<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Rally's Hamburgers, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
[RALLY'S LOGO]
RALLY'S HAMBURGERS, INC.
600 CLEVELAND STREET, EIGHTH FLOOR
CLEARWATER, FLORIDA 34615
May 15, 1998
Dear Stockholder:
You are cordially invited to attend the 1998 Annual Meeting of
Stockholders of Rally's Hamburgers, Inc. The Meeting will be held on Thursday,
June 11, 1998 at 9:00 a.m., Pacific Time, at Fess Parker's Doubletree Resort,
located at 633 East Cabrillo Boulevard, Santa Barbara, California.
The Notice of the Meeting and the Proxy Statement on the following
pages cover the formal business of the Meeting. We will also report on the
progress of the Company and comment on matters of current interest.
It is important that your shares be represented at the Meeting. We ask
that you promptly sign, date and return the enclosed proxy card in the envelope
provided, even if you plan to attend the Meeting. Returning your proxy card to
us will not prevent you from voting in person at the Meeting if you are present
and choose to do so.
If your shares are held in street name by a brokerage firm, your broker
will supply you with a proxy to be returned to the brokerage firm. It is
important that you return the form to the brokerage firm as quickly as possible
so that the brokerage firm may vote your shares. You may not vote your shares in
person at the Meeting unless you obtain a power of attorney or legal proxy from
your broker authorizing you to vote the shares, and you present this power of
attorney or proxy at the Meeting.
Your Board of Directors and management look forward to greeting you
personally at the Meeting.
Sincerely,
James T. Holder
Secretary
<PAGE> 3
RALLY'S HAMBURGERS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 11, 1998
Notice is hereby given that the Annual Meeting of Stockholders of
Rally's Hamburgers, Inc., a Delaware corporation, will be held at Fess Parker's
Doubletree Resort, located at 633 East Cabrillo Boulevard, Santa Barbara,
California, on Thursday, June 11, 1998, at 9:00 a.m., Pacific Time, for the
following purposes:
1. To elect a Board of Directors comprised of nine
directors to serve until the next Annual Meeting of Stockholders and
until their successors are elected and qualified or until their earlier
resignation, removal from office or death;
2. To approve the conversion of the Company's Series A
Preferred Stock into Common Stock;
3. To ratify and approve an amendment to the Company's
1990 Stock Option Plan;
4. To ratify and approve the grant of options to the
Non-Employee Directors;
5. To ratify the appointment of KPMG Peat Marwick LLP as
the Company's independent auditors for fiscal 1998; and
6. To transact such other business as may properly come
before the Meeting or any adjournment thereof.
Your attention is directed to the Proxy Statement accompanying this
Notice for a more complete description of the matters to be acted upon at the
Meeting. The 1997 Annual Report of the Company is also enclosed. Stockholders of
record at the close of business on May 11, 1998 are entitled to receive notice
of and to vote at the Meeting and any adjournment thereof. 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 3938 State
Street, #200, Santa Barbara, California 93105 for a period of ten days prior to
the Meeting date.
All stockholders are cordially invited to attend the Meeting. Whether
or not you expect to attend, please sign and return the enclosed Proxy promptly
in the envelope provided to assure the presence of a quorum. You may revoke your
Proxy and vote in person at the Meeting if you desire. If your shares are held
in street name by a brokerage firm, your broker will supply you with a proxy to
be returned to the brokerage firm. It is important that you return the form to
the brokerage firm as quickly as possible so that the brokerage firm may vote
your shares. You may not vote your shares in person at the Meeting unless you
obtain a power of attorney or legal proxy from your broker authorizing you to
vote the shares, and you present this power of attorney or proxy at the Meeting.
By order of the Board of Directors,
JAMES T. HOLDER
Secretary
Clearwater, Florida
May 15, 1998
<PAGE> 4
RALLY'S HAMBURGERS, INC.
600 CLEVELAND STREET, EIGHTH FLOOR
CLEARWATER, FLORIDA 34615
PROXY STATEMENT
This Proxy Statement is furnished by the Board of Directors and
management of Rally's Hamburgers, Inc. (the "Company" or "Rally's") in
connection with the solicitation of proxies to be voted at the Company's 1998
Annual Meeting of Stockholders, which will be held at 9:00 a.m., Pacific Time,
on Thursday, June 11, 1998, at Fess Parker's Doubletree Resort, 633 East
Cabrillo Boulevard, Santa Barbara, California (the "Meeting").
Any proxy delivered pursuant to this solicitation may be revoked, at
the option of the person executing the proxy, at any time before it is exercised
by delivering a signed revocation to the Company, by submitting a later-dated
proxy or by attending the Meeting in person and casting a ballot. If proxies are
signed and returned without voting instructions, the shares represented by the
proxies will be voted as recommended by the Board of Directors.
The close of business on May 11, 1998 has been designated as the record
date for the determination of stockholders entitled to receive notice of and to
vote at the Meeting ("Stockholders"). As of May 11, 1998, 24,879,414 shares of
the Company's common stock, par value $.10 per share (the "Common Stock"), were
issued and outstanding. Each Stockholder will be entitled to one vote for each
share of Common Stock registered in his or her name on the books of the Company
as of the close of business on May 11, 1998 on all matters that come before the
Meeting.
The affirmative vote of a plurality of the votes cast at the Meeting
will be required for the election of Directors. A properly executed proxy marked
"WITHHOLD AUTHORITY" with respect to the election of one or more Directors will
not be treated as voted with respect to the Directors indicated, although it
will be counted for purposes of determining whether there is a quorum. For each
other item to be acted upon at the Meeting, the affirmative vote of the holders
of a majority of the shares of Common Stock represented in person or by proxy at
the meeting and entitled to vote on the item will be required for approval. A
properly executed proxy marked "ABSTAIN," although counted for purposes of
determining whether there is a quorum, will not be voted. Accordingly, an
abstention will have the same effect as a vote cast against such other matters.
In accordance with the rules of the NASDAQ National Market, brokers and
nominees may be precluded from exercising their voting discretion with respect
to certain matters to be acted upon (e.g., any proposal which would
substantially affect the rights or privileges of the Common Stock) and thus, in
the absence of specific instructions from the beneficial owner of shares, will
not be empowered to vote the shares on such matters. 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. Shares represented by such broker non-votes
will, however, be counted for purposes of determining whether there is a quorum.
The cost of soliciting proxies will be borne by the Company. In
addition to the use of the mails, proxies may be solicited personally or by
telephone by regular employees of the Company, without additional compensation.
The Company will reimburse brokers and other persons holding stock in their
names, or in the names of nominees, for their expenses in sending proxy
materials to their principals and obtaining their proxies. The approximate date
on which this Proxy Statement and enclosed form of proxy has been first mailed
to Stockholders is May 15, 1998.
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<PAGE> 5
ELECTION OF DIRECTORS
There are currently nine seats on the Board of Directors of the
Company, with no vacancies. The Board of Directors unanimously recommends that
you vote "FOR" the election as Directors of the nominees set forth below, to
hold office until the Company's next annual meeting of stockholders and until
their successors shall be duly elected and qualified or until their earlier
resignation, removal from office or death. The nominees for election as
Directors at the Meeting are as follows: Terry N. Christensen; Willie D. Davis;
William P. Foley, II; James J. Gillespie; David Gotterer; Ronald B. Maggard;
Andrew F. Puzder; Burt Sugarman; and C. Thomas Thompson. See "Management -
Directors and Executive Officers" and " - Security Ownership of Management and
Others" for further information about such nominees.
Directors are elected by a plurality of the votes cast. Stockholders
may not vote cumulatively in the election of Directors. In the event any of the
nominees should be unable to serve, which is not anticipated, the proxy
committee, which consists of James J. Gillespie, Joseph N. Stein and James T.
