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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHECKERS DRIVE-IN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 5812 58-1654960
State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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600 CLEVELAND STREET
CLEARWATER, FLORIDA 34615
(813) 441-3500
(Address, including zip code, and telephone number, including area code, of
Registrant's Principal Executive Offices)
JOSEPH N. STEIN
EXECUTIVE VICE PRESIDENT
CHECKERS DRIVE-IN RESTAURANTS, INC.
600 CLEVELAND STREET
CLEARWATER, FLORIDA 34615
(813) 441-3500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to:
JANET S. MCCLOUD, ESQ.
CHRISTENSEN, MILLER, FINK, JACOBS, GLASER, WEIL & SHAPIRO, LLP
2121 AVENUE OF THE STARS, 18TH FLOOR
LOS ANGELES, CALIFORNIA 90067
(310) 553-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND THE
ACQUISITION OF THE SHARES REGISTERED HEREBY IS APPROVED BY THE PARTNERS OF
NASHVILLE TWIN DRIVE-THRU PARTNERS, L.P. ("NTDT").
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE(3)
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Common Stock, par value $.001
per share(4)................. 884,037 $1.1667 $1,031,380 $312.54
Price Guarantee................ N/A N/A N/A N/A(5)
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(1) The number of shares of common stock, par value $.001 per share (the "Common
Stock"), of Checkers Drive-In Restaurants, Inc. (the "Registrant") to be
registered has been determined based on that certain Amended and Restated
Note Repayment Agreement, dated as of July 17, 1997, between the Registrant
and NTDT and the terms of the convertible notes to be issued in a private
placement in exchange for an outstanding note of the Company with
outstanding principal and interest of $1,031,380 as of July 17, 1997. An
additional indeterminable number of shares is being registered to cover
adjustments pursuant to said agreement and the convertible notes.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)(2) under the Securities Act of 1933, as amended.
(3) The registration fee for the securities registered hereby has been
calculated pursuant to Section 6(b) of the Securities Act and Rule 457(f)
promulgated thereunder.
(4) Issuable upon conversion of the convertible notes.
(5) No separate fee is payable pursuant to Rule 457(n).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CHECKERS DRIVE-IN RESTAURANTS, INC.
CROSS REFERENCE SHEET
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LOCATION OR
ITEM OF FORM S-4 CAPTION IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.................. Facing Page of the Registration Statement;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... AVAILABLE INFORMATION; INCORPORATION OF
DOCUMENTS BY REFERENCE; TABLE OF CONTENTS
3. Risk Factors, Ratio of Earnings To Fixed Charges
And Other Information........................... SUMMARY; RISK FACTORS
4. Terms of the Transaction........................ SUMMARY; THE TRANSACTION; THE AGREEMENT;
DESCRIPTION OF CAPITAL STOCK
5. Pro Forma Financial Information................. HISTORICAL AND PRO FORMA SELECTED
CONSOLIDATED FINANCIAL DATA
6. Material Contracts with the Company Being
Acquired........................................ Not Applicable
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters.................................... Not Applicable
8. Interests of Named Experts and Counsel.......... PRINCIPAL STOCKHOLDERS AND SECURITY
OWNERSHIP OF MANAGEMENT; LEGAL MATTERS;
EXPERTS
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.. Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants..... Not Applicable
11. Incorporation of Certain Information by
Reference....................................... Not Applicable
12. Information with Respect to S-2 or S-3
Registrants..................................... Not Applicable
13. Incorporation of Certain Information by
Reference....................................... Not Applicable
14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrants..................... SUMMARY; BUSINESS; MARKET FOR COMMON STOCK
AND DIVIDENDS; HISTORICAL AND PRO FORMA
SELECTED CONSOLIDATED FINANCIAL DATA;
INDEX TO FINANCIAL STATEMENTS;
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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LOCATION OR
ITEM OF FORM S-4 CAPTION IN PROSPECTUS
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C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies....... Not Applicable
16. Information with Respect to S-2 or S-3
Companies....................................... Not Applicable
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies............................ Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited.............. Not Applicable
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited, or in an
Exchange Offer.................................. OUTSIDE FRONT COVER PAGE; SUMMARY; THE
TRANSACTION; THE AGREEMENT; BUSINESS;
MANAGEMENT; PRINCIPAL STOCKHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 13, 1997
PROSPECTUS
CHECKERS DRIVE-IN RESTAURANTS, INC.
COMMON STOCK
PRICE GUARANTEE
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The shares of the common stock, par value $.001 per share (the "Common
Stock"), of Checkers Drive-In Restaurants, Inc. (the "Company" or "Checkers"),
covered by this Prospectus, and the Registration Statement of which it is a
part, are issuable in connection with the acquisition of a promissory note of
the Company, dated March 31, 1995 and originally due on April 30, 1996, in the
original principal amount of $1,354,287 (the "NTDT Note") held by Nashville Twin
Drive-Thru Partners, Ltd., a Tennessee limited partnership ("NTDT"). NTDT
received the NTDT Note in March 1995 in connection with the acquisition by the
Company of two Checkers restaurants in the Nashville, Tennessee area. The term
of the NTDT Note has been extended until the earlier of the acquisition of the
NTDT Note and November 16, 1997. See "The Transaction."
The Common Stock is traded on the NASDAQ National Market (the "NMS") and
price quotations are listed under the symbol "CHKR." On , 1997, the
last reported per share sale price of the Common Stock on the NMS was
$ . See "Market For The Common Stock And Dividends."
SEE "RISK FACTORS" COMMENCING ON PAGE FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
, 1997
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AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The Common Stock is quoted on the
NMS, and such reports, proxy statements and other information may also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 "K" Street, N.W., Washington, D.C. 20006. Electronic filings made
through the Electronic Data Gathering Analysis and Retrieval System are publicly
available through the Commission's Web Site (http://www.sec.gov).
INCORPORATION OF DOCUMENTS BY REFERENCE
This Prospectus does not contain all of the information set forth in the
Registration Statement on Form S-4 (together, with its exhibits, the
"Registration Statement") that the Company has filed with the Commission under
the Securities Act of 1933, as amended (the "Securities Act"), and to which
reference is hereby made. The Registration Statement may be inspected at the
public reference facilities of the Commission at the addresses noted above, and
copies thereof may be obtained from the Commission at prescribed rates.
THE COMPANY WILL PROVIDE, UPON WRITTEN OR ORAL REQUEST AND WITHOUT CHARGE
TO EACH PERSON TO WHOM THIS PROSPECTUS IS DELIVERED, A COPY OF ANY OR ALL OF THE
DOCUMENTS INCORPORATED HEREIN BY REFERENCE (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED THEREIN BY REFERENCE). REQUESTS
MAY BE DIRECTED TO CHECKERS DRIVE-IN RESTAURANTS, INC., 600 CLEVELAND STREET,
EIGHTH FLOOR, CLEARWATER, FLORIDA 34615, ATTENTION: SECRETARY, TELEPHONE NO.:
(813) 441-3500.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY CHECKERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO PURCHASE BY ANYONE
IN ANY STATE (I) IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED (II) IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO; OR
(III) TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE DISTRIBUTION OF SECURITIES
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF CHECKERS SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN OR IN THE DOCUMENTS INCORPORATED HEREIN BY REFERENCE HAS NOT
CHANGED SINCE THE DATE OR THE DATES THEREOF.
Checkers(R) is a registered service mark and Champ Burger(R) is a registered
trademark of the Company.
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TABLE OF CONTENTS
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PAGE
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AVAILABLE INFORMATION....................................... 2
INCORPORATION OF DOCUMENTS BY REFERENCE..................... 2
SUMMARY..................................................... 5
RISK FACTORS................................................ 8
Decreasing Restaurant Sales............................... 8
History of Operating Losses............................... 8
Competitive Environment................................... 8
Certain Financing Considerations; Leverage................ 9
Reliance on Key Personnel................................. 9
Proposed Acquisition of Certain Notes..................... 9
Shares Eligible for Future Issuance and Sale.............. 10
Continued Listing on NASDAQ National Market............... 11
Control by Principal Stockholder.......................... 11
Government Regulation..................................... 11
HISTORICAL AND PRO FORMA SELECTED CONSOLIDATED FINANCIAL
DATA................................................... 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 16
Introduction.............................................. 16
Results of Operations..................................... 16
Liquidity and Capital Resources........................... 25
THE TRANSACTION............................................. 31
Purchase of the NTDT Note................................. 31
Background of and Reasons for the Acquisition of the NTDT
Note................................................... 32
Dissenters' Rights; Solicitation Of Proxies, Consents Or
Authorizations......................................... 32
Accounting Treatment...................................... 32
Certain Federal Income Tax Consequences................... 33
Federal Securities Law Consequences....................... 33
Regulatory Approvals...................................... 33
THE AGREEMENT............................................... 33
General................................................... 33
Closing Date and Effective Time........................... 33
Representations and Warranties............................ 34
Certain Covenants......................................... 34
Conditions................................................ 35
Termination............................................... 35
Amendment and Waiver...................................... 35
Indemnification........................................... 35
Expenses.................................................. 36
MARKET FOR COMMON STOCK AND DIVIDENDS....................... 37
Market Information........................................ 37
Dividends................................................. 37
BUSINESS.................................................... 38
Introduction.............................................. 38
Restaurant Development and Acquisition Activities......... 38
Restaurant Operations..................................... 38
Franchise Operations...................................... 42
Manufacturing Operations.................................. 44
Competition............................................... 44
Employees................................................. 45
Trademarks and Service Marks.............................. 45
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Government Regulation..................................... 45
Properties................................................ 46
Litigation................................................ 47
MANAGEMENT.................................................. 49
Directors and Executive Officers.......................... 49
Section 16(a) Beneficial Ownership Reporting Compliance... 51
Compensation of Executive Officers........................ 52
Certain Relationships and Related Transactions............ 54
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF
MANAGEMENT................................................ 58
DESCRIPTION OF CAPITAL STOCK................................ 59
General................................................... 59
Common Stock.............................................. 59
Preferred Stock........................................... 60
Directors' Liability...................................... 60
Section 203 of the Delaware General Corporation Law....... 60
Anti-takeover Effects of Provisions of the Company's
Restated Certificate of Incorporation and By-laws...... 60
Restated Certificate of Incorporation..................... 61
By-laws................................................... 62
Transfer Agent and Registrar.............................. 63
LEGAL MATTERS............................................... 63
EXPERTS..................................................... 63
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A -- AMENDED AND RESTATED NOTE REPAYMENT
AGREEMENT................................................. A-1
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus, is not intended to be complete and is qualified in its entirety
by reference to the more detailed information appearing elsewhere herein. The
entire Prospectus, the Appendices hereto and the documents incorporated herein
by reference should be reviewed in their entirety.
GENERAL
This Prospectus relates to the proposed acquisition of the NTDT Note
pursuant to an Amended and Restated Note Repayment Agreement, dated as of July
17, 1997 (the "NTDT Agreement"), in consideration of the issuance of convertible
subordinated promissory notes (the "New NTDT Notes") in an aggregate principal
amount equal to the outstanding principal and accrued interest of the NTDT Note.
See "The Transaction."
THE COMPANY
The Company develops, produces, owns, operates and franchises quick-service
"double drive-thru restaurants. Checkers' restaurants are designed to provide
fast and efficient automobile-oriented service incorporating a 1950's diner and
art deco theme, with a highly visible, distinctive and uniform look that is
intended to appeal to customers of all ages. The restaurants feature a limited
menu of high quality hamburgers, cheeseburgers and bacon cheeseburgers,
specially seasoned french fries, hot dogs and chicken sandwiches as well as
related items such as soft drinks and old fashioned premium milk shakes. As of
June 16, 1997, there were 480 restaurants operating in 23 states, the District
of Columbia and Puerto Rico (233 Company-operated, including 14 joint ventures,
and 247 franchised).
The principal executive offices of the Company are located at 600 Cleveland
Street, Eighth Floor, Clearwater, Florida 34615, and its telephone number is
(813) 441-3500.
THE TRANSACTION
General. Pursuant to the NTDT Agreement, the Company will acquire the NTDT
Note for a purchase price (the "NTDT Purchase Price") equal to the aggregate
outstanding principal amount of and accrued unpaid interest on the NTDT Note
($1,031,380 at July 17, 1997) (the "Transaction"). The NTDT Purchase Price is
payable in the form of the New NTDT Notes in an aggregate principal amount equal
to the NTDT Purchase Price. The number of shares of Common Stock (the "Shares")
to be delivered upon conversion of the New NTDT Notes will be computed by
dividing the principal amount of the New NTDT Notes being converted by the
average per share closing sale price of the Common Stock on the NMS for three
full trading days ending on the business day immediately preceding the date on
which NTDT delivers a notice of conversion to the Company. If the closing and
the conversion of the New NTDT Notes had occurred on August 1, 1997,
approximately $84,037 shares of Common Stock would have been delivered to NTDT.
See "The Transaction -- Purchase of the NTDT Note" for a description of certain
additional payments.
Closing of the Transaction. The closing of the Transaction will occur on
the third business day following the date on which the NTDT partners approve the
NTDT Agreement.
Certain Covenants. Pursuant to the NTDT Agreement, NTDT has agreed, among
other things, to either dissolve and wind up its affairs or otherwise distribute
the shares of Common Stock received upon conversion of the New NTDT Notes to its
partners within one year after the closing of the NTDT Agreement. See "The
Agreement -- Certain Covenants."
Conditions to the Transaction. The obligations of the parties to
consummate the Transaction are subject to the satisfaction of certain
conditions, including approval of the NTDT Agreement by the partners of NTDT.
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Termination. The NTDT Agreement may be terminated and the Transaction may
be abandoned at any time prior to the closing, before or after the approval by
the partners of NTDT, by: (a) the mutual consent of NTDT and the Company; (b)
action of the managing general partner of NTDT or action of the Board of
Directors of the Company if there has been a breach or failure by the other to
perform in any material respect any of its representations and warranties,
covenants or conditions contained in the NTDT Agreement, which is not cured
within five days after written notice thereof; or (c) action of the managing
general partner of NTDT or action of the Board of Directors of the Company, if
the conditions to their respective obligations in the NTDT Agreement have not
been satisfied or waived.
Purchase Price Guarantee. The Company has guaranteed that, if NTDT sells
all of the Shares in a reasonably prompt manner (but, other than sales made on a
price "uptick" (see "The Transactions -- Federal Securities Laws
Consequences")), no more than 50,000 Shares in any one-week period or 25,000
Shares in any one-day period), NTDT will receive net proceeds from the sale of
the Shares equal to the NTDT Purchase Price, i.e., the aggregate outstanding
principal and accrued interest of the NTDT Note, $1,031,380 as of July 17, 1997.
If NTDT receives less than such amount, the Company will issue to NTDT
additional shares of Common Stock, which the Company has agreed to register
under the Securities Act, based upon the difference between such net proceeds
and the NTDT Purchase Price. The Company has the option at any time to deliver
cash to NTDT in lieu of additional shares of Common Stock. In addition, the
Company may require NTDT to sell back any shares of Common Stock acquired upon
conversion of the New NTDT Notes or pursuant to the aforesaid guarantee. If NTDT
receives net proceeds in excess of the NTDT Purchase Price or receives net
proceeds equal to such amount and still holds any New NTDT Notes or shares of
Common Stock issued pursuant thereto, then NTDT shall be required to deliver to
the Company such excess net proceeds, New NTDT Notes or shares of Common Stock.
See "The Transaction -- Purchase of the NTDT Note."
Accounting Treatment. The Company will account for the Transaction as a
payment of the liabilities represented by the NTDT Note and the sale of the New
NTDT Notes for an amount equal to the NTDT Purchase Price.
Certain Federal Income Tax Consequences. Assuming that the tax basis of
NTDT in the NTDT Note is equal to the outstanding principal balance due
thereunder, there will be no income tax consequences resulting from the issuance
of the New NTDT Notes in payment of the principal balance due under the NTDT
Note.
Federal Securities Law Consequences. All shares of Common Stock received
by NTDT or the NTDT partners upon conversion of the New NTDT Notes may be resold
by them only in transactions permitted by the resale provisions of Rule 145
promulgated under the Securities Act or as otherwise permitted under the
Securities Act. Pursuant to the terms of the NTDT Agreement, the following
limits have been imposed on the sales that may be made by NTDT: (i) NTDT may
sell not more than 50,000 shares of Common Stock per week and (ii) NTDT may sell
not more than 25,000 shares in any one day, provided that it may sell additional
shares in excess of such limits if such additional shares are sold at a price
higher than the lowest then current bid price for the Common Stock.
Regulatory Approvals. The Company and NTDT are not aware of any material
federal or state regulatory approvals which must be obtained in connection with
their respective transactions, other than the continued effectiveness of the
Registration Statement under the Securities Act through the date of issuance of
the shares of Common Stock to NTDT pursuant to the NTDT Agreement.
Dissenters' Rights; Solicitation of Proxies, Consents or
Authorizations. The following information has been provided by the management
of NTDT.
The managing general partner of NTDT has called a meeting of the partners
of NTDT to consider the approval of the NTDT Agreement and the Transaction. No
proxies, consents or authorizations will be solicited from any partner of NTDT
in connection with such meeting or approval of the NTDT Agreement and the
Transaction. The affirmative vote of a majority of the outstanding partnership
interests of NTDT will be necessary to approve the NTDT Agreement and the
Transaction. Any person appearing at the meeting as a
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proxy for a partner of NTDT will be required to present a written proxy power
meeting the requirements of Tennessee law in order to vote such partner's
interests shares in the meeting. NTDT partners will have no dissenters' rights
in connection with the Transaction.
RISK FACTORS
Certain factors should be considered in evaluating the ownership of the
Common Stock to be issued in the Transaction. See "Risk Factors."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS PROSPECTUS UNDER "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT AND THE EXCHANGE ACT. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS
OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE,
OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: GENERAL ECONOMIC AND BUSINESS
CONDITIONS; THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING; SUCCESS OF OPERATING
INITIATIVES; DEVELOPMENT AND OPERATING COSTS; ADVERTISING AND PROMOTIONAL
EFFORTS; ADVERSE PUBLICITY; ACCEPTANCE OF NEW PRODUCT OFFERINGS; CONSUMER TRIAL
AND FREQUENCY; AVAILABILITY, LOCATIONS, AND TERMS OF SITES FOR RESTAURANT
DEVELOPMENT; CHANGES IN BUSINESS STRATEGY OR DEVELOPMENT PLANS; QUALITY OF
MANAGEMENT; AVAILABILITY, TERMS AND DEPLOYMENT OF CAPITAL; THE RESULTS OF
FINANCING EFFORTS; BUSINESS ABILITIES AND JUDGMENT OF PERSONNEL; AVAILABILITY OF
QUALIFIED PERSONNEL; FOOD, LABOR AND EMPLOYEE BENEFIT COSTS; CHANGES IN, OR THE
FAILURE TO COMPLY WITH, GOVERNMENT REGULATIONS; WEATHER CONDITIONS; CONSTRUCTION
SCHEDULES; AND OTHER FACTORS REFERENCED IN THIS PROSPECTUS.
RISK FACTORS
DECREASING RESTAURANT SALES
Average net sales per Company-operated restaurant open for a full year have
been declining each fiscal quarter since the second quarter of 1993. Average net
sales were approximately $1,021,000 and $619,000 per Company-operated restaurant
for the 12-month periods ended March 31, 1993 and June 16, 1997, respectively.
Management believes that the decrease in comparable restaurant sales over this
time period is primarily attributable to increased sales pressure from
competitor discounting. The Company also cannibalized certain markets in fiscal
1993 and 1994. See "Risk Factors -- Competitive Environment." Cannibalization
results from the addition of Company restaurants in existing markets in an
attempt to increase market share, to reduce the possibility of entry by other
double drive-thru concepts, to provide a sufficient sales base to support
broadcast media advertising and to enhance customer convenience. As a result of
the addition of Company restaurants in existing markets, the sales of certain
Company restaurants have been adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
HISTORY OF OPERATING LOSSES
The Company has reported losses from operations in each of its last three
fiscal years. Restaurant margins in 1996 decreased from 6.1% to (0.7%),
primarily as a result of high labor, food and paper costs. In addition,
comparable sales continued to decrease in 1996 and the first and second quarters
of fiscal 1997. In 1997, under the direction of new top management, the Company
has implemented new programs designed to improve food, paper and labor costs in
its restaurants. No assurance can be given that such programs will be successful
or reduce the Company's operating losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETITIVE ENVIRONMENT
The fast food restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, consumer concerns
about the nutritional quality of quick-service food and increases in the number
of, and particular location of, competing quick-service restaurants. Factors
such as inflation, increases in food, labor and energy costs, the availability
and cost of suitable sites, fluctuating interest and insurance rates, state and
local regulations and licensing requirements and the availability of an adequate
number of hourly-paid employees can also adversely affect the fast food
restaurant industry.
In addition, major chains, which have operating concepts similar to or
competitive with the Company and which also have substantially greater financial
resources and longer operating histories than the Company,
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<PAGE> 12
dominate the fast food restaurant industry. The Company competes primarily on
the basis of food quality, price and speed of service. A significant change in
pricing or other marketing strategies by one or more of these competitors could
have an adverse impact on sales, earnings and growth of the Company. All of the
major fast food chains have increasingly offered selected food items and
combination meals at discounted prices. Beginning generally in the summer of
1993, the major fast food hamburger chains began to intensify their promotions
of value priced meals, many specifically targeting the $.99 price point at which
the Company sells its "Champ Burger(R)." This increased promotional activity has
been sustained, and management believes that it has had a negative impact on the
Company's sales. While the Company cannot predict the duration of this
promotional activity or the extent to which this pricing may become more or less
competitive, such pricing could have a continued adverse effect on the Company's
sales and earnings. See "Business -- Competition."
CERTAIN FINANCING CONSIDERATIONS; LEVERAGE
As of June 16, 1997, the Company had outstanding approximately $26.6
million principal amount of indebtedness under its Amended and Restated Credit
Agreement dated as of November 22, 1996, as amended (the "Restated Credit
Agreement"). Pursuant to the Restated Credit Agreement, the Company is required
to maintain minimum consolidated EBITDA of $1.3 million for each of the three
four-week periods ending September 8, 1997, $2 million for each of the four
four-week periods ending December 29, 1997 and $2.75 million for each four-week
period thereafter. Consolidated EBITDA is defined as the sum of consolidated net
income, interest expense, provision for income taxes and depreciation,
amortization (including amortization of goodwill and other intangibles but
excluding amortization of prepaid cash expenses that were paid in a prior
period) minus non-cash items, in each case on a consolidated basis and
determined in accordance with generally accepted auditing principles. In
addition, there are limits on the Company's ability to incur capital
expenditures, additional indebtedness or liens and on its ability to enter into
transactions with affiliates. In February 1997, the Company obtained a waiver
under the Restated Credit Agreement of its obligation to comply with the minimum
consolidated EBITDA requirement through July 14, 1997. While the Company is
currently in compliance, and management believes that the Company will be able
to comply in the future, with the minimum consolidated EDITA, no assurance can
be given that the Company will be able to so comply. The degree to which the
Company's assets are leveraged and the degree to which the Company is unable to
meet the covenants referred to above may adversely affect the Company's ability
to finance its future operations and could limit its ability to pursue business
opportunities that may be in the interests of the Company and its stockholders.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
RELIANCE ON KEY PERSONNEL
Significant management changes have occurred since the end of the third
quarter of fiscal 1996. The success of the Company will be dependent on the new
senior management team. In addition, the Company's ability to attract and retain
experienced successful executives to its management team will affect its
performance. The loss of one or more members of senior management could
adversely affect the Company's business and development. See "Management."
PROPOSED ACQUISITION OF CERTAIN NOTES
In addition to the NTDT Note, as of July 17, 1997, the Company had a note
payable to Restaurant Development Group, Inc. ("RDG") with outstanding principal
and accrued interest of $1,499,364 (the "RDG Note") and three notes payable to
Rall-Folks, Inc. ("Rall-Folks") with aggregate outstanding principal and
interest of $1,596,960 (the "Rall-Folks Notes" and, collectively with the NTDT
Note and the RDG Note, the "Notes"). The RDG Note and the Rall-Folks Notes are
past due. The Company has recently entered into amended agreements with RDG and
Rall-Folks whereby it has agreed to acquire the RDG Note and the Rall-Folks
Notes in consideration of the issuance of 1,207,491 shares and 1,323,404 shares
of Common Stock, respectively, and in the case of RDG, a warrant to purchase an
additional 120,000 shares of Common Stock. The Company previously entered into
agreements with these parties to acquire their notes and failed to meet the
closing deadlines contained in such agreements. No assurance can be given that
the
9
<PAGE> 13
Company will be able to comply with the new deadlines set forth in the amended
agreements. If the Company is unable to consummate one or more of these
transactions and if the Company is thereafter unable to reach other arrangements
with Rall-Folks, RDG or NTDT, as the case may be, this will result in
obligations to repay the Notes and the Company may default under the terms of
the Restated Credit Agreement. The Company agreed to pay each of RDG and
Rall-Folks $100,000 on the execution of their amended agreements and on the 15th
day of each month thereafter (which payments reduce the outstanding principal
amounts of the RDG Note and the Rall-Folks Notes, respectively) until, in the
case of Rall-Folks, the earlier of December 15, 1997 or the effective date of
the registration statement for the Rall-Folks Agreement and, in the case of RDG,
until the effective date of the registration statement with respect to the RDG
Agreement. Such registration statements were declared effective on ,
1997. In addition, the Company has guaranteed that RDG and Rall-Folks will
receive minimum net proceeds from the sale of Common Stock they receive under
their respective agreements ($1,499,364 and $1,596,960, respectively, as of July
17, 1997). No assurance can be given that RDG and Rall-Folks will receive such
minimum net proceeds or that the Company will not be required to issue
additional shares of Common Stock pursuant to such price guarantees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SHARES ELIGIBLE FOR FUTURE ISSUANCE AND SALE
As of July 16, 1997, (i) 60,537,489 shares of Common Stock were
outstanding, (ii) 38,112,173 shares of Common Stock were reserved for issuance
in connection with the exercise of outstanding options, warrants and conversion
rights (including the Company's Series A Preferred Stock, $0.001 par value per
share (the "Preferred Stock"), which was converted into 9,383,118 shares of
Common Stock on August 6, 1997), (iii) approximately 3,415,432 shares of Common
Stock were issuable as a result of contractual obligations of the Company, i.e.,
shares issuable to Rall-Folks, and RDG and shares issuable assuming conversion
of the New NTDT Notes and (iv) options to purchase 6,700,000 shares of Common
Stock were available for grant under the Company's stock option plans as
proposed to be amended. The Company currently has an obligation to register the
offer and sale of approximately shares of the Common Stock. At the
Company's Annual Meeting of Stockholders held on August 6, 1997, stockholders
approved an amendment to the Company's Certificate of Incorporation increasing
the number of authorized shares of Common Stock from 100,000,000 to 150,000,000
shares. The Company may issue additional shares of the Common Stock and
preferred stock in the future in connection with acquisitions, corporate
combinations, financing activities or employee compensation plans. Sales of
substantial amounts of Common Stock in the open market or the availability of
such shares for sale could adversely affect the market for the Common Stock. See
"Market For Common Stock and Dividends."
If the Transaction and the acquisition of the Rall-Folks Notes and the RDG
Note are consummated and the New NTDT Notes are converted, it is anticipated
that approximately 3,415,432 shares of Common Stock will be issued (representing
approximately 5.3% of the shares of Common Stock outstanding after such
issuance). The number of shares to be issued will be determined by dividing the
outstanding principal amount of and accrued interest due under the Notes
($4,125,704 as of July 17, 1997) by the average of the closing per share sale
price of the Common Stock for a set number of days prior to the closing date for
each transaction. In order to promote an orderly distribution of the Common
Stock to be issued to and sold by Rall-Folks, RDG and NTDT, the Company
negotiated the following limits on sales: (i) each of Rall-Folks, RDG and NTDT
may sell not more than 50,000 shares of Common Stock per week (150,000 in the
aggregate); and (ii) each may sell not more than 25,000 shares in any one day
(75,000 shares in the aggregate); provided that each may sell additional shares
in excess of such limits if such additional shares are sold at a price higher
than the lowest then current bid price for the Common Stock. While it is
anticipated that the foregoing limits will allow an orderly distribution of the
Common Stock to be issued to and sold by Rall-Folks, RDG and NTDT, the effect of
a potential offering of an average of 150,000 shares of Common Stock per week by
Rall-Folks, RDG and NTDT in the aggregate is undeterminable at this time.
The individuals or entities having registration rights for Common Stock
will be entitled to sell such stock subject to any limitations under federal
securities laws resulting from their relationship to the Company. There
10
<PAGE> 14
can be no assurance that any of these sales will not have an adverse effect on
the market price for the Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
CONTINUED LISTING ON NASDAQ NATIONAL MARKET
NASDAQ has issued proposed amendments to the requirements for continued
listing on the NMS, including a requirement that the trading value of the stock
of each listed company not fall below the minimum trading value of $1.00 per
share for any 30-day period. The market price of the Common Stock was below
$1.00 for an aggregate of 59 days during 1996, with the longest consecutive
period being 24 days. As of July 17, 1997, the closing per share price of the
Common Stock on the NMS was $1.25 per share, as compared to $1.78125 per share
on March 17, 1997. In addition, it is possible that the market price of the
common Stock could be further adversely affected as a result of anticipated
dispositions of Common Stock by Rall-Folks, RDG and NTDT or sales of other
shares of Common Stock which the Company has an obligation to register under the
Securities Act. If the market price of the Common Stock were to decrease further
and the new stricter requirements for continued testing on the NMS take effect,
no assurance can be given that the Company will be able to continue to list the
Common Stock on the NMS. See "Risk Factors -- Proposed Acquisition of Certain
Checkers Notes" and "Risk Factors -- Shares Eligible for Future Issuance and
Sale."
CONTROL BY PRINCIPAL STOCKHOLDER
CKE Restaurants, Inc. ("CKE") holds 12,754,885 shares of Common Stock
(18.2% of the outstanding shares). In addition, CKE has the right to acquire an
additional 7,350,428 shares upon exercise of currently exercisable warrants. CKE
would hold approximately 25.9% of the outstanding shares after giving effect to
the exercise of the warrants. No other stockholder of the Company owns 5% or
more of the Company's outstanding Common Stock. Consequently, CKE may be deemed
to have the practical ability to have a significant influence on all matters put
to a vote of the Company's stockholders. See "Management -- Certain
Relationships and Related Transactions" and "Principal Stockholders and Security
Ownership of Management."
GOVERNMENT REGULATION
The restaurant business is subject to extensive federal, state and local
government regulations relating to the development and operations of fast food
restaurants, including regulations relating to building, parking, ingress and
egress and zoning requirements and the preparation and sale of food and laws
that govern the Company's relationship with their respective employees, such as
minimum wage requirements, overtime and working conditions and citizenship
requirements. The failure to obtain or retain food licenses or substantial
increases in the minimum wage could adversely affect operations. The Company is
also subject to federal regulation and certain state laws which regulate the
offer and sale of franchises to their respective franchisees.
11
<PAGE> 15
HISTORICAL AND PRO FORMA
SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated Statement of Operations data presented
for each of the fiscal years in the three-year period ended December 30, 1996
and the Balance Sheet data as of December 30, 1996 and January 1, 1996 were
derived from, and should be read in conjunction with, the audited financial
statements and related notes of Checkers Drive-In Restaurants, Inc. and
subsidiaries included elsewhere herein. The Statement of Operations data for the
years ended December 31, 1993 and December 31, 1992 and the Balance Sheet data
as of January 2, 1995, December 31, 1993 and December 31, 1992 were derived from
audited financial statements not included herein. The selected consolidated
financial data presented below as of and for the periods ended June 17, 1996 and
June 16, 1997 is derived from unaudited consolidated financial statements;
however, in the opinion of the Company, all adjustments, consisting of normal
recurring adjustments, necessary for the presentation of the Company's financial
position and results of operations for such periods have been included.
Operating results for the quarter ended June 16, 1997 are not necessarily
indicative of the results that may be expected for future periods, including the
entire year ended December 29, 1997.
The Company declared a three-for-two stock split, a two-for-one stock split
and a three-for-two stock split payable in the form of stock dividends effective
February 20, 1992, September 3, 1992, and June 30, 1993, respectively. All share
and per share information has been retroactively restated to reflect the splits.
In 1993, the Company completed a number of acquisitions, five of which (for a
total of 20 Restaurants) were accounted for as poolings of interests. The
information provided below has been restated to reflect the retroactive
combination of the entities involved in the acquisitions accounted for as
poolings of interests and to provide pro forma income taxes for all S
Corporations involved.
As of January 1, 1994, the Company changed from a calendar reporting year
ending on December 31st to a fiscal year which will generally end on the Monday
closest to December 31st. Each quarter consists of three 4-week periods, with
the exception of the fourth quarter which consists of four 4-week periods.
<TABLE>
<CAPTION>
YEAR ENDED TWO QUARTERS ENDED
---------------------------------------------------- -------------------
DEC. 30, JAN. 1, JAN. 2, DEC. 31, DEC. 31, JUNE 16, JUNE 17,
1996 1996 1995 1993 1992 1997 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Operating Revenue.............. $164,960 $190,305 $215,115 $184,027 $102,137 $ 67,870 $ 77,073
Restaurant Operating Costs......... 156,548 167,836 173,087 124,384 63,774 61,370 67,825
Cost of Modular Restaurant Package
Revenues......................... 1,704 4,854 10,485 20,208 11,899 289 998
Other Depreciation and
Amortization..................... 4,326 4,044 2,796 1,325 511 1,029 1,667
General and Administrative
Expense.......................... 20,190 24,215 21,875 14,048 7,988 6,899 7,297
Accounting Charges and Loss
Provisions....................... 24,405 26,572 14,771 -- -- -- --
Interest Expense................... 6,233 5,724 3,564 556 706 5,174 2,605
Interest Income.................... 678 674 326 273 1,266 181 495
Minority Interests in Income
(Loss)........................... (1,509) (192) 185 342 400 (60) 66
Income from Continuing Operations
(Pretax)......................... $(46,258) $(42,074) $(11,324) $ 23,437 $ 18,125 $ (6,650) $ (2,890)
Income from Continuing Operations
(Pretax) per Common Share........ $ (0.89) $ (0.83) $ (0.23) $ 0.49 $ 0.40 $ (0.11) $ (0.06)
Total Assets....................... $136,110 $166,819 $196,770 $179,950 $101,526 $124,914 $160,673
Long-Term Obligations and
Redeemable Preferred Stock....... $ 39,906 $ 38,090 $ 38,341 $ 36,572 $ 4,162 $ 40,494 $ 32,289
Cash Dividends Declared per Common
Share............................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
12
<PAGE> 16
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Pro Forma Consolidated Financial Data sets forth certain
unaudited pro forma financial information giving effect to the purchase of the
Notes. See "Risk Factors -- Proposed Acquisition of Certain Checkers Notes" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The pro forma financial
information is based on, and should be read in conjunction with, the historical
consolidated financial statements of the Company and the notes related thereto
beginning on page F-1 of this Prospectus. The pro forma financial information
gives effect to the issuance of 3,712,987 shares of Common Stock in connection
with the purchase of the Rall-Folks Notes and the RDG Note and the conversion of
the New NTDT Note, based upon the per share price of the Common Stock of $1.219,
assuming each closing had occurred on June 16, 1997.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------------------------------------
HISTORICAL AT
JUNE 16, 1997 RDG RALL-FOLKS NTDT PRO-FORMA
------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents............. $ 3,912,122 $ 3,912,122
Receivables........................... 2,651,696 2,651,696
Other Current Assets.................. 10,105,890 10,105,890
------------ ------------
Total Current Assets........... 16,669,708 16,669,708
------------ ------------
Property and Equipment................ 93,803,952 93,803,952
Net Intangibles....................... 11,885,777 11,885,777
Other Noncurrent Assets............... 2,554,237 2,554,237
------------ ------------
$124,913,674 $124,913,674
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Installments of Long-Term
Debt(1)............................. 8,220,502(1) (1,693,225) (1,687,627) (1,121,894) 3,717,756
Other Current Liabilities............. 24,645,035 (6,208) (8,877) (8,299) 24,621,651
------------ ------------
Total Current Liabilities...... 32,865,537 28,339,407
============ ============
Long-Term Debt, Less Current
Installments........................ 30,494,456 30,494,456
Other Non-Current Liabilities......... 8,445,315 8,445,315
------------ ------------
Total Liabilities.............. 71,805,308 67,279,178
============ ============
Stockholders' Equity
Preferred Stock....................... 88 88
Common Stock.......................... 60,750(2) 1,394 1,392 927 64,463
Additional Paid-in Capital............ 109,748,424(1) 1,698,039 1,695,112 1,129,266 114,270,841
Warrants.............................. 9,463,132 9,463,132
Retained (Deficit) Earnings........... (65,764,028) (65,764,028)
------------ ------------
53,508,366 58,034,496
Less Treasury Stock, at Cost.......... 400,000 400,000
------------ ------------
Net Stockholders' Equity....... 53,108,366 57,634,496
------------ ------------
$124,913,674 $124,913,674
============ ============
</TABLE>
- ---------------
(1) Assumes all shares to be issued pursuant to the purchase agreements with
Rall-Folks, RDG and NTDT (the "Agreements"), including shares issued on
conversion of the New NTDT Note, are issued on June 16, 1997 at the current
market value of $1.219 and based upon actual principal and accrued interest
balances as of June 16, 1997. Shares that may be issued pursuant to the
price protection provisions of the Agreements are not reflected above.
(2) Total shares assumed issued to RDG, Rall-Folks and NTDT are 1,394,121,
1,391,718 and 927,148 respectively.
13
<PAGE> 17
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWO QUARTERS ENDED JUNE 16, 1997
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------------------------
HISTORICAL RDG RALL-FOLKS NTDT PRO-FORMA
----------- --------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Net Restaurant sales................. 64,201,101 64,201,101
Franchise revenues and fees.......... 3,325,352 3,325,352
Modular restaurant packages.......... 343,670 343,670
----------- --------- --------- ------- -----------
Total revenues............... 67,870,123 67,870,123
Costs and expenses:
Costs of sales and other restaurant
expenses.......................... 61,369,856 61,369,856
Cost of modular restaurant package
revenues.......................... 288,711 288,711
Other depreciation and
amortization...................... 1,028,769 1,028,769
General and administrative
expenses.......................... 6,899,740 6,899,740
----------- --------- --------- ------- -----------
Total costs and expenses..... 69,587,076 69,587,076
----------- --------- --------- ------- -----------
Operating income (loss)........... (1,716,953) (1,716,953)
Other income (expense)
Interest income...................... 181,063 181,063
Interest expense..................... (5,174,410)(1) 69,069 103,528 91,129 (4,910,684)
----------- --------- --------- ------- -----------
Loss before minority interest, and
income tax expense (benefit).... (6,710,300) (6,466,574)
Minority interests in (losses)
earnings........................ (59,885) (59,885)
----------- --------- --------- ------- -----------
Loss before income tax expense
(benefit)....................... (6,650,415) (6,386,689)
Income tax expense (benefit)...... 0 0
----------- --------- --------- ------- -----------
Net loss.......................... ($6,650,415) ($6,386,689)
=========== ========= ========= ======= ===========
Net loss per common share......... ($ 0.11) ($ 0.10)
=========== ========= ========= ======= ===========
Weighted average number of common
shares outstanding.............. 57,970,015(1) 1,394,121 1,391,718 927,148 61,683,002
=========== ========= ========= ======= ===========
</TABLE>
- ---------------
(1) Assumes all shares to be issued pursuant to the Agreements are issued on
December 31, 1996 at the current market value of $1.219 and based upon
actual principal and accrued interest balances as of June 16, 1997.
14
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------------------------------------------
HISTORICAL RDG RALL-FOLKS NTDT PRO-FORMA
------------ --------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net Restaurant sales............... 155,392,311 155,392,311
Franchise revenues and fees........ 8,366,382 8,366,382
Modular restaurant packages........ 1,201,624 1,201,624
------------ ------------
Total revenues............. 164,960,317 164,960,317
Costs and expenses:
Costs of sales and other restaurant
expenses........................ 156,548,472 156,548,472
Cost of modular restaurant package
revenues........................ 1,703,623 1,703,623
Other depreciation and
amortization.................... 4,325,517 4,325,517
General and administrative
expenses........................ 20,189,965 20,189,965
Accounting charges and
provisions...................... 24,404,679 24,404,679
------------ ------------
Total costs and expenses... 207,172,256 207,172,256
------------ ------------
Operating income (loss).... (42,211,939) (42,211,939)
Other income (expense)
Interest income.................... 677,995 677,995
Interest expense................... (6,232,761) 145,523 202,914 108,526 (5,775,798)
------------ ------------
Loss before minority interest,
and income tax expense
(benefit)..................... (47,766,705) (47,309,742)
Minority interests in (losses)
earnings...................... (1,508,825) (1,508,825)
------------ ------------
Loss before income tax expense
(benefit)..................... (46,257,880) (45,800,917)
Income tax expense (benefit).... 151,000 151,000
------------ ------------
Net loss........................ $(46,408,880) $(45,951,917)
============ ============
Net loss per common share....... $ (0.90) $ (0.83)
============ ============
Weighted average number of
common shares outstanding..... 51,698,480 1,394,121 1,391,718 927,148 55,411,467
============ ========= ========= ======= ============
</TABLE>
- ---------------
(1) Assumes all shares to be issued pursuant to the Agreements are issued on
January 2, 1996 at the current market value of $1.219 and based upon actual
principal and accrued interest balances as of June 16, 1997.
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The Company commenced operations on August 1, 1987 to operate and franchise
Checkers double drive-thru restaurants. As of June 16, 1997, the Company had an
ownership interest in 233 Company-operated restaurants and an additional 247
restaurants were operated by franchisees. The Company's ownership interest in
the Company-operated restaurants is in one of two forms: (i) the Company owns
100% of the restaurant (as of June 16, 1997, there were 219 such restaurants);
and (ii) the Company owns a 10.55% or 65.83% interest in a partnership which
owns the Restaurant (a "Joint Venture Restaurant"). As of June 16, 1997, there
were 14 such Joint Venture Restaurants. See "Business -- Restaurant
Operations -- Joint Venture Restaurants."
The Company has begun to see the positive effects of aggressive programs
implemented at the beginning of fiscal 1997 that are designed to improve food,
paper and labor costs. These costs totalled 69.2% and 63.6% of net restaurant
revenues in the first and second quarters of 1997 compared to 65.6%, 69.3%,
73.3% and 75.9% of net restaurant revenues in the first, second, third and
fourth quarters of fiscal 1996. These improvements were achieved despite an
11.5% decrease in Company-owned same store sales in the second quarter of 1997
as compared to the second quarter of the prior year. Although the Company's
operating margins for the first half of 1997 were better than the annualized
margins for fiscal year 1996, the Company intends to continue to implement
programs to further improve those margins.
In the second quarter of fiscal 1997, the Company, along with its
franchisees, experienced a net increase of three operating restaurants, compared
to a net increase of six operating restaurants in the second quarter of fiscal
1996. Based on information obtained from the Company's franchisees, the Checkers
franchise community expects to open approximately 30 new units in 1997. The
Company does not currently expect significant further restaurant closures,
choosing instead to focus on improving restaurant margins. The Company's
franchisees as a whole continue to experience higher average per store sales
than Company restaurants.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues of the listed items included in the Company's Consolidated Statements
of Operations. Certain items are shown as a percentage of restaurant sales and
Modular Restaurant Package ("MRP") revenue. The table also sets forth certain
selected restaurant operating data.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWO QUARTERS ENDED
-------------------------------------- -------------------
DECEMBER 30, JANUARY 1, JANUARY 2, JUNE 16, JUNE 17,
1996 1996 1995 1997 1996
------------ ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net Restaurant Sales.................. 94.2% 93.9% 90.6% 94.6% 93.8%
Franchise Revenues and Fees........... 5.1% 4.5% 4.1% 4.9% 5.4%
Modular Restaurant Packages........... 0.7% 1.6% 5.3% 0.5% 0.8%
-------- -------- -------- -------- --------
Total Revenues................ 100.0% 100.0% 100.0% 100% 100%
-------- -------- -------- -------- --------
Costs and Expenses:
Restaurant Food and Paper Cost(1)..... 35.2% 35.7% 35.5% 33.5% 34.1%
Restaurant Labor Costs(1)............. 36.9% 32.6% 30.2% 32.9% 34.8%
Restaurant Occupancy Expense(1)....... 8.3% 6.5% 5.0% 8.1% 7.8%
Restaurant Depreciation and
Amortization(1).................... 5.7% 6.0% 6.3% 6.0% 5.5%
Advertising Expense(1)................ 4.8% 4.5% 4.1% 5.0% 2.9%
Other Restaurant Operating
Expenses(1)........................ 9.9% 8.7% 7.8% 10.0% 8.6%
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
FISCAL YEAR ENDED TWO QUARTERS ENDED
-------------------------------------- -------------------
DECEMBER 30, JANUARY 1, JANUARY 2, JUNE 16, JUNE 17,
1996 1996 1995 1997 1996
------------ ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cost of Modular Restaurant Package
Revenues(2)........................ 141.8% 162.1% 92.0% 84.0% 154.4%
Other Depreciation and Amortization... 2.6% 2.1% 1.3% 1.5% 2.2%
General and Administrative Expenses... 12.2% 12.7% 10.2% 10.2% 9.5%
-------- --------
Impairment of Long-lived Assets....... 9.3% 9.9% 0.0%
Losses on Assets to be Disposed of.... 4.3% 1.7% 4.2%
Loss Provisions....................... 1.2% 2.3% 2.6%
-------- -------- --------
Total Costs and Expenses...... 125.6% 119.6% 103.7%
======== ======== ======== ======== ========
Operating (Loss)...................... (25.6)% (19.6)% (3.7)% (2.5)% (0.9)%
-------- --------
Other Income (Expense):
Interest Income....................... 0.4% 0.4% 0.2% 0.3% 0.6%
Interest Expense...................... (3.8)% (3.0)% (1.7)% (3.7)% (3.3)%
Interest -- loan cost amortization...... (3.9)% (0.1)%
Minority Interest in (Losses)
Earnings.............................. (0.9)% (0.1)% 0.1% (0.1)% 0.1%
-------- -------- -------- -------- --------
Loss Before Income Tax Expense
(Benefit)............................. (28.0)% (22.1)% (5.3)% (9.8)% (3.7)%
Income Tax Expense (Benefit)............ 0.1% (4.7)% (2.1)% 0.0% (1.4)%
-------- -------- -------- -------- --------
Net Loss...................... (28.1)% (17.5)% (3.1)% (9.8)% (2.3)%
======== ======== ======== ======== ========
Operating Data:
System Wide Restaurant Sales (in
000's)
Company Operated................... $155,392 $178,744 $194,922 $ 64,201 $ 72,318
Franchise.......................... 172,566 190,151 180,977 81,259 89,297
-------- -------- -------- -------- --------
Total......................... $327,958 $368,895 $375,899 $145,460 $161,615
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 1, JANUARY 2, JUNE 16, JUNE 17,
1996 1996 1995 1997 1996
------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Average Annual Net Sales Per Restaurant Open
for a Full Year (in 000's)(3):
Company Operated.......................... $651 $721 $815 $619 $620
Franchised................................ 755 814 840 762 769
---- ---- ---- ---- ----
System Wide............................... $699 $765 $827 $690 $719
==== ==== ==== ==== ====
Number of Restaurants(4)
Company Operated.......................... 232 242 261 233 243
Franchised................................ 246 257 235 247 264
---- ---- ---- ---- ----
Total............................. 478 499 496 480 507
==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) As a percent of net restaurant sales.
(2) As a percent of Modular Restaurant Package revenues.
(3) Includes sales for restaurants open for entire trailing 13 periods, and
stores expected to be closed in the following year.
(4) Number of restaurants open at end of period.
Comparison of Historical Results -- Fiscal Years 1996 and 1995
Revenues. Total revenues decreased 13.3% to $165.0 million in 1996
compared to $190.3 million in 1995. Company-operated net restaurant sales
decreased 13.1% to $155.4 million in 1996 from $178.7 million
17
<PAGE> 21
in 1995. The decrease resulted partially from a net reduction of ten
Company-operated restaurants since January 1, 1996. Comparable Company-operated
restaurant sales for the year ended December 30, 1996 decreased 9.7% as compared
to the year ended January 1, 1996, which includes those restaurants open at
least 13 periods. These decreases in net restaurant sales and comparable
restaurant sales is primarily attributable to continuing sales pressure from
competitor discounting, severe weather in January and February of 1996 and the
inability of the Company to effect a competitive advertising campaign during
fiscal 1996. See "Risk Factors -- Competitive Environment" and
"Business -- Competition."
