-----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, OXS9BWk2b86YznY9XtekfoqINyh35dY8sosTFycmrS+L4PdGrxhaPh1QnaNv5g65 RcwQP1mml++UCtiqIodyew== 0001016843-01-000272.txt : 20010409 0001016843-01-000272.hdr.sgml : 20010409 ACCESSION NUMBER: 0001016843-01-000272 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20010101 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHECKERS DRIVE IN RESTAURANTS INC /DE CENTRAL INDEX KEY: 0000879554 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 581654960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19649 FILM NUMBER: 1591535 BUSINESS ADDRESS: STREET 1: PO BOX 18800 CITY: CLEARWATER STATE: FL ZIP: 33762 BUSINESS PHONE: 7275192000 MAIL ADDRESS: STREET 1: 14255 49TH STREET NORTH BLDG I CITY: CLEARWATER STATE: FL ZIP: 33762 10-K405 1 0001.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ---------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] for the fiscal year ended January 1, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ____________ TO _________________ COMMISSION FILE NUMBER 0-19649 CHECKERS DRIVE-IN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) Delaware 58-1654960 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14255 49th Street North, Building 1, Suite 101 Clearwater, Florida 33762 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (727) 519-2000 Securities registered pursuant to 12(b) and 12 (g) of the Act: NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED TICKER -------------- ------------------- ------ Common Stock, par value $.001 per share NASDAQ--NMS CHKR Common Stock Purchase Warrants NASDAQ--NMS CHKRZ Common Stock Purchase Warrants NASDAQ--NMS CHKRW Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the Registrant's Common Stock as of February 9, 2001 was 9,758,533 shares. The aggregate market value of the shares of Registrant held by non-affiliates of the Registrant, based on the closing price of such stock on the National Market System of the NASDAQ Stock Market, as of February 9, 2001, was approximately $40.7 million. For purposes of the foregoing calculation only, all directors and executive officers of the Registrant have been deemed affiliates. DOCUMENTS INCORPORATED BY REFERENCE Part II of this 10-K incorporates information by reference from the Registrant's definitive proxy statement, which will be filed on or before May 2, 2001. CHECKERS DRIVE-IN RESTAURANTS, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PART I ITEM 1. Business......................................................................3 ITEM 2. Properties...................................................................10 ITEM 3. Legal Proceedings............................................................10 ITEM 4. Submission of Matters to a Vote of Security Holders..........................12 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................................................13 ITEM 6. Selected Financial Data......................................................14 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................15 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...................20 ITEM 8. Financial Statements and Supplementary Data..................................21 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................................................48 PART III ITEM 10. Directors and Executive Officers of the Registrant...........................48 ITEM 11. Executive Compensation.......................................................49 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...............49 ITEM 13. Certain Relationships and Related Transactions...............................49 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............50
2 PART I ITEM 1. BUSINESS GENERAL Checkers Drive-In Restaurants, Inc. ("Checkers"), a Delaware corporation, and its wholly-owned subsidiaries (collectively, the "Company") is one of the largest chains of double drive-thru restaurants in the United States. Our Company is a combination of two separate quick-service restaurant chains, Checkers and Rally's Hamburgers (Rally's), which were merged in August 1999. Although Checkers was the surviving entity for purposes of corporate law, Rally's was considered the surviving entity for accounting purposes since the shareholders of Rally's owned a majority of our outstanding stock immediately following the merger. At January 1, 2001, there were 427 Rally's restaurants operating in 18 different states and 427 Checkers restaurants operating in 23 different states, the District of Columbia, Puerto Rico and the West Bank in the Middle East. Of the 854 restaurant locations, 195 are owned by us and 659 are owned by franchisees. Three of the owned restaurants are owned by joint venture partnerships in which we have a 50%-75% ownership interest. Our restaurants offer high quality food, serving primarily the drive-thru and take-out segments of the quick-service restaurant industry. Checkers commenced operations in April 1986 and began offering franchises in January 1987. Rally's opened its first restaurant in January 1985 and began offering franchises in November 1986. RECENT DEVELOPMENTS During fiscal 2000, we undertook significant revitalization of our management structure, training and operations. Our senior management was reorganized, including the elimination of the officers previously shared with Santa Barbara Restaurant Group, consolidation of some senior management functions, elimination of the Regional Vice President management layer and reduction of corporate headquarters staffing. Management increased its focus on cost efficient methods to obtain, train, motivate, and retain restaurant level management. Retention rates for all classifications of restaurant employees improved from 1999 to 2000. The architect of these changes is Daniel J. Dorsch, our President and Chief Executive Officer, who in November of 2000 entered into a three year employment agreement. Also during fiscal 2000, we sold 167 Company-owned restaurants to our franchisees, and used the majority of those funds to pay down a portion of our pre-existing debt. Additional sales to franchisees may occur in 2001. On February 3, 2000, we reacquired the master franchise rights for Puerto Rico, which we operate under our subsidiary, Checkers of Puerto Rico, Inc. There were 11 Checkers franchised locations in Puerto Rico as of January 1, 2001. On January 17, 2001, we reacquired 17 Checkers restaurants in Philadelphia that were owned by a franchisee, Great Lakes Restaurant Company II, LLC. In February 2001, the 17 Philadelphia Restaurants were sold to Quality Food Group of Washington, D.C., Inc., an affiliate of an existing franchisee. Also, on January 18, 2001, 35 Rally's restaurants in Detroit and 5 Checkers restaurants in Kansas City that were owned by Great Lakes Restaurants Company, LLC. were closed. Through cooperation between the franchisee's lender and Checkers, all of these locations were reopened by January 22, 2001, and have continued to operate and pay royalties to us. In addition, 10 Rally's restaurants in Toledo, being operated by Great Lakes Restaurant Company III, LLC., were reacquired. We conducted an advertising agency review, and we chose MARC/USA on November 1, 2000, as our new agency. During the first quarter of 2001, we plan to initiate a new re-branding and marketing "life style" campaign aimed at expanding our target audience using the slogan: "YOU GOTTA EAT(SM) " CONCEPT AND STRATEGY The Company operates under two brands "Checkers (R)" and "Rally's Hamburgers (R)". The Company's operating concept includes: (i) offering a limited menu to permit the maximum attention to quality and speed of preparation; (ii) utilizing distinctive restaurant design that features a "double drive-thru" concept and creates significant curb appeal; (iii) providing fast service using a "double drive-thru" design for its restaurants and a computerized point-of-sale system that expedites the ordering and preparation process; and (iv) great tasting quality food and drinks made fresh to order at a fair price. The Company's primary strategy is to serve the drive-thru and take-out segment of the quick-service restaurant industry. RESTAURANT LOCATIONS As of January 1, 2001, there were 195 Company-owned and operated restaurants in eight states (including three restaurants owned by joint venture partnerships in which we have interests ranging from 50% to 75%) and 659 restaurants operated by our franchisees in 28 states, the District of Columbia, Puerto Rico and the West Bank, Middle East. The following table sets forth the locations of each restaurant. 3 COMPANY-OWNED AND OPERATED RALLY'S RESTAURANTS (67) Ohio (11) Indiana (21) Tennessee (10) Louisiana (23) Mississippi (1) Kentucky (1) FRANCHISED RALLY'S RESTAURANTS, INCLUDING CKE-OPERATED RESTAURANTS (360) Ohio (89) Virginia (16) West Virginia (4) California (44) Georgia (1) Pennsylvania (2) Indiana (32) Arizona (4) Alabama (16) Michigan (46) Illinois (15) Florida (17) Kentucky (36) Louisiana (3) Tennessee (1) Mississippi (4) Missouri (20) Arkansas (10) COMPANY-OWNED AND OPERATED CHECKERS RESTAURANTS (128) Florida (86) Georgia (38) Tennessee (4) FRANCHISED CHECKERS RESTAURANTS (299) Florida (90) Illinois (9) Missouri (3) Georgia (46) South Carolina (10) West Virginia (2) Alabama (24) Louisiana (9) Iowa (2) North Carolina (11) New Jersey (11) Washington, D.C. (2) Maryland (19) Tennessee (4) Michigan (1) Puerto Rico (11) Wisconsin (4) Texas (1) New York (14) Virginia (4) West Bank, Middle East (2) Delaware (1) Pennsylvania (12) Kansas (2) Mississippi (5) During fiscal 2000, we opened or reopened 23 restaurants, including 22 franchisee operated stores and one company operated store. During the same period, we closed 76 restaurants, including 70 franchisee operated stores and six company operated stores. Also during fiscal 2000, we sold 167 company operated restaurants to franchisees. Our growth strategy for the next two years is to focus on the controlled development of additional franchised and company operated restaurants primarily in our existing core markets and to further penetrate markets currently under development by franchisees. We also intend to develop select international markets. SITE SELECTION The selection of a site for a restaurant is critical to its success. Management inspects and approves each potential restaurant site prior to final selection of the site. In evaluating particular sites, the Company considers various factors including traffic count, speed of traffic, convenience of access, size and configuration, demographics and density of population, visibility and cost. The Company also reviews competition and the sales and traffic counts of national and regional chain restaurants operating in the area. The majority of Company-owned and operated restaurants are located on leased land and the Company intends to continue to use leased sites where possible. RESTAURANT DESIGN AND SERVICE Our 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 generally 760 to 980 sq. ft., which is less than one-fourth the size of the typical restaurants of the four largest quick-service hamburger chains. Our restaurants, due to their small size, require only 18,000 to 25,000 square feet of land area, which is approximately one-third to one-half the land area used by the four largest quick-service hamburger chains. As a result of the small size of the restaurant building, our restaurants generally require a smaller capital investment and have lower occupancy and operating costs per restaurant than traditional quick-service competitors. The size of the facility also permits somewhat greater flexibility with respect to the selection of prospective sites for restaurants. 