U.S. Dollars
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------------
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] for the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to _________________
Commission file number 0-17980
--------------
RALLY'S HAMBURGERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 62-1210077
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
10002 Shelbyville Road, Suite 150, Louisville, Kentucky 40223
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 245-8900
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Class on which Registered
---------------------- ----------------------------
<S> <C> <C>
Securities registered pursuant to 12(b) of the Act: 9 7/8% Senior Notes New York Stock Exchange
due 2000
Securities registered pursuant to 12(g) of the Act: Common Stock, par NASDAQ -- NMS
value $.10 per share
Securities registered pursuant to 12(g) of the Act: Common Stock NASDAQ -- NMS
Purchase Warrants
</TABLE>
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. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
February 24, 1997 was 20,541,602 shares. The aggregate market value of the
shares of Registrant held by non-affiliates of the Registrant, based on the
closing price of such stock on the National Market System of the NASDAQ Stock
Market, as of February 24 1997 was approximately $45,042,594. For purposes of
the foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
Portions of the Registrants' Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorported by reference in Part III of this Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PART I Page No.
Item 1. Business.....................................................................................3
Item 2. Properties..................................................................................10
Item 3. Legal Proceedings...........................................................................10
Item 4. Submission of Matters to a Vote of Security Holders.........................................13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................13
Item 6. Selected Consolidated 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.................................................27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.......50
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant..............50
Item 11. Executive Compensation......................................................................50
Item 12. Stock Ownership of Principal Holders and Management.........................................50
Item 13. Certain Relationships and Related Transactions..............................................50
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................50
</TABLE>
2
<PAGE>
PART I
Item 1. Business
General
Rally's Hamburgers, Inc. and its subsidiaries are collectively referred
to herein as the context requires as "Rally's" or the "Company". See Note 1 to
Consolidated Financial Statements.
Rally's is one of the largest chains of double drive-thru restaurants in
the United States. At February 24, 1997, the Rally's system included 471
restaurants in 19 states, primarily in the Midwest and the Sunbelt, comprised of
214 Company-owned and operated, 230 franchised and 27 Company-owned restaurants
in Western markets which are operated as Rally's restaurants by CKE Restaurants,
Inc. ("CKE"), a significant shareholder of the Company, under an operating
agreement which began July 1996. One additional Company-owned store covered by
the operating agreement has been converted to the Carl's Jr. format and is not
included in the above store count. The remaining 27 restaurants are included in
the franchised store count herein. The Company's restaurants offer high quality
fast food. The Company serves the drive-thru and take-out segments of the
quick-service restaurant industry. The Company opened its first restaurant in
January 1985 and began offering franchises in November 1986. See "Management's
Discussion and Analysis of Financial Condition and Result of Operations."
On March 25, 1997, the Company agreed in principle to a merger transaction
pursuant to which the COmpany would become a wholly-owned subsidiary of Checkers
Drive-In Restaurants, Inc., a Delaware corporation ("Checkers"). Checkers,
together with its franchisees, operates approximately 478 double drive-thru
hamburger restaurants primarily located in the Southeastern United States. Under
the terms of the letter of intent executed by the Company and Checkers, each
share of the Company's Common Stock will be converted into three shares of
Checker's common stock upon consummation of the merger. The transaction is
subject to negotiation of definitive agreements, recipt of fairness opinions by
each party, receipt of stockholder and other required approvals and other
customary conditions.
Cautionary Statement
Information provided herein by the Company contains, and from time to time
the Company may disseminate material and make statements which may contain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). These cautionary statements are being
made pursuant to the provisions of the Act and with the intention of obtaining
the benefits of the "safe harbor" provisions of the Act. The Company cautions
investors that any forward-looking statements made by the Company are not
guarantees of future performance and that actual results may differ materially
from those in the forward-looking statements as a result of various factors,
including but not limited to, the following:
(i) The Company competes with numerous well established competitors
who have substantially greater financial resources and longer
operating histories than the Company. Competitors have
increasingly offered selected food items and combination meals,
including hamburgers, at discounted prices, and continued
discounting by competitors may adversely affect revenues and
profitability of Company restaurants.
(ii) The Company will be negatively impacted if the Company is unable
to reverse declining same store sales. Sales increases will be
dependent, among other things, on success of Company advertising
and promotion of new and existing menu items. No assurances can be
given that such advertising and promotions will in fact be
successful.
(iii)The Company may also be negatively impacted by other factors
common to the restaurant industry such as changes in consumer
tastes, away from red meat and fried foods; increases in the costs
of food, paper, labor, health care, worker's compensation or
energy; an inadequate number of hourly paid employees; and/or
decreases in the availability of affordable capital resources.
3
<PAGE>
Concept and Strategy
The Company's primary strategy is to serve the drive-thru and take-out
segment of the quick-service restaurant industry. The Company's operating
strategy is to take advantage of off-premise food consumption by serving a
limited menu consisting of a variety of great tasting burgers with limited side
items. The key elements of this strategy are Rally's operating system,
restaurant design, brand positioning and marketing program.
Rally's Operating System. The Rally's operating system is designed to
provide fast and accurate service of high quality fast food. Within the
restaurants, all products are prepared to order in a systematic fashion moving
from the back of the restaurant to the front windows with each employee
performing specific duties. Labor is staffed in an attempt to courteously serve
guests within 45 seconds of their reaching the drive-thru window and to maintain
a safe, clean food service environment. The Company's training and franchise
support programs are designed to promote consistency of product and service
throughout the Rally's system and are documented in a uniform confidential
operations manual.
The Company installed computer-based point of sale devices and related
software in each of its Company-owned restaurants in 1993 and 1994. This
software allows Rally's to centralize control over certain aspects of restaurant
operations at the corporate office on a daily basis. As a result, menu prices
and menus can be controlled and transactions reviewed and audited at corporate
headquarters.
The Company continued to update and improve its restaurant back office
software in 1995 and 1996. Modules such as time and attendance, inventory
management and daily variance reporting either have been or are in the process
of being rolled into all Company locations. The Company believes that the system
is providing current data on a daily basis that is used to analyze and make
decisions about the business.
Restaurant Design and Economics. Rally's restaurants present a distinctive
design which conveys a message of "clean and fast" to the passing motorist. The
restaurants' typical "double drive-thru" design features drive-thru windows on
both sides of the restaurant for quicker service. While the restaurants
generally do not have an interior dining area, most have a patio for outdoor
eating. These areas contain canopy tables and seats and are landscaped to create
an attractive eating environment. Rally's restaurant buildings average 600 to
720 square feet depending upon geographic location and require less property
than the traditional eat-in restaurants. As a result of the small size of the
restaurant building, Rally's restaurants generally require a smaller capital
investment and have lower occupancy and operating costs per restaurant than
traditional dine-in fast feeders. The size of the facility also permits somewhat
greater flexibility with respect to the selection of prospective sites for
restaurants.
During 1996, the Company opened six new restaurants. The incremental cash
outlay, exclusive of land, of opening these restaurants was reduced due to the
substantial use of surplus assets as well as to the types of restaurants
constructed (stick versus modular versus conversions of pre-existing
restaurants). In total, the incremental cash outlay, exclusive of land, of these
six restaurants was approximately $1,225,000.
In 1994, the full development cost associated with constructing and opening
a Rally's restaurant (excluding land cost and interest on construction) was
approximately $478,000. When purchased, the majority of real estate sites have
cost between $100,000 and $300,000. As of February 24, 1997, approximately 69%
of Company-owned and operated restaurants were located on leased real estate.
Over the past year, the Company has been building stores by either using
surplus equipment and/or surplus modular buildings or purchasing conversion
properties. When using surplus equipment and modular buildings, the Company's
cash outlay has typically been approximately $250,000. The Company recently
acquired four conversion properties. The Company's total cost, including land,
building, equipment and conversion cost is expected to be less than $250,000 per
store. The Company is currently working on several similar conversion
opportunities. Although the Company expects to continue to use excess modular
buildings and seek additional conversion opportunities, the Company estimates
that the cost associated with new store development will return to the higher
pre-slowdown levels where these alternatives are not practical.
4
<PAGE>
Brand Positioning: Bigger, Better Burgers. Rally's is establishing
an overall brand positioning as THE quick service restaurant chain serving a
variety of great tasting burgers. This positioning is supported by:
1. A limited menu based on high quality burgers, french fries, onion rings
and soft drinks/shakes.
2. New visually attractive menu boards that merchandise these high quality
burgers by utilizing high definition photographs of the featured menu
offerings.
3. Television advertising featuring big, juicy burgers and targeting
Rally's heavy users.
This new brand positioning represents a major strategic shift for Rally's
away from its recent positioning which had been based primarily on low prices
and quick service. Good value and quick service are still important to guests,
but the competitive environment has become so price oriented that basing a brand
positioning on low prices is not unique enough to differentiate Rally's from its
competitors. Further, relying too heavily on low prices and price promotion had
a negative financial impact on the Company, causing higher costs as a percentage
of sales and lower profits. By focusing the brand positioning on what Rally's
believes guests really want from a quick service hamburger restaurant and on
what Rally's can effectively provide - great tasting burgers - Rally's believes
that it will be able to effectively differentiate itself from its competitors
and improve its sales and guest count trends over time.
Rally's has increased the size of its hamburger patty from 2.8 ounces to
3.2 ounces, reformulated its spice profile and added two new signature burgers
to its product line - The Super Double and the Barbecue Bacon Cheeseburger
(single and double). These new products, along with a bigger Rallyburger(R) and
Big Buford(TM) double cheeseburger, currently represent the core burger line-up.
Additionally, the Company offers its One of a Kind Fries(R), a chicken breast
sandwich, onion rings, Coca-Cola(R) brand soft drinks and milk shakes. A limited
number of additional products may be offered in some locations from time to
time.
Marketing Program. Rally's introduced a new advertising campaign initially
in three Company markets in late 1996 and in all Company controlled markets in
late February 1997 to support the new brand positioning. This new advertising
was created by the Company's advertising agency, Mendelsohn/Zien Advertising,
and was based on an extremely successful advertising campaign the agency
developed for the California-based Carl's Jr. chain. Rally's has entered into a
marketing-sharing agreement with CKE restaurants covering the use of these
commercials. Under the agreement, the cost of the commercials is lower than that
of developing similar unique creative for the Company's use. The advertising,
which uses the theme-line "If it doesn't get all over the place, it doesn't
belong in your face," features Rally's new signature burgers and targets a heavy
user market segment of young adults aged 18-34. This new advertising campaign
relies heavily on television as its primary medium. In cases where effective
levels of television are not affordable, the Company may use radio, outdoor or
print advertising.
Working Capital
The Company's working capital requirements are generally typical of
companies within the quick-service restaurant industry. The Company does not
normally require large amounts of working capital to maintain operations since
sales are for cash, purchases are on open accounts and meat and produce
inventories are limited to a two to four day supply to assure freshness. During
1995 and 1996, the Company's working capital requirements were substantially
reduced as a result of significant slowdowns in construction from prior years.
Additionally, sales of certain assets held for sale, net of underlying
encumbrances, provided another source of working capital. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Franchising Program; Area Development Rights
The Company offers area development agreements to franchisees for
construction of one or more new restaurants over a defined period of time within
a defined geographic area. The specific restaurant locations selected by
franchisees are subsequently designated in separate franchise agreements. Under
the standard area development agreement, a franchisee is generally required to
pay, at the time the agreement is signed, a non-refundable fee of approximately
$5,000 per potential restaurant in the defined geographic area. The number of
potential restaurants is determined by negotiation between the Company and the
franchisee. The Company's standard area development agreement also provides for
a franchise fee of approximately $15,000 for each restaurant, which is due when
the franchise agreement with respect to a restaurant is executed. The standard
5
<PAGE>
franchise agreement is for a term of 15 years and provides for payment to the
Company of royalties equal to 4% of gross sales and minimum marketing
expenditures of 4% of gross sales (1/2% of which is paid to the Rally's National
Advertising Fund). The Company requires each franchisee to have an approved
full-time Principal Operator who is responsible for the supervision and conduct
of the franchise. As of February 24, 1997, the Company had 41 franchisees
operating 230 restaurants (exclusive of the CKE-operated restaurants),
representing approximately 49% of all systemwide restaurants. Approximately 5 of
these franchisees operate approximately 25 restaurants in Western markets which
are in designated market areas ("DMA's") where Carl's Jr. has previously run
commercials now being used by the Company. These Rally's stores would not be
able to utilize the marketing material that the Company received from Carl's Jr.
as part of the marketing-sharing agreement. The Company has reached an agreement
in principle with these franchisee groups which would provide these franchisees
additional funding and flexibility to allow them to continue to effectively
compete without having access to the above referenced marketing materials.
Expansion Strategy
The Company currently intends to open approximately 15 new restaurants in
existing Company markets in 1997. These new restaurants are expected to be a
mixture of freestanding locations and conversions. In addition, the Company
plans to reopen 3 units previously closed. Currently, franchisees are expected
to open approximately 20 locations during 1997.
There can be no assurance that the Company or its franchisees will be able
to open planned new restaurants or that, if opened, these restaurants can be
operated profitably. The Company has pursued and intends to continue to pursue
an expansion strategy which depends upon a number of factors, some of which are
beyond the control of the Company. Such factors include the availability and
cost of suitable locations, the hiring, training and retention of skilled
management and other personnel, the availability of adequate financing and the
selection of viable franchisees. The Company may also make selective
acquisitions, depending on, among other factors, the availability of suitable
acquisition prospects and appropriate financing. There can be no assurance that
the Company will be able to acquire additional restaurants or that, if acquired,
such restaurants will be profitably added to the Rally's system. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
6
<PAGE>
Restaurant Locations
The following table sets forth the number of restaurants in the Rally's
system at February 24, 1997 by designated market area ("DMA"):
<TABLE>
<CAPTION>
Company-owned Restaurants (214)
<S> <C> <C>
Alabama: Kentucky: Missouri:
Birmingham (14) Lexington (8) St. Louis (26)
Anniston (1) Louisville (22) Paducah-Cape Girardeau-Harrisburg-Mt.Vernon (1)
Florida: Louisiana: Ohio:
Jacksonville-Brunswick (11) New Orleans (22) Cincinnati (12)
Tallahassee-Thomasville (6) Michigan: Toledo (11)
Indiana Detroit (35) Tennessee:
Indianapolis (22) Flint-Saginaw-Bay City (1) Memphis (9)
Virginia:
Norfolk-Portsmouth-Newport News (13)
Franchised Restaurants (257)
Arizona: Indiana: Ohio:
Phoenix (8) Indianapolis (2) Cleveland (29)
Arkansas: Evansville (7) Columbus (23)
Little Rock-PineBluff (10) Ft. Wayne (4) Cincinnati (10)
Joplin-Pittsburgh (1) South Bend-Elkhart (3) Dayton (19)
Ft. Smith (5) Terre Haute (4) Lima (2)
California: Kentucky: Toledo (2)
Bakersfield (4) Bowling Green (2) Youngstown (2)
Yuma-El Centro (4) Lexington (1) Zanesville (1)
Fresno-Visalia (2) Louisville (4) Pennsylvania:
Los Angeles (19) Louisiana: Pittsburgh (3)
Palm Springs (1) New Orleans (3) Tennessee:
San Diego (14) Michigan: Knoxville (1)
Florida: Flint-Saginaw-Bay City (8) Memphis (3)
Jacksonville - Brunswick (2) Detroit (6) Nashville (1)
Tallahassee-Thomasville (2) Lansing (4) Virginia:
W. Palm Beach-Ft. Pierce (1) Mississippi: Norfolk-Portsmouth-Newport News (1)
Georgia: Jackson (4) Roanoke-Lynchburg (8)
Augusta (4) Missouri: West Virginia:
Illinois: Columbia-Jefferson City (1) Charleston-Huntington (6)
Chicago (9) Springfield (5) Parkersburg (1)
Champaign-Springfield-Decatur (1)
</TABLE>
Site Selection and Construction
The Company believes that the location of a Rally's restaurant is very
important to its success. In evaluating particular sites, the Company uses
demographic data related to quick-service restaurant sales. Sites proposed for
both Company-owned restaurants and franchised restaurants must be accepted by a
committee comprised of most members of the Company's senior management team. The
committee considers, among other factors, the accessibility, visibility, cost,
surrounding traffic patterns and population characteristics of each potential
site.
The Company has prototype plans and approved suppliers for the construction
of its restaurants. Since 1990, the Company has increasingly used modular
buildings. Prior to that time, "stick" (constructed on-site) buildings were used
almost exclusively.
7
<PAGE>
Purchasing
Franchisees are required to purchase their equipment, food, beverages and
supplies from Company-approved suppliers. All products must meet specifications
set by the Company, and management continually monitors the quality of the food,
beverages and supplies provided to the restaurants. The Company negotiates
directly with wholesale suppliers to ensure consistent quality and freshness of
products throughout the Rally's system and believes that it has obtained
competitive pricing from its suppliers. The Company currently has
approximately18 major food and paper suppliers and 29 distributors. During the
year, the Company began participating with related parties in attempting to
leverage aggregate purchase volumes of common items to obtain more favorable
pricing. The Company expects these efforts will continue in the future.
Restaurant Staffing and Training; Franchise Support
A typical Rally's restaurant, during peak hours, is staffed with 8 to 12
team members, with a manager generally on the premises at all times. The
function of assuring that each Company-owned restaurant consistently delivers
high-quality food and service is performed by Area Managers. Area Managers
report to Regional Vice Presidents. Regional Vice Presidents, Area Managers and
restaurant management are compensated with a fixed salary plus a bonus based on
the performance of the restaurants under their supervision. On average, the
Company has one Area Manager for every 5 to 10 Company restaurants and 8 to 11
Area Managers for each of the three Regional Vice Presidents. The Regional Vice
Presidents report to the Senior Vice President of Operations.
The Company believes that training is important to the success of its
restaurant operations. The Company's training programs emphasize quality food
preparation, quick service, cleanliness of restaurants, courteous employees and
consistency of execution.
All General Managers of Company-owned restaurants are required to complete
the Company's training program, which generally consists of five weeks of
hands-on training. The designated operating partner of each franchisee is
required to receive similar training, generally 12 weeks in duration. All
Company and franchise General Managers must generally complete an intensive
six-day "Train the Trainer" program before being certified to train management
personnel in their respective markets. The certification process takes
approximately 30 days to complete. In addition, the Company sends a training
team consisting of both management and hourly workers to a new franchisee's
first three restaurant openings for a duration of up to two weeks (one week
before and one week after the opening). After a new franchisee opens three
restaurants, the Company provides this training team as it deems necessary, or
upon the franchisee's request at the franchisee's expense.
The Company has six Franchise Business Managers, each of whom acts as a
link between the Company and its franchisees. The Franchise Business Managers
perform regularly scheduled restaurant operation evaluations to ensure that each
franchised restaurant consistently delivers high quality food and fast, friendly
service in a clean environment. They also review the financial results and
effectiveness of franchise restaurant management to identify possible areas of
improvement. Franchise Business Managers report to the Director of Franchise
Operations. Currently, each Franchise Business Manager supports an average of 40
franchised restaurants.
Competition
The quick-service restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, traffic patterns,
consumer concerns about the nutritional quality of quick-service food and
increases in the number and particular locations of competing quick-service
restaurants. Factors such as inflation, increases in food, labor (including
health care costs) and energy costs and the availability of an adequate number
of hourly-paid employees also affect the quick-service restaurant industry.
Major chains, which have substantially greater financial resources and longer
operating histories than the Company, dominate the quick-service restaurant
industry. The Company believes that its primary competitors are five national
chains: McDonald's, Wendy's, Hardee's, Burger King and Taco Bell. In certain
markets, the Company competes with other quick-service double drive-thru
hamburger chains with operating concepts similar to the Company. Certain of the
major chains have increasingly offered selected food items and combination
meals, including hamburgers, at discounted prices. The Company believes that the
pricing strategies of its competitors, in general, had an adverse impact on the
Company's systemwide sales in the last three
8
<PAGE>
fiscal years. The pricing or other marketing strategies of one or more of these
competitors could have a continuing adverse impact on the Company's performance.
With respect to the sale of franchises, the Company competes with many
franchisors of restaurants, including other double drive-thru franchisors, and
franchisors of other business concepts. The Company believes it has attracted a
number of franchisees with significant experience in the restaurant industry as
a result of the strength of its concept and operating strategy and the favorable
potential return available from a relatively low capital investment.
In general, there is active competition for management personnel, capital
and attractive commercial real estate sites suitable for restaurants.
Employees
As of February 24, 1997, the Company employed approximately 4,800
employees, including approximately 100 corporate personnel.
Most employees, other than restaurant management and certain corporate
personnel, are paid on an hourly basis. The Company believes that it provides
working conditions and wages that are comparable with those of other companies
within the quick-service restaurant industry. The Company's employees are not
covered by a collective bargaining agreement.
Trademarks and Service Marks
The Company regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. The Company has
registered its principal logo Rally's Hamburgers(R) and its design with the U.S.
Patent and Trademark Office (the "PTO") on the Principal Register as a service
mark for its restaurant services. The Company registered One of a Kind Fries(R)
with the PTO on the Principal Register as a trademark for its french fries. The
Company also registered the Rallyburger(R), Rally-Q(R) and Smokin' Sausage(R)
with the PTO as a trademark for these Company sandwiches. The Company has also
filed with the PTO several applications to register service marks and trademarks
used in connection with its advertising of products and services including the
Big Buford(TM) sandwich. The Company's policy is to pursue registration of its
marks whenever possible and to oppose strenuously any infringement of its marks.
Government Regulation
The Company is subject to Federal Trade Commission ("FTC") regulation and
state laws which regulate the offer and sale of franchises. The Company is also
subject to a number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires the Company to furnish to prospective
franchisees a franchise offering circular containing information prescribed by
the FTC Rule. At least fifteen states presently regulate the offer and sale of
franchises and, in almost all cases, require registration of the franchise
offering with state authorities.
State laws that regulate the offer and sale of franchises and/or the
franchisor-franchisee relationship presently exist in a substantial number of
states. Such laws generally require registration of the franchise offering with
state authorities and/or regulate the franchise relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith, prohibiting
interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating
discrimination among franchisees in charges, royalties or fees. These laws have
not precluded the Company from seeking franchisees in any given area. Although
such laws may restrict a franchisor in the termination of a franchise agreement
by, for example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination, an opportunity to cure a
default and repurchase of inventory or other compensation, these provisions have
not had a significant effect on the Company's operations.
9
<PAGE>
The Company is not aware of any pending franchise legislation which, in its
view, is likely to affect significantly the operations of the Company. The
Company believes that its operations comply substantially with the FTC Rule and
state franchise laws. Each Company-operated and franchised restaurant is subject
to regulation by federal agencies and to licensing and regulation by state and
local health, sanitation, safety, fire and other departments. Difficulties or
failures in obtaining the required licenses or approvals could delay or prevent
the opening of new restaurants.
The Company is subject to federal and state environmental regulations,
although such regulations have not had a material effect on the Company's
operations. More stringent and varied requirements of local governmental bodies
with respect to zoning, land use and environmental factors could delay or
prevent development of new restaurants in particular locations. The Company is
also subject to the Fair Labor Standards Act and various state laws governing
such matters as minimum wage requirements, overtime and other working conditions
and citizenship requirements. A significant number of the Company's food service
personnel are paid at rates related to the federal minimum wage and increases in
the minimum wage could increase the Company's labor costs.
The restaurant business is subject to extensive federal, state and local
regulations relating to the development and operation of restaurants, including
regulations relating to building and zoning requirements, access to persons with
disabilities, preparation and sale of food and laws governing the Company's
relationship with its employees, including minimum wage requirements, overtime
and working conditions and citizenship requirements. The failure to obtain or
retain food licenses, or a substantial increase in the minimum wage rate, could
adversely affect the operations of the Company's restaurants.
The Company believes that it is operating in substantial compliance with
applicable laws and regulations governing its operations.
Item 2. Properties
As of February 24, 1997, the Company owned or leased parcels of land and
buildings for restaurants, either operating, under construction or held for sale
or disposal as follows: Company-owned land (77) and buildings (254); and
Company-leased land (228) and buildings (60). Land leased by the Company for
restaurants is generally under "triple net" leases that require the Company to
pay real estate taxes, maintenance and insurance with respect to the premises
and, in some cases, pay contingent rentals based on sales in excess of specified
amounts. Generally, the leases have initial terms of five to fifteen years with
options to renew for additional periods which can range from five to twenty
years. The Company also leases its corporate headquarters of approximately
18,800 square feet. The Company also leases certain temporary storage facilities
for excess modular buildings and surplus equipment.
Item 3. Legal Proceedings
Jonathan Mittman, Steven Horowitz, Dina Horowitz and John Hannan v. Rally's
Hamburgers, Inc., Burt Sugarman, GIANT GROUP, LTD., Wayne Albritton, Donald C.
Moore, Edward C. Binzel, Gena L. Morris, Patricia L. Glaser and Arthur Andersen
LLP (Case NO. C-94-0049-L-(CS).
This putative class action purportedly on behalf of the stockholders' of
Rally's, alleging certain violations of the Securities Exchange Act of 1934,
among other claims, with respect to Rally's common stock, was filed in the
United States District Court for the Western District of Kentucky on January 24,
1994 (Civ. No. C94-0039-L(CS)) against GIANT Group, Ltd. ("GIANT"), Rally's,
certain present and former officers and directors and Rally's auditors. The
complaint alleges defendants violated the Securities Exchange Act of 1934, among
other claims, by issuing inaccurate public statements about the Company in order
to arbitrarily inflate the price of its common stock. The plaintiffs seek
unspecified damages. On February 14, 1994, a related lawsuit was filed by two
other stockholders making the same allegations before the same court, known as
Edward L. Davidson and Rick Sweeney v. Rally's Hamburgers, Inc., Burt Sugarman,
GIANT GROUP, LTD., Wayne M. Albritton, Donald C. Moore, Edward C. Binzel, Gena
L. Morris, Patricia L. Glaser and Arthur Andersen LLP, (Civ. No. C-94-0087-L-S).
On March 23, 1994, all plaintiffs filed a consolidated lawsuit known as Mittman
et al. v. Rally's Hamburgers, Inc. et al., (Civ. No. C-94-0039-L(CS)) (the
"Mittman Actions").
10
<PAGE>
The Court denied plaintiffs motion for class certification, "until such
time as the issue of typicality of claims is further developed and clarified."
The Court granted Mr. Sugarman's motion to strike certain scurrilous and
irrelevant allegations, and directed plaintiffs to amend their complaint to
conform to the Court's order. On April 15, 1994, Ms. Glaser and GIANT filed a
motion to dismiss the consolidated lawsuit for lack of personal jurisdiction.
The remaining defendants filed motions to dismiss for failure to state a claim
upon which relief can be granted. On April 5, 1995, the Court denied these
motions. (The Court struck plaintiffs' punitive damages allegations and required
plaintiffs to amend their claims under Section 20 of the Exchange Act but
otherwise the Court let stand the most recent version of plaintiffs' complaint
at this juncture).
Plaintiffs filed their second amended complaint on June 29, 1995, joining
additional plaintiffs pursuant to stipulation of the parties.
Plaintiffs renewed their motion for class certification on or about July
31, 1995. Defendants filed in opposition in this motion on or about October 31,
1995. On April 16, 1996, the Court granted the motion and certified a class from
July 20, 1992 to September 29, 1993.
On October 3, 1995, plaintiffs filed a motion to disqualify Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP ("Christensen, Miller") as
counsel for defendants based on a purported conflict of interest allegedly
arising from the representation of multiple defendants as well as Ms. Glaser's
position as both a director of Rally's and a partner in Christensen, Miller. The
Court denied the motion in the fall of 1996 and refused to disqualify
Christensen, Miller.
Fact discovery is set to close in April 1997. No trial date has been
scheduled yet.
The Company denies all wrongdoing and intends to vigorously defend itself
in this action. Because these matters are in a preliminary stage, the Company is
unable to determine whether a resolution adverse to the Company will have a
material effect on its results of operations or financial condition.
Accordingly, no provisions for any liabilities that may result upon adjudication
have been made in the accompanying financial statements. An estimate of defense
costs reimbursable under the Company's directors' and officers' insurance is
included in "Other Assets" in the accompanying consolidated financial
statements.
Rally's Hamburgers, Inc. v. Red Line Burgers, Inc. (Case No. H-954115).
In July 1994, the Company entered into an agreement with Red Line Burgers,
Inc. ("Red Line") whereby Red Line leased from the Company all of its assets
being operated as Rally's restaurants in Houston, Texas. Additionally, the
agreement called for Red Line to convert Red Line's eight competing units in the
Houston market to the Rally's brand. Red Line failed to make certain lease
payments and on June 20, 1995, the Company filed an action in the United States
District Court for the Southern District of Texas, Galveston Division, seeking
recovery of damages from Red Line for its breach of the leases and subleases
entered into with the Company. The action alleges that Red Line also committed
events of default under the terms of all of its Franchise Agreements with the
Company. As a result of such defaults, the Company terminated such Franchise
Agreements, and on August 3, 1995, the Company filed suit in the United States
District Court, Western District of Kentucky, alleging breach of contract due to
Red Line's failure to pay royalties and other payments required by the Franchise
Agreements and its failure to pay approximately $400,000 plus interest owed on
certain promissory notes issued to the Company in lieu of such payments. The
Company also seeks accountability for approximately $660,000 in conversion costs
paid by the Company for conversion of Red Line's Houston restaurants. Subsequent
to the commencement of the foregoing actions, Red Line filed for reorganization
under Chapter 11 of the United States Bankruptcy Code. In connection with such
proceedings, the Company's actions against Red Line have been stayed. In
November, 1996, Red Line filed a First Amended Disclosure Statement and First
Amended Liquidating Plan of Reorganization (the "Plan") which disputed Red
Line's obligation to pay the Company any of the foregoing monies. By Bankruptcy
Court Order entered February 28, 1997 (the "Confirmation Order"), the Company's
general unsecured claims were allowed in the amount of approximately $615,000
[and the general unsecured claim of Rally's National Advertising Fund was
allowed in the amount of approximately $38,000]. The Confirmation Order also
approved the Plan. The Plan provides for, among other things, mutual releases
among the Company and Red Line (such releases do not affect the allowed general
unsecured claim described above) and the sale of Red Line's assets. Cash from
those sales will be insufficient to pay all secured claims, taxes and
administrative claims. Some of the
11
<PAGE>
Red Line assets are to be acquired by New Red Line, Inc., an entity involving
certain insiders and/or affiliates of Red Line. Unsecured creditors of Red Line
(including the Company) will receive under the Plan a minority stock interest in
New Red Line, Inc. At this time, the likelihood of realizing any value on
account of such minority stock interest is considered extremely speculative. The
receivable balances have been fully reserved.
Harbor Finance Partners v. GIANT GROUP, LTD., Burt Sugarman, Mary Hart,
Michael M. Fleishman, David Gotterer, Patricia L. Glaser, Willie D. Davis and
John A. Roschman (Civ. Act. No. 14834).
In February 1996, Harbor Finance Partners ("Harbor") commenced a derivative
action, purportedly on behalf of Rally's against GIANT and certain of Rally's
officers and directors before the Delaware Chancery Court. Harbor named Rally's
as a nominal defendant. Harbor claims that the directors and officers of both
Rally's and GIANT, along with GIANT, breached their fiduciary duties to the
public shareholders of Rally's by causing Rally's to repurchase from GIANT
certain Rally's 97/8% Senior Notes due in the year 2000 at an inflated price.
Harbor seeks "millions of dollars in damages," along with rescission of the
repurchase transaction. In the fall of 1996, all defendants moved to dismiss the
action. The Chancery Court conducted a hearing on November 26, 1996, but has not
yet ruled on the pending motions. The Company denies all wrongdoing and intends
to vigorously defend the action. It is not possible to predict the outcome of
this action at this time.
