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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1997 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.)
600 Cleveland Street, Eighth Floor
Clearwater, Florida 33755
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 441-3500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 16, 1998, was $54,260,752 based upon the reported
closing sale price of such shares on the Nasdaq Stock Market's National Market
for that date. As of March 16, 1998, there were 73,406,112 common shares
outstanding.
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
This document, including exhibits, contains 83 pages. The exhibit index is
located on page 58.
CHECKERS DRIVE-IN RESTAURANTS, INC.
1997 Form 10-K Annual Report
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TABLE OF CONTENTS
PART I
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ITEM 1. BUSINESS.................................................................................................. 3
ITEM 2. PROPERTIES................................................................................................ 12
ITEM 3. LEGAL PROCEEDINGS......................................................................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................... 14
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................................................................... 14
ITEM 6. SELECTED FINANCIAL DATA................................................................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................................................... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................ 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................................................................... 52
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................ 52
ITEM 11. EXECUTIVE COMPENSATION.................................................................................... 52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................ 52
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.......................................... 53
2
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K under "Item 1. Business," "Item 3. Legal
Proceedings," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Form 10-K constitute
"forward-looking statements" within the meaning of the Securities Act of 1933
and the Securities Exchange Act of 1934. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors which may cause the
actual results, performance, or achievements of Checkers Drive-In Restaurants,
Inc. ("Checkers" and collectively with its subsidiaries and various joint
venture partnerships controlled by Checkers, 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; development
and operating costs; advertising and promotional efforts; adverse publicity;
acceptance of new product offerings; consumer trial and frequency; availability,
locations, and terms of sites for restaurant development; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; the results of financing efforts; business abilities and
judgment of personnel; availability of qualified personnel; food, labor and
employee benefit costs; changes in, or the failure to comply with, government
regulations; weather conditions; construction schedules; and other factors
referenced in this Form 10-K.
ITEM 1. BUSINESS.
Introduction
Unless the context requires otherwise, references in this
Report to the "Company" or the "Registrant" means Checkers Drive-In Restaurants,
Inc., its wholly-owned subsidiaries and the 10.55% to 65.83% owned joint venture
partnerships controlled by the Company.
The Company develops, produces, owns, operates and franchises
quick-service "double drive-thru" restaurants under the name "Checkers(R)" (the
"Restaurants"). The Restaurants are designed to provide fast and efficient
automobile-oriented service incorporating a 1950's diner and art deco theme with
a highly visible, distinctive and uniform look that is intended to appeal to
customers of all ages. The Restaurants feature a limited menu of high quality
hamburgers, cheeseburgers and bacon cheeseburgers, specially seasoned french
fries, hot dogs, and chicken sandwiches, as well as related items such as soft
drinks and old fashioned premium milk shakes.
As of December 29, 1997, there were 479 Restaurants operating
in the States of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa,
Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New
York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Virginia,
West Virginia, Wisconsin, Washington D.C., in Puerto Rico and West Bank, Israel
(230 Company-operated (including 12 joint ventured) and 249 franchised).
As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a fiscal year which will generally end
on the Monday closest to December 31st. Each quarter consists of three 4-week
periods, with the exception of the fourth quarter which consists of four 4-week
periods.
Recent Developments
Effective November 30, 1997, the Company entered into a
management services agreement with Rally's Hamburgers, Inc. ("Rally's") pursuant
to which the Company is providing key services to Rally's, including executive
management, financial planning and accounting, franchise administration,
purchasing and human resources. In addition, the Company and Rally's share
certain of their executive officers, including the Chief Executive Officer and
the Chief Operating Officer. Management believes that entering into the
management services agreement and sharing certain executive officers will enable
the Company and Rally's to take advantage of cost saving opportunities by
facilitating the combination of administrative and operational functions. See
"Item 7. Managements's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 5 to the Consolidated Financial Statements set
forth under "Item 8. Consolidated Financial Statements and Supplementary Data".
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On December 18, 1997, Rally's acquired approximately 19.1
million shares of the Company's Common Stock pursuant to that certain Exchange
Agreement, dated as of December 8, 1997 (the "Exchange Agreement"), between
Rally's, CKE Restaurants, Inc., Fidelity National Financial, Inc., GIANT GROUP,
LTD., and other parties named in the Exchange Agreement. Rally's owns, operates
and franchises approximately 477 double drive-thru restaurants primarily in the
Midwest and the Sunbelt.
Restaurant Development and Acquisition Activities
During 1997, the Company opened one Restaurant, acquired or
leased five Restaurants from franchisees, leased one Restaurant to a franchisee
and closed seven Restaurants for a net reduction of two Company-operated
Restaurants in 1997. Franchisees opened 24 Restaurants, leased one Restaurant
from the Company, sold or transferred five Restaurants to the Company and closed
16 Restaurants for a net increase of three franchisee-operated Restaurants in
1997.
During 1997, the Company focused its efforts on existing
operating markets of highest market penetration ("Core Markets"). It is the
Company's intent in the future to continue that focus and to grow only in its
Core Markets through acquisitions, new Restaurant openings or through other
growth opportunities. The Company will continue to seek to expand through
existing and new franchisees. From time to time, the Company may close or sell
additional Restaurants when determined by management and the Board of Directors
to be in the best interests of the Company.
Franchisees operated 249, or 52%, of the total Restaurants
open at December 29, 1997. The Company's long-term strategy is for 60% to 65% of
its Restaurants to be operated by franchisees. Because of the Company's limited
capital resources, it will rely on franchisees for a larger portion of chain
expansion to continue market penetration. The inability for franchisees to
obtain sufficient financing capital on a timely basis may have a materially
adverse effect on expansion efforts.
Restaurant Operations
Concept. The Company's operating concept includes: (i)
offering a limited menu to permit the maximum attention to quality and speed of
preparation; (ii) utilizing a distinctive Restaurant design that features a
"double drive-thru" concept, projects a uniform image and creates significant
curb appeal; (iii) providing fast service using a "double drive-thru" design for
its Restaurants and a computerized point-of-sale system that expedites the
ordering and preparation process; and (iv) great tasting quality food and drinks
at a fair price.
Restaurant Locations. As of December 29, 1997, there were 230
Restaurants owned and operated by the Company in 11 states and the District of
Columbia (including 14 Restaurants owned by partnerships in which the Company
has interests ranging from 10.55% to 65.83%) and 249 Restaurants operated by the
Company's franchisees in 24 States, the District of Columbia , Puerto Rico and
West Bank, Israel. The following table sets forth the locations of such
Restaurants.
Company-operated
(230 Restaurants)
Florida(135) Missouri(5) Kansas(2)
Georgia(37) Mississippi(5) Delaware (1)
Pennsylvania(13) Tennessee(5) New Jersey (4)
Alabama(12)
Illinois (11)
Franchised
(249 Restaurants)
Florida(55) Texas(4) New York(6)
Illinois(24) New Jersey(10) Puerto Rico(6)
Georgia(48) Tennessee(5) West Virginia(2)
Alabama(20) Virginia(4) Missouri(2)
North Carolina(14) Wisconsin (4) Iowa(2)
South Carolina(9) Indiana(3) Mississippi(1)
Maryland(15) Michigan(3) Washington D.C.(2)
Louisana(9) West Bank, Israel(1)
Of these Restaurants, 25 were opened in 1997 (one Company-operated and 24
franchised), two of which
4
included fully equipped manufactured modular buildings, "Modular Restaurant
Packages" ("MRP's"), produced by the Company and 14 of which included MRP's
which were relocated from closed sites. The Company currently expects
approximately 30 additional Restaurants to be opened in 1998 primarily by
franchisees with substantially all of these Restaurants to include MRP's
relocated from closed sites. If either the Company or the franchisee(s) are
unable to obtain sufficient capital on a timely basis, the Company's ability to
achieve its 1998 expansion plans may be materially adversely affected. The
Company's growth strategy for the next two years is to focus on the controlled
development of additional franchised and Company-operated Restaurants primarily
in its existing Core Markets and to further penetrate markets currently under
development by franchisees, including select international markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Site Selection. The Company believes that the location of a
Restaurant is critical to its success. Management inspects and approves each
potential Restaurant site prior to final selection of the site. In evaluating
particular sites, the Company considers various factors including traffic count,
speed of traffic, convenience of access, size and configuration, demographics
and density of population, visibility and cost. The Company also reviews
competition and the sales and traffic counts of national and regional chain
Restaurants operating in the area. Approximately 84% of Company-operated
Restaurants are located on leased land and the Company intends to continue to
use leased sites where possible. The Company believes that the use of the
Modular Restaurant Package provides the Company and its franchisees with
additional flexibility in the size, control and location of sites.
Restaurant Design and Service. The Restaurants are built to
Company-approved specifications as to size, interior and exterior decor,
equipment, fixtures, furnishings, signs, parking and site improvements. The
Restaurants have a highly visible, distinctive and uniform look that is intended
to appeal to customers of all ages. The Restaurants are less than one-fourth the
size of the typical Restaurants of the four largest fast food hamburger chains
(generally 760 to 980 sq. ft.) and require approximately one-third to one-half
the land area (approximately 18,000 to 25,000 square feet). Substantially all of
the Restaurants in operation consist of MRP's produced and installed by the
Company. Prior to February 15, 1994, the MRP's were produced and installed by
Champion Modular Restaurant Company, Inc., a Florida corporation ("Champion")
and wholly-owned subsidiary of the Company. Champion was merged with and into
the Company effective February 15, 1994. During periods when the Champion
construction facility is operating at an efficient production level, the Company
believes that utilization of a modular Restaurant building generally costs less
than comparably built Restaurants using conventional, on-site construction
methods. See discussion under "Restaurant Development Cost" below.
The Company's standard Restaurant is designed around a 1950's
diner and art deco theme with the use of white and black tile in a checkerboard
motif, glass block corners, a protective drive-thru cover on each side of the
Restaurant supported by red aluminum columns piped with white neon lights and a
wide stainless steel band piped with red neon lights that wraps around the
Restaurant as part of the exterior decor. Most Restaurants utilize a "double
drive-thru" concept that permits simultaneous service of two automobiles from
opposite sides of the Restaurant. Although a substantial proportion of the
Company's sales are made through its drive-thru windows, service is also
available through walk-up windows. While the Restaurants normally do not have an
interior dining area, most have parking and a patio for outdoor eating. The
patios contain canopy tables and benches, are well landscaped and have outside
music in order to create an attractive and "fun" eating experience. Although
each sandwich is made-to-order, the Company's objective is to serve customers
within 30 seconds of their arrival at the drive-thru window. Each Restaurant has
a computerized point-of-sale system which displays each individual item ordered
on a monitor in front of the food and drink preparers. This enables the
preparers to begin filling an order before the order is completed and totaled
and thereby increases the speed of service to the customer and the opportunity
of increasing sales per hour, provides better inventory and labor costs control
and permits the monitoring of sales volumes and product utilization. The
Restaurants are generally open from 12 to 15 hours per day, seven days a week,
for lunch, dinner and late-night snacks and meals.
Restaurant Development Costs. During the fiscal years ended
December 29, 1997 and December 30, 1996 the average cost of opening a
Company-operated Restaurant (exclusive of land costs) utilizing MRP's was
$375,000 which included modular building costs, fixtures, equipment and signage
costs, site improvement costs and various soft costs (e.g., engineering and
permit fees). This average dropped 11.6% from 1995 due to the availability and
use of used MRP's in 1996 and 1997. Future costs, after all remaining used MRP's
are relocated, may be more consistent with that of prior years. During 1996 and
1997, there were no land acquisitions. During periods when the Champion
construction facility is operating at an efficient production level, the Company
believes that utilization of MRP's generally costs less than comparably built
Restaurants using conventional, on-site construction methods. The Company
believes it is even more cost effective to utilize used MRP's when available. At
such time as there are no longer used MRP's available, but demand for new MRP's
is not sufficient to allow the Champion construction facility to operate at an
efficient level, it may become more cost effective to seek other manufacturers
of
5
MRP's or to build restaurants utilizing conventional, on site construction
methods.
Menu. The menu of a Restaurant includes hamburgers,
cheeseburgers and bacon cheeseburgers, chicken, grilled chicken, hot dogs and
deluxe chili dogs and specially seasoned french fries, as well as related items
such as soft drinks, old fashioned premium milk shakes and apple nuggets. The
menu is designed to present a limited number of selections to permit the
greatest attention to quality, taste and speed of service. The Company is
engaged in product development research and seeks to enhance the variety offered
to consumers from time to time without substantially expanding the limited menu.
In 1996, the Company and various franchise restaurants conducted a test of the
Company's proprietary L.A. Mex mexican brand. The Company decided to discontinue
the test in 1997.
Supplies. The Company and its franchisees purchase their food,
beverages and supplies from Company-approved suppliers. All products must meet
standards and specifications set by the Company. Management constantly monitors
the quality of the food, beverages and supplies provided to the Restaurants. The
Company has been successful in negotiating price concessions from suppliers for
bulk purchases of food and paper supplies by the Restaurants. The Company
believes that its continued efforts over time have achieved cost savings,
improved food quality and consistency and helped decrease volatility of food and
supply costs for the Restaurants. All essential food and beverage products are
available or, upon short notice, could be made available from alternate
qualified suppliers. Among other factors, the Company's profitability is
depended upon its ability to anticipate and react to changes in food costs.
Various factors beyond the Company's control, such as climate changes and
adverse weather conditions, may affect food costs.
Management and Employees. Each Company-operated Restaurant
employs an average of approximately 20 hourly employees, many of whom work
part-time on various shifts. The management staff of a typical Restaurant
operated by the Company consists of a general manager, one assistant manager and
a shift manager. The Company has an incentive compensation program for store
managers that provides the store managers with a quarterly bonus based upon the
achievement of certain defined goals. A Restaurant general manager is generally
required to have prior Restaurant management experience, preferably within the
fast food industry, and reports directly to a market manager. The market manager
typically has responsibility for eight to twelve Restaurants.
Supervision and Training. The Company requires each franchisee
and Restaurant manager to attend a comprehensive training program of both
classroom and in-store training. The program was developed by the Company to
enhance consistency of Restaurant operations and is considered by management as
an important step in operating a successful Restaurant. During this program, the
attendees are taught certain basic elements that the Company believes are vital
to the Company's operations and are provided with a complete operations manual,
together with training aids designed as references to guide and assist in the
day-to-day operations. In addition, hands-on experience is incorporated into the
program by requiring each attendee, prior to completion of the training course,
to work in and eventually manage an existing Company-operated Restaurant. After
a Restaurant is opened, the Company continues to monitor the operations of both
franchised and Company-operated Restaurants to assist in the consistency and
uniformity of operation.
Advertising and Promotion. The Company communicates with its
customers by employing a consistent and enticing approach to advertising and
promoting its products. Using television and radio commercials where efficient
and practical, as well as outdoor billboards and direct mail print advertising
in less densely penetrated markets, the Company informs the public about their
brand position and promotional product opportunities. When the customers arrive
at the restaurant, they are exposed to readerboard messages, pole banners,
menuboards, and value oriented extender cards, all of which work together to
present a simple, unified and coherent selling message at the time they are
making their purchase decisions. As of December 29, 1997, the Company and its
franchisees were working together in four advertising co-ops covering 186
restaurants. The Company requires franchisees to spend a minimum of 4% of gross
sales to promote their restaurants, which includes a combination of local store
marketing and co-op advertising. In addition, each Company and franchise
restaurant contributes to a National Production Fund that provides broadcast
creative and point of purchase material production for each promotion. Ongoing
consumer research is employed to track attitudes, brand awareness, and market
share of not only Checkers' customers, but also of its major competitor's
customers as well. In addition, customer focus groups and sensory panels are
conducted in the Company's core markets to provide both qualitative and
quantitative data. This research data is vital in creating a better
understanding of the Company's short and long term marketing strategies.
Brand Positioning: The Best Burger: The Company is in the process of
establishing an overall brand positioning as serving the BEST hamburger
in the fast food industry. This position will be supported by:
A. A limited menu of the highest quality hamburgers/
cheeseburgers, chicken sandwiches, seasoned French
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fries, soft drinks and milk shakes, all deliverable in a
double drive through format.
B. A new, creative positioning has been established. "Fresh.
Because we just made it.", allows the Company to take
advantage of the consumers' understanding that their food has
been freshly prepared, not retrieved from under a heat lamp or
microwave oven and given to them.
C. Television, radio, outdoor and direct mail print advertising
designed to differentiate the Company from other fast food
hamburger chains and to target heavy hamburger users.
The new brand positioning has been developed through extensive
research with the core user of the Company's products, as well as other fast
food hamburger users who might be convinced to become a loyal user. The long
range benefit of such a positioning is believed to help the Company compete more
favorably in an environment where quality and taste is much more difficult to
deliver on a consistent basis by the major fast food competitors, given the
operating systems of those competitors. Although good value and fast service are
still important to consumers, the competitive environment has remained so price
oriented in the past few years, that the Company's competitive advantage has
been seriously eroded. Further, the over reliance on price has placed immense
pressure on margins, as food, labor and other costs have continued to rise,
while the Company's ability to raise prices in the aforementioned competitive
climate has been restricted.
With a focus on a brand positioning that provides consumers
what they say they want from a fast food hamburger chain--quality hamburgers,
served quickly at a reasonable price--the Company believes it can begin to break
the cycle of low price only promotions, differentiate itself from its
competitors and improve sales and guest count trends over time.
Restaurant Reporting. Each Company-operated Restaurant has a
computerized point-of-sale system coupled with a back office computer. With this
system, management is able to monitor sales, labor and food costs, customer
counts and other pertinent information. This information allows management to
better control labor utilization, inventories and operating costs. Each system
at Company-operated Restaurants is polled daily by a computer at the principal
offices of the Company.
Year 2000 Issues. Many computer systems using two-digit fields
to store years must be converted to read four-digit fields before the turn of
the century in order to recognize the difference between the years 1900 and
2000. All major software systems of the Company are either in compliance with
the Year 2000 or upgraded software packages are scheduled to be installed to
meet that requirement. As a result, the Company expects these upgrades to cost
approximately $100,000 and believes the Year 2000 will not have a negative
effect on any major business process.
