RALLYS HAMBURGERS INC, 10-K/A, 1999-05-28

RALLYS HAMBURGERS INC
10-K/A, 1999-05-28
EATING PLACES

Previous: GENERAL CALIFORNIA MUNICIPAL BOND FUND INC /NY/, N-30D, 1999-05-28

Next: AMERISOURCE DISTRIBUTION CORP, S-4, 1999-05-28

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)

(Mark One)

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

FOR THE FISCAL YEAR ENDED DECEMBER 28, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM ______________ TO _____________.

COMMISSION FILE NUMBER 0-17980

RALLY'S HAMBURGERS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 62-1210077
---------------------------------------- ----------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
14255 49TH STREET NORTH
BUILDING 1, SUITE 101 33762
CLEARWATER, FLORIDA ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(Registrant's Telephone Number, including Area Code): (727) 519-2000

The purpose of this amendment is to amend all items in their entirety to read
as set forth herein.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

RALLY'S HAMBURGERS, INC.

1998 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
Item 1. Business ................................................................. 3
Item 2. Properties ............................................................... 10
Item 3. Legal Proceedings ........................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders ...................... 12

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .... 13
Item 6. Selected Financial Data .................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............... 24
Item 8. Financial Statements and Supplementary Data .............................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures ............................................. 58
PART III
Item 10. Directors and Executive Officers of the Registrant ....................... 58
Item 11. Executive Compensation ................................................... 61
Item 12. Security Ownership of Certain Beneficial Owners and Management ........... 66
Item 13. Certain Relationships and Related Transactions ........................... 67

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......... 68
</TABLE>

<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

Rally's Hamburgers, Inc. and its subsidiaries are collectively referred to
herein as the context requires as "Rally's" or the "Company". See Note 1 to
Consolidated Financial Statements.

Rally's is one of the largest chains of double drive-thru restaurants in
the United States. The Company opened its first restaurant in January 1985 and
began offering franchises in November 1986. At December 28, 1998, the Rally's
system included 475 restaurants in 18 states, primarily in the Midwest and the
Sunbelt, comprised of 226 Company-owned and operated and 249 franchised,
including 26 Company-owned restaurants in Western markets which are operated as
Rally's restaurants by CKE Restaurants, Inc. ("CKE"), a significant shareholder
of the Company, under an operating agreement which began July 1996. Two
additional Company-owned stores covered by the operating agreement have been
converted to the Carl's Jr. format and are not included in the above store
count. The Company's restaurants offer high quality food, serving primarily the
drive-thru and take-out segments of the quick-service restaurant industry. The
Company opened its first restaurant in January 1985 and began offering
franchises in November 1986. See "Item 7: Management's Discussion and Analysis
of Financial Condition and Results of Operations."

As of December 29, 1997 the Company changed from a fiscal year ending on
the Sunday closest to December 31st to a fiscal year ending on the Monday
closest to December 31st. This resulted in an extra day in fiscal 1998. The
Company also changed its quarterly reporting periods from four 13-week quarters
to three 12-week quarters and a 16-week fourth quarter

Comparable store sales at Rally's were 1.8% below the prior year. Although
sales continued to decline on a same store basis, the decrease in 1998 was the
smallest in four years. Product innovations during the year included the shift
from a 3.2 ounce hamburger patty to a two-patty platform featuring a 2.67 ounce
patty and a 4.3 ounce patty. The 2.67 ounce patty allows Rally's to sell a
fully-dressed Rallyburger for $0.99 while also offering the Super Rallyburger
that utilizes the larger patty for a premium price. This change was necessary
to ensure that Rally's can remain competitive as food and labor costs continue
to escalate.

RECENT DEVELOPMENTS

On January 29, 1999, Checkers Drive-In Restaurants, Inc. ("Checkers") and
Rally's announced the signing of a definitive merger agreement pursuant to
which both companies would merge in an all stock transaction, ("the Merger").
The Merger agreement provides that each outstanding share of Rally's stock will
be exchanged for 1.99 shares of Checkers stock. The approximate 19.1 million
shares of Checkers common stock which the Rally's owns will be retired
following the Merger. Checkers and Rally's have each received investment
bankers' opinions as to the fairness of the exchange rate used in the Merger.
The transaction is subject to certain approvals, including but not limited to
approval by the shareholders of Checkers and Rally's and potentially the
holders of Rally's Senior Notes and is expected to close in the second quarter
of fiscal year 1999.

<PAGE>

54,277,117 shares (48.2 percent of Checkers common stock) will then be held by
then current shareholders of Checkers. Immediately following the Merger, the
Checkers common stock will undergo a one-for-twelve reverse split resulting in
total common shares outstanding of approximately 9,387,859. In addition, each
of Rally's outstanding stock options (5.6 million) will be exchanged for
options to acquire Checkers common stock at a 1 to 1.99 exchange rate.

The business combination under the Merger will be accounted for under the
purchase method. The transaction will be accounted for as a reverse acquisition
as the stockholders of Rally's will receive the larger portion of the voting
interests in the combined enterprise. Accordingly, Rally's will be considered
the acquirer for accounting purposes and therefore, Checkers' assets and
liabilities will be recorded based upon their fair market value.

On December 18, 1998, Rally's entered into a $4.3 million mortgage
transaction with FFCA Acquisition Corporation pursuant to which eight fee-owned
properties were mortgaged. The terms of the transaction include a stated
interest rate of 9.5% on the unpaid balance over a 20 year term with monthly
payments totaling approximately $40,000. Rally's is required to utilize the
entire net proceeds to reduce the Senior Notes. Purchases on the open market
were initiated immediately after the mortgage was finalized and will be
completed as they become available on the open market. As of March 5, 1999, the
Company had utilized $2.7 million of the proceeds to repurchase $3.1 million
face value of the Senior Notes.

On December 31, 1998 Santa Barbara Restaurant Group, Inc. ("SBRG"),
acquired approximately 2.4 million shares of Rally's common stock pursuant to
an exchange agreement with Fidelity National Financial, Inc. SBRG operates or
franchises approximately 330 restaurants under the Green Burrito, Timber Lodge
Steakhouse, JB's, and Galaxy Diner names.

In November, 1998, Rally's received notice from NASDAQ that delisting
could occur on February 22, 1999 if the Company's common stock failed to
maintain a closing bid greater than or equal to $1.00 for ten consecutive
trading days during the subsequent 90-day period. As Rally's stock price did
not meet the criteria, management attended an oral hearing to present a plan of
action to NASDAQ to regain compliance with this standard. On May 14, 1999, the
Company was notified by NASDAQ that its listing status would be continued until
June 30, 1999. On or before that date, the Company must submit documentation of
the consummation of the merger with Checkers.

CONCEPT AND STRATEGY

Rally's primary strategy is to serve the drive-thru and take-out segment
of the quick-service restaurant industry. The Company's operating strategy is
to take advantage of off-premise food consumption by serving a limited menu
consisting of a variety of great tasting burgers with limited side items. The
key elements of this strategy are Rally's operating system, restaurant design,
brand positioning and marketing programs.

RALLY'S OPERATING SYSTEM. The Rally's operating system is designed to
provide fast and accurate service of high quality food. Within the restaurants,
all products are prepared to order in a systematic fashion moving from the back
of the restaurant to the front windows with each employee performing specific
duties. Labor is staffed in an attempt to courteously serve guests within 45
seconds of their reaching the drive-thru window and to maintain a safe, clean
food service environment. The Company's training and franchise support programs
are designed to promote consistency of product and service throughout the
Rally's system and are documented in a uniform confidential operations manual.

Rally's has point of sale devices and related software in each of its
Company-owned restaurants which allow Rally's to centralize control over
certain aspects of restaurant operations at the corporate office on a daily
basis. As a result, menu prices and menus can be controlled and transactions

<PAGE>

reviewed and audited at corporate headquarters. The point of sale devices are
coupled with a back office computer to monitor sales, assist inventory
management, maintain cash control, provide variance reporting, and control
labor and food costs. Each restaurant transmits its data via a daily polling
procedure and it is accumulated at the principal offices of Rally's. This data
is used to analyze and make decisions about the business. The Company's back
office computer system will be upgraded or replaced in 1999 at a cost estimated
at approximately $500,000.

RESTAURANT DESIGN AND ECONOMICS. Rally's restaurants present a distinctive
design which conveys a message of "clean and fast" to the passing motorist. The
restaurants' typical "double drive-thru" design features drive-thru windows on
both sides of the restaurant for quicker service. While the restaurants
generally do not have an interior dining area, most have a patio for outdoor
eating. These areas contain canopy tables and seats and are landscaped to
create an attractive eating environment. Rally's restaurant buildings average
600 to 720 square feet depending upon geographic location and require less
property than the traditional eat-in restaurants. As a result of the small size
of the restaurant building, Rally's restaurants generally require a smaller
capital investment and have lower occupancy and operating costs per restaurant
than traditional quick-service competitors. The size of the facility also
permits somewhat greater flexibility with respect to the selection of
prospective sites for restaurants.

During 1998, Rally's continued the test of an indoor seating environment
where a 20 to 50 seat dining room replaced the passenger side drive-thru lane.
As of December 28, 1998, seven units were converted from a double-drive-thru
format to a single drive-thru/indoor seating format. The preliminary test
results have not resulted in a consistent pattern of sales increases necessary
to achieve an attractive economic return. Therefore, Rally's will be initiating
a second phase of the dining room test where indoor seating will be added while
retaining both drive-thru lanes.

During 1998, Rally's opened one new restaurant, closed five restaurants,
and acquired one restaurant from franchisees. The incremental cash outlay,
exclusive of land, of opening the restaurant was reduced due to the use of
surplus assets and was approximately $350,000.

In 1994, the full development cost associated with constructing and
opening a Rally's restaurant (excluding land cost and interest on construction)
was approximately $478,000. When purchased, the majority of real estate sites
have cost between $100,000 and $300,000. As of December 28, 1998, approximately
69% of Company-owned and operated restaurants were located on leased real
estate.

Over the past two years, Rally's has been building stores by either using
surplus equipment and/or surplus modular buildings or purchasing conversion
properties. When using surplus equipment and modular buildings, Rally's cash
outlay has typically been between $250,000 to $350,000. Although Rally's expects
to continue to use excess modular buildings and seek additional conversion
opportunities, Rally's estimates that the cost associated with new store
development will return to the higher pre-slowdown levels where these
alternatives are not practical.

BRAND POSITIONING: QUALITY FOCUS. Rally's is attempting to establish an
overall brand positioning as the quick-service hamburger chain which serves the
best tasting hamburger for a reasonable price in America. This positioning is
supported by:

1. A limited menu of high quality but fairly priced
hamburgers/cheeseburgers, chicken sandwiches, french fries and soft
drinks, executed via a highly focused operating system.

2. Television, radio and outdoor advertising which differentiates Rally's
from other quick-service hamburger chains and targets frequent
hamburger consumers.

3. New, visually attractive menu boards, merchandising and packaging that
feature these value based products/brands and ingredients.

This new brand positioning continues to represent a strategic shift for
Rally's away from its prior positioning which had been based primarily on low
prices and quick service. Low prices and quick

<PAGE>

service are still important to guests, but the competitive environment has
become so price oriented that basing a brand positioning on low prices is not
unique enough to differentiate Rally's from its competitors. Further, relying
too heavily on low prices and price promotion had a negative financial impact
on Rally's, causing higher costs as a percentage of sales and lower profits. By
focusing the brand positioning on what Rally's believes guests really want from
a quick service hamburger restaurant and on what Rally's can effectively
provide -- great tasting burgers at a fair price -- Rally's believes that it
will be able to effectively differentiate itself from its competitors and
improve its sales and guest count trends over time.

In 1998 Rally's shifted its hamburger platform to create value options for
its customers. The 3.2 ounce hamburger patty was replaced with a 2.67 ounce
patty and a larger 4.0 ounce patty. The 2.67 ounce hamburger patty allows
Rally's to sell a great $0.99 fully dressed Rallyburger to its customers, while
the larger 4.0 ounce patty allows for an upsell opportunity to the premium
Super Rallyburger sandwich. Additionally, Rally's continues to offer its One of
a Kind Fries/registered trademark/, a chicken breast sandwich, onion rings,
soft drinks and milk shakes. A limited number of additional products may be
offered in some locations from time to time.

MARKETING PROGRAM. Rally's "best tasting burger" campaign which began in
April 1998 was not successful in substantially increasing sales. Therefore, in
late July 1998, Rally's discontinued this campaign and turned to a new
advertising company, Crispin, Porter & Bogusky of Miami, to develop a strategy
focusing on the freshness of the Rally's products. The current advertising
campaign uses television as the primary medium. In cases where effective levels
of television are not affordable, Rally's may use radio, outdoor or print
advertising.

INFLATION

The Company does not believe inflation has had a material impact on
earnings during the past three years. Substantial increases in costs could have
a significant impact on the Company and the industry. If operating expenses
increase, management believes it can recover increased costs by increasing
prices to the extent deemed advisable considering competition.

SEASONALITY

The seasonality of restaurant sales due to consumer spending habits can be
significantly affected by the timing of advertising, competitive market
conditions and weather related events. While restaurant sales for certain
quarters can be stronger, there is no predominant pattern.

WORKING CAPITAL

Rally's working capital requirements are generally typical of companies
within the quick-service restaurant industry. Rally's does not normally require
large amounts of working capital to maintain operations since sales are for
cash, purchases are on open accounts and meat and produce inventories are
limited to a two to four day supply to assure freshness. During 1997 and 1998,
Rally's working capital requirements were substantially reduced as a result of
significant slowdowns in new store construction as compared with prior years.
Additionally, sales of certain assets held for sale, net of underlying
encumbrances, provided another source of working capital. Additional working
capital will be required for the second phase of the indoor dining areas
project. Rally's also plans to utilize working capital to open a limited number
of new restaurants and to remodel an undetermined number of existing
restaurants in fiscal 1999. See "Item 7: Management's Discussion and Analysis
of Financial Condition and Results of Operations."

FRANCHISING PROGRAM; AREA DEVELOPMENT RIGHTS

The Company offers area development agreements to franchisees for
construction of one or more new restaurants over a defined period of time
within a defined geographic area. The specific

<PAGE>

restaurant locations selected by franchisees are subsequently covered by
separate franchise agreements. Under the standard area development agreement, a
franchisee is generally required to pay, at the time the agreement is signed, a
non-refundable fee of approximately $5,000 per potential restaurant in the
defined geographic area. The number of potential restaurants is determined by
negotiation between Rally's and the franchisee. The Company's standard area
development agreement also provides for a franchise fee of approximately
$30,000 for each restaurant, which is due when the franchise agreement with
respect to a restaurant is executed. The standard franchise agreement is for a
term of 15 years and provides for payment to Rally's of royalties equal to 4%
of sales and minimum marketing expenditures of 4% of sales (1/2% of which is
paid to the Rally's National Advertising Fund). Rally's requires each
franchisee to have an approved full-time Principal Operator who is responsible
for the supervision and conduct of the franchise. As of December 28, 1998,
Rally's had 32 franchisees operating 223 restaurants (exclusive of the
CKE-operated restaurants), representing approximately 47.3% of all systemwide
restaurants. Total franchise fees and royalties recognized as revenues during
1998, 1997 and 1996 were $4.6 million, $4.8 million and $5.9 million,
respectively.

EXPANSION STRATEGY

Rally's currently intends to open up to five new restaurants in existing
Company markets in 1999. Currently, existing and new franchisees are expected
to open 10 to 20 locations during 1999. There can be no assurance that Rally's
or its franchisees will be able to open planned new restaurants or that, if
opened, these restaurants can be operated profitably. The Company has pursued
and intends to continue to pursue an expansion strategy, which may include
addition of indoor seating to existing units.

RESTAURANT LOCATIONS

The following table sets forth the number of restaurants in the Rally's
system at December 28, 1998 by state:

COMPANY-OWNED AND OPERATED RESTAURANTS (226)

Michigan (37) Indiana (22) Virginia (13)
Kentucky (31) Missouri (20) Arkansas (10)
Louisiana (23) Florida (16) Illinois (10)
Ohio (23) Alabama (13) Tennessee (8)

FRANCHISED RESTAURANTS (INCLUDING CKE -- OPERATED RESTAURANTS) (249)

Ohio (86) Virginia (7) West Virginia (4)
California (50) Arizona (6) Missouri (3)
Indiana (27) Illinois (6) Pennsylvania (3)
Michigan (18) Louisiana (5) Alabama (2)
Kentucky (15) Mississippi (4) Florida (2)
Georgia (7) Tennessee (4)

SITE SELECTION AND CONSTRUCTION

Rally's believes that the location of a Rally's restaurant is very
important to its success. In evaluating particular sites, Rally's uses
demographic data related to quick-service restaurant sales. Sites proposed for
both Company-owned restaurants and franchised restaurants must be accepted by a
committee comprised of most members of Rally's senior management team. The
committee considers, among other factors, the accessibility, visibility, cost,
surrounding traffic patterns and population characteristics of each potential
site.

<PAGE>

The Company has prototype plans and approved suppliers for the
construction of its restaurants. Since 1990, Rally's has increasingly used
modular buildings. Prior to that time, "stick" (constructed on-site) buildings
were used almost exclusively.

PURCHASING

Franchisees are required to purchase their equipment, food, beverages and
supplies from Company-approved suppliers. All products must meet specifications
set by Rally's. Management continually monitors the quality of the food,
beverages and supplies provided to the restaurants. Rally's negotiates directly
with wholesale suppliers to ensure consistent quality and freshness of products
throughout the Rally's system and believes that it has obtained competitive
pricing from its suppliers. The majority of the Company's food and paper is
distributed by Fast Food Merchandisers, Inc. All essential food and beverage
products are available or, upon short notice, could be made available from
alternate qualified suppliers. Therefore, management believes that the loss of
any one supplier would not have a material adverse effect on Rally's. During
the year, Rally's continued participating with related parties in attempting to
leverage aggregate purchase volumes of common items to obtain more favorable
pricing. Rally's expects these efforts will continue in the future.

RESTAURANT STAFFING AND TRAINING; FRANCHISE SUPPORT

A typical Rally's restaurant averages a total of 25 employees, which
usually includes two salaried managers. The function of assuring that each
Company-owned restaurant consistently delivers high-quality food and service is
performed by Area Managers. Area Managers report to Regional Vice Presidents.
Area Managers and restaurant management are compensated with a fixed salary
plus a bonus based on the performance of the restaurants under their
supervision. Rally's has one Area Manager for every eight to ten Company
restaurants and approximately ten Area Managers for each Regional Vice
President. The Regional Vice Presidents are employees of Checkers and report to
the Chief Operating Officer of Checkers under the Management Agreement.

The Company believes that training is important to the success of its
restaurant operations. Rally's training programs emphasize quality food
preparation, quick service, cleanliness of restaurants, courteous employees and
consistency of execution.

All General Managers of Company-owned restaurants are required to complete
the Company's training program, which generally consists of five weeks of
hands-on training. The designated operating partner of each franchisee is
required to receive similar training, generally 12 weeks in duration. All
Company and franchise General Managers must generally complete an intensive
six-day "Train the Trainer" program before being certified to train management
personnel in their respective markets. The certification process takes
approximately 30 days to complete. In addition, Rally's sends a training team
consisting of both management and hourly workers to a new franchisee's first
three restaurant openings for a duration of up to two weeks (one week before
and one week after the opening). After a new franchisee opens three
restaurants, Rally's provides this training team as it deems necessary, or upon
the franchisee's request at the franchisee's expense.

The Company employs Franchise Business Managers through the Management
Agreement with Checkers, who act as a link between Rally's and its franchisees.
The Franchise Business Managers perform regularly scheduled restaurant
operation evaluations to ensure that each franchised restaurant consistently
delivers high quality food and fast, friendly service in a clean environment.
They also review the financial results and effectiveness of franchise
restaurant management to identify possible areas of improvement.

COMPETITION

The quick-service restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in

<PAGE>

consumer tastes, traffic patterns, consumer concerns about the nutritional
quality of quick-service food and increases in the number and particular
locations of competing quick-service restaurants. Factors such as inflation,
increases in food, labor (including health care costs) and energy costs and the
availability of an adequate number of hourly-paid employees also affect the
quick-service restaurant industry. Major chains, which have substantially
greater financial resources and longer operating histories than Rally's,
dominate the quick-service restaurant industry. The Company believes that its
primary competitors are five national chains: McDonald's, Wendy's, Hardee's,
Burger King and Taco Bell. In certain markets, Rally's competes with other
quick-service double drive-thru hamburger chains with similar operating
concepts. Certain of the major chains have increasingly offered selected food
items and combination meals, including hamburgers, at discounted prices.
Rally's believes that the pricing strategies of its competitors, in general,
had an adverse impact on the Company's systemwide sales in the last four fiscal
years. The pricing or other marketing strategies of one or more of these
competitors could have a continuing adverse impact on Rally's performance.

With respect to the sale of franchises, Rally's competes with many
franchisors of restaurants, including other double drive-thru franchisors, and
franchisors of other business concepts. Rally's believes it has attracted a
number of franchisees with significant experience in the restaurant industry as
a result of the strength of its concept and operating strategy and the
favorable potential return available from a relatively low capital investment.

In general, there is active competition for management personnel, capital
and attractive commercial real estate sites suitable for restaurants.

EMPLOYEES

As of February 1, 1999, Rally's employed approximately 5,100 employees,
substantially all of which are restaurant personnel. On November 30, 1997,
Rally's entered into a Management Services Agreement, pursuant to which
predominately all of the management of Checkers manages the corporate and field
operations of the Company.

Most employees, other than restaurant management and certain corporate
personnel, are paid on an hourly basis. Rally's believes that it provides
working conditions and wages that are comparable with those of other companies
within the quick-service restaurant industry. Rally's employees are not covered
by a collective bargaining agreement.

TRADEMARKS AND SERVICE MARKS

Rally's regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. Rally's has registered
its principal logo Rally's Hamburgers/registered trademark/ and its design with
the U.S. Patent and Trademark Office (the "PTO") on the Principal Register as a
service mark for its restaurant services. Rally's registered One of a Kind
Fries/registered trademark/ with the PTO on the Principal Register as a
trademark for its french fries. The Company also registered the
Rallyburger/registered trademark/, Rally-Q/registered trademark/ and Smokin'
Sausage/registered trademark/ with the PTO as a trademark for these Company
sandwiches. Rally's has also filed with the PTO several applications to
register service marks and trademarks used in connection with its advertising
of products and services including the Big BufordTM sandwich. The Company's
policy is to pursue registration of its marks whenever possible and to oppose
strenuously any infringement of its marks.