4 The Checkers standard restaurant is designed around a 1950's diner and art deco theme with the use of white and black tile in a checkerboard motif, glass block corners, a protective drive-thru cover on each side of the restaurant supported by red aluminum columns piped with white neon lights and a wide stainless steel band piped with red neon lights that wraps around the restaurant as part of the exterior decor. Most restaurants utilize a "double drive-thru" concept that permits simultaneous service of two automobiles from opposite sides of the restaurant. Although a substantial portion of the Company's sales are made through its drive-thru windows, service is also available through walk-up windows. While the restaurants normally do not have an interior dining area, most have parking and a patio for outdoor eating. The patios contain canopy tables and benches, are well landscaped and have outside music in order to create an attractive and "fun" eating experience. Although each sandwich is made-to-order, the Company's objective is to serve customers within 30 seconds of their arrival at the drive-thru window. Each restaurant has a computerized point-of-sale system which displays each individual item ordered in front of the food and drink preparers. This enables the preparers to begin filling an order before the order is completed and totaled and thereby increases the speed of service to the customer and the opportunity of increasing sales per hour, provides better inventory and labor costs control and permits the monitoring of sales volumes and product utilization. The Rally's standard restaurant presents a distinctive design which conveys a message of "clean and fast" to the passing motorist. The restaurants' typical "double drive-thru" design features drive-thru windows on both sides of the restaurant for quicker service. While the restaurants generally do not have an interior dining area, most have a patio for outdoor eating. These areas contain canopy tables and seats and are landscaped to create an attractive eating environment. The Company's restaurants are generally open from 12 to 15 hours per day, seven days a week, for lunch, dinner and late-night snacks and meals. MENU The menu at Checkers is a hamburger product line including the original 1/4 Pound Champ Burger(R), a fully dressed and seasoned "made-to-order" burger, all white-meat chicken sandwiches, all beef hotdogs - including chili-cheese dogs, Checkers Famous Fries(TM), Coca-Cola soft drinks and super thick shakes. The menu at Rally's is a hamburger product line including the signature Big Buford(R), a fully dressed double cheeseburger, all white-meat chicken sandwiches, all beef hot dogs - including chili-cheese dogs, Rally's seasoned fries, Coca-Cola soft drinks and super thick shakes. The limited menus are designed to deliver quality, a high taste profile and unmatched speed of delivery. We are engaged in product development research and seek to enhance variety through many, limited time only product promotions throughout the calendar year. BRAND POSITIONING: FRESH The double drive-thru concept for both Checkers and Rally's provides a unique point of difference for product delivery. Simplified hamburger and chicken sandwich product lines (along with fries, colas and shakes) are served quickly, at a tremendous value. Consumers today want their food served hot, fresh and fast at a value. The Checkers and Rally's concepts take full advantage of the relationship between consumer's busy lives, cars and fast food. This brand positioning is based on consumer research, as tested with the core customer of the Company's products, as well as, other quick-service hamburger users who might be convinced to become a loyal customer. MARKETING PROGRAM You gotta be here. You gotta be there. You gotta do this. You gotta do that. But "You Gotta Eat". That's the simple premise we use in our new marketing campaign, launched in January 2001. We put those words to music in the tract that has become our rallying cry and new tagline, "You Gotta Eat". The music and campaign is an energetic, singable, can't-get-it-out-of-your-head song, with an eye for TV and radio message that resonates with our expanded target audience while capturing the flavor and personality of Checkers/Rally's. "You Gotta Eat" carries over into our print advertising, including free standing inserts, outdoor and in-store efforts. The message "You Gotta Eat" permeates every piece of the campaign. The media plan will incorporate a diverse mix of TV, radio and print executions. PURCHASING All of our restaurants purchase our food, beverages and supplies from company-approved suppliers. All products must meet our standards and specifications and management constantly monitors the quality of the food, beverages and supplies provided to the restaurants. In August 1999, we entered into a purchasing services agreement with CKE Restaurants, Inc. which makes available to us the cooperative buying power of all restaurants owned or affiliated with CKE. This agreement has allowed us to receive price concessions from many of our suppliers of food and paper products. The agreement will expire on August 5, 2001. As this agreement is terminated, our product cost may increase. 5 We believe that our 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, our profitability is dependent upon our ability to anticipate and react to changes in food costs. Various factors beyond our control, such as climate changes and adverse weather conditions, may affect food costs. MANAGEMENT AND EMPLOYEES A typical restaurant employs approximately 25 hourly employees, many of whom work part-time on various shifts. The management staff of a typical restaurant operated by the Company consists of a general manager, one assistant manager and a shift manager. A general manager is generally required to have prior restaurant management experience, preferably within the quick-service industry, and reports directly to an area manager. The area manager typically has responsibility for eight to ten restaurants and for assuring that each Company-owned restaurant consistently delivers high-quality food and service. Area managers, in most cases, report to District Directors. The Company has an incentive compensation program for area and store managers that provides for a monthly bonus based upon the achievement of certain sales and profit goals. As of January 1, 2001, we employed approximately 3,700 employees, substantially all of which were restaurant personnel. Most employees other than restaurant management and certain corporate personnel are paid on an hourly basis. We believe the Company provides working conditions and wages that are comparable with those of other companies within the service restaurant industry. We also believe we have good employee relations. None of the Company's employees are covered by a collective bargaining agreement. SUPERVISION AND TRAINING Each new franchisee and restaurant manager attends a comprehensive training program. The program was developed by the Company to enhance consistency of restaurant operations and is considered by management as an important step in operating a successful restaurant. During this program, the attendees are taught certain basic elements that we believe are vital to the Company's operations and are provided with a complete operations manual, together with training aids designed as references to guide and assist in the day-to-day operations. In addition, hands-on experience is incorporated into the program by requiring each attendee, prior to completion of the training course, to work in an existing Company-operated restaurant. After a restaurant is opened, we continue to monitor the operations of both franchised and Company-operated restaurants to assist in the consistency and uniformity of operation. We also employ franchise business consultants, who have been fully trained by us to assist franchisees in implementing our operating procedures and policies once a restaurant is open. As part of these services, the franchise business consultants rate the restaurant's hospitality, food quality, speed of service, cleanliness and maintenance of facilities. The franchisees receive a written report of the franchise business consultant's findings with deficiencies, if any noted, and recommended procedures to correct such deficiencies. 