SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
CHECKERS DRIVE-IN RESTAURANTS, INC.
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(Name of Registrant as Specified in its Charter)
NOT APPLICABLE
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Name of Person(s) Filing Proxy Statement, other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14(a)-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total Fee Paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
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[GRAPHIC OMITTED]
RALLY'S CHECKERS DRIVE-IN
HAMBURGERS, INC. RESTAURANTS, INC.
MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT
The boards of directors of Rally's Hamburgers, Inc. and Checkers Drive-In
Restaurants, Inc. have agreed on a merger of Rally's and Checkers. In the
merger, Checkers will acquire all of the common stock of Rally's. Each
stockholder of Rally's will receive 1.99 shares of Checkers common stock for
each share of Rally's common stock held. Checkers is also proposing to amend
its certificate of incorporation to increase the number of authorized shares of
Checkers common stock to 175 million and to effect a one-for-12 reverse stock
split. In addition, Checkers and Rally's are asking their stockholders to
approve the other proposals listed in their notices of meeting.
The boards of directors of Rally's and Checkers have each determined that
the merger is advisable and in the best interests of its stockholders, and each
board unanimously recommends voting FOR adoption of the merger agreement.
We cannot complete the merger unless the stockholders of each company
approve it. We have each scheduled meetings for our stockholders to vote on the
merger agreement. Whether or not you plan to attend your company's meeting,
please take the time to vote by completing and mailing the enclosed proxy card
to us. If your shares are held in "street name," you must instruct your broker
in order to vote. The stockholders meetings will each be held on August 5, 1999
at Four Seasons Biltmore, 1260 Channel Dr., Santa Barbara, California, with the
Rally's annual meeting at 9:30 a.m. and the Checkers annual meeting at 10:30
a.m., local time.
On June 30, 1999, the closing per share price of Checkers and Rally's
common stock, as reported on the NASDAQ National Market, was $.375 and $.5625.
This joint proxy statement/prospectus provides you with detailed
information about the proposed merger. We encourage you to read this entire
document carefully.
IN PARTICULAR, PLEASE SEE THE SECTION ENTITLED "RISK FACTORS" STARTING AT
PAGE 7 FOR A DISCUSSION OF RISKS ASSOCIATED WITH THE MERGER.
We are not mailing a separate annual report to stockholders this year. We
encourage you to read this document carefully. In addition, you may obtain
information about our companies from documents that we have filed with the
Securities and Exchange Commission.
[GRAPHIC OMITTED]
/s/ WILLIAM P. FOLEY, II
------------------------
William P. Foley, II
Chairman of the Board
Rally's Hamburgers, Inc. & Checkers Drive-In Restaurants, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE REGULATORS
HAS APPROVED OF THE CHECKERS COMMON STOCK TO BE ISSUED IN THE MERGER, NOR HAVE
THEY DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Joint Proxy Statement/Prospectus dated July 1, 1999 and first mailed to
stockholders on July 6, 1999
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CHECKERS DRIVE-IN RESTAURANTS, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 5, 1999
Checkers Drive-In Restaurants, Inc. will hold its annual meeting of
stockholders at Four Seasons Biltmore, 1260 Channel Dr., Santa Barbara,
California, at 10:30 a.m. local time on August 5, 1999, to vote on:
1. The adoption and approval of the agreement and plan of merger, dated as
of January 28, 1999, by and between Checkers Drive-In Restaurants, Inc.
and Rally's Hamburgers, Inc.;
2. An amendment to Checkers certificate of incorporation to increase the
authorized shares of Checkers common stock to 175 million;
3. A one-for-12 reverse stock split;
4. Election of three directors;
5. Ratification and approval of an amendment to the Checkers 1994 stock
option plan for non-employee directors;
6. Approval of the Checkers employee stock purchase plan;
7. Ratification of the appointment of KPMG LLP as Checkers' independent
certified public accountants for fiscal 1999; and
8. Any other matters that properly come before the Checkers meeting, or any
adjournments or postponements of the Checkers meeting.
Record holders of Checkers common stock at the close of business on June
21, 1999, will receive notice of and may vote at the meeting, including any
adjournments or postponements. A list of these stockholders will be available
for inspection for ten days before the meeting at 3938 State Street, Suite 200,
Santa Barbara, California 93105.
[GRAPHIC OMITTED]
/s/ JAMES J. GILLESPIE
-------------------------------------
James J. Gillespie
President and Chief Executive Officer
July 1, 1999
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE CHECKERS ANNUAL MEETING. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MATTERS THAT YOU WILL VOTE ON AT
THE CHECKERS MEETING.
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RALLY'S HAMBURGERS, INC.
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 5, 1999
Rally's Hamburgers, Inc. will hold an annual meeting of stockholders at
Four Seasons Biltmore, 1260 Channel Dr., Santa Barbara, California, at 9:30
a.m. local time on August 5, 1999, to vote on:
1. The adoption and approval of the agreement and plan of merger, dated as
of January 28, 1999, by and between Checkers Drive-In Restaurants, Inc.
and Rally's Hamburgers, Inc.;
2. Election of a board of directors to serve if the merger is not
completed; and
3. Any other matters that properly come before the Rally's meeting, or any
adjournments or postponements of the Rally's meeting.
Record holders of Rally's common stock at the close of business on June
21, 1999, will receive notice of and may vote at the meeting, including any
adjournments or postponements. A list of these stockholders will be available
for inspection for ten days before the meeting at 3938 State Street, Suite 200,
Santa Barbara, California 93105.
[GRAPHIC OMITTED]
/s/ JAMES J. GILLESPIE
-------------------------------------
James J. Gillespie
President and Chief Executive Officer
July 1, 1999
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE RALLY'S SPECIAL MEETING. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER ............................................ iv
SUMMARY ........................................................................... 1
RISK FACTORS ...................................................................... 7
A WARNING ABOUT FORWARD-LOOKING STATEMENTS ........................................ 13
THE STOCKHOLDERS MEETINGS ......................................................... 14
Purpose, Time and Place ......................................................... 14
Record Date; Voting Power ....................................................... 14
Votes Required .................................................................. 15
Voting of Proxies ............................................................... 16
Revocability of Proxies ......................................................... 16
Solicitation of Proxies ......................................................... 17
Share Ownership of Management and Certain Stockholders .......................... 18
THE MERGER ........................................................................ 22
General ......................................................................... 22
Background of the Merger ........................................................ 22
Certain Exchanged Information ................................................... 27
Reasons for the Merger; Recommendation of Each Company's Board of Directors ..... 28
Opinions of Financial Advisors .................................................. 35
Terms of the Merger Agreement ................................................... 47
General ....................................................................... 47
Closing; Effective Time ....................................................... 47
Checkers Certificate of Incorporation ......................................... 48
Directors and Principal Officers of Checkers after the Merger ................. 48
Reservation of Right to Revise Transaction .................................... 48
The Merger Consideration ...................................................... 48
Exchange of Certificates; Fractional Shares ................................... 49
Representations and Warranties ................................................ 49
Certain Covenants ............................................................. 50
No Solicitation ............................................................... 51
Employee Benefit Plans ........................................................ 51
Indemnification and Insurance ................................................. 52
Conditions to the Consummation of the Merger .................................. 52
Termination ................................................................... 53
Expenses ...................................................................... 54
Amendment; Extension and Waiver ............................................... 54
Certain Federal Income Tax Consequences ......................................... 54
Interests of Certain Persons in the Merger ...................................... 57
Accounting Treatment ............................................................ 60
Regulatory Matters .............................................................. 60
Restrictions on Resales by Affiliates ........................................... 60
</TABLE>
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PAGE
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Litigation ........................................................... 61
Dissenters' Rights of Appraisal ...................................... 61
INCREASE IN AUTHORIZED SHARES OF
CHECKERS COMMON STOCK ................................................. 62
REVERSE STOCK SPLIT .................................................... 63
General .............................................................. 63
Purpose of the Reverse Split ......................................... 64
Effectiveness of the Reverse Split ................................... 65
Exchange of Stock Certificates ....................................... 66
Certain Federal Income Tax Consequences of the Reverse Split ......... 67
Miscellaneous ........................................................ 68
ELECTION OF DIRECTORS .................................................. 69
PRO FORMA CONSOLIDATED FINANCIAL DATA .................................. 70
SELECTED HISTORICAL FINANCIAL DATA ..................................... 73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CHECKERS ................................. 75
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF RALLY'S .................................. 92
BUSINESS OF CHECKERS ................................................... 105
BUSINESS OF RALLY'S .................................................... 126
MANAGEMENT ............................................................. 139
Directors and Executive Officers ..................................... 139
Executive Compensation ............................................... 145
APPROVAL OF AMENDMENT TO CHECKERS STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS ............................................ 161
General .............................................................. 161
Description of the Directors Plan .................................... 161
APPROVAL OF EMPLOYEE STOCK
PURCHASE PLAN ......................................................... 164
General .............................................................. 164
Terms of the Stock Purchase Plan ..................................... 164
Recommendation and Vote Required ..................................... 166
COMPARATIVE STOCK PRICES AND DIVIDENDS ................................. 166
Market Prices ........................................................ 166
Dividends ............................................................ 167
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PAGE
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COMPARATIVE RIGHTS OF STOCKHOLDERS
OF CHECKERS AND RALLY'S ...................................... 167
Authorized Capital .......................................... 168
Board of Directors .......................................... 168
Officers .................................................... 169
Special Meetings of Stockholders ............................ 170
Stockholder Action by Written Consent ....................... 170
Stockholder Proposal and Nomination Procedure ............... 170
Amendment to Governing Documents ............................ 171
Takeover Provisions ......................................... 171
RATIFICATION AND APPROVAL OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ..................... 172
LEGAL OPINIONS ................................................ 172
EXPERTS ....................................................... 172
STOCKHOLDER PROPOSALS ......................................... 173
OTHER MATTERS ................................................. 174
WHERE YOU CAN FIND MORE INFORMATION ........................... 174
INDEX TO FINANCIAL INFORMATION ................................ F-1
APPENDIX A -- Agreement and Plan of Merger
APPENDIX B -- Opinion of Schroder & Co. Inc.
APPENDIX C -- Opinion of Credit Suisse First Boston Corporation
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QUESTIONS AND ANSWERS ABOUT
THE MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: We believe that merging Checkers and Rally's will create strategic
opportunities to meet the challenges posed by the rapidly changing quick
service restaurant industry that would not otherwise be available. By
combining Checkers' and Rally's operations we expect to produce a stronger
company better able to:
/bullet/ capitalize on growth opportunities; and
/bullet/ expand its combined market base.
To review the reasons for the merger in greater detail, see pages 28 to 35.
Q: WHAT WILL RALLY'S STOCKHOLDERS RECEIVE FOR THEIR RALLY'S SHARES?
A: Rally's stockholders will receive 1.99 shares of Checkers common stock in
exchange for each Rally's share they held. This exchange ratio will not
change, even if the market price of Checkers common stock or Rally's common
stock increases or decreases between now and the date that the merger is
completed.
Q: WILL THE MERGER HAVE ANY EFFECT ON THE OUTSTANDING SHARES OF CHECKERS COMMON
STOCK?
A: Yes. All shares of Checkers common stock held by Rally's, approximately 19.1
million shares, will be canceled and retired and become authorized but
unissued shares. However, the merger will not have any effect on the number
of shares of Checkers common stock that other Checkers stockholders own. The
number of outstanding shares of Checkers common stock will be increased to
112.7 million as a result of the merger and then reduced to 9.4 million as a
result of the reverse stock split.
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this joint proxy statement/prospectus, simply
indicate on your proxy card how you want to vote and sign and mail it in the
enclosed return envelope.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will not be able to vote your shares for the merger without
instructions from you. You should instruct your broker to vote your shares,
following the procedure provided by your broker.
Q. CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy card is voted at
your meeting. You can do this in one of three ways.
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First, you can send a written notice to the secretary of Checkers or Rally's,
stating that you would like to revoke your proxy.
Second, you can complete and submit a new proxy card.
Third, you can attend the appropriate meeting and vote in person.
Your attendance alone will not, however, revoke your proxy. If you have
instructed a broker to vote your shares, you must follow the procedure
provided by your broker to change those instructions.
Q: SHOULD I SEND IN MY RALLY'S STOCK CERTIFICATES NOW?
A: No. Please wait until after the merger is completed. At that time, you will
receive written instructions for exchanging the stock certificate(s) that
represent your shares of Rally's common stock for stock certificate(s) that
represent your new shares of Checkers common stock.
Q. WILL THE RIGHTS OF RALLY'S STOCKHOLDERS CHANGE AS A RESULT OF THE MERGER?
A: Yes. Currently Rally's stockholder rights are governed by Delaware law and
Rally's certificate of incorporation and by-laws. After the merger, Rally's
stockholders will become stockholders of Checkers and their rights will
continue to be governed by Delaware law but will be governed by Checkers'
certificate of incorporation and by-laws. For a summary of differences
between the rights of Rally's and Checkers' stockholders, see page 167.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT CHECKERS AND RALLY'S?
A: Both of our companies file periodic reports and other information with the
Securities and Exchange Commission. You may read and copy this information at
the Commission's public reference facilities. Please call the Commission at
1-800-SEC-0330 for information about these facilities. This information is
also available at the Commission's Internet site (http://www.sec.gov) and the
offices of the NASDAQ National Market. For a more detailed description of the
information available, please see page 174.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have more questions about the merger, you can contact:
James T. Holder, Esq.
Senior Vice President, General Counsel
& Secretary
Checkers Drive-In Restaurants, Inc.
and Rally's Hamburgers, Inc.
14255 49th Street North, Building 1
Clearwater, Florida 33762
Phone Number: (727) 519-2000
or
American Stock Transfer & Trust Co.
40 Wall Street, 46th Floor
New York, New York 10005
Phone Number: (800) 937-5449
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY
STATEMENT/ PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE ENTIRE DOCUMENT AND THE OTHER
DOCUMENTS TO WHICH WE REFER FOR A MORE COMPLETE DESCRIPTION OF THE TRANSACTIONS
WE ARE PROPOSING. FOR MORE INFORMATION ABOUT THE TWO COMPANIES, SEE "WHERE YOU
CAN FIND MORE INFORMATION" (PAGE 174). WE HAVE INCLUDED PAGE REFERENCES
PARENTHETICALLY TO DIRECT YOU TO A MORE COMPLETE DESCRIPTION OF TOPICS IN THIS
SUMMARY.
THE COMPANIES
RALLY'S HAMBURGERS, INC. (PAGE 126)
14255 49th Street North
Building 1
Clearwater, FL 33762
(727) 519-2000
Rally's develops, produces, owns, operates and franchises quick service
"double drive-thru" restaurants, primarily in the Midwest and the Sunbelt, with
469 restaurants in 18 states.
CHECKERS DRIVE-IN RESTAURANTS, INC.
(PAGE 105)
14255 49th Street North
Building 1
Clearwater, FL 33762
(727) 519-2000
Checkers develops, produces, owns, operates and franchises quick
service "double drive-thru" restaurants, primarily in the Southeast, with 465
restaurants in 23 states, the District of Columbia, Puerto Rico and the West
Bank in the Middle East.
THE MERGER (PAGE 22)
The merger agreement is the document that governs the merger
acquisition of Rally's by Checkers. As a result of the merger, the separate
corporate existence of Rally's will cease, and Rally's stockholders will
receive 1.99 shares of Checkers common stock for each share of Rally's common
stock they own just before the merger. Completion of the merger proposal
depends on passage of the proposal to increase Checkers authorized shares.
OUR REASONS FOR THE MERGER (PAGE 28)
We believe that Checkers' acquisition of Rally's will combine the
strengths of our individual companies and will create a company that will be
able to compete better in the fast food industry. Although we have already
eliminated many overlapping functions and processes and are currently using our
combined buying power to reduce the cost of goods and services, we expect to
further reduce general and administrative and marketing expenses by
approximately $380,000 each year.
INCREASE IN AUTHORIZED COMMON STOCK
(PAGE 62)
Checkers does not have enough authorized shares of common stock to
implement the merger and provide for the exercise of outstanding options and
warrants. Therefore, Checkers is proposing
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to amend its certificate of incorporation to increase the authorized common
stock from 150,000,000 to 175,000,000.
THE REVERSE STOCK SPLIT (PAGE 63)
If Checkers' stockholders approve the reverse stock split, you will own
one-twelfth of the number of shares of Checkers common stock you held just
before the reverse split, including the Checkers stock received in the merger.
If your shares are not evenly divisible by 12, you will receive a pro rata
portion of the net proceeds from the sale in the open market by the exchange
agent of all fractional shares resulting from the reverse stock split. The
number of shares of authorized Checkers common stock will not change as a
result of the reverse stock split.
OUR RECOMMENDATIONS TO STOCKHOLDERS (PAGE 28)
RALLY'S STOCKHOLDERS. The Rally's board of directors believes that the
merger is advisable and in the best interests of Rally's and its stockholders
who are not affiliated with Checkers or Rally's and unanimously recommends that
the Rally's stockholders vote "FOR"
/bullet/ the proposal to adopt and approve the merger agreement; and
/bullet/ the election of directors.
CHECKERS STOCKHOLDERS. The Checkers Board of Directors believes that
the merger is advisable and in the best interests of Checkers and its
stockholders and unanimously recommends that the Checkers stockholders vote
"FOR"
/bullet/ the proposal to adopt and approve the merger agreement;
/bullet/ the increase in the authorized shares of Checkers common stock;
/bullet/ the one-for-12 reverse stock split;
/bullet/ election of three directors;
/bullet/ amendment to Checkers 1994 stock option plan for non-employee
directors;
/bullet/ Checkers' employee stock purchase plan; and
/bullet/ ratification of the appointment of the independent certified public
accountants.
VOTES REQUIRED (PAGE 15)
To conduct business at the Checkers and Rally's stockholders meetings,
a quorum of the outstanding shares on June 21, 1999 the record date, must be
present. A quorum consists of a majority of the outstanding shares on the
record date; 29,335,243 shares for Rally's and 73,408,047 shares for Checkers.
In order to adopt the merger agreement, stockholders holding a majority of the
outstanding shares of each company must vote for adoption and approval of the
merger agreement. Election of Rally's directors, who will only serve if the
merger is not completed, requires a plurality of the votes cast at the Rally's
meeting.
The affirmative vote of Checkers' stockholders holding a majority of
the outstanding Checkers common stock is also required for the approval of the
increase in Checkers authorized common stock and the reverse stock split.
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A majority of the votes cast at the Checkers meeting is required for
approval of:
/bullet/ Checkers' stock option plan;
/bullet/ election of three directors;
/bullet/ Checkers' employee stock purchase plan; and
/bullet/ ratification of the independent certified public accountants.
Holders of approximately 52% of Rally's common stock have granted
Rally's a proxy to vote their shares in connection with the merger. In
addition, Rally's officers and directors hold approximately 1.3% of Rally's
common stock, including 0.7% included in the 52.0% referred to in the preceding
sentence.
Rally's, which holds approximately 26% of Checkers common stock, has
granted a proxy to Checkers to vote all of its shares in connection with the
merger and each of the other matters to be considered at the Checkers meeting.
Checkers officers and directors hold less than 1% of Checkers common stock.
OPINIONS OF FINANCIAL ADVISORS
RALLY'S (PAGE 35). Schroder & Co. Inc. has given a written opinion to
the independent committee of the Rally's board of directors as to the fairness
of the exchange ratio in the merger, from a financial point of view, to the
stockholders of Rally's who are not affiliated with Checkers or Rally's. We
have attached as Appendix B to this document the written opinion of Schroder &
Co. Inc.
CHECKERS (PAGE 41). Credit Suisse First Boston Corporation has given a
written opinion to the independent committee of the Checkers board of directors
as to the fairness, from a financial point of view, of the exchange ratio in
the merger. We have attached as Appendix C to this document the written opinion
of Credit Suisse First Boston Corporation.
You should read the opinions carefully in their entirety to understand
the procedures followed, assumptions made, matters considered and limitations
on the review undertaken by each of Schroder & Co. Inc. and Credit Suisse First
Boston Corporation in providing their opinions. THE OPINIONS OF SCHRODER & CO.
INC. AND CREDIT SUISSE FIRST BOSTON CORPORATION ARE DIRECTED TO THE INDEPENDENT
COMMITTEES OF THE BOARDS OF DIRECTORS OF RALLY'S AND CHECKERS AND DO NOT
CONSTITUTE RECOMMENDATIONS TO ANY STOCKHOLDER AS TO HOW TO VOTE AT THE RALLY'S
OR CHECKERS MEETINGS.
INTERESTS OF PERSONS INVOLVED IN THE MERGER (PAGE 57)
The executive officers and directors of Rally's and Checkers have
interests in the merger that are different from your interests. Certain
directors of Rally's and Checkers (or companies in which they have interests)
hold approximately $16.4 million of Checkers' outstanding debt. We may use some
of the assets of Checkers after the merger to repay all or a portion of such
debt.
Rally's executive officers and directors will receive options to
purchase 8,820,675 shares of Checkers common stock in exchange for their
Rally's options. Based upon the market price of Checkers common stock on May
12, 1999, the
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aggregate value of these options would be $1,009,855. If the amendment to
Checkers' 1994 stock option plan for non-employee directors is approved,
Checkers' non-employee directors after the merger and the reverse stock split
will each receive options for Checkers common stock with an exercise price
equal to the market value of the stock on the date of grant.
As a part of the merger transaction, Checkers will sign a joint
purchasing agreement with CKE Restaurants, Inc., an affiliate of the Chairman
of the Board of Rally's and Checkers and a principal stockholder of Rally's.
The agreement will provide that CKE will assist Checkers in cooperative
purchasing.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES (PAGE 54)
We expect that Checkers and Rally's and their stockholders will not
recognize any gain or loss for U.S. federal income tax purposes in the merger,
except in connection with any cash that Rally's stockholders receive instead of
fractional shares. Checkers and Rally's have received a legal opinion that this
will be the case. This legal opinion is filed as an exhibit to the Registration
Statement of which this Joint Proxy Statement/Prospectus forms a part. The
opinion will not bind the Internal Revenue Service, which could take a
different view.
Determining the actual tax consequences of the merger to you as an
individual taxpayer can be complicated. The tax treatment will depend on your
specific situation and many variables not within our or your control. You
should consult your own tax advisor for a full understanding of the merger's
tax consequences.
ACCOUNTING TREATMENT (PAGE 60)
We expect the merger to be treated as a purchase transaction and,
because former Rally's stockholders will hold a majority of Checkers common
stock after the merger, as an acquisition of Checkers by Rally's for accounting
and financial reporting purposes.
NO DISSENTERS' RIGHTS OF APPRAISAL (PAGE 61)
Under Delaware law, Rally's and Checkers stockholders will not have any
dissenter's rights of appraisal in connection with the merger.
REGULATORY MATTERS (PAGE 60)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
requires Rally's and Checkers to give information to the Antitrust Division of
the United States Department of Justice and the United States Federal Trade
Commission. A 30-day waiting period must expire or be terminated before the
merger may be completed. On February 16, 1999, Rally's and Checkers made the
required filings with the Department of Justice and the Federal Trade
Commission. The Federal Trade Commission granted early termination of the
required waiting period on February 26, 1999.
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COMPARATIVE HISTORICAL AND PRO FORMA
COMBINED PER SHARE DATA
We have summarized below per share information of Checkers and Rally's on
a historical and pro forma basis after giving effect to the merger. Rally's
stockholders will be entitled to receive 1.99 shares of Checkers common stock
in exchange for each share of Rally's common stock. The pro forma information
is also adjusted for the effect of a one-for-twelve reverse stock split. The
information set forth below is only a summary and you should read it with the
historical financial statements and related notes contained in this joint proxy
statement/prospectus.
<TABLE>
<CAPTION>
CHECKERS RALLY'S PRO
HISTORICAL HISTORICAL FORMA
------------ ------------ -----------
<S> <C> <C> <C>
Quarterly earnings per diluted share before extraordinary
items (1) ............................................. $ (0.02) $ (0.05) $ (0.25)
Annual earnings per diluted share before extraordinary
items (1) ............................................. $ (0.07) $ (0.28) $ (1.21)
Book value per share (2) ................................ $ 0.59 $ 1.12 $ 7.64
Cash dividends declared per share ....................... -0- -0- -0-
</TABLE>
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(1) Assumes the merger was consummated on December 29, 1997.
(2) Assumes the merger was consummated on March 22, 1999.
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SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The merger will be accounted for as a "purchase," which means that the
purchase price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values at the time the companies are combined.
Because former Rally's stockholders will own a majority of Checkers outstanding
common stock as a result of the merger, Rally's will be considered the
acquiring company for accounting purposes. We are providing the following
financial information to aid you in your analysis of the financial aspects of
the merger. We derived this information from audited financial statements for
1998 for both Checkers and Rally's. The information is only a summary of the
unaudited pro forma financial information presented on pages 70 to 72, and you
should read it in conjunction with our historical financial statements and
related notes contained in this joint proxy statement/prospectus.
While this pro forma financial information has been prepared based upon
currently available information using assumptions that we believe are
appropriate, you should be aware that this pro forma information may not be
indicative of what actual results will be in the future or would have been for
the periods presented. You should read the notes to the unaudited pro forma
financial information beginning on page 70 for further discussion of the
assumptions we made to prepare this information.
QUARTER ENDED YEAR ENDED
MARCH 22, 1999 DECEMBER 28, 1998
--------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA INCOME STATEMENT DATA:
Net revenues $ 61,832 $ 290,660
Net loss before extraordinary
items (2,386) (11,322)
Cash dividends -- --
Diluted earnings per share before
extraordinary items (0.25) (1.21)
Weighted average common and
common equivalent shares outstanding 9,388 9,388
PRO FORMA BALANCE SHEET DATA:
Total assets $219,197
Long-term debt and capital leases
(including current portion) 98,394
Stockholders' equity 71,737
6
<PAGE>
RISK FACTORS
IN ADDITION, TO THE OTHER INFORMATION INCLUDED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS, INCLUDING THE MATTERS ADDRESSED IN "A WARNING ABOUT
FORWARD-LOOKING STATEMENTS" ON PAGE 13, STOCKHOLDERS OF RALLY'S HAMBURGERS,
INC. AND CHECKERS DRIVE-IN RESTAURANTS, INC. SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED BELOW IN DETERMINING WHETHER TO ADOPT THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
RALLY'S AND CHECKERS' DECREASING RESTAURANT SALES MAY CONTINUE AFTER THE
MERGER.
We cannot predict whether sales after the merger will increase, decrease
or remain flat. Rally's has had lower restaurant sales during each year from
1993 through 1997 and had flat sales in 1998. Checkers has had lower restaurant
sales during each quarter from March 1996 through December 1997, and annual
sales declined each year from 1992 through 1997. Checkers comparable store
sales during 1998 increased 2.3%, while total restaurant sales increased 1.7%.
RALLY'S AND CHECKERS WILL CONTINUE TO EXPERIENCE OPERATING LOSSES IF THEY ARE
UNABLE TO SIGNIFICANTLY INCREASE SALES AFTER THE MERGER.
Rally's has had losses before extraordinary items in each year since 1993,
and Checkers has had net losses in each year since 1994. Rally's had net losses
of $4.5 million and $7.5 million in 1997 and 1998, and Checkers had net losses
of $12.9 million and $5.3 million in 1997 and 1998. These losses were primarily
caused by lower restaurant sales at Rally's and Checkers during these periods.
We have adopted programs to reduce our expenses, but we continue to incur
losses because of the failure to increase sales.
THE MERGER CONSIDERATION IS FIXED DESPITE POTENTIAL CHANGES IN RELATIVE STOCK
PRICES.
Upon completion of the merger, each Rally's common share will be converted
into 1.99 Checkers common shares (prior to giving effect to the proposed
one-for-12 reverse stock split). This exchange ratio will not be adjusted in
the event of any increase or decrease in the price of Rally's or Checkers
common stock. The prices of Rally's and Checkers common stock when the merger
takes place may be different than their prices at the date of this joint proxy
statement/prospectus and at the date of the stockholders meetings. See
"Comparative Stock Prices and Dividends" on page 166 for further information.
These differences may be the result of changes in the business, operations or
prospects of Rally's or Checkers, market assessments of the likelihood and
timing of the merger, regulatory considerations, general market and economic
conditions and other factors. At the time of their meetings, Rally's
stockholders will not know the exact value of the Checkers common stock that
they will receive when the merger is completed. You are urged to obtain current
market quotations for Rally's and Checkers.
7
<PAGE>
CHECKERS MAY NOT BE ABLE TO REALIZE SIGNIFICANT ADDITIONAL COST SAVINGS AS A
RESULT OF THE MERGER.
The operations of Rally's and Checkers have already been substantially
consolidated as a result of a management services agreement, which took effect
as of November 1997, under which Checkers provides executive management and
other administrative services to Rally's. In addition, Rally's and Checkers
have, since late 1996, coordinated their purchasing efforts with CKE
Restaurants, Inc., owner of the Carls, Jr. and Hardee's chains, a principal
stockholder of Rally's and a major creditor of Checkers. We believe we will be
able to achieve additional savings as a result of the elimination of the costs
associated with Rally's being a public company. However, we do not believe
there will be additional significant cost savings as a result of the
combination of our operations.
THE COMBINED COMPANY WILL BE REQUIRED TO PAY FEDERAL INCOME TAXES IF IT HAS
TAXABLE INCOME GREATER THAN ITS AVAILABLE NET OPERATING LOSS CARRYFORWARDS.
As a result of the merger, the combined company may be required to pay
federal income taxes because of limitations on the use of net operating loss
carryforwards. Currently, Checkers has approximately $61.6 million in loss
carryforwards which it can use in whole or in part in any year. Rally's
currently has approximately $49.8 million in loss carryforwards, of which it
may use approximately $2.3 million each year with any unused portion carried
forward to the next year. The merger will result in an ownership change of
Checkers and Rally's for purposes of the Internal Revenue Code and the combined
company's use of net operating loss carryforwards may be limited to
approximately $41 million after the merger, of which it may use approximately
$2.2 million each year with any unused portion carried forward. We have
consulted with our tax counsel about the foregoing. See "The Merger--Certain
Federal Income Tax Consequences" at page 54.
CONTINUED LISTING ON NASDAQ IS UNCERTAIN.
Checkers common stock could be delisted from the NASDAQ National Market if
its trading value does not remain above $1.00 per share after the merger and
the reverse stock split. If Checkers stock were delisted the trading market for
Checkers stock would lose a considerable amount of liquidity.
The requirements for continued listing on the NASDAQ National Market
include a requirement that the closing bid price of the common stock of each
listed company not fall below the minimum trading value of $1.00 per share for
any 30 trading day period. The market price of Checkers common stock has closed
below $1.00 since July 28, 1998. Except for one day, Rally's common stock has
closed below $1.00 since February 1, 1999. Checkers and Rally's received
letters from NASDAQ stating that their common stock would be delisted if they
were unable to comply with the $1.00 minimum bid price requirement. Checkers
requested a hearing with a NASDAQ panel which was held on February 19, 1999 and
automatically stayed the delisting. A similar hearing was held for Rally's on
April 23,
8
<PAGE>
1999. At the hearings, Checkers and Rally's explained their plan for compliance
with the $1.00 requirement in the future, including the merger and the
one-for-12 reverse stock split which is being presented to their stockholders.
On June 18, 1999, we were notified by NASDAQ that it would continue the listing
of both companies' securities through the anticipated closing date of August 9,
1999. After the merger, Checkers stock must have a closing bid price of at
least $1.00 per share for a minimum of ten consecutive days and Checkers must
comply with all other requirements for continued listing. We must submit
documents on or prior to August 9, 1999 showing that the merger has been
completed, at which time Rally's stock will be delisted since Rally's will no
longer exist as a separate corporation. We cannot be certain that the market
price of Checkers common stock will increase enough after the merger and the
reverse stock split to satisfy the minimum trading value requirement.
Therefore, we cannot be certain that Checkers will be able to continue to list
its common stock on NASDAQ. On June 17, 1999, the closing per share price of
Rally's common stock and Checkers common stock was $0.6875 and $0.375,
respectively. If Checkers stock is delisted from NASDAQ, it will be traded on
the OTC Bulletin Board.
WE ARE ADVERSELY AFFECTED BY INTENSE COMPETITION.
There is intense competition in the quick-service restaurant industry
which has adversely affected both Rally's and Checkers. We expect to continue
to experience intense competition.
In addition, we compete with major chains which have substantially greater
financial resources and longer operating histories then we do and dominate the
quick-service restaurant industry. We compete primarily on the basis of food
quality, price and speed of service. A significant change in pricing or other
marketing strategies by one or more of our competitors could have a material
adverse impact on our sales, earnings and growth. All of the major
quick-service chains have increasingly offered selected food items and
combination meals at discounted prices. Beginning generally in the summer of
1993, the major quick-service hamburger chains began to intensify their
promotions of value priced meals, many specifically targeting the $.99 price
point at which we sell many of our products. This increased promotional
activity has continued, and management believes that it has had a negative
impact on our sales. While we cannot predict how long this promotional activity
will last or the extent to which this pricing may become more or less
competitive, we believe such pricing will have a continued adverse effect on
our sales and earnings.
This competition can be significantly affected by many factors, including:
/bullet/ changes in local, regional or national economic conditions;
/bullet/ changes in consumer tastes;
/bullet/ consumer concerns about the nutritional quality of quick-service
food;
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<PAGE>
/bullet/ increases in the number of, and particular location of, competing
quick-service restaurants. We can also be hurt by our competitors'
ability to deal more effectively than we can with factors such as:
/bullet/ inflation;
/bullet/ increases in food, labor and energy costs;
/bullet/ the availability and cost of suitable sites
/bullet/ fluctuating interest and insurance rates;
/bullet/ state and local regulations and licensing requirements; and
/bullet/ the availability of an adequate number of hourly-paid employees.
OUR AVAILABLE CASH WILL BE LIMITED AS A RESULT OF OUR DEBT SERVICE OBLIGATIONS.
After the merger, Checkers will continue to carry a heavy debt burden
which will limit its operating flexibility and affect cash flow. On May 12,
1999, Rally's had outstanding approximately $52.8 million of its 9-7/8% senior
notes, which must be paid by June 15, 2000, and Checkers had outstanding
approximately $17.4 million of debt under its credit agreement, which must be
paid by April 30, 2000. In December 1998, Rally's and Checkers completed
mortgage financing transactions of $4.3 million and $10 million. Both Rally's
and Checkers are required to make large interest payments. In 1998, $5.7
million was paid on Rally's senior notes and $3.3 million was paid on Checkers'
principal debt. Giving effect to the merger, Checkers will be obligated to pay
approximately $5.1 million, $2.3 million and $1.3 million in interest annually
on the senior notes, the debt under the credit agreement and the mortgage debt,
respectively.
IF WE ARE UNABLE TO REPAY OUR DEBT WHEN DUE, OUR CREDITORS MAY USE ALL LEGAL
MEANS TO COLLECT, INCLUDING FORECLOSURE ON OUR ASSETS.
In order to repay the Checkers debt and the senior notes, Checkers may
seek to raise capital through sale of equity securities in one or more private
placements, which would dilute the interests of current stockholders. In
addition, Checkers may enter into one or more sale/leaseback transactions
and/or sell certain of the Checkers and Rally's company-owned restaurants after
the merger. The net proceeds would be used to pay down the amount owed under
the senior notes and the credit agreement. Of course, we cannot be certain that
the proceeds of these transactions will be sufficient to repay a significant
portion of the amounts owed on the senior notes and the credit agreement.
IF WE ARE UNABLE TO COMPLY WITH OUR DEBT COVENANTS, OUR CREDITORS MAY
ACCELERATE THE DUE DATE OF, AND INCREASE THE INTEREST PAYABLE ON OUR DEBT.
Checkers will be subject to the significant restrictions contained in
Checkers and Rally's debt obligations. After the merger, Checkers will be
subject to restrictive covenants under
10
<PAGE>
the senior notes and the mortgage financing. Under the Checkers credit
agreement, Checkers must continue to maintain minimum consolidated earnings
before interest, taxes, depreciation and amortization, including amortization
of goodwill and other intangibles, of $2.75 million for each trailing 12-week
period. Checkers obtained a waiver of this requirement through August 9, 1999.
If the waiver had not been granted, the holders of the Checkers debt could have
demanded immediate payment of all outstanding principal and interest and
required an increase in the interest rate from 13% to 15%.
STOCKHOLDERS WILL BE DILUTED BY THE MERGER.
As a result of the merger and the reverse stock split, approximately
/bullet/ 9.4 million Checkers common shares will be outstanding (excluding
treasury shares),
/bullet/ 4.8 million shares will be reserved for issuance in connection
with the exercise of outstanding options and warrants, and
/bullet/ options to purchase 8.8 million shares will be available for grant
under our stock option plans.
As a result, your percentage ownership interest in the combined company
may be less than your percentage ownership was in Rally's or Checkers before
the merger. For example, if you owned approximately 10% of Rally's common stock
before the merger, you would own approximately 5% of Checkers common stock
after the merger. We may issue additional shares of common stock or preferred
stock in the future in connection with private placements, acquisitions,
corporate combinations, financing activities or employee compensation plans,
which could further dilute your percentage ownership interest.
THE COMBINED COMPANY'S LARGEST STOCKHOLDERS WILL HAVE A SIGNIFICANT INFLUENCE
ON MATTERS PUT TO A VOTE.
As a result of the merger and the reverse stock split, CKE Restaurants,
Inc. will own 1,560,907 Checkers common shares (approximately 16.6% of the
outstanding shares) and will beneficially own 865,511 shares underlying
warrants, and Santa Barbara Restaurant Group, Inc. will own 399,471 Checkers
common shares (approximately 4.3% of the outstanding shares). Therefore, we
believe CKE and Santa Barbara Restaurant Group will have a significant
influence on elections of directors and other matters put to a vote of
stockholders after the merger. In addition, GIANT GROUP, LTD. will own 534,915
Checkers common shares (approximately 5.7% of the outstanding shares) and will
beneficially own 237,416 shares underlying warrants.
CHECKER'S STOCK PRICE MAY BECOME MORE VOLATILE AS A RESULT OF THE MERGER.
Checkers common stock, which is traded on the NASDAQ National Market, has
experienced, and could experience in the future, significant price and volume
fluctuations
11
<PAGE>
which could adversely affect its market price. The increase in Checkers' per
share price coupled with a reduced number of shares outstanding, both of which
are expected to occur as a result of the merger and the reverse stock split,
may lead to an increase in this volatility. We believe this result may occur
because the anticipated increase in analyst coverage of Checkers could result
in increased market sensitivity to information about Checkers and absolute
price changes may be greater as a result of Checkers' increased share price. In
addition, we believe that factors such as quarterly fluctuations in our
financial results, the overall economy and the financial markets could cause
the price of Checkers common stock to fluctuate substantially. Additionally,
Checkers stock has historically traded at a discount from its per share book
value. After the merger, such discount may continue.
WE MAY INCUR SIGNIFICANT COSTS DEFENDING LAWSUITS TO WHICH WE ARE A PARTY.
Although we cannot determine at this time the outcome of the lawsuits to
which Checkers or Rally's is a party, if the outcome is adverse to us, the
potential liability could be material. In addition, we believe that the costs
of defending these actions could be significant. Checkers and Rally's are
parties to the litigation described at pages 121 and 135 in this joint
statement/prospectus. The Checkers litigation matters described at page 121
include four disputes with its franchisees and include claims of fraud and
violations of state franchise laws. The Rally's litigation matters described at
page 135 include a securities class action against Rally's and various Rally's
officers and directors and a derivative action, purportedly brought on behalf
of Rally's against GIANT and various Rally's officers and directors. In
addition, Checkers and Rally's are defendants in two actions filed in
connection with a proposed merger of Checkers, Rally's and GIANT on behalf of
Checkers' stockholders. Although that transaction has since been terminated
these complaints have not been dismissed and the plaintiffs may amend their
complaints to challenge the merger of Rally's and Checkers. If the plaintiffs
in these actions proceed and are successful after the merger is completed, we
could be required to "undo" the merger. See "The Merger--Litigation" at page
61.
THE COMBINED COMPANY'S COSTS MAY INCREASE IF THE JOINT PURCHASING ARRANGEMENT
WITH CKE IS TERMINATED.
If the joint purchasing arrangement with CKE were terminated, the combined
company's cost of supplies would probably increase. Since the reduction of the
joint purchasing arrangement to a written agreement is a condition to the
completion of the merger, we expect the signed agreement with CKE to be
delivered prior to the merger. While Rally's and Checkers may, under the terms
of the merger agreement, waive this condition, neither company intends to do
so. If Rally's and Checkers were to waive the condition and the joint
purchasing arrangement were not reduced to writing, any party to the
arrangement could terminate it at will. See "Joint Purchasing Agreement" at
page 59.
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<PAGE>
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this document, and in the public
documents to which we refer, that are subject to risks and uncertainties. These
forward-looking statements include information about possible or assumed future
results of our operations or the performance of the combined company after the
merger. Also, when we use any of the words "believes," "expects," "anticipates"
or similar expressions, we are making forward-looking statements. Many possible
events or factors could affect the future financial results and performance of
each of our companies and the combined company after the merger. This could
cause results or performance to differ materially from those expressed in our
forward-looking statements. You should consider these risks when you vote on
the merger, including the following events or factors:
1. Our revenues after the merger may be lower than we expect, our
restructuring charges may be higher than we expect or our operating
costs after the merger may be greater than we expect;
2. Competition within the fast food restaurant industry, which is already
intense, may get stronger;
3. We may have more trouble obtaining regulatory approvals for the merger
than we expect;
4. We may have more trouble integrating our businesses or retaining key
personnel than we expect;
5. Our cost savings from the merger may be less than we expect, or we may
be unable to achieve those cost savings as soon as we expect;
6. General economic or business conditions may be worse than we expect;
7. Legislative or regulatory changes may adversely affect our business;
8. Technological changes and systems integration may prove to be harder to
make or more expensive than we expect;
9. Adverse changes may occur in the securities markets; and
10. We may not be able to restructure Rally's and Checkers' debt on
favorable terms.
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<PAGE>
THE STOCKHOLDERS MEETINGS
PURPOSE, TIME AND PLACE
Checkers and Rally's are furnishing this joint proxy statement/prospectus
to Checkers' and Rally's stockholders in connection with the solicitation of
proxies by the boards of directors of Checkers and Rally's for use at their
meetings of stockholders to be held on August 5, 1999 at Four Seasons Biltmore,
1260 Channel Dr., Santa Barbara, California. The Rally's meeting will be held
at 9:30 a.m. local time, and the Checkers meeting will be held at 10:30 a.m.,
local time.
At their meeting, the Checkers stockholders will be asked to vote on
proposals to:
/bullet/ adopt and approve the agreement and plan of merger, dated as of
January 28, 1999, between Checkers and Rally's;
/bullet/ amend Checkers' certificate of incorporation to increase the
number of authorized shares of Checkers common stock;
/bullet/ amend Checkers' certificate of incorporation to effect a
one-for-12 reverse stock split;
/bullet/ elect three directors;
/bullet/ approval of amendments to Checkers' 1994 stock option plan for
non-employee directors;
/bullet/ approve the Checkers employee stock purchase plan; and
/bullet/ ratify the appointment of KPMG LLP as Checkers' independent
certified public accountants.
At their meeting, the holders of Rally's common stock will be asked to
vote on a proposal to adopt and approve the merger agreement and elect
directors in the event the merger is not consummated.
RECORD DATE; VOTING POWER
The Checkers and Rally's boards have each fixed the close of business,
5:00 p.m., New York City time, on June 21, 1999, as the record date for
determining the Checkers and Rally's stockholders entitled to notice of and to
vote at, their stockholders meetings. Only stockholders of record at the close
of business on the record date will be entitled to notice of, and to vote at,
the stockholders meetings.
At the close of business on the record date, 29,335,243 shares of Rally's
common stock were issued and outstanding and entitled to vote at the Rally's
meeting, and 73,408,047 shares of Checkers common stock were issued and
outstanding and entitled to
14
<PAGE>
vote at the Checkers meeting. Stockholders of record of Checkers and Rally's
common stock are entitled to one vote per share on any matter which may
properly come before their meetings. Votes at each meeting may be cast in
person or by proxy. See "--Voting of Proxies" on page 16.
The presence at the Checkers meeting and the Rally's meeting, either in
person or by proxy, of the holders of a majority of the outstanding Checkers
common stock or the Rally's common stock entitled to vote, is necessary to
constitute a quorum in order to transact business at such meetings. However, in
the event that a quorum is not present at either meeting, it is expected that
the meeting will be adjourned or postponed in order to solicit additional
proxies.
VOTES REQUIRED
Approval of the merger agreement will require the affirmative vote of the
holders of a majority of the outstanding Checkers common shares and Rally's
common shares. A similar vote is required of the holders of Checkers common
shares for the approval of the increase in Checkers authorized common shares
and the one-for-12 reverse stock split. Approval of:
/bullet/ Checkers stock option plan;
/bullet/ election of three directors;
/bullet/ Checkers employee stock purchase plan; and
/bullet/ ratification of the independent certified public accountants
requires a majority of the votes cast at the Checkers meeting. Election of
Rally's directors, who will only serve if the merger is not completed, requires
a plurality of the votes cast at the Rally's meeting.
Under applicable Delaware law, in determining whether the proposal to
adopt and approve the merger agreement and the transactions contemplated
thereby and the amendments to Checkers' certificate of incorporation,
abstentions will have the same effect as a vote against the proposals. Brokers
who hold Checkers common stock or Rally's common stock as nominees, in the
absence of instructions from the beneficial owners, will not have discretionary
authority to vote for approval and adoption of the merger agreement, but
brokers who hold Checkers common stock will have authority to vote for the
approval of the increase in authorized Checkers common stock and the reverse
stock split. Any shares which are not voted because the nominee-broker lacks
discretionary authority will have the same effect as a vote against the
proposals.
A properly executed proxy marked "Withhold Authority" with respect to the
election of one or more directors will not be treated as voted with respect to
the directors indicated, although it will be counted for purposes of
determining whether there is a quorum. A
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<PAGE>
properly executed proxy marked "Abstain," although counted for purposes of
determining whether there is a quorum, will not be voted. Accordingly, an
abstention will have the same effect as a vote cast against any proposal.
Brokers, in the absence of instructions from the beneficial owners, will have
discretionary authority to vote shares of Checkers common stock held by them as
nominees for all proposals other than the merger agreement. Any shares as to
which a broker has discretionary authority but which are not voted will be
counted for purposes of determining whether there is a quorum but will not be
counted in determining the number of shares needed for approval of the option
plans.
CKE Restaurants, Santa Barbara Restaurant Group, GIANT and William P.
Foley, II, owners of approximately 52% of the outstanding Rally's common stock,
have granted a proxy to Rally's to vote their shares in connection with the
merger. Therefore, adoption and approval of the merger agreement by Rally's
stockholders is assured. In addition, Rally's has granted a proxy to Checkers
to vote its Checkers common shares (approximately 26% of the outstanding
shares) in connection with the merger and the other matters to be considered
and voted upon at the Checkers meeting.
VOTING OF PROXIES
Shares represented by properly executed proxies received in time for the
meetings will be voted at the meeting in the manner specified by the proxies.
Checkers stockholders should be aware that, if your proxy is properly executed
but does not contain voting instructions, your proxy will be voted FOR adoption
and approval of Checkers proposals 1 through 7. Rally's stockholders should be
aware that, if your proxy is properly executed but does not contain voting
instructions, your proxy will be voted FOR adoption and approval of Rally's
proposals 1 and 2. It is not expected that any other matter will be brought
before the Checkers and Rally's stockholders meetings. If other matters are
properly presented before the meetings, the persons named in such proxy will
have authority to vote in accordance with their judgment on any other such
matter, including any proposal to adjourn or postpone the meeting or otherwise
concerning the conduct of the meeting; provided, that a proxy that has been
designated to vote against the adoption and approval of the merger agreement
will not be voted, either directly or through a separate proposal, to adjourn
the meeting to solicit additional votes.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed Rally's and Checkers proxy cards does
not preclude a stockholder from voting in person. A stockholder of Rally's or
Checkers may revoke a proxy at any time prior to its exercise by:
/bullet/ delivering, prior to the meeting, to James T. Holder, Secretary of
Rally's Hamburgers, Inc. and Checkers Drive-In Restaurants, Inc.,
14255 49th Street North, Building I, Clearwater, Florida 33762, a
written notice of revocation bearing a later date or time than the
proxy;
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/bullet/ delivering to the Secretary of Rally's or Checkers a duly executed
proxy bearing a later date or time than the proxy; or
/bullet/ attending the Rally's meeting or Checkers meeting and voting in
person. Neither Rally's nor Checkers expects to adjourn their
meeting for a period of time long enough to require the setting of
a new record date for such meeting. If an adjournment occurs, it
will have no effect on the ability of either Rally's or Checkers
stockholders of record as of June 21, 1999 to exercise their
voting rights or to revoke any previously delivered proxies.
SOLICITATION OF PROXIES
Each of Rally's and Checkers will bear the cost of solicitation of proxies
from its own stockholders. In addition to solicitation by mail, the directors,
officers and employees of each of Rally's and Checkers and their subsidiaries
may solicit proxies from their stockholders by telephone, telegram or in
person. Arrangements will also be made with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of stock held of record by them, and Rally's
and Checkers will reimburse the custodians, nominees and fiduciaries for their
reasonable out-of-pocket expenses.
In addition, Checkers has retained D.F. King & Co., Inc. and American
Stock Transfer & Trust Co. to assist it in the solicitation of proxies from
stockholders in connection with its meeting. The proxy solicitors will receive
a fee of $8,000 as compensation for their services. Checkers has agreed to
reimburse the solicitors for their out-of-pocket expenses and to indemnify them
against certain liabilities arising out of or in connection with the
engagements.
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SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS
RALLY'S
The following table sets forth, as of May 12, 1999, information as to the
beneficial ownership of Rally's common stock by:
/bullet/ each person serving Rally's as a director on such date;
/bullet/ each person who qualifies as a "named executive officer" as
defined in Item 402(a)(3) of Regulation S-K under the Securities
Exchange Act of 1934, as amended;
/bullet/ all current directors and executive officers of Rally's as a
group; and
/bullet/ each person known to Rally's as having beneficial ownership of
more than 5% of Rally's common stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES (1) CLASS (2)
- ---------------------------------------------- -------------------- -----------
<S> <C> <C>
William P. Foley, II ......................... 734,353(3) 2.5%
James J. Gillespie ........................... 100,000(4) *
Harvey Fattig ................................ 18,667(4) *
Joseph N. Stein .............................. 45,667(5) *
James T. Holder .............................. 11,667(4) *
Richard A. Peabody ........................... 17,000(6) *
Terry N. Christensen ......................... 437,177(7) 1.5%
Willie D. Davis .............................. 490,000(4) 1.7%
David Gotterer ............................... 508,568(8) 1.7%
Ronald B. Maggard ............................ 275,000(9) *
Andrew Puzder ................................ 265,925(10) *
Burt Sugarman ................................ 1,358,209(11) 4.6%
C. Thomas Thompson ........................... 510,125(12) 1.7%
All current directors and executive officers
as a group (12 persons) .................... 4,772,358(13) 16.3%
CKE Restaurants, Inc. ........................ 10,937,995(14) 37.3%
1700 N. Harbor Blvd.
Anaheim, CA 92801
Santa Barbara Restaurant Group, Inc. ......... 2,408,874 8.2%
3938 State Street, #200
Santa Barbara, CA 93105
GIANT GROUP, LTD. ............................ 3,225,618 11.0%
9000 Sunset Blvd., 16th Floor
Los Angeles, CA 90069
Citigroup Inc.(15)
153 East 53rd Street ......................... 1,809,516(16) 6.2%
New York, NY 10043
</TABLE>
- ----------------
* Less than 1%.
18
<PAGE>
(1) Based upon information furnished to Rally's by the named persons and
information contained in filings with the Securities and Exchange
Commission. Under the rules of the Commission, a person is deemed to
beneficially own shares over which the person has or shares voting or
investment power or which the person has the right to acquire beneficial
ownership within 60 days. Unless otherwise indicated, the named persons
have sole voting and investment power with respect to their shares.
(2) Based on 29,335,243 shares outstanding as of May 12, 1999. Shares subject
to options or warrants exercisable within 60 days are deemed outstanding
for computing the percentage of class of the persons holding options or
warrants but are not deemed outstanding for computing the percentage of
class for any other person.
(3) Includes 533,000 shares underlying options and warrants. Excludes
9,412,507 shares held directly and 1,525,488 shares underlying warrants
held by CKE and 2,408,874 shares held directly by Santa Barbara Restaurant
Group, as to which Mr. Foley disclaims beneficial ownership. Mr. Foley is
Chairman of the Board and Chief Executive Officer of CKE and Chairman of
the Board of Santa Barbara Restaurant Group.
(4) Represents common stock underlying options.
(5) Includes 18,667 shares underlying options. Mr. Stein resigned as an
officer of Checkers and Rally's effective April 8, 1999.
(6) Includes 7,000 shares underlying options.
(7) Includes 410,000 shares underlying options and warrants.
(8) Includes 474,115 shares underlying options and warrants, but excludes
22,500 shares underlying options held by Mr. Gotterer, as to which shares
he disclaims beneficial ownership since a business partner is entitled to
the beneficial ownership of such shares upon any exercise of such options.
(9) Includes 245,000 shares underlying options.
(10) Includes 245,000 shares underlying options.
(11) Includes 1,040,000 shares underlying options and 15,285 shares and 252,586
shares beneficially owned by Mr. Sugarman's minor child and spouse, as to
which he disclaims beneficial ownership. Excludes 3,225,618 shares owned
by GIANT GROUP, LTD. as to which Mr. Sugarman disclaims beneficial
ownership. Mr. Sugarman is the Chairman of the Board, President and Chief
Executive Officer of GIANT.
(12) Includes 490,000 shares underlying options.
(13) Includes 4,083,116 shares underlying options and warrants.
(14) Includes 9,412,507 shares held directly and 1,525,488 shares underlying
warrants.
(15) Based upon a Schedule 13G, dated December 31, 1998, filed by Citigroup
Inc., Associated Madison Companies, Inc., PFS Services, Inc., The
Travelers Insurance Group Inc., Travelers Property Casualty Corp. and The
Travelers Indemnity Company. Travelers Property Casualty Corp. is the sole
stockholder of The Travelers Indemnity Company; The Travelers Insurance
Group Inc. is the majority stockholder of Travelers Property Casualty
Corp.; PFS Services, Inc. is the sole stockholder of The Travelers
Indemnity Group Inc.; Associated Madison Companies, Inc. is the sole
stockholder of PFS Services, Inc.; and Citigroup is the sole stockholder
of Associated Madison Companies.
(16) Includes an unspecified number of securities entitling the holder to
acquire Rally's common stock.
19
<PAGE>
CHECKERS
The following table sets forth, as of May 12, 1999, information as to the
beneficial ownership of Checkers common stock by:
/bullet/ each person serving Checkers as a director on such date, each
nominee for director and each Rally's director who will become a
Checkers director after the merger;
/bullet/ each person who qualifies as a "named executive officer" as
defined in Item 402(a)(3) of Regulation S-K under the Exchange
Act;
/bullet/ all of the current directors and executive officers of Checkers as
a group; and
/bullet/ each person known to Checkers as having beneficial ownership of
more than 5% of Checkers common stock.
NUMBER OF
SHARES
BENEFICIALLY PERCENT OF
NAME OWNED (1) CLASS (2)
- -------------------------------------------- ------------- ----------
William P. Foley, II ....................... 1,401,500(3) 1.9%
James J. Gillespie ......................... -- *
Harvey Fattig .............................. 98,000(4) *
Joseph N. Stein ............................ 318,000(5) *
James T. Holder ............................ 227,500(4) *
Richard A. Peabody ......................... 62,333(6) *
Richard E. Fortman ......................... -- --
Terry N. Christensen ....................... 546,800(4) *
Clarence V. McKee .......................... 549,200(4) *
Peter O'Hara ............................... 145,000(7) *
Burt Sugarman .............................. 1,257,050(8) 1.7%
Willie D. Davis ............................ -- --
David Gotterer ............................. -- --
Ronald B. Maggard .......................... -- --
Andrew Puzder .............................. -- --
C. Thomas Thompson ......................... 733,290(9) *
All current Directors and executive officers
as a group (11 persons) ................... 5,338,673(10) 7.3%
Rally's Hamburgers, Inc. ................... 19,130,930 26.1%
14255 49th Street North
Building I
Clearwater, Florida 33762
CKE Restaurants, Inc. ...................... 7,350,428(11) 10.0%
401 W. Carl Karcher Way
Anaheim, CA 92801
- ----------------
* Less than 1%
(1) Based upon information furnished to Checkers by the named persons and
information contained in filings with the Securities and Exchange
Commission. Under the rules of the Commission, a
20
<PAGE>
person is deemed to beneficially own shares over which the person has or
shares voting or investment power or which the person has the right to
acquire beneficial ownership within 60 days. Unless otherwise indicated,
the named persons have sole voting and investment power with respect to
their shares.
(2) Based on 73,408,047 Checkers common shares outstanding as of May 12, 1999.
Shares subject to options or warrants exercisable within 60 days are
deemed outstanding for computing the percentage of class of the persons
holding options or warrants but are not deemed outstanding for computing
the percentage of class for any other person.
(3) Includes 1,401,500 shares subject to options and warrants. Excludes
2,108,262 shares subject to warrants held by Fidelity National Financial,
Inc. and 7,350,428 shares subject to warrants held by CKE, as to which Mr.
Foley disclaims beneficial ownership. Mr. Foley is the Chairman of the
Board and Chief Executive Officer of CKE and Fidelity.
(4) Represents shares underlying options.
(5) Includes 298,000 shares subject to options. Mr. Stein resigned as an
officer of Checkers and Rally's effective April 8, 1999.
(6) Includes 51,333 shares subject to options.
(7) Includes 120,000 shares subject to options. Excludes 2,000 shares held by
Mr. O'Hara's mother, as to which he disclaims beneficial ownership.
(8) Includes 1,257,050 shares subject to options and warrants. Excludes
2,849,002 shares subject to warrants held by KCC Delaware Company, a
wholly owned subsidiary of GIANT, of which Mr. Sugarman is Chairman of the
Board, President and Chief Executive Officer, as to which Mr. Sugarman
disclaims beneficial ownership.
(9) Includes 733,290 shares subject to options and warrants.
(10) Includes 5,068,583 shares subject to options and warrants.
(11) Includes 7,350,428 shares subject to warrants.
21
<PAGE>
THE MERGER
GENERAL
This joint proxy statement/prospectus is being furnished to stockholders
of Rally's and Checkers in connection with the solicitation of proxies by the
Rally's and Checkers boards from holders of their common stock for use at the
stockholders meetings to be held on July 29, 1999. This joint proxy
statement/prospectus also constitutes a prospectus of Checkers, which is a part
of the registration statement on form S-4 filed by Checkers with the Securities
and Exchange Commission under the Securities Act of 1933 in order to register
the shares of Checkers common stock to be issued in the merger.
In the merger, other than shares held by Checkers or in Rally's treasury
or by any wholly owned subsidiary of Rally's or Checkers, each share of Rally's
common stock issued and outstanding immediately prior to the effective time of
the merger, will be converted, without any action on the part of the holder,
into 1.99 Checkers common shares. Cash will be paid in lieu of fractional
shares.
BACKGROUND OF THE MERGER
In April 1996, CKE Restaurants, Inc. and Fidelity National Financial, Inc.
acquired a total of 3,118,239 Rally's common shares, and options to buy a total
of 2,350,428 additional shares, from GIANT GROUP, LTD., which at the time
beneficially owned 47.6% of Rally's common stock and was Rally's largest
stockholder. By December 1996, all of the options acquired by CKE and Fidelity
had been exercised. In March 1996, as a part of the arrangement between GIANT,
on the one hand, and CKE and Fidelity, on the other hand, William P. Foley, II,
chairman of the board of CKE and Fidelity, and C. Thomas Thompson, chief
executive officer of CKE, were elected directors of Rally's, and in October
1997, Mr. Foley became the chairman of the board of Rally's. In November 1996,
a group of investors, including CKE, Fidelity, a subsidiary of GIANT, Messrs.
Foley and Thompson and Burt Sugarman, chairman of the board, president and
chief executive officer of GIANT, entered into an amended and restated credit
agreement with Checkers, as a result of which Checkers, among other things,
issued to the various investors warrants to purchase a total of 20 million
Checkers common shares. The warrants are exercisable through November 22, 2002
at $.75 per share. Terry N. Christensen, a director of GIANT and Rally's, and
Messrs. Foley and Thompson were elected as directors of Checkers. In June 1997,
Mr. Sugarman was also elected as a director of Checkers.
Currently, Rally's owns 19,130,930 Checkers common shares, approximately
26% of the total outstanding shares. Rally's acquired most of these shares, in
exchange for the issuance of a total of 8,476,036 Rally's common shares, in
December 1997 from CKE, Fidelity and various other Checkers stockholders,
including Terry N. Christensen, William P. Foley, II, David Gotterer, Andrew
Puzder, Burt Sugarman and C. Thomas Thompson, all of whom serve on the Rally's
board and/or the Checkers board. Most of the Checkers
22
<PAGE>
common stock acquired by Rally's was originally issued in February 1997 as part
of a $19.5 million private placement by Checkers. In December 1998, Fidelity
transferred its holdings in Rally's to Santa Barbara Restaurant Group, Inc. in
exchange for 2,478,000 shares of Santa Barbara Restaurant Group's common stock,
as a result of which Fidelity beneficially owns 7,187,765 shares, including
warrants to purchase 2,470,000 shares, or approximately 40.7% of the
outstanding Santa Barbara Restaurant Group's common stock. Mr. Foley is the
chairman, Mr. Puzder is the chief executive officer and a director, and Mr.
Sugarman is a director, of Santa Barbara Restaurant Group.
The businesses of Rally's and Checkers are highly complementary. They
offer similar products in similar restaurant formats. Checkers' and Rally's
systems and volumes are of similar size, and for the most part, their areas of
operations do not overlap, with Checkers being concentrated in the Southeast
and Rally's being concentrated in the Midwest and the Sunbelt. Since early
1997, when ownership of the two companies began to overlap, and particularly
since December 1997, when Rally's became the largest stockholder of Checkers,
Checkers and Rally's have increasingly sought to increase their operating
efficiencies through integrating management and operations. Effective November
1997, Rally's and Checkers entered into a management services agreement under
which Checkers provides key services to Rally's including executive management,
financial planning and accounting, franchise, purchasing and human resources.
Checkers and Rally's share executive officers, including the chief executive
officer and chief operating officer, and share a common corporate headquarters.
Over the course of many years, including periods during which Rally's and
Checkers were under wholly separate ownership and management, they have from
time to time explored possible business combinations.
In March 1997, the Checkers board approached Mr. Sugarman, in his capacity
as chairman of the board of Rally's, and advised him that Checkers had an
interest in a potential business combination with Rally's. On March 25, 1997,
Rally's and Checkers announced the execution of a letter of intent with respect
to the proposed merger. The board of each company established a special
committee to review the proposal and each board and their special committee
held a number of meetings to consider the proposal during the period from March
through June 1997. A key term of the proposed transaction was the requirement
that the transaction be accounted for as a pooling of interests for the reasons
described below. In June 1997, when it became apparent that pooling treatment
would not be assured, Rally's and Checkers discontinued their discussions
regarding a potential transaction.
If combining companies use the purchase, as opposed to the pooling, method
of accounting for a business combination, they are required to amortize any
goodwill which results from the combination. Goodwill will result if the value
of the transaction exceeds the value of the net assets of the acquired company.
In the case of a stock for stock merger of two publicly traded companies, the
value of the transaction is determined by the market
23
<PAGE>
price of the stock being acquired. Due to the value of the proposed transaction
in 1997, the amortization expense we would have been required to record would
have significantly offset the projected savings we expected to achieve as a
result of the transaction. However, the value of the merger now proposed
between Checkers and Rally's is substantially less than in 1997 since the
market price of the stock of Checkers and Rally's has declined. Therefore, the
goodwill associated with our merger is much less than in 1997, and we will have
significantly less amortization expense as a result.
Checkers and Rally's continued the process of seeking to strengthen and
streamline their operations and effect operating efficiencies through
integration of various management and procurement functions. As described
above, these efforts culminated in late 1997 with the entry into the management
services agreement, at which time Checkers began to provide key services to
Rally's, and the exchange transaction, as a result of which Rally's became
Checkers' largest stockholder.
Following GIANT's determination in late 1997 to terminate its ocean-going
yacht co-ownership program, GIANT actively explored various acquisition
opportunities in order to make more effective use of its approximately $50
million in net tangible assets, especially since the market price for GIANT
common stock was significantly below its book value. In August 1998, in
conversations between Mr. Sugarman and Mr. Foley, the possibility of a business
combination between Rally's and GIANT was raised. The basic idea was that the
infusion of GIANT's cash and other resources into Rally's would significantly
strengthen Rally's balance sheet and its ability to implement its business
plan. Since GIANT's stockholders would become direct stockholders in Rally's,
they would have the opportunity to participate in the growth prospects of the
reinvigorated company. In the course of discussions in August 1998, which
principally involved Messrs. Sugarman, Christensen, Foley and Puzder, it was
understood that GIANT common stock would be valued at its book value and that
Rally's common stock would be valued on a basis to be negotiated, but which
would relate to its current and historical trading prices.
Rally's board met on August 26, 1998 to give initial consideration to the
proposal. While Rally's board expressed significant interest in pursuing such a
transaction, no decision or recommendation was reached at that time, but
Rally's was directed to continue discussions with GIANT to explore whether or
not agreement could be reached on an appropriate exchange ratio.
During the next two weeks there were a series of conversations,
principally among Messrs. Sugarman, Foley, Christensen and Puzder, over the
terms of a possible transaction. In the course of such discussions, the
possibility of including a merger with Checkers in the transaction was raised,
and the consensus was that it would be desirable. A three-way merger would
enable Rally's and Checkers to complete their integration and cost saving
efforts, while the infusion of GIANT's liquid assets would strengthen the
combined company's ability to implement the overall business plan for the
combined operations.
In early September 1998 the GIANT board met to discuss the proposed
expanded transaction. The reaction was favorable, and GIANT's directors who
were not also members
24
<PAGE>
of Rally's board or Checkers' board were directed to function as an independent
committee to specially review any proposed transaction.
The Rally's board and Checkers board met separately on September 11, 1998
to consider the proposed transaction. The Rally's board discussed at length the
efficiencies of combining Rally's and Checkers' systems and the increased
strength that the availability of GIANT's resources would bring to the combined
system. Those members of Rally's board who were also members of the GIANT board
excused themselves from the meeting during a portion of the discussion, which
focused on obtaining an appropriate exchange ratio for the transaction with
GIANT. Rally's officers were requested to continue discussions with GIANT and
report back to the Rally's board. At the Checkers board meeting, with the
members who were also members of the GIANT board being excused, the concept of
the transaction was approved, with the Checkers board noting GIANT's resources
would be made available to the combined company.
On September 17, 1998, the boards of Rally's, Checkers and GIANT each met
again, this time specifically to review a proposed non-binding letter of intent
concerning the transaction. Following discussion at each of the meetings in
which, at the Rally's and Checkers meetings, members who were also on the GIANT
board were excused, the letter of intent was approved, subject however to the
results of board meetings to be held the next week by CKE and Fidelity, in
which the transaction would be discussed. Following such meetings, a letter of
intent was executed on September 25, 1998.
Following the execution of the non-binding letter of intent, each board
established an independent committee of directors not affiliated with
management or any of the parties to the proposed merger to independently review
the transaction. In addition, GIANT and Rally's each engaged investment bankers
to analyze the transaction from a financial point of view and all three
companies formalized the designation of their independent directors to
constitute independent committees to review the proposed merger. Drafts of the
proposed merger agreement were prepared and distributed to and commented on by
the various parties.
In October, the parties determined that an acquisition structure in which
GIANT acquired Checkers and Rally's would be preferable from a tax perspective
to one in which Rally's was the acquiring entity and facilitate the listing of
the combined company's common stock on the New York Stock Exchange.
Accordingly, while the relative exchange ratios between GIANT, Checkers and
Rally's common stock contemplated in the letter of intent were preserved, a
merger agreement was prepared to implement the revised structure and the
exchange ratios were accordingly restated to reflect the revised structure.
The letter of intent contemplated a 30-day exclusivity period during which
the parties agreed not to solicit or negotiate any other party with respect to
a business combination. The parties expected that a definitive merger agreement
would be negotiated and executed within that period. After expiration of the
exclusivity period, each party was free to pursue
25
<PAGE>
other opportunities. As negotiations continued into October, it became apparent
that the transaction probably would not be completed by December 31, 1998.
GIANT had, for its own business reasons, entered into the negotiations on the
basis that the transaction could be completed by year end. As a result of the
foregoing after the exclusivity period expired, GIANT, Checkers and Rally's
decided to terminate the proposed three-way merger.
During November, representatives of Rally's and Checkers continued to
discuss a possible combination in conjunction with a reverse stock split and
mortgage refinancing. Independent committees of the Rally's board, Messrs.
Davis and Maggard, and the Checkers board, Messrs. McKee and O'Hara, were
established in December 1998. In an effort to speed the process along in the
event the companies agreed to a merger, in early December, management provided
certain information on the companies to the two top contenders for selection as
financial advisors. In mid-December 1998, the Rally's independent committee had
preliminary meetings with Schroder & Co. Inc., which it retained as its
financial advisor, and Morris, Nichols, Arsht & Tunnell, which it retained as
its legal advisor. Soon after those meetings, Schroders made an introductory
telephone call to representatives of Credit Suisse First Boston. During this
call, the financial advisors discussed potential ranges of an exchange ratio,
with Schroders suggesting a ratio of 2.89 to 2.99 Checkers common shares for
each Rally's common share.
In early January 1999, a new draft merger agreement, based on the earlier
drafts which had been circulated and commented on, in connection with the
earlier GIANT, Rally's and Checkers proposed transactions, providing for the
merger of Rally's into Checkers was distributed to Checkers' and Rally's
management and independent committees, as well as their legal and financial
advisors. In addition, the Checkers independent committee had preliminary
discussions with Credit Suisse First Boston, and Prickett, Jones, Elliott,
Kristol & Schnee, its legal advisor. During the course of several discussions
during January, the independent committees of Checkers and Rally's reviewed the
potential benefits of a combination between Checkers and Rally's with their
financial and legal advisors. Among other things, the committees considered the
potential cost savings that would result from a combined company, the greater
visibility a combined company would have and the possibility that a combined
company could result in an improved capital structure. The committees concluded
that they should pursue further discussions, including negotiating a favorable
exchange ratio.
During January, the independent committees, together with their financial
advisors, engaged in a series of negotiations regarding the exchange ratio and
the terms of the transactions. The first meeting occurred in mid-January. After
discussions between Schroders and Credit Suisse First Boston in which, at the
direction of Checkers' independent committee, Credit Suisse First Boston
discussed with Schroders an exchange ratio below two for one, Schroders, upon
instruction from the Rally's independent committee, proposed a ratio of
approximately 2.2 to one. The financial advisors agreed to meet with the
independent committees to discuss the exchange ratio. About a week later, the
financial advisors met again. Credit Suisse First Boston informed Schroders
that the
26
<PAGE>
Checkers independent committee had authorized a slightly higher ratio, but
still below two for one. Schroders stated that the Rally's independent
committee had agreed to lower its recommended ratio to approximately 2.05 to
one. During the next two days, the parties met twice. Rally's independent
committee, through Schroders, proposed a ratio of 2.02 to one and the Checkers
independent committee, through Credit Suisse First Boston, proposed a ratio
slightly below two for one. On January 22, 1999, the independent committees of
Checkers and Rally's, with the assistance of their legal and financial
advisors, negotiated an exchange ratio of 1.99 Checkers common shares for each
Rally's common share and the other terms of the merger. We believe that the
trading prices of Checkers and Rally's stock have historically been volatile as
a result, in part, of matters unrelated to our financial performance. To
address that concern, and to prevent further fluctuation of our stock prices
which could result from the market's perception of the status of the merger,
the committees decided not to have an exchange ratio which would fluctuate with
our stock prices. However, the committees included a provision in the merger
agreement which provides that either company may terminate the merger if either
board of directors receives another acquisition proposal that the board
determines is superior to the merger.
On January 26, 1999, a revised merger agreement, which incorporated the
comments of the independent committees' legal advisors, was distributed, and on
January 27, 1999, the independent committees of Checkers and Rally's, and their
financial and legal advisors, each met with its board of directors. After
presentations by the legal and financial advisors relating to the terms of the
proposed transaction and a favorable recommendation from their independent
committees, the Checkers board and the Rally's board each unanimously approved
the merger agreement and voted to recommend its adoption and approval by their
stockholders.
CERTAIN EXCHANGED INFORMATION
The management of Checkers and Rally's will typically complete a strategic
planning process that results in a financial forecast of future operations. In
the course of the discussions described in "The Merger--Background of the
Merger" certain of these internal financial forecasts were provided to the
financial advisors.
The Checkers projections included revenues of $157 million, $177 million
and $204 million for fiscal years 1999, 2000 and 2001, respectively. Such
projections included net income (loss) before loss provisions of $2 million, $8
million and $15 million for fiscal years 1999, 2000 and 2001, respectively. The
projections also included earnings before interest, taxes, depreciation and
amortization of $17 million, $23 million and $31 million for fiscal years 1999,
2000 and 2001, respectively.
The Rally's projections included revenues of $158 million, $179 million
and $206 million for fiscal years 1999, 2000 and 2001, respectively. Such
projections included net income before loss provisions and before the expense
associated with Rally's equity investment in Checkers of $3 million, $7 million
and $12 million for fiscal years 1999, 2000 and 2001,
27
<PAGE>
respectively. The projections also included earnings before interest, taxes,
depreciation and amortization of $20 million, $27 million and $35 million for
fiscal years 1999, 2000 and 2001, respectively.
The internal financial forecasts were prepared for internal budgeting and
planning only and not with a view to public disclosure or compliance with
published guidelines of the Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections or
forecasts. While presented with numerical specificity, the forecasts are based
upon a variety of assumptions relating to the business of the respective
companies and inherently subject to significant uncertainties and contingencies
that are beyond the control of the management of Checkers and Rally's. See
"Risk Factors" and "A Warning About Forward Looking Statements." Accordingly,
actual results may differ materially from those forecasted. The inclusion of
the forecasts herein should not be regarded as a representation by Checkers or
Rally's or any other person that such forecasts are or will prove to be
correct. As a matter of course, neither Checkers or Rally's makes public
projections or forecasts of its anticipated financial position or results of
operations. Except to the extent required under the federal securities laws,
neither Checkers or Rally's intends to make publicly available any update or
other revisions to any of the forecasts to reflect circumstances existing after
the respective dates of the preparation of the forecasts.
REASONS FOR THE MERGER; RECOMMENDATION OF EACH COMPANY'S
BOARD OF DIRECTORS
JOINT REASONS FOR THE MERGER
The Checkers board and the Rally's board each believe that the combined
company after the merger will have the potential for greater financial
strength, operational efficiencies, earning power and growth potential than
either Checkers or Rally's would have on its own. The Checkers board and the
Rally's board identified a number of potential benefits of the merger which
they believe could contribute to the success of the combined company and thus
enure to the benefit of stockholders of both companies, including the
following:
/bullet/ The increased market depth and geographic scope of the combined
company after the merger, with approximately 1,000 restaurants
system-wide, may allow the combined company to compete more
effectively with larger quick-service companies.
/bullet/ The compatibility of the Checkers and Rally's concepts and products
may enhance (1) integration of the two systems through, among other
things, conversion of Rally's restaurants into Checkers restaurants in
appropriate markets and vice versa and (2) development of a stronger
brand entity.
/bullet/ The combination of Checkers and Rally's will give us the opportunity
to continue, on a permanent basis, the savings and efficiencies
achieved under the management services agreement through integration
of purchasing, marketing, development and construction
28
<PAGE>
and administrative functions. The management services agreement expires
on November 30, 2004. Without the merger, there is no certainty that
either party will be willing to continue this arrangement.
/bullet/ The expansion of our joint purchasing arrangement with restaurants
owned by or affiliated with CKE, and the reduction of that arrangement
to writing, as provided in the merger agreement, may provide continued
efficiencies and savings and the potential for co-branding
opportunities. Our arrangement with CKE has been informal prior to the
merger, and CKE can end the arrangement at any time. As a condition to
the merger, GIANT, an 11% stockholder of Rally's, requested that the
arrangement with CKE be formalized in a written document in order to
ensure the combined company would be able to take advantage of this
relationship.
/bullet/ The merger and the reverse stock split may cause the price of the
combined company's stock to increase sufficiently to enable it to
continue to be listed on NASDAQ.
RALLY'S
The Rally's board and its independent committee believe that the merger is
fair to, and in the best interests of, Rally's and the Rally's stockholders who
are not affiliated with Checkers or Rally's. Accordingly, the Rally's board and
its independent committee have unanimously approved the merger agreement and
unanimously recommend that the Rally's stockholders vote for the adoption and
approval of the merger agreement and the transactions contemplated thereby,
including the merger.
The Rally's board and its independent committee believe that the
consummation of the merger presents an opportunity to create an integrated and
well capitalized competitor in the quick service restaurant industry, with the
ability to develop strong national brand identities. The Rally's board and its
independent committee believe that the combination of the Rally's and Checkers
systems, with approximately 1000 locations centered in the Southeast, Midwest
and Sunbelt regions of the United States, coupled with the infusion of
approximately $14.3 million of recently completed mortgage refinancing by
Checkers and Rally's, will enable Checkers after the merger to strengthen its
balance sheet, streamline operations and implement a prudent growth strategy
for the system.
In reaching its decision to approve the merger agreement and recommend its
adoption and approval to the Rally's stockholders, the Rally's board and its
independent committee consulted with Rally's management, as well as with its
financial and legal advisors, and considered the positive factors listed below:
/bullet/ The Rally's board reviewed historical information concerning Checkers'
business, prospects, financial performance and condition, management
and competitive position. The Rally's board considered favorably the
fact that Checkers restaurants are generally in markets different from
Rally's restaurants. In addition, the Rally's board considered
favorably the steps Checkers has taken to control costs and to improve
the marketing of its products.
29
<PAGE>
/bullet/ The Rally's board reviewed the consideration to be received by Rally's
stockholders in the merger. The Rally's board considered favorably the
fact that the consideration would not fluctuate even if the price of
Rally's and/or Checkers stock changes given the volatile nature of
those stock prices in recent years.
/bullet/ The Rally's board reviewed the terms of the merger agreement,
including the representations, warranties and covenants and the
conditions to each party's obligation to complete the merger. The
Rally's board considered favorably that the terms of the merger
agreement are reasonable and protective of Rally's interests. In
particular, the Rally's board considered favorably that:
(1) the conditions to each party's obligations to complete the
merger are typical or likely to be satisfied; and
(2) Rally's may terminate the merger agreement if the Rally's
board receives a competing proposal which the Rally's board,
after receiving a recommendation from its independent
committee, determines is more advantageous to the Rally's
stockholders.
/bullet/ The Rally's board reviewed pro forma financial data for Checkers after
giving effect to the merger. The Rally's board considered favorably
the expectation that the combined company might be able to save
$380,000 annually from the elimination of Rally's public company
expenses.
/bullet/ The Rally's board assessed the possibility of being part of a combined
company and the risk of continuing to be an independent company, in
view of the increased competitive trends in the quick-service food
industry. The Rally's board considered favorably that the Rally's
stockholders, as stockholders of the combined company, would share the
benefits resulting from any improved competitive position.
/bullet/ The Rally's board considered the potential conflicts of interest which
result from Rally's ownership of approximately 26% of Checkers common
stock. The Rally's board considered favorably the elimination of those
potential conflicts as a result of the merger.
/bullet/ The Rally's board considered the need to repay or refinance
approximately $56.7 million of Rally's senior notes by June 2000. The
Rally's board considered favorably that the combined company may have
increased access to debt and equity markets as a result of its larger
size, its post-merger balance sheet and prospects and increased
visibility to institutional and other investors.
/bullet/ The Rally's board considered favorably the opinion of Schroder & Co.
Inc., including the related financial analyses, to the effect that, as
of the date of the opinion and based upon and subject to the matters
stated in the opinion, the exchange ratio was fair, from a financial
point of view, to stockholders. A copy of the Schroder opinion is
attached as
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Appendix B to this joint proxy statement/prospectus and is described below
under "--Opinions of Financial Advisors-Rally's."
/bullet/ The Rally's board considered the ability of Checkers and Rally's to
complete the merger, including their ability to obtain necessary
regulatory approvals and their obligations to attempt to obtain those
approvals, and determined that there was a strong likelihood that the
merger would be completed.
/bullet/ The Rally's board considered the efforts of the independent committee
and its financial advisors to negotiate an exchange ratio most
favorable to the stockholders of Rally's who are not affiliated with
Rally's or Checkers.
/bullet/ The Rally's board received reports from management as to the results
of the due diligence investigation of Checkers and determined that
these reports did not contain issues that would preclude its approval
of the merger.
The Rally's board also considered and reviewed with management the
potentially negative factors listed below relating to the merger.
/bullet/ The Rally's board considered the risk that the additional synergies
and benefits sought in the merger would not be fully achieved, which
might have the effect of adversely affecting the market value of
Checkers common stock received in the merger.
/bullet/ The Rally's board considered the risk that the merger and the reverse
stock split will not result in a sufficient increase in the trading
price of Checkers common stock to prevent it from being delisted from
NASDAQ.
/bullet/ The Rally's board considered the risk that the price for Checkers
stock would decrease or the price for Rally's stock would increase
significantly prior to completion of the merger.
/bullet/ The Rally's board considered the risk that the combined company would
be unable to repay or refinance approximately $17.4 million of
Checkers' debt.
/bullet/ The Rally's board considered the risk that the announcement of the
merger and the efforts necessary to complete the merger could result
in a disruption in the operations of Rally's by, among other things,
diverting management and other resources of Rally's from its day to
day business.
/bullet/ The Rally's board considered the interests of executive officers and
directors in the merger, including the fact that the executive
officers and five members of the Rally's board are executives and/or
directors of Checkers and certain Rally's directors are creditors of
Checkers.
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/bullet/ The Rally's board considered the risk that the merger would not be
completed. In evaluating this risk, the Rally's board considered the
circumstances under which Checkers could terminate the merger
agreement.
The Rally's board considered that following the merger and the
reconstitution of Checkers as a substantially larger enterprise in the
quick-service restaurant industry, there was potential for substantial long
term appreciation for Checkers common stock.
The above discussion of the information and factors considered by the
Rally's board is not intended to be exhaustive, but includes the material
factors considered by the Rally's board. In reaching its determination to
approve and recommend the merger, the Rally's board did not assign any relative
or specific weights to the foregoing factors, and individual directors may have
given differing weights to different factors. The Rally's board is unanimous in
their recommendation that Rally's stockholders vote for adoption and approval
of the merger agreement. For a discussion of the interests of the executives
and directors of Rally's in the merger, see "--Interests of Certain Persons in
the Merger" on page 57.
The Rally's board and its independent committee have determined that the
merger is advisable and in the best interests of Rally's and its stockholders
who are not affiliated with Checkers or Rally's and recommend a vote for
adoption and approval of the merger agreement.
CHECKERS
The Checkers board and its independent committee believe that the merger
is fair to, and in the best interests of, Checkers and the Checkers
stockholders. Accordingly, the Checkers board and its independent committee
have unanimously approved the merger agreement and unanimously recommend that
the Checkers stockholders vote for the adoption and approval of the merger
agreement and the transactions contemplated thereby, including the merger.
The Checkers board and its independent committee believe that the
consummation of the merger presents an opportunity to create an integrated and
well capitalized competitor in the quick service restaurant industry, with the
ability to develop a strong national brand identity. The Checkers board and its
independent committee believe that the combination of the Checkers and Rally's
systems, with approximately 1000 locations centered in the Southeast, Midwest
and Sunbelt regions of the United States, coupled with the $14.3 million of
recently completed mortgage refinancing and the availability of up to forty
Rally's fee-owned properties that could be utilized for a potential
sale-leaseback of approximately $12 million, will enable Checkers to strengthen
its balance sheet, streamline operations and implement a prudent growth
strategy for the system.
In reaching its decision to approve the merger agreement and recommend its
adoption and approval to the Checkers stockholders, the Checkers board and its
independent
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committee consulted with Checkers management, as well as with its financial and
legal advisors, and considered the positive factors, listed below:
/bullet/ The Checkers board reviewed historical information concerning Rally's
business, prospects, financial performance and condition, management
and competitive position. The Checkers board considered favorably the
fact that Rally's restaurants are generally in markets different from
Checkers restaurants. In addition, the Checkers board considered
favorably the steps Rally's has taken to control costs and to improve
the marketing of its products.
/bullet/ The Checkers board reviewed the terms of the merger agreement,
including the representations, warranties and covenants and the
conditions to each party's obligation to complete the merger. The
Checkers board considered favorably that the terms of the merger
agreement are reasonable and protective of Checkers' interests. In
particular, the Checkers board considered favorably that:
(1) the conditions to each party's obligations to complete the
merger are typical or likely to be satisfied; and
(2) Checkers may terminate the merger agreement if the Checkers
board receives a competing proposal which the Checkers board,
after receiving a recommendation from its independent
committee, determines is more advantageous to the Checkers
stockholders.
/bullet/ The Checkers board reviewed pro forma financial data for Checkers
after giving effect to the merger. The Checkers board considered
favorably the expectation that the combined company might be able to
save $380,000 annually from the elimination of Rally's public company
expenses.
/bullet/ The Checkers board assessed the possibility of being part of a
combined company and the risk of continuing to be an independent
company, in view of the increased competitive trends in the
quick-service food industry. The Checkers board considered favorably
that the Checkers stockholders, as stockholders of the combined
company, would share the benefits resulting from any improved
competitive position.
/bullet/ The Checkers board considered the need to repay or refinance
approximately $17.4 million of Checkers indebtedness by April 2000.
The Checkers board considered favorably that the combined company may
have increased access to debt and equity markets as a result of its
larger size, its post-merger balance sheet and prospects and increased
visibility to institutional and other investors.
/bullet/ The Checkers board considered favorably the opinion of Credit Suisse
First Boston, including the related financial analyses, to the effect
that, as of the date of the opinion and based upon and subject to the
matters stated in the opinion, the exchange ratio was
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fair, from a financial point of view, to Checkers. Credit Suisse First
Boston performed a variety of financial analyses to reach this
conclusion and this information was set forth in the written material
that was delivered to the board members. The board noted that while the
adjusted management case II in the discounted cash flow and the
selected companies analyses generated exchange ratio ranges below the
1.99 merger exchange ratio, the majority of the analyses performed by
Credit Suisse First Boston generally supported the fairness of the
exchange ratio from a financial point of view. The board determined
that the totality of the analyses performed supported the conclusion of
Credit Suisse First Boston that the exchange ratio was fair from a
financial point of view. A copy of the Credit Suisse First Boston
opinion is attached as Appendix C to this joint proxy
statement/prospectus and is described below under "--Opinions of
Financial Advisors-Checkers."
/bullet/ The Checkers board considered the ability of Checkers and Rally's to
complete the merger, including their ability to obtain necessary
regulatory approvals and their obligations to attempt to obtain those
approvals, and determined that there was a strong likelihood that the
merger would be completed.
/bullet/ The Checkers board received reports from management as to the results
of the due diligence investigation of Rally's and determined that
these reports did not contain issues that would preclude its approval
of the merger.
/bullet/ The Checkers board considered the efforts of the independent committee
and its financial advisors to negotiate an exchange ratio most
favorable to Checkers.
The Checkers board also considered and reviewed with management the
potentially negative factors listed below relating to the merger.
/bullet/ The Checkers board considered the risk that Checkers may not be able
to successfully integrate the operation of the two companies and that
the anticipated benefits of the merger, including additional cost
savings and operating synergies may not be fully achieved, which might
have the effect of adversely affecting the market value of Checkers
common stock received in the merger.
/bullet/ The Checkers board considered the risk that the price for Checkers
stock would increase or the price for Rally's stock would decrease
significantly prior to completion of the merger.
/bullet/ The Checkers board considered the risk that the announcement of the
merger and the efforts necessary to complete the merger could result
in a disruption in the operations of Checkers by, among other things,
diverting management and other resources of Checkers from its day to
day business.
/bullet/ The Checkers board considered the risk that the combined company would
be unable to repay or refinance approximately $56.7 million of Rally's
senior notes.
/bullet/ The Checkers board considered the interests of executive officers and
directors in the merger, including the fact that the executive
officers and five members of the Rally's board are executives and/or
directors of Checkers and certain Checkers directors are creditors of
Checkers.
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/bullet/ The Checkers board considered the risk that the merger would not be
completed. In evaluating this risk, the Checkers board considered the
circumstances under which Rally's could terminate the merger
agreement.
/bullet/ The Checkers board considered that the combined company was likely to
incur transaction costs of approximately $1.5 million, including
investment banking, legal and accounting fees.
The Checkers board considered that following the merger and the
reconstitution of Checkers as a substantially larger enterprise in the quick
service restaurant industry, there was potential for substantial long term
appreciation for Checkers common stock.
The above discussion of the information and factors considered by the
Checkers board and its independent committee is not intended to be exhaustive,
but includes the material factors considered by the Checkers board. In reaching
its determination to approve and recommend the merger, the Checkers board and
its independent committee did not assign any relative or specific weights to
the foregoing factors, and individual directors may have given differing
weights to different factors. In addition, the Checkers board and its
independent committee did not undertake to make any specific determination as
to whether any particular factor (or any aspect of any particular factor) was
favorable or unfavorable to its ultimate determination, but rather reached a
general consensus, based on the totality of the factors described above, that
the merger was in the best interest of Checkers and its shareholders. The
Checkers board and its independent committee are unanimous in their
recommendation that Checkers stockholders vote for adoption and approval of the
merger agreement. For a discussion of the interests of the executives and
directors of Checkers in the merger, see "--Interests of Certain Persons in the
Merger" on page 57.
The Checkers board and its independent committee have determined that the
merger is advisable and in the best interests of Checkers and its stockholders
and recommend a vote for adoption and approval of the merger agreement.
OPINIONS OF FINANCIAL ADVISORS
RALLY'S
The independent committee of the Rally's board of directors engaged
Schroder & Co. Inc. to act as its financial advisor in connection with the
negotiation by the independent committee of the financial terms of a proposed
stock-for-stock merger of Rally's and Checkers and to undertake an analysis to
render an opinion to the independent committee, as investment bankers, as to
whether or not the exchange ratio used in the merger is fair, from a financial
point of view, to the stockholders of Rally's who are not affiliated with
Checkers or Rally's. As part of its investment banking activities, Schroders is
regularly engaged in the valuation of businesses and their securities in
connection with merger transactions and other types of acquisitions, negotiated
underwritings, secondary
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distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The independent committee selected
Schroders as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in transactions similar
to the merger.
At the January 27, 1999 meeting of the independent committee, Schroders
delivered its oral opinion, and subsequently confirmed in writing as of that
date, that the exchange ratio is fair, from a financial point of view, to the
stockholders of Rally's who are not affiliated with Checkers or Rally's.
The full text of the opinion of Schroders, which sets forth the
assumptions made, matters considered and limitations of review by Schroders, is
attached as Appendix B to this joint proxy statement/prospectus. Stockholders
of Rally's are urged to read the entire opinion of Schroders carefully. The
opinion of Schroders does not constitute a recommendation to any stockholder of
Rally's as to how the stockholder should vote at the special meeting.
