UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 1996 Commission file number 0-19649
CHECKERS DRIVE-IN RESTAURANTS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1654960
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
600 Cleveland Street, Eighth Floor
Clearwater, Florida 34617-1079
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (813) 441-3500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
----------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 14, 1997, was $115,405,155 based upon the reported closing
sale price of such shares on the Nasdaq Stock Market's National Market for that
date. As of March 14, 1997, there were 60,540,409 common shares outstanding.
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Sockholders are incorporated by reference in Part III of this Form 10-K.
This document, including exhibits, contains 125 pages. The exhibit index is
located on page 61.
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CHECKERS DRIVE-IN RESTAURANTS, INC.
1996 Form 10-K Annual Report
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TABLE OF CONTENTS
ITEM 1. BUSINESS............................................................ 3
ITEM 2. PROPERTIES.......................................................... 11
ITEM 3. LEGAL PROCEEDINGS................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................. 13
ITEM 6. SELECTED FINANCIAL DATA............................................. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE.......................................................... 52
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 53
ITEM 11. EXECUTIVE COMPENSATION.............................................. 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...... 53
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 53
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K... 54
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS FORM 10-K UNDER "ITEM 1. BUSINESS," "ITEM 3. LEGAL
PROCEEDINGS," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS FORM 10-K CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE
ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS OF CHECKERS DRIVE-IN RESTAURANTS,
INC. ("CHECKERS" AND COLLECTIVELY WITH ITS SUBSIDIARIES AND VARIOUS JOINT
VENTURE PARTNERSHIPS CONTROLLED BY CHECKERS, 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 FORM 10-K.
ITEM 1. BUSINESS.
INTRODUCTION
Unless the context requires otherwise, references in this Report to
the "Company" or the "Registrant" means Checkers Drive-In Restaurants, Inc., its
wholly-owned subsidiaries and the 10.55% to 65.83% owned joint venture
partnerships controlled by the Company.
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 December 30, 1996, there were 478 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 (232 Company-operated
(including 14 joint ventured) and 246 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 1996, the Company focused its efforts on existing operating
markets of highest market penetration ("Core Markets"). It is the Company's
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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 246, or 51%, of the total Restaurants open at
December 30, 1996. 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"), 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 Checkers' 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.
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-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 December 30, 1996, there were 232
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 246 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
(232 RESTAURANTS)
Florida (136) 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)
FRANCHISED
(246 RESTAURANTS)
Florida (56) Texas (9) Wisconsin (3)
Illinois (25) Maryland (11) New York (3)
Georgia (47) New Jersey (8) Puerto Rico (2)
Alabama (18) Tennessee (8) West Virginia (2)
North Carolina (17) Virginia (5) Missouri (2)
South Carolina (11) Indiana (3) Iowa (2)
Louisiana (9) Michigan (3) Mississippi (1)
Washington D.C. (1)
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" ("MRP's"), produced by the Company and
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nine of which included MRP's which were relocated from other sites. The Company
currently expects approximately 30 additional Restaurants to be opened in 1997
(primarily by franchisees) with substantially all of these Restaurants to
include MRP's 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
Modular Restaurant Package 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
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 fiscal years ended December
30, 1996 and January 1, 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
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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
depended 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 December 30, 1996, the
Company and its franchises had five active advertising co-ops covering 216
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 December 30, 1996, 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 13 (excluding Illinois partnerships) Joint Venture Restaurants
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
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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 formula set forth in the agreement. None of these partnerships
have been granted area development agreements.
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 246,
or 51%, of the total Restaurants open at December 30, 1996. 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 visit the site at
least once during construction to meet with the franchisee's site contractor and
to review construction standards.
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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 246
franchised Restaurants at December 30, 1996, 222 were being operated by multiple
unit operators and 24 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 a Franchise Fee 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 (as defined) and to expend certain amounts
for advertising and promotion.
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
8
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total of five as of March 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 (8) weeks after an executed
agreement.
CAPACITY. As of December 30, 1996, the Company had seven (7)
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 has two (2) modular convenience
store units in various stages of construction. As of December 30, 1996, the
Company had thirty-four (34) used Modular Restaurant Packages available for
relocation to new sites, seven (7) of which have been moved to the Champion
production facility for refurbishment, and twenty-seven (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 (3) to four (4) 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,
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 99(cent) 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.
9
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EMPLOYEES
As of December 30, 1996, 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 160 corporate employees, excluding
manufacturing operations, approximately nine are in management positions and the
remainder are professional and administrative or office employees.
As of December 30, 1996, the Company employed approximately 16
persons in its manufacturing operations, nine of whom were corporate personnel
and seven of whom were production personnel, including welders and warehouse
personnel. Of the nine corporate employees, three were in management positions
and six were administrative or office employees. As of March 1997, the Company
had reduced the number of persons employed in its manufacturing operations to
five. 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 REGULATIONS
The Company has no material contracts with the United States
government or any of its agencies.
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.
10
<PAGE>
ITEM 2. PROPERTIES.
Of the 232 Restaurants which were operated by the Company as of
December 30, 1996, the Company held ground leases for 194 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 "Restaurant
Operations" under Item 1 of this Report.
The Company has 15 owned parcels of land and 40 leased parcels of
land which are available for sale or sub-lease. Of these parcels, 30 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 "Manufacturing
Operations" under Item 1 of this Report.
The Company also leases approximately 8,000 aggregate square feet in
two regional offices and one training center.
ITEM 3. LEGAL PROCEEDINGS
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
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
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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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Common Stock of the Company began trading publicly in the
over-the-counter market on the Nasdaq Stock Market's National Market on November
15, 1991, under the symbol CHKR. The following table sets forth the high and low
closing sale price of the Checkers Common Stock as reported in the Nasdaq
National Market for the periods indicated:
High Low
---- ---
1995
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
HOLDERS
At March 14, 1997, the Company had approximately 7,339 stockholders
of record.
DIVIDENDS
Dividends are prohibited under the terms of the Company's major debt
agreement. The Company has not 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 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.
RECENT UNREGISTERED SALES
During fiscal year 1996, the Company has engaged in the following
sales of its securities which were not registered under the Securities Act of
1933, and which have not been previously reported.
On November 22, 1996, the Company issued, to the lenders under its
Amended and Restated Credit Agreement, warrants to purchase an aggregate of 20
million shares of Common Stock in consideration of such lenders agreeing to the
terms of such Amended and Restated Credit Agreement. See Note 3 to Notes to
Consolidated Financial Statements, contained in Item 8 of this Form 10-K, which
is incorporated herein by this reference. Such sales were made pursuant to
Section 4(2) of the Securities Act of 1933 based upon, among other factors, the
limited nature of the offering, the number of lenders and the status of the
purchasers as "accredited investors," as such term is defined under Rule 501 of
Regulation D under the Securities Act of 1933.
Pursuant to contractual obligations entered into in 1996, the
Company has issued warrants to purchase 5,100,000 shares of Common Stock in
connection with the settlement of LOPEZ ET. AL. V. CHECKERS DRIVE-IN
RESTAURANTS, INC., ET. AL. See Item 3 of this Form 10-K which is incorporated
herein by this reference. Such issuance was pursuant to Section 3 (a) (10) of
the Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share 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 Balance Sheet data as of December 30, 1996, and as of 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 year ended December 31, 1993 and December 31, 1992 and 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 information provided below has also been adjusted to reflect
income tax expense as if Champion was not an S Corporation from inception (May
1990) through its acquisition by the Company (November 1991). Also, 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>
--------------------------------------------------------------
Dec. 30, Jan. 1, Jan. 2, Dec. 31, Dec. 31,
1996 1996 1995 1993 1992
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Operating Revenue $ 164,960 $ 190,305 $ 215,115 $ 184,027 $ 102,137
Restaurant Operating Costs 156,548 167,836 173,087 124,384 63,774
Cost of Modular Restaurant Package
Revenues 1,704 4,854 10,485 20,208 11,899
Other Depreciation and Amortization 4,326 4,044 2,796 1,325 511
Selling, General and Administrative Expense 20,190 24,215 21,875 14,048 7,988
Accounting Charges and Loss Provisions 24,405 26,572 14,771 -- --
Interest Expense 6,233 5,724 3,564 556 706
Interest Income 678 674 326 273 1,266
Minority Interests in Income (Loss) (1,509) (192) 185 342 400
Income from Continuing Operations (Pretax) $ (46,258) $ (42,074) $ (11,324) $ 23,437 $ 18,125
Income from Continuing Operations
(Pretax) per Common Share $ (0.89) $ (0.83) $ (0.23) $ 0.49 $ 0.40
Total Assets $ 136,110 $ 166,819 $ 196,770 $ 179,950 $ 101,526
Long-Term Obligations and Redeemable
Preferred Stock $ 39,906 $ 38,090 $ 38,341 $ 36,572 $ 4,162
Cash Dividends Declared per Common Share $ -- $ -- $ -- $ -- $ --
</TABLE>
14
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ITEM 7. 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 December 30, 1996, the
Company had an ownership interest in 232 Company-operated Restaurants and an
additional 246 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 December 30, 1996, there were 218
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
December 30, 1996, there were 14 such Joint Venture Restaurants). (See "Business
- - Restaurant Operations - Joint Venture Restaurants" in Item 1 of this Report.)
The Company did not realize the anticipated results expected from the
introduction of certain cost cutting and efficiency enhancing programs
implemented into the restaurants in fiscal 1996. Restaurant margins decreased
from 6.1% to (0.7)%, primarily as a result of high labor costs. The continued
decrease in comparable sales likewise adversely affected programs designed to
improve restaurant margins. The Company has implemented aggressive programs in
the beginning of fiscal year 1997 that are designed to improve food, paper and
labor costs in the restaurants. These programs include closure of one drive thru
lane during slow periods, adjusting the salaried manager complement and
establishing a labor matrix that guides the general managers to an acceptable
amount of labor hours for different sales volume levels.
As of March 1996, the Company had 53 Company and franchise Restaurants
testing its proprietary L.A. Mex Mexican brand. Although initial sales were
encouraging, the sales increases resulted in little or no contribution to the
profitability of the test units. Additionally, speed of service was adversely
impacted by the addition of the L.A. Mex products. As a result, the Company
closed 13 of the 53 tests in February 1997 and expects to close a majority of
the tests in the first two quarters of fiscal year 1997.
In July 1996, the company's primary credit facility was acquired from
the then existing bank lending group by a new group of lenders led by DDJ
Capital Management LLC (collectively, the "DDJ Group"). In November 1996, CKE
Restaurants, Inc. ("CKE") and other investors, including certain members of the
DDJ Group (collectively the "CKE Group") acquired the credit facility from the
DDJ Group. The credit facility was restructured in late November 1996. The
Company negotiated the deferment of principal payments, reduction in interest
rate, extension of the maturity date by one year, and the elimination or
relaxation of all financial performance and ratio covenants. The restructuring
required the Company to issue to the CKE Group warrants to purchase 20 million
shares of the Company's common stock at $.75 per share. Additionally, the
restructured loan agreement required the Company to elect three members selected
by the CKE Group to the Company's Board of Directors resulting in a seven member
Board. The new members elected to the Company's Board of Directors pursuant to
the restructured loan agreement were William P. Foley, II, Terry N. Christensen
and C. Thomas Thompson.
Significant management changes have occurred since the end of the third
quarter of fiscal year 1996. Effective December 17, 1996, Albert J. DiMarco
resigned as the Company's Chief Executive Officer and President. Mr. DiMarco
simultaneously resigned as a member of the Company's Board of Directors. On that
same date, C. Thomas Thompson was elected to serve as Vice Chairman of the Board
of Directors and as Chief Executive Officer. On January 6, 1997, Richard E.
Fortman was elected to serve as President and Chief Operating Officer of the
Company and Joseph N. Stein was elected to serve as Executive Vice President and
Chief Administrative Officer of the Company. Effective January 21, 1997, Michael
E. Dew resigned as Vice President of Company Operations. Effective that same
date, Michael T. Welch, Vice President of Operations, Marketing, Restaurant
Support Services and Research & Development assumed the additional duties of
Vice President of Company Operations. On January 24, 1997, James T. Holder,
Chief Financial Officer and Secretary of the Company was promoted to Senior Vice
President, General Counsel and Secretary of the Company and Joseph N. Stein
assumed the additional duties of Chief Financial Officer. Messrs. Thompson and
Fortman respectively bring over 25 and 27 years of experience in the operation
of quick service restaurants to the Company.
During fiscal 1996, the Company applied a marketing strategy that
consisted of strategic limited time offer ("LTO") products supported by radio
and outdoor advertising. The majority of these LTO products carried a low price
point and were designed to be introduced for a four to eight week period.
Comparable store sales continued to decline during fiscal year 1996. The Company
is therefore evaluating alternative marketing strategies, including a greater
emphasis on the quality of the burgers and fries that Checkers offers, and an
increased emphasis on combo meals. The Company plans to test a new marketing
strategy in selected markets during fiscal year 1997.
15
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In fiscal year 1996, the Company, along with its franchisees,
experienced a net reduction of 21 operating restaurants. In 1997, the franchise
community expects to open up to 30 new units and the Company intends to close
fewer restaurants focusing on improving Restaurant margins. The franchise group
as a whole continues to experience higher average per store sales than Company
stores.
The Company receives revenues from Restaurant sales, franchise fees,
royalties and sales of fully-equipped manufactured MRP's. Cost of Restaurant
sales relates to food and paper costs. Other Restaurant expenses include labor
and all other Restaurant costs for Company-operated Restaurants. Cost of MRP's
relates to all Restaurant equipment and building materials, labor and other
direct and indirect costs of production. Other expenses, such as depreciation
and amortization, and selling, general and administrative expenses, relate both
to Company-operated Restaurant operations and MRP revenues as well as the
Company's franchise sales and support functions. The Company's revenues and
expenses are affected by the number and timing of additional Restaurant openings
and the sales volumes of both existing and new Restaurants. MRP revenues are
directly affected by the number of new franchise Restaurant openings and the
number of new MRP's produced or used MRP's refurbished for sale in connection
with those openings.
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 revenue. The table also sets forth certain selected
Restaurant operating data.
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
Dec. 30, Jan. 1, Jan. 2,
1996 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Revenues:
Gross Restaurant Sales 96.8 96.4 93.4
Coupons & Discounts 2.6 2.5 2.8
--------------------------------------------
Net Restaurant Sales 94.2 93.9 90.6
Royalties 4.5 4.0 3.2
Franchise Fees 0.6 0.5 0.9
Modular Restaurant Packages 0.7 1.6 5.3
--------------------------------------------
Total Revenues 100.0% 100.0% 100.0%
--------------------------------------------
Costs and Expenses:
Restaurant Food and Paper Cost(1) 34.2 34.7 34.4
Restaurant Labor Costs(1) 35.9 31.8 29.3
Restaurant Occupancy Expense(1) 8.1 6.3 4.9
Restaurant Depreciation and Amortization(1) 5.5 5.8 6.1
Advertising Expense(1) 4.6 4.4 3.9
Other Restaurant Operating Expenses(1) 9.6 8.5 7.5
Cost of Modular Restaurant Package Revenues(2) 141.8 162.1 92.0
Other Depreciation and Amortization 2.6 2.1 1.3
Selling, General and Administrative Expenses 12.2 12.7 10.2
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
Operating Loss (25.6)% (19.6)% (3.7)%
Other Income (Expense):
Interest Income 0.4 0.4 0.4
Interest Expense (3.8) (3.0) (1.7)
Minority Interest in Earnings (0.9) (0.1) 0.1
--------------------------------------------
Loss Before Income Tax Expense (Benefit) (28.0)% (22.1)% (5.2)%
Income Tax Expense (Benefit) 0.1 % (4.6)% (2.1)%
--------------------------------------------
Net Loss (28.1)% (17.5)% (3.1)%
============================================
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
Dec. 30, Jan. 1, Jan. 2,
1996 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Operating Data:
System Wide Restaurant Sales (in 000's)
Company Operated $ 155,392 $ 178,744 $ 194,922
Franchise $ 172,566 $ 190,151 $ 180,977
--------------------------------------------
Total $ 327,958 $ 368,895 $ 375,899
============================================
Average Annual Net Sales Per Restaurant Open
For A Full Year (in 000's) (3):
Company Operated $ 651 $ 721 $ 815
Franchised 755 814 840
--------------------------------------------
System Wide $ 699 $ 765 $ 827
--------------------------------------------
Number of Restaurants (4)
Company Operated 232 242 261
Franchised 246 257 235
--------------------------------------------
Total 478 499 496
============================================
_____________________________________________________________
(1) As a percent of gross 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.
</TABLE>
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 in 1995. The
decrease resulted partially from a net reduction of 10 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.
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.
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
17
<PAGE>
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 MRP's 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 MRP's from previously opened sites. These efforts have been
successful, however, these sales have negatively impacted the new building
revenues. 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 ($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; and 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 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.
18
<PAGE>
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 (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 above mentioned CDDT bankruptcy.
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.
Fourth quarter 1995 accounting charges included $3.0 million for
warrants to be issued in settlement of litigation (see Item 3 - LOPEZ, ET AL VS.
CHECKERS) 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
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
19
<PAGE>
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.
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.
Modular Restaurant Package revenues decreased 73.7% to $3.0 million
in 1995 compared to $11.4 million in 1994 due to decreased sales volume of
Modular Restaurant Packages 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 Modular Restaurant
Packages from previously opened sites which has negatively impacted the new
building revenues. Modular Restaurant Package revenues are recognized on the
percentage of completion method during the construction process; therefore, a
substantial portion of Modular Restaurant Package 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 of gross restaurant
sales in 1995 from $7.9 million or 3.9% of 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 Modular Restaurant Packages totalled $4.9 million or 162.1%
of Modular Restaurant Package 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 Modular Restaurant Package 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.
