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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
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 30, 1996 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 34617-1079
(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
----------------
(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 14, 1997, was $115,405,155 based upon the reported closing
sale price of such shares on the Nasdaq Stock Market's National Market for that
date. As of March 14, 1997, there were 60,540,409 common shares outstanding.
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Sockholders are incorporated by reference in Part III of this Form 10-K.
This document, including exhibits, contains 125 pages. The exhibit index is
located on page 61.
CHECKERS DRIVE-IN RESTAURANTS, INC.
1996 Form 10-K Annual Report
----------------------------
TABLE OF CONTENTS
ITEM 1. BUSINESS............................................................ 3
ITEM 2. PROPERTIES.......................................................... 11
ITEM 3. LEGAL PROCEEDINGS................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................. 13
ITEM 6. SELECTED FINANCIAL DATA............................................. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE.......................................................... 52
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 53
ITEM 11. EXECUTIVE COMPENSATION.............................................. 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 53
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K... 54
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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 30, 1996, there were 478 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. and in Puerto Rico (232 Company-operated
(including 14 joint ventured) and 246 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.
RESTAURANT DEVELOPMENT AND ACQUISITION ACTIVITIES
During 1996, the Company opened five Restaurants, acquired 18
Restaurants and partnership interests in an additional nine Restaurants from
franchisees, sold or leased 15 Restaurants to franchisees and closed 27
Restaurants for a net reduction of ten Company-operated Restaurants in 1996.
Franchisees opened 25 Restaurants, acquired or leased 15 Restaurants
from the Company, sold or transferred 27 Restaurants to the Company and closed
24 Restaurants for a net reduction of 11 franchisee-operated Restaurants in
1996.
During 1996, the Company focused its efforts on existing operating
markets of highest market penetration ("Core Markets"). It is the Company's
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intent in the near future to continue that focus and to grow only in its Core
Markets through acquisitions or new Restaurant openings. 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 246, or 51%, of the total Restaurants open at
December 30, 1996. 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.
On March 25, 1997, Checkers agreed in principle to a merger
transaction pursuant to which Rally's Hamburgers, Inc., a Delaware corporation
("Rally's"), will become a wholly-owned subsidiary of Checkers. Rally's,
together with its franchisees, operates approximately 471 double drive-thru
hamburger restaurants primarily in the midwestern United States. Under the terms
of the letter of intent executed by Checkers and Rally's, each share of Rally's
common stock will be converted into three shares of Checkers' Common Stock upon
consummation of the merger. The transaction is subject to negotiation of
definitive agreements, receipt of fairness opinions by each party, receipt of
stockholder and other required approvals and other customary conditions.
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 30, 1996, there were 232
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 246 Restaurants operated by the
Company's franchisees in 20 States, the District of Columbia and Puerto Rico.
The following table sets forth the locations of such Restaurants.
COMPANY-OPERATED
(232 RESTAURANTS)
Florida (136) Missouri (6) Kansas (2)
Georgia (38) Mississippi (5) Delaware (1)
Pennsylvania (13) Tennessee (2) New Jersey (4)
Alabama (12) Washington D.C. (1)
Illinois (12)
FRANCHISED
(246 RESTAURANTS)
Florida (56) Texas (9) Wisconsin (3)
Illinois (25) Maryland (11) New York (3)
Georgia (47) New Jersey (8) Puerto Rico (2)
Alabama (18) Tennessee (8) West Virginia (2)
North Carolina (17) Virginia (5) Missouri (2)
South Carolina (11) Indiana (3) Iowa (2)
Louisiana (9) Michigan (3) Mississippi (1)
Washington D.C. (1)
Of these Restaurants, 30 were opened in 1996 (five Company-operated
and 25 franchised), 12 of which included fully equipped manufactured modular
buildings, "Modular Restaurant Packages" ("MRP's"), produced by the Company and
4
nine of which included MRP's which were relocated from other sites. The Company
currently expects approximately 30 additional Restaurants to be opened in 1997
(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 1997 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 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. The Company believes that utilization of a modular
Restaurant building generally costs less than comparably built Restaurants using
conventional, on-site construction methods.
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. All 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 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. Operational enhancements are being implemented
to facilitate product delivery with reduced overhead costs.
RESTAURANT DEVELOPMENT COSTS. During the fiscal years ended December
30, 1996 and January 1, 1996 the average cost of opening a Company-operated
Restaurant (exclusive of land costs) utilizing an MRP was $424,000 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 37.5% from 1994 due to the use of used MRP's in 1995 and
1996. Future costs, after all remaining used MRP's are relocated, may be more
consistent with that of prior years. During 1995 and 1996, there were no land
acquisitions. The Company believes that utilization of MRP's generally costs
less than comparably built Restaurants using 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
5
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 has decided to
discontinue the test in the majority of test units.
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 using several different methods at the store level. Menuboards, value
meal extender cards, pole banners and the readerboards are all utilized in
tandem to present a simple, unified, coherent message to the customers. Outdoor
billboards and radio commercials are used to reach customers at the critical
time when they are making their purchase decisions. As of December 30, 1996, the
Company and its franchises had five active advertising co-ops covering 216
restaurants. The Company requires franchisees to spend a minimum of 4% of gross
sales on marketing their restaurant which includes a combination of local
store marketing, co-op advertising and other advertising. In addition, each
Company and franchise restaurant pays into a National Production Fund that
provides broadcast creative and Point of Purchase materials for each promotion.
Ongoing consumer research is utilized to track attitudes, 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 to better understand the
Company's customers for building both short and long-term marketing strategies.
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.
JOINT VENTURE RESTAURANTS. As of December 30, 1996, there were 14
Restaurants owned by 12 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 13 of the 14 Joint Venture
Restaurants, and in 12 of those Joint Venture Restaurants the Company receives a
fee for such services of 1% to 2.5% of gross sales. All of the Joint Venture
Restaurants pay the standard royalty fee of 4% of gross sales. The agreements
for four of the 13 (excluding Illinois partnerships) Joint Venture Restaurants
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
6
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 certain quarters
can be stronger, or weaker, for Restaurant sales when compared to other
quarters, there is no predominant pattern.
FRANCHISE OPERATIONS
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 246,
or 51%, of the total Restaurants open at December 30, 1996. 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 Company and the franchisees currently anticipate to be
opened in 1997 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.
