RALLY'S HAMBURGERS, INC.
Suite 150
10002 Shelbyville Road
Louisville, Kentucky 40223
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 7, 1997
To the Stockholders:
The Annual Meeting of Stockholders (the "Annual Meeting") of Rally's
Hamburgers, Inc. (the "Company") will be held at the Park Hyatt Hotel, 2151
Avenue of the Stars, Los Angeles, California on August 7, 1997, at 11:00 a.m.
Pacific Time for the following purposes:
(1) To elect a Board of eight directors to serve until the next annual
meeting of stockholders;
(2) To ratify the appointment of Arthur Andersen LLP as the Company's
independent auditors for the fiscal year ending December 28, 1997; and
(3) To transact such other business as may properly come before the
meeting or any adjournments thereof.
A Proxy Statement describing matters to be considered at the Annual Meeting
is attached to this Notice. Only stockholders of record at the close of business
on July 16, 1997 are entitled to receive notice of and to vote at the meeting. A
list of such stockholders will be available for examination by any stockholder,
for any purpose germane to the meeting, during ordinary business hours, at the
law offices of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP,
at 2121 Avenue of the Stars, Eighteenth Floor, Los Angeles, California for a
period of ten days prior to the meeting date.
By Order of the Board of Directors
Evan G. Hughes
Secretary
Louisville, Kentucky
July 18, 1997
IMPORTANT
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE MARK THE CURRENT
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE WHICH HAS BEEN
PROVIDED. IN THE EVENT YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND
VOTE YOUR SHARES IN PERSON.
<PAGE>
RALLY'S HAMBURGERS, INC.
Suite 150
10002 Shelbyville Road
Louisville, Kentucky 40223
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AUGUST 7, 1997
General Information
This Proxy Statement and accompanying proxy are being furnished in
connection with the solicitation of proxies by the Board of Directors (the
"Board") of Rally's Hamburgers, Inc., a Delaware corporation (the "Company"), to
be voted at the Annual Meeting of Stockholders (the "Annual Meeting") and any
adjournments thereof. The Annual Meeting will be held at the Park Hyatt Hotel,
2151 Avenue of the Stars, Los Angeles, California on August 7, 1997, at 11:00
a.m. Pacific Time for the purposes set forth in this Proxy Statement and the
accompanying Notice of Annual Meeting. This Proxy Statement and accompanying
proxy are first being mailed to stockholders on or about July 18, 1997.
A stockholder signing and returning a proxy has the power to revoke it at
any time before the shares subject to it are voted by: (i) notifying the
Secretary of the Company in writing of such revocation; (ii) filing a duly
executed proxy bearing a later date; or (iii) attending the Annual Meeting and
voting in person. If the proxy is properly signed and returned to the Company
and not revoked, it will be voted in accordance with the instructions contained
therein. Unless contrary instructions are given, the proxy will be voted FOR the
nominees for director named in the Proxy Statement and proposal 2 set forth in
the attached Notice of Annual Meeting of Stockholders and in the discretion of
proxy holders on such other business as may properly come before the Annual
Meeting.
The original solicitation of proxies by mail may be supplemented by
telephone and other means of communication and through personal solicitation by
officers, directors and other employees of the Company, at no compensation.
Proxy materials will also be distributed through brokers, custodians and other
like parties to the beneficial owners of the Company's Common Stock, par value
$.10 per share (the "Common Stock"), and the Company will reimburse such parties
for their reasonable out-of-pocket and clerical expenses incurred in connection
therewith.
2
<PAGE>
Record Date And Voting Securities
The Board has fixed the Record Date (the "Record Date") for the Annual
Meeting as the close of business on July 16, 1997, and all holders of record of
Common Stock on this date are entitled to receive notice of and to vote at the
Annual Meeting and any adjournments thereof. At the Record Date, there were
20,557,091 shares of Common Stock outstanding. For each share of Common Stock
held on the Record Date, a stockholder is entitled to one vote on each matter to
be considered at the Annual Meeting. A majority of the outstanding shares
present in person or by proxy is required to constitute a quorum to transact
business at the meeting.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the inspectors of election appointed for the meeting, who also will determine
whether a quorum exists. The affirmative vote of a plurality of the votes cast
at the Annual Meeting will be required for the election of directors.
Abstentions or "withheld" votes will be treated as present and entitled to vote
for purposes of determining a quorum, but as unvoted with respect to the
director or directors indicated. The affirmative vote of a majority of the
shares of Common Stock present and entitled to vote will be required for the
approval of Proposal 2. Since Delaware law treats only those shares voted "for"
a matter as affirmative votes, abstentions or withheld votes will have the same
effect as negative votes or votes "against" a particular matter. If a broker
indicates that it does not have discretionary authority as to certain shares to
vote on a particular matter, such shares will not be considered as present and
entitled to vote with respect to that matter.
3
<PAGE>
STOCK OWNERSHIP OF PRINCIPAL HOLDERS AND MANAGEMENT
The following tables set forth as of the Record Date information concerning
each stockholder known by the Company to beneficially own more than five percent
of the outstanding Common Stock of the Company and information regarding
beneficial ownership of the Company's Common Stock by each director and each
executive officer named in the Summary Compensation Table in this Proxy
Statement and all directors and executive officers as a group.
RALLY'S
HAMBURGERS, INC.