20
<PAGE>
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 Modular Restaurant Packages 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 settle
lease liabilities over the remaining lives (up to fourteen 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; (ii) write down obsolete
inventory and menu boards; (iii) expense costs associated with the hiring of new
employees, including recruiting fees and relocation costs; (iv) provide for
severance pay; (v) write-off loan origination fees incurred in connection with
the Company's credit facility, which has been substantially renegotiated; (vi)
dispose of a subsidiary which distributes promotional apparel; (vii) reserve for
the settlement of litigation arising in the ordinary course of business and
accrue for legal fees. 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 Modular Restaurant Packages; 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 Item 3 - LOPEZ, ET AL VS.
CHECKERS) 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
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.
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.
21
<PAGE>
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 modular Restaurant package 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.
LIQUIDITY AND CAPITAL RESOURCES
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 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"). 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 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 controlling shareholder of Rally's Hamburgers, Inc.
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 members of CKE Group warrants to purchase an aggregate of 20
million shares of the Companys' 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. Since November 22, 1996, 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 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.
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 then outstanding balance
22
<PAGE>
due under the Rall-Folks Notes (the "Rall-Folks Purchase Price"). The total
amount of principal outstanding under the Rall-Folks Notes was approximately
$1.8 million as of March 1, 1997. 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 $1.7 million as of
March 1, 1997. 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 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
23
<PAGE>
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 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 March 1, 1997. 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 consumated, 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
24
<PAGE>
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.
The consumation 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.
The Company currently does not have significant development plans
for additional Company Restaurants during fiscal 1997.
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.
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 8,771,900 shares of the Company's common
stock. 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. If the conversion of the Preferred Stock into common
stock is not approved by the Company's shareholders at the 1997 Annual Meeting,
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
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
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 required, 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.
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
25
<PAGE>
used to supplement working capital. As of December 30, 1996, the Company owns or
leases approximately 47 parcels of excess real property which it intends to
continue to agressively market to third parties, and has an inventory of
approximately 36 used MRP's which it intends to continue to agressively market
to franchisees and third parties. There can be no assurance that the Company
will be successful in disposing of these assets, and 50% of the proceeds from
the sale of excess real property must be used to reduce the principal balance
under the Restated Credit Agreement.
The Company has previously had significant working capital due to
the proceeds from its two public stock offerings. As of December 31, 1993, these
proceeds had been utilized to purchase long-term property and equipment. The
Company has negative working capital of $26.7 million at December 30, 1996
(determined by subtracting current liabilities from current assets). It is
anticipated that the Company will continue to have negative working capital
since approximately 85% of the Company's assets are long-term (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 has implemented aggressive programs at the beginning of
fiscal year 1997 designed to improve food, paper and labor costs in the
Restaurants. 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 Rall-Folks Notes, the RDG Note and the NTDT Note for Common
Stock. If the Company is unable to consummate one or more of those transactions,
and if the Company is thereafter unable to reach some other arrangements with
Rall Folks, RDG or NTDT, the Company may default under the terms of the Restated
Credit Agreement. In that event, the Company would seek financing from one or
more of its current lenders or other third parties to satisfy its obligations to
Rall-Folks, RDG and NTDT, although no assurance can be given that the Company
would be successful in those efforts.
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 above. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(A) FINANCIAL STATEMENTS
(1) FINANCIAL STATEMENTS. The Company's Financial Statements included in
Item 8 hereof, as required, consist of the following:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors 27
Consolidated Balance Sheets - December 30, 1996 and January 1, 1996 28
Consolidated Statements of Operations -
Years ended December 30, 1996, January 1, 1996 and January 2, 1995 30
Consolidated Statements of Stockholders' Equity -
Years ended December 30, 1996, January 1, 1996 and January 2, 1995 31
Consolidated Statements of Cash Flows -
Years ended December 30, 1996, January 1, 1996 and January 2, 1995 32
Notes to Consolidated Financial Statements -
Years ended December 30, 1996, January 1, 1996 and January 2, 1995 34
</TABLE>
26
<PAGE>
Independent Auditors' Report
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 also
have 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 present
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
27
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 30, January 1,
1996 1996
-------------------------------------
<S> <C> <C>
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
=====================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 30, January 1,
1996 1996
-----------------------------------
<S> <C> <C>
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.
29
<PAGE>
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.
30
<PAGE>
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 pay 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.
31
<PAGE>
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 (used in) provided by investing
activities $ (2,631,699) $ 2,561,467 $ (20,632,775)
----------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
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 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.
33
<PAGE>
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.
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
34
<PAGE>
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.
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.
35
<PAGE>
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 30, January 1, Useful Life
1996 1996 in Years
------------------------------------------------
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
==========================================
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>
Aggregate maturities under the existing terms of long-term debt
agreements for each of the succeeding five years are as follows:
1997 $9,589,233
1998 7,217,865
1999 31,391,670
2000 1,000,145
2001 234,618
Thereafter 61,689
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
36
<PAGE>
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 Companys' 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 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
37
<PAGE>
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 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
38
<PAGE>
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 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.
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.
39
<PAGE>
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
--------------------------------------------------
<C> <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)
==================================================
Actual expense differs from the expected expense by applying the
federal income tax rate of 35% to earnings before income tax as follows:
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>
40
<PAGE>
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.
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.
41
<PAGE>
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.
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
42
<PAGE>
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 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
43
<PAGE>
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 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"), La-Van 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.
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
44
<PAGE>
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"). 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
45
<PAGE>
$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 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) As Reported $(0.90) $(0.65) $(0.14)
Per Common Share 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.
46
<PAGE>
Summary of the Status of the Company's Stock Option Plans
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Average Average Average
Exercise Exercise Exercise
Price Price 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
(1). The weighted-average fair value of options granted whose exercise price exceeds
market was also $0.39.
</TABLE>
Summary of Company Stock Option Plan's Prices
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------
Weighted- |
Number Average Weighted- | Number Weighted-
Range of Outstanding Remaining Average | Exercisable at Average
Exercise Prices 12/30/96 Contractual Exercise Price | 12/30/96 Exercise Price
Life (Yrs.) |
- --------------------------------------------------------------------------------------------------
|
<C> <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.
47
<PAGE>
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 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
48
<PAGE>
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.
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:
Year Ending Operating
December 31 Leases
--------------------------------
1997 8,245,000
1998 7,328,000
1999 7,165,000
2000 7,349,000
2001 6,999,000
Thereafter 53,599,000
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.
49
<PAGE>
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
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 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.
50
<PAGE>
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.
51
<PAGE>
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) (24,243) (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 Checkers' 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
DISCLOSURE
Not applicable
52
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to the information under the headings "ELECTION OF DIRECTORS,"
"MANAGEMENT - Directors and Executive Officers" and "MANAGEMENT Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's
definitive Proxy Statement to be used in connection with the Company's 1997
Annual Meeting of Stockholders, which will be filed with the Commission on or
before April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information under the headings "MANAGEMENT - Compensation of
Executive Officers" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1997 Annual Meeting of Stockholders, which will be
filed with the commission prior to April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the information under the heading "MANAGEMENT - Security Ownership
of Management and Others" in the Company's definitive Proxy Statement to be used
in connection with the Company's 1997 Annual Meeting of Stockholders, which will
be filed with the Commission prior to April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information under the heading "MANAGEMENT - Certain
Transactions" in the company's definitive Proxy Statement to be used in
connection with the Company's 1997 Annual Meeting of Stockholders, which will be
filed with the Commission prior to April 30, 1997.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1.0 The following Financial Statements of the Registrant are included
in Part II, Item 8:
Report of Independent Auditors
Consolidated Balance Sheets - December 30, 1996 and January 1,
1996
Consolidated Statements of Operations - Years ended December 30,
1996, January 1, 1996 and January 2, 1995
Consolidated Statements of Stockholders' Equity - years ended
December 30, 1996, January 1, 1996 and January 2, 1995
Consolidated Statements of Cash Flows - years ended December 30,
1996, January 1, 1996 and January 2, 1995
Notes to Consolidated Financial Statements - years ended December
30, 1996, January 1, 1996 and January 2, 1995
2.0 The following financial Statement Schedules of the Registrant are
included in Item 14(d):
VIII - VALUATION ACCOUNTS
All schedules, other than those indicated above, are omitted
because of the absence of the conditions under which they are
required or because the required information is included in the
consolidated financial statements or the notes thereto.
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.
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.
54
<PAGE>
4.4 Form of Warrant issued to lenders under the Amended and Restated
Credit Agreement, dated November 22, 1996, between the Company
and CKE Restaurants, Inc., as Agent, and the lenders listed
therein, as filed with the Commission as Exhibit 4.3 on the
Company's Form 8-K, dated November 22, 1996, is hereby
incorporated by reference.
4.5 The Company agrees to furnish the Commission upon its request a
copy of any instrument which defines the rights of holders of
long-term debt of the Company and which authorizes a total amount
of securities not in excess of 10% of the total assets of the
Company and its subsidiaries on a consolidated basis.
10.1 Agreement of General Partnership dated May 5, 1989, between the
Company and Donna M. Brown- McMullen and Thomas W. McMullen, 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.
10.2 Agreement of General Partnership dated March 1990, between the
Company and GNC Investments, Inc., as filed with the Commission
as Exhibit 10.6 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.
10.3 Assignment and Assumption Agreement dated December 31, 1993, by
and between the Company and GNC Investments, Inc., a Florida
corporation, as filed with the Commission as Exhibit 10.3 to the
Company's Form 10-K for the year ended December 31, 1993, is
hereby incorporated herein by reference.
10.4 Management Agreement dated December 31, 1993, by and between the
Company and GNC Investments, Inc., a Florida corporation, as
filed with the Commission as Exhibit 10.4 to the Company's Form
10-K for the year ended December 31, 1993, is hereby incorporated
herein by reference.
10.5 Agreement of General Partnership dated February 21, 1990, between
the Company and Dolphin Drive- Thru, Inc., as filed with the
Commission as Exhibit 10.8 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.
10.6 Lease Agreement effective May 1, 1990, between the 34th and 35th
Checkers Partnership and Brown & Brown St. Petersburg, 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.
10.7 Form of Indemnification Agreement between the Company and its
directors and certain officers, as filed with the Commission as
Exhibit 4.4 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.
10.8 Checkers Franchise Agreement dated January 16, 1992, between the
Company and Michael G. Perez, George W. Cook and Norma L. Cook,
as filed with the Commission as Exhibit 10.16 to the Company's
Form 10-K for the year ended December 31, 1991, is hereby
incorporated herein by reference.
10.9 Continuing Personal Guaranty dated January 16, 1992, by Michael
G. Perez, George W. Cook and Norma L. Cook ("Franchisee") to the
Company, as filed with the Commission as Exhibit 10.17 to the
Company's Form 10-K for the year ended December 31, 1991, is
hereby incorporated herein by reference.
10.10 1991 Stock Option Plan of the Company, as amended on May 10,
1994, as filed with the Commission as Exhibit 4 to the Company's
Registration Statement on Form S-8 filed on June 15, 1994 (File
No. 33-80236), is hereby incorporated herein by reference.
55
<PAGE>
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, 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 that certain
Purchase Agreement between Checkers and Restaurant Development
Group, Inc., dated as of August 3, 1995, 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 that certain
Purchase Agreement between Checkers and Restaurant Development
Group, Inc., dated as of August 3, 1995, 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 Purchase Agreement between the Company and Rall-Folks, Inc.,
dated as of August 2, 1995, as filed with the Commission as
Exhibit 2 to the Company's Form 8-K dated July 31, 1995, is
herein incorporated by reference.
10.20 Amendment No. 1, dated as of October 20, 1995, to that certain
Purchase Agreement between Checkers and Rall-Folks, Inc., dated
as of August 2, 1995, 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.
10.21 Amendment No. 2, dated as of April 11, 1996 to that certain
Purchase Agreement between the Company and Rall-Folks, Inc.,
dated as of August 2, 1995, 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.
10.22 Note Repayment Agreement dated as of April 12, 1996 between the
Company and Nashville Twin Drive-thru Partners, L.P., 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.
10.23 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.
56
<PAGE>
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.31 * 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.
10.32 * 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.
10.33 * 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.
10.34 Purchase Agreement dated February 19, 1997, as filed with the
Commission as Exhibit 10.1 to theCompany's Form 8-K, dated March
5, 1997, is hereby incorporated by reference.
** 10.35 * Employment Agreement between the Company and David Miller, dated
July 29, 1996.
** 10.36 * Employment Agreement between the Company and James T. Holder,
dated November 22, 1996.
** 10.37 * Severance, Release and Indemnity Agreement between the Company
and Albert J. DiMarco dated January 27, 1997.
** 10.38 Warrant Agreement dated March 11, 1997, between the Company and
Chasemellon Shareholder Services, L.L.C.
21 List of the subsidiaries of the Company.
23 Consent of Independent Auditors
57
<PAGE>
27 Financial Data Schedule
___________________________________
* Management contract or compensatory plan or arrangement.
** Filed herewith.
(b) Reports on Form 8-K:
During the last quarter of the year ended December 30, 1996, the
Company filed the following Reports on Form 8-K:
A Report on Form 8-K, dated November 8, 1996, reporting under
Item 5, the sale of the Company's debt under it's primary
credit facility on November 14, 1996.
A Report on Form 8-K, dated November 22, 1996, reporting under
Item 5, the execution of an Amended and Restated Credit
Agreement on November 22, 1996, which restructured its primary
debt with its new senior secured lenders, who acquired the
debt on November 14, 1996.
A Report on Form 8-K, dated December 17, 1996, reporting under
Item 5, the appointment of C. Thomas Thompson as Vice Chairman
and Chief Executive Officer of the Company, effective December
17, 1996, replacing Albert J. DiMarco, who resigned to pursue
other interests. The Company also announced the commitment by
members of its new lender group to invest approximately $20
million in the Company through the purchase of common shares
in a private placement in the next 30 to 45 days.
(c) Exhibits:
The exhibits listed under Item 14(a) are filed as part of this
Report.
(d) Financial Statements Schedules:
VIII - Valuation Accounts
58
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
Schedule VIII - Valuation Accounts
<TABLE>
<CAPTION>
Balance at Balance at
Beginning of End of
Period Expensed Deductions Period
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Description
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>
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Clearwater, State of Florida on March 28, 1996.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: /s/ C. Thomas Thompson
----------------------------------------
C. Thomas Thompson
Chief Executive Officer
By: /s/ Richard E. Fortman
----------------------------------------
Richard E. Fortman
President and Chief Operating Officer
By: /s/ Joseph N. Stein
----------------------------------------
Joseph N. Stein
Executive Vice President, Chief Financial
Officer and Chief Accounting Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Company and in
the capacities indicated on March 28, 1996.
Signature Title
- --------- -----
/s/ Frederick E. Fisher
- ------------------------------
Frederick E. Fisher Director and Chairman of the Board
/s/ C. Thomas Thompson
- ------------------------------
C. Thomas Thompson Director, Vice Chairman of the Board and
Chief Executive Officer
/s/ Joseph N. Stein
- ------------------------------
Joseph N. Stein Chief Financial Officer and
Chief Accounting Officer
/s/ Richard E. Fortman
- ------------------------------
Richard E. Fortman President and Chief Operating Officer
/s/ Terry N. Christensen
- ------------------------------
Terry N. Christensen Director
/s/ William P. Foley, Ii
- ------------------------------
William P. Foley, II Director
/s/ Clarence V. Mckee
- ------------------------------
Clarence V. McKee Director
/s/ Andrew H. Hines, Jr.
- ------------------------------
Andrew H. Hines, Jr. Director
60
<PAGE>
1996 FORM 10-K
CHECKERS DRIVE-IN RESTAURANTS, INC.
EXHIBIT INDEX
Exhibit #
- ---------
2.0 The following financial Statement Schedules of the Registrant are
included in Item 14(d):
VIII - VALUATION ACCOUNTS
All schedules, other than those indicated above, are omitted because
of the absence of the conditions under which they are required or
because the required information is included in the consolidated
financial statements or the notes thereto.
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.
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.
61
<PAGE>
4.4 Form of Warrant issued to lenders under the Amended and Restated
Credit Agreement, dated November 22, 1996, between the Company and
CKE Restaurants, Inc., as Agent, and the lenders listed therein, as
filed with the Commission as Exhibit 4.3 on the Company's Form 8-K,
dated November 22, 1996, is hereby incorporated by reference.
4.5 The Company agrees to furnish the Commission upon its request a copy
of any instrument which defines the rights of holders of long-term
debt of the Company and which authorizes a total amount of securities
not in excess of 10% of the total assets of the Company and its
subsidiaries on a consolidated basis.
10.1 Agreement of General Partnership dated May 5, 1989, between the
Company and Donna M. Brown-McMullen and Thomas W. McMullen, 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.
10.2 Agreement of General Partnership dated March 1990, between the
Company and GNC Investments, Inc., as filed with the Commission as
Exhibit 10.6 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.
10.3 Assignment and Assumption Agreement dated December 31, 1993, by and
between the Company and GNC Investments, Inc., a Florida corporation,
as filed with the Commission as Exhibit 10.3 to the Company's Form
10-K for the year ended December 31, 1993, is hereby incorporated
herein by reference.
10.4 Management Agreement dated December 31, 1993, by and between the
Company and GNC Investments, Inc., a Florida corporation, as filed
with the Commission as Exhibit 10.4 to the Company's Form 10-K for
the year ended December 31, 1993, is hereby incorporated herein by
reference.
10.5 Agreement of General Partnership dated February 21, 1990, between the
Company and Dolphin Drive-Thru, Inc., as filed with the Commission as
Exhibit 10.8 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.
10.6 Lease Agreement effective May 1, 1990, between the 34th and 35th
Checkers Partnership and Brown & Brown St. Petersburg, 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.
10.7 Form of Indemnification Agreement between the Company and its
directors and certain officers, as filed with the Commission as
Exhibit 4.4 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.
10.8 Checkers Franchise Agreement dated January 16, 1992, between the
Company and Michael G. Perez, George W. Cook and Norma L. Cook, as
filed with the Commission as Exhibit 10.16 to the Company's Form 10-K
for the year ended December 31, 1991, is hereby incorporated herein
by reference.