In arriving at its opinion, Schroders, among other things:
1. reviewed Rally's: (a) Annual Report on Form 10-K for the fiscal year
ended December 28, 1997; (b) Quarterly Reports on Form 10-Q for the
quarters ended March 22, 1998, June 14, 1998 and September 6, 1998;
(c) proxy statement dated June 11, 1998; (d) reports on Form 8-K dated
May 8, 1998, September 25, 1998 and November 2, 1998; and (e) Form S-3
filed June 3, 1998, as amended on August 25, 1998;
2. reviewed Checkers': (a) Annual Report on Form 10-K for the fiscal year
ended December 29, 1997; (b) Quarterly Reports on Form 10-Q for the
quarters ended March 23, 1998, June 15, 1998 and September 7, 1998;
(c) proxy statement dated June 11, 1998; (d) reports on Form 8-K dated
September 25, 1998 and November 2, 1998; and (e) Form S-3 filed June
2, 1998, as amended on August 21, 1998;
3. reviewed the most recently available, as of January 21, 1999,
projected financial information of Rally's, Checkers and the combined
company as prepared by management of Rally's;
4. conducted discussions with the senior management of Rally's and
Checkers concerning the merger, their historical financial results and
projected financial information as presented and described in 1.
through 3. above;
5. performed various financial analyses, as Schroders deemed appropriate,
of Rally's, Checkers and the combined company using generally accepted
analytical methodologies, including: (a) the application to the
financial results of the public trading multiples of companies which
Schroders deemed comparable; (b) the application to the financial
results of the multiples reflected in recent mergers and acquisitions
for businesses which Schroders deemed comparable; and (c) discounted
cash flow analyses utilizing the projections referred to in paragraph
3. above;
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6. reviewed the historical trading prices and volumes of Rally's common
stock and Checkers common stock on the NASDAQ National Market from
January 1, 1996 to January 22, 1999;
7. reviewed the draft merger agreement as distributed on January 26,
1999; and
8. performed such other financial studies, analyses, inquiries and
investigations as Schroders deemed appropriate.
In its review and analysis and in formulating its opinion, Schroders
assumed and relied upon the accuracy and completeness of all information
supplied or otherwise made available to it by Rally's or obtained by it from
other sources, and upon the assurance of Rally's management that they are not
aware of any information or facts that would make the information provided to
Schroders incomplete or misleading. Schroders did not independently verify such
information. Schroders did not undertake an independent appraisal of the assets
or liabilities, contingent or otherwise, of Rally's nor was it furnished with
any such appraisals. With respect to financial forecasts and projections
referred to in clause 3. above, Schroders was advised by Rally's, and Schroders
assumed, without independent investigation, that they were reasonably prepared
and reflected the best currently available estimates and judgments of the
management of Rally's as to the expected future financial performance of
Rally's and of Checkers. In addition, Schroders relied on the conclusions of
Rally's management and advice provided by its legal counsel Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, that the merger does not
constitute a change of control with respect to Rally's outstanding senior notes
due 2000.
Schroders noted that its opinion was necessarily based upon financial,
economic, market and other conditions as they existed, and the information made
available to Schroders, as of January 22, 1999. Schroders disclaimed any
undertaking or obligation to advise any person of any change in any fact or
matter affecting its opinion that may come or be brought to its attention after
the date of such opinion.
Set forth below is a brief summary of selected analyses presented by
Schroders to the Rally's independent committee on January 27, 1999 in
connection with the Schroders opinion. The following table summarizes all
analyses that Schroders judged to be material and the resulting exchange
ratios.
METHODOLOGIES EXCHANGE RATIO
- ----------------------------------------- ---------------
Historical Stock Prices:
One Month ........................... 1.702
Three Month ......................... 1.740
Six Month ........................... 1.668
Twelve Month......................... 1.943
EBITDA Multiple:
1998 ................................ 1.410
1999 ................................ 2.779
Net Cash Flow Multiple:
1998 ................................ 2.212
1999 ................................ 3.024
Discounted Cash Flow .................. 2.973
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Generally, each of these methodologies is an indicator of the proportion
of value that Rally's contributes to the combined company. For all of these
methodologies, a result less than the actual transaction exchange ratio of 1.99
supports the conclusion that the exchange ratio is fair, and a result greater
than 1.99 does not support the conclusion that the exchange ratio is fair. As
shown in the table, the exchange ratios implied by historical trading activity
are all below the 1.99 ratio in the merger agreement, as is the ratio implied
by 1998 EBITDA multiple analysis. In contrast, the exchange ratios implied by
projected 1999 EBITDA multiple analysis, the net cash flow multiple analysis
and the discounted cash flow analysis are all above the 1.99 ratio. While
Schroders considered all these analyses in examining the fairness of the 1.99
ratio, they chose to place relatively greater weight on the exchange ratios
implied by actual historical results due to the uncertainty inherent in these
projections. In addition, Schroders placed greater weight on the EBITDA
multiple analysis than the net cash flow multiple analysis because net cash
flow is not a traditional valuation methodology.
HISTORICAL STOCK PRICES. Schroders analyzed the historical trading prices
and volumes of Rally's common stock and Checkers common stock on the NASDAQ
National Market from January 1, 1996 to January 22, 1999. Based on the closing
prices of the stocks on January 22, 1999, the exchange ratio was 1.652 shares
of Checkers per share of Rally's. The exchange ratios implied by the average
closing prices over one, three, six and twelve months were each below the ratio
of 1.99 in the merger agreement and ranged from 1.668 to 1.943. Schroders also
examined the trading volumes of both stocks. The trading volumes of both stocks
during these periods were low, which can result in stock price volatility. In
short, low trading volumes can result in stock price volatility because as the
number of trades decreases the price variance or dispersion may increase. As an
example, if only two investors trade in a stock on a given day, they may have
very different opinions regarding the value of the stock and, as such, will be
willing to pay different prices for the stock. Their willingness to pay
different prices for the same stock, based upon their own information and
valuation, can cause the stock price to fluctuate dramatically. As the number
of investors and trades increase, so does the amount of information concerning
the stock, and the stock price will more accurately reflect its value.
Therefore, Schroders did not rely on the relative stock prices on any one
particular day, but rather examined their average relationship over time.
Therefore, the results of this methodology support the conclusion that the
exchange ratio is fair.
EBITDA MULTIPLE ANALYSIS. Schroders applied a multiple to the 1998 and
1999 earnings before interest, taxes, depreciation and amortization, "EBITDA,"
of the two companies in order to reach an adjusted market value (that is,
equity value plus debt less cash). These adjusted market values were then
reduced by net debt and adjusted for the 26.1% stake of Checkers held by
Rally's in order to determine the equity value per share of each company, which
was then used to calculate the implied exchange ratio. Schroders determined
that it was appropriate to apply the same multiple to both Rally's and Checkers
as a result of their similar operating concepts and financial performance. The
EBITDA multiples used were determined by taking an approximate 20% discount to
the average
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1998 and 1999 EBITDA multiples of a group of five comparable public restaurant
companies that included: Wendy's International, Inc.; Sonic Corporation;
Foodmaker, Inc.; Tricon Global Restaurants, Inc.; and CKE Restaurants, Inc.
Applying a multiple of 6.5x EBITDA to both companies results in an
exchange ratio of 1.410, while applying a multiple of 6.0x 1999 EBITDA to both
companies results in an exchange ratio of 2.779. These EBITDA multiples were
based on the actual EBITDA multiples of comparable companies as described
above. The 1999 EBITDA multiple for Rally's and Checkers is lower than the 1998
multiple because the average 1999 EBITDA multiple of the comparable companies
is lower than the average 1998 multiple for those companies. This would occur
if 1999 EBITDA is higher than 1998 EBITDA because the same enterprise value is
used to calculate both multiples. The implied exchange ratio of 1.410 based on
1998 EBITDA supports the conclusion that the actual exchange ratio of 1.99 is
fair. Although the implied exchange ratio of 2.779 based on 1999 EBITDA does
not support the conclusion that the actual exchange ratio of 1.99 is fair, as
discussed previously, Schroders placed less emphasis on results based on
projected financial results due to the uncertainty inherent in such
projections.
NET CASH FLOW MULTIPLE ANALYSIS. Schroders applied a multiple of 1998 and
1999 net cash flow, defined as net income plus depreciation and amortization,
of the two companies in order to reach an equity value. The equity values were
then adjusted for the 26.1% stake of Checkers held by Rally's in order to
determine the equity value per share of each company, which was then used to
calculate the implied exchange ratio. Schroders determined that it was
appropriate to apply the same multiple to both Rally's and Checkers as a result
of their similar operating concepts and financial performance. The multiples
were determined by taking an approximate 20% discount to the average 1998 and
1999 net cash flow multiples of the same group of five comparable public
restaurant companies listed above.
Applying a multiple of 7.5x 1998 net cash flow to both companies results
in an exchange ratio of 2.212, while applying a multiple of 7.0x 1999 net cash
flow to both companies results in an exchange ratio of 3.024. Since the implied
exchange ratios resulting from this methodology are greater than 1.99, they do
not support the conclusion that the exchange ratio is fair. However, net cash
flow is not a traditional valuation methodology, but was used here because both
Rally's and Checkers generate negative net income, making price/earnings
multiples not applicable. As a result, Schroders chose to place less emphasis
on net cash flow multiple analysis than EBITDA multiple analysis. In addition,
Rally's has significantly more leverage than Checkers, which causes comparable
operating performance to yield lower net cash flow.
Schroders noted that the comparable public restaurant companies used in
the EBITDA multiple analysis and the net cash flow multiple analysis varied
significantly in several areas, including but not limited to
/bullet/ size,
/bullet/ geographic diversity,
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/bullet/ status as a single or multi-concept restaurant operator,
/bullet/ market capitalization,
/bullet/ financial leverage and
/bullet/ historical growth record. No adjustments were made to the
comparable company analysis to reflect any of these factors.
However, Schroders' analysis of these and other financial criteria
indicates that Rally's and Checkers should be valued below the
average of their comparables. The 20% discount was a qualitative
attempt to adjust the valuation multiples for the differences
between Rally's, Checkers and the comparable group.
No company used in either the EBITDA multiple analysis or net cash flow
multiplier analysis as a comparison is identical to Rally's or Checkers.
Accordingly, an analysis of the results of the foregoing involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which Rally's and Checkers are being
compared. Mathematical analysis (such as determining an average or a range) is
not, in itself, a meaningful method of using comparable company data.
DISCOUNTED CASH FLOW ANALYSIS. Schroders applied a discounted cash flow
analysis to the financial cash flow forecasts for Rally's and Checkers for
calendar years 1999 to 2003. Using this information, Schroders calculated the
net present value of free cash flows each company could generate through 2003
using discount rates of 11%, 12% and 13%. Schroders' estimate of the
appropriate discount rate was based on the weighted average cost of capital of
comparable restaurant companies. Schroders also calculated the terminal value
of the two companies in the year 2003 based on exit multiples of 2003 EBITDA
ranging from 5.0x to 7.0x and discounted these terminal values using discount
rates of 11%, 12% and 13%. This analysis indicated a range of implied exchange
ratios from 2.85 to 3.06. This implied range does not support the conclusion
that the actual exchange ratio of 1.99 is fair because the implied range is
higher than 1.99. However, Schroders chose to place less weight on this
analysis as a result of the uncertainty inherent in any projections, especially
those that extend far into the future such as these.
Inherent in any discounted cash flow valuation are the use of a number of
assumptions, including the accuracy of projections, and the subjective
determination of an appropriate terminal value and discount rate to apply to
the projected cash flows of the entity under examination. Variations in any of
those assumptions or judgments could significantly alter the results of a
discounted cash flow analysis.
The summary set forth above does not purport to be a complete description
of the presentation by Schroders to the Rally's independent committee or the
analyses performed by Schroders. The preparation of a fairness opinion
necessarily is not susceptible to partial analysis or summary description.
Schroders believes that such analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses and of the
factors considered, without considering all such analyses and factors, would
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create an incomplete view of the analyses set forth in its presentation to the
independent committee. In addition, Schroders may have given various analyses
more or less weight than other analyses, and may have deemed various
assumptions more or less weight than other assumptions, so that the range of
exchange ratios resulting from any particular analysis described above should
not be taken to represent Schroders' view of the actual value of Rally's.
In performing its analyses, Schroders made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Rally's. The analyses
performed by Schroders are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as part of
Schroders' analysis of the fairness, from a financial point of view, of the
exchange ratio, to the stockholders of Rally's who are not affiliated with
either Checkers or Rally's and were provided to the independent committee in
connection with the delivery of the Schroders opinion. The analyses do not
purport to be appraisals or to reflect the prices at which a company might
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future. Schroders used in its analyses various
projections of future performance prepared by the management of Rally's. The
projections are based on numerous variables and assumptions which are
inherently unpredictable. Accordingly, actual results could vary significantly
from those set forth in such projections.
As described above, the Schroders opinion and presentation to the
independent committee were among the many factors taken into consideration by
Rally's board of directors in making its determination to approve, and to
recommend that its stockholders adopt and approve the merger.
MISCELLANEOUS. Pursuant to Rally's independent committee's engagement of
Schroders, Rally's has agreed to pay Schroders a fee of $200,000 following the
delivery of the Schroders opinion. Rally's has also agreed to reimburse
Schroders for its reasonable out-of-pocket expenses. Pursuant to a separate
letter agreement, Rally's has agreed to indemnify Schroders, its affiliates,
and their respective partners, directors, officers, agents, consultants,
employees and controlling persons against certain liabilities, including
liabilities under the federal securities laws.
Schroders provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, including derivative securities,
of Rally's or Checkers for its own account and for the accounts of its
customers. Schroders has in the past provided and may in the future provide
investment banking services for affiliates of Rally's for which it has received
and may in the future receive customary compensation.
CHECKERS
Credit Suisse First Boston Corporation has acted as financial advisor to
the independent committee of the Checkers board in connection with the merger.
Credit Suisse
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First Boston was selected by the independent committee based on the firm's
experience, expertise and familiarity with Checkers and its business. Credit
Suisse First Boston is an internationally recognized investment banking firm
and is regularly engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
In connection with Credit Suisse First Boston's engagement, the
independent committee of the Checkers board requested that Credit Suisse First
Boston evaluate the fairness, from a financial point of view, to Checkers of
the exchange ratio in the merger. On January 27, 1999, Credit Suisse First
Boston rendered to the independent committee an oral opinion, subsequently
confirmed by delivery of a written opinion dated January 28, 1999, the date of
the merger agreement, to the effect that, as of the date of the opinion and
based upon and subject to the matters stated in the opinion, the exchange ratio
was fair to Checkers from a financial point of view.
The full text of Credit Suisse First Boston's written opinion dated
January 28, 1999 to the independent committee of the Checkers board, which
describes the procedures followed, assumptions made, matters considered and
limitations on the review undertaken, is attached as Appendix C to this joint
proxy statement/prospectus and is incorporated herein by reference. Holders of
Checkers common stock are urged to read this opinion carefully in its entirety.
Credit Suisse First Boston's opinion is addressed to the independent committee
and relates only to the fairness of the exchange ratio from a financial point
of view to Checkers, does not address any other aspect of the proposed merger
or any related transaction and does not constitute a recommendation to any
stockholder as to how to vote at the Checkers annual meeting. The summary of
Credit Suisse First Boston's opinion included in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and publicly available business and financial information relating to
Checkers and Rally's. Credit Suisse First Boston also reviewed other
information relating to Checkers and Rally's, including financial forecasts,
provided to or discussed with Credit Suisse First Boston by Checkers and
Rally's, and met with the managements of Checkers and Rally's to discuss the
businesses and prospects of Checkers and Rally's.
Credit Suisse First Boston considered financial and stock market data of
Checkers and Rally's and compared those data with similar data for other
publicly held companies in businesses similar to Checkers and Rally's. In
addition, Credit Suisse First Boston considered, to the extent publicly
available, the financial terms of other business combinations and other
transactions recently effected. Credit Suisse First Boston also considered
other information, financial studies, analyses and investigations and
financial, economic and market criteria which Credit Suisse First Boston deemed
relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the information
provided to or otherwise
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reviewed by Credit Suisse First Boston and relied on the information being
complete and accurate in all material respects. With respect to financial
forecasts, Credit Suisse First Boston was advised, and assumed, that the
forecasts were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of Checkers and Rally's as
to the future financial performance of Checkers and Rally's and the cost
savings and other potential synergies, including the amount, timing and
achievability thereof, anticipated to result from the merger. Credit Suisse
First Boston also assumed, with the consent of the independent committee of the
Checkers board, that (a) the merger will not constitute a "change of control"
under the terms of the Rally's 9-7/8% senior notes due 2000, which assumption is
to be confirmed by an opinion of counsel in form and substance satisfactory to
Credit Suisse First Boston, dated as of the date the merger is completed, (b)
neither Checkers nor Rally's will be required to otherwise repurchase the
Rally's senior notes in connection with the merger and (c) the merger will be
treated as a tax-free reorganization for federal income tax purposes.
Credit Suisse First Boston was not requested to make and did not make an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of Checkers or Rally's, nor was Credit Suisse First Boston furnished
with any evaluations or appraisals. Credit Suisse First Boston's opinion was
necessarily based upon information available to, and financial, economic,
market and other conditions as they existed and could be evaluated by, Credit
Suisse First Boston on the date of its opinion. Credit Suisse First Boston did
not express any opinion as to the actual value of the Checkers common stock
when issued pursuant to the merger or the prices at which the Checkers common
stock will trade subsequent to the merger. Although Credit Suisse First Boston
evaluated the exchange ratio from a financial point of view, Credit Suisse
First Boston was not requested to, and did not, recommend the specific
consideration payable in the merger, which consideration was determined by the
independent committees of Checkers and Rally's. No other limitations were
imposed on Credit Suisse First Boston with respect to the investigations made
or procedures followed by Credit Suisse First Boston in rendering its opinion.
In preparing its opinion to the independent committee of the Checkers
board, Credit Suisse First Boston performed a variety of financial and
comparative analyses, including those described below. The summary of Credit
Suisse First Boston's analyses described below is not a complete description of
the analyses underlying Credit Suisse First Boston's opinion. The preparation
of a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, a fairness opinion is not readily susceptible to summary
description. Credit Suisse First Boston arrived at its ultimate opinion based
on the results of all of the analyses undertaken by it and assessed as a whole.
Credit Suisse First Boston did not draw conclusions from or with regard to any
one factor or method of analysis. Rather, Credit Suisse First Boston believed
that the totality of the factors considered and analyses performed by Credit
Suisse First Boston in connection with its opinion operated collectively
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to support its determination as to the fairness to Checkers of the exchange
ratio in the merger from a financial point of view. Accordingly, Credit Suisse
First Boston believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors or focusing on information
presented in tabular format, without considering all analyses and factors or
narrative description of the analyses, could create a misleading or incomplete
view of the processes underlying its analyses and opinion.
In its analyses, Credit Suisse First Boston considered industry
performance, regulatory, general business, economic, market and financial
conditions and other matters existing as of the date of its opinion, many of
which are beyond the control of Checkers and Rally's. No company, transaction
or business used in its analyses as a comparison is identical to Checkers or
Rally's or the proposed merger, nor is an evaluation of the results of those
analyses entirely mathematical. Rather, Credit Suisse First Boston's analyses
involve complex considerations and judgments concerning financial and operating
characteristics and other factors that could affect the acquisition, public
trading or other values of the companies, business segments or transactions
being analyzed. The estimates contained in Credit Suisse First Boston's
analyses and the ranges of valuations resulting from any particular analysis
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable than those
suggested by its analyses. In addition, analyses relating to the value of
businesses or securities do not purport to be appraisals or to reflect the
prices at which businesses or securities actually may be sold. Accordingly,
Credit Suisse First Boston's analyses and estimates are inherently subject to
substantial uncertainty.
Credit Suisse First Boston's opinion and financial analyses were only one
of many factors considered by the independent committee of the Checkers board
in its evaluation of the proposed merger and should not be viewed as
determinative of the views of the independent committee of the Checkers board
or management of Checkers with respect to the merger or the exchange ratio.
The following is a summary of the material analyses performed by Credit
Suisse First Boston in connection with its opinion to the Checkers independent
committee dated January 28, 1999. THE FINANCIAL ANALYSES SUMMARIZED BELOW
INCLUDE INFORMATION PRESENTED IN TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND
CREDIT SUISSE FIRST BOSTON'S FINANCIAL ANALYSES, THE TABLES MUST BE READ
TOGETHER WITH THE TEXT OF EACH SUMMARY. THE TABLES ALONE DO NOT CONSTITUTE A
COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE DATA SET FORTH
IN THE TABLES BELOW WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE
FINANCIAL ANALYSES, INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE
ANALYSES, COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF CREDIT SUISSE FIRST
BOSTON'S FINANCIAL ANALYSES.
DISCOUNTED CASH FLOW ANALYSIS. Credit Suisse First Boston estimated the
present value of the stand-alone, unlevered, after-tax free cash flows that
each of Checkers and Rally's could produce over the calendar years 1999 through
2008 based on three scenarios.
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The first scenario, the management case, was based on estimates of the
managements of Checkers and Rally's for 1999 to 2003 and extrapolated for
calendar years 2004 to 2008 in conjunction with the managements of Checkers and
Rally's, including compounded annual revenue growth of approximately 14.1% for
Checkers and approximately 14.5% for Rally's and EBITDA (earnings before
interest, taxes, depreciation and amortization) margins equal to approximately
17.4% for Checkers and approximately 18.5% for Rally's. The second scenario,
the adjusted management case I, was based on adjustments to the management case
discussed with and reviewed by the management of Checkers and Rally's,
including compounded annual revenue growth of approximately 7.9% for Checkers
and approximately 8.5% for Rally's and lower EBITDA margins equal to
approximately 13.5% for Checkers and approximately 14.9% for Rally's. The third
scenario, the adjusted management case II, was based on adjustments to the
management case discussed with and reviewed by the managements of Checkers and
Rally's, including compounded annual revenue growth of approximately 2.8% for
Checkers and approximately 3.2% for Rally's and EBITDA margins equal to
approximately 9.8% for Checkers and approximately 10.7% for Rally's. Ranges of
estimated terminal values for Checkers and Rally's were calculated using
terminal multiples of estimated 2008 EBITDA, of 6.0x to 7.0x. The free cash
flow streams and estimated terminal values were then discounted to present
value using discount rates of 13.5% to 14.5%. This analysis indicated an
exchange ratio reference range of 3.14x to 3.82x for the management case, 2.74x
to 2.95x for the adjusted management case I, and 1.41x to 1.82x for the
adjusted management case II, as compared to the exchange ratio in the merger of
1.99x.
SELECTED COMPANIES ANALYSIS. Credit Suisse First Boston compared certain
financial, operating and stock market data of Checkers and Rally's to
corresponding data of the following selected publicly traded companies in the
quick-service restaurant industry: CKE Restaurants, Inc.; Foodmaker, Inc.,
McDonald's Corp.; Sonic Corp.; Tricon Global Restaurants, Inc.; and Wendy's
International, Inc.
Credit Suisse First Boston calculated equity values for the selected
companies as a multiple of latest 12 months and estimated calendar year 1999
net income. Credit Suisse First Boston calculated enterprise values, that is,
equity market value plus debt less cash, as multiples of latest 12 months and
estimated calendar year 1999 sales and EBITDA. All multiples were based on
closing stock prices on January 22, 1999. Estimated financial data for the
selected companies were based on estimates of selected investment banking
firms. Applying a range of selected multiples of estimated calendar year 1999
EBITDA derived from the selected companies to corresponding financial data of
Checkers and Rally's indicated an exchange ratio reference range of 2.61x to
2.91x for the management case, 1.81x to 2.22x for the adjusted management case
I and 0.54x to 1.30x for the adjusted management case II, as compared to the
exchange ratio in the merger of 1.99x.
SELECTED MERGER AND ACQUISITIONS ANALYSIS. Credit Suisse First Boston
analyzed, among other things, the implied purchase prices and transaction
multiples paid in the following selected merger and acquisition transactions in
the quick-service restaurant
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industry (acquirer/target): CKE Restaurants, Inc./Flagstar Enterprises, Inc.;
Berkshire Hathaway, Inc./International Dairy Queen, Inc.; Port Royal Holdings,
Inc./The Krystal Company; CKE Restaurants, Inc./Hardee's Food Systems, Inc.;
RTM Restaurant Group/Arby's; Inc., Triarc Companies Inc./Long John Silvers; and
Taco Cabana, Inc./Two Pesos, Inc.
Credit Suisse First Boston compared equity values in the selected
transactions as multiples of latest 12 months net income and enterprise values
as multiples of latest 12 months sales, EBITDA and earnings before interest and
taxes. All multiples were based on financial information available at the time
of the relevant transaction. Applying a range of selected multiples of EBITDA
derived from the selected transactions to corresponding financial data of
Checkers and Rally's indicated an exchange ratio reference range of 1.94x to
2.32x, as compared to the exchange ratio in the merger of 1.99x.
EXCHANGE RATIO ANALYSES. Credit Suisse First Boston also conducted the
following relative analyses and compared the exchange ratio in the merger with
the exchange ratios implied by those analyses:
HISTORICAL STOCK TRADING EXCHANGE RATIO ANALYSIS. Credit Suisse First
Boston performed an exchange ratio analysis comparing the average daily
closing stock prices for Checkers and Rally's during the one-month,
three-month, six-month, one-year and two-year periods preceding January
22, 1999, as well as the closing stock prices of Checkers and Rally's
on January 22, 1999. As set forth in the table below, this comparison
indicated an exchange ratio range of 1.65x to 2.14x, as compared to the
exchange ratio in the merger of 1.99x:
<TABLE>
<CAPTION>
PERIOD PRECEDING JANUARY 22, 1999 IMPLIED EXCHANGE RATIO
- ----------------------------------- -----------------------
<S> <C>
January 22, 1999 1.65x
One month 1.69x
Three months 1.74x
Six months 1.70x
One year 1.92x
Two years 2.14x
</TABLE>
RELATIVE CONTRIBUTION EXCHANGE RATIO ANALYSIS. Credit Suisse First
Boston performed an exchange ratio analysis comparing the relative
contributions of Checkers and Rally's to the total number of
restaurants, total assets and tangible assets of the combined company.
Credit Suisse First Boston also compared the relative contributions of
Checkers and Rally's to the latest 12 months and estimated 1999 sales
and EBITDA of the combined company, based on management case, adjusted
management case I and adjusted management case II estimates. This
analysis indicated an exchange ratio reference range of 1.56x to 2.01x,
as compared to the exchange ratio in the merger of 1.99x.
PRO FORMA MERGER ANALYSIS. Credit Suisse First Boston analyzed the
potential pro forma effect of the merger on estimated earnings per share of
Checkers common stock for
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the fiscal years ended 1999 through 2003 based on management case, adjusted
management case I and adjusted management case II estimates. In this analysis,
Credit Suisse First Boston utilized, among other things, cost savings and other
potential synergies anticipated by the management of Checkers and Rally's to
result from the merger and an effective tax rate of 38.0%. Based on an exchange
ratio of 1.99x in the merger, this analysis indicated that the proposed merger
would be (1) accretive to Checkers earnings per share in each of 1999, 2000,
2001, 2002 and 2003 using management case estimates, (2) dilutive to Checkers
earnings per share in 1999 and 2000 and accretive in each of 2001, 2002 and
2003 using adjusted management case I estimates, and (3) dilutive to Checkers
earnings per share in each of 1999, 2000, 2001, 2002 and 2003 using adjusted
management case II estimates. The actual results achieved by the combined
company may vary from projected results and the variations may be material.
MISCELLANEOUS. Pursuant to the terms of Credit Suisse First Boston's
engagement, Checkers has agreed to pay Credit Suisse First Boston for its
financial advisory services in connection with the merger an aggregate fee of
$750,000. Checkers also has agreed to reimburse Credit Suisse First Boston for
out-of-pocket expenses incurred by Credit Suisse First Boston Corporation in
performing its services, including fees and expenses of legal counsel and any
other advisor retained by Credit Suisse First Boston, and to indemnify Credit
Suisse First Boston and related parties and entities against liabilities,
including liabilities under the federal securities laws, arising out of Credit
Suisse First Boston's engagement.
Credit Suisse First Boston and its affiliates have in the past provided
financial services to Checkers unrelated to the proposed merger. In the
ordinary course of its business, Credit Suisse First Boston and its affiliates
may actively trade the debt and equity securities of both Checkers and Rally's
for their own accounts and for the accounts of customers and, accordingly, may
at any time hold long or short positions in such securities.
TERMS OF THE MERGER AGREEMENT
GENERAL
This section of the joint proxy statement/prospectus describes material
provisions of the merger agreement. This summary is qualified in its entirety
by reference to the merger agreement, which is included as Appendix A to this
joint proxy statement/prospectus. All stockholders of Rally's and Checkers are
urged to read the entire merger agreement carefully.
CLOSING; EFFECTIVE TIME
The closing of the merger will take place approximately three business
days after the conditions in the merger agreement are satisfied. We may,
however, agree to another date for the closing. We expect to close the merger
on August 9, 1999, which is the end of one
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of our accounting periods. When the merger is closed, we will file a
certificate of merger with the Secretary of State of Delaware, as a result of
which, the merger of Rally's into Checkers will be complete.
CHECKERS' CERTIFICATE OF INCORPORATION
When the merger is completed, we will file a certificate of amendment to
Checkers' certificate of incorporation with the Secretary of State of Delaware,
as a result of which it will be amended to increase the number of authorized
Checkers common shares to 175 million and to effect a one-for-twelve reverse
stock split. The reverse stock split will reduce the number of Checkers
outstanding shares but will not reduce the number of authorized Checkers
shares. The amended certificate of incorporation will be the certificate of
incorporation of Checkers after the merger until it is changed or amended.
DIRECTORS AND PRINCIPAL OFFICERS OF CHECKERS AFTER THE MERGER
Checkers and Rally's currently share their executive officers, and it is
anticipated that such persons will continue as executive officers of Checkers
after the merger. The other officers of Checkers will be appointed by its board
as provided in its bylaws. The initial board of directors of Checkers after the
merger will have 11 directors, consisting of the Rally's board (five of whom
also serve on the Checkers board) and the Checkers board.
RESERVATION OF RIGHT TO REVISE TRANSACTION
Rally's and Checkers may agree to change the method of combining their
businesses before or after stockholder approval, including to provide for a
different form of merger. No change, however, may (1) alter or change the
amount or kind of payment to be received by Rally's stockholders, (2) change in
a negative way the proposed accounting treatment for the merger or the tax
treatment to Rally's or Checkers or to Rally's stockholders or (3) delay
receipt of any approval of the merger.
THE MERGER CONSIDERATION
Upon completion of the merger, without any action on the part of any
stockholder of Rally's, each issued and outstanding Rally's common share, other
than shares to be canceled as described below, will be converted into the right
to receive 1.99 Checkers common shares.
Each Rally's common share held by Checkers, Rally's or any wholly owned
subsidiary of Rally's or Checkers will be automatically canceled and retired
upon completion of the merger and will cease to exist. Each Checkers common
share owned by Rally's will be automatically canceled and retired upon
completion of the merger. No securities of Checkers or other payment will be
delivered in exchange for those shares.
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EXCHANGE OF CERTIFICATES; FRACTIONAL SHARES
At or before completion of the merger, Checkers will deposit with American
Stock Transfer & Trust Co., as exchange agent for the merger, certificates
representing the Checkers common shares to be issued in the merger.
After the merger is completed, the exchange agent will mail a form of
transmittal letter to the holders of Rally's common stock. The form of
transmittal letter will contain instructions on how to surrender certificates
in exchange for Checkers common stock and cash in lieu of fractional shares, if
applicable.
RALLY'S STOCK CERTIFICATES SHOULD NOT BE RETURNED WITH THE ENCLOSED PROXY
CARD AND SHOULD NOT BE FORWARDED TO THE EXCHANGE AGENT EXCEPT WITH A
TRANSMITTAL FORM, WHICH WILL BE PROVIDED TO HOLDERS AFTER THE MERGER IS
COMPLETED.
No certificates representing fractional Checkers common shares will be
issued, and fractional share interests will not entitle the owner to vote or to
any rights of a stockholder of Checkers. Instead of issuing fractional shares,
Checkers will instruct the exchange agent to sell all fractional shares in the
open market. Checkers will pay to persons who would otherwise receive
fractional shares an amount in cash equal to the pro rata portion of the net
proceeds received by the exchange agent from such sale.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains certain customary mutual representations and
warranties by each of Rally's and Checkers relating to, among other things:
/bullet/ corporate organization, structure and power;
/bullet/ subsidiaries;
/bullet/ capitalization;
/bullet/ authorization, execution, delivery, performance and enforceability
of, required consents, approvals, orders and authorizations of
governmental authorities relating to, and noncontravention of
certain agreements as a result of, the merger agreement;
/bullet/ documents filed by Rally's and Checkers with the Securities and
Exchange Commission and other regulatory entities, the accuracy of
information contained in those documents and the absence of
undisclosed liabilities of Rally's and Checkers;
/bullet/ the accuracy of information supplied by Rally's and Checkers in
connection with this joint proxy statement/prospectus and the
related registration statement;
/bullet/ the absence of material changes or events with respect to Rally's
and Checkers since 1997;
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/bullet/ compliance with applicable laws and litigation;
/bullet/ the absence of changes in benefit plans;
/bullet/ matters relating to the Employee Retirement Income Security Act of
1974;
/bullet/ tax matters;
/bullet/ required stockholder votes in connection with the merger
agreement;
/bullet/ satisfaction of certain state takeover statutes;
/bullet/ engagement of and payment of fees to brokers, investment bankers,
finders and financial advisors in connection with the merger
agreement;
/bullet/ intellectual property matters including efforts to resolve any
"Year 2000" computer problems; and
/bullet/ certain material contracts.
CERTAIN COVENANTS
CONDUCT OF BUSINESS. Rally's and Checkers have each agreed that, during
the period from the date of the merger agreement to the date the merger is
completed, each party will:
/bullet/ not engage in any unusual transactions;
/bullet/ try to maintain its business and current business organization;
and
/bullet/ try to keep available the services of its current officers and
other key employees and preserve its relationships with those
persons having business dealings with it.
The merger agreement provides that Rally's and Checkers will not take any
action not allowed by the merger agreement, such as:
/bullet/ amending organizational documents;
/bullet/ issuing, selling or encumbering any shares of capital stock or
options to acquire any shares of capital stock;
/bullet/ selling, leasing or encumbering property or assets;
/bullet/ declaring or paying dividends or recapitalizing, other than
Checkers' proposed one-for-12 reverse stock split to be
implemented immediately after the merger.
/bullet/ redeeming capital stock;
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/bullet/ making acquisitions; or
/bullet/ taking any action that would cause the representations and
warranties regarding absence of certain changes or events to no
longer be true.
NO SOLICITATION
The merger agreement provides that Rally's and Checkers will not, directly
or indirectly:
/bullet/ solicit, initiate, or encourage any acquisition proposal;
/bullet/ waive any provision of any standstill or similar agreement;
/bullet/ engage in negotiations regarding any acquisition proposal; or
/bullet/ give access to their properties, books or records to any person
that may be considering making an acquisition proposal.
However, if either the Rally's board or the Checkers board determines that
an acquisition proposal is or could be more advantageous to their stockholders
than the merger, it may (a) furnish information with respect to it and its
subsidiaries to any person making an acquisition proposal on a confidential
basis and (b) participate in discussions or negotiations regarding such
acquisition proposal. An "acquisition proposal" means any offer or proposal
for, or any indication of interest in, a merger or other business combination
involving Rally's or Checkers, or any of their subsidiaries, or the acquisition
of any equity interest in, or a substantial portion of the assets of, any
party, other than the transactions contemplated by the merger agreement.
EMPLOYEE BENEFIT PLANS
After the completion of the merger, the employee benefit plans of Checkers
and Rally's in effect at that time will remain in effect with respect to the
employees of Checkers and Rally's, until such time as Checkers adopts new
employee benefit plans and arrangements with respect to employees of Checkers.
After completion of the merger, Checkers will honor all employee benefit plans
of Rally's and all other contracts, arrangements and commitments which apply to
current or former employees or directors of Rally's.
Employees of Checkers and Rally's will receive credit for purposes of
eligibility to participate, vesting, benefit accrual and eligibility to receive
benefits under any employee benefit plan, program or arrangement established or
maintained by Checkers or any of its subsidiaries and made available to such
employees for service accrued or deemed accrued before the merger with Checkers
and Rally's or any of their subsidiaries, provided, however, that the crediting
of service will not duplicate any benefit or the funding of any benefit.
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INDEMNIFICATION AND INSURANCE
Checkers has agreed to indemnify those persons currently entitled to
indemnification from Rally's for liabilities for acts or omissions occurring at
or prior to the merger and to assume as of the date of the merger any
indemnification agreements of Rally's in effect as of the date of the merger
agreement.
For four years after the date of the merger, Checkers will maintain in
effect Rally's current directors' and officers' liability insurance covering
acts or omissions occurring before the merger on terms no less favorable than
those in effect on the date of the merger agreement. However, Checkers may
substitute policies of Checkers containing terms no less favorable. Checkers is
not required to pay premiums for the insurance described in this paragraph of
more than 125% of the premiums paid by Checkers and Rally's in 1997.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Rally's and Checkers' obligations to complete the merger are subject to
the satisfaction or wavier of various conditions, which include, in addition to
the other customary closing conditions, the following:
1. the Rally's stockholders must approve the merger and the Checkers
stockholders must approve the merger and the increase in authorized shares;
2. other than the filing with the Secretary of State of Delaware of the
certificate of merger, all actions required by any governmental agency, court
or authority or any non-governmental authority to consummate the merger must
have been obtained;
3. no order or injunction against completion of the merger shall have been
issued; and
4. the registration statement of which this joint proxy statement/
prospectus is a part shall have become effective under the Securities Act of
1933.
In addition, the obligation of each of Rally's and Checkers to complete
the merger is subject to the satisfaction or waiver of the following additional
conditions:
1. the representations and warranties of the other being true and correct
as of the date of the merger agreement and as of the date the merger is
completed (except to the extent expressly made as of an earlier date, in which
case as of the earlier date), with certain exceptions where the failure would
not have a material adverse effect;
2. the other party to the merger agreement having performed in all
material respects obligations required to be performed by it under the merger
agreement on or prior to the closing date, provided that the covenant not to
issue, sell or deliver, any capital stock or split, combine, reclassify or
subdivide its capital stock shall have been duly performed and complied with in
all respects;
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3. Checkers and Rally's having received from Christensen, Miller, Fink,
Jacobs, Glaser, Weil & Shapiro, LLP opinions to the effect that (A) the merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code and that Checkers and Rally's will each be a party to
such reorganization within the meaning of Section 368(a) of the Code (see "The
Merger--Certain Federal Income Tax Consequences" at page 54) and (B) the
completion of the merger agreement will not result in a change of control of
Rally's, as that term is used and defined in the Rally's senior note indenture
or require Rally's, Checkers or any other person to make an offer to purchase
the senior notes pursuant to the indenture; and
4. no material adverse change having occurred relating to the other party
at any time after the date of the merger agreement.
Subject to certain limited exceptions specified in the merger agreement,
"material adverse change" and "material adverse effect" mean, when used in
connection with Rally's and Checkers, a change or effect, that a reasonable
person would want to know about before investing in the company and that will
have a negative impact on the business, financial condition or results of
operations of Rally's or Checkers and its subsidiaries.
TERMINATION
The merger agreement may be terminated at any time before completion of
the merger, whether before or after adoption and approval of the merger
agreement by the stockholders of Rally's or Checkers:
(a) by mutual written consent of Rally's and Checkers;
(b) by either Rally's or Checkers:
1. if the merger has not been completed by August 9, 1999;
2. if the approval of Checkers stockholders has not been obtained at the
Checkers annual meeting;
3. if the approval of Rally's stockholders has not been obtained at the
Rally's meeting;
4. if any injunction, order or decree by a governmental authority of
competent jurisdiction shall be in effect and shall have become final
and nonappealable; provided, that the party seeking to terminate the
merger agreement shall have used all required efforts to prevent and
remove such restraint;
5. if any of the conditions to its obligation to complete the merger is
incapable of being satisfied, provided the terminating party is not in
breach of the merger agreement; or
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<PAGE>
6. if the terminating party's board has determined, after receiving
advice from its independent committee, that termination is required by
reason of a superior acquisition proposal having been made to it.
If the merger agreement is terminated by either Rally's or Checkers, it
will become void and have no effect, without any liability or obligation on the
part of Rally's or Checkers, other than, among other things, (a) in connection
with any brokerage or advisory fees of any kind incurred by either Rally's or
Checkers, (b) the obligation of Rally's or Checkers to keep all nonpublic
information connected with the merger confidential, and (c) the agreement
between Rally's and Checkers to each pay their own fees and share the costs of
the Hart-Scott-Rodino filing; provided, however, that Rally's or Checkers will
not be relieved from any liability for any willful and material breach of any
of its representations, warranties, covenants or agreements in the merger
agreement.
EXPENSES
Whether or not the merger is completed, all fees and expenses incurred in
connection with the merger will be paid by the party incurring such fees or
expenses, except that
1. Checkers and Rally's will share equally the costs of filing the notice
required under the Hart-Scott-Rodino Act and
2. if the merger agreement is terminated by reason of an acquisition proposal,
the terminating party will reimburse the non-terminating party for their
reasonable and documented transaction costs.
AMENDMENT; EXTENSION AND WAIVER
The merger agreement may be amended at any time before or after the
approval of the merger agreement by the Checkers or Rally's stockholders. After
stockholder approval, we may not amend the merger agreement if the law requires
further approval by either Checkers or Rally's stockholders unless we get the
required approval. The merger agreement may only be amended by a written
agreement signed by Checkers and Rally's.
At any time prior to the completion of the merger, we may extend the time
for the completion of the merger, waive any inaccuracies in the representations
and warranties of the other party or waive compliance by the other party of the
agreements or conditions contained in the merger agreement unless the law
requires the waiver to be approved by the Checkers or Rally's stockholders. Any
extension or waiver must be in writing and signed by the waiving party. The
failure of Checkers or Rally's to assert any of its rights under the merger
agreement will not constitute a waiver of its rights.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Following is a discussion of all material United States federal income tax
consequences of the merger. Statements of legal conclusion regarding tax
treatments, tax effects or tax
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consequences that are set forth in this section reflect the opinion of
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP. The conclusions
are based on the Internal Revenue Code of 1986, Treasury regulations, rulings
of the Internal Revenue Service and court decisions, all of which are subject
to change, possibly with retroactive effect. Moreover, due to the lack of
definitive judicial authority and administrative guidance, substantial
uncertainties exist with respect to many of the tax consequences of the
transaction. No ruling has been requested from the Internal Revenue Service on
any aspect of the merger, nor will such a ruling be requested. Accordingly, no
assurance can be given that the IRS will necessarily agree with the conclusions
set forth below, or that, if challenged in a court of competent jurisdiction,
that such court will necessarily concur with such conclusions.
The tax treatment of each Rally's stockholder will depend in part upon
such stockholder's particular situation. Special tax consequences not described
below may be applicable to particular classes of taxpayers, including financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States or who are legal entities formed under the laws of jurisdictions
outside the United States and Rally's stockholders who acquired their shares
through the exercise of employee stock options or otherwise as compensation.
This discussion also assumes that the Rally's stockholders hold their Rally's
common stock as a capital asset.
This discussion is not intended to be legal or tax advice to any
particular holder of Rally's common stock. All Rally's stockholders should
consult with their own tax advisors as to the particular consequences of the
merger to them, including the applicability and effect of any state, local and
foreign tax laws.
TAX CONSEQUENCES OF THE MERGER
The merger will qualify as a "tax-free reorganization," as defined in
/section/368(a)(1)(A) of the Code. As such, the merger will have the following
federal income tax consequences:
1. The exchange in the merger of Rally's common stock solely for Checkers
common stock will not result in the recognition of gain or loss to the Rally's
stockholders with respect to such exchange.
2. A Rally's stockholder who receives cash in the merger instead of a
fractional share interest in Checkers common stock will be treated as having
exchanged such fractional share for cash in a redemption subject to Section 302
of the Code, and the Rally's stockholder generally will recognize capital gain
or loss in such exchange equal to the difference between the cash received and
the portion of such stockholder's tax basis that is allocable to the fractional
share so exchanged.
3. The tax basis of the Checkers common stock received by a Rally's
stockholder in the merger will be the same as the stockholder's tax basis in the
Rally's common stock surrendered in exchange therefor.
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<PAGE>
4. The holding period of Checkers common stock received by the Rally's
stockholders in the merger will include the holding period of Rally's common
stock surrendered in exchange therefor.
5. No gain or loss will be recognized by Rally's or Checkers as a result of
the merger.
The obligation of Checkers and Rally's to consummate the merger is
conditioned upon, among other things, receipt by Checkers and Rally's of a
legal opinion that, based on a review of the merger agreement, the registration
statement, certain other facts and documents which they consider relevant and
certain representations made by Rally's and Checkers, the merger will have the
tax effect set forth above.
LIMITATION OF UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
Section 382 of the Code generally limits a corporation's use of its net
operating loss carryforwards and certain built-in losses if the corporation
undergoes an "ownership change." An ownership change generally occurs when a
percentage of the corporation's stock held by certain persons, identified in
Code Section 382 as "5% shareholders," increases in the aggregate by more than
50 percentage points over the lowest level held by such persons during a
three-year testing period. If an ownership change occurs, the corporation's
annual utilization of its net operating loss carryforwards is limited to the
product of the corporation's equity value immediately before the ownership
change multiplied by the applicable long-term federal tax-exempt rate. The
merger will result in an ownership change of Checkers and Rally's for purposes
of Section 382 of the Code. As a result, the Company's ability to use net
operating loss carryforwards may be limited to approximately $41 million of net
operating losses in the aggregate, of which approximately $2.2 million is
expected to be available each year, with any unused portion carried forward to
the following year.
BACKUP WITHHOLDING
Any cash received in the merger by a Rally's stockholder may be subject to
backup withholding at a rate of 31%. Backup withholding will not apply,
however, to a taxpayer who (a) furnishes a correct taxpayer identification
number and certifies that he or she is not subject to backup withholding on IRS
Form W-9 (or an appropriate substitute form), (b) provides a certificate of
foreign status on IRS Form W-8 (or an appropriate form), or (c) is otherwise
exempt from backup withholding. The IRS may impose a $50 penalty upon any
taxpayer who fails to provide the correct taxpayer identification number, as
required.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF ALL MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT
PURPORT TO BE A COMPLETE ANALYSIS OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A
RALLY'S STOCKHOLDER'S DECISION WHETHER TO VOTE IN FAVOR OF THE MERGER. BECAUSE
CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE PARTICULAR
CIRCUMSTANCES OF EACH RALLY'S
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<PAGE>
STOCKHOLDER, EACH RALLY'S STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX
ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE
MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX
LAWS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Checkers and Rally's boards with
respect to the merger, you should be aware that, as described below, certain
members of Checkers' and Rally's managements and boards have interests in the
merger that are different from, or in addition to, your interests as
stockholders and that may create potential conflicts of interest. Two executive
officers of Checkers are members of the seven-person Checkers board that
approved the merger and two executive officers of Rally's are members of the
nine-person Rally's board that approved the merger. In addition, five members
of the Rally's board also serve on the Checkers board.
Except as described below, we are not aware of any material interest in
the merger of our executive officers and directors, other than those of
stockholders of Checkers and Rally's generally.
DIRECTORS AND EXECUTIVE OFFICERS FOLLOWING THE MERGER
Upon completion of the merger, the Checkers board of directors will
consist of 11 members, including all of the current members of the Rally's
board (five of whom are also members of the Checkers board) and the Checkers
board. William P. Foley, II, Chairman of the Board of Checkers and Rally's,
will continue as Chairman after the merger. The executive officers of Checkers
will also continue in office after the merger.
STOCK OPTIONS
The members of the Rally's board and Rally's executive officers hold
options to acquire a total of 4,432,500 shares of Rally's common stock.
Pursuant to the merger agreement, holders of Rally's options will have the
right to receive 1.99 shares of Checkers common stock on exercise of such
options. In addition, Checkers is proposing an amendment to its stock option
plan for non-employee directors which would result in a grant of options to
purchase 40,000 shares to the Chairman of the Board, 20,000 shares to the Vice
Chairman and 10,000 shares of Checkers common stock (after giving effect to the
one-for-12 reverse stock split) to each of the other non-employee directors of
Checkers after the merger.
The following table sets forth certain information with respect to
Checkers options to be granted pursuant to the merger to:
1. the Chief Executive Officer of Checkers and Rally's;
2. the other four most highly compensated executive officers of Checkers
and Rally's, who received at least $100,000 in salary and bonus in 1998;
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<PAGE>
3. all executive officers of Checkers and Rally's as a group;
4. all non-executive officer directors of Checkers and Rally's as a group;
and
5. all non-executive officer employees of Checkers and Rally's as a group.
The options shown below will be adjusted for the proposed one-for-twelve
reverse stock split and are not necessarily indicative of the number of options
that may be granted in the future.
<TABLE>
<CAPTION>
NUMBER OF
NAME & POSITION DOLLAR VALUE (1) OPTIONS
- ------------------------------------------- ------------------ ------------
<S> <C> <C>
James J. Gillespie ........................ $135,850 796,000
President and Chief
Executive Officer
Harvey Fattig ............................. 19,019 111,440
Executive Vice President &
Chief Operating Officer
Joseph N. Stein (2) ....................... -- --
Executive Vice President &
Chief Administrative Officer
James T. Holder ........................... 11,887 69,650
Senior Vice President, General
Counsel & Secretary
Richard A. Peabody ........................ 7,132 41,790
Senior Vice President & Chief
Financial Officer
All Current Executive Officers
as a group (5 persons) .................. 173,888 1,018,880
All Current Non-Executive Officer Directors
as a group (8 persons) .................. 835,967 7,801,795
All Non-Executive Officer Employees
as a group (227 persons) ................ 279,835 1,639,668
</TABLE>
- ----------------
(1) Based upon the difference between the exercise price and the closing price
of the Checkers common stock of $0.4375 as reported on the NASDAQ National
Market on May 12, 1999.
(2) Mr. Stein resigned as an officer of Checkers and Rally's effective April 8,
1999.
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<PAGE>
CHECKERS CREDIT AGREEMENT
The debt which Checkers owes under its credit agreement (approximately
$17.4 million at May 12, 1999) is held by a group of investors which includes
William P. Foley, II, Burt Sugarman and C. Thomas Thompson and certain of their
affiliates and associates. While we intend to refinance such debt at lower
interest rates, if available, it may not be possible to do so on acceptable
terms. We may use some of the proceeds from the sale of Rally's and/or Checkers
restaurants to make interest and principal payments on such debt. Therefore,
completion of the merger may benefit the lenders in the credit agreement to the
extent the merger facilitates the repayment of the Checkers debt or increases
the credit worthiness of Checkers. The following table sets forth the names of
such holders and the amount of the debt held under the credit agreement:
<TABLE>
<CAPTION>
AMOUNT OF
NAME OF DEBT HOLDER DEBT HELD
- ------------------------------------------------- -------------
<S> <C>
CKE Restaurants, Inc.(1) ........................ $7,727,459
Santa Barbara Restaurant Group, Inc.(1) ......... 4,941,979
Fidelity National Financial, Inc.(1) ............ 2,216,403
William P. Foley, II(1) ......................... 698,541
Burt Sugarman(2) ................................ 748,784
Andrew Puzder(3) ................................ 29,951
C. Thomas Thompson(4) ........................... 29,951
</TABLE>
- ----------------
(1) Mr. Foley is the chairman of the board and chief executive officer of CKE
and Fidelity and the Chairman of the Board of Rally's, Checkers and Santa
Barbara Restaurant Group.
(2) Mr. Sugarman is the Chairman of the Board, President and Chief Executive
Officer of GIANT and is a director of Rally's and Checkers.
(3) Mr. Puzder is a director and Chief Executive Officer of Santa Barbara
Restaurant Group, Executive Vice President and General Counsel of CKE and
a director of Rally's.
(4) Mr. Thompson is a director of Santa Barbara Restaurant Group, Rally's and
Checkers and an executive officer of CKE.
JOINT PURCHASING AGREEMENT
The execution of a joint purchasing agreement between Checkers and CKE is
a condition to Checkers' and Rally's obligation to complete the merger. The
primary objective of the agreement is for Checkers to be included and benefit
from the cooperative buying power of all restaurants directly owned or
otherwise affiliated with CKE. The agreement provides generally that CKE will
assist Checkers in connection with the cooperative purchasing of food,
beverage, paper and other products, including administrative support in the bid
solicitation process, forward buying recommendations for key commodity items
and assistance in negotiation of key long term vendor contracts. The form of
agreement has been filed as an exhibit to the registration statement of which
this joint proxy statement/prospectus is a part. Messrs. Foley, Puzder and
Thompson are executive officers and/or directors of CKE, which is a major
stockholder of Rally's and the lenders' agent under the Checkers credit
agreement.
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<PAGE>
INDEMNIFICATION AND INSURANCE
Pursuant to the merger agreement, Checkers will indemnify from liability
for acts or omissions occurring at or prior to completion of the merger
officers and directors of Rally's currently entitled to indemnification from
Rally's as provided in its certificate of incorporation and bylaws. For a
period of four years after the completion of the merger, Checkers will maintain
liability insurance covering acts or omissions occurring before the merger with
respect to those persons who were covered by Rally's directors' and officers'
liability insurance policies on terms no less favorable than those in effect on
the date of the merger agreement. Checkers, however, will not be required to
pay more than 125% of the amount paid by Rally's and Checkers in 1997 to
maintain such insurance. Checkers is permitted under the merger agreement to
substitute policies of Checkers containing terms no less favorable to the
directors and officers in question.
ACCOUNTING TREATMENT
The merger will be accounted for as a "purchase" for accounting and
financial reporting purposes. Based upon the controlling interest in Checkers
to be obtained by Rally's stockholders as a result of the merger, the merger
will be accounted for as an acquisition of Checkers by Rally's stockholders (a
reverse acquisition in which Rally's is considered the acquirer for accounting
purposes). Accordingly, the historical financial information of the merged
entity will reflect that of Rally's.
REGULATORY MATTERS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations thereunder require that we file with the Antitrust
Division of the Department of Justice and the Federal Trade Commission a notice
of the merger. In compliance with the HSR Act, we filed the required notice
with respect to the merger on February 16, 1999. We were then required to wait
30 days before completing the merger. The waiting period was terminated early
by the Federal Trade Commission on February 26, 1999. Federal or state
antitrust authorities or a private person or entity could seek to enjoin the
merger under the antitrust laws at any time prior to its completion or to
compel recision or divestiture at any time after the merger.
RESTRICTION ON RESALES BY AFFILIATES
The Checkers common stock to be issued to Rally's stockholders in the
merger have been registered under the Securities Act. These shares may be
traded freely and without restriction by those stockholders not deemed to be
"affiliates" of Checkers or Rally's, as that term is defined under the
Securities Act. An affiliate of Checkers or Rally's is a person who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, Checkers or Rally's, as the case may be. Any
subsequent transfer by an affiliate of Checkers or Rally's must be permitted by
the resale provisions of
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Rule 145 under the Securities Act (or Rule 144 under the Securities Act, in the
case of persons who become affiliates of Checkers after the merger) or as
otherwise permitted under the Securities Act. These restrictions are expected
to apply to the directors and executive officers of Rally's.
Rally's has agreed to deliver to Checkers an agreement from each of its
affiliates that they will not dispose of Checkers common stock in violation of
the Securities Act, except pursuant to an effective registration statement
under the Securities Act, in conformity with the limitations of Rule 145 or in
a transaction that is not required to be registered under the Securities Act.
LITIGATION
An action entitled FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF
NATHAN SUCKMAN V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL., Case No. 16667,
was filed on September 29, 1998 in the Delaware Court of Chancery in and for
New Castle County, Delaware by First Albany Corp., as custodian for the benefit
of Nathan Suckman, an alleged stockholder of 500 shares of Checkers common
stock. The complaint names Checkers, GIANT, Rally's and certain of their
current and former officers and directors as defendants, including Messrs.
Foley, Gillespie, Fattig, Stein, Holder, Peabody, Christensen, McKee, O'Hara,
Sugarman and Thompson. The complaint alleges generally that certain of the
defendants engaged in an unlawful scheme and plan to permit Rally's to acquire
the public shares of Checkers common stock in a "going private" transaction for
grossly inadequate consideration and in breach of the defendants' fiduciary
duties. The plaintiff allegedly initiated the complaint on behalf of all
Checkers stockholders as of September 28, 1998 and seeks, among other things,
declaratory and injunctive relief against the consummation of the merger, or if
the merger is completed, rescission of the merger, and costs and disbursements
incurred in connection with bringing the action, including attorneys' fees, and
such other relief as the court may deem proper. A second putative class action,
DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF THOSE
SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL., Case No.
16680, was filed on October 2, 1998 in the Delaware Court of Chancery in and
for New Castle County, Delaware. The complaint contains generally similar
allegations as those in the FIRST ALBANY complaint and seeks similar relief.
Plaintiffs have indicated that they will probably file an amended complaint if
a merger between Checkers and Rally's is completed. Checkers and Rally's deny
all wrongdoing and intend to defend these lawsuits vigorously.
Each of Checkers and Rally's are involved in various other litigation
matters which are described at pages 121 and 135.
DISSENTERS' RIGHTS OF APPRAISAL
Under applicable state law, stockholders of Checkers and Rally's are not
entitled to dissenters' rights of appraisal in connection with the merger.
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<PAGE>
PROPOSAL 2
INCREASE IN AUTHORIZED SHARES OF CHECKERS COMMON STOCK
GENERAL
The Checkers board has approved a proposal to amend Checkers' certificate
of incorporation to increase the number of authorized shares of Checkers common
stock from 150,000,000 to 175,000,000 in order to have sufficient shares,
assuming all options and warrants are exercised, immediately after the merger.
If approved at the Checkers annual meeting, the proposed amendment will become
effective upon the filing of a certificate of amendment to Checkers'
certificate of incorporation with the Secretary of State of the State of
Delaware, which will occur at the same time the certificate of merger is filed.
We cannot complete the merger unless this proposal is approved.
INCREASE IN AUTHORIZED SHARES
Proposal 2 would amend the first sentence of Article 4 of Checkers'
certificate of incorporation to read as follows:
"The total number of shares of all classes of Capital Stock which the
Corporation shall have the authority to issue is 177,000,000 shares,
consisting of (i) 175,000,000 shares of common stock, $.001 par value per
share (the "Common Stock"), and (ii) 2,000,000 shares of preferred stock,
$.001 par value per share (the "Preferred Stock")."
We cannot complete the merger unless we increase our Checkers' authorized
common shares. Therefore, we believe that it is in Checkers' best interests to
increase the number of authorized shares of common stock. In addition, we
believe that it is in our best interests to have additional authorized but
unissued shares available for issuance to meet business needs as they arise. At
May 12, 1999, 73,408,047 shares of Checkers common stock were issued and
outstanding and options and warrants to purchase an additional 33,270,000
shares were also outstanding. Pursuant to the merger agreement, Checkers will
issue 58,377,134 shares of common stock on completion of the merger and will be
obligated to issue an additional 23,942,110 shares if all options and warrants
issued in the merger are exercised.
The authorized shares of Checkers common stock in excess of outstanding
shares will be available for issuance at any time and for any corporate purpose
that the Checkers board deems advisable, without further action by
stockholders, except as may be required by applicable law or by the rules of
any stock exchange or national securities association trading system on which
Checkers common stock may be listed or traded. The issuance of additional
common shares may have a dilutive effect on earnings per share and, for persons
who do not purchase additional shares to maintain their pro rata interest in
Checkers, on such stockholder's percentage voting power.
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<PAGE>
Checkers has no arrangements, agreements, understandings or plans at the
present time for the issuance or use of the additional shares of Checkers
common stock proposed to be authorized except in connection with the merger,
the possible exercise of options and warrants currently outstanding or to be
issued in the merger, the grant of additional options under Checkers' stock
option plans. Checkers' board does not intend to issue any Checkers common
stock except on terms which it deems to be in the best interests of Checkers
and its then existing stockholders. Any future issuance of Checkers common
stock will be subject to the rights of holders of outstanding shares of any
preferred stock which Checkers may issue in the future.
Although we have no plans to issue shares of Checkers' stock in the future
in order to make acquisition of control of Checkers more difficult, future
issuances could have that effect. For example, the acquisition of shares of
Checkers' stock by an entity in order to acquire control of Checkers might be
discouraged through the public or private issuance of additional shares of
stock, since the issuance would dilute the stock ownership of the acquiring
entity. Stock could also be issued to existing stockholders as a dividend or
privately placed with purchasers who might side with the board in opposing a
takeover bid, thus discouraging such a bid.
The Checkers board has determined that the proposed amendment of Checkers'
certificate of incorporation to increase the number of authorized of Checkers
common shares is advisable and in the best interests of Checkers and recommends
a vote for Proposal 2.
PROPOSAL 3
REVERSE STOCK SPLIT
GENERAL
The Checkers board has approved a proposal to amend Checkers' certificate
of incorporation to effect a one-for-12 reverse stock split of Checkers common
stock. If the reverse split is approved by the Checkers stockholders, we intend
to file a certificate of amendment immediately after completion of the merger.
Upon the filing of the certificate of amendment with the Secretary of
State of Delaware, each certificate representing Checkers common shares
outstanding immediately prior to the reverse split, including shares received
by Rally's stockholders in the merger, will be deemed automatically, without
any action on the part of Checkers or its stockholders, to represent
one-twelfth the number of shares of Checkers common stock immediately prior to
the reverse split. No fractional shares will be issued as a result of the
reverse split. Instead, Checkers will cause all fractional shares to be sold in
the open market. Each stockholder whose shares are not evenly divisible by 12
will receive the holder's pro rata share of the net proceeds of the sale.
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After the reverse split becomes effective, stockholders will be asked to
surrender certificates representing their Checkers shares in the letter of
transmittal to be sent to stockholders by Checkers. After the old certificates
are surrendered, a certificate representing the reduced number of shares will
be issued and sent to stockholders. However, each old certificate will continue
to be valid and represent shares equal to one-twelfth the number of shares held
prior to the reverse split.
The voting and other rights that presently characterize Checkers common
stock will not be altered by the reverse split.
PURPOSE OF THE PROPOSED REVERSE SPLIT
We believe the reverse split is desirable for several reasons. As a result
of the merger, Checkers will have over 112 million common shares outstanding.
In addition, more than 53 million additional common shares will be issuable
upon exercise of options and warrants outstanding after the merger. We believe
that the reverse split should enhance the acceptability of Checkers common
stock by the financial community and investing public. The reduction in the
number of issued and outstanding shares caused by the reverse split is expected
to increase the market price of Checkers common stock thereby reducing the
negative attributes traditionally associated with a low per share market price.
We anticipate that the higher share price expected to result from the reverse
split will enable Checkers to comply with the $1.00 minimum trading value
required by the NASDAQ National Market.
We also believe that the reverse split will result in a broader market for
Checkers common stock than that which currently exists for Rally's or Checkers
common stock. A variety of brokerage house policies and practices tend to
discourage individual brokers within those firms from dealing with lower priced
stocks. Some of those policies and practices pertain to the payment of broker's
commissions and to time consuming procedures that function to make the handling
of lower priced stock economically unattractive to brokers. In addition, the
structure of trading commissions also tends to have an adverse impact upon
holders of lower priced stock because the brokerage commission on a sale of
lower priced stock generally represents a higher percentage of the sales price
than the commission on a relatively higher priced issue. The proposed reverse
split should result in a price level for Checkers common stock that will
reduce, to some extent, the effect of the policies and practices of brokerage
firms and diminish the adverse impact of trading commissions on the market for
Checkers common stock. The expected increased price level may also encourage
interest and trading in Checkers common stock and possibly promote greater
liquidity for Checkers' stockholders, although liquidity could be adversely
affected by the reduced number of shares of Checkers common stock outstanding
after the reverse split.
We cannot be certain whether any or all of these effects will occur,
including, whether the market price share after the reverse split will exceed
or remain above the current market price. In addition, we do not know if the
market for Checkers common stock will be improved.
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EFFECTIVENESS OF THE REVERSE SPLIT
Assuming approval of the reverse split by the Checkers stockholders, we
intend to file the certificate of amendment with the Delaware Secretary of
State immediately after completion of the merger. Without any further action on
the part on the part of Checkers or its stockholders, the reverse split will be
effective and the certificates representing Checkers common stock will be
deemed to represent one-twelfth the number of shares held before the reverse
split.
Checkers' stockholders have no right under Delaware law to dissenter's
rights of appraisal as a result of the reverse split.
When the reverse split is completed, Checkers will have the same number of
authorized common shares, that is 175 million. As of May 12, 1999, the number
of issued and outstanding shares of Checkers common stock was approximately
73.4 million, and after giving effect to the issuance of shares on completion
of the merger, the number of outstanding shares will be approximately 112.7
million. As a result of the reverse stock split, there will be approximately
9.4 million shares of Checkers common stock outstanding.
As of May 12, 1999, Checkers had outstanding options and warrants to
acquire 33.3 million shares of Checkers common stock and Rally's had
outstanding options and warrants to acquire 12.0 million shares of Rally's
common stock. After the merger and the reverse stock split, Checkers will have
outstanding options and warrants for approximately 4.8 million shares and 8.8
million shares will be available for grant under Checkers' option plans. The
plans and agreements pursuant to which such options and warrants are or will be
issued each provide that in the event of a change in the capitalization, such
as the reverse split, the number of shares covered by each option and warrant
will be adjusted so as to maintain the holder's proportionate interest, and the
applicable exercise price will also be appropriately adjusted. For example, the
number of shares subject to the publicly traded warrants for Rally's common
stock will be increased by multiplying the number of shares subject to the
warrant by 1.99 pursuant to the merger agreement and then reduced, pursuant to
the reverse stock split, by dividing that number by 12, and the exercise price
will be increased by dividing the old exercise price by 1.99 and then
multiplying that number by 12.
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The following table sets forth the effects of the reverse split and the
merger on Checkers common stock and certain financial information:
<TABLE>
<CAPTION>
MARCH 22, 1999
----------------------------------------------------
AS ADJUSTED
CHECKERS' AS ADJUSTED (MERGER &
ACTUAL (MERGER) REVERSE SPLIT)
---------------- --------------- ---------------
<S> <C> <C> <C>
Common stock:
Authorized .......................... 150,000,000 175,000,000 175,000,000
Issued and outstanding .............. 73,408,047 112,654,311 9,387,859
Reserved for outstanding options and
warrants .......................... 33,269,935 57,212,045 4,767,670
Available for issuance .............. 43,322,018 5,133,644 160,844,471
Other Effects of the Reverse Split:
Stated capital ...................... $121,652,000 $137,020,000 $137,020,000
Retained deficit .................... (77,755,000) (65,283,000) (65,283,000)
Total stockholders' equity .......... 43,497,000 71,737,000 71,737,000
Net loss per common share (quarter
ended March 22, 1999) ............. (0.02) (0.05) (0.25)
Net loss per common share (year ended
December 28, 1998) ................ $ (0.07) $ (0.10) $ (1.21)
</TABLE>
The reverse split may result in some stockholders owning "odd-lots" of
less than 100 Checkers common shares. Brokerage commissions and other costs of
transactions in odd-lots are generally higher than the costs of transactions in
"round-lots" of even multiples of 100 shares.
Checkers common stock is registered under Section 12(g) of the Exchange
Act and is traded on the NASDAQ National Market. As a result, Checkers is
subject to the periodic reporting and other requirements of the Exchange Act.
The reverse split will not affect such registration or reporting requirements.
The reverse split is intended to enable Checkers' to continue to be traded on
the NASDAQ National Market. At present prices, Checkers common stock is below
the minimum trading price required by NASDAQ to maintain its listing. See "Risk
Factors--Continued Listing on NASDAQ is Uncertain" at page 8.
EXCHANGE OF STOCK CERTIFICATES
Checkers will send a letter of transmittal to each holder of record of
Checkers common stock outstanding on the date the reverse split is effective.
The letter of transmittal will contain instructions for the surrender of
certificates to the transfer agent for Checkers common stock. Upon submission
of a properly completed and executed letter of transmittal to the transfer
agent, together with the holder's stock certificate(s), a stockholder will be
entitled to receive a certificate representing the number of shares resulting
from the reverse split.
66
<PAGE>
Stockholders should not submit any certificates until requested to do so.
No new stock certificate will be issued to a stockholder until the surrender of
the stockholder's old certificate(s), together with the properly completed and
executed letter of transmittal to the transfer agent.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT
Checkers has not sought a ruling from the IRS regarding the federal income
tax consequences of the reverse split, and there can be no assurance that the
IRS or the courts will accept the positions expressed herein. Checkers believes
that because the reverse split is not part of a plan to periodically increase a
stockholder's proportionate interest in the assets or earnings and profits of
Checkers, the reverse split will have the following federal income tax
consequences:
1. No gain or loss will be recognized by a stockholder on the surrender of
the stockholder's Checkers common stock or receipt of the new stock
certificate.
2. The stockholder's tax basis of the shares of Checkers common stock
received as a result of the reverse split will equal the stockholder's
tax basis of the shares of Checkers common stock exchanged therefor.
3. The stockholder's holding period of the shares of Checkers common stock
received after the reverse split will include the stockholder's holding
period of the shares of Checkers common stock held prior to the reverse
split.
4. A stockholder who receives cash instead of fractional shares will be
treated as if Checkers has issued fractional shares to the holder and
then immediately redeemed such shares for cash. Such stockholder should
generally recognize gain or loss measured by the difference between the
amount of cash received and the basis of the stockholder's shares held
prior to the reverse split allocable to such fractional shares, as if
they had actually been issued. Such gain or loss will be capital gain or
loss, if such stockholder's shares were held as a capital asset, and any
such capital gain or loss will generally be long-term capital gain or
loss to the extent such stockholder's holding period for the shares held
prior to the reverse split then exceeds 12 months.
5. The reverse split will constitute a reorganization within the meaning of
Section 368(a)(1)(E) of the Internal Revenue Code, and Checkers will not
recognize any gain or loss as a result of the reverse split.
Any cash received in the reverse split by a Checkers stockholder may be
subject to backup withholding at a rate of 31%. Backup withholding will not
apply, however, to a taxpayer who (a) furnishes a correct taxpayer
identification number and certifies that he or she is not subject to backup
withholding on IRS Form W-9 (or an appropriate substitute
67
<PAGE>
form), (b) provides a certificate of foreign status on IRS Form W-8 (or an
appropriate form), or (c) is otherwise exempt from backup withholding. The IRS
may impose a $50 penalty upon any taxpayer who fails to provide the correct
taxpayer identification number, as required.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF ALL MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE SPLIT AND DOES NOT
PURPORT TO BE A COMPLETE ANALYSIS OF ALL POTENTIAL TAX EFFECTS RELEVANT TO A
CHECKERS STOCKHOLDER'S DECISION WHETHER TO VOTE IN FAVOR OF THE REVERSE SPLIT
BECAUSE CERTAIN TAX CONSEQUENCES OF THE REVERSE SPLIT MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH CHECKERS STOCKHOLDER, EACH CHECKERS
STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES TO SUCH STOCKHOLDER OF THE REVERSE SPLIT, INCLUDING
THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
MISCELLANEOUS
We may abandon the reverse split at any time before its effectiveness if
for any reason we deem it advisable. We may consider abandoning the proposed
reverse split if we determine, in our sole discretion, that the reverse split
would adversely affect the ability of Checkers to raise capital or the
liquidity of our common stock, among other things.
The Checkers board has determined that the reverse split is advisable and
recommends that you vote in favor of Proposal 3.
68
<PAGE>
PROPOSAL 4
ELECTION OF DIRECTORS
CHECKERS
There are currently seven seats on the Checkers board of directors, with
no vacancies. The board is divided into three classes of directors serving
staggered three-year terms. Directors hold their positions until the annual
meeting of stockholders in the year in which their term expires and until their
respective successors are elected and qualified or until their earlier
resignation, removal from office or death. The term of office of three of
Checkers' directors, William P. Foley, II, Clarence V. McKee and C. Thomas
Thompson, will expire at the Checkers meeting. The Checkers board unanimously
recommends that you vote "FOR" the election of Messrs. Foley, McKee and
Thompson as directors, to hold office until Checkers' annual meeting in 2002
and until their successors are elected and qualified or until their earlier
resignation, removal from office or death. See "Management--Directors and
Executive Officers" and "The Stockholders Meetings--Share Ownership of
Management and Certain Stockholders" at pages 139 and 18 for further
information on such nominees. Stockholders may vote for up to three nominees.
Stockholders may not vote cumulatively in the election of directors. In the
event any of the nominees should be unable to serve, which is not anticipated,
the Checkers proxy committee, which consists of Messrs. James J. Gillespie,
Richard A. Peabody and James T. Holder, will vote for such other person or
persons for the office of director as the Checkers board may recommend. As a
result of the merger, the following persons, who are currently directors of
Rally's, will be appointed as directors of Checkers: Willie D. Davis, term
expiring in 2001; David Gotterer, term expiring in 2000; Ronald B. Maggard,
term expiring in 2000; and Andrew F. Puzder, term expiring in 2002.
RALLY'S
If the merger is completed, Rally's will cease to exist as a separate
corporation, and Rally's stockholders will become Checkers stockholders. If,
for any reason, we are unable to complete the merger, the Rally's board of
directors has nominated the following persons, who currently make up the
Rally's board, to serve as directors of Rally's until Rally's next annual
meeting and until their successors are elected and qualified or until their
earlier resignation, removal from office or death: Terry N. Christensen, Willie
D. Davis, William P. Foley, II, James J. Gillespie, David Gotterer, Ronald B.
Maggard, Andrew F. Puzder, Burt Sugarman and C. Thomas Thompson. See
"Management--Directors and Executive Officers" and "The Stockholders
Meeting--Share Ownership of Management and Certain Stockholders" at pages 139
and 18 or further information on such nominees.
69
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS AND NOTES
The following pro forma condensed consolidated financial data sets forth
certain unaudited pro forma financial information giving effect to the merger.
The pro forma financial information is based on, and should be read in
conjunction with, the historical consolidated financial statements of each of
the companies and the related notes.
The following pro forma condensed consolidating balance sheet information
gives effect to the issuance of 58,377,134 shares of Checkers common stock in
exchange for 29,335,243 shares of Rally's common stock, based upon the per
share price of Checkers common shares of $0.531 and a one-for-twelve reverse
split, assuming the merger and reverse stock split had occurred on March 22,
1999:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CHECKERS RALLY'S
MARCH 22, MARCH 22, PRO FORMA
1999 1999 ADJUSTMENTS MERGED
----------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Total current assets ........................................... $ 11,861 $ 13,323 $ $ 25,184
Property and equipment, net .................................... 77,162 60,290 137,452
Investment in affiliate, including net goodwill
of $11,717 after accumulated amortization...................... -- 22,567 A) (22,567) --
Intangibles, net of accumulated amortization ................... 9,916 23,402 G) 19,391 52,709
Other assets, net of accumulated amortization .................. 1,232 2,620 3,852
--------- -------- --------- ---------
$ 100,171 $122,202 $ (3,176) $ 219,197
========= ======== ========= =========
LIABILITIES:
Current liabilities ............................................ 18,824 19,204 B) 1,500 39,528
Senior notes, net of discount, less current maturities ......... -- 53,543 53,543
Long-term debt and capital lease obligations, less
current maturities ............................................ 28,853 12,588 41,441
Minority interests in joint ventures ........................... 674 -- 674
Other long-term liabilities .................................... 8,323 3,951 12,274
--------- -------- ---------
Total liabilities ............................................. 56,674 89,286 1,500 147,460
STOCKHOLDERS' EQUITY:
Preferred stock ................................................ -- -- --
Common stock ................................................... 73 2,961 C) (3,025) 9
Additional paid-in capital ..................................... 121,579 97,346 D) (81,914) 137,011
Retained deficit ............................................... (77,755) (65,283) E) 77,755 (65,283)
--------- -------- --------- ---------
43,897 35,024 (7,184) 71,737
Less treasury stock, at cost ................................... (400) (2,108) F) 2,508 --
--------- -------- --------- ---------
Net stockholders' equity ...................................... 43,497 32,916 (4,676) 71,737
--------- -------- --------- ---------
$ 100,171 $122,202 $ (3,176) $ 219,197
========= ======== ========= =========
</TABLE>
- ----------------
A) Pro forma adjustment to record the elimination of Rally's original
investment of $10,850 in Checkers common stock and the reclassification to
intangibles of $11,717 of goodwill associated with Rally's investment in
Checkers.
B) Pro forma adjustment to accrue estimated transaction costs related to the
merger.
C) Pro forma adjustments to record the issuance of 58,377 shares of Checkers
common stock in exchange for Rally's outstanding shares $58; to eliminate
the previous common stock account of Rally's, ($2,961); to eliminate the
par value associated with Rally's investment in Checkers common stock,
($19); and to effect a one-for-twelve reverse split, ($103).
D) Pro forma adjustments, in accordance with reverse acquisition accounting, to
record the fair value of the outstanding 54,277 shares of common stock of
Checkers valued at $0.531 per share; $28,767 which is net related par
value, eliminate the previous treasury stock of Rally's $2,108; eliminate
the previous additional paid-in capital account of Checkers, ($121,579); to
reduce additional paid in capital for the par value of the 58,377 shares
issued to Rally's stockholders, ($58); to eliminate the previous common
stock account of Rally's, $2,961; to attribute a $10,000 estimated fair
value to the outstanding Checkers stock options and warrants, and to give
effect a one-for-twelve reverse split, $103.
E) Pro forma adjustments to record the elimination of the retained deficit
account of Checkers.
F) Pro forma adjustment to eliminate the previous treasury stock of Checkers,
$400; as well as the treasury stock of Rally's, $2,108, which is cancelled
as a result of the merger.
G) Pro forma adjustment to record goodwill of $7,674 associated with the merger
and the reclassification of $11,717 of goodwill associated with Rally's
original investment in Checkers (see A).
70
<PAGE>
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the merger, assuming the merger and the reverse stock split had occurred on
December 29, 1997:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CHECKERS RALLY'S
TWELVE WEEKS TWELVE WEEKS
ENDED ENDED PRO FORMA
MARCH 22, 1999 MARCH 22, 1999 ADJUSTMENTS MERGED
---------------- ---------------- ------------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUES ...................................... $ 31,713 $30,119 61,832
-------- ------- ----- ------
COSTS AND EXPENSES:
Restaurant operating costs .......................... 26,434 24,206 50,640
Advertising expense ................................. 1,912 1,801 3,713
Other expenses ...................................... 98 352 450
Other depreciation and amortization ................. 454 570 H) 194 1,218
General and administrative expense .................. 2,917 3,081 I) (88) 5,910
-------- ------- ----- ------
Total cost and expenses ............................ 31,815 30,010 106 61,931
-------- ------- ----- ------
Operating (loss) income ............................ (102) 109 (106) (99)
Other income (expense):
Interest income .................................... 58 188 246
Gains on bond repurchases .......................... -- 256 256
Loss on investment in affiliate .................... -- (434) J) 434 --
Interest expense ................................... (1,181) (1,685) (2,866)
-------- ------- ----- ------
Loss before minority interest, income taxes ......... (1,225) (1,566) 328 (2,463)
Minority interests in (losses) earnings ............. (114) -- (114)
-------- ------- ----- ------
Loss before income taxes ............................ (1,111) (1,566) 328 (2,349)
Income taxes ........................................ -- 37 37
-------- ------- ----- ------
Net (loss) earnings ................................. $ (1,111) $(1,603) $328 $(2,386)
======== ======= ===== =======
Comprehensive (loss) earnings ....................... $ (1,111) $(1,603) $ 328 $(2,386)
======== ======= ===== =======
Net (loss) income per common share
(basic and diluted) ............................... $ (0.02) $ (0.05) $ (0.25)
======== ======= =======
Weighted average number of common
shares (basic and diluted) ........................ 73,408 29,335 K) 9,388
======== ======= =======
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded on
Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment in
Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the merger, effected for the
one-for-twelve reverse split.
71
<PAGE>
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the merger, assuming the merger had occurred December 29, 1997:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
-------------- -------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total Revenues ......................................... $145,708 $144,952 $ 290,660
-------- -------- ------ ---------
COSTS AND EXPENSES:
Restaurant operating costs ............................. 119,416 113,782 233,198
Advertising expense .................................... 6,921 9,853 16,774
Other expenses ......................................... 516 647 1,163
Other depreciation and amortization .................... 2,275 2,503 H) 842 5,620
General and administrative expense ..................... 13,309 13,404 I) (380) 26,333
SFAS 121 provisions .................................... 2,953 3,362 6,315
-------- -------- ---------
Total costs and expenses ............................. 145,390 143,551 462 289,403
-------- -------- ------ ---------
Operating income (loss) .............................. 318 1,401 (462) 1,257
-------- -------- ------ ---------
Other income (expense):
Interest expense ...................................... (6,007) (7,145) (13,152)
Loss on investment in affiliate ....................... -- (2,019) J) 2,019 --
Interest income ....................................... 272 480 752
-------- -------- ------- ---------
Loss before minority interest and income tax expense
(benefit) ............................................. (5,417) (7,283) 1,557 (11,143)
Minority interests in operations of joint venture ...... (73) -- (73)
-------- -------- ------- ---------
Loss before income tax expense (benefit) ............... (5,344) (7,283) 1,557 11,070
Income tax expense ..................................... -- 252 252
-------- -------- ------- ---------
Net (loss) earnings .................................... $ (5,344) $ (7,535) $ 1,557 $ (11,322)
======== ======== ======= =========
Comprehensive (loss) earnings .......................... $ (5,344) $ (7,535) $ 1,557 $ (11,322)
======== ======== ======= =========
Net loss per common share (basic and diluted) .......... $ (0.07) $ (0.28) $ (1.21)
======== ======== =========
Weighted average number of common shares (basic
and diluted) .......................................... 73,388 27,170 K) 9,388
======== ======== =========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded on
Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment in
Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the merger, effected for the
one-for-twelve reverse split.
72
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Checkers and Rally's are providing the following financial information to
help you analyze the financial aspects of the merger. This information is only
a summary and you should read it in conjunction with the historical financial
statements and related notes contained in this joint proxy
statement/prospectus.
As of January 1, 1994, Checkers changed from a calendar reporting year
ending on December 31 to a fiscal year which generally ends on the Monday
closest to December 31. Each quarter consists of three four-week periods, with
the exception of the fourth quarter which consists of four-week periods.
As of December 29, 1997, Rally's changed from a fiscal year ending on the
Sunday closest to December 31 with four 13-week quarters to a fiscal year
ending on the Monday closest to December 31 with quarters consisting of three
four-week periods, with the exception of the fourth quarter which consists of
four four-week periods.
SELECTED HISTORICAL FINANCIAL DATA OF CHECKERS
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1995 1996 1996 1997 1998
------------ ------------ -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
Company Restaurant Sales ............ $194,922 $178,744 $155,392 $135,710 $137,965
Other Revenues ...................... 20,193 11,561 9,569 8,184 7,743
--------- -------- -------- -------- --------
Total Revenues ........... ......... 215,115 190,305 164,961 143,894 145,708
Operating Expenses .................. 208,245 200,949 183,268 146,844 142,437
Accounting Charges and
Loss Provisions .................... 14,771 26,572 23,905 1,027 2,953
Interest Expense .................... 3,564 5,724 6,233 8,650 6,007
Interest Income ..................... 326 674 678 375 272
Minority Interests .................. 185 (192) (1,509) (66) (73)
--------- -------- -------- -------- --------
Income (Loss) Before Taxes .......... (11,324) (42,074) (46,258) (12,186) (5,344)
Tax Provision (Benefit) ............. (4,573) (8,855) 151 0 0
--------- -------- -------- -------- --------
Net Income (Loss) ................... $ (6,751) $(33,219) $(46,409) $(12,186) $ (5,344)
========= ======== ======== ======== ========
Net Income (Loss) per
Common Share ....................... $ (0.14) $ (0.65) $ (0.90) $ (0.20) $ (0.07)
========= ======== ======== ======== ========
Total Assets ........................ $196,770 $166,819 $136,110 $115,401 $102,099
Book value per Common Share ......... 2.21 1.55 0.78 0.69 0.61
Long-Term Obligations and
Redeemable Preferred Stock ......... $ 38,341 $ 38,090 $ 39,906 $ 29,401 $ 29,654
Cash Dividends Declared per
Common Share ....................... $ 0 $ 0 $ 0 $ 0 $ 0
<CAPTION>
QUARTER ENDED
------------------------
MARCH 23, MARCH 22,
1998 1999
----------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA
AND RATIOS)
<S> <C> <C>
Company Restaurant Sales ............ $ 35,107 $ 30,140
Other Revenues ...................... 1,896 1,573
-------- --------
Total Revenues ........... ......... 37,003 31,713
Operating Expenses .................. 35,316 31,815
Accounting Charges and
Loss Provisions .................... 63 0
Interest Expense .................... 1,369 1,181
Interest Income ..................... 79 58
Minority Interests .................. (60) (114)
-------- --------
Income (Loss) Before Taxes .......... 394 (1,111)
Tax Provision (Benefit) ............. 0 0
-------- --------
Net Income (Loss) ................... $ 394 $ (1,111)
======== ========
Net Income (Loss) per
Common Share ....................... $ 0.01 $ (0.02)
======== ========
Total Assets ........................ $113,676 $100,171
Book value per Common Share ......... 0.69 0.59
Long-Term Obligations and
Redeemable Preferred Stock ......... $ 28,894 $ 28,853
Cash Dividends Declared per
Common Share ....................... $ 0 $ 0
</TABLE>
73
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF RALLY'S
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, DECEMBER 28, DECEMBER 28,
1995 1995 1996 1997 1998
------------ -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
Company Restaurant
Sales .......................... $178,476 $181,778 $156,445 $139,348 $139,602
Other Revenues .................. 7,842 7,081 6,307 5,582 5,350
-------- -------- -------- -------- --------
Total Revenues ................. 186,318 188,859 162,752 144,930 144,952
Operating Expenses .............. 184,049 194,050 158,691 141,429 140,352
Accounting Charges and
Loss Provisions ................ 17,259 31,045 20 158 3,362
Interest Expense ................ 9,742 10,682 8,622 7,434 7,145
Interest Income ................. 477 538 614 750 480
Gains on Bond
Repurchases .................... $ 0 $ 0 $ 0 $ 0 $ 163
Loss on Investment in
Affiliate ...................... 0 0 0 720 2,019
-------- -------- -------- -------- --------
Loss Before Taxes ............... (24,255) (46,380) (3,967) (4,061) (7,283)
Tax Provision (Benefit) ......... (4,982) 539 (675) 455 252
-------- -------- -------- -------- --------
Loss Before Extraordinary
Item ........................... (19,273) (46,919) (3,292) (4,516) (7,535)
Extraordinary Item .............. 0 0 5,280 0 0
-------- -------- -------- -------- --------
Net Income (Loss) ............... $(19,273) $(46,919) $ 1,988 $ (4,516) $ (7,535)
======== ======== ======== ======== ========
Income (Loss) per
common share ...................
Income (Loss) before
extrordinary item ............. $ (1.42) $ (3.00) $ (0.19) $ (0.22) $ (0.28)
Extraordinary Item ............. $ 0 $ 0 $ 0.31 $ 0 $ 0
-------- -------- -------- -------- --------
Net Income (Loss) per
Common Share ................... $ (1.42) $ (3.00) $ 0.12 $ (0.22) $ (0.28)
======== ======== ======== ======== ========
Total Assets .................... $169,416 $137,392 $112,258 $134,297 $123,306
Book value per Common
Share .......................... 2.21 0.43 0.94 1.69 1.18
Long-Term Obligations
and Redeemable
Preferred Stock ................ $ 91,647 $ 80,414 $ 68,080 $ 67,250 $ 68,817
Cash Dividends Declared
per Common Share ............... $ 0 $ 0 $ 0 $ 0 $ 0
<CAPTION>
QUARTER ENDED
------------------------
MARCH 22, MARCH 22,
1998 1999
----------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA
AND RATIOS)
<S> <C> <C>
Company Restaurant
Sales .......................... $ 30,962 $ 29,040
Other Revenues .................. 1,202 1,079
-------- --------
Total Revenues ................. 32,164 30,119
Operating Expenses .............. 31,534 30,010
Accounting Charges and
Loss Provisions ................ 31 0
Interest Expense ................ 1,690 1,685
Interest Income ................. 77 188
Gains on Bond
Repurchases .................... $ 0 $ 256
Loss on Investment in
Affiliate ...................... 42 434
-------- --------
Loss Before Taxes ............... (1,056) (1,566)
Tax Provision (Benefit) ......... 26 37
-------- --------
Loss Before Extraordinary
Item ........................... (1,082) (1,603)
Extraordinary Item .............. 0 0
-------- --------
Net Income (Loss) ............... $ (1,082) $ (1,603)
======== ========
Income (Loss) per
common share ...................
Income (Loss) before
extrordinary item ............. $ (0.04) $ (0.05)
Extraordinary Item ............. $ 0 $ 0
-------- --------
Net Income (Loss) per
Common Share ................... $ (0.04) $ (0.05)
======== ========
Total Assets .................... $131,816 $122,202
Book value per Common
Share .......................... 1.65 1.12
Long-Term Obligations
and Redeemable
Preferred Stock ................ $ 67,024 $ 66,131
Cash Dividends Declared
per Common Share ............... $ 0 $ 0
</TABLE>
74
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CHECKERS
INTRODUCTION
Checkers commenced operations on August 1, 1987, to operate and franchise
Checkers double drive-thru restaurants. As of March 22, 1999, Checkers had an
ownership interest in 233 Company operated restaurants and an additional 232
restaurants were operated by franchisees. Checkers' ownership interest in the
Checkers' operated restaurants is in one of two forms: (i) Checkers owns 100%
of the restaurant (as of March 22, 1999, there were 221 such restaurants) and
(ii) Checkers owns a 10.55% or 65.83% interest in a partnership which owns the
restaurant. As of March 22, 1999, there were 12 such joint venture restaurants
whose operations are consolidated in the financial statements of Checkers. See
"Business. -- Restaurant Operations -- Joint Venture Restaurants" on page 112
for a more detailed description.
During fiscal 1998, comparable store sales for Checkers were 2.3% above
the prior year representing the first full-year increase in six years. The
first quarter of 1998 featured the successful introduction of a spicy chicken
sandwich that was somewhat unique to the quick-service segment. Other product
innovations during 1998 included the transition to a two-patty platform that
enabled Checkers to utilize a large hamburger patty for a premium sandwich
while also using a smaller hamburger patty for its lower priced menu offerings.
Critical to the success of these and other menu offerings was the operational
and marketing focus on serving fresh food. In the first quarter of fiscal 1999,
comparable store sales at Checkers were 14.3% below the same quarter of the
prior year. Severe winter weather in January and intense discounting by major
competitors combined to reduce sales. In addition, the seasonal population
increase that typically occurs in the core Florida markets was less significant
this year. During 1998 and the first quarter of 1999, Checkers broadcast media
utilized the positioning statement "Fresh, because we just made it" to
emphasize the commitment to serve fresh hot food to every customer. This
message was primarily communicated to consumers via television advertising.
Since the first quarter of fiscal 1998, Checkers, along with its
franchisees, experienced a net decrease of 18 operating restaurants. In fiscal
1998, Checkers opened two restaurants and closed two and franchisees opened 18
restaurants and closed 35. In the first quarter of fiscal 1999, Checkers opened
one restaurant, acquired three restaurants from franchisees and closed one
restaurant and franchisees opened three restaurants and transferred three
restaurants to Checkers. The franchise group as a whole continues to experience
higher average per store sales than Checkers stores.
On November 30, 1997, a management services agreement was established
between Checkers and Rally's pursuant to which Checkers is providing
accounting, information technology and other management services to Rally's. At
approximately the same time, a new management team was put into place to
provide the operational and functional expertise necessary to explore the
opportunities and potential synergies available to both
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companies. Total fees charged to Rally's under this agreement were $95,000 in
1997, $5.6 million in 1998 and $1.7 million in the first quarter of 1999.