Royalties decreased 2.2% to $7.4 million in 1996 from $7.6 million in 1995
due primarily to a net reduction of 11 franchised restaurants since January 1,
1996. Comparable franchised restaurant sales for restaurants open at least 12
months for the year ended December 30, 1996 decreased approximately 7.2% as
compared to the year ended January 1, 1996. The Company believes that the
decline in sales experienced by franchisees can be attributed primarily to the
same factors noted above, but that these factors may have been mitigated to some
extent by the location in many instances of franchise restaurants in less
competitive markets. In addition, the Company believes that the franchisees have
been able to maintain average net restaurant sales above those of Company-owned
restaurants as a result of franchisees conducting local restaurant marketing
campaigns targeted at the specific demographics of the population constituting
the primary customers of each restaurant.
Franchise fees decreased 3.2% to approximately $930,000 in 1996 from
approximately $961,000 in 1995. An actual decrease of $421,000 as a direct
result of fewer franchised restaurants opened as well as certain discounting of
fees on non-standard restaurant openings, offset by the effect of recording
$390,000 of revenue from terminations of Area Development Agreements during the
year ended December 30, 1996, generated the net decrease of $31,000. The Company
recognizes franchise fees as revenues when the Company has substantially
completed its obligations under the franchise agreement, usually at the opening
of the franchised restaurant.
MRP revenues decreased 59.9% to $1.2 million in 1996 compared to $3.0
million in 1995 due to decreased sales volume of MRPs to the Company's
franchisees which is a result of a slow down in franchisee restaurant opening
activity. Also, the Company made a concerted effort to refurbish and sell its
inventory of used MRPs from closed sites. Because of the number of used MRPs
available, the Company has typically sold them for a price which approximates
book value. The sales price is primarily dependent upon demand and therefore may
change as demand increases or supply decreases. However, these sales have
negatively impacted the new MRP revenues. Revenues from the sale of new MRPs are
recognized on the percentage of completion method during the construction
process; therefore, a substantial portion of MRP revenues are recognized prior
to the opening of a restaurant. See "Business -- Litigation."
Costs and expenses. Restaurant food ($49.5 million) and paper ($5.2
million) costs totalled $54.7 million or 34.2% of gross restaurant sales for
1996, compared to $63.7 million ($57.6 million food costs; $6.1 million, paper
costs) or 34.7% of gross restaurant sales for 1995. The decrease in food and
paper costs as a percentage of gross restaurant sales was due primarily to
decreases in beef costs and paper costs experienced by the Company during fiscal
1996, partially offset by various promotional discounts in the final two
quarters of 1996.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes, totalled $57.3 million or 35.9% of gross
restaurant sales for 1996, compared to $58.2 million or 31.8% of gross
restaurant sales for 1995. The increase in restaurant labor costs as a
percentage of gross restaurant sales was due primarily to the decline in average
gross restaurant sales relative to the semi-variable nature of these costs; a
high level of turnover in the regional management positions, which caused
inconsistencies in the management of labor costs in the restaurants; increase in
labor costs resulting from the L.A. Mex dual brand test which the Company and
various franchise restaurants conducted in 1996; and an increase in the federal
minimum wage rate. The decrease in actual expense was caused by a reduction in
the variable portion of labor expenses as sales declined.
Restaurant occupancy expense, which includes rent, property taxes, licenses
and insurance, totalled $12.9 million or 8.1% of gross restaurant sales for
1996, compared to $11.6 million or 6.3% of gross restaurant sales
18
<PAGE> 22
for 1995. This increase in restaurant occupancy costs as a percentage of gross
restaurant sales was due primarily to the decline in average gross restaurant
sales relative to the fixed nature of these expenses and also higher average
occupancy costs resulting from the acquisition of interests in 12 restaurants in
Chicago, Illinois.
Restaurant depreciation and amortization decreased 16.9% to $8.8 million
for 1996, from $10.6 million for 1995, due primarily to late 1995 and 1996
impairments recorded under Statement of Financial Accounting Standards No. 121
which was adopted as of January 1, 1996.
Advertising decreased to $7.4 million or 4.6% of restaurant sales for 1996
which did not materially differ from the $8.1 million or 4.4% of restaurant
sales spent for advertising in 1995.
Other restaurant expenses includes all other restaurant level operating
expenses other than food and paper costs, labor and benefits, rent and other
costs which includes utilities, maintenance and other costs. These expenses
totalled $15.3 million or 9.6% of gross restaurant sales for 1996 compared to
$15.6 million or 8.5% of gross restaurant sales for 1995. The increase for 1996
as a percentage of gross restaurant sales, was primarily related to the decline
in average gross restaurant sales relative to the fixed and semi-variable nature
of many expenses.
Costs of MRP revenues totalled $1.7 million or 141.8% of MRP revenues for
1996, compared to $4.9 million or 162.1% of such revenues for 1995. The decrease
in these expenses as a percentage of MRP revenues was attributable to a third
quarter 1995 accounting charge of $500,000 to write-down excess work in process
buildup and a reduction in direct and indirect labor in early 1996.
Selling, general and administrative expenses decreased to $20.2 million or
12.2% of total revenues in 1996 from $24.2 million or 12.7% of total revenues in
1995. The decrease in these expenses was primarily attributable to a decrease in
corporate overhead costs as a result of the Company's restructuring during 1995
and early 1996.
Accounting Charges and Loss Provisions. The Company recorded accounting
charges and loss provisions of $16.8 million during the third quarter of 1996,
$1.2 million of which consisted of various selling, general and administrative
expenses including refinancing costs of $850,000 to expense capitalized costs
incurred in connection with the Company's previous lending arrangements with its
bank group. Provisions totalling $14.2 million to close 27 restaurants, relocate
22 of them, settle 16 leases on real property underlying these stores and sell
land underlying the other 11 restaurants, and impairment charges related to an
additional 28 under-performing restaurants were recorded. A loss provision of
$500,000 was also recorded to reserve for obsolescence in Champion's finished
buildings inventory.
Additional accounting charges and loss provisions of $11.1 million were
recorded during the fourth quarter of 1996, $1.5 million of which consisted of
various selling, general and administrative expenses (including severance,
employee relocations, bad debt provisions and other charges). Provisions
totalling $6.4 million including $1.4 million for additional losses on assets to
be disposed of, $4.6 million for impairment charges related to 9
under-performing restaurants received by the Company through a July 1996
franchisee bankruptcy action and $400,000 for other impairment charges were also
recorded. Additionally, in the fourth quarter of 1996, a $1.1 million provision
for loss on the disposal of the L.A. Mex product line, workers compensation
accruals of $1.1 million (included in restaurant labor costs), adjustments to
goodwill of approximately $510,000 (included in other depreciation and
amortization) and approximately a $450,000 charge for the assumption of minority
interests in losses on joint-venture operations as a result of the receipt by
the Company of certain assets from the bankruptcy of a franchisee.
Third quarter 1995 accounting charges and loss provisions of $8.8 million
consisted of $2.8 million in various selling, general and administrative
expenses (write-off of receivables, accruals for recruiting fees, relocation
costs, severance pay, reserves for legal settlements and the accrual of legal
fees); $3.2 million to provide for restaurant relocation costs, write-downs and
abandoned site costs; $344,000 to expense refinancing costs; $645,000 to provide
for inventory obsolescence; $1.5 million for workers compensation exposure
included in restaurant labor costs and $260,000 in other charges, net, including
the $500,000 write-down of excess inventory and a minority interest adjustment.
19
<PAGE> 23
Fourth quarter 1995 accounting charges included $3.0 million for warrants
to be issued in settlement of litigation and to accrue approximately $800,000
for legal fees in connection with the settlement and continued defense of
various litigation matters. See "Business -- Litigation." Additionally, during
the fourth quarter of 1995, the Company early adopted Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of" ("SFAS 121") which requires a
write-down of certain intangibles and property related to under performing
sites. The effect of adopting SFAS 121 was a total charge to earnings for 1995
of $18.9 million, consisting of a $5.9 million write-down of goodwill and a
$13.1 million write-down of property and equipment.
Interest expense. Interest expense increased to $6.2 million or 3.8% of
total revenues in 1996 from $5.7 million or 3.0% of total revenues in 1995. This
increase was due to the Company's 1996 debt restructuring and related
amortization of deferred loan costs.
Income tax expense (benefit). Due to the loss for 1996, the Company
recorded an income tax benefit of $18.0 million or 38.9% of the loss before
income taxes and recorded a deferred income tax valuation allowance of $18.1
million, resulting in a net tax expense of $151,000 for 1996, as compared to an
income tax benefit of $16.5 million or 39.1% of earnings before income taxes and
recorded a deferred income tax valuation allowance of $7.6 million resulting in
a net tax benefit of $8.9 million for 1995. The effective tax rates differ from
the expected federal tax rate of 35.0% due primarily to state income taxes.
Net loss. Earnings were significantly impacted by the loss provisions and
the write-downs associated with SFAS 121 in 1996 and in 1995. Net loss before
tax and the provisions (provisions totalled $27.9 million in 1996 and $31.6
million in 1995) was $18.4 million or $.36 per share for 1996 and $10.5 million
or $.21 per share for 1995, which resulted primarily from a decrease in the
average net restaurant sales and margins, and a decrease in royalties and
franchise fees, offset by a decrease in depreciation and amortization and
selling, general and administrative expenses.
Comparison of Historical Results -- Fiscal Years 1995 and 1994
Revenues. Total revenues decreased 11.5% to $190.3 million in 1995
compared to $215.1 million in 1994. Company-operated restaurant sales decreased
8.3% to $178.7 million in 1995 from $194.9 million in 1994. The decrease
resulted primarily from a net reduction of 19 Company-operated restaurants since
January 2, 1995, partially offset by a full year of operations for
Company-operated restaurants opened in 1994. Comparable Company-operated
restaurant sales for the year ended January 1, 1996, decreased 11.5% as compared
to the year ended January 2, 1995. This includes those restaurants open at least
13 periods. The decrease in comparable restaurant sales is primarily
attributable to increased sales pressure from competitor discounting and the
severe weather in various parts of the United States.
Royalties increased 10.0% to $7.6 million in 1995 from $6.9 million in 1994
due primarily to a 5.1% increase in franchised restaurant sales and a net
addition of 22 franchised restaurants since January 2, 1995. Comparable
franchised restaurant sales for restaurants open at least 12 months for the year
ended January 1, 1996, decreased approximately 3.1% as compared to the year
ended January 2, 1995. The Company believes that the decline in sales
experienced by franchisees can be attributed primarily to the same factors noted
above, but that these factors may have been mitigated to some extent by the
location in many instances of franchise restaurants in less competitive markets.
In addition, the Company believes that the franchisees have been able to
maintain average net restaurant sales above those of Company-owned restaurants
as a result of franchisees conducting local restaurant marketing campaigns
targeted at the specific demographics of the population constituting the primary
customers of each restaurant.
Franchise fees decreased 48.8% to approximately $961,000 in 1995 from $1.9
million in 1994. This was a direct result of opening fewer franchised
restaurants during the year ended January 1, 1996. The Company recognizes
franchise fees as revenues when the Company has substantially completed its
obligations under the franchise agreement, usually at the opening of the
franchised restaurant.
MRP revenues decreased 73.7% to $3.0 million in 1995 compared to $11.4
million in 1994 due to decreased sales volume of MRP's to the Company's
franchisees which is a result of a slow down in franchisee
20
<PAGE> 24
restaurant opening activity. MRP revenues are recognized on the percentage of
completion method during the construction process; therefore, a substantial
portion of MRP revenues are recognized prior to the opening of a restaurant.
Costs and expenses. Restaurant food ($57.6 million) and paper ($6.1
million) costs totalled $63.7 million or 34.7% of gross restaurant sales for
1995, compared to $69.2 million ($63.4 million, food costs; $5.8 million, paper
costs) or 34.4% of gross restaurant sales for 1994.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes, totalled $58.2 million or 31.8% of gross
restaurant sales for 1995, compared to $58.8 or 29.3% of gross restaurant sales
for 1994. The increase in restaurant labor costs as a percentage of gross
restaurant sales was due primarily to the decline in average gross restaurant
sales relative to the fixed and semi-variable nature of these costs and a
provision of $1.5 million for workers compensation exposure in the third quarter
of 1995.
Restaurant occupancy expense, which includes rent, property taxes, licenses
and insurance, totalled $11.6 or 6.3% of gross restaurant sales for 1995,
compared to $9.7 or 4.9% of gross restaurant sales for 1994. This increase in
restaurant occupancy costs as a percentage of gross restaurant sales was due
partially to the decline in average gross restaurant sales relative to the fixed
and semi-variable nature of these expenses while the increase in the actual
expense resulted from increases in utilities, property taxes and insurance.
Restaurant depreciation and amortization decreased 13.7% to $10.6 million
for 1995, from $12.3 for 1994, due primarily to the net reduction of 19
Company-operated restaurants since January 2, 1995.
Advertising increased to $8.1 million or 4.4% of gross restaurant sales in
1995 from $7.9 million or 3.9% of gross restaurant sales 1994. The increase in
this expense was due to increased expenditures for broadcast advertising.
Other restaurant expenses includes all other restaurant level operating
expenses other than food and paper costs, labor and benefits, rent and other
costs which includes utilities, maintenance and other costs. These expenses
totalled $15.6 million or 8.5% of gross restaurant sales for 1995 compared to
$15.1 or 7.5% of gross restaurant sales for 1994. The increase as a percentage
of gross restaurant sales was primarily related to the decline in average gross
restaurant sales relative to the fixed and semi-variable nature of many
expenses.
Cost of MRP's totalled $4.9 million or 162.1% of MRP revenues in 1995
compared to $10.5 million or 92.0% of such revenues in 1994. The increase in
these expenses as a percentage of MRP revenues was attributable to the decline
in the number of units produced relative to the fixed and semi-variable nature
of many expenses. The total number of units declined in 1995, not only because
of the decline in the number of units produced for franchisees, but also because
the Company opened fewer restaurants in 1995 than 1994 and also used relocated
Company units for certain 1995 restaurant openings. The Company also incurred
costs associated with the reduction in volume.
Selling, general and administrative expenses increased to $24.2 million or
12.7% of total revenues in 1995 from $21.9 million or 10.2% of total revenues in
1994. The increase in these expenses was primarily attributable to third quarter
1995 accounting charges of $3.6 million as discussed below, partially offset by
a decrease in corporate overhead costs as a result of the Company's
restructuring.
Accounting Charges and Loss Provisions. The Company recorded accounting
charges and loss provisions totalling $8.8 million during the quarter ended
September 11, 1995. There was no comparable charge for the quarter ended
September 12, 1994. These charges include a provision of $3.2 million for
restaurant relocations and abandoned site costs. The provision for restaurant
relocations and abandoned site costs consists of a $1.2 million charge to write
down 21 relocated MRP's to net realizable value and a charge of $2.0 million to
adjust existing reserves necessary to expense site improvements, settle leases
and provide for other costs associated with the abandonment of under performing
restaurant sites and to provide for the closure of four additional restaurants.
Of the above provision totalling $3.2 million approximately $2.3 million
represents accounting charges primarily for the write-off of site costs to
originally open the restaurants and cash expenditures to be made to
21
<PAGE> 25
settle lease liabilities over the remaining lives (up to 14 years) of the
underlying leases. These payments are expected to be funded out of operating
cash flows.
In addition to the provision of $3.2 million discussed above, the Company
recorded charges of $3.6 million to: (i) write-off uncollectible receivables
related primarily to the Champion division ($1.2 million); (ii) write down
obsolete inventory and menu boards ($423,00); (iii) expense costs associated
with the hiring of new employees, including recruiting fees and relocation costs
($429,000); (iv) provide for severance pay ($274,000); (v) write-off loan
origination fees incurred in connection with the Company's credit facility,
which has been substantially renegotiated ($344,000); (vi) dispose of a
subsidiary which distributes promotional apparel ($263,000); (vii) reserve for
the settlement of litigation arising in the ordinary course of business and
accrue for legal fees ($700,000). These charges are included in selling, general
and administrative expenses.
Other third quarter accounting charges included a $1.5 million charge to
reserve for future workers compensation claims exposure in connection with the
Company's self-insured plan, which was included in other restaurant operating
expenses; a $721,000 charge for the Champion division to write-off previously
capitalized costs which are no longer expected to provide any future benefit and
to write down obsolete equipment inventories, which was included in cost of
MRP's; a $314,000 recovery of minority interests in losses which had been
previously reserved by the Company, which was included in minority interests in
earnings (losses); and a $101,000 charge to reserve for state income tax
assessments, which was reflected in income tax expense (benefit).
Fourth quarter 1995 accounting charges included $3.0 million for warrants
to be issued in settlement of litigation (see "Business -- Litigation") and to
accrue approximately $800,000 for legal fees in connection with the settlement
and continued defense of various litigation matters. Additionally, during the
fourth quarter of 1995, the Company early adopted SFAS 121 which requires a
write-down of certain intangibles and property related to under performing
sites. The effect of adopting SFAS 121 was a total charge to earnings for 1995
of $18.9 million, consisting of a $5.9 million write-down of goodwill and a
$13.1 million write-down of property and equipment.
Comparatively, in 1994 the Company recorded provisions totalling $4.5
million in the first quarter and $11.4 million in the fourth quarter of 1994.
The first quarter $4.5 million provision included $1.8 million to provide for
the write-off of site costs and the other costs to originally open restaurants
and $1.7 million for lease liability settlements related to the 21 closed or
underperforming restaurants. The fourth quarter 1994 provisions totalling $11.4
million included a $1.7 million charge to settle leases and expense site costs
and $3.0 million in other costs to originally open restaurants for the 12 under
performing restaurants to be relocated. These charges, along with the first
quarter $4.5 million charge described above are combined, and the total $9.1
million was reflected in the Company's 1994 Consolidated Statement of
Operations. A restructuring charge of $5.6 million was included in the fourth
quarter 1994 provisions to provide for the Company's reorganization due to its
inability to find sufficient capital on acceptable terms to maintain its growth
rate and the resultant downsizing of staff and offices and the write-off of
costs associated with sites which will not be developed and new restaurant
openings which have been delayed. The charge consisted of severance costs,
closed office expense and loss on sale of the Company plane totaling $680,000,
and site costs and other costs to open previously anticipated new restaurants of
$5.0 million. Other fourth quarter 1994 provisions included $850,000 for legal
costs and an allowance for royalty receivables due from a franchisee involved in
a bankruptcy, and $275,000 for settlement of real estate title claims, both of
which were included in 1994 selling, general and administrative expenses. Of the
1994 provisions which total $15.9 million, approximately $11.0 million
represents non-cash charges primarily for the write-off of site costs and other
costs to originally open the restaurants. The remaining $4.9 million primarily
represents cash expenditures to be made to settle lease liabilities over the
remaining lives of the underlying leases.
Interest expense. Interest expense increased to $5.7 million or 2.9% of
total revenues in 1995 from $3.6 million or 1.6% of total revenues in 1994. This
increase was due to the Company's 1995 debt issuances in connection with
restaurant acquisitions and capitalized leases resulting from sale-leaseback
transactions.
22
<PAGE> 26
Income tax expense (benefit). Due to the loss for the year ended January
1, 1996, the Company recorded an income tax benefit of $8.9 million or 21.0% of
the loss before income taxes for the year ended January 1, 1996, as compared to
income tax benefit of $4.6 million (after giving effect to pro forma income
taxes for merged entities during their S Corporation status), or 40.4% of
earnings before income taxes for the year ended January 2, 1995. The effective
tax rates of 21.0% in 1995 and 40.4% in 1994 (after giving effect to pro forma
income taxes for merged entities during their S corporation periods) differed
from the expected federal tax rate of 35% primarily due to state income taxes,
tax-free investment income, job tax credits and the implementation of SFAS 121
in 1995.
Net Loss. Earnings were significantly impacted by the loss provisions
which were recorded in 1995 and the write-downs associated with implementation
of SFAS 121. Net loss before the provisions, which totalled $31.5 million, was
$1.7 million or $.03 per share, which resulted primarily from a decrease in the
average net restaurant sales and margins, a decrease in franchise fees, a
decrease in MRP revenues and margins, increased advertising and interest expense
offset by a significant decrease in selling, general and administrative
expenses. The provisions net of tax benefit represent a charge of $26.7 million
or $.53 per share, resulting in an overall net loss of $33.2 million or $.65 per
share for the year ended January 1, 1996.
Comparison of Historical Results -- Two Quarters ended June 16, 1997 and Two
Quarters Ended June 17, 1996
Revenues. Total revenues decreased 11.9% to $67.9 million for the two
quarters ended June 16, 1997, compared to $77.1 million for the two quarters
ended June 17, 1996. Company-operated net restaurant sales decreased 11.2% to
$64.2 million for the two quarters ended June 16, 1997, from $72.3 million for
the two quarters ended June 17, 1996. Net restaurant sales for comparable
Company-owned restaurants for the two quarters ended June 16, 1997 decreased
10.1% compared to the two quarters ended June 17, 1996. Comparable Company-owned
restaurants are those continuously open during both reporting periods. These
decreases in net restaurant sales and comparable net restaurant sales are
primarily attributable to a highly competitive environment in the first two
quarters of 1997 and the Company's 1997 focus on cutting costs and developing a
new advertising campaign for the remainder of 1997.
Franchise revenues and fees decreased 19.1% to $3.3 million for the two
quarters ended June 16, 1997, from $4.1 million for the two quarters ended June
17, 1996. This was a result of a net reduction of 17 franchised restaurants
since June 17, 1996, and opening fewer franchised restaurants during the first
two quarters of 1997 than in the first two quarters of 1996. The Company
recognizes franchise fees as revenues when the Company has substantially
completed its obligations under the franchise agreement, usually at the opening
of the franchised restaurant.
Revenues from the Champion Modular Restaurant division decreased 46.9% to
$344,000 for the two quarters ended June 16, 1997, from $647,000 for the two
quarters ended June 17, 1996. MRP revenues are recognized on the percentage of
completion method during the construction process; therefore, a substantial
portion of the MRP revenues and costs are recognized prior to the opening of a
restaurant or shipment to a convenience store operator. The primary source of
revenues for the Champion Modular Restaurant division in fiscal 1997 have been
the construction of modular buildings for third parties, refurbishment of used
MRP's for franchisees and the completion of construction of MRP's in process.
Costs and expenses. Restaurant food and paper costs totalled $21.5 million
or 33.5% of net restaurant sales for the two quarters ended June 16, 1997,
compared to $24.7 million or 34.1% of net restaurant sales for the two quarters
ended June 17, 1996. The actual decrease in food and paper costs was due
primarily to the decrease in net restaurant sales, while the decrease in these
costs as a percentage of net restaurant sales was due to new purchasing
contracts negotiated in the first two quarters of 1997.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes, totalled $21.1 million or 32.9% of net
restaurant sales for the two quarters ended June 16, 1997, compared to $25.2
million or 34.8% of net restaurant sales for the two quarters ended June 17,
1996. The decrease in restaurant labor costs as a percentage of net restaurant
sales was due primarily to the new labor utilization
23
<PAGE> 27
programs implemented in the first quarter of 1997, partially offset by the
increase in the federal minimum wage rate.
Restaurant occupancy expense, which includes rent, property taxes, licenses
and insurance, totalled $5.2 million or 8.1% of net restaurant sales for the two
quarters ended June 16, 1997, compared to $5.7 million or 7.8% of net restaurant
sales for the two quarters ended June 17, 1996. This increase in restaurant
occupancy costs as a percentage of net restaurant sales was due primarily to the
decline in average net restaurant sales relative to the fixed and semi-variable
nature of these expenses and the acquisition of interests in 12 restaurants in
the high cost Chicago market in the third quarter of 1996.
Restaurant depreciation and amortization decreased 3.3% to $3.8 million for
the two quarters ended June 16, 1997, from $4.0 million for the two quarters
ended June 17, 1996, due primarily to fourth quarter 1996 impairments under the
SFAS 121 and a net decrease of ten Company-operated restaurants from June 17,
1996, to June 16, 1997. However, as a percentage of net restaurant sales, these
expenses increased to 6.0% for the quarter ended June 16, 1997 from 5.4% for the
quarter ended June 17, 1997 because of the greater relative decline in sales.
Advertising expenses increased to $3.2 million or 5.0% of net restaurant
sales for the two quarters ended June 16, 1997, from $2 million or 2.9% of net
restaurant sales for the two quarters ended June 17, 1996. The increase in this
expense was due to decreased utilization of coupons in lieu of advertising
dollars in 1997 and the first and second quarter 1996 capitalization of
television commercial production costs relating to the L.A. Mex duel brand test,
which costs were expensed later in 1996 when it was determined that the
commercial would no longer be utilized.
Other restaurant expenses includes all other restaurant level operating
expenses other than food and paper costs, labor and benefits, rent and other
occupancy costs which include utilities, maintenance and other costs. These
expenses totalled $6.4 million or 10.0% of net restaurant sales for the two
quarters ended June 16, 1997, compared to $6.2 million or 8.6% of net restaurant
sales for the two quarters ended June 17, 1996. The increase in the two quarters
ended June 16, 1997, as a percentage of net restaurant sales was primarily
related to the decline in average net restaurant sales relative the fixed and
semi-variable nature of these expenses. The increase in the actual expense by
3.1% was primarily due to certain one-time credits recorded in the first quarter
of 1996.
Costs of MRP revenues totalled $289,000 or 84.0% of MRP revenues for the
two quarters ended June 16, 1997, compared to $998,000 or 154.4% of such
revenues for the two quarters ended June 16, 1996. The decrease in these
expenses as a percentage of MRP revenues was attributable to the elimination of
various excess fixed costs in the first quarter of 1997.
General and administrative were $6.9 million or 10.2% of total revenues,
for the two quarters ended June 16, 1997, compared to $7.3 million or 9.5% of
total revenues for the two quarters ended June 17, 1996. The actual decrease in
normal recurring general and administrative expenses of $747,000 was mostly
attributable to a reduction in corporate staffing early in 1997. This reduction
was partially offset by $350,000 of costs incurred as a result of terminated
merger negotiations with Rally's Hamburgers, Inc., resulting in a reported
decrease of $397,000.
Interest expense. Interest expense was $2.5 million or 3.7% of total
revenues for the two quarters ended June 16, 1997, and $2.5 million or 3.3% of
total revenues for the two quarters ended June 17, 1996. This consistency was
due to a reduction in the weighted average balance of debt outstanding during
the respective periods, partially offset by an increase in the Company's
effective interest rates since the second quarter of 1996.
Income tax benefit. Due to the loss for the two quarters ended June 16,
1997, the Company recorded an income tax benefit of $2.5 million or 38.0% of the
loss before income taxes which was completely offset by a deferred income tax
valuation allowance of $2.5 million for the two quarters ended June 16, 1997, as
compared to an income tax benefit of $1.1 million or 38.0% of earnings before
income taxes for the two quarters ended June 17, 1996. The effective tax rates
differ from the expected federal tax rate of 35.0% due to state income taxes and
job tax credits.
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Net loss. The net loss for the two quarters was $6.7 million or $.11 per
share. This net loss was significantly impacted by the expensing of $2.7 million
in deferred loan costs and $350,000 in terminated merger costs in the two
quarters ended June 16, 1997. Net loss before tax, deferred loan cost
amortization and terminated merger costs was $3.6 million or $.06 per share for
the two quarters ended June 16, 1997, and $1.5 million or $.03 per share for the
two quarters ended June 17, 1996. This increased net loss was primarily
attributable to lower levels of net restaurant sales and a decrease in royalties
and franchise fees, partially offset by an increase in average net margins and a
decline in general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Bank Financing. On July 29, 1996, the debt under the Company's prior bank
loan agreement (the "Loan Agreement") and credit line (the "Credit Line") was
acquired by an investor group of lenders led by an affiliate of DDJ Capital
Management LLC (collectively, "DDJ"). On November 14, 1996, the debt under the
Loan Agreement and Credit Line was acquired from DDJ by a group of entities and
individuals, most of whom are engaged in the fast food restaurant business. This
investor group (the "CKE Group") was led by CKE, the parent of Carl Karcher
Enterprises, Inc., Casa Bonita, Inc. and Summit Family Restaurants, Inc., and a
principal stockholder of Rally's Hamburgers, Inc. ("Rally's"). Also
participating were certain members of the DDJ Group, as well as KCC Delaware
Company, a wholly-owned subsidiary of GIANT GROUP, LTD., ("GIANT"), which is a
principal stockholder of Rally's.
On November 22, 1996, the Company and the CKE Group executed the Restated
Credit Agreement, thereby completing a restructuring of the debt under the Loan
Agreement and the Credit Line into a single obligation. At the time of the
restructuring, the outstanding principal balance under the Loan Agreement and
the Credit Line was $35.8 million. Pursuant to the terms of the Restated Credit
Agreement, the term of the debt was extended by one year until July 31, 1999,
and the interest rate on the indebtedness was reduced to a fixed rate of 13%. In
addition, all principal payments were deferred until May 19, 1997, and the CKE
Group agreed to eliminate certain financial covenants, to relax others and to
eliminate approximately $6 million in restructuring fees and charges. Pursuant
to the Restated Credit Agreement, certain members of the CKE Group agreed to
provide to the Company a short-term revolving line of credit of up to $2.5
million, also at a fixed interest rate of 13% (the "Secondary Credit Line").
Pursuant to the Restated Credit Agreement, the Company is required to maintain
minimum Consolidated EBITDA of $1.3 million for each of the three four-week
periods ending September 8, 1997, $2 million for each of the four four-week
periods ending December 29, 1997, and $2.75 million for each four-week period
thereafter.
In consideration for the restructuring, the Restated Credit Agreement
required the Company to issue to the members of the CKE Group warrants to
purchase an aggregate of 20 million shares of the Common Stock at an exercise
price of $.75 per share, which was the approximate market price of the Common
Stock prior to the announcement of the debt transfer. The Company agreed to
register such shares under the Securities Act; however, it did not file the
registration statement with respect to such shares by the required date, May 22,
1997 (the "Target Filing Date"). Therefore, the Company is obligated to pay the
warrant holders an aggregate of approximately $2,000 per week until such
registration statement is filed with the Commission. An additional late fee of
$2,000 per week is payable because such registration statement was not declared
effective by the required date, July 21, 1997. (the "Target Effective Date").
Since November 22, 1996, the Company has reduced the principal balance
under the Restated Credit Agreement by $9.2 million and has repaid the Secondary
Credit Line in full. A portion of the funds utilized to make these principal
reduction payments were obtained by the Company from the sale of certain closed
restaurant sites to third parties. Additionally, the Company utilized $10.5
million of the proceeds from the private placement described below. Pursuant to
the Restated Credit Agreement, the prepayments of principal made in 1996 and
early in 1997 will relieve the Company of the requirement to make any of the
regularly scheduled principal payments under the Restated Credit Agreement which
would have otherwise become due in fiscal year 1997. The Restated Credit
Agreement provides that 50% of any future asset sales must be utilized to prepay
principal.
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<PAGE> 29
Rall-Folks Notes. On May 14, 1997, the Company entered into an amendment
and restatement of an August 2, 1995 Purchase Agreement, which had been
previously amended in October 1995, April 1996 and June 1996 (the "Rall-Folks
Agreement"), pursuant to which the Company agreed to issue shares of the Common
Stock (the "Rall-Folks Stock Payment") in exchange for and in complete
satisfaction of the Rall-Folks Notes. The Rall-Folks Notes are unsecured and
fully subordinated to the Restated Credit Agreement. The Company is paying
interest on the Rall-Folks Notes, at the prime rate on a current basis.
Rall-Folks received the Rall-Folks Notes from the Company in May 1994 as partial
consideration for its sale to the Company of seven Rally's double drive through
restaurants in the Atlanta, Georgia area. The Rall-Folks Notes were initially
due on August 4, 1995. The term of the Rall-Folks Notes has been extended until
the earlier of the closing of the Rall-Folks Agreement (which is to occur on or
before December 15, 1997), or until 20 days after the termination of the
Rall-Folks Agreement in accordance with its terms. The acquisition of the
Rall-Folks Notes is contingent upon certain conditions, including approval of
the Rall-Folks Agreement by the stockholders of Rall-Folks.
Pursuant to the Rall-Folks Agreement, the Company is to deliver to
Rall-Folks shares of its Common Stock with a value equal to the then outstanding
balance due under the Rall-Folks Notes (the "Rall-Folks Purchase Price"),
$1,596,960 as of July 17, 1997. The number of shares to be issued will be
determined by dividing the Rall-Folks Purchase Price by the average of the per
share closing sale price of the Common Stock as reported on the NMS for the five
full trading days ending on the third business day immediately preceding the
closing date.
The Company has guaranteed that if Rall-Folks sells all of the Common Stock
constituting the Rall-Folks Stock Payment in a reasonably prompt manner (subject
to certain limitations described under "Risk Factors -- Shares Eligible for
Future Sale"), Rall-Folks will receive net proceeds from the sale of such stock
equal to the Rall-Folks Purchase Price. If Rall-Folks receives less than such
amount, the Company has agreed to issue to Rall-Folks, at the option of
Rall-Folks, either: (i) the number of additional shares of Common Stock (the
"Second Rall-Folks Stock Payment") with an aggregate market value equal to the
difference between the Rall-Folks Purchase Price and the net amount received by
Rall-Folks from the sale of the Common Stock constituting the Stock Payment
(such difference is hereinafter referred to as the "Rall-Folks Price
Differential"); or (ii) a six-month promissory note with a principal amount
equal to the Rall-Folks Price Differential, interest at 11%, subordination
provisions identical to those contained in the Rall-Folks Notes. The market
value of the Second Rall-Folks Stock Payment will be based upon the average of
the per share closing sale price share of the Common Stock as reported on the
NMS for the three full trading days immediately preceding the date on which the
Company issues instructions to its transfer agent to issue the shares of Common
Stock constituting the Second Rall-Folks Stock Payment (such average closing
price is hereinafter referred to as the "Resale Price" with respect to such
shares).
The Company has agreed that, if Rall-Folks elects to take additional shares
of Common Stock, the Company will promptly prepare and file a registration
statement (a "Resale Registration Statement") under federal and state securities
laws for the resale of such shares by Rall-Folks. If the proceeds of such sales
are not at least equal to the Rall-Folks Price Differential, the entire
procedure as described above will be repeated until Rall-Folks has received net
proceeds from the sale of Common Stock equal to the Rall-Folks Purchase Price.
The Company has further agreed that, if it issues a note to Rall-Folks in
payment of a Rall-Folks Price Differential, it will enter into an agreement with
Rall-Folks substantially identical to the Rall-Folks Agreement pursuant to which
the Company will agree to issue to Rall-Folks, following approval of such
agreement by the stockholders of Rall-Folks and the satisfaction or waiver of
all conditions precedent to such issuance, additional shares of Common Stock in
payment of such note, which Common Stock will be registered by the Company in a
registration statement prior to its issuance, provided that such registration is
permitted under the rules of the Commission. If such registration is not
permitted, the Company has agreed to register the sale by Rall-Folks of such
additional shares under federal and state securities laws. The Company will pay
all expenses of all registrations of Common Stock under the Rall-Folks
Agreement, other than the expenses of counsel of Rall-Folks.
The foregoing notwithstanding, the Company has the option at any time to
deliver cash to Rall-Folks in lieu of additional shares in order to pay any
Rall-Folks Price Differential. Under the Rall-Folks Agreement,
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<PAGE> 30
the Company may, at any time, require Rall-Folks, either to, at Rall-Folks'
option, (i) sell back to the Company all or any portion of the shares of Common
Stock issued to Rall-Folks under the Rall-Folks Agreement at their Resale Price
or (ii) terminate any future price protection for shares of Common Stock
retained by Rall-Folks.
Under the Rall-Folks Agreement, the Company is obligated to pay to
Rall-Folks in cash an amount each quarter equal to 2.5% of the value of the
Common Stock held by it on such date (such value being deemed to be the
Rall-Folks Purchase Price less the net proceeds prior from the sale of Common
Stock issued under the Rall-Folks Agreement). The Company was required to pay
Rall-Folks $100,000 on the execution of the May 1997 amendment to the Rall-Folks
Agreement and $100,000 per month commencing July 15, 1997 (which amounts reduced
the outstanding principal amount of the Rall-Folks Notes) until the registration
statement with respect to the Rall-Folks Agreement was declared effective. An
aggregate of $ was paid to Rall-Folks pursuant to such provision
before such registration statement was declared effective on ,
1997.
RDG Note. On August 3, 1995, the Company entered into a purchase agreement
(as amended in October 1995, April 1996 and June 1997, the "RDG Agreement") with
RDG pursuant to which the Company agreed to issue shares of its Common Stock and
a warrant in exchange for and in complete satisfaction of the RDG Note. The
total amount of principal and accrued interest outstanding under the RDG Note
was $1,499,364 million as of July 17, 1997. The Company is paying interest on
the RDG Note on a current basis at the rate of 12% per annum. RDG received the
RDG Note from the Company in May 1994 as partial consideration for its sale to
the Company of nine Rally's double drive through restaurants in the Miami,
Florida area. The RDG Note is unsecured and fully subordinated to the Restated
Credit Agreement.
The RDG Note was initially due on August 4, 1995. The term of the RDG Note
has been extended until the earlier of the closing of the RDG Agreement (which
is to occur on or prior to November 25, 1997), or until approximately one month
after the termination of the RDG Agreement in accordance with its terms. The
acquisition of the RDG Note is contingent upon certain conditions, including
approval of the RDG Agreement by the stockholders of RDG. In the event the
stockholders of RDG do not approve the transaction within 30 days after the
registration statement relating thereto is declared effective, the term of the
RDG Note is to be extended one year from the earlier of the date of the RDG
stockholders' meeting and the date which is 30 days after the effectiveness of
such registration statement.
In partial consideration of the transfer of the RDG Note to the Company,
the Company will deliver to RDG shares of Common Stock with a value equal to the
sum of (i) the outstanding balance due under the RDG Note on the closing date
and (ii) $10,000 (being the estimated legal expenses of RDG to be incurred in
connection with the registration of the Common Stock) (the "RDG Purchase
Price"). The number of shares to be issued (the "RDG Stock Payment") will be
equal to the amount determined by dividing the RDG Purchase Price by the average
of the per share closing sale price of the Common Stock as reported on the NMS
for the ten full trading days ending on the third business day immediately
preceding the closing date (such average closing price hereinafter referred to
as the "Average Closing Price").
The Company has guaranteed that if RDG sells all of the Common Stock issued
for the RDG Note in a reasonably prompt manner (subject to certain limitations
described below), RDG will receive net proceeds from the sale of such stock
equal to at least 80% of the RDG Purchase Price (such amount is hereinafter
referred to as the "Guaranteed Purchase Price"). If RDG receives less than such
amount, the Company will issue to RDG additional shares of Common Stock with a
value equal to the difference between the Guaranteed Purchase Price and the
aggregate net proceeds received from the sale of the Common Stock constituting
the RDG Stock Payment (such difference is hereinafter referred to as the
"Initial Price Differential"). The number of shares to be issued (the "Second
RDG Stock Payment") will be equal to the amount determined by dividing the
Initial Price Differential by the arithmetic average of the per share closing
sale price of the Common Stock as reported on the NMS for the ten full trading
days immediately preceding the date on which the Company issues instructions to
its transfer agent to issue such additional shares (such average closing sale
price being referred to hereinafter as the "Resale Price" with respect to such
shares).
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<PAGE> 31
The Company will promptly prepare and file a registration statement (a
"Resale Registration Statement") under federal and state securities laws for the
resale of the shares constituting the Second RDG Stock Payment. In the event
that the aggregate net proceeds from the sale of such shares is less than the
Initial Price Differential, the Company will issue to RDG additional shares of
Common Stock with a value equal to the difference between the Guaranteed
Purchase Price and the aggregate net proceeds received from the sale of the
Common Stock constituting the RDG Stock Payment and the Second RDG Stock Payment
(such difference is hereinafter referred to as the "Second Price Differential"),
as provided above with respect to the Initial Price Differential. Subject to the
same conditions and limitations as apply to the first Resale Registration
Statement and RDG's sales of stock thereunder, the Company will promptly
register such additional shares under a new Resale Registration Statement and
RDG may sell the same. The Company and RDG will continue this process until such
time as there is no Price Differential realized by RDG on the sale of any batch
of Common Stock issued in payment of a Price Differential on a previous batch of
Common Stock. The Company will pay all expenses of such registration, other than
the expenses of counsel for RDG.
The foregoing notwithstanding, the Company has the option at any time to
deliver cash to RDG in lieu of additional shares in order to pay any Price
Differential. In the event that RDG should receive net proceeds from the sale of
all Common Stock issued hereunder in excess of the Guaranteed Purchase Price, or
in the event that once RDG has received net proceeds equal to such amount it
still holds shares delivered by the Company in connection with the payment of
the Guaranteed Purchase Price, then RDG shall be liable to the Company for the
excess net proceeds and the excess shares of Common Stock, and shall promptly
pay the same over to the Company. Under the Agreement, the Company may, at any
time, require RDG, at RDG's option, to sell back to the Company any shares of
Common Stock issued to RDG under the Agreement at their Resale Price or
terminate any future price protection for such shares. In such event, RDG would
have the right to resell to the Company a portion of any such shares and to
retain the remainder, which remaining shares would not have any future price
protection; however, RDG would not be liable to the Company for any additional
funds received upon the sale of such shares in excess of their Resale Price.
As further consideration for the transfer of the RDG Note to the Company,
the Company agreed to issue RDG a warrant (the "Warrant") for the purchase of
120,000 shares of Common Stock at a price equal to the average closing sale
price of the Common Stock for the ten full trading days ending on the third
business day immediately preceding the closing date (such price is referred to a
the "Average Closing Price"); however, in the event that the average closing
price of the Common Stock for the 90 day period after the closing date is less
than the Average Closing Price, the purchase price for the Common Stock under
the Warrant will be changed on the 91st day after the closing date to the
average closing price for such 90 day period. The Warrant will be exercisable at
any time within five years after the closing date.
Upon the request of RDG (or, in the event that the Warrant is distributed
to the stockholders of RDG upon the dissolution of RDG, upon the request of a
majority in interest of the stockholders of RDG), at any time after June 1,
1996, and prior to the fifth anniversary of the closing date, the Company will
promptly prepare and file a registration statement under which the shares of
Common Stock to be issued upon the exercise of the Warrant will be registered
(the "Warrant Share Registration Statement"). The Company will pay all expenses
related to such registration, except that RDG (or the RDG stockholders) shall
bear the expense of any fees of RDG's (or the stockholders') advisors, including
legal counsel. The Warrant Share Registration Statement will be kept effective
for a period of 10 days, during which time RDG (or the stockholders of RDG, in
the event that the Warrant has been distributed by RDG) will have the
opportunity to purchase Common Stock pursuant to the terms of the Warrant. Prior
to such time, or thereafter, Common Stock may be purchased pursuant to the
warrant in private, unregistered transactions, provided an exemption from
registration under the Securities Act is available.
If, and only if, the Commission will not permit the registration of the
shares of Common Stock to be issued upon the exercise of the Warrant, upon the
request of RDG (or, in the event that the Warrant is distributed to the
stockholders of RDG upon the dissolution of RDG, upon the request of a majority
in interest of the stockholders of RDG), at any time after June 1, 1996, and
prior to the fifth anniversary of the closing date, the Company will promptly
prepare and file a registration statement (a "Warrant Share Resale Registration
Statement") under which the Company shall register the shares of Common Stock
issued prior
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<PAGE> 32
to or at such time pursuant to the Warrant, subject to the Company's ability to
delay filing under certain conditions set forth in the Agreement. The Company
will use its commercially reasonable best efforts to keep the Warrant Share
Resale Registration Statement effective for 90 days, subject to the Company's
ability to suspend (and later recontinue) sales under certain conditions set
forth in the RDG Agreement.
The Company is obligated to pay to it in cash an amount each quarter equal
to 2.5% of the value of the Common Stock held by it on such date (such value
being deemed to be the RDG Purchase Price less the net proceeds previously
received from the sale of Common Stock issued under the RDG Agreement). The
Company was required to pay RDG $100,000 on the execution of the June 1997
amendment to the RDG Agreement and $100,000 per month commencing July 15, 1997
(which amounts reduced the outstanding principal amount of the RDG Note) until
the registration statement with respect to the RDG Agreement was declared
effective. An aggregate of $ was paid to RDG pursuant to such provision
before such registration statement was declared effective on , 1997.
NTDT Note. On April 11, 1996, the Company entered into an agreement with
NTDT pursuant to which the Company was to issue shares of Common Stock to NTDT
in blocks of 200,000 shares each, valued at the closing price of the Common
Stock on the day prior to the date they were delivered to NTDT, and the amount
outstanding under the NTDT Note was to be reduced by the value of the stock so
delivered to NTDT. Pursuant to the terms of the NTDT Agreement, as amended and
restated, the term of the NTDT Note has been extended to the earlier of the
closing of the NTDT Agreement or November 16, 1997, and the Company has agreed
to purchase the NTDT Note for the NTDT Purchase Price, i.e., the outstanding
principal amount of and accrued unpaid interest on the NTDT Note, payable in the
form of the New NTDT Notes. See "The Transaction" and "The Agreement."
Private Placement. On February 21, 1997, the Company completed a private
placement (the "Private Placement") of 8,771,929 shares of Common Stock and
87,719 shares of Preferred Stock. The Company received approximately $20 million
in proceeds from the Private Placement. The Company used the Private Placement
proceeds as follows: $8 million was utilized to reduce the principal balance due
under the Restated Credit Agreement; $2.5 million was utilized to repay the
Secondary Credit Line; $2.3 million was utilized to pay outstanding balances to
various key food and paper distributors; and the remaining amount was used
primarily to pay down outstanding balances due certain other vendors. The
reduction of the debt under the Restated Credit Agreement and the Secondary
Credit Line, both of which carry a 13% interest rate reduced the Company's
interest expense by more than $1.3 million annually. The Private Placement
purchase agreement requires that the Company submit to its shareholders for vote
at its 1997 Annual Meeting of Stockholders the conversion of the Preferred Stock
into Common Stock. The Company's stockholders approved such conversion at the
Annual Meeting of Stockholders held on August 6, 1997, and the Preferred Stock
was automatically converted into 9,383,118 shares of Common Stock.
Sales of Assets. In the fiscal year ended December 30, 1996, the Company
raised approximately $1.8 million from the sale of various of its assets to
third parties, including both personal and excess real property from closed or
undeveloped restaurant locations. Under the terms of the Loan Agreement and the
Restated Credit Agreement, approximately 50% of those sales proceeds were
utilized to reduce outstanding principal. The Company also received $3.5 million
in connection with the reduction of a note receivable which funds were generally
used to supplement working capital. During the first two quarters of 1997, the
Company sold eight parcels of excess real property and eight modular restaurant
packages, resulting in net proceeds to the Company of $2.8 million. As of June
16, 1997, the Company owned or leased approximately 42 parcels of excess real
property which it intends to continue to aggressively market to third parties,
and had an inventory of approximately 28 used modular restaurant packages which
it intends to continue to aggressively market to franchisees and third parties.
There can be no assurance that the Company will be successful in disposing of
these assets. Of the proceeds from the sale of such assets, 50% must be used to
reduce the principal balance under the Restated Credit Agreement.
Working Capital. The Company had negative working capital of $16.2 million
at June 16, 1997 (determined by subtracting current liabilities from current
assets). It is anticipated that the Company will continue to have negative
working capital since approximately 86.7% of the Company's assets are long-term
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<PAGE> 33
(property, equipment, and intangibles), and since all operating trade payables,
accrued expenses, and property and equipment payables are current liabilities of
the Company. The Company has not reported a profit for any quarter since
September 1994.
The Company currently does not have significant development plans for
additional Company restaurants during 1997.
The Company implemented aggressive programs at the beginning of fiscal year
1997 designed to improve food, paper and labor costs in the restaurants. These
costs totalled 63.6% of net restaurant revenues in the second quarter of 1997,
compared to 72.1% of net restaurant revenues in fiscal 1996 despite an 11.5%
decrease in Company-owned same store sales in the second quarter of 1997 as
compared to the second quarter of the prior year. The Company also reduced the
corporate and regional staff by 32 employees in the beginning of fiscal year
1997. Overall, the Company believes fundamental steps have been taken to improve
the Company's profitability, but there can be no assurance that it will be able
to do so. Management believes that cash flows generated from operations and the
Private Placement should allow the Company to meet its financial obligations and
to pay operating expenses in fiscal year 1997. The Company must, however, also
successfully consummate the purchase of the Notes as described above. If the
Company is unable to consummate one or more of these transactions, and if the
Company is thereafter unable to reach some other arrangements with Rall-Folks,
RDG or NTDT, as the case may be, this will result in obligations to repay the
Notes, and the Company may default under the terms of the Restated Credit
Agreement.
The Company's prior operating results are not necessarily indicative of
future results. The Company's future operating results may be affected by a
number of factors, including: uncertainties related to the general economy;
competition; costs of food and labor; the Company's ability to obtain adequate
capital and to continue to lease or buy successful sites and construct new
restaurants; and the Company's ability to locate capable franchisees. The price
of the Company's Common Stock can be affected by the all of these factors.