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, and many at our franchise restaurants are polled daily by our computer system at our corporate office. JOINT VENTURE RESTAURANTS As of January 1, 2001, there were three restaurants owned by separate general partnerships in which we own interests ranging from 50% to 75%. All of these restaurants are consolidated in our financial statements. We are the managing partner of two of the three joint venture restaurants. In the two joint venture restaurants managed by us, we receive 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 which is 4% of gross sales. INFLATION Food and labor costs are significant inflationary factors in the Company's operations. Many of our employees are paid hourly rates related to the statutory minimum wage; therefore, increases in the minimum wage increase the Company's costs. In addition, many of our leases require us to pay base rents with escalation provisions based on the consumer price index, percentage rents based on revenues, and to pay taxes, maintenance, insurance, repairs and utility costs, all of which are expenses 6 subject to inflation. We have generally been able to offset the effects of inflation to date through small menu price increases. There can be no assurance that we will be able to continue to offset the effects of inflation through menu price increases. WORKING CAPITAL Our working capital requirements are typical of companies within the quick-service restaurant industry. We do not normally require large amounts of working capital to maintain operations since sales are for cash, purchases are on open accounts and meat and produce inventories are limited to a two to four day supply to assure freshness. Sales of certain assets held for sale, net of underlying encumbrances, provided a source of working capital during fiscal 2000. We also plan to utilize working capital to open a limited number of new restaurants and to remodel an undetermined number of existing restaurants in fiscal 2001. SEASONALITY The seasonality of restaurant sales due to consumer spending habits can be significantly affected by the timing of advertising, competitive market conditions and weather related events. While restaurant sales for certain quarters can be stronger, or weaker, there is no predominant pattern. FRANCHISE OPERATIONS STRATEGY. We encourage controlled development of franchised restaurants in our existing markets, as well as, in certain additional states. The primary criteria considered by us in the selection, review and approval of prospective franchisees are the availability of adequate capital to open and operate the number of restaurants franchised and prior experience in operating quick-service restaurants. Franchisees operated 659, or 77%, of the total restaurants open at January 1, 2001. During fiscal 2000, we sold a total of 167 company operated restaurants to existing and new franchisees. We may sell additional company operated restaurants to franchisees in fiscal 2001. After such sales are completed, approximately 80% of our restaurants would be franchised and approximately 20% would be company operated. In the future, our success will continue to be dependent upon our franchisees and the manner in which they operate and develop their restaurants to promote and develop the Checkers and Rally's concepts and our reputation for quality and speed of service. Although we have 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 open in 2001, or that the franchisees will successfully develop or operate restaurants in their franchise areas in a manner consistent with our concepts and standards. As a result of inquiries concerning international development, we may develop a limited number of international markets and have registered our trademarks in various foreign countries. The most likely format for international development is through the issuance of master franchise agreements and/or joint venture agreements. The terms and conditions of these agreements may vary from the standard area development agreement and franchise agreement in order to comply with laws and customs different from those of the United States. On March 31, 1995, we entered into a master franchise agreement for the Caribbean basin. This master franchise agreement was terminated by us on February 3, 2000. We have also granted three franchise agreements for the West Bank in the Middle East. FRANCHISEE SUPPORT SERVICES. We maintain 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 franchisee, we typically send a team to the restaurant to assist the franchisee during the first four days that the restaurant is open. This team monitors compliance with the Company's standards as to quality of product and speed of service. In addition, the team provides on-site training to all restaurant personnel. This training is in addition to the training provided to the franchisee and the franchisee's management team described under "Restaurant Operations - Supervision and Training" above. We also employ franchise business consultants ("FBC's"), who have been fully trained by the Company to assist franchisees in implementing the operating procedures and policies of the Company once a restaurant is open. As part of these services, the FBC rates the restaurant's hospitality, food quality, speed of service, cleanliness and maintenance of facilities. The franchisees receive a written report of the FBC's findings, with deficiencies, if any, and noted, recommended procedures to correct such deficiencies. FRANCHISE AGREEMENTS. The franchise agreement grants to the franchisee an exclusive license at a specified location to operate a restaurant in accordance with the Checkers and Rally's systems and to utilize the Company's trademarks, service marks and other rights of the Company relating to the sale of its menu items. The term of the current franchise agreement is generally 20 years. Upon expiration of the franchise term, the franchisee will generally be entitled to acquire a successor franchise for the restaurants on the terms and conditions of the Company's then current form of franchise agreement if the franchisee remains in compliance with the franchise agreement throughout its term and if certain other conditions are met, including the payment of a fee equal to 25% of the then current franchise fee. 7 In some instances, we grant to the franchisee the right to develop and open a specified number of restaurants within a limited period of time and in a defined geographic area (the "Franchised Area") and thereafter to operate each restaurant in accordance with the terms and conditions of a franchise agreement. In that event, the franchisee ordinarily signs two agreements, an area development agreement and a franchise agreement. Each area development agreement establishes the number of restaurants the franchisee is to construct and open in the Franchised Area during the term of the area development agreement (normally a maximum of five years) after considering many factors, including the residential, commercial and industrial characteristics of the area, geographic factors, population of the area and the previous experience of the franchisee. The franchisee's development schedule for the restaurants is set forth in the area development agreement. The Company may terminate the area development agreement of any franchisee that fails to meet its development schedule. The franchise agreement and area development agreement require that the franchisee select proposed sites for restaurants within the franchised area and submit information regarding such sites to us for our review, although final site selection is at the discretion of the franchisee. We do not arrange or make any provisions for financing the development of restaurants by our franchisees. 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. We provide a training program for management personnel of our franchisees at our corporate office. Under the terms of the franchise agreement, the Company has mandated 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. We may terminate a franchise agreement for several reasons including the franchisee's bankruptcy or insolvency, default in the payment of indebtedness to the Company or suppliers, failure to maintain standards set forth in the franchise agreement or operations manual, continued violation of any safety, health or sanitation law, ordinance or governmental rule or regulation or cessation of business. In such event, we may also elect to terminate the franchisee's area development agreement. FRANCHISE FEES AND ROYALTIES. Under the current franchise agreement, a franchisee is generally required to pay application fees, site approval fees and an initial franchise fee together totaling $30,000 for each restaurant opened by the franchisee. As an additional incentive for new restaurant development in 2001, the total fees have been reduced to $20,000 for new store openings in 2001. 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 franchise fee as each restaurant is developed. Each franchisee is also generally required to pay the Company a semi-monthly royalty of 4% of the restaurant's gross sales (as defined) and to expend certain amounts for advertising and promotion. COMPETITION Our restaurant operations compete in the quick-service industry, which is highly competitive with respect to price, concept, quality and speed of service, location, attractiveness of facilities, customer recognition, convenience and food quality and variety. The industry includes many quick-service chains, including national chains which have significantly greater resources than the Company that can be devoted to advertising, product development and new restaurants, and which makes them less vulnerable to fluctuations in food, paper, labor and other costs. In certain markets, we will also compete with other quick-service double drive-thru hamburger chains with operating concepts similar to the Company. The quick-service industry is often significantly affected by many factors, including changes in local, regional or national economic conditions affecting consumer spending habits, demographic trends and traffic patterns, changes in consumer taste, consumer concerns about the nutritional quality of quick-service food and increases in the number, type and location of competing quick-service restaurants. We compete primarily on the basis of speed of service, price, value, food quality and taste. All of the major chains have increasingly offered selected food items and combination meals, including hamburgers, at temporarily or permanently discounted prices. This promotional activity has continued at increasing levels, and management believes that it has had a negative impact on the Company's sales and earnings. Increased competition, additional discounting and changes in marketing strategies by one or more of these competitors could have an adverse effect on the Company's sales and earnings in the affected markets. In addition, with respect to selling franchises, we compete with many franchisors of restaurants and other business concepts. TRADEMARKS AND SERVICE MARKS We believe that our rights in our trademarks and service marks are important to our marketing efforts and a valuable part of our business. We own a number of trademarks and service marks that have been registered, or for which applications are pending, with the United States Patent and Trademark Office including but not limited to: "Rally's Hamburgers(R)", "One of a Kind Fries", "Big Buford(R)", "Checkers(R)", "Checkers BurgeroFriesoColas" and "Champ Burger(R)". It is the Company's policy to pursue registration of its marks whenever possible and to vigorously oppose any infringement of its marks. 8 GOVERNMENT REGULATION The restaurant industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and building and zoning requirements. In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Many of our employees are paid hourly rates based upon the federal and state minimum wage laws. Recent legislation increasing the minimum wage has resulted in higher labor costs to the Company. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could have a material adverse effect on the Company's business, financial condition and results of operation. The Company is also subject to extensive federal and state regulations governing franchise operations and sale which impose registration and disclosure requirements on franchisors in the offer and sale of franchises and in certain cases, dictating substantive standards that govern the relationship between franchisors and franchisees, including limitations on the ability of franchisors to terminate franchisees and alter franchise arrangements. ENVIRONMENTAL MATTERS The Company is subject to various federal, state and local environmental laws. These laws govern discharges to air and water from the Company's restaurants, as well as, handling and disposal practices for solid and hazardous waste. These laws may impose liability for damages for the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. The Company may be responsible for environmental conditions relating to its restaurants and the land on which the restaurants are located, regardless of whether the restaurants or land in question are leased or owned and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. We are not aware of any environmental conditions that would have a material adverse effect on our businesses, assets or results of operations taken as a whole. We cannot be certain that environmental conditions relating to prior, existing or future restaurants will not have a material adverse effect on the Company. Moreover, there is no assurance that: (1) future laws, ordinances or regulations will not impose any material environmental liability; or (2) the current environmental condition of the properties will not be adversely affected by tenants or other third parties or by the condition of land or operations in the vicinity of the properties. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Form 10-K under "Item 1. Business," "Item 3. Legal Proceedings", "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K constitute "forward-looking statements" which we believe are within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. Also, when we use words such as "believes", "expects", "anticipates" or similar expressions, we are making forward looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Some of the risks that should be considered include: (i) The fact that we compete with numerous well established competitors who have substantially greater financial resources and longer operating histories than us, which enables them to engage in heavy and sustained discounting as well as substantial advertising and promotion. While this competition is already intense, if it increases, it could have an even greater adverse impact on revenues and profitability of company and franchise restaurants. (ii) The fact that we must reverse declining same store sales if we are to achieve improved profitability. Sales increases will depend, among other things, on the success of our advertising and promotion efforts and the success of other operating initiatives, all of which are speculative. We may also be negatively impacted by other factors common to the restaurant industry such as changes in consumer tastes away from red meat and fried foods; consumer acceptance of new products; consumer frequency; increases in the costs of food; paper, labor, health care, workers' compensation or energy; an inadequate number of available hourly paid employees; and/or decreases in the availability of affordable capital resources; development and operating costs. Other factors which may negatively impact the Company include, among others, adverse publicity; general economic and business conditions; availability, locations, and terms of sites for restaurant development; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; the results of financing efforts; business abilities and judgement of personnel; availability of qualified personnel; changes in, or failure to comply with, government 9 regulations; continued NASDAQ listing; weather conditions; construction schedules and other factors referenced in this Form 10-K. ITEM 2. PROPERTIES We owned 195 restaurants as of January 1, 2001, inclusive of the three restaurants owned by joint venture partnerships. We held ground leases on 188 of these restaurants and owned the land on the remaining seven. Our leases are generally written for a term of 20 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. When practicable, we prefer to lease the land for our restaurants. As of January 1, 2001, we owned three vacant parcels of land available for sale or lease. In addition, we lease 55 parcels of land which are available for sub-lease, of which 22 parcels were subleased at January 1, 2001. Thirty-two restaurants owned or subleased are subject to a mortgage in favor of FFCA Acquisition Corporation. In addition, 72 restaurants secure our primary debt with Textron Financial Corporation. Our executive offices are located in approximately 26,500 square feet of leased office space and 6,000 square foot of adjoining warehouse space in Clearwater, Florida. The lease expires on June 30, 2003, however, we anticipate exercising our right to terminate the lease on June 30, 2001 and entering into an office lease for premises located at 4800 West Cypress Street, Tampa, Florida 33607. During fiscal 2000, we aggressively pursued the sale of our Company owned restaurants to new or existing franchisees in transactions that provided immediate funds to reduce debt and also provided a continued source of income through future royalties. We completed six separate transactions involving the sale of 167 Company-owned restaurants to new and existing franchisees and also sold our modular building facility, generating cash proceeds which were used to repay $40.3 million of debt. The most recent of these transactions, the sale of 28 Rally's restaurants, was completed on September 29, 2000. ITEM 3. LEGAL PROCEEDINGS JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET AL. In January and February 1994, two putative class action lawsuits were filed, purportedly on behalf of the stockholders of Rally's, in the United States District Court for the Western District of Kentucky, Louisville Division, against Rally's, Burt Sugarman and Giant Group, Ltd. and certain of Rally's former officers and directors and its auditors. The cases were subsequently consolidated under the case name Jonathan Mittman et. al. vs. Rally's Hamburgers, Inc., et. al. The complaints allege that the defendants violated the Securities Exchange Act of 1934, among other claims, by issuing inaccurate public statements about Rally's in order to arbitrarily inflate the price of its common stock. The plaintiffs seek unspecified damages. On April 15, 1994, Rally's filed a motion to dismiss and a motion to strike. On April 5, 1995, the Court struck certain provisions of the complaint but otherwise denied Rally's motion to dismiss. In addition, the Court denied plaintiffs' motion for class certification; the plaintiffs renewed this motion, and despite opposition by the defendants, the Court granted such motion for class certification on April 16, 1996, certifying a class from July 20, 1992 to September 29, 1993. Motions for Summary Judgment were filed by the parties in September 2000, and rulings by the Court are pending. The defendants deny all wrongdoing and intend to defend themselves vigorously in this matter. Management is unable to predict the outcome of this matter at the present time or whether or not certain available insurance coverages will apply. FIRST ALBANY CORP. V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. This putative class action was filed on September 29, 1998, in the Delaware Chancery Court in and for New Castle County, Delaware by First Albany Corp., as custodian for the benefit of Nathan Suckman, an alleged stockholder of 500 shares of the Company's common stock. The complaint names the Company and certain of its current and former officers and directors as defendants, including William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, Richard A. Peabody, James T. Holder, Terry N. Christensen, Frederick E. Fisher, Clarence V. McKee, Burt Sugarman, C. Thomas Thompson and Peter C. O'Hara. The complaint also names Rally's and Giant as defendants. The complaint arises out of the proposed merger announced on September 28, 1998 between Checkers, Rally's and Giant and alleges generally, that certain of the defendants engaged in an unlawful scheme and plan to permit Rally's to acquire the public shares of Checkers stock in a "going-private" transaction for grossly inadequate consideration and in breach of the defendants' fiduciary duties. The plaintiff allegedly initiated the complaint on behalf of all stockholders of Checkers as of September 28, 1998, and seeks, among other relief, certain declaratory and injunctive relief against the consummation of the proposed merger, or in the event the proposed merger is consummated, recission of the proposed merger and costs and disbursements incurred in connection with bringing the action. In view of a decision by Checkers, Giant and Rally's not to implement the transaction that had been announced on September 28, 1998, plaintiffs have agreed to provide Checkers and all other defendants with an open extension of time to respond to the complaint. Although, plaintiffs indicated that they would likely file an amended complaint in the event of the consummation of a merger between Checkers and Rally's, no amendment has been filed to date even though the merger of Checkers and Rally's was 10 completed on August 9, 1999. We believe the lawsuit is without merit and intend to defend it vigorously in the event that plaintiffs seek to renew the lawsuit. DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. This class action was filed on October 2, 1998, in the Delaware Chancery Court in and for New Castle County, Delaware by David J. Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified number of shares of our common stock. The complaint names Checkers and certain of its current and former officers and directors as defendants, including William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, Richard A. Peabody, James T. Holder, Terry N. Christensen, Frederick E. Fisher, Clarence V. McKee, Burt Sugarman, C. Thomas Thompson and Peter C. O'Hara. The complaint also names Rally's and Giant as defendants. As with the FIRST ALBANY complaint described above, this complaint arises out of the proposed merger announced on September 28, 1998 between Checkers, Rally's and Giant and alleges generally, that certain of the defendants engaged in an unlawful scheme and plan to permit Rally's to acquire the public shares of Checkers's common stock in a "going-private" transaction for grossly inadequate consideration and in breach of the defendant's fiduciary duties. The plaintiffs allegedly initiated the complaint on behalf of all stockholders of Checkers as of September 28, 1998, and seeks, among other relief, certain declaratory and injunctive relief against the consummation of the proposed merger, or in the event the proposed merger is consummated, rescission of the proposed merger and costs and disbursements incurred in connection with bringing the action. For the reasons stated above in the description of the FIRST ALBANY action, plaintiffs have agreed to provide the company and all other defendants with an open extension of time to respond to the complaint. Although, plaintiffs indicated that they would likely file an amended complaint in the event of the consummation of a merger between Checkers and Rally's, no such amendment has been filed to date even though the merger of Checkers and Rally's was completed on August 9, 1999. The company believes the lawsuit is without merit and intends to defend these actions vigorously. GREENFELDER ET AL. V. WHITE, JR., ET AL. On August 10, 1995, a state court complaint was filed in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, Civil Division, entitled GAIL P. GREENFELDER AND POWERS BURGERS, INC. V. JAMES F. WHITE, JR., CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK. A companion complaint was also filed in the same Court on May 21, 1997, entitled GAIL P. GREENFELDER, POWERS BURGERS OF AVON PARK, INC., AND POWER BURGERS OF SEBRING, INC. V. JAMES F. WHITE, JR., CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK. The original complaint alleged, generally, that certain officers of Checkers intentionally inflicted severe emotional distress upon Ms. Greenfelder, who is the sole stockholder, president and director of Powers Burgers, Inc., a Checkers franchisee. The present versions of the amended complaints in the two actions assert a number of claims for relief, including claims for breach of contract, fraudulent inducement to contract, post-contract fraud and breaches of implied duties of "good faith and fair dealings" in connection with various franchise agreements and an area development agreement, battery, defamation, negligent retention of employees, and violation of Florida's Franchise Act. The parties reached a tentative settlement on January 11, 2001. In the event the settlement is not consummated, we intend to defend vigorously. CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES, INC., ET AL. On August 10, 1995, a state court counterclaim and third party complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, Civil Division, entitled TAMPA CHECKMATE FOOD SERVICES, INC., CHECKMATE FOOD SERVICES, INC. AND ROBERT H. GAGNE V. CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JAMES F. WHITE, JR., JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK. 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, Checkers sought to collect on a promissory note and foreclose on a mortgage securing the promissory note issued by Tampa Checkmate and Mr. Gagne and obtain declaratory relief regarding the rights of the respective parties under Tampa Checkmate's franchise agreement with Checkers. The counterclaim, as amended, alleged violations of Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act, and breaches of implied duties of "good faith and fair dealings" in connection with a settlement agreement and franchise agreement between various of the parties and sought a judgment for damages in an unspecified amount, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The case was tried before a jury in August of 1999. The court entered a directed verdict and an involuntary dismissal as to all claims alleged against Robert G. Brown, George W. Cook, and Jared Brown. The court also entered a directed verdict and an involuntary dismissal as to certain other claims alleged against Checkers and the remaining individual counterclaim defendants, James E. Mattei, Herbert G. Brown and James F. White, Jr. The jury returned a verdict in favor of Checkers, James E. Mattei, Herbert G. Brown and James F. White, Jr. as to all counterclaims brought by Checkmate Food Services, Inc. and in favor of Mr. Mattei as to all claims alleged by Tampa Checkmate and Mr. Gagne. In response to certain jury interrogatories, however, the jury made the following determination: (i) that Mr. Gagne was fraudulently induced to execute a certain unconditional guaranty and that Checkers was therefore not entitled to enforce its terms; (ii) that Checkers, H. Brown and Mr. White fraudulently induced Tampa Checkmate to execute a certain franchise agreement whereby Tampa Checkmate was damaged in the amount of $151,331; (iii) that Checkers, H. Brown and Mr. White violated a provision of the Florida Franchise Act relating to that franchise agreement whereby Tampa Checkmate and Mr. Gagne were each damaged in 11 the amount of $151,331; and (iv) that none of the defendants violated Florida's Deceptive and Unfair Trade Practices Act relating to that franchise agreement. We believe that the responses to the jury interrogatories described above are "advisory" because of certain pre-trial orders entered by the Court. As a result, we believe that the responses contained in the jury interrogatories are not binding on the trial court, and that it is incumbent on the trial court to weigh the evidence and enter its own verdict. The trial court nonetheless determined that the responses to the jury interrogatories described above are binding upon it and entered a final judgment accordingly. We believe that the entry of the judgment was erroneous and we have filed a notice of appeal to the Court of Appeals for the Second District of Florida. 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. In July 1997, Checkers filed an Adversary Complaint in the Tampa Checkmate bankruptcy proceedings entitled CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES, INC. The Adversary Complaint sought a preliminary 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. Tampa Checkmate filed a counterclaim to Checkers complaint that essentially contained the same claims set forth in the amended counterclaim filed in the state court action. The court granted Checkers' motion for preliminary injunction on July 23, 1998, and Tampa Checkmate de-identified its restaurant. On December 15, 1998, the Court granted Checkers motion to convert Tampa Checkmate's bankruptcy proceedings from a Chapter 11 proceeding to a Chapter 7 liquidation. The bankruptcy court has granted Checkers' motion to lift the automatic stay imposed by 11 U.S.C. ss.362 to allow Checkers to proceed with the disposition of the property which is the subject of its mortgage. The counterclaim in the bankruptcy proceedings remains pending, but we believe the merits of the counterclaims were already determined by state court proceedings described above. TEX-CHEK, INC. ETAL V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET.AL. On February 4, 1997, a petition was filed against Checkers and two former officers and directors of Checkers in the District Court of Travis County, Texas 98th Judicial District, entitled TEX-CHEX, INC., BRIAN MOONEY, AND SILVIO PICCINI V. CHECKERS DRIVE-IN RESTAURANTS, INC., JAMES MATTEI, AND HERBERT G. BROWN. The original petition generally alleged that Tex-Chex, Inc. and the individual plaintiffs were induced into entering into two franchise agreements and related personal guarantees with Checkers based on fraudulent misrepresentations and omissions made by Checkers. On October 2, 1998, the plaintiffs filed an amended petition realleging the fraudulent misrepresentations and omission claims set forth in the original petition and asserting additional causes of action for violation of Texas' Deceptive Trade Practices Act and violation of Texas' Business Opportunity Act. This matter was settled March 13, 2001. DOROTHY HAWKINS V. CHECKERS DRIVE-IN RESTAURANTS, INC. AND KPMG PEAT MARWICK. On March 4, 1999, a state court complaint was filed in the Circuit Court in and for Pinellas County, Florida, Civil Division. The complaint alleges that Mrs. Hawkins was induced into purchasing a restaurant site and entering into a franchise agreement with Checkers based on misrepresentations and omissions made by Checkers. The complaint asserts claims for breach of contract, breach of the implied covenant of good faith and fair dealing, violation of Florida's Deceptive Trade Practices Act, fraudulent concealment, fraudulent inducement, and negligent representation. The Company denies the material allegations of the complaint and intend to defend this lawsuit vigorously. No estimate of any possible loss or range of loss resulting from the lawsuit can be made at this time. We are also 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 our consolidated financial position, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our annual meeting of shareholders on September 15, 2000. At the meeting the following matters were voted upon at the annual meeting for fiscal 2000: the election of David Gotterer, Ronald B. Maggard and Burt Sugarman as directors to serve until the annual shareholders meeting in 2003; the ratification and approval of an amendment to our 1991 stock option plan to increase the number of shares available under the plan to 1,500,000 shares; the ratification and approval of an amendment to our 1994 plan for non-employee directors; and the ratification and approval of the appointment of KPMG LLP as our independent auditors. 12 The following are the total number of votes cast for, against, or withheld, as to the matters set forth above:
AGAINST/ ABSTENTIONS/ FOR WITHHELD BROKER NON-VOTES --------- --------- ---------------- 1. The election of David Gotterer. 8,226,257 352,309 18,110 2. The election of Ronald B. Maggard. 8,234,218 344,348 18,110 3. The election of Burt Sugarman. 8,034,265 544,301 18,110 4. The ratification and approval of an amendment to our 1991 Plan for Non-Employee Directors. 3,214,441 1,004,718 34,929 5. The ratification and approval of an amendment to our 1994 Plan for Non-Employee Directors. 2,914,316 1,302,664 37,108 6. The ratification and approval of the appointment of KPMG LLP as our independent auditors. 8,543,415 30,847 22,414
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the National Market System of the NASDAQ Stock Market under the symbol "CHKR". As of January 1, 2001, there were approximately 28,000 stockholders of record of our common stock. The following table below sets forth the high and low closing sales price quotations of the Company's common stock, as reported on the NASDAQ National Market, for the periods indicated, as adjusted for the one-for-twelve reverse stock split effected August 9, 1999.