10.9 Continuing Personal Guaranty dated January 16, 1992, by Michael G.
Perez, George W. Cook and Norma L. Cook ("Franchisee") to the
Company, as filed with the Commission as Exhibit 10.17 to the
Company's Form 10-K for the year ended December 31, 1991, is hereby
incorporated herein by reference.
10.10 * 1991 Stock Option Plan of the Company, as amended on May 10, 1994,
as filed with the Commission as Exhibit 4 to the Company's
Registration Statement on Form S-8 filed on June 15, 1994 (File No.
33-80236), is hereby incorporated herein by reference.
62
<PAGE>
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, 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 that certain
Purchase Agreement between Checkers and Restaurant Development Group,
Inc., dated as of August 3, 1995, 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 that certain Purchase
Agreement between Checkers and Restaurant Development Group, Inc.,
dated as of August 3, 1995, 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 Purchase Agreement between the Company and Rall-Folks, Inc., dated as
of August 2, 1995, as filed with the Commission as Exhibit 2 to the
Company's Form 8-K dated July 31, 1995, is herein incorporated by
reference.
10.20 Amendment No. 1, dated as of October 20, 1995, to that certain
Purchase Agreement between Checkers and Rall-Folks, Inc., dated as of
August 2, 1995, 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.
10.21 Amendment No. 2, dated as of April 11, 1996 to that certain Purchase
Agreement between Checkers and Restaurant Development Group, Inc.,
dated as of August 3, 1995, 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.
10.22 Note Repayment Agreement dated as of April 12, 1996 between the
Company and Nashville Twin Drive-thru Partners, L.P., 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.
63
<PAGE>
10.23 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.
10.24 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.
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.29 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.
10.30 * 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.
10.31 * 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.
10.32 * 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.
10.33 * 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.
10.34 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.
** 10.35 * Employment Agreement between the Company and David Miller, dated July
29, 1996.
** 10.36 * Employment Agreement between the Company and James T. Holder dated
November 22, 1996.
** 10.37 * Employment Agreement between the Company and Albert J. DiMarco
dated January 27, 1997.
64
<PAGE>
** 10.38 Warrant Agreement dated March 11, 1997, between the Company and
Chasemellon Shareholder Services, L.L.C.
21 List of the subsidiaries of the Company.
23 Consent of Independent Auditors
27 Financial Data Schedule
_____________________________________
* Management contract or compensatory plan or arrangement.
** Filed herewith.
65
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Employment Agreement") is made and entered
into as of the 29th day of July, 1996 (the "Commencement Date"), by and between
CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation (the "Company"), and
DAVID MILLER, an individual ("Employee").
W I T N E S S E T H
WHEREAS, the Company develops, produces, owns, operates and
franchises quick-service "double drive-thru" restaurants under the name
"Checkers" (such activities, together with all other activities of the Company
and its subsidiaries, as conducted at or prior to the termination of this
Employment Agreement, and any future activities reasonably related thereto which
are contemplated by the Company and/or its subsidiaries at the termination of
this Employment Agreement identified in writing by the Company to Employee at
the date of such termination, are hereinafter referred to as the "Business
Activities");
WHEREAS, the Company desires to employ Employee upon the terms and
subject to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, the mutual
promises, covenants and conditions herein contained and for other good and
valuable considerations, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto intending to be legally bound hereby agree as
follows:
Section 1. EMPLOYMENT. The Company hereby employs Employee, and Employee
hereby accepts employment with the Company, all upon the terms and subject to
the conditions set forth in this Employment Agreement.
Section 2. CAPACITY AND DUTIES. Employee is and shall be employed in the
capacity of Vice President of Franchise Operations of the Company and its
subsidiaries and shall have such other duties, responsibilities and authorities
as are assigned to him by the President so long as such additional duties,
responsibilities and authorities are consistent with Employee's position and
level of authority as Vice President of Franchise Operations of the Company.
Subject to the advice and general directions of the President, and except as
otherwise herein provided, Employee shall devote substantially all of his
business time, best efforts and attention to promote and advance the business of
the Company and its subsidiaries and to perform diligently and faithfully all
the duties, responsibilities and obligations of Employee to be performed by him
under this Employment Agreement. Employee's duties shall include all of those
duties being performed by Employee as of the date hereof.
During the Employment Period (as hereinafter defined),
Employee shall not be employed in any other business activity, whether or not
such activity is pursued for gain, profit or other pecuniary advantage;
provided, however, that this restriction shall not be construed as preventing
Employee from investing his personal assets in a business which does not compete
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with the Company or its subsidiaries or with any other company or entity
affiliated with the Company, where the form or manner of such investment will
not require services of any significance on the part of Employee in the
operation of the affairs of the business in which such investment is made and in
which his participation is solely that of a passive investor or advisor.
Section 3. TERM OF EMPLOYMENT. The term of employment of Employee by the
Company pursuant to this Employment Agreement shall be for the period (the
"Employment Period") commencing on the Commencement Date and ending on the one
year anniversary of the Commencement Date, or such earlier date that Employee's
employment is terminated in accordance with the provisions of this Employment
Agreement; provided however, that the Employment Period shall automatically be
extended for a successive one year period, with Employee's written consent,
unless the Company gives Employee thirty (30) days written notice prior to the
end of such year that it does not intend to extend the term of the Employment
Period.
Section 4. PLACE OF EMPLOYMENT. Employee's principal place of work shall
be located at the principal offices of the Company, currently located in
Clearwater, Florida, provided that the principal offices of the Company may be
moved from time to time in the discretion of the Board of Directors.
Section 5. COMPENSATION. During the Employment Period, subject to all the
terms and conditions of this Employment Agreement and as compensation for all
services to be rendered by Employee under this Employment Agreement, the Company
shall pay to or provide Employee with the following:
Section 5.1. BASE SALARY. The Company shall pay to employee a base
annual salary at the rate of Ninety-Five Thousand Dollars ($95,000) per year
through the end of the term of the Agreement and any extensions thereof, payable
at such intervals (at least monthly) as salaries are paid generally to other
executive officers of the Company.
Section 5.2. BONUS. Employee shall be eligible to receive an annual
cash bonus pursuant to the cash bonus plan adopted by the Company, and available
generally to employees of similar position. The Company reserves the right to
modify or eliminate the cash bonus plan at any time.
Section 5.3. VACATION AND OTHER BENEFITS. Employee shall be entitled
to Three (3) weeks vacation during each calendar year. Vacation days not used
may not be carried into subsequent years. The Company shall provide Employee
with the other benefits specified on Exhibit 5.03 attached hereto.
Section 6. ADHERENCE TO STANDARDS. Employee shall comply with the written
policies, standards, rules and regulations of the Company from time to time
established for all executive officers of the Company consistent with Employee's
position and level of authority.
Section 7. REVIEW OF PERFORMANCE. The President shall periodically review
and evaluate the performance of Employee under this Employment Agreement with
Employee.
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Section 8. EXPENSES. The Company shall reimburse Employee for all
reasonable, ordinary and necessary expenses (including, but not limited to,
automobile and other business travel and customer entertainment expenses)
incurred by him in connection with his employment hereunder in accordance with
the written policy and guidelines established by the Company for executive
officers; provided, however, Employee shall render to the Company a complete and
accurate accounting of all such expenses in accordance with the substantiation
requirements of section 274 of the Internal Revenue Code of 1986, as amended
(the "Code"), as a condition precedent to such reimbursement.
Section 9. TERMINATION WITH CAUSE BY THE COMPANY. This Employment
Agreement may be terminated with Cause (as hereinafter defined) by the Company
provided that the Company shall (i) give Employee the Notice of Termination (as
hereinafter defined) and (ii) pay Employee his annual base salary through the
Date of Termination (as hereinafter defined) at the rate in effect at the time
the Notice of Termination is given plus any bonus or incentive compensation
which has been earned or has become payable pursuant to the terms of any
compensation or benefit plan as of the Date of Termination, but which have not
yet been paid.
Section 10. TERMINATION WITHOUT CAUSE BY THE COMPANY OR FOR GOOD REASON BY
EMPLOYEE. This Employment Agreement may be terminated by the Company (i) at the
end of the Term of Employment, (ii) during the Term of Employment without cause
as hereinafter defined, or (iii) by reason of the death or Disability Reason (as
hereinafter defined) provided that the Company shall continue to pay to Employee
(or the estate of Employee in the event of termination due to the death of
employee) the compensation and other benefits described in Section 5 of this
Employment Agreement, except for annual cash bonuses or incentive compensation
for six (6) months from the Date of Termination. Employee's right to terminate
his employment for Good Reason shall not be affected by his incapacity due to
physical or mental illness. In the event of termination by the Company by reason
of Employee's death or Disability, medical, hospitalization or disability
benefits coverage comparable to that provided by the company during Employee's
lifetime shall be provided to Employee, his spouse and dependents for twelve
(12) months from the Date of Termination, and for eighteen (18) months from the
Date of Termination with respect to medical and hospitalization benefits for the
Employee and his family. The benefits provided under this Section 10 shall be no
less favorable to Employee in terms of amounts, deductibles and costs to him, if
any, than such benefits provided by the Company to him and shall not be
interpreted so as to limit any benefits to which Employee, as a terminated
employee of the Company, or his family may be entitled under the Company's life
insurance, medical, hospitalization or disability plans following his Date of
Termination or under applicable law.
In the event of Termination by the Employee for Good Reason, the
Company shall continue to pay to Employee the compensation and other benefits
described in Section 5 of this Employment Agreement, except for annual cash
bonuses or incentive compensation for six (6) months from the Date of
Termination, and shall continue to provide medical, hospitalization or
disability benefits coverage to Employee, his spouse and dependents for twelve
(12) months from the Date of Termination.
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In the event that within a period of one (1) year of a Change in
Control, this Employment Agreement is terminated by the Company for any reason
other than for cause (or the Company gives notice that it is not renewing the
Employment Agreement pursuant to Section 3), the Company shall continue to pay
to Employee the compensation and other benefits described in Section 5 of this
Employment Agreement, except for annual cash bonuses or incentive compensation
for twelve (12) months from the Date of Termination, and shall continue to
provide medical, hospitalization or disability benefits coverage to Employee,
his or her spouse and dependents for a period of eighteen (18) months from the
Date of Termination.
Section 11. DEFINITIONS. In addition to the words and terms elsewhere
defined in this Employment Agreement, certain capitalized words and terms used
in this Employment Agreement shall have the meanings given to them by the
definitions and descriptions in this Section 12 unless the context or use
indicates another or different meaning or intent, and such definition shall be
equally applicable to both the singular and plural forms of any of the
capitalized words and terms herein defined. The following words and terms are
defined terms under this Employment Agreement:
Section 11.1. "Disability" shall mean a physical or mental illness
which, in the judgment of the company after consultation with the licensed
physician attending Employee, impairs Employee's ability to substantially
perform his duties under this Employment Agreement as an employee and as a
result of which he shall have been absent from his duties with the Company on a
full-time basis for six (6) consecutive months.
Section 11.2. A termination with "Cause" shall mean a termination of
this Employment Agreement by reason of a good faith determination by the Board
that Employee (i) failed to substantially perform his duties with this Company
(other than a failure resulting from his incapacity due to physical or mental
illness) after a written demand for substantial performance has been delivered
to him by the Board, which demand specifically identifies the manner in which
the Board believes he has not substantially performed his duties; (ii) has
engaged in conduct the consequences of which are materially adverse to the
company, monetarily or otherwise; or (iii) has materially breached the terms of
this Employment Agreement. No act, or failure to act, on Employee's part shall
be grounds for termination with Cause unless he has acted or failed to act with
an absence of good faith or without a reasonable belief that his action or
failure to act was in or at least not opposed to the best interests of the
Company. Employee shall not be deemed to have been terminated with cause unless
there shall have been delivered to Employee a letter setting forth the reasons
for the Company's termination of the Employee with cause.
Section 11.3. "Good Reason" shall mean the occurrence of any of the
following events without Employee's prior express written consent: (i) any
material change in Employee's status, title, authorities or responsibilities
under this Employment Agreement which represents a demotion from such status,
title, position or responsibilities which are materially inconsistent with his
status, title, position or work responsibilities set forth in this Employment
Agreement; or any removal of Employee from, or failure to appoint, elect,
reappoint or reelect Employee to, any of such positions, except in connection
with the termination of his employment with Cause, or as a result of his death
or Disability; provided, however, that no change in title, authorities or
responsibilities customarily attributable solely to the Company ceasing to be a
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publicly traded corporation shall constitute Good Reason hereunder; (ii) the
failure by the Company to continue in effect any incentive, bonus or other
compensation plan in which Employee participates, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan) has been
made with respect to the failure to continue such plan, or the failure by the
Company to continue Employee's participation therein, or any action by the
Company which would directly or indirectly materially reduce his participation
therein or reward opportunities thereunder; provided, however, that Employee
continues to meet all eligibility requirements thereof; (iii) the failure by the
Company to continue in effect any employee benefit plan (including any medical,
hospitalization, life insurance or disability benefit plan in which Employee
participates), or any material fringe benefit or prerequisite enjoyed by him
unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to the failure to continue such
plan, or the failure by the Company to continue Employee's participation
therein, or any action by the Company which would directly or indirectly
materially reduce his participation therein or reward opportunities thereunder,
or the failure by the Company to provide him with the benefits to which he is
entitled under this Employment Agreement; provided, however, that Employee
continues to meet all eligibility requirements thereof; (iv) any other material
breach by the Company of any provision of this Employment Agreement; (v) the
failure of the Company to obtain a satisfactory agreement from any successor or
assign of the Company to assume and agree to perform this Employment Agreement,
as contemplated in Section 22 hereof; (vi) any purported termination of
employee's employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of this Employment Agreement; and for purposes of
this Employment Agreement, no such purported termination shall be effective; or
(vii) any Change of Control as hereinafter defined) of the Company.
Section 11.4. Change of Control. "Change of Control" shall be deemed
to have occurred when: (i) securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding voting securities
are acquired pursuant to a tender offer or an exchange offer by a person or
entity which is not a wholly-owned subsidiary of the Company or any of its
affiliates; (ii) a merger or consolidation is consummated in which the Company
is a constituent corporation and which results in less than 50% of the
outstanding voting securities of the surviving or resulting entity being owned
by the then existing stockholders of the Company; (iii) a sale is consummated by
the Company of substantially all of the Company's assets to a person or entity
which is not a wholly-owned subsidiary of the Company or any of its affiliates;
(iv) a Control Purchase (as defined in Section 8 of the Plan) has occurred; (v)
during any period of two consecutive years, individuals who, at the beginning of
such period, constituted the Board cease, for any reason, to constitute at least
a majority thereof, unless the election or nomination for election for each new
director was approved by the vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period; (vi) an
Approved Transaction (as defined in Section 8 of the Plan) has occurred; or
(vii) a merger or consolidation with Rally's Hamburgers, Inc, CKE Restaurants,
Inc., or any entity affiliated with either or them.
Section 11.5. Notice of Termination. "Notice of Termination" shall
mean a written notice which shall indicate the specified termination provision
in this Employment Agreement relied upon and shall set forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
Employee's employment under the provision so indicated; provided, however, no
such purported termination shall be effective without such Notice of
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Termination; provided further, however, any purported termination by the Company
or by Employee shall be communicated by a Notice of Termination to the other
party hereto in accordance with Section 13 of this Employment Agreement.
Section 11.6. Date of Termination. "Date of Termination" shall mean
the date specified in the Notice of Termination (which, in the case of a
termination pursuant to section 10 of this Employment Agreement shall not be
less than sixty (60) days, and in the case of a termination pursuant to Section
11 of this Employment Agreement shall not be more than sixty (60) days, from the
date such Notice of Termination is given); provided, however, that if within
thirty (30) days after any Notice of Termination is given the party receiving
such Notice of Termination notifies the other party that a dispute exists
concerning the termination, the Date of Termination shall be the date finally
determined by either mutual written agreement of the parties or by the final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been taken).
Section 12. FEES AND EXPENSES. The Company shall pay all legal fees and
related expenses (including the costs of experts, evidence and counsel) incurred
by Employee as a result of a contest or dispute over Employee's termination of
employment if such contest or dispute is resolved in Employee's favor.
Section 13. NOTICES. For the purposes of this Employment Agreement,
notices and all other communications provided for in the Employment Agreement
shall be in writing and shall be deemed to have been duly given when personally
delivered or sent by certified mail, return receipt requested, postage prepaid,
or by expedited (overnight) courier with established national reputation,
shipping prepaid or billed to sender, in either case addressed to the respective
addresses last given by each party to the other (provided that all notices to
the Company shall be directed to the attention of the President with a copy to
the Secretary of the Company) or to such other address as either party may have
furnished to the other in writing in accordance herewith. All notices and
communication shall be deemed to have been received on the date of delivery
thereof, or on the second day after deposit thereof with an expedited courier
service, except that notice of change of address shall be effective only upon
receipt.
Section 14. LIFE INSURANCE. The Company may, at any time after the
execution of this Employment Agreement, apply for and procure as owner and for
its own benefit, life insurance on Employee, in such amounts and in such form or
forms as the Company may determine. Employee shall, at the request of the
Company, submit to such medical examinations, supply such information, and
execute such documents as may be required by the insurance company or companies
to whom the Company has applied for such insurance. Employee hereby represents
that to his knowledge he is in excellent physical and mental condition and is
not under the influence of alcohol, drugs or similar substance.
Section 15. PROPRIETARY INFORMATION AND INVENTIONS. Employee understands
and acknowledges that:
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Section 15.1. TRUST. Employees employment creates a relationship of
confidence and trust between Employee and the Company with respect to certain
information applicable to the business of the Company its subsidiaries
(collectively, the "Group") or applicable to the business of any franchisee,
vendor or customer of any of the Group, which may be made known to Employee by
the Group or by any franchisee, vendor or customer of any of the Group or
learned by Employee during the Employment Period.