Joint Venture Restaurants. As of December 29, 1997, there were
12 Restaurants owned by 10 separate general and limited partnerships in which
the Company owns general and limited partnership interests ranging from 10.55%
to 65.83%, with other parties owning the remaining interests (the "Joint Venture
Restaurants"). The Company is the managing partner of 11 of the 12 Joint Venture
Restaurants. In all 12 Joint Venture Restaurants the Company receives a fee for
management services of 1% to 2.5% of gross sales. In addition, all of the Joint
Venture Restaurants pay the standard royalty fee of 4% of gross sales. The
agreements for four of the Joint Venture Restaurants (excluding Illinois
partnerships) in which the Company is the managing partner are terminable
through a procedure whereby the initiating party sets a price for the interest
in the joint venture and the other party must elect either to sell its interest
in the joint venture or purchase the initiating party's interest at such price.
Some, but not all of the partnership agreements also contain the right of the
partnership to acquire a deceased individual partner's interest at the fair
market value thereof based upon a defined formula set forth in the agreement.
None of these partnerships have been granted area development agreements.
Inflation. The Company does not believe inflation has had a
material impact on earnings during the past three years. Substantial increases
in costs could have a significant impact on the Company and the industry. If
operating expenses increase, management believes it can recover increased costs
by increasing prices to the extent deemed advisable considering competition.
Seasonality. The seasonality of Restaurant sales due to
consumer spending habits can be significantly affected by the timing of
advertising, competitive market conditions and weather related events. While
Restaurant sales for certain quarters can be stronger, or weaker, there is no
predominant pattern.
Franchise Operations
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Strategy. In addition to the acquisition and development of
additional Company-operated Restaurants, the Company encourages controlled
development of franchised Restaurants in its existing markets as well as in
certain additional states. The primary criteria considered by the Company in the
selection, review and approval of prospective franchisees are the availability
of adequate capital to open and operate the number of Restaurants franchised and
prior experience in operating fast food Restaurants. Franchisees operated 249,
or 52%, of the total Restaurants open at December 29, 1997. The Company has
acquired and sold, and may in the future acquire or sell, Restaurants from and
to franchisees when the Company believes it to be in its best interests to do
so. In the future, the Company's success will continue to be dependent upon its
franchisees and the manner in which they operate and develop their Restaurants
to promote and develop the Checkers concept and its reputation for quality and
speed of service. Although the Company has established criteria to evaluate
prospective franchisees, there can be no assurance that franchisees will have
the business abilities or access to financial resources necessary to open the
number of Restaurants the franchisees currently anticipate to be opened in 1998
or that the franchisees will successfully develop or operate Restaurants in
their franchise areas in a manner consistent with the Company's concepts and
standards.
As a result of inquiries concerning international development,
the Company may develop a limited number of international markets and has begun
the process of registering its trademarks in various foreign countries. The most
likely format for international development is through the issuance of master
franchise agreements and/or joint venture agreements. The terms and conditions
of these agreements may vary from the standard Area Development Agreement and
Franchise Agreement in order to comply with laws and customs different from
those of the United States. The Company has entered into a master Franchise
Agreement for the Caribbean Basin and has granted a single franchise agreement
for the West Bank in Palestine.
Franchisee Support Services. The Company maintains a staff of
well-trained and experienced Restaurant operations personnel whose primary
responsibilities are to help train and assist franchisees in opening new
Restaurants and to monitor the operations of existing Restaurants. These
services are provided as part of the Company's franchise program. Upon the
opening of a new franchised Restaurant by a new franchisee, the Company
typically sends a Restaurant team to the Restaurant to assist the franchisee
during the first four days that the Restaurant is open. This team works in the
Restaurant to monitor compliance with the Company's standards as to quality of
product and speed of service. In addition, the team provides on-site training of
all Restaurant personnel. This training is in addition to the training provided
to the franchisee and the franchisee's management team described under
"Restaurant Operations - Supervision and Training" above. The Company also
employs Franchise Business Consultants ("FBCs"), who have been fully trained by
the Company to assist franchisees in implementing the operating procedures and
policies of the Company once a Restaurant is open. As part of these services,
the FBC rates the Restaurant's hospitality, food quality, speed of service,
cleanliness and maintenance of facilities. The franchisees receive a written
report of the FBC's findings and, if any deficiencies are noted, recommended
procedures to correct such deficiencies.
The Company also provides site development and construction
support services to its franchisees. All sites and site plans are submitted to
the Company for its review prior to construction. These plans include
information detailing building location, internal traffic patterns and curb
cuts, location of utilities, walkways, driveways, signs and parking lots and a
complete landscape plan. The Company's construction personnel also visit the
site at least once during construction to meet with the franchisee's site
contractor and to review construction standards.
Franchise Agreements. The Unit Franchise Agreement grants to
the franchisee an exclusive license at a specified location to operate a
Restaurant in accordance with the Checkers(R) system and to utilize the
Company's trademarks, service marks and other rights of the Company relating to
the sale of its menu items. The term of the current Unit Franchise Agreement is
generally 20 years. Upon expiration of a Unit Franchise Agreement, the
franchisee will be entitled to acquire a successor franchise for the Restaurants
on the terms and conditions of the Company's then current form of Unit Franchise
Agreement if the franchisee remains in compliance with the Unit Franchise
Agreement throughout its term and if certain other conditions are met (including
the payment of a $6,000 renewal fee equal to 50% of the then current franchise
fee).
In some instances, the Company grants to the franchisee the
right to develop and open a specified number of Restaurants within a limited
period of time and in a defined geographic area (the "Franchised Area") and
thereafter to operate each Restaurant in accordance with the terms and
conditions of a Unit Franchise Agreement. In that event, the franchisee
ordinarily signs two agreements, an Area Development Agreement and a Unit
Franchise Agreement. Each Area Development Agreement establishes the number of
Restaurants the franchisee is to construct and open in the Franchised Area
during the term of the Area Development Agreement (normally a maximum of five
Restaurants) after considering many factors, including the residential,
commercial and industrial characteristics of the area, geographic factors,
population of the area and the previous
8
experience of the franchisee. The franchisee's development schedule for the
Restaurants is set forth in the Area Development Agreement. Of the 249
franchised Restaurants at December 29, 1997, 232 were being operated by multiple
unit operators and 17 were being operated by single unit operators. The Company
may terminate the Area Development Agreement of any franchisee that fails to
meet its development schedule.
The Unit Franchise Agreement and Area Development Agreement
require that the franchisee select proposed sites for Restaurants within the
Franchised Area and submit information regarding such sites to the Company for
its review, although final site selection is at the discretion of the
franchisee. The Company does not arrange or make any provisions for financing
the development of Restaurants by its franchisees. To the extent new or used
MRP's are available for sale, and/or to the extent that the Company deems it
feasible to begin constructing new MRP's again in the Champion construction
facility, the Company will offer the franchisees an opportunity to buy a Modular
Restaurant Package from the Company in those geographic areas where the Modular
Restaurant Package can be installed in compliance with applicable laws. Each
franchisee is required to purchase all fixtures, equipment, inventory, products,
ingredients, materials and other supplies used in the operation of its
Restaurants from approved suppliers, all in accordance with the Company's
specifications. The Company provides a training program for management personnel
of its franchisees at its corporate offices. Under the terms of the Unit
Franchise Agreement, the Company has adopted standards of quality, service and
food preparation for franchised Restaurants. Each franchisee is required to
comply with all of the standards for Restaurant operations as published from
time to time in the Company's operations manual.
The Company may terminate a Unit Franchise Agreement for
several reasons including the franchisee's bankruptcy or insolvency, default in
the payment of indebtedness to the Company or suppliers, failure to maintain
standards set forth in the Unit Franchise Agreement or operations manual,
material continued violation of any safety, health or sanitation law, ordinance
or governmental rule or regulation or cessation of business. In such event, the
Company may also elect to terminate the franchisee's Area Development Agreement.
Franchise Fees and Royalties. Under the current Unit Franchise
Agreement, a franchisee is generally required to pay application fees, site
approval fees and an initial Franchise Fee together totaling $30,000 for each
Restaurant opened by the franchisee. If a franchisee is awarded the right to
develop an area pursuant to an Area Development Agreement, the franchisee
typically pays the Company a $5,000 Development Fee per store which will be
applied to the Franchisee Fee as each Restaurant is developed. Each franchisee
is also generally required to pay the Company a semi-monthly royalty of 4% of
the Restaurant's gross sales (as defined) and to expend certain amounts for
advertising and promotion
Manufacturing Operations
Strategy. Although the Company does not believe that the use
of MRP's is critical to the success of any individual restaurant or the Company
in general, the Company believes that the integration of its Restaurant
operations with its production of Modular Restaurant Packages for use by the
Company and sale to its franchisees provides it with a competitive advantage
over other fast food companies that use conventional, on-site construction
methods. These advantages include more efficient construction time, direct
control of the quality, consistency and uniformity of the Restaurant image as
well as having standard Restaurant operating systems. In addition, the Company
believes the ability to relocate a Modular Restaurant Package provides greater
economies and flexibility than alternative methods. The cost and construction
time effeciencies may be significantly impacted by the Company's decision
whether or not to resume construction of MRP's at its Champion construction
facility. Due to the number of Modular Restaurant Packages currently available
for relocation from closed Restaurant sites, it is not anticipated that any
significant new construction of Modular Restaurant Packages will occur during
fiscal year 1998. In the short term, the Company's construction facility located
in Largo, Florida will be utilized to store and refurbish used Modular
Restaurant Packages for sale to franchisees or others and use by the Company.
The Company is evaluating other options in relation to the future use of this
facility, which could include generating other outside business, leasing the
facility or an eventual sale of the facility. Operation of the construction
facility consists of five personnel, and substantially all of the labor in the
manufacturing and refurbishment process is done through independent contractors,
the number of which may be increased or decreased with demand.
Construction. The Champion construction facility is designed
to produce a complete Modular Restaurant Package ready for delivery and
installation at a Restaurant site. When the Champion construction is fully
operational the Modular Restaurant Packages are built and refurbished using
assembly line techniques and a fully integrated and complete production system.
Each Modular Restaurant Package consists of a modular building complete with all
mechanical, electrical and plumbing systems (except roof top systems which are
installed at the site), along with all Restaurant equipment. The modular
building is a complete operating Restaurant when sited, attached to its
foundation and all utilities are connected. All
9
Modular Restaurant Packages are constructed in accordance with plans and
specifications approved by the appropriate governmental agencies and are
typically available in approximately eight (8) weeks after an executed
agreement.
Capacity. As of December 29, 1997, the Company had five (5)
substantially completed new Modular Restaurant Packages in inventory, one of
which is under contract for sale to a franchisee. As of December 29, 1997, the
Company had thirty-five (35) used Modular Restaurant Packages available for
relocation to new sites, eight (8) of which have been moved to the Champion
production facility for refurbishment, and twenty-seven (27) of which are at
closed sites. Although the Company does not require a franchisee to use a
Modular Restaurant Package, because of the expected benefits associated
therewith, the Company anticipates that substantially all of the Restaurants
developed by it or its franchisees in the immediate future will include Modular
Restaurant Packages produced by the Company, or relocated from other sites.
Modular Restaurant Packages from closed sites are being marketed at various
prices depending upon age and condition.
Transportation and Installation of Modular Restaurant
Packages. Once all site work has been completed to the satisfaction of the
Company and all necessary governmental approvals have been obtained for
installation of the Modular Restaurant, the Modular Restaurant Package is
transported to such site by an independent trucking contractor. All
transportation costs are charged to the customer. Once on the site, the Modular
Restaurant Package is installed by independent contractors hired by the Company
or franchisee, in accordance with procedures specified by the Company. The
Company's personnel inspect all mechanical, plumbing and electrical systems to
make sure they are in good working order, and inspect and approve all site
improvements on new Modular Restaurant Packages sold by the Company. Used
Modular Restaurant Packages are typically sold without warranties. Once a
Modular Restaurant Package has been delivered to a site, it takes generally
three (3) to four (4) weeks before the Restaurant is in full operation.
Competition
The Company's Restaurant operations compete in the fast food
industry, which is highly competitive with respect to price, concept, quality
and speed of service, Restaurant location, attractiveness of facilities,
customer recognition, convenience and food quality and variety. The industry
includes many fast food chains, including national chains which have
significantly greater resources than the Company that can be devoted to
advertising, product development and new Restaurants. In certain markets, the
Company will also compete with other quick-service double drive-thru hamburger
chains with operating concepts similar to the Company. The fast food industry is
often significantly affected by many factors, including changes in local,
regional or national economic conditions affecting consumer spending habits,
demographic trends and traffic patterns, changes in consumer taste, consumer
concerns about the nutritional quality of quick-service food and increases in
the number, type and location of competing quick-service Restaurants. The
Company competes primarily on the basis of speed of service, price, value, food
quality and taste. In addition, with respect to selling franchises, the Company
competes with many franchisors of Restaurants and other business concepts. All
of the major chains have increasingly offered selected food items and
combination meals, including hamburgers, at temporarily or permanently
discounted prices. Beginning generally in the summer of 1993, the major fast
food hamburger chains began to intensify the promotion of value priced meals,
many specifically targeting the 99(cent) price point at which the Company sells
its quarter pound "Champ Burger(R)". This promotional activity has continued at
increasing levels, and management believes that it has had a negative impact on
the Company's sales and earnings. Increased competition, additional discounting
and changes in marketing strategies by one or more of these competitors could
have an adverse effect on the Company's sales and earnings in the affected
markets.
With respect to its Modular Restaurant Packages, the Company
competes primarily on the basis of price and speed of construction with other
modular construction companies as well as traditional construction companies,
many of which have significantly greater resources than the Company. When the
inventory of new and used MRP's is depleted, there is no assurance that the
Company will again initiate new construction at its Champion construction
facility thereby requiring the Company and its franchisees to purchase MRP's
from other modular construction companies or to utilize conventional
construction methods.
Employees
Effective November 30, 1997, the Company entered into a
Management Services Agreement, pursuant to which Rally's Hamburgers, Inc.,
("Rally's") will be managed and operated predominantly by the corporate
management of the Company. Rally's, together with its franchisees, operates
approximately 477 double drive-thru hamburger restaurants primarily in the
Midwest and Sunbelt. In addition, the Company and Rally's share certain of their
executive officers, including the Chief Executive Officer and the Chief
Operating Officer.
10
As of December 29, 1997, the Company employed approximately
5,000 persons in its Restaurant operations, approximately 800 of whom are
Restaurant management and supervisory personnel and the remainder of whom are
hourly Restaurant personnel. Of the approximately 165 corporate employees, five
are involved in the manufacturing operation, approximately nine are in upper
management positions and the remainder are professional and administrative or
office employees.
The Company considers its employee relations to be good. Most
employees, other than management and corporate personnel, are paid on an hourly
basis. The Company believes that it provides working conditions and wages that
compare favorably with those of its competition. None of the Company's employees
is covered by a collective bargaining agreement.
Trademarks and Service Marks
The Company believes its trademarks and service marks have
significant value and are important to its marketing efforts. The Company has
registered certain trademarks and service marks (including the name "Checkers",
"Checkers BurgersoFriesoColas" and "Champ Burger" and the design of the
Restaurant building) in the United States Patent and Trademark office. The
Company has also registered the service mark "Checkers" individually and/or with
a rectangular checkerboard logo of contiguous alternating colors to be used with
Restaurant services in the states where it presently does, or anticipates doing,
business. The Company has various other trademark and service mark registration
applications pending. It is the Company's policy to pursue registration of its
marks whenever possible and to oppose any infringement of its marks.
Government Regulations
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 Federal Trade Commission and certain laws of States and
foreign countries which govern the offer and sale of franchises, several of
which are highly restrictive. Many State franchise laws impose substantive
requirements on the franchise agreement, including limitations on noncompetition
provisions and on provisions concerning the termination or nonrenewal of a
franchise. Some States require that certain materials be registered before
franchises can be offered or sold in that state. The failure to obtain or retain
food licenses or approvals to sell franchises, or an increase in the minimum
wage rate, employee benefit costs (including costs associated with mandated
health insurance coverage) or other costs associated with employees could
adversely affect the Company and its franchisees. A mandated increase in the
minimum wage rate was implemented in both 1997 and 1996.
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.
The Company has no material contracts with the United States
government or any of its agencies.
11
ITEM 2. PROPERTIES.
Of the 230 Restaurants which were operated by the Company as
of December 29, 1997, the Company held ground leases for 194 Restaurants and
owned the land for 36 Restaurants. The Company's leases are generally written
for a term of from five to twenty years with one or more five year renewal
options. Some leases require the payment of additional rent equal to a
percentage of annual revenues in excess of specified amounts. Ground leases are
treated as operating leases. Leasehold improvements made by the Company
generally become the property of the landlord upon expiration or earlier
termination of the lease; however, in most instances, if the Company is not in
default under the lease, the building, equipment and signs remain the property
of the Company and can be removed from the site upon expiration of the lease. In
the future, the Company intends, whenever practicable, to lease land for its
Restaurants. For further information with respect to the Company's Restaurants,
see "Restaurant Operations" under Item 1 of this Report.
The Company has 8 owned parcels of land and 31 leased parcels
of land which are available for sale or sub-lease. Of these parcels, 30 are
related to Restaurant closings as described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The other nine
parcels primarily represent surplus land available from multi-user sites where
the Company developed a portion for a Restaurant and undeveloped sites which the
Company ultimately decided it would not develop.
The Company's executive offices are located in approximately
19,600 square feet of leased space in the Barnett Bank Building, Clearwater,
Florida. The Company's lease will expire on April 30, 1998. In order to
accommodate additional staffing and on-site storage space needed as a result of
the Management Services Agreement, (see Item 1. "Business Employees"), the
Company has executed a five year lease with a new landlord for 26,500 square
feet of office space and 6,000 square feet of adjoining warehouse space in
Clearwater. The Company expects to relocate its executive office to this
location by July, 1998.
The Company owns a 89,850 square foot facility in Largo,
Florida. This includes a 70,850 square foot fabricated metal building for use in
its Modular Restaurant manufacturing operations, and two buildings totaling
19,000 square feet for its office and warehouse operations. See "Manufacturing
Operations" under Item 1 of this Report.
The Company also leases approximately 4,800 aggregate square
feet in two regional offices.
