utilized to prepay principal. The Company has outstanding promissory notes in the aggregate principal amount of approximately $3.8 million at September 8, 1997 and $3.5 million at October 9, 1997 (the "Notes") 10 payable to Rall-Folks, Inc. ("Rall-Folks"), Restaurant Development Group, Inc. ("RDG") and Nashville Twin Drive-Through Partners, L.P. ("N.T.D.T."). The Company had agreed to acquire the Notes issued to Rall-Folks and RDG in consideration of the issuance of an aggregate of approximately 1.9 million shares of Common Stock and the Note issued to NTDT in exchange for a convertible note in the same principal amount and convertible into approximately 614,000 shares of Common Stock pursuant to purchase agreements entered into in 1995 and subsequently amended. All three of the parties received varying degrees of protection on the purchase price of the promissory notes. Accordingly, the actual number of shares to be issued will be determined by the market price of the Company's stock. The Company was not able to consummate these transactions as originally scheduled. Pursuant to the most recent amendment, consummation of the Rall-Folks, RDG and NTDT purchases is to occur prior to December 16, November 25, and November 15, 1997, respectively, subject to extension in certain cases. The Company does not currently have sufficient cash available to pay one or more of these notes if required to do so. NOTE 3: STOCKHOLDERS' EQUITY On February 21, 1997, the Company completed a private placement (the "Private Placement") of 8,771,929 shares of the Company's common stock, $.001 par value, and 87,719 shares of the Company's Series A preferred stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased 6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and other qualified investors, including other members of the CKE Group of lenders under the Restated Credit Agreement, also participated in the Private Placement. The Company received approximately $19.5 million in net proceeds from the Private Placement. On August 6, 1997, the 87,719 shares of preferred stock were converted into 8,771,900 shares of the company's common stock, valued at $9,999,966. In accordance with the agreement underlying the Private Placement (the "Private Placement Agreement"), the company also issued 610,514 shares of common stock as a dividend pursuant to the liquidation preference provisions of the Private Placement Agreement, valued at $696,000 to the holders of the preferred stock used in the Private Placement. At the Company's Annual Meeting of Stockholders held on August 6, 1997, stockholders approved an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of common stock from 100,000,000 to 150,000,000 shares. NOTE 4: STOCK OPTION PLANS In August 1991, the Company adopted the 1991 stock option plan, as amended, for employees whereby incentive stock options, non-qualified stock options, stock appreciation rights and restrictive shares can be granted to eligible salaried individuals. The plan was amended on August 6, 1997 by the approval of the stockholders to increase the number of shares subject to the plan from 3,500,000 to 5,000,000. In 1994, the Company adopted the 1994 stock option plan for non-employee directors, as amended (The "Directors Plan"). The Directors Plan was amended on August 6, 1997 by the approval of the Company's stockholders to increase the number of shares subject to the Directors plan from 200,000 to 5,000,000. The Directors Plan provided for the automatic grant to each non-employee director upon election to the Board of Directors of a non-qualified, ten-year option to acquire shares of the Company's common stock, with the subsequent automatic grant on the first day of each fiscal year thereafter during the time such person is serving as a non-employee director of a non-qualified ten-year option to acquire additional shares of common stock. One-fifth of the shares of common stock subject to each initial option grant become exercisable on a cumulative basis on each of the first five anniversaries of the grant of such option. One-third of the shares of common stock subject to each subsequent option grant become exercisable on a cumulative basis on each of the first three anniversaries of the date of the grant of such option. Each non-employee director serving on the Board as of July 26, 1994 received options to purchase 12,000 shares. Each new non-employee director elected or appointed subsequent to that date also received options to purchase 12,000 shares. Each non-employee director has also received additional options to purchase 3,000 shares of common stock on the first day of each fiscal year. On August 6, 1997 the Directors Plan was amended to provide: (i) an increase in the option grant to new non-employee directors to 100,000 shares, (ii) an increase in the annual option grant to 20,000 shares and (iii) the grant of an option to purchase 300,000 shares to each non-employee director who was a Director both immediately prior to and following the effective date of the amendment. Both the 1991 Stock Option Plan and the Directors Plan provide that the shares granted come from the Company's authorized but unissued or reacquired common stock. The exercise price of the options granted pursuant to these plans will not be less than 100 percent of the fair market 11 value of the shares on the date of grant. An option may vest and be exercisable immediately as of the date of the grant and no option will be exercisable and will expire after ten years from the date granted. In August 1994, employees granted $11.50, $11.63, $12.33 and $19.00 options were given the opportunity to forfeit those options and be granted an option to purchase a share at $5.13 for every two option shares retired. As a result of this offer, options for 662,228 shares were forfeited in return for options for 331,114 shares at $5.13 per share. In February 1996, employees (excluding executive officers) granted options in 1993 and 1994 with exercise prices in excess of $2.75 were offered the opportunity to exchange for a new option grant for a lesser number of shares at an exercise price of $1.95, which represented a 25% premium over the market price of the Company's common stock on the date the plan was approved. Existing options with an exercise price in excess of $11.49 could be cancelled in exchange for new options on a four to one basis. Options with an exercise price between $11.49 and $2.75 could be cancelled in exchange for new options on a three for one basis. The offer to employees expired April 30, 1996 and, as a result of this offer, options for 49,028 shares were forfeited in return for options for 15,877 shares at the $1.95 exercise price. During the quarter ended March 24, 1997, the Company granted 285,000 options pursuant to the terms of the 1991 Employee Stock Option Plan referenced above and the Company granted options to purchase a total of 500,000 shares of its common stock as part of compensation packages for two new executive officers, which options were not granted pursuant to the terms of the 1991 Employee Stock Option Plan. During the quarter ended June 16, 1997, 12,000 options were granted pursuant to the terms of the Directors Plan and during the quarter ended September 8, 1997, 1.6 million options were granted pursuant to the terms of the Directors Plan.. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in fiscal 1996 and each of the first three quarters of 1997 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced by approximately $1.4 million, $680,000, $43,000 and $1.0 million, respectively, on a pro forma basis. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and the first three quarters of fiscal 1997, respectively: dividend yield of zero percent for all periods; expected volatility of 64, 81, and 89 percent, risk-free interest rates of 6.5, 6.0, and 5.9 percent, and expected lives of 3.5, 2, and 2 years, respectively. The compensation cost disclosed above may not be representative of the effects on reported income in future quarters, for example, because options vest over several years and additional awards are made each year. NOTE 5: INCOME TAXES The Company recorded income tax benefits of $660,000 for the quarter ended September 8, 1997 and $8.6 million for the quarter ended September 8, 1996, or 38.0% of the losses before income taxes. The Company then recorded valuation allowances of $660,000 and $10.3 million against deferred income tax assets as of September 8, 1997 and September 9, 1996 respectively. The Company's total valuation allowances of $30.0 million as of September 8, 1997, is maintained on deferred tax assets which the Company has not determined to be more likely than not realizable at this time. Subject to a review of the tax assets, these valuation allowances will be reversed during periods in the future in which the Company records pre-tax income, in amounts necessary to offset any then recorded income tax expenses attributable to such future periods. NOTE 6: LOSS PROVISIONS The Company recorded accounting charges and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which consisted of various selling, general and administrative expenses. Provisions totalling $14.2 million to close 27 Restaurants, relocate 22 of them ($4.2 million), settle 16 leases on real property underlying these stores ($1.2 million) and sell land underlying the other 11 Restaurants ($307,000), and impairment charges related to an additional 28 under-performing Restaurants ($8.5 million) were recorded. Included in general and administrative expenses in the third quarter of 1996 are refinancing costs of $845,775 recorded to expense capitalized loan costs incurred in connection with the Company's previous lending arrangements with its bank group, $499,644 in unusual bad debt provisions, and $750,000 in provisions for state sales tax audits. A loss provision of $500,000 was also recorded to adjust Champion's finished buildings inventory to fair market value. 12 NOTE 7: SUBSEQUENT EVENT In October 1997, the Company and Rally's Hamburgers, Inc. ("Rally's") entered into an employment agreement with James J. Gillespie, effective November 10, 1997, pursuant to which he is to serve as Chief Executive Officer of the Company and Rally's. Mr. Gillespie is also to serve as a director of the Company and Rally's. The term of employment is for two years, subject to automatic renewal by the Company and Rally's for one-year periods thereafter, at an annual base salary of $282,500. Mr. Gillespie is also entitled to participate in the incentive bonus plans of the Company and Rally's. Upon execution of the employment agreement, Mr. Gillespie was granted an option to purchase 300,000 shares of Rally's common stock, $.10 par value per share, and is entitled to receive, on November 10, 1997, a signing bonus of $50,000. The option vests in three equal annual installments commencing on November 10, 1998; provided, that if the term of the agreement is not extended to November 10, 2000, the option shall become fully vested on November 10, 1999. Mr. Gillespie is entitled to choose to participate in either the Company's or Rally's employee benefit plans and programs and is entitled to reimbursement of his reasonable moving expenses and a relocation fee of $5,000. The agreement may be terminated at any time for cause. If Mr. Gillespie is terminated without cause, he will be entitled to receive his base annual salary, and any earned unpaid bonus, through the unexpired term of the agreement, payable in a lump sum or as directed by Mr. Gillespie. Mr. Gillespie has agreed to keep confidential all non-public information about the Company and Rally's during the term of his employment and for a two-year period thereafter. In addition, Mr. Gillespie has agreed that he will not, during his employment, engage in any business which is competitive with either the Company or Rally's. The Company and Rally's intend to share the costs associated with this agreement. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company commenced operations on August 1, 1987, to operate and franchise Checkers double drive-thru Restaurants. As of September 8, 1997, the Company had an ownership interest in 232 Company-operated Restaurants and an additional 248 Restaurants were operated by franchisees. The Company's ownership interest in the Company-operated Restaurants is in one of two forms: (i) the Company owns 100% of the Restaurant (as of September 8, 1997, there were 219 such Restaurants) and (ii) the Company owns a 10.55% to 65.83% interest in a partnership which owns the Restaurant (a "Joint Venture Restaurant") (as of September 8, 1997, there were 13 such Joint Venture Restaurants). The Company continues to see the positive effects of aggressive programs implemented at the beginning of fiscal 1997 that are designed to improve food, paper and labor costs. These costs totalled 69.2%, 63.6% and 63.7% of net restaurant revenues in the first second and third quarters of 1997, compared to 65.6%, 69.3%, 73.3% and 75.9% of net restaurant revenues in the first, second, third and fourth quarters of fiscal 1996. These improvements in costs were achieved despite a 6.4% decrease in Company owned same store sales in the third quarter of 1997 as compared to the third quarter of the prior year. The Company was able to reduce food and paper costs by cooperating with CKE