Holder, will vote for such other person or persons for the office of Director as
the Board of Directors may recommend.
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. Executive
officers serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William P. Foley, II 53 Chairman of the Board of Directors
James J. Gillespie 47 President, Chief Executive Officer and Director
Harvey Fattig 57 Executive Vice President and Chief Operating Officer
Joseph N. Stein 37 Executive Vice President and Chief Financial Officer
James T. Holder 39 Vice President, Assistant General Counsel and
Secretary
Terry N. Christensen 57 Director
Willie D. Davis 63 Director
David Gotterer 69 Director
Ronald B. Maggard 48 Director
Andrew F. Puzder 47 Director
</TABLE>
-3-
<PAGE> 6
<TABLE>
<S> <C> <C>
Burt Sugarman 58 Director
C. Thomas Thompson 48 Director
</TABLE>
William P. Foley, II has served as a Director of the Company since 1996
and as Chairman of the Board since October 1997. Mr. Foley has been the Chairman
of the Board and Chief Executive Officer of Fidelity National Financial, Inc.,
which through its subsidiaries is a title insurance underwriting company
("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 of
Directors and Chief Executive Officer of CKE Restaurants, Inc., owner, operator
and franchisor of quick-service restaurants, primarily under the Carl's Jr. and
Hardee's brand names ("CKE"), and as Chairman of the Board of Checkers Drive-In
Restaurants, Inc. ("Checkers"), developer, owner, operator and franchisor of
quick-service "double drive-thru" restaurants under the name "Checkers," and is
a director of Micro General Corporation, DataWorks Corporation and Fresh Foods,
Inc.
James J. Gillespie has served as President and Chief Executive Officer
of the Company, and as Chief Executive Officer of Checkers, since November 1997
and as a Director of the Company and Checkers since December 1997. Mr. Gillespie
served as President of the Applebee's Division of Apple South, Inc., franchisee
of 254 Applebee restaurants from January to October 1997. Prior thereto, Mr.
Gillespie served since 1976 in various capacities with Long John Silver's Inc.,
operator and franchisor of Long John Silver's restaurants, including as Senior
Vice President-Franchise Operations and, prior to that position, as Divisional
Vice President, Southwest Division. The Company and Checkers share the costs
related to the employment of Mr. Gillespie and other shared executive officers.
See "Management-Compensation of Executive Officers" and "Compensation Committee
Interlocks and Insider Participation."
Harvey Fattig has served as Chief Operating Officer of the Company
since March 1998. From March 1990 through February 1998, Mr. Fattig served as
Regional Vice President of Long John Silver's Inc.
Joseph N. Stein has served as Executive Vice President and Chief
Financial Officer of the Company since December 1997 and as Executive Vice
President and Chief Administrative Officer of Checkers since January 1997. He
served as Chief Financial Officer of Checkers from January 1997 to February,
1998. From May 1995 through December 1996, Mr. Stein was Senior Vice President
and Chief Financial Officer for Carl Karcher Enterprises, Inc., and for more
than five years prior to his employment with Carl Karcher Enterprises, Inc., he
was Senior Vice President, Director, National Agency Operation at Fidelity
National Title Company.
James T. Holder has served as Vice President, Assistant General Counsel
and Secretary of the Company since December 1997 and as a Senior Vice President
and General Counsel of Checkers since January 1997, as Chief Financial Officer
of Checkers from May to December 1996, and as Secretary since October 1995. Mr.
Holder served as Vice President and General Counsel of Checkers from September
1995 to June 1996, as senior legal counsel for Checkers from December 1994
through April 1995 and corporate counsel from November 1993 through November
1994. Mr. Holder was engaged in the private practice of law from January 1991 to
November 1993, in Tampa, Florida.
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<PAGE> 7
Terry N. Christensen has served as a Director of the Company since
1996. Mr. Christensen has been a partner in the law firm of Christensen, Miller,
Fink, Jacobs, Glaser, Weil & Shapiro, LLP since May 1988. Mr. Christensen is a
director of GIANT GROUP, LTD. ("GIANT"), MGM Grand, Inc. and Checkers.
Willie D. 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 and L.A. Gear, Inc.
David 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 has served as a Director of the Company since 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.
Andrew F. Puzder has served as a Director of the Company since 1997. He
has served as Executive Vice President and General Counsel of CKE since February
1997 and as an Executive Vice President and General Counsel of Fidelity since
January 1995. From March 1994 through December 1994, Mr. Puzder was a partner at
the law firm of Stradling, Yocca, Carlson & Rauth. From September 1991 through
March 1994, he was a partner at Lewis, D'Amato, Brisbois and Bisgaard, a law
firm.
Burt Sugarman has served as a Director of the Company since 1997. Mr.
Sugarman has been the Chairman of the Board, President and Chief Executive
Officer of GIANT for more than the past five years and served as the Chief
Executive Officer of Rally's from 1990 and as the Chairman of the Board of
Directors of Rally's from 1991, resigning from these offices in February 1994.
Mr. Sugarman resumed the position of Chairman of the Board of Directors of
Rally's in November 1994 and resigned such office in October 1997. Mr. Sugarman
is a Director of GIANT and Rally's.
C. Thomas Thompson has served as a Director of the Company since 1996.
He served as Chief Executive Officer of Checkers from December 1996 to November
1997, and he has served as Vice Chairman of the Board of Checkers since December
1996. Mr. Thompson has been President and Chief Operating Officer of Carl
Karcher Enterprises, Inc., a wholly owned subsidiary of CKE, since October 1994
and President of CKE since December 1984. Since 1984, Mr. Thompson has been a
partner in a partnership which owns and operates 15 restaurants under the Carl's
Jr. franchise system. Mr. Thompson is a director of Checkers.
No family relationships exist between any of the Directors of the
Company, the persons listed as nominees for election as Directors at the Meeting
and the executive officers of the Company. There are no arrangements or
understandings between any Director or nominee and any other person concerning
service or nomination as a Director.
The Board of Directors held six meetings during 1997. In 1997, each
incumbent Director attended at least 75% of the meetings of the Board of
Directors and of each committee of which he was a member.
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<PAGE> 8
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has Executive, Audit, Compensation and Option
Committees; it does not have a Nominating Committee. The entire Board of
Directors functions as a Nominating Committee, and the Board will consider
written recommendations from stockholders for nominations to the Board of
Directors in accordance with the procedures set forth in the By-Laws of the
Company.
Until October 1997, the Executive Committee consisted of William P.
Foley, II, Burt Sugarman (Chair), C. Thomas Thompson and Donald Doyle, formerly
Chief Executive Officer and a Director of the Company. Since November 1997, the
Executive Committee has consisted of Messrs. Foley, Gillespie, Sugarman (Chair)
and Thompson. During intervals between the meetings of the Board of Directors,
the Executive Committee exercises all the powers of the Board (except those
powers specifically reserved by Delaware law to the full Board of Directors) in
the management and direction of the Company's business and conduct of the
Company's affairs in all cases in which specific directions have not been given
by the Board.
The Audit Committee consists of Willie D. Davis and C. Thomas Thompson
(Chair) and held one meeting in 1997. 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 Compensation Committee consists of William P. Foley, II (Chair),
David Gotterer and Ronald B. Maggard and held one meeting in 1997. Its principal
function is to make recommendations to the Board of Directors with respect to
the compensation and benefits to be paid to officers, and it also recommends to
the Board of Directors the award of bonuses to executive officers. The
Compensation Committee also performs other duties prescribed by the Board of
Directors with respect to employee benefit programs.