Rally's Hamburgers, Inc., v. Arkansas Investment Group, Inc., U.S. District
Court for the Western District of Kentucky, Case No. 3:96CV-603-S
Rally's filed a lawsuit on August 12, 1996 against Arkansas Investment
Group, Inc. ("AIGI"), a franchisee that currently operates ten Rally's
restaurants located in Arkansas. The lawsuit seeks to recover royalties and
contributions to the Rally's National Advertising Fund owed by AIGI pursuant to
the applicable franchise agreements, which total approximately $500,000 with
accrued interest as of February 28, 1997. After falling in arrears on its
royalties and advertising fund contributions, Rally's and AIGI negotiated a
written agreement to allow AIGI to make payments under a revised payment
schedule. AIGI also defaulted on that written obligation. AIGI has filed an
Answer and Counterclaim in which it alleges it does not owe the royalties and
advertising contributions due to its alleged disagreement with operational and
marketing decisions of Rally's and Rally's alleged failure to rebate sums
obtained from suppliers. AIGI has asserted causes of action for breach of
contract, violation of the Arkansas Franchise Practices Act, unjust enrichment
and fraud. The Counterclaim alleges that AIGI has been damaged in excess of
approximately $75,000 (the minimum jurisdictional amount for federal court), but
no specific amount of damages is identified in the Counterclaim. Rally's denies
AIGI's allegations and intends to vigorously defend the Counterclaim. Because
the litigation is in a preliminary stage, the Company is unable to determine
whether a resolution adverse to the Company will have a material effect on its
results of operations or financial condition. Accordingly, no provisions for any
liabilities that may result upon adjudication have been made in the accompanying
financial statements.
Kader Investments, Inc. v. Rally's Hamburgers, Inc., CAL.SUPER.CT.,
Orange County (Case No. 772257)
In December 1994, Rally's entered into two franchise agreements with Kader
Investments, Inc. ("Kader") for the development and operation of Rally's
Hamburgers restaurants in Anaheim, California and Tustin, California. Rally's
assisted the franchisee in developing and opening the restaurants. On November
27, 1996, Kader filed a six-count Complaint against Rally's in the California
Superior Court for Orange County (Case No. 772257) alleging material
misrepresentation, respondent superior, breach of contract, breach of the
implied covenant of good faith and fair dealing, fraud and unfair competition.
These claims arise out of allegations concerning Rally's offer and sale of two
franchises (under a two-store development agreement), and Rally's actions during
the term of the agreements. The Complaint seeks as relief rescission of the
parties' franchise and development agreements; general damages of at least
$1,494,277 and $1,400,000 for the material misrepresentation and fraud counts,
respectively; general damages in unspecified amounts as to the other counts;
punitive damages in unspecified amounts; and attorneys' fees. Rally's filed an
Answer, and intends to file a Cross-Complaint alleging breach of contract. The
court has permitted the parties to hold discovery in abeyance for a short period
pending settlement discussions. The Company is currently attempting to settle
the claim. However, the outcome of such settlement discussion is uncertain at
this time. Should discussions not result in a settlement, Rally's intends to
vigorously defend against the claims. Because the litigation is in a preliminary
stage, the Company is unable to determine whether a resolution adverse to the
Company will have a material effect on its results of operations or financial
12
<PAGE>
condition. Accordingly, no provisions for any liabilities that may result upon
adjudication have been made in the accompanying financial statements.
The Company is involved in other litigation matters incidental to its
business. With respect to such other suits, management does not believe the
litigation in which it is involved will have a material effect upon its results
of operation or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the National Market System of the
NASDAQ Stock Market under the symbol "RLLY". As of February 24, 1997, there were
approximately 1,552 record holders of the Company's Common Stock. The table
below sets forth the high and low sales prices of the Company's Common Stock, as
reported on the NASDAQ National Market System, for each quarter during the
Company's last two years.
1996
Quarter ended March 31 June 30 September 29 December 29
High $ 2 1/4 $ 4 5/16 $ 3 9/16 $ 4 7/8
Low 1 1/32 11/2 2 1/8 3
1995
Quarter ended April 2 July 2 October 1 December 31
High $ 4 $ 4 $ 3 5/8 $ 2 11/16
Low 2 1/2 2 1/4 2 1/4 1 5/16
On December 20, 1996, the Company issued warrants (the "Warrants") to
purchase an aggregate of 1,500,000 restricted shares of its Common Stock to CKE
and Fidelity National Financial, Inc. The Warrants have a three-year term and
are not exercisable until December 20, 1997. The exercise price is $4.375 per
share, the closing price of the Common Stock on December 20, 1996. The
underlying shares of Common Stock have not been registered with the Securities
and Exchange Commission and, therefore, are not freely tradable. Upon exercise,
the Warrants will provide approximately $6.6 million in additional capital to
the Company. See Note 4 to the accompanying consolidated financial statements
for further discussion.
13
<PAGE>
Item 6. Selected Consolidated Financial Data
The consolidated financial data was derived from the consolidated financial
statements and includes Rally's Hamburgers, Inc. and its wholly-owned
subsidiaries. This selected data should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto, and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein.
<TABLE>
<CAPTION>
(In thousands, except per share amounts and statistical data)
<S> <C> <C> <C> <C> <C>
January 3, January 2, January 1, December 31, December 29,
1993 1994 1995 1995 1996
------------- ------------- ------------ -------------- -------------
Systemwide sales $ 296,543 $ 354,666 $ 370,087 $ 355,719 $ 316,670
============= ============= ============ ============== =============
Company restaurant sales $ 112,894 $ 165,829 $ 178,476 $ 181,778 $ 156,445
Other revenues 7,754 8,517 7,842 7,081 6,307
----------- ------------- ------------ -------------- -------------
Total revenues 120,648 174,346 186,318 188,859 162,752
------------- ------------- ------------ -------------- -------------
Income (loss) from operations 15,057 (7,050) (14,636) (36,470) 4,090
(1)(2)(3)
Other (expense) (797) (4,433) (9,619) (9,910) (8,057)
Litigation settlement - (2,000) - - -
------------- ------------- ------------ -------------- -------------
Income (loss) before taxes 14,260 (13,483) (24,255) (46,380) (3,967)
Tax provision (benefit) 4,981 (4,576) (4,982) 539 (675)
------------- ------------- ------------ -------------- -------------
Net income (loss) before 9,279 (8,907) (19,273) (46,919) (3,292)
extraordinary items
Extraordinary items (4) - - - - 5,280
============= ============= ============ ============== =============
Net income/loss 9,279 (8,907) (19,273) (46,919) 1,988
============= ============= ============ ============== =============
Income (loss) per common share:
Income (loss) before extraordinary $ .76 $ (.67) $ (1.42) $ (3.00) $ (.19)
item
Extraordinary item - - - - .31
------------- ------------- ------------ -------------- -------------
Net income (loss) $ .76 $ (.67) $ (1.42) $ (3.00) $ .12
============= ============= ============ ============== =============
Weighted average shares outstanding 12,264 13,207 13,564 15,620 17,007
Total assets $ 107,001 $ 185,397 $ 169,416 $ 137,392 $ 112,258
Long-term debt and obligations under
capital leases 24,045 97,784 94,141 97,958 69,564
Shareholders' equity 61,283 62,527 53,487 6,672 19,365
Restaurants open at end of period
Company 197 252 250 239 209
Franchised 253 268 292 242 258
============= ============= ============ ============== =============
Total 450 520 542 481 467
============= ============= ============ ============== =============
</TABLE>
(1) The fiscal year ended January 2, 1994 includes approximately $12.6 million
charged against operations for a major business restructuring program and
other restaurant closings.
(2) The fiscal year ended January 1, 1995 includes approximately $17.3 million
charged against operations for changes in business strategies.
(3) The fiscal year ended December 31, 1995 includes approximately $17.3
million charged against operations for changes in business strategies and
restaurant closings. The year also includes approximately $13.7 million
related to the Company's implementation of Statement of Financial
Accounting Standards No. 121. See Note 16 to the accompanying consolidated
financial statements.
(4) The extraordinary items for the fiscal year ended December 29, 1996
represents a gain on the early retirement of debt, net of tax expense of
$1,350,000. See Note 10 to the accompanying consolidated financial
statements.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This has been a significant year for the Company on many fronts. In order
to more readily understand the Company's improved performance, the following
table provides a comparative view of the Company's underlying operations.
<TABLE>
<CAPTION>
(In thousands)
Fiscal Years Ended
-----------------------------------------------------------
<S> <C> <C> <C>
January 1, December 31, December 29,
1995 1995 1996
---------------- ----------------- ---------------
Income (loss) from operations before restaurant
closures and other $ 2,623 $ (5,425) $ 4,110
Provision for restaurant closures and other (17,259) (31,045) (20)
--------------- ---------------- --------------
Income (loss) from operations (14,636) (36,470) 4,090
Total other expense (9,619) (9,910) (8,057)
--------------- ---------------- ---------------
Loss before income taxes and extraordinary items
(24,255) (46,380) (3,967)
(Provision) benefit for income taxes 4,982 (539) 675
Extraordinary items, net of tax - - 5,280
--------------- ---------------- --------------
Net income (loss) $ (19,273) $ (46,919) $ 1,988
=============== ================ ==============
</TABLE>
The extraordinary gain, net of tax, of approximately $5.3 million or $.31
per share from the Company's early retirement of certain of its outstanding
Senior Notes, at amounts below carrying value, resulted in the Company reporting
net income for fiscal 1996. The transactions involving the Senior Notes were
opportunities created by the Company's conservation of cash during the second
half of 1995 and the depressed market price of the Senior Notes during the year.
In addition, the transactions resulted in a reduction of net interest expense in
1996 of approximately $1.3 million and $2.1 million as compared to 1994 and
1995, respectively. These transactions are more fully described in Note 10 to
the accompanying consolidated financial statements.
As more fully discussed in Note 13 to the accompanying financial
statements, the Company's effective tax rate applied to its book operating
losses is significantly below statutory rates, due primarily to concerns as to
the ultimate realizability of net operating loss carryforwards. Until
circumstances otherwise indicate that realization becomes more likely than not,
no additional benefit will be recognized.
As evidenced in the table above, the provision for restaurant closures
and other was significantly reduced in 1996 from the prior year levels. This
reduction is primarily attributable to the current year strengthening of the
store level economics which have improved the Company's ability to recover, at a
minimum, its store level investment and to prior writedowns of underperforming
assets, thereby reducing the need at this time for additional writedowns or
disposals of Company assets. See the section below entitled "Restaurant Closures
and Other" for a more detailed discussion.
The Company's income from operations before restaurant closures and
other in fiscal 1996 represented a substantial improvement of approximately $9.5
million over the prior year. This improvement in the Company's financial
performance is primarily attributable to a turnaround plan, predominately
formulated in the first half of 1996, which the Company has been implementing
over the balance of the year. The plan focuses on four key strategies to stem
the prior negative operational performance trend: (i) strengthen the balance
sheet and reduce fixed costs, (ii) improve store level profitability, (iii)
establish an effective brand positioning, and (iv) pursue opportunistic new
store development. The results of each strategy of the plan are more fully
discussed below.
15
<PAGE>
Although the Company's debt level is still high, the Company has made
substantial progress in improving its balance sheet and reducing fixed costs.
The debt load was significantly reduced through the retirement of approximately
$22 million face value of the Company's Senior Notes in January 1996 and an
additional $4.7 million during the fourth quarter. As a result, the Company's
annual interest expense related to the Senior Notes has been reduced by
approximately $2.6 million. In addition, $10.8 million in gross proceeds were
generated through the Company's Rights Offering completed in September 1996. The
proceeds from the Offering have been used to pay off debt of $4.5 million
approximately and the remainder will be used for new store construction,
refurbishment of some existing restaurants and for other general corporate
purposes, including possible further debt reduction. Outstanding warrants from
the Rights Offering and from a separate issuance of 1,500,000 additional
warrants in December 1996, if exercised, could raise an additional $17.4 million
in cash proceeds. The Company also made progress in disposing of surplus assets,
as assets held for sale declined by over $4 million from the end of 1995.
Lastly, the Company reduced its general and administrative costs by over $3.5
million during the year.
The Company has also made progress in the second key strategy of its
turnaround plan, as store-level profitability has improved. Much of this
improvement resulted from the Company's cost reduction actions related to food,
paper and labor which were implemented in the beginning of the second quarter of
1996 and are further discussed in "Results of Operations." The primary impact of
these changes was realized during the third and fourth quarters and was
reflected in the Company's store profit margins. Improvement in store level
profitability also resulted from improvements in the Company's cost structure,
reflecting the elimination of heavy discounting that drove traffic increases but
did not materially improve the Company's profitability.
The Company's third key strategy in its turnaround plan will be the
primary focus going into 1997. Although the Company generated net income from
operations, same store sales continued to decline since 1995. To combat this
negative trend in sales, management believes an effective brand positioning must
be established in order to grow same store sales. The new brand positioning,
referred to as "Bigger, Better Burgers," was developed during the fourth quarter
of 1996 with the assistance of the Company's new advertising agency,
Mendelsohn/Zien. The new positioning is based on an improved burger product line
including two new premium burgers; new, more impactful menu boards; and new
advertising. The new advertising mirrors the successful campaign created by
Mendelsohn/Zien for the Carl's Jr. chain. The new positioning was rolled out to
three of the Company's markets in December 1996 and to the remaining Company
markets by late February 1997. The Company's franchisees have also begun
conversion to the new brand positioning and, in general, are very supportive.
Although preliminary sales results have been encouraging, management does not
expect to see the full impact of this new strategy prior to the second quarter
of 1997. Management believes that new brand positioning will result in a gradual
increase in sales over time.
The final strategy in the Company's turnaround plan is to increase focus on
new store development. Faced with declining same store sales and profitability
over the three years prior to 1996, the Company had concluded at various times
that a constriction of operations through store closures was necessary. Given
the progress against its plan, management believes that the Company can once
again start focusing on growing sales through new store development. In 1996,
the Company opened 6 stores and franchisees opened 15 stores, for a total of 21
new stores. For 1997, management expects to open 15 Company stores and 20
franchised stores. In addition, as a result of improved store level economics
and in an effort to improve future cash flows, management has decided to reopen
three stores previously closed and to continue to operate one store that had
been designated for closure. These decisions were made possible by the
improvements in controllable cost performance in the second half of the year.
Further discussion of the factors affecting results of operations is
included below.
Proposed Trasaction
On March 25, 1997, the Company agreed in principle to a merger transaction
pursuant to which the COmpany would become a wholly-owned subsidiary of Checkers
Drive-In Restaurants, Inc., a Delaware corporation ("Checkers"). Checkers,
together with its franchisees, operates approximately 478 double drive-thru
hamburger restaurants primarily located in the Southeastern United States. Under
the terms of the letter of intent executed by the Company and Checkers, each
share of the Company's Common Stock will be converted into three shares of
Checker's common stock upon consummation of the merger. The transaction is
subject to negotiation of definitive agreements, recipt of fairness opinions by
each party, receipt of stockholder and other required approvals and other
customary conditions.
16
<PAGE>
Restaurant Closures And Other
Certain charges in fiscals 1994, 1995 and 1996 have been aggregated and
segregated into the caption "Provision for Restaurant Closures and Other" in the
accompanying Statements of Operations. These items represent estimates of the
impact of management decisions which have been made at various points in time in
response to the Company's sales and profit performance and the then-current
revenue building and profit enhancing strategies and are discussed in further
detail below.
The Company entered 1993 with plans to rapidly develop and open over 100
new Company restaurants. Many of these units were targeted for new or
underdeveloped markets. Under the Company's 1993 expansion strategy, the Company
believed that rapid penetration of new or underdeveloped markets would result in
the same favorable operating leverage and marketing efficiencies that it had
experienced in its more developed markets.
In late 1993, the Company decided to reassess the pace of its growth
strategy, as it became apparent that many of its new restaurants, primarily
those in certain of the new markets, were not performing at expected levels,
despite allocation of incremental advertising funds into those markets. This
allocation of advertising funds, the Company now believes, was unsuccessful in
driving incremental sales in those certain markets and, moreover, reduced the
Company's ability to maintain overall share of voice in its existing markets.
The impact of the poor performance of those certain markets, therefore,
decreased overall store level profitability while unfavorably impacting general
and administrative cost ratios.
As a result of these, and other factors, the Company decided in late 1993,
to (i) significantly slow down its development of new restaurants and ultimately
to close certain restaurants, (ii) exit certain markets and (iii) not to enter
other markets. The Company also began developing plans to reduce restaurant
operating expenses, general and administrative costs and costs associated with
the development of new restaurants. The Company believed these strategies would
help it maintain its everyday low price strategy for its products in the future
and provide the best opportunity for improved profitability.
During 1994, the Company implemented strategies designed to increase sales
and profits at restaurant level. These strategies included, among others,
discounting its products for certain periods of time in certain markets to
respond to increased competition and the introduction of certain limited time
only products and premium quality sandwiches which the Company believed would
increase guest frequency and ticket averages. The Company's advertising campaign
was also reviewed during 1994 resulting in the replacement in late 1994 of the
Company's advertising agency. In July 1994, the Board of Directors reinstated a
senior management team led by longtime Company restaurant operators to increase
focus on improved operations. Despite these strategies, sales and profits of
Company-owned restaurants, as a whole, did not adequately respond.
Additionally, throughout 1994, the Company continued to monitor its growth
strategy in relation to operating performance and available financial and
management resources, and periodically made decisions to further reduce its
planned new restaurant openings. Due to the individual decisions made at various
times during the year, provisions of $9.3 million were made in the accompanying
financial statements for the write-off of assets related to the previously
incurred costs on construction projects to be abandoned, for the expected
occupancy-related costs until disposal of sites which will not be developed, and
for reduction to net realizable values of assets which, as a result of such
decisions, were then considered to be surplus or impaired. These charges are
discussed in more detail below.
In November 1994, the Board of Directors retained outside professional
consultants to assist the Board and management in a critical evaluation of the
Company's business. The culmination of this work was a plan, which was adopted
by management, designed to improve earnings and cash flow . Part of the plan
called for significant curtailment of new Company-owned restaurant development
in 1995 and concentration of the Company's management and resources in certain
of its existing Company markets. The plan also called for improving cash flows
through (i) building revenues through premium sandwich offerings and limited
time offers and (ii) selling all non-productive assets. The Company's
management, therefore, began efforts to franchise or selectively otherwise
17
<PAGE>
divest of approximately 60 Company-owned stores. This strategy was expected to
allow the Company to concentrate on regaining sales, profit and cash flow
momentum in its other markets through stronger focus on a smaller number of its
most profitable markets. The Company believed that franchisees would be better
able to concentrate on the units that had not been top performers and achieve
near term improvement in the performance of those units. Efforts to franchise or
divest of these stores were expected to encompass a combination of strategies
such as sale, joint venture, leasing arrangements and external management
contracts. As a result of this plan, the Company recorded a charge of $8.0
million in 1994, representing an estimate of the difference between the
estimated net realizable value, given the then most likely divestiture/disposal
plan, and the net book value of these restaurants and markets. The charge
included approximately $3.2 million as a reserve against identifiable goodwill,
territory rights and other intangible assets. The remaining $4.8 million was
recorded as a reserve against property and equipment.
Early in 1995, six of the 60 units, five of which were in one market, were
closed and sublet. During the third quarter, 1995, management concluded that it
was unlikely that much of the 1994 plan of disposal described above would be
executable. For this reason, the Company decided to close up to 16 of the
remaining restaurants, resulting in an additional charge in the third quarter,
1995 of approximately $400,000 to reflect additional writedown of the property
and equipment to currently estimated net realizable values and $2.3 million to
record reserves for expected future occupancy related costs. Eight of these
restaurants were closed as of December 31, 1995. Six additional restaurants were
closed in 1996. The Company decided in 1996 to continue to operate 2 of these 16
restaurants until such time that the leases have expired or the properties have
been sublet. The Company decided to continue to operate the remaining 38 stores
previously included in the original 60 restaurants. With the restaurant closures
discussed above and without the burden of impending closure associated with the
prior plan regarding these markets, management believes that the markets
represent acceptable growth opportunities for future development.
Management also decided to close nine non-profitable restaurants in certain
of its core markets resulting in charges in the third quarter 1995 of
approximately $1.9 million related to the writedown of assets to their net
realizable values and $1.9 million to record expected future occupancy related
costs. Seven of these restaurants were closed as of December 31, 1995. The
Company decided in 1996 to continue to operate two of these restaurants, one of
which is being operated by CKE, as part of a management agreement with the
Company.
During the third quarter 1995, charges were recorded of approximately $3.3
million to dispose of the assets located on eight sites which had been operated
as Company units and then leased to a former franchisee. The Company decided not
to refranchise these units due to failure to identify a suitable franchise
candidate which management believed had adequate and evident financial resources
to successfully open the Houston market. This charge consisted of a writedown of
approximately $2.7 million of the assets to their estimated net realizable
values and reserves of approximately $600,000 for expected future occupancy
related costs.
In 1995, 18 additional modular buildings became excess, as expected Company
development continued to be reduced and decisions were made regarding other
restaurant closures. At December 31, 1995, the Company had available 54
substantially completed modular restaurant buildings, which were not expected to
be assigned to future Company development. In order to recognize the impact of
the additional excess buildings and to more competitively price all of the
modular buildings, the Company recorded charges of approximately $1.6 million in
the third quarter, 1995 and $458,000 in the fourth quarter, 1995. The charges of
$2.3 million related to third quarter 1995 closure decisions, described above,
also included approximately $1.5 million related to an additional writedown on
modular buildings which were previously utilized at those locations. During
1996, the Company sold 20 buildings, resulting in 34 buildings available for
sale at December 29, 1996 which are being marketed to franchisees and others.
Current expectations of net realizable value are based on the Company's
experience related to marketing the buildings.
The Company recorded approximately $1.5 million in charges in the third
quarter, 1995 related to further writedowns on excess land idled by slowdowns in
the Company's expansion plans. Such land had been scheduled to be auctioned
during the fourth quarter, 1995. These auctions occurred in the fourth quarter
and closed in the first quarter, 1996. The absolute auctions generated lower
than anticipated sales prices, and additional losses of
18
<PAGE>
$1.1 million were recorded in the fourth quarter, 1995. As further discussed in
"Liquidity and Capital Resources," these sales provided cash flow of
approximately $2.4 million, primarily in the first quarter, 1996.
During the fourth quarter, 1995 the sublessee of five of the six sites
closed under the November 1994 plan, defaulted on the terms of the sublease
agreements, resulting in charges of $483,000 related to occupancy and $430,000
to reduce the carrying value of the tangible assets to management's estimate of
fair value less cost to sell.
Due to concerns for obsolescence and abnormal wear and tear associated with
transport and storage of surplus equipment, management recorded an $820,000
writedown in December, 1995 of the equipment's carrying value. Additionally,
fourth quarter, 1995 charges totaling approximately $1.1 million were recorded
to reflect changes in the estimated net realizable values of the Company's
remaining surplus assets and properties.
The $9.3 million of charges recorded in 1994, discussed above, included the
following.
The Company recorded charges of $2.6 million related to abandoned projects,
$300,000 related to the write-off of certain identifiable intangibles which were
not expected to be recoverable and $450,000 to increase reserves previously
provided on surplus assets due to the continued slowdown in the development of
new restaurants. The costs related to abandoned projects represent writeoffs of
recorded amounts not expected to be recovered ($1.6 million) and estimated
occupancy costs until disposal ($1.0 million).
Management decided to exit one of its non-core, underperforming markets
and, at that time, recorded a charge of approximately $1.1 million primarily to
cover writedown of assets ($800,000) and occupancy exposure ($300,000).
Additionally, the Company wrote off intangible assets associated with an
abandoned project site ($131,000), provided for the estimated occupancy exposure
on abandoned project sites ($430,000) and provided for asset write-offs on
projects to be abandoned ($443,000).
Based upon the Company's estimates of the number of excess modular
buildings and the then current estimate as to recoverability, the Company
recorded a charge of $1.2 million in 1994. Included in the $2.6 million of
charges noted above is $300,000 related to an additional writedown on modular
buildings which had been assigned to projects subsequently abandoned after the
end of the third quarter.
During 1994, management determined that portions of the equipment,
training, and installation expenditures related to its point of sale and back
office restaurant systems' rapid installation resulted in higher costs or
overbillings and did not ultimately add to the value of the Company's systems.
Approximately $1.3 million of these costs were deemed to have no probable future
economic benefit and were written off. In addition, due to the further
curtailment of new store development, the writedown of the Company's point of
sale and back office software recorded in 1993 was increased (approximately
$300,000). Further, management also decided to remove from operation and not
pursue further deployment of its high tech video ordering technology and,
therefore, recorded a charge of $600,000 related to the hardware and software
costs of this endeavor.
The Company also recorded charges in 1994 of approximately $400,000 related
to the recorded values of projects abandoned in 1994.
The $12.6 million of charges recorded in 1993 included the following.
The Company recorded charges of $11.9 million related to a major business
restructuring program and other restaurant closings designed to improve the
Company's profitability. As a result of these actions, the Company closed 20
restaurants in 8 markets (including certain markets which the Company has exited
entirely), and abandoned its plans to build an additional 46 restaurants then
under development.
The restructuring program resulted in a charge against operations of
approximately $9.6 million. Approximately $8 million of the charge related to
asset writedowns, including writedowns to recoverable amounts
19
<PAGE>
of certain other assets whose recovery was dependent on previous development
plans and the balance represented future occupancy-related expenses. The
decision to close other restaurants resulted in an additional charge against
operations during 1993 of approximately $2.3 million, of which approximately
$1.8 million related to writedowns of assets, and the balance represented future
occupancy-related expenses.
In addition to the charges discussed above, the Company reached decisions
during 1993 to reduce the carrying value of certain underperforming assets in
non-core markets by approximately $700,000.
As described above, a substantial portion of the charges in fiscals 1993,
1994 and 1995 related to asset writedowns. The remainder of the charges related
substantially to the establishment of reserves for expected future
occupancy-related costs. During 1996, the Company revised its estimate of net
realizable value for five of its poor performing restaurants in Montgomery,
Alabama based upon an existing agreement to sell the restaurants to a
non-affiliated restaurant operator. Such change in estimate resulted in a
reduction of approximately $232,000 in related reserves. In addition, during the
fourth quarter of 1996, management decided to reopen three units previously
closed and to continue to operate a fourth unit that had been designated for
closure, resulting in a reduction in the reserves for future occupancy-related
costs of approximately $659,000. In addition, approximately $87,000 in other
charges for net changes in estimated asset recovery were recorded during 1996.
Such adjustments to the reserves are included in the caption "Provision for
restaurant closures and other" on the accompanying Statement of Operations.
Total Minimum lease commitments associated with surplus properties is $11.2
million. As of December 29, 1996, approximately $5.8 million remained in the
reserve for expected future occupancy-related costs, which is net of amounts
representing interest, discounted at 12%, as well as estimated future sublease
recoveries. Assets held for sale of $2.0 million at December 29, 1996 resulting
from the actions noted above consist mainly of surplus land, buildings and
equipment. The expected disposal dates for these assets are over the next 3 to
24 months. The carrying amounts of such assets to be disposed of are shown
separately on the accompanying consolidated balance sheets.
In addition to the charges described above, 1995 results include
approximately $13.7 million of certain charges recorded in the fourth quarter
related to the adoption of Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). This charge represents impairment of the carrying
value of the assets of 37 stores based on management's future cash flow
estimates given then current base lines and reasonable trend assumptions.
Additional impairment reserves of approximately $824,000 were recorded during
1996, primarily related to three additional restaurants determined to be
impaired. See Note16 to the accompanying consolidated financial statements.
General
Rally's revenues are derived primarily from Company-owned restaurant sales
and royalty fees from franchisees. The Company also receives revenues from the
award of exclusive rights to develop Rally's restaurants in certain geographic
areas (area development fees) and the award of licenses to use the Rally's brand
and confidential operating system (franchise fees). Systemwide sales consist of
aggregate revenues of Company-owned and franchised restaurants (including
CKE-operated). Company revenue also includes payments resulting from an
operating agreement with CKE, referred to as Owner fee income in the
accompanying consolidated financial statements. Restaurant cost of sales,
restaurant operating expenses, depreciation and amortization, and advertising
and promotion expenses relate directly to Company-owned restaurants. General and
administrative expenses relate to both Company-owned restaurants and franchise
operations. Owner expenses relate to CKE-operated restaurants and consist
primarily of depreciation and amortization.
20
<PAGE>
The table below sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in the Company's
consolidated statements of income and operating data for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 3, January 2, January 1, December December 29,
31,
1993 1994 1995 1995 1996
------------- ------------- ------------ ------------ -------------
Revenues:
Restaurant sales 93.6% 95.1% 95.8% 96.2% 96.1%
Franchise revenues and fees 6.4 4.9 4.2 3.8 3.6
Owner fee income - - - - .3
------------- ------------- ------------ ------------ -------------
100.0% 100.0% 100.0% 100.0% 100.0%
------------- ------------- ------------ ------------ -------------
Costs and expenses:
Restaurant cost of sales (1) 34.7% 35.2% 35.0% 35.7% 34.3%
Restaurant operating expenses (1) 38.6 42.9 43.7 46.4 45.5
General and administrative expenses 9.4 10.1 9.7 10.0 9.4
Advertising and promotion expenses (1) 5.5 7.0 6.1 7.3 5.0
Depreciation and amortization (1) 4.8 6.1 7.9 7.2 6.3
Owner expense (2) - - - - 169.1
Other charges (credits) - 7.2 9.3 16.4 -
Income (loss) from operations 12.5 (4.0) (7.9) (19.3) 2.5
Total other (expense) (.7) (3.7) (5.1) (5.3) (5.0)
------------- ------------- ------------ ------------ -------------
Net income (loss) before income taxes
and extraordinary items 11.8 (7.7) (13.0) (24.6) (2.5)
Net income (loss) 7.7% (5.1)% (10.3)% (24.8)% 1.2%
============= ============= ============ ============ =============
Number of restaurants:
Restaurants open at the beginning of 333 450 520 542 481
period
------------- ------------- ------------ ------------ -------------
Company restaurants opened (closed or
transferred), net during period 81 55 (2) (11) (30)
Franchised restaurants opened (closed or
transferred), net during period 36 15 24 (50) 16
------------- ------------- ------------ ------------ -------------
Total restaurants opened (closed or
transferred), net during period 117 70 22 (61) (14)
============= ============= ============ ============ =============
Total restaurants open at end of period 450 520 542 481 467
============= ============= ============ ============ =============
</TABLE>
- --------------------------
(1) As a percentage of restaurant sales.
(2) As a percentage of owner fee income.
Results of Operations
Fiscal Year Ended December 29, 1996 Compared With Fiscal Year Ended
December 31, 1995
Systemwide sales declined 11% for 1996 to approximately $316.7 million
compared with approximately $355.7 million a year ago. This decrease is
attributable to the comparatively lower number of units in operation in 1996 and
to same store sales declines of 7% systemwide. The decline in same store sales
is primarily due to the lower customer counts experienced upon the elimination
of deep discounting programs in the third and fourth quarters of 1996 and to the
reduced media spending in the fourth quarter of 1996.
Total Company revenues decreased 14% to approximately $162.8 million in
1996 compared with approximately $188.9 million in 1995. Company-owned
restaurant sales decreased 14% to approximately $156.5 million due to fewer
Company units in operation, a 6% decline in same store sales, and a decline of
approximately $9 million due to the Company's operating agreement with CKE, as
discussed in "Liquidity and Capital Resources." Year-to-date, the Company opened
6 units, closed 8 units, and transferred operational responsibility to CKE for
28 units. Franchisees, exclusive of CKE, opened 15 units and closed 26 units.
Five of the Company closures which were in the Montgomery DMA were sold in
September, 1996.
