...............................................................................
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
for the fiscal year ended January 3, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO _________________
COMMISSION FILE NUMBER 0-19649
CHECKERS DRIVE-IN RESTAURANTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-1654960
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14255 49th Street North, Building 1, Suite 101
Clearwater, Florida 33762
- ---------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (727) 519-2000
Securities registered pursuant to 12(b) and 12(g)of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE TICKER
-------------- --------------------- ------
9 7/8% Senior Notes due June 15, 2000 New York Stock Exchange
Common Stock, par value $.001 per share NASDAQ--MNS CHKR
Common Stock Purchase Warrants NASDAQ--NMS CHKRZ
Common Stock Parchase Warrants NASDAQ--NMS CHKRW
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of January
3, 2000, was 9,436,094 shares. The aggregate market value of the shares of
Registrant held by non-affiliates of the Registrant, based on the closing price
of such stock on the National Market System of the NASDAQ Stock Market, as of
January 3, 2000, was approximately $20 million. For purposes of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.
[DOCUMENTS INCORPORATED BY REFERENCE]
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I
ITEM 1. BUSINESS.............................................................3
ITEM 2. PROPERTIES..........................................................12
ITEM 3. LEGAL PROCEEDINGS...................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................17
ITEM 6. SELECTED FINANCIAL DATA.............................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES...............................................54
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................54
ITEM 11. EXECUTIVE COMPENSATION..............................................54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.....56
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Checkers Drive-In Restaurants, Inc. ("Checkers") a Delaware
Corporation, includes Rally's Hamburgers, Inc. ("Rally's"), and its wholly-owned
subsidiaries, which are collectively referred to herein as "the Company". On
August 9, 1999, Checkers merged with Rally's. (See Note 3: Merger).
The Company is one of the largest chains of double drive-thru
restaurants in the United States. At January 3, 2000, there were 464 Rally's
restaurants operating in 18 different states and there were 443 Checkers
restaurants operating in 22 different states, the District of Columbia, Puerto
Rico and the West Bank in the Middle East. Of those restaurants, 367 were
Company operated and 540 were operated by franchisees, including 22
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. The Company's
ownership interest in the Company operated restaurants is in one of two forms:
(i) the Company owns 100% of the restaurant (as of January 3, 2000, there were
364 such restaurants) and (ii) the Company owns a 10.55% to 65.83% interest in
various partnerships which own the restaurants (a "Joint Venture Restaurant").
As of January 3, 2000, there were 3 such Joint Venture Restaurants whose
operations are consolidated in the financial statements of the Company. The
Company's restaurants offer high quality food, serving primarily the drive-thru
and take-out segments of the quick-service restaurant industry. Checkers
commenced operations on August 5, 1987. Rally's opened its first restaurant in
January 1985 and began offering franchises in November 1986. See also "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RECENT DEVELOPMENTS
On August 9, 1999, Checkers completed its acquisition of Rally's ("the
Merger"). On that date, Rally's owned 19,130,930 shares (26.06%) of the
outstanding common stock of Checkers and public shareholders owned the remaining
54,277,117 shares of Checkers common stock. Checkers issued 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. In accordance with the Merger agreement, the 19,130,930 million shares of
Checkers common stock that were owned by Rally's were retired. After the
transaction, Rally's shareholders owned 58,377,134 shares (51.8% of the
outstanding common stock of the new Checkers) and the remaining 54,277,117
shares (48.2% of Checker common stock) were held by then current shareholders of
Checkers. Checkers and Rally's each received investment bankers' opinions as to
the fairness of the exchange rate used in the merger. Immediately following the
merger and a one-for-twelve reverse stock split, there were 9,436,094 shares of
Checkers' Common Stock outstanding.
The merger transaction was accounted for under the purchase method of
accounting and was treated as a reverse acquisition as the stockholders of
Rally's received the larger portion (51.8%) of the voting interests in the
combined Company. Accordingly, Rally's was considered the acquirer for
accounting purposes and recorded Checkers' assets and liabilities based upon
their fair market value. (See Note 3: Merger). In conjunction with the merger,
the Company assumed $30.8 million of debt, of which $19.5 million was
short-term. As of January 3, 2000, the short-term balance had been reduced to
$6.2 million.
On November 23, 1999, the Company sold 36 Rally's restaurants in the
Detroit, Michigan market area and 6 Checker's restaurants in the Kansas City,
Missouri market area to Great Lakes Restaurant Company, L.L.C. for $15.6 million
in cash and notes. Great Lakes Restaurant Company, L.L.C. will operate the newly
acquired restaurants as a franchisee and will pay ongoing royalties based on
sales at the restaurants.
On December 20, 1999, the Company sold 13 Rally's restaurants in the
Birmingham, Alabama market area to HJK, L.L.C. for $3.7 million. HJK, L.L.C. is
an affiliate of Frontrunners, Inc., a company that currently operates 2 Rally's
in Alabama. HJK, L.L.C. will operate the newly acquired Rally's restaurants as a
franchisee and pay ongoing royalties based on sales at the restaurants.
On December 23, 1999, the Company completed a $3.6 million
sale-leaseback transaction with Franchise Finance Corporation of America
("FFCA") involving nine properties.
On December 27, 1999, a subsidiary of the Company, Checkers of
Chicago, Inc., a Delaware corporation, discontinued operations in the Chicago
metropolitan area and on January 7, 2000, filed for relief under Chapter 7 of
the United States Bankruptcy Code. Checkers of Chicago, Inc. had operated eight
restaurants as a general partner of certain
3
<PAGE>
limited partnerships and three Company-owned restaurants, all of which are now
closed. The other Checkers and Rally's restaurants operated by Checkers and its
franchisees are not affected by this action.
On December 30, 1999, the Company sold 18 Checker's restaurants in the
Philadelphia, Pennsylvania market area to Great Lakes Restaurant Company, L.L.C.
for $1.0 million. Great Lakes Restaurant Company, L.L.C. will operate the newly
acquired restaurants as a franchisee and will pay ongoing royalties based on
sales at the restaurants.
As of January 3, 2000, the Company had short-term debt obligations
totaling $55.3 million. Of this balance, $6.2 million is due to be repaid on
April 30, 2000 and $45.8 million is due and payable on June 15, 2000. The
remaining $3.3 million of short-term debt is related to capitalized lease
obligations which the Company expects to fund through cash flow from operations.
As of March 30, 2000, the Company has used $8.3 million of the proceeds from the
above transactions to reduce its short-term debt such that $2.0 million remains
outstanding on the debt due April 30, 2000 and $41.7 million remains outstanding
on the debt due June 15, 2000. (See Note 2: Going Concern and Liquidity).
The Company is aggressively pursuing a debt reduction strategy and
believes the majority of the debt reduction can be accomplished by the sale of
Company owned restaurants to new or existing franchisees in transactions that
provide immediate funds to reduce debt and also provide a continued source of
income through future royalties. As of January 3, 2000, the Company had entered
into non-binding letters of intent to sell 163 restaurants in eight markets
which transactions are expected to generate net proceeds of approximately $33
million. The Company is also negotiating to sell additional restaurants that
could generate additional proceeds of approximately $10 million. The Company
expects that it will be able to refinance any remaining debt at market terms.
Although the Company believes that it's debt reduction and refinancing strategy
will be successful, there can be no assurance that the Company will be able to
satisfy the entire principle balances of the Restated Credit Agreement due April
30, 2000 and Senior Notes due June 15, 2000.
In December 1999, the Company named Daniel J. Dorsch as its new Chief
Executive Officer and President to replace Jay Gillespie. Mr. Dorsch will also
serve as a member of the Checkers Board of Directors. Mr. Dorsch has over 25
years experience in various restaurant management roles and has owned and
operated numerous KFC, Taco Bell and Papa John's franchise restaurants.
In other management changes, the Company announced that Ted Abajian
would be assuming the role of Senior Vice President and Chief Financial Officer
to replace Richard Peabody. Mr. Abajian will continue to serve as Senior Vice
President and Chief Financial Officer for Santa Barbara Restaurant Group, Inc.
He has over 15 years in restaurant management and significant public company
experience.
On March 30, 2000, the Company completed the sale of 62 Checkers
restaurants in Mobile, Alabama and West Palm Beach and Orlando, Florida market
areas to Titan Holdings, LLC for $10.25 million in cash and notes, less sales
commissions and other costs. Titan holdings, LLC will operate the newly acquired
Checkers restaurants as a franchisee and pay ongoing royalties based on sales at
the restaurants.
CONCEPT AND STRATEGY
The Company operates under two brands "Checkers (R)" and "Rally's
Hamburgers (R)". The Company's operating concept includes: (i) offering a
limited menu to permit the maximum attention to quality and speed of
preparation; (ii) utilizing distinctive restaurant designs that feature a
"double drive-thru" concept and creates significant curb appeal; (iii) providing
fast service using a "double drive-thru" design for its restaurants and a
computerized point-of-sale system that expedites the ordering and preparation
process; and (iv) great tasting quality food and drinks made fresh to order at a
fair price. The Company's primary strategy is to serve the drive-thru and
take-out segment of the quick-service restaurant industry.
RESTAURANT LOCATIONS.
As of January 3, 2000, there were 367 restaurants owned and operated
by the Company in 13 states (including 3 restaurants owned by partnerships in
which the Company has interests ranging from 10.55% to 65.83%) and 540
restaurants operated by the Company's franchisees in 27 States, the District of
Columbia, Puerto Rico and the West Bank, Middle East. The following table sets
forth the locations of such restaurants (See Note 14: Subsequent Events):
4
<PAGE>
COMPANY- OWNED
CHECKERS RALLY'S TOTAL
- ------------- ------------ -----
Alabama (12) Arkansas (10)
Florida (133) Florida (16)
Georgia (37) Illinois (10)
Mississippi (5) Indiana (27)
Tennessee (4) Kentucky (26)
Louisiana (23)
Mississippi (1)
Missouri (20)
Ohio (21)
Tennessee (10)
Virginia (12)
- ---------------------------------------------------------------------
TOTAL 191 176 367
- ---------------------------------------------------------------------
FRANCHISES
CHECKERS RALLY'S
- ------------- ---------------
Alabama (11) Alabama (15)
Delaware (1) Arizona (5)
Florida (48) California (53)
Georgia (45) Florida (1)
Illinois (11) Georgia (6)
Iowa (2) Illinois (6)
Kansas (2) Indiana (28)
Louisiana (11) Kentucky (14)
Maryland (17) Louisiana (5)
Michigan (1) Michigan (52)
Missouri (7) Mississippi (4)
New Jersey (13) Ohio (85)
New York (13) Pennsylvania (2)
North Carolina (12) Tennessee (1)
Pennsylvania (13) Virginia (7)
Puerto Rico (15) West Virginia (4)
South Carolina (10)
Tennessee (5)
Texas (1)
Virginia (4)
Washington, D.C. (2)
West Bank, Middle East (2)
West Virginia (2)
Wisconsin (4)
- -------------------------------------------------------------------------
TOTAL 252 288 540
- -------------------------------------------------------------------------
GRAND TOTAL 907
=========================================================================
Of these restaurants, 470 were acquired as a result of the Merger (236
Company operated and 234 franchised), 14 franchises were opened or reopened in
1999, 52 restaurants were closed (25 company operated and 27 franchised), 73
Company operated restaurants were sold to franchisees and 10 were acquired from
franchisees. The Company's growth strategy for the next two years is to focus on
the controlled development of additional franchised and Company-operated
restaurants primarily in its existing Core Markets and to further penetrate
markets currently under development by franchisees, including select
international markets. See " Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations - 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, the Company considers
various factors including traffic count, speed of traffic, convenience of
access, size and configuration, demographics and density of population,
visibility and cost. The Company also reviews competition and the sales and
traffic counts of national and regional chain restaurants operating in the area.
The majority of Company operated restaurants are located on leased land and the
Company intends to continue to use leased sites where possible.
5
<PAGE>
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).
The 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 the
Company's 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, the Company's objective is to serve customers
within 30 seconds of their arrival at the drive-thru window. Each restaurant has
a computerized point-of-sale system which displays each individual item ordered
on a monitor in front of the food and drink preparers. This enables the
preparers to begin filling an order before the order is completed and totaled
and thereby increases the speed of service to the customer and the opportunity
of increasing sales per hour, provides better inventory and labor costs control
and permits the monitoring of sales volumes and product utilization.
The Rally's standard restaurant presents 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.
The Company's restaurants are generally open from 12 to 15 hours per
day, seven days a week, for lunch, dinner and late-night snacks and meals.
MENU.
The menu at Checkers is a hamburger product line including the
original 1/4 Pound Champ Burger(R), a fully dressed and seasoned "made-to-order"
burger, all white-meat chicken sandwiches, all beef hotdogs - including
chili-cheese dogs, Checkers Famous Fries (TM), Coca-Cola soft drinks and super
thick shakes. The limited menu is designed to deliver quality, a high taste
profile and unmatched speed of delivery. The Company is engaged in product
development research and seeks to enhance variety through many, limited time
only product promotions throughout the calendar year.
The menu at Rally's is a hamburger product line including the
signature Big Buford(R), a fully dressed double cheeseburger, all white-meat
chicken sandwiches, all beef hot dogs - including chili-cheese dogs, Rally's
seasoned fries, Coca-Cola soft drinks and super thick shakes. The limited menu
is designed to deliver quality, a high taste profile and unmatched speed of
delivery. The Company is engaged in product development research and seeks to
enhance variety through many, limited time only product promotions throughout
the calendar year.
BRAND POSITIONING: FRESH
The double drive-thru concept for both Checkers and Rally's provides a
unique point of difference for product delivery. A simplified hamburger and
chicken sandwich product line (along with fries, colas and shakes) is served
quickly, at a tremendous value. Consumers today want their food served hot,
fresh and fast at a value. The Checkers and Rally's concepts take full advantage
of the relationship between consumer's busy lives, cars and fast food.
This brand positioning is based on consumer research with the core
customer of the Company's products, as well as other quick-service hamburger
users who might be convinced to become a loyal customer.
6
<PAGE>
MARKETING PROGRAM.
In the fall of 1999, work began on a new advertising campaign aimed at
the heavy fast food user (18-25 year old males) who represent 80% of burger
category revenues. The overall message was simple: hot food fast, at a value.
The advertising campaign (developed by Crispin Porter & Bogusky, Miami) uses
television as the primary medium. The message is delivered in a unique format
using animation taking advantage of the popularity of this type of medium today.
The advertising campaign was launched in January of 2000.
In addition, the Company utilizes radio, outdoor billboards and
various forms of print advertising (ROP, FSI, ADVO etc.) to target consumers on
a local store basis. Franchisees are able to take advantage of a national print
program that can be customized to fit their geographic and local market needs.
The promotional calendar focuses on limited time offer products at a
value to help drive traffic. At the store level, point of purchase merchandising
is specifically designed to enhance average check by offering the consumer a
choice of combo meals, and additional add-ons to their meal.
PURCHASING.
The Company and its franchisees purchase their food, beverages and
supplies from Company-approved suppliers. All products must meet standards and
specifications set by the Company due primarily to joint purchasing with CKE
Restaurants, Inc. Management constantly monitors the quality of the food,
beverages and supplies provided to the restaurants. The Company has been
successful in negotiating price concessions from suppliers for bulk purchases of
food and paper supplies by the restaurants. The Company believes that its
continued efforts over time have achieved cost savings, improved food quality
and consistency and helped decrease volatility of food and supply costs for the
restaurants. All essential food and beverage products are available or, upon
short notice, could be made available from alternate qualified suppliers. Among
other factors, the Company's profitability is dependent upon its ability to
anticipate and react to changes in food costs. Various factors beyond the
Company's control, such as climate changes and adverse weather conditions, may
affect food costs.
MANAGEMENT AND EMPLOYEES.
A typical restaurant employs approximately 25 hourly employees, many
of whom work part-time on various shifts. The management staff of a typical
restaurant operated by the Company consists of a general manager, one assistant
manager and a shift manager. 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 ten restaurants and for assuring that each
Company-owned restaurant consistently delivers high-quality food and service.
Area managers report to regional vice presidents. The Company has an incentive
compensation program for area and store managers that provides for a monthly
bonus based upon the achievement of certain sales and profit goals.
As of January 3, 2000, the Company employed approximately 8,000
employees, substantially all of which were restaurant personnel. Most employees
other than restaurant management and certain corporate personnel are paid on an
hourly basis. The Company believes that it provides working conditions and wages
that are comparable with those of other companies within the service
restaurant industry. The Company considers its employee relations to be good.
None of the Company's employees are covered by a collective bargaining
agreement.
SUPERVISION AND TRAINING.
The Company requires each franchisee and restaurant manager to attend
a comprehensive training program. The program was developed by the Company to
enhance consistency of restaurant operations and is considered by management as
an important step in operating a successful restaurant. During this program, the
attendees are taught certain basic elements that the Company believes are vital
to the Company's operations and are provided with a complete operations manual,
together with training aids designed as references to guide and assist in the
day-to-day operations. In addition, hands-on experience is incorporated into the
program by requiring each attendee, prior to completion of the training course,
to work in an existing Company-operated restaurant. After a restaurant is
opened, the Company continues to monitor the operations of both franchised and
Company-operated restaurants to assist in the consistency and uniformity of
operation.
The Company employs Franchise Business Consultants ("FBC's") who act
as a link between the Company and its franchisees. The FBC's 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.
7
<PAGE>
RESTAURANT REPORTING.
Each Company-operated restaurant has a computerized point-of-sale
system coupled with a back office computer. With this system, management is able
to monitor sales, labor and food costs, customer counts and other pertinent
information. This information allows management to better control labor
utilization, inventories and operating costs. Each system at Company-operated
restaurants is polled daily by a computer at the principal offices of the
Company.
JOINT VENTURE RESTAURANTS.
As of January 3, 2000 there were 3 restaurants owned by separate
general and limited partnerships in which the Company owns general and limited
partnership interests ranging from 10.55% to 65.83%, with other parties owning
the remaining interests (the "Joint Venture restaurants"), all of which are
consolidated in the Company's financial statements. The Company is the managing
partner of 2 of the 3 Joint Venture restaurants. In the 2 Joint Venture
restaurants managed by the Company, 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. Prior to the end of the fiscal
year, the Company, as the managing partner for the 8 restaurants in Chicago made
the decision to close the restaurants at the end of business on December 27,
1999, due to poor performance. On January 7, 2000, Checkers of Chicago, Inc., a
wholly owned subsidiary of the Company, and the General Partner in the Chicago
Limited Partnerships, filed for bankruptcy protection under Chapter 7 of the US
Bankruptcy Code. (see Note 14: Subsequent Events).
INFLATION.
Food and labor costs are significant inflationary factors in the
Company's operations. Many of the Company's employees are paid hourly rates
related to the statutory minimum wage; therefore, increases in the minimum wage
increase the Company's costs. In addition, many of the Company's leases require
it to pay base rents with escalation provisions based on the consumer price
index, in addition to percentage rentals based on revenues, and to pay taxes,
maintenance, insurance, repairs and utility costs, all of which are expenses
subject to inflation. The Company has generally been able offset the effects of
inflation to date through small menu price increases. There can be no assurance
that the Company will be able to continue to offset the effects of inflation
through menu price increase.
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.
FRANCHISE OPERATIONS
STRATEGY. The Company encourages controlled development of franchised
restaurants in its existing markets as well as in certain additional states. The
primary criteria considered by the Company in the selection, review and approval
of prospective franchisees are the availability of adequate capital to open and
operate the number of restaurants franchised and prior experience in operating
quick-service restaurants. Franchisees operated 540, or 60%, of the total
restaurants open at January 3, 2000. During the fourth quarter of fiscal 1999
the Company sold a total of 73 Company operated restaurants to existing and new
franchisees. In addition, the Company intends to sell additional Company
operated restaurants to franchisees in fiscal 2000. After such sales are
completed, approximately 75% of the Company's restaurants will be franchised and
approximately 25% will be Company operated. In the future, the Company's success
will continue to be dependent upon its franchisees and the manner in which they
operate and develop their restaurants to promote and develop the Checkers and
Rallys concepts and its reputation for quality and speed of service. Although
the Company has established criteria to evaluate prospective franchisees, there
can be no assurance that franchisees will have the business abilities or access
to financial resources necessary to open the number of restaurants the
franchisees currently anticipate to be opened in 2000 or that the franchisees
will successfully develop or operate restaurants in their franchise areas in a
manner consistent with the Company's concepts and standards. As a result of
inquiries concerning international development, the Company may develop a
limited number of international markets and has begun the process of registering
its trademarks in various foreign countries. The most likely format for
international development is through the issuance of master franchise agreements
and/or joint venture agreements. The terms and conditions of these agreements
may vary from the standard area development agreement and franchise agreement in
order to comply with laws and customs different from those of the United States.
On March 31, 1995, the Company entered into a master franchise agreement for the
Caribbean Basin. This master franchise agreement was terminated by the Company
on February 3, 2000 (See Note 14: Subsequent Events). The Company has also
granted two franchise agreements for the West Bank in the Middle East.
FRANCHISEE SUPPORT SERVICES. The Company maintains a staff of
well-trained and experienced restaurant operations personnel whose primary
responsibilities are to help train and assist franchisees in opening new
restaurants and to monitor the operations of existing restaurants. These
services are provided as part of the Company's franchise program. Upon
8
<PAGE>
the opening of a new franchised restaurant by a franchisee, the Company
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
the Company's 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. The Company also employs Franchise Business
Consultants ("FBC's"), who have been fully trained by the Company to assist
franchisees in implementing the operating procedures and policies of the Company
once a restaurant is open. As part of these services, the FBC rates the
restaurant's hospitality, food quality, speed of service, cleanliness and
maintenance of facilities. The franchisees receive a written report of the FBC's
findings and, if any deficiencies are noted, recommended procedures to correct
such deficiencies.
The Company also provides site development and construction support
services to its franchisees. All sites and site plans are submitted to the
Company for its review prior to construction. These plans include information
detailing building location, internal traffic patterns and curb cuts, location
of utilities, walkways, driveways, signs and parking lots and a complete
landscape plan. The Company's construction personnel also visit the site at
least once during construction to meet with the franchisee's site contractor and
to review construction standards.
FRANCHISE AGREEMENTS. The franchise agreement grants to the franchisee
an exclusive license at a specified location to operate a restaurant in
accordance with the Checkers and Rally's systems and to utilize the Company's
trademarks, service marks and other rights of the Company relating to the sale
of its menu items. The term of the current franchise agreement is generally 20
years. Upon expiration of the franchise term, the franchisee will generally be
entitled to acquire a successor franchise for the restaurants on the terms and
conditions of the Company's then current form of franchise agreement if the
franchisee remains in compliance with the franchise agreement throughout its
term and if certain other conditions are met, including the payment of fee equal
to 25% of the then current franchise fee.
In some instances, the Company grants to the franchisee the right to
develop and open a specified number of restaurants within a limited period of
time and in a defined geographic area (the "Franchised Area") and thereafter to
operate each restaurant in accordance with the terms and conditions of a
franchise agreement. In that event, the franchisee ordinarily signs two
agreements, an area development agreement and a 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 years) 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. The Company may terminate the area
development agreement of any franchisee that fails to meet its development
schedule.
The franchise agreement and area development agreement require that
the franchisee select proposed sites for restaurants within the franchised area
and submit information regarding such sites to the Company for its review,
although final site selection is at the discretion of the franchisee. The
Company does not arrange or make any provisions for financing the development of
restaurants by its franchisees. To the extent used MRP's are available for sale,
the Company will offer the franchisees an opportunity to buy an MRP from the
Company in those geographic areas where the MRP can be installed in compliance
with applicable laws. Each franchisee is required to purchase all fixtures,
equipment, inventory, products, ingredients, materials and other supplies used
in the operation of its restaurants from approved suppliers, all in accordance
with the Company's specifications. The Company provides a training program for
management personnel of its franchisees at its corporate offices. Under the
terms of the franchise agreement, the Company has adopted standards of quality,
service and food preparation for franchised restaurants. Each franchisee is
required to comply with all of the standards for restaurant operations as
published from time to time in the Company's operations manual.
The Company may terminate a franchise agreement for several reasons
including the franchisee's bankruptcy or insolvency, default in the payment of
indebtedness to the Company or suppliers, failure to maintain standards set
forth in the Franchise Agreement or operations manual, continued violation of
any safety, health or sanitation law, ordinance or governmental rule or
regulation or cessation of business. In such event, the Company may also elect
to terminate the franchisee's Area Development Agreement.
FRANCHISE FEES AND ROYALTIES. Under the current franchise agreement, a
franchisee is generally required to pay application fees, site approval fees and
an initial Franchise Fee together totaling $20,000 for each restaurant opened by
the franchisee. If a franchisee is awarded the right to develop an area pursuant
to an Area Development Agreement, the franchisee typically pays the Company a
$5,000 Development Fee per store, which will be applied to the Franchisee Fee as
each restaurant is developed. Each franchisee is also generally required to pay
the Company a semi-monthly royalty of 4% of the restaurant's gross sales (as
defined) and to expend certain amounts for advertising and promotion.
COMPETITION
The Company's 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
9
<PAGE>
and food quality and variety. The industry includes many quick-service chains,
including national chains which have significantly greater resources than the
Company that can be devoted to advertising, product development and new
restaurants, and which makes them less vulnerable to fluctuations in food,
paper, labor and other costs. In certain markets, the Company will also compete
with other quick-service double drive-thru hamburger chains with operating
concepts similar to the Company. The 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. The Company competes
primarily on the basis of speed of service, price, value, food quality and
taste. In addition, with respect to selling franchises, the Company competes
with many franchisors of restaurants and other business concepts. All of the
major chains have increasingly offered selected food items and combination
meals, including hamburgers, at temporarily or permanently discounted prices.
This promotional activity has continued at increasing levels, and management
believes that it has had a negative impact on the Company's sales and earnings.
Increased competition, additional discounting and changes in marketing
strategies by one or more of these competitors could have an adverse effect on
the Company's sales and earnings in the affected markets.
TRADEMARKS AND SERVICE MARKS
The Company believes that its rights in its trademarks and service
marks are important to its marketing efforts and a valuable part of its
business. The Company owns a number of trademarks and service marks that have
been registered, or for which applications are pending, with the United States
Patent and Trademark Office including but not limited to: "Rally's Hamburgers",
"One of a Kind Fries", "Big Buford", "Checkers", "Checkers BurgeroFriesoColas"
and "Champ Burger". It is the Company's policy to pursue registration of its
marks whenever possible and to vigorously oppose any infringement of its marks.
GOVERNMENT REGULATION
The restaurant industry is subject to numerous federal, state and
local government regulations, including those relating to the preparation and
sale of food and building and zoning requirements. In addition, the Company is
subject to laws governing its relationship with employees, including minimum
wage requirements, overtime, working and safety conditions and citizenship
requirements. Many of the Company's employees are paid hourly rates based upon
the federal and state minimum wage laws. Recent legislation increasing the
minimum wage has resulted in higher labor costs to the Company. An increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees could have a material adverse effect on the Company's business,
financial condition and results of operation.
The Company is also subject to extensive federal and state regulations
governing franchise operations and sale which impose registration and disclosure
requirements on franchisors in the offer and sale of franchises and in certain
cases, dictating substantive standards that govern the relationship between
franchisors and franchisees, including limitations on the ability of franchisors
to terminate franchisees and alter franchise arrangements.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local
environmental laws. These laws govern discharges to air and water from the
Company's restaurants, as well as handling and disposal practices for solid and
hazardous waste. These laws may impose liability for damages for the costs of
cleaning up sites of spills, disposals or other releases of hazardous materials.
The Company may be responsible for environmental conditions relating to its
restaurants and the land on which the restaurants are located, regardless of
whether the restaurants or land in question are leased or owned and regardless
of whether such environmental conditions were created by the Company or by a
prior owner or tenant.
The Company is not aware of any environmental conditions that would
have a material adverse effect on our businesses, assets or results of
operations taken as a whole. The Company cannot be certain that environmental
conditions relating to prior, existing or future restaurants will not have a
material adverse effect on the Company. Moreover, there is no assurance that:
(1) future laws, ordinances or regulations will not impose any material
environmental liability: or (2) the current environmental condition of the
properties will not be adversely affected by tenants or other third parties or
by the condition of land or operations in the vicinity of the properties.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain statements in this Form 10-K under "Item 1. Business," "Item
3. Legal Proceedings", "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Form 10-K
constitute "forward-looking statements" which we believe are within the meaning
of the Securities Act of 1933, as amended and the Securities Exchange Act of
1934, as amended. Also, when the Company uses words such as "believes,"
"expects," "anticipates" or similar expressions, it is making forward looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of the company to be
10
<PAGE>
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Some of the risks that
should be considered include:
(i) These risks include the fact that the Company competes with
numerous well established competitors who have substantially
greater financial resources and longer operating histories than
the Company, which enables them to engage in heavy and sustained
discounting as well as substantial advertising and promotion.