ITEM 3. 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,
12
Robert G. Brown and George W. Cook, Case No. 95-4644-CI-21 (hereinafter the
"Power Burgers Litigation"). The original Complaint alleged, generally, that
certain officers of the Company intentionally inflicted severe emotional
distress upon Ms. Greenfelder, who is the sole stockholder, President and
Director of Powers Burgers, Inc. (hereinafter "Powers Burgers") a Checkers
franchisee. The original Complaint further alleged that Ms. Greenfelder and
Powers Burgers were induced into entering into various agreements and personal
guarantees with the Company based upon misrepresentations by the Company and its
officers and that the Company violated provisions of Florida's Franchise Act and
Florida's Deceptive and Unfair Trade Practices Act. The original Complaint
alleged that the Company is liable for all damages caused to the Plaintiffs. The
Plaintiffs seek damages in an unspecified amount in excess of $2,500,000 in
connection with the claim of intentional infliction of emotional distress,
$3,000,000 or the return of all monies invested by the Plaintiffs in Checkers'
franchises in connection with the misrepresentation of claims, punitive damages,
attorneys' fees and such other relief as the court may deem appropriate. The
Court has granted, in whole or in part, three (3) Motions to Dismiss the
Plaintiffs' Complaint, as amended, including an Order entered on February 14,
1997, which dismissed the Plaintiffs' claim of intentional infliction of
emotional distress, with prejudice, but granted the Plaintiffs leave to file an
amended pleading with respect to the remaining claims set forth in their Amended
Complaint. A third Amended Complaint has been filed and an Answer, Affirmative
Defenses, and a Counterclaim to recover unpaid royalties and advertising fund
contributions has been filed by the Company. In response to the Court's
dismissal of certain claims in the Power Burgers Litigation, on May 21, 1997 a
companion action was filed in the Circuit Court of the Sixth Judicial Circuit in
and for Pinellas County, Florida, Civil Division, entitled Gail P. Greenfelder,
Powers Burgers of Avon Park, Inc., and Power Burgers of Sebring, Inc. v. James
F. White, Jr., Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E.
Mattei, Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 97-3565-CI,
asserting, in relevant part, the same causes of action as asserted in the Power
Burgers Litigation. An Answer, Affirmative Defenses, and a Counterclaim to
recover unpaid royalties and advertising fund contributions have been filed by
the Company. On February 4, 1998, the Company terminated Power Burgers, Inc.'s,
Power Burgers of Avon Park, Inc.'s and Power Burgers of Sebring, Inc.'s
franchise agreements and thereafter filed two Complaints in the United States
District Court for the Middle District of Florida, Tampa Division, styled
Checkers Drive-In Restaurants, Inc. v. Power Burgers of Avon Park, Inc., Case
No. 98-409-CIV-T-17A and Checkers Drive-In Restaurants, Inc. v. Powers Burgers,
Inc, Case No. 98-410-CIV-T-26E. The Complaint seeks, inter alia, a temporary and
permanent injunction enjoining Power Burgers, Inc. and Power Burgers of Avon
Park, Inc.'s continued use of Checkers' Marks and trade dress. A Motion to Stay
the foregoing actions are currently pending. The Company believes the lawsuits
initiated against the Company are without merit, and intends to continue to
defend them vigorously. No estimate of any possible loss or range of loss
resulting from the lawsuit can be made at this time.
Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services,
Inc., et al. On August 10, 1995, a state court Counterclaim and Third Party
Complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in
and for Hillsborough County, Florida, Civil Division, entitled Tampa Checkmate
Food Services, Inc., Checkmate Food Services, Inc. and Robert H. Gagne v.
Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, James F.
White, Jr., Jared D. Brown, Robert G. Brown and George W. Cook, Case No.
95-3869. In the original action filed by the Company in July 1995, against Mr.
Gagne and Tampa Checkmate Food Services, Inc., (hereinafter "Tampa Checkmate") a
company controlled by Mr. Gagne, the Company is seeking to collect on a
promissory note and foreclose on a mortgage securing the promissory note issued
by Tampa Checkmate and Mr. Gagne, and obtain declaratory relief regarding the
rights of the respective parties under Tampa Checkmate's franchise agreement
with the Company. The Counterclaim and Third Party Complaint allege, generally,
that Mr. Gagne, Tampa Checkmate and Checkmate Food Services, Inc. (hereinafter
"Checkmate") were induced into entering into various franchise agreements with,
and personal guarantees to, the Company based upon misrepresentations by the
Company. The Counterclaim and Third Party Complaint seek damages in the amount
of $3,000,000 or the return of all monies invested by Checkmate, Tampa Checkmate
and Mr. Gagne in Checkers' franchises, punitive damages, attorneys' fees and
such other relief as the court may deem appropriate. The Counterclaim was
dismissed by the court on January 26, 1996, with the right to amend. On February
12, 1996, the Counterclaimants filed an Amended Counterclaim alleging violations
of Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act,
and breaches of implied duties of "good faith and fair dealings" in connection
with a settlement agreement and franchise agreement between various of the
parties. The Amended Counterclaim seeks a judgment for damages in an unspecified
amount, punitive damages, attorneys' fees and such other relief as the court may
deem appropriate. The Company has filed an Answer to the Complaint. On or about
July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the United States
Bankruptcy Court for the Middle District of Florida, Tampa Division entitled In
re: Tampa Checkmate Food Services, Inc., and numbered as 97-11616-8G-1 on the
docket of said Court. On July 25, 1997, Checkers filed an Adversary Complaint in
the Tampa Checkmate bankruptcy proceedings entitled Checkers Drive-In
Restaurants, Inc. v. Tampa Checkmate Food Services, Inc. and numbered as Case
No. 97-738. 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.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Common Stock of the Company began trading publicly in the
over-the-counter market on the Nasdaq Stock Market's National Market on November
15, 1991, under the symbol CHKR. The following table sets forth the high and low
closing sale price of the Checkers Common Stock as reported in the Nasdaq
National Market for the periods indicated:
High Low
1997
First Quarter $3.00 $1.69
Second Quarter $1.84 $1.09
Third Quarter $1.69 $1.09
Fourth Quarter $1.59 $0.81
1996
First Quarter $1.75 $1.19
Second Quarter $1.50 $1.13
Third Quarter $1.25 $0.75
Fourth Quarter $1.97 $0.78
Holders
At March 16, 1998, the Company had approximately 7,085
stockholders of record.
Dividends
Dividends are prohibited under the terms of the Company's
major debt agreement. The Company has not paid or declared cash distributions or
dividends (other than the payment of cash in lieu of fractional shares in
connection with its stock splits). Any future cash dividends will be determined
by the Board of Directors based on the Company's earnings, financial condition,
capital requirements, debt covenants and other relevant factors.
Recent Unregistered Sales
During fiscal year 1997, the Company has engaged in the
following sales of its securities which were not registered under the Securities
Act of 1933, and which have not been previously reported.
None
14
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
(in thousands, except per share data)
The selected historical consolidated Statement of Operations
data presented for each of the fiscal years in the three-year period ended
December 29, 1997 and Balance Sheet data as of December 29, 1997, and as of
December 30, 1996, were derived from, and should be read in conjunction with,
the audited consolidated financial statements and related notes of Checkers
Drive-In Restaurants, Inc. and subsidiaries included elsewhere herein. The
Statement of Operations data for the year ended January 2, 1995 and December 31,
1993 and Balance Sheet data as of January 1, 1996, January 2, 1995 and December
31, 1993 were derived from audited financial statements not included herein.
As of January 1, 1994, the Company changed from a calendar
reporting year ending on December 31st to a fiscal year which will generally end
on the Monday closest to December 31st. Each quarter consists of three 4-week
periods, with the exception of the fourth quarter which consists of four 4-week
periods.
Fiscal Years Ending
---------------------------------------------------------------
Dec. 29, Dec. 30, Jan. 1, Jan. 2, Dec. 31,
1997 1996 1996 1995 1993
----------------------------------------------------------------
Statements of Operations:
-------------------------
Net Operating Revenue $ 143,893 $ 164,960 $ 190,305 $ 215,115 $ 184,027
Restaurant Operating Costs $ 127,839 $ 156,548 $ 167,836 $ 173,087 $ 124,384
Cost of Modular Restaurant Package
Revenues 618 1,704 4,854 10,485 20,208
Other Depreciation and Amortization 2,263 4,326 4,044 2,796 1,325
General and Administrative Expense 16,123 20,690 24,215 21,875 14,048
SFAS 121 Impairment and Other Loss Provisions 1,027 23,905 26,572 14,771 -
Interest Expense 8,650 6,233 5,724 3,564 556
Interest Income 375 678 674 326 273
Minority Interests in Income (Loss) (66) (1,509) (192) 185 342
Income from Continuing Operations (Pretax) $ (12,186) $ (46,258) $ (42,074) $ (11,324) $ 23,437
Income from Continuing Operations
(Pretax) per Common Share $ (0.19) $ (0.89) $ (0.83) $ (0.23) $ 0.49
Balance Sheet:
--------------
Total Assets $ 115,401 $ 136,110 $ 166,819 $ 196,770 $ 179,950
Long-Term Obligations and Redeemable
Preferred Stock $ 29,401 $ 39,906 $ 38,090 $ 38,341 $ 36,572
Cash Dividends Declared per Common Share $ - $ - $ - $ - $ -
15
ITEM 7. 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 December 29, 1997, the
Company had an ownership interest in 230 Company-operated Restaurants and an
additional 249 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 December 29, 1997, there were 218
such Restaurants) and (ii) the Company owns a 10.55% or 65.83% interest in a
partnership which owns the Restaurant (a "Joint Venture Restaurant") (as of
December 30, 1996, there were 12 such Joint Venture Restaurants). (See "Business
Restaurant Operations - Joint Venture Restaurants" in Item 1 of this Report.)
The Company realized significant reductions in food, paper and
labor costs during 1997. These costs totaled 64.5% of restaurant revenues in
1997 versus 72.1% in 1996. This improvement in costs was achieved despite the
9.9% decline in comparable store sales in 1997 versus 1996. 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. to leverage the
purchasing power of the three entities to negotiate improved terms for their
respective contacts with suppliers.
As of March 1996, the Company had 53 Company and franchise
Restaurants testing its proprietary L.A. Mex Mexican brand. Although initial
sales were encouraging, the sales increases resulted in little or no
contribution to the profitability of the test units. Additionally, speed of
service was adversely impacted by the addition of the L.A. Mex products. As a
result, the Company terminated the tests during the first two quarters of fiscal
year 1997.
Significant management changes have occurred since the end of the
third quarter of fiscal year 1997. Effective November 10, 1997, C. Thomas
Thompson resigned as the Company's Chief Executive Officer. On that same date,
James J. Gillespie was appointed to serve as Chief Executive Officer of the
Company and of Rally's Hamburgers, Inc. ("Rally's"). Mr. Thompson has retained
his position on the Board of Directors of the Company. Effective December 15,
1997, Robert L. Purple was appointed Senior Vice President of Marketing and
Steven M. Cohen was appointed Senior Vice President of Human Resources.
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.
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. 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.
In fiscal year 1997, the Company, along with its franchisees,
experienced a net increase of one operating restaurant. 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.
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 selling, general and administrative expenses,
relate both to Company-operated Restaurant operations and MRP revenues as well
16
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.
Fiscal Year Ended
-----------------------------------------------------------
Dec. 29, Dec. 30, Jan.1,
1997 1996 1996
-----------------------------------------------------------
Revenues:
- ---------
Restaurant Sales 94.3 % 94.2 % 93.9 %
Royalties 4.9 % 4.5 % 4.0 %
Franchise Fees 0.3 % 0.6 % 0.5 %
Modular Restaurant Packages 0.5 % 0.7 % 1.6 %
-----------------------------------------------------------
Total Revenues 100.0 % 100.0 % 100.0 %
-----------------------------------------------------------
Costs and Expenses:
-------------------
Restaurant Food and Paper Cost(1) 32.1 % 35.2 % 35.7 %
Restaurant Labor Costs(l) 32.4 % 36.9 % 32.6 %
Restaurant Occupancy Expense(1) 8.6 % 8.3 % 6.5 %
Restaurant Depreciation and Amortization(1) 6.1 % 5.7 % 6.0 %
Advertising Expense(l) 5.0 % 4.8 % 4.5 %
Other Restaurant Operating Expenses(l) 9.9 % 9.9 % 8.7 %
Cost of Modular Restaurant Package Revenues(2) 87.1 % 141.8 % 162.1 %
Other Depreciation and Amortization 1.6 % 2.6 % 2.1 %
Selling, General and Administrative Expenses 11.2 % 12.5 % 12.7 %
Impairment of Long-lived Assets 0.4 % 9.0 % 9.9 %
Losses on Assets to be Disposed of 0.2 % 4.3 % 1.7 %
Loss provisions 0.1 % 1.2 % 2.3 %
-----------------------------------------------------------
Operating Loss (2.8)% (25.6)% (19.6)%
Other Income (Expense):
-----------------------
Interest Income 0.3 % 0.4 % 0.4 %
Interest Expense (6.0)% (3.8)% (3.1)%
Minority Interest in Earnings (0.0)% (0.9)% (0.1)%
-----------------------------------------------------------
Loss Before Income Tax Expense (Benefit) (8.5)% (28.0)% (22.1)%
Income Tax Expense (Benefit) 0.0 % 0.1 % (4.7)%
-----------------------------------------------------------
Net Loss (8.5)% (28.1)% (17.5)%
===========================================================
Net Loss to Common Shareholders (9.0)% (28.1)% (17.5)%
===========================================================
17
Fiscal Year Ended
-----------------------------------------------------------
Dec. 29, Dec. 30, Jan.1,
1997 1996 1996
-----------------------------------------------------------
Operating Data:
System Wide Restaurant Sales (in 000's)
Company Operated $ 135,710 $ 155,392 $ 178,744
Franchise $ 174,600 $ 172,566 $ 190,151
-----------------------------------------------------------
Total $ 310,310 $ 327,958 $ 368,895
===========================================================
Average Annual Net Sales Per Restaurant Open
For A Full Year (in 000's)(3):
Company Operated $ 586 $ 651 $ 721
Franchised $ 737 755 814
-----------------------------------------------------------
System Wide $ 661 $ 699 $ 765
-----------------------------------------------------------
Number of Restaurants (4)
Company Operated 230 232 242
Franchised 249 246 257
-----------------------------------------------------------
Total 479 478 499
===========================================================
- ------------------------------------------------------------
(1) As a percent of Restaurant sales.
(2) As a percent of Modular Restaurant Package revenues.
(3) Includes sales for Restaurants open for entire trailing 13 periods, and
stores expected to be closed in the following year.
(4) Number of Restaurants open at end of period.
Comparison of Historical Results - Fiscal Years 1997 and 1996
Revenues. Total revenues decreased 12.8% to $143.9 million in
1997 compared to $165 million in 1996. Company-operated restaurant sales
decreased 12.7% to $135.7 million in 1997 from $155.4 million in 1996. The
decrease resulted partially from a net reduction of 2 Company-operated
Restaurants since December 30, 1996. Comparable Company-operated Restaurant
sales for the year ended December 29, 1997, decreased 9.9% as compared to the
year ended December 30, 1996, which includes those Restaurants open at least 26
periods. These decreases in restaurant sales and comparable Restaurant sales is
primarily attributable to a highly competitive environment during 1997 and the
Company's focus on cutting costs while developing a new marketing strategy.
Franchise revenues and fees decreased 10.7% to approximately
$7.5 million in 1997 from approximately $8.4 million in 1996. An actual decrease
of $503,000 was a direct result of one fewer franchised Restaurant opening as
well as a decline in comparable franchise restaurant sales of 5.9% during 1997,
and a decline in the weighted average royalty rate charge due to openings in
Puerto Rico, as well as certain discounting of fees on non-standard Restaurant
openings. The remaining decrease of $390,000 is due to the recording of revenue
from terminations of Area Development Agreements during the year ended December
30, 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.
MRP revenues decreased 40.9% to $710,000 in 1997 compared to
$1.2 million in 1996 due to decreased sales volume of MRP's to the Company's
franchisees which is a result of franchisees sales of used MRP's and the
Company's efforts to refurbish and sell its inventory of used MRP's from
previously closed sites. These efforts have been successful, however, these
sales have negatively impacted the new building revenues. MRP revenues are
recognized on the percentage of completion method during the construction
process; therefore, a substantial portion of MRP revenues are recognized prior
to the opening of a Restaurant.
18
Costs and expenses. Restaurant food ($40.6 million) and paper
($3.0 million) costs totaled $43.6 million or 32.1% of restaurant sales for
1997, compared to $54.7 million ($49.5 million food costs; $5.2 million, paper
costs) or 35.2% of restaurant sales for 1996. The dollar decrease in food and
paper costs was due primarily to the decrease 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, totaled $43.9 million or 32.4% of
restaurant sales for 1997, compared to $57.3 million or 36.9% of restaurant
sales for 1996. The decrease in restaurant labor costs as a percentage of
restaurant sales was due primarily to various Restaurant level initiatives
implemented in the first quarter of 1997, partially offset by a minimum wage
increase in 1997.
Restaurant occupancy expense, which includes rent, property
taxes, licenses and insurance, totaled $11.7 million or 8.6% of restaurant sales
for 1997, compared to $12.9 million or 8.3% of restaurant sales for 1996. The
increase in restaurant occupancy costs as a percentage of restaurant sales was
due primarily to the decline in average restaurant sales relative to the fixed
nature of these expenses and also higher average occupancy costs resulting from
the acquisition of interests in 12 Restaurants in Chicago, Illinois in July,
1996.
Restaurant depreciation and amortization decreased 6.0% to
$8.3 million for 1997, from $8.8 million for 1996, due primarily to 1996
impairments recorded under Statement of Financial Accounting Standards No. 121
and the impact of Restaurant closures during late 1996 and early 1997. However,
as a percentage of restaurant sales, these expenses increased to 6.1% in 1997
from 5.7% in 1996 due to the decline in average restaurant sales.
Advertising expense decreased to $6.8 million or 5.0% of
restaurant sales for 1997 which did not materially differ from the $7.4 million
or 4.8% of restaurant sales spent for advertising in 1996.
Other restaurant expenses includes all other Restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other costs which includes utilities, maintenance and other costs. These
expenses which declined consistently with sales declines, totaled $13.5 million
or 9.9% of restaurant sales for 1997 compared to $15.3 million or 9.9% of
restaurant sales for 1996, resulting primarily from Restaurant closures in late
1996 and early 1997.
Costs of MRP revenues totaled $618,000 or 87.1% of MRP
revenues for 1997, compared to $1.7 million or 141.8% of such revenues for 1996.
The decrease in these expenses as a percentage of MRP revenues was attributable
to the elimination of various excess fixed costs in the first quarter of 1997.
General and administrative expenses decreased to $16.1 million
or 11.2% of total revenues in 1997 from $20.7 million or 12.5% of total revenues
in 1996. The 1997 general and administrative expenses were increased by
accounting charges of $314,000 for severance and relocations. The 1996 general
and administrative expenses were increased by accounting charges of $3.6 million
consisting of $1.1 million in unusual bad debt expenses and other, $750,000
provisions for state sales tax audits, $925,000 for severance and relocation and
a $845,000 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 before 1996 and 1997
accounting charges of $1.3 million was mostly attributed to a reduction in
corporate staffing early in 1997.