21
<PAGE>
Restaurant cost of sales, as a percentage of sales, decreased to 34.3% for
1996 compared with 35.7% for 1995. This decrease is attributable primarily to
various cost reduction actions taken during the second half of 1996, partially
offset by higher food and paper costs as a percentage of sales in the first six
months of 1996. These cost reduction actions include selective changes in some
product and packaging specifications as well as re-negotiation of purchase terms
and selection of alternative vendors. Management intends to continue to consumer
test and implement such cost saving strategies in its stores, where appropriate.
The increase in cost of sales in the first half of 1996 resulted primarily from
a carryover of deep discounting programs in the first quarter of 1996 and to a
shift in product mix sold, reflecting the impact of a larger percent of Big
Buford(TM) sandwich sales in the first two quarters of 1996 compared to the same
period of 1995. While this product carries a significantly higher dollar profit
per unit, it does carry a higher food cost percentage than did the products
formerly comprising its share of the total product mix. The Company from time to
time negotiates purchase contracts for certain items used in its restaurants in
the normal course of business. Although some of these contracts contain minimum
purchase quantities, such quantities do not exceed expected usage over the term
of such agreements.
Restaurant operating expenses were 45.5% of sales for 1996 compared with
46.4% for 1995. The reduction is primarily due to management's cost reduction
actions in the labor area and better fixed cost coverage in stores operating
during the second half of the year, partially offset by increased bonus costs
associated with store management compensation. This better fixed cost coverage
is the result of closing poorer performing units and of transferring operational
responsibility for certain higher fixed cost restaurants in Western markets to
CKE. The identified and implemented changes in staffing levels and labor
deployment in certain stores have yielded savings in management and crew labor.
Management believes that these cost reduction actions should favorably influence
ongoing operating expense performance; however, their impact may be partially
offset by future increases in the minimum wage.
General and administrative expenses on a year-to-date basis are lower than
1995, on both a dollar and a percentage of sales basis. This decrease is caused
primarily by reductions in the corporate and field operations staffs, and by
lower levels of bad debt and other dead project charges, partially offset by
higher legal fees.
Advertising expenses decreased approximately $5.4 million to 5.0% of sales
for 1996 compared to 7.3% for 1995 due primarily to decreases in levels of radio
advertising, outdoor advertising, and television advertising. During the fourth
quarter, management decided to limit media spending until work with the new
advertising agency on new creative and brand positioning was completed.
Company-wide spending on the new advertising campaign did not begin until late
February 1997.
Depreciation and amortization on a year-to-date basis decreased to
approximately $9.8 million as compared to approximately $13.0 million for the
same period in the prior year. This decrease is primarily due to asset
writedowns associated with the adoption of SFAS 121 at the beginning of the
fourth quarter 1995, to a decrease in the number of properties being operated by
the Company, and to a segregation into Owner expense of depreciation and
amortization associated with the CKE-operated properties.
Owner expenses of approximately $744,000 for 1996 represent the Company's
segregated ownership cost related to the 28 units operated by CKE. These
expenses consist primarily of depreciation and amortization associated with the
properties.
Interest expense decreased 19.3% to approximately $8.6 million for 1996 as
compared to approximately $10.7 million for 1995 primarily due to the early
extinguishment of debt, as previously discussed. See "Liquidity and Capital
Resources" and Note 10 to the accompanying consolidated financial statements,
for further discussion.
Interest income was higher for 1996 as compared to 1995 due to increases in
the average daily invested amounts.
The Company's decrease in Other is due primarily to the current year
storage costs related to excess modular buildings.
22
<PAGE>
The Company's net tax provision on a year to date basis is approximately
$675,000 (obtained by adding the tax provision line to the tax expense of
approximately $1,350,000 which has been netted against the extraordinary gain).
$575,000 of this amount is related to state taxes expected to be payable.
$100,000 relates to reduction of an IRS receivable for a NOL carryback to 1987,
1988, and 1989, further described in Note 13 to the accompanying consolidated
financial statements. See earlier discussion above concerning the extraordinary
gain.
Fiscal Year Ended December 31, 1995 Compared With Fiscal Year Ended
January 1, 1995
Systemwide sales declined 4% for 1995 to approximately $355.7 million
compared with approximately $370.1 million a year ago. This decrease was the
result of store closings and a decline of 5% in systemwide same store sales,
offset in part by the full-year impact of 1994 store openings.
Total revenue increased 1% from approximately $186.3 million in 1994 to
approximately $188.9 million in 1995. Company-owned restaurant sales increased
2% to approximately $181.8 million. This increase was primarily attributable to
the impact of the acquisition of ten units in Hampton Roads, Virginia from a
franchisee as discussed in Note 2 to the accompanying consolidated financial
statements, offset in part by a 4% decline in Company-owned same store sales.
The ten units in Hampton Roads, Virginia were included in the Company's
calculation of same store sales for the full year of 1995. Royalty fees
decreased 6% in 1995 due to a 6% decline in franchise same store sales and the
impact of the Hampton Roads, Virginia acquisition.
Restaurant cost of sales, as a percentage of sales, increased to 35.7% for
1995 compared with 35.0% for 1994. This increase resulted primarily from the
dramatic shift of product mix sold, reflecting the impact of the introduction of
our Big Buford(TM) sandwich early in 1995. While this product carries a
significantly higher dollar profit per unit, it does carry a higher food cost
percentage than did the products formerly comprising its share of the total
product mix. Secondary factors include aggressive discounting during the
Company's tenth anniversary promotion, selective product repricing in the fourth
quarter and significantly higher paper cost in 1995 due to a higher commodity
cost and improved product packaging.
Restaurant operating expenses were 46.4% of sales for 1995 compared with
43.7% for 1994. This increase as a percentage of sales is primarily attributable
to higher labor, occupancy and repair and maintenance costs and to the decline
in same store sales resulting in the Company's inability to adequately leverage
the non-variable components of lease costs and labor costs. The higher labor
costs were also impacted by an increased average wage rate, higher levels of
management staffing, and poor maintenance and execution of the Company's store
level labor management system.
General and administrative expenses in 1995, on both a dollar and a
percentage of sales basis, were higher than in 1994 primarily due to a charge of
approximately $1.5 million related to uncertainty of collection of certain
receivables, offset partly by cost reduction initiatives implemented during
1995.
Advertising expenses increased in 1995 to approximately $13.2 million or
7.3% of sales, as compared with approximately $10.9 million or 6.1% of sales in
1994. This increase is primarily attributable to higher levels of advertising
expenditures related to new product introductions, summer sweepstakes promotion
and the tenth anniversary promotion. Incremental advertising dollars were not
effective in driving incremental sales dollars at rates previously achieved.
Depreciation and amortization decreased in 1995 to approximately $13.0
million as compared to approximately $14.1 million in 1994. This decrease is
primarily due to a decrease in the number of properties in operation in 1995 and
asset writedowns associated with the adoption of SFAS 121 at the beginning of
the fourth quarter, 1995.
Interest expense increased in 1995 to approximately $10.7 million as
compared to approximately $9.7 million in 1994 primarily due to the debt
incurred as part of the Hampton Roads, Virginia acquisition, discussed above.
23
<PAGE>
Interest income was higher in 1995 than in 1994 due primarily to a
significant increase in the average daily invested amounts.
The Company recognized other income of approximately $200,000 in 1995 as
compared with other expense of approximately $400,000 in 1994. The increase was
primarily attributable to the loss recorded in 1994 of approximately $300,000
related to the sale of Beaman (see Note 2 to the consolidated financial
statements). The remainder of the increase is attributable to the difference in
investment gains and losses between years.
Liquidity and Capital Resources
The Company's cash flow from operating activity was approximately $543,000
for 1996 compared with approximately $8.5 million for 1995 and approximately
$6.3 million for 1994. The notable decrease in 1996 from 1995 resulted primarily
from reductions in working capital which more than offset higher net income in
1996. The change in working capital related primarily to decreased balances in
accounts payable in 1996 due to decreased food and paper costs as a percentage
of sales and to decreased overall sales volumes. The decreased overall sales
volumes are attributable to the factors discussed above in the year to year
comparison. The decrease in 1995 from 1994 is primarily a result of declining
net income, somewhat offset by higher accrued liabilities associated with
advertising, workers compensation costs, and other miscellaneous accruals.
Capital expenditures of approximately $2.3 million for 1996 were funded
primarily through sales of surplus properties and existing cash balances.
Approximately $1,286,000 of these expenditures were for the construction or
conversion of new stores, six of which opened in 1996 and five of which opened
within the first two months of fiscal 1997. The Company spent approximately
$220,000 for the replacement of three existing store buildings, constructed in
the late eighties, with surplus modular buildings. Such actions were taken to
provide increased operational flexibility and to reduce maintenance costs in
these units given the low cash outflow necessary to utilize certain of the
surplus modular buildings. Remaining capital expenditures were primarily for the
purchase and installation of certain replacement equipment.
The Company plans to open fifteen units in 1997 and reopen three units
previously closed (see further discussion above). Full year capital expenditures
are expected to be in the range of approximately $6 million to $8 million,
inclusive of replacement capital. This level of new unit development exceeds
that of 1996 (six units) and 1995 (three units) but is significantly less than
that of 1994 (36 units).
In January 1996, the Company repurchased, in two transactions,
approximately $22 million face value of its 9 7/8% Senior Notes due in the year
2000. The Notes were purchased from GIANT GROUP, LTD. ("GIANT") at a price of
$678.75 per $1,000 principal amount, representing the market closing price on
the last business day prior to the repurchase date. The first transaction
involved the repurchase of approximately $16 million face value of the Notes for
approximately $11.1 million in cash. The second transaction involved the
purchase of approximately $6 million face value of the Notes in exchange for a
short-term note of approximately $4.1 million due in three installments of
principal and interest, bearing interest at prime. The Company paid the final
installment together with accrued interest on this note on September 27, 1996.
Prior to the Senior Notes repurchases, the Company's Board of Directors had
received an independent opinion from an investment banking firm as to the
fairness of the transactions. Additionally, in four separate transactions during
the fourth quarter 1996, the Company repurchased approximately $4.7 million face
value of the Notes from various other bondholders for approximately $4.5 million
in cash. As a result of these debt repurchases, the annualized ongoing interest
payments on the Senior Notes have been reduced by approximately $2.6 million per
year to approximately $5.8 million.
Principal payments of debt and capital leases totaled approximately $21.8
million during 1996, inclusive of the approximately $11.1 million, the
approximately $4.1 million and the approximately $4.5 million related to the
Senior Notes repurchased, as discussed above. The Company is required to make a
mandatory sinking fund payment on June 15, 1999 calculated to retire 33 1/3% in
aggregate principal amount of the Senior Notes issued with the balance maturing
on June 15, 2000. The repurchase discussed above reduces such sinking fund
requirement to approximately $1.6 million from approximately $28.3 million.
24
<PAGE>
In February 1996, the Company obtained a one-year credit facility from
GIANT. Concurrent with the completion of its Rights Offering on September 20,
1996, this credit facility was terminated by agreement of the parties.
The Company is actively marketing the assets included in the caption
"Assets held for sale" in the accompanying consolidated balance sheet and
expects realization in cash over the next 3 to 24 months, although actual timing
of such cash flows cannot be predicted. The assets contained in this caption are
recorded at management's current estimate of fair market value less costs to
sell. There can be no assurances that these values will be realized. Of the
approximate $3.7 million generated during 1996 from the sale of land and
buildings, approximately $1.9 million was generated during the first quart of
1996 from the closing of the sales of eleven properties auctioned in the fourth
quarter 1995.
During 1996, the Company received funds (approximately $90,000) on land
contracts which are the subject of an aggregate amount of approximately $1.8
million of sale/leaseback financing. The interest rate on such facility is
approximately 12.5%. The holder of such contracts has been unable to complete
contractual requirements to fund such transactions. During the first quarter of
1997, the Company has received an additional $100,000 in funds on one of these
properties. The Company continues to consider alternatives offered by the holder
including substitution of a different buyer or extension of time available to
fund the agreements.
On July 1, 1996, the Company entered into a ten-year operating agreement
with Carl Karcher Enterprises, Inc., a subsidiary of CKE Restaurants, Inc.
(collectively referred to as "CKE"). Pursuant to the agreement, 28 Rally's-owned
restaurants located in California and Arizona are being operated by CKE. The
Company retains ownership in the restaurants and receives from CKE a percentage
of gross revenues referred to in the financial statements as Owner fee income.
This income is offset by the Company's segregated ownership costs related to
these units, referred to as Owner expenses in the financial statements and
consists primarily of noncash expenses of depreciation and amortization. The
agreement has improved profitability and cash flow, generating approximately
$340,000 cash flow in the last six months of 1996.
The Company completed its Shareholder Rights Offering on September 20,
1996. The Offering raised over $10.8 million in gross proceeds, offset by legal
and other issuance costs of approximately $437,000. In addition to the
approximate $10.8 million of gross proceeds provided by the Offering, the
Warrants issued could provide approximately $10.8 million for the Company's
future growth. The proceeds from the Offering have been used to pay off debt of
$4.5 million approximately and the remainder will be used for new store
construction, refurbishment of some existing restaurants and for other general
corporate purposes, including possible further debt reduction.
On October 21, 1996, the Company was notified by the indenture trustee that
the bondholder consent it had been soliciting had been approved by the required
majority of the holders of record of its 9 7/8% Senior Notes due 2000. The
consent will allow two of the Company's current stockholders, CKE and Fidelity
National Financial, Inc. and/or their affiliates, to acquire 35% or more of the
outstanding shares of the Company's common stock without triggering "Change in
control" provisions requiring the Company to offer to purchase the Senior Notes
at 101% of their face value. This gives the Company greater flexibility to raise
capital in the future, and it gives two of its largest stockholders the ability
to increase their investment in the Company.
On December 20, 1996, the Company issued warrants (the "Warrants") to
purchase an aggregate of 1,500,000 restricted shares of its Common Stock to CKE
and Fidelity National Financial, Inc. The Warrants have a three-year term and
are not exercisable until December 20, 1997. The exercise price is $4.375 per
share, the closing price of the Common Stock on December 20, 1996. The
underlying shares of Common Stock have not been registered with the Securities
and Exchange Commission and, therefore, are not freely tradable. Upon exercise,
the Warrants will provide approximately $6.6 million in additional capital to
the Company. See Note 4 to the accompanying consolidated financial statements
for further discussion.
25
<PAGE>
The Company believes existing cash balances and cash flow from operations
should be sufficient to fund its current operations and obligations. The ability
of the Company to satisfy its obligations under the Senior Notes, however,
continues to be dependent upon, among other factors, the Company successfully
increasing revenues and profits.
26
<PAGE>
<TABLE>
<CAPTION>
Item 8. Financial Statements and Supplementary Data
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND DECEMBER 29, 1996
(In thousands, except shares and per share amounts)
December December 29,
31, 1995 1996
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,811 $ 2,285
Restricted cash 683 1,649
Investments 4,933 1,958
Royalties receivable, including $483 and $0 from related parties at December 31, 1995 and
December 29, 1996, respectively, net of a reserve for doubtful accounts of $922 and
$1,405 at December 31, 1995 and December 29, 1996, respectively 818 437
Accounts and other receivables including $23 and $565 from related parties at December 31,
1995 and December 29, 1996, respectively, net of a reserve for doubtful accounts of $453
and $301 at December 31, 1995 and December 29, 1996, respectively 2,131 1,698
Inventory, at lower of cost or market 1,056 794
Prepaid expenses and other current assets 1,131 999
Assets held for sale 2,506 596
------------- --------------
Total current assets 22,069 10,416
Assets held for sale 3,517 1,426
Net property and equipment, at historical cost 78,683 69,806
Notes receivable, including $175 and $127 from related parties at December 31, 1995 and
December 29, 1996, respectively, net of a reserve for doubtful accounts of $542 and $853 at
December 31, 1995 and December 29, 1996, respectively 789 773
Goodwill, less accumulated amortization of $1,704 and $2,243 at December 31, 1995 and
December 29, 1996, respectively 10,921 10,482
Reacquired franchise and territory rights, less accumulated amortization of $1,202 and $1,984
at December 31, 1995 and December 29, 1996, respectively 12,261 11,439
Other intangibles, less accumulated amortization of $2,344 and $2,459 at December 31, 1995 and
December 29, 1996, respectively 5,262 4,769
Other assets, less accumulated amortization of $1,638 and $1,101 at December 31, 1995 and
December 29, 1996, respectively 3,890 3,147
------------- --------------
Total assets $ 137,392 $ 112,258
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 8,773 4,884
Accrued liabilities 15,959 13,600
Current maturities of long-term debt and obligations under capital leases 17,544 1,484
------------- --------------
Total current liabilities 42,276 19,968
Senior notes, less current maturities, net of discount of $768 and $429 at December 31, 1995
and December 29, 1996, respectively 69,034 57,897
Long-term debt, less current maturities 5,749 4,775
Obligations under capital leases, less current maturities 5,631 5,408
Other liabilities 8,030 4,845
------------- --------------
Total liabilities 130,720 92,893
------------- --------------
Commitments and contingencies (Note 12)
Shareholders' equity:
Preferred stock, $.10 par value, 5,000,000 shares authorized, no shares issued - -
Common stock, $.10 par value, 50,000,000 shares authorized, 15,927,000 and 20,788,000 shares
issued at December 31, 1995 and December 29, 1996, respectively 1,593 2,079
Additional paid-in capital 60,804 71,023
Less: Treasury shares, 273,000 at December 31, 1995 and December 29, 1996 (2,108) (2,108)
Retained deficit (53,617) (51,629)
------------- --------------
Total shareholders' equity 6,672 19,365
============= ==============
Total liabilities and shareholders' equity $ 137,392 $ 112,258
============= ==============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 1, 1995, DECEMBER 31, 1995, AND DECEMBER 29, 1996
(In thousands, except per share amounts)
Fiscal Years Ended
----------------------------------------------
<S> <C> <C> <C>
January 1, December 31, December 29,
1995 1995 1996
------------ --------------- ---------------
REVENUES:
Restaurant sales $ 178,476 $ 181,778 $ 156,445
Franchise revenues and fees 7,842 7,081 5,867
Owner fee income - - 440
------------ --------------- ---------------
Total revenues 186,318 188,859 162,752
------------ --------------- ---------------
COSTS AND EXPENSES:
Restaurant costs of sales 62,518 64,813 53,712
Restaurant operating expenses exclusive of depreciation and
amortization and advertising and promotion expenses 78,072 84,305 71,155
General and administrative expenses 18,068 18,972 15,426
Advertising and promotion expenses 10,898 13,188 7,767
Depreciation and amortization 14,139 13,006 9,838
Owner expense - - 744
Provision for restaurant closures and other 17,259 31,045 20
------------ --------------- ---------------
Total costs and expenses 200,954 225,329 158,662
------------ --------------- ---------------
Income (loss) from operations (14,636) (36,470) 4,090
------------ --------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (9,742) (10,682) (8,622)
Interest income 477 538 614
Other (354) 234 (49)
------------ --------------- ---------------
Total other (expense) (9,619) (9,910) (8,057)
------------ --------------- ---------------
Loss before income taxes and extraordinary items (24,255) (46,380) (3,967)
PROVISION (BENEFIT) FOR INCOME TAXES (4,982) 539 (675)
------------ --------------- ---------------
Loss before extraordinary items (19,273) (46,919) (3,292)
EXTRAORDINARY ITEMS (net of tax expense of $1,350) - - 5,280
------------ --------------- ---------------
Net income (loss) $ (19,273) $ $
(46,919) 1,988
============ =============== ===============
Earnings (loss) per common share:
Earnings (loss) before extraordinary item $ $ $
(1.42) (3.00) (.19)
Extraordinary item - - .31
============ =============== ===============
Earnings (loss) per common share $ $ $
(1.42) (3.00) .12
============ =============== ===============
Weighted average shares outstanding 13,564 15,620 17,007
============ =============== ===============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Treasury Stock and
Common Stock Preferred Stock Contingent Shares
--------------------------- ------------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Additional Retained
Shares Shares Shares Shares Paid-In Earnings Total
Authorized Issued Amount Authorized Issued Amount Shares Amount Capital (Deficit) Equity
---------- -------- ------- ---------- ------- ------- ------ ---------- --------- ---------- ----------
Balances at January 2,1994 25,000 13,268 $1,327 - - $ - (239) $(2,009) 50,634 $ 12,575 $ 62,527
Issuance of common stock - 2,569 257 - - - - - 9,976 - 10,233
Net loss - - - - - - - - - (19,273) (19,273)
---------- -------- ------- ---------- ------- ------- ------ ---------- ---------- ---------- --------
Balances at January 1, 25,000 15,837 1,584 - - - (239) (2,009) 60,610 (6,698) 53,487
1995
Amendment to the 25,000 - - - - - - - - -
Charter (A)
Issuance of common stock - 90 9 - - - - - 194 - 203
Treasury stock acquired - - - - - - (34) (99) - - (99)
Net loss - - - - - - - - - (46,919) (46,919)
---------- -------- ------- ---------- ------- ------- ------ ---------- ---------- ---------- --------
Balances at
December 31, 1995 50,000 15,927 1,593 - - - (273) (2,108) 60,804 (53,617) 6,672
Issuance of common stock - 35 3 - - - - - 74 - 77
Authorization of
preferred stock (B) - - - 5,000,000 - - - - - -
Shareholders Rights Offering - 4,826 483 - - - - - 9,975 - 10,458
Issuance of
compensatory stock
options and warrants - - - - - - - - 170 - 170
Net income - - - - - - - - - 1,988 1,988
========== ======== ======= ========== ======= ======= ====== ========== ========== ========== ========
Balances at December
29, 1996 50,000 20,788 $2,079 5,000,000 - $ - (273) $(2,108) $71,023 $(51,629) $ 19,365
========== ======== ======= ========== ======= ======= ====== ========== ========== ========== ========
(A) On May 13, 1995, stockholders of the Company approved a proposal to amend the Certificate of Incorporation to increase
the number of authorized shares of Common Stock from 25,000,000 shares to 50,000,000.
(B) On July 10, 1996, stockholders of the Company ratified the authorization of 5,000,000 shares of Preferred Stock at a par value
of $.10.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Fiscal Years Ended
--------------------------------------------
<S> <C> <C> <C>
January 1, December 31, December 29,
1995 1995 1996
------------ -------------- ---------------
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Net income (loss) $ (19,273) $ (46,919) $ 1,988
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 14,139 13,006 10,482
Extraordinary items, before tax expense of $1,350 - - (6,630)
Provision for restaurant closures and other 17,259 31,045 20
Provision for losses on receivables 377 1,507 968
Other 568 2,276 1,265
Changes in assets and liabilities net of effects from business
combinations:
(Increase) decrease in assets:
Receivables (1,810) 775 (306)
Inventory (14) (63) 262
Prepaid expenses and other current assets 752 185 161
Other assets (2,563) 292 (121)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 187 7,815 (6,011)
Deferred income taxes (1,524) - -
Other liabilities (1,824) (1,424) (1,535)
------------ -------------- ---------------
Net cash provided by operating activities 6,274 8,495 543
------------ -------------- ---------------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
(Increase) decrease in investments 9,022 (848) 2,975
Notes receivable 429 154 312
Pre-opening costs (832) (45) (156)
Capital expenditures (19,808) (3,405) (2,306)
Proceeds from the sale of property and equipment 2,525 4,266 4,392
(Increase) decrease in intangible assets (1,436) (111) (39)
Acquisition of businesses, net of cash acquired (1,836) (1,931) -
Proceeds from the sale of a business - 2,730 -
------------ -------------- ---------------
Net cash provided by (used in) investing activities (11,936) 810 5,178
------------ -------------- ---------------
CASH FLOWS PROVIDED FROM (USED IN) FINANCING ACTIVITIES:
(Increase) in restricted cash - (683) (966)
Payment of organization and development costs (4) (3) -
Principal payments of debt (5,538) (2,114) (1,696)
Senior Notes retirement - - (19,612)
Issuance of common stock, net of costs of issuance 10,233 203 10,535
Principal payments on capital lease obligations (393) (604) (508)
------------ -------------- ---------------
Net cash provided from (used in) financing activities 4,298 (3,201) (12,247)
------------ -------------- ---------------
Net increase (decrease) in cash (1,364) 6,104 (6,526)
CASH AND CASH EQUIVALENTS, beginning of period 4,071 2,707 8,811
============ ============== ===============
CASH AND CASH EQUIVALENTS, end of period $ 2,707 $ 8,811 $ 2,285
============ ============== ===============
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
</TABLE>
30
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular dollars in thousands, except per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Financial Statement Presentation and Organization
The consolidated financial statements include Rally's Hamburgers, Inc.
and its wholly-owned subsidiaries, each of which is described below.
Rally's Hamburgers, Inc. and its subsidiaries are collectively
referred to herein as the context requires as "Rally's" or the
"Company". All significant intercompany accounts and transactions have
been eliminated.
Rally's is one of the largest chains of double drive-thru restaurants
in the United States. At December 29, 1996, the Rally's system
included 467 restaurants in 19 states, primarily in the Midwest and
the Sunbelt, comprised of 209 Company-owned and operated, 231
franchised and 27 Company-owned restaurants in Western markets which
are operated as Rally's restaurants by CKE Restaurants, Inc. ("CKE"),
a significant shareholder of the Company, under an operating agreement
which began July, 1996. One additional Company-owned store covered by
the operating agreement has been converted to the Carl's Jr. format
and is not included in the above store count. The Company's
restaurants offer high quality fast food. The Company serves the
drive-thru and take-out segments of the quick-service restaurant
industry. The Company opened its first restaurant in January 1985 and
began offering franchises in November 1986.
Rally's Hamburgers, Inc., Rally's of Ohio, Inc., Self Service Drive
Thru, Inc. and Hampton Roads Foods, Inc. own and operate Rally's
restaurants in various states. Additionally, Rally's Hamburgers, Inc.
operates as franchisor of the Rally's brand. Rally's Management, Inc.
provides overall corporate management of the Company's businesses.
Rally's Finance, Inc. was organized for the purpose of making loans to
Rally's franchisees to finance the acquisition of restaurant equipment
and modular buildings. RAR, Inc. was organized for the purpose of
acquiring and operating a corporate airplane and is currently
inactive. The Company's wholly-owned subsidiary, ZDT Corporation, was
formed to own the Zipps brand and franchise system. MAC 1 was
organized for the purpose of acquiring a manufacturer of modular
buildings. The manufacturing business was sold in January 1995 (see
Note 2).
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates, when actual transactions
anticipated are consummated. In addition, despite management
diligence, changes in estimates do and will continue to occur due to
changes in available relevant data and consummation of the events and
transactions. The statements are prepared on a going concern basis.
Certain of the most significant estimates include useful lives
assigned to depreciable/amortizable assets, fair value less costs to
sell of long-lived assets held for sale, fair value of long-lived
assets held for use, future net occupancy costs related to
closed/disposable properties, accruals for the Company's self-insured
and high deductible insurance programs, and disclosures regarding
commitments and contingencies.
b) Revenue Recognition
The Company recognizes franchise fees as income on the date a
restaurant is opened, at which time the Company has performed its
obligations relating to such fees. Area development fees are generated
from the awarding of exclusive rights to develop, own and operate
Rally's restaurants in certain
31
<PAGE>
geographic areas pursuant to an Area Development Agreement. Such fees
are recognized as income on a pro rata basis as the restaurants are
opened or upon the cancellation or expiration of an Area Development
Agreement. Both franchise fees and area development fees are
non-refundable. The Company also receives royalty fees from
franchisees in the amount of 4% of each franchised restaurant's gross
revenues, as defined in the Franchise Agreement. Royalty fees are
recognized as earned.
c) Property and Equipment
Property and equipment are depreciated using the straight-line method
for financial reporting purposes and accelerated methods for income
tax purposes. The estimated useful lives for financial reporting
purposes are the shorter of 20 years or the lease life plus available
renewal options for buildings and property held under capital leases,
eight years for furniture and equipment, five years for software and
computer systems and the life of the lease for leasehold improvements.
Expenditures for major renewals and betterments are capitalized while
expenditures for maintenance and repairs are expensed as incurred.
d) Interest Costs
Interest costs incurred during the construction of restaurants are
capitalized as a component of the cost of the restaurants and are
amortized on a straight-line basis over the estimated useful lives of
the restaurants. The amounts capitalized for the fiscal years ended
January 1, 1995, December 31, 1995 and December 29, 1996 were
approximately $490,000, $30,000 and $7,000, respectively.
e) Inventory
Inventory is valued at latest invoice cost which approximates the
lower of first-in, first-out cost or market.
f) Supplemental Disclosures of Cash Flow Information
Fiscal Years Ended
--------------------------------------
January 1, December 31, December 29,
1995 1995 1996
------------ ------------ ------------
Interest paid (net of amount capitalized) $ 9,760 $ 10,679 $ 8,639
Income taxes paid 163 212 983
Capital lease obligations incurred - 1,616 111
The purchase of HRF described in Note 2 was recorded as follows:
Fiscal
Year Ended
---------------
December 31,
1995
---------------
Fair value of assets acquired $ 9,133
Cash paid (2,125)
===============
Liabilities assumed $ 7,008
===============
As a result of the sale of Beaman discussed in Note 2, the Company
recorded the net present value of a non-interest bearing note of
approximately $347,000. The Company recorded in 1996 approximately
$547,000 in notes receivable primarily as the result of the sale of
five of its restaurants in Montgomery, Alabama. These non-cash
transactions have been excluded from the consolidated statement of
cash flows.
32
<PAGE>
During fiscal 1995 and 1996, the Company accepted notes due within two
to five years, bearing interest at rates previously specified in the
underlying franchise agreements, for certain receivables from
franchises in the aggregate amount of approximately $542,000 for 1995
and approximately $340,000 for 1996. There were no such notes in 1994.
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid debt instruments with an original maturity
of three months or less at the date of purchase to be cash
equivalents. Cash equivalents at December 31, 1995 and December 29,
1996 were approximately $6.8 million and $976,000, respectively.
g) Earnings (Loss) Per Common Share
Earnings (loss) per common share is calculated based upon the weighted
average shares and common equivalent shares outstanding during the
periods.
h) Goodwill, Reacquired Franchise Rights, Other Intangibles and Other
Assets
Goodwill, reacquired franchise and territory rights, other intangibles
and other assets are being amortized using the straight-line method
over the following periods:
Amortization
Period
--------------
Goodwill 5, 20-25 years
Reacquired franchise and territory rights 15-20 years
Other intangibles 3-25 years
Other assets 5-25 years
Subsequent to the intangibles' acquisition, the Company evaluates
whether later events and circumstances have occurred that indicate the
remaining estimated useful life of goodwill and other intangibles may
warrant revision or that the remaining balance of goodwill and other
intangibles may not be recoverable. When factors indicate that
goodwill or other intangibles should be evaluated for possible
impairment, the Company uses an estimate of the related undiscounted
cash flows over the remaining life of the goodwill and other
intangibles in measuring whether the goodwill and other intangibles
are recoverable. The amount of any such impairment is determined as
the difference between carrying value and fair value based upon
discounted cash flows. No such impairment was recorded in any period
presented except as disclosed in Note 16.
i) Owner Fee Income and Expense
Revenue received as a result of the operating agreement with CKE is
referred to as Owner fee income in the accompanying consolidated
financial statements. Expenses related to the ongoing investment in
the CKE-operated restaurants consist primarily of depreciation and
amortization and are referred to as Owner expenses in the accompanying
consolidated financial statements.
j) Advertising Costs
It is the Company's policy to expense advertising costs as incurred.
k) Reclassification
Certain items have been reclassified in the accompanying consolidated
financial statements for prior periods in order to be comparable with
the classification adopted for the fiscal year ended December 29,
1996. Such reclassifications had no effect on previously reported net
income.