While this competition is already intense, if it increases it
could have an even greater adverse impact on revenues and
profitability of Company and franchise restaurants.
(ii) The Company must reverse declining same store sales if it is to
achieve improved profitability. Sales increases will depend,
among other things, on the success of Company's advertising and
promotion efforts and the success of other operating
initiatives, all of, which are speculative.
(iii) The Company has substantial senior debt obligations coming due
in April and June 2000. The Company intends to sell certain
markets to repay this debt or reduce it to a level where it can
be refinanced. These market sales are contingent on a number of
factors, many of which are not within the Company's control,
such as the ability of a purchaser to secure financing. The
failure of the Company to consummate one or more of the market
sales could have a material adverse effect on the Company's
financial condition.
The Company may also be negatively impacted by other factors common to
the restaurant industry such as changes in consumer tastes away from red meat
and fried foods; consumer acceptance of new products consumer and trial
frequency; increases in the costs of food; paper, labor, health care, workers'
compensation or energy; an inadequate number of available hourly paid employees;
and/or decreases in the availability of affordable capital resources;
development and operating costs. Other factors which may negatively impact the
Company include, among others, the receipt of a qualified opinion from the
Company's auditors; adverse publicity; general economic and business conditions;
availability, locations, and terms of sites for restaurant development; changes
in business strategy or development plans; quality of management; availability,
terms and deployment of capital; the results of financing efforts; business
abilities and judgement of personnel; availability of qualified personnel;
changes in, or failure to comply with, government regulations; impact of Year
2000; continued NASDAQ listing; weather conditions; construction schedules and
other factors referenced in this Form 10-K.
11
<PAGE>
ITEM 2. PROPERTIES
The Company's 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. This lease expires June 30, 2003.
The Company also owns an 89,850 square foot manufacturing facility in
Largo, Florida. The Company has entered into an agreement to sell this facility
and expects to complete the transaction during the second quarter of fiscal
2000.
The following table sets forth information regarding the Company's restaurant
properties as of January 3, 2000:
LEASED OWNED
CHECKERS LAND LAND (2) TOTAL
------ ----- -----
Company-operated 158 33 191
Franchise-operated (1) 26 4 30
Vacant 20 8 28
---- ---- ----
Subtotal 204 45 249
RALLY'S
Company-operated 145 31 176
Franchise-operated (1) 45 8 53
Subleased/vacant 26 2 28
---- ---- ----
Subtotal 216 41 257
Total 420 86 506
==== ==== ====
(1) "Franchisee-operated" properties are those which are owned or leased by
Company and subleased to franchisee operators.
(2) Certain of these properties are mortgaged.
The terms of the Company's leases or subleases vary in length expiring
on various dates through 2018. The expiration of these leases is not expected to
have a material impact on the Company's operations in any particular year as the
expiration dates are staggered over a number of years and many of the leases
contain renewal options.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET AL. (Case NO.
C-94-0039-L-CS). In January and February 1994, two putative class action
lawsuits were filed, purportedly on behalf of the stockholders of Rally's, in
the United States District Court for the Western District of Kentucky,
Louisville division, against Rally's, Burt Sugarman and GIANT GROUP, LTD.
("GIANT") and certain of Rally's 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
("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 was completed
in August 1999. Expert discovery is scheduled to be completed by June 2000.
Motions for Summary Judgment will be filed by the parties by early July, 2000.
Management is unable to predict the outcome of this matter at the present time
or whether or not certain available insurance coverage's will apply. The
defendants deny all wrongdoing and intend to defend themselves vigorously in
this matter.
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 and 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 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 complaint. Although, plaintiffs indicated that they would
likely file an amended complaint in the event of the consummation of a merger
between the Company and Rally's, no such amendment has been filed to date. The
Company believes the lawsuit is without merit and intends to defend it
vigorously should plaintiffs seek to renew the lawsuit.
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. Although, plaintiffs
indicated that they would
13
<PAGE>
likely file an amended complaint in the event of the consummation of a merger
between the Company and Rally's, no such amendment has been filed to date. The
Company believes the lawsuit is without merit and intends to defend it
vigorously.
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. A companion complaint was also filed in
the same Court on May 21, 1997, 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-21. The original
complaint alleged, generally, that certain officers of the Company intentionally
inflicted severe emotional distress upon Ms. Greenfelder, who is the sole
stockholder, president and director of Powers Burgers, Inc., a Checkers
franchisee. The present versions of the Amended Complaints in the two actions
assert a number of claims for relief, including claims for breach of contract,
fraudulent inducement to contract, post-contract fraud and breaches of implied
duties of "good faith and fair dealings" in connection with various franchise
agreements and an area development agreement, battery, defamation, negligent
retention of employees, and violation of Florida's Franchise Act. The Company
believes that these lawsuits are without merit, and intends to continue to
defend them vigorously.
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 sought 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, as amended, alleged 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 and sought a
judgment for damages in an unspecified amount, punitive damages, attorneys' fees
and such other relief as the court may deem appropriate.
The case was tried before a jury in August of 1999. The court entered a
directed verdict and an involuntary dismissal as to all claims alleged against
Robert G. Brown, George W. Cook, and Jared Brown. The court also entered a
directed verdict and an involuntary dismissal as to certain other claims alleged
against the Company and the remaining individual Counterclaim Defendants, James
E. Mattei, Herbert G. Brown and James F. White, Jr. The jury returned a verdict
in favor of the Company, James E. Mattei, Herbert G. Brown and James F. White,
Jr. as to all counterclaims brought by Checkmate Food Services, Inc. and in
favor of Mr. Mattei as to all claims alleged by Tampa Checkmate and Mr. Gagne.
In response to certain jury interrogatories, however, the jury made the
following determination: (i) That Mr. Gagne was fraudulently induced to execute
a certain Unconditional Guaranty and that the Company was therefore not entitled
to enforce its terms; (ii) That the Company, H. Brown and Mr. White fraudulently
induced Tampa Checkmate to execute a certain franchise agreement whereby Tampa
Checkmate was damaged in the amount of $151,331; (iii) That the Company, H.
Brown and Mr. White violated a provision of the Florida Franchise Act relating
to that franchise agreement whereby Tampa Checkmate and Mr. Gagne were each
damaged in the amount of $151,330; and (iv) That none of the Defendants violated
Florida's Deceptive and Unfair Trade Practices Act relating to that franchise
agreement.
As a result of certain pre-trial orders entered by the court, the
Company believes that the responses to the jury interrogatories are "advisory"
and are not binding on the court. The court has determined, however, that the
responses to the jury interrogatories are binding upon it and has indicated an
intent to enter a judgment accordingly. The Company believes that entry of such
a judgment would be erroneous and would constitute reversible error. The Company
has filed various post-trial motions which it believes are meritorious and
intends to continue to defend the case vigorously, including the taking of an
appeal if it becomes necessary.
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. In July 1997, Checkers filed an
Adversary Complaint in those proceedings entitled CHECKERS DRIVE-IN RESTAURANTS,
INC. V. TAMPA CHECKMATE FOOD SERVICES, INC. and numbered as Case No. 97-738. The
Adversary Complaint sought a preliminary and permanent injunction enjoining
Tampa Checkmate's continued use of Checkers' marks and trade dress in light of
the termination of its franchise agreement on April 8, 1997. Tampa Checkmate
14
<PAGE>
filed a counterclaim which essentially contained the same claims set forth in
the Amended Counterclaim filed in the state court action. The court granted the
Company's Motion for preliminary injunction on July 23, 1998, and Tampa
Checkmate de-identified its restaurant. On December 15, 1998, the Court entered
an order converting Tampa Checkmate's Bankruptcy proceedings from a Chapter 11
to a Chapter 7 liquidation. Additionally, on February 1, 1999, the Bankruptcy
court lifted the automatic stay to permit the Company to dispose of the property
subject to its mortgage. The Company has filed a deficiency claim in the
Bankruptcy proceedings for approximately $985,000, which, together with Tampa
Checkmate's Counterclaim, remain pending. The Company intends to continue to
defend this case vigarously.
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 believes the causes of action
asserted in the amended Petition against the Company and the individual
defendants are without merit and intends to defend them vigorously.
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 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 for summary judgement which remains pending. The
Company believes the causes of action asserted in the Counterclaim against the
Company and Mr. Brown are without merit and intends to defend them vigorously.
DOROTHY HAWKINS V. CHECKERS DRIVE-IN RESTAURANTS, INC. AND KPMG PEAT
MARWICK, Case No. 99-001584-CI-21. On March 4, 1999, a state court complaint was
filed in the Circuit Court in and for Pinellas County, Florida, Civil Division.
The Complaint alleges that Mrs. Hawkins was induced into purchasing a restaurant
site and entering into a franchise agreement with the Company based on
misrepresentations and omissions made by Checkers. The Complaint 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, fraudulent
concealment, fraudulent inducement, and negligent representation. The Company
denies the material allegations of the Complaint and intends to defend the
lawsuit vigorously.
SNAPPS RESTAURANTS, INC. V. CHECKERS DRIVE-IN RESTAURANTS, INC. On
February 21, 2000, a Complaint was filed against the Company in the Common Pleas
Court for Franklin County, Ohio entitled SNAPPS RESTAURANTS, INC. V. CHECKERS
DRIVE-IN RESTAURANTS, INC. which was thereafter removed by the Company to the
United States District Court for the Southern District of Ohio, and numbered as
Case No. C2-00-0216 on the docket of said court (the "Southern District
Action"). The Complaint filed in the Southern District Action seeks a temporary
and permanent injunction enjoining the Company from terminating seventy-seven
franchise agreements with Snapps Restaurants, Inc. ("Snapps") and alleges
wrongful termination of franchise agreements and various breaches of contract.
On February 22, 2000, a Complaint was filed by the Company against Snapps in the
United States District Court for the Northern District of Ohio entitled CHECKERS
DRIVE-IN RESTAURANTS, INC. V. SNAPPS RESTAURANTS, INC., and numbered as Case No.
3:00CV7110 on the docket of said court (the "Northern District Action"). The
Company's Complaint in the Northern District Action seeks to enjoin Snapps'
continued use of the Rally's marks and trade dress following the termination of
its franchise agreements and to collect unpaid royalty fees and advertising fund
contributions. The Company and Snapps have also filed arbitration proceedings
with the American Arbitration Association which have been assigned Case No. 25 Y
114 00057 00 and Case No. 331140004900 (collectively the "Arbitration
Proceedings"). On March 10, 2000, the parties reached an agreement in principle
to resolve the dispute. The Company believes the causes of action asserted
against it by Snapps are without merit and, in the event the settlement
described above is not consummated, the Company intends to defend them
vigorously.
15
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the National Market System of
the NASDAQ Stock Market under the symbol "CHKR". As of January 3, 2000, there
were approximately 6,900 stockholders of record of the Company's Common Stock.
The table below sets forth the high and low sales prices of the Company's Common
Stock, as reported on the NASDAQ National Market System, for each quarter during
the last two years. For all periods prior to the merger, the table below
represents the stock prices of Checker's adjusted for the one-for-twelve reverse
stock split, which occurred on August 9, 1999.
1999
Quarter Ended FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
High $ 8.63 $ 5.63 $ 4.50 $ 3.44
Low 3.75 3.00 1.69 1.25
1998
Quarter Ended FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
High $ 12.75 $ 18.37 $ 15.37 $ 8.25
Low 9.75 10.50 7.87 3.75
DIVIDENDS
The Company has not declared or paid any dividends on its common stock
since incorporation and does not intend to do so in the foreseeable future.
Dividends are prohibited under the terms of the Company's Restated Credit
Agreement and are permitted under the Indenture governing the 9 7/8% Senior
Notes only if certain income tests are met.
RECENT UNREGISTERED SALES
On April 26, 1999, the Company issued a promissory note in the amount
of $765,000 to Memphis Development, Inc. In connection with the acquisition of
three restaurants. The note has a five-year term and bears an initial interest
rate of 7.75%. The interest rate is variable and is re-determined on an annual
basis at prime plus 1%. The issuance of this note is exempt from registration
under Section IV (II) of the Securities Act.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data was derived from the consolidated financial
statements of the Company, which includes its wholly owned subsidiaries. The
merger of Checkers and Rally's on August 9, 1999 was accounted for as a reverse
acquisition as former shareholders of Rally's owned a majority of the
outstanding stock of Checkers subsequent to the merger. Therefore, for
accounting purposes, Rally's is deemed to have acquired Checkers. The table
below reflects the results of operations of Rally's for all periods presented
and includes the operating results of Checkers subsequent to August 9, 1999.
The per share data has been adjusted for all periods to reflect for the exchange
ratio of 1.99 to 1 and the one-for-twelve reverse split that occurred on August
9, 1999. This information should be read in conjunction with the consolidated
financial statements of Checkers and the related notes thereto, and the
information contained in "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein.
The Company currently reports on a fiscal year, which ends on the
Monday closest to December 31st. Currently each quarter consists of three 4-week
periods, with the exception of the fourth quarter, which consists of four 4-week
periods. All periods have 52 weeks except the period ending January 3, 2000,
which has 53 weeks.
<TABLE>
<CAPTION>
(In thousands, except per share amounts and statistical data)
JANUARY 3, DECEMBER 28, DECEMBER 28, DECEMBER 29, DECEMBER 31,
2000 1998 1997 1996 1995
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Systemwide sales (1,4) $ 401,964 $ 286,876 $ 290,133 $ 316,670 $ 355,719
========== ========== ========== ========== =========
Company restaurant sales (4) $ 192,340 $ 139,602 $ 139,348 $ 156,445 $ 181,778
Other revenues (4) 9,495 5,350 5,582 6,307 7,081
---------- ---------- ---------- ----------- ----------
Total revenues (4) 201,835 144,952 144,930 162,752 188,859
---------- ---------- ---------- ----------- ----------
(Loss) income from operations (2,4) (17,184) 1,401 3,343 4,041 (36,470)
Other expenses (4) (9,217) (8,684) (7,404) (8,008) (9,910)
----------- ---------- ---------- ----------- ----------
Loss before taxes (4) (26,401) (7,283) (4,061) (3,967) (46,380)
Tax provision (benefit) (4) 336 252 455 (675) 539
----------- ---------- ---------- ----------- ----------
Loss before extraordinary items (4) (26,737) (7,535) (4,516) (3,292) (46,919)
Extraordinary items (3,4) 849 -- - 5,280 -
---------- ---------- ---------- ----------- ----------
Net income (loss) (4) $ (25,888) $ (7,535) $ (4,516) $ 1,988 $ (46,919)
========== ========== ========== ========== ==========
Income (loss) per common share (basic & diluted):
Loss before extraordinary
items (4) $ (4.02) $ (1.67) $ (1.32) $ (1.17) $ (18.12)
Extraordinary item (4) 0.13 -- -- 1.87 --
---------- ---------- ---------- ----------- ----------
Net income (loss) per common share (4) $ (3.89) $ (1.67) $ (1.32) $ 0.70 $ (18.12)
========== =========== ========== ========== =========
Weighted average shares outstanding (4) 6,657 4,506 3,434 2,820 2,590
========== ========== ========== ========== =========
Total assets (5) $ 165,653 $ 123,306 $ 134,297 $ 112,258 $ 137,392
Long-term debt and obligations under
capital leases, including current portion (5) $ 80,767 $ 70,307 $ 68,444 $ 69,654 $ 97,958
Cash dividends declared per common
share (5) $ -- $ -- $ -- $ -- $ --
Restaurants open at end of period:
Company (5) 367 226 229 209 239
Franchised (5) 540 249 248 258 242
---------- ---------- ---------- ---------- ---------
Total (5) 907 475 477 467 481
========== ========== ========== ========== =========
</TABLE>
(1) Systemwide sales consist of aggregate revenues of Company-owned and
franchised restaurants (including CKE-operated restaurants).
(2) The fiscal year ended December 31, 1995 includes approximately $17.3 million
charged against operations for changes in business strategies and restaurant
closings and approximately $13.7 million related to the implementation of
Statement of Financial Accounting Standards No. 121 ("SFAS 121"). The fiscal
year ended January 3, 2000 includes approximately $22 million relating to SFAS
121 and $1.7 million for the period ending December 28, 1998.
(3) The extraordinary item for the fiscal year ended January 3, 2000 and
December 29, 1996 was a gain on the early retirement of debt, net of tax expense
of $0 and $1,350,000, respectively.
(4) The information presented for the period ending January 3, 2000 reflects the
results for Rally's for the full thirteen periods and only the post merger
twenty-one week period from August 10, 1999 to January 3, 2000 for Checkers.
(5) The balance sheet presented as of January 3, 2000 represents the combined
balance sheet of the merged entity. All prior periods reflect Rally's only.
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On August 9, 1999, Checkers Drive-In Restaurants, Inc. ("Checkers") and
Rally's Hamburgers, Inc., ("Rally's") completed their merger ("Merger"). The
merger of Checkers with Rally's was accounted for as a reverse acquisition as
former shareholders of Rally's owned a majority of the outstanding stock of
Checkers subsequent to the merger. Therefore, for accounting purposes, Rally's
is deemed to have acquired Checkers. All pre-Merger financial information
presented represents the financial results for Rally's. The post-merger
financial results include both Rally's and Checkers.
As noted in Item 6: "Selected Financial Data", and as more fully
described in Note 3: "Merger", the Company completed the Merger on August 9,
1999. This Merger has had a significant impact on the Company's results of
operations and is the principal reason for the significant differences when
comparing results of operations for the period ending January 3, 2000 with the
results of operations for the period ended December 28, 1998. The comparability
of future periods will also be affected by the Merger.
At January 3, 2000, the Company's system included 907 restaurants,
comprised of 367 Company-owned and operated and 540 franchised restaurants. At
January 3, 2000, there were 464 Rally's restaurants operating in 18 different
states and there were 443 Checkers restaurants operating in 22 different states,
the District of Columbia, Puerto Rico and the West Bank in the Middle East. The
Company's ownership interest in the Company-operated restaurants is in one of
two forms: (i) the Company owns 100% of the restaurant (as of January 3, 2000,
there were 364 such restaurants) and (ii) the Company owns a 10.55% to 65.83%
interest in various partnerships which own the restaurants (a "Joint Venture
Restaurant"). As of January 3, 2000, there were 3 such Joint Venture Restaurants
whose operations are consolidated in the financial statements of the Company.
The Company-owned restaurants include 22 units 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.
The Company receives revenues from restaurant sales, franchise fees,
royalties and sales of fully-equipped manufactured modular restaurant packages.
The Company'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 food and paper cost, labor costs,
occupancy expense, other operating expenses, depreciation and amortization, and
advertising and promotion expenses relate directly to Company-owned 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 Company operated restaurant operations
and modular restaurant packages revenues as well as the Company's franchise
sales and support functions. Owner expenses relate to CKE-operated restaurants
and consist primarily of depreciation and amortization. The Company's revenues
and expenses are affected by the number and timing of additional restaurant
openings and the sales volumes of both existing and new restaurants. Modular
restaurant packages 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.
Effective November 30, 1997, Checkers and Rally's entered into a
Management Services Agreement ("Agreement") whereby Checkers provided
accounting, technology, and other functional and management services to
predominantly all of the operations of Rally's. Checkers received fees from
Rally's relative to the shared departmental costs times the respective store
ratio. Upon completion of the Merger, this Agreement was terminated. During the
period from December 29, 1998 through August 9, 1999 and the years ended
December 28, 1998 and 1997 Checkers charged Rally's $4.7 million, $5.6 million
and $95 thousand, respectively in accordance with the Agreement.
As a result of the Merger, the Company acquired 470 Checkers
restaurants. In fiscal 1999, excluding the impact of the Merger, the Company
opened 0 restaurants and closed 25 restaurants. Franchisees opened 14
restaurants and closed 27.
19
<PAGE>
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in Company's
consolidated statements of income and operating data for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 (4) 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Restaurant sales 95.3% 96.3% 96.2%
Franchise revenues and fees 4.4% 3.2% 3.3%
Owner fee income 0.3% 0.5% 0.5%
------- ------- -------
100.0% 100.0% 100.0%
======= ======= =======
COST AND EXPENSES:
Restaurant food and paper costs (1) 31.3% 31.8% 32.3%
Restaurant labor costs (1) 32.4% 30.5% 29.8%
Restaurant occupancy expense (1) 6.8% 5.3% 4.7%
Restaurant depreciation and amortization (1) 4.0% 5.2% 5.1%
Other restaurant operating expenses (1) 9.7% 8.8% 9.2%
General and administrative expenses 9.1% 8.8% 10.7%
Advertising (1) 6.1% 7.1% 7.4%
Bad debt expense 0.9% 0.4% (0.3)%
Owner depreciation (2) 215.8% 90.6% 84.3%
Other depreciation and amortization 1.9% 1.7% 1.8%
Impairment of long-lived assets 10.8% 1.2% 0.0%
Losses on assets to be disposed of 0.2% 1.1% 0.1%
Gain on sales of markets (1.3)% 0.0% 0.0%
------- ------- -------
OPERATING INCOME (LOSS) (8.5)% 1.0% 2.3%
======= ======= =======
OTHER INCOME (EXPENSE):
Interest income 0.4% 0.3% 0.5%
Loss on investment in affiliate (0.7)% (1.4)% (0.5)%
Interest expense (including interest-loan cost and bond
discount amortization) (4.3)% (4.9)% (5.1)%
------- ------- -------
Loss before minority interest, income tax expense,
and extraordinary item (13.1)% (5.0)% (2.8)%
Minority interest in operations of joint ventures 0.0% 0.0% 0.0%
------- ------- -------
Loss before income tax expense and
extraordinary item (13.1)% (5.0)% (2.8)%
Income tax expense 0.2% 0.2% 0.3%
------- ------- -------
Net loss from continuing operations before
extraordinary item (13.2)% (5.2)% (3.1)%
======= ======= =======
Gain on early extinguishment of debt, net of income taxes 0.4% 0.0% 0.5%
------- ------- -------
Net loss (12.8)% (5.2)% (3.1)%
======= ======= =======
Number of restaurants-Company owned and franchised (3):
Restaurants open at the beginning of period 475 477 467
------- ------- -------
Restaurants acquired through Merger 470
Company-owned restaurants opened, closed or
transferred, net during period (95) (3) 20
Franchised restaurants opened, closed or
transferred, net during period 57 1 (10)
------- ------- -------
Total restaurants acquired,opened, closed or
transferred, net during period 432 (2) 10
------- ------- ------
Total restaurants open at end of period 907 475 477
======= ======= ======
</TABLE>
(1) As a percentage of restaurant sales.
(2) As a percentage of owner fee income.
(3) Number of restaurants open at end of period. 1998 and 1997 amounts reflect
Rally's only.
(4) Includes the results of operations for Checkers after August 9, 1999.
20
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF HISTORICAL RESULTS - FISCAL YEARS 1999 AND 1998
REVENUES. Total revenues were $201.8 million for the year ended January
3, 2000, compared to $145.0 million for the year ended December 28, 1998.
Company operated restaurant sales increased by $52.7 million for the year, from
$139.6 million in fiscal 1998 to $192.3 million in fiscal 1999. The Merger with
Checkers resulted in a $54.4 million increase in sales. Overall sales for
Rally's declined by $1.7 million from the prior year. Sales at comparable
stores, which include only the units that were in operation for the full years
being compared, increased 0.2% in 1999 as compared with 1998. Sales from sold
and closed stores represented a reduction of $3.2 million offset by the extra
week in the current year of $1.5 million. Franchise revenues and fees increased
by $4.1 million, primarily as a result of the Merger.
COSTS AND EXPENSES. Restaurant food and paper costs decreased to 31.3%
of restaurant sales in 1999 compared with 31.8% in 1998. The Company continued
to benefit from its participation in the purchasing co-op with CKE Restaurants,
Inc. and Santa Barbara Restaurant Group, Inc.
Restaurant labor costs, which include restaurant employees' salaries,
wages, benefits, bonuses and related taxes totaled $62.4 million or 32.4% of
restaurant sales for 1999 compared with $42.6 million or 30.5% for 1998. 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 1999.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $13.1 million or 6.8% of restaurant sales in 1999
compared with $7.3 million or 5.3% in 1998. 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 $7.7 million in 1999
increased by $500,000 from $7.2 million in 1998 primarily due to the Merger.
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 $18.7 million or 9.7% of restaurant sales in 1999
compared with $12.3 million or 8.8% in 1998. The increase as a percent of sales
was due primarily to the Merger as Checkers has higher restaurant operating
expenses.
Advertising expense increased approximately $1.9 million to $11.8
million or 6.1% of restaurant sales for 1999 compared with 7.1% for 1998 due to
additional promotions initiated in an attempt to increase sales.
Bad debt expense increased to 0.9% of restaurant sales from 0.4% in the
prior year as a result of collectibility issues with certain franchisees.
Other depreciation and amortization was $3.8 million in 1999 compared
to $2.5 million in 1998. The Merger with Checkers resulted in total goodwill of
approximately $27 million and other intangibles of approximately $20 million,
which resulted in $900,000 of additional amortization expense. The remaining
$400,000 relates to depreciation expense of other non-restaurant fixed assets
acquired as a result of the Merger.
General and administrative expenses increased $5.5 million in 1999 to
$18.3 million, or 9.1% of revenues as compared to $12.8 million or 8.8% of
revenues in 1998. The increase is due primarily to the Merger.
The loss on investment in affiliate of $1.4 million represents Rally's
share of the losses incurred by Checkers ($1.0 million) and the amortization of
related goodwill ($0.4 million) prior to the Merger.
During 1999 the Company recorded accounting charges and loss provisions
of $21.9 million in accordance with SFAS 121. (See Note 5: Accounting Charges
and Loss Provisions).
INTEREST EXPENSE. Interest expense increased 21.0% to approximately
$8.6 million for 1999 as compared to $7.1 million for 1998. This increase is
primarily due to the addition of $30.8 million of debt assumed with the Merger.
INTEREST INCOME. Interest income was higher for 1999 as compared to
1998 primarily due to the Merger which enabled the Company to increase its
average daily invested cash balances.
21
<PAGE>
INCOME TAX. The Company's 1999 tax provision was approximately $336,000
representing estimated state taxes versus a prior year tax provision of
$252,000.
COMPARISON OF HISTORICAL RESULTS - FISCAL YEARS 1998 AND 1997
REVENUES. Total revenues in 1998 of $145.0 million were consistent with
1997 total revenues of $144.9 million. Company operated restaurant sales of
$139.6 million were also consistent with the prior year sales of $139.3 million.
Sales at comparable stores, which include only the units that were in operation
for the full years being compared, decreased 1.8% in 1998 as compared with 1997.
Also impacting the year to year comparison was the sales increase of $4.1
million associated with 21 units that were opened or transferred from
franchisees during 1997 and 1998 offset by the sales decrease of $1.6 million
related to six units that were closed during 1998.
Franchise revenues and fees decreased 4.2% in 1998 from approximately
$4.8 million in 1997 to $4.6 million in 1998. The decrease is primarily
attributable to lower average sales levels in franchised units.
COSTS AND EXPENSES. Restaurant food and paper costs decreased to 31.8%
of restaurant sales in 1998 compared with 32.3% in 1997. Rally's continued to
benefit from its participation in the purchasing co-op with CKE Restaurants,
Inc., Santa Barbara Restaurant Group, Inc. and Checkers.
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.
Restaurant occupancy expense, which includes rent, property taxes,
licenses and insurance totaled $7.3 million or 5.3% of restaurant sales in 1998
compared with $6.5 million or 4.7% in 1997. Restaurant occupancy expense
increased as a percentage of restaurant sales due primarily to the decline in
average restaurant sales relative to the fixed and semi-variable nature of these
expenses.
Restaurant depreciation and amortization of $7.2 million in 1998 was
consistent with the expense of $7.1 million in 1997. Additional expense
associated with Company operated restaurants that opened during 1998 and 1997
was offset by the closure of eight restaurants during 1998 and the impact of
certain assets becoming fully depreciated.