Accounting Charges and Loss Provisions. During the fourth
quarter of 1997, the Company recorded accounting charges and loss provisions of
$1.3 million, to accrue for severance and relocations ($314,000) to impair
goodwill associated with one under-performing store ($565,000) , to provide for
additional losses on assets to be disposed due to certain sublease properties
being converted to surplus ($312,000), and a provision for the aging of Champion
inventories ($150,000).
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 ($500,000 provision for
bad debt, a $750,000 provision for state sales tax audits and refinancing costs
of $845,000 were recorded to expense capitalized costs incurred in connection
with the Company's previous lending arrangements with its bank group.).
Provisions totaling $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
reserve for Champion's finished buildings inventory as an adjustment to fair
market value.
Additional accounting charges and loss provisions of $12.8
million were recorded during the fourth quarter of
19
1996, $1.5 million of which consisted of various selling, general and
administrative expenses (including $579,000 for severance, $346,000 for employee
relocations, bad debt provisions of $366,000 and $204,000 for other charges).
Provisions totaling $7.7 million, including $1.4 million for additional losses
on assets to be disposed of, $5.4 million for impairment charges related to 9
under-performing restaurants received by the Company through a July 1996
franchisee bankruptcy action and $393,000 for other impairment charges were also
recorded. Additionally, in the fourth quarter of 1996, a $1.1 million provision
for loss on the disposal of the L.A. Mex product line, workers compensation
accruals of $1.1 million (included in restaurant labor costs), adjustments to
goodwill of approximately $510,000 (included in other depreciation and
amortization) and approximately a $453,000 charge for the assumption of minority
interests in losses on joint-venture operations as a result of the receipt by
the Company of certain assets from the bankruptcy of a franchisee.
Interest expense. Interest expense other than loan cost
amortization decreased to $5.0 million or 3.5% of total revenues in 1997 from
$6.1 million or 3.7% of total revenues in 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. Loan cost amortization
increased by $3.5 million from $159,000 in 1996 to $3.7 million in 1997 due to
the November 22, 1996 capitalization of deferred loan costs and $9.7 million in
unscheduled principal reductions in early 1997.
Income tax expense (benefit). There were no net taxes after
valuation allowances for 1997. Due to the loss for 1996, the Company recorded an
income tax benefit of $18.0 million or 38.9% of the loss before income taxes and
recorded a deferred income tax valuation allowance of $18.1 million, resulting
in a net tax expense of $151,000 for 1996. The effective tax rates differ from
the expected federal tax rate of 35.0% due primarily to state income taxes.
Net loss. As stated above earnings were significantly impacted
by the loss provisions and the write-downs associated with SFAS 121 in 1997 and
in 1996. Net loss before tax and the provisions (provisions totaled $1.3 million
in 1997 and $29.6 million in 1996) was $10.9 million or $.17 per share for 1997
and $16.7 million or $.32 per share for 1996, which resulted primarily from an
increase in the net Restaurant margins, decreases in depreciation and
amortization, general and administrative expenses, and interest expense other
than loan cost amortization, partially offset by a decrease in royalties and
franchises fees and an increase in loan cost amortization.
Comparison of Historical Results - Fiscal Years 1996 and 1995
Revenues. Total revenues decreased 13.3% to $165.0 million in
1996 compared to $190.3 million in 1995. Company-operated restaurant sales
decreased 13.1% to $155.4 million in 1996 from $178.7 million in 1995. The
decrease resulted partially from a net reduction of 10 Company-operated
Restaurants since January 1, 1996. Comparable Company-operated Restaurant sales
for the year ended December 30, 1996, decreased 9.7% as compared to the year
ended January 1, 1996, which includes those Restaurants open at least 13
periods. These decreases in restaurant sales and comparable Restaurant sales is
primarily attributable to continuing sales pressure from competitor discounting,
severe weather in January and February of 1996 and the inability of the Company
to effect a competitive advertising campaign during fiscal 1996.
Royalties decreased 2.2% to $7.4 million in 1996 from $7.6
million in 1995 due primarily to a net reduction of 11 franchised Restaurants
since January 1, 1996. Comparable franchised Restaurant sales for Restaurants
open at least 12 months for the year ended December 30, 1996, decreased
approximately 7.2% as compared to the year ended January 1, 1996. The Company
believes that the decline in sales experienced by franchisees can be attributed
primarily to the same factors noted above, but that these factors may have been
mitigated to some extent by the location in many instances of franchise
restaurants in less competitive markets.
Franchise fees decreased 3.2% to approximately $930,000 in
1996 from approximately $961,000 in 1995. An actual decrease of $421,000 as a
direct result of fewer franchised Restaurants opened as well as certain
discounting of fees on non-standard Restaurant openings, offset by the effect of
recording $390,000 of revenue from terminations of Area Development Agreements
during the year ended December 30, 1996, generated the net decrease of $31,000.
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.
MRP revenues decreased 59.9% to $1.2 million in 1996 compared
to $3.0 million in 1995 due to decreased sales volume of MRP's to the Company's
franchisees which is a result of a slow down in franchisee Restaurant opening
activity. Also, the Company made a concerted effort to refurbish and sell its
inventory of used MRP's from previously closed sites. These efforts have been
successful, however, these sales have negatively impacted the new building
revenues. MRP revenues are
20
recognized on the percentage of completion method during the construction
process; therefore, a substantial portion of MRP revenues are recognized prior
to the opening of a Restaurant.
Costs and expenses. Restaurant food ($49.5 million) and paper
($5.2 million) costs totaled $54.7 million or 35.2% of restaurant sales for
1996, compared to $63.7 million ($57.6 million food costs; $6.1 million, paper
costs) or 35.7% of restaurant sales for 1995. The decrease in food and paper
costs as a percentage of restaurant sales was due primarily to decreases in beef
costs and paper costs experienced by the Company during fiscal 1996, partially
offset by various promotional discounts in the final two quarters of 1996.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totaled $57.3 million or 36.9% of
restaurant sales for 1996, compared to $58.2 million or 32.6% of restaurant
sales for 1995. The increase in restaurant labor costs as a percentage of
restaurant sales was due primarily to the decline in average restaurant sales
relative to the semi-variable nature of these costs; a high level of turnover in
the regional management positions, which caused inconsistencies in the
management of labor costs in the Restaurants; increase in labor costs resulting
from the L.A. Mex dual brand test; and increase in the federal minimum wage
rate. The decrease in actual expense was caused by a reduction in the variable
portion of labor expenses as sales declined.
Restaurant occupancy expense, which includes rent, property
taxes, licenses and insurance, totaled $12.9 million or 8.3% of restaurant sales
for 1996, compared to $11.6 million or 6.5% of restaurant sales for 1995. This
increase in restaurant occupancy costs as a percentage of restaurant sales was
due primarily to the decline in average restaurant sales relative to the fixed
nature of these expenses and also higher average occupancy costs resulting from
the acquisition of interests in 12 Restaurants in Chicago, Illinois.
Restaurant depreciation and amortization decreased 16.9% to
$8.8 million for 1996, from $10.6 million for 1995, due primarily to late 1995
and 1996 impairments recorded under Statement of Financial Accounting Standards
No. 121 which was adopted as of January 1, 1996.
Advertising decreased to $7.4 million or 4.8% of restaurant
sales for 1996 which did not materially differ from the $8.1 million or 4.5% of
restaurant sales spent for advertising in 1995.
Other restaurant expenses includes all other Restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other costs which includes utilities, maintenance and other costs. These
expenses totaled $15.3 million or 9.9% of restaurant sales for 1996 compared to
$15.6 million or 8.7% of restaurant sales for 1995. The increase for 1996 as a
percentage of restaurant sales, was primarily related to the decline in average
restaurant sales relative to the fixed and semi-variable nature of many
expenses.
Costs of MRP revenues totaled $1.7 million or 141.8% of MRP
revenues for 1996, compared to $4.9 million or 162.1% of such revenues for 1995.
The decrease in these expenses as a percentage of MRP revenues was attributable
to a third quarter 1995 accounting charge of $500,000 to write-down excess work
in process buildup and a reduction in direct and indirect labor in early 1996.
General and administrative expenses decreased to $20.7 million
or 12.5% of total revenues in 1996 from $24.2 million or 12.7% of total revenues
in 1995. The decrease in these expenses was primarily attributable to a decrease
in corporate overhead costs as a result of the Company's restructuring during
1995 and early 1996.
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 general and administrative
expenses ($500,000 provision for bad debt, a $750,000 provision for state sales
tax audits and refinancing costs of $845,000 recorded to expense capitalized
costs incurred in connection with the Company's previous lending arrangements
with its bank group). Provisions totaling $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 reserve for Champion's finished buildings inventory as an adjustment
to fair market value.
Additional accounting charges and loss provisions of $12.8
million were recorded during the fourth quarter of 1996, $1.5 million of which
consisted of various general and administrative expenses (including $579,000 for
severance, $346,000 for employee relocations, bad debt provisions of $366,000
and $204,000 for other charges). Provisions totaling $7.7
21
million, including $1.4 million for additional losses on assets to be disposed
of, $5.4 million for impairment charges related to 9 under-performing
restaurants received by the Company through a July 1996 franchisee bankruptcy
action and $393,000 for other impairment charges were also recorded.
Additionally, in the fourth quarter of 1996, a $1.1 million provision for loss
on the disposal of the L.A. Mex product line, workers compensation accruals of
$1.1 million (included in restaurant labor costs), adjustments to goodwill of
approximately $510,000 (included in other depreciation and amortization) and
approximately a $453,000 charge for the assumption of minority interests in
losses on joint-venture operations as a result of the receipt by the Company of
certain assets from the bankruptcy of a franchisee.
Third quarter 1995 accounting charges and loss provisions of
$8.8 million consisted of $2.9 million in various selling, general and
administrative expenses (write-off of $1.2 million in receivables, accruals for
$125,000 in recruiting fees, $304,000 in relocation costs, $274,000 in severance
pay, $101,000 in state taxes, reserves of $700,000 for legal settlements, the
write-off of a $263,000 investment in an apparel company); $3.2 million to
provide for restaurants relocation costs, write-down and abandoned site costs;
$344,000 to expense refinancing costs; $645,000 to provide for inventory
obsolescence; $1.5 million for workers compensation exposure included in
restaurant labor costs and $185,000 in other charges, net, including the
$499,000 write-down of excess work in progress inventory costs and a minority
interest credit of $314,000.
Fourth quarter 1995 accounting charges included $3.0 million
for warrants to be issued in settlement of litigation (see Item 3 - Lopez, et al
vs. Checkers) and to accrue approximately $800,000 for legal fees in connection
with the settlement and continued defense of various litigation matters.
Additionally, during the fourth quarter of 1995, the Company early adopted
Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS
121) which requires a write-down of certain intangibles and property related to
under performing sites. The effect of adopting SFAS 121 was a total charge to
earnings for 1995 of $18.9 million, consisting of a $5.9 million write-down of
goodwill and a $13.1 million write-down of property and equipment.
Interest expense. Total interest expense increased to $6.2
million or 3.8% of total revenues in 1996 from $5.7 million or 3.0% of total
revenues in 1995. This increase was due to the Company's 1996 debt restructuring
and related amortization of deferred loan costs.
Income tax expense (benefit). Due to the loss for 1996, the
Company recorded an income tax benefit of $18.0 million or 38.9% of the loss
before income taxes and recorded a deferred income tax valuation allowance of
$18.1 million, resulting in a net tax expense of $151,000 for 1996, as compared
to an income tax benefit of $16.5 million or 39.1% of earnings before income
taxes and recorded a deferred income tax valuation allowance of $7.6 million
resulting in a net tax benefit of $8.9 million for 1995. The effective tax rates
differ from the expected federal tax rate of 35.0% due primarily to state income
taxes.
Net loss. As stated above earnings were significantly impacted
by the loss provisions and the write-downs associated with SFAS 121 in 1996 and
in 1995. Net loss before tax and the provisions (provisions totaled $29.6
million in 1996 and $31.6 million in 1995) was $16.7 million or $.32 per share
for 1996 and $10.5 million or $.21 per share for 1995, which resulted primarily
from a decrease in the average Restaurant sales and margins, and a decrease in
royalties and franchise fees, offset by a decrease in depreciation and
amortization and general and administrative expenses.
Liquidity and Capital Resources
On October 28, 1993, the Company entered into a loan agreement
(the "Loan Agreement") with a group of banks ("Bank Group") providing for an
unsecured, revolving credit facility. The Company borrowed approximately $50
million under this facility primarily to open new Restaurants and pay off
approximately $4 million of previously-existing debt. The Company subsequently
arranged for the Loan Agreement to be converted to a term loan and
collateralized the term loan and a revolving line of credit ranging from $1
million to $2 million (the "Credit Line") with substantially all of the
Company's assets.
On July 29, 1996, the debt under the Loan Agreement and Credit
Line was acquired from the 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., Taco Bueno
Restaurants, Inc., and Summit Family Restaurants, Inc. Also participating were
most members of the DDJ Group, Fidelity National Financial, Inc. ("Fidelity")
and KCC Delaware Company, a wholly-owned subsidiary of GIANT GROUP, LTD., CKE,
Fidelity and GIANT are the largest stockholders of Rally's Hamburgers, Inc.
On November 22, 1996, the Company and the CKE Group executed
an Amended and Restated Credit
22
Agreement (the "Restated Credit Agreement") thereby completing a restructuring
of the debt under the Loan Agreement. The Restated Credit Agreement consolidated
all of the debt under the Loan Agreement and the Credit Line into a single
obligation. At the time of the restructuring, the outstanding principal balance
under the Loan Agreement and the Credit Line was $35.8 million. Pursuant to the
terms of the Restated Credit Agreement, the term of the debt was extended by one
(1) year until July 31, 1999, and the interest rate on the indebtedness was
reduced to a fixed rate of 13%. In addition, all principal payments were
deferred until May 19, 1997, and the CKE Group agreed to eliminate certain
financial covenants, to relax others and to eliminate approximately $4.3 million
in restructuring fees and charges. The Restated Credit Agreement also provided
that certain members of the CKE Group agreed to provide to the Company a short
term revolving line of credit of up to $2.5 million, also at a fixed interest
rate of 13% (the "Secondary Credit Line"). In consideration for the
restructuring, the Restated Credit Agreement required the Company to issue to
the members of the CKE Group warrants to purchase an aggregate of 20 million
shares of the Company 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. Since November 22, 1996, the Company has reduced the
principal balance under the Restated Credit Agreement by $9.7 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 as 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 1998 through maturity. The Restated
Credit Agreement provides however, that 50% of any future asset sales must be
utilized to prepay principal.
The Company's 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 violation was primarily due to the Company
recording certain accounting charges and loss provisions in period 13 of fiscal
1997, as discussed in Note 8 to the consolidated financial statements (see Item
8). The Company received a waiver for period 13 of fiscal 1997 and for periods
one and two of fiscal 1998. The Company expects to cure the covenant violation
for period three of fiscal 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.
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 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.
During 1997, the Company acquired the minority share of one
joint-venture restaurant, the operations and certain of the equipment including
one MRP associated with five operating franchise restaurants and one closed
franchise having an aggregate fair value of $1.4 million. Total consideration
consisted of net cash disbursements totaling $282,000, the assumption of
$803,000 in long-term debts and capital leases, other accruals of $95,000,
relief of minority interests of $372,000, forgiveness of receivables of
$114,000, and distribution of property of $438,000. As a result of this
transaction, goodwill of $831,000 was recorded.
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 $10
million. 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.
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
23
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 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 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.
On December 18, 1997, Rally's Hamburgers, Inc. a Delaware
corporation ("Rally's") acquired approximately 19.1 million shares of the common
stock, $.001 par value per share of the Company, pursuant to that certain
Exchange Agreement, dated as of December 8, 1997 (the "Exchange Agreement"),
between Rally's, CKE Restaurants, Inc., Fidelity National Financial, Inc., GIANT
GROUP LTD and the other parties named in the Exchange Agreement.
The Company has negative working capital of $14.2 million at
December 29, 1997 (determined by subtracting current liabilities from current
assets). It is anticipated that the Company will continue to have negative
working capital since approximately 88% 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. As of January 26, 1998, $1.2 million in restricted cash
balances were relieved for the Company's use as the funds have been guaranteed
by a letter of credit from a bank.
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 totaled 64.5% of net restaurant revenues in 1997,
compared to 72.1% of net restaurant revenues in fiscal 1996, despite a 9.9%
decrease in Company owned comparable store sales in 1997 as compared to the
prior year. The Company reduced the corporate and regional staff by 32 employees
in the beginning of fiscal year 1997 and consummated the purchase of the
Rall-Folks Notes, the RDG Note and the NTDT Note in December 1997 and January
1998.
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 the income generated by
this agreement has enabled 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
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,
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.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(1) Financial Statements. The Company's Financial Statements included in
Item 8 hereof, as required, consist of the following:
Page
----
Independent Auditors Report 26
Consolidated Balance Sheets - December 29, 1997 and December 30, 1996 27
Consolidated Statements of Operations -
Years ended December 29, 1997, December 30, 1996 and January 1, 1996 29
Consolidated Statements of Stockholders' Equity -
Years ended December 29, 1997, December 30, 1996 and January 1, 1996 30
Consolidated Statements of Cash Flows -
Years ended December 29, 1997, December 30, 1996 and January 1, 1996 31
Notes to Consolidated Financial Statements -
Years ended December 29, 1997, December 30, 1996 and January 1, 1996 33
25
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Checkers Drive-In Restaurants, Inc. and Subsidiaries:
We have audited the consolidated financial statements of
Checkers Drive-In Restaurants, Inc. and subsidiaries as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
Item 14. These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Checkers Drive-In Restaurants, Inc. and subsidiaries as of December
29, 1997 and December 30, 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 29,
1997, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK, LLP
Tampa, Florida
February 27, 1998
26
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 29, December 30,
1997 1996
-------------------------------------------
Current assets:
Cash and cash equivalents
Restricted $ 2,555 $ 1,505
Unrestricted 1,366 1,551
Accounts receivable, net 1,175 1,544
Notes receivable 265 214
Inventories 2,222 2,261
Property and equipment held for resale 4,332 7,608
Income taxes receivable - 3,514
Deferred loan costs - (note 1) 1,648 2,452
Prepaid expenses and other current assets 309 306
-------------------------------------------
Total Current Assets 13,872 20,955
Property and equipment, net 87,889 98,189
Goodwill and non-compete
agreements, net of accumulated amortization of $5,014
in 1997 and $4,186 in 1996 (notes 1 and 6) 11,520 12,284
Deferred loan costs - less current portion (note 1) 1,099 3,900
Notes receivable - long term portion 381 -
Deposits and other noncurrent assets 640 782
-------------------------------------------
$ 115,401 $ 136,110
===========================================
See accompanying notes to consolidated financial statements.