The Option Committee consists of Terry Christensen (Chair) and Andrew
F. Puzder and met one time in 1997. Its principal function is to make
recommendations to the Board of Directors with respect to options to be granted
pursuant to the Company's stock option plans.
COMPENSATION OF DIRECTORS
Directors who are not employees are compensated on the basis 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 participate in the
1994 Stock Option Plan For Non-Employee Directors. Such Plan provides for the
automatic grant to each non-employee Director upon election to the Board of
Directors of a non-qualified, ten-year option to acquire 15,000 shares of the
Company's Common Stock, with the subsequent automatic grant on May 11 of each
year, or the anniversary of such person's election as a Director if elected
after May 11, 1996, during the time such person is serving as a non-employee
Director of a non-qualified, ten-year option to acquire an additional 15,000
shares of Common Stock. In addition, each non-employee Director who is elected a
member of the Executive Committee is granted an additional option for 7,500
shares of Common Stock, and the Chairman of the Executive Committee is granted a
third option for 20,000 shares of Common Stock upon election as Chairman. During
the period each Non-Employee Director serves on the Executive Committee, such
Non-Employee Director receives subsequent automatic grants of an option to
purchase 7,500 shares of Common Stock (plus an additional 20,000 shares in the
case of the Chairman of the Executive Committee) on May 11 of each year or the
anniversary of such person's election to the Executive Committee if elected
after May 11, 1996. All such options have an exercise price equal to the closing
sale price of the Common Stock on the date of grant. Such
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<PAGE> 9
options are immediately exercisable. Directors who are employees of the Company
receive no extra compensation for their services as Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors, officers and holders of more
than 10% of the Company's Common Stock to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and any other equity securities of the Company. To the
Company's knowledge, based solely upon a review of the forms, reports and
certificates filed with the Company by such persons, all such Section 16(a)
filing requirements were complied with by such persons in 1996, except as
follows:
Messrs. Maggard and Puzder each filed their Form 3 late. Messrs.
Christensen, Davis, Gotterer and Sugarman each filed one Form 5 late, each of
which related to one option grant.
-7-
<PAGE> 10
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth, as of April 23, 1998, information as
to: (a) the beneficial ownership of the Company's Common Stock and Series A
Preferred Stock by (i) each person serving the Company as a Director on such
date and each nominee for Director, (ii) each person who qualifies as a "named
executive officer" as defined in Item 402(a)(3) of Regulation S-K under the
Exchange Act (the "Named Executive Officers") and (iii) all of the Directors and
executive officers of the Company as a group; and (b) the beneficial ownership
of the Company's Common Stock by each person known to the Company as having
beneficial ownership of more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED STOCK
------------ ------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME SHARES(1) CLASS(2) SHARES(1) CLASS(3)
- ----- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
William P. Foley, II 544,553(4) 2.2% 1,018 2.2%
James J. Gillespie -- -- --
Terry N. Christensen 395,392(5) 1.6% 124 *
Willie D. Davis 460,000(6) 1.8% -- --
David Gotterer 518,068(7) 2.1% 255 *
Ronald B. Maggard 245,000(8) 1.0% -- --
Andrew Puzder 229,725(9) * -- --
Burt Sugarman 875,671(10) 3.4% 255 *
C. Thomas Thompson 454,925(11) 1.8% 102 *
Gary Beisler(12) 95,507(13) * -- --
Donald Doyle(12) 203,530(14) * -- --
Evan G. Hughes(12) 35,994 * -- --
All current Directors and 3,524,563(15) 12.5%
executive officers as a
group (12 persons)
CKE Restaurants, Inc. 8,076,095(16) 30.9% 28,619 62.7%
1700 N. Harbor Blvd.
Anaheim, CA 92801
Fidelity National Financial, Inc. 3,128,461(16) 12.2% 3,771 8.3%
3938 State Street, #200
Santa Barbara, CA 93105
GIANT GROUP, LTD. 3,180,718 12.9% 449 *
9000 Sunset Blvd., 16th Floor
Los Angeles, CA 90069
</TABLE>
- -------------
* Less than 1%.
-8-
<PAGE> 11
(1) Based upon information furnished to the Company by the named persons
and information contained in filings with the SEC. Under the rules of
the SEC, 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. Excludes shares of
Common Stock which will be received upon conversion of the Company's
Series A Participating Preferred Stock, $.10 par value per share (the
"Series A Preferred Stock"), if Proposal 2 is approved at the Meeting.
See "Compensation Committee Interlocks and Insider Participation" and
"Approval of the Conversion of the Series A Preferred Stock."
(2) Based on 24,636,363 shares of Common Stock outstanding as of April 23,
1998. Shares of Common Stock subject to options or warrants exercisable
within 60 days ("Exercisable Securities") are deemed outstanding for
computing the percentage of class of the persons holding such options
or warrants but are not deemed outstanding for computing the percentage
of class for any other person.
(3) Based on 45,667 shares of Series A Preferred Stock outstanding as of
April 13, 1998.
(4) Includes 445,000 shares of Common Stock underlying Exercisable
Securities.
(5) Includes 380,615 shares of Common Stock underlying Exercisable
Securities.
(6) Represents Common Stock underlying Exercisable Securities.
(7) Includes 486,615 shares of Common Stock underlying Exercisable
Securities, 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.
(8) Includes 215,000 shares of Common Stock underlying Exercisable
Securities.
(9) Includes 219,000 shares of Common Stock underlying Exercisable
Securities.
(10) Includes 850,833 shares of Common Stock underlying Exercisable
Securities. Excludes 3,180,718 shares owned by 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 shares held by AJ Sugarman and Mary Hart Sugarman, Mr.
Sugarman's minor child and spouse, respectively, as to which Mr.
Sugarman disclaims beneficial ownership. Mr. Sugarman is the Chairman
of the Board, President & Chief Executive Officer of GIANT and
beneficially owns approximately 55.2% of the outstanding common stock
of GIANT.
(11) Includes 267,500 shares of Common Stock underlying Exercisable
Securities.
(12) Messrs. Beisler and Hughes ceased being executive officers of the
Company in March 1998 and September 1997, respectively. Mr. Doyle
resigned all positions with the Company on October 8, 1997.
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<PAGE> 12
(13) Includes 93,231 shares of Common Stock underlying Exercisable
Securities.
(14) Includes 135,790 shares of Common Stock underlying Exercisable
Securities.
(15) Includes 3,524,563 shares Common Stock underlying Exercisable
Securities.
(16) Includes 6,550,607 shares of Common Stock held directly and 1,525,488
shares of Common Stock underlying Exercisable Securities.
(17) Includes 2,031,774 shares of Common Stock held directly and 1,096,687
shares of Common Stock underlying Exercisable Securities.
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<PAGE> 13
COMPENSATION OF EXECUTIVE OFFICERS
The following table is a summary of the compensation paid or accrued by
the Company for the last three fiscal years for services in all capacities to
each of the persons who qualified as a Named Executive Officer during the year
ended December 30, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND SALARY BONUS COMPENSATION OPTIONS ALL OTHER
PRINCIPAL POSITION ($) ($) ($)(1) (#) COMPENSATION
- ------------------ --- --- --- --- ------------
<S> <C> <C> <C> <C> <C> <C>
James J. Gillespie(2) 1997 $ 22,533 $25,000 $ 3,818(3) 300,000 $ --
Chief Executive Officer
Donald E. Doyle(4) 1997 $265,668 $45,887 $ 6,000(5) -- $ --
President and Chief 1996 227,116 -- 18,000(5) 350,000 --
Executive Officer
Gary J. Beisler(6) 1997 $168,077 $40,581 $ 5,700(7) 20,000 --
Sr. Vice President 1996 161,154 5,400 5,700(7) 54,500 --
Operations 1995 135,687 19,577 -- 10,000 --
Evan G. Hughes(8) 1997 $110,762 $21,777 $ -- 20,000 $ --
Senior Vice President 1996 138,462 -- -- 15,000 --
Chief Administrative 1995 97,500 15,540 1,462 45,000 --
Officer and Secretary
</TABLE>
- ------------
(1) Certain perquisites were provided to certain of the Named Executive
Officers, but in no event did the value of the perquisites provided in
any year exceed 10% of the amount of the executive's salary for that
year.
