-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L3DQfx8ClrY6OrQLa5Wq66uD/Nvi+6aaBFfFcdpWPhc4V15XgBUwRGmnreX8un+4 fwFad7PcqhQuZg5yl7b4Zw== 0001016843-00-000306.txt : 20000404 0001016843-00-000306.hdr.sgml : 20000404 ACCESSION NUMBER: 0001016843-00-000306 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000103 FILED AS OF DATE: 20000403 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHECKERS DRIVE IN RESTAURANTS INC /DE CENTRAL INDEX KEY: 0000879554 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 581654960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19649 FILM NUMBER: 592740 BUSINESS ADDRESS: STREET 1: 14255 49TH STREET NORTH BLDG I CITY: CLEARWATER STATE: FL ZIP: 89109 BUSINESS PHONE: 7275192000 MAIL ADDRESS: STREET 1: 14255 49TH STREET NORTH BLDG I CITY: CLEARWATER STATE: FL ZIP: 89109 10-K405 1 ............................................................................... 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] CHECKERS DRIVE-IN RESTAURANTS, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
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
2 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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.
(In thousands, except per share amounts and statistical data) JANUARY 3, DECEMBER 28, DECEMBER 28, DECEMBER 29, DECEMBER 31, 2000 1998 1997 1996 1995 ---------- ------------ ------------ ------------ ------------ 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 ========== ========== ========== ========== =========
(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 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 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:
FISCAL YEAR ENDED --------------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 28, 2000 (4) 1998 1997 ---------- ----------- ----------- 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 ======= ======= ======
(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 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 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 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 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 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (1) INDEX TO FINANCIAL STATEMENTS:
PAGE ---- 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
25 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 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 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JANUARY 3, DECEMBER 28, 2000 1998 --------- ------------ 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 ========= =========
See accompanying notes to the consolidated financial statements 28 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------ FISCAL YEAR ENDED JANUARY 3, DECEMBER 28, DECEMBER 28, 2000 1998 1997 --------- ----------- ----------- 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 ========= ========= =========
See accompanying notes to the consolidated financial statements 29 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PREFERRED TREASURY PAID-IN ACCUMULATED TOTAL STOCK STOCK STOCK CAPITAL DEFICIT EQUITY --------- --------- --------- ---------- ----------- --------- 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 ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements 30 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FISCAL YEARS ENDED ------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 28, 2000 1998 1997 --------- ----------- ----------- 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 ======== ======== ========
See accompanying notes to the consolidated financial statements 31 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
ADDITIONS BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR ---------- ---------- ---------- ---------- ----------- 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 ======= ======= ======= ======= =======
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 i) INTANGIBLE ASSETS - Intangible assets consists of the following and are being amortized using the straight-line method over the following periods:
JANUARY 3, DECEMBER 28, 1998 -------------------------------- -------------------------------- GROSS ACCUM GROSS ACCUM ESTIMATED AMOUNT AMORT NET AMOUNT AMORT NET LIVES ------- ------- ------- ------- ------- ------- ----------- 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 ======= ======= ======= ======= ======= ========
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 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 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 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.
53 WEEKS 52 WEEKS (In thousands, except per share amounts) ENDED ENDED JANUARY 3, 2000 DECEMBER 28, 1998 -------------- ----------------- 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 ========= =========
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 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 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.
BALANCE ADDITIONS AT CHARGED BALANCE BEGINNING TO CASH OTHER AT END DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES OF YEAR - ------------------------------------------------ --------- -------- -------- -------- -------- 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 ======== ======== ======== ======== ========
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 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 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 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 NOTE 9: LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES Long-term debt and obligations under capital leases consists of the following:
JANUARY 3, DECEMBER 28, 2000 1998 --------- ----------- 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 ======== ========
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 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):
January 3, December, 28, 2000 1998 ----- ---- 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 ======= =======
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 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:
January 3, December 28, December 28, 2000 1998 1997 ---------- ------------ ------------ 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 ====== ====== ======
45 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 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.
(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 ------ -------- ------ --------- ------ --------- 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
The following table summarizes information about stock options outstanding at January 3, 2000:
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 - --------------- ------------ ----------- ----------- ----------- --------- $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 ========= ======= =========== ========= =========
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 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 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 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:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL --------- --------- --------- --------- --------- 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) ========= ========= ========= ========= =========
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 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 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 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 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 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 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 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 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 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 EX-3.3 2 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 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 EX-3.4 3 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 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 EX-3.5 4 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 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 EX-4.3 5 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 ---------- 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- 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- 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- 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- 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- 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- 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- 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- "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- (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- 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- 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- 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- 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- 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- 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- EX-10.17 6 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 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 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 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 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 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 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 EX-10.18 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 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, 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 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 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 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. 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 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 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. 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. 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 EX-23.1 8 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 EX-23.2 9 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 EX-27 10
5 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. 1,000 12-MOS 12-MOS JAN-03-2000 DEC-28-1998 DEC-29-1999 DEC-29-1997 JAN-03-2000 DEC-28-1998 9,729 6,481 0 0 5,462 3,718 2,678 968 1,736 1,017 56,198 11,736 49,432 61,914 0 0 165,653 123,306 86,010 15,865 0 0 0 0 0 0 9 5 46,654 34,514 165,653 123,306 192,340 139,602 201,835 144,952 175,352 124,282 199,364 140,189 779 480 385 1,635 8,648 7,145 (26,401) (7,283) 336 252 (26,737) (7,535) 0 0 849 0 0 0 (25,888) (7,535) (3.89) (1.67) (3.89) (1.67) PP&E is net accumulated depreciation and amortization of $40,423 and $51,961, respectively.
-----END PRIVACY-ENHANCED MESSAGE-----