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.
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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
$5,000 renewal 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 experience of the franchisee. The franchisee's development schedule for
the Restaurants is set forth in the Area Development Agreement. Of the 246
franchised Restaurants at December 30, 1996, 222 were being operated by multiple
unit operators and 24 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. The Company does 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 a Franchise Fee of $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. 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 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. 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 1997. 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 facility will also be utilized for
construction of modular convenience store units on a very limited basis pursuant
to an existing agreement with a third party convenience store chain.
Administrative personnel of the construction facility have been reduced to a
8
total of five as of March 1997, 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 Company has the ability to produce a complete
Modular Restaurant Package ready for delivery and installation at a Restaurant
site. The Modular Restaurant Packages are built and refurbished in a Company-
owned facility in Largo, Florida, 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 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 30, 1996, the Company had seven (7)
substantially completed new Modular Restaurant Packages in inventory, one of
which is under contract for sale to a franchisee. Additionally, the Company has
contracted with a third party convenience store chain for the construction of
modular convenience store units. The Company has two (2) modular convenience
store units in various stages of construction. As of December 30, 1996, the
Company had thirty-four (34) used Modular Restaurant Packages available for
relocation to new sites, seven (7) 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 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. 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 Package
on a specified site, 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.
9
EMPLOYEES
As of December 30, 1996, the Company employed approximately 6,500
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 160 corporate employees, excluding
manufacturing operations, approximately nine are in management positions and the
remainder are professional and administrative or office employees.
As of December 30, 1996, the Company employed approximately 16
persons in its manufacturing operations, nine of whom were corporate personnel
and seven of whom were production personnel, including welders and warehouse
personnel. Of the nine corporate employees, three were in management positions
and six were administrative or office employees. As of March 1997, the Company
had reduced the number of persons employed in its manufacturing operations to
five. Substantially all of the labor performed in the manufacturing operations
is being done through independent contractors.
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 Burgers*Fries*Colas" 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 Company has no material contracts with the United States
government or any of its agencies.
The restaurant industry generally, and each Company-operated and
franchised Restaurant specifically, are subject to numerous federal, state and
local government regulations, including those relating to the preparation and
sale of food and those relating to building, zoning, health, accommodations for
disabled members of the public, sanitation, safety, fire, environmental and land
use requirements. The Company and its franchisees are also subject to laws
governing their relationship with employees, including minimum wage
requirements, accommodation for disabilities, overtime, working and safety
conditions and citizenship requirements. The Company is also subject to
regulation by the FTC and certain laws of States and foreign countries which
govern the offer and sale of franchises, several of which are highly
restrictive. Many State franchise laws impose substantive requirements on the
franchise agreement, including limitations on noncompetition provisions and on
provisions concerning the termination or nonrenewal of a franchise. Some States
require that certain materials be registered before franchises can be offered or
sold in that state. The failure to obtain or retain food licenses or approvals
to sell franchises, or an increase in the minimum wage rate, employee benefit
costs (including costs associated with mandated health insurance coverage) or
other costs associated with employees could adversely affect the Company and its
franchisees. A mandated increase in the minimum wage rate was implemented in
1996 and current federal law requires an additional increase in 1997.
The Company's construction, transportation and placement of Modular
Restaurant Packages is subject to a number of federal, state and local laws
governing all aspects of the manufacturing process, movement, end use and
location of the building. Many states require approval through state agencies
set up to govern the modular construction industry, other states have provisions
for approval at the local level. The transportation of the Company's Modular
Restaurant Package is subject to state, federal and local highway use laws and
regulations which may prescribe size, weight, road use limitations and various
other requirements. The descriptions and the substance of the Company's
warranties are also subject to a variety of state laws and regulations.
10
ITEM 2. PROPERTIES.
Of the 232 Restaurants which were operated by the Company as of
December 30, 1996, the Company held ground leases for 194 Restaurants and owned
the land for 38 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 15 owned parcels of land and 40 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 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.
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 totalling 19,000
square feet for its office and warehouse operations. See "Manufacturing
Operations" under Item 1 of this Report.
The Company also leases approximately 8,000 aggregate square feet in
two regional offices and one training center.
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 seek to represent a
class of all purchasers of the Company's Common Stock between November 22, 1991
and October 8, 1993, and seek an unspecified amount of damages. Although the
Company believes this lawsuit is unfounded and without merit, in order to avoid
further expenses of litigation, the parties have reached an agreement in
principle for the settlement of this class action. The agreement for settlement
provides for one of the Company's director and officer liability insurance
carriers and another party to contribute to a fund for the purpose of paying
claims on a claims-made basis up to a total of $950,000. The Company has agreed
to contribute ten percent (10%) of claims made in excess of $475,000 for a total
potential liability of $47,500. The settlement is subject to the execution of an
appropriate stipulation of settlement and other documentation as may be required
or appropriate to obtain approval of the settlement by the Court, notice to the
class of pendency of the action and proposed settlement, and final court
approval of the settlements.
LOPEZ ET AL. V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL., Case No.
94-282-Civ-T-17C. On February 18, 1994, a class action complaint was filed by
four stockholders against the Company, Herbert G. Brown and James Mattei, former
officers and directors, in the United States District Court for the Middle
District of Florida, Tampa Division. The complaint alleges, generally, that the
defendants made certain materially false and misleading public statements
concerning the pricing practices of competitors and analysts' projections of the
Company's earnings for the year ended December 31, 1993, in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
11
thereunder. The plaintiffs seek to represent a class of all purchasers of the
Company's Common Stock between August 26, 1993 and March 15, 1994, and seek an
unspecified amount of damages. Although the Company believes this lawsuit is
unfounded and without merit, in order to avoid further expenses of litigation,
the parties have reached an agreement for the settlement of this class action.
The agreement for settlement provides for various director and officer liability
insurance carriers to pay $8,175,000 cash and for the Company to issue warrants
valued at approximately $3,000,000, for the purchase of 5,100,000 shares of the
Company common stock at a price of $1.4375 per share. The warrants will be
exercisable for a period of four (4) years after the effective date of the
settlement. At a hearing held on November 22, 1996, the Court determined that
the proposed settlement is fair, reasonable and adequate. The settlement has
been implemented and the lawsuit has been dismissed.
