-----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, DXPFK0chYqHe08f2zo3/ON3E5BtTAMW6i5For5eYG2xEtoKTacZQbH30CfZg7xcm MZm3CS5ZPTknQGklgtAXwg== 0001042910-98-000223.txt : 19980331 0001042910-98-000223.hdr.sgml : 19980331 ACCESSION NUMBER: 0001042910-98-000223 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971229 FILED AS OF DATE: 19980330 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 000-19649 FILM NUMBER: 98579335 BUSINESS ADDRESS: STREET 1: 600 CLEVELAND ST 8TH FL STREET 2: STE 1050 CITY: CLEARWATER STATE: FL ZIP: 34615 BUSINESS PHONE: 8134413500 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 29, 1997 Commission file number 0-19649 Checkers Drive-In Restaurants, Inc. (Exact name of Registrant as specified in its charter) Delaware 58-1654960 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 600 Cleveland Street, Eighth Floor Clearwater, Florida 33755 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (813) 441-3500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock ------------ (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 16, 1998, was $54,260,752 based upon the reported closing sale price of such shares on the Nasdaq Stock Market's National Market for that date. As of March 16, 1998, there were 73,406,112 common shares outstanding. Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. This document, including exhibits, contains 83 pages. The exhibit index is located on page 58. CHECKERS DRIVE-IN RESTAURANTS, INC. 1997 Form 10-K Annual Report ----------------------------
TABLE OF CONTENTS PART I - ------ ITEM 1. BUSINESS.................................................................................................. 3 ITEM 2. PROPERTIES................................................................................................ 12 ITEM 3. LEGAL PROCEEDINGS......................................................................................... 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................................... 14 PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................................................................................... 14 ITEM 6. SELECTED FINANCIAL DATA................................................................................... 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................................................... 16 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 DISCLOSURE...................................................................................... 52 PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................................................ 52 ITEM 11. EXECUTIVE COMPENSATION.................................................................................... 52 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................ 52 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.......................................... 53
2 PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K under "Item 1. Business," "Item 3. Legal Proceedings," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K constitute "forward-looking statements" within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Checkers Drive-In Restaurants, Inc. ("Checkers" and collectively with its subsidiaries and various joint venture partnerships controlled by Checkers, the "Company") to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the impact of competitive products and pricing; success of operating initiatives; development and operating costs; advertising and promotional efforts; adverse publicity; acceptance of new product offerings; consumer trial and frequency; availability, locations, and terms of sites for restaurant development; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; the results of financing efforts; business abilities and judgment of personnel; availability of qualified personnel; food, labor and employee benefit costs; changes in, or the failure to comply with, government regulations; weather conditions; construction schedules; and other factors referenced in this Form 10-K. ITEM 1. BUSINESS. Introduction Unless the context requires otherwise, references in this Report to the "Company" or the "Registrant" means Checkers Drive-In Restaurants, Inc., its wholly-owned subsidiaries and the 10.55% to 65.83% owned joint venture partnerships controlled by the Company. The Company develops, produces, owns, operates and franchises quick-service "double drive-thru" restaurants under the name "Checkers(R)" (the "Restaurants"). The Restaurants are designed to provide fast and efficient automobile-oriented service incorporating a 1950's diner and art deco theme with a highly visible, distinctive and uniform look that is intended to appeal to customers of all ages. The Restaurants feature a limited menu of high quality hamburgers, cheeseburgers and bacon cheeseburgers, specially seasoned french fries, hot dogs, and chicken sandwiches, as well as related items such as soft drinks and old fashioned premium milk shakes. As of December 29, 1997, there were 479 Restaurants operating in the States of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, West Virginia, Wisconsin, Washington D.C., in Puerto Rico and West Bank, Israel (230 Company-operated (including 12 joint ventured) and 249 franchised). As of January 1, 1994, the Company changed from a calendar reporting year ending on December 31st to a fiscal year which will generally end on the Monday closest to December 31st. Each quarter consists of three 4-week periods, with the exception of the fourth quarter which consists of four 4-week periods. Recent Developments Effective November 30, 1997, the Company entered into a management services agreement with Rally's Hamburgers, Inc. ("Rally's") pursuant to which the Company is providing key services to Rally's, including executive management, financial planning and accounting, franchise administration, purchasing and human resources. In addition, the Company and Rally's share certain of their executive officers, including the Chief Executive Officer and the Chief Operating Officer. Management believes that entering into the management services agreement and sharing certain executive officers will enable the Company and Rally's to take advantage of cost saving opportunities by facilitating the combination of administrative and operational functions. See "Item 7. Managements's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5 to the Consolidated Financial Statements set forth under "Item 8. Consolidated Financial Statements and Supplementary Data". 3 On December 18, 1997, Rally's acquired approximately 19.1 million shares of the Company's Common Stock pursuant to that certain Exchange Agreement, dated as of December 8, 1997 (the "Exchange Agreement"), between Rally's, CKE Restaurants, Inc., Fidelity National Financial, Inc., GIANT GROUP, LTD., and other parties named in the Exchange Agreement. Rally's owns, operates and franchises approximately 477 double drive-thru restaurants primarily in the Midwest and the Sunbelt. Restaurant Development and Acquisition Activities During 1997, the Company opened one Restaurant, acquired or leased five Restaurants from franchisees, leased one Restaurant to a franchisee and closed seven Restaurants for a net reduction of two Company-operated Restaurants in 1997. Franchisees opened 24 Restaurants, leased one Restaurant from the Company, sold or transferred five Restaurants to the Company and closed 16 Restaurants for a net increase of three franchisee-operated Restaurants in 1997. During 1997, the Company focused its efforts on existing operating markets of highest market penetration ("Core Markets"). It is the Company's intent in the future to continue that focus and to grow only in its Core Markets through acquisitions, new Restaurant openings or through other growth opportunities. The Company will continue to seek to expand through existing and new franchisees. From time to time, the Company may close or sell additional Restaurants when determined by management and the Board of Directors to be in the best interests of the Company. Franchisees operated 249, or 52%, of the total Restaurants open at December 29, 1997. The Company's long-term strategy is for 60% to 65% of its Restaurants to be operated by franchisees. Because of the Company's limited capital resources, it will rely on franchisees for a larger portion of chain expansion to continue market penetration. The inability for franchisees to obtain sufficient financing capital on a timely basis may have a materially adverse effect on expansion efforts. Restaurant Operations Concept. The Company's operating concept includes: (i) offering a limited menu to permit the maximum attention to quality and speed of preparation; (ii) utilizing a distinctive Restaurant design that features a "double drive-thru" concept, projects a uniform image and creates significant curb appeal; (iii) providing fast service using a "double drive-thru" design for its Restaurants and a computerized point-of-sale system that expedites the ordering and preparation process; and (iv) great tasting quality food and drinks at a fair price. Restaurant Locations. As of December 29, 1997, there were 230 Restaurants owned and operated by the Company in 11 states and the District of Columbia (including 14 Restaurants owned by partnerships in which the Company has interests ranging from 10.55% to 65.83%) and 249 Restaurants operated by the Company's franchisees in 24 States, the District of Columbia , Puerto Rico and West Bank, Israel. The following table sets forth the locations of such Restaurants. Company-operated (230 Restaurants) Florida(135) Missouri(5) Kansas(2) Georgia(37) Mississippi(5) Delaware (1) Pennsylvania(13) Tennessee(5) New Jersey (4) Alabama(12) Illinois (11) Franchised (249 Restaurants) Florida(55) Texas(4) New York(6) Illinois(24) New Jersey(10) Puerto Rico(6) Georgia(48) Tennessee(5) West Virginia(2) Alabama(20) Virginia(4) Missouri(2) North Carolina(14) Wisconsin (4) Iowa(2) South Carolina(9) Indiana(3) Mississippi(1) Maryland(15) Michigan(3) Washington D.C.(2) Louisana(9) West Bank, Israel(1) Of these Restaurants, 25 were opened in 1997 (one Company-operated and 24 franchised), two of which 4 included fully equipped manufactured modular buildings, "Modular Restaurant Packages" ("MRP's"), produced by the Company and 14 of which included MRP's which were relocated from closed sites. The Company currently expects approximately 30 additional Restaurants to be opened in 1998 primarily by franchisees with substantially all of these Restaurants to include MRP's relocated from closed sites. If either the Company or the franchisee(s) are unable to obtain sufficient capital on a timely basis, the Company's ability to achieve its 1998 expansion plans may be materially adversely affected. The Company's growth strategy for the next two years is to focus on the controlled development of additional franchised and Company-operated Restaurants primarily in its existing Core Markets and to further penetrate markets currently under development by franchisees, including select international markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Site Selection. The Company believes that the location of a Restaurant is critical to its success. Management inspects and approves each potential Restaurant site prior to final selection of the site. In evaluating particular sites, the Company considers various factors including traffic count, speed of traffic, convenience of access, size and configuration, demographics and density of population, visibility and cost. The Company also reviews competition and the sales and traffic counts of national and regional chain Restaurants operating in the area. Approximately 84% of Company-operated Restaurants are located on leased land and the Company intends to continue to use leased sites where possible. The Company believes that the use of the Modular Restaurant Package provides the Company and its franchisees with additional flexibility in the size, control and location of sites. Restaurant Design and Service. The Restaurants are built to Company-approved specifications as to size, interior and exterior decor, equipment, fixtures, furnishings, signs, parking and site improvements. The Restaurants have a highly visible, distinctive and uniform look that is intended to appeal to customers of all ages. The Restaurants are less than one-fourth the size of the typical Restaurants of the four largest fast food hamburger chains (generally 760 to 980 sq. ft.) and require approximately one-third to one-half the land area (approximately 18,000 to 25,000 square feet). Substantially all of the Restaurants in operation consist of MRP's produced and installed by the Company. Prior to February 15, 1994, the MRP's were produced and installed by Champion Modular Restaurant Company, Inc., a Florida corporation ("Champion") and wholly-owned subsidiary of the Company. Champion was merged with and into the Company effective February 15, 1994. During periods when the Champion construction facility is operating at an efficient production level, the Company believes that utilization of a modular Restaurant building generally costs less than comparably built Restaurants using conventional, on-site construction methods. See discussion under "Restaurant Development Cost" below. The Company's standard Restaurant is designed around a 1950's diner and art deco theme with the use of white and black tile in a checkerboard motif, glass block corners, a protective drive-thru cover on each side of the Restaurant supported by red aluminum columns piped with white neon lights and a wide stainless steel band piped with red neon lights that wraps around the Restaurant as part of the exterior decor. Most Restaurants utilize a "double drive-thru" concept that permits simultaneous service of two automobiles from opposite sides of the Restaurant. Although a substantial proportion of the Company's sales are made through its drive-thru windows, service is also available through walk-up windows. While the Restaurants 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 Restaurants are generally open from 12 to 15 hours per day, seven days a week, for lunch, dinner and late-night snacks and meals. Restaurant Development Costs. During the fiscal years ended December 29, 1997 and December 30, 1996 the average cost of opening a Company-operated Restaurant (exclusive of land costs) utilizing MRP's was $375,000 which included modular building costs, fixtures, equipment and signage costs, site improvement costs and various soft costs (e.g., engineering and permit fees). This average dropped 11.6% from 1995 due to the availability and use of used MRP's in 1996 and 1997. Future costs, after all remaining used MRP's are relocated, may be more consistent with that of prior years. During 1996 and 1997, there were no land acquisitions. During periods when the Champion construction facility is operating at an efficient production level, the Company believes that utilization of MRP's generally costs less than comparably built Restaurants using conventional, on-site construction methods. The Company believes it is even more cost effective to utilize used MRP's when available. At such time as there are no longer used MRP's available, but demand for new MRP's is not sufficient to allow the Champion construction facility to operate at an efficient level, it may become more cost effective to seek other manufacturers of 5 MRP's or to build restaurants utilizing conventional, on site construction methods. Menu. The menu of a Restaurant includes hamburgers, cheeseburgers and bacon cheeseburgers, chicken, grilled chicken, hot dogs and deluxe chili dogs and specially seasoned french fries, as well as related items such as soft drinks, old fashioned premium milk shakes and apple nuggets. The menu is designed to present a limited number of selections to permit the greatest attention to quality, taste and speed of service. The Company is engaged in product development research and seeks to enhance the variety offered to consumers from time to time without substantially expanding the limited menu. In 1996, the Company and various franchise restaurants conducted a test of the Company's proprietary L.A. Mex mexican brand. The Company decided to discontinue the test in 1997. Supplies. The Company and its franchisees purchase their food, beverages and supplies from Company-approved suppliers. All products must meet standards and specifications set by the Company. Management constantly monitors the quality of the food, beverages and supplies provided to the Restaurants. The Company has been successful in negotiating price concessions from suppliers for bulk purchases of food and paper supplies by the Restaurants. The Company believes that its continued efforts over time have achieved cost savings, improved food quality and consistency and helped decrease volatility of food and supply costs for the Restaurants. All essential food and beverage products are available or, upon short notice, could be made available from alternate qualified suppliers. Among other factors, the Company's profitability is depended upon its ability to anticipate and react to changes in food costs. Various factors beyond the Company's control, such as climate changes and adverse weather conditions, may affect food costs. Management and Employees. Each Company-operated Restaurant employs an average of approximately 20 hourly employees, many of whom work part-time on various shifts. The management staff of a typical Restaurant operated by the Company consists of a general manager, one assistant manager and a shift manager. The Company has an incentive compensation program for store managers that provides the store managers with a quarterly bonus based upon the achievement of certain defined goals. A Restaurant general manager is generally required to have prior Restaurant management experience, preferably within the fast food industry, and reports directly to a market manager. The market manager typically has responsibility for eight to twelve Restaurants. Supervision and Training. The Company requires each franchisee and Restaurant manager to attend a comprehensive training program of both classroom and in-store training. The program was developed by the Company to enhance consistency of Restaurant operations and is considered by management as an important step in operating a successful Restaurant. During this program, the attendees are taught certain basic elements that the Company believes are vital to the Company's operations and are provided with a complete operations manual, together with training aids designed as references to guide and assist in the day-to-day operations. In addition, hands-on experience is incorporated into the program by requiring each attendee, prior to completion of the training course, to work in and eventually manage an existing Company-operated Restaurant. After a Restaurant is opened, the Company continues to monitor the operations of both franchised and Company-operated Restaurants to assist in the consistency and uniformity of operation. Advertising and Promotion. The Company communicates with its customers by employing a consistent and enticing approach to advertising and promoting its products. Using television and radio commercials where efficient and practical, as well as outdoor billboards and direct mail print advertising in less densely penetrated markets, the Company informs the public about their brand position and promotional product opportunities. When the customers arrive at the restaurant, they are exposed to readerboard messages, pole banners, menuboards, and value oriented extender cards, all of which work together to present a simple, unified and coherent selling message at the time they are making their purchase decisions. As of December 29, 1997, the Company and its franchisees were working together in four advertising co-ops covering 186 restaurants. The Company requires franchisees to spend a minimum of 4% of gross sales to promote their restaurants, which includes a combination of local store marketing and co-op advertising. In addition, each Company and franchise restaurant contributes to a National Production Fund that provides broadcast creative and point of purchase material production for each promotion. Ongoing consumer research is employed to track attitudes, brand awareness, and market share of not only Checkers' customers, but also of its major competitor's customers as well. In addition, customer focus groups and sensory panels are conducted in the Company's core markets to provide both qualitative and quantitative data. This research data is vital in creating a better understanding of the Company's short and long term marketing strategies. Brand Positioning: The Best Burger: The Company is in the process of establishing an overall brand positioning as serving the BEST hamburger in the fast food industry. This position will be supported by: A. A limited menu of the highest quality hamburgers/ cheeseburgers, chicken sandwiches, seasoned French 6 fries, soft drinks and milk shakes, all deliverable in a double drive through format. B. A new, creative positioning has been established. "Fresh. Because we just made it.", allows the Company to take advantage of the consumers' understanding that their food has been freshly prepared, not retrieved from under a heat lamp or microwave oven and given to them. C. Television, radio, outdoor and direct mail print advertising designed to differentiate the Company from other fast food hamburger chains and to target heavy hamburger users. The new brand positioning has been developed through extensive research with the core user of the Company's products, as well as other fast food hamburger users who might be convinced to become a loyal user. The long range benefit of such a positioning is believed to help the Company compete more favorably in an environment where quality and taste is much more difficult to deliver on a consistent basis by the major fast food competitors, given the operating systems of those competitors. Although good value and fast service are still important to consumers, the competitive environment has remained so price oriented in the past few years, that the Company's competitive advantage has been seriously eroded. Further, the over reliance on price has placed immense pressure on margins, as food, labor and other costs have continued to rise, while the Company's ability to raise prices in the aforementioned competitive climate has been restricted. With a focus on a brand positioning that provides consumers what they say they want from a fast food hamburger chain--quality hamburgers, served quickly at a reasonable price--the Company believes it can begin to break the cycle of low price only promotions, differentiate itself from its competitors and improve sales and guest count trends over time. Restaurant Reporting. Each Company-operated Restaurant has a computerized point-of-sale system coupled with a back office computer. With this system, management is able to monitor sales, labor and food costs, customer counts and other pertinent information. This information allows management to better control labor utilization, inventories and operating costs. Each system at Company-operated Restaurants is polled daily by a computer at the principal offices of the Company. Year 2000 Issues. Many computer systems using two-digit fields to store years must be converted to read four-digit fields before the turn of the century in order to recognize the difference between the years 1900 and 2000. All major software systems of the Company are either in compliance with the Year 2000 or upgraded software packages are scheduled to be installed to meet that requirement. As a result, the Company expects these upgrades to cost approximately $100,000 and believes the Year 2000 will not have a negative effect on any major business process. Joint Venture Restaurants. As of December 29, 1997, there were 12 Restaurants owned by 10 separate general and limited partnerships in which the Company owns general and limited partnership interests ranging from 10.55% to 65.83%, with other parties owning the remaining interests (the "Joint Venture Restaurants"). The Company is the managing partner of 11 of the 12 Joint Venture Restaurants. In all 12 Joint Venture Restaurants the Company receives a fee for management services of 1% to 2.5% of gross sales. In addition, all of the Joint Venture Restaurants pay the standard royalty fee of 4% of gross sales. The agreements for four of the Joint Venture Restaurants (excluding Illinois partnerships) in which the Company is the managing partner are terminable through a procedure whereby the initiating party sets a price for the interest in the joint venture and the other party must elect either to sell its interest in the joint venture or purchase the initiating party's interest at such price. Some, but not all of the partnership agreements also contain the right of the partnership to acquire a deceased individual partner's interest at the fair market value thereof based upon a defined formula set forth in the agreement. None of these partnerships have been granted area development agreements. Inflation. The Company does not believe inflation has had a material impact on earnings during the past three years. Substantial increases in costs could have a significant impact on the Company and the industry. If operating expenses increase, management believes it can recover increased costs by increasing prices to the extent deemed advisable considering competition. Seasonality. The seasonality of Restaurant sales due to consumer spending habits can be significantly affected by the timing of advertising, competitive market conditions and weather related events. While Restaurant sales for certain quarters can be stronger, or weaker, there is no predominant pattern. Franchise Operations 7 Strategy. In addition to the acquisition and development of additional Company-operated Restaurants, the Company encourages controlled development of franchised Restaurants in its existing markets as well as in certain additional states. The primary criteria considered by the Company in the selection, review and approval of prospective franchisees are the availability of adequate capital to open and operate the number of Restaurants franchised and prior experience in operating fast food Restaurants. Franchisees operated 249, or 52%, of the total Restaurants open at December 29, 1997. The Company has acquired and sold, and may in the future acquire or sell, Restaurants from and to franchisees when the Company believes it to be in its best interests to do so. In the future, the Company's success will continue to be dependent upon its franchisees and the manner in which they operate and develop their Restaurants to promote and develop the Checkers concept and its reputation for quality and speed of service. Although the Company has established criteria to evaluate prospective franchisees, there can be no assurance that franchisees will have the business abilities or access to financial resources necessary to open the number of Restaurants the franchisees currently anticipate to be opened in 1998 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. The Company has entered into a master Franchise Agreement for the Caribbean Basin and has granted a single franchise agreement for the West Bank in Palestine. Franchisee Support Services. The Company maintains a staff of well-trained and experienced Restaurant operations personnel whose primary responsibilities are to help train and assist franchisees in opening new Restaurants and to monitor the operations of existing Restaurants. These services are provided as part of the Company's franchise program. Upon the opening of a new franchised Restaurant by a new franchisee, the Company typically sends a Restaurant team to the Restaurant to assist the franchisee during the first four days that the Restaurant is open. This team works in the Restaurant to monitor compliance with the Company's standards as to quality of product and speed of service. In addition, the team provides on-site training of all Restaurant personnel. This training is in addition to the training provided to the franchisee and the franchisee's management team described under "Restaurant Operations - Supervision and Training" above. The Company also employs Franchise Business Consultants ("FBCs"), who have been fully trained by the Company to assist franchisees in implementing the operating procedures and policies of the Company once a Restaurant is open. As part of these services, the FBC rates the Restaurant's hospitality, food quality, speed of service, cleanliness and maintenance of facilities. The franchisees receive a written report of the FBC's findings and, if any deficiencies are noted, recommended procedures to correct such deficiencies. The Company also provides site development and construction support services to its franchisees. All sites and site plans are submitted to the Company for its review prior to construction. These plans include information detailing building location, internal traffic patterns and curb cuts, location of utilities, walkways, driveways, signs and parking lots and a complete landscape plan. The Company's construction personnel also visit the site at least once during construction to meet with the franchisee's site contractor and to review construction standards. Franchise Agreements. The Unit Franchise Agreement grants to the franchisee an exclusive license at a specified location to operate a Restaurant in accordance with the Checkers(R) system and to utilize the Company's trademarks, service marks and other rights of the Company relating to the sale of its menu items. The term of the current Unit Franchise Agreement is generally 20 years. Upon expiration of a Unit Franchise Agreement, the franchisee will be entitled to acquire a successor franchise for the Restaurants on the terms and conditions of the Company's then current form of Unit Franchise Agreement if the franchisee remains in compliance with the Unit Franchise Agreement throughout its term and if certain other conditions are met (including the payment of a $6,000 renewal fee equal to 50% 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 Unit Franchise Agreement. In that event, the franchisee ordinarily signs two agreements, an Area Development Agreement and a Unit Franchise Agreement. Each Area Development Agreement establishes the number of Restaurants the franchisee is to construct and open in the Franchised Area during the term of the Area Development Agreement (normally a maximum of five Restaurants) after considering many factors, including the residential, commercial and industrial characteristics of the area, geographic factors, population of the area and the previous 8 experience of the franchisee. The franchisee's development schedule for the Restaurants is set forth in the Area Development Agreement. Of the 249 franchised Restaurants at December 29, 1997, 232 were being operated by multiple unit operators and 17 were being operated by single unit operators. The Company may terminate the Area Development Agreement of any franchisee that fails to meet its development schedule. The Unit Franchise Agreement and Area Development Agreement require that the franchisee select proposed sites for Restaurants within the Franchised Area and submit information regarding such sites to the Company for its review, although final site selection is at the discretion of the franchisee. The Company does not arrange or make any provisions for financing the development of Restaurants by its franchisees. To the extent new or used MRP's are available for sale, and/or to the extent that the Company deems it feasible to begin constructing new MRP's again in the Champion construction facility, the Company will offer the franchisees an opportunity to buy a Modular Restaurant Package from the Company in those geographic areas where the Modular Restaurant Package can be installed in compliance with applicable laws. Each franchisee is required to purchase all fixtures, equipment, inventory, products, ingredients, materials and other supplies used in the operation of its Restaurants from approved suppliers, all in accordance with the Company's specifications. The Company provides a training program for management personnel of its franchisees at its corporate offices. Under the terms of the Unit Franchise Agreement, the Company has adopted standards of quality, service and food preparation for franchised Restaurants. Each franchisee is required to comply with all of the standards for Restaurant operations as published from time to time in the Company's operations manual. The Company may terminate a Unit Franchise Agreement for several reasons including the franchisee's bankruptcy or insolvency, default in the payment of indebtedness to the Company or suppliers, failure to maintain standards set forth in the Unit Franchise Agreement or operations manual, material continued violation of any safety, health or sanitation law, ordinance or governmental rule or regulation or cessation of business. In such event, the Company