Restaurants, Inc. and Rally's Hamburgers, Inc. to leverage the purchasing power of the three entities to negotiate improved terms for their respective contracts with suppliers. The Company has achieved annualized saving in excess of $5.0 million. The Company has also implemented over 15 changes in restaurant operations in order to lower labor and benefits costs. These changes include adjusting the number of salaried managers per store, creating an incentive program targeting profit, closing one drive thru lane during slow periods and creating a labor matrix that guides the managers on proper staffing levels. In an effort to improve sales, the Company is in the process of creating a new brand identify that will appeal to the heavy fast food users. The Company has recently selected a new advertising agency that is working with management to create a new marketing program that will emphasize the quality of the Company's product while distinguishing it from its competitors. The first advertising campaign using this strategy began on October 6, 1997. In addition, the Company is seeking to improve sales by enhancing the experience of the customer when visiting a Checkers Restaurant. The Company and a franchisee are currently testing in-restaurant dining areas in certain restaurants. The Company has also reintroduced the "mystery shop" program which enables the Company to evaluate quality, service and cleanliness of its restaurants through a service which provides customers to perform such evaluations. The Company does not believe that its debt has a significant impact on current operating results. Although the Company's Restaurant operating margins for the first three quarters of 1997 were 37.2% higher than the Restaurant operating margins for the first three quarters of 1996, the Company intends to continue to implement programs to further improve those margins. In the third quarter of fiscal 1997, the Company, along with its franchisees, experienced a net increase of two operating Restaurants, compared to a net decrease of two operating Restaurants in the third quarter of fiscal 1996. Based on information obtained from the Company's franchisees, in 1997, the franchise community expects to open approximately 30 new units. The Company does not currently expect significant further Restaurant closures, choosing instead to focus on improving Restaurant margins. This Quarterly Report on Form 10-Q contains forward looking statements, which are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the impact of competitive products and pricing; success of operating initiatives; advertising and promotional effort; adverse publicity; availability, changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; the results of financing efforts; food, labor, and employee benefit costs; changes in, or the failure to comply with, government regulations; weather conditions; construction schedules; and risks that any sales growth resulting from the Company's current and future remodeling of restaurants and other operating strategies could be sustained. 14 RESULTS OF OPERATIONS The following table sets forth the percentage relationship to total revenues of the listed items included in the Company's Consolidated Statements of Operations. Certain items are shown as a percentage of Restaurant sales and Modular Restaurant Package revenue. The table also sets forth certain selected restaurant operating data. Quarter Ended Three Quarters Ended (Unaudited) (Unaudited) ------------------------------------------------------------------ September 8, September 9, September 8, September 9, 1997 1996 1997 1996 ------------------------------------------------------------------ Revenues: Net restaurant sales 94.1% 94.0% 94.4% 93.9% Franchise revenues and fees 5.4% 5.3% 5.1% 5.3% Modular restaurant packages 0.5% 0.7% 0.5% 0.8% ------------------------------------------------------------------ Total revenue 100% 100% 100% 100% Costs and Expenses: Restaurant food and paper costs (1) 31.6% 35.6% 32.9% 34.6% Restaurant labor costs (1) 32.1% 37.7% 32.7% 35.8% Restaurant occupancy expense (1) 9.1% 9.1% 8.5% 8.2% Restaurant depreciation and amortization (1) 6.2% 5.9% 6.0% 5.6% Advertising expense (1) 5.2% 4.3% 5.1% 3.4% Other restaurant operating expense (1) 10.1% 10.7% 10.0% 9.3% Costs of modular restaurant package revenues(2) 99.8% 154.7% 88.8% 154.5% Other depreciation and amortization 1.6% 2.8% 1.5% 2.4% Selling, general and administrative expense 10.3% 17.0% 10.2% 11.9% Impairment of long-lived assets 0.0% 22.8% 0.0% 7.4% Losses on assets to be disposed of 0.0% 15.4% 0.0% 5.0% Loss provision 0.0% 1.3% 0.0% 0.4% ------------------------------------------------------------------ Operating (loss) income (0.9%) (57.4%) (2.0%) (19.3%) ------------------------------------------------------------------ Other income (expense): Interest income 0.2% 0.3% 0.2% 0.5% Interest expense (3.2%) (3.6%) (3.5%) (3.4%) Interest - loan cost amortization (1.4%) (0.2%) (3.1%) (0.1%) Minority interests (0.0%) (0.2%) (0.1%) 0.0% ------------------------------------------------------------------ Loss before income tax benefit (5.3%) (60.7%) (8.3%) (22.3%) Income tax expense (benefit) 0.0% (4.6%) 0.0% 0.5% ------------------------------------------------------------------ Net loss (5.3%) (65.4%) (8.3%) (22.8%) ================================================================== Preferred dividends 2.1% 0.0% 0.7% 0.0% ------------------------------------------------------------------ Net loss to common shareholders (7.4%) (65.4%) (9.0%) (22.8%) ================================================================== Operating data: System-wide restaurant sales (in 000's): Company-operated $ 30,786 $ 34,875 $ 94,987 $ 107,193 Franchised 43,226 44,491 124,485 133,788 ------------------------------------------------------------------ Total $ 74,012 79,366 $219,472 $ 240,981 ================================================================== 1997 1996 --------------------------- Average annual net sales per restaurant open for a full year (in 000's) (3): Company-operated $612 $633 Franchised $742 $787 System-wide $677 $706 --------------------------- Number of Restaurants (4) Company-operated 232 255 Franchised 248 250 --------------------------- Total 480 505 =========================== (1) As a percent of net restaurant sales. (2) As a percent of Modular restaurant package revenues. (3) Includes sales of Restaurants open for entire trailing 13 period year including stores expected to be closes in the following year. (4) Number of Restaurants open at end of period. 