GREENFELDER ET AL. V. WHITE, ,JR., ET AL. On August 10, 1995, a
state court complaint was filed in the Circuit Court of the Sixth Judicial
Circuit for Pinellas County, Florida, Civil Division, entitled GAIL P.
GREENFELDER AND POWERS BURGERS, INC. V. JAMES F. WHITE, JR., CHECKERS DRIVE-IN
RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JARED D. BROWN, ROBERT G.
BROWN AND GEORGE W. COOK, Case No. 95-4644-C1-21. The original complaint
alleged, generally, that certain officers of the Company intentionally inflicted
severe emotional distress upon Ms. Greenfelder, who is the sole stockholder,
president and director of Powers Burgers, a Checkers franchisee. The original
complaint further alleged that Ms. Greenfelder and Powers Burgers were induced
to enter into various agreements and personal guarantees with the Company based
upon misrepresentations by the Company and its officers and the Company violated
provisions of Florida's Franchise Act and Florida's Deceptive and Unfair Trade
Practices Act. The original complaint alleged that the Company is liable for all
damages caused to the plaintiffs as follows: damages in an unspecified amount in
excess of $2,500,000 in connection with the claim of intentional infliction of
emotional distress; $3,000,000 or the return of all monies invested by the
plaintiffs in Checkers franchises in connection with the misrepresentation of
claims; punitive damages; attorneys' fees; and such other relief as the court
may deem appropriate. The Court has granted, in whole or in part, three (3)
motions to dismiss the plaintiff's complaint, as amended, including an order
entered on February 14, 1997, which dismissed the plaintiffs' claim of
intentional infliction of emotional distress, with prejudice, but granted the
plaintiffs leave to file an amended pleading with respect to the remaining
claims set forth in their amended complaint. The Company believes that this
lawsuit is unfounded and without merit, and intends to continue to defend it
vigorously. No estimate of any possible loss or range of loss resulting from the
lawsuit can be made at this time.
CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD
SERVICES, INC., ET AL. On August 10, 1995, a state court counterclaim and
third-party complaint was filed in the Circuit Court of the Thirteenth Judicial
Circuit in and for Hillsborough County, Florida, Civil Division, entitled TAMPA
CHECKMATE FOOD SERVICES, INC., CHECKMATE FOOD SERVICES, INC., AND ROBERT H.
GAGNE V. CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI,
JAMES F. WHITE,, JR., JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK, Case
No. 95-3869. In the original action, filed by the Company in July 1995 against
Mr. Gagne and Tampa Checkmate Food Services, Inc., a company controlled by Mr.
Gagne, the Company is seeking to collect on a promissory note and foreclose on a
mortgage securing the promissory note issued by Tampa Checkmate and Mr. Gagne,
and obtain declaratory relief regarding the rights of the respective parties
under Tampa Checkmate's franchise agreement with the Company. The counterclaim
and third party complaint allege, generally, that Mr. Gagne, Tampa Checkmate and
Checkmate Food Services, Inc. were induced into entering into various franchise
agreements with and personal guarantees to the Company based upon
misrepresentations by the Company. The counterclaim and third party complaint
seeks damages in the amount of $3,000,000 or the return of all monies invested
by Checkmate, Tampa Checkmate and Gagne in Checkers franchises, punitive
damages, attorneys' fees and such other relief as the court may deem
appropriate. The counterclaim was dismissed by the court on January 26, 1996
with the right to amend. On February 12, 1996 the counterclaimants filed an
amended counterclaim alleging violations of Florida's Franchise Act, Florida's
Deceptive and Unfair Trade Practices Act, and breaches of implied duties of
"good faith and fair dealings" in connection with a settlement agreement and
franchise agreement between various of the parties. The amended counterclaim
seeks a judgement for damages in an unspecified amount, punitive damages,
attorneys' fees and such other relief as the court may deem appropriate. The
Company has filed a motion to dismiss the amended counterclaim. The Company
believes that this lawsuit is unfounded and without merit, and intends to
continue to defend it vigorously. No estimate of any possible loss or range of
loss resulting from the lawsuit can be made at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
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
---- ---
1995
First Quarter $4.06 $1.88
Second Quarter $2.81 $1.81
Third Quarter $3.25 $1.72
Fourth Quarter $1.97 $0.92
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 14, 1997, the Company had approximately 7,339 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 and other relevant factors.
RECENT UNREGISTERED SALES
During fiscal year 1996, 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.
On November 22, 1996, the Company issued, to the lenders under its
Amended and Restated Credit Agreement, warrants to purchase an aggregate of 20
million shares of Common Stock in consideration of such lenders agreeing to the
terms of such Amended and Restated Credit Agreement. See Note 3 to Notes to
Consolidated Financial Statements, contained in Item 8 of this Form 10-K, which
is incorporated herein by this reference. Such sales were made pursuant to
Section 4(2) of the Securities Act of 1933 based upon, among other factors, the
limited nature of the offering, the number of lenders and the status of the
purchasers as "accredited investors," as such term is defined under Rule 501 of
Regulation D under the Securities Act of 1933.
Pursuant to contractual obligations entered into in 1996, the
Company has issued warrants to purchase 5,100,000 shares of Common Stock in
connection with the settlement of LOPEZ ET. AL. V. CHECKERS DRIVE-IN
RESTAURANTS, INC., ET. AL. See Item 3 of this Form 10-K which is incorporated
herein by this reference. Such issuance was pursuant to Section 3 (a) (10) of
the Securities Act of 1933.
13
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
30, 1996 and Balance Sheet data as of December 30, 1996, and as of January 1,
1996, were derived from, and should be read in conjunction with, the audited
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 December 31, 1993 and December 31, 1992 and Balance Sheet data as
of January 2, 1995, December 31, 1993 and December 31, 1992 were derived from
audited financial statements not included herein.
The information provided below has also been adjusted to reflect
income tax expense as if Champion was not an S Corporation from inception (May
1990) through its acquisition by the Company (November 1991). Also, the Company
declared a three-for-two stock split, a two-for-one stock split and a
three-for-two stock split payable in the form of stock dividends effective
February 20, 1992, September 3, 1992, and June 30, 1993, respectively. All share
and per share information has been retroactively restated to reflect the splits.