33
<PAGE>
2. ACQUISITION AND DISPOSITION
On February 13, 1995, the Company acquired all of the shares of common
stock of Hampton Roads Foods, Inc. (a Louisiana corporation) and certain of
the assets of HRF, Inc. (a Virginia corporation), collectively referred to
as "HRF", for approximately $7.2 million, of which approximately $2.1
million was paid in cash and the remainder to be paid over the ensuing six
years pursuant to a secured promissory note, bearing interest at 9%. In
addition, the Company assumed approximately $654,000 of notes payable and
other liabilities and HRF's lease obligations, including capital lease
obligations of approximately $1.3 million. HRF owned and operated a total
of ten Rally's restaurants and owned the exclusive right to develop
additional Rally's restaurants in the Hampton Roads and Norfolk, Virginia
areas. The acquisition of HRF was accounted for as a purchase.
The total purchase price of approximately $9.1 million has been allocated
in the accompanying balance sheet as net property and equipment
(approximately $2.1 million) and as intangible and other assets
(approximately $6.7 million). The remainder of the purchase price,
approximately $319,000, was allocated to various current assets. The
intangible and other asset amounts include a non-compete (approximately
$150,000) which is being amortized over five years and reacquired franchise
and territory rights (approximately $6.6 million) which are being amortized
over 15 years.
The impact on operations of this acquisition was not significant for any of
the periods presented, and, therefore, proforma amounts are not presented
giving effect to this acquisition.
On January 30, 1995, the Company sold all of the shares of common stock of
Beaman Corporation, its wholly-owned modular building subsidiary, for
approximately $3.1 million, of which approximately $2.7 million was paid in
cash, and the remainder to be paid pursuant to a non-interest bearing,
unsecured promissory note.
3. RESTAURANT CLOSURES AND OTHER
Certain charges in fiscals1994, 1995 and 1996 have been aggregated and
segregated into the caption "Provision for Restaurant Closures and Other"
in the accompanying Statements of Operations. These items represent
estimates of the impact of management decisions which have been made at
various points in time in response to the Company's sales and profit
performance and the then-current revenue building and profit enhancing
strategies.
In summary and chronologically, the decisions that had been reached in 1994
were to abandon additional real estate development projects and certain
investment in infrastructure (approximately $5.3 million) and to abandon
additional projects and franchise or otherwise dispose of up to 60 Company
restaurants (approximately $12.0 million). During 1995, the Company
concluded that much of its 1994 plan of disposal would not be executable.
As a result, the Company decided to (i) close up to 16 of the original 60
restaurants included in the 1994 disposal plan, (ii) close nine poor
performing restaurants in its core markets, (iii) writeoff estimated
exposure resulting from the default of a subleasee/franchisee in a former
Company market, (iv) record additional writedowns of modular building
value, (v) record writedowns to sales price less cost to sell of all
properties auctioned in fourth quarter, 1995 (vi) record asset writedowns
and occupancy exposure related to the default of a tenant for five of the
units closed under the 1994 plan and (vii) record other changes in
estimates related to the Company's surplus properties. The charges for the
above 1995 items totaled approximately $17.3 million. Also reflected in
this caption for fiscal 1995 is an approximate $13.7 million charge related
to the Company's adoption of Statement of Financial Accounting Standards
No. 121 ("SFAS 121) further discussed in Note 16.
Included in this caption for fiscal 1996 are charges of approximately
$679,000 related to the writedown and sale of assets offset by
approximately $659,000 resulting from a reduction in surplus property
reserves related to Management's decision to re-open three units previously
closed and to continue to operate a fourth unit that had been designated
for closure. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations--"Restaurants Closures and Other."
34
<PAGE>
4. RELATED PARTY TRANSACTIONS
a) Issuance of Warrants
On December 20, 1996, the Company issued warrants (the "Warrants") to
purchase an aggregate of 1,500,000 restricted shares of its Common
Stock to CKE and Fidelity National Financial, Inc. The Warrants were
granted as an incentive to CKE and Fidelity to continue to participate
in the identification and exploitation of synergistic opportunities
with the Company. The Warrants have a three-year term and are not
exercisable until December 20, 1997. The exercise price is $4.375 per
share, the closing price of the Common Stock on December 20, 1996. The
underlying shares of Common Stock have not been registered with the
Securities and Exchange Commission and, therefore, are not freely
tradable. Upon exercise, the Warrants would provide approximately $6.6
million in additional capital to the Company. The Company obtained a
valuation analysis from an investment banking firm of national
standing. Such analysis estimated the value of the Warrants to be
approximately $960,000. Approximately $24,000 has been expensed during
1996 within General and Administrative expenses. The remaining value
will be expensed in fiscal 1997 over the remainder of the vesting
period of the underlying Warrants.
b) West Coast Operating Agreement
On July 1, 1996, the Company entered into a ten-year Operating
Agreement with Carl Karcher Enterprises, Inc., a subsidiary of CKE
Restaurants, Inc. (collectively referred to as "CKE"). CKE is the
operator of the Carl's Jr. restaurant chain. Pursuant to the
agreement, 28 Rally's owned restaurants located in California and
Arizona are being operated by CKE. Such agreement is cancelable after
an initial five-year period, at the discretion of CKE. A portion of
these restaurants, at the discretion of CKE, will be converted to the
Carl's Jr. format. To date, one restaurant has been converted. The
agreement was approved by a majority of the independent Directors of
the Company. Prior to the agreement, the Company's independent
Directors had received an opinion as to the fairness of the agreement,
from a financial point of view, from an investment banking firm of
national standing.
Under the terms of the Operating Agreement, CKE is responsible for
conversion costs associated with transforming the restaurants to the
Carl's Jr. format, as well as the operating expenses of all the
restaurants. Rally's retains ownership of all 28 restaurants and is
entitled to receive a percentage of gross revenues generated by each
restaurant. Subsequent to the agreement, the Company's revenues have
been, and will continue to be, reduced by the absence of the
restaurants' sales, somewhat offset by the fee paid to the Company by
CKE. For the first six months of the current year, the restaurants
covered by this Operating Agreement had sales of approximately $10.5
million. The Company anticipates that the agreement will continue to
positively impact both net income and cash flow. While the overall
impact of the agreement is not expected to be material to the
financial statements, it will allow management to concentrate its
efforts in more fully developed Rally's markets. The agreement will
also allow the Company to take advantage of any improvements in
restaurant operations attained by CKE by implementing these
improvements in Company stores. In the event of a sale by Rally's of
any of the 28 restaurants, Rally's and CKE would share in the proceeds
based upon the relative value of their respective capital investments
in such restaurant.
c) Option Grants to Non-employees
During 1996, the Company granted 150,000 options to certain
individuals not employed by the Company for services provided.
Approximately $84,000 has been expensed for these grants in General
and Administrative Expenses in the accompanying Statement of
Operations. Such options were granted at the market values on the
dates of grant, were immediately exercisable and expire in five years.
35
<PAGE>
d) Other Transactions
The Company has had transactions with certain companies or individuals
which are related parties by virtue of having stockholders in common,
by being officers/directors or because they are controlled by
significant stockholders or officers/directors of the Company. Such
transactions which impacted the Company's consolidated financial
statements are summarized below. Information with respect to related
party rent is disclosed in Note 12. The Company and its franchisees
each pay 1/2% of sales to the Rally's National Advertising Fund (the
"Fund"), established for the purpose of creating and producing
advertising for the chain. The Fund is not included in the
consolidated financial statements, although the Company's
contributions to the Fund are included in the Advertising and
Promotion Expenses in the Company's consolidated Statements of
Operations.
December 31, December 29,
1995 1996
------------------ ----------------
Balance Sheet Amounts
Royalties receivable $ 483 $ -
Accounts receivable 23 565
Notes receivable 175 127
Accounts payable 307 95
Accrued liabilities - 60
Fiscal Years Ended
----------------------------------------------
January 1, December 31, December 29,
1995 1995 1996
------------- ------------- ---------------
Revenue and Transaction Amounts
Repurchase of Senior Notes (gross) $ - $ - $ 6,339
Royalty fees 2,129 2,407 -
Owner fee income - - 440
Rental income 195 262 -
Interest income 93 16 49
========== ========== =============
$ 2,417 $ 2,685 $ 6,828
========== ========== =============
Expense Amounts
Legal $ 923 $ 777 $ 1,024
Owner expense - - 744
Interest expense - - 180
Compensatory stock options and
warrants - - 170
Other 14 - -
========== ========== =============
$ 937 $ 777 $ 2,118
========== ========== =============
5. RESTRICTED CASH
Restricted cash consists of amounts held in various Certificates of Deposit
as collateral for Letters of Credit and daily Automated Clearing House
("ACH") transactions.
6. INVESTMENTS
Excess funds are being invested in U.S. Treasury and investment grade
corporate debt securities. These securities are deemed as
"available-for-sale" under SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities" and are reported at fair value. Unrealized
holding gains and losses, excluding those
36
<PAGE>
losses considered to be other than temporary, are reported as a net amount
in a separate component of shareholders' equity. No net unrealized losses
were reported for any period presented. Provisions for declines in market
value are made for losses considered to be other than temporary. No such
provision was necessary for the years ended December 31, 1995 and December
29, 1996. The provision for the year ended January 1, 1995 was
approximately $95,000. The market value of the portfolio was determined
based on quoted market prices for these investments. Realized gains or
losses from the sale of investments are based on the specific
identification method.
The carrying value is equal to the market value of investments at December
31, 1995 and December 29, 1996 and consist of the following:
December 31, 1995
United States government and its agencies $ 4,933
Corporate debt instruments -
==========
Total $ 4,933
==========
December 29, 1996
United States government and its agencies $ 500
Corporate debt instruments 1,458
==========
Total $ 1,958
==========
The contractual maturities of these investments at December 29, 1996 were
as follows:
1997 $ 500
2002 248
2012 299
2013 597
2017 314
=========
1,958
=========
The proceeds from the sale of investments and related gross gains and
losses for the twelve months ended January 1, 1995, December 31, 1995 and
December 29, 1996 were as follows:
Fiscal Years Ended
----------------------------------------
January 1, December 31, December 29,
1995 1995 1996
---------- -------------- ------------
Proceeds from the sale of $ 17,798 $ 15,653 $ 10,531
investments
Gross gains realized 137 56 -
Gross losses realized (364) - (4)
37
<PAGE>
7. NET PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, December 29,
1995 1996
---------------- ---------------
Land $ 14,310 $ 14,074
Buildings and leasehold improvements 46,520 47,463
Equipment, furniture and fixtures 45,036 41,312
---------------- ---------------
105,866 102,849
Less accumulated depreciation (32,049) (37,518)
---------------- ---------------
73,817 65,331
---------------- ---------------
Property held under capital lease 6,208 6,145
Less accumulated amortization (1,342) (1,670)
---------------- ---------------
4,866 4,475
================ ===============
Net property and equipment $ 78,683 $ 69,806
================ ===============
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31, December 29,
1995 1996
--------------- ---------------
Payroll and payroll taxes $ 3,013 $ 2,245
Closed store reserve 2,767 1,964
Workers compensation 2,102 2,367
Advertising 1,819 316
Other 6,258 6,708
=============== ===============
$ 15,959 $ 13,600
=============== ===============
9. OTHER LIABILITIES
Other liabilities consist of the following:
December 31, December 29,
1995 1996
--------------- ---------------
Closed store reserve $ 6,908 $ 3,881
Unfavorable lease loss 890 748
Other 232 216
=============== ===============
$ 8,030 $ 4,845
=============== ===============
10. SENIOR NOTES
On March 9, 1993, the Company sold approximately $85 million of 9 7/8%
Senior, Notes due 2000 (the "Notes"). The Company is required to make a
mandatory sinking fund payment on June 15, 1999 to retire 33 1/3% in
aggregate principal amount of the Notes issued. The Notes are carried net
of the related discount, which is being amortized over the life of the
Notes. Interest is payable June 15 and December 15. The Notes include
certain restrictive covenants which, among other restrictions, limit the
Company's ability to obtain additional borrowings and to pay dividends as
well as impose certain change of control provisions, as defined.
38
<PAGE>
On January 29, 1996, the Company repurchased, in two transactions, at a
price of approximately $678.75 per $1,000 principal amount, approximately
$22 million face value of its 9 7/8% Senior Notes due in the year 2000 from
GIANT GROUP, LTD. ("GIANT"). The price paid in each transaction represented
the market closing price on January 26, 1996. The first transaction
involved the repurchase of approximately $16 million face value of the
Notes for approximately $11.1 million in cash. The second transaction
involved the purchase of approximately $6 million face value of Notes in
exchange for a short-term note of approximately $4.1 million, due in three
installments of principal and interest, issued by Rally's. The Company paid
the final installment on this note, together with accrued interest thereon,
on September 27, 1996. The purchases were approved by a majority of the
independent Directors of the Company. Prior to the purchases, the Company's
independent Directors had received an opinion as to the fairness of the
transactions, from a financial point of view, from an investment banking
firm of national standing. Due to the repurchases in January 1996, the
redemption price of approximately $15.2 million has been classified in the
caption "Current Maturities of Long-Term Debt and Obligations Under Capital
Leases" in the accompanying consolidated balance sheet for fiscal 1995.
Additionally, in four separate transactions during the fourth quarter 1996,
the Company repurchased approximately $4.7 million face value of the Notes
from various other bondholders for approximately $4.5 million in cash.
These purchases resulted in extraordinary gains in 1996 net of tax,
totaling approximately $5.3 million or $.31 per share. As a result of these
debt repurchases, the annualized ongoing interest payments on the Senior
Notes have been reduced by approximately $2.6 million per year to
approximately $5.8 million. In addition, these repurchases have reduced the
sinking fund requirement discussed above to approximately $1.6 million from
approximately $28 million.
The remaining outstanding Notes are publicly traded and at December 29,
1996 had a market value of approximately $54.5 million based on the quoted
market price for such notes.
On September 5, 1996 by Consent Solicitation Statement, the Company
solicited consent of its bondholders whereby the beneficial ownership of
35% or more of the voting stock of the Company by GIANT, Fidelity National
Financial, Inc., CKE and/or any of their affiliates would not constitute a
change of control for purposes of Section 4.14 of the Indenture. On October
21, 1996, the bondholder consent was approved by a majority of the holders
of record as of the date of the Consent Solicitation.
39
<PAGE>
11. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
-------------- --------------
<S> <C> <C>
Notes payable to banks, maturing at various dates through February 10, 2000,
secured by property and/or equipment, bearing interest ranging from
1/2% above prime to 9.25%. The notes are payable in monthly principal
and interest installments ranging from $848 to $41,033. $ 1,883 $ 1,006
Note payable to finance company due October 1998, secured by certain
equipment, bearing interest at a rate of 7.3%. The note is payable in
monthly principal and interest installments of $6,762. 384 133
Note payable to Company for acquisition of certain markets, secured by
certain property and equipment, maturing November 30, 1998, bearing
interest of 8.3%. The note is payable in monthly principal and
interest installments of $11,494. 205 79
Secured notes payable to a bank used to finance equipment and/or modular
buildings for franchisees (the Franchisee Loans), maturing at various
dates through July 15, 2000, bearing interest at prime plus 1/2%. The
notes are payable in monthly principal installments of $4,875.
Interest is payable monthly. 261 195
Notespayable to former owners for acquisition of market, secured by common
stock of Hampton Roads Foods, maturing March 13, 2001, with
outstanding balances due after last monthly payments, bearing interest
of 9.0%. The notes are payable in monthly principal and interest
installments ranging from $4,742 to $50,211. 4,814 4,461
-------------- --------------
7,547 5,874
Less - Current portion (1,798) (1,099)
- -
============== ==============
$ 5,749 $ 4,775
============== ==============
</TABLE>
At December 29, 1996, the prime rate was 8.25%. There were no short-term
borrowings in the year ended December 31, 1995.
The following are the maturities of long-term debt for each of the next
five years and thereafter:
Year
-------------------
1997 $ 1,099
1998 722
1999 727
2000 590
Thereafter 2,736
============
$ 5,874
============
The Company is subject to certain restrictive covenants under its debt
agreements.
The market value of the Company's long-term debt approximated book value at
December 29, 1996. Debt related to the acquisition of Hampton Roads Foods
was entered into in 1995 and bears interest at rates which approximate
current rates for debt with similar terms. The majority of the remaining
long-term debt has contractual rates which vary based on fluctuations in
market rates.
40
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
(a) Lease Commitments
The Company leases certain land and buildings generally under
agreements with terms of or renewable to 15 to 20 years. Some of the
leases contain contingent rental provisions based on percentages of
gross sales. The leases generally obligate the Company for the cost of
property taxes, insurance and maintenance. Following is a schedule by
year of future minimum lease commitments under all leases at December
29, 1996:
Capital Operating
Year Leases Leases
- --------------------------------------------- ----------- ----------
1997 $ 1,087 8,475
1998 1,010 7,870
1999 973 7,216
2000 906 6,413
Thereafter 6,772 33,052
---------- ==========
Total minimum lease commitments 10,748 $ 63,026
==========
Less amounts representing interest,
discounted at rates ranging from 10% to 12% (4,955)
-----------
Present value of minimum lease payments 5,793
Current portion of capital lease obligations (385)
===========
Long-Term lease obligations $ 5,408
===========
The discount rates applicable to the Company's capital leases
approximate currently available market rates. Minimum operating lease
payments have not been reduced by minimum sublease rentals of $2.7
million due in the future under noncancellable subleases.
Rent expense consists of:
Fiscal Years Ended
----------------------------------------
January 1, December December
1995 31, 1995 29, 1996
----------- ------------- -------------
Minimum rentals - related parties $ 261 $ 292 $ 470
Minimum rentals - others 6,514 6,641 4,681
Contingent rentals - others 136 173 122
=========== ============= ============
$ 6,911 $ 7,106 $ 5,273
=========== ============= ============
(b) Litigation
In January and February 1994, two putative class action lawsuits were
filed, purportedly on behalf of the stockholders of Rally's in the
United States District Court for the Western District of Kentucky,
against Rally's, Burt Sugarman and GIANT and certain of Rally's
present and former officers and directors and its auditors. The
complaints allege defendants violated the Securities Exchange Act of
1934, among other claims, by issuing inaccurate public statements
about the Company in order to arbitrarily inflate the price of its
common stock. The plaintiffs seek unspecified damages. On April 15,
1994, Rally's filed a motion to dismiss and a motion to strike. On
April 5, 1995, the Court struck certain provisions of the complaint
but otherwise denied Rally's motion to dismiss. In addition, the Court
denied plaintiffs' motion for class certification; the plaintiffs
renewed this motion, and despite opposition by the defendants, the
Court granted such motion for class certification on April 16, 1996,
certifying a class from July 20, 1992 to September 29, 1993. In
October 1995, the plaintiffs filed a motion to disqualify Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP ("Christensen,
Miller") as counsel for defendants based on a purported conflict of
interest allegedly arising from the representation of multiple
defendants as well as Ms. Glaser's position as both a former director
of Rally's and a partner in Christensen, Miller. Defendants filed an
opposition to the motion, and the motion to disqualify Christensen,
Miller was denied. The action was stayed between May 30 and July 31,
1996 to facilitate settlement discussions. One settlement conference
has been conducted; no others are currently scheduled. The Court
denied the motion in the fall of 1996 and refused to disqualify
Christensen, Miller. Fact
41
<PAGE>
discovery is set to close in April 1997. No trial date has been
scheduled yet. Management is unable to predict the outcome of this
matter at the present time or whether or not certain available
insurance coverages will apply. The defendants deny all wrongdoing and
intend to defend themselves vigorously in this matter. Discovery is
proceeding. Because these matters are in a preliminary stage, the
Company is unable to determine whether a resolution adverse to the
Company will have a material effect on its results of operations or
financial condition. Accordingly, no provisions for any liabilities
that may result upon adjudication have been made in the accompanying
financial statements. An estimate of defense costs reimbursable under
the Company's directors' and officers' insurance is included in "Other
Assets" in the accompanying consolidated financial statements.
In July 1994, the Company entered into an agreement with Red Line
Burgers, Inc. ("Red Line") whereby Red Line leased from the Company
all of its assets being operated as Rally's restaurants in Houston,
Texas. Additionally, the agreement called for Red Line to convert Red
Line's eight competing units in the Houston market to the Rally's
brand. Red Line failed to make certain lease payments and on June 20,
1995, the Company filed an action in the United States District Court
for the Southern District of Texas, Galveston Division, seeking
recovery of damages from Red Line for its breach of the leases and
subleases entered into with the Company. The action alleges that Red
Line also committed events of default under the terms of all of its
Franchise Agreements with the Company. As a result of such defaults,
the Company terminated such Franchise Agreements, and on August 3,
1995, the Company filed suit in the United States District Court,
Western District of Kentucky, alleging breach of contract due to Red
Line's failure to pay royalties and other payments required by the
Franchise Agreements and its failure to pay approximately $400,000
plus interest owed on certain promissory notes issued to the Company
in lieu of such payments. The Company also seeks accountability for
approximately $660,000 in conversion costs paid by the Company for
conversion of Red Line's Houston restaurants. Subsequent to the
commencement of the foregoing actions, Red Line filed for
reorganization under Chapter 11 of the United States Bankruptcy Code.
In connection with such proceedings, the Company's actions against Red
Line have been stayed. In November, 1996, Red Line filed a First
Amended Disclosure Statement and First Amended Liquidating Plan of
Reorganization (the "Plan") which disputed Red Line's obligation to
pay the Company any of the foregoing monies. By Bankruptcy Court Order
entered February 28, 1997 (the "Confirmation Order"), the Company's
general unsecured claims were allowed in the amount of approximately
$615,000. The Confirmation Order also approved the Plan. The Plan
provides for, among other things, mutual releases among the Company
and Red Line (such releases do not affect the allowed general
unsecured claims described above) and the sale of Red Line's assets.
Cash from those sales will be insufficient to pay all secured claims,
taxes and administrative claims. Some of the Red Line assets are to be
acquired by New Red Line, Inc., an entity involving certain insiders
and/or affiliates of Red Line. Unsecured creditors of Red Line
(including the Company) will receive under the Plan a minority stock
interest in New Red Line, Inc. At this time, the likelihood of
realizing any value on account of such minority stock interest is
considered extremely speculative. The receivable balances have been
fully reserved.
In February 1996, Harbor Finance Partners ("Harbor") commenced a
derivative action, purportedly on behalf of Rally's against GIANT and
certain of Rally's officers and directors before the Delaware Chancery
Court. Harbor named Rally's as a nominal defendant. Harbor claims that
the directors and officers of both Rally's and GIANT, along with
GIANT, breached their fiduciary duties to the public shareholders of
Rally's by causing Rally's to repurchase from GIANT certain Rally's
Senior Notes at an inflated price. Harbor seeks "millions of dollars
in damages", along with rescission of the repurchase transaction. In
the fall of 1996, all defendants moved to dismiss the action. The
Chancery Court conducted a hearing on November 26, 1996, but has not
yet ruled on the pending motions. The Company denies all wrongdoing
and intends to vigorously defend the action. It is not possible to
predict the outcome of this action at this time.
Rally's filed a lawsuit on August 12, 1996 against Arkansas Investment
Group, Inc. ("AIGI"), a franchisee that currently operates ten Rally's
restaurants located in Arkansas. The lawsuit seeks to recover
royalties and contributions to the Rally's National Advertising Fund
owed by AIGI pursuant to the applicable franchise agreements, which
total approximately $500,000 with accrued interest as of December 29,
1996. After falling in arrears on its royalties and advertising fund
contributions, Rally's and AIGI negotiated a written agreement to
allow AIGI to make payments under a revised payment schedule. AIGI
also defaulted on that written
42
<PAGE>
obligation. AIGI has filed an Answer and Counterclaim in which it
alleges it does not owe the royalties and advertising contributions
due to its alleged disagreement with operational and marketing
decisions of Rally's and Rally's alleged failure to rebate sums
obtained from suppliers. AIGI has asserted causes of action for breach
of contract, violation of the Arkansas Franchise Practices Act, unjust
enrichment and fraud. The Counterclaim alleges that AIGI has been
damaged in excess of approximately $75,000 (the minimum jurisdictional
amount for federal court), but no specific amount of damages is
identified in the Counterclaim. Rally's denies AIGI's allegations and
intends to vigorously defend the Counterclaim. Because the litigation
is in a preliminary stage, the Company is unable to determine whether
a resolution adverse to the Company will have a material effect on its
results of operations or financial condition. Accordingly, no
provisions for any liabilities that may result upon adjudication have
been made in the accompanying financial statements.
In December 1994, Rally's entered into two franchise agreements with
Kader Investments, Inc. ("Kader") for the development and operation of
Rally's Hamburgers restaurants in Anaheim, California and Tustin,
California. Rally's assisted the franchisee in developing and opening
the restaurants. On November 27, 1996, Kader filed a six-count
Complaint against Rally's in the California Superior Court for Orange
County (Case No. 772257) alleging material misrepresentation,
respondent superior, breach of contract, breach of the implied
covenant of good faith and fair dealing, fraud and unfair competition.
These claims arise out of allegations concerning Rally's offer and
sale of two franchises (under a two-store development agreement), and
Rally's actions during the term of the agreements. The Complaint seeks
as relief rescission of the parties' franchise and development
agreements; general damages of at least $1,494,277 and $1,400,000 for
the material misrepresentation and fraud counts, respectively; general
damages in unspecified amounts as to the other counts; punitive
damages in unspecified amounts; and attorneys' fees. Rally's filed an
Answer, and intends to file a Cross-Complaint alleging breach of
contract. The court has permitted the parties to hold discovery in
abeyance for a short period pending settlement discussions. Rally's is
currently attempting to settle the claim. However, the outcome of such
settlement discussion is uncertain at this time. Should discussions
not result in a settlement, Rally's intends to vigorously defend
against the claims. Because the litigation is in a preliminary stage,
the Company is unable to determine whether a resolution adverse to the
Company will have a material effect on its results of operations or
financial condition. Accordingly, no provisions for any liabilities
that may result upon adjudication have been made in the accompanying
financial statements.
The Company is involved in other litigation matters incidental to its
business. With respect to such other suits, management does not
believe the litigation in which it is involved will have a material
effect upon its results of operation or financial condition.
(c) Other Commitments
The Company is contingently liable on certain franchisee lease
commitments totaling approximately $366,000. The Company from time to
time negotiates purchase contracts for certain items used in its
restaurants in the normal course of business. Although some of these
contracts contain minimum purchase quantities, such quantities do not
exceed expected usage over the term of such agreements.
13. INCOME TAXES
The asset and liability method contemplated by Statement of Financial
Accounting Standards No. 109 requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of substantially
all temporary differences between the tax bases and financial reporting
bases of assets and liabilities (excluding goodwill).
43
<PAGE>
The major components of the Company's computation of deferred tax assets
and liabilities at December 31, 1995 and December 29, 1996 are as follows:
<TABLE>
<CAPTION>
December 31, December 29,
1995 1996
-------------- ------------
<S> <C> <C>
Excess of tax depreciation over book depreciation $ 11,390 $ 8,430
Acquired intangibles with no tax basis 2,199 2,070
Other 8 30
============== ============
Gross deferred tax liabilities $ 13,597 $ 10,530
============== ============
Net operating loss carryforwards $ 13,070 $ 12,824
Amounts accrued for financial reporting purposes not yet 17,122 12,885
deductible for tax purposes
Alternative minimum tax and targeted jobs tax credit carryforwards 937 937
Other 1,267 1,514
------------ ------------
Gross deferred tax assets 32,396 28,160
Less valuation allowance 18,799 17,630
============== ============
Net deferred tax asset $ 13,597 $ 10,530
============== ============
</TABLE>
The primary changes from December 31, 1995 in the components of the above
assets and liabilities relate to the Company's changes and business
strategies, restructuring, other restaurant closings (See Note 3) and
impact of SFAS 121 (See Note 16) offset by current year tax depreciation in
excess of book depreciation. The alternative minimum tax credit
carryforward has no expiration. The net operating loss carryforwards will
expire approximately $641,000 in 2008, approximately $20.2 million in 2009
and approximately $17.5 million in 2010 and approximately $1.6 million in
2011. The targeted jobs tax carryforward expires approximately $118,000 in
2006, approximately $184,000 in 2007 and approximately $200,000 in 2008. A
valuation allowance of approximately $17.6 million has been established due
to the uncertainty of realizing the benefit associated with the net
operating loss carryforwards generated in the current and previous years.
Income tax expense consists of the following:
Fiscal Years Ended
----------------------------------------
January 1, December December
1995 31, 1995 29, 1996
------------ ------------ ------------
Current $ (3,458) $ 539 $ (675)
Deferred (1,524) - -
============ ============ ============
Total tax (benefit) expense $ (4,982) $ 539 $ (675)
============ ============ ============
Income tax expense for year ended December 29, 1996 consists of a benefit
of $1,350,000 related to the extraordinary gain recognized from the
purchase of bonds, $575,000 in state income tax expense and $100,000 in
expense related to a reduction in a receivable from the IRS resulting from
a NOL carryback to the years 1987, 1988 and 1989.
A reconciliation of the provisions for income taxes with the federal
statutory rate is as follows:
Fiscal Years Ended
----------------------------------------
January 1, December 31, December
1995 1995 29, 1996
----------- -------------- ------------
Provision (benefit) computed at $ (8,247) $ (15,770) $ (1,349)
statutory rate
State and local income taxes, net of
federal income tax benefit 162 736 380
Valuation allowance 3,446 15,352 182
Other (343) 221 112
=========== ============== ============
$ (4,982) $ 539 $ (675)
=========== ============== ============
44
<PAGE>
14. STOCK-BASED COMPENSATION PLANS
The Company currently has three stock option plans in effect, the 1990
Stock Option Plan (the "Employees' Plan"), the 1990 Stock Option Plan for
Non-Employee Directors (the "1990 Directors' Plan"), and the 1995 Stock
Option Plan for Non-Employee Directors (the "1995 Directors' Plan").
Additionally, the Company has an employee stock purchase plan (the "1993
Purchase Plan"). Although there are existing options outstanding under the
1990 Directors' Plan, no additional grants will be made pursuant to this
plan. The Company accounts for these plans under APB Opinion No. 25, under
which approximately $66,000 of compensation cost has been recognized in
fiscal 1996 related to 157,000 options granted to directors under the 1995
Directors Plan. Such compensation represents the difference between the
market values on the dates of grant and the measurement date, July 10,
1996, the date when the grants were ultimately approved by the shareholders
at the annual meeting. No compensation cost was recognized in any other
period presented.
During 1996, a total of 350,000 additional options were granted to five of
the current directors. These options were not granted pursuant to an option
plan. The options were granted at a price equal to the stock's market price
on the date of grant. The options were immediately exercisable and expire
after five years.
Had compensation cost for all option grants to employees and directors been
determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
1995 1996
---- ----
Net Income (Loss): As Reported $ (46,919) $ 1,988
Pro Forma (47,154) (699)
Earnings (Loss) Per
Common Share: As Reported $ (3.00) $ .12
Pro Forma (3.02) (.04)
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 2, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years. Additionally, the pro forma amounts include approximately
$16,000 and $12,000 in 1995 and 1996, respectively, related to the purchase
discount offered under the 1993 Purchase Plan.
The Company may sell up to 500,000 shares of stock to its employees under
the 1993 Purchase Plan. The Company has sold approximately 36,000 shares,
51,000 shares, and 25,000 shares in 1994, 1995, and 1996, respectively, and
has sold approximately 126,000 shares through December 29, 1996 since the
inception of this plan in 1993. The Company sells shares at 85% of the
stock's market price at date of purchase. The weighted average fair value
of shares sold in 1995 and 1996 was approximately $2.06 and $3.03,
respectively.
Options to purchase an aggregate of 5.5 million shares of the Company's
Common Stock may be granted under the stock option plans, at a price not
less than the market value on the date of grant. The Company has granted
options on approximately 2.4 million shares under the stock option plans.
Outstanding options expire ten years after grant under the Employees' Plan,
except with regard to shares granted to the Company's President and Chief
Executive Officer pursuant to his employment agreement which expires in
five years. Options outstanding under the two directors' plans expire five
years after grant. Options are exercisable over various periods ranging
from immediate to three years after grant depending upon their grant dates
and the plan under which the options were granted.