15 COMPARISON OF HISTORICAL RESULTS - QUARTER ENDED SEPTEMBER 8, 1997 AND QUARTER ENDED SEPTEMBER 9, 1996 REVENUES. Total revenues decreased 11.7% to $32.7 million for the quarter ended September 8, 1997, compared to $37.1 million for the quarter ended September 9, 1996. Company-operated net restaurant sales decreased 11.7% to $30.8 million for the quarter ended September 8, 1997, from $34.9 million for the quarter ended September 9, 1996. Net restaurant sales for comparable Company-owned Restaurants for the quarter ended September 8, 1997, decreased 6.4% compared to the quarter ended September 9, 1996. Comparable Company-owned Restaurants are those continuously open during both reporting periods. These decreases in net restaurant sales and comparable net restaurant sales are primarily attributable to a highly competitive environment during the third quarter of 1997 and the Company's 1997 focus on reducing Restaurants costs of sales. Franchise revenues and fees decreased 8.6% to $1.8 million for the quarter ended September 8, 1997, from $2.0 million for the quarter ended September 9, 1996. This was a result of a net decrease of two franchised restaurants and a decline in average franchise restaurant sales since September 9, 1996. The Company recognizes franchise fees as revenues when the Company has substantially completed its obligations under the franchise agreement, usually at the opening of the franchised restaurant. Modular restaurant package revenues decreased 39.1% to $150,000 for the quarter ended September 8, 1997, from $247,000 for the quarter ended September 9, 1996. Modular restaurant package revenues are recognized on the percentage of completion method during the construction process; therefore, a substantial portion of the modular restaurant package revenues and costs are recognized prior to the opening of a Restaurant or shipment to a convenience store operator. COSTS AND EXPENSES. Restaurant food and paper costs totalled $9.7 million or 31.6% of net Restaurant sales for the quarter ended September 8, 1997, compared to $12.4 million or 35.6% of net restaurant sales for the quarter ended September 9, 1996. The actual decrease in food and paper costs was due primarily to the decrease in net restaurant sales while the decrease in these costs as a percentage of net restaurant sales was due to new purchasing contracts negotiated in the first quarter of 1997. Restaurant labor costs, which includes restaurant employees' salaries, wages, benefits and related taxes, totalled $9.9 million or 32.1% of net restaurant sales for the quarter ended September 8, 1997, compared to $13.1 million or 37.7% of net restaurant sales for the quarter ended September 9, 1996. The decrease in restaurant labor costs as a percentage of net restaurant sales was due primarily to various Restaurant level initiatives implemented in the first quarter of 1997. Restaurant occupancy expense, which includes rent, property taxes, licenses and insurance, totalled $2.8 million or 9.1% of net restaurant sales for the quarter ended September 8, 1997, compared to $3.2 million or 9.1% of net restaurant sales for the quarter ended September 9, 1996. This decrease in restaurant occupancy costs was due primarily to a net reduction of 23 Company-operated Restaurants since September 9, 1996. Restaurant depreciation and amortization decreased 7.8% to $1.9 million for the quarter ended September 8, 1997, from $2.1 million for the quarter ended September 9, 1996, due primarily to fourth quarter 1996 impairments under the Statement of Financial Accounting Standards No. 121 and a net decrease of 23 Company-operated restaurants from September 9, 1996, to September 8, 1997. However, as percentage of net restaurant sales, these expenses increased to 6.2% for the quarter ended September 8, 1997 from 5.9% for the quarter ended September 9, 1996 because of the greater relative decline in sales. Advertising expense increased to $1.6 million or 5.2% of net restaurant sales for the quarter ended September 8, 1997, from $1.5 million or 4.3% of net restaurant sales for the quarter ended September 9, 1996. The percentage increase was due to higher sales volume in the third quarter of 1996 driven by a $.99 chicken sandwich promotion. Other restaurant expenses includes all other Restaurant level operating expenses other than food and paper costs, labor costs, and occupancy expenses which includes supplies, utilities, maintenance and other costs. These expenses totalled $3.1 million or 10.1% of net restaurant sales for the quarter ended September 8, 1997, compared to $3.7 million or 10.7% of net restaurant sales for the quarter ended September 9, 1996. The actual decrease in these expenses as well as the decrease as a percentage of net restaurant sales was primarily related to tighter spending controls implemented in the second quarter of 1997. Costs of modular restaurant package revenues totalled $150,000 or 99.8% of modular restaurant package revenues for the quarter ended September 8, 1997, compared to $382,000 or 154.7% of such revenues for the quarter ended September 9, 1996. The decrease in these expenses as a percentage of modular restaurant package revenues was attributable to the elimination of various excess fixed costs in the first quarter of 1997. General and administrative expenses were $3.4 million or 10.3% of total revenues, for the quarter ended September 8, 1997, compared to $6.3 million or 17.0% of total revenues for the 16 quarter ended September 9, 1996. Third quarter 1996 general and administrative expenses were increased by accounting charges of $2.1 million consisting of $499,644 in unusual bad debt expenses, $750,000 provision for state sales tax audits and $845,775 write-off of capitalized costs incurred in connection with the Company's previous lending arrangements with its bank group. The actual decrease in normal recurring general and administrative expenses of $816,000 was mostly attributable to a reduction in corporate staffing early in 1997. OTHER ACCOUNTING CHARGES AND LOSS PROVISIONS. The Company recorded accounting charges and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which consisted of various selling, general and administrative expenses. Provisions totalling $14.2 million to close 27 Restaurants, relocate 22 of them ($4.2 million), settle 16 leases on real property underlying these stores ($1.2 million) and sell land underlying the other 11 Restaurants ($307,000), and impairment charges related to an additional 28 under-performing Restaurants ($8.5 million) were recorded. A loss provision of $500,000 was also recorded to adjust Champion's finished buildings inventory to fair market value. INTEREST EXPENSE. Interest expense other than loan cost amortization decreased to $1.0 million or 3.2% of total revenues for the quarter