In 1993, the Company completed a number of acquisitions, five of which (for a
total of 20 Restaurants) were accounted for as poolings of interests. The
information provided below has been restated to reflect the retroactive
combination of the entities involved in the acquisitions accounted for as
poolings of interests and to provide pro forma income taxes for all S
Corporations involved.
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.
--------------------------------------------------------------
Dec. 30, Jan. 1, Jan. 2, Dec. 31, Dec. 31,
1996 1996 1995 1993 1992
--------------------------------------------------------------
Net Operating Revenue $ 164,960 $ 190,305 $ 215,115 $ 184,027 $ 102,137
Restaurant Operating Costs 156,548 167,836 173,087 124,384 63,774
Cost of Modular Restaurant Package
Revenues 1,704 4,854 10,485 20,208 11,899
Other Depreciation and Amortization 4,326 4,044 2,796 1,325 511
Selling, General and Administrative Expense 20,190 24,215 21,875 14,048 7,988
Accounting Charges and Loss Provisions 24,405 26,572 14,771 -- --
Interest Expense 6,233 5,724 3,564 556 706
Interest Income 678 674 326 273 1,266
Minority Interests in Income (Loss) (1,509) (192) 185 342 400
Income from Continuing Operations (Pretax) $ (46,258) $ (42,074) $ (11,324) $ 23,437 $ 18,125
Income from Continuing Operations
(Pretax) per Common Share $ (0.89) $ (0.83) $ (0.23) $ 0.49 $ 0.40
Total Assets $ 136,110 $ 166,819 $ 196,770 $ 179,950 $ 101,526
Long-Term Obligations and Redeemable
Preferred Stock $ 39,906 $ 38,090 $ 38,341 $ 36,572 $ 4,162
Cash Dividends Declared per Common Share $ -- $ -- $ -- $ -- $ --
14
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 30, 1996, the
Company had an ownership interest in 232 Company-operated Restaurants and an
additional 246 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 30, 1996, 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 14 such Joint Venture Restaurants). (See "Business
- - Restaurant Operations - Joint Venture Restaurants" in Item 1 of this Report.)
The Company did not realize the anticipated results expected from the
introduction of certain cost cutting and efficiency enhancing programs
implemented into the restaurants in fiscal 1996. Restaurant margins decreased
from 6.1% to (0.7)%, primarily as a result of high labor costs. The continued
decrease in comparable sales likewise adversely affected programs designed to
improve restaurant margins. The Company has implemented aggressive programs in
the beginning of fiscal year 1997 that are designed to improve food, paper and
labor costs in the restaurants. These programs include closure of one drive thru
lane during slow periods, adjusting the salaried manager complement and
establishing a labor matrix that guides the general managers to an acceptable
amount of labor hours for different sales volume levels.
As of March 1996, the Company had 53 Company and franchise Restaurants
testing its proprietary L.A. Mex Mexican brand. Although initial sales were
encouraging, the sales increases resulted in little or no contribution to the
profitability of the test units. Additionally, speed of service was adversely
impacted by the addition of the L.A. Mex products. As a result, the Company
closed 13 of the 53 tests in February 1997 and expects to close a majority of
the tests in the first two quarters of fiscal year 1997.
In July 1996, the company's primary credit facility was acquired from
the then existing bank lending group by a new group of lenders led by DDJ
Capital Management LLC (collectively, the "DDJ Group"). In November 1996, CKE
Restaurants, Inc. ("CKE") and other investors, including certain members of the
DDJ Group (collectively the "CKE Group") acquired the credit facility from the
DDJ Group. The credit facility was restructured in late November 1996. The
Company negotiated the deferment of principal payments, reduction in interest
rate, extension of the maturity date by one year, and the elimination or
relaxation of all financial performance and ratio covenants. The restructuring
required the Company to issue to the CKE Group warrants to purchase 20 million
shares of the Company's common stock at $.75 per share. Additionally, the
restructured loan agreement required the Company to elect three members selected
by the CKE Group to the Company's Board of Directors resulting in a seven member
Board. The new members elected to the Company's Board of Directors pursuant to
the restructured loan agreement were William P. Foley, II, Terry N. Christensen
and C. Thomas Thompson.
Significant management changes have occurred since the end of the third
quarter of fiscal year 1996. Effective December 17, 1996, Albert J. DiMarco
resigned as the Company's Chief Executive Officer and President. Mr. DiMarco
simultaneously resigned as a member of the Company's Board of Directors. On that
same date, C. Thomas Thompson was elected to serve as Vice Chairman of the Board
of Directors and as Chief Executive Officer. On January 6, 1997, Richard E.
Fortman was elected to serve as President and Chief Operating Officer of the
Company and Joseph N. Stein was elected to serve as Executive Vice President and
Chief Administrative Officer of the Company. Effective January 21, 1997, Michael
E. Dew resigned as Vice President of Company Operations. Effective that same
date, Michael T. Welch, Vice President of Operations, Marketing, Restaurant
Support Services and Research & Development assumed the additional duties of
Vice President of Company Operations. On January 24, 1997, James T. Holder,
Chief Financial Officer and Secretary of the Company was promoted to Senior Vice
President, General Counsel and Secretary of the Company and Joseph N. Stein
assumed the additional duties of Chief Financial Officer. Messrs. Thompson and
Fortman respectively bring over 25 and 27 years of experience in the operation
of quick service restaurants to the Company.
During fiscal 1996, the Company applied a marketing strategy that
consisted of strategic limited time offer ("LTO") products supported by radio
and outdoor advertising. The majority of these LTO products carried a low price
point and were designed to be introduced for a four to eight week period.
Comparable store sales continued to decline during fiscal year 1996. The Company
is therefore evaluating alternative marketing strategies, including a greater
emphasis on the quality of the burgers and fries that Checkers offers, and an
increased emphasis on combo meals. The Company plans to test a new marketing
strategy in selected markets during fiscal year 1997.