GOVERNMENT REGULATION

Rally's is subject to Federal Trade Commission ("FTC") regulation and
state laws which regulate the offer and sale of franchises. Rally's is also
subject to a number of state laws which regulate

<PAGE>

substantive aspects of the franchisor-franchisee relationship. The FTC's Trade
Regulation Rule on Franchising (the "FTC Rule") requires the Company to furnish
to prospective franchisees a franchise offering circular containing information
prescribed by the FTC Rule. At least fifteen states presently regulate the
offer and sale of franchises and, in almost all cases, require registration of
the franchise offering with state authorities.

State laws that regulate the offer and sale of franchises and/or the
franchisor-franchisee relationship presently exist in a substantial number of
states. Such laws generally require registration of the franchise offering with
state authorities and/or regulate the franchise relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith,
prohibiting interference with the right of free association among franchisees,
limiting the imposition of standards of performance on a franchisee and
regulating discrimination among franchisees in charges, royalties or fees.
These laws have not precluded the Company from seeking franchisees in any given
area. Although such laws may restrict a franchisor in the termination of a
franchise agreement by, for example, requiring "good cause" to exist as a basis
for the termination, advance notice to the franchisee of the termination, an
opportunity to cure a default and repurchase of inventory or other
compensation, these provisions have not had a significant effect on Rally's
operations.

Rally's is not aware of any pending franchise legislation which, in its
view, is likely to affect significantly the operations of the Company. Rally's
believes that its operations comply substantially with the FTC Rule and state
franchise laws. Each Company operated and franchised restaurant is subject to
regulation by federal agencies and to licensing and regulation by state and
local health, sanitation, safety, fire and other departments. Difficulties or
failures in obtaining the required licenses or approvals could delay or prevent
the opening of new restaurants.

The Company is subject to federal and state environmental regulations,
although such regulations have not had a material effect on Rally's operations.
More stringent and varied requirements of local governmental bodies with
respect to zoning, land use and environmental factors could delay or prevent
development of new restaurants in particular locations. Rally's is also subject
to the Fair Labor Standards Act and various state laws governing such matters
as minimum wage requirements, overtime and other working conditions and
citizenship requirements. A significant number of the Company's food service
personnel are paid at rates related to the federal minimum wage and increases
in the minimum wage could increase Rally's labor costs.

The restaurant business is subject to extensive federal, state and local
regulations relating to the development and operation of restaurants, including
regulations relating to building and zoning requirements, access to persons
with disabilities, preparation and sale of food and laws governing the Rally's
relationship with its employees, including minimum wage requirements, overtime
and working conditions and citizenship requirements. The failure to obtain or
retain food licenses, or a substantial increase in the minimum wage rate, could
adversely affect the operations of the Company's restaurants. Rally's believes
that it is operating in substantial compliance with applicable laws and
regulations governing its operations.

ITEM 2. PROPERTIES

As of December 28, 1998, Rally's owned or leased parcels of land and
buildings for restaurants, either operating, under construction or held for
sale or disposal as follows: Company-owned land (84) and buildings (283); and
Company-leased land (226) and buildings (27). Land leased by Rally's for
restaurants is generally under "triple net" leases that require Rally's to pay
real estate taxes, maintenance and insurance with respect to the premises and,
in some cases, pay contingent rentals based on sales in excess of specified
amounts. Generally, the leases have initial terms of five to fifteen years with
options to renew for additional periods which can range from five to twenty
years. Rally's also leases the Louisville office of approximately 18,800 square
feet, which has been subleased subsequent to Rally's transfer of all of its
corporate management functions to Clearwater,

<PAGE>

Florida in February 1998. See Note 4 to the Consolidated Financial Statements.
Rally's also leases certain temporary storage facilities for excess modular
buildings and surplus equipment.

ITEM 3. LEGAL PROCEEDINGS

JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET AL. (Case No.
C-94-0039-L-CS). In January and February 1994, two putative class action
lawsuits were filed, purportedly on behalf of the stockholders of Rally's
Hamburgers Inc. "Rally's", in the United States District Court for the Western
District of Kentucky, Louisville division, against Rally's, Burt Sugarman and
GIANT GROUP, LTD. ("GIANT") and certain of Rally's present and former officers
and directors and its auditors. The cases were subsequently consolidated under
the case name Jonathan Mittman et al vs. Rally's Hamburgers, Inc., et al, case
number C-94-0039-L(CS). The complaints allege defendants violated the
Securities Exchange Act of 1934, among other claims, by issuing inaccurate
public statements about the Company in order to arbitrarily inflate the price
of its common stock. The plaintiffs seek unspecified damages. On April 15,
1994, Rally's filed a motion to dismiss and a motion to strike. On April 5,
1995, the Court struck certain provisions of the complaint but otherwise denied
Rally's motion to dismiss. In addition, the Court denied plaintiffs' motion for
class certification; the plaintiffs renewed this motion, and despite opposition
by the defendants, the Court granted such motion for class certification on
April 16, 1996, certifying a class from July 20, 1992 to September 29, 1993. In
October 1995, the plaintiffs filed a motion to disqualify Christensen, Miller,
Fink, Jacobs, Glaser, Weil & Shapiro, LLP ("Christensen, Miller") as counsel
for defendants based on a purported conflict of interest allegedly arising from
the representation of multiple defendants as well as Ms. Glaser's position as
both a former director of Rally's and a partner in Christensen, Miller.
Defendants filed an opposition to the motion, and the motion to disqualify
Christensen, Miller was denied. A settlement conference occurred on December 7,
1998, but was unsuccessful. Fact discovery is not yet complete, but it is
anticipated that a deadline for completion of fact discovery will be set during
1999. No trial date has been set. Management is unable to predict the outcome
of this matter at the present time or whether or not certain available
insurance coverages will apply. The defendants deny all wrongdoing and intend
to defend themselves vigorously in this matter. Because these matters are in a
preliminary stage, the Company is unable to determine whether a resolution
adverse to the Company will have a material effect on its results of operations
or financial condition. Accordingly, no provisions for any liabilities that may
result upon adjudication have been made in the accompanying financial
statements. An estimate of defense costs reimbursable under the Company's
directors' and officers' insurance is included in "Other Assets" in the
accompanying consolidated financial statements.

HARBOR FINANCE PARTNERS V. GIANT GROUP, LTD. ET AL. (Civ. Act. No. 14834).
In February 1996, Harbor Finance Partners ("Harbor") commenced a derivative
action, purportedly on behalf of Rally's against GIANT and certain of Rally's
officers and directors before the Delaware Chancery Court. Harbor named Rally's
as a nominal defendant. Harbor claims that the directors and officers of both
Rally's and GIANT, along with GIANT, breached their fiduciary duties to the
public shareholders of Rally's by causing Rally's to repurchase from GIANT
certain Rally's Senior Notes at an inflated price. Harbor seeks "millions of
dollars in damages", along with rescission of the repurchase transaction. In
the fall of 1996, all defendants moved to dismiss the action. The Chancery
Court conducted a hearing on November 26, 1996 and denied the motions to
dismiss on April 3, 1997. Discovery is underway. No trial date has been set.
The Company denies all wrongdoing and intends to vigorously defend the action.
It is not possible to predict the outcome of this action at this time.

<PAGE>

Christensen, Burt Sugarman and C. Thomas Thompson. The Complaint also names
Checkers and GIANT as defendants. The complaint arises out of the proposed
merger announced on September 28, 1998 between Rally's, Checkers and GIANT (the
"Proposed Merger") and alleges generally, that certain of the defendants
engaged in an unlawful scheme and plan to permit Rally's to acquire the public
shares of the common stock of Checkers in a "going-private" transaction for
grossly inadequate consideration and in breach of the defendants' fiduciary
duties. The plaintiff allegedly initiated the Complaint on behalf of all
stockholders of Checkers as of September 28, 1998, and seeks INTER ALIA,
certain declaratory and injunctive relief against the consummation of the
Proposed Merger, or in the event the Proposed Merger is consummated, recision
of the Proposed Merger and costs and disbursements incurred in connection with
bringing the action, including attorney's fees, and such other relief as the
Court may deem just and proper. In view of a decision by Rally's, GIANT and
Checkers not to implement the transaction that had been announced on September
28, 1998, plaintiffs have agreed to provide the Company and all other
defendants with an open extension of time to respond to the complaint.
Plaintiffs have indicated that they will likely file an amended complaint in
the event of the consummation of a merger between Rally's and Checkers. The
Company denies all wrongdoing and intends to defend the action vigorously. No
estimate of possible loss or range of loss resulting from the lawsuit can be
made at this time.

DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF
THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. Case
No. 16680. This putative class action was filed on October 2, 1998, in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified
number of shares of the common stock of Checkers. The complaint names Rally's
and certain of its current officers and directors as defendants including
William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, James
T. Holder, Terry N. Christensen, Burt Sugarman and C. Thomas Thompson. The
Complaint also names Checkers and GIANT as defendants. As with the FIRST ALBANY
complaint described above, this complaint arises out of the proposed merger
announced on September 28, 1998 between Rally's, Checkers and GIANT (the
"Proposed Merger") and alleges generally, that certain of the defendants
engaged in an unlawful scheme and plan to permit Rally's to acquire the public
shares of the Checkers' common stock in a "going-private" transaction for
grossly inadequate consideration and in breach of the defendant's fiduciary
duties. The plaintiffs allegedly initiated the Complaint on behalf of all
stockholders of Checkers as of September 28, 1998, and seeks INTER ALIA,
certain declaratory and injunctive relief against the consummation of the
Proposed Merger, or in the event the Proposed Merger is consummated, recision
of the Proposed Merger and costs and disbursements incurred in connection with
bringing the action, including attorneys' fees, and such other relief as the
Court may deem just and proper. For the reasons stated above in the description
of the FIRST ALBANY action, plaintiffs have agreed to provide the Company and
all other defendants with an open extension of time to respond to the
complaint. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between Rally's and
Checkers. The Company denies all wrongdoing and intends to defend the action
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.

The Company is involved in other litigation matters incidental to its
business. With respect to such other lawsuits, management does not believe the
litigation in which it is involved will have a material effect upon its results
of operation or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is quoted on the National Market System of the
NASDAQ Stock Market under the symbol "RLLY". As of February 22, 1999, there
were approximately 1,559 record holders of the Company's Common Stock. The
table below sets forth the high and low sales prices of the Company's Common
Stock, as reported on the NASDAQ National Market System, for each quarter
during the last two years.

QUARTER ENDED 1998 MARCH 23 JUNE 15 SEPTEMBER 7 DECEMBER 28
- -------------------- ---------- --------- ------------- ------------
High ............... $31/8 $21 5/16 $ 21/8 $13/16
Low ................ 21/4 2 29/32 15/32

QUARTER ENDED 1997 MARCH 30 JUNE 29 SEPTEMBER 28 DECEMBER 28
- -------------------- ---------- ---------- -------------- ------------
High ............... $5 $3-13/16 $4 $4-5/8
Low ................ 2-3/8 1-15/16 1-7/8 2

On December 18, 1997, the Company issued 3,909,336 shares of Rally's
common stock and 45,667 shares of Rally's preferred stock pursuant to the
Exchange Agreement (see Item 8, Note 2 to the accompanying consolidated
financial statements), in a private placement pursuant to Section 4(2) of the
Securities Act of 1933. The Company received approximately 19.1 million shares
of Checkers common stock in exchange for the Rally's common stock and the
Rally's preferred stock. The Rally's preferred stock was converted into
4,566,700 shares of Rally's common stock in 1998 upon approval of such
conversion by Rally's stockholders. The terms of the Rally's preferred stock
was set forth in Exhibit B to the Exchange Agreement. The parties to the
Exchange Agreement include CKE, GIANT, and Fidelity. For a list of the other
purchasers, see Exhibit A to the Exchange Agreement, which is filed as Exhibit
10.12 to the Company's 1997 Form 10-K.

Rally's has not declared or paid any dividends on its common stock, and
does not intend to declare or pay any dividends in the foreseeable future. The
Company currently intends to retain any earnings for the future operation and
development of its business. Any determination to pay dividends in the future
will be at the discretion of Rally's Board of Directors and will be dependent
upon the Company's results of operations, financial condition, capital
expenditures, working capital requirements, any contractual restrictions and
other factors deemed relevant by the Board of Directors. Furthermore, under the
terms of the Indenture governing the 9 7/8% Senior Notes due 2000, Rally's is
not permitted to pay any dividends on the Common Stock unless certain income
tests are met.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data was derived from the consolidated
financial statements of Rally's and its wholly-owned subsidiaries. This data
should be read in conjunction with the consolidated financial statements of
Rally's and the notes thereto, and the information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28, DECEMBER 29, DECEMBER 31, JANUARY 1,
1998 1997 1996 1995 1995
-------------- -------------- -------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
Systemwide sales(1) .............................. $286,876 $290,133 $316,670 $ 355,719 $ 370,087
======== ======== ======== ========= =========
Company restaurant sales ......................... $139,602 $139,350 $156,445 $ 181,778 $ 178,476
Other revenues ................................... 5,350 5,580 6,307 7,081 7,842
-------- -------- -------- --------- ---------
Total revenues ................................ 144,952 144,930 162,752 188,859 186,318
-------- -------- -------- --------- ---------
(Loss) income from operations(2) ................. (618) 3,320 4,090 (36,470) (14,636)
Other expenses ................................ (6,665) (7,381) (8,057) (9,910) (9,619)
Loss before taxes ............................... (7,283) (4,061) (3,967) (46,380) (24,255)
Tax provision (benefit) .......................... 252 455 (675) 539 (4,982)
-------- -------- -------- --------- ---------
Loss before extraordinary items ................. (7,535) (4,516) (3,292) (46,919) (19,273)
Extraordinary items(3) ........................... -- -- 5,280 -- --
-------- -------- -------- --------- ---------
Net income (loss) ............................. $ (7,535) $ (4,516) $ 1,988 $ (46,919) $ (19,273)
======== ======== ======== ========= =========
Income (loss) per common share:
Loss before extraordinary items ................. $ (0.28) $ (0.22) $ (0.19) $ (3.00) $ (1.42)
Extraordinary item ............................... -- -- 0.31 -- --
-------- -------- -------- --------- ---------
Net income (loss) per common share ............... $ (0.28) $ (0.22) $ 0.12 $ (3.00) $ (1.42)
======== ======== ======== ========= =========
Weighted average shares outstanding .............. 27,170 20,709 17,007 15,620 13,564
======== ======== ======== ========= =========
Total assets ..................................... $123,306 $134,297 $112,258 $ 137,392 $ 169,416
Long-term debt and obligations under capital
leases, including current portion ............... $ 70,307 $ 68,444 $ 69,654 $ 97,958 $ 94,141
Cash dividends declared per common share ......... $ -- $ -- $ -- $ -- $ --
Restaurants open at end of period:
Company ......................................... 226 229 209 239 250
Franchised ...................................... 249 248 258 242 292
-------- -------- -------- --------- ---------
Total ............................................ 475 477 467 481 542
======== ======== ======== ========= =========
</TABLE>
- ---------------
(1) Systemwide sales consist of aggregate revenues of Company-owned and
franchised restaurants (including CKE-operated restaurants).

(2) The fiscal year ended January 1, 1995 includes approximately $17.3 million
charged against operations for changes in business strategies. The fiscal
year ended December 31, 1995 includes approximately $17.3 million charged
against operations for changes in business strategies and restaurant
closings and approximately $13.7 million related to Rally's implementation
of Statement of Financial Accounting Standards No. 121.

(3) The extraordinary item for the fiscal year ended December 29, 1996 was a
gain on the early retirement of debt, net of tax expense of $1,350,000.

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The principal business of Rally's Hamburgers, Inc. (the "Company",
"Rally's") is the operation and franchising of Rally's restaurants. At December
28, 1998, the Rally's system included 475 restaurants, comprised of 226
Company-owned and operated, 249 franchised restaurants, including 26
Company-owned restaurants in Western markets which are operated as Rally's
restaurants by CKE Restaurants, Inc. ("CKE"), a significant shareholder of the
Company, under an operating agreement which began in July, 1996. Two additional
Company-owned stores covered by the operating agreement have been converted to
the Carl's Jr. format and are not included in the above store count.

As of December 29, 1997 Rally's changed from a fiscal year ending on the
Sunday closest to December 31st to a fiscal year ending on the Monday closest
to December 31st. This resulted in an extra day in fiscal 1998. Rally's also
changed its quarterly reporting periods from four 13-week quarters to three
12-week quarters and a 16-week fourth quarter.

On November 30, 1997, a Management Services Agreement was established
between Rally's and Checkers Drive-In Restaurants, Inc. ("Checkers") pursuant
to which Checkers is providing accounting, information technology and other
management services to Rally's. At the same time, a new management team was
hired to provide the operational and functional expertise necessary to explore
the opportunities and potential synergies available to both companies. The
relationship between Rally's and Checkers provided reductions in general and
administrative expenses for both companies. Rally's corporate office in
Louisville, Kentucky was closed and as were various regional offices of both
companies. The Management Services Agreement also provided for the supervision
of both Checkers and Rally's operations by a single Regional Vice President,
which increased spans of control with fewer personnel. The number of markets
that contain both Checkers and Rally's units is limited and no markets in which
either company utilizes broadcast media is shared. Therefore, the companies
combined their advertising creative and media buying with one agency in August
of 1998 which resulted in similar commercials running for both companies with
savings of agency fees and production costs. Although both companies have
benefited greatly by participating in the purchasing cooperative with CKE
Restaurants, Inc., further savings were realized during the year as product
specifications were matched where possible. Total fees incurred by the Rally's
under this agreement were $5.6 million in 1998 and $95,000 in 1997.

On January 29, 1999, Rally's and Checkers announced the signing of a
definitive merger agreement pursuant to which both companies would merge in an
all stock transaction, (the "Merger"). The Merger agreement provides that each
outstanding share of Rally's stock will be exchanged for 1.99 shares of
Checkers stock. The approximate 19.1 million shares of Checkers common stock
which Rally's owns will be retired following the Merger. See Item 1. "Business
- -- Recent Developments".

Critical to the success of these and other menu offerings was the
operational and marketing focus on serving fresh food. The transition to a new
advertising agency resulted in the utilization of a new positioning statement
"Fresh, because we just made it" to emphasize the commitment to serve fresh hot
food to every customer. This message was primarily communicated to consumers
via television advertising.

15
<PAGE>

Although Rally's debt level is still high, the Company has made
substantial progress in improving its balance sheet and reducing fixed costs.
Interest cost was reduced by approximately $300,000 in 1998 after decreasing
$1.2 million in 1997 and $2.1 million in 1996. Interest was significantly
reduced through the retirement of approximately $22 million face value of the
Company's Senior Notes in January 1996 and an additional $4.7 million during
the fourth quarter of 1996. In addition, $10.8 million in gross proceeds were
generated through the Company's rights offering completed in September, 1996.
The proceeds from the offering were used to pay off debt of approximately $4.5
million and the remainder was used for new store construction, refurbishment of
some existing restaurants and for other general corporate purposes. Outstanding
warrants from a rights offering and from a separate issuance of 1,500,000
additional warrants in December, 1996, (see "Liquidity and Capital Resources")
if exercised, would raise an additional $17.4 million in cash proceeds. Rally's
is currently evaluating its options to determine the optimal manner in which to
refinance or retire the Senior Notes.

The Company's revenues are derived primarily from Company-owned restaurant
sales and royalty fees from franchisees. Rally's also receives revenues from
the award of exclusive rights to develop Rally's restaurants in certain
geographic areas (area development fees) and the award of licenses to use the
Rally's brand and confidential operating system (franchise fees). Company
revenue also includes payments resulting from an operating agreement with CKE,
referred to as Owner fee income in the accompanying consolidated financial
statements. Restaurant cost of sales, restaurant operating expenses,
depreciation and amortization, and advertising and promotion expenses relate
directly to Company-owned restaurants. General and administrative expenses
relate to both Company-owned restaurants and franchise operations. Owner
expenses relate to CKE-operated restaurants and consist primarily of
depreciation and amortization.

16
<PAGE>

RESULTS OF OPERATIONS

The table below sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in Rally's consolidated
statements of income and operating data for the periods indicated:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales ............................................. 96.3% 96.2% 96.1%
Franchise revenues and fees .................................. 3.2% 3.3% 3.6%
Owner fee income ............................................. 0.5% 0.5% 0.3%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
COST AND EXPENSES:
Restaurant food and paper costs(1) ........................... 31.8% 32.3% 34.3%
Restaurant labor costs(1) .................................... 30.5% 29.8% 31.1%
Restaurant occupancy expense(1) .............................. 5.3% 4.7% 4.5%
Restaurant depreciation and amortization(1) .................. 5.2% 5.1% 4.9%
Other restaurant operating expenses(1) ....................... 8.8% 9.2% 9.5%
Advertising expense(1) ....................................... 7.1% 7.4% 5.0%
Owner depreciation(2) ........................................ 90.6% 84.3% 90.9%
Other depreciation and amortization .......................... 1.7% 1.8% 1.4%
General and administrative expenses .......................... 9.2% 10.4% 9.9%
Impairment of long-lived assets .............................. 1.2% 0.0% 0.0%
Losses on assets to be disposed of ........................... 1.1% 0.1% 0.0%
----- ----- -----
INCOME FROM OPERATIONS ....................................... 1.0% 2.3% 2.5%
Loss (income) net of amortization on investment
in affiliate ............................................... 1.4% 0.5% 0.0%
Other income (expense) ....................................... ( 4.6)% ( 4.6)% ( 4.9)%
----- ----- -----
Net loss before income taxes and extraordinary items ......... ( 5.0)% ( 2.8)% ( 2.5)%
NET INCOME (LOSS) ............................................ ( 5.2)% ( 3.1)% 1.2%
===== ===== =====
Number of restaurants (company-owned and franchised):
Restaurants open at the beginning of period .................. 477 467 481
----- ----- -----
Company restaurants opened (closed or transferred),
net during period .......................................... (3) 20 (30)
Franchised restaurants opened (closed or transferred),
net during period .......................................... 1 (10) 16
----- ----- -----
Total restaurants opened (closed or transferred),
net during period .......................................... (2) 10 (14)
----- ----- -----
Total restaurants open at end of period ...................... 475 477 467
===== ===== =====
</TABLE>
- ----------------
(1) As a percentage of restaurant sales.