On August 26, 1994, the Board of Directors authorized an option exchange
program, subject to shareholder approval, pursuant to which options to
purchase 1,042,000 common shares at prices ranging from $8.00 to $21.50 per
share were terminated. These options were reissued, subject to shareholder
approval, at $4.125 per share, which was the closing price of the Company's
Common Stock on August 26, 1994. The option exchange program was approved
by the shareholders at the annual meeting held on May 13, 1995.
45
<PAGE>
A summary of the status of all options granted to employees and directors,
as well as those options granted to non-employees (see Note 4), at January
1, 1995, December 31, 1995, and December 29, 1996, and changes during the
years then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
December 31, 1995 December 29, 1996
---------------------- ----------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
--------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,225 $ 4.74 2,219 $ 4.24
Granted at price equal to market 676 2.88 2,154 2.63
Granted at price greater than market --- --- 350 1.75
Exercised --- --- (9) 3.05
Forfeited (412) 3.93 (201) 3.34
Expired (270) 5.38 (667) 5.62
========= ========
Outstanding at end of year 2,219 4.24 3,846 2.92
========= ========
Exercisable at end of year 1,048 5.09 2,359 3.21
Weighted average of fair value of
options granted $1.76 $1.31
</TABLE>
The Company had approximately 1,910,000 options outstanding as of January
2, 1994 at prices ranging form $2.67 to $21.50. During fiscal 1994,
approximately 1,925,000 options were granted at prices ranging from $2.875
to $11.25; approximately 34,000 options were exercised at prices ranging
form $2.66 to $6.92; and approximately 1,576,000 options were terminated
with prices ranging from $4.125 to $21.50. These transactions resulted in
approximately 2,225,000 options outstanding as of January 1, 1995, with
prices ranging form $2.67 to $9.333. At January 1, 1995, approximately
756,000 options were exercisable at prices ranging from $2.67 to $6.50.
The following table summarizes information about stock options outstanding
at December 29, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------ --------------------------------
Wtd. Avg.
Range of Outstanding Remaining Wtd. Avg. Exercisable Wtd. Avg.
Exercise Prices as of Contractual Exercise as of Exercise
Dec. 29, 1996 Life Price Dec. 29, 1996 Price
---------------- ---------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$1.25 to 2.50 982 6.9 years $1.88 80 $2.36
2.50 to 3.75 2,047 5.1 2.93 1,679 2.92
3.75 to 5.00 817 5.1 4.16 599 4.16
================ ===============
$1.25 to 5.00 3,846 5.6 2.92 2,358 3.21
================ ===============
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1995 and 1996, respectively: expected
volatility of 45.0 percent and 45.7 percent; risk-free interest rates of
6.75 percent and 6.82 percent for options granted to employees and 6.54
percent and 6.59 percent for options granted to directors; and expected
lives for fiscal 1995 and 1996 of eight years for options granted to
employees and five years for options granted to directors. An expected
dividend yield of 0 percent per share was used for all periods based on the
Company's history of no dividend payments.
46
<PAGE>
15. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995
Revenues $ 42,470 $ 49,843 $ 49,851 $ 46,695 $ 188,859
Income (loss) from operations (993) 1,205 (14,803) (21,879) (36,470)
Net loss (3,509) (1,244) (17,316) (24,850) (46,919)
Loss per common share (.22) (.08) (1.11) (1.59) (3.00)
Year Ended December 29, 1996
Revenues $ 41,912 $ 47,357 $ 38,781 $ 34,702 $ 162,752
Income (loss) from operations (3,369) 2,413 2,632 2,414 4,090
Net income 838 111 414 625 1,988
Earnings (loss) per common
share:
Earnings (loss) before (.24) .01 .01 .01 (.19)
extraordinary item
Extraordinary item .29 - .02 .02 .31
=========== =========== =========== =========== ===========
Earnings (loss) per common share .05 .01 .03 .03 .12
=========== =========== =========== =========== ===========
</TABLE>
16. IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed of " (SFAS 121), at the beginning of the fourth quarter,
1995. This Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS 121 requires that
impairment for long-lived assets and identifiable intangibles to be held
and used, if any, be based on the fair value of the asset. Long-lived
assets and certain identifiable intangibles to be disposed of are to be
reported at the lower of carrying amount or fair value less cost to sell.
For purposes of applying this statement, the Company determines fair value
utilizing the present value of expected future cash flows using a discount
rate commensurate with the risks involved.
Long-lived assets considered for impairment under SFAS 121 are required to
be grouped at the "lowest level for which there are identifiable cash flows
that are largely independent of the cash flows of other groups." The
Company believes the most correct application of this standard is obtained
by examining individual restaurants where circumstances indicate that an
impairment issue may exist. This belief is primarily based on the fact that
it is at individual restaurant level that most investment and closure
decisions are made on an ongoing basis. In addition, if an asset being
tested for recoverability was acquired in a business combination accounted
for using the purchase method, the goodwill that arose in that transaction
is included as part of the asset being evaluated and in determining the
amount of any impairment.
Prior to the issuance of SFAS 121, the Company recorded impairment of
long-lived assets deemed to be permanently impaired. Generally, such
assessment of permanent impairment arose concurrent with a management
decision to dispose of such an asset at which time the asset was written
down to estimated net realizable value. In general, other long-lived assets
were reviewed for impairment only if there were dramatic changes in
operating results or cash flows of a segregable group of outlets,
indicating a likelihood that a permanent impairment has occurred.
The Company's past practices of estimating net realizable value for assets
to be disposed of are consistent with the Statement's requirements to write
down such assets to fair market value less costs to sell and no adjustment
regarding such assets was necessary upon adoption of the Statement. The
expected disposal dates for these assets are over the next 3 to 24 months
and consist mainly of surplus land, buildings and equipment. The carrying
amounts of such assets to be disposed of are shown separately on the
accompanying balance sheets. The majority of assets held for sale resulted
from constriction of the Company's development plan and other associated
store closings further discussed in Note 3.
47
<PAGE>
The Company's fourth quarter, 1995 review relating to assets to be held and
used indicated that 37 of its 238 operating restaurants met the Company's
criteria for impairment review. All of the indicated restaurants were
deemed to be impaired based on current estimates of their underlying cash
flows and a provision for impairment was recorded in the fourth quarter,
1995 of approximately $13.7 million related to writedowns of the assets
associated with these restaurants. Approximately $824,000 of associated
intangible assets was included in this writedown. The writedown is included
in the caption " Restaurant Closures and Other." The writedown of these
assets resulted in reduced depreciation and amortization expense in the
fourth quarter, 1995 of approximately $351,000.
The magnitude of the writedown noted above resulted primarily from two
factors: (1) the review of assets to be held and used at individual
restaurant level, a lower level than used in the past and (2) the recent
historical and continuing poor operating performance of the restaurants
themselves (including the restaurant's 1995 full year performance).
During the first quarter of 1996, two additional restaurants, due to their
continued poor operating performance, were determined to be impaired,
resulting in charges of approximately $754,000 included in the caption,
"Restaurant Closures and Other". No additional restaurants were determined
to be impaired in 1996. As required by the SFAS 121, the Company will
continue to periodically review its assets for impairment where
circumstances indicate that such impairment may exist.
17. SHAREHOLDER RIGHTS OFFERING
A Shareholder Rights Offering (the "Offering") was completed on September
20, 1996. The Company distributed to holders of record of its Common Stock,
as of the close of business on July 31, 1996 (the "Record Date"),
transferable subscription rights ("Right(s)") to purchase Units consisting
of one share of Common Stock and one Warrant to purchase an additional
share of Common Stock. Stockholders received one Right for each share of
Common Stock held on the Record Date. For each 3.25 Rights held, a holder
had the right to purchase one Unit for $2.25 each. The Offering consisted
of 4,825,805 Units. Each Warrant may be exercised to acquire an additional
share of Common Stock at an exercise price of $2.25 per share and expires
on September 26, 2000. The Company may redeem the Warrants, at $.01 per
Warrant, upon 30 days' prior written notice in the event the closing price
of the Common Stock equals or exceeds $6.00 per share for 20 out of 30
consecutive trading days ending not more than 30 days preceding the date of
the notice of redemption. The Offering was fully subscribed and raised over
approximately $10.8 million in gross proceeds offset by legal and other
issuance costs of approximately $437,000. The proceeds from the Offering
have been used to pay off debt of approximately $4.5 million and the
remainder will be used for new store construction, refurbishment of some
existing restaurants and for other general corporate purposes, including
possible further debt reduction. The net proceeds from the Offering were
attributable primarily to the sale of the Company's common stock. The
amount attributable to the warrants is included in "Additional paid-in
capital."
In addition to the approximately $10.8 million provided by the Rights
Offering, the Warrants issued, if exercised, could provide an additional
$10.8 million in proceeds.. The Company had 15,683,869 shares of Common
Stock outstanding on the Record Date. Immediately after the Offering,
20,509,674 shares of Common Stock and 4,825,805 Warrants were outstanding.
As of December 29, 1996, 4,818,597 of these Warrants were outstanding. The
Warrants are publicly traded and at December 29, 1996 had a market value of
approximately $11.7 million based on the quoted market price for such
warrants.
18. SUBSEQUENT EVENTS
On March 25, 1997, the Company agreed in principle to a merger transaction
pursuant to which the COmpany would become a wholly-owned subsidiary of
Checkers Drive-In Restaurants, Inc., a Delaware corporation ("Checkers").
Checkers, together with its franchisees, operates approximately 478 double
drive-thru hamburger restaurants primarily located in the Southeastern
United States. Under the terms of the letter of intent executed by the
Company and Checkers, each share of the Company's Common Stock will be
converted into three shares of Checker's common stock upon consummation of
the merger. The transaction is subject to negotiation of definitive
agreements, recipt of fairness opinions by each party, receipt of
stockholder and other required approvals and other customary conditions.
48
<PAGE>
Report of Independent Public Accountants
To Rally's Hamburgers, Inc.:
We have audited the accompanying consolidated balance sheets of Rally's
Hamburgers, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and December 29, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three fiscal
years in the period ended December 29, 1996. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rally's Hamburgers, Inc. and
subsidiaries as of December 31, 1995 and December 29, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 29, 1996, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Louisville, Kentucky
February 12, 1997
(except with respect to the matter discussed in Note 18, as to which
the date is March 25, 1997)
49
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the
Registrant; Executive Compensation; Security Ownership of Certain Beneficial
Owners and Management; and Certain Relationships and Related Transactions.
The information required by these items is omitted because the Company is
filing a definitive proxy statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this Report which includes
the required information. The required information contained in the Company's
proxy statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
Page Number in
This Form 10-K
------------------
<S> <C> <C>
(a)(1) Index to Consolidated Financial Statements:
Report of Independent Public Accountants 49
Consolidated Balance Sheets as of December 31, 1995 and
December 29, 1996 27
Consolidated Statements of Operations for each of the three
years in the period ended December 29, 1996 28
Consolidated Statements of Shareholders' Equity for each of the
three years in the period December 29, 1996 29
Consolidated Statements of Cash Flow for each of the three
years in the period ended December 29, 1996 30
Notes to Consolidated Financial Statements 31
(a)(2) Index to Financial Statement Schedules:
Report of Independent Public Accountants 49
Schedules as of and for each of the three years in the period
ended December 29, 1996:
Schedule II - Valuation and Qualifying Accounts 55
All other schedules have been omitted because the required information is not
applicable, not required or is included elsewhere in the financial statements
and notes thereto.
</TABLE>
50
<PAGE>
(a)(3) Exhibits:
3.1 Restated Certificate of Incorporation. (Filed as Exhibit 3.1 to
Rally's Quarterly Report on Form 10-Q for the quarter ended
September 29, 1996, and incorporated herein by reference.)
3.2 Restated By-Laws. (Filed as Exhibit 3.3 to Form 8 Amendment No. 1
to Rally's Annual Report on Form 10-K dated September 28, 1990,
and incorporated herein by reference.)
4.1 Indenture dated as of March 1, 1993, between the Company, certain
of its subsidiaries and PNC Bank Kentucky, Inc., as Trustee,
relating to the issuance of $85,000,000 principal amount of the
Company's 9 7/8% Senior Notes due 2000. (Filed as Exhibit 4.1 to
Rally's Annual Report on Form 10-K for the year ended January 3,
1993, and incorporated herein by reference.)
4.2 Specimen form of 9 7/8% Senior Note due 2000. (Filed as Exhibit
4.2 to Rally's Annual Report on Form 10-K for the year ended
January 3, 1993, and incorporated herein by reference.)
4.3 Form of Common Stock Certificate. (Filed as Exhibit 4 to Rally's
Registration Statement on Form S-1, dated October 11, 1989, and
incorporated herein by reference.)
4.4 Form of Warrant Agreement between Rally's Hamburgers, Inc. and
American Stock Transfer & Trust Company, as Warrant Agent,
including form of Warrant Certificate.
4.5 Form of Warrant Agreement between Rally's Hamburgers, Inc. and
CKE Restaurants, Inc., including form of Warrant Certificate.
4.6 First Amendment to the Indenture.
4.7 Other Debt Instruments - Copies of debt instruments for which the
related debt is less than 10% of the Company's total assets will
be furnished to the Commission upon request.
10.1 Form of Indemnity Agreement between the Company and its directors
and officers. (Filed as Exhibit 10.2 to Rally's Registration
Statement on Form S-1, dated October 11, 1989, and incorporated
herein by reference.)
*10.2 Amended and Restated Non-qualified Stock Option Plan. (Filed as
Exhibit 10.3 to Amendment No. 1 to Rally's Registration Statement
on Form S-1, dated October 11, 1989, and incorporated herein by
reference.)
*10.3 First Amendment to the Amended and Restated Non-qualified Stock
Option Plan, dated as of October 26, 1989. (Filed as Exhibit 10.4
to Rally's Registration Statement on Form S-1, dated December 29,
1989, and incorporated herein by reference.)
10.4 Lease between Blue Ridge Associates and the Company dated
November 17, 1987. (Filed as Exhibit 10.6 to Rally's Registration
Statement on Form S-1, dated October 11, 1989, and incorporated
herein by reference.)
*10.5 Rally's, Inc. 1990 Stock Option Plan, as amended.
51
<PAGE>
*10.6 Rally's Hamburgers, Inc. 1995 Stock Option Plan for Non-Employee
Directors. (Filed as Exhibit A to Rally's definitive Proxy
Statement, dated June 19, 1996 for the Annual Meeting of
Stockholders held on July 10, 1996, and incorporated herein by
reference.)
10.7 Agreement and Plan of Reorganization dated December 12, 1990 by
and among the Company, Snapps Drive Thru, Inc. and Jeffrey S.
Roschman. (Filed as Exhibit 10.24 to Rally's Registration
Statement on Form S-1, dated March 15, 1990, and incorporated
herein by reference.)
10.8 Agreement dated December 12, 1990 by and among the Company,
Rally's of Ohio, Inc., Snapps Restaurants, Inc., Snapps
Restaurants of Springfield, Inc., Jeffrey S. Roschman and Robert
J. Roschman. (Filed as Exhibit 10.25 to Rally's Registration
Statement on From S-1, dated March 15, 1990, and incorporated
herein by reference.)
10.9 Agreement for Purchase and Sale of Assets dated June 12, 1992
among the Company, ZDT Corporation, Zipps Drive Thru, Inc.,
Robert W. Gontram, Metro East Zipps, Inc. and Illinois Zipps
Properties, Inc. (Filed as Exhibit 2.1 to Rally's Registration
Statement on Form S-1, dated May 8, 1992, and incorporated herein
by reference.)
*10.10 Employment Agreement between the Company and Evan G. Hughes dated
March 28, 1995. (Filed as Exhibit 10.13 to Rally's Quarterly
Report on Form 10-Q for the quarter ended April 2, 1995, and
incorporated herein by reference.)
*10.11 Employment Agreement between the Company and Donald E. Doyle
dated March 1, 1996. (Filed as Exhibit 10.12 to Rally's Annual
Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference.)
*10.12 Supplemental Employment Agreement between the Company and
Donald E. Doyle, dated February 11, 1997.
10.13 Note purchase agreement ($16 million face value bonds) between
GIANT (seller) and Rally's (buyer), dated January 29, 1996.
(Filed as Exhibit 10.14 to Rally's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by
reference.)
10.14 Note purchase agreement ($6 million face value bonds) between
GIANT (seller) and Rally's (buyer), dated January 29, 1996.
(Filed as Exhibit 10.15 to Rally's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by
reference.)
10.15 Operating Agreement by and between Rally's Hamburgers, Inc. and
Carl Karcher Enterprises. (Filed as Exhibit 10.43 to CKE
Restaurants, Inc.'s Quarterly Report on FOrm 10-Q for the quarter
ended May 20, 1996, and incorporated herein by reference.)
10.16 Consulting Agreement by and between Rally's Hamburgers, Inc. and
CKE Restaurants, Inc.
21 Subsidiaries of the Company:
(a) Rally's of Ohio, Inc. , an Ohio corporation.
(b) Self-Service Drive-Thru, Inc., a Louisiana corporation.
(c) Rally's Finance, Inc., a Delaware corporation.
(d) Rally's Management, Inc., a Kentucky corporation.
(e) ZDT Corporation, a Missouri corporation.
(f) RAR, Inc., a Delaware corporation.
(g) MAC1, Inc., a Delaware corporation.
(h) Hampton Roads Foods, Inc., a Louisiana corporation.
* Compensatory plan required to be filed as an exhibit pursuant to Item 14c of
Form 10K.
52
<PAGE>
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the last quarter of year
1996.
(c) Exhibits Required by Item 601 of Regulation S-K:
Described in Item 14(a)(3) of this Annual Report on Form 10-K.
(d) Financial Statement Schedules:
Described in Item 14(a)(2) of this Annual Report on Form 10-K.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RALLY'S HAMBURGERS, INC.
Date: INSERT DATE
By: /s/ Burt Sugarman
--------------------------------------
Burt Sugarman
Chairman and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Burt Sugarman Chairman and Director March 27, 1997
- -------------------------------------
Burt Sugarman
/s/ Terry N. Christensen Director March 27, 1997
- -------------------------------------
Terry N. Christensen
/s/ Willie D. Davis Director March 27, 1997
- -------------------------------------
Willie D. Davis
/s/ William P. Foley II Director March 27, 1997
- -------------------------------------
William P. Foley II
/s/ David Gotterer Director March 27, 1997
- -------------------------------------
David Gotterer
/s/ Mark A. Noltemeyer Senior Vice President, March 27, 1997
- ------------------------------------- Finance
Mark A. Noltemeyer (Principal Financial
and Accounting Officer)
/s/ Donald E. Doyle President, Chief March 27, 1997
- ------------------------------------- Executive Officer and Director
Donald E. Doyle
54
<PAGE>
<TABLE>
<CAPTION>
Rally's Hamburgers, Inc. and Subsidiaries
Schedule II
Valuation and Qualifying Accounts
(In thousands)
Additions
--------------------------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Year Expenses Accounts Deductions End of Year
- ------------------------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended January 1, 1995
Accounts receivable $ 90 $ 86 $ - $ - $ 176
Royalties receivable 169 291 - 58 402
============ ============ ============ ============ ============
$ 259 $ 377 $ - $ 58 $ 578
============ ============ ============ ============ ============
Year Ended December 31, 1995
Accounts receivable $ 176 $ 376 $ 18 $ 117 $ 453
Royalties receivable 402 838 (267) 51 922
Notes receivable - 293 249 - 542
============ ============ ============ ============ ============
$ 578 $ 1,507 $ - $ 168 $ 1,917
============ ============ ============ ============ ============
Year Ended December 29, 1996
Accounts receivable 453 54 0 206 301
Royalties receivable 922 697 (81) 133 1,405
Notes receivable 542 200 81 (30) 853
============ ============ ============ ============ ============
$ 1,917 $ 951 $ 0 $ 309 $ 2,559
============ ============ ============ ============ ============
</TABLE>
55
<PAGE>
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statements (Registration Statement Nos. 33-33367, 33-39419,
33-39420 and 33-62792).
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 25, 1997
<PAGE>
Exhibit 4.4
RALLY'S HAMBURGERS, INC.
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of September 26, 1996,
is made and entered into by and between RALLY'S HAMBURGERS, INC., a Delaware
corporation (the "Company"), and American Stock Transfer & Trust Company, as
warrant agent (the "Warrant Agent")
WHEREAS, in connection with a rights offering (the "Rights Offering")
pursuant to which the shareholders of the Company ("Shareholders") may purchase
up to 4,825,805 units (the "Units"), each Unit consisting of one share of the
Company's common stock, $.10 par value (the "Common Stock"), and one redeemable
common stock purchase warrant (the "Warrant"), the Company will issue up to
4,825,805 Warrants evidencing the right to purchase an aggregate of 4,825,805
shares of Common Stock as constituted on the date hereof; and
WHEREAS, the Company desires the Warrant Agent act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer, exchange, exercise and redemption of the
Warrants;
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties agree as follows:
SECTION 1. Appointment of Warrant Agent. The Company hereby appoints the
Warrant Agent to act as agent of the Company for the Warrants, and the Warrant
Agent hereby accepts such appointment and agrees to perform the same in
accordance with the terms and conditions set forth in this Agreement.
SECTION 2. Warrants and Form of Warrant Certificates.
(A) Each Warrant shall entitle the registered holder of the certificate
representing such Warrant to purchase upon the exercise thereof, one share of
Common Stock, subject to the adjustments provided for in Section 9 hereof, at
any time until 5:00 p.m, Eastern time, on September 26, 2000 ("Expiration Date")
unless earlier redeemed pursuant to Section 11 hereof.
(B) The Warrant certificates shall be in registered form only. The text of
the Warrant certificate and the form of election to exercise a Warrant on the
reverse side thereof shall be substantially in the form of Exhibit A attached
hereto. Each Warrant certificate shall be dated as of the date of issuance
thereof by the Warrant Agent (whether upon initial issuance or upon transfer or
exchange) and shall be executed on behalf of the Company by the manual or
facsimile signature of its President or a Vice President, under its corporate
seal, affixed or in facsimile, and attested to by the manual or facsimile
signature of its Secretary or an Assistant Secretary. In case any officer of the
Company who shall have signed any Warrant certificate shall cease to be such
officer of the Company prior to the issuance thereof, such Warrant certificate
may nevertheless be issued and delivered with the same force and effect as
though the person who signed the same had not ceased to be such officer of the
Company. Any such Warrant certificate may be signed on behalf of the Company by
persons who, at the actual date of execution of such Warrant certificate, are
the proper officers of the Company, although at the nominal date of such Warrant
certificate any such person shall not have been such officer of the Company.
SECTION 3. Exercise of Warrants and Warrant Price. Subject to the
provisions of this Agreement, each registered holder of one or more Warrant
certificates shall have the right, which may be exercised as in such Warrant
certificates expressed, to purchase from the Company (and the Company shall
issue and sell to such registered holder) the number of shares of Common Stock
to which the Warrants represented by such certificates are at the time entitled
hereunder.
1
<PAGE>
Each Warrant not exercised by its expiration date shall become void, and
all rights thereunder and all rights in respect thereof under this Agreement
shall cease on such date.
A Warrant may be exercised by the surrender of the certificate representing
such Warrant to the Company, at the office of the Warrant Agent, or at the
office of a successor to the Warrant Agent, with the subscription form set forth
on the reverse thereof duly executed and properly endorsed with the signatures
properly guaranteed, and upon payment in full to the Warrant Agent for the
account of the Company of the Warrant Price (as hereinafter defined) for the
number of shares of Common Stock as to which the Warrant is exercised. Such
Warrant Price shall be paid in full in cash, or by certified check or bank draft
payable in United States currency to the order of the Warrant Agent.
The price per share of Common Stock at which the Warrants may be exercised
(the "Warrant Price") shall be $2.25 (adjusted in accordance with Section 9
hereof, taking into account prior adjustments). At any time, or from time to
time the Company may reduce either or both of the Warrant Prices or extend the
expiration date for such period or periods of time as it may determine. Notice
of any such reduction in the Warrant Prices or extension of the expiration date
shall be promptly provided to the Warrant Agent.
Subject to the further provisions of this Section 3 and of Section 6
hereof, upon such surrender of Warrant certificates and payment of the
applicable Warrant Price as aforesaid, the Company shall issue and cause to be
delivered, with all reasonable dispatch to or upon the written order of the
registered holder of such Warrants and in such name or names as such registered
holder may designate, a certificate or certificates for the number of securities
so purchased upon the exercise of such Warrants, together with cash, as provided
in Section 10 of this Agreement, in respect of any fraction of a share or
security otherwise issuable upon such surrender. All shares of Common Stock
issued upon the exercise of a Warrant shall be validly issued, fully paid and
nonassessable and shall be listed on any and all national securities exchanges
upon which any other shares of the Common Stock or securities otherwise issuable
are then listed.
Certificates representing such securities shall be deemed to have been
issued and any person so designated to be named therein shall be deemed to have
become a holder of record of such securities as of the date of the surrender of
such Warrants and payment of the Warrant Price as aforesaid; provided, however,
that if, at the date of surrender of such Warrants and payment of the applicable
Warrant Price, the transfer books for the Common Stock or other securities
purchasable upon the exercise of such Warrants shall be closed, the certificates
for the securities in respect of which such Warrants are then exercised shall be
issuable as of the date on which such books shall next be opened and until such
date the Company shall be under no duty to deliver any certificate for such
securities. The rights of purchase represented by each Warrant certificate shall
be exercisable, at the election of the registered holders thereof, either as an
entirety or from time to time for part of the number of securities specified
therein and, in the event that any Warrant certificate is exercised in respect
of less than all of the securities specified therein at any time prior to the
expiration date of the Warrant certificate, a new Warrant certificate or
certificates will be issued to such registered holder for the remaining number
of securities specified in the Warrant certificate so surrendered.
SECTION 4. Countersignature and Registration. The Warrant Agent shall
maintain books (the "Warrant Register") for the registration and the
registration of transfer of the Warrants. The Warrant certificates shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as such under this Agreement) and shall not be
valid for any purpose unless so countersigned. Warrant certificates may be so
countersigned, however, by the Warrant Agent and delivered by the Warrant Agent
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
Prior to due presentment for registration of transfer of any Warrant
certificate, the Company and the Warrant Agent may deem and treat the person in
whose name such Warrant certificate shall be registered upon the Warrant
Register (the "registered holder") as the absolute owner of such Warrant
certificate and of each Warrant
2
<PAGE>
represented thereby (notwithstanding any notation of ownership or other writing
on the Warrant certificate made by anyone other than the Company or the Warrant
Agent), for the purpose of any exercise thereof, of any distribution or notice
to the holder thereof, and for all other purposes, and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary.
SECTION 5. Transfer and Exchange of Warrants. The Warrant Agent shall
register the transfer, from time to time, any outstanding Warrant upon the
Warrant Register, upon surrender of the certificate evidencing such Warrant for
transfer, properly endorsed with signatures properly guaranteed and accompanied
by appropriate instructions for transfer. Upon any such transfer, a new Warrant
certificate representing an equal aggregate number of Warrants shall be issued
to the transferee and the surrendered Warrant certificate shall be canceled by
the Warrant Agent. The Warrant certificates so canceled shall be delivered by
the Warrant Agent to the Company from time to time upon request.
Warrant certificates may be surrendered to the Warrant Agent, together with
a written request for exchange, and thereupon the Warrant Agent shall issue in
exchange therefor one or more new Warrant certificates as requested by the
registered holder of the Warrant certificate or certificates so surrendered,
representing an equal aggregate number of Warrants.
The Warrant Agent shall not be required to effect any registration of
transfer or exchange which will result in the issuance of a Warrant certificate
for a fraction of a warrant.
No service charge shall be made for any exchange or registration of
transfer of Warrant certificates.
The Warrant Agent is hereby authorized to countersign and to deliver, in
accordance with the terms of this Agreement, the new Warrant certificates
required to be issued pursuant to the provisions hereof, and the Company,
whenever required by the Warrant Agent, will supply the Warrant Agent with
Warrant certificates duly executed on behalf of the Company for such purpose.
SECTION 6. Payment of Taxes. The Company will pay any documentary stamp
taxes attributable to the initial issuance of the shares of Common Stock
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificates for shares
of Common Stock in a name other than that of the registered holder of Warrants
in respect of which such shares are issued, and in such case neither the Company
nor the Warrant Agent shall be required to issue or deliver any certificate for
shares of Common Stock or any Warrant certificate until the person requesting
the same has paid to the Company the amount of such tax or has established to
the Company's satisfaction that such tax has been paid.
SECTION 7. Mutilated or Missing Warrants. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may in
its discretion issue, and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant
certificate, or in lieu of and substitution for the Warrant certificate lost,
stolen or destroyed, a new Warrant certificate representing an equal aggregate
number of Warrants, but only upon receipt of evidence satisfactory to the
Company and the Warrant Agent of such loss, theft or destruction of such Warrant
certificate and reasonable indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant certificates shall also comply with such
other reasonable conditions and pay such reasonable charges as the Company or
the Warrant Agent may prescribe.
SECTION 8. Reservation of Common Stock. There have been reserved, and the
Company shall at all times keep reserved, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Warrants then outstanding,
and the transfer agent for the Common Stock and every subsequent transfer agent
for any shares of the Company's capital stock issuable upon the exercise of any
of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all times to reserve such number of authorized and unissued shares
as shall be requisite for such purpose.
3
<PAGE>
Prior to the issuance of any shares of Common Stock upon exercise of the
Warrants, the Company shall secure the listing of such shares on any and all
national securities exchanges upon which any of the other shares of the Common
Stock are then listed. So long as any unexpired Warrants remain outstanding, the
Company will file such post-effective amendments to the Registration Statement
or supplements to the Prospectus filed pursuant to the Securities Act of 1933,
as amended (the "Act"), with respect to the Warrants (or such other registration
statements or post-effective amendments or supplements) as may be necessary to
permit trading in the Warrants and to permit the Company to deliver to each
person exercising a Warrant a Prospectus meeting the requirements of Section
10(a)(3) of the Act, and otherwise complying therewith; and the Company will,
from time to time, furnish the Warrant Agent with such Prospectuses in
sufficient quantity to permit the Warrant Agent to deliver such a Prospectus to
each holder of a Warrant upon the exercise thereof. The Company will keep a copy
of this Agreement on file with the transfer agent for the Common Stock and with
every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants.
The Warrant Agent is hereby irrevocably authorized to requisition from time
to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed certificates for such purpose and will itself provide or otherwise make
available any cash as provided in Section 10 of this Agreement. All Warrant
certificates surrendered in the exercise of the rights thereby evidenced shall
be canceled by the Warrant Agent and shall thereafter be delivered to the
Company, and such canceled Warrant certificates shall constitute sufficient
evidence of the number of shares of Common Stock which have been issued upon the
exercise of such Warrants. Promptly after the expiration date of the Warrants,
the Warrant Agent shall certify to the Company the aggregate number of such
Warrants which expired unexercised, and after the expiration date of the
Warrants, no shares of Common Stock shall be subject to reservation in respect
of such Warrants.