15
In fiscal year 1996, the Company, along with its franchisees,
experienced a net reduction of 21 operating restaurants. In 1997, the franchise
community expects 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 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. 30, Jan. 1, Jan. 2,
1996 1996 1995
--------------------------------------------
Revenues:
Gross Restaurant Sales 96.8 96.4 93.4
Coupons & Discounts 2.6 2.5 2.8
--------------------------------------------
Net Restaurant Sales 94.2 93.9 90.6
Royalties 4.5 4.0 3.2
Franchise Fees 0.6 0.5 0.9
Modular Restaurant Packages 0.7 1.6 5.3
--------------------------------------------
Total Revenues 100.0% 100.0% 100.0%
--------------------------------------------
Costs and Expenses:
Restaurant Food and Paper Cost(1) 34.2 34.7 34.4
Restaurant Labor Costs(1) 35.9 31.8 29.3
Restaurant Occupancy Expense(1) 8.1 6.3 4.9
Restaurant Depreciation and Amortization(1) 5.5 5.8 6.1
Advertising Expense(1) 4.6 4.4 3.9
Other Restaurant Operating Expenses(1) 9.6 8.5 7.5
Cost of Modular Restaurant Package Revenues(2) 141.8 162.1 92.0
Other Depreciation and Amortization 2.6 2.1 1.3
Selling, General and Administrative Expenses 12.2 12.7 10.2
Impairment of Long-lived Assets 9.3 9.9 0.0
Losses on Assets to be Disposed of 4.3 1.7 4.2
Loss provisions 1.2 2.3 2.6
Operating Loss (25.6)% (19.6)% (3.7)%
Other Income (Expense):
Interest Income 0.4 0.4 0.4
Interest Expense (3.8) (3.0) (1.7)
Minority Interest in Earnings (0.9) (0.1) 0.1
--------------------------------------------
Loss Before Income Tax Expense (Benefit) (28.0)% (22.1)% (5.2)%
Income Tax Expense (Benefit) 0.1 % (4.6)% (2.1)%
--------------------------------------------
Net Loss (28.1)% (17.5)% (3.1)%
============================================
16
Fiscal Year Ended
--------------------------------------------
Dec. 30, Jan. 1, Jan. 2,
1996 1996 1995
--------------------------------------------
Operating Data:
System Wide Restaurant Sales (in 000's)
Company Operated $ 155,392 $ 178,744 $ 194,922
Franchise $ 172,566 $ 190,151 $ 180,977
--------------------------------------------
Total $ 327,958 $ 368,895 $ 375,899
============================================
Average Annual Net Sales Per Restaurant Open
For A Full Year (in 000's) (3):
Company Operated $ 651 $ 721 $ 815
Franchised 755 814 840
--------------------------------------------
System Wide $ 699 $ 765 $ 827
--------------------------------------------
Number of Restaurants (4)
Company Operated 232 242 261
Franchised 246 257 235
--------------------------------------------
Total 478 499 496
============================================
_____________________________________________________________
(1) As a percent of gross 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 1996 AND 1995
REVENUES. Total revenues decreased 13.3% to $165.0 million in 1996
compared to $190.3 million in 1995. Company-operated net 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 net 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
17
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 opened 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.
COSTS AND EXPENSES. Restaurant food ($49.5 million) and paper ($5.2
million) costs totalled $54.7 million or 34.2% of gross restaurant sales for
1996, compared to $63.7 million ($57.6 million food costs; $6.1 million, paper
costs) or 34.7% of gross restaurant sales for 1995. The decrease in food and
paper costs as a percentage of gross 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, totalled $57.3 million or 35.9% of
gross restaurant sales for 1996, compared to $58.2 million or 31.8% of gross
restaurant sales for 1995. The increase in restaurant labor costs as a
percentage of gross restaurant sales was due primarily to the decline in average
gross 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, totalled $12.9 million or 8.1% of gross restaurant sales
for 1996, compared to $11.6 million or 6.3% of gross restaurant sales for 1995.
This increase in restaurant occupancy costs as a percentage of gross restaurant
sales was due primarily to the decline in average gross 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 4.6% of restaurant sales
for 1996 which did not materially differ from the $8.1 million or 4.4% 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 totalled $15.3 million or 9.6% of gross restaurant sales for 1996
compared to $15.6 million or 8.5% of gross restaurant sales for 1995. The
increase for 1996 as a percentage of gross restaurant sales, was primarily
related to the decline in average gross restaurant sales relative to the fixed
and semi-variable nature of many expenses.
Costs of MRP revenues totalled $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.
Selling, general and administrative expenses decreased to $20.2
million or 12.2% 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, $1.2 million of which consisted of various selling, general and
administrative expenses including refinancing costs of $850,000 to expense
capitalized costs incurred in connection with the Company's previous lending
arrangements with its bank group. Provisions totalling $14.2 million to close 27
Restaurants, relocate 22 of them, settle 16 leases on real property underlying
these stores and sell land underlying the other 11 Restaurants, and impairment
charges related to an additional 28 under-performing Restaurants were recorded.
A loss provision of $500,000 was also recorded to reserve for obsolescence in
Champion's finished buildings inventory.
18
Additional accounting charges and loss provisions of $11.1 million
were recorded during the fourth quarter of 1996, $1.5 million of which consisted
of various selling, general and administrative expenses (including severance,
employee relocations, bad debt provisions and other charges). Provisions
totalling $6.4 million including $1.4 million for additional losses on assets to
be disposed of, $4.6 million for impairment charges related to 9
under-performing Restaurants received by the Company through a July 1996
franchisee bankruptcy action and $400,000 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 (included in Restaurant labor costs), adjustments to goodwill
of approximately $510,000 (included in other depreciation and amortization) and
approximately a $450,000 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 above mentioned CDDT bankruptcy.
Third quarter 1995 accounting charges and loss provisions of $8.8
million consisted of $2.8 million in various selling, general and administrative
expenses (write-off of receivables, accruals for recruiting fees, relocation
costs, severance pay, reserves for legal settlements and the accrual of legal
fees); $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 $260,000 in other charges, net, including
the $500,000 write-down of excess inventory and a minority interest adjustment.
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. 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. 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 totalled $27.9 million in 1996
and $31.6 million in 1995) was $18.4 million or $.36 per share for 1996 and
$10.5 million or $.21 per share for 1995, which resulted primarily from a
decrease in the average net Restaurant sales and margins, and a decrease in
royalties and franchise fees, offset by a decrease in depreciation and
amortization and selling, general and administrative expenses.