(2) As a percentage of owner fee income.

17
<PAGE>

COMPARISON OF HISTORICAL RESULTS -- FISCAL YEARS 1998 AND 1997

REVENUES. Total revenues in 1998 of $145.0 million were consistent with
1997 total revenues of $144.9 million. Company operated restaurant sales of
$139.6 million were also consistent with the prior year sales of $139.3
million. Sales at comparable stores, which include only the units that were in
operation for the full years being compared, decreased 1.8% in 1998 as compared
with 1997. Also impacting the year to year comparison was the sales increase of
$4.1 million associated with 21 units that were opened or transferred from
franchisees during 1997 and 1998 offset by the sales decrease of $1.6 million
related to six units that were closed during 1998.

Franchise revenues and fees decreased 4.2% in 1998 from approximately $4.8
million in 1997 to $4.6 million in 1998. The decrease is primarily attributable
to lower average sales levels in franchised units.

COSTS AND EXPENSES. Restaurant food and paper costs decreased to 31.8% of
restaurant sales in 1998 compared with 32.3% in 1997. Rally's continued to
benefit from its participation in the purchasing co-op with CKE Restaurants,
Inc., Santa Barbara Restaurant Group, Inc. and Checkers. In addition, food and
papers costs as a percentage of sales also decreased due to limited price
increases to certain combo items that were taken in 1998.

Restaurant labor costs, which include restaurant employees' salaries,
wages, benefits, bonuses and related taxes totaled $42.6 million or 30.5% of
restaurant sales for 1998 compared with $41.5 million or 29.8% for 1997. The
increase as a percentage of sales is due in part to the inefficiencies
associated with operating the restaurants at lower sales levels. In addition,
incremental labor was strategically added to focus on speed of service
improvements in 1998.

Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $7.3 million or 5.3% of restaurant sales in 1998
compared with $6.5 million or 4.7% in 1997. Restaurant occupancy expense
increased as a percentage of restaurant sales due primarily to the decline in
average restaurant sales relative to the fixed and semi-variable nature of
these expenses.

Restaurant depreciation and amortization of $7.2 million in 1998 was
consistent with the expense of $7.1 million in 1997. Additional expense
associated with Company operated restaurants that opened during 1998 and 1997
was offset by the closure of eight restaurants during 1998 and the impact of
certain assets becoming fully depreciated.

Other restaurant operating expenses include all other restaurant level
operating expenses other than food and paper costs, labor and benefits, rent
and other occupancy costs and specifically includes utilities, maintenance and
other costs. These expenses totaled $12.2 million or 8.8% of restaurant sales
in 1998 compared with $12.8 million or 9.2% in 1997. The decrease as a percent
of sales was due primarily to reduced maintenance expenses during 1998.

Advertising expense decreased approximately $489,000 to $9.9 million or
7.1% of restaurant sales for 1998 compared with 7.4% for 1997.

Owner depreciation and amortization was $647,000 in 1998 compared to
$627,000 in 1997. The increase of $20,000 was primarily due to the addition of
two CKE operated restaurants in 1998.

General and administrative expenses decreased $1.7 million in 1998 due to
savings experienced as a result of Management Services Agreement with Checkers
and the impact of $940,000 in 1997 associated with warrants that were issued to
CKE and Fidelity National Financial, Inc. (Fidelity), on December 20, 1996.

The loss on investment in affiliate of $2.0 million represents Rally's
share of the loss of Checkers ($1.4 million) and the amortization of related
goodwill ($627,000).

18
<PAGE>

Impairment of long-lived assets of $1.7 million representing the
write-down of $590,000 of property and equipment and $1.1 million of
intangibles was recorded during 1998 related to four under-performing sites. No
such charges were made in 1997. Losses on assets to be disposed of in the
amounts of $1.6 million and $158,000 were recorded in 1998 and 1997,
respectively, to provide for the estimated losses on disposal for current year
closures and the additional carrying costs of closed restaurants until eventual
disposal.

The following summarizes the activities in the reserves for restaurant
relocations and abandoned sites as well as the activity associated with
impairments of long-lived assets.

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES END OF YEAR
- -------------------------------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 28, 1998
Impairment of long-lived
assets ................... $ -- $1,727 $ -- $ (1,727) $ --
Losses on assets to be
disposed of .............. 4,558 1,635 (939) 169 5,423
------ ------ -------- -------- ------
$4,558 $3,362 $ (939) $ (1,558) $5,423
====== ====== ======== ======== ======
Year Ended December 28, 1997
Impairment of long-lived
assets ................... $ -- $ -- $ -- $ -- $ --
Losses on assets to be
disposed of .............. 5,845 158 (1,486) 41 4,558
------ ------ -------- -------- ------
$5,845 $ 158 $ (1,486) $ 41 $4,558
====== ====== ======== ======== ======
</TABLE>

The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of the Company's estimates for the ongoing
carrying costs of each location which has been closed or was never developed.
These costs include rents, property taxes, maintenance, utilities and in some
cases the cost to relocate the modular restaurant to a storage facility. The
cash outlays for these costs have been estimated for various terms ranging from
five months to 11 years.

INTEREST EXPENSE. Interest expense decreased 3.9% to approximately $7.1
million for 1998 as compared to $7.4 million for 1997 primarily due to
repurchases of Senior Notes that occurred during 1998.

INTEREST INCOME. Interest income was lower for 1998 as compared to 1997
due to decreases in the average daily invested amounts.

INCOME TAX. The Company's 1998 tax provision was approximately $252,000
representing estimated state taxes versus a prior year net tax provision of
$455,000.

COMPARISON OF HISTORICAL RESULTS -- FISCAL YEARS 1997 AND 1996

REVENUES. Total revenues decreased 11% to $144.9 million in 1997 compared
with $162.8 million in 1996. Company operated restaurant sales decreased 11% to
$139.3 million from $156.4 million in 1996. Sales at comparable stores, which
include only the units that were in operation for the full years being
compared, decreased 9.2% in 1997 as compared with 1996. During 1997, Rally's
opened 9 new restaurants, reopened three restaurants previously closed,
acquired 11 restaurants from franchisees, closed 2 units and transferred 1
restaurant to a franchisee.

Franchise revenues and fees decreased 17.5% in 1997 to approximately $4.8
million from approximately $5.9 million in 1996. Franchisees, exclusive of CKE,
opened 19 new units, acquired 1 unit from the Company, closed 19 units and
transferred ownership of 11 restaurants to the Company.

COSTS AND EXPENSES. Restaurant food and paper costs decreased to 32.3% in
1997 compared with 34.3% in 1996. The decrease was attributable primarily to
various cost reduction actions taken

19
<PAGE>

during 1997 and the second half of 1996. Management's efforts to improve food
and paper costs by implementing tighter operational controls was supplemented
by cost of sales reductions realized by cooperating with CKE Restaurants, Inc.
and Checkers to leverage the purchasing power of the three entities to
negotiate improved terms for their respective contracts with suppliers.

Restaurant labor costs, which include restaurant employees' salaries,
wages, benefits, bonuses and related taxes totaled $41.5 million or 29.8% of
restaurant sales for 1997 compared with $48.6 million or 31.1% for 1996. The
improvement is primarily attributable to reductions in management and crew
labor that resulted from implemented changes in staffing levels and labor
deployment.

Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $6.5 million or 4.7% of restaurant sales in 1997
compared with $7.1 million or 4.5% in 1996. Restaurant occupancy expense
increased as a percentage of restaurant sales due primarily to the decline in
average restaurant sales relative to the fixed and semi-variable nature of
these expenses.

Restaurant depreciation and amortization decreased to $7.1 million in 1997
as compared with $7.7 million for the prior year. The decrease was primarily
due to a segregation of the expense associated with the CKE-operated properties
into owner depreciation and amortization as of July 1, 1996 and certain assets
becoming fully depreciated during 1997.

Other restaurant operating expenses include all other restaurant level
operating expenses other than food and paper costs, labor and benefits, rent
and other occupancy costs and specifically includes utilities, maintenance and
other costs. These expenses totaled $12.8 million or 9.2% of restaurant sales
in 1997 compared with $14.9 million or 9.5% in 1996.

Advertising expense increased approximately $2.5 million to 7.4% of
restaurant sales for 1997 compared with 5.0% for 1996. During the first quarter
of 1997, Rally's initiated a new campaign that made greater use of television
advertising than in previous years which contributed to the increased cost.
Media expenditures were curtailed during the fourth quarter of 1996 as
management worked with the new advertising agency on new creative and brand
positioning.

Owner depreciation was $627,000 in 1997 compared to $400,000 in 1996.

General and administrative expenses decreased $1.0 million in 1997 due
primarily to reductions in the corporate and field operations staff and lower
levels of bad debt expense, partially offset by higher legal fees.

During the fourth quarter of 1997, Rally's recorded loss on investment in
affiliate of $720,000 based upon its share of the losses of Checkers for
December 1997 and the amortization of related goodwill.

20
<PAGE>

The following summarizes the activities in the reserves for restaurant
relocations and abandoned sites as well as the activity associated with
impairments of long-lived assets.

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES END OF YEAR
- -------------------------------- ------------ ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 28, 1997
Impairment of long-lived
assets ................... $ -- $ -- $ -- $ -- $ --
Losses on assets to be
disposed of .............. 5,845 158 (1,486) 41 4,558
------ ------ -------- ------ ------
$5,845 $ 158 $ (1,486) $ 41 $4,558
====== ====== ======== ====== ======
Year Ended December 29, 1996
Impairment of long-lived
assets ................... $ -- $ 824 $ -- $ (824) $ --
Losses on assets to be
disposed of .............. 9,675 (804) (3,830) 804 5,845
------ ------ -------- ------ ------
$9,675 $ 20 $ (3,830) $ (20) $5,845
====== ====== ======== ====== ======
</TABLE>

INTEREST EXPENSE. Interest expense decreased 13.8% to approximately $7.4
million for 1997 as compared to $8.6 million for 1996 primarily due to the
early extinguishment of debt during the fourth quarter of 1996.

INTEREST INCOME. Interest income was higher for 1997 as compared to 1996
due to increases in the average daily invested amounts.

INCOME TAX. The Company's 1997 tax provision was approximately $455,000
representing estimated state taxes versus a prior year net tax provision of
$675,000 (obtained by netting the tax benefit line with the tax expense of $1.4
million which has been netted against the extraordinary gain). Of the prior
year net amount, $575,000 related to state taxes expected to be payable and
$100,000 related to reduction of an IRS receivable for a NOL carryback to 1987,
1988 and 1989.

LIQUIDITY AND CAPITAL RESOURCES

Rally's cash and cash equivalents increased approximately $593,000 to $4.6
million in 1998. Rally's cash flow from operating activities was approximately
$2.5 million for 1998 compared to $8.3 million for 1997. Of this decrease, $3.4
million was attributable to a decrease in accounts payable balances and $3.1
million was due to a decrease in accrued liabilities. Offsetting these
decreases was an increase in accounts receivable of $1.6 million.

The Company utilized $2.2 million to fund investing activities during
1998. Included in capital expenditures of $2.3 million was $848,000 for the
construction or conversion of new stores and $692,000 to add dining rooms to
four test units. The remaining capital expenditures were primarily for the
purchase and installation of replacement equipment. During 1998, the Company
generated $615,000 of proceeds from the sale of property and equipment and
utilized $855,000 for the acquisition of two restaurants.

Financing activities for the year included the repayment of Senior Notes
in the amount of $2.2 million and the repayment of other long term debt of $1.2
million.

21
<PAGE>

During 1998 and prior to December 18, 1998, Rally's repurchased on the
open market approximately $1.7 million face value of its Senior Notes at an
average price of $887.90 per $1,000 principal amount. During the third quarter
of 1998, the Company completed the required mandatory sinking fund payment due
June 15, 1999 calculated to retire 33 1/3% in aggregate original principal
amount of the Senior Notes.

In January 1996, Rally's repurchased approximately $22 million face value
of its 9 7/8% Senior Notes due in the year 2000. The Senior Notes were purchased
from GIANT GROUP, LTD. ("GIANT") at a price of $678.75 per $1,000 principal
amount, representing the market closing price on the last business day prior to
the repurchase date. Prior to the Senior Notes repurchases, the Company's Board
of Directors had received an independent opinion from an investment banking firm
as to the fairness of the transactions. Additionally, during the fourth quarter
of 1996, Rally's repurchased approximately $4.7 million face value of the Senior
Notes from various other bondholders for approximately $4.5 million in cash.

The Company is actively marketing the assets included in the caption
"Assets held for sale" in the accompanying consolidated balance sheet and
expects realization in cash over the next 12 months, although actual timing of
such cash flows cannot be predicted. The assets contained in this caption are
recorded at management's current estimate of fair market value less costs to
sell. There can be no assurances that these values will be realized.

On July 1, 1996, Rally's entered into a ten-year operating agreement with
Carl Karcher Enterprises, Inc., a subsidiary of CKE Restaurants, Inc.
(collectively referred to as "CKE"). Pursuant to the agreement, 27 (2 of which
have been converted to a Carl's Jr. format) Rally's-owned restaurants located
in California and Arizona are being operated by CKE. The Company retains
ownership in the restaurants and receives from CKE a percentage of gross
revenues referred to in the financial statements as owner fee income. This
income is offset by the Company's segregated ownership costs related to these
units, referred to as owner depreciation in the financial statements and
consists primarily of noncash expenses of depreciation and amortization. The
agreement has improved cash flow, generating approximately $714,000 in 1998 and
$790,000 in 1997.

Rally's completed its shareholder rights offering on September 20, 1996.
The offering raised over $10.8 million in gross proceeds, offset by legal and
other issuance costs of approximately $437,000. In addition to the approximate
$10.8 million of gross proceeds provided by the offering, the warrants, if
exercised, would provide approximately $10.8 million for the Company's future
growth. The proceeds from the offering were used in 1997 to retire debt of
approximately $4.5 million and the remainder was used primarily in 1997 for new
store construction, refurbishment of some existing restaurants and for other
general corporate purposes.

On October 21, 1996, Rally's was notified by the indenture trustee that
the noteholder consent it had been soliciting had been approved by the required
majority of the holders of record of its 9 7/8% Senior Notes due 2000. The
consent will allow two of the Company's current stockholders, CKE and Fidelity
National Financial, Inc. and/or their affiliates, to acquire 35% or more of the
outstanding shares of the Company's common stock without triggering "Change in
control" provisions requiring Rally's to offer to purchase the Senior Notes at
101% of their face value. This gives Rally's greater flexibility to raise
capital in the future, and it gives two of its largest stockholders the ability
to increase their investment in the Company.

22
<PAGE>

On December 1, 1998, the Company entered into two lease agreements, which
have been recorded as capital lease obligations, with Granite Financial Inc., a
wholly owned subsidiary of Fidelity, whereby the Company leased security
equipment for its restaurants costing $627,000. The first lease agreement is
payable monthly at $9,689, including effective interest at 11.35%. The second
lease is payable monthly at $11,097, including effective interest at 12.39% and
both have terms of 3 years.

On December 20, 1996, Rally's issued warrants (the "Warrants") to purchase
an aggregate of 1,500,000 restricted shares of its Common Stock to CKE and
Fidelity National Financial, Inc. The Warrants have a three-year term and
became exercisable on 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. If exercised,
the Warrants would provide approximately $6.6 million in additional capital to
Rally's. See Note 4 to the accompanying consolidated financial statements for
further discussion.

Management has plans in place to improve profitability and cash flows from
operations. The Company believes existing cash balances and cash flow from
operations should be sufficient to fund its current operations and obligations
for the remainder of fiscal year 1999, including interest payments on the
Senior Notes.

The ability of the Company to satisfy its long-term obligations under the
Senior Notes, however, continues to be dependent upon, among other factors, the
Company successfully increasing revenues and profits. In addition, the Company
is evaluating other alternatives for the repayment and refinancing of the
Senior Notes. If the Company is unable to refinance the debt in full,
management of the Company is evaluating a series of sale-leaseback transactions
and the possibility of selling company-owned stores in certain markets to
existing and potentially new franchisees. Management also anticipates that
further debt reductions may also be accomplished by completing a private
placement of preferred or common stock during the twelve months preceding the
maturity date of the Senior Notes. There can be no assurance that the Company
will be able to satisfy the entire principal balance of the Senior Notes on the
maturity date of June 15, 2000.

YEAR 2000

The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19".
Pursuant to the terms of the Management Services Agreement that exists between
Rally's and Checkers, the information technology department of Checkers has
completed an assessment of all known internal Information Technology (IT)
systems of Rally's and Checkers to document the state of readiness.

Administrative services such as accounting and payroll are provided to
Rally's by Checkers. Checkers utilizes accounting software packages such as
Lawson (general ledger/accounts payable) and Cyborg (payroll) that require
periodic upgrades to benefit from the latest modifications to the programs.
Typically, all releases of such upgrades must be implemented, eliminating a
company's ability to move directly to the most recent release. During 1998,
Checkers successfully implemented all required releases of both Lawson and
Cyborg that preceded the Year 2000 compliant release. The consulting and
training required for the next Lawson and Cyborg upgrades are underway with
targeted implementation dates during the second quarter of 1999 at a total cost
to Rally's of approximately $50,000. Costs of replacing certain desktop
computers and other required modifications at the corporate office are not
expected to exceed $70,000. The upgrade of corporate office systems is
approximately 75% complete and should be finalized by August 31, 1999. Pursuant
to the Management Services Agreement that exists between Rally's and Checkers,
the costs of compliance of shared corporate office systems are allocated
between the two companies.

23
<PAGE>

An assessment of the computer systems utilized at the store level has also
been completed. The cash registers that are used for each transaction represent
approximately 80% of the hardware in each restaurant and are Year 2000
compliant. The back-office computer that is utilized for capturing and
controlling such items as payroll and food cost and is required to sustain
communication of this and other data to the corporate office is not Year 2000
compliant. The Company has scheduled the purchase of new computer systems and
the installation of the software currently utilized by the Checkers
restaurants. Final testing of this software is complete and, the rollout is
expected to be completed by August 31, 1999. The estimated cost of the project
is approximately $500,000.

The Company is continuing to identify third parties that must be Year 2000
compliant to ensure the continued success of our operations. Letters requesting
written verification of compliance have been sent to companies that provide
financial services, utilities, inventory preparation and distribution and other
key services. The Company has not been notified of any anticipated Year 2000
related failures by these third parties but it can not be assured that all such
entities will be operable on January 1, 2000. The distribution centers that
deliver products to the restaurants maintain an adequate inventory to supply
items for approximately three weeks. If suppliers are unable to deliver product
to the distribution centers due to Year 2000 or other plant malfunctions,
alternative suppliers are currently identified that could deliver product that
matches the Company's specifications. If the Company is unable to obtain
verification of Year 2000 compliance from its primary distributor by September
1, 1999, an alternative distributor will be selected to ensure continued
delivery of inventory to the restaurants. Although not negotiated at this time,
it is probable that the resulting delivery costs of the inventory would be
higher resulting in higher food and paper costs for the Company. If
documentation of Year 2000 compliance is not received from financial
institutions by November 1, 1999, the Company will transfer its banking
relationships to other banks at an incremental cost not expected to exceed
$100,000. No contingency plans are available if the utility services for the
restaurants are interrupted due to Year 2000 failures.

Although the Company's systems are not currently fully Year 2000
compliant, management feels that risk in this area is minimal. The most
significant exposure exists in the planned rollout of a back-office computer
system at the store level. Failure to complete this project in a timely manner
would require the temporary installation of a manual payroll system at the
store level and the food cost controls that are provided by the current and
proposed systems would be lost resulting in higher cost of sales. As the cash
registers would remain operable, the Company's restaurants would remain open
for business.

If Checkers is unable to implement the upgrade to the payroll system,
Rally's would be able to utilize a third party to process payroll at a cost of
approximately $125,000 per year. Contingency plans related to the accounting
software package are still under development.

ITEM 7A. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKETS RISK

CAUTIONARY STATEMENT

INFORMATION PROVIDED HEREIN BY THE COMPANY CONTAINS, AND FROM TIME TO TIME
THE COMPANY MAY DISSEMINATE MATERIAL AND MAKE STATEMENTS WHICH MAY CONTAIN
"FORWARD-LOOKING" INFORMATION. WE BELIEVE THAT THESE "FORWARD-LOOKING"
STATEMENTS ARE WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT"). THESE CAUTIONARY
STATEMENTS ARE BEING MADE PURSUANT TO THE PROVISIONS OF THE ACT AND WITH THE
INTENTION OF OBTAINING THE BENEFITS OF THE "SAFE HARBOR" PROVISIONS OF THE ACT.
THE COMPANY CAUTIONS INVESTORS THAT ANY FORWARD-LOOKING STATEMENTS MADE BY THE
COMPANY ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND THAT ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, INCLUDING BUT NOT LIMITED TO, THE FOLLOWING:

(i) THE COMPANY COMPETES WITH NUMEROUS WELL ESTABLISHED COMPETITORS WHO
HAVE SUBSTANTIALLY GREATER FINANCIAL RESOURCES AND LONGER OPERATING
HISTORIES THAN THE COMPANY. COMPETITORS

24
<PAGE>

HAVE INCREASINGLY OFFERED SELECTED FOOD ITEMS AND COMBINATION MEALS,
INCLUDING HAMBURGERS, AT DISCOUNTED PRICES, AND CONTINUED DISCOUNTING BY
COMPETITORS MAY ADVERSELY AFFECT REVENUES AND PROFITABILITY OF COMPANY
RESTAURANTS.

(ii) THE COMPANY WILL BE NEGATIVELY IMPACTED IF THE COMPANY IS UNABLE TO
REVERSE DECLINING SAME STORE SALES. SALES INCREASES WILL BE DEPENDENT,
AMONG OTHER THINGS, ON THE SUCCESS OF COMPANY ADVERTISING AND PROMOTION
OF NEW AND EXISTING MENU ITEMS. NO ASSURANCES CAN BE GIVEN THAT SUCH
ADVERTISING AND PROMOTIONS WILL IN FACT BE SUCCESSFUL.