Additionally, any shortfall in revenue or earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's Common Stock in a given period. See "Risk
Factors -- Continued Listing on NASDAQ National Market."
SFAS 121. The Company must examine its assets for potential impairment
where circumstances indicate that such impairment may exist, in accordance with
Generally Accepted Accounting Principles and the SFAS 121. As a retailer, the
Company believes such examination requires the operations and store level
economics of individual restaurants be evaluated for potential impairment. The
Company recorded significant write-downs of its assets in the fourth quarter of
fiscal year 1995 and during fiscal year 1996 pursuant to SFAS 121. No assurance
can be given that even an overall return to profitability will preclude the
write-down of assets associated with the operation of an individual restaurant
or restaurants in the future.
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THE TRANSACTION
PURCHASE OF THE NTDT NOTE
Pursuant to the NTDT Agreement, the Company has agreed to acquire the NTDT
Note using the New NTDT Notes which are convertible into shares of the Company's
Common Stock. The aggregate amount of principal and interest due under the NTDT
Note is $1,031,380. The Company is paying interest on the NTDT Note, at the rate
of 18% per annum, on a current basis.
The NTDT Note was initially due on April 30, 1996. The term of the NTDT
Note has been extended until the earlier of the closing of the NTDT Agreement or
November 16, 1997. The acquisition of the NTDT Note is contingent upon certain
conditions, including approval of the NTDT Agreement by the partners of NTDT. If
the partners of NTDT do not approve the NTDT Agreement within 30 days of receipt
of notice of the effectiveness of the Registration Statement, the term of the
NTDT Note is to be extended until December 31, 1998 and the interest rate is to
be reduced to 12% per annum.
NTDT received the NTDT Note from the Company in March 1995 as partial
consideration for two Checkers restaurants in the Nashville, Tennessee area. The
New NTDT Notes will be due and payable on December 31, 1998, will bear interest
at the rate of 18% per annum, payable monthly, and will be convertible into
Common Stock, computed by dividing the principal of the New NTDT Notes being
converted by the average per share closing sale price of the Common Stock on the
NMS for the three full trading days ending on the business day immediately
preceding the date on which NTDT delivers a notice of conversion to the Company.
The Company has the right to pay NTDT cash in lieu of issuing shares of Common
Stock upon receipt of a notice of conversion. The Company has agreed to pay any
and all taxes that may be payable as a result of the conversion of the New NTDT
Notes (other than certain transfer taxes). The NTDT Note is, and the New NTDT
Notes will be, fully subordinated to the Restated Credit Agreement and secured
by the property acquired upon issuance of the NTDT Note.
The Company has guaranteed that if NTDT sells all of the Common Stock
issuable upon conversion of the New NTDT Notes in a reasonably prompt manner
(subject to limitations described below), NTDT will receive net proceeds from
such sale equal to the NTDT Purchase Price. If NTDT receives less than such
amount, the Company will issue additional shares of Common Stock (the "Stock
Payment") with an aggregate market value equal to the difference between the
NTDT Purchase Price and the net amount received by NTDT from the sale of the
Common Stock received upon conversion of the New NTDT Notes (such difference is
hereinafter referred to as the "Price Differential"). The number of shares of
Common Stock constituting the Stock Payment will be determined by dividing the
Price Differential by the average of the per share closing sale price of the
Common Stock as reported on the NMS for the three full trading days immediately
preceding the date on which the Company issues instructions to its transfer
agent to issue the shares of Common Stock constituting the Stock Payment (such
average closing price is hereinafter referred to as the "Resale Price" with
respect to such shares.)
The Company has agreed that it will promptly prepare and file a
registration statement (a "Resale Registration Statement") under federal and
state securities laws for the resale by NTDT of the shares of Common Stock
constituting the Stock Payment. If the proceeds of such sales are not at least
equal to the Price Differential, the entire procedure as described above will be
repeated until NTDT has received net proceeds from the sale of Common Stock
equal to the NTDT Purchase Price. The Company has the right to deliver cash in
lieu of the Stock Payment in order to pay any Price Differential.
Under the NTDT Agreement, the Company is obligated to pay NTDT in cash an
amount each month equal to 18% of the value of (i) the shares of Common Stock
received upon conversion of the New NTDT Notes and held by it on such date (such
value being deemed to be the applicable Conversion Price for such shares of
Common Stock) and (ii) shares of Common Stock received as a Stock Payment and
held by it on such date (such value being deemed to be the Resale Price for such
shares of Common Stock).
The Company was required to pay NTDT $100,000 in July 1997 on execution of
the NTDT Agreement and $100,000 on the 15th day of each month thereafter (which
amounts reduced the outstanding principal
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<PAGE> 35
amount of the NTDT Note) until the registration statement with respect to the
NTDT Agreement was declared effective. An aggregate of $ was paid to
NTDT pursuant to such provision before such registration statement was declared
effective on , 1997.
In order to promote an orderly distribution of the Common Stock to be
issued to and sold by NTDT (and certain other persons holding notes of the
Company which the Company is repaying in shares of Common Stock (see "Risk
Factors -- Shares Eligible for Future Sale")), the Company has imposed the
following limits on the sales that may be made by NTDT, without the Company's
prior consent: (i) NTDT may sell not more than 50,000 shares of Common Stock per
week; and (ii) NTDT may sell not more than 25,000 shares in any one day;
provided that it may sell additional shares in excess of such limits if such
additional shares are sold at a price higher than the lowest then current bid
price for the Common Stock.
BACKGROUND OF AND REASONS FOR THE ACQUISITION OF THE NTDT NOTE
The Company. The NTDT Note was issued in March 1995 in connection with the
acquisition by the Company of two Checkers restaurants in the Nashville,
Tennessee area and was initially due on April 30, 1996. Pursuant to the NTDT
Agreement, the NTDT Note was initially to be repaid by the Company in exchange
for Common Stock issued in increments of 200,000 shares. Such repayment was to
be completed on or before April 30, 1996. The Company began negotiating with
NTDT in early April 1996 for a complete settlement of the NTDT Note by issuance
of shares of Common Stock and continued such negotiations until an agreement was
executed on April 11, 1996. The consummation of the repayment of the NTDT Note
was delayed due to the Company's negotiations with various investor groups
during 1996 concerning the restructure of the Company's debt. The agreement with
NTDT was amended and restated in July 1997 to provide for the issuance of the
New NTDT Notes, which are convertible into Common Stock, and the other terms
described herein, including a termination date for the acquisition of the NTDT
Note of November 15, 1997. However, if the partners of NTDT fail to approve the
NTDT Agreement within 30 days after the date NTDT receives notice of the
effectiveness of the Registration Statement of which this Prospectus is a part,
the term of the NTDT Note will be extended to December 31, 1998, and the
interest rate will be reduced to 12% per annum. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
NTDT. The following information has been provided by the management of
NTDT.
It became apparent to NTDT that the Company would not be able to pay the
NTDT Note in full on the maturity date. Given the subordinated position of the
NTDT Note and the terms of the Company's senior indebtedness, the NTDT Agreement
appeared to NTDT to be the best alternative for NTDT to get paid over a short
period of time, without further legal costs or management time invested.
DISSENTERS' RIGHTS; SOLICITATION OF PROXIES, CONSENTS OR AUTHORIZATIONS
The following information has been provided by the management of NTDT.
The managing general partner of NTDT has called a meeting of the partners
of NTDT to consider the approval of the NTDT Agreement and the Transaction. No
proxies, consents or authorization will be solicited from any partner of NTDT in
connection with such meeting or approval. Partners of NTDT will have to attend
the meeting in person or by proxy in order to vote on the approval of the NTDT
Agreement and the Transaction. The affirmative vote of a majority of the
outstanding partnership interests of NTDT will be necessary to approve the NTDT
Agreement and the Transaction. Any person appearing at the meeting as a proxy
for a partner of NTDT will be required to present a written proxy power meeting
the requirements of Tennessee law in order to vote such partners' interests at
the meeting. The partners of NTDT will have no dissenters, rights in connection
with the Transaction.
ACCOUNTING TREATMENT
The Company will account for the Transaction as a payment of the
liabilities represented by the NTDT Note, resulting in a reduction in the
liabilities of the Company equal to the outstanding balance due under the
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<PAGE> 36
NTDT Note, and the sale of Common Stock for an amount equal to the NTDT Purchase
Price, resulting in an increase in stockholders' equity in an equal amount.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The receipt of the Common Stock issued on conversion of the New NTDT Notes
will be treated for federal income tax purposes as a repayment of the principal
due under the New NTDT Notes. Assuming that the tax basis of NTDT in the New
NTDT Notes is equal to the outstanding principal balance due under the New NTDT
Notes, there will be no income tax consequences resulting from the issuance of
Common Stock upon conversion of the New NTDT Notes. NTDT's tax basis in the
Common Stock constituting the Stock received upon conversion of the New NTDT
Notes will be equal to the NTDT Purchase Price.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Common Stock received by NTDT or the NTDT partners may be
resold by them only in transactions permitted by the resale provisions of Rule
145 promulgated under the Securities Act or as otherwise permitted under the
Securities Act. Rule 145 limits the amount of Common Stock that such persons may
sell during any three-month period and specifies certain other restrictions on
resale. Pursuant to the terms of the NTDT Agreement, the following limits have
been imposed on the sales that may be made by NTDT: (i) NTDT may sell not more
than 50,000 shares of Common Stock per week; and (ii) NTDT may sell not more
than 25,000 shares in any one day, provided that it may sell additional shares
in excess of such limits if such additional shares are sold at a price higher
than the lowest then current bid price for the Common Stock. See "The
Agreement -- Certain Covenants."
REGULATORY APPROVALS
Neither the Company nor NTDT is aware of any material federal or state
regulatory approvals which must be obtained in connection with the purchase and
sale of the Note, other than the continued effectiveness of the Registration
Statement under the Securities Act through the date of issuance of the shares of
the Common Stock to NTDT pursuant to the NTDT Agreement.
THE AGREEMENT
The following is a brief summary of certain terms of the NTDT Agreement,
which is attached to this Prospectus as Appendix A and incorporated herein by
this reference. The description of the terms of the NTDT Agreement and the
transactions contemplated therein are qualified in their entirety by reference
to the NTDT Agreement.
GENERAL
The NTDT Agreement provides that, following the satisfaction or waiver of
the conditions to the purchase of the NTDT Note, NTDT will transfer the NTDT
Notes to the Company in return for the New NTDT Notes in an aggregate principal
amount equal to the total amount of principal and accrued interest then
outstanding under the NTDT Note. See "The Transaction -- Purchase of the NTDT
Notes."
CLOSING DATE AND EFFECTIVE TIME
The NTDT Agreement provides that, if all other conditions to the purchase
have been satisfied or waived by all parties and the NTDT Agreement has not been
terminated according to its terms, the closing of the transfer of the NTDT Note
to the Company and the New NTDT Note to NTDT will be held on the third business
day following the date on which the partners of NTDT approve the NTDT Agreement
and the Transaction (the "Closing Date"), but no later than November 15, 1997.
The NTDT Agreement further provides that a meeting of such partners will be held
within 30 days after notice is delivered to NTDT of the effectiveness of the
Registration Statement of which this Prospectus is a part. If the partners of
NTDT fail to approve the NTDT Agreement within 30 days after effectiveness of
the Registration Statement, the term of
33
<PAGE> 37
the NTDT Note is to be extended to December 31, 1998 and the interest rate is to
be reduced to 12% per annum.
REPRESENTATIONS AND WARRANTIES
The NTDT Agreement contains various representations and warranties of NTDT
relating to, among other things: (a) organization and good standing of NTDT; (b)
NTDT's authority; (c) authorization and enforceability of the NTDT Agreement;
(d) title to the NTDT Note; (e) litigation and disputes relating to the NTDT
Note or the Transaction; and (f) the accuracy of information relating to NTDT
supplied in connection with the Registration Statement.
The NTDT Agreement also contains various representations and warranties by
the Company relating to, among other things: (a) its organization and good
standing; (b) corporate authority; (c) corporate authorization and
enforceability of the NTDT Agreement; (d) the capital structure of the Company;
(e) required consents; and (f) the accuracy of information concerning the
Company in the Registration Statement.
CERTAIN COVENANTS
Pursuant to the NTDT Agreement, NTDT has agreed to, among other things: (a)
refrain from any sale or pledge of the NTDT Note or any other action
inconsistent with its representations, warranties or obligations under the NTDT
Agreement; (b) extend the term of the NTDT Note until the earlier of the Closing
Date or November 15, 1997; provided, however, if the partners of NTDT fail to
approve the NTDT Agreement and the Transaction within 30 days after NTDT
receives actual notice that the Registration Statement, of which this Prospectus
is a part, has been declared effective by the Commission, the terms of the NTDT
Note shall be extended until December 31, 1998 and the interest rate thereon
shall be reduced to 12% per annum; (c) furnish such information concerning NTDT
as is required to be set forth in the Registration Statement for the Common
Stock or any other governmental filings; (d) call a meeting of its stockholders
to be held within 30 days after the date NTDT receives notice of the
effectiveness of the Registration Statement of which this Prospectus is a part
for the purpose of obtaining approval of the NTDT Agreement and the transactions
described therein; (e) either dissolve and wind up its affairs or otherwise
distribute the shares of the Common Stock received under the NTDT Agreement to
its partners within one year after the Closing Date; and (f) comply with
securities law requirements for all resales of the Common Stock. To insure that
such sales will be made in an orderly manner, NTDT has agreed that (i) it will
not sell more than 50,000 shares of Common Stock per week and (ii) it will not
sell more than 25,000 shares in any one day, provided that it may sell
additional shares in excess of such limits if such additional shares are sold at
a price higher than the lowest then current bid price for the Common Stock (on
an "uptick"). NTDT has further agreed that, upon the distribution of any of the
Common Stock to any partners of NTDT, it will cause such person to deliver an
agreement to the Company which will contain the covenants set forth in
subparagraph (f) above with a proportionate limitation on sales of Common Stock.
The NTDT Agreement also contains various covenants of the Company relating
to, among other things: (a) registration of the shares of Common Stock to be
issued for the NTDT Note; (b) preparation of the Registration Statement; (c)
issuance of additional notes and/or shares of Common Stock to NTDT under certain
circumstances to make up any differential between the NTDT Purchase Price for
the NTDT Note and the net proceeds from the sale of the Common Stock received by
NTDT; and (d) refrain from any activity or transaction inconsistent with any of
its representations, warranties and obligations under the NTDT Agreement.
Each of the Company and NTDT have also agreed, among other things: to (a)
maintain the confidentiality of all confidential information provided to it by
the other party; (b) cooperate and consult with the other party in the
preparation of the Registration Statement; and (c) use its best efforts to cause
the transactions contemplated by the NTDT Agreement to be consummated.
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CONDITIONS
The respective obligations of the Company and NTDT to effect the purchase
and sale of the NTDT Note are subject to the following conditions, among others:
(a) no order, decree or injunction enjoining or prohibiting the transactions
contemplated by the NTDT Agreement shall be in effect; (b) the partners of NTDT
shall have approved the purchase and sale of the NTDT Note pursuant to the terms
of the NTDT Agreement; and (c) the Registration Statement shall not be subject
to any stop order or any threatened stop order; and (d) the Closing Date shall
be on or before November 15, 1997 (collectively, the "Mutual Conditions").
In addition, the obligations of the Company to consummate the purchase of
the NTDT Note are subject to the following conditions, among others: (a) all of
the representations and warranties of NTDT shall be true and correct in all
material respects as of the Closing Date, as though made on the Closing Date
(subject to certain limitations); and (b) NTDT shall have performed in all
material respects its obligations under the NTDT Agreement (collectively, the
"Company Conditions").
The obligations of NTDT to consummate the sale of the NTDT Note are subject
to the following additional conditions, among others: (a) all of the
representations and warranties of the Company shall be true and correct in all
material respects as of the Closing Date, as though made on the Closing Date
(subject to certain limitations); (b) the Company shall have performed in all
material respects its obligations under the NTDT Agreement; and (c) there shall
have been no material adverse change in the financial condition, results of
operations, business or prospects of the Company and its subsidiaries, taken as
a whole, since January 2, 1996 (collectively, the "NTDT Conditions").
TERMINATION
The NTDT Agreement may be terminated at any time prior to the Closing Date:
(i) upon mutual written consent of the Company and NTDT; (ii) by the managing
general partners of NTDT if any NTDT Condition or Mutual Condition is not
satisfied or waived; (iii) by the Board of Directors of the Company if any of
the Company Conditions or the Mutual Conditions is not satisfied or waived; (iv)
by the managing general partner of NTDT if there is a breach of or failure by
the Company to perform in any material respect any of the representations,
warranties, commitments, covenants or conditions under the NTDT Agreement, which
breach or failure is not cured within five days after written notice thereof is
given to the Company; or (v) by the Board of Directors of the Company if there
is breach of or failure by NTDT to perform in any material respect any of the
representations, warranties, commitments, covenants or conditions under the NTDT
Agreement, which breach or failure is not cured within five days after written
notice thereof is give it to NTDT.
AMENDMENT AND WAIVER
Subject to applicable law, (a) the NTDT Agreement may be amended at any
time by the Company and NTDT, and (b) either party may extend the time for
performance of the obligations of the other party to the NTDT Agreement, waive
any inaccuracies in the representations and warranties of the other party
contained in the NTDT Agreement, waive compliance with any agreements or
conditions contained in the NTDT Agreement, or waive or modify performance of
any of the obligations of the other party under the NTDT Agreement.
INDEMNIFICATION
NTDT and the Company have each agreed to indemnify the other for all
claims, liabilities, obligations, losses, damages and expenses arising out of or
attributable to: (a) the breach of any of its warranties or the inaccuracy of
any of its representations contained in the NTDT Agreement or otherwise made or
given in writing in connection with the NTDT Agreement; (b) any failure of it to
perform or observe its respective covenants or conditions; or (c) claims arising
out of or based upon material misstatements in or omissions from the
Registration Statement or any Resale Registration Statement insofar as such
claims arise out of or are based upon written information provided by such party
for inclusion in the Registration Statement or any
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<PAGE> 39
Resale Registration Statement. In addition, the Company has agreed to indemnify
NTDT for any failure by the Company to comply with the provisions of the
Securities Act or any applicable state securities law in connection with the
registration of any of the Common Stock issued under the NTDT Agreement.
EXPENSES
The NTDT Agreement provides that each party shall pay all expenses incurred
by it in connection with the negotiation of the NTDT Agreement and the
consummation of the transactions contemplated therein, except that the Company
paid NTDT $10,000 upon execution of the amended and restated NTDT Agreement and
has agreed to pay all expenses relating to the preparation and filing of the
Registration Statement, any Resale Registration Statement and all NMS and state
securities law filings.
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<PAGE> 40
MARKET FOR COMMON STOCK
AND DIVIDENDS
MARKET INFORMATION
The Common Stock is traded on the NMS under the symbol CHKR. The following
table sets forth the high and low closing sale price of the Common Stock as
reported on the NMS for the periods indicated:
<TABLE>
<CAPTION>
1995 HIGH LOW
- ---- ----- -----
<S> <C> <C>
First Quarter............................................... $4.06 $1.88
Second Quarter.............................................. $2.81 $1.81
Third Quarter............................................... $3.25 $1.72
Fourth Quarter.............................................. $1.97 $0.92
1996
- ----
First Quarter............................................... $1.75 $1.19
Second Quarter.............................................. $1.50 $1.13
Third Quarter............................................... $1.25 $0.75
Fourth Quarter.............................................. $1.97 $0.78
1997
- ----
First Quarter............................................... $3.00 $1.69
Second Quarter.............................................. $1.84 $1.09
Third Quarter(1)............................................ $ $
</TABLE>
- ---------------
(1) Through , 1997.
The last reported per share sale price of the Common Stock as reported on
the NMS on , 1997 was . At July 16, 1997, the Company had
approximately 7,300 stockholders of record.
DIVIDENDS
Dividends are prohibited under the terms of the Restated Credit Agreement.
The Company has never paid or declared cash distributions or dividends (other
than the payment of cash in lieu of fractional shares in connection with its
stock splits). Any permitted future cash dividends will be determined by the
Board of Directors based on the Company's earnings, financial condition, capital
requirements and other relevant factors.
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<PAGE> 41
BUSINESS
INTRODUCTION
The Company develops, produces, owns, operates and franchises quick-service
"double drive-thru" restaurants under the name "Checkers(R)" (the
"Restaurants"). The Restaurants are designed to provide fast and efficient
automobile-oriented service incorporating a 1950's diner and art deco theme with
a highly visible, distinctive and uniform look that is intended to appeal to
customers of all ages. The Restaurants feature a limited menu of high quality
hamburgers, cheeseburgers and bacon cheeseburgers, specially seasoned french
fries, hot dogs, and chicken sandwiches, as well as related items such as soft
drinks and old fashioned premium milk shakes.
As of June 16, 1997, there were 480 Restaurants operating in the States of
Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana,
Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia,
Wisconsin, Washington D.C. and in Puerto Rico (233 Company-operated (including
14 joint ventured) and 247 franchised).
As of January 1, 1994, the Company changed from a calendar reporting year
ending on December 31st to a fiscal year which will generally end on the Monday
closest to December 31st. Each quarter consists of three 4-week periods, with
the exception of the fourth quarter which consists of four 4-week periods.
RESTAURANT DEVELOPMENT AND ACQUISITION ACTIVITIES
During 1996, the Company opened five Restaurants, acquired 18 Restaurants
and partnership interests in an additional nine Restaurants from franchisees,
sold or leased 15 Restaurants to franchisees and closed 27 Restaurants for a net
reduction of ten Company-operated Restaurants in 1996. Franchisees opened 25
Restaurants, acquired or leased 15 Restaurants from the Company, sold or
transferred 27 Restaurants to the Company and closed 24 Restaurants for a net
reduction of 11 franchisee-operated Restaurants in 1996. During the first two
quarters of 1997, the Company and its franchises experienced a net increase of
three Restaurants.
During 1996, the Company focused its efforts on existing operating markets
of highest market penetration ("Core Markets"). It is the Company's intent in
the near future to continue that focus and to grow only in its Core Markets
through acquisitions or new Restaurant openings. The Company will continue to
seek to expand through existing and new franchisees. From time to time, the
Company may close or sell additional Restaurants when determined by management
and the Board of Directors to be in the best interests of the Company.
Franchisees operated 247, or 51%, of the total Restaurants open at June 16,
1997. The Company's long-term strategy is for 60% to 65% of its Restaurants to
be operated by franchisees. Because of the Company's limited capital resources,
it will rely on franchisees for a larger portion of chain expansion to continue
market penetration. The inability for franchisees to obtain sufficient financing
capital on a timely basis may have a materially adverse effect on expansion
efforts.
On March 25, 1997, Checkers agreed in principle to a merger transaction
pursuant to which Rally's Hamburgers, Inc., a Delaware corporation ("Rally's"),
would have become a wholly-owned subsidiary of Checkers. Rally's, together with
its franchisees, operates approximately 471 double drive-thru hamburger
restaurants primarily in the midwestern United States. Negotiations with Rally's
were terminated in June 1997.
RESTAURANT OPERATIONS
Concept. The Company's operating concept includes: (i) offering a limited
menu to permit the maximum attention to quality and speed of preparation; (ii)
utilizing a distinctive Restaurant design that features a "double drive-thru"
concept, projects a uniform image and creates significant curb appeal; (iii)
providing fast service using a "double drive-thru" design for its Restaurants
and a computerized point-of-
38
<PAGE> 42
sale system that expedites the ordering and preparation process; and (iv) great
tasting quality food and drinks at a fair price.
Restaurant Locations. As of June 16, 1997, there were 233 Restaurants
owned and operated by the Company in 11 states and the District of Columbia
(including 14 Restaurants owned by partnerships in which the Company has
interests ranging from 10.55% to 65.83%) and 247 Restaurants operated by the
Company's franchisees in 20 States, the District of Columbia and Puerto Rico.
The following table sets forth the locations of such Restaurants.
COMPANY-OPERATED
(233 RESTAURANTS)
<TABLE>
<S> <C> <C>
Florida (137) Missouri (6) Kansas (2)
Georgia (38) Mississippi (5) Delaware (1)
Pennsylvania (13) Tennessee (2) New Jersey (4)
Alabama (12) Washington D.C. (1)
Illinois (12)
</TABLE>
FRANCHISED
(247 RESTAURANTS)
<TABLE>
<S> <C> <C>
Florida (56) Texas (9) Wisconsin (3)
Illinois (25) Maryland (14) New York (3)
Georgia (48) New Jersey (9) Puerto Rico (2)
Alabama (19) Tennessee (8) West Virginia (2)
North Carolina (15) Virginia (5) Missouri (1)
South Carolina (9) Indiana (3) Iowa (2)
Louisiana (9) Michigan (3) Mississippi (1)
Washington D.C. (1)
</TABLE>
Of these Restaurants, 30 were opened in 1996 (five Company-operated and 25
franchised), 12 of which included fully equipped manufactured modular buildings,
"Modular Restaurant Packages" ("MRPs"), produced by the Company and nine of
which included MRPs which were relocated from other sites, and eight were opened
in the first two quarters of 1997 (one Company-operated and seven franchised).
The Company currently expects approximately 30 additional Restaurants to be
opened in 1997 (primarily by franchisees) with substantially all of these
Restaurants to include MRPs relocated from closed sites. If either the Company
or the franchisee(s) are unable to obtain sufficient capital on a timely basis,
the Company's ability to achieve its 1997 expansion plans may be materially
adversely affected. The Company's growth strategy for the next two years is to
focus on the controlled development of additional franchised and
Company-operated Restaurants primarily in its existing Core Markets and to
further penetrate markets currently under development by franchisees, including
select international markets. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Site Selection. The Company believes that the location of a Restaurant is
critical to its success. Management inspects and approves each potential
Restaurant site prior to final selection of the site. In evaluating particular
sites, the Company considers various factors including traffic count, speed of
traffic, convenience of access, size and configuration, demographics and density
of population, visibility and cost. The Company also reviews competition and the
sales and traffic counts of national and regional chain Restaurants operating in
the area. Approximately 84% of Company-operated Restaurants are located on
leased land and the Company intends to continue to use leased sites where
possible. The Company believes that the use of the MRP provides the Company and
its franchisees with additional flexibility in the size, control and location of
sites.
Restaurant Design and Service. The Restaurants are built to
Company-approved specifications as to size, interior and exterior decor,
equipment, fixtures, furnishings, signs, parking and site improvements. The
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<PAGE> 43
Restaurants have a highly visible, distinctive and uniform look that is intended
to appeal to customers of all ages. The Restaurants are less than one-fourth the
size of the typical Restaurants of the four largest fast food hamburger chains
(generally 760 to 980 sq. ft.) and require approximately one-third to one-half
the land area (approximately 18,000 to 25,000 square feet). Substantially all of
the Restaurants consist of MRP's produced and installed by the Company. Prior to
February 15, 1994, the MRP's were produced and installed by Champion Modular
Restaurant Company, Inc., a Florida corporation ("Champion") and wholly-owned
subsidiary of the Company. Champion was merged with and into the Company
effective February 15, 1994. The Company believes that utilization of a modular
Restaurant building generally costs less than comparably built Restaurants using
conventional, on-site construction methods.
The Company's standard Restaurant is designed around a 1950's diner and art
deco theme with the use of white and black tile in a checkerboard motif, glass
block corners, a protective drive-thru cover on each side of the Restaurant
supported by red aluminum columns piped with white neon lights and a wide
stainless steel band piped with red neon lights that wraps around the Restaurant
as part of the exterior decor. All Restaurants utilize a "double drive-thru"
concept that permits simultaneous service of two automobiles from opposite sides
of the Restaurant. Although a substantial proportion of the Company's sales are
made through its drive-thru windows, service is also available through walk-up
windows. While the Restaurants do not have an interior dining area, most have
parking and a patio for outdoor eating. The patios contain canopy tables and
benches, are well landscaped and have outside music in order to create an
attractive and "fun" eating experience. Although each sandwich is made-to-order,
the Company's objective is to serve customers within 30 seconds of their arrival
at the drive-thru window. Each Restaurant has a computerized point-of-sale
system which displays each individual item ordered on a monitor in front of the
food and drink preparers. This enables the preparers to begin filling an order
before the order is completed and totaled and thereby increases the speed of
service to the customer and the opportunity of increasing sales per hour,
provides better inventory and labor costs control and permits the monitoring of
sales volumes and product utilization. The Restaurants are generally open from
12 to 15 hours per day, seven days a week, for lunch, dinner and late-night
snacks and meals. Operational enhancements are being implemented to facilitate
product delivery with reduced overhead costs.
Restaurant Development Costs. During the two fiscal years ended December
30, 1996, the average cost of opening a Company-operated Restaurant (exclusive
of land costs) utilizing an MRP was $424,000 which included modular building
costs, fixtures, equipment and signage costs, site improvement costs and various
soft costs (e.g., engineering and permit fees). This average dropped 37.5% from
1994 due to the use of used MRP's in 1995 and 1996. Future costs, after all
remaining used MRP's are relocated, may be more consistent with that of prior
years. During 1995 and 1996, there were no land acquisitions. The Company
believes that utilization of MRP's generally costs less than comparably built
Restaurants using conventional, on-site construction methods.
Menu. The menu of a Restaurant includes hamburgers, cheeseburgers and
bacon cheeseburgers, chicken, grilled chicken, hot dogs and deluxe chili dogs
and specially seasoned french fries, as well as related items such as soft
drinks, old fashioned premium milk shakes and apple nuggets. The menu is
designed to present a limited number of selections to permit the greatest
attention to quality, taste and speed of service. The Company is engaged in
product development research and seeks to enhance the variety offered to
consumers from time to time without substantially expanding the limited menu. In
1996, the Company and various franchise restaurants conducted a test of the
Company's proprietary L.A. Mex Mexican brand. The Company has decided to
discontinue the test in the majority of test units.
Supplies. The Company and its franchisees purchase their food, beverages
and supplies from Company-approved suppliers. All products must meet standards
and specifications set by the Company. Management constantly monitors the
quality of the food, beverages and supplies provided to the Restaurants. The
Company has been successful in negotiating price concessions from suppliers for
bulk purchases of food and paper supplies by the Restaurants. The Company
believes that its continued efforts over time have achieved cost savings,
improved food quality and consistency and helped decrease volatility of food and
supply costs for the Restaurants. All essential food and beverage products are
available or, upon short notice, could be made available from alternate
qualified suppliers. Among other factors, the Company's profitability is
dependent
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upon its ability to anticipate and react to changes in food costs. Various
factors beyond the Company's control, such as climate changes and adverse
weather conditions, may affect food costs.
Management and Employees. Each Company-operated Restaurant employs an
average of approximately 20 hourly employees, many of whom work part-time on
various shifts. The management staff of a typical Restaurant operated by the
Company consists of a general manager, one assistant manager and a shift
manager. The Company has an incentive compensation program for store managers
that provides the store managers with a quarterly bonus based upon the
achievement of certain defined goals. A Restaurant general manager is generally
required to have prior Restaurant management experience, preferably within the
fast food industry, and reports directly to a market manager. The market manager
typically has responsibility for eight to twelve Restaurants.
Supervision and Training. The Company requires each franchisee and
Restaurant manager to attend a comprehensive training program of both classroom
and in-store training. The program was developed by the Company to enhance
consistency of Restaurant operations and is considered by management as an
important step in operating a successful Restaurant. During this program, the
attendees are taught certain basic elements that the Company believes are vital
to the Company's operations and are provided with a complete operations manual,
together with training aids designed as references to guide and assist in the
day-to-day operations. In addition, hands-on experience is incorporated into the
program by requiring each attendee, prior to completion of the training course,
to work in and eventually manage an existing Company-operated Restaurant. After
a Restaurant is opened, the Company continues to monitor the operations of both
franchised and Company-operated Restaurants to assist in the consistency and
uniformity of operation.
Advertising and Promotion. The Company communicates with its customers
using several different methods at the store level. Menuboards, value meal
extender cards, pole banners and the readerboards are all utilized in tandem to
present a simple, unified, coherent message to the customers. Outdoor billboards
and radio commercials are used to reach customers at the critical time when they
are making their purchase decisions. As of June 16, 1997, the Company and its
franchisees had five active advertising co-ops covering 217 restaurants. The
Company requires franchisees to spend a minimum of 4% of gross sales on
marketing their restaurant which includes a combination of local store
marketing, co-op advertising and other advertising. In addition, each Company
and franchise restaurant pays into a National Production Fund that provides
broadcast, creative and Point of Purchase materials for each promotion. Ongoing
consumer research is utilized to track attitudes, awareness and market share of
not only Checkers' customers, but also of its major competitor's customers as
well. In addition, customer focus groups and sensory panels are conducted in the
Company's Core Markets to provide both qualitative and quantitative data. This
research data is vital to better understand the Company's customers for building
both short and long-term marketing strategies.
Restaurant Reporting. Each Company-operated Restaurant has a computerized
point-of-sale system coupled with a back office computer. With this system,
management is able to monitor sales, labor and food costs, customer counts and
other pertinent information. This information allows management to better
control labor utilization, inventories and operating costs. Each system at
Company-operated Restaurants is polled daily by a computer at the principal
offices of the Company.
Joint Venture Restaurants. As of June 16, 1997, there were 14 Restaurants
owned by 12 separate general and limited partnerships in which the Company owns
general and limited partnership interests ranging from 10.55% to 65.83%, with
other parties owning the remaining interests (the "Joint Venture Restaurants").
The Company is the managing partner of 13 of the 14 Joint Venture Restaurants,
and in 12 of those Joint Venture Restaurants the Company receives a fee for such
services of 1% to 2.5% of gross sales. All of the Joint Venture Restaurants pay
the standard royalty fee of 4% of gross sales. The agreements for four of the
Joint Venture Restaurants (excluding Illinois partnerships) in which the Company
is the managing partner are terminable through a procedure whereby the
initiating party sets a price for the interest in the joint venture and the
other party must elect either to sell its interest in the joint venture or
purchase the initiating party's interest at such price. Some, but not all of the
partnership agreements also contain the right of the partnership to acquire a
deceased individual partner's interest at the fair market value thereof based
upon a defined
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formula set forth in the agreement. None of these partnerships have been granted
area development agreements. See "Business -- Litigation."
Inflation. The Company does not believe inflation has had a material
impact on earnings during the past three years. Substantial increases in costs
could have a significant impact on the Company and the industry. If operating
expenses increase, management believes it can recover increased costs by
increasing prices to the extent deemed advisable considering competition.
Seasonality. The seasonality of Restaurant sales due to consumer spending
habits can be significantly affected by the timing of advertising, competitive
market conditions and weather related events. While certain quarters can be
stronger, or weaker, for Restaurant sales when compared to other quarters, there
is no predominant pattern.
FRANCHISE OPERATIONS
Strategy. In addition to the acquisition and development of additional
Company-operated Restaurants, the Company encourages controlled development of
franchised Restaurants in its existing markets as well as in certain additional
states. The primary criteria considered by the Company in the selection, review
and approval of prospective franchisees are the availability of adequate capital
to open and operate the number of Restaurants franchised and prior experience in
operating fast food Restaurants. Franchisees operated 249, or 52%, of the total
Restaurants open at June 16, 1997. The Company has acquired and sold, and may in
the future acquire or sell, Restaurants from and to franchisees when the Company
believes it to be in its best interests to do so. In the future, the Company's
success will continue to be dependent upon its franchisees and the manner in
which they operate and develop their Restaurants to promote and develop the
Checkers concept and its reputation for quality and speed of service. Although
the Company has established criteria to evaluate prospective franchisees, there
can be no assurance that franchisees will have the business abilities or access
to financial resources necessary to open the number of Restaurants the Company
and the franchisees currently anticipate to be opened in 1997 or that the
franchisees will successfully develop or operate Restaurants in their franchise
areas in a manner consistent with the Company's concepts and standards.
As a result of inquiries concerning international development, the Company
may develop a limited number of international markets and has begun the process
of registering its trademarks in various foreign countries. The most likely
format for international development is through the issuance of master franchise
agreements and/or joint venture agreements. The terms and conditions of these
agreements may vary from the standard Area Development Agreement and Franchise
Agreement in order to comply with laws and customs different from those of the
United States.
Franchisee Support Services. The Company maintains a staff of well-trained
and experienced Restaurant operations personnel whose primary responsibilities
are to help train and assist franchisees in opening new Restaurants and to
monitor the operations of existing Restaurants. These services are provided as
part of the Company's franchise program. Upon the opening of a new franchised
Restaurant by a new franchisee, the Company typically sends a Restaurant team to
the Restaurant to assist the franchisee during the first four days that the
Restaurant is open. This team works in the Restaurant to monitor compliance with
the Company's standards as to quality of product and speed of service. In
addition, the team provides on-site training of all Restaurant personnel. This
training is in addition to the training provided to the franchisee and the
franchisee's management team described under "Restaurant
Operations -- Supervision and Training" above. The Company also employs
Franchise Business Consultants ("FBCs"), who have been fully trained by the
Company to assist franchisees in implementing the operating procedures and
policies of the Company once a Restaurant is open. As part of these services,
the FBC rates the Restaurant's hospitality, food quality, speed of service,
cleanliness and maintenance of facilities. The franchisees receive a written
report of the FBC's findings and, if any deficiencies are noted, recommended
procedures to correct such deficiencies.
The Company also provides site development and construction support
services to its franchisees. All sites and site plans are submitted to the
Company for its review prior to construction. These plans include information
detailing building location, internal traffic patterns and curb cuts, location
of utilities, walkways, driveways, signs and parking lots and a complete
landscape plan. The Company's construction personnel also
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visit the site at least once during construction to meet with the franchisee's
site contractor and to review construction standards.
Franchise Agreements. The Unit Franchise Agreement grants to the
franchisee an exclusive license at a specified location to operate a Restaurant
in accordance with the Checkers(R) system and to utilize the Company's
trademarks, service marks and other rights of the Company relating to the sale
of its menu items. The term of the current Unit Franchise Agreement is generally
20 years. Upon expiration of a Unit Franchise Agreement, the franchisee will be
entitled to acquire a successor franchise for the Restaurants on the terms and
conditions of the Company's then current form of Unit Franchise Agreement if the
franchisee remains in compliance with the Unit Franchise Agreement throughout
its term and if certain other conditions are met (including the payment of a
$5,000 renewal fee).
In some instances, the Company grants to the franchisee the right to
develop and open a specified number of Restaurants within a limited period of
time and in a defined geographic area (the "Franchised Area") and thereafter to
operate each Restaurant in accordance with the terms and conditions of a Unit
Franchise Agreement. In that event, the franchisee ordinarily signs two
agreements, an Area Development Agreement and a Unit Franchise Agreement. Each
Area Development Agreement establishes the number of Restaurants the franchisee
is to construct and open in the Franchised Area during the term of the Area
Development Agreement (normally a maximum of five Restaurants) after considering
many factors, including the residential, commercial and industrial
characteristics of the area, geographic factors, population of the area and the
previous experience of the franchisee. The franchisee's development schedule for
the Restaurants is set forth in the Area Development Agreement. Of the 249
franchised Restaurants at June 16, 1997, 226 were being operated by multiple
unit operators and 23 were being operated by single unit operators. The Company
may terminate the Area Development Agreement of any franchisee that fails to
meet its development schedule.
The Unit Franchise Agreement and Area Development Agreement require that
the franchisee select proposed sites for Restaurants within the Franchised Area
and submit information regarding such sites to the Company for its review,
although final site selection is at the discretion of the franchisee. The
Company does not arrange or make any provisions for financing the development of
Restaurants by its franchisees. The Company does offer the franchisees an
opportunity to buy a Modular Restaurant Package from the Company in those
geographic areas where the Modular Restaurant Package can be installed in
compliance with applicable laws. Each franchisee is required to purchase all
fixtures, equipment, inventory, products, ingredients, materials and other
supplies used in the operation of its Restaurants from approved suppliers, all
in accordance with the Company's specifications. The Company provides a training
program for management personnel of its franchisees at its corporate offices.
Under the terms of the Unit Franchise Agreement, the Company has adopted
standards of quality, service and food preparation for franchised Restaurants.
Each franchisee is required to comply with all of the standards for Restaurant
operations as published from time to time in the Company's operations manual.
The Company may terminate a Unit Franchise Agreement for several reasons
including the franchisee's bankruptcy or insolvency, default in the payment of
indebtedness to the Company or suppliers, failure to maintain standards set
forth in the Unit Franchise Agreement or operations manual, material continued
violation of any safety, health or sanitation law, ordinance or governmental
rule or regulation or cessation of business. In such event, the Company may also
elect to terminate the franchisee's Area Development Agreement.
Franchise Fees and Royalties. Under the current Unit Franchise Agreement,
a franchisee is generally required to pay fees of $30,000 for each Restaurant
opened by the franchisee. If a franchisee is awarded the right to develop an
area pursuant to an Area Development Agreement, the franchisee typically pays
the Company a $5,000 Development Fee per store which will be applied to the
Franchisee Fee as each Restaurant is developed. Each franchisee is also
generally required to pay the Company a semi-monthly royalty of 4% of the
Restaurant's gross sales and to expend certain amounts for advertising and
promotion.
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MANUFACTURING OPERATIONS
Strategy. The Company believes that the integration of its Restaurant
operations with its production of Modular Restaurant Packages for use by the
Company and sale to its franchisees provides it with a competitive advantage
over fast food companies that use conventional, on-site construction methods.
These advantages include more efficient construction time, direct control of the
quality, consistency and uniformity of the Restaurant image as well as having
standard Restaurant operating systems. In addition, the Company believes the
ability to relocate a Modular Restaurant Package provides greater economies and
flexibility than alternative methods. Due to the number of Modular Restaurant
Packages currently available for relocation from closed Restaurant sites, it is
not anticipated that any significant new construction of Modular Restaurant
Packages will occur during fiscal year 1997. In the short term, the Company's
construction facility located in Largo, Florida will be utilized to store and
refurbish used Modular Restaurant Packages for sale to franchisees or others and
use by the Company. The facility will also be utilized for construction of
modular convenience store units on a very limited basis pursuant to an existing
agreement with a third party convenience store chain. Administrative personnel
of the construction facility have been reduced to a total of two as of June 16,
1997, and substantially all of the labor in the manufacturing and refurbishment
process is done through independent contractors, the number of which may be
increased or decreased with demand.
Construction. The Company has the ability to produce a complete Modular
Restaurant Package ready for delivery and installation at a Restaurant site. The
Modular Restaurant Packages are built and refurbished in a Company-owned
facility in Largo, Florida, using assembly line techniques and a fully
integrated and complete production system. Each Modular Restaurant Package
consists of a modular building complete with all mechanical, electrical and
plumbing systems (except roof top systems which are installed at the site),
along with all Restaurant equipment. The modular building is a complete
operating Restaurant when sited, attached to its foundation and all utilities
are connected. All Modular Restaurant Packages are constructed in accordance
with plans and specifications approved by the appropriate governmental agencies
and are typically available in approximately eight weeks after an executed
agreement.
Capacity. As of June 16, 1997, the Company had six substantially completed
new Modular Restaurant Packages in inventory, one of which is under contract for
sale to a franchisee. Additionally, the Company has contracted with a third
party convenience store chain for the construction of modular convenience store
units. The Company had two modular convenience store units in various stages of
construction. As of June 16, 1997, the Company had 34 used Modular Restaurant
Packages available for relocation to new sites, seven of which have been moved
to the Champion production facility for refurbishment, and 27 of which are at
closed sites. Although the Company does not require a franchisee to use a
Modular Restaurant Package, because of the expected benefits associated
therewith, the Company anticipates that substantially all of the Restaurants
developed by it or its franchisees will include Modular Restaurant Packages
produced by the Company, or relocated from other sites. Modular Restaurant
Packages from closed sites are being marketed at various prices depending upon
age and condition.
Transportation and Installation. Once all site work has been completed to
the satisfaction of the Company and all necessary governmental approvals have
been obtained for installation of the Modular Restaurant Package on a specified
site, the Modular Restaurant Package is transported to such site by an
independent trucking contractor. All transportation costs are charged to the
customer. Once on the site, the Modular Restaurant Package is installed by
independent contractors hired by the Company or franchisee, in accordance with
procedures specified by the Company. The Company's personnel inspect all
mechanical, plumbing and electrical systems to make sure they are in good
working order, and inspect and approve all site improvements on new Modular
Restaurant Packages sold by the Company. Used Modular Restaurant Packages are
typically sold without warranties. Once a Modular Restaurant Package has been
delivered to a site, it takes generally three to four weeks before the
Restaurant is in full operation.
COMPETITION
The Company's Restaurant operations compete in the fast food industry,
which is highly competitive with respect to price, concept, quality and speed of
service, Restaurant location, attractiveness of facilities,
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customer recognition, convenience and food quality and variety. The industry
includes many fast food chains, including national chains which have
significantly greater resources than the Company that can be devoted to
advertising, product development and new Restaurants. In certain markets, the
Company will also compete with other quick-service double drive-thru hamburger
chains with operating concepts similar to the Company. The fast food industry is
often significantly affected by many factors, including changes in local,
regional or national economic conditions affecting consumer spending habits,
demographic trends and traffic patterns, changes in consumer taste, consumer
concerns about the nutritional quality of quick-service food and increases in
the number, type and location of competing quick-service Restaurants. The
Company competes primarily on the basis of speed of service, price, value, food
quality and taste. In addition, with respect to selling franchises, the Company
competes with many franchisors of Restaurants and other business concepts. All
of the major chains have increasingly offered selected food items and
combination meals, including hamburgers, at temporarily or permanently
discounted prices. Beginning generally in the summer of 1993, the major fast
food hamburger chains began to intensify the promotion of value priced meals,
many specifically targeting the 99c price point at which the Company sells its
quarter pound "Champ Burger(R)". This promotional activity has continued at
increasing levels, and management believes that it has had a negative impact on
the Company's sales and earnings. Increased competition, additional discounting
and changes in marketing strategies by one or more of these competitors could
have an adverse effect on the Company's sales and earnings in the affected
markets.
With respect to its Modular Restaurant Packages, the Company competes
primarily on the basis of price and speed of construction with other modular
construction companies as well as traditional construction companies, many of
which have significantly greater resources than the Company.
EMPLOYEES
As of June 16, 1997, the Company employed approximately 6,500 persons in
its Restaurant operations, approximately 800 of whom are Restaurant management
and supervisory personnel and the remainder of whom are hourly Restaurant
personnel. Of the approximately 140 corporate employees, excluding manufacturing
operations, approximately six are in management positions and the remainder are
professional and administrative or office employees.
As of June 16, 1997, the Company employed approximately five persons in its
manufacturing operations, two of whom were corporate personnel and three of whom
were production personnel, including welders and warehouse personnel. Of the two
corporate employees, one was in a management position and one was an
administrative employee. Substantially all of the labor performed in the
manufacturing operations is being done through independent contractors.
The Company considers its employee relations to be good. Most employees,
other than management and corporate personnel, are paid on an hourly basis. The
Company believes that it provides working conditions and wages that compare
favorably with those of its competition. None of the Company's employees is
covered by a collective bargaining agreement.
TRADEMARKS AND SERVICE MARKS
The Company believes its trademarks and service marks have significant
value and are important to its marketing efforts. The Company has registered
certain trademarks and service marks (including the name "Checkers", "Checkers
Burgers - Fries - Colas" and "Champ Burger" and the design of the Restaurant
building) in the United States Patent and Trademark office. The Company has also
registered the service mark "Checkers" individually and/or with a rectangular
checkerboard logo of contiguous alternating colors to be used with Restaurant
services in the states where it presently does, or anticipates doing, business.
The Company has various other trademark and service mark registration
applications pending. It is the Company's policy to pursue registration of its
marks whenever possible and to oppose any infringement of its marks.
GOVERNMENT REGULATION
The Company has no material contracts with the United States government or
any of its agencies.
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The restaurant industry generally, and each Company-operated and franchised
Restaurant specifically, are subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and those relating to building, zoning, health, accommodations for disabled
members of the public, sanitation, safety, fire, environmental and land use
requirements. The Company and its franchisees are also subject to laws governing
their relationship with employees, including minimum wage requirements,
accommodation for disabilities, overtime, working and safety conditions and
citizenship requirements. The Company is also subject to regulation by the FTC
and certain laws of States and foreign countries which govern the offer and sale
of franchises, several of which are highly restrictive. Many State franchise
laws impose substantive requirements on the franchise agreement, including
limitations on noncompetition provisions and on provisions concerning the
termination or nonrenewal of a franchise. Some States require that certain
materials be registered before franchises can be offered or sold in that state.
The failure to obtain or retain food licenses or approvals to sell franchises,
or an increase in the minimum wage rate, employee benefit costs (including costs
associated with mandated health insurance coverage) or other costs associated
with employees could adversely affect the Company and its franchisees. A
mandated increase in the minimum wage rate was implemented in 1996 and current
federal law requires an additional increase in 1997.