COMPARISON OF HISTORICAL RESULTS - FISCAL YEARS 1995 AND 1994
REVENUES. Total revenues decreased 11.5% to $190.3 million in 1995
compared to $215.1 million in 1994. Company-operated Restaurant sales decreased
8.3% to $178.7 million in 1995 from $194.9 million in 1994. The decrease
resulted primarily from a net reduction of 19 Company-operated Restaurants since
January 2, 1995, partially offset by a full year of operations for
Company-operated Restaurants opened in 1994. Comparable Company-operated
Restaurant sales for the year ended January 1, 1996, decreased 11.5% as compared
to the year ended January 2, 1995. This includes those Restaurants open at least
13 periods. The decrease in comparable Restaurant sales is primarily
attributable to increased sales pressure from competitor discounting and the
severe weather in various parts of the United States.
Royalties increased 10.0% to $7.6 million in 1995 from $6.9 million
in 1994 due primarily to a 5.1% increase in franchised Restaurant sales and a
net addition of 22 franchised Restaurants since January 2, 1995. Comparable
franchised Restaurant sales for Restaurants open at least 12 months for the year
ended January 1, 1996, decreased approximately 3.1% as compared to the year
19
ended January 2, 1995. 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 48.8% to approximately $961,000 in 1995
from $1.9 million in 1994. This was a direct result of opening fewer franchised
Restaurants during the year ended January 1, 1996. The Company recognizes
franchise fees as revenues when the Company has substantially completed its
obligations under the franchise agreement, usually at the opening of the
franchised Restaurant.
Modular Restaurant Package revenues decreased 73.7% to $3.0 million
in 1995 compared to $11.4 million in 1994 due to decreased sales volume of
Modular Restaurant Packages 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 Modular Restaurant
Packages from previously opened sites which has negatively impacted the new
building revenues. Modular Restaurant Package revenues are recognized on the
percentage of completion method during the construction process; therefore, a
substantial portion of Modular Restaurant Package revenues are recognized prior
to the opening of a Restaurant.
COSTS AND EXPENSES. Restaurant food ($57.6 million) and paper ($6.1
million) costs totalled $63.7 million or 34.7% of gross restaurant sales for
1995, compared to $69.2 million ($63.4 million, food costs; $5.8 million, paper
costs) or 34.4% of gross restaurant sales for 1994.
Restaurant labor costs, which includes restaurant employees'
salaries, wages, benefits and related taxes, totalled $58.2 million or 31.8% of
gross restaurant sales for 1995, compared to $58.8 or 29.3% of gross restaurant
sales for 1994. The increase in restaurant labor costs as a percentage of gross
restaurant sales was due primarily to the decline in average gross restaurant
sales relative to the fixed and semi-variable nature of these costs and a
provision of $1.5 million for workers compensation exposure in the third quarter
of 1995.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totalled $11.6 or 6.3% of gross restaurant sales for
1995, compared to $9.7 or 4.9% of gross restaurant sales for 1994. This increase
in restaurant occupancy costs as a percentage of gross restaurant sales was due
partially to the decline in average gross restaurant sales relative to the fixed
and semi-variable nature of these expenses while the increase in the actual
expense resulted from increases in utilities, property taxes and insurance.
Restaurant depreciation and amortization decreased 13.7% to $10.6
million for 1995, from $12.3 for 1994, due primarily to the net reduction of 19
Company-operated Restaurants since January 2, 1995.
Advertising increased to $8.1 million or 4.4% of of gross restaurant
sales in 1995 from $7.9 million or 3.9% of of gross restaurant sales 1994. The
increase in this expense was due to increased expenditures for broadcast
advertising.
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 totalled $15.6 million or 8.5% of gross restaurant sales for 1995
compared to $15.1 or 7.5% of gross restaurant sales for 1994. The increase as a
percentage of gross restaurant sales, was primarily related to the decline in
average gross restaurant sales relative to the fixed and semi-variable nature of
many expenses.
Cost of Modular Restaurant Packages totalled $4.9 million or 162.1%
of Modular Restaurant Package revenues in 1995 compared to $10.5 million or
92.0% of such revenues in 1994. The increase in these expenses as a percentage
of Modular Restaurant Package revenues was attributable to the decline in the
number of units produced relative to the fixed and semi-variable nature of many
expenses. The total number of units declined in 1995, not only because of the
decline in the number of units produced for franchisees, but also because the
Company opened fewer Restaurants in 1995 than 1994, and also used relocated
Company units for certain 1995 Restaurant openings. The Company also incurred
costs associated with the reduction in volume.
Selling, general and administrative expenses increased to $24.2
million or 12.7% of total revenues in 1995 from $21.9 million or 10.2% of total
revenues in 1994. The increase in these expenses was primarily attributable to
third quarter 1995 accounting charges of $3.6 million as discussed below,
partially offset by a decrease in corporate overhead costs as a result of the
Company's restructuring.
20
ACCOUNTING CHARGES AND LOSS PROVISIONS. The Company recorded
accounting charges and loss provisions totalling $8.8 million during the quarter
ended September 11, 1995. There was no comparable charge for the quarter ended
September 12, 1994. These charges include a provision of $3.2 million for
Restaurant relocations and abandoned site costs. The provision for Restaurant
relocations and abandoned site costs consists of a $1.2 million charge to write
down 21 relocated Modular Restaurant Packages to net realizable value and a
charge of $2.0 million to adjust existing reserves necessary to expense site
improvements, settle leases, and provide for other costs associated with the
abandonment of under performing Restaurant sites and to provide for the closure
of four additional Restaurants.
Of the above provision totalling $3.2 million approximately $2.3
million represents accounting charges primarily for the write-off of site costs
to originally open the Restaurants and cash expenditures to be made to settle
lease liabilities over the remaining lives (up to fourteen years) of the
underlying leases. These payments are expected to be funded out of operating
cash flows.