27
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS'EQUITY
December 29, December3O,
1997 1996
---------------------------------------------
Current liabilities:
Short term debt (note 3) $ - $ 2,500
Current installments of long term debt (note 3) 3,484 9,589
Accounts payable 8,186 15,142
Accrued wages, salaries, and benefits 2,528 2,528
Reserve for restructuring, Restaurant relocations and
abandoned sites (note 8) 2,159 2,799
Accrued liabilities 11,408 13,784
Deferred franchise fee income 260 337
--------------------------------------------
Total current liabilities 28,025 46,679
Long-term debt, less current installments (note 3) 29,401 39,906
Deferred franchise fee income 346 466
Long-term reserves for Restaurant relocations
and abandoned sites 581 1,001
Minority interests in joint ventures 966 1,455
Other noncurrent liabilities 5,710 6,263
--------------------------------------------
Total liabilities 65,029 95,770
--------------------------------------------
Stockholders'equity (note 7):
Preferred stock, $.001 par value, Authorized 2,000,000
shares, no shares outstanding - -
Common stock, $.001 par value, authorized 100,000,000 shares,
72,755,031 and 51,768,480 shares issued and outstanding at
December 29, 1997 and December 30, 1996, respectively 73 52
Additional paid-in capital 112,536 90,339
Warrants (notes 7 and 1O) 9,463 9,463
Retained (deficit) earnings (71,300) (59,114)
--------------------------------------------
50,772 40,740
Less treasury stock, at cost, (578,904 shares) 400 400
--------------------------------------------
Net stockholders'equity 50,372 40,340
--------------------------------------------
--------------------------------------------
Commitments and related party transactions (notes 5 and 9) $ 115,401 $ 136,110
============================================
See accompanying notes to consolidated financial statements.
28
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Fiscal Years Ended
--------------------------------------------------------
December 29, December 30, January l,
1997 1996 1996
--------------------------------------------------------
Revenues:
Net Restaurant sales $ 135,710 $ 155,392 $ 178,744
Franchise revenues and fees 7,474 8,367 8,567
Modular restaurant packages 710 1,202 2,994
--------------------------------------------------------
Total revenues 143,894 164,961 190,305
--------------------------------------------------------
Costs and expenses:
Restaurant food and paper costs 43,625 54,707 63,727
Restaurant labor costs 43,919 57,302 58,245
Restaurant occupancy expenses 11,706 12,926 11,562
Restaurant depreciation and amortization 8,313 8,848 10,650
Advertising expense 6,820 7,420 8,087
Other restaurant operating expenses 13,457 15,345 15,565
Cost of modular restaurant package revenues 618 1,704 4,854
Other deprecation and amortization 2,263 4,326 4,044
General and administrative expenses 16,123 20,690 24,215
Impairment of long-lived assets (notes 1 and 8) 565 14,782 18,935
Losses on assets to be disposed of (note 8) 312 7,131 3,192
Loss provisions (note 8) 150 1,992 4,445
--------------------------------------------------------
Total cost and expenses 147,871 207,173 227,521
--------------------------------------------------------
Operating loss (3,977) (42,212) (37,216)
--------------------------------------------------------
Other income (expense)
Interest income 375 678 674
Interest expense (5,000) (6,074) (5,436)
Interest expense - loan cost amortization (3,650) (159) (288)
--------------------------------------------------------
Loss before minority interest and
income tax expense (benefit) (12,252) (47,767) (42,266)
Minority interest in (losses) earnings (66) (1,509) (192)
--------------------------------------------------------
Loss before income tax expense (benefit) (12,186) (46,258) (42,074)
Income tax expense (benefit) (note 4) - 151 (8,855)
--------------------------------------------------------
Net loss $ (12,186) $ (46,409) $ (33,219)
========================================================
Preferred dividends 696 - -
Net loss to common shareholders $ (12,882) $ (46,409) $ (33,219)
========================================================
Basic earnings (loss) per common share $ (0.20) $ (0.90) $ (0.65)
========================================================
Diluted earnings (loss) per common share $ (0.20) $ (0.90) $ (0.65)
========================================================
Weighted average number of common shares
outstanding-basic and diluted 63,390 51,698 50,903
========================================================
See accompanying notes to consolidated financial statements.
29
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 29, 1997, December 30, 1996 and January 1, 1996
(Dollars in thousands)
Additional Retained Net
Preferred Common Paid-In Earnings Treasury Stockholders
Stock Stock Capital Warrants (Deficit) Stock Equity
---------------------------------------------------------------------------------
Balance at, January 2, 1995 $ - $ 50 $ 89,022 $ - $ 20,515 $ (400) $ 109,187
Issuance of 178,273 shares of common stock
at $2.24 per share to acquire territory rights - 0 400 - - - 400
Issuance of I 1 8,740 shares of common stock at
$2.20 per share to acquire a promotional apparel
company - 0 260 - - - 260
Issuance of 126,375 shares of connnon stock at
$2.19 per share to acquire a Restaurant - 0 276 - - - 276
Issuance of 907,745 shares of common stock as
consideration for Restaurant acquisition (note 6) - 1 55 - - - 56
Issuance of 8,377 shares of common stock at
$1.91 per share to pay consulting fees - 0 16 - - - 16
Warrants issued in settlement of
litigation - - - 3,000 - - 3,000
Net loss - - - - (33,219) - (33,219)
---------------------------------------------------------------------------------
Balance at, January 1, 1996 - 52 90,029 3,000 (12,705) (400) 79,976
Issuance of 200,000 shares of common stock at
$1.14 as payment on long-term debt - 0 222 - - 222
Issuance of 40,000 shares of common stock at
$1.19 per share to pay consulting fees - 0 47 - - 47
Warrants issued to investor group - - - 6,463 - 6,463
Employee stock options vested upon severance - - 41 - - 41
Net loss - - - - (46,409) - (46,409)
---------------------------------------------------------------------------------
Balance at, December 30, 1996 - 52 90,339 9,463 (59,114) (400) 40,340
Private placement of 8,981,453 shares of common
stock and 87,719 shares of preferred stock 0 9 19,373 - - - 19,382
Exercise of employee stock option for 125 shares
of common stock - - 0 - - - 0
Conversion of preferred stock to common stock (0) 9 (9) - - - 0
Issuance of 1, 1 16,376 shares of common stock
in payment of long term debt and accrued interest - 1 1,271 - - - 1,272
Issuance of 192,308 shares of common stock
in payment of long term debt - 0 196 - - - 196
Issuance of 1,093,124 shares of common stock
in payment of long term debt and accrued interest - 0 1,174 - - - 1,175
Issuance of 220,751 shares of common stock
in payment of long term debt and accrued interest - 0 192 - - - 192
Net loss - - - - (12,186) - (12,186)
---------------------------------------------------------------------------------
Balances, December 29,1997 $ - $ 73 $112,536 $ 9,463 $ (71,300) $ (400) $ 50,372
=================================================================================
See accompanying notes to consolidated financial statements.
30
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Year Ended
---------------------------------------------------
December 29, December 30, January l,
1997 1996 1996
---------------------------------------------------
Cash flows from operating activities:
Net loss $ (12,186) $ (46,409) $ (33,219)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 10,576 13,173 14,694
Impairment of long-lived assets 565 15,282 18,935
Provision for losses on assets to be disposed of 312 7,132 3,192
Provision for bad debt 1,013 1,311 2,261
Deferred loan cost amortization 3,650 1,300 -
Loss provisions 150 1,991 3,800
Gain on extinguishment of debt (359) - -
(Gain) loss on sale of property & equipment 243 (75) 126
Minority interests in losses (66) (1,509) (192)
Other - - -
Change in assets and liabilities:
Increase in receivables (1,501) (474) (1,126)
Decrease in notes receivables 133 3,012 -
Decrease (increase) in inventories 170 346 (588)
Decrease in costs and earnings in excess
of billings on uncompleted contracts - - 1,042
Decrease (increase) in income tax receivable 3,514 (242) (1,713)
Decrease (increase) in deferred income tax assets - 3,358 (3,358)
(Increase) decrease in prepaid expenses (105) (90) 447
Decrease (increase) in deposits and other noncurrent assets 142 (309) (103)
(Decrease) increase in accounts payable (6,608) 4,273 (2,811)
(Decrease) increase in accrued liabilities (3,452) 2,525 4,457
(Decrease) increase in deferred income (197) (261) 206
Decrease in deferred income taxes liabilities - - (2,540)
---------------------------------------------
Net cash (used in) provided by operating activities (4,006) 4,334 3,510
---------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,671) (4,240) (2,876)
Proceeds from sale of assets 4,166 1,813 5,502
Increase in goodwill and noncompete agreements - (4)
Acquisitions of restaurants, net cash paid (282) (200) (64)
Net cash provided by (used in) investing ---------------------------------------------
activities $2,213 $ (2,631) $ 2,562
---------------------------------------------
See accompanying notes to consolidated financial statements.
31
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Year Ended
--------------------------------------------------
December 29, December 30, January l,
1997 1996 1996
--------------------------------------------------
Cash flows from financing activities:
Proceeds from (payments of) issuance of short-term debt-net $ (2,500) $ 1,500 $ 1,000
Proceeds from issuance of long-term debt - - 4,183
Principal payments on long-term debt (14,183) (3,584) (11,239)
Net proceeds from sales of stock 19,414
Proceeds from investment by minority interest - 285 -
Distributions to minority interest (73) (212) (164)
--------------------------------------------------
Net cash provided by (used in) financing activities 2,658 (2,011) (6,220)
--------------------------------------------------
Net increase (decrease) in cash 865 (308) (148)
Cash at beginning of period 3,056 3,364 3,512
--------------------------------------------------
Cash at end of period $ 3,921 $ 3,056 $ 3,364
=================================================
Supplemental disclosures of cash flow information:
Interest paid $ 5,399 $ 5,842 $ 5,065
Income taxes paid - - 182
Schedule of noncash investing and financing activities
Note received on sale of assets $ 179 $ - $ 4,982
=================================================
Capital lease obligations incurred $ - $ 225 $ 5,000
=================================================
Acquisitions of restaurants:
Fair value of assets acquired 1,360 9,902 3,046
Receivables forgiven (114) (5,429) -
Reversal of deferred gain - 1,422 -
Liabilitiesassumed (898) (5,695) (1,989)
Stock issued - (993)
Assets distributed (438) - -
Reduction of minority interest 372 - -
--------------------------------------------------
Total cash paid for the net assets acquired $ 282 $ 200 $ 64
=================================================
Stock issued for repayment of debt and accrued interest $ 2,901 $ 228 $ -
=================================================
Stock issued for payment of consulting fees $ - $ 48 $ -
=================================================
See accompanying notes to consolidated financial statements.
32
CHECKERS DRIVE-IN RESTAURANTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1997, December 30, 1996 and January 1, 1996
(Tabular dollars in thousands, except per share amounts)
Note 1: Summary of Significant Accounting Policies and Practices
a) Purpose and Organization - The principal business of
Checkers Drive-In Restaurants, Inc. (the "Company") is the operation and
franchising of Checkers Restaurants. At December 29, 1997 there were 479
Checkers Restaurants operating in 23 different states, the District of Columbia,
Puerto Rico and Israel. Of those Restaurants, 230 were Company-operated
(including thirteen joint ventures) and 249 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. Intercompany
balances and transactions have been eliminated in consolidation and minority
interests have been established for the outside partners' interests.
b) Cash and Cash Equivalents - The Company considers all
highly liquid instruments purchased with a 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 obligations 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. As of January 26, 1998, $1.2 million in restricted
cash balances were relieved for the company's use as the funds have been
guaranteed by a letter of credit from a bank.
c) Receivables - Receivables consist primarily of royalties
due from franchisees notes and accounts receivable from the sale of Modular
Restaurant Packages. Allowances for doubtful receivables was $2.1 million at
December 29, 1997 and $2.2 million at December 30, 1996.
d) Inventories - Inventories, which consist principally of food
and supplies, are stated at the lower of cost, first-in, first-out (FIFO) method
or market.
e) Pre-Opening Costs - Pre-opening costs are deferred and
amortized over 12 months commencing with a Restaurant's opening. Such costs
totaled $14,000 at December 30,1996 (none at December 29, 1997).
f) Deferred Loan Costs - Deferred loan costs of $6.9 million
incurred in connection with the Company's November 22, 1996 restructure of its
primary credit facility (see Notes 3 and 10) are being amortized on the
effective interest method. During 1997, the Company expensed an additional $1.2
million of deferred loan costs due to unscheduled principal reductions made
during 1997.
g) 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.
h) 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 (SFAS 121 impairments of goodwill were $565,000 in 1997,
$4.6 million in 1996 and $5.8 million in 1995).
i) Revenue Recognition - Franchise fees and area development
franchise fees are generated from the sale of rights to develop, own and operate
Checkers Restaurants. Area development franchise 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 Area Development 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 a Restaurant). Both franchise fees and area
development franchise fees are non-refundable. Franchise fees and area
development franchises fees received prior to the substantial completion of the
Company's obligations are deferred.
The Company receives royalty fees from franchisees, generally
in the amount of 4% of each Restaurant's revenues. Royalty fees are recognized
as earned. The Champion Modular Restaurant division recognizes revenues on the
percentage-of-completion method, measured by the percentage of costs incurred to
the estimated total costs of the contract.
33
j) 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.
k) Earnings per Share - The Company calculates basic and
diluted earning (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.
l) Stock Options - As discussed in Note 7, the Company utilizes
the disclosure-only provisions of Statement of Financial Accounting Standards
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation".
m) 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. In applying SFAS No. 121 during 1995, 1996 and in 1997, the Company
reviewed all stores that recorded losses in the applicable fiscal years and
performed a discounted cash flow analysis where indicated for each store based
upon such results projected over a ten or fifteen year period. This period of
time was selected based upon the lease term and the age of the building, which
the Company believes is appropriate based upon its limited operating history and
the estimated useful life of its modular restaurants. Impairments were recorded
to adjust the asset values to the amount recoverable under the discounted cash
flow analysis in the cases where the undiscounted cash flows were not sufficient
for full asset recovery, in accordance with SFAS No. 121. The Company recorded
significant SFAS No. 121 impairment losses in 1995 and 1996 again in 1997
because sales continued to decline in each fiscal year, which necessitated a
review of the carrying value of its assets. The effect of applying SFAS No. 121
resulted in a reduction of property and equipment and goodwill of $565,000 in
1997, $14.8 million in 1996 and $18.9 million in 1995.
n) Disclosures about Fair Values of Financial Instruments - The
balance sheets as of December 29, 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.
The carrying amounts of cash and equivalents, receivables, accounts payable, and
long-term debt which 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.
o) 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 will be required. The Company believes that this standard will not have
a material effect on the Company's financial statements.
In June 1997, SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related information" (Statement 131), was issued. This statement
will change the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products, services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. Statement 131 is effective for fiscal years beginning
after December 15, 1997. The Company does not expect that Statement 131 will
have material effect upon the Company's financial statements.
34
p) 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.
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 1996 financial
statements have been reclassified to conform to the 1997 presentation.
35
Note 2: Property and Equipment
Property and equipment consists of the following:
December 29, December 30, Useful Life
1997 1996 In Years
------------------------------------------
Land and improvements $ 55,882 $ 56,544 0-15
Buildings 28,938 29,282 20-31.5
Equipment and fixtures 45,362 46,286 5-10
--------------------------
130,182 132,112
Less accumulated
depreciation and
wnortization 42,293 33,923
--------------------------
$ 87,889 $ 98,189
==========================
Note 3: Long-Term Debt
Long-term debt consists of the following:
December 29, December 30,
1997 1996
------------------------------
Notes payable under Loan Agreement $ 26,077 $ 35,818
Notes payable due at various dates, secured by buildings and equipment, with
interest at rates primarily ranging from 9.0% to 15.83%, payable monthly 5,441 8,963
Unsecured notes payable, bearing interest at rates ranging from prime to 18% - 3,481
Other, at interest rates ranging from 7.0% to 10.0% 1,367 1,233
------------------------------
Total long-term debt 32,885 49,495
Less current installments 3,484 9,589
------------------------------
Long-term debt, less current installments $ 29,401 $ 39,906
==============================
Aggregate maturities under the existing terms of long-term
debt agreements for each of the succeeding five years are as follows:
1998 $ 3,484
1999 $ 27,714
2000 $ 1,215
2001 $ 339
2002 $ 133
-------------
$ 32,885
=============
On October 28, 1993, the Company entered into a loan agreement
(the "Loan Agreement") with a group of banks ("Bank Group") providing for an
unsecured, revolving credit facility. The Company borrowed approximately $50
million under this facility primarily to open new Restaurants and pay off
approximately $4 million of previously-existing debt. The Company subsequently
arranged for the Loan Agreement to be converted to a term loan and
collateralized the term loan and a revolving line of credit ranging from $1
million to $2 million (the "Credit Line") with substantially all of the
Company's assets.
36
On July 29, 1996, the debt under the Loan Agreement and Credit
Line was acquired from the 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., Taco Bueno Restaurants, Inc., and Summit Family
Restaurants, Inc. Also participating were most members of the DDJ Group, as well
as KCC Delaware, a wholly-owned subsidiary of Giant Group, Ltd., which is a
controlling shareholder of Rally's Hamburgers, Inc. Waivers of all defaults
under the Loan Agreement and Credit Line were granted through November 22, 1996,
to provide a period of time during which the Company and the CKE Group could
negotiate an agreement on debt restructuring.