(2) Mr. Gillespie was appointed President and Chief Executive Officer in
November 1997.
(3) Includes relocation expenses ($3,708) and life insurance premiums
($110).
(4) Mr. Doyle joined the Company as President and Chief Executive Officer
in March 1996. He resigned from all positions he held with the Company
in October 1997.
(5) Consists of relocation expenses.
(6) Mr. Beisler resigned all positions he held in the Company in March
1998.
(7) Consists of automobile allowance.
(8) Mr. Hughes resigned all positions he held in the Company in December
1997.
-11-
<PAGE> 14
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to
the Named Executive Officers during fiscal 1997 pursuant to the Company's 1990
Stock Option Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
INDIVIDUAL GRANTS(1) TERM(2)
NUMBER OF PERCENTAGE OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL 1997 ($/SHARE) DATE 5% ($) 10% ($)
- ---- ------- ----------- --------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
James J.Gillespie 300,000 42.86% $4.00 11/10/07 $754,674 $1,912,491
Donald E. Doyle -0- -- -- -- -- --
Gary J. Beisler 20,000 2.86% 2.75 3/4/07 34,589 87,656
Evan G. Hughes 20,000 2.86% 2.75 3/4/07 34,589 87,656
</TABLE>
- -----------------------
(1) All options were granted pursuant to the 1990 Stock Option Plan.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
provided in compliance with Regulation S-K under the Exchange Act. The
Company does not necessarily believe that these appreciation
calculations are indicative of actual future stock option values or
that the price of the Common Stock will appreciate at such rates.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
Set forth below is information with respect to options exercised by the
Named Executive Officers during fiscal 1997, and the number and value of
unexercised stock options held by the Named Executive Officers at the end of the
fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE
UNDERLYING UNEXERCISED MONEY OPTIONS
SHARES ACQUIRED VALUE OPTIONS HELD AT FISCAL
ON REALIZED AT FISCAL YEAR END YEAR END(1)
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- --- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
James J. Gillespie -- -- N/A 300,000 -- --
Gary J. Beisler -- N/A 93,231 -- $ 39,490 --
Donald E. Doyle -- N/A 176,192 -- $220,240 --
Evan G. Hughes 34,998 $43,014 -- -- -- --
</TABLE>
- -------------------------
(1) Based on the difference between the option price and closing price of
the Company's Common Stock on the NASDAQ National Market on December
28, 1997 ($3.00).
-12-
<PAGE> 15
EMPLOYMENT AND SEVERANCE AGREEMENTS
Effective November 10, 1997, the Company, Checkers and James J.
Gillespie entered into an employment agreement, pursuant to which Mr. Gillespie
serves as the President and Chief Executive Officer and a Director of the
Company and Checkers. The term of employment is for two years, subject to
automatic renewal by the Company and Checkers for one-year periods thereafter,
at an annual base salary of $282,500. Mr. Gillespie is also entitled to
participate in the incentive bonus plans of the Company and Checkers. Upon
execution of the employment agreement, Mr. Gillespie was granted an option to
purchase 300,000 shares of Common Stock and became entitled to receive a signing
bonus of $50,000. The option vests in three equal annual installments commencing
on November 10, 1998; provided, that if the term of the agreement is not
extended to November 10, 2000, the option shall become fully vested on November
10, 1999. Mr. Gillespie is entitled to choose to participate in either the
Company's or Checkers' employee benefit plans and programs and is entitled to
reimbursement of his reasonable moving expenses and a relocation fee of $5,000.
The agreement may be terminated at any time for cause. If Mr. Gillespie is
terminated without cause, he will be entitled to receive his base annual salary,
and any earned unpaid bonus, through the unexpired term of the agreement,
payable in a lump sum or as directed by Mr. Gillespie. Cause is defined as (i) a
material default or breach under the agreement, (ii) the willful and habitual
failure to perform duties under the agreement or corporate policies, or (iii)
misconduct, dishonesty, insubordination or other act that has a direct,
substantial and adverse effect on the reputation of the Company or Checkers or
their relationships with their customers or employees. Mr. Gillespie has agreed
to keep confidential all nonpublic information about the Company and Checkers
during the term of his employment and for a two-year period thereafter. In
addition, Mr. Gillespie has agreed that he will not, during his employment,
engage in any business which is competitive with either the Company or Checkers.
The Company and Checkers intend to share the costs associated with this
agreement. See "Compensation Committee Interlocks and Insider Participation."
In February 1998, the Company, Checkers and Harvey Fattig entered into
a letter agreement pursuant to which Mr. Fattig is employed. Pursuant to the
agreement, Mr. Fattig serves as Executive Vice President and Chief Operating
Officer of the Company and Checkers and is paid by Checkers at an annual rate
of $175,000. Mr. Fattig is entitled to be considered for an annual bonus and
received options to purchase 108,000 shares of Checkers' Common Stock and
42,000 shares of the Company's Common Stock. The options vest in equal
installments over a three-year period. Mr. Fattig is entitled to reimbursement
of his relocation expenses and to six months' severance pay if terminated
without cause prior to the third anniversary of his employment.
In March 1996, the Company and Donald E. Doyle entered into an
agreement pursuant to which Mr. Doyle was employed as President and Chief
Executive Officer of the Company commencing March 18, 1998 at an annual base
salary of $295,000. The agreement was scheduled to expire in March 1998, subject
to renewal at the discretion of the Board of Directors. Mr. Doyle was granted an
option to purchase 350,000 shares of Common Stock at $1.75 per share. Mr. Doyle
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 agreed that, during the term of his
employment and for a three-year period thereafter, he would not disclose 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 this employment agreement was modified to provide that his
employment was on an "at will" basis. In addition, the supplemental agreement
provided for the acceleration of the vesting of 57,142 nonqualified options
granted to Mr. Doyle upon occurrences of certain changes in Mr. Doyle's
employment status. In October, 1997, Mr. Doyle tendered his resignation as an
officer and director of the Company, and the above-described options vested
pursuant to the supplemental agreement.
-13-
<PAGE> 16
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION POLICIES
The Compensation Committee of the Board of Directors has been comprised
of Terry N. Christensen (Chair), William P. Foley, II and David Gotterer since
May 1996, each of whom is a non-employee Director. During 1997, 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
its decisions relating to compensation of executive officers in 1997.
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 Company's stock option plan. The annual salaries of the Company's executive
officers 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 upon recommendations of the Compensation Committee. During 1997,
Mr. Gillespie received a signing bonus of $50,000 from Checkers, of which the
Company reimbursed Checkers $25,000, and Mr. Beisler received a bonus of
$40,561.
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. In 1997, the Compensation Committee approved the
following grant of options: Mr. Gillespie, 300,000 shares; Mr. Beisler, 20,000
shares; and Mr. Hughes, 20,000 shares.
-14-
<PAGE> 17
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
James J. Gillespie has served as the Chief Executive Officer of the
Company and Checkers since November 1997. In reviewing the terms of Mr.
Gillespie's employment agreement and determining the compensation to be paid to
him in 1997, the Compensation Committee applied the policies described above.