may also elect to terminate the franchisee's Area Development Agreement. Franchise Fees and Royalties. Under the current Unit Franchise Agreement, a franchisee is generally required to pay application fees, site approval fees and an initial Franchise Fee together totaling $30,000 for each Restaurant opened by the franchisee. If a franchisee is awarded the right to develop an area pursuant to an Area Development Agreement, the franchisee typically pays the Company a $5,000 Development Fee per store which will be applied to the Franchisee Fee as each Restaurant is developed. Each franchisee is also generally required to pay the Company a semi-monthly royalty of 4% of the Restaurant's gross sales (as defined) and to expend certain amounts for advertising and promotion Manufacturing Operations Strategy. Although the Company does not believe that the use of MRP's is critical to the success of any individual restaurant or the Company in general, the Company believes that the integration of its Restaurant operations with its production of Modular Restaurant Packages for use by the Company and sale to its franchisees provides it with a competitive advantage over other fast food companies that use conventional, on-site construction methods. These advantages include more efficient construction time, direct control of the quality, consistency and uniformity of the Restaurant image as well as having standard Restaurant operating systems. In addition, the Company believes the ability to relocate a Modular Restaurant Package provides greater economies and flexibility than alternative methods. The cost and construction time effeciencies may be significantly impacted by the Company's decision whether or not to resume construction of MRP's at its Champion construction facility. Due to the number of Modular Restaurant Packages currently available for relocation from closed Restaurant sites, it is not anticipated that any significant new construction of Modular Restaurant Packages will occur during fiscal year 1998. In the short term, the Company's construction facility located in Largo, Florida will be utilized to store and refurbish used Modular Restaurant Packages for sale to franchisees or others and use by the Company. The Company is evaluating other options in relation to the future use of this facility, which could include generating other outside business, leasing the facility or an eventual sale of the facility. Operation of the construction facility consists of five personnel, and substantially all of the labor in the manufacturing and refurbishment process is done through independent contractors, the number of which may be increased or decreased with demand. Construction. The Champion construction facility is designed to produce a complete Modular Restaurant Package ready for delivery and installation at a Restaurant site. When the Champion construction is fully operational the Modular Restaurant Packages are built and refurbished using assembly line techniques and a fully integrated and complete production system. Each Modular Restaurant Package consists of a modular building complete with all mechanical, electrical and plumbing systems (except roof top systems which are installed at the site), along with all Restaurant equipment. The modular building is a complete operating Restaurant when sited, attached to its foundation and all utilities are connected. All 9 Modular Restaurant Packages are constructed in accordance with plans and specifications approved by the appropriate governmental agencies and are typically available in approximately eight (8) weeks after an executed agreement. Capacity. As of December 29, 1997, the Company had five (5) substantially completed new Modular Restaurant Packages in inventory, one of which is under contract for sale to a franchisee. As of December 29, 1997, the Company had thirty-five (35) used Modular Restaurant Packages available for relocation to new sites, eight (8) of which have been moved to the Champion production facility for refurbishment, and twenty-seven (27) of which are at closed sites. Although the Company does not require a franchisee to use a Modular Restaurant Package, because of the expected benefits associated therewith, the Company anticipates that substantially all of the Restaurants developed by it or its franchisees in the immediate future will include Modular Restaurant Packages produced by the Company, or relocated from other sites. Modular Restaurant Packages from closed sites are being marketed at various prices depending upon age and condition. Transportation and Installation of Modular Restaurant Packages. Once all site work has been completed to the satisfaction of the Company and all necessary governmental approvals have been obtained for installation of the Modular Restaurant, the Modular Restaurant Package is transported to such site by an independent trucking contractor. All transportation costs are charged to the customer. Once on the site, the Modular Restaurant Package is installed by independent contractors hired by the Company or franchisee, in accordance with procedures specified by the Company. The Company's personnel inspect all mechanical, plumbing and electrical systems to make sure they are in good working order, and inspect and approve all site improvements on new Modular Restaurant Packages sold by the Company. Used Modular Restaurant Packages are typically sold without warranties. Once a Modular Restaurant Package has been delivered to a site, it takes generally three (3) to four (4) weeks before the Restaurant is in full operation. Competition The Company's Restaurant operations compete in the fast food industry, which is highly competitive with respect to price, concept, quality and speed of service, Restaurant location, attractiveness of facilities, customer recognition, convenience and food quality and variety. The industry includes many fast food chains, including national chains which have significantly greater resources than the Company that can be devoted to advertising, product development and new Restaurants. In certain markets, the Company will also compete with other quick-service double drive-thru hamburger chains with operating concepts similar to the Company. The fast food industry is often significantly affected by many factors, including changes in local, regional or national economic conditions affecting consumer spending habits, demographic trends and traffic patterns, changes in consumer taste, consumer concerns about the nutritional quality of quick-service food and increases in the number, type and location of competing quick-service Restaurants. The Company competes primarily on the basis of speed of service, price, value, food quality and taste. In addition, with respect to selling franchises, the Company competes with many franchisors of Restaurants and other business concepts. All of the major chains have increasingly offered selected food items and combination meals, including hamburgers, at temporarily or permanently discounted prices. Beginning generally in the summer of 1993, the major fast food hamburger chains began to intensify the promotion of value priced meals, many specifically targeting the 99(cent) price point at which the Company sells its quarter pound "Champ Burger(R)". This promotional activity has continued at increasing levels, and management believes that it has had a negative impact on the Company's sales and earnings. Increased competition, additional discounting and changes in marketing strategies by one or more of these competitors could have an adverse effect on the Company's sales and earnings in the affected markets. With respect to its Modular Restaurant Packages, the Company competes primarily on the basis of price and speed of construction with other modular construction companies as well as traditional construction companies, many of which have significantly greater resources than the Company. When the inventory of new and used MRP's is depleted, there is no assurance that the Company will again initiate new construction at its Champion construction facility thereby requiring the Company and its franchisees to purchase MRP's from other modular construction companies or to utilize conventional construction methods. Employees Effective November 30, 1997, the Company entered into a Management Services Agreement, pursuant to which Rally's Hamburgers, Inc., ("Rally's") will be managed and operated predominantly by the corporate management of the Company. Rally's, together with its franchisees, operates approximately 477 double drive-thru hamburger restaurants primarily in the Midwest and Sunbelt. In addition, the Company and Rally's share certain of their executive officers, including the Chief Executive Officer and the Chief Operating Officer. 10 As of December 29, 1997, the Company employed approximately 5,000 persons in its Restaurant operations, approximately 800 of whom are Restaurant management and supervisory personnel and the remainder of whom are hourly Restaurant personnel. Of the approximately 165 corporate employees, five are involved in the manufacturing operation, approximately nine are in upper management positions and the remainder are professional and administrative or office employees. The Company considers its employee relations to be good. Most employees, other than management and corporate personnel, are paid on an hourly basis. The Company believes that it provides working conditions and wages that compare favorably with those of its competition. None of the Company's employees is covered by a collective bargaining agreement. Trademarks and Service Marks The Company believes its trademarks and service marks have significant value and are important to its marketing efforts. The Company has registered certain trademarks and service marks (including the name "Checkers", "Checkers BurgersoFriesoColas" and "Champ Burger" and the design of the Restaurant building) in the United States Patent and Trademark office. The Company has also registered the service mark "Checkers" individually and/or with a rectangular checkerboard logo of contiguous alternating colors to be used with Restaurant services in the states where it presently does, or anticipates doing, business. The Company has various other trademark and service mark registration applications pending. It is the Company's policy to pursue registration of its marks whenever possible and to oppose any infringement of its marks. Government Regulations The restaurant industry generally, and each Company-operated and franchised Restaurant specifically, are subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and those relating to building, zoning, health, accommodations for disabled members of the public, sanitation, safety, fire, environmental and land use requirements. The Company and its franchisees are also subject to laws governing their relationship with employees, including minimum wage requirements, accommodation for disabilities, overtime, working and safety conditions and citizenship requirements. The Company is also subject to regulation by the Federal Trade Commission and certain laws of States and foreign countries which govern the offer and sale of franchises, several of which are highly restrictive. Many State franchise laws impose substantive requirements on the franchise agreement, including limitations on noncompetition provisions and on provisions concerning the termination or nonrenewal of a franchise. Some States require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain food licenses or approvals to sell franchises, or an increase in the minimum wage rate, employee benefit costs (including costs associated with mandated health insurance coverage) or other costs associated with employees could adversely affect the Company and its franchisees. A mandated increase in the minimum wage rate was implemented in both 1997 and 1996. The Company's construction, transportation and placement of Modular Restaurant Packages is subject to a number of federal, state and local laws governing all aspects of the manufacturing process, movement, end use and location of the building. Many states require approval through state agencies set up to govern the modular construction industry, other states have provisions for approval at the local level. The transportation of the Company's Modular Restaurant Package is subject to state, federal and local highway use laws and regulations which may prescribe size, weight, road use limitations and various other requirements. The descriptions and the substance of the Company's warranties are also subject to a variety of state laws and regulations. The Company has no material contracts with the United States government or any of its agencies. 11 ITEM 2. PROPERTIES. Of the 230 Restaurants which were operated by the Company as of December 29, 1997, the Company held ground leases for 194 Restaurants and owned the land for 36 Restaurants. The Company's leases are generally written for a term of from five to twenty years with one or more five year renewal options. Some leases require the payment of additional rent equal to a percentage of annual revenues in excess of specified amounts. Ground leases are treated as operating leases. Leasehold improvements made by the Company generally become the property of the landlord upon expiration or earlier termination of the lease; however, in most instances, if the Company is not in default under the lease, the building, equipment and signs remain the property of the Company and can be removed from the site upon expiration of the lease. In the future, the Company intends, whenever practicable, to lease land for its Restaurants. For further information with respect to the Company's Restaurants, see "Restaurant Operations" under Item 1 of this Report. The Company has 8 owned parcels of land and 31 leased parcels of land which are available for sale or sub-lease. Of these parcels, 30 are related to Restaurant closings as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations". The other nine parcels primarily represent surplus land available from multi-user sites where the Company developed a portion for a Restaurant and undeveloped sites which the Company ultimately decided it would not develop. The Company's executive offices are located in approximately 19,600 square feet of leased space in the Barnett Bank Building, Clearwater, Florida. The Company's lease will expire on April 30, 1998. In order to accommodate additional staffing and on-site storage space needed as a result of the Management Services Agreement, (see Item 1. "Business Employees"), the Company has executed a five year lease with a new landlord for 26,500 square feet of office space and 6,000 square feet of adjoining warehouse space in Clearwater. The Company expects to relocate its executive office to this location by July, 1998. The Company owns a 89,850 square foot facility in Largo, Florida. This includes a 70,850 square foot fabricated metal building for use in its Modular Restaurant manufacturing operations, and two buildings totaling 19,000 square feet for its office and warehouse operations. See "Manufacturing Operations" under Item 1 of this Report. The Company also leases approximately 4,800 aggregate square feet in two regional offices. ITEM 3. LEGAL PROCEEDINGS Except as described below, the Company is not a party to any material litigation and is not aware of any threatened material litigation: In re Checkers Securities Litigation, Master File No. 93-1749-Civ-T-17A. On October 13, 1993, a class action complaint was filed in the United States District Court for the Middle District of Florida, Tampa Division, by a stockholder against the Company, certain of its officers and directors, including Herbert G. Brown, Paul C. Campbell, George W. Cook, Jared D. Brown, Harry S. Cline, James M. Roche, N. John Simmons, Jr. and James F. White, Jr., and KPMG Peat Marwick, the Company's auditors. The complaint alleges, generally, that the Company issued materially false and misleading financial statements which were not prepared in accordance with generally accepted accounting principles, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Florida common law and statute. The allegations, including an allegation that the Company inappropriately selected the percentage of completion method of accounting for sales of modular restaurant buildings, are primarily directed to certain accounting principles followed by Champion. The plaintiffs sought to represent a class of all purchasers of the Company's Common Stock between November 22, 1991 and October 8, 1993, and an unspecified amount of damages. Although the Company believed this lawsuit was unfounded and without merit, in order to avoid further expenses of litigation, the parties reached an agreement in principle for the settlement of this class action. The agreement for settlement provides for one of the Company's director and officer liability insurance carriers and another party to contribute to a fund for the purpose of paying claims on a claims-made basis up to a total of $950,000. The Company has agreed to contribute ten percent (10%) of claims made in excess of $475,000 for a total potential liability of $47,500. The settlement was approved by the Court on January 30, 1998. 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, 12 Robert G. Brown and George W. Cook, Case No. 95-4644-CI-21 (hereinafter the "Power Burgers Litigation"). The original Complaint alleged, generally, that certain officers of the Company intentionally inflicted severe emotional distress upon Ms. Greenfelder, who is the sole stockholder, President and Director of Powers Burgers, Inc. (hereinafter "Powers Burgers") a Checkers franchisee. The original Complaint further alleged that Ms. Greenfelder and Powers Burgers were induced into entering into various agreements and personal guarantees with the Company based upon misrepresentations by the Company and its officers and that the Company violated provisions of Florida's Franchise Act and Florida's Deceptive and Unfair Trade Practices Act. The original Complaint alleged that the Company is liable for all damages caused to the Plaintiffs. The Plaintiffs seek damages in an unspecified amount in excess of $2,500,000 in connection with the claim of intentional infliction of emotional distress, $3,000,000 or the return of all monies invested by the Plaintiffs in Checkers' franchises in connection with the misrepresentation of claims, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The Court has granted, in whole or in part, three (3) Motions to Dismiss the Plaintiffs' Complaint, as amended, including an Order entered on February 14, 1997, which dismissed the Plaintiffs' claim of intentional infliction of emotional distress, with prejudice, but granted the Plaintiffs leave to file an amended pleading with respect to the remaining claims set forth in their Amended Complaint. A third Amended Complaint has been filed and an Answer, Affirmative Defenses, and a Counterclaim to recover unpaid royalties and advertising fund contributions has been filed by the Company. In response to the Court's dismissal of certain claims in the Power Burgers Litigation, on May 21, 1997 a companion action was filed in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, Civil Division, entitled Gail P. Greenfelder, Powers Burgers of Avon Park, Inc., and Power Burgers of Sebring, Inc. v. James F. White, Jr., Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 97-3565-CI, asserting, in relevant part, the same causes of action as asserted in the Power Burgers Litigation. An Answer, Affirmative Defenses, and a Counterclaim to recover unpaid royalties and advertising fund contributions have been filed by the Company. On February 4, 1998, the Company terminated Power Burgers, Inc.'s, Power Burgers of Avon Park, Inc.'s and Power Burgers of Sebring, Inc.'s franchise agreements and thereafter filed two Complaints in the United States District Court for the Middle District of Florida, Tampa Division, styled Checkers Drive-In Restaurants, Inc. v. Power Burgers of Avon Park, Inc., Case No. 98-409-CIV-T-17A and Checkers Drive-In Restaurants, Inc. v. Powers Burgers, Inc, Case No. 98-410-CIV-T-26E. The Complaint seeks, inter alia, a temporary and permanent injunction enjoining Power Burgers, Inc. and Power Burgers of Avon Park, Inc.'s continued use of Checkers' Marks and trade dress. A Motion to Stay the foregoing actions are currently pending. The Company believes the lawsuits initiated against the Company are without merit, and intends to continue to defend them vigorously. No estimate of any possible loss or range of loss resulting from the lawsuit can be made at this time. Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services, Inc., et al. On August 10, 1995, a state court Counterclaim and Third Party Complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, Civil Division, entitled Tampa Checkmate Food Services, Inc., Checkmate Food Services, Inc. and Robert H. Gagne v. Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, James F. White, Jr., Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 95-3869. In the original action filed by the Company in July 1995, against Mr. Gagne and Tampa Checkmate Food Services, Inc., (hereinafter "Tampa Checkmate") a company controlled by Mr. Gagne, the Company is seeking to collect on a promissory note and foreclose on a mortgage securing the promissory note issued by Tampa Checkmate and Mr. Gagne, and obtain declaratory relief regarding the rights of the respective parties under Tampa Checkmate's franchise agreement with the Company. The Counterclaim and Third Party Complaint allege, generally, that Mr. Gagne, Tampa Checkmate and Checkmate Food Services, Inc. (hereinafter "Checkmate") were induced into entering into various franchise agreements with, and personal guarantees to, the Company based upon misrepresentations by the Company. The Counterclaim and Third Party Complaint seek damages in the amount of $3,000,000 or the return of all monies invested by Checkmate, Tampa Checkmate and Mr. Gagne in Checkers' franchises, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The Counterclaim was dismissed by the court on January 26, 1996, with the right to amend. On February 12, 1996, the Counterclaimants filed an Amended Counterclaim alleging violations of Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act, and breaches of implied duties of "good faith and fair dealings" in connection with a settlement agreement and franchise agreement between various of the parties. The Amended Counterclaim seeks a judgment for damages in an unspecified amount, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The Company has filed an Answer to the Complaint. On or about July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division entitled In re: Tampa Checkmate Food Services, Inc., and numbered as 97-11616-8G-1 on the docket of said Court. On July 25, 1997, Checkers filed an Adversary Complaint in the Tampa Checkmate bankruptcy proceedings entitled Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services, Inc. and numbered as Case No. 97-738. The Adversary Complaint seeks a temporary and permanent injunction enjoining Tampa Checkmate's continued use of Checkers' Marks and trade dress notwithstanding the termination of its Franchise Agreement on April 8, 1997. The Company believes that the lawsuit is without merit and intends to continue to defend it vigorously. No estimate of possible loss or range of loss resulting from the lawsuit can be made at this time. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Common Stock of the Company began trading publicly in the over-the-counter market on the Nasdaq Stock Market's National Market on November 15, 1991, under the symbol CHKR. The following table sets forth the high and low closing sale price of the Checkers Common Stock as reported in the Nasdaq National Market for the periods indicated: High Low 1997 First Quarter $3.00 $1.69 Second Quarter $1.84 $1.09 Third Quarter $1.69 $1.09 Fourth Quarter $1.59 $0.81 1996 First Quarter $1.75 $1.19 Second Quarter $1.50 $1.13 Third Quarter $1.25 $0.75 Fourth Quarter $1.97 $0.78 Holders At March 16, 1998, the Company had approximately 7,085 stockholders of record. Dividends Dividends are prohibited under the terms of the Company's major debt agreement. The Company has not paid or declared cash distributions or dividends (other than the payment of cash in lieu of fractional shares in connection with its stock splits). Any future cash dividends will be determined by the Board of Directors based on the Company's earnings, financial condition, capital requirements, debt covenants and other relevant factors. Recent Unregistered Sales During fiscal year 1997, the Company has engaged in the following sales of its securities which were not registered under the Securities Act of 1933, and which have not been previously reported. None 14 ITEM 6. SELECTED FINANCIAL DATA Selected Consolidated Financial Data (in thousands, except per share data) The selected historical consolidated Statement of Operations data presented for each of the fiscal years in the three-year period ended December 29, 1997 and Balance Sheet data as of December 29, 1997, and as of December 30, 1996, were derived from, and should be read in conjunction with, the audited consolidated financial statements and related notes of Checkers Drive-In Restaurants, Inc. and subsidiaries included elsewhere herein. The Statement of Operations data for the year ended January 2, 1995 and December 31, 1993 and Balance Sheet data as of January 1, 1996, January 2, 1995 and December 31, 1993 were derived from audited financial statements not included herein. As of January 1, 1994, the Company changed from a calendar reporting year ending on December 31st to a fiscal year which will generally end on the Monday closest to December 31st. Each quarter consists of three 4-week periods, with the exception of the fourth quarter which consists of four 4-week periods.
Fiscal Years Ending --------------------------------------------------------------- Dec. 29, Dec. 30, Jan. 1, Jan. 2, Dec. 31, 1997 1996 1996 1995 1993 ---------------------------------------------------------------- Statements of Operations: ------------------------- Net Operating Revenue $ 143,893 $ 164,960 $ 190,305 $ 215,115 $ 184,027 Restaurant Operating Costs $ 127,839 $ 156,548 $ 167,836 $ 173,087 $ 124,384 Cost of Modular Restaurant Package Revenues 618 1,704 4,854 10,485 20,208 Other Depreciation and Amortization 2,263 4,326 4,044 2,796 1,325 General and Administrative Expense 16,123 20,690 24,215 21,875 14,048 SFAS 121 Impairment and Other Loss Provisions 1,027 23,905 26,572 14,771 - Interest Expense 8,650 6,233 5,724 3,564 556 Interest Income 375 678 674 326 273 Minority Interests in Income (Loss) (66) (1,509) (192) 185 342 Income from Continuing Operations (Pretax) $ (12,186) $ (46,258) $ (42,074) $ (11,324) $ 23,437 Income from Continuing Operations (Pretax) per Common Share $ (0.19) $ (0.89) $ (0.83) $ (0.23) $ 0.49 Balance Sheet: -------------- Total Assets $ 115,401 $ 136,110 $ 166,819 $ 196,770 $ 179,950 Long-Term Obligations and Redeemable Preferred Stock $ 29,401 $ 39,906 $ 38,090 $ 38,341 $ 36,572 Cash Dividends Declared per Common Share $ - $ - $ - $ - $ -
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Introduction The Company commenced operations on August 1, 1987, to operate and franchise Checkers Double Drive-Thru Restaurants. As of December 29, 1997, the Company had an ownership interest in 230 Company-operated Restaurants and an additional 249 Restaurants were operated by franchisees. The Company's ownership interest in the Company-operated Restaurants is in one of two forms: (i) the Company owns 100% of the Restaurant (as of December 29, 1997, there were 218 such Restaurants) and (ii) the Company owns a 10.55% or 65.83% interest in a partnership which owns the Restaurant (a "Joint Venture Restaurant") (as of December 30, 1996, there were 12 such Joint Venture Restaurants). (See "Business Restaurant Operations - Joint Venture Restaurants" in Item 1 of this Report.) The Company realized significant reductions in food, paper and labor costs during 1997. These costs totaled 64.5% of restaurant revenues in 1997 versus 72.1% in 1996. This improvement in costs was achieved despite the 9.9% decline in comparable store sales in 1997 versus 1996. Management's efforts to improve food, paper, and labor costs by implementing tighter operational controls was supplemented by cost of sales reductions realized by cooperating with CKE Restaurants, Inc. and Rally's Hamburgers, Inc. to leverage the purchasing power of the three entities to negotiate improved terms for their respective contacts with suppliers. As of March 1996, the Company had 53 Company and franchise Restaurants testing its proprietary L.A. Mex Mexican brand. Although initial sales were encouraging, the sales increases resulted in little or no contribution to the profitability of the test units. Additionally, speed of service was adversely impacted by the addition of the L.A. Mex products. As a result, the Company terminated the tests during the first two quarters of fiscal year 1997. Significant management changes have occurred since the end of the third quarter of fiscal year 1997. Effective November 10, 1997, C. Thomas Thompson resigned as the Company's Chief Executive Officer. On that same date, James J. Gillespie was appointed to serve as Chief Executive Officer of the Company and of Rally's Hamburgers, Inc. ("Rally's"). Mr. Thompson has retained his position on the Board of Directors of the Company. Effective December 15, 1997, Robert L. Purple was appointed Senior Vice President of Marketing and Steven M. Cohen was appointed Senior Vice President of Human Resources. Effective January 5, 1998 Richard A. Peabody was appointed Vice President and Chief Financial Officer, assuming the financial responsibilities previously held by Mr. Joseph N. Stein who retained his position as Executive Vice President and Chief Administrative Officer. On January 26, 1998 David M. Bunch was appointed Sr. Vice President of Real Estate Development. On February 23, 1998, Harvey Fattig was appointed Executive Vice President and Chief Operating Officer of the Company and of Rally's. Early in fiscal 1997, the Company applied a marketing strategy that included a greater emphasis on the quality of the burgers and fries that the Company offers, and an increased emphasis on combo meals. The Company introduced a new advertising campaign in several Company-operated markets, as well as the Tampa co-op television markets in the fall of 1997. The campaign was based on strategic research, which confirmed the consumer belief in the freshly prepared quality of the products. The new creative, which features a "commercial within a commercial" focus, invites a customer to make his/her own commercial, since "we make everything fresh here at Checkers". Created by the Company's new advertising agency, Crispin, Porter and Bogusky out of Miami, Florida, the Company believes that these fun and engaging spots communicate the core belief of the consumer, and dovetail nicely into the broader strategic position of the best burger in the fast food industry. Television remains the primary advertising medium in the Company's core markets, while radio, outdoor and direct mail print provide the primary coverage in other, less efficient markets. In fiscal year 1997, the Company, along with its franchisees, experienced a net increase of one operating restaurant. In 1998, the franchise community has indicated an intent to open up to 30 new units and the Company intends to close fewer restaurants focusing on improving Restaurant margins. The franchise group as a whole continues to experience higher average per store sales than Company stores. The Company receives revenues from Restaurant sales, franchise fees, royalties and sales of fully-equipped manufactured MRP's. Cost of Restaurant sales relates to food and paper costs. Other Restaurant expenses include labor and all other Restaurant costs for Company-operated Restaurants. Cost of MRP's relates to all Restaurant equipment and building materials, labor and other direct and indirect costs of production. Other expenses, such as depreciation and amortization, and selling, general and administrative expenses, relate both to Company-operated Restaurant operations and MRP revenues as well 16 as the Company's franchise sales and support functions. The Company's revenues and expenses are affected by the number and timing of additional Restaurant openings and the sales volumes of both existing and new Restaurants. MRP revenues are directly affected by the number of new franchise Restaurant openings and the number of new MRP's produced or used MRP's refurbished for sale in connection with those openings. Results of Operations The following table sets forth the percentage relationship to total revenues of the listed items included in the Company's Consolidated Statements of Operations. Certain items are shown as a percentage of Restaurant sales and Modular Restaurant Package revenue. The table also sets forth certain selected Restaurant operating data.