THE COMPANY MAY ALSO BE NEGATIVELY IMPACTED BY OTHER FACTORS COMMON TO THE
RESTAURANT INDUSTRY SUCH AS CHANGES IN CONSUMER TASTES AWAY FROM RED MEAT AND
FRIED FOODS; INCREASES IN THE COSTS OF FOOD, PAPER, LABOR, HEALTH CARE,
WORKERS' COMPENSATION OR ENERGY; AN INADEQUATE NUMBER OF HOURLY PAID EMPLOYEES;
AND/OR DECREASES IN THE AVAILABILITY OF AFFORDABLE CAPITAL RESOURCES. OTHER
FACTORS WHICH MAY NEGATIVELY IMPACT THE COMPANY INCLUDE, AMONG OTHERS, GENERAL
ECONOMIC AND BUSINESS CONDITIONS; AVAILABILITY, LOCATIONS, AND TERMS OF SITES
FOR RESTAURANT DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS;
QUALITY OF MANAGEMENT; AVAILABILITY, TERMS AND DEPLOYMENT OF CAPITAL; THE
RESULTS OF FINANCING EFFORTS; BUSINESS ABILITIES AND JUDGEMENT OF PERSONNEL;
AVAILABILITY OF QUALIFIED PERSONNEL; CHANGES IN, OR FAILURE TO COMPLY WITH,
GOVERNMENT REGULATIONS; IMPACT OF YEAR 2000; CONTINUED NASDAQ LISTING; WEATHER
CONDITIONS; CONSTRUCTION SCHEDULES AND OTHER FACTORS REFERENCED IN THIS FORM
10-K.

25
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(1) FINANCIAL STATEMENTS. The Company's Financial Statements included in Item 8
hereof, as required, consist of the following:

PAGE
-----
Independent Auditors' Reports ................................... 27

Consolidated balance sheets --
December 28, 1998 and December 28, 1997 ....................... 29

Consolidated statements of operations and comprehensive income --
Years ended December 28, 1998, December 28, 1997 and
December 29, 1996 ............................................. 31

Consolidated statements of stockholders' equity --
Years ended December 28, 1998, December 28, 1997 and
December 29, 1996 ............................................. 32

Consolidated statements of cash flows --
Years ended December 28, 1998, December 28, 1997 and
December 29, 1996 ............................................. 33

Notes to consolidated financial statements --
Years ended December 28, 1998, December 28, 1997 and
December 29, 1996 ............................................. 34

26
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Rally's Hamburgers, Inc.:

We have audited the consolidated balance sheet of Rally's Hamburgers, Inc.
and subsidiaries as of December 28, 1998 and the related consolidated statement
of operations and comprehensive income, shareholders' equity and cash flows for
the year ended December 28, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rally's
Hamburgers, Inc. and subsidiaries as of December 28, 1998 and the results of
their operations and their cash flows for the year ended December 28, 1998, in
conformity with generally accepted accounting principles.

KPMG LLP

Tampa, Florida
February 26, 1999

27
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Rally's Hamburgers, Inc.:

We have audited the accompanying consolidated balance sheet of Rally's
Hamburgers, Inc. (a Delaware corporation) and subsidiaries as of December 28,
1997 and the related consolidated statements of operations and comprehensive
income, stockholders' equity and cash flows for each of the two fiscal years in
the period ended December 28, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Checkers Drive-In
Restaurants, Inc. (Checkers), the investment in which is reflected in the
accompanying financial statements using the equity method of accounting. The
investment in Checkers represents 19 percent of the Company's total assets as
of December 28, 1997, and the equity in its net loss represents 16 percent of
the Company's 1997 net loss. The statements of Checkers were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for Checkers, is based solely on the report of
the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Rally's Hamburgers, Inc. and subsidiaries
as of December 28, 1997, and the results of their operations and their cash
flows for each of the two fiscal years in the period ended December 28, 1997,
in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Louisville, Kentucky
February 27, 1998

28
<PAGE>

RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 4,601 4,008
Restricted cash ................................................. 1,880 1,380
Investments ..................................................... 47 446
Accounts receivable, net ........................................ 2,597 1,949
Notes receivable, net ........................................... 153 --
Inventory ....................................................... 1,017 1,052
Prepaid expenses and other current assets ....................... 310 1,057
Property and equipment held for sale ............................ 1,131 1,076
-------- -----
Total current assets .......................................... 11,736 10,968
Property and equipment, net ...................................... 61,914 68,067
Investment in affiliate, net of accumulated amortization ......... 23,001 24,988
Notes receivable, net ............................................ 375 872
Goodwill, net of accumulated amortization of
$3,062 and $2,811, respectively................................. 8,477 9,913
Reacquired franchise and territory rights, net of
accumulated amortization of $4,129
and $2,991, respectively........................................ 11,620 12,758
Other intangibles, net of accumulated
amortization of $1,470
and $2,894, respectively........................................ 3,783 4,334
Other assets, net of accumulated
amortization of $285 and
$1,400, respectively............................................ 2,400 2,397
-------- ------
$123,306 $134,297
======== ========
</TABLE>

See Notes to Consolidated Financial Statements

29
<PAGE>

RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ................................................... $ 3,686 $ 7,076
Accrued wages, salaries and benefits ............................... 1,825 2,262
Reserves for restaurant relocations and abandoned sites ............ 3,148 1,665
Accrued liabilities ................................................ 5,716 8,596
Current maturities of long-term debt and obligations
under capital lease .............................................. 1,490 1,194
--------- ---------
Total current liabilities ....................................... 15,865 20,793
Senior notes, net of discount of $59 and $321, respectively......... 55,768 58,005
Long-term debt, less current maturities ............................ 7,819 4,017
Obligations under capital lease, less current maturities ........... 5,230 5,228
Long-term reserves for restaurant relocations
and abandoned sites .............................................. 2,275 3,655
Other noncurrent liabilities ....................................... 1,830 1,086
--------- ---------
Total liabilities ............................................... 88,787 92,784
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value, authorized
5,000,000 shares, issued, none at
December 28, 1998 and 45,667 at
December 28, 1997 ............................................... -- 5
Common stock, $.10 par value, authorized
50,000,000 shares, issued 29,608,688 at
December 28, 1998 and 24,836,900 at
December 28, 1997 ................................................ 2,961 2,484
Additional paid-in capital ......................................... 97,346 97,277
Retained deficit ................................................... (63,680) (56,145)
--------- ---------
36,627 43,621
Less treasury stock, at cost, 273,445 shares ....................... (2,108) (2,108)
--------- ---------
Net stockholders' equity ........................................ 34,519 41,513
--------- ---------
$ 123,306 $ 134,297
========= =========
</TABLE>

See Notes to Consolidated Financial Statements

30
<PAGE>

RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales ......................................... $139,602 $139,348 $156,445
Franchise revenues and fees .............................. 4,636 4,838 5,867
Owner fee income ......................................... 714 744 440
-------- -------- --------
Total revenues ........................................... $144,952 $144,930 $162,752
-------- -------- --------
COSTS AND EXPENSES:
Restaurant food and paper costs .......................... 44,352 44,997 53,712
Restaurant labor costs ................................... 42,570 41,464 48,634
Restaurant occupancy expense ............................. 7,333 6,487 7,093
Restaurant depreciation and amortization ................. 7,234 7,069 7,744
Other restaurant operating expense ....................... 12,293 12,782 14,871
Advertising expense ...................................... 9,853 10,255 7,767
Owner depreciation ....................................... 647 627 400
Other depreciation and amortization ...................... 2,503 2,623 2,338
General and administrative expenses ...................... 13,404 15,125 16,132
Impairment of long-lived assets .......................... 1,727 -- 824
Losses on assets to be disposed of ....................... 1,635 158 (804)
-------- -------- --------
Total costs and expenses .............................. $143,551 $141,587 $158,711
-------- -------- --------
Operating income ...................................... 1,401 3,343 4,041
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income .......................................... 480 750 614
Loss on investment in affiliate .......................... (2,019) (720) --
Interest expense ......................................... (7,145) (7,434) (8,622)
-------- -------- --------
Loss before income tax expense .......................... (7,283) (4,061) (3,967)
Income tax expense (benefit) ............................. 252 455 (675)
-------- -------- --------
Net loss before extraordinary item .................... $ (7,535) $ (4,516) $ (3,292)
Extraordinary item (net of tax expense of $1,350)......... -- -- $ 5,280
-------- -------- --------
Net (loss) income ..................................... $ (7,535) $ (4,516) $ 1,988
======== ======== ========
Comprehensive (loss) income ............................. $ (7,535) $ (4,516) $ 1,988
======== ======== ========
Net loss per share before extraordinary item ............. $ (0.28) $ (0.22) $ (0.19)
======== ======== ========
Extraordinary item ....................................... -- -- $ 0.31
======== ======== ========
Net (loss) income per common share
(basic and diluted) .................................... $ (0.28) $ (0.22) $ 0.12
======== ======== ========
Weighted average number of common shares
outstanding (basic and diluted) ........................ 27,170 20,709 17,007
======== ======== ========
</TABLE>

See Notes to Consolidated Financial Statements

31
<PAGE>

RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PREFERRED TREASURY PAID-IN EARNINGS TOTAL
STOCK STOCK STOCK CAPITAL (DEFICIT) EQUITY
-------- ----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 ................. $1,593 $ -- $ (2,108) $60,804 $ (53,617) $ 6,672
Issuance of common stock ...................... 3 -- -- 74 -- 77
Shareholders rights offering .................. 483 -- -- 9,975 -- 10,458
Compensatory stock options
and warrants ................................ -- -- -- 170 -- 170
Net income .................................... 1,988 1,988
--------- --------
Balances at December 29, 1996 ................. 2,079 -- (2,108) 71,023 (51,629) 19,365
Issuance of common stock ...................... 14 -- -- 264 -- 278
Compensatory stock options
and warrants ................................ -- -- -- 957 -- 957
Issuance of common stock and
preferred to acquire investment
in affiliate ................................ 391 5 -- 25,033 -- 25,429
Net loss ...................................... -- -- -- -- (4,516) (4,516)
------ ---- -------- ------- --------- --------
Balances at December 28, 1997 ................. 2,484 5 (2,108) 97,277 (56,145) 41,513
Exercise of 49,080 employee stock
options, net of $2 issuance costs............ 4 -- -- 83 -- 87
Issuance of 156,008 shares of common
stock in settlement of litigation, net of
$10 issuance costs........................... 16 -- -- 349 -- 365
Conversion of preferred shares to
common stock ................................ 457 (5) -- (452) -- --
Other equity funding, net ..................... -- -- -- 89 -- 89
Net loss ...................................... -- -- -- -- (7,535) (7,535)
------ ----- -------- ------- --------- --------
Balances at December 28, 1998 ................. $2,961 $-- $ (2,108) $97,346 $ (63,680) $ 34,519
====== ===== ======== ======= ========= ========
</TABLE>

See Notes to Consolidated Financial Statements

32
<PAGE>

RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .......................................... $ (7,535) $ (4,516) $ 1,988
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Depreciation and amortization ............................. 10,386 10,319 10,482
Impairment of long-lived assets ........................... 1,727 -- 824
Provisions for losses on assets to be disposed of ......... 1,635 158 (804)
Gain on bond repurchase ................................... (163) -- (6,630)
Amortization of bond costs and discounts .................. 390 398 395
Provisions for (recovery of) bad debt ..................... 593 (392) 968
Warrant expense ........................................... -- 940 20
Loss, net of amortization, on investment in affiliate ..... 2,019 720 --
Loss on disposal of property & equipment .................. 211 1,025 --
Changes in assets and liabilities:
Increase in accounts receivable ........................... (1,635) (331) (306)
Decrease in notes receivable .............................. 219 256 312
Decrease (increase) in inventory .......................... 86 (196) 262
Decrease (increase) in prepaid expenses and other
current assets .......................................... 979 (613) (34)
Decrease (increase) in other assets ....................... 45 221 (121)
(Decrease) increase in accounts payable ................... (3,390) 1,081 (3,889)
Decrease in accrued liabilities ........................... (3,082) (793) (2,807)
-------- -------- ---------
Net cash provided by operating activities ................ $ 2,485 $ 8,277 $ 660
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................... (2,290) (6,845) (2,306)
Acquisitions of restaurants ................................ (855) (2,172) --
Decrease in investments .................................... 399 1,512 2,975
Proceeds from sale of property and equipment ............... 615 1,872 4,392
Cash paid for additional investment in affiliates .......... (32) -- --
-------- -------- ---------
Net cash (used in) provided by
investing activities .................................. $ (2,163) $ (5,633) $ 5,061
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in restricted cash ..................... (500) 269 (966)
Repayments of senior notes ................................. (2,168) -- (19,612)
Proceeds from issuance of long-term debt ................... 4,300 -- --
Deferred loan costs incurred ............................... (290) -- --
Principal payments on long-term debt ....................... (1,247) (1,488) (2,204)
Net proceeds from issuance of common stock ................. 87 298 10,535
Other equity funding ....................................... 89 -- --
-------- -------- ---------
Net cash provided by (used in) financing activities ...... $ 271 $ (921) $ (12,247)
-------- -------- ---------
Net increase (decrease) in cash .......................... 593 1,723 (6,526)
CASH AT BEGINNING OF PERIOD ................................. 4,008 2,285 8,811
-------- -------- ---------
CASH AT END OF PERIOD ....................................... $ 4,601 $ 4,008 $ 2,285
======== ======== =========
</TABLE>

See Notes to Consolidated Financial Statements

33
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION -- The accompanying
consolidated financial statements include Rally's Hamburgers, Inc. and its
wholly-owned subsidiaries. Rally's Hamburgers, Inc. and its subsidiaries are
collectively referred to herein as the context requires as "Rally's" or the
"Company". The investment in affiliate, which is owned more than 20% and less
than 50% represents an investment in Checkers Drive-In Restaurants, Inc.
("Checkers") and is recorded on the equity method (See Note 2). All significant
intercompany accounts and transactions have been eliminated.

Rally's is one of the largest double drive-thru restaurant chains in the
United States. At December 28, 1998, the Company's system included 475
restaurants in 18 states, primarily in the Midwest and the Sunbelt, comprised
of 226 Company-owned and operated, 223 franchised and 26 Company-owned
restaurants in Western markets which are operated as Rally's restaurants by CKE
Restaurants, Inc. ("CKE"), a significant shareholder of the Company, under an
operating agreement which began in July 1996. Two additional Company-owned
stores covered by the operating agreement have been converted to the Carl's Jr.
format and are not included in the above store count. The Company's restaurants
offer high quality fast food. The Company serves the drive-thru and take-out
segments of the quick-service restaurant industry. The Company opened its first
restaurant in January 1985 and began offering franchises in November 1986.

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, when actual
transactions anticipated are consummated. Certain of the most significant
estimates include useful lives assigned to depreciable/amortizable assets, fair
value less costs to sell of long-lived assets held for sale, fair value of
long-lived assets held for use, future net occupancy costs related to
closed/disposable properties, accruals for the Company's self-insured and high
deductible insurance programs, and disclosures regarding commitments and
contingencies.

b) REVENUE RECOGNITION -- The Company recognizes franchise fees as income
on the date a restaurant is opened, at which time the Company has performed its
obligations relating to such fees. Area development fees are generated from the
awarding of exclusive rights to develop, own and operate Rally's restaurants in
certain geographic areas pursuant to an Area Development Agreement. Such fees
are recognized as income on a pro rata basis as the restaurants are opened or
upon the cancellation or expiration of an Area Development Agreement. Both
franchise fees and area development fees are non-refundable. The Company also
receives royalty fees from franchisees in the amount of 4% of each franchised
restaurant's gross revenues, as defined in the Franchise Agreement. Royalty
fees are recognized as earned.

34
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

c) RECEIVABLES -- Receivables consist primarily of royalties and notes due
from franchisees and advances to Rally's National Advertising Fund. A
rollforward of the allowances for doubtful receivables is as follows:

<TABLE>
<CAPTION>
ADDITIONS
----------------------------
BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED TO BALANCE AT
DESCRIPTION YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF YEAR
- --------------------------------- ------------ ----------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 29, 1996
Accounts receivable ......... $1,375 $ 751 $ (81) $ 339 $1,706
Notes receivable ............ 542 200 81 (30) 853
------ ------ ------ ------ ------
$1,917 $ 951 $ 0 $ 309 $2,559
====== ====== ====== ====== ======
Year Ended December 28, 1997
Accounts receivable ......... $1,706 $ (180) $ (153) $ 942 $ 431
Notes receivable ............ 853 (212) 148 558 231
------ ------ ------ ------ ------
$2,559 $ (392) $ (5) $1,500 $ 662
====== ====== ====== ====== ======
Year Ended December 28, 1998
Accounts receivable ......... $ 431 $ 471 $ 0 $ 259 $ 643
Notes receivable ............ 231 95 0 0 326
------ ------ ------ ------ ------
$ 662 $ 566 $ 0 $ 259 $ 969
====== ====== ====== ====== ======
</TABLE>

d) PROPERTY AND EQUIPMENT -- Property and equipment are depreciated using
the straight-line method for financial reporting purposes and accelerated
methods for income tax purposes. The estimated useful lives for financial
reporting purposes are the shorter of 20 years or the lease life plus available
renewal options for buildings and property held under capital leases, eight
years for furniture and equipment, five years for software and computer systems
and the life of the lease for leasehold improvements. Expenditures for major
renewals and betterments are capitalized while expenditures for maintenance and
repairs are expensed as incurred. Property and equipment held for sale includes
various excess restaurant facilities and land. The aggregate carrying value of
property and equipment held for sale is periodically reviewed and adjusted
downward to market value, when appropriate.

e) INVENTORY -- Inventory is valued at latest invoice cost which
approximates the lower of first-in, first-out cost or market.

f) CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents. Restricted Cash consists of cash on deposit with various financial
institutions as collateral to support the Company's obligations to certain
states for potential workers' compensation claims. This cash is not available
for the Company's use until such time that the respective states permit its
release. Cash equivalents at December 28, 1997 and December 28, 1998 were
approximately $2.3 million and $1.5 million, respectively.

g) INVESTMENTS -- All of the Company's investment securities are deemed as
"available-for-sale" under SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities". Accordingly, investments are reported at fair
value with unrealized holding gains and losses, excluding those losses
considered to be other than temporary, reported as a net amount in a separate
component of shareholders' equity. Provisions for declines in market value are
made for losses considered to be

35
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

other than temporary. Realized gains or losses from the sale of investments are
based on the specific identification method. No unrealized gains or losses were
recorded for any period presented, due to the quoted market prices of the
Company's investments approximating the cost. Investments consisted of
mortgage-backed securities at December 28, 1998 and December 28, 1997 of
$47,000 and $446,000, respectively.

h) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Interest paid .............................. $6,714 $7,013 $8,639
Income taxes paid .......................... $ 222 $ 545 $ 983
Capital lease obligations incurred ......... $ 627 $ 386 $ 111
</TABLE>

On December 18, 1997 Rally's acquired approximately 26.33% of the
outstanding common stock of Checkers in exchange for common and preferred stock
Rally's valued at $25.4 million (see Note 2).

On April 24, 1998, the Company acquired two restaurants in settlement of
litigation with a former franchisee (see Note 2). On July 9, 1997, the Company
acquired from Arkansas Investment Group, Inc., substantially all the operating
assets employed in the franchisee Rally's restaurants (see Note 2). These
acquisitions were recorded as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Fair value of assets acquired ............ $ 949 $ 2,800 $ --
Issuance of common stock ................. (375) -- --
Issuance of note payable ................. (420) -- --
Utilization of bad debt and other reserves
previously established ................. 975 -- --
Cash paid ................................ (855) (2,200) --
------ -------- ----
Receivables forgiven ..................... $ 274 $ 600 $ --
====== ======== ====
</TABLE>

The Company recorded in 1996 approximately $547,000 in notes receivable
primarily as the result of the sale of five of its restaurants in Montgomery,
Alabama.

During fiscal 1996, 1997, and 1998, the Company accepted notes due within
two to five years, bearing interest at rates up to 12%, as previously specified
in the underlying franchise agreements in exchange for certain receivables from
franchisees in the aggregate amount of approximately $340,000 for 1996,
approximately $493,000 for 1997, and approximately $30,000 for 1998.

i) EARNINGS (LOSS) PER COMMON SHARE -- Basic earnings (loss) per common
share is calculated based upon the Company's reported income and the weighted
average common shares outstanding of 27,170, 20,709 and 17,007 for fiscal years
1998, 1997 and 1996, respectively. The income and average shares outstanding
for purposes of the computation of diluted earnings per share are the same as
for the computation of basic earnings per share. Potentially dilutive
convertible preferred stock, common stock warrants and common stock options
have no effect as they are anti-dilutive for all periods presented.

36
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

j) STOCK OPTIONS -- The Company utilizes the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation".

k) IMPAIRMENT OF LONG-LIVED ASSETS -- The Company accounts for long-lived
assets under the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" (SFAS 121) which requires the write-down of certain intangibles
and tangible property associated with under performing sites. In applying SFAS
No. 121 the Company reviewed all stores that recorded losses in the applicable
fiscal years and performed a discounted cash flow analysis where indicated for
each store based upon such results projected over a ten or fifteen year period.
This period of time was selected based upon the lease term and the age of the
building, which the Company believes is appropriate based upon its limited
operating history and the estimated useful life of its restaurants. Impairments
were recorded to adjust the asset values to the amount recoverable under the
discounted cash flow analysis in the cases where the undiscounted cash flows
were not sufficient for full asset recovery, in accordance with SFAS No. 121.
The effect of applying SFAS No. 121 resulted in a reduction of property and
equipment and goodwill of $1.7 million in 1998, $-0- in 1997 and $824,000 in
1996.

l) INCOME TAXES -- The Company accounts for income taxes under the asset
or liability method whereby deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

m) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- The balance
sheets as of December 28, 1998 and December 28, 1997, reflect the fair value
amounts which have been determined, using available market information and
appropriate valuation methodologies. However, considerable judgement is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.

Cash and cash equivalents, receivables -- Due to the short maturity of
these items, the carrying amounts are a reasonable estimate of their fair
value.

Investments and Senior Notes -- The fair values of investments and Senior
Notes are based upon quoted market prices. At December 28, 1998 the carrying
value and fair value of Senior Notes was $55.8 million and $44.4 million,
respectively. At December 28, 1997, the carrying value and fair value of Senior
Notes was $58.0 million and $55.2 million, respectively.

Long-term debt -- The fair value of long-term debt approximates the
carrying value due to all significant amounts bearing interest at rates which
are variable or approximate a rate estimated to be available currently.