Other restaurant operating expenses include all other restaurant level
operating expenses other than food and paper costs, labor and benefits, rent and
other occupancy costs and specifically includes utilities, maintenance and other
costs. These expenses totaled $12.3 million or 8.8% of restaurant sales in 1998
compared with $12.8 million or 9.2% in 1997. The decrease as a percent of sales
was due primarily to reduced maintenance expenses during 1998.
Advertising expense decreased approximately $402,000 to $9.9 million or
7.1% of restaurant sales for 1998 compared with 7.4% for 1997.
Bad debt expense increased to 0.4% of restaurant sales from (0.3)% in
the prior year as a result of collectibility issues with certain franchisees.
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 $2.7 million in 1998 due
to savings experienced as a result of Management Services Agreement with
Checkers and the impact of $940,000 in 1997 associated with warrants that were
issued to CKE and Fidelity National Financial, Inc (Fidelity), on December 20,
1996.
The loss on investment in affiliate of $2.0 million represents Rally's
share of the losses incurred by 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.
INTEREST EXPENSE. Interest expense decreased 3.9% to approximately $7.1
million for 1998 as compared to $7.4 million for 1997 primarily due to
repurchases of Senior Notes that occurred during 1998.
INTEREST INCOME. Interest income was lower for 1998 as compared to 1997
due to decreases in the average daily invested amounts.
22
<PAGE>
INCOME TAX. The Company's 1998 tax provision was approximately $252,000
representing estimated state taxes versus a prior year net tax provision of
$455,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficit of $29.8 million at January
3, 2000. This significant deficit is due to the short term maturity of the
amounts due pursuant to both the Restated Credit Agreement and the 9 7/8% Senior
Notes. As of January 3, 2000, the Restated Credit Agreement had an outstanding
balance of $6.2 million and matures on April 30, 2000, and the 9 7/8% Senior
notes had an outstanding balance of $45.8 million and matures on June 15, 2000.
As of March 30, 2000, the balance owing on the Restated Credit Agreement and the
9 7/8% Senior notes was $2.0 million and $41.7 million, respectively. The 9 7/8%
Senior Notes were sold by Rally's in 1993 and mature on June 15, 2000. Prior to
the merger with Checkers, 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 during the third quarter of 1998. During
the fourth quarter of 1999, the Company repurchased on the open market
approximately $10 million face value of its senior notes at prices ranging from
$770.00 to $966.10 per $1,000 principal amount. The remaining principal amount
was $45.8 million on January 3, 2000.
In connection with the Merger, the Company assumed certain debt
obligations of Checkers (See Note 9: Long term debt and obligations under
capital leases). The table below summarizes the debt assumed as of August 9,
1999 (see Note 3: Merger):
AUGUST 9, 1999
($000)
--------------
Restated Credit Agreement $17,432
FFCA 9,899
Capital lease obligations 1,648
Other 1,791
-------
Total debt assumed $30,770
=======
The Company is aggressively pursuing a debt reduction strategy and
believes the majority of the debt reduction can be accomplished by the sale of
Company owned restaurants to new or existing franchisees in transactions that
provide immediate funds to reduce debt and also provide a continued source of
income through future royalties. As of January 3, 2000, the Company had entered
into non-binding letters of intent to sell 163 restaurants in eight markets
which transactions are expected to generate net proceeds of approximately $33
million. The Company is also negotiating to sell additional restaurants that
could generate additional proceeds of approximately $10 million. The Company
expects that it will be able to refinance any remaining debt at market terms.
Although the Company believes that it's debt reduction and refinancing strategy
will be successful, there can be no assurance that the Company will be able to
satisfy the entire principle balances of the Restated Credit Agreement due April
30, 2000 and Senior Notes due June 15, 2000.
Cash and cash equivalents decreased approximately $200,000 to $4.4
million during the year ended January 3, 2000. Cash flow from operating
activities was $12.8 million, compared to $2.5 million during the same period
last year. The increase of $10.3 million is largely attributable to increases in
the balances of accounts payable and accrued liabilities due to the timing of
payments in the current year.
On December 23, 1999, the Company completed a sales leaseback agreement
with FFCA involving nine properties for $3.5 million. As a result of this
transaction the Company recorded a $2 million capital lease obligation. The
lease agreements are payable monthly ranging from $1,134 to $5,409 with an
interest rate of 10%. The leases have a term of 20 years.
Cash flow from investing activities increased to $10.4 million due
primarily to proceeds from the sales of markets. These proceeds, along with a
sales leaseback transaction mentioned above, were used to pay down the Restated
Credit Agreement by $13.6 million and the Senior Notes by $9.1 million during
1999. Additionally, the Company utilized $7.2 million for capital expenditures
primarily related to remodeling restaurants and the purchase and installation of
replacement equipment.
YEAR 2000
The Company has addressed the potential business risks associated with
the Year 2000. The Year 2000 issue involved the use of two-digit year field
instead of a four-digit year field in computer systems. If computer systems
cannot distinguish between the year 1900 and the year 2000, system failures or
other computer errors could result. To date, the Company is not aware of the
occurrence of any significant Year 2000 problems being reported. Some business
risks associated with the Year 2000 issue may remain throughout 2000. However,
it is not anticipated that future Year 2000 issues, if any, will have a material
adverse effect on the Company.
23
<PAGE>
ITEM 7A. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKETS RISK.
Interest rate and foreign exchange rate fluctuations
The Company's exposure to financial market risks is the impact that
interest rate changes and availability could have on its debt. Borrowings under
the Senior Notes bear interest at 9 7/8%. Borrowings under the Amended and
Restated Credit Agreement bear interest at 13%. An increase in short-term and
long-term interest rates would result in a reduction of pre-tax earnings.
Substantially all of our business is transacted in U.S. dollars. Accordingly,
foreign exchange rate fluctuations have never had a significant impact on the
Company and are not expected to in the foreseeable future.
Commodity Price Risk
The Company purchases certain products which are affected by commodity
prices and are, therefore, subject to price volatility caused by weather, market
conditions and other factors which are not considered predictable or within the
Company's control. Although many of the products purchased are subject to
changes in commodity prices, certain purchasing contracts or pricing
arrangements contain risk management techniques designed to minimize price
volatility. Typically, the Company uses these types of purchasing techniques to
control costs as an alternative to directly managing financial instruments to
hedge commodity prices. In many cases, the Company believes it will be able to
address commodity cost increases, which are significant and appear to be
long-term in nature by adjusting its menu pricing or changing our product
delivery strategy. However, increases in commodity prices could result in lower
restaurant-level operating margins.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(1) INDEX TO FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports 26
Consolidated Balance Sheets - January 3, 2000 and December 28, 1998 28
Consolidated Statements of Operations and Comprehensive Income -
Years ended January 3, 2000, December 28, 1998 and December 28, 1997 29
Consolidated Statements of Stockholders' Equity -
Years ended January 3, 2000, December 28, 1998 and December 28, 1997 30
Consolidated Statements of Cash Flows -
Years ended January 3, 2000, December 28, 1998 and December 28, 1997 31
Notes to Consolidated Financial Statements 32
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Checkers Drive-In Restaurants, Inc.:
We have audited the consolidated balance sheets of Checkers Drive-In
Restaurants, Inc. and subsidiaries as of January 3, 2000 and December 28, 1998,
and the related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the years in the two-year period
ended January 3, 2000. 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 January 3, 2000 and December
28, 1998, and the results of their operations and their cash flows for each of
the years in the two-year period ended January 3, 2000 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has a substantial amount of debt
maturing in 2000, which raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
- ---------------
KPMG LLP
Tampa, Florida
March 21, 2000
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Checkers Drive-In Restaurants, Inc:
We have audited the accompanying consolidated statements of operations
and comprehensive income, stockholders' equity and cash flows of Checkers
Drive-In Restaurants, Inc. (formerly Rally's Hamburgers, Inc. - see note 1(a) to
the consolidated financial statements) and subsidiaries for the year 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 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 financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Checkers Drive-In Restaurants, Inc. and subsidiaries for the year ended December
28, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Louisville, Kentucky
February 27, 1998
27
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
2000 1998
--------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,371 $ 4,601
Restricted cash 5,358 1,880
Investments 2,193 47
Accounts and notes receivable, net 2,784 2,750
Inventory 1,736 1,017
Prepaid expenses and other current assets 2,606 310
Property and equipment held for sale 37,150 1,131
--------- ---------
Total current assets 56,198 11,736
Property and equipment, net 49,432 61,914
Investment in affiliate, net of accumulated amortization (note 3) -- 23,001
Notes receivable, net - less current portion 1,210 375
Lease receivable, net- less current portion 1,378 --
Intangible assets, net 56,188 23,880
Other assets, net 1,247 2,400
--------- ---------
$ 165,653 $ 123,306
========= =========
CURRENT LIABILITIES:
Senior notes, net of discount $ 45,848 $ --
Current maturities of long-term debt and obligations under capital leases 9,481 1,490
Accounts payable 9,070 3,686
Reserves for restaurant relocations and abandoned sites 4,769 3,148
Accrued wages 3,334 1,825
Accrued liabilities 13,508 5,716
--------- ---------
Total current liabilities 86,010 15,865
Senior notes, net -- 55,768
Long-term debt, less current maturities 17,761 7,819
Obligations under capital leases, less current maturities 7,677 5,230
Long-term reserves for restaurant relocations and adandoned sites 2,324 2,275
Minority interests in joint ventures 535 --
Other long-term liabilities 4,683 1,830
--------- ---------
Total liabilities 118,990 88,787
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, authorized 2,000,000 shares, none issued
at January 3, 2000, and December 28, 1998 -- --
Common stock, $.001 par value, authorized 175,000,000 shares, issued
9,436,094 at January 3, 2000 and 4,910,107 at December 28, 1998
(as adjusted for Merger) 9 5
Additional paid-in capital 136,622 100,302
Accumulated deficit (89,568) (63,680)
--------- ---------
47,063 36,627
Less treasury stock, 48,242 and 45,346 shares at January 3, 2000
and December 29, 1998, respectively, at cost (400) (2,108)
--------- ---------
Total stockholders' equity 46,663 34,519
--------- ---------
$ 165,653 $ 123,306
========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
28
<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
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Restaurant sales $ 192,340 $ 139,602 $ 139,348
Franchise revenues and fees 8,788 4,636 4,838
Owner fee & other income 707 714 744
--------- --------- ---------
Total revenues $ 201,835 $ 144,952 $ 144,930
COSTS AND EXPENSES:
Restaurant food and paper costs 60,112 44,352 44,997
Restaurant labor costs 62,403 42,570 41,464
Restaurant occupancy expense 13,083 7,333 6,487
Restaurant depreciation and amortization 7,745 7,234 7,069
Other restaurant operating expenses 18,728 12,293 12,782
General and administrative expenses 18,301 12,838 15,517
Advertising 11,755 9,853 10,255
Bad debt expense 1,879 566 (392)
Owner depreciation 1,526 647 627
Other depreciation and amortization 3,832 2,503 2,623
Impairment of long-lived assets 21,886 1,727 --
Losses on assets to be disposed of 385 1,635 158
Gain on sales of markets (2,616) -- --
--------- --------- ---------
Total costs and expenses $ 219,019 $ 143,551 $ 141,587
--------- --------- ---------
Operating income (loss) (17,184) 1,401 3,343
OTHER INCOME (EXPENSE):
Interest income 779 480 750
Loss on investment in affiliate (1,379) (2,019) (720)
Interest expense (including interest-loan cost and bond
discount amortization) (8,648) (7,145) (7,434)
--------- --------- ---------
Loss before minority interest, income tax expense,
and extraordinary item (26,432) (7,283) (4,061)
Minority interest in operations of joint ventures 31 -- --
--------- --------- ---------
Loss before income tax expense and
extraordinary item (26,401) (7,283) (4,061)
Income tax expense 336 252 455
--------- --------- ---------
Net loss from continuing operations before
extraordinary item (26,737) (7,535) (4,516)
Gain on early extinguishment of debt, net of income taxes 849 -- --
--------- --------- ---------
Net loss (25,888) (7,535) (4,516)
========= ========= =========
Comprehensive loss (25,888) (7,535) (4,516)
========= ========= =========
Net loss per share (basic and diluted):
Net loss before extraordinary item (4.02) (1.67) (1.32)
Extraordinary item 0.13 -- --
========= ========= =========
Net loss (3.89) (1.67) (1.32)
========= ========= =========
Weighted average number of common shares outstanding
(basic and diluted) 6,657 4,506 3,434
========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
29
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED TREASURY PAID-IN ACCUMULATED TOTAL
STOCK STOCK STOCK CAPITAL DEFICIT EQUITY
--------- --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 29, 1996 $ 3 $ -- $ (2,108) $ 73,099 $ (51,629) $ 19,365
Issuance of common stock -- -- -- 278 -- 278
Compensatory stock options and
warrants -- -- -- 957 -- 957
Issuance of common stock and
preferred to acquire investment
in affiliate 1 1 -- 25,427 -- 25,429
Net loss -- -- -- -- (4,516) (4,516)
--------- --------- --------- --------- --------- ---------
Balances at December 28, 1997 $ 4 $ 1 $ (2,108) $ 99,761 $ (56,145) $ 41,513
Exercise of 8,139 employee stock
options, net of $2 issuance costs -- -- -- 87 -- 87
Issuance of 25,871 shares of
common stock in settlement
of litigation, net of $10 issuance costs -- -- -- 365 -- 365
Conversion of preferred shares to
common stock 1 (1) -- -- -- --
Other equity funding, net -- -- -- 89 -- 89
Net loss -- -- -- -- (7,535) (7,535)
--------- --------- --------- --------- --------- ---------
Balances at December 28, 1998 $ 5 $ -- $ (2,108) $ 100,302 $ (63,680) $ 34,519
Merger of Checkers & Rally's 4 -- 1,708 36,320 -- 38,032
Net loss -- -- -- -- (25,888) (25,888)
--------- --------- --------- --------- --------- ---------
Balances at January 3, 2000 $ 9 $ -- $ (400) $ 136,622 $ (89,568) $ 46,663
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements
30
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(25,888) $ (7,535) $ (4,516)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 13,103 10,384 10,319
Impairment of long-lived assets 21,886 1,727 --
Provisions for losses on assets to be disposed of 385 1,635 158
Gain on bond repurchases (849) (163) --
Amortization of bond costs and discounts 466 390 398
Provisions for (recovery of) bad debt 1,879 566 (392)
Warrant expense -- -- 940
Loss, net of amortization, on investment in affiliate 1,379 2,019 720
Loss on disposal of property and equipment -- 211 1,025
Gain on market sales (2,616) -- --
Minority interests in losses of joint ventures (31) -- --
Changes in assets and liabilities:
Increase in receivables (31) (1,416) (75)
(Increase) decrease in inventory 1,447 86 (196)
(Increase) decrease in prepaid expenses and other
current assets (2,114) 979 (613)
Decrease in other assets 1,360 45 221
Increase (decrease) in accounts payable (282) (3,390) 1,081
Increase (decrease) in accrued liabilities 2,686 (3,053) (793)
-------- -------- --------
Net cash provided by operating activities $ 12,780 $ 2,485 $ 8,277
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (7,173) (2,290) (6,845)
Acquisitions of restaurants (142) (855) (2,172)
Merger, net of cash acquired of $1,461 (434) -- --
Proceeds from sales of markets 15,568 -- --
(Increase) decrease in investments (2,146) 399 1,512
Proceeds from sales leaseback 3,530 -- --
Proceeds from sale of property and equipment 1,160 615 1,872
Cash paid for additional investment in affiliates -- (32) --
-------- -------- --------
Net cash (used in) provided by investing activities $ 10,363 $ (2,163) $ (5,633)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in restricted cash (612) (500) 269
Repayments of senior notes (9,120) (2,168) --
Proceeds from issuance of long-term debt -- 4,300 --
Deferred loan costs incurred -- (290) --
Principal payments on long-term debt (13,627) (1,247) (1,488)
Net proceeds from issuance of common stock -- 87 298
Distributions to minority interests (15) 89 --
-------- -------- --------
Net cash provided by (used in) financing activities $(23,374) $ 271 $ (921)
-------- -------- --------
Net increase (decrease) in cash (230) 593 1,723
CASH AT BEGINNING OF PERIOD 4,601 4,008 2,285
-------- -------- --------
CASH AT END OF PERIOD $ 4,371 $ 4,601 $ 4,008
======== ======== ========
</TABLE>
See accompanying notes to the consolidated financial statements
31
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of Checkers Drive-In Restaurants, Inc. and its
wholly owned subsidiaries, collectively referred to as "the Company".
On August 9, 1999, Checkers Drive-In Restaurants, Inc. ("Checkers")
merged with Rally's Hamburgers, Inc. ("Rally's"). The merger was accounted for
as a reverse acquisition whereby Rally's was treated as the acquirer and
Checkers as the acquiree, as the former shareholders of Rally's owned a majority
of the outstanding common stock of Checkers subsequent to the merger ("Merger").
The fair value of Checkers was based on the average per share value of Checkers'
common stock which was $0.531 per share near January 29, 1999, the date the
Merger agreement was signed. Additionally, since the Company assumed the stock
options and warrants outstanding of Checkers, the fair value of these options
and warrants was included in determining the valuation of Checkers (see Note 3:
Merger). The 1998 and 1997 financial information presented herein represents the
financial results of Rally's only. The 1999 financial information includes the
financial results of Rally's for the entire year and the financial results of
Checkers for the period from August 9, 1999 to January 3, 2000.
The accounts of the joint ventures have been included with those of the
Company in the accompanying consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated and minority
interests have been established for the outside partners' interests.
The Company reports on a fiscal year, which ends 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 includes a 53rd week, thereby increasing the fourth
quarter to seventeen weeks.
b) PURPOSE AND ORGANIZATION - The principal business of the Company is
the operation and franchising of Checkers and Rally's restaurants. At January 3,
2000, there were 464 Rally's restaurants operating in 18 different states and
there were 443 Checkers restaurants operating in 22 different states, the
District of Columbia, Puerto Rico and the West Bank in the Middle East. Of those
restaurants, 367 were Company operated (including 3 joint venture restaurants)
and 540 were operated by franchisees, including 22 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.
c) 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.
d) 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
stockholders' 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 investments approximating cost. Investments consisted of
mortgage-backed securities at January 3, 2000 and December 28, 1998 of
approximately $2.2 million and $47,000, respectively.
e) RECEIVABLES - Receivables consist primarily of royalties, franchise
fees, notes due from franchisees, owner fee income, and advances to one of the
Company's advertising funds which provides broadcast creative production for use
by Rally's corporate and franchise restaurants. A rollforward of the allowance
for doubtful receivables is as follows:
32
<PAGE>
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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 $ -- $ 259 $ 643
Notes Receivable 231 95 -- -- 325
------- ------- ------- ------- -------
$ 662 $ 566 $ -- $ 259 $ 968
======= ======= ======= ======= =======
Year Ended January 3, 2000
Accounts Receivable $ 643 $ 1,702 $ -- $ 169 $ 2,176
Notes Receivable 325 177 -- -- 502
------- ------- ------- ------- -------
$ 968 $ 1,879 $ -- $ 169 $ 2,678
======= ======= ======= ======= =======
</TABLE>
f) INVENTORY - Inventory, which consists principally of food and supplies
are stated at the lower of cost (first-in, first-out (FIFO) method) or market.
g) PROPERTY AND EQUIPMENT - Property and equipment are stated at cost
except for assets that have been impaired, for which the carrying amount is
reduced to estimated fair value. Assets 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 and equipment held for sale includes excess restaurant facilities and
land and is recorded at its estimated fair market value. The aggregate carrying
value of property and equipment held for sale is periodically reviewed and
adjusted downward to market value, when appropriate. Property and equipment are
depreciated using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. Expenditures for major renewals and
betterments are capitalized. Maintenance and repairs are expensed as incurred.
h) IMPAIRMENT OF LONG-LIVED ASSETS - The Company accounts for long-lived
assets under 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 reviews 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,
equipment and intangible assets of approximately $21.9 million in 1999, $1.7
million in 1998 and $-0- in 1997.
33
<PAGE>
i) INTANGIBLE ASSETS - Intangible assets consists of the following and are
being amortized using the straight-line method over the following periods:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28, 1998
-------------------------------- --------------------------------
GROSS ACCUM GROSS ACCUM ESTIMATED
AMOUNT AMORT NET AMOUNT AMORT NET LIVES
------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Goodwill $33,920 $(3,246) $30,674 $11,539 $(3,062) $ 8,477 5-25 years
Tradename 19,923 (383) 19,540 -- -- -- 20 years
Reacquired franchise rights 6,379 (3,908) 2,471 15,749 (4,129) 11,620 5-20 years
Other intangibles 5,078 (1,575) 3,503 5,253 (1,470) 3,783 3-25 years
------- ------- ------- ------- ------- -------
Total intangible assets $65,300 $(9,112) $56,188 $32,541 $(8,661) $ 23,880
======= ======= ======= ======= ======= ========
</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 tangibles may not be
recoverable. When factors indicate that goodwill or other tangibles should be
evaluated for possible impairment, the Company utilizes the procedures as set
forth in SFAS No 121. The effect of applying SFAS No. 121 resulted in a
reduction to intangible assets of approximately $12.1 million in 1999, $1.6
million in 1998 and $0 in 1997.
j) EARNINGS (LOSS) PER COMMON SHARE - The Company calculates basic and
diluted earnings (loss) per share in accordance with Statement of Financial
Accounting Standard No. 128, "Earnings per Share". Although Checkers is the
surviving legal entity after the Merger, for accounting purposes the Merger was
treated as a reverse acquisition of Checkers by Rally's. Therefore, only the
historical net income (loss) of Rally's is included in the historical financial
results of the Company for all periods prior to the Merger. The weighted average
number of common shares outstanding has been adjusted for all periods to reflect
for the exchange ratio of 1.99 to 1 and the one-for-twelve reverse split that
occurred on August 9, 1999.
k) STOCK OPTIONS - The Company has elected to follow the accounting
provisions of the Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" for stock based compensation and to furnish the
disclosure required under Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation".
l) REVENUE RECOGNITION - Franchise fees and area development 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. Franchise fees and area
development franchise fees received prior to substantial completion of the
Company's obligations are deferred. The Company receives royalty fees from
franchisees based on a percentage of each restaurant's gross revenues. Royalty
fees are recognized as earned.
m) OWNER FEE INCOME AND DEPRECIATION - Revenue received as a result of the
operating agreement with CKE is referred to as Owner fee and other 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 and amortization in the accompanying consolidated financial
statements.
n) INCOME TAXES - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under the asset or liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date (See Note 10: Income Taxes).
o) DEFERRED LOAN COSTS AND BOND DISCOUNTS- Deferred loan costs incurred in
connection with the Company's mortgages payable to FFCA Acquisition Corporation
and discounts related to the Senior Notes are amortized on the effective
interest method.
p) RECLASSIFICATIONS - Certain items in the 1998 and 1997 Consolidated
Financial Statements have been reclassified to conform with the 1999
presentation.
34
<PAGE>
q) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
FISCAL YEAR ENDED
------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 1998 1997
--------- ----------- ------------
Interest paid $ 7,862 $6,714 $7,013
Income taxes paid $ 165 $ 222 $ 545
Capital lease obligations incurred $ 2,750 $ 627 $ 386
Fair value of net assets acquired
in the Merger $32,766 $ -- $ --
On August 9, 1999, Checkers and Rally's merged (see Note 3: Merger).
On April 26, 1999, the Company acquired three restaurants from a former
franchisee. On April 24, 1998, the Company acquired two restaurants in a
settlement of litigation with a former franchisee. On July 9, 1997, the Company
acquired from Arkansas Investment Group, Inc., substantially all the operating
assets employed in the franchisee's Rally's restaurants (see Note 4: Other
Acquisitions). These acquisitions were recorded as follows:
FISCAL YEAR ENDED
----------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 1998 1997
---------- ----------- -----------
Fair value of assets acquired $ 907 $ 949 $ 2,800
Cash paid (142) $ (855) $(2,200)
Issuance of common stock -- (375) --
Issuance of note payable (765) (420) --
Utilization of bad debt and other
reserves previously established -- 975 --
------- ------- -------
Receivables forgiven $ -- $ 274 $ 600
======= ======= =======
During fiscal 1997 and 1998, the Company accepted notes due within two
to 10 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 $493,000 for 1997 and
approximately $30,000 for 1998. In conjunction with the sale Detroit and Kansas
markets in 1999, the Company accepted notes of approximately $1.0 million,
payable through November 23, 2009. In addition, lease receivables were accepted
for approximately $1.8 million, payable through January 1, 2019.
r) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The balance
11eets as of January 3, 2000 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, investments, receivables, accounts payable, and long-term debt
are a reasonable estimate of their fair value, based upon their short maturity
or quoted market prices. 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.
The fair value of Senior Notes was $45.8 million and $44.4 million,
based on quoted market prices at January 3, 2000 and December 28, 1998.
s) 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 stockholders. 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. The Company operates primarily in one industry segment, the
quick-service restaurant industry.
t) 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
35
<PAGE>
revenues and expenses during the reported period. Actual results could differ
from those estimates. Certain of the more significant estimates include reserves
for restaurant relocations and abandoned sites and allowances for doubtful
accounts.
NOTE 2: GOING CONCERN AND LIQUIDITY
The accompanying consolidated financial statements have been prepared
on a going concern basis of accounting and do not reflect any adjustments that
might result if the Company is unable to continue as a going concern. At January
3, 2000, the Company has $6.2 million outstanding under its Restated Credit
Agreement maturing on April 30, 2000, has $45.8 million of its 9 7/8% Senior
Notes maturing June 15, 2000, and had a working capital deficit of $29.8
million. The ability of the Company to repay these amounts as they come due
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to recoverability and classification of recorded asset
amounts or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
The Company is aggressively pursuing a debt reduction strategy and
believes the majority of the debt reduction can be accomplished by the sale of
Company owned restaurants to new or existing franchisees in transactions that
provide immediate funds to reduce debt and also provide a continued source of
income through future royalties. As of January 3, 2000, the Company had entered
into non-binding letters of intent to sell 163 restaurants in eight markets
which transactions are expected to generate net proceeds of approximately $33
million. The Company is also negotiating to sell additional restaurants that
could generate additional proceeds of approximately $10 million. The Company
expects that it will be able to refinance any remaining debt at market terms.
Although the Company believes that it's debt reduction and refinancing strategy
will be successful, there can be no assurance that the Company will be able to
satisfy the entire principle balances of the Restated Credit Agreement due April
30, 2000 and Senior Notes due June 15, 2000.
NOTE 3: MERGER
On August 9, 1999, Checkers completed its acquisition of Rally's (the
Merger). On that date, Rally's owned 19,130,930 shares (26.06%) of the
outstanding common stock of Checkers and public shareholders owned the remaining
54,277,117 shares of Checkers common stock. Checkers issued 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. In accordance with the merger agreement the 19,130,930 shares of Checkers
common stock owned by Rally's was retired. After the transaction, Rally's
shareholders owned 58,377,134 shares (51.8% of the outstanding common stock of
the new Checkers) and the remaining 54,277,117 shares (48.2% of Checker common
stock) were held by then current shareholders of Checkers. Immediately following
the merger and a one-for-twelve reverse stock split, there were 9,436,094 shares
outstanding.
The Merger transaction was accounted for under the purchase method of
accounting and was treated as a reverse step acquisition as the stockholders of
Rally's received the larger portion (51.8%) of the voting interests in the
combined Company and Rally's previously owned 26.06% of Checkers. Accordingly,
Rally's was considered the acquirer for accounting purposes and recorded
Checkers' assets and liabilities based upon their fair market values. The
operating results of Checkers' have been included in the accompanying
consolidated financial statements from the date of acquisition. The excess of
the purchase price over the estimated fair value of net assets acquired was
approximately $27 million including $11.5 million relating to Rally's original
investment in Checkers and is being amortized over 20 years using the
straight-line method.
36
<PAGE>
The following table represents the unaudited pro forma results of
operations for the 53-week period ended January 3, 2000 and the 52-week period
ended December 28, 1998 assuming the Merger and reverse split had occurred on
December 29, 1997. These pro forma results have been prepared for comparative
purposes only and are not necessarily indicative of what would have occurred had
the Merger occurred at that date or of results which may occur in the future.