Fiscal Year Ended ----------------------------------------------------------- Dec. 29, Dec. 30, Jan.1, 1997 1996 1996 ----------------------------------------------------------- Revenues: - --------- Restaurant Sales 94.3 % 94.2 % 93.9 % Royalties 4.9 % 4.5 % 4.0 % Franchise Fees 0.3 % 0.6 % 0.5 % Modular Restaurant Packages 0.5 % 0.7 % 1.6 % ----------------------------------------------------------- Total Revenues 100.0 % 100.0 % 100.0 % ----------------------------------------------------------- Costs and Expenses: ------------------- Restaurant Food and Paper Cost(1) 32.1 % 35.2 % 35.7 % Restaurant Labor Costs(l) 32.4 % 36.9 % 32.6 % Restaurant Occupancy Expense(1) 8.6 % 8.3 % 6.5 % Restaurant Depreciation and Amortization(1) 6.1 % 5.7 % 6.0 % Advertising Expense(l) 5.0 % 4.8 % 4.5 % Other Restaurant Operating Expenses(l) 9.9 % 9.9 % 8.7 % Cost of Modular Restaurant Package Revenues(2) 87.1 % 141.8 % 162.1 % Other Depreciation and Amortization 1.6 % 2.6 % 2.1 % Selling, General and Administrative Expenses 11.2 % 12.5 % 12.7 % Impairment of Long-lived Assets 0.4 % 9.0 % 9.9 % Losses on Assets to be Disposed of 0.2 % 4.3 % 1.7 % Loss provisions 0.1 % 1.2 % 2.3 % ----------------------------------------------------------- Operating Loss (2.8)% (25.6)% (19.6)% Other Income (Expense): ----------------------- Interest Income 0.3 % 0.4 % 0.4 % Interest Expense (6.0)% (3.8)% (3.1)% Minority Interest in Earnings (0.0)% (0.9)% (0.1)% ----------------------------------------------------------- Loss Before Income Tax Expense (Benefit) (8.5)% (28.0)% (22.1)% Income Tax Expense (Benefit) 0.0 % 0.1 % (4.7)% ----------------------------------------------------------- Net Loss (8.5)% (28.1)% (17.5)% =========================================================== Net Loss to Common Shareholders (9.0)% (28.1)% (17.5)% ===========================================================
17
Fiscal Year Ended ----------------------------------------------------------- Dec. 29, Dec. 30, Jan.1, 1997 1996 1996 ----------------------------------------------------------- Operating Data: System Wide Restaurant Sales (in 000's) Company Operated $ 135,710 $ 155,392 $ 178,744 Franchise $ 174,600 $ 172,566 $ 190,151 ----------------------------------------------------------- Total $ 310,310 $ 327,958 $ 368,895 =========================================================== Average Annual Net Sales Per Restaurant Open For A Full Year (in 000's)(3): Company Operated $ 586 $ 651 $ 721 Franchised $ 737 755 814 ----------------------------------------------------------- System Wide $ 661 $ 699 $ 765 ----------------------------------------------------------- Number of Restaurants (4) Company Operated 230 232 242 Franchised 249 246 257 ----------------------------------------------------------- Total 479 478 499 ===========================================================
- ------------------------------------------------------------ (1) As a percent of Restaurant sales. (2) As a percent of Modular Restaurant Package revenues. (3) Includes sales for Restaurants open for entire trailing 13 periods, and stores expected to be closed in the following year. (4) Number of Restaurants open at end of period. Comparison of Historical Results - Fiscal Years 1997 and 1996 Revenues. Total revenues decreased 12.8% to $143.9 million in 1997 compared to $165 million in 1996. Company-operated restaurant sales decreased 12.7% to $135.7 million in 1997 from $155.4 million in 1996. The decrease resulted partially from a net reduction of 2 Company-operated Restaurants since December 30, 1996. Comparable Company-operated Restaurant sales for the year ended December 29, 1997, decreased 9.9% as compared to the year ended December 30, 1996, which includes those Restaurants open at least 26 periods. These decreases in restaurant sales and comparable Restaurant sales is primarily attributable to a highly competitive environment during 1997 and the Company's focus on cutting costs while developing a new marketing strategy. Franchise revenues and fees decreased 10.7% to approximately $7.5 million in 1997 from approximately $8.4 million in 1996. An actual decrease of $503,000 was a direct result of one fewer franchised Restaurant opening as well as a decline in comparable franchise restaurant sales of 5.9% during 1997, and a decline in the weighted average royalty rate charge due to openings in Puerto Rico, as well as certain discounting of fees on non-standard Restaurant openings. The remaining decrease of $390,000 is due to the recording of revenue from terminations of Area Development Agreements during the year ended December 30, 1996. The Company recognizes franchise fees as revenues when the Company has substantially completed its obligations under the franchise agreement, usually at the opening of the franchised Restaurant. MRP revenues decreased 40.9% to $710,000 in 1997 compared to $1.2 million in 1996 due to decreased sales volume of MRP's to the Company's franchisees which is a result of franchisees sales of used MRP's and the Company's efforts to refurbish and sell its inventory of used MRP's from previously closed sites. These efforts have been successful, however, these sales have negatively impacted the new building revenues. MRP revenues are recognized on the percentage of completion method during the construction process; therefore, a substantial portion of MRP revenues are recognized prior to the opening of a Restaurant. 18 Costs and expenses. Restaurant food ($40.6 million) and paper ($3.0 million) costs totaled $43.6 million or 32.1% of restaurant sales for 1997, compared to $54.7 million ($49.5 million food costs; $5.2 million, paper costs) or 35.2% of restaurant sales for 1996. The dollar decrease in food and paper costs was due primarily to the decrease in restaurant sales while the decrease in these costs as a percentage of restaurant sales was due to new purchasing contracts negotiated in early 1997. Restaurant labor costs, which includes restaurant employees' salaries, wages, benefits and related taxes, totaled $43.9 million or 32.4% of restaurant sales for 1997, compared to $57.3 million or 36.9% of restaurant sales for 1996. The decrease in restaurant labor costs as a percentage of restaurant sales was due primarily to various Restaurant level initiatives implemented in the first quarter of 1997, partially offset by a minimum wage increase in 1997. Restaurant occupancy expense, which includes rent, property taxes, licenses and insurance, totaled $11.7 million or 8.6% of restaurant sales for 1997, compared to $12.9 million or 8.3% of restaurant sales for 1996. The increase in restaurant occupancy costs as a percentage of restaurant sales was due primarily to the decline in average restaurant sales relative to the fixed nature of these expenses and also higher average occupancy costs resulting from the acquisition of interests in 12 Restaurants in Chicago, Illinois in July, 1996. Restaurant depreciation and amortization decreased 6.0% to $8.3 million for 1997, from $8.8 million for 1996, due primarily to 1996 impairments recorded under Statement of Financial Accounting Standards No. 121 and the impact of Restaurant closures during late 1996 and early 1997. However, as a percentage of restaurant sales, these expenses increased to 6.1% in 1997 from 5.7% in 1996 due to the decline in average restaurant sales. Advertising expense decreased to $6.8 million or 5.0% of restaurant sales for 1997 which did not materially differ from the $7.4 million or 4.8% of restaurant sales spent for advertising in 1996. Other restaurant expenses includes all other Restaurant level operating expenses other than food and paper costs, labor and benefits, rent and other costs which includes utilities, maintenance and other costs. These expenses which declined consistently with sales declines, totaled $13.5 million or 9.9% of restaurant sales for 1997 compared to $15.3 million or 9.9% of restaurant sales for 1996, resulting primarily from Restaurant closures in late 1996 and early 1997. Costs of MRP revenues totaled $618,000 or 87.1% of MRP revenues for 1997, compared to $1.7 million or 141.8% of such revenues for 1996. The decrease in these expenses as a percentage of MRP revenues was attributable to the elimination of various excess fixed costs in the first quarter of 1997. General and administrative expenses decreased to $16.1 million or 11.2% of total revenues in 1997 from $20.7 million or 12.5% of total revenues in 1996. The 1997 general and administrative expenses were increased by accounting charges of $314,000 for severance and relocations. The 1996 general and administrative expenses were increased by accounting charges of $3.6 million consisting of $1.1 million in unusual bad debt expenses and other, $750,000 provisions for state sales tax audits, $925,000 for severance and relocation and a $845,000 write-off of capitalized costs incurred in connection with the Company's previous lending arrangements with its bank group. The actual decrease in normal recurring general and administrative expenses before 1996 and 1997 accounting charges of $1.3 million was mostly attributed to a reduction in corporate staffing early in 1997. Accounting Charges and Loss Provisions. During the fourth quarter of 1997, the Company recorded accounting charges and loss provisions of $1.3 million, to accrue for severance and relocations ($314,000) to impair goodwill associated with one under-performing store ($565,000) , to provide for additional losses on assets to be disposed due to certain sublease properties being converted to surplus ($312,000), and a provision for the aging of Champion inventories ($150,000). The Company recorded accounting charges and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which consisted of various selling, general and administrative expenses ($500,000 provision for bad debt, a $750,000 provision for state sales tax audits and refinancing costs of $845,000 were recorded to expense capitalized costs incurred in connection with the Company's previous lending arrangements with its bank group.). Provisions totaling $14.2 million to close 27 restaurants, relocate 22 of them ($4.2 million), settle 16 leases on real property underlying these stores ($1.2 million) and sell land underlying the other 11 restaurants ($307,000), and impairment charges related to an additional 28 under-performing restaurants ($8.5 million) were recorded. A loss provision of $500,000 was also recorded to reserve for Champion's finished buildings inventory as an adjustment to fair market value. Additional accounting charges and loss provisions of $12.8 million were recorded during the fourth quarter of 19 1996, $1.5 million of which consisted of various selling, general and administrative expenses (including $579,000 for severance, $346,000 for employee relocations, bad debt provisions of $366,000 and $204,000 for other charges). Provisions totaling $7.7 million, including $1.4 million for additional losses on assets to be disposed of, $5.4 million for impairment charges related to 9 under-performing restaurants received by the Company through a July 1996 franchisee bankruptcy action and $393,000 for other impairment charges were also recorded. Additionally, in the fourth quarter of 1996, a $1.1 million provision for loss on the disposal of the L.A. Mex product line, workers compensation accruals of $1.1 million (included in restaurant labor costs), adjustments to goodwill of approximately $510,000 (included in other depreciation and amortization) and approximately a $453,000 charge for the assumption of minority interests in losses on joint-venture operations as a result of the receipt by the Company of certain assets from the bankruptcy of a franchisee. Interest expense. Interest expense other than loan cost amortization decreased to $5.0 million or 3.5% of total revenues in 1997 from $6.1 million or 3.7% of total revenues in 1996. This decrease was due to a reduction in the weighted average balance of debt outstanding during the respective periods, partially offset by an increase in the Company's effective interest rates since the second quarter of 1996. Loan cost amortization increased by $3.5 million from $159,000 in 1996 to $3.7 million in 1997 due to the November 22, 1996 capitalization of deferred loan costs and $9.7 million in unscheduled principal reductions in early 1997. Income tax expense (benefit). There were no net taxes after valuation allowances for 1997. Due to the loss for 1996, the Company recorded an income tax benefit of $18.0 million or 38.9% of the loss before income taxes and recorded a deferred income tax valuation allowance of $18.1 million, resulting in a net tax expense of $151,000 for 1996. The effective tax rates differ from the expected federal tax rate of 35.0% due primarily to state income taxes. Net loss. As stated above earnings were significantly impacted by the loss provisions and the write-downs associated with SFAS 121 in 1997 and in 1996. Net loss before tax and the provisions (provisions totaled $1.3 million in 1997 and $29.6 million in 1996) was $10.9 million or $.17 per share for 1997 and $16.7 million or $.32 per share for 1996, which resulted primarily from an increase in the net Restaurant margins, decreases in depreciation and amortization, general and administrative expenses, and interest expense other than loan cost amortization, partially offset by a decrease in royalties and franchises fees and an increase in loan cost amortization. Comparison of Historical Results - Fiscal Years 1996 and 1995 Revenues. Total revenues decreased 13.3% to $165.0 million in 1996 compared to $190.3 million in 1995. Company-operated restaurant sales decreased 13.1% to $155.4 million in 1996 from $178.7 million in 1995. The decrease resulted partially from a net reduction of 10 Company-operated Restaurants since January 1, 1996. Comparable Company-operated Restaurant sales for the year ended December 30, 1996, decreased 9.7% as compared to the year ended January 1, 1996, which includes those Restaurants open at least 13 periods. These decreases in restaurant sales and comparable Restaurant sales is primarily attributable to continuing sales pressure from competitor discounting, severe weather in January and February of 1996 and the inability of the Company to effect a competitive advertising campaign during fiscal 1996. Royalties decreased 2.2% to $7.4 million in 1996 from $7.6 million in 1995 due primarily to a net reduction of 11 franchised Restaurants since January 1, 1996. Comparable franchised Restaurant sales for Restaurants open at least 12 months for the year ended December 30, 1996, decreased approximately 7.2% as compared to the year ended January 1, 1996. The Company believes that the decline in sales experienced by franchisees can be attributed primarily to the same factors noted above, but that these factors may have been mitigated to some extent by the location in many instances of franchise restaurants in less competitive markets. Franchise fees decreased 3.2% to approximately $930,000 in 1996 from approximately $961,000 in 1995. An actual decrease of $421,000 as a direct result of fewer franchised Restaurants opened as well as certain discounting of fees on non-standard Restaurant openings, offset by the effect of recording $390,000 of revenue from terminations of Area Development Agreements during the year ended December 30, 1996, generated the net decrease of $31,000. The Company recognizes franchise fees as revenues when the Company has substantially completed its obligations under the franchise agreement, usually at the opening of the franchised Restaurant. MRP revenues decreased 59.9% to $1.2 million in 1996 compared to $3.0 million in 1995 due to decreased sales volume of MRP's to the Company's franchisees which is a result of a slow down in franchisee Restaurant opening activity. Also, the Company made a concerted effort to refurbish and sell its inventory of used MRP's from previously closed sites. These efforts have been successful, however, these sales have negatively impacted the new building revenues. MRP revenues are 20 recognized on the percentage of completion method during the construction process; therefore, a substantial portion of MRP revenues are recognized prior to the opening of a Restaurant. Costs and expenses. Restaurant food ($49.5 million) and paper ($5.2 million) costs totaled $54.7 million or 35.2% of restaurant sales for 1996, compared to $63.7 million ($57.6 million food costs; $6.1 million, paper costs) or 35.7% of restaurant sales for 1995. The decrease in food and paper costs as a percentage of restaurant sales was due primarily to decreases in beef costs and paper costs experienced by the Company during fiscal 1996, partially offset by various promotional discounts in the final two quarters of 1996. Restaurant labor costs, which includes restaurant employees' salaries, wages, benefits and related taxes, totaled $57.3 million or 36.9% of restaurant sales for 1996, compared to $58.2 million or 32.6% of restaurant sales for 1995. The increase in restaurant labor costs as a percentage of restaurant sales was due primarily to the decline in average restaurant sales relative to the semi-variable nature of these costs; a high level of turnover in the regional management positions, which caused inconsistencies in the management of labor costs in the Restaurants; increase in labor costs resulting from the L.A. Mex dual brand test; and increase in the federal minimum wage rate. The decrease in actual expense was caused by a reduction in the variable portion of labor expenses as sales declined. Restaurant occupancy expense, which includes rent, property taxes, licenses and insurance, totaled $12.9 million or 8.3% of restaurant sales for 1996, compared to $11.6 million or 6.5% of restaurant sales for 1995. This increase in restaurant occupancy costs as a percentage of restaurant sales was due primarily to the decline in average restaurant sales relative to the fixed nature of these expenses and also higher average occupancy costs resulting from the acquisition of interests in 12 Restaurants in Chicago, Illinois. Restaurant depreciation and amortization decreased 16.9% to $8.8 million for 1996, from $10.6 million for 1995, due primarily to late 1995 and 1996 impairments recorded under Statement of Financial Accounting Standards No. 121 which was adopted as of January 1, 1996. Advertising decreased to $7.4 million or 4.8% of restaurant sales for 1996 which did not materially differ from the $8.1 million or 4.5% of restaurant sales spent for advertising in 1995. Other restaurant expenses includes all other Restaurant level operating expenses other than food and paper costs, labor and benefits, rent and other costs which includes utilities, maintenance and other costs. These expenses totaled $15.3 million or 9.9% of restaurant sales for 1996 compared to $15.6 million or 8.7% of restaurant sales for 1995. The increase for 1996 as a percentage of restaurant sales, was primarily related to the decline in average restaurant sales relative to the fixed and semi-variable nature of many expenses. Costs of MRP revenues totaled $1.7 million or 141.8% of MRP revenues for 1996, compared to $4.9 million or 162.1% of such revenues for 1995. The decrease in these expenses as a percentage of MRP revenues was attributable to a third quarter 1995 accounting charge of $500,000 to write-down excess work in process buildup and a reduction in direct and indirect labor in early 1996. General and administrative expenses decreased to $20.7 million or 12.5% of total revenues in 1996 from $24.2 million or 12.7% of total revenues in 1995. The decrease in these expenses was primarily attributable to a decrease in corporate overhead costs as a result of the Company's restructuring during 1995 and early 1996. Accounting Charges and Loss Provisions. The Company recorded accounting charges and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which consisted of various general and administrative expenses ($500,000 provision for bad debt, a $750,000 provision for state sales tax audits and refinancing costs of $845,000 recorded to expense capitalized costs incurred in connection with the Company's previous lending arrangements with its bank group). Provisions totaling $14.2 million to close 27 restaurants, relocate 22 of them ($4.2 million) settle 16 leases on real property underlying these stores ($1.2 million) and sell land underlying the other 11 restaurants ($307,000), and impairment charges related to an additional 28 under-performing restaurants ($8.5 million) were recorded. A loss provision of $500,000 was also recorded to reserve for Champion's finished buildings inventory as an adjustment to fair market value. Additional accounting charges and loss provisions of $12.8 million were recorded during the fourth quarter of 1996, $1.5 million of which consisted of various general and administrative expenses (including $579,000 for severance, $346,000 for employee relocations, bad debt provisions of $366,000 and $204,000 for other charges). Provisions totaling $7.7 21 million, including $1.4 million for additional losses on assets to be disposed of, $5.4 million for impairment charges related to 9 under-performing restaurants received by the Company through a July 1996 franchisee bankruptcy action and $393,000 for other impairment charges were also recorded. Additionally, in the fourth quarter of 1996, a $1.1 million provision for loss on the disposal of the L.A. Mex product line, workers compensation accruals of $1.1 million (included in restaurant labor costs), adjustments to goodwill of approximately $510,000 (included in other depreciation and amortization) and approximately a $453,000 charge for the assumption of minority interests in losses on joint-venture operations as a result of the receipt by the Company of certain assets from the bankruptcy of a franchisee. Third quarter 1995 accounting charges and loss provisions of $8.8 million consisted of $2.9 million in various selling, general and administrative expenses (write-off of $1.2 million in receivables, accruals for $125,000 in recruiting fees, $304,000 in relocation costs, $274,000 in severance pay, $101,000 in state taxes, reserves of $700,000 for legal settlements, the write-off of a $263,000 investment in an apparel company); $3.2 million to provide for restaurants relocation costs, write-down and abandoned site costs; $344,000 to expense refinancing costs; $645,000 to provide for inventory obsolescence; $1.5 million for workers compensation exposure included in restaurant labor costs and $185,000 in other charges, net, including the $499,000 write-down of excess work in progress inventory costs and a minority interest credit of $314,000. Fourth quarter 1995 accounting charges included $3.0 million for warrants to be issued in settlement of litigation (see Item 3 - Lopez, et al vs. Checkers) and to accrue approximately $800,000 for legal fees in connection with the settlement and continued defense of various litigation matters. Additionally, during the fourth quarter of 1995, the Company early adopted Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121) which requires a write-down of certain intangibles and property related to under performing sites. The effect of adopting SFAS 121 was a total charge to earnings for 1995 of $18.9 million, consisting of a $5.9 million write-down of goodwill and a $13.1 million write-down of property and equipment. Interest expense. Total interest expense increased to $6.2 million or 3.8% of total revenues in 1996 from $5.7 million or 3.0% of total revenues in 1995. This increase was due to the Company's 1996 debt restructuring and related amortization of deferred loan costs. Income tax expense (benefit). Due to the loss for 1996, the Company recorded an income tax benefit of $18.0 million or 38.9% of the loss before income taxes and recorded a deferred income tax valuation allowance of $18.1 million, resulting in a net tax expense of $151,000 for 1996, as compared to an income tax benefit of $16.5 million or 39.1% of earnings before income taxes and recorded a deferred income tax valuation allowance of $7.6 million resulting in a net tax benefit of $8.9 million for 1995. The effective tax rates differ from the expected federal tax rate of 35.0% due primarily to state income taxes. Net loss. As stated above earnings were significantly impacted by the loss provisions and the write-downs associated with SFAS 121 in 1996 and in 1995. Net loss before tax and the provisions (provisions totaled $29.6 million in 1996 and $31.6 million in 1995) was $16.7 million or $.32 per share for 1996 and $10.5 million or $.21 per share for 1995, which resulted primarily from a decrease in the average Restaurant sales and margins, and a decrease in royalties and franchise fees, offset by a decrease in depreciation and amortization and general and administrative expenses. Liquidity and Capital Resources On October 28, 1993, the Company entered into a loan agreement (the "Loan Agreement") with a group of banks ("Bank Group") providing for an unsecured, revolving credit facility. The Company borrowed approximately $50 million under this facility primarily to open new Restaurants and pay off approximately $4 million of previously-existing debt. The Company subsequently arranged for the Loan Agreement to be converted to a term loan and collateralized the term loan and a revolving line of credit ranging from $1 million to $2 million (the "Credit Line") with substantially all of the Company's assets. On July 29, 1996, the debt under the Loan Agreement and Credit Line was acquired from the Bank Group by an investor group led by an affiliate of DDJ Capital Management, LLC (collectively, "DDJ"). On November 14, 1996, the debt under the Loan Agreement and Credit Line was acquired from DDJ by a group of entities and individuals, most of whom are engaged in the fast food restaurant business. This investor group (the "CKE Group") was led by CKE Restaurants, Inc., the parent of Carl Karcher Enterprises, Inc., Taco Bueno Restaurants, Inc., and Summit Family Restaurants, Inc. Also participating were most members of the DDJ Group, Fidelity National Financial, Inc. ("Fidelity") and KCC Delaware Company, a wholly-owned subsidiary of GIANT GROUP, LTD., CKE, Fidelity and GIANT are the largest stockholders of Rally's Hamburgers, Inc. On November 22, 1996, the Company and the CKE Group executed an Amended and Restated Credit 22 Agreement (the "Restated Credit Agreement") thereby completing a restructuring of the debt under the Loan Agreement. The Restated Credit Agreement consolidated all of the debt under the Loan Agreement and the Credit Line into a single obligation. At the time of the restructuring, the outstanding principal balance under the Loan Agreement and the Credit Line was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the term of the debt was extended by one (1) year until July 31, 1999, and the interest rate on the indebtedness was reduced to a fixed rate of 13%. In addition, all principal payments were deferred until May 19, 1997, and the CKE Group agreed to eliminate certain financial covenants, to relax others and to eliminate approximately $4.3 million in restructuring fees and charges. The Restated Credit Agreement also provided that certain members of the CKE Group agreed to provide to the Company a short term revolving line of credit of up to $2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit Line"). In consideration for the restructuring, the Restated Credit Agreement required the Company to issue to the members of the CKE Group warrants to purchase an aggregate of 20 million shares of the Company common stock at an exercise price of $.75 per share, which was the approximate market price of the common stock prior to the announcement of the debt transfer. Since November 22, 1996, the Company has reduced the principal balance under the Restated Credit Agreement by $9.7 million and has repaid the Secondary Credit Line in full. A portion of the funds utilized to make these principal reduction payments were obtained by the Company from the sale of certain closed restaurant sites to third parties. Additionally, the Company utilized $10.5 million of the proceeds from the February 21, 1997, private placement as described later in this section. Pursuant to the Restated Credit Agreement, the prepayments of principal made in 1996 and early in 1997 will relieve the Company of the requirement to make any of the regularly scheduled principal payments under the Restructured Credit Agreement which would have otherwise become due in fiscal year 1998 through maturity. The Restated Credit Agreement provides however, that 50% of any future asset sales must be utilized to prepay principal. The Company's Restated Credit Agreement with the CKE Group contains restrictive covenants which include the consolidated EBITDA covenant as defined. As of December 29, 1997, the Company was in violation of the consolidated EBITDA covenant. The violation was primarily due to the Company recording certain accounting charges and loss provisions in period 13 of fiscal 1997, as discussed in Note 8 to the consolidated financial statements (see Item 8). The Company received a waiver for period 13 of fiscal 1997 and for periods one and two of fiscal 1998. The Company expects to cure the covenant violation for period three