ended September 8, 1997, from $1.3 million or 3.6% of total revenues for the quarter ended September 9, 1996. This decrease was due to a reduction in the weighted average balance of debt outstanding during the respective periods. INCOME TAX BENEFIT. Due to the loss for the quarter, the Company recorded an income tax benefit of $660,000 or 38.0% of the loss before income taxes which was completely offset by a deferred income tax valuation allowance of $660,000 for the quarter ended September 8, 1997, as compared to an income tax benefit of $8.6 million or 38.0% of earnings before income taxes, offset by a deferred income tax allowance of $10.3 million resulting in a net tax expense of $1.7 million for the quarter ended September 9, 1996. The effective tax rates differ from the expected federal tax rate of 35.0% due to state income taxes and job tax credits. NET LOSS. The net loss for the quarter was $1.7 million. The net loss to common shareholders was $2.4 million or $.04 per share after deducting preferred dividends. This net loss was impacted by the expensing of $445,000 in deferred loan costs in the quarter ended September 8, 1997. Net loss before tax, impairment of long-lived assets, losses on assets to be disposed of, accounting charges and loss provisions and deferred loan cost amortization was $1.3 million or $.02 per share for the quarter ended September 8, 1997, and $5.7 million or $.11 per share for the quarter ended September 9, 1996, which resulted primarily from an increase in the average Restaurant margins, decreases in general and administrative expenses and interest expense other than loan cost amortization, partially offset by a decrease in royalties and franchise fees. COMPARISON OF HISTORICAL RESULTS - THREE QUARTERS ENDED SEPTEMBER 8, 1997 AND THREE QUARTERS ENDED SEPTEMBER 9, 1996 REVENUES. Total revenues decreased 11.9% to $100.6 million for the three quarters ended September 8, 1997, compared to $114.2 million for the three quarters ended September 9, 1996. Company-operated net restaurant sales decreased 11.4% to $95.0 million for the three quarters ended September 8, 1997, from $107.2 million for the three quarters ended September 9, 1996. Net restaurant sales for comparable Company-owned Restaurants for the three quarters ended September 8, 1997, decreased 9.5% compared to the three quarters ended September 9, 1996. Comparable Company-owned Restaurants are those continuously open during both reporting periods. These decreases in net restaurant sales and comparable net restaurant sales are primarily attributable to a highly competitive environment during the first three quarters of 1997 and the Company's 1997 focus on cutting costs and developing a new advertising campaign for the remainder of 1997. Franchise revenues and fees decreased 15.7% to $5.1 million for the three quarters ended September 8, 1997, from $6.1 million for the three quarters ended September 9, 1996. This was a result of a net decrease of two franchised restaurants and a decline in average franchise restaurant sales since September 9, 1996. The Company recognizes franchise fees as revenues when the Company has substantially completed its obligations under the franchise agreement, usually at the opening of the franchised Restaurant. Modular restaurant package revenues decreased 44.7% to $494,000 for the three quarters ended September 8, 1997, from $893,000 for the three quarters ended September 9, 1996. Modular restaurant package revenues are recognized on the percentage of completion method during the construction process; therefore, a substantial portion of the modular restaurant package revenues and costs are recognized prior to the opening of a Restaurant or shipment to a convenience store operator. COSTS AND EXPENSES. Restaurant food and paper costs totalled $31.2 million or 32.9% of net Restaurant sales for the three quarters ended September 8, 1997, compared to $37.1 million or 34.6% of net restaurant sales for the three quarters ended September 9, 1996. The actual decrease in food and paper costs was due primarily to the decrease in net restaurant sales while the decrease in these costs as a percentage of net restaurant sales was due to new purchasing contracts negotiated in the first two quarters of 1997. Restaurant labor costs, which includes restaurant employees' salaries, wages, benefits and related taxes, totalled $31.0 million or 32.7% of net restaurant sales for the three quarters ended September 8, 1997, compared to $38.3 million or 35.8% of net restaurant sales for the three quarters ended September 9, 1996. The decrease in restaurant labor costs as a percentage of net restaurant sales was due primarily to various Restaurant level initiatives implemented in the first quarter of 1997. 17 Restaurant occupancy expense, which includes rent, property taxes, licenses and insurance, totalled $8.0 million or 8.5% of net restaurant sales for the three quarters ended September 8, 1997, compared to $8.8 million or 8.2% of net restaurant sales for the three quarters ended September 9, 1996. This increase in restaurant occupancy costs as a percentage of net restaurant sales was due primarily to the decline in average net restaurant sales relative to the fixed and semi-variable nature of these expenses and the acquisition of interests in 12 Restaurants in the high cost Chicago market in the third quarter of 1996. Restaurant depreciation and amortization decreased 4.8% to $5.7 million for the three quarters ended September 8, 1997, from $6.0 million for the three quarters ended September 8, 1996, due primarily to fourth quarter 1996 impairments under the Statement of Financial Accounting Standards No. 121 and a net decrease of 23 Company-operated restaurants from September 8, 1996, to September 8, 1997. However, as percentage of net restaurant sales, these expenses increased to 6.0% for the quarter ended September 8, 1997 from 5.6% for the quarter ended September 9, 1996 because of the greater relative decline in sales. Advertising expense increased to $4.8 million or 5.1% of net restaurant sales for the three quarters ended September 8, 1997, from $3.6 million or 3.4% of net restaurant sales for the three quarters ended September 9, 1996. The increase in this expense was due to decreased utilization of coupons in lieu of advertising dollars in 1997 and the first and second quarter 1996 capitalization of television production costs that were expensed later in 1996. Other restaurant expenses includes all other Restaurant level operating expenses other than food and paper costs, labor costs, rent and occupancy expenses which include supplies, utilities, maintenance and other costs. These expenses totalled $9.5 million or 10.0% of net restaurant sales for the three quarters ended September 8, 1997, compared to $10.0 million or 9.3% of net restaurant sales for the three quarters ended September 9, 1996. The increase in the three quarters ended September 8, 1997, as a percentage of net restaurant sales was primarily related to the decline in average net restaurant sales relative to the fixed and semi-variable nature of these expenses, and increased spending on repair and maintenance as part of a program to improve the visual appeal of the restaurants. Costs of modular restaurant package revenues totalled $439,000 or 88.8% of modular restaurant package revenues for the three quarters ended September 8, 1997, compared to $1.4 million or 154.7% of such revenues for the three quarters ended September 9, 1996. The decrease in these expenses as a percentage of modular restaurant package revenues was attributable to the elimination of various excess fixed costs in the first quarter of 1997. General and administrative expenses were $10.3 million or 10.2% of total revenues, for the three quarters ended September 8, 1997, compared to $13.6 million or 11.9% of total revenues for the three quarters ended September 9, 1996. Third quarter 1996 general and administrative expenses were increased by accounting charges of $2.1 million consisting of $499,644 in unusual bad debt expenses, $750,000 provision for state sales tax audits and $845,775 write-off of capitalized costs incurred in connection with the Company's previous lending arrangements with its bank group. The actual decrease in normal recurring general and administrative expenses of $1.6 million was mostly attributable to a reduction in corporate staffing early in 1997. This reduction was partially offset by $350,000 of costs incurred as a result of terminated merger negotiations with Rally's Hamburgers, Inc., resulting in a reported decrease of $1.2 million before 1996 accounting charges. OTHER ACCOUNTING CHARGES AND LOSS PROVISIONS. The Company recorded accounting charges and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which consisted of various selling, general and administrative expenses. Provisions totalling $14.2 million to close 27 Restaurants, relocate 22 of them ($4.2 million), settle 16 leases on real property underlying these stores ($1.2 million) and sell land underlying the other 11 Restaurants ($307,000), and impairment charges related to an additional 28 under-performing Restaurants ($8.5 million) were recorded. A loss provision of $500,000 was also recorded to adjust Champion's finished buildings inventory to fair market value. INTEREST EXPENSE. Interest expense other than loan cost amortization was $3.6 million or 3.5% of total revenues for the three quarters ended September 8, 1997, and $3.9 million or 3.4% of total revenues for the three quarters ended September 9, 1996. This decrease was due to a reduction in the weighted average balance of debt outstanding during the respective periods, partially offset by an increase in the Company's effective interest rates since the second quarter of 1996. INCOME TAX BENEFIT. Due to the loss for the three quarters, the Company recorded an income tax benefit of $3.2 million or 38.0% of the loss before income taxes which was completely offset by a deferred income tax valuation allowance of $3.2 million for the three quarters ended September 8, 1997, as compared to an income tax benefit of $1.1 million or 38.0% of earnings before income taxes, offset a deferred income tax valuation allowance of $10.3 million resulting in a net tax expense of $626,000 for the three quarters ended September 9, 1996. The effective tax rates differ from the expected federal tax rate of 35.0% due to state income taxes and job tax credits. NET LOSS. The net loss for the three quarters was $8.4 million. The net loss to common shareholders was $9.1 million or $0.15 per share after deducting preferred dividends. This net loss was significantly impacted by the expensing of $3.1 million in deferred loan costs and $350,000 in terminated merger costs in the three quarters ended September 8, 1997. Net loss before tax, deferred loan cost amortization, terminated merger cost s and accounting charges and loss provisions was 18 $4.9 million or $.08 per share for the three quarters ended September 8, 1997, and $8.5 million or $.16 per share for the three quarters ended September 9, 1996. This decrease in net loss before tax and other above mentioned charges was primarily attributable to an increase in average Restaurant margins and a decline in general and administrative expenses and interest expense other than loan cost amortization, partially offset by lower levels of net Restaurant sales and a decrease in royalties and franchise fees. LIQUIDITY AND CAPITAL RESOURCES On July 29, 1996, the debt under the Company's prior bank loan agreement (the "Loan Agreement") and credit line ("Credit Line") was acquired from a Bank Group by an investor group led by an affiliate of DDJ Capital Management, LLC (collectively, "DDJ"). On November 14, 1996, the debt under the Loan Agreement and Credit Line was acquired from DDJ by a group of entities and individuals, most of whom are engaged in the fast food restaurant business. This investor group (the "CKE Group") was led by CKE Restaurants, Inc., the parent of Carl Karcher Enterprises, Inc., Casa Bonita, Inc., and Summit Family Restaurants, Inc. Also participating were most members of the DDJ Group, as well as KCC Delaware Company, a wholly-owned subsidiary of GIANT GROUP, LTD., which is a principal shareholder of Rally's Hamburgers, Inc. On November 22, 1996, the Company and the CKE Group executed an Amended and Restated Credit Agreement (the "Restated Credit Agreement") thereby completing a restructuring of the debt under the Loan Agreement. The Restated Credit Agreement consolidated all of the debt under the Loan Agreement and the Credit Line into a single obligation. At the time of the restructuring, the outstanding principal balance under the Loan Agreement and the Credit Line was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the term of the debt was extended by one (1) year until July 31, 1999, and the interest rate payable to the CKE Group on the indebtedness was reduced to a fixed rate of 13%. In addition, all principal payments were deferred until May 19, 1997, and the CKE Group agreed to eliminate certain financial covenants, to relax others and to eliminate approximately $4.3 million in cash loan fees under the Loan Agreement. The Restated Credit Agreement also provided that certain members of the CKE Group agreed to provide to the Company a short term revolving line of credit of up