-----------------------
Number of Percent of
Shares (1) Class (2)
--------- -----------
Gary J. Beisler............................. 75,717 (3) *
Terry N. Christensen........................ 183,230 (4) *
Willie D. Davis............................. 260,000 (5) 1.25%
Donald E. Doyle............................. 201,146 (6) *
William P. Foley,II......................... 245,000 (7) 1.18%
Michael E. Foss............................. 71,640 (8) *
David Gotterer.............................. 294,730 (9) 1.42%
Evan G. Hughes.............................. 36,067 (10) *
Ronald B. Maggard........................... 45,000 (11) *
Mark A. Noltemeyer.......................... 38,536 (12) *
Burt Sugarman............................... 650,833 (13) 3.07%
C. Thomas Thompson.......................... 245,000 (14) *
All current directors and executive officers
as a group (12 persons, included above)..... 2,346,899 (15) 10.33%
5% Beneficial Owners
- --------------------
GIANT GROUP, LTD. (16)...................... 3,136,849 15.26%
Fidelity National Financial, Inc. (17)...... 2,009,788 (18) 9.61%
CKE Restaurants, Inc. (19).................. 4,528,015 (20) 21.23%
Travelers Group, Inc. (21).................. 2,263,974 (22) 10.49%
*Represents less than 1% of class.
(1) Based upon information furnished to the Company by the named persons, and
information contained in filings with the Securities and Exchange
Commission (the "Commission"). Under the rules of the Commission, a person
is deemed to beneficially own shares over which the person has or shares
voting or investment power or which the person has the right to acquire
beneficial ownership within 60 days. Unless otherwise indicated, the named
persons have sole voting and investment power with respect to their
respective shares.
4
<PAGE>
(2) Based on 20,557,091 shares outstanding as of July 16, 1997. Shares of
Common Stock subject to options exercisable within 60 days under the
Company's stock option plan are deemed outstanding for computing the
percentage of class of the person holding such options but are not deemed
outstanding for computing the percentage of class for any other person.
(3) Includes 73,441 shares that Mr. Beisler may purchase pursuant to options
and warrants.
(4) Includes 180,615 shares that Mr. Christensen may purchase pursuant to
options and warrants.
(5) Represents 260,000 shares that Mr. Davis may purchase pursuant to options.
(6) Includes 133,406 shares that Mr. Doyle may purchase pursuant to options and
warrants.
(7) Represents 245,000 shares that Mr. Foley may purchase pursuant to stock
options. Excludes 6,537,803 shares which are beneficially owned by CKE
Restaurants, Inc. ("CKE") and Fidelity National Financial, Inc.
("Fidelity") and as to which Mr. Foley disclaims beneficial ownership. See
Notes (18) and (20) below. Mr. Foley is the Chairman of the Board and Chief
Executive Officer of Fidelity and CKE, and he owns 20.3% of the outstanding
shares of common stock of Fidelity. A limited partnership whose general
partner is controlled by Mr. Foley owns 15.8% of the outstanding common
stock of CKE. Fidelity owns 2.2% of the outstanding common stock of CKE.
Mr. Foley may be deemed to be a controlling person of CKE and Fidelity.
(8) Includes 32,008 shares that Mr. Foss may purchase pursuant to options and
warrants. Mr. Foss resigned from all positions held in the Company in
January 1997.
(9) Includes 266,615 shares that Mr. Gotterer may purchase pursuant to options
and warrants, but excludes 22,500 shares underlying options held by Mr.
Gotterer, as to which shares he disclaims beneficial ownership since a
business partner is entitled to the beneficial ownership of such shares
upon any exercise of such options.
(10) Includes 35,072 shares that Mr. Hughes may purchase pursuant to options and
warrants.
(11) Includes 15,000 shares that Mr. Maggard may purchase pursuant to options.
(12) Includes 33,249 shares that Mr. Noltemeyer may purchase pursuant to options
and warrants.
(13) Represents 650,833 shares that Mr. Sugarman may purchase pursuant to
options. Excludes 3,136,849 shares owned by GIANT GROUP, LTD. ("GIANT") of
which Mr. Sugarman may be deemed to be a controlling person. Mr. Sugarman
disclaims beneficial ownership of the shares owned by GIANT. Also excludes
2,615 shares held by Mr. Sugarman as custodian for his minor child and
145,884 shares beneficially owned by Mr. Sugarman's spouse (including
104,692 shares subject to options and warrants) as to which shares Mr.
Sugarman disclaims beneficial ownership. Mr. Sugarman is the Chairman of
the Board, President & Chief Executive Officer of GIANT, and, as of March
14, 1997, he beneficially owned 55.2% of the outstanding common stock of
GIANT.
5
<PAGE>
(14) Represents 245,000 shares that Mr. Thompson may purchase pursuant to
options.
(15) Includes 2,170,239 shares which may be acquired by all directors and
executive officers as a group pursuant to options and warrants.
(16) The address of GIANT is 9000 Sunset Boulevard, Los Angeles, California
90069.
(17) The address of Fidelity is 17911 Von Karman Avenue, Irvine, California
92714.
(18) Includes 1,663,101 shares owned directly and 346,687 shares underlying
currently exercisable warrants.
(19) The address of CKE is 1200 North Harbor Boulevard, Anaheim, California
92801.
(20) Includes 3,752,527 shares owned directly and 775,488 shares underlying
currently exercisable warrants.