of fiscal 1998 due to the effect of period 13 of fiscal 1997 no longer impacting the trailing three period reporting calculation. Consequently the debt obligation has been classified as a long-term obligation as of December 29, 1997. On February 21, 1997, the Company completed a private placement (the "Private Placement") of 8,771,929 shares of the Company's common stock, $.001 par value, and 87,719 shares of the Company's Series A preferred stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased 6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and other qualified investors, including other members of the CKE Group of lenders under the Restated Credit Agreement, also participated in the Private Placement. The Company received approximately $19.5 million in proceeds from the Private Placement. The Company used $8 million of the Private Placement proceeds to reduce the principal balance due under the Restated Credit Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3 million was utilized to pay outstanding balances to various key food and paper distributors; and the remaining amount was used primarily to pay down outstanding balances due certain other vendors. The reduction of the debt under the Restated Credit Agreement and the Secondary Credit Line, both of which carried a 13% interest rate reduced the Company's interest payments by more than $1.3 million on an annualized basis. During 1997, the Company acquired the minority share of one joint-venture restaurant, the operations and certain of the equipment including one MRP associated with five operating franchise restaurants and one closed franchise having an aggregate fair value of $1.4 million. Total consideration consisted of net cash disbursements totaling $282,000, the assumption of $803,000 in long-term debts and capital leases, other accruals of $95,000, relief of minority interests of $372,000, forgiveness of receivables of $114,000, and distribution of property of $438,000. As a result of this transaction, goodwill of $831,000 was recorded. On August 6, 1997, the 87,719 shares of preferred stock were converted into 8,771,900 shares of the Company's common stock valued at $10 million. In accordance with the agreement underlying the Private Placement (the "Private Placement Agreement"), the Company also issued 610,524 shares of common stock as a dividend pursuant to the liquidation preference provisions of the Private Placement Agreement, valued at $696,000 to the holders of the preferred stock issued in the Private Placement. At November 14, 1997, the effective date of the Company's Registration Statements on Forms S-4, the Company had outstanding promissory notes in the aggregate principal amount of approximately $3.2 million (the "Notes") payable to Rall-Folks, Inc. ("Rall-Folks"), Restaurant Development Group, Inc. ("RDG") and Nashville Twin Drive-Through Partners, L.P. (N.T.D.T."). The Company agreed to acquire the Notes issued to Rall-Folks and RDG in consideration of the issuance of an aggregate of approximately 1.9 million shares of Common Stock and the Note issued to NTDT in exchange for a series of convertible notes in the same aggregate principal amount and convertible into approximately 614,000 shares of Common Stock pursuant to agreements entered into in 1995 and subsequently amended. All three of the parties received varying degrees of protection on the purchase price of the promissory notes. Accordingly, the actual number of shares to be issued was to be determined by the market price of the Company's stock. Consummation of the Rall-Folks, RDG, and NTDT purchases occurred on November 24, and December 5, and November 24, 1997, respectively. During December 1997 and January 1998, the Company issued an aggregate of 2,943,752 shares of Common 23 Stock to Rall-Folks, RDG and NTDT in payment of $3.2 million of principal and accrued interest relating to the Note. In January 1998, the Company issued 279,868 share of Common Stock to Rall-Folks pursuant to the purchase price protection provisions of Note re-purchase agreement with the Company. Rall-Folks has completed the sale of all of the Company's Common Stock issued to it and on March 6, 1998 the Company paid $86,000 in cash to Rall-Folks in full settlement of all obligations of the Company to Rall-Folks. NTDT has also completed the sale of all of the Company's Common Stock issued to it pursuant to the terms of it's Note re-purchase agreement with the Company. The Company owes approximately $57,000 to NTDT in accrued interest and to cover the deficiency pursuant to the price protection provisions of it's Note re-purchase agreement with the Company. The Company intends to satisfy all of its obligations in connection with the NTDT transactions prior to April 30, 1998. RDG has not yet completed the sale of all of the Company's Common Stock issued to it in December 1997 and January 1998. Based upon the closing price of the Company's stock on March 25, 1998, upon the issuance and sale of the remaining Common Stock available to be issued to RDG pursuant to the registration statement, the Company does not anticipate that any amounts required to be paid to satisfy it's obligations to RDG under it's Note re-purchase agreement will have a material financial impact to the Company. The Company currently does not have significant development plans for additional Company Restaurants during fiscal 1998. On December 18, 1997, Rally's Hamburgers, Inc. a Delaware corporation ("Rally's") acquired approximately 19.1 million shares of the common stock, $.001 par value per share of the Company, pursuant to that certain Exchange Agreement, dated as of December 8, 1997 (the "Exchange Agreement"), between Rally's, CKE Restaurants, Inc., Fidelity National Financial, Inc., GIANT GROUP LTD and the other parties named in the Exchange Agreement. The Company has negative working capital of $14.2 million at December 29, 1997 (determined by subtracting current liabilities from current assets). It is anticipated that the Company will continue to have negative working capital since approximately 88% of the Company's assets are long-term (property, equipment, and intangibles), and since all operating trade payables, accrued expenses, and property and equipment payables are current liabilities of the Company. The Company has not reported a profit for any quarter since September 1994. As of January 26, 1998, $1.2 million in restricted cash balances were relieved for the Company's use as the funds have been guaranteed by a letter of credit from a bank. The Company implemented aggressive programs at the beginning of fiscal year 1997 designed to improve food, paper and labor costs in the Restaurants. These costs totaled 64.5% of net restaurant revenues in 1997, compared to 72.1% of net restaurant revenues in fiscal 1996, despite a 9.9% decrease in Company owned comparable store sales in 1997 as compared to the prior year. The Company reduced the corporate and regional staff by 32 employees in the beginning of fiscal year 1997 and consummated the purchase of the Rall-Folks Notes, the RDG Note and the NTDT Note in December 1997 and January 1998. Additionally, effective November 30,1997, the Company entered into a Management Services Agreement with Rally's whereby the Company is providing accounting, technology, and other functional and management services to predominantly all of the operations of Rally's. The Management Services Agreement carries a term of seven years, terminable upon the mutual consent of the parties. The Company will receive fees from Rally's relative to the shared departmental costs times the respective store ratio. The Company has increased its corporate and regional staff in late 1997 and early 1998 in order to meet the demands of the agreement, but management believes the income generated by this agreement has enabled the Company to attract the management staff with expertise necessary to more successfully manage and operate both Rally's and the Company at significantly reduced costs to both entities. Overall, the Company believes many of the fundamental steps have been taken to improve the Company's initiative toward profitability, but there can be no assurance that it will be able to do so. Management believes that cash flows generated from operations, and asset sales should allow the Company to continue to meet its financial obligations and to pay operating expenses. The Company's prior operating results are not necessarily indicative of future results. The Company's future operating results may be affected by a number of factors, including: uncertainties related to the general economy; competition; costs of food and labor; the Company's ability to obtain adequate capital and to continue to lease or buy successful sites and construct new Restaurants; and the Company's ability to locate capable franchisees. The price of the Company's common stock can be affected by the above. Additionally, any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of the Company's common stock in a given period. ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (1) Financial Statements. The Company's Financial Statements included in Item 8 hereof, as required, consist of the following:
Page ---- Independent Auditors Report 26 Consolidated Balance Sheets - December 29, 1997 and December 30, 1996 27 Consolidated Statements of Operations - Years ended December 29, 1997, December 30, 1996 and January 1, 1996 29 Consolidated Statements of Stockholders' Equity - Years ended December 29, 1997, December 30, 1996 and January 1, 1996 30 Consolidated Statements of Cash Flows - Years ended December 29, 1997, December 30, 1996 and January 1, 1996 31 Notes to Consolidated Financial Statements - Years ended December 29, 1997, December 30, 1996 and January 1, 1996 33
25 Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Checkers Drive-In Restaurants, Inc. and Subsidiaries: We have audited the consolidated financial statements of Checkers Drive-In Restaurants, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 14. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Checkers Drive-In Restaurants, Inc. and subsidiaries as of December 29, 1997 and December 30, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 29, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK, LLP Tampa, Florida February 27, 1998 26 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS
December 29, December 30, 1997 1996 ------------------------------------------- Current assets: Cash and cash equivalents Restricted $ 2,555 $ 1,505 Unrestricted 1,366 1,551 Accounts receivable, net 1,175 1,544 Notes receivable 265 214 Inventories 2,222 2,261 Property and equipment held for resale 4,332 7,608 Income taxes receivable - 3,514 Deferred loan costs - (note 1) 1,648 2,452 Prepaid expenses and other current assets 309 306 ------------------------------------------- Total Current Assets 13,872 20,955 Property and equipment, net 87,889 98,189 Goodwill and non-compete agreements, net of accumulated amortization of $5,014 in 1997 and $4,186 in 1996 (notes 1 and 6) 11,520 12,284 Deferred loan costs - less current portion (note 1) 1,099 3,900 Notes receivable - long term portion 381 - Deposits and other noncurrent assets 640 782 ------------------------------------------- $ 115,401 $ 136,110 ===========================================
See accompanying notes to consolidated financial statements. 27 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) LIABILITIES AND STOCKHOLDERS'EQUITY
December 29, December3O, 1997 1996 --------------------------------------------- Current liabilities: Short term debt (note 3) $ - $ 2,500 Current installments of long term debt (note 3) 3,484 9,589 Accounts payable 8,186 15,142 Accrued wages, salaries, and benefits 2,528 2,528 Reserve for restructuring, Restaurant relocations and abandoned sites (note 8) 2,159 2,799 Accrued liabilities 11,408 13,784 Deferred franchise fee income 260 337 -------------------------------------------- Total current liabilities 28,025 46,679 Long-term debt, less current installments (note 3) 29,401 39,906 Deferred franchise fee income 346 466 Long-term reserves for Restaurant relocations and abandoned sites 581 1,001 Minority interests in joint ventures 966 1,455 Other noncurrent liabilities 5,710 6,263 -------------------------------------------- Total liabilities 65,029 95,770 -------------------------------------------- Stockholders'equity (note 7): Preferred stock, $.001 par value, Authorized 2,000,000 shares, no shares outstanding - - Common stock, $.001 par value, authorized 100,000,000 shares, 72,755,031 and 51,768,480 shares issued and outstanding at December 29, 1997 and December 30, 1996, respectively 73 52 Additional paid-in capital 112,536 90,339 Warrants (notes 7 and 1O) 9,463 9,463 Retained (deficit) earnings (71,300) (59,114) -------------------------------------------- 50,772 40,740 Less treasury stock, at cost, (578,904 shares) 400 400 -------------------------------------------- Net stockholders'equity 50,372 40,340 -------------------------------------------- -------------------------------------------- Commitments and related party transactions (notes 5 and 9) $ 115,401 $ 136,110 ============================================
See accompanying notes to consolidated financial statements. 28 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share amounts)
Fiscal Years Ended -------------------------------------------------------- December 29, December 30, January l, 1997 1996 1996 -------------------------------------------------------- Revenues: Net Restaurant sales $ 135,710 $ 155,392 $ 178,744 Franchise revenues and fees 7,474 8,367 8,567 Modular restaurant packages 710 1,202 2,994 -------------------------------------------------------- Total revenues 143,894 164,961 190,305 -------------------------------------------------------- Costs and expenses: Restaurant food and paper costs 43,625 54,707 63,727 Restaurant labor costs 43,919 57,302 58,245 Restaurant occupancy expenses 11,706 12,926 11,562 Restaurant depreciation and amortization 8,313 8,848 10,650 Advertising expense 6,820 7,420 8,087 Other restaurant operating expenses 13,457 15,345 15,565 Cost of modular restaurant package revenues 618 1,704 4,854 Other deprecation and amortization 2,263 4,326 4,044 General and administrative expenses 16,123 20,690 24,215 Impairment of long-lived assets (notes 1 and 8) 565 14,782 18,935 Losses on assets to be disposed of (note 8) 312 7,131 3,192 Loss provisions (note 8) 150 1,992 4,445 -------------------------------------------------------- Total cost and expenses 147,871 207,173 227,521 -------------------------------------------------------- Operating loss (3,977) (42,212) (37,216) -------------------------------------------------------- Other income (expense) Interest income 375 678 674 Interest expense (5,000) (6,074) (5,436) Interest expense - loan cost amortization (3,650) (159) (288) -------------------------------------------------------- Loss before minority interest and income tax expense (benefit) (12,252) (47,767) (42,266) Minority interest in (losses) earnings (66) (1,509) (192) -------------------------------------------------------- Loss before income tax expense (benefit) (12,186) (46,258) (42,074) Income tax expense (benefit) (note 4) - 151 (8,855) -------------------------------------------------------- Net loss $ (12,186) $ (46,409) $ (33,219) ======================================================== Preferred dividends 696 - - Net loss to common shareholders $ (12,882) $ (46,409) $ (33,219) ======================================================== Basic earnings (loss) per common share $ (0.20) $ (0.90) $ (0.65) ======================================================== Diluted earnings (loss) per common share $ (0.20) $ (0.90) $ (0.65) ======================================================== Weighted average number of common shares outstanding-basic and diluted 63,390 51,698 50,903 ========================================================
See accompanying notes to consolidated financial statements. 29 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 29, 1997, December 30, 1996 and January 1, 1996 (Dollars in thousands)
Additional Retained Net Preferred Common Paid-In Earnings Treasury Stockholders Stock Stock Capital Warrants (Deficit) Stock Equity --------------------------------------------------------------------------------- Balance at, January 2, 1995 $ - $ 50 $ 89,022 $ - $ 20,515 $ (400) $ 109,187 Issuance of 178,273 shares of common stock at $2.24 per share to acquire territory rights - 0 400 - - - 400 Issuance of I 1 8,740 shares of common stock at $2.20 per share to acquire a promotional apparel company - 0 260 - - - 260 Issuance of 126,375 shares of connnon stock at $2.19 per share to acquire a Restaurant - 0 276 - - - 276 Issuance of 907,745 shares of common stock as consideration for Restaurant acquisition (note 6) - 1 55 - - - 56 Issuance of 8,377 shares of common stock at $1.91 per share to pay consulting fees - 0 16 - - - 16 Warrants issued in settlement of litigation - - - 3,000 - - 3,000 Net loss - - - - (33,219) - (33,219) --------------------------------------------------------------------------------- Balance at, January 1, 1996 - 52 90,029 3,000 (12,705) (400) 79,976 Issuance of 200,000 shares of common stock at $1.14 as payment on long-term debt - 0 222 - - 222 Issuance of 40,000 shares of common stock at $1.19 per share to pay consulting fees - 0 47 - - 47 Warrants issued to investor group - - - 6,463 - 6,463 Employee stock options vested upon severance - - 41 - - 41 Net loss - - - - (46,409) - (46,409) --------------------------------------------------------------------------------- Balance at, December 30, 1996 - 52 90,339 9,463 (59,114) (400) 40,340 Private placement of 8,981,453 shares of common stock and 87,719 shares of preferred stock 0 9 19,373 - - - 19,382 Exercise of employee stock option for 125 shares of common stock - - 0 - - - 0 Conversion of preferred stock to common stock (0) 9 (9) - - - 0 Issuance of 1, 1 16,376 shares of common stock in payment of long term debt and accrued interest - 1 1,271 - - - 1,272 Issuance of 192,308 shares of common stock in payment of long term debt - 0 196 - - - 196 Issuance of 1,093,124 shares of common stock in payment of long term debt and accrued interest - 0 1,174 - - - 1,175 Issuance of 220,751 shares of common stock in payment of long term debt and accrued interest - 0 192 - - - 192 Net loss - - - - (12,186) - (12,186) --------------------------------------------------------------------------------- Balances, December 29,1997 $ - $ 73 $112,536 $ 9,463 $ (71,300) $ (400) $ 50,372 =================================================================================
See accompanying notes to consolidated financial statements. 30 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Fiscal Year Ended --------------------------------------------------- December 29, December 30, January l, 1997 1996 1996 --------------------------------------------------- Cash flows from operating activities: Net loss $ (12,186) $ (46,409) $ (33,219) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 10,576 13,173 14,694 Impairment of long-lived assets 565 15,282 18,935 Provision for losses on assets to be disposed of 312 7,132 3,192 Provision for bad debt 1,013 1,311 2,261 Deferred loan cost amortization 3,650 1,300 - Loss provisions 150 1,991 3,800 Gain on extinguishment of debt (359) - - (Gain) loss on sale of property & equipment 243 (75) 126 Minority interests in losses (66) (1,509) (192) Other - - - Change in assets and liabilities: Increase in receivables (1,501) (474) (1,126) Decrease in notes receivables 133 3,012 - Decrease (increase) in inventories 170 346 (588) Decrease in costs and earnings in excess of billings on uncompleted contracts - - 1,042 Decrease (increase) in income tax receivable 3,514 (242) (1,713) Decrease (increase) in deferred income tax assets - 3,358 (3,358) (Increase) decrease in prepaid expenses (105) (90) 447 Decrease (increase) in deposits and other noncurrent assets 142 (309) (103) (Decrease) increase in accounts payable (6,608) 4,273 (2,811) (Decrease) increase in accrued liabilities (3,452) 2,525 4,457 (Decrease) increase in deferred income (197) (261) 206 Decrease in deferred income taxes liabilities - - (2,540) --------------------------------------------- Net cash (used in) provided by operating activities (4,006) 4,334 3,510 --------------------------------------------- Cash flows from investing activities: Capital expenditures (1,671) (4,240) (2,876) Proceeds from sale of assets 4,166 1,813 5,502 Increase in goodwill and noncompete agreements - (4) Acquisitions of restaurants, net cash paid (282) (200) (64) Net cash provided by (used in) investing --------------------------------------------- activities $2,213 $ (2,631) $ 2,562 ---------------------------------------------
See accompanying notes to consolidated financial statements. 31 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Fiscal Year Ended -------------------------------------------------- December 29, December 30, January l, 1997 1996 1996 -------------------------------------------------- Cash flows from financing activities: Proceeds from (payments of) issuance of short-term debt-net $ (2,500) $ 1,500 $ 1,000 Proceeds from issuance of long-term debt - - 4,183 Principal payments on long-term debt (14,183) (3,584) (11,239) Net proceeds from sales of stock 19,414 Proceeds from investment by minority interest - 285 - Distributions to minority interest (73) (212) (164) -------------------------------------------------- Net cash provided by (used in) financing activities 2,658 (2,011) (6,220) -------------------------------------------------- Net increase (decrease) in cash 865 (308) (148) Cash at beginning of period 3,056 3,364 3,512 -------------------------------------------------- Cash at end of period $ 3,921 $ 3,056 $ 3,364 ================================================= Supplemental disclosures of cash flow information: Interest paid $ 5,399 $ 5,842 $ 5,065 Income taxes paid - - 182 Schedule of noncash investing and financing activities Note received on sale of assets $ 179 $ - $ 4,982 ================================================= Capital lease obligations incurred $ - $ 225 $ 5,000 ================================================= Acquisitions of restaurants: Fair value of assets acquired 1,360 9,902 3,046 Receivables forgiven (114) (5,429) - Reversal of deferred gain - 1,422 - Liabilitiesassumed (898) (5,695) (1,989) Stock issued - (993) Assets distributed (438) - - Reduction of minority interest 372 - - -------------------------------------------------- Total cash paid for the net assets acquired $ 282 $ 200 $ 64 ================================================= Stock issued for repayment of debt and accrued interest $ 2,901 $ 228 $ - ================================================= Stock issued for payment of consulting fees $ - $ 48 $ - =================================================
See accompanying notes to consolidated financial statements. 32 CHECKERS DRIVE-IN RESTAURANTS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 29, 1997, December 30, 1996 and January 1, 1996 (Tabular dollars in thousands, except per share amounts) Note 1: Summary of Significant Accounting Policies and Practices a) Purpose and Organization - The principal business of Checkers Drive-In Restaurants, Inc. (the "Company") is the operation and franchising of Checkers Restaurants. At December 29, 1997 there were 479 Checkers Restaurants operating in 23 different states, the District of Columbia, Puerto Rico and Israel. Of those Restaurants, 230 were Company-operated (including thirteen joint ventures) and 249 were operated by franchisees. The accounts of the joint ventures have been included with those of the Company in these consolidated financial statements. The consolidated financial statements also include the accounts of all of the Company's subsidiaries. Intercompany balances and transactions have been eliminated in consolidation and minority interests have been established for the outside partners' interests. b) Cash and Cash Equivalents - The Company considers all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents. Restricted Cash consists of cash on deposit with various financial institutions as collateral to support the Company's obligations to the States of Florida and Georgia 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. As of January 26, 1998, $1.2 million in restricted cash balances were relieved for the company's use as the funds have been guaranteed by a letter of credit from a bank. c) Receivables - Receivables consist primarily of royalties due from franchisees notes and accounts receivable from the sale of Modular Restaurant Packages. Allowances for doubtful receivables was $2.1 million at December 29, 1997 and $2.2 million at December 30, 1996. d) Inventories - Inventories, which consist principally of food and supplies, are stated at the lower of cost, first-in, first-out (FIFO) method or market. e) Pre-Opening Costs - Pre-opening costs are deferred and amortized over 12 months commencing with a Restaurant's opening. Such costs totaled $14,000 at December 30,1996 (none at December 29, 1997). f) Deferred Loan Costs - Deferred loan costs of $6.9 million incurred in connection with the Company's November 22, 1996 restructure of its primary credit facility (see Notes 3 and 10) are being amortized on the effective interest method. During 1997, the Company expensed an additional $1.2 million of deferred loan costs due to unscheduled principal reductions made during 1997. g) Property and Equipment - Property and equipment (P & E) are stated at cost except for P & E that have been impaired, for which the carrying amount is reduced to estimated fair value. Property and equipment under capital leases are stated at their fair value at the inception of the lease. Depreciation and amortization are computed on straight-line method over the estimated useful lives of the assets. h) Goodwill and Non-Compete Agreements - Goodwill and non-compete agreements are being amortized over 20 years and 3 to 7 years, respectively, on a straight-line basis (SFAS 121 impairments of goodwill were $565,000 in 1997, $4.6 million in 1996 and $5.8 million in 1995). i) Revenue Recognition - Franchise fees and area development franchise fees are generated from the sale of rights to develop, own and operate Checkers Restaurants. Area development franchise fees are based on the number of potential Restaurants in a specific area which the franchisee agrees to develop pursuant to the terms of the Area Development Agreement between the Company and the franchisee and are recognized as income on a pro-rata basis when substantially all of the Company's obligations per location are satisfied (generally at the opening of a Restaurant). Both franchise fees and area development franchise fees are non-refundable. Franchise fees and area development franchises fees received prior to the substantial completion of the Company's obligations are deferred. The Company receives royalty fees from franchisees, generally in the amount of 4% of each Restaurant's revenues. Royalty fees are recognized as earned. The Champion Modular Restaurant division recognizes revenues on the percentage-of-completion method, measured by the percentage of costs incurred to the estimated total costs of the contract. 33 j) Income Taxes - The Company accounts for income taxes under the Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. k) Earnings per Share - The Company calculates basic and diluted earning (loss) per share in accordance with the Statement of Financial Accounting Standard No. 128, "Earnings per Share", which is effective for periods ending after December 15, 1997. SFAS 128 replaces the presentation of primary earnings per share and fully diluted earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB 15") with basic earnings per share and diluted earnings per share. l) Stock Options - As discussed in Note 7, the Company utilizes the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". m) Impairment of Long Lived Assets - During the fourth quarter of 1995, the Company early adopted the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121) which requires the write-down of certain intangibles and tangible property associated with under performing sites. In applying SFAS No. 121 during 1995, 1996 and in 1997, the Company reviewed all stores that recorded losses in the applicable fiscal years and performed a discounted cash flow analysis where indicated for each store based upon such results projected over a ten or fifteen year period. This period of time was selected based upon the lease term and the age of the building, which the Company believes is appropriate based upon its limited operating history and the estimated useful life of its modular restaurants. 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 Company recorded significant SFAS No. 121 impairment losses in 1995 and 1996 again in 1997 because sales continued to decline in each fiscal year, which necessitated a review of the carrying value of its assets. The effect of applying SFAS No. 121 resulted in a reduction of property and equipment and goodwill of $565,000 in 1997, $14.8 million in 1996 and $18.9 million in 1995. n) Disclosures about Fair Values of Financial Instruments - The balance sheets as of December 29, 1997, and December 30, 1996, reflect the fair value amounts which have been determined, using available market information and appropriate valuation methodologies. However, considerable judgement is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of cash and equivalents, receivables, accounts payable, and long-term debt which are a reasonable estimate of their fair value. Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. o) New Accounting Standards - In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. This statement is effective for fiscal years beginning after December 15, 1997. Reclassification of the Company's financial statements for earlier periods provided for comparative purposes will be required. The Company believes that this standard will not have a material effect on the Company's financial statements. In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and Related information" (Statement 131), was issued. This statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products, services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. Statement 131 is effective for fiscal years beginning after December 15, 1997. The Company does not expect that Statement 131 will have material effect upon the Company's financial statements. 34 p) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. q) Year 2000 - In January 1997, the Company developed a plan to deal with the Year 2000 problem and began converting its computer systems to be Year 2000 compliant. The plan provides for the conversion efforts to be completed by the end of 1999. The Year 2000 problem is the result of computer programs being written using two digits rather then four to define the applicable year. The total cost of the project is estimated to be $100,000 and will be funded through operating cash flows. The Company anticipates expensing all costs associated with these systems changes as the costs are incurred. r) Reclassifications - Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 presentation. 35 Note 2: Property and Equipment Property and equipment consists of the following: December 29, December 30, Useful Life 1997 1996 In Years ------------------------------------------ Land and improvements $ 55,882 $ 56,544 0-15 Buildings 28,938 29,282 20-31.5 Equipment and fixtures 45,362 46,286 5-10 -------------------------- 130,182 132,112 Less accumulated depreciation and wnortization 42,293 33,923 -------------------------- $ 87,889 $ 98,189 ========================== Note 3: Long-Term Debt Long-term debt consists of the following:
December 29, December 30, 1997 1996 ------------------------------ Notes payable under Loan Agreement $ 26,077 $ 35,818 Notes payable due at various dates, secured by buildings and equipment, with interest at rates primarily ranging from 9.0% to 15.83%, payable monthly 5,441 8,963 Unsecured notes payable, bearing interest at rates ranging from prime to 18% - 3,481 Other, at interest rates ranging from 7.0% to 10.0% 1,367 1,233 ------------------------------ Total long-term debt 32,885 49,495 Less current installments 3,484 9,589 ------------------------------ Long-term debt, less current installments $ 29,401 $ 39,906 ==============================
Aggregate maturities under the existing terms of long-term debt agreements for each of the succeeding five years are as follows: 1998 $ 3,484 1999 $ 27,714 2000 $ 1,215 2001 $ 339 2002 $ 133 ------------- $ 32,885 ============= On October 28, 1993, the Company entered into a loan agreement (the "Loan Agreement") with a group of banks ("Bank Group") providing for an unsecured, revolving credit facility. The Company borrowed approximately $50 million under this facility primarily to open new Restaurants and pay off approximately $4 million of previously-existing debt. The Company subsequently arranged for the Loan Agreement to be converted to a term loan and collateralized the term loan and a revolving line of credit ranging from $1 million to $2 million (the "Credit Line") with substantially all of the Company's assets. 36 On July 29, 1996, the debt under the Loan Agreement and Credit Line was acquired from the Bank Group by an investor group led by an affiliate of DDJ Capital Management, LLC (collectively, "DDJ"). The Company and DDJ began negotiations for restructuring of the debt. On November 14, 1996, and prior to consummation of a formal debt restructuring with DDJ, the debt under the Loan Agreement and Credit Line was acquired from DDJ by a group of entities and individuals, most of whom are engaged in the fast food restaurant business. This investor group (the "CKE Group") was led by CKE Restaurants, Inc., the parent of Carl Karcher Enterprises, Inc., Taco Bueno Restaurants, Inc., and Summit Family Restaurants, Inc. Also participating were most members of the DDJ Group, as well as KCC Delaware, a wholly-owned subsidiary of Giant Group, Ltd., which is a controlling shareholder of Rally's Hamburgers, Inc. Waivers of all defaults under the Loan Agreement and Credit Line were granted through November 22, 1996, to provide a period of time during which the Company and the CKE Group could negotiate an agreement on debt restructuring. On November 22, 1996, the Company and the CKE Group executed an Amended and Restated Credit Agreement (the "Restated Credit Agreement") thereby completing a restructuring of the debt under the Loan Agreement. The Restated Credit Agreement consolidated all of the debt under the Loan Agreement and the Credit Line into a single obligation. At the time of the restructuring, the outstanding principal balance under the Loan Agreement and the Credit Line was $35.8 million. Pursuant to the terms of the Restated Credit Agreement, the term of the debt was extended by one (1) year until July 31, 1999, and the interest rate on the indebtedness was reduced to a fixed rate of 13%. In addition, all principal payments were deferred until May 19, 1997, and the CKE Group agreed to eliminate certain financial covenants, to relax others and to eliminate approximately $4.3 million in restructuring fees and charges. The Restated Credit Agreement also provided that certain members of the CKE Group agreed to provide to the Company a short term revolving line of credit of up to $2.5 million, also at a fixed interest rate of 13% (the "Secondary Credit Line"). In consideration for the restructuring, the Restated Credit Agreement required the Company to issue to the CKE Group warrants to purchase an aggregate of 20 million shares of the Companys' common stock at an exercise price of $.75 per share, which was the approximate market price of the common stock prior to the announcement of the debt transfer. As of December 29, 1997, the Company has reduced the principal balance under the Restated Credit Agreement by $9.7 million and has repaid the Secondary Credit Line in full. A portion of the funds utilized to make these principal reduction payments were obtained by the Company from the sale of certain closed restaurant sites to third parties. Additionally, the Company utilized $10.5 million of the proceeds from the February 21, 1997, private placement (described later in this section). Pursuant to the Restated Credit Agreement, the prepayments of principal made in 1996 and in 1997 will relieve the Company of the requirement to make any of the regularly scheduled principal payments under the Restated Credit Agreement which would have otherwise become due in fiscal year 1998 through maturity. The Restated Credit Agreement provides however, that 50% of any future asset sales must be utilized to prepay principal. On February 21, 1997, the Company completed a private placement (the "Private Placement") of 8,771,929 shares of the Company's common stock, $.001 par value, and 87,719 shares of the Company's Series A preferred stock, $114 par value (the "Preferred Stock"). CKE Restaurants, Inc. purchased 6,162,299 of the Company's common stock and 61,623 of the Preferred Stock and other qualified investors, including other members of the CKE Group of lenders under the Restated Credit Agreement, also participated in the Private Placement. The Company received approximately $20 million in proceeds from the Private Placement. The Company used $8 million of the Private Placement proceeds to reduce the principal balance due under the Restated Credit Agreement; $2.5 million was utilized to repay the Secondary Credit Line; $2.3 million was utilized to pay outstanding balances to various key food and paper distributors; and the remaining amount was used primarily to pay down outstanding balances due certain other vendors. On August 6, 1997, the 87,719 shares of preferred stock were converted into 8,771,900 shares of the Company's common stock valued at $10 million. In accordance with the agreement underlying the Private Placement (the "Private Placement Agreement"), the Company also issued 610,524 shares of common stock as a dividend pursuant to the liquidation preference provisions of the Private Placement Agreement, valued at $696,000 to the holders of the preferred stock issued in the Private Placement. This dividend was charged to paid-in capital due to the retained deficit position of the Company. At November 13, 1997 the effective date of the registration statements filed on Forms S-4 the Company had outstanding promissory notes in the aggregate principal amount of approximately $3.2 million, (the "Notes") payable to Rall-Folks, Inc. ("Rall-Folks"), Restaurant Development Group, Inc. ("RDG") and Nashville Twin Drive-Through Partners, L.P. (N.T.D.T."). The Company agreed to acquire the Notes issued to Rall-Folks and RDG in consideration of the issuance of an aggregate of approximately 1.9 million shares of Common Stock and the Note issued to NTDT in exchange for a convertible note in the same principal amount and convertible into approximately 614,000 shares of Common Stock pursuant agreements entered into in 1995 and subsequently amended. All three of the parties received varying degrees of protection on the purchase price of the promissory notes. Accordingly, the actual number of shares to be issued was to be determined by the market price of the Company's stock. Consummation of the Rall-Folks, RDG, and NTDT purchases occurred on November 24, December 5, 37 and November 24, 1997, respectively. During December 1997, the Company issued an aggregate of 2,622,559 shares of common stock in payment of $2.9 million of principal and accrued interest relating to the Notes. After these issuances, the remaining amount owed in relation to these Notes was $322,000, payable to NTDT. In early 1998, the Company issued an additional 359,129 shares of common stock to NTDT. Additionally, in January 1998, the Company issued 12,064 shares of common stock to RDG in payment of accrued interest, 279,868 shares of common stock and paid $86,000 in cash to Rall-Folks in full settlement of all remaining amounts owed in relation to debt principal, accrued interest, and purchase price protection. It is currently estimated that the Company owes $57,000 in additional cash payments to NTDT for accrued interest and purchase price protection. The Company currently has available an additional 103,000 registered shares which may be issued to RDG as purchase price protection and does not expect any significant financial commitments beyond such shares necessary to settle the Notes. The Company's Restated Credit Agreement with the CKE Group contains restrictive covenants which include the consolidated EBITDA covenant as defined. As of December 29, 1997, the Company was in violation of the consolidated EBITDA covenant. The violation was primarily due to the Company recording certain accounting charges and loss provisions in period 13 of fiscal 1997, as discussed in Note 8. The Company received a waiver for period 13 of fiscal 1997 and for periods one and two of fiscal 1998. The Company expects to cure the covenant violation for period three of fiscal 1998 due to the effect of period 13 of fiscal 1997 no longer impacting the trailing three period reporting calculation. Consequently the debt obligation has been classified as a long-term obligation as of December 29, 1997. Note 4: Income Taxes Income tax expense (benefit) from continuing operations in fiscal years 1997, 1996 and 1995 amounted to $-O-, $151,000, and ($8.9 million) respectively. Income tax expense (benefit) consists of: Current Deferred Total -------------------------------------------------- 1997 Federal $ - $ - $ - State $ - $ - $ - -------------------------------------------------- $ - $ - $ - ================================================== 1996 Federal $ (3,397) $ 3,397 $ - State 190 (39) 151 -------------------------------------------------- $ (3,207) $ 3,358 $ 151 ================================================== 1995 Federal $ (2,957) $ (4,523) $ (7,480) State - (1,375) (1,375) -------------------------------------------------- $ (2,957) $ (5,898) $ (8,855) ================================================== 38 Actual expense differs from the expected expense by applying the federal income tax rate of 35% to earnings before income tax as follows:
Fiscal Year Ended ---------------------------------------------------- Dec 29, Dec 30, Jan. 1, 1997 1996 1996 ---------------------------------------------------- "Expected" tax (benefit) expense $ (4,265) $ (16,190) $ (14,726) State taxes, net of federal benefit (474) (1,802) (1,632) Change in valuation allowance for deferred tax asset allocated to income tax expense 4,624 18,125 7,616 Other, net 115 18 (113) ---------------------------------------------------- Actual tax expense (benefit) $ - $ 151 $ (8,855) ====================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, are represented below:
December 29, December 30, 1997 1996 ------------------------------- Deferred Tax Assets: Impairment of long-lived assets tinder SFAS 121 $15,885 $16,085 Accrued expenses and provisions for restructuring and Restaurant relocations and abandoned sites, principally due to deferral for income tax purposes 8,121 8,581 Federal net operating losses and credits 19,583 13,878 State net operating losses and credits 3,032 2,210 Deferral of franchise income and costs associated with franchise openings in progress 76 100 Other 680 284 ---------------------------- Total gross deferred tax assets 47,377 41,138 Valuation allowance (30,365) (25,741) ---------------------------- Net deferred tax assets $ 17,012 $ 15,397 ---------------------------- Deferred Tax Liabilities: Property and equipment principally due to differences in depreciation 16,899 15,276 Pre-opening expense 113 121 ---------------------------- Total gross deferred tax liabilities 17,012 15,397 ---------------------------- Net deferred tax assets $ - $ - ============================
The net change in the valuation allowance in the years ended December 29, 1997 and December 30, 1996 was an increase of $4.6 million and $18.1 million, respectively. The total valuation allowance of $30.4 million is maintained on deferred tax assets which the Company has not determined to be more likely than not realizable at this time. The Company will continue to review the valuation allowance on a quarterly basis and make adjustments as appropriate. At December 29, 1997 the Company has net operating loss carry forwards for Federal income tax purposes of $52.6 million which are available to offset future taxable income, if any, through 2012. The Company also has alternative minimum tax credit carry forwards of approximately $1.3 million which are available to reduce future regular income taxes, if any, over an indefinite period as well as Targeted Jobs Tax Credit carry forwards in the amount of $446,000 which are available to reduce future regular income taxes, if any, through 2009. 39 Note 5: Related Parties Previous to 1995, the Company entered into joint ventures with related parties to operate two Restaurants. The joint venture agreements require royalty fees of 2 to 4% and one of the agreements requires a management fee of 2.5% be paid to the Company. Total fees received by the Company were $103,000 in 1995. Previous to 1995, the Company sold its 50% partnership interest in one of the above joint ventures back to the joint venture partner. This joint venture partner has an additional franchise Restaurant. Royalties paid by these Restaurants to the Company, for the time period in which the Restaurants were owned 100% by the joint venture partner were $68,000 in 1995. Previous to 1995, the Company entered into a unit franchise agreement for the operation of a single restaurant in Dania, Florida, with a related party. In connection with the transaction, the related party and his wife executed a continuing guaranty, which guaranty provides for the personal guaranty of both of the individuals of all obligations of the franchisee under the franchise agreement. Total sums received by the Company in royalty fees in fiscal year 1995 were $31,000. Previous to 1995, the Company entered into a unit franchise agreement for the operation of a single restaurant in the Clearwater, Florida area with three related parties. In connection with the transaction, the related parties executed a continuing guaranty, which guaranty provides for the personal guaranty of each of the individuals of all obligations of the franchisee under the franchise agreement. Total sums received by the Company in royalty fees in fiscal year 1995 were $18,000. Previous to 1995, the Company entered into an Area Development Agreement with two related parties. The Agreement provides for the payment to the Company of the standard development fee, a standard franchise fee per restaurant and payment of standard royalty fees. Six unit franchise agreements have been granted pursuant to the Agreement in the names of various entities in which the related parties each hold a fifty (50%) ownership interest. Total royalty fees received by the Company in fiscal year 1995 and pursuant to the unit franchise agreements were $194,000. Previous to 1995, the Company sold one of its Restaurants in Ft. Lauderdale, Florida, to a related party, The sales price was $905,000 and the Company received $705,000 in cash and a promissory note for $200,000. A gain of approximately $470,000 was recognized by the Company. Total royalty fees received by the Company in fiscal years 1995 pursuant to the unit franchise agreement for the Restaurant were $31,000. Previous to 1995, the Company acquired 13 Restaurants from a Director of the Company and a group of five partnerships (see note 6). The Company also entered into a joint venture agreement with an affiliate of the Director in September 1993, whereby the Director's affiliate served as the operating general partner and owned 25% interest in the joint venture. The agreement gave the Company the right to purchase, and gave the Director the right to require the Company to purchase, the Director's 25% interest in the joint venture at December 31, 1995 based on a formula price. The Director received compensation and distributions totaling approximately $180,000 in 1995 from the joint venture. The joint venture subleased its office space in Atlanta from an affiliate of the Director in 1995. Rent paid by the joint venture in 1995 was $87,000. Total franchise fees received from the Director and his affiliate and recognized as income was and $96,000 in 1995. The Company purchased the interest of the Director and his affiliations in the joint venture and sold three of these Restaurants to an affiliate of the Director in August 1995. On July 17, 1995, Checkers of Raleigh, a North Carolina corporation ("C of R") in which a Director at the time was the principal officer and shareholder, took possession of two under performing Company Restaurants pursuant to a verbal agreement, and entered into two franchise agreements which provided for waiver of the initial franchise fees but required the payment to the Company of royalty fees of 1%, 2% and 3% during the first, second and third years, respectively, and 4% thereafter. On January 1, 1996, C of R entered into leases for these Restaurants for a term of three years for (i) the building and equipment at a monthly rental of 1.5%, 3% and 4.5% of gross sales during the first, second and third years respectively, and (ii) the land at a monthly rental of 3% of gross sales for the first year and 4% of gross sales thereafter. Total sums received by the Company in fiscal year 1995 for this Restaurants were: (a) $3,000 in royalty fees pursuant to the unit franchise agreements, and (b) -0- in rent. The Director executed a continuing guaranty, which provides for the personal guaranty of all of the obligations of the franchisee under the franchise agreements. Pursuant to an Options for Asset Purchase dated January 1, 1996, C of R was granted the option to purchase these Restaurants for the greater of (a) 50% of its sales for the prior year, or (b) $350,000 each. On December 5, 1995, Checkers of Asheville, a North Carolina corporation ("C of A") in which a Director at the time was the principal officer and shareholder, took possession of three under performing Company Restaurants pursuant to a verbal agreement, and entered into unit franchise agreements which provided for waiver of the initial franchise fees but generally 40 required the payment to the Company of the standard royalty fees. On January 1, 1996, C of A entered into leases for this Restaurant for a term of three years for the land, building and equipment at monthly rentals at rates generally varying between 1% to 6% of gross sales. The Director executed a continuing guaranty, which provides for the personal guaranty of all of the obligations of the franchisee under the franchise agreements. Pursuant to Options for Asset Purchase dated January 1, 1996, C of A was granted the option to purchase these Restaurants for the greater of (a) 50% of its sales for the prior year, or (b) $350,000 for one restaurant and $300,000 for the remaining two restaurants. In January 1996, the Company entered into an Agreement for Lease with Option for Asset Purchase ("Agreement") with a Director in which the Company was granted certain rights for three years in and to a Restaurant in Clearwater, Florida. Checkers (a) entered into a sublease for the real property and an equipment lease for the fixed assets at a combined monthly rental of $3,000, and (b) agreed to purchase the inventory located at the Restaurant. The Company incurred approximately $166,000 in legal fees for 1995, respectively, from a law firm in which a Director of the Company, at the time, was a partner. Additionally, during 1997 the Company incurred $539,000 in legal fees from a law firm in which a current Director of the Company is a partner. In October 1997, the Company and Rally's Hamburgers, Inc. ("Rally's") entered into an employment agreement with James J. Gillespie, effective November 10, 1997, pursuant to which he is to serve as Chief Executive Officer of the Company and Rally's. Mr. Gillespie is also to serve as a director of the Company and Rally's. The term of employment is for two years, subject to automatic renewal by the Company and Rally's for one-year periods thereafter, at an annual base salary of $283,000. Mr. Gillespie is also entitled to participate in the incentive bonus plans of the Company and Rally's. Upon execution of the employment agreement, Mr. Gillespie was granted an option to purchase 300,000 shares of Rally's common stock, $.10 par value per share, and received a signing bonus of $50,000. The options vest in three equal annual installments commencing on November 10, 1998; provided, that if the term of the agreement is not extended to November 10, 2000, the option shall become fully vested in November 10, 1999. Mr. Gillespie is entitled to choose to participate in either the Company's or Rally's employee benefit plans and programs and is entitled to reimbursement of his reasonable moving expenses and a relocation fee of $5,000. The agreement may be terminated at any time for cause. If Mr. Gillespie is terminated without cause, he will be entitled to receive his base annual salary, and any earned unpaid bonus, through the unexpired term of the agreement, payable in a lump sum or as directed by Mr. Gillespie. Mr. Gillespie has agreed to keep confidential all non-public information about the Company and Rally's during the term of his employment and for a two-year period thereafter. In addition, Mr. Gillespie has agreed that he will not, during his employment, engage in any business which is competitive with either the Company or Rally's. The Company and Rally's will share the costs associated with his agreement, pursuant to that certain Management Services Agreement dated November 30, 1997. Effective November 30, 1997 the Company entered into a Management Services Agreement with Rally's, whereby the Company is providing accounting, technology, and other functional and management services to predominantly all of the operations of Rally's. The management Services Agreement carries a term of seven years, terminable upon the mutual consent of the parties. The Company will receive fees from Rally's relative to the shared departmental costs times the respective store ratio. The Company has increased its corporate and regional staff in late 1997 and early 1998 in order to meet the demands of the agreement, but management believes the income generated by this agreement has enabled the Company to attract the management staff with expertise necessary to more successfully manage and operate both Rally's and the Company at significantly reduced costs to both entities. Overall, the Company believes many of the fundamental steps have been taken to improve the Company's initiative toward profitability, but there can be no assurance that it will be able to do so. Management believes that cash flows generated from operations, and asset sales should allow the Company to continue to meet its financial obligations and to pay operating expenses. On December 18, 1997 Rally's, Hamburgers, Inc. ("Rally's") acquired approximately 19.1 million shares of the Company's common stock, pursuant to that certain Exchange Agreement, dated as of December 8, 1997 (the "Exchange Agreement"), between Rally's, CKE Restaurants, Inc., Fidelity National Financial, Inc., GIANT GROUP, LTD. and the other parties named in the Exchange Agreement. As of December 18, 1997, Rally's owned approximately 26.3% of the outstanding common stock of the Company. 