In addition to the provision of $3.2 million discussed above, the
Company recorded charges of $3.6 million to (i) write-off uncollectible
receivables related primarily to the Champion division; (ii) write down obsolete
inventory and menu boards; (iii) expense costs associated with the hiring of new
employees, including recruiting fees and relocation costs; (iv) provide for
severance pay; (v) write-off loan origination fees incurred in connection with
the Company's credit facility, which has been substantially renegotiated; (vi)
dispose of a subsidiary which distributes promotional apparel; (vii) reserve for
the settlement of litigation arising in the ordinary course of business and
accrue for legal fees. These charges are included in selling, general and
administrative expenses.
Other third quarter accounting charges included a $1.5 million
charge to reserve for future workers compensation claims exposure in connection
with the Company's self-insured plan, which was included in other Restaurant
operating expenses; a $721,000 charge for the Champion division to write-off
previously capitalized costs which are no longer expected to provide any future
benefit and to write down obsolete equipment inventories, which was included in
cost of Modular Restaurant Packages; a $314,000 recovery of minority interests
in losses which had been previously reserved by the Company, which was included
in minority interests in earnings (losses); and a $101,000 charge to reserve for
state income tax assessments, which was reflected in income tax expense
(benefit).
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.
Comparatively, in 1994 the Company recorded provisions totalling
$4.5 million in the first quarter and $11.4 million in the fourth quarter of
1994. The first quarter $4.5 million provision included $1.8 million to provide
for the write-off of site costs and the other costs to originally open
Restaurants and $1.7 million for lease liability settlements related to the 21
closed or underperforming Restaurants. The fourth quarter 1994 provisions
totalling $11.4 million included a $1.7 million charge to settle leases and
expense site costs and $3.0 million in other costs to originally open
Restaurants for the 12 under performing Restaurants to be relocated. These
charges, along with the first quarter $4.5 million charge described above are
combined, and the total $9.1 million was reflected in the Company's 1994
Consolidated Statement of Operations. A restructuring charge of $5.6 million was
included in the fourth quarter 1994 provisions to provide for the Company's
reorganization due to its inability to find sufficient capital on acceptable
terms to maintain its growth rate and the resultant downsizing of staff and
offices and the write-off of costs associated with sites which will not be
developed and new Restaurant openings which have been delayed. The charge
consisted of severance costs, closed office expense, and loss on sale of the
Company plane totaling $680,000, and site costs and other costs to open
previously anticipated new Restaurants of $5.0 million. Other fourth quarter
1994 provisions included $850,000 for legal costs and an allowance for royalty
receivables due from a franchisee involved in a bankruptcy, and $275,000 for
settlement of real estate title claims, both of which were included in 1994
selling, general and administrative expenses. Of the 1994 provisions which total
$15.9 million, approximately $11.0 million represents non-cash charges primarily
for the write-off of site costs and other costs to originally open the
Restaurants. The remaining $4.9 million primarily represents cash expenditures
to be made to settle lease liabilities over the remaining lives of the
underlying leases.
INTEREST EXPENSE. Interest expense increased to $5.7 million or 2.9%
of total revenues in 1995 from $3.6 million or 1.6% of total revenues in 1994.
This increase was due to the Company's 1995 debt issuances in connection with
Restaurant acquisitions and capitalized leases resulting from sale-leaseback
transactions.
21
INCOME TAX EXPENSE (BENEFIT). Due to the loss for the year ended
January 1, 1996, the Company recorded an income tax benefit of $8.9 million or
21.0% of the loss before income taxes for the year ended January 1, 1996, as
compared to income tax benefit of $4.6 million (after giving effect to pro forma
income taxes for merged entities during their S Corporation status), or 40.4% of
earnings before income taxes for the year ended January 2, 1995. The effective
tax rates of 21.0% in 1995 and 40.4% in 1994 (after giving effect to pro forma
income taxes for merged entities during their S corporation periods) differed
from the expected federal tax rate of 35% primarily due to state income taxes,
tax-free investment income, job tax credits and the implementation of SFAS 121
in 1995.
NET LOSS. Earnings were significantly impacted by the loss
provisions which were recorded in 1995 and the write-downs associated with
implementation of SFAS 121. Net loss before the provisions, which totalled $31.5
million, was $1.7 million or $.03 per share, which resulted primarily from a
decrease in the average net Restaurant sales and margins, a decrease in
franchise fees, a decrease in modular Restaurant package revenues and margins,
increased advertising and interest expense offset by a significant decrease in
selling, general and administrative expenses. The provisions net of tax benefit
represent a charge of $26.7 million or $.53 per share, resulting in an overall
net loss of $33.2 million or $.65 per share for the year ended January 1, 1996.
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., Casa Bonita, Inc., and
Summit Family Restaurants, Inc. Also participating were most members of the DDJ
Group, as well as KCC Delaware Company, a wholly-owned subsidiary of GIANT
GROUP, LTD., which is a controlling shareholder of Rally's Hamburgers, Inc.
On November 22, 1996, the Company and the CKE Group executed an
Amended and Restated Credit Agreement (the "Restated Credit Agreement") thereby
completing a restructuring of the debt under the Loan Agreement. The Restated
Credit Agreement consolidated all of the debt under the Loan Agreement and the
Credit Line into a single obligation. At the time of the restructuring, the
outstanding principal balance under the Loan Agreement and the Credit Line was
$35.8 million. Pursuant to the terms of the Restated Credit Agreement, the term
of the debt was extended by one (1) year until July 31, 1999, and the interest
rate on the indebtedness was reduced to a fixed rate of 13%. In addition, all
principal payments were deferred until May 19, 1997, and the CKE Group agreed to
eliminate certain financial covenants, to relax others and to eliminate
approximately $6 million in restructuring fees and charges. The Restated Credit
Agreement also provided that certain members of the CKE Group agreed to provide
to the Company a short term revolving line of credit of up to $2.5 million, also
at a fixed interest rate of 13% (the "Secondary Credit Line"). In consideration
for the restructuring, the Restated Credit Agreement required the Company to
issue to the members of 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. Since November 22, 1996, the Company has
reduced the principal balance under the Restated Credit Agreement by $9.1
million and has repaid the Secondary Credit Line in full. A portion of the funds
utilized to make these principal reduction payments were obtained by the Company
from the sale of certain closed restaurant sites to third parties. Additionally,
the Company utilized $10.5 million of the proceeds from the February 21, 1997,
private placement which is described later in this section. Pursuant to the
Restated Credit Agreement, the prepayments of principal made in 1996 and early
in 1997 will relieve the Company of the requirement to make any of the regularly
scheduled principal payments under the Restructured Credit Agreement which would
have otherwise become due in fiscal year 1997.