The Company's construction, transportation and placement of Modular
Restaurant Packages is subject to a number of federal, state and local laws
governing all aspects of the manufacturing process, movement, end use and
location of the building. Many states require approval through state agencies
set up to govern the modular construction industry, other states have provisions
for approval at the local level. The transportation of the Company's Modular
Restaurant Package is subject to state, federal and local highway use laws and
regulations which may prescribe size, weight, road use limitations and various
other requirements. The descriptions and the substance of the Company's
warranties are also subject to a variety of state laws and regulations.
PROPERTIES
Of the 233 Restaurants which were operated by the Company as of June 16,
1997, the Company held ground leases for 195 Restaurants and owned the land for
38 Restaurants. The Company's leases are generally written for a term of from
five to twenty years with one or more five year renewal options. Some leases
require the payment of additional rent equal to a percentage of annual revenues
in excess of specified amounts. Ground leases are treated as operating leases.
Leasehold improvements made by the Company generally become the property of the
landlord upon expiration or earlier termination of the lease; however, in most
instances, if the Company is not in default under the lease, the building,
equipment and signs remain the property of the Company and can be removed from
the site upon expiration of the lease. In the future, the Company intends,
whenever practicable, to lease land for its Restaurants. For further information
with respect to the Company's Restaurants, see "Business -- Restaurant
Operations."
The Company has eight owned parcels of land and 33 leased parcels of land
which are available for sale or sub-lease. Of these parcels, 34 are related to
restaurant closings as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The other parcels primarily
represent surplus land available from multi-user sites where the Company
developed a portion for a Restaurant, and undeveloped sites which the Company
ultimately decided it would not develop.
The Company's executive offices are located in approximately 19,600 square
feet of leased space in the Barnett Bank Building, Clearwater, Florida. The
Company's lease will expire on April 30, 1998.
The Company owns a 89,850 square foot facility in Largo, Florida. This
includes a 70,850 square foot fabricated metal building for use in its Modular
Restaurant manufacturing operations, and two buildings totalling 19,000 square
feet for its office and warehouse operations. See "Business -- Manufacturing
Operations."
The Company also leases approximately 8,000 aggregate square feet in two
regional offices and one training center.
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LITIGATION
Except as described below, the Company is not a party to any material
litigation and is not aware of any threatened material litigation:
In re Checkers Securities Litigation, Master File No. 93-1749-Civ-T-17A. On
October 13, 1993, a class action complaint was filed in the United States
District Court for the Middle District of Florida, Tampa Division, by a
stockholder against the Company, certain of its officers and directors,
including Herbert G. Brown, Paul C. Campbell, George W. Cook, Jared D. Brown,
Harry S. Cline, James M. Roche, N. John Simmons, Jr. and James F. White, Jr.,
and KPMG Peat Marwick, the Company's auditors. The complaint alleges, generally,
that the Company issued materially false and misleading financial statements
which were not prepared in accordance with generally accepted accounting
principles, in violation of Section 10(b) and 20(a) of the Exchange Act and Rule
10b-5 thereunder, and Florida common law and statute. The allegations, including
an allegation that the Company inappropriately selected the percentage of
completion method of accounting for sales of modular restaurant buildings, are
primarily directed to certain accounting principles followed by Champion. The
plaintiffs seek to represent a class of all purchasers of the Company's Common
Stock between November 22, 1991 and October 8, 1993, and seek an unspecified
amount of damages. Although the Company believes this lawsuit is unfounded and
without merit, in order to avoid further expenses of litigation, the parties
have reached an agreement in principle for the settlement of this class action.
The agreement for settlement provides for one of the Company's director and
officer liability insurance carriers and another party to contribute to a fund
for the purpose of paying claims on a claims-made basis up to a total of
$950,000. The Company has agreed to contribute ten percent (10%) of claims made
in excess of $475,000 for a total potential liability of $47,500. The settlement
is subject to the execution of an appropriate stipulation of settlement and
other documentation as may be required or appropriate to obtain approval of the
settlement by the Court, notice to the class of pendency of the action and
proposed settlement, and final court approval of the settlements.
Greenfelder et al. v. White, Jr., et al. On August 10, 1995, a state court
complaint was filed in the Circuit Court of the Sixth Judicial Circuit for
Pinellas County, Florida, Civil Division, entitled Gail P. Greenfelder and
Powers Burgers, Inc. v. James F. White, Jr., Checkers Drive-In Restaurants,
Inc., Herbert G. Brown, James E. Mattei, Jared D. Brown, Robert G. Brown and
George W. Cook, Case No. 95-4644-C1-21. The original complaint alleged,
generally, that certain officers of the Company intentionally inflicted severe
emotional distress upon Ms. Greenfelder, who is the sole stockholder, president
and director of Powers Burgers, a Checkers franchisee. The original complaint
further alleged that Ms. Greenfelder and Powers Burgers were induced to enter
into various agreements and personal guarantees with the Company based upon
misrepresentations by the Company and its officers and the Company violated
provisions of Florida's Franchise Act and Florida's Deceptive and Unfair Trade
Practices Act. The original complaint alleged that the Company is liable for all
damages caused to the plaintiffs as follows: damages in an unspecified amount in
excess of $2,500,000 in connection with the claim of intentional infliction of
emotional distress; $3,000,000 or the return of all monies invested by the
plaintiffs in Checkers franchises in connection with the misrepresentation of
claims; punitive damages; attorneys' fees; and such other relief as the court
may deem appropriate. The Court has granted, in whole or in part, three (3)
motions to dismiss the plaintiff's complaint, as amended, including an order
entered on February 14, 1997, which dismissed the plaintiffs' claim of
intentional infliction of emotional distress, with prejudice, but granted the
plaintiffs leave to file an amended pleading with respect to the remaining
claims set forth in their amended complaint. The Company believes that this
lawsuit is unfounded and without merit, and intends to continue to defend it
vigorously. No estimate of any possible loss or range of loss resulting from the
lawsuit can be made at this time.
Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services, Inc.,
et al. On August 10, 1995, a state court counterclaim and third-party complaint
was filed in the Circuit Court of the Thirteenth Judicial Circuit in and for
Hillsborough County, Florida, Civil Division, entitled Tampa Checkmate Food
Services, Inc., Checkmate Food Services, Inc., and Robert H. Gagne v. Checkers
Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, James F. White,
Jr., Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 95-3869. In
the original action, filed by the Company in July 1995 against Mr. Gagne and
Tampa Checkmate Food Services, Inc., a company controlled by Mr. Gagne, the
Company is seeking to
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collect on a promissory note and foreclose on a mortgage securing the promissory
note issued by Tampa Checkmate and Mr. Gagne, and obtain declaratory relief
regarding the rights of the respective parties under Tampa Checkmate's franchise
agreement with the Company. On July 1, 1997, the court entered an order
requiring Tampa Checkmate to deliver possession to the Company of the restaurant
formerly operated under its franchise agreement. On July 14, 1997, Tampa
Checkmate filed for protection under Chapter 11 of the U.S. Bankruptcy laws. The
counterclaim and third party complaint allege, generally, that Mr. Gagne, Tampa
Checkmate and Checkmate Food Services, Inc. were induced into entering into
various franchise agreements with and personal guarantees to the Company based
upon misrepresentations by the Company. The counterclaim and third party
complaint seeks damages in the amount of $3,000,000 or the return of all monies
invested by Checkmate, Tampa Checkmate and Gagne in Checkers franchises,
punitive damages, attorneys' fees and such other relief as the court may deem
appropriate. The counterclaim was dismissed by the court on January 26, 1996
with the right to amend. On February 12, 1996 the counterclaimants filed an
amended counterclaim alleging violations of Florida's Franchise Act, Florida's
Deceptive and Unfair Trade Practices Act, and breaches of implied duties of
"good faith and fair dealings" in connection with a settlement agreement and
franchise agreement between various of the parties. The amended counterclaim
seeks a judgment for damages in an unspecified amount, punitive damages,
attorneys' fees and such other relief as the court may deem appropriate. The
Company has filed a motion to dismiss the amended counterclaim. The Company
believes that this lawsuit is unfounded and without merit, and intends to
continue to defend it vigorously. No estimate of any possible loss or range of
loss resulting from the lawsuit can be made at this time.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Directors and
executive officers of the Company and the positions they hold with the Company.
Executive officers serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
C. Thomas Thompson......... 47 Chief Executive Officer and Vice Chairman of the Board of
Directors (term expiring in 1999)
Richard E. Fortman......... 47 President and Chief Operating Officer
Joseph N. Stein............ 36 Executive Vice President, Chief Administrative Officer
and Chief Financial Officer
James T. Holder............ 38 Senior Vice President, General Counsel and Secretary
Michael T. Welch........... 45 Vice President, Operations, Marketing, Restaurant Support
Services and Research & Development
David D. Miller............ 44 Vice President of Franchise Operations, Sales and
Development
Wendy A. Beck.............. 32 Vice President of Treasury & Tax, Treasurer
William P. Foley,
II(1)(2)................. 52 Chairman of the Board, Director (term expiring in 1999)
Frederick E. Fisher........ 66 Director (term expiring in 1998)
Terry N. Christensen(1).... 56 Director (term expiring in 1998)
Clarence V. McKee(1)(2).... 54 Director (term expiring in 1999)
Burt Sugarman.............. 58 Director (term expiring in 1997)
Jean Giles Wittner......... 62 Director (term expiring in 2000)
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee and the Stock Option Committee.
C. Thomas Thompson has served as a Director of the Company since November
1996 and as Chief Executive Officer and Vice Chairman of the Board of Directors
of the Company since December 1996. Mr. Thompson has been President and Chief
Operating Officer of Carl Karcher Enterprises, Inc., a wholly owned subsidiary
of CKE, owner and franchisor of the Carl's Jr. restaurant chain, 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 Rally's.
Richard E. Fortman has served as President and Chief Operating Officer of
the Company since January 1997. For approximately 27 years, prior to joining the
Company, Mr. Fortman was employed by Carl Karcher Enterprises, Inc. in various
capacities. From August 1993 through December 1996, he served as Regional Vice
President, from August 1992 through August 1993, he served as Director of
Regional Operations, and from July 1984 through August 1992, he served as
Regional Director.
Joseph N. Stein has served as Executive Vice President, Chief
Administrative Officer and Chief Financial Officer of the Company since January
1997. 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.
James T. Holder has served as Senior Vice President and General Counsel of
the Company since January 1997, as Chief Financial Officer of the Company from
May to December 1996, and as Secretary since September 1995. Mr. Holder served
as Vice President and General Counsel of the Company from September 1995 to June
1996, as senior legal counsel for the Company from December 1994 through August
1995 and corporate counsel from November 1993 through November 1994. Mr. Holder
was engaged in the private practice of law from January 1991 to November 1993,
in Tampa, Florida.
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<PAGE> 53
Michael T. Welch has served as Vice President, Operations, Marketing,
Restaurant Support Services and Research & Development of the Company since
March 1995. From May 1994 to March 1995, Mr. Welch served as Regional Vice
President of Operations, responsible for all Company operations outside Florida.
From 1987 to May 1994, Mr. Welch was President and a principal of W-S
Acquisition Corporation, which owned and operated several Wendy's franchises.
David D. Miller has served as Vice President, Franchise Operations of the
Company since May 1996. Mr. Miller served as Vice President Marketing from March
1996 to April 1996, as Senior Director of Operations from October 1995 to March
1996, as Senior Director of Franchise Operations from January 1991 to October
1995 and as Franchise Business Consultant from November 1989 to January 1991.
Wendy A. Beck has served as Treasurer of the Company since November 1995
and as Vice President of Treasury and Tax since April 1997 and prior thereto as
Senior Director of Treasury & Tax from August 1995. Since joining the Company in
March 1993, Ms. Beck has served in various positions with the Company. Prior to
joining the Company, Ms. Beck served as Senior Tax Accountant for Lincare
Holdings, Inc., a national provider of home health care services, where she was
employed since October 1987.
William P. Foley, II has served as a Director of the Company since November
1996 and as Chairman of the Board from since June 1997. Mr. Foley has been the
Chairman of the Board and Chief Executive Officer of Fidelity National
Financial, Inc., which through its subsidiaries is a title insurance
underwriting company ("Fidelity"), since its formation in 1984. Mr. Foley was
also President of Fidelity from 1984 until December 31, 1994. He has been
Chairman of the Board and Chief Executive Officer of Fidelity National Title
Insurance Company since April 1981. Mr. Foley is also currently serving as
Chairman of the Board of Directors and Chief Executive Officer of CKE and is a
director of Micro General Corporation and Rally's.
Terry N. Christensen has served as a Director of the Company 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, Rally's and MGM Grand, Inc.
Frederick E. Fisher has served as a Director of the Company since February
1995 and as Chairman of the Board from November 1996 to June 1997. Mr. Fisher is
a private investor and has been a leader in many community and state charitable
organizations since his retirement in 1983. Mr. Fisher was Chairman and Chief
Executive Officer of U.S. Capital Corporation, a resort development company, in
1982 and 1983. Mr. Fisher served as the Vice Chairman and Chief Financial
Officer of U.S. Home Corporation from 1969 to 1981, during which time it grew
from a local building company to the nation's largest home builder.
Clarence V. McKee has served as a Director of the Company since June 1996.
Mr. McKee has been the President and Chief Executive Officer of McKee
Communications, Inc., a Tampa, Florida based company engaged in the acquisition
and management of communications companies, since October 1992. From 1987 to
October 1992, Mr. McKee was the co-owner, Chairman and Chief Executive Officer
of WTVT-Inc., the licensee of television channel 13 in Tampa, Florida. Mr. McKee
is a member of the Boards of Directors of the Florida Progress Corporation and
its subsidiary, Florida Power Corporation, and Barnett Banks, Inc. He is a
former chairman of the Florida Association of Broadcasters.
Burt Sugarman has served as a Director of the Company since June 1997. Mr.
Sugarman has been the Chairman of the Board, President and Chief Executive
Officer of GIANT, a New York Stock Exchange Company, for more than the past five
years and served as the Chief Executive Officer of Rally's, owner and franchisor
of a chain of approximately 470 double drive-thru restaurants, 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. Mr. Sugarman is a Director
of GIANT and Rally's.
Jean Giles Wittner has served as a Director of the Company since August
1997. Ms. Giles Wittner has been President of Wittner & Company, a diversified
company specializing in life insurance brokerage, employee benefit consulting,
benefit administration an commercial property management, from 1988 to the
present. She is a director of First Progress Corporation, Raymond James Bank and
the Pinellas County
50
<PAGE> 54
Education Foundation and a trustee of Florida Progress Foundation, Eckard
College and Menorah Manor. She also serves on the Pinellas Work Force
Development Board.
No family relationships exist between any of the Directors of the Company,
the persons listed as nominees for election as Directors at the Meeting and the
executive officers of the Company. There are no arrangements or understandings
between any Director or nominee and any other person concerning service or
nomination as a Director.
The Board of Directors has Audit, Compensation and Stock Option Committees;
it does not have a Nominating Committee. The entire Board of Directors functions
as a Nominating Committee, and the Board will consider written recommendations
from stockholders for nominations to the Board of Directors in accordance with
the procedures set forth in the By-Laws of the Company.
The Board of Directors held 29 meetings during 1996 and acted seven times
by unanimous written consent without a meeting.
During 1996, the Audit Committee consisted of Frederick E. Fisher,
Chairman, Andrew H. Hines, Jr. and Clarence V. McKee and held two meetings. The
Audit Committee recommends the appointment of the independent public accountants
of the Company, discusses and reviews the scope and fees of the prospective
annual audit and reviews the results thereof with the independent public
accountants, reviews and approves non-audit services of the independent public
accountants, reviews compliance with existing major accounting and financial
policies of the Company, reviews the adequacy of the financial organization of
the Company, reviews management's procedures and policies relative to the
adequacy of the Company's internal accounting controls and compliance with
federal and state laws relating to accounting practices, and reviews and
approves (with the concurrence of the majority of the disinterested Directors of
the Company) transactions, if any, with affiliated parties.
During 1996, the Compensation Committee consisted of Frederick E. Fisher,
Chairman, and Andrew H. Hines, Jr. and held two meetings. Its principal function
is to make recommendations to the Board of Directors with respect to the
compensation and benefits to be paid to officers, and it performs other duties
prescribed by the Board with respect to employee stock plans and benefit
programs.
During 1996, the Stock Option Committee consisted of Frederick E. Fisher,
Chairman and Andrew H. Hines, Jr. and acted two times by unanimous written
consent without a meeting. Its principal function is to make recommendations to
the Board of Directors with respect to the Company's 1991 Stock Option Plan and
other duties prescribed by the Board.
In 1996, each incumbent Director attended at least 75% of the meetings of
the Board of Directors and of each committee of which he was a member.
Directors who are not employees are compensated on the basis of $1,000 plus
out-of-pocket expenses for each Board and committee meeting attended.
Non-employee Directors also participate in the 1994 Stock Option Plan For
Non-Employee Directors, which 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 100,000 shares of the Company's Common
Stock, with the subsequent automatic grant on the first day of each fiscal year
thereafter during the time such person is serving as a non-employee Director of
a non-qualified, ten-year option to acquire an additional 20,000 shares of
Common Stock. All such options are immediately exercisable and have an exercise
price equal to the closing sale price of the Common Stock on the date of grant.
Directors who are employees of the Company receive no extra compensation for
their services as Directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
officers and holders of more than 10% of the Company's Common Stock to file with
the Commission initial reports of ownership and reports of changes in ownership
of Common Stock and any other equity securities of the Company. To the Company's
knowledge, based solely upon a review of the forms, reports and certificates
filed with the Company by such
51
<PAGE> 55
persons, all such Section 16(a) filing requirements were complied with by such
persons in 1996, except as follows:
Herbert G. Brown, a former director of the Company, failed to file two
Forms 4 with respect to two transactions and filed Forms 5 with respect thereto
late; Robert G. Brown, a former director, filed one report late with respect to
two transactions; George W. Cook, a former director, filed two reports late with
respect to 19 transactions; Terry N. Christensen, a director, filed a Form 3
late and one report with respect to one transaction late; and Andrew J. Hines,
Jr., a director, filed one report late with respect to one transaction.
COMPENSATION OF EXECUTIVE OFFICERS
The following table is a summary of the compensation paid or accrued by the
Company for the last three fiscal years for services in all capacities to each
of the persons who qualified as a "named executive officer" (as defined in Item
402(a)(3) of Regulation S-K under the Exchange Act) during the year ended
December 30, 1996 ("Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING
YEAR SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION ENDED ($) ($) ($)(1) (#)(2)
- --------------------------- ----- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
C. Thomas Thompson(3)...................... 1996 $ -- $ -- $ -- 12,000
Vice Chairman/CEO
James T. Holder............................ 1996 $140,350 $23,077 $ 120(4) 90,500
Senior Vice President, 1995 80,617 -- 3,112(5) --
General Counsel and Secretary 1994 70,923 -- -- 8,500
Michael T. Welch(6)........................ 1996 $125,390 $ 2,467 $ 372(4) 80,000
Vice President, 1995 99,773 15,200 13,261(8) --
Operations Services and
Research & Development
Albert J. DiMarco(7)....................... 1996 $275,000 -- $ 5,691(5) 100,000
President and CEO 1995 100,769 475 200,000
Anthony L. Austin(6)....................... 1996 $109,645 -- $131,628(9) --
Vice President, Human 1995 133,249 -- 27,069(10) 35,000
Resources, Training and Urban Affairs
</TABLE>
- ---------------
(1) Certain perquisites were provided to certain of the Named Executive
Officers, but in no event did the value of the perquisites provided in any
year exceed 10% of the amount of the executive's salary for that year.
(2) The options listed were granted pursuant to the Company's 1991 Stock Option
Plan or 1994 Stock Option Plan for Non-Employee Directors (the "Director
Plan").
(3) Mr. Thompson was appointed Chief Executive Officer and Vice Chairman of the
Company in December 1996. The options listed were granted pursuant to the
Director Plan prior to such appointment.
(4) Consists of life insurance premiums.
(5) Consists of automobile allowance.
(6) Messrs. Welch and Austin became executive officers of the Company in March
1995 and January 1995, respectively. Mr. Austin relinquished his position
with the Company in July 1996.
(7) Mr. DiMarco became President, Chief Executive Officer and a Director of the
Company in July 1995 and relinquished such positions in December 1996.
(8) Includes moving expenses ($8,815) and automobile allowance ($4,446).
52
<PAGE> 56
(9) Consists of severance pursuant to employment agreement.
(10) Consists of moving allowance.
Employment Agreements
Albert J. DiMarco. On July 28, 1995, the Company entered into an
employment agreement with Albert J. DiMarco with respect to his employment as
President and Chief Executive Officer of the Company and its subsidiaries and
his service as a Director of the Company. The employment agreement provided for
a term of employment ending on December 31, 1997, a compensation package
consisting of an initial base annual salary in the amount of $250,000 through
December 31, 1995 and a minimum of $275,000 thereafter (subject to annual
increases at the discretion of the Board), as well as other miscellaneous
benefits (including moving expense, expense allowances, health insurance and
potential cash bonuses) and the grant, at the commencement of Mr. DiMarco's
employment agreement, of a non-qualified option to acquire 200,000 shares of
Common Stock, at an exercise price of $2.28. Pursuant to a Severance, Release
and Indemnity Agreement dated January 27, 1997 entered into by Mr. DiMarco and
the Company, Mr. DiMarco's employment agreement was terminated, and Mr. DiMarco
received a note of the Company in the principal amount of $360,000 payable, in
cash or by certified check or wire transfer, through March 31, 1997 in
installments equal to his regular salary with the balance payable upon the
earlier to occur of (a) the Company obtaining new equity through a rights
offering and/or private placement or (b) March 31, 1997. The note was paid in
full on February 20, 1997. In addition, pursuant to such agreement options to
purchase up to 300,000 shares of Common Stock held by Mr. DiMarco became fully
vested and are exercisable until January 27, 1999, and the Indemnity Agreement
dated July 28, 1995 between the Company and Mr. DiMarco is to remain in effect.
Anthony L. Austin. On January 4, 1995, the Company entered into an
employment agreement with Anthony L. Austin with respect to his employment as
Vice President, Human Resources, Training and Urban Affairs. The employment
agreement provided for a term of employment ending on December 31, 1996, a
compensation package consisting of an initial base annual salary in the amount
of $132,500, as well as other miscellaneous benefits (including moving expense,
expense allowances, health insurance and potential cash bonuses) and the grant
at the commencement of Mr. Austin's employment agreement of a non-qualified
option to acquire 35,000 shares of Common Stock, at an exercise price of $2.19.
The option for 35,000 shares was terminated upon termination of Mr. Austin's
employment by the Company.
Stock Option Grants. The following table details individual grants of
stock options made in fiscal year ended December 30, 1996 to any of the Named
Executive Officers. No grants of stock appreciation rights (SARS) were made in
fiscal year ended December 30, 1996. The table also indicates the potential
realizable value of each grant of options assuming that the market price of the
underlying security appreciates in value from the date of the grant to the end
of the option term at the specified annualized rates.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
-----------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED OF STOCK PRICE APPRECIATION
UNDERLYING TO EXERCISE FOR OPTION TERM(2)
OPTIONS EMPLOYEES OR BASE -------------------------------
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ---------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
C. Thomas Thompson................... 12,000 -- -- -- -- --
James T. Holder...................... 90,500 9.3% $1.53 7/12/06 $87,080 $220,678
Michael T. Welch..................... 80,000 8.2 1.53 7/12/06 76,977 195,074
Albert J. DiMarco.................... 100,000 10.2 1.53 7/12/06 96,221 243,843
Anthony L. Austin.................... -0- -0- -- -- -- --
</TABLE>
- ---------------
(1) All options were granted pursuant to the 1991 Stock Option Plan, except for
those granted to C. Thomas Thompson which were granted prior to the date Mr.
Thompson became an employee of the Company. Mr. Thompson's options were
granted pursuant to the Director Plan.
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<PAGE> 57
(2) The 5% and 10% assumed annual rates of stock price appreciation are provided
in compliance with Regulation S-K under the Exchange Act. The Company does
not necessarily believe that these appreciation calculations are indicative
of actual future stock option values or that the price of the Common Stock
will appreciate at such rates.
Stock Option Exercises and Year End Option Values. No stock options were
exercised by any of the Named Executive Officers during fiscal year ended
December 30, 1996. The following table details the fiscal year-end value of
unexercised options on an aggregated basis for all Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)(1)
-------------- -------------
SHARES ACQUIRED ON VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
C. Thomas Thompson.................. -0- -0- -0-/12,000 -0-/-0-
Albert J. DiMarco................... -0- -0- 300,000/-0- $25,125/-0-
Anthony L. Austin................... -0- -0- -0- -0-
James T. Holder..................... -0- -0- 23,291/76,709 $5,685/-0-
Michael T. Welch.................... -0- -0- 20,000/80,000 $5,625/-0-
David D. Miller..................... -0- -0- 43,062/56,938 $3,722/-0-
</TABLE>
- ---------------
(1) Calculation of the value of unexercised in-the-money options is based upon
unexercised options at fiscal year end which have an exercise price below
$1.78125, the closing price of the Common Stock as reported on the NMS on
December 30, 1997.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth herein briefly describes certain transactions
between the Company and certain affiliated parties and/or certain of their
relatives. Management of the Company believes that such transactions have been
on terms no less favorable to the Company than those that could have been
obtained from unaffiliated parties. Any such transactions since November 15,
1991 have been approved by a majority of the Company's disinterested Directors.
Transactions in which Current Affiliated Parties May Have an Interest. On
November 22, 1996, the Company entered into the Restated Credit Agreement with
CKE, as agent of the various lenders named therein (the "Lenders"). The Lenders
include CKE, Fidelity, C. Thomas Thompson, William P. Foley, II, Burt Sugarman
and KCC Delaware Company, ("KCC"), a wholly owned subsidiary of GIANT. Pursuant
to the Restated Credit Agreement, the Company's primary debt aggregating
approximately $35.8 million principal amount, which had been acquired by the
Lenders on November 14, 1996, was restructured by, among other things, extending
its maturity by one year to July 31, 1999, fixing the interest rate at 13.0% per
annum, eliminating or relaxing certain covenants, delaying scheduled principal
payments until May 19, 1997 and eliminating $6.0 million in restructuring fees
and charges. In connection with the restructuring, the Company issued to the
Lenders warrants to purchase an aggregate of 20 million shares of Common Stock
at an exercise price of $0.75 per share, the approximate market price of the
Common Stock on the day prior to the announcement of the acquisition of the
Company's debt by the Lenders. The Lenders specified above received warrants in
the following amounts: CKE, 7,350,428; Fidelity, 2,108,262; C. Thomas Thompson,
28,490; William P. Foley, II, 854,700; Burt Sugarman, 712,250; and KCC. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
On February 20, 1997, the Company received $20 million in consideration for
issuing an aggregate of 8,771,929 shares of Common Stock for $1.14 per share and
87,719 shares of Preferred Stock for $114.00 per share in a private placement.
The purchase price was based upon the closing price ($1.34) of the Common
54
<PAGE> 58
Stock on December 16, 1996, the day prior to the approval of the transaction by
the Board of Directors, less a discount for the fact that such shares are not
freely transferable for a one-year period. The purchasers in the private
placement included: CKE (6,162,299 shares of Common Stock and 61,636 shares of
Preferred Stock); Fidelity (438,596 shares of Common Stock and 4,385 shares of
Preferred Stock); C. Thomas Thompson (21,929 shares of Common Stock and 219
shares of Preferred Stock); Terry N. Christensen (21,929 shares of Common Stock
and 219 shares of Preferred Stock); William P. Foley, II (219,298 shares of
Common Stock and 2,192 shares of Preferred Stock); and Burt Sugarman (54,824
shares of Common Stock and 548 shares of Preferred Stock). The purchasers in the
private placement also received certain piggyback and demand registration rights
and agreed not to sell any shares of Common Stock received in the private
placement in the open market for a one-year period. The Preferred Stock was
converted into an aggregate of 9,383,118 shares of Common Stock on August 6,
1997, upon approval by the Company's stockholders of such conversion. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, a law firm
of which Terry N. Christensen is a partner (see "Management -- Directors and
Executive Officers"), has performed legal services for the Company. Such
services have related to compliance with securities laws and other business
matters.
Transactions in Which Former Affiliated Parties May Have an Interest. In
January 1996, the Company entered into an Agreement for Lease with Option for
Asset Purchase with George W. Cook, a Director of the Company until June 1996,
in which the Company was granted certain rights for three years in and to a
restaurant in Clearwater, Florida. Checkers (a) entered into a sublease for the
real property and an equipment lease for the fixed assets at a combined monthly
rental of $3,000, and (b) agreed to purchase the inventory located at the
Restaurant.
On December 5, 1995, Checkers of Asheville ("C of A"), a North Carolina
Corporation in which George W. Cook is the principal officer and shareholder,
took possession of three under performing Company Restaurants pursuant to a
verbal agreement, and entered into Unit Franchise Agreements which provided for
waiver of the initial franchise fee but required the payment to the Company of
the standard royalty fee. On January 1, 1996, C of A entered into leases for
these Restaurants for a term of three years for the land, building and equipment
at a monthly rental of: (i) 4% of gross sales during the first year, 6% of gross
sales the second year, and a direct pass through of land rent during the third
year; (ii) 1% of gross sales payable from and after the fourth month of the
lease; and (iii) 3% of gross sales, respectively. Mr. Cook executed a continuing
guaranty, which provides for the personal guaranty of all of the obligations of
the franchisee under the franchise agreements. Pursuant to Options for Asset
Purchase dated January 1, 1996, C of A was granted the option, for a period of
three years, to purchase these Restaurants for the greater of (a) 50% of its
sales for the prior year, or (b) $350,000 each.
On July 17, 1995, C of A took possession of two under performing Company
Restaurants pursuant to a verbal agreement and entered into franchise agreements
which provided for waiver of the initial franchise fee but required the payment
to the Company of a royalty fee of 1%, 2% and 3% during the first, second and
third years, respectively, and 4% thereafter. On January 1, 1996, C of A entered
into leases for these restaurants for a term of three years for (i) the building
and equipment at a monthly rental of 1.5%, 3% and 4.5% of gross sales during the
first, second and third years respectively, and (ii) the land at a monthly
rental of 3% of gross sales for the first year and 4% of gross sales thereafter.
Total sums received by the Company in fiscal year ended December 30, 1996 for
these restaurant were: (a) $6,351 in royalty fees pursuant to the Unit Franchise
Agreement, and (b) $17,500 in rent. Mr. Cook executed a continuing guaranty,
which provides for the personal guaranty of all of the obligations of the
franchisee under the franchise agreements. Pursuant to Options for Asset
Purchase dated January 1, 1996, Checkers of Raleigh ("C of R"), a North Carolina
Corporation in which George W. Cook is the principal officer and shareholder,
was granted the option, for a period of three years, to purchase these
Restaurants for the greater of (a) 50% of its sales for the prior year, or (b)
$350,000 each.
55
<PAGE> 59
Effective as of July 28, 1995, the Company, InnerCityFoods ("ICF"), a joint
venture 75% owned by a subsidiary of the Company and 25% owned by La-Van
Hawkins, who ceased being a director of the Company January 1996, InnerCityFoods
Leasing Company and InnerCityFoods Joint Venture Company (collectively, the
"Checkers Parties") and La-Van Hawkins Group, Inc. ("Hawkins Group"), Mr.
Hawkins and La-Van Hawkins InnerCityFoods, LLC (collectively, the "Hawkins
Parties"), entered into an Asset Purchase Agreement (the "Hawkins Agreement")
providing for the purchase of the interest of the Hawkins Parties in ICF, the
sale by ICF of its three restaurants in Baltimore, Maryland to the Hawkins
Parties, the grant of certain development rights to the Hawkins Parties, and the
termination of all of the agreements between the Checkers Parties and the
Hawkins Parties relating to the operation of ICF.
The transactions contemplated by the Hawkins Agreement were consummated on
August 15, 1995. On that date, the Company purchased all of the rights, title
and interest of Hawkins Group in and to ICF. The component of the purchase price
based upon the Net After Tax Earnings of ICF was zero, and the amounts owed by
the Hawkins Parties to the Checkers Parties was in excess of the remaining
$1,250,000 purchase price. Accordingly, there was no net purchase price payable
to the Hawkins Parties by the Company for Hawkins Group's interest in ICF. The
Checkers Parties also sold all of their respective rights, titles and interests
in the three Baltimore Restaurants to the Hawkins Parties for a purchase price
of $4,800,000. The purchase price was paid by the delivery of a promissory note
in the amount of $4,982,355, which amount includes the purchase price for the
three restaurants, the approximately $107,355 owed by the Hawkins Parties to the
Checkers Parties in connection with the operation of ICF that was not offset by
the $1,250,000 purchase price for Hawkins Group's interest in ICF, and an
advance of $75,000 to the Hawkins Parties which was used primarily to pay
closing costs related to the transaction. The note bears interest at a floating
rate which is the lesser of 10.5% or .25% above the current borrowing rate of
the Company under its primary credit facility. Interest only is payable for the
first six months with principal and interest being payable thereafter based on a
15-year amortization rate with the final payment of principal and interest due
on August 15, 2002. The note is secured by a pledge of all the assets sold.
Royalty fees for the three restaurants are at standard rates provided that the
Company will receive an additional royalty fee of 4% on all sales in excess of
$1,800,000 per Restaurant.
The Hawkins Parties were granted development rights for Restaurants in
certain defined areas of Baltimore, Maryland, Washington, D.C., Bronx, New York,
and Harlem, New York, as well as a right of first refusal for certain
territories in California and Virginia. Franchise fees and royalty rates for all
restaurants developed under such development rights will be at standard rates
provided that the Company will receive an additional royalty fee of 4% on all
sales in excess of $1,800,000 per Restaurant.
In February 1995, the Company entered into two separate Unit Franchise
Agreements for the operation of two Restaurants in North Carolina, with GNB,
Inc., a corporation owned by George W. Cook, Norma Cook and Michael Perez, his
wife and her son, which agreements provided for payment to the Company of the
standard royalty fee. The Restaurants were existing Restaurants purchased by Mr.
Cook from the prior franchisee, and the agreements provide for the franchise fee
to be waived. In connection with the transaction, Mr. Cook executed a continuing
guaranty, which guaranty provides for the personal guaranty of Mr. Cook of all
obligations of the franchisee under the franchise agreement. Total royalty fees
received by the Company in fiscal years ended January 1, 1996 and December 30,
1996 pursuant these agreements were $37,295 and 47,965, respectively.
The Company incurred approximately $105,000 and $334,000, respectively, of
expenses for services provided by the law firm of MacFarlane Ausley Ferguson &
McMullen in 1995 and 1994, respectively. The firm continues to provide legal
services to the Company. Harry S. Cline, a Director of the Company from 1991
until June 1996, is a partner in the firm.
In July 1993, the Company entered into an Area Development Agreement with
New Iberia Drive-In, Inc. ("New Iberia"), a corporation in which the cousin of
Herbert G. Brown, a Director of the Company until April 1996, was the sole
shareholder. The agreement was transferred in November 1993 from New Iberia to
Walker-LA Louisiana Partnership, a Louisiana general partnership in which that
cousin and Mr. Brown's son-in-law each hold a 50% ownership interest. The
agreement provides for the payment to the Company of the
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<PAGE> 60
standard development fee, a standard franchise fee per Restaurant and payment of
standard royalty fees. Six Unit Franchise Agreements have been granted pursuant
to the agreement in the names of various entities in which the cousin and
son-in-law each hold a 50% ownership interest. Total royalty fees received by
the Company in fiscal years ended January 1, 1996 and December 30, 1996 pursuant
to these Unit Franchise Agreements were $193,582 and $187,165, respectively.
In December 1993, the Company sold one of its restaurants in Ft.
Lauderdale, Florida, to Dania-Auger, Inc., a Florida corporation in which the
father-in-law of Jared D. Brown, formerly a beneficial owner of more than 5% of
the Common Stock and a Director of the Company until June 1996, is the principal
officer and stockholder. The sales price was $905,000 and the Company received
$705,000 in cash and a promissory note for $200,000. A gain of approximately
$470,000 was recognized by the Company. The term of the promissory note was for
two years bearing interest at prime plus 2% with interest only payments due
quarterly and one balloon principal payment due on or before December 31, 1995.
Dania-Auger is currently negotiating for the sale of the Restaurant to another
franchisee. The Company agreed to extend the term of the note to the earlier of
May 31, 1996 or the date the Restaurant is sold. The note, which remains
outstanding, is secured by property in Broward County, Florida. Total royalty
fees received by the Company in fiscal years ended January 1, 1996 and December
30, 1996 pursuant to the Unit Franchise Agreement for the Restaurant were
$31,378 and $24,652, respectively.
In January 1992, the Company entered into a Unit Franchise Agreement for
the operation of a single Restaurant in the Clearwater, Florida area with George
W. Cook, Norma Cook and Michael Perez, his wife and her son, which agreement
provided for payment to the Company of a standard $25,000 franchise fee and a
standard royalty fee of 4% of sales. In connection with the transaction, Mr.
Cook and Mr. Perez executed a continuing guaranty, which guaranty provides for
the personal guaranty of each of the individuals of all obligations of the
franchisee under the franchise agreement. Total sums received in royalty fees by
the Company in fiscal years ended January 1, 1996 and December 30, 1996 pursuant
to the Unit Franchise Agreement were $37,461 and $23,674, respectively.
In September 1991, the Company entered into a Unit Franchise Agreement for
the operation of a single Restaurant in Dania, Florida, with Dania-Auger, Inc.,
a Florida corporation in which Paul Auger, the father-in-law of Jared D. Brown
is the principal officer and stockholder. The unit franchise agreement provided
for payment to the Company of a standard $25,000 franchise fee and a standard
royalty fee of 4% of sales. In connection with the transaction, Mr. Auger and
his wife, Donna Auger, executed a continuing guaranty, which guaranty provides
for the personal guaranty of both of the individuals of all obligations of the
franchisee under the franchise agreement. Total sums received in royalty fees by
the Company in fiscal years ended January 1, 1996 and December 30, 1996 pursuant
to the unit franchise agreement were $31,286 and $26,584, respectively.
In March 1990, a general partnership was formed between the Company (50%
interest) and GNC Investments, Inc. (50% interest), a Florida corporation
("GNC") in which George W. Cook is the principal officer and stockholder, for
the purpose of owning and operating a joint venture Restaurant in Clearwater,
Florida. The term of the partnership agreement was for 30 years unless sooner
terminated by the affirmative vote of a majority of the partners. The Company
was required to operate the Restaurant and was entitled to receive a royalty fee
of 2% of sales. In the event of the death of George W. Cook, the partnership was
required to pay the Company a management fee of 2.5% and a royalty fee of 4%,
respectively, of sales. On December 31, 1993, the Company sold its 50%
partnership interest to GNC for $422,000 and recognized a gain of $200,218. GNC
assumed all liabilities of the Company for any partnership obligations, and
entered into a standard form Unit Franchise Agreement with the Company. A
Management Agreement was signed on December 31, 1993, between the Company and
GNC whereby the Company agreed to manage the operations of the Restaurant until
the earlier of such date that GNC has hired a management team for such
Restaurant or April 30, 1994. GNC reimbursed the Company for all of its
out-of-pocket expenses in managing and operating the Restaurant during such
period. On January 1, 1996, the Company leased the Restaurant and subleased the
real property from GNC for a combined monthly rental of $3,000. Total sums
received by the Company in fiscal years ended January 1, 1996 and December 30,
1996 pursuant to the unit franchise agreement were $14,082 and $2,285 in royalty
fees, respectively.
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In May 1989 and March 1990, the Company entered into joint ventures (50%
interest) and a Florida corporation (50% interest) owned 100% and equally by
Donna M. Brown-McMullen and her husband Thomas W. McMullen. The joint ventures
own and operate Restaurants in Clearwater, Florida. The term of each agreement
is for 30 years unless sooner terminated by the affirmative vote of a majority
of the partners. The Company is required to operate the Restaurants and is
entitled to receive royalty fees of 2% and 4% and a management fee of 2.5% and
0% of sales, respectively. The partnership agreement contains certain
restrictions on transfer of partnership interests and rights of first refusal in
favor of each of the partners. Total fees received by the Company from the
partnership in fiscal years ended January 1, 1996 and December 30, 1996 were
$102,835 and $43,882, respectively. Donna M. Brown-McMullen is the daughter of
Herbert G. Brown.
PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of June 16, 1997, information as to: (a)
the beneficial ownership of the Company's Common Stock and Preferred Stock by
(i) each person serving the Company as a Director on such date and each nominee
for Director, (ii) each person who qualifies as a "named executive officer" as
defined in Item 402(a)(3) of Regulation S-K under the Exchange Act, and (iii)
all of the Directors and executive officers of the Company as a group; and (b)
the beneficial ownership of the Company's Common Stock by each person known to
the Company as having beneficial ownership of more than 5% of the Company's
Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------------- ------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME SHARES(1) CLASS(2) SHARES(1) CLASS(3)
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
C. Thomas Thompson.......................... 210,419(4) * 219 *
James T. Holder............................. 123,291(5) * -- --
Michael T. Welch............................ 23,333(5) * -- --
Albert J. DiMarco........................... 300,000(5) * -- --
Anthony L. Austin........................... -0- -- -- --
Terry N. Christensen........................ 31,929 * 219 *
Frederick E. Fisher......................... 5,800(5) * -- --
William P. Foley, II........................ 1,073,998(6) 1.7% 2,192(7) 2.5%
Clarence V. McKee........................... 3,400 * -- --
Burt Sugarman............................... 767,075(8) 1.2% 548(9) --
Jean Giles Wittner.......................... -0- -- -- --
All Directors and executive officers as a
group (14 persons)........................ (10) 5.0% 3,178 3.6%
Name and Address of 5%
Beneficial Owner
CKE Restaurants, Inc.
1700 N. Harbor Blvd.
Anaheim, California 92801................... 13,512,727 (11) 19.9%
</TABLE>
- ---------------
* Less than 1%
(1) Based upon information furnished to the Company by the named persons and
information contained in filings with the Commission. Under the rules of
the Commission, a person is deemed to beneficially own shares over which
the person has or shares voting or investment power or which the person has
the right to acquire beneficial ownership within 60 days. Unless otherwise
indicated, the named persons have sole voting and investment power with
respect to their respective shares. Excludes shares of Common Stock which
will be received upon conversion of the Preferred Stock if such conversion
is approved by the Company's stockholders.
(2) Based on 60,749,933 shares of Common Stock outstanding as of June 16, 1997.
Shares of Common Stock subject to options or warrants exercisable within 60
days are deemed outstanding for computing
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<PAGE> 62
the percentage of class of the persons holding such options or warrants but
are not deemed outstanding for computing the percentage of class for any
other person.
(3) Based on 87,719 shares of Preferred Stock outstanding as of June 16, 1997.
(4) Includes 160,000 shares subject to options and 28,490 shares subject to
warrants exercisable on or prior to August 15, 1997.
(5) Shares subject to stock options exercisable on or prior to August 15, 1997.
(6) Includes 854,700 Shares subject to warrants exercisable prior to August 15,
1997; but excludes 438,596 shares held by Fidelity and 2,108,262 shares
subject to exercisable warrants held by Fidelity and 6,161,299 shares held
by CKE and 7,350,423 shares subject to warrants exercisable prior to August
15, 1997 held by CKE, all as to which Mr. Foley disclaims beneficial
ownership. Mr. Foley is the Chairman of the Board and Chief Executive
Officer of Fidelity and CKE, and he owns 20.3% of the outstanding common
stock of Fidelity. A limited partnership whose general partner is
controlled by Mr. Foley owns 15.8% of the outstanding common stock of CKE,
and Fidelity owns 2.2% of the outstanding common stock of CKE. Mr. Foley
may be deemed to be a controlling person of CKE and Fidelity.
(7) Excludes 4,385 shares held by Fidelity and 61,636 shares held by CKE, all
as to which Mr. Foley disclaims beneficial ownership. (See Note 9.)
(8) Includes 712,251 shares subject to warrants exercisable prior to August 15,
1997. Excludes 131,578 shares and 13,157 shares held by Mr. Sugarman's
spouse and by his son, respectively, and 200,000 shares held by GIANT, of
which Mr. Sugarman is Chairman of the Board, President and Chief Executive
Officer, as to which Mr. Sugarman disclaims beneficial ownership.
(9) Excludes 1,315 shares and 131 shares held by Mr. Sugarman's spouse and by
his son, respectively, as to which Mr. Sugarman disclaims beneficial
ownership.
(10) Includes 548,561 shares subject to stock options exercisable on or prior to
August 15, 1997, for other executive officers not listed above.
(11) Includes 7,350,428 shares subject to warrants exercisable on or prior to
August 15, 1997.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 150,000,000
shares of common stock, $.001 par value per share (the "Common Stock"), and (ii)
2,000,000 shares of preferred stock, $.001 par value per share. The Company has
had, and may in the future have from time to time, discussions with franchisees
and others concerning the possible acquisition of Restaurants using Common Stock
as consideration. The Company has entered into agreements with the holders of
other subordinated promissory notes of the Company, pursuant to which the
Company will issue Common Stock in payment of all outstanding principal due
under the notes. See "Risk Factors -- Proposed Acquisition of Certain Notes" and
"Risk Factors -- Shares Eligible for Future Issuance and Sale" and "The
Transaction."
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to the prior rights of the
holders of preferred stock, holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors from funds legally
available therefor, and to share ratably in the assets of the Company legally
available for distribution to the stockholders in the event of liquidation or
dissolution. The Common Stock has no preemptive rights and no subscription or
redemption privileges. The Common Stock does not have cumulative voting rights,
which means the holder or holders of more than half the shares voting for the
election of Directors can elect all the Directors then being elected. All the
outstanding shares of Common Stock are, and the shares to be issued in the
Transaction when issued will be, fully paid and not liable for further call or
assessment.
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<PAGE> 63
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of preferred stock. The
preferred stock may be issued from time to time in one or more series, and the
Board of Directors is authorized to fix the dividend rights, dividend rates, any
conversion or exchange rights, any voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, the
liquidation preferences and any other rights, preferences, privileges and
restrictions of any series of preferred stock and the number of shares
constituting such series and the designation thereof. The Company has no present
plans to issue any shares of preferred stock. Depending upon the rights of such
preferred stock, the issuance of preferred stock could have an adverse effect on
holders of Common Stock by delaying or preventing a change in control of the
Company, making removal of the present management of the Company more difficult
or resulting in restrictions upon payment of dividends and other distributions
to the holders of Common Stock.
DIRECTORS' LIABILITY
As authorized by the Delaware General Corporation Law ("DGCL"), the
Restated Certificate limits the liability of Directors to the Company for
monetary damages. The effect of this provision in the Restated Certificate is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
Director for breach of fiduciary duty as a Director (including breaches
resulting from negligent behavior) except in certain limited situations. This
provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a Director's fiduciary duty. These provisions will not
alter the liability of Directors under federal securities laws.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the DGCL. That
section provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person or
affiliate or associate of such person who is an "Interested Stockholder" for a
period of three years from the date that such person became an Interested
Stockholder unless: (a) the transaction resulting in a person's becoming an
Interested Stockholder, or the business combination, is approved by the board of
directors of the corporation before the person becomes an Interested
Stockholder, (b) the Interested Stockholder acquires 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an Interested Stockholder (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by certain
employee stock ownership plans) or (c) on or after the date the person becomes
an Interested Stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the Interested Stockholder. An "Interested
Stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person is
an Interested Stockholder.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS
Certain provisions of the Restated Certificate and the By-laws of the
Company (the "By-laws") could have an anti-takeover effect. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
of control of the Company. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover of the
Company that does not contemplate the acquisition of all of its outstanding
shares or an unsolicited proposal for the restructuring or sale of all or part
of the Company. The provisions are also intended to discourage certain tactics
that may be used in proxy
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<PAGE> 64
fights. The Board of Directors believes that, as a general rule, such takeover
proposals would not be in the best interests of the Company and its
stockholders.
RESTATED CERTIFICATE OF INCORPORATION
Classified Board of Directors. The Company's Restated Certificate of
Incorporation, as amended (the "Restated Certificate"), provides for the Board
of Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year.
The Board of Directors believes that a classified Board of Directors will
help to assure the continuity and stability of the Board of Directors and the
business strategies and policies of the Company as determined by the Board of
Directors, because the likelihood of continuity and stability in the composition
of the Company's Board of Directors and in the policies formulated by the Board
will be enhanced by staggered three-year terms.
The classified board provisions could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial to the Company
and its stockholders. In addition, the classified board provision could delay
stockholders who do not agree with the policies of the Board of Directors from
removing a majority of the Board for two years, unless they can show cause and
obtain the requisite vote. See "Number of Directors; Removal" below.