41 Note 6: Acquisitions and Dispositions On March 31, 1995, the Company re-acquired certain rights relating to the development and operation of Checkers Restaurants in the cities of Flint and Saginaw, Michigan. The purchase price was $400,000 payable by the delivery of 178,273 shares of Common Stock. Effective as of July 28, 1995, an Asset Purchase Agreement (the "Agreement") was entered into by and among InnerCity Foods, a Georgia general partnership ("ICF"), InnerCity Foods Joint Venture company, a Delaware corporation and wholly owned subsidiary of the Registrant ("ICF JVC"), InnerCity Foods Leasing Company, a Delaware corporation and wholly owned subsidiary of the Company ("Leasing"), The La-Van Hawkins Group, Inc., a Georgia corporation ("Hawkins Group"), La-Van Hawkins InnerCity Foods, LLC, a Maryland limited liability company ("LHICF"), and La-Van Hawkins, an individual who was the President of ICF and a Director of the Company from August 1994 to January 1996 ("Hawkins"). For purposes of the disclosure in this term, ICF JVC, Leasing and the Company are collectively referred to as the "Checkers Parties" and Hawkins Group, LHICF and Hawkins are collectively referred to as the "Hawkins Parties". ICF was a joint venture between the Hawkins Group and ICF JVC, of which the Hawkins Group was the Operating Partner. The Hawkins Group is controlled by Hawkins. ICF was engaged in the operation of seven Checkers Restaurants in Atlanta, Georgia, six Checkers Restaurants in Philadelphia, Pennsylvania, and three Checkers Restaurants in Baltimore, Maryland. ICF JVC owned a 75% interest in ICF and the Hawkins Group owned a 25% interest in ICF. The physical assets comprising the Restaurants operated by ICF were owned by Leasing and leased to ICF. The Agreement consisted of two separate transactions. The first transaction was the purchase by the Company of all of the rights, titles, and interest of Hawkins Group in and to ICF for a purchase price of $1.3 million, plus an amount based on ICF's earnings times 1.25, minus all amounts owed by the Hawkins Parties to the Checkers Parties in connection with the operation of ICF. The component of the purchase price based upon the earnings of ICF was zero, and the amounts owed by the Hawkins Parties to the Checkers Parties was in excess of $1.3 million. Accordingly, there was no net purchase price payable to the Hawkins Parties by the Company for Hawkins Group's interest in ICF. The second transaction under the Agreement was the sale by the Checkers Parties of all of their respective rights, titles and interests in the three Checkers Restaurants located in Baltimore, Maryland, to LHICF for a purchase price of $4.8 million. The purchase price was paid by the delivery of a promissory note in the amount of $5.0 million, which amount includes the purchase price for the three Restaurants, the approximately $107,000 owed by the Hawkins Parties to the Checkers Parties in connection with the operation of ICF that was not offset by the $1.2 million purchase price for Hawkins Group's interest in ICF and an advance of $75,000 to Hawkins that was used primarily to pay closing costs related to the transaction. The note bore interest at a floating rate which is the lesser of (i) .25% above the current borrowing rate of the Company under its Loan Agreement and (ii) 10.5%. Interest only is payable for the first six months with principal and interest being payable thereafter based on a 15 year amortization rate with the final payment of principal and interest due August 2002. The note was secured by a pledge of all the assets sold. Royalty fees for the three Restaurants were at standard rates provided that the Company would receive an additional royalty fee of 4% on all sales in excess of $1.8 million per Restaurant. On August 16, 1996, the Company received $3.5 million and a Checkers Restaurant in Washington D.C., valued at $660,000, in settlement of a note receivable of $5.0 million, accrued interest of $320,000, and other receivables of $279,000. This transaction resulted in an elimination of a deferred gain of $1.4 million which had been previously recorded as a liability upon the sale of three Checkers Restaurants located in Baltimore, Maryland on July 28, 1995 when the $5.0 million note receivable was generated. In addition to the two transactions described above, the Agreement also provided for the Hawkins Parties to be granted, and such parties were granted on the closing date, development rights for Checkers Restaurants in certain defined areas of Baltimore, Maryland, Washington, D.C., Bronx, New York, and Harlem, New York, as well as a right of first refusal for certain territories in California and Virginia. Franchise fees and royalty rates for all Restaurants developed under such development rights would be at standard rates provided that the Company would receive an additional royalty fee of 4% on all sales in excess of $1.8 million per Restaurant. The Agreement supersedes all other prior agreements, understandings and letters related to the transactions contemplated by the Agreement including, but not limited to, the Joint Venture Agreement, dated as of August 10, 1993 and the Management Agreement, Engagement Agreement and Buy/Sell Agreement, each dated as of September 7, 1993, by and among certain of the Hawkins Parties and their affiliates and the Checkers Parties; provided, however, that any provisions of such agreements that would survive the termination of such agreements according to the terms of such agreements are deemed to have survived the termination of such agreements pursuant to the terms of the Agreement. In March, 1995 the Company purchased two Checkers Restaurants in Nashville, Tennessee from a franchisee. Consideration consisted of approximately $50,000 in cash secured, subordinated promissory notes for approximately $1.6 million and future cash payments of up to $800,000 consisting of $200,000 for a noncompete agreement ($40,000 per year for five years) and up to $600,000 through an earnout provision. In April 1995, the Company acquired the remaining 50% share of a joint venture Restaurant in St. Petersburg, Florida. Pursuant to the terms of the Assignment Agreement by and among the 42 Company and the other partners of the joint venture, the Company acquired the one-half interest for 126,375 shares of Common Stock valued at approximately $280,000. Additionally in April 1995, the Company acquired substantially all of the assets of a promotional apparel distributor ("the Distributor") for a purchase price including (a) $67,000, payable in shares of Common Stock, and (b) the assumption of approximately $238,000 of liabilities, approximately $196,000 of which was represented by promissory notes payable to certain stockholders of the Distributor (the "Noteholders"). The Company issued a total of 118,740 shares of Common Stock to the Distributor in payment of the $67,000 purchase price and to the Noteholders in payment of their notes. On July 1, 1996, the Company acquired certain general and limited partnership interests in nine Checkers restaurants in the Chicago area, three wholly-owned Checkers Restaurants and other assets and liabilities as a result of the bankruptcy of Chicago Double-Drive Thru, Inc. ("CDDT"). These assets were received in lieu of past due royalties, notes receivable and accrued interest, from CDDT which totaled, net of reserves, $3.3 million. Assets of $8.9 million ($7.0 million tangible and $1.9 million intangible) and liabilities of approximately $3.0 million were consolidated into the balance sheet of the Company as of the acquisition date. Long-term debt of $1.6 million was assumed as a result of the acquisition of the assets of CDDT, including an obligation to the Internal Revenue Service of $545,000 and an obligation to the State of Illinois Department of Revenue of $155,000, each subject to interest at 9.125% per year. The remaining acquired notes ($922,000) are payable to a Bank and other parties with interest at rates ranging from 8.11% to 10.139%. Non-interest bearing notes payable, certain accrued liabilities and permitted encumbrances of $1.1 million related to this acquisition were assumed by the Company. Accounts payable incurred by CDDT and its partnerships in the normal course of business amounting to $333,000 were also recorded in connection with this acquisition. During 1997, the Company acquired the minority share of one joint-venture restaurant, the operations and certain of the equipment including one MRP associated with five operating franchise restaurants and one closed franchise restaurant having an aggregate fair value of $1.4 million, for a total net cash disbursement of $282,000. As a result of these acquisitions, the Company recorded the assumption of total indebtedness of $898,000, including long-term debts and capital leases of $803,000 and other accruals of $95,000. Additionally, as a result of these transactions, minority interests of $372,000 were eliminated, receivables of $114,000 were forgiven, property of $438,000 was distributed and goodwill of $831,000 was recorded. The operations of these acquisitions are included in these financial statements from the date of purchase. The impact of the 1995, 1996 and 1997 acquisitions on the consolidated results of operations for the period prior to acquisitions is immaterial. Note 7: Stock Option Plans In August 1991, the Company adopted the 1991 Stock Option Plan (the 1991 Stock option Plan), as amended for employees whereby incentive stock options, nonqualified stock options, stock appreciation rights and restrictive shares can be granted to eligible salaried individuals. The plan was amended on August 6, 1997 to increase the number of shares subject to the Plan from 3,500,000 to 5,000,000. In 1994, the Company adopted a Stock Option Plan for Non-Employee Directors, in 1994, as amended (The "Directors Plan"). The Directors Plan was amended on August 6, 1997 by the approval of the Company's stockholders to increase the number of shares subject to the Directors Plan from 200,000 to 5,000,000. provides for the automatic grant to each non-employee director upon election to the Board of Directors a non-qualified, ten-year option to acquire shares of the Company's common stock, with the subsequent automatic grant on the first day of each fiscal year thereafter during the time such person is serving as a non-employee director of a non-qualified ten-year option to acquire additional shares of common stock. One-fifth of the shares of common stock subject to each initial option grant become exercisable on a cumulative basis on each of the first five anniversaries of the grant of such option. One-third of the shares of common stock subject to each subsequent option grant become exercisable on a cumulative basis on each of the first three anniversaries of the date of the grant of such option. Each Non-Employee Director serving on the Board as of July 26, 1994 received options to purchase 12,000 shares. Each new Non-Employee Director elected or appointed subsequent to that date also received options to purchase 12,000 shares. Each Non-Employee Director has also received additional options to purchase 3,000 shares of Common Stock on the first day of each fiscal year. On August 6, 1997 the Directors Plan was amended to provide: (I) an increase in the option grant to new Non-Employee Directors to 100,000 shares, (ii) an increase in the annual options grant to 20,000 shares and (iii) the grant of an option to purchase 300,000 shares each to each Non-Employee Directors 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. 43 Both the 1991 Stock Option Plan and the Directors Plan provide that the shares granted come from the Company's authorized but unissued or reacquired common stock. The exercise price of the options granted pursuant to these Plans will not be less than 100 per-cent 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. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plan for employees been determined based on the fair value at the grant date for awards in fiscal 1995, 1996, and 1997 consistent with the provisions of SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: Fiscal Year Ended -------------------------------------------------- December 29, December 30, January 1, 1997 1996 1996 -------------------------------------------------- As Reported $ (12,882) $ (46,409) $ (33,219) Pro Forma $ (14,896) $ (47,829) $ (33,707) As Reported $ (0.20) $ (0.90) $ (0.65) Pro Forma $ (0.23) $ (0.93) $ (0.66) 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 1995, 1996 and 1997, respectively: dividend yield of zero percent for all years; expected volatility of 60, 64 and 86 percent, risk-free interest rates of 6.2, 6.5 and 5.9 percent, and expected lives of 5.1, 3.5 and 2.0 years. The compensation cost disclosed above may not be representative of the effects on reported income in future years, for example, because options in many cases vest over several years and additional awards are made each year. Information regarding the employee option plan for 1997, 1996 and 1995 is as follows: 44 Summary of the Status of the CDmpany's Stock Option Plam
1997 1996 1995 ---------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Averge Shares Exercise Price Shares Exercise Price Shares Exercise Price ---------------------------------------------------------------------------------- Outstanding at the beginning of the year 3,344,230 $ 3.94 2,631,084 $ 4.75 2,948,674 $ 5.44 Granted (exercise price equals market) 2,737,000 1.40 96,100 1.00 521,182 2.37 Granted (exercise price exceeds market) - - 953,056 1.54 - Exercised (125) 1.53 - - - Forfeited (842,675) 6.25 (336,010) 2.07 (838,772) 4.00 --------- ---------- ---------- Outstanding at the end of the year 5,238,430 2.21 3,344,230 3.94 2,631,084 4.75 ========= ========== ========== Options Exercisable at year end 4,511,768 2,165,934 1,147,650 --------- ---------- ---------- Weighted-average fair value of options granted during the year $ 0.78 $ 0.39(1) $ 1.08
(1). The, weighted-average fair value of options granted whose exercise price exceeds market was $0.39.
- --------------------------------------------------------------------------------------------------------------- Weighted-Average Number Remaining Weighted Number Weighted Range of Oustanding Contractual Average Exercisable Average Exercise Prices 12/30/97 Life (Yrs.) Exercise Price at 12/30/97 Exercise Price - --------------------------------------------------------------------------------------------------------------- $0.75 to $2.00 3,480,889 9.2 1.42 3,038,902 1.41 $2.01 to $3.00 857,045 3.7 2.58 599,955 2.57 $3.01 to $4.00 214,550 2.1 3.35 207,300 3.54 $4.01 to $5.00 - - - - - $5.01 to $6.00 671,442 2.4 5.16 632,459 5.15 $6.01 to $20.00 14,504 4.5 12.33 33,152 8.51 - --------------------------------------------------------------------------------------------------------------- $0.75 to $20.00 5,238,430 7.1 2.21 4,511,768 2.24 ===============================================================================================================
In February 1996, employees (excluding executive officers) who were granted options in 1993 and 1994 with exercise prices in excess of $2.75 were offered the opportunity to exchange for a new option grant for a lesser number of shares at an exercise price of $1.95, which represented a 25% premium over the market price of the Company's common stock on the date the plan was approved. Existing options with an exercise price in excess of $11.49 could be cancelled in exchange for new options on a three to one basis. The offer to employees expired April 30, 1996 and, as a result of this offer, options for 49,028 shares were forfeited in return for option for 15,877 shares at the $1.95 exercise price. These changes are reflected in the tables above. 45 Note 8: Loss Provisions During 1997, the Company recorded accounting charges and loss provisions of $1.0 million to provide for impaired goodwill associated with one under-performing store ($565,000) , to provide for additional losses on assets to be disposed due to certain sublease properties being converted to surplus ($312,000), and a provision for the aging of Champion inventories ($150,000). The Company recorded accounting charges and loss provisions of $16.8 million during the third quarter of 1996, $2.1 million of which consisted of various general and administrative expenses ($500,000 for bad debt expense and a $750,000 provision for state sales tax audits and refinancing costs of $845,000 were also recorded to expense capitalized costs incurred in connection with the Company's previous lending arrangements with its bank group). Provisions totaling $14.2 million to close 27 Restaurants and relocate 22 of them ($4.2 million), settle 16 leases on real property underlying these stores ($1.2 million) and sell land underlying the other 11 Restaurants ($307,000), and impairment charges related to an additional 28 under-performing Restaurants ($8.5 million) were recorded.. A provision of $500,000 was also recorded for Champion's finished buildings inventory as an adjustment to fair market value. Additional accounting charges and loss provisions of $12.8 million were recorded during the fourth quarter of 1996, $1.5 million of which consisted of various selling, general and administrative expenses ($579,000 for severance, $346,000 for employee relocations, bad debt provisions of $366,000, and $204,000 for other charges). Provisions totaling $7.7 million including $1.4 million for additional losses on assets to be disposed of, $5.9 million for impairment charges related to 9 under-performing Restaurants received by the Company as a result of the CDDT bankruptcy in July 1996 and $393,000 for other impairment charges were also recorded. Additionally, in the fourth quarter of 1996, a provision of $351,000 was recorded for legal settlements, a $1.1 million provision for loss on the disposal of the L.A. Mex product line, workers compensation accruals of $1.1 million (included in Restaurant labor costs), adjustments to goodwill of $514,000 (included in other depreciation and amortization) and a $453,000 charges for the assumption of minority interests in losses on joint-venture operations as a result of the receipt by the Company of certain assets from the above mentioned CDDT bankruptcy. Third quarter 1995 accounting charges and loss provisions of $8.8 million consisted of $2.9 million in various selling, general and administrative expenses ($1.2 million write-off of receivables, accruals for $125,000 in recruiting fees, $304,000 in relocation costs, $274,000 in severance pay, $101,000 in state income and sales taxes, reserves for $700,000 in legal settlements, the write off of a $263,000 investment in an apparel company); $3.2 million to provide for Restaurant relocation costs, write-downs and abandoned site costs; $344,000 to expense refinancing costs; $645,000 to provide for inventory obsolescence; $1.5 million for workers compensation exposure included in Restaurant labor costs and $185,000 in other charges, net, including the $499,000 write-down of excess work in progress inventory costs and a minority interest credit of $314,000. Fourth quarter 1995 accounting charges included $3.0 million for warrants to be issued in settlement of litigation (see Note 9 (b) - Lopez, et al vs. Checkers) to accrue approximately $800,000 for legal fees in connection with the settlement and continued defense of various litigation matters. Additionally, during the fourth quarter of 1995, the Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121) which required a write-down of certain intangibles and property related to under performing sites. The effect of adopting SFAS 121 was a total charge to earnings for 1995 of $18.9 million, consisting of a $5.9 million write-down of goodwill and a $13.1 million write-down of property and equipment. The significant loss provisions discussed above during 1997, 1996 and 1995 were caused by declining sales and a corresponding decline in cash flows which impacted the Company's ability to support its net assets as reviewed under SFAS No. 121. The result of declining sales and cash flows also necessitated the recording of additional provisions to account for reductions in corporate staffing and other overhead expenses associated with the restructuring required to bring the Company's corporate and support activities in line with the lower levels of sales and cash flows. Lease payments, other cash charges and asset write-offs in 1997, 1996 and 1995 reduced the Reserve for restaurant relocation and abandoned sites by $2.0 million, $5.5 million and $5.2 million, respectively. Legal reserves were utilized by $3.0 million in 1995, $686,000 in 1996 and $90,000 in 1997. Other provisions are typically utilized on a current basis. 46 Supplemental Schedule of Accounting charges and loss provisions --------------------------------------
1997 1996 1995 --------------------------------------------------------------------------------------- Provision Provision Total Reserve Total Reserve Provision Reserve Balance Balance Balance Balance Total Balance --------------------------------------------------------------------------------------- Workers compensation adjustments $ - $ - $ 1,093 $ - $ 1,500 $ - Amortization adjustments - - 514 - - - Excess work-in-progress ------------ ------------ ------------ inventory adjustment - - - - 499 - ------------ ------------ ------------ Unusual bad debt provisions - - 866 866 1,167 - State income/sales tax audits - - 750 750 101 101 Severance 81 81 579 579 274 274 Relocations 233 233 346 346 304 304 Recruiting fees - - - - 125 125 Refinancmg costs - - 845 - 344 - Legal settlements - - - 14 700 700 Write-off of investments in apparel Co. - - - - 263 - Other - - 204 - - - -------------------------------------------------------------------------------------- Total general and administrative 314 314 3,590 2,555 3,278 1,504 ------------ ------------ ------------ Impairment of long lived assets 565 14,782 18,935 ------------ ------------ ------------ Closing and relocating restaurants 312 - 5,624 - 1,199 - Settling leases - - 1,200 - 1,993 - Selling land - - 307 - - - -------------------------------------------------------------------------------------- Total losses on assets to be disposed of 312 2,159 7,131 3,800 3,192 2,124 -------------------------------------------------------------------------------------- Loss on disposal of product line - - 1,141 1,141 - - Severance costs/restructuring reserve - - - - - 166 Legal settlements/legal reserve - 1,075 351 1,151 3,800 800 Champion inventory fair value write-down and obsolescence reserves 150 215 500 65 645 38 -------------------------------------------------------------------------------------- Total loss provisions/restructuring 150 1,290 1,992 2,357 4,445 1,004 -------------------------------------------------------------------------------------- Adjustments to rrunonty interests - - 453 - (314) - -------------------------------------------------------------------------------------- Total accounting charges and loss provisions $ 1,341 $ 3,763 $ 29,555 $ 8,712 $ 31,535 $ 4,632 ======================================================================================
Workers compensation adjustments are included in Restaurant labor costs. Amortization adjustments are included in Other depreciation and amortization. Excess work-in progress inventory adjustment is included in Cost of modular restaurant package revenues. The reserve balance for unusual bad debt provisions is included in Allowances for doubtful receivables and the other reserves related to general and administrative expenses as well as legal reserves are included in Accrued liabilities. 47 Note 9: Commitments and Contingencies a) Lease Commitments - The Company leases Restaurant properties and office space under operating lease agreements. These operating leases generally have five to ten-year terms with options to renew. Base rent expense on these properties was approximately $9.1 million in 1997, $8.0 million in 1996, and $9.8 million in 1995. Future minimum lease payments under non-cancelable operating leases as of December 29, 1997 are approximately as follows: Year ending Operating December 31 leases -------------------------------------- 1998 $ 7,769 1999 7,545 2000 7,797 2001 7,437 2002 6,343 Thereafter $ 47,691 b) Litigation - Except as described below, the Company is not a party to any material litigation and is not aware of any threatened material litigation: In re Checkers Securities Litigation, Master File No. 93-1749-Civ-T-17A. On October 13, 1993, a class action complaint was filed in the United States District Court for the Middle District of Florida, Tampa Division, by a stockholder against the Company, certain of its officers and directors, including Herbert G. Brown, Paul C. Campbell, George W. Cook, Jared D. Brown, Harry S. Cline, James M. Roche, N. John Simmons, Jr. and James F. White, Jr., and KPMG Peat Marwick, the Company's auditors. The complaint alleges, generally, that the Company issued materially false and misleading financial statements which were not prepared in accordance with generally accepted accounting principles, in violation of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Florida common law and statute. The allegations, including an allegation that the Company inappropriately selected the percentage of completion method of accounting for sales of modular restaurant buildings, are primarily directed to certain accounting principles followed by Champion. The plaintiffs sought to represent a class of all purchasers of the Company's Common Stock between November 22, 1991 and October 8, 1993, and an unspecified amount of damages. Although the Company believed this lawsuit was unfounded and without merit, in order to avoid further expenses of litigation, the parties have reached an agreement in principle for the settlement of this class action. The agreement for settlement provides for one of the Company's director and officer liability insurance carriers and another party to contribute to a fund for the purpose of paying claims on a claims-made basis up to a total of $950,000. The Company has agreed to contribute ten percent (10%) of claims made in excess of $475,000 for a total potential liability of $47,500. The settlement was approved by the Court on January 30, 1998. Greenfelder et al. v. White, ,Jr., et al. On August 10, 1995, a state court Complaint was filed in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, Civil Division, entitled Gail P. Greenfelder and Powers Burgers, Inc. v. James F. White, Jr., Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 95-4644-CI-21 (hereinafter the "Power Burgers Litigation"). The original Complaint alleged, generally, that certain officers of the Company intentionally inflicted severe emotional distress upon Ms. Greenfelder, who is the sole stockholder, President and Director of Powers Burgers, Inc. (hereinafter "Powers Burgers") a Checkers franchisee. The original Complaint further alleged that Ms. Greenfelder and Powers Burgers were induced into entering into various agreements and personal guarantees with the Company based upon misrepresentations by the Company and its officers and that the Company violated provisions of Florida's Franchise Act and Florida's Deceptive and Unfair Trade Practices Act. The original Complaint alleged that the Company is liable for all damages caused to the Plaintiffs. The Plaintiffs seek damages in an unspecified amount in excess of $2,500,000 in connection with the claim of intentional infliction of emotional distress, $3,000,000 or the return of all monies invested by the Plaintiffs in Checkers' franchises in connection with the misrepresentation of claims, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The Court has granted, in whole or in part, three (3) Motions to Dismiss the Plaintiffs' Complaint, as amended, including an Order entered on February 14, 1997, which dismissed the Plaintiffs' claim of intentional infliction of emotional distress, with prejudice, but granted the Plaintiffs leave to file an amended pleading with respect to the remaining claims set forth in their Amended Complaint. A third Amended Complaint has been filed and an Answer, Affirmative Defenses, and a Counterclaim to recover unpaid royalties and advertising fund contributions has been filed by the Company. In response to the Court's dismissal of 48 certain claims in the Power Burgers Litigation, on May 21, 1997, a companion action was filed in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, Civil Division, entitled Gail P. Greenfelder, Powers Burgers of Avon Park, Inc., and Power Burgers of Sebring, Inc. v. James F. White, Jr., Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 97-3565-CI, asserting, in relevant part, the same causes of action as asserted in the Power Burgers Litigation. An Answer, Affirmative Defenses, and a Counterclaim to recover unpaid royalties and advertising fund contributions have been filed by the Company. On February 4, 1998, the Company terminated Power Burgers, Inc.'s, Power Burgers of Avon Park, Inc.'s and Power Burgers of Sebring, Inc.'s franchise agreements and thereafter filed two Complaints in the United States District Court for the Middle District of Florida, Tampa Division, styled Checkers Drive-In Restaurants, Inc. v. Power Burgers of Avon Park, Inc., Case No. 98-409-CIV-T-17A and Checkers Drive-In Restaurants, Inc. v. Powers Burgers, Inc, Case No. 98-410-CIV-T-26E. The Complaint seeks, inter alia, a temporary and permanent injunction enjoining Power Burgers, Inc. and Power Burgers of Avon Park, Inc.'s continued use of Checkers' Marks and trade dress. A Motion to Stay the foregoing actions are currently pending. The Company believes the lawsuits initiated against the Company are without merit, and intends to continue to defend them vigorously. No estimate of any possible loss or range of loss resulting from the lawsuit can be made at this time. Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services, Inc., et al. On August 10, 1995, a state court Counterclaim and Third Party Complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, Civil Division, entitled Tampa Checkmate Food Services, Inc., Checkmate Food Services, Inc. and Robert H. Gagne v. Checkers Drive-In Restaurants, Inc., Herbert G. Brown, James E. Mattei, James F. White, Jr., Jared D. Brown, Robert G. Brown and George W. Cook, Case No. 95-3869. In the original action filed by the Company in July 1995, against Mr. Gagne and Tampa Checkmate Food Services, Inc., (hereinafter "Tampa Checkmate") a company controlled by Mr. Gagne, the Company is seeking to collect on a promissory note and foreclose on a mortgage securing the promissory note issued by Tampa Checkmate and Mr. Gagne, and obtain declaratory relief regarding the rights of the respective parties under Tampa Checkmate's franchise agreement with the Company. The Counterclaim and Third Party Complaint allege, generally, that Mr. Gagne, Tampa Checkmate and Checkmate Food Services, Inc. (hereinafter "Checkmate") were induced into entering into various franchise agreements with, and personal guarantees to, the Company based upon misrepresentations by the Company. The Counterclaim and Third Party Complaint seek damages in the amount of $3,000,000 or the return of all monies invested by Checkmate, Tampa Checkmate and Mr. Gagne in Checkers' franchises, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The Counterclaim was dismissed by the court on January 26, 1996, with the right to amend. On February 12, 1996, the Counterclaimants filed an Amended Counterclaim alleging violations of Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act, and breaches of implied duties of "good faith and fair dealings" in connection with a settlement agreement and franchise agreement between various of the parties. The Amended Counterclaim seeks a judgment for damages in an unspecified amount, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The Company has filed an Answer to the Complaint. On or about July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in the United States Bankruptcy Court for the Middle District of Florida, Tampa Division entitled In re: Tampa Checkmate Food Services, Inc., and numbered as 97-11616-8G-1 on the docket of said Court. On July 25, 1997, Checkers filed an Adversary Complaint in the Tampa Checkmate bankruptcy proceedings entitled Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services, Inc. and numbered as Case No. 97-738. The Adversary Complaint seeks a temporary and permanent injunction enjoining Tampa Checkmate's continued use of Checkers' Marks and trade dress notwithstanding the termination of its Franchise Agreement on April 8, 1997. The Company believes that the lawsuit is without merit and intends to continue to defend it vigorously. No estimate of possible loss or range of loss resulting from the lawsuit can be made at this time. The Company is involved in 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. c) Purchase Commitments - The Checkers Drive-In Restaurant chain, which includes both the Company and franchisee-owned stores together, has purchase agreements with various suppliers extending beyond one year. Subject to the supplier's quality and performance, the purchases covered by these agreements aggregate approximately $18.3 million in 1998 and $5.5 million in years 1999 through 2004. Note 10: Warrants As partial consideration for the transfer of the RDG promissory note of the Company (the "Note") back to the Company, the Company is obligated to deliver to the holder of the Note a warrant (the "Warrant") for the purchase of 120,000 shares of Common Stock at a price equal to the average closing sale price of the Common Stock for the ten full trading days ending on the third business day immediately preceding the closing date (such price is referred to as the "Average Closing 49 Price"); however, in the event that the average closing price of the Common Stock for the ninety day period after the closing date is less than the Average Closing Price, the purchase price for the Common Stock under the Warrant will be changed on the 91st day after the closing date to the average closing price for such ninety day period. The Warrant will be exercisable at any time within five years after the closing date. The Company is obligated to register the stock acquired by the holders of the Note under the Warrant. Pursuant to a November 22, 1996 settlement the Company issued warrants for the purchase of 5,100,000 shares of the Company's Common Stock. These warrants, valued at $3.0 million, were issued in settlement of certain litigation, are exercisable at $1.375 during the period beginning November 22, 2000 and ending on December 22, 2000. On November 22, 1996, the Company issued warrants to purchase 20 million shares of Common Stock of the Company to the members of the new lender group (see Note 3) at an exercise price of $0.75 per share which was the approximate market price of the common stock prior to the announcement of the transfer of the debt. These warrants were valued at $6.5 million, the value of the concessions given as consideration for the warrants. The warrants are exercisable at any time until November 22, 2002. Checkers is obligated to register the common stock issuable under the warrants within six months and to maintain such registration for the life of the warrants. The holders of the warrants also have other registration rights relating to the common stock to be issued under the warrants. The warrants contain customary anti-dilution provisions. The warrants to purchase 150,000 shares of Checkers common stock for $2.69 per share, which were issued in April 1995 to Checkers' prior bank lending group under the prior loan agreement, were cancelled. 50 Note 11: Unaudited Quarterly Financial Data The following table presents selected quarterly financial data for the periods indicated (in 000's, except per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- 1997 ---- Net revenues $ 34,157 $ 33,713 $ 32,733 $ 43,290 Impairment of long-lived assets - - - 565 Losses on assets to be disposed of - - - 312 Loss provisions - - - 150 Loss from operations (1,818) 102 (304) (1,958) Net loss (5,181) (1,469) (1,738) (3,798) Preferred dividends - 696 Net loss to common shareholders (5,181) (1,469) (2,434) (3,798) Basic loss per share $ (0.09) $ (0.02) $ (0.04) $ (0.05) Diluted loss per share $ (0.09) $ (0.02) $ (0.04) $ (0.05) 1996 ---- Net revenues $ 38,423 $ 38,650 $ 37,088 $ 50,799 Impairment of long-lived assets - - 8,468 6,814 Losses on assets to be disposed of - - 5,702 1,430 Loss provisions - - 500 1,491 Loss from operations 714 (1,428) (21,303) (20,195) Net loss (252) (1,548) (24,243) (20,366) Basic loss per share $ - $ (0.02) $ (0.47) $ (0.39) Diluted loss per share $ - $ (0.02) $ (0.47) $ (0.39) 1995 ---- Net revenues $ 46,044 $ 48,923 $ 43,451 $ 51,887 Impairment of long-lived assets - - - 18,935 Losses on assets to be disposed of - 3,192 - Loss provisions - - 645 3,800 Loss from operations (1,618) (691) (10,516) (24,391) Net loss (1,693) (1,231) (7,312) (22,983) Basic loss per share $ (0.03) $ (0.02) $ (0.14) $ (0.45) Diluted loss per share $ (0.03) $ (0.02) $ (0.14) $ (0.45)
51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND DISCLOSURE 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 1998 Annual Meeting of Stockholders, which will be filed with the Commission on or before April 29, 1998. 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 1998 Annual Meeting of Stockholders, which will be filed with the commission on or before April 29, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information under the heading "MANAGEMENT - Security Ownership of Management and Others" in the Company's definitive Proxy Statement to be used in connection with the Company's 1998 Annual Meeting of Stockholders, which will be filed with the Commission on or before April 29, 1998. 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 1998 Annual Meeting of Stockholders, which will be filed with the Commission on or before April 29, 1998. 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1.0 The following Financial Statements of the Registrant are included in Part II, Item 8: Independent Auditors Report Consolidated Balance Sheets - December 29, 1997 and December 30, 1996 Consolidated Statements of Operations - Years ended December 29, 1997, December 30, 1996 and January 1, 1996 Consolidated Statements of Stockholders' Equity - years ended December 29, 1997, December 30, 1996 and January 1, 1996 Consolidated Statements of Cash Flows - years ended December 29, 1997, December 30, 1996 and January 1, 1996 Notes to Consolidated Financial Statements - years ended December 29, 1997, December 30, 1996 and January 1, 1996 2.0 The following financial Statement Schedules of the Registrant are included in Item 14(d): VIII - Valuation Accounts All schedules, other than those indicated above, are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or the notes thereto. 3.1 Restated Certificate of Incorporation of the Company, as filed with the Commission as Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed on September 26, 1991 (File No. 33-42996), is hereby incorporated herein by reference. 3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Company, as filed with the Commission as Exhibit 3 to the Company's Form 10-Q for the quarter ended June 30, 1993, is hereby incorporated herein by reference. 3.3 By-laws, as amended through February 16, 1995, of the Registrant, as filed with the Commission as Exhibit 3.3 to the Company's Form 10-Q for the quarter ended March 27, 1995, is hereby incorporated herein by reference. 3.4 Certificate of Designation of Series A Preferred Stock of the Company dated February 12, 1997, as filed with the Commission as Exhibit 3.1 to the Company's Form 8-K, dated February 19, 1997, is hereby incorporated by reference. 4.1 Collateral Assignment of Trademarks as Security from Borrower, dated April 12, 1995, between the Company and each of the banks party to the Amended and Restated Credit Agreement, dated as of April 12, 1995, as filed with the Commission as Exhibit 3 to the Company's Form 8-K dated April 12, 1995, is hereby incorporated by reference. 4.2 Amended and Restated Credit Agreement, dated as of November 22, 1996, between the Company, CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.1 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 4.3 Second Amended and Restated Security Agreement, dated as of November 22, 1996, between the Company and CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.2 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 53 4.4 Form of Warrant issued to lenders under the Amended and Restated Credit Agreement, dated November 22, 1996, between the Company and CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.3 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 4.5 The Company agrees to furnish the Commission upon its request a copy of any instrument which defines the rights of holders of long-term debt of the Company and which authorizes a total amount of securities not in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 10.1 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. 10.3* 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 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. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 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. 10.10 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. 10.11* Employment Agreement between the Company and Michael T. Welch, dated July 26, 1996, as filed with the Commission as Exhibit 10.52 to the Company's Form 10-Q for the quarter ended June 17, 1996, is hereby incorporated by reference. 10.12 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 reference. 54 10.13* Employment Agreement between the Company and David Miller, dated July 29, 1996, as filed with the Commission as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1996 (the "1996 10-K"), is hereby incorporated by reference. 10.14* Employment Agreement between the Company and James T. Holder, dated November 22, 1996, as filed with the Commission as Exhibit 10.36 to the 1996 10-K, is hereby incorporated by reference. 10.15 Warrant Agreement dated March 11, 1997, between the Company and Chasemellon Shareholder Services, L.L.C, as filed with the Commission as Exhibit 10.38 to the 10-K, is hereby incorporated by reference ** 10.16* Employment Agreement dated November 10, 1997, between the Company, Rally's Hamburgers, Inc. and Jay Gillespie. ** 10-17 Management Services Agreement dated November 30, 1997, between the Company and Rally's Hamburgers, Inc. 21 List of the subsidiaries of the Company. 23 Consent of Independent Auditors 27 Financial Data Schedule - -------------------------------------- * Management contract or compensatory plan or arrangement. ** Filed herewith. (b) Reports on Form 8-K: During the last quarter of the year ended December 29, 1997, there were no reports on Form 8-K filed by the Company. (c) Exhibits: The exhibits listed under Item 14(a) are filed as part of this Report. (d) Financial Statements Schedules: VIII - Valuation Accounts 55 Schedule VIII - Valuation Accounts (In Thousands)
Balance at Balance at Beginning of Period Expensed Deductions End of Period ------------------------------------------------------------- Description Year ended January 1, 1996 Allowance for doubtful receivables $84 $2,261 $987 $1,358 ============================================================= Year ended December 30, 1996 Allowance for doubtful receivables $1,358 $1,311 $452 $2,217 ============================================================= Year ended December 29, 1997 Allowance for doubtful receivables $2,217 $1,013 $1,095 $2,135 =============================================================
56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clearwater, State of Florida on March 28, 1996. CHECKERS DRIVE-IN RESTAURANTS, INC. By:/s/ Jay Gillespie ------------------------------------------ Jay Gillespie Chief Executive Officer By:/s/ Richard A. Peabody ------------------------------------------ Richard A. Peabody Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities indicated on March 28, 1996. Signature Title - --------- ----- /s/ William P. Foley, II - ------------------------------- William P. Foley II Director and Chairman of the Board /s/ C. Thomas Thompson - ------------------------------- C. Thomas Thompson Director, Vice Chairman of the Board /s/ Jay Gillespie - ------------------------------- Jay Gillespie Chief Executive Officer /s/ Richard A. Peabody - ------------------------------- Richard A. Peabody Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Terry N. Christensen - ------------------------------- Terry N. Christensen Director /s/ Frederick E. Fisher - ------------------------------- Frederick E. Fisher Director /s/ Clarence V. McKee - ------------------------------- Clarence V. McKee Director /s/ Burt Sugarman - ------------------------------- Burt Sugarman Director /s/ Jean Giles Wittner - ------------------------------- Jean Giles Wittner Director 57 1997 FORM 10-K CHECKERS DRIVE-IN RESTAURANTS, INC. EXHIBIT INDEX Exhibit # Exhibit Description - --------- ------------------- 2.0 The following financial Statement Schedules of the Registrant are included in Item 14(d): VIII - Valuation Accounts All schedules, other than those indicated above, are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or the notes thereto. 3.1 Restated Certificate of Incorporation of the Company, as filed with the Commission as Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed on September 26, 1991 (File No. 33-42996), is hereby incorporated herein by reference. 3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Company, as filed with the Commission as Exhibit 3 to the Company's Form 10-Q for the quarter ended June 30, 1993, is hereby incorporated herein by reference. 3.3 By-laws, as amended through February 16, 1995, of the Registrant, as filed with the Commission as Exhibit 3.3 to the Company's Form 10-Q for the quarter ended March 27, 1995, is hereby incorporated herein by reference. 3.4 Certificate of Designation of Series A Preferred Stock of the Company dated February 12, 1997, as filed with the Commission as Exhibit 3.1 to the Company's Form 8-K, dated February 19, 1997, is hereby incorporated by reference. 4.1 Collateral Assignment of Trademarks as Security from Borrower, dated April 12, 1995, between the Company and each of the banks party to the Amended and Restated Credit Agreement, dated as of April 12, 1995, as filed with the Commission as Exhibit 3 to the Company's Form 8-K dated April 12, 1995, is hereby incorporated by reference. 4.2 Amended and Restated Credit Agreement, dated as of November 22, 1996, between the Company, CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.1 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference 4.3 Second Amended and Restated Security Agreement, dated as of November 22, 1996, between the Company and CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.2 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 4.4 Form of Warrant issued to lenders under the Amended and Restated Credit Agreement, dated November 22, 1996, between the Company and CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.3 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 58 4.5 The Company agrees to furnish the Commission upon its request a copy of any instrument which defines the rights of holders of long-term debt of the Company and which authorizes a total amount of securities not in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis. 10.1 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. 10.3* 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 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. 10.5 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. 10.6 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. 10.7 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. 10.8 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. 10.9 Amendment No. 2, dated as of April 11, 1996 to that certain Purchase Agreement between Checkers and Restaurant Development Group, Inc., dated as of August 3, 1995, as filed with the Commission as Exhibit 10.35 to the Company's Form 10-K for the year ended January 1, 1996, is hereby incorporated by reference. 10.10 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. 10.11* Employment Agreement between the Company and Michael T. Welch, dated July 26, 1996, as filed with the commission as Exhibit 10.52 to the Company's Form 10-Q for the quarter ended June 17, 1996, is hereby incorporated by reference. 10.12 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 reference. 59 **10.13* Employment Agreement between the Company and David Miller, dated July 29, 1996, as filed with the Commission as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1996 (the "1996 10-K"), is hereby incorporated by reference. 10.14 * Employment Agreement between the Company and James T. Holder dated November 2, 1997, as filed with the Commission as Exhibit 10.36 to the 1996 10-K, is hereby incorporated by reference. 10.15 Warrant Agreement dated March 11, 1997, between the Company and Chasemellon Shareholder Services, L.L.C., as filed with the Commission as Exhibit 10.38 to the 1996 10-K, is hereby incorporated by reference. ** 10.16* Employment Agreement dated November 10, 1997, between the Company, Rally's Hamburgers, Inc. and Jay Gillespie. ** 10-17 Management Services Agreement dated November 30, 1997, between the Company and Rally's Hamburgers, Inc. 21 List of the subsidiaries of the Company. 23 Consent of Independent Auditors 27 Financial Data Schedule - -------------------------------------- * Management contract or compensatory plan or arrangement. ** Filed herewith. 60 EX-10.16 2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is effective as of November 10, 1997 (the "Effective Date"), by and among RALLY'S HAMBURGERS, INC., a Kentucky corporation ("Rally's"), CHECKERS DRIVE-IN RESTAURANTS, INC., a Florida corporation ("Checkers"), and JAY GILLESPIE, an individual (the "Executive"). Rally's and Checkers are sometimes referred to herein singularly as a "Company" and collectively as the "Companies." 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 Companies each employ the Executive to serve in an executive and managerial capacity as their Chief Executive Officer, and the Executive accepts such employment and agrees to perform such reasonable responsibilities and duties commensurate with the aforesaid positions, as directed by the Boards of Directors of the Companies or as set forth in the Articles of Incorporation and/or the Bylaws of the Companies, for all locations in which the Companies have offices. In addition, the Boards of Directors of each Company, or any appropriate committee of such Board, shall recommend to the shareholders of such Company that Executive be elected to serve as a director on the Board of such Company for each year during the Term (as defined below). 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 Companies notify the Executive that they are terminating this Agreement prior to November 10th of such year. 3. Compensation. 3.1 Annual Salary. During the Term of this Agreement, the Companies shall pay Executive an aggregate minimum base annual salary, before deducting all applicable withholdings, of Two Hundred Eighty-Two Thousand Five Hundred Dollars ($282,500) per year (the "Base Salary"), payable at the times and in the manner dictated by the Companies' standard payroll policies. The Boards of Directors of Checkers and Rally's shall determine how the Base Salary under this Section 3.1 and the Incentive Bonus earned by the Executive under 3.2(a), below shall be allocated between the Companies. 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 Companies' Incentive Bonus Plan, pursuant to which the Executive shall be entitled to earn up to a maximum of fifty percent (50%) of his Base Salary (the "Incentive Bonus"). The Incentive Bonus will be based on certain performance criteria determined in good faith by the Companies' respective Boards of Directors. The Incentive Bonus 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 either (i) Rally's or (ii) 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 Rally's or 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. Rally's hereby grants to Executive options to purchase 300,000 shares of Rally's Common Stock, in accordance with and pursuant to the terms of Rally's Stock Option Plan (the "Plan"). The exercise price for such options shall be the closing price on the Effective Date of Rally's Common Stock publicly traded on NASDAQ, as stated in the Wall Street Journal. The above described options shall vest and become exercisable in three (3) equal installments of 100,000 shares each on each of the first three (3) anniversaries of the Effective Date. Notwithstanding the above, if the Term is not extended for an addition one (1) year pursuant to Section 2, above, then 200,000 shares of options shall vest and become exercisable on the second anniversary of the Effective Date. (d) Moving Expenses/Monthly Stipend. Rally's and/or Checkers, as the Companies so determine, shall pay all of Executive's reasonable moving expenses from Dallas, Texas to the location at which Executive shall initially perform his primary duties hereunder or any subsequent relocation of Executive required by the Companies. In addition, in order to assist Executive with such transition expenses, Rally's and/or Checkers, as the Companies so determine, shall pay Executive the sum of One Thousand Dollars ($1,000) per month commencing on the Effective Date and continuing for the five (5) consecutive months thereafter. (e) Commencement Bonus. On the Effective Date, Rally's and/or Checkers, as the Companies so determine, shall pay Executive a one time commencement bonus of Fifty Thousand Dollars ($50,000). The Companies shall deduct from all compensation payable under this Agreement to Executive any taxes or withholdings the Companies are required to deduct pursuant to state and federal laws or by mutual agreement among the parties. 3.3. Vacation. Executive will be entitled to paid vacation time in accordance with the Companies' personnel policies and procedures made available to the Companies' executive employees of similar rank, as the same may change from time to time, or as otherwise determined 2 by the respective Boards of Directors of the Companies. In addition, Executive shall be entitled to such holidays consistent with the Companies' standard policies or as the Companies' respective Boards of Directors may approve. 3.4 Expense Reimbursement. In addition to the compensation and benefits provided herein, the Companies 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 Companies 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 Companies may terminate this Agreement immediately for cause upon written notice to the Executive, in which event the Companies 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 Companies' 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 their respective relationships with their customers or employees, including, without limitation, (i) use of alcohol or illegal drugs such as 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 Companies, 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 Companies terminate this Agreement under this Section 4.2, it shall continue to pay to the Executive (i) the Base Salary and (ii) the Incentive Bonus earned by the Executive in the prior year, for the unexpired Term of this Agreement. The amount payable to 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 Companies shall only be obligated to pay to the Executive the Base Salary due him through the date of termination. 3 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 Companies shall have the right upon written notice to the Executive to terminate this Agreement, without further obligation, by paying Executive the Base Salary without offset for the remainder of the Term of this Agreement 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 Companies Following Change of Control. In the event of a Change of Control (as defined below) of either Company, the Companies 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 either 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 in either Company by Carl Karcher Enterprises, Inc. or 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 Companies' 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 each Company he will occupy a position of trust and confidence, and he further acknowledges that 4 he will have access to and learn substantial information about each 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 such Company. Accordingly, during the Executive's employment by each Company and for a period of two (2) years thereafter, Executive will keep confidential, and will not without such Company's permission reproduce, copy or disclose to any other person or firm, any such information or any documents or information relating to such Company's methods, processes, customers, accounts, analyses, systems, charts, programs, procedures, correspondence, or records, or any other documents used or owned by such 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 such Company unless otherwise required by law or court ordered subpoena. 6.2 Competitive Activities During Employment Executive agrees that during his employment by the Companies, he will devote substantially all his business time and effort to and give undivided loyalty to the Companies. Executive will not, during his employment by the Companies, engage in any way whatsoever, directly or indirectly, in any business that is competitive with either Company, nor solicit, or in any other manner work for or assist any business which is competitive with either Company. During his employment by the Companies, Executive will undertake no planning for or organization of any business activity competitive with the work he performs as an executive of either Company, and Executive will not, during his employment by the Companies, combine or conspire with any other employee of either Company or any other person for the purpose of organizing any such competitive business activity. 6.3 Remedy for Breach. Executive acknowledges that the Companies 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 Companies may be entitled, the Companies 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 Companies 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 appropriate Company all records and documents of or pertaining to such Company and shall not make or retain any copy or extract of any such record or document. 5 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 Companies. Executive will, whenever requested by either Company during the period of his employment, execute and deliver any and all documents which such Company shall deem appropriate in order to apply for and obtain patents for improvements or inventions or in order to assign and convey to such 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 Companies 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 Governing Law and Venue. Any dispute arising exclusively from the relationship between Rally's and the Executive under this Agreement shall be governed by Kentucky law, and venue for any such dispute shall be in Clay County, Kentucky. Any dispute arising exclusively from the relationship between Checkers and the Executive under this Agreement shall be governed by Florida law, and venue for any such dispute shall be in Pinellas County, Florida. Any dispute under this Agreement involving both Companies and the Executive shall be governed either by Kentucky law or Florida law, and venue for any such dispute shall be either in Clay County, Kentucky or Pinellas County, Florida. 9.3 Attorneys' Fees. In any litigation, arbitration, or other proceeding by which one party either seeks to enforce its rights under this Agreement (whether in contract, tort, or both) or seeks a declaration of any rights or obligations under this Agreement, the prevailing party shall be entitled to recover from the non-prevailing party reasonable attorney fees, together with any costs and expenses, to resolve the dispute and to enforce the final judgment. 9.4 Severability. If any section, subsection or provision hereof is found for any reason whatsoever to be invalid or inoperative, that section, subsection or provision shall be deemed severable and shall not affect the force and validity of any other provision of this Agreement. If any covenant herein is determined by a court to be overly broad thereby making the covenant unenforceable, the parties agree and it is their desire that such court shall substitute a reasonable judicially enforceable limitation in place of the offensive part of the covenant and 6 that as so modified the covenant shall be as fully enforceable as if set forth herein by the parties themselves in the modified form. The covenants of each Company and the Executive in this Agreement shall each be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of the Executive against either Company or of either Company against the Executive, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Companies or the Executive of the covenants in this Agreement. 