2000 Quarter Ended FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER High $ 2.56 $ 4.12 $ 5.50 $ 4.50 Low 1.81 1.47 3.12 2.94
1999 Quarter Ended FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER High $ 8.63 $ 5.63 $ 4.50 $ 3.44 Low 3.75 3.00 1.69 1.25
DIVIDENDS We have not declared or paid any dividends on our common stock since incorporation and do not intend to do so in the foreseeable future. Dividends are restricted under the terms of our notes payable. FUTURE REGISTRATIONS We intend to register 425,000 shares of our common stock for the sale to holders of our outstanding common stock purchase warrants which were issued in 1997. We issued warrants to purchase 5,100,000 shares of our common stock on May 30, 1997. After adjustment for a one-for-twelve reverse stock split which occurred on August 9, 1999, the common stock available for purchase by these warrants is 425,000 shares. The warrants are exercisable at anytime during the 30 day period beginning from the date approval is obtained from the Securities and Exchange Commission for this registration. The Company's Board of Directors reduced the original exercise price of $1.375 to $0.4583 effective September 20, 1999. As a result of the one-for-twelve reverse stock split, it now requires the exercise of twelve warrants to receive one share of the common stock for an aggregate exercise price of $5.50 per share. If all of the warrants were exercised to purchase these shares, they would provide approximately $2.3 million in additional capital to the Company. 13 ITEM 6. SELECTED FINANCIAL DATA The following table shows our selected financial data. On August 9, 1999, Checkers merged with Rally's. The merger was accounted for as a reverse acquisition whereby Rally's was treated as the acquirer and Checkers as the acquiree, as the former shareholders of Rally's owned a majority of the outstanding common stock of Checkers subsequent to the merger. The fiscal 1998, 1997 and 1996 financial information presented herein represents the financial results of Rally's only. The fiscal 1999 financial information includes the results of Rally's for the entire year and the results of Checkers for the period from August 9, 1999 to January 3, 2000. The fiscal 2000 financial information includes the results of the merged companies. The selected historical statement of operations and historical balance sheet data presented have been derived from our audited consolidated financial statements. Please note that our fiscal year ended January 3, 2000 contained 53 weeks. You should read the following selected financial data in conjunction with Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and accompanying notes. CONSOLIDATED STATEMENTS OF OPERATIONS (For the years ended) (1) (In thousands, except per share amounts and statistical data)
JANUARY 1, JANUARY 3, DECEMBER 28, DECEMBER 28, DECEMBER 29, 2001 2000 1998 1997 1996 --------- --------- ----------- ----------- ------------ Company restaurant sales $ 162,804 $ 192,340 $ 139,602 $ 139,348 $ 156,445 Other revenues 18,386 9,495 5,350 5,582 6,307 --------- --------- --------- --------- --------- Total revenues 181,190 201,835 144,952 144,930 162,752 --------- --------- --------- --------- --------- Income (loss) from operations (2) 8,051 (17,184) 1,401 3,343 4,041 Other expenses (5,955) (9,217) (8,684) (7,404) (8,008) --------- --------- --------- --------- --------- Income (loss) before taxes and extraordiary item 2,096 (26,401) (7,283) (4,061) (3,967) Income tax (benefit) expense (475) 336 252 455 (675) --------- --------- --------- --------- --------- Income (loss) before extraordinary item 2,571 (26,737) (7,535) (4,516) (3,292) Extraordinary item (3) (229) 849 -- -- 5,280 --------- --------- --------- --------- --------- Net income (loss) $ 2,342 $ (25,888) $ (7,535) $ (4,516) $ 1,988 ========= ========= ========= ========= ========= Basic earnings (loss) per share: Income (loss) before extraordinary item $ 0.27 $ (4.02) $ (1.67) $ (1.32) $ (1.17) Extraordinary item (0.02) 0.13 -- -- 1.87 --------- --------- --------- --------- --------- Net income (loss) $ 0.25 $ (3.89) $ (1.67) $ (1.32) $ 0.70 ========= ========= ========= ========= ========= Diluted earnings (loss) per share: Income (loss) before extraordinary item $ 0.25 $ (4.02) $ (1.67) $ (1.32) $ (1.17) Extraordinary item (0.02) 0.13 -- -- 1.87 --------- --------- --------- --------- --------- Net income (loss) $ 0.23 $ (3.89) $ (1.67) $ (1.32) $ 0.70 ========= ========= ========= ========= ========= Weighted average shares outstanding Basic 9,419 6,657 4,506 3,434 2,820 ========= ========= ========= ========= ========= Diluted 10,194 6,657 4,506 3,434 2,820 ========= ========= ========= ========= =========
14 SELECTED OPERATING DATA (AS OF AND FOR THE YEARS ENDED) (IN THOUSANDS)
JANUARY 1, JANUARY 3, DECEMBER 28, DECEMBER 28, DECEMBER 29, 2001 2000 1998 1997 1996 --------- ---------- ----------- ----------- ------------ Systemwide sales (4) $536,511 $401,964 $286,876 $290,133 $316,670 ======== ======== ======== ======== ======== Restaurants open at end of period: Company 195 367 226 229 209 Franchised 659 540 249 248 258 -------- -------- -------- -------- -------- Total 854 907 475 477 467 ======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA (5) (In thousands)
JANUARY 1, JANUARY 3, DECEMBER 28, DECEMBER 28, DECEMBER 29, 2001 2000 1998 1997 1996 --------- --------- ----------- ----------- ----------- Working capital $ (8,990) $ (27,451) $ (4,129) $ (9,825) $ (9,552) Total assets $ 125,998 $ 165,653 $ 123,306 $ 134,297 $ 112,258 Long-term debt and obligations under capital leases, including current portion $ 40,538 $ 80,767 $ 70,307 $ 68,444 $ 69,654 Total stockholders' equity $ 50,934 $ 46,663 $ 34,519 $ 41,513 $ 19,365 Cash dividends declared per common share $ -- $ -- $ -- $ -- $ --
(1) The information presented for the period ending January 3, 2000 reflects the results for Rally's for the full year and only the post merger period from August 10, 1999 to January 3, 2000 for Checkers. Fiscal 1998, 1997 and 1996 includes Rally's only. Fiscal 2000 includes the results of the merged companies. (2) Includes asset impairment charges of approximately $0.6 million, $22.3 million and $3.4 million for fiscal 2000, 1999 and 1998, respectively. (3) The extraordinary item for fiscal 2000 represents a loss on early retirement of debt, net of tax expense of $0. The extraordinary items for fiscal 1999 and 1996 represents a gain on the early retirement of debt, net of tax expense of $0 and $1,350, respectively. (4) Systemwide sales consist of aggregate revenues of Company-owned and franchised restaurants (including CKE-operated restaurants). (5) The balance sheet presented as of January 1, 2001 and January 3, 2000 represents the combined balance sheet of the merged entity. All prior periods reflect Rally's only. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On August 9, 1999, Checkers Drive-In Restaurants, Inc. ("Checkers") and Rally's Hamburgers, Inc., ("Rally's") completed their merger ("Merger"). The merger of Checkers with Rally's was accounted for as a reverse acquisition as former shareholders of Rally's owned a majority of the outstanding stock of Checkers subsequent to the merger. Therefore, for accounting purposes, Rally's is deemed to have acquired Checkers. All pre-Merger financial information represents the financial results for Rally's only. The post-merger financial results include both Rally's and Checkers. 15 The Merger has had a significant impact on the Company's results of operations and is the principal reason for the significant differences when comparing results of operations for the periods ending January 1, 2001 and January 3, 2000 with the results of operations for the period ended December 28, 1998. As a result of the Merger in fiscal 1999, the Company acquired 470 Checkers restaurants. At January 1, 2001, the Company's system included 854 restaurants, comprised of 195 Company-owned and operated and 659 franchised restaurants. At January 1, 2001, there were 427 Rally's restaurants operating in 18 different states and there were 427 Checkers restaurants operating in 22 different states, the District of Columbia, Puerto Rico and the West Bank in the Middle East. As of January 1, 2001, our ownership interest in Company-operated restaurants is in one of two forms: (i) 100% ownership of 192 restaurants and (ii) a 50% to 75% ownership interest in three partnerships which own the restaurants (a "Joint Venture Restaurant"). The Joint Venture Restaurants' operations are consolidated in the financial statements of the Company. The franchised restaurants include 23 units in Western markets which are operated by CKE Restaurants, Inc. ("CKE"), a significant shareholder of the Company, under an operating agreement which began in July, 1996. In fiscal 2000, we opened 1 restaurant, closed 6 restaurants and sold 167 restaurants to franchisees. Franchisees opened 22 restaurants and closed 70, in fiscal 2000. We receive revenues from restaurant sales, franchise fees and royalties. Our revenues also include payments resulting from an operating agreement with CKE, referred to as Owner fee income in the accompanying consolidated financial statements. Restaurant food and paper cost, labor costs, occupancy expense, other operating expenses, depreciation and amortization, and advertising and promotion expenses relate directly to Company-owned restaurants. Other expenses, such as depreciation and amortization, and general and administrative expenses, relate both to Company-owned restaurant operations and franchise sales and support functions. Owner expenses relate to CKE-operated restaurants and consist primarily of depreciation and amortization. Our revenues and expenses are affected by the number and timing of additional restaurant openings and the sales volumes of both existing and new restaurants. Effective November 30, 1997, Checkers and Rally's entered into a Management Services Agreement ("Agreement") whereby Checkers provided accounting, technology, and other functional and management services to predominantly all of the operations of Rally's. Checkers received fees from Rally's relative to the shared departmental costs times the respective store ratio. Upon completion of the Merger, this Agreement was terminated. During the period from December 29, 1998 through August 9, 1999 and the year ended December 28, 1998, Checkers charged Rally's $4.7 million and $5.6 million, respectively in accordance with the Agreement. 