The relationship between Checkers and Rally's provided reductions in
general and administrative expenses for both companies. The Rally's corporate
office in Louisville, Kentucky was closed, as well as various regional offices
of both companies. The management services agreement also provided for the
supervision of both Checkers and Rally's operations by a single Regional Vice
President, within each region, which increased spans of control with fewer
personnel. The number of markets that contain both Checkers and Rally's units
is limited and no market in which either company utilizes broadcast media is
shared. Therefore, the companies combined their advertising creative and media
buying with one agency in August of 1998 which resulted in similar commercials
running for both companies with reductions of agency fees and production costs.
In relation to food and paper costs, although both companies had already
benefited greatly by participating in the purchasing cooperative with CKE
Restaurants, Inc., further savings were realized during the year as product
specifications were matched where possible.
Checkers receives revenues from restaurant sales, franchise fees,
royalties and sales of fully-equipped manufactured modular restaurant packages.
Cost of restaurant sales relates to food and paper costs. Other restaurant
expenses include labor and all other restaurant costs for Checkers operated
restaurants. Cost of modular restaurant packages 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 general
and administrative expenses, relate both to Checkers operated restaurant
operations and modular restaurant package revenues as well as Checkers'
franchise sales and support functions. Checkers' revenues and expenses are
affected by the number and timing of additional restaurant openings and the
sales volumes of both existing and new restaurants. Modular restaurant package
revenues are directly affected by the number of new franchise restaurant
openings and the number of new modular restaurant packages produced or used
modular restaurant packages refurbished for sale in connection with those
openings.
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RESULTS OF OPERATIONS.
The following table sets forth the percentage relationship to total
revenues of the listed items included in Checkers' 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>
QUARTER ENDED
FISCAL YEAR ENDED (UNAUDITED)
-------------------------------------------- ----------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30, MARCH 22, MARCH 23,
1998 1997 1996 1999 1998
-------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Restaurant sales .............................. 94.7% 94.3% 94.2% 95.0% 94.9%
Royalties ..................................... 4.8% 4.9% 4.5% 4.7% 4.5%
Franchise fees ................................ 0.3% 0.3% 0.6% 0.2% 0.5%
Modular restaurant packages ................... 0.2% 0.5% 0.7% 0.1% 0.1%
---- ---- ---- ---- ----
Total revenues ............................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
COST AND EXPENSES
Restaurant food and paper costs(1) ............ 31.3% 32.1% 35.2% 30.2% 32.4%
Restaurant labor costs(1) ..................... 31.8% 32.4% 36.9% 33.4% 30.5%
Restaurant occupancy expense(1) ............... 7.8% 8.0% 8.3% 8.0% 7.5%
Restaurant depreciation and
amortization(1) .............................. 5.6% 6.1% 5.7% 5.5% 5.3%
Other restaurant operating expense(1) ......... 10.1% 9.9% 9.9% 10.7% 8.8%
Advertising expense(1) ........................ 5.0% 5.0% 4.8% 6.3% 5.3%
Costs of modular restaurant package
revenues(2) ................................. 215.0% 87.0% 141.8% 753.9% 134.6%
Other depreciation and amortization ........... 1.6% 1.6% 2.6% 1.4% 1.4%
General and administrative expense ............ 9.1% 11.8% 12.5% 9.2% 8.6%
Impairment of long-lived assets ............... 1.2% 0.4% 9.0% 0.0% 0.0%
Losses on assets to be disposed of ............ 0.8% 0.2% 4.3% 0.0% 0.2%
Loss provisions ............................... 0.0% 0.1% 1.2% 0.0% 0.0%
----- ----- ----- ----- -----
Operating income (loss) ....................... 0.2% (2.8)% (25.6)% (0.3)% 4.4%
----- ----- ----- ----- -----
OTHER INCOME (EXPENSE)
Interest income ............................... 0.2% 0.3% 0.4% 0.2% 0.2%
Interest expense .............................. (4.1)% (6.0)% (3.8)% (2.7)% (2.6)%
Minority interests in losses .................. (0.1)% 0.0% (0.9)% 0.4% 0.2%
----- ----- ----- ----- -----
Loss before income tax expense ................ (3.7)% (8.5)% (28.0)% (3.5)% 1.1%
Income tax expense ............................ 0.0% 0.0% 0.1% 0.0% 0.0%
----- ----- ----- ----- -----
Net loss ....................................... (3.7)% (8.5)% (28.1)% (3.5)% 1.1%
===== ===== ===== ===== =====
Net loss to common shareholders ................ (3.7)% (9.0)% (28.1)% (3.5)% 1.1%
===== ===== ===== ===== =====
</TABLE>
- ----------------
(1) As a percent of restaurant sales.
(2) As a percent of modular restaurant package revenues.
77
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
FISCAL YEAR ENDED (UNAUDITED)
-------------------------------------------- ----------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30, MARCH 22, MARCH 22,
1998 1997 1996 1999 1998
-------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Operating data:
System-wide restaurant sales (in 000's):
Company operated ...................... $137,965 $135,710 $155,392 $30,140 $35,107
Franchised ............................ 180,648 174,600 172,566 38,755 47,715
-------- -------- -------- ------- -------
Total ................................ $318,613 $310,310 $327,958 $68,895 $82,822
======== ======== ======== ======= =======
Average annual sales per restaurant
open for a full year (in 000's)(3):
Company operated ...................... $ 606 $ 586 $ 651 $ 583 $ 599
Franchised ............................ $ 750 $ 737 $ 755 $ 766 $ 730
System-wide ........................... $ 677 $ 661 $ 699 $ 670 $ 664
-------- -------- -------- ------- -------
Number of restaurants(4):
Company operated ...................... 230 230 232 233 230
Franchised ............................ 232 249 246 232 253
-------- -------- -------- ------- -------
Total ................................ 462 479 478 465 483
======== ======== ======== ======= =======
</TABLE>
- ----------------
(3) Includes sales for restaurants open continuously during the year.
(4) Number of restaurants open at end of period.
COMPARISON OF HISTORICAL RESULTS -- FISCAL YEARS 1998 AND 1997
REVENUES. Total revenues increased 1.3% to $145.7 million in 1998 compared
to $143.9 million in 1997. Checkers operated restaurant sales increased 1.7% to
$138.0 million in 1998 from $135.7 million in 1997. Comparable Checkers
operated restaurant sales for the year ended December 28, 1998, increased 2.3%
as compared to the year ended December 29, 1997. Comparable Checkers-owned
restaurants are those continuously open during both reporting periods. The
increase in restaurant sales is primarily attributable to the successful
introduction of the spicy chicken sandwich during the first quarter of fiscal
1998 and the brand positioning advertising featuring the "Fresh, because we
just made it" tag line that focuses on the quality of the Checkers products.
Franchise revenues and fees remained constant at $7.5 million in 1998 and
1997.
Modular restaurant package revenues decreased 66.2% to $240,000 compared
with $710,000 in 1997 due to decreased sales volume of modular restaurant
packages to Checkers' franchisees which is a result of franchisees sales of
used modular restaurant packages and Checkers' efforts to refurbish and sell
its inventory of used MRP's from previously closed sites. These efforts have
been successful, however, these sales have negatively impacted the new building
revenues.
COSTS AND EXPENSES. Restaurant food and paper costs totaled $43.2 million
or 31.3% of restaurant sales compared with $43.6 million or 32.1% of restaurant
sales for 1997. The decrease in these costs as a percentage of restaurant sales
was due to new purchasing contracts negotiated in 1997 and 1998.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits, bonuses and related taxes, totaled $43.8 million or 31.8% of
restaurant sales for 1998
78
<PAGE>
compared with $43.9 million or 32.4% of restaurant sales for 1997. The decrease
in restaurant labor costs as a percentage of restaurant sales was due primarily
to efficiencies gained at higher sales level and a $66,000 reduction in
workers' compensation expense, partially offset by a $594,000 increase in group
insurance costs.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totaled $10.8 million or 7.8% of restaurant sales for
1998, consistent with $10.8 million or 8.0% of restaurant sales for 1997.
Restaurant depreciation and amortization decreased 6.7% to $7.8 million
for 1998, from $8.3 million for 1997, due to certain assets becoming fully
depreciated during 1998. These expenses decreased to 5.6% in 1998 from 6.1% in
1997 due to the increase in average restaurant sales.
Advertising expense remained constant at $6.9 million or 5.0% of
restaurant sales in 1998 and $6.8 million or 5.0% of restaurant sales for 1997.
Other restaurant expenses includes all other restaurant level operating
expenses other than food and paper costs, labor and benefits, rent and other
occupancy costs and specifically includes utilities, maintenance and other
costs. These expenses totaled $13.9 million or 10.1% of restaurant sales for
1998 compared to $13.4 million or 9.9% of restaurant sales for 1997. The
increase in this expense is due primarily to increased repair and maintenance
expenditures.
Costs of modular restaurant package revenues totaled $516,000 or 215.0% of
modular restaurant package revenue for 1998 compared with $618,000 or 87.0% of
modular restaurant package revenues for 1997. The increase in these expenses as
a percentage of modular restaurant package revenues was attributable to the
fixed and semi-variable nature of these costs.
General and administrative expenses decreased to $13.3 million or 9.1% of
total revenues in 1998 from $17.0 million or 11.8% of total revenues in 1997.
The reductions in 1998 are due primarily to the management services agreement
with Rally's, reductions in legal expenses, the reversal of $500,000 of
previously accrued state sales tax audit provisions due to the successful
completion of certain state sales tax audits and a fourth quarter 1997 accrual
for severance and relocations of $314,000 associated with the recruitment of
six new members of executive management.
ACCOUNTING CHARGES AND LOSS PROVISIONS. During 1998 Checkers recorded
accounting charges and loss provisions of $3.0 million in accordance with SFAS
121, including impairment charges related to seven stores ($1.8 million), the
expenses necessary to adjust the net realizable value of assets held for sale
($551,000) and store closure expense ($645,000) which primarily includes
provisions for carrying costs of restaurants closed in prior years that have
not been disposed of and similar costs for two restaurants closed in 1998.
Comparatively, during 1997, Checkers recorded accounting charges and
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<PAGE>
loss provisions totalling $1.0 million, including impairment charges to write
off goodwill associated with one under-performing store ($565,000), to provide
for additional losses on assets to be disposed due to certain sublease
properties being converted to surplus ($312,000), and a provision to write down
Champion inventories to fair value ($150,000).
A summary of the accounting charges and loss provisions for 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF
ACCOUNTING CHARGES AND LOSS PROVISIONS
-----------------------------------------------------------------------
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH NON-CASH BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS DEDUCTIONS END OF YEAR
- --------------------------------------------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1998:
Impairment of long-lived assets ............ $ -- $1,757 $ -- $ (1,757) $ --
Losses on assets to be disposed of ......... 2,740 1,196 (1,635) (236) 2,065
Other loss provisions ...................... 1,290 -- (85) -- 1,205
------ ------ -------- -------- ------
$4,030 $2,953 $ (1,720) $ (1,993) $3,270
====== ====== ======== ======== ======
Year ended December 29, 1997:
Impairment of long-lived assets ............ $ -- $ 565 $ -- $ (565) $ --
Losses on assets to be disposed of ......... 3,800 312 (1,695) 323 2,740
Other loss provisions ...................... 2,357 150 (76) (1,141) 1,290
------ ------ -------- -------- ------
$6,157 $1,027 $ (1,771) $ (1,383) $4,030
====== ====== ======== ======== ======
</TABLE>
The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of Checkers' estimates for the ongoing carrying
costs of each location which has been closed or was never developed. These
costs include rents, property taxes, insurance, maintenance, utilities and in
some cases the cost to relocate the modular restaurant to a storage facility.
The cash outlays for these costs have been estimated for various terms ranging
from five months to three years.
INTEREST EXPENSE. Interest expense other than loan cost amortization
decreased to $4.0 million or 2.7% of total revenues in 1998 from $5.0 million
or 3.5% of total revenues in 1997. This decrease was due to a reduction in the
weighted average balance of debt outstanding during the respective periods.
Loan cost amortization decreased by $1.7 million from $3.7 million in 1997 to
$2.0 million in 1998 due primarily to the lower weighted average debt balances
in 1998 versus 1997 and the accelerated amortization of deferred loan costs
recognized upon unscheduled principal payments of $8.0 million in 1998 and $9.7
million in 1997.
INCOME TAX EXPENSE (BENEFIT). During 1998, Checkers recorded income tax
benefit of $2.0 million or 38.0% of the net loss before income taxes, which was
offset by the recording of deferred income tax valuation allowances of $2.0
million for the year ended December 28, 1998, as compared to an income tax
benefit of $4.6 million or 38.0% of earnings before income taxes offset by
deferred income tax valuation allowances of $4.6 million for the year ended
December 29, 1997. The effective tax rates differ from the expected federal tax
rate of 34.0% due to state income taxes and job tax credits.
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<PAGE>
COMPARISON OF HISTORICAL RESULTS -- FISCAL YEARS 1997 AND 1996
REVENUES. Total revenues decreased 12.8% to $143.9 million in 1997
compared to $165.0 million in 1996. Checkers-operated restaurant sales
decreased 12.7% to $135.7 million in 1997 from $155.4 million in 1996. The
decrease resulted partially from a net reduction of 2 Checkers operated
restaurants since December 30, 1996. Comparable Checkers operated restaurant
sales for the year ended December 29, 1997, decreased 9.9% as compared to the
year ended December 30, 1996, which includes those restaurants open at least 26
periods. These decreases in restaurant sales and comparable restaurant sales is
primarily attributable to a highly competitive environment during 1997 and
Checkers' focus on cutting costs while developing a new marketing strategy.
Franchise revenues and fees decreased 10.7% to approximately $7.5 million
in 1997 from approximately $8.4 million in 1996. An actual decrease of $503,000
was a direct result of one fewer franchised restaurant opening as well as a
decline in comparable franchise restaurant sales of 5.9% during 1997, and a
decline in the weighted average royalty rate charge due to openings in Puerto
Rico, as well as certain discounting of fees on non-standard restaurant
openings. The remaining decrease of $390,000 is due to the recording of revenue
from terminations of area development agreements during the year ended December
30, 1996. Checkers recognizes franchise fees as revenues when Checkers has
substantially completed its obligations under the franchise agreement, usually
at the opening of the franchised restaurant.
Modular restaurant packages revenues decreased 40.9% to $710,000 in 1997
compared to $1.2 million in 1996 due to decreased sales volume of modular
restaurant packages to Checkers' franchisees which is a result of franchisees
sales of used modular restaurant packages and Checkers' efforts to refurbish
and sell its inventory of used modular restaurant packages from previously
closed sites. These efforts have been successful, however, these sales have
negatively impacted the new building revenues.
COSTS AND EXPENSES. Restaurant food ($40.6 million) and paper ($3.0
million) costs totaled $43.6 million or 32.1% of restaurant sales for 1997,
compared to $54.7 million ($49.5 million food costs; $5.2 million, paper costs)
or 35.2% of restaurant sales for 1996. The dollar decrease in food and paper
costs was due primarily to the decrease in restaurant sales while the decrease
in these costs as a percentage of restaurant sales was due to new purchasing
contracts negotiated in early 1997.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes, totaled $43.9 million or 32.4% of restaurant
sales for 1997, compared to $57.3 million or 36.9% of restaurant sales for
1996. The decrease in restaurant labor costs as a percentage of restaurant
sales was due primarily to various restaurant level initiatives implemented in
the first quarter of 1997 and a decrease of $2.3 million in workers'
compensation expense, partially offset by a minimum wage increase in 1997.
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<PAGE>
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totaled $10.8 million or 8.0% of restaurant sales for
1997, compared to $12.9 million or 8.3% of restaurant sales for 1996.
Restaurant depreciation and amortization decreased 6.0% to $8.3 million
for 1997, from $8.8 million for 1996, due primarily to 1996 impairments
recorded under Statement of Financial Accounting Standards No. 121 and the
impact of restaurant closures during late 1996 and early 1997. However, as a
percentage of restaurant sales, these expenses increased to 6.1% in 1997 from
5.7% in 1996 due to the decline in average restaurant sales.
Advertising expense decreased to $6.8 million or 5.0% of restaurant sales
for 1997 which did not materially differ from the $7.4 million or 4.8% of
restaurant sales spent for advertising in 1996.
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
which declined consistently with sales declines, totaled $13.5 million or 9.9%
of restaurant sales for 1997 compared to $15.3 million or 9.9% of restaurant
sales for 1996, resulting primarily from restaurant closures in late 1996 and
early 1997.
Costs of modular restaurant package revenues totaled $618,000 or 87.0% of
modular restaurant package revenues for 1997, compared to $1.7 million or
141.8% of such revenues for 1996. The decrease in these expenses as a
percentage of modular restaurant package revenues was attributable to the
elimination of various excess fixed costs in the first quarter of 1997.
General and administrative expenses decreased to $17.0 million or 11.8% of
total revenues in 1997 from $20.7 million or 12.5% of total revenues in 1996.
The 1997 general and administrative expenses included charges of $314,000 for
severance and relocations associated with the recruitment of six new members of
executive management. The 1996 general and administrative expenses included
$1.1 million in unusual bad debt expenses and other, $750,000 provisions for
state sales tax audits, $925,000 for severance and relocation and a $845,000
write-off of existing loan costs incurred in connection with Checkers' previous
lending arrangements with its bank group. Excluding the above charges,
recurring general and administrative expenses decreased $372,000 primarily
attributable to a reduction in corporate staffing early in 1997.
ACCOUNTING CHARGES AND LOSS PROVISIONS. During the fourth quarter of 1997,
Checkers recorded accounting charges and loss provisions totalling $1.0
million, including charges to write off goodwill associated with one
under-performing store ($565,000), to provide for additional losses on assets
to be disposed due to certain sublease properties being converted to surplus
($312,000) and a provision to write down Champion inventories to fair value
($150,000). Checkers recorded accounting charges and loss provisions totalling
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$14.7 million during the third quarter of 1996 and $9.2 million during the
fourth quarter of 1996. Third quarter provisions under SFAS 121 of $14.2
million to close 27 restaurants, relocate 22 of them ($4.2 million), settle 16
leases on real property underlying these stores ($1.2 million) and sell land
underlying the other 11 restaurants ($307,000), and impairment charges related
to an additional 28 under-performing restaurants ($8.5 million) were recorded.
A loss provision of $500,000 was also recorded to reserve for Champion's
finished buildings inventory as an adjustment to fair market value. Fourth
quarter provisions under SFAS 121 totaling $7.7 million, including $1.4 million
for additional losses on assets to be disposed of, $5.9 million for impairment
charges related to nine under-performing restaurants received by Checkers
through a July 1996 franchisee bankruptcy action and $393,000 for other
impairment charges were also recorded. Additionally, in the fourth quarter of
1996, a provision of $351,000 was recorded for legal settlements, and a $1.1
million provision for loss was recorded for the disposal of the L.A. Mex
product line.
A summary of the accounting charges and loss provisions for 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF
ACCOUNTING CHARGES AND LOSS PROVISIONS
-----------------------------------------------------------------------
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH NON-CASH BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS DEDUCTIONS END OF YEAR
- --------------------------------------------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 29, 1997:
Impairment of long-lived assets ............ $ -- $ 565 $ -- $ (565) $ --
Losses on assets to be disposed of ......... 3,800 312 (1,695) 323 2,740
Other loss provisions ...................... 2,357 150 (76) (1,141) 1,290
------ ------- -------- --------- ------
$6,157 $ 1,027 $ (1,771) $ (1,383) $4,030
====== ======= ======== ========= ======
Year ended December 30, 1996:
Impairment of long-lived assets ............ $ -- $14,782 $ -- $ (14,782) $ --
Losses on assets to be disposed of ......... 2,124 7,131 (943) (4,512) 3,800
Other loss provisions ...................... 1,004 1,992 -- (639) 2,357
------ ------- -------- --------- ------
$3,128 $23,905 $ (943) $ (19,933) $6,157
====== ======= ======== ========= ======
</TABLE>
The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of Checkers estimates for the ongoing carrying
costs of each location which has been closed or was never developed. These
costs include rents, property taxes, insurance, maintenance, utilities and in
some cases the cost to relocate the modular restaurant to a storage facility.
The cash outlays for these costs have been estimated for various terms ranging
from five months to three years.
INTEREST EXPENSE. Interest expense other than loan cost amortization
decreased to $5.0 million or 3.5% of total revenues in 1997 from $6.1 million
or 3.7% of total revenues in 1996. This decrease was due to a reduction in the
weighted average balance of debt outstanding during the respective periods,
partially offset by an increase in Checkers' effective interest rates since the
second quarter of 1996. Loan cost amortization increased by $3.5 million from
$159,000 in 1996 to $3.7 million in 1997 due to the November 22, 1996
capitalization of deferred loan costs and $9.7 million in unscheduled principal
reductions in early 1997.
83
<PAGE>
INCOME TAX EXPENSE (BENEFIT). There were no net taxes after valuation
allowances for 1997. Due to the loss for 1996, Checkers 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. The effective tax rates differ from the
expected federal tax rate of 35.0% due primarily to state income taxes.
COMPARISON OF HISTORICAL RESULTS -- QUARTER ENDED MARCH 22, 1999 AND QUARTER
ENDED MARCH 23, 1998
REVENUES. Total revenues decreased 14.3% to $31.7 million for the quarter
ended March 22, 1999, compared to $37.0 million for the quarter ended March 23,
1998. Checkers operated restaurant sales decreased $14.1% to $30.1 million for
the quarter ended March 22, 1999, from $35.1 million for the quarter ended
March 23, 1998. Restaurant sales for comparable Checkers-owned restaurants for
the quarter ended March 22, 1999, decreased 14.3% compared to the quarter ended
March 23, 1998. Comparable Checkers-owned restaurants are those continuously
open during both reporting periods. These decreases in restaurant sales and
comparable restaurants sales are primarily attributable to severe winter
weather and intense discounting by competitors during the current quarter.
Franchise revenues and fees decreased 15.4% to $1.6 million for the
quarter ended March 22, 1999, from $1.8 million for the quarter ended March 23,
1998. This was a result of a net decrease of twenty-one franchised restaurants
since March 23, 1998, and opening three franchise restaurants during the
quarter ended March 22, 1999 versus one in the first quarter of fiscal 1998.
Checkers recognizes franchise fees as revenues when Checkers has substantially
completed its obligations under the franchise agreement, usually at the opening
of the franchised restaurant.
Modular restaurant package package revenues decreased 75.0% to $13,000 for
the quarter ended March 22, 1999, from $52,000 for the quarter ended March 23,
1998 due to decreased sales volume of modular restaurant packages to Checkers'
franchisees which is a result of franchisees sales of used modular restaurant
packages and Checkers' efforts to refurbish and sell its inventory of used
modular restaurant packages from previously closed sites. These efforts have
been successful, however, these sales have negatively impacted the new building
revenues.
COSTS AND EXPENSES. Restaurant food and paper costs totalled $9.1 million
or 30.2% of restaurant sales for the quarter ended March 22, 1999, compared to
$11.4 million or 32.4% of restaurant sales for the quarter ended March 23,
1998. The decrease in these costs as a percentage of restaurant sales was due
to the introduction of the two-patty platform that utilizes a smaller hamburger
patty for the value conscious customer.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes, totalled $10.1 million or 33.4% of
restaurant sales for the quarter ended March 22, 1999, compared to $10.7
million or 30.5% of restaurant sales for the quarter
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<PAGE>
ended March 23, 1998. The increase in restaurant labor costs as a percentage of
restaurant sales was due to the decrease in comparable store sales and the
impact of operating at lower sales levels.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance, totalled $2.4 million or 8.0% of restaurant sales for
the quarter ended March 22, 1999 compared to $2.6 million or 7.5% of restaurant
sales for the quarter ended March 23, 1998. This increase in restaurant
occupancy costs as a percentage of restaurant sales was due primarily to the
decrease in average restaurant sales relative to the fixed and semi-variable
nature of these expenses.
Restaurant depreciation and amortization decreased by $231,000 or 12.3%
for the quarter ended March 22, 1999, as compared to the quarter ended March
23, 1998, due primarily to certain assets becoming fully depreciated, partially
offset by a net increase of three Checkers operated restaurants from March 23,
1998 to March 22, 1999.
Advertising expense remained consistent at $1.9 million or 6.3% of
restaurant sales for the quarter ended March 22, 1999, and $1.9 million or 5.3%
of restaurant sales for the quarter ended March 23, 1998.
Other restaurant expenses includes all other restaurant level operating
expenses other than food and paper costs, labor and benefits, rent and other
occupancy costs which includes utilities, maintenance and other costs. These
expenses totaled $3.2 million or 10.7% of restaurant sales for the quarter
ended March 22, 1999, compared to $3.1 million or 8.8% of restaurant sales for
the quarter ended March 23, 1998. The increase in the quarter ended March 22,
1999, as a percentage of restaurant sales was primarily related to the decrease
in average restaurant sales relative to the fixed and semi-variable nature of
these expenses.
Costs of modular restaurant package revenues totalled $98,000 or 766.2% of
modular restaurant package revenues for the quarter ended March 22, 1999,
compared to $70,000 or 134.6% of such revenues for the quarter ended March 23,
1998. The increase in these expenses as a percentage of modular restaurant
package revenues was attributable to the decline in modular restaurant package
revenues relative to the fixed and semi-variable nature of these costs.
General and administrative expenses were $2.9 million or 9.2% of total
revenues, for the quarter ended March 22, 1999, compared to $3.2 million or
8.6% of total revenues for the quarter ended March 23, 1998. The decrease in
these expenses of $251,000 was primarily due to the additional savings
associated with the management services agreement with Rally's which gained the
most significant effect in the middle of the first quarter of 1998.
INTEREST EXPENSE. Interest expense other than loan cost amortization
decreased to $850,000 or 2.7% of total revenues for the quarter ended March 22,
1999 from $954,000 or 2.6% of total revenues for the quarter ended March 23,
1998. This decrease was due to a
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reduction in the weighted average balance of debt outstanding during the
respective periods and the impact of a $10.0 million mortgage transaction in
December 1998, the proceeds of which were primarily used to reduce debt bearing
higher interest rates. Loan cost amortization decreased by $83,000 to $331,000
in 1999 from $415,000 for the quarter ended March 23, 1998 due to accelerated
amortization of deferred loan costs associated with unscheduled principal
reductions in 1998.
INCOME TAX EXPENSE. Due to the loss for the quarter, Checkers recorded an
income tax benefit of $422,000 or 38.0% of the loss before income taxes which
was completely offset by deferred income tax valuation allowances of $422,000
for the quarter ended March 22, 1999, as compared to an income tax benefit of
$150,000 or 35.0% of earnings before income taxes offset by the reversal of
deferred income tax valuation allowances of $2.0 million for the quarter ended
March 23, 1998. The effective tax rates differ from the expected federal tax
rate of 34.0% due to state income taxes and job tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Checkers cash and cash equivalents increased approximately $742,000 to
$4.7 million in 1998. Strong sales and improved cost controls resulted in cash
flow from operating activities of $3.1 million in 1998 compared to a negative
cash flow of $4.0 million in 1997. During the first quarter of 1999, cash and
cash equivalents decreased approximately $1.0 million to $3.6 million.
Investing activities provided an additional $494,000 of cash in 1998.
Proceeds from the sale of assets in 1998 generated $2.0 million of cash.
Capital expenditures of $1.5 million were for the replacement of store
equipment, $964,000; construction of a side dining unit, $171,000; and the
upgrade and expansion of corporate computer systems, $365,000. The decrease in
the first quarter of 1999 was primarily the result of lower sales and capital
expenditures related to new menu boards.
Financing activities for 1998 included a $10 million mortgage transaction,
$8.6 million of which was utilized to reduce long term debt. Additional long
term debt of $3.7 million was repaid during 1998 utilizing the proceeds from
asset sales and funds generated from operations. During the first quarter of
1999, approximately $291,000 of long term debt was repaid.
On November 14, 1996, Checkers' debt under its loan agreement and credit
line was acquired from its previous lenders by a group of entities and
individuals, most of whom are engaged in the quick-service restaurant business.
This investor group was led by CKE Restaurants, Inc., the parent of Carl
Karcher Enterprises, Inc., Hardee's Food System, Inc., Taco Bueno Restaurants,
Inc., and Summit Family Restaurants, Inc. Also participating were most members
of the DDJ Group, Fidelity National Financial, Inc. and KCC Delaware Company, a
wholly-owned subsidiary of GIANT GROUP, LTD., CKE, GIANT and an affiliate of
Fidelity, Santa Barbara Restaurant Group, Inc., are the largest stockholders of
Rally's.
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On November 22, 1996, Checkers and the lender group executed and amended
and 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 lender group agreed to eliminate certain financial covenants,
to relax others and to eliminate approximately $4.3 million in restructuring
fees and charges. The restated credit agreement also provided that certain
members of the lender group agreed to provide to Checkers a short term
revolving line of credit of up to $2.5 million, also at a fixed interest rate
of 13%. In consideration for the restructuring, the restated credit agreement
required Checkers to issue to the members of the lender group warrants to
purchase an aggregate of 20 million shares of Checkers' 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, Checkers has reduced the principal balance under the restated credit
agreement by $18.4 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 Checkers from the sale of certain closed restaurant sites to third
parties. Additionally, Checkers utilized $10.5 million of the proceeds from the
February 21, 1997, private placement and $8.0 million of the proceeds of a
$10.0 million mortgage financing transaction completed on December 18, 1998 for
these principal reductions, both which are described later in this section.
Pursuant to the restated credit agreement, the prepayments of principal made in
1996 and early in 1997 relieved Checkers of the requirement to make any of the
regularly scheduled principal payments under the restated credit agreement
which would have otherwise become due in fiscal year 1998 through maturity. The
amended and restated credit agreement provides however, that 50% of any future
asset sales must be utilized to prepay principal.
At March 22, 1999, a significant portion ($17.4 million) of Checkers'
long-term debt relates to Checkers' restated credit agreement which originally
was to mature on July 31, 1999. During March and April 1999, Santa Barbara
Restaurant Group, Inc., a company which is an 8.2% owner, as of December 31,
1998, of Rally's acquired approximately $4.9 million of debt due to three
members of the lender group. The terms associated with the such debt are
identical to terms that other participants of the lender group have pursuant to
the restated credit agreement. On March 24, 1999, the lender group agreed to an
extension of the maturity date to April 30, 2000. As of December 28, 1998,
Fidelity National Financial, Inc. owned 31.1% of the outstanding common stock
of Santa Barbara Restaurant Group.
Checkers' restated credit agreement with the lender group contains
restrictive covenants which include the consolidated EBITDA covenant as
defined. As of December 28, 1998 and during a majority of 1998, Checkers was in
violation of the consolidated EBITDA
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covenant. Checkers received a waiver for periods 11 through 13 of fiscal 1998,
and for all periods remaining through the earlier of August 9, 1999 or the
effective date of the merger with Rally's.
On February 21, 1997, Checkers completed a private placement of 8,981,453
shares of Checkers common stock and 87,719 shares of Checkers Series A
preferred stock. CKE Restaurants, Inc. purchased 6,162,299 of Checkers' common
stock and 61,623 of the preferred stock and other qualified investors,
including other members of the lender group under the restated credit agreement
and Raymond James and Associates, Inc., also participated in the private
placement. Checkers received approximately $19.5 million in net proceeds after
$500,000 of issuance costs from the private placement. Checkers 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 carried a 13% interest rate reduced Checkers' interest payments by more
than $1.3 million on an annualized basis. Raymond James and Associates, Inc.
received 209,524 shares of the common stock for services related to the private
placement. Under the purchase price protection provisions of these 209,524
shares, Raymond James and Associates, Inc. was paid $170,000 as of December 28,
1998 and will be paid a remaining total of approximately $252,000 during 1999.
On August 6, 1997, the 87,719 shares of preferred stock were converted into
8,771,900 shares of Checkers common stock valued at $10 million. In accordance
with the agreement underlying the private placement, Checkers also issued
610,524 shares of common stock as a dividend pursuant to the liquidation
preference provisions of the private placement agreement, valued at $696,000 to
the holders of the preferred stock issued in the private placement.
Checkers had outstanding promissory notes in the aggregate principal
amount of approximately $3.2 million payable to Rall-Folks, Inc., Restaurant
Development Group, Inc. and Nashville Twin Drive-Through Partners, L.P.
Checkers agreed to acquire the notes issued to Rall-Folks and RDG in
consideration of the issuance of an aggregate of approximately 1.9 million
shares of common stock and the note issued to NTDT in exchange for a series of
convertible notes in the same aggregate principal amount and convertible into
approximately 614,000 shares of common stock pursuant to agreements entered
into in 1995 and subsequently amended. All three of the parties received
varying degrees of protection on the purchase price of the promissory notes.
Accordingly, the actual number of shares to be issued was to be determined by
the market price of Checkers' stock. Consummation of the Rall-Folks, RDG, and
NTDT purchases occurred on November 24, and December 5, and November 24, 1997,
respectively.
During December 1997, Checkers issued an aggregate of 2,622,559 shares of
common stock in payment of $2.9 million of principal and accrued interest
relating to the notes. After these issuance's, the remaining amount owed in
relation to these notes was $322,000,
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payable to NTDT. During 1998, Checkers issued an additional 359,129 shares of
common stock and paid $121,000 in cash to NTDT, issued 12,064 shares of common
stock and paid $29,000 in cash to RDG and issued 279,868 shares of common stock
and paid $86,000 in cash to Rall-Folks in full settlement of all remaining
amounts owed in relation to debt principal, accrued interest and purchase price
protection under the notes.
On December 1, 1998, Checkers entered into two lease agreements, which
have been recorded as obligations under capital lease, with Granite Financial,
Inc., a wholly owned subsidiary of Fidelity, whereby Checkers leased $659,000
of security equipment for its restaurants in the aggregate. The first lease
agreement is payable monthly at approximately $13,000 including effective
interest at 13.08%. The second lease is payable at approximately $9,000,
including effective interest at 10.90%. Both of these leases have terms of
three years.
On December 18, 1998, Checkers completed a $10.0 million mortgage
financing transaction with FFCA Acquisition Corporation collateralized by 24
fee-owned properties. The terms of the transaction include a stated interest
rate of 9.5% on the unpaid balance over a 20 year term. The net proceeds of the
mortgage transaction were approximately $9.6 million of which $8.0 million was
utilized to reduce the amount outstanding under the restated credit agreement
and approximately $612,000 was used to retire other debt associated with the
collateral upon closing. Approximately $1.0 million was retained for
operational initiatives of Checkers, including but not limited to new menu
boards.
In 1999, the franchise community has indicated an intent to open 20 to 30
new units and Checkers intends to close fewer restaurants focusing on improving
restaurant margins.
Checkers has a working capital deficit of $7.0 million at March 22, 1999.
It is anticipated that Checkers will continue to have a working capital deficit
since approximately 88% of the Checkers' assets are long-term, primarily
property, equipment, and intangibles, and since primarily all operating trade
payables, accrued expenses, and property and equipment payables are current
liabilities of Checkers.
Management continues to develop initiatives designed to improve
profitability and cash flow from operations. Checkers believes that existing
cash balances and cash flow from operations should be sufficient to fund its
current operations and obligations during fiscal year 1999, including interest
payments on all long term debt.
Checkers is addressing the refinancing or repayment options related to the
remaining debt due its lender group. If the proposed merger with Rally's is
completed, proceeds from a potential sale-leaseback of certain fee-owned
properties currently owned by Rally's could become available to repay a portion
of the Checkers debt. Management anticipates that further debt reductions may
be accomplished by completing a private placement of preferred or common stock.
Management is also evaluating other debt repayment strategies that are not
contingent upon the completion of the merger, including the option of selling
company-owned stores in certain markets to existing and potentially new
franchisees.
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YEAR 2000
The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19".
Checkers has completed an assessment of all known internal information
technology systems to document its state of readiness.
Checkers utilizes accounting software packages such as Lawson, for general
ledger/accounts payable, and Cyborg for payroll, that require periodic upgrades
to benefit from the latest modifications to the programs. Typically, all
releases of such upgrades must be implemented, eliminating a company's ability
to move directly to the most recent release. During 1998, Checkers successfully
implemented all required releases of both Lawson and Cyborg that preceded the
Year 2000 compliant release. The consulting and training required for the next
Lawson and Cyborg upgrades are underway with targeted implementation dates
during the second quarter of 1999 at a cost to Checkers of approximately
$50,000. Checkers has assessed the computer systems utilized at the Checkers
restaurant level and determined such systems to be 100% Year 2000 compliant.
Costs of replacing certain desktop computers and other required modifications
at the corporate office are not expected to exceed $70,000. The upgrade of
corporate office systems is approximately 75% complete and should be finalized
by August 31, 1999.
Pursuant to the management services agreement that exists between Checkers
and Rally's, Checkers is also responsible for the testing for and
implementation of Year 2000 computer systems for Rally's. In addition, as
administrative functions of Rally's such as payroll and accounting are handled
by Checkers employees, initiatives previously discussed will also impact the
operations of Rally's. Checkers' information technology department is also
responsible for the store level computer systems utilized by Rally's. While the
cash registers that are used by Rally's for each transaction are Year 2000
compliant, the back-office computer and related software is not. The
back-office computer is utilized for capturing and controlling such items as
payroll and food cost and is required to sustain communication of this and
other data to the corporate office. New computer systems will be purchased by
Rally's and the software currently utilized by the Checkers restaurants will be
installed. Final testing of this software will be complete during the first
quarter of 1999 and completion of the rollout is expected by August 31, 1999.
The costs of compliance of shared systems is allocated between the two
companies, whereas additional hardware costs at the restaurants are not shared.
Checkers is continuing to identify third parties that must be Year 2000
compliant to ensure the continued success of our operations. Letters requesting
written verification of compliance have been sent to companies that provide
financial services, utilities, inventory preparation and distribution and other
key services. Checkers has not been notified of any anticipated Year 2000
related failures by these third parties but it can not be assured that all such
entities will be operable on January 1, 2000. The distribution centers that
deliver
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products to the restaurants maintain an adequate inventory to supply items for
approximately three weeks. If suppliers are unable to deliver product to the
distribution centers due to Year 2000 or other plant malfunctions, alternative
suppliers are currently identified that could deliver product that matches
Checkers' specifications. If Checkers is unable to obtain verification of Year
2000 compliance from its primary distributor by September 1, 1999, an
alternative distributor will be selected to ensure the continued delivery of
inventory to the restaurants. Although not negotiated at this time, it is
probable that the resulting delivery costs of the inventory would be higher
resulting in higher food and paper costs for Checkers. If documentation of Year
2000 compliance is not received from financial institutions by November 1,
1999, Checkers will transfer its banking relationships to other banks at an
incremental cost not expected to exceed $100,000. No contingency plans are
available if the utility services for the restaurants are interrupted due to
Year 2000 failures.
Although Checkers' systems are not currently fully Year 2000 compliant,
management feels that Checkers' risk in this area is minimal. If Checkers is
unable to implement the upgrade to the payroll system, it would be able to
utilize a third party to process payroll at a cost of approximately $125,000
per year. Contingency plans related to the accounting software package are
still under development.
Overall, Checkers believes many of the fundamental steps have been taken
to improve Checkers' initiative toward profitability, but there can be no
assurance that it will be able to do so. Management believes that cash flows
generated from operations, and asset sales should allow Checkers to continue to
meet its financial obligations and to pay operating expenses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF RALLY'S
The principal business of Rally's is the operation and franchising of
Rally's restaurants. At March 22, 1999, the Rally's system included 469
restaurants, comprised of 225 Rally's-owned and operated, 244 franchised
restaurants, including 25 Rally's-owned restaurants in Western markets which
are operated as Rally's restaurants by CKE Restaurants, Inc., a significant
shareholder of Rally's, under an operating agreement which began in July, 1996.
Two additional Rally's-owned stores covered by the operating agreement have
been converted to the Carl's Jr. format and are not included in the above store
count.
As of December 29, 1997 Rally's changed from a fiscal year ending on the
Sunday closest to December 31st to a fiscal year ending on the Monday closest
to December 31st. This resulted in an extra day in fiscal 1998. Rally's also
changed its quarterly reporting periods from four 13-week quarters to three
12-week quarters and a 16-week fourth quarter.
On November 30, 1997, a management services agreement was established
between Rally's and Checkers pursuant to which Checkers is providing
accounting, information technology and other management services to Rally's. At
the same time, a new management team was hired to provide the operational and
functional expertise necessary to explore the opportunities and potential
synergies available to both companies. The relationship between Rally's and
Checkers provided reductions in general and administrative expenses for both
companies. Rally's corporate office in Louisville, Kentucky was closed and as
were various regional offices of both companies. The management services
agreement also provided for the supervision of both Checkers and Rally's
operations by a single regional vice president, which increased spans of
control with fewer personnel. The number of markets that contain both Checkers
and Rally's units is limited and no markets in which either company utilizes
broadcast media is shared. Therefore, the companies combined their advertising
creative and media buying with one agency in August of 1998 which resulted in
similar commercials running for both companies with savings of agency fees and
production costs. Although both companies have benefited greatly by
participating in the purchasing cooperative with CKE Restaurants, Inc., further
savings were realized during the year as product specifications were matched
where possible. Total fees incurred by the Rally's under this agreement were
$95,000 in 1997, $5.6 million in 1998 and $1.7 million in the first quarter of
1999.
During fiscal 1998, comparable store sales at Rally's were 1.8% below the
prior year and sales during the first quarter of 1999 were 6.1% below the prior
first quarter of 1998. In the first quarter of 1999, Rally's sales were
negatively impacted by severe weather in January and increased discounting by
Rally's competitors. Although sales continued to decline on a same store basis,
the decrease in 1998 was the smallest in four years. Product innovations during
the year included the shift from a 3.2 ounce hamburger patty to a two-patty
platform featuring a 2.67 ounce patty and a 4.3 ounce patty. The 2.67 ounce
patty allows Rally's to sell a fully-dressed Rallyburger for $0.99 while also
offering the Super
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Rallyburger that utilizes the larger patty for a premium price. This change was
necessary to ensure that Rally's can remain competitive as food and labor costs
continue to escalate.
Critical to the success of these and other menu offerings was the
operational and marketing focus on serving fresh food. The transition to a new
advertising agency resulted in the utilization of a new positioning statement
"Fresh, because we just made it" to emphasize the commitment to serve fresh hot
food to every customer. This message was primarily communicated to consumers
via television advertising.
Although Rally's debt level is still high, Rally's has made substantial
progress in improving its balance sheet and reducing fixed costs. Interest cost
was reduced by approximately $300,000 in 1998 after decreasing $1.2 million in
1997 and $2.1 million in 1996. Interest was significantly reduced through the
retirement of approximately $22 million face value of Rally's senior notes in
January 1996 and an additional $4.7 million during the fourth quarter of 1996.
In addition, $10.8 million in gross proceeds were generated through Rally's
rights offering completed in September, 1996. The proceeds from the offering
were used to pay off debt of approximately $4.5 million and the remainder was
used for new store construction, refurbishment of some existing restaurants and
for other general corporate purposes. Rally's is currently evaluating its
options to determine the optimal manner in which to refinance or retire the
senior notes. These alternatives include a sale-leaseback transaction or
additional mortgage financing. Other options include the sale of certain
company-owned markets to current or new franchisees in transactions that would
provide immediate funds to reduce debt and would also provide a continued
source of income through future royalties.
Rally's revenues are derived primarily from Rally's-owned restaurant sales
and royalty fees from franchisees. Rally's also receives revenues from the
award of exclusive rights to develop Rally's restaurants in certain geographic
areas, called area development fees, and the award of licenses to use the
Rally's brand and confidential operating system (franchise fees). Rally's
revenue also includes payments resulting from an operating agreement with CKE,
referred to as Owner fee income in the accompanying consolidated financial
statements. Restaurant cost of sales, restaurant operating expenses,
depreciation and amortization, and advertising and promotion expenses relate
directly to Rally's-owned restaurants. General and administrative expenses
relate to both Rally's-owned restaurants and franchise operations. Owner
expenses relate to CKE-operated restaurants and consist primarily of
depreciation and amortization.
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RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to total revenues,
unless otherwise indicated, of certain items included in Rally's consolidated
statements of income and operating data for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED
FISCAL YEAR ENDED (UNAUDITED)
-------------------------------------------- ----------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29, MARCH 22, MARCH 22,
1998 1997 1996 1999 1998
-------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Restaurant sales .................................... 96.3% 96.2% 96.1% 96.4% 96.3%
Franchise revenues and fees ......................... 3.2% 3.3% 3.6% 3.0% 3.2%
Owner fee income .................................... 0.5% 0.5% 0.3% 0.6% 0.5%
---- ---- ---- ---- ----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
COST AND EXPENSES:
Restaurant food and paper costs(1) .................. 31.8% 32.3% 34.3% 29.5% 32.4%
Restaurant labor costs(1) ........................... 30.5% 29.8% 31.1% 32.4% 31.4%
Restaurant occupancy expense(1) ..................... 5.3% 4.7% 4.5% 6.1% 5.0%
Restaurant depreciation and amortization(1) ......... 5.2% 5.1% 4.9% 5.6% 5.4%
Other restaurant operating expenses(1) .............. 8.8% 9.2% 9.5% 9.7% 8.6%
Advertising expense(1) .............................. 7.1% 7.4% 5.0% 6.2% 5.3%
Owner depreciation(2) ............................... 90.6% 84.3% 90.9% 216.1% 85.0%
Other depreciation and amortization ................. 1.7% 1.8% 1.4% 1.9% 1.9%
General and administrative expenses ................. 9.2% 10.4% 9.9% 10.2% 10.8%
Impairment of long-lived assets ..................... 1.2% 0.0% 0.0% 0.0% 0.0%
Losses on assets to be disposed of .................. 1.1% 0.1% 0.0% 0.0% 0.1%
----- ----- ----- ----- -----
INCOME FROM OPERATIONS .............................. 1.0% 2.3% 2.5% 0.4% 1.6%
Loss (income) net of amortization on investment
in affiliate ....................................... 1.4% 0.5% 0.0% 1.4% 0.1%
Other income (expense) .............................. (4.6)% (4.6)% (4.9)% (4.2)% (5.1)%
----- ----- ----- ----- -----
Net loss before income taxes and extraordinary
items .............................................. (5.0)% (2.8)% (2.5)% (5.2)% (3.3)%
NET INCOME (LOSS) ................................... (5.2)% (3.1)% 1.2% (5.3)% (3.4)%
===== ===== ===== ===== =====
Number of restaurants (company-owned and
franchised):
Restaurants open at the beginning of period ......... 477 467 481 475 477
----- ----- ----- ----- -----
Company restaurants opened (closed or
transferred), net during period .................... (3) 20 (30) (1) --
Franchised restaurants opened (closed or
transferred), net during period .................... 1 (10) 16 (5) 1
----- ----- ----- ------ -----
Total restaurants opened (closed or transferred),
net during period .................................. (2) 10 (14) (6) 1
------ ----- ----- ------ -----
Total restaurants open at end of period ............. 475 477 467 469 478
===== ===== ===== ===== =====
</TABLE>
- ----------------
(1) As a percentage of restaurant sales.
(2) As a percentage of owner fee income.
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COMPARISON OF HISTORICAL RESULTS -- FISCAL YEARS 1998 AND 1997
REVENUES. Total revenues in 1998 of $145.0 million were consistent with
1997 total revenues of $144.9 million. Rally's operated restaurant sales of
$139.6 million were also consistent with the prior year sales of $139.3
million. Sales at comparable stores, which include only the units that were in
operation for the full years being compared, decreased 1.8% in 1998 as compared
with 1997. Also impacting the year to year comparison was the sales increase of
$4.1 million associated with 21 units that were opened or transferred from
franchisees during 1997 and 1998 offset by the sales decrease of $1.6 million
related to six units that were closed during 1998.
Franchise revenues and fees decreased 4.2% in 1998 from approximately $4.8
million in 1997 to $4.6 million in 1998. The decrease is primarily attributable
to lower average sales levels in franchised units.
COSTS AND EXPENSES. Restaurant food and paper costs decreased to 31.8% of
restaurant sales in 1998 compared with 32.3% in 1997. Rally's continued to
benefit from its participation in the purchasing co-op with CKE Restaurants,
Inc., Santa Barbara Restaurant Group, Inc. and Checkers. In addition, food and
paper costs as a percentage of sales also decreased due to limited price
increases to certain combo items that were taken in 1998.
Restaurant labor costs, which include restaurant employees' salaries,
wages, benefits, bonuses and related taxes totaled $42.6 million or 30.5% of
restaurant sales for 1998 compared with $41.5 million or 29.8% for 1997. The
increase as a percentage of sales is due in part to the inefficiencies
associated with operating the restaurants at lower sales levels. In addition,
incremental labor was strategically added to focus on speed of service
improvements in 1998.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $7.3 million or 5.3% of restaurant sales in 1998
compared with $6.5 million or 4.7% in 1997. Restaurant occupancy expense
increased as a percentage of restaurant sales due primarily to the decline in
average restaurant sales relative to the fixed and semi-variable nature of
these expenses.
Restaurant depreciation and amortization of $7.2 million in 1998 was
consistent with the expense of $7.1 million in 1997. Additional expense
associated with Rally's operated restaurants that opened during 1998 and 1997
was offset by the closure of eight restaurants during 1998 and the impact of
certain assets becoming fully depreciated.
Other restaurant operating expenses include all other restaurant level
operating expenses other than food and paper costs, labor and benefits, rent
and other occupancy costs and specifically includes utilities, maintenance and
other costs. These expenses totaled $12.2 million or 8.8% of restaurant sales
in 1998 compared with $12.8 million or 9.2% in 1997. The decrease as a percent
of sales was due primarily to reduced maintenance expenses during 1998.
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Advertising expense decreased approximately $489,000 to $9.9 million or
7.1% of restaurant sales for 1998 compared with 7.4% for 1997.
Owner depreciation and amortization was $647,000 in 1998 compared to
$627,000 in 1997. The increase of $20,000 was primarily due to the addition of
two CKE operated restaurants in 1998.
General and administrative expenses decreased $1.7 million in 1998 due to
savings experienced as a result of the management services agreement with
Checkers and the impact of $940,000 of expense in 1997 associated with warrants
that were issued to CKE and Fidelity National Financial, Inc., on December 20,
1996.
The loss on investment in affiliate of $2.0 million represents Rally's
share of the loss of Checkers ($1.4 million) and the amortization of related
goodwill ($627,000).
Impairment of long-lived assets of $1.7 million representing the
write-down of $590,000 of property and equipment and $1.1 million of
intangibles was recorded during 1998 related to four under-performing sites. No
such charges were made in 1997. Losses on assets to be disposed of in the
amounts of $1.6 million and $158,000 were recorded in 1998 and 1997,
respectively, to provide for the estimated losses on disposal for current year
closures and the additional carrying costs of closed restaurants until eventual
disposal.
The following summarizes the activities in the reserves for restaurant
relocations and abandoned sites as well as the activity associated with
impairments of long-lived assets.
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES END OF YEAR
- --------------------------------------------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 28, 1998
Impairment of long-lived assets ............ $ -- $1,727 $ -- $ (1,727) $ --
Losses on assets to be disposed of ......... 4,558 1,635 (939) 169 5,423
------ ------ -------- -------- ------
$4,558 $3,362 $ (939) $ (1,558) $5,423
====== ====== ======== ======== ======
Year Ended December 28, 1997
Impairment of long-lived assets ............ $ -- $ -- $ -- $ -- $ --
Losses on assets to be disposed of ......... 5,845 158 (1,486) 41 4,558
------ ------ -------- -------- ------
$5,845 $ 158 $ (1,486) $ 41 $4,558
====== ====== ======== ======== ======
</TABLE>
The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of Rally's estimates for the ongoing carrying
costs of each location which has been closed or was never developed. These
costs include rents, property taxes, maintenance, utilities and in some cases
the cost to relocate the modular restaurant to a storage facility. The cash
outlays for these costs have been estimated for various terms ranging from five
months to 11 years.
INTEREST EXPENSE. Interest expense decreased 3.9% to approximately $7.1
million for 1998 as compared to $7.4 million for 1997 primarily due to
repurchases of senior notes that occurred during 1998.
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INTEREST INCOME. Interest income was lower for 1998 as compared to 1997
due to decreases in the average daily invested amounts.
INCOME TAX. Rally's 1998 tax provision was approximately $252,000
representing estimated state taxes versus a prior year net tax provision of
$455,000.
COMPARISON OF HISTORICAL RESULTS -- FISCAL YEARS 1997 AND 1996
REVENUES. Total revenues decreased 11% to $144.9 million in 1997 compared
with $162.8 million in 1996. Rally's operated restaurant sales decreased 11% to
$139.3 million from $156.4 million in 1996. Sales at comparable stores, which
include only the units that were in operation for the full years being
compared, decreased 9.2% in 1997 as compared with 1996. During 1997, Rally's
opened 9 new restaurants, reopened three restaurants previously closed,
acquired 11 restaurants from franchisees, closed 2 units and transferred 1
restaurant to a franchisee.
Franchise revenues and fees decreased 17.5% in 1997 to approximately $4.8
million from approximately $5.9 million in 1996. Franchisees, exclusive of CKE,
opened 19 new units, acquired 1 unit from Rally's, closed 19 units and
transferred ownership of 11 restaurants to Rally's.
COSTS AND EXPENSES. Restaurant food and paper costs decreased to 32.3% in
1997 compared with 34.3% in 1996. The decrease was attributable primarily to
various cost reduction actions taken during 1997 and the second half of 1996.
Management's efforts to improve food and paper costs by implementing tighter
operational controls was supplemented by cost of sales reductions realized by
cooperating with CKE Restaurants, Inc. and Checkers to leverage the purchasing
power of the three entities to negotiate improved terms for their respective
contracts with suppliers.
Restaurant labor costs, which include restaurant employees' salaries,
wages, benefits, bonuses and related taxes totaled $41.5 million or 29.8% of
restaurant sales for 1997 compared with $48.6 million or 31.1% for 1996. The
improvement is primarily attributable to reductions in management and crew
labor that resulted from implemented changes in staffing levels and labor
deployment.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $6.5 million or 4.7% of restaurant sales in 1997
compared with $7.1 million or 4.5% in 1996. Restaurant occupancy expense
increased as a percentage of restaurant sales due primarily to the decline in
average restaurant sales relative to the fixed and semi-variable nature of
these expenses.
Restaurant depreciation and amortization decreased to $7.1 million in 1997
as compared with $7.7 million for the prior year. The decrease was primarily
due to a segregation of the expense associated with the CKE-operated properties
into owner depreciation and amortization as of July 1, 1996 and certain assets
becoming fully depreciated during 1997.
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Other restaurant operating expenses include all other restaurant level
operating expenses other than food and paper costs, labor and benefits, rent
and other occupancy costs and specifically includes utilities, maintenance and
other costs. These expenses totaled $12.8 million or 9.2% of restaurant sales
in 1997 compared with $14.9 million or 9.5% in 1996.
Advertising expense increased approximately $2.5 million to 7.4% of
restaurant sales for 1997 compared with 5.0% for 1996. During the first quarter
of 1997, Rally's initiated a new campaign that made greater use of television
advertising than in previous years which contributed to the increased cost.
Media expenditures were curtailed during the fourth quarter of 1996 as
management worked with the new advertising agency on new creative and brand
positioning.
Owner depreciation was $627,000 in 1997 compared to $400,000 in 1996.
General and administrative expenses decreased $1.0 million in 1997 due
primarily to reductions in the corporate and field operations staff and lower
levels of bad debt expense, partially offset by higher legal fees.
During the fourth quarter of 1997, Rally's recorded loss on investment in
affiliate of $720,000 based upon its share of the losses of Checkers for
December 1997 and the amortization of related goodwill.
The following summarizes the activities in the reserves for restaurant
relocations and abandoned sites as well as the activity associated with
impairments of long-lived assets.
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES END OF YEAR
- ---------------------------- ------------ ------------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 28, 1997
Impairment of long-lived
assets .................. $ -- $ -- $ -- $ -- $ --
Losses on assets to be
disposed of ............. 5,845 158 (1,486) 41 4,558
------ ------ -------- ------ ------
$5,845 $ 158 $ (1,486) $ 41 $4,558
====== ====== ======== ====== ======
Year Ended December 29, 1996
Impairment of long-lived
assets .................. $ -- $ 824 $ -- $ (824) $ --
Losses on assets to be
disposed of ............. 9,675 (804) (3,830) 804 5,845
------ ------ -------- ------ ------
$9,675 $ 20 $ (3,830) $ (20) $5,845
====== ====== ======== ====== ======
</TABLE>
The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of the Rally's estimates for the ongoing carrying
costs of each location which has been closed or was never developed. These
costs include rents, property taxes, maintenance, utilities and in some cases
the cost to relocate the modular
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restaurant to a storage facility. The cash outlays for these costs have been
estimated for various terms ranging from five months to 11 years.
INTEREST EXPENSE. Interest expense decreased 13.8% to approximately $7.4
million for 1997 as compared to $8.6 million for 1996 primarily due to the
early extinguishment of debt during the fourth quarter of 1996.
INTEREST INCOME. Interest income was higher for 1997 as compared to 1996
due to increases in the average daily invested amounts.
INCOME TAX. Rally's 1997 tax provision was approximately $455,000
representing estimated state taxes versus a prior year net tax provision of
$675,000 (obtained by netting the tax benefit line with the tax expense of $1.4
million which has been netted against the extraordinary gain). Of the prior
year net amount, $575,000 related to state taxes expected to be payable and
$100,000 related to reduction of an IRS receivable for a NOL carryback to 1987,
1988 and 1989
COMPARISON OF HISTORICAL RESULTS -- QUARTER ENDED MARCH 22, 1999 AND QUARTER
ENDED MARCH 22, 1998
REVENUES. Total revenue for the quarter ended March 22, 1999 of $30.1
million reflects a decrease of $2.0 million from the revenue of $32.2 million
that was recognized for the quarter ended March 22, 1998. Comparable store
sales for Rally's-owned restaurants decreased 6.1% compared to the same twelve
weeks of the prior year. Comparable Rally's-owned restaurants are those
continuously open during both reporting periods. Restaurant sales were
negatively impacted during the quarter by severe weather in January and
increased discounting by our competitors.
COST AND EXPENSES. Restaurant food and paper cost decreased to 29.5% of
restaurant sales in the quarter ended March 22, 1999 compared to 32.4% of
restaurant sales in the quarter ended March 22, 1998. The decrease is due
primarily to the introduction of the two-patty platform that utilizes a smaller
hamburger patty for the value conscious customer.
Restaurant labor costs, which includes restaurant employees' salaries,
wages, benefits and related taxes increased to 32.4% of restaurant sales for
the quarter ended March 22, 1999 compared to 31.4% of restaurant sales for the
quarter ended March 22, 1998. This increase is due primarily to the impact of
operating at a lower sales volume.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $1.8 million or 6.1% of restaurant sales for the
quarter ended March 22, 1999 compared to $1.6 million or 5.0% of restaurant
sales for the quarter ended March 22, 1998. The dollar increase is due
primarily to increased insurance and rental costs.
Restaurant depreciation and amortization decreased to $1.6 million for the
quarter ended March 22, 1999 compared to $1.7 million for the quarter ended
March 22, 1998. This
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decrease was due to certain assets becoming fully depreciated since the end of
the quarter ended March 22, 1998 and the net reduction of two units since that
time period.
Other restaurant operating expenses include all other restaurant level
operating expenses other than food and paper costs, labor and benefits, rent
and other occupancy costs and specifically includes utilities, maintenance and
other costs. These expenses increased to $2.8 million or 9.7% of restaurant
sales for the quarter ended March 22, 1999 compared to $2.7 million or 8.6% of
restaurant sales during the quarter ended March 22, 1998, due to increased
repair and maintenance expenditures.
Advertising expense increased to $1.8 million or 6.2% of restaurant sales
for the quarter ended March 22, 1999 compared to $1.6 million or 5.3% of
restaurant sales for the quarter ended March 22, 1998. The increase is due to
an expanded schedule of television advertising, into additional markets as well
as in those already using television, during the current fiscal quarter as
compared to the comparable first quarter in the prior year.
Owner expenses of $352,000 for the quarter ended March 22, 1999 represent
Rally's segregated ownership cost related to the 25 units operated by CKE.
These expenses consist primarily of depreciation and amortization associated
with the properties, which have increased by $217,000 from the quarter ended
March 22, 1998 due to a reduction in the estimated lives of the underlying
assets.
The loss on investment in affiliate of $434,000 for the quarter ended
March 22, 1999 and $42,000 for the quarter ended March 22, 1998 represents the
Rally's share of the income (loss) of Checkers and the amortization of related
goodwill.
General and administrative expenses were $3.1 million for the quarter
ended March 22, 1999 compared to $3.5 million for the quarter ended March 22,
1998. This reduction is due to additional savings associated with the
management services agreement with Checkers which gained the most significant
effect in the middle of the first quarter of 1998.
INTEREST EXPENSE. Interest expense remained consistent at $1.7 million for
the quarter ended March 22, 1999 and $1.7 million for the quarter ended March
22, 1998.
INTEREST INCOME. Interest income increased by $112,000 for the quarter
ended March 22, 1999 to $188,000 compared to $77,000 for the quarter ended
March 22, 1998 due to increases in the average investments.
INCOME TAX. Rally's net tax provision for both quarters represents
estimated state income taxes expected to be payable for both years. Rally's has
continued not recording a net tax benefit for the current book losses due to
uncertainty of their ultimate realization.
LIQUIDITY AND CAPITAL RESOURCES
Rally's cash and cash equivalents increased approximately $593,000 to $4.6
million in 1998. Rally's cash flow from operating activities was approximately
$2.5 million for 1998
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compared to $8.3 million for 1997. Of this decrease, $3.4 million was
attributable to a decrease in accounts payable balances and $3.1 million was
due to a decrease in accrued liabilities. Offsetting these decreases was an
increase in accounts receivable of $1.6 million. Rally's cash flow from
operating activities was approximately $4.4 million for the first quarter of
1999 compared with $505,000 for the first quarter of 1998. The notable increase
from 1998 to 1999 resulted primarily from increased balances in accounts
payable and accrued liabilities compared to the prior year.
Rally's utilized $2.2 million to fund investing activities during 1998.
Included in capital expenditures of $2.3 million was $848,000 for the
construction or conversion of new stores and $692,000 to add dining rooms to
four test units. The remaining capital expenditures were primarily for the
purchase and installation of replacement equipment. During 1998, Rally's
generated $615,000 of proceeds from the sale of property and equipment and
utilized $855,000 for the acquisition of two restaurants.
Rally's cash flow from operating activities was approximately $4.4 million
for the first quarter of 1999 compared with ($505,000) for the first quarter of
the prior year. The notable increase from 1998 to 1999 resulted primarily from
increased balances in accounts payable and accrued liabilities compared to the
prior year.
Capital expenditures of approximately $408,000 for the first quarter of
1999 were funded primarily through cash flow operations. Approximately $185,000
of these expenditures were for the construction or conversion of new stores in
1999. Additionally, $96,000 was spent in the first quarter to add dining rooms
to test units. Remaining capital expenditures in 1999 of $127,000 were
primarily for the purchase and installation of certain replacement equipment.
Financing activities for 1998 included the repayment of senior notes in
the amount of $2.2 million and the repayment of other long term debt of $1.2
million.
During 1998 and prior to December 18, 1998, Rally's repurchased on the
open market approximately $1.7 million face value of its senior notes at an
average price of $887.90 per $1,000 principal amount. During the third quarter
of 1998, Rally's completed the required mandatory sinking fund payment due June
15, 1999 calculated to retire 33 1/3% in aggregate original principal amount of
the senior notes.
On December 18, 1998, Rally's entered into a $4.3 million mortgage
transaction with FFCA Acquisition Corporation pursuant to which eight fee-owned
properties were mortgaged. The terms of the transaction include a stated
interest rate of 9.5% on the unpaid balance over a 20 year term with monthly
payments totaling approximately $40,000. Rally's is required to utilize the
entire net proceeds to reduce the senior notes. Purchases on the open market
were initiated immediately after the mortgage was finalized and will be
completed as they become available on the open market. As of March 5, 1999,
Rally's had utilized $2.7 million of the proceeds to repurchase $3.1 million
face value of the senior notes.
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In January 1996, Rally's repurchased approximately $22 million face value
of its 9 7/8% senior notes due in the year 2000. The senior notes were purchased
from GIANT at a price of $678.75 per $1,000 principal amount, representing the
market closing price on the last business day prior to the repurchase date.
Prior to the senior notes repurchases, Rally's board of directors had received
an independent opinion from an investment banking firm as to the fairness of
the transactions. Additionally, during the fourth quarter of 1996, Rally's
repurchased approximately $4.7 million face value of the senior notes from
various other bondholders for approximately $4.5 million in cash.
Rally's is actively marketing the assets included in the caption "Assets
held for sale" in the accompanying consolidated balance sheet and expects
realization in cash over the next 12 months, although actual timing of such
cash flows cannot be predicted. The assets contained in this caption are
recorded at management's current estimate of fair market value less costs to
sell. There can be no assurances that these values will be realized.
On July 1, 1996, Rally's entered into a ten-year operating agreement with
Carl Karcher Enterprises, Inc., a subsidiary of CKE Restaurants, Inc. Pursuant
to the agreement, 27 of which 2 of which have been converted to a Carl's Jr.
format, Rally's-owned restaurants located in California and Arizona are being
operated by CKE. Rally's retains ownership in the restaurants and receives from
CKE a percentage of gross revenues referred to in the financial statements as
owner fee income. This income is offset by Rally's segregated ownership costs
related to these units, referred to as owner depreciation in the financial
statements and consists primarily of noncash expenses of depreciation and
amortization. The agreement has improved cash flow, generating approximately
$714,000 in 1998 and $790,000 in 1997.
Rally's completed its shareholder rights offering on September 20, 1996.
The offering raised over $10.8 million in gross proceeds, offset by legal and
other issuance costs of approximately $437,000. In addition to the approximate
$10.8 million of gross proceeds provided by the offering, the warrants, if
exercised, would provide approximately $10.8 million for Rally's future growth.
The proceeds from the offering were used in 1997 to retire debt of
approximately $4.5 million and the remainder was used primarily in 1997 for new
store construction, refurbishment of some existing restaurants and for other
general corporate purposes.
On October 21, 1996, Rally's was notified by the indenture trustee that
the noteholder consent it had been soliciting had been approved by the required
majority of the holders of record of its 9 7/8% Senior Notes due 2000. The
consent will allow two of Rally's current stockholders, CKE and Fidelity
National Financial, Inc. and/or their affiliates, to acquire 35% or more of the
outstanding shares of Rally's common stock without triggering "Change in
control" provisions requiring Rally's to offer to purchase the senior notes at
101% of their face value. This gives Rally's greater flexibility to raise
capital in the future, and it gives two of its largest stockholders the ability
to increase their investment in Rally's.
On December 1, 1998, Rally's entered into two lease agreements, which have
been recorded as capital lease obligations, with Granite Financial Inc., a
wholly owned subsidiary
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of Fidelity, whereby Rally's leased security equipment for its restaurants
costing $627,000. The first lease agreement is payable monthly at $9,689,
including effective interest at 11.35%. The second lease is payable monthly at
$11,097, including effective interest at 12.39% and both have terms of 3 years.
On December 20, 1996, Rally's issued warrants to purchase an aggregate of
1,500,000 restricted shares of its common stock to CKE and Fidelity National
Financial, Inc. The warrants have a three-year term and became exercisable on
December 20, 1997. The exercise price is $4.375 per share, the closing price of
the common stock on December 20, 1996. The underlying shares of common stock
have not been registered with the Securities and Exchange Commission and,
therefore, are not freely tradable. If exercised, the warrants would provide
approximately $6.6 million in additional capital to Rally's. See Note 4 to the
accompanying consolidated financial statements for further discussion.
Management has plans in place to improve profitability and cash flows from
operations. Rally's believes existing cash balances and cash flow from
operations should be sufficient to fund its current operations and obligations
for the remainder of fiscal year 1999, including interest payments on the
senior notes. The ability of Rally's to satisfy its long-term obligations under
the senior notes, however, continues to be dependent upon, among other factors,
Rally's successfully increasing revenues and profits. In addition, Rally's is
evaluating other alternatives for the repayment and refinancing of the senior
notes. If Rally's is unable to refinance the debt in full, management of
Rally's is evaluating a series of sale-leaseback transactions and the
possibility of selling company-owned stores in certain markets to existing and
potentially new franchisees. Management also anticipates that further debt
reductions may also be accomplished by completing a private placement of
preferred or common stock during the twelve months preceding the maturity date
of the senior notes. There can be no assurance that Rally's will be able to
satisfy the entire principal balance of the senior notes on the maturity date
of June 15, 2000.
YEAR 2000
The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of "19".
Pursuant to the terms of the management services agreement that exists between
Rally's and Checkers, the information technology department of Checkers has
completed an assessment of all known internal Information Technology (IT)
systems of Rally's and Checkers to document the state of readiness.
Administrative services such as accounting and payroll are provided to
Rally's by Checkers. Checkers utilizes accounting software packages such as
Lawson, for general ledger/accounts payable, and Cyborg for payroll that
require periodic upgrades to benefit from the latest modifications to the
programs. Typically, all releases of such upgrades must be implemented,
eliminating a company's ability to move directly to the most recent release.
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During 1998, Checkers successfully implemented all required releases of both
Lawson and Cyborg that preceded the Year 2000 compliant release. The consulting
and training required for the next Lawson and Cyborg upgrades are underway with
targeted implementation dates during the second quarter of 1999 at a total cost
to Rally's of approximately $50,000. Costs of replacing certain desktop
computers and other required modifications at the corporate office are not
expected to exceed $70,000. The upgrade of corporate office systems is
approximately 75% complete and should be finalized by August 31, 1999. Pursuant
to the management services agreement that exists between Rally's and Checkers,
the costs of compliance of shared corporate office systems are allocated
between the two companies.
An assessment of the computer systems utilized at the store level has also
been completed. The cash registers that are used for each transaction represent
approximately 80% of the hardware in each restaurant and are Year 2000
compliant. The back-office computer that is utilized for capturing and
controlling such items as payroll and food cost and is required to sustain
communication of this and other data to the corporate office is not Year 2000
compliant. Rally's has scheduled the purchase of new computer systems and the
installation of the software currently utilized by the Checkers restaurants.
Final testing of this software is complete and, the rollout is expected to be
completed by August 31, 1999. The estimated cost of the project is
approximately $500,000.
Rally's is continuing to identify third parties that must be Year 2000
compliant to ensure the continued success of our operations. Letters requesting
written verification of compliance have been sent to companies that provide
financial services, utilities, inventory preparation and distribution and other
key services. Rally's has not been notified of any anticipated Year 2000
related failures by these third parties but it can not be assured that all such
entities will be operable on January 1, 2000. The distribution centers that
deliver products to the restaurants maintain an adequate inventory to supply
items for approximately three weeks. If suppliers are unable to deliver product
to the distribution centers due to Year 2000 or other plant malfunctions,
alternative suppliers are currently identified that could deliver product that
matches Rally's specifications. If Rally's is unable to obtain verification of
Year 2000 compliance from its primary distributor by September 1, 1999, an
alternative distributor will be selected to ensure continued delivery of
inventory to the restaurants. Although not negotiated at this time, it is
probable that the resulting delivery costs of the inventory would be higher
resulting in higher food and paper costs for Rally's. If documentation of Year
2000 compliance is not received from financial institutions by November 1,
1999, Rally's will transfer its banking relationships to other banks at an
incremental cost not expected to exceed $100,000. No contingency plans are
available if the utility services for the restaurants are interrupted due to
Year 2000 failures.
Although Rally's systems are not currently fully Year 2000 compliant,
management feels that risk in this area is minimal. The most significant
exposure exists in the planned rollout of a back-office computer system at the
store level. Failure to complete this project in a timely manner would require
the temporary installation of a manual payroll system at the store level and
the food cost controls that are provided by the current and proposed
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systems would be lost resulting in higher cost of sales. As the cash registers
would remain operable, Rally's restaurants would remain open for business.
If Checkers is unable to implement the upgrade to the payroll system,
Rally's would be able to utilize a third party to process payroll at a cost of
approximately $125,000 per year. Contingency plans related to the accounting
software package are still under development.
BUSINESS OF CHECKERS
INTRODUCTION
Unless the context requires otherwise, references to "Checkers" means
Checkers Drive-In Restaurants, Inc., its wholly owned subsidiaries and the
10.55% to 65.83% owned joint venture partnerships controlled by it.
Checkers develops, produces, owns, operates and franchises quick-service
"double drive-thru" restaurants under the name "Checkers/registered
trademark/." Checkers commenced operations on August 1, 1987, to operate and
franchise Checkers Double Drive-Thru 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 March 22, 1999, there were 465 Checkers 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., Puerto Rico and West Bank, in the Middle
East, 233 company-operated, including 12 joint ventured, and 232 franchised.
Checkers reports on a fiscal year which will 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.
Comparable store sales for Checkers in 1998 were 2.3% above the prior year
representing the first full-year increase in six years. In the first quarter of
1999, comparable store sales decreased 14.3% as compared to the prior year.
Severe weather in January and intense discounting by major competitors in the
first quarter of 1999 combined to reduce sales. In addition, the seasonal
population increase that typically occurs in the core Florida markets was less
significant in the first quarter of 1999. The first quarter of 1998 featured
the successful introduction of a spicy chicken sandwich that was somewhat
unique to the
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quick-service segment. Other product innovations during 1998 included the
transition to a two-patty platform that enabled Checkers to utilize a large
hamburger patty for a premium sandwich while also using a smaller hamburger
patty for its lower priced menu offerings. Critical to the success of these and
other menu offerings was the operational and marketing focus on serving fresh
food.
RECENT DEVELOPMENTS
On December 18, 1998, Checkers completed a $10.0 million mortgage
financing transaction with FFCA Acquisition Corporation collateralized by 24
fee-owned properties. The terms of the transaction include a stated interest
rate of 9.5% on the unpaid balance over a 20-year term. The net proceeds of the
mortgage transaction were approximately $9.6 million of which $8.0 million was
utilized to reduce the amount outstanding under Checkers' credit agreement and
approximately $612,000 was used to retire other debt associated with the
collateral upon closing. Approximately $1.0 million was retained as working
capital and was used in part for new menu boards.
RESTAURANT DEVELOPMENT AND ACQUISITION ACTIVITIES
During 1998, Checkers reopened two restaurants and closed two restaurants,
maintaining 230 company-operated restaurants at December 28, 1998. Franchisees
opened 18 restaurants and closed 35 restaurants for a net decrease of five
franchisee-operated restaurants in 1998. Franchisees operated 232, or 50%, of
the total restaurants open at December 28, 1998. During the first quarter of
1999, Checkers opened one restaurant, acquired three restaurants from
franchisees and closed one restaurant, and franchisees opened three
restaurants. Because of Checkers' limited capital resources, it will rely on
franchisees for a larger portion of chain expansion. The inability of
franchisees to obtain sufficient financing capital on a timely basis may have a
materially adverse effect on expansion efforts.
To the extent permitted by operating cash flow or external financing
sources, Checkers intends to focus future growth primarily in its existing
markets of higher market penetration through acquisitions, new restaurant
openings or through other growth opportunities. Checkers will continue to seek
to expand through existing and new franchisees. From time to time, Checkers may
close or sell additional restaurants or markets when determined by management
and its board of directors to be in Checkers' best interests.
RESTAURANT OPERATIONS
CONCEPT
Checkers' operating concept includes:
/bullet/ offering a limited menu to permit the maximum attention to quality
and speed of preparation;
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/bullet/ utilizing a distinctive restaurant design that features a "double
drive-thru" concept, projects a uniform image and creates
significant curb appeal;
/bullet/ 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
/bullet/ great tasting quality food and drinks made fresh to order at a
fair price.
RESTAURANT LOCATIONS
As of March 22, 1999, there were 233 restaurants owned and operated by
Checkers in 13 states including 12 restaurants owned by partnerships in which
Checkers has interests ranging from 10.55% to 65.83%, and 232 restaurants
operated by franchisees in 18 states, the District of Columbia, Puerto Rico and
the West Bank, Middle East. The following table sets forth the locations of
such restaurants:
COMPANY-OPERATED RESTAURANTS (233)
<TABLE>
<S> <C> <C>
Florida (136) Illinois (11) New Jersey (4)
Georgia (38) Missouri (5) North Carolina (2)
Pennsylvania (13) Mississippi (4) Kansas (2)
Alabama (12) Tennessee (4) Delaware (1)
South Carolina (1)
FRANCHISED RESTAURANTS (232)
Florida (49) Illinois (11) Missouri (2)
Georgia (50) South Carolina (10) West Virginia (2)
Alabama (20) Louisiana (9) Iowa (2)
North Carolina (11) New Jersey (9) Washington, D.C. (2)
Maryland (15) Tennessee (5) Michigan (1)
Puerto Rico (14) Wisconsin (4) Texas (1)
New York (11) Virginia (3) West Bank, Middle East (1)
</TABLE>
Of these restaurants, 20 were opened or reopened in 1998 two
company-operated and 18 franchised, which included 13 used fully equipped
manufactured modular buildings, "modular restaurant packages," either reopened
or relocated from closed sites, five conversions of other restaurant concepts
buildings and two non-traditional locations. Checkers currently expects
approximately 20 to 30 additional restaurants to be opened in 1999 primarily by
franchisees with a majority of these restaurants to include modular restaurant
packages relocated from closed sites. Checkers and its franchises have closed a
total of one restaurant, and have opened three restaurants, during 1999. It is
not anticipated that Checkers or its franchisees will experience a significant
number of additional restaurant closures during fiscal 1999. If either Checkers
or the franchisees are unable to obtain sufficient capital on a timely basis,
Checkers' ability to achieve its 1999 expansion plans
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may be materially adversely affected. Checkers' continued 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 of
Checkers--Liquidity and Capital Resources."
SITE SELECTION
The selection of a site for 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, Checkers considers
various factors including traffic count, speed of traffic, convenience of
access, size and configuration, demographics and density of population,
visibility and cost. Checkers 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 Checkers intends to continue to use leased sites where possible.
Checkers believes that the use of the modular restaurant package provides it
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 quick-service 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 in operation
consist of modular restaurant packages produced and installed by Checkers.
Checkers' 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. Most restaurants utilize a "double
drive-thru" concept that permits simultaneous service of two automobiles from
opposite sides of the restaurant. Although a substantial portion of Checkers'
sales are made through its drive-thru windows, service is also available
through walk-up windows. While the restaurants normally 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, Checkers' objective is to serve customers within 30
seconds of their arrival at the drive-thru window. Each restaurant has a
computerized
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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.
RESTAURANT DEVELOPMENT COSTS
Checkers estimates that the average cost of opening a Checkers restaurant,
exclusive of land costs, utilizing used modular restaurant packages is
approximately $375,000 which includes modular building costs, fixtures,
equipment and signage costs, site improvement costs and various soft costs,
e.g., engineering and permit fees. Future costs, after all remaining used
modular restaurant packages are relocated, would be higher than this average.
During periods when the Champion construction facility is operating at an
efficient production level, Checkers believes that utilization of modular
restaurant packages generally costs less than comparably built restaurants
using conventional, on-site construction methods. Checkers believes it is even
more cost effective to utilize used modular restaurant packages when available.
At such time as there are no longer used modular restaurant packages available,
but demand for new modular restaurant packages is not sufficient to allow the
Champion construction facility to operate at an efficient level, it may become
more cost effective to seek other manufacturers of modular restaurant packages
or to build restaurants utilizing conventional, on site construction methods.
Checkers did not open any restaurants on new sites in fiscal 1998.
MENU
The menu of a restaurant includes hamburgers, cheeseburgers and bacon
cheeseburgers, chicken sandwiches, 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. Checkers is engaged in
product development research and seeks to enhance the variety offered to
consumers from time to time without substantially expanding the limited menu.
SUPPLIES
Checkers and its franchisees purchase their food, beverages and supplies
from company-approved suppliers. All products must meet standards and
specifications set by Checkers due primarily to joint purchasing with Rally's
and CKE Restaurants, Inc. Management constantly monitors the quality of the
food, beverages and supplies provided to the restaurants. Checkers has been
successful in negotiating price concessions from suppliers for bulk purchases
of food and paper supplies by the restaurants. Checkers believes that its
continued efforts over time have achieved cost savings, improved food
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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.
Therefore, management believes that the loss of any one supplier would not have
a material adverse effect on Checkers. Among other factors, Checkers'
profitability is dependent upon its ability to anticipate and react to changes
in food costs. Various factors beyond Checkers' 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 19
hourly employees, many of whom work part-time on various shifts. The management
staff of a typical restaurant operated by Checkers consists of a general
manager, one assistant manager and a shift manager. Checkers 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 general
manager is generally required to have prior restaurant management experience,
preferably within the quick-service industry, and reports directly to an area
manager. The area manager typically has responsibility for eight to twelve
restaurants.
SUPERVISION AND TRAINING
Checkers requires each franchisee and restaurant manager to attend a
comprehensive training program of both classroom and in-store training. The
program was developed by Checkers 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 Checkers believes are vital to Checkers' 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, Checkers continues to monitor the operations of both franchised and
company-operated restaurants to assist in the consistency and uniformity of
operation.
ADVERTISING AND PROMOTION
Checkers communicates with its customers by employing a consistent and
enticing approach to advertising and promoting its products. Using television
and radio commercials where efficient and practical, as well as outdoor
billboards and direct mail print advertising in less densely penetrated
markets, Checkers informs the public about their brand position and promotional
product opportunities. When the customers arrive at the restaurant, they are
exposed to readerboard messages, pole banners, menuboards, and value oriented
extender cards, all of which work together to present a simple, unified and
coherent selling message at the time they are making their purchase decisions.
As of March 22, 1999,
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Checkers and its franchisees were working together in seven advertising co-ops
covering 153 Checkers restaurants systemwide. Checkers requires franchisees to
spend a minimum of 4% of gross sales to promote their restaurants, which
includes a combination of local store marketing and co-op advertising. In
addition, each company and franchise restaurant contributes to a National
Production Fund that provides broadcast creative and point of purchase material
production for each promotion. Ongoing consumer research is employed to track
attitudes, brand 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 Checkers' core markets to
provide both qualitative and quantitative data. This research data is vital in
creating a better understanding of Checkers' short and long term marketing
strategies.
BRAND POSITIONING: QUALITY FOCUS
Checkers is in the process of establishing an overall brand positioning as
serving the best tasting hamburger in the quick-service industry at a
reasonable price. This position will be supported by:
A. A limited menu of high quality hamburgers/cheeseburgers, chicken
sandwiches, seasoned french fries, soft drinks and milk shakes, all
deliverable in a double drive through format.
B. A new, creative positioning has been established. "Fresh. Because we
just made it.", allows Checkers to take advantage of the consumers'
understanding that their food has been freshly prepared, not retrieved
from under a heat lamp or microwave oven and given to them.
C. Television, radio, outdoor and direct mail print advertising designed
to differentiate the Company from other quick-service hamburger chains
and to target frequent quick-service customers.
The new brand positioning has been developed through extensive research
with the core customer of Checkers' products, as well as other quick-service
hamburger users who might be convinced to become a loyal customer. The long
range benefit of such a positioning is believed to help Checkers compete more
favorably in an environment where quality and taste is much more difficult to
deliver on a consistent basis by the major quick-service competitors, given the
operating systems of those competitors. Although good value and quick service
are still important to consumers, the competitive environment has remained so
price oriented in the past few years, that Checkers' competitive advantage has
been seriously eroded. Further, the over reliance on price has placed immense
pressure on margins, as food, labor and other costs have continued to rise,
while Checkers' ability to raise prices in the aforementioned competitive
climate has been restricted.
With a focus on a brand positioning that provides consumers what they say
they want from a quick-service hamburger chain -- quality hamburgers, served
quickly at a
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reasonable price -- Checkers believes it can begin to break the cycle of low
price only promotions, differentiate itself from its competitors and improve
sales and guest count trends over time.
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 Checkers.
YEAR 2000 ISSUES
Many computer systems using two-digit fields to store years must be
converted to read four-digit fields before the turn of the century in order to
recognize the difference between the years 1900 and 2000. All major software
systems of Checkers are either in compliance with the year 2000 or upgraded
software packages are scheduled to be installed to meet that requirement.
Checkers utilizes accounting software packages such as Lawson (general
ledger/accounts payable) and Cyborg (payroll) that require periodic upgrades to
benefit from the latest modifications to the programs. Typically, all releases
of such upgrades must be implemented, eliminating a company's ability to move
directly to the most recent release. During 1998, Checkers successfully
implemented all required releases of both Lawson and Cyborg that preceded the
year 2000 compliant release. The consulting and training required for the next
Lawson and Cyborg upgrades are underway with targeted implementation dates
during the third quarter of 1999 at a cost to Checkers of approximately
$50,000. Checkers has assessed the computer systems utilized at the restaurant
level and determined such systems to be Year 2000 compliant. Costs of replacing
certain desktop computers and other required modifications at the corporate
office are not expected to exceed $70,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Checkers--Year
2000" at page 102.
JOINT VENTURE RESTAURANTS
As of March 22, 1999, there were 12 restaurants owned by 10 separate
general and limited partnerships in which Checkers owns general and limited
partnership interests ranging from 10.55% to 65.83%, with other parties owning
the remaining interests, all of which are consolidated in Checkers' financial
statements. Checkers is the managing partner of 11 of the 12 joint venture
restaurants. In the 11 joint venture restaurants managed by Checkers, it
receives a fee for management services of 1% to 2.5% of gross sales. In
addition, all of the joint venture restaurants pay the standard royalty fee of
4% of gross sales. The agreements for four of the joint venture restaurants,
excluding Illinois partnerships, in which Checkers is the managing partner are
terminable through a procedure whereby the initiating party sets a price for
the interest in the joint venture and
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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
Checkers 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 Checkers and the industry. If operating expenses
increase, management believes it can recover increased costs by increasing
prices to the extent deemed advisable considering competition.
SEASONALITY
The seasonality of restaurant sales due to consumer spending habits can be
significantly affected by the timing of advertising, competitive market
conditions and weather related events. While restaurant sales for certain
quarters can be stronger, or weaker, there is no predominant pattern.
WORKING CAPITAL
Checkers' working capital requirements are generally typical of companies
within the quick-service restaurant industry. Checkers does not normally
require large amounts of working capital to maintain operations since sales are
for cash, purchases are on open accounts and meat and produce inventories are
limited to a two to four day supply to assure freshness. During 1997 and 1998,
Checkers' working capital requirements were substantially reduced as a result
of significant slowdowns in new store construction as compared with prior
years. Additionally, sales of certain assets held for sale, net of underlying
encumbrances, provided another source of working capital. Additional working
capital will be required for the second phase of the indoor dining area
project. Checkers also plans to utilize working capital to open a limited
number of new restaurants and to remodel an undetermined number of existing
restaurants in fiscal 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Checkers--
Liquidity and Capital Resources."
FRANCHISE OPERATIONS
STRATEGY
In addition to the acquisition and development of additional
company-operated restaurants, Checkers encourages controlled development of
franchised restaurants in its existing markets as well as in certain additional
states. The primary criteria considered by
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Checkers 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 quick-service
restaurants. Franchisees operated 232, or 50%, of the total restaurants open at
March 22, 1999. Checkers has acquired and sold, and may in the future acquire
or sell, restaurants from and to franchisees when Checkers believes it to be in
its best interests to do so. In the future, Checkers' 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 Checkers 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 franchisees currently
anticipate to be opened in 1999 or that the franchisees will successfully
develop or operate restaurants in their franchise areas in a manner consistent
with Checkers' concepts and standards.
As a result of inquiries concerning international development, Checkers
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. Checkers has entered into a master franchise
agreement for the Caribbean basin and has granted a single franchise agreement
for the West Bank in the Middle East.
FRANCHISEE SUPPORT SERVICES
Checkers 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 Checkers'
franchise program. Upon the opening of a new franchised restaurant by a new
franchisee, Checkers typically sends a team to the restaurant to assist the
franchisee during the first four days that the restaurant is open. This team
monitors compliance with Checkers' standards as to quality of product and speed
of service. In addition, the team provides on-site training to 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. Checkers also employs franchise
business consultants, who have been fully trained by Checkers to assist
franchisees in implementing the operating procedures and policies of Checkers
once a restaurant is open. As part of these services, the consultant rates the
restaurant's hospitality, food quality, speed of service, cleanliness and
maintenance of facilities. The franchisees receive a written report of the
consultant's findings and, if any deficiencies are noted, recommended
procedures to correct such deficiencies.
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Checkers also provides site development and construction support services
to its franchisees. All sites and site plans are submitted to Checkers 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. Checkers' construction personnel also visit the site at least once during
construction to meet with the franchisee's site contractor and to review
construction standards.
FRANCHISE AGREEMENTS
The unit franchise agreement grants to the franchisee an exclusive license
at a specified location to operate a restaurant in accordance with the
Checkers/registered trademark/ system and to utilize Checkers' trademarks,
service marks and other rights of Checkers 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 generally be
entitled to acquire a successor franchise for the restaurants on the terms and
conditions of Checkers' 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 fee
equal to 50% of the then current franchise fee.
In some instances, Checkers 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 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 232 franchised restaurants
at March 22, 1999, 220 were being operated by multiple unit operators and 12
were being operated by single unit operators. Checkers 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 Checkers for its review,
although final site selection is at the discretion of the franchisee. Checkers
does not arrange or make any provisions for financing the development of
restaurants by its franchisees. To the extent new or used modular restaurant
packages are available for sale, and/or to the extent that Checkers deems it
feasible to begin constructing new modular restaurant packages again in the
Champion construction facility, Checkers will offer the franchisees an
opportunity to buy a modular restaurant package from Checkers in those
geographic areas where the modular
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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 Checkers'
specifications. Checkers provides a training program for management personnel
of its franchisees at its corporate offices. Under the terms of the unit
franchise agreement, Checkers 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 Checkers' operations manual.
Checkers may terminate a unit franchise agreement for several reasons
including the franchisee's bankruptcy or insolvency, default in the payment of
indebtedness to Checkers 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, Checkers 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 application fees, site approval fees and an initial franchise
fee together totaling $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 Checkers 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
Checkers a semi-monthly royalty of 4% of the restaurant's gross sales and to
expend certain amounts for advertising and promotion. Total franchise fees and
royalties recognized as revenues during 1998, 1997 and 1996 were $7.5 million,
$7.5 million and $8.4 million, respectively.
MANUFACTURING OPERATIONS
STRATEGY
Although Checkers does not believe that the use of modular restaurant
packages is critical to the success of any individual restaurant or Checkers in
general, Checkers believes that the integration of its restaurant operations
with its production of modular restaurant packages for use by Checkers and sale
to its franchisees provides it with a competitive advantage over other
quick-service 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, Checkers believes
the ability to relocate a modular restaurant package provides greater economies
and flexibility than alternative methods. The cost and construction time
efficiencies may be significantly impacted by Checkers' decision whether or not
to resume construction of modular restaurant packages
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at its Champion construction facility located in Largo, Florida. 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 1999.
In the short term, Checkers' Champion construction facility will be utilized to
store and refurbish used modular restaurant packages for sale to franchisees or
others and use by Checkers. Checkers is evaluating other options in relation to
the future use of this facility, which could include generating other outside
business, leasing the facility or an eventual sale of the facility. Operation
of the construction facility consists of five personnel, 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 Champion construction facility is designed to produce a complete MRP
ready for delivery and installation at a restaurant site. When the Champion
construction is fully operational the modular restaurant packages are built and
refurbished using assembly line techniques and a fully integrated and complete
production system. Each modular restaurant package consists of a modular
building complete with all mechanical, electrical and plumbing systems, except
roof top systems which are installed at the site, along with all restaurant
equipment. The modular building is a complete operating restaurant when sited,
attached to its foundation and all utilities are connected. All modular
restaurant packages are constructed in accordance with plans and specifications
approved by the appropriate governmental agencies and are typically available
in approximately eight weeks after an executed agreement.