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS
(In thousands, except per share amounts) ENDED ENDED
JANUARY 3, 2000 DECEMBER 28, 1998
-------------- -----------------
<S> <C> <C>
Total revenue $ 290,138 $ 290,660
Net loss before extraordinary item (28,651) (11,322)
Extraordinary item 849 --
--------- ---------
Net loss (27,802) (11,322)
========= =========
Net loss per share before extraordinary
item (basic and diluted) (3.05) (1.21)
Extraordinary item, per share 0.09 --
--------- ---------
Net loss per share (basic and diluted) (2.96) (1.21)
--------- ---------
Weighted average number of shares outstanding 9,388 9,388
========= =========
</TABLE>
The estimated fair value of assets acquired, liabilities assumed and
resulting goodwill relating to the Merger, which is subject to further
refinement, is summarized below:
(In Thousands)
Purchase price (including direct costs) $ 40,068
Property and equipment held for sale $ 13,175
Current assets 6,872
Property and equipment 43,955
Trade name 19,923
Other assets 711
--------
Total assets $ 84,636
Total liabilities assumed (51,870)
--------
Net assets acquired 32,766
Adjustment for Rally's original investment in Checkers (8,519)
--------
Net assets acquired as adjusted for initial investment $ 24,247
--------
Goodwill resulting from Merger $ 15,821
Goodwill resulting from Rally's original investment
in Checkers 11,476
--------
Total goodwill $ 27,297
========
37
<PAGE>
NOTE 4: OTHER ACQUISITIONS
On April 26, 1999, the Company acquired substantially all the operating
assets (excluding real property) of Memphis Development, Inc. ("MDI"), a former
franchisee of three Rally's restaurants in Memphis, Tennessee, for approximately
$900,000. Of the total purchase price, the Company paid approximately $135,000
in cash, and for the remaining $765,000, issued a five year promissory note
bearing an initial interest rate of 7.75%. The interest rate is variable and is
predetermined on an annual basis at prime plus 1%. The Company entered into
ten-year leases with MDI for the underlying real property on which each of the
three restaurants is situated. The acquisition of the assets from MDI was
accounted for as a purchase. The Company believes that the $900,000 purchase
price represents the fair value of the assets acquired.
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 Company restaurants for approximately $2.8 million. The
cash disbursed in payment of the purchase price was reduced by certain amounts
owed by AIGI to the Company. Actual cash disbursed was approximately $2.2
million. In addition, the Company assumed five of AIGI's ground lease
obligations, five of its ground and building lease obligations, and entered into
three additional ground leases. AIGI owned and operated a total of ten Company
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.
On April 24, 1998, in settlement of litigation with a franchisee, the
Company purchased the franchisee's restaurants for total consideration of $1.9
million. The consideration consisted of $855,000 in cash, $274,000 in
forgiveness of account receivable, $375,000 in restricted stock and $420,000 in
notes payable.
The impact on operations of the above other acquisitions was not
significant for any of the periods presented, and therefore, proforma amounts
are not presented giving effect to this acquisition.
NOTE 5: ACCOUNTING CHARGES & LOSS PROVISIONS
Certain charges in fiscal years 1999, 1998 and 1997 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 the last quarter of 1999, the Company placed certain markets for
sale in accordance with its plan to meet its short-term debt requirements. At
the end of 1999, 5 major Rally's markets were written down to their estimated
fair market values, based on purchase prices expected to be received during the
first half of fiscal year 2000. The Company recorded an estimated $13 million
impairment charge relating to property and equipment and intangibles assets
associated with these market sales. Accordingly, $22.8 million of property and
equipment has been reclassified to "Property and equipment held for sale" in the
accompanying consolidated balance sheet. In addition, in connection with the
Merger with Checkers, the Company plans to sell 3 existing Checkers' markets. As
these assets have been recorded at their estimated fair market value in
accordance with purchase accounting, the impact of these adjustments have been
reflected in purchase accounting.
During 1999, impairment charges of approximately $7.7 million were
recognized relating to thirty-one under performing restaurants. Additionally,
the Company closed twenty-eight restaurants and recorded net provisions for
future occupancy costs of approximately $385,000. In addition, as a result of
the Merger, the Company recognized $1.2 million relating to a decline in the
fair market value of Rally's initial investment in Checkers.
In 1998, an impairment expense of $1.7 million related to four under
performing restaurants were incurred. The Company also 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).
Other losses were recorded upon the disposal of prior year's closures for
$172,000. 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. No restaurants
were determined to be impaired in 1997.
38
<PAGE>
The following table summarizes the components of the provision for
restaurant closures and other provisions as well as the year end balances of
certain related reserves.
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED BALANCE
BEGINNING TO CASH OTHER AT END
DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES OF YEAR
- ------------------------------------------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended January 3, 2000
Impairment of long-lived assets $ -- $ 21,886 $ -- $(21,886) $ --
Accrual for restaurant closures
included in restaurant occupancy expense -- 3,780 -- -- 3,780
Losses (gains) on assets to be
disposed of 5,423 385 (3,766) 1,271 3,313
-------- -------- -------- -------- --------
$ 5,423 $ 26,051 $ (3,766) $(20,615) $ 7,093
======== ======== ======== ======== ========
Year ended December 28, 1998
Impairment of long-lived assets $ -- $ 1,727 $ -- $ (1,727) $ --
Losses (gains) 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 (gains) on assets to be disposed of 5,845 158 (1,486) 41 4,558
-------- -------- -------- -------- --------
$ 5,845 $ 158 $ (1,486) $ 41 $ 4,558
======== ======== ======== ======== ========
</TABLE>
As a result of the Merger, the Company assumed approximately $1.3
million relating to reserves for future lease obligations, as reflected in 1999
"Other Changes" shown in the above table. The ending balance each year in the
reserves for restaurant relocations and abandoned sites consists of the
Company's estimates for the ongoing costs of each location which has been closed
or was never developed. Those costs include rent, 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 6: RELATED PARTY TRANSACTIONS
a) MANAGEMENT SERVICES AGREEMENT - Effective November 30, 1997, Checkers
and Rally's entered into a Management Services Agreement ("Agreement") whereby
Checkers provided accounting, technology, and other functional and management
services to predominantly all of the operations of Rally's. Checkers received
fees from Rally's relative to the shared departmental costs times the respective
store ratio. Upon completion of the Merger, this Agreement was terminated.
During the period from December 29, 1998 through August 9, 1999, and the years
ended December 28, 1998 and 1997, Checkers charged Rally's $4.7 million, $5.6
million, and $95 thousand respectively in accordance with the Agreement.
b) ISSUANCE OF WARRANTS - On November 22, 1996, the Company issued
warrants the ("Restructuring Warrants") for the purchase of 20 million shares of
the Company's Common Stock. The Restructuring Warrants were issued to the
members of a lending group in connection with a restructuring of the Company's
primary credit facility (See Note 9: Long-term Debt and Obligations under
Capital leases). The lending group included CKE Restaurants, Inc., KCC Delaware,
a wholly owned subsidiary of GIANT Group, LTD., Fidelity National Financial,
Inc., William P. Foley, II and Burt Sugarman. The Restructuring Warrants were
valued at $6.5 million, which was the value of the concessions given as
consideration by the lending group. After giving effect to the one-for-twelve
reverse stock split, the Restructuring Warrants permit the acquisition of
1,666,667 shares of the Company's Common Stock. The Restructuring Warrants were
exercisable upon issuance and remain exercisable until November 22, 2002. The
exercise price of each Restructuring Warrant was originally $0.75 which was the
approximate market price of the Common Stock of Checkers prior to the
announcement of the transfer and restructuring of the debt. After giving effect
to a September 20, 1999 re-pricing by the Company, the current exercise price of
each Restructuring Warrant is $0.25. Due to the one-for-twelve reverse stock
split, twelve warrants must be exercised to acquire one share of the Company's
Common Stock for an aggregate purchase price of $3.00 per share.
c) 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 JR. format.
During 1999, the leases for three restaurants expired and were not renewed.
Including
39
<PAGE>
closures from prior periods, there were 24 remaining restaurants as of January
3, 2000 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. The Company retains ownership of
all 24 restaurants, two of which are Carl's Jrs. and is entitled to receive a
percentage of gross revenues generated by each restaurant. In the event of a
sale by the Company of any of the 24 restaurants, the Company and CKE would
share in the proceeds based upon the relative value of their respective capital
investments in such restaurant.
d) OTHER TRANSACTIONS - The Company also 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.
The Company and its franchisees each pay a percentage of sales to the
Rally's National Advertising Fund and the Checkers National Production fund (the
"Funds"), established for the purpose of creating and producing advertising for
the chain. The Funds are not included in the consolidated financial statements,
although the Company's contributions to the Funds are included in the
advertising expenses in the consolidated statements of operations. Additionally,
certain Company operated restaurants and franchises participate in coops, which
are accounted for similarly to the Funds.
On December 1, 1998, the Company entered into two 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. 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.
During fiscal 1999, the Company entered into four lease agreements,
which have been recorded as capital lease obligations, with Granite Financial
Inc. whereby the Company purchased security equipment for its restaurants valued
at $651,346. The lease agreements are payable monthly ranging from $3,065 to
$10,785, including effective interest ranging from 13.381% to 14.04%. All of the
leases have terms of 3 years.
During 1999, and in 1998 and 1997, the Company incurred $803,000,
$1,152,000 and $1,017,000, respectively in legal fees from a law firm in which a
current Director of the Company is a partner.
Beginning in September 1999 the Company engaged Peter O'Hara, one of
its current Directors, to provide consulting services at a monthly fee of
$10,000. Mr. O'Hara continues to provide the services and may do so for an
undetermined period of time.
40
<PAGE>
SUMMARY OF RELATED PARTY TRANSACTIONS (IN THOUSANDS):
- ------------------------------------------------------
FISCAL YEAR ENDED
-----------------------
JANUARY 3, DECEMBER 28,
2000 1998
-------- -----------
BALANCE SHEET AMOUNTS
Accounts receivable $ 1,128 $ 1,510
Notes receivable $ -- $ 53
Investment in affiliate $ -- $23,001
Accounts payable $ 103 $ 221
Accrued liabilities $ 353 $ 53
Restated Credit Agreement $ 6,202 $ --
Capital leases $ 1,877 $ 619
FISCAL YEAR ENDED
---------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 1998 1997
--------- ----------- -----------
REVENUE AND TRANSACTION AMOUNTS
Owner fee income $689 $714 $742
Interest income 141 117 52
---- ---- ----
$830 $831 $794
==== ==== ====
FISCAL YEAR ENDED
-----------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 1998 1996
---------- ----------- -----------
EXPENSE AMOUNTS
Legal fees $ 803 $1,152 $1,017
Consulting fees 40 -- --
Rent expense 185 352 396
Owner depreciation 1,526 647 627
Interest expense 878 9 --
Compensatory stock options and warrants -- -- 940
Loss on investment in affiliate 1,379 2,019 720
Management Services Agreement 4,696 5,593 95
------ ------ ------
$9,507 $9,772 $3,795
====== ====== ======
41
<PAGE>
NOTE 7: PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
JANUARY 3, DECEMBER 28, ESTIMATED
2000 1998 USEFUL LIVES
--------- ------------ ------------
Land and Improvements $ 28,645 $ 14,487 0-15 years
Leasehold Interest 1,855 -- 15 years
Building and leasehold improvements 26,495 52,448 20-39 years
Equipment, furniture and fixtures 29,930 40,168 3-15 years
--------- ---------
86,925 107,103
Less accumulated depreciation (39,849) (48,905)
--------- ---------
47,076 58,198
--------- ---------
Property held under capital leases 2,930 6,772 3-20 years
Less accumulated amortization (574) (3,056)
--------- ---------
2,356 3,716
--------- ---------
Net property and equipment $ 49,432 $ 61,914
========= =========
Depreciation expense of property and equipment was approximately $10
million, $8.3 million, and $ 7.2 million for the years ending 1999, 1998 and
1997, respectively.
NOTE 8: 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 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 January 3, 2000 and December 28, 1998, the amounts outstanding
net of discounts were $45.8 million and $55.8 million, respectively.
During 1999, the Company repurchased on the open market approximately
$10 million face value of Senior Notes. The Senior Notes were purchased from
various Noteholders at prices ranging from $770.00 to $966.10 per $1000
principal amount. These purchases resulted in extraordinary gains in 1999 of
approximately $849,000 or $0.13 per share.
On December 18, 1998, the Company entered into a $4.3 million mortgage
transaction with FFCA Acquisition Corporation ("FFCA") 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. The Company was required to
utilize the entire net proceeds from this transaction to reduce the Senior
Notes. Purchases on the open market were initiated immediately after the
mortgage was finalized and have been completed.
As discussed in Note 2, the Company is evaluating various alternatives
for the repayment and refinancing of the Senior Notes prior to their maturity in
June 2000. 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.
42
<PAGE>
NOTE 9: LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases consists of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
2000 1998
--------- -----------
<S> <C> <C>
Note payable under Restated Credit Agreement at 13% interest due each
twenty-eight day period, originally maturing July 31, 1999, subsequently
extended to April 30, 2000. Secured by substantially all Checkers assets 6,202 $ --
Mortgages payable to FFCA Acquisition Corporation secured by twenty-four
Company-owned Checkers restaurants, payable in 240 aggregate monthly
installments of $93,213, including interest at 9.5% 9,824 --
Mortgages payable to FFCA Acquisition Corporation secured by eight Company-owned
Rally's restaurants, payable in 240 monthly installments of $40,082,
including interest at 9.5%. The Company utilized the net proceeds of the loan
to retire a portion of its Senior Notes 4,224 4,300
Obligations under capital leases, maturing at various dates through January 1,
2018, secured by property and equipment, bearing interest ranging from 10% to
17%. The leases are payable in monthly principal and interest installments
averaging $197,000 9,193 5,816
Notes payable to former Rally's franchise owners for acquisition of markets,
secured by the related assets acquired, with maturities through May 1, 2004,
bearing interest at rates ranging from 7.5% to 9%. The notes are payable
in monthly principal and interest installments ranging from $4,742 to $50,211 4,247 4,022
Various other notes payable to banks, maturing at various dates through November
10, 2001, secured by property and equipment, bearing interest ranging from
1/2% above prime to 15.8%. The notes are payable in monthly principal and
interest installments ranging from $1,531 to $13,333 1,229 401
-------- --------
Total long-term debt and obligations under capital leases 34,919 14,539
Less current installments (9,481) (1,490)
-------- --------
Long-term debt, less current maturities $ 25,438 $ 13,049
======== ========
</TABLE>
Aggregate maturities of long-term debt and obligations under capital leases for
each of the five succeeding years are as follows:
FISCAL YEAR LONG-TERM CAPITAL
ENDED DEBT LEASES TOTAL
------------ --------- ------- --------
2000 $ 7,965 $ 1,516 $ 9,481
2001 3,317 1,340 4,657
2002 663 688 1,351
2003 655 496 1,151
2004 570 408 978
Thereafter 12,556 4,745 17,301
------- ------- -------
$25,726 $ 9,193 $34,919
======= ======= =======
As a result of the Merger, the Company assumed debt due to the CKE
Group under the Amended and Restated Credit Agreement (the "Restated Credit
Agreement"). The Restated Credit Agreement previously consolidated all of the
debt under the Checkers' loan agreement and the credit line into a single
obligation. Pursuant to the Restated Credit Agreement, the term was extended to
April 30, 2000 and the rate was fixed at 13%. The Restated Credit Agreement
provides however, that 50%
43
<PAGE>
of any future asset sales must be utilized to prepay principal. During the
fourth quarter of 1999, payments in the amount of $11.2 million were made to the
lender group reducing the outstanding principal balance to $6.2 million as of
January 3, 2000. A portion for these payment were obtained from the market sales
occurring in the fourth quarter of fiscal 1999 and the FFCA transaction which
took place on December 23, 1999. Additionally, the Restated Credit Agreement
contains restrictive covenants, which include an EBITDA covenant. Prior to the
merger, the Company was not in compliance with these covenants and received
waivers from the lender group. Subsequent to the merger, the Company was not in
compliance with these covenants and has obtained a waiver from the lender group.
Also, as a result of the Merger, the Company assumed a mortgage
financing agreement with FFCA Acquisition Corporation ("FFCA"), which is
collateralized by 24 restaurants. This mortgage financing is payable monthly at
$93,213, including interest at 9.5% and has a term of 20 years. The Company is
also subject to certain restrictive covenants under these debt agreements and
was in compliance for the fiscal year ending January 3, 2000. If the twenty-four
restaurants 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.
On December 23, 1999, the Company completed a sales leaseback agreement
with FFCA involving nine properties for $3.5 million. As a result of this
transaction, the Company recorded a $2 million capital lease obligation, payable
in monthly amounts ranging from $1,134 to $5,409 with an interest rate of 10%.
The leases have a term of 20 years.
The Company leases various restaurant facilities, security equipment
and a corporate telephone system which are recorded as capital leases with
effective interest rates ranging from 7.0% to 16.03% (See Note 6: Related Party
Transaction).
NOTE 10: INCOME TAXES
Under the provisions of SFAS No. 109, the components of the net
deferred income tax assets and liabilities recognized in the Company's
Consolidated Balance Sheet at January 3, 2000 and December 29, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
January 3, December, 28,
2000 1998
----- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards 10,655 17,464
Excess of tax basis over book basis of property,
equipment and intangibles 1,108
Accruals, reserves and other 14,468 9,414
Alternative minimum tax credit carryforward 1,760 937
------- -------
27,991 27,815
Less valuation allowance (27,991) (21,114)
------- -------
Net deferred tax asset 6,701
======= =======
Deferred tax liabilities
Excess of tax basis over book basis of property,
equipment and intangibles 6,699
Other 2
------- -------
Total deferred tax liabilities 6,701
======= =======
</TABLE>
As a result of the Merger, and the Internal Revenue Code section 382
limitation (see below) certain deferred income tax assets of Rally's were
reduced. This reduction of $14.6 million in deferred income tax assets required
an adjustment to the Rally's valuation allowance that was recorded at December
28, 1998. Additionally, deferred income tax assets and liabilities of Checkers
were recorded on the balance sheet of Rally's, as of the Merger date and are
reflected in the January 3, 2000 amounts. The Checker's deferred income tax
assets of $13.5 million were subject to a 100% valuation allowance at the Merger
date (See Note 3: Merger).
As a result of the Merger, both companies experienced an ownership
change as defined by Internal Revenue Code Section 382. As a result of this
ownership change, the surviving entity or post-merger Checkers is significantly
limited in utilizing the net operating loss carryforwards that were generated
before the merger, before the ownership change, in offsetting taxable income
arising after the ownership change. As of August 9, 1999 Rally's and Checkers
had net operating loss carryforwards of approximately $49.8 million and $60.9
million, respectively for a combined total of $110.7 million. The Company
believes that the limitations imposed by Internal Revenue Code Section 382 could
restrict the prospective utilization of the total net operating loss
carryforward to approximately $31.3 million over the carryforward life of the
net operating losses. The remaining net operating loss carryforward of $79.4
million could expire before becoming available under these limitations. The
$31.3 million net operating loss carryforwards are subject to limitation in any
given year and will expire in 2018. The Company had approximately $2 million of
alternative minimum tax credit carryforwards for U.S. federal income tax
purposes, which are available indefinitely.
A valuation allowance has been provided for 100 percent of the deferred
tax assets since management can not determine that it is more likely than not
that the deferred tax assets will be realized. When realization of the deferred
tax assets are more likely than not to occur, the benefit related to the
deductible temporary differences will be recognized as a reduction of income tax
expense.
44
<PAGE>
Income tax expense for continuing operations consists of the following:
FISCAL YEAR ENDED
January 3, December 28, December 28,
2000 1998 1997
---------- ------------ ------------
Current - State $336 $252 $455
Deferred -- -- --
---- ---- ----
Total tax expense $336 $252 $455
==== ==== ====
The following is a reconciliation of the income tax benefit computed by
applying the federal statutory income tax rate to net loss before income taxes
to the income tax provision shown on the Consolidated Statement of Income:
<TABLE>
<CAPTION>
January 3, December 28, December 28,
2000 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Benefit computed at statutory rate (8,970) (2,562) (1,330)
Tax effect of equity in loss of affiliate 469 687 245
State and local income taxes, net of
federal income tax benefit 336 252 455
Change in deferred tax asset valuation
allowance 8,250 2,017 1,364
Other 257 (142) (279)
------ ------ ------
336 252 455
====== ====== ======
</TABLE>
45
<PAGE>
NOTE 11: STOCKHOLDERS EQUITY
As a result of the Merger with Checkers being the surviving entity,
the stock based compensation plans that survived the Merger were those of
Checkers. However, due to the fact that the Merger was accounted for as a
reverse acquisition by Rally's (See Note 3: Merger), the historical financial
information regarding the stock based compensation plans presented below are
those of Rally's. All figures presented below have been adjusted to give effect
to the Merger adjusted for the exchange ratio of 1.99 to 1 and the
one-for-twelve reverse stock split, where applicable.
a) STOCK-BASED COMPENSATION PLANS -In August 1991, the Company adopted the
1991 stock option plan ("1991 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 June 11, 1998 to increase the number of shares subject to the Plan to
791,667.
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 16,667 to 416,667. It also
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. Prior to the August 6, 1997 amendment, one-fifth of the
shares of common stock subject to each initial option grant became 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 became exercisable on a cumulative basis on each of the first three
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
1,000 shares. Each new Non-Employee Director elected or appointed subsequent to
that date also received options to purchase 1,000 shares. Each Non-Employee
Director has also received additional options to purchase 250 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 8,333 shares, (ii) an increase in the annual options grant to 1,667
shares and (iii) the grant of an option to purchase 25,000 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.
Both the 1991 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.
As a result of the Merger, the Company assumed:
o 301,087 options previously issued to Checkers' employees under
the 1991 Plan at prices ranging from $4.50 to $61.56
o 232,169 options previously issued to Checkers' non-employee
directors under the Directors Plan at prices ranging from $3.76
to $68.25
o 116,669 options previously issued to officers and directors of
Checkers which were not issued under any plan.
Subsequent to the Merger, the Company issued the following options
pursuant to the 1991 Plan:
o Options to purchase 90,000 shares at an exercise price of $2.50
per share on September 9, 1999.
o Options to purchase 25,000 shares at an exercise price of $1.97
per share on September 27, 1999.
o Options to purchase 10,000 shares at an exercise price of $1.56
per share on October 4, 1999.
o Options to purchase 250,000 shares at an exercise price of $1.28
per share on December 14, 1999.
Subsequent to the Merger, the Company issued the following options
pursuant to the Directors Plan:
o Options to purchase 40,000 shares to the Chairman of the Board at
an exercise price of $1.78 on August 17, 1999.
o Options to purchase 20,000 shares to the Vice Chairman of the
Board at an exercise price of $1.78 on August 17, 1999.
o Options to purchase a total of 80,000 shares to all other
non-employee directors at an exercise price of $1.78 on August
17, 1999
46
<PAGE>
Of the options granted by the Company subsequent to the date of the Merger,
409,767 will require shareholder approval at the next meeting. Additionally, on
September 1, 1999, various directors notified the Company of their decision to
voluntarily cancel an aggregate of 379,305 outstanding options with exercise
prices ranging from $9.75 to $30.15 per share.
A summary of the status of all options granted to employees and
directors, as well as those options granted to non-employees, at January 3,
2000, December 28, 1998 and December 28, 1997, and changes during the years then
ended is presented in the table below. All references to number of shares and
per share amounts have been adjusted for the exchange ratio of 1.99 to 1 and the
subsequent one-for-twelve reverse split that was effected in August 1999.
<TABLE>
<CAPTION>
(Shares represented in thousands)
JANUARY 3, 2000 DECEMBER 28,1998 DECEMBER 28, 1997
----------------------- ------------------------- ------------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding shares at beginning of year 935 $ 8.20 640 $ 18.03 608 $ 17.60
Assumed in Merger 650 9.56 -- -- -- --
Granted at price equal to market 562 1.85 1,091 $ 7.60 143 18.09
Exercised -- -- (8) 9.83 (13) 14.95
Forfeited (487) 13.38 (277) 13.63 (71) 16.58
Expired (55) 9.87 (510) 15.32 (27) 21.89
------ ------- ------ ------- ------ -------
Outstanding at end of year 1,605 $ 4.72 935 $ 8.20 640 $ 18.03
====== ======= ====== ======= ====== =======
Exercisable at end of year 1,092 $ 5.89 765 $ 9.29 484 $ 18.51
Weighted average of fair value of
options granted $ 1.48 $ 5.43 $ 10.73
</TABLE>
The following table summarizes information about stock options
outstanding at January 3, 2000:
<TABLE>
<CAPTION>
WTD. AVG
OUTSTANDING REMAINING WTD AVG. NUMBER WTD. AVG
RANGE OF AS OF CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES 1/3/00 LIFE (YRS) 1/3/00 1/3/00 PRICE
- --------------- ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.28-$2.00 425,000 9.8 $ 1.4930 140,000 $ 1.78
$2.01-$4.00 710,053 7.3 3.14 553,027 3.22
$4.01-$8.00 300,039 6.6 4.46 228,938 4.45
$8.01-$16.00 108,980 7.5 13.21 108,980 13.21
$16.01-$61.56 61,533 3.7 31.63 61,333 31.60
--------- ------- ----------- --------- ---------
1,605,605 7.7 $ 4.72 1,092,278 $ 5.89
========= ======= =========== ========= =========
</TABLE>
Had compensation cost for all option grants to employees and directors
been determined consistent with FASB Statement No. 123, the Company's net income
and earnings per share would have been reduced to the following pro forma
amounts:
FISCAL YEAR ENDED
---------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 28,
2000 1998 1997
---------- ----------- -----------
Net loss: As reported $ (25,888) $ (7,535) $ (4,516)
Pro forma $ (26,293) $ (10,916) $ (5,577)
Loss per common share As reported $ (3.89) $ (1.67) $ (1.32)
Pro forma $ (3.95) $ (2.42) $ (1.62)
47
<PAGE>
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 1999, 1998 and
1997, respectively: expected volatility of 100 percent, 86.0 percent, and 47.0
percent; risk-free interest rates of rates ranging from 4.95-5.68 percent, 5.45
percent and 6.26 percent for options granted to employees and rate ranging from
4.92-5.035 percent, 5.45 percent and 6.47 percent for options granted to
directors; and expected lives for fiscal 1999, 1998 and 1997 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.
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 $10,000 and $17,000 in
1998 and 1997, related to the purchase discount offered under the Rally's 1993
Stock Purchase Plan which was terminated in 1998.
On August 5, 1999, the Company's shareholders approved a new employee
stock purchase plan ("Stock Purchase Plan"). The Stock Purchase Plan offers
eligible employees the opportunity to purchase common shares of the Company
through voluntary regular payroll deductions. The Company will make matching
contributions to the Stock Purchase Plan relating to the employees contributions
made the previous year, and which have remained in the Stock Purchase Plan for
the full year. The Company will make a matching contribution equal to one-half
of the contributions by officers and directors of the Company and one-third of
contributions by those employees who are not officers or directors subject to
certain limitations. Any employee contributions, and any of the Company's
matching contributions for that employee, are delivered to the broker
administering the Stock Purchase Plan and the broker opens individual accounts
for the participants. The broker utilizes the employee's voluntary
contributions, and any matching contributions by the Company, to purchase the
Company's stock at prevailing market rates. No matching contributions have been
made by the Company pursuant to this Stock Purchase Plan because it has not been
in existence for a full year.
b) SHAREHOLDER RIGHTS OFFERING - A Shareholder Rights Offering (the
"Offering") was completed by Rally's on September 26, 1996. Rally's 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 to purchase units
consisting of one share of Rally's common stock and one warrant (the "Rights
Offering Warrant") to purchase an additional Share of Rally's common stock.
Due to the fact that upon completion of the Merger, Rally's corporate existence
ceased, the Rally's Rights Offering Warrants were exchanged for newly issued
Checkers warrants (the "Checkers Rights Offering Warrants"). The Company issued
Checkers Rights Offering Warrants to purchase 798,302 of the Company's common
stock. The Checkers Rights Offering Warrants are exercisable from the date of
issuance and continuing until September 26, 2001. The exercise price of each
Checkers Rights Offering Warrant is $4.52, representing an exercise price
reduction of two thirds from the original Rights Offering Warrants approved by
the Company's Board of Directors on September 20,1999. The Company may redeem
the Checkers Rights Offering Warrants at $.01 per warrant, upon 30 days' prior
written notice in the event the closing price of the Company's Common Stock
equals or exceeds $36.18 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
Checkers Rights Offering Warrants are publicly held and are traded on the NASDAQ
(trading symbol: CHKRZ). If all of the Checkers Rights Offering warrants were
exercised, it would provide the Company with $3.6 million in proceeds.
c) WARRANTS - As a result of the Merger, the Company assumed
warrants previously issued by Checkers in settlement of litigation (the
"Settlement Warrants"). The Settlement Warrants permit the acquisition of an
aggregate 425,000 shares of the Company's Common Stock. The Settlement Warrants
are exercisable at any time during the period beginning November 22, 2000 and
ending on December 22, 2000. The Company's Board of Directors reduced the
original exercise price of $1.375 by two thirds effective September 20, 1999 to
$0.4583. As a result of the one-for-twelve reverse stock split, it now requires
the exercise of twelve warrants to receive one share of the Company's Common
Stock for an aggregate exercise price of $5.50 per share. If all of the
Settlement Warrants were to be exercised, they would provide approximately $2.3
million in additional capital to the Company.