Section 15.2. PROPRIETARY INFORMATION. The Group possesses and will
continue to possess information that has been created, discovered, or developed
by, or otherwise become known to, the Group (including, without limitation,
information created, discovered, developed or made known to by Employee during
the period of or arising out of my employment by the Company) or in which
property rights have been or may be assigned or otherwise conveyed to the Group,
which information has commercial value in the business in which the Group is
engaged and is treated by the Group as confidential. Except as otherwise herein
provided, all such information is hereinafter called "Proprietary Information",
which term, as used herein, shall also include, but shall not be limited to,
data, functional specifications, computer programs, know-how, research,
technology, improvements, developments, designs, marketing plans, strategies,
forecasts, new products, unpublished financial statements, budgets, projections,
licenses, franchises, prices, costs, and customer, supplier and potential
acquisition candidates lists. Notwithstanding anything to the contrary, the term
"Proprietary Information" shall not include (i) information which is in the
public domain, (ii) information which is published or otherwise becomes part of
the public domain through no fault of Employee, (iii) information which Employee
can demonstrate was in Employee's possession at the time of disclosure and was
not acquired by Employee directly or indirectly from any of the Group on a
confidential basis, (iv) information which becomes available to Employee on a
non-confidential basis from a source other than any of the Group and which
source, to the best of employee's knowledge, did not acquire the information on
a confidential basis or (v) information required to be disclosed by any federal
or state law, rule or regulation or by any applicable judgment, order or decree
or any court or governmental body or agency having jurisdiction in the premises.
All Proprietary Information shall be the sole property of the
Group and their respective assigns. Employee assigns to the Company any rights
Employee may have or acquire in such Proprietary Information. At all times, both
during Employee's employment by the Company and after its termination, Employee
shall keep in strictest confidence and trust all Proprietary Information, and
Employee shall not use or disclose any Proprietary Information without the
written consent of the Group, except as may be necessary in the ordinary course
of performing Employee's duties as an employee of the Company.
Section 16. SURRENDER OF DOCUMENTS. Employee shall, at the request of the
Company, promptly surrender to the Company or its nominee any Proprietary
Information or document, memorandum, record, letter or other paper in his
possession or under his control relating to the operation, business or affairs
of the Group.
Section 17. PRIOR EMPLOYMENT AGREEMENTS. Employee represents and warrants
that Employee's performance of all the terms of this Employment Agreement and as
an employee of the Company does not, and will not, breach any employment
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agreement, arrangement or understanding or any agreement, arrangement or
understanding to keep in confidence proprietary information acquired by Employee
in confidence or in trust prior to Employee's employment by the Company.
Employee has not entered into, and shall not enter into, any agreement,
arrangement or understanding, either written or oral, which is in conflict with
this Employment Agreement or which would be violated by Employee entering into,
or carrying out his obligations under, this Employment Agreement.
Section 18. RESTRICTIVE COVENANT. Employee acknowledges and recognizes
Employee's possession of Proprietary Information and the highly competitive
nature of the business of the Group and, accordingly, so long as the Company is
not in default under this Agreement agrees that in consideration of the premises
contained herein Employee will not, during the period of Employee's employment
by the Company and (i) for a period of one (1) year following the Date of
Termination if this Employment Agreement is terminated by the Company with Cause
or by the Employee other than for Good Reason or (ii) six (6) months following
the Termination Date if this Employment Agreement is terminated by the Company
other than with Cause or by the Employee for Good Reason, (a) directly or
indirectly engage in any Competitive Business (as hereinafter defined) in the
United States, whether such engagement shall be an employer, officer, director,
owner, employee, consultant, stockholder, partner or other participant in any
Competitive Business, (b) assist others in engaging in any Competitive Business
in the manner described in the foregoing clause (a), or (c) induce employees of
the Company to terminate their employment with the Company or engage in any
Competitive Business in the United States; provided, however, that the ownership
of the outstanding capital stock of a corporation whose shares are traded on a
national securities exchange or on the over-the-counter market or the ownership
and/or operation of a Checkers Restaurant under a franchise agreement with the
Company shall not be deemed engaging any Competitive Business. "Competitive
Business" shall mean any restaurant providing exclusively drive-thru or
drive-in, fast food, primarily featuring hamburgers, cheeseburgers, hot dogs or
other food items offered by a Checkers Restaurant, or any other business that is
the same as or similar to the Checkers Restaurant concept as it exists on the
date of this Employment Agreement or on the Termination Date.
Section 19. REMEDIES. Employee acknowledges and agrees that the Company's
remedy at law for a breach or a threatened breach of the provisions herein would
be inadequate, and in recognition of this Fat, in the event of a breach or
threatened breach by Employee of any of the provisions of this Employment
Agreement, it is agreed that the Company shall be entitled to, equitable relief
in the form of specific performance, a temporary restraining order, a temporary
or permanent injunction or any other equitable remedy which may then be
available, without posting bond or other security. Employee acknowledges that
the granting of a temporary injunction, a temporary restraining order or other
permanent injunction merely prohibiting Employee from engaging in any Business
Activities would not be an adequate remedy upon breach or threatened breach of
this Employment Agreement, and consequently agrees upon any such breach or
threatened breach to the granting of injunctive relief prohibiting Employee from
engaging in any activities prohibited by this Employment Agreement. No remedy
herein conferred is intended to be exclusive of any other remedy, and each and
every such remedy shall be cumulative and shall be in addition to any other
remedy given hereunder now or hereinafter existing at law or in equity or by
statute or otherwise.
Section 20. SUCCESSIVE EMPLOYMENT NOTICE. Within five (5) business days
after the Termination Date, Employee shall provide notice to the Company of
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Employee's next intended employment. If such employment is not known by employee
at such date, Employee shall notify the Company immediately upon determination
of such information. Employee shall continue to provide the company with notice
of employee's place and nature of employment and any change in place or nature
of employment during the period ending (i) two (2) years after the Termination
Date if this Employment Agreement is terminated by the Company for Cause or by
the Employee other than for Good Reason or (ii) six (6) months after the
Termination Date if this employment Agreement is terminated by the company other
than for Cause or by the Employee for Good Reason. Failure of employee to
provide the company with such information in an accurate and timely fashion
shall be deemed to be a breach of this Employment Agreement and shall entitle
the Company to all remedies provided for in this Employment Agreement as a
result of such breach.
Section 21. SUCCESSORS. This Employment Agreement shall be binding on the
Company and any successor to any of its businesses or assets. Without limiting
the effect of the prior sentence, the Company shall use its best efforts to
require any successor or assign (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Employment Agreement in the same manner and to the same extent that the Company
would be required to perform it if no such succession or assignment had taken
place. As used in this Employment Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid which assumes and agrees to perform this Employment Agreement or
which is otherwise obligated under this Agreement by the first sentence of this
Section 22, by operation of law or otherwise.
Section 22. INDEMNIFICATION AGREEMENT. Upon the execution of this
Employment Agreement, the Company and employee shall each execute and deliver to
the other an Indemnification Agreement dated as of the date hereof.
Section 23. BINDING EFFECT. This Employment Agreement shall inure to the
benefit of and be enforceable by Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Employee should die while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Employment
Agreement to Employee's estate.
Section 24. MODIFICATION AND WAIVER. No provision of this Employment
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by Employee and such officer as
may be specifically designated by the Board. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Employment Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
Section 25. HEADINGS. Headings used in this Agreement are for convenience
only and shall not be used to interpret or construe its provisions.
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Section 26. WAIVER OF BREACH. The waiver of either the Company or Employee
of a breach of any provision of this Employment Agreement shall not operate or
be construed as a waiver of any subsequent breach by either the Company or
Employee.
Section 27. AMENDMENTS. No amendments or variations of the terms and
conditions of this Employment Agreement shall be valid unless the same is in
writing and signed by all of the parties hereto.
Section 28. SEVERABILITY. The invalidity or unenforceability of any
provision of this Employment Agreement, whether in whole or in part, shall not
in any way affect the validity and/or enforceability of any other provision
herein contained. any invalid or unenforceable provision shall be deemed
severable to the extent of any such invalidity or unenforceability. It is
expressly understood and agreed that while the Company and Employee consider the
restrictions contained in this Employment Agreement reasonable for the purpose
of preserving for the Company the good will, other proprietary rights and
intangible business value of the Company if a final judicial determination is
made by a court having jurisdiction that the time or territory or any other
restriction contained in this Employment Agreement is an unreasonable or
otherwise unenforceable restriction against Employee, the provisions of such
clause shall not be rendered void but shall be deemed amended to apply as to
maximum time and territory and to such other extent as such court may judicially
determine or indicate to be reasonable.
Section 29. GOVERNING LAW. This Employment Agreement shall be construed
and enforced pursuant to the laws of the State of Florida.
Section 30. ARBITRATION. Any controversy or claim arising out of or
relating to this Employment Agreement or any transactions provided for herein,
or the breach thereof, other than a claim for injunctive relief shall be settled
by arbitration in accordance with the commercial Arbitration Rules of the
American Arbitration Association (the "Rules") in effect at the time demand for
arbitration is made by any party. The evidentiary and procedural rules in such
proceedings shall be kept to the minimum level of formality that is consistent
with the Rules. One arbitrator shall be named by the Company, a second shall be
named by Employee and the third arbitrator shall be named by the two arbitrators
so chosen. In the event that the third arbitrator is not agreed upon, he or she
shall be named by the American Arbitration Association. Arbitration shall occur
in Tampa, Florida or such other location agreed to by the Company and employee.
The award made by all or a majority of the panel of arbitrators shall be final
and binding, and judgment may be entered in any court of law having competent
jurisdiction. The award is subject to confirmation, modification, correction, or
vacation only as explicitly provided in Title 9 of the United States Code. The
prevailing party shall be entitled to an award of pre- and post-award interest
as well as reasonable attorneys' fees incurred in connection with the
arbitration and any judicial proceedings related thereto.
Section 31. EXECUTIVE OFFICER STATUS. Employee acknowledges that he shall
be deemed to be an "executive officer" of Checkers for purposes of the
Securities Act of 1993, as amended (the "1933 Act"), and the Securities Exchange
Act of 1934, as amended (the "1934 Act") and that he shall comply in al respects
with all the rules and regulations under the 1933 Act and the 1934 act
applicable to him in a timely and non-delinquent manner. In order to assist the
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company in complying with its obligations under the 1933 Act and 1934 Act,
Employee shall provide to the Company such information about Employee as the
Company shall reasonably request including, but not limited to, information
relating to personal history and stockholdings. Employee shall report to the
General Counsel of the Company or other designated officer of the Company all
changes in beneficial ownership of any shares of the Company Common Stock deemed
to be beneficially owned by Employee and/or any members of Employee's immediate
family.
Section 32. COUNTERPARTS. This Employment Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute but one document.
Section 33. EXHIBITS. The Exhibits attached hereto are incorporated herein
by reference and are an integral part of this Employment Agreement.
IN WITNESS WHEREOF, this Employment Agreement has been duly executed
by the Company and the Employee as of the date first above written.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: \S\ ALBERT J. DIMARCO
----------------------------------
Albert J. DiMarco, President
EMPLOYEE
\S\ DAVID MILLER
----------------------------------
David Miller
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EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement (the "Employment Agreement") is made and
entered into as of the 22nd day of November, 1996 (the Commencement Date"), by
and between CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation (the
"Company"), and JAMES T. HOLDER, an individual ("Employee").
W I T N E S S E T H:
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WHEREAS, the Company develops, produces, owns, operates and
franchises quick-service "double drive-thru" restaurants under the name
"Checkers" (such activities, together with all other activities of the Company
and its subsidiaries, as conducted at or prior to the termination of this
Employment Agreement, and any future activities reasonably related thereto which
are contemplated by the Company and/or its subsidiaries at the termination of
this Employment Agreement identified in writing by the Company to Employee at
the date of such termination, are hereinafter referred to as the "Business
Activities");
WHEREAS, the Company desires to employ Employee upon the terms and
subject to the terms and conditions set forth in this Employment Agreement; and,
WHEREAS, Employee desires to be employed by the Company upon the
terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, the mutual
promises, covenants and conditions herein contained and for other good and
valuable considerations, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto intending to be legally bound hereby agree as
follows:
Section 1. EMPLOYMENT. The Company hereby employs Employee, and
Employee hereby accepts employment with the Company, all upon the terms and
subject to the conditions set forth in this Employment Agreement.
Section 2. CAPACITY AND DUTIES. Employee is and shall be employed in
the capacity of Vice President and Chief Financial Officer of the Company and
its subsidiaries and shall have such other duties, responsibilities and
authorities as are assigned to him by the President and/or Chief Executive
Officer of the Company (the "President") so long as such additional duties,
responsibilities and authorities are consistent with Employee's position and
level of authority as Vice President and Chief Financial Officer of the Company.
<PAGE>
Employee shall report directly to the President. Subject to the advice and
general directions of the President and except as otherwise herein provided,
Employee shall devote substantially all of his business time, best efforts and
attention to promote and advance the business of the Company and its
subsidiaries and to perform diligently and faithfully all the duties,
responsibilities and obligations of Employee to be performed by him under this
Employment Agreement.
During the Employment Period (as hereinafter defined), Employee shall not
be employed in any other business activity, whether or not such activity is
pursued for gain, profit or other pecuniary advantage; PROVIDED, HOWEVER, that
this restriction shall not be construed as preventing Employee from investing
his personal assets in a business which does not compete with the Company or its
subsidiaries or with any other company or entity affiliated with the Company,
where the form or manner of such investment will not require services of any
significance on the part of Employee in the operation of the affairs of the
business in which such investment is made and in which his participation is
solely that of a passive investor or advisor.
Section 3. TERM OF EMPLOYMENT. The term of employment of Employee by
the Company pursuant to this Employment Agreement shall be for the period (the
"Employment Period") commencing on the Commencement Date and ending on December
31, 1998, or such earlier date that Employee's employment is terminated in
accordance with the provisions of this Employment Agreement ; PROVIDED HOWEVER,
that the Employment Period shall automatically be extended at the end of 1998 to
December 31, 1999, and at the end of 1999 to December 31, 2000, with Employee's
written consent, unless the Company gives Employee written notice prior to the
end of such year that it does not intend to extend the term of the Employment
Period. Unless the Employment Period is terminated by the Company with Cause (as
hereinafter defined) or by Employee other than for Good Reason prior to the end
of the Employment Period, Employee shall be deemed to have "retired" from
employment with the Company on the Date of Termination (as hereinafter defined)
for purposes of the Company's 1991 Stock Option Plan (the "Plan") and Section 9
of the Stock Option Agreement (as hereinafter defined).
Section 4. PLACE OF EMPLOYMENT. Employee's principal place of work
shall be located at the principal offices of the Company, currently located in
Clearwater, Florida, provided that the principal offices of the Company may be
moved from time to time in the discretion of the Board of Directors.
Section 5. COMPENSATION. During the Employment Period, subject to
all the terms and conditions of this Employment Agreement and as compensation
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for all services to be rendered by Employee under this Employment Agreement, the
Company shall pay to or provide Employee with the following:
5.01 BASE SALARY. The Company shall pay to Employee
a base annual salary at the rate of One Hundred and Eighty Thousand
Dollars ($180,000.00) per year from the Commencement Date through
December 31, 1996, payable at such intervals (at least monthly) as
salaries are paid generally to other executive officers of the
Company. On January 1, 1997, and on each January 1 thereafter during
the Employment Term, Employee's base annual salary shall be reviewed
by the President and shall be increased to an amount which is
determined in good faith by the President based upon a complete
review of Employee's performance under this Employment Agreement
during the prior year and the growth and profitability of the
Company, which review shall be communicated in writing to Employee.
5.02 CASH BONUS. Employee shall be eligible to
receive an annual cash bonus in 1997 in an amount up to 50% of his
annual base salary, pursuant to a cash bonus plan to be prepared by
the Compensation Committee of the Board, after consultation with
Employee. The terms of the cash bonus plan shall be no less
favorable than those included in any cash bonus plans for other
executive officers and/or management and other significant employees
of the Company whose base annual salary exceeds One Hundred Thousand
Dollars ($100,000).
5.03 OTHER BENEFITS. The Company shall provide Employee with the
other benefits specified on Exhibit 5.03 attached hereto.
5.04 STOCK OPTION. INTENTIONALLY LEFT BLANK.
Section 6. MOVING EXPENSES. INTENTIONALLY LEFT BLANK.
Section 7. ADHERENCE TO STANDARDS. Employee shall comply with the
written policies, standards, rules and regulations of the Company from time to
time established for all executive officers of the Company consistent with his
position and level of authority as President and Chief Executive Officer.
Section 8. REVIEW OF PERFORMANCE. The President and Chief Executive
Officer of the Company shall periodically review and evaluate the performance of
Employee under this Employment Agreement with Employee.
Section 9. EXPENSES. The Company shall reimburse Employee for all
reasonable, ordinary and necessary expenses (including, but not limited to,
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automobile and other business travel and customer entertainment expenses)
incurred by him in connection with his employment hereunder in accordance with
the written policy and guidelines established by the Company for executive
officers; PROVIDED, HOWEVER, Employee shall render to the Company a complete and
accurate accounting of all such expenses in accordance with the substantiation
requirements of Section 274 of the Internal Revenue Code of 1986, as amended
(the "Code"), as a condition precedent to such reimbursement.
Section 10. TERMINATION WITH CAUSE BY THE COMPANY. This Employment
Agreement may be terminated with Cause (as hereinafter defined) by the Company
provided that the Company shall (i) give Employee the Notice of Termination (as
hereinafter defined) and (ii) pay Employee his annual base salary through the
Date of Termination (as hereinafter defined) at the rate in effect at the time
the Notice of Termination is given plus any bonus or incentive compensation
which has been earned or has become payable pursuant to the terms of any
compensation or benefit plan as of the Date of Termination, but which have not
yet been paid.