37
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

n) GOODWILL, REACQUIRED FRANCHISE RIGHTS, OTHER INTANGIBLES AND OTHER
ASSETS -- Goodwill, reacquired franchise and territory rights, other
intangibles and other assets are being amortized using the straight-line method
over the following periods:

AMORTIZATION
PERIOD
-------------
Goodwill .......................................... 5-25 years
Reacquired franchise and territory rights ......... 5-20 years
Other intangibles ................................. 3-25 years
Other assets....................................... 3-25 years

Subsequent to the intangibles' acquisition, the Company evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill and other intangibles may warrant revision or
that the remaining balance of goodwill and other intangibles may not be
recoverable. When factors indicate that goodwill or other intangibles should be
evaluated for possible impairment, the Company utilizes the procedures as set
forth in SFAS No 121.

o) OWNER FEE INCOME AND DEPRECIATION -- Revenue received as a result of
the operating agreement with CKE is referred to as Owner fee income in the
accompanying consolidated financial statements. Depreciation expenses related
to the ongoing investment in the CKE-operated restaurants are referred to as
Owner depreciation in the accompanying consolidated financial statements.

p) ADVERTISING COSTS -- It is the Company's policy to expense advertising
costs as incurred.

q) RECLASSIFICATIONS -- Certain items in the 1997 and 1996 financial
statement have been reclassified to conform with the 1998 presentation.

NOTE 2: ACQUISITIONS

On July 9, 1997, the Company acquired from Arkansas Investment Group, Inc.
("AIGI") substantially all the operating assets employed in the operation of
AIGI's franchised Rally's restaurants for approximately $2.8 million. The cash
disbursed in payment of the purchase price was reduced by certain amounts owed
by AIGI to the Company. Actual cash disbursed was approximately $2.2 million.
In addition, the Company assumed five of AIGI's ground lease obligations, five
of its ground and building lease obligations, and entered into three additional
ground leases. AIGI owned and operated a total of ten Rally's restaurants in
the Little Rock, Arkansas market. The acquisition of the AIGI operating assets
was accounted for as a purchase. The Company believes that the $2.8 million
represents the fair value of the acquired assets. The impact on operations of
this acquisition was not significant for any of the periods presented, and
therefore, proforma amounts are not presented giving effect to this
acquisition.

On December 18, 1997, the Company acquired approximately 19.1 million
shares of the common stock, $0.001 par value per share, of Checkers, pursuant
to that certain Exchange Agreement, dated as of December 8, 1997 (the "Exchange
Agreement"), between Rally's, CKE, Fidelity National Financial, Inc.
("Fidelity"), GIANT GROUP, LTD. ("GIANT") and the other parties named in the
Exchange Agreement. CKE, Fidelity and GIANT beneficially owned 5,278,015
shares, 2,759,788 shares and 3,136,849 shares, respectively, of Rally's common
stock prior to the consummation of the Exchange Agreement, approximately 23.9%,
12.7% and 15.2% of the then outstanding shares of Rally's common stock. In
addition, Terry Christensen, William Foley, II, David

38
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2: ACQUISITIONS--(CONTINUED)

Gotterer, Andrew Puzder, Burt Sugarman and C. Thomas Thompson, who are
Directors of Rally's, were parties to the Exchange Agreement. Mary Hart
Sugarman, AJ Sugarman and Al Sugarman, who also participated in the exchange,
are related to Burt Sugarman. In consideration of the acquisition of the
Checkers shares, Rally's issued 3,909,336 shares of its common stock, $.10 par
value per share, and 45,667 shares of its Series A Participating Preferred
Stock, $.10 par value per share with a combined value of $25.4 million. The
Rally's preferred stock was converted into 4,566,700 shares of Rally's common
stock after approval of such conversion by Rally's stockholders. The exchange
ratio used to determine the number of shares of Rally's common stock (including
the shares to be issued upon conversion of the Rally's preferred stock) issued
pursuant to the Exchange Agreement was based upon the average closing price of
the Checkers common stock and the Rally's common stock for the five trading
days preceding the public announcement of the proposed exchange on September
19, 1997. This stock acquisition was accounted for as a long term asset under
"Investment in affiliate" using the equity method of accounting with an initial
investment value of $25.4 million, based upon the market value of the Rally's
common shares issued and issuable upon conversion of the Rally's preferred
stock issued. This investment represented a 26.33% interest in Checkers and was
recorded with an initial investment of $13.2 million and a goodwill (excess of
purchase price over fair value of assets acquired) of $12.2 million being
amortized over 20 years. Amortization expense related to this goodwill was
$627,000 in 1998 and $52,000 in 1997. The Company purchased an additional
30,000 shares of Checkers common stock in January 1998. As of December 28,
1998, the Company owned 26.06% of Checkers outstanding common stock.

Summarized financial information of Checkers follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Condensed statement of operations data:
Total revenues .......................... $145,708 $ 143,894 $ 164,961
Operating income (loss) ................. 318 (3,977) (42,212)
Net loss ................................ (5,344) (12,186) (46,409)
Preferred dividends ..................... -- 696 --
Net loss to common shareholders ......... $ (5,344) $ (12,882) $ (46,409)
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Condensed balance sheet data:
Current assets .................. $ 12,298 $ 13,872 $ 20,955
Non-current assets .............. 89,801 101,529 115,155
-------- -------- --------
$102,099 $115,401 $136,110
======== ======== ========
Current liabilities ............. $ 18,608 $ 28,025 $ 46,679
Non-current liabilities ......... 38,883 37,004 49,091
Stockholders' equity ............ 44,608 50,372 40,340
-------- -------- --------
$102,099 $115,401 $136,110
======== ======== ========
</TABLE>

In December 1994, the Company entered into two franchise agreements with
Kader Investments, Inc. ("Kader") for the development and operation of Rally's
Hamburgers restaurants in Anaheim, California and Tustin, California. The
Company assisted the franchisee in developing and

39
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2: ACQUISITIONS--(CONTINUED)

opening the restaurants. On November 27, 1996, Kader filed a six-count
Complaint against Rally's in the California Superior Court for Orange County
(Case No. 772257) alleging material misrepresentation, respondent superior,
breach of contract, breach of the implied covenant of good faith and fair
dealing, fraud and unfair competition. These claims arose out of allegations
concerning Rally's offer and sale of two franchises (under a two-store
development agreement), and Rally's actions during the term of the agreements.
The Complaint sought as relief rescission of the parties' franchise and
development agreements; general damages of at least $1.5 million and $1.4
million for the material misrepresentation and fraud counts, respectively;
general damages in unspecified amounts as to the other counts; punitive damages
in unspecified amounts; and attorneys' fees. The Company filed an Answer, but
on December 18, 1997 in settlement of the litigation, the parties entered into
a memorandum of understanding pursuant to which the Company would purchase
Kader's restaurants for total consideration $1.9 million. The consideration
consisted of $855,000 in cash, $274,000 in forgiveness of accounts receivable,
$375,000 in restricted stock and $420,000 in notes payable. The transaction
closed on April 24, 1998 and the action has been dismissed.

NOTE 3: RESTAURANT CLOSURES AND OTHER

Certain charges in fiscal years 1998, 1997 and 1996 have been referred to
as Impairment of long-lived assets and Losses on assets to be disposed of.
These items represent estimates of the impact of management decisions, which
have been made at various points in time in response to the Company's sales and
profit performance and the then-current revenue building and profit enhancing
strategies.

During 1998, impairment expense of $1.7 million related to four under
performing restaurants was incurred. No additional restaurants were determined
to be impaired in 1997. During 1996, three restaurants, due to their continued
poor operating performance, were determined to be impaired, resulting in
charges of approximately $824,000. As required by the SFAS 121, the Company
will continue to periodically review its assets for impairment where
circumstances indicate that such impairment may exist.

During 1998, the Company closed five restaurants, resulting in the
recording of losses on assets held for sale of $713,000 ($249,000 for fixed
asset write-downs and $464,000 for future occupancy costs). Also in 1998, other
losses recorded upon the disposal of prior years closures was $172,000 and
losses on assets to be disposed of for the continued occupancy costs of other
prior years closures was $750,000.

During 1997, the Company recorded provisions of $33,000 and $199,000 to
write-off leasehold improvements and future rental costs associated with the
Louisville corporate office and regional offices. Additionally in 1997, the
Company recorded gains on held for sale properties of $74,000. During 1996, a
reduction of $891,000 was recorded in surplus property reserves related to
management's decision to re-open three units previously closed and to continue
to operate a fourth unit that had been designated for closure, offset by the
loss on sale of assets of $87,000.

40
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3: RESTAURANT CLOSURES AND OTHER--(CONTINUED)

The following summarizes the activities in the reserves for restaurant
relocations and abandoned sites as well as the activity associated with
impairments of long-lived assets.

The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of the Company's estimates for the ongoing
carrying costs of each location which has been closed or was never developed.
Those costs include rents, property taxes, maintenance, utilities and in some
cases the cost to relocate the modular restaurant to a storage facility. The
cash outlays for these costs have been estimated for various terms ranging from
five months to 11 years.

NOTE 4: RELATED PARTY TRANSACTIONS

a) ISSUANCE OF WARRANTS -- On December 20, 1996, the Company issued
warrants (the "Warrants") to purchase an aggregate of 1,500,000 restricted
shares of its Common Stock to CKE and Fidelity. The Warrants were granted as an
incentive to CKE and Fidelity to continue to participate in the identification
and implementation of synergistic opportunities with the Company. The Warrants
have a three-year term and became exercisable on 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. If exercised, the Warrants would provide approximately $6.6
million in additional capital to the Company. The Company obtained a valuation
analysis from an investment banking firm of national standing. Such analysis
estimated the value of the Warrants to be approximately $960,000. Approximately
$20,000 and $940,000 was expensed in 1996 and 1997, respectively.

b) WEST COAST OPERATING AGREEMENT -- On July 1, 1996, the Company entered
into a ten-year operating agreement with Carl Karcher Enterprises, Inc., the
subsidiary of CKE that operates the Carl's Jr. restaurant chain. Pursuant to
the agreement, CKE began operating 29 Rally's owned

41
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4: RELATED PARTY TRANSACTIONS--(CONTINUED)

restaurants located in California and Arizona, two of which were converted to a
Carl's Jrs. format. During 1998, two restaurants which the Company acquired
from a franchisee were added to the agreement and the leases for two of the
restaurants expired and were not renewed leaving 26 restaurants operating under
the agreement. Such agreement is cancelable after an initial five-year period,
at the discretion of CKE. A portion of these restaurants, at the discretion of
CKE, will be converted to the Carl's Jr. format. 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 any conversion costs associated with transforming restaurants
to the Carl's Jr. format, as well as the operating expenses of all the
restaurants. Rally's retains ownership of all 27 (two of which are Carl's Jrs.)
restaurants and is entitled to receive a percentage of gross revenues generated
by each restaurant. In the event of a sale by Rally's of any of the 27
restaurants, Rally's and CKE would share in the proceeds based upon the
relative value of their respective capital investments in such restaurant.

c) OPTION GRANTS TO NON-EMPLOYEES -- During 1996, the Company granted
150,000 options to certain individuals not employed by the Company for services
provided. Approximately $84,000 has been expensed for these grants in general
and administrative expenses in the accompanying 1996 Statement of Operations.
Such options were granted at the market values on the dates of grant, were
immediately exercisable and expire in five years.

d) OTHER TRANSACTIONS -- The Company has had transactions with certain
companies or individuals which are related parties by virtue of having
stockholders in common, by being officers/ directors or because they are
controlled by significant stockholders or officers/directors of the Company.
Such transactions which impacted the Company's consolidated financial statements
are summarized below. Information with respect to related party rent is
disclosed in Note 10. The Company and its franchisees each pay 1/2% of sales to
the Rally's National Advertising Fund (the "Fund"), established for the purpose
of creating and producing advertising for the chain. The Fund is not included in
the consolidated financial statements, although the Company's contributions to
the Fund are included in the Advertising and Promotion Expenses in the Company's
consolidated Statements of Operations.

Effective November 30, 1997, the Company entered into a Management
Services Agreement, pursuant to which predominately all of the management of
Checkers is providing key services to the Company, including executive
management, financial planning and accounting, franchise administration,
purchasing and human resources. In addition, the Company and Checkers share
certain of their executive officers, including Chief Executive Officer and the
Chief Operating Officer. The total cost of these services was $5.6 million and
$95,000 in 1998 and 1997, respectively. On January 29, 1999, the Company and
Checkers announced the Merger agreement pursuant to which both companies would
merge in an all stock transaction (see Note 16).

On December 1, 1998, the Company entered into two lease agreements, which
have been recorded as capital lease obligations, with Granite Financial Inc., a
wholly owned subsidiary of Fidelity, whereby the Company purchased security
equipment for its restaurants valued at $627,000 in the aggregate. The first
lease agreement is payable monthly at $9,689, including effective interest at
11.35%. The second lease is payable monthly at $11,097, including effective
interest at 12.39% and both have terms of 3 years.

42
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4: RELATED PARTY TRANSACTIONS--(CONTINUED)
SUMMARY OF RELATED PARTY TRANSACTIONS

DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
BALANCE SHEET AMOUNTS
Accounts receivable ............. $ 1,510 $ 1,078
Notes receivable ................ $ 53 $ 86
Investment in affiliate ......... $ 23,001 $ 24,988
Accounts payable ................ $ 221 $ 520
Accrued liabilities ............. $ 53 $ 65

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUE AND TRANSACTION AMOUNTS
Repurchase of Senior Notes (gross gain) ......... $ -- $ -- $6,339
Owner fee income ................................ 714 742 440
Interest income ................................. 117 52 49
---- ---- ------
$831 $794 $6,828
==== ==== ======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
EXPENSE AMOUNTS
Legal ........................................... $1,152 $1,017 $1,024
Rent expense .................................... 352 396 470
Owner depreciation .............................. 647 647 400
Interest expense ................................ 9 -- 180
Compensatory stock options and warrants ......... -- 940 170
Loss on investment in affiliate ................. 2,019 720 --
Management service agreement .................... 5,593 95 --
------ ------ ------
$9,772 $3,815 $2,244
====== ====== ======
</TABLE>

NOTE 5: PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
Land ........................................ $ 14,487 $ 14,145
Building and leasehold improvements ......... 52,448 52,196
Equipment, furniture and fixtures ........... 40,168 40,582
--------- ---------
107,103 106,923
Less accumulated depreciation ............... (48,905) (42,872)
--------- ---------
58,198 64,051
--------- ---------
Property held under capital lease ........... 6,772 6,145
Less accumulated amortization ............... (3,056) (2,129)
--------- ---------
3,716 4,016
--------- ---------
Net property and equipment .................. $ 61,914 $ 68,067
========= =========

43
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6: SENIOR NOTES

On March 9, 1993, the Company sold approximately $85 million of 9 7/8%
Senior Notes due June 2000 (the "Senior Notes"). The Company was required to
make a mandatory sinking fund payment on or before June 15, 1999 to retire
33 1/3% in aggregate principal amount of the Senior Notes issued, which was
satisfied during the third quarter of 1998. The Senior Notes are carried net of
the related discount, which is being amortized over the life of the Senior
Notes. Interest is payable June 15 and December 15 of each year until maturity.
The Senior Notes include certain restrictive covenants, which, among other
restrictions, limit the Company's ability to obtain additional borrowings and
to pay dividends as well as impose certain change of control provisions, as
defined. As of December 28, 1998 and December 28, 1997, the amounts outstanding
net of discounts were $55.8 million and $58.0 million, respectively.

In January 1996, Rally's repurchased approximately $22 million face value
of Senior Notes. The Senior Notes were purchased from GIANT at a price of
$678.75 per $1,000 principal amount, representing the market closing price on
the last business day prior to the repurchase date. Prior to the Senior Notes
repurchases, the Company's Board of Directors had received an independent
opinion from an investment banking firm as to the fairness of the transactions.
Additionally, during the fourth quarter of 1996, Rally's repurchased
approximately $4.7 million face value of the Senior Notes from various other
bondholders for approximately $4.5 million in cash.

These purchases resulted in extraordinary gains in 1996 net of tax,
totaling approximately $5.3 million or $.31 per share. As a result of these
debt repurchases, the annualized ongoing interest payments on the Senior Notes
was reduced to approximately $5.8 million.

During 1998 and prior to December 18, 1998 Rally's repurchased on the open
market approximately $1.7 million face value of its Senior Notes at an average
price of $887.90 per $1,000 principal amount. During the third quarter of 1998,
the Company completed the required mandatory sinking fund payment due June 15,
1999 calculated to retire 33 1/3% in aggregate original principal amount of the
Senior Notes.

The Company entered into a $4.3 million mortgage transaction with FFCA
Acquisition Corporation ("FFCA") pursuant to which eight fee-owned properties
were mortgaged on December 18, 1998. The terms of the transaction include a
stated interest rate of 9.5% on the unpaid balance over a 20-year term with
monthly payments totaling approximately $40,000. The Company is required to
utilize the entire net proceeds to reduce the Senior Notes. Purchases on the
open market were initiated immediately after the mortgage was finalized and
will be completed as they become available.

The remaining outstanding Senior Notes are publicly traded and at December
28, 1998 had a market value of approximately $44.4 million based on the quoted
market price for such notes.

The Company is evaluating various alternatives for the repayment and
refinancing of the Senior Notes prior to their maturity in June 2000. If the
Company is unable to refinance the debt in full, management of the Company is
evaluating a series of sale-leaseback transactions and the possibility of
selling company-owned stores in certain markets to existing and potentially new
franchisees. Management also anticipates that further debt reductions may also
be accomplished by completing a private placement of preferred or common stock
during the twelve months preceding the maturity date of the Senior Notes. There
can be no assurance that the Company will be able to satisfy the entire
principal balance of the Senior Notes on the maturity date of June 15, 2000.

44
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7: LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
<S> <C> <C>
Mortgages payable to FFCA Acquisition Corporation secured by eight
Company owned restaurants payable in 240 aggregate monthly
installments of $40,082, including interest at 9.5%. The Company is
required to utilize the net proceeds of the loan to retire Senior Notes ..... $4,300 $ --

Notes payable to former franchise owners for acquisition of market,
secured by common stock of Hampton Road Foods, maturing
March 13, 2001, with outstanding balances due after last monthly
payments, bearing interest of 9%. The notes are payable in monthly
principal and interest installments ranging from $4,742 to $50,211........... 4,022 4,073

Notes payable to banks, maturing at various dates through November 10,
2001, secured by property and/or equipment, bearing interest ranging
from 1/2% above prime to 9.25%. The notes are payable in monthly
principal and interest installments ranging from $1,531 to $13,333.
Interest is payable monthly ................................................. 323 530

Secured notes payable to a bank used to finance equipment and/or
modular buildings for franchisees (the Franchisee Loans), maturing at
various dates through July 15, 2000, bearing interest at prime plus 1/2%.
The notes are payable in monthly principal installments of $4,875.
Interest is payable monthly ................................................. 78 136

Note payable to finance company due September 1998, secured by
certain equipment, bearing interest at a rate of 7.3%. The note is
payable in monthly principal and interest installments of $6,762, paid
in 1998 ..................................................................... -- 59
------ ------
8,723 4,798
Less current portion .......................................................... (904) (781)
------ ------
$7,819 $4,017
====== ======
</TABLE>

At December 28, 1998, the prime rate was 7.75%.

The following are the remaining annual maturities of long-term debt:

YEAR
--------
1999 ............... $ 904
2000 ............... 740
2001 ............... 2,894
2002 ............... 194
2003 ............... 143
Thereafter ......... 3,848
------
$8,723
======

The Company is subject to certain restrictive covenants under its debt
agreements. If the eight properties included in the FFCA Mortgage transaction
are not in compliance with certain financial performance criteria, the Company
is allowed to substitute another property as security for the debt.

45
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8: COMMITMENTS AND CONTINGENCIES

a) LEASE COMMITMENTS -- The Company leases certain land and buildings
generally under agreements with terms of or renewable to 15 to 20 years. Some
of the leases contain contingent rental provisions based on percentages of
gross sales. The leases generally obligate the Company for the cost of property
taxes, insurance and maintenance.

Following is a schedule by year of future minimum lease commitments under
all leases at December 28, 1998:

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- ---------------------------------------------------------- ----------- ----------
<S> <C> <C>
1999 .................................................. $ 1,344 $ 5,701
2000 .................................................. 961 5,175
2001 .................................................. 929 4,994
2002 .................................................. 694 4,298
2003 .................................................. 716 3,523
Thereafter ............................................ 4,155 16,871
-------- -------
Total minimum lease commitments ....................... $ 8,799 $40,562
=======
Less amounts representing interest, discounted at rates
ranging from 7.00% to 16.03% ........................ (2,983)
--------
Present value of minimum lease payments ............... 5,816
Current portion of capital lease obligations .......... (586)
--------
Long-term obligations under capital lease ............. $ 5,230
========
</TABLE>

Rent expense totalled $5.0 million, $4.8 million and $5.3 million in 1998,
1997 and 1996, respectively.

b) SELF INSURANCE -- The Company is self-insured for most workers'
compensation, general liability and automotive liability losses subject to per
occurrence and aggregate annual liability limitations. The Company is also
self-insured for health care claims for eligible participating employees
subject to certain deductibles and limitations. The Company determines its
liability for claims incurred but not reported on an actuarial basis.

c) LITIGATION -- JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET
AL. (Case No. C-94-0039-L-CS). In January and February 1994, two putative class
action lawsuits were filed, purportedly on behalf of the stockholders of
Rally's, in the United States District Court for the Western District of
Kentucky, Louisville division, against Rally's, Burt Sugarman and GIANT and
certain of Rally's present and former officers and directors and its auditors.
The cases were subsequently consolidated under the case name Jonathan Mittman
et al vs. Rally's Hamburgers, Inc., et al, case number C-94-0039-L(CS). The
complaints allege defendants violated the Securities Exchange Act of 1934,
among other claims, by issuing inaccurate public statements about the

46
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8: COMMITMENTS AND CONTINGENCIES--(CONTINUED)

Company in order to arbitrarily inflate the price of its common stock. The
plaintiffs seek unspecified damages. On April 15, 1994, Rally's filed a motion
to dismiss and a motion to strike. On April 5, 1995, the Court struck certain
provisions of the complaint but otherwise denied Rally's motion to dismiss. In
addition, the Court denied plaintiffs' motion for class certification; the
plaintiffs renewed this motion, and despite opposition by the defendants, the
Court granted such motion for class certification on April 16, 1996, certifying
a class from July 20, 1992 to September 29, 1993. In October 1995, the
plaintiffs filed a motion to disqualify Christensen, Miller, Fink, Jacobs,
Glaser, Weil & Shapiro, LLP ("Christensen, Miller") as counsel for defendants
based on a purported conflict of interest allegedly arising from the
representation of multiple defendants as well as Ms. Glaser's position as both
a former director of Rally's and a partner in Christensen, Miller. Defendants
filed an opposition to the motion, and the motion to disqualify Christensen,
Miller was denied. A settlement conference occurred on December 7, 1998, but
was unsuccessful. Fact discovery is not yet complete, but it is anticipated
that a deadline for completion of fact discovery will be set during 1999. No
trial date has been set. Management is unable to predict the outcome of this
matter at the present time or whether or not certain available insurance
coverages will apply. The defendants deny all wrongdoing and intend to defend
themselves vigorously in this matter. Because these matters are in a
preliminary stage, the Company is unable to determine whether a resolution
adverse to the Company will have a material effect on its results of operations
or financial condition. Accordingly, no provisions for any liabilities that may
result upon adjudication have been made in the accompanying financial
statements. An estimate of defense costs reimbursable under the Company's
directors' and officers' insurance is included in "Other Assets" in the
accompanying consolidated financial statements.

FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN V.
CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative class
action was filed on September 29, 1998, in the Delaware Chancery Court in and
for New Castle County, Delaware by an alleged stockholder of 500 shares of the
common stock of Checkers. The complaint names the Company and certain of its
current officers and directors as defendants including William P. Foley, II,
James J. Gillespie, Harvey Fattig, Joseph N. Stein, James T. Holder, Terry N.
Christensen, Burt Sugarman and C. Thomas Thompson. The Complaint also names
Checkers and GIANT as defendants. The complaint arises out of the proposed
merger announced on September 28, 1998 between Rally's, Checkers and GIANT (the
"Proposed Merger") and alleges generally, that certain of the defendants
engaged in an unlawful scheme and plan to permit Rally's to acquire the public
shares of the common stock of Checkers in a "going-private" transaction for
grossly inadequate consideration and in breach of the defendants' fiduciary
duties. The plaintiff allegedly initiated the Complaint on behalf of all
stockholders of Checkers as of September 28, 1998, and seeks INTER ALIA,
certain declaratory and injunctive relief against the consummation of the
Proposed Merger, or in the event the Proposed Merger is

47
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8: COMMITMENTS AND CONTINGENCIES--(CONTINUED)

consummated, recision of the Proposed Merger and costs and disbursements
incurred in connection with bringing the action, including attorney's fees, and
such other relief as the Court may deem just and proper. In view of a decision
by Rally's, GIANT and Checkers not to implement the transaction that had been
announced on September 28, 1998, plaintiffs have agreed to provide the Company
and all other defendants with an open extension of time to respond to the
complaint. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between Rally's and
Checkers. The Company denies all wrongdoing and intends to defend the action
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.

DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF
THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. Case
No. 16680. This putative class action was filed on October 2, 1998, in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified
number of shares of the common stock of Checkers. The complaint names the
Company and certain of its current officers and directors as defendants
including William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N.
Stein, James T. Holder, Terry N. Christensen, Burt Sugarman and C. Thomas
Thompson. The Complaint also names Checkers and GIANT as defendants. As with
the FIRST ALBANY complaint described above, this complaint arises out of the
proposed merger announced on September 28, 1998 between the Rally's, Checkers
and GIANT (the "Proposed Merger") and alleges generally, that certain of the
defendants engaged in an unlawful scheme and plan to permit Rally's to acquire
the public shares of the Checkers' common stock in a "going-private"
transaction for grossly inadequate consideration and in breach of the
defendant's fiduciary duties. The plaintiffs allegedly initiated the Complaint
on behalf of all stockholders of Checkers as of September 28, 1998, and seeks
INTER ALIA, certain declaratory and injunctive relief against the consummation
of the Proposed Merger, or in the event the Proposed Merger is consummated,
recision of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees, and such other
relief as the Court may deem just and proper. For the reasons stated above in
the description of the FIRST ALBANY action, plaintiffs have agreed to provide
the Company and all other defendants with an open extension of time to respond
to the complaint. Plaintiffs have indicated that they will likely file an
amended complaint in the event of the consummation of a merger between Rally's
and Checkers. The Company denies all wrongdoing and intends to defend the
action vigorously. No estimate of possible loss or range of loss resulting from
the lawsuit can be made at this time.

d) OTHER COMMITMENTS -- The Company is contingently liable on certain
franchisee lease commitments totaling approximately $407,000. The Company from
time to time negotiates purchase contracts for certain items used in its
restaurants in the normal course of business. Although some of these contracts
contain minimum purchase quantities, such quantities do not exceed expected
usage over the term of such agreements.

e) PURCHASE COMMITMENTS -- The Rally's Hamburger chain, which includes
both the Company and some franchisee-owned stores, has purchase agreements with
various suppliers extending beyond one year. Subject to the suppliers' quality
and performance, the purchases covered by those agreements aggregate
approximately $48.8 million in 1999 and a total of approximately $70.0 million
for the years 2000 through 2004.

48
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9: INCOME TAXES

The major components of the Company's computation of deferred tax assets
and liabilities at December 28, 1998 and December 28, 1997 are as follows:

<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
<S> <C> <C>
Excess of tax depreciation over book depreciation ......... $ 5,109 $ 9,316
Acquired intangibles with no tax basis .................... 1,590 2,070
Other ..................................................... 2 17
------- -------
Gross deferred tax liabilities ............................ $ 6,701 $11,403
======= =======
Net operating loss carryforwards .......................... $17,464 $17,488
Amounts accrued for financial reporting purposes not
yet deductible for tax purposes ......................... 9,178 10,742
Alternative minimum tax and targeted job
tax credit carryforward ................................. 937 937
Other ..................................................... 236 1,230
------- -------
Gross deferred tax assets ................................. $27,815 $30,397
Less valuation allowance .................................. 21,114 18,994
------- -------
Net deferred tax asset .................................... $ 6,701 $11,403
======= =======
</TABLE>

As of December 28, 1998, the Company had net operating loss ("NOL")
carryforwards for Federal income tax purposes of approximately $49.8 million,
the majority of which expires in various amounts from 2008 to 2012. The Company
also has alternative minimum tax credit carryforwards of approximately $503,000
that have no expiration and $434,000 in targeted jobs tax credits which expire
in various amounts from 2005 to 2008. A valuation allowance of approximately
$21.1 million has been established due to the uncertainty of realizing the
benefit associated with the NOL carryforwards generated in the current and
previous years. In addition, pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended, the utilization of the Company's NOL carryforwards to
offset future taxable income can be limited if the Company experiences a change
in ownership of more than 50 percentage points within a three-year period. The
Company experienced an ownership change, as defined in Section 382, in December
of 1997 in connection with the acquisition of a 26.1% interest in Checkers. The
acquisition in combination with significant equity transactions that occurred
within the preceding 3 years of December 1997 generated a more than 50
percentage point ownership change. As a result of this ownership change, the
Company is significantly limited in utilizing its NOL carryforwards and tax
credit carry forwards arising before the ownership change to offset future
taxable income and tax, respectively. It is anticipated that certain of the
Company's net operating loss carryforwards and tax credit carryforwards could
expire before becoming available under Section 382. Additionally, on January
29, 1999, the Company and Checkers announced the signing of a definitive merger
agreement pursuant to which the Company will merge into Checkers in an all
stock transaction, "the Merger" (see Note 13). The Company believes that the
Merger would cause it to experience a second ownership change. In the event of
the Merger, the Company would be severely limited in utilizing its net
operating loss carryforwards and tax credit carryforwards arising before the
ownership change to offset future taxable income and tax, respectively. It is
anticipated that a significant amount of the Company's net operating loss
carryforwards and tax credit carryforwards could expire before becoming
available under Section 382.

49
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9: INCOME TAXES--(CONTINUED)

Income tax expense, including the tax provision on the extraordinary item
in 1996, consists of the following:

FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
Current ................... $252 $455 $675
Deferred .................. -- -- --
---- ---- ----
Total tax expense ......... $252 $455 $675
==== ==== ====

Income tax expense for the years ended December 28, 1998, December 28,
1997 and December 29, 1996 consisted of $252,000, $455,000 and $675,000 in
state income tax expense

A reconciliation of income tax expense with the federal statutory rate is
as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Provision (benefit) computed at statutory rate ......... $ (2,562) $ (1,330) $ 905
Tax effect of equity in loss of affiliate .............. 687 245 --
State and local income taxes, net of federal
income tax benefit ................................... 150 455 575
Change in deferred tax asset valuation
allowance ............................................ 2,119 1,364 (1,169)
Other .................................................. (142) (279) 364
-------- -------- --------
$ 252 $ 455 $ 675
======== ======== ========
</TABLE>

NOTE 10: STOCK-BASED COMPENSATION PLANS

The Company currently has three stock option plans in effect, the 1990
Stock Option Plan (the "Employees' Plan"), the 1990 Stock Option Plan for
Non-Employee Directors (the "1990 Directors' Plan"), and the 1995 Stock Option
Plan for Non-Employee Directors (the "1995 Directors' Plan"). In 1998, the
Company terminated the employee stock purchase plan (the "1993 Purchase Plan").
Although there are existing options outstanding under the 1990 Directors' Plan,
no additional grants will be made pursuant to this plan. The Company accounts
for these plans under APB Opinion No. 25, under which approximately $66,000 of
compensation cost was recognized in fiscal 1996 related to 157,000 options
granted to directors under the 1995 Directors Plan. Such compensation
represented the difference between the market values on the dates of grant and
the measurement date, July 10, 1996, the date when the grants were ultimately
approved by the shareholders at the annual meeting. No compensation cost was
recognized in any other period presented.

During 1996, a total of 350,000 options were granted to five of the
current directors and 1.6 million options were granted to the current directors
on February 12, 1998. These options were not granted pursuant to an option
plan. The options were granted at a price equal to the stock's market price on
the date of grant. The options were immediately exercisable and expire after
five years.

Pursuant to the Employees' Plan, the Company issued options to purchase
720,800 shares at an exercise price of $2.531 on April 27, 1998 and issued
options to purchase 100,000 shares at an exercise price of $1.313 on August 18,
1998.

50
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10: STOCK-BASED COMPENSATION PLANS--(CONTINUED)

The Employees Plan was amended on June 11, 1998 to increase the number of
shares subject to the Plan from 3,250,000 to 5,750,000 and was further amended
to enable certain employees of Checkers who provide services to the Company
pursuant to the Management Services Agreement that exists between the two
companies to participate in the Employees' Plan.

Pursuant to the 1995 Directors Plan, the Company issued options to
purchase 184,000 shares at an exercise price of $2.313 on May 11, 1998. The
options were immediately exercisable and expire after ten years.

On January 29, 1999, the Company and Checkers announced the signing of a
definitive Merger agreement pursuant to which both companies would merge in an
all stock transaction. The Merger agreement provides that each outstanding
share of Company stock will be exchanged for 1.99 shares of Checkers stock. The
approximate 19.1 million shares of Checkers common stock which the company owns
will be retired following the Merger. Pursuant to the Merger agreement, each of
the Company's stock options (5.6 million as of December 28, 1998) will be
exchanged for Checkers options at an exchange rate of 1 to 1.99.

The Company was authorized to sell up to 500,000 shares of stock to its
employees under the 1993 Purchase Plan. The Company sold approximately 28,000
shares and 33,000 shares in 1996 and 1997, respectively, and has sold
approximately 161,000 shares through December 28, 1998 since the inception of
this plan in 1993. The Company sold shares at 85% of the stock's market price
at date of purchase. The weighted average fair value of shares sold in 1997 and
1996 was approximately $3.06 and $3.04, respectively.

Options to purchase an aggregate of 5.5 million shares of the Company's
Common Stock may be granted under the stock option plans, at a price not less
than the market value on the date of grant. The Company has granted options on
approximately 2.5 million shares under the stock option plans. Outstanding
options under the Employees' Plan generally expire ten years after grant.
Certain options granted to a former President and Chief Executive Officer of
the company expire five years from the date of grant. Options outstanding under
the two directors' plans expire five years after grant. Options are exercisable
over various periods ranging from immediate to three years after grant
depending upon their grant dates and the plan under which the options were
granted.

51
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10: STOCK-BASED COMPENSATION PLANS--(CONTINUED)

A summary of the status of all options granted to employees and directors,
as well as those options granted to non-employees (see Note 4), at December 28,
1998, December 28, 1997 and December 29, 1996, and changes during the years
then ended is presented in the table and narrative below:

<TABLE>
<CAPTION>
DECEMBER 28, 1998 DECEMBER 28, 1997 DECEMBER 29, 1996
---------------------- ------------------- ---------------------
WTD. WTD. WTD.
AVG. AVG. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- -------- ---------- ----------- ---------
(SHARES REPRESENTED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............. 3,859 $ 2.99 3,664 $ 2.98 2,219 $ 4.24
Granted at price equal to market ............. 6,579 1.26 863 3.00 2,154 2.63
Granted at price greater than market ......... -- -- -- -- 176 1.75
Exercised .................................... (49) 1.63 (78) 2.48 (9) 3.05
Forfeited .................................... (1,672) 2.26 (429) 2.75 (207) 3.34
Expired ...................................... (3,077) 2.54 (161) 3.63 (669) 5.62
------ ------- ----- ------- ----- -------
Outstanding at end of year ................... 5,640 1.36 3,859 2.99 3,664 2.92
====== ======= ===== ======= ===== =======
Exercisable at end of year ................... 4,615 $ 1.54 2,921 $ 3.07 2,359 $ 3.21
Weighted average of fair value of
options granted ............................ $ 0.90 $ 1.78 $ 1.31
</TABLE>

On December 15, 1998, the Company repriced the 1990 Stock Option Plan and
the options issued outside of a plan. The new option price is $.531 the closing
market price at December 15, 1998. As a result of this transaction 2,124,216
options in the 1990 Stock Option Plan and 1,850,000 options issued outside of a
plan were cancelled and reissued at the new price. These changes are reflected
in the table above.

The following table summarizes information about stock options outstanding
at December 28, 1998:

<TABLE>
<CAPTION>
WTD. AVG.
OUTSTANDING REMAINING WTD. AVG. NUMBER WTD. AVG.
RANGE OF AS OF CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES 12/28/98 LIFE (YRS.) PRICE 12/28/98 PRICE
- -------------------- ------------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$0.531 to $2.00 3,770,287 5.7 $ .5765 2,745,065 $ .5922
$ 2.01 to $3.00 1,735,830 2.7 2.8265 1,735,830 2.8265
$ 3.01 to $4.00 20,000 2.4 3.4413 20,000 3.4413
$ 4.01 to $5.00 113,900 0.3 4.3555 113,900 4.3555
- -------------------- --------- --- -------- --------- --------
$0.53 to $20.00 5,640,017 4.6 $ 1.3555 4,614,795 $ 1.5378
==================== ========= === ======== ========= ========
</TABLE>

52
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 10: STOCK-BASED COMPENSATION PLANS--(CONTINUED)

Had compensation cost for all option grants to employees and directors
been determined consistent with FASB Statement No. 123, Rally's net income and
earnings per share would have been reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Income (Loss): As Reported .......... $ (7,535) $ (4,516) $ 1,988
Pro Forma ............ $ (10,916) $ (5,577) $ (699)
Earnings (Loss) Per
Commmon Share: As Reported .......... $ (0.28) $ (0.22) $ 0.12
Pro Forma ............ $ (0.40) $ (0.27) $ (0.04)
</TABLE>

Because the Statement 123 method of accounting has not been applied to
options granted prior to January 2, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the pro forma amounts include approximately $17,000 and $12,000
in 1997 and 1996, respectively, related to the purchase discount offered under
the 1993 Purchase Plan.

For purposes of the pro forma disclosures assuming the use of the fair
value method of accounting, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal 1998, 1997 and
1996, respectively: expected volatility of 86.0 percent, 47.0 percent, and 45.7
percent; risk-free interest rates of 5.45 percent, 6.26 percent and 6.82
percent for options granted to employees and 5.45 percent, 6.47 percent and
6.59 percent for options granted to directors; and expected lives for fiscal
1998, 1997 and 1996 of four years for options granted to employees and
directors. An expected dividend yield of 0 percent was used for all periods
based on the Company's history of no dividend payments.

NOTE 11: QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 28, 1998
Revenues ....................... $ 32,164 $ 34,450 $ 34,796 $ 43,542 $144,952
Income from operations ......... 557 32 531 281 1,401
Net loss ....................... (1,082) (1,600) (1,011) (3,842) (7,535)
-------- -------- -------- -------- --------
Loss per common share
(basic and diluted) .......... $ (0.04) $ (0.06) $ (0.03) $ (0.13) $ (0.28)
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 28, 1997
Revenues ....................... $ 32,595 $ 38,090 $ 38,522 $ 35,723 $144,930
Income from operations ......... 975 1,832 561 (25) 3,343
Net income (loss) .............. (952) 92 (1,148) (2,508) (4,516)
-------- -------- -------- -------- --------
Loss per common share
(basic and diluted) .......... $ (0.05) $ -- $ (0.06) $ (0.11) $ (0.22)
======== ======== ======== ======== ========
</TABLE>

53
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 12: SHAREHOLDER RIGHTS OFFERING

A Shareholder Rights Offering (the "Offering") was completed on September
20, 1996. The Company distributed to holders of record of its common stock, as
of the close of business on July 31, 1996 (the "Record Date"), transferable
subscription rights ("Right(s)") to purchase units consisting of one share of
common stock and one warrant to purchase an additional share of common stock.
Stockholders received one Right for each share of common stock held on the
Record Date. For each 3.25 Rights held, a holder had the right to purchase one
unit for $2.25 each. The Offering consisted of 4,825,805 units. Each warrant
may be exercised to acquire an additional share of common stock at an exercise
price of $2.25 per share and expires on September 26, 2000. The Company may
redeem the warrants, at $.01 per warrant, upon 30 days' prior written notice in
the event the closing price of the common stock equals or exceeds $6.00 per
share for 20 out of 30 consecutive trading days ending not more than 30 days
preceding the date of the notice of redemption. The Offering was fully
subscribed and raised over approximately $10.8 million in gross proceeds,
offset by legal and other issuance costs of approximately $437,000. The net
proceeds from the Offering were attributable primarily to the sale of the
Company's common stock. The amount attributable to the warrants is included in
"Additional paid-in capital."

In addition to the approximately $10.8 million provided by the Offering,
the warrants issued, if exercised, could provide an additional $10.8 million in
proceeds. The Company had 15,683,869 shares of common stock outstanding on the
Record Date. Immediately after the Offering, 20,509,674 shares of common stock
and 4,825,805 warrants were outstanding. As of December 28, 1998, 4,813,757 of
these warrants were outstanding. The warrants are publicly traded and at
December 28, 1998 had a market value of approximately $301,000 based on the
quoted market price for such warrants.

NOTE 13: SUBSEQUENT EVENTS

On January 29, 1999, Rally's and Checkers announced the signing of a
definitive merger agreement pursuant to which both companies would merge in an
all stock transaction. The Merger agreement provides that each outstanding
share of Rally's stock will be exchanged for 1.99 shares of Checkers stock. The
approximate 19.1 million shares of Checkers common stock which Rally's owns
will be retired following the Merger. Checkers and Rally's have each received
investment bankers' opinions as to the fairness of the exchange rate used in
the Merger. The transaction is subject to certain approvals, including but not
limited to approval by the shareholders of Checkers and Rally's and potentially
the holders of Rally's Senior Notes and is expected to close in the second
quarter of fiscal year 1999.

At December 28, 1998, Rally's owned 19,130,930 shares (26.06 percent) of
the outstanding common stock of Checkers and public shareholders owned the
remaining 54,277,177 shares of Checkers common stock. Checkers will issue
58,377,134 shares of its common stock to Rally's shareholders in exchange for
all the outstanding common stock of Rally's (29,335,243 outstanding shares) at
a 1 to 1.99 exchange ratio. After the transaction, Rally's shareholders will
own 58,377,134 shares (51.8 percent of the outstanding common stock of the new
Checkers) and the remaining 54,277,117 shares (48.2 percent of Checkers common
stock) will then be held by then current shareholders of Checkers. Immediately
following the Merger, the Checkers common stock will undergo a one-for-twelve
reverse split resulting in total common shares outstanding of approximately
9,387,859. In addition, each of Rally's outstanding stock options (5.6 million
at December 28, 1998) will be exchanged for Checkers options at an exchange
rate of 1 to 1.99.

The business combination under the Merger will be accounted for under the
purchase method. The transaction will be accounted for as a reverse acquisition
as the stockholders of Rally's will

54
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 13: SUBSEQUENT EVENTS--(CONTINUED)

receive the larger portion (51.8%) of the voting interests in the combined
enterprise. For purposes of computing the resulting voting interests,
exercisable options and warrants with exercise prices that exceed the market
value of the common stock of the respective company have been excluded.
Accordingly, Rally's is considered the acquirer for accounting purposes and
therefore, Checkers' assets and liabilities will be recorded based upon their
fair market value (see Note 14).

NOTE 14: PRO FORMA INFORMATION (UNAUDITED)

The following pro forma condensed consolidated financial data sets forth
certain pro forma financial information giving effect to the Merger. The pro
forma financial information is based on, and should be read in conjunction with
the historical consolidated financial statements of each of the companies and
the notes related thereto. The pro forma condensed consolidating balance sheet
gives effect to the issuance of 58,377,134 shares of Checkers common stock in
exchange for 29,335,243 shares of Rally's common stock, based upon the per
share price of Checkers common shares at $0.531 and a one-for twelve reverse
split, assuming the Merger had occurred December 28, 1998:

<TABLE>
<CAPTION>
CHECKERS RALLY'S
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
-------------- -------------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Total current assets ................................. 12,298 11,736 -- 24,034
Property and equipment, net .......................... 78,390 61,914 140,304
Investment in affiliate, including net goodwill of
$11,861 after accumulated amortization.............. -- 23,001 A) (23,001) --
Intangibles, net of accumulated amortization ......... 10,123 23,880 G) 18,714 52,717
Other assets, net of accumulated amortization ........ 1,288 2,775 4,063
------ -------- --------- -------
$ 102,099 $123,306 $ (4,287) $ 221,118
========= ======== ========= =========
CURRENT LIABILITIES:
Current liabilities .................................. 18,608 15,865 B) 1,500 35,973
Senior notes, net of discount, less
current maturities ................................. -- 55,768 55,768
Long-term debt and capital lease obligations, less
current maturities ................................. 29,654 13,049 42,703
Minority interests in joint ventures ................. 802 -- 802
Other long-term liabilities .......................... 8,427 4,105 12,532
--------- -------- --------- ---------
Total liabilities .................................. 57,491 88,787 1,500 147,778
STOCKHOLDERS' EQUITY:
Preferred stock ...................................... -- -- -- --
Common stock ......................................... 73 2,961 C) (3,025) 9
Additional paid-in capital ........................... 121,579 97,346 D) (81,914) 137,011
Retained deficit ..................................... (76,644) (63,680) E) 76,644 (63,680)
--------- -------- --------- ---------
45,008 36,627 (8,295) 73,340
Less treasury stock, at cost ......................... (400) (2,108) F) 2,508 --
--------- -------- --------- ---------
Net stockholders'equity ............................ 44,608 34,519 (5,787) 73,340
--------- -------- --------- ---------
$ 102,099 $123,306 $ (4,287) $ 221,118
========= ======== ========= =========
</TABLE>
- ----------------
A) Pro forma adjustment to record the elimination of Rally's original
investment of $11,140 in Checkers common stock and the reclassification to
intangibles of $11,861 of goodwill associated with Rally's investment in
Checkers.