to $2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit Line"). In consideration for the restructuring, the Restated Credit Agreement required the Company to issue to the members of the CKE Group warrants to purchase an aggregate of 20 million shares of the Companys' common stock at an exercise price of $.75 per share, which was the approximate market price of the common stock prior to the announcement of the debt transfer. As of September 8, 1997, the Company has reduced the principal balance under the Restated Credit Agreement by $9.4 million and has repaid the Secondary Credit Line in full. A portion of the funds utilized to make these principal reduction payments were obtained by the Company from the sale of certain closed restaurant sites to third parties. Additionally, the Company utilized $10.5 million of the proceeds from the February 21, 1997, private placement which is described later in this section. Pursuant to the Restated Credit Agreement, the prepayments of principal made in 1996 and early in 1997 will relieve the Company of the requirement to make any of the regularly scheduled principal payments under the Restructured Credit Agreement which would have otherwise become due in fiscal year 1997 through maturity. The Amended and Restated Credit Agreement provides however, that 50% of any future asset sales must be utilized to prepay principal. The Company has outstanding promissory notes in the aggregate principal and interest amount of approximately $3.5 million as of October 9, 1997 (the "Notes") payable to Rall-Folks, Inc. ("Rall-Folks"), Restaurant Development Group, Inc. ("RDG") and Nashville Twin Drive-Through Partners, L.P. ("N.T.D.T."). The Company had agreed to acquire the Notes issued to Rall-Folks and RDG in consideration of the issuance of an aggregate of approximately 1.9 million shares of Common Stock and the Note issued to NTDT in exchange for a convertible note in the same principal amount and convertible into approximately 614,000 shares of Common Stock pursuant to purchase agreements entered into in 1995 and subsequently amended. All three of the parties received varying degrees of protection on the purchase price of the promissory notes. Accordingly, the actual number of shares to be issued will be determined by the market price of the Company's stock. The Company was not able to consummate these transactions as originally scheduled. Pursuant to the most recent amendment, consummation of the Rall-Folks, RDG and NTDT purchases is to occur prior to December 16, November 25, and November 15, 1997, respectively, subject to extension in certain cases. The Company does not currently have sufficient cash available to pay one or more of these notes if required to do so. On February 21, 1997, the Company completed a private placement (the "Private Placement") of 8,771,929 shares of the Company's common stock, $.001 par value, and 87,719 shares of the Company's Series A preferred stock, $.001 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased 6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and other qualified investors, including other members of the CKE Group of lenders under the Restated Credit Agreement, also participated in the Private Placement. The Company received approximately $19.5 million in net proceeds from the Private Placement. The Company used $8 million of the Private Placement proceeds to reduce the principal balance due under the Restated Credit Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3 million was utilized to pay outstanding balances to various key food and paper distributors; and the remaining amount was used primarily to pay down outstanding balances due certain other vendors. The reduction of the debt under the Restated Credit Agreement and the Secondary Credit Line, both of which carry a 13% interest rate will reduce the Company's interest expense by more than $1.3 million annually. 19 On August 6, 1997, the 87,719 shares of preferred stock were converted into 8,771,900 shares of the Company's common stock valued at $9,999,966. In accordance with the agreement underlying the Private Placement (the "Private Placement Agreement"), the Company also issued 610,524 shares of common stock as a dividend pursuant to the liquidation preference provisions of the Private Placement Agreement, valued at $696,000 to the holders of the preferred stock issued in the Private Placement. In the fiscal year ended December 30, 1996, the Company raised approximately $1.8 million from the sale of various of its assets to third parties, including both personal and excess real property from closed or undeveloped Restaurant locations. Under the terms of the Loan Agreement and the Restated Credit Agreement, approximately 50% of those sales proceeds were utilized to reduce outstanding principal. The Company also received $3.5 million in connection with the reduction of a note receivable which funds were generally used to supplement working capital. During the first three quarters of 1997, the Company sold nine parcels of excess real property and ten MRP's resulting in net proceeds to the Company of $3.1 million. As of September 8, 1997 the Company owns or leases approximately 39 parcels of excess real property which it intends to continue to aggressively market to third parties, and has an inventory of approximately 32 used MRP's which it intends to continue to aggressively market to franchisees and third parties. There can be no assurance that the Company will be successful in disposing of these assets, and 50% of the proceeds from the sale of excess real property must be used to reduce the principal balance under the Restated Credit Agreement. The Company has negative working capital of $14.5 million at September 8, 1997 (determined by subtracting current liabilities from current assets). It is anticipated that the Company will continue to have negative working capital since approximately 86.2% of the Company's assets are long-term (property, equipment, and intangibles), and since all operating trade payables, accrued expenses, and property and equipment payables are current liabilities of the Company. The Company has not reported a profit for any quarter since September 1994. The Company currently does not have significant development plans for additional Company Restaurants during fiscal 1997. The Company implemented aggressive programs at the beginning of fiscal year 1997 designed to improve food, paper and labor costs in the Restaurants. These costs totalled 63.6% and 63.7% of net restaurant revenues in the second and third quarters of 1997, respectively, compared to 72.1% of net restaurant revenues in fiscal 1996, despite a 6.4% decrease in