CAPACITY
As of March 22, 1999, Checkers had five substantially completed new
modular restaurant packages in inventory and 20 used modular restaurant
packages available for relocation to new sites, 12 of which have been moved to
the Champion production facility for refurbishment, and eight of which are at
closed sites. Although Checkers does not require a franchisee to use a modular
restaurant package, because of the expected benefits associated therewith,
Checkers anticipates that substantially all of the restaurants developed by it
or its franchisees in the immediate future will include modular restaurant
packages produced by Checkers, or relocated from other sites. Modular
restaurant packages from closed sites are being marketed at various prices
depending upon age and condition. At December 28, 1998, the carrying value of
Champion inventories, which does not include used modular restaurant packages
but does include new materials, equipment, and substantially completed new
modular restaurant packages, was $1.1 million.
TRANSPORTATION AND INSTALLATION OF MODULAR RESTAURANT PACKAGES
Once all site work has been completed to Checkers' satisfaction and all
necessary governmental approvals have been obtained for installation, the
modular restaurant package
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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 Checkers or
franchisee, in accordance with procedures specified by Checkers. Checkers'
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 Checkers. Used modular restaurant
packages are typically sold without warranties. Once a modular restaurant
package has been delivered to a site, it takes generally three to four weeks
before the restaurant is in full operation.
COMPETITION
Checkers' restaurant operations compete in the quick-service industry,
which is highly competitive with respect to price, concept, quality and speed
of service, location, attractiveness of facilities, customer recognition,
convenience and food quality and variety. The industry includes many
quick-service chains, including national chains which have significantly
greater resources than Checkers that can be devoted to advertising, product
development and new restaurants such as McDonalds, Wendy's, Burger King and
Hardees. In certain markets, Checkers will also compete with other
quick-service double drive-thru hamburger chains with operating concepts
similar to Checkers. The quick-service 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. Checkers competes primarily on the basis
of speed of service, price, value, food quality and taste. In addition, with
respect to selling franchises, Checkers 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. This promotional
activity has continued at increasing levels, and management believes that it
has had a negative impact on Checkers' 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 Checkers' sales
and earnings in the affected markets.
With respect to its modular restaurant packages, Checkers 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 Checkers. When the inventory of
new and used modular restaurant packages is depleted, there is no assurance
that Checkers will again initiate new construction at its Champion construction
facility thereby requiring Checkers and its franchisees to purchase modular
restaurant packages from other modular construction companies or to utilize
conventional construction methods.
In general, there is active competition for management personnel, capital
and attractive commercial real estate sites suitable for restaurants.
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EMPLOYEES
Effective November 30, 1997, Checkers entered into a management services
agreement, pursuant to which Rally's is managed and operated predominantly by
the corporate management of Checkers. Rally's, together with its franchisees,
operates approximately 469 double drive-thru hamburger restaurants primarily in
the Midwest and the Sunbelt. In addition, Checkers and Rally's share certain of
their executive officers, including the chief executive officer and the chief
operating officer.
As of March 22, 1999, Checkers employed approximately 4,600 persons in its
restaurant operations, approximately 450 of whom are restaurant management and
supervisory personnel and the remainder of whom are hourly restaurant
personnel. Of the approximately 165 corporate employees, five are involved in
the manufacturing operation, approximately nine are in upper management
positions and the remainder are professional and administrative or office
employees.
Checkers considers its employee relations to be good. Most employees,
other than management and corporate personnel, are paid on an hourly basis.
Checkers believes that it provides working conditions and wages that compare
favorably with those of its competition. None of Checkers' employees are
covered by a collective bargaining agreement.
TRADEMARKS AND SERVICE MARKS
Checkers believes its trademarks and service marks have significant value
and are important to its business. Checkers has registered certain trademarks
and service marks, including the name "Checkers", "Checkers Burgers /bullet/
Fries /bullet/ Colas" and "Champ Burger" and the design of the restaurant
building in the United States Patent and Trademark office. Checkers 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.
Checkers has various other trademark and service mark registration applications
pending. It is the Checkers' policy to pursue registration of its marks
whenever possible and to oppose any infringement of its marks.
GOVERNMENT REGULATION
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. Checkers 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
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citizenship requirements. Checkers is also subject to regulation by the Federal
Trade Commission 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 Checkers and its
franchisees. A mandated increase in the minimum wage rate was implemented in
both 1997 and 1996.
Checkers' 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 Checkers' modular restaurant packages 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 Checkers' warranties are also subject to
a variety of state laws and regulations.
Checkers has no material contracts with the United States government or
any of its agencies.
PROPERTIES
Of the 233 restaurants which were operated by Checkers as of March 22,
1999, Checkers held ground leases for 196 restaurants and owned the land for 37
restaurants. Of the 37 restaurants on owned land, 24 of those parcels are
subject to a mortgage in favor of FFCA Acquisition Corporation and the
remainder secure Checkers' primary debt to the CKE lender group. Checkers'
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. Leasehold improvements made by Checkers generally become the property
of the landlord upon expiration or earlier termination of the lease; however,
in most instances, if Checkers is not in default under the lease, the building,
equipment and signs remain the property of Checkers and can be removed from the
site upon expiration of the lease. In the future, Checkers intends, whenever
practicable, to lease land for its restaurants. For further information with
respect to Checkers' restaurants, see "Business--Restaurant Operations."
Checkers has seven owned parcels of land and 20 leased parcels of land
which are available for sale or sub-lease. Of these parcels, 19 are related to
restaurant closings as described in "Management's Discussion and Analysis of
Financial Condition and Results of
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Operations of Checkers." The other eight parcels primarily represent surplus
land available from multi-user sites where Checkers developed a portion for a
restaurant and undeveloped sites which Checkers ultimately decided it would not
develop.
Checkers' executive offices are located in approximately 26,500 square
feet of leased office space and 6,000 square feet of adjoining warehouse space
in Clearwater, Florida. Checkers' lease expires June 30, 2003. Checkers moved
to this location in June 1998 to accommodate additional staffing and on site
storage space needed as a result of the management service agreement. See
"Business of Checkers--Employees."
Checkers owns an 89,850 square foot facility in Largo, Florida. This
includes a 70,850 square foot fabricated metal building for use in its modular
restaurant packages manufacturing operations, and two buildings totaling 19,000
square feet for its office and warehouse operations. See "Business of
Checkers--Manufacturing Operations."
Checkers terminated the lease of one regional office effective February 1,
1999. Checkers leases approximately 1,504 aggregate square feet in an
unoccupied regional office. This lease will expire July 31, 2000.
LEGAL PROCEEDINGS
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 Checkers, 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
LLP, Checkers' auditors. The complaint alleges, generally, that Checkers 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 Checkers 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
sought to represent a class of all purchasers of Checkers' common stock between
November 22, 1991 and October 8, 1993, and an unspecified amount of damages.
Although Checkers believed this lawsuit was unfounded and without merit, in
order to avoid further expenses of litigation, the parties reached an agreement
in principle for the settlement of this class action. The agreement for
settlement provides for one of Checkers' 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. Checkers agreed
to contribute ten percent (10%) of claims made in excess of $475,000 for a
total potential liability of $47,500. The settlement was approved by the Court
on January 30, 1998. The time period for submission of claims to Checkers has
passed and therefore Checkers has no further liability in connection with this
matter.
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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 in and
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-CI-21 The original complaint alleged,
generally, that certain officers of Checkers intentionally inflicted severe
emotional distress upon Ms. Greenfelder, who is the sole stockholder, President
and Director of Powers Burgers, Inc., a Checkers franchisee. The original
complaint further alleged that Ms. Greenfelder and Powers Burgers were induced
into entering into various agreements and personal guarantees with Checkers
based upon misrepresentations by Checkers and its officers and that Checkers
violated provisions of Florida's Franchise Act and Florida's Deceptive and
Unfair Trade Practices Act. The original complaint alleged that Checkers is
liable for all damages caused to the plaintiffs. The plaintiffs seek 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 motions to dismiss the plaintiffs' complaint 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. A third amended complaint has been
filed and an answer, affirmative defenses, and a counterclaim to recover unpaid
royalties and advertising fund contributions has been filed by Checkers. In
response to the court's dismissal of certain claims in the Power Burgers
litigation, on May 21, 1997, a companion action was filed in the Circuit Court
of the Sixth Judicial Circuit in and for Pinellas County, Florida, Civil
Division, entitled GAIL P. GREENFELDER, POWERS BURGERS OF AVON PARK, INC., AND
POWER BURGERS OF SEBRING, 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. 97-3565-CI, asserting, in relevant part, the
same causes of action as asserted in the Power Burgers litigation. An answer,
affirmative defenses, and a counterclaim to recover unpaid royalties and
advertising fund contributions have been filed by Checkers. On February 4,
1998, Checkers terminated Power Burgers, Inc.'s, Power Burgers of Avon Park,
Inc.'s and Power Burgers of Sebring, Inc.'s franchise agreements and thereafter
filed two complaints in the United States District Court for the Middle
District of Florida, Tampa Division, entitled CHECKERS DRIVE-IN RESTAURANTS,
INC. V. POWER BURGERS OF AVON PARK, INC., Case No. 98-409-CIV-T-17A and
CHECKERS DRIVE-IN RESTAURANTS, INC. V. POWERS BURGERS, INC. Case No.
98-410-CIV-T-26E. The complaint seeks, INTER ALIA, a temporary and permanent
injunction enjoining Power Burgers, Inc. and Power Burgers of Avon Park, Inc.'s
continued use of Checkers' marks and trade dress. A motion to stay the
foregoing actions pending a resolution of the lawsuits pending in the Sixth
Judicial Circuit in and for Pinellas County, Florida described above has been
granted by the United States District Court. Checkers
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denies all wrongdoing and intends to continue to defend the lawsuits
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 Checkers in July 1995, against Mr.
Gagne and Tampa Checkmate Food Services, Inc., a company controlled by Mr.
Gagne, Checkers 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 Checkers. 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, Checkers based upon
misrepresentations by Checkers. The counterclaim and third party complaint seek
damages in the amount of $3,000,000 or the return of all monies invested by
Checkmate, Tampa Checkmate and Mr. Gagne in Checkers' franchises, punitive
damages, attorneys' fees and such other relief as the court may deem
appropriate. The counterclaim was dismissed by the court on January 26, 1996,
with the right to amend. On February 12, 1996, the counterclaimants filed an
amended counterclaim alleging violations of Florida's Franchise Act, Florida's
Deceptive and Unfair Trade Practices Act, and breaches of implied duties of
"good faith and fair dealings" in connection with a settlement agreement and
franchise agreement between various of the parties. The amended counterclaim
seeks a judgment for damages in an unspecified amount, punitive damages,
attorneys' fees and such other relief as the court may deem appropriate.
Checkers filed an answer to the amended counterclaim, but on October 21, 1998,
the court dismissed the amended counterclaim based on counterclaimants failure
to comply with certain court rules relating to the prosecution of the claims.
The court's dismissal is the subject of a pending motion for reconsideration.
On or about July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the
United States Bankruptcy Court for the Middle District of Florida, Tampa
Division entitled IN RE: TAMPA CHECKMATE FOOD SERVICES, INC., and numbered as
97-11616-8G-1 on the docket of said Court. On July 25, 1997, Checkers filed an
adversary complaint in the Tampa Checkmate bankruptcy proceedings entitled
CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES, INC. and
numbered as Case No. 97-738. Following a hearing on Checkers' motion for
preliminary injunction on July 22, 1998, the court entered an order enjoining
Tampa Checkmate's continued use of Checkers' marks and trade dress
notwithstanding the termination of its franchise agreement on April 8, 1997. On
December 15, 1998, the court granted Checkers' motion to convert Tampa
Checkmate's bankruptcy proceedings from a Chapter 11 proceeding to a Chapter 7
liquidation. Additionally, on February 1, 1999, the bankruptcy Court granted
Checkers' motion to lift the automatic stay
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imposed by 11 U.S.C Section 362 to allow Checkers to proceed with the
disposition of the property which is the subject of its mortgage. The adversary
complaint and counterclaim in the bankruptcy proceedings remain pending.
Checkers denies all wrongdoing and intends to continue to defend the lawsuit
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.
TEX-CHEX, INC. ET AL V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET. AL. On
February 4, 1997, a petition was filed against Checkers and two former officers
and directors of Checkers in the District Court of Travis County, Texas 98th
Judicial District, entitled TEX-CHEX, INC., BRIAN MOONEY, AND SILVIO PICCINI V.
CHECKERS DRIVE-IN RESTAURANTS, INC., JAMES MATTEI, AND HERBERT G. BROWN and
numbered as Case No. 97-01335 on the docket of said court. The original
petition generally alleged that Tex-Chex, Inc. and the individual plaintiffs
were induced into entering into two franchise agreements and related personal
guarantees with Checkers based on fraudulent misrepresentations and omissions
made by Checkers. On October 2, 1998, the plaintiffs filed an amended petition
realleging the fraudulent misrepresentations and omission claims set forth in
the original petition and asserting additional causes of action for violation
of Texas' Deceptive Trade Practices Act and violation of Texas' Business
Opportunity Act. Checkers denies all wrongdoing and intends to defend the
causes of action asserted in the amended petition against Checkers and the
individual defendants vigorously. The matter is in the pre-trial stages and 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. INTERSTATE DOUBLE DRIVE-THRU, INC.
ET. AL. On May 9, 1998, a counterclaim was filed against Checkers and a former
officer and director of Checkers, Herbert T. Brown, in the United States
District Court for the Middle District of Florida, Tampa Division, entitled
CHECKERS DRIVE-IN RESTAURANTS, INC. V. INTERSTATE DOUBLE DRIVE-THRU, INC. AND
JIMIME V. GOLES and numbered as Case No. 98-648-CIV-T-23B on the docket of said
court. The original complaint filed by Checkers seeks a temporary and permanent
injunction enjoining Interstate Double Drive-Tru, Inc. and Mr. Giles' continued
use of Checkers' marks and trade dress notwithstanding the termination of its
franchise agreement and to collect unpaid royalty fees and advertising fund
contributions. The court granted Checkers' motion for a preliminary injunction
on July 16, 1998. The counterclaim generally alleges that Interstate Double
Drive-Thru, Inc. and Mr. Giles were induced into entering a franchise agreement
and a personal guaranty, respectively, with Checkers based on
misrepresentations and omissions made by Checkers. The counterclaim asserts
claims for breach of contract, breach of the implied covenant of good faith and
fair dealing, violation of Florida's Deceptive Trade Practices Act, violation
of Florida's Franchise Act, violation of Mississippi's Franchise Act,
fraudulent concealment, fraudulent inducement, negligent misrepresentation and
rescission. Checkers has filed a motion to dismiss seven of the nine causes of
action set forth in the counterclaim which remain pending. Checkers denies all
wrongdoing and intends to defend the causes of action asserted in the
Counterclaim against Checkers and Mr. Brown vigorously. The matter is in the
pre-trial stages and no estimate of any possible loss or range of loss
resulting from the lawsuit can be made at this time.
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FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN V.
CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative class
action was filed on September 29, 1998, in the Delaware Chancery Court in and
for New Castle County, Delaware by First Albany Corp., as custodian for the
benefit of Nathan Suckman, an alleged stockholder of 500 shares of Checkers'
common stock. The complaint names Checkers and certain of its current and
former officers and directors as defendants including William P. Foley, II,
James J. Gillespie, Harvey Fattig, Joseph N. Stein, Richard A. Peabody, James
T. Holder, Terry N. Christensen, Frederick E. Fisher, Clarence V. McKee, Burt
Sugarman, C. Thomas Thompson and Peter C. O'Hara. The complaint also names
Rally's and GIANT as defendants. The complaint arises out of the proposed
merger announced on September 28, 1998 between Checkers, Rally's and GIANT and
alleges generally, that certain of the defendants engaged in an unlawful scheme
and plan to permit Rally's to acquire the public shares of Checkers stock in a
"going-private" transaction for grossly inadequate consideration and in breach
of the defendants' fiduciary duties. The plaintiff allegedly initiated the
complaint on behalf of all stockholders of Checkers as of September 28, 1998,
and seeks inter alia, certain declaratory and injunctive relief against the
consummation of the proposed merger, or in the event the proposed merger is
consummated, recision of the proposed merger and costs and disbursements
incurred in connection with bringing the action, including attorney's fees, and
such other relief as the court may deem just and proper. In view of a decision
by Checkers, GIANT and Rally's not to implement the transaction that had been
announced on September 28, 1998, plaintiffs have agreed to provide Checkers and
all other defendants with an open extension of time to respond to the
complaint. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between Checkers and
Rally's. Checkers denies all wrongdoing and intends to defend the lawsuit
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.
DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF
THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. Case
No. 16680. This putative class action was filed on October 2, 1998, in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified
number of shares of Checkers common stock. The complaint names Checkers and
certain of its current officers and directors as defendants including William
P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, Richard A.
Peabody, James T. Holder, Terry N. Christensen, Frederick E. Fisher, Clarence
V. McKee, Burt Sugarman, C. Thomas Thompson and Peter C. O'Hara. The complaint
also names Rally's and GIANT as defendants. As with the First Albany complaint
described above, this complaint arises out of the proposed merger announced on
September 28, 1998 between Checkers, Rally's and GIANT and alleges generally,
that certain of the defendants engaged in an unlawful scheme and plan to permit
Rally's to acquire the public shares of the Checkers common stock in a
"going-private" transaction for grossly inadequate consideration and in breach
of the defendant's fiduciary duties. The plaintiffs allegedly initiated the
complaint on behalf of all stockholders of Checkers as of September 28, 1998,
and seeks INTER ALIA, certain declaratory and injunctive relief against the
consummation of
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the proposed merger, or in the event the proposed merger is consummated,
recision of the proposed merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees, and such other
relief as the court may deem just and proper. For the reasons stated above in
the description of the FIRST ALBANY action, plaintiffs have agreed to provide
Checkers and all other defendants with an open extension of time to respond to
the complaint. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between Checkers and
Rally's. Checkers denies all wrongdoing and intends to defend the lawsuit
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.
Checkers is involved in other litigation matters incidental to its
business. With respect to such other suits, management does not believe the
litigation in which it is involved will have a material effect upon its results
of operation or financial condition.
BUSINESS OF RALLY'S
GENERAL
Rally's is one of the largest chains of double drive-thru restaurants in
the United States. Rally's opened its first restaurant in January 1985 and
began offering franchises in November 1986. At March 22, 1999, the Rally's
system included 469 restaurants in 18 states, primarily in the Midwest and the
Sunbelt, comprised of 225 company-owned and operated and 244 franchised,
including 25 company-owned restaurants in Western markets which are operated as
Rally's restaurants by CKE, a significant shareholder of Rally's, under an
operating agreement which began July 1996. Two additional company-owned stores
covered by the operating agreement have been converted to the Carl's Jr. format
and are not included in the above store count. Rally's restaurants offer high
quality food, serving primarily the drive-thru and take-out segments of the
quick-service restaurant industry. Rally's opened its first restaurant in
January 1985 and began offering franchises in November 1986.
As of December 29, 1997, Rally's changed from a fiscal year ending on the
Sunday closest to December 31st to a fiscal year ending on the Monday closest
to December 31st. This resulted in an extra day in fiscal 1998. Rally's also
changed its quarterly reporting periods from four 13-week quarters to three
12-week quarters and a 16-week fourth quarter
Comparable store sales at Rally's in 1998 were 1.8% below the prior year.
Although sales continued to decline on a same store basis, the decrease in 1998
was the smallest in four years. Product innovations during the year included
the shift from a 3.2 ounce hamburger patty to a two-patty platform featuring a
2.67 ounce patty and a 4.3 ounce patty. The 2.67 ounce patty allows Rally's to
sell a fully-dressed Rallyburger for $0.99 while also offering the Super
Rallyburger that utilizes the larger patty for a premium price. This change was
necessary to ensure that Rally's can remain competitive as food and labor costs
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continue to escalate. In the first quarter of 1999, comparable store sales
decreased 6.1% as compared to the prior year. Severe weather in January and
intense discounting by major competitors in the first quarter of 1999 combined
to reduce sales.
RECENT DEVELOPMENTS
On December 18, 1998, Rally's entered into a $4.3 million mortgage
transaction with FFCA Acquisition Corporation pursuant to which eight fee-owned
properties were mortgaged. The terms of the transaction include a stated
interest rate of 9.5% on the unpaid balance over a 20 year term with monthly
payments totaling approximately $40,000. Rally's is required to utilize the
entire net proceeds to reduce the Senior Notes. Purchases on the open market
were initiated immediately after the mortgage was finalized and will be
completed as they become available on the open market. As of March 5, 1999, the
Company had utilized $2.7 million of the proceeds to repurchase $3.1 million
face value of the Senior Notes.
On December 31, 1998, Santa Barbara Restaurant Group, Inc. acquired
approximately 2.4 million shares of Rally's common stock pursuant to an
exchange agreement with Fidelity National Financial, Inc. Santa Barbara
Restaurant Group operates or franchises approximately 330 restaurants under the
Green Burrito, Timber Lodge Steakhouse, JB's, and Galaxy Diner names.
CONCEPT AND STRATEGY
Rally's primary strategy is to serve the drive-thru and take-out segment
of the quick-service restaurant industry. Rally's operating strategy is to take
advantage of off-premise food consumption by serving a limited menu consisting
of a variety of great tasting burgers with limited side items. The key elements
of this strategy are Rally's operating system, restaurant design, brand
positioning and marketing programs.
THE RALLY'S OPERATING SYSTEM
The Rally's operating system is designed to provide fast and accurate
service of high quality food. Within the restaurants, all products are prepared
to order in a systematic fashion moving from the back of the restaurant to the
front windows with each employee performing specific duties. Labor is staffed
in an attempt to courteously serve guests within 45 seconds of their reaching
the drive-thru window and to maintain a safe, clean food service environment.
Rally's training and franchise support programs are designed to promote
consistency of product and service throughout the Rally's system and are
documented in a uniform confidential operations manual.
Rally's has point of sale devices and related software in each of its
company-owned restaurants which allow Rally's to centralize control over
certain aspects of restaurant operations at the corporate office on a daily
basis. As a result, menu prices and menus can
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be controlled and transactions reviewed and audited at corporate headquarters.
The point of sale devices are coupled with a back office computer to monitor
sales, assist inventory management, maintain cash control, provide variance
reporting, and control labor and food costs. Each restaurant transmits its data
via a daily polling procedure and it is accumulated at the principal offices of
Rally's. This data is used to analyze and make decisions about the business.
Rally's back office computer system will be upgraded or replaced in 1999 at a
cost estimated at approximately $500,000.
RESTAURANT DESIGN AND ECONOMICS.
Rally's restaurants present a distinctive design which conveys a message
of "clean and fast" to the passing motorist. The restaurants' typical "double
drive-thru" design features drive-thru windows on both sides of the restaurant
for quicker service. While the restaurants generally do not have an interior
dining area, most have a patio for outdoor eating. These areas contain canopy
tables and seats and are landscaped to create an attractive eating environment.
Rally's restaurant buildings average 600 to 720 square feet depending upon
geographic location and require less property than the traditional eat-in
restaurants. As a result of the small size of the restaurant building, Rally's
restaurants generally require a smaller capital investment and have lower
occupancy and operating costs per restaurant than traditional quick-service
competitors. The size of the facility also permits somewhat greater flexibility
with respect to the selection of prospective sites for restaurants.
During 1998 and the first quarter of 1999, Rally's continued the test of
an indoor seating environment where a 20 to 50 seat dining room replaced the
passenger side drive-thru lane. As of March 22, 1999, eight units were
converted from a double-drive-thru format to a single drive-thru/indoor seating
format. The preliminary test results have not resulted in a consistent pattern
of sales increases necessary to achieve an attractive economic return.
Therefore, Rally's will be initiating a second phase of the dining room test
where indoor seating will be added while retaining both drive-thru lanes.
During 1998, Rally's opened one new restaurant, closed five restaurants,
and acquired one restaurant from franchisees. The incremental cash outlay,
exclusive of land, of opening the restaurant was reduced due to the use of
surplus assets and was approximately $350,000. During the first quarter of
1999, Rally's closed one restaurant, and franchisees closed five restaurants
and opened one restaurant, for a net decrease of five restaurants.
In 1994, the full development cost associated with constructing and
opening a Rally's restaurant excluding land cost and interest on construction
was approximately $478,000. When purchased, the majority of real estate sites
have cost between $100,000 and $300,000. As of March 22, 1999, approximately
69% of Company-owned and operated restaurants were located on leased real
estate.
Over the past two years, Rally's has been building stores by either using
surplus equipment and/or surplus modular buildings or purchasing conversion
properties. When using surplus equipment and modular buildings, Rally's cash
outlay has typically been
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between $250,000 to $350,000. Although Rally's expects to continue to use
excess modular buildings and seek additional conversion opportunities, Rally's
estimates that the cost associated with new store development will return to
the higher pre-slowdown levels where these alternatives are not practical.
BRAND POSITIONING: QUALITY FOCUS.
Rally's is attempting to establish an overall brand positioning as the
quick-service hamburger chain which serves the best tasting hamburger for a
reasonable price in America. This positioning is supported by:
1. A limited menu of high quality but fairly priced
hamburgers/cheeseburgers, chicken sandwiches, french fries and soft
drinks, executed via a highly focused operating system;
2. Television, radio and outdoor advertising which differentiates Rally's
from other quick-service hamburger chains and targets frequent hamburger
consumers; and
3. New, visually attractive menu boards, merchandising and packaging that
feature these value based products/brands and ingredients.
This new brand positioning continues to represent a strategic shift for
Rally's away from its prior positioning which had been based primarily on low
prices and quick service. Low prices and quick service are still important to
guests, but the competitive environment has become so price oriented that
basing a brand positioning on low prices is not unique enough to differentiate
Rally's from its competitors. Further, relying too heavily on low prices and
price promotion had a negative financial impact on Rally's, causing higher
costs as a percentage of sales and lower profits. By focusing the brand
positioning on what Rally's believes guests really want from a quick service
hamburger restaurant and on what Rally's can effectively provide -- great
tasting burgers at a fair price -- Rally's believes that it will be able to
effectively differentiate itself from its competitors and improve its sales and
guest count trends over time.
In 1998, Rally's shifted its hamburger platform to create value options
for its customers. The 3.2 ounce hamburger patty was replaced with a 2.67 ounce
patty and a larger 4.0 ounce patty. The 2.67 ounce hamburger patty allows
Rally's to sell a great $0.99 fully dressed Rallyburger to its customers, while
the larger 4.0 ounce patty allows for an upsell opportunity to the premium
Super Rallyburger sandwich. Additionally, Rally's continues to offer its One of
a Kind Fries/registered trademark/, a chicken breast sandwich, onion rings,
soft drinks and milk shakes. A limited number of additional products may be
offered in some locations from time to time.
MARKETING PROGRAM.
Rally's "best tasting burger" campaign which began in April 1998 was not
successful in substantially increasing sales. Therefore, in late July 1998,
Rally's discontinued this
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campaign and turned to a new advertising company, Crispin, Porter & Bogusky of
Miami, to develop a strategy focusing on the freshness of the Rally's products.
The current advertising campaign uses television as the primary medium. In
cases where effective levels of television are not affordable, Rally's may use
radio, outdoor or print advertising.
INFLATION
Rally's 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 Rally's and the industry. If operating expenses increase,
management believes it can recover increased costs by increasing prices to the
extent deemed advisable considering competition.
SEASONALITY
The seasonality of restaurant sales due to consumer spending habits can be
significantly affected by the timing of advertising, competitive market
conditions and weather related events. While restaurant sales for certain
quarters can be stronger, there is no predominant pattern.
WORKING CAPITAL
Rally's working capital requirements are generally typical of companies
within the quick-service restaurant industry. Rally's does not normally require
large amounts of working capital to maintain operations since sales are for
cash, purchases are on open accounts and meat and produce inventories are
limited to a two to four day supply to assure freshness. During 1997 and 1998,
Rally's working capital requirements were substantially reduced as a result of
significant slowdowns in new store construction as compared with prior years.
Additionally, sales of certain assets held for sale, net of underlying
encumbrances, provided another source of working capital. Additional working
capital will be required for the second phase of the indoor dining areas
project. Rally's also plans to utilize working capital to open a limited number
of new restaurants and to remodel an undetermined number of existing
restaurants in fiscal 1999. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Rally's."
FRANCHISING PROGRAM; AREA DEVELOPMENT RIGHTS
Rally's offers area development agreements to franchisees for construction
of one or more new restaurants over a defined period of time within a defined
geographic area. The specific restaurant locations selected by franchisees are
subsequently covered by separate franchise agreements. Under the standard area
development agreement, a franchisee is generally required to pay, at the time
the agreement is signed, a non-refundable fee of approximately $5,000 per
potential restaurant in the defined geographic area. The number of potential
restaurants is determined by negotiation between Rally's and the franchisee.
Rally's standard area development agreement also provides for a franchise fee
of
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approximately $30,000 for each restaurant, which is due when the franchise
agreement with respect to a restaurant is executed. The standard franchise
agreement is for a term of 15 years and provides for payment to Rally's of
royalties equal to 4% of sales, and minimum marketing expenditures of 4% of
sales, 1/2% of which is paid to the Rally's National Advertising Fund. Rally's
requires each franchisee to have an approved full-time Principal Operator who
is responsible for the supervision and conduct of the franchise. As of March
22, 1999, Rally's had 31 franchisees operating 219 restaurants, exclusive of
the CKE-operated restaurants, representing approximately 47.3% of all
systemwide restaurants. Total franchise fees and royalties recognized as
revenues during 1998, 1997 and 1996 were $4.6 million, $4.8 million and $5.9
million, respectively.
EXPANSION STRATEGY
Rally's currently intends to open up to five new restaurants in existing
company markets in 1999. Currently, existing and new franchisees are expected
to open 10 to 20 locations during 1999. There can be no assurance that Rally's
or its franchisees will be able to open planned new restaurants or that, if
opened, these restaurants can be operated profitably. Rally's has pursued and
intends to continue to pursue an expansion strategy, which may include addition
of indoor seating to existing units.
RESTAURANT LOCATIONS
The following table sets forth the number of restaurants in the Rally's
system at March 22, 1999 by state:
COMPANY-OWNED AND OPERATED RESTAURANTS (225)
<TABLE>
<S> <C> <C>
Michigan (37) Indiana (22) Virginia (13)
Kentucky (30) Missouri (20) Arkansas (10)
Louisiana (23) Florida (16) Illinois (10)
Ohio (23) Alabama (13) Tennessee (8)
FRANCHISED RESTAURANTS (INCLUDING CKE -- OPERATED RESTAURANTS) (244)
Ohio (87) Virginia (7) West Virginia (4)
California (50) Arizona (5) Pennsylvania (2)
Indiana (27) Illinois (6) Alabama (2)
Michigan (17) Louisiana (5) Florida (2)
Kentucky (15) Mississippi (4)
Georgia (7) Tennessee (4)
</TABLE>
SITE SELECTION AND CONSTRUCTION
Rally's believes that the location of a Rally's restaurant is very
important to its success. In evaluating particular sites, Rally's uses
demographic data related to quick-service restaurant sales. Sites proposed for
both company-owned restaurants and franchised restaurants must be accepted by a
committee comprised of most members of Rally's senior
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management team. The committee considers, among other factors, the
accessibility, visibility, cost, surrounding traffic patterns and population
characteristics of each potential site.
Rally's has prototype plans and approved suppliers for the construction of
its restaurants. Since 1990, Rally's has increasingly used modular buildings.
Prior to that time, "stick" (constructed on-site) buildings were used almost
exclusively.
PURCHASING
Franchisees are required to purchase their equipment, food, beverages and
supplies from company-approved suppliers. All products must meet specifications
set by Rally's. Management continually monitors the quality of the food,
beverages and supplies provided to the restaurants. Rally's negotiates directly
with wholesale suppliers to ensure consistent quality and freshness of products
throughout the Rally's system and believes that it has obtained competitive
pricing from its suppliers. The majority of the Rally's food and paper is
distributed by Fast Food Merchandisers, Inc. All essential food and beverage
products are available or, upon short notice, could be made available from
alternate qualified suppliers. Therefore, management believes that the loss of
any one supplier would not have a material adverse effect on Rally's. During
the year, Rally's continued participating with related parties in attempting to
leverage aggregate purchase volumes of common items to obtain more favorable
pricing. Rally's expects these efforts will continue in the future.
RESTAURANT STAFFING AND TRAINING; FRANCHISE SUPPORT
A typical Rally's restaurant averages a total of 25 employees, which
usually includes two salaried managers. The function of assuring that each
company-owned restaurant consistently delivers high-quality food and service is
performed by area managers. Area managers report to regional vice presidents.
Area managers and restaurant management are compensated with a fixed salary
plus a bonus based on the performance of the restaurants under their
supervision. Rally's has one area manager for every eight to ten company
restaurants and approximately ten area managers for each regional vice
president. The regional vice presidents are employees of Checkers and report to
the chief operating officer of Checkers under the management services
agreement.
Rally's believes that training is important to the success of its
restaurant operations. Rally's training programs emphasize quality food
preparation, quick service, cleanliness of restaurants, courteous employees and
consistency of execution.
All general managers of company-owned restaurants are required to complete
Rally's training program, which generally consists of five weeks of hands-on
training. The designated operating partner of each franchisee is required to
receive similar training, generally 12 weeks in duration. All company and
franchise general managers must generally complete an intensive six-day "Train
the Trainer" program before being certified to train management personnel in
their respective markets. The certification process takes
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approximately 30 days to complete. In addition, Rally's sends a training team
consisting of both management and hourly workers to a new franchisee's first
three restaurant openings for a duration of up to two weeks one week before and
one week after the opening. After a new franchisee opens three restaurants,
Rally's provides this training team as it deems necessary, or upon the
franchisee's request at the franchisee's expense.
Rally's employs franchise business managers through the management
services agreement with Checkers, who act as a link between Rally's and its
franchisees. The franchise business managers perform regularly scheduled
restaurant operation evaluations to ensure that each franchised restaurant
consistently delivers high quality food and fast, friendly service in a clean
environment. They also review the financial results and effectiveness of
franchise restaurant management to identify possible areas of improvement.
COMPETITION
The quick-service restaurant industry is highly competitive and can be
significantly affected by many factors, including changes in local, regional or
national economic conditions, changes in consumer tastes, traffic patterns,
consumer concerns about the nutritional quality of quick-service food and
increases in the number and particular locations of competing quick-service
restaurants. Factors such as inflation, increases in food, labor, including
health care costs, and energy costs and the availability of an adequate number
of hourly-paid employees also affect the quick-service restaurant industry.
Major chains, which have substantially greater financial resources and longer
operating histories than Rally's, dominate the quick-service restaurant
industry. Rally's believes that its primary competitors are five national
chains: McDonald's, Wendy's, Hardee's, Burger King and Taco Bell. In certain
markets, Rally's competes with other quick-service double drive-thru hamburger
chains with similar operating concepts. Certain of the major chains have
increasingly offered selected food items and combination meals, including
hamburgers, at discounted prices. Rally's believes that the pricing strategies
of its competitors, in general, had an adverse impact on Rally's systemwide
sales in the last four fiscal years. The pricing or other marketing strategies
of one or more of these competitors could have a continuing adverse impact on
Rally's performance.
With respect to the sale of franchises, Rally's competes with many
franchisors of restaurants, including other double drive-thru franchisors, and
franchisors of other business concepts. Rally's believes it has attracted a
number of franchisees with significant experience in the restaurant industry as
a result of the strength of its concept and operating strategy and the
favorable potential return available from a relatively low capital investment.
In general, there is active competition for management personnel, capital
and attractive commercial real estate sites suitable for restaurants.
EMPLOYEES
As of March 22, 1999, Rally's employed approximately 5,100 employees,
substantially all of which are restaurant personnel. On November 30, 1997,
Rally's entered into a
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management services agreement, pursuant to which predominately all of the
management of Checkers manages the corporate and field operations of Rally's.
Most employees, other than restaurant management and certain corporate
personnel, are paid on an hourly basis. Rally's believes that it provides
working conditions and wages that are comparable with those of other companies
within the quick-service restaurant industry. Rally's employees are not covered
by a collective bargaining agreement.
TRADEMARKS AND SERVICE MARKS
Rally's regards its trademarks and service marks as having significant
value and as being important to its marketing efforts. Rally's has registered
its principal logo Rally's Hamburgers/registered trademark/ and its design with
the U.S. Patent and Trademark Office on the principal register as a service
mark for its restaurant services. Rally's also registered Big Buford/registered
trademark/, the Rallyburger/registered trademark/, Rally-Q/registered
trademark/ and Smokin' Sausage/registered trademark/ with the patent office as
a trademark for these company sandwiches. Rally's policy is to pursue
registration of its marks whenever possible and to oppose strenuously any
infringement of its marks.
GOVERNMENT REGULATION
Rally's is subject to Federal Trade Commission regulation and state laws
which regulate the offer and sale of franchises. Rally's is also subject to a
number of state laws which regulate substantive aspects of the
franchisor-franchisee relationship. The FTC's Trade Regulation Rule on
Franchising requires Rally's to furnish to prospective franchisees a franchise
offering circular containing information prescribed by the FTC rule. At least
fifteen states presently regulate the offer and sale of franchises and, in
almost all cases, require registration of the franchise offering with state
authorities.
State laws that regulate the offer and sale of franchises and/or the
franchisor-franchisee relationship presently exist in a substantial number of
states. Such laws generally require registration of the franchise offering with
state authorities and/or regulate the franchise relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith,
prohibiting interference with the right of free association among franchisees,
limiting the imposition of standards of performance on a franchisee and
regulating discrimination among franchisees in charges, royalties or fees.
These laws have not precluded Rally's from seeking franchisees in any given
area. Although such laws may restrict a franchisor in the termination of a
franchise agreement by, for example, requiring "good cause" to exist as a basis
for the termination, advance notice to the franchisee of the termination, an
opportunity to cure a default and repurchase of inventory or other
compensation, these provisions have not had a significant effect on Rally's
operations.
Rally's is not aware of any pending franchise legislation which, in its
view, is likely to affect significantly its operations. Rally's believes that
its operations comply substantially with the FTC rule and state franchise laws.
Each company operated and franchised
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restaurant is subject to regulation by federal agencies and to licensing and
regulation by state and local health, sanitation, safety, fire and other
departments. Difficulties or failures in obtaining the required licenses or
approvals could delay or prevent the opening of new restaurants.
Rally's is subject to federal and state environmental regulations,
although such regulations have not had a material effect on Rally's operations.
More stringent and varied requirements of local governmental bodies with
respect to zoning, land use and environmental factors could delay or prevent
development of new restaurants in particular locations. Rally's is also subject
to the Fair Labor Standards Act and various state laws governing such matters
as minimum wage requirements, overtime and other working conditions and
citizenship requirements. A significant number of Rally's food service
personnel are paid at rates related to the federal minimum wage and increases
in the minimum wage could increase Rally's labor costs.
The restaurant business is subject to extensive federal, state and local
regulations relating to the development and operation of restaurants, including
regulations relating to building and zoning requirements, access to persons
with disabilities, preparation and sale of food and laws governing the Rally's
relationship with its employees, including minimum wage requirements, overtime
and working conditions and citizenship requirements. The failure to obtain or
retain food licenses, or a substantial increase in the minimum wage rate, could
adversely affect the operations of the Rally's restaurants. Rally's believes
that it is operating in substantial compliance with applicable laws and
regulations governing its operations.
PROPERTIES
As of March 22, 1999, Rally's owned or leased parcels of land and
buildings for restaurants, either operating, under construction or held for
sale or disposal as follows: company-owned land (84) and buildings (283); and
company-leased land (225) and buildings (37). Land leased by Rally's for
restaurants is generally under "triple net" leases that require Rally's to pay
real estate taxes, maintenance and insurance with respect to the premises and,
in some cases, pay contingent rentals based on sales in excess of specified
amounts. Generally, the leases have initial terms of five to fifteen years with
options to renew for additional periods which can range from five to twenty
years. Rally's also leases the Louisville office of approximately 18,800 square
feet, which has been subleased subsequent to Rally's transfer of all of its
corporate management functions to Clearwater, Florida in February 1998. Rally's
also leases certain temporary storage facilities for excess modular buildings
and surplus equipment.
LEGAL PROCEEDINGS
JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET AL. (Case No.
C-94-0039-L-CS). In January and February 1994, two putative class action
lawsuits were filed, purportedly on
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behalf of the stockholders of Rally's, in the United States District Court for
the Western District of Kentucky, Louisville division, against Rally's, Burt
Sugarman and GIANT and certain of Rally's present and former officers and
directors and its auditors. The cases were subsequently consolidated under the
case name Jonathan Mittman et al vs. Rally's Hamburgers, Inc., et al, case
number C-94-0039-L(CS). The complaints allege defendants violated the
Securities Exchange Act of 1934, among other claims, by issuing inaccurate
public statements about Rally's in order to arbitrarily inflate the price of
its common stock. The plaintiffs seek unspecified damages. On April 15, 1994,
Rally's filed a motion to dismiss and a motion to strike. On April 5, 1995, the
court struck certain provisions of the complaint but otherwise denied Rally's
motion to dismiss. In addition, the court denied plaintiffs' motion for class
certification; the plaintiffs renewed this motion, and despite opposition by
the defendants, the court granted such motion for class certification on April
16, 1996, certifying a class from July 20, 1992 to September 29, 1993. In
October 1995, the plaintiffs filed a motion to disqualify Christensen, Miller,
Fink, Jacobs, Glaser, Weil & Shapiro, LLP as counsel for defendants based on a
purported conflict of interest allegedly arising from the representation of
multiple defendants as well as Ms. Glaser's position as both a former director
of Rally's and a partner in Christensen, Miller. Defendants filed an opposition
to the motion, and the motion to disqualify Christensen, Miller was denied. A
settlement conference occurred on December 7, 1998, but was unsuccessful. Fact
discovery is not yet complete, but it is anticipated that a deadline for
completion of fact discovery will be set during 1999. No trial date has been
set. Management is unable to predict the outcome of this matter at the present
time or whether or not certain available insurance coverages will apply. The
defendants deny all wrongdoing and intend to defend themselves vigorously in
this matter. Because these matters are in a preliminary stage, Rally's is
unable to determine whether a resolution adverse to Rally's will have a
material effect on its results of operations or financial condition.
Accordingly, no provisions for any liabilities that may result upon
adjudication have been made in the accompanying financial statements. An
estimate of defense costs reimbursable under Rally's directors' and officers'
insurance is included in "Other Assets" in the accompanying consolidated
financial statements.
HARBOR FINANCE PARTNERS V. GIANT GROUP, LTD. ET AL. (Civ. Act. No. 14834).
In February 1996, Harbor Finance Partners commenced a derivative action,
purportedly on behalf of Rally's against GIANT and certain of Rally's officers
and directors before the Delaware Chancery Court. Harbor named Rally's as a
nominal defendant. Harbor claims that the directors and officers of both
Rally's and GIANT, along with GIANT, breached their fiduciary duties to the
public shareholders of Rally's by causing Rally's to repurchase from GIANT
certain Rally's senior notes at an inflated price. Harbor seeks "millions of
dollars in damages," along with rescission of the repurchase transaction. In
the fall of 1996, all defendants moved to dismiss the action. The Chancery
Court conducted a hearing on November 26, 1996 and denied the motions to
dismiss on April 3, 1997. Discovery is underway. No trial date has been set.
Rally's denies all wrongdoing and intends to vigorously defend the action. It
is not possible to predict the outcome of this action at this time.
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FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN V.
CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative class
action was filed on September 29, 1998, in the Delaware Chancery Court in and
for New Castle County, Delaware by an alleged stockholder of 500 shares of the
common stock of Checkers. The complaint names Rally's and certain of its
current officers and directors as defendants including William P. Foley, II,
James J. Gillespie, Harvey Fattig, Joseph N. Stein, James T. Holder, Terry N.
Christensen, Burt Sugarman and C. Thomas Thompson. The complaint also names
Checkers and GIANT as defendants. The complaint arises out of the proposed
merger announced on September 28, 1998 between Rally's, Checkers and GIANT and
alleges generally, that certain of the defendants engaged in an unlawful scheme
and plan to permit Rally's to acquire the public shares of the common stock of
Checkers in a "going-private" transaction for grossly inadequate consideration
and in breach of the defendants' fiduciary duties. The plaintiff allegedly
initiated the complaint on behalf of all stockholders of Checkers as of
September 28, 1998, and seeks certain declaratory and injunctive relief against
the consummation of the proposed merger, or in the event the proposed merger is
consummated, recision of the proposed merger and costs and disbursements
incurred in connection with bringing the action, including attorney's fees, and
such other relief as the court may deem just and proper. In view of a decision
by Rally's, GIANT and Checkers not to implement the transaction that had been
announced on September 28, 1998, plaintiffs have agreed to provide Rally's and
all other defendants with an open extension of time to respond to the
complaint. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between Rally's and
Checkers. Rally's denies all wrongdoing and intends to defend the action
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.
DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF
THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. Case
No. 16680. This putative class action was filed on October 2, 1998, in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified
number of shares of the common stock of Checkers. The complaint names Rally's
and certain of its current officers and directors as defendants including
William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, James
T. Holder, Terry N. Christensen, Burt Sugarman and C. Thomas Thompson. The
complaint also names Checkers and GIANT as defendants. As with the FIRST ALBANY
complaint described above, this complaint arises out of the proposed merger
announced on September 28, 1998 between Rally's, Checkers and GIANT and alleges
generally, that certain of the defendants engaged in an unlawful scheme and
plan to permit Rally's to acquire the public shares of the Checkers' common
stock in a "going-private" transaction for grossly inadequate consideration and
in breach of the defendant's fiduciary duties. The plaintiffs allegedly
initiated the Complaint on behalf of all stockholders of Checkers as of
September 28, 1998, and seeks certain declaratory and injunctive relief against
the consummation of the proposed merger, or in the event the proposed merger is
consummated, recision of the proposed merger and costs and disbursements
incurred in connection with bringing the action, including attorneys' fees, and
such other relief as the
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Court may deem just and proper. For the reasons stated above in the description
of the FIRST ALBANY action, plaintiffs have agreed to provide Rally's and all
other defendants with an open extension of time to respond to the complaint.
Plaintiffs have indicated that they will likely file an amended complaint in
the event of the consummation of a merger between Rally's and Checkers. Rally's
denies all wrongdoing and intends to defend the action vigorously. No estimate
of possible loss or range of loss resulting from the lawsuit can be made at
this time.
Rally's is involved in other litigation matters incidental to its
business. With respect to such other lawsuits, management does not believe the
litigation in which it is involved will have a material effect upon its results
of operation or financial condition.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Checkers
directors, persons who are to become directors of Checkers as a result of the
merger and executive officers of Checkers and Rally's and the positions they
hold. Executive officers serve at the pleasure of the Checkers board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- ----- -------------------------------------------------------------------
<S> <C> <C>
William P. Foley, II 54 Chairman of the Board of Directors of Checkers and Rally's
(Checkers term expiring in 1999); Nominee for director of
Checkers with term expiring in 2002
James J. Gillespie 48 President, Chief Executive Officer and Director of Checkers and
Rally's (Checkers term expiring in 2001)
Harvey Fattig 58 Executive Vice President and Chief Operating Officer of Checkers
and Rally's
Richard A. Peabody 38 Senior Vice President and Chief Financial Officer of Checkers
and Rally's
James T. Holder 40 Senior Vice President, General Counsel and Secretary of
Checkers and Rally's
Terry N. Christensen 58 Director of Checkers and Rally's (Checkers term expiring in
2001);
Clarence V. McKee 56 Director of Checkers (term expiring in 1999); Nominee for director
of Checkers with term expiring in 2002
Peter C. O'Hara 43 Director of Checkers (term expiring in 2001)
Burt Sugarman 60 Director of Checkers and Rally's (Checkers term expiring in 2000)
C.Thomas Thompson 49 Director of Checkers and Rally's (Checkers term expiring in
1999); Nominee for director of Checkers with term expiring in
2002
Willie D. Davis 64 Currently a director of Rally's
David Gotterer 70 Currently a director of Rally's
Ronald B. Maggard 49 Currently a director of Rally's
Andrew F. Puzder 48 Currently a director of Rally's
</TABLE>
William P. Foley, II has served as a director of Checkers since November
1996 and as Chairman of the Board since June 1997. Mr. Foley has been the
Chairman of the Board of Santa Barbara Restaurant Group, Inc. since July 1997.
He has been the Chairman of the Board and Chief Executive Officer of Fidelity
National Financial, Inc., which through its subsidiaries is a title insurance
underwriting company, since its formation in 1984. Mr. Foley was also President
of Fidelity from 1984 until December 31, 1994. He has been Chairman of the
Board and Chief Executive Officer of Fidelity National Title Insurance Company
since April 1981. Mr. Foley is also currently serving as Chairman of the Board
of Directors and Chief Executive Officer of CKE Restaurants, Inc., owner,
operator and franchisor of quick-service restaurants, primarily under the
Carl's Jr. and Hardee's brand names, and as Chairman of the Board of Rally's
and is a director of Micro General Corporation, Miravant Medical Technologies
and Fresh Foods, Inc.
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James J. Gillespie has served as Chief Executive Officer of Checkers, and
as President and Chief Executive Officer of Rally's, since November 1997 and as
a director of Checkers and Rally's since December 1997. Mr. Gillespie has
served as President of Checkers since February 1998. He served as President of
the Applebee's Division of Apple South, Inc., franchisee of 254 Applebee
restaurants from January to October 1997. Prior thereto, Mr. Gillespie served
since 1976 in various capacities with Long John Silver's, Inc., operator and
franchisor of Long John Silver's restaurants, including as Senior Vice
President-Franchise Operations and, prior to that position, as Divisional Vice
President, Southwest Division. Checkers and Rally's share the costs related to
the employment of Mr. Gillespie and other shared executive officers. See
"--Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" at pages 145 and 158.
Harvey Fattig has served as Chief Operating Officer of Checkers and
Rally's since March 1998. Mr. Fattig served as Regional Vice President of Long
John Silver's, Inc. from March 1990 through February 1998.
Richard A. Peabody has served as Senior Vice President and Chief Financial
Officer of Checkers and Rally's since April 1999 and prior thereto as Vice
President and Chief Financial Officer of Checkers since January 1998. From
December 1996 to December 1997, Mr. Peabody was Chief Administrative Officer of
Taco Bueno Restaurants, Inc., a subsidiary of CKE. For more than five years
prior to his employment with Taco Bueno Restaurants, Inc., Mr. Peabody was
Division Controller at Black-eyed Pea Management Corp.
James T. Holder has served as a Senior Vice President and General Counsel
of Checkers since January 1997 and as Senior Vice President, General Counsel
and Secretary of Rally's since December 1997. He served as Chief Financial
Officer of Checkers from May to December 1996 and has served as Secretary of
Checkers since October 1995. Mr. Holder served as Vice President and General
Counsel of Checkers from September 1995 to June 1996, as senior legal counsel
for Checkers from December 1994 through April 1995 and corporate counsel from
November 1993 through November 1994. Mr. Holder was engaged in the private
practice of law from January 1991 to November 1993, in Tampa, Florida.
Terry N. Christensen has served as a director of Checkers since November
1996. Mr. Christensen has been a partner in the law firm of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP since May 1988. Mr.
Christensen is a director of GIANT GROUP, LTD., Rally's and MGM Grand, Inc.
Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP has performed
legal services for Checkers and Rally's during 1998 and will perform legal
services for Checkers in 1999. Such services have related to litigation,
compliance with securities laws and other business matters.
Clarence V. McKee has served as a director of Checkers since June 1996.
Mr. McKee has been the President and Chief Executive Officer of McKee
Communications, Inc., a
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Tampa, Florida based company engaged in the acquisition and management of
communications companies, since October 1992. From 1987 to October 1992, Mr.
McKee was the co-owner, Chairman and Chief Executive Officer of WTVT-Inc., the
licensee of television channel 13 in Tampa, Florida. Mr. McKee is a member of
the boards of directors of the Florida Progress Corporation and its subsidiary,
Florida Power Corporation. He is a former chairman of the Florida Association
of Broadcasters.
Burt Sugarman has served as a director of Checkers since June 1997. Mr.
Sugarman has been the Chairman of the Board, President and Chief Executive
Officer of GIANT for more than the past five years and served as the Chief
Executive Officer of Rally's from 1990 and as the Chairman of the Board of
Directors of Rally's from 1991, resigning from these offices in February 1994.
Mr. Sugarman resumed the position of Chairman of the Board of Directors of
Rally's in November 1994 and resigned such office in October 1997. Mr. Sugarman
is a Director of GIANT, Rally's, and Santa Barbara Restaurant Group, Inc.
C. Thomas Thompson has served as a director of Checkers since November
1996 and as Vice Chairman of the Board of Directors since December 1996. He
also served as Chief Executive Officer of Checkers from December 1996 to
November 1997. Mr. Thompson has been President and Chief Operating Officer of
Carl Karcher Enterprises, Inc., a wholly owned subsidiary of CKE, since October
1994 and as President of CKE since December 1984. Since 1984, Mr. Thompson has
been a partner in a partnership which owns and operates 15 restaurants under
the Carl's Jr. franchise system. Mr. Thompson is a director of Santa Barbara
Restaurant Group and Rally's.
Peter C. O'Hara has served as a director of Checkers since June 1998. He
has served as president of Capital Management of L. I., N.Y., Inc., a Checkers
franchise area developer for Long Island, New York, since March 1994. Prior
thereto, from June 1990 to April 1994, Mr. O'Hara served as Chief Operating
Officer and a director of Pudgie's Famous Chicken, Ltd., owner, operator and
franchisor, primarily in New York state, of quick service restaurants featuring
skinless fried chicken.
Willie D. Davis has served as a director of Rally's since 1994. Mr. Davis
has been the President and a director of All-Pro Broadcasting, Inc., a holding
company operating several radio stations, for more than the past five years.
Mr. Davis currently also serves on the board of directors of Sara Lee
Corporation, K-Mart Corporation, Dow Chemical Company, MGM Grand, Inc.,
Alliance Bank, WICOR Incorporated, Johnson Controls Incorporated, Basset
Furniture Company and Strong Fund.
David Gotterer has served as a director of Rally's since 1989. Mr.
Gotterer has been a partner in the accounting firm of Mason & Company, LLP, New
York, New York, for more than the past five years. Mr. Gotterer is a director
and Vice Chairman of GIANT.
Ronald B. Maggard has served as a director of Rally's since August 1997.
For more than the past five years, Mr. Maggard has been President of Maggard
Enterprises, Newport Beach, which owns 20 franchised Long John Silver
restaurants and President of Midstate Distributing, Lexington, Kentucky, which
is a Miller Distributing Company.
141
<PAGE>
Andrew F. Puzder has served as a director of Rally's since August 1997.
Mr. Puzder has been Chief Executive Officer and a director of Santa Barbara
Restaurant Group, Inc. since July 1997. He has served as Executive Vice
President and General Counsel of CKE since February 1997 and was an Executive
Vice President and General Counsel of Fidelity from January 1995 to April 1997.
From March 1994 through December 1994, Mr. Puzder was a partner at the law firm
of Stradling, Yocca, Carlson & Rauth. From September 1991 through March 1994,
he was a partner at Lewis, D'Amato, Brisbois and Bisgaard, a law firm. Mr.
Puzder is also a director of Fresh Foods, Inc. and Javelin Systems, Inc.
No family relationships exist between any of the directors of Checkers,
the persons who are currently Rally's directors but not Checkers directors and
the executive officers of Checkers. There are no arrangements or understandings
between any director and any other person concerning service or nomination as a
director.
The Checkers board held five meetings during 1998 and acted one time by
unanimous written consent without a meeting. In 1998, each incumbent director
attended at least 75% of the meetings of the Checkers board and of each
committee of which he was a member.
The Rally's board held seven meetings during 1998 and acted one time by
unanimous written consent without a meeting. In 1998, each incumbent director
attended at least 75% of the meetings of the Rally's board and of each
committee of which he was a member.
BOARD COMMITTEES
CHECKERS. The Checkers board has audit, compensation and stock option
committees; it does not have a nominating committee. The entire Checkers board
functions as a nominating committee, and the Checkers board will consider
written recommendations from stockholders for nominations to it in accordance
with the procedures set forth in the by-laws of Checkers. See "Stockholder
Proposals" on page 173.
During 1998, the Checkers audit committee consisted of William P. Foley,
II, Chairman, Terry N. Christensen and Clarence V. McKee and held one meeting.
The audit committee recommends the appointment of the independent public
accountants of Checkers, discusses and reviews the scope and fees of the
prospective annual audit and reviews the results thereof with the independent
public accountants, reviews and approves non-audit services of the independent
public accountants, reviews compliance with existing major accounting and
financial policies of Checkers, reviews the adequacy of the financial
organization of Checkers, reviews management's procedures and policies relative
to the adequacy of Checkers' internal accounting controls and compliance with
federal and state laws relating to accounting practices, and reviews and
approves (with the concurrence of the majority of the disinterested directors
of Checkers) transactions, if any, with affiliated parties.
During 1998, the compensation committee consisted of William P. Foley, II,
Chairman, and Clarence V. McKee and held one meeting. Its principal function is
to make recommendations to the Checkers board with respect to the compensation
and benefits to be paid to officers, and it performs other duties prescribed by
the Checkers board with respect to employee stock plans and benefit programs.
142
<PAGE>
During 1998, the stock option committee consisted of William P. Foley, II,
Chairman and Clarence V. McKee held two meetings. Its principal function is to
make recommendations to the Checkers board with respect to Checkers' stock
option plans and other duties prescribed by the Checkers board.
The Rally's board has executive, audit, compensation and option
committees; it does not have a nominating committee. The entire board functions
as a nominating committee, and the board will consider written recommendations
from stockholders for nominations to the board of directors in accordance with
the procedures set forth in the Rally's bylaws.
The executive committee consists of Messrs. Foley, Gillespie, Sugarman,
Chair, and Thompson. During intervals between the meetings of the board, the
executive committee exercises all the powers of the board, except those powers
specifically reserved by Delaware law to the full board, in the management and
direction of Rally's business and conduct of its affairs in all cases in which
specific directions have not been given by the board.
The audit committee consists of Willie D. Davis and C. Thomas Thompson,
Chair, and held one meeting in 1998. The audit committee is responsible for
exercising supervisory control over the internal auditing and accounting
procedures, practices of personnel of Rally's and for making recommendations to
the board concerning the appointment of independent auditors.
The compensation committee consists of William P. Foley, II, Chair, David
Gotterer and Ronald B. Maggard and held one meeting in 1998. Its principal
function is to make recommendations to the board with respect to the
compensation and benefits to be paid to officers, and it also recommends to the
board the award of bonuses to executive officers. The compensation committee
also performs other duties prescribed by the board with respect to employee
benefit programs.
The option committee consists of Terry Christensen, Chair, and Andrew F.
Puzder and met two times in 1998. Its principal function is to make
recommendations to the board with respect to options to be granted pursuant to
Rally's stock option plans.
COMPENSATION OF DIRECTORS
CHECKERS. Directors who are not employees of Checkers are compensated on
the basis of $1,000 plus out-of-pocket expenses for each board and committee
meeting attended. Non-employee directors also participate in the Checkers 1994
Stock Option Plan For Non-Employee Directors, which provides for the automatic
grant to each non-employee director of Checkers, upon election to the board, of
a non-qualified, ten-year option to acquire 100,000 shares of Checkers common
stock, with the subsequent automatic grant on the first day of each fiscal year
thereafter during the time such person is serving as a non-employee director of
a non-qualified, ten-year option to acquire an additional 20,000 shares of
Checkers common stock. All such options have an exercise price equal to the
closing sale price of the Checkers common stock on the date of grant. One-fifth
of each
143
<PAGE>
initial option granted before August 6, 1997 become exercisable on a cumulative
basis on each of the first five anniversaries of the date of the grant of such
option. One-third of each annual option granted before August 6, 1997 becomes
exercisable on a cumulative basis on each of the first three anniversaries of
the date of the grant of such option. All options granted on or after August 6,
1997 are exercisable immediately upon grant. Options are exercisable whether or
not the non-employee director is, at the time of exercise, an eligible member
of the Checkers board, unless the director is removed for cause. Directors who
are employees of Checkers receive no extra compensation for their services as
directors.
RALLY'S. Directors who are not employees of Rally's are compensated on the
basis of $10,000 per annum, paid quarterly, plus $500 for each board meeting
attended. Non-employee directors also receive $500 for each committee meeting
attended on a date other than a date on which a board meeting is held and
participate in the 1994 stock option plan for non-employee directors. Such plan
provides for the automatic grant to each non-employee director upon election to
the board of a non-qualified, ten-year option to acquire 15,000 shares of
Rally's common stock, with the subsequent automatic grant on May 11 of each
year, on the anniversary of such person's election as a director if elected
after May 11, 1996, during the time such person is serving as a non-employee
director of a non-qualified, ten-year option to acquire an additional 15,000
shares of Rally's common stock. In addition, each non-employee director who is
elected a member of the executive committee is granted an additional option for
7,500 shares of Rally's common stock, and the Chairman of the executive
committee is granted a third option for 20,000 shares of Rally's common stock
upon election as chairman. During the period each non-employee director serves
on the executive committee, such non-employee director receives subsequent
automatic grants of an option to purchase 7,500 shares of common stock, plus an
additional 20,000 shares in the case of the chairman of the executive
committee, on May 11 of each year or the anniversary of such person's election
to the executive committee if elected after May 11, 1996. All such options have
an exercise price equal to the closing sale price of the Rally's common stock
on the date of grant. Such options are immediately exercisable. Directors who
are employees of Rally's receive no extra compensation for their services as
directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Checkers' and Rally's directors, officers and holders of more than 10% of
Checkers and Rally's common stock to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Checkers common stock and any other equity securities of Checkers and Rally's.
To Checkers' or Rally's knowledge, based solely upon a review of the forms,
reports and certificates filed with Checkers or Rally's by such persons, all
such Section 16(a) filing requirements were complied with by such persons in
1998, except as follows: Richard A. Peabody filed one Form 3 late and Burt
Sugarman, James T. Holder, Clarence V. McKee and Wendy A. Beck each filed one
Form 5 late with respect to Checkers.
144
<PAGE>
EXECUTIVE COMPENSATION
The following table is a summary of the compensation paid or accrued by
Checkers and Rally's for the last three fiscal years for services in all
capacities to each of the persons who qualified as a "named executive officer"
under Item 402(b) of Regulation S-K. The amounts shown below are the total
compensation received for services to both Checkers and Rally's. Based upon the
management services agreement, Checkers and Rally's paid 50.1% and 49.9% of the
1998 compensation, excluding bonuses and relocation expenses which were
incurred only by Checkers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------------- -------------
CHECKERS RALLY'S
OTHER SECURITIES SECURITIES
ANNUAL UNDERLYING UNDERLYING
SALARY BONUS COMPENSATION OPTIONS OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (1) (#) (2) (#) (2) COMPENSATION
- ----------------------------- ------ ----------- ----------------- ------------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
James J. Gillespie (3) 1998 $282,500 $ 20,000 $ 45,304(4) 600,000 500,000 $
Chief Executive Officer 1997 45,067 50,000 -- 300,000 --
Harvey Fattig (5) 1998 $147,404 $ -- $ -- 588,000 -- $--
Executive Vice President
and Chief Operating Officer
Joseph N. Stein (6) 1998 $200,000 $ 150,000(7) $ -- 538,000 112,000 $--
Executive Vice President 1997 189,230 -- 108,441(8) 250,000 -- --
and Chief Administrative
Officer
James T. Holder 1998 $180,000 $ 144,000(7) $ -- 380,000 70,000 $--
Senior Vice President, 1997 179,231 -- -- 100,000 -- --
General Counsel and 1996 140,350 23,077 -- 90,500 -- --
Secretary
Richard A. Peabody (9) 1998 $124,259 $ -- $ 36,839(10) 308,000 42,000 $--
Senior Vice President and
Chief Financial Officer
Richard E. Fortman(11) 1998 $ 35,384 $ 200,000(7) $ -- -- -- $--
1997 189,230 -- -- 250,000 -- --
</TABLE>
- --------------
(1) Certain perquisites were provided to certain of the executives named
above, but in no event did the value of the perquisites provided in any
year exceed 10% of the amount of the executive's salary for that year.
(2) With the exception of the Checkers options granted to Mr. Stein and Mr.
Fortman in 1997, the Checkers options listed were granted pursuant to
Checkers' 1991 stock option plan, and the Rally's options listed were
granted pursuant to the Rally's 1990 stock option plan. In December 1998,
outstanding options under the Checkers and Rally's plans, including
options granted earlier in 1998, as well as the option granted to Mr.
Stein in 1997, were cancelled and reissued. See "Management--Executive
Compensation--Option Grants in Last Fiscal Year" on page 148. Neither
Checkers nor Rally's had any restricted stock awards outstanding at any
time during the periods covered by the table.
(3) Mr. Gillespie was appointed Chief Executive Officer of Checkers and
Rally's in November 1997.
(4) Includes relocation expenses ($9,809) and travel ($34,194).
(5) Mr. Fattig was appointed Executive Vice President and Chief Operating
Officer in March 1998.
(6) Mr. Stein was appointed Executive Vice President and Chief Administrative
Officer of Checkers in January 1997 and subsequently assumed the Chief
Financial Officer position. He relinquished his position as Checkers Chief
Financial Officer in January 1998. He was appointed Executive Vice
President and Chief Financial Officer of Rally's in December 1997. He
resigned as an officer of Checkers and Rally's effective April 8, 1999.
(7) Bonuses paid to Messrs. Stein, Holder and Fortman in 1998 were based on
1997 results but paid in 1998.
(8) Consists of relocation expenses ($108,221).
(9) Mr. Peabody was appointed Vice President and Chief Financial Officer of
Checkers in January 1998 and Senior Vice President and Chief Financial
Officer of Checkers and Rally's in April 1999.
(10) Includes relocation expenses ($36,718).
(11) Mr. Fortman was appointed President and Chief Operating Officer of
Checkers in January 1997. He resigned from Checkers in February 1998.
145
<PAGE>
EMPLOYMENT AGREEMENTS
Effective November 10, 1997, Checkers, Rally's and James J. Gillespie
entered into an employment agreement, the costs of which are shared by the
companies. The principal terms of the agreement are as follows:
TITLE: President, Chief Executive Officer and director of Checkers and
Rally's.
TERM: 2 years, with optional renewal by either Checkers or Rally's.
BASE SALARY: $282,500 per year.
STOCK OPTIONS: Option to purchase 300,000 shares of Rally's common stock
granted upon effectiveness of the agreement. The option vests in three
equal annual installments beginning on November 10, 1998. In the event the
term of the agreement is not extended to November 10, 2000, the option
becomes fully vested on November 10, 1999. In addition, Mr. Gillespie is
entitled to choose to participate in either Checkers or Rally's employee
benefit plans.
BONUS: Mr. Gillespie received a signing bonus of $50,000 and is eligible to
receive an annual incentive bonus.
MOVING EXPENSES: Yes, moving expenses were paid, plus a $5,000 relocation
fee.
Mr. Gillespie's agreement may be terminated at any time by Checkers or
Rally's for cause. If Mr. Gillespie is terminated without cause, he is entitled
to receive his base annual salary, and any earned unpaid bonus, through the
unexpired term of the agreement. The payment may be in a lump sum or as
directed by Mr. Gillespie. The term "cause" is defined as either:
1. a material default or breach under the agreement; or
2. the willful and habitual failure to perform duties under the agreement
or corporate policies; or
3. misconduct, dishonesty, insubordination or other act that has a direct
substantial and adverse effect on the reputation of Checkers or Rally's
or their relationships with their customers or employees.
Mr. Gillespie has agreed to keep confidential all nonpublic information
about the companies during the term of his employment and for a two-year period
after his employment. In addition, Mr. Gillespie has agreed that during his
employment, he will not engage in any business which is competitive with the
companies.
146
<PAGE>
In February 1998, Checkers, Rally's and Harvey Fattig entered into an
employment agreement, the costs of which are shared by the companies. The terms
of the agreement are as follows:
TITLE: Executive Vice President and Chief Operating Officer, of Checkers
and Rally's.
BASE SALARY: $175,000 per year.
STOCK OPTIONS: Option to purchase 42,000 shares of Rally's common stock and
options to purchase 108,000 shares of Checkers common stock are granted.
The options vest in equal installments over a three-year period.
BONUS: Mr. Fattig is eligible to receive an incentive bonus.
MOVING EXPENSES: Moving expenses were paid.
OTHER: Mr. Fattig is entitled to six month's severance pay if terminated
without cause prior to the third anniversary of his employment.
147
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following tables set forth information regarding options by Checkers
and Rally's granted to the executives named in the summary compensation table
during fiscal 1998.
CHECKERS
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS (1) FOR OPTION TERM (2)
--------------------------------------------------------- -----------------------
NUMBER OF % OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE
GRANTED EMPLOYEES PRICE EXPIRATION
NAME (#) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------ ---------------- ---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
James J. Gillespie ..... 300,000(3) 4.1% $0.84375 4/27/08 $159,189 $403,416
300,000(4) 4.1% 0.375 4/27/08 65,226 162,359
------- ---
600,000 8.2%
======= ===
Harvey Fattig .......... 294,000(3) 4.0% $ 1.000 4/27/08 $184,895 $468,560
294,000(4) 4.0% 0.375 4/27/08 63,922 159,112
------- ---
588,000 8.1%
======= ===
Richard A. Peabody ..... 154,000(3) 2.1% $ 1.000 4/27/08 $ 96,850 $245,436
154,000(4) 2.1% 0.375 4/27/08 33,483 83,344
------- ---
308,000 4.2%
======= ===
Joseph N. Stein ........ 144,000(3) 2.0% $ 1.000 4/27/08 $ 90,561 $229,499
144,000(4) 2.0% 0.375 4/27/08 31,309 77,932
250,000(4) 3.4% 0.375 1/6/07 45,207 108,475
------- ---
538,000 7.4%
======= ===
James T. Holder ........ 90,000(3) 1.2% $ 1.000 4/27/08 $ 56,601 $143,437
1,000(4) 0.0% 0.375 12/31/03 105 232
1,000(4) 0.0% 0.375 8/1/04 119 266
7,500(4) 0.1% 0.375 12/21/04 961 2,180
90,500(4) 1.2% 0.375 7/12/06 15,182 35,943
100,000(4) 1.4% 0.375 1/6/07 18,083 43,390
90,000(4) 1.2% 0.375 4/27/08 19,568 48,708
------- ---
380,000 5.2%
======= ===
</TABLE>
- ----------------
(1) All options were granted pursuant to the 1991 stock option plan.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
provided in compliance with Regulation S-K under the Exchange Act.
Checkers does not necessarily believe that these appreciation calculations
are indicative of actual future stock option values or that the price of
Checkers common stock will appreciate at such rates.
(3) Options for Mr. Gillespie were issued on August 18, 1998 while options for
other executives were issued on April 27, 1998. These options were
cancelled on December 15 pursuant to the issuance of repriced options.
(4) Represents reissuance of repriced options on December 15, 1998.
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<PAGE>
RALLY'S
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS (1) FOR OPTION TERM (2)
--------------------------------------------------------- ----------------------
NUMBER OF % OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE
GRANTED EMPLOYEES PRICE EXPIRATION
NAME (#) IN FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------ ---------------- ---------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James J. Gillespie ..... 100,000(3) 3.8% $1.313 8/18/08 $82,574 $209,258
100,000(4) 3.8% 0.531 8/18/08 32,063 80,518
300,000(4) 11.3% 0.531 11/10/07 86,739 213,098
------- ----
500,000 6.8%
======= ====
Harvey Fattig .......... 56,000(3) 2.1% $2.531 4/27/08 $89,137 $225,891
56,000(4) 2.1% 0.531 4/27/08 17,241 42,915
------- ----
112,000 1.5%
======= ====
Joseph N. Stein ........ 56,000(3) 2.1% $2.531 4/27/08 $89,137 $225,891
56,000(4) 2.1% 0.531 4/27/08 17,241 42,915
------- ----
112,000 1.5%
======= ====
James T. Holder ........ 35,000(3) 1.3% $2.531 4/27/08 $55,711 $141,182
35,000(4) 1.3% 0.531 4/27/08 10,775 26,822
------- ----
70,000 1.0%
======= ====
Richard A. Peabody ..... 21,000(3) 0.8% $2.531 4/27/08 $33,426 $ 84,709
21,000(4) 0.8% 0.531 4/27/08 6,465 16,093
------- ----
42,000 0.6%
======= ====
</TABLE>
- ----------------
(1) All options were granted pursuant to the Rally's 1990 stock option plan.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
provided in compliance with Regulation S-K under the Exchange Act. Rally's
does not necessarily believe that these appreciation calculations are
indicative of actual future stock option values or that the price of
Rally's common stock will appreciate at such rates.
(3) Options for Mr. Gillespie were issued on August 18, 1998 while options for
other executives were issued on April 27, 1998. These options were
cancelled on December 15 pursuant to the issuance of repriced options.
(4) Represents reissuance of repriced options on December 15, 1998.
149
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
Set forth below is information with respect to Checkers and Rally's
options exercised by the executives named in the summary compensation table on
page 145 during fiscal 1998 and the number and value of unexercised stock
options held by such executives at the end of the fiscal year.
CHECKERS
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END (#) AT FY-END ($) (1)
--------------------------- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ ----------------- -------------- --------------------------- --------------------------
<S> <C> <C> <C> <C>
James J. Gillespie ..... -0- -0- -0-/300,000 -0-/-0-
Harvey Fattig .......... -0- -0- -0-/294,000 -0-/-0-
Joseph N. Stein ........ -0- -0- 250,000/144,000 -0-/-0-
James T. Holder ........ -0- -0- 174,875/115,125 -0-/-0-
Richard A. Peabody ..... -0- -0- -0-/154,000 -0-/-0-
Richard E. Fortman .....
</TABLE>
- ----------------
(1) Based upon the difference between the exercise price and the closing price
of Checkers common stock ($.3125) as reported on the NASDAQ National
Market on December 28, 1998.
RALLY'S
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END (#) AT FY-END ($) (1)
--------------------------- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------ ----------------- -------------- --------------------------- --------------------------
<S> <C> <C> <C> <C>
James J. Gillespie ..... -0- -0- 100,000/200,000 -0-/-0-
Harvey Fattig .......... -0- -0- -0-/56,000 -0-/-0-
Joseph N. Stein ........ -0- -0- -0-/56,000 -0-/-0-
James T. Holder ........ -0- -0- -0-/35,000 -0-/-0-
Richard A. Peabody ..... -0- -0- -0-/21,000 -0-/-0-
</TABLE>
- ----------------
(1) Based upon the difference between the exercise price and the closing price
of Rally's common stock ($.53125) as reported on the NASDAQ National
Market on December 28, 1998.
REPORT OF THE COMPENSATION COMMITTEES
The information contained in this section, the following section and the
section entitled "Performance Graph" are not deemed to be "soliciting material"
or to be "filed" with the Securities and Exchange Commission or subject to
Regulation A under the Securities Act or to the liabilities of Section 18 of
the Exchange Act.
CHECKERS. The following report was prepared by the members of Checkers'
compensation committee at the end of fiscal year ended December 28, 1998.
150
<PAGE>
Annual compensation for all the executive officers of Checkers is
determined by the compensation committee, subject to the terms of any
applicable employment agreement negotiated between an officer and Checkers.
During fiscal year 1998, annual compensation was set with the intent of
reasonably compensating the executive officers of Checkers, in line with
industry norms, based upon the committee members' subjective evaluation of each
officer. The evaluations are based upon assigned responsibilities, past and
anticipated potential contribution to the profitability of Checkers, individual
performance and productivity, and growth and earnings of Checkers. Annual
bonuses, where appropriate, may be awarded by the board based upon
recommendations of the compensation committee. During 1998 Messrs. Stein,
Holder and Fortman received $150,000, $144,000 and $200,000 in bonuses for
1997. No bonuses were earned or paid for 1998.
During fiscal 1998, awards of stock options under Checkers' 1991 stock
option plan to all executive officers and other employees of Checkers were made
at the discretion of the members of the stock option committee. The stock
option committee consisted of all of the members of the compensation committee
in fiscal year 1998. The stock option committee did not give particular weight
to a specific factor or use a formula in determining awards under the plan.
While not required under the terms of the plan, all existing stock options were
granted with an exercise price at least equal to the market value of the stock
at the time of the grant and generally included vesting periods which the stock
option committee believed would encourage the employee to remain with Checkers.
The benefits derived from each stock option granted under the plan is directly
attributable to a future increase in the value of Checkers common stock. In
December 1998, all outstanding options had exercise prices substantially in
excess of the current market price of Checkers common stock. As a result, the
members of Checkers' compensation committee and stock option committee
concluded that the options were not providing the desired incentive to the
option holders. The compensation committee and the stock option committee
decided to cancel all outstanding options, other than options granted under the
stock option plan for non-employee directors, and issue new options at the
current market price. The other terms of the reissued options remained the
same. See "--Option Grants in Last Fiscal Year" at page 148.
James J. Gillespie has served as the chief executive officer of Checkers
and Rally's since November 1997. In reviewing the terms of Mr. Gillespie's
employment agreement and determining the compensation to be paid to him in
1998, the compensation committee applied the policies described above. During
August 1998, Mr. Gillespie was granted an option to purchase 300,000 shares of
Checkers common stock and an option to purchase 100,000 shares of Rally's
common stock. These options vest in three annual installments. All of the
options held by Mr. Gillespie were cancelled and reissued in December 1998
based upon the reasons described above.
William P. Foley, II (Chairman)
Clarence V. McKee
151
<PAGE>
RALLY'S. The compensation committee of the Rally's board has been
comprised of Terry N. Christensen, Chair, William P. Foley, II and David
Gotterer since May 1996, each of whom is a non-employee director. During 1997,
the compensation committee was responsible for advising the board on matters
relating to the compensation of Rally's executive officers and administering
Rally's 1990 stock option plan. Set forth below is a report submitted by the
compensation committee describing its compensation policies and its decisions
relating to compensation of executive officers in 1998.
The compensation committee's policies concerning the compensation of
Rally's executive officers are summarized as follows:
/bullet/ Compensation awarded by Rally's should be effective in attracting,
motivating and retaining key executives;
/bullet/ Executive officers should receive incentive compensation which
relates to Rally's performance and the executives' contribution to
such performance; and
/bullet/ Rally's compensation programs should give the executives a
financial interest in Rally's similar to the interests of its
stockholders.
The compensation committee believes that the performance of Rally's
including profitability, return on equity and cash flow, as well as Rally's
performance in relation to the performance of other companies engaged in the
quick-service restaurant industry is important in determining the compensation
to be awarded to its executive officers.
Rally's executive officers are compensated through a combination of
salary, annual bonuses, where appropriate, and grants of stock options under
its stock option plan. The annual salaries of Rally's executive officers are
reviewed from time to time by the compensation committee. The compensation
committee recommends to the board that adjustments be made where necessary in
order for the annual salaries of Rally's executives to be competitive with the
salaries paid by other companies in the industry.
Annual bonuses, where appropriate, may be awarded by the board based upon
recommendations of the compensation committee. No bonuses were earned or paid
for 1998.
The compensation committee periodically grants stock options under the
1990 stock option plan in order to provide executive officers and other
employees with an interest in Rally's. The compensation committee believes that
stock options are a valuable tool in encouraging executive officers to align
their interests with the interests of the stockholders and to manage Rally's
for the long term.
In December 1998, all outstanding options had exercise prices
substantially in excess of the current market price of Rally's common stock. As
a result, the members of the compensation committee concluded that the options
were not providing the desired
152
<PAGE>
incentive to the option holders. The compensation committee decided to cancel
all outstanding options, other than options granted under the non-employee
director plan, and issue new options at the current market price. See "--Option
Grants in Last Fiscal Year" at page 149.
James J. Gillespie has served as the Chief Executive Officer of Rally's
and Checkers since November 1997. In reviewing the terms of Mr. Gillespie's
employment agreement and determining the compensation to be paid to him in
1997, the compensation committee applied the policies described above. Pursuant
to his employment agreement, Mr. Gillespie is paid by Checkers at the annual
rate of $282,500 and received a signing bonus of $50,000. Rally's reimbursed
Checkers for its share of Mr. Gillespie's compensation (49.9%). Pursuant to his
employment agreement, Mr. Gillespie was granted an option to purchase 300,000
shares of Rally's common stock in 1997. The option vests in three annual
installments subject to acceleration in certain circumstances. See "Employment
Agreements" at page 76. During August 1998, Mr. Gillespie was granted options
for 300,000 shares of Checkers common stock and 100,000 shares of Rally's
common stock. These options vest in three annual installments. All of the
options held by Mr. Gillespie were cancelled and reissued in December 1998 for
the reasons described above.
William P. Foley, II (Chairman)
David Gotterer
Ronald B. Maggard
153
<PAGE>
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
12/30/93 12/31/94 12/29/95 12/30/96 12/29/97 12/28/98
<S> <C> <C> <C> <C> <C> <C>
Checkers 100 19 9 13 7 3
S&P 500 100 98 131 161 203 261
S&P Rest 100 99 147 144 154 234
</TABLE>
* Total return assumes reinvestment of any dividends for all companies
considered within the comparison.
** The Standard and Poor's Restaurant Index includes McDonald's Corporation and
Wendy's International, Inc. among others.
The foregoing graph assumes $100 invested on December 30, 1993, in
Checkers, the S&P 500 Index and the S&P Restaurant Index.
154
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE STOCKHOLDER RETURN
The following graph compares the cumulative return experienced by holders
of Rally's common stock to the returns of the NASDAQ Stock Market (U.S.
Companies) and to the peer group indices during the period from December 30,
1993 through the end of Rally's 1998 fiscal year. The peer group consists of
the following publicly held restaurant companies: CKE Restaurants, Inc. (Carl
Karcher Enterprises); Checkers Drive-In Restaurants, Inc.; Flagstar Companies,
Inc.; Foodmaker, Inc.; Krystal Company; and Sonic Corp. The graphs assume the
investment of $100 on December 30, 1993 in Rally's common stock and each of the
indices. Total return calculations assume the reinvestment of all dividends.
Rally's has never paid a cash dividend.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG RALLY'S HAMBURGERS, INC.,
NASDAQ COMPOSITE INDEX AND PEER GROUP**
[GRAPHIC OMITTED]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
12/30/93 12/31/94 12/29/95 12/30/96 12/29/97 12/28/98
Rally's 100 34 11 51 33 6
NASDAQ 100 97 135 166 202 281
Peer Group Average 100 60 67 107 157 161
</TABLE>
Note: The stock price performance shown on the graphs above is not necessarily
indicative of future price performance. Additionally, the stock
performance graph shall not be deemed incorporated by reference by any
general statement incorporating by reference this joint proxy
statement/prospectus into any filing under the Securities Act or under
the Exchange Act except to the extent specifically incorporated by
reference, and shall not otherwise be deemed filed under such acts.
155
<PAGE>
TEN-YEAR OPTION REPRICINGS
RALLY'S
<TABLE>
<CAPTION>
LENGTH OF
NUMBER MARKET ORIGINAL
OF PRICE EXERCISE OPTION
SECURITIES OF STOCK PRICE TERM
UNDERLYING AT TIME OF AT TIME OF NEW REMAINING
OPTIONS REPRICING OR REPRICING OR EXERCISE AT DATE OF
REPRICED OR AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE AMENDED ($) ($) ($) AMENDMENT
- ---------------------------------------- ---------- ------------- -------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Wayne M. Albritton ..................... 8/26/94 140,000 4.125 16.500 4.125 9 yrs 4 mos
Former President and Chief ............ 8/26/94 15,000 4.125 10.125 4.125 10 yrs 2 mos
Executive Officer ..................... 2/4/91 22,500 6.000 11.040 6.000 3 yrs 8 mos
2/4/91 75,000 6.000 9.500 6.000 4 yrs 6 mos
William Klausman ....................... 8/26/94 12,500 4.125 16.500 4.125 9 yrs 4 mos
Fomer Senior Vice President, .......... 8/26/94 10,050 4.125 10,125 4.125 10 yrs 2 mos
General Counsel and Secretary
Bruce M. Ley ........................... 8/26/94 10,000 4.125 16,500 4.125 9 yrs 4 mos
Former Executive Vice ................. 8/26/94 15,950 4.125 10.125 4.125 10 yrs 2 mos
President-Marketing
Donald C. Moore ........................ 8/26/94 10,000 4.125 16,500 4.125 9 yrs 4 mos
Former Senior Vice President .......... 8/26/94 12,500 4.125 10,125 4.125 10 yrs 2 mos
and Chief Financial Officer
Burt Sugarman .......................... 8/26/94 300,000 4.125 16,500 4.125 9 yrs 4 mos
Former Chief Executive Officer, ....... 2/4/91 90,000 6.000 9.500 6.000 4 yrs 6 mos
Current Vice Chairman
James J. Gillespie ..................... 12/15/98 300,000 0.531 4.000 0.531 8 yrs 11 mos
President and Chief ................... 100,000 0.531 1.313 0.531 9 yrs 8 mos
Executive Officer
Harvey Fattig .......................... 12/15/98 56,000 0.531 2.531 0.531 9 yrs 4 mos
Executive Vice President and
Chief Operating Officer
Joseph N. Stein ........................ 12/15/98 56,000 0.531 2.531 0.531 9 yrs 4 mos
Former Executive Vice President
and Chief Financial Officer
James T. Holder ........................ 12/15/98 35,000 0.531 2.531 0.531 9 yrs 4 mos
Senior Vice President,
General Counsel and
Secretary
Richard A. Peabody ..................... 12/15/98 21,000 0.531 2.531 0.531 9 yrs 4 mos
Senior Vice President and
Chief Financial Officer
</TABLE>
156
<PAGE>
CHECKERS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER MARKET ORIGINAL
OF PRICE EXERCISE OPTION
SECURITIES OF STOCK PRICE TERM
UNDERLYING AT TIME OF AT TIME OF NEW REMAINING
OPTIONS REPRICING OR REPRICING OR EXERCISE AT DATE OF
REPRICED OR AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE AMENDED ($) ($) ($) AMENDMENT
- ----------------------------------------- ----------- ------------- -------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Herbert G. Brown ........................ 8/1/94 125,000 5.13 11.63 5.13 9 yrs 4 mos
Former Chairman, Director
James F. White, Jr. ..................... 8/1/94 112,500 5.13 12.33 5.13 8 yrs 6 mos
Former Vice Chairman, Director.......... 8/1/94 10,000 5.13 11.63 5.13 9 yrs 4 mos
Chief Executive Officer
N. John Simmons, Jr. .................... 8/1/94 56,250 5.13 12.33 5.13 8 yrs 6 mos
Former Vice President-Finance........... 8/1/94 10,000 5.13 11.63 5.13 9 yrs 4 mos
and Chief Financial Officer
Paul C. Campbell ........................ 8/1/94 2,625 5.13 12.33 5.13 8 yrs 6 mos
Former Vice President-Business.......... 8/1/94 5,000 5.13 11.63 5.13 9 yrs 4 mos
Planning and Administration
Gregory T. DeCelle ...................... 8/1/94 2,260 5.13 12.33 5.13 8 yrs 6 mos
Former Vice President-.................. 8/1/94 5,000 5.13 11.63 5.13 9 yrs 4 mos
Development
John E. Hellriegel ...................... 8/1/94 18,750 5.13 12.33 5.13 8 yrs 6 mos
Former Vice President-.................. 8/1/94 5,000 5.13 11.63 5.13 9 yrs 4 mos
Franchising
Anthony J. Monzo ........................ 8/1/94 18,750 5.13 12.33 5.13 8 yrs 6 mos
Former Vice President-.................. 8/1/94 5,000 5.13 11.63 5.13 9 yrs 4 mos
Marketing
Thomas M. Nash .......................... 8/1/94 18,750 5.13 12.33 5.13 8 yrs 6 mos
Former Vice President-.................. 8/1/94 5,000 5,13 11,63 5.13 9 yrs 4 mos
Real Estate
Jerry E. Ward ........................... 8/1/94 2,250 5.13 12.33 5.13 8 yrs 6 mos
Former Vice President-.................. 8/1/94 5,000 5.13 11.63 5.13 9 yrs 4 mos
Construction Manufacturing
James J. Gillespie ...................... 12/15/98 300,000 0.375 0.844 0.375 9 yrs 8 mos
President and Chief
Executive Officer
Harvey Fattig ........................... 12/15/98 294,000 0.375 1.000 0.375 9 yrs 4 mos
Executive Vice President and
Chief Operating Officer
Joseph N. Stein ......................... 12/15/98 250,000 0.375 1.770 0.375 8 yrs 1 mo
Former Executive Vice President......... 12/15/98 144,000 0.375 1.000 0.375 9 yrs 4 mos
and Chief Administrative Officer
Richard A. Peabody ...................... 12/15/98 154,000 0.375 1.000 0.375 9 yrs 4 mos
Vice President and Chief
Financial Officer
James T. Holder ......................... 12/15/98 1,000 0.375 11.630 0.375 5 years
Senior Vice President,.................. 12/15/98 1,000 0.375 5.130 0.375 5 yrs 4 mos
General Counsel and..................... 12/15/98 7,500 0.375 2.630 0.375 6 years
Secretary............................... 12/15/98 90,500 0.375 1.530 0.375 7 yrs 5 mos
12/15/98 100,000 0.375 1.770 0.375 8 yrs 1 mo
12/15/98 80,000 0.375 1.000 0.375 9 yrs 4 mos
</TABLE>
157
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committees of the Checkers and Rally's boards are
responsible for executive compensation decisions as described above. The
committees have been comprised of Messrs. Foley and McKee for Checkers and
Messrs. Foley, Gotterer and Maggard for Rally's during 1998. Mr. Foley is
Chairman of the Board of Santa Barbara Restaurant Group and CKE, which, as of
May 12, 1999, beneficially owned approximately 8.2% and 32.1% of the
outstanding shares of Rally's common stock. Rally's holds approximately 26.1%
of the outstanding Checkers common stock.
On November 22, 1996, Checkers entered into an amended and restated credit
agreement with CKE, who serves as the agent of the various lenders under the
agreement. Such lenders now include, among others, CKE, Fidelity, Santa Barbara
Restaurant Group, William P. Foley, II, Andrew F. Puzder, Burt Sugarman and C.
Thomas Thompson. Pursuant to the agreement, Checkers' primary debt totalling
approximately $35.8 million principal amount in November 1996, was restructured
by, among other things:
/bullet/ extending its maturity by one year to July 31, 1999;
/bullet/ fixing the interest rate at 13.0% per annum;
/bullet/ eliminating or relaxing certain covenants;
/bullet/ delaying scheduled principal payments until May 19, 1997; and
/bullet/ eliminating $6.0 million in restructuring fees and charges.
In connection with the restructuring, Checkers issued to the lenders
warrants to purchase an aggregate of 20 million shares of Checkers common stock
at an exercise price of $0.75 per share, the approximate market price of
Checkers common stock on the day prior to the announcement of the acquisition
of Checkers' debt by the lenders. The lenders specified above received warrants
in the following amounts: CKE, 7,350,428; Fidelity, 2,108,262; KCC Delaware
Company, an original participant in the lender group and a wholly owned
subsidiary of GIANT, 2,849,002; William P. Foley, II, 854,700; Andrew F.
Puzder, 28,490; Burt Sugarman, 712,250; and C. Thomas Thompson, 28,490. The
lenders also received certain piggyback and demand registration rights with
respect to the shares of Checkers common stock underlying their warrants.
On February 20, 1997, Checkers received $19.5 million in consideration for
issuing an aggregate of 8,771,929 shares of Checkers common stock and 87,719
shares of Checkers' series A preferred in a private placement. The per share
purchase price for the common stock was $1.14, based upon the closing price
($1.34) on December 16, 1996, the day prior to the approval of the transaction
by the Checkers board, less a discount for the fact that such shares were not
freely transferable for a one-year period. The purchasers in the private
placement included:
/bullet/ CKE with 6,162,299 shares of common and 61,636 shares of series A
preferred;
/bullet/ Fidelity with 438,596 shares of common and 4,385 shares of series
A preferred;
/bullet/ C. Thomas Thompson with 21,929 shares of common and 219 shares of
series A preferred;
158
<PAGE>
/bullet/ William P. Foley, II with 219,298 shares of common and 2,192
shares of series A preferred; and
/bullet/ Burt Sugarman with 54,824 shares of common and 2,192 shares of
series A preferred.