SECTION 9. Adjustment of Warrant Price and Number of Shares of Common
Stock. The number and kind of securities purchasable upon the exercise of the
Warrants and the applicable Warrant Price shall be subject to adjustment from
time to time upon the happening of certain events, as follows:
9.1 Adjustments. The number of shares of Common Stock purchasable upon
the exercise of each Warrant and the applicable Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in Common Stock
or make a distribution in Common Stock, (ii) subdivide its outstanding
Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue, by
reclassification of its Common Stock, other securities of the Company,
the number of shares of Common Stock purchasable upon exercise of a
Warrant immediately prior thereto shall be adjusted so that the holder
of a Warrant shall be entitled to receive the kind and number of
shares of Common Stock or other securities of the Company which such
holder would have owned or would have been entitled to receive
immediately after the happening of any of the events described above,
had the Warrant been exercised immediately prior to the happening of
such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 9.1(a) shall become effective
immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) In case the Company shall issue rights, options, warrants or
convertible securities to all or substantially all holders of its
Common Stock, without any charge to such holders, entitling them to
subscribe for or purchase Common Stock at a price per share which is
lower at the record date mentioned below than the then Current Market
Price (as defined in Section 10 hereof), the number of shares of
Common Stock thereafter purchasable upon the exercise of each Warrant
shall be determined by multiplying the number of shares of Common
Stock theretofore purchasable upon exercise of a Warrant by a fraction
of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, options,
warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase, and of
which the denominator
4
<PAGE>
shall be the number of shares of Common Stock outstanding immediately
prior to the issuance of such rights, options, warrants or convertible
securities plus the number of shares which the aggregate offering
price of the total number of shares offered would purchase at such
Current Market Price. Such adjustment shall be made whenever such
rights options, warrants or convertible securities are issued and
shall become effective immediately and retroactive to the record date
for the determination of shareholders entitled to receive such rights,
options, warrants or convertible securities.
(c) In case the Company shall distribute to all or substantially
all holders of its Common Stock, evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or
rights, options, warrants or convertible securities containing the
right to subscribe for or purchase Common Stock (excluding those
referred to in subsection 9.1 (b) above), then in each case the number
of shares of Common Stock thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of shares
of Common Stock theretofore purchasable upon exercise of such Warrant
by a fraction, of which the numerator shall be the then Current Market
Price on the date of such distribution, and of which the denominator
shall be such Current Market Price on such date minus the then fair
value (as determined by the Board of Directors, which determination,
if reasonable and based upon the Board of Directors' good faith
business judgment, shall be binding upon the registered holders) of
the portion of the assets or evidences of indebtedness so distributed
or of such subscription rights, options, warrants or convertible
securities applicable to one share. Such adjustment shall be made
whenever any such distribution is made and shall become effective on
the date of distribution retroactive to the record date for the
determination of shareholders entitled to receive such distribution.
(d) No adjustment in the number of shares of Common Stock
purchasable pursuant to the Warrants shall be required unless such
adjustment would require an increase or decrease of at least one
percent in the number of shares of Common Stock then purchasable upon
the exercise of the Warrants; provided, however that any adjustments
which by reason of this subsection 9.1(d) are not required to be made
immediately shall be carried forward and taken into account in any
subsequent adjustment.
(e) Whenever the number of shares of Common Stock purchasable
upon the exercise of a Warrant is adjusted as herein provided, the
applicable Warrant Price payable upon exercise of the Warrant shall be
adjusted by multiplying such Warrant Price immediately prior to such
adjustment by the fraction, of which the numerator shall be the number
of shares of Common Stock purchasable upon the exercise of such
Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of shares of Common Stock so
purchasable immediately thereafter.
(f) To the extent not covered by subsections 9.1 (b) or (c)
hereof, in case the Company shall sell or issue Common Stock or
rights, options, warrants or convertible securities containing the
right to subscribe for or purchase shares of Common Stock at a price
per share (determined, in the case of such rights, options, warrants
or convertible securities, by dividing (i) the total amount received
or receivable by the Company in consideration of the sale or issuance
of such rights, options, warrants or convertible securities, plus the
total consideration payable to the Company upon exercise or conversion
thereof, by (ii) the total number of shares covered by such rights,
options, warrants or convertible securities) lower than the then
Current Market Price in effect immediately prior to such sale or
issuance, then the number of Shares thereafter purchasable upon the
exercise of the Warrants shall be determined by multiplying the number
of Shares theretofore purchasable upon exercise of the Warrants by a
fraction, of which the numerator shall be the applicable Warrant Price
and the denominator shall be that price calculated to the nearest
cent) determined by dividing (I) an amount equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to such
sale or issuance multiplied by the applicable Warrant Price, plus (B)
the consideration received by the Company upon such sale or issuance,
by (II) the total number of shares of Common Stock outstanding
immediately after such sale or issuance. For the purpose of such
adjustments, the Common Stock which the holders of any such rights,
options,
5
<PAGE>
warrants or convertible securities shall be entitled to subscribe for
or purchase shall be deemed issued and outstanding as of the date of
such sale or issuance and the consideration received by the Company
therefor shall be deemed to be the consideration received by the
Company for such rights, options, warrants or convertible securities,
plus the consideration or premiums stated in such rights, options,
warrants or convertible securities to be paid for the Common Stock
covered thereby In case the Company shall sell or issue Common Stock
or rights, options, warrants or convertible securities containing the
right to subscribe for or purchase Common Stock for a consideration
consisting, in whole or in part, of property other than cash or its
equivalent, then in determining the "price per share" of Common Stock
and the "consideration received by the Company" for purpose of the
first sentence of this subsection 9.1(f), the Board of Directors shall
determine the fair value of said property, and such determination, if
reasonable and based upon the Board of Directors' good faith business
judgment, shall be binding upon the Warrantholder. In determining the
"price per share" of Common Stock, any underwriting discounts or
commissions shall not be deducted from the price received by the
Company for sales of securities registered under the Act.
(g) Whenever the number of shares of Common Stock purchasable
upon the exercise of a Warrant or the Warrant Price is adjusted as
herein provided, the Company shall cause to be promptly mailed to the
Warrant Agent and each registered holder of a Warrant by first class
mail, postage prepaid, notice of such adjustment or adjustments and,
with regard to the Warrant Agent only, a certificate of the chief
financial officer of the Company setting forth the number of shares of
Common Stock purchasable upon the exercise of a Warrant and the
applicable Warrant Price after such adjustment, a brief statement of
the facts requiring such adjustment and the computation by which such
adjustment was made.
(h) For the purpose of this Section 9, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of
the Company at the date of this Agreement, or (ii) any other class of
stock resulting from successive changes or reclassification of such
Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event
that at any time, as a result of an adjustment made pursuant to this
Section 9, a registered holder shall become entitled to purchase any
securities of the Company other than Common Stock, (i) if the
registered holder's right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company
shall obtain an opinion of an investment banking firm valuing such
other securities and (ii) thereafter the number of such other
securities so purchasable upon exercise of a Warrant and the
applicable Warrant Price of such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common
Stock contained in this Section 9.
(i) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the
number of shares of Common Stock purchasable upon exercise of a
Warrant and the applicable Warrant Price, to the extent a Warrant has
not then been exercised shall, upon such expiration, be readjusted and
shall thereafter be such as they would have been had they been
originally adjusted (or had the original adjustment not been required,
as the case may be) on the basis of (A) the fact that the only shares
of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options,
warrants or conversion privileges, and (B) the fact that such shares
of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such privileges, options, warrants or
conversion privileges whether or not exercised; provided, however,
that no such readjustment shall have the effect of increasing the
applicable Warrant Price by an amount in excess of the amount of the
adjustment initially made in respect of the issuance, sale or grant of
such rights, options, warrants or conversion privileges.
9.2 No Adjustment for Dividends. Except as provided in Section 9.1
hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the exercise of
a Warrant.
9.3 No Adjustment in Certain Cases. No adjustments shall be made
pursuant to Section 9 hereof in connection with the issuance of the Rights,
the Units (or the shares of Common Stock included therein) or the Warrants
(or the underlying shares of Common Stock). No adjustments shall be made
pursuant to Section 9 hereof in connection with the grant or exercise of
presently authorized or outstanding options to purchase, or the issuance of
shares of Common Stock on the exercise thereof under the Company's 1990
Stock Option Plan and 1995 Stock
6
<PAGE>
Option Plan for Non-Employee Directors or other options described in the
Prospectus, or incorporated by reference, dated July 31, 1996, as
supplemented, pursuant to which the Warrants were offered and sold.
9.4 Preservation of Purchase Rights Upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or
merger of the Company into another corporation or in case of any sale or
conveyance to another corporation of the property, assets or business of
the Company as an entirety or substantially as an entirety, the Company or
such successor or purchasing corporation, as the case may be, shall execute
with the Warrant Agent an agreement that the registered holders of the
Warrants shall have the right thereafter, upon payment of the Warrant Price
in effect immediately prior to such action, to purchase, upon exercise of
each Warrant, the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after
the happening of such consolidation, merger, sale or conveyance had each
Warrant been exercised immediately prior to such action. In the event of a
merger described in Section 368(a)(2)(E) of the Internal Revenue Code of
1986, as amended, in which the Company is the surviving corporation, the
right to purchase shares of Common Stock under the Warrants shall terminate
on the date of such merger and thereupon the Warrants shall become null and
void, but only if the controlling corporation shall agree to substitute for
the Warrants its warrants which entitle the holders thereof to purchase
upon their exercise the kind and amount of shares and other securities and
property which they would have owned or been entitled to receive had the
Warrants been exercised immediately prior to such merger. Any such
agreements referred to in this subsection 9.4 shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to
the adjustments provided for in Section 9 hereof. The provisions of this
subsection 9.4 shall similarly apply to successive consolidations, mergers,
sales or conveyances.
9.5 Par Value of Shares of Common Stock. Before taking any action
which would cause an adjustment reducing the applicable Warrant Price below
the then par value of the Common Stock issuable upon exercise of the
Warrants, the Company will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly
and legally issue fully paid and nonassessable Common Stock at such
adjusted applicable Warrant Price.
9.6 Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing (which may
be any such firm regularly employed by the Company) to make any computation
required under this Section 9.0 and a certificate signed by such firm shall
be conclusive evidence of the correctness of any computation made under
this Section 9.
9.7 Statement on Warrant Certificates. Irrespective of any adjustments
in the applicable Warrant Price or the number of securities issuable upon
exercise of Warrants, Warrant certificates theretofore or thereafter issued
may continue to express the same price and number of securities as are
stated in the similar Warrant certificates initially issuable pursuant to
this Agreement. However, the Company may, at any time in its sole
discretion (which shall be conclusive), make any change in the form of
Warrant certificate that it may deem appropriate and that does not affect
the substance thereof; and any Warrant certificate thereafter issued,
whether upon registration of transfer of, or in exchange or substitution
for, an outstanding Warrant certificate, may be in the form so changed.
9.8 No Rights as Shareholder; Notices to Holders of Warrants. If, at
any time prior to the expiration of a Warrant and prior to its exercise,
any one or more of the following events shall occur: (a) any action which
would require an adjustment pursuant to subsection 9.1 or 9.4 hereof, or
(b) a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation, merger or sale of its property, assets and
business as an entirety or substantially as an entirety) shall be proposed:
then the Company shall give notice in writing of such event to the
registered holders of the Warrants, as provided in Section 18 hereof, at
least 20 days prior (and pursuant to the provisions of subsection 9.1(e)
with respect to adjustments pursuant to subsection 9.1(f) and 9.1(i)) to
the date fixed as a record date or the date of closing the transfer books
for the determination of the shareholders entitled to any relevant
dividend, distribution, subscription
7
<PAGE>
rights or other rights or for the determination of shareholders entitled to
vote on such proposed dissolution, liquidation or winding up. Such notice
shall specify such record date or the date of closing the transfer books,
as the case may be. Failure to mail or receive such notice or any defect
therein shall not affect the validity of any action taken with respect
thereto.
Section 10. Fractional Interests. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of a Warrant. If any
fraction of a share of Common Stock would, except for the provisions of this
Section 10, be issuable on the exercise of a Warrant (or specified portion
thereof), the Company shall in lieu thereof pay an amount in cash equal to the
then Current Market Price multiplied by such fraction. For purposes of this
Agreement, the term "Current Market Price" shall mean (i) if the Common Stock is
traded in the over-the-counter market and not in the NASDAQ National Market
System nor on any national securities exchange, the average of the per share
closing bid prices of the Common Stock on the 30 consecutive trading days
immediately preceding the date in question, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded in the NASDAQ National Market System or on a national securities
exchange, the average for the 30 consecutive trading days immediately preceding
the date in question of the daily per share closing prices of the Common Stock
in the NASDAQ National Market System or on the principal stock exchange on which
it is listed, as the case may be. For purposes of clause (i) above, if trading
in the Common Stock is not reported by NASDAQ, the bid price referred to in said
clause shall be the lowest bid price as reported in the "pink sheets" published
by National Quotation Bureau, Incorporated. The closing price referred to in
clause (ii) above shall be the last reported sale price or, in the case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices, in either case in the NASDAQ National Market System or on the
national securities exchange on which the Common Stock is then listed.
SECTION 11. Redemption.
(A) The then outstanding Warrants may be redeemed, at the option of
the Company, at $.01 per share of Common Stock purchasable upon exercise of
such Warrants, at any time after the Daily Market Price per share of the
Common Stock for a period of 20 out of 30 consecutive trading days ending
not more than 30 days prior to the date of the notice given pursuant to
Section 11(B) hereof has equaled or exceeded $6.00, as adjusted from time
to time as provided in Section 9 hereof, and prior to expiration of the
Warrants. The Daily Market Price of the Common Stock shall be determined by
the Company in the manner set forth in Section 11(E) as of the end of each
trading day (or, if no trading in the Common Stock occurred on such day, as
of the end of the immediately preceding trading day in which trading
occurred) and verified to the Warrant Agent before the Company may give
notice of redemption. All outstanding Warrants must be redeemed if any are
redeemed, and any right to exercise an outstanding Warrant shall terminate
at 5:00 p.m. (New York City Time) on the business day immediately preceding
the date fixed for redemption. A trading day shall mean a day in which
trading of securities occurred on the New York Stock Exchange.
(B) The Company may exercise its right to redeem the Warrants only by
giving the notice set forth in the following sentence by the end of the
thirtieth (30th) trading day after the provisions of Section 11(A) have
been satisfied. In case the Company shall exercise its right to redeem, it
shall give notice to the Warrant Agent and the registered holders of the
outstanding Warrants, by mailing to such registered holders a notice of
redemption, first class, postage prepaid, at their addresses as they shall
appear on the records of the Warrant Agent. Any notice mailed in the manner
provided herein shall be conclusively presumed to have been duly given
whether or not the registered holder actually receives such notice.
(C) The notice of redemption shall specify the redemption price, the
date fixed for redemption (which shall be between the thirtieth (30th) and
forty-fifth (45th) day after such notice is mailed), the place where the
Warrant certificates shall be delivered and the redemption price shall be
paid, and that the right to exercise the Warrant shall terminate at 5:00
p.m. (New York City Time) on the business day immediately preceding the
date fixed for redemption.
8
<PAGE>
(D) Appropriate adjustment shall be made to the redemption price and
to the minimum Daily Market Price prerequisite to redemption set forth in
Section II(A) hereof, in each case on the same basis as provided in Section
9 hereof with respect to adjustment of the Warrant Price.
(E) For purposes of this Agreement, the term "Daily Market Price"
shall mean (i) if the Common Stock is traded in the over-the-counter market
and not in the NASDAQ National Market System nor on any national securities
exchange, the closing bid price of the Common Stock on the trading day in
question, as reported by NASDAQ or an equivalent generally accepted
reporting service, or (ii) if the Common Stock is traded in the NASDAQ
National Market System or on a national securities exchange, the daily per
share closing price of the Common Stock in the NASDAQ National Market
System or on the principal stock exchange on which it is listed on the
trading day in question, as the case may be. For purposes of clause (i)
above, if trading in the Common Stock is not reported by NASDAQ, the bid
price referred to in said clause shall be the lowest bid price as reported
in the "pink sheets" published by National Quotation Bureau, Incorporated.
The closing price referred to in clause (ii) above shall be the last
reported sale price or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices, in either
case in the NASDAQ National Market System or on the national securities
exchange on which the Common Stock is then listed.
SECTION 12. Rights as Warrantholders. Nothing contained in this Agreement
or in any of the Warrants shall be construed as conferring upon the holders
thereof, as such, any of the rights of shareholders of the Company, including
without limitation, the right to receive dividends or other distributions, to
exercise any preemptive rights, to vote or to consent or to receive notice as
shareholders in respect of the meetings of shareholders or the election of
directors or the Company or any other matter. Anything herein to the contrary
notwithstanding, the Company shall cause copies of all financial statements and
reports, proxy statements and other documents as it shall send to its
shareholders to be sent by the same class mail as sent to its shareholders,
postage prepaid, on the date of the mailing to such shareholders, to each
registered holder of Warrants at his address appearing on the Warrant Register
as of the record date for the determination of the shareholders entitled to such
documents.
SECTION 13. Disposition of Proceeds on Exercise of Warrants. The Warrant
Agent shall account promptly to the Company with respect to Warrants exercised,
and shall promptly pay to the Company all monies received by it upon the
exercise of such Warrants, and shall keep copies of this Agreement available for
inspection by holders of Warrants during normal business hours.
SECTION 14. Merger or Consolidation or Change of Name of Warrant Agent. Any
corporation into which the Warrant Agent may be merged or with which it may be
consolidated, or any corporation resulting from any merger or consolidation to
which the Warrant Agent shall be a party, or any corporation succeeding to the
corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto provided that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of Section 16 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement and any of the Warrant certificates shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrant
certificates so countersigned, and in case at that time any of the Warrant
certificates shall not have been countersigned, any successor to the Warrant
Agent may countersign such Warrant certificates either in the name of the
predecessor Warrant Agent or in the name of the successor Warrant Agent, and in
all such cases the Warrants represented by such Warrant certificates shall have
the full force provided in the Warrant certificates and in this Agreement. Any
such successor Warrant Agent shall promptly give notice of its succession as
Warrant Agent to the Company and to the registered holder of each Warrant
certificate.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant certificates so countersigned, and, in case at that time any
of the Warrant
9
<PAGE>
certificates shall not have been countersigned, the Warrant Agent may
countersign such Warrant certificates either in its prior name or in its changed
name, and, in all such cases, the Warrants represented by such Warrant
certificates shall have the full force provided in the Warrant certificates and
in this Agreement.
SECTION 15. Duties of Warrant Agent. The Warrant Agent hereby undertakes
the duties and obligations imposed by this Agreement upon the following terms
and conditions, all of which shall bind the Company and the holders of Warrants
by their acceptance thereof.
(A) The statements of fact and recitals contained herein and in the
Warrants shall be taken as statements of the Company and the Warrant Agent
assumes no responsibility for the correctness of any of the same except
such as describe the Warrant Agent or action taken or to be taken by it.
The Warrant Agent assumes no responsibility with respect to the
distribution of the Warrants except as herein expressly provided.
(B) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or
in the Warrants to be complied with by the Company.
(C) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant
Agent shall incur no liability or responsibility to the Company or to any
holder of any Warrant in respect of any action taken, suffered or omitted
by it hereunder in good faith and in accordance with the opinion or the
advice of such counsel.
(D) The Warrant Agent shall incur no liability or responsibility to
the Company or to any holder of any Warrant for any action taken in
reliance on any notice, resolution, waiver, consent, order, certificate or
other paper, document or instrument believed by it to be genuine and to
have been signed, sent or presented by the proper party or parties.
(E) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges incurred by the
Warrant Agent in the execution of this Agreement and to indemnify the
Warrant Agent and save it harmless against any and all liabilities,
including judgments, costs and reasonable counsel fees, for anything done
or omitted by the Warrant Agent in the execution of this Agreement, except
as a result of the Warrant Agent's negligence, willful misconduct or bad
faith.
(F) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action on behalf of
the Company or any registered holder, but this provision shall not affect
the power of the Warrant Agent to take such action as the Warrant Agent may
consider proper. All rights of action under this Agreement or under any of
the Warrants may be enforced by the Warrant Agent without the possession of
any of the Warrants or the production thereof at any trial or other
proceeding relative thereto, and any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as Warrant
Agent, and any recovery of judgment shall be for the ratable benefit of all
the registered holders of the Warrants, as their respective rights or
interests may appear.
(G) The Warrant Agent and any shareholder, director, officer, or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants
or other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or
lend money to the Company or otherwise act as fully and freely as though it
were not Warrant Agent under this Agreement. Nothing herein shall preclude
the Warrant Agent from acting in any other capacity for the Company or for
any other legal entity.
10
<PAGE>
(H) The Warrant Agent shall act hereunder solely as agent and not in a
ministerial capacity, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything which
it may do or refrain from doing in connection with this Agreement, except
for its own negligence, willful misconduct or bad faith.
(I) Any request, direction, election, order or demand of the Company
shall be sufficient if evidenced by an instrument signed in the name of the
Company by its President, a Vice President or chief financial officer
(unless other evidence in respect thereof is therein specifically
prescribed); and any resolution of the Board of Directors may be evidenced
to the Warrant Agent by a copy thereof certified by the Secretary or an
Assistant Secretary of the Company.
SECTION 16. Change of Warrant Agent. The Warrant Agent may resign and be
discharged from its duties under this Agreement by giving the Company at least
30 days' prior notice in writing, and by mailing notice in writing to the
registered holders at their addresses appearing on the Warrant Register, of such
resignation, specifying a date when such resignation shall take effect. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and by like mailing of notice to the registered holders of the Warrants.
If the Warrant Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Warrant Agent.
If the Company shall fail to make such appointment within 30 days after such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the registered
holder of a Warrant (who shall, with such notice, submit his Warrant certificate
for inspection by the Company), then the registered holder of any Warrant may
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. Any successor Warrant Agent, whether appointed by the
Company or by such a court, shall be registered and otherwise authorized to
serve as a transfer agent pursuant to the Securities Exchange Act of 1934, as
amended. If at any time the Warrant Agent shall cease to be eligible in
accordance with the provisions of this Section 16, it shall resign immediately
in the manner and with the effect specified in this Section 16. After acceptance
in writing of the appointment, the successor Warrant Agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed; but the former
Warrant Agent shall deliver and transfer to the successor Warrant Agent any
property at the time held by it hereunder, and execute and deliver any further
assurance, conveyance, act or deed necessary for the purpose. Upon request of
any successor Warrant Agent, the Company shall make, execute, acknowledge and
deliver any and all instruments in writing for more fully and effectually
vesting in and confirming to such successor Warrant Agent all such powers,
rights, duties and responsibilities. Failure to file or mail any notice provided
in this Section 16, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Warrant Agent or the
appointment of the successor Warrant Agent, as the case may be.
SECTION 17. Identity of Transfer Agent. Forthwith upon the appointment of
any transfer agent for the Common Stock or of any subsequent transfer agent for
shares of the Common Stock or other shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.
SECTION 18. Notices. All notices, requests and other communications
pursuant to this Agreement shall be in writing and shall be sufficiently given
or made when delivered or three business days after deposit in the U.S. mail, by
first class mail, postage prepaid, addressed as follows:
(a) if to the Company, to (until another address is filed in writing
by the Company with the Warrant Agent):
Rally's Hamburgers, Inc.
10002 Shelbyville Road, Suite 150
Louisville, Kentucky 40223
Attention: President
11
<PAGE>
(b) if to the Warrant Agent, to (until another address is filed in
writing by the Warrant Agent with the Company):
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: George Karfunkel
(c) if to the registered holder of a Warrant, to the address of such
holder as shown in the Warrant Register.
SECTION 19. Supplements and Amendments. The Company and the Warrant Agent
may from time to time supplement or amend this Agreement without the approval of
any holders of Warrants in order to cure any ambiguity or to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provision herein, or to make any other provisions in regard to
matters or questions arising hereunder which the Company and the Warrant Agent
may deem necessary or desirable and which shall not be inconsistent with the
provisions of the Warrants, or which shall not adversely affect the interests of
the holders of Warrants (including reducing the Warrant Price or extending the
redemption or expiration date).
SECTION 20. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Warrant Agent or the registered
holders of the Warrants shall bind and inure to the benefit of their respective
successors and assigns hereunder.
SECTION 21. Governing Law. This Agreement shall be deemed to be a contract
made under the laws of the State of Delaware and for all purposes shall be
construed in accordance with the laws of said State.
SECTION 22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement. This Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
SECTION 23. Counterparts. This Agreement may be executed in counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
SECTION 24. Descriptive Headings. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
RALLY'S HAMBURGERS, INC.
By: /s/ Michael E. Foss
-----------------------------
Its: Senior V.P. and C.F.O.
-----------------------------
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/ Herbert J. Lemmer
-----------------------------
Its: Vice President
-----------------------------
12
<PAGE>
EXHIBIT A
WARRANT CERTIFICATE NO. 1 WARRANTS
CUSIP 75 1203126
WARRANT TO PURCHASE SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 26, 2000
RALLY'S HAMBURGERS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that, for value received,
__________________________________________, the registered holder hereof or
assigns (the "Holder"), is entitled to purchase from Rally's Hamburgers, Inc., a
Delaware corporation (the "Company"), at any time before 5:00 p.m., New York
City Time, on September 26, 2000, at the purchase price per share of $2.25 (the
"Warrant Price"), the number of shares of Common Stock of the Company set forth
above (the "Shares"). The number of Shares purchasable upon exercise of each
Warrant evidenced hereby and the Warrant Price per Share shall be subject to
adjustment from time to time as set forth in the Warrant Agreement referred to
below. This Warrant is subject to redemption by the Company, at $.01 per Share
of Common Stock purchasable upon exercise hereof, upon not less than 30 nor more
than 45 days' notice, at any time after the Daily Market Price (determined
pursuant to the Warrant Agreement) per Share of Common Stock has equaled or
exceeded $6.00 for a period of at least 20 out of 30 consecutive trading days
during the 30 trading days prior to the date of the notice of redemption, and
prior to expiration of the Warrants. The Warrant redemption price and the Daily
Market Price referred to above shall be subject to adjustment from time to time
as set forth in the Warrant Agreement.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price (subject to adjustment) at the principal office in
American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York,
New York 10005 (the "Warrant Agent"). Payment of such price shall be made at the
option of the Holder in cash or by certified check or bank draft payable to the
Warrant Agent, all as provided in the Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of Common
Stock Purchase Warrants with rights to purchase an aggregate of up to 4,825,805
Shares of Common Stock of the Company and are issued under and in accordance
with a Warrant Agreement dated as of September 26, 1996, between the Company and
the Warrant Agent and are subject to the terms and provisions contained in such
Warrant Agreement, to all of which the Holder of this Warrant certificate by
acceptance hereof consents. A copy of the Warrant Agreement may be obtained for
inspection by the Holder hereof upon written request to the Warrant Agent.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
countersigned and issued to the Holder a new Warrant certificate in respect of
the Shares as to which the Warrants evidenced hereby have not been exercised.
This Warrant certificate may be exchanged at the office of the Warrant Agent by
surrender of this Warrant certificate properly endorsed (with a signature
guarantee) either separately or in combination with one or more other Warrants
or one or more new Warrants to purchase the same aggregate number of Shares as
were evidenced by the Warrant or Warrants exchanged. No fractional Shares will
be issued upon the exercise of rights to purchase hereunder, but the Company
shall pay the cash value of any fraction upon the exercise of one or more
Warrants. The Warrants evidenced hereby are transferable at the office of the
Warrant Agent in the manner and subject to the limitations set forth in the
Warrant Agreement.
13
<PAGE>
The Holder hereof may be treated by the Company, the Warrant Agent and all
other persons dealing with this Warrant certificate as the absolute owner hereof
for all purposes and as the person entitled to exercise the rights represented
hereby, any notice to the contrary notwithstanding, and until such transfer is
entered on such books, the Company may treat the Holder hereof as the owner for
all purposes.
This Warrant certificate does not entitle the Holder hereof to any of the
rights of a stockholder of the Company.
This Warrant certificate shall not be valid or obligatory for any purpose
until it has been countersigned by the Warrant Agent.
Dated: ___________, 1996 RALLY'S HAMBURGERS, INC.
By: /s/
-----------------------------
ATTEST:
- -------------------------
- -------------------------
Countersigned:
- -------------------------
Warrant Agent
By: /s/
--------------------
Authorized Signatory
14
<PAGE>
[Reverse side of Warrant Certificate]
RALLY'S HAMBURGERS, INC.
PURCHASE FORM
Mailing Address:
Rally's Hamburger, Inc.
10002 Shelbyville Road
Suite 150
Louisville, Kentucky 40223
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for and to purchase thereunder, _________
Shares of Common Stock provided for therein, and requests that certificates for
such Shares be issued in the name of:
(Please Print or Type Name, Address and Social Security number)
and if said number of Shares shall not be all the Shares purchasable hereunder
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his Assignee as below indicated and delivered to the address stated
below.
Dated:________________________
Name of Holder or Assignee:
- ------------------------------
(Please Print)
Address:
Signature:
------------------------------------------
Note: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
- ----------------------------------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
15
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
right to purchase ________ Shares represented by the within Warrant Certificate
unto, and requests that a Certificate for such warrant be issued in the name of
- ------------------------------------------------------------
(Name and Address of Assignee Must Be Printed or Typewritten)
- ------------------------------------------------------------
hereby irrevocably constituting and appointing ____________________ as Attorney
to transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of Shares shall not be all of
the Shares purchasable under the within Warrant certificate, that a new Warrant
certificate for the balance of such Shares purchasable under the within Warrant
certificate be registered in the name of the undersigned Holder and delivered to
such Holder's address as then set forth on the Company's books.
Dated:____________________________
--------------------------------------------
Signature of Registered Holder
Note: The signature on this assignment must correspond with the
name as it appears upon the face of the within Warrant
certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
- -----------------------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
16
<PAGE>
Exhibit 4.5
RALLY'S HAMBURGERS, INC.
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of December 20, 1996, is
made and entered into by and between RALLY'S HAMBURGERS, INC., a Delaware
corporation (the "Company"), FIDELITY NATIONAL FINANCIAL, INC., a Delaware
corporation ("Fidelity") and CKE RESTAURANTS, INC., a Delaware corporation
("CKE").
WHEREAS, the Company has requested that Fidelity and CKE provide services
to the Company, and Fidelity and CKE are willing to do so;
WHEREAS, in connection with the foregoing, the Company desires to issue to
CKE common stock purchase warrants evidencing the right to purchase 750,000
shares of the Company's common stock, $.10 par value (the "Common Stock") (the
"CKE Warrants"), and to issue to Fidelity common stock purchase warrants
evidencing the right to purchase 750,000 shares of Common Stock (the "Fidelity
Warrants") (the CKE Warrants and the Fidelity Warrants are collectively referred
to herein as the "Warrants");
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties agree as follows:
SECTION 1. Grant of Warrants. The Company hereby grants to CKE the CKE
Warrants and hereby grants to Fidelity the Fidelity Warrants.
SECTION 2. Warrants and Form of Warrant Certificates.
(A) Each Warrant shall entitle the registered holder of the
certificate representing such Warrant to purchase upon the exercise
thereof, one share of Common Stock, subject to the adjustments provided for
in Section 10 hereof, commencing December 20, 1997 until 5:00 p.m, Eastern
time, on December 20, 1999 ("Expiration Date").
(B) The Warrant certificates shall be in registered form only. The
text of the Warrant certificate and the form of election to exercise a
Warrant on the reverse side thereof shall be substantially in the form of
Exhibit A attached hereto. Each Warrant certificate shall be dated as of
the date of issuance thereof by the Company (whether upon initial issuance
or upon transfer or exchange) and shall be executed on behalf of the
Company by the manual or facsimile signature of its President or a Vice
President, under its corporate seal, affixed or in facsimile, and attested
to by the manual or facsimile signature of its Secretary or an Assistant
Secretary. In case any officer of the Company who shall have signed any
Warrant certificate shall cease to be such officer of the Company prior to
the issuance thereof, such Warrant certificate may nevertheless be issued
and delivered with the same force and effect as though the person who
signed the same had not ceased to be such officer of the Company. Any such
Warrant certificate may be signed on behalf of the Company by persons who,
at the actual date of execution of such Warrant certificate, are the proper
officers of the Company, although at the nominal date of such Warrant
certificate any such person shall not have been such officer of the
Company.
SECTION 3. Exercise of Warrants and Warrant Price. Subject to the
provisions of this Agreement, each registered holder of one or more Warrant
certificates shall have the right, which may be exercised as in such Warrant
certificates expressed, to purchase from the Company (and the Company shall
issue and sell to such registered holder) the number of shares of Common Stock
to which the Warrants represented by such certificates are at the time entitled
hereunder.