Special Meetings of the Stockholders. The Restated Certificate prohibits
the taking of stockholder action by written consent without written consent
without a meeting. The Restated Certificate provides that special meetings of
stockholders of the Company may be called only by the Chairman, the President or
by a majority of the members of the Board of Directors. Furthermore, if a
proposal requiring stockholder action is made by or on behalf of an Interested
Stockholder or a Director affiliated with an Interested Stockholder or where an
Interested Stockholder otherwise seeks action requiring stockholder approval,
the affirmative vote of a majority of the Continuing Directors (Directors who
are not affiliates or associates of an Interested Stockholder and were Directors
before such person became an Interested Stockholder and any successor of a
Continuing Director who was approved by a majority of the Continuing Directors)
will also be required to call a special meeting of stockholders. This provision
will make it more difficult for stockholders to take action opposed by the Board
of Directors. The term "Interested Stockholder" generally means any person
(other than a stockholder who was a stockholder prior to August 27, 1991) who is
a beneficial owner of or has announced a plan to acquire 10% or more of the
outstanding shares of capital stock entitled to vote on matters generally
submitted to stockholders ("Voting Stock") and an Affiliate or Associate (other
than a stockholder who was a stockholder prior to August 27, 1991) which, at any
beneficial owner of 10% or more or the outstanding Voting Stock.
Special Voting Requirements for Certain Transactions. The Restated
Certificate provides that (i) any merger or consolidation of the Company or any
subsidiary with (a) any Interested Stockholder or (b) any other corporation
which is, or after such merger or consolidation would be, and affiliate or
associate of an Interested Stockholder, (ii) if any sale, lease or other
disposition to or with or on behalf of any Interested Stockholder or any
affiliate or associate of any Interested Stockholder of 5% of the book value of
the total assets of the Company or 5% of stockholders' equity, (iii) certain
liquidations or dissolutions of the Company and any proposal to amend the
Restated Certificate made on behalf of an Interested Stockholder or any
affiliate or associate of an Interested Stockholder or (iv) certain
reclassifications and recapitalizations or other transactions that have the
effect of increasing an Interested Stockholder's proportionate share of the
Company's capital stock (collectively "Business Combinations") require, subject
to certain exceptions, the affirmative vote of the holders of at least 80% of
the Voting Stock other than the Voting Stock of which an Interested Stockholder
is the beneficial owner.
The above requirements generally do not apply to a Business Combination
approved by a disinterested majority of the Continuing Directors if certain
other requirements are met. Such other requirements are designed to provide an
incentive to an Interested Stockholder to treat the stockholders within a class
equally,
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<PAGE> 65
to discourage discriminatory two-tiered transactions and to encourage an
Interested Stockholder to furnish timely information regarding such Business
Combination.
Amendment of Certain Provisions of the Restated Certificate. The Restated
Certificate generally requires the affirmative vote of the holders of at least
80% of the outstanding Voting Stock in order to amend its provisions, including
any provisions concerning (i) the classified board, (ii) the amendment of the
By-laws, (iii) any proposed compromise or arrangement between the Company and
its creditors, (iv) the authority of the stockholders to act by written consent,
(v) the liability of Directors, (vi) certain business combinations and (vii) the
required vote to amend the Restated Certificate. These voting requirements will
make it more difficult for stockholders to make changes in the Restated
Certificate which would be designed to facilitate the exercise of control over
the Company. In addition, the requirement for approval by at least an 80%
stockholder vote will enable the holders of a minority of the voting securities
of the Company to prevent the holders of a majority or more of such securities
from amending such provisions of the Restated Certificate.
Number of Directors; Removal. The Restated Certificate provides that the
Board of Directors will consist of between five and fifteen members, the exact
number to be fixed from time to time by resolution adopted by a majority of the
Directors then in office. The Company currently has eight directors and no
vacancies. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, the Restated Certificate provides that Directors of the
Company may be removed only for cause and only by the affirmative vote of
holders of a majority of the outstanding shares of Voting Stock. Additionally,
if the proposal to remove a Director is made by or on behalf of an Interested
Stockholder, removal will also require the affirmative vote of holders of a
majority of Disinterested Shares (shares of Voting Stock held by stockholders
other than any Interested Stockholder by or for whom a proposal to remove a
Director is made). These provisions will preclude a stockholder from removing
incumbent directors without cause and simultaneously gaining control of the
Board of Directors by filing the vacancies created by such removal with its own
nominees.
BY-LAWS
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-laws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as Director as well as for other
stockholder proposals to be considered at stockholders' meetings.
Notice of stockholder proposals and Director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or the Directors are to be elected. To be
timely, notice must be received at the principal executive offices of the
Company (a) in the case of an annual meeting, not less than 60 nor more than 90
days prior to the meeting of stockholders; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or make to the stockholders, notice by the stockholder in order
be timely must be so received not later than the close of business on the tenth
day following the day on which such notice of the date of the annual meeting was
mailed or public disclosure of the date of the annual meeting was made,
whichever first occurs; and (b) in the case of a special meeting of stockholders
called for the purpose of electing Directors, not later than the close of
business on the tenth day following the day on which notice of the date of the
special meeting was mailed or public disclosure of the date of the special
meeting was made, whichever first occurs.
A stockholders' notice to the Secretary (a) with respect to a stockholder
proposal, shall set forth as to each matter the stockholder proposes to bring
before the meeting, (ii) the reasons for conducting such business at the
meeting, (iii) the name and record address of the stockholder proposing such
business; (iv) the class or series and number of shares of the Company which are
owned beneficially or of record by such stockholder, (v) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (vi) a representation that such stockholder intends to appear in
person or by prosy at the annual meeting to bring such business before the
meeting; and (b) with respect to a Director nomination, shall set forth (i)
certain information about the nominee, (ii) the consent of the nominee to serve
as a Director if elected, (iii) the name and record address of
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<PAGE> 66
the nominating stockholder, (iv) the class or series and number of shares of the
Company which are beneficially owned by such stockholder, (v) a description of
all arrangements or understandings between such stockholder and each proposed
nominee and any other person pursuant to which the nominations are to be made,
(vi) a representation that such stockholder intends to appear in person or by
proxy at the meeting to nominate the persons named and (vii) certain other
information.
The purpose of requiring advance notice is to afford the Board of Directors
an opportunity to consider the qualifications of the proposed nominees or the
merits of other stockholder proposals and, to the extent deemed necessary or
desirable by the Board of Directors, to inform stockholders about those matters.
Amendment to By-law Provisions. The Restated Certificate provides that the
By-laws are subject oz adoption, amendment, repeal or rescission either by (a) a
majority of the authorized number of Directors and, if one or more Interested
Stockholder exists, by a majority of the Directors who are Continuing Directors
or (b) the affirmative vote of the holders of not less than 80% of the
outstanding shares of Voting Stock and, if such adoption, amendment, or repeal
or rescission is proposed by or on behalf of an Interested Stockholder or a
Director affiliated with and Interested Stockholder, by a majority of the
Disinterested Shares. These provisions will make it more difficult for
stockholders to make changes in the By-laws. The 80% vote will allow the holders
of a minority of the voting securities to prevent the holders of a majority or
more of voting securities from amending the By-laws.
TRANSFER AGENT AND REGISTRAR
Chase Mellon Shareholder Services, L.L.C., Ridgefield Park, New Jersey, is
the Transfer Agent and Registrar for the Common Stock.
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby and
certain other legal matters in connection with this offering are being passed
upon for the Company by Christensen, Miller, Fink, Jacobs, Glaser, Weil &
Shapiro, LLP, Los Angeles, California, counsel for the Company.
EXPERTS
The consolidated financial statements and schedules of Checkers Drive-In
Restaurants, Inc. and subsidiaries as of December 30, 1996 and January 1, 1996
and for each of the years in the three-year period ended December 30, 1996,
included herein and elsewhere in the Registration Statement, have been included
herein and in the Registration Statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, given on the
authority of said firm as experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Auditors.......................................... F-2
Consolidated Balance Sheets -- December 30, 1996 and January
31, 1996.................................................. F-3
Consolidated Statements of Operations -- Years ended
December 30, 1996, January 1, 1996 and January 2, 1995.... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 30, 1996, January 1, 1996 and January 2,
1995...................................................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 30, 1996, January 1, 1996 and January 2, 1995.... F-6
Notes to Consolidated Financial Statements -- Years ended
December 30, 1996, January 1, 1996 and January 2, 1995.... F-8
Schedule VIII -- Valuation Accounts......................... F-30
Condensed Consolidated Balance Sheets -- June 16, 1997 and
December 30, 1996......................................... F-31
Condensed Consolidated Statements of Operations -- Two
Quarters ended June 16, 1997 and June 17, 1996............ F-32
Condensed Consolidated Statements of Cash Flows -- Two
Quarters ended June 16, 1997 and June 17, 1996............ F-33
Notes to Condensed Consolidated Financial Statements........ F-34
</TABLE>
F-1
<PAGE> 68
REPORT OF AUDITORS
The Board of Directors and Stockholders
Checkers Drive-In Restaurants, Inc. and Subsidiaries:
We have audited the consolidated financial statements of Checkers Drive-In
Restaurants, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in Item 14. These
consolidated financial statements and financial statement schedule 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presently fairly, in all material respects, the financial position of Checkers
Drive-In Restaurants, Inc. and subsidiaries as of December 30, 1996 and January
1, 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 30, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Tampa, Florida
March 3, 1997
F-2
<PAGE> 69
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 1,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Restricted................................................ $ 1,505,000 $ 687,500
Unrestricted.............................................. 1,551,493 2,676,296
Accounts receivable......................................... 1,544,137 1,942,544
Notes receivable............................................ 214,063 2,885,962
Inventory................................................... 2,260,945 3,161,996
Property and equipment held for resale...................... 7,607,879 4,338,964
Income taxes receivable..................................... 3,514,188 3,272,594
Deferred loan costs -- (note 1)............................. 2,451,551 --
Prepaid expenses and other current assets................... 305,721 1,368,532
------------ ------------
Total Current Assets............................... 20,954,977 20,334,388
Property and equipment, at cost, net of accumulated
depreciation and amortization (note 2).................... 98,188,550 119,949,100
Note receivable from related party (note 6)................. -- 5,182,355
Goodwill and non-compete agreements, net of accumulated
amortization of $4,186,132 in 1996 and $3,211,665 in 1995
(note 6).................................................. 12,283,789 17,019,078
Deferred income taxes (note 4).............................. -- 3,358,000
Deferred loan costs -- less current portion (note 1)........ 3,899,820 --
Deposits and other noncurrent assets........................ 782,694 975,996
------------ ------------
$136,109,830 $166,818,917
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt (note 3).................................... $ 2,500,000 $ 1,000,000
Current installments of long term debt (note 3)............. 9,589,233 13,170,619
Accounts payable............................................ 15,142,249 10,536,745
Accrued wages, salaries, and benefits....................... 2,527,993 2,637,830
Reserve for restructuring, Restaurant relocations and
abandoned sites (note 8).................................. 3,799,770 2,290,223
Accrued liabilities......................................... 13,784,309 13,652,230
Deferred franchise fee income............................... 336,919 300,000
------------ ------------
Total current liabilities.......................... 47,680,473 43,587,647
Long-term debt, less current installments (note 3).......... 39,905,987 38,090,278
Deferred franchise fee income............................... 465,500 763,000
Minority interests in joint ventures........................ 1,454,672 549,255
Other noncurrent liabilities................................ 6,262,813 3,852,729
------------ ------------
Total liabilities.................................. 95,769,445 86,842,909
------------ ------------
STOCKHOLDERS' EQUITY (NOTE 7):
Preferred stock, $.001 par value, Authorized 2,000,000
shares, no shares outstanding............................. -- --
Common stock, $.001 par value, authorized 100,000,000
shares, 51,768,480 issued and outstanding at December 30,
1996 and 51,528,480 at January 1, 1996.................... 51,768 51,528
Additional paid-in capital.................................. 90,339,098 90,029,213
Warrants (notes 7 and 10)................................... 9,463,132 3,000,000
Retained (deficit) earnings................................. (59,113,613) (12,704,733)
------------ ------------
40,740,385 80,376,008
Less treasury stock, at cost, 578,904 shares................ 400,000 400,000
------------ ------------
Net stockholders' equity.................................... 40,340,385 79,976,008
------------ ------------
Commitments and related party transactions (notes 5 and
9)........................................................ $136,109,830 $166,818,917
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 70
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Net Restaurant sales............................... $155,392,311 $178,744,335 $194,921,500
Royalties.......................................... 7,436,720 7,606,060 6,917,688
Franchise fees..................................... 929,662 960,769 1,876,750
Modular restaurant packages........................ 1,201,624 2,994,285 11,398,642
------------ ------------ ------------
Total revenues............................. 164,960,317 190,305,449 215,114,580
------------ ------------ ------------
COSTS AND EXPENSES:
Restaurant food and paper costs.................... 54,706,940 63,726,528 69,171,769
Restaurant labor costs............................. 57,301,817 58,245,114 58,771,755
Restaurant occupancy expenses...................... 12,926,386 11,562,191 9,743,089
Restaurant depreciation and amortization........... 8,847,663 10,649,982 12,334,119
Advertising expense................................ 7,420,414 8,086,874 7,932,986
Other restaurant operating expenses................ 15,345,252 15,565,453 15,133,639
Cost of modular restaurant package revenues........ 1,703,623 4,853,502 10,484,926
Other Deprecation and amortization................. 4,325,517 4,044,290 2,796,088
Selling general and administrative expenses........ 20,189,965 24,215,251 21,875,325
Impairment of long-lived assets (notes 1 and 8).... 15,281,745 18,935,190 --
Losses on assets to be disposed of (note 8)........ 7,131,639 3,192,000 9,140,000
Loss Provisions (note 8)........................... 1,991,295 4,445,000 5,631,000
------------ ------------ ------------
Total cost and expenses.................... 207,172,256 227,521,375 223,014,696
------------ ------------ ------------
Operating loss............................. (42,211,939) (37,215,926) (7,900,116)
------------ ------------ ------------
Other income (expense)
Interest income................................. 677,995 674,119 325,614
Interest expense................................ (6,232,761) (5,724,242) (3,564,454)
------------ ------------ ------------
Loss before minority interest, and income tax
expense (benefit)............................... (47,766,705) (42,266,049) (11,138,956)
Minority interest in (losses) earnings............. (1,508,825) (191,575) 185,298
------------ ------------ ------------
Loss before income tax expense (benefit)........... (46,257,880) (42,074,474) (11,324,254)
Income tax expense (benefit) (note 4).............. 151,000 (8,855,000) (4,573,000)
------------ ------------ ------------
Net Loss............................................. $(46,408,880) $(33,219,474) $ (6,751,254)
============ ============ ============
Net loss per common share............................ $ (.90) $ (.65) $ (.14)
============ ============ ============
Weighted average number of common shares
outstanding........................................ 51,698,480 50,903,238 49,464,023
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 71
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
ADDITIONAL NET
COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS
STOCK CAPITAL WARRANTS EARNINGS STOCK EQUITY
------- ----------- ---------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at, December 31, 1993.... $48,641 $83,356,420 $ -- $ 27,265,995 $(400,000) $110,271,056
Issuance of 884,208 shares of
common stock at $5.77 to $6.28
per share to acquire
Restaurants.................... 884 5,427,998 -- -- -- 5,428,882
Issuance of 664,045 shares of
common stock as consideration
for Restaurant acquisitions
(note 6)....................... 664 237,238 -- -- -- 237,902
Net loss......................... -- -- -- (6,751,254) -- (6,751,254)
------- ----------- ---------- ------------ --------- ------------
Balance at, January 2, 1995...... 50,189 89,021,656 0 20,514,741 (400,000) 109,186,586
Issuance of 178,273 shares of
common stock at $2.24 per share
to acquire territory rights.... 178 399,822 -- -- -- 400,000
Issuance of 118,740 shares of
common stock at $2.20 per share
to acquire a promotional
apparel company................ 119 260,590 -- -- -- 260,709
Issuance of 126,375 shares of
common stock at $2.19 per share
to acquire a Restaurant........ 126 276,347 -- -- -- 276,473
Issuance of 907,745 shares of
common stock as consideration
for Restaurant acquisition
(note 6)....................... 908 54,806 -- -- -- 55,714
Issuance of 8,377 shares of
common stock at $1.91 per share
to pay consulting fees......... 8 15,992 -- -- -- 16,000
Warrants issued in settlement of
litigation..................... -- -- 3,000,000 -- -- 3,000,000
Net Loss......................... -- -- -- (33,219,474) -- (33,219,474)
------- ----------- ---------- ------------ --------- ------------
Balance at, January 1 1996....... 51,528 90,029,213 3,000,000 (12,704,733) (400,000) 79,976,008
Issuance of 200,000 shares of
common stock at $1.14 as
payment on long-term debt...... 200 221,925 -- -- -- 222,125
Issuance of 40,000 shares of
common stock at $1.19 per share
to consulting fees............. 40 47,460 -- -- -- 47,500
Warrants issued to investor
group.......................... -- -- 6,463,132 -- -- 6,463,132
Employee stock options vested
upon severance................. -- 40,500 -- -- -- 40,500
Net loss......................... -- -- -- (46,408,880) -- (46,408,880)
------- ----------- ---------- ------------ --------- ------------
Balance at, December 30, 1996.... $51,768 $90,339,098 $9,463,132 $(59,113,613) $(400,000) $ 40,340,385
======= =========== ========== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 72
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings (Loss)................................ $(46,408,880) $(33,219,474) $ (6,751,254)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Deprecation and amortization.................... 13,173,180 14,694,273 15,130,208
Impairment of long-lived assets................. 15,281,745 18,935,190 --
Provision for losses on assets to be disposed
of............................................ 7,131,639 3,192,000 9,140,000
Provision for bad debt.......................... 1,310,818 2,261,196 846,521
Deferred loan cost amortization................. 1,300,081 -- --
Loss Provisions................................. 1,991,295 3,800,000 4,669,847
(Gain) loss on sale of property & equipment..... (74,580) 125,816 68,375
Minority interests in (losses) earnings......... (1,508,825) (191,575) 185,298
Other........................................... -- -- 237,902
Change in assets and liabilities:
Increase in receivables......................... (474,386) (1,125,719) (592,568)
Decrease in notes receivables................... 3,011,825 -- --
Decrease (Increase) in inventory................ 370,590 (588,445) (524,328)
(Increase) Decrease in costs and earnings in
excess of billings on uncompleted contracts... (24,793) 1,041,847 70,872
Increase in income tax receivable............... (241,594) (1,712,595) (423,671)
Decrease (Increase) in deferred income tax
assets........................................ 3,358,000 (3,358,000) --
(Increase) decrease in prepaid expenses......... (89,972) 447,445 (4,477,970)
Increase in deposits and other noncurrent
assets........................................ (309,088) (103,203) (1,248,738)
Increase (decrease) in accounts payable......... 4,272,963 (2,810,879) (3,339,470)
Increase in accrued liabilities................. 2,526,157 4,457,293 3,483,562
(Decrease) increase in deferred income.......... (260,581) 205,500 (448,000)
Decrease in deferred income taxes liabilities... -- (2,540,000) (3,701,000)
------------ ------------ ------------
Net cash provided by operating
activities............................... 4,335,594 3,510,670 12,325,586
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (4,240,449) (2,876,491) (34,763,515)
Proceeds from sale of assets....................... 1,812,625 5,502,347 15,372,000
Increase in goodwill and noncompete agreements..... (3,875) -- (156,206)
Acquisitions of companies, net cash paid........... (200,000) (64,389) (1,085,054)
------------ ------------ ------------
Net cash provided by (used in) investing
activities............................... $ (2,631,699) $ 2,561,467 $(20,632,775)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 73
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1996, JANUARY 1, 1996 AND JANUARY 2, 1995
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 30, JANUARY 2,
1996 JANUARY 1, 1996 1995
------------ --------------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt-net........ $ 1,500,000 $ 1,000,000 $ --
Proceeds from issuance of long-term debt............. -- 4,183,195 --
Borrowing on notes note payable to banks............. -- -- 18,000,000
Repayments on notes payable to banks................. -- -- (7,250,000)
Principal payments on long-term debt................. (3,584,309) (11,239,365) (2,097,525)
Proceeds from investment by minority interest........ 285,000 -- --
Distributions to minority interest................... (211,889) (163,696) (273,240)
----------- ------------ -----------
Net cash provided by (used in) financing
activities................................. (2,011,198) (6,219,866) 8,379,235
----------- ------------ -----------
Net increase (decrease) in cash.............. (307,303) (147,729) 72,046
CASH AT BEGINNING OF PERIOD............................ 3,363,796 3,511,525 3,439,479
----------- ------------ -----------
CASH AT END OF PERIOD.................................. 3,056,493 3,363,796 3,511,525
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................ 5,842,109 5,065,292 3,662,963
Income taxes paid.................................... -- 182,121 242,000
Note received on sale of assets...................... -- 4,982,355 --
Capital lease obligations incurred................... 225,000 5,000,000 887,048
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisitions of companies:
Fair value of assets acquired..................... 9,902,452 3,045,758 12,637,201
Receivables forgiven.............................. (5,429,459) -- --
Reversal of deferred gain......................... 1,421,517 -- --
Liabilities assumed............................... (5,694,510) (1,988,476) (6,123,265)
Stock issued...................................... -- (992,893) (5,428,882)
----------- ------------ -----------
Total cash paid for the net assets
acquired................................... 200,000 64,389 1,085,054
=========== ============ ===========
Stock issued for repayment of debt................... 228,125 -- --
=========== ============ ===========
Stock issued for payment of consulting fees.......... $ 47,500 $ -- $ --
=========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 74
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1996, JANUARY 1, 1996, AND JANUARY 2, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PURPOSE AND ORGANIZATION. The principal business of Checkers Drive-In
Restaurants, Inc. (the "Company") is the operation and franchising of Checkers
Restaurants. At December 30, 1996, there were 478 Checkers Restaurants operating
in 23 different states, the District of Columbia, and Puerto Rico. Of those
Restaurants, 232 were Company-operated (including thirteen joint ventures) and
246 were operated by franchisees. The accounts of the joint ventures have been
included with those of the Company in these consolidated financial statements.
The consolidated financial statements also include the accounts of all of
the Company's subsidiaries, including Champion Modular Restaurant Company, Inc.
("Champion"). Champion manufactures Modular Restaurant Packages primarily for
the Company and franchisees. Effective February 15, 1994, Champion was merged
into the Company and is currently operated as a division. Intercompany balances
and transactions have been eliminated in consolidation and minority interests
have been established for the outside partners' interests.
As of January 1, 1994, the Company changed from a calendar reporting year
ending on December 31st to a fiscal year which will generally end on the Monday
closest to December 31st. Each quarter consists of three 4-week periods with the
exception of the fourth quarter which consists of four 4-week periods.
(b) ACCOUNTING CHANGE. As discussed in Note 7, the Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation".
(c) REVENUE RECOGNITION. Franchise fees and area development franchise
fees are generated from the sale of rights to develop, own and operate Checkers
Restaurants. Area development franchise fees are based on the number of
potential Restaurants in a specific area which the franchisee agrees to develop
pursuant to the terms of the Area Development Agreement between the Company and
the franchisee and are recognized as income on a pro-rata basis when
substantially all of the Company's obligations per location are satisfied
(generally at the opening of a Restaurant). Both franchise fees and area
development franchise fees are non-refundable. Franchise fees and area
development franchises fees received prior to the substantial completion of the
Company's obligations are deferred.
The Company receives royalty fees from franchisees, generally in the amount
of 4% of each Restaurant's revenues. Royalty fees are recognized as earned.
Champion recognizes revenues on the percentage-of-completion method,
measured by the percentage of costs incurred to the estimated total costs of the
contract.
(d) CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents.
(e) RECEIVABLES. Receivables consist primarily of royalties due from
franchisees and receivables from the sale of Modular Restaurant Packages.
Allowances for doubtful receivables was $2,216,836 at December 30, 1996 and
$1,357,938 at January 1, 1996.
(f) INVENTORY. Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market.
(g) PRE-OPENING COSTS. Pre-opening costs are deferred and amortized over
12 months commencing with a Restaurant's opening. Such costs totalled $14,133 at
December 30,1996 and $161,234 at January 1, 1996.
F-8
<PAGE> 75
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(h) DEFERRED LOAN COSTS. Deferred loan costs of $6,805,677 incurred in
connection with the Company's November 22, 1996 restructure of its primary
credit facility (see Notes 3 and 10) are being amortized on the effective
interest method.
(i) PROPERTY AND EQUIPMENT. Property and equipment (P & E) are stated at
cost except for P & E that have been impaired, for which the carrying amount is
reduced to estimated fair value. Property and equipment under capital leases are
stated at their fair value at the inception of the lease. Depreciation and
amortization are computed on straight-line method over the estimated useful
lives of the assets.
(j) IMPAIRMENT OF LONG LIVED ASSETS. During the fourth quarter of 1995,
the Company early adopted 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 during 1995 and in 1996, 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 modular restaurants.
The Company recorded significant SFAS No. 121 impairment losses in 1995 and
again in 1996 because sales continued to decline in both fiscal years, in spite
of several marketing programs, which necessitated a review of the carrying value
of its assets. The effect of applying SFAS No. 121 resulted in a reduction of
property and equipment and goodwill of $15,281,745 in 1996 and $18,935,190 in
1995.
(k) GOODWILL AND NON-COMPETE AGREEMENTS. Goodwill and non-compete
agreements are being amortized over 20 years and 3 to 7 years, respectively, on
a straight-line basis (SFAS 121 impairments of goodwill were $4,631,742 in 1996
and $5,850,447 in 1995).
(l) INCOME TAXES. The Company accounts for income taxes under the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, 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. Under SFAS 109, 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) USE OF ESTIMATES. 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
(n) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS. The balance
sheets as of December 30, 1996, and January 1, 1996, 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.
F-9
<PAGE> 76
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and cash equivalents, receivables, accounts payable, and short-term
debt -- The carrying amounts of these items are a reasonable estimate of their
fair value.
Long-term debt -- Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value for debt issues that are not quoted on an exchange.
(o) STOCK SPLITS. The Company declared a three-for-two stock split,
payable in the form of stock dividends effective June 30, 1993. All share
information and per share information in these financial statements has been
retroactively restated to reflect the split.
(p) RECLASSIFICATIONS. Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform to the 1996 presentation.
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 1, USEFUL LIFE
1996 1996 IN YEARS
------------ ------------ -----------
<S> <C> <C> <C>
Land and improvements........................... $ 56,544,488 $ 59,534,146 15
Buildings....................................... 29,282,034 43,879,310 20-31.5
Equipment and fixtures.......................... 46,285,823 41,980,907 5-10
Construction-in-progress........................ -- 1,162,652
------------ ------------
132,112,345 146,557,015
Less accumulated depreciation and
amortization.................................. 33,923,796 26,607,915
------------ ------------
$ 98,188,550 $119,949,100
============ ============
</TABLE>
Capitalized interest totalled approximately $328,000 for 1994 (none in 1995
or 1996).
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 1,
1996 1996
------------ -----------
<S> <C> <C>
Notes payable under Loan Agreement.......................... $35,818,099 $37,021,241
Notes payable due at various dates, secured by buildings and
equipment, with interest at rates primarily ranging from
9.0% to 15.83%, payable monthly........................... 8,962,991 10,578,069
Unsecured notes payable, bearing interest at rates ranging
from prime to 12%......................................... 3,480,852 3,580,852
Other....................................................... 1,233,278 80,735
----------- -----------
Total long-term debt........................................ 49,495,220 51,260,897
Less current installments................................... 9,589,233 13,170,619
----------- -----------
Long-term debt, less current installments................... $39,905,987 $38,090,278
=========== ===========
</TABLE>
F-10
<PAGE> 77
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Aggregate maturities under the existing terms of long-term debt agreements
for each of the succeeding five years are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 9,589,233
1998........................................................ 7,217,865
1999........................................................ 31,391,670
2000........................................................ 1,000,145
2001........................................................ 234,618
Thereafter.................................................. 61,689
</TABLE>
On October 28, 1993, the Company entered into a loan agreement (the "Loan
Agreement") with a group of banks ("Bank Group") providing for an unsecured,
revolving credit facility. The Company borrowed approximately $50 million under
this facility primarily to open new Restaurants and pay off approximately $4
million of previously-existing debt. The Company subsequently arranged for the
Loan Agreement to be converted to a term loan and collateralized the term loan
and a revolving line of credit ranging from $1 million to $2 million (the
"Credit Line") with substantially all of the Company's assets. On March 15,
1996, the Bank Group advanced an additional sum of approximately $1.5 million to
the Company which funds were used for the payment of various property taxes (the
"Property Tax Loan"). The Property Tax Loan, together with all accrued interest,
was repaid in full on June 12, 1996, from proceeds of an income tax refund to
the Company.
On July 29, 1996, the debt under the Loan Agreement and Credit Line was
acquired from the Bank Group by an investor group led by an affiliate of DDJ
Capital Management, LLC (collectively, "DDJ"). The Company and DDJ began
negotiations for restructuring of the debt. On November 14, 1996, and prior to
consummation of a formal debt restructuring with DDJ, the debt under the Loan
Agreement and Credit Line was acquired from DDJ by a group of entities and
individuals, most of whom are engaged in the fast food restaurant business. This
investor group (the "CKE Group") was led by CKE Restaurants, Inc., the parent of
Carl Karcher Enterprises, Inc., Casa Bonita, Inc., and Summit Family
Restaurants, Inc. Also participating were most members of the DDJ Group, as well
as KCC Delaware, a wholly-owned subsidiary of Giant Group, Ltd., which is a
controlling shareholder of Rally's Hamburgers, Inc. Waivers of all defaults
under the Loan Agreement and Credit Line were granted through November 22, 1996,
to provide a period of time during which the Company and the CKE Group could
negotiate an agreement on debt restructuring.
On November 22, 1996, the Company and the CKE Group executed an Amended and
Restated Credit Agreement (the "Restated Credit Agreement") thereby completing a
restructuring of the debt under the Loan Agreement. The Restated Credit
Agreement consolidated all of the debt under the Loan Agreement and the Credit
Line into a single obligation. At the time of the restructuring, the outstanding
principal balance under the Loan Agreement and the Credit Line was $35.8
million. Pursuant to the terms of the Restated Credit Agreement, the term of the
debt was extended by one (1) year until July 31, 1999, and the interest rate on
the indebtedness was reduced to a fixed rate of 13%. In addition, all principal
payments were deferred until May 19, 1997, and the CKE Group agreed to eliminate
certain financial covenants, to relax others and to eliminate approximately $6
million in restructuring fees and charges. The Restated Credit Agreement also
provided that certain members of the CKE Group agreed to provide to the Company
a short term revolving line of credit of up to $2.5 million, also at a fixed
interest rate of 13% (the "Secondary Credit Line"). In consideration for the
restructuring, the Restated Credit Agreement required the Company to issue to
the CKE Group warrants to purchase an aggregate of 20 million shares of the
Company's common stock at an exercise price of $.75 per share, which was the
approximate market price of the common stock prior to the announcement of the
debt transfer. As of February 27, 1997, the Company has reduced the principal
balance under the Restated Credit Agreement by $9.1 million and has repaid the
Secondary Credit Line in full. A portion of the funds utilized to make these
principal reduction payments were obtained by the Company from
F-11
<PAGE> 78
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the sale of certain closed restaurant sites to third parties. Additionally, the
Company utilized $10.5 million of the proceeds from the February 21, 1997,
private placement which is described later in this section. Pursuant to the
Restated Credit Agreement, the prepayments of principal made in 1996 and early
in 1997 will relieve the Company of the requirement to make any of the regularly
scheduled principal payments under the Restructured Credit Agreement which would
have otherwise become due in fiscal year 1997. The Amended and Restated Credit
Agreement provides however, that 50% of any future asset sales must be utilized
to prepay principal.
On August 2, 1995, the Company entered into a purchase agreement (as
amended in October 1995 and April 1996 the "Rall-Folks Agreement") with
Rall-Folks, Inc. ("Rall-Folks") pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of three
promissory notes of the Company held by Rall-Folks (the "Rall-Folks Notes").
Pursuant to the Rall-Folks Agreement, the Company is to deliver to Rall-Folks
shares of its Common Stock with a value equal to the outstanding balance due
under the Rall-Folks Notes (the "Rall-Folks Purchase Price"). The total amount
of principal outstanding under the Rall-Folks Notes was approximately $1,888,000
as of January 1, 1996 and $1,788,000 as of December 30, 1996. The Rall-Folks
Notes are fully subordinated to the Company's existing bank debt.
Under the terms of the Rall-folks Agreement, the Company guaranteed that if
Rall-Folks sells all of the Common Stock issued for the Rall-folks Notes in a
reasonably prompt manner (subject to certain limitations described below)
Rall-Folks will receive net proceeds from the sale of such stock equal to the
Rall-Folks Purchase Price. If Rall-Folks receives less than such amount, the
Company will issue to Rall-Folks, at the option of Rall-Folks, either (i)
additional shares of Common Stock, to be sold by Rall-Folks, until Rall-Folks
receives an amount equal to the Rall-Folks Purchase Price, or (ii) a six-month
promissory note bearing interest at 11%, with all principal and accrued interest
due at maturity, and subordinated to the Company's bank debt pursuant to the
same subordination provisions, equal to the difference between the Rall-Folks
Purchase Price and the net amount received by Rall-Folks from the sale of the
Common Stock.
On August 3, 1995, the Company entered into a purchase agreement (as
amended in October 1995 and April 1996, the "RDG Agreement") with Restaurant
Development Group, Inc. ("RDG") pursuant to which the Company agreed to issue
shares of its Common Stock in exchange for and in complete satisfaction of a
promissory note of the Company held by RDG (the "RDG Note"). The total amount of
principal outstanding under the RDG Note was approximately $1,693,000 as of
January 1, 1996 and as of December 30, 1996. The RDG Note is fully subordinated
to the Company's existing bank debt. In partial consideration of the transfer of
the RDG Note to the Company, the Company will deliver to RDG shares of Common
Stock with a value equal to the sum of (i) the outstanding balance due under the
RDG Note on the closing date and (ii) $10,000 (being the estimated legal
expenses of RDG to be incurred in connection with the registration of the Common
Stock) (the "RDG Purchase Price").
As further consideration for the transfer of the RDG Note to the Company,
the Company agreed to issue RDG a warrant (the "Warrant") for the purchase of
120,000 shares of Common Stock at a price equal to the average closing sale
price of the Common Stock for the ten full trading days ending on the third
business day immediately preceding the closing date (such price is referred to a
the "Average Closing Price"); however, in the event that the average closing
price of the Common Stock for the 90 day period after the closing date is less
than the Average Closing Price, the purchase price for the Common Stock under
the Warrant will be changed on the 91st day after the closing date to the
average closing price for such 90 day period. The Warrant will be exercisable at
any time within five years after the closing date.
Under the terms of the RDG Agreement, the Company has guaranteed that if
RDG sells all of such Common Stock issued for the RDG note in a reasonably
prompt manner (subject to certain limitations described below), RDG will receive
net proceeds from the sale of such stock equal to at least 80% of the RDG
F-12
<PAGE> 79
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Price. If RDG receives less than such amount, the Company will issue
additional shares of Common Stock to RDG, to be sold by RDG, until RDG receives
an amount equal to 80% of the Purchase Price.
The Rall-Folks Notes and the RDG Notes were due on August 4, 1995. Pursuant
to the Rall-Folks Agreement and the RDG Agreement, the Rall-Folks Notes and the
RDG Note were to be acquired by the Company in exchange for Common Stock on or
before September 30, 1995. The Company and Rall-folks and RDG amended the
Rall-Folks Agreement and the RDG Agreement, respectively, to allow for a closing
in May 1996 (subject to extension in the event closing is delayed due to review
by the Securities and Exchange Commission of the registration statement covering
the Common Stock to be issued in the transaction). The transactions with
Rall-Folks and RDG have been delayed due to the Company's negotiations with the
various investor groups during fiscal 1996 concerning the restructure of the
Company's debt. Each of the parties has the right to terminate their respective
Agreement.
Pursuant to the Rall-Folks Agreement and the RDG Agreement, the term of the
Notes will be extended until the earlier of the closing of the repurchase of the
Notes or until approximately one month after the termination of the applicable
Agreement by a party in accordance with its terms. Closing is contingent upon a
number of conditions, including the prior registration under the federal and
state securities laws of the Common Stock to be issued and the subsequent
approval of the transaction by the stockholders of Rall-Folks and RDG of their
respective transactions. In the event the Company complies with all of its
obligations under the Rall-Folks Agreement and the stockholders of Rall-Folks do
not approve the transaction, the term of the Rall-Folks Notes was to have been
extended until December 1996. In the event the Company complies with all of its
obligations under the RDG Agreement and the stockholders of RDG do not approve
the transaction, the term of the RDG Note was to have been extended
approximately one year. The Company intends to attempt to negotiate a further
extension of these notes. No assurance can be given that the Company will be
successful in any attempted negotiations.
Under the terms of the Rall-Folks Agreement and the RDG Agreement, if the
transaction contemplated therein is consummated, so long as Rall-Folks and RDG,
respectively, is attempting to sell the Common Stock issued to it in a
reasonably prompt manner (subject to the limitations described below), the
Company is obligated to pay to it in cash an amount each quarter equal to 2.5%
of the value of the Common Stock held by it on such date (such value being based
upon the value of the Common Stock when issued to it).
On April 11, 1996, the Company entered into a Note Repayment Agreement (the
"NTDT Agreement") with Nashville Twin Drive-Thru Partners, L.P. ("NTDT")
pursuant to which the Company may issue shares of its Common Stock in exchange
for and in complete satisfaction of a promissory note of the Company held by
NTDT which matured on April 30, 1996 (the "NTDT Note"). Pursuant to the NTDT
Agreement, the Company is to issue shares of Common Stock to NTDT in blocks of
two hundred thousand shares each valued at the closing price of the Common Stock
on the day prior to the date they are delivered to NTDT (such date is
hereinafter referred to as the "Delivery Date" and the value of the Common Stock
on such date is hereinafter referred to as the "Fair Value"). The amount
outstanding under the NTDT Note will be reduced by the Fair Value of the stock
delivered to NTDT on each Delivery Date. The Company is obligated to register
each block of Common Stock for resale by NTDT under the federal and state
securities laws, and to keep such registration effective for a sufficient length
of time to allow the sale of the block of Common Stock, subject to limitations
on sales imposed by the Company described below. As each block of Common Stock
is sold, the Company will issue another block, to be registered for resale and
sold by NTDT, until NTDT receives net proceeds from the sale of such Common
Stock equal to the balance due under the NTDT Note. The Company will continue to
pay interest in cash on the outstanding principal balance due under the NTDT
Note through the date on which NTDT receives net proceeds from the sale of
Common Stock sufficient to repay the principal balance of the NTDT Note. On each
Delivery Date and on the same day of each month thereafter if NTDT holds on such
subsequent date any unsold shares of Common Stock, the Company will
F-13
<PAGE> 80
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also pay to NTDT in cash an amount equal to .833% of the Fair Value of the
shares of Common Stock issued to NTDT as part of such block of Common Stock and
held by NTDT on such date. Once the NTDT Note has been repaid in full, NTDT is
obligated to return any excess proceeds or shares of Common Stock to the
Company. The total amount of principal outstanding under the NTDT Note was
approximately $1,354,000 as of December 30, 1996. The NTDT Note is fully
subordinated to the Company's existing bank debt. The term of the NTDT Note was
to have been extended until May 31, 1997, if the Company was in compliance with
its obligations under the NTDT Agreement and NTDT had received at least $1.0
million from the sale of the Common Stock by January 31, 1997. The Company did
not meet these obligations and the Note, therefore, was not extended. Such dates
were to be extended if NTDT failed to make a commercially reasonable attempt to
sell an average of 10,000 shares of Common Stock per day on each trading day
that a registration statement covering unsold shares held by NTDT is in effect
prior to such dates, or if the Company is delayed in filing a registration
statement (or an amendment or supplement thereto) due to the failure of NTDT to
provide information required to be provided to the Company under the NTDT
Agreement. In the event that the Company files a voluntary bankruptcy petition,
an involuntary bankruptcy petition is filed against the Company and not
dismissed within 60 days, a receiver or trustee is appointed for the Company's
assets, the Company makes an assignment of substantially all of its assets for
the benefit of its creditors, trading in the Common Stock is suspended for more
than 14 days, or the Company fails to comply with its obligations under the NTDT
Agreement, the outstanding balance due under the NTDT Note will become due and
NTDT may thereafter seek to enforce the NTDT Note. The Company has not complied
with its obligations under the NTDT Agreement to date.
If these transactions are consummated, it is anticipated that approximately
4,000,000 shares of Common Stock will be issued by the Company (representing
approximately 6.2% of the shares outstanding after such issuance) as
consideration for various assets, primarily the Rall-Folks Notes, the RDG Note
and the NTDT Note (the "Notes") described above. The number of shares to be
issued will be determined by dividing the outstanding balance due under the
Notes (approximately $4.8 million as of March 1, 1997) or the purchase price for
the assets (approximately $300,000) by the average of the closing sale price per
share of the Common Stock for a set number of days prior to the closing date for
each transaction. The shares will either be available for immediate sale by the
persons and entities to whom they are issued,or the Company will be required to
register them for sale under the federal and state securities laws. In order to
promote an orderly distribution of the Common Stock to be issued to and sold by
Rall-Folks, RDG and NTDT, the Company negotiated the following limits on the
sales that may be made by Rall-Folks, RDG and NTDT: (i) each may sell not more
than 50,000 shares of Common Stock per week (150,000 in the aggregate) and (ii)
each may sell not more than 25,000 shares in any one day (75,000 shares in the
aggregate); provided that each may sell additional shares in excess of such
limits if such additional shares are sold at a price higher than the lowest then
current bid price for the Common Stock. While it is anticipated that the
foregoing limits, if the agreements containing such limits remain in effect,
will allow an orderly distribution of the Common Stock to be issued to and sold
by Rall-Folks, RDG and NTDT, the effect of a continuous offering of an average
of 30,000 shares per day by Rall-Folks, RDG and NTDT is undeterminable at this
time. The individuals or entities having registration rights for Common Stock to
be issued upon the exercise of the warrants under the Restated Credit Agreement,
(or any other individuals or entities having piggyback registration rights
thereto) will be entitled to sell such stock upon exercise of the warrants
subject to any limitations under federal securities laws resulting from their
relationship to the Company. The individuals or entities having registration
rights for Common Stock issued in connection with the Private Placement may be
sold in the open market only after the expiration of one year from the date of
issuance, also subject to any applicable federal securities laws. There can be
no assurance that any of these sales will not have an adverse effect on the
market price for the Common Stock.
F-14
<PAGE> 81
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consummation of the transaction with each of Rall-Folks, RDG and NTDT
has been delayed by the negotiations with the various investor groups during
fiscal 1996 concerning the restructure of the Company's debt. Pursuant to the
terms of the Restated Credit Agreement, the Company is obligated to purchase or
repay the Rall-Folks Notes, the RDG Note and the NTDT Note using Common Stock,
or may repay them in cash.
On February 21, 1997, the Company completed a private placement (the
"Private Placement") of 8,771,929 shares of the Company's common stock, $.001
par value, and 87,719 shares of the Company's Series A preferred stock, $114 par
value (the "Preferred Stock"). CKE Restaurants, Inc. purchased 6,162,299 of the
Company's common stock and 61,623 of the Preferred Stock and other qualified
investors, including other members of the CKE Group of lenders under the
Restated Credit Agreement, also participated in the Private Placement. The
Company received approximately $20 million in proceeds from the Private
Placement. The Company used $8 million of the Private Placement proceeds to
reduce the principal balance due under the Restated Credit Agreement; $2.5
million was utilized to repay the Secondary Credit Line; $2.3 million was
utilized to pay outstanding balances to various key food and paper distributors;
and the remaining amount was used primarily to pay down outstanding balances due
certain other vendors. The reduction of the debt under the Restated Credit
Agreement and the Secondary Credit Line, both of which carry a 13% interest rate
will reduce the Company's interest expense by more than $1.3 million annually.
NOTE 4: INCOME TAXES
Income tax expense (benefit) from continuing operations in fiscal years
1996, 1995 and 1994 amounted to $151,000, ($8,855,000), and ($4,573,000)
respectively.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
1996
Federal....................................... $(3,397,000) $ 3,397,000 $ --
State......................................... 190,000 (39,000) 151,000
----------- ----------- -----------
$(3,207,000) $ 3,358,000 $ 151,000
=========== =========== ===========
1995
Federal....................................... $(2,957,000) $(4,523,000) $(7,480,000)
State......................................... -- (1,375,000) (1,375,000)
----------- ----------- -----------
$(2,957,000) $(5,898,000) $(8,855,000)
=========== =========== ===========
1994
Federal....................................... $ (773,000) $(3,094,000) $(3,867,000)
State......................................... (99,000) (607,000) (706,000)
----------- ----------- -----------
$ (872,000) $(3,701,000) $(4,573,000)
=========== =========== ===========
</TABLE>
F-15
<PAGE> 82
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual expense differs from the expected expense by applying the federal
income tax rate of 35% to earnings before income tax as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
DEC. 30, JAN. 1, JAN. 2,
1996 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
"Expected" tax (benefit) expense.............. $(16,190,000) $(14,726,000) $(3,963,000)
State taxes, net of federal benefit........... (1,802,000) (1,632,000) (459,000)
Change in valuation allowance for deferred tax
asset allocated to income tax expense....... 18,125,000 7,616,000 --
Adjustments to deferred taxes for enacted
change in federal tax rate.................. -- -- --
Other, Net.................................... 18,000 (113,000) (151,000)
------------ ------------ -----------
Actual tax expense (benefit).................. $ 151,000 $ (8,855,000) $(4,573,000)
============ ============ ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities, are
represented below:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 1,
1996 1996
------------ -----------
<S> <C> <C>
Deferred Tax Assets:
Impairment of long-lived assets under SFAS 121........... $ 16,085,000 $ 7,365,000
Accrued expenses and provisions for restructuring and
Restaurant relocations and abandoned sites,
principally due to deferral for income tax purposes... 8,581,000 6,156,000
Federal net operating losses and credits................. 13,878,000 7,733,000
State net operating losses and credits................... 2,210,000 1,275,000
Deferral of franchise income and costs associated with
franchise openings in progress........................ 100,000 337,000
Other.................................................... 284,000 995,000
------------ -----------
Total gross deferred tax assets.................. 41,138,000 23,861,000
Valuation allowance...................................... (25,741,000) (7,616,000)
------------ -----------
Net deferred tax assets.......................... $ 15,397,000 $16,245,000
------------ -----------
Deferred Tax Liabilities:
Property and equipment, principally due to differences in
depreciation.......................................... 15,276,000 12,824,000
Pre-opening expense...................................... 121,000 63,000
------------ -----------
Total gross deferred tax liabilities............. 15,397,000 12,887,000
------------ -----------
Net deferred tax assets.......................... $ -- $ 3,358,000
============ ===========
</TABLE>
The net change in the valuation allowance in the year ended December 30,
1996 was an increase of $18,125,000. The total valuation allowance of
$25,741,000 is maintained on deferred tax assets which the Company has not
determined to be more likely than not realizable at this time. The Company will
continue to review the valuation allowance on a quarterly basis and make
adjustments as appropriate.
The current year federal net operating loss was carried back for federal
tax purposes. This resulted in an unused portion of the net operating loss and
alternative tax net operating loss available for carryforward which are both
reflected in Federal net operating losses and credits.
F-16
<PAGE> 83
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 30, 1996 the Company has net operating loss carryforwards for
Federal income tax purposes of $31,513,000 which are available to offset future
taxable income, if any, through 2011. The Company also has alternative minimum
tax credit carryforwards of approximately $1,131,000 which are available to
reduce future regular income taxes, if any, over an indefinite period as well as
Targeted Jobs Tax Credit carryforwards in the amount of $446,000 which are
available to reduce future regular income taxes, if any, through 2011.
The Company was examined by the Internal Revenue Service (IRS) for 1991 and
1992 and received tax deficiency notices on February 23, 1995. The IRS
challenged the life used for depreciation purposes by the Company for its
modular restaurant buildings. The amount of the assessment for 1991 and 1992 was
$579,551, before any related interest. The Company successfully appealed the tax
deficiency notices and was notified by the IRS, and concurred with by the Joint
Committee on Taxation, that the returns for the audited years be accepted as
filed.
NOTE 5: RELATED PARTIES
In May 1989 and March 1990, the Company entered into joint ventures with
related parties to operate two Restaurants. The joint venture agreements require
royalty fees of 2 to 4% and one of the agreements requires a management fee of
2.5% be paid to the Company. Total fees received by the Company were $102,835
and $111,725 respectively during 1995 and 1994.
In December 1993, the Company sold its 50% partnership interest in one of
the above joint ventures back to the joint venture partner for $422,000 and
recognized a gain of $200,218. This joint venture partner has an additional
franchise Restaurant. Royalties paid by these Restaurants to the Company, for
the time periods in which the Restaurants were owned 100% by the joint venture
partner, were $67,935, and $62,222 in 1995 and 1994, respectively.