The purchasers in the private placement also received certain piggyback
and demand registration rights and agreed not to sell any Checkers common stock
received in the private placement in the open market for a one-year period. The
series A preferred was converted into 9,383,118 shares of Checkers common upon
approval of the conversion by Checkers stockholders on August 6, 1997.
Effective November 30, 1997, Checkers and Rally's entered into a
management services agreement pursuant to which Checkers is providing key
services to Rally's, including executive management, financial planning and
accounting, franchise, purchasing and human resources. In addition, Checkers
and Rally's share certain of their executive officers, including the chief
executive officer and the chief operating officer. Management believes that
entering into the management services agreement and sharing certain executive
officers enable Checkers and Rally's to take advantage of cost savings
opportunities by facilitating the combination of administrative and operational
functions. The total cost of the services provided by Checkers in 1998 and the
first quarter of 1999 was $5.6 million and $1.4 million.
Pursuant to the merger agreement, Checkers and CKE are to enter into a
joint purchasing agreement. For a description of the terms of this agreement,
see "The Merger--Interests of Certain Persons in the Merger" on page 57.
On December 18, 1997, Rally's acquired approximately 19.1 million shares
of Checkers' common stock pursuant to an exchange agreement between Rally's,
CKE, Fidelity, GIANT and certain other parties, including various directors of
Rally's and Checkers and members of their immediate families. Pursuant to the
exchange agreement, Rally's issued an aggregate of 3,909,336 shares of Rally's
common stock and 45,667 shares of series A preferred stock. The Rally's series
A preferred stock was converted into 4,566,700 shares of Rally's common stock
upon approval of the conversion by Rally's stockholders. The exchange ratio
used to determine the number of shares of Rally's common stock issued pursuant
to the exchange agreement, including upon conversion of the series A preferred
stock, was based upon the average closing price of Rally's common stock and
Checkers common stock for the five trading days preceding the public
announcement of the proposed exchange on September 22, 1997.
The following table sets forth the names, number of shares of Checkers
common stock surrendered and the number of shares of Rally's common stock and
series A preferred stock received pursuant to the exchange agreement by each
person who is: a director, or nominee for director; an executive officer; a
beneficial owner of more than five percent of Rally's common stock; or any
member of the immediate family of any of the foregoing.
159
<PAGE>
<TABLE>
<CAPTION>
RALLY'S SECURITIES RECEIVED
---------------------------------
NUMBER OF SHARES
OF CHECKERS COMMON SERIES A
NAME STOCK EXCHANGED COMMON STOCK PREFERRED STOCK
- -------------------------------- ------------------- -------------- ----------------
<S> <C> <C> <C>
CKE(1) ......................... 12,754,885 2,798,080 28,619
Fidelity(1) .................... 1,680,616 368,673 3,771
GIANT(1) ....................... 200,045 43,869 449
David Gotterer(2) .............. 113,438 24,838 255
Burt Sugarman(3) ............... 113,438 24,838 255
Mary Hart Sugarman(4) .......... 272,230 59,702 611
AJ Sugarman(4) ................. 27,168 5,955 61
Terry Christensen(3) ........... 55,353 12,162 124
Al Sugarman(4) ................. 45,353 9,925 102
William P. Foley II(3) ......... 453,754 99,553 1,018
Andrew Puzder(2) ............... 45,353 9,925 102
C. Thomas Thompson(3) .......... 45,353 9,925 102
</TABLE>
- ----------------
(1) Five percent stockholder.
(2) Director of Rally's.
(3) Director of Rally's and Checkers.
(4) Family member of Mr. Sugarman.
On July 1, 1996, Rally's entered into a ten-year operating agreement with
Carl Karcher Enterprises, Inc., a subsidiary of CKE. Under the agreement, 28
Rally's owned restaurants located in California and Arizona are being operated
by the CKE subsidiary. The agreement is cancelable after an initial five-year
term, at the discretion of CKE. To date, two of these restaurants have been
converted to the Carl's Jr. format. Under the terms of the agreement, the CKE
subsidiary is responsible for conversion costs associated with transforming the
restaurants to the Carl's Jr. format, as well as the operating expenses of all
the restaurants. Rally's retains ownership of all 28 restaurants and is
entitled to receive a percentage of gross revenues generated by each
restaurant. Rally's revenues have been, and will continue to be, reduced by the
absence of the restaurants' sales, somewhat offset by the fee paid to Rally's
by the CKE subsidiary. Rally's anticipates that the agreement will continue to
positively impact both net income and cash flow. While the overall impact of
the agreement is not expected to be material to Rally's financial statements,
Rally's believes that it will allow management to concentrate its efforts in
more fully developed markets and to take advantage of any improvements in
restaurant operations attained. In the event of a sale of any of the 28
restaurants, the parties would share in the proceeds based upon the relative
value of their respective capital investments in such restaurant.
In October 1996, Rally's entered in a consulting agreement with CKE
pursuant to which CKE is to assist and advise Rally's in connection with its
operations. The consulting agreement, which was initially scheduled to expire
in February 1997, was extended to March 31, 1998. The consulting agreement
provides for payments of $3,000 per month plus ordinary expenses. In 1998,
Rally's paid $11,000 to CKE pursuant to this agreement.
On December 1, 1998, Checkers entered into two lease agreements which have
been recorded as obligations under capital lease, with Granite Financial, Inc.,
a wholly owned
160
<PAGE>
subsidiary of Fidelity, whereby Checkers leased $659,000 of security equipment
for its restaurants in the aggregate. The first lease agreement is payable
monthly at approximately $13,000 including effective interest at 13.08%. The
second lease is payable monthly at approximately $9,000, including effective
interest at 10.90%. Both of these leases have terms of three years.
PROPOSAL 5
APPROVAL OF AMENDMENT TO CHECKERS STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
GENERAL
Checkers' 1994 stock option plan for non-employee directors was originally
adopted by the Checkers board in 1994 and approved by the Checkers stockholders
at their 1995 annual meeting. The Checkers board believes that the issuance of
options under the plan has been of substantial value in facilitating Checkers
efforts to attract and retain qualified persons to serve as directors. By
providing directors with an opportunity to acquire an ownership interest in
Checkers, we believe the plan will also accomplish the purpose of more closely
aligning the interests of directors and stockholders. The proposed amendment to
the plan would make a special one-time grant of options to purchase 40,000
Checkers common shares to the Chairman of the Board, 20,000 shares to the Vice
Chairman of the Board and 10,000 shares to each other non-employee director
immediately after the merger and reverse stock split.
DESCRIPTION OF THE DIRECTORS PLAN
There are 5,000,000 shares of Checkers common stock authorized for the
grant of options under the plan. While the number of shares subject to
outstanding options is subject to adjustment for subsequent stock splits, stock
dividends, recapitalization, reorganization, merger consolidation or similar
events, Checkers board has determined that the number of shares subject to the
plan will remain the same after the reverse stock split. Shares subject to
options will be authorized but unissued shares of Checkers common stock and may
include treasury shares. Shares subject to options which expire or are canceled
will be available for future grants under the plan.
The plan is administered by the Checkers board or a board committee
consisting of at least two members selected by, and serving at the pleasure of,
the Checkers board. The committee has the discretion to adopt rules and
regulations and to impose conditions upon the exercise of the options which it
deems appropriate to administer the plan and which are not inconsistent with
the plan.
"Non-employee directors" participate in the plan. There are currently six
non-employee directors. After the merger there will be a total of eleven
non-employee directors. Non-employee directors are members of the Checkers
board who are not employees of Checkers or any of its subsidiaries for at least
the last year.
161
<PAGE>
The term of the plan is ten years, commencing July 26, 1994. No options
may be granted after July 26, 2004, but the exercise periods of previously
granted options may extend beyond that date.
Each non-employee director serving on the Checkers board as of July 26,
1994 received options to purchase 12,000 shares. Each new non-employee director
elected or appointed subsequent to that date also received options to purchase
12,000 shares. Previously, each non-employee director had received additional
options to purchase 3,000 shares of Checkers common stock on the first day of
each fiscal year. Pursuant to an amendment to the plan in August 1997, each new
non-employee director receives options for 100,000 shares when elected or
appointed and options for 20,000 shares at the beginning of each fiscal year. A
special one-time grant of options to purchase 300,000 shares of Checkers common
stock was made to each person who was a non-employee director both before and
after the 1997 annual meeting of stockholders. Subject to stockholder approval,
after the merger and reverse stock split Checkers will grant options to
purchase 40,000 shares of Checkers common stock to the Chairman of the Board,
20,000 shares to the Vice Chairman of the Board and 10,000 shares to each other
non-employee director. The exercise price of each option will be the closing
price of Checkers common stock as reported on the NASDAQ National Market system
or other established securities exchange on the date of the grant.
Options expire ten years after the date of the grant. For options granted
prior to the August 1997 amendment to the plan, one-fifth of the options
initially granted became exercisable each year, and one-third of the options
received annually became exercisable each year. Options granted on or after the
August 1997 amendment become exercisable immediately upon grant. Options are
exercisable whether or not the non-employee director is, at the time of
exercise, an eligible member of the Checkers board, unless the non-employee
director is removed for cause. In the event of the death of a non-employee
director, options may be exercised by his or her estate.
The purchase price for all options is payable in full upon exercise and
may be paid in cash or in Checkers common stock or in a combination of cash and
common stock, at the optionee's election.
Options may not be transferred or assigned except upon the death of the
optionee.
The Checkers board may discontinue, amend, alter or suspend the plan at
any time, except that stockholder approval is required for any amendment
required to be approved by Rule 16b-3 under the Exchange Act. In addition,
provisions of the plan related to eligibility and participation may not be
amended more than once every six months, except to comport with changes in the
Internal Revenue Code and regulations.
A holder of an option granted under the plan does not realize taxable
income when the holder receives a grant of options. Checkers may not claim a
tax deduction in connection with these grants. When an optionee exercises an
option, he will be deemed to have
162
<PAGE>
received taxable income in an amount equal to the difference between the market
value of the underlying Checkers common stock on the date of exercise and the
exercise price. The income realized will be subject to withholding. Checkers
may claim a tax deduction with respect to the withholding. When an optionee
sells stock acquired by the exercise of an option and held for more than one
year following the date of exercise, the gain or loss (equal to the difference
between the sale price and the market value on the date of exercise) will be
taxed at long term capital gain or loss rates. If the stock was held for one
year or less, the gain or loss will be treated as short term capital gain or
loss. If and to the extent that the exercise price is paid with shares of
Checkers common stock, the optionee will not realize any income as a result,
but his unrealized appreciation in the stock tendered will be excluded from his
basis in the stock acquired.
The following table sets forth certain information with respect to stock
options which will be granted pursuant to the directors plan solely as a result
of the merger to all current directors of Rally's who are not executive
officers of Checkers or Rally's. Since the options shown below are granted
solely pursuant to the merger agreement they are not indicative of the number
of options that may be granted in the future, and do not include options that
will be granted upon approval of this proposal.
AMENDED PLAN BENEFITS
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
-------------------------
BEFORE AFTER
DOLLAR REVERSE REVERSE
NAME & POSITION VALUE ($)(1) SPLIT SPLIT
- -------------------------------------------- -------------- ------------ ----------
<S> <C> <C> <C>
Terry N. Christensen ....................... $ 70,664 815,900 67,992
Willie D. Davis ............................ 87,646 975,100 81,258
William P. Foley, II ....................... 92,942 1,060,670 88,389
David Gotterer ............................. 87,646 930,325 77,527
Ronald B. Maggard .......................... 70,664 487,550 40,629
Andrew Puzder .............................. 70,664 487,550 40,629
Burt Sugarman .............................. 266,726 2,069,600 172,467
C. Thomas Thompson ......................... 89,015 975,100 81,258
All Directors who are not Executive Officers
as a group (8 persons) ................... 835,967 7,801,795 650,149
</TABLE>
- ----------------
(1) Based on the difference between the exercise price and the closing price of
the Checkers common stock of $.4375 as reported on the NASDAQ National
Market on May 12, 1999.
The Rally's board recommends a vote for adoption of the amendment to the
director plan.
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PROPOSAL 6
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN
GENERAL
The Checkers board is proposing that Checkers stockholders approve a new
employee stock purchase plan. The stock purchase plan will offer eligible
employees the opportunity to purchase common shares of Checkers through regular
payroll deductions. The purpose of the stock purchase plan is to encourage and
facilitate the acquisition of an ownership interest in Checkers by its
employees. We believe that employees who decide to participate in our stock
purchase plan have a close identification with, and greater motivation to work
for, our success because of their ability as stockholders to participate in the
growth and earnings of their employer.
TERM OF THE STOCK PURCHASE PLAN
The following is a summary of the principal features of the stock purchase
plan of Checkers.
GENERAL
The stock purchase plan provides for voluntary contributions by eligible
employees of Checkers through payroll deductions. The contributions will be
matched by Checkers to the extent described below under the section entitled
"Matching Contributions." The contributions of participating employees,
together with any matching contributions, are sent to the broker under the
stock purchase plans and the broker opens individual accounts for the
participants. The broker will purchase shares of Checkers common stock at
prevailing market rates.
ADMINISTRATION
The stock purchase plan will be administered by Checkers' board of
directors or a committee appointed by the board. All questions about the stock
purchase plans are determined by the administrators. Administrators who are
eligible employees are permitted to participate in the stock purchase plans.
Administrators receive no additional compensation for their services in
connection with the administration of the stock purchase plans.
ELIGIBILITY
Participation in the stock purchase plan is completely voluntary. Any
person who has reached the age of majority and who is currently employed by
Checkers may begin participating in the Plan on the first day of the month
following the date of hire.
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OFFERING DATES
Shares are offered pursuant to the stock purchase plan in periods
coinciding with Checkers' fiscal quarters.
MATCHING CONTRIBUTION
Upon the one year anniversary date of the end of an offering period,
Checkers will make a matching contribution equal to one-third of a
participant's contribution less any withholding taxes for those participants
that are neither officers nor directors. On that date, Checkers will make a
matching contribution equal to one-half of the participant's contributions less
any withholding taxes for participants that are either officers or directors.
PURCHASE PRICE
The purchase price per share is either: the reported closing price of the
common stock on the NASDAQ National Market System or other established stock
exchange on the purchase date, or if no sale shall have been made on such date,
on the preceding date on which there was a sale; or, if the common stock is not
then listed on an exchange, the average of the closing bid and asked prices per
share for the common stock on the over-the-counter market as quoted on the
NASDAQ National Market System, an amount determined in good faith by the
administrators of the plans.
PURCHASE OF STOCK AND DELIVERY OF SHARES
Piper Jaffray, Inc. has been designated to act as broker under the stock
purchase plan to open and maintain an account in the name of each participant
and to purchase shares of common stock on behalf of the participant. From time
to time, the broker, as agent for the participants, shall purchase as many full
shares or fractional shares of common stock as the participant's contributions
will permit. The shares to be purchased shall be purchased at the then current
fair market value on the open market. The amount of common stock purchased by
the broker shall be allocated to the respective brokerage account of each
participant on the basis of the average cost of the common stock so purchased,
in proportion to the amount allocable to each participant. Unless otherwise
requested by the participant, all full shares and fractional shares so
purchased shall be registered in the name of the broker and will remain so
registered until delivery is requested by the participant in accordance with
the stock purchase plan.
NONASSIGNABILITY
Payroll deductions credited to a participant's account and rights of a
participant under the stock purchase plan may not be pledged, assigned or
transferred for any reason except by will or the laws of descent and
distribution. Any attempt at such pledge, assignment or transfer may be treated
by Checkers as an election to withdraw from its stock purchase plan.
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AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
Checkers may at any time terminate, suspend or amend the stock purchase
plan. If the stock purchase plan is terminated, participants shall be entitled
to receive the funds in their account but shall not be entitled to any matching
contribution.
TAX CONSEQUENCES
Checkers stock purchase plan is not intended to qualify as an employee
stock purchase plan under Section 423 of the Internal Revenue Code of 1986. To
the extent a participant receives shares of the common stock for a price less
than its fair market value, the participant will recognize income equal to such
difference. The stock purchase plan will provide for the purchase of shares to
be made at fair market value. As such, there should be no income to the
participant upon the purchase of shares of the common stock. Participants will
receive long-term capital gain or loss treatment on the disposition of shares
acquired under the stock purchase plan if the shares have been held for more
than one year and short-term capital gain or loss treatment if the shares have
been held for one year or less.
Checkers will be required to withhold federal income tax with respect to
its matching contributions. Such amounts will be withheld from the matching
contributions and the remaining amount will be used for the purchase of shares.
RECOMMENDATION AND VOTE REQUIRED
Approval of the stock purchase plan requires the affirmative vote of the
holders of a majority of the shares of common stock present in person or by
proxy at the Checkers annual meeting. The Checkers board recommends that you
vote for approval of the Checkers stock purchase plan.
COMPARATIVE STOCK PRICES AND DIVIDENDS
MARKET PRICES
Rally's common stock is traded on the NASDAQ National Market under the
trading symbol "RLLY," and Checkers common stock is traded on the NASDAQ
National Market under the trading symbol "CHKR." As of May 12, 1999, Rally's
had 1,551 stockholders of record, and Checkers had 6,850 stockholders of
record. See "Risk Factors--Continued Listing on NASDAQ is Uncertain" on page 8
for a discussion of the possible delisting of Rally's and Checkers from the
NASDAQ National Market. The following table sets forth the high and low closing
sale price quotations for Rally's and Checkers common stock, as well as the
closing sale price, as reported on the NASDAQ National Market for the periods
indicated.
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<TABLE>
<CAPTION>
RALLY'S CHECKERS
----------------------------- ------------------------------
HIGH LOW CLOSE HIGH LOW CLOSE
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
1st Quarter ......... $5.00 $2.38 $4.00 $3.00 $1.69 $1.80
2nd Quarter ......... 3.81 1.94 2.63 1.84 1.09 1.19
3rd Quarter ......... 4.00 1.88 3.28 1.69 1.09 1.16
4th Quarter ......... 4.63 2.00 3.00 1.59 0.81 0.81
1998
- ----
1st Quarter ......... $3.13 $2.25 $2.28 $1.06 $0.81 $0.94
2nd Quarter ......... 2.94 2.00 2.06 1.53 0.87 1.19
3rd Quarter ......... 2.13 0.91 1.06 1.28 0.66 0.72
4th Quarter ......... 1.19 0.47 0.53 0.68 0.31 0.31
1999
- ----
1st Quarter ......... $1.25 $0.50 $0.72 $0.72 $0.31 $0.38
2nd Quarter ......... 1.53 0.50 0.63 0.47 0.25 0.41
</TABLE>
DIVIDENDS
Rally's and Checkers have not paid any dividends during the past five
years, and we do not expect Checkers to pay any dividends for the foreseeable
future. Any determination to pay dividends in the future will be at the
discretion of the Checkers board and will be dependent on Checkers' future
results of operations, financial conditions, capital expenditures, working
capital requirements and other factors deemed relevant. Rally's senior notes
indenture, which will be assumed by Checkers as a result of the merger, places
significant restrictions on the ability to pay dividends.
COMPARATIVE RIGHTS OF STOCKHOLDERS OF
CHECKERS AND RALLY'S
The rights of the Rally's stockholders are currently governed by the
Delaware General Corporation Law and the Rally's certificate of incorporation
and bylaws. The rights of the Checkers and Rally's stockholders after the
merger will be governed by the Delaware General Corporation Law and the
Checkers certificate of incorporation and bylaws. The following are summaries
of the material differences between the current rights of the Rally's
stockholders and their rights after the merger. Unless otherwise set forth
below, such rights are identical.
The following discussion is not intended to be complete and is qualified
by reference to the certificates of incorporation and bylaws of Rally's and
Checkers. Copies of these documents are incorporated by reference herein and
will be sent to stockholders of Checkers upon request. See "Where You Can Find
More Information" on page 174 to find out exactly where the document can be
located.
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<PAGE>
AUTHORIZED CAPITAL
RALLY'S. The authorized capital stock of Rally's consists of 50 million
shares of common stock, par value $.10 per share, and five million shares of
preferred stock, par value $.10 per share. As of March 24, 1999, there were
29,335,243 shares of Rally's common stock outstanding, and no shares of
preferred stock outstanding.
CHECKERS. The authorized capital stock of Checkers consists of 150 million
shares of common stock, par value $0.001 per share, and two million shares of
preferred stock, par value $0.001 per share. As of May 12, 1999, there were
73,408,047 shares of Checkers common stock outstanding, and no shares of
preferred stock outstanding. After the merger and the reverse split, the total
authorized capital stock of Checkers will consist of 175 million shares of
common stock, par value $0.001 per share, of which approximately 9.4 million
shares will be outstanding; and two million shares of preferred stock, par
value $0.001 per share, none of which will be outstanding.
BOARD OF DIRECTORS
RALLY'S. Pursuant to the Rally's bylaws, the number of directors may not
be less than four nor more than 16 directors, the exact number of which shall
be determined from time to time by resolution adopted by the board. The act of
the majority of the directors present at a meeting at which a quorum is present
is the act of Rally's board. Special meetings of Rally's board may be called at
the request of the chairman of the board or by a majority of the board.
CHECKERS. Pursuant to the Checkers certificate of incorporation, the
number of directors may not be less than five nor more than 15, with the
precise number to be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors then in
office. Initially after the merger, the Checkers board will consist of 11
directors, consisting of the current Rally's board, five of whom are also
members of the Checkers board, and the Checkers board. The Checkers board is
divided into three classes, with directors holding office until the annual
meeting for the year in which their term expires and until successors are
elected and qualified, subject to earlier death, resignation, retirement,
disqualification or removal from office. Currently, Checkers directors serve
for a three year term. Each class consists of one-third of the total number of
directors constituting the entire Checkers board. Pursuant to the Checkers
bylaws, special meetings of the board may be called by the chairman, the
president or a majority of the board.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
RALLY'S. The Rally's bylaws provide that newly created directorships and
vacancies on the board may be filled by a majority of the directors then in
office, though less than a quorum, or by a sole remaining director. The
directors so chosen hold office until the next annual election and until their
successors are duly elected and qualified, or until their earlier replacement.
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<PAGE>
CHECKERS. Pursuant to the Checkers certificate of incorporation, newly
created directorships on the board may be filled by a majority of the board
then in office, provided a quorum is present, and any other vacancies occurring
in the Checkers board may be filled by a majority of the directors then in
office, even if less than a quorum is present, or by a sole remaining director.
Directors of any class elected to fill a newly created directorship hold office
for a term that coincides with the remaining term of that class, and any
director elected to fill a vacancy not resulting from an increase in the number
of directors will have the same remaining term as that of his predecessor.
If the number of directors is changed, any increase or decrease is
apportioned among the classes in order to maintain the number of directors in
each class as nearly equal as possible, but in no case does a decrease in the
number of directors shorten the term of any incumbent director. Vacancies on
the Checkers board that result from an increase in the number of directors may
be filled by a majority of the board then in office, provided that a quorum is
present. Any other vacancy occurring in the Checkers board is filled by a
majority of the directors then in office, even if less than a quorum is
present, or by a sole remaining director.
REMOVAL OF DIRECTORS
RALLY'S. The Rally's certificate of incorporation and bylaws are silent on
the removal of directors. The Delaware General Corporation Law provides that
any director or the entire board of directors may be removed, with or without
cause, by the holders of a majority of the shares then entitled to vote in the
election of directors.
CHECKERS. Pursuant to the Checkers certificate of incorporation, any
director or the entire board may be removed from office at any time, but only
for cause by an affirmative vote of the holders of a majority of the then
outstanding shares of capital stock entitled to vote. However, if a proposal to
remove a director for cause is made by or on behalf of certain insiders, then
such removal requires the affirmative vote of the holders of a majority of
shares held by stockholders other than the insider making such proposal.
OFFICERS
RALLY'S. Pursuant to the Rally's bylaws, the officers of Rally's are
chosen by the board and consist of a chairman of the board of directors, a
chairman of the executive committee, a president, a secretary and a treasurer
and such other officers as may be appointed by the board. Any officer elected
by the Rally's board may be removed at any time by the affirmative vote of a
majority of the board or by an affirmative vote of a majority of the executive
committee.
CHECKERS. Pursuant to the Checkers bylaws, the board elects a president, a
secretary, a treasurer and such other officers as the Checkers board
determines. Under the Checkers bylaws, an officer may be removed at any time by
the affirmative vote of a majority of the board whenever, in their judgment,
the best interests of Checkers would be served thereby.
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SPECIAL MEETINGS OF STOCKHOLDERS
RALLY'S. Pursuant to the Rally's bylaws, special meetings stockholders may
be called either by the chairman of the board of directors or by a majority of
the board.
CHECKERS. The Checkers certificate of incorporation provides that special
meetings of the stockholders may be called by the chairman of the board, the
president or by a majority of the members of the board. However, when a
proposal is made by or on behalf of certain insiders, or where certain insiders
otherwise seek action requiring stockholder approval, then the affirmative vote
of a majority of disinterested directors is also required to call a special
meeting of stockholders for the purpose of considering such proposal and
obtaining such approval.
STOCKHOLDER ACTION BY WRITTEN CONSENT
RALLY'S. Rally's certificate of incorporation and bylaws are silent on
stockholder action by written consent. The Delaware General Corporation Law
provides that any action to be taken at any annual or special meeting of
stockholders may be taken by written consent without a meeting, without prior
notice and without a vote. The written consent must set forth the action to be
taken, and must be signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
CHECKERS. The Checkers certificate of incorporation provides that no
action required or permitted to be taken at any annual or special meeting of
stockholders may be taken by written consent.
STOCKHOLDER PROPOSAL AND NOMINATION PROCEDURE
RALLY'S. The Rally's bylaws and certificate of incorporation are silent on
the issue of advance notice of stockholder proposals and director nominations
at annual meetings. The Delaware General Corporation Law does not explicitly
require that stockholder proposals be the subject of an advance notice to
stockholders.
CHECKERS. The Checkers bylaws provide that at any annual meeting of
stockholders, only such business shall be conducted as shall have been:
specified in the notice of the meeting given by or at the direction of the
board; otherwise properly brought before the meeting by or at the direction of
Checkers board; or otherwise properly brought before the annual meeting by a
stockholder of record at the time of giving of notice of the annual meeting and
who is entitled to vote as such meeting. The stockholder must give notice of
the business proposed to be brought before the annual meeting to the secretary
of Checkers not less than 60 days nor more than 90 days prior to the annual
meeting. However, in the event that less than 70 days' notice or prior public
disclosure of the date of
170
<PAGE>
the meeting is given to stockholders, the stockholder's proposal must be
received not later than the close of business on the tenth day following such
notice or public disclosure.
A stockholder's notice to Checkers' secretary must describe each matter
the stockholder proposes to bring before the annual meeting and the
stockholder's reasons for each proposal. The stockholder's notice must also
include information about the stockholder, his Checkers common stock and any
voting or other arrangements he may have in connection with each proposal.
AMENDMENT TO GOVERNING DOCUMENTS
RALLY'S. The Rally's certificate of incorporation and bylaws are silent on
amending Rally's certificate of incorporation. Section 242 of the Delaware
General Corporation Law provides that a certificate of incorporation may be
amended upon the approval of a corporation's board of directors and
stockholders. The Rally's bylaws provide that the stockholders, by the
affirmative vote of a majority of the stock issued and outstanding, may at any
regular meeting or special meeting, alter or amend Rally's bylaws, if the
notice of such meeting includes the proposed amendment. The Rally's board, by
affirmative vote of a majority of its members, may alter, adopt, repeal or
amend the Rally's bylaws, subject to the right of Rally's stockholders at any
special or regular meeting, to alter, amend or rescind the bylaws.
CHECKERS. The Checkers certificate of incorporation provides that Checkers
may amend, change, add to or repeal any provision contained in the Checkers
bylaws. However, any change to the bylaws must be approved by either (i) a
majority of the authorized number of noninterested directors, or (ii) the
affirmative vote of the holders of not less than 80% of the then outstanding
shares of capital stock entitled to vote, excluding any shares held by an
interested stockholder proposing such amendment.
The Checkers certificate of incorporation provides that Checkers may
amend, change, add to or repeal any provision contained in the Checkers
certificate of incorporation. However, an affirmative vote of at least 80% of
the then outstanding shares of the capital stock entitled to vote is required
to change the Checkers certificate of incorporation with respect to business
combinations, certain provisions relating to directors, compromises of debts,
written actions by the stockholders, liability of the directors for monetary
damages and special meetings of stockholders.
TAKEOVER PROVISIONS
RALLY'S. The Rally's certificate of incorporation and bylaws do not
contain any provisions with respect to business combinations. Under the
Delaware General Corporation Law, an agreement of merger, or the sale, lease or
exchange of all or substantially all of a corporation's assets, must be
approved by the corporation's board of directors and the holders of a majority
of the outstanding shares of stock entitled to vote thereon.
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<PAGE>
CHECKERS. The Checkers certificate of incorporation contains certain
provisions restricting Checkers from entering into certain business
combinations with, or proposed by or on behalf of, any insider unless approved
by a majority of the disinterested directors or by the affirmative vote of
holders of not less than 80% of the voting stock, excluding stock beneficially
owned by such insider.
PROPOSAL 7
RATIFICATION AND APPROVAL OF APPOINTMENT OF
CHECKERS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Checkers and Rally's each has engaged the firm of KPMG LLP, independent
certified public accountants, to report upon their financial statements for
fiscal 1998. A representative from KPMG LLP will be in attendance at both the
Checkers annual meeting and the Rally's special meeting, will have the
opportunity to make a statement if desired, and will be available to respond to
any questions from those in attendance. Checkers has appointed KPMG LLP to
report upon its financial statements for the fiscal year ending January 3,
2000, subject to ratification of such appointment by the stockholders at the
Checkers meeting. Stockholder ratification of Checkers' independent certified
public accountants is not required by Checkers' bylaws or otherwise. The
Checkers board has elected to seek such ratification as a matter of good
corporate practice and unanimously recommends that you vote "FOR" such
ratification. If the stockholders do not ratify this appointment, other
certified public accountants will be considered by the Checkers board upon
recommendation of Checkers' audit committee.
LEGAL OPINIONS
The legality of the Checkers common stock to be issued in connection with
the merger will be passed upon for Checkers by James T. Holder, Senior Vice
President, General Counsel and Secretary of Checkers and Rally's. Certain legal
matters with respect to the federal income tax consequences of the merger will
be passed upon for Rally's and Checkers by Christensen, Miller, Fink, Jacobs,
Glaser, Weil and Shapiro, LLP. Terry N. Christensen, a partner of Christensen,
Miller, Fink, Jacobs, Glaser, Weil and Shapiro, LLP, is a director of Rally's
and Checkers, and he and other attorneys in such firm own, directly or
indirectly through options, approximately 546,800 shares of Checkers common
stock and 437,177 shares of Rally's common stock.
EXPERTS
The consolidated financial statements and schedule of Checkers as of
December 28, 1998 and December 29, 1997, and for each of the years in the
three-year period ended December 28, 1998, included in Checker's Form 10-K/A
for the fiscal year ended
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December 28, 1998, are included in this joint proxy statement/prospectus at
page F-2 and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants and upon the authority of said
firm as experts in accounting and auditing.
The consolidated financial statements and schedule of Rally's as of
December 28, 1998, and for the year then ended, included in Rally's Form 10-K/A
for the fiscal year ended December 28, 1998, are included in this joint proxy
statement/prospectus at page F-54 and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants and upon
the authority of said firm as experts in accounting and auditing.
The Rally's financial statements and schedules as of December 28, 1997 and
for each of the years in the two-year period ended December 28, 1997, included
in this joint proxy statement/prospectus and in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
On May 8, 1998, Rally's notified Arthur Andersen LLP, which acted as
Rally's independent auditors for fiscal 1997, that Rally's intended to engage
KPMG LLP, as of such date, as its independent auditors for fiscal 1998. The
decision to change accountants was approved by the audit committee of Rally's
board of directors. During the two fiscal years and the interim period prior to
May 8, 1998, there were no disagreements with Arthur Andersen LLP on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure or any reportable events. Arthur Andersen's report
for the two years prior to fiscal 1998 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principles. Arthur Andersen LLP has furnished Rally's
with a letter addressed to the Securities and Exchange Commission stating that
it agreed with the foregoing. A copy of the Arthur Andersen LLP letter has been
filed as an exhibit to Rally's Current Report on Form 8-K/A dated May 8, 1998
and as an exhibit to the Registration Statement of which this joint proxy
statement/prospectus is a part.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 2000 annual meeting
of stockholders of Checkers must be received by the Secretary of Checkers no
later than March 3, 2000 for inclusion in the proxy materials for such meeting.
Due to the proposed merger, Rally's does not currently expect to hold a
2000 Annual meeting of stockholders. In the event the merger is not consummated
and such a meeting is held, to be eligible for inclusion in Rally's proxy
statement and form of proxy relating to that meeting , proposals of
stockholders intended to be presented at such meeting must be received by
Rally's within ten days after Rally's announces publicly the date of the
meeting.
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OTHER MATTERS
As of the date of this joint proxy statement/prospectus, the Rally's board
and the Checkers board know of no matters that will be presented for
consideration at the stockholders meetings other than as described in this
joint proxy statement/prospectus. If any other matters shall properly come
before either the Rally's or the Checkers meeting or at any adjournments or
postponements of the meetings and be voted upon, the enclosed proxies will be
deemed to confer discretionary authority on the individuals named as proxies
therein to vote the shares represented by such proxies as to any such matters.
The persons named as proxies intend to vote or not to vote in accordance with
the recommendation of the respective managements of Rally's and Checkers.
WHERE YOU CAN FIND MORE INFORMATION
Rally's and Checkers file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information that the
companies file at the Commission's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. Rally's
and Checkers public filings are also available to the public from commercial
document retrieval services and at the Internet World Wide Web site maintained
by the Commission at "http://www.sec.gov." Reports, proxy statements and other
information concerning Rally's and Checkers also may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
Checkers has filed a registration statement to register with the
Commission the shares of Checkers common stock to be issued to Rally's
stockholders in the merger. This joint proxy statement/prospectus is a part of
the registration statement and constitutes a prospectus of Checkers and a proxy
statement of Rally's and Checkers for their stockholders meetings.
As allowed by Commission rules, this joint proxy statement/prospectus does
not contain all the information that stockholders can find in the registration
statement or the exhibits to the registration statement.
Rally's has supplied all information contained in this joint proxy
statement/prospectus relating to Rally's, and Checkers has supplied all
information relating to Checkers.
If you are a stockholder of Rally's or Checkers, you can obtain copies of
the documents filed by Rally's or Checkers with the Commission through Rally's
or Checkers or the Commission or the Commission's internet world wide web site
described above. The Annual Reports on Form 10-K/A for the fiscal year ended
December 28, 1998 and Quarterly Reports on Form 10-Q for the period ended March
22, 1999 of Checkers and Rally's are
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available from Checkers and Rally's without charge, excluding all exhibits
unless specifically incorporated by reference as an exhibit to this Joint Proxy
Statement/Prospectus. Stockholders may obtain documents filed by Rally's or
Checkers with the Commission by requesting them in writing or by telephone at
the following address:
Rally's Hamburgers, Inc. or
Checkers Drive-In Restaurants, Inc.
14255 49th Street North
Building 1
Clearwater, FL 33762
Attention: James T. Holder, Secretary
(727) 519-2000
If you would like to request documents, please do so by July 22, 1999 to
receive them before the stockholders meetings. If you request any incorporated
documents from us we will mail them to you by first class mail, or other
equally prompt means, within one business day of our receipt of your request.
You should rely only on the information contained in this joint proxy
statement/prospectus to vote your shares at the Rally's meeting and/or the
Checkers meeting. Rally's and Checkers have not authorized anyone to provide you
with information that is different from what is contained in this joint proxy
statement/prospectus. Therefore, if anyone does give you different or additional
information, you should not rely upon it.
This joint proxy statement/prospectus is dated July 1, 1999. You should
not assume that the information contained in the joint proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this joint proxy statement/prospectus to stockholders
nor the issuance of Checkers common stock in the merger shall create any
implication to the contrary.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CHECKERS DRIVE-IN RESTAURANTS, INC.
Independent Auditors' Report .................................................. F-2
Consolidated Balance Sheets -- December 29, 1997 and December 28, 1998 ........ F-3
Consolidated Statements of Operations and Comprehensive Income --
Years ended December 30, 1996, December 29, 1997 and December 28, 1998 ..... F-5
Consolidated Statements of Stockholders' Equity -- Years ended
December 30, 1996, December 29, 1997 and December 28, 1998 ................. F-6
Consolidated Statements of Cash Flows -- Years ended
December 30, 1996, December 29, 1997 and December 28, 1998 ................. F-7
Notes to Consolidated Financial Statements -- Years ended
December 30, 1996, December 29, 1997 and December 28, 1998 ................. F-9
Condensed Consolidated Balance Sheets -- December 28, 1998
and March 22, 1999 (Unaudited) ............................................. F-39
Condensed Consolidated Statements of Operations and Comprehensive Income --
Quarters ended March 23, 1998 and March 22, 1999 (Unaudited) ............... F-41
Condensed Consolidated Statements of Cash Flows -- Quarters ended
March 23, 1998 and March 22, 1999 (Unaudited) .............................. F-42
Notes to Condensed Consolidated Financial Statements (Unaudited) .............. F-43
RALLY'S HAMBURGERS, INC.
Independent Auditors' Reports ................................................. F-54
Consolidated Balance Sheets -- December 28, 1997 and December 28, 1998 ........ F-56
Consolidated Statements of Operations and Comprehensive Income --
Years ended December 29, 1996, December 28, 1997 and December 28, 1998 ..... F-58
Consolidated Statements of Stockholders' Equity -- Years ended
December 29, 1996, December 28, 1997 and December 28, 1998 ................. F-59
Consolidated Statements of Cash Flows -- Years ended
December 29, 1996, December 28, 1997 and December 28, 1998 ................. F-60
Notes to Consolidated Financial Statements -- Years ended
December 29, 1996, December 28, 1997 and December 28, 1998 ................. F-61
Condensed Consolidated Balance Sheets -- December 28, 1998
and March 22, 1999 (Unaudited) ............................................. F-91
Condensed Consolidated Statements of Operations and Comprehensive Income --
Quarters ended March 22, 1998 and March 22, 1999 (Unaudited) ............... F-93
Condensed Consolidated Statements of Cash Flows -- Quarters ended
March 22, 1998 and March 22, 1999 (Unaudited) .............................. F-94
Notes to Condensed Consolidated Financial Statements (Unaudited) .............. F-95
</TABLE>
F-1
<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. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We 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 28, 1998 and
December 29, 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 28, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Tampa, Florida
February 26, 1999, except as to Note 2, which is as of March 24, 1999
F-2
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1998 1997
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents:
Restricted ................................................ $ 1,738 $ 2,555
Unrestricted .............................................. 2,925 1,366
Accounts receivable, net ................................... 1,327 1,175
Notes receivable, net -- current portion ................... 224 265
Inventory .................................................. 2,068 2,222
Property and equipment held for sale ....................... 2,755 4,332
Deferred loan costs -- current portion ..................... 793 1,648
Prepaid expenses and other current assets .................. 468 309
-------- --------
Total current assets ..................................... 12,298 13,872
Property and equipment, net (Note 3) ....................... 78,390 87,889
Intangibles, net of accumulated amortization of
$5,607 in 1998 and $5,014 in 1997 (Notes 1 and 7)......... 10,123 11,520
Deferred loan costs -- less current portion ................ 378 1,099
Notes receivable, net -- less current portion .............. 252 381
Deposits and other non-current assets ...................... 658 640
-------- --------
$102,099 $115,401
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1998 1997
-------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt and capital
lease obligations (Notes 4 and 11) .............................. $ 1,381 $ 3,484
Accounts payable .................................................. 5,896 8,186
Accrued wages, salaries and benefits .............................. 2,360 2,528
Reserves for restaurant relocations and abandoned
sites (Note 10) ................................................. 1,635 2,159
Other accrued liabilities ......................................... 7,133 11,408
Deferred income-current portion ................................... 203 260
--------- ---------
Total current liabilities ....................................... 18,608 28,025
Long-term debt, less current maturities (Note 4) .................. 28,645 28,645
Obligations under capital leases, less current maturities ......... 1,009 756
Straight-line rent accruals ....................................... 4,070 3,624
Deferred income, less current portion ............................. 848 346
Long-term reserves for restaurant relocations and
abandoned sites (Note 10) ....................................... 430 581
Minority interests in joint ventures (Note 1a) .................... 802 966
Other noncurrent liabilities ...................................... 3,079 2,086
--------- ---------
Total liabilities ............................................... 57,491 65,029
STOCKHOLDERS' EQUITY (Note 8):
Preferred stock, $.001 par value, authorized 2,000,000
shares, no shares outstanding ................................... -- --
Common stock, $.001 par value, authorized
150,000,000 shares, issued and outstanding
73,408,047 at December 28, 1998 and
72,755,031 at December 29, 1997 ................................. 73 73
Additional paid-in capital (Notes 8 and 9) ........................ 121,579 121,999
Retained deficit .................................................. (76,644) (71,300)
--------- ---------
45,008 50,772
Less treasury stock, at cost, 578,904 shares ...................... 400 400
--------- ---------
Net stockholders' equity ........................................ 44,608 50,372
--------- ---------
$ 102,099 $ 115,401
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales ........................................... $137,965 $ 135,710 $ 155,392
Franchise revenues and fees ................................ 7,503 7,474 8,367
Modular restaurant packages ................................ 240 710 1,202
-------- --------- ---------
Total revenues ........................................... $145,708 $ 143,894 $ 164,961
COSTS AND EXPENSES:
Restaurant food and paper costs ............................ 43,186 43,625 54,707
Restaurant labor costs ..................................... 43,805 43,919 57,302
Restaurant occupancy expense ............................... 10,763 10,797 12,926
Restaurant depreciation and amortization ................... 7,759 8,313 8,848
Other restaurant operating expense ......................... 13,903 13,447 15,345
Advertising expense ........................................ 6,921 6,820 7,420
Cost of modular restaurant package revenues ................ 516 618 1,704
Other depreciation and amortization ........................ 2,275 2,263 4,326
General and administrative expenses ........................ 13,309 17,042 20,690
Impairment of long-lived assets (Note 10) .................. 1,757 565 14,782
Losses on assets to be disposed of (Note 10) ............... 1,196 312 7,131
Other loss provisions (Note 10) ............................ -- 150 1,992
-------- --------- ---------
Total costs and expenses ................................. 145,390 147,871 207,173
-------- --------- ---------
Operating income (loss) .................................. 318 (3,977) (42,212)
OTHER INCOME (EXPENSE):
Interest income ............................................ 272 375 678
Interest expense ........................................... (3,981) (5,000) (6,074)
Interest -- loan cost amortization ......................... (2,026) (3,650) (159)
-------- --------- ---------
Loss before minority interests and income
tax expense ............................................ (5,417) (12,252) (47,767)
Minority interests in operations of joint ventures ......... (73) (66) (1,509)
-------- --------- ---------
Loss before income taxes (Note 5) ......................... (5,344) (12,186) (46,258)
Income taxes ............................................... -- -- 151
-------- --------- ---------
Net loss ................................................. $ (5,344) $ (12,186) $ (46,409)
Preferred dividends ........................................ $ -- $ 696 $ --
-------- --------- ---------
Net loss to common shareholders ............................ $ (5,344) $ (12,882) $ (46,409)
======== ========= =========
Comprehensive loss ......................................... $ (5,344) $ (12,882) $ (46,409)
======== ========= =========
Net loss per common share -- (basic and diluted) ........... $ (0.07) $ (0.20) $ (0.90)
======== ========= =========
Weighted average number of common shares
(basic and diluted) ....................................... 73,388 63,390 51,698
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 28, 1998, DECEMBER 29, 1997 AND DECEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL NET
PREFERRED COMMON PAID-IN RETAINED TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT STOCK EQUITY
----------- -------- ------------ ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ......................... $ -- $52 $ 93,029 $ (12,705) $ (400) $ 79,976
Issuance of 200,000 shares of common stock
at $1.14 as payment on long-term debt............. -- -- 222 -- -- 222
Issuance of 40,000 shares of common stock
at $1.19 per share to pay consulting fees......... -- -- 47 -- -- 47
Warrants issued to investor group .................. -- -- 6,463 -- -- 6,463
Employee stock options vested
upon severance ................................... -- -- 41 -- -- 41
Net loss ........................................... -- -- -- (46,409) -- (46,409)
---- --- -------- --------- ------ ---------
Balance at December 30, 1996 ....................... -- 52 99,802 (59,114) (400) 40,340
Private placement of 8,981,453 shares of
common stock and 87,719 shares of
preferred stock .................................. 0 9 19,373 -- -- 19,382
Exercise of employee stock option for 125
shares of common stock ........................... -- 0 0 -- -- 0
Conversion of preferred stock to
common stock ..................................... -- 9 (9) -- -- --
Issuance of 1,116,376 shares of
common stock in payment of
long-term debt ................................... -- 1 1,271 -- -- 1,272
Issuance of 192,308 shares of common stock
in payment of long-term debt ..................... -- 0 196 -- -- 196
Issuance of 1,093,124 shares of
common stock in payment of
long-term debt and accrued interest .............. -- 1 1,174 -- -- 1,175
Issuance of 220,751 shares of common stock
in payment of long-term debt and
accrued interest.................................. -- 0 192 -- -- 192
Net loss ........................................... -- -- -- (12,186) -- (12,186)
---- --- -------- --------- ------ ---------
Balance at December 29, 1997 ....................... -- $73 $121,999 $ (71,300) $ (400) $ 50,372
Issuance of 651,061 shares of common stock
in payment of long-term debt and
accrued interest, net of payments for
purchase price protection ........................ -- 0 (2) -- -- (2)
Exercise of 5,000 employee stock options ........... -- 0 4 -- -- 4
Additional payments for purchase price
protection related to 1997 private
placement (note 3) ............................... -- -- (422) -- -- (422)
Net loss ........................................... -- -- -- (5,344) -- (5,344)
---- --- -------- --------- ------ ---------
Balance at December 28, 1998 ....................... $ -- $73 $121,579 $ (76,644) $ (400) $ 44,608
==== === ======== ========= ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (5,344) $ (12,186) $ (46,409)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization .............................. 10,034 10,576 13,173
Impairment of long-lived assets ............................ 1,757 565 15,282
Provision for losses on assets to be disposed of ........... 1,196 312 7,132
Provision for bad debt ..................................... 751 1,013 1,311
Deferred loan cost amortization ............................ 2,026 3,650 1,300
Loss provision ............................................. -- 150 1,991
Gain on debt extinguishment ................................ (141) (359) --
Loss (gain) on disposal of property & equipment ............ 219 243 (75)
Minority interests in operations of joint ventures ......... (73) (66) (1,509)
Changes in assets and liabilities:
Increase in accounts receivable ............................ (754) (1,501) (474)
Decrease in notes receivable ............................... 29 133 3,012
Decrease in inventory ...................................... 154 170 346
Decrease (increase) in income taxes receivable ............. -- 3,514 (242)
Decrease in deferred income tax assets ..................... -- -- 3,358
Increase in prepaid expenses and other
current assets .......................................... (202) (105) (90)
(Increase) decrease in deposits and other
noncurrent assets ....................................... (17) 142 (309)
(Decrease) increase in accounts payable .................... (2,257) (6,608) 4,273
(Decrease) increase in accrued liabilities ................. (4,467) (3,452) 2,525
Decrease in deferred income taxes liabilities .............. -- (197) (261)
Increase in deferred income ................................ 176 -- --
-------- --------- ---------
Net cash provided by (used in)
operating activities .................................... 3,087 (4,006) 4,334
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................... (1,525) (1,671) (4,240)
Proceeds from sale of assets ............................... 2,019 4,166 1,813
Acquisitions of restaurants ................................ -- (282) (204)
-------- --------- ---------
Net cash provided by (used in)
investing activities .................................... $ 494 $ 2,213 $ (2,631)
-------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt .............. $ 10,000 $ -- $ --
Deferred loan costs incurred .......................... (431) -- --
Proceeds from (payments of) issuance of
short-term debt, net ................................ -- (2,500) 1,500
Principal payments on long-term debt .................. (12,317) (14,183) (3,584)
Net proceeds from sale of stock ....................... -- 19,414 --
Proceeds from investment by minority interest ......... -- -- 285
Distributions to minority interests ................... (90) (73) (212)
--------- --------- --------
Net cash (used in) provided by
financing activities ............................. (2,838) 2,658 (2,011)
--------- --------- --------
Net increase (decrease) in cash ..................... 742 865 (308)
CASH AT BEGINNING OF PERIOD ........................... 3,921 3,056 3,364
--------- --------- --------
CASH AT END OF PERIOD ................................. $ 4,663 $ 3,921 $ 3,056
========= ========= ========
Supplemental disclosures of cash flow information:
Interest paid ....................................... $ 3,972 $ 5,399 $ 5,842
========= ========= ========
Income taxes paid ................................... $ -- $ -- $ --
========= ========= ========
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Note received on sale of assets ..................... $ -- $ 179 $ --
========= ========= ========
Capital lease obligations incurred .................. $ 659 $ 491 $ 225
========= ========= ========
Acquisitions of restaurants:
Fair value of assets acquired ...................... $ -- $ 1,360 $ 9,906
Receivables forgiven ............................... -- (114) (5,429)
Reversal of deferred gain .......................... -- -- 1,422
Liabilities assumed ................................ -- (898) (5,695)
Assets distributed ................................. -- (438) --
Reduction of minority interest ..................... -- 372 --
--------- --------- --------
Total cash paid for the net
assets acquired .............................. $ -- $ 282 $ 204
========= ========= ========
Stock issued for repayment of debt and
accrued interest .................................... $ 113 $ 2,901 $ 228
========= ========= ========
Stock issued for payment of consulting fees ........... $ -- $ 229 $ 47
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1998, DECEMBER 29, 1997 AND DECEMBER 30, 1996
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
a) PURPOSE AND ORGANIZATION -- The principal business of Checkers Drive-In
Restaurants, Inc. ("Checkers") and (the "Company") is the operation and
franchising of Checkers restaurants. At December 28, 1998 there were 462
Checkers restaurants operating in 22 different states, the District of
Columbia, Puerto Rico and West Bank in the Middle East. Of those restaurants,
230 were Company-operated (including twelve restaurants owned by general and
limited partnerships, "the joint ventures") and 232 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 100%
owned subsidiaries and one limited partnership which has ceased operations of
its sole restaurant. Intercompany balances and transactions have been
eliminated in consolidation and minority interests have been established for
the outside partners' interests. The Company reports on a fiscal year which
will 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) CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents. Restricted Cash consists of cash on deposit with various financial
institutions as collateral to support the Company's obligations to certain
states for potential workers' compensation claims. This cash is not available
for the Company's use until such time that the respective states permit its
release.
c) RECEIVABLES -- Receivables consist primarily of royalties and notes due
from franchisees, notes and accounts receivable from the sale of MRP's. A
rollforward of the total allowances for doubtful receivables is as follows:
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS PERIOD
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Year ended December 30, 1996 ......... $1,358 $1,311 $ 452 $2,217
Year ended December 29, 1997 ......... $2,217 $1,013 $1,095 $2,135
Year ended December 28, 1998 ......... $2,135 $ 751 $ 537 $2,349
</TABLE>
d) INVENTORIES -- Inventories, which consist principally of food and
supplies, are stated at the lower of cost, first-in, first-out (FIFO) method or
market.
e) PRE-OPENING COSTS -- Pre-opening costs are expensed as incurred.
F-9
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
f) DEFERRED LOAN COSTS -- Deferred loan costs of $6.9 million incurred in
connection with the Company's November 22, 1996 restructure of its primary
credit facility (see Notes 4 and 9) are being amortized using the effective
interest method. During 1998 and 1997, the Company expensed an additional
$222,000 and $1.2 million, respectively, of deferred loan costs due to
unscheduled principal reductions made during those years.
g) 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. P & E under capital leases are stated at their
fair value at the inception of the lease. Depreciation and amortization are
computed on straight-line method over the estimated useful lives of the assets.
Property held for sale includes various excess restaurant facilities and land.
The aggregate carrying value of property and equipment held for sale is
periodically reviewed and adjusted downward to market value, when appropriate.
h) INTANGIBLES -- Goodwill and other intangibles are being amortized over
20 years and 3 to 7 years, respectively, on a straight-line basis (SFAS 121
impairments of goodwill were $390,000 in 1998, $565,000 in 1997 and $4.6
million in 1996). Amortization expense related to intangibles in 1998, 1997 and
1996 was $1.0 million, $1.0 million and $1.8 million, respectively.
i) 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. The Champion Modular Restaurant division
recognizes revenues on the percentage-of-completion method, measured by the
percentage of costs incurred to the estimated total costs of the contract.
j) 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
F-10
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
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.
k) EARNINGS PER SHARE -- The Company calculates basic and diluted earning
(loss) per share in accordance with the Statement of Financial Accounting
Standard No. 128, "Earnings per Share", which is effective for periods ending
after December 15, 1997.
l) STOCK OPTIONS -- As discussed in Note 8, the Company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation".
m) IMPAIRMENT OF LONG-LIVED ASSETS -- The Company accounts for long-lived
assets under the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" (SFAS 121) which requires the write-down of certain intangibles
and tangible property associated with under-performing sites. In applying SFAS
No. 121 the Company reviewed all stores that recorded losses in the applicable
fiscal years and performed a discounted cash flow analysis where indicated for
each store based upon such results projected over a ten or fifteen year period.
This period of time was selected based upon the lease term and the age of the
building, which the Company believes is appropriate based upon its operating
history and the estimated useful life of its restaurants. Impairments were
recorded to adjust the asset values to the amount recoverable under the
discounted cash flow analysis in the cases where the undiscounted cash flows
were not sufficient for full asset recovery, in accordance with SFAS No. 121.
The effect of applying SFAS No. 121 resulted in a reduction of property and
equipment and goodwill of $1.8 million in 1998, $565,000 in 1997 and $14.8
million in 1996.
n) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- The balance
sheets as of December 28, 1998, and December 29, 1997, reflect the fair value
amounts which have been determined, using available market information and
appropriate valuation methodologies. However, considerable judgement is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying
F-11
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
amounts of cash and equivalents, receivables, accounts payable, and long-term
debt which are a reasonable estimate of their fair value. 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) SEGMENT REPORTING -- SFAS No. 131, "Disclosures about segments of an
enterprise and related information" (Statement 131) changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information
in their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products, services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. Statement 131 is effective for fiscal years beginning after December
15, 1997. The Company operates primarily in the quick-service restaurant
industry. The Company's Champion Modular Restaurants division does not have a
material effect upon the Company's financial statements.
p) 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.
q) RECLASSIFICATIONS -- Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform to the 1998 presentation.
NOTE 2: LIQUIDITY
The Company has a working capital deficit of $6.3 million at December 28,
1998. It is anticipated that the Company will continue to have a working
capital deficit since approximately 88% of the Company's assets are long-term
(primarily property, equipment, and intangibles), and since all operating trade
payables, accrued expenses, and property and equipment payables are current
liabilities of the Company. At December 28, 1998, a significant portion ($17.4
million) of the Company's long-term debt relates to the Company's Restated
Credit Agreement which originally was to mature on July 31, 1999. On March 24,
1999, the Company and Santa Barbara Restaurant Group, Inc. ("SBRG"), a company
which is an 8.2% owner (as of December 31, 1998) of Rally's, executed a letter
of intent whereby SBRG agreed to acquire approximately $1.9 million of debt due
to two members of the
F-12
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: LIQUIDITY--(CONTINUED)
lender group. The terms associated with the SBRG debt will be identical to
terms that other participants of the lender group have pursuant to the Restated
Credit Agreement. On March 24, 1999, SBRG and the other remaining members of
the lender group have also agreed to an extension of the maturity date to April
30, 2000. As of December 28, 1998, Fidelity National Financial, Inc. owned
31.1% of the outstanding common stock of SBRG (see Note 4).
NOTE 3: PROPERTY AND EQUIPMENT
Property and Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29, USEFUL LIFE
1998 1997 IN YEARS
-------------- -------------- ------------
<S> <C> <C> <C>
Land and improvements ....................... $ 53,334 $ 55,583 0-15
Buildings ................................... 28,748 28,671 20-31.5
Equipment, furniture and fixtures ........... 45,048 45,141 5-10
--------- --------- -------
127,130 129,395
Less accumulated depreciation ............... (50,055) (42,234)
--------- ---------
77,075 87,161
--------- ---------
Properties held under capital lease ......... 1,464 787
Less accumulated amortization ............... (149) (59)
--------- ---------
1,315 728
========= =========
Net property and equipment .................. $ 78,390 $ 87,889
========= =========
</TABLE>
F-13
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1998 1997
-------------- -------------
<S> <C> <C>
Note payable under Restated Credit Agreement at 13%
interest due each 28 day period, originally maturing
July 31, 1999, subsequently extended to April 30, 2000
(see Note 2) ............................................... $17,432 $26,077
Notes payable due at various dates secured by building
and equipment with interest rates primarily ranging from
9.0% to 11.32%, payable monthly ............................ 1,214 4,530
Mortgages payable to FFCA Acquisition Corporation
secured by 24 Company owned restaurants, payable in
aggregate monthly installments of $93,213, including
interest at 9.5% ........................................... 10,000 --
Other, at interest rates ranging from 7.0% to 10.0% ......... 997 1,367
------- -------
Total long-term debt ........................................ 29,643 31,974
Less current installments ................................... 998 3,329
------- -------
Long-term debt, less current maturities ..................... $28,645 $28,645
======= =======
</TABLE>
Aggregate maturities under the existing term of the long-term debt
agreements for each of the succeeding five years are as follows:
<TABLE>
<S> <C>
1999 ......................................................... $ 998
2000 ......................................................... 18,475
2001 ......................................................... 321
2002 ......................................................... 310
2003 ......................................................... 340
Thereafter ................................................... 9,199
-------
$29,643
=======
</TABLE>
On November 14, 1996, and prior to consummation of a formal debt
restructuring with an investor group led by an affiliate of Capital Management,
LLC (collectively, "DDJ") the debt under the Company's then outstanding loan
agreement and credit line was acquired from DDJ by a group of entities and
individuals, most of whom are engaged in the quick-service restaurant business.
This investor group (the "CKE Group") was led by CKE Restaurants, Inc. ("CKE"),
the parent of Carl Karcher Enterprises, Inc., Hardees Food Systems, Inc., Taco
Bueno Restaurants, Inc., and Summit Family Restaurants, Inc. Also participating
were most members of the DDJ Group, Fidelity National Financial, Inc,
("Fidelity") and KCC Delaware, a wholly-owned subsidiary of GIANT GROUP, LTD.
("GIANT"). CKE, GIANT and an affiliate of Fidelity (Santa Barbara Restaurant
Group, Inc.) are the largest stockholders of Rally's.
F-14
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: LONG-TERM DEBT--(CONTINUED)
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 and credit
line. 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
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 $4.3 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 the CKE Group warrants to
purchase an aggregate of 20 million shares of the Company's common stock at an
exercise price of $.75 per share, which was the approximate market price of the
common stock prior to the announcement of the debt transfer. Since November 22,
1996, the Company has reduced the principal balance under the Restated Credit
Agreement by $18.4 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 and $8.0 million of the proceeds
of a $10.0 million mortgage financing transaction completed on December 18,
1998 for these principal reductions, both which are described later in this
section. Pursuant to the Restated Credit Agreement, the prepayments of
principal made in 1996 and early in 1997 relieved the Company of the
requirement to make any of the regularly scheduled principal payments under the
Restated Credit Agreement which would have otherwise become due in fiscal year
1998 through maturity. The Amended and Restated Credit Agreement provides
however, that 50% of any future asset sales must be utilized to prepay
principal. See Note 2: "Liquidity", for additional information occurring
subsequent to December 28, 1998 regarding the extension of the maturity date of
the Restated Credit Agreement.
On February 21, 1997, the Company completed a private placement (the
"Private Placement") of 8,981,453 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 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
F-15
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: LONG-TERM DEBT--(CONTINUED)
lenders under the Restated Credit Agreement and Raymond James and Associates,
Inc. also participated in the Private Placement. The Company received
approximately $19.5 million in net proceeds after $500,000 of issuance costs
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. Raymond James and Associates,
Inc. received 209,524 shares of the common stock for services related to the
Private Placement. Under the purchase price protection provisions of these
209,524 shares, the Company paid Raymond James and Associates, Inc. $170,000
and has accrued an additional $252,000 at December 28, 1998.
On August 6, 1997, the 87,719 shares of preferred stock issued in
connection with the Private Placement were converted into 8,771,900 shares of
the Company's common stock valued at $10 million. In accordance with the
agreement underlying the Private Placement, the Company also issued 610,524
shares of common stock as a dividend pursuant to the liquidation preference
provisions of the Private Placement Agreement, valued at $696,000 to the
holders of the preferred stock issued in the Private Placement. This dividend
was charged to additional paid-in capital due to the retained deficit position
of the Company.
At November 13, 1997 the effective date of the registration statements
filed on Forms S-4 the Company had outstanding promissory notes in the
aggregate principal amount of approximately $3.2 million, (the "Notes") payable
to Rall-Folks, Inc. ("Rall-Folks"), Restaurant Development Group, Inc. ("RDG")
and Nashville Twin Drive-Through Partners, L.P. ("N.T.D.T."). The Company
agreed to acquire the Notes issued to Rall-Folks and RDG in consideration of
the issuance of an aggregate of approximately 1.9 million shares of Common
Stock and the Note issued to NTDT in exchange for a convertible note in the
same principal amount and convertible into approximately 614,000 shares of
Common Stock pursuant to agreements entered into in 1995 and subsequently
amended. All three of the parties received varying degrees of protection on the
purchase price of the promissory notes. Accordingly, the actual number of
shares to be issued was to be determined by the market price of the Company's
stock. Consummation of the Rall-Folks, RDG, and NTDT purchases occurred on
November 24, December 5, and November 24, 1997, respectively.
During December 1997, the Company issued an aggregate of 2,622,559 shares
of common stock in payment of $2.9 million of principal and accrued interest
relating to the Notes. After these issuance's, the remaining amount owed in
relation to these Notes was $322,000, payable to NTDT. During 1998, the Company
issued an additional 359,129
F-16
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: LONG-TERM DEBT--(CONTINUED)
shares of common stock and paid $121,000 in cash to NTDT, issued 12,064 shares
of common stock to RDG and issued 279,868 shares of common stock and paid
$86,000 in cash to Rall-Folks and paid $29,000 in cash in full settlement of
all remaining amounts owed in relation to debt principal, accrued interest, and
purchase price protection under the Notes.
On December 18, 1998, the Company completed a mortgage financing agreement
with FFCA Acquisition Corporation ("FFCA") whereby the Company received $10.0
million, which is collateralized by 24 restaurants. Of the net proceeds from
FFCA of approximately $9.6 million, the Company used $8.0 million to pay down
the Restated Credit Agreement, resulting in the expensing of an additional
$222,000 of deferred financing costs related to the Restated Credit Agreement.
Additionally, the Company utilized approximately $612,000 to retire other debts
associated with the collateral upon closing. This mortgage financing is payable
monthly at $93,000, including interest at 9.5% and has a term of 20 years.
The Company's Restated Credit Agreement with the CKE Group contains
restrictive covenants which include the consolidated EBITDA covenant as
defined. As of December 28, 1998, the Company was in violation of the
consolidated EBITDA covenant. The Company received a waiver for periods 11
through 13 of fiscal 1998, and for all periods remaining through the earlier of
July 12, 1999 or the effective date of the Merger with Rally's (See Note 13).
F-17
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: INCOME TAXES
Income tax expense (benefit) from continuing operations in fiscal years
1998, 1997 and 1996 Amounted to $-0-, $-0- and $151,000, respectively.
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------ ---------- ------
<S> <C> <C> <C>
1998
Federal ......... $ -- $ -- $ --
State ........... -- -- --
-------- ------ ----
$ -- $ -- $ --
======== ====== ====
1997
Federal ......... $ -- $ -- $ --
State ........... -- -- --
-------- ------ ----
$ -- $ -- $ --
======== ====== ====
1996
Federal ......... $ (3,397) $3,397 $ --
State ........... 190 (39) 151
-------- ------ ----
$ (3,207) $3,358 $151
======== ====== ====
</TABLE>
Actual income tax expense differs from the amount computed by applying the
U.S. Federal income tax rate of 35% to earnings before income taxes as follows
is:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
"Expected" tax benefit ...................... $ (1,817) $ (4,265) $ (16,190)
State taxes, net of federal benefit ......... (210) (474) (1,802)
Change in valuation allowance for
deferred tax asset allocated to
income tax expense ......................... 2,010 4,624 18,125
Other, net .................................. 17 115 18
-------- -------- ---------
Actual tax expense .......................... $ -- $ -- $ 151
======== ======== =========
</TABLE>
F-18
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities, are presented
below:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1998 1997
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Impairment of long-lived assets under SFAS 121 ............... $ 16,428 $ 15,885
Accrued expenses and provisions for restructuring
and restaurant relocations and abandoned sites,
principally due to deferral for income tax purpose ......... 7,761 8,121
Federal net operating losses and credits ...................... 22,798 19,583
State net operating losses and credits ........................ 3,400 3,032
Deferral of franchise income and costs associated with
franchise openings in progress ............................... 92 76
Other ......................................................... -- 680
--------- ---------
Total gross deferred tax assets ............................. 50,479 47,377
Valuation allowance ........................................... (32,375) (30,365)
--------- ---------
Deferred tax assets ......................................... $ 18,104 17,012
--------- ---------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation ................................ 17,935 16,899
Other ........................................................ 169 113
--------- ---------
Total gross deferred tax liabilities ......................... 18,104 17,012
Net deferred tax assets .................................... $ -- $ --
========= =========
</TABLE>
The net change in the valuation allowance in the years ended December 28,
1998 and December 29, 1997 was an increase of $2.0 million and $4.6 million,
respectively. The Company has provided the valuation allowance of $32.4 million
since management can not determine that it is more likely than not that the
deferred tax assets will be realized.
As of December 28, 1998 the Company had net operating loss carry forwards
for Federal income tax purposes of $61.6 million of which $54.4 million expires
in various amounts from 2010 to 2012 and $7.2 million expires in 2017. The
Company also has alternative minimum tax credit carry forwards of approximately
$1.3 million which are available to reduce future regular income taxes, if any,
over an indefinite period. The Targeted Jobs Tax credit carry forwards in the
amount of $446,000 expire in various amounts from 2006 to 2009.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
the utilization of the Company's net operating loss carryforwards to offset
future taxable income
F-19
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: INCOME TAXES--(CONTINUED)
may be limited if the Company experiences a change in ownership of more than 50
percentage points within a three year period. As of December 28, 1998, the
Company had not experienced an ownership change that would subject its net
operating loss carryforwards or tax credit carryforwards to be limited in
offsetting future taxable income and tax, respectively. However, on January 29,
1999, the Company and Rally's announced the signing of a definitive merger
agreement pursuant to which Rally's will merge into Checkers in an all stock
transaction, "the Merger" (see Note 13). The Company believes that the Merger
would cause it to experience an ownership change. In the event of the Merger,
the Company would be significantly limited in utilizing its net operating loss
carryforwards and tax credit carryforwards arising before the ownership change
to offset future taxable income and tax, respectively. It is anticipated that a
significant amount of the Company's net operating loss carryforwards and tax
credit carryforwards could expire before becoming available under Section 382.
NOTE 6: RELATED PARTIES
Effective November 10, 1997, Checkers and Rally's entered into an
employment agreement with James J. Gillespie, pursuant to which he is to serve
as Chief Executive Officer of both Checkers and Rally's. Mr. Gillespie is also
to serve as a director of Checkers and Rally's. The term of employment is for
two years, subject to automatic renewal by Checkers and Rally's for one-year
periods thereafter, at an annual base salary of $283,000. Mr. Gillespie is also
entitled to participate in the incentive bonus plans of Checkers and Rally's.
Upon execution of the employment agreement, Mr. Gillespie was granted an option
to purchase 300,000 shares of Rally's common stock, $.10 par value per share,
and received a signing bonus of $50,000. The options vest in three equal annual
installments commencing on November 10, 1998; provided that if the term of the
agreement is not extended to November 10, 2000, the option shall become fully
vested on November 10, 1999. Mr. Gillespie is entitled to choose to participate
in either Checkers or Rally's employee benefit plans and programs and is
entitled to reimbursement of his reasonable moving expenses and a relocation
fee of $5,000. The agreement may be terminated at any time for cause. If Mr.
Gillespie is terminated without cause, he will be entitled to receive his base
annual salary, and any earned unpaid bonus, through the unexpired term of the
agreement, payable in a lump sum or as directed by Mr. Gillespie. Mr. Gillespie
has agreed to keep confidential all non-public information about Checkers and
Rally's during the term of his employment and for a two-year period thereafter.
In addition, Mr. Gillespie has agreed that he will not, during his employment,
engage in any business, which is competitive with either Checkers or Rally's.
Checkers and Rally's will share the costs associated with his agreement,
pursuant to that certain Management Services Agreement dated November 30, 1997.
F-20
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: RELATED PARTIES--(CONTINUED)
Effective November 30, 1997 the Company entered into a Management Services
Agreement with Rally's, whereby Checkers is providing accounting, technology,
and other functional and management services to predominantly all of the
operations of Rally's. The Management Services Agreement carries a term of
seven years, terminable upon the mutual consent of the parties. The Company
will receive fees from Rally's relative to the shared departmental costs times
the respective store ratio. Checkers increased its corporate and regional staff
in late 1997 and 1998 in order to meet the demands of the agreement, but
management believes the income generated by this agreement has enabled Checkers
to attract the management staff with expertise necessary to more successfully
manage and operate both companies at significantly reduced costs to both
entities. During 1998 and 1997, the Company charged Rally's $5.6 million and
$95,000, respectively in accordance with the Management Service Agreement.
Overall, the Company believes many of the fundamental steps have been taken to
improve the Company's initiative toward profitability, but there can be no
assurance that it will be able to do so. Management believes that cash flows
generated from operations, and asset sales should allow the Company to continue
to meet its financial obligations and to pay operating expenses. On January 29,
1999, Checkers and Rally's announced the signing of a definitive merger
agreement pursuant to which Rally's will merge into Checkers in an all stock
transaction (See Note 13).
During 1998 and in 1997, the Company incurred $87,000 and $539,000,
respectively, in legal fees from a law firm in which a current Director of the
Company is a partner.
Also during 1998, the Company purchased $226,000 of equipment from Hardees
Equipment Division, a wholly-owned subsidiary of CKE Restaurants, Inc.
In addition, during 1998, the Company entered into two capital lease
agreements with Granite, a wholly-owned subsidiary of Fidelity (See Note 11:
a).
NOTE 7: ACQUISITIONS AND DISPOSITIONS
On 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 totaled, net of reserves, $3.3 million. Assets of
$8.9 million ($7.0 million tangible and $1.9 million intangible) and
liabilities of approximately $3.0 million were consolidated into the balance
sheet of the Company as of the acquisition date. Long-term debt of $1.6 million
was assumed as a result of the acquisition of the assets of CDDT, including an
obligation to the Internal Revenue Service of
F-21
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: ACQUISITIONS AND DISPOSITIONS--(CONTINUED)
$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 and notes payable of
$922,000 to a bank and other parties with interest at rates ranging from 8.11%
to 10.139%. In addition non-interest bearing notes, certain accounts payable
and accrued liabilities totalling $1.4 million related to this acquisition were
assumed by the Company.
During 1997, the Company acquired the minority share of one joint-venture
restaurant, the operations and certain of the equipment including one MRP
associated with five operating franchise restaurants and one closed franchise
restaurant having an aggregate fair value of $1.4 million, for a total net cash
disbursement of $282,000. As a result of these acquisitions, the Company
assumed indebtedness of $898,000, including long-term debt and capital lease
obligation of $803,000 and other accruals of $95,000. As a result of these
transactions, minority interests of $372,000 were eliminated, receivables of
$114,000 were forgiven, property of $438,000 was distributed and goodwill of
$831,000 was recorded.
The operations of the 1996 and 1997 acquisitions are included in these
financial statements from the date of purchase. The impact of these
acquisitions on the consolidated results of operations for the period prior to
acquisitions is immaterial.
NOTE 8: STOCK OPTION PLANS
In August 1991, the Company adopted the 1991 Stock Option Plan (the "1991
Stock Option Plan"), as amended for employees whereby incentive stock options,
nonqualified stock options, stock appreciation rights and restrictive shares
can be granted to eligible salaried individuals. The plan was amended on August
6, 1997 to increase the number of shares subject to the Plan from 3,500,000 to
5,000,000.
In 1994, the Company adopted a Stock Option Plan for Non-Employee
Directors, as amended (The "Directors Plan"). The Directors Plan was amended on
August 6, 1997 by the approval of the Company's stockholders to increase the
number of shares subject to the Directors Plan from 200,000 to 5,000,000 and
provides for the automatic grant to each non-employee director upon election to
the Board of Directors a non-qualified, ten-year option to acquire 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 additional
shares of common stock. 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
F-22
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: STOCK OPTION PLANS--(CONTINUED)
anniversaries of the date of the grant of such option. Each Non-Employee
Director serving on the Board as of July 26, 1994 received options to purchase
12,000 shares. Each new Non-Employee Director elected or appointed subsequent
to that date also received options to purchase 12,000 shares. Each Non-Employee
Director previously received additional options to purchase 3,000 shares of
Common Stock on the first day of each fiscal year. On August 6, 1997 the
Directors Plan was amended to provide: (i) an increase in the option grant to
new Non-Employee Directors to 100,000 shares, (ii) an increase in the annual
options grant to 20,000 shares and (iii) the grant of an option to purchase
300,000 shares to each Non-Employee Director who was a Director both
immediately prior to and following the effective date of the amendment. Options
granted to Non-Employee Directors on or after August 6, 1997 are exercisable
immediately upon grant.
Pursuant to the Directors' Plan, the Company issued options to purchase
1,400,000 shares at an exercise price of $0.9375 to the existing Directors of
the Company on February 12, 1998 and issued options to purchase 100,000 shares
at an exercise price of $1.375 to a new Director on June 11, 1998.
Additionally, on April 27, 1998, pursuant to the 1991 Stock Option Plan, the
Company issued options to purchase 3,024,250 shares at an exercise price of
$1.00 and issued 300,000 shares at an exercise price of $0.84375 on August 18,
1998.
Both the 1991 Stock Option Plan and the Directors Plan provide that the
shares granted come from the Company's authorized but unissued or reacquired
common stock. The exercise 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 grant. An option may vest and be exercisable immediately as of the date
of the grant and no option will be exercisable, and will expire, after ten
years from the date granted.
F-23
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: STOCK OPTION PLANS--(CONTINUED)
The following is a summary of stock option activity for the last three
years:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------------- ---------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning
of the year ............... 5,238,430 $1.86 3,344,230 $3.94 2,631,084 $4.75
Granted (exercise price
equals market) ............ 9,802,174 0.67 2,737,000 1.40 96,100 1.00
Granted (exercise price
exceeds market) ........... -- -- -- -- 953,056 1.54
Exercised .................. -- -- (125) 1.53 -- --
Forfeited .................. (6,978,416) 1.37 (842,675) 6.25 (336,010) 2.07
---------- --------- ---------
Outstanding at the end
of the year ............... 8,062,188 $0.80 5,238,430 $2.21 3,344,230 $3.94
========== ========= =========
Options Exercisable at
year end .................. 4,684,718 4,511,768 2,165,934
========== ========= =========
Weighted-average fair values
of options granted during
the year .................. $ 0.41 $ 0.78 $ 0.39
============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES 12/28/1998 LIFE (YRS.) PRICE AT 12/28/98 PRICE
- --------------------- ------------- ------------------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$0.375 to $2.00 7,728,552 8.8 0.66 4,360,690 0.84
$2.01 to $3.00 163,790 1.4 2.62 161,382 2.62
$3.01 to $4.00 12,900 5.9 3.27 8,100 3.28
$4.01 to $5.00 -- -- -- -- --
$5.01 to $6.00 156,946 1.5 5.25 154,546 5.24
- --------------------- --------- --- ---- --------- ----
$0.375 to $20.00 8,062,188 8.5 0.80 4,684,718 1.05
===================== ========= === ==== ========= ====
</TABLE>
In February 1996, employees (excluding executive officers) who were
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 three to 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.
F-24
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: STOCK OPTION PLANS--(CONTINUED)
On December 15, 1998, the Company repriced options granted under the 1991
Stock Option Plan and options issued outside of a plan. The new option price is
$0.375, the closing market price at December 15, 1998. As a result of this
transaction, 3,727,924 options in the 1991 Stock Option Plan and 1,250,000
issued outside of a plan were cancelled and reissued at the new price. These
changes are reflected in the table above.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for the Company's stock option plan
for employees been determined based on the fair value at the grant date for
awards in fiscal 1998, 1997, 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 END
--------------------------------------------------------------
DECEMBER 29, 1998 DECEMBER 29, 1997 DECEMBER 30, 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
As Reported ......... $ (5,344) $ (12,882) $ (46,409)
Pro Forma ........... $ (6,891) $ (14,896) $ (47,829)
As Reported ......... $ (0.07) $ (0.20) $ (0.90)
Pro Forma ........... $ (0.09) $ (0.23) $ (0.93)
</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 1998, 1997 and 1996,
respectively: dividend yield of zero percent for all years; expected volatility
of 90, 60 and 64 percent, risk-free interest rates of 5.5, 6.2 and 6.5 percent,
and expected lives of 4.0, 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 in many cases vest over several years and
additional awards are made each year.
NOTE 9: WARRANTS
As partial consideration for the transfer of the RDG promissory note of
the Company (the "Note") back to the Company in 1997, the Company issued a
warrant (the "Warrant") for the purchase of 120,000 shares of common stock. In
connection with the satisfaction of the Company's obligations to RDG with
respect to the sale of the Company's common stock issued to RDG, the Company
acquired the Warrant from RDG in August, 1998 for $2,600 and the Warrant was
cancelled.
F-25
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: WARRANTS--(CONTINUED)
Pursuant to a November 22, 1996 settlement the Company issued warrants for
the purchase of 5,100,000 shares of the Company's common stock. These warrants,
valued at $3.0 million, were issued in settlement of certain litigation, are
exercisable at $1.375 during the period beginning November 22, 2000 and ending
on December 22, 2000.
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 4) 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 $6.5 million, 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 anti-dilution
provisions.
NOTE 10: ACCOUNTING CHARGES AND LOSS PROVISIONS
During 1998 the Company recorded accounting charges and loss provisions of
$3.0 million under SFAS 121, including impairment charges related to seven
stores ($1.8 million), the expenses necessary to adjust the net realizable
value of assets held for sale ($551,000), store closure expense ($645,000)
which primarily includes provisions for ongoing carrying costs of restaurants
closed in prior years that have not been disposed of and similar costs for two
restaurants closed in 1998.
During 1997, the Company recorded accounting charges and loss provisions
totalling $1.0 million, including impairment charges to write off goodwill
associated with one under-performing store ($565,000), to provide for
additional losses on assets to be disposed due to certain sublease properties
being converted to surplus ($312,000), and a provision to write down Champion
inventories to fair value ($150,000).
The Company recorded accounting charges and loss provisions totalling
$14.7 million during the third quarter of 1996 and $9.2 million during the
fourth quarter of 1996. Third quarter 1996 provisions under SFAS 121 of $14.2
million to close 27 restaurants and relocate 22 of them ($4.2 million), settle
16 leases on real property underlying these stores ($1.2 million) and sell land
underlying the other 11 restaurants ($307,000), and impairment charges related
to an additional 28 under-performing restaurants ($8.5 million) were recorded.
A provision of $500,000 was also recorded for Champion's finished buildings
inventory as an adjustment to fair market value. Fourth quarter provisions
under SFAS 121
F-26
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: ACCOUNTING CHARGES AND LOSS PROVISIONS--(CONTINUED)
of $7.7 million including $1.4 million for additional losses on assets to be
disposed of, $5.9 million for impairment charges related to 9 under-performing
restaurants received by the Company as a result of the CDDT bankruptcy in July
1996 and $393,000 for other impairment charges were also recorded.
Additionally, in the fourth quarter of 1996, a provision of $351,000 was
recorded for legal settlements, and a $1.1 million provision was recorded for
the disposal of the L.A. Mex product line.
A summary of the accounting charges and loss provisions for 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF
ACCOUNTING CHARGES AND LOSS PROVISIONS
-----------------------------------------------------------------------
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH NON-CASH BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS DEDUCTIONS END OF YEAR
- ----------------------------------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 28, 1998:
Impairment of long-lived
assets ....................... $ -- $ 1,757 $ -- $ (1,757) $ --
Losses on assets to be
disposed of .................. 2,740 1,196 (1,635) (236) 2,065
Other loss provisions ......... 1,290 -- (85) -- 1,205
------ ------- -------- --------- ------
$4,030 $ 2,953 $ (1,720) $ (1,993) $3,270
====== ======= ======== ========= ======
Year ended December 29, 1997:
Impairment of long-lived
assets ....................... $ -- $ 565 $ -- $ (565) $ --
Losses on assets to be
disposed of .................. 3,800 312 (1,695) 323 2,740
Other loss provisions ......... 2,357 150 (76) (1,141) 1,290
------ ------- -------- --------- ------
$6,157 $ 1,027 $ (1,771) $ (1,383) $4,030
====== ======= ======== ========= ======
Year ended December 30, 1996:
Impairment of long-lived
assets ....................... $ -- $14,782 $ -- $ (14,782) $ --
Losses on assets to be
disposed of .................. 2,124 7,131 (943) (4,512) 3,800
Other loss provisions ......... 1,004 1,992 -- (639) 2,357
------ ------- -------- --------- ------
$3,128 $23,905 $ (943) $ (19,933) $6,157
====== ======= ======== ========= ======
</TABLE>
The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of the Company's estimates for the ongoing
carrying costs of each location which has been closed or was never developed.
These costs include rents, property taxes, insurance, maintenance, utilities
and in some cases the cost to relocate the modular restaurant to a storage
facility. The cash outlays for these costs have been estimated for various
terms ranging from five months to three years.
F-27
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: 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 $7.9 million in 1998, $9.1 million in 1997, and
$8.0 million in 1996. On December 1, 1998, the Company entered into two lease
agreements, which have been recorded as obligations under capital lease, with
Granite Financial Inc., a wholly-owned subsidiary of Fidelity, whereby the
Company leased security equipment for its restaurants costing $659,000. The
first lease agreement is payable monthly at approximately $13,000 including
effective interest at 13.08%. The second lease is payable at approximately
$9,000, including effective interest at 10.90%. Both of these leases have terms
of three years. Additionally, the Company leases various restaurant facilities
which are recorded as capital leases with effective interest rates ranging from
11.3% to 15.8%.
Future minimum lease payments under capital leases and operating leases as
of December 28, 1998 are approximately as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
1999 ................................................. $ 544 $ 8,412
2000 ................................................. 564 8,549
2001 ................................................. 471 8,204
2002 ................................................. 110 7,045
2003 ................................................. 35 6,005
Thereafter ........................................... -- 42,936
------ -------
Total minimum lease commitments ...................... $1,724 $81,151
Less amounts representing interest, rates ranging
from 10.9% to 15.8% ................................. (332)
------
Present value of minimum lease payments .............. 1,392
Current portion of capital lease obligations ......... (383)
------
Long-term obligations under capital lease ............ $1,009
======
</TABLE>
b) SELF INSURANCE -- The Company is self-insured for most workers'
compensation, general liability and automotive liability losses subject to per
occurrence and aggregate annual liability limitations. The Company is also
self-insured for health care claims for eligible participating employees
subject to certain deductibles and limitations. The Company determines its
liability for claims incurred but not reported on an actuarial basis.
c) LITIGATION -- Except as described below, the Company is not a party to
any material litigation and is not aware of any threatened material litigation:
F-28
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 in and
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-CI-21 (hereinafter the "Power Burgers
Litigation"). 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, Inc. (hereinafter "Powers Burgers") a Checkers franchisee. The
original Complaint further alleged that Ms. Greenfelder and Powers Burgers were
induced into entering into various agreements and personal guarantees with the
Company based upon misrepresentations by the Company and its officers and that
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. The Plaintiffs
seek 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 Plaintiffs'
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. A third Amended Complaint has been filed and an Answer, Affirmative
Defenses, and a Counterclaim to recover unpaid royalties and advertising fund
contributions has been filed by the Company. In response to the Court's
dismissal of certain claims in the Power Burgers Litigation, on May 21, 1997, a
companion action was filed in the Circuit Court of the Sixth Judicial Circuit
in and for Pinellas County, Florida, Civil Division, entitled GAIL P.
GREENFELDER, POWERS BURGERS OF AVON PARK, INC., AND POWER BURGERS OF SEBRING,
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. 97-3565-CI, asserting, in relevant part, the same causes of action as
asserted in the Power Burgers Litigation. An Answer, Affirmative Defenses, and
a Counterclaim to recover unpaid royalties and advertising fund contributions
have been filed by the Company. On February 4, 1998, the Company terminated
Power Burgers, Inc.'s, Power Burgers of Avon Park, Inc.'s and Power Burgers of
Sebring, Inc.'s franchise agreements and thereafter filed two Complaints in the
United States District Court for the Middle District of Florida, Tampa
Division, styled CHECKERS DRIVE-IN RESTAURANTS, INC. V. POWER BURGERS OF AVON
PARK, INC., Case No. 98-409-CIV-T-17A and CHECKERS DRIVE-IN
F-29
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
RESTAURANTS, INC. V. POWERS BURGERS, INC. Case No. 98-410-CIV-T-26E. The
Complaint seeks, inter alia, a temporary and permanent injunction enjoining
Power Burgers, Inc. and Power Burgers of Avon Park, Inc.'s continued use of
Checkers' Marks and trade dress. A Motion to Stay the foregoing actions pending
a resolution of the lawsuits pending in the Sixth Judicial Circuit in and for
Pinellas County, Florida described above has been granted by the United States
District Court. The Company denies all wrongdoing and intends to continue to
defend the lawsuits 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., (hereinafter "Tampa Checkmate")
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. (hereinafter
"Checkmate") 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 seek damages in the amount
of $3,000,000 or the return of all monies invested by Checkmate, Tampa
Checkmate and Mr. Gagne in Checkers' franchises, punitive damages, attorneys'
fees and such other relief as the court may deem appropriate. The Counterclaim
was dismissed by the court on January 26, 1996, with the right to amend. On
February 12, 1996, the Counterclaimants filed an Amended Counterclaim alleging
violations of Florida's Franchise Act, Florida's Deceptive and Unfair Trade
Practices Act, and breaches of implied duties of "good faith and fair dealings"
in connection with a settlement agreement and franchise agreement between
various of the parties. The Amended Counterclaim seeks a judgment for damages
in an unspecified amount, punitive damages, attorneys' fees and such other
relief as the court may deem appropriate. The Company filed an Answer to the
Amended Counterclaim, but on October 21, 1998, the court dismissed the Amended
Counterclaim based on Counterclaimants failure to comply with certain Court
rules relating to the prosecution of the claims. The Court's dismissal is the
subject of a pending Motion for Reconsideration. On or
F-30
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
about July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the United
States Bankruptcy Court for the Middle District of Florida, Tampa Division
entitled IN RE: TAMPA CHECKMATE FOOD SERVICES, INC., and numbered as
97-11616-8G-1 on the docket of said Court. On July 25, 1997, Checkers filed an
Adversary Complaint in the Tampa Checkmate bankruptcy proceedings entitled
CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES, INC. and
numbered as Case No. 97-738. Following a hearing on Checkers' motion for
Preliminary Injunction on July 22, 1998, the Court entered an order enjoining
Tampa Checkmate's continued use of Checkers' Marks and trade dress
notwithstanding the termination of its Franchise Agreement on April 8, 1997. On
December 15, 1998, the court granted the Company's Motion to Convert Tampa
Checkmate's bankruptcy proceedings from a Chapter 11 proceeding to a Chapter 7
liquidation. Additionally, on February 1, 1999, the bankruptcy Court granted
the Company's Motion to Lift the Automatic Stay imposed by 11 U.S.C Section 362
to allow the Company to proceed with the disposition of the property which is
the subject of its mortgage. The adversary Complaint and Counterclaim in the
bankruptcy proceedings remain pending. The Company denies all wrongdoing and
intends to continue to defend the lawsuit vigorously. No estimate of possible
loss or range of loss resulting from the lawsuit can be made at this time.
TEX-CHEX. INC. ET AL V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET. AL. On
February 4, 1997, a Petition was filed against the Company and two former
officers and directors of the Company in the District Court of Travis County,
Texas 98th Judicial District, ENTITLED TEX-CHEX, INC., BRIAN MOONEY, AND SILVIO
PICCINI V. CHECKERS DRIVE-IN RESTAURANTS, INC., JAMES MATTEI, AND HERBERT G.
BROWN and numbered as Case No. 97-01335 on the docket of said court. The
original Petition generally alleged that Tex-Chex, Inc. and the individual
Plaintiffs were induced into entering into two franchise agreements and related
personal guarantees with the Company based on fraudulent misrepresentations and
omissions made by the Company. On October 2, 1998, the Plaintiffs filed an
Amended Petition realleging the fraudulent misrepresentations and omission
claims set forth in the original Petition and asserting additional causes of
action for violation of Texas' Deceptive Trade Practices Act and violation of
Texas' Business Opportunity Act. The Company denies all wrongdoing and intends
to defend the causes of action asserted in the amended Petition against the
Company and the individual defendants vigorously. The matter is in the
pre-trial stages and 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. INTERSTATE DOUBLE DRIVE-THRU, INC.
ET. AL. On May 9, 1998, a Counterclaim was filed against the company and a
former officer and director of the Company, Herbert T. Brown, in the United
States District Court for the Middle District of Florida, Tampa Division,
entitled CHECKERS DRIVE-IN RESTAURANTS, INC. V. INTERSTATE
F-31
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
DOUBLE DRIVE-THRU, INC. AND JIMMIE V. GILES and numbered as Case No.
98-648-CIV-T-23B on the docket of said court. The original Complaint filed by
the Company seeks a temporary and permanent injunction enjoining Interstate
Double Drive-Thru, Inc. and Mr. Giles' continued use of Checkers' Marks and
trade dress notwithstanding the termination of its Franchise Agreement and to
collect unpaid royalty fees and advertising fund contributions. The Court
granted the Company's motion for a preliminary injunction on July 16, 1998. The
Counterclaim generally alleges that Interstate Double Drive-Thru, Inc. and Mr.
Giles were induced into entering a franchise agreement and a personal guaranty,
respectfully, with the Company based on misrepresentations and omissions made
by the Company. The Counterclaim asserts claims for breach of contract, breach
of the implied convenant of good faith and fair dealing, violation of Florida's
Deceptive Trade Practices Act, violation of Florida's Franchise Act, violation
of Mississippi's Franchise Act, fraudulent concealment, fraudulent inducement,
negligent misrepresentation and rescission. The Company has filed a motion to
dismiss seven of the nine causes of action set forth in the Counterclaim which
remain pending. The Company denies all wrongdoing and intends to defend the
causes of action asserted in the Counterclaim against the Company and Mr. Brown
vigorously. The matter is in the pre-trial stages and no estimate of any
possible loss or range of loss resulting from the lawsuit can be made at this
time.
FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN V.
CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative class
action was filed on September 29, 1998, in the Delaware Chancery Court in and
for New Castle County, Delaware by First Albany Corp., as custodian for the
benefit of Nathan Suckman, an alleged stockholder of 500 shares of the
Company's common stock. The complaint names the Company and certain of its
current and former officers and directors as defendants including William P.
Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, Richard A.