Section 11. TERMINATION WITHOUT CAUSE BY THE COMPANY OR FOR GOOD
REASON BY EMPLOYEE. This Employment Agreement may be terminated by (i) the
Company by reason of the death or Disability (as hereinafter defined) of
Employee or (ii) Employee for Good Reason (as hereinafter defined) provided that
the Company shall continue to pay to Employee (or the estate of Employee in the
event of termination due to the death of Employee) the compensation and other
benefits described in Section 5 of this Employment Agreement, except for annual
cash bonuses or incentive compensation for the years subsequent to the year in
which this Employment Agreement is terminated, until such time as this
Employment Agreement would have automatically terminated as provided in Section
3 hereof (assuming that written notice of the Company's intent not to extend the
Employment Period was given to Employee on the date this Employment Agreement
was terminated). Employee's right to terminate his employment for Good Reason
shall not be affected by his incapacity due to physical or mental illness. In
the event of termination by reason of Employee's death or Disability, medical,
hospitalization or disability benefits coverage comparable to that provided by
the Company during Employee's lifetime shall be provided to his spouse and
dependents for the remaining term of this Employment Agreement. The benefits
provided under this Section 11 shall be no less favorable to Employee in terms
of amounts, deductibles and costs to him, if any, than such benefits provided by
the Company to him and his dependents as of the Date of Termination. This
Section 11 shall not be interpreted so as to limit any benefits to which
Employee, as a terminated employee of the Company, or his family may be entitled
under the Company's life insurance, medical, hospitalization or disability plans
following his Date of Termination or under applicable law.
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Section 12. DEFINITIONS. In addition to the words and terms
elsewhere defined in this Employment Agreement, certain capitalized words and
terms used in this Employment Agreement shall have the meanings given to them by
the definitions and descriptions in this Section 12 unless the context or use
indicates another or different meaning or intent, and such definition shall be
equally applicable to both the singular and plural forms of any of the
capitalized words and terms herein defined. The following words and terms are
defined terms under this Employment Agreement:
12.01 "Disability" shall mean a physical or mental illness
which, in the judgment of the Company after consultation with the
licensed physician attending Employee, impairs Employee's ability to
substantially perform his duties under this Employment Agreement as
an employee and as a result of which he shall have been absent from
his duties with the Company on a full-time basis for six (6)
consecutive months.
12.02 A termination with "Cause" shall mean a termination
of this Employment Agreement by reason of a good faith determination
by the Board that Employee (i) failed to substantially perform his
duties with the Company (other than a failure resulting from his
incapacity due to physical or mental illness) after a written demand
for substantial performance has been delivered to him by the Board,
which demand specifically identifies the manner in which the Board
believes he has not substantially performed his duties; (ii) has
engaged in conduct the consequences of which are materially adverse
to the Company, monetarily or otherwise; or (iii) has materially
breached the terms of this Employment Agreement. No act, or failure
to act, on Employee's part shall be grounds for termination with
Cause unless he has acted or failed to act with an absence of good
faith or without a reasonable belief that his action or failure to
act was in or at least not opposed to the best interests of the
Company. Notwithstanding the foregoing, Employee shall not be deemed
to have been terminated with Cause unless there shall have been
delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than a majority of the entire
membership of the Board (exclusive of Employee) at a meeting of the
Board called and held for the purpose of terminating Employee (after
reasonable notice to Employee and opportunity for him, together with
his counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Employee failed to perform his duties or
engaged in conduct in the manner or of the type set forth above in
the first sentence of this Section 12.02 and specifying the
particulars thereof in detail.
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12.03 "Good Reason" shall mean the occurrence of any of
the following events without Employee's prior express written
consent: (i) any material change in Employee's status, title,
authorities or responsibilities (including reporting
responsibilities) under this Employment Agreement which represents a
demotion from such status, title, position or responsibilities
(including reporting responsibilities); the assignment to him of any
duties or work responsibilities which are materially inconsistent
with his status, title, position or work responsibilities set forth
in this Employment Agreement or which are materially inconsistent
with the status, title, position or work responsibilities of the
President of a publicly traded corporation; or any removal of
Employee from, or failure to appoint, elect, reappoint or reelect
Employee to, any of such positions, except in connection with the
termination of his employment with Cause, or as a result of his
death or Disability; PROVIDED, HOWEVER, that no change in title,
authorities or responsibilities customarily attributable solely to
the Company ceasing to be a publicly traded corporation shall
constitute Good Reason hereunder; (ii) the failure by the Company to
continue in effect any incentive, bonus or other compensation plan
in which Employee participates, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been
made with respect to the failure to continue such plan, or the
failure by the Company to continue Employee's participation therein,
or any action by the Company which would directly or indirectly
materially reduce his participation therein or reward opportunities
thereunder; PROVIDED, HOWEVER, that Employee continues to meet all
eligibility requirements thereof; (iii) the failure by the Company
to continue in effect any employee benefit plan (including any
medical, hospitalization, life insurance or disability benefit plan
in which Employee participates), or any material fringe benefit or
prerequisite enjoyed by him unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been
made with respect to the failure to continue such plan, or the
failure by the Company to continue Employee's participation therein,
or any action by the Company which would directly or indirectly
materially reduce his participation therein or reward opportunities
thereunder, or the failure by the Company to provide him with the
benefits to which he is entitled under this Employment Agreement;
PROVIDED, HOWEVER, that Employee continues to meet all eligibility
requirements thereof; (iv) any other material breach by the Company
of any provision of this Employment Agreement; (v) the failure of
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<PAGE>
the Company to obtain a satisfactory agreement from any successor or
assign of the Company to assume and agree to perform this Employment
Agreement, as contemplated in Section 22 hereof; (vi) any purported
termination of Employee's employment which is not effected pursuant
to a Notice of Termination satisfying the requirements of this
Employment Agreement; and for purposes of this Employment Agreement,
no such purported termination shall be effective; or (vii) any
Change of Control (as hereinafter defined) of the Company.
12.04 CHANGE OF CONTROL. "Change of Control" shall be
deemed to have occurred when: (i) securities of the Company
representing 50% or more of the combined voting power of the
Company's then outstanding voting securities are acquired pursuant
to a tender offer or an exchange offer by a person or entity which
is not a wholly-owned subsidiary of the Company or any of its
affiliates; (ii) a merger or consolidation is consummated in which
the Company is a constituent corporation and which results in less
than 50% of the outstanding voting securities of the surviving or
resulting entity being owned by the then existing stockholders of
the Company; (iii) a sale is consummated by the Company of
substantially all of the Company's assets to a person or entity
which is not a wholly-owned subsidiary of the Company or any of its
affiliates; (iv) a Control Purchase (as defined in Section 8 of the
Plan) has occurred; (v) during any period of two consecutive years,
individuals who, at the beginning of such period, constituted the
Board cease, for any reason, to constitute at least a majority
thereof, unless the election or nomination for election for each new
director was approved by the vote of at least two-thirds of the
directors then still in office who were directors at the beginning
of the period; (vi) an Approved Transaction (as defined in Section 8
of the Plan) has occurred; or (vii) a merger or consolidation with
Rally's Hamburgers, Inc.
12.05 NOTICE OF TERMINATION. "Notice of Termination" shall
mean a written notice which shall indicate the specific termination
provision in this Employment Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Employee's employment under the
provision so indicated; PROVIDED, HOWEVER, no such purported
termination shall be effective without such Notice of Termination;
PROVIDED FURTHER, HOWEVER, any purported termination by the Company
or by Employee shall be communicated by a Notice of Termination to
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the other party hereto in accordance with Section 14 of this
Employment Agreement.
12.06 DATE OF TERMINATION. "Date of Termination" shall mean the date
specified in the Notice of Termination (which, in the case of a
termination pursuant to Section 10 of this Employment Agreement
shall not be less than sixty (60) days, and in the case of a
termination pursuant to Section 11 of this Employment Agreement
shall not be more than sixty (60) days, from the date such Notice of
Termination is given); PROVIDED, HOWEVER, that if within thirty (30)
days after any Notice of Termination is given the party receiving
such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be
the date finally determined by either mutual written agreement of
the parties or by the final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been taken).
Section 13. FEES AND EXPENSES. The Company shall pay all legal fees
and related expenses (including the costs of experts, evidence and counsel)
incurred by Employee as a result of a contest or dispute over Employee's
termination of employment if such contest or dispute is resolved in Employee's
favor.
Section 14. NOTICES. For the purposes of this Employment Agreement,
notices and all other communications provided for in the Employment Agreement
shall be in writing and shall be deemed to have been duly given when personally
delivered or sent by certified mail, return receipt requested, postage prepaid,
or by expedited (overnight) courier with established national reputation,
shipping prepaid or billed to sender, in either case addressed to the respective
addresses last given by each party to the other (provided that all notices to
the Company shall be directed to the attention of the President with a copy to
the Secretary of the Company) or to such other address as either party may have
furnished to the other in writing in accordance herewith. All notices and
communication shall be deemed to have been received on the date of delivery
thereof, on the third business day after the mailing thereof, or on the second
day after deposit thereof with an expedited courier service, except that notice
of change of address shall be effective only upon receipt.
Section 15. LIFE INSURANCE. The Company may, at any time after the
execution of this Employment Agreement, apply for and procure as owner and for
its own benefit, life insurance on Employee, in such amounts and in such form or
forms as the Company may determine. Employee shall, at the request of the
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Company, submit to such medical examinations, supply such information, and
execute such documents as may be required by the insurance company or companies
to whom the Company has applied for such insurance. Employee hereby represents
that to his knowledge he is in excellent physical and mental condition and is
not under the influence of alcohol, drugs or similar substance.
Section 16. PROPRIETARY INFORMATION AND INVENTIONS.
Employee understands and acknowledges that:
16.01 TRUST. Employee's employment creates a relationship
of confidence and trust between Employee and the Company with
respect to certain information applicable to the business of the
Company and its subsidiaries (collectively, the "Group") or
applicable to the business of any franchisee, vendor or customer of
any of the Group, which may be made known to Employee by the Group
or by any franchisee, vendor or customer of any of the Group or
learned by Employee during the Employment Period.
16.02 PROPRIETARY INFORMATION. The Group possesses and
will continue to possess information that has been created,
discovered, or developed by, or otherwise become known to, the Group
(including, without limitation, information created, discovered,
developed or made known to by Employee during the period of or
arising out of my employment by the Company) or in which property
rights have been or may be assigned or otherwise conveyed to the
Group, which information has commercial value in the business in
which the Group is engaged and is treated by the Group as
confidential. Except as otherwise herein provided, all such
information is hereinafter called "Proprietary Information", which
term, as used herein, shall also include, but shall not be limited
to, data, functional specifications, computer programs, know-how,
research, technology, improvements, developments, designs, marketing
plans, strategies, forecasts, new products, unpublished financial
statements, budgets, projections, licenses, franchises, prices,
costs, and customer, supplier and potential acquisition candidates
lists. Notwithstanding anything contained in this Employment
Agreement to the contrary, the term "Proprietary Information" shall
not include (i) information which is in the public domain, (ii)
information which is published or otherwise becomes part of the
public domain through no fault of Employee, (iii) information which
Employee can demonstrate was in Employee's possession at the time of
disclosure and was not acquired by Employee directly or indirectly
from any of the Group on a confidential basis, (iv) information
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which becomes available to Employee on a non-confidential basis from
a source other than any of the Group and which source, to the best
of Employee's knowledge, did not acquire the information on a
confidential basis or (v) information required to be disclosed by
any federal or state law, rule or regulation or by any applicable
judgment, order or decree or any court or governmental body or
agency having jurisdiction in the premises.
All Proprietary Information shall be the sole property of the Group and their
respective assigns. Employee assigns to the Company any rights Employee may have
or acquire in such Proprietary Information. At all times, both during Employee's
employment by the Company and after its termination, Employee shall keep in
strictest confidence and trust all Proprietary Information, and Employee shall
not use or disclose any Proprietary Information without the written consent of
the Group, except as may be necessary in the ordinary course of performing
Employee's duties as an employee of the Company.
Section 17. SURRENDER OF DOCUMENTS. Employee shall, at the request
of the Company, promptly surrender to the Company or its nominee any Proprietary
Information or document, memorandum, record, letter or other paper in his
possession or under his control relating to the operation, business or affairs
of the Group.
Section 18. PRIOR EMPLOYMENT AGREEMENTS. Employee represents and
warrants that Employee's performance of all the terms of this Employment
Agreement and as an employee of the Company does not, and will not, breach any
employment agreement, arrangement or understanding or any agreement, arrangement
or understanding to keep in confidence proprietary information acquired by
Employee in confidence or in trust prior to Employee's employment by the
Company. Employee has not entered into, and shall not enter into, any agreement,
arrangement or understanding, either written or oral, which is in conflict with
this Employment Agreement or which would be violated by Employee entering into,
or carrying out his obligations under, this Employment Agreement.
Section 19. RESTRICTIVE COVENANT. Employee acknowledges and
recognizes Employee's possession of Proprietary Information and the highly
competitive nature of the business of the Group and, accordingly, so long as the
Company is not in default under this Agreement agrees that in consideration of
the premises contained herein Employee will not, during the period of Employee's
employment by the Company and (i) for a period of one (1) year following the
Date of Termination if this Employment Agreement is terminated by the Company
with Cause or by the Employee other than for Good Reason or (ii) six (6) months
following the Termination Date if this Employment Agreement is terminated by the
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Company other than with Cause or by the Employee for Good Reason, (a) directly
or indirectly engage in any Competitive Business (as hereinafter defined) in the
United States, whether such engagement shall be as an employer, officer,
director, owner, employee, consultant, stockholder, partner or other participant
in any Competitive Business, (b) assist others in engaging in any Competitive
Business in the manner described in the foregoing clause (a), or (c) induce
employees of the Company to terminate their employment with the Company or
engage in any Competitive Business in the United States; PROVIDED, HOWEVER, that
the ownership of the outstanding capital stock of a corporation whose shares are
traded on a national securities exchange or on the over-the-counter market or
the ownership and/or operation of a Checkers Restaurant under a franchise
agreement with the Company shall not be deemed engaging in any Competitive
Business. "Competitive Business" shall mean any fast food, quick-service,
drive-thru or drive-in restaurant business, primarily featuring hamburgers,
cheeseburgers, hot dogs or other food items offered by a Checkers Restaurant,
including, but not limited to McDonalds, Burger King, Wendy's, Hardees, Rally's
Hamburger's, Inc. and/or Taco Bell restaurants, or any other business that is
the same as or similar to the Checkers Restaurant concept as it exists on the
date of this Employment Agreement or on the Termination Date.
Section 20. REMEDIES. Employee acknowledges and agrees that the
Company's remedy at law for a breach or a threatened breach of the provisions
herein would be inadequate, and in recognition of this fact, in the event of a
breach or threatened breach by Employee of any of the provisions of this
Employment Agreement, it is agreed that the Company shall be entitled to,
equitable relief in the form of specific performance, a temporary restraining
order, a temporary or permanent injunction or any other equitable remedy which
may then be available, without posting bond or other security. Employee
acknowledges that the granting of a temporary injunction, a temporary
restraining order or other permanent injunction merely prohibiting Employee from
engaging in any Business Activities would not be an adequate remedy upon breach
or threatened breach of this Employment Agreement, and consequently agrees upon
any such breach or threatened breach to the granting of injunctive relief
prohibiting Employee from engaging in any activities prohibited by this
Employment Agreement. No remedy herein conferred is intended to be exclusive of
any other remedy, and each and every such remedy shall be cumulative and shall
be in addition to any other remedy given hereunder now or hereinafter existing
at law or in equity or by statute or otherwise.
Section 21. SUCCESSIVE EMPLOYMENT NOTICE. Within five (5) business
days after the Termination Date, Employee shall provide notice to the Company of
Employee's next intended employment. If such employment is not known by Employee
at such date, Employee shall notify the Company immediately upon determination
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of such information. Employee shall continue to provide the Company with notice
of Employee's place and nature of employment and any change in place or nature
of employment during the period ending (i) two (2) years after the Termination
Date if this Employment Agreement is terminated by the Company for Cause or by
the Employee other than for Good Reason or (ii) six (6) months after the
Termination Date if this Employment Agreement is terminated by the Company other
than for Cause or by the Employee for Good Reason. Failure of Employee to
provide the Company with such information in an accurate and timely fashion
shall be deemed to be a breach of this Employment Agreement and shall entitle
the Company to all remedies provided for in this Employment Agreement as a
result of such breach.
Section 22. SUCCESSORS. This Employment Agreement shall be binding
on the Company and any successor to any of its businesses or assets. Without
limiting the effect of the prior sentence, the Company shall use its best
efforts to require any successor or assign (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform
this Employment Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession or assignment had
taken place. As used in this Employment Agreement, "Company" shall mean the
Company as hereinbefore defined and any successor or assign to its business
and/or assets as aforesaid which assumes and agrees to perform this Employment
Agreement or which is otherwise obligated under this Agreement by the first
sentence of this Section 22, by operation of law or otherwise.
Section 23. INDEMNIFICATION AGREEMENT. Upon the execution of this
Employment Agreement, the Company and Employee shall each execute and deliver to
the other an Indemnification Agreement dated as of the date hereof, the form of
which is attached hereto as Exhibit 23.
Section 24. BINDING EFFECT. This Employment Agreement shall inure to
the benefit of and be enforceable by Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would still be
payable to him hereunder if he had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Employment Agreement to Employee's estate.
Section 25. MODIFICATION AND WAIVER. No provision of this Employment
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by Employee and such officer as
may be specifically designated by the President. No waiver by either party
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hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Employment Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
Section 26. HEADINGS. Headings used in this Agreement are for
convenience only and shall not be used to interpret or construe its provisions.
Section 27. WAIVER OF BREACH. The waiver of either the Company or
Employee of a breach of any provision of this Employment Agreement shall not
operate or be construed as a waiver of any subsequent breach by either the
Company or Employee.
Section 28. AMENDMENTS. No amendments or variations of the terms and
conditions of this Employment Agreement shall be valid unless the same is in
writing and signed by all of the parties hereto.