(21) The address of Travelers Group, Inc. is 388 Greenwich Street, New York, New
York 10013.
(22) Includes 1,016,787 shares underlying currently exercisable warrants.
Compliance with Section 16(a) of the
Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended ("the
Exchange Act"), requires that the Company's directors and executive officers,
and persons who own more than 10% of a registered class of the Company's equity
securities, file with the Securities and Exchange Commission and NASDAQ reports
of ownership and changes in ownership of Common Stock and other equity
securities of the Company. Officers, directors and greater than 10% stockholders
are required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that, during the 1996 fiscal year, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with except that (i) Messrs. Foley and Thompson each filed their
initial report on Form 3 late; and (ii) one report, covering one transaction,
was filed late by Jeffrey Rosenthal, a former director of the Company.
6
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
At the Annual Meeting, eight directors are to be elected to serve until the
next annual meeting of stockholders. The persons named in the accompanying proxy
have advised the Company that they intend to vote the shares covered by the
proxies FOR the election of the nominees named below. Although it is not
anticipated that any of the nominees will decline or be unable to serve, if that
should occur, the proxy holders may, in their discretion, vote for substitute
nominees. Directors are elected by a plurality of the votes cast. The nominees
for election as directors at the Annual Meeting are as follows: Burt Sugarman;
Donald E. Doyle; Terry N. Christensen; Willie D. Davis; William P. Foley II;
David Gotterer; Ronald B. Maggard; and C. Thomas Thompson. See "Management -
Directors and Executive Officers" and "Stock Ownership of Principal Holders and
Management."
MANAGEMENT
Directors and Executive Officers
The following table sets forth the names and ages of the directors and
executive officers of the Company and the positions they hold with the Company.
Executive officers serve at the pleasure of the Board of Directors.
Name Age(1) Position or Office
Burt Sugarman 58 Chairman of the Board and Director
Donald E. Doyle 50 President, Chief Executive Officer
and Director
Evan G. Hughes 30 Senior Vice President, Chief Administrative
Officer and Secretary
Gary J. Beisler 40 Senior Vice President, Operations
Mark A. Noltemeyer 41 Senior Vice President, Finance
Terry N. Christensen 56 Director
Willie D. Davis 62 Director
William P. Foley, II 52 Director
David Gotterer 68 Director
Ronald B. Maggard 48 Director
C. Thomas Thompson 47 Director
- --------------------------
(1) Ages as of July 16, 1997
7
<PAGE>
Burt Sugarman. Mr. Sugarman has been a Director of the Company since 1989.
For more than the past five years, Mr. Sugarman has been Chairman of the Board,
President and Chief Executive Officer of GIANT, a New York Stock Exchange
company. At the Record Date, GIANT owned approximately 15.26% of the outstanding
Common Stock of the Company. Mr. Sugarman served as Chief Executive Officer of
the Company from 1990 and as its Chairman of the Board since 1991, resigning
from these offices in February 1994. Mr. Sugarman resumed the position of
Chairman of the Board in November 1994.
Donald E. Doyle. On March 18, 1996, the Company named Donald E. Doyle to
the position of President and Chief Executive Officer. Mr. Doyle was also
appointed to the Company's Board of Directors. Prior thereto, since 1994, Mr.
Doyle served as Chief Operating Officer of Hardee's Foodsystems, Inc., an
operator and franchisor of over 3,500 Hardee's quick service restaurants. Mr.
Doyle served from 1992 to 1994 as President and Chief Executive Officer of CKE,
the parent of the Carl's Jr. hamburger chain. From 1989 to 1992, Mr. Doyle
served as President and Chief Executive Officer of the Greater Louisville
Economic Development Partnership. Prior to that date, Mr. Doyle held a variety
of senior positions with KFC, finally serving as President of KFC-USA from 1984
to 1988.
Evan G. Hughes. Mr. Hughes joined the Company as Senior Executive Vice
President and Chief Administrative Officer in March 1995. In December 1995, due
to a corporate reorganization, Mr. Hughes became Senior Vice President, Chief
Administrative Officer and Secretary. He was a trade development consultant in
Houston, Texas and subsequently a business development and marketing manager
with AT&T - Network Systems in Morristown, New Jersey between April 1994 and
March 1995. Mr. Hughes served as Director of Administration for Rally's from
March 1993 until March 1994. Also, Mr. Hughes served as an appointee of the Bush
Administration in Washington, D.C. from December 1988 until November 1992. From
late 1989 until February 1992, he served as Director of Operations at the U.S.
Department of Commerce.
Gary J. Beisler. Mr. Beisler joined the Company in 1987 as an Area
Franchise Director. Since then, he has held positions as District Franchise
Director, Area Director of Company Operations and Vice President of Franchise
Operations. Currently, as Senior Vice President of Operations, he is responsible
for Company Operations, Franchise Operations and Real Estate, Development and
Construction. Prior to 1987, Mr. Beisler owned and operated his own restaurant
and served as Director of Operations for The Fresher Cooker, a Louisville-based
fast food restaurant chain.
Mark A. Noltemeyer. Mr. Noltemeyer joined the Company in 1993 as Chief
Accounting Officer and in January 1994, was promoted to Vice President and Chief
Accounting Officer. In January 1997, Mr. Noltemeyer was promoted to Senior Vice
President, Finance. From 1985 to 1993, Mr. Noltemeyer was employed by KFC in a
variety of finance positions. At the time he left KFC, he was Worldwide Director
of Technical Accounting Services having held such position since 1992. Mr.