Peabody, James T. Holder, Terry N. Christensen, Frederick E. Fisher, Clarence
V. McKee, Burt Sugarman, C. Thomas Thompson and Peter C. O'Hara. The Complaint
also names Rally's Hamburgers, Inc. ("Rally's") and GIANT GROUP, LTD. ("GIANT")
as defendants. The complaint arises out of the proposed merger announced on
September 28, 1998 between the Company, Rally's and GIANT (the "Proposed
Merger") and alleges generally, that certain of the defendants engaged in an
unlawful scheme and plan to permit Rally's to acquire the public shares of the
Company's stock in a "going-private" transaction for grossly inadequate
consideration and in breach of the defendants' fiduciary duties. The plaintiff
allegedly initiated the Complaint on behalf of all stockholders of the Company
as of September 28, 1998, and seeks INTER ALIA, certain declaratory and
injunctive relief against the consummation of the Proposed merger, or in the
event the Proposed Merger is consummated, recision of the Proposed Merger and
costs and disbursements incurred in
F-32
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
connection with bringing the action, including attorney's fees, and such other
relief as the Court may deem just and proper. In view of a decision by the
Company, GIANT and Rally's not to implement the transaction that had been
announced on September 28, 1998, plaintiffs have agreed to provide the Company
and all other defendants with an open extension of time to respond to the
compliant. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between the Company and
Rally's. The Company denies all wrongdoing and intends to defend the lawsuit
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.
DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF
THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. Case
No. 16680. This putative class action was filed on October 2, 1998, in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified
number of shares of the Company's common stock. The complaint names the Company
and certain of its current officers and directors as defendants including
William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein,
Richard A. Peabody, James T. Holder, Terry N. Christensen, Frederick E. Fisher,
Clarence V. McKee Burt Sugarman, C. Thomas Thompson and Peter C. O'Hara. The
Complaint also names Rally's and GIANT as defendants. As with the FIRST ALBANY
complaint described above, this complaint arises out of the proposed merger
announced on September 28, 1998 between the Company, Rally's and GIANT (the
"Proposed Merger") and alleges generally, that certain of the defendants
engaged in an unlawful scheme and plan to permit Rally's to acquire the public
shares of the Company's common stock in a "going-private" transaction for
grossly inadequate consideration and in breach of the defendant's fiduciary
duties. The plaintiffs allegedly initiated the Complaint on behalf of all
stockholders of the Company as of September 28, 1998, and seeks INTER ALIA,
certain declaratory and injunctive relief against the consummation of the
Proposed merger, or in the event the Proposed Merger is consummated, recision
of the Proposed Merger and costs and disbursements incurred in connection with
bringing the action, including attorneys' fees, and such other relief as the
Court may deem just and proper. For the reasons stated above in the description
of the FIRST ALBANY action, plaintiffs have agreed to provide the Company and
all other defendants with an open extension of time to respond to the
complaint. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between the Company and
Rally's. The Company denies all wrongdoing and intends to defend the lawsuit
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.
F-33
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
d) 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
suppliers' quality and performance, the purchases covered by these agreements
aggregate approximately $66.9 million in 1999 and a total of $83.3 million for
the years 2000 through 2004.
NOTE 12: QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table represents 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>
1998
Net revenues ............................... $ 37,003 $ 34,826 $ 32,585 $ 41,294
Impairment of long-lived assets ............ -- -- -- 1,757
Losses on assets to be disposed of ......... 63 63 251 819
Income (loss) from operations .............. 1,624 1,064 (246) (2,124)
Net income (loss) .......................... 394 (207) (1,469) (4,062)
Net income (loss) per common share
(basic and diluted) ....................... $ 0.01 $ -- $ (0.02) $ (0.07)
1997
Net revenues ............................... $ 34,157 $ 33,713 $ 32,733 $ 43,290
Impairment of long-lived assets ............ -- -- -- 565
Losses on assets to be disposed of ......... -- -- -- 312
Loss provisions ............................ -- -- -- 150
(Loss) income from operations .............. (1,818) 102 (304) (1,958)
Net loss ................................... (5,181) (1,469) (1,738) (3,798)
Preferred dividends ........................ -- -- 696 --
Net loss to common shareholders ............ (5,181) (1,469) (2,434) (3,798)
Net loss per common share
(basic and diluted) ....................... $ (0.09) $ (0.02) $ (0.04) $ (0.05)
</TABLE>
NOTE 13: SUBSEQUENT EVENTS
On January 29, 1999, Checkers and Rally's announced the signing of a
definitive merger agreement pursuant to which Rally's will merge into Checkers
in an all stock transaction. The merger agreement provides that each
outstanding share of the Rally's stock will be exchanged for 1.99 shares of
Checkers stock. The approximate 19.1 million
F-34
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13: SUBSEQUENT EVENTS--(CONTINUED)
shares of Checkers common stock which the Rally's owns will be retired as a
result of the Merger. Checkers and Rally's have each received investment
bankers' opinions as to the fairness of the exchange rate used in the Merger.
The Merger transaction is subject to certain approvals, including but not
limited to approval by the shareholders of Checkers and Rally's and potentially
the holders of Rally's Senior Notes and is expected to close in the second
quarter of fiscal year 1999.
At December 28, 1998, Rally's owned 19,130,930 shares (26.06 percent) of
the outstanding common stock of Checkers and public shareholders owned the
remaining 54,277,177 shares of Checkers common stock. Checkers will issue
58,377,134 shares of its common stock to Rally's shareholders in exchange for
all the outstanding common stock of Rally's (29,335,243 outstanding shares) at
a 1 to 1.99 exchange ratio. After the transaction, Rally's shareholders will
own 58,377,134 shares (51.8 percent of the outstanding common stock of the new
Checkers) and the remaining 54,277,117 shares (48.2 percent of Checker common
stock) will then be held by then current shareholders of Checkers. Immediately
following the Merger and the one-for-twelve reverse split, there will be
approximately 9,387,859 common shares outstanding. In addition, each of Rally's
outstanding stock options (5.6 million as of December 28, 1998) will be
exchanged for options at the exchange rate of 1 to 1.99 of Checkers.
The business combination under the Merger will be accounted for under the
purchase method. The Merger transaction will be accounted for as a reverse
acquisition as the stockholders of Rally's will receive the larger portion
(51.8%) of the voting interests in the combined enterprise. For purposes of
computing the resulting voting interests, exercisable options and warrants with
exercise prices that exceed the market value of the common stock of the
respective company have been excluded. Accordingly, Rally's is considered the
acquirer for accounting purposes and therefore, Checkers' assets and
liabilities will be recorded based upon their fair market value (See Note 14
for unaudited proforma information).
See Note 2: "Liquidity", for additional information on events occurring
subsequent to December 28, 1998.
NOTE 14: PRO FORMA INFORMATION (UNAUDITED)
The following unaudited pro forma condensed consolidated financial data
sets forth certain pro forma financial information giving effect to the Merger.
The pro forma financial information is based on, and should be read in
conjunction with the historical consolidated financial statements of each of
the companies and the notes related thereto.
F-35
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)
The pro forma condensed consolidating balance sheet gives effect to the
issuance of 58,377,134 shares of the Checkers common stock in exchange for
29,335,243 shares of Rally's common stock, based upon the per share price of
the Checkers common shares at $0.531 and a one-for-twelve reverse split,
assuming the Merger had occurred December 28, 1998:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
-------------- ------------------ ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS:
Current assets ................................ $ 12,298 $ 11,736 $ -- $ 24,034
Property and equipment, net ................... 78,390 61,914 140,304
Investment in affiliate, including net
goodwill of $11,861, net of
accumulated amortization ..................... -- 23,001 A) (23,001) --
Intangibles, net of accumulated
amortization ................................. 10,123 23,880 G) 18,714 52,717
Other assets, net of accumulated
amortization ................................. 1,288 2,775 -- 4,063
--------- -------- --------- ---------
$ 102,099 $123,306 $ (4,287) $ 221,118
========= ======== ========= =========
LIABILITIES:
Current liabilities ........................... 18,608 15,865 1,500 35,973
Senior notes, net of discount, less
current maturities ........................... -- 55,768 -- 55,768
Long-term debt and capital lease
obligations, less current maturities ......... 29,654 13,049 -- 42,703
Minority interests in joint ventures .......... 802 -- -- 802
Other long-term liabilities ................... 8,427 4,105 -- 12,532
--------- -------- --------- ---------
Total liabilities ............................ 57,491 88,787 1,500 147,778
STOCKHOLDERS' EQUITY:
Preferred stock ............................... -- -- -- --
Common stock .................................. 73 2,961 C) (3,025) 9
Additional paid-in capital .................... 121,579 97,346 D) (81,914) 137,011
Retained deficit .............................. (76,644) (63,680) E) 76,644 (63,680)
--------- -------- --------- ---------
45,008 36,627 (8,295) 73,340
Less treasury stock, at cost .................. (400) (2,108) F) 2,508 --
--------- -------- --------- ---------
Net stockholders'equity ...................... 44,608 34,519 (5,787) 73,340
--------- -------- --------- ---------
$ 102,099 $123,306 $ (4,287) $ 221,118
========= ======== ========= =========
</TABLE>
F-36
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)
- ----------------
A) Pro forma adjustment to record the elimination of Rally's original
investment of $11,140 in Checkers common stock, and the reclassification to
intangibles of $11,861 of goodwill associated with Rally's investment in
Checkers.
B) Pro forma adjustment to accrue estimated transaction costs related to the
Merger.
C) Pro forma adjustment to record the issuance of 58,377 shares of Checkers
common stock in exchange for Rally's outstanding shares, $58; to eliminate
the previous common stock account of Rally's, ($2,961); to eliminate the par
value associated with Rally's investment in Checkers common stock, ($19) and
to effect a one-for-twelve reverse split, ($103).
D) Pro forma adjustments, in accordance with reverse acquisition accounting, to
record the fair value of the outstanding 54,277 shares of common stock of
Checkers valued at $0.531 per share, $28,767 which is net of related par
value, eliminate the previous treasury stock of Rally's, ($2,108); eliminate
the previous additional paid-in capital account of Checkers, ($121,579); to
reduce additional paid in capital for the par value of the 58,377 shares
issued to Rally's shareholders, ($58); to eliminate the previous common
stock account of Rally's, $2,961; to attribute a $10,000 estimated fair
value to the outstanding Checkers stock options and warrants, and effect a
one-for-twelve reverse split, $103.
E) Pro forma adjustments to record the elimination of the retained deficit
account of Checkers.
F) Pro forma adjustment to eliminate the previous treasury stock of Checkers,
$400; as well as the treasury stock of Rally's, $2,108 which is cancelled as
a result of the Merger.
G) Pro forma adjustment to record goodwill of $6,853 associated with the Merger
and the reclassification of $11,861 of goodwill associated with Rally's
original investment in Checkers (see A).
NOTES: The final adjustments to value the outstanding Checkers options and
warrants as well as final adjustments to the fair value of assets and
liabilities as a result of the Merger will not be known until the
merger is formally completed.
F-37
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
FISCAL YEAR FISCAL YEAR
ENDED ENDED PRO FORMA
DECEMBER 28, 1998 DECEMBER 28, 1998 ADJUSTMENTS MERGED
------------------- ------------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
TOTAL REVENUES ......................... $145,708 $144,952 $ 290,660
-------- -------- ---------
COSTS AND EXPENSES:
Restaurant operating costs ............. 119,416 113,782 233,198
Advertising expense .................... 6,921 9,853 16,774
Other expenses ......................... 516 647 1,163
Other depreciation and amortization..... 2,275 2,503 H) 842 5,620
General and administrative
expense ............................... 13,309 13,404 I) (380) 26,333
SFAS 121 provisions .................... 2,953 3,362 -- 6,315
-------- -------- ------ ---------
Total cost and expenses .............. 145,390 143,551 462 289,403
-------- -------- ------ ---------
Operating income (loss) .............. 318 1,401 (462) 1,257
-------- -------- ------ ---------
Other income (expense):
Interest expense ..................... (6,007) (7,145) (13,152)
Loss on investment in affiliate ...... -- (2,019) J) 2,019 --
Interest income ...................... 272 480 -- 752
-------- -------- ------ ---------
Loss before minority interest and
income tax expense (benefit) .......... (5,417) (7,283) 1,557 (11,143)
Minority interests in operations of
joint ventures ........................ (73) -- -- (73)
-------- -------- ------ ---------
Loss before income tax
expense (benefit) ..................... (5,344) (7,283) 1,557 (11,070)
Income tax expense (benefit) ........... -- 252 -- 252
-------- -------- ------ ---------
Net (loss) earnings .................... (5,344) (7,535) 1,557 (11,322)
======== ======== ====== =========
Comprehensive (loss) earnings .......... $ (5,344) $ (7,535) $1,557 $ (11,322)
======== ======== ====== =========
Net loss per common share (basic
and diluted) .......................... $ (0.07) $ (0.28) $ (1.21)
======== ======== =========
Weighted average number
of common shares (basic
and diluted) .......................... 73,388 27,170 K) 9,388
======== ======== =========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded on
Rally's.
J) Pro forma adjustment to eliminate loss from Rally's equity investment in
Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
F-38
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 22, DECEMBER 28,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents:
Restricted ......................................... $ 1,417 $ 1,738
Unrestricted ....................................... 2,219 2,925
Accounts receivable ................................. 1,788 1,327
Notes receivable, net - current portion ............. 94 224
Inventory ........................................... 2,035 2,068
Property and equipment held for sale ................ 2,756 2,755
Deferred loan costs - current portion ............... 432 793
Prepaid expenses and other current assets ........... 1,120 468
-------- --------
Total current assets .............................. 11,861 12,298
Property and equipment, net .......................... 77,162 78,390
Intangibles, net of accumulated amortization ......... 9,916 10,123
Deferred loan costs - less current portion ........... 428 378
Notes receivable, net-less current portion ........... 235 252
Deposits and other non-current assets ................ 569 658
-------- --------
$100,171 $102,099
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-39
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 22, DECEMBER 28,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease obligations ....... $ 1,891 $ 1,381
Accounts payable ......................................................... 5,654 5,896
Accrued wages, salaries and benefits ..................................... 2,688 2,360
Reserves for restaurant relocations and abandoned sites .................. 1,207 1,635
Other accrued liabilities ................................................ 7,177 7,133
Deferred income-current portion .......................................... 207 203
--------- ---------
Total current liabilities ............................................. 18,824 18,608
Long-term debt, less current maturities .................................. 28,105 28,645
Obligations under capital leases, less current maturities ................ 748 1,009
Deferred income, less current portion .................................... 752 848
Long-term reserves for restaurant relocations and abandoned sites ........ 543 430
Minority interests in joint ventures ..................................... 674 802
Other noncurrent liabilities ............................................. 7,028 7,149
--------- ---------
Total liabilities ..................................................... 56,674 57,491
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized 2,000,000 shares,
no shares outstanding ................................................... -- --
Common stock, $.001 par value, authorized
150,000,000 shares, issued and outstanding 73,408,047 at
March 22, 1999 and at December 28, 1998 ................................. 73 73
Additional paid-in capital ............................................... 121,579 121,579
Retained deficit ......................................................... (77,755) (76,644)
--------- ---------
43,897 45,008
Less treasury stock, at cost, 578,904 shares ............................. 400 400
--------- ---------
Net stockholders' equity .............................................. 43,497 44,608
--------- ---------
$ 100,171 $ 102,099
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-40
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------
MARCH 22, MARCH 23,
1999 1998
----------- ----------
<S> <C> <C>
REVENUES:
Restaurant sales ....................................................... $ 30,140 $35,107
Franchise revenues and fees ............................................ 1,560 1,844
Modular restaurant packages ............................................ 13 52
-------- -------
Total revenues ............................................ ......... $ 31,713 $37,003
COSTS AND EXPENSES:
Restaurant food and paper costs ........................................ 9,089 11,389
Restaurant labor costs ................................................. 10,057 10,691
Restaurant occupancy expense ........................................... 2,408 2,637
Restaurant depreciation and amortization ............................... 1,643 1,874
Other restaurant operating expense ..................................... 3,237 3,097
Advertising expense .................................................... 1,912 1,876
Cost of modular restaurant package revenues ............................ 98 70
Other depreciation and amortization .................................... 454 515
General and administrative expenses .................................... 2,917 3,167
Losses on assets to be disposed of ..................................... -- 63
-------- -------
Total costs and expenses ............................................ 31,815 35,379
-------- -------
Operating (loss) income ............................................. (102) 1,624
OTHER INCOME (EXPENSE): ................................................
Interest income ........................................................ 58 79
Interest expense ....................................................... (850) (954)
Interest - loan cost amortization ...................................... (331) (415)
-------- -------
(Loss) income before minority interests and income taxes ............... (1,225) 334
Minority interests in operations of joint ventures ..................... (114) (60)
-------- -------
(Loss) income before income taxes ...................................... (1,111) 394
Income taxes ........................................................... -- --
-------- -------
Net (loss) income ........................................... ......... $ (1,111) $ 394
======== =======
Comprehensive (loss) income ............................................ $ (1,111) $ 394
======== =======
Net loss per common share - (basic and diluted) ....................... $ (0.02) $ 0.01
======== =======
Weighted average number of common shares - (basic and diluted) ......... 73,408 73,313
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-41
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------
MARCH 22, MARCH 23,
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: .............................
Net (loss) income ................................................ $ (1,111) $ 394
Adjustments to reconcile net (loss) income to net cash provided by
operating activities: ............................................
Depreciation and amortization ................................... 2,098 2,389
Provision for losses on assets to be disposed of ................ -- 63
Deferred loan cost amortization ................................. 331 412
Provision for bad debt .......................................... 106 116
Loss on disposal of property & equipment ........................ (6) (3)
Minority interests in (losses) earnings ......................... (114) (60)
Changes in assets and liabilities:
Increase in accounts receivable ................................. (561) (1,123)
Decrease (increase) in notes receivable ......................... 141 (16)
Decrease in inventory ........................................... 33 108
Increase in prepaid expenses and other current assets ........... (648) (335)
Decrease in deposits and other .................................. 89 14
Decrease in accounts payable .................................... (242) (1,515)
(Decrease) increase in accrued liabilities ...................... (44) 58
(Decrease) increase in deferred income .......................... (92) 279
-------- --------
Net cash (used in) provided by operating activities ............ (20) 781
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (701) (127)
Proceeds from sale of assets ..................................... 17 273
-------- --------
Net cash (used in) provided by investing activities ............ (684) 146
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt ............................. (291) (961)
Deferred loan costs incurred ..................................... (17) --
Distributions to minority interests .............................. (15) (20)
-------- --------
Net cash used in financing activities .......................... (323) (981)
-------- --------
Net decrease in cash ........................................... (1,027) (54)
CASH AT BEGINNING OF PERIOD ....................................... 4,663 3,921
-------- --------
CASH AT END OF PERIOD ............................................. $ 3,636 $ 3,867
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid ................................................... $ 907 $ 946
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-42
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION -- The accompanying unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
necessary to present fairly the information set forth therein have been
included. The operating results for the quarter ended March 22, 1999, are not
necessarily an indication of the results that may be expected for the fiscal
year ending January 3, 2000. Except as disclosed herein, there has been no
material change in the information disclosed in the notes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 28, 1998. Therefore, it is suggested that the
accompanying financial statements be read in conjunction with the Company's
December 28, 1998 consolidated financial statements.
(b) PURPOSE AND ORGANIZATION -- The principal business of Checkers
Drive-In Restaurants, Inc. (the "Company", "Checkers") is the operation and
franchising of Checkers restaurants. At March 22, 1999, there were 465 Checkers
restaurants operating in 22 different states, the District of Columbia, Puerto
Rico and West Bank in the Middle East. Of those restaurants, 233 were
Company-operated (including 12 joint venture restaurants) and 232 were operated
by franchisees. The accounts of the joint ventures have been included with
those of the Company in these condensed consolidated financial statements.
Intercompany balances and transactions have been eliminated in consolidation
and minority interests have been established for the outside partners'
interests. The Company reports on a fiscal year which will 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. The
Company's 1999 fiscal year will include a 53rd week, thereby increasing the
fourth quarter to seventeen weeks.
(c) REVENUE RECOGNITION -- Franchise fees are generated from the sale of
rights to develop, own and operate restaurants. Such fees are based on the
number of potential restaurants in a specific area which the franchisee agrees
to develop pursuant to the terms of the franchise agreement between the Company
and the franchisee and are recognized as income on a pro rata basis when
substantially all of the Company's obligations per location are satisfied,
generally at the opening of the restaurant. Franchise fees are nonrefundable.
The Company receives royalty fees from franchisees based on a percentage of
each restaurant's gross revenues. Royalty fees are recognized as earned.
(d) CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with an original maturity of less than three months to be
cash
F-43
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
equivalents. Restricted Cash consists of cash on deposit with various financial
institutions as collateral to support the Company's obligations to certain
states for potential workers' compensation claims. This cash is not available
for the Company's use until such time that the respective states permit its
release.
(e) RECEIVABLES -- Receivables consist primarily of franchise fees,
royalties and notes due from franchisees and receivables from the sale of
MRP's. Allowances for doubtful receivables were $2.2 million at March 22, 1999
and $2.3 million at December 28, 1998.
(f) INVENTORY -- Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market.
(g) DEFERRED LOAN COSTS -- Deferred loan costs incurred in connection with
the Company's November 22, 1996 restructure of its primary credit facility and
the mortgages payable to FFCA Acquisition Corporation (see Note 3) are being
amortized on the effective interest method.
(h) IMPAIRMENT OF LONG LIVED ASSETS -- The Company accounts for tangible
property and intangibles under the Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" (SFAS 121), which requires the write-down of certain
intangibles and tangible property associated with under performing sites to the
level supported by the forecasted discounted cash flow in cases where
undiscounted cash flow projected does not exceed the book value of the related
assets.
(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. P & E under capital leases are stated at their
fair value at the inception of the lease. Depreciation and amortization are
computed on straight-line method over the estimated useful lives of the assets.
Property held for sale includes various excess restaurant facilities and land.
The aggregate carrying value of property and equipment held for sale is
periodically reviewed and adjusted downward to market value, when appropriate.
(j) INTANGIBLES -- Goodwill and other intangibles are being amortized over
20 years and 3 to 7 years, respectively, on a straight-line basis.
(k) INCOME TAXES -- The Company accounts for income taxes under the
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, deferred
tax assets and liabilities are recognized
F-44
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date (see Note 5).
(l) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- The balance
sheets as of March 22, 1999 and December 28, 1998 reflect the fair value
amounts which have been determined using available market information and
appropriate valuation methodologies. However, considerable judgement is
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. The carrying amounts of
cash and cash equivalents, receivables, accounts payable, and long-term debt
are a reasonable estimate of their fair value. 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.
(m) EARNINGS PER SHARE -- The Company calculates basic and diluted
earnings (loss) per share in accordance with the Statement of Financial
Accounting Standard No. 128, "Earnings per Share", which is effective for
periods ending after December 15, 1997.
(n) SEGMENT REPORTING -- SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The Company operates primarily in the quick-service restaurant
industry. The Company's Champion Modular Restaurants division does not have a
material effect upon the Company's financial statements.
(o) 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
F-45
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
(p) RECLASSIFICATIONS -- Certain amounts in the 1998 financial statements
have been reclassified to conform to the 1999 presentation.
NOTE 2: LIQUIDITY
The Company has a working capital deficit of $7.0 million at March 22,
1999. It is anticipated that the Company will continue to have a working
capital deficit since approximately 88% of the Company's assets are long-term
(primarily property, equipment, and intangibles), and since all operating trade
payables, accrued expenses, and property and equipment payables are current
liabilities of the Company. At March 22, 1999, a significant portion ($17.4
million) of the Company's long-term debt relates to the Company's Restated
Credit Agreement which originally was to mature on July 31, 1999. During March
and April 1999, Santa Barbara Restaurant Group, Inc. ("SBRG"), a company which
is an 8.2% owner of Rally's Hamburgers Inc., ("Rally's") acquired approximately
$4.9 million of debt due to three members of the lender group. The terms
associated with the SBRG debt are identical to terms that other participants of
the lender group have pursuant to the Restated Credit Agreement. On March 24,
1999, SBRG and the other remaining members of the lender group agreed to an
extension of the maturity date to April 30, 2000. As of March 22, 1999,
Fidelity National Financial, Inc. owned 31.1% of the outstanding common stock
of SBRG.
See Note 6: "Merger" for discussion of the Merger with Rally's. Rally's
has a working capital deficit of $5.9 million at March 22, 1999. It is
anticipated that Rally's will continue to have a working capital deficit since
approximately 89% of Rally's assets are long-term (primarily property,
equipment, investment in affiliate and intangibles), and since all operating
trade payables, accrued expenses, and property and equipment payables are
current liabilities of Rally's. At March 22, 1999, a significant portion ($53.5
million) of Rally's long-term liabilities relates to the Rally's Senior Notes
to mature in June, 2000. Rally's is currently evaluating alternatives for
refinancing or repaying the outstanding Senior Notes that mature in June 2000.
These alternatives include a sale-leaseback transaction or additional mortgage
financing. Other options include the sale of certain Rally-owned markets to
current or new franchisees in transactions that would provide immediate funds
to reduce debt and would also provide a continued source of income through
future royalties.
F-46
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 22, DECEMBER 28,
1999 1998
----------- -------------
<S> <C> <C>
Note payable under Restated Credit Agreement at
13% interest due each 28 day period, originally maturing
July 31, 1999, subsequently extended to April 30, 2000
(see Note 2) ............................................... $17,432 $17,432
Notes payable due at various dates secured by building and
equipment with interest rates primarily ranging from
9.0% to 11.32%, payable monthly ............................ 1,068 1,214
Mortgages payable to FFCA Acquisition Corporation
secured by 24 Company-owned restaurants,
payable in aggregate monthly installments of $93,213,
including interest at 9.5% ................................. 9,972 10,000
Other, at interest rates ranging from 7.0% to 10.0% ......... 965 997
------- -------
Total long-term debt and capital lease obligations .......... 29,437 29,643
Less current installments ................................... 1,332 998
------- -------
Long-term debt, less current maturities ..................... $28,105 $28,645
======= =======
</TABLE>
NOTE 4: INCOME TAXES
The Company recorded an income tax benefit of $422,000 for the quarter
ended March 22, 1999 and income tax expense of $150,000 for the quarter ended
March 23, 1998, or 38.0% of the respective loss or income before income taxes.
The Company then recorded a valuation allowance of $422,000 against deferred
income tax assets for the quarter ended March 22, 1999 (reversed $150,000 in
valuation allowances for the quarter ended March 23, 1998). The Company's total
valuation allowances of approximately $32.8 million as of March 22, 1999 is
maintained on deferred tax assets which the Company has not determined to be
more likely than not realizable at this time. Subject to a review of the tax
assets, these valuation allowances will be reversed during periods in the
future in which the Company records pre-tax income, in amounts necessary to
offset any then recorded income tax expenses attributable to such future
periods.
NOTE 5: RELATED PARTIES
Effective November 30, 1997 the Company entered into a Management Services
Agreement with Rally's whereby Checkers is providing accounting, technology,
and other functional and management services to predominantly all of the
operations of Rally's. The Management Services Agreement carries a term of
seven years, terminable upon the mutual consent of the parties. The Company
will receive fees from Rally's relative to the shared departmental costs times
the respective store ratio. Checkers increased its corporate
F-47
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 5: RELATED PARTIES--(CONTINUED)
and regional staff in late 1997 and 1998 in order to meet the demands of the
agreement, but management believes the income generated by this agreement has
enabled Checkers to attract the management staff with expertise necessary to
more successfully manage and operate both companies at significantly reduced
costs to both entities. During the quarters ended March 22, 1999 and March 23,
1998, the Company charged Rally's $1.7 million and $913,000, respectively in
accordance with the Management Service Agreement. Effective April 6, 1999, the
Company began sharing the services of the Chief Financial Officer with Rally's.
NOTE 6: MERGER
On January 29, 1999, Checkers and Rally's announced the signing of a
definitive merger agreement ("the Merger") pursuant to which Rally's will merge
into Checkers in an all stock transaction. The Merger agreement provides that
each outstanding share of the Rally's stock will be exchanged for 1.99 shares
of Checkers stock. Immediately following the Merger and a one-for-twelve
reverse split, there will be approximately 9,387,859 common shares outstanding.
In addition, each of Rally's outstanding stock options (5.6 million as of March
22, 1999) will be exchanged for options at the exchange rate of 1 to 1.99 of
Checkers. The approximate 19.1 million shares of Checkers common stock which
Rally's owns will be retired as a result of the Merger. Checkers and Rally's
have each received investment bankers' opinions as to the fairness of the
exchange rate used in the Merger. The Merger transaction is subject to certain
approvals, including but not limited to approval by the shareholders of
Checkers and Rally's and the holders of Rally's Senior Notes and is expected to
close in the third quarter of fiscal year 1999.
At March 22, 1999, Rally's owned 19,130,930 shares (26.06 percent) of the
outstanding common stock of Checkers and public shareholders owned the
remaining 54,277,177 shares of Checkers common stock. Checkers will issue
58,377,134 shares of its common stock to Rally's shareholders in exchange for
all the outstanding common stock of Rally's (29,335,243 outstanding shares) at
a 1 to 1.99 exchange ratio. After the transaction, Rally's shareholders will
own 58,377,134 shares (51.8 percent of the outstanding common stock of the new
Checkers) and the remaining 54,277,117 shares (48.2 percent of Checker common
stock) will then be held by then current shareholders of Checkers.
The Merger transaction will be accounted for under the purchase method of
accounting and will be treated as a reverse acquisition as the stockholders of
Rally's will receive the larger portion (51.8%) of the voting interests in the
combined enterprise. Accordingly, Rally's is considered the acquirer for
accounting purposes and therefore, Checkers' assets and liabilities will be
recorded based upon their fair market value.
F-48
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 6: MERGER--(CONTINUED)
The following unaudited pro forma condensed consolidated financial data
sets forth certain pro forma financial information giving effect to the Merger.
The pro forma financial information is based on, and should be read in
conjunction with the historical consolidated financial statements of each of
the companies and the notes related thereto.
F-49
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 6: MERGER--(CONTINUED)
The pro forma condensed consolidating balance sheet gives effect to the
issuance of 58,377,134 shares of the Checkers common stock in exchange for
29,335,243 shares of Rally's common stock, based upon the per share price of the
Checkers common shares at $0.531 and a one-for-twelve reverse split, assuming
the Merger had occurred March 22, 1999:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
MARCH 22, MARCH 22, PRO FORMA
1999 1999 ADJUSTMENTS MERGED
-------- -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS:
Current assets ............................... $ 11,861 $ 13,323 $ $ 25,184
Property and equipment, net .................. 77,162 60,290 137,452
Investment in affiliate, including
net goodwill of $11,717, net of
accumulated amortization ................... -- 22,567 A) (22,567) --
Intangibles, net of accumulated
amortization ............................... 9,916 23,402 G) 19,391 52,709
Other assets, net of accumulated
amortization ............................... 1,232 2,620 3,852
-------- -------- --------- ---------
$100,171 $122,202 $ (3,176) $ 219,197
======== ======== ========= =========
LIABILITIES:
Current liabilities .......................... 18,824 19,204 B) 1,500 39,528
Senior notes, net of discount,
less current maturities .................... -- 53,543 53,543
Long-term debt and capital lease
obligations, less
current maturities ......................... 28,853 12,588 41,441
Minority interests in joint ventures ......... 674 -- 674
Other long-term liabilities .................. 8,323 3,951 12,274
-------- -------- --------- ---------
Total liabilities .......................... 56,674 89,286 1,500 147,460
STOCKHOLDERS' EQUITY:
Preferred stock .............................. -- -- --
Common stock ................................. 73 2,961 C) (3,025) 9
Additional paid-in capital ................... 121,579 97,346 D) (81,914) 137,011
Retained deficit ............................. (77,755) (65,283) E) 77,755 (65,283)
-------- -------- --------- ---------
43,897 35,024 (7,184) 71,737
Less treasury stock, at cost ................. (400) (2,108) F) 2,508 --
-------- -------- --------- ---------
Net stockholders' equity ................... 43,497 32,916 (4,676) 71,737
-------- -------- --------- ---------
$100,171 $122,202 $ (3,176) $ 219,197
======== ======== ========= =========
</TABLE>
F-50
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 6: MERGER--(CONTINUED)
- ----------------
A) Pro forma adjustment to record the elimination of Rally's original
investment of $10,850 in Checkers common stock and the reclassification to
intangibles of $11,717 of goodwill associated with Rally's investment in
Checkers.
B) Pro forma adjustment to accrue estimated transaction costs related to the
Merger.
C) Pro forma adjustment to record the issuance of 58,377 shares of Checkers
common stock in exchange for Rally's outstanding shares, $58; to eliminate
the previous common stock account of Rally's, ($2,961); to eliminate the
par value associated with Rally's investment in Checkers common stock,
($19); and to effect a one-for-twelve reverse split, ($103).
D) Pro forma adjustments, in accordance with reverse acquisition accounting,
to record the fair value of the outstanding 54,277 shares of common stock
of Checkers valued at $0.531 per share, $28,767 which is net of related par
value; eliminate the previous treasury stock of Rally's, ($2,108);
eliminate the previous additional paid-in capital account of Checkers,
($121,579); to reduce additional paid in capital for the par value of the
58,377 shares issued to Rally's shareholders, ($58); to eliminate the
previous common stock account of Rally's, $2,961; to attribute a $10,000
estimated fair value to the outstanding Checkers stock options and
warrants, and effect a one-for-twelve reverse split, $103.
E) Pro forma adjustments to record the elimination of the retained deficit
account of Checkers.
F) Pro forma adjustment to eliminate the previous treasury stock of Checkers,
$400; as well as the treasury stock of Rally's, $2,108 which is cancelled
as a result of the Merger.
G) Pro forma adjustment to record goodwill of $7,674 associated with the
Merger and the reclassification of $11,717 of goodwill associated with
Rally's original investment in Checkers (see A).
NOTES: The final adjustments to value the outstanding Checkers options and
warrants as well as final adjustments to the fair value of assets and
liabilities as a result of the Merger will not be known until the merger is
completed.
F-51
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 6: MERGER--(CONTINUED)
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
TWELVE WEEKS TWELVE WEEKS
ENDED ENDED
MARCH 22, MARCH 22, PRO FORMA
1999 1999 ADJUSTMENTS MERGED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
TOTAL REVENUES .................................. $ 31,713 $30,119 $ 61,832
-------- ------- ----- --------
COSTS AND EXPENSES:
Restaurant operating costs ..................... 26,434 24,206 50,640
Advertising expense ............................ 1,912 1,801 3,713
Other expenses ................................. 98 352 450
Other depreciation and amortization ............ 454 570 H) 194 1,218
General and administrative expense ............. 2,917 3,081 I) (88) 5,910
-------- ------- ------ --------
Total cost and expenses ....................... 31,815 30,010 106 61,931
-------- ------- ------ --------
Operating (loss) income ....................... (102) 109 (106) (99)
Other income (expense):
Interest income ................................ 58 188 246
Gains on bond repurchases ...................... -- 256 256
Loss on investment in affiliate ................ -- (434) J) 434 --
Interest expense ............................... (1,181) (1,685) (2,866)
-------- ------- ------ --------
Loss before minority interest,
income taxes .................................. (1,225) (1,566) 328 (2,463)
Minority interests in (losses) earnings ......... (114) -- (114)
-------- ------- ------ --------
Loss before income taxes ........................ (1,111) (1,566) 328 (2,349)
-------- ------- ------ --------
Income taxes .................................... -- 37 37
-------- ------- ------ --------
Net (loss) earnings ............................. $ (1,111) $(1,603) $ 328 $ (2,386)
======== ======= ====== ========
Comprehensive (loss) earnings ................... $ (1,111) $(1,603) $ 328 $ (2,386)
======== ======= ====== ========
Net (loss) income per common share (basic
and diluted) .................................. $ (0.02) $ (0.05) $ (0.25)
======== ======= ========
Weighted average number of common
shares (basic and diluted) .................... 73,408 29,335 K) 9,388
======== ======= ========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded
on Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment
in Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
F-52
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)--(CONTINUED)
NOTE 6: MERGER--(CONTINUED)
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
-------------- -------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total Revenues ................................... $145,708 $144,952 $ 290,660
-------- -------- ------ ---------
COSTS AND EXPENSES:
Restaurant operating costs ...................... 119,416 113,782 233,198
Advertising expense ............................. 6,921 9,853 16,774
Other expenses .................................. 516 647 1,163
Other depreciation and amortization ............. 2,275 2,503 H) 842 5,620
General and administrative expense .............. 13,309 13,404 I) (380) 26,333
SFAS 121 provisions ............................. 2,953 3,362 6,315
-------- -------- ------ ---------
Total cost and expenses ........................ 145,390 143,551 462 289,403
-------- -------- ------ ---------
Operating income (loss) ........................ 318 1,401 (462) 1,257
Other income (expense):
Interest income ................................. 272 480 752
Loss on investment in affiliate ................. -- (2,019) J) 2,019 --
Interest expense ................................ (6,007) (7,145) -- (13,152)
-------- -------- ------ ---------
Loss before minority interest and income tax
expense (benefit) ............................... (5,417) (7,283) 1,557 (11,143)
Minority interests in operations of joint ventures (73) -- (73)
-------- -------- ------ ---------
Loss before income tax expense (benefit) ......... (5,344) (7,283) 1,557 (11,070)
Income tax expense (benefit) ..................... -- 252 252
-------- -------- ------ ---------
Net (loss) earnings .............................. (5,344) (7,535) 1,557 (11,322)
======== ======== ====== =========
Comprehensive (loss) earnings .................... $ (5,344) $(7,535) $1,557 $ (11,322)
======== ======== ====== =========
Net loss per common share (basic and diluted) $ (0.07) $ (0.28) $ (1.21)
======== ======== =========
Weighted average number of common shares
(basic and diluted) ............................. 73,388 27,170 K) 9,388
======== ======== =========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded
on Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment
in Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
F-53
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Rally's Hamburgers, Inc.:
We have audited the consolidated balance sheet of Rally's Hamburgers, Inc.
and subsidiaries as of December 28, 1998 and the related consolidated statement
of operations and comprehensive income, shareholders' equity and cash flows for
the year ended December 28, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rally's
Hamburgers, Inc. and subsidiaries as of December 28, 1998 and the results of
their operations and their cash flows for the year ended December 28, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Tampa, Florida
February 26, 1999
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rally's Hamburgers, Inc.:
We have audited the accompanying consolidated balance sheet of Rally's
Hamburgers, Inc. (a Delaware corporation) and subsidiaries as of December 28,
1997 and the related consolidated statements of operations and comprehensive
income, stockholders' equity and cash flows for each of the two fiscal years in
the period ended December 28, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of Checkers Drive-In
Restaurants, Inc. (Checkers), the investment in which is reflected in the
accompanying financial statements using the equity method of accounting. The
investment in Checkers represents 19 percent of the Company's total assets as
of December 28, 1997, and the equity in its net loss represents 16 percent of
the Company's 1997 net loss. The statements of Checkers were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to the amounts included for Checkers, is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Rally's Hamburgers, Inc. and subsidiaries
as of December 28, 1997, and the results of their operations and their cash
flows for each of the two fiscal years in the period ended December 28, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
February 27, 1998
F-55
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 4,601 4,008
Restricted cash ........................................... 1,880 1,380
Investments ............................................... 47 446
Accounts receivable, net .................................. 2,597 1,949
Notes receivable, net ..................................... 153 --
Inventory ................................................. 1,017 1,052
Prepaid expenses and other current assets ................. 310 1,057
Property and equipment held for sale ...................... 1,131 1,076
-------- --------
Total current assets .................................. 11,736 10,968
Property and equipment, net ................................ 61,914 68,067
Investment in affiliate, net of accumulated amortization ... 23,001 24,988
Notes receivable, net ...................................... 375 872
Goodwill, net of accumulated amortization of
$3,062 and $2,811, respectively .......................... 8,477 9,913
Reacquired franchise and territory rights, net of
accumulated amortization of $4,129
and $2,991, respectively ................................. 11,620 12,758
Other intangibles, net of accumulated
amortization of $1,470
and $2,894, respectively ................................. 3,783 4,334
Other assets, net of accumulated
amortization of $285 and
$1,400, respectively ..................................... 2,400 2,397
-------- --------
$123,306 $134,297
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-56
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ................................................... $ 3,686 $ 7,076
Accrued wages, salaries and benefits ............................... 1,825 2,262
Reserves for restaurant relocations and abandoned sites ............ 3,148 1,665
Accrued liabilities ................................................ 5,716 8,596
Current maturities of long-term debt and obligations
under capital lease .............................................. 1,490 1,194
--------- ---------
Total current liabilities ..................................... 15,865 20,793
Senior notes, net of discount of $59 and $321, respectively......... 55,768 58,005
Long-term debt, less current maturities ............................ 7,819 4,017
Obligations under capital lease, less current maturities ........... 5,230 5,228
Long-term reserves for restaurant relocations
and abandoned sites .............................................. 2,275 3,655
Other noncurrent liabilities ....................................... 1,830 1,086
--------- ---------
Total liabilities ............................................. 88,787 92,784
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value, authorized
5,000,000 shares, issued, none at
December 28, 1998 and 45,667 at
December 28, 1997 ............................................... -- 5
Common stock, $.10 par value, authorized
50,000,000 shares, issued 29,608,688 at
December 28, 1998 and 24,836,900 at
December 28, 1997 ................................................ 2,961 2,484
Additional paid-in capital ......................................... 97,346 97,277
Retained deficit ................................................... (63,680) (56,145)
--------- ---------
36,627 43,621
Less treasury stock, at cost, 273,445 shares ....................... (2,108) (2,108)
--------- ---------
Net stockholders' equity ...................................... 34,519 41,513
--------- ---------
$ 123,306 $ 134,297
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-57
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales ......................................... $139,602 $139,348 $156,445
Franchise revenues and fees .............................. 4,636 4,838 5,867
Owner fee income ......................................... 714 744 440
-------- -------- --------
Total revenues ........................................... $144,952 $144,930 $162,752
-------- -------- --------
COSTS AND EXPENSES:
Restaurant food and paper costs .......................... 44,352 44,997 53,712
Restaurant labor costs ................................... 42,570 41,464 48,634
Restaurant occupancy expense ............................. 7,333 6,487 7,093
Restaurant depreciation and amortization ................. 7,234 7,069 7,744
Other restaurant operating expense ....................... 12,293 12,782 14,871
Advertising expense ...................................... 9,853 10,255 7,767
Owner depreciation ....................................... 647 627 400
Other depreciation and amortization ...................... 2,503 2,623 2,338
General and administrative expenses ...................... 13,404 15,125 16,132
Impairment of long-lived assets .......................... 1,727 -- 824
Losses on assets to be disposed of ....................... 1,635 158 (804)
-------- -------- --------
Total costs and expenses .............................. $143,551 $141,587 $158,711
-------- -------- --------
Operating income ...................................... 1,401 3,343 4,041
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income .......................................... 480 750 614
Loss on investment in affiliate .......................... (2,019) (720) --
Interest expense ......................................... (7,145) (7,434) (8,622)
-------- -------- --------
Loss before income tax expense .......................... (7,283) (4,061) (3,967)
Income tax expense (benefit) ............................. 252 455 (675)
-------- -------- --------
Net loss before extraordinary item .................... $ (7,535) $ (4,516) $ (3,292)
Extraordinary item (net of tax expense of $1,350)......... -- -- $ 5,280
-------- -------- --------
Net (loss) income ..................................... $ (7,535) $ (4,516) $ 1,988
======== ======== ========
Comprehensive (loss) income ............................. $ (7,535) $ (4,516) $ 1,988
======== ======== ========
Net loss per share before extraordinary item ............. $ (0.28) $ (0.22) $ (0.19)
======== ======== ========
Extraordinary item ....................................... -- -- $ 0.31
======== ======== ========
Net (loss) income per common share
(basic and diluted) .................................... $ (0.28) $ (0.22) $ 0.12
======== ======== ========
Weighted average number of common shares
outstanding (basic and diluted) ........................ 27,170 20,709 17,007
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-58
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PREFERRED TREASURY PAID-IN EARNINGS TOTAL
STOCK STOCK STOCK CAPITAL (DEFICIT) EQUITY
-------- ----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 ................. $1,593 $ -- $ (2,108) $60,804 $ (53,617) $ 6,672
Issuance of common stock ...................... 3 -- -- 74 -- 77
Shareholders rights offering .................. 483 -- -- 9,975 -- 10,458
Compensatory stock options
and warrants ................................ -- -- -- 170 -- 170
Net income .................................... 1,988 1,988
------ ---- -------- ------- --------- --------
Balances at December 29, 1996 ................. 2,079 -- (2,108) 71,023 (51,629) 19,365
Issuance of common stock ...................... 14 -- -- 264 -- 278
Compensatory stock options
and warrants ................................ -- -- -- 957 -- 957
Issuance of common stock and
preferred to acquire investment
in affiliate ................................ 391 5 -- 25,033 -- 25,429
Net loss ...................................... -- -- -- -- (4,516) (4,516)
------ ---- -------- ------- --------- --------
Balances at December 28, 1997 ................. 2,484 5 (2,108) 97,277 (56,145) 41,513
Exercise of 49,080 employee stock
options, net of $2 issuance costs............ 4 -- -- 83 -- 87
Issuance of 156,008 shares of common
stock in settlement of litigation, net of
$10 issuance costs........................... 16 -- -- 349 -- 365
Conversion of preferred shares to
common stock ................................ 457 (5) -- (452) -- --
Other equity funding, net ..................... -- -- -- 89 -- 89
Net loss ...................................... -- -- -- -- (7,535) (7,535)
------ ---- -------- ------- --------- --------
Balances at December 28, 1998 ................. $2,961 $ -- $ (2,108) $97,346 $ (63,680) $ 34,519
====== ==== ======== ======= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-59
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .......................................... $ (7,535) $ (4,516) $ 1,988
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Depreciation and amortization ............................. 10,386 10,319 10,482
Impairment of long-lived assets ........................... 1,727 -- 824
Provisions for losses on assets to be disposed of ......... 1,635 158 (804)
Gain on bond repurchase ................................... (163) -- (6,630)
Amortization of bond costs and discounts .................. 390 398 395
Provisions for (recovery of) bad debt ..................... 593 (392) 968
Warrant expense ........................................... -- 940 20
Loss, net of amortization, on investment in affiliate ..... 2,019 720 --
Loss on disposal of property & equipment .................. 211 1,025 --
Changes in assets and liabilities:
Increase in accounts receivable ........................... (1,635) (331) (306)
Decrease in notes receivable .............................. 219 256 312
Decrease (increase) in inventory .......................... 86 (196) 262
Decrease (increase) in prepaid expenses and other
current assets .......................................... 979 (613) (34)
Decrease (increase) in other assets ....................... 45 221 (121)
(Decrease) increase in accounts payable ................... (3,390) 1,081 (3,889)
Decrease in accrued liabilities ........................... (3,082) (793) (2,807)
-------- -------- ---------
Net cash provided by operating activities ................ $ 2,485 $ 8,277 $ 660
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................... (2,290) (6,845) (2,306)
Acquisitions of restaurants ................................ (855) (2,172) --
Decrease in investments .................................... 399 1,512 2,975
Proceeds from sale of property and equipment ............... 615 1,872 4,392
Cash paid for additional investment in affiliates .......... (32) -- --
-------- -------- ---------
Net cash (used in) provided by
investing activities .................................. $ (2,163) $ (5,633) $ 5,061
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in restricted cash ..................... (500) 269 (966)
Repayments of senior notes ................................. (2,168) -- (19,612)
Proceeds from issuance of long-term debt ................... 4,300 -- --
Deferred loan costs incurred ............................... (290) -- --
Principal payments on long-term debt ....................... (1,247) (1,488) (2,204)
Net proceeds from issuance of common stock ................. 87 298 10,535
Other equity funding ....................................... 89 -- --
-------- -------- ---------
Net cash provided by (used in) financing activities ...... $ 271 $ (921) $ (12,247)
-------- -------- ---------
Net increase (decrease) in cash .......................... 593 1,723 (6,526)
CASH AT BEGINNING OF PERIOD ................................. 4,008 2,285 8,811
-------- -------- ---------
CASH AT END OF PERIOD ....................................... $ 4,601 $ 4,008 $ 2,285
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
F-60
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) FINANCIAL STATEMENT PRESENTATION AND ORGANIZATION -- The accompanying
consolidated financial statements include Rally's Hamburgers, Inc. and its
wholly-owned subsidiaries. Rally's Hamburgers, Inc. and its subsidiaries are
collectively referred to herein as the context requires as "Rally's" or the
"Company". The investment in affiliate, which is owned more than 20% and less
than 50% represents an investment in Checkers Drive-In Restaurants, Inc.
("Checkers") and is recorded on the equity method (See Note 2). All significant
intercompany accounts and transactions have been eliminated.
As of December 29, 1997 the Company changed from a fiscal year ending on
the Sunday closest to December 31st to a fiscal year ending on the Monday
closest to December 31st. This resulted in an extra day in fiscal 1998. The
Company also changed its quarterly reporting periods from four 13-week quarters
to three 12-week quarters and a 16-week fourth quarter.
Rally's is one of the largest double drive-thru restaurant chains in the
United States. At December 28, 1998, the Company's system included 475
restaurants in 18 states, primarily in the Midwest and the Sunbelt, comprised
of 226 Company-owned and operated, 223 franchised and 26 Company-owned
restaurants in Western markets which are operated as Rally's restaurants by CKE
Restaurants, Inc. ("CKE"), a significant shareholder of the Company, under an
operating agreement which began in July 1996. Two additional Company-owned
stores covered by the operating agreement have been converted to the Carl's Jr.
format and are not included in the above store count. The Company's restaurants
offer high quality fast food. The Company serves the drive-thru and take-out
segments of the quick-service restaurant industry. The Company opened its first
restaurant in January 1985 and began offering franchises in November 1986.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates, when actual
transactions anticipated are consummated. Certain of the most significant
estimates include useful lives assigned to depreciable/amortizable assets, fair
value less costs to sell of long-lived assets held for sale, fair value of
long-lived assets held for use, future net occupancy costs related to
closed/disposable properties, accruals for the Company's self-insured and high
deductible insurance programs, and disclosures regarding commitments and
contingencies.
b) REVENUE RECOGNITION -- The Company recognizes franchise fees as income
on the date a restaurant is opened, at which time the Company has performed its
obligations
F-61
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
relating to such fees. Area development fees are generated from the awarding of
exclusive rights to develop, own and operate Rally's restaurants in certain
geographic areas pursuant to an Area Development Agreement. Such fees are
recognized as income on a pro rata basis as the restaurants are opened or upon
the cancellation or expiration of an Area Development Agreement. Both franchise
fees and area development fees are non-refundable. The Company also receives
royalty fees from franchisees in the amount of 4% of each franchised
restaurant's gross revenues, as defined in the Franchise Agreement. Royalty
fees are recognized as earned.
c) RECEIVABLES -- Receivables consist primarily of royalties and notes due
from franchisees and advances to Rally's National Advertising Fund. A
rollforward of the allowances for doubtful receivables is as follows:
<TABLE>
<CAPTION>
ADDITIONS
----------------------------
BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED TO BALANCE AT
DESCRIPTION YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF YEAR
- ----------- ------------ ----------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 29, 1996
Accounts receivable ......... $1,375 $ 751 $ (81) $ 339 $1,706
Notes receivable ............ 542 200 81 (30) 853
------ ------ ------ ------ ------
$1,917 $ 951 $ 0 $ 309 $2,559
====== ====== ====== ====== ======
Year Ended December 28, 1997
Accounts receivable ......... $1,706 $ (180) $ (153) $ 942 $ 431
Notes receivable ............ 853 (212) 148 558 231
------ ------ ------ ------ ------
$2,559 $ (392) $ (5) $1,500 $ 662
====== ====== ====== ====== ======
Year Ended December 28, 1998
Accounts receivable ......... $ 431 $ 471 $ 0 $ 259 $ 643
Notes receivable ............ 231 95 0 0 326
------ ------ ------ ------ ------
$ 662 $ 566 $ 0 $ 259 $ 969
====== ====== ====== ====== ======
</TABLE>
d) PROPERTY AND EQUIPMENT -- Property and equipment are depreciated using
the straight-line method for financial reporting purposes and accelerated
methods for income tax purposes. The estimated useful lives for financial
reporting purposes are the shorter of 20 years or the lease life plus available
renewal options for buildings and property held under capital leases, eight
years for furniture and equipment, five years for software and computer systems
and the life of the lease for leasehold improvements. Expenditures for major
renewals and betterments are capitalized while expenditures for maintenance and
repairs are expensed as incurred. Property and equipment held for sale includes
various excess
F-62
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
restaurant facilities and land. The aggregate carrying value of property and
equipment held for sale is periodically reviewed and adjusted downward to
market value, when appropriate.
e) INVENTORY -- Inventory is valued at latest invoice cost which
approximates the lower of first-in, first-out cost or market.
f) CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents. Restricted Cash consists of cash on deposit with various financial
institutions as collateral to support the Company's obligations to certain
states for potential workers' compensation claims. This cash is not available
for the Company's use until such time that the respective states permit its
release. Cash equivalents at December 28, 1997 and December 28, 1998 were
approximately $2.3 million and $1.5 million, respectively.
g) INVESTMENTS -- All of the Company's investment securities are deemed as
"available-for-sale" under SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities". Accordingly, investments are reported at fair
value with unrealized holding gains and losses, excluding those losses
considered to be other than temporary, reported as a net amount in a separate
component of shareholders' equity. Provisions for declines in market value are
made for losses considered to be other than temporary. Realized gains or losses
from the sale of investments are based on the specific identification method.
No unrealized gains or losses were recorded for any period presented, due to
the quoted market prices of the Company's investments approximating the cost.
Investments consisted of mortgage-backed securities at December 28, 1998 and
December 28, 1997 of $47,000 and $446,000, respectively.
h) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Interest paid .............................. $6,714 $7,013 $8,639
Income taxes paid .......................... $ 222 $ 545 $ 983
Capital lease obligations incurred ......... $ 627 $ 386 $ 111
</TABLE>
On December 18, 1997 Rally's acquired approximately 26.33% of the
outstanding common stock of Checkers in exchange for common and preferred stock
Rally's valued at $25.4 million (see Note 2).
F-63
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
On April 24, 1998, the Company acquired two restaurants in settlement of
litigation with a former franchisee (see Note 2). On July 9, 1997, the Company
acquired from Arkansas Investment Group, Inc., substantially all the operating
assets employed in the franchisee Rally's restaurants (see Note 2). These
acquisitions were recorded as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Fair value of assets acquired ............ $ 949 $ 2,800 $ --
Issuance of common stock ................. (375) -- --
Issuance of note payable ................. (420) -- --
Utilization of bad debt and other reserves
previously established ................. 975 -- --
Cash paid ................................ (855) (2,200) --
------ -------- ----
Receivables forgiven ..................... $ 274 $ 600 $ --
====== ======== ====
</TABLE>
The Company recorded in 1996 approximately $547,000 in notes receivable
primarily as the result of the sale of five of its restaurants in Montgomery,
Alabama.
During fiscal 1996, 1997, and 1998, the Company accepted notes due within
two to five years, bearing interest at rates up to 12%, as previously specified
in the underlying franchise agreements in exchange for certain receivables from
franchisees in the aggregate amount of approximately $340,000 for 1996,
approximately $493,000 for 1997, and approximately $30,000 for 1998.
i) EARNINGS (LOSS) PER COMMON SHARE -- Basic earnings (loss) per common
share is calculated based upon the Company's reported income and the weighted
average common shares outstanding of 27,170, 20,709 and 17,007 for fiscal years
1998, 1997 and 1996, respectively. The income and average shares outstanding
for purposes of the computation of diluted earnings per share are the same as
for the computation of basic earnings per share. Potentially dilutive
convertible preferred stock, common stock warrants and common stock options
have no effect as they are anti-dilutive for all periods presented.
j) STOCK OPTIONS -- The Company utilizes the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation".
k) IMPAIRMENT OF LONG-LIVED ASSETS -- The Company accounts for long-lived
assets under the Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of" (SFAS 121) which requires the write-down of certain intangibles
and tangible property associated with
F-64
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
under performing sites. In applying SFAS No. 121 the Company reviewed all
stores that recorded losses in the applicable fiscal years and performed a
discounted cash flow analysis where indicated for each store based upon such
results projected over a ten or fifteen year period. This period of time was
selected based upon the lease term and the age of the building, which the
Company believes is appropriate based upon its limited operating history and
the estimated useful life of its restaurants. Impairments were recorded to
adjust the asset values to the amount recoverable under the discounted cash
flow analysis in the cases where the undiscounted cash flows were not
sufficient for full asset recovery, in accordance with SFAS No. 121. The effect
of applying SFAS No. 121 resulted in a reduction of property and equipment and
goodwill of $1.7 million in 1998, $-0- in 1997 and $824,000 in 1996.
l) INCOME TAXES -- The Company accounts for income taxes under the asset
or liability method whereby deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
m) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- The balance
sheets as of December 28, 1998 and December 28, 1997, reflect the fair value
amounts which have been determined, using available market information and
appropriate valuation methodologies. However, considerable judgement is
necessarily required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Cash and cash equivalents, receivables -- Due to the short maturity of
these items, the carrying amounts are a reasonable estimate of their fair
value.
Investments and Senior Notes -- The fair values of investments and Senior
Notes are based upon quoted market prices. At December 28, 1998 the carrying
value and fair value of Senior Notes was $55.8 million and $44.4 million,
respectively. At December 28, 1997, the carrying value and fair value of Senior
Notes was $58.0 million and $55.2 million, respectively.
F-65
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Long-term debt -- The fair value of long-term debt approximates the
carrying value due to all significant amounts bearing interest at rates which
are variable or approximate a rate estimated to be available currently.
n) GOODWILL, REACQUIRED FRANCHISE RIGHTS, OTHER INTANGIBLES AND OTHER
ASSETS -- Goodwill, reacquired franchise and territory rights, other
intangibles and other assets are being amortized using the straight-line method
over the following periods:
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD
-------------
<S> <C>
Goodwill .......................................... 5-25 years
Reacquired franchise and territory rights ......... 5-20 years
Other intangibles ................................. 3-25 years
Other assets....................................... 3-25 years
</TABLE>
Subsequent to the intangibles' acquisition, the Company evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill and other intangibles may warrant revision or
that the remaining balance of goodwill and other intangibles may not be
recoverable. When factors indicate that goodwill or other intangibles should be
evaluated for possible impairment, the Company utilizes the procedures as set
forth in SFAS No 121.
o) OWNER FEE INCOME AND DEPRECIATION -- Revenue received as a result of
the operating agreement with CKE is referred to as Owner fee income in the
accompanying consolidated financial statements. Depreciation expenses related
to the ongoing investment in the CKE-operated restaurants are referred to as
Owner depreciation in the accompanying consolidated financial statements.
p) ADVERTISING COSTS -- It is the Company's policy to expense advertising
costs as incurred.
q) RECLASSIFICATIONS -- Certain items in the 1997 and 1996 financial
statement have been reclassified to conform with the 1998 presentation.
NOTE 2: ACQUISITIONS
On July 9, 1997, the Company acquired from Arkansas Investment Group, Inc.
("AIGI") substantially all the operating assets employed in the operation of
AIGI's franchised Rally's restaurants for approximately $2.8 million. The cash
disbursed in payment of the purchase price was reduced by certain amounts owed
by AIGI to the Company. Actual cash disbursed was approximately $2.2 million.
In addition, the Company assumed five of AIGI's ground
F-66
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: ACQUISITIONS--(CONTINUED)
lease obligations, five of its ground and building lease obligations, and
entered into three additional ground leases. AIGI owned and operated a total of
ten Rally's restaurants in the Little Rock, Arkansas market. The acquisition of
the AIGI operating assets was accounted for as a purchase. The Company believes
that the $2.8 million represents the fair value of the acquired assets. The
impact on operations of this acquisition was not significant for any of the
periods presented, and therefore, proforma amounts are not presented giving
effect to this acquisition.
On December 18, 1997, the Company acquired approximately 19.1 million
shares of the common stock, $0.001 par value per share, of Checkers, pursuant
to that certain Exchange Agreement, dated as of December 8, 1997 (the "Exchange
Agreement"), between Rally's, CKE, Fidelity National Financial, Inc.
("Fidelity"), GIANT GROUP, LTD. ("GIANT") and the other parties named in the
Exchange Agreement. CKE, Fidelity and GIANT beneficially owned 5,278,015
shares, 2,759,788 shares and 3,136,849 shares, respectively, of Rally's common
stock prior to the consummation of the Exchange Agreement, approximately 23.9%,
12.7% and 15.2% of the then outstanding shares of Rally's common stock. In
addition, Terry Christensen, William Foley, II, David Gotterer, Andrew Puzder,
Burt Sugarman and C. Thomas Thompson, who are Directors of Rally's, were
parties to the Exchange Agreement. Mary Hart Sugarman, AJ Sugarman and Al
Sugarman, who also participated in the exchange, are related to Burt Sugarman.
In consideration of the acquisition of the Checkers shares, Rally's issued
3,909,336 shares of its common stock, $.10 par value per share, and 45,667
shares of its Series A Participating Preferred Stock, $.10 par value per share
with a combined value of $25.4 million. The Rally's preferred stock was
converted into 4,566,700 shares of Rally's common stock after approval of such
conversion by Rally's stockholders. The exchange ratio used to determine the
number of shares of Rally's common stock (including the shares to be issued
upon conversion of the Rally's preferred stock) issued pursuant to the Exchange
Agreement was based upon the average closing price of the Checkers common stock
and the Rally's common stock for the five trading days preceding the public
announcement of the proposed exchange on September 19, 1997. This stock
acquisition was accounted for as a long term asset under "Investment in
affiliate" using the equity method of accounting with an initial investment
value of $25.4 million, based upon the market value of the Rally's common
shares issued and issuable upon conversion of the Rally's preferred stock
issued. This investment represented a 26.33% interest in Checkers and was
recorded with an initial investment of $13.2 million and a goodwill (excess of
purchase price over fair value of assets acquired) of $12.2 million being
amortized over 20 years. Amortization expense related to this goodwill was
$627,000 in 1998 and $52,000 in 1997. The Company purchased an additional
30,000 shares of Checkers common stock in January 1998. As of December 28,
1998, the Company owned 26.06% of Checkers outstanding common stock.
F-67
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: ACQUISITIONS--(CONTINUED)
Summarized financial information of Checkers follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Condensed statement of operations data:
Total revenues .......................... $145,708 $ 143,894 $ 164,961
Operating income (loss) ................. 318 (3,977) (42,212)
Net loss ................................ (5,344) (12,186) (46,409)
Preferred dividends ..................... -- 696 --
Net loss to common shareholders ......... $ (5,344) $ (12,882) $ (46,409)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Condensed balance sheet data:
Current assets .................. $ 12,298 $ 13,872 $ 20,955
Non-current assets .............. 89,801 101,529 115,155
-------- -------- --------
$102,099 $115,401 $136,110
======== ======== ========
Current liabilities ............. $ 18,608 $ 28,025 $ 46,679
Non-current liabilities ......... 38,883 37,004 49,091
Stockholders' equity ............ 44,608 50,372 40,340
-------- -------- --------
$102,099 $115,401 $136,110
======== ======== ========
</TABLE>
In December 1994, the Company entered into two franchise agreements with
Kader Investments, Inc. ("Kader") for the development and operation of Rally's
Hamburgers restaurants in Anaheim, California and Tustin, California. The
Company assisted the franchisee in developing and opening the restaurants. On
November 27, 1996, Kader filed a six-count Complaint against Rally's in the
California Superior Court for Orange County (Case No. 772257) alleging material
misrepresentation, respondent superior, breach of contract, breach of the
implied covenant of good faith and fair dealing, fraud and unfair competition.
These claims arose out of allegations concerning Rally's offer and sale of two
franchises (under a two-store development agreement), and Rally's actions
during the term of the agreements. The Complaint sought as relief rescission of
the parties' franchise and development agreements; general damages of at least
$1.5 million and $1.4 million for the material misrepresentation and fraud
counts, respectively; general damages in unspecified amounts as to the other
counts; punitive damages in unspecified amounts; and attorneys' fees. The
Company filed an Answer, but on December 18, 1997 in settlement of the
litigation, the parties entered into a memorandum of understanding pursuant to
which the Company would purchase Kader's restaurants for total consideration
$1.9 million. The
F-68
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: ACQUISITIONS--(CONTINUED)
consideration consisted of $855,000 in cash, $274,000 in forgiveness of
accounts receivable, $375,000 in restricted stock and $420,000 in notes
payable. The transaction closed on April 24, 1998 and the action has been
dismissed.
NOTE 3: RESTAURANT CLOSURES AND OTHER
Certain charges in fiscal years 1998, 1997 and 1996 have been referred to
as Impairment of long-lived assets and Losses on assets to be disposed of.
These items represent estimates of the impact of management decisions, which
have been made at various points in time in response to the Company's sales and
profit performance and the then-current revenue building and profit enhancing
strategies.
During 1998, impairment expense of $1.7 million related to four under
performing restaurants was incurred. No additional restaurants were determined
to be impaired in 1997. During 1996, three restaurants, due to their continued
poor operating performance, were determined to be impaired, resulting in
charges of approximately $824,000. As required by the SFAS 121, the Company
will continue to periodically review its assets for impairment where
circumstances indicate that such impairment may exist.
During 1998, the Company closed five restaurants, resulting in the
recording of losses on assets held for sale of $713,000 ($249,000 for fixed
asset write-downs and $464,000 for future occupancy costs). Also in 1998, other
losses recorded upon the disposal of prior years closures was $172,000 and
losses on assets to be disposed of for the continued occupancy costs of other
prior years closures was $750,000.
During 1997, the Company recorded provisions of $33,000 and $199,000 to
write-off leasehold improvements and future rental costs associated with the
Louisville corporate office and regional offices. Additionally in 1997, the
Company recorded gains on held for sale properties of $74,000. During 1996, a
reduction of $891,000 was recorded in surplus property reserves related to
management's decision to re-open three units previously closed and to continue
to operate a fourth unit that had been designated for closure, offset by the
loss on sale of assets of $87,000.
F-69
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: RESTAURANT CLOSURES AND OTHER--(CONTINUED)
The following summarizes the activities in the reserves for restaurant
relocations and abandoned sites as well as the activity associated with
impairments of long-lived assets.
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO CASH OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES END OF YEAR
- ------------------------------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 28, 1998
Impairment of long-lived
assets .................. $ -- $1,727 $ -- $ (1,727) $ --
Losses on assets to be
disposed of ............. 4,558 1,635 (939) 169 5,423
------ ------ -------- -------- ------
$4,558 $3,362 $ (939) $ (1,558) $5,423
====== ====== ======== ======== ======
Year Ended December 28, 1997
Impairment of long-lived
assets .................. $ -- $ -- $ -- $ -- $ --
Losses on assets to be
disposed of ............. 5,845 158 (1,486) 41 4,558
------ ------ -------- -------- ------
$5,845 $ 158 $ (1,486) $ 41 $4,558
====== ====== ======== ======== ======
Year Ended December 29, 1996
Impairment of long-lived
assets .................. $ -- $ 824 $ -- $ (824) $ --
Losses on assets to be
disposed of ............. 9,675 (804) (3,830) 804 5,845
------ ------ -------- -------- ------
$9,675 $ 20 $ (3,830) $ (20) $5,845
====== ====== ======== ======== ======
</TABLE>
The ending balance each year in the reserves for restaurant relocations
and abandoned sites consists of the Company's estimates for the ongoing
carrying costs of each location which has been closed or was never developed.
Those costs include rents, property taxes, maintenance, utilities and in some
cases the cost to relocate the modular restaurant to a storage facility. The
cash outlays for these costs have been estimated for various terms ranging from
five months to 11 years.
NOTE 4: RELATED PARTY TRANSACTIONS
a) ISSUANCE OF WARRANTS -- On December 20, 1996, the Company issued
warrants (the "Warrants") to purchase an aggregate of 1,500,000 restricted
shares of its Common Stock to CKE and Fidelity. The Warrants were granted as an
incentive to CKE and Fidelity to continue to participate in the identification
and implementation of synergistic opportunities with the Company. The Warrants
have a three-year term and became exercisable on December 20, 1997. The
exercise price is $4.375 per share, the closing price of the Common Stock on
December 20, 1996. The underlying shares of Common Stock have not been
registered with the Securities and Exchange Commission and, therefore, are not
freely
F-70
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: RELATED PARTY TRANSACTIONS--(CONTINUED)
tradable. If exercised, the Warrants would provide approximately $6.6 million
in additional capital to the Company. The Company obtained a valuation analysis
from an investment banking firm of national standing. Such analysis estimated
the value of the Warrants to be approximately $960,000. Approximately $20,000
and $940,000 was expensed in 1996 and 1997, respectively.
b) WEST COAST OPERATING AGREEMENT -- On July 1, 1996, the Company entered
into a ten-year operating agreement with Carl Karcher Enterprises, Inc., the
subsidiary of CKE that operates the Carl's Jr. restaurant chain. Pursuant to
the agreement, CKE began operating 29 Rally's owned restaurants located in
California and Arizona, two of which were converted to a Carl's Jrs. format.
During 1998, two restaurants which the Company acquired from a franchisee were
added to the agreement and the leases for two of the restaurants expired and
were not renewed leaving 26 restaurants operating under the agreement. Such
agreement is cancelable after an initial five-year period, at the discretion of
CKE. A portion of these restaurants, at the discretion of CKE, will be
converted to the Carl's Jr. format. The agreement was approved by a majority of
the independent Directors of the Company. Prior to the agreement, the Company's
independent Directors had received an opinion as to the fairness of the
agreement, from a financial point of view, from an investment banking firm of
national standing. Under the terms of the operating agreement, CKE is
responsible for any conversion costs associated with transforming restaurants
to the Carl's Jr. format, as well as the operating expenses of all the
restaurants. Rally's retains ownership of all 27 (two of which are Carl's Jrs.)
restaurants and is entitled to receive a percentage of gross revenues generated
by each restaurant. In the event of a sale by Rally's of any of the 27
restaurants, Rally's and CKE would share in the proceeds based upon the
relative value of their respective capital investments in such restaurant.
c) OPTION GRANTS TO NON-EMPLOYEES -- During 1996, the Company granted
150,000 options to certain individuals not employed by the Company for services
provided. Approximately $84,000 has been expensed for these grants in general
and administrative expenses in the accompanying 1996 Statement of Operations.
Such options were granted at the market values on the dates of grant, were
immediately exercisable and expire in five years.
d) OTHER TRANSACTIONS -- The Company has had transactions with certain
companies or individuals which are related parties by virtue of having
stockholders in common, by being officers/directors or because they are
controlled by significant stockholders or officers/
directors of the Company. Such transactions which impacted the Company's
consolidated financial statements are summarized below. Information with
respect to related party rent is disclosed in Note 10. The Company and its
franchisees each pay 1/2% of sales to the Rally's National Advertising Fund
(the "Fund"), established for the purpose of creating and
F-71
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: RELATED PARTY TRANSACTIONS--(CONTINUED)
producing advertising for the chain. The Fund is not included in the
consolidated financial statements, although the Company's contributions to the
Fund are included in the Advertising and Promotion Expenses in the Company's
consolidated Statements of Operations.
Effective November 30, 1997, the Company entered into a Management
Services Agreement, pursuant to which predominately all of the management of
Checkers is providing key services to the Company, including executive
management, financial planning and accounting, franchise administration,
purchasing and human resources. In addition, the Company and Checkers share
certain of their executive officers, including Chief Executive Officer and the
Chief Operating Officer. The total cost of these services was $5.6 million and
$95,000 in 1998 and 1997, respectively. On January 29, 1999, the Company and
Checkers announced the Merger agreement pursuant to which both companies would
merge in an all stock transaction (see Note 16).
On December 1, 1998, the Company entered into two lease agreements, which
have been recorded as capital lease obligations, with Granite Financial Inc., a
wholly owned subsidiary of Fidelity, whereby the Company purchased security
equipment for its restaurants valued at $627,000 in the aggregate. The first
lease agreement is payable monthly at $9,689, including effective interest at
11.35%. The second lease is payable monthly at $11,097, including effective
interest at 12.39% and both have terms of 3 years.
SUMMARY OF RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
<S> <C> <C>
BALANCE SHEET AMOUNTS
Accounts receivable ............. $ 1,510 $ 1,078
Notes receivable ................ $ 53 $ 86
Investment in affiliate ......... $ 23,001 $ 24,988
Accounts payable ................ $ 221 $ 520
Accrued liabilities ............. $ 53 $ 65
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
REVENUE AND TRANSACTION AMOUNTS
Repurchase of Senior Notes (gross gain) ......... $ -- $ -- $6,339
Owner fee income ................................ 714 742 440
Interest income ................................. 117 52 49
---- ---- ------
$831 $794 $6,828
==== ==== ======
</TABLE>
F-72
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: RELATED PARTY TRANSACTIONS--(CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
EXPENSE AMOUNTS
Legal ........................................... $1,152 $1,017 $1,024
Rent expense .................................... 352 396 470
Owner depreciation .............................. 647 647 400
Interest expense ................................ 9 -- 180
Compensatory stock options and warrants ......... -- 940 170
Loss on investment in affiliate ................. 2,019 720 --
Management service agreement .................... 5,593 95 --
------ ------ ------
$9,772 $3,815 $2,244
====== ====== ======
</TABLE>
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
<S> <C> <C>
Land ........................................ $ 14,487 $ 14,145
Building and leasehold improvements ......... 52,448 52,196
Equipment, furniture and fixtures ........... 40,168 40,582
--------- ---------
107,103 106,923
Less accumulated depreciation ............... (48,905) (42,872)
--------- ---------
58,198 64,051
--------- ---------
Property held under capital lease ........... 6,772 6,145
Less accumulated amortization ............... (3,056) (2,129)
--------- ---------
3,716 4,016
--------- ---------
Net property and equipment .................. $ 61,914 $ 68,067
========= =========
</TABLE>
NOTE 6: SENIOR NOTES
On March 9, 1993, the Company sold approximately $85 million of 9 7/8%
Senior Notes due June 2000 (the "Senior Notes"). The Company was required to
make a mandatory sinking fund payment on or before June 15, 1999 to retire
33 1/3% in aggregate principal amount of the Senior Notes issued, which was
satisfied during the third quarter of 1998. The Senior Notes are carried net of
the related discount, which is being amortized over the life of the Senior
Notes. Interest is payable June 15 and December 15 of each year until maturity.
The Senior Notes include certain restrictive covenants, which, among other
restrictions, limit the Company's ability to obtain additional borrowings and
to pay dividends as well as impose certain change of control provisions, as
defined. As of December 28, 1998 and December 28, 1997, the amounts outstanding
net of discounts were $55.8 million and $58.0 million, respectively.
F-73
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: SENIOR NOTES--(CONTINUED)
In January 1996, Rally's repurchased approximately $22 million face value
of Senior Notes. The Senior Notes were purchased from GIANT at a price of
$678.75 per $1,000 principal amount, representing the market closing price on
the last business day prior to the repurchase date. Prior to the Senior Notes
repurchases, the Company's Board of Directors had received an independent
opinion from an investment banking firm as to the fairness of the transactions.
Additionally, during the fourth quarter of 1996, Rally's repurchased
approximately $4.7 million face value of the Senior Notes from various other
bondholders for approximately $4.5 million in cash.
These purchases resulted in extraordinary gains in 1996 net of tax,
totaling approximately $5.3 million or $.31 per share. As a result of these
debt repurchases, the annualized ongoing interest payments on the Senior Notes
was reduced to approximately $5.8 million.
During 1998 and prior to December 18, 1998 Rally's repurchased on the open
market approximately $1.7 million face value of its Senior Notes at an average
price of $887.90 per $1,000 principal amount. During the third quarter of 1998,
the Company completed the required mandatory sinking fund payment due June 15,
1999 calculated to retire 33 1/3% in aggregate original principal amount of the
Senior Notes.
The Company entered into a $4.3 million mortgage transaction with FFCA
Acquisition Corporation ("FFCA") pursuant to which eight fee-owned properties
were mortgaged on December 18, 1998. The terms of the transaction include a
stated interest rate of 9.5% on the unpaid balance over a 20-year term with
monthly payments totaling approximately $40,000. The Company is required to
utilize the entire net proceeds to reduce the Senior Notes. Purchases on the
open market were initiated immediately after the mortgage was finalized and
will be completed as they become available.
The remaining outstanding Senior Notes are publicly traded and at December
28, 1998 had a market value of approximately $44.4 million based on the quoted
market price for such notes.
The Company is evaluating various alternatives for the repayment and
refinancing of the Senior Notes prior to their maturity in June 2000. If the
Company is unable to refinance the debt in full, management of the Company is
evaluating a series of sale-leaseback transactions and the possibility of
selling company-owned stores in certain markets to existing and potentially new
franchisees. Management also anticipates that further debt reductions may also
be accomplished by completing a private placement of preferred or common stock
during the twelve months preceding the maturity date of the Senior Notes. There
can be no assurance that the Company will be able to satisfy the entire
principal balance of the Senior Notes on the maturity date of June 15, 2000.
F-74
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
-------------- -------------
<S> <C> <C>
Mortgages payable to FFCA Acquisition Corporation secured by eight
Company owned restaurants payable in 240 aggregate monthly
installments of $40,082, including interest at 9.5%. The Company is
required to utilize the net proceeds of the loan to retire Senior Notes ..... $4,300 $ --
Notes payable to former franchise owners for acquisition of market,
secured by common stock of Hampton Road Foods, maturing
March 13, 2001, with outstanding balances due after last monthly
payments, bearing interest of 9%. The notes are payable in monthly
principal and interest installments ranging from $4,742 to $50,211........... 4,022 4,073
Notes payable to banks, maturing at various dates through November 10,
2001, secured by property and/or equipment, bearing interest ranging
from 1/2% above prime to 9.25%. The notes are payable in monthly
principal and interest installments ranging from $1,531 to $13,333.
Interest is payable monthly ................................................. 323 530
Secured notes payable to a bank used to finance equipment and/or
modular buildings for franchisees (the Franchisee Loans), maturing at
various dates through July 15, 2000, bearing interest at prime plus 1/2%.
The notes are payable in monthly principal installments of $4,875.
Interest is payable monthly ................................................. 78 136
Note payable to finance company due September 1998, secured by
certain equipment, bearing interest at a rate of 7.3%. The note is
payable in monthly principal and interest installments of $6,762, paid
in 1998 ..................................................................... -- 59
------ ------
8,723 4,798
Less current portion .......................................................... (904) (781)
------ ------
$7,819 $4,017
====== ======
</TABLE>
At December 28, 1998, the prime rate was 7.75%.
F-75
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7: LONG-TERM DEBT--(CONTINUED)
The following are the remaining annual maturities of long-term debt:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
1999 ............................................................ $ 904
2000 ............................................................ 740
2001 ............................................................ 2,894
2002 ............................................................ 194
2003 ............................................................ 143
Thereafter ...................................................... 3,848
------
$8,723
======
</TABLE>
The Company is subject to certain restrictive covenants under its debt
agreements. If the eight properties included in the FFCA Mortgage transaction
are not in compliance with certain financial performance criteria, the Company
is allowed to substitute another property as security for the debt.
NOTE 8: COMMITMENTS AND CONTINGENCIES
a) LEASE COMMITMENTS -- The Company leases certain land and buildings
generally under agreements with terms of or renewable to 15 to 20 years. Some
of the leases contain contingent rental provisions based on percentages of
gross sales. The leases generally obligate the Company for the cost of property
taxes, insurance and maintenance.
On December 1, 1998, the Company entered into two lease agreements, which
have been recorded as capital lease obligations, with Granite Financial Inc., a
wholly owned subsidiary of Fidelity, whereby the Company leased security
equipment for its restaurants costing $627,000. The first lease agreement is
payable monthly at $9,689, including effective interest at 11.35%. The second
lease is payable monthly at $11,097, including effective interest at 12.39% and
both have terms of 3 years. Additionally, the Company leases various restaurant
facilities and a corporate telephone system which are recorded as capital
leases with effective interest rates ranging from 7.0% to 16.03%.
F-76
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Following is a schedule by year of future minimum lease commitments under
all leases at December 28, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- ---------------------------------------------------------- ----------- ----------
<S> <C> <C>
1999 .................................................. $ 1,344 $ 5,701
2000 .................................................. 961 5,175
2001 .................................................. 929 4,994
2002 .................................................. 694 4,298
2003 .................................................. 716 3,523
Thereafter ............................................ 4,155 16,871
-------- -------
Total minimum lease commitments ....................... $ 8,799 $40,562
=======
Less amounts representing interest, discounted at rates
ranging from 7.00% to 16.03% ........................ (2,983)
--------
Present value of minimum lease payments ............... 5,816
Current portion of capital lease obligations .......... (586)
--------
Long-term obligations under capital lease ............. $ 5,230
========
</TABLE>
Rent expense totalled $5.0 million, $4.8 million and $5.3 million in 1998,
1997 and 1996, respectively.
b) SELF INSURANCE -- The Company is self-insured for most workers'
compensation, general liability and automotive liability losses subject to per
occurrence and aggregate annual liability limitations. The Company is also
self-insured for health care claims for eligible participating employees
subject to certain deductibles and limitations. The Company determines its
liability for claims incurred but not reported on an actuarial basis.
c) LITIGATION -- JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET
AL. (Case No. C-94-0039-L-CS). In January and February 1994, two putative class
action lawsuits were filed, purportedly on behalf of the stockholders of
Rally's, in the United States District Court for the Western District of
Kentucky, Louisville division, against Rally's, Burt Sugarman and GIANT and
certain of Rally's present and former officers and directors and its auditors.
The cases were subsequently consolidated under the case name Jonathan Mittman
et al vs. Rally's Hamburgers, Inc., et al, case number C-94-0039-L(CS). The
complaints allege defendants violated the Securities Exchange Act of 1934,
among other claims, by issuing inaccurate public statements about the Company
in order to arbitrarily inflate the price of its common stock. The plaintiffs
seek unspecified damages. On April 15, 1994, Rally's filed a motion to dismiss
and a motion to strike. On April 5, 1995, the Court struck certain provisions
of the complaint but otherwise denied Rally's motion to dismiss. In addition,
the Court denied plaintiffs' motion for class certification; the plaintiffs
renewed this
F-77
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
motion, and despite opposition by the defendants, the Court granted such motion
for class certification on April 16, 1996, certifying a class from July 20,
1992 to September 29, 1993. In October 1995, the plaintiffs filed a motion to
disqualify Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP
("Christensen, Miller") as counsel for defendants based on a purported conflict
of interest allegedly arising from the representation of multiple defendants as
well as Ms. Glaser's position as both a former director of Rally's and a
partner in Christensen, Miller. Defendants filed an opposition to the motion,
and the motion to disqualify Christensen, Miller was denied. A settlement
conference occurred on December 7, 1998, but was unsuccessful. Fact discovery
is not yet complete, but it is anticipated that a deadline for completion of
fact discovery will be set during 1999. No trial date has been set. Management
is unable to predict the outcome of this matter at the present time or whether
or not certain available insurance coverages will apply. The defendants deny
all wrongdoing and intend to defend themselves vigorously in this matter.
Because these matters are in a preliminary stage, the Company is unable to
determine whether a resolution adverse to the Company will have a material
effect on its results of operations or financial condition. Accordingly, no
provisions for any liabilities that may result upon adjudication have been made
in the accompanying financial statements. An estimate of defense costs
reimbursable under the Company's directors' and officers' insurance is included
in "Other Assets" in the accompanying consolidated financial statements.
HARBOR FINANCE PARTNERS V. GIANT GROUP, LTD. ET AL. (Civ. Act. No. 14834).
In February 1996, Harbor Finance Partners ("Harbor") commenced a derivative
action, purportedly on behalf of Rally's against GIANT and certain of Rally's
officers and directors before the Delaware Chancery Court. Harbor named Rally's
as a nominal defendant. Harbor claims that the directors and officers of both
Rally's and GIANT, along with GIANT, breached their fiduciary duties to the
public shareholders of Rally's by causing Rally's to repurchase from GIANT
certain Rally's Senior Notes at an inflated price. Harbor seeks "millions of
dollars in damages", along with rescission of the repurchase transaction. In
the fall of 1996, all defendants moved to dismiss the action. The Chancery
Court conducted a hearing on November 26, 1996 and denied the motions to
dismiss on April 3, 1997. Discovery is underway. No trial date has been set.
The Company denies all wrongdoing and intends to vigorously defend the action.
It is not possible to predict the outcome of this action at this time.
FIRST ALBANY CORP., AS CUSTODIAN FOR THE BENEFIT OF NATHAN SUCKMAN V.
CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. Case No. 16667. This putative class
action was filed on September 29, 1998, in the Delaware Chancery Court in and
for New Castle County, Delaware by an alleged stockholder of 500 shares of the
common stock of Checkers. The complaint names the Company and certain of its
current officers and directors as defendants including William P. Foley, II,
James J. Gillespie, Harvey Fattig, Joseph N. Stein,
F-78
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
James T. Holder, Terry N. Christensen, Burt Sugarman and C. Thomas Thompson.
The Complaint also names Checkers and GIANT as defendants. The complaint arises
out of the proposed merger announced on September 28, 1998 between Rally's,
Checkers and GIANT (the "Proposed Merger") and alleges generally, that certain
of the defendants engaged in an unlawful scheme and plan to permit Rally's to
acquire the public shares of the common stock of Checkers in a "going-private"
transaction for grossly inadequate consideration and in breach of the
defendants' fiduciary duties. The plaintiff allegedly initiated the Complaint
on behalf of all stockholders of Checkers as of September 28, 1998, and seeks
INTER ALIA, certain declaratory and injunctive relief against the consummation
of the Proposed Merger, or in the event the Proposed Merger is consummated,
recision of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorney's fees, and such other
relief as the Court may deem just and proper. In view of a decision by Rally's,
GIANT and Checkers not to implement the transaction that had been announced on
September 28, 1998, plaintiffs have agreed to provide the Company and all other
defendants with an open extension of time to respond to the complaint.
Plaintiffs have indicated that they will likely file an amended complaint in
the event of the consummation of a merger between Rally's and Checkers. The
Company denies all wrongdoing and intends to defend the action vigorously. No
estimate of possible loss or range of loss resulting from the lawsuit can be
made at this time.
DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF
THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. Case
No. 16680. This putative class action was filed on October 2, 1998, in the
Delaware Chancery Court in and for New Castle County, Delaware by David J.
Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified
number of shares of the common stock of Checkers. The complaint names the
Company and certain of its current officers and directors as defendants
including William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N.
Stein, James T. Holder, Terry N. Christensen, Burt Sugarman and C. Thomas
Thompson. The Complaint also names Checkers and GIANT as defendants. As with
the FIRST ALBANY complaint described above, this complaint arises out of the
proposed merger announced on September 28, 1998 between the Rally's, Checkers
and GIANT (the "Proposed Merger") and alleges generally, that certain of the
defendants engaged in an unlawful scheme and plan to permit Rally's to acquire
the public shares of the Checkers' common stock in a "going-private"
transaction for grossly inadequate consideration and in breach of the
defendant's fiduciary duties. The plaintiffs allegedly initiated the Complaint
on behalf of all stockholders of Checkers as of September 28, 1998, and seeks
INTER ALIA, certain declaratory and injunctive relief against the consummation
of the Proposed Merger, or in the event the Proposed Merger is consummated,
recision of the Proposed Merger and costs and disbursements incurred in
connection with bringing the action, including attorneys' fees, and such other
relief as the
F-79
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8: COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Court may deem just and proper. For the reasons stated above in the description
of the FIRST ALBANY action, plaintiffs have agreed to provide the Company and
all other defendants with an open extension of time to respond to the
complaint. Plaintiffs have indicated that they will likely file an amended
complaint in the event of the consummation of a merger between Rally's and
Checkers. The Company denies all wrongdoing and intends to defend the action
vigorously. No estimate of possible loss or range of loss resulting from the
lawsuit can be made at this time.
The Company is involved in other litigation matters incidental to its
business. With respect to such other lawsuits, management does not believe the
litigation in which it is involved will have a material effect upon its results
of operation or financial condition.
d) OTHER COMMITMENTS -- The Company is contingently liable on certain
franchisee lease commitments totaling approximately $407,000. The Company from
time to time negotiates purchase contracts for certain items used in its
restaurants in the normal course of business. Although some of these contracts
contain minimum purchase quantities, such quantities do not exceed expected
usage over the term of such agreements.
e) PURCHASE COMMITMENTS -- The Rally's Hamburger chain, which includes
both the Company and some franchisee-owned stores, has purchase agreements with
various suppliers extending beyond one year. Subject to the suppliers' quality
and performance, the purchases covered by those agreements aggregate
approximately $48.8 million in 1999 and a total of approximately $70.0 million
for the years 2000 through 2004.
F-80
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: INCOME TAXES
The major components of the Company's computation of deferred tax assets
and liabilities at December 28, 1998 and December 28, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 28,
1998 1997
------------ ------------
<S> <C> <C>
Excess of tax depreciation over book depreciation ......... $ 5,109 $ 9,316
Acquired intangibles with no tax basis .................... 1,590 2,070
Other ..................................................... 2 17
------- -------
Gross deferred tax liabilities ............................ $ 6,701 $11,403
======= =======
Net operating loss carryforwards .......................... $17,464 $17,488
Amounts accrued for financial reporting purposes not
yet deductible for tax purposes ......................... 9,178 10,742
Alternative minimum tax and targeted job
tax credit carryforward ................................. 937 937
Other ..................................................... 236 1,230
------- -------
Gross deferred tax assets ................................. $27,815 $30,397
Less valuation allowance .................................. 21,114 18,994
------- -------
Net deferred tax asset .................................... $ 6,701 $11,403
======= =======
</TABLE>
As of December 28, 1998, the Company had net operating loss ("NOL")
carryforwards for Federal income tax purposes of approximately $49.8 million,
the majority of which expires in various amounts from 2008 to 2012. The Company
also has alternative minimum tax credit carryforwards of approximately $503,000
that have no expiration and $434,000 in targeted jobs tax credits which expire
in various amounts from 2005 to 2008. A valuation allowance of approximately
$21.1 million has been established due to the uncertainty of realizing the
benefit associated with the NOL carryforwards generated in the current and
previous years. In addition, pursuant to Section 382 of the Internal Revenue
Code of 1986, as amended, the utilization of the Company's NOL carryforwards to
offset future taxable income can be limited if the Company experiences a change
in ownership of more than 50 percentage points within a three-year period. The
Company experienced an ownership change, as defined in Section 382, in December
of 1997 in connection with the acquisition of a 26.1% interest in Checkers. The
acquisition in combination with significant equity transactions that occurred
within the preceding 3 years of December 1997 generated a more than 50
percentage point ownership change. As a result of this ownership change, the
Company is significantly limited in utilizing its NOL carryforwards and tax
credit carry forwards arising before the ownership change to offset future
taxable income and tax, respectively. It is anticipated that certain of the
Company's net operating loss carryforwards and tax credit carryforwards could
expire before becoming available under Section 382. Additionally, on January
29, 1999, the Company and Checkers announced the signing of a definitive merger
agreement pursuant to which the Company will merge into Checkers in an
F-81
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9: INCOME TAXES--(CONTINUED)
all stock transaction, "the Merger" (see Note 13). The Company believes that
the Merger would cause it to experience a second ownership change. In the event
of the Merger, the Company would be severely limited in utilizing its net
operating loss carryforwards and tax credit carryforwards arising before the
ownership change to offset future taxable income and tax, respectively. It is
anticipated that a significant amount of the Company's net operating loss
carryforwards and tax credit carryforwards could expire before becoming
available under Section 382.