Section 29. SEVERABILITY. The invalidity or unenforceability of any
provision of this Employment Agreement, whether in whole or in part, shall not
in any way affect the validity and/or enforceability of any other provision
herein contained. Any invalid or unenforceable provision shall be deemed
severable to the extent of any such invalidity or unenforceability. It is
expressly understood and agreed that while the Company and Employee consider the
restrictions contained in this Employment Agreement reasonable for the purpose
of preserving for the Company the good will, other proprietary rights and
intangible business value of the Company if a final judicial determination is
made by a court having jurisdiction that the time or territory or any other
restriction contained in this Employment Agreement is an unreasonable or
otherwise unenforceable restriction against Employee, the provisions of such
clause shall not be rendered void but shall be deemed amended to apply as to
maximum time and territory and to such other extent as such court may judicially
determine or indicate to be reasonable.
Section 30. GOVERNING LAW. This Employment Agreement shall be
construed and enforced pursuant to the laws of the State of Florida.
Section 31. ARBITRATION. Any controversy or claim arising out of or
relating to this Employment Agreement or any transactions provided for herein,
or the breach thereof, other than a claim for injunctive relief shall be settled
by arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association (the "Rules") in effect at the time demand for
arbitration is made by any party. The evidentiary and procedural rules in such
proceedings shall be kept to the minimum level of formality that is consistent
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with the Rules. One arbitrator shall be named by the Company, a second shall be
named by Employee and the third arbitrator shall be named by the two arbitrators
so chosen. In the event that the third arbitrator is not agreed upon, he or she
shall be named by the American Arbitration Association. Arbitration shall occur
in Tampa, Florida or such other location agreed to by the Company and Employee.
The award made by all or a majority of the panel of arbitrators shall be final
and binding, and judgment may be entered in any court of law having competent
jurisdiction. The award is subject to confirmation, modification, correction, or
vacation only as explicitly provided in Title 9 of the United States Code. The
prevailing party shall be entitled to an award of pre- and post-award interest
as well as reasonable attorneys' fees incurred in connection with the
arbitration and any judicial proceedings related thereto.
Section 32. EXECUTIVE OFFICER STATUS. Employee acknowledges that he
shall be deemed to be an "executive officer" of Checkers for purposes of the
Securities Act of 1993, as amended (the "1933 Act"), and the Securities Exchange
Act of 1934, as amended (the "1934 Act") and that he shall comply in all
respects with all the rules and regulations under the 1933 Act and the 1934 Act
applicable to him in a timely and non-delinquent manner. In order to assist the
Company in complying with its obligations under the 1933 Act and 1934 Act,
Employee shall provide to the Company such information about Employee as the
Company shall reasonably request including, but not limited to, information
relating to personal history and stockholdings. Employee shall report to the
General Counsel of the Company or other designated officer of the Company all
changes in beneficial ownership of any shares of the Company Common Stock deemed
to be beneficially owned by Employee and/or any members of Employee's immediate
family.
Section 33. COUNTERPARTS. This Employment Agreement may be executed
in one or more counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute but one document.
Section 34. EXHIBITS. The Exhibits attached hereto are incorporated
herein by reference and are an integral part of this Employment Agreement.
- 14 -
<PAGE>
IN WITNESS WHEREOF, this Employment Agreement has been duly executed
by the Company and Employee as of the date first above written.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By \s\Albert J. Dimarco
------------------------------------------
Albert J. DiMarco
President and
Chief Executive Officer
EMPLOYEE
\s\James T. Holder
------------------------------------------
James T. Holder
- 15 -
<PAGE>
EXHIBIT 5.03
OTHER BENEFITS
1. VACATION AND HOLIDAYS. Employee shall be entitled to a vacation
allowance as mutually agreed to between Employee and the Vice Chairman of the
Board of the Company; PROVIDED, HOWEVER, Employee shall be entitled to a
vacation allowance of three (3) weeks per year (prorated for 1995), with the
timing of such vacation to be selected by Employee, after consultation with the
Vice Chairman of the Board of the Company, provided that such timing does not
unreasonably interfere with the performance of Employee's duties under the
Employment Agreement. The vacation allowance does not include holidays observed
by the Company.
2. AUTOMOBILE. The Company shall provide Employee with an automobile
of a style at least equivalent to a Lexus SE 400 with the maintenance, operating
expenses and replacement thereof to be consistent with the past policies
established by the Company for its current executive officers; alternatively, at
the discretion of Employee, the Company shall pay to Employee monthly an amount
equal to the monthly lease payments for such an automobile, based upon a
standard 36 month closed end lease with no initial capital cost reduction.
3. MEDICAL INSURANCE. The Company shall provide Employee and his
dependents with such medical and health insurance benefits as are presently
provided or may hereafter be provided to the executive officers of the Company.
4. DISABILITY INSURANCE. The Company shall provide Employee with
such disability insurance benefits as are presently provided or may hereafter be
provided to the executive officers of the Company.
5. EXECUTIVE SECRETARY AND OFFICE. The Company shall provide to
Employee an executive secretary for his sole use who has been, or will be,
trained to operate WordPerfect 5.1. The Company shall also provide to Employee
an executive office with appropriate furniture and equipment (including portable
dictation equipment).
6. HOUSING ALLOWANCE. The Company shall provide Employee with a
housing allowance of up to $1,000 per month for two (2) months following the
Commencement Date for purposes of renting a temporary residence in the Tampa Bay
area.
7. OTHER BENEFITS. The Company shall provide Employee with any and
all other benefits that generally become available to the executive officers and
other significant employees of the Company.
SEVERANCE, RELEASE AND INDEMNITY AGREEMENT
------------------------------------------
This Severance, Release and Indemnity Agreement ("Agreement") is being
made and entered into this 27th day of January, 1997, by and between ALBERT J.
DIMARCO ("DiMarco") and CHECKERS DRIVE-IN RESTAURANTS, INC. ("Checkers").
WHEREAS, DiMarco and Checkers entered into an Employment Agreement, Stock
Option Agreement and Indemnification Agreement, all dated July 28, 1995
(hereinafter collectively referred to as the "Employment Agreement") pursuant to
which DiMarco was employed as the President, Chief Executive Officer and
Director of Checkers; and
WHEREAS, by Resolution of the Checkers Board of Directors dated November
22, 1996, the Employment Agreement was amended to extend the Term of Employment
through December 31, 1998; and
WHEREAS, DiMarco and Checkers wish to terminate all of their respective
rights and obligations under the Employment Agreement but only on the terms and
conditions specifically set forth herein.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
<PAGE>
1. Termination of Employment Agreement. Upon the execution of this
--------------------------------------
Agreement, all respective rights and obligations of Checkers and DiMarco under
the Employment Agreement except for the indemnity obligations specifically
referenced herein are canceled and terminated and shall be of no further force
and effect. The term of DiMarco's Employment Agreement shall end and DiMarco's
last day of employment shall be the date of this Agreement.
2. Cash and Stock Consideration to DiMarco. Upon execution of this
-------------------------------------------
Agreement. DiMarco shall receive the following cash and stock consideration from
Checkers. All of the cash and stock consideration will be subject to all federal
and state withholding and other required deductions.
a) CASH. The total amount of $360,000.00 to be paid as follows:
(i) for a period ending no later than March 31, 1997, DiMarco
shall continue to receive his regular salary paid in the
normal course at regular intervals; (ii) the entire balance
remaining due after application of DiMarco's regular gross
salary payments provided for in (i) above shall be paid in
cash, certified check or wire transfer in full upon the first
to occur of either (1) Checkers obtaining new equity through a
rights offering and/or private placement of Checkers'
securities or (2) March 31, 1997. Payment of a total of
$360,000 at any time prior to March 31, 1997 terminates all
cash obligations owing from Checkers to DiMarco.
2
<PAGE>
Upon execution of this Agreement, Checkers shall execute and
deliver to DiMarco a note in the principal amount of
$360,000.00 in the form of Exhibit "A" attached hereto. Said
note shall be held in escrow by counsel for DiMarco pending
the timely and full payment of the obligations set forth in
this subparagraph. Payments made pursuant to Section 2(a)(i)
and (ii) above shall reduce any amounts due under said note
and said note shall be canceled and returned to Checkers upon
payment of $360,000 as set forth above.
b) STOCK OPTIONS. DiMarco shall retain all current stock options
totaling Three Hundred Thousand (300,000) shares of stock,
which options shall immediately vest on the date prior to the
date of this Agreement and shall be exercisable at any time
within two years from the date of this Agreement at the prices
set forth in the existing Stock Option Agreements between
DiMarco and Checkers (copies of which are attached hereto as
Exhibit "B") (the "DiMarco Options"). Should Checkers file
with the Securities and Exchange Commission an S-8
Registration Statement, an S-3 Registration Statement, or an
S-1 Registration Statement which reasonably can include the
DiMarco Options, Checkers agrees to include the DiMarco's
Options in the first of such Registration Statements to be
filed. DiMarco acknowledges that his options remain
non-qualified options.
3. Continuation of Indemnity Obligations. Checkers and DiMarco agree
---------------------------------------
and acknowledge that the Indemnity Agreement dated July 28, 1995 between Checker
and DiMarco (a copy of which is attached hereto as Exhibit "C") is and will
remain a continuing, valid, binding and enforceable agreement and that neither
3
<PAGE>
the termination of DiMarco's employment and/or the execution of this Agreement
will have any effect whatsoever on the Indemnity Agreement.
4. Other Consideration to DiMarco. DiMarco shall receive from Checkers
and Checkers shall provide to DiMarco the following additional consideration:
a) Checkers hereby assigns and DiMarco hereby assumes the
automobile lease and all obligations related to DiMarco's
company automobile. If DiMarco is unable to assume of if
Checkers is unable to assign such lease, Checkers will
continue to provide DiMarco with use of the company automobile
currently driven by DiMarco through the end of the lease term,
provided all lease, insurance and other obligations are paid
by and are the responsibility of DiMarco. In either event,
DiMarco agrees to indemnify and hold harmless Checkers from
and against all obligations relating to the lease or the use
of the automobile after the date hereof.
b) With respect to health and insurance benefits, DiMarco shall
make a COBRA election and Checkers shall pay his COBRA costs
for a period of one year from the date of this Agreement or
until DiMarco is employed at a company providing comparable or
superior benefits, whichever occurs first.
5. Mutual Release. DiMarco and Checkers mutually agree to release and
discharge each other to the fullest extent possible and with respect to
DiMarco's release of Checkers, its affiliated corporations, benefit plans, and
4
<PAGE>
programs, its shareholders, creditors, officers, agents, administrators,
directors, attorneys and employees from any and all claims, losses, expenses
either of them may now have, have had in the past or may have in the future of
any kind or nature, known or unknown, with respect to the Employment Agreement,
DiMarco's status as a shareholder or creditor of Checkers, any actions or lack
of actions of DiMarco as an employee, President, Chief Executive Officer and
Director of Checkers, or of the Company up through the date hereof. DiMarco's
release of Checkers includes, but is not limited to, any claimed violation of
state, federal or other law prohibiting discrimination such as claims arising
under Title VII of the Civil Rights Act of 1964, claims under the Age
Discrimination in Employment Act of 1967 and claims arising under any federal,
state or local law pertaining to benefits. This release will not waive any
rights arising under this Agreement or the Indemnity Agreement referenced in
paragraph 3 hereof.
6. Age Discrimination. DiMarco expressly acknowledges that, by entering
------------------
into this Agreement, he is waiving any and all right or claims that he may have
arising under the Age Discrimination in Employment Act of 1967, as amended,
which have arisen on or before the date of the execution of this Agreement.
DiMarco further expressly acknowledges and agrees that:
5
<PAGE>
a) In return for this Agreement, he will receive compensation
beyond that which he was already entitled to receive before
entering into this Agreement.
b) He was orally advised by Checkers and is hereby informed that
he had twenty-one (21) day within which to consider the
Agreement, which twenty-one (21) days is hereby waived;
c) He was given a copy of this Agreement and informed that he had
twenty-one (21) days within which to consider the Agreement,
which twenty-one (21) days is hereby waived;
d) He was informed that he has seven (7) days following the date
of the execution of this Agreement (which date is January 27,
1997) in which to revoke the Agreement. Any revocation must be
in writing and hand-delivered during the revocation period to
Checkers. If this Agreement is not so revoked, it shall become
effective and enforceable seven (7) days following execution
by DiMarco. If revoked, all consideration theretofore paid to
DiMarco under this Agreement shall be immediately returned to
Checkers by DiMarco.
7. Availability. DiMarco agrees to be reasonably available, considering
------------
the time constraints of any new position he may take, for interviews or
depositions at his principal place of business or pursuant to a validly subpoena
in any matter in which Checkers is a party and about which DiMarco has
knowledge.
6
<PAGE>
8. Conduct of Parties. DiMarco and Checkers agree to refrain from taking
------------------
any action or making any comments that would or would likely damage the good
reputation and integrity of each other and with respect to Checkers, its
affiliated companies, shareholders, creditors, directors or employees.
9. Merger, Modification and Waiver. This Agreement constitutes the entire
--------------------------------
understanding of the parties with respect to the subject matter hereof. No
provision of this Agreement may be modified, waived or discharged unless such
waiver, modification of discharge is agreed to in writing. No waiver by either
party at any time of any breach by the other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or any prior or
subsequent time.
10. Governing Law. This Agreement shall be construed and enforced
--------------
pursuant to the laws of the State of Florida.
11. Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement or any transactions provided for herein, or the breach thereof,
other than a claim for injunctive relief shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
7
<PAGE>
Association (the "Rules") in effect at the time demand for arbitration is made
by any party. The evidentiary and procedural rules in such proceedings shall be
kept to the minimum level of formality that is consistent with the Rules. One
arbitrator shall be named by the Company, a second shall be named by Employee
and the third arbitrator shall be named by the two arbitrators so chosen. In the
event that the third arbitrator is not agreed upon, he or she shall be named by
the American Arbitration Association. Arbitration shall occur in Tampa, Florida
or such other location agreed to by the Company and Employee. The award made by
all or a majority of the panel of arbitrators shall be final and binding, and
judgment may be entered in any court of law having competent jurisdiction. The
award is subject to confirmation, modification, correction, or vacation only as
explicitly provided in Title 9 of the United States Code. The prevailing party
shall be entitled to an award of pre- and post-award interest as well as
reasonable attorneys' fees incurred in connection with the arbitration and any
judicial proceedings related thereto.
12. Counterparts. This Agreement may be executed in one or more
------------
counterparts. Each of which shall be deemed to be an original, but all of which
together shall constitute but one document.
8
<PAGE>
13. No Assignment. Each party represents that such party has made no
--------------
assignment or other transfer of all or any part of the claims release herein to
any other person or party.
14. Inurement. This Agreement shall inure to the benefit of and be
---------
binding upon the parties hereto and their respective heirs, successors and
assigns.
9
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by Checkers and
DiMarco as of the date first above written.
CHECKERS DRIVE-IN RESTAURANTS, INC.
BY: \s\ Richard Fortman
------------------------------
Richard Fortman, President
BY: \s\ Albert J. DiMarco
-----------------------------
Albert J. DiMarco
10
WARRANT AGREEMENT
-----------------
WARRANT AGREEMENT dated as of March 11, 1997, between CHECKERS DRIVE-IN
RESTAURANTS, INC., a Delaware corporation (the "Company"), and CHASEMELLON
SHAREHOLDER SERVICES. L.L.C., as Warrant Agent (the "Warrant Agent").
WHEREAS, the Company proposes to issue warrants as hereinafter described
(the "Warrants") to purchase up to an aggregate of 5,100,000 shares (the
"Shares") of the common stock of the Company, par value $.001 per share (the
"Common Stock"), in connection with the settlement of certain litigation,
entitled RICHARD LOPEZ, ET AL., V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL.,
filed in the United States District Court for the Middle District of Florida,
Tampa Division, Case No. 94-282-CIV-T-17C; and
WHEREAS, the Company wishes the Warrant Agent to act on its behalf and the
Warrant Agent is willing to act in connection with the issuance, division,
transfer, exchange and exercise of Warrants;
NOW, THEREFORE, in consideration of the foregoing and for the purpose of
defining the terms and provisions of the Warrants and the respective rights and
obligations thereunder of the Company, the Warrant Agent and the registered
owners of the Warrants (the "Holders"), the Company and the Warrant Agent hereby
agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT
The Company hereby appoints Warrant Agent to act as agent for the Company
in accordance with the instructions hereinafter in the Agreement set forth, and
the Warrant Agent hereby accepts such appointment.
SECTION 2. TRANSFERABILITY AND FORM OF WARRANT
2.1. Registration. The Warrants shall be numbered and shall be registered
in a Warrant Register. The Company and the Warrant Agent shall be entitled to
treat the Holder of any Warrant as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Warrant on the part of any other person, and shall not be liable for any
registration of transfer of Warrants which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with actual
knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration of transfer, or with such knowledge of such facts
that its participation therein amounts to bad faith.
<PAGE>
2.2. Transfer. The Warrants shall be transferable only on the books of the
Company maintained at the office of the Warrant Agent in Pittsburgh,
Pennsylvania, upon delivery thereof duly endorsed by a Holder or by its duly
authorized attorney or representative, or accompanied by proper evidence of
succession, assignment, or authority to transfer, with all signatures properly
guaranteed and accompanied by appropriate instructions for transfer. In all
cases of transfer by an attorney, the original letter of attorney, duly
approved, or an official copy thereof, duly certified, shall be deposited and
remain with the Warrant Agent. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced, and may be required to be deposited and remain with
the Warrant Agent in its discretion. Upon any registration of transfer, the
Warrant Agent shall countersign and deliver new Warrants to the person entitled
thereto.
2.3. Form of Warrants. The text of the Warrants and of the form of
election to purchase Shares shall be substantially as set forth in Exhibit A
attached hereto. The price of Shares and the number of Shares issuable upon
exercise of Warrants are subject to adjustment upon the occurrence of certain
events, all as hereinafter provided. The Warrants shall be executed on behalf of
the Company by its President or one of its Vice Presidents, under its corporate
seal reproduced thereon attested by its Secretary or an Assistant Secretary. The
signature of any of these officers on the Warrants may be manual or facsimile.