55
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14: PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)

B) Pro forma adjustment to accrue estimated transaction costs related to the
Merger.

C) Pro forma adjustments to record the issuance of 58,377 shares of Checkers
common stock in exchange for Rally's outstanding shares, $58; to eliminate
the previous common stock account of Rally's, ($2,961); to eliminate the
par value associated with Rally's investment in Checkers common stock,
($19) and to effect a one-for-twelve reverse split, ($103).

D) Pro forma adjustments, in accordance with reverse acquisition accounting, to
record the fair value of the outstanding 54,277 shares of common stock of
Checkers valued at $0.531 per share, $28,767 which is net of related par
value; eliminate the previous treasury stock of Rally's, ($2,108);
eliminate the previous additional paid-in capital account of Checkers,
($121,579); to reduce additional paid in capital for the par value of the
58,377 shares issued to Rally's shareholders, ($58); to eliminate the
previous common stock account of Rally's, $2,961; to attribute a $10,000
estimated fair value to the outstanding Checkers stock options and
warrants, and effect a one-for-twelve reverse split, $103.

E) Pro forma adjustments to record the elimination of the retained deficit
account of Checkers.

F) Pro forma adjustment to eliminate the previous treasury stock of Checkers,
$400; as well as the treasury stock of Rally's, $2,108 which is cancelled
as a result of the Merger.

G) Pro forma adjustment to record goodwill of $6,853 associated with the Merger
and the reclassification of $11,861 of goodwill associated with Rally's
original investment in Checkers (see A).

NOTE: The final adjustments to value the outstanding Checkers options and
warrants as well as final adjustments to the fair value of assets and
liabilities as a result of the Merger will not be known until the Merger
is formally completed.

56
<PAGE>

RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 14: PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)

The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997.

<TABLE>
<CAPTION>
CHECKERS RALLY'S
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
-------------- -------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total Revenues ........................................ $145,708 $144,952 $ 290,660
-------- -------- ---------
COSTS AND EXPENSES:
Restaurant operating costs ............................ 119,416 113,782 233,198
Advertising expense ................................... 6,921 9,853 16,774
Other expenses ........................................ 516 647 1,163
Other depreciation and amortization ................... 2,275 2,503 H) 842 5,620
General and administrative expense .................... 13,309 13,404 I) (380) 26,333
SFAS 121 provisions ................................... 2,953 3,362 6,315
-------- -------- ---------
Total costs and expenses ............................ 145,390 143,551 462 289,403
-------- -------- ---- ---------
Operating income (loss) ............................. 318 1,401 (462) 1,257
-------- -------- ---- ---------
Other income (expense):
Interest expense ..................................... (6,007) (7,145) (13,152)
Loss (income) net of amortization on
investment in affiliate ............................ -- (2,019) J) 2,019 --
Interest income ...................................... 272 480 752
-------- -------- ---------
Loss before minority interest and income tax
expense (benefit) ................................... (5,417) (7,283) 1,557 (11,143)
Minority interests in operations of joint venture ..... (73) -- (73)
-------- -------- ---------
Loss before income tax expense (benefit) .............. (5,344) (7,283) 1,557 11,070
Income tax expense .................................... -- 252 252
-------- -------- ---------
Net (loss) earnings ................................... $ (5,344) $(7,535) $1,557 $ (11,322)
======== ======== ====== =========
Comprehensive (loss) earnings ......................... $ (5,344) $(7,535) $1,557 $ (11,322)
======== ======== ====== =========
Net loss per common share (basic and diluted) ......... $ (0.07) $ (0.28) $ (1.21)
======== ======== =========
Weighted average number of common shares
(basic and diluted) ................................. 73,388 27,170 K) 9,388
======== ======== =========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.

I) Pro forma adjustment to eliminate excess public company expenses recorded on
Rally's.

J) Pro forma adjustment to eliminate loss from the Rally's equity investment in
Checkers.

K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.

57
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

On May 8, 1998, the Company announced the appointment of KPMG LLP as
independent auditors for the year ending December 28, 1998 thereby replacing
Arthur Andersen LLP, on Form 8-K filed May 8, 1998, which is herein
incorporated by reference.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT.

DIRECTORS AND EXECUTIVE OFFICERS

Set forth below is a list of the current Board members and executive
officers of Rally's Hamburgers, Inc. (the "Company") together with their ages,
all positions they hold, offices currently held by them and the year each
person joined the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- -------------------------------------------------------------
<S> <C> <C>
William P. Foley, II 54 Chairman of the Board of Directors

James J. Gillespie 48 President, Chief Executive Officer and Director

Harvey Fattig 58 Executive Vice President and Chief Operating Officer

Joseph N. Stein (1) 38 Executive Vice President and Chief Financial Officer

Richard A. Peabody 38 Senior Vice President and Chief Financial Officer (effective
April 8, 1999)

James T. Holder 40 Senior Vice President, General Counsel and Secretary

Terry N. Christensen 58 Director

Burt Sugarman 60 Director

C.Thomas Thompson 49 Director

Willie D. Davis 64 Director

David Gotterer 70 Director

Ronald B. Maggard 49 Director

Andrew F. Puzder 48 Director
</TABLE>
- ----------------
(1) Mr. Stein resigned as an officer of Rally's effective April 8, 1999.

William P. Foley, II has served as a director of the Company since
November 1996 and as Chairman of the Board since October 1997. Mr. Foley has
been the Chairman of the Board of Santa Barbara Restaurant Group, Inc. since
July 1997. He 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, and as Chairman of the
Board of Checkers Drive-In Restaurants, Inc. ("Checkers") and is a director of
Micro General Corporation, Miravant Medical Technologies and Fresh Foods, Inc.

James J. Gillespie has served as President and Chief Executive Officer of
Rally's, since November 1997 and as a director of the Company and Checkers
since December 1997. Mr. Gillespie

58
<PAGE>

has served as President of Checkers since February 1998. He 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. Checkers and Rally's share the costs related to
the employment of Mr. Gillespie and other shared executive officers. See "--
Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation".

Harvey Fattig has served as Chief Operating Officer of Rally's and
Checkers since March 1998. Mr. Fattig served as Regional Vice President of Long
John Silver's, Inc. from March 1990 through February 1998.

Joseph N. Stein served as Executive Vice President and Chief Financial
Officer of Rally's from December 1997 to April 1999. He served as Chief
Financial Officer of Checkers from January 1997 to February 1998 and as
Executive Vice President and Chief Administrative Officer of Checkers from
January 1997 to April 1999. From May 1995 through December 1996, Mr. Stein was
Senior Vice President and Chief Financial Officer for Carl Karcher Enterprises,
Inc. For more than five years prior to his employment with Carl Karcher
Enterprises, Inc., Mr. Stein was Senior Vice President, Director, National
Agency Operation at Fidelity National Title Company.

Effective April 8, 1999 Richard A. Peabody was appointed Senior Vice
President and Chief Financial Officer of the Company. Mr. Peabody has served as
Vice President and Chief Financial Officer of Checkers since January 1998. From
December 1996 to December 1997, Mr. Peabody was Chief Administrative Officer of
Taco Bueno Restaurants, Inc., a subsidiary of CKE. For more than five years
prior to his employment with Taco Bueno Restaurants, Inc., Mr. Peabody was
Division Controller at Black-eyed Pea Management Corp.

James T. Holder has served as Senior Vice President, General Counsel and
Secretary of Rally's since December 1997 and as a Senior Vice President and
General Counsel of Checkers since January 1997. He served as Chief Financial
Officer of Checkers from May to December 1996 and has served as Secretary of
Checkers 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.

Terry N. Christensen has served as a director of Rally's since November
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., Checkers and MGM Grand, Inc.
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP has performed
legal services for Checkers and Rally's during 1998 and will perform legal
services for Checkers in 1999. Such services have related to litigation,
compliance with securities laws and other business matters.

Burt Sugarman has served as a director of Rally's since October 1997. Burt
Sugarman 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 has been the Chairman of the Board, President and
Chief Executive Officer of GIANT for more than the past five years. Mr.
Sugarman is a Director of GIANT, Checkers, and Santa Barbara Restaurant Group,
Inc.

C. Thomas Thompson has served as a director of Rally's since November 1996
and as Vice Chairman of the Board of Directors of Checkers since December 1996.
He also served as Chief Executive Officer of Checkers from December 1996 to
November 1997. Mr. Thompson has been

59
<PAGE>

President and Chief Operating Officer of Carl Karcher Enterprises, Inc., a
wholly owned subsidiary of CKE, since October 1994 and as 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 Santa Barbara Restaurant Group.

Willie D. Davis has served as a director of Rally's 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 also 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, Basset
Furniture Company and Strong Fund.

David Gotterer has served as a director of Rally's 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 Rally's since August 1997.
For more than the past five years, Mr. Maggard has been President of Maggard
Enterprises, Newport Beach, which owns 69 franchised Long John Silver
restaurants and President of Midstate Distributing, Lexington, Kentucky, which
is a Miller Distributing Company.

Andrew F. Puzder has served as a director of Rally's since August 1997.
Mr. Puzder has been Chief Executive Officer and a director of Santa Barbara
Restaurant Group, Inc. since July 1997. He has served as Executive Vice
President and General Counsel of CKE since February 1997 and was an Executive
Vice President and General Counsel of Fidelity from January 1995 to April 1997.
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. Mr.
Puzder is a director of Fresh Foods, Inc. and Javelin Systems, Inc.

No family relationships exist between any of the directors of Rally's, the
persons who are currently Rally's directors but not Checkers directors and the
executive officers of Rally's. There are no arrangements or understandings
between any director and any other person concerning service or nomination as a
director.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Rally's directors, officers and holders of more than 10% of Rally's common
stock to file with the Securities and Exchange Commission initial reports of
ownership and reports of changes in ownership of Rally's common stock and any
other equity securities of Rally's. To Rally's knowledge, based solely upon a
review of the forms, reports and certificates filed with Rally's by such
persons, all such Section 16(a) filing requirements were complied with by such
persons in 1998.

60
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table is a summary of the compensation paid or accrued by
Rally's and Checkers for the last three fiscal years for services in all
capacities to each of the persons who qualified as a "named executive officer"
under Item 402(b) of Regulation S-K. The amounts shown below are the total
compensation received for services to both Rally's and Checkers. Based upon the
management services agreement, Rally's and Checkers paid 49.9% and 50.1% of the
1998 compensation, excluding bonuses and relocation expenses which were
incurred only by Checkers. Compensation for Mr. Stein and Mr. Holder during
1996 and 1997 was incurred only by Checkers.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------------- -------------
RALLY'S
OTHER SECURITIES
ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (1) (#) (2) COMPENSATION
- --------------------------------- ------ ----------- ----------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James J. Gillespie (3) 1998 $282,500 $ -- $ 45,304(4) 500,000 $
Chief Executive Officer 1997 45,067 50,000 300,000 --

Harvey Fattig (5) 1998 $147,404 $ -- $ -- -- $
Executive Vice President
and Chief Operating Officer

Joseph N. Stein (6) 1998 $200,000 $ 150,000(7) $ -- 112,000 $
Executive Vice President 1997 189,230 -- 108,441(8) -- --
and Chief Financial Officer

James T. Holder (9) 1998 $180,000 $ 144,000(7) $ -- 70,000 $ --
Senior Vice President, 1997 179,231 -- -- -- --
General Counsel and 1996 140,350 23,077 -- -- --
Secretary

Richard A. Peabody (10) 1998 $124,259 $ -- $ 36,836 42,000 $ --
Senior Vice President and
Chief Financial Officer
</TABLE>
- --------------
(1) Certain other perquisites were provided to certain of the executives named
above, 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) The Rally's options listed were granted pursuant to the Rally's 1990 stock
option plan. In December 1998, outstanding options under Rally's plans,
including options granted earlier in 1998 to Mr. Stein, were cancelled and
reissued. See "Option Grants in Last Fiscal Year" on the next page.

(3) Mr. Gillespie was appointed Chief Executive Officer of Rally's and
Checkers in November 1997.

(4) Includes relocation expenses ($9,809) and travel ($34,194).

(5) Mr. Fattig was appointed Executive Vice President and Chief Operating
Officer in March 1998.

(6) Mr. Stein was appointed Executive Vice President and Chief Financial
Officer of Rally's in December 1997. He resigned as an officer of Rally's
and Checkers effective April 8, 1999.

(7) Bonuses paid to Messrs. Stein and Holder in 1998 were based on 1997
results but paid in 1998.

(8) Consists of relocation expenses ($108,221).

(9) Mr. Holder was appointed Senior Vice President, General Counsel and
Secretary of Rally's in December, 1997.

(10) Mr. Peabody was appointed Senior Vice President and Chief Financial
Officer of Rally's in April, 1999. Pursuant to the management services
agreement, Mr. Peabody's compensation was also allocated between Rally's
and Checkers.

61
<PAGE>

OPTIONS GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding options granted to
the Named Executive Officers during fiscal 1998 pursuant to the Company's 1990
Stock Option Plan.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS (1) FOR OPTION TERM (2)
--------------------------------------------------------------- ------------------------
NUMBER OF % OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE
GRANTED EMPLOYEES PRICE EXPIRATION
NAME (#) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ---------------------------- ---------------- ---------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James J. Gillespie ......... 100,000(3) 3.8% $ 1.313 8/18/08 $82,574 $209,258
100,000(4) 3.8% 0.531 8/18/08 32,063 80,518
300,000(4) 11.3% 0.531 11/10/07 86,739 213,098
------- ----
500,000 6.8%
======= ====

Harvey Fattig .............. 56,000(3) 2.1% $ 2.531 4/27/08 $89,137 $225,891
56,000(4) 2.1% 0.531 4/27/08 17,241 42,915
------- ----
112,000 1.5%
======= ====

Joseph N. Stein ............ 56,000(3) 2.1% $ 2.531 4/27/08 $89,137 $225,891
56,000(4) 2.1% 0.531 4/27/08 17,241 42,915
------- ----
112,000 1.5%
======= ====

James T. Holder ............ 35,000(3) 1.3% $ 2.531 4/27/08 $55,711 $141,182
35,000(4) 1.3% 0.531 4/27/08 10,775 26,822
------- ----
70,000 1.0%
======= ====

Richard A. Peabody ......... 21,000(3) 0.8% $ 2.531 4/27/08 $33,426 $ 84,709
21,000(4) 0.8% 0.531 4/27/08 6,465 16,093
------- ====
42,000 0.6%
======= ====
</TABLE>
- ----------------
(1) All options were granted pursuant to the Rally's 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. Rally's
does not necessarily believe that these appreciation calculations are
indicative of actual future stock option values or that the price of
Rally's common stock will appreciate at such rates.

(3) Options for Mr. Gillespie were issued on August 18, 1998 while options for
other executives were issued on April 27, 1998. These options were
cancelled on December 15 pursuant to the issuance of repriced options.

(4) Represents reissuance of repriced options on December 15, 1998.

62
<PAGE>

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 1998, 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 VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END (#) AT FY-END ($) (1)
--------------------------- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ ----------------- -------------- --------------------------- --------------------------
<S> <C> <C> <C> <C>
James J. Gillespie ..... -0- -0- 100,000/200,000 -0-/-0-
Harvey Fattig .......... -0- -0- -0-/56,000 -0-/-0-
Joseph N. Stein ........ -0- -0- -0-/56,000 -0-/-0-
James T. Holder ........ -0- -0- -0-/35,000 -0-/-0-
Richard A. Peabody ..... -0- -0- -0-/21,000 -0-/-0-
</TABLE>
- ----------------
(1) Based upon the difference between the exercise price and the closing price
of Rally's common stock ($.53125) as reported on the NASDAQ National
Market on December 28, 1998.

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 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 and 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 options are
immediately exercisable. Directors who are employees of the Company receive no
extra compensation for their services as Directors.

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, 2000,

63
<PAGE>

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's
employee benefit plans and programs and is entitled to reimbursment 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 relationship 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 Santa
Barbara Restaurant Group share the costs associated with this agreement. See
"Compensation Committee Interlocks and Insider Participation."

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 1998 and which will provide legal services to the Company in the
future. Mr. Foley is Chairman of the Board and Chief Executive Officer of Santa
Barbara Restaurant Group and CKE, which as of May 12, 1999 beneficially owned
approximately 8.2% and 32.1%, 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 11.0% of the outstanding shares of Common
Stock.

Effective November 30, 1997, the Company and Checkers entered into a
management services agreement (the "Management Services Agreement") pursuant to
which predominately all of the management of 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
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 1998 was $5.6
million.

On July 1, 1996, the Company entered into a ten-year operating agreement
with Carl Karcher Enterprises, Inc., the subsidiary of CKE that operates the
Carl's Jr. restaurant chain. Pursuant to the agreement, CKE began operating 29
Rally's owned restaurants located in California and Arizona, two of which were
converted to a Carl's Jrs. format. During 1998, two restaurants which the
Company acquired from a franchisee were added to the agreement and the leases
for two of the restaurants expired and were not renewed leaving 26 restaurants
operating under the agreement. Such agreement is cancelable after an initial
five-year period, at the discretion of CKE. A portion of these restaurants, at
the discretion of CKE, will be converted to the Carl's Jr. format. 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 any conversion costs
associated with transforming restaurants to the Carl's Jr. format, as well as
the operating expenses of all the restaurants. Rally's

64
<PAGE>

retains ownership of all 27 (two of which are Carl's Jrs.) restaurants and is
entitled to receive a percentage of gross revenues generated by each
restaurant. In the event of a sale by Rally's of any of the 27 restaurants,
Rally's and CKE would share in the proceeds based upon the relative value of
their respective capital investments in such restaurant.

On December 18, 1997, Rally's acquired approximately 19.1 million shares
of Checkers' common stock pursuant to an exchange agreement, dated as of
December 8, 1997, between Rally's, CKE, Fidelity, GIANT and the other parties
named therein, including certain directors of Rally's and/or Checkers and
members of their immediate families. Pursuant to the exchange agreement,
Rally's issued an aggregate of 3,909,336 shares of Rally's common stock and
45,667 shares of series A preferred stock. The series A preferred stock was
converted into 4,566,700 shares of common stock upon approval of the conversion
by Rally's stockholders. The exchange ratio used to determine the number of
shares of Rally's 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 Rally's 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 Rally's 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) a beneficial owner of more than five percent of
Rally's 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 STOCK EXCHANGED COMMON 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(3) ............... 113,438 24,838 255
Mary Hart Sugarman(4) .......... 272,230 59,702 611
AJ Sugarman(4) ................. 27,168 5,955 61
Terry Christensen(3) ........... 55,353 12,162 124
Al Sugarman(4) ................. 45,353 9,925 102
William P. Foley II(3) ......... 453,754 99,553 1,018
Andrew Puzder(2) ............... 45,353 9,925 102
C. Thomas Thompson(3) .......... 45,353 9,925 102
</TABLE>
- ----------------
(1) Five percent stockholder.
(2) Director of Rally's.
(3) Director of Rally's and Checkers.
(4) Family member of Mr. Sugarman.

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
1998, the Company paid $45,000 to CKE pursuant to this agreement.

65
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT

The following table sets forth, as of May 12, 1999, information as to: (a)
the beneficial ownership of Rally's common stock by (i) each person serving
Rally's as a director on such date, (ii) each person who qualifies as a "named
executive officer" as defined in Item 402(a)(3) of Regulation S-K under the
Securities Exchange Act of 1934, as amended, (iii) all current directors and
executive officers of Rally's as a group and (iv) each person known to Rally's
as having beneficial ownership of more than 5% of Rally's common stock.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES (1) CLASS (2)
- ---------------------------------------------- -------------------- -----------
<S> <C> <C>
William P. Foley, II ......................... 734,353(3) 2.5%
James J. Gillespie ........................... 100,000(4) *
Harvey Fattig ................................ 18,667(4) *
Joseph N. Stein .............................. 45,667(5) *
James T. Holder .............................. 11,667(4) *
Richard A. Peabody ........................... 17,000(6) *
Terry N. Christensen ......................... 437,177(7) 1.5%
Willie D. Davis .............................. 490,000(4) 1.7%
David Gotterer ............................... 508,568(8) 1.7%
Ronald B. Maggard ............................ 275,000(9) *
Andrew Puzder ................................ 265,925(10) *
Burt Sugarman ................................ 1,358,209(11) 4.6%
C. Thomas Thompson ........................... 510,125(12) 1.7%
All current directors and executive officers
as a group (12 persons) .................... 4,772,358(13) 16.3%
CKE Restaurants, Inc. ........................ 10,937,995(14) 37.3%
1700 N. Harbor Blvd.
Anaheim, CA 92801
Santa Barbara Restaurant Group, Inc. ......... 2,408,874 8.2%
3938 State Street, #200
Santa Barbara, CA 93105
GIANT GROUP, LTD. ............................ 3,225,618 11.0%
9000 Sunset Blvd., 16th Floor
Los Angeles, CA 90069
Citigroup Inc.(15)
153 East 53rd Street ......................... 1,809,516(16) 6.0%
New York, NY 10043
</TABLE>
- ----------------
* Less than 1%.

(1) Based upon information furnished to Rally's by the named persons and
information contained in filings with the Securities and Exchange
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 shares.