Noltemeyer is a Certified Public Accountant.
8
<PAGE>
Terry N. Christensen. Mr. Christensen has served as a Director of the
Company since 1996. For more than the past five years, Mr. Christensen has been
a partner in the law firm of Christensen, Miller, Fink, Jacobs, Glaser, Weil &
Shapiro, LLP, which firm provides legal services to the Company. Mr. Christensen
is a director of GIANT, MGM Grand, Inc. and Checker's Drive-In Restaurants, Inc.
Willie D. Davis. Mr. Davis has served as a Director of the Company since
1994. Mr. Davis has been the President and a director of All-Pro Broadcasting,
Inc., a holding company operating several radio stations, for more than the past
five years. Mr. Davis currently serves on the Board of Directors of Sara Lee
Corporation, K-Mart Corporation, Dow Chemical Company, MGM Grand, Inc., Alliance
Bank, WICOR Incorporated, Johnson Controls Incorporated, L.A. Gear and Strong
Fund.
William P. Foley, II. Mr. Foley has served as a Director of the Company
since 1996. Mr. Foley has served as the Chairman of the Board and Chief
Executive Officer of Fidelity since its formation in 1984. Mr. Foley was also
President of Fidelity from 1984 until December 31, 1994. He has been Chairman of
the Board and Chief Executive Officer of Fidelity National Title Insurance
Company since April 1981. Mr. Foley is also currently serving as Chairman of the
Board and Chief Executive Officer of CKE, Chairman of the Board of Checkers
Drive-In Restaurants, Inc. and is a director of Micro General Corporation.
David Gotterer. Mr. Gotterer has served as a Director of the Company since
1989. Mr. Gotterer has been a partner in the accounting firm of Mason & Company,
LLP, New York, New York, for more than the past five years. Mr. Gotterer is a
director and Vice Chairman of GIANT.
Ronald B. Maggard. Mr. Maggard began serving as a Director of the Company
in 1997. For more than the past five years, Mr. Maggard has been President of
Maggard Enterprises, Newport Beach, which owns 25 franchised Long John Silver
restaurants and two franchised Fazoli's restaurants.
C. Thomas Thompson. Mr. Thompson has served as a Director of the Company
since 1996. Mr. Thompson has been President and Chief Operating Officer of Carl
Karcher Enterprises, Inc. since 1994. Prior thereto, since 1984, Mr. Thompson
was a partner in a partnership which owned and operated 15 restaurants under the
Carl's Jr. franchise system. Mr. Thompson is also currently serving as Chief
Executive Officer and Vice Chairman of the Board of Checker's Drive-In
Restaurants, Inc., owner and franchisor of approximately 475 double-drive thru
restaurants.
On February 13, 1996, a derivative lawsuit naming the members of the
Company's Board of Directors was filed in Delaware Chancery Court by a
shareholder, Harbor Finance Partners. The suit alleges a breach of fiduciary
duty on the part of the Board of Directors in connection with the purchase from
GIANT of the Company's 9.875% Senior Notes due in the year 2000 at an allegedly
inflated price. The Company and its Directors deny all allegations of wrongdoing
made by the plaintiff and intend to defend the suit vigorously. Management does
not believe that this litigation will have a material adverse effect on its
results of operations or financial condition. See "Compensation Committee
Interlocks and Insider Participation."
9
<PAGE>
Meetings of the Board of Directors
The Board of Directors met on 12 occasions during 1996. Each director
attended at least 75% of the aggregate of the meetings of the Board and its
committees on which such director served during his or her period of service.
Committees of the Board of Directors
The Board of Directors has an Executive Committee, a Compensation Committee
and an Audit Committee. The Board of Directors does not have a nominating
committee or any committee performing a similar function. The Executive
Committee is currently comprised of Messrs. Doyle, Foley, Sugarman (Chair) and
Thompson and meets from time to time as considered necessary by its members.
During 1996, the Executive Committee met on two occasions.
The Audit Committee is responsible for exercising supervisory control over
the internal auditing and accounting procedures, practices and personnel of the
Company and for making recommendations to the Board concerning the appointment
of the Company's independent auditors. The current members of the Audit
Committee are Messrs. Davis and Thompson (Chair). During 1996, the Audit
Committee met on one occasion.
The principal duties of the Compensation Committee are to review the
compensation of directors and officers of the Company and to prepare
recommendations and periodic reports to the Board concerning such matters. The
Compensation Committee also administers the Company's employee stock option plan
and recommends to the Board of Directors the award of bonuses to executive
officers. The current members of the Compensation Committee are Messrs.
Christensen (Chair), Foley and Gotterer. Michael Fleishman, who was formerly a
director, served on the Compensation Committee until May, 1996. Burt Sugarman,
Chairman of the Board of the Company, served on the Compensation Committee until
March, 1996. The Compensation Committee met on three occasions during 1996.
Compensation of Directors
Directors not employed by the Company are compensated at a rate of $10,000
per annum, paid quarterly, plus $500 for each Board meeting attended.
Non-employee directors also receive $500 for each committee meeting attended on
a date other than a date on which a Board meeting is held, and are eligible to
participate in the Company's 1995 Stock Option Plan for Non-Employee Directors.