On November 22, 1996, the Company and the CKE Group executed
an Amended and Restated Credit Agreement (the "Restated Credit Agreement")
thereby completing a restructuring of the debt under the Loan Agreement. The
Restated Credit Agreement consolidated all of the debt under the Loan Agreement
and the Credit Line into a single obligation. At the time of the restructuring,
the outstanding principal balance under the Loan Agreement and the Credit Line
was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the
term of the debt was extended by one (1) year until July 31, 1999, and the
interest rate on the indebtedness was reduced to a fixed rate of 13%. In
addition, all principal payments were deferred until May 19, 1997, and the CKE
Group agreed to eliminate certain financial covenants, to relax others and to
eliminate approximately $4.3 million in restructuring fees and charges. The
Restated Credit Agreement also provided that certain members of the CKE Group
agreed to provide to the Company a short term revolving line of credit of up to
$2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit
Line"). In consideration for the restructuring, the Restated Credit Agreement
required the Company to issue to the CKE Group warrants to purchase an aggregate
of 20 million shares of the Companys' common stock at an exercise price of $.75
per share, which was the approximate market price of the common stock prior to
the announcement of the debt transfer. As of December 29, 1997, the Company has
reduced the principal balance under the Restated Credit Agreement by $9.7
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 (described later in this section). Pursuant to the Restated
Credit Agreement, the prepayments of principal made in 1996 and in 1997 will
relieve the Company of the requirement to make any of the regularly scheduled
principal payments under the Restated Credit Agreement which would have
otherwise become due in fiscal year 1998 through maturity. The Restated Credit
Agreement provides however, that 50% of any future asset sales must be utilized
to prepay principal.
On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of the Company's common
stock, $.001 par value, and 87,719 shares of the Company's Series A preferred
stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased
6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and
other qualified investors, including other members of the CKE Group of lenders
under the Restated Credit Agreement, also participated in the Private Placement.
The Company received approximately $20 million in proceeds from the Private
Placement. The Company used $8 million of the Private Placement proceeds to
reduce the principal balance due under the Restated Credit Agreement; $2.5
million was utilized to repay the Secondary Credit Line; $2.3 million was
utilized to pay outstanding balances to various key food and paper distributors;
and the remaining amount was used primarily to pay down outstanding balances due
certain other vendors.
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 $10
million. 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. This dividend was charged to paid-in
capital due to the retained deficit position of the Company.
At November 13, 1997 the effective date of the registration
statements filed 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 convertible note in the same principal
amount and convertible into approximately 614,000 shares of Common Stock
pursuant 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,
37
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. After these issuances, the remaining
amount owed in relation to these Notes was $322,000, payable to NTDT. 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.
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 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 violation was primarily due to the Company
recording certain accounting charges and loss provisions in period 13 of fiscal
1997, as discussed in Note 8. The Company received a waiver for period 13 of
fiscal 1997 and for periods one and two of fiscal 1998. The Company expects to
cure the covenant violation for period three of fiscal 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.
Note 4: Income Taxes
Income tax expense (benefit) from continuing operations in
fiscal years 1997, 1996 and 1995 amounted to $-O-, $151,000, and ($8.9 million)
respectively.
Income tax expense (benefit) consists of:
Current Deferred Total
--------------------------------------------------
1997
Federal $ - $ - $ -
State $ - $ - $ -
--------------------------------------------------
$ - $ - $ -
==================================================
1996
Federal $ (3,397) $ 3,397 $ -
State 190 (39) 151
--------------------------------------------------
$ (3,207) $ 3,358 $ 151
==================================================
1995
Federal $ (2,957) $ (4,523) $ (7,480)
State - (1,375) (1,375)
--------------------------------------------------
$ (2,957) $ (5,898) $ (8,855)
==================================================
38
Actual expense differs from the expected expense by applying
the federal income tax rate of 35% to earnings before income tax as follows:
Fiscal Year Ended
----------------------------------------------------
Dec 29, Dec 30, Jan. 1,
1997 1996 1996
----------------------------------------------------
"Expected" tax (benefit) expense $ (4,265) $ (16,190) $ (14,726)
State taxes, net of federal benefit (474) (1,802) (1,632)
Change in valuation allowance for deferred tax
asset allocated to income tax expense 4,624 18,125 7,616
Other, net 115 18 (113)
----------------------------------------------------
Actual tax expense (benefit) $ - $ 151 $ (8,855)
====================================================
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities,
are represented below:
December 29, December 30,
1997 1996
-------------------------------
Deferred Tax Assets:
Impairment of long-lived assets tinder SFAS 121 $15,885 $16,085
Accrued expenses and provisions for restructuring and Restaurant
relocations and abandoned sites, principally due to deferral for
income tax purposes 8,121 8,581
Federal net operating losses and credits 19,583 13,878
State net operating losses and credits 3,032 2,210
Deferral of franchise income and costs associated with franchise
openings in progress 76 100
Other 680 284
----------------------------
Total gross deferred tax assets 47,377 41,138
Valuation allowance (30,365) (25,741)
----------------------------
Net deferred tax assets $ 17,012 $ 15,397
----------------------------
Deferred Tax Liabilities:
Property and equipment principally due to differences in depreciation 16,899 15,276
Pre-opening expense 113 121
----------------------------
Total gross deferred tax liabilities 17,012 15,397
----------------------------
Net deferred tax assets $ - $ -
============================
The net change in the valuation allowance in the years ended
December 29, 1997 and December 30, 1996 was an increase of $4.6 million and
$18.1 million, respectively. The total valuation allowance of $30.4 million is
maintained on deferred tax assets which the Company has not determined to be
more likely than not realizable at this time. The Company will continue to
review the valuation allowance on a quarterly basis and make adjustments as
appropriate.
At December 29, 1997 the Company has net operating loss carry
forwards for Federal income tax purposes of $52.6 million which are available to
offset future taxable income, if any, through 2012. The Company also has
alternative minimum tax credit carry forwards of approximately $1.3 million
which are available to reduce future regular income taxes, if any, over an
indefinite period as well as Targeted Jobs Tax Credit carry forwards in the
amount of $446,000 which are available to reduce future regular income taxes, if
any, through 2009.
39
Note 5: Related Parties
Previous to 1995, the Company entered into joint ventures with
related parties to operate two Restaurants. The joint venture agreements require
royalty fees of 2 to 4% and one of the agreements requires a management fee of
2.5% be paid to the Company. Total fees received by the Company were $103,000 in
1995.
Previous to 1995, the Company sold its 50% partnership
interest in one of the above joint ventures back to the joint venture partner.
This joint venture partner has an additional franchise Restaurant. Royalties
paid by these Restaurants to the Company, for the time period in which the
Restaurants were owned 100% by the joint venture partner were $68,000 in 1995.
Previous to 1995, the Company entered into a unit franchise
agreement for the operation of a single restaurant in Dania, Florida, with a
related party. In connection with the transaction, the related party and his
wife executed a continuing guaranty, which guaranty provides for the personal
guaranty of both of the individuals of all obligations of the franchisee under
the franchise agreement. Total sums received by the Company in royalty fees in
fiscal year 1995 were $31,000.
Previous to 1995, the Company entered into a unit franchise
agreement for the operation of a single restaurant in the Clearwater, Florida
area with three related parties. In connection with the transaction, the related
parties executed a continuing guaranty, which guaranty provides for the personal
guaranty of each of the individuals of all obligations of the franchisee under
the franchise agreement. Total sums received by the Company in royalty fees in
fiscal year 1995 were $18,000.
Previous to 1995, the Company entered into an Area Development
Agreement with two related parties. The Agreement provides for the payment to
the Company of the standard development fee, a standard franchise fee per
restaurant and payment of standard royalty fees. Six unit franchise agreements
have been granted pursuant to the Agreement in the names of various entities in
which the related parties each hold a fifty (50%) ownership interest. Total
royalty fees received by the Company in fiscal year 1995 and pursuant to the
unit franchise agreements were $194,000.
Previous to 1995, the Company sold one of its Restaurants in
Ft. Lauderdale, Florida, to a related party, The sales price was $905,000 and
the Company received $705,000 in cash and a promissory note for $200,000. A gain
of approximately $470,000 was recognized by the Company. Total royalty fees
received by the Company in fiscal years 1995 pursuant to the unit franchise
agreement for the Restaurant were $31,000.
Previous to 1995, the Company acquired 13 Restaurants from a
Director of the Company and a group of five partnerships (see note 6). The
Company also entered into a joint venture agreement with an affiliate of the
Director in September 1993, whereby the Director's affiliate served as the
operating general partner and owned 25% interest in the joint venture. The
agreement gave the Company the right to purchase, and gave the Director the
right to require the Company to purchase, the Director's 25% interest in the
joint venture at December 31, 1995 based on a formula price. The Director
received compensation and distributions totaling approximately $180,000 in 1995
from the joint venture. The joint venture subleased its office space in Atlanta
from an affiliate of the Director in 1995. Rent paid by the joint venture in
1995 was $87,000. Total franchise fees received from the Director and his
affiliate and recognized as income was and $96,000 in 1995. The Company
purchased the interest of the Director and his affiliations in the joint venture
and sold three of these Restaurants to an affiliate of the Director in August
1995.
On July 17, 1995, Checkers of Raleigh, a North Carolina
corporation ("C of R") in which a Director at the time was the principal officer
and shareholder, took possession of two under performing Company Restaurants
pursuant to a verbal agreement, and entered into two franchise agreements which
provided for waiver of the initial franchise fees but required the payment to
the Company of royalty fees of 1%, 2% and 3% during the first, second and third
years, respectively, and 4% thereafter. On January 1, 1996, C of R entered into
leases for these Restaurants for a term of three years for (i) the building and
equipment at a monthly rental of 1.5%, 3% and 4.5% of gross sales during the
first, second and third years respectively, and (ii) the land at a monthly
rental of 3% of gross sales for the first year and 4% of gross sales thereafter.
Total sums received by the Company in fiscal year 1995 for this Restaurants
were: (a) $3,000 in royalty fees pursuant to the unit franchise agreements, and
(b) -0- in rent. The Director executed a continuing guaranty, which provides for
the personal guaranty of all of the obligations of the franchisee under the
franchise agreements. Pursuant to an Options for Asset Purchase dated January 1,
1996, C of R was granted the option to purchase these Restaurants for the
greater of (a) 50% of its sales for the prior year, or (b) $350,000 each.
On December 5, 1995, Checkers of Asheville, a North Carolina
corporation ("C of A") in which a Director at the time was the principal officer
and shareholder, took possession of three under performing Company Restaurants
pursuant to a verbal agreement, and entered into unit franchise agreements which
provided for waiver of the initial franchise fees but generally
40
required the payment to the Company of the standard royalty fees. On January 1,
1996, C of A entered into leases for this Restaurant for a term of three years
for the land, building and equipment at monthly rentals at rates generally
varying between 1% to 6% of gross sales. The Director executed a continuing
guaranty, which provides for the personal guaranty of all of the obligations of
the franchisee under the franchise agreements. Pursuant to Options for Asset
Purchase dated January 1, 1996, C of A was granted the option to purchase these
Restaurants for the greater of (a) 50% of its sales for the prior year, or (b)
$350,000 for one restaurant and $300,000 for the remaining two restaurants.
In January 1996, the Company entered into an Agreement for
Lease with Option for Asset Purchase ("Agreement") with a Director in which the
Company was granted certain rights for three years in and to a Restaurant in
Clearwater, Florida. Checkers (a) entered into a sublease for the real property
and an equipment lease for the fixed assets at a combined monthly rental of
$3,000, and (b) agreed to purchase the inventory located at the Restaurant.
The Company incurred approximately $166,000 in legal fees for
1995, respectively, from a law firm in which a Director of the Company, at the
time, was a partner. Additionally, during 1997 the Company incurred $539,000 in
legal fees from a law firm in which a current Director of the Company is a
partner.
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 $283,000. 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 received a signing
bonus of $50,000. The options vest 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 in 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 will share the costs associated with his agreement,
pursuant to that certain Management Services Agreement dated November 30, 1997.
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 the income generated by
this agreement has enabled 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
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,
and asset sales should allow the Company to continue to meet its financial
obligations and to pay operating expenses.
On December 18, 1997 Rally's, Hamburgers, Inc. ("Rally's")
acquired approximately 19.1 million shares of the Company's common stock,
pursuant to that certain Exchange Agreement, dated as of December 8, 1997 (the
"Exchange Agreement"), between Rally's, CKE Restaurants, Inc., Fidelity National
Financial, Inc., GIANT GROUP, LTD. and the other parties named in the Exchange
Agreement. As of December 18, 1997, Rally's owned approximately 26.3% of the
outstanding common stock of the Company.
41
Note 6: Acquisitions and Dispositions
On March 31, 1995, the Company re-acquired certain rights
relating to the development and operation of Checkers Restaurants in the cities
of Flint and Saginaw, Michigan. The purchase price was $400,000 payable by the
delivery of 178,273 shares of Common Stock.
Effective as of July 28, 1995, an Asset Purchase Agreement
(the "Agreement") was entered into by and among InnerCity Foods, a Georgia
general partnership ("ICF"), InnerCity Foods Joint Venture company, a Delaware
corporation and wholly owned subsidiary of the Registrant ("ICF JVC"), InnerCity
Foods Leasing Company, a Delaware corporation and wholly owned subsidiary of the
Company ("Leasing"), The La-Van Hawkins Group, Inc., a Georgia corporation
("Hawkins Group"), La-Van Hawkins InnerCity Foods, LLC, a Maryland limited
liability company ("LHICF"), and La-Van Hawkins, an individual who was the
President of ICF and a Director of the Company from August 1994 to January 1996
("Hawkins"). For purposes of the disclosure in this term, ICF JVC, Leasing and
the Company are collectively referred to as the "Checkers Parties" and Hawkins
Group, LHICF and Hawkins are collectively referred to as the "Hawkins Parties".
ICF was a joint venture between the Hawkins Group and ICF JVC, of which the
Hawkins Group was the Operating Partner. The Hawkins Group is controlled by
Hawkins. ICF was engaged in the operation of seven Checkers Restaurants in
Atlanta, Georgia, six Checkers Restaurants in Philadelphia, Pennsylvania, and
three Checkers Restaurants in Baltimore, Maryland. ICF JVC owned a 75% interest
in ICF and the Hawkins Group owned a 25% interest in ICF. The physical assets
comprising the Restaurants operated by ICF were owned by Leasing and leased to
ICF. The Agreement consisted of two separate transactions. The first transaction
was the purchase by the Company of all of the rights, titles, and interest of
Hawkins Group in and to ICF for a purchase price of $1.3 million, plus an amount
based on ICF's earnings times 1.25, minus all amounts owed by the Hawkins
Parties to the Checkers Parties in connection with the operation of ICF. The
component of the purchase price based upon the earnings of ICF was zero, and the
amounts owed by the Hawkins Parties to the Checkers Parties was in excess of
$1.3 million. Accordingly, there was no net purchase price payable to the
Hawkins Parties by the Company for Hawkins Group's interest in ICF. The second
transaction under the Agreement was the sale by the Checkers Parties of all of
their respective rights, titles and interests in the three Checkers Restaurants
located in Baltimore, Maryland, to LHICF for a purchase price of $4.8 million.
The purchase price was paid by the delivery of a promissory note in the amount
of $5.0 million, which amount includes the purchase price for the three
Restaurants, the approximately $107,000 owed by the Hawkins Parties to the
Checkers Parties in connection with the operation of ICF that was not offset by
the $1.2 million purchase price for Hawkins Group's interest in ICF and an
advance of $75,000 to Hawkins that was used primarily to pay closing costs
related to the transaction. The note bore interest at a floating rate which is
the lesser of (i) .25% above the current borrowing rate of the Company under its
Loan Agreement and (ii) 10.5%. Interest only is payable for the first six months
with principal and interest being payable thereafter based on a 15 year
amortization rate with the final payment of principal and interest due August
2002. The note was secured by a pledge of all the assets sold. Royalty fees for
the three Restaurants were at standard rates provided that the Company would
receive an additional royalty fee of 4% on all sales in excess of $1.8 million
per Restaurant. On August 16, 1996, the Company received $3.5 million and a
Checkers Restaurant in Washington D.C., valued at $660,000, in settlement of a
note receivable of $5.0 million, accrued interest of $320,000, and other
receivables of $279,000. This transaction resulted in an elimination of a
deferred gain of $1.4 million which had been previously recorded as a liability
upon the sale of three Checkers Restaurants located in Baltimore, Maryland on
July 28, 1995 when the $5.0 million note receivable was generated.
In addition to the two transactions described above, the
Agreement also provided for the Hawkins Parties to be granted, and such parties
were granted on the closing date, development rights for Checkers Restaurants in
certain defined areas of Baltimore, Maryland, Washington, D.C., Bronx, New York,
and Harlem, New York, as well as a right of first refusal for certain
territories in California and Virginia. Franchise fees and royalty rates for all
Restaurants developed under such development rights would be at standard rates
provided that the Company would receive an additional royalty fee of 4% on all
sales in excess of $1.8 million per Restaurant. The Agreement supersedes all
other prior agreements, understandings and letters related to the transactions
contemplated by the Agreement including, but not limited to, the Joint Venture
Agreement, dated as of August 10, 1993 and the Management Agreement, Engagement
Agreement and Buy/Sell Agreement, each dated as of September 7, 1993, by and
among certain of the Hawkins Parties and their affiliates and the Checkers
Parties; provided, however, that any provisions of such agreements that would
survive the termination of such agreements according to the terms of such
agreements are deemed to have survived the termination of such agreements
pursuant to the terms of the Agreement.
In March, 1995 the Company purchased two Checkers Restaurants
in Nashville, Tennessee from a franchisee. Consideration consisted of
approximately $50,000 in cash secured, subordinated promissory notes for
approximately $1.6 million and future cash payments of up to $800,000 consisting
of $200,000 for a noncompete agreement ($40,000 per year for five years) and up
to $600,000 through an earnout provision. In April 1995, the Company acquired
the remaining 50% share of a joint venture Restaurant in St. Petersburg,
Florida. Pursuant to the terms of the Assignment Agreement by and among the
42
Company and the other partners of the joint venture, the Company acquired the
one-half interest for 126,375 shares of Common Stock valued at approximately
$280,000. Additionally in April 1995, the Company acquired substantially all of
the assets of a promotional apparel distributor ("the Distributor") for a
purchase price including (a) $67,000, payable in shares of Common Stock, and (b)
the assumption of approximately $238,000 of liabilities, approximately $196,000
of which was represented by promissory notes payable to certain stockholders of
the Distributor (the "Noteholders"). The Company issued a total of 118,740
shares of Common Stock to the Distributor in payment of the $67,000 purchase
price and to the Noteholders in payment of their notes.