Pursuant to his employment agreement, Mr. Gillespie is paid by Checkers at the
annual rate of $ 282,500 and received a signing bonus of $ 50,000. The Company
reimbursed Checkers for its share of Mr. Gillespie's compensation. Pursuant to
his employment, Mr. Gillespie was granted an option to purchase 300,000 shares
of Common Stock, which option vests in three annual installments subject to
acceleration in certain circumstances. See "Management-Employment and Severance
Agreements."
Effective October 8, 1997, Donald E. Doyle resigned his position as
President and Chief Executive Officer and as a Director of the Company. Payments
that Mr. Doyle received in connection with his resignation are described under
the Summary Compensation Table. The Committee's actions with respect to Mr.
Doyle's resignation reflect the Committee's reasonable judgment of Mr. Doyle's
service and position with the Company.
William P. Foley, II (Chairman)
David Gotterer
Ronald B. Maggard
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 has been
comprised of Messrs. Christensen, Foley and Gotterer since May 1996. Mr.
Christensen is a partner in a law firm which provided legal services to the
Company during 1997 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 May 3, 1998, beneficially owned approximately
30.9% and 12.2%, respectively, of the outstanding shares of Common Stock. Mr.
Gotterer serves as a director and Vice Chairman of the Board, and serves on the
Compensation Committee of the Board of Directors, of GIANT, which beneficially
owns approximately 12.9% of the outstanding shares of Common Stock.
On December 18, 1997, the Company acquired approximately 19.1 million
shares of Checkers' common stock, $.001 par value per share ("Checkers Common
Stock"), pursuant to that certain Exchange Agreement, dated as of December 8,
1997 (the "Exchange Agreement"), between the Company, CKE, Fidelity, GIANT and
the other parties named therein, including certain directors of the Company and
members of their immediate families. Pursuant to the Exchange Agreement, the
Company issued an aggregate of 3,909,336 shares of Common Stock and 45,667
shares of Series A Preferred Stock. The Series A Preferred Stock will be
converted into an aggregate of 4,566,700 shares of Common Stock upon approval of
Proposal No. 2 by the Company's stockholders. The exchange ratio used to
determine the number of shares of Common Stock to be issued pursuant to the
Exchange Agreement (including upon conversion of the Series A Preferred Stock)
was based upon the average closing price of the Common Stock and Checkers Common
Stock for the five trading days preceding the public announcement of the
proposed exchange on September 22, 1997. The following table sets forth the
names, number of shares of Checkers Common Stock surrendered and the number of
shares of Common Stock and Series A Preferred Stock received pursuant to the
Exchange Agreement by each person who is: (i) a Director (or nominee for
Director); (ii) an executive officer; (iii)
-15-
<PAGE> 18
a beneficial owner of more than five percent of the Common Stock; or (iv) any
member of the immediate family of any of the foregoing.
<TABLE>
<CAPTION>
RALLY'S SECURITIES RECEIVED
NUMBER OF SHARES OF CHECKERS COMMON SERIES A
NAME COMMON STOCK EXCHANGED STOCK PREFERRED STOCK
- ---- ---------------------- ----- ---------------
<S> <C> <C> <C>
CKE(1) 12,754,885 2,798,080 28,619
Fidelity(1) 1,680,616 368,673 3,771
GIANT(1) 200,045 43,869 449
David Gotterer(2) 113,438 24,838 255
Burt Sugarman(2) 113,438 24,838 255
Mary Hart Sugarman(3) 272,230 59,702 611
AJ Sugarman(3) 27,168 5,955 61
Terry Christensen(2) 55,353 12,162 124
Al Sugarman(3) 45,353 9,925 102
William P. Foley II(2) 453,754 99,553 1,018
Andrew Puzder(2) 45,353 9,925 102
C. Thomas Thompson(2) 45,353 9,925 102
</TABLE>
- ---------------
(1) Five percent stockholder.
(2) Director.
(3) Family member of Mr. Sugarman.
Effective November 30, 1997, the Company and Checkers entered into a
management services agreement (the "Management Services Agreement") pursuant to
which Checkers is providing key services to the Company, including executive
management, financial planning and accounting, franchise, purchasing and human
resources. In addition, the Company and Checkers share certain of their
executive officers, including the Chief Executive Officer and the Chief
Operating Officer. Management believes that the Company's acquisition of the
Checkers Common Stock, entering into the Management Services Agreement and
sharing certain executive officers will enable the Company and Checkers to take
advantage of cost savings opportunities by facilitating the combination of
administrative and operational functions. Management believes that the net cost
of the services provided by Checkers are generally below the cost of such
services if provided by the Company or a third party. The total cost of these
services in 1997 was $95,000.
On July 1, 1996, the Company entered into a ten-year Operating
Agreement with Carl Karcher Enterprises, Inc., a subsidiary of CKE ("CKEI"),
pursuant to which 28 Rally's owned restaurants located in California and Arizona
are being operated by CKEI. Such agreement is cancelable after an initial
five-year term, at the discretion of CKE. To date, two of these restaurants have
been converted to the Carl's Jr. format. Under the terms of the Operating
Agreement, CKEI 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. The Company retains ownership of all 28 restaurants and is
entitled to receive a percentage of gross revenues generated by each restaurant.
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 CKEI. The Company anticipates that the Operating Agreement will
continue to positively impact both net income and cash flow. While the overall
impact of the Operating Agreement is not expected to be material to the
Company's financial statements, management believes that it will allow
management to concentrate its efforts in more fully developed Rally's markets
and to take advantage of any improvements in restaurant operations
-16-
<PAGE> 19
attained by CKEI. In the event of a sale of any of the 28 restaurants, the
Company and CKEI would share in the proceeds based upon the relative value of
their respective capital investments in such restaurant.
In October 1996, the Company entered into a Consulting Agreement with
CKE pursuant to which CKE is to assist and advise the Company in connection with
its operations. The Consulting Agreement, which was initially scheduled to
expire in February 1997, was extended to March 31, 1998. The Consulting
Agreement provides for payments of $3,000 per month plus ordinary expenses. In
1997, the Company paid $45,000 to CKE pursuant to this agreement.
The Company entered into a marketing sharing agreement with CKE for a
one-year term commencing December 1, 1996. The agreement provided for the use by
the Company of advertising created for CKE's Carl's Jr. restaurant chain. The
agreement, which has been terminated, provided for payments to CKE of 30% of its
production costs per commercial. The Company paid CKE $267,047 pursuant to this
agreement.
COMPARISON OF FIVE-YEAR CUMULATIVE STOCKHOLDER RETURN
The following graph compares the cumulative return experienced by
holders of the Common Stock to the returns of the NASDAQ Stock Market (U.S.
Companies) and to the peer group indices during the period from December 31,
1992 through the end of the Company's 1997 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 31, 1992 in the Common Stock and each of the
indices. Total return calculations assume the reinvestment of all dividends. The
Company has never paid a cash dividend.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG RALLY'S HAMBURGERS, INC.,
NASDAQ COMPOSITE INDEX AND PEER GROUP
<TABLE>
<CAPTION>
12/31/92 12/30/93 12/31/94 12/29/95 12/30/96 12/28/97
<S> <C> <C> <C> <C> <C> <C>
RALLY'S 100 50 17 6 26 17
NASDAQ COMP 100 115 111 155 191 232
PEER GROUP 100 77 45 61 106 124
</TABLE>
Note: The stock price performance shown on the graph above is not necessarily
indicative of future price performance. Additionally, the Stock
Performance Graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into
any filing under the Securities Act or under the Exchange Act except
to the extent that the Company specifically incorporates this
information by reference, and shall not otherwise by deemed filed
under such Acts.