Also as a result of the Merger, the Company assumed 20 million warrants
issued by Checkers on November 22, 1996 in connection with the restructuring of
its primary credit facility (the "Restructuring Warrants"). The Restructuring
Warrants are exercisable at any time from the date of issuance until November
22, 2002. The Company's Board of Directors reduced the original exercise price
of $0.75 by two thirds effective September 20, 1999 to $0.25. As a result of the
one-for-twelve reverse stock split, it now requires the exercise of twelve
warrants to receive one share of the Company's Common Stock for an aggregate
exercise price of $3.00 per share. If all of the Restructuring Warrants were to
be exercised, they would provide approximately $5 million in additional capital
to the Company. The Company registered the common stock issuable under the
Restructuring Warrants and is obligated to maintain such registration for the
life of the
48
<PAGE>
warrants. The holders of the Restructuring Warrants also have other registration
rights relating to the common stock to be issued thereunder. The Restructuring
Warrants contain customary anti-dilution provisions.
49
<PAGE>
NOTE 12: QUARTERLY FINANCIAL DATA (UNADUITED)
The following table represents selected quarterly financial data for
the periods indicated (in 000's except per share data). Earnings per share are
computed independently for each of the quarters presented. Accordingly, the sum
of the quarterly earnings per share in 1999 and 1998 does not equal the total
computed for the year:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 3, 2000
Revenues $ 30,119 $ 36,368 $ 45,604 $ 89,744 $ 201,835
Income (loss) from operations 109 2,205 803 (20,301) $ (17,184)
Net income (loss) before
extraordinary item (1,603) 355 (1,364) (24,125) (26,737)
Extraordinary item -- -- -- 849 849
--------- --------- --------- --------- ---------
Net income (loss) (1,603) 355 (1,364) (23,276) (25,888)
--------- --------- --------- --------- ---------
Income (loss) per share
(basic and diluted) $ (0.33) $ 0.07 $ (0.21) $ (2.48) $ (3.89)
========= ========= ========= ========= =========
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)
--------- --------- --------- --------- ---------
Net loss per share before
(basic and diluted) $ (0.27) $ (0.39) $ (0.21) $ (0.78) $ (1.67)
========= ========= ========= ========= =========
</TABLE>
NOTE 13: COMMITMENTS AND CONTINGENCIES
a) LEASE COMMITMENTS - The Company leases land and buildings generally
under agreements with terms of or renewable to 15 to 20 years. Some of the
leases contain contingent rental provisions based on percentages of gross sales.
The leases generally obligate the Company for the cost of property taxes,
insurance and maintenance.
Following is a schedule by year of future minimum lease commitments for
operating leases at January 3, 2000:
YEAR LEASES
---------------------- ---------
2000 $ 18,132
2001 17,305
2002 14,953
2003 12,347
2004 9,416
Thereafter 51,183
---------
Totals $ 123,336
=========
Rent expense totaled $11.4 million, $5.0 million and $4.8 million in
1999, 1998 and 1997, respectively.
b) SELF INSURANCE - For 1999 the Company was self-insured for most
workers' compensation, general liability and automotive liability losses subject
to per occurrence and aggregate annual liability limitations. Currently, for
workers compensation, the Company is insured, but maintains $1.3 million as
collateral with state regulatory agencies securing prior period self insured
claims until they are settled. The Company is also self-insured, subject to
umbrella policies, 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) EMPLOYMENT CONTRACT- Effective December 14,1999, the Company entered
into an employment agreement with its new Chief Executive Officer. The CEO will
also serve as a director of the Company. The term of the agreement is for two
years subject to automatic renewal for successive one-year periods at an annual
base salary of $200,000. The CEO is entitled to participate in the Company's
incentive bonus plan and was granted an option to purchase 100,000 shares of the
Company's common stock at $1.28 per share. The option is fully vested. The
agreement may be terminated at any time for
50
<PAGE>
cause. If the CEO is terminated without cause during the first year of the
agreement, the CEO will be entitled to receive a lump sum amount equal to six
month's base compensation. If terminated without cause one year or more after
the effective date of the agreement, the CEO will be entitled to receive a lump
sum amount equal to the base compensation for the remaining term of the
agreement. The agreement contains confidentiality and non-competition
provisions.
d) 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 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
("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 was completed
in August 1999. Expert discovery is scheduled to be completed by June 2000.
Motions for Summary Judgment will be filed by the parties by early July, 2000.
Management is unable to predict the outcome of this matter at the present time
or whether or not certain available insurance coverage's will apply. The
defendants deny all wrongdoing and intend to defend themselves vigorously in
this matter.
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 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 complaint. Although, plaintiffs indicated that they would
likely file an amended complaint in the event of the consummation of a merger
between the Company and Rally's, no such amendment has been filed to date. The
Company believes the lawsuit is without merit and intends to defend it
vigorously should plaintiffs seek to renew the lawsuit.
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
51
<PAGE>
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. Although, plaintiffs
indicated that they would likely file an amended complaint in the event of the
consummation of a merger between the Company and Rally's, no such amendment has
been filed to date. The Company believes the lawsuit is without merit and
intends to defend it vigorously.
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. A companion complaint was also filed in
the same Court on May 21, 1997, 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-21. The original
complaint alleged, generally, that certain officers of the Company intentionally
inflicted severe emotional distress upon Ms. Greenfelder, who is the sole
stockholder, president and director of Powers Burgers, Inc., a Checkers
franchisee. The present versions of the Amended Complaints in the two actions
assert a number of claims for relief, including claims for breach of contract,
fraudulent inducement to contract, post-contract fraud and breaches of implied
duties of "good faith and fair dealings" in connection with various franchise
agreements and an area development agreement, battery, defamation, negligent
retention of employees, and violation of Florida's Franchise Act. The Company
believes that these lawsuits are without merit, and intends to continue to
defend them vigorously.
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 sought 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, as amended, alleged 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 and sought a
judgment for damages in an unspecified amount, punitive damages, attorneys' fees
and such other relief as the court may deem appropriate.
The case was tried before a jury in August of 1999. The court entered a
directed verdict and an involuntary dismissal as to all claims alleged against
Robert G. Brown, George W. Cook, and Jared Brown. The court also entered a
directed verdict and an involuntary dismissal as to certain other claims alleged
against the Company and the remaining individual Counterclaim Defendants, James
E. Mattei, Herbert G. Brown and James F. White, Jr. The jury returned a verdict
in favor of the Company, James E. Mattei, Herbert G. Brown and James F. White,
Jr. as to all counterclaims brought by Checkmate Food Services, Inc. and in
favor of Mr. Mattei as to all claims alleged by Tampa Checkmate and Mr. Gagne.
In response to certain jury interrogatories, however, the jury made the
following determination: (i) That Mr. Gagne was fraudulently induced to execute
a certain Unconditional Guaranty and that the Company was therefore not entitled
to enforce its terms; (ii) That the Company, H. Brown and Mr. White fraudulently
induced Tampa Checkmate to execute a certain franchise agreement whereby Tampa
Checkmate was damaged in the amount of $151,331; (iii) That the Company, H.
Brown and Mr. White violated a provision of the Florida Franchise Act relating
to that franchise agreement whereby Tampa Checkmate and Mr. Gagne were each
damaged in the amount of $151,330; and (iv) That none of the Defendants violated
Florida's Deceptive and Unfair Trade Practices Act relating to that franchise
agreement.
As a result of certain pre-trial orders entered by the court, the
Company believes that the responses to the jury interrogatories are "advisory"
and are not binding on the court. The court has determined, however, that the
responses to the jury interrogatories are binding upon it and has indicated
intent to enter a judgment accordingly. The Company believes that entry of such
a judgment would be erroneous and would constitute reversible error. The Company
has filed various post-trial motions, which it believes are meritorious and
intends to continue to defend the case vigorously, including the taking of an
appeal if it becomes necessary.
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
97-11616-8G-1 on the docket of said court. In July 1997, Checkers filed an
Adversary Complaint in those proceedings entitled CHECKERS DRIVE-IN RESTAURANTS,
INC. V. TAMPA CHECKMATE FOOD SERVICES, INC. and numbered as Case No. 97-738. The
Adversary Complaint sought a preliminary and permanent injunction enjoining
Tampa Checkmate's continued use of Checkers' marks and trade dress in light of
the termination of its franchise agreement on April 8, 1997. Tampa Checkmate
52
<PAGE>
filed a Counterclaim which essentially contained the same claims set forth in
the Amended Counterclaim filed in the state court action. The court granted the
Company's Motion for preliminary injunction on July 23, 1998, and Tampa
Checkmate de-identified its restaurant. On December 15, 1998, the Court entered
an order converting Tampa Checkmate's Bankruptcy proceedings from a Chapter 11
to a Chapter 7 liquidation. Additionally, on February 1, 1999, the Bankruptcy
court lifted the automatic stay to permit the Company to dispose of the property
subject to its mortgage. The Company has filed a deficiency claim in the
Bankruptcy proceedings for approximately $985,000, which, together with Tampa
Checkmate's Counterclaim, remain pending. The Company intends to continue to
defend this case vigorously.
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 believes the causes of action
asserted in the amended Petition against the Company and the individual
defendants are without merit and intends to defend them vigorously.
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 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 for summary judgement which remains pending. The
Company believes the causes of action asserted in the Counterclaim against the
Company and Mr. Brown are without merit and intends to defend them vigorously.
DOROTHY HAWKINS V. CHECKERS DRIVE-IN RESTAURANTS, INC. AND KPMG PEAT
MARWICK, Case No. 99-001584-CI-21. On March 4, 1999, a state court complaint was
filed in the Circuit Court in and for Pinellas County, Florida, Civil Division.
The Complaint alleges that Mrs. Hawkins was induced into purchasing a restaurant
site and entering into a franchise agreement with the Company based on
misrepresentations and omissions made by Checkers. The Complaint 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, fraudulent
concealment, fraudulent inducement, and negligent representation. The Company
denies the material allegations of the Complaint and intends to defend the
lawsuit vigorously.
SNAPPS RESTAURANTS, INC. V. CHECKERS DRIVE-IN RESTAURANTS, INC. On
February 21, 2000, a Complaint was filed against the Company in the Common Pleas
Court for Franklin County, Ohio entitled SNAPPS RESTAURANTS, INC. V. CHECKERS
DRIVE-IN RESTAURANTS, INC. which was thereafter removed by the Company to the
United States District Court for the Southern District of Ohio, and numbered as
Case No. C2-00-0216 on the docket of said court (the "Southern District
Action"). The Complaint filed in the Southern District Action seeks a temporary
and permanent injunction enjoining the Company from terminating seventy-seven
franchise agreements with Snapps Restaurants, Inc. ("Snapps") and alleges
wrongful termination of franchise agreements and various breaches of contract.
On February 22, 2000, a Complaint was filed by the Company against Snapps in the
United States District Court for the Northern District of Ohio entitled CHECKERS
DRIVE-IN RESTAURANTS, INC. V. SNAPPS RESTAURANTS, INC., and numbered as Case No.
3:00CV7110 on the docket of said court (the "Northern District Action"). The
Company's Complaint in the Northern District Action seeks to enjoin Snapps'
continued use of the Rally's marks and trade dress following the termination of
its franchise agreements and to collect unpaid royalty fees and advertising fund
contributions. The Company and Snapps have also filed arbitration proceedings
with the American Arbitration Association which have been assigned Case No. 25 Y
114 00057 00 and Case No. 331140004900 (collectively the "Arbitration
Proceedings"). On March 10, 2000, the parties reached an agreement in principle
to resolve the dispute. The Company believes the causes of action asserted
against it by Snapps are without merit and, in the event the settlement
described above is not consummated, the Company intends to defend them
vigorously.
53
<PAGE>
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 other matters will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
e) PURCHASE COMMITMENTS -The Company 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
$126.9 million in 2000 and a total of approximately $112.5 million for the years
2001 through 2005.
f) CHICAGO BANKRUPTCY - On December 27, 1999, a subsidiary of the Company,
Checkers of Chicago, Inc., a Delaware corporation, discontinued operations in
the Chicago metropolitan area and on January 7, 2000, filed for relief under
Chapter 7 of the United States Bankruptcy Code. Checkers of Chicago, Inc. had
operated eight restaurants as a general partner of certain limited partnerships
and three Company-owned restaurants, all of which are now closed. The other
Checkers and Rally's restaurants operated by Checkers Drive-In Restaurants and
its franchisees are not affected by this action.
NOTE 14: SUBSEQUENT EVENTS (UNAUDITED)
a) SALE OF 62 CHECKERS' RESTAURANTS - On March 30, 2000, the Company
completed the sale of 62 Checkers restaurants in Mobile, Alabama and West Palm
Beach and Orlando, Florida market areas to Titan Holdings, LLC for $10.25
million in cash and notes, less sales commissions and other costs. Titan
holdings, LLC will operate the newly acquired Checkers restaurants as franchisee
and pay ongoing royalties based on sales at the restaurants. The Company has
used the net proceeds from this transaction to reduce existing debt. The
outstanding short-term debt balance as of March 30, 2000, is $43.7 million.
b) TERMINATION OF SUNCHECK OF PUERTO RICO - On February 3, 2000, the
Company terminated its master franchise agreement with Suncheck of Puerto Rico
and the related development agreement for Puerto Rico and the Caribbean as a
result of Sunchecks failure to cure certain defaults under the master franchise
agreement. The Company, through its new subsidiary, Checkers of Puerto Rico,
Inc. is now the franchisor of 14 restaurants in Puerto Rico.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to the information under the headings "ELECTION OF DIRECTORS,"
"MANAGEMENT - Directors and Executive Officers" and "MANAGEMENT -Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Company's
definitive Proxy Statement to be used in connection with the Company's Special
Meeting of Stockholders, which will be filed with the Commission on or before
May 2, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information under the headings "MANAGEMENT - Compensation of
Executive Officers" in the Company's definitive Proxy Statement to be used in
connection with the Company's Special Meeting of Stockholders, which will be
filed with the commission on or before May 2, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the information under the heading "MANAGEMENT - Security Ownership
of Management and Others" in the Company's definitive Proxy Statement to be used
in
54
<PAGE>
connection with the Company's Special Meeting of Stockholders, which will be
filed with the Commission on or before May 2, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information under the heading "MANAGEMENT - Certain
Transactions" in the company's definitive Proxy Statement to be used in
connection with the Company's Special Meeting of Stockholders, which will be
filed with the Commission on or before May 2, 2000.
55
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1.0 The following financial statements of the Registrant are included
in Part II, Item 8:
Index to Consolidated Financial Statements:
Independent Auditors' Reports
Consolidated balance sheets as of January 3, 2000 and December 28,
1998.
Consolidated statements of operations and comprehensive income for
each of the three years in the three-year period ended January 3,
2000.
Consolidated statements of shareholders' equity for each of the
three years in the three-year period ended January 3, 2000.
Consolidated statements of cash flow for each of the three years
in the three-year period ended January 3, 2000.
Notes to consolidated financial statements
2.0 All schedules have been omitted because the required information
is not applicable, not required or is included elsewhere in the
financial statements and notes thereto.
3.0 The list of exhibits set forth in Item 14(c) below is incorporated
here in by reference.
(b) Reports on Form 8-K
None
(c) List of Exhibits
2.1 Agreement and Plan of Merger dated January 28, 1999 between the
Company and Checkers Drive-In Restaurants, Inc. File as exhibit
10.18 to the Company's 1998 Form 10-K, and incorporated herein by
reference.
3.1 Restated Certificate of Incorporation of the Company, as filed
with the Commission as Exhibit 3.1 to the Company's Registration
Statement on Form S-1 filed on September 26, 1991 (File No.
33-42996), is hereby incorporated herein by reference.
3.2 Certificate of Amendment to Restated Certificate of Incorporation
of the Company, as filed with the Commission as Exhibit 3 to the
Company's Form 10-Q for the quarter ended June 30, 1993, is hereby
incorporated herein by reference.
**3.3 Certificate of Amendment to Certificate of Incorporation of the
Company dated August 9, 1999.
**3.4 Certificate of Merger of Domestic Corporations dated August 9,
1999.
**3.5 Certificate of Amendment to Certificate of Incorporation of the
Company dated August 9, 1999.
3.6 By-laws, as amended through February 16, 1995, of the Registrant,
as filed with the Commission as Exhibit 3.3 to the Company's Form
10-Q for the quarter ended March 27, 1995, is hereby incorporated
herein by reference.
4.1 Indenture dated as of March 1, 1993, between Rally's, certain of
its subsidiaries and PNC Bank Kentucky, Inc., as Trustee, relating
to the issuance of $85,000,000 principal amount of the Company's
9 7/8% Senior Notes due 2000. (Filed as Exhibit 4.1 to Rally's
Annual Report on Form 10-K for the year ended January 3, 1993, and
incorporated herein by reference.)
4.2 Specimen form of 9 7/8% Senior Note due 2000. (Filed as Exhibit
4.2 to Rally's Annual Report on Form 10-K for the year ended
January 3, 1993, and incorporated herein by reference.)
**4.3 Form of Warrant Agreement dated August 9, 1999, between Checkers
Drive-In Restaurants, Inc. and American Stock Transfer and Trust
Company, Inc., as a Warrant Agent including form of Warrant
Certificate.
4.4 First Amendment to the Indenture (incorporated by reference to
Exhibit 4.6 to Rally's 1996 10-K).
4.5 Collateral Assignment of Trademarks as Security from Borrower,
dated April 12, 1995, between the Company and each of the banks
party to the Amended and Restated Credit Agreement, dated as of
April 12, 1995, as filed with the Commission as Exhibit 3 to the
Company's Form 8-K dated April 12, 1995, is hereby incorporated by
reference.
56
<PAGE>
4.6 Amended and Restated Credit Agreement, dated as of November 22,
1996, between the Company, CKE Restaurants, Inc., as Agent, and
the lenders listed therein, as filed with the Commission as
Exhibit 4.1 on the Company's Form 8-K, dated November 22, 1996, is
hereby incorporated by reference.
4.7 Second Amended and Restated Security Agreement, dated as of
November 22, 1996, between the Company and CKE Restaurants, Inc.,
as Agent, and the lenders listed therein, as filed with the
Commission as Exhibit 4.2 on the Company's Form 8-K, dated
November 22, 1996, is herebyincorporated by reference.
4.8 Form of Warrant issued to lenders under the Amended and Restated
Credit Agreement, dated November 22, 1996, between the Company and
CKE Restaurants, Inc., as Agent, and the lenders listed therein,
as filed with the Commission as Exhibit 4.3 on the Company's Form
8-K, dated November 22, 1996, is hereby incorporated by reference.
4.9 Other Debt Instruments - Copies of debt instruments for which the
related debt is less than 10% of the Company's total assets will
be furnished to the Commission upon request.
10.1 Form of Indemnification Agreement between the Company and its
directors and certain officers, as filed with the Commission as
Exhibit 4.4 to the Company's Registration Statement on Form S-1
filed on September 26, 1991 (File No. 33-42996), is hereby
incorporated herein by reference.
10.2* 1991 Stock Option Plan of the Company, as amended on May 10,
1994, as filed with the Commission as Exhibit 4 to the Company's
Registration Statement on Form S-8 filed on June 15, 1994 (File
No. 33-80236), is hereby incorporated herein by reference.
10.21* Amendment to 1991 Stock Option Plan, as filed with the Commission
on page 18 of the Company's proxy statement dated May 15, 1998 is
incorporated herein by reference.
10.3* 1994 Stock Option Plan for Non-Employee Directors, as filed with
the Commission as Exhibit 10.32 to the Company's form 10-K for the
year ended January 2, 1995, is hereby incorporated by reference.
10.4 Lease between Blue Ridge Associates and the Company dated November
17, 1987. (Filed as Exhibit 10.6 to Rally's Registration Statement
on Form S-1, dated October 11, 1989, and incorporated herein by
reference).
10.5 Purchase Agreement between the Company and Restaurant Development
Group, Inc., dated as of August 3, 1995, as filed with the
Commission as Exhibit 1 to the Company's Form 8-K dated July 31,
1995, is herein incorporated by reference.
10.6 Amendment No. 1, dated as of October 20, 1995, to that certain
Purchase Agreement between Checkers and Restaurant Development
Group, Inc., dated as of August 3, 1995, as filed with the
Commission as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended September 11, 1995, is hereby incorporated by
reference.
10.7 Amendment No. 2, dated as of April 11, 1996, to that certain
Purchase Agreement between Checkers and Restaurant Development
Group, Inc., dated as of August 3, 1995, as filed with the
Commission as Exhibit 10.32 to the Company's Form 10-K for the
year ended January 1, 1996, is hereby incorporated by reference.
10.8 Purchase Agreement between the Company and Rall-Folks, Inc., dated
as of August 2, 1995, as filed with the Commission as Exhibit 2 to
the Company's Form 8-K dated July 31, 1995, is herein incorporated
by reference.
10.9 Amendment No. 1, dated as of October 20, 1995, to that certain
Purchase Agreement between Checkers and Rall-Folks, Inc., dated as
of August 2, 1995, as filed with the Commission as Exhibit 10.2 to
the Company's Form 10-Q for the quarter ended September 11, 1995,
is hereby incorporated by reference.
10.10 Amendment No. 2, dated as of April 11, 1996 to that certain
Purchase Agreement between the Company and Rall-Folks, Inc., dated
as of August 2, 1995, as filed with the Commission as Exhibit
10.35 to the Company's Form 10-K for the year ended January 1,
1996, is hereby incorporated by reference.
10.11 Note Repayment Agreement dated as of April 12, 1996 between the
Company and Nashville Twin Drive-Thru Partners, L.P., as filed
with the Commission as Exhibit 10.36 to the Company's Form 10-K
for the year ended January 1, 1996, is hereby incorporated by
reference.
10.12 Purchase Agreement dated February 19, 1997, as filed with the
Commission as Exhibit 10.1 to the Company's Form 8-K, dated March
5, 1997 is hereby incorporated by referance.
10.13 Operating Agreement by and between Rally's Hamburgers, Inc. and
Carl Karcher Enterprises. (Filed as Exhibit 10.43 to CKE
Restaurants, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended May 20, 1996, and incorporated herein by reference.)
57
<PAGE>
10.14 Consulting Agreement by and between Rally's Hamburgers, Inc. and
CKE Restaurants, Inc. (incorporated by reference to Exhibit 10.16
to Rally's 1996 10-K).
10.15* Management Services Agreement, dated November 30, 1997, between
Checkers Drive-In Restaurants, Inc. and Rally's Hamburgers, Inc.
as filed with the Commission as Exhibit 10.17 to the Company's
1997 Annual Report Form 10-K is hereby incorporated by reference.
10.16* Employment Agreement dated November 10, 1997, between the Company,
Checkers Drive-In Restaurants, Inc. and Jay Gillespie.
10.17** Employment Agreement between the Company and Daniel Dorsch dated
December 14, 1999.
10.18** Checkers Drive-In Restaurants, Inc. Employee Stock Purchase Plan.
21 Subsidiaries of the Company:
(a) Rally's of Ohio, Inc. , an Ohio corporation.
(b) Self-Service Drive-Thru, Inc., a Louisiana corporation
(merged with Rally's effective December 28, 1998).
(c) Rally's Finance, Inc., a Delaware corporation (merged with
Rally's effective December 28, 1998).
(d) Rally's Management, Inc., a Kentucky corporation.
(e) ZDT Corporation, a Missouri corporation.
(f) RAR, Inc., a Delaware corporation (merged with Rally's
effective December 28, 1998).
(g) MAC1, Inc., a Delaware corporation.
(h) Hampton Roads Foods, Inc., a Louisiana corporation.
(i) Checkers of Puerto Rico, Inc.
(j) Checkers of Chicago, Inc.
23.1** Consent of KPMG LLP
23.2** Consent of Arthur Andersen LLP
27** Financial Data Schedule
* Compensatory plan required to be filed as an exhibit pursuant to Item 14c
of Form 10K.
** Filed herewith
(d) Financial Statement Schedules:
Described in Item 14(a)(2) of this Form 10-K.
(c) List of Exhibits
2.1 Agreement and Plan of Merger dated January 28, 1999 between
the Company and Checkers Drive-In Restaurants, Inc. filed as
exhibit 10.18 to the Company's 1998 Form 10-K, and incorporated
herein by reference.
(d) Financial Statement Schedules:
Described in Item 14(a)(2) of this Form 10-K.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Clearwater, State of Florida on March 24, 1999.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: /s/ DANIEL J. DORSCH
--------------------
Daniel J. Dorsch
President and Chief Executive Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Company and in
the capacities indicated on March 24, 1999.
SIGNATURE TITLE
/s/ WILLIAM P. FOLEY, II
- -------------------------
William P. Foley II Director and Chairman of the Board
/s/ PETER C. O'HARA
- -------------------------
Peter C. O'Hara Director, Vice Chairman of the Board
/s/ DANIEL J. DORSCH President, Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
Daniel J. Dorsch
/s/ THEODORE ABAJIAN Senior Vice President and Chief Financial Officer
- ------------------------- (Principal Financial and Accounting Officer)
Theodore Abajian
/s/ TERRY N. CHRISTENSEN
- -------------------------
Terry N. Christensen Director
/s/ CLARENCE V. MCKEE
- -------------------------
Clarence V. McKee Director
/s/ C.THOMAS THOMPSON
- ---------------------
C.Thomas Thompson Director
/s/ BURT SUGARMAN
- -------------------------
Burt Sugarman Director
/s/ ANDREW F. PUZDER
- --------------------
Andrew F. Puzder Director
/s/ RONALD B. MAGGARD
- ---------------------
Ronald B. Maggard Director
/s/ WILLIE D. DAVIS
- -------------------
Willie D. Davis Director
/s/ DAVID GOTTERER
- ------------------
David Gotterer Director
59
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
CHECKERS DRIVE-IN RESTAURANTS, INC.
Checkers Drive-In Restaurants, Inc. a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST" That pursuant to a Unanimous Written Consent of the Board of
Directors of the Corporation, resolutions were duly adopted setting forth a
proposed amendment of the Corporation's Restated Certificate of Incorporation,
as amended (the "Certificate of Incorporation"), declaring said amendment to be
advisable and providing that the amendment be presented to the stockholders for
consideration at the next annual meeting of stockholders. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the first sentence of Article 4 of the Corporation's
Certificate of Incorporation be, and it hereby is, amended 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".)"
SECOND: That thereafter, the annual meeting of stockholders of the
Corporation was duly called and held on August 5, 1999, upon notice in
accordance with Section 222 of the General Corporation Law of the State of
Delaware at which meeting the necessary number of shares as required by statute
were voted in favor of the amendment.
THIRD: That said amendment was fully adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATION
FILED 0:900 AN 08/09/1999
991328329 -2272161
<PAGE>
IN WITNESS WHEREOF, Checkers Drive-In Restaurants, Inc. has duly caused
this certificate to be signed by Richard A Peabody, its Senior Vice-President
and Chief Financial Officer, this 9th day of August, 1999.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: /s/ RICHARD A. PEABODY
------------------------
Richard A. Peabody
Senior Vice President and
Chief Financial Officer
EXHIBIT 3.4
STATE OF DELAWARE
CERTIFICATE OF MERGER OF
DOMESTIC CORPORATION
Pursuant to Title 8, Section 251(c) of the Delaware General Corporation
Law, the undersigned corporation executed the following Certificate of Merger:
FIRST: The name of the surviving corporation is Checkers Drive-In
Restaurants, Inc., and the name of the corporation being merged into this
surviving corporation is Rally's Hamburgers, Inc.
SECOND: The Agreement of Merger has been approved, adopted, certified,
executed and acknowledged by each of the constituent corporations.