On July 1, 1996, the Company acquired certain general and
limited partnership interests in nine Checkers restaurants in the Chicago area,
three wholly-owned Checkers Restaurants and other assets and liabilities as a
result of the bankruptcy of Chicago Double-Drive Thru, Inc. ("CDDT"). These
assets were received in lieu of past due royalties, notes receivable and accrued
interest, from CDDT which totaled, net of reserves, $3.3 million. Assets of $8.9
million ($7.0 million tangible and $1.9 million intangible) and liabilities of
approximately $3.0 million were consolidated into the balance sheet of the
Company as of the acquisition date. Long-term debt of $1.6 million was assumed
as a result of the acquisition of the assets of CDDT, including an obligation to
the Internal Revenue Service of $545,000 and an obligation to the State of
Illinois Department of Revenue of $155,000, each subject to interest at 9.125%
per year. The remaining acquired notes ($922,000) are payable to a Bank and
other parties with interest at rates ranging from 8.11% to 10.139%. Non-interest
bearing notes payable, certain accrued liabilities and permitted encumbrances of
$1.1 million related to this acquisition were assumed by the Company. Accounts
payable incurred by CDDT and its partnerships in the normal course of business
amounting to $333,000 were also recorded in connection with this acquisition.
During 1997, the Company acquired the minority share of one
joint-venture restaurant, the operations and certain of the equipment including
one MRP associated with five operating franchise restaurants and one closed
franchise restaurant having an aggregate fair value of $1.4 million, for a total
net cash disbursement of $282,000. As a result of these acquisitions, the
Company recorded the assumption of total indebtedness of $898,000, including
long-term debts and capital leases of $803,000 and other accruals of $95,000.
Additionally, as a result of these transactions, minority interests of $372,000
were eliminated, receivables of $114,000 were forgiven, property of $438,000 was
distributed and goodwill of $831,000 was recorded.
The operations of these acquisitions are included in these
financial statements from the date of purchase. The impact of the 1995, 1996 and
1997 acquisitions on the consolidated results of operations for the period prior
to acquisitions is immaterial.
Note 7: 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. 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.
43
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 per-cent 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 fiscal 1995, 1996, and 1997 consistent with the provisions of SFAS No.
123, the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below:
Fiscal Year Ended
--------------------------------------------------
December 29, December 30, January 1,
1997 1996 1996
--------------------------------------------------
As Reported $ (12,882) $ (46,409) $ (33,219)
Pro Forma $ (14,896) $ (47,829) $ (33,707)
As Reported $ (0.20) $ (0.90) $ (0.65)
Pro Forma $ (0.23) $ (0.93) $ (0.66)
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 1995, 1996 and 1997,
respectively: dividend yield of zero percent for all years; expected volatility
of 60, 64 and 86 percent, risk-free interest rates of 6.2, 6.5 and 5.9 percent,
and expected lives of 5.1, 3.5 and 2.0 years. The compensation cost disclosed
above may not be representative of the effects on reported income in future
years, for example, because options in many cases vest over several years and
additional awards are made each year. Information regarding the employee option
plan for 1997, 1996 and 1995 is as follows:
44
Summary of the Status of the CDmpany's Stock Option Plam
1997 1996 1995
----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Averge
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------
Outstanding at the
beginning of the year 3,344,230 $ 3.94 2,631,084 $ 4.75 2,948,674 $ 5.44
Granted (exercise price equals market) 2,737,000 1.40 96,100 1.00 521,182 2.37
Granted (exercise price exceeds market) - - 953,056 1.54 -
Exercised (125) 1.53 - - -
Forfeited (842,675) 6.25 (336,010) 2.07 (838,772) 4.00
--------- ---------- ----------
Outstanding at the
end of the year 5,238,430 2.21 3,344,230 3.94 2,631,084 4.75
========= ========== ==========
Options Exercisable at
year end 4,511,768 2,165,934 1,147,650
--------- ---------- ----------
Weighted-average fair
value of options
granted during the year $ 0.78 $ 0.39(1) $ 1.08
(1). The, weighted-average fair value of options granted whose exercise price
exceeds market was $0.39.
- ---------------------------------------------------------------------------------------------------------------
Weighted-Average
Number Remaining Weighted Number Weighted
Range of Oustanding Contractual Average Exercisable Average
Exercise Prices 12/30/97 Life (Yrs.) Exercise Price at 12/30/97 Exercise Price
- ---------------------------------------------------------------------------------------------------------------
$0.75 to $2.00 3,480,889 9.2 1.42 3,038,902 1.41
$2.01 to $3.00 857,045 3.7 2.58 599,955 2.57
$3.01 to $4.00 214,550 2.1 3.35 207,300 3.54
$4.01 to $5.00 - - - - -
$5.01 to $6.00 671,442 2.4 5.16 632,459 5.15
$6.01 to $20.00 14,504 4.5 12.33 33,152 8.51
- ---------------------------------------------------------------------------------------------------------------
$0.75 to $20.00 5,238,430 7.1 2.21 4,511,768 2.24
===============================================================================================================
In February 1996, employees (excluding executive officers) who
were 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 three to 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 option for 15,877 shares at the $1.95
exercise price. These changes are reflected in the tables above.
45
Note 8: Loss Provisions
During 1997, the Company recorded accounting charges and loss
provisions of $1.0 million to provide for impaired goodwill associated with one
under-performing store ($565,000) , to provide for additional losses on assets
to be disposed due to certain sublease properties being converted to surplus
($312,000), and a provision for the aging of Champion inventories ($150,000).
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 general and administrative expenses ($500,000 for bad debt expense
and a $750,000 provision for state sales tax audits and refinancing costs of
$845,000 were also recorded to expense capitalized costs incurred in connection
with the Company's previous lending arrangements with its bank group).
Provisions totaling $14.2 million to close 27 Restaurants and 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 provision of $500,000 was also recorded for
Champion's finished buildings inventory as an adjustment to fair market value.
Additional accounting charges and loss provisions of $12.8
million were recorded during the fourth quarter of 1996, $1.5 million of which
consisted of various selling, general and administrative expenses ($579,000 for
severance, $346,000 for employee relocations, bad debt provisions of $366,000,
and $204,000 for other charges). Provisions totaling $7.7 million including $1.4
million for additional losses on assets to be disposed of, $5.9 million for
impairment charges related to 9 under-performing Restaurants received by the
Company as a result of the CDDT bankruptcy in July 1996 and $393,000 for other
impairment charges were also recorded. Additionally, in the fourth quarter of
1996, a provision of $351,000 was recorded for legal settlements, a $1.1 million
provision for loss on the disposal of the L.A. Mex product line, workers
compensation accruals of $1.1 million (included in Restaurant labor costs),
adjustments to goodwill of $514,000 (included in other depreciation and
amortization) and a $453,000 charges for the assumption of minority interests in
losses on joint-venture operations as a result of the receipt by the Company of
certain assets from the above mentioned CDDT bankruptcy.
Third quarter 1995 accounting charges and loss provisions of
$8.8 million consisted of $2.9 million in various selling, general and
administrative expenses ($1.2 million write-off of receivables, accruals for
$125,000 in recruiting fees, $304,000 in relocation costs, $274,000 in severance
pay, $101,000 in state income and sales taxes, reserves for $700,000 in legal
settlements, the write off of a $263,000 investment in an apparel company); $3.2
million to provide for Restaurant relocation costs, write-downs and abandoned
site costs; $344,000 to expense refinancing costs; $645,000 to provide for
inventory obsolescence; $1.5 million for workers compensation exposure included
in Restaurant labor costs and $185,000 in other charges, net, including the
$499,000 write-down of excess work in progress inventory costs and a minority
interest credit of $314,000.
Fourth quarter 1995 accounting charges included $3.0 million
for warrants to be issued in settlement of litigation (see Note 9 (b) - Lopez,
et al vs. Checkers) to accrue approximately $800,000 for legal fees in
connection with the settlement and continued defense of various litigation
matters. Additionally, during the fourth quarter of 1995, the Company adopted
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 required a write-down of certain intangibles and property related to
under performing sites. The effect of adopting SFAS 121 was a total charge to
earnings for 1995 of $18.9 million, consisting of a $5.9 million write-down of
goodwill and a $13.1 million write-down of property and equipment.
The significant loss provisions discussed above during 1997,
1996 and 1995 were caused by declining sales and a corresponding decline in cash
flows which impacted the Company's ability to support its net assets as reviewed
under SFAS No. 121. The result of declining sales and cash flows also
necessitated the recording of additional provisions to account for reductions in
corporate staffing and other overhead expenses associated with the restructuring
required to bring the Company's corporate and support activities in line with
the lower levels of sales and cash flows.
Lease payments, other cash charges and asset write-offs in
1997, 1996 and 1995 reduced the Reserve for restaurant relocation and abandoned
sites by $2.0 million, $5.5 million and $5.2 million, respectively. Legal
reserves were utilized by $3.0 million in 1995, $686,000 in 1996 and $90,000 in
1997. Other provisions are typically utilized on a current basis.
46
Supplemental Schedule of
Accounting charges and loss provisions
--------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------------
Provision Provision
Total Reserve Total Reserve Provision Reserve
Balance Balance Balance Balance Total Balance
---------------------------------------------------------------------------------------
Workers compensation adjustments $ - $ - $ 1,093 $ - $ 1,500 $ -
Amortization adjustments - - 514 - - -
Excess work-in-progress ------------ ------------ ------------
inventory adjustment - - - - 499 -
------------ ------------ ------------
Unusual bad debt provisions - - 866 866 1,167 -
State income/sales tax audits - - 750 750 101 101
Severance 81 81 579 579 274 274
Relocations 233 233 346 346 304 304
Recruiting fees - - - - 125 125
Refinancmg costs - - 845 - 344 -
Legal settlements - - - 14 700 700
Write-off of investments in
apparel Co. - - - - 263 -
Other - - 204 - - -
--------------------------------------------------------------------------------------
Total general and administrative 314 314 3,590 2,555 3,278 1,504
------------ ------------ ------------
Impairment of long lived assets 565 14,782 18,935
------------ ------------ ------------
Closing and relocating
restaurants 312 - 5,624 - 1,199 -
Settling leases - - 1,200 - 1,993 -
Selling land - - 307 - - -
--------------------------------------------------------------------------------------
Total losses on assets to be disposed of 312 2,159 7,131 3,800 3,192 2,124
--------------------------------------------------------------------------------------
Loss on disposal of product line - - 1,141 1,141 - -
Severance costs/restructuring
reserve - - - - - 166
Legal settlements/legal reserve - 1,075 351 1,151 3,800 800
Champion inventory fair value
write-down and obsolescence reserves 150 215 500 65 645 38
--------------------------------------------------------------------------------------
Total loss provisions/restructuring 150 1,290 1,992 2,357 4,445 1,004
--------------------------------------------------------------------------------------
Adjustments to rrunonty interests - - 453 - (314) -
--------------------------------------------------------------------------------------
Total accounting charges and loss provisions $ 1,341 $ 3,763 $ 29,555 $ 8,712 $ 31,535 $ 4,632
======================================================================================
Workers compensation adjustments are included in Restaurant labor
costs. Amortization adjustments are included in Other depreciation and
amortization. Excess work-in progress inventory adjustment is included in Cost
of modular restaurant package revenues. The reserve balance for unusual bad debt
provisions is included in Allowances for doubtful receivables and the other
reserves related to general and administrative expenses as well as legal
reserves are included in Accrued liabilities.
47
Note 9: Commitments and Contingencies
a) Lease Commitments - The Company leases Restaurant
properties and office space under operating lease agreements. These operating
leases generally have five to ten-year terms with options to renew. Base rent
expense on these properties was approximately $9.1 million in 1997, $8.0 million
in 1996, and $9.8 million in 1995.
Future minimum lease payments under non-cancelable operating leases as of
December 29, 1997 are approximately as follows:
Year ending Operating
December 31 leases
--------------------------------------
1998 $ 7,769
1999 7,545
2000 7,797
2001 7,437
2002 6,343
Thereafter $ 47,691
b) Litigation - 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 have reached an agreement in principle for
the settlement of this class action. The agreement for settlement provides for
one of the Company's director and officer liability insurance carriers and
another party to contribute to a fund for the purpose of paying claims on a
claims-made basis up to a total of $950,000. The Company has agreed to
contribute ten percent (10%) of claims made in excess of $475,000 for a total
potential liability of $47,500. The settlement 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
48
certain claims in the Power Burgers Litigation, on May 21, 1997, a companion
action was filed in the Circuit Court of the Sixth Judicial Circuit in and for
Pinellas County, Florida, Civil Division, entitled Gail P. Greenfelder, Powers
Burgers of Avon Park, Inc., and Power Burgers of Sebring, Inc. v. James F.
White, Jr., Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E.
Mattei, Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 97-3565-CI,
asserting, in relevant part, the same causes of action as asserted in the Power
Burgers Litigation. An Answer, Affirmative Defenses, and a Counterclaim to
recover unpaid royalties and advertising fund contributions have been filed by
the Company. On February 4, 1998, the Company terminated Power Burgers, Inc.'s,
Power Burgers of Avon Park, Inc.'s and Power Burgers of Sebring, Inc.'s
franchise agreements and thereafter filed two Complaints in the United States
District Court for the Middle District of Florida, Tampa Division, styled
Checkers Drive-In Restaurants, Inc. v. Power Burgers of Avon Park, Inc., Case
No. 98-409-CIV-T-17A and Checkers Drive-In Restaurants, Inc. v. Powers Burgers,
Inc, Case No. 98-410-CIV-T-26E. The Complaint seeks, inter alia, a temporary and
permanent injunction enjoining Power Burgers, Inc. and Power Burgers of Avon
Park, Inc.'s continued use of Checkers' Marks and trade dress. A Motion to Stay
the foregoing actions are currently pending. The Company believes the lawsuits
initiated against the Company are without merit, and intends to continue to
defend them vigorously. No estimate of any possible loss or range of loss
resulting from the lawsuit can be made at this time.
Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services,
Inc., et al. On August 10, 1995, a state court Counterclaim and Third Party
Complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in
and for Hillsborough County, Florida, Civil Division, entitled Tampa Checkmate
Food Services, Inc., Checkmate Food Services, Inc. and Robert H. Gagne v.
Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, James F.
White, Jr., Jared D. Brown, Robert G. Brown and George W. Cook, Case No.
95-3869. In the original action filed by the Company in July 1995, against Mr.
Gagne and Tampa Checkmate Food Services, Inc., (hereinafter "Tampa Checkmate") a
company controlled by Mr. Gagne, the Company is seeking to collect on a
promissory note and foreclose on a mortgage securing the promissory note issued
by Tampa Checkmate and Mr. Gagne, and obtain declaratory relief regarding the
rights of the respective parties under Tampa Checkmate's franchise agreement
with the Company. The Counterclaim and Third Party Complaint allege, generally,
that Mr. Gagne, Tampa Checkmate and Checkmate Food Services, Inc. (hereinafter
"Checkmate") were induced into entering into various franchise agreements with,
and personal guarantees to, the Company based upon misrepresentations by the
Company. The Counterclaim and Third Party Complaint seek damages in the amount
of $3,000,000 or the return of all monies invested by Checkmate, Tampa Checkmate
and Mr. Gagne in Checkers' franchises, punitive damages, attorneys' fees and
such other relief as the court may deem appropriate. The Counterclaim was
dismissed by the court on January 26, 1996, with the right to amend. On February
12, 1996, the Counterclaimants filed an Amended Counterclaim alleging violations
of Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act,
and breaches of implied duties of "good faith and fair dealings" in connection
with a settlement agreement and franchise agreement between various of the
parties. The Amended Counterclaim seeks a judgment for damages in an unspecified
amount, punitive damages, attorneys' fees and such other relief as the court may
deem appropriate. The Company has filed an Answer to the Complaint. On or about
July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the United States
Bankruptcy Court for the Middle District of Florida, Tampa Division entitled In
re: Tampa Checkmate Food Services, Inc., and numbered as 97-11616-8G-1 on the
docket of said Court. On July 25, 1997, Checkers filed an Adversary Complaint in
the Tampa Checkmate bankruptcy proceedings entitled Checkers Drive-In
Restaurants, Inc. v. Tampa Checkmate Food Services, Inc. and numbered as Case
No. 97-738. 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.
The Company is involved in various other claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
c) Purchase Commitments - The Checkers Drive-In Restaurant
chain, which includes both the Company and franchisee-owned stores together, has
purchase agreements with various suppliers extending beyond one year. Subject to
the supplier's quality and performance, the purchases covered by these
agreements aggregate approximately $18.3 million in 1998 and $5.5 million in
years 1999 through 2004.
Note 10: Warrants
As partial consideration for the transfer of the RDG
promissory note of the Company (the "Note") back to the Company, the Company is
obligated to deliver to the holder of the Note a warrant (the "Warrant") for the
purchase of 120,000 shares of Common Stock at a price equal to the average
closing sale price of the Common Stock for the ten full trading days ending on
the third business day immediately preceding the closing date (such price is
referred to as the "Average Closing
49
Price"); however, in the event that the average closing price of the Common
Stock for the ninety day period after the closing date is less than the Average
Closing Price, the purchase price for the Common Stock under the Warrant will be
changed on the 91st day after the closing date to the average closing price for
such ninety day period. The Warrant will be exercisable at any time within five
years after the closing date. The Company is obligated to register the stock
acquired by the holders of the Note under the Warrant.
Pursuant to a November 22, 1996 settlement the Company issued
warrants for the purchase of 5,100,000 shares of the Company's Common Stock.
These warrants, valued at $3.0 million, were issued in settlement of certain
litigation, are exercisable at $1.375 during the period beginning November 22,
2000 and ending on December 22, 2000.
On November 22, 1996, the Company issued warrants to purchase
20 million shares of Common Stock of the Company to the members of the new
lender group (see Note 3) at an exercise price of $0.75 per share which was the
approximate market price of the common stock prior to the announcement of the
transfer of the debt. These warrants were valued at $6.5 million, the value of
the concessions given as consideration for the warrants. The warrants are
exercisable at any time until November 22, 2002. Checkers is obligated to
register the common stock issuable under the warrants within six months and to
maintain such registration for the life of the warrants. The holders of the
warrants also have other registration rights relating to the common stock to be
issued under the warrants. The warrants contain customary anti-dilution
provisions. The warrants to purchase 150,000 shares of Checkers common stock for
$2.69 per share, which were issued in April 1995 to Checkers' prior bank lending
group under the prior loan agreement, were cancelled.