-17-
<PAGE> 20
PROPOSAL NO. 2
APPROVAL OF THE CONVERSION OF THE SERIES A PREFERRED STOCK
BACKGROUND
In December 1997, the Company completed an exchange (the "Exchange") of
its equity securities, which resulted in the issuance of 3,909,336 shares of the
Company's Common Stock and 45,667 shares of the Company's Series A Preferred
Stock in exchange for 19,100,960 shares of Checkers Common Stock. The exchange
ratio was based upon the average closing prices of the Common Stock and Checkers
Common Stock for the five trading days immediately preceding the announcement of
the proposed exchange on September 22, 1997. The participants in the Exchange
also received certain piggyback and demand registration rights with respect to
the Common Stock received in the Exchange. The terms of the Exchange, including
the terms of the Series A Preferred Stock, were reviewed and approved by an
Independent Committee of the Board of Directors, consisting of Willie D. Davis
and Ronald B. Maggard.
The participants in the Exchange included CKE, Fidelity, William P.
Foley, II, Terry N. Christensen, David Gotterer, Andrew Puzder, Burt Sugarman
and C. Thomas Thompson. See "Compensation Committee Interlocks and Insider
Participation" for a table setting the shares exchanged by such persons. As a
result of the Exchange, CKE, Fidelity and GIANT now beneficially own
approximately 30.9%, 12.2% and 12.9%, respectively, of the outstanding shares of
Common Stock.
DESCRIPTION OF SERIES A PREFERRED STOCK
The rights, preferences, privileges and restrictions of the Series A
Preferred Stock are set forth in the Certificate of Designation of Series A
Preferred of the Company, filed with the Secretary of State of the State of
Delaware on December 17, 1997 (the "Certificate of Designation"), a copy of
which is attached hereto as Appendix I. The principal terms of the Series A
Preferred Stock are summarized below. Such summary is qualified in its entirety
by reference to the Certificate of Designation which is incorporated herein by
this reference.
Liquidation Preference. Upon any liquidation (voluntary or otherwise),
dissolution or winding up of the Company, holders of the Series A Preferred
Stock will be entitled to receive an amount equal to $ 300 per share, plus
accrued unpaid dividends, based upon the number of days elapsed and a 360-day
year (the "Liquidation Preference"), prior to any distribution to holders of
Common Stock. After payment in full of the Liquidation Preference to holders of
the Series A Preferred and after holders of the Common Stock shall have received
an amount per share equal to the Liquidation Preference, then the remaining
assets of the Corporation shall be distributed ratably to the holders of the
Series A Preferred Stock and the holders of the Common Stock.
Dividends. If the Company's stockholders do not approve the conversion
of the Series A Preferred Stock into Common Stock, as set forth in this Proposal
No. 2, the holders of the Series A Preferred Stock will have the right to
receive, in preference to any dividends in cash or property (other than capital
stock) to holders of Common Stock, cumulative dividends, accruing from December
17, 1997, of $ 43.50 per share per annum, subject to adjustment in certain
circumstances. Such dividends shall be payable (i) in cash, (ii) in shares of
Common Stock having an aggregate fair market value equal to the amount of the
dividend or (iii) in cash and shares of Common Stock. Such dividends will be
payable in arrears in cash commencing on August 31, 1998 and quarterly
thereafter on the last day of November, February, May and August to
-18-
<PAGE> 21
holders of record of the Series A Preferred Stock on such dates as the Board of
Directors may from time to time determine, when and as declared by the Board of
Directors.
Voting Rights. Holders of the Series A Preferred Stock have no voting
rights except as follows: (i) upon failure of the Company to declare and pay any
two dividends, whether or not consecutive, or upon failure of the Company to
redeem the outstanding Series A Preferred Stock on or prior to December 17,
2000, holders of the Series A Preferred Stock will have the right, voting as a
class, to elect two additional Directors to the Board of Directors; and (ii)
approval of holders of 2/3 of the outstanding shares of Series A Preferred Stock
will be required for an amendment to the Company's Amended Certificate of
Incorporation which would materially alter or change the power, preferences or
special rights of the Series A Preferred Stock so as to affect them adversely.
Conversion. If the holders of the Common Stock approve Proposal No. 2,
each outstanding share of the Series A Preferred Stock will automatically be
converted into the number of shares of Common Stock obtained by dividing the
Liquidation Preference by $ 3.00, subject to adjustment. At June 11, 1998, the
Liquidation Preference will be $300, which will result in 4,566,700 shares of
Common Stock being issued upon conversion of the Series A Preferred Stock. The
participants in the Exchange have agreed to vote in favor of the conversion of
the Series A Preferred Stock.
Mandatory Redemption. If the holders of Common Stock do not approve
Proposal No. 2, the Company will be required to redeem all outstanding shares of
Series A Preferred Stock on or prior to December 17, 2000 at a redemption price
equal to the Liquidation Preference. If the Company defaults on the obligation
to redeem the Series A Preferred Stock, then the dividend rate shall be
increased to $ 54.00 per annum and the holders of the Series A Preferred Stock
shall be entitled, voting as a separate class, to elect two additional
Directors, unless such holders are already entitled to elect two Directors.
PROPOSAL
The Board of Directors has concluded that the conversion of the Series
A Preferred Stock into Common Stock is in the best interests of the Company and
its stockholders in order to avoid the obligation to pay cash dividends on the
Series A Preferred Stock aggregating $ 2,245,234 per year and to redeem the
Series A Preferred Stock by December 17, 2000. THE BOARD OF DIRECTORS RECOMMENDS
THAT THE STOCKHOLDERS APPROVE THE CONVERSION OF THE SERIES A PREFERRED STOCK
INTO COMMON STOCK PURSUANT TO SECTION 9 OF THE CERTIFICATE OF DESIGNATION.
-19-
<PAGE> 22
PROPOSAL NO. 3
RATIFICATION AND APPROVAL OF THE
GRANT OF STOCK OPTIONS TO NON-EMPLOYEE DIRECTORS
On February 12, 1998, pursuant to the recommendation of the Stock
Option Committee, the Board of Directors approved the grant of options
(collectively, the "Options" and individually, an "Option") to purchase 200,000
shares of Common Stock to each of the Company's Non-Employee Directors, as set
forth in the following table.
OPTION GRANTS TO
NON-EMPLOYEE DIRECTORS
<TABLE>
<CAPTION>
NAME DOLLAR VALUE ($)(1) NUMBER OF
- ---- ------------------- ---------
OPTIONS
-------
<S> <C> <C>
William P. Foley, II $ 0 200,000
Terry N. Christensen 0 200,000
Willie D. Davis 0 200,000
David Gotterer 0 200,000
Ronald B. Maggard 0 200,000
Andrew F. Puzder 0 200,000
Burt Sugarman 0 200,000
C. Thomas Thompson 0 200,000
</TABLE>
- -----------
(1) Based on the difference between the exercise price and the
closing price of the Common Stock of $2.31 as reported on the
NASDAQ National Market on May 8, 1998.
The Stock Option Committee and the Board of Directors believe that the
grant of the Options to Non-Employee Directors helps the Company compete for,
motivate and retain high caliber directors, and that it is in the best interests
of the Company and its stockholders to grant these Options. Any increase in the
value of the Options is dependent on appreciation in the market value of the
Common Stock, and indirectly upon improved performance by the Company. Any such
appreciation or improvement will benefit all stockholders of the Company.
The Options, which are not transferable have a ten-year term and may be
exercised at any time during such term, whether or not the holder remains a
Director. The exercise price is $2.375 per share, the closing price of the
Common Stock on the NASDAQ National Market on the date of grant.