Warrants bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any one of them shall have ceased to
hold such offices prior to the delivery of such Warrants or did not hold such
office on the date of this Agreement.
Warrants shall be dated as of the date of counter-signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution,
or transfer.
2.4. Countersignature of Warrants. The Warrants shall be countersigned by
the Warrant Agent (or any successor to the Warrant Agent then acting as warrant
agent under this Agreement) and shall not be valid for any purpose unless so
countersigned. Warrants may be countersigned, however, by the Warrant Agent (or
by its successor as warrant agent hereunder) and may be delivered by the Warrant
Agent, notwithstanding that the persons whose manual or facsimile signatures
appear thereon as proper officers of the Company shall have ceased to be such
officers at the time of such countersignature, issuance, or delivery. The
Warrant Agent shall, upon written instructions of the President or Secretary of
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<PAGE>
the Company, countersign, issue and deliver Warrants entitling the Holders
thereof to purchase an amount not exceeding 5,100,000 Shares (subject to
adjustment pursuant to Section 10 hereof) and shall countersign and deliver
Warrants as otherwise provided in this Agreement.
SECTION 3. EXCHANGE OF WARRANT CERTIFICATES
Warrant certificates may be exchanged for another certificate or
certificates entitling the Holder thereof to purchase a like aggregate number of
Shares as the certificate or certificates surrendered then entitle such Holder
to purchase. Any Holder of a Warrant desiring to exchange Warrant certificates
shall make such request in writing delivered to the Company, and shall
surrender, properly endorsed, the certificate or certificates evidencing the
Warrant or Warrants to be so exchanged. Thereupon, the Warrant Agent shall
countersign and deliver to the person entitled thereto a new Warrant certificate
or certificates, as the case may be, as so requested.
SECTION 4. TERM OF THE WARRANTS; REGISTRATION OF SHARES; EXERCISE
OF WARRANTS
The Warrants shall expire on December 22, 2000 (the "Expiration Date"),
unless extended pursuant to the terms of this Section 4.
On or before November 22, 2000, the Company shall file and have declared
effective by the Securities and Exchange Commission ("SEC") a registration
statement under the Securities Act of 1933 (the "Registration Statement")
registering the Shares underlying the Warrants for issuance upon exercise of the
Warrants, and the Company shall maintain the effectiveness of such Registration
Statement until the Expiration Date; PROVIDED, HOWEVER, that the Company will
have the right (a) to defer the initial filing or effectiveness for up to 90
days, or (b) after effectiveness, to suspend effectiveness of the Registration
Statement for up to 90 days if, in the good faith judgment of the board of
directors of the Company and upon the advice of counsel to the Company, 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 the Company, disclosure of which
at the time is not, in the opinion of the board of directors of the Company upon
the advice of counsel, (A) otherwise required, and (B) in the best interests of
the Company. The date that the Registration Statement is declared effective by
the SEC is hereafter referred to as the "Effective Date." The Company will give
the holders of the Warrants notice of any suspension of effectiveness of the
Registration Statement. If the Registration Statement is not declared effective
-3-
<PAGE>
at least thirty days prior to the Expiration Date, the Expiration Date shall be
extended by one day for each day after such date that the Registration Statement
is not effective. If the Registration Statement is suspended by the Company
after effectiveness, the Expiration Date shall be extended by one day for each
day that such effectiveness is suspended. The Company will pay all expenses
related to such registration.
Subject to the terms of this Agreement, each Holder shall have the right,
at any time during the period commencing on the Effective Date until 4:00 P.M.
New York time on the Expiration Date while the Registration Statement is in
effect and sales thereunder have not been suspended by the Company (the
"Exercise Period"), to purchase from the Company the number of fully paid and
nonassessable Shares to which the Holder may at the time be entitled to purchase
pursuant to such Warrants, upon surrender to the Company at the office of the
Warrant Agent of the certificate or certificates evidencing the Warrants to be
exercised, together with the form of election to purchase on the reverse thereof
duly completed and signed, and upon payment to the Warrant Agent of the Warrant
Price (as defined in and determined in accordance with the provisions of
Sections 9 and 10 hereof), for the number of Shares in respect of which such
Warrants are then exercised. Payment of the aggregate Warrant Price shall be
made in cash or by certified or cashier's check.
Upon such surrender of Warrants and payment of the Warrant Price as
aforesaid, the Company shall issue and cause to be delivered with all reasonable
dispatch to or upon the written order of the Holder and in such name or names as
the Holder may designate, a certificate or certificates for the number of full
Shares so purchased upon the exercise of such Warrants, together with cash, as
provided in Section 11 hereof, in respect of any fractional Shares otherwise
issuable upon such surrender. Such certificate or certificates shall be deemed
to have been issued and any person so designated to be named therein shall be
deemed to have become a holder of record of such Shares as of the date of the
surrender of such Warrants and payment of the Warrant Price, as aforesaid;
PROVIDED, HOWEVER, that if, at the date of surrender of such Warrants and
payment of such Warrant Price, the transfer books for the Shares or other class
of stock purchasable upon the exercise of such Warrants shall be closed, the
certificates for the Shares in respect of which such Warrants are then exercised
shall be issuable as of the date on which such books shall be next opened
(whether before or after the Expiration Date) and until such date the Company
shall be under no duty to deliver any certificate for such Shares; PROVIDED
FURTHER, HOWEVER, that the transfer books of record, unless otherwise required
by law, shall not be closed at any one time for a period longer than twenty
days. The rights of purchase represented by the Warrants shall be exercisable
during the Exercise Period, at the election of the Holders thereof, either in
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<PAGE>
full or from time to time in part and, in the event that a certificate
evidencing Warrants is exercised in respect of less than all of the Shares
specified therein during the Exercise Period, a new certificate evidencing the
remaining Warrant or Warrants will be issued, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrant
certificates pursuant to the provisions of this Section and of Section 2.4
hereof and the Company, whenever required by the Warrant Agent, will supply the
Warrant Agent with Warrant certificates duly executed on behalf of the Company
for such purpose.
SECTION 5. PAYMENT OF TAXES
The Company will pay all documentary stamp taxes, if any, attributable to
the initial issuance of Shares issuable upon the exercise of Warrants; PROVIDED,
HOWEVER, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issuance or delivery
of any certificates for shares of Common Stock in a name other than that of the
registered holder of the Warrants in respect of which such shares are issued,
and in such case neither the Company nor the Warrant Agent shall be required to
issue or deliver any certificate for shares of Common Stock or any Warrant
certificate until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid.
SECTION 6. MUTILATED OR MISSING WARRANTS
In case any of the certificates evidencing the Warrants shall be
mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue
and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant certificate, or in lieu of and substitution for the Warrant
certificate lost, stolen or destroyed, a new Warrant certificate of like tenor
and representing an equivalent right or interest; but only upon receipt of
evidence satisfactory to the Company and the Warrant Agent of such loss, theft
or destruction of such warrant and indemnity, if requested, also satisfactory to
them. Applicants for such substitute Warrant certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
SECTION 7. RESERVATION OF SHARES
There have been reserved, and the Company shall at all times keep
reserved, out of its authorized Common Stock a number of shares of Common Stock
sufficient to provide for the exercise of the rights of purchase represented by
the outstanding Warrants. The Transfer Agent for the Common Stock (the "Transfer
Agent") and every subsequent transfer agent for any shares of the Company's
-5-
<PAGE>
capital stock issuable upon the exercise of any of the rights of purchase
aforesaid will be irrevocably authorized and directed at all times to reserve
such number of authorized shares as shall be requisite for such purpose. The
Company will keep a copy of this Agreement on file with the Transfer Agent for
the Common Stock and with every subsequent transfer agent for any shares of the
Company's Capital stock issuable upon the exercise of the rights of purchase
represented by the Warrants. The Warrant Agent is irrevocably authorized to
requisition from time to time from such Transfer Agent such stock certificates
required to honor outstanding Warrants upon exercise thereof in accordance with
the terms of this Agreement. The Company will supply such Transfer Agent with
duly executed stock certificates for such purpose and will provide or otherwise
make available any cash which may be payable as provided in Section 11 hereof.
All Warrants surrendered in the exercise of the rights thereby evidenced shall
be cancelled by the Warrant Agent and shall thereafter be delivered to the
Company. Promptly after the date of expiration of the Warrants, the Warrant
Agent shall certify to the Company the aggregate number of Warrants then
outstanding, and thereafter no share shall be subject to reservation in respect
of such Warrants.
SECTION 8. PURCHASE OR REDEMPTION OF WARRANTS BY THE COMPANY
8.1. Purchase of Warrants The Company shall have the right, except as
limited by law, other agreements or herein, to purchase or otherwise acquire
Warrants at such times, in such manner and for such consideration as it may deem
appropriate; PROVIDED, HOWEVER, that the Company shall not have any right to
redeem any or all of the Warrants or require the sale of the same by any Holder.
8.2. Cancellation of Warrants. In the event the Company shall purchase or
otherwise acquire Warrants, the same shall thereupon be delivered to the Warrant
Agent and be cancelled by it and retired. The Warrant Agent shall cancel any
Warrant surrendered for exchange, substitution, transfer, or exercise in whole
or in part.
SECTION 9. WARRANT PRICE
The price (the "Warrant Price") per share at which Shares shall be
purchasable upon exercise of Warrants shall be $1.375, subject to adjustment
pursuant to Section 10 hereof.
SECTION 10. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES
The number and kind of securities purchasable upon the exercise of each
Warrant and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
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<PAGE>
10.1. Adjustments. The number of Shares purchasable upon the exercise of
each Warrant and the Warrant Price shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in shares of Common Stock
or make a distribution in shares of Common Stock, (ii) subdivide its outstanding
shares of Common Stock, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company,
the number of Shares purchasable upon exercise of each Warrant immediately prior
thereto shall be adjusted so that the Holder of each Warrant shall be entitled
to receive the kind and number of Shares or other securities of the Company
which he would have owned or have been entitled to receive after the happening
of any of such event or any record date with respect thereto. An adjustment made
pursuant to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.
(b) In case the Company shall issue rights, options or warrants to all or
substantially all holders of its shares of Common Stock, without any charge to
such holders, entitling them to subscribe for or purchase shares of Common Stock
at a price per share which is lower at the record date mentioned below than the
current market price per share of Common Stock (as defined in paragraph (d)
below), the number of Shares thereafter purchasable upon the exercise of each
Warrant shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of each Warrant by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding on the date of
issuance of such rights, options or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase, and of which the
denominator shall be the number of shares of Common Stock outstanding on the
date of issuance of such rights, options or warrants plus the number of shares
which the aggregate offering price of the total number of shares of Common Stock
so offered would purchase at such current market price. Such adjustment shall be
made whenever such rights, options or warrants are issued, and shall become
effective retroactively immediately after the record date for the determination
of stockholders entitled to receive such rights, options or warrants.
(c) In case the Company shall distribute to all or substantially all
holders of its shares of Common Stock evidences of its indebtedness or assets
(excluding cash dividends or distributions out of earnings) or rights, options
or warrants or convertible securities containing the right to subscribe for or
purchase shares of Common Stock (excluding those referred to in paragraph (b)
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above) then in each case the number of Shares thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number of shares
theretofore purchasable upon exercise of the Warrant by a fraction, of which the
numerator shall be the then current market price per share of Common Stock (as
defined in paragraph (d) below) on the date of such distribution, and of which
the denominator shall be such current market price per share of Common Stock,
less the then fair value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the portion of the assets
or evidences of indebtedness so distributed or of such subscription rights,
options or warrants, or of such convertible securities applicable to one share
of Common Stock. Such adjustment shall be made whenever any such distribution is
made, and shall become effective on the date of distribution retroactive to the
record date for the determination of the stockholders entitled to receive such
distribution.
(d) For the purposes of this Agreement, the current market price per share
of Common Stock of the Company at any date shall be deemed to be (i) if the
shares of Common Stock are traded in the over-the-counter market and not on any
national securities exchange and not in the NASDAQ National Market System, the
average of the mean between the bid and asked prices per share, as reported by
The National Quotation Bureau, Inc., or an equivalent generally accepted
reporting service, for the five (5) consecutive trading days immediately
preceding the date for which the determination of current market price is to be
made, or, (ii) if the shares of Common Stock are traded on a national securities
exchange or in the NASDAQ National Market System, the average daily per share
closing price on the principal national securities exchange on which they are so
listed or in the NASDAQ National Market System, as the case may be, for the five
(5) consecutive trading days immediately preceding the date for which the
determination of current market price is to be made. The closing price referred
to in clause (ii) above shall be the last reported sales price or, in case no
such reported sale takes place on such day, the average of the reported closing
bid and asked prices, in either case on the national securities exchange on
which the shares of Common Stock are then listed or in the NASDAQ National
Market System.
(e) No adjustment in the number of Shares purchasable hereunder shall be
required unless such adjustment would require an increase or decrease of at
least 1 percent in the number of Shares purchasable upon the exercise of each
Warrant; PROVIDED, HOWEVER, that any adjustments which by reason of this
paragraph (e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(f) Whenever the number of Shares purchasable upon the exercise of each
Warrant is adjusted, as herein provided, the Warrant Price per Share payable
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upon exercise of each Warrant shall be adjusted by multiplying such Warrant
Price immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of Shares purchasable upon the exercise of each Warrant
immediately prior to such adjustment, and of which the denominator shall be the
number of Shares so purchasable immediately thereafter.
(g) In case the Company shall sell and issue shares of Common Stock, or
rights, options, warrants or convertible securities containing the right to
subscribe for or purchase shares of Common Stock, at a price per share of Common
Stock (determined in the case of such rights, options, warrants or convertible
securities, by dividing (i) the total amount received or receivable by the
Company in consideration of the sale and issuance of such rights, options,
warrants or convertible securities, plus the total consideration payable to the
Company upon exercise or conversion thereof, by (ii) the total number of shares
of Common Stock covered by such rights, options, warrants or convertible
securities) lower than the Fair Market Value (as defined in paragraph (h) below)
for the Common Stock immediately prior to the date upon which the Company enters
into a binding agreement to sell and issue such securities, then the Warrant
Price shall be reduced to a price (calculated to the nearest cent) determined by
dividing (i) an amount equal to the sum of (1) the number of shares of Common
Stock outstanding immediately prior to such sale and issuance multiplied by the
then existing Warrant Price, plus (2) the consideration received by the Company
upon such sale and issuance, by (ii) the total number of shares of Common Stock
outstanding immediately after such sale and issuance; PROVIDED, HOWEVER, that
adjustments pursuant to this paragraph (g) shall only be made if such sale or
issuance is to an officer, director or other affiliate of the Company, or any
relative of any of the above, and if no adjustment for such sale or issuance is
made pursuant to paragraph (c) above. The number of Shares purchasable upon the
exercise of each Warrant shall be that number determined by multiplying the
number of Shares issuable upon exercise immediately prior to such adjustment by
a fraction, of which the numerator is the Warrant Price in effect immediately
prior to such an adjustment and the denominator is the Warrant Price as so
adjusted. For the purposes of such adjustments, the shares of Common Stock which
the holders of any such rights, options, warrants or convertible securities
shall be entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale and issuance and the consideration
received by the Company therefor shall be deemed to be the consideration
received by the Company for such rights, options, warrants or convertible
securities, plus the consideration or premiums stated in such rights, options,
warrants, or convertible securities to be paid for the shares of Common Stock
covered thereby. In case the Company shall sell and issue shares of Common
Stock, or rights, options, warrants, or convertible securities containing the
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right to subscribe for or purchase shares of Common Stock, for a consideration
consisting, in whole or in part, of property other than cash or its equivalent,
then in determining the "price per share of Common Stock" and the "consideration
received by the Company" for purposes of the first sentence of this paragraph
(g), the Board of Directors shall determine, in its discretion, the fair value
of said property and such determination, if made in good faith, shall be binding
upon all Holders of Warrants. There shall be no adjustment of the Warrant Price
pursuant to this paragraph (g) if the amount of such adjustment would be less
than $.05 per Share; PROVIDED, HOWEVER, that any adjustment which by reason of
this provision is not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(h) For the purposes of this Agreement, the Fair Market Value per share of
Common Stock of the Company at any date shall be deemed to be (i) for shares of
Common Stock that will be freely transferable by the holder thereof upon
issuance by the Company, the current market price as defined in paragraph (d)
above, and (ii) for shares of Common Stock that will not be freely transferable
by the holder thereof upon issuance by the Company, the fair value as determined
by the Board of Directors of the Company, taking into account the time period
during which the transfer of such shares will be restricted, and the conditions
and limitations on their transfer. Such determination, if made in good faith,
shall be binding upon all Holders of Warrants.
(i) Whenever the number of Shares purchasable upon the exercise of each
Warrant or the Warrant Price of such Shares is adjusted, as herein provided, the
Company shall cause the Warrant Agent to promptly mail by first class mail,
postage prepaid, to each Holder of a Warrant or Warrants notice of such
adjustment or adjustments together with a certificate of a firm or independent
public accountants selected by the Board of Directors of the Company (who may be
the regular accountants employed by the Company) setting forth the number of
Shares purchasable upon the exercise of each Warrant and the Warrant Price of
such Shares after such adjustment and the computation by which such adjustment
was made. Such certificate shall be conclusive evidence of the correctness of
such an adjustment. The Warrant Agent shall be entitled to rely on such
certificate and shall be under no duty or responsibility with respect to any
such certificate, except to exhibit the same, from time to time, to any holder
of a Warrant or Warrants desiring an inspection thereof during reasonable
business hours. The Warrant Agent shall not at any time be under any duty or
responsibility to any Holders of Warrants to determine whether any facts exist
which may require any adjustment of the Warrant Price or the number of Shares or
other stock or property purchasable or with respect to the nature or extent of
any such adjustment when made, or with respect to the method employed in making
such adjustment.