On August 2, 1995, the Company entered into a purchase agreement (as
amended in October 1995 and April 1996, the "Rall-Folks Agreement") with
Rall-Folks, Inc. ("Rall-Folks") pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of three
promissory notes of the Company held by Rall-Folks (the "Rall-Folks Notes").
Pursuant to the Rall-Folks Agreement, the Company is to deliver to Rall-Folks
shares of its Common Stock with a value equal to the then outstanding balance
22
due under the Rall-Folks Notes (the "Rall-Folks Purchase Price"). The total
amount of principal outstanding under the Rall-Folks Notes was approximately
$1.8 million as of March 1, 1997. The Rall-Folks Notes are fully subordinated to
the Company's existing bank debt.
Under the terms of the Rall-folks Agreement, the Company guaranteed
that if Rall-Folks sells all of the Common Stock issued for the Rall-folks Notes
in a reasonably prompt manner (subject to certain limitations described below)
Rall-Folks will receive net proceeds from the sale of such stock equal to the
Rall-Folks Purchase Price. If Rall-Folks receives less than such amount, the
Company will issue to Rall-Folks, at the option of Rall-Folks, either (i)
additional shares of Common Stock, to be sold by Rall-Folks, until Rall-Folks
receives an amount equal to the Rall-Folks Purchase Price, or (ii) a six-month
promissory note bearing interest at 11%, with all principal and accrued interest
due at maturity, and subordinated to the Company's bank debt pursuant to the
same subordination provisions, equal to the difference between the Rall-Folks
Purchase Price and the net amount received by Rall-Folks from the sale of the
Common Stock.
On August 3, 1995, the Company entered into a purchase agreement (as
amended in October 1995 and April 1996, the "RDG Agreement") with Restaurant
Development Group, Inc. ("RDG") pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of a
promissory note of the Company held by RDG (the "RDG Note"). The total amount of
principal outstanding under the RDG Note was approximately $1.7 million as of
March 1, 1997. The RDG Note is fully subordinated to the Company's existing bank
debt. In partial consideration of the transfer of the RDG Note to the Company,
the Company will deliver to RDG shares of Common Stock with a value equal to the
sum of (i) the outstanding balance due under the RDG Note on the closing date
and (ii) $10,000 (being the estimated legal expenses of RDG to be incurred in
connection with the registration of the Common Stock) (the "RDG Purchase
Price").
As further consideration for the transfer of the RDG Note to the
Company, the Company agreed to issue RDG 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 a the "Average Closing Price"); however, in the event that the
average closing price of the Common Stock for the 90 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 90 day period. The Warrant will be
exercisable at any time within five years after the closing date.
Under the terms of the RDG Agreement, the Company has guaranteed
that if RDG sells all of such Common Stock issued for the RDG Note in a
reasonably prompt manner (subject to certain limitations described below), RDG
will receive net proceeds from the sale of such stock equal to at least 80% of
the RDG Purchase Price. If RDG receives less than such amount, the Company will
issue additional shares of Common Stock to RDG, to be sold by RDG, until RDG
receives an amount equal to 80% of the Purchase Price.
The Rall-Folks Notes and the RDG Notes were due on August 4, 1995.
Pursuant to the Rall-Folks Agreement and the RDG Agreement, the Rall-Folks Notes
and the RDG Note were to be acquired by the Company in exchange for Common Stock
on or before September 30, 1995. The Company and Rall-folks and RDG amended the
Rall- Folks Agreement and the RDG Agreement, respectively, to allow for a
closing in May 1996 (subject to extension in the event closing is delayed due to
review by the Securities and Exchange Commission of the registration statement
covering the Common Stock to be issued in the transaction). The transactions
with Rall-Folks and RDG have been delayed due to the Company's negotiations with
the various investor groups during fiscal 1996 concerning the restructure of the
Company's debt. Each of the parties has the right to terminate their respective
Agreement.
Pursuant to the Rall-Folks Agreement and the RDG Agreement, the term
of the Notes will be extended until the earlier of the closing of the repurchase
of the Notes or until approximately one month after the termination of the
applicable Agreement by a party in accordance with its terms. Closing is
contingent upon a number of conditions, including the prior registration under
the federal and state securities laws of the Common Stock to be issued and the
subsequent approval of the transaction by the stockholders of Rall-Folks and RDG
of their respective transactions. In the event the Company complies with all of
its obligations under the Rall-Folks Agreement and the stockholders of
Rall-Folks do not approve the transaction, the term of the Rall-Folks Notes was
to have been extended until December 1996. In the event the Company complies
with all of its obligations under the RDG Agreement and the stockholders of RDG
do not approve the transaction, the term of the RDG Note was to have been
extended approximately one year. The Company intends to attempt to negotiate a
further extension of these notes. No assurance can be given that the Company
will be successful in any attempted negotiations.
Under the terms of the Rall-Folks Agreement and the RDG Agreement,
if the transaction contemplated therein is consummated, so long as Rall-Folks
and RDG, respectively, is attempting to sell the Common Stock issued to it in a
23
reasonably prompt manner (subject to the limitations described below), the
Company is obligated to pay to it in cash an amount each quarter equal to 2.5%
of the value of the Common Stock held by it on such date (such value being based
upon the value of the Common Stock when issued to it).
On April 11, 1996, the Company entered into a Note Repayment
Agreement (the "NTDT Agreement") with Nashville Twin Drive-Thru Partners, L.P.
("NTDT") pursuant to which the Company may issue shares of its Common Stock in
exchange for and in complete satisfaction of a promissory note of the Company
held by NTDT which matured on April 30, 1996 (the "NTDT Note"). Pursuant to the
NTDT Agreement, the Company is to issue shares of Common Stock to NTDT in blocks
of two hundred thousand shares each valued at the closing price of the Common
Stock on the day prior to the date they are delivered to NTDT (such date is
hereinafter referred to as the "Delivery Date" and the value of the Common Stock
on such date is hereinafter referred to as the "Fair Value"). The amount
outstanding under the NTDT Note will be reduced by the Fair Value of the stock
delivered to NTDT o