An optionee will not recognize any taxable income at the grant of the
Option, but will generally realize ordinary income for federal income tax
purposes at the time of exercise of such Options equal to the difference between
the fair market value of the Common Stock on the date of exercise and the
exercise price. Any taxable income recognized in connection with an Option
exercised by an optionee who at the time of exercise is an Employee of the
Company will be subject to tax withholding. Upon
-20-
<PAGE> 23
resale of such shares by the optionee, any difference between the sale price and
the optionee's exercise price, to the extent not recognized as taxable income as
described above, will be treated as long-term, mid-term or short-term capital
gain or loss, depending upon the holding period. The Company will be entitled to
a tax deduction in the same amount as the ordinary income recognized by the
optionee with respect to shares acquired upon exercise of an Option.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE GRANT OF OPTIONS TO
THE COMPANY'S NON-EMPLOYEE DIRECTORS.
-21-
<PAGE> 24
PROPOSAL NO. 4
RATIFICATION AND APPROVAL OF AMENDMENT TO 1990 STOCK OPTION PLAN
Description of the Amendment
The Company's 1990 Stock Option Plan, as amended (the "1990 Plan"), was
originally adopted by the Board of Directors in August 1990 and approved by the
stockholders at their 1991 annual meeting. The Board believes that the issuance
of options under the 1990 Plan has been of substantial value in facilitating the
efforts of the Company to attract and retain key employees. By providing key
employees with an opportunity to acquire an ownership interest in the Company,
the 1990 Plan has also accomplished the purpose of more closely aligning the
interests of management and stockholders. The proposed amendments to the 1990
Plan would increase the number of shares of Common Stock subject to the 1990
Plan by 2,500,000 and change the definition of "Employees" eligible to
participate in the 1990 Plan so that employees of Checkers who provide services
to the Company pursuant to the Management Services Agreement with Checkers will
be eligible to receive options under the 1990 Plan.
At the Meeting, stockholders will be asked to approve the following
resolutions:
RESOLVED, that Section 2(g) of the 1990 Plan is hereby amended to read
as follows:
"(g) Employees. For purposes of a Non-Qualified Option granted
hereunder, any employee, director, general partner, officer, consultant or
advisor (provided that any such consultant or advisor provides bona fide
services which are not in connection with the offer or sale of securities in a
capital-raising transaction). For purposes of an Incentive Option granted
hereunder, an employee as defined in accordance with Treasury Regulation
ss.1.421-7(h)(1)."
RESOLVED FURTHER, that the second sentence of Section 4 of the 1990
Plan is hereby amended to read as follows:
"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 5,750,000 shares."
Description of the 1990 Plan
The 1990 Plan as amended, will reserve 5,750,000 shares of Common
Stock for issuance pursuant to the exercise of options granted thereunder. The
1990 Plan is administered by a committee (the "Committee") comprised of at least
two Non-Employee Directors who are ineligible to receive options under the 1990
Plan, and is currently comprised of Messrs. Christensen (Chair) and Puzder. As
proposed to be amended, approximately 270 Employees would be eligible to receive
options under the 1990 Plan. Approximately 200 Employees hold options granted
under the 1990 Plan.
The Committee has sole discretion to determine the Employees to receive
options under the 1990 Plan and the timing and amount of options granted under
the 1990 Plan. The Committee may grant options pursuant to the 1990 Option Plan
which are intended to meet the requirements of incentive stock options ("ISOs")
as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"IRC"), or options not intended to be ISOs ("Non-Qualified Options"). The
Committee has the discretion to determine the exercise price of any option,
although in the case of an ISO, the price may not be less than 100% of the fair
market value of the Common Stock at the time of grant, as determined by the
closing price of the Common Stock on The NASDAQ National Market on such date.
The method or time when the option may be exercised in whole or in part is
determined by the Committee, except that in no event may an option be
exercisable within six months of the date of grant in the case of an optionee
who would otherwise be subject to Section 16(b) of the Exchange Act ("Section
16(b)"). Shares subject to, but not delivered under, an option terminating or
expiring for any reason prior to its exercise in full are available for the
grant of future options under the 1990 Plan.
The 1990 Plan does not state a maximum or minimum number of options
that may be granted to an individual under the 1990 Plan except that, as to
ISOs, the IRC limits the maximum aggregate value of the Common Stock for which
ISOs may become exercisable in any one year to $ 100,000. The term of an ISO is
determined by the Committee, but may not exceed ten years from the date of
grant. An ISO must be exercised by an employee either during employment or
within three months of termination of employment. No ISO may be granted to an
Employee who immediately after the granting of such ISO would own more than 10%
of the issued and outstanding Common Stock ("10% Stockholder"), unless the
exercise price of the ISO is at least 110% of the fair market value of the
Common Stock at the time of such grant and the ISO is not exercisable after five
years from the date of such grant.
In the event any change is made in the Company's capitalization that
results from a stock dividend, recapitalization, reorganization, merger,
consolidation, split-up, combination or exchange of shares or any
-22-
<PAGE> 25
similar change affecting the Common Stock, appropriate adjustment, as determined
by the Committee, will be made in the exercise price and in the number and class
of shares subject to the option.
In the event of a sale of all or substantially all of the assets of the
Company or the merger of the Company with or into another corporation, holders
of outstanding options will have the right to receive, upon exercise of the
option and payment of the exercise price, the same consideration which the
stockholders of the Company received pursuant to such transaction.
The Board of Directors may amend or terminate the 1990 Plan from time
to time in such respects as the Board may deem advisable; provided that the
Board may not (i) increase the number of shares subject to the 1990 Plan without
stockholder approval, (ii) permit the grant of an option with an exercise price
that is less than the fair market value of the Common Stock, (iii) permit the
grant of an option with a term beyond that provided in the 1990 Plan or (iv)
make a material change in the class of eligible employees.
An optionee who is granted an ISO generally will not recognize taxable
income either upon the grant or the exercise of an ISO, although the exercise
may be subject to the alternative minimum tax as the difference between the fair
market value of the Common Stock at the time of exercise and the exercise price
is a tax preference item. No deduction will ordinarily be available to the
Company as a result of the grant or exercise of an ISO. Upon the sale or
exchange of the shares underlying an ISO more than two years after the date of
grant and one year after the date of exercise, the optionee will recognize
capital gain (or loss) in the amount by which the sales price exceeds (or is
less than) the adjusted basis of the shares. Such gain (or loss) will be
mid-term gain (or loss) if the shares are held for more than one year from the
date of exercise, and will be long-term gain (or loss) if the shares are held
for more than 18 months from the date of exercise. If the shares are sold prior
to the end of the holding periods discussed above, the optionee will recognize
ordinary income at the time of sale or exchange equal to the difference between
the exercise price and the lower of (i) the fair market value of the shares of
the date of exercise or (ii) the sale price of the shares.
An optionee granted Non-Qualified Options is not subject to many of the
restrictions involving ISOs. An optionee will not recognize any taxable income
at the grant of the Non-Qualified Option, but will generally realize ordinary
income for federal income tax purposes at the time of exercise of such options
equal to the difference between the fair market value of the Common Stock on the
date of exercise and the exercise price. Any taxable income recognized in
connection with a Non-Qualified Option exercised by an optionee who is an
Employee of the Company will be subject to tax withholding. Upon resale of such
shares by the optionee, any difference between the sale price and the optionee's
exercise price, to the extent not recognized as taxable income as described
above, will be treated as long-term, mid-term or short-term capital gain or
loss, depending upon the holding period. The Company will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the optionee
with respect to shares acquired upon exercise of a Non-Qualified Option.
The foregoing is only a summary of certain effects of federal income
taxation upon the optionee and the Company with respect to the grant and
exercise of options under the 1990 Plan, does not purport to be complete and
does not discuss the tax consequences of the optionee's death or the income tax
laws of any local, state or foreign jurisdiction in which any optionee may
reside.