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(j) For the purpose of this subsection 10.1, the term "Shares of Common
Stock" shall mean (i) the class of stock designed as the Common Stock of the
Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Shares consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to this subsection 10.1, the Holders of a Warrant or
Warrants shall become entitled to purchase any securities of the Company other
than Shares of Common Stock, thereafter the number of such other securities so
purchasable upon exercise of each Warrant and the Warrant Price of such
securities shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent a practicable to the provisions with respect to the
Shares contained in paragraphs (a) through (h), inclusive, above, and the
provisions of Sections 4, 7, 11, and 12, paragraphs (i) through (k) of Section
10.1, inclusive, and subsections 10.2 through 10.5, inclusive, with respect to
the Shares shall apply on like terms to any such other securities.
(k) Upon the expiration of any rights, options, warrants or conversion
privileges, if any thereof shall not have been exercised, the number of Shares
purchasable upon exercise of a Warrant and the Warrant Price to the extent the
Warrant shall not then have been exercised, shall, upon such expiration, be
readjusted and shall thereafter be such as they would have been had it been
originally adjusted (or had the original adjustment not been required, as the
case may be) on the basis of (1) the only shares of Common Stock so issued were
the shares of Common Stock, if any, actually issued or sold upon the exercise of
such rights, options, warrants or conversion rights and (2) such shares of
Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the consideration, if any,
actually received by the Company for the issuance, sale or grant of all of such
rights, options, warrants or conversion rights whether or not exercised;
PROVIDED, HOWEVER, that no such readjustment shall have the effect of increasing
the Warrant Price by an amount in excess of the amount of the adjustment
initially made in respect of the issuance, sale or grant of such rights,
options, warrants or convertible rights.
10.2. No Adjustment for Dividends. Except as provided in subsection 10.1,
no adjustment in respect of any dividends shall be made during the terms of the
Warrants or upon the exercise of the Warrants.
10.3. No Adjustment in Certain Cases. No adjustments shall be made in
connection with the issuance of Shares of Common Stock in connection with the
issuance of Shares upon exercise of Warrants.
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10.4. Preservation of Purchase Rights upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Warrant Agent
an agreement that each Holder of a Warrant shall have the right thereafter upon
payment of the Warrant Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of Shares and other
securities and property which he would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale or conveyance
had such Warrant been exercised immediately prior to such action. Such agreement
shall provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 10. The Company
shall mail by first class mail, postage prepaid, to the Holder of each Warrant,
notice of the execution of any such agreement. The provisions of this subsection
10.4 shall similarly apply to successive consolidations, mergers, sales or
conveyances. The Warrant Agent shall be under no duty or responsibility to
determine the correctness of any provisions contained in any such agreement
relating either to the kind or amount of Shares of stock or other securities or
property receivable upon exercise of Warrants or with respect to the method
employed and provided therein for any adjustments.
10.5. Statement on Warrants. Irrespective of any adjustments in the
Warrant Price or the number or kind of Shares purchasable upon the exercise of
the Warrants, Warrants theretofore or thereafter issued may continue to express
the same price and number and kind of Shares as are stated in the Warrants
initially issuable pursuant to this Agreement.
SECTION 11. FRACTIONAL INTERESTS
The Company shall not be required to issue fractional Shares on the
exercise of Warrants. If more than one Warrant shall be presented for exercise
in full at the same time by the same Holder, the number of full Shares which
shall be issuable upon the exercise thereof shall be computed on the basis of
the aggregate number of Shares represented by the Warrants so presented. If any
fraction of a Share would, except for the provisions of this Section 11, be
issuable on the exercise of any Warrant (or specified portion thereof), the
Company shall pay an amount in cash equal to the current market price per Share
(as defined in Section 9(d) above) multiplied by such fraction.
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SECTION 12. NO RIGHT AS STOCKHOLDERS; NOTICES TO WARRANT HOLDERS
Nothing contained in this Agreement or in any of the Warrants shall be
construed as conferring upon the Holders or their transferees the right to vote
or receive dividends or to consent or to receive notice as stockholders in
respect of any meetings of stockholders for the election of directors of the
Company or any other matter, or any rights whatsoever as stockholders of the
Company. If, however, at any time prior to the expiration of the Warrants and
prior to their exercise, any of the following events shall occur:
(a) Any action which would require an adjustment pursuant to subsections
10.1 or 10.4, or
(b) a dissolution, liquidation, or winding up of the Company (other than
in connection with a consolidation, merger, or sale of all or
substantially all of its property, assets, and business as an
entirety) shall be proposed;
then in any one or more of said events, the Company shall (a) give notice in
writing of such event to the Holders as provided in Section 18 hereof and (b)
cause notice of such event to be published once in one or more newspapers
printed in the English language and in general circulation in the cities of New
York, New York and Clearwater, Florida. Failure to publish or mail such notice
or any defect therein or in the publication or mailing thereof shall not affect
the validity of any action taken in connection with such dividend, distribution,
or subscription rights, or proposed dissolution, liquidation or winding up.
SECTION 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS;
INSPECTION OF WARRANT AGREEMENT
The Warrant Agent shall account promptly to the Company with respect to
Warrants exercised and concurrently pay to the Company all moneys received by
the Warrant Agent for the purchase of the Shares through the exercise of such
Warrants.
The Warrant Agent shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by Holders of Warrants
during normal business hours at its office at 4 Station Square, 3rd Floor,
Pittsburgh, Pennsylvania. The Company shall supply the Warrant Agent from time
to time with such numbers of copies of this Agreement as the Warrant Agent may
request.
SECTION 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT
Any corporation into which the Warrant Agent may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
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consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further action on the part of any of the parties hereto, provided
that such corporation would be eligible for appointment as successor Warrant
Agent under the provisions of Section 16 hereof. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement, any of the Warrants shall have been countersigned but not delivered,
any such successor to the Warrant Agent may countersign such Warrants either in
the name of the predecessor Warrant Agent or in the name of the successor
Warrant Agent; and in all such cases Warrants shall have the full force provided
in the Warrants and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrants shall have been countersigned but not delivered,
the Warrant Agent may adopt the countersignatures under its prior name and
deliver Warrants so countersigned; and in case at that time any of the Warrants
shall not have been countersigned, the Warrant Agent may countersign such
Warrants either in its prior name or in its changed name; and in all such cases
such Warrants shall have the full force provided in the Warrants and in this
Agreement.
SECTION 15. CONCERNING THE WARRANT AGENT
The Warrant Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions, by all of which the Company
and the Holders of Warrants, by their acceptance thereof, shall be bound:
15.1. The statements contained herein and in the Warrants shall be taken
as statements of the Company and the Warrant Agent assumes no responsibility for
the correctness of any of the same except such as describe the Warrant Agent or
action taken by it. The Warrant Agent assumes no responsibility with respect to
he distribution of the Warrants except as herein otherwise provided.
15.2. The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrants to be complied with by the Company.
15.3. The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys, agents or employees, and the Warrant Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys, agents, or employees or for any loss to the Company resulting
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from such neglect or misconduct provided reasonable care shall have been
exercised in the selection and continued employment thereof.
15.4. The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any Holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
15.5. Whenever in the performance of its duties under the Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
provided or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proven and
established by a certificate signed by the President or a Vice President or the
Treasurer or the Secretary of the Company and delivered to the Warrant Agent for
any action taken or suffered in good faith by it under the provisions of this
Agreement in reliance upon such certificate.
15.6. The Company agrees to pay the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the performance of its duties
under the Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charge of any kind and nature incurred by the
Warrant Agent in the performance of its duties under this Agreement. The Company
shall indemnify the Warrant Agent and save it harmless against any and all
liabilities, including judgments, costs, and counsel fees, for anything done or
omitted by the Warrant Agreement in the performance of its duties under this
Agreement except as a result of the Warrant Agent's negligence or bad faith. In
no case will the Warrant Agent be liable for special, indirect, incidental or
consequential loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Warrant Agent has been advised of the possibility
of such damages.
15.7. The Warrant Agent shall be under no obligation to institute any
action, suit, or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more Holders of Warrants shall furnish the
Warrant Agent with reasonable security and indemnity for any costs and expenses
which may be incurred, but this provision shall not affect the power of the
Warrant Agent to take such action as the Warrant Agent may consider proper,
whether with or without any such security or indemnity. All rights of action
under this Agreement or under any of the Warrants may be enforced by the Warrant
Agent without the possession of any of the Warrants or the production thereof at
any trial or other proceeding relative thereto, and any such action, suit or
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proceeding instituted by the Warrant Agent shall be brought in its name as
Warrant Agent, and any recovery of judgment shall be for the ratable benefit of
the Warrants, as their respective rights or interests may appear.
15.8. The Warrant Agent and any stockholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to or
otherwise act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
15.9. The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own negligence or bad faith.
15.10. The Warrant Agent will not incur any liability or responsibility to
the Company or to any Holder of any Warrant for any action taken in reliance on
any notice, resolution, waiver, consent, order, certificate, or other paper,
document or instrument reasonably believed by it to be genuine and to have been
signed, sent or presented by the proper party or parties.
15.11. The Warrant Agent shall not be under any responsibility in respect
of the validity of this Warrant Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof); nor
shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Shares
(or other stock) to be issued pursuant to this Warrant Agreement or any Warrant,
or as to whether any Shares (or other stock) will when issued be validly issued,
fully paid and nonassessable, or as to the Warrant Price or the number or amount
of Shares or other securities or other property issuable upon exercise of any
Warrant.
15.12. The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board or the President or a Vice President or the Secretary or
the Treasurer of the Company, and to apply such officers for advice or
instructions in connection with its duties, and shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officers.
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SECTION 16. CHANGE OF WARRANT AGENT
The Warrant Agent may resign and may be discharged from its duties under
this Agreement by giving to the Company thirty days' notice in writing. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of acting, the Company shall appoint a successor to the Warrant
Agent. If the Company shall fail to make such appointment within a period of
thirty days after such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Warrant Agent or by
the Holder of a Warrant (who shall with such notice submit his Warrant for
inspection by the Company), then the Holder of any Warrant may apply to any
court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or
such a court, shall be a bank or trust company in good standing, incorporated
under the laws of the United States of America or any state thereof and having
at the time of its appointment as Warrant Agent a combined capital and surplus
of at least $50,000,000. After appointment, the successor Warrant Agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Warrant Agent without further act or deed; but the
former Warrant Agent shall deliver and transfer to the successor Warrant Agent
any property at the time held by it hereunder, and execute and deliver any
further reassurance, conveyance, act or deed necessary for the purpose. Failure
to file any notice provided for in this Section 16, however, or any defect
therein, shall not affect the legality or validity of the resignation or removal
of the Warrant Agent or the appointment of the successor warrant agent, as the
case may be. In the vent of such resignation or removal, the successor warrant
agent shall mail, first class, to each Holder, written notice of such removal or
resignation and the name and address of such successor Warrant Agent.
SECTION 17. IDENTITY OF TRANSFER AGENT
Forthwith upon the appointment of any subsequent Transfer Agent for the
Company's Shares of Common Stock, or any other Shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such Transfer Agent at least twenty days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution, or
subscription rights, or for the determination of stockholders entitled to vote
on such proposed dissolution, liquidation or winding up. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be.
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SECTION 18. NOTICES
(a) Any notice pursuant to this Agreement by the Company or by the Holder
of any Warrant to the Warrant Agent, or by the Warrant Agent or by the Holder of
any Warrant to the Company, shall be in writing and shall be deemed to have been
duly delivered on the business day after the date sent, if sent by recognized
overnight courier service or on the fifth day after the date sent, if mailed by
first-class certified mail, postage prepaid and return receipt requested, as
follows:
(i) If to the Company, to:
Checkers Drive-In Restaurants, Inc.
600 Cleveland Street, Eighth Floor
Clearwater, Florida 34615
Attention: Chief Financial Officer
with a copy to:
Paul R. Lynch, Esquire
Shumaker, Loop & Kendrick
101 East Kennedy Boulevard
Suite 2800
Tampa, Florida 33602
(ii) If to the Warrant Agent, to:
ChaseMellon Shareholder Services, L.L.C.
4 Station Square, 3rd Floor
Pittsburgh, Pennsylvania 15219
Each party hereto may from time to time change the address to which notices to
it are to be delivered or mailed hereunder by notice in accordance with the
foregoing to the other party.
(b) Any notice mailed pursuant to this Agreement by the Company or the
Warrant Agent to the Holders of Warrants shall be in writing and shall be deemed
to have been duly given if mailed, postage prepaid, to such Holders at their
respective addresses on the books of the Warrant Agent.
SECTION 19. SUPPLEMENTS AND AMENDMENTS
The Company and the Warrant Agent may from time to time supplement or
amend this Agreement, without the approval of any Holders of Warrants, in order
to cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provisions herein, or to
make any other provisions in regard to matters or questions arising hereunder
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which the Company and the Warrant Agent may deem necessary or desirable and
which shall not be inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the Holders of Warrants.
SECTION 20. SUCCESSORS
All the covenants and provisions of this Agreement by or for the benefit
of the Company or the Holders shall bind and inure to the benefit of their
respective successors and assigns thereunder.
SECTION 21. MERGER OR CONSOLIDATION OF THE COMPANY
The Company will not merge or consolidate with or into any other
corporation unless the corporation resulting from such merger or consolidation
(if not the Company) shall expressly assume, by supplemental agreement
satisfactory in form to the Warrant Agent and duly executed and delivered to the
Warrant Agent, the due and punctual performance and observance of each and every
covenant and condition of this Agreement to be performed and observed by the
Company.
SECTION 22. APPLICABLE LAW
This Agreement and each Warrant issued hereunder shall be deemed to be a
contract made under the laws of the state of Delaware and for all purposes shall
be construed in accordance with the laws of said state.
SECTION 23. BENEFITS OF THIS AGREEMENT
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company, the Warrant Agent, and the Holders of
Warrants any legal or equitable right, remedy or claim under this Agreement and
this Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent and the Holders of Warrants.
SECTION 24. COUNTERPARTS
This Agreement may be executed in any number of counterparts and each such
counterpart shall for all purposes be deemed to be an original, and all such
counterparts shall together constitute but one and the same instrument.
SECTION 25. CAPTIONS
The captions of Sections and paragraphs of this Agreement have been
inserted for convenience only and shall have no substantive effect.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
CHECKERS DRIVE-IN RESTAURANTS, INC.
Attest:
By: /S/ JOSEPH N. STEIN
---------------------------
Joseph N. Stein
/S/ JAMES T. HOLDER
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James T. Holder, Secretary
CHASEMELLON SHAREHOLDER SERVICES,
L.L.C., as Warrant Agent
By: /S/ MARILYN SPISAK
---------------------------
Authorized Signatory
-20-
CHECKERS DRIVE-IN RESTAURANTS, INC.
LIST OF SUBSIDIARIES
EXHIBIT 21
The following entities are consolidated with the Company for financial reporting
purposes:
% Owned State of Organization
------- ---------------------
CHA Partners 50% Delaware
Checkers Walsingham, Inc. 100% Delaware
Chicago Leasing Company 100% Delaware
Clearwater Gulf to Bay Partners 50% Delaware
InnerCityFoods 75% Delaware
InnerCityFoods Joint Venture Company 100% Delaware
InnerCityFoods Leasing Company 100% Delaware
InnerCityFoods Restaurant Company 100% Delaware
Skipper Road Checkers Partnership 75% Delaware
Checkers acquisition (Trigger Reef, Inc.) 100% Delaware
580 Partners 50% Delaware
Checkers/Conway, Inc. 100% Delaware
Checkers/Temco Joint Venture 51% Florida
Checkers of Chicago 100% Delaware
Metro Double Drive-Thru, L.P. 10.55% Chicago
Greater Chicago Double Drive-Thru, L.P. 60.79% Chicago
Stony Island Double Drive-Thru, L.P. 36.03% Chicago
Northside Double Drive-Thru, L.P. 65.83% Chicago
Chicagoland Double Drive-Thru V, L.P. 48.42% Chicago
Chicago Double Drive -Thru VI, L.P. 25.08% Chicago
Evergreen Double Drive-Thru, L.P. 54.73% Chicago
123
The Board of Directors
Checkers Drive-In Restaurants, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-92882 and No. 33-95506) on Form S-3 and the registration statements (No.
33-47063 arid No. 33-80236) on Form S-8 of Checkers Drive-In Restaurants, Inc.
of our report dated March 3, 1997, relating to the consolidated balance sheets
of Checkers Drive-In Restaurants, Inc. and subsidiaries as of December 30, 1996
and January 1, 1996, and the related consolidated statements of earnings,
retained earnings, and cash flows for each of the years in the three-year period
ended December 30, 1996 and all related schedules, which report appears in the
December 30, 1996 annual report on Form 10-K of Checkers Drive-In Restaurants,
Inc.
KPMG PEAT MARWICK LLP
Tampa, Florida
March 27, 1997
124
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHECKERS DRIVE-IN RESTAURANTS, INC. FOR THE FISCAL YEAR
ENDED DECEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-02-1996
<PERIOD-END> DEC-30-1996
<CASH> 3,056
<SECURITIES> 0
<RECEIVABLES> 5,272
<ALLOWANCES> 0
<INVENTORY> 2,261
<CURRENT-ASSETS> 20,955
<PP&E> 98,189
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,110
<CURRENT-LIABILITIES> 47,680
<BONDS> 39,906
0
0
<COMMON> 52
<OTHER-SE> 40,289
<TOTAL-LIABILITY-AND-EQUITY> 136,110
<SALES> 157,524
<TOTAL-REVENUES> 164,960
<CGS> 158,252
<TOTAL-COSTS> 182,768
<OTHER-EXPENSES> (2,187)
<LOSS-PROVISION> 24,405
<INTEREST-EXPENSE> 6,233
<INCOME-PRETAX> (46,258)
<INCOME-TAX> 151
<INCOME-CONTINUING> (46,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,409)
<EPS-PRIMARY> (.90)
<EPS-DILUTED> .00
<FN>
Footnotes: (1) Receivables consist of -
Accounts Receivable $ 1,544
Notes receivable 214
Income taxes receivable 3,514
--------
$ 5,272
========
(2) PP&E is net of accumulated depreciation of $33,924.
</FN>
</TABLE>