In February 1990, the Company entered into a joint venture as a 50% partner
with an unaffiliated Florida corporation to own and operate a Restaurant. In
May, 1990, a related party leased to the partnership the land on which the
Restaurant is located. Rent paid by the partnership in 1993 and 1994 was
$43,656, and $43,656, respectively.
In September 1991, the Company entered into a unit franchise agreement for
the operation of a single restaurant in Dania, Florida, with a related party.
The unit franchise agreement provided for payment to the Company of a standard
$25,000 franchise fee and a standard royalty fee of 4% of sales. In connection
with the transaction, the related party and his wife executed a continuing
guaranty, which guaranty provides for the personal guaranty of both of the
individuals of all obligations of the franchisee under the franchise agreement.
Total sums received by the Company in royalty fees in fiscal years 1995 and 1994
pursuant to the unit franchise agreement were $31,286, and $32,827,
respectively.
In January 1992, the Company entered into a unit franchise agreement for
the operation of a single restaurant in the Clearwater, Florida area with three
related parties, which agreement provided for payment to the Company of a
standard $25,000 franchise fee and a standard royalty fee of 4% of sales. In
connection with the transaction, the related parties executed a continuing
guaranty, which guaranty provides for the personal guaranty of each of the
individuals of all obligations of the franchisee under the franchise agreement.
Total sums received by the Company in royalty fees in fiscal years 1995 and 1994
pursuant to the unit franchise agreement were $17,932 and $33,296 respectively.
In February 1992, a general partnership was formed between a Director and
an unaffiliated Florida corporation, for the purpose of developing a shopping
center in Ocala, Florida. In July, 1992, the partnership leased to the Company
land on which a Restaurant was built. In October, 1994, the partnership sold the
land the Company was leasing to an unaffiliated entity. Total rent paid during
1994 was $21,730.
F-17
<PAGE> 84
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1993, a general partnership among certain related parties leased
to the Company under a triple net lease a parcel of land on which a Checkers
restaurant was to be built. The term of the lease was for five years, with five
five-year option periods and monthly rent payments of $4,167 during the initial
term. Due to the reductions in the Company's development plans, no restaurant
was ever built on the property and the lease was terminated in 1994, with no
rent ever having been paid by the Company. The Company did pay approximately
$72,000 in development related fees to third parties in connection with its
efforts to develop the property, approximately $30,000 of which were reimbursed
to the Company by the partnership.
In July 1993, the Company entered into an Area Development Agreement with
two related parties. The Agreement provides for the payment to the Company of
the standard development fee, a standard franchise fee per restaurant and
payment of standard royalty fees. Six unit franchise agreements have been
granted pursuant to the Agreement in the names of various entities in which the
related parties each hold a fifty (50%) ownership interest. Total royalty fees
received by the Company in fiscal years 1995 and 1994 and pursuant to the unit
franchise agreements were $193,582 and $187,143 respectively.
In December 1993, the Company sold one of its Restaurants in Ft.
Lauderdale, Florida, to a related party, The sales price was $905,000 and the
Company received $705,000 in cash and a promissory note for $200,000. A gain of
approximately $470,000 was recognized by the Company. The term of the promissory
note was for two years bearing interest at prime + 2% with interest only
payments due quarterly and one balloon principal payment due on or before
December 31, 1995. The related party is currently negotiating for the sale of
the Restaurant to another franchisee. The Company has agreed to extend the term
of the Note to the earlier of May 31, 1996 or the date the Restaurant is sold.
The note is secured by property in Broward County, Florida. Total royalty fees
received by the Company in fiscal years 1995 and 1994 pursuant to the unit
franchise agreement for the Restaurant were $31,378 and $32,599 respectively.
In September 1993, the Company acquired 13 Restaurants from a Director of
the Company and a group of five partnerships (see note 6). The Company also
entered into a joint venture agreement with an affiliate of the Director in
September 1993, whereby the Director's affiliate served as the operating general
partner and owned 25% interest in the joint venture. The agreement gave the
Company the right to purchase, and gave the Director the right to require the
Company to purchase, the Director's 25% interest in the joint venture at
December 31, 1995 based on a formula price. The Director received compensation
and distributions totalling approximately $179,916 in 1995 and $265,000 in 1994
from the joint venture. The joint venture also paid development fees of $200,000
in 1994 (none in 1995) to the Director and an affiliate of the Director. The
joint venture subleased its office space in Atlanta from an affiliate of the
Director in 1995 and 1994. Rent paid by the joint venture in 1995 and 1994 was
$86,595 and $124,905 respectively. Total franchise fees received from the
Director and his affiliate and recognized as income was and $96,250 in 1995
(none in 1994). The Company purchased the interest of the Director and his
affiliations in the joint venture and sold three of these Restaurants to an
affiliate of the Director in August 1995 (see Note 6 relating to
InnerCityFoods).
On July 17, 1995, Checkers of Raleigh, a North Carolina corporation ("C of
R") in which a Director is the principal officer and shareholder, took
possession of an under performing Company Restaurant pursuant to a verbal
agreement, and entered into a franchise agreement which provided for waiver of
the initial franchise fee but required the payment to the Company of a royalty
fee of 1%, 2% and 3% during the first, second and third years, respectively, and
4% thereafter. On January 1, 1996, C of R entered into leases for this
Restaurant for a term of three years for (i) the building and equipment at a
monthly rental of 1.5%, 3% and 4.5% of gross sales during the first, second and
third years respectively, and (ii) the land at a monthly rental of 3% of gross
sales for the first year and 4% of gross sales thereafter. Total sums received
by the Company in fiscal year 1995 for this Restaurant were: (a) $2,037 in
royalty fees pursuant to the unit franchise agreement, and (b) -0- in rent. All
sums due and owing to the Company under the leases as of December 30, 1996 were
required to be paid on or before March 31, 1997. The Director executed a
continuing guaranty, which provides for the
F-18
<PAGE> 85
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
personal guaranty of all of the obligations of the franchisee under the
franchise agreement. Pursuant to an Option for Asset Purchase dated January 1,
1996, C of R was granted the option to purchase this Restaurant for the greater
of (a) 50% of its sales for the prior year, or (b) $350,000. On July 17, 1995, C
of R took possession of another under performing Company Restaurant pursuant to
a verbal agreement, and entered into a franchise agreement which provided for
waiver of the initial franchise fee but required the payment to the Company of a
royalty fee of 1%, 2% and 3% during the first, second and third years,
respectively, and 4% thereafter. On January 1, 1996, C of R entered into leases
for this Restaurant for a term of three years for (i) the building and equipment
at a monthly rental of 1.5%, 3% and 4.5% of gross sales during the first, second
and third years, respectively, and (ii) the land at a monthly rental of 3% of
gross sales for the first year and 4% of gross sales thereafter. Total sums
received by the Company in fiscal year 1995 for this Restaurant were: (a) $1,392
in royalty fees pursuant to the unit franchise agreement, and (b) -0- in rent.
All sums due and owing to the Company under the leases as of January 1, 1996,
were required to be paid on or before March 31, 1996. The Director executed a
continuing guaranty, which provides for the personal guaranty of all of the
obligations of the franchisee under the franchise agreement. Pursuant to an
Option for Asset Purchase dated January 1, 1996, C of R was granted the option
to purchase this Restaurant for the greater of (a) 50% of its sales for the
prior year, or (b) $350,000.
On December 5, 1995, Checkers of Asheville, a North Carolina corporation
("C of A") in which a Director is the principal officer and shareholder, took
possession of an under performing Company Restaurant pursuant to a verbal
agreement, and entered into a unit franchise agreement which provided for waiver
of the initial franchise fee but required the payment to the Company of the
standard royalty fee. On January 1, 1996, C of A entered into leases for this
Restaurant for a term of three years for the land, building and equipment at a
monthly rental of 4% of gross sales during the first year, 6% of gross sales the
second year, and a direct pass through of land rent during the third year. The
Director executed a continuing guaranty, which provides for the personal
guaranty of all of the obligations of the franchisee under the franchise
agreement. Pursuant to an Option for Asset Purchase dated January 1, 1996, C of
A was granted the option to purchase this Restaurant for the greater of (a) 50%
of its sales for the prior year, or (b) $350,000. On December 5, 1995, C of A
took possession of another under performing Company Restaurant pursuant to a
verbal agreement, and entered into a franchise agreement which provided for
waiver of (i) the initial franchise fee, and (ii) royalties during the first
three months, but requires the payment to the Company of the standard royalty
fee thereafter. On January 1, 1996, C of A entered into leases for this
Restaurant for a term of three years for the building and equipment at a monthly
rental of 1% of gross sales payable from and after the fourth month of the
lease. The Director executed a continuing guaranty, which provides for the
personal guaranty of all of the obligations of the franchisee under the
franchise agreement. Pursuant to an Option for Asset Purchase dated January 1,
1996, C of A was granted the option to purchase this Restaurant for the greater
of (a) 50% of its sales for the prior year, or (b) $300,000. On December 5,
1995, C of A took possession of another under performing Company Restaurant
pursuant to a verbal agreement and entered into a franchise agreement which
provided for waiver of the initial franchise fee but required the payment to the
Company of the standard royalty fee. On January 1, 1996, C of A entered into
leases for this Restaurant for a term of three years for the land, building and
equipment at a monthly rental of 3% of gross sales. The Director executed a
continuing guaranty, which provides for the personal guaranty of all of the
obligations of the franchisee under the franchise agreement. Pursuant to an
Option for Asset Purchase dated January 1, 1996, C of A was granted the option
to purchase this Restaurant for the greater of (a) 50% of its sales for the
prior year, or (b) $300,000.
In January 1996, the Company entered into an Agreement for Lease with
Option for Asset Purchase ("Agreement") with a Director in which the Company was
granted certain rights for three years in and to a Restaurant in Clearwater,
Florida. Checkers (a) entered into a sublease for the real property and an
equipment lease for the fixed assets at a combined monthly rental of $3,000, and
(b) agreed to purchase the inventory located at the Restaurant. In March 1996,
the Company exercised its option to purchase this
F-19
<PAGE> 86
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Restaurant for a purchase price of $300,000. All amounts owed to the Company by
C of R and C of A (totalling $116,547) were offset against the purchase price.
The Company incurred approximately $166,000 and $334,000 in legal fees for
1995 and 1994, respectively, from a law firm in which a Director of the Company,
at the time, was a partner.
Management believes that all of the above transactions were completed on
terms comparable to those which could have been negotiated with independent
third parties.
NOTE 6: ACQUISITIONS AND DISPOSITIONS
In May 1994, the Company completed an exchange agreement with Rally's
Hamburgers, Inc. ("Rally's") in which the Company acquired or leased three
Atlanta, Georgia Restaurant sites directly from Rally's and leased, assigned
existing leases for, or sold 18 Checkers Restaurant sites to Rally's. Also in
May 1994, the Company acquired eight Restaurant properties in Atlanta, Georgia
from two Rally's franchisees, and nine Restaurant properties in Miami, Florida
from a third Rally's franchisee. The aggregate purchase price for these
acquisitions was approximately $9,708,000 (676,761 shares of Common Stock,
$177,000 in cash, and approximately $5,295,000 in subordinated promissory notes
and assumed liabilities). Goodwill of $5,760,814 resulted from these
transactions.
The Company acquired five additional Restaurants from three franchisees
during 1994, for an aggregate of 207,457 shares of Common Stock, $908,000 in
cash, and $828,000 in assumption of liabilities. Goodwill of $729,249 resulted
from these transactions.
On March 31, 1995, the Company re-acquired certain rights relating to the
development and operation of Checkers Restaurants in the cities of Flint and
Saginaw, Michigan. The purchase price was $400,000 payable by the delivery of
178,273 shares of Common Stock.
Effective as of July 28, 1995, an Asset Purchase Agreement (the
"Agreement") was entered into by and among InnerCityFoods, a Georgia general
partnership ("ICF"), InnerCityFoods Joint Venture company, a Delaware
corporation and wholly owned subsidiary of the Registrant ("ICF JVC"),
InnercityFoods Leasing Company, a Delaware corporation and wholly owned
subsidiary of the Company ("Leasing"), The La-Van Hawkins Group, Inc., a Georgia
corporation ("Hawkins Group"), LaVan Hawkins InnerCityFoods, LLC, a Maryland
limited liability company ("LHICF"), and La-Van Hawkins, an individual who was
the President of ICF and a Director of the Company from August 1994 to January
1996 ("Hawkins"). For purposes of the disclosure in this term, ICF JVC, Leasing
and the Company are collectively referred to as the "Checkers Parties" and
Hawkins Group, LHICF and Hawkins are collectively referred to as the "Hawkins
Parties".
ICF was a joint venture between the Hawkins Group and ICF JVC, of which the
Hawkins Group was the Operating Partner. The Hawkins Group is controlled by
Hawkins. ICF was engaged in the operation of seven Checkers Restaurants in
Atlanta, Georgia, six Checkers Restaurants in Philadelphia, Pennsylvania, and
three Checkers Restaurants in Baltimore, Maryland. ICF JVC owned a 75% interest
in ICF and the Hawkins Group owned a 25% interest in ICF. The physical assets
comprising the Restaurants operated by ICF were owned by Leasing and leased to
ICF.
The Agreement consisted of two separate transactions. The first transaction
was the purchase by the Company of all of the rights, titles, and interest of
Hawkins Group in and to ICF for a purchase price of $1,250,000, plus an amount
based on ICF's earnings times 1.25, minus all amounts owed by the Hawkins
Parties to the Checkers Parties in connection with the operation of ICF. The
component of the purchase price based upon the earnings of ICF was zero, and the
amounts owed by the Hawkins Parties to the Checkers Parties was in excess of
$1,250,000. Accordingly, there was no net purchase price payable to the Hawkins
Parties by the Company for Hawkins Group's interest in ICF.
F-20
<PAGE> 87
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The second transaction under the Agreement was the sale by the Checkers
Parties of all of their respective rights, titles and interests in the three
Checkers Restaurants located in Baltimore, Maryland, to LHICF for a purchase
price of $4,800,000. The purchase price was paid by the delivery of a promissory
note in the amount of $4,982,355, which amount includes the purchase price for
the three Restaurants, the approximately $107,355 owed by the Hawkins Parties to
the Checkers Parties in connection with the operation of ICF that was not offset
by the $1,250,000 purchase price for Hawkins Group's interest in ICF and an
advance of $75,000 to Hawkins that was used primarily to pay closing costs
related to the transaction. The note bears interest at a floating rate which is
the lesser of (i) .25% above the current borrowing rate of the Company under its
Loan Agreement and (ii) 10.5%. Interest only is payable for the first six months
with principal and interest being payable thereafter based on a 15 year
amortization rate with the final payment of principal and interest due August
2002. The note is secured by a pledge of all the assets sold. Royalty fees for
the three Restaurants are at standard rates provided that the Company will
receive an additional royalty fee of 4% on all sales in excess of $1,800,000 per
Restaurant.
In addition to the two transactions described above, the Agreement also
provided for the Hawkins Parties to be granted, and such parties were granted on
the closing date, development rights for Checkers Restaurants in certain defined
areas of Baltimore, Maryland, Washington, D.C., Bronx, New York, and Harlem, New
York, as well as a right of first refusal for certain territories in California
and Virginia. Franchise fees and royalty rates for all Restaurants developed
under such development rights will be at standard rates provided that the
Company will receive an additional royalty fee of 4% on all sales in excess of
$1,800,000 per Restaurant.
The Agreement also provides that the Agreement supersedes all other prior
agreements, understandings and letters related to the transactions contemplated
by the Agreement including, but not limited to, the Joint Venture Agreement,
dated as of August 10, 1993 and the Management Agreement, Engagement Agreement
and Buy/Sell Agreement, each dated as of September 7, 1993, by and among certain
of the Hawkins Parties and their affiliates and the Checkers Parties; provided,
however, that any provisions of such agreements that would survive the
termination of such agreements according to the terms of such agreements are
deemed to have survived the termination of such agreements pursuant to the terms
of the Agreement.
The Company purchased two Checkers Restaurants in Nashville, Tennessee in
March 1995 from a franchisee. Consideration consisted of approximately $50,000
in cash at closing, secured, subordinated promissory notes for approximately
$1,550,000 and future cash payments of up to $800,000 consisting of $200,000 for
a noncompete agreement ($40,000 per year for five years) and up to $600,000
through an earnout provision.
In April 1995, the Company acquired the remaining 50% share of a joint
venture Restaurant in St. Petersburg, Florida. Pursuant to the terms of the
Assignment Agreement by and among the Company and the other partners of the
joint venture, the Company acquired the one-half interest for 126,375 shares of
Common Stock valued at approximately $280,000.
In April 1995, the Company acquired substantially all of the assets of a
promotional apparel distributor ("the Distributor") for a purchase price
including (a) $67,400, payable in shares of Common Stock, and (b) the assumption
of approximately $238,000 of liabilities, approximately $196,000 of which was
represented by promissory notes payable to certain stockholders of the
Distributor (the "Noteholders"). The Company issued a total of 118,740 shares of
Common Stock to the Distributor in payment of the $67,400 purchase price and to
the Noteholders in payment of their notes.
As of the close of business July 1, 1996, the Company acquired certain
general and limited partnership interests in nine Checkers restaurants in the
Chicago area, three wholly-owned Checkers Restaurants and other assets and
liabilities as a result of the bankruptcy of Chicago Double-Drive Thru, Inc.
("CDDT").
F-21
<PAGE> 88
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These assets were received in lieu of past due royalties, notes receivable and
accrued interest, from CDDT which totalled, net of reserves, $3,333,014. Assets
of $8,892,905 ($7,038,011 tangible and $1,854,894 intangible) and liabilities of
approximately $3,018,760 were consolidated into the balance sheet of the Company
as of the acquisition date. The Company has not received, from the bankruptcy
trustee, closing financial statements for these partnerships and therefore, the
resulting minority interests of approximately $2,341,131 recorded as of July 1,
1996, along with certain of the above-mentioned assets and liabilities are
subject to adjustment.
Long-term debt of $1,621,757 was assumed as a result of the acquisition of
the assets of CDDT, including an obligation to the Internal Revenue Service of
$545,000 and an obligation to the State of Illinois Department of Revenue of
$155,000, each subject to interest at 9.125% per year. The remaining acquired
notes $(921,757) are payable to a Bank and other parties with interest at rates
ranging from 8.11% to 10.139%. Non-interest bearing notes payable, certain
accrued liabilities and permitted encumbrances of $1,064,462 related to this
acquisition were assumed by the Company. Accounts payable incurred by CDDT and
its partnerships in the normal course of business amounting to $332,541 were
also recorded in connection with this acquisition.
On August 16, 1996, the Company received $3,500,000 and a Checkers
Restaurant in Washington D.C., valued at $659,547, in settlement of a note
receivable of $4,982,355, accrued interest of $319,924, and other receivables of
$278,785. This transaction resulted in an elimination of a deferred gain of
$1,421,517 which had been previously recorded as a liability upon the sale of
three Checkers Restaurants located in Baltimore, Maryland on July 28, 1995 when
the $4,982,355 note receivable was generated.
The operations of these acquisitions are included in these financial
statements from the date of purchase. The impact of the 1994, 1995 and 1996
acquisitions on the consolidated results of operations for the period prior to
acquisitions is immaterial.
NOTE 7: STOCK OPTION PLANS
In August 1991, the Company adopted a stock option plan for employees
whereby incentive stock options, nonqualified stock options, stock appreciation
rights and restrictive shares can be granted to eligible salaried individuals.
An option may vest immediately as of the date of grant and no option will be
exercisable after ten years from the date of the grant. All options expire no
later than 10 years from the date of grant. The Company has reserved 3,500,000
shares for issuance under the plan. In 1994, the Company adopted a stock option
plan for non-employee directors, which 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 12,000 shares of the Company's common
stock, with the subsequent automatic grant on the first day of each fiscal year
thereafter during the time such person is serving as a non-employee director of
a non-qualified ten-year option to acquire an additional 3,000 shares of common
stock. The Company has reserved 200,000 shares for issuance under this plan. All
such options have an exercise price equal to the closing sale price of the
common stock on the date of grant. One-fifth of the shares of common stock
subject to each initial option grant become exercisable on a cumulative basis on
each of the first five anniversaries of the grant of such option. One-third of
the shares of common stock subject to each subsequent option grant become
exercisable on a cumulative basis on each of the first three anniversaries of
the date of the grant of such option. As of December 30, 1996, there were
111,600 options outstanding with a weighted average exercise price of $2.93 per
share. The plans provide that shares granted come from the Company's authorized
but unissued or reacquired common stock. The price of the options granted
pursuant to these plans will not be less than 100 percent of the fair market
value of the shares on the date of the grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." Accordingly, no compensation cost has
F-22
<PAGE> 89
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plan for employees been determined based on the fair
value at the grant date for awards in fiscal 1994, 1995, and 1996 consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
DECEMBER 30, JANUARY 1, JANUARY 2,
1996 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net Earnings (Loss)
As Reported................................. $(46,408,880) $(33,219,474) $(6,751,254)
Pro Forma................................... (47,828,734) (33,706,928) (7,136,711)
Net Earnings (Loss) Per Common Share
As Reported................................. (0.90) (0.65) (0.14)
Pro Forma................................... $ (0.93) $ (0.66) $ (0.14)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1994, 1995 and 1996, respectively: dividend yield
of zero percent for all years; expected volatility of 57, 60 and 64 percent,
risk-free interest rates of 7.1, 6.2 and 6.5 percent, and expected lives of 4.7,
5.1 and 3.5 years. The compensation cost disclosed above may not be
representative of the effects on reported income in future years, for example,
because options vest over several years and additional awards are made each
year. Information regarding the employee option plan for 1996, 1995 and 1994 is
as follows.
SUMMARY OF THE STATUS OF THE COMPANY'S STOCK OPTION PLANS
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the year... 2,579,484 $4.75 2,915,074 $5.44 2,119,000 $9.95
Granted (exercise price equals market)..... 24,100 1.00 500,182 2.37 1,855,376 3.85
Granted (exercise price exceeds market).... 953,056 1.54 -- --
Exercised.................................. -- -- --
Forfeited.................................. (336,010) 2.07 (835,772) 4.00 (1,059,302) 5.09
--------- --------- ----------
Outstanding at the end of the year......... 3,220,630 3.94 2,579,484 4.75 2,915,074 5.44
========= ========= ==========
Options Exercisable at year end............ 2,165,934 1,147,650 572,124
--------- --------- ----------
Weighted-average fair value of options
granted during the year.................. $ 0.39(1) $ 1.08 $ 2.01
</TABLE>
- ---------------
(1) The weighted-average fair value of options granted whose exercise price
exceeds market was also $0.39.
F-23
<PAGE> 90
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUMMARY OF COMPANY STOCK OPTION PLAN'S PRICES
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE -------------------------------
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICES 12/30/96 LIFE (YRS.) EXERCISE PRICE 12/30/96 EXERCISE PRICE
- ------------------------ ----------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.75 to $2.00..................... 816,069 9.5 1.52 206,204 1.53
$2.01 to $3.00..................... 896,840 4.7 2.59 470,701 2.56
$3.01 to $4.00..................... 388,125 2.2 3.55 388,125 3.55
$4.01 to $5.00..................... -- -- -- -- --
$5.01 to $6.00..................... 816,001 2.6 5.13 801,097 5.13
$6.01 to $20.00.................... 303,595 6.9 11.72 299,807 11.71
---------- --- ----- --------- -----
$0.75 to $20.00.................... 3,220,630 5.3 3.94 2,165,934 4.86
========== === ===== ========= =====
</TABLE>
In August 1994, employees granted $11.50, $11.63, $12.33 and $19.00 options
were given the opportunity to forfeit those options and be granted an option to
purchase a share at $5.13 for every two option shares retired. As a result of
this offer, options for 662,228 shares were forfeited in return for options for
331,114 shares at $5.13 per share, and these changes are reflected in the above
table.
In February 1996, employees (excluding executive officers) granted options
in 1993 and 1994 with exercise prices in excess of $2.75 were offered the
opportunity to exchange for a new option grant for a lesser number of shares at
an exercise price of $1.95, which represented a 25% premium over the market
price of the Company's common stock on the date the plan was approved. Existing
options with an exercise price in excess of $11.49 could be cancelled in
exchange for new options on a four to one basis. Options with an exercise price
between $11.49 and $2.75 could be cancelled in exchange for new options on a
three for one basis. The offer to employees expired April 30, 1996 and, as a
result of this offer, options for 49,028 shares were forfeited in return for
options for 15,877 shares at the $1.95 exercise price. These changes are
reflected in the tables above.
NOTE 8: LOSS PROVISIONS
The Company recorded accounting charges and loss provisions of $16,765,552
during the third quarter of 1996, $1,249,644 of which consisted of various
selling, general and administrative expenses. Provisions totalling $14,169,777
to close 27 Restaurants, relocate 22 of them, settle 16 leases on real property
underlying these stores and sell land underlying the other 11 Restaurants, and
impairment charges related to an additional 28 under-performing Restaurants were
recorded. Refinancing costs of $845,775 were also recorded to expense
capitalized costs incurred in connection with the Company's previous lending
arrangements with its bank group. A provision of $500,000 was also recorded to
reserve for obsolescence in Champion's finished buildings inventory.
Additional accounting charges and loss provisions of $11,136,453 were
recorded during the fourth quarter of 1996, $1,128,652 of which consisted of
various selling, general and administrative expenses ($578,810 for severance,
$346,000 for employee relocations, bad debt provisions of $366,078, and $203,842
for other charges). Provisions totalling $6,441,001 including $1,428,898 for
additional losses on assets to be disposed of, $4,618,139 for impairment charges
related to 9 under-performing Restaurants received by the Company as a result of
the CDDT bankruptcy in July 1996 and $392,964 for other impairment charges were
also recorded. Additionally, in the fourth quarter of 1996, a $1,140,746
provision for loss on the disposal of the L.A. Mex product line, workers
compensation accruals of $1,093,000 (included in Restaurant labor costs),
adjustments to goodwill of $513,676 (included in other depreciation and
amortization) and a $453,300 charge for the
F-24
<PAGE> 91
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumption of minority interests in losses on joint-venture operations as a
result of the receipt by the Company of certain assets from the above mentioned
CDDT bankruptcy.
Third quarter 1995 accounting charges and loss provisions of $8,800,000
consisted of $2,833,000 in various selling, general and administrative expenses
(write-off of receivables, accruals for recruiting fees, relocation costs,
severance pay, reserves for legal settlements and the accrual of legal fees);
$3,192,000 to provide for Restaurant relocation costs, write-downs and abandoned
site costs; $344,000 to expense refinancing costs; $645,000 to provide for
inventory obsolescence; $1,500,000 for workers compensation exposure included in
Restaurant labor costs and $259,000 in other charges, net, including the
$499,000 write-down of excess inventory and a minority interest adjustment.
Fourth quarter 1995 accounting charges included $3,000,000 for warrants to
be issued in settlement of litigation (see Note 9 (b) - Lopez, et al vs.
Checkers) to accrue approximately $800,000 for legal fees in connection with the
settlement and continued defense of various litigation matters. Additionally,
during the fourth quarter of 1995, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed Of" (SFAS 121) which required a write-down
of certain intangibles and property related to under performing sites. The
effect of adopting SFAS 121 was a total charge to earnings for 1995 of
$18,935,190, consisting of a $5,850,447 write-down of goodwill and a $13,084,743
write-down of property and equipment.
The significant loss provisions discussed above during 1995 and 1996 were
caused by declining sales and a corresponding decline in cash flows which
impacted the Company's ability to support its net assets as reviewed under SFAS
No. 121. The result of declining sales and cash flows also necessitated the
recording of additional provisions to account for reductions in corporate
staffing and other overhead expenses associated with the restructuring required
to bring the Company's corporate and support activities in line with the lower
levels of sales and cash flows.
In 1994 the Company recorded provisions totalling $4,500,000 in the first
quarter and $11,396,000 in the fourth quarter of 1994. The first quarter
$4,500,000 provision included $1,753,000 to provide for the write-off of site
costs and the other costs to originally open Restaurants and $1,728,000 in lease
liability settlements for the 21 underperforming or closed Restaurants. The
fourth quarter 1994 provisions totalling $11,396,000 included a $1,690,000
charge to settle leases and $2,950,000 to expense site costs and other costs to
originally open Restaurants for 12 under performing Restaurants to be relocated.
These charges, along with the first quarter $4,500,000 charge described above
are combined, and the total $9,140,000 was reflected in the Company's 1994
statement of operations. A restructuring charge of $5,631,000 was included in
the fourth quarter 1994 provisions to provide for the Company's reorganization
due to its inability to find sufficient capital on acceptable terms to maintain
its growth rate and the resultant downsizing of staff and offices and the
write-off of costs associated with sites which will not be developed and new
Restaurant openings which have been delayed. The charge consisted of severance
costs, closed office expense, and loss on sale of the Company plane totalling
$680,000, and site costs and other costs to open previously anticipated new
Restaurants of $4,951,000. Other fourth quarter 1994 provisions included
$850,000 for legal costs and an allowance for royalty receivables due from a
franchisee involved in a bankruptcy, and $275,000 for settlement of real estate
title claims, both of which were included in 1994 selling, general and
administrative expenses. Of the 1994 provisions which total $15,896,000,
approximately $11,000,000 represents non-cash charges primarily for the
write-off of site costs and other costs to originally open the Restaurants. The
remaining $4,900,000 primarily represents cash expenditures to be made to settle
lease liabilities (approximately $4,100,000) over the remaining lives (up to
fourteen years) of the underlying leases.
Lease payments, other cash charges and asset write-offs in 1996 and 1995
reduced the Reserve for restaurant relocations and abandoned sites and the
Reserve for restructuring were $6,259,944 and $3,334,946, respectively.
F-25
<PAGE> 92
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9: COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS. The Company leases Restaurant properties and office
space under operating lease agreements. These operating leases generally have
five to ten-year terms with options to renew. Base rent expense on these
properties was approximately $8,015,000 in 1996, $9,773,000 in 1995, and
$7,800,000 in 1994.
Future minimum lease payments under noncancelable operating leases as of
December 30, 1996 are approximately as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31 LEASES
- ----------------------- ----------
<S> <C>
1997...................................................... 8,245,000
1998...................................................... 7,328,000
1999...................................................... 7,165,000
2000...................................................... 7,349,000
2001...................................................... 6,999,000
Thereafter................................................ 53,599,000
</TABLE>
(b) LITIGATION. Except as described below, the Company is not a party to
any material litigation and is not aware of any threatened material litigation:
In re Checkers Securities Litigation, Master File No.
93-1749-Civ-T-17A. On October 13, 1993, a class action complaint was filed
in the United States District Court for the Middle District of Florida,
Tampa Division, by a stockholder against the Company, certain of its
officers and directors, including Herbert G. Brown, Paul C. Campbell,
George W. Cook, Jared D. Brown, Harry S. Cline, James M. Roche, N. John
Simmons, Jr. and James F. White, Jr., and KPMG Peat Marwick, the Company's
auditors. The complaint alleges, generally, that the Company issued
materially false and misleading financial statements which were not
prepared in accordance with generally accepted accounting principles, in
violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 thereunder, and Florida common law and statute. The
allegations, including an allegation that the Company inappropriately
selected the percentage of completion method of accounting for sales of
modular restaurant buildings, are primarily directed to certain accounting
principles followed by Champion. The plaintiffs seek to represent a class
of all purchasers of the Company's Common Stock between November 22, 1991
and October 8, 1993, and seek an unspecified amount of damages. Although
the Company believes this lawsuit is unfounded and without merit, in order
to avoid further expenses of litigation, the parties have reached an
agreement in principle for the settlement of this class action. The
agreement for settlement provides for one of the Company's director and
officer liability insurance carriers and another party to contribute to a
fund for the purpose of paying claims on a claims-made basis up to a total
of $950,000. The Company has agreed to contribute ten percent (10%) of
claims made in excess of $475,000 for a total potential liability of
$47,500. The settlement is subject to the execution of an appropriate
stipulation of settlement and other documentation as may be required or
appropriate to obtain approval of the settlement by the Court, notice to
the class of pendency of the action and proposed settlement, and final
court approval of the settlements.
Lopez et al. v. Checkers Drive-In Restaurants, Inc. et al., Case No.
94-282-Civ-T-17C. On February 18, 1994, a class action complaint was filed
by four stockholders against the Company, Herbert G. Brown and James
Mattei, former officers and directors, in the United States District Court
for the Middle District of Florida, Tampa Division. The complaint alleges,
generally, that the defendants made certain materially false and misleading
public statements concerning the pricing practices of competitors and
analysts' projections of the Company's earnings for the year ended December
31, 1993, in violation of
F-26
<PAGE> 93
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5 thereunder. The plaintiffs seek to represent a class of all
purchasers of the Company's Common Stock between August 26, 1993 and March
15, 1994, and seek an unspecified amount of damages. Although the Company
believes this lawsuit is unfounded and without merit, in order to avoid
further expenses of litigation, the parties have reached an agreement for
the settlement of this class action. The agreement for settlement provides
for various director and officer liability insurance carriers to pay
$8,175,000 cash and for the Company to issue warrants valued at
approximately $3,000,000, for the purchase of 5,100,000 shares of the
Company common stock at a price of $1.4375 per share. The warrants will be
exercisable for a period of four (4) years after the effective date of the
settlement. At a hearing held on November 22, 1996, the Court determined
that the proposed settlement is fair, reasonable and adequate. The
settlement has been implemented and the lawsuit has been dismissed.
Greenfelder et al. v. White, Jr., et al. On August 10, 1995, a state
court complaint was filed in the Circuit Court of the Sixth Judicial
Circuit for Pinellas County, Florida, Civil Division, entitled Gail P.
Greenfelder and Powers Burgers, Inc. v. James F. White, Jr., Checkers
Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, Jared D.
Brown, Robert G. Brown and George W. Cook, Case No. 95-4644-C1-21. The
original complaint alleged, generally, that certain officers of the Company
intentionally inflicted severe emotional distress upon Ms. Greenfelder, who
is the sole stockholder, president and director of Powers Burgers, a
Checkers franchisee. The original complaint further alleged that Ms.
Greenfelder and Powers Burgers were induced to enter into various
agreements and personal guarantees with the Company based upon
misrepresentations by the Company and its officers and the Company violated
provisions of Florida's Franchise Act and Florida's Deceptive and Unfair
Trade Practices Act. The original complaint alleged that the Company is
liable for all damages caused to the plaintiffs as follows: damages in an
unspecified amount in excess of $2,500,000 in connection with the claim of
intentional infliction of emotional distress; $3,000,000 or the return of
all monies invested by the plaintiffs in Checkers franchises in connection
with the misrepresentation of claims; punitive damages; attorneys' fees;
and such other relief as the court may deem appropriate. The Court has
granted, in whole or in part, three (3) motions to dismiss the plaintiff's
complaint, as amended, including an order entered on February 14, 1997,
which dismissed the plaintiffs' claim of intentional infliction of
emotional distress, with prejudice, but granted the plaintiffs leave to
file an amended pleading with respect to the remaining claims set forth in
their amended complaint. The Company believes that this lawsuit is
unfounded and without merit, and intends to continue to defend it
vigorously. No estimate of any possible loss or range of loss resulting
from the lawsuit can be made at this time.
Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services,
Inc., et al. On August 10, 1995, a state court counterclaim and third-party
complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit
in and for Hillsborough County, Florida, Civil Division, entitled Tampa
Checkmate Food Services, Inc., Checkmate Food Services, Inc., and Robert H.
Gagne v. Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E.
Mattei, James F. White, Jr., Jared D. Brown, Robert G. Brown and George W.
Cook, Case No. 95-3869. In the original action, filed by the Company in
July 1995 against Mr. Gagne and Tampa Checkmate Food Services, Inc., a
company controlled by Mr. Gagne, the Company is seeking to collect on a
promissory note and foreclose on a mortgage securing the promissory note
issued by Tampa Checkmate and Mr. Gagne, and obtain declaratory relief
regarding the rights of the respective parties under Tampa Checkmate's
franchise agreement with the Company. The counterclaim and third party
complaint allege, generally, that Mr. Gagne, Tampa Checkmate and Checkmate
Food Services, Inc. were induced into entering into various franchise
agreements with and personal guarantees to the Company based upon
misrepresentations by the Company. The counterclaim and third party
complaint seeks damages in the amount of $3,000,000 or the return of all
monies invested by Checkmate, Tampa Checkmate and Gagne in Checkers
franchises, punitive damages, attorneys' fees and
F-27
<PAGE> 94
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
such other relief as the court may deem appropriate. The counterclaim was
dismissed by the court on January 26, 1996 with the right to amend. On
February 12, 1996 the counterclaimants filed an amended counterclaim
alleging violations of Florida's Franchise Act, Florida's Deceptive and
Unfair Trade Practices Act, and breaches of implied duties of "good faith
and fair dealings" in connection with a settlement agreement and franchise
agreement between various of the parties. The amended counterclaim seeks a
judgement for damages in an unspecified amount, punitive damages,
attorneys' fees and such other relief as the court may deem appropriate.
The Company has filed a motion to dismiss the amended counterclaim. The
Company believes that this lawsuit is unfounded and without merit, and
intends to continue to defend it vigorously. No estimate of any possible
loss or range of loss resulting from the lawsuit can be made at this time.
(c) PURCHASE COMMITMENTS. The Checkers Drive-In Restaurant chain, which
includes both the Company and franchisee-owned stores together, has purchase
agreements with various suppliers extending beyond one year. Subject to the
supplier's quality and performance, the purchases covered by these agreements
aggregate approximately $9 million in 1997, $11 million in 1998, $8 million in
1999 and $5 million in 2000.
NOTE 10: WARRANTS
As partial consideration for the transfer of a promissory note of the
Company (the "Note") back to the Company, the Company is obligated to deliver to
the holder of the Note a warrant (the "Warrant") for the purchase of 120,000
shares of Common Stock at a price equal to the average closing sale price of the
Common Stock for the ten full trading days ending on the third business day
immediately preceding the closing date (such price is referred to as the
"Average Closing Price"); however, in the event that the average closing price
of the Common Stock for the ninety day period after the closing date is less
than the Average Closing Price, the purchase price for the Common Stock under
the Warrant will be changed on the 91st day after the closing date to the
average closing price for such ninety day period. The Warrant will be
exercisable at any time within five years after the closing date. The Company is
obligated to register the stock acquired by the holders of the Note under the
Warrant. It is anticipated that the transaction will close in the second quarter
of 1996.
The Company issued warrants for the purchase of 5,100,000 shares of the
Company's Common Stock at a price of $1.4375 per share. These warrants, valued
at $3,000,000, were issued in settlement of certain litigation (note 9 (b)
- -Lopez, et al vs. v.Checkers), and will be exercisable for a period of four
years after the effective date of the settlement.
On November 22, 1996, the Company issued warrants to purchase 20 million
shares of Common Stock of the Company to the members of the new lender group
(see Note 3) at an exercise price of $0.75 per share which was the approximate
market price of the common stock prior to the announcement of the transfer of
the debt. These warrants were valued at $6,463,132, the value of the concessions
given as consideration for the warrants. The warrants are exercisable at any
time until November 22, 2002. Checkers is obligated to register the common stock
issuable under the warrants within six months and to maintain such registration
for the life of the warrants. The holders of the warrants also have other
registration rights relating to the common stock to be issued under the
warrants. The warrants contain customary antidilution provisions. The warrants
to purchase 150,000 shares of Checkers common stock for $2.69 per share, which
were issued in April 1995 to Checkers' prior bank lending group under the prior
loan agreement, were cancelled.
F-28
<PAGE> 95
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: UNAUDITED QUARTERLY FINANCIAL DATA
The following table presents selected quarterly financial data for the
periods indicated (in 000's, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- -------- --------
<S> <C> <C> <C> <C>
1996
Net revenues.................................... $38,423 $38,650 $ 37,088 $ 50,799
Impairment of long-lived assets................. -- -- 8,468 6,814
Losses on assets to be disposed of.............. -- -- 5,702 1,430
Loss provisions................................. -- -- 500 1,491
Loss from operations............................ 714 (1,428) (21,303) (20,195)
Net loss........................................ (252) (1,548) (24,423) (20,366)
Earnings per share.............................. $ (.00) $ (.02) $ (.47) $ .(39)
1995
Net revenues.................................... $46,044 $48,923 $ 43,451 $ 51,887
Impairment of long-lived assets................. -- -- -- 18,935
Losses on assets to be disposed of.............. -- -- 3,192 --
Loss provisions................................. -- -- 645 3,800
Loss from operations............................ (1,618) (691) (10,516) (24,391)
Net loss........................................ (1,693) (1,231) (7,312) (22,983)
Earnings per share.............................. $ (.03) $ (.02) $ (.14) $ (.45)
1994
Net revenues.................................... $51,735 $47,157 $ 50,789 $ 65,434
Losses on assets to be disposed of.............. 4,500 -- -- 4,640
Loss provisions................................. -- -- -- 5,631
Loss from operations............................ (2,367) 2,661 1,328 (9,522)
Net loss........................................ (1,758) 1,265 387 (6,646)
Earnings per share.............................. $ (.04) $ .03 $ .01 $ (.13)
</TABLE>
NOTE 12: UNAUDITED SUBSEQUENT EVENT
On March 25, 1997, Checkers agreed in principle to a merger transaction
pursuant to which Rally's Hamburgers, Inc., a Delaware corporation ("Rally's"),
will become a wholly-owned subsidiary of Checkers. Rally's, together with its
franchisees, operates approximately 471 double drive-thru hamburger restaurants
primarily in the midwestern United States. Under the terms of the letter of
intent executed by Checkers and Rally's, each share of Rally's common stock will
be converted into three shares of Checker's Common Stock upon consummation of
the merger. The transaction is subject to negotiation of definitive agreements,
receipt of fairness opinions by each party, receipt of stockholder and other
required approvals and other customary conditions.
F-29
<PAGE> 96
SCHEDULE VIII
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF PERIOD EXPENSED DEDUCTIONS PERIOD
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended January 2, 1995
Allowance for doubtful receivables............. $ 165,000 $ 887,000 $968,000 $ 84,000
========== ========== ======== ==========
Year ended January 1, 1996
Allowance for doubtful receivables............. $ 84,000 $2,261,196 $987,258 $1,357,938
========== ========== ======== ==========
Year ended December 30, 1996
Allowance for doubtful receivables............. $1,357,938 $1,310,818 $451,920 $2,216,836
========== ========== ======== ==========
</TABLE>
F-30
<PAGE> 97
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 16, DECEMBER 30,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents:
Restricted................................................ $ 2,566 $ 1,505
Unrestricted.............................................. 1,346 1,551
Accounts receivable......................................... 2,299 1,544
Note receivable............................................. 353 214
Inventory................................................... 2,157 2,261
Property and equipment held for sale........................ 5,316 7,608
Income taxes receivable..................................... -- 3,514
Deferred loan costs......................................... 1,830 2,452
Prepaid expenses and other current assets................... 803 306
-------- --------
Total current assets............................... 16,670 20,955
Property and equipment, at cost, net of accumulated
depreciation and amortization............................. 93,804 98,188
Intangibles, net of accumulated amortization................ 11,886 12,284
Deferred loan costs -- less current portion................. 1,867 3,900
Deposits and other non-current assets....................... 687 783
-------- --------
$124,914 $136,110
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short term debt............................................. $ -- $ 2,500
Current installments of long-term debt...................... 8,221 9,589
Accounts payable............................................ 7,967 15,142
Accrued wages, salaries and benefits........................ 2,172 2,528
Reserves for restructuring, restaurant relocations and
abandoned sites........................................... 3,216 3,800
Other accrued liabilities................................... 10,846 13,784
Deferred income............................................. 444 337
-------- --------
Total current liabilities.......................... 32,866 47,680
Long-term debt, less current installments................... 30,494 39,906
Deferred franchise fee income............................... 466 466
Minority interests in joint ventures........................ 1,361 1,455
Other noncurrent liabilities................................ 6,619 6,263
-------- --------
Total liabilities.................................. 71,806 95,770
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized 2,000,000
shares, issued and outstanding 87,719 at June 16, 1997
(none at December 30, 1996)............................... 0 --
Common stock, $.001 par value, authorized 100,000,000
shares, issued and outstanding 60,750,058 at June 16, 1997
and 51,768,480 at December 30, 1996....................... 61 52
Additional paid-in capital.................................. 109,748 90,339
Warrants.................................................... 9,463 9,463
Retained earnings........................................... (65,764) (59,114)
-------- --------
53,508 40,740
Less treasury stock, at cost, 578,904 shares................ 400 400
Net stockholder's equity........................... 53,108 40,340
-------- --------
$124,914 $136,100
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-31
<PAGE> 98
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-------------------
JUNE 16, JUNE 17,
1997 1996
-------- --------
<S> <C> <C>
REVENUES:
Net restaurant sales........................................ $ 64,201 $72,318
Franchise revenues and fees................................. 3,325 4,108
Modular restaurant packages................................. 344 647
-------- -------
Total revenues.................................... 67,870 77,073
-------- -------
COSTS AND EXPENSES:
Restaurant food and paper costs............................. 21,509 24,663
Restaurant labor costs...................................... 21,130 25,202
Restaurant occupancy expense................................ 5,232 5,657
Restaurant depreciation and amortization.................... 3,827 3,958
Advertising expense......................................... 3,240 2,107
Other restaurant operating expense.......................... 6,432 6,238
Costs of modular restaurant package revenues................ 289 998
Other depreciation and amortization......................... 1,029 1,667
General and administrative expenses......................... 6,899 7,297
-------- -------
Total costs and expenses.......................... 69,587 77,787
-------- -------
Operating (loss) income........................... (1,717) (714)
-------- -------
OTHER INCOME (EXPENSE):
Interest income............................................. 181 495
Interest expense............................................ (2,519) (2,515)
Interest -- loan cost amortization.......................... (2,655) (90)
-------- -------
Loss before minority interests and income tax expense
(benefit)................................................. (6,710) (2,824)
Minority interests.......................................... (60) 66
-------- -------
Loss before income tax benefit.............................. (6,650) (2,890)
Income tax benefit.......................................... -- (1,089)
-------- -------
Net loss.......................................... $ (6,650) $(1,801)
======== =======
Net loss per common share................................... $ (0.11) $ (0.03)
======== =======
Weighted average number of common shares outstanding........ 57,970 51,613
======== =======
</TABLE>
F-32
<PAGE> 99
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWO QUARTERS ENDED
-------------------
JUNE 16, JUNE 17,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (6,650) $(1,801)
Adjustments to reconcile net earnings to net cash (used in)
provided by operating activities:
Depreciation and amortization............................. 4,856 5,678
Deferred loan cost amortization........................... 2,655 90
Provision for bad debt.................................... 201 136
(Gain) loss on sale of property & equipment............... (8) 105
Minority interests in (losses) earnings................... (60) 66
Change in assets and liabilities:
Increase in receivables................................... (995) (312)
Decrease in notes receivable.............................. 40 7
Decrease in inventory..................................... 165 119
Decrease in costs and earnings in excess of billings on
uncompleted contracts.................................. 213 143
Decrease in income taxes receivable....................... 3,514 1,585
Increase in prepaid expenses and other.................... (530) (1,462)
Increase in deferred income tax assets.................... -- (69)
Decrease in deposits and other noncurrent assets.......... 95 20
(Decrease), Increase in accounts payable.................. (6,991) 2,143
Decrease in accrued liabilities........................... (3,898) (3,358)
Increase in deferred income............................... 107 18
-------- -------
Net cash provided by (used in) operating activities....... (7,286) 3,108
Cash flows from investing activities:
Capital expenditures........................................ (756) (1,745)
Proceeds from sale of assets................................ 2,827 1,468
Increase in goodwill........................................ (70) --
-------- -------
Net cash provided by (used in) investing
activities....................................... 2,001 (277)
-------- -------
Cash flows from financing activities:
Repayments on short term debt............................... (2,500) --
Principal payments on long-term debt........................ (10,776) (3,443)
Net proceeds from private placement......................... 19,450 --
Proceeds from investment by minority interests.............. -- 285
Distributions to minority interests......................... (33) (130)
-------- -------
Net cash provided by (used in) financing
activities....................................... 6,141 (3,288)
-------- -------
Net increase in cash.............................. 856 (457)
Cash at beginning of period................................. 3,056 3,364
Cash at end of period....................................... $ 3,912 $ 2,907
======== =======
Supplemental disclosures of cash flow information --Interest
paid...................................................... $ 3,003 $ 2,514
======== =======
</TABLE>
F-33
<PAGE> 100
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION -- The accompanying unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
necessary to present fairly the information set forth therein have been
included. The operating results for the quarter and the two quarters ended June
16, 1997, are not necessarily an indication of the results that may be expected
for the fiscal year ending December 29, 1997. Except as disclosed herein, there
has been no material change in the information disclosed in the notes to the
consolidated financial statements included in the Company's Annual Report on
form 10-K for the year ended December 30, 1996. Therefore, it is suggested that
the accompanying financial statements be read in conjunction with the Company's
December 30, 1996 consolidated financial statements. As of January 1, 1994, the
Company changed from a calendar reporting year ending on December 31st to a year
which will end on the Monday closest to December 31. Each quarter consists of
three 4-week periods with the exception of the fourth quarter which consists of
four 4-week periods.