Company owned same store sales in the third quarter of 1997 as compared to the third quarter of the prior year. The Company also reduced the corporate and regional staff by 32 employees in the beginning of fiscal year 1997. Overall, the Company believes many of the fundamental steps have been taken to improve the Company's initiative toward profitability, but there can be no assurance that it will be able to do so. Management believes that cash flows generated from operations, asset sales and the Private Placement should allow the Company to continue to meet its financial obligations and to pay operating expenses. The Company must, however, also successfully consummate the purchase of the Rall-Folks Notes, the RDG Note and the NTDT Note for Common Stock. If the Company is unable to consummate one or more of those transactions, and if the Company is thereafter unable to reach some other arrangements with Rall Folks, RDG or NTDT, the Company may default under the terms of the Restated Credit Agreement. The Company's prior operating results are not necessarily indicative of future results. The Company's future operating results may be affected by a number of factors, including: uncertainties related to the general economy; competition; costs of food and labor; the Company's ability to obtain adequate capital and to continue to lease or buy successful sites and construct new Restaurants; and the Company's ability to locate capable franchisees. The price of the Company's common stock can be affected by the above. Additionally, any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in a given period. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: None, except as previously reported in the Company's Form 10-Q for the quarter ended March 24, 1997. ITEM 2. CHANGES IN SECURITIES On August 6, 1997, the Shareholders of the Company approved the conversion of all 87,719 outstanding shares of Series A Preferred Stock. Upon such approval, the Series A Preferred Stock converted to 9,382,414 shares of the Company's common stock pursuant to the terms of the Certificate of Designation of Series A Preferred Stock of the Company filed with the Secretary of State of the State of Delaware on February 18, 1997. The Company claimed an exemption under Section 4(2) of the Securities Act of 1933. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: The Annual Meeting of Stockholders of the Company was held on August 6, 1997. At the meeting, the following actions were taken by the stockholders: 1. Burt Sugarman and Jean Giles-Wittner were elected as Directors to serve until the Annual Meeting in the year 2000 and until their successors are elected and qualified or until their resignation, removal from office or death. The votes cast for and against each were as follows: Name For Against Burt Sugarman 47,610,065 703,792 Jean Giles-Wittner 47,596,208 717,649 2. A proposal to amend the Company's Certificate of Incorporation to increase the authorized shares of the Company's Common Stock by 50,000,000 shares was approved. The voting on the proposal was as follows: For: 46,247,839 Against: 1,815,931 Abstain: 250,087 3. The Company's capital restructuring, including the conversion os Series A Preferred Stock in Common Stock was ratified. The voting on the proposal was as follows: For: 17,975,302 Against: 1,044,709 Abstain: 336,594 4. A proposal to amend the Company's 1991 Stock Option Plan (the "Plan") to increase the number of shares of Common Stock subject to the Plan by 1,500,000 shares was approved. The voting on the proposal was as follows: For: 16,424,783 Against: 2,428,224 Abstain: 503,598 5. A proposal to amend the Company's 1994 Stock Option Plan for non-employee Directors (the "Directors Plan") to increase the number of shares of Common Stock subject to the Director's Plan by 4,800,000, to specify certain additional automatic grants to non-employee Directors, to provide that future options granted under the Director's Plan will vest immediately and to provide that, in general, options granted under the Director's Plan do not terminate if the grantee ceases to be a non-employee Director was approved. The voting in the proposal was as follows: For: 16,635,907 Against: 2,268,045 Abstain: 452,653 6. The appointment of KPMG Peat Marwick as the Company's independent auditors for the year 1997 was ratified and approved. The voting on the proposal was as follows: For: 47,742,739 Against: 295,187 Abstain: 275,931 ITEM 5. OTHER INFORMATION: In October 1997, the Company and Rally's Hamburgers, Inc. ("Rally's") entered into an employment agreement with James J. Gillespie, whereby, effective November 10, 1997, Mr. Gillespie will serve as Chief Executive Officer, and on the Boards of Directors, of the Company and Rally's. Mr. Gillespie served as President of the Applebee's Division of Apple South, Inc., franchisee of 254 Applebee restaurants from January to October 1997. Prior thereto, Mr. Gillespie served since 1976 in various capacities with Long John Silver's Inc., operator and franchisor of Long John Silver's restaurants, including as Senior Vice President - Franchise Operations and, prior to that position, as Divisional Vice President, Southwest Division. Checkers and Rally's intend to share the costs related to Mr. Gillespie's employment. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27 Financial Data Schedule (included in electronic filing only). (b) Reports on 8-K: There were no reports on Form 8-K filed during the quarter covered by this report. 22 SIGNATURE - --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Checkers Drive-In Restaurants, Inc. ----------------------------------- (Registrant) Date: October 22, 1997 By: /s/ Joseph N. Stein ------------------------------------------------- Joseph N. Stein Executive Vice President, Chief Financial Officer and Chief Accounting Officer 23 September 8, 1997 FORM 10-Q CHECKERS DRIVE-IN RESTAURANTS, INC. EXHIBIT INDEX Exhibit # Exhibit Description --------- ------------------- 27 Financial Data Schedule (included in electronic filing only).
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EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements of Checkers Drive-in Restaurants, Inc., for the quarterly period ended September 8, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 OTHER DEC-29-1997 DEC-31-1996 SEP-08-1997 3,721 0 2,427 0 2,045 16,724 132,180 42,216 121,300 31,234 38,507 0 0 70 51,300 121,300 95,481 100,603 90,800 102,623 (298) 0 6,666 (8,388) 0 (8,388) 0 0 0 (8,388) (.15) 0 Footnote (1): Receivables consist of -- Accounts Receivable - net $1,810 Notes Receivable 617 --------- $2,427 ========= 25
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