Income tax expense, including the tax provision on the extraordinary item
in 1996, consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Current ................... $252 $455 $675
Deferred .................. -- -- --
---- ---- ----
Total tax expense ......... $252 $455 $675
==== ==== ====
</TABLE>
Income tax expense for the years ended December 28, 1998, December 28,
1997 and December 29, 1996 consisted of $252,000, $455,000 and $675,000 in
state income tax expense
A reconciliation of income tax expense with the federal statutory rate is
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Provision (benefit) computed at statutory rate ......... $ (2,562) $ (1,330) $ 905
Tax effect of equity in loss of affiliate .............. 687 245 --
State and local income taxes, net of federal
income tax benefit ................................... 150 455 575
Change in deferred tax asset valuation
allowance ............................................ 2,119 1,364 (1,169)
Other .................................................. (142) (279) 364
-------- -------- --------
$ 252 $ 455 $ 675
======== ======== ========
</TABLE>
NOTE 10: STOCK-BASED COMPENSATION PLANS
The Company currently has three stock option plans in effect, the 1990
Stock Option Plan (the "Employees' Plan"), the 1990 Stock Option Plan for
Non-Employee Directors (the "1990 Directors' Plan"), and the 1995 Stock Option
Plan for Non-Employee Directors (the "1995 Directors' Plan"). In 1998, the
Company terminated the employee stock purchase
F-82
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: STOCK-BASED COMPENSATION PLANS--(CONTINUED)
plan (the "1993 Purchase Plan"). Although there are existing options
outstanding under the 1990 Directors' Plan, no additional grants will be made
pursuant to this plan. The Company accounts for these plans under APB Opinion
No. 25, under which approximately $66,000 of compensation cost was recognized
in fiscal 1996 related to 157,000 options granted to directors under the 1995
Directors Plan. Such compensation represented the difference between the market
values on the dates of grant and the measurement date, July 10, 1996, the date
when the grants were ultimately approved by the shareholders at the annual
meeting. No compensation cost was recognized in any other period presented.
During 1996, a total of 350,000 options were granted to five of the
current directors and 1.6 million options were granted to the current directors
on February 12, 1998. These options were not granted pursuant to an option
plan. The options were granted at a price equal to the stock's market price on
the date of grant. The options were immediately exercisable and expire after
five years.
Pursuant to the Employees' Plan, the Company issued options to purchase
720,800 shares at an exercise price of $2.531 on April 27, 1998 and issued
options to purchase 100,000 shares at an exercise price of $1.313 on August 18,
1998.
The Employees Plan was amended on June 11, 1998 to increase the number of
shares subject to the Plan from 3,250,000 to 5,750,000 and was further amended
to enable certain employees of Checkers who provide services to the Company
pursuant to the Management Services Agreement that exists between the two
companies to participate in the Employees' Plan.
Pursuant to the 1995 Directors Plan, the Company issued options to
purchase 184,000 shares at an exercise price of $2.313 on May 11, 1998. The
options were immediately exercisable and expire after ten years.
On January 29, 1999, the Company and Checkers announced the signing of a
definitive Merger agreement pursuant to which both companies would merge in an
all stock transaction. The Merger agreement provides that each outstanding
share of Company stock will be exchanged for 1.99 shares of Checkers stock. The
approximate 19.1 million shares of Checkers common stock which the company owns
will be retired following the Merger. Pursuant to the Merger agreement, each of
the Company's stock options (5.6 million as of December 28, 1998) will be
exchanged for Checkers options at an exchange rate of 1 to 1.99.
The Company was authorized to sell up to 500,000 shares of stock to its
employees under the 1993 Purchase Plan. The Company sold approximately 28,000
shares and
F-83
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: STOCK-BASED COMPENSATION PLANS--(CONTINUED)
33,000 shares in 1996 and 1997, respectively, and has sold approximately
161,000 shares through December 28, 1998 since the inception of this plan in
1993. The Company sold shares at 85% of the stock's market price at date of
purchase. The weighted average fair value of shares sold in 1997 and 1996 was
approximately $3.06 and $3.04, respectively.
Options to purchase an aggregate of 5.5 million shares of the Company's
Common Stock may be granted under the stock option plans, at a price not less
than the market value on the date of grant. The Company has granted options on
approximately 2.5 million shares under the stock option plans. Outstanding
options under the Employees' Plan generally expire ten years after grant.
Certain options granted to a former President and Chief Executive Officer of
the company expire five years from the date of grant. Options outstanding under
the two directors' plans expire five years after grant. Options are exercisable
over various periods ranging from immediate to three years after grant
depending upon their grant dates and the plan under which the options were
granted.
A summary of the status of all options granted to employees and directors,
as well as those options granted to non-employees (see Note 4), at December 28,
1998, December 28, 1997 and December 29, 1996, and changes during the years
then ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
DECEMBER 28, 1998 DECEMBER 28, 1997 DECEMBER 29, 1996
---------------------- ------------------- ------------------
WTD. WTD. WTD.
AVG. AVG. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- -------- ---------- -------- ---------
(SHARES REPRESENTED IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ............. 3,859 $2.99 3,664 $2.98 2,219 $4.24
Granted at price equal to market ............. 6,579 1.26 863 3.00 2,154 2.63
Granted at price greater than market ......... -- -- -- -- 176 1.75
Exercised .................................... (49) 1.63 (78) 2.48 (9) 3.05
Forfeited .................................... (1,672) 2.26 (429) 2.75 (207) 3.34
Expired ...................................... (3,077) 2.54 (161) 3.63 (669) 5.62
------ ----- ----- ----- ----- -----
Outstanding at end of year ................... 5,640 1.36 3,859 2.99 3,664 2.92
====== ===== ===== ===== ===== =====
Exercisable at end of year ................... 4,615 $1.54 2,921 $3.07 2,359 $3.21
Weighted average of fair value of
options granted ............................ $ 0.90 $ 1.78 $ 1.31
</TABLE>
On December 15, 1998, the Company repriced the 1990 Stock Option Plan and
the options issued outside of a plan. The new option price is $.531 the closing
market price at December 15, 1998. As a result of this transaction 2,124,216
options in the 1990 Stock Option Plan and 1,850,000 options issued outside of a
plan were cancelled and reissued at the new price. These changes are reflected
in the table above.
F-84
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: STOCK-BASED COMPENSATION PLANS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 28, 1998:
<TABLE>
<CAPTION>
WTD. AVG.
OUTSTANDING REMAINING WTD. AVG. NUMBER WTD. AVG.
RANGE OF AS OF CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES 12/28/98 LIFE (YRS.) PRICE 12/28/98 PRICE
- -------------------- ------------- ------------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$0.531 to $2.00 3,770,287 5.7 $ .5765 2,745,065 $ .5922
$ 2.01 to $3.00 1,735,830 2.7 2.8265 1,735,830 2.8265
$ 3.01 to $4.00 20,000 2.4 3.4413 20,000 3.4413
$ 4.01 to $5.00 113,900 0.3 4.3555 113,900 4.3555
- -------------------- --------- --- ------- --------- -------
$0.53 to $20.00 5,640,017 4.6 $1.3555 4,614,795 $1.5378
==================== ========= === ======= ========= =======
</TABLE>
Had compensation cost for all option grants to employees and directors
been determined consistent with FASB Statement No. 123, Rally's net income and
earnings per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
DECEMBER 28, DECEMBER 28, DECEMBER 29,
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Income (Loss): As Reported .......... $ (7,535) $ (4,516) $ 1,988
Pro Forma ............ $ (10,916) $ (5,577) $ (699)
Earnings (Loss) Per
Commmon Share: As Reported .......... $ (0.28) $ (0.22) $ 0.12
Pro Forma ............ $ (0.40) $ (0.27) $ (0.04)
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 2, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the pro forma amounts include approximately $17,000 and $12,000
in 1997 and 1996, respectively, related to the purchase discount offered under
the 1993 Purchase Plan.
For purposes of the pro forma disclosures assuming the use of the fair
value method of accounting, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in fiscal 1998, 1997 and
1996, respectively: expected volatility of 86.0 percent, 47.0 percent, and 45.7
percent; risk-free interest rates of 5.45 percent, 6.26 percent and 6.82
percent for options granted to employees and 5.45 percent, 6.47 percent and
6.59 percent for options granted to directors; and expected lives for fiscal
1998, 1997 and 1996 of four years for options granted to employees and
directors. An expected dividend yield of 0 percent was used for all periods
based on the Company's history of no dividend payments.
F-85
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11: QUARTERLY FINANCIAL DATA (UNAUDITED)
As of December 29, 1997 the Company changed from a fiscal year ending on
the Sunday closest to December 31st to a fiscal year ending on the Monday
closest to December 31st. This resulted in an extra day in fiscal 1998. The
Company also changed its quarterly reporting periods from four 13-week quarters
to three 12-week quarters and a 16-week fourth quarter.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 28, 1998
Revenues ....................... $ 32,164 $ 34,450 $ 34,796 $ 43,542 $144,952
Income from operations ......... 557 32 531 281 1,401
Net loss ....................... (1,082) (1,600) (1,011) (3,842) (7,535)
-------- -------- -------- -------- --------
Loss per common share
(basic and diluted) .......... $ (0.04) $ (0.06) $ (0.03) $ (0.13) $ (0.28)
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 28, 1997
Revenues ....................... $ 32,595 $ 38,090 $ 38,522 $ 35,723 $144,930
Income from operations ......... 975 1,832 561 (25) 3,343
Net income (loss) .............. (952) 92 (1,148) (2,508) (4,516)
-------- -------- -------- -------- --------
Loss per common share
(basic and diluted) .......... $ (0.05) $ -- $ (0.06) $ (0.11) $ (0.22)
======== ======== ======== ======== ========
</TABLE>
NOTE 12: SHAREHOLDER RIGHTS OFFERING
A Shareholder Rights Offering (the "Offering") was completed on September
20, 1996. The Company distributed to holders of record of its common stock, as
of the close of business on July 31, 1996 (the "Record Date"), transferable
subscription rights ("Right(s)") to purchase units consisting of one share of
common stock and one warrant to purchase an additional share of common stock.
Stockholders received one Right for each share of common stock held on the
Record Date. For each 3.25 Rights held, a holder had the right to purchase one
unit for $2.25 each. The Offering consisted of 4,825,805 units. Each warrant
may be exercised to acquire an additional share of common stock at an exercise
price of $2.25 per share and expires on September 26, 2000. The Company may
redeem the warrants, at $.01 per warrant, upon 30 days' prior written notice in
the event the closing price of the common stock equals or exceeds $6.00 per
share for 20 out of 30 consecutive trading days ending not more than 30 days
preceding the date of the notice of redemption. The Offering was fully
subscribed and raised over approximately $10.8 million in gross proceeds,
offset by legal and other issuance costs of approximately $437,000. The net
proceeds from the Offering were attributable primarily to the sale of the
Company's common stock. The amount attributable to the warrants is included in
"Additional paid-in capital."
In addition to the approximately $10.8 million provided by the Offering,
the warrants issued, if exercised, could provide an additional $10.8 million in
proceeds. The Company had 15,683,869 shares of common stock outstanding on the
Record Date. Immediately after the Offering, 20,509,674 shares of common stock
and 4,825,805 warrants were outstanding.
F-86
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12: SHAREHOLDER RIGHTS OFFERING--(CONTINUED)
As of December 28, 1998, 4,813,757 of these warrants were outstanding. The
warrants are publicly traded and at December 28, 1998 had a market value of
approximately $301,000 based on the quoted market price for such warrants.
NOTE 13: SUBSEQUENT EVENTS
On January 29, 1999, Rally's and Checkers announced the signing of a
definitive merger agreement pursuant to which both companies would merge in an
all stock transaction. The Merger agreement provides that each outstanding
share of Rally's stock will be exchanged for 1.99 shares of Checkers stock. The
approximate 19.1 million shares of Checkers common stock which Rally's owns
will be retired following the Merger. Checkers and Rally's have each received
investment bankers' opinions as to the fairness of the exchange rate used in
the Merger. The transaction is subject to certain approvals, including but not
limited to approval by the shareholders of Checkers and Rally's and potentially
the holders of Rally's Senior Notes and is expected to close in the second
quarter of fiscal year 1999.
At December 28, 1998, Rally's owned 19,130,930 shares (26.06 percent) of
the outstanding common stock of Checkers and public shareholders owned the
remaining 54,277,177 shares of Checkers common stock. Checkers will issue
58,377,134 shares of its common stock to Rally's shareholders in exchange for
all the outstanding common stock of Rally's (29,335,243 outstanding shares) at
a 1 to 1.99 exchange ratio. After the transaction, Rally's shareholders will
own 58,377,134 shares (51.8 percent of the outstanding common stock of the new
Checkers) and the remaining 54,277,117 shares (48.2 percent of Checkers common
stock) will then be held by then current shareholders of Checkers. Immediately
following the Merger, the Checkers common stock will undergo a one-for-twelve
reverse split resulting in total common shares outstanding of approximately
9,387,859. In addition, each of Rally's outstanding stock options (5.6 million
at December 28, 1998) will be exchanged for Checkers options at an exchange
rate of 1 to 1.99.
The business combination under the Merger will be accounted for under the
purchase method. The transaction will be accounted for as a reverse acquisition
as the stockholders of Rally's will receive the larger portion (51.8%) of the
voting interests in the combined enterprise. For purposes of computing the
resulting voting interests, exercisable options and warrants with exercise
prices that exceed the market value of the common stock of the respective
company have been excluded. Accordingly, Rally's is considered the acquirer for
accounting purposes and therefore, Checkers' assets and liabilities will be
recorded based upon their fair market value (see Note 14).
F-87
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: PRO FORMA INFORMATION (UNAUDITED)
The following pro forma condensed consolidated financial data sets forth
certain pro forma financial information giving effect to the Merger. The pro
forma financial information is based on, and should be read in conjunction with
the historical consolidated financial statements of each of the companies and
the notes related thereto. The pro forma condensed consolidating balance sheet
gives effect to the issuance of 58,377,134 shares of Checkers common stock in
exchange for 29,335,243 shares of Rally's common stock, based upon the per
share price of Checkers common shares at $0.531 and a one-for twelve reverse
split, assuming the Merger had occurred December 28, 1998:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
------------ ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS:
Total current assets ................................. 12,298 11,736 -- 24,034
Property and equipment, net .......................... 78,390 61,914 140,304
Investment in affiliate, including net goodwill of
$11,861 after accumulated amortization.............. -- 23,001 A) (23,001) --
Intangibles, net of accumulated amortization ......... 10,123 23,880 G) 18,714 52,717
Other assets, net of accumulated amortization ........ 1,288 2,775 4,063
--------- -------- --------- ---------
$ 102,099 $123,306 $ (4,287) $ 221,118
========= ======== ========= =========
LIABILITIES:
Current liabilities .................................. 18,608 15,865 B) 1,500 35,973
Senior notes, net of discount, less
current maturities ................................. -- 55,768 55,768
Long-term debt and capital lease oligations, less
current maturities ................................. 29,654 13,049 42,703
Minority interests in joint ventures ................. 802 -- 802
Other long-term liabilities .......................... 8,427 4,105 12,532
--------- -------- --------- ---------
Total liabilities ................................ 57,491 88,787 1,500 147,778
STOCKHOLDERS' EQUITY:
Preferred stock ...................................... -- -- -- --
Common stock ......................................... 73 2,961 C) (3,025) 9
Additional paid-in capital ........................... 121,579 97,346 D) (81,914) 137,011
Retained deficit ..................................... (76,644) (63,680) E) 76,644 (63,680)
--------- -------- --------- ---------
45,008 36,627 (8,295) 73,340
Less treasury stock, at cost ......................... (400) (2,108) F) 2,508 --
--------- -------- --------- ---------
Net stockholders'equity .......................... 44,608 34,519 (5,787) 73,340
--------- -------- --------- ---------
$ 102,099 $123,306 $ (4,287) $ 221,118
========= ======== ========= =========
</TABLE>
- ----------------
A) Pro forma adjustment to record the elimination of Rally's original
investment of $11,140 in Checkers common stock and the reclassification to
intangibles of $11,861 of goodwill associated with Rally's investment in
Checkers.
B) Pro forma adjustment to accrue estimated transaction costs related to the
Merger.
F-88
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)
C) Pro forma adjustments to record the issuance of 58,377 shares of Checkers
common stock in exchange for Rally's outstanding shares, $58; to eliminate
the previous common stock account of Rally's, ($2,961); to eliminate the
par value associated with Rally's investment in Checkers common stock,
($19) and to effect a one-for-twelve reverse split, ($103).
D) Pro forma adjustments, in accordance with reverse acquisition accounting,
to record the fair value of the outstanding 54,277 shares of common stock
of Checkers valued at $0.531 per share, $28,767 which is net of related par
value; eliminate the previous treasury stock of Rally's, ($2,108);
eliminate the previous additional paid-in capital account of Checkers,
($121,579); to reduce additional paid in capital for the par value of the
58,377 shares issued to Rally's shareholders, ($58); to eliminate the
previous common stock account of Rally's, $2,961; to attribute a $10,000
estimated fair value to the outstanding Checkers stock options and
warrants, and effect a one-for-twelve reverse split, $103.
E) Pro forma adjustments to record the elimination of the retained deficit
account of Checkers.
F) Pro forma adjustment to eliminate the previous treasury stock of Checkers,
$400; as well as the treasury stock of Rally's, $2,108 which is cancelled
as a result of the Merger.
G) Pro forma adjustment to record goodwill of $6,853 associated with the
Merger and the reclassification of $11,861 of goodwill associated with
Rally's original investment in Checkers (see A).
NOTE: The final adjustments to value the outstanding Checkers options and
warrants as well as final adjustments to the fair value of assets and
liabilities as a result of the Merger will not be known until the Merger
is formally completed.
F-89
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: PRO FORMA INFORMATION (UNAUDITED)--(CONTINUED)
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997.
<TABLE>
<CAPTION>
CHECKERS RALLY'S
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
-------------- -------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total Revenues ........................................ $145,708 $144,952 $ 290,660
-------- -------- ------ ---------
COSTS AND EXPENSES:
Restaurant operating costs ............................ 119,416 113,782 233,198
Advertising expense ................................... 6,921 9,853 16,774
Other expenses ........................................ 516 647 1,163
Other depreciation and amortization ................... 2,275 2,503 H) 842 5,620
General and administrative expense .................... 13,309 13,404 I) (380) 26,333
SFAS 121 provisions ................................... 2,953 3,362 6,315
-------- -------- ------ ---------
Total costs and expenses ............................ 145,390 143,551 462 289,403
-------- -------- ------ ---------
Operating income (loss) ............................. 318 1,401 (462) 1,257
-------- -------- ------ ---------
Other income (expense):
Interest expense ..................................... (6,007) (7,145) (13,152)
Loss on investment in affiliate....................... -- (2,019) J) 2,019 --
Interest income ...................................... 272 480 752
-------- -------- ------ ---------
Loss before minority interest and income tax
expense (benefit) ................................... (5,417) (7,283) 1,557 (11,143)
Minority interests in operations of joint venture ..... (73) -- (73)
-------- -------- ------ ---------
Loss before income tax expense (benefit) .............. (5,344) (7,283) 1,557 11,070
Income tax expense .................................... -- 252 252
-------- -------- ------ ---------
Net (loss) earnings ................................... $ (5,344) $ (7,535) $1,557 $ (11,322)
======== ======== ====== =========
Comprehensive (loss) earnings ......................... $ (5,344) $ (7,535) $1,557 $ (11,322)
======== ======== ====== =========
Net loss per common share (basic and diluted) ......... $ (0.07) $ (0.28) $ (1.21)
======== ======== =========
Weighted average number of common shares
(basic and diluted) ................................. 73,388 27,170 K) 9,388
======== ======== =========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded
on Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment
in Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
F-90
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 22, DECEMBER 28,
1999 1998
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................ $ 6,729 $ 4,601
Restricted cash .................................................. 1,242 1,880
Investments ...................................................... 95 47
Accounts receivable, net ......................................... 2,596 2,597
Notes receivable, net -- current portion ......................... 120 153
Inventory ........................................................ 872 1,017
Prepaid expenses and other current assets ........................ 538 310
Assets held for sale ............................................. 1,131 1,131
-------- --------
Total current assets .......................................... 13,323 11,736
Property and equipment, net ...................................... 60,290 61,914
Investment in affiliate, net of accumulated amortization ......... 22,567 23,001
Notes receivable, net -- less current portion .................... 344 375
Goodwill, net of accumulated amortization ........................ 8,318 8,477
Reacquired franchise and territory rights, net of
accumulated amortization ....................................... 11,358 11,620
Other intangibles, net of accumulated amortization ............... 3,726 3,783
Other assets, net of accumulated amortization .................... 2,276 2,400
-------- --------
$122,202 $123,306
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-91
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 22, DECEMBER 28,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 5,595 $ 3,686
Reserves for restaurant relocations and abandoned sites .................. 3,180 3,148
Accrued liabilities ...................................................... 8,910 7,541
Current maturities of long-term debt and obligations under capital
lease .................................................................. 1,519 1,490
--------- ---------
Total current liabilities ............................................ 19,204 15,865
Senior notes, net of discounts ........................................... 53,543 55,768
Long-term debt, less current maturities .................................. 7,629 7,819
Obligations under capital lease, less current maturities ................. 4,959 5,230
Long-term reserves for restaurant relocations and adandoned sites ........ 2,077 2,275
Other noncurrent liabilities ............................................. 1,874 1,830
--------- ---------
Total liabilities ....................................................... 89,286 88,787
STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value, authorized
5,000,000 shares, no shares outstanding ................................ -- --
Common stock, $.10 par value, authorized 50,000,000 shares, issued
29,608,688 at March 22, 1999 and at December 28, 1998 .................. 2,961 2,961
Additional paid-in capital ............................................... 97,346 97,346
Retained deficit ......................................................... (65,283) (63,680)
--------- ---------
35,024 36,627
Less treasury stock, at cost, 273,445 shares ............................. (2,108) (2,108)
--------- ---------
Net stockholders' equity ................................................ 32,916 34,519
$ 122,202 $ 123,306
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-92
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------
MARCH 22, MARCH 22,
1999 1998
----------- ------------
<S> <C> <C>
REVENUES:
Restaurant sales ................................. $ 29,040 $ 30,962
Franchise revenues and fees ...................... 916 1,043
Owner fee income ................................. 163 159
-------- --------
Total revenues ................................ $ 30,119 $ 32,164
-------- --------
COSTS AND EXPENSES:
Restaurant food and paper costs .................. 8,568 10,047
Restaurant labor costs ........................... 9,420 9,708
Restaurant occupancy expense ..................... 1,770 1,552
Restaurant depreciation and amortization ......... 1,624 1,676
Other restaurant operating expense ............... 2,824 2,663
Advertising expense .............................. 1,801 1,644
Owner depreciation ............................... 352 135
Other depreciation and amortization .............. 570 627
General and administrative expenses .............. 3,081 3,482
Losses on assets to be disposed of ............... -- 31
-------- --------
Total costs and expenses ...................... 30,010 31,565
-------- --------
Operating income .............................. 109 599
OTHER INCOME (EXPENSE):
Interest income .................................. 188 77
Gains on bond repurchases ........................ 256 --
Loss on investment in affiliate .................. (434) (42)
Interest expense ................................. (1,685) (1,690)
-------- --------
Loss before income tax expense ................... (1,566) (1,056)
Income tax expense ............................... 37 26
-------- --------
Net loss ...................................... $ (1,603) $ (1,082)
======== ========
Comprehensive loss ............................ $ (1,603) $ (1,082)
======== ========
Net loss per common share --
(basic and diluted) ............................ $ (0.05) $ (0.04)
======== ========
Weighted average number of common shares --
(basic and diluted) ............................ 29,335 24,568
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-93
<PAGE>
RALLY'S HAMBURGERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------
MARCH 22 MARCH 22
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $ (1,603) $ (1,082)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization .......................................... 2,547 2,438
Provision for losses on assets to be disposed of ....................... -- 31
Gains on bond repurchases .............................................. (256) --
Deferred loan costs amortization ....................................... 99 94
Provision for bad debt ................................................. 165 35
Loss, net of amortization on investment in affiliate ................... 434 42
Changes in assets and liabilities:
Increase in accounts receivable ........................................ (139) (1,033)
Decrease in notes receivable ........................................... 39 --
Decrease (increase) in inventory ....................................... 145 (55)
(Increase) decrease in prepaid expenses and other current assets ....... (234) 7
Decrease (increase) in deposits and other .............................. 34 (23)
Increase in accounts payable ........................................... 1,909 1,008
Increase (decrease) in accrued liabilities ............................. 1,223 (1,967)
-------- --------
Net cash provided by operating activities ............................. 4,363 (505)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................... (408) (623)
Cash paid on business purchases ......................................... -- (32)
(Increase) decrease in investments ...................................... (48) 102
Proceeds from sale of assets ............................................ -- 119
-------- --------
Net cash used in investing activities .................................. (456) (434)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in restricted cash ............................................. 638 --
Proceeds from (repayments of) senior notes .............................. (1,985) --
Principal payments on long-term debt and capital lease obligations ...... (432) (275)
-------- --------
Net cash used in financing activities .................................. (1,779) (275)
-------- --------
Net increase (decrease) in cash ........................................ 2,128 (1,214)
CASH AT BEGINNING OF PERIOD .............................................. 4,601 4,008
-------- --------
CASH AT END OF PERIOD .................................................... $ 6,729 $ 2,794
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid, net ..................................................... $ 390 $ 267
======== ========
Income taxes paid ...................................................... $ -- $ 21
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-94
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION -- The accompanying unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
necessary to present fairly the information set forth therein have been
included. The operating results for the quarter ended March 22, 1999, are not
necessarily an indication of the results that may be expected for the fiscal
year ending January 03, 2000. Except as disclosed herein, there has been no
material change in the information disclosed in the notes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 28, 1998. Therefore it is suggested that the
accompanying financial statements be read in conjunction with the Company's
December 28, 1998 consolidated financial statements. As of December 29, 1997
the Company changed from a 13 week quarter to a 12 week quarter with the
exception of the fourth quarter which will generally consist of sixteen weeks.
The fiscal year will end on the Monday closest to December 31st. The Company's
1999 fiscal year will include a 53rd week, thereby increasing the fourth
quarter to seventeen weeks.
(b) PURPOSE AND ORGANIZATION -- The principal business of Rally's
Hamburgers, Inc. (the "Company", "Rally's") is the operation and franchising of
Rally's restaurants. Rally's is one of the largest chains of double drive-thru
restaurants in the United States. At March 22, 1999, the Rally's system
included 469 restaurants in 18 states located primarily in the Midwest and the
Sunbelt and are comprised of 225 Company-owned and operated, 244 franchised
restaurants, including 25 Company-owned restaurants in Western markets which
are operated as Rally's restaurants by CKE Restaurants, Inc. ("CKE"), a
significant shareholder of the Company, under an operating agreement which
began in July, 1996. Two additional Company-owned stores covered by the
operating agreement have been converted to the Carl's Jr. format and are not
included in the above store count. The Company's restaurants offer high quality
fast food. The Company primarily serves the drive-thru and take-out segments of
the quick-service restaurant industry. The Company opened its first restaurant
in January 1985 and began offering franchises in November 1986. The
consolidated financial statements include Rally's Hamburgers, Inc. and its
wholly owned subsidiaries. Rally's Hamburgers, Inc. and its subsidiaries are
collectively referred to herein, as the context requires as "Rally's" or the
"Company". All significant inter-company accounts and transactions have been
eliminated. The investment in affiliate, which is 26.06% owned, represents an
investment in Checkers Drive-In Restaurants, Inc. ("Checkers") and is recorded
under the equity method.
F-95
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(c) REVENUE RECOGNITION -- The Company recognizes franchise fees as income
on the date a restaurant is opened, at which time the Company has performed its
obligations relating to such fees. Area development fees are generated from the
awarding of exclusive rights to develop, own and operate Rally's restaurants in
certain geographic areas pursuant to an Area Development Agreement. Such fees
are recognized as income on a pro rata basis as the restaurants are opened or
upon the cancellation or expiration of an Area Development Agreement. Both
franchise fees and area development fees are non-refundable. The Company also
receives royalty fees from franchisees typically in the amount of 4% of each
franchised restaurant's gross revenues, as defined in the Franchise Agreement.
Royalty fees are recognized as earned.
(d) CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with an original maturity of less than three months to be
cash equivalents. Restricted Cash consists of cash on deposit with various
financial institutions as collateral to support the Company's obligations to
certain states for potential workers' compensation claims. This cash is not
available for the Company's use until such time that the respective states
permit its release.
(e) RECEIVABLES -- Receivables consist primarily of franchise fees,
royalties and notes due from franchisees and owner fee income and advances to
the National Advertising Fund which provides broadcast creative production for
use by the Company and its franchisees. Allowances for doubtful receivables
were $1.1 million at March 22, 1999 and $969,000 at December 28, 1998.
(f) INVENTORY -- Inventory is valued at latest invoice cost, which
approximates the lower of first-in, first-out cost or market.
(g) IMPAIRMENT OF LONG LIVED ASSETS -- The Company accounts for tangible
property and intangibles under the Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" (SFAS 121), which requires the write-down of certain
intangibles and tangible property associated with under performing sites to the
level supported by the forecasted discounted cash flow in cases where
undiscounted cash flow projected does not exceed the book value of the related
assets.
(h) PROPERTY AND EQUIPMENT -- Property and equipment are depreciated using
the straight-line method for financial reporting purposes and accelerated
methods for income tax
F-96
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
purposes. The estimated useful lives for financial reporting purposes are the
shorter of 20 years or the lease life plus available renewal options for
buildings and property held under capital leases, eight years for furniture and
equipment, five years for software and computer systems and the life of the
lease for leasehold improvements. Expenditures for major renewals and
betterments are capitalized while expenditures for maintenance and repairs are
expensed as incurred. Property and equipment held for sale includes various
excess restaurant facilities and land. The aggregate carrying value of property
and equipment held for sale is periodically reviewed and adjusted downward to
market value, when appropriate.
(i) 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.
(j) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- The balance
sheets as of March 22, 1999 and December 28, 1998 reflect the fair value
amounts which have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is 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. The carrying amounts of
cash and cash equivalents, receivables, accounts payable, and long-term debt
are a reasonable estimate of their fair value. 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.
(k) EARNINGS (LOSS) PER COMMON SHARE -- Basic and diluted earnings (loss)
per share are calculated in accordance with the Statement of Financial
Accounting Standard No. 128, "Earnings per Share". Potentially dilutive common
stock warrants and options have no effect, as they are anti-dilutive for all
periods presented.
(l) OWNER FEE INCOME AND DEPRECIATION -- Revenue received as a result of
the operating agreement with CKE is referred to as owner fee income in the
accompanying consolidated financial statements. Depreciation expenses related
to the ongoing investment in the CKE-operated restaurants are referred to as
owner depreciation in the accompanying consolidated financial statements.
F-97
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(m) ADVERTISING COSTS -- It is the Company's policy to expense advertising
costs as incurred.
(n) RECLASSIFICATIONS -- Certain items have been reclassified in the
accompanying consolidated financial statements for prior periods in order to be
comparable with the classification adopted for the current period. Such
reclassifications had no effect on previously reported net income.
NOTE 2: LIQUIDITY
The Company has a working capital deficit of $5.9 million at March 22,
1999. It is anticipated that the Company will continue to have a working
capital deficit since approximately 89% of the Company's assets are long-term
(primarily property, equipment, investment in affiliate and intangibles), and
since all operating trade payables, accrued expenses, and property and
equipment payables are current liabilities of the Company. At March 22, 1999, a
significant portion ($53.5 million) of the Company's long-term liabilities
relate to the Company's Senior Notes that mature in June, 2000.
The Company is currently evaluating alternatives for refinancing or
repaying the outstanding Senior Notes that mature in June 2000. These
alternatives include a sale-leaseback transaction or additional mortgage
financing. Other options include the sale of certain company-owned markets to
current or new franchisees in transactions that would provide immediate funds
to reduce debt and would also provide a continued source of income through
future royalties. There can be no assurance that the Company will be able to
satisfy the entire principal balance of the Senior Notes on the maturity date
of June 15, 2000.
F-98
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 22, DECEMBER 28,
1999 1998
----------- -------------
<S> <C> <C>
Mortgages payable to FFCA Acquisition Corporation secured
by eight Company owned restaurants payable in 240
aggregate monthly installments of $40,082, including
interest at 9.5%. The Company is required to utilize the net
proceeds of the loan to retire Senior Notes (See Note 2:
"Liquidity") ............................................... $4,288 $4,300
Notes payable to former franchise owners for acquisition of
market, secured by common stock of Hampton Road
Foods, maturing March 13, 2001, bearing interest of 9%.
The notes are payable in monthly principal and interest
installments ranging from $4,742 to $50,211................. 3,891 4,022
Notes payable to banks, maturing at various dates through
November 10, 2001, secured by property and/or
equipment, bearing interest ranging from 1/2% above prime
to 9.25%. The notes are payable in monthly principal and
interest installments ranging from $1,531 to $13,333.
Interest is payable monthly ................................ 244 323
Secured notes payable to a bank used to finance equipment
and/or modular buildings for franchisees (the Franchisee
Loans), maturing at various dates through July 15, 2000,
bearing interest at prime plus 1/2%. The notes are payable
in monthly principal installments of $4,875. Interest is
payable monthly ............................................ 63 78
------ ------
8,486 8,723
Less current portion ........................................ (857) (904)
------ ------
$7,629 $7,819
====== ======
</TABLE>
NOTE 4: RELATED PARTY TRANSACTION
Effective November 30, 1997, the Company entered into a Management
Services Agreement, pursuant to which the management of Checkers is providing
key services to the Company, including executive management, financial planning
and accounting, franchise administration, purchasing and human resources. In
addition, the Company and Checkers share their executive officers, including
Chief Executive Officer and the Chief Operating Officer. The total cost of
these services was $1.7 million and $913,000 during the quarters ended March
22, 1999 and March 22, 1998. Effective April 6, 1999, the Company began sharing
the services of the Chief Financial Officer with Checker's.
F-99
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: MERGER
On January 29, 1999, Rally's and Checkers announced the signing of a
definitive merger agreement pursuant to which both companies would merge in an
all stock transaction, (the "Merger"). The Merger agreement provides that each
outstanding share of Rally's stock will be exchanged for 1.99 shares of
Checkers stock. Immediately following the Merger, the Checkers common stock
will undergo a one-for-twelve reverse split resulting in total common shares
outstanding of approximately 9,387,859. In addition, each of Rally's
outstanding stock options (5.6 million at March 22, 1999) will be exchanged for
Checkers options at an exchange rate of 1 to 1.99. The approximate 19.1 million
shares of Checkers common stock which Rally's owns will be retired following
the Merger. Checkers and Rally's have each received investment bankers'
opinions as to the fairness of the exchange rate used in the Merger. The
transaction is subject to certain approvals, including but not limited to
approval by the shareholders of Checkers and Rally's and the holders of Rally's
Senior Notes and is expected to close in the third quarter of fiscal year 1999.
At March 22, 1999, Rally's owned 19,130,930 shares (26.06 percent) of the
outstanding common stock of Checkers and public shareholders owned the
remaining 54,277,177 shares of Checkers common stock. Checkers will issue
58,377,134 shares of its common stock to Rally's shareholders in exchange for
all the outstanding common stock of Rally's (29,335,243 outstanding shares) at
a 1 to 1.99 exchange ratio. After the transaction, Rally's shareholders will
own 58,377,134 shares (51.8 percent of the outstanding common stock of the new
Checkers) and the remaining 54,277,117 shares (48.2 percent of Checkers common
stock) will then be held by then current shareholders of Checkers.
The Merger transaction will be accounted for under the purchase method of
accounting and will be treated as a reverse acquisition as the stockholders of
Rally's will receive the larger portion of the voting interests in the combined
enterprise. Accordingly, Rally's is considered the acquirer for accounting
purposes and therefore, Checkers' assets and liabilities will be recorded based
upon their fair market value .
The following pro forma condensed consolidated financial data sets forth
certain pro forma financial information giving effect to the Merger. The pro
forma financial information is based on, and should be read in conjunction with
the historical consolidated financial statements of each of the companies and
the notes related thereto.
F-100
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: MERGER--(CONTINUED)
The pro forma condensed consolidating balance sheet gives effect to the
issuance of 58,377,134 shares of Checkers common stock in exchange for
29,335,243 shares of Rally's common stock, based upon the per share price of
Checkers common shares at $0.531 and a one-for twelve reverse split, assuming
the Merger had occurred March 22, 1999:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
MARCH 22, MARCH 22, PRO FORMA
1999 1999 ADJUSTMENTS MERGED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS:
Total current assets .......................... 11,861 13,323 25,184
Property and equipment, net ................... 77,162 60,290 137,452
Investment in affiliate, including
net goodwill of $11,717 after
accumulated amortization ..................... -- 22,567 A) (22,567) --
Intangibles, net of accumulated
amortization ................................. 9,916 23,402 G) 19,391 52,709
Other assets, net of accumulated
amortization ................................. 1,232 2,620 3,852
-------- -------- --------- --------
$100,171 $122,202 $ (3,176) $219,197
======== ======== ========= ========
LIABILITIES:
Current liabilities ........................... 18,824 19,204 B) 1,500 39,528
Senior notes, net of discount, less
current maturities ........................... -- 53,543 53,543
Long-term debt and capital lease
obligations, less current maturities ......... 28,853 12,588 41,441
Minority interests in joint ventures .......... 674 -- 674
Other long-term liabilities ................... 8,323 3,951 12,274
-------- -------- --------- --------
Total liabilities ................. ......... 56,674 89,286 1,500 147,460
STOCKHOLDERS' EQUITY:
Preferred stock ............................... -- -- --
Common stock .................................. 73 2,961 C) (3,025) 9
Additional paid-in capital .................... 121,579 97,346 D) (81,914) 137,011
Retained deficit .............................. (77,755) (65,283) E) 77,755 (65,283)
-------- -------- --------- --------
43,897 35,024 (7,184) 71,737
Less treasury stock, at cost .................. (400) (2,108) F) 2,508 --
-------- -------- --------- --------
Net stockholders' equity .................... 43,497 32,916 (4,676) 71,737
-------- -------- --------- --------
$100,171 $122,202 $ (3,176) $219,197
======== ======== ========= ========
</TABLE>
- ----------------
A) Pro forma adjustment to record the elimination of Rally's original
investment of $10,850 in Checkers common stock and the reclassification to
intangibles of $11,717 of goodwill associated with Rally's investment in
Checkers.
B) Pro forma adjustment to accrue estimated transaction costs related to the
Merger.
F-101
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: MERGER--(CONTINUED)
C) Pro forma adjustments to record the issuance of 58,377 shares of Checkers
common stock in exchange for Rally's outstanding shares, $58; to eliminate
the previous common stock account of Rally's, ($2,961); to eliminate the
par value associated with Rally's investment in Checkers common stock,
($19); and to effect a one-for-twelve reverse split, ($103).
D) Pro forma adjustments, in accordance with reverse acquisition accounting to
record the fair value of the outstanding 54,277 shares of common stock of
Checkers valued at $0.531 per share, $28,767 which is net of related par
value; eliminate the previous treasury stock of Rally's, ($2,108);
eliminate the previous additional paid-in capital account of Checkers,
($121,579); to reduce additional paid in capital for the par value of the
58,377 shares issued to Rally's shareholders, ($58); to eliminate the
previous common stock account of Rally's, $2,961; to attribute a $10,000
estimated fair value to the outstanding Checkers stock options and
warrants, and effect a one-for-twelve reverse split, $103.
E) Pro forma adjustments to record the elimination of the retained deficit
account of Checkers.
F) Pro forma adjustment to eliminate the previous treasury stock of Checkers,
$400, as well as the treasury stock of Rally's, $2,108 which is cancelled
as a result of the Merger.
G) Pro forma adjustment to record goodwill of $7,674 associated with the
Merger and the reclassification of $11,717 of goodwill associated with
Rally's original investment in Checkers (see A).
NOTE: The final adjustments to value the outstanding Checkers options and
warrants as well as final adjustments to the fair value of assets and
liabilities as a result of the Merger will not be known until the Merger is
completed.
F-102
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: MERGER--(CONTINUED)
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
TWELVE WEEKS TWELVE WEEKS
ENDED ENDED
MARCH 22, MARCH 22, PRO FORMA
1999 1999 ADJUSTMENTS MERGED
-------- ------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total Revenues .............................. $ 31,713 $30,119 $ 61,832
-------- ------- ------ --------
COSTS AND EXPENSES:
Restaurant operating costs .................. 26,434 24,206 50,640
Advertising expense ......................... 1,912 1,801 3,713
Other expenses .............................. 98 352 450
Other depreciation and amortization ......... 454 570 H) 194 1,218
General and administrative expense .......... 2,917 3,081 I) (88) 5,910
-------- ------- ------ --------
Total cost and expenses ................... 31,815 30,010 106 61,931
-------- ------- ------ --------
Operating (loss) income ................... (102) 109 (106) (99)
Other income (expense):
Interest income ............................ 58 188 246
Gains on bond repurchases .................. -- 256 256
Loss on investment in affiliate ............ -- (434) J) 434 --
Interest expense ........................... (1,181) (1,685) (2,866)
-------- ------- ------ --------
Loss before minority interest,
income taxes ............................... (1,225) (1,566) 328 (2,463)
Minority interests in (losses) earnings ..... (114) -- (114)
-------- ------- ------ --------
Loss before income taxes .................... (1,111) (1,566) 328 (2,349)
Income taxes ................................ -- 37 37
-------- ------- ------ --------
Net (loss) earnings ......................... $ (1,111) $(1,603) $ 328 $ (2,386)
======== ======= ====== ========
Comprehensive (loss) earnings ............... $ (1,111) $(1,603) $ 328 $ (2,386)
======== ======= ====== ========
Net (loss) income per common share
(basic and diluted) ........................ $ (0.02) $ (0.05) $ (0.25)
======== ======= ========
Weighted average number of common
shares (basic and diluted) ................. 73,408 29,335 K) 9,388
======== ======= ========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded
on Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment
in Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
F-103
<PAGE>
RALLY'S HAMBURGERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5: MERGER--(CONTINUED)
The following unaudited pro forma condensed consolidating statement of
operations sets forth certain pro forma financial information giving effect to
the Merger, assuming the Merger had occurred December 29, 1997:
<TABLE>
<CAPTION>
CHECKERS RALLY'S
FISCAL YEAR FISCAL YEAR
ENDED ENDED
DECEMBER 28, DECEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS MERGED
-------------- -------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total Revenues .......................... $145,708 $144,952 $ 290,660
-------- -------- ------ ---------
COSTS AND EXPENSES:
Restaurant operating costs .............. 119,416 113,782 233,198
Advertising expense ..................... 6,921 9,853 16,774
Other expenses .......................... 516 647 1,163
Other depreciation and amortization ..... 2,275 2,503 H) 842 5,620
General and administrative expense ...... 13,309 13,404 I) (380) 26,333
SFAS 121 provisions ..................... 2,953 3,362 6,315
-------- -------- ------ ---------
Total costs and expenses .............. 145,390 143,551 462 289,403
-------- -------- ------ ---------
Operating income (loss) ............... 318 1,401 (462) 1,257
-------- -------- ------ ---------
Other income (expense):
Interest expense ....................... (6,007) (7,145) (13,152)
Loss on investment in affiliate ........ -- (2,019) J) 2,019 --
Interest income ........................ 272 480 752
-------- -------- ------ ---------
Loss before minority interest and
income tax expense (benefit) ........... (5,417) (7,283) 1,557 (11,143)
Minority interests in operations of
joint venture .......................... (73) -- (73)
-------- -------- ------ ---------
Loss before income tax expense
(benefit) .............................. (5,344) (7,283) 1,557 11,070
Income tax expense ...................... -- 252 252
-------- -------- ------ ---------
Net (loss) earnings ..................... $ (5,344) $ (7,535) $1,557 $ (11,322)
======== ======== ====== =========
Comprehensive (loss) earnings ........... $ (5,344) $ (7,535) $1,557 $ (11,322)
======== ======== ====== =========
Net loss per common share
(basic and diluted) .................... $ (0.07) $ (0.28) $ (1.21)
======== ======== =========
Weighted average number of common
shares (basic and diluted) ............. 73,388 27,170 K) 9,388
======== ======== =========
</TABLE>
- ----------------
H) Pro forma adjustment to increase the amortization of goodwill associated
with the Merger.
I) Pro forma adjustment to eliminate excess public company expenses recorded
on Rally's.
J) Pro forma adjustment to eliminate loss from the Rally's equity investment
in Checkers.
K) The merged weighted average number of common shares outstanding consists of
112,654 shares immediately following the Merger, effected for the
one-for-twelve reverse split.
F-104
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JANUARY 28, 1999
BY AND BETWEEN
CHECKERS DRIVE-IN RESTAURANTS, INC.,
A DELAWARE CORPORATION,
AND
RALLY'S HAMBURGERS, INC.,
A DELAWARE CORPORATION.
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January
28, 1999, is by and between Checkers Drive-In Restaurants, Inc., a Delaware
corporation ("Checkers"), and Rally's Hamburgers, Inc., a Delaware corporation
("Rally's").
RECITALS
WHEREAS, the respective Boards of Directors of Checkers and Rally's have
determined that a business combination between Checkers and Rally's is in the
best interests of their respective companies and stockholders and have adopted
resolutions approving this Agreement and the transactions contemplated hereby
and declaring their advisability;
WHEREAS, Checkers and Rally's desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated hereby;
WHEREAS, for federal income tax purposes, it is intended that the business
combination shall qualify as a reorganization within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, concurrently with the execution hereof, Rally's, on the one hand,
and CKE Restaurants, Inc. ("CKE"), Santa Barbara Restaurant Group, Inc.
("SBR"), William P. Foley II and GIANT GROUP, LTD. ("GIANT") (collectively, the
"Consenting Rally's Stockholders"), on the other hand, are entering into a
Voting Agreement substantially in the form of Exhibit A hereto (the "Rally's
Voting Agreement") in which each Consenting Rally's Stockholder grants an
irrevocable proxy with respect to the approval and adoption of this Agreement,
and all other matters contemplated hereby or in furtherance hereof, for all
shares of the voting stock of Rally's which each is entitled (i) to vote at a
meeting of Rally's stockholders to consider the Merger (the "Rally's Meeting")
or (ii) to express consent or dissent thereon in writing without a meeting;
WHEREAS, Rally's is willing in this Agreement to grant to Checkers its
irrevocable proxy with respect to the approval and adoption of this Agreement,
an amendment to Checkers' Certificate of Incorporation to effect a one-for-12
reverse stock split and all other matters contemplated hereby or in furtherance
hereof for all outstanding shares of the voting stock of Checkers of which
Rally's is the record or beneficial owner as of the date hereof and any shares
of the voting stock of Checkers of which Rally's becomes the record or
beneficial owner after the date hereof and prior to the record date for the
meeting of Checkers' stockholders to consider the Merger (the "Checkers
Meeting");
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
subject to the terms and conditions set forth herein, Checkers and Rally's
hereby agree as follows:
A-2
<PAGE>
ARTICLE 1
THE MERGER; CLOSING; EFFECTIVE TIME
1.1 THE MERGER.
(a) Subject to the terms and conditions contained in this Agreement, at
the Effective Time (as defined in Section 1.3), Rally's shall be merged with
and into Checkers (the "Merger"), and the separate corporate existence of
Rally's shall thereupon cease, in accordance with the applicable provisions of
the Delaware General Corporation Law (the "DGCL"). Following the Merger,
Checkers shall continue as the surviving corporation (sometimes hereinafter
referred to as the "Surviving Corporation"). As used in this Agreement, the
term "Subsidiary" shall mean, with respect to Checkers or Rally's, any
corporation or other legal entity of which such party controls or owns,
directly or indirectly, more than 50% of the stock or other equity interest
entitled to vote on the election of members to the board of directors or
similar governing body.
(b) At the Effective Time, the corporate existence of Checkers, with all
its rights, privileges, powers and franchises, shall continue unaffected and
unimpaired by the Merger. The Merger shall have the effects specified in
Section 259 of the DGCL.
1.2 THE CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, 2121 Avenue of the Stars,
18th Floor, Los Angeles, California 90067, at 9:00 a.m., local time, as soon as
practicable, but in no event later than the third business day immediately
following the date on which the last of the conditions specified in Article 7
is satisfied or waived in accordance herewith, or at such other date, time and
place as Checkers and Rally's may agree in writing. The date on which the
Closing occurs is hereinafter referred to as the "Closing Date."
1.3 EFFECTIVE TIME. Subject to the terms and conditions of this Agreement,
at or as promptly as practicable after the Closing, the parties hereto shall
cause a certificate of merger with respect to the Merger in appropriate form
(the "Certificate of Merger"), executed in accordance with the relevant
provisions of the DGCL, to be filed with the Secretary of State of the State of
Delaware as provided in the DGCL. Upon the effectiveness of such filing, or at
such other time as may be specified in such filings, the Merger shall become
effective in accordance with the DGCL. The time and date at which the Merger
becomes effective is herein referred to as the "Effective Time."
ARTICLE 2
GOVERNING DOCUMENTS, DIRECTORS AND OFFICERS
OF SURVIVING ENTITIES
2.1 CERTIFICATE OF INCORPORATION. At the Effective Time and without any
further action on the part of Checkers or Rally's, the certificate of
incorporation of Checkers
A-3
<PAGE>
shall be the certificate of incorporation of Checkers until thereafter amended
as provided therein and under applicable law.
2.2 BY-LAWS. At the Effective Time and without any further action on the
part of Checkers or Rally's, the by-laws of Checkers shall be the by-laws of
Checkers until thereafter amended or repealed in accordance with their terms
and as provided in the certificate of incorporation of Checkers and under
applicable law.
2.3 DIRECTORS AND OFFICERS. The directors of Checkers and Rally's at the
Effective Time shall, from and after the Effective Time, be the directors of
Checkers, and the officers of Checkers at the Effective Time shall, from and
after the Effective Time, remain the officers of Checkers, until, in each case,
their respective successors shall have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the certificate of incorporation and by-laws of Checkers.
ARTICLE 3
CONVERSION OF SHARES
3.1 CONVERSION OF SHARES.
(a) At the Effective Time, each share of Rally's Common Stock, $.10 par
value per share (the "Rally's Common Stock"), issued and outstanding
immediately prior to the Effective Time (other than Rally's Common Stock held
by Checkers, by Rally's in its treasury or by any wholly owned Subsidiary of
Checkers or Rally's (collectively, the "Excluded Shares")), shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into and represent, without interest, but subject to Section 3.3,
1.99 shares of Checkers Common Stock, $.001 par value per share (the "Checkers
Common Stock"), (the "Merger Consideration").
(b) At the Effective Time, all of Rally's Common Stock issued and
outstanding immediately prior to the Effective Time (other than the Excluded
Shares), by virtue of the Merger and without any action on the part of the
holders thereof, shall no longer be outstanding and shall be canceled and
retired and shall cease to exist, and each registered holder of any such
Rally's Common Stock shall thereafter cease to have any rights with respect to
such Rally's Common Stock, except that each holder (other than holders of
Excluded Shares) will have the right to receive, upon the surrender of the
certificate or certificates, if any, representing such Rally's Common Stock in
accordance with Section 3.2, without interest, the Merger Consideration for
such Rally's Common Stock.
(c) At the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof, each Excluded Share shall no longer be
outstanding, shall be canceled and retired without payment of any consideration
therefor, and each registered holder thereof shall thereafter cease to have any
rights with respect to such Rally's Common Stock.
A-4
<PAGE>
(d) At the Effective Time, each share of Checkers Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall not be affected by the Merger, except that each share of
Checkers Common Stock held by Rally's shall, by virtue of the Merger and
without any action on the part of Rally's or Checkers, no longer be outstanding
and shall be canceled and retired, and shall become authorized but unissued
shares of Checkers Common Stock.
3.2 SURRENDER AND PAYMENT.
(a) Prior to the Effective Time, Checkers shall appoint an agent (the
"Exchange Agent") for the purpose of exchanging certificates representing
Rally's Common Stock for the Merger Consideration. At the Effective Time,
Checkers will deposit with the Exchange Agent, for the benefit of holders of
shares of Rally's Common Stock, certificates representing shares of Checkers
Common Stock constituting the aggregate Merger Consideration to be paid in
respect of the Rally's Common Stock. Promptly after the Effective Time,
Checkers shall send, or shall cause the Exchange Agent to send, to each holder
of record of a certificate or certificates which immediately prior to the
Effective Time represented outstanding shares of Rally's Common Stock a form of
letter of transmittal for use in such exchange (which form shall specify that
the delivery shall be effected, and risk of loss and title shall pass, only
upon proper delivery of the certificates, if any, representing Rally's Common
Stock to the Exchange Agent), advising such holder of the terms of the exchange
effected by the Merger and the procedure for surrendering to the Exchange Agent
such certificate for the Merger Consideration.
(b) Each holder of Rally's Common Stock that has been converted into the
Merger Consideration, upon surrender to the Exchange Agent of the certificate
or certificates, if any, representing such Rally's Common Stock, together with
a properly completed letter of transmittal covering such Rally's Common Stock
and such other documents as may be reasonably required by Checkers or the
Exchange Agent, will be entitled to receive the Merger Consideration payable in
respect of such Rally's Common Stock, and the certificate so surrendered shall
be canceled. Until so surrendered, each such certificate shall, after the
Effective Time, represent for all purposes only the right to receive such
Merger Consideration.
(c) If any portion of the Merger Consideration is to be paid to a person
other than the registered holder of the Rally's Common Stock represented by the
certificate or certificates, if any, surrendered in exchange therefor, it shall
be a condition to such payment that the certificate or certificates, if any, so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the person requesting such payment shall pay to the Exchange
Agent any transfer or other taxes required as a result of such payment to a
person other than the registered holder of such Rally's Common Stock or
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers of Rally's Common Stock. If after the Effective Time certificates
representing Rally's Common Stock
A-5
<PAGE>
are presented to either the Surviving Corporation or, subject to the provisions
of Section 3.2(e), the Exchange Agent, they shall be canceled and exchanged for
the Merger Consideration in accordance with the procedures set forth in this
Article 3.
(e) Any portion of the Merger Consideration deposited with the Exchange
Agent pursuant to Section 3.2(a), and any portion of the proceeds from the sale
of fractional shares issuable in connection with the Merger, that remains
unclaimed by the holders of Rally's Common Stock entitled thereto 12 months
after the Effective Time shall be returned by the Exchange Agent to Checkers or
an Affiliate (as defined below) designated by Checkers, and any such holder who
has not exchanged his Rally's Common Stock for the Merger Consideration in
accordance with this Article 3 prior to that time shall thereafter look only to
Checkers for such holder's claim for the Merger Consideration, and the holder's
pro rata share of the aggregate cash received by Checkers upon the sale of
fractional shares otherwise issuable in connection with the Merger and any
dividends or distributions with respect to Checkers Common Stock paid after the
Effective Time. Notwithstanding the foregoing, Checkers shall not be liable to
any holder of Rally's Common Stock for any amount paid to a public authority
pursuant to applicable abandoned property laws. For purposes of this Agreement,
an "Affiliate" of a specified person is a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, the person specified.
(f) No dividends or other distributions with respect to Checkers Common
Stock constituting part of the Merger Consideration shall be paid to the holder
of any unsurrendered certificates representing Rally's Common Stock until such
certificates are surrendered as provided in this Section 3.2. Upon such
surrender, there shall be paid (to the extent due and not yet paid), without
interest, to the person in whose name the certificates representing Checkers
Common Stock into which such Rally's Common Stock were converted are
registered, any dividends and other distributions in respect of Checkers Common
Stock that are payable on a date subsequent to, and the record date for which
occurs after, the Effective Time.
3.3 FRACTIONAL SHARES. No certificates or scrip representing fractional
shares of Checkers Common Stock shall be issued in the Merger, but in lieu
thereof each holder of Rally's Common Stock otherwise entitled to a fractional
share shall be entitled to receive, from the Exchange Agent in accordance with
the provisions of this Section 3.3, a pro rata portion of the net cash proceeds
received by the Exchange Agent upon the sale of fractional shares issuable in
connection with the Merger. As soon as practicable after the determination of
the amount of cash, if any, to be paid to holders of Rally's Common Stock in
lieu of any fractional share, the Exchange Agent shall promptly pay all such
amounts without interest to all holders of Rally's Common Stock entitled
thereto.
3.4 NO FURTHER RIGHTS. At and after the Effective Time, each holder of a
certificate or certificates that represented issued and outstanding Rally's
Common Stock (other than Excluded Shares) immediately prior to the Effective
Time shall cease to have
A-6
<PAGE>
any rights as a stockholder of Rally's, except for the right to receive the
Merger Consideration upon surrender of the holder's certificate or
certificates; provided that the rights of holders of options or warrants to
acquire Rally's Common Stock shall be governed by Section 6.11 and Section 3.6
of this Agreement, respectively.
3.5 CERTAIN ADJUSTMENTS. The exchange ratio set forth in Section 3.1(a)
shall be appropriately adjusted in the event of any changes in the shares of
Checkers Common Stock or Rally's Common Stock by reason of any stock dividend,
reclassification, recapitalization, stock split, combination or exchange of
shares, or any similar event occurring prior to the Effective Time (each, an
"Adjustment Event"), to provide to the holders of Rally's Common Stock the same
economic effect and percentage ownership of Checkers Common Stock as
contemplated by this Agreement prior to such Adjustment Event.
3.6 WARRANTS. Outstanding warrants to purchase Rally's Common Stock will,
by reason of the Merger, be converted into warrants to purchase the Merger
Consideration upon payment of the applicable warrant exercise price, and in all
other respects such warrants will not be affected by the Merger.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF CHECKERS
Checkers represents and warrants to Rally's as follows:
4.1 ORGANIZATION AND STANDING.
(a) Checkers is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation and is duly
qualified to do business, and in good standing, in each jurisdiction in which
the character of the properties owned or leased by it or the conduct of its
business requires it to be so qualified, except where the failure to be so
qualified or to be in good standing would not have a Material Adverse Effect on
Checkers. For purposes of this Agreement, the term "Material Adverse Effect"
means, with respect to any person, an effect that is, or would reasonably be
expected to be, materially adverse to the business, assets, liabilities,
financial condition or results of operations of such person and its
Subsidiaries taken as a whole or to the ability of such party to perform its
obligations hereunder; provided, however, that fluctuations in the market price
of Rally's Common Stock or Checkers Common Stock shall not be deemed to have a
Material Adverse Effect on Rally's or Checkers, as the case may be.
(b) Checkers has furnished to Rally's complete and correct copies of the
organizational documents (each an "Organizational Document") of Checkers and
each of its Subsidiaries, as amended through the date hereof. Such
Organizational Documents are in full force and effect and no other
Organizational Documents are applicable to or binding upon Checkers or any
Subsidiary of Checkers.
A-7
<PAGE>
4.2 AUTHORIZATION, VALIDITY AND EFFECT.
(a) Checkers has the requisite corporate power and authority to execute
and deliver this Agreement, a joint purchasing agreement (as contemplated by
Section 7.1(g)) and all other agreements and documents contemplated hereby or
thereby to be executed and delivered by it, and, subject to approval by
Checkers stockholders, to consummate the transactions contemplated hereby and
thereby. Subject to approval and adoption by Checkers' stockholders of this
Agreement, the execution and delivery of this Agreement, the joint purchasing
agreement and such other agreements and documents, and the consummation of the
transactions contemplated herein and therein, have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
Checkers. This Agreement has been duly and validly executed and delivered by
and represents the legal, valid and binding obligation of Checkers, enforceable
against it in accordance with its terms, except as the enforcement hereof may
be limited by bankruptcy, insolvency or other laws affecting the enforcement of
creditor's rights generally.
(b) The Board of Directors of Checkers has: (i) approved and adopted, and
declared advisable, this Agreement; (ii) recommended to its stockholders that
they approve and adopt this Agreement; and (iii) duly approved the transactions
contemplated by this Agreement for purposes of Article 9 of Checkers'
Certificate of Incorporation and Section 203 of the DGCL such that the
restrictions on "business combinations" set forth in Article 9 of Checkers'
Certificate of Incorporation and Section 203 of the DGCL will not apply to such
transactions.
4.3 CAPITALIZATION.
(a) The authorized capital stock of Checkers consists of: (i) 150,000,000
shares of Checkers Common Stock, of which, as of the date hereof, 73,408,047
shares are issued and outstanding, and 578,904 shares are held in Checkers'
treasury; and (ii) 2,000,000 shares of Preferred Stock, $.001 per value per
share, none of which is outstanding as of the date hereof. As of the date
hereof, Checkers had outstanding options and warrants representing the right to
acquire from Checkers not more than 33,695,815 shares of Checkers Common Stock.
Each such option or warrant, the holder thereof, the grant date, exercise
price, the vesting date and other material terms thereof and the instrument or
plan pursuant to which such option or warrant was issued are described in
SECTION 4.3(B) OF THE DISCLOSURE MEMORANDUM delivered to Rally's three business
days prior to the execution hereof (the "Checkers Disclosure Memorandum").
(b) Except as set forth in Section 4.3(a), there are no shares of capital
stock or other equity securities of Checkers outstanding, and except as set
forth in SECTION 4.3(B) OF THE CHECKERS DISCLOSURE MEMORANDUM, no outstanding
options, warrants or rights to subscribe for, securities or rights convertible
into or exchangeable for, or contracts, commitments or arrangements by which
Checkers is or may be required to issue or sell additional shares of Checkers
Common Stock or any other equity interest in Checkers (collectively, the
"Checkers Equity Rights").
A-8
<PAGE>
(c) Except as described in SECTION 4.3(C) OF THE CHECKERS DISCLOSURE
MEMORANDUM, since September 7, 1998, Checkers has not (i) issued any shares of
Checkers Common Stock or Checkers Equity Rights, other than pursuant to the
exercise of options and warrants that were issued and outstanding on September
7, 1998, (ii) purchased, redeemed or otherwise acquired, directly or indirectly
through one or more Subsidiaries, any of Checkers Common Stock or (iii)
declared, set aside, made or paid to the stockholders of Checkers dividends or
other distributions on the outstanding shares of Checkers Common Stock.
4.4 CHECKERS SUBSIDIARIES.
(a) SECTION 4.4(A) OF THE CHECKERS DISCLOSURE MEMORANDUM lists all
Subsidiaries of Checkers. All of the outstanding shares of capital stock of
each Subsidiary of Checkers are duly and validly issued, fully paid and
non-assessable and are owned by Checkers either directly or indirectly through
another wholly owned Subsidiary of Checkers free and clear of all claims,
liens, charges, encumbrances, defaults or equities of whatever character
("Liens"). No equity securities of any Subsidiary of Checkers may be required
to be issued (other than to Checkers) by reason of any (i) option, warrant or
right to subscribe therefor, (ii) convertible security or securities or rights
exchangeable therefor or (iii) contracts, commitments, understandings or
arrangements. There are no contracts, commitments, understandings or
arrangements by which Checkers or any Subsidiary of Checkers is or may be
obligated to sell, vote or otherwise transfer any shares of the capital stock
of any Subsidiary.
(b) Each Subsidiary of Checkers is duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is incorporated
or organized, has the corporate power and authority necessary for it to own or
lease its properties and assets and to carry on its business as it is now being
conducted, and is duly qualified to do business and in good standing in the
jurisdictions in which the ownership of its property or the conduct of its
business requires it to be so qualified, except for such jurisdictions in which
the failure to be so qualified and in good standing would not have a Material
Adverse Effect on Checkers.
(c) Other than as set forth in SECTION 4.4(C) OF THE CHECKERS DISCLOSURE
MEMORANDUM and except for interests in Subsidiaries, neither Checkers nor any
Subsidiary thereof owns, directly or indirectly, any interest or investment
(whether equity or debt) in any corporation, limited liability company,
partnership, joint venture, business trust or other legal entity.
4.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) None of the execution and delivery by Checkers of this Agreement or
any other agreement contemplated herein, nor the consummation by Checkers of
the transactions contemplated herein or therein, nor compliance by Checkers
with any of the provisions hereof or thereof, will: (i) conflict with or result
in a breach of any provision of the Organizational Documents of Checkers or any
Subsidiary thereof; (ii) constitute or result in
A-9
<PAGE>
the breach of any term, condition or provision of, or constitute a default
under, or give rise to any right of termination, cancellation or acceleration
with respect to, or result in the creation of any Lien upon, any property or
assets of Checkers or any Subsidiary thereof pursuant to any note, bond,
mortgage, indenture, license, agreement, lease or other instrument or
obligation to which any of them is a party or by which any of them or their
respective properties or assets may be subject, and that would, in any such
event, have a Material Adverse Effect on Checkers; or (iii) subject to receipt
of the requisite approvals referred to in Section 4.5(b), violate any order,
writ, injunction, decree, statute, rule or regulation of any governmental,
quasi-governmental, judicial, quasi-judicial or regulatory authority with
jurisdiction, domestic or foreign (each, a "Governmental Authority") applicable
to Checkers, any Subsidiary thereof, or any of their respective properties or
assets where such violation would have a Material Adverse Effect on Checkers.
(b) Other than (i) in connection or compliance with the provisions of
applicable state and federal securities laws and the rules and regulations of
the Securities and Exchange Commission (the "Commission") thereunder, (ii)
notices and completion of the applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (iii) filings with the Secretary of State of the State of Delaware
required to effect the Merger, (iv) in connection or compliance with the
applicable requirements of the Code and state, local and foreign tax laws, (v)
as set forth in SECTION 4.5(B) OF THE CHECKERS DISCLOSURE MEMORANDUM and (vi)
where the failure to give such notice, make such filing or receive such order,
authorization, exemption, consent or approval would not have a Material Adverse
Effect on Checkers, no notice to, filing with, authorization of, exemption by
or consent or approval of any Governmental Authority is necessary for the
consummation by Checkers of the transactions contemplated in this Agreement or
the joint purchasing agreement.
4.6 CHECKERS REPORTS; FINANCIAL STATEMENTS.
(a) Checkers has filed all forms, reports and documents required to be
filed by it with the Commission since January 3, 1995 (collectively, the
"Checkers Reports") pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder. As of their respective dates as subsequently amended
prior to the date of this Agreement, the Checkers Reports (i) complied as to
form in all material respects with the applicable requirements of the Exchange
Act and the rules and regulations promulgated thereunder and (ii) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.
(b) Each of the audited consolidated financial statements and unaudited
consolidated interim financial statements of Checkers (including any related
notes and schedules) included (or incorporated by reference) in its Annual
Report on Form 10-K for the fiscal year ended December 29, 1997, as amended
(the "Checkers Form 10-K"), and its Quarterly
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Report on Form 10-Q for the period ended September 7, 1998 (the "Checkers Form
10-Q"), copies of which have been provided to Rally's (collectively, the
"Checkers Financial Statements"), have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") applied on a
consistent basis (except as disclosed therein) and fairly present, in all
material respects, the consolidated financial position and the consolidated
results of operations, changes in stockholders' equity and cash flows of
Checkers and its consolidated Subsidiaries as of the dates and for the periods
indicated (subject to normal year-end adjustments in the case of the interim
unaudited financial statements).
(c) As of the date of this Agreement, except as set forth in Checkers
Reports or SECTION 4.6(C) OF THE CHECKERS DISCLOSURE MEMORANDUM: (i) no event
has occurred since December 29, 1997 (y) which if such event had occurred prior
to December 29, 1997 would have been required to be disclosed in Checkers Form
10-K or (z) which could have a Material Adverse Effect on Checkers; (ii)
Checkers has not engaged in any transaction with any of its affiliates; and
(iii) neither Checkers nor any Subsidiary of Checkers has any material
outstanding claims against it, liabilities or indebtedness, contingent or
otherwise, nor does there exist any condition, fact or circumstances which
Checkers reasonably anticipates will create such claim or liability, other than
claims or liabilities incurred subsequent to December 29, 1997 in the ordinary
course of business, consistent with past practices, and which individually and
in the aggregate do not have and are not reasonably anticipated to have a
Material Adverse Effect on Checkers.
(d) Since December 29, 1997 and except as disclosed in SECTION 4.6(D) OF
THE CHECKERS DISCLOSURE MEMORANDUM or Checkers Reports, Checkers and its
Subsidiaries have conducted their respective businesses only in the ordinary
course and consistent with past practices.
(e) Since December 29, 1997, except as disclosed in SECTION 4.6(E) OF THE
CHECKERS DISCLOSURE MEMORANDUM and Checkers Reports, there has been no event or
condition that has caused or is reasonably anticipated to cause a Material
Adverse Effect on Checkers.
4.7 TAX AND ACCOUNTING MATTERS.
(a) For purposes of this Section 4.7: (i) the term "Taxes" shall include
all federal, state, county, local or foreign taxes, charges, levies, imposts or
other assessments of any nature whatsoever, including corporate income tax,
corporate franchise tax, payroll tax, sales tax, use tax, property tax, excise
tax, withholding tax, and environmental tax, together with any interest thereon
and any penalties or additions to tax relating thereto imposed by any
governmental taxing authority for which Checkers or any other member of the
Checkers Group (as defined below in this Section 4.7(a)) may be directly or
contingently liable in its own right, as collection agent for taxes imposed on
another person, as a result of any guaranty or election, or as a transferee of
the assets of, or as successor to, any person, or pursuant to any applicable
law; (ii) the term the "Checkers Group" shall mean, individually
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and collectively, Checkers, any Subsidiary of Checkers, and any individual,
trust, corporation, partnership, limited liability company or other entity as
to which Checkers may be liable for Taxes for which Checkers or such individual
or entity may be directly or contingently liable in its own right, as a result
of any guaranty or election, or as a transferee of the assets of, or as
successor to, any person, or pursuant to any applicable law; and (iii) the term
"Returns" shall mean all returns, reports, estimates, declarations of estimated
tax, information statements and other filings relating to, or required to be
filed in connection with, any Taxes, including, without limitation, information
returns or reports with respect to backup or employee withholding and other
payments to third parties.
(b) Except as indicated in SECTION 4.7(B) OF THE CHECKERS DISCLOSURE
MEMORANDUM: (i) all Returns required to be filed by or on behalf of any member
of the Checkers Group have been duly filed on a timely basis and all such
Returns are true, correct and complete in all material respects; (ii) all Taxes
that have been shown as due and payable on the Returns that have been filed by
or on behalf of each member of the Checkers Group have been timely paid, and no
other Taxes are payable by any member of the Checkers Group with respect to
items or periods covered by such Returns (whether or not shown on or reportable
on such Returns); (iii) the amounts set forth as provisions for current and
deferred taxes and/or accrued liabilities in the Checkers Financial Statements
are sufficient for the payment of all unpaid Taxes accrued for or applicable to
all periods ended on the respective dates of the Checkers Financial Statements
and all years and periods prior thereto, and each of the amounts set forth on
the Checkers Financial Statements in respect of current Taxes and deferred
Taxes has been correctly determined in accordance with GAAP; (iv) no member of
the Checkers Group is delinquent in the payment of any Taxes or has requested
any extension of time within which to file any Return, which Return has not
since been filed, accompanied by payment of all Taxes shown as due and payable
thereon; (v) there is no dispute or claim concerning any Tax liability of any
member of the Checkers Group either (A) claimed or raised by any governmental
taxing authority in writing or (B) as to which any director or officer of any
member of the Checkers Group (or employees responsible for Taxes of any such
member of the Checkers Group) has knowledge based upon personal contact with
any agent of such authority, other than those Taxes, identified in SECTION
4.7(B) OF THE CHECKERS DISCLOSURE MEMORANDUM, being contested in good faith by
appropriate proceedings; (vi) no member of the Checkers Group has waived any
statute of limitations in respect of Taxes or granted any extension of the
limitations period applicable to any claim for Taxes; (vii) Checkers is not
liable for the Taxes of any person, including, without limitation, as a result
of the application of United States Treasury Regulation Section 1.1502-6, any
analogous provision of state, local or foreign law (including, without
limitation, principles of unitary taxation), or as a result of any contractual
arrangement, whether with any third party or with any taxing authority; (viii)
Checkers is not nor has it ever been a party to any tax sharing agreement with
any corporation or limited liability company which is not currently a member of
the Checkers Group; (ix) no claim has ever been made by any governmental taxing
authority in any jurisdiction where any member of the Checkers Group does not
file Returns that it is or may be subject to taxation by such jurisdiction; (x)
there are no Liens on any of the assets of any member of the Checkers
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Group that arose in connection with any failure (or alleged failure) to pay any
Taxes; (xi) each member of the Checkers Group has withheld and paid over all
Taxes required to have been withheld and paid over and complied with all
information reporting and backup withholding requirements, including
maintenance of required records with respect thereto, in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party; (xii) no director or officer of any member
of the Checkers Group (or employees responsible for Taxes of such member)
expects any governmental taxing authority to assess any additional Taxes for
any period for which Returns have been filed; (xiii) SECTION 4.7(B) OF THE
CHECKERS DISCLOSURE MEMORANDUM lists all Returns (relating to any type of Tax
and to any taxable period) filed with respect to Checkers that have been
audited and indicates those Returns that currently are the subject of audit;
(xiv) Checkers has delivered or made available to Rally's correct and complete
copies of all federal, state, local and foreign income and franchise Tax
Returns filed with respect to Checkers for all taxable periods for which the
applicable statute of limitations for the assessment of any Tax has not yet
expired, and has provided representatives of Rally's access to all Returns
(relating to any type of Tax and to any taxable period) filed with respect to
Checkers; (xv) Checkers has delivered to Rally's all examination reports and
statements of deficiency assessed against or agreed to by each member of the
Checkers Group since January 1, 1995; (xvi) Checkers is not and has never been
a "United States real property holding corporation" within the meaning of
Section 897(c) of the Code; (xvii) no member of the Checkers Group is a
"consenting corporation" under Section 341(f) of the Code; (xviii) no member of
the Checkers Group has entered into any compensatory agreement with respect to
the performance of services as to which payment or vesting thereunder
(including payment or vesting as a result of the transactions contemplated
hereunder) would result in a nondeductible expense to the Checkers Group
pursuant to Section 280G of the Code or an excise tax to the recipient of such
payment pursuant to Section 4999 of the Code; (xix) Checkers has not agreed,
nor is it required, to make any adjustment under Section 481(a) of the Code by
reason of a change in accounting method or otherwise that would require the
recognition of income pursuant to such adjustment in any post-closing period;
(xx) SECTION 4.7(B) OF THE CHECKERS DISCLOSURE MEMORANDUM sets forth a list of
each joint venture, limited liability company, partnership or other arrangement
or contract which is treated as a partnership for federal income tax purposes
in which Checkers holds a direct or indirect ownership interest as of the date
hereof or during any taxable period as to which the statute of limitations on
the assessment of income or franchise tax has not yet expired; and (xxi) any
past due property taxes for which Checkers or any Subsidiary of Checkers is
liable do not exceed $100,000.
4.8 PROPERTIES. Except as disclosed or reserved against in the Checkers
Financial Statements and except for circumstances that would not have a
Material Adverse Effect on Checkers, Checkers and each Subsidiary thereof has
good title to all of the material properties and assets, tangible or
intangible, reflected in Checkers Financial Statements as being owned by
Checkers and its Subsidiaries as of the dates thereof, free and clear of all
Liens, except such imperfections or irregularities of title as do not affect
the use thereof in any material respect and statutory liens securing payments
not yet delinquent. All leased
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buildings and all leased fixtures, equipment and other property and assets that
are material to the business of Checkers on a consolidated basis are held under
leases or subleases that are valid instruments enforceable in accordance with
their respective terms. All leases to which Checkers or any Subsidiary thereof
is a party were entered into in the ordinary course of business. None of such
leases is with an Affiliate or contains any material terms or conditions which
make any such lease unreasonably onerous or commercially unreasonable.
4.9 COMPLIANCE WITH LAWS. Except as disclosed in the Checkers Reports and
except for environmental matters, which shall be covered by Section 4.16 and
which shall not be covered by this Section 4.9, Checkers and each Subsidiary
thereof: (i) is in compliance with all laws, regulations, reporting and
licensing requirements and orders applicable to its business or employees
conducting its business, the breach or violation of which would have a Material
Adverse Effect on Checkers; and (ii) has received no notification or
communication from any Governmental Authority (y) asserting that it or any of
its Subsidiaries is not in compliance with any of the statutes, regulations or
ordinances that such Governmental Authority enforces, which noncompliance would
have a Material Adverse Effect on Checkers or (z) threatening to revoke any
license, franchise, permit or authorization of any Governmental Authority,
which revocation would have a Material Adverse Effect on Checkers.
4.10 EMPLOYEE BENEFIT PLANS.
(a) Except as listed in SECTION 4.10 OF THE CHECKERS DISCLOSURE
MEMORANDUM, none of Checkers, any of the Subsidiaries of Checkers or any of
their respective ERISA Affiliates (as defined below) maintains, is a party to,
participates in or has any liability or contingent liability with respect to:
(i) any "employee welfare benefit plan" or "employee pension benefit
plan" (as those terms are defined in Sections 3(l) and 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), respectively); or
(ii) any retirement or deferred compensation plan, incentive
compensation plan, stock plan, unemployment compensation plan, vacation pay,
severance pay, bonus or benefit arrangement, insurance or hospitalization
program or any other fringe benefit arrangements for any current or former
employee, director, consultant or agent, whether pursuant to contract,
arrangement, custom or informal understanding, which does not constitute an
employee benefit plan (as defined in Section 3(3) of ERISA).
For purposes of this Agreement, the term "ERISA Affiliate" means, with
respect to any person, any corporation, trade or business which, together with
such person, is a member of a controlled group of corporations or a group of
trades or businesses under common control within the meaning of sections
414(b), (c), (m) or (o) of the Code.
(b) A true and correct copy of each of the plans, arrangements and
agreements listed in SECTION 4.10 OF THE CHECKERS DISCLOSURE MEMORANDUM
(referred to collectively as
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"Checkers Employee Benefit Plans"), and all contracts relating thereto, or to
the funding thereof, including, without limitation, all trust agreements,
insurance contracts, administration contracts, investment management
agreements, subscription and participation agreements, and record keeping
agreements, each as in effect on the date hereof, has been supplied or made
available to Rally's. In the case of any Checkers Employee Benefit Plan which
is not in written form, Rally's has been supplied with an accurate description
of such Checkers Employee Benefit Plan as in effect on the date hereof. A true
and correct copy of the most recent annual report, actuarial report,
accountant's opinion relating to the plan's financial statements, summary plan
description and Internal Revenue Service determination letter with respect to
each Checkers Employee Benefit Plan, to the extent applicable, and a current
schedule of assets (and the fair market value thereof assuming liquidation of
any asset which is not readily tradable) held with respect to any funded
Checkers Employee Benefit Plan has been supplied or made available to Rally's,
and there have been no material changes in the financial condition of the
respective plans from that stated in the annual reports and actuarial reports
supplied.
(c) As to all Checkers Employee Benefit Plans:
(i) Such Plans comply and have been administered in form and in
operation in all material respects with all applicable requirements of law, and
no event has occurred which will or could cause any such Checkers Employee
Benefit Plan to fail to comply with such requirements and no notice has been
issued by any governmental authority questioning or challenging such
compliance.
(ii) Such Plans which are employee pension benefit plans comply in form
and in operation with all applicable requirements of Sections 401(a) and 501(a)
of the Code; there have been no amendments to such Plans which are not the
subject of a favorable determination letter issued with respect thereto by the
Internal Revenue Service; and no event has occurred which will or could give
rise to disqualification of any such Plan under such sections or to a tax under
Section 511 of the Code.
(iii) None of the assets of any such Plan (other than Checkers 401(k)
plan and employee stock purchase plan) are invested in employer securities or
employer real property.
(iv) There have been no "prohibited transactions" (as described in
Section 406 of ERISA or Section 4975 of the Code) with respect to any such Plan
and none of Checkers, any of its Subsidiaries or any of their respective ERISA
Affiliates has engaged in any prohibited transaction.
(v) There have been no acts or omissions by Checkers, any of its
Subsidiaries or any of their respective ERISA Affiliates which have given rise
to or may give rise to fines, penalties, taxes or related charges under section
502 of ERISA or Chapters 43, 47 or 68 of the Code for which Checkers or any of
its Subsidiaries may be liable.
(vi) None of the payments contemplated by such Plans would, in the
aggregate, constitute excess parachute payments (as defined in section 280G of
the Code) and neither
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the execution of this Agreement nor the consummation of the transactions
contemplated by this Agreement would accelerate the payment, vesting or funding
of benefits under any of such Plans.
(vii) There are no actions, suits or claims (other than routine claims
for benefits) pending or, to the actual knowledge of Checkers' President and
Chief Executive Officer or Chief Financial Officer ("Checkers' Knowledge"),
threatened involving any such Plan or the assets thereof and no facts exist
which could give rise to any such actions, suits or claims (other than routine
claims for benefits).
(viii) No such Plan is subject to Title IV of ERISA and no such Plan is
a multi- employer plan (within the meaning of Section 3(37)) of ERISA.
(ix) None of Checkers or any of its Subsidiaries has any liability or
contingent liability for providing, under any such Plan or otherwise, any
post-retirement medical or life insurance benefits, other than statutory
liability for providing group health plan continuation coverage under Part 6 of
Title I of ERISA and Section 4980B of the Code.
(x) Accruals for all obligations under such Plans are reflected in the
financial statements of Checkers in accordance with GAAP.
(xi) To Checkers' Knowledge, there has been no act or omission that
would impair the ability of Checkers or any of its Subsidiaries (or any
successor thereto) to unilaterally amend or terminate any Employee Benefit
Plan.
4.11 MATERIAL CONTRACTS.
(a) Set forth in SECTION 4.11 OF THE CHECKERS DISCLOSURE MEMORANDUM is a
list, as of the date hereof, of the following agreements:
(i) each agreement pursuant to which Checkers or any of its
Subsidiaries is entitled to receive amounts in excess of $100,000 (or the fair
market equivalent thereof in goods or services) on an annual or annualized
basis; each agreement pursuant to which Checkers or any of its Subsidiaries is
obligated to pay an amount in excess of $100,000 (or the fair market equivalent
thereof in goods or services) on an annual or annualized basis; and each
agreement, the term of which exceeds two years and which may not be canceled by
Checkers or any of its Subsidiaries without penalty on one year or less notice,
and pursuant to which Checkers or any of its Subsidiaries is entitled to
receive (in cash, services or property) or will be obligated to pay, during the
unexpired term thereof, an amount in excess of $100,000 (or the fair market
equivalent thereof in goods or services);
(ii) each franchise, partnership, limited liability company, joint
venture or trust agreement to which Checkers or any of its Subsidiaries is a
party;
(iii) each agreement limiting the right of Checkers or any of its
Subsidiaries to engage in or compete with any person in any business or
geographical area;
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(iv) each agreement or other arrangement of or involving Checkers or
any of its Subsidiaries with respect to indebtedness for money borrowed,
including letters of credit, guaranties, indentures, swaps and similar
agreements;
(v) each management, consulting, employment, severance or similar
agreement requiring the payment of compensation in excess of $ 100,000
annually, to which Checkers or any of its Subsidiaries is a party and which may
not be terminated by Checkers or such Subsidiary without penalty on 90 days (or
less) notice;
(vi) each lease or other agreement with respect to real property leased
by Checkers or any of its Subsidiaries and which: requires Checkers or any of
its Subsidiaries to pay an amount or amounts in excess of $100,000 on annual or
annualized basis; or has an unexpired term which exceeds two years and may not
be canceled by Checkers or any of its Subsidiaries without penalty on one year
or less notice and which requires Checkers or any of its Subsidiaries to pay,
during the unexpired term, an amount in excess of $100,000;
(vii) each collective bargaining agreement to which Checkers or any of
its Subsidiaries is a party;
(viii) each agreement with any Affiliate of Checkers (other than
employment agreements and agreements between Checkers and any Subsidiary
thereof) to which Checkers or any of its Subsidiaries is a party which involves
total payments or liabilities to or from Checkers or any of its Subsidiaries in
excess of $60,000;
(ix) each guaranty or indemnification (other than for money borrowed) or
other similar agreement to which Checkers or any of its Subsidiaries is a
party; and
(x) each stockholder agreement, voting trust agreement, share purchase
agreement, registration rights agreement or other similar agreement to which
Checkers is a party or other agreement granting rights to one or more of the
stockholders of Checkers, restricting the voting or transferability of Checkers
Common Stock or otherwise pertaining to Checkers Common Stock or any interest
(economic or voting) therein.
(b) Except for such matters as would not, individually or in the
aggregate, have a Material Adverse Effect on Checkers, each contract identified
in SECTION 4.11 OF THE CHECKERS DISCLOSURE MEMORANDUM (the "Checkers
Contracts") is in full force and effect and is a legal, valid and binding
contract or agreement of Checkers, and there is no default or breach or, to
Checkers' Knowledge, any event that, with the giving of notice or lapse of time
or both, would result in a material default or breach) by Checkers, any of its
Subsidiaries or, to Checkers' Knowledge, any other party in the timely
performance of any obligation to be performed or paid thereunder or any other
material provision thereof. To Checkers' Knowledge, none of its franchisees or
suppliers will terminate or reduce any of their agreements with Checkers, which
termination or reduction would have a Material Adverse Effect on Checkers.
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(c) Except for such matters as would not, individually or in the
aggregate, have a Material Adverse Effect on Checkers, none of Checkers
Contracts will terminate, become terminable by the other party thereto, or have
the terms thereof become amended or amendable by the other party thereto
without the consent of Checkers, as a result of the execution and delivery of
this Agreement, the joint purchasing agreement or any of the other agreements
or documents contemplated hereby or thereby or the consummation of the
transactions contemplated hereby or thereby.
4.12 LEGAL PROCEEDINGS. Except as set forth in SECTION 4.12 OF THE
CHECKERS DISCLOSURE MEMORANDUM, there are no actions, suits or proceedings
instituted or pending or, to Checkers' Knowledge, threatened, against Checkers
or any of its Subsidiaries or against any property, asset, interest or right of
any of them, that involve more than $100,000 in controversy, whether or not
covered by insurance, or that seek relief other than money damages from
Checkers or any of its subsidiaries, or that would have, either individually or
in the aggregate, a Material Adverse Effect on Checkers if adversely decided.
Neither Checkers nor any of its Subsidiaries is subject to any judgment, order,
writ, injunction or decree that would have a Material Adverse Effect on
Checkers.
4.13 CERTAIN INFORMATION.
(a) When the Registration Statement (as defined in Section 6.4) to be
filed with the Commission by Checkers pursuant to Section 6.4 or any
post-effective amendment thereto shall become effective, and at all times
subsequent thereto up to and including the Effective Time, such Registration
Statement and all amendments or supplements thereto, with respect to all
information set forth therein furnished by Checkers relating to Checkers or its
Subsidiaries, shall comply as to form in all material respects with the
provisions of all applicable securities laws. Any written information supplied
or to be supplied by Checkers specifically for inclusion in the Joint Proxy
Statement/Prospectus, at the time it is sent to Checkers stockholders, or the
Registration Statement at the time it is filed with the Commission and when it
is declared effective by the Commission, will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they
were made not misleading.
(b) If at any time prior to the Effective Time, any event occurs of which
Checkers has knowledge and which is required to be described in the
Registration Statement or any supplement or amendment thereto, Checkers will
file and disseminate, as required, a supplement or amendment which complies as
to form in all material respects with the provisions of all applicable
securities laws. Prior to its filing with the Commission, the Registration
Statement and each amendment or supplement thereto shall be delivered to
Rally's and its counsel.
(c) All documents that Checkers is responsible for filing with the
Commission or any other Governmental Authority in connection with the
transactions contemplated hereby shall
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comply as to form in all material respects with the provisions of applicable
law and the applicable rules and regulations thereunder.
4.14 NO BROKERS. Checkers has not entered into a contract, arrangement or
understanding with any person or firm that may result in the obligation of
Checkers or any of its Subsidiaries to pay any finder's fees, brokerage or
agent's commissions or other like payments in connection with the negotiations
leading to this Agreement, or the consummation of the transactions contemplated
hereby or thereby, except that Checkers has retained Credit Suisse First Boston
Corporation as its financial advisor.
4.15 OPINION OF FINANCIAL ADVISOR. The Independent Committee of the Board
of Directors of Checkers has received the opinion (the "Checkers Opinion") of
Credit Suisse First Boston Corporation (the "Checkers Financial Advisor") to
the effect that, as of the date hereof and based upon and subject to certain
matters stated in such opinion, the 1.99 exchange ratio set forth in Section
3.1(a) is fair to Checkers from a financial point of view. A copy of such
written opinion and any amendments or supplements thereto shall be delivered to
Rally's as promptly as practicable after receipt thereof by Checkers.
4.16 ENVIRONMENTAL. Except as disclosed in SECTION 4.16 OF THE CHECKERS
DISCLOSURE MEMORANDUM and except insofar as inaccuracies in the following
statements would not have a Material Adverse Effect on Checkers (and with
respect to properties formerly owned or leased by Checkers or any of its
Subsidiaries, only with respect to such period of ownership or lease): (i) the
properties owned or leased by Checkers or any of its Subsidiaries and
properties formerly owned or leased by Checkers or any of its Subsidiaries for
which Checkers has contractual liability (the "Checkers Properties") are or
were, as the case may be, in compliance in all material respects with all
applicable federal, state and local environmental and hazardous waste laws and
regulations; (ii) no enforcement actions are pending or threatened against
Checkers or any of its Subsidiaries and no notice of potential liability or
administrative or judicial proceedings (including notices regarding clean up of
off-site third party hazardous waste sites) has been received by Checkers or
such Subsidiary; (iii) there does not now exist on any Checkers Properties
currently owned or leased by Checkers, and there has not occurred on, from or
under Checkers Properties, a material disposal or release of, Hazardous
Substances, Hazardous Wastes or Contaminants (as such terms are defined in
SECTION 4.16 OF THE CHECKERS DISCLOSURE MEMORANDUM; (iv) Checkers Properties
contain no unregistered underground storage tanks; (v) neither Checkers nor any
of its Subsidiaries nor any of their respective predecessors has any contingent
liability in connection with the release of any Hazardous Substances, Hazardous
Wastes or Contaminants into the environment; and (vi) neither Checkers or any
of its Subsidiaries nor any of their respective predecessors has (A) given any
release or waiver of liability that would waive or impair any claim based on
Hazardous Substances, Hazardous Wastes or Contaminants to any current or prior
tenant or owner of any real property owned or leased at any time by either
Checkers or any of its Subsidiaries or to any party who may be potentially
responsible for the presence of Hazardous Substances, Hazardous Wastes or
Contaminants on any such real property; or (B) made any promise of
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indemnification to any party regarding Hazardous Substances, Hazardous Wastes
or Contaminants that may be located on any real property owned or leased at any
time by either Checkers or any Subsidiary or any of their respective
predecessors. SECTION 4.16 OF THE CHECKERS DISCLOSURE MEMORANDUM contains a
description of environmental indemnities of which either Checkers or any of its
Subsidiaries is a beneficiary.
4.17 PERSONNEL. Except as set forth in SECTION 4.17 OF THE CHECKERS
DISCLOSURE MEMORANDUM, there is no outstanding liability for arrears of wages,
payroll taxes or failure to comply with applicable employment laws and there
are no labor disputes existing, or to Checkers' Knowledge, threatened,
involving strikes, work stoppages, slow downs or lockouts. There are no
grievance proceedings or claims of unfair labor practices filed or, to
Checkers' Knowledge, threatened to be filed with the National Labor Relations
Board against Checkers or any of its Subsidiaries. To Checkers' Knowledge,
there is no union representation or organizing effort pending or threatened
against Checkers or any Subsidiary. Neither Checkers nor any Subsidiary has
agreed to recognize any union or other collective bargaining unit except those
governed by the terms of the agreements listed in SECTION 4.11 OF THE CHECKERS
DISCLOSURE MEMORANDUM.
4.18 TAKEOVER STATUTES. Except for Article 9 of Checkers' Certificate of
Incorporation, Sections 607.0901--607.0903 of the Florida 1989 Business
Corporation Act and Section 203 of the DGCL, no "fair price," "moratorium,"
"control share acquisition" or other anti-takeover statute or regulation
enacted under any federal or state or foreign law, applicable to Checkers is
applicable to the Merger or the other transactions contemplated hereby.