(b) PURPOSE AND ORGANIZATION -- The principal business of Checkers Drive-In
Restaurants, Inc. (the "Company") is the operation and franchising of Checkers
Restaurants. At June 16, 1997, there were 480 Checkers Restaurants operating in
23 different states, the District of Columbia, and Puerto Rico. Of those
Restaurants, 233 were Company-operated (including thirteen joint ventures) and
247 were operated by franchisees. The accounts of the joint ventures have been
included with those of the Company in these consolidated financial statements.
Champion Modular Restaurant Company, a division of the Company, ("Champion")
manufactures Modular Restaurant Packages ("MRP's") primarily for the Company and
franchisees.
The consolidated financial statements also include the accounts of all of
the Company's subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation and minority interests have been established for the
outside partners' interests.
(c) REVENUE RECOGNITION -- Franchise fees are generated from the sale of
rights to develop, own and operate Restaurants. Such fees are based on the
number of potential Restaurants in a specific area which the franchisee agrees
to develop pursuant to the terms of the franchise agreement between the Company
and the franchisee and are recognized as income on a pro rata basis when
substantially all of the Company's obligations per location are satisfied,
generally at the opening of the Restaurant. Franchise fees are nonrefundable.
The Company receives royalty fees from franchisees based on a percentage of
each restaurant's gross revenues. Royalty fees are recognized as earned.
Champion recognizes revenues on the percentage-of-completion method,
measured by the percentage of costs incurred to the estimated total costs of the
contract.
(d) CASH, AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with an original maturity of less than three months to be
cash equivalents.
(e) RECEIVABLES -- Receivables consist primarily of franchise fees,
royalties and notes due from franchisees, and receivables from the sale of
modular restaurant packages. Allowances for doubtful receivables were $1.8
million at June 16, 1997 and $2.2 million at December 30, 1996.
(f) INVENTORY -- Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market.
F-34
<PAGE> 101
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(g) DEFERRED LOAN COSTS -- Deferred loan costs incurred in connection with
the Company's November 22, 1996 restructure of its primary credit facility (see
Note 2) are being amortized on the effective interest method.
(h) PROPERTY AND EQUIPMENT -- Property and equipment (P & E) are stated at
cost except for P & E that have been impaired, for which the carrying amount is
reduced to estimated fair value. Property and equipment under capital leases are
stated at their fair value at the inception of the lease Depreciation and
amortization are computed on straight-line method over the estimated useful
lives of the assets.
(i) IMPAIRMENT OF LONG LIVED ASSETS -- During the fourth quarter of 1995,
the Company early adopted 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 to the
level supported by the forecasted discounted cash flow.
(j) GOODWILL AND NON-COMPETE AGREEMENTS -- Goodwill and non-compete
agreements are being amortized over 20 years and 3 to 7 years, respectively, on
a straight-line basis
(k) INCOME TAXES -- The Company accounts for income taxes under the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, 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. Under SFAS 109, 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 (see Note 4).
(l) USE OF ESTIMATES -- 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
(m) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- The balance
sheets as of June 16, 1997 and December 30, 1996, 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, accounts payable, and short-term
debt -- The carrying amounts of these items are a reasonable estimate of their
fair value.
Long-term debt -- Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value for debt issues that are not quoted on an exchange.
(n) EARNINGS PER SHARE -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," ("SFAS 128") which is effective for reporting periods
ending after December 15, 1997. SFAS 128 replaces the presentation of primary
earnings per share and fully diluted earnings per share previously found in
Accounting Principles Board
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<PAGE> 102
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Opinion No. 15, "Earnings Per Share" ("APB 15") with basic earnings per share
and diluted earnings per share. Due to the net losses for each of the periods
ended June 16, 1997 and June 17, 1996, the inclusion of options and warrants
would result in an antidilutive per share amount. Therefore, for all periods
presented, such options and warrants are excluded from earnings per share
calculations under both APB 15 and, on a proforma basis, SFAS 128.
(o) RECLASSIFICATIONS -- Certain amounts in the 1996 financial statements
have been reclassified to conform to the 1997 presentation.
NOTE 2. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 16, DECEMBER 30,
1997 1996
-------- ------------
<S> <C> <C>
Notes payable under Loan Agreement.......................... $26,574 $35,818
Notes payable due at various dates, secured by buildings and
equipment with interest rates primarily ranging from 9.0%
to 15.83%, payable monthly................................ 7,610 8,963
Unsecured notes payable, bearing interest at rates ranging
from prime to 18%......................................... 3,381 3,481
Other....................................................... 1,150 1,233
------- -------
Total long-term debt........................................ 38,715 49,495
Less current installments................................... 8,221 9,589
------- -------
Long-term debt, less current installments................... $30,494 $39,906
======= =======
</TABLE>
On July 29, 1996, the debt under the Company's prior bank loan agreement
(the "Loan Agreement") and credit line ("Credit Line") was acquired from a bank
group by an investor group led by an affiliate of DDJ Capital Management, LLC
(collectively, "DDJ"). The Company and DDJ began negotiations for restructuring
of the debt. On November 14, 1996, and prior to consummation of a formal debt
restructuring with DDJ, the debt under the Loan Agreement and Credit Line was
acquired from DDJ by a group of entities and individuals, most of whom are
engaged in the fast food restaurant business. This investor group (the "CKE
Group") was led by CKE Restaurants, Inc., the parent of Carl Karcher
Enterprises, Inc., Casa Bonita, Inc., and Summit Family Restaurants, Inc. Also
participating were most members of the DDJ Group, as well as KCC Delaware
Company, a wholly-owned subsidiary of Giant Group, Ltd., which is a principal
shareholder of Rally's Hamburgers, Inc. Waivers of all defaults under the Loan
Agreement and Credit Line were granted through November 22, 1996, to provide a
period of time during which the Company and the CKE Group could negotiate an
agreement on debt restructuring.
On November 22, 1996, the Company and the CKE Group executed an Amended and
Restated Credit Agreement (the "Restated Credit Agreement") thereby completing a
restructuring of the debt under the Loan Agreement. The Restated Credit
Agreement consolidated all of the debt under the Loan Agreement and the Credit
Line into a single obligation. At the time of the restructuring, the outstanding
principal balance under the Loan Agreement and the Credit Line was $35.8
million. Pursuant to the terms of the Restated Credit Agreement, the term of the
debt was extended by one (1) year until July 31, 1999, and the interest rate on
the indebtedness was reduced to a fixed rate of 13%. In addition, all principal
payments were deferred until May 19, 1997, and the CKE Group agreed to eliminate
certain financial covenants, to relax others and to eliminate approximately $6
million in restructuring fees and charges. The Restated Credit Agreement also
provided that certain members of the CKE Group agreed to provide to the Company
a short term revolving line of credit of up to $2.5 million, also at a fixed
interest rate of 13% (the "Secondary Credit Line"). In consideration for the
restructuring, the Restated Credit Agreement required the Company to issue to
the CKE Group warrants to purchase an aggregate of 20 million shares of the
Company's common stock at an exercise
F-36
<PAGE> 103
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
price of $.75 per share, which was the approximate market price of the common
stock prior to the announcement of the debt transfer. As of June 16, 1997, the
Company has reduced the principal balance under the Restated Credit Agreement by
$9.2 million and has repaid the Secondary Credit Line in full. A portion of the
funds utilized to make these principal reduction payments were obtained by the
Company from the sale of certain closed restaurant sites to third parties.
Additionally, the Company utilized $10.5 million of the proceeds from the
February 21, 1997, private placement which is described later in this section
for these principal reduction payments. Pursuant to the Restated Credit
Agreement, the prepayments of principal made in 1996 and early in 1997 will
relieve the Company of the requirement to make any of the regularly scheduled
principal payments under the Restructured Credit Agreement which would have
otherwise become due in fiscal year 1997. The Amended and Restated Credit
Agreement provides however, that 50% of any future asset sales must be utilized
to prepay principal.
The Company has outstanding promissory notes in the aggregate principal
amount of approximately $4.5 million (the "Notes") payable to Rall-Folks, Inc
("Rall-Folks"), Restaurant Development Group, Inc ("RDG") and Nashville Twin
Drive-Through Partners, L P. ("N.T.D.T."). The Company had agreed to acquire the
Notes issued to Rall-Folks and RDG in consideration of the issuance of an
aggregate of approximately 2.8 million shares of Common Stock and the Note
issued to NTDT in exchange for a convertible note in the same principal amount
and convertible into approximately 927,000 shares of Common Stock pursuant to
purchase agreements entered into in 1995 and subsequently amended. All three of
the parties received varying degrees of protection on the purchase price of tile
promissory notes. Accordingly, the actual number of shares to be issued will be
determined by the market price of the Company's stock. The Company was not able
to consummate these transactions as originally scheduled. Pursuant to the most
recent amendment, consummation of the Rall-Folks, RDG and NTDT purchases is to
occur prior to December 16, November 25, and November 15, 1997, respectively,
subject to extension in certain cases. The Company does not currently have
sufficient cash available to pay one or more of these notes if required to do
so.
NOTE 3. PRIVATE PLACEMENT
On February 21, 1997, the Company completed a private placement (the
"Private Placement") of 8,771,929 shares of the Company's common stock, $.001
par value, and 87,719 shares of the Company's Series A preferred stock, $114 par
value (the "Preferred Stock"). CKE Restaurants, Inc. purchased 6,162,299 of the
Company's common stock and 61,623 of the Preferred Stock and other qualified
investors, including other members of the CKE Group of lenders under the
Restated Credit Agreement, also participated in the Private Placement. The
Company received approximately $19.5 million in net proceeds from the Private
Placement.
The Private Placement purchase agreement requires that the Company submit
to its shareholders for vote at its 1997 Annual Shareholders' Meeting the
conversion of the Preferred Stock into shares of the Company's common stock
based upon the Preferred Stock liquidation preference. If the shareholders do
not vote in favor of the conversion, the Preferred Stock will remain outstanding
with the rights and preferences set forth in the Certificate of Designation of
Series A Preferred Stock of the Company (the "Certificate," a copy of which is
an Exhibit hereto), including (i) a dividend preference, (ii) a voting
preference, (iii) a liquidation preference and (iv) a redemption requirement.
Holders of the Preferred Stock will have the right to receive cash dividends
equal to $16.53 per share per annum payable on a quarterly basis beginning
August 19, 1997. Such dividends are cumulative and must be paid in full prior to
any dividends being declared or paid with respect to the Company's common stock.
If the Company is in default with respect to any dividends on the Preferred
Stock, then no cash dividends can be declared or paid with respect to the
Company's common stock. If the Company fails to pay any two required dividends
on the Preferred Stock, then the number of seats on the Company's Board of
Directors will be increased by two and the holders of the Preferred Stock will
have the
F-37
<PAGE> 104
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
right, voting as a separate class, to elect the Directors to fill those two new
seats, which new Directors will continue in office until the holders of the
Preferred Stock have elected successors or the dividend default has been cured.
In the event of any liquidation, dissolution or winding up, but not including
any consolidation or merger of the Company, the holders of the Preferred Stock
will be entitled to receive a liquidation preference of $114 per share plus any
accrued but unpaid dividends (the "Liquidation Preference"). In the event the
stockholders do not approve the conversion of the Preferred Stock and the
Company subsequently completes a consolidation or merger and the result is a
change in control of the Company, then each share of the Preferred Stock will be
automatically redeemed for an amount equal to the Liquidation Preference. The
Company is required to redeem the Preferred Stock for an amount equal to the
Liquidation Preference on or before February 12, 1999. If the redemption does
not occur as requited, the dividend rate will increase from $16.53 per share to
$20.52 per share. Additionally, if there are not then Directors serving which
were elected by the holders of the Preferred Stock, the number of directors
constituting the Company's Board of Directors will be increased by two and the
holders of the Preferred Stock voting as a class will be entitled to elect the
Directors to fill the created vacancies.
NOTE 4. STOCK OPTION PLANS
In August 1991, the Company adopted a stock option plan for employees
whereby incentive stock options, nonqualified stock options, stock appreciation
rights and restrictive shares can be granted to eligible salaried individuals.
An option may vest immediately as of the date of grant and no option will be
exercisable after ten years from the date of the grant. All options expire no
later than 10 years from the date of grant. The Company has reserved 3,500,000
shares for issuance under the plan. In 1994, the Company adopted a stock option
plan for non-employee directors, which 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 12,000 shares of the Company's common
stock, with the subsequent automatic grant on the first day of each fiscal year
thereafter during the time such person is serving as a non-employee director of
a non-qualified ten-year option to acquire an additional 3,000 shares of common
stock. The Company has reserved 200,000 shares for issuance under this plan. All
such options have an exercise price equal to the closing sale price of the
common stock on the date of grant. One-fifth of the shares of common stock
subject to each initial option grant become exercisable on a cumulative basis on
each of the first five anniversaries of the grant of such option. One-third of
the shares of common stock subject to each subsequent option grant become
exercisable on a cumulative basis on each of the first three anniversaries of
the date of the grant of such option. The plans provide that shares granted come
from the Company's authorized but unissued or reacquired common stock. The price
of tile options granted pursuant to these plans will not be less than 100
percent of the fair market value of the shares on the date of the grant. In
August 1994, employees granted $11.50, $11.63, $12.33 and $19.00 options were
given the opportunity to forfeit those options and be granted an option to
purchase a share at $5.13 for every two option shares retired. As a result of
this offer, options for 662,228 shares were forfeited in return for options for
331,114 shares at $5.13 per share.
In February 1996, employees (excluding executive officers) granted options
in 1993 and 1994 with exercise prices in excess of $2.75 were offered the
opportunity to exchange for a new option grant for a lesser number of shares at
an exercise price of $1.95, which represented a 25% premium over the market
price of the Company's common stock on the date the plan was approved. Existing
options with an exercise price in excess of $11.49 could be cancelled in
exchange for new options on a four to one basis. Options with an exercise price
between $11.49 and $2.75 could be cancelled in exchange for new options on a
three for one basis. The offer to employees expired April 30, 1996 and, as a
result of this offer, options for 49,028 shares were forfeited in return for
options for 15,877 shares at the $1.95 exercise price.
F-38
<PAGE> 105
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
During the quarter ended March 24, 1997, the Company granted 285,000
options pursuant to the terms of the 1991 Employee Stock Option Plan referenced
above and the Company granted options to purchase a total of 500,000 shares of
its common stock as part of compensation packages for two new executive
officers, which options were not granted pursuant to the terms of the 1991
Employee Stock Option Plan. During the quarter ended June 16, 1997, 12,000
options were granted pursuant to the terms of the 1994 Stock Option Plan for
Non-Employee Directors referenced above.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plan
for employees been determined based on the fair value at the grant date for
awards in fiscal 1996 and each of the first two quarters of 1997 consistent with
the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced by approximately $1.4 million; $680,000 and
$43,000 respectively, on a pro forma basis. 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 1996 and the
first two quarters of fiscal 1997, respectively: dividend yield of zero percent
for both periods; expected volatility of 64 and 81 percent, risk-free interest
rates of 6.5 and 6.0 percent, and expected lives of 3.5 and 2 years,
respectively. The compensation cost disclosed above may not be representative of
the effects on reported income in future quarters, for example, because options
vest over several years and additional awards are made each year.
NOTE 5. INCOME TAXES
The Company recorded income tax benefits of $558,000 for the quarter ended
June 16, 1997 and $934,000 for the quarter ended June 17, 1996, or 38.0% of the
losses before income taxes. The Company then recorded a valuation allowance of
$558,000 against deferred income tax assets as of June 16, 1997. The Company's
total valuation allowances of $29.3 million as of June 16, 1997, is maintained
on deferred tax assets which the Company has not determined to be more likely
than not realizable at this time. Subject to a review of the tax assets, these
valuation allowances will be reversed during periods in the future in which the
Company records pre-tax income, in amounts necessary to offset any then recorded
income tax expenses attributable to such future periods.
NOTE 6. MERGER
On March 25, 1997, the Company agreed in principle to a merger transaction
pursuant to which Rally's Hamburgers, Inc., a Delaware corporation ("Rally's"),
was to become a wholly-owned subsidiary of Checkers. Under the terms of the
letter of intent executed by Checkers and Rally's, each share of Rally's common
stock would be convened into three shares of Checkers' Common Stock upon
consummation of the merger. The transaction was subject to negotiation of
definitive agreements, receipt of fairness opinions by each party, receipt of
stockholder and other required approvals and other customary conditions and the
ability to use the pooling of interests method of accounting for the merger. On
June 16, 1997, the Company announced the termination of merger negotiations due
to the inability to obtain prior approval from the Securities and Exchange
Commission for favorable accounting treatment of the proposed merger. Certain
legal, accounting and other expenses totalling $350,000 associated with the
proposed transaction were included in general and administrative expenses for
the quarter ended June 16, 1997.
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<PAGE> 106
APPENDIX A
AMENDED AND RESTATED NOTE REPAYMENT AGREEMENT
THIS AMENDED AND RESTATED NOTE REPAYMENT AGREEMENT (the "Agreement") is
made and entered into as of this 17th day of July, 1997, and amends and restates
in its entirety that certain Note Repayment Agreement, dated as of April 11,
1996 (as amended and restated hereby, the "Agreement"), by and among CHECKERS
DRIVE-IN RESTAURANTS, INC., a Delaware corporation ("Checkers"), NASHVILLE TWIN
DRIVE-THRU PARTNERS, L.P., a Tennessee limited partnership ("NTDT"), JONES &
JONES TWIN DRIVE-THRU, INC., a Tennessee corporation and a general partner of
NTDT ("Jones & Jones"), NTD ENTERPRISES, INC., a Tennessee corporation and a
general partner of NTDT ("NTD"), and ROLAND L. JONES, an individual ("Jones")
(NTDT, Jones & Jones, NTD and Jones are collectively referred to herein as the
"NTDT Parties").
WHEREAS, NTDT holds a promissory note of Checkers, dated March 31, 1995, in
the original principal amount of $1,354,287.00 (the "Note"); and
WHEREAS, Checkers and the NTDT Parties have entered into the Note Repayment
Agreement, pursuant to which Checkers was granted the right to repay the Note by
delivering to NTDT shares of the common stock of Checkers ("Common Stock"); and
WHEREAS, Checkers and NTDT desire to amend and restate the Agreement to
provide for an exchange of the Note for a series of subordinated promissory
notes, with an aggregate principal amount equal to the outstanding balance due
under the Note, which new notes will be convertible by NTDT into shares of
Common Stock pursuant to the terms and conditions hereof;
NOW, THEREFORE, in consideration of the premises, the mutual
representations, warranties, covenants and agreements hereinafter contained, and
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound, the parties agree as
follows:
ARTICLE I
PURCHASE AND SALE
1.01 Purchase and Sale of the Note. Subject to and upon the terms and
conditions hereinafter set forth and the representations and warranties
contained herein, Checkers agrees to purchase from NTDT, and NTDT agrees to
sell, assign, transfer and deliver to Checkers, free and clear of any and all
liens, encumbrances, liabilities, claims, charges and restrictions of any kind
or nature whatsoever, all of NTDT's right, title and interest (which will be
good, valid and complete) in and to the Note.
1.02 Non-Assumption of Liabilities. None of the provisions of this
Agreement will be deemed to create any obligation or liability of Checkers to
any person or entity other than NTDT, whether under a third-party beneficiary
theory, successor liability theory or otherwise.
ARTICLE II
PURCHASE PRICE
The aggregate purchase price (the "Purchase Price") payable to NTDT for the
Note will be equal to the outstanding balance (principal and accrued interest)
due under the Note on the Closing Date (as hereinafter defined). The Purchase
Price shall be payable by delivery at Closing (as hereinafter defined) of
promissory notes issued by Checkers to NTDT (the "New Notes") with an aggregate
principal balance equal to the Purchase Price. Each of the New Notes shall be
issued with an original principal amount of $100,000, except for one New Note
which shall be issued in a principal amount equal to the remainder resulting
from dividing the Purchase Price by $100,000. The New Notes shall be
subordinated to Checkers' primary debt facility, pursuant to the same terms as
the Note. The New Notes shall be convertible into shares of the common stock
A-1
<PAGE> 107
of Checkers, par value $.001 per share ("Common Stock"), as provided in Article
III hereof. The New Notes shall be issued in the form attached hereto as Exhibit
A.
ARTICLE III
CONVERSION OF NEW NOTES
3.01 Conversion Privilege and Conversion Price. Subject to and upon
compliance with the provisions of this Article, at the option of NTDT, each of
the New Notes may be converted from time to time (so long as NTDT has not been
notified by Checkers that the effectiveness of the Registration Statement (as
defined in Section 6.01 hereof) is suspended) at the principal amount thereof
into fully paid and nonassessable shares of Common Stock at the Conversion
Price, determined as hereinafter provided, in effect at the time of conversion.
Checkers shall have the option of paying in cash the balance due under any New
Note in lieu of issuing shares of Common Stock upon the exercise by NTDT of its
right of conversion with respect to any New Note. If Checkers elects to repay
such New Note in cash (including principal and accrued interest), such payment
shall be delivered to NTDT within 15 business days after delivery to Checkers of
NTDT's notice (delivered pursuant to Section 3.02 hereof) of its intention to
convert the New Note.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "Conversion Price") shall be the arithmetic
average (rounded to the nearest penny) of the closing sale price per share of
the Common Stock as reported on the Nasdaq Stock Market's National Market (as
reported in The Wall Street Journal) for the three full trading days ending on
the business day immediately preceding the date on which NTDT delivers to
Checkers notice of its intent to convert as provided in Section 3.02 hereof.
3.02 Exercise of Conversion Privilege. In order to exercise the conversion
privilege, NTDT shall surrender the New Note to be converted, duly endorsed or
assigned to Checkers or in blank, at its office at 600 Cleveland Street, Eighth
Floor, Clearwater, Florida 34615, accompanied by written notice to Checkers at
such office that NTDT has elected to convert such New Note into shares of Common
Stock.
Provided that NTDT has not been notified by Checkers that the effectiveness
of the Registration Statement (as defined in Section 6.01 hereof) is suspended,
a New Note shall be deemed to have been converted immediately prior to the close
of business on the day of surrender of such New Note for conversion in
accordance with the foregoing provisions (the "Conversion Date"), and at such
time the rights of NTDT as the holder of such New Note shall cease and NTDT
shall be treated for all purposes as the record holder of the Common Stock into
which such New Note is convertible at such time. If NTDT shall surrender a New
Note along with notice of its election to convert such New Note at a time when
the effectiveness of the Registration Statement is suspended, then (i) Checkers
shall hold the New Note in trust for the benefit of NTDT until the effectiveness
of the Registration Statement is recontinued and (ii) the Conversion Date shall
be the day that Checkers gives notice to NTDT that the effectiveness of the
Registration Statement is recontinued and the New Note shall be deemed to have
been converted immediately prior to the close of business on such date, and at
such time the rights of NTDT as the holder of such New Note shall cease and NTDT
shall be treated for all purposes as the record holder of the Common Stock into
which such New Note is convertible at such time.
3.03 Delivery of Shares. Within seven business days after any Conversion
Date, Checkers shall cause to be delivered to NTDT one or more certificates in
the name of NTDT representing the shares of Common Stock issuable upon
conversion of the related New Note.
Checkers' delivery to NTDT of the fixed number of shares of the Common
Stock into which the New Note is convertible shall be deemed to satisfy
Checkers' obligation to pay the principal amount of the New Note subject to
Checker's obligations set forth in Section 6.02 hereof. Checkers shall also
deliver to NTDT with the certificates representing the Common Stock a check in
payment of all interest accrued on the converted New Note from the end of the
prior interest period through the Conversion Date.
3.04 Fractions of Shares. No fractional shares of Common Stock shall be
issued upon conversion of a New Note. If more than one New Note shall be
surrendered for conversion at one time, the number of full
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<PAGE> 108
shares which shall be issuable upon conversion thereof shall be computed on the
basis of the aggregate principal amount of the New Notes so surrendered. In the
event that the number of shares of Common Stock to be issued includes a
fractional share, the number of shares shall be rounded up or down to the
nearest whole number of shares.
3.05 Company to Reserve Common Stock. Checkers shall at all times reserve
and keep available, free from preemptive rights, out of its authorized but
unissued Common Stock, for the purpose of effecting the conversion of the New
Notes, the full number of shares of Common Stock then issuable upon the
conversion of all outstanding New Notes.
3.06 Taxes on Conversions. Checkers will pay any and all taxes that may be
payable in respect of the issue or delivery of shares of Common Stock on
conversion of New Notes pursuant hereto. Checkers shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of shares of Common Stock in a name other than that of
NTDT, and no such issue or delivery shall be made unless and until NTDT has paid
to Checkers the amount of any such tax, or has established to the satisfaction
of Checkers that such tax has been paid.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF NTDT
NTDT represents and warrants to Checkers (each of which shall be deemed
material and independently relied upon by Checkers) as follows:
4.01 Organization and Standing. NTDT is a partnership duly organized,
validly existing and in good standing under the laws of the State of
Tennessee with full power and authority to own its properties and assets.
4.02 Authority. Subject to receipt of the approval and consent of the
partners of NTDT, NTDT has the full power and authority to enter into and
perform this Agreement and to consummate the transactions contemplated
herein in accordance with the terms of this Agreement.
4.03 Authorization. Other than obtaining the consent of the partners
of NTDT, NTDT has taken all necessary actions to authorize and approve the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby. This Agreement constitutes a legal, valid and binding
obligation of NTDT, enforceable against NTDT in accordance with its terms.
4.04 Title to the Note. NTDT has good, valid and complete title to
the Note.
4.05 Litigation and Disputes. There is no claim, litigation or
proceeding pending or, to the knowledge of NTDT, threatened, against or
with respect to NTDT, and there exists no basis or grounds for any such
suit, action, proceeding, claim or investigation, which affects the title
or interest of NTDT to or in the Note or which would prevent or affect the
consummation of the transactions contemplated by this Agreement by NTDT.
4.06 Registration Statement. None of the information regarding NTDT
supplied or to be supplied by NTDT for inclusion (i) in the Registration
Statement (as hereinafter defined) or any Resale Registration Statement (as
hereinafter defined) to be filed by Checkers with the Securities and
Exchange Commission ("SEC") in connection with the registration of the
Common Stock issued hereunder, or (ii) in any other documents to be filed
with the SEC or any other regulatory authority in connection with the
transactions contemplated in this Agreement, as the same may be updated by
written notice from NTDT to Checkers from time to time, will at the
respective time such documents are filed and, in the case of the
Registration Statement or any Resale Registration Statement, when it
becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading.
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<PAGE> 109
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CHECKERS
Checkers represents and warrants to NTDT (each of which shall be deemed
material and independently relied upon by NTDT) as follows:
5.01 Organization and Standing. Checkers is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Delaware with full power and authority to own its properties and
assets and to conduct its business as now conducted or proposed to be
conducted. Checkers is in good standing and duly qualified to conduct
business as a foreign corporation in each of the jurisdictions in which the
nature of its business or the ownership of its properties requires such
qualification and in which failure to be so qualified would have a material
adverse effect on the business, operations, assets, financial position or
prospects of Checkers.
5.02 Corporate Authority. Checkers has the full power and authority
to enter into and perform this Agreement and to consummate the transactions
contemplated herein in accordance with the terms of this Agreement.
5.03 Corporate Authorization. Checkers has taken all necessary
corporate actions to authorize and approve the execution, delivery and
performance of this Agreement and the transactions contemplated hereby.
This Agreement constitutes a legal, valid and binding obligation of
Checkers, enforceable against Checkers in accordance with its terms.
5.04 Capitalization. As of May 1, 1997, the authorized capital stock
of Checkers consisted of (i) 100,000,000 shares of Common Stock, of which
60,540,409 shares were issued and outstanding, and (ii) 2,000,000 shares of
preferred stock, $.001 par value per share, of which 87,719 shares were
issued and outstanding. All of the issued and outstanding shares of Common
Stock are validly issued, fully paid, nonassessable and outstanding and not
issued in violation of the preemptive rights of any stockholder.
5.05 Required Consents. Except for the registration of the New Notes
and the shares of Common Stock to be issued hereunder with the SEC and
under the blue sky laws of the State of Tennessee, no consents or approvals
of any public body or authority and no consents or waivers from any other
parties to any agreements or other instruments are required for the lawful
consummation on the part of Checkers of the transactions contemplated by
this Agreement.
5.06 Registration Statement. None of the information included (i) in
the Registration Statement or any Resale Registration Statement and (ii) in
any other documents to be filed with the SEC or any regulatory authority in
connection with the transactions contemplated in this Agreement will at the
respective time such documents are filed and, in the case of the
Registration Statement or any Resale Registration Statement, when it
becomes effective, be false or misleading with respect to any material
fact, or omit to state any material fact necessary in order to make the
statements therein not misleading, except that no representation or
warranty is being made with respect to information supplied by NTDT to
Checkers for inclusion therein. All documents which Checkers is responsible
for filing with the SEC and any regulatory authority in connection with the
Registration Statement or any Resale Registration Statement will comply as
to form in all material respects with the provisions of applicable law.
ARTICLE VI
COVENANTS OF CHECKERS
Checkers covenants to NTDT as follows:
6.01 Preparation of the Registration Statement. Checkers shall
prepare and file with the SEC a registration statement on Form S-4
(including the related prospectus), and required amendments thereto or
supplements to any prospectus contained therein (the "Registration
Statement"), and all necessary or appropriate related securities law or
blue sky filings required in the State of Tennessee (together with all
amendments and supplements thereto, the "Blue Sky Filings"), relating to
the issuance of the New
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Notes and the shares of Common Stock issuable upon conversion of the New
Notes, and shall use its commercially reasonable best efforts to have the
same declared effective by the SEC as expeditiously as practicable, and
shall use its commercially reasonable best efforts to keep such
Registration Statement and Blue Sky Filings current for such period of time
as is required for NTDT to complete the conversion of all of the New Notes
into shares of Common Stock, so long as NTDT proceeds in good faith to
convert such New Notes and sell the shares of Common Stock received upon
conversion in a prompt but orderly manner as described in Section 6.03
hereof; provided, however, that Checkers shall have the right (i) to defer
the initial filing or request for acceleration of effectiveness or (ii)
after effectiveness, to suspend effectiveness of any such registration
statement, if, in the good faith judgment of the board of directors of
Checkers and upon the advice of counsel to Checkers, such delay in filing
or requesting acceleration of effectiveness or such suspension of
effectiveness is necessary in light of the existence of material nonpublic
information (financial or otherwise) concerning Checkers, disclosure of
which at the time is not, in the opinion of the board of directors of
Checkers upon the advice of counsel, (a) otherwise required, and (b) in the
best interests of Checkers. Checkers shall not voluntarily take any action
that would cause more than a 90-day delay in filing or requesting
acceleration of effectiveness or a 90-day suspension of effectiveness. The
Registration Statement will not cover resales of the Common Stock. When the
Registration Statement is declared effective by the SEC, Checkers shall
give NTDT prompt notice of such fact and shall supply NTDT with sufficient
copies of the prospectus contained in such Registration Statement to enable
NTDT to send copies to each of its partners in connection with calling of a
meeting of such partners for the purpose of voting on this Agreement and
the transactions contemplated herein. Checkers shall give NTDT notice of
any suspensions and recontinuations of the effectiveness of the
Registration Statement. Subject to the foregoing, Checkers shall file all
such post effective amendments and supplements to the Registration
Statement and Blue Sky Filings as may be necessary, in its judgment, to
keep such Registration Statement and Blue Sky Filings current.
6.02 Guarantee of Proceeds from the Sale of the Common Stock. The
parties acknowledge that the intent of this Section is to provide a
mechanism under which NTDT will receive cash from (i) the sale of Common
Stock issued upon the conversion of the New Notes, (ii) the sale of Common
Stock issued pursuant to the terms of this Section 6.02 in payment of a
Price Differential (as defined herein), and (iii) the repayment of any New
Note or the repurchase of any shares of Common Stock as provided in this
Section 6.02, which cash will be equal in the aggregate to, but not in
excess of, the Purchase Price. In order to effectuate the foregoing, and
provided that NTDT proceeds in good faith (as described in Section 6.03) to
convert the New Notes and sell all of the Common Stock received upon the
conversion of the New Notes in a reasonably prompt but orderly manner
(subject to the limitations set forth in Section 7.06), if the aggregate
Net Proceeds (gross proceeds less brokers' commissions and discounts) from
the sale of such stock is less than the Purchase Price, Checkers shall
issue to NTDT additional shares of Common Stock with a value equal to the
difference between the Purchase Price and the aggregate Net Proceeds
received from the sale of the Common Stock (such difference is hereinafter
referred to as the "Initial Price Differential"). Checkers shall issue
instructions to its transfer agent to issue to NTDT the additional shares
of Common Stock within five business days after the delivery to Checkers of
the last confirmation slip relating to the final sale of the Common Stock
issued upon the conversion of all of the New Notes. NTDT shall instruct all
brokers selling the Common Stock on its behalf to furnish to Checkers and
its counsel a copy of the confirmation slip relating to each sale of Common
Stock at the same time as such confirmation slip is provided to NTDT. The
number of shares to be issued (the "Stock Payment") shall be equal to the
amount determined by dividing the Initial Price Differential by the
arithmetic average (rounded to the nearest penny) of the closing sale price
per share of the Common Stock as reported on the Nasdaq Stock Market's
National Market (as reported in The Wall Street Journal) for the three full
trading days immediately preceding the date on which Checkers issues
instructions to its transfer agent to issue such additional shares (such
average closing sale price being referred to hereinafter as the "Resale
Price" for such shares).
Checkers shall promptly prepare and file a registration statement and
all necessary or appropriate related state securities law or blue sky
filings under which Checkers shall register the Common Stock representing
the Stock Payment and NTDT may sell the shares representing the Stock
Payment upon the
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terms and conditions provided in Section 6.04 below. In the event that the
aggregate Net Proceeds from the sale of such shares is less than the
Initial Price Differential, Checkers shall issue additional shares of
Common Stock with a value equal to the difference between the Purchase
Price and the aggregate Net Proceeds received from the sale of (a) the
Common Stock issued to NTDT upon the conversion of the New Notes and (b)
the Common Stock constituting the Stock Payment (such difference is
hereinafter referred to as the "Second Price Differential"), as provided
above with respect to the Initial Price Differential. Checkers shall
register the same and NTDT may sell the same as provided in Section 6.04
below with respect to the Stock Payment. Checkers and NTDT will continue
this process until such time as there is no Price Differential realized by
NTDT on the sale of any batch of Common Stock issued in payment of a Price
Differential on a previous batch of Common Stock.
Notwithstanding any other provision of this Agreement, Checkers shall
have the option at any time to deliver cash to NTDT in lieu of additional
shares of Common Stock in order to pay any Price Differential. Checkers
also shall have the right to require NTDT at any time to sell to Checkers
any shares held by NTDT which were acquired upon conversion of a New Note
or which represent part of a Stock Payment at a price per share equal to
the applicable Conversion Price or Resale Price thereof. In the event that
NTDT should receive aggregate Net Proceeds from the sale of Common Stock
issued upon the conversion of the New Notes and/or pursuant to the terms of
this Section 6.02 in excess of the Purchase Price, or in the event that
once NTDT has received Net Proceeds equal to the Purchase Price it still
holds any New Notes or shares of Common Stock delivered by Checkers upon
the conversion of a New Note or pursuant to this Section 6.02, then NTDT
shall promptly deliver to Checkers such excess Net Proceeds, the remaining
New Notes and the excess shares of Common Stock.
6.03 Proceeding in Good Faith to Convert the New Notes and Sell the
Shares of Common Stock. The parties agree that NTDT will be deemed to be
proceeding in good faith to convert the New Notes and sell the Common Stock
in a reasonably prompt but orderly manner if it sells in each three-month
period commencing with the three month period beginning on the day after
the Closing Date and continuing in each consecutive three-month period
thereafter at least 90% of the lesser of (i) the maximum number of shares
of Common Stock permitted to be sold during such period under Rule 144
promulgated under the Securities Act of 1933 or (ii) the maximum number of
shares permitted to be sold during such period under Section 7.06 hereof
without regard to sales on upticks (as defined therein). NTDT may convert
the New Notes one or more at a time, in its discretion, with one New Note
being converted immediately after the sale of all of the shares of Common
Stock received upon the conversion of the previously converted New Note.
6.04 Registration of Common Stock Constituting the Stock Payments. As
soon as practicable after the issuance of the Common Stock constituting the
Stock Payment and any subsequent Stock Payments, if any, Checkers shall
prepare and file a registration statement on Form S-3 (if it is eligible to
use such form), or such other form as it deems suitable (together with all
amendments and supplements thereto, the "Resale Registration Statement"),
and all necessary or appropriate related Blue Sky Filings (together with
all amendments and supplements thereto), under which Checkers shall
register the shares of Common Stock issued in payment of a Price
Differential pursuant to Section 6.02. Checkers shall also use its
commercially reasonable best efforts to have the Resale Registration
Statement declared effective by the SEC as expeditiously as practicable,
and shall keep such Resale Registration Statement and Blue Sky Filings
current for such period of time as is required for NTDT to complete the
sale of all shares of Common Stock registered therein, so long as NTDT
proceeds in good faith to sell such shares in a prompt but orderly manner,
as provided in Section 6.03; provided, however, that Checkers shall have
the right (i) to defer the initial filing or request for acceleration of
effectiveness, or (ii) after effectiveness, to suspend effectiveness of the
Resale Registration Statement (to be later recontinued) if, in the good
faith judgment of the board of directors of Checkers and upon the advice of
counsel to Checkers, such delay in filing or requesting acceleration of
effectiveness or such suspension of effectiveness is necessary in light of
the existence of material non-public information (financial or otherwise)
concerning Checkers, disclosure of which at the time is not, in the opinion
of the board of directors of Checkers upon the advice of counsel, (a)
otherwise required, and (b) in the best interests of Checkers. Checkers
shall not voluntarily
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take any action that would cause more than a 90-day delay in filing or
requesting acceleration of effectiveness or a 90-day suspension of
effectiveness. Checkers shall give NTDT notice of effectiveness and any
suspensions and recontinuations of the effectiveness of the Resale
Registration Statement. Subject to the foregoing, Checkers shall file all
such post effective amendments and supplements to the Resale Registration
Statement and Blue Sky Filings as may be necessary, in its judgment, to
keep such Resale Registration Statement and Blue Sky Filings current. NTDT
may proceed to sell the shares registered in the Resale Registration
Statement beginning on the date the Resale Registration Statement is
declared effective by the SEC. Notwithstanding the foregoing, Checkers
shall not be obligated to register shares for sale in the states of Arizona
or Nevada, unless the costs of registration in such states, including
filing fees and reasonable attorneys' fees, are paid by NTDT.
6.05 Payment of Current Interest. Checkers acknowledges that the
annual interest rate on the Note is currently 18%, and agrees that the Note
shall continue to bear interest at an annual rate of 18% until the Closing
Date. Until the Closing Date, Checkers shall continue to pay to NTDT on the
first day of each month an amount in cash equal to the interest due under
the Note for the preceding month. On the Closing Date, Checkers shall pay
in cash the interest accrued through the Closing Date on the Note.
Following the Closing Date, the New Notes shall bear interest at an annual
rate of 18% until their conversion into Common Stock. Checkers shall pay to
NTDT on the first day of each month an amount in cash equal to the interest
due under the New Notes for the preceding month.
6.06 Payment of Interest on Value of Unsold Shares. Beginning on the
first day of the month following the Conversion Date with respect to a
converted New Note, and on the first day of each month thereafter until all
of the shares of Common Stock received upon the conversion of such New Note
are sold, Checkers shall pay to NTDT in cash an amount equal to .00049315%
(representing an annual rate of 18%) of the value of each such share of
Common Stock for each day during such month that the share was held by
NTDT. The value of each such share shall be deemed to be the applicable
Conversion Price for such share of Common Stock. Similarly, if additional
shares of Common Stock are issued by Checkers to NTDT pursuant to the terms
of Section 6.02, then beginning on the first day of the month following the
issuance of such additional shares and on the first day of each month
thereafter until all of the shares of Common Stock issued under Section
6.02 are sold, Checkers shall pay to NTDT in cash an amount equal to
.00049315% (representing an annual rate of 18%) of the value of each such
share of Common Stock for each day during such month that the share was
held by NTDT. The value of each such share shall be deemed to be the
applicable Resale Price for such share of Common Stock.
6.07 Additional Payments. Upon the execution hereof by NTDT, Checkers
shall pay to NTDT in cash the amount of One Hundred Thousand Dollars
($100,000.00), to be applied against the principal balance due under the
Note. Beginning on August 15, 1997, and on the 15th day of each month
thereafter through October 15, 1997, in the event that the Registration
Statement has not been declared effective by the SEC prior to such date,
Checkers shall pay to NTDT in cash the amount of One Hundred Thousand
Dollars ($100,000.00), to be applied against the principal balance due
under the Note. Notwithstanding any other provision contained in this
Agreement, all remaining principal due under the Note and any accrued but
unpaid interest thereon shall be payable on November 15, 1997, if the
Registration Statement is not declared effective by the SEC before such
date.
6.08 Payment of Legal Expenses. Upon the execution hereof by NTDT,
Checkers shall pay to NTDT Ten Thousand Dollars ($10,000.00) as partial
reimbursement for legal fees incurred by NTDT in connection with this
Agreement and related matters.
6.09 Covenant as to Common Stock. Checkers covenants that all shares
of Common Stock which may be issued upon conversion of the New Notes or
pursuant to the terms of Section 6.02 hereof will upon issue be fully paid
and nonassessable and, except as provided in Section 3.06, Checkers will
pay all taxes, liens and charges with respect to the issue thereof.
Checkers will list or cause to have quoted the shares of Common Stock
issued upon conversion of the New Notes or pursuant to the terms of Section
6.02 hereof on each national securities exchange or in the over-the-counter
market or such other market on which the Common Stock is then listed or
quoted.
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6.10 Equal Treatment. Checkers shall not enter into any agreement
with any other creditor whose debt is subordinated to Checkers' primary
debt facility that provides for the repayment of such creditor's debt under
terms more favorable than those contained in this Agreement.
ARTICLE VII
COVENANTS OF NTDT
NTDT covenants to Checkers as follows:
7.01 Actions Prior to Closing. From and after the date of execution
of this Agreement and until the Closing Date, or until this Agreement shall
be terminated as herein provided, NTDT shall not (i) sell the Note to any
other corporation or person, (ii) pledge the Note to any person or
otherwise subject the Note to a lien or encumbrance, (iii) engage in any
activity, enter into any transaction or fail to take any action which would
be inconsistent with any of the representations and warranties as set forth
in Article III of this Agreement as if such representations and warranties
were made at a time subsequent to such activity or transaction and all
references to the date of this Agreement were deemed to be such later time.
7.02 Extension of the Term of the Note; Modification of Interest
Rate. Upon the execution hereof by NTDT, the term of the Note shall be
extended until and the Note shall be payable on the earlier of (i) the
Closing Date or (ii) November 16, 1997; provided however, that in the event
the Registration Statement is declared effective by the SEC prior to
November 16, 1997, and the partners of NTDT fail to approve this Agreement
and the transactions contemplated herein within 30 days after NTDT receives
actual notice that the Registration Statement has been declared effective
by the SEC, the term of the Note shall be extended automatically until
December 31, 1998 and the interest rate shall be reduced to an annual rate
of 12%. Similarly, after the Closing Date, if NTDT does not proceed in good
faith (as described in Section 6.03 hereof) to convert the New Notes and
sell the Common Stock, the term of the Note shall be extended automatically
until December 31, 1998 and the interest rate shall be reduced to an annual
rate of 12%.
7.03 Registration Statement Information. On request of Checkers, NTDT
will furnish to Checkers all information concerning NTDT as is required to
be set forth in (i) the Registration Statement and any Resale Registration
Statement and (ii) any application or statement made by Checkers to any
governmental agency or authority in connection with the transactions
contemplated by this Agreement.
7.04 Approval by Partners. Promptly after the date on which NTDT
receives actual notice that the Registration Statement has been declared
effective by the SEC, NTDT shall call a meeting of the partners of NTDT, to
be held within 30 days after NTDT's receipt of such notice, for the purpose
of obtaining the approval of the partners of NTDT of this Agreement and the
transactions contemplated herein. NTDT shall distribute a copy of the
Registration Statement to each partner of NTDT along with the notice of
such meeting.
7.05 Dissolution of NTDT or Distribution of Common Stock to the
Partners. Within one year after the Closing, NTDT shall either (i)
dissolve and wind up its affairs pursuant to Tennessee law or (ii)
distribute the shares of Common Stock issued to NTDT pursuant to the terms
of this Agreement to the partners of NTDT, pro rata in accordance with
their proportionate ownership interest in NTDT.
7.06 Transfers of the New Notes and the Common Stock. Except as
permitted herein, NTDT shall not sell, pledge, transfer or otherwise
dispose of the New Notes to be received by it hereunder. NTDT shall not
sell, pledge, transfer or otherwise dispose of the shares of Common Stock
to be received by it upon the conversion of the New Notes except in
compliance with the applicable provisions of the 1933 Act and the rules and
regulations promulgated thereunder, including Rule 145. In order to assure
that any sales of the shares of Common Stock issued hereunder will be made
in an orderly manner so as not to adversely affect the market for the
Common Stock, for a period of two years after the Closing Date, NTDT shall
not, without the prior consent of Checkers, (i) sell in excess of 50,000
shares of Common
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Stock during any calendar week and (ii) sell in excess of 25,000 shares in
any one day; provided however, that additional sales in excess of such
limits may be made provided the same are made at a price higher than the
lowest then current bid price for the Common Stock (on an "uptick").
Checkers may refuse to register or give effect to any sales in excess of
such limitations (NTDT shall provide Checkers with satisfactory evidence
that all sales in excess of such limits were made on an uptick). NTDT shall
not sell any shares of Common Stock issued hereunder for consideration
other than cash. NTDT agrees that it will comply with all of its
obligations under Section 6.02 hereof. NTDT shall, upon the distribution of
any of the Common Stock to any partner of NTDT, cause such person to
deliver an Agreement to Checkers as a condition of such distribution and
the transfer of the ownership of such shares upon the stock register of
Checkers, which agreement shall contain covenants of such person identical
to the covenants of NTDT set forth in this Section 7.06 and a proportionate
limitation on sales.
ARTICLE VIII
MUTUAL COVENANTS OF CHECKERS AND NTDT
Each of Checkers and NTDT covenants with the other as follows:
8.01 Confidentiality. All information furnished by one party to the
other in connection with this Agreement or the transactions contemplated
hereby shall be kept confidential by such other party (and shall be used by
it and its officers, attorneys, accountants and representatives (including
brokers) only in connection with this Agreement and the transactions
contemplated hereby) except to the extent that such information (i) already
is known to such other party when received, (ii) thereafter becomes
lawfully obtainable from other sources, (iii) is required to be disclosed
in any document filed with the SEC or any other agency of any government,
or (iv) as otherwise required to be disclosed pursuant to any federal or
state law, rule or regulation or by any applicable judgment, order or
decree of any court or by any governmental body or agency having
jurisdiction in the premises after such other party has given reasonable
prior written notice to the other parties to this Agreement of the pending
disclosure of any such information. In the event that the transactions
contemplated by this Agreement shall fail to be consummated, it shall
promptly cause all copies of documents or extracts thereof containing
information and data as to the other party hereto to be returned to such
other party.
8.02 Preparation of Registration Statements. Each party shall
cooperate and consult with the other party hereto in the preparation of the
Registration Statement and any Resale Registration Statement to be filed by
Checkers with the SEC registering the shares of Common Stock to be issued
hereunder. When the Registration Statement, any Resale Registration
Statement or any Post-Effective Amendment thereto shall become effective,
the information prepared by each party for inclusion therein (i) will
comply in all material respects with the applicable provisions of the 1933
Act and the Rules and Regulations promulgated thereunder and (ii) will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein are necessary to make the statements
contained therein not misleading. In no event shall any party hereto be
liable to any other party hereto for any untrue statement of a material
fact or omission to state a material fact in any registration statement, or
any amendment or supplement thereto, or in any report made in reliance
upon, and in conformity with, written information concerning the other
party hereto furnished by such other party specifically for use in such
registration statement or report. Each party hereto shall advise the other
party hereto promptly of the happening of any event which makes untrue any
statement of a material fact contained in the Registration Statement or any
Resale Registration Statement or any amendment or supplement thereto or
that requires the making of a change in the registration statement or any
amendment or supplement thereto in order to make any material statement
therein not misleading.
8.03 Miscellaneous Agreements. Subject to the terms and conditions
herein provided, each party shall use its best efforts to take, or cause to
be taken, all action, and to do, or cause to be done, all things necessary,
appropriate or desirable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this
Agreement.