50
Note 11: Unaudited Quarterly Financial Data
The following table presents selected quarterly financial data for the periods
indicated (in 000's, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------
1997
----
Net revenues $ 34,157 $ 33,713 $ 32,733 $ 43,290
Impairment of long-lived assets - - - 565
Losses on assets to be disposed of - - - 312
Loss provisions - - - 150
Loss from operations (1,818) 102 (304) (1,958)
Net loss (5,181) (1,469) (1,738) (3,798)
Preferred dividends - 696
Net loss to common shareholders (5,181) (1,469) (2,434) (3,798)
Basic loss per share $ (0.09) $ (0.02) $ (0.04) $ (0.05)
Diluted loss per share $ (0.09) $ (0.02) $ (0.04) $ (0.05)
1996
----
Net revenues $ 38,423 $ 38,650 $ 37,088 $ 50,799
Impairment of long-lived assets - - 8,468 6,814
Losses on assets to be disposed of - - 5,702 1,430
Loss provisions - - 500 1,491
Loss from operations 714 (1,428) (21,303) (20,195)
Net loss (252) (1,548) (24,243) (20,366)
Basic loss per share $ - $ (0.02) $ (0.47) $ (0.39)
Diluted loss per share $ - $ (0.02) $ (0.47) $ (0.39)
1995
----
Net revenues $ 46,044 $ 48,923 $ 43,451 $ 51,887
Impairment of long-lived assets - - - 18,935
Losses on assets to be disposed of - 3,192 -
Loss provisions - - 645 3,800
Loss from operations (1,618) (691) (10,516) (24,391)
Net loss (1,693) (1,231) (7,312) (22,983)
Basic loss per share $ (0.03) $ (0.02) $ (0.14) $ (0.45)
Diluted loss per share $ (0.03) $ (0.02) $ (0.14) $ (0.45)
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein
by reference to the information under the headings "ELECTION OF DIRECTORS,"
"MANAGEMENT - Directors and Executive Officers" and "MANAGEMENT-Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's
definitive Proxy Statement to be used in connection with the Company's 1998
Annual Meeting of Stockholders, which will be filed with the Commission on or
before April 29, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to the information under the headings "MANAGEMENT - Compensation of
Executive Officers" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1998 Annual Meeting of Stockholders, which will be
filed with the commission on or before April 29, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein
by reference to the information under the heading "MANAGEMENT - Security
Ownership of Management and Others" in the Company's definitive Proxy Statement
to be used in connection with the Company's 1998 Annual Meeting of Stockholders,
which will be filed with the Commission on or before April 29, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein
by reference to the information under the heading "MANAGEMENT - Certain
Transactions" in the company's definitive Proxy Statement to be used in
connection with the Company's 1998 Annual Meeting of Stockholders, which will be
filed with the Commission on or before April 29, 1998.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1.0 The following Financial Statements of the Registrant are
included in Part II, Item 8:
Independent Auditors Report
Consolidated Balance Sheets - December 29, 1997 and
December 30, 1996
Consolidated Statements of Operations - Years ended
December 29, 1997, December 30, 1996 and January 1, 1996
Consolidated Statements of Stockholders' Equity - years
ended December 29, 1997, December 30, 1996 and
January 1, 1996
Consolidated Statements of Cash Flows - years ended
December 29, 1997, December 30, 1996 and January 1, 1996
Notes to Consolidated Financial Statements - years ended
December 29, 1997, December 30, 1996 and
January 1, 1996
2.0 The following financial Statement Schedules of the
Registrant are included in Item 14(d):
VIII - Valuation Accounts
All schedules, other than those indicated above, are
omitted because of the absence of the conditions under
which they are required or because the required
information is included in the consolidated financial
statements or the notes thereto.
3.1 Restated Certificate of Incorporation of the Company, as
filed with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 filed on September 26,
1991 (File No. 33-42996), is hereby incorporated herein by
reference.
3.2 Certificate of Amendment to Restated Certificate of
Incorporation of the Company, as filed with the Commission
as Exhibit 3 to the Company's Form 10-Q for the quarter
ended June 30, 1993, is hereby incorporated herein by
reference.
3.3 By-laws, as amended through February 16, 1995, of the
Registrant, as filed with the Commission as Exhibit 3.3 to
the Company's Form 10-Q for the quarter ended March 27,
1995, is hereby incorporated herein by reference.
3.4 Certificate of Designation of Series A Preferred Stock
of the Company dated February 12, 1997, as filed with the
Commission as Exhibit 3.1 to the Company's Form 8-K, dated
February 19, 1997, is hereby incorporated by reference.
4.1 Collateral Assignment of Trademarks as Security from
Borrower, dated April 12, 1995, between the Company and
each of the banks party to the Amended and Restated Credit
Agreement, dated as of April 12, 1995, as filed with the
Commission as Exhibit 3 to the Company's Form 8-K dated
April 12, 1995, is hereby incorporated by reference.
4.2 Amended and Restated Credit Agreement, dated as of
November 22, 1996, between the Company, CKE Restaurants,
Inc., as Agent, and the lenders listed therein, as filed
with the Commission as Exhibit 4.1 on the Company's Form
8-K, dated November 22, 1996, is hereby incorporated by
reference.
4.3 Second Amended and Restated Security Agreement, dated
as of November 22, 1996, between the Company and CKE
Restaurants, Inc., as Agent, and the lenders listed
therein, as filed with the Commission as Exhibit 4.2 on
the Company's Form 8-K, dated November 22, 1996, is hereby
incorporated by reference.
53
4.4 Form of Warrant issued to lenders under the Amended
and Restated Credit Agreement, dated November 22, 1996,
between the Company and CKE Restaurants, Inc., as Agent,
and the lenders listed therein, as filed with the
Commission as Exhibit 4.3 on the Company's Form 8-K, dated
November 22, 1996, is hereby incorporated by reference.
4.5 The Company agrees to furnish the Commission upon its
request a copy of any instrument which defines the rights
of holders of long-term debt of the Company and which
authorizes a total amount of securities not in excess of
10% of the total assets of the Company and its
subsidiaries on a consolidated basis.
10.1 Form of Indemnification Agreement between the Company and
its directors and certain officers, as filed with the
Commission as Exhibit 4.4 to the Company's Registration
Statement on Form S-1 filed on September 26, 1991 (File
No. 33-42996), is hereby incorporated herein by reference.
10.2* 1991 Stock Option Plan of the Company, as amended on May
10, 1994, as filed with the Commission as Exhibit 4 to the
Company's Registration Statement on Form S-8 filed on June
15, 1994 (File No. 33-80236), is hereby incorporated
herein by reference.
10.3* 1994 Stock Option Plan for Non-Employee Directors, as
filed with the Commission as Exhibit 10.32 to the
Company's form 10-K for the year ended January 2, 1995, is
hereby incorporated by reference.
10.4 Purchase Agreement between the Company and Restaurant
Development Group, Inc., dated as of August 3, 1995, as
filed with the Commission as Exhibit 1 to the Company's
Form 8-K dated July 31, 1995, is herein incorporated by
reference.
10.5 Amendment No. 1, dated as of October 20, 1995, to that
certain Purchase Agreement between Checkers and Restaurant
Development Group, Inc., dated as of August 3, 1995, as
filed with the Commission as Exhibit 10.1 to the Company's
Form 10-Q for the quarter ended September 11, 1995, is
hereby incorporated by reference.
10.6 Amendment No. 2, dated as of April 11, 1996, to that
certain Purchase Agreement between Checkers and Restaurant
Development Group, Inc., dated as of August 3, 1995, as
filed with the Commission as Exhibit 10.32 to the
Company's Form 10-K for the year ended January 1, 1996, is
hereby incorporated by reference.
10.7 Purchase Agreement between the Company and Rall-Folks,
Inc., dated as of August 2, 1995, as filed with the
Commission as Exhibit 2 to the Company's Form 8-K dated
July 31, 1995, is herein incorporated by reference.
10.8 Amendment No. 1, dated as of October 20, 1995, to that
certain Purchase Agreement between Checkers and
Rall-Folks, Inc., dated as of August 2, 1995, as filed
with the Commission as Exhibit 10.2 to the Company's Form
10-Q for the quarter ended September 11, 1995, is hereby
incorporated by reference.
10.9 Amendment No. 2, dated as of April 11, 1996 to that
certain Purchase Agreement between the Company and
Rall-Folks, Inc., dated as of August 2, 1995, as filed
with the Commission as Exhibit 10.35 to the Company's Form
10-K for the year ended January 1, 1996, is hereby
incorporated by reference.
10.10 Note Repayment Agreement dated as of April 12, 1996
between the Company and Nashville Twin Drive-Thru
Partners, L.P., as filed with the Commission as Exhibit
10.36 to the Company's Form 10-K for the year ended
January 1, 1996, is hereby incorporated by reference.
10.11* Employment Agreement between the Company and
Michael T. Welch, dated July 26, 1996, as filed with the
Commission as Exhibit 10.52 to the Company's Form 10-Q for
the quarter ended June 17, 1996, is hereby incorporated by
reference.
10.12 Purchase Agreement dated February 19, 1997, as filed
with the Commission as Exhibit 10.1 to the Company's Form
8-K, dated March 5, 1997, is hereby incorporated by
reference.
54
10.13* Employment Agreement between the Company and David
Miller, dated July 29, 1996, as filed with the Commission
as Exhibit 10.35 to the Company's Annual Report on Form
10-K for the fiscal year ended December 30, 1996 (the
"1996 10-K"), is hereby incorporated by reference.
10.14* Employment Agreement between the Company and James
T. Holder, dated November 22, 1996, as filed with the
Commission as Exhibit 10.36 to the 1996 10-K, is hereby
incorporated by reference.
10.15 Warrant Agreement dated March 11, 1997, between the
Company and Chasemellon Shareholder Services, L.L.C, as
filed with the Commission as Exhibit 10.38 to the 10-K, is
hereby incorporated by reference
** 10.16* Employment Agreement dated November 10, 1997, between the
Company, Rally's Hamburgers, Inc. and Jay Gillespie.
** 10-17 Management Services Agreement dated November 30, 1997,
between the Company and Rally's Hamburgers, Inc.
21 List of the subsidiaries of the Company.
23 Consent of Independent Auditors
27 Financial Data Schedule
- --------------------------------------
* Management contract or compensatory plan or arrangement.
** Filed herewith.
(b) Reports on Form 8-K:
During the last quarter of the year ended December 29,
1997, there were no reports on Form 8-K filed by the
Company.
(c) Exhibits:
The exhibits listed under Item 14(a) are filed as part of
this Report.
(d) Financial Statements Schedules:
VIII - Valuation Accounts
55
Schedule VIII - Valuation Accounts
(In Thousands)
Balance at Balance at
Beginning of Period Expensed Deductions End of Period
-------------------------------------------------------------
Description
Year ended January 1, 1996
Allowance for doubtful receivables $84 $2,261 $987 $1,358
=============================================================
Year ended December 30, 1996
Allowance for doubtful receivables $1,358 $1,311 $452 $2,217
=============================================================
Year ended December 29, 1997
Allowance for doubtful receivables $2,217 $1,013 $1,095 $2,135
=============================================================
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Clearwater, State of Florida on March 28, 1996.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By:/s/ Jay Gillespie
------------------------------------------
Jay Gillespie
Chief Executive Officer
By:/s/ Richard A. Peabody
------------------------------------------
Richard A. Peabody
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company
and in the capacities indicated on March 28, 1996.
Signature Title
- --------- -----
/s/ William P. Foley, II
- -------------------------------
William P. Foley II Director and Chairman of the Board
/s/ C. Thomas Thompson
- -------------------------------
C. Thomas Thompson Director, Vice Chairman of the Board
/s/ Jay Gillespie
- -------------------------------
Jay Gillespie Chief Executive Officer
/s/ Richard A. Peabody
- -------------------------------
Richard A. Peabody Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Terry N. Christensen
- -------------------------------
Terry N. Christensen Director
/s/ Frederick E. Fisher
- -------------------------------
Frederick E. Fisher Director
/s/ Clarence V. McKee
- -------------------------------
Clarence V. McKee Director
/s/ Burt Sugarman
- -------------------------------
Burt Sugarman Director
/s/ Jean Giles Wittner
- -------------------------------
Jean Giles Wittner Director
57
1997 FORM 10-K
CHECKERS DRIVE-IN RESTAURANTS, INC.
EXHIBIT INDEX
Exhibit # Exhibit Description
- --------- -------------------
2.0 The following financial Statement Schedules of the Registrant
are included in Item 14(d):
VIII - Valuation Accounts
All schedules, other than those indicated above, are omitted
because of the absence of the conditions under which they are
required or because the required information is included in the
consolidated financial statements or the notes thereto.
3.1 Restated Certificate of Incorporation of the Company, as filed
with the Commission as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 filed on September 26, 1991 (File No.
33-42996), is hereby incorporated herein by reference.
3.2 Certificate of Amendment to Restated Certificate of
Incorporation of the Company, as filed with the Commission as
Exhibit 3 to the Company's Form 10-Q for the quarter ended June
30, 1993, is hereby incorporated herein by reference.
3.3 By-laws, as amended through February 16, 1995, of the
Registrant, as filed with the Commission as Exhibit 3.3 to the
Company's Form 10-Q for the quarter ended March 27, 1995, is
hereby incorporated herein by reference.
3.4 Certificate of Designation of Series A Preferred Stock of the
Company dated February 12, 1997, as filed with the Commission as
Exhibit 3.1 to the Company's Form 8-K, dated February 19, 1997,
is hereby incorporated by reference.
4.1 Collateral Assignment of Trademarks as Security from Borrower,
dated April 12, 1995, between the Company and each of the banks
party to the Amended and Restated Credit Agreement, dated as of
April 12, 1995, as filed with the Commission as Exhibit 3 to the
Company's Form 8-K dated April 12, 1995, is hereby incorporated
by reference.
4.2 Amended and Restated Credit Agreement, dated as of November 22,
1996, between the Company, CKE Restaurants, Inc., as Agent, and
the lenders listed therein, as filed with the Commission as
Exhibit 4.1 on the Company's Form 8-K, dated November 22, 1996,
is hereby incorporated by reference
4.3 Second Amended and Restated Security Agreement, dated as of
November 22, 1996, between the Company and CKE Restaurants,
Inc., as Agent, and the lenders listed therein, as filed with
the Commission as Exhibit 4.2 on the Company's Form 8-K, dated
November 22, 1996, is hereby incorporated by reference.
4.4 Form of Warrant issued to lenders under the Amended and Restated
Credit Agreement, dated November 22, 1996, between the Company
and CKE Restaurants, Inc., as Agent, and the lenders listed
therein, as filed with the Commission as Exhibit 4.3 on the
Company's Form 8-K, dated November 22, 1996, is hereby
incorporated by reference.
58
4.5 The Company agrees to furnish the Commission upon its request a
copy of any instrument which defines the rights of holders of
long-term debt of the Company and which authorizes a total
amount of securities not in excess of 10% of the total assets of
the Company and its subsidiaries on a consolidated basis.
10.1 Form of Indemnification Agreement between the Company and its
directors and certain officers, as filed with the Commission as
Exhibit 4.4 to the Company's Registration Statement on Form S-1
filed on September 26, 1991 (File No. 33-42996), is hereby
incorporated herein by reference.
10.2* 1991 Stock Option Plan of the Company, as amended on May 10,
1994, as filed with the Commission as Exhibit 4 to the Company's
Registration Statement on Form S-8 filed on June 15, 1994 (File
No. 33-80236), is hereby incorporated herein by reference.
10.3* 1994 Stock Option Plan for Non-Employee Directors, as filed with
the Commission as Exhibit 10.32 to the Company's form 10-K for
the year ended January 2, 1995, is hereby incorporated by
reference.
10.4 Purchase Agreement between the Company and Restaurant
Development Group, Inc., dated as of August 3, 1995, as filed
with the Commission as Exhibit 1 to the Company's Form 8-K dated
July 31, 1995, is herein incorporated by reference.
10.5 Amendment No. 1, dated as of October 20, 1995, to that certain
Purchase Agreement between Checkers and Restaurant Development
Group, Inc., dated as of August 3, 1995, as filed with the
Commission as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended September 11, 1995, is hereby incorporated by
reference.
10.6 Amendment No. 2, dated as of April 11, 1996, to that certain
Purchase Agreement between Checkers and Restaurant Development
Group, Inc., dated as of August 3, 1995, as filed with the
Commission as Exhibit 10.32 to the Company's Form 10-K for the
year ended January 1, 1996, is hereby incorporated by reference.
10.7 Purchase Agreement between the Company and Rall-Folks, Inc.,
dated as of August 2, 1995, as filed with the Commission as
Exhibit 2 to the Company's Form 8-K dated July 31, 1995, is
herein incorporated by reference.
10.8 Amendment No. 1, dated as of October 20, 1995, to that certain
Purchase Agreement between Checkers and Rall-Folks, Inc., dated
as of August 2, 1995, as filed with the Commission as Exhibit
10.2 to the Company's Form 10-Q for the quarter ended September
11, 1995, is hereby incorporated by reference.
10.9 Amendment No. 2, dated as of April 11, 1996 to that certain
Purchase Agreement between Checkers and Restaurant Development
Group, Inc., dated as of August 3, 1995, as filed with the
Commission as Exhibit 10.35 to the Company's Form 10-K for the
year ended January 1, 1996, is hereby incorporated by reference.
10.10 Note Repayment Agreement dated as of April 12, 1996 between the
Company and Nashville Twin Drive-Thru Partners, L.P., as filed
with the Commission as Exhibit 10.36 to the Company's Form 10-K
for the year ended January 1, 1996, is hereby incorporated by
reference.
10.11* Employment Agreement between the Company and Michael T. Welch,
dated July 26, 1996, as filed with the commission as Exhibit
10.52 to the Company's Form 10-Q for the quarter ended June 17,
1996, is hereby incorporated by reference.
10.12 Purchase Agreement dated February 19, 1997, as filed with the
Commission as Exhibit 10.1 to the Company's Form 8-K, dated
March 5, 1997, is hereby incorporated by reference.
59
**10.13* Employment Agreement between the Company and David Miller,
dated July 29, 1996, as filed with the Commission as Exhibit
10.35 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1996 (the "1996 10-K"), is hereby
incorporated by reference.
10.14 * Employment Agreement between the Company and James T. Holder
dated November 2, 1997, as filed with the Commission as Exhibit
10.36 to the 1996 10-K, is hereby incorporated by reference.
10.15 Warrant Agreement dated March 11, 1997, between the Company and
Chasemellon Shareholder Services, L.L.C., as filed with the
Commission as Exhibit 10.38 to the 1996 10-K, is hereby
incorporated by reference.
** 10.16* Employment Agreement dated November 10, 1997, between the
Company, Rally's Hamburgers, Inc. and Jay Gillespie.
** 10-17 Management Services Agreement dated November 30, 1997,
between the Company and Rally's Hamburgers, Inc.
21 List of the subsidiaries of the Company.
23 Consent of Independent Auditors
27 Financial Data Schedule
- --------------------------------------
* Management contract or compensatory plan or arrangement.
** Filed herewith.
60