THIRD: The name of the surviving corporation is Checkers Drive-In
Restaurants, Inc., a Delaware corporation.
FOURTH: The Certificate of Incorporation of the surviving corporation
shall be its Certificate of Incorporation.
FIFTH: The merger is to become effective at 11:59 p.m. on August 9,
1999.
SIXTH: The Agreement of Merger is on file at Checkers Drive-In
Restaurants, Inc. 14255 49th Street North, Building I, Clearwater, Florida
33762, the place of business of the surviving corporation.
SEVENTH: A copy of the Agreement of Merger will be furnished by the
surviving corporation on request without cost, to any stockholders of the
constituent corporation.
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATION
FILED 11:59 ON 08/09/1999
991389261 -2272161
<PAGE>
IN WITNESS WHEREOF, said surviving corporation has caused this
certificate to be signed by an authorized officer, the 9th day of August, A.D.,
1999.
Name: /s/ RICHARD A. PEABODY
--------------------------
Richard A. Peabody
Title: SENIOR VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
-------------------------
Senior Vice-President and
Chief Financial Officer
EXHIBIT 3.5
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF INCORPORATION OF
CHECKERS DRIVE-IN RESTAURANTS, INC.
Checkers Drive-In Restaurants, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
'Company"), DOES HEREBY CERTIFY:
FIRST: That pursuant to a Unanimous Written Consent of the Board of
Directors of the Company, resolutions were duly adopted setting forth a proposed
amendment of the Company's Restated Certificate of Incorporation, as amended
(the "Certificate of Incorporation"), declaring said amendment to be advisable
and providing that the amendment be presented to the stockholders for
consideration at the next annual meeting of stockholders. The resolution setting
forth the proposed amendment is as follows:
"RESOLVED, that the company be, and it hereby is, authorized and
directed to cause a one-for-twelve (1/12) reverse stock split (the
"Reverse Stock Split") of the Company's issued and outstanding Common
Stock, as contemplated by the Agreement and Plan of Merger, dated as of
January 28, 1999, by and between the Company and Rally's Hamburgers,
Inc., a Delaware corporation, which Reverse Stock Split shall decrease
the number of issued and outstanding shares of Common Stock by
one-twelfth, but shall have no effect on the Company's 175 million
shares of authorized Common Stock."
SECOND: That thereafter, the annual meeting of stockholders of the
Company was duly called and held on August 5th, 1999, upon notice in accordance
with Section 222 of the General Corporation Law of the State of Delaware at
which meeting the necessary number of shares as required by statute were voted
in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATION
FILED 11:59 ON 08/09/1999
99132908 -2272161
<PAGE>
IN WITNESS WHEREOF, Checkers Drive-In Restaurants, Inc. has duly caused
this certificate to be signed by Richard A Peabody, its Senior Vice-President
and Chief Financial Officer, this 9th day of August, 1999.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: /s/ RICHARD A. PEABODY
------------------------
Richard A. Peabody
Senior Vice President and
Chief Financial Officer
EXHIBIT 4.3
----------
CHECKERS DRIVE-IN RESTAURANTS, INC.
WARRANT AGREEMENT
BETWEEN
CHECKERS DRIVE-IN RESTAURANTS, INC.,
as the successor-in-interest by merger to
Rally=s Hamburgers, Inc.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
AS WARRANT AGENT
Dated as of August 9, 1999
----------
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS, INC.
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of August 9, 1999,
is made and entered into by and between Checkers Drive-In Restaurants, Inc., a
Delaware corporation (the "Company"), as successor-in-interest by merger to
Rally's Hamburgers, Inc., a Delaware corporation ("Rally's"), on the one hand,
and American Stock Transfer & Trust Company, as warrant agent (the "Warrant
Agent"), on the other hand.
WHEREAS, reference is hereby made to that certain rights offering in
November of 1996 (the "Rights Offering"), whereby the shareholders of Rally's
("Shareholders") were entitled to purchase units of Rally's securities (the
"Units"), each Unit consisting of one share of Rally's common stock (the
"Rally's Common Stock"), and one redeemable common stock purchase warrant (the
"Rally's Warrants"). In the Rights Offering Rally's issued approximately 4.8
million Rally's Warrants evidencing the right to purchase an aggregate of
approximately 4.8 million shares of Rally's Common Stock; and
WHEREAS, on August 9, 1999, the Company completed its merger with
Rally's. In the merger, each outstanding Rally's Warrant was converted into a
Checkers warrant at a conversion ratio of 1.99 and was adjusted to reflect a
one-for-twelve reverse stock split; and
WHEREAS, on September 20, 1999, the Company (i) reduced the exercise
price on the Rally's Warrants by two-thirds (2/3), resulting in holders of the
Rally's Warrants receiving one new Company warrant with an exercise price of
$4.52 per share for each 6.03 Rally's Warrant held, and (ii) extended the
Rally's Warrant term one year to September 26, 2001 (the "Warrants"); and
WHEREAS, the Company desires the Warrant Agent act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer, exchange, exercise and redemption of the
Warrants.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as agent of the Company for the Warrants, and the
Warrant Agent hereby accepts such appointment and agrees to perform the same in
accordance with the terms and conditions set forth in this Agreement.
SECTION 2. WARRANTS AND FORM OF WARRANT CERTIFICATES.
(A) Each Warrant shall entitle the registered holder of the
certificate representing such Warrant to purchase upon the exercise thereof, one
share of the Company's Common Stock, par value $.001 per share (the "Common
Stock"), subject to the adjustments provided for in Section 9 hereof, at any
time until 5:00 p.m, Eastern time, on September 26, 2001 ("Expiration Date")
unless earlier redeemed pursuant to Section 11 hereof.
(B) The Warrant certificates shall be in registered form only.
The text of the Warrant certificate and the form of election to exercise a
Warrant on the reverse side thereof shall be substantially in the form of
EXHIBIT A attached hereto. Each Warrant certificate shall be dated as of the
date of issuance thereof by the Warrant Agent (whether upon initial issuance or
upon transfer or exchange) and shall be executed on behalf of the Company by the
manual or facsimile signature of its President or a Vice President, under its
corporate seal, affixed or in facsimile, and attested to by the manual or
facsimile signature of its Secretary or an Assistant Secretary. In case any
officer of the Company who shall have signed any Warrant certificate shall cease
to be such officer of the Company prior to the issuance thereof, such Warrant
certificate may nevertheless be issued and delivered with the same force and
effect as though the person who signed the same had not ceased to be such
officer of the Company. Any such Warrant certificate may be signed on behalf of
the Company by persons who, at the actual date of execution of such Warrant
certificate, are the proper officers of the Company, although at the nominal
date of such
-2-
<PAGE>
Warrant certificate any such person shall not have been such officer of the
Company.
SECTION 3. EXERCISE OF WARRANTS AND WARRANT PRICE. Subject to the
provisions of this Agreement, each registered holder of one or more Warrant
certificates shall have the right, which may be exercised as in such Warrant
certificates expressed, to purchase from the Company (and the Company shall
issue and sell to such registered holder) the number of shares of Common Stock
to which the Warrants represented by such certificates are at the time entitled
hereunder.
Each Warrant not exercised by its expiration date shall become void,
and all rights thereunder and all rights in respect thereof under this Agreement
shall cease on such date.
A Warrant may be exercised by the surrender of the certificate
representing such Warrant to the Company, at the office of the Warrant Agent, or
at the office of a successor to the Warrant Agent, with the subscription form
set forth on the reverse thereof duly executed and properly endorsed with the
signatures properly guaranteed, and upon payment in full to the Warrant Agent
for the account of the Company of the Warrant Price (as hereinafter defined) for
the number of shares of Common Stock as to which the Warrant is exercised. Such
Warrant Price shall be paid in full in cash, or by certified check or bank draft
payable in United States currency to the order of the Warrant Agent.
The price per share of Common Stock at which the Warrants may be
exercised (the "Warrant Price") shall be $4.52 (adjusted in accordance with
Section 9 hereof, taking into account prior adjustments). At any time, or from
time to time the Company may reduce either or both of the Warrant Price or
extend the expiration date for such period or periods of time as it may
determine. Notice of any such reduction in the Warrant Price or extension of the
expiration date shall be promptly provided to the Warrant Agent.
Subject to the further provisions of this Section 3 and of Section 6
hereof, upon such surrender of Warrant certificates and payment of the
applicable Warrant Price as aforesaid, the Company shall issue and cause to be
delivered, with all reasonable dispatch to or upon the written order of the
registered holder of such Warrants and in such name or names as such registered
holder may designate, a certificate or certificates for the number of securities
so purchased upon the exercise of such Warrants, together with cash, as provided
in Section 10 of this Agreement, in respect of any fraction of a share or
security otherwise issuable upon such surrender. All shares of Common Stock
issued upon the exercise of a Warrant shall be validly issued, fully paid and
nonassessable and shall be listed on any and all national securities exchanges
upon which any other shares of the Common Stock or securities otherwise issuable
are then listed.
Certificates representing such securities shall be deemed to have been
issued and any person so designated to be named therein shall be deemed to have
become a holder of record of such securities as of the date of the surrender of
such Warrants and payment of the Warrant Price as aforesaid; provided, however,
that if, at the date of surrender of such Warrants and payment of the applicable
Warrant Price, the transfer books for the Common Stock or other securities
purchasable upon the exercise of such Warrants shall be closed, the certificates
for the securities in respect of which such Warrants are then exercised shall be
issuable as of the date on which such books shall next be opened and until such
date the Company shall be under no duty to deliver any certificate for such
securities. The rights of purchase represented by each Warrant certificate shall
be exercisable, at the election of the registered holders thereof, either as an
entirety or from time to time for part of the number of securities specified
therein and, in the event that any Warrant certificate is exercised in respect
of less than all of the securities specified therein at any time prior to the
expiration date of the Warrant certificate, a new Warrant certificate or
certificates will be issued to such registered holder for the remaining number
of securities specified in the Warrant certificate so surrendered.
SECTION 4. COUNTERSIGNATURE AND REGISTRATION. The Warrant Agent shall
maintain books (the "Warrant Register") for the registration and the
registration of transfer of the Warrants. The Warrant certificates shall be
countersigned manually or by facsimile by the Warrant Agent (or by any successor
to the Warrant Agent then acting as such under this Agreement) and shall not be
valid for any purpose unless so countersigned. Warrant certificates may be so
countersigned, however, by the Warrant Agent and delivered by the Warrant Agent
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
-3-
<PAGE>
Prior to due presentment for registration of transfer of any Warrant
certificate, the Company and the Warrant Agent may deem and treat the person in
whose name such Warrant certificate shall be registered upon the Warrant
Register (the "registered holder") as the absolute owner of such Warrant
certificate and of each Warrant represented thereby (notwithstanding any
notation of ownership or other writing on the Warrant certificate made by anyone
other than the Company or the Warrant Agent), for the purpose of any exercise
thereof, of any distribution or notice to the holder thereof, and for all other
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary.
SECTION 5. TRANSFER AND EXCHANGE OF WARRANTS. The Warrant Agent shall
register the transfer, from time to time, of any outstanding Warrant upon the
Warrant Register, upon surrender of the certificate evidencing such Warrant for
transfer, properly endorsed with signatures properly guaranteed and accompanied
by appropriate instructions for transfer. Upon any such transfer, a new Warrant
certificate representing an equal aggregate number of Warrants shall be issued
to the transferee and the surrendered Warrant certificate shall be canceled by
the Warrant Agent. The Warrant certificates so canceled shall be delivered by
the Warrant Agent to the Company from time to time upon request.
Warrant certificates may be surrendered to the Warrant Agent, together
with a written request for exchange, and thereupon the Warrant Agent shall issue
in exchange therefor one or more new Warrant certificates as requested by the
registered holder of the Warrant certificate or certificates so surrendered,
representing an equal aggregate number of Warrants.
The Warrant Agent shall not be required to effect any registration of
transfer or exchange which will result in the issuance of a Warrant certificate
for a fraction of a warrant.
No service charge shall be made for any exchange or registration of
transfer of Warrant certificates.
The Warrant Agent is hereby authorized to countersign and to deliver,
in accordance with the terms of this Agreement, the new Warrant certificates
required to be issued pursuant to the provisions hereof, and the Company,
whenever required by the Warrant Agent, will supply the Warrant Agent with
Warrant certificates duly executed on behalf of the Company for such purpose.
SECTION 6. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance of the shares of Common Stock
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the issuance or delivery of any certificates for shares
of Common Stock in a name other than that of the registered holder of Warrants
in respect of which such shares are issued, and in such case neither the Company
nor the Warrant Agent shall be required to issue or deliver any certificate for
shares of Common Stock or any Warrant certificate until the person requesting
the same has paid to the Company the amount of such tax or has established to
the Company's satisfaction that such tax has been paid.
SECTION 7. MUTILATED OR MISSING WARRANTS. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may in
its discretion issue, and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant
certificate, or in lieu of and substitution for the Warrant certificate lost,
stolen or destroyed, a new Warrant certificate representing an equal aggregate
number of Warrants, but only upon receipt of evidence satisfactory to the
Company and the Warrant Agent of such loss, theft or destruction of such Warrant
certificate and reasonable indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant certificates shall also comply with such
other reasonable conditions and pay such reasonable charges as the Company or
the Warrant Agent may prescribe.
SECTION 8. RESERVATION OF COMMON STOCK. There have been reserved, and
the Company shall at all times keep reserved, out of the authorized and unissued
shares of Common Stock, a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Warrants then outstanding,
and the transfer agent for the Common Stock and every subsequent transfer agent
for any shares of the Company's capital stock issuable upon the exercise of any
of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all
-4-
<PAGE>
times to reserve such number of authorized and unissued shares as shall be
requisite for such purpose.
Prior to the issuance of any shares of Common Stock upon exercise of
the Warrants, the Company shall secure the listing of such shares on any and all
national securities exchanges upon which any of the other shares of the Common
Stock are then listed. So long as any unexpired Warrants remain outstanding, the
Company will file such post-effective amendments to the registration statement
or supplements to the prospectus filed pursuant to the Securities Act of 1933,
as amended (the "Act"), with respect to the Warrants (or such other registration
statements or post-effective amendments or supplements) as may be necessary to
permit trading in the Warrants and to permit the Company to deliver to each
person exercising a Warrant a prospectus meeting the requirements of Section
10(a)(3) of the Act, and otherwise complying therewith; and the Company will,
from time to time, furnish the Warrant Agent with such prospectuses in
sufficient quantity to permit the Warrant Agent to deliver such a prospectus to
each holder of a Warrant upon the exercise thereof. The Company will keep a copy
of this Agreement on file with the transfer agent for the Common Stock and with
every subsequent transfer agent for any shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants.
The Warrant Agent is hereby irrevocably authorized to requisition from
time to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed certificates for such purpose and will itself provide or otherwise make
available any cash as provided in Section 10 of this Agreement. All Warrant
certificates surrendered in the exercise of the rights thereby evidenced shall
be canceled by the Warrant Agent and shall thereafter be delivered to the
Company, and such canceled Warrant certificates shall constitute sufficient
evidence of the number of shares of Common Stock which have been issued upon the
exercise of such Warrants. Promptly after the expiration date of the Warrants,
the Warrant Agent shall certify to the Company the aggregate number of such
Warrants which expired unexercised, and after the expiration date of the
Warrants, no shares of Common Stock shall be subject to reservation in respect
of such Warrants.
SECTION 9. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON
STOCK. The number and kind of securities purchasable upon the exercise of the
Warrants and the applicable Warrant Price shall be subject to adjustment from
time to time upon the happening of certain events, as follows:
9.1 ADJUSTMENTS. The number of shares of Common Stock purchasable upon
the exercise of each Warrant and the applicable Warrant Price shall be subject
to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in Common
Stock or make a distribution in Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock
into a smaller number of shares of Common Stock, or (iv) issue, by
reclassification of its Common Stock, other securities of the Company,
the number of shares of Common Stock purchasable upon exercise of a
Warrant immediately prior thereto shall be adjusted so that the holder
of a Warrant shall be entitled to receive the kind and number of shares
of Common Stock or other securities of the Company which such holder
would have owned or would have been entitled to receive immediately
after the happening of any of the events described above, had the
Warrant been exercised immediately prior to the happening of such event
or any record date with respect thereto. Any adjustment made pursuant
to this subsection 9.1(a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any,
for such event.
(b) In case the Company shall issue rights, options, warrants
or convertible securities to all or substantially all holders of its
Common Stock, without any charge to such holders, entitling them to
subscribe for or purchase Common Stock at a price per share which is
lower at the record date mentioned below than the then Current Market
Price (as defined in Section 10 hereof), the number of shares of Common
Stock thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of shares of Common Stock
theretofore purchasable upon exercise of a Warrant by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, options,
warrants or convertible securities plus the number of additional shares
of Common Stock offered for subscription or purchase, and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of shares which the aggregate
offering price of the total
-5-
<PAGE>
number of shares offered would purchase at such Current Market Price.
Such adjustment shall be made whenever such rights options, warrants or
convertible securities are issued and shall become effective
immediately and retroactive to the record date for the determination of
shareholders entitled to receive such rights, options, warrants or
convertible securities.
(c) In case the Company shall distribute to all or
substantially all holders of its Common Stock, evidences of its
indebtedness or assets (excluding cash dividends or distributions out
of earnings) or rights, options, warrants or convertible securities
containing the right to subscribe for or purchase Common Stock
(excluding those referred to in subsection 9.1 (b) above), then in each
case the number of shares of Common Stock thereafter purchasable upon
the exercise of each Warrant shall be determined by multiplying the
number of shares of Common Stock theretofore purchasable upon exercise
of such Warrant by a fraction, of which the numerator shall be the then
Current Market Price on the date of such distribution, and of which the
denominator shall be such Current Market Price on such date minus the
then fair value (as determined by the Board of Directors, which
determination, if reasonable and based upon the Board of Directors'
good faith business judgment, shall be binding upon the registered
holders) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights, options, warrants or
convertible securities applicable to one share. Such adjustment shall
be made whenever any such distribution is made and shall become
effective on the date of distribution retroactive to the record date
for the determination of shareholders entitled to receive such
distribution.
(d) No adjustment in the number of shares of Common Stock
purchasable pursuant to the Warrants shall be required unless such
adjustment would require an increase or decrease of at least one
percent in the number of shares of Common Stock then purchasable upon
the exercise of the Warrants; provided, however that any adjustments
which by reason of this subsection 9.1(d) are not required to be made
immediately shall be carried forward and taken into account in any
subsequent adjustment.
(e) Whenever the number of shares of Common Stock purchasable
upon the exercise of a Warrant is adjusted as herein provided, the
applicable Warrant Price payable upon exercise of the Warrant shall be
adjusted by multiplying such Warrant Price immediately prior to such
adjustment by the fraction, of which the numerator shall be the number
of shares of Common Stock purchasable upon the exercise of such Warrant
immediately prior to such adjustment, and of which the denominator
shall be the number of shares of Common Stock so purchasable
immediately thereafter.
(f) To the extent not covered by subsections 9.1 (b) or (c)
hereof, in case the Company shall sell or issue Common Stock or rights,
options, warrants or convertible securities containing the right to
subscribe for or purchase shares of Common Stock at a price per share
(determined, in the case of such rights, options, warrants or
convertible securities, by dividing (i) the total amount received or
receivable by the Company in consideration of the sale or issuance of
such rights, options, warrants or convertible securities, plus the
total consideration payable to the Company upon exercise or conversion
thereof, by (ii) the total number of shares covered by such rights,
options, warrants or convertible securities) lower than the then
Current Market Price in effect immediately prior to such sale or
issuance, then the number of Shares thereafter purchasable upon the
exercise of the Warrants shall be determined by multiplying the number
of Shares theretofore purchasable upon exercise of the Warrants by a
fraction, of which the numerator shall be the applicable Warrant Price
and the denominator shall be that price calculated to the nearest cent)
determined by dividing (I) an amount equal to the sum of (A) the number
of shares of Common Stock outstanding immediately prior to such sale or
issuance multiplied by the applicable Warrant Price, plus (B) the
consideration received by the Company upon such sale or issuance, by
(II) the total number of shares of Common Stock outstanding immediately
after such sale or issuance. For the purpose of such adjustments, the
Common Stock which the holders of any such rights, options, warrants or
convertible securities shall be entitled to subscribe for or purchase
shall be deemed issued and outstanding as of the date of such sale or
issuance and the consideration received by the Company therefor shall
be deemed to be the consideration received by the Company for such
rights, options, warrants or convertible securities, plus the
consideration or premiums stated in such rights, options, warrants or
convertible securities to be paid for the Common Stock covered thereby.
In case the Company shall sell or issue Common Stock or rights,
options, warrants or convertible securities containing the right to
subscribe for or purchase Common Stock for a consideration
-6-
<PAGE>
consisting, in whole or in part, of property other than cash or its
equivalent, then in determining the "price per share" of Common Stock
and the "consideration received by the Company" for purpose of the
first sentence of this subsection 9.1(f), the Board of Directors shall
determine the fair value of said property, and such determination, if
reasonable and based upon the Board of Directors' good faith business
judgment, shall be binding upon the Warrantholder. In determining the
"price per share" of Common Stock, any underwriting discounts or
commissions shall not be deducted from the price received by the
Company for sales of securities registered under the Act.
(g) Whenever the number of shares of Common Stock purchasable
upon the exercise of a Warrant or the Warrant Price is adjusted as
herein provided, the Company shall cause to be promptly mailed to the
Warrant Agent and each registered holder of a Warrant by first class
mail, postage prepaid, notice of such adjustment or adjustments and,
with regard to the Warrant Agent only, a certificate of the chief
financial officer of the Company setting forth the number of shares of
Common Stock purchasable upon the exercise of a Warrant and the
applicable Warrant Price after such adjustment, a brief statement of
the facts requiring such adjustment and the computation by which such
adjustment was made.
(h) For the purpose of this Section 9, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassification of such Common
Stock consisting solely of changes in par value, or from par value to
no par value, or from no par value to par value. In the event that at
any time, as a result of an adjustment made pursuant to this Section 9,
a registered holder shall become entitled to purchase any securities of
the Company other than Common Stock, (i) if the registered holder's
right to purchase is on any other basis than that available to all
holders of the Company's Common Stock, the Company shall obtain an
opinion of an investment banking firm valuing such other securities and
(ii) thereafter the number of such other securities so purchasable upon
exercise of a Warrant and the applicable Warrant Price of such
securities shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in this Section 9.
(i) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the
number of shares of Common Stock purchasable upon exercise of a Warrant
and the applicable Warrant Price, to the extent a Warrant has not then
been exercised shall, upon such expiration, be readjusted and shall
thereafter be such as they would have been had they been originally
adjusted (or had the original adjustment not been required, as the case
may be) on the basis of (A) the fact that the only shares of Common
Stock so issued were the shares of Common Stock, if any, actually
issued or sold upon the exercise of such rights, options, warrants or
conversion privileges, and (B) the fact that such shares of Common
Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise plus the consideration, if
any, actually received by the Company for the issuance, sale or grant
of all such privileges, options, warrants or conversion privileges
whether or not exercised; provided, however, that no such readjustment
shall have the effect of increasing the applicable Warrant Price by an
amount in excess of the amount of the adjustment initially made in
respect of the issuance, sale or grant of such rights, options,
warrants or conversion privileges.
9.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 9.1
hereof, no adjustment in respect of any dividends or distributions out of
earnings shall be made during the term of a Warrant or upon the exercise of a
Warrant.
9.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments shall be made
pursuant to Section 9 hereof in connection with the issuance of the shares of
Common Stock underlying the Warrants. No adjustments shall be made pursuant to
Section 9 hereof in connection with the grant or exercise of presently
authorized or outstanding options to purchase, or the issuance of shares of
Common Stock on the exercise thereof under any of the Company's stock option
plans, including, but not limited to, the Rally's 1990 Stock Option Plan and
1995 Stock Option Plan for Non-Employee Directors.
9.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any
-7-
<PAGE>
consolidation of the Company with or merger of the Company into another
corporation or in case of any sale or conveyance to another corporation of the
property, assets or business of the Company as an entirety or substantially as
an entirety, the Company or such successor or purchasing corporation, as the
case may be, shall execute with the Warrant Agent an agreement that the
registered holders of the Warrants shall have the right thereafter, upon payment
of the Warrant Price in effect immediately prior to such action, to purchase,
upon exercise of each Warrant, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale or conveyance
had each Warrant been exercised immediately prior to such action. In the event
of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of
1986, as amended, in which the Company is the surviving corporation, the right
to purchase shares of Common Stock under the Warrants shall terminate on the
date of such merger and thereupon the Warrants shall become null and void, but
only if the controlling corporation shall agree to substitute for the Warrants
its warrants which entitle the holders thereof to purchase upon their exercise
the kind and amount of shares and other securities and property which they would
have owned or been entitled to receive had the Warrants been exercised
immediately prior to such merger. Any such agreements referred to in this
subsection 9.4 shall provide for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section 9
hereof. The provisions of this subsection 9.4 shall similarly apply to
successive consolidations, mergers, sales or conveyances.
9.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action which
would cause an adjustment reducing the applicable Warrant Price below the then
par value of the Common Stock issuable upon exercise of the Warrants, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable Common Stock at such adjusted applicable Warrant Price.
9.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section 9.0 and a certificate signed by such firm shall be conclusive
evidence of the correctness of any computation made under this Section 9.
9.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any adjustments
in the applicable Warrant Price or the number of securities issuable upon
exercise of Warrants, Warrant certificates theretofore or thereafter issued may
continue to express the same price and number of securities as are stated in the
similar Warrant certificates initially issuable pursuant to this Agreement.
However, the Company may, at any time in its sole discretion (which shall be
conclusive), make any change in the form of Warrant certificate that it may deem
appropriate and that does not affect the substance thereof; and any Warrant
certificate thereafter issued, whether upon registration of transfer of, or in
exchange or substitution for, an outstanding Warrant certificate, may be in the
form so changed.
9.8 NO RIGHTS AS SHAREHOLDER; NOTICES TO HOLDERS OF WARRANTS. If, at
any time prior to the expiration of a Warrant and prior to its exercise, any one
or more of the following events shall occur: (a) any action which would require
an adjustment pursuant to subsection 9.1 or 9.4 hereof, or (b) a dissolution,
liquidation or winding up of the Company (other than in connection with a
consolidation, merger or sale of its property, assets and business as an
entirety or substantially as an entirety) shall be proposed:
then the Company shall give notice in writing of such event to the registered
holders of the Warrants, as provided in Section 18 hereof, at least 20 days
prior (and pursuant to the provisions of subsection 9.1(e) with respect to
adjustments pursuant to subsection 9.1(f) and 9.1(i)) to the date fixed as a
record date or the date of closing the transfer books for the determination of
the shareholders entitled to any relevant dividend, distribution, subscription
rights or other rights or for the determination of shareholders entitled to vote
on such proposed dissolution, liquidation or winding up. Such notice shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to mail or receive such notice or any defect therein shall not
affect the validity of any action taken with respect thereto.
Section 10. FRACTIONAL INTERESTS. The Company shall not be required to
issue fractional shares of Common Stock on the exercise of a Warrant. If any
fraction of a share of Common Stock would, except for the provisions of this
Section 10, be issuable on the exercise of a Warrant (or specified portion
thereof), the Company
-8-
<PAGE>
shall in lieu thereof pay an amount in cash equal to the then Current Market
Price multiplied by such fraction. For purposes of this Agreement, the term
"Current Market Price" shall mean (i) if the Common Stock is traded in the
over-the-counter market and not in the NASDAQ National Market System nor on any
national securities exchange, the average of the per share closing bid prices of
the Common Stock on the 30 consecutive trading days immediately preceding the
date in question, as reported by NASDAQ or an equivalent generally accepted
reporting service, or (ii) if the Common Stock is traded in the NASDAQ National
Market System or on a national securities exchange, the average for the 30
consecutive trading days immediately preceding the date in question of the daily
per share closing prices of the Common Stock in the NASDAQ National Market
System or on the principal stock exchange on which it is listed, as the case may
be. For purposes of clause (i) above, if trading in the Common Stock is not
reported by NASDAQ, the bid price referred to in said clause shall be the lowest
bid price as reported in the "pink sheets" published by National Quotation
Bureau, Incorporated. The closing price referred to in clause (ii) above shall
be the last reported sale price or, in the case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices, in
either case in the NASDAQ National Market System or on the national securities
exchange on which the Common Stock is then listed.