(2) Based on 29,335,243 shares outstanding as of May 12, 1999. Shares subject
to options or warrants exercisable within 60 days are deemed outstanding
for computing the percentage of class of the persons holding options or
warrants but are not deemed outstanding for computing the percentage of
class for any other person.

(3) Includes 533,000 shares underlying options and warrants.

(4) Represents common stock underlying options.

(5) Includes 18,667 shares underlying options. Mr. Stein resigned as an
officer of Rally's effective April 8, 1999.

(6) Includes 7,000 shares underlying options.

66
<PAGE>

(7) Includes 410,000 shares underlying options and warrants.

(8) Includes 474,115 shares underlying 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.

(9) Includes 245,000 shares underlying options.

(10) Includes 245,000 shares underlying options.

(11) Includes 1,040,000 shares underlying options and 15,285 shares and 252,586
shares beneficially owned by Mr. Sugarman's minor child and spouse, as to
which he disclaims beneficial ownership. Excludes 3,225,618 shares owned
by GIANT GROUP, LTD. as to which Mr. Sugarman disclaims beneficial
ownership. Mr. Sugarman is the Chairman of the Board, President & Chief
Executive Officer of GIANT.

(12) Includes 490,000 shares underlying options.

(13) Includes 3,699,115 shares underlying options.

(14) Includes 9,412,507 shares held directly and 1,525,488 shares underlying
warrants.

(15) Based upon a Schedule 13G, dated December 31, 1998, filed by Citigroup
Inc., Associated Madison Companies, Inc., PFS Services, Inc., The
Travelers Insurance Group Inc., Travelers Property Casualty Corp. and The
Travelers Indemnity Company. Travelers Property Casualty Corp. is the sole
stockholder of The Travelers Indemnity Company; The Travelers Insurance
Group Inc. is the majority stockholder of Travelers Property Casualty
Corp.; PFS Services, Inc. is the sole stockholder of The Travelers
Indemnity Group Inc.; Associated Madison Companies, Inc. is the sole
stockholder of PFS Services, Inc.; and Citigroup is the sole stockholder
of Associated Madison Companies.

(16) Includes an unspecified number of securities entitling the holder to
acquire Rally's common stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

"Item 10. Executive Compensation - Compensation Interlocks and Insider
Participation" is incorporated herein by reference. Christensen, Miller, Fink,
Jacob, Glaser, Weil & Shapiro, LLP has performed legal services for the Company
during 1998 and will perform legal services for the Company in 1999. Such
services have related to compliance with securities laws, litigation and other
business matters.

67
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1.0 The following financial statements of the Registrant are included
in Part II, Item 8:

Index to Consolidated Financial Statements: Independent Auditors'
Reports Consolidated balance sheets as of December 28, 1998 and
December 28, 1997

Consolidated statements of operations and comprehensive income for
each of the three years in the three-year period ended December 28,
1998

Consolidated statements of shareholders' equity for each of the three
years in the three-year period ended December 28, 1998 Consolidated
statements of cash flow for each of the three years in the three-year
period ended December 28, 1998 Notes to consolidated financial
statements

2.0 All schedules have been omitted because the required information is
not applicable, not required or is included elsewhere in the
financial statements and notes thereto.

3.0 Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ---------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation. (Filed as Exhibit 3.1 to Rally's Quarterly Report on
Form 10-Q for the quarter ended September 29, 1996, and incorporated herein by
reference.)
3.2 Restated By-Laws. (Filed as Exhibit 3.3 to Form 8 Amendment No. 1 to Rally's Annual
Report on Form 10-K dated September 28, 1990, and incorporated herein by reference.)
4.1 Indenture dated as of March 1, 1993, between the Company, certain of its subsidiaries and
PNC Bank Kentucky, Inc., as Trustee, relating to the issuance of $85,000,000 principal
amount of the Company's 9 7/8% Senior Notes due 2000. (Filed as Exhibit 4.1 to Rally's
Annual Report on Form 10-K for the year ended January 3, 1993, and incorporated herein by
reference.)
4.2 Specimen form of 9 7/8% Senior Note due 2000. (Filed as Exhibit 4.2 to Rally's Annual Report
on Form 10-K for the year ended January 3, 1993, and incorporated herein by reference.)
4.3 Form of Common Stock Certificate. (Filed as Exhibit 4 to Rally's Registration Statement on
Form S-1, dated October 11, 1989, and incorporated herein by reference.)
4.4 Form of Warrant Agreement between Rally's Hamburgers, Inc. and American Stock Transfer
& Trust Company, as Warrant Agent, including form of Warrant Certificate (incorporated by
reference to Exhibit 4.4 to Rally's Annual Report on Form 10-K for the fiscal year ended
December 29, 1996 (the "1996 10-K")).
4.5 Form of Warrant Agreement between Rally's Hamburgers, Inc. and CKE Restaurants, Inc.,
including form of Warrant Certificate (incorporated by reference to Exhibit 4.5 to the 1996
10-K).
4.6 First Amendment to the Indenture (incorporated by reference to Exhibit 4.6 to the 1996
10-K).
4.7 Other Debt Instruments -- Copies of debt instruments for which the related debt is less than
10% of the Company's total assets will be furnished to the Commission upon request.
4.8 Certificate of Designation for Rally's Series A Participating Preferred Stock.
</TABLE>

68
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------------------
<S> <C>

10.1 Indemnity Agreement between the Company and James T. Holder dated December 16,
1997.**
10.1.1 List of officers and directors with whom the Company has entered into indemnity
agreements.**

10.2 Amended and Restated Non-qualified Stock Option Plan. (Filed as Exhibit 10.3 to
Amendment No. 1 to Rally's Registration Statement on Form S-1, dated October 11, 1989,
and incorporated herein by reference.)*
10.3 First Amendment to the Amended and Restated Non-qualified Stock Option Plan, dated as of
October 26, 1989. (Filed as Exhibit 10.4 to Rally's Registration Statement on form S-1, dated
December 29, 1989, and incorporated herein by reference.)*
10.4 Lease between Blue Ridge Associates and the Company dated November 17, 1987. (Filed
as Exhibit 10.6 to Rally's Registration Statement on Form S-1, dated October 11, 1989, and
incorporated herein by reference.)
10.5 Rally's, Inc. 1990 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.5
to the 1996 10-K).*
10.6 Rally's Hamburgers, Inc. 1995 Stock Option Plan for Non-employee Directors. (Filed as
Exhibit A to Rally's definitive Proxy Statement, dated June 19, 1996, for the Annual Meeting
of Stockholders held on July 10, 1996, and incorporated herein by reference.)*
10.7 Employment Agreement between the Company and Evan G. Hughes dated March 28, 1995.
(Filed as Exhibit 10.13 to Rally's Quarterly Report on Form 10-Q for the quarter ended
April 2, 1995, and incorporated herein by reference.)*
10.8 Employment Agreement between the Company and Donald E. Doyle dated March 1, 1996.
(Filed as Exhibit 10.12 to Rally's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference.)*
10.9 Supplemental Employment Agreement between the Company and Donald E. Doyle, dated
February 11, 1997 (incorporated by reference to Exhibit 10.12 to the 1996 10-K).*
10.10 Operating Agreement by and between Rally's Hamburgers, Inc. and Carl Karcher
Enterprises. (Filed as Exhibit 10.43 to CKE Restaurants, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended May 20, 1996, and incorporated herein by reference.)
10.11 Consulting Agreement by and between Rally's Hamburgers, Inc. and CKE Restaurants, Inc.
(incorporated by reference to Exhibit 10.16 to the 1996 10-K).
10.12 Exchange Agreement, dated as of December 8, 1997, between Rally's Hamburgers, Inc.,
CKE, Fidelity, GIANT and the other parties named in Exhibit A thereto (incorporated by
reference to Exhibit A to Rally's Statement on Schedule 13D, dated December 18, 1997.
10.13 Management Services Agreement, dated November 30, 1997, between Checkers Drive-In
Restaurants, Inc. and Rally's Hamburgers, Inc.*
10.14 Employment Agreement dated November 10, 1997, between the Company, Checkers
Drive-In Restaurants, Inc. and Jay Gillespie.*
10.15 Certificate of Designation of Series A Participating Preferred Stock of Rally's Hamburgers,
Inc., dated December 8, 1997.
10.16 Form 10-K of Checkers Drive-In Restaurants, Inc. for the fiscal year ended December 29,
1997. (Filed with the Commission on March 30, 1998, and herein incorporated by reference.)
10.17 Form 10-K of Checkers Drive-In Restaurants, Inc. for the fiscal year ended December 28,
1998. (Filed with the Commission on March 25, 1999, and herein incorporated by reference.)
</TABLE>

69
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------
<S> <C>

10.18 Agreement and Plan of Merger dated January 29, 1999 between the Company and Checkers
Drive-In Restaurants, Inc., as filed with the Commission as Exhibit 10.18 to the Form 10-K
for the year ended December 28, 1998 of Checkers Drive-In Restaurants, Inc., is hereby
incorporated by reference.

21 Subsidiaries of the Company:
(a) Rally's of Ohio, Inc., an Ohio corporation.
(b) Self-Service Drive-Thru, Inc., a Louisiana corporation (merged with the Company,
effective December 28, 1998).
(c) Rally's Finance, Inc., a Delaware corporation (merged with the Company, effective
December 28, 1998).
(d) Rally's Management, Inc., a Kentucky corporation.
(e) ZDT Corporation, a Missouri corporation.
(f) RAR, Inc., a Delaware corporation (merged with the Company, effective December 28,
1998).
(g) MAC1, Inc., a Delaware corporation.
(h) Hampton Roads Foods, Inc., a Louisiana corporation.
23 Consent of KPMG LLP**
24 Consent of Arthur Andersen LLP**

27 Financial Data Schedule, as filed with the Commission as Exhibit 27 to Rally's Annual Report
on Form 10-K for the year ended December 28, 1998, is hereby incorporated by reference.

</TABLE>
- ----------------
* Compensatory plan required to be filed as an exhibit pursuant to Item 14c of
Form 10K.
** Filed herewith

(b) Reports on Form 8-K:

The following reports on Form 8-K were filed during the last quarter of
year 1998:

On September 25, 1998, the Company filed a report on Form 8-K under Item
5 announcing the signing of a letter of intent between the Company,
Checkers Drive-In Restaurants, Inc. and GIANT GROUP, LTD. whereby the
three companies would merge in an all-stock transaction.

On November 2, 1998, the Company filed a report on Form 8-K under Item 5
announcing the termination of the proposed merger between the Company,
Checkers Drive-In Restaurants, Inc. and GIANT GROUP, LTD.

Described in Item 14(a)(3) of this Annual Report on Form 10-K.

(d) Financial Statement Schedules:

Described in Item 14(a)(2) of this Annual Report on Form 10-K.

70
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

RALLY'S HAMBURGERS, INC.
Dated: May 28, 1999

BY: /s/ RICHARD A. PEABODY
-----------------------------
Richard A. Peabody
Senior Vice President and
Chief Financial Officer

71
<PAGE>

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION
- ------- -----------

10.1 Indemnity Agreement between the Company and James T. Holder dated
December 16, 1997.

10.1.1 List of officers and directors with whom the Company has entered
into indemnity agreements.

23 Consent of KPMG LLP

24 Consent of Arthur Andersen LLP

EXHIBIT 10.1

INDEMNITY AGREEMENT

This Agreement is made as of the 16th day of December, 1997, between
Rally's Hamburgers, Inc., a Delaware corporation (the "Corporation"), and James
T. Holder (the "Indemnitee"), a director and/or officer of the Corporation.

RECITALS

A. The Indemnitee is currently serving as a director and/or officer of
the Corporation and the Corporation wishes the Indemnitee to continue in such
capacity. The Indemnitee is willing, under certain circumstances, to continue in
such capacity.

B. The Corporation's Certificate of Incorporation (the "Certificate")
provides that the Corporation shall indemnify each of its directors and officers
(among others) to the fullest extent permitted by law. The General Corporation
Law of the State of Delaware (the "Statute"), by its terms, recognizes that such
indemnification is not exclusive of other rights that may arise by agreement,
vote of stockholders or as otherwise therein provided.

C. The Corporation may decide to purchase policies of directors' and
officers' liability insurance ("D&O Insurance"). However, D&O Insurance coverage
has been severely limited, the premium costs have increased severalfold, and the
availability of such insurance at a reasonable price is uncertain. Accordingly,
any policy which the Corporation may be able to obtain for its directors and
officers may apply only to the extent that the Corporation is not permitted by
law to indemnify its directors and officers or if the Corporation is financially
unable to pay the indemnification permitted by law.

D. The indemnities available under the Corporation's Certificate and
the D&O Insurance may not be adequate to protect the Indemnitee against the
risks associated with service to the Corporation.

AGREEMENT

NOW, THEREFORE, in order to induce the Indemnitee to continue to serve
as a director and/or officer of the Corporation and in consideration for his or
her continued services, and in order to do everything possible to procure and
maintain adequate D&O Insurance coverage, the Corporation hereby agrees to
indemnify the Indemnitee as follows:

1. INDEMNITY. The Corporation will pay on behalf of the Indemnitee, and
his executors, administrators or assigns, any amount which the Indemnitee is or
becomes legally obligated to pay because of any claim or claims made against the
Indemnitee because of any act or omission or neglect or breach of duty,
including any actual or alleged error or misstatement or misleading statement,
which the Indemnitee commits or suffers while acting in the capacity as a
director or officer of the Corporation or, at the

<PAGE>

request of the Corporation, as an officer, director or trustee of a partnership,
joint venture, trust or other enterprise (including service with respect to
employee benefit plans) and solely because of being a director, officer or
trustee. The payments which the Corporation will be obligated to make hereunder
shall include, among other things, damages, judgments, settlements and costs,
costs of investigation and costs of defense of legal actions, claims or
proceedings, and appeals therefrom, and costs of attachments or similar bonds;
provided however, that the Corporation shall no be obligated to make any
payments hereunder, including fines, fees or other obligations imposed by law
which it is prohibited by applicable law from paying by way of indemnity (or any
other reason) to the Indemnitee.

2. ENFORCEMENT. If a claim under this Agreement is not paid by the
Corporation, or on its behalf, within sixty (60) days after a written claim has
been received by the Corporation, the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim, and if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim.

3. SUBROGATION. In the event of payment under this Agreement, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Corporation effectively to
bring suit to enforce such rights.

4. EXCLUSIONS. The Corporation shall not be liable under this Agreement
to make any payment in connection with any claim made against the Indemnitee:

(a) for which payment is actually made to the Indemnitee under a valid
and collectible insurance policy, except in respect of any
deductible and any excess beyond the amount of payment under such
insurance;

(b) for which the Indemnitee is indemnified by the Corporation
otherwise than pursuant to this Agreement;

(c) if it is proved by final judgment in a court of law or other
adjudication to have been based upon or attributable to the
Indemnitee gaining in fact any personal profit or advantage to
which the Indemnitee was not legally entitled;

(d) for an accounting of profits made from the purchase or sale by the
Indemnitee of securities of the Corporation within the meaning of
Section 16(b) of the Securities Exchange Act of 1934 and amendments
thereto or similar provisions of any state statutory law or common
law;

(e) brought about or directly contributed to by the dishonesty of the
Indemnitee seeking payment hereunder; however, notwithstanding the
foregoing, the Indemnitee shall be protected under this Agreement
as to

<PAGE>

any claims upon which suit may be brought against the Indemnitee by
reason of any alleged dishonesty of such Indemnitee, unless a
judgment or other final adjudication thereof adverse to the
Indemnitee shall establish that the Indemnitee committed (I) acts
of active and deliberate dishonesty (ii) with actual dishonest
purpose and intent and, which acts were material to the cause of
action so adjudicated; or

(f) if a proper court holds that payment is prohibited by applicable
law or is against public policy.

5. PARTIAL INDEMNITY. If the Indemnitee is entitled under any provision
of this Agreement to indemnification by the Corporation for a portion of any
costs, charges, or expenses, but not, however, to indemnification for all of the
total amount thereof, the Corporation shall nevertheless indemnify the
Indemnitee for the portion of such costs, charges, or expenses to which the
Indemnitee is entitled.

6. CONSENT. No costs, charges or expenses for which indemnity shall be
sought thereunder shall be incurred without the Corporation's consent, which
consent shall not be unreasonably withheld.

7. NOTICE OF CLAIM. The Indemnitee, as a condition precedent to the
Indemnitee's right to be indemnified under this Agreement, shall give to the
Corporation notice in writing as soon as practicable of any claim made against
the Indemnitee for which indemnity will or could be sought under this Agreement.
Notice to the Corporation shall be directed to the attention of: General
Counsel, 600 Cleveland St., 8th Floor, Clearwater, FL 34615 (or such other
address as the Corporation shall designate in writing to the Indemnitee); notice
shall be deemed received if sent by prepaid mail properly addressed, the date of
such notice being the date postmarked. In addition, the Indmnitee shall give the
Corporation such information and cooperation as it may reasonably require and as
shall be within the Indemnitee's power.

8. ADVANCEMENT OF EXPENSES. Costs and expenses (including attorneys'
fees) incurred by the Indemnitee in defending or investigating any action, suit,
proceeding or investigation shall be paid by the Corporation in advance of the
final disposition of such matter, if the Indemnitee shall undertake in writing
to repay any such advances in the event that it is ultimately determined that
the Indemnity is not entitled to indemnification under the terms of this
Agreement. The advances to be made hereunder shall be paid by the Corporation to
the Indemnity within twenty (20) days following delivery of a written request
therefore, together with the required written undertaking, by the Indemnitee to
the Corporation.

9. EMPLOYEE BENEFIT PLANS. For purposes of this Agreement, the
Indemnitee's capacity as a director of the Corporation shall include any service
by the Indemnitee, on behalf or at the request of the Corporation, as a
fiduciary with respect to any employee benefit plan, its participants, or
beneficiaries; references to "fines" shall include any excise taxes asserted on
a person with respect to any employee benefit plan.

<PAGE>

10. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one instrument.

11. NON-EXCLUSIVITY. Nothing herein shall be deemed to diminish or
otherwise restrict the Indemnitee's right to indemnification under any provision
of the Certificate or By-laws of the Corporation or under Delaware law.

12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with Delaware law.

13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon all
successors and assigns of the Corporation (including any transferee of all or
substantially all of its assets and any successors by merger or operation of
law) and shall inure to the benefit of the heirs, personal representatives and
estate of the Indemnitee.

14. SEPARABILITY; INTERPRETATION OF AGREEMENT. If any provisions of
this Agreement shall be held to be invalid, illegal or unenforceable for any
reason whatsoever (i) the validity, legality and enforceability of the remaining
provisions of this Agreement (including without limitation, all portions of any
paragraphs of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that are not by themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby, and (ii) to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent of the parties that the Corporation provides
indemnification to the Indemnitee to the fullest extent permissible.

15. SAVINGS CLAUSE. Whenever there is a conflict between any provision
of this Agreement and any applicable present or future statute, law or
regulation contrary to which the Corporation and the Indemnitee have no legal
right to contract, the latter shall prevail, but in such event the affected
provisions of this Agreement shall be curtailed and restricted only to the
extent necessary to bring them within applicable legal requirements.

16. COVERAGE. The provisions of this Agreement shall apply with respect
to the Indemnitee's service as an officer and/or director of the Corporation
prior to the date of this Agreement and with respect to all periods of such
service after the date of this Agreement. The director or officer of the
Corporation may enforce the Corporation's obligations hereunder even though the
director and/or officer may have ceased to be a director and/or officer of the
Corporation.

17. MODIFICATION AND WAIVER. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute

<PAGE>

a waiver of any other provision hereof (whether or not similar) nor shall such
waiver constitute a continuing waiver.

IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and signed as of the day and year first above written.

RALLY'S HAMBURGERS, INC.

Dated: December 16, 1997 By: /s/ JAMES J. GILLESPIE
------------------------
Title: PRESIDENT AND CHIEF
EXECUTIVE OFFICER

INDEMNITEE

By: /s/ JAMES T. HOLDER
------------------------
(Name of Indemnitee)

EXHIBIT 10.1.1

RALLY'S HAMBURGERS, INC.
OFFICERS AND DIRECTORS WITH WHOM THE COMPANY
HAS ENTERED INTO INDEMNITY AGREEMENTS

Allbritton, Wayne M. Glasscock, C. Edward Morris, Gena L.
Ballard, William C., Jr. Gotterer, David Noltemeyer, Mark A.
Beck, Wendy A. Hart, Mary Peabody, Richard A.
Beisler, Gary J. Holder, James T. Peterman, David J.
Binzel, Edward C. Hughes, Evan G. Puzder, Andrew F.
Christensen, Terry N. Kannapell, J. Douglas Roschman, John A.
Davis, Willie D. Kinder, Terry L. Rosenthal, Jeffrey
Dieruf, Thomas A. Klausman, William C. Sherman, Richard F.
Doyle, Donald E. Kohler, Thomas J. Smith, Larry R.
Elam, Charlotte Laney, D. Randy Stein, Joseph N.
Fattig, Harvey Lavely, Anthony Sugarman, Burt
Fleishman, Michael M. Ley, Bruce M. Thompson, C. Thomas
Foley, William P., II Maggard, Ronald B. Trotter, James M., III
Foss, Michael E. McKnight, Albert E., Jr. Trotter, William E., II
Gillespie, James J. Meyer, Andrew C. Van Dyke, Guy W.
Glaser, Patricia L. Moore, Donald C.

EXHIBIT 23

The Board of Directors and Stockholders
Rally's Hamburgers, Inc.:

We consent to incorporation by reference in the registration statements (Nos.
33-33367, 33-39419, 33-62792 and 33-66978) on Form S-8 of Rally's
Hamburgers, Inc. of our report dated February 26, 1999, relating to the
consolidated balance sheet of Rally's Hamburgers, Inc. and subsidiaries as of
December 28, 1998, and the related consolidated statement of operations and
comprehensive income, shareholders' equity, and cash flows for the year ended
December 28, 1998, which report appears in the December 28, 1998, annual report
on Form 10-K/A of Rally's Hamburgers, Inc.

/s/ KPMG LLP

Tampa, Florida
May 28, 1999

EXHIBIT 24

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed Form
S-8 Registration Statements (Registration Statement Nos. 33-33367, 33-39419,
33-39420, 33-62792 and 33-66978).

/s/ ARTHUR ANDERSEN LLP
-------------------
Arthur Andersen LLP

Louisville, Kentucky
May 28, 1999