16 RESULTS OF OPERATIONS The table below sets forth the percentage relationship to total revenues, unless otherwise indicated, of certain items included in our consolidated statements of income and operating data for the periods indicated:
FISCAL YEAR ENDED -------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 (3) 1998 (3) --------- --------- ----------- REVENUES: Restaurant sales 89.9% 95.3% 96.3% Franchise revenues and other income 10.1% 4.7% 3.7% ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== COST AND EXPENSES: Restaurant food and paper costs (1) 31.6% 31.3% 31.8% Restaurant labor costs (1) 33.1% 32.4% 30.5% Restaurant occupancy expense (1) 6.7% 6.8% 5.3% Restaurant depreciation and amortization (1) 2.6% 4.0% 5.2% Other restaurant operating expenses (1) 10.7% 9.7% 8.8% General and administrative expenses 9.4% 9.1% 8.8% Advertising (1) 6.4% 6.1% 7.1% Bad debt expense 0.4% 0.9% 0.4% Non-cash compensation 1.0% 0.0% 0.0% Other depreciation and amortization 2.9% 2.7% 2.2% Impairment of long-lived assets 0.0% 11.0% 2.3% Gain on sales of markets (0.0)% (1.3)% 0.0% ----- ----- ----- OPERATING INCOME (LOSS) 4.4% (8.5)% 1.0% ===== ===== ===== OTHER INCOME (EXPENSE): Interest income 0.4% 0.4% 0.3% Loss on investment in affiliate 0.0% (0.7)% (1.4)% Interest expense (including interest-loan cost and bond discount amortization) (3.6)% (4.3)% (4.9)% ----- ----- ----- Income (loss) before minority interest, income taxes and extraordinary item 1.2% (13.1)% (5.0)% Minority interest in operations of joint ventures 0.0% 0.0% 0.0% ----- ----- ----- Income (loss) before income taxes and extraordinary item 1.2% (13.1)% (5.0)% Income tax (benefit) expense (0.2)% 0.1% 0.2% ----- ----- ----- Net income (loss) from continuing operations before extraordinary item 1.4% (13.2)% (5.2)% ===== ===== ===== Gain (loss) on early extinguishment of debt, net of income taxes (0.1)% 0.4% 0.0% ----- ----- ----- Net income (loss) 1.3% (12.8)% (5.2)% ===== ===== ===== Number of restaurants-Company owned and franchised (2): Restaurants open at the beginning of period 907 475 477 ----- ----- ----- Restaurants acquired through Merger -- 470 -- Company-owned restaurants opened, closed or transferred, net during period (172) (95) (3) Franchised restaurants opened, closed or transferred, net during period 119 57 1 ----- ----- ----- Total restaurants acquired,opened, closed or transferred, net during period (53) 432 (2) ----- ----- ----- Total restaurants open at end of period 854 907 475 ===== ===== =====
(1) As a percentage of restaurant sales. (2) Number of restaurants open at end of period. 1998 amounts reflect Rally's only. (3) Includes the results of operations for Rally's only, through August 9, 1999. RESULTS OF OPERATIONS COMPARISON OF HISTORICAL RESULTS - FISCAL YEARS 2000 AND 1999 REVENUES. Total revenues were $181.2 million for the year ended January 1, 2001, compared to $201.8 million for the year ended January 3, 2000. Company-owned restaurant sales decreased by $29.5 million for the year, from $192.3 million in fiscal 1999, to $162.8 million in fiscal 2000. The primary reason for the decrease was the result from the sale of 167 restaurants to franchisees. This was partially offset by a full year of merged company revenues. Sales at comparable stores, which include only the units that were in operation for the full years being compared, decreased 1.1% in 2000 as compared with 1999. Franchise revenues and fees increased by $8.9 million, primarily as a result of the Company-owned restaurants sales, resulting in an increase in royalties of $7.3 million and franchise fees of $1.6 million. COSTS AND EXPENSES. Restaurant food and paper costs remained consistent at 31.6% of restaurant sales in 2000 compared with 31.3% in 1999. The Company continues to benefit from its participation in the purchasing co-op with CKE Restaurants, Inc. and Santa Barbara Restaurant Group, Inc. Restaurant labor costs, which include restaurant employees' salaries, wages, benefits, bonuses and related taxes totaled $53.8 million or 33.1% of restaurant sales for 2000 compared with $62.4 million or 32.4% for 1999. The increase as a percentage of sales is due to increases in management salaries and other incentives to various employees designed to enhance retention rates on a going forward basis, as well as other increased labor rates. Restaurant occupancy expense, which includes rent, property taxes, licenses and insurance totaled $11.0 million or 6.7% of restaurant sales in 2000 compared with $13.1 million or 6.8% in 1999. Restaurant occupancy expense remained consistent as a percentage of restaurant sales. Restaurant depreciation and amortization of $4.3 million in 2000 decreased by $3.4 million from $7.7 million in 1999 primarily due to the sale of 167 Company-owned restaurants. Other restaurant operating expenses include all other restaurant level operating expenses and specifically includes utilities, maintenance and other costs. These expenses totaled $17.4 million or 10.7% of restaurant sales in 2000 compared with $18.7 million or 9.7% in 1999. The increase as a percent of sales was due primarily to a full year of Checkers' operations recognized in 2000, as Checkers' restaurants have higher restaurant operating expenses. Advertising expense decreased approximately $1.4 million to $10.4 million, or 6.4% of restaurant sales for 2000 compared with 6.1% for 1999. The increase as a percentage relates primarily to the decrease in revenues due to the sale of 167 Company-owned restaurants. Bad debt expense decreased to 0.4% of total revenues from 0.9% in the prior year. This was the result of collectibility issues with certain franchisees in 1999. Other depreciation and amortization remained consistent at $5.2 million in 2000 compared to $5.4 million in 1999. General and administrative expenses decreased $1.3 million in 2000 to $17.0 million, or 9.4% of revenues as compared to $18.3 million, or 9.1% of revenues in 1999. The decrease is due primarily to the reduction of our administrative staff. The loss on investment in affiliate in 1999 of $1.4 million represents Rally's share of the losses incurred by Checkers ($1.0 million) and the amortization of related goodwill ($0.4 million) prior to the Merger. During 2000 and 1999 the Company recorded impairment charges and loss provisions in accordance with SFAS 121 of $0.6 and $22.3 million, respectively INTEREST EXPENSE. Interest expense decreased to approximately $6.6 million for 2000 as compared to $8.6 million for 1999. This decrease is primarily due to the repayment of approximately $40.3 million in debt during 2000. INTEREST INCOME. Interest income was lower for 2000 as compared to 1999 primarily as the result of a lower cash balance due to debt repayments. INCOME TAX. The Company's 2000 tax benefit was approximately $475,000 representing estimated 2000 state taxes and a $623,000 favorable tax ruling. The prior year tax provision of $336,000 was for estimated state taxes. 