9.5 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: To Rally's: Rally's Hamburgers, Inc. 10002 Shelbyville Road, Suite 150 Louisville, Kentucky 40223 Attn: William P. Foley, II To Checkers: Checkers Drive-In Restaurants, Inc. 600 Cleveland Street Clearwater, Florida 34615 Attn: William P. Foley, II To Executive: Jay Gillespie 115 Twin Lakes Drive Double Tree, Texas 75067 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 7 of Control of a Company and the Successor assumes, either expressly or by operation of law, such Company's obligations under this Agreement, then such 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. 9.9 Potential Conflicts of Interests. In the event that the assumption by Executive of the duties of Chief Executive Officer of both Companies creates a conflict of interest, the Companies shall indemnify, defend and hold harmless Executive from and against any and all claims, losses, damages, causes of action or other proceedings, and any and all other liabilities of any nature whatsoever, which arise out of or relate to such alleged conflict. Nothing contained in this Section 9.9 shall be deemed to be an admission by the Companies that such a conflict exists, and notwithstanding the Companies agreement to abide by the terms of this Section 9.9, the Companies expressly disclaim that such a conflict exists. IN WITNESS WHEREOF the parties have executed this Employment Agreement as of the date set forth above. RALLY'S: RALLY'S HAMBURGERS, INC., a Kentucky corporation By: /s/ William P. Foley II ----------------------------- Its: Chairman of the Board CHECKERS: CHECKERS DRIVE-IN RESTAURANTS, INC., a Florida corporation By: /s/ William P. Foley II ----------------------------- Its: Chairman of the Board EXECUTIVE: /s/ Jay Gillespie ----------------------------- Jay Gillespie 8 EX-10.17 3 MANAGEMENT SERVICES AGREEMENT This Agreement, dated November 30, 1997, is by and between CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation ("Checkers"), and RALLY'S HAMBURGERS, INC., a Delaware corporation ("Rally's"). Background of the Agreement Checkers is skilled and experienced in operating double-drive-through fast-food restaurants. Rally's is engaged in owning, operating and franchising double-drive-through restaurants (the "Rally's Restaurants") and believes that it would be beneficial to it and to its stockholders, by reducing overhead costs and gaining Checkers special skills, to engage Checkers to provide to the Rally's Restaurants the services described on Exhibit A attached hereto and incorporated herein by this reference (the "Services"). Checkers is willing to act as such manager in the terms and conditions herein contained and, as a consequence, the parties are entering into this Agreement in order to set forth the terms on which such Services are to be provided. Agreement NOW THEREFORE, in consideration of the mutual warrants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed by the parties hereto as follows: 1. Services. During the term of this Agreement, Checkers shall provide to Rally's all of the Services for the Restaurants which are owned by Rally's (the "Owned Restaurants"), subject to the terms and conditions specified in this Agreement, and shall provide corporate purchasing services (the "Purchasing Services") to the Restaurants which are franchised by Rally's (the "Franchised Restaurants") which allow the Franchised Restaurants to purchase food and paper products, small wares and equipment on substantially the same terms that such products may be purchased by the Owned Restaurants. Checkers agrees and acknowledges that, subject to Section 6 below, certain information received by Rally's from Checkers in connection with Checkers performing the Services hereunder may be disclosed to franchises of Rally's provided, however, that Checkers shall have no obligation to provide any services to the Franchised Restaurants other than Purchasing Services. Checkers is expressly authorized to provide the Services (including the Purchasing Services with respect to Franchised Restaurants), in any reasonable manner it deems appropriate to meet the day-to-day requirements of the business and administrative aspects of Rally's' operation of the Owned Restaurants which shall be consistent with the services provided to the restaurants owned and operated by Rally's itself (the "Rally's Restaurants"). Notwithstanding anything herein to the contrary, (i) Checker's shall not be obligated to perform the Services for the Owned Restaurants or the Franchised Restaurants that is in a manner different from the manner which Rally's provides the Services for the Rally's Restaurants, (ii) Checker's shall not be obligated to perform Services for the Owned Restaurants that Rally's does not perform for Rally's Restaurants, (iii) Checkers shall not be liable for any direct, indirect or consequential damages suffered or incurred by Rally's or to any third party, including, without limitation, lost profits arising from or relating to any breach by Checkers of its obligations hereunder absent a finding in a final judgment of a court of competent jurisdiction that such damages proximately resulting from the bad faith, gross negligence or willful misconduct 1 of Checkers or its agents. Specifically excluded from the service to be provided hereunder are marketing and franchise operations services. 2. Term. The term of this Agreement will commence on the date hereof and will terminate or expire on the earlier of (a) seven (7) years from the date hereof; (b) a breach of a material provision of this Agreement by either party which is not cured by such party within 30 days of receipt of notice from the non-breaching party; (c) the entry of any judgment, order, injunction or decree of any court, arbitrator or governmental agency which would cause the provision of the Services to be in conflict with or in violation of any such judgment, order, injunction or decree; or (d) the mutual consent of the parties; provided, however, that unless the parties otherwise agreement, (i) Rally's shall continue to provide the Purchasing Services to the Owned Restaurants through the end of their respective lease terms on the same terms as set forth herein and (ii) Rally's shall continue to provide the Purchasing Services to the Franchised Restaurants until the expiration or termination of the existing franchise agreement for such Franchised Restaurant. 3. Transition of Services. Checkers and Rally's shall mutually and immediately undertake to develop and implement a plan (the "Plan") designed to ensure a smooth transition of the Services to be performed by Rally's. 4. Compensation. 4.1. In consideration for the Services provided hereunder Rally's agrees to pay to Checkers fees for the Services (the "Service Fee") for each regular four-week accounting period (each, an "Accounting Period") in accordance with the schedule of fees attached hereto as Exhibit B and incorporated herein by this reference. The ratio utilized in calculative the Service Fee shall be re-computed at the beginning of each fiscal quarter based upon the then current data. 4.2. In addition to the payment of the Service Fee as specified in paragraph 4.1 above. Rally's shall be responsible for the payment of any and all actual out-of-pocket costs and expenses incurred by or on behalf of Checkers and paid to any third party in connection with the Services to be provided hereunder and the operation of the Owned Restaurants and shall reimburse Checkers for such costs and expenses incurred by or on behalf of Checkers or its affiliates in connection with the services rendered hereunder, including, without limitation, costs of replacement equipment, travel expenses, year-end employee accounting reporting matters (for example, Form 1099's, W-2's, etc.) and legal and accounting and other professional fees and expenses. All such expenses which exceed $1,000.00 must be approved by Rally's prior to incurring such expense. 4.3. In addition to the Service Fee described in Paragraph 4.1 above and reimbursement of out of pocket expenses described in Paragraph 4.2 above, Rally's shall be responsible to pay an amount equal to a prorata portion (based on Corporate Store Ratio) of book depreciation of any new assets acquired by Checkers which benefit Checkers but are necessary to provide the services described herein. The cost of any assets acquired by either party hereto for its own exclusive use shall be borne by the party acquiring such asset. 2 4.4. Checkers shall calculate all Service Fees and expense reimbursements due to Checkers for each Accounting period hereunder, all of which shall be paid by Rally's within ten (10) days after receipt of Checkers invoice. 5. Indemnification. 5.1. Such party (the "Indemnifying Party") shall indemnify, hold harmless and defend the other and its affiliates, and the respective officers, directors, shareholders and employees of such other, and such affiliates (individually an "Indemnified Party" and collectively the "Indemnified Parties"), from and against any and all liabilities, losses, judgments, damages, demands, claims, causes of action or any other legal or government proceedings, or any settlement thereof, and any and all costs and expenses (including reasonable attorneys' fees), whether or not covered by insurance, caused or asserted to have been caused, directly or indirectly, by or as a result of any intentional or willful misconduct, or the gross negligence, of the Indemnifying Party or any of its officers or management employees in connection with its performance of its material covenants hereunder. 5.2. Promptly after being informed of, or learning of, any demand, claim, cause of action, proceeding or other matter (a "Claim") for which it may be entitled to indemnity hereunder, an Indemnified Party shall give written notice of the Claim to the Indemnifying Party, stating the nature and basis of the Claim and the amount thereof, to the extent known by the Indemnified Party; provided, however, that the failure to give such notice shall not relieve the Indemnifying Party of its obligations except if and to the extent it is materially prejudiced by such failure. The Indemnifying Party shall have the right, at its option, to defend, at its own expense and by counsel reasonably acceptable to the Indemnified Parties against any such Third Party Claim; provided that if the Indemnifying Party fails to do so within ten (10) days after being notified or otherwise learning of the Claim, the Indemnified Parties shall be entitled (i) to defend the Claim with counsel of its own choosing, at the expense of the Indemnifying Party (which shall pay such expenses, including the reasonable fees and expenses of such counsel, as and when they are incurred by the Indemnified Parties); and (ii) to settle or compromise the Claim without the consent of the Indemnifying Party. In no event shall any Indemnifying Party compromise or settle any Claim without the consent of the Indemnified Parties, unless the terms of the settlement or compromise provide for a general and unconditional release of the Indemnified Parties from the Claim and does not require the payments of any sums by, does not place any restrictions or imposes any covenants on, and does not require or provide for any admission of any liability on the part of, any Indemnified Party. 6. Confidential and Proprietary Information. 6.1. Checkers shall (a) maintain in strict confidence and not disclose any Confidential Information of Rally's without Rally's' express written authorization; (b) not use any Confidential Information in any way to the direct or indirect detriment of Rally's; and (c) ensure that its affiliates and advisors who have access to any of such Confidential Information shall comply with these nondisclosure obligations and use restrictions; provided, however, that Checkers may disclose Confidential Information to those of its representatives who need to know Confidential Information for the purposes of this Agreement, subject to the following conditions: (a) such representatives shall be informed of the confidential nature of the Confidential Information; (b) 3 such Representative shall agree to be bound by this Section and shall be directed by Checkers not to disclose to any other person any Confidential Information; and (c) Checkers shall be responsible for any breach of this Section by any of its representatives. 6.2. If Checkers is requested or required (by oral questions, interrogatories, requests for information or documents, subpoenas, civil investigative demands, or similar processes) to disclose or produce any Confidential Information furnished in the course of its dealings with Rally's or its advisors or representatives, Checkers shall (a) provide Rally's with prompt notice thereof and copies, if possible, and, if not, a description, of the Confidential Information requested or required to be produced so that Rally's may seek an appropriate protective order or waive compliance with the provisions of this Section and (b) consult with Rally's as to the advisability of Rally's taking legally available steps to quash or narrow such request. Checkers further agrees that, if in the absence of a protective order or the receipt of a waiver hereunder Checkers is nonetheless, in the written opinion of its legal counsel, compelled to disclose or produce Confidential Information of Rally's to any tribunal legally authorized to request and entitled to receive such Confidential Information or to stand liable for contempt or suffer other censure or penalty. Checkers may disclose or produce such Confidential Information to such tribunal without liability hereunder, provided, however, that Checkers shall give Rally's written notice of the Confidential Information to be so disclosed or produced as far in advance of its disclosure or production as is practicable and shall use its best efforts to obtain, to the greatest extent practicable, an order or other reliable assurance that confidential treatment will be accorded to such Confidential Information so required to be disclosed or produced. For purposes of this Section 6, the term "Confidential Information" shall mean any information of Rally's (whether written or oral), including all notes, studies, information, forms, business or management methods, formulae, recipes, marketing data, or trade secrets or know-how of Rally's, whether or not such Confidential Information is disclosed or otherwise made available to one party by the other party pursuant to this Agreement or otherwise. Confidential Information shall also include the terms and provisions of this Agreement. Confidential Information does not include, however, any information that (i) is or becomes generally available to and known by the public (other than as a result of the disclosure directly or indirectly by the receiving party or its affiliates, advisors or representatives that is not permitted by this Agreement or the consent of the furnishing party); (ii) has already been or is hereafter independently acquired or developed by the receiving party without violating any confidentiality agreement with or other obligation of secrecy to the furnishing party; or (iii) information which a party has determined, after consultation with its legal counsel, that it is required to disclose by laws or government regulations applicable to it. 7. General Provisions. 7.1. In providing the Services hereunder, Checkers shall not be required to make any financial commitments or expend any of its own funds, except under arrangements reasonably satisfactory to Checkers which will assure Checkers of prompt reimbursement by Rally's. 7.2. Checkers and its representatives shall have authority to act on behalf of Rally's to the extent reasonably required to perform the Services called for by this Agreement. In particular, representatives of Checkers shall be authorized to sign purchase orders in the name 4 of Rally's. Rally's shall at all times have designated personnel available for consultation by Checkers in respect of the Services to be provided hereunder, which personnel shall have full authority to make any determinations necessary in connection with such Services. Checkers shall be fully protected in relying upon any authorizations or instructions received by Checkers from any such personnel who shall have been so authorized in writing by Rally's to act hereunder. 7.3. Rally's acknowledges that Checkers is entering into this Agreement at the request of Rally's, and that Checkers has made no representation or warranty that the Services will enable Rally's to achieve any projected level of sales or profits or that any of the products or services ordered by Checkers from third parties on behalf of Rally's will be purchased at or below the prices projected by Rally's. Furthermore, Checkers has made no representation or warranty as to the quality or timeliness of delivery with respect to any products or services ordered by Checkers from third parties on behalf of Rally's pursuant hereto. The foregoing shall not, however, limit the obligation of Checkers to provide, or cause to be provided, the Services as called for hereunder in a good faith, diligent manner. 7.4. The parties hereto acknowledge that each owns and maintains its own assets such as office furniture and equipment. Except as specifically set forth herein, there will be no fees charged for the use of such assets by either party. 8. Relationship of Parties. Except as specifically provided herein, neither party shall act or represent or hold itself out as having the authority to act as an agent for or partner of the other party, or in any way bind or commit the other party to any obligations. Nothing contained in this Agreement shall be construed as creating a partnership, joint venture, agency, trust or other association of any kind, each party being individually responsible only for its obligations as set forth in this Agreement. 9. Force Majeure. If Checkers is prevented from complying, either totally or in part, with any of the terms or provisions of this Agreement by reason of fire, flood, storm, strike, lockout or other labor trouble, riot, war, rebellion or other causes beyond the reasonable control of Checkers or other acts of God, then upon written notice to Rally's, the affected provisions and/or other requirements of this Agreement shall be suspended during the period of such disability and Checkers shall have no liability to Rally's in connection therewith. Checkers shall make all reasonable efforts to remove such disability as soon as reasonably practicable but in no event later than thirty days after the occurrence of such disability. 10. Miscellaneous. 10.1. Entire Agreement. This Agreement contains the entire agreement between the parties with respect to the matters referred to herein, and supersedes all prior agreements and understandings of the parties relating to such matters. 10.2. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. 10.3. Amendment. This Agreement may be amended only by a written document signed by the parties hereto. 5 10.4. Notices. Any notices hereunder shall be in writing and shall be effective upon receipt (by delivery, telex, telefax or similar electronic communication), or three business days after having been sent, by certified or registered mail, postage prepaid, addressed to the parties as follows: If to Checkers: Checkers Drive-In Restaurants, Inc. P.O. Box 1079 Clearwater, Florida 34617-1079 Attention: James Holder, Esq. If to Rally's: Rally's Hamburgers, Inc. 600 Cleveland Street 8th Floor Clearwater, Florida 34617 Attention: Joseph N. Stein Either party may change its address for notices by written notice as provided above. 10.5. Assignment. Neither party may assign this Agreement without the prior written consent of the other, except that Checkers may assign this Agreement to any wholly-owned subsidiary, but no such assignment shall release Checkers from its obligations set out in Section 6. Except as provided in the preceding sentence, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, and any corporation into which or with which a party may be liquidated, merged or consolidated. 10.6. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute a single agreement. 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day first above written. CHECKERS DRIVE-IN RESTAURANTS, INC. By: /s/ James T. Holder -------------------------------------- Senior Vice President Title RALLY'S HAMBURGERS, INC. By: /s/ Joseph N. Stein -------------------------------------- Chief Financial Officer Title 7 EXHIBIT A SERVICES TO BE PROVIDED o Executive Services: o Provide executive management and oversight to various departments performing services under this management agreement o Travel Service: o Provide travel, lodging and transportation arrangements including hotel, flight and car rental needs o Legal (in hours): o Provide traditional in-house legal services including engagement of outside counsel and general legal advice and support to all company departments o Litigation and case management services o Real estate and other transactional services o Contract negotiation and documentation o Documentation of Franchise work-outs o Real Estate & Construction Services: o Site selection for new sites o Administration of existing leases, including renewals o Disposition of excess properties o Construction manager, including new site relocations and other projects (including dining room additions) o Facilities maintenance supervision (R&M) o Franchise Administration: o Maintenance and enforcement of franchise agreements o Prepare UFOC updates including regulatory filings and compliance o Provide franchise workout assistance o Assist in franchise "town hall" and "business exchange" meetings o Franchise Sales and Development: o Develop sales kits o Pursue new franchisees through tradeshows, cold calls and solicitations, etc. o Provide turnkey management of new franchisee screenings, approvals and integration A-1 o Human Resources: o All Functions of HR except that Rally's would recruit and train its own Management Personnel o Assist in the initial response to employee grievances; provided, however, that in no event shall such services include legal representation, whether by in-house or outside counsel, for any legal or administrative claims brought by employees or third parties o Workers' Compensation Investigations o Public Accidents o Safety Program o Source Unit Liability Insurance o Source Workers' Compensation Insurance o Training: o Maintaining and updating all Materials, handbooks, Training Materials, etc. o Treasury; Tax; Internal Audit; Loss Prevention: o Process Personal Property Statements, as required o Reconcile Bank Statements o Reconcile Bank Card Deposits o Sales Tax o Licenses o Federal and State Tax Return Preparation o Company and Franchise Restaurant Audit Services o Loss Prevention Services, including Analysis and Management of Surveillance Equipment Installation and Maintenance o Collection and Tracking of Royalties o Restaurant Quality Assurance: o Develop and maintain restaurant quality assurance programs o Research and Development: o Product and Recipe Development o Accounting Functions: o Track & verify that Daily Sales Deposits are made in a timely manner o Issue Daily Sales Tracking Report o Bill and track Accounts Receivable o Process and Verify Daily Sales Activities A-2 o Issue Monthly Sales Reports to Landlords o Maintain Depreciation Schedules o Issue Weekly P&L's o Provide Detail Back-Up for period P&L's o Review Purveyor Statements and Request Past Due Invoices o Tickle Payments o Payroll: o All Payroll Functions o Bonus Calculations and Payments o Employee Benefits o Medical, Life & Disability Insurance o 1099 & W-9's o Forms and supply orders - All Restaurants/Corporate Office o Accounts Payable: o Process Accounts Payable, Including Prior Payment of Invoices o Issue Accounts Payable Checks o Issue Back-up for Accounts Payable Checks o Review Vendor Statements and Request Past Due Invoices o Issue Standard Payments; i.e., Building Rent, CAM, Miscellaneous o Track and Calculate and Issue Sales Tax Reports and Payments o Track and Issue Personal and Real Property Tax Payments o Calculate and Track Percentage Rent Liabilities and Payments o Information Technology: o Maintenance of POS system o Maintenance of Park City back office system (including any replacement) o Maintenance of all corporate systems (including general ledger and related programs and EIS programs) o Development of systems reasonably requested by Rally's management o Restaurant polling process administration o Administration of all telecommunication and network services o Financial and Planning: o Provide corporate and restaurant budgeting services o Provide ROI analysis o Provide operational and marketing analytical support A-3 o Purchasing: o Regular purveyor quality assurance visits and documentation o All Food and Paper Products, Smallwares and Equipment o Regional Operations Support: o Provide operational management guidance for corporate stores o Includes Chief Operating Officer and Regional Vice President support o Corporate Overhead Support: o Use of facilities at Clearwater, Florida office o Includes rent, utilities, supplies, phone service and other general corporate costs o Management of leases and equipment purchasing o Communication services A-4 EXHIBIT B SCHEDULE OF FEES
Service Area Fee Effective Date ------------ --- --------------- Executive Services Actual Cost x Corporate Store Ratio 12/31/97 Travel Services Same 12/31/97 Legal (in-house) Actual Cost x Corporate Same Ratio 12/31/97 Real Estate & Construction Services Same 1/27/98 Franchise Administration Actual Cost x Franchise Store Ratio 12/31/97 Franchise Sales and Development Same 1/27/98 Human Resources Actual Cost x Corporate Store Ratio 1/27/98 Training Same 1/27/98 Treasury; Tax; Internal Audit; Loss Prevention Same 1/27/98 Restaurant Quality Assurance Same 1/27/98 Research and Development Same 1/27/98 Accounting Functions Same 1/27/98 Payroll Same 1/27/98 Accounts Payable Same 1/27/98 Information Technology Same 1/27/98 Financial Planning Same 1/27/98 Purchasing Same 2/26/98 B-1 Regional Operations Support Same 2/26/98 Corporate Overhead Support Actual Cost x (Checkers corporate employees supporting Rally's/Checkers total corporate employees) 1/27/98
"Corporate Store Ratio" is the ratio of all Rally's stores (including JVs) to all stores (including JVs) of Checkers and Rally's combined. "Franchise Store Ratio" is the ratio of all Rally's franchised stores to all franchised stores of Checkers and Rally's combined. B-2 EX-21 4 CHECKERS DRIVE-IN RESTAURANTS, INC. LIST OF SUBSIDIARIES EXHIBIT 21 The following entities are consolidated with the Company for financial reporting purposes: % Owned State of Organization - -------------------------------------------------------------------------------- CHA Partners 50% Delaware Checkers Walsingham, Inc. 100% Delaware Chicago Leasing Company 100% Delaware Innercity Foods Joint Venture Company 100% Delaware Innercity Foods Leasing Company 100% Delaware Innercity Foods Restaurant Company 100% Delaware Skipper Road Checkers Partnership 75% Delaware 580 Partners 50% Delaware Checkers/Conway, Inc. 100% Delaware Checkers/Tempco Joint Venture 51% Florida Checkers of Chicago 100% Delaware Metro Double Drive-Thru, L.P. 10.55% Chicago Greater Chicago Double Drive-Thru, L.P. 60.79% Chicago Stony Island Double Drive-Thru, L.P. 36.03% Chicago Northside Double Drive-Thru, L.P. 65.83% Chicago Chicagoland Double Drive-Thru V, L.P. 48.42% Chicago Chicago Double Drive-Thru VI, L.P. 25.08% Chicago Evergreen Double Drive-Thru, L.P. 54.73% Chicago EX-22 5 CONSENT The Board of Directors Checkers Drive-In Restaurants We consent to incorporation by reference in the registration statement on Form S-4 (No. 333-3800) and the registration statements on Form S-8 (No. 33-47063 and 33-80236) of Checkers Drive-In Restaurants, Inc. of our report dated February 27, 1998, relating to the consolidated balance sheets of Checkers Drive-In Restaurants, Inc. and subsidiaries as of December 29, 1997 and December 30, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 29, 1997 and all related schedules, which report appears in the December 29, 1997 annual report on Form 10-K of Checkers Drive-In Restaurants, Inc. /s/ KPMG PEAT MARWICK LLP ------------------------- KPMG PEAT MARWICK LLP Tampa, Florida March 27, 1998 EX-27 6 FDS --
5 This schedule contains summary financial information extracted from the financial statements of Checkers Drive-in Restaurants, Inc., for the quarterly periods ended December 29, 1997 and December 30, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS 12-MOS DEC-29-1997 DEC-30-1996 DEC-31-1996 JAN-02-1996 DEC-29-1997 DEC-30-1996 3,921 3,056 0 0 1,440 5,272 0 0 2,222 2,261 13,872 20,955 87,889 98,189 0 0 115,401 136,110 28,025 47,679 29,401 39,906 73 52 0 0 0 0 50,299 40,288 115,401 136,110 136,420 156,594 143,894 164,961 128,458 158,252 146,844 183,268 (441) (2,187) 1,027 23,905 8,650 6,233 (12,186) (46,258) 0 151 (12,186) (46,409) 0 0 0 0 (696) 0 (12,882) (46,409) (.20) (.90) (.20) (.90) Footnotes: (1) Receivables consist of-- Accounts Receivable $1,175 $1,544 Notes Receivable 265 214 Income Taxes Receivable - 3,514 -------------------- Total $1,440 $5,272 ==================== (2) PP&E is net of accumulated depreciation and amortization of $42,293 and $33,924 respectively.
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