10
<PAGE>
Executive Compensation
Set forth below is information concerning the annual and long-term
compensation of any person who served as the Chief Executive Officer during any
portion of 1996, and the other four most highly compensated executive officers
of the Company as of December 29, 1996, for services in all capacities to the
Company for the last three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Annual Compensation Compensation
-------------------------------------- ------------------------
Other Annual Stock All Other
Salary Bonus Compensation Options Compensation
Name & Principal Position Year ($) ($)(1) ($) (In Shares) ($)
- ------------------------- ---- --- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald E. Doyle 1996 $227,116 (2) $ 0 $ 18,000 (3) 350,000 $ 0
President and CEO 1995 0 0 0 0 0
1994 0 0 0 0 0
Gary J. Beisler 1996 $161,154 $ 5,400 $ 5,700 54,500 $ 0
Sr. Vice President, 1995 135,687 19,577 0 10,000 0
Operations 1994 115,373 0 5,225 48,400 0
Michael E. Foss (4) 1996 $187,692 $ 0 $ 36,178 (3) 10,000 $ 0
Former Sr. Vice 1995 72,443 (5) 100,000 0 160,000 0
President, Chief 1994 0 0 0 0 0
Financial Officer
Evan G. Hughes 1996 $138,462 $ 0 $ 0 15,000 $ 0
Sr. Vice President, 1995 97,500 (6) 15,540 1,462 45,000 0
Chief Administrative 1994 13,462 (6) 0 0 0 0
Officer and Secretary
Mark A. Noltemeyer 1996 $ 116,346 $ 0 $ 0 10,000 $ 0
Sr. Vice President, 1995 108,064 5,000 0 10,000 0
Finance 1994 98,269 0 0 22,150 0
- ----------------------------
<FN>
(1) With the exception of the amounts paid to Messrs. Foss and Hughes in 1995
related to recruitment bonuses, the amounts shown in this column represent
payments made under the Company's Officer Bonus Plan, pursuant to which the
executive officers earned cash bonuses based on individual performance.
(2) Represents partial year payment. Mr. Doyle joined the Company as President
and Chief Executive Officer in March 1996.
(3) With respect to Messrs. Doyle and Foss, the amount in 1996 represents a
reimbursement of relocation expenses incurred.
11
<PAGE>
(4) Mr. Foss resigned from all positions he held in the Company in January
1997.
(5) Represents partial year payment. Mr. Foss joined the Company as Senior Vice
President and Chief Financial Officer in July 1995.
(6) Represents partial year payment. Mr. Hughes rejoined the Company as Senior
Executive Vice President and Chief Administrative Officer in March 1995. In
December 1995, due to a corporate reorganization, Mr. Hughes became Senior
Vice President, Chief Administrative Officer and Secretary. Mr. Hughes
originally joined the Company in March 1993 as Director of Administration
and resigned in March 1994.
</FN>
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information regarding options granted to the
named executive officers during the 1996 fiscal year pursuant to the Company's
1990 Stock Option Plan. The Company does not grant stock appreciation rights
("SARs").
<TABLE>
<CAPTION>
Number of Percentage of
Securities Total Options
Underlying Granted to Exercise of Grant Date
Options Employees in Base Price Expiration Present
Name Granted(#) Fiscal 1996 ($/Share) Date Value ($)(1)
- ---- ---------- ----------- --------- ---- ------------
<S> <C> <C> <C> <C> <C>
Donald E. Doyle 350,000 13.90% $1.75 03/17/01 $360,325
Gary J. Beisler 40,000 1.59% $1.625 02/26/06 $40,224
Gary J. Beisler 14,500 0.58% $2.94 06/21/06 $26,405
Michael E. Foss 10,000 (2) 0.40% $1.625 02/26/06 $10,056
Evan G. Hughes 15,000 0.60% $1.625 02/26/06 $15,084
Mark A. Noltemeyer 10,000 0.40% $1.625 02/26/06 $10,056
- ---------------------
<FN>
(1) The Company used the Black-Scholes model of option valuation to determine
grant date present value. The present value calculation is based on, among
other things, the following assumptions: (a) interest of 6.81% for the
February 26, 1996 and March 18, 1996 grants, and 6.84% for the June 21,
1996 grant, based on the then quoted yield of Treasury Bills maturing in
eight years; (b) dividend yield of 0% per share based on the Company's
history of no dividend payments; and (c) stock price expected future
volatility of 45.7% determined based upon the monthly stock closing prices
for the past four to five years of companies included in the Company's peer
group. See "Comparison of Five-Year Cumulative Stockholder Return." The
Company does not advocate or necessarily agree that the Black-Scholes model
can properly determine the value of an option. There is no assurance that
the value, if any, realized by the option holder will be at or near the
value estimated under the Black-Scholes model.
12
<PAGE>
(2) These options terminated upon Mr. Foss' resignation from the Company and
became available for future grants under the Company's 1990 Stock Option
Plan.