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8.04 The Closing. The Closing (the "Closing") of the transactions
contemplated herein shall take place at the offices of [JONES & SHOCKLEY,
1319 FIFTH AVENUE NO., NASHVILLE, TENNESSEE], at 10:00 a.m., local time on
the third business day following the date on which the partners of NTDT
approve this Agreement and the transactions contemplated herein, or at such
other time and place as Checkers and NTDT shall agree (the "Closing Date").
The obligations of Checkers and NTDT to close or effect the transactions
contemplated in this Agreement shall be subject to satisfaction, unless
duly waived, of the applicable conditions set forth in this Agreement.
ARTICLE IX
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CHECKERS AND NTDT
The respective obligations of each party to effect the transactions
contemplated herein shall be subject to the fulfillment or waiver at or prior to
the Closing Date of the following conditions:
9.01 Litigation. Neither Checkers nor NTDT shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction
which enjoins or prohibits the consummation of the transactions
contemplated herein.
9.02 NTDT Partner Approval. This Agreement and the transactions
contemplated herein shall have been approved by the partners in NTDT
pursuant to the provisions of the partnership agreement of NTDT.
9.03 Registration Statement Effective. The Registration Statement
shall have been declared effective by the SEC and the state securities
commission in each jurisdiction in which the New Notes to be issued
hereunder is required to be registered, and shall not be subject to a stop
order or any threatened stop order.
9.04 Closing Date. The Closing Date shall be on the third business
day following the date on which the partners of NTDT approve this Agreement
and the transactions contemplated herein after the SEC declares the
Registration Statement effective.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF NTDT
The obligations of NTDT to effect the transactions contemplated herein
shall be subject to the fulfillment or waiver at or prior to the Closing Date of
the following conditions:
10.01 Representations and Warranties. The representations and
warranties of Checkers set forth in Article V of this Agreement shall be
true and correct in all material respects as of the date of this Agreement
and as of the Closing Date (as though made on and as of the Closing Date)
except (i) to the extent such representations and warranties are by their
expressed provisions made as of a specified date and (ii) for the effect of
transactions contemplated by this Agreement.
10.02 Performance of Obligations. Checkers shall have performed in
all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date.
10.03 Officers' Certificate. Checkers shall have furnished to NTDT a
certificate dated the Closing Date, signed on behalf of Checkers by its
Chief Executive Officer, President, Chief Operating Officer or Chief
Financial Officer, to the effect that, to his knowledge and belief, the
conditions set forth in Sections 10.01 and 10.02 have been satisfied.
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ARTICLE XI
CONDITIONS PRECEDENT TO OBLIGATIONS OF CHECKERS
The obligations of Checkers to effect the transactions contemplated herein
shall be subject to fulfillment at or prior to the Closing Date of the following
conditions:
11.01 Representations and Warranties. The representations and
warranties of NTDT set forth in Article IV of this Agreement shall be true
and correct in all material respects as of the date of this Agreement and
as of the Closing Date (as though made on and as of the Closing Date)
except (i) to the extent such representations and warranties are by their
expressed provisions made as of a specified date and (ii) for the effect of
transactions contemplated by this Agreement.
11.02 Performance of Obligations. NTDT shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date.
11.03 Certificate of Managing General Partner. NTDT shall have
furnished to Checkers a certificate dated the Closing Date, signed on
behalf of NTDT by its managing general partner, to the effect that, to his
knowledge and belief, the conditions set forth in Sections 11.01 and 11.02
have been satisfied.
ARTICLE XII
DOCUMENTS TO BE DELIVERED AT THE CLOSING BY NTDT
NTDT shall deliver to Checkers the following documents at the Closing:
12.01 Certificate of Managing General Partner. A certificate of the
managing general partner of NTDT, dated the Closing Date, with respect to
the matters set forth in Section 11.03 of this Agreement, as well as the
incumbency of the corporate officers of the managing general partner and
their signatures, good standing, and the partner resolutions of NTDT
approving this Agreement and the transactions contemplated by this
Agreement.
12.02 The Note. The Note, marked "Paid in Full" over the signature of
a duly authorized officer of NTDT.
12.03 Other Documents. Such other documents as shall be reasonably
requested by Checkers and its counsel or required to be delivered pursuant
to this Agreement.
ARTICLE XIII
DOCUMENTS TO BE DELIVERED AT THE CLOSING BY CHECKERS
Checkers shall deliver to NTDT the following documents at the Closing:
13.01 Officer's Certificate. The certificate referred to in Section
10.03 of this Agreement.
13.02 Certificate of Secretarial Officer. The certificate of the
Secretary or Assistant Secretary of Checkers, dated the Closing Date, with
respect to the incumbency of corporate officers and their signatures,
corporate good standing and the corporate director resolutions authorizing
the transactions contemplated by this Agreement.
13.03 New Notes. The New Notes executed on behalf of Checkers.
13.04 Other Documents. Such other documents as shall be reasonably
requested by NTDT or its counsel or required to be delivered pursuant to
this Agreement.
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ARTICLE XIV
TERMINATION AND ABANDONMENT
14.01 Events of Termination. This Agreement may be terminated at any time
before the Closing Date: (i) by mutual consent of Checkers and NTDT; (ii) by
NTDT if any of the conditions precedent found in Articles IX or X of this
Agreement have not been met and have not been waived in writing by NTDT; (iii)
by Checkers if any of the conditions precedent found in Articles IX or XI of
this Agreement have not been met and have not been waived in writing by
Checkers; (iv) by NTDT if there is a breach of or failure by Checkers to perform
in any material respect any of the representations, warranties, commitments,
covenants or conditions under this Agreement, which breach or failure is not
cured within five days after written notice thereof is given to Checkers; or (v)
by Checkers if there is a breach of or failure by NTDT to perform in any
material respect any of the representations, warranties, commitments, covenants
or conditions under this Agreement, which breach or failure is not cured within
five days after written notice thereof is given to NTDT. In the event of
termination and abandonment by any party as above provided in clauses (ii),
(iii), (iv) or (v) of this Section, written notice shall forthwith be given to
the other party, which notice shall clearly specify the reason of such party for
terminating this Agreement. Termination by either party hereto pursuant to this
Section 14.01 shall not restrict or limit in any manner the remedies which the
parties might have at law or in equity for any breach of the covenants,
representations, or warranties contained in this Agreement.
14.02 Survival. The provisions in Sections 8.01 and 16.13 of this
Agreement shall survive the termination of this Agreement.
ARTICLE XV
INDEMNIFICATION
15.01 Survival. All representations, warranties, covenants and agreements
of each of the parties hereto set forth in this Agreement or in any other
instrument or document delivered by any of the parties hereto pursuant to this
Agreement shall survive the Closing and shall remain operative and in full force
and effect regardless of any investigations at any time made by or on behalf of
any party hereto and shall not be deemed merged in any document or instrument
executed or delivered at or after the Closing.
15.02 Indemnification by NTDT. From and after the Closing, NTDT shall
indemnify, defend and hold harmless Checkers' Group (as hereinafter defined)
from, against and with respect to any claim, liability, obligation, loss,
damage, assessment, judgment, cost and expense (including, without limitation,
reasonable attorney's and accountant's fees and costs and expenses reasonably
incurred in investigating, preparing, defending against or prosecuting any
litigation or claim, action, suit, proceeding or demand), of any kind or
character arising out of or in any manner incident, relating or attributable to
(i) the inaccuracy in any representation or breach of warranty of NTDT contained
in this Agreement or otherwise made or given in writing in connection with this
Agreement, (ii) any failure by NTDT to perform or observe any covenant,
agreement or condition to be performed or observed by it under this Agreement or
under any certificates or other documents or agreements executed by it in
connection with this Agreement, and (iii) any claims arising out of or based
upon any untrue statement of a material fact contained in the Registration
Statement or any Resale Registration Statement or any prospectus included
therein or arising out of or based upon any omission to state therein a material
fact necessary to make the statements made, in light of the circumstances under
which they were made, not misleading, insofar as such claims arise out of or are
based upon information furnished to Checkers in writing by NTDT for use therein.
NTDT shall be liable to and shall reimburse Checkers' Group for any payment made
by Checkers' Group at any time after the Closing in respect of any liability,
obligation or claim to which the foregoing indemnity relates within five (5)
days of the date of receipt by NTDT of written demand for payment thereof by
Checkers' Group. If any claim covered by the foregoing indemnity be asserted
against Checkers' Group, Checkers shall notify NTDT promptly and give it an
opportunity to defend the same, and Checkers shall extend reasonable cooperation
to NTDT in connection with such defense. In the event that NTDT fails to defend
the same within a reasonable time, Checkers shall be entitled to assume the
defense thereof and NTDT shall be liable to repay Checkers for all of its
expenses
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reasonably incurred in connection with such defense (including reasonable
attorney's fees and settlement payments). For purposes of this Agreement, the
term "Checkers' Group" shall mean Checkers and its subsidiaries, parents,
officers, directors, employees, agents, representatives, predecessors,
successors, attorneys and accountants.
15.03 Indemnification by Checkers. From and after the Closing, Checkers
shall indemnify, defend and hold harmless NTDT's Group (as hereinafter defined)
from, against and with respect to any claim, liability, obligation, loss,
damage, assessment, judgment, cost and expense (including, without limitation,
reasonable attorney's and accountant's fees and costs and expenses reasonably
incurred in investigating, preparing, defending against or prosecuting any
litigation or claim, action, suit, proceeding or demand), of any kind or
character arising out of or in any manner incident, relating or attributable to
(i) the inaccuracy in any representation or breach of warranty of Checkers
contained in this Agreement or otherwise made or given in writing in connection
with this Agreement, (ii) any failure by any Checkers to perform or observe any
covenant, agreement or condition to be performed or observed by it under this
Agreement or under any certificates or other documents or agreements executed by
it in connection with this Agreement, (iii) any failure by Checkers to comply
with the provisions of the 1933 Act or any applicable state securities law in
connection with the registration of any of the Common Stock issued hereunder,
and (iv) any claims arising out of or based upon any untrue statement of a
material fact contained in the Registration Statement or any Resale Registration
Statement or any prospectus included therein or arising out of or based upon any
omission to state therein a material fact necessary to make the statements made,
in light of the circumstances under which they were made, not misleading, other
than claims which arise out of or are based upon information furnished by NTDT
to Checkers in writing for use therein. Checkers shall be liable to and shall
reimburse NTDT's Group for any payment made by NTDT's Group at any time after
the Closing in respect of any liability, obligation or claim to which the
foregoing indemnity relates within five (5) days of the date of receipt by
Checkers of written demand for payment thereof by NTDT's Group. If any claim
covered by the foregoing indemnity be asserted against NTDT's Group, NTDT shall
notify Checkers promptly and give it an opportunity to defend the same, and
NTDT's Group shall extend reasonable cooperation to Checkers in connection with
such defense. In the event that Checkers fails to defend the same within a
reasonable time, NTDT's Group shall be entitled to assume the defense thereof
and Checkers shall be liable to repay NTDT's Group for all of its expenses
reasonably incurred in connection with such defense (including reasonable
attorney's fees and settlement payments). For purposes of this Agreement, the
term "NTDT's Group" shall mean NTDT and its subsidiaries, parents, officers,
directors, employees, agents, representatives, predecessors, successors,
attorneys and accountants.
ARTICLE XVI
MISCELLANEOUS
16.01 Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the corporate parties hereto and their respective successors
and permitted assigns, and of the individual parties hereto and their respective
heirs, personal representatives and permitted assigns.
16.02 Publicity. Subject to the other provisions of this Agreement, press
releases and other publicity materials relating to the transactions contemplated
by this Agreement shall be released by the parties hereto only after review and
with the consent of each of Checkers and NTDT; provided, however, Checkers shall
have the right, after consulting with NTDT, to make a public announcement of the
execution of this Agreement and a disclosure of the basic terms and conditions
of this Agreement if advised to do so by its legal counsel in connection with
the reporting and disclosure obligations of Checkers under the federal
securities laws and/or the Nasdaq Stock Market.
16.03 Headings. The headings in this Agreement have been inserted solely
for ease of reference and shall not be considered in the interpretation or
construction of this Agreement.
16.04 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall
together constitute one and the same instrument.
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16.05 Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Florida without regard to any applicable conflicts of
law.
16.06 Expenses. Except as otherwise herein provided, each of the parties
hereto shall pay its respective costs and expenses incurred or to be incurred by
it in connection with the negotiations respecting this Agreement and the
transactions contemplated by this Agreement, including preparation of documents,
obtaining any necessary regulatory approvals and the consummation of the other
transactions contemplated in this Agreement. Except as expressly stated
otherwise herein, the costs related to the preparation and filing of the
Registration Statement, any Resale Registration Statement, and all Nasdaq and
state securities law filings shall be paid by Checkers, except that NTDT shall
bear the expenses of any fees of NTDT's advisors, including legal counsel.
16.07 Non-Assignment. This Agreement shall not be assignable by any party
without the written consent of the others.
16.08 Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the transactions contemplated herein
and supersedes all other prior agreements, understandings and letters related
hereto.
16.09 Singular and Plural. Unless the context of this Agreement otherwise
clearly requires, references to the plural include the singular and the singular
includes the plural. Wherever the context so requires, the masculine shall refer
to the feminine, the neuter shall refer to the masculine or the feminine, the
singular shall refer to the plural, and vice versa.
16.10 Knowledge of NTDT. Wherever any representation, warranty or other
statement made in this Agreement is qualified as to the knowledge of NTDT, such
qualification shall mean the actual knowledge of NTDT and each of the directors
and executive officers of NTDT.
16.11 Notices. Any notice or other communications required or permitted by
this Agreement shall be in writing and shall be deemed to have been duly given
(i) on the date sent if delivered personally or by cable, telecopy, telegram or
telex (which is confirmed) or (ii) on the date received if mailed by registered
or certified mail (return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Checkers, to:
Checkers Drive-In Restaurants, Inc.
600 Cleveland Street, Eighth Floor
Clearwater, Florida 34615
Attention: General Counsel
Telecopy No.: (813) 298-2125
with a copy to:
Paul R. Lynch, Esquire
Shumaker, Loop & Kendrick
101 East Kennedy Boulevard
Suite 2800
Tampa, Florida 33602
Telecopy No.: (813) 229-1660
and,
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(b) if to NTDT, to:
Nashville Twin Drive-Thru Partners, L.P.
1314 5th Avenue North, Suite 100
Nashville, Tennessee 37208
Attention: Roland Jones
Telecopy No.:
with a copy to:
Susan Short Jones, Esquire
Jones & Shockley
1319 Fifth Avenue No.
Nashville, Tennessee 37208
Telecopy No.:
16.12 Rights of Third Parties. This Agreement shall not create any legal
rights in any person or entity other than the parties to this Agreement, except
for Checkers' Group under Section 15.02 and NTDT's Group under Section 15.03 of
this Agreement.
16.13 Remedies. Nothing contained in this Agreement shall be construed to
restrict or limit in any manner the remedies which the parties might have at law
or in equity for any breach of the covenants, representations, or warranties
contained in this Agreement.
16.14 Amendment. This Agreement may be amended or supplemented by the
parties hereto. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
16.15 Waiver. Any party hereto may, by written notice to the other parties
hereto, (i) extend the time for the performance of any of the obligations or
other actions of such other party under this Agreement, (ii) waive any
inaccuracies in the representations or warranties of such other party contained
in this Agreement or in any document delivered pursuant to this Agreement, or
(iii) waive compliance with any of the conditions or covenants of such other
party contained in this Agreement, or (iv) waive or modify performance of any of
the obligations of such other party under this Agreement. Except as provided in
the preceding sentence, no action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any of the representations, warranties, covenants, conditions, or agreements
contained in the Agreement. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach. If, prior to the Closing, any party provides all of the other
parties with written notice, which refers specifically to this Section 16.15,
that a representation or warranty made by such party in or pursuant to this
Agreement is not true, correct and complete and the Closing is consummated
notwithstanding such disclosure, such other parties shall be deemed to have
waived any claims for indemnification under this Agreement as a result of the
inaccuracy of such representation or warranty.
16.16 Effectiveness. This Amended and Restated Purchase Agreement shall
become effective upon execution by all of the parties hereto and the payment by
Checkers to NTDT in cash of the amount of One Hundred Ten Thousand Dollars
($110,000.00), One Hundred Thousand Dollars ($100,000.00) of which is to be
applied against the principal balance due under the Note, as required under
Section 6.07 hereof, and Ten Thousand Dollars ($10,000.00) of which is to
reimburse NTDT for legal expenses as required under Section 6.08.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.
NEXT PAGE IS SIGNATURE PAGE.]
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IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
as of the day and year first above written.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: /s/ JOSEPH N. STEIN
------------------------------------
Joseph N. Stein
Executive Vice President
NASHVILLE TWIN DRIVE-THRU PARTNERS,
L.P.
By: JONES & JONES TWIN DRIVE-THRU,
INC.
General Partner
By: /s/ ROLAND L. JONES
------------------------------------
Roland L. Jones
President
By: NTD ENTERPRISES, INC.
General Partner
By: /s/ DAVID M. WILDS
------------------------------------
David M. Wilds
President
JONES & JONES TWIN DRIVE-THRU, INC.
By: /s/ ROLAND L. JONES
------------------------------------
Roland L. Jones
President
NTD ENTERPRISES, INC.,
By: /s/ DAVID M. WILDS
------------------------------------
David M. Wilds
President
/s/ ROLAND L. JONES
------------------------------------
Roland L. Jones
Individually
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EXHIBIT A
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
$100,000.00 , 1997
Nashville, Tennessee
This Subordinated Convertible Promissory Note (the "Note") is one of a
series of notes issued by Checkers Drive-In Restaurants, Inc. ("Checkers"), a
Delaware corporation having offices at 600 Cleveland Street, Eighth Floor,
Clearwater, Florida 34615, to Nashville Twin Drive-thru Partners, L.P. ("NTDT"),
a Tennessee limited partnership having offices at 1314 Fifth Avenue N., Suite
100, Nashville, Tennessee 37208, pursuant to the terms of that certain Amended
and Restated Note Repayment Agreement, of even date herewith, by and between
Checkers and NTDT, among others (the "Agreement"). This note and the other notes
issued by Checkers to NTDT under the Agreement are being issued in replacement
of that certain subordinated promissory note, dated March 31, 1995, issued by
Checkers to NTDT in the original principal amount of $1,354,287.00. Capitalized
terms not otherwise defined herein have the meanings ascribed to them in the
Agreement. To the extent that any conflict shall exist between the terms of this
Note and the terms of the Agreement, the Agreement shall control.
Checkers promises to pay to the order of NTDT, c/o Jones & Jones Twin
Drive-Thru, Inc., 1314 Fifth Avenue N., Suite 100, Nashville, Tennessee 37208,
One Hundred Thousand and No/100 Dollars ($100,000.00), plus interest on the
outstanding balance from this date until paid, pursuant to the terms of this
promissory note ("Note").
1. Interest. Checkers shall pay interest on the outstanding principal
balance of this Note at a fixed rate of eighteen percent (18%) per annum.
Interest shall be calculated on the basis of a 360-day year and a 30-day month.
2. Payments.
2.01 Interest shall be payable on the outstanding principal amount
due under this Note on a monthly basis in arrears, beginning on July 1,
1997, and on the first day of every month thereafter until maturity.
2.02 Checkers shall pay the then outstanding balance of this Note in
full on December 31, 1998.
2.03 Checkers shall make all payments on this Note to NTDT, c/o Jones
& Jones Twin Drive-Thru, Inc., 1314 Fifth Avenue N., Suite 100, Nashville,
Tennessee 37208, Attention: Roland Jones, or at such other place as the
holder of this Note may designate.
2.04 Checkers may prepay all or part of this Note at any time without
penalty. Except as set forth above, all payments shall be credited first to
interest accrued but unpaid and second to principal.
3. Default and acceleration.
3.01 Each of the following shall constitute an Event of Default under
this Note: (a) the failure by Checkers to make any scheduled payment on
this Note when due; (b) the failure by Checkers to make any scheduled
Contingent Purchase Price payment provided for in the Asset Purchase
Agreement, dated as of November 4, 1994, by and between Checkers and NTDT,
among others, when due; (c) the suspension of effectiveness of the
Registration Statement by Checkers for more than 90 days; (d) the
suspension of trading in the common stock of Checkers for more than 14
consecutive days on the Nasdaq Stock Market; (e) the filing of any petition
by Checkers under any provision of the Federal Bankruptcy Code or any state
law relating to insolvency, or the filing of any such petition by any party
against Checkers, unless such petition and all other proceedings thereunder
are dismissed within sixty (60) days after such filing; (f) the appointment
of a trustee or receiver for substantially all of the assets of Checkers,
unless such appointment is vacated or dismissed within sixty (60) days from
the date of such appointment; (g) an adjudication that Checkers is
insolvent or bankrupt; (h) any assignment by
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Checkers of substantially all of its assets for the benefit of its
creditors or any other marshalling of the assets of Checkers; or (i) the
dissolution or termination of Checkers.
3.02 Subject to the provisions of Section 4, upon the occurrence of any
Event of Default, at the option of NTDT, all amounts due under this Note shall
become immediately due and payable without notice or demand.
4. Subordination.
4.01 The Subordinated Obligations (as defined in Section 4.02 hereof)
are subordinate and junior in right of payment, to the extent and in the
manner set forth in this Section 4, to the prior payment in full of all
Senior Debt (as defined in Section 4.02 hereof). This Section shall
constitute a continuing offer to the lenders which are or may become a
party to the Credit Agreement (as defined in Section 4.02 hereof) and to
all Persons who, in reliance upon such provisions, become holders of or
continue to hold, Senior Debt and such provisions are made for the benefit
of the holders of Senior Debt of Checkers, and such holders are made
obligees hereunder and they and/or each of them (or the Agent on their
behalf) may enforce such provisions. The parties hereto acknowledge the
reliance by the lenders and the Agent under the Credit Agreement upon the
provisions hereof.
4.02 Definitions. For the purposes of this Section 4, the following
terms shall have the following respective meanings (provided, that, other
capitalized terms used in this Section 4 but not defined in this Section 4
shall have the meanings attributed thereto in the Credit Agreement):
"Affiliate" means (i) any Person that directly, or indirectly
through one or more intermediaries, controls Checkers (a "Controlling
Person"), (ii) any Person (other than Checkers or a Subsidiary), which
is controlled by or is under common control with a Controlling Person,
or (iii) any Person (other than a Subsidiary) of which Checkers owns,
directly or indirectly, 20% or more of the common stock or equivalent
entity interests. As used herein, the term "control" means possession,
directly or indirectly, of the power to direct or cause the direction of
the management or policies of a Person, whether through the ownership of
voting securities, by contract or otherwise.
"Blockage Period" means a period commencing on the date on which
the Agent shall have delivered a Senior Default Notice and ending on
that date on which the Agent shall deliver a written notice to the
holder of the Subordinated Obligations that no Senior Default shall
remain in existence.
"Credit Agreement" means that certain Amended and Restated Credit
Agreement, dated as of November 22, 1996, among Checkers, the lenders
from time to time parties thereto, and CKE Restaurants, Inc., as agent
(the "Agent"), together with all amendments and supplements thereto.
"Person" means an individual, a corporation, a partnership, an
unincorporated association, a trust or any other entity or organization,
including, but not limited to, a government or political subdivision or
an agency or instrumentality thereof.
"Senior Debt" means at any time (a) indebtedness incurred under the
Credit Agreement and the other Loan Documents delivered in connection
therewith from time to time and outstanding (up to a maximum amount of
$85,000,000), plus all interest, fees, expenses, indemnities, premiums,
penalties and other obligations payable from time to time under the
Credit Agreement, as the same may be amended from time to time, and (b)
all extensions, renewals, refundings and replacements of any of the
foregoing made pursuant to the Credit Agreement. Notwithstanding the
foregoing, Senior Debt shall not include (i) any indebtedness of the
Company which, by its terms or the terms of the instrument creating or
evidencing it, is designated subordinated indebtedness or is subordinate
in right of payment to or pari passu with the Subordinated Obligations
or (ii) any indebtedness of the Company incurred in connection with the
acquisition of any property, which indebtedness is owed to the Person or
any Affiliate thereof from which such property was acquired.
"Senior Default" means any default (including, without limitation,
any Default or Event of Default) under or contained in any agreement or
instrument evidencing Senior Debt or pursuant to
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which Senior Debt has been incurred, which default entitles the holder
or holders of such Senior Debt (immediately or following the expiration
of any applicable grace periods, the giving of any required notices of
the taking of any action by such holder) to accelerate the maturity
thereof.
"Senior Default Notice" means a written certificate signed by the
Agent and delivered to the Company to the effect that a Senior Default
has occurred and is continuing as of the date of such certificate.
"Subordinated Obligations" means, at any time, all indebtedness
evidenced by this Note and outstanding at any one time, plus all
interest, fees, expenses, and other obligations payable from time to
time on account of this Note, as the same may be amended from time to
time.
"Subsidiary" means any corporation or other entity of which
securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing
similar functions are at the time directly or indirectly owned by
Checkers, and any partnership in which Checkers or any Subsidiary is a
general partner.
4.03 Payment Blockage. During any Blockage Period, no direct or
indirect payment (in cash, property or securities or by set-off or
otherwise) shall be made or agreed to be made by or on behalf of Checkers
or from any of its properties or from any other source on account of the
Subordinated Obligations, or in respect of any prepayment, redemption,
retirement, purchase or other acquisition of this Note or of any judgment
for any of the foregoing.
4.04 Acceleration Blockage. Until all of the Company's obligations
under the Credit Agreement have been paid in full (as evidenced by a
written notice by the Agent to that effect), no holder of this Note shall
have the right during any Blockage Period to take any action to accelerate
the maturity of this Note pursuant to Section 3.02 hereof or to pursue, by
suit or otherwise, any remedy with respect to its rights hereunder, whether
provided hereunder or by law.
4.05 Insolvency, Bankruptcy, etc.
(a) In the event of:
(i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding
relating to Checkers or its property,
(ii) any proceeding for the liquidation, dissolution or other
winding up of Checkers, voluntary or involuntary, whether or not
involving insolvency or bankruptcy,
(iii) any assignment by Checkers for the benefit of creditors,
or
(iv) any other marshalling of the assets of Checkers;
the Senior Debt shall first be paid in full before any payment, set-off or
distribution, whether in cash, securities or other property (subject to the
first parenthetical in the immediately following sentence), shall be made by or
on behalf of Checkers or from its assets or any other source to any holder of
any Subordinated Obligation on account of such Subordinated Obligation. Any
payment or distribution, whether in cash, securities or other property (other
than Securities of Checkers or any other corporation provided for by a plan of
reorganization or readjustment the payment of which is subordinate, at least to
the extent provided in these subordination provisions with respect to the
Subordinated Obligations, to the payment in full of all Senior Debt at the time
outstanding and to any securities issued in respect thereof under any such plan
of reorganization or readjustment), which would otherwise (but for these
subordination provisions) be payable or deliverable in respect of the
Subordinated Obligations shall be paid or delivered directly to the holders of
Senior Debt in accordance with the priorities then existing among such holders
(and pro rata among holders having the same priority) until all Senior Debt
shall have been paid in full.
(b) If the holders of the Subordinated Obligations do not file
proper claims or proofs of claim in the form required in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating
to Checkers or its property prior to 30 days before the expiration of
the time to file such
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claims, then (i) upon the request of the Agent, the holders of the
Subordinated Obligations shall file such claims and proofs of claim in
respect of their Subordinated Obligations and execute and deliver such
powers of attorney, assignments and proofs of claim as may be directed
by the Agent to enable the holders of Senior Debt to file any and all
claims upon or in respect of this Note and the Subordinated Obligations
and (ii) whether or not the holders of the Subordinated Obligations
shall take the action described in clause (i) of this Section 4.05(b),
the Agent shall nevertheless be deemed to have such powers of attorney
as may be necessary to file appropriate claims and proofs of claim and
otherwise exercise the powers described above.
4.06 Maturity or Acceleration of Senior Debt. Notwithstanding any
provision to the contrary contained herein, in the event that any Senior
Debt (a) has matured by passage of time or by acceleration (by scheduled or
required payment or otherwise) and has not been paid or (b) has been
declared due and payable as the result of the occurrence of any one or more
Senior Defaults in respect thereof, no payment shall be made by or on
behalf of Checkers or from its assets or any other source in respect of the
Subordinated Obligations and no purchase, redemption, retirement or other
acquisition shall be made in respect of any Subordinated Obligations unless
and until (i) such Senior Debt shall have been paid in full or (ii) such
declaration and its consequences shall have been rescinded or all such
defaults shall have been remedied or waived or shall have ceased to exist
(as evidenced by a written notice by the Agent to that effect).
4.07 Constructive Trust. If any payment or distribution of any
character or any security, whether in cash, securities or other property
(other than Securities of Checkers or any other corporation provided for by
a plan of reorganization or readjustment the payment of which is
subordinate, at least to the extent provided in this Section 4 with respect
to the Subordinated Obligations, to the payment of the Senior Debt at the
time outstanding and to any securities issued in respect thereof under any
such plan or reorganization or readjustment), shall be received from or on
behalf of Checkers, or from any of its properties or any other source,
including pursuant to a judgment, by any holder of any Subordinated
Obligation on account of such Subordinated Obligation or any of the
provisions hereof in contravention of any of the terms hereof, and before
all the Senior Debt shall have been paid in full (as evidenced by a written
notice by the Agent to that effect), or provision for such payment has been
made, such payment or distribution or security shall be received in trust
for the benefit of, and shall be paid over or delivered and transferred to,
the holders of the Senior Debt at the time outstanding in accordance with
the priorities then existing among such holders (and pro rata among holders
having the same priority) for application to the payment of all Senior Debt
remaining unpaid, to the extent necessary to pay all such Senior Debt in
full. In the event of a failure of any holder of any Subordinated
Obligation to endorse or assign any such payment, distribution or security,
each holder of Senior Debt is hereby irrevocable authorized to endorse or
assign the same and a power of attorney, which is coupled with an interest,
is hereby granted to each such holder of Senior Debt, including, without
limitation, the Agent for that purpose.
4.08 Checkers' Obligations. Neither the Agent nor any present or
future holder of any Senior Debt shall be prejudiced in the right to
enforce the subordination of the Subordinated Obligations by any act or
failure to act on the part of Checkers. Nothing contained herein shall
impair, as between Checkers and any holder of any Subordinated Obligation,
the obligation of Checkers to pay to the holder thereof the Subordinated
Obligations as and when the same shall become due and payable in accordance
with the terms hereof, or prevent any holder of this Note from exercising
all rights, powers and remedies otherwise permitted by applicable law or
hereunder upon a default hereunder, all subject to the rights of the Agent
and the holders of the Senior Debt as set forth in this Section 4. Checkers
hereby covenants and agrees that, immediately upon receipt of any Senior
Default Notice, it will deliver copies thereof to the holder of this Note.
4.09 No Impairment of Rights. No right of the Agent or any present or
future holder of any Senior Debt to enforce the subordination provisions
contained herein shall at any time or in any way be prejudiced or impaired
by any act or failure to act on the part of Checkers or any holder of a
Subordinated Obligation or by any non-compliance by Checkers or any holder
of a Subordinated
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Obligation with the terms, provisions and covenants of this Note,
regardless of any knowledge thereof the Agent or any such holder of such
Senior Debt may have or otherwise be charged with.
4.10 Terms of the Subordinated Obligations. The Subordinated
Obligations shall only be repaid in accordance with the scheduled repayment
of the same as provided in Sections 2.01, 2.02 and 2.03 hereof. Without the
prior written consent of the Agent, none of the material financial terms
(including, without limitation, principal repayment and interest rate) of
the Subordinated Obligations may be amended or otherwise altered, and in no
event shall the holders of the Subordinated Obligations accept any
prepayments thereof or allow Checkers or its Subsidiaries, or any of its or
their respective Affiliates, to take any action having the practical effect
of same (including, without limitation, a purchase of the Subordinated
Obligations).
5. Conversion. This Note is convertible into shares of the common stock of
Checkers, par value $.001 per share, upon the terms and conditions set forth in
Article III of the Agreement, which terms and conditions are incorporated herein
by this reference.
6. Miscellaneous.
6.01 This Note shall be construed under the laws of the State of
Florida.
6.02 If any payment comes due on a day on which banking institutions
in the State of Florida or the State of Tennessee are required or
authorized to close, Checkers may make the payment and pay the additional
interest accrued to the date of payment on the next day on which banking
institutions are open.
6.03 None of the following will be a course of dealing, estoppel,
waiver or implied amendment on which any party to this Note may rely: (a)
NTDT's acceptance of one or more late or partial payments; (b) NTDT's
forbearance from exercising any right or remedy under this Note; (c) NTDT's
forbearance from exercising any right or remedy under this Note on any one
or more occasions; or (d) NTDT's knowledge of any breach or breaches of
this Note. NTDT's exercise of any rights or remedies or a part of a right
or remedy on one or more occasions shall not preclude NTDT from exercising
the right or remedy at any other time. NTDT's rights and remedies under
this Note, and the law and equity are cumulative to, but independent of,
each other.
6.04 NTDT may give notices to Checkers in writing, by personal
delivery to Checkers at 600 Cleveland Street, Eighth Floor, Clearwater,
Florida 34615 or by a national courier service (prepaid) or United States
mail (postage prepaid) addressed to Checkers at 600 Cleveland Street,
Eighth Floor, Clearwater, Florida 34615. When personally delivered, all
notices shall be given when actually received. When delivered by courier or
mail, all notices shall be given the second day after delivering to the
courier or the second day after mailing. NTDT may also give notices by oral
communication, in person at or by electronic communication to any of
Checkers's offices where NTDT customarily contacts Checkers. Any notices
meeting the requirements of this section shall be effective, regardless of
whether or not actually received. This section does not preclude any other
means of notice.
6.05 Each party to this Note jointly and severally waives protest,
noting for protest, all notices, and all demands not otherwise required
above.
6.06 Each party to this Note consents to venue and personal
jurisdiction of any state or federal court sitting in Pinellas County,
Florida for enforcing this Note and waives all objections to venue and
jurisdiction of any such court. No party to this Note other than the holder
shall bring any action related to this Note in any court not sitting in
Pinellas County, Florida.
6.07 This Note is secured by a Security Agreement, dated as of March
31, 1995, executed by Checkers and covering certain property described
therein.
6.08 This note may not be assigned by the holder. Any purported
assignment shall be null and void.
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<PAGE> 127
6.09 Checkers agrees to pay all costs of collection when incurred,
including reasonable attorneys' fees.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By:
------------------------------------------
STATE OF TENNESSEE
COUNTY OF
The foregoing promissory note was executed and acknowledged before me this
day June, 1997, by , of CHECKERS DRIVE-IN
RESTAURANTS, INC., a Delaware corporation, on behalf of the corporation. He is
personally known to me or has produced as identification.
---------------------------------------------
NOTARY PUBLIC
Name:
---------------------------------------
My: Commission Expires:
(notary seal)
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<PAGE> 128
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its directors and
officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful. The Company's By-laws provide that the Company shall
indemnify its directors and such of its officers, employees and agents as it may
from time to time designate, to the fullest extent permitted by Section 145 of
the DGCL, as now existing or as may hereafter be amended.
Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for breaches
of fiduciary duty. The enabling statute provides, however, that liability for
breaches of the duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or knowing violation of the law, and the
unlawful purchase or redemption of stock or payment of unlawful dividends or the
receipt of improper personal benefits cannot be eliminated or limited in this
manner. The Company's Restated Certificate of Incorporation includes a provision
which eliminates, to the fullest extent permitted by DGCL, director liability
for monetary damages for breaches of fiduciary duty. In addition, the
stockholders and the Board of Directors of the Company have approved the
execution by the Company of indemnification agreements with the Directors and
certain officers of the Company, the form of which was filed with the Securities
and Exchange Commission on September 26, 1992, as Exhibit 4.4 to the
Registration Statement of the Company on Form S-1 (File No. 33-42996).
The Company maintains officers' and directors' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
ITEM 16. EXHIBIT AND FINANCIAL STATEMENT SCHEDULE
EXHIBITS
<TABLE>
<C> <C> <S>
3.1 -- Restated Certificate of Incorporation of the Company, as
filed with the Commission as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 filed on September 26,
1991 (File No. 33-42996), is hereby incorporated herein by
reference.
3.2 -- Certificate of Amendment to Restated Certificate of
Incorporation of the Company, as filed with the Commission
as Exhibit 3 to the Company's Form 10-Q for the quarter
ended June 30, 1993, is hereby incorporated herein by
reference.
3.3 -- By-laws, as amended through February 16, 1995, of the
Registrant, as filed with the Commission as Exhibit 3.3 to
the Company's Form 10-Q for the quarter ended March 27,
1995, is hereby incorporated herein by reference.
3.4 -- Certificate of Designation of Series A Preferred Stock of
the Company dated February 12, 1997, as filed with the
Commission as Exhibit 3.1 to the Company's Form 8-K, dated
February 19, 1997, is hereby incorporated by reference.
4.1 -- Collateral Assignment of Trademarks as Security from
Borrower, dated April 12, 1995, between the Company and each
of the banks party to the Amended and Restated Credit
Agreement, dated as of April 12, 1995, as filed with the
Commission as Exhibit 3 to the Company's Form 8-K dated
April 12, 1995, is hereby incorporated by reference.
</TABLE>
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<PAGE> 129
4.2 -- Amended and Restated Credit Agreement, dated as of November
22, 1996, between the Company, CKE Restaurants, Inc., as
Agent, and the lenders listed therein, as filed with the
Commission as Exhibit 4.1 on the Company's Form 8-K, dated
November 22, 1996, is hereby incorporated by reference.
4.3 -- Second Amended and Restated Security Agreement, dated as of
November 22, 1996, between the Company and CKE Restaurants,
Inc., as Agent, and the lenders listed therein, as filed
with the Commission as Exhibit 4.2 on the Company's Form
8-K, dated November 22, 1996, is hereby incorporated by
reference.
5.* -- Opinion of Christensen, Miller, Fink, Jacobs, Glaser, Weil &
Shapiro, LLP.
10.11 -- Asset Purchase Agreement made and entered into as of July
27, 1995, among InnerCityFoods, InnerCityFoods Joint Venture
Company, InnerCityFoods Leasing Company, Checkers Drive-In
Restaurants, Inc., The La-Van Hawkins Group, Inc., La-Van
Hawkins InnerCityFoods, LLC, and La-Van Hawkins as filed
with the Commission as Exhibit 10.25 to the Company's Form
10-Q for the quarter ended June 19, 1995, is hereby
incorporated herein by reference.
10.12 -- Agreement for Purchase and Sale of Assets, dated as of
December 29, 1993, between the Company and Dania-Auger,
Inc., as filed with the Commission as Exhibit 10.27 to the
Company's Form 10-K for the year ended December 31, 1993, is
hereby incorporated herein by reference.
10.13 -- Management Agreement, dated as of December 31, 1993, between
the Company and Dania-Auger, Inc., as filed with the
Commission as Exhibit 10.28 to the Company's Form 10-K for
the year ended December 31, 1993, is hereby incorporated
herein by reference.
10.14 -- Ground Lease, dated March 10, 1993, by and between Blue
Heron Partnership, a Florida general partnership, and the
Company, as filed with the Commission as Exhibit 10.30 to
the Company's Form 10-K for the year ended December 31,
1993, is hereby incorporated herein by reference.
10.15 -- 1994 Stock Option Plan for Non-Employee Directors, as filed
with the Commission as Exhibit 10.32 to the Company's form
10-K for the year ended January 2, 1995, is hereby
incorporated by reference.
10.16 -- Purchase Agreement between the Company and Restaurant
Development Group, Inc., dated as of August 3, 1995 (the
"RDG Agreement"), as filed with the Commission as Exhibit 1
to the Company's Form 8-K dated July 31, 1995, is herein
incorporated by reference.
10.17 -- Amendment No. 1, dated as of October 20, 1995, to the RDG
Agreement, as filed with the Commission as Exhibit 10.1 to
the Company's Form 10-Q for the quarter ended September 11,
1995, is hereby incorporated by reference.
10.18 -- Amendment No. 2, dated as of April 11, 1996, to the RDG
Agreement as filed with the Commission as Exhibit 10.32 to
the Company's Form 10-K for the year ended January 1, 1996,
is hereby incorporated by reference.
10.19 -- Amendment No. 3, dated as of June 2, 1997, to the RDG
Agreement, as filed on August 12, 1997 with the Commission
as Appendix A to the Prospectus contained in the Company's
Registration Statement on Form S-4 (File No. 333-3800), is
hereby incorporated by reference.
10.20 -- Purchase Agreement between the Company and Rall-Folks, Inc.,
dated as of August 2, 1995 (the "Rall-Folks Agreement"), as
filed with the Commission as Exhibit 2 to the Company's Form
8-K dated July 31, 1995, is herein incorporated by
reference.
10.21 -- Amendment No. 1, dated as of October 20, 1995, to the
Rall-Folks Agreement, as filed with the Commission as
Exhibit 10.2 to the Company's Form 10-Q for the quarter
ended September 11, 1995, is hereby incorporated by
reference.
10.22 -- Amendment No. 2, dated as of April 11, 1996 to the
Rall-Folks Agreement, as filed with the Commission as
Exhibit 10.35 to the Company's Form 10-K for the year ended
January 1, 1996, is hereby incorporated by reference.
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<PAGE> 130
10.23 -- Amended and Restated Purchase Agreement, dated as of May 14,
1997, between the Company and Rall-Folks, Inc., as filed
with the Commission as Appendix A to the Prospectus
contained in the Company's Registration Statement on Form
S-4 (File No. 333-3920), is hereby incorporated by
reference.
10.24 -- Note Repayment Agreement dated as of April 12, 1996 between
the Company and Nashville Twin Drive-thru Partners, L.P.
(the "NTDT Agreement"), as filed with the Commission as
Exhibit 10.36 to the Company's Form 10-K for the year ended
January 1, 1996, is hereby incorporated by reference.
10.25 -- Amended and Restated Note Repayment Agreement, dated as of
July 17, 1997, among the Company, Nashville Twin Drive-Thru
Partners, L.P., Jones & Jones Twin Drive-Thru, Inc., NTD
Enterprises, Inc. and Roland L. Jones, as filed on August
13, 1997 with the Commission as Appendix A to the Company's
Registration Statement on Form S-4 (File No. 333- ), is
hereby incorporated by reference.
10.26 -- Lease Agreement (store 480) between the Company and George
W. Cook, dated January 1, 1996, as filed with the Commission
as Exhibit 10.37 to the Company's Form 10-K for the year
ended January 1, 1996, is hereby incorporated by reference.
10.27 -- Sublease and Equipment Lease Agreement (store 174) between
the Company and George W. Cook dated January 1, 1996, as
filed with the Commission as Exhibit 10.38 to the Company's
Form 10-K for the year ended January 1, 1996, is hereby
incorporated by reference.
10.28 -- Sublease and Equipment Lease Agreement (store 188) between
the Company and George W. Cook dated January 1, 1996, as
filed with the Commission as Exhibit 10.39 to the Company's
Form 10-K for the year ended January 1, 1996, is hereby
incorporated by reference.
10.29 -- Sublease and Equipment Lease Agreement (store 344) between
the Company and George W. Cook dated January 1, 1996, as
filed with the Commission as Exhibit 10.40 to the Company's
Form 10-K for the year ended January 1, 1996, is hereby
incorporated by reference.
10.30 -- Sublease and Equipment Lease Agreement (store 611) between
the Company and George W. Cook dated January 1, 1996, as
filed with the Commission as Exhibit 10.41 to the Company's
Form 10-K for the year ended January 1, 1996, is hereby
incorporated by reference.
10.31 -- Option for Asset Purchase, between the Company and George W.
Cook, dated January 1, 1996, as filed with the Commission as
Exhibit 10.42 to the Company's Form 10-K for the year ended
January 1, 1996, is hereby incorporated by reference.
10.32 -- Agreement for Lease with Option for Asset Purchase between
the Company and George W. Cook dated January 1, 1996, as
filed with the Commission as Exhibit 10.43 to the Company's
Form 10-K for the year ended January 1, 1996, is hereby
incorporated by reference.
10.33 -- Employment Agreement between the Company and Anthony L.
Austin dated January 4, 1995, as filed with the Commission
as Exhibit 10.44 to the Company's Form 10-K for the year
ended January 1, 1996, is hereby incorporated by reference.
10.34 -- Employment Agreement between the Company and Albert J.
DiMarco dated July 28, 1995, as filed with the Commission as
Exhibit 10.45 to the Company's Form 10-K for the year ended
January 1, 1996, is hereby incorporated by reference.
10.35 -- Employment letter from the Company to George W. Cook, dated
August 10, 1995, as filed with the Commission as Exhibit
10.46 to the Company's Form 10-K for the year ended January
1, 1996, is hereby incorporated by reference.
10.36 -- Employment Agreement between the Company and Michael T.
Welch, dated July 26, 1996, as filed with the Commission as
Exhibit 10.52 to the Company's Form 10-Q for the quarter
ended June 17, 1996, is hereby incorporated by reference.
10.37 -- Purchase Agreement dated February 19, 1997, as filed with
the Commission as Exhibit 10.1 to the Company's Form 8-K,
dated March 5, 1997, is hereby incorporated by reference.
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<PAGE> 131
10.38 -- Employment Agreement between the Company and David Miller,
dated July 29, 1996, as filed with the Commission as Exhibit
10.46 to the Company's Form 10-K for the year ended December
30, 1996 (the "1996 10-K"), is hereby incorporated by
reference.
10.39 -- Employment Agreement between the Company and James T.
Holder, dated November 22, 1996, as filed with the
Commission as Exhibit 10.36 to the 1996 10-K, is hereby
incorporated by reference.
10.40 -- Severance, Release and Indemnity Agreement between the
Company and Albert J. DiMarco dated January 27, 1997, as
filed with the Commission as Exhibit 10.37 to the 1996 10-K,
is hereby incorporated by reference.
10.41 -- Warrant Agreement dated March 11, 1997, between the Company
and Chasemellon Shareholder Services, L.L.C., as filed with
the Commission as Exhibit 10.38 to the 1996 10-K, is hereby
incorporated by reference.
21* -- List of the subsidiaries of the Company.
23.1** -- Consent of Independent Auditors
23.2 -- Consent of Counsel (see Exhibit 5)
23.3* -- Consent of Jean Giles Wittner
24 -- Power of Attorney (see P. II- )
- ---------------
* To be filed by amendment.
** Filed herewith.
(b) Financial Statements Schedules:
VIII -- Valuation Accounts
(Included in the Prospectus at page F-29)
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the financial
statements or notes thereto or the schedule is not required or inapplicable
under the related instructions.
ITEM 22. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Company undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The Company undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) The Company hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to items 4,
10(b), 11, or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
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<PAGE> 132
(4) The Company hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration Statement when it became effective.
(5) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the provisions set forth in Item 20, or otherwise, the
Company has been advised in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and the Company will be
governed by the final adjudication of such issue.
(6) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
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<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereby duly authorized, in the City of Clearwater, State of
Florida, on August 5, 1997.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: /s/ C. THOMAS THOMPSON
------------------------------------
C. Thomas Thompson
Chief Executive Officer
(Principal Executive Officer)
By: /s/ JOSEPH N. STEIN
------------------------------------
Joseph N. Stein
Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
(Principal Financial & Accounting
Officer)
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Richard E. Fortman, Joseph N. Stein and James T. Holder, and each of them, his
true and lawful attorneys-in-fact and agents, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on August 5, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ WILLIAM P. FOLEY, II Chairman of the Board
- --------------------------------------------------------
William P. Foley
/s/ C. THOMAS THOMPSON Chief Executive Officer and Director
- --------------------------------------------------------
C. Thomas Thompson
/s/ TERRY N. CHRISTENSEN Director
- --------------------------------------------------------
Terry N. Christensen
/s/ FREDERICK E. FISHER Director
- --------------------------------------------------------
Frederick E. Fisher
Director
- --------------------------------------------------------
Andrew H. Hines, Jr.
</TABLE>
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<PAGE> 134
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ CLARENCE V. MCKEE Director
------------------------------------------------------
Clarence V. McKee
/s/ BURT SUGARMAN Director
------------------------------------------------------
Burt Sugarman
</TABLE>
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<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Checkers Drive-In Restaurants, Inc.:
We consent to incorporation by reference in the registration statement on Form
S-4 of Checkers Drive-In Restaurants, Inc. of our report dated March 3, 1997,
relating to the balance sheets of Checkers Drive-In Restaurants, Inc. and
subsidiaries as of December 30, 1996 and January 1, 1996, and the related
statements of operations and cash flows for each of the years in the three-year
period ended December 30, 1996, which report appears in the December 30, 1996
annual report on Form 10-K of Checkers Drive-In Restaurants, Inc.
/s/ KPMG Peat Marwick LLP
Tampa, Florida
August 4, 1997