Each Warrant not exercised by its expiration date shall become void, and
all rights thereunder and all rights in respect thereof under this Agreement
shall cease on such date.
A Warrant may be exercised by the surrender of the certificate representing
such Warrant to the Company, with the subscription form set forth on the reverse
thereof duly executed and properly endorsed with the signatures properly
guaranteed, and upon payment in full to the Company of the Warrant Price (as
hereinafter defined) for the number of shares of Common Stock as to which the
Warrant is exercised. Such Warrant Price shall be paid in full in cash or by
certified check or bank draft payable in United States currency to the order of
the Company.
1
<PAGE>
The price per share of Common Stock at which the Warrants may be exercised
(the "Warrant Price") shall be $4.375 (adjusted in accordance with Section 10
hereof, taking into account prior adjustments). At any time, or from time to
time the Company may reduce the Warrant Price and/or extend the expiration date
for such period or periods of time as it may determine. Notice of any such
reduction in the Warrant Price or extension of the expiration date shall be
promptly provided to the registered holder of the Warrants so affected.
Subject to the further provisions of this Section 3 and of Section 6
hereof, upon such surrender of Warrant certificates and payment of the
applicable Warrant Price as aforesaid, the Company shall issue and cause to be
delivered, with all reasonable dispatch to or upon the written order of the
registered holder of such Warrants and in such name or names as such registered
holder may designate, a certificate or certificates for the number of securities
so purchased upon the exercise of such Warrants, together with cash, as provided
in Section 11 of this Agreement, in respect of any fraction of a share or
security otherwise issuable upon such surrender. All shares of Common Stock
issued upon the exercise of a Warrant shall be validly issued, fully paid and
nonassessable.
Certificates representing such securities shall be deemed to have been
issued and any person so designated to be named therein shall be deemed to have
become a holder of record of such securities as of the date of the surrender of
such Warrants and payment of the Warrant Price as aforesaid; provided, however,
that if, at the date of surrender of such Warrants and payment of the applicable
Warrant Price, the transfer books for the Common Stock or other securities
purchasable upon the exercise of such Warrants shall be closed, the certificates
for the securities in respect of which such Warrants are then exercised shall be
issuable as of the date on which such books shall next be opened and until such
date the Company shall be under no duty to deliver any certificate for such
securities. The rights of purchase represented by each Warrant certificate shall
be exercisable, at the election of the registered holders thereof, either as an
entirety or from time to time for part of the number of securities specified
therein and, in the event that any Warrant certificate is exercised in respect
of less than all of the securities specified therein at any time prior to the
expiration date of the Warrant certificate, a new Warrant certificate or
certificates will be issued to such registered holder for the remaining number
of securities specified in the Warrant certificate so surrendered.
SECTION 4. Registration. The Company shall maintain books (the "Warrant
Register") for the registration and the registration of transfer of the
Warrants. Prior to due presentment for registration of transfer of any Warrant
certificate, the Company may deem and treat the person in whose name such
Warrant certificate shall be registered upon the Warrant Register (the
"registered holder") as the absolute owner of such Warrant certificate and of
each Warrant represented thereby (notwithstanding any notation of ownership or
other writing on the Warrant certificate made by anyone other than the Company),
for the purpose of any exercise thereof, of any distribution or notice to the
holder thereof, and for all other purposes, and the Company shall not be
affected by any notice to the contrary.
SECTION 5. Transfer and Exchange of Warrants. Subject to the provisions of
Section 9, the Company shall register the transfer, from time to time, of any
outstanding Warrant upon the Warrant Register, upon surrender of the certificate
evidencing such Warrant for transfer, properly endorsed with signatures properly
guaranteed and accompanied by appropriate instructions for transfer. Upon any
such transfer, a new Warrant certificate representing an equal aggregate number
of Warrants shall be issued to the transferee and the surrendered Warrant
certificate shall be canceled by the Company.
Warrant certificates may be surrendered to the Company, together with a
written request for exchange, and thereupon the Company shall issue in exchange
therefor one or more new Warrant certificates as requested by the registered
holder of the Warrant certificate or certificates so surrendered, representing
an equal aggregate number of Warrants.
The Company shall not be required to effect any registration of transfer or
exchange which will result in the issuance of a Warrant certificate for a
fraction of a Warrant.
No service charge shall be made for any exchange or registration of
transfer of Warrant certificates.
2
<PAGE>
SECTION 6. Payment of Taxes. The Company will pay any documentary stamp
taxes attributable to the initial issuance of the shares of Common Stock
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificates for shares
of Common Stock in a name other than that of the registered holder of Warrants
in respect of which such shares are issued, and in such case the Company shall
not be required to issue or deliver any certificate for shares of Common Stock
or any Warrant certificate until the person requesting the same has paid to the
Company the amount of such tax or has established to the Company's satisfaction
that such tax has been paid.
SECTION 7. Mutilated or Missing Warrants. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may in
its discretion issue, in lieu of and substitution for the Warrant certificate
lost, stolen or destroyed, a new Warrant certificate representing an equal
aggregate number of Warrants, but only upon receipt of evidence satisfactory to
the Company of such loss, theft or destruction of such Warrant certificate and
reasonable indemnity, if requested, also satisfactory to them. Applicants for
such substitute Warrant certificates shall also comply with such other
reasonable conditions and pay such reasonable charges as the Company may
prescribe.
SECTION 8. Reservation of Common Stock. There have been reserved, and the
Company shall at all times keep reserved, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Warrants then outstanding,
and the transfer agent for the Common Stock and every subsequent transfer agent
for any shares of the Company's capital stock issuable upon the exercise of any
of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all times to reserve such number of authorized and unissued shares
as shall be requisite for such purpose.
All Warrant certificates surrendered in the exercise of the rights thereby
evidenced shall be canceled by the Company, and such canceled Warrant
certificates shall constitute sufficient evidence of the number of shares of
Common Stock which have been issued upon the exercise of such Warrants. After
the expiration date of the Warrants, no shares of Common Stock shall be subject
to reservation in respect of such Warrants.
SECTION 9. Representations and Warrants of CKE and Fidelity and
Restrictions on Transfer
9.1 Representations and Warranties by CKE and Fidelity (collectively,
the "Warrantholders"). CKE and Fidelity severally represent and warrant to
the Company as follows:
(a) The Warrants are being acquired for such Warrantholder's own
account, for investment and not with a view to, or for resale in
connection with, any distribution or public offering thereof within
the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Such Warrantholder understands that neither the Warrants nor
the Common Stock underlying them have been registered under the
Securities Act by reason of their issuance in a transaction exempt
from the registration and prospectus delivery requirements of the
Securities Act pursuant to Section 4(2) thereof, that the Company has
no present intention of registering the Warrants or the Common Stock
underlying them (collectively, the "Securities"), that the Securities
must be held by the Warrantholder indefinitely, and that the
Warrantholder must therefore bear the economic risk of such investment
indefinitely, unless a subsequent disposition thereof is registered
under the Securities Act or is exempt from registration.
(c) Such Warrantholder is an "Accredited Investor" as that term
is defined in Rule 501 of Regulation D promulgated under the
Securities Act. Such Warrantholder is able to bear the economic risk
of the purchase of the Securities pursuant to the terms of this
Agreement, including a complete loss of the Warrantholders' investment
in the Securities.
(d) Such Warrantholder has the full right, power and authority to
enter into and perform its obligations under this Agreement, and this
Agreement constitutes the valid and binding obligations of the
Warrantholder enforceable in accordance with their terms.
3
<PAGE>
(e) No consent, approval or authorization of or designation,
declaration or filing with any governmental authority on the part of
such Warrantholder is required in connection with the valid execution
and delivery of this Agreement.
9.2 Restrictions on Transfer.
(a) Each certificate representing the Securities shall be
endorsed with substantially the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT
BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, THE TRANSFER IS MADE IN COMPLIANCE WITH RULE 144
PROMULGATED UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF
COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO
THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT.
The Company need not register a transfer of any Securities, and may also
instruct its transfer agent not to register the transfer of the Securities,
unless the conditions specified in the foregoing legend are satisfied.
(b) Any legend endorsed on a certificate pursuant to subsection
9.2(a) and any stop transfer instructions shall be removed and the
Company shall issue a certificate without such legend to the holder
thereof if such Securities are registered under the Securities Act and
a prospectus meeting the requirements of Section 10 of the Securities
Act is available, if such legend may be properly removed under the
terms of Rule 144 promulgated under the Securities Act or if such
holder provides the Company with an opinion of counsel for such
holder, reasonably satisfactory to legal counsel for the Company, to
the effect that a sale, transfer or assignment of such Securities may
be made without registration.
SECTION 10. Adjustment of Warrant Price and Number of Shares of Common
Stock. The number and kind of securities purchasable upon the exercise of the
Warrants and the applicable Warrant Price shall be subject to adjustment from
time to time upon the happening of certain events, as follows:
10.1 Adjustments. The number of shares of Common Stock purchasable
upon the exercise of each Warrant and the applicable Warrant Price shall be
subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in Common Stock
or make a distribution in Common Stock, (ii) subdivide its outstanding
Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock, or (iv) issue, by
reclassification of its Common Stock, other securities of the Company,
the number of shares of Common Stock purchasable upon exercise of a
Warrant immediately prior thereto shall be adjusted so that the holder
of a Warrant shall be entitled to receive the kind and number of
shares of Common Stock or other securities of the Company which such
holder would have owned or would have been entitled to receive
immediately after the happening of any of the events described above,
had the Warrant been exercised immediately prior to the happening of
such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 10.1(a) shall become effective
immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) In case the Company shall issue rights, options, warrants or
convertible securities to all or substantially all holders of its
Common Stock, without any charge to such holders, entitling them to
subscribe for or purchase Common Stock at a price per share which is
lower at the record date mentioned below than the then Current Market
Price (as defined in Section 11 hereof), the number of shares of
Common Stock thereafter purchasable upon the exercise of each Warrant
shall be determined by multiplying the number of shares of Common
Stock theretofore purchasable upon exercise of a Warrant by a fraction
of which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, options,
warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares
4
<PAGE>
of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or convertible securities plus the number of
shares which the aggregate offering price of the total number of
shares offered would purchase at such Current Market Price. Such
adjustment shall be made whenever such rights options, warrants or
convertible securities are issued and shall become effective
immediately and retroactive to the record date for the determination
of shareholders entitled to receive such rights, options, warrants or
convertible securities.
(c) In case the Company shall distribute to all or substantially
all holders of its Common Stock, evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or
rights, options, warrants or convertible securities containing the
right to subscribe for or purchase Common Stock (excluding those
referred to in subsection 10.1 (b) above), then in each case the
number of shares of Common Stock thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number
of shares of Common Stock theretofore purchasable upon exercise of
such Warrant by a fraction, of which the numerator shall be the then
Current Market Price on the date of such distribution, and of which
the denominator shall be such Current Market Price on such date minus
the then fair value (as determined by the Board of Directors, which
determination, if reasonable and based upon the Board of Directors'
good faith business judgment, shall be binding upon the registered
holders) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights, options, warrants or
convertible securities applicable to one share. Such adjustment shall
be made whenever any such distribution is made and shall become
effective on the date of distribution retroactive to the record date
for the determination of shareholders entitled to receive such
distribution.
(d) No adjustment in the number of shares of Common Stock
purchasable pursuant to the Warrants shall be required unless such
adjustment would require an increase or decrease of at least one
percent in the number of shares of Common Stock then purchasable upon
the exercise of the Warrants; provided, however that any adjustments
which by reason of this subsection 10.1(d) are not required to be made
immediately shall be carried forward and taken into account in any
subsequent adjustment.
(e) Whenever the number of shares of Common Stock purchasable
upon the exercise of a Warrant is adjusted as herein provided, the
applicable Warrant Price payable upon exercise of the Warrant shall be
adjusted by multiplying such Warrant Price immediately prior to such
adjustment by the fraction, of which the numerator shall be the number
of shares of Common Stock purchasable upon the exercise of such
Warrant immediately prior to such adjustment, and of which the
denominator shall be the number of shares of Common Stock so
purchasable immediately thereafter.
(f) To the extent not covered by subsections 10.1 (b) or (c)
hereof, in case the Company shall sell or issue Common Stock or
rights, options, warrants or convertible securities containing the
right to subscribe for or purchase shares of Common Stock at a price
per share (determined, in the case of such rights, options, warrants
or convertible securities, by dividing (i) the total amount received
or receivable by the Company in consideration of the sale or issuance
of such rights, options, warrants or convertible securities, plus the
total consideration payable to the Company upon exercise or conversion
thereof, by (ii) the total number of shares covered by such rights,
options, warrants or convertible securities) lower than the then
Current Market Price in effect immediately prior to such sale or
issuance, then the number of Shares thereafter purchasable upon the
exercise of the Warrants shall be determined by multiplying the number
of Shares theretofore purchasable upon exercise of the Warrants by a
fraction, of which the numerator shall be the applicable Warrant Price
and the denominator shall be that price calculated to the nearest cent
determined by dividing (I) an amount equal to the sum of (A) the
number of shares of Common Stock outstanding immediately prior to such
sale or issuance multiplied by the applicable Warrant Price, plus (B)
the consideration received by the Company upon such sale or issuance,
by (II) the total number of shares of Common Stock outstanding
immediately after such sale or issuance. For the purpose of such
adjustments, the Common Stock which the holders of any such rights,
options, warrants or convertible securities shall be entitled to
subscribe for or purchase shall be deemed issued and outstanding as of
the date of such sale or issuance and the consideration received by
the Company therefore shall be deemed to be the consideration received
by the Company for such rights, options, warrants or convertible
securities, plus the consideration or premiums stated in such rights,
options, warrants or convertible securities to be paid for the Common
Stock covered thereby. In case the Company shall sell or issue Common
Stock or rights, options, warrants or convertible securities
containing the right to subscribe for or purchase Common Stock for a
consideration consisting, in whole or in part, of property other than
cash or its equivalent, then in determining the "price per share" of
Common Stock and the "consideration received by the Company" for
purpose of the first sentence of this
5
<PAGE>
subsection 10.1(f), the Board of Directors shall determine the fair
value of said property, and such determination, if reasonable and
based upon the Board of Directors' good faith business judgment, shall
be binding upon the Warrantholder. In determining the "price per
share" of Common Stock, any underwriting discounts or commissions
shall not be deducted from the price received by the Company for sales
of securities registered under the Securities Act.
(g) Whenever the number of shares of Common Stock purchasable
upon the exercise of a Warrant or the Warrant Price is adjusted as
herein provided, the Company shall cause to be promptly mailed to each
registered holder of a Warrant by first class mail, postage prepaid,
notice of such adjustment or adjustments and a certificate of the
chief financial officer of the Company setting forth the number of
shares of Common Stock purchasable upon the exercise of a Warrant and
the applicable Warrant Price after such adjustment, a brief statement
of the facts requiring such adjustment and the computation by which
such adjustment was made.
(h) For the purpose of this Section 10, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of
the Company at the date of this Agreement, or (ii) any other class of
stock resulting from successive changes or reclassification of such
Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event
that at any time, as a result of an adjustment made pursuant to this
Section 10, a registered holder shall become entitled to purchase any
securities of the Company other than Common Stock, (i) if the
registered holder's right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company
shall obtain an opinion of an investment banking firm valuing such
other securities and (ii) thereafter the number of such other
securities so purchasable upon exercise of a Warrant and the
applicable Warrant Price of such securities shall be subject to
adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common
Stock contained in this Section 10.
(i) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the
number of shares of Common Stock purchasable upon exercise of a
Warrant and the applicable Warrant Price, to the extent a Warrant has
not then been exercised shall, upon such expiration, be readjusted and
shall thereafter be such as they would have been had they been
originally adjusted (or had the original adjustment not been required,
as the case may be) on the basis of (A) the fact that the only shares
of Common Stock so issued were the shares of Common Stock, if any,
actually issued or sold upon the exercise of such rights, options,
warrants or conversion privileges, and (B) the fact that such shares
of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise plus the
consideration, if any, actually received by the Company for the
issuance, sale or grant of all such privileges, options, warrants or
conversion privileges whether or not exercised; provided, however,
that no such readjustment shall have the effect of increasing the
applicable Warrant Price by an amount in excess of the amount of the
adjustment initially made in respect of the issuance, sale or grant of
such rights, options, warrants or conversion privileges.
10.2 No Adjustment for Dividends. Except as provided in Section 10.1
hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the exercise of
a Warrant.
10.3 No Adjustment in Certain Cases. No adjustments shall be made
pursuant to Section 10 hereof in connection with the issuance of the
Warrants (or the underlying shares of Common Stock). No adjustments shall
be made pursuant to Section 10 hereof in connection with the grant or
exercise of presently authorized or outstanding options to purchase, or the
issuance of shares of Common Stock on the exercise thereof under the
Company's 1990 Stock Option Plan and 1995 Stock Option Plan for
Non-Employee Directors.
10.4 Preservation of Purchase Rights Upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or
merger of the Company into another corporation or in case of any sale or
conveyance to another corporation of the property, assets or business of
the Company as an entirety or substantially as an entirety, the registered
holders of the Warrants shall have the right thereafter, upon payment of
the Warrant Price in effect immediately prior to such action, to purchase,
upon exercise of each Warrant, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale or
conveyance had each Warrant been exercised immediately prior to such
action. In the event of a merger described in Section 368(a)(2)(E) of the
Internal Revenue Code of 1986, as amended, in which the Company is the
surviving corporation, the right to purchase shares of Common Stock under
6
<PAGE>
the Warrants shall terminate on the date of such merger and thereupon the
Warrants shall become null and void, but only if the controlling
corporation shall agree to substitute for the Warrants its warrants which
entitle the holders thereof to purchase upon their exercise the kind and
amount of shares and other securities and property which they would have
owned or been entitled to receive had the Warrants been exercised
immediately prior to such merger. Any such agreements referred to in this
subsection 10.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section
10 hereof. The provisions of this subsection 10.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
10.5 Par Value of Shares of Common Stock. Before taking any action
which would cause an adjustment reducing the applicable Warrant Price below
the then par value of the Common Stock issuable upon exercise of the
Warrants, the Company will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly
and legally issue fully paid and nonassessable Common Stock at such
adjusted applicable Warrant Price.
10.6 Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing (which may
be any such firm regularly employed by the Company) to make any computation
required under this Section 10 and a certificate signed by such firm shall
be conclusive evidence of the correctness of any computation made under
this Section 10.
10.7 Statement on Warrant Certificates. Irrespective of any
adjustments in the applicable Warrant Price or the number of securities
issuable upon exercise of Warrants, Warrant certificates theretofore or
thereafter issued may continue to express the same price and number of
securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time
in its sole discretion (which shall be conclusive), make any change in the
form of Warrant certificate that it may deem appropriate and that does not
affect the substance thereof; and any Warrant certificate thereafter
issued, whether upon registration of transfer of, or in exchange or
substitution for, an outstanding Warrant certificate, may be in the form so
changed.
10.8 No Rights as Shareholder; Notices to Holders of Warrants. If, at
any time prior to the expiration of a Warrant and prior to its exercise,
any one or more of the following events shall occur: (a) any action which
would require an adjustment pursuant to subsection 10.1 or 10.4 hereof, or
(b) a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation, merger or sale of its property, assets and
business as an entirety or substantially as an entirety) shall be proposed:
then the Company shall give notice in writing of such event to the
registered holders of the Warrants, as provided in Section 14 hereof, at
least 20 days prior (and pursuant to the provisions of subsection 10.1(e)
with respect to adjustments pursuant to subsection 10.1(f) and 10.1(i)) to
the date fixed as a record date or the date of closing the transfer books
for the determination of the shareholders entitled to any relevant
dividend, distribution, subscription rights or other rights or for the
determination of shareholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such
record date or the date of closing the transfer books, as the case may be.
Failure to mail or receive such notice or any defect therein shall not
affect the validity of any action taken with respect thereto.
Section 11. Fractional Interests. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of a Warrant. If any
fraction of a share of Common Stock would, except for the provisions of this
Section 11, be issuable on the exercise of a Warrant (or specified portion
thereof), the Company shall in lieu thereof pay an amount in cash equal to the
then Current Market Price multiplied by such fraction. For purposes of this
Agreement, the term "Current Market Price" shall mean (i) if the Common Stock is
traded in the over-the-counter market and not in the NASDAQ National Market
System nor on any national securities exchange, the average of the per share
closing bid prices of the Common Stock on the 30 consecutive trading days
immediately preceding the date in question, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded in the NASDAQ National Market System or on a national securities
exchange, the average for the 30 consecutive trading days immediately preceding
the date in question of the daily per share closing prices of the Common Stock
in the NASDAQ National Market System or on the principal stock exchange on which
it is listed, as the case may be. For purposes of clause (i) above, if trading
in the Common Stock is not reported by NASDAQ, the bid price referred to in said
clause shall be the lowest bid price as reported in the "pink sheets" published
by National Quotation Bureau, Incorporated. The closing price referred to in
clause (ii)
7
<PAGE>
above shall be the last reported sale price or, in the case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices, in either case in the NASDAQ National Market System or on the national
securities exchange on which the Common Stock is then listed.
SECTION 12. Rights as Warrantholders. Nothing contained in this Agreement
or in any of the Warrants shall be construed as conferring upon the holders
thereof, as such, any of the rights of shareholders of the Company, including
without limitation, the right to receive dividends or other distributions, to
exercise any preemptive rights, to vote or to consent or to receive notice as
shareholders in respect of the meetings of shareholders or the election of
directors or the Company or any other matter. Anything herein to the contrary
notwithstanding, the Company shall cause copies of all financial statements and
reports, proxy statements and other documents as it shall send to its
shareholders to be sent by the same class mail as sent to its shareholders,
postage prepaid, on the date of the mailing to such shareholders, to each
registered holder of Warrants at his address appearing on the Warrant Register
as of the record date for the determination of the shareholders entitled to such
documents.
SECTION 13. Notices. All notices, requests and other communications
pursuant to this Agreement shall be in writing and shall be sufficiently given
or made when delivered or three business days after deposit in the U.S. mail, by
first class mail, postage prepaid, addressed as follows:
(a) if to the Company, to (until another address is provided to the
registered holders of the Warrants):
Rally's Hamburgers, Inc.
10002 Shelbyville Road, Suite 150
Louisville, Kentucky 40223
Attention: President
(b) if to the registered holder of a Warrant, to the address of such
holder as shown in the Warrant Register.
SECTION 14. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any holders of
Warrants in order to cure any ambiguity or to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company may deem necessary or desirable
and which shall not be inconsistent with the provisions of the Warrants, or
which shall not adversely affect the interests of the holders of Warrants
(including reducing the Warrant Price or extending the redemption or expiration
date).
SECTION 15. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the registered holders of the Warrants
shall bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 16. Governing Law. This Agreement shall be deemed to be a contract
made under the laws of the State of Delaware and for all purposes shall be
construed in accordance with the laws of said State.
SECTION 17. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
registered holders of the Warrants any legal or equitable right, remedy or claim
under this Agreement. This Agreement shall be for the sole and exclusive benefit
of the Company and the registered holders of the Warrants.
SECTION 18. Counterparts. This Agreement may be executed in counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
SECTION 19. Descriptive Headings. The descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
RALLY'S HAMBURGERS, INC.
By: /s/ Donald E. Doyle
---------------------------------
Its: President & C.E.O.
---------------------------------
CKE RESTAURANTS, INC.
By: /s/ Andrew F. Puzder
---------------------------------
Its: Executive Vice President
---------------------------------
FIDELITY NATIONAL FINANCIAL, INC.
By: /s/ Andrew F. Puzder
--------------------------------
Its: Executive Vice President
--------------------------------
9
<PAGE>
WARRANT CERTIFICATE NO. 1 750,000 WARRANTS
WARRANT TO PURCHASE SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 20, 1999
RALLY'S HAMBURGERS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that, for value received, Fidelity National Financial, Inc.,
the registered holder hereof or assigns (the "Holder"), is entitled to purchase
from Rally's Hamburgers, Inc., a Delaware corporation (the "Company"),
commencing December 20, 1997 until 5:00 p.m., New York City Time, on December
20, 1999, at the purchase price per share of $4.375 (the "Warrant Price"), the
number of shares of Common Stock of the Company set forth above (the "Shares").
The number of Shares purchasable upon exercise of each Warrant evidenced hereby
and the Warrant Price per Share shall be subject to adjustment from time to time
as set forth in the Warrant Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price (subject to adjustment) at the principal office of
the Company, 10002 Shelbyville Road, Suite 150, Louisville, Kentucky 40223.
Payment of such price shall be made at the option of the Holder in cash or by
certified check or bank draft payable to the Company, all as provided in the
Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of Common
Stock Purchase Warrants with rights to purchase an aggregate of up to 1,500,000
Shares of Common Stock of the Company and are issued under and in accordance
with a Warrant Agreement dated as of December 20, 1996, between the Company, CKE
Restaurants, Inc., and Fidelity National Financial, Inc. and are subject to the
terms and provisions contained in such Warrant Agreement, to all of which the
Holder of this Warrant certificate by acceptance hereof consents. A copy of the
Warrant Agreement may be obtained for inspection by the Holder hereof upon
written request to the Company.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
issued to the Holder a new Warrant certificate in respect of the Shares as to
which the Warrants evidenced hereby have not been exercised. This Warrant
certificate may be exchanged at the office of the Company by surrender of this
Warrant certificate properly endorsed (with a signature guarantee) either
separately or in combination with one or more other Warrants or one or more new
Warrants to purchase the same aggregate number of Shares as were evidenced by
the Warrant or Warrants exchanged. No fractional Shares will be issued upon the
exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. The Warrants
evidenced hereby are transferable at the office of the Company in the manner and
subject to the limitations set forth in the Warrant Agreement.
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant certificate as the absolute owner hereof for all
purposes and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding, and until such transfer is entered
on such books, the Company may treat the Holder hereof as the owner for all
purposes.
This Warrant certificate does not entitle the Holder hereof to any of the
rights of a stockholder of the Company.
Dated: December 20, 1996 RALLY'S HAMBURGERS, INC.
By: /s/
-------------------------------
-------------------------------
ATTEST:
- -----------------------------
- -----------------------------
10
<PAGE>
WARRANT CERTIFICATE NO. 2 750,000 WARRANTS
WARRANT TO PURCHASE SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 20, 1999
RALLY'S HAMBURGERS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that, for value received, CKE Restaurants, Inc., the
registered holder hereof or assigns (the "Holder"), is entitled to purchase from
Rally's Hamburgers, Inc., a Delaware corporation (the "Company"), commencing
December 20, 1997 until 5:00 p.m., New York City Time, on December 20, 1999, at
the purchase price per share of $4.375 (the "Warrant Price"), the number of
shares of Common Stock of the Company set forth above (the "Shares"). The number
of Shares purchasable upon exercise of each Warrant evidenced hereby and the
Warrant Price per Share shall be subject to adjustment from time to time as set
forth in the Warrant Agreement referred to below.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price (subject to adjustment) at the principal office of
the Company, 10002 Shelbyville Road, Suite 150, Louisville, Kentucky 40223.
Payment of such price shall be made at the option of the Holder in cash or by
certified check or bank draft payable to the Company, all as provided in the
Warrant Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of Common
Stock Purchase Warrants with rights to purchase an aggregate of up to 1,500,000
Shares of Common Stock of the Company and are issued under and in accordance
with a Warrant Agreement dated as of December 20, 1996, between the Company, CKE
Restaurants, Inc., and Fidelity National Financial, Inc. and are subject to the
terms and provisions contained in such Warrant Agreement, to all of which the
Holder of this Warrant certificate by acceptance hereof consents. A copy of the
Warrant Agreement may be obtained for inspection by the Holder hereof upon
written request to the Company.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
issued to the Holder a new Warrant certificate in respect of the Shares as to
which the Warrants evidenced hereby have not been exercised. This Warrant
certificate may be exchanged at the office of the Company by surrender of this
Warrant certificate properly endorsed (with a signature guarantee) either
separately or in combination with one or more other Warrants or one or more new
Warrants to purchase the same aggregate number of Shares as were evidenced by
the Warrant or Warrants exchanged. No fractional Shares will be issued upon the
exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. The Warrants
evidenced hereby are transferable at the office of the Company in the manner and
subject to the limitations set forth in the Warrant Agreement.
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant certificate as the absolute owner hereof for all
purposes and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding, and until such transfer is entered
on such books, the Company may treat the Holder hereof as the owner for all
purposes.
This Warrant certificate does not entitle the Holder hereof to any of the
rights of a stockholder of the Company.
Dated: December 20, 1996 RALLY'S HAMBURGERS, INC.
By: /s/
---------------------------
ATTEST:
- ----------------------------
- ----------------------------
11
<PAGE>
[Reverse Side of Warrant Certificate]
RALLY'S HAMBURGERS, INC.
PURCHASE FORM
Mailing Address:
Rally's Hamburger, Inc.
10002 Shelbyville Road
Suite 150
Louisville, Kentucky 40223
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for and to purchase thereunder, _________
Shares of Common Stock provided for therein, and requests that certificates for
such Shares be issued in the name of:
- -------------------------------------------------------------------------------
and if said number of Shares shall not be all the Shares purchasable
hereunderthat a new Warrant certificate for the balance of the Shares
purchasable under the within Warrant certificate be registered in the name of
the undersigned Holder or his Assignee as below indicated and delivered to the
address stated below.
Dated:________________________
Name of Holder or Assignee:
- ------------------------------
(Please Print)
Address:
- ------------------------------
- ------------------------------
Signature:
--------------------------------------------------------------
Note: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
12
<PAGE>
ASSIGNMENT
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers the
right to purchase ________ Shares represented by the within Warrant Certificate
unto, and requests that a Certificate for such warrant be issued in the name of
- -------------------------------------------------------------------------------
(Name and Address of Assignee Must Be Printed or Typewritten)
hereby irrevocably constituting and appointing ____________________ as Attorney
to transfer said Warrants on the books of the Company, with full power of
substitution in the premises and, if said number of Shares shall not be all of
the Shares purchasable under the within Warrant certificate, that a new Warrant
certificate for the balance of such Shares purchasable under the within Warrant
certificate be registered in the name of the undersigned Holder and delivered to
such Holder's address as then set forth on the Company's books.
Dated:____________________________
----------------------------------
Signature of Registered Holder
Note: The signature on this assignment must correspond with the name as it
appears upon the face of the within Warrant certificate in every particular,
without alteration or enlargement or any change whatever.
Signature Guaranteed:
- -----------------------------------------
(Signature must be guaranteed by a bank or trust company having an office or
correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers, Inc.)
13
<PAGE>
Exhibit 4.6
THIS FIRST SUPPLEMENTAL INDENTURE is made and entered into as of November
14, 1996 by and among Rally's Hamburgers, Inc., a Delaware corporation (the
"Company"), as Issuer, Rally's of Ohio, Inc., Restaurant Acquisition Corp. and
Self-Service Drive-Thru, Inc., as Subsidiary Guarantors (collectively, the
"Subsidiary Guarantors"), and PNC Bank, Kentucky, Inc., as Trustee (the
"Trustee"). Capitalized terms not defined herein shall have the same meaning as
those ascribed to them in the Indenture (as defined below).
RECITALS
A. WHEREAS, the Company, the Subsidiary Guarantors and the Trustee are
parties to that certain Indenture dated as of March 1, 1993 (the "Indenture")
related to the issuance by the Company of its 9 7/8% Senior Notes due June 15,
2000 (the "Senior Notes");
B. WHEREAS, an amendment to Section 4.14 of the Indenture (the
"Amendement") has been duly approved by the holders of the Senior Notes in
accordance with Article 9 of the Indenture;
C. WHEREAS, the Company and the Subsidiary Guarantors have taken all
necessary corporate action to duly authorize their respective execution and
delivery of this First Supplemental Indenture; and
D. WHEREAS, the Company has delivered to the Trustee the documents required
pursuant to Article 9 of the Indenture;
NOW, THEREFORE, in consideration of good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree, for
the benefit of each other and the holders of Senior Notes, as follows:
ARTICLE I
Section 1.01. Notwithstanding anything to the contrary contained in
the Indenture, Section 4.14 of the Indenture shall be amended in its
entirety to read as follows:
Section 4.14. Change of Control.
If, at any time, (i) an event or series of events occurs by which any
Person or Group of Persons (other than GIANT GROUP LTD., Fidelity National
Financial, Inc., CKE Restaurants, Inc., or any of their respective
affiliates) shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases, merger, consolidation or
otherwise, have become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 35% or more of the combined voting power
of then outstanding Voting Stock of the Company, (ii) the Company is merged
with or into another corporation with the effect that immediately after
such transaction the stockholders of the Company hold less than a majority
of the combined voting power of the then outstanding Voting Stock of the
Person surviving such transaction, (iii) the direct or indirect sale,
lease, exchange or other transfer to any Person or Group of persons of all
or substantially all of the assets of the Company, (iv) the liquidation or
dissolution of the Company, or (v) any Person (other than Burt Sugerman and
his Affiliates) shall, as a result of a tender or exchange offer, open
market purchases, privately negotiated purchases, merger, consolidation or
otherwise, have become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 35% or more of the combined voting power
of the then outstanding Voting Stock of GIANT GROUP LTD. if at such time
GIANT GROUP LTD. is the beneficial owner (within the meaning of Rule 13d-3
under the Exchange Act) of 25% or more of the combined voting power of the
then outstanding Voting Stock of the Company (each a "Change of Control"
and the time of such Change of Control being referred to as the "Change of
Control Date"), then the Company shall notify the Holders in writing of
such occurrence and shall make an offer to purchase (as the same may be
extended in accordance with applicable law, the "Change of Control Offer")
on a Business Day (the "Change of Control Payment Date") not later than 60
days following each Change of Control Date, all then outstanding Securities
at a purchase price equal to 101% of the principal amount thereof plus
accrued and unpaid interest thereon to the Change of Control Payment Date,
if any. The Change of Control Offer shall be mailed by the Company not less
than 30 days nor more than 45 days before any Change of Control Date to
Holders of Securities at their last registered address with a copy to the
Trustee and the paying Agent and shall set forth (a) notice that a
1
<PAGE>
Change of Control has occurred and that each Holder of Securities then
outstanding has the right to require the Company to purchase, for cash,
such Holders Securities at 101% of the principal amount thereof plus
accrued and unpaid interest thereon to the Change of Control Payment Date,
(b) the Change of Control Payment Date, (c) a description of the Change of
Control and (d) a description of the procedures to be followed by such
Holder in order to have its Securities purchased. The Change of Control
Offer shall remain open for not less than 30 days, nor more than 45 days,
and until the close of business on any such Change of Control Payment Date.
If the Change of Control Payment Date is on or after an interest payment
record date and on or before the related Interest Payment Date, any accrued
interest will be paid to the person in whose name a Security is registered
at the close of business on such record date, and no additional interest
will be payable to Holders who tender a Security pursuant to the Change of
Control Offer.
The Company shall comply with Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder, to the extent such
laws and regulations are applicable, in the event that a Change of Control
occurs and the Company is required to offer to purchase Securities pursuant
to this Section 4.14.
On the Change of Control Payment Date, the Company shall (x) accept
for payment Securities or portions thereof tendered pursuant to the Change
of Control Offer, (y) deposit with the Paying Agent money sufficient to pay
the purchase price of all Securities or portions thereof so tendered and
(z) deliver to the Trustee for cancellation Securities so accepted together
with an Officers' Certificate identifying the Securities or portions
thereof tendered to the Company. The Paying Agent shall promptly mail to
the Holders of Securities so accepted payment in an amount equal to the
purchase price and the Trustee shall promptly authenticate and mail to such
Holders a new Security of the same series equal in principal amount of any
unpurchased portion of the Security surrendered."
ARTICLE II
CONCERNING THE TRUSTEE
SECTION 2.01. The Trustee hereby accepts the trusts hereby declared
and provided and agrees to perform the same upon the terms and conditions
set forth in the Indenture and in this First Supplement Indenture,
including the terms and provisions defining and limiting the liabilities in
the performance of the trust created by the Indenture, as supplemented by
this First Supplemental Indenture.
SECTION 2.02. The Trustee shall not be responsible in any manner
whatsoever for or in respect of the validity or sufficiency of this First
Supplemental Indenture or the due execution hereof by Issuer of the
Subsidiary Guarantors.
ARTICLE 111
MISCELLANEOUS
SECTION 3.01. Except as modified herein, the Indenture is in all
respects confirmed.
SECTION 3.02. This First Supplemental Indenture may be executed in any
number of counterparts, and by the parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same instrument.
SECTION 3.03. This First Supplemental Indenture shall be governed by
and construed in accordance with the internal laws of the State of New
York, without regard to the conflicts of laws rules thereof.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture
to be executed as of the day and year first above written.
RALLY'S, INC.
By: /s/ Donald E. Doyle
--------------------------------------
DONALD E. DOYLE
Its: President, Chief Executive Officer
ATTEST:
/s/ Evan G. Hughes (SEAL)
- ---------------------
EVAN G. HUGHES
Its: Senior Vice President, Chief
Administrative Officer and Secretary
RALLY'S OF OHIO, INC.,
as Subsidiary Guarantor
By: /s/ Michael E. Foss
--------------------------------------
MICHAEL E. FOSS
Its: President Officer
ATTEST:
/s/ Evan G. Hughes (SEAL)
- ---------------------
EVAN G. HUGHES
Its: Secretary
RESTAURANT ACQUISITION CORP.,
as Subsidiary Guarantor
By: /s/ Michael E. Foss
--------------------------------------
MICHAEL E. FOSS
Its: President
ATTEST:
/s/ Evan G. Hughes (SEAL)
- ---------------------
EVAN G. HUGHES
Its: Secretary
SELF SERVICE DRIVE-THRU, INC.,
as Subsidiary Guarantor
By: /s/ Michael E. Foss
--------------------------------------
MICHAEL E. FOSS
Its: President
ATTEST:
/s/ Evan G. Hughes (SEAL)
- ---------------------
EVAN G. HUGHES
Its: Secretary
PNC BANK, KENTUCKY, INC.,
as Trustee
By: /s/ Jack R. Cornwall
--------------------------------------
Name: JACK R. CORNWALL
Title: Assistant Vice President
ATTEST:
/s/ D.G. Metcalf (SEAL)
- ---------------------
Name: D.G. METCALF
Title: Vice President
3
<PAGE>
Exhibit 10.5
RALLY'S HAMBURGERS, INC.
1990 STOCK OPTION PLAN
1. Purpose of Plan. The purpose of this 1990 Stock Option Plan is to
promote the interest of Rally's Hamburgers, Inc., its subsidiaries and
stockholders, by encouraging selected key employees of the Corporation to
acquire a proprietary interest in the Corporation. Such investments should
increase the personal interest and the special effort of such persons in
providing for the continued success and progress of the business of the
Corporation and should enhance the Corporation's efforts to attract and retain
competent key employees.
2. Definitions. The following terms when used herein shall have the
meanings set forth below, unless a different meaning is plainly required by the
context:
(a) Board. The Board of Directors of the Parent.
(b) Code. The Internal Revenue Code of 1986, as it may be amended from
time to time. Reference to any section of the Code shall include any
provision successor thereto.
(c) Committee. The Committee provided for in Section 7.
(d) Common Stock. Shares of the Parent's common stock, par value $.10
per share.
(e) Corporation. The Parent and its "subsidiaries" (as that term is
defined in section 425(f) of the Code).
(f) Disability. Permanent and total disability within the meaning of
section 22(e)(3) of the Code.
(g) Employees. Officers and other key management personnel of the
Corporation, as determined by the Committee from time to time.
(h) Fair Market Value. The fair market value of a share of Common
Stock on a given date, as determined by the Committee; provided, however,
that if the Common Stock on such date is (i) traded on the NASDAQ national
market system, the Fair Market Value shall be the closing price of the
Common Stock on such system; or (ii) traded on an established securities
exchange, the Fair Market Value shall be the closing price of the Common
Stock in the reported consolidated trading of such exchange. If there are
no Common Stock transactions reported for such date, the determination
shall be made as of the last immediately preceding date on which Common
Stock transactions were reported. If there shall be any material alteration
in the present system of reporting sales prices of Common Stock shall no
longer be traded or listed as set forth above, the Fair Market Value of the
Common Stock as of a particular date shall be determined under such method
as shall be determined by the Committee.
(i) Incentive Option. An option defined in section 422A of the Code,
which meets the requirements of Sections 5 and 6.
(j) Non-Qualified Option. An option which is not an Incentive Option.
(k) Option. An Incentive Option or a Non-Qualified Option granted to
an Optionee pursuant to the Plan.
[REFLECTS AMENDMENTS THROUGH MAY ____, 1996]
1
<PAGE>
(l) Option Agreement. A written agreement between the Corporation and
an Optionee evidencing the grant of an Option and containing terms and
conditions concerning the exercise of the Option.
(m) Option Price. The price to be paid for shares to be purchased
pursuant to the exercise of an Option.
(n) Optionee. An Employee who has been granted an Option or the
personal representative, heir or legatee of an Optionee who has the right
to exercise the Option upon the death of the Optionee.
(o)Parent. Rally's Hamburgers, Inc., a Delaware corporation.
(p) Plan. This 1990 Stock Option Plan, as it may be amended from time
to time.
3. Eligibility and Participation. Persons eligible to receive Options under
the Plan shall be Employees who are selected by the Committee. In determining
the Employees to whom Options shall be granted, the number of shares to be
covered by each Option and whether the Options shall be Incentive Options or
Non-Qualified Options, the Committee shall take into account the duties of the
respective Employees, their present and potential contribution to the success of
the Corporation, their anticipated number of years of active service remaining
and such other factors as it deems relevant in connection with accomplishing the
purposes of the Plan. An Employee who has been granted an Option may be granted
an additional Option or Options as the Committee shall so determine.
4. Shares Subject to the Plan. The stock to be offered under the Plan shall
be shares of Common Stock, which shares may be unissued shares or treasury
shares. Subject to the adjustments provided for in Section 8, the aggregate
number of shares to be delivered upon exercise of all Options granted under the
Plan shall not exceed 3,250,000 shares. Shares of Common Stock subject to, but
not delivered under, an Option terminating or expiring for any reason prior to
its exercise in full shall be deemed available for Options to be granted
thereafter during the term of the Plan.
5. Terms and Conditions of Options. All Options granted hereunder shall be
subject to the following terms and conditions:
(a) To Whom Options May Be Granted. Options shall be granted only to
Employees. In the case of Incentive Options, Options shall not be granted
to any Employee who immediately after the granting of an Incentive Option
under the Plan owns more than 10% of the issued and outstanding Common
Stock unless such Incentive Option is granted at 110% of the Value of the
Common Stock at the time of the grant of the Incentive Option. For the
purpose of this Section 5(a) (and Section 6(d)), consistent with the
provisions of section 425(d) of the Code, an Employee is considered as
owning all of the Common Stock owned by his brothers, sisters, spouse,
ancestors and lineal descendants and his pro rata share of all Common Stock
owned by corporations, partnerships, estates and trusts in which he has an
interest.
(b) Non-Transferability of Option. The Option shall not be
transferable by the Optionee otherwise than by bequest or the laws of
descent and distribution, and shall be exercisable during the Optionee's
lifetime only by the Optionee.
(c) Termination of Option Upon Termination of Employment. (i) Subject
to Section 5(c)(ii), if the Optionee's employment by the Corporation shall
terminate for any reason other than death, Disability or termination for
cause, the Option shall terminate six months (three months in the case of
an Incentive Option) after the Optionee's employment terminates (unless the
Optionee dies during such period), or on the Option's expiration date, if
earlier, and shall be exercisable during such period after termination of
employment only with respect to the number of shares which the Optionee was
entitled to purchase on the day preceding the termination of the Optionee's
employment, except that the Committee may, in specific cases, and in its
sole discretion, permit exercise by an Optionee of all, or a part of, the
unexercised Option within the period referred to above after the Optionee's
employment terminates. If the Optionee's employment shall terminate because
of discharge for cause, the Option
2
<PAGE>
shall terminate on the date of the Optionee's discharge.(ii)
Notwithstanding Section 5(c)(i), the Committee may, in its discretion, vary
the foregoing provisions with respect to a particular Optionee or
particular Options granted to such Optionee to make the termination
provisions applicable to such Optionee more favorable to such Optionee so
long as such variation does not extend the expiration date of such Options.
Any such variation shall be set forth in the applicable Option Agreement or
an amendment thereto.
(d) Termination of Option Upon Death or Disability. In the event of
the Optionee's death or Disability while in the employ of the Corporation,
or Optionee's death within six months (three months in case of an Incentive
Option) after the termination of the Optionee's employment (other than by
reason of discharge for cause) the Option shall terminate upon the earliest
to occur of (i) 12 months after the date of the Optionee's death or
Disability or such other date as shall be specified in the Option
Agreement, or (ii) the Option's expiration date. The Option shall be
exercisable during such period after the Optionee's death or Disability
with respect to the number of shares as to which the Option shall have been
exercisable on the date preceding the Optionee's death or Disability, as
the case may be.
(e) Limitation on Incentive Option. If the aggregate value (determined
at the time the Option is granted) with respect to which Options are
exercisable for the first time by an Optionee during any calendar year
under the Plan or any other plan of the Corporation exceeds $100,000, then
notwithstanding anything contained herein, such Option shall be treated as
a Non-Qualified Option to the extent of the excess.
6. Other Terms and Conditions of Option Agreements. The Committee shall
have the power, subject to the limitations contained in the Plan, to prescribe
any terms and conditions regarding the grant or exercise of any Option under the
Plan and in particular shall prescribe the following terms and conditions which
shall be contained in the Option Agreement for all Options:
(a) Type of Option. Whether the Option is an Incentive Option or a
Non-qualified Option.
(b) Number of Shares of Common Stock. The number of shares of Common
Stock to which it pertains.
(c) Exercise Price. The exercise price of the Option, which shall not
be less than 100% of the Fair Market Value of the Common Stock at the time
of the grant of an Incentive Option, except as otherwise provided in
Section 5(a).
(d) Term of Option. The term of the Option, which shall not exceed 10
years from the date on which the Option is granted, unless the Optionee
owns more than 10% of the issued and outstanding Common Stock, in which
case the term shall not exceed five years.
(e) How Exercised. The method or time when the Option may be exercise
in whole or in part, including, but not limited to, whether it may be
exercised by delivery of previously owned shares of common Stock. However,
in no event shall an Option be exercisable within six months of the date of
grant in the case of an Optionee subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(f) Withholding of Taxes. For a Non-Qualified Option, the provisions
for the withholding of Federal, state and local income or other taxes which
are due in connection with the exercise of the Non-Qualified Option.
7. Administration. The Plan shall be administered by the Committee
appointed by the Board which shall consist of two or more disinterested persons
(within the meaning of Rule 16b-3 promulgated pursuant to the Exchange Act
("Rule 16b-3")). In accordance with and subject to the provisions of the Plan,
the Committee shall have full power and authority to interpret the provisions
and supervise the administration of the Plan. All decisions, determinations and
selections made by the Committee pursuant to the provisions of the Plan shall be
final. Each Option granted shall be evidenced by an Option Agreement containing
such terms and conditions as may be approved by the Committee and which shall
not be inconsistent with the Plan.
3
<PAGE>
8. Adjustments Upon Changes in Capitalization. Notwithstanding the
limitations set forth in Section 4, in the event of a merger, consolidation,
reorganization, stock dividend, stock split or other change in corporate
structure or capitalization affecting the Common Stock, the Committee shall make
an appropriate adjustment in the maximum number of shares available under the
Plan or to any one individual and in the number, kind and Option Price, of
Common Stock subject to Options granted under the Plan. Any such adjustment
regarding an Incentive Option shall be made so as not to constitute a
modification, extension or renewal of the Incentive Option within the meaning of
Section 425(h) of the Code.
9. Time of Granting Options. Nothing contained in the Plan or in any
resolution adopted or to be adopted by the Board or by the stockholders of the
Parent, and no action taken by the Committee (other than the granting of a
specific Option), shall constitute the granting of an Option hereunder. The
granting of an Option pursuant to the Plan shall take place only on the date
such Option is approved by the Committee.
10. Amendment and Discontinuance. The Board may discontinue, amend, alter
or suspend the Plan; provided, however, that any amendment requiring stockholder
approval under Rule 16b-3, as in effect from time to time, shall not be made
without obtaining such approval. Unless amended in accordance with the amended
Plan with the consent of the Optionee, any Option which is outstanding under the
Plan at the time of its amendment or termination shall remain in effect in
accordance with its terms and conditions and those of the Plan as in effect when
the Option was granted.
11. Merger, Consolidation, Etc.
(a) Conversion on Merger. In the event the Corporation merges or
consolidates with another corporation, or all or substantially all of the
Corporation's capital stock or assets are required by another corporation,
and the surviving or acquiring corporation issues shares of its stock to
the Corporation's shareholders in connection with the merger, consolidation
or acquisition, the surviving or acquiring corporation shall adopt the Plan
and, upon the exercise of an Option, the Optionee shall, at no additional
cost (other than the Option Price), be entitled to receive, in lieu of the
number of shares of Common Stock to which such Option is then exercisable,
the number and class of shares of stock or other securities to which the
Optionee would have been entitled pursuant to the terms of the merger,
consolidation or acquisition if immediately prior thereto the Optionee had
been the holder of record of the number of shares of Common Stock equal to
the number of shares of Common Stock as to which the Option shall then be
exercisable.
(b) No Conversion on Certain Mergers. In the event that the
Corporation merges or consolidates with another corporation, or all or
substantially all of the Corporation's capital stock or assets are acquired
by another corporation, and the surviving or acquiring corporation does not
issue shares of its stock to the Corporation's shareholders in connection
with the merger, consolidation or acquisition, then, notwithstanding any
other provision of the Plan to the contrary, no Option may be exercised
after the effective date of the merger, consolidation or acquisition.
12. Effectiveness and Termination of the Plan.
(a) Effective Date. The Plan shall become effective upon adoption by
the Board. The Plan shall be rescinded and all Options granted hereunder
shall be null and void unless within 12 months from the date of the
adoption of the Plan by the Board it shall have been approved by the
holders of a majority of the outstanding Common Stock present or
represented and entitled to vote on the Plan at a stockholders' meeting.
(b) Termination Date. The Plan shall terminate on the earliest to
occur of (i) the date when all the Common Stock available under the Plan
shall have been acquired through the exercise of Options granted under the
Plan, (ii) 10 years after the date of adoption of the Plan by the Board or
(iii) such other date as the Board may determine.
13. Governing Law. The provisions of the Plan shall be construed,
administered and enforced according to the laws of the Commonwealth of Kentucky
and shall be construed in such a fashion that all Incentive Options shall
qualify as "incentive stock options" within the meaning of section 422A of the
Code.
4
<PAGE>
14. Replacement Options. The Committee may permit the voluntary surrender
of all or a portion of any Option granted under the Plan, conditioned upon the
granting of the Optionee of a new Option under the Plan for the same or
different number of shares as the Committee may determine. The new Option shall
be exercisable at such price, during such period and in accordance with such
other terms and conditions as the Committee may determine, consistent with the
provisions of the Plan, without regard to the price, period of exercise or other
terms or conditions of the Option surrendered.
ORIGINALLY ADOPTED: August 8, 1990
[Reflects amendments through May __, 1996]
Rally's Hamburgers, Inc.
By: /s/ Donald E. Doyle
---------------------------------
Chairman & CEO
5
<PAGE>
Exhibit 10.12
SUPPLEMENTAL AGREEMENT
This Supplemental Agreement (this "Supplement") is made and entered into as
of the 11th day of February 1997 by and between RALLY'S HAMBURGERS, INC., a
Delaware corporation (the "Company:"), and DONALD E. DOYLE (the "Executive").
RECITALS:
The parties hereto have previously entered into each of (i) the Employment
Agreement, dated March 1, 1996 (the "Employment Agreement"), (ii) the Rally's
Inc. Non-Qualified Stock Option Agreement, dated March 18, 1995 [sic] (the "NQSO
Agreement") and (iii) the Rally's Hamburgers, Inc. Incentive Stock Option
Agreement, dated March 18, 1996 (the "ISO Agreement"). The Company and the
Executive wish to amend certain provisions of the Employment Agreement, NQSO
Agreement and ISO Agreement as provided in this Supplement following certain
discussions and correspondence between them.
NOW, THEREFORE, in consideration of the agreements contained herein and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, the Executive and the Company hereby agree as follows:
AGREEMENT
1. At all times during the Term (as defined in the Employment Agreement,
as modified by this Supplement) Executive shall report to the
Executive Committee of the Board of Directors of the Company (the
"Executive Committee") or to any member thereof designated by a
majority of the Executive Committee. The Executive shall have such
powers and duties as the Executive Committee or such designated
memeber shall prescribe from time to time, provided that such duties
are consistent with the Executive's position as President and Chief
Executive Officer of the Company.
2. Notwithstanding Section 1 of the Employment Agreement to the contrary,
the Company may terminate the Executive's employment under the
Employment Agreement at any time without cause or notice of any kind
whatsoever, it being the intention of the parties that Executive's
employment under the Employment Agreement as modified by this
Supplement will be on an "at will" basis. The Term (as defined in the
Employment Agreement, as modified by this Supplement) shall end on
March 17, 1998 or upon any prior termination of Executive's employment
under the Employment Agreement as modified by this Supplement.
3. (a)If the Company shall terminate the Executive's employment other
than for cause, death or Disability (as defined in the Rally's, Inc.
1990 Stock Option Plan, as amended (the "Plan")),
(i) Company shall pay to the Executive his Base Salary through the
end of the month in which such termination occurs at the rate and
at such times such Base Salary would otherwise be payable under
the Employment Agreement as if such termination had not occurred,
(ii) the Executive may exercise the Option granted in the NQSO
Agreement (the "NQSO Option") (A) at any time occurring before
the Termination Date (as defined in the NQSO Agreement), to the
extent of all Option Shares (as defined in the NQSO Agreement) as
to which the NQSO Option becomes exercisable by the Executive on
March 19, 1997, as if such termination of employment (if
applicable) had not occurred, and (B) at any time occurring
before the Termination Date with respect to such additional
Option Shares as to which the NQSO Option becomes exercisable by
the Executive on March 19, 1998, as if such termination of
employment (if applicable) had not occurred; and
1
<PAGE>
(iii)subject to the provisions of Section 6 of the ISO Agreement, the
Executive may exercise the Option granted in the ISO Agreement
(the "ISO Option") at any time occurring before the Termination
Date (as defined in the ISO Agreement), to the extent of all
shares as to which such ISO Option becomes exercisable by the
Executive on March 19, 1997, as if such termination of employment
(if applicable) had not occurred; and
(iv) the NQSO Option and the ISO Option shall each vest on, and become
exercisable on, the date of such termination of employment to the
extent set forth in clauses (ii) and (iii) above; provided,
however, this Section 3 shall not be interpreted to reduce the
number of shares subject to either the NQSO Option or the ISO
Option if the Company does not terminate the Executive's
employment other than for cause, death or Disability.
(b) For purposes of this Section 3, "cause" shall mean (i) the willful
engaging by the Executive in gross misconduct which is materially
injurious to the Company, (ii) conviction of a felony involving any
financial impropriety or which would materially interfere with the
Executive's ability to perform his services required under the
Employment Agreement (as modified hereby) or otherwise be materially
injurious to the Company, or (iii) the willful refusal of the
Executive to perform in a material respect any of his material
obligations under the Employment Agreement (as modified hereby)
without proper justification after being notified with specificity by
the Board of Directors of the Company in writing of the particular
respects in which the Board of Directors asserts that the Executive
has not performed such material obligations. For purposes of this
Section 3, no act, or failure to act, on the Executive's part shall be
considered willful unless done, or admitted to be done, by the
Executive in bad faith and without reasonable belief that such action
or omission was in the best interests of the Company.
4. Except as provided in Section 3 above, following a termination of the
Executive's employment without cause by the Company, (i) the Company
shall have no obligations under the Employment Agreement, including,
without limitation, any obligation thereunder to pay Base Salary or
other compensation or to provide other benefits except to the extent
otherwise provided by law, and (ii) the Executive shall have no right
to exercise the NQSO Option or the ISO Option.
5. To the extent the terms of this Supplement shall conflict with or be
inconsistent with the terms of Employment Agreement, the NQSO
Agreement, the ISO Agreement or the Plan, the terms hereof shall
control as between the parties hereto. Except to the extent the terms
of this Supplement conflict with or are inconsistent with the terms of
Employment Agreement, the NQSO Agreement, the ISO Agreement or the
Plan, the terms and conditions of each thereof are confirmed in their
entireties as controlling between the parties hereto as if this
Supplement had not been executed. Without limitation to the
immediately preceding sentence, (i) Sections 4 and 4.1 of the
Employment Agreement are hereby confirmed, and (ii) the Company's
right to terminate Executive's employment without cause provided under
Section 2 hereof shall be in addition to, and not in limitation on,
the Company's other rights to terminate the Executive's employment
provided in the Employment Agreement. The parties acknowledge and
agree that the correct date of the NQSO Agreement is March 18, 1996,
not March 18, 1995, and the text of the NQSO Agreement is hereby
amended to reflect such correction.
6. This Supplement will be effective as of the date first written above
upon the execution and delivery hereof by each party hereto.
2
<PAGE>
IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the
Executive have executed and delivered this Supplement as of the date first
written above.
Date: 2/21/97 RALLY'S HAMBURGERS, INC.
--------------------------------
By: /s/ Terry Christensen
------------------------------
Title: Member Board of Directors
------------------------------
Date: 2/21/97 /s/ Donald E. Doyle
-------------------------------- ---------------------------------------
DONALD E. DOYLE
3
<PAGE>
Exhibit 10.16
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is made and entered into as of the
1st day of October, 1996, by and between RALLY'S HAMBURGERS, INC., a Delaware
corporation ("Rally's"), and CKE RESTAURANTS INC., a Delaware Corporation
("Consultant").
RECITALS:
A. Rally's is engaged in the operation and franchising of double drive thru
quick service restaurants (the "Business").
B. Consultant has valuable experience and expertise in restaurant
operation.
C. Rally's desires to engage Consultant in order to secure for Rally's the
benefit of Consultant's experience, efforts and abilities in connection with the
Business, and Consultant desires to be engaged by Rally's in such capacity,
pursuant to the terms and conditions of this agreement.
NOW, THEREFORE, Consultant and Rally's hereby agree as follows:
1. Terms of Agreement. Rally's hereby engages Consultant, and Consultant
hereby accepts such engagement and agrees to serve Rally's, on the terms and
conditions set forth herein for a term commencing on the date hereof and
expiring February 28, 1997 (the "Term"), unless mutually extended.
2. Duties; Standards.
2.1. Duties. Consultant shall assist and advise Rally's in connection
with Rally's operation of the Business. Without limiting the generality of
the foregoing, Consultant shall work on those projects assigned to
Consultant from time to time by the Chief Executive Officer and President
of Rally's, to whom Consultant shall report during the Term.
2.2. Standard of Services. During the Term, Consultant shall (a)
devote such time and energy to the duties requested of Consultant in
connection herewith as reasonable determined by Consultant and Rally's (not
to exceed 10 days during any month of the Term) and (b) use Consultant's
reasonable efforts, skill and abilities to promote Rally's interests.
3. Compensation.
3.1. Base Compensation. For the Term, Rally's shall pay Consultant
base compensation in the amount of $15,000, which shall be payable on
February 28, 1997. If this Agreement is mutually extended, then Rally's
shall pay base compensation to Consultant in the amount of $3,000 each
month, which shall be payable in arrears on the first day of the month
following the month for which such compensation is payable.
3.2. Expenses. In addition to such base compensation, Rally's shall
reimburse Consultant for all ordinary and necessary expenses incurred by
Consultant in the performance of duties hereunder, provided such expenses
are approved by Rally's in advance and thereafter accounted for in
accordance with Rally's policies.
4. Independent Contractor Relationship. In all matters related to this
Agreement, Consultant shall be deemed to be acting as an independent contractor.
Consultant shall have no authority to act for or otherwise bind Rally's in any
matter whatsoever. This Agreement shall not be construed as establishing any
joint venture, partnership, or any other business entity between Consultant and
Rally's.
1
<PAGE>
5. Confidentiality. In the provision of services hereunder Consultant
acknowledges that it will be provided and will otherwise have access to certain
information about the properties, operations, financial conditions and prospects
of Rally's that is non-public, confidential or proprietary in nature (the
"Confidential Information"). Consultant agrees to use such Confidential
Information only in the performance of its services to Rally's hereunder and not
to disclose any Confidential Information to any other person or entity, except
for those employees of Consultant who actually will be performing services
hereunder. The term Confidential Information shall not include information which
(i) is or becomes generally available to the public other than as a result of a
disclosure by Consultant or Consultant's employees, officers or directors, (ii)
was available to Consultant on a non-confidential basis from a source which was
not known by Consultant. after due inquiry, to be bound by a confidentiality
agreement or other obligation of confidentiality with or to Rally's prior to its
disclosure by Rally's, or (iii) becomes available to Consultant on a
non-confidential basis from a source other than Rally's which is not known by
Consultant, after due inquiry, to be bound by a confidentiality agreement or
other obligation of confidentiality with or to Rally's.
6. Miscellaneous.
6.1. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties concerning its subject matter. It supersedes all prior
or written or contemporaneous oral agreements, correspondence, arrangements
and understandings related to its subject matter.
6.2. Captions. All captions in this Agreement are intended soley for
the convenience of the parties, and none shall be deemed to affect the
meaning and construction of any provision hereof.
6.3. Amendment and Modifications. No amendment or other modification
to this Agreement shall be binding upon any party unless executed in
writing by all of the parties hereto.
6.4. Assignment. Consultant may not assign or delegate or otherwise
transfer any of Consultant's rights or obligations under this Agreement to
any other person or entity without obtaining the prior written consent of
Rally's.
6.5. Binding Effect. This Agreement shall be binding upon, and shall
inure to the benefit of and be enforceable by, the parties hereto, their
successors and assigns.
IN WITNESS WHEREOF, Rally's, by its duly authorized officer, and Consultant have
executed and delivered this Agreement on the date first written above.
RALLY'S HAMBURGERS, INC.
By: /s/ Donald Doyle
Title: President & CEO
CKE RESTAURANTS, INC.
By: /s/ C. Thomas Thompson
Title: President, C.O.O.
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of 12/29/96 and the Consolidated Statement of
Operations for the year ended 12/29/96.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-29-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-29-1996
<EXCHANGE-RATE> 1
<CASH> 3,934
<SECURITIES> 1,958
<RECEIVABLES> 2,908 <F1>
<ALLOWANCES> 0
<INVENTORY> 794
<CURRENT-ASSETS> 10,416
<PP&E> 69,806 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,258
<CURRENT-LIABILITIES> 19,968
<BONDS> 68,080
0
0
<COMMON> 2,079
<OTHER-SE> 17,286
<TOTAL-LIABILITY-AND-EQUITY> 112,258
<SALES> 156,445
<TOTAL-REVENUES> 162,752
<CGS> 53,712
<TOTAL-COSTS> 158,662
<OTHER-EXPENSES> 49
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,622
<INCOME-PRETAX> (3,967)
<INCOME-TAX> (675)
<INCOME-CONTINUING> (3,292)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,280
<CHANGES> 0
<NET-INCOME> 1,988
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<FN>
<F1> The asset values for receivables and PP&E represent net amounts.
</FN>
</TABLE>