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<PAGE> 26
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE AMENDMENT
TO THE COMPANY'S 1990 STOCK OPTION PLAN.
AMENDED PLAN BENEFITS
The following table sets forth certain information with respect to
stock options granted pursuant to the 1990 Plan during the fiscal year 1997 to:
(i) the Named Executive Officers; (ii) all current executive officers as a
group; (iii) all current non-executive officer Directors as a group; and (iv)
all non-executive officer employees as a group. The options shown below are not
necessarily indicative of the number of options that may be granted in the
future.
<TABLE>
<CAPTION>
NAME & POSITION DOLLAR VALUE(1) NUMBER OF OPTIONS
- --------------- --------------- -----------------
<S> <C> <C>
James J. Gillespie $ -0- 300,000
President and Chief Executive
Officer
Gary J. Beisler -0- 20,000
Senior Vice President
Operations
Donald E. Doyle -- -0-
President and Chief Executive
Officer
Evan G. Hughes -0- 20,000
Senior Vice President
Chief Administrative Officer
and Secretary
All Current Executive Officers as -0- 300,000
a group (4 persons)
All Current Non-Executive Officer -- -0-
Directors as a group (8 persons)
All Non-Executive Officer $79,638 360,000
Employees as a group (52 persons)
</TABLE>
- ---------------
(1) Based upon the difference between the exercise price and the closing
price of the Common Stock of $2.31 as reported on the NASDAQ National
Market on May 11, 1998.
PROPOSAL NO. 5
RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Company has selected the firm of KPMG Peat Marwick LLP, independent
certified public accountants, to serve as the independent auditors for the
Company for the fiscal year ending December 28, 1998, subject to ratification of
such appointment by the stockholders at the Meeting. Arthur Andersen LLP acted
as independent auditors for the Company for fiscal 1997. A representative of
KPMG Peat Marwick LLP will be present at the meeting and will be given the
opportunity to make a statement and to respond to appropriate questions from
stockholders. Stockholder ratification of the Company's independent certified
public accountants is not required by the Company's By-Laws or otherwise. The
Board of Directors has elected to seek such ratification as a matter of good
corporate practice and unanimously recommends that you vote "FOR" such
ratification. If the stockholders do not ratify this appointment, other
certified public accountants will be considered by the Board of Directors upon
recommendation of the Audit Committee.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS APPROVE THE
APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR
FISCAL 1998.
KPMG Peat Marwick LLP, the independent accountants for Checkers in
which the Company has a significant investment, was selected by the Company, and
the Company notified Arthur Andersen LLP that it intended to engage KPMG Peat
Marwick LLP, as the Company's independent auditors for fiscal 1998 on May 8,
1998. The decision to change accountants was approved by the Audit Committee of
the Board of Directors.
During the two most recent fiscal years and the subsequent interim
period prior to May 8, 1998, there have been no disagreements with Arthur
Andersen LLP on any matter of accounting principals or practices, financial
statement disclosure, or auditing scope or procedure or any reportable events.
Arthur Andersen LLP's report on the financial statements for the past two years
contained no adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles. The Company
has provided Arthur Andersen LLP with a copy of the Company's Form 8-K, which it
proposes to file in connection with the foregoing.
OTHER BUSINESS
Management of the Company does not know of any other business that may
be presented at the Meeting. If any matter not described herein should be
presented for stockholder action at the Meeting, the persons named in the
enclosed Proxy will vote the shares represented thereby in accordance with their
best judgment.
STOCKHOLDER PROPOSALS FOR
PRESENTATION AT THE 1999 ANNUAL MEETING
The Board of Directors requests that any stockholder proposals intended
for presentation at the 1999 Annual Meeting of Stockholders be submitted to
James T. Holder, Secretary, in writing no later than January 13, 1999, for
consideration for inclusion in the Company's proxy materials for such meeting.
-24-
<PAGE> 27
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference the financial statements
contained in the Company's Annual Report to stockholders for the fiscal year
ended December 28, 1997 (which contains a copy of the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 1997), a copy of which is being
delivered with this Proxy Statement.
ANNUAL REPORT ON FORM 10-K
THE COMPANY WILL PROVIDE WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY
OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
28, 1997, AS AMENDED, INCLUDING THE FINANCIAL STATEMENTS AND THE FINANCIAL
STATEMENT SCHEDULES AND THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE
PERIOD ENDED MARCH 22, 1998. WRITTEN REQUESTS, ACCOMPANIED BY A GOOD FAITH
REPRESENTATION THAT, AS OF MAY 11, 1998, THE PERSON MAKING THE REQUEST WAS THE
BENEFICIAL OWNER OF COMMON STOCK, SHOULD BE DIRECTED TO RALLY'S HAMBURGERS,
INC., 600 CLEVELAND STREET, 8TH FLOOR, CLEARWATER, FLORIDA 34615, ATTENTION:
CORPORATE SECRETARY.
By Order of the Board of Directors,
JAMES T. HOLDER
Secretary
Dated: May 15, 1998
-25-
<PAGE> 28
APPENDIX
PROXY
RALLY'S HAMBURGERS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS -- JUNE 11, 1998
The undersigned hereby appoints James J. Gillespie, Joseph N. Stein and
James T. Holder, and each of them, proxies with full power of substitution, for
and in the name of the undersigned to vote all shares of Common Stock of Rally's
Hamburgers, Inc., a Delaware corporation (the "Company"), that the undersigned
would be entitled to vote at the Company's 1998 Annual Meeting of Stockholders
to be held on June 11, 1998 (the "Meeting"), and at any adjournments thereof,
upon the matters set forth in the Notice of the Meeting as stated hereon, hereby
revoking any proxy heretofore given. In their discretion, the proxies are
further authorized to vote upon such other business as may properly come before
the Meeting or any adjournments thereof.
The undersigned acknowledges receipt of the Notice of the Meeting and
the accompanying Proxy Statement, Annual Report and Form 10-Q.
(Continued and to be SIGNED on the other side)
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
ADMISSION TICKET
ANNUAL MEETING OF STOCKHOLDERS
OF
RALLY'S HAMBURGERS, INC.
THURSDAY, JUNE 11, 1998, 9:00 AM (LOCAL TIME)
FESS PARKER'S DOUBLETREE RESORT
633 EAST CABRILLO BOULEVARD
SANTA BARBARA, CALIFORNIA
<PAGE> 29
THE BOARD RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3, 4 AND 5.
Please mark your vote as indicated in this example: [X]
1. Election of Directors Below.
Nominees:
Terry Christensen, Willie D. Davis, William P. Foley, II, James J.
Gillespie, David Gotterer, Ronald B. Maggard, Andrew Puzder, Burt
Sugarman and C. Thomas Thompson.
For, except vote withheld from the following nominee(s):
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR WITHHELD ABSTAIN
<S> <C> <C> <C>
2. Approval of the conversion of [ ] [ ] [ ]
the Company's Series A
Preferred Stock.
3. Ratify and approve of an amendment to [ ] [ ] [ ]
the Company's 1990 Stock Option Plan.
4. Ratify and approve the grant of options
to the Company's Non-Employee
Directors.
5. Ratification of the appointment [ ] [ ] [ ]
of _______________ as independent
auditors.
</TABLE>
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS INDICATED,
WILL BE VOTED FOR THE ELECTION OF THE NOMINEES FOR DIRECTORS LISTED ABOVE, FOR
APPROVAL OF THE PROPOSALS SET FORTH ABOVE AND AS SAID PROXIES DEEM ADVISABLE ON
SUCH OTHER MATTERS AS MAY COME BEFORE THE MEETING.
SIGNATURE SIGNATURE
------------------------ ------------------------
Date: Date:
------------------ ------------------
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such.