18 COMPARISON OF HISTORICAL RESULTS - FISCAL YEARS 1999 AND 1998 REVENUES. Total revenues were $201.8 million for the year ended January 3, 2000, compared to $145.0 million for the year ended December 28, 1998. Company-owned restaurant sales increased by $52.7 million for the year, from $139.6 million in fiscal 1998 to $192.3 million in fiscal 1999. The Merger with Checkers resulted in a $54.4 million increase in sales. Overall sales for Rally's declined by $1.5 million from the prior year. Sales at comparable stores, which include only the units that were in operation for the full years being compared, increased 0.2% in 1999 as compared with 1998. Sales from sold and closed stores represented a reduction of $3.2 million offset by the extra week in the current year of $1.5 million. Franchise revenues and fees increased by $4.1 million, primarily as a result of the Merger. COSTS AND EXPENSES. Restaurant food and paper costs decreased to 31.3% of restaurant sales in 1999 compared with 31.8% in 1998. The Company continued to benefit from its participation in the purchasing co-op with CKE Restaurants, Inc. and Santa Barbara Restaurant Group, Inc. Restaurant labor costs, which include restaurant employees' salaries, wages, benefits, bonuses and related taxes totaled $62.4 million or 32.4% of restaurant sales for 1999 compared with $42.6 million or 30.5% for 1998. The increase as a percentage of sales is due in part to the inefficiencies associated with operating the restaurants at lower sales levels. In addition, incremental labor was strategically added to focus on speed of service improvements in 1999. Restaurant occupancy expense, which includes rent, property taxes, licenses and insurance totaled $13.1 million or 6.8% of restaurant sales in 1999 compared with $7.3 million or 5.3% in 1998. Restaurant occupancy expense increased as a percentage of restaurant sales due primarily to the decline in average restaurant sales relative to the fixed and semi-variable nature of these expenses. Restaurant depreciation and amortization of $7.7 million in 1999 increased by $500,000 from $7.2 million in 1998 primarily due to the Merger. Other restaurant operating expenses include all other restaurant level operating expenses other than food and paper costs, labor and benefits, rent and other occupancy costs and specifically includes utilities, maintenance and other costs. These expenses totaled $18.7 million or 9.7% of restaurant sales in 1999 compared with $12.3 million or 8.8% in 1998. The increase as a percent of sales was due primarily to the Merger as Checkers has higher restaurant operating expenses. Advertising expense increased approximately $1.9 million to $11.8 million or 6.1% of restaurant sales for 1999 compared with 7.1% for 1998 due to additional promotions initiated in an attempt to increase sales. Bad debt expense increased to 0.9% of restaurant sales from 0.4% in the prior year as a result of collectibility issues with certain franchisees. Other depreciation and amortization was $5.4 million in 1999 compared to $3.2 million in 1998. The Merger with Checkers resulted in total goodwill of approximately $27 million and other intangibles of approximately $20 million, which resulted in $900,000 of additional amortization expense. Another $400,000 relates to depreciation expense of other non-restaurant fixed assets acquired as a result of the Merger. General and administrative expenses increased $5.5 million in 1999 to $18.3 million, or 9.1% of revenues as compared to $12.8 million or 8.8% of revenues in 1998. The increase is due primarily to the Merger. The loss on investment in affiliate of $1.4 million represents Rally's share of the losses incurred by Checkers ($1.0 million) and the amortization of related goodwill ($0.4 million) prior to the Merger. During 1999 the Company recorded accounting charges and loss provisions of $22.3 million in accordance with SFAS 121. (See Note 5: Accounting Charges and Loss Provisions). INTEREST EXPENSE. Interest expense increased 21.0% to approximately $8.6 million for 1999 as compared to $7.1 million for 1998. This increase is primarily due to the addition of $30.8 million of debt assumed with the Merger. INTEREST INCOME. Interest income was higher for 1999 as compared to 1998 primarily due to the Merger which enabled the Company to increase its average daily invested cash balances. INCOME TAX. The Company's 1999 tax provision was approximately $336,000 representing estimated state taxes versus a prior year tax provision of $252,000. 19 LIQUIDITY AND CAPITAL RESOURCES We have a working capital deficit of $9.0 million at January 1, 2001 as compared to a $27.5 million deficit at January 3, 2000. The decrease in the deficit is primarily due to the repayment of $40.3 million in debt. Included in the current liabilities is $5.9 million for Textron Financial Corporation debt coming due on June 15, 2001, which can be extended until June 15, 2002 at our option. On March 16, 2001, we received a commitment from Heller Financial, Inc. to refinance the $5.9 million over a 30 month term at a significantly reduced interest rate. Cash and cash equivalents decreased approximately $3.4 million to $923,000 during the year ended January 1, 2001. Cash from operating activities was $1.3 million, compared to $12.8 million during the same period last year. The decrease of $11.5 million is largely attributable to a decrease in the balances of accounts payable and accrued liabilities due to the timing of payments in the current year. Cash flow from investing activities increased to $33.5 million due primarily to proceeds from the sales of restaurants. These proceeds were used to pay off the Restated Credit Agreement and the Senior Notes during 2000. Additionally, the Company utilized $1.9 million for capital expenditures primarily related to remodeling restaurants and the purchase and installation of replacement equipment. Cash flows from financing activities decreased to $38.2 million due primarily to the repayment of Restated Credit Agreement and the Senior Notes during 2000. We believe that our existing cash at January 1, 2001, together with cash provided from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133) effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that derivatives be carried at fair value and provides for hedge accounting when certain conditions are met. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 137, "Accounting for Derivative Instruments and Hedging Activities - - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137) which deferred the effective date of adoption of SFAS 133 for one year. We do not believe the adoption of SFAS 133 will have a material effect upon the Company. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," (SFAS 140) effective for transfers after March 31, 2001. SFAS 140 is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. We do not believe the adoption of SFAS 140 will have a material effect upon the Company. ITEM 7A. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISKS Interest rate and foreign exchange rate fluctuations Our exposure to financial market risks is the impact that interest rate changes and availability could have on our debt. Borrowings under our primary debt facilities bear interest ranging from 9.5% to 30.0%. An increase in short-term and long-term interest rates would result in a reduction of pre-tax earnings. Substantially all of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company and are not expected to in the foreseeable future. Commodity Price Risk We purchase certain products which are affected by commodity prices and are, therefore, subject to price volatility caused by weather, market conditions and other factors which are not considered predictable or within the Company's control. Although many of the products purchased are subject to changes in commodity prices, certain purchasing contracts or pricing arrangements have been negotiated in advance to minimize price volatility. Typically, the Company uses these types of purchasing techniques to control costs as an alternative to directly managing financial instruments to hedge commodity prices. In many cases, the Company believes it will be able to address commodity cost increases, which are significant and appear to be long-term in nature by adjusting its menu pricing or changing our product delivery strategy. However, increases in commodity prices could result in lower restaurant-level operating margins. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS: PAGE ---- Independent Auditors' Report 22 Consolidated Balance Sheets - January 1, 2001 and January 3, 2000 23 Consolidated Statements of Operations and Comprehensive Income - Years ended January 1, 2001, January 3, 2000 and December 28, 1998 24 Consolidated Statements of Stockholders' Equity - Years ended January 1, 2001, January 3, 2000 and December 28, 1998 25 Consolidated Statements of Cash Flows - Years ended January 1, 2001, January 3, 2000 and December 28, 1998 26 Notes to Consolidated Financial Statements 27 21 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Checkers Drive-In Restaurants, Inc.: We have audited the consolidated balance sheets of Checkers Drive-In Restaurants, Inc. and subsidiaries as of January 1, 2001 and January 3, 2000, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended January 1, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Checkers Drive-In Restaurants, Inc. and subsidiaries as of January 1, 2001 and January 3, 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended January 1, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Tampa, Florida March 9, 2001 22 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
JANUARY 1, JANUARY 3, 2001 2000 ---------- --------- CURRENT ASSETS: Cash and cash equivalents $ 923 4,371 Restricted cash 1,847 5,358 Investments -- 2,193 Accounts, notes and leases receivable, net 4,666 2,784 Inventory 996 1,736 Prepaid expenses and other current assets 2,189 2,606 Property and equipment held for sale 8,774 37,150 --------- --------- Total current assets 19,395 56,198 Property and equipment, net 42,522 49,432 Notes receivable, net - less current portion 4,610 1,210 Lease receivable, net- less current portion 8,957 1,378 Intangible assets, net 48,341 56,188 Other assets, net 2,173 1,247 --------- --------- $ 125,998 $ 165,653 ========= ========= CURRENT LIABILITIES: Current maturities of long-term debt and obligations under capital leases $ 9,362 $ 9,481 