</FN>
</TABLE>
Aggregated Option Exercises In Last Fiscal Year
And Fiscal Year End Option Values
Set forth below is information with respect to options exercised by the
named executive officers during the 1996 fiscal year, and the number and value
of unexercised stock options held by the named executive officers at the end of
the fiscal year. There were no SARs outstanding at the 1996 fiscal year end.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-The-
Options Held At Fiscal Money Options at
Shares Acquired Value Realized Year End Fiscal Year End(1)
Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ---------------- ------------ ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald E. Doyle 0 N/A 0 350,000 $ 0 $ 920,499
Gary J. Beisler 0 N/A 35,599 77,301 13,259 145,260
Michael E. Foss 0 N/A 53,333 116,667 60,265 148,081
Evan G. Hughes 0 N/A 14,999 45,001 24,047 89,426
Mark A. Noltemeyer 0 N/A 18,098 24,052 8,795 39,499
- ---------------------
<FN>
(1) Based on the difference between the option exercise price and closing price
of the Company's Common Stock on the NASDAQ National Market system on
December 29, 1996 ($4.375).
</FN>
</TABLE>
Employment and Severance Agreements
In April 1995, the Company and Evan Hughes entered into an Employment
Agreement pursuant to which Mr. Hughes was to serve as Senior Executive Vice
President and Chief Administrative Officer for a term of 30 months beginning on
March 28, 1995 at an annual salary of not less than $130,000. Mr. Hughes is
eligible to participate in the Company's incentive bonus programs. Pursuant to
the terms and conditions of the Company's 1990 Stock Option Plan, Mr. Hughes was
granted an option to purchase 35,000 shares of the Company's Common Stock at
$2.75 per share. Upon joining the Company, Mr. Hughes was awarded a signing
bonus of $10,000 after federal, state and local tax deductions. Under his
Employment Agreement, Mr. Hughes has agreed not to compete with the Company in
the double drive-thru hamburger business for a period of 18 months after the
termination of his employment with the Company.
In July 1995, the Company and Michael Foss entered into an Employment
Agreement pursuant to which Mr. Foss served as the Company's Senior Vice
President and Chief Financial Officer for a term that commenced August 1, 1995,
and expired on January 31, 1997, at an annual salary of not less than $175,000.
Mr. Foss was eligible to participate during his employment in the Company's
incentive bonus programs. Pursuant to the terms and conditions of the Company's
1990 Stock Option Plan, Mr. Foss was granted an option to
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purchase 160,000 shares of the Company's Common Stock at $3.25 per share. On
joining the Company, Mr. Foss was awarded a signing bonus of $100,000 in cash
and 30,188 shares of Common Stock having a value of $100,000 as an inducement
for Mr. Foss to terminate his previous employment. Mr. Foss agreed, during the
term of his Employment Agreement and for three years thereafter, not to
disclose, other than to employees of the Company or to persons to whom
disclosure is reasonably necessary or appropriate in connection with the
performance of his duties thereunder, any material, confidential information
relating to certain of the operations of the Company, the disclosure of which
would be materially damaging to the Company. Mr. Foss resigned all positions
held with the Company effective January 31, 1997.
In March 1996, the Company and Donald E. Doyle entered into an Employment
Agreement pursuant to which Mr. Doyle serves as President and Chief Executive
Officer of the Company for a term commencing March 18, 1996 and expiring March
17, 1998, at an annual base salary of $295,000, subject to annual review. This
agreement is renewable on an annual basis for a new two-year term at the
discretion of the Board. Mr. Doyle is eligible to participate in the Company's
incentive and bonus programs. Pursuant to the terms and conditions of the
Company's 1990 Stock Option Plan, Mr. Doyle was granted an option to purchase
350,000 shares of the Company's Common Stock at $1.75 a share, the market price
on the date of Mr. Doyle's employment by the Company. Under his Employment
Agreement, Mr. Doyle has agreed not to compete with the Company in the double
drive-thru hamburger business for a period of two years after the termination of
his employment with the Company. In addition, Mr. Doyle has agreed, during the
term of his Employment Agreement and for three years thereafter, not to
disclose, other than to employees of the Company or to persons to whom
disclosure is reasonably necessary or appropriate in connection with the
performance of his duties thereunder, any material confidential information
relating to certain of the operations of the Company, the disclosure of which
would be materially damaging to the Company. In February 1997, the Company and
Mr. Doyle entered into a Supplemental Agreement pursuant to which his Employment
Agreement was modified to state that Mr. Doyle's employment will be on an "at
will" basis. In addition, his Supplemental Agreement provides for the
acceleration of the vesting of 57,142 of the options granted to Mr. Doyle upon
occurrence of certain changes in Mr. Doyle's employment status prior to the
normal vesting date for these options.
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Compensation Committee Report On Executive Compensation
Compensation Policies
The Compensation Committee of the Board of Directors was comprised of Terry
N. Christensen (Chair), William P. Foley, II and David Gotterer since May, 1996.
All current members of the Compensation Committee are non-employee directors.
Prior to May 1996, the Committee was comprised of Messrs. Fleishman, Gotterer
and Sugarman (the latter only until March 1996). Messrs. Fleishman and Gotterer
are not employees of the Company. During 1996, the Compensation Committee was
responsible for advising the Board of Directors on matters relating to the
compensation of the Company's executive officers and administering the Company's
1990 Stock Option Plan. Set forth below is a report submitted by the
Compensation Committee describing its compensation policies and the Committee's
decisions relating to compensation of executive officers in 1996.
The Compensation Committee's policies concerning the compensation of the
Company's executive officers are summarized as follows:
- Compensation awarded by the Company should be effective in attracting,
motivating and retaining key executives;
- Executive officers should receive incentive compensation which relates to
the Company's performance and the executives' contribution to such
performance; and
- The Company's compensation programs should give the executives a
financial interest in the Company similar to the interests of the Company's
stockholders.
The Compensation Committee believes that the performance of the Company,
including profitability, return on equity and cash flow, as well as the
Company's performance in relation to the performance of other companies engaged
in the quick-service restaurant industry is important in determining the
compensation to be awarded to the Company's executive officers.
The Company's executive officers are compensated through a combination of
salary, annual bonuses (where appropriate) and grants of stock options under the
1990 Stock Option Plan. The annual salaries of the Company's executives are
reviewed from time to time by the Compensation Committee. The Compensation
Committee recommends to the Board of Directors that adjustments be made where
necessary in order for the annual salaries of the Company's executives to be
competitive with the salaries paid by other companies in the industry.
Annual bonuses, where appropriate, may be awarded by the Board of Directors
based on recommendations of the Compensation Committee. No bonuses were awarded
in 1996 to the Company's named executive officers except as reflected in the
Summary Compensation Table in this Proxy Statement.
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The Compensation Committee periodically grants stock options under the 1990
Stock Option Plan in order to provide executive officers and other employees
with an interest in the Company. The Compensation Committee believes that stock
options are a valuable tool in encouraging executive officers to align their
interests with the interests of the stockholders and to manage the Company for
the long-term. No stock options were granted in 1996 to the Company's named
executive officers other than as reflected in the Option Grant Table in this
Proxy Statement.
Compensation of the Chief Executive Officer
Mr. Doyle has served as the Chief Executive Officer of the Company since
March 1996. In determining the compensation paid to him in 1996, the
Compensation Committee applied the policies described above. Mr. Doyle was
eligible to participate in the same executive compensation plans available to
the Company's other executive officers. Mr. Doyle, the President and Chief
Executive Officer of the Company, was paid a base salary of $227,116. No bonus
was awarded to Mr. Doyle under the Company's Bonus Plan during the 1996 fiscal
year. Mr. Doyle received $18,000 during fiscal 1996 representing a reimbursement
of relocation expenses incurred.
Mr. Doyle was granted options to purchase 350,000 shares under the
Company's 1990 stock options plan in 1996. In February 1997, the Company and Mr.
Doyle entered into a Supplemental Agreement which provides for the acceleration
of the vesting of 57,142 of these options upon the occurrence of certain changes
in Mr. Doyle's employment status prior to the normal vesting date for these
options.
OBRA Deductibility Limitation
Under the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), subject to
certain exceptions and transition provisions, the allowable deduction for
compensation paid or accrued with respect to the chief executive officer and
each of the four most highly compensated executive officers of a publicly held
corporation, is limited to $1 million per year, per executive officer. The
Company has determined not to take any actions at this time with respect to its
compensation plans which might be necessary to exempt compensation under such
plans from the OBRA deductibility limitation.
Terry N. Christensen (Chair)
William P. Foley, II
David Gotterer
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Compensation Committee
Interlocks And Insider Participation
The Compensation Committee of the Board of Directors is responsible for
executive compensation decisions as described above. The Committee was comprised
of Messrs. Christensen, Foley and Gotterer since May 1996. Prior to May 1996,
the Committee was comprised of Messrs. Fleishman, Gotterer and Sugarman (the
latter only until March 1996). Mr. Christensen is a partner in a law firm which
provided legal services to the Company during 1996 and which will provide legal
services to the Company in the future. Mr. Foley is Chairman of the Board and
Chief Executive Officer of Fidelity and CKE, which, as of the Record Date,
beneficially owned approximately 9.61% and 21.23%, respectively, of the
outstanding shares of Common Stock of the Company. Mr. Fleishman is a member in
a law firm which provided legal services to the Company during 1996 and which
will provide legal services to the Company in the future. Mr. Sugarman is a
director of the Company and serves as Chairman of the Board. Mr. Sugarman also
serves as the Chairman of the Board, President and Chief Executive Officer of
GIANT, which as of the Record Date owned approximately15.26% of the outstanding
Common Stock of the Company. Mr. Gotterer, a director of the Company, serves as
a director and Vice Chairman of the Board of GIANT. Mr. Gotterer also serves on
the Compensation Committee of GIANT.
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, may be converted to the
Carl's Jr. format. To date, two restaurants have 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.
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.
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On December 20, 1996, the Company issued warrants (the "Warrants") to
purchase 750,000 restricted shares of its Common Stock each to CKE and Fidelity.
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, which will be expensed by the Company over the one-year vesting
period.
Rally's has entered into a marketing-sharing agreement with CKE covering
the use of advertising created by the Company's advertising agency,
Mendelsohn/Zien Advertising, for the benefit of the Company and its franchisees,
based on a successful advertising campaign originally developed for the
California-based Carl's Jr. chain. The agreement is for a one-year period
beginning December 1, 1996, renewable for additional successive one-year terms,
and calls for the reimbursement per commercial to CKE for 30% of its production
costs (not to exceed $100,000). In addition, the Company entered into a
Consulting Agreement with CKE in October 1996, pursuant to which CKE is to
assist and advise the Company in connection with its operation of the business.
The Consulting Agreement expired February 28, 1997, but has been extended until
February 28, 1998. Payments under the Consulting Agreement are $3,000 per month
plus ordinary expenses.
On January 29, 1996, the Company repurchased from GIANT, in two
transactions, at a price of $678.75 per $1,000 principal amount, $22 million
face value of the Company's 9.875% Senior Notes due in the year 2000. The price
paid in each transaction represented the market closing price of the Senior
Notes on January 26, 1996. The first transaction involved the repurchase of $16
million face value of the Senior Notes for $11.1 million in cash. The second
transaction involved the purchase of $6 million face value of Senior Notes in
exchange for a $4.1 million short-term note due in three installments of
principal and interest issued by Rally's to GIANT bearing interest at the
highest publicly announced referenced rate of interest maintained by a large
banking institution for commercial loans of short-term maturities to its most
credit-worthy large corporate borrowers. The purchases were approved by a
majority of the independent directors of the Company, all of whom were
unaffiliated with GIANT. 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.
GIANT purchased the Senior Notes sold to the Company for $11.4 million during
the last two years.
In early February 1996, GIANT entered into a one-year credit facility with
the Company. Such credit facility was evidenced by a note payable to GIANT for
up to $2 million. Any monies advanced under said note bore interest at the
highest publicly announced referenced rate of interest maintained by a large
banking institution for commercial loans of short-term maturities to its most
credit-worthy large corporate borrowers. Interest was payable
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<PAGE>
monthly. The facility was terminated upon the Company's completion of its
shareholders rights offering in September 1996. In addition, during 1996 GIANT
issued certain irrevocable letters of credit to secure the obligation of the
Company under its high deductible workers' compensation insurance program and to
secure certain surety bonds previously issued by the Company. Such letters of
credit were replaced by the Company during 1996 with irrevocable letters of
credit issued by the Company which are secured by certificates of deposit
purchased by the Company.
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Comparison Of Five-Year Cumulative Stockholder Return
The following graph compares the cumulative return experienced by holders
of the Company's Common Stock to the returns of the NASDAQ Stock Market (U.S.
Companies) and to the peer group indices during the period from December 29,
1991 through the end of the Company's 1996 fiscal year. The peer group consists
of the following publicly-held restaurant companies: CKE Restaurants, Inc. (Carl
Karcher Enterprises); Checkers Drive-In Restaurants, Inc.; Flagstar Companies,
Inc.; Foodmaker, Inc.; Krystal Company; and Sonic Corp. The graphs assume the
investment of $100 on December 29, 1991 in the Company's Common Stock and each
of the indices. Total return calculations assume the reinvestment of all
dividends. The Company has never paid a cash dividend.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Legend
Symbol CRSP Total Returns Index for: 12/27/91 12/31/92 12/31/93 12/30/94 12/29/95 12/27/96
- ------ ------------------------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
- ----- Rally's Hamburgers, Inc. 100.0 155.6 77.2 26.9 8.7 44.3
- - - - - Nasdaq Stock Market (US Companies) 100.0 120.6 138.4 135.3 191.4 235.7
......... Self-Determined Peer Group 100.0 152.2 106.2 54.1 56.0 82.0
Companies in the Self-Determined Peer Group:
C K E RESTAURANTS, INC. CHECKERS DRIVE IN RESTAURANTS, INC.
FLAGSTAR COMPANIES, INC. FOODMAKER, INC.
KRYSTAL COMPANY SONIC CORP
Notes:
A. The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the previous trading day.
C. If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D. The index level for all series was set to $100.00 on 12//27/97.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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PROPOSAL 2
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has appointed Arthur Andersen LLP as independent
auditors of the Company for the 1997 fiscal year ending December 28, 1997.
Arthur Andersen has acted as independent auditors for the Company since 1987.
Representatives of Arthur Andersen are expected to be present at the Annual
Meeting where they will have an opportunity to make a statement, if they desire
to do so, and to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF ARTHUR
ANDERSEN LLP AS INDEPENDENT AUDITORS FOR THE 1997 FISCAL YEAR.
Other Business
The Board of Directors is not aware of any other matters to be presented at
the Annual Meeting other than those set forth in the Notice of Annual Meeting
and routine matters incidental to the conduct of the meeting. If any other
matters should properly come before the Annual Meeting or any adjournment or
postponement thereof, the persons named in the proxy, or their substitutes,
intend to vote on such matters in accordance with their best judgment.
Stockholder Proposals
Any stockholder proposal intended to be presented at the 1998 Annual
Meeting of Stockholders must be received by the Company by March 19, 1998 in
order to be considered for inclusion in the Company's proxy materials for such
meeting.
Annual and Quarterly Reports
The Company's 1996 Annual Report to Stockholders (which includes its Annual
Report on Form 10-K for the period ending December 29, 1996) and its Quarterly
Report on Form 10-Q for the period ending March 30, 1997 accompany this Proxy
Statement.
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The Company's 1996 Annual Report on Form 10-K (including the financial
statements and schedules thereto) and Quarterly Report on Form 10-Q for the
quarterly period ended March 30, 1997 will be provided without charge to each
stockholder upon written request. Each request must set forth a good faith
representation that, as of July 16, 1997 , the Record Date for the Annual
Meeting, the person making the request was the beneficial owner of shares of
Common Stock of the Company. The request should be directed to: Evan G. Hughes,
Secretary, Rally's Hamburgers, Inc., 10002 Shelbyville Road, Suite 150,
Louisville, Kentucky 40223, telephone (502) 245-8900.
By Order of the Board of Directors
EVAN G. HUGHES
Secretary
Louisville, Kentucky
July 18, 1997
22