SECTION 11. REDEMPTION.
(A) The then outstanding Warrants may be redeemed, at the
option of the Company, at $.01 per warrant, at any time after the Daily Market
Price per share of the Common Stock for a period of 20 out of 30 consecutive
trading days ending not more than 30 days prior to the date of the notice given
pursuant to Section 11(B) hereof has equaled or exceeded $36.18, as adjusted
from time to time as provided in Section 9 hereof, and prior to expiration of
the Warrants. The Daily Market Price of the Common Stock shall be determined by
the Company in the manner set forth in Section 11(E) as of the end of each
trading day (or, if no trading in the Common Stock occurred on such day, as of
the end of the immediately preceding trading day in which trading occurred) and
verified to the Warrant Agent before the Company may give notice of redemption.
All outstanding Warrants must be redeemed if any are redeemed, and any right to
exercise an outstanding Warrant shall terminate at 5:00 p.m. (New York City
Time) on the business day immediately preceding the date fixed for redemption. A
trading day shall mean a day in which trading of securities occurred on the New
York Stock Exchange.
(B) The Company may exercise its right to redeem the Warrants
only by giving the notice set forth in the following sentence by the end of the
thirtieth (30th) trading day after the provisions of Section 11(A) have been
satisfied. In case the Company shall exercise its right to redeem, it shall give
notice to the Warrant Agent and the registered holders of the outstanding
Warrants, by mailing to such registered holders a notice of redemption, first
class, postage prepaid, at their addresses as they shall appear on the records
of the Warrant Agent. Any notice mailed in the manner provided herein shall be
conclusively presumed to have been duly given whether or not the registered
holder actually receives such notice.
(C) The notice of redemption shall specify the redemption
price, the date fixed for redemption (which shall be between the thirtieth
(30th) and forty-fifth (45th) day after such notice is mailed), the place where
the Warrant certificates shall be delivered and the redemption price shall be
paid, and that the right to exercise the Warrant shall terminate at 5:00 p.m.
(New York City Time) on the business day immediately preceding the date fixed
for redemption.
(D) Appropriate adjustment shall be made to the redemption
price and to the minimum Daily Market Price prerequisite to redemption set forth
in Section II(A) hereof, in each case on the same basis as provided in Section 9
hereof with respect to adjustment of the Warrant Price.
(E) For purposes of this Agreement, the term "Daily Market
Price" shall mean (i) if the Common Stock is traded in the over-the-counter
market and not in the NASDAQ National Market System nor on any national
securities exchange, the closing bid price of the Common Stock on the trading
day in question, as reported by NASDAQ or an equivalent generally accepted
reporting service, or (ii) if the Common Stock is traded in the NASDAQ National
Market System or on a national securities exchange, the daily per share closing
price of the Common Stock in the NASDAQ National Market System or on the
principal stock exchange on which it is listed on the trading day in question,
as the case may be. For purposes of clause (i) above, if trading in the Common
Stock is not reported by NASDAQ, the bid price referred to in said clause shall
be the lowest bid price as reported in the
-9-
<PAGE>
"pink sheets" published by National Quotation Bureau, Incorporated. The closing
price referred to in clause (ii) above shall be the last reported sale price or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices, in either case in the NASDAQ National
Market System or on the national securities exchange on which the Common Stock
is then listed.
SECTION 12. RIGHTS AS WARRANTHOLDERS. Nothing contained in this
Agreement or in any of the Warrants shall be construed as conferring upon the
holders thereof, as such, any of the rights of shareholders of the Company,
including without limitation, the right to receive dividends or other
distributions, to exercise any preemptive rights, to vote or to consent or to
receive notice as shareholders in respect of the meetings of shareholders or the
election of directors or the Company or any other matter. Anything herein to the
contrary notwithstanding, the Company shall cause copies of all financial
statements and reports, proxy statements and other documents as it shall send to
its shareholders to be sent by the same class mail as sent to its shareholders,
postage prepaid, on the date of the mailing to such shareholders, to each
registered holder of Warrants at his address appearing on the Warrant Register
as of the record date for the determination of the shareholders entitled to such
documents.
SECTION 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANTS. The
Warrant Agent shall account promptly to the Company with respect to Warrants
exercised, and shall promptly pay to the Company all monies received by it upon
the exercise of such Warrants, and shall keep copies of this Agreement available
for inspection by holders of Warrants during normal business hours
SECTION 14. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT.
Any corporation into which the Warrant Agent may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Warrant Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto provided that such
corporation would be eligible for appointment as a successor Warrant Agent under
the provisions of Section 16 of this Agreement. In case at the time such
successor to the Warrant Agent shall succeed to the agency created by this
Agreement and any of the Warrant certificates shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrant
certificates so countersigned, and in case at that time any of the Warrant
certificates shall not have been countersigned, any successor to the Warrant
Agent may countersign such Warrant certificates either in the name of the
predecessor Warrant Agent or in the name of the successor Warrant Agent, and in
all such cases the Warrants represented by such Warrant certificates shall have
the full force provided in the Warrant certificates and in this Agreement. Any
such successor Warrant Agent shall promptly give notice of its succession as
Warrant Agent to the Company and to the registered holder of each Warrant
certificate.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant certificates shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrant certificates so countersigned, and, in case at that
time any of the Warrant certificates shall not have been countersigned, the
Warrant Agent may countersign such Warrant certificates either in its prior name
or in its changed name, and, in all such cases, the Warrants represented by such
Warrant certificates shall have the full force provided in the Warrant
certificates and in this Agreement.
SECTION 15. DUTIES OF WARRANT AGENT. The Warrant Agent hereby
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, all of which shall bind the Company and the
holders of Warrants by their acceptance thereof.
(A) The statements of fact and recitals contained herein and
in the Warrants shall be taken as statements of the Company and the Warrant
Agent assumes no responsibility for the correctness of any of the same except
such as describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of the
Warrants except as herein expressly provided.
(B) The Warrant Agent shall not be responsible for any failure
of the Company to comply with any of the covenants contained in this Agreement
or in the Warrants to be complied with by the Company.
-10-
<PAGE>
(C) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
(D) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other paper, document or instrument believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties.
(E) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement, except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(F) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action on
behalf of the Company or any registered holder, but this provision shall not
affect the power of the Warrant Agent to take such action as the Warrant Agent
may consider proper. All rights of action under this Agreement or under any of
the Warrants may be enforced by the Warrant Agent without the possession of any
of the Warrants or the production thereof at any trial or other proceeding
relative thereto, and any such action, suit or proceeding instituted by the
Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of
judgment shall be for the ratable benefit of all the registered holders of the
Warrants, as their respective rights or interests may appear.
(G) The Warrant Agent and any shareholder, director, officer,
or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant
Agent from acting in any other capacity for the Company or for any other legal
entity.
(H) The Warrant Agent shall act hereunder solely as agent and
not in a ministerial capacity, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything which it
may do or refrain from doing in connection with this Agreement, except for its
own negligence, willful misconduct or bad faith.
(I) Any request, direction, election, order or demand of the
Company shall be sufficient if evidenced by an instrument signed in the name of
the Company by its President, a Vice President or chief financial officer
(unless other evidence in respect thereof is therein specifically prescribed);
and any resolution of the Board of Directors may be evidenced to the Warrant
Agent by a copy thereof certified by the Secretary or an Assistant Secretary of
the Company.
SECTION 16. CHANGE OF WARRANT AGENT. The Warrant Agent may resign and
be discharged from its duties under this Agreement by giving the Company at
least 30 days' prior notice in writing, and by mailing notice in writing to the
registered holders at their addresses appearing on the Warrant Register, of such
resignation, specifying a date when such resignation shall take effect. The
Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and by like mailing of notice to the registered holders of the Warrants.
If the Warrant Agent shall resign or be removed or shall otherwise become
incapable of acting, the Company shall appoint a successor to the Warrant Agent.
If the Company shall fail to make such appointment within 30 days after such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the registered
holder of a Warrant (who shall, with such notice, submit his Warrant certificate
for inspection by the Company), then the registered holder of any Warrant may
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. Any successor Warrant Agent, whether
-11-
<PAGE>
appointed by the Company or by such a court, shall be registered and otherwise
authorized to serve as a transfer agent pursuant to the Securities Exchange Act
of 1934, as amended. If at any time the Warrant Agent shall cease to be eligible
in accordance with the provisions of this Section 16, it shall resign
immediately in the manner and with the effect specified in this Section 16.
After acceptance in writing of the appointment, the successor Warrant Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Warrant Agent without further act or deed; but
the former Warrant Agent shall deliver and transfer to the successor Warrant
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Upon
request of any successor Warrant Agent, the Company shall make, execute,
acknowledge and deliver any and all instruments in writing for more fully and
effectually vesting in and confirming to such successor Warrant Agent all such
powers, rights, duties and responsibilities. Failure to file or mail any notice
provided in this Section 16, however, or any defect therein, shall not affect
the legality or validity of the resignation or removal of the Warrant Agent or
the appointment of the successor Warrant Agent, as the case may be.
SECTION 17. IDENTITY OF TRANSFER AGENT. Forthwith upon the appointment
of any transfer agent for the Common Stock or of any subsequent transfer agent
for shares of the Common Stock or other shares of the Company's capital stock
issuable upon the exercise of the rights of purchase represented by the
Warrants, the Company will file with the Warrant Agent a statement setting forth
the name and address of such transfer agent.
SECTION 18. NOTICES. All notices, requests and other communications
pursuant to this Agreement shall be in writing and shall be sufficiently given
or made when delivered or three business days after deposit in the U.S. mail, by
first class mail, postage prepaid, addressed as follows:
(a) if to the Company, to (until another address is filed in
writing by the Company with the Warrant Agent):
Checkers Drive-In Restaurants, Inc.
14255 49th Street North, Building 1
Clearwater, Florida 33762
Attention: President
(b) if to the Warrant Agent, to (until another address is
filed in writing by the Warrant Agent with the Company):
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attention: Checkers Drive-In Restaurants, Inc.
Warrant Agent
(c) if to the registered holder of a Warrant, to the address
of such holder as shown in the Warrant Register.
SECTION 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrants in order to cure any ambiguity or to correct
or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants, or which shall not adversely
affect the interests of the holders of Warrants (including reducing the Warrant
Price or extending the redemption or expiration date).
SECTION 20. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent or the
registered holders of the Warrants shall bind and inure to the benefit of their
respective successors and assigns hereunder.
SECTION 21. GOVERNING LAW. This Agreement shall be deemed to be a
contract made under the laws of the State of Delaware and for all purposes shall
be construed in accordance with the laws of said State.
-12-
<PAGE>
SECTION 22. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrants any legal or equitable
right, remedy or claim under this Agreement. This Agreement shall be for the
sole and exclusive benefit of the Company, the Warrant Agent and the registered
holders of the Warrants.
SECTION 23. COUNTERPARTS. This Agreement may be executed in
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
SECTION 24. DESCRIPTIVE HEADINGS. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
CHECKERS DRIVE-IN RESTAURANTS, INC.
By: /s/ ANDREW D. SIMONS
----------------------------------
Its: Vice President and General Counsel
----------------------------------
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/ HERBERT J. LEMMER
----------------------------------
Its: Vice President
----------------------------------
-14-
<PAGE>
W A R R A N T S
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 26, 2001
CHECKERS DRIVE-IN RESTAURANTS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 162809 13 1
This certifies that, for value received,the registered holder hereof or assigns
(the "Holder"),
is entitled to purchase from Checkers Drive-In Restaurants, Inc., a Delaware
corporation (the "Company"), at any time before 5:00 p.m., New York City Time,
on September 26, 2001, at the purchase price per share of $4.52 (the "Warrant
Price"), the number of shares of Common Stock of the Company set forth above
(the "Shares"). The number of Shares purchasable upon exercise of each Warrant
evidenced hereby and the Warrant Price per Share shall be subject to adjustment
from time to time as set forth in the Warrant Agreement referred to below. This
Warrant is subject to redemption by the Company, at $.01 per Warrant, upon not
less than 30 nor more than 45 days' notice, at any time after the Daily Market
Price (determined pursuant to the Warrant Agreement) per Share of Common Stock
has equaled or exceeded $36.18 for a period of at least 20 out of 30 consecutive
trading days during the 30 trading days prior to the date of the notice of
redemption, and prior to expiration of the Warrants. The Warrant redemption
price and the Daily Market Price referred to above shall be subject to
adjustment from time to time as set forth in the Warrant Agreement.
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant certificate with the Purchase Form attached hereto
duly executed (with a signature guarantee as provided thereon) and simultaneous
payment of the Warrant Price (subject to adjustment) at the principal office in
American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York,
New York 10005 (the "Warrant Agent"). Payment of such price shall be made at the
option of the Holder in cash or by certified check or bank draft payable to the
Warrant Agent, all as provided in the Warrant Agreement.
The Warrants evidenced hereby are issued under and in accordance with a Warrant
Agreement dated as of August 9, 1999, between the Company and the Warrant Agent
and are subject to the terms and provisions contained in such Warrant Agreement,
to all of which the Holder of this Warrant certificate by acceptance hereof
consents. A copy of the Warrant Agreement may be obtained for inspection by the
Holder hereof upon written request to the Warrant Agent.
Upon any partial exercise of the Warrants evidenced hereby, there shall be
countersigned and issued to the Holder a new Warrant certificate in respect of
the Shares as to which the Warrants evidenced hereby have not been exercised.
This Warrant certificate may be exchanged at the office of the Warrant Agent by
surrender of this Warrant certificate properly endorsed (with a signature
guarantee) either separately or in combination with one or more other Warrants
or one or more new Warrants to purchase the same aggregate number of Shares as
were evidenced by the Warrant or Warrants exchanged. No fractional Shares will
be issued upon the exercise of rights to purchase hereunder, but the Company
shall pay the cash value of any fraction upon the exercise of one or more
Warrants. The Warrants evidenced hereby are transferable at the office of the
Warrant Agent in the manner and subject to the limitations set forth in the
Warrant Agreement.
The Holder hereof may be treated by the Company, the Warrant Agent and all other
persons dealing with this Warrant certificate as the absolute owner hereof for
all purposes and as the person entitled to exercise the rights represented
hereby, any notice to the contrary notwithstanding, and until such transfer is
entered on such books, the Company may treat the Holder hereof as the owner for
all purposes.
This Warrant certificate does not entitle the Holder hereof to any
of the rights of a stockholder of the Company.
-15-
<PAGE>
This Warrant certificate shall not be valid or obligatory for any purpose until
it has been countersigned by the Warrant Agent.
Dated: , 2000
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
Warrant Agent
By:
Authorized Signatory
CHECKERS DRIVE-IN RESTAURANTS, INC.
ATTEST:
By:
SECRETARY/TREASURER
PRESIDENT
CHECKERS DRIVE-IN RESTAURANTS, INC.
PURCHASE FORM
Mailing Address:
CHECKERS DRIVE-IN RESTAURANTS, INC.
14255 49TH Street North, Building 1
Clearwater, Florida 33762
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for and to purchase thereunder, Shares of
Common Stock provided for therein, and requests that certificates for such
Shares be issued in the name of:
(Please Print or Type Name, Address and Social Security number)
and if said number of Shares shall not be all the Shares purchasable hereunder
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his Assignee as below indicated and delivered to the address stated
below.
Dated:
Name of Holder or Assignee:
(Please Print)
-16-
<PAGE>
Address:
Signature:
Note: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature(s) Guaranteed:
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
-17-
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is effective as of December 14,
1999 (the "Effective Date"), by CHECKERS DRIVE-IN RESTAURANTS, INC., a Florida
corporation ("Checkers"), and Daniel Dorsch, an individual (the "Executive").
Checkers is sometimes referred to herein singularly as the "Company". In
consideration of the mutual covenants and agreements set forth herein, the
parties hereto agree as follows:
l. Employment and Duties. Subject to the terms and conditions of this
Agreement, the Company employs the Executive to serve in an executive and
managerial capacity as the Chief Executive Officer, and the Executive accepts
such employment and agrees to perform such reasonable responsibilities and
duties commensurate with the aforesaid position, as directed by the Board of
Directors of the Company or as set forth in the Articles of Incorporation and/or
the Bylaws of the Company, for all locations in which the Company has offices or
stores. In addition, the Board of Directors of the Company, or any appropriate
committee of such Board, shall recommend to the shareholders of the Company that
the Executive be elected to serve as a director on the Board of the Company for
each year during the Term (as defined below). The Executive agrees to devote his
full time efforts to his employment duties at Checkers
2. Term. The term of employment under this Agreement shall be for a
period of two (2) years (the "Term") commencing on the Effective Date, subject
to termination pursuant to Section 4, below. This Agreement shall automatically
be renewed each year for an additional one (1) year term unless the Company
notifies the Executive that it is terminating this Agreement prior to December
14th of the preceeding year.
3. COMPENSATION.
3.1 ANNUAL SALARY. During the Term of this Agreement, the
Company shall pay Executive an aggregate minimum base annual salary, before
deducting all applicable withholdings, of Two Hundred Thousand Dollars
($200,000) per year (the "Base Salary"), payable at the times and in the manner
dictated by the Company's standard payroll policies.
3.2. OTHER COMPENSATION AND BENEFITS. During the Term, as
additional compensation, the Executive shall be entitled to participate in and
receive the following:
(a) INCENTIVE BONUS. The Executive shall be entitled to
participate in the Company's Incentive Bonus Plan, pursuant to which the
Executive shall be entitled to earn up to a maximum of thirty five percent (35%)
of his Base Salary (the "Incentive Bonus"). The Incentive Bonus will be based on
the Executive's achievement of certain performance criteria determined in good
faith by the Company's Boards of Directors. The Incentive Bonus if any, shall be
pro-rated for any partial employment period. Any Incentive Bonus due for a given
year of the term shall be paid no later than April 15th of the following year.
(b) BENEFITS. Executive shall be entitled to choose to
participate in and receive all benefits under the Checker's employee benefit
plans or programs (including, without limitation, medical, dental, disability,
and group life), any retirement savings plans or programs (including, without
<PAGE>
limitation, employee stock purchase plans), and such other perquisites of office
as Checkers may, from time to time and in their sole discretion, make available
generally to employees of similar rank as Executive, subject to such eligibility
provisions as may be in effect from time to time.
(c) STOCK OPTIONS. Checkers hereby grants to the
Executive, options to purchase 100,000 shares of Checkers Common Stock, in
accordance with and pursuant to the terms of the Checkers Stock Option Plan (the
"Plan"). The exercise price for such options shall be the closing price on the
Effective Date of Checkers Common Stock publicly traded on NASDAQ, as stated in
the Wall Street Journal. The above described options shall all be vested in
their entirety upon the Effective date of this agreement.
3.3. VACATION. Executive will be entitled to paid vacation
time in accordance with the Company's personnel policies and procedures made
available to the Company's executive employees of similar rank, as the same may
change from time to time, or as otherwise determined by the Board of Directors
of the Company. In addition, Executive shall be entitled to such holidays
consistent with the Company's standard policies or as the Company's Board of
Directors may approve.
3.4 EXPENSE REIMBURSEMENT. In addition to the compensation
and benefits provided herein, the Company shall, upon receipt and approval of
appropriate documentation, reimburse Executive each month for his reasonable
travel, lodging, entertainment, promotion and other ordinary and necessary
business expenses. The arrangement set forth in this Section 3.4 is intended to
constitute an accountable plan within the meaning of Section 162 of the Internal
Revenue Code, as amended (the "Code") and the accompanying regulations, and the
Executive agrees to comply with all reasonable guidelines established by the
Company from time to time to meet the requirements of Section 162 of the Code
and the accompanying regulations.
4. TERMINATION.
4.1 FOR CAUSE. Notwithstanding any other provisions to the
contrary contained herein, the Company may terminate this Agreement immediately
for cause upon written notice to the Executive, in which event the Company shall
be obligated to pay the Executive that portion of the Base Salary and the
Incentive Bonus, if any, due him through the date of termination. For purposes
of this Agreement, "cause" shall mean: (a) material default or other material
breach by Executive of Executive's obligations hereunder; (b) the willful and
habitual failure by Executive to perform the duties that Executive is required
to perform under this Agreement or the Company's corporate policies, provided
such corporate policies have previously been delivered to Executive; or (c)
misconduct, dishonesty, insubordination, or other act by Executive that in any
way has a direct, substantial and adverse effect on either Company's reputation
or it's respective relationships with it's customers or employees, including,
without limitation, (i) use of alcohol or illegal drugs such as
2
<PAGE>
to interfere with the Executive's obligations hereunder, (ii) conviction of a
felony or of any crime involving moral turpitude or theft, and (iii) material
failure by Executive to comply with applicable laws or governmental regulations
pertaining to Executive's employment hereunder.
4.2 WITHOUT CAUSE. Notwithstanding any other provisions to the
contrary contained herein, the Company, on the one hand, and the Executive, on
the other hand, may terminate this Agreement immediately without cause by giving
written notice to the other. If the Company terminates this Agreement under this
Section 4.2, it shall continue to pay the Executive for a period of six months
from the date of termination if the Executive was terminated within the first
year from the Effective Date of the Agreement or through the balance of the
unexpired Term if the Executive was terminated one year or more after the
effective date of this Agreement. The amount payable to the Executive hereunder
shall be paid to the Executive in lump sum or as otherwise directed by the
Executive. If the Executive terminates this Agreement under this Section 4.2,
the Executive agrees that he will also terminate his position as a director of
the company and the Company shall only be obligated to pay to the Executive the
Base Salary due him through the date of termination.
4.3 DISABILITY. Notwithstanding any other provisions to the
contrary contained herein, if the Executive fails to perform his duties
hereunder on account of illness or other incapacity for a period of six (6)
consecutive months, the Company shall have the right upon written notice to the
Executive to terminate this Agreement, without further obligation, by paying
Executive (1) an amount equal to six months of his base salary or (2) the Base
Salary for the remainder of the Term of this Agreement, whichever is less, in a
lump sum or as otherwise directed by Executive.
4.4 DEATH. Notwithstanding any other provisions to the
contrary contained herein, if the Executive dies during the Term of this
Agreement, this Agreement shall terminate immediately, and the Executive's legal
representatives or designated beneficiary shall be entitled to receive the Base
Salary to the date of Executive's death in a lump sum or as otherwise directed
by Executive's legal representatives or designated beneficiary, whichever the
case may be.
4.5 TERMINATION BY THE COMPANY FOLLOWING CHANGE OF CONTROL. In
the event of a Change of Control (as defined below) of the Company, the Company
shall require any Successor (as defined below) to assume and agree to perform
this Agreement in the same manner and to the same extent that such Company would
be required to perform if the Change of Control had not occurred. Upon the
assumption of this Agreement by the Successor, and its agreement to perform the
duties and obligations of such Company hereunder, that Company shall be released
from any further liability under this Agreement. As used herein, a "Change of
Control" of the Company shall mean the acquisition by a "Successor," whether
directly or indirectly, by purchase, merger, consolidation or otherwise, of all
or substantially all of the common stock, business and/or assets of such
Company; provided, however, that a Change of Control shall not be deemed to have
occurred as a result of an increased ownership interest of the Company by Carl
Karcher Enterprises, Inc. or
3
<PAGE>
Fidelity National Financial, Inc., or any of their respective affiliates, or a
transfer of any such ownership interests by any such entity to any of its
affiliates.
4.6 EFFECT OF TERMINATION. Termination for any cause shall not
constitute a waiver of the Company's rights under this Agreement as specified in
Section 6 nor a release of Executive from any obligation hereunder except his
obligation to perform his day-to-day duties as an Executive.
5. NON-DELEGATION OF EXECUTIVE'S RIGHTS. The obligations, rights and
benefits of Executive hereunder are personal and may not be assigned or
transferred in any manner whatsoever, nor are such obligations, rights or
benefits subject to involuntary alienation, assignment or transfer.
6. COVENANTS OF EXECUTIVE.
6.1 CONFIDENTIALITY. Executive acknowledges that in his
capacity as an Executive of the Company he will occupy a position of trust and
confidence, and he further acknowledges that he will have access to and learn
substantial information about the Company and its respective operations that is
confidential or not generally known in the industry including, without
limitation, information that relates to purchasing, sales, customers, marketing,
such Company's financial position and financing arrangements. Executive agrees
that all such information is proprietary or confidential or constitutes trade
secrets and is the sole property of the Company. Accordingly, during the
Executive's employment by the Company and for a period of two (2) years
thereafter, Executive will keep confidential, and will not without the Company's
permission reproduce, copy or disclose to any other person or firm, any such
information or any documents or information relating to the Company's methods,
processes, customers, accounts, analyses, systems, charts, programs, procedures,
correspondence, or records, or any other documents used or owned by the Company,
nor will Executive advise, discuss with or in any way assist any other person or
firm in obtaining or learning about any of the items described in this section,
either alone or with others, outside the scope of his duties and
responsibilities with the Company unless otherwise required by law or court
ordered subpoena.
6.2 COMPETITIVE ACTIVITIES DURING EMPLOYMENT. Executive agrees
that during his employment by the Company, he will devote substantially all his
business time and effort to and give undivided loyalty to the Company. Executive
will not, during his employment by the Company, engage in any way whatsoever,
directly or indirectly, in any business that is competitive with the Company,
nor solicit, or in any other manner work for or assist any business which is
competitive with the Company. During his employment by the Company, Executive
will undertake no planning for or organization of any business activity
competitive with the work he performs as an executive of the Company, and
Executive will not, during his employment by the Company, combine or conspire
with any other employee of the Company or any other person for the purpose of
organizing any such competitive business activity.
4
<PAGE>
6.3 REMEDY FOR BREACH. Executive acknowledges that the Company
will be irrevocably damaged if all of the provisions of this Section 6 are not
specifically enforced. Accordingly, the Executive agrees that, in addition to
any other relief to which the Company may be entitled, the Company will be
entitled to seek and obtain injunctive relief from a court of competent
jurisdiction for the purpose of restraining the Executive from any actual or
threatened breach of this Section 6. The Executive's obligations under this
Section 6 shall survive the Executive's termination of employment with the
Company for the periods of time specified in this Section 6.
7. RETURN OF DOCUMENTS. Upon termination of this Agreement, Executive
shall return immediately to the Company all records and documents of or
pertaining to the Company and shall not make or retain any copy or extract of
any such record or document.
8. IMPROVEMENTS AND INVENTIONS. Any and all improvements or inventions
which Executive may conceive, make or participate in during the period of his
employment shall be the sole and exclusive property of the Company. Executive
will, whenever requested by the Company during the period of his employment,
execute and deliver any and all documents which the Company shall deem
appropriate in order to apply for and obtain patents for improvements or
inventions or in order to assign and convey to the Company the sole and
exclusive right, title and interest in and to such improvements, inventions,
patents or applications.
9. MISCELLANEOUS.
9.1 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes
the entire agreement between the parties with respect to Executive's employment
with the Company and supersedes any and all prior or contemporaneous agreements
or understandings, whether oral or written, relating to the such employment.
This Agreement may be amended, modified, supplemented, or changed only by a
written document signed by all parties to this Agreement.
9.2 DISPUTES AND GRIEVANCES. The Executive agrees that the
exclusive forum for any dispute or grievance arising from or relating to this
Agreement or the Executive's employment at the company, shall be governed by the
Company's "Fast Track Resolution Program", a copy of which will be made
available to the Executive
9.3 NOTICES. Any notice, request, or instruction to be given
hereunder shall be in writing and shall be deemed given when personally
delivered or three (3) days after being sent by United States certified mail,
postage prepaid, with return receipt requested, to the parties at their
respective addresses set forth below:
5
<PAGE>
To Checkers:
Checkers Drive-In Restaurants, Inc.
14255 49th Street North, Building 1
Clearwater, Florida 33762
Attn: William P. Foley, II
To Executive:
Daniel J. Dorsch
15310 Amberly Drive
Suite 320
Tampa, FL 33467
9.6 WAIVER. The failure of a party to insist upon strict
adherence to any term of this Agreement on any occasion shall not be considered
a waiver thereof or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Agreement.
9.7 ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties and their permitted assigns. Neither this
Agreement nor any of the rights of the parties hereunder may be transferred or
assigned by either party, except that if there is a Change of Control of the
Company and the Successor assumes, either expressly or by operation of law, such
Company's obligations under this Agreement, then the Company shall assign its
rights and obligations hereunder to such Successor subject to the terms of
Section 4.5 of this Agreement. Any assignment or transfer in violation of this
Section 9.7 shall be void.