4.19 INTELLECTUAL PROPERTY. Except as set forth in SECTION 4.19 OF THE
CHECKERS DISCLOSURE MEMORANDUM: (i) Checkers and each of its Subsidiaries owns
or possesses or has all Intellectual Property necessary to conduct its business
as conducted; (ii) neither Checkers nor any of its Subsidiaries has received
any unresolved notice of, or is aware of any fact or circumstance that would
give any third party a right to assert, infringement or misappropriation of, or
conflict with, asserted rights of others or invalidity or unenforceability of
any Intellectual Property owned by Checkers or any of its Subsidiaries; (iii)
the use of such Intellectual Property to conduct the business and operations of
Checkers and its Subsidiaries as conducted does not infringe on the rights of
any person; (iv) no person is challenging or infringing on or otherwise
violating any right of Checkers or any of its Subsidiaries with respect to any
Intellectual Property owned by and/or licensed to Checkers or any of its
Subsidiaries; (v) neither the execution of this Agreement nor the consummation
of the transactions contemplated hereby will result in a loss or limitation in
(x) the rights and licenses of Checkers or any of its Subsidiaries to use or
enjoy the benefit of any Intellectual Property employed by them in connection
with their business as conducted (y) the amount of any royalties or other
benefits received by Checkers or any of its Subsidiaries from Intellectual
Property owned by it.
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4.20 INSURANCE. Checkers and its Subsidiaries maintain, with reputable
insurers, insurance in such amounts, including deductible arrangements, and of
such a character as is usually maintained by reasonably prudent managers of
companies engaged in the same or similar business.
4.21 YEAR 2000 COMPLIANCE. Except as set forth in SECTION 4.21 OF THE
CHECKERS DISCLOSURE MEMORANDUM, Checkers' information systems are designed to
be used prior to, during and after the calendar year 2000 A.D., and its
information systems will accurately receive, provide and process date/time data
(including but not limited to calculating, comparing and sequencing) from, into
and between the twentieth and twenty-first centuries, including the years 1999
and 2000, and leap year calculations, and will not malfunction, cease to
function, or provide invalid or incorrect results as a result of time/date
data.
4.22 VOTING REQUIREMENTS. The affirmative vote of the holders of a
majority of the outstanding shares of Checkers Common Stock is the only vote of
the holders of any class or series of Checkers capital stock necessary to
approve and adopt this Agreement, the Merger and the other transactions
contemplated hereby.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF RALLY'S
Rally's represents and warrants to Checkers as follows:
5.1 ORGANIZATION AND STANDING.
(a) Rally's is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation and is duly qualified
to do business, and is in good standing, in each jurisdiction in which the
character of the properties owned or leased by it or the conduct of its
business requires it to be so qualified, except where the failure to be so
qualified or to be in good standing would not have a Material Adverse Effect on
Rally's.
(b) Rally's has furnished to Checkers complete and correct copies of its
Certificate of Incorporation and By-laws and of the Certificate of
Incorporation and By-laws or similar Organizational Documents of each of its
Subsidiaries, as amended through the date hereof. Such Organizational Documents
are in full force and effect and no other organizational documents are
applicable to or binding upon Rally's or any Subsidiary of Rally's.
5.2 AUTHORIZATION, VALIDITY AND EFFECT.
(a) Rally's has the requisite corporate power and authority to execute and
deliver this Agreement, the Rally's Voting Agreement and all other agreements
and documents contemplated hereby or thereby to be executed and delivered by
it, and, subject to
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stockholder approval, to consummate the transactions contemplated hereby and
thereby. Subject to approval and adoption by Rally's stockholders of this
Agreement, the execution and delivery of this Agreement, the Rally's Voting
Agreement and such other agreements and documents, and the consummation of the
transactions, contemplated herein and therein, have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
Rally's. This Agreement has been duly and validly executed and delivered by
Rally's and represent the legal, valid and binding obligation of Rally's
enforceable against it in accordance with their respective terms, except as the
enforcement hereof may be limited by bankruptcy, insolvency or other laws
affecting the enforcement of creditor's rights generally.
(b) The Board of Directors of Rally's has duly approved the transactions
contemplated by this Agreement for the purposes of Section 203 of the DGCL,
such that the restrictions on "business combinations" set forth in Section 203
of the DGCL will not apply to such transactions.
5.3 CAPITALIZATION.
(a) The authorized capital stock of Rally's consists of: (i) 50,000,000
shares of Rally's Common Stock, of which, as of the date hereof, 29,335,243
shares are issued and outstanding and 273,445 shares are held in Rally's
treasury; and (ii) 5,000,000 shares of Preferred Stock, $.10 per value per
share (the "Rally's Preferred Stock"), none of which is outstanding as of the
date hereof. All of the outstanding shares of Rally's Common Stock are duly and
validly issued and outstanding and are fully paid and non-assessable. As of the
date hereof, Rally's had outstanding options and warrants representing the
right to acquire from Rally's not more than 11,740,544 shares of Rally's Common
Stock, subject to adjustment. Each such option or warrant, the holder thereof,
the grant date, exercise price, the vesting date and other material terms
thereof and the instrument or plan pursuant to which such option or warrant was
issued are described in SECTION 5.3(B) OF THE DISCLOSURE MEMORANDUM delivered
to Checkers three business days prior to the execution hereof (the "Rally's
Disclosure Memorandum").
(b) Except as set forth in Section 5.3(a), there are no shares of capital
stock or other equity securities of Rally's outstanding, and except as set
forth in SECTION 5.3(B) OF THE RALLY'S DISCLOSURE MEMORANDUM, no outstanding
options, warrants or rights to subscribe for, securities or rights convertible
into or exchangeable for, or contracts, commitments or arrangements by which
Rally's is or may be required to issue or sell additional Rally's Common Stock
or any other equity interest in Rally's (collectively, "Rally's Equity
Rights").
(c) Except as described in SECTION 5.3(C) OF THE RALLY'S DISCLOSURE
MEMORANDUM, since September 6, 1998, Rally's has not (i) issued any Rally's
Common Stock or Rally's Equity Rights, other than pursuant to the exercise of
options and warrants that were issued and outstanding on September 6, 1998,
(ii) purchased, redeemed or otherwise acquired, directly or indirectly through
one or more Subsidiaries, any Rally's Common Stock or
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(iii) declared, set aside, made or paid to the stockholders of Rally's
dividends or other distributions on the outstanding Rally's Common Stock.
5.4 RALLY'S SUBSIDIARIES.
(a) SECTION 5.4(A) OF THE RALLY'S DISCLOSURE MEMORANDUM lists all
Subsidiaries of Rally's. All of the outstanding shares of capital stock of each
Subsidiary of Rally's are duly and validly issued, fully paid and
non-assessable and are owned by Rally's either directly or indirectly through
another wholly owned Subsidiary of Rally's free and clear of all Liens. No
equity securities of any Subsidiary may be required to be issued (other than to
Rally's) by reason of any (i) option, warrant or right to subscribe therefor,
(ii) convertible security or securities or rights exchangeable therefor, or
(iii) contracts, commitments, understandings or arrangements. There are no
contracts, commitments, understandings or arrangements by which Rally's or any
Subsidiary of Rally's is or may be obligated to sell, vote or otherwise
transfer any shares of the capital stock of any Subsidiary of Rally's.
(b) Each Subsidiary of Rally's is duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated or
organized, has the corporate power and authority necessary for it to own or
lease its properties and assets and to carry on its business as it is now being
conducted, and is duly qualified to do business and in good standing in the
jurisdictions in which the ownership of its property or the conduct of its
business requires it to be so qualified, except for such jurisdictions in which
the failure to be so qualified and in good standing would not have a Material
Adverse Effect on Rally's.
(c) Other than as set forth in SECTION 5.4(C) OF THE RALLY'S DISCLOSURE
MEMORANDUM and except for interests in Subsidiaries, neither Rally's nor any
Subsidiary thereof owns, directly or indirectly, any interest or investment
(whether equity or debt) in any corporation, limited liability company,
partnership, joint venture, business, trust or other legal entity.
5.5 NO CONFLICT; REQUIRED FILINGS AND CONSENTS.
(a) Neither the execution and delivery by Rally's of this Agreement, the
Rally's Voting Agreement or any other agreement contemplated herein or therein
to which it is a party nor the consummation by Rally's of the transactions
contemplated herein or therein, nor compliance by Rally's with any of the
provisions hereof or thereof will: (i) conflict with or result in a breach of
any provision of the Organizational Documents of Rally's or any Subsidiary
thereof; (ii) constitute or result in the breach of any term, condition or
provision of, or constitute a default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any Lien upon, any property or assets of Rally's or any Subsidiary
thereof pursuant to, any note, bond, mortgage, indenture, license, agreement,
lease or other instrument or obligation to which any of them is a party or by
which any of them or any of their properties or assets may be subject, and that
would, in any such event, have a Material Adverse Effect on Rally's; or (iii)
subject to receipt of the requisite approvals referred to in Section 5.5(b),
violate any order, writ, injunction, decree, statute, rule or regulation of any
Governmental Authority, applicable to
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Rally's or any Subsidiary thereof or any of their respective properties or
assets which violation would have a Material Adverse Effect on Rally's; or (iv)
constitute or result in a Change of Control, as that term is used and defined
in the Indenture, dated as of March 1, 1993, by and among Rally's, as issuer,
certain of its subsidiaries, as subsidiary guarantors, and Chase Manhattan
Trust Company, N.A., as successor trustee (the "Indenture"), or require
Rally's, Checkers or any other person to make a Change of Control Offer
pursuant to Section 4.14 of the Indenture, or otherwise give rise to any
obligation to offer to purchase the securities issued pursuant to the
Indenture.
(b) Other than (i) in connection or compliance with the provisions of
applicable state and federal securities laws, and the rules and regulations of
the Commission thereunder, (ii) notices and completion of the applicable
waiting period under the HSR Act, (iii) filings with the Secretary of State of
the State of Delaware required to effect the Merger, (iv) in connection or
compliance with the applicable requirements of the Code, and state, local and
foreign tax laws, (v) as set forth in SECTION 5.5(B) OF THE RALLY'S DISCLOSURE
MEMORANDUM and (vi) where the failure to give such notice, make such filing or
receive such order, authorization, exemption, consent or approval would not
have a Material Adverse Effect on Rally's, no notice to, filing with,
authorization of, exemption by or consent or approval of any Governmental
Authority is necessary for the consummation by Rally's of the transactions
contemplated in this Agreement or the Rally's Voting Agreement.
5.6 RALLY'S REPORTS; FINANCIAL STATEMENTS.
(a) Rally's has filed all forms, reports and documents required to be
filed by it with the Commission since January 2, 1995 (collectively, the
"Rally's Reports") pursuant to Section 13 or 15(d) of the Exchange Act, and the
rules and regulations promulgated thereunder. As of their respective dates as
subsequently amended prior to the date of this Agreement, the Rally's Reports
(i) complied as to form in all material respects with the applicable
requirements of the Exchange Act and the rules and regulations promulgated
thereunder and (ii) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which
they were made, not misleading.
(b) Each of the audited consolidated financial statements and unaudited
consolidated interim financial statements of Rally's (including any related
notes and schedules) included (or incorporated by reference) in its Annual
Report on Form 10-K for the fiscal year ended December 28, 1997, as amended
(the "Rally's Form 10-K"), and its Quarterly Report on Form 10-Q for the period
ended September 6, 1998 (the "Rally's Form 10-Q"), copies of which have been
provided to Checkers (collectively, the "Rally's Financial Statements"), have
been prepared in accordance with GAAP applied on a consistent basis (except as
disclosed therein) and fairly present, in all material respects, the
consolidated financial position and the consolidated results of operations,
changes in stockholders' equity and cash flows of Rally's and its consolidated
Subsidiaries as of the dates and for the periods indicated (subject to normal
year-end adjustments in the case of the interim unaudited financial
statements).
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(c) As of the date of this Agreement, except set forth in the Rally's
Reports or SECTION 5.6(C) OF THE RALLY'S DISCLOSURE MEMORANDUM: (i) no event
has occurred since December 28, 1997 (y) which if such event had occurred prior
to December 28, 1997 would have been required to be disclosed in the Rally's
Form 10-K or (z) which could have a Material Adverse Effect on Rally's; (ii)
Rally's has not engaged in any transaction with any of its affiliates and (iii)
neither Rally's nor any Subsidiary of Rally's has any material outstanding
claims against it, liabilities or indebtedness, contingent or otherwise, nor
does there exist any condition, fact or circumstances which Rally's reasonably
anticipates will create such claim or liability, other than claims or
liabilities incurred subsequent to December 28, 1997 in the ordinary course of
business, consistent with past practices, and which individually and in the
aggregate do not have and are not reasonably anticipated to have a Material
Adverse Effect on Rally's.
(d) Since December 28, 1997 and except as disclosed in SECTION 5.6(D) OF
THE RALLY'S DISCLOSURE MEMORANDUM or the Rally's Reports, Rally's and its
Subsidiaries have conducted their respective businesses only in the ordinary
course and consistent with past practices.
(e) Since December 28, 1997, except as disclosed in SECTION 5.6(E) OF THE
RALLY'S DISCLOSURE MEMORANDUM and the Rally's Reports, there has been no event
or condition that has caused or is reasonably anticipated to cause a Material
Adverse Effect on Rally's.
5.7 TAX AND ACCOUNTING MATTERS.
(a) For purposes of this Section 5.7: (i) the term "Taxes" shall include
all federal, state, county, local or foreign taxes, charges, levies, imposts or
other assessments of any nature whatsoever, including corporate income tax,
corporate franchise tax, payroll tax, sales tax, use tax, property tax, excise
tax, withholding tax, and environmental tax, together with any interest thereon
and any penalties or additions to tax relating thereto imposed by any
governmental taxing authority for which Rally's or any other member of the
Rally's Group (as defined below in this Section 5.7(a)) may be directly or
contingently liable in its own right, as collection agent for taxes imposed on
another person, as a result of any guaranty or election, or as a transferee of
the assets of, or as successor to, any person, or pursuant to any applicable
law; (ii) the term the "Rally's Group" shall mean, individually and
collectively, Rally's, any Subsidiary of Rally's, and any individual, trust,
corporation, partnership, limited liability company or other entity as to which
Rally's may be liable for Taxes for which Rally's or such individual or entity
may be directly or contingently liable in its own right, as a result of any
guaranty or election, or as a transferee of the assets of, or as successor to,
any person, or pursuant to any applicable law; and (iii) the term "Returns"
shall mean all returns, reports, estimates, declarations of estimated tax,
information statements and other filings relating to, or required to be filed
in connection with, any Taxes, including, without limitation, information
returns or reports with respect to backup or employee withholding and other
payments to third parties.
(b) Except as indicated in SECTION 5.7(B) OF THE RALLY'S DISCLOSURE
MEMORANDUM: (i) all Returns required to be filed by or on behalf of any member
of the Rally's Group have
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been duly filed on a timely basis and all such Returns are true, correct and
complete in all material respects; (ii) all Taxes that have been shown as due
and payable on the Returns that have been filed by or on behalf of each member
of the Rally's Group have been timely paid, and no other Taxes are payable by
any member of the Rally's Group with respect to items or periods covered by
such Returns (whether or not shown on or reportable on such Returns); (iii) the
amounts set forth as provisions for current and deferred taxes and/or accrued
liabilities in the Rally's Financial Statements are sufficient for the payment
of all unpaid Taxes accrued for or applicable to all periods ended on the
respective dates of the Rally's Financial Statements and all years and periods
prior thereto, and each of the amounts set forth on the Rally's Financial
Statements in respect of current Taxes and deferred Taxes has been correctly
determined in accordance with GAAP; (iv) no member of the Rally's Group is
delinquent in the payment of any Taxes or has requested any extension of time
within which to file any Return, which Return has not since been filed,
accompanied by payment of all Taxes shown as due and payable thereon; (v) there
is no dispute or claim concerning any Tax liability of any member of the
Rally's Group either (A) claimed or raised by any governmental taxing authority
in writing or (B) as to which any director or officer of any member of the
Rally's Group (or employees responsible for Taxes of any such member of the
Rally's Group) has knowledge based upon personal contact with any agent of such
authority, other than those Taxes, identified in SECTION 5.7(B) OF THE RALLY'S
DISCLOSURE MEMORANDUM, being contested in good faith by appropriate
proceedings; (vi) no member of the Rally's Group has waived any statute of
limitations in respect of Taxes or granted any extension of the limitations
period applicable to any claim for Taxes; (vii) Rally's is not liable for the
Taxes of any person, including, without limitation, as a result of the
application of United States Treasury Regulation Section 1.1502-6, any
analogous provision of state, local or foreign law (including, without
limitation, principles of unitary taxation), or as a result of any contractual
arrangement, whether with any third party or with any taxing authority; (viii)
Rally's is not nor has it ever been a party to any tax sharing agreement with
any corporation or limited liability company which is not currently a member of
the Rally's Group; (ix) no claim has ever been made by any governmental taxing
authority in any jurisdiction where any member of the Rally's Group does not
file Returns that it is or may be subject to taxation by such jurisdiction; (x)
there are no Liens on any of the assets of any member of the Rally's Group that
arose in connection with any failure (or alleged failure) to pay any Taxes;
(xi) each member of the Rally's Group has withheld and paid over all Taxes
required to have been withheld and paid over and complied with all information
reporting and backup withholding requirements, including maintenance of
required records with respect thereto, in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder, or other third
party; (xii) no director or officer of any member of the Rally's Group (or
employees responsible for Taxes of such member) expects any governmental taxing
authority to assess any additional Taxes for any period for which Returns have
been filed; (xiii) SECTION 5.7(B) OF THE RALLY'S DISCLOSURE MEMORANDUM lists
all Returns (relating to any type of Tax and to any taxable period) filed with
respect to Rally's that have been audited and indicates those Returns that
currently are the subject of audit; (xiv) Rally's has delivered or made
available to Checkers correct and complete copies of all federal, state,
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local and foreign income and franchise Tax Returns filed with respect to
Rally's for all taxable periods for which the applicable statute of limitations
for the assessment of any Tax has not yet expired, and has provided
representatives of Checkers access to all Returns (relating to any type of Tax
and to any taxable period) filed with respect to Rally's; (xv) Rally's has
delivered to Checkers all examination reports and statements of deficiency
assessed against or agreed to by each member of the Rally's Group since January
2, 1995; (xvi) Rally's is not and has never been a "United States real property
holding corporation" within the meaning of Section 897(c) of the Code; (xvii)
no member of the Rally's Group is a "consenting corporation" under Section
341(f) of the Code; (xviii) no member of the Rally's Group has entered into any
compensatory agreement with respect to the performance of services as to which
payment or vesting thereunder (including payment or vesting as a result of the
transactions contemplated hereunder) would result in a nondeductible expense to
the Rally's Group pursuant to Section 280G of the Code or an excise tax to the
recipient of such payment pursuant to Section 4999 of the Code; (xix) Rally's
has not agreed, nor is it required, to make any adjustment under Section 481(a)
of the Code by reason of a change in accounting method or otherwise that would
require the recognition of income pursuant to such adjustment in any
post-closing period; (xx) SECTION 5.7(B) OF THE RALLY'S DISCLOSURE MEMORANDUM
sets forth a list of each joint venture, limited liability company, partnership
or other arrangement or contract which is treated as a partnership for federal
income tax purposes in which Rally's holds a direct or indirect ownership
interest as of the date hereof or during any taxable period as to which the
statute of limitations on the assessment of income or franchise tax has not yet
expired; and (xxi) any past due property taxes for which Rally's or any
Subsidiary of Rally's is liable do not exceed $100,000.
5.8 PROPERTIES. Except as disclosed or reserved against in the Rally's
Financial Statements and except for circumstances that would not have a
Material Adverse Effect on Rally's, Rally's and each Subsidiary thereof has
good title to all of the material properties and assets, tangible or
intangible, reflected in the Rally's Financial Statements as being owned by
Rally's and its Subsidiaries as of the dates thereof, free and clear of all
Liens, except such imperfections or irregularities of title as do not affect
the use thereof in any material respect and statutory liens securing payments
not yet delinquent. All leased buildings and all leased fixtures, equipment and
other property and assets that are material to the business of Rally's on a
consolidated basis are held under leases or subleases that are valid
instruments enforceable in accordance with their respective terms. All leases
to which Rally's or any Subsidiary thereof is a party were entered into in the
ordinary course of business. None of such leases is with an Affiliate or
contains any material terms or conditions which make any such lease
unreasonably onerous or commercially unreasonable.
5.9 COMPLIANCE WITH LAWS. Except as disclosed in the Rally's Reports and
except for environmental matters, which shall be covered by Section 5.16 hereof
and which shall not be covered by this Section 5.9, Rally's and each Subsidiary
thereof: (i) is in compliance with all laws, regulations, reporting and
licensing requirements and orders applicable to its business or employees
conducting its business, the breach or violation of
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which would have a Material Adverse Effect on Rally's; and (ii) has received
no notification or communication from any Governmental Authority (y) asserting
that it or any of its Subsidiaries is not in compliance with any of the
statutes, regulations or ordinances that such Governmental Authority enforces,
which noncompliance would have a Material Adverse Effect on Rally's or (z)
threatening to revoke any license, franchise, permit or authorization of any
Governmental Authority, which revocation would have a Material Adverse Effect
on Rally's.
5.10 EMPLOYEE BENEFIT PLANS.
(a) Except as listed in SECTION 5.10 OF THE RALLY'S DISCLOSURE MEMORANDUM,
none of Rally's, any of the Subsidiaries of Rally's or any of their respective
ERISA Affiliates maintains, is a party to, participates in or has any liability
or contingent liability with respect to:
(i) any "employee welfare benefit plan" or "employee pension benefit
plan" (as those terms are defined in Sections 3(l) and 3(2) of ERISA
respectively); or
(ii) any retirement or deferred compensation plan, incentive
compensation plan, stock plan, unemployment compensation plan, vacation pay,
severance pay, bonus or benefit arrangement, insurance or hospitalization
program or any other fringe benefit arrangements for any current or former
employee, director, consultant or agent, whether pursuant to contract,
arrangement, custom or informal understanding, which does not constitute an
employee benefit plan (as defined in Section 3(3) of ERISA).
(b) A true and correct copy of each of the plans, arrangements, and
agreements listed in SECTION 5.10 OF THE RALLY'S DISCLOSURE MEMORANDUM
(referred to collectively as "Rally's Employee Benefit Plans"), and all
contracts relating thereto, or to the funding thereof, including, without
limitation, all trust agreements, insurance contracts, administration
contracts, investment management agreements, subscription and participation
agreements, and record keeping agreements, each as in effect on the date
hereof, has been supplied or made available to Checkers. In the case of any
Rally's Employee Benefit Plan which is not in written form, Checkers has been
supplied with an accurate description of such Rally's Employee Benefit Plan as
in effect on the date hereof. A true and correct copy of the most recent annual
report, actuarial report, accountant's opinion relating to of the plan's
financial statements, summary plan description and Internal Revenue Service
determination letter with respect to each Rally's Employee Benefit Plan, to the
extent applicable, and a current schedule of assets (and the fair market value
thereof assuming liquidation of any asset which is not readily tradable) held
with respect to any funded Rally's Employee Benefit Plan has been supplied or
made available to Checkers, and there have been no material changes in the
financial condition of the respective plans from that stated in the annual
reports and actuarial reports supplied.
(c) As to all Rally's Employee Benefit Plans:
(i) Such Plans comply and have been administered in form and in
operation in all material respects with all applicable requirements of law, and
no event has occurred which
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will or could cause any such Rally's Employee Benefit Plan to fail to comply
with such requirements and no notice has been issued by any governmental
authority questioning or challenging such compliance.
(ii) Such Plans which are employee pension benefit plans comply in form
and in operation with all applicable requirements of Sections 401(a) and 501(a)
of the Code; there have been no amendments to such Plans which are not the
subject of a favorable determination letter issued with respect thereto by the
Internal Revenue Service; and no event has occurred which will or could give
rise to disqualification of any such Plan under such sections or to a tax under
Section 511 of the Code.
(iii) None of the assets of any such Plan (other than Rally's employee
stock purchase plan) are invested in employer securities or employer real
property.
(iv) There have been no "prohibited transactions" (as described in
Section 406 of ERISA or Section 4975 of the Code) with respect to any such Plan
and none of Rally's, any of its Subsidiaries or any of their respective ERISA
Affiliates has engaged in any prohibited transaction.
(v) There have been no acts or omissions by Rally's, any of its
Subsidiaries or any of their respective ERISA Affiliates which have given rise
to or may give rise to fines, penalties, taxes or related charges under section
502 of ERISA or Chapters 43, 47 or 68 of the Code for which Rally's or any of
its Subsidiaries may be liable.
(vi) None of the payments contemplated by such Plans would, in the
aggregate, constitute excess parachute payments (as defined in section 280G of
the Code) and neither the execution of this Agreement nor the consummation of
the transactions contemplated by this Agreement would accelerate the payment,
vesting or funding of benefits under any of such Plans.
(vii) There are no actions, suits or claims (other than routine claims
for benefits) pending or, to the actual knowledge of Rally's President and
Chief Executive Officer or Chief Financial Officer ("Rally's Knowledge"),
threatened involving any such Plan or the assets thereof and no facts exist
which could give rise to any such actions, suits or claims (other than routine
claims for benefits).
(viii) No such Plan is subject to Title IV of ERISA and no such Plan is
a multi- employer plan (within the meaning of Section 3(37)) of ERISA.
(ix) None of Rally's or any of its Subsidiaries has any liability or
contingent liability for providing, under any such Plan or otherwise, any
post-retirement medical or life insurance benefits, other than statutory
liability for providing group health plan continuation coverage under Part 6 of
Title I of ERISA and Section 4980B of the Code.
(x) Accruals for all obligations under such Plans are reflected in the
financial statements of Rally's in accordance with GAAP.
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(xi) To Rally's Knowledge, there has been no act or omission that would
impair the ability of Rally's or any of its Subsidiaries (or any successor
thereto) to unilaterally amend or terminate any Employee Benefit Plan.
5.11 MATERIAL CONTRACTS.
(a) Set forth in SECTION 5.11 OF THE RALLY'S DISCLOSURE MEMORANDUM is a
list, as of the date hereof, of the following agreements:
(i) each agreement pursuant to which Rally's or any of its Subsidiaries
is entitled to receive amounts in excess of $100,000 (or the fair market
equivalent thereof in goods or services) on an annual or annualized basis; each
agreement pursuant to which Rally's or any of its Subsidiaries is obligated to
pay an amount in excess of $100,000 (or the fair market equivalent thereof in
goods or services) on an annual or annualized basis; and each agreement, the
term of which exceeds two years and which may not be canceled by Rally's or any
of its Subsidiaries without penalty on one year or less notice, and pursuant to
which Rally's or any of its Subsidiaries is entitled to receive (in cash,
services or property) or will be obligated to pay, during the unexpired term
thereof, an amount in excess of $100,000 (or the fair market equivalent thereof
in goods or services);
(ii) each franchise, partnership, limited liability company, joint
venture or trust agreement to which Rally's or any of its Subsidiaries is a
party;
(iii) each agreement limiting the right of Rally's or any of its
Subsidiaries to engage in or compete with any person in any business or
geographical area;
(iv) each agreement or other arrangement of or involving Rally's or any
of its Subsidiaries with respect to indebtedness for money borrowed, including
letters of credit, guaranties, indentures, swaps and similar agreements;
(v) each management, consulting, employment, severance or similar
agreement requiring the payment of compensation in excess of $100,000 annually,
to which Rally's or any of its Subsidiaries is a party and which may not be
terminated by Rally's or such Subsidiary without penalty on 90 days (or less)
notice;
(vi) each lease or other agreement with respect to real property leased
by Rally's or any of its Subsidiaries and which: requires Rally's or any of its
Subsidiaries to pay an amount or amounts in excess of $100,000 on annual or
annualized basis; or has an unexpired term which exceeds two years and may not
be canceled by Rally's or any of its Subsidiaries without penalty on one year
or less notice and which requires Rally's or any of its Subsidiaries to pay,
during the unexpired term, an amount in excess of $100,000;
(vii) each collective bargaining agreement to which Rally's or any of
its Subsidiaries is a party;
(viii) each agreement with any Affiliate of Rally's (other than
employment agreements and agreements between Rally's and any Subsidiary
thereof) to which Rally's
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or any of its Subsidiaries is a party which involves total payments or
liabilities to or from Rally's or any of its Subsidiaries in excess of $60,000;
(ix) each guaranty or indemnification (other than for money borrowed) or
other similar agreement to which Rally's or any of its Subsidiaries is a party;
and
(x) each stockholder agreement, voting trust agreement, share purchase
agreement, registration rights agreement or other similar agreement to which
Rally's is a party or other agreement granting rights to one or more of the
stockholders of Rally's, restricting the voting or transferability of Rally's
Common Stock or otherwise pertaining to Rally's Common Stock or any interest
(economic or voting) therein.
(b) Except for such matters as would not, individually or in the
aggregate, have a Material Adverse Effect on Rally's, each contract identified
in SECTION 5.11 OF THE RALLY'S DISCLOSURE MEMORANDUM (the "Rally's Contracts")
is in full force and effect and is a legal, valid and binding contract or
agreement of Rally's, and there is no default or breach or, to Rally's
Knowledge, any event that, with the giving of notice or lapse of time or both,
would result in a material default or breach by Rally's, any of its
Subsidiaries or, to Rally's Knowledge, any other party in the timely
performance of any obligation to be performed or paid thereunder or any other
material provision thereof. To Rally's Knowledge none of its franchisees or
suppliers will terminate or reduce any of their agreements with Rally's, which
termination would have a Material Adverse Effect on Rally's.
(c) Except for such matters as would not, individually or in the
aggregate, have a Material Adverse Effect on Rally's, none of the Rally's
Contracts will terminate, become terminable by the other party thereto, or have
the terms thereof become amended or amendable by the other party thereto
without the consent of Rally's, as a result of the execution and delivery of
this Agreement or any of the other agreements or documents contemplated hereby
or thereby to which Rally's is a party or the consummation of the transactions
contemplated hereby or thereby.
5.12 LEGAL PROCEEDINGS. Except as disclosed in SECTION 5.12 OF THE RALLY'S
DISCLOSURE MEMORANDUM, there are no actions, suits, investigations or
proceedings instituted, pending or, to Rally's Knowledge, threatened, against
Rally's or any of its Subsidiaries, or against any property, asset, interest or
right of any of them, that involve more than $100,000 in controversy, whether
or not covered by insurance, or that seek relief other than money damages from
Rally's or any of its Subsidiaries, or that would have, either individually or
in the aggregate, a Material Adverse Effect on Rally's if adversely decided.
Neither Rally's nor any of its Subsidiaries is subject to any judgment, order,
writ, injunction or decree that would have a Material Adverse Effect on
Rally's.
5.13 CERTAIN INFORMATION.
(a) When the Registration Statement (as defined in Section 6.4) to be
filed with the Commission by Checkers pursuant to Section 6.4 or any
post-effective amendment thereto
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shall become effective, and at all times subsequent to such effectiveness up to
and including the Effective Time, such Registration Statement and all
amendments or supplements thereto, with respect to all information set forth
therein furnished by Rally's relating to Rally's or any of its Subsidiaries,
shall, if Rally's has approved the contents and presentation of such
information, comply as to form in all material respects with the provisions of
all applicable securities laws. Any written information supplied or to be
supplied by Rally's specifically for inclusion in the Joint Proxy
Statement/Prospectus, at the time it is sent to Rally's stockholders, or the
Registration Statement, at the time it is filed with the Commission and when it
is declared effective by the Commission, will not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
(b) If at any time prior to the Effective Time, any event occurs of which
Rally's has knowledge and which is required to be described in the Registration
Statement or any supplement or amendment thereto, Rally's will provide Checkers
with sufficient supplemental written information to enable Checkers to file and
disseminate, as required, a supplement or amendment to the Registration
Statement.
(c) All documents that Rally's is responsible for filing with the
Commission or any other Governmental Authority in connection with the
transactions contemplated hereby shall comply as to form in all material
respects with the provisions of applicable law and the applicable rules and
regulations thereunder.
5.14 NO BROKERS. Except as disclosed in SECTION 5.14 OF THE RALLY'S
DISCLOSURE MEMORANDUM, Rally's has not entered into any contract, arrangement
or understanding with any person or firm that may result in the obligation of
Rally's, any of its Subsidiaries or Checkers to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby, or thereby except that Rally's has retained Schroder & Co.
Inc. as its financial advisor.
5.15 OPINION OF FINANCIAL ADVISOR. Rally's has received the opinion (the
"Rally's Opinion") of Schroder & Co. Inc. (the "Rally's Financial Advisor") to
the effect that, as of the date hereof, the 1.99 exchange ratio set forth in
Section 3.1(a) is fair, from a financial point of view, to the stockholders of
Rally's who are not affiliated with either Checkers or Rally's. A copy of such
written opinion and any amendments or supplements thereto shall be delivered to
Checkers as promptly as practicable after receipt thereof by Rally's.
5.16 ENVIRONMENTAL. Except as disclosed in SECTION 5.16 OF THE RALLY'S
DISCLOSURE MEMORANDUM and except insofar as inaccuracies in the following
statements would not have a Material Adverse Effect on Rally's (and with
respect to properties formerly owned or leased by Rally's or any of its
Subsidiaries, only with respect to such period of
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ownership or lease): (i) the properties owned or leased by Rally's or any of
its Subsidiaries and properties formerly owned or leased by Rally's or any of
its Subsidiaries for which Rally's has contractual liability (the "Rally's
Properties") are or were, as the case may be, in compliance in all material
respects with all applicable federal, state and local environmental and
hazardous waste laws and regulations; (ii) no enforcement actions are pending
or threatened against Rally's or any of its Subsidiaries and no notice of
potential liability or administrative or judicial proceedings (including
notices regarding clean up of off-site third party hazardous waste sites) has
been received by Rally's or such Subsidiary; (iii) there does not now exist on
any Rally's Properties currently owned or leased by Rally's, and there has not
occurred on, from or under Rally's Properties, a material disposal or release
of, Hazardous Substances, Hazardous Wastes or Contaminants (as such terms are
defined in SECTION 5.16 OF THE RALLY'S DISCLOSURE MEMORANDUM); (iv) Rally's
Properties contain no unregistered underground storage tanks; (v) neither
Rally's nor any of its Subsidiaries nor any of their respective predecessors
has any contingent liability in connection with the release of any Hazardous
Substances, Hazardous Wastes or Contaminants into the environment; and (vi)
neither Rally's or any of its Subsidiaries nor any of their respective
predecessors has (A) given any release or waiver of liability that would waive
or impair any claim based on Hazardous Substances, Hazardous Wastes or
Contaminants to any current or prior tenant or owner of any real property owned
or leased at any time by either Rally's or any of its Subsidiaries or to any
party who may be potentially responsible for the presence of Hazardous
Substances, Hazardous Wastes or Contaminants on any such real property; or (B)
made any promise of indemnification to any party regarding Hazardous
Substances, Hazardous Wastes or Contaminants that may be located on any real
property owned or leased at any time by either Rally's or any Subsidiary or any
of their respective predecessors. SECTION 5.16 OF THE RALLY'S DISCLOSURE
MEMORANDUM contains a description of environmental indemnities of which either
Rally's or any of its Subsidiaries is a beneficiary.
5.17 PERSONNEL. Except as set forth in SECTION 5.17 OF THE RALLY'S
DISCLOSURE MEMORANDUM, there is no outstanding liability for arrears of wages,
payroll taxes or failure to comply with applicable employment laws and there
are no labor disputes existing, or to Rally's Knowledge, threatened, involving
strikes, work stoppages, slow downs or lockouts. There are no grievance
proceedings or claims of unfair labor practices filed or, to Rally's Knowledge,
threatened to be filed with the National Labor Relations Board against Rally's
or any of its Subsidiaries. To Rally's Knowledge, there is no union
representation or organizing effort pending or threatened against Rally's or
any Subsidiary. Neither Rally's nor any Subsidiary has agreed to recognize any
union or other collective bargaining unit except those governed by the terms of
the agreements listed in SECTION 5.11 OF THE RALLY'S DISCLOSURE MEMORANDUM.
5.18 TAKEOVER STATUTES. Except for Section 203 of the DGCL, no "fair
price," "moratorium," "control share acquisition" or other similar
anti-takeover statute or regulation enacted under any federal, state or other
law applicable to Rally's is applicable to the Merger or the other transactions
contemplated hereby.
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5.19 INTELLECTUAL PROPERTY. Except as set forth in SECTION 5.19 OF THE
RALLY'S DISCLOSURE MEMORANDUM: (i) Rally's and each of its Subsidiaries owns or
possesses or has all rights and licenses in, all patents, patent rights,
licenses, inventions (whether or not patentable or reduced to practice),
copyrights (whether registered or unregistered), know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), registered and unregistered trademarks,
service marks and trade names and other intellectual property rights
(collectively, "Intellectual Property") necessary to conduct its business as
conducted; (ii) neither Rally's nor any of its Subsidiaries has received any
unresolved notice of, or is aware of any fact or circumstance that would give
any third party a right to assert, infringement or misappropriation of, or
conflict with, asserted rights of others or invalidity or unenforceability of
any Intellectual Property owned by Rally's or any of its Subsidiaries; (iii)
the use of such Intellectual Property to conduct the business and operations of
Rally's and its Subsidiaries as conducted does not infringe on the rights of
any person; (iv) no person is challenging or infringing on or otherwise
violating any right of Rally's or any of its Subsidiaries with respect to any
Intellectual Property owned by and/or licensed to Rally's or any of its
Subsidiaries; (v) neither the execution of this Agreement nor the consummation
of the transactions contemplated hereby will result in a loss or limitation in
(x) the rights and licenses of Rally's or any of its Subsidiaries to use or
enjoy the benefit of any Intellectual Property employed by them in connection
with their business as conducted or (y) the amount of any royalties or other
benefits received by Rally's or any of its Subsidiaries from Intellectual
Property owned by it.
5.20 INSURANCE. Rally's and its Subsidiaries maintain, with reputable
insurers, insurance in such amounts, including deductible arrangements, and of
such a character as is usually maintained by reasonably prudent managers of
companies engaged in the same or similar business.
5.21 YEAR 2000 COMPLIANCE. Except as disclosed in SECTION 5.21 OF THE
RALLY'S DISCLOSURE MEMORANDUM, Rally's information systems are designed to be
used prior to, during and after the calendar year 2000 A.D., and its
information systems will accurately receive, provide and process date/time data
(including but not limited to calculating, comparing and sequencing) from, into
and between the twentieth and twenty-first centuries, including the years 1999
and 2000, and leap year calculations, and will not malfunction, cease to
function, or provide invalid or incorrect results as a result of time/date
data.
5.22 VOTING REQUIREMENTS. The affirmative vote of the holders of a
majority of the outstanding shares of Rally's Common Stock is the only vote of
the holders of any class or series of Rally's capital stock necessary to
approve and adopt this Agreement, the Merger and the other transactions
contemplated hereby.
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ARTICLE 6
COVENANTS AND AGREEMENTS
6.1 INTERIM OPERATIONS OF CHECKERS. Prior to the earlier of the Effective
Time or the termination of this Agreement, except as contemplated by any other
provision of this Agreement, unless Rally's has previously consented in writing
thereto (which consent shall not be unreasonably withheld or delayed), Checkers
and its Subsidiaries will each conduct its operations according to its ordinary
course of business consistent with past practice and will each use its
reasonable best efforts to preserve intact its business organization, to keep
available the services of its officers and employees and to maintain existing
relationships with licensors, licensees, suppliers, contractors, distributors,
customers and others having business relationships with it to the end that its
goodwill and ongoing business will not be impaired in any material respect at
the Effective Time. Without limiting the generality of the foregoing, Checkers
shall not, and shall not permit any Subsidiary thereof to:
(a) grant any general increase in compensation or benefits to its
employees or to its officers, except in the ordinary course consistent with
past practice or as required by law; pay any bonus compensation except in the
ordinary course consistent with past practice or in accordance with the
provisions of any applicable program or plan adopted by the Checkers Board or
any Subsidiary of Checkers prior to the date hereof; enter into or amend the
terms of any severance agreements with its officers; or effect any change in
retirement benefits for any class of its employees or officers (unless such
change is required by applicable law) that would materially increase the
retirement benefit liabilities of Checkers and its Subsidiaries on a
consolidated basis;
(b) amend, alter or revise any existing employment contract,
understanding, arrangement or agreement with any person receiving compensation
(including salary and bonus) in excess of $100,000 per year (unless such
amendment is required by law) to increase the compensation (including bonus) or
benefits payable thereunder or pursuant thereto or enter into any new
employment contract, understanding, arrangement or agreement with any person
having a salary thereunder in excess of $100,000 that Checkers or such
Subsidiary does not have the unconditional right to terminate without liability
(other than liability for services already rendered) at any time on or after
the Effective Time;
(c) adopt any new employee benefit plan or make any change in or to any
existing Checkers Employee Benefit Plan other than any such change that (i) is
required by law, (ii) in the opinion of counsel is necessary or advisable to
maintain the tax qualified status of any such, plan, or (iii) would not
materially increase, in the aggregate, the employee benefit plan liabilities of
Checkers and its Subsidiaries, taken as a whole;
(d) except as disclosed in SECTION 6.1(D) OF THE CHECKERS DISCLOSURE
MEMORANDUM, sell, lease or otherwise dispose of any of its assets (including
capital stock of its Subsidiaries) or acquire any business or assets in a
single transaction or a series of similar transactions, except in the ordinary
course of business for an amount not exceeding $100,000 in the aggregate;
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(e) except as disclosed in SECTION 6.1(E) OF THE CHECKERS DISCLOSURE
MEMORANDUM, incur any indebtedness for borrowed money or make any loans,
advances or capital contributions to, or investments (other than
non-controlling investments in the ordinary course of business) in, any other
person other than a Subsidiary, or issue or sell any debt securities, other
than borrowings in connection with acquisitions permitted by subsection 6.1(d);
(f) except as disclosed in SECTION 6.1(F) OF THE CHECKERS DISCLOSURE
MEMORANDUM, authorize, commit to or make capital expenditures in an amount
exceeding $100,000 in the aggregate;
(g) mortgage or otherwise encumber or subject to any Lien any material
amount of properties or assets owned by Checkers or any Subsidiary thereof as
of the date of this Agreement except for such of the foregoing as are in the
normal course of business;
(h) make any material change to its accounting (including tax accounting)
methods, principles or practices, except as may be required by GAAP;
(i) amend or propose to amend its Organizational Documents;
(j) declare or pay any dividend or distribution with respect to its
capital stock;
(k) other than pursuant to options or warrants or other securities or
commitments outstanding as of the date hereof and listed in SECTION 4.3(B) OF
THE CHECKERS DISCLOSURE MEMORANDUM, issue, sell, deliver or agree to issue,
sell, deliver (whether through issuance or granting of options, warrants,
commitments, subscriptions or rights to purchase) any capital stock or split,
combine, reclassify or subdivide the capital stock;
(l) make any tax election or settle or compromise any material tax
liability for an aggregate amount greater than reflected on Checkers Financial
Statements;
(m) directly or indirectly redeem, purchase or otherwise acquire any
shares of its capital stock or other securities or any capital stock of
Rally's;
(n) enter into any new lines of business or otherwise make material
changes to the operation of its business;
(o) except as to liabilities accrued as of the date of this Agreement,
pay or agree to pay in settlement or compromise of any suits or claims of
liability against Checkers, its directors, officers, employees or agents, more
than an aggregate of $100,000 for all such suits and claims; provided, however,
in the event Checkers does not effect such settlement or compromise because
Rally's has declined to consent thereto, and this Agreement is subsequently
terminated by Checkers pursuant to Section 8.1 hereof, Rally's shall indemnify
and hold Checkers harmless against all liabilities and expenses reasonably
incurred in connection with such matter to the extent in excess of the amount
for which Checkers could have settled or compromised such matter if Rally's had
granted such consent;
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(p) enter into any agreement providing for the acceleration of any
party's rights or payment or performance or other consequence as a result of a
change in control of Checkers;
(q) take any action or agree, in writing or otherwise, to take any of the
foregoing actions or any action which would make any representation or warranty
in Article 4 hereof materially untrue or incorrect; or
(r) commit to any of the foregoing.
6.2 INTERIM OPERATIONS OF RALLY'S. Prior to the earlier of the Effective
Time or the termination of this Agreement, except as contemplated by any other
provision of this Agreement, unless Checkers has previously consented in
writing thereto (which consent shall not be unreasonably withheld or delayed),
Rally's and its Subsidiaries will each conduct its operations according to its
ordinary course of business consistent with past practice and will each use its
reasonable best efforts to preserve intact its business organization, to keep
available the services of its officers and employees and to maintain existing
relationships with licensors, licensees, suppliers, contractors, distributors,
customers and others having business relationships with it to the end that its
goodwill and ongoing business will not be impaired in any material respect at
the Effective Time. Without limiting the generality of the foregoing, Rally's
shall not, and shall not permit any of its Subsidiaries to:
(a) grant any general increase in compensation or benefits to its
employees or to its officers, except in the ordinary course consistent with
past practice or as required by law; pay any bonus compensation except in the
ordinary course consistent with past practice or in accordance with the
provisions of any applicable program or plan adopted by the Rally's Board or
any Subsidiary of Rally's prior to the date hereof; enter into or amend the
terms of any severance agreements with its officers; or effect any change in
retirement benefits for any class of its employees or officers (unless such
change is required by applicable law) that would materially increase the
retirement benefit liabilities of Rally's and its Subsidiaries on a
consolidated basis;
(b) amend, alter or revise any existing employment contract,
understanding, arrangement or agreement with any person receiving compensation
(including salary and bonus) in excess of $100,000 per year (unless such
amendment is required by law) to increase the compensation (including bonus) or
benefits payable thereunder or pursuant thereto or enter into any new
employment contract, understanding, arrangement or agreement with any person
having a salary thereunder in excess of $100,000 that Rally's or such
Subsidiary does not have the unconditional right to terminate without liability
(other than liability for services already rendered) at any time on or after
the Effective Time;
(c) adopt any new employee benefit plan or make any change in or to any
existing Rally's Employee Benefit Plan other than any such change that (i) is
required by law, (ii) in the opinion of counsel is necessary or advisable to
maintain the tax qualified status of any
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such, plan, or (iii) would not materially increase, in the aggregate, the
employee benefit plan liabilities of Rally's and its Subsidiaries, taken as a
whole;
(d) except as disclosed in SECTION 6.2(D) OF THE RALLY'S DISCLOSURE
MEMORANDUM, sell, lease or otherwise dispose of any of its assets (including
capital stock of its Subsidiaries) or acquire any business or assets in a
single transaction or in a series of similar transactions, except in the
ordinary course of business for an amount not exceeding $100,000 in the
aggregate;
(e) except as disclosed in SECTION 6.2(E) OF THE RALLY'S DISCLOSURE
MEMORANDUM, incur any indebtedness for borrowed money or make any loans,
advances or capital contributions to, or investments (other than
non-controlling investments in the ordinary course of business) in, any other
person other than a Subsidiary, or issue or sell any debt securities, other
than borrowings in connection with acquisitions permitted by subsection 6.2(d);
(f) except as disclosed in SECTION 6.2(F) OF THE RALLY'S DISCLOSURE
MEMORANDUM, authorize, commit to or make capital expenditures in an amount
exceeding $100,000 in the aggregate;
(g) mortgage or otherwise encumber or subject to any Lien any material
amount of properties or assets owned by Rally's or any Subsidiary thereof as of
the date of this Agreement except for such of the foregoing as are in the
normal course of business;
(h) make any material change to its accounting (including tax accounting)
methods, principles or practices, except as may be required by GAAP;
(i) amend or propose to amend its Organizational Documents;
(j) declare or pay any dividend or distribution with respect to its
capital stock;
(k) other than pursuant to options or warrants or other securities
commitments outstanding as of the date hereof and listed in SECTION 5.3(B) OF
THE RALLY'S DISCLOSURE MEMORANDUM, issue, sell, deliver or agree to issue,
sell, deliver (whether through issuance or granting of options, warrants,
commitments, subscriptions or rights to purchase) any capital stock or split,
combine, reclassify or subdivide the capital stock;
(l) make any tax election or settle or compromise any material tax
liability for an aggregate amount greater than reflected on the Rally's
Financial Statements;
(m) directly or indirectly redeem, purchase or otherwise acquire any
shares of its capital stock or other securities or any capital stock of
Checkers;
(n) enter into any new lines of business or otherwise make material
changes to the operation of its business;
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(o) except as to liabilities accrued as of the date of this Agreement,
pay or agree to pay in settlement or compromise of any suits or claims of
liability against Rally's, its directors, officers, employees or agents, more
than an aggregate of $100,000 for all such suits and claims; provided, however,
in the event Rally's does not effect such settlement or compromise because
Checkers has declined to consent thereto, and this Agreement is subsequently
terminated by Rally's pursuant to Section 8.1, Checkers shall indemnify and
hold Rally's harmless against all liabilities and expenses reasonably incurred
in connection with such matter to the extent in excess of the amount for which
Rally's could have settled or compromised such matter if Checkers had granted
such consent;
(p) enter into any agreement providing for the acceleration of any
party's rights or payment or performance or other consequence as a result of a
change in control of Rally's;
(q) take any action or agree, in writing or otherwise, to take any of the
foregoing actions or any action which would make any representation or warranty
in Article 5 hereof materially untrue or incorrect; or
(r) commit to any of the foregoing.
6.3 INVESTIGATION AND CONFIDENTIALITY.
(a) Prior to the earlier of the Effective Time and the termination of
this Agreement, Checkers and Rally's shall keep each other advised of all
material developments relevant to the transactions contemplated hereby and may
make or cause to be made such investigation, if any, of the business and
properties of the other and of their respective financial and legal condition
as Checkers or Rally's may reasonably deem necessary or advisable to
familiarize itself and its advisors with such business, properties and other
matters; provided, however, that such investigation shall be reasonably related
to the transactions contemplated hereby and shall not interfere unnecessarily
with normal operations. Checkers and Rally's each agree to furnish the other
and their respective advisors with such financial and operating data and other
information with respect to its businesses, properties and employees as
Checkers or Rally's, as applicable, shall from time to time reasonably request.
(b) Checkers and Rally's acknowledge that in the course of such
investigation, each will be providing the other and its representatives with
information which is proprietary and confidential. Checkers and Rally's each,
on behalf of itself and its representatives, agrees that it will treat as
confidential all information provided to it by the other which the other
designate as such in writing ("Confidential Information"), and that it will use
such Confidential Information solely in connection with the Merger and the
other transactions contemplated by this Agreement. In the event the Agreement
is terminated, Checkers and Rally's will return and/or destroy without
retaining any copies thereof, as requested by the party which provided the
Confidential Information to it, all such Confidential Information. The
foregoing restrictions shall not apply to any information which: (a) has not
been designated as Confidential Information; (b) which the recipient has
obtained from sources other than the
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other party hereto, which sources, to the best of the recipient's knowledge and
belief, are not subject to any confidentiality undertaking and did not acquire
such information from sources which are subject to such an undertaking; or (c)
has become known to the public other than through a violation of this Section
6.3(b). The parties acknowledge that the foregoing provisions shall not apply
to information received by directors of Checkers or Rally's who receive such
information in their capacity as a directors of the other, all of which
information is subject to customary standards of confidentiality.
6.4 STOCKHOLDERS' MEETINGS; JOINT PROXY STATEMENT/PROSPECTUS; REGISTRATION
STATEMENT.
(a) Checkers and Rally's, acting through their respective Boards of
Directors, shall, in accordance with applicable law and their respective
Certificates of Incorporation and By-Laws, promptly and duly give notice of
Meetings of their respective stockholders (the "Stockholders' Meetings") to
consider and act upon this Agreement, the Rally's Voting Agreement and the
transactions and other documents contemplated herein and therein and, as soon
as practicable following the date upon which Checkers Registration Statement on
Form S-4 required to be filed with the Commission in connection with the
issuance of Checkers Common Stock pursuant to the Merger (the "Registration
Statement") becomes effective, mail to their respective stockholders the Joint
Proxy Statement/Prospectus contained in the Registration Statement and relating
to the Stockholders' Meetings (the "Joint Proxy Statement/Prospectus") in
accordance with the requirements of the DGCL, the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations thereunder and
Regulation 14A under the Exchange Act. The Joint Proxy Statement/
Prospectus shall contain the recommendation of Checkers' Board of Directors and
Rally's Board of Directors to their respective stockholders that they vote in
favor of the approval and adoption of this Agreement.
(b) As soon as practicable following the date hereof, Checkers and
Rally's shall prepare and file with the Commission, pursuant to Regulation 14A
of the Exchange Act, a Joint Proxy Statement/Prospectus with respect to: at the
Stockholders' Meetings, the Merger and all matters required to be submitted to
their respective stockholders in order to consummate the transactions
contemplated hereby; and at the Checkers Meeting, (i) an amendment top
Checkers' Certificate of Incorporation to increase in the number of authorized
shares of Checkers Common Stock, (ii) an amendment to Checkers' Certificate of
Incorporation to effect a one-for-12 reverse stock split (the "Reverse Split"),
(iii) adoption of Checkers' 1999 Stock Option Plan and approval of amendments
to Checkers' 1994 Stock Option Plan for Non-Employee Directors, and (iv) such
other matters as Checkers, with the approval of Rally's (such approval not to
be unreasonably withheld or delayed), determines to be appropriate to bring
before the Checkers stockholders. Rally's shall cooperate with Checkers in
preparing the Joint Proxy Statement/Prospectus and shall provide Checkers with
all information about Rally's that is required to be included in the Joint
Proxy Statement/Prospectus under the rules and regulations of the Commission
under the Securities Act and the Exchange Act, as the case may be.
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(c) As soon as practicable following receipt of final comments from the
staff of the Commission on the Joint Proxy Statement/Prospectus (or advice that
such staff will not review such filing), Checkers shall use its reasonable best
efforts to file the Registration Statement, to have the Registration Statement
declared effective by the Commission and to maintain the effectiveness of such
Registration Statement until the Effective Date.
(d) The parties shall cooperate in taking any action reasonably necessary
to allow the Joint Proxy Statement/Prospectus to also serve as a prospectus for
the Registration Statement. Promptly after the effectiveness of the
Registration Statement, Checkers and Rally's shall mail the Joint Proxy
Statement/Prospectus to all of their respective stockholders. Checkers and
Rally's shall cooperate with each other in the preparation of the Joint Proxy
Statement/Prospectus and the Registration Statement and shall advise the other
in writing if, at any time prior to the date(s) of the Stockholders' Meetings,
any such party shall obtain knowledge of any facts that might make it necessary
or appropriate to amend or supplement the Joint Proxy Statement/Prospectus or
the Registration Statement in order to make the statements contained or
incorporated by reference therein not misleading or to comply with applicable
law. Notwithstanding the foregoing, each party shall be responsible for the
information and disclosures which it makes or incorporates by reference in all
regulatory filings, the Joint Proxy Statement/Prospectus and the Registration
Statement.
6.5 NOTIFICATION. Checkers and Rally's shall, after obtaining knowledge of
the occurrence, non-occurrence or threatened occurrence or non-occurrence of
any fact or event that would cause or constitute a material breach or failure
of any of the representations and warranties, covenants or conditions set forth
herein, or that would constitute or result in a Material Adverse Effect to such
party, notify the other parties in writing thereof with reasonable promptness.
6.6 ACQUISITION PROPOSAL.
(a) From the date hereof until the Effective Time or the termination
hereof, Checkers and Rally's and their respective Subsidiaries will not, and
will not authorize, permit or cause their respective officers, directors,
employees or other agents to, directly or indirectly, (i) take any action to
solicit, initiate or encourage any Acquisition Proposal (as hereinafter
defined), (ii) waive any provision of any standstill or similar agreements
entered into by Rally's or Checkers or any of them with respect to Rally's or
Checkers, (iii) engage in negotiations regarding or disclose any nonpublic
information relating to any other party, respectively, or (iv) afford access to
their respective properties, books or records to any person that may be
considering making, or has made, an Acquisition Proposal. Nothing contained in
this Section 6.6 shall prohibit Rally's or Checkers and their respective Boards
of Directors from (i) taking and disclosing a position with respect to a tender
offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated by the
Commission under the Exchange Act, or (ii) furnishing information to, or
entering into negotiations with, any person or entity that makes an unsolicited
bona fide proposal to acquire such party pursuant to a merger, consolidation,
share exchange, purchase of a substantial portion of the assets,
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business combination or other similar transaction, if, and only to the extent
that, (A) such Board of Directors determines in the good faith exercise of its
informed business judgment and after receiving the advice and recommendation of
its special committee of the Board of Directors that the Acquisition Proposal
is or could be more advantageous to their respective stockholders than the
transactions contemplated by this Agreement (a "Superior Proposal"), (B) prior
to furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such party provides written notice to the other
parties hereto to the effect that it is furnishing information to, or entering
into discussions or negotiations with, such person or entity, and (C) subject
to any confidentiality agreement with such person or entity (which such party
determined in good faith was required to be executed in order for the Board of
Directors to comply with its fiduciary duties to its stockholders imposed by
law) such party keeps the other parties hereto informed of the status of any
such negotiations or discussions.
(b) The term "Acquisition Proposal" as used herein means any offer or
proposal for, or any indication of interest in, a merger or other business
combination involving Rally's or Checkers, or any of their respective
Subsidiaries, or the acquisition of any equity interest in, or a substantial
portion of the assets of, any such party, other than the transactions
contemplated by this Agreement.
6.7 FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, the parties hereto shall (a) within ten business days hereof, make
their respective filings and use their reasonable best efforts to cause any
required third party filings to be made, and thereafter make any other required
submissions, under the HSR Act; (b) use their reasonable best efforts to
cooperate with each other in (i) determining which filings are required to be
made prior to the Effective Time with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Effective Time from,
Governmental Authorities in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and (ii)
timely making all such filings and timely seeking all such consents, approvals,
permits or authorizations; and (c) use their reasonable best efforts to take,
or cause to be taken, all other action and do, or cause to be done, all other
things necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement and satisfy the conditions to the
transactions contemplated hereby. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Agreement, subject to the remaining provisions hereof, the officers and
directors of the parties shall promptly take all such necessary action.
6.8 INDEMNIFICATION AND INSURANCE.
(a) Checkers shall: (i) indemnify and hold harmless each present employee,
agent, director or officer of Rally's and its Subsidiaries and anyone who
becomes an employee, agent, director or officer of Rally's after the date
hereof and prior to the Effective Time ("Indemnified Parties") from and against
any and all claims arising out of or in connection
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with activities in such capacity, or on behalf of, or at the request of,
Rally's or any of its Subsidiaries, and shall advance expenses incurred with
respect to the foregoing, as they are incurred, to the fullest extent permitted
under applicable law; and (ii) assume any indemnification agreements to which
Rally's or any of its Subsidiaries is a party.
(b) Checkers shall keep in effect provisions substantially similar to the
provisions in Rally's Certificate of Incorporation and by-laws providing for
exculpation of director and officer liability and its indemnification of or
advancement of expenses to the Indemnified Parties to the fullest extent
permitted under the DGCL, which provisions shall not be amended except as
required by applicable law or except to make changes permitted by law that
would enhance the Indemnified Parties right to indemnification or advancement
of expenses.
(c) If, after the Effective Time, Checkers or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers all or substantially all of its property and assets
to any person, then, in each such case, proper provision shall be made so that
the successors and assigns of Checkers assume all of the obligations set forth
in this Section 6.8. The provisions of this Section 6.8 are intended to be for
the benefit of and to grant third party rights to, and shall be enforceable by,
each person who is now or who becomes prior to the Effective Time an employee,
agent, director or officer of Rally's or any of its Subsidiaries (and his or
her heirs and representatives).
(d) Checkers will cause to be maintained for a period of not less than
four years from the Effective Time directors and officers liability insurance
("D&O Insurance"), to the extent commercially available, on terms and
conditions no less advantageous to the Indemnified Parties than Rally's
existing D&O Insurance, as the case may be. Notwithstanding the foregoing: (i)
in satisfying its obligation under this Section 6.8(d), Checkers shall not be
obligated to pay premiums in excess of 125% of the premium paid or to be paid
by Rally's for 1997, which amounts are disclosed in SECTIONS 6.8(D)OF THE
RALLY'S DISCLOSURE MEMORANDUM, but provided further that Rally's shall
nevertheless be obligated to provide such coverage as may be obtained for 125%
of the premium to be paid by Rally's for such insurance for 1997; and (ii) this
provision shall be deemed satisfied as long as Checkers maintains under its own
D&O Insurance coverage meeting the requirements of the first sentence of this
Section 6.8(d) with separate coverage limits applicable to Rally's officers and
directors with respect to acts and occurrences prior to the Effective Time.
6.9 PUBLICITY. Checkers and Rally's shall, subject to their respective
legal obligations (including requirements of national securities exchanges and
other similar regulatory bodies), consult with each other regarding the text of
any press release regarding the transactions contemplated hereby before issuing
any such press release and in making any filings with any Governmental
Authority or with any national securities exchange with respect thereto.
6.10 TAXES. Checkers shall pay any and all transfer taxes (including,
without limitation, any real estate transfer taxes) incurred in connection with
the Merger, whether
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such taxes are imposed on Checkers, Rally's, their respective Subsidiaries or
their stockholders, except transfer taxes in connection with the registration
of Checkers Common Stock in a name other than the name of the holder of Rally's
Common Stock in respect of which Checkers Common Stock is to be issued.
Checkers and Rally's each agree to treat the Merger as a reorganization within
Section 368(a)(1) of the Code.
6.11 OPTIONS.
(a) Checkers shall, prior to the Effective Time, adopt a new stock option
plan (the "1999 Option Plan") with terms substantially similar to those of
Checkers 1991 Stock Option Plan, as amended. In addition, Checkers shall, prior
to the Effective Time, amend its 1994 Stock Option Plan for Non-Employee
Directors (the "Director Option Plan" and together with the 1999 Option Plan,
the "Option Plans") and shall submit the Option Plans to Checkers stockholders
for their approval at the Checkers Meeting.
(b) Each outstanding option to acquire Rally's Common Stock ("Rally's
Options") shall at the Effective Time be converted into and become an option
("Roll-Over Options") to purchase that number of shares of Checkers Common
Stock determined by multiplying the number of shares subject to the Rally's
Options by the exchange ratio set forth in Section 3.1. The vesting and term of
the Roll-Over Options shall be that of the Rally's Options it replaces.
(c) Outstanding options to acquire Checkers Common Stock will remain
unchanged.
6.12 NASDAQ. As promptly as practicable after the date hereof, Checkers
shall make all required filings with NASDAQ and shall use all commercially
reasonable efforts to cause the shares of Checkers Common Stock issuable as a
result of the Merger to be quoted on the NASDAQ National Market immediately
following the Effective Time. Checkers and Rally's shall fully cooperate with
each other and take all commercially reasonable steps as may be required in
order to maintain trading of Checkers Common Stock on the NASDAQ National
Market after the Effective Time.
6.13 ANCILLARY AND OTHER AGREEMENTS. Each of Rally's and Checkers shall
use its best efforts to cause, respectively:
(a) The Rally's Voting Agreement to be implemented in accordance with its
terms; and
(b) The joint purchasing agreement (as such term is hereinafter defined),
the execution and delivery of which are conditions to the consummation of the
Merger, to be executed and delivered as promptly as practicable, and in any
event at or prior to Closing, to be effective as of the Effective Time.
6.14 AFFILIATES. At least ten (10) days prior to the Closing, Rally's
shall identify to Checkers all persons who would be deemed to be affiliates of
Rally's for purposes of
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Rule 145 under the Securities Act (the "Rule 145 Affiliates"), and Checkers
shall have received an agreement substantially in the form of Exhibit B to this
Agreement from each Rule 145 Affiliate.
6.15 CHECKERS MANAGEMENT. Checkers shall have duly taken all requisite
corporate action so that, effective at the Effective Time:
(a) The Checkers Board shall consist of the members of the respective
Board of Directors of Rally's and Checkers immediately prior to the Effective
Time.
(b) The Chairman of the Checkers Board shall be William P. Foley, II.
(c) The other officers of Checkers shall remain the officers of
Checkers immediately prior to the Effective Time and their titles shall remain
the same.
6.16 PROXY FOR CHECKERS SHARES HELD BY RALLY'S.
(a) Rally's hereby appoints Checkers, with full power of substitution
and resubstitution, as Rally's irrevocable attorney-in-fact and proxy (Checkers
together with its substitutes are referred to collectively as the "Proxy") for
and in the name of Rally's to vote, in the Proxy's absolute, sole and binding
discretion, all shares of Checkers Common Stock (y) that Rally's is entitled to
vote at the Checkers Meeting, and at any adjournments thereof, or (z) as to
which Rally's is entitled to express consent or dissent to corporate action in
writing without a meeting upon the Merger, the Merger Agreement and all other
matters contemplated by the Merger Agreement, revoking any proxy heretofore
given. The Proxy is further authorized to vote, in the Proxy's absolute, sole
and binding discretion, upon such other business as may properly come before
the Checkers Meeting or be presented to the Checkers stockholders for their
consent or dissent. Rally's intends this Proxy to be irrevocable and coupled
with an interest and will take such further action and execute such other
instruments as may be necessary to effectuate the intent of this agreement.
(b) If for any reason the proxy granted pursuant to Section 6.16(a) of
this Agreement shall be determined invalid, unenforceable or ineffective with
respect to any or all of its Checkers Common Stock, Rally's agrees:
(i) to vote all of its Checkers Common Stock on all matters as to which
Rally's is entitled to vote at the Checkers Meeting in the manner specified in
writing by the Proxy, which manner shall be determined in its absolute, sole
and binding discretion, provided, however, that Rally's shall not be obligated
to vote any of its Checkers Common Stock in a manner prohibited by the terms of
an injunction issued by any court having jurisdiction;
(ii) to express consent or dissent to corporate action in writing without
a meeting on all of its Checkers Common Stock in the manner specified in
writing by the Proxy, which manner shall be determined in the Proxy's absolute,
sole and binding discretion, provided, however, that Rally's shall not be
obligated to vote any of its Checkers Common Stock in a manner prohibited by
the terms of an injunction issued by any court having jurisdiction;
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(iii) notice by the Proxy of action to be taken pursuant to paragraphs
(a) and (b) of this Section 6.16 shall be delivered to Rally's on or prior to
the date and time on which such votes, consents or dissents are to be cast;
(iv) Rally's agrees to refrain from granting any proxy or authorization
to any person with respect to the voting of its Checkers Common Stock, except
pursuant to this Agreement, or taking any action contrary to or in any manner
inconsistent with the terms of this Agreement; and
(v) Rally's further agrees to execute all additional writings, consents
and authorizations as may be reasonably requested by Checkers to evidence the
agreements contained in this Section 6.16.
ARTICLE 7
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1 CONDITIONS TO OBLIGATIONS OF THE PARTIES. The respective obligations
of Checkers and Rally's to effect the Merger shall be subject to the
satisfaction or waiver at or prior to the Closing of each of the following
conditions:
(a) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(b) None of the parties hereto shall be subject to any order or
injunction of a court or Governmental Authority of competent jurisdiction that
prohibits the consummation of the transactions contemplated by this Agreement.
In the event any such order or injunction shall have been issued, each party
agrees to use its reasonable best efforts to have any such order overturned or
injunction lifted.
(c) All consents, authorizations, orders and approvals of (or filings or
registrations with) any Governmental Authority required in connection with the
execution, delivery and performance of this Agreement (each a "Regulatory
Authorization") shall have been obtained or made, except for filings in
connection with the Merger and any other documents required to be filed after
the Effective Time and except where the failure to have obtained or made any
such consent, authorization, order, approval, filing or registration would not
have a Material Adverse Effect on Checkers following the Effective Time.
(d) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect.
(e) This Agreement and the Merger shall have been duly approved by the
requisite vote under the DGCL of holders of outstanding voting securities of
Checkers and Rally's representing a majority of the votes entitled to be voted
on the matter.
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(f) Checkers and Rally's shall have received an opinion of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP to the effect that the Merger
qualifies as a tax free reorganization under the Code.
(g) Checkers shall have entered into a joint purchasing agreement with
CKE Restaurants, Inc., on terms and conditions satisfactory to Checkers and
Rally's in the exercise of reasonable judgment, providing for joint purchasing
by Checkers (for its Checkers and Rally's operations) and CKE Restaurants, Inc.
(for its Carl's, Jr., Hardee's and other restaurant operations) of all items
presently being jointly purchased and such additional items as may reasonably
be added in the future, including food, paper, beverage, signs building
materials, kitchen equipment and construction services.
(h) Checkers and Rally's shall have received an opinion of Christensen,
Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP to the effect that the
consummation of this Agreement and the transactions contemplated hereby will
not constitute or result in a Change of Control, as that term is used and
defined in the Indenture, or require Rally's, Checkers or any other person to
make a Change of Control Offer pursuant to Section 4.14 of the Indenture, or
otherwise give rise to any obligation to offer to purchase the securities
issued pursuant to the Indenture.
7.2 CONDITIONS TO OBLIGATION OF RALLY'S. The obligation of Rally's to
effect the Merger shall be subject to the satisfaction or waiver at or prior to
the Closing of each of the following additional conditions:
(a) The representations and warranties of Checkers set forth in this
Agreement which are qualified as to materiality and the representations and
warranties contained in Section 4.3 shall be true and correct in all respects,
and the representations and warranties of Checkers set forth in this Agreement
which are not qualified as to materiality shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (except for any such
representations and warranties made as of a specified date, which shall be true
and correct in all respects or all material respects, as the case may be, as of
such date); provided, however that, except with respect to the representations
and warranties in Section 4.3, this condition shall be deemed satisfied unless
the failure of such condition to be satisfied would have a material adverse
effect on the benefits that the stockholders of Rally's are reasonably expected
to receive in the Merger.
(b) The agreement of Checkers contained in Section 6.1(k) shall have been
duly performed and complied with in all respects and each of the agreements and
covenants of Checkers to be performed and complied with by Checkers pursuant to
this Agreement prior to the Effective Time shall have been duly performed and
complied with in all material respects; provided, however, that except for the
agreements contained in Sections 6.1(k), this condition shall be deemed
satisfied unless the failure of such condition to be satisfied
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would have a material adverse effect on the benefits that the stockholders of
Rally's are reasonably expected to receive in the Merger.
(c) Checkers shall have delivered to Rally's a certificate, dated as of
the Closing Date and signed on its behalf by its chief executive officer and
chief financial officer, as to the satisfaction by it of the conditions set
forth in Sections 7.2(a) and 7.2(b), together with any other certificates or
documents which Rally's or its counsel may reasonably request in connection
with the consummation of the Merger and the other transactions contemplated
herein.
7.3 CONDITIONS TO OBLIGATION OF CHECKERS. The obligation of Checkers to
effect the Merger shall be subject to the satisfaction or waiver at or prior to
the Closing of each of the following additional conditions:
(a) The representations and warranties of Rally's set forth in this
Agreement which are qualified as to materiality and the representations and
warranties contained in Section 5.3 shall be true and correct in all respects,
and the representations and warranties of Rally's set forth in this Agreement
which are not qualified as to materiality shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (except for any such
representations and warranties made as of a specified date, which shall be true
and correct in all respects or all material respects, as the case may be, as of
such date); provided, however that, except with respect to the representations
and warranties in Section 5.3, this condition shall be deemed satisfied unless
the failure of such condition to be satisfied would have a Material Adverse
Effect on the benefits that the stockholders of Checkers are reasonably
expected to receive in the Merger.
(b) The agreement of Rally's contained in Section 6.2(k) shall have been
duly performed and complied with in all respects and each of the agreements and
covenants of Rally's to be performed and complied with by Rally's pursuant to
this Agreement prior to the Effective Time shall have been duly performed and
complied with in all material respects; provided, however, that except for the
agreements contained in Section 6.2(k), this condition shall be deemed
satisfied unless the failure of such condition to be satisfied would have a
Material Adverse Effect on the benefits that the stockholders of Checkers are
reasonably expected to receive in the Merger.
(c) Rally's shall have delivered to Checkers a certificate, dated as of
the Closing Date and signed on its behalf by its chief executive officer and
chief financial officer, as to the satisfaction by it of the conditions set
forth in Sections 7.3(a) and 7.3(b), together with any other certificates or
documents which Checkers or its counsel may reasonably request in connection
with the consummation of the Merger and the other transactions contemplated
herein.
(d) At least ten (10) days prior to the Closing, Rally's shall have
delivered to Checkers letters identifying all persons who would be deemed to be
Rule 145 Affiliates of
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Rally's, and Checkers shall have received an agreement substantially in the
form of Exhibit B to this Agreement from each Rule 145 Affiliate.
(e) All agreements relating to the Rally's Common Stock, voting or
otherwise, to which Affiliates of Rally's are parties (other than this
Agreement), including those listed in SECTIONS 5.3(B) AND 5.11(A)(X) OF THE
RALLY'S DISCLOSURE MEMORANDUM, shall have been terminated without any liability
to Rally's or Checkers other than those liabilities fully satisfied prior to
the Closing.
ARTICLE 8
TERMINATION OF AGREEMENT
8.1 TERMINATION. Notwithstanding any other provision of this Agreement,
this Agreement may be terminated at any time prior to the Effective Time:
(a) by mutual written consent of Checkers and Rally's, whether or not
their respective stockholders have approved this Agreement and the Merger;
(b) by Checkers or Rally's, upon written notice to the other party, if
the Merger shall not have been consummated on or prior to June 30, 1999 (the
"Termination Date");
(c) by Checkers or Rally's, upon written notice to the other parties, if
a Governmental Authority of competent jurisdiction shall have issued an
injunction, order or decree enjoining or otherwise prohibiting the consummation
of the transactions contemplated by this Agreement, and such injunction, order
or decree shall have become final and non-appealable or if a Governmental
Authority has otherwise made a final determination that any required Regulatory
Authorization would not be forthcoming; provided, however, that the party
seeking to terminate this Agreement pursuant to this clause has used all
required efforts as specified in Section 8.1(b) to remove such injunction,
order or decree;
(d) by Checkers or Rally's, if any condition to such party's obligations
to consummate the transactions contemplated hereby is incapable of being
satisfied on or prior to the Termination Date; provided, however, that the
terminating party has not breached the terms of this Agreement; or
(e) by either Checkers or Rally's if, in the exercise of its good faith
business judgment, the Board of Directors of the terminating party determines
that such termination is required by reason of the receipt of a Superior
Proposal.
8.2 EFFECT OF TERMINATION.
(a) In the event of the termination of this Agreement pursuant to Section
8.1, the respective obligations of the parties under this Agreement will
terminate except for
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Sections 6.1(o), 6.2(o), 6.3(b), 8.2, 9.2, 9.4, 9.5, 9.6, 9.10, 9.11, 9.12 and
9.13; provided, however, that the termination of this Agreement will not
relieve any party from liability for any breach of this Agreement.
(b) The parties acknowledge that in the event this Agreement is
terminated by Checkers or Rally's by reason of Section 8.1(a) hereof, each
non-terminating party shall be entitled to reimbursement from the terminating
party of the non-terminating party's reasonable and documented transaction
costs, including without limitation, legal and accounting expenses and amounts
paid or payable to its financial advisor in connection with obtaining the
Checkers Opinion or the Rally's Opinion, as applicable.
ARTICLE 9
MISCELLANEOUS AND GENERAL
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties contained herein shall survive the Effective
Time or the termination of this Agreement. The covenants and agreements
contained herein shall survive the Effective Time.
9.2 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except
as expressly provided herein and except that the filing fees in connection with
the HSR Act filings shall be shared equally by Checkers and Rally's.
9.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assignable by any party hereto without the prior
written consent of the other parties hereto.
9.4 THIRD PARTY BENEFICIARIES. Except as set forth in Article 3 and
Section 6.8 (each of which shall inure to the benefit of the persons or
entities benefiting from the provisions thereof, which persons are intended to
be third party beneficiaries thereof; provided, however, that no person shall
have third party beneficiary or other rights under Article 3 of this Agreement
if the Merger has not been consummated, regardless of the reason that the
Merger has not been consummated), each party hereto intends that this Agreement
shall not benefit or create any right or cause of action in or on behalf of any
person other than the parties hereto.
9.5 NOTICES. Any notice or other communication provided for herein or
given hereunder to a party hereto shall be sufficient if in writing, and sent
by facsimile transmission (electronically confirmed), delivered in person,
mailed by first class registered or certified mail, postage prepaid, or sent by
Federal Express or other overnight courier of national reputation, addressed as
follows:
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If to Checkers: Checkers Drive-In Restaurants, Inc.
14255 49th Street North, Building I
Clearwater, Florida 33762
Attention: Chief Executive Officer
Facsimile: (727) 519-2218
with a copy to: Stradling Yocca Carlson & Rauth
660 Newport Center Drive
Suite 1600
P. O. Box 7680
Newport Beach, California 92658-7680
Attention: C. Craig Carlson, Esq.
Fax: (949) 725-4100
If to Rally's: Rally's Hamburgers, Inc.
14255 49th Street North, Building I
Clearwater, Florida 33762
Attention: Chief Executive Officer
Facsimile: (727) 519-2218
with a copy to: Christensen, Miller, Fink, Jacobs, Glaser, Weil &
Shapiro, LLP
2121 Avenue of the Stars, 18th Floor
Los Angeles, California 90067
Attention: Gary N. Jacobs, Esq.
Facsimile: (310) 556-2920
or to such other address with respect to a party as such party shall notify the
other parties in writing as above provided.
9.6 COMPLETE AGREEMENT. This Agreement and the other documents and
agreements delivered by the parties in connection herewith contain the complete
agreement among the parties hereto with respect to the Merger and the other
transactions contemplated hereby and thereby and supersede all prior agreements
and understandings among the parties hereto with respect thereto.
9.7 CAPTIONS; REFERENCES. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement. When a
reference is made in this Agreement to a clause, a Section, a subsection or an
Article, such reference shall be to such clause, Section, subsection or Article
of this Agreement unless otherwise indicated.
9.8 AMENDMENT. At any time, the parties hereto, by action taken by their
respective Board of Directors or pursuant to authority delegated by their
respective Boards of Directors, may amend this Agreement. This Agreement may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
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9.9 WAIVER. At any time prior to the Effective Time, the parties hereto
may (a) extend the time for the performance of any of the obligations or other
acts of the parties hereto, (b) waive any inaccuracies in the representations
and warranties contained herein or in any document delivered pursuant hereto,
or (c) waive compliance with any of the agreements or conditions contained
herein, to the extent permitted by applicable law. Any agreement on the part of
a party hereto to any such extension or waiver shall be valid only if set forth
in a writing signed on behalf of such party. No party may assert a claim with
respect to a matter so waived.
9.10 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware, without regard
to its rules of conflict of laws.
9.11 SEVERABILITY. Any term or provision of this Agreement that is
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without rendering invalid, illegal or unenforceable the
remaining terms and provisions of this Agreement or affecting the validity,
legality or enforceability of any of the terms or provisions of this Agreement
in any other jurisdiction. If any provision of this Agreement is so broad as to
be unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
9.12 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof, this being in addition to any
other remedy to which they are entitled at law or in equity.
9.13 CONSENT TO JURISDICTION. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive
jurisdiction of the federal and state courts located in the State of Delaware
or the County of Los Angeles, State of California, (the "Designated Courts")
for any litigation arising out of or relating to this Agreement and the
transactions contemplated hereby (and agrees not to commence any litigation
relating thereto except in such Designated Courts), waives any objection to the
laying of venue of any such litigation in the Designated Courts and agrees not
to plead or claim in any Designated Court that such litigation brought therein
has been brought in an inconvenient forum.
9.14 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute but one instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
CHECKERS DRIVE-IN RESTAURANTS, INC.,
a Delaware corporation
By: /s/ JAMES J. GILLESPIE
-----------------------
Name: James J. Gillespie
Title: President and Chief Executive Officer
RALLY'S HAMBURGERS, INC.,
a Delaware corporation
By: /s/ JOSEPH N. STEIN
--------------------
Name: Joseph N. Stein
Title: Executive Vice President and
Chief Financial Officer
A-53
<PAGE>
LIST OF EXHIBITS
A. Rally's Voting Agreement
B. Form of Rule 145 Affiliate Letter
A-54
<PAGE>
CHECKERS DISCLOSURE MEMORANDUM INDEX
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<S> <C>
4.3(b) Options, warrants, rights
4.3(c) Issuances of Securities
4.4(a) Subsidiaries
4.4(c) Investments, etc.
4.5(b) Filings and Consents
4.6(c) Financial Statements
4.6(d) Ordinary Course
4.6(e) Material Adverse Effect
4.7(b) Taxes
4.10 ERISA
4.11 Material Contracts
4.12 Legal Proceedings
4.16 Environmental
4.17 Personnel
4.19 Intellectual Property
4.21 Year 2000 compliance
6.1(d) Dispositions or acquisitions of assets
6.1(e) Incurrence of indebtedness
6.1(f) Capital expenditures
</TABLE>
A-55
<PAGE>
RALLY'S DISCLOSURE MEMORANDUM INDEX
<TABLE>
<S> <C>
5.3(b) Options, warrants, rights
5.3(c) Issuances of Securities
5.4(a) Subsidiaries
5.4(c) Investments, etc.
5.5(b) Filings and Consents
5.6(d) Ordinary Course
5.6(c) Financial Statements
5.6(e) Material Adverse Effect
5.7(b) Taxes
5.10 ERISA
5.11 Material Contracts
5.12 Legal Proceedings
5.16 Environmental
5.17 Personnel
5.19 Intellectual Property
5.21 Year 2000 Compliance
6.2(d) Dispositions or acquisitions of assets
6.2(e) Incurrence of indebtedness
6.2(f) Capital expenditures
</TABLE>
A-56
<PAGE>
APPENDIX B
[SCHRODER & CO. INC. LETTERHEAD]
January 27, 1999
Special Committee of the Board of Directors
Rally's Hamburgers, Inc.
14255 49th Street North
Building 1, Suite 101
Clearwater, FL 33762
Dear Sirs:
We understand that Rally's Hamburgers, Inc. ("Rally's" or the "Company")
and Checkers Drive- In Restaurants, Inc. ("Checkers") propose to enter into an
Agreement and Plan of Merger (the "Merger Agreement"), whereby the Company will
become a wholly-owned subsidiary of Checkers (collectively, the "Combined
Company") (the "Transaction"). the Merger Agreement provides, among other
things, that the holders of Common Stock, par value $0.10 per share, of the
Company ("Rally's Common Stock"), shall receive 1.99 shares (the "Exchange
Ratio") of Checkers common stock, par value $0.001 per share ("Checkers Common
Stock") in exchange for each share of Rally's Common Stock issued and
outstanding.
You (the "Special Committee") have requested our opinion, as investment
bankers, as to whether or not the Exchange Ratio is fair from a financial point
of view to the stockholders of Rally's who are not affiliated with either
Checkers or Rally's (the "Opinion"). It is understood that the Opinion shall be
used by you solely in connection with your consideration of the transaction and
for no other purpose, and that the Company will not furnish the Opinion or any
other material prepared by Schroder & Co. Inc. ("Schroders") to any other
person or persons or use or refer to the Opinion for any other purpose without
Schroders' prior written approval. Schroders understands and agrees that its
Opinion may be referred to and reproduced in full in a Registration Statement
on Form S-4 to be filed with the Securities and Exchange Commission (the
"Commission") in connection with the Transaction and in any proxy statement
mailed to shareholders of the Company.
Schroders, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements and valuation for estate,
corporate and other purposes. Schroders provides a full range of financial
advisory and securities services and, in the course of its normal trading
activities, may from time to time effect transactions and hold securities,
including derivative securities, of Rally's or Checkers for its own account and
for the accounts of its customers. Schroders has in the past provided and may
in the future provide investment banking services for affiliates of Rally's for
which we have received and may in the future receive customary compensation.
B-1
<PAGE>
Special Committee of the Board of Directors
Rally's Hamburgers, Inc.
Page 2
In connection with the Opinion set forth herein, we have, among other
things:
<TABLE>
<S> <C>
(i) reviewed (a) the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 28, 1997; (b) its
Quarterly Reports on form 10-Q for the quarters ended March 22, 1998, June 14,
1998 and September 6, 1998; (c) proxy statement dated June 11, 1998; (d) reports
on From 8-K dated May 8, 1998, September 25, 1998 and November 2, 1998; and
(e) Form S-3 filed June 3, 1998, as amended on August 25, 1998.
(ii) reviewed (a) Checkers' Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the fiscal year ended December 29, 1997; (b) its
Quarterly Reports on Form 10-Q for the quarters ended March 23, 1998 June 15,
1998 and September 7, 1998; (c) proxy statement dated June 11, 1998; (d) reports
on Form 8-K dated September 25, 1998 and November 2, 1998; and (e) Form S-3
filed June 2, 1998, as amended on August 21, 1998.
(iii) reviewed the most recently available, as of January 21, 1999, projected financial
information of the Company, Checkers and the Combined Company as prepared by
management of the Company;
(iv) conducted discussions with the senior management of the Company and Checkers
concerning the Transaction, their historical financial results and projected financial
information as presented and described in (i) through (iii) above;
(v) performed various financial analyses, as we deemed appropriate, of the Company,
Checkers and the Combined Company using generally accepted analytical
methodologies, including; (a) the application to the financial results of the public
trading multiples of companies which we deemed comparable; (b) the application to
the financial results of the multiples reflected in recent mergers and acquisitions for
businesses which we deemed comparable; and (c) discounted cash flow analyses
utilizing the projections referred to in paragraph (iii) above;
(vi) reviewed the historical trading prices and volumes of Rally's Common Stock and
Checkers Common Stock on the NASDAQ National Market System from January 1,
1996 to January 22, 1999;
(vii) reviewed the draft Agreement and Plan of Merger as distributed on January 26,
1999; and
(viii) performed such other financial studies, analyses, inquiries and investigations as we
deemed appropriate.
</TABLE>
B-2
<PAGE>
Special Committee of the Board of Directors
Rally's Hamburgers, Inc.
Page 3
In our review and analysis and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all information supplied or
otherwise made available to us by the Company and Checkers or obtained by us
from other sources that we believe to be reliable, and upon the assurance of
the Company's management that they are not aware of any information or facts
that would make the information provided to us by the Company or Checkers
incomplete or misleading. We have not attempted to independently verify any of
such information. In particular, we have (i) assumed that the financial
projections referred to in (iii) above have been reasonably prepared on a basis
reflecting the best currently available estimates and judgements of the
Company, and (ii) relied on the conclusions of the Company's management and
advice provided by its legal counsel, Christensen, Miller, Fink, Jacobs,
Glaser, Weil & Shapiro, LLP, that the Transaction does not constitute a change
of control with respect to the Company's outstanding Senior Notes due 2000. We
have not undertaken an independent appraisal of the assets or liabilities
(contingent or otherwise ) of the Company or Checkers, nor have we been
furnished with any such appraisals.
The Opinion is necessarily based upon financial, economic, market and
other conditions as they exist and can be evaluated by us on the date hereof.
We disclaim any undertaking or obligation to advise any person of any change in
any fact or matter affecting our opinion which may come or be brought to our
attention after the date of the Opinion unless specifically requested to do so.
The Opinion is provided for the information and assistance of the Special
Committee in connection with its consideration of the Transaction. The Opinion
does not constitute a recommendation as to any action the Special Committee
should take in connection with the Transaction or any aspect thereof or
alternative thereto, and the Opinion does not constitute a recommendation as to
how any stockholder of Rally's should vote with respect to the Transaction.
In rendering the Opinion, we have not been engaged as an agent or
fiduciary of the Company's shareholders or of any other third party. The
Opinion relates solely to the fairness, from a financial point of view, to the
stockholders of Rally's who are not affiliated with either Checkers or Rally's
of the Exchange Ratio. We express no opinion herein as to the structure, terms
or effect of any other aspect of the Transaction.
Based upon and subject to all the foregoing, we are of the opinion, as
investment bankers, that as of the date hereof, the Exchange Ratio is fair,
from a financial point of view, to the stockholders of Rally's who are not
affiliated with either Checkers or Rally's
Very truly yours,
SCHRODER & CO. INC.
B-3
<PAGE>
APPENDIX C
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
January 28, 1999
Independent Committee of the Board of Directors
Checkers Drive-In Restaurants, Inc.
14255 49th Street North
Clearwater, Florida 33762
Members of the Independent Committee:
You have asked us to advise you with respect to the fairness to Checkers
Drive-In Restaurants, Inc. ("Checkers") from a financial point of view of the
Exchange Ratio (as defined below) set forth in the Agreement and Plan of
Merger, dated as of January 28, 1999 (the "Merger Agreement"), by and between
Checkers and Rally's Hamburgers, Inc. ("Rally's"). The Merger Agreement
provides for, among other things, the merger of Rally's with and into Checkers
(the "Merger") pursuant to which each outstanding share of the common stock,
par value $0.10 per share, of Rally's will be converted into the right to
receive 1.99 shares (the "Exchange Ratio") of the common stock, par value
$0.001 per share, of Checkers (the "Checkers Common Stock").
In arriving at our opinion, we have reviewed the Merger Agreement and
certain publicly available business and financial information relating to
Checkers and Rally's. We have also reviewed certain other information relating
to Checkers and Rally's, including financial forecasts, provided to or
discussed with us by Checkers and Rally's, and have met with the managements of
Checkers and Rally's to discuss the businesses and prospects of Checkers and
Rally's. We have also considered certain financial and stock market data of
Checkers and Rally's, and we have compared those data with similar data for
other publicly held companies in businesses similar to Checkers and Rally's,
and we have considered, to the extent publicly available, the financial terms
of certain other business combinations and other transactions which have
recently been effected. We also considered such other information, financial
studies, analyses and investigations and financial, economic and market
criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have been advised, and have assumed, that such
forecasts have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the managements of Checkers and Rally's as
to the future financial performance of Checkers and Rally's and the cost
savings and other potential synergies (including the amount, timing and
achievability thereof) anticipated to result from the Merger. We also have
assumed, with your consent, that (i) the Merger will not constitute a "change
of control" under the terms of the Rally's 9 7/8% Senior Notes Due 2000 (the
"Notes"), which assumption shall be confirmed by an opinion of counsel, dated
as of the Effective Time (as defined in the Merger Agreement), pusuant to
Section 7.1(h) of the Merger Agreement, which opinion shall be in form and
C-1
<PAGE>
Independent Committee of the Board of Directors
Checkers Drive-In Restaurants, Inc.
January 28, 1999
Page 2
substance satisfactory to us, (ii) neither Checkers nor Rally's will be
required to otherwise repurchase the Notes in connection with the Merger and
(iii) the Merger will be treated as a tax-free reorganization for federal
income tax purposes. We have not been requested to make, and have not made, an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Checkers or Rally's, nor have we been furnished with any such
evaluations or appraisals. Our opinion is necessarily based upon information
available to us, and financial, economic, market and other conditions as they
exist and can be evaluated, on the date hereof. We are not expressing any
opinion as to what the value of the Checkers Common Stock actually will be when
issued pursuant to the Merger or the prices at which the Checkers Common Stock
will trade subsequent to the Merger.
We have acted as financial advisor to the Independent Committee of the
Checkers Board of Directors in connection with the Merger and will receive a
fee for our services, a portion of which is contingent upon the consummation of
the Merger. We will also receive a fee upon delivery of this opinion. We have
in the past provided financial services to Checkers unrelated to the proposed
Merger. In the ordinary course of business, Credit Suisse First Boston and its
affiliates may actively trade the debt and equity securities of Checkers and
Rally's for their own accounts and for the accounts of customers and,
accordingly, may at any time hold long or short positions in such securities.
It is understood that this letter is for the information of the
Independent Committee of the Board of Directors of Checkers in connection with
its evaluation of the Merger, does not constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to any matter
relating to the Merger and is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus or proxy statement, or in any
other document used in connection with the offering or sale of securities, nor
shall this letter be used for any other purposes, without our prior written
consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair to Checkers from a financial point of
view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
C-2