9.8 CAPTIONS AND HEADINGS. The captions and headings are for
convenience of reference only and shall not be used to construe the terms or
meaning of any provisions of this Agreement.
6
<PAGE>
IN WITNESS WHEREOF the parties have executed this Employment Agreement as of the
date set forth above.
CHECKERS:
CHECKERS DRIVE-IN RESTAURANTS,
INC., a Florida corporation
By: /s/ WILLIAM D. FOLEY, II
-------------------------
Its: Chairman of the Board
---------------------
EXECUTIVE:
/s/ DANIEL J. DORSCH
--------------------
Daniel J. Dorsch
7
EXHIBIT 10.18
CHECKERS DRIVE-IN RESTAURANTS, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE OF PLAN. The purpose of this Employee Stock Purchase Plan
(the "Plan") is to encourage a sense of proprietorship on the part of employees
of Checkers Drive-In Restaurants, Inc., a Delaware corporation (the "Company"),
and its subsidiary corporations (as defined below) by assisting them in making
regular purchases of shares of the Company, and thus to benefit the Company by
increasing such employees' interest in the growth of the Company and subsidiary
corporations and in such entities' financial success. Participation in the Plan
is entirely voluntary, and the Company makes no recommendations to its employees
as to whether they should participate.
2. DEFINITIONS.
2.1 "Base Earnings" shall mean the Employee's regular salary rate
before deductions required by law and deductions authorized by the Employee.
Base Earnings do not include: pay for overtime, extended workweek schedules, or
any other form of extra compensation; payments by the Company or subsidiary
corporations, as applicable, of social security, worker's compensation,
unemployment compensation, any disability payments or other payments required by
statute; or contributions by the Company or subsidiary corporations, as
applicable, for insurance, annuity, or other employee benefit plans.
2.2 "Board" shall mean the Board of Directors of the Company.
2.3 "Broker" shall mean the financial institution designated to act as
Broker under the Plan pursuant to Paragraph 17 hereof.
2.4 "Brokerage Account" shall mean an account established on behalf of
each Participant pursuant to Paragraph 9.1 hereof.
2.5 "Committee" shall mean a Stock Purchase Committee appointed by the
Board.
2.6 "Common Stock" shall mean the Common Stock of the Company.
2.7 "Company" shall mean Checkers Drive-In Restaurants, Inc., a
Delaware corporation, or any successor.
2.8 "Company Account" shall mean the account established in the name of
the Company pursuant to Paragraph 7.2 hereof.
2.9 "Employee" shall mean any person who has reached the age of 21 and
is currently employed by the Company or one of its subsidiary corporations:
(a) on an hourly basis as a restaurant employee for at least 30 hours
per week and has been so employed continuously during the preceding one
(1) year (provided that the
<PAGE>
Board or the Committee may in its discretion waive such one (1) year
requirement), excluding non-employees and persons on leave of absence;
(b) on an hourly basis as a non-restaurant employee for at least 30
hours per week and has been so employed continuously during the
preceding 90 days (provided that the Board or the Committee may in its
discretion waive such 90-day requirement), excluding non-employees and
persons on leave of absence; or
(c) is exempt from the overtime and minimum wage requirements under
federal and state laws and has been so employed continuously during the
preceding 90 days (provided that the Board or the Committee may in its
discretion waive such 90-day requirement), excluding non-employees and
persons on leave of absence. An Employee may also be referred to herein
as a Participant.
2.10 "Enrollment Form" shall mean the Employee Stock Purchase Plan
Enrollment Form.
2.11 "Incentive Compensation" shall mean compensation received by any
Employee of the Company, or its subsidiaries, as a bonus or performance-based
award, which is in addition to such Employee's regular salary.
2.12 "Interested Party" shall mean the persons described in Paragraph
16 hereof.
2.13 "Plan" shall mean this Employee Stock Purchase Plan.
2.14 "Subsidiary" shall mean a corporation, domestic or foreign, of
which not less than 50% of the voting shares are held by the Company or a
subsidiary corporation, whether or not such corporation now exists or is
hereafter organized or acquired by the Company or a subsidiary corporation.
3. ADMINISTRATION. The Plan shall be administered by the Board or, in
the discretion of the Board, by the Committee which shall consist of not less
than two persons to be appointed by, and to serve at the pleasure of, the Board.
The Board or the Committee shall have full authority to construe, interpret,
apply and administer the Plan and to establish and amend such rules and
procedures as it deems necessary or appropriate from time to time for the proper
administration of the Plan. In addition, the Board or the Committee may engage
or hire such persons, including without limitation, the Broker, to provide
administrative, recordkeeping and other similar services in connection with its
administration of the Plan, as it may deem necessary or appropriate from time to
time. The members of the Board and the Committee and the officers of the Company
shall be entitled to rely upon all certificates and reports made by such
persons, including the Broker, and upon all opinions given by any legal counsel
or investment adviser selected or approved by the Board or the Committee.
The members of the Board and the Committee and the officers of the
Company shall be fully protected in respect of any action taken or suffered to
be taken by them in good faith in reliance upon any such certificates, reports,
opinions or other advice of any such person,
<PAGE>
and all action so taken or suffered shall be conclusive upon each of them and
upon all Participants. The Company shall indemnify each member of the Board and
the Committee and any other officer or employee of the Company who is designated
to carry out any responsibilities under the Plan for any liability arising out
of or connected with his or her duties hereunder, except such liability as may
arise from such person's gross negligence or willful misconduct.
4. ELIGIBILITY. Any Employee as defined in Paragraph 2.9 shall be
eligible to participate in the Plan. Any Employee participating in the Plan who,
after the commencement of a particular Offering Period, as defined in Paragraph
5, shall for any reason fail to meet the standards of eligibility shall be
considered to have withdrawn from the Plan, effective as of the date upon which
the Participant shall have become ineligible. Any reference in this Plan to
withdrawal by a Participant from the Plan shall include ineligibility as
described in this Paragraph.
No member of the Board or Committee who is not an Employee shall be
eligible to participate in the Plan.
5. OFFERING PERIODS. Shares shall be offered pursuant to this Plan in
periods which coincide with the Company's fiscal quarters ("Offering Periods"),
commencing on the effective date of the Plan pursuant to Paragraph 21 and
continuing thereafter until terminated in accordance with Paragraph 15. The
Board shall have the power to change the duration of Offering Periods if such
change is announced at least 10 days prior to the scheduled beginning of the
first Offering Period to be affected.
6. PARTICIPATION. Participation in the Plan is voluntary. An eligible
Employee may apply to participate in the Plan by submitting to the Company's
Benefits Department an Enrollment Form authorizing a payroll deduction and
purchase of shares. The Enrollment Form shall be on a form provided by the
Company and may be submitted to the Company at any time. Participation shall not
be effective until the Enrollment Form is reviewed and accepted by the Company
by written notice to the Employee. Once the Enrollment Form has been reviewed
and accepted by the Company, participation in the Plan shall commence
immediately.
7. PAYROLL DEDUCTIONS.
7.1 ELECTION. At the time a Participant submits an Enrollment Form, the
Participant shall elect to have payroll deductions made on each payday during
the Offering Period at a whole percentage from 3% to 15% of the Base Earnings
which the Participant is to receive on such payday. In addition to the deduction
from Base Earnings, or in lieu of the deduction from Base Earnings, a
Participant may elect, upon submission of an Enrollment Form, to have payroll
deductions made at a whole percentage from 3% to 15% of the Incentive
Compensation which the Participant is to receive.
7.2 HOLDING OF FUNDS. All payroll deductions authorized by each
Participant shall be held in a non-interest account in the name of the Checkers
Drive-In Restaurants, Inc. Employee Stock Purchase Plan (the "Company Account")
until used to purchase Common Stock and shall not be used for any other purpose.
The Company shall maintain records reflecting the amount in
<PAGE>
the Company Account of each Participant. All withholding taxes in connection
with a Participant's payroll deduction shall be deducted from the remainder of
the Base Earnings and/or Incentive Compensation paid to the Participant and not
from the amount to be placed in the Company Account. A Participant may not make
any additional payments into the Company Account. All amounts in the Company
Account derived from payroll deductions shall be referred to as the "Participant
Contribution."
7.3 CHANGES IN ELECTION. Participation in the Plan will continue until
the Participant withdraws from the Plan, is no longer eligible to participate or
the Plan is terminated. Such participation shall be on the basis of the payroll
deduction election submitted by such Employee to the Company and then currently
in effect. Each such election shall remain in effect until the effective date of
any change in the amount of payroll deduction as requested by the Participant
and accepted by the Company. To be effective in any Offering Period, a change in
the amount of payroll deduction must be requested in writing and submitted to
the Company. A Participant may change his withholding percentage at any time
during an Offering Period, but only one time during any Offering Period. If a
Participant's Base Earnings change during an Offering Period, the amount of the
payroll deduction will be changed to the figure reflecting the Participant's
previously elected deduction percentage applied to his or her new Base Earnings
(but will not in any event be in excess of 15% of the Participant's Base
Earnings).
8. CONTRIBUTION BY THE COMPANY OR A SUBSIDIARY. The Company or a
Subsidiary shall make matching contributions (the "Matching Contribution") as
follows:
8.1 OFFICERS AND DIRECTORS AS PARTICIPANTS. For each officer or
director of the Company or a Subsidiary who participates in the Plan and remains
an Employee of the Company or a Subsidiary for at least one year after the
termination of a particular Offering Period, the Company or Subsidiary shall
make upon the one year anniversary date after such Offering Period a Matching
Contribution equal to either one-half of the number of shares purchased on
behalf of such Participant or equal to one-half of the dollar amount contributed
by such Participant during such one year earlier Offering Period subject to
Paragraph 8.3, at the sole discretion of the Company, less all withholding taxes
in connection with such Matching Contribution. "Officer" shall mean those
individuals elected as Officers by the Board of Directors of the Company and its
Subsidiaries, and shall be determined as of the end of an Offering Period.
"Director" shall mean an employee and a member of the Board of Directors of the
Company and its subsidiaries. "Director" shall also mean employees of the
Company and its subsidiaries who hold the title Director. Withholding taxes as
and when required in connection with such Matching Contribution shall be
withheld based upon the person's existing withholding percentages or as
otherwise required by law from the Participant's base earnings.
8.2 OTHER PARTICIPANTS. For each Participant in the Plan (other than an
officer or director) who remains an Employee of the Company or a Subsidiary for
at least one year after the termination of a particular Offering Period, the
Company or Subsidiary shall make upon the one year anniversary date after such
Offering Period a Matching Contribution equal to either one-third of the number
of shares purchased on behalf of such Participant or equal to one-third of the
dollar amount contributed by such Participant during such one year earlier
Offering Period subject to Paragraph 8.3, at the sole discretion of the Company.
Withholding taxes as and when
<PAGE>
required in connection with such Matching Contribution shall be withheld based
upon the person's existing withholding percentages or as otherwise required by
law from the Participant's base earnings.
8.3 TIMING OF WITHHOLDING. The Company shall withhold taxes in two
subsequent pay periods or as otherwise required by law.
9. PURCHASE OF SHARES REGARDING PARTICIPANT'S CONTRIBUTION.
9.1 BROKERAGE ACCOUNT. Following the acceptance by the Company of a
Participant's Enrollment Form, the Company shall direct the Broker to open and
maintain an account (the "Brokerage Account") in the name of such Participant
and to purchase shares of Common Stock on behalf of such Participant as
permitted under this Plan.
9.2 DELIVERY OF FUNDS TO BROKER FROM COMPANY. The Company, from time to
time during an Offering Period, shall deliver to the Broker an amount equal to
the total of all Participant Contributions together with a list of the amount of
such Contributions from each Participant.
9.3 BROKER'S PURCHASE OF SHARES. From time to time, the Broker, as
agent for the Participants, shall purchase as many full shares or fractional
shares of Common Stock as such Contributions will permit. The shares to be
purchased shall be purchased at the then current fair market value and shall be
shares purchased on the open market. The amount of Common Stock purchased by the
Broker pursuant to this Paragraph 9.3 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. At the end of each Offering Period under the Plan, each Participant
shall acquire full ownership of all full shares and fractional shares of Common
Stock purchased for his Brokerage Account. Unless otherwise requested by the
Participant, all such 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 in accordance with Paragraph 9.5.
9.4 FEES AND COMMISSIONS. The Company shall pay the Broker's
administrative charges for opening and maintaining the Brokerage Accounts for
active Participants and the brokerage commissions on purchases made for such
Brokerage Accounts which are attributable to Participant Contributions and
Matching Contributions under the Plan. Such Brokerage Accounts may be utilized
for other transactions as described in Paragraph 9.5 below, but any fees,
commissions or other charges by the Broker in connection with such other
transactions shall, in certain circumstances described in Paragraph 9.5, be
payable directly to the Broker by the Participant.
9.5 PARTICIPANT ACCOUNTS WITH BROKER. Each Participant's Brokerage
Account shall be credited with all cash dividends paid with respect to full
shares and fractional shares of Common Stock purchased pursuant to Paragraphs
9.3 and 10 unless such shares are registered in the Participant's name. Unless
otherwise instructed by the Participant, dividends on such Common Stock shall
automatically be reinvested in Common Stock as soon as practicable
<PAGE>
following receipt of such dividends by the Broker. Applicable fees and brokerage
commissions on the reinvestment of such dividends will be payable by the
Participant. Any stock dividends or stock splits which are made with respect to
shares of Common Stock purchased pursuant to Paragraphs 9.3 and 10 shall be
credited to the Participant's Brokerage Account without charge. Any Participant
may request that a certificate for any or all of the full shares of Common Stock
credited to his or her Brokerage Account be delivered to him at any time;
provided, however, the Participant shall be charged by the Broker for any fees
applicable to such requests. A Participant may request the Broker at any time to
sell any or all of the full shares or fractional shares of Common Stock credited
to his Brokerage Account. Unless otherwise instructed by the Participant, upon
such sale the Broker will mail to the Participant a check for the proceeds, less
any applicable fees and brokerage commissions and any transfer taxes,
registration fees or other normal charges which shall be payable by the
Participant. Except as provided in Paragraph 13, a request by the Participant to
the Broker to sell shares of Common Stock or for delivery of certificates shall
not affect an Employee's status as a Participant. A Participant who has a
Brokerage Account with the Broker may purchase additional shares of Common Stock
of the Company for his Brokerage Account at any time by separate purchases
arranged through the Broker. When any such purchases are made, the Participant
will be charged by the Broker for any and all fees and brokerage commissions
applicable to such transactions. In addition, any subsequent transactions with
respect to such shares acquired including, but not limited to, purchases, sales,
reinvestment of dividends, requests for certificates, and crediting of stock
dividends or stock splits, shall be at the expense of the Participant and the
Broker shall charge the Participant directly for any and all fees and brokerage
commissions applicable to such transactions.
10. ISSUANCE OF SHARES REGARDING MATCHING CONTRIBUTION. Subject to
Paragraph 19, on the 10th day after the first anniversary of an Offering Period,
each Participant's direct employer shall make the Matching Contribution for each
qualified Participant in an amount described in Paragraph 8 by delivering to the
Broker an amount equal to the total funds necessary to make the Matching
Contributions described in Paragraph 8 together with a list of the number of
shares allocable to the Brokerage Account of each Participant. As soon as
practicable thereafter, the Broker shall purchase the number of shares of Common
Stock required in order to make the Matching Contributions. The shares to be
purchased shall be purchased at the then current fair market value and allocated
to participant accounts on the settlement date. The shares may, at the election
of the Company, be either treasury shares, shares authorized but unissued, or
shares purchased on the open market. At the time of such allocation, each
Participant shall immediately acquire full ownership of all full and fractional
shares of Common Stock purchased. Unless otherwise requested by the Participant,
all such shares so purchased shall be registered in the name of the Broker and
will remain so registered until delivery is requested in accordance with
Paragraph 9.5.
11. VOTING AND SHARES. All voting rights with respect to the full and
fractional shares of Common Stock held in the Brokerage Account of each
Participant may be exercised by each Participant and the Broker shall exercise
such voting rights in accordance with the Participant's signed proxy instruction
duly delivered to the Broker.
<PAGE>
12. STATEMENT OF ACCOUNT. As soon as practicable after the end of each
Offering Period, the Broker shall deliver to each Participant a statement
regarding all activity in his or her Brokerage Account, including his or her
participation in the Plan for such Offering Period. Such statement will show the
number of shares acquired or sold, the price per share, the transaction date,
stock splits, dividends paid, dividends reinvested and the total number of
shares held in the Brokerage Account. The Broker shall also deliver to each
Participant as promptly as practicable, by mail or otherwise, all notices of
meetings, proxy statements and other material distributed by the Company to its
stockholders, including the Company's annual report to its stockholders
containing audited financial statements.
13. WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the Plan,
effective as of the end of any Offering Period, by giving written notice to the
Company not later than the 15th day prior to the end of such Offering Period.
Upon any such withdrawal, the Participant shall be entitled to receive as
promptly as possible from the Company all of the Participant's payroll
deductions credited to the Company Account in his or her name during the
applicable Offering period, but shall not be entitled to the benefit of any
Matching Contributions. In the event a Participant withdraws from the Plan
pursuant to this Paragraph 13, the Company shall notify the Broker as soon as
practicable and the broker shall maintain or close the Participant's Brokerage
Account in accordance with the procedures set forth in Paragraph 16. A
Participant who withdraws from the Plan may not reenter the Plan except by
execution and delivery of a new Enrollment Form and payroll deduction election,
and his or her participation shall be effective upon acceptance of the
Enrollment Form by the Company by written notice to the Employee not sooner than
30 days after receipt of the Enrollment Form, provided that the Company may in
its discretion accept an Enrollment Form prior to the expiration of such 30
days.
14. TERMINATION OF EMPLOYMENT. In the event of the termination of a
Participant's employment with the Company or a Subsidiary for any reason during
an Offering Period, including, but not limited to, the death of a Participant,
participation in the Plan shall terminate as well as any rights to future
Matching Contributions. The Participant or the personal representative of the
Participant shall be entitled to receive an amount of cash determined in the
same manner and payable at the same time as if the Participant had withdrawn
from the Plan by giving notice of withdrawal effective as of the date such
termination occurs. Notwithstanding the foregoing, termination of employment by
one employer for the purpose of being re-employed immediately by the Company or
one of its Subsidiaries shall not be considered termination under this Paragraph
14. Any reference in this Plan to withdrawal by a Participant from the Plan
shall include termination as described in this Paragraph 14. In the event of the
termination of a Participant's employment pursuant to this Paragraph 14, the
Company shall notify the broker as soon as practicable and the Broker shall
maintain or close the Participant's Brokerage Account in accordance with the
procedures set forth in Paragraph 16.
15. AMENDMENT, SUSPENSION AND TERMINATION OF PLAN.
15.1 AUTHORITY TO TERMINATE. This Plan may be terminated by the Board
at any time. Such termination shall be communicated in writing to all
Participants as soon as practicable after the date of such Board action. If the
Plan is terminated, each Participant shall be entitled to
<PAGE>
receive as promptly as possible from the Company all payroll deductions
attributable to him or her which have not been used for purchase of Common Stock
pursuant to Paragraph 9, ("Account Balance"), but he or she shall not be
entitled to the benefit of any future Matching Contributions with respect to
such deductions or interest or otherwise for any past Offering Periods.
15.2 MAXIMUM TERM. In any event, this Plan shall terminate 20 years
from the date the Plan is adopted or the date the Plan is approved by the
stockholders, whichever is earlier. In the event that the Company terminates the
Plan pursuant to this Paragraph 15, the Broker shall maintain or close the
Participant's Brokerage Accounts in accordance with the procedures set forth in
Paragraph 16.
15.3 AMENDMENT. Notwithstanding any other provision to the contrary,
any provision of this Plan may be amended by the Board if such change does not
materially alter the rights and interests of stockholders of the Company.
15.4 MAXIMUM SHARES. An aggregate of 500,000 shares of Common Stock
shall be subject to the Plan, provided that such number shall be automatically
adjusted to reflect any stock split, reverse stock split, stock dividend,
recapitalization, merger, consolidation, combination, reclassification or
similar corporate change. If there are any changes in the capitalization of the
Company, such as through mergers, consolidations, reorganizations,
recapitalizations, stock splits or stock dividends, appropriate adjustments will
be made by the Company in the number of shares of its Common stock subject to
purchase under the Plan.
16. DISPOSITION OF BROKERAGE ACCOUNT FOLLOWING WITHDRAWAL, DEATH,
TERMINATION OF EMPLOYMENT OR TERMINATION OF PLAN. As soon as practicable
following the notification of the withdrawal of a Participant from the Plan, the
notification of the termination of a Participant's employment with the Company
or a Subsidiary (which includes the death of the Participant) or of the
notification that the Plan is terminated pursuant to Paragraph 15 hereof, the
Broker shall notify the former Participant, or in the event of his death, his
designated beneficiary, if any, or if no designated beneficiary the estate of
the deceased Participant (collectively, an "Interested Party"), regarding the
disposition of the former Participant's or deceased Participant's Brokerage
Account. As soon as practicable following receipt of the notification set forth
in the preceding sentence, the Interested Party may request the Broker to
dispose of the former Participant's or deceased Participant's Brokerage Account,
at the Interested Party's expense, by any one of the following means:
(a) The Interested Party may request the Broker to maintain the former
Participant's or deceased Participant's Brokerage Account for the
benefit of the Interested Party or any other person. The Interested
Person shall be charged by the Broker for all maintenance fees and any
and all other fees in connection with the Brokerage Account.
(b) The Interested Party may request the Broker to sell all of the
full shares and fractional shares of Common Stock, if any, held in the
former Participant's or deceased Participant's Brokerage Account. Upon
such sale, the Broker will mail to the Interested Party a check for the
proceeds, less any applicable fees and brokerage commissions and
<PAGE>
any transfer taxes, registration fees or other charges which shall be
payable by the Interested Party.
(c) The Interested Party may request the Broker to provide a
certificate for all of the full shares of Common Stock, if any,
together with a check in an amount equal to the proceeds of the sale
any fractional shares of Common Stock held in the former Participant's
or deceased Participant's Brokerage Account, less any applicable fees
and brokerage commissions and any transfer taxes, registration fees or
other charges which are payable by the Participant.
17. BROKER. The Broker shall be Piper Jaffray, Inc. which has agreed to
act as Broker for such period as is determined by the Company. Either the
Company or the Broker may terminate such designation at any time upon 30 days'
written notice. In the event of such termination of the Broker, the Company may
administer the Plan without the use of a Broker or may appoint a successor
Broker. Any successor Broker shall be vested with all the powers, rights, duties
and immunities of the Broker hereunder to the same extent as if originally named
as the Broker hereunder. The relationship between the Broker and the Participant
will be the normal relationship of a broker and its client, and the Company
assumes no responsibility in this respect.
18. CONDITIONS TO ISSUANCE OF SHARES. Shares shall not be issued under
the Plan unless issuance and delivery of such shares pursuant to the Plan shall
comply with all applicable provisions of law, domestic or foreign, including,
without limitation, the Securities Act of 1933, as amended; the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, the securities laws of the state in which any Employee resides, NASD
requirements and the requirements of any stock exchange upon which the Common
Stock may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance. By execution of the
Enrollment Form, the Participant covenants and agrees that all shares are being
purchased only for investment and without any present intention to sell or
distribute such shares.
19. NOTICES.
19.1 TO COMPANY OR SUBSIDIARIES. Any notice hereunder to the Company or
to its Subsidiaries shall be in writing and such notice shall be deemed made
only when delivered or three days after being mailed by certified mail, return
receipt requested, to the Company's principal office at 14255 49th Street North,
Building 1, Clearwater, Florida 33762 or to such other address as the Company
may designate by notice to the Participants.
19.2 TO PARTICIPANT. Any notice to a Participant hereunder shall be in
writing and any such communication and any delivery to a Participant shall be
deemed made if mailed or delivered to the Participant at such address as the
Participant may have on file with the Company and with the Broker.
<PAGE>
20. MISCELLANEOUS.
20.1 NO LIMITATION ON TERMINATION OF EMPLOYMENT. Nothing in the Plan
shall in any manner be construed to limit in any way the right of the Company or
any of its Subsidiaries to terminate an Employee's employment at any time,
without regard to the effect of such termination on any right such Employee
would otherwise have under the Plan, or give any right to an Employee to remain
employed by the Company in any particular position or at any particular rate of
remuneration.
20.2 LIABILITY. The Company, its Subsidiaries, any member of the Board
or Committee and any other person participating in any determination of any
question under the Plan, or in the interpretation, administration or application
of the Plan, shall have no liability to any party for any action taken or not
taken in good faith under the Plan, or based on or arising out of a
determination of any question under the Plan or an interpretation,
administration or application of the Plan made in good faith.
20.3 CAPTIONS. The captions of the paragraphs of this Plan are for
convenience only and shall not control or affect the meaning or construction of
any of its provisions.
20.4 ASSIGNMENT. Any rights of Employees hereunder shall be
nonforfeitable, and no Account Balance or contribution made by any employer may
revert or inure to the benefit of the Company or any Subsidiary, provided that
no Participant shall be entitled to sell, assign, pledge or hypothecate any
right or interest in his or her Account Balance.
20.5 GOVERNING LAW. Delaware law governs this Plan.
20.6 SEVERABILITY. In case any provision of this Plan shall be held
illegal or invalid for any reason, said illegality or invalidity shall not
affect the remaining parts hereof, but this Plan shall be construed and enforced
as if such illegal and invalid provision had never been inserted herein.
20.7 SUCCESSORS. The provisions of this Plan shall bind and inure to
the benefit of the Company and its successors and assigns. The term "successors"
as used herein shall include any corporate or other business entity which shall
by merger, consolidation, purchase or otherwise acquire all or substantially all
of the business and assets of the Company, and successors of any such
corporation or other business entity.
<PAGE>
21. EFFECTIVE DATE OF PLAN. The Plan shall become effective upon the
first day of the next fiscal quarter after which the Board approves the Plan.
__________________________
[_____________________]
Chief Executive Officer
ATTEST:______________________
_________________ , Secretary
EXHIBIT 23.1
The Board of Directors and Stockholders
Checkers Drive-In Restaurants, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
33-47063, 33-63992, and 33-80236) on Form S-8 of Checkers Drive-In Restaurants,
Inc. of our report dated March 21, 2000, relating to the consolidated balance
sheets of Checkers Drive-In Restaurants, Inc. and subsidiaries as of January 3,
2000, and December 28, 1998 and the related consolidated statement of operations
and comprehensive income, shareholders' equity, and cash flows for each of the
years in the two-year period ended January 3, 2000, which appears in the January
3, 2000, annual report on Form 10-K of Checkers Drive-In Restaurants, Inc.
/s/ KPMG LLP
- ------------
KPMG LLP
Tampa, Florida
April 3, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statements (Registration Statement Nos. 33-47063, 33-63992,
and 33-80236).
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Louisville, Kentucky
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Company, for the fiscal years ended January 3, 2000 and
December 28, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-03-2000 DEC-28-1998
<PERIOD-START> DEC-29-1999 DEC-29-1997
<PERIOD-END> JAN-03-2000 DEC-28-1998
<CASH> 9,729 6,481
<SECURITIES> 0 0
<RECEIVABLES> 5,462 3,718
<ALLOWANCES> 2,678 968
<INVENTORY> 1,736 1,017
<CURRENT-ASSETS> 56,198 11,736
<PP&E> 49,432 61,914 <F1>
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 165,653 123,306
<CURRENT-LIABILITIES> 86,010 15,865
<BONDS> 0 0
0 0
0 0
<COMMON> 9 5
<OTHER-SE> 46,654 34,514
<TOTAL-LIABILITY-AND-EQUITY> 165,653 123,306
<SALES> 192,340 139,602
<TOTAL-REVENUES> 201,835 144,952
<CGS> 175,352 124,282
<TOTAL-COSTS> 199,364 140,189
<OTHER-EXPENSES> 779 480
<LOSS-PROVISION> 385 1,635
<INTEREST-EXPENSE> 8,648 7,145
<INCOME-PRETAX> (26,401) (7,283)
<INCOME-TAX> 336 252
<INCOME-CONTINUING> (26,737) (7,535)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 849 0
<CHANGES> 0 0
<NET-INCOME> (25,888) (7,535)
<EPS-BASIC> (3.89) (1.67)
<EPS-DILUTED> (3.89) (1.67)
<FN>
<F1>
PP&E is net accumulated depreciation and amortization of $40,423 and
$51,961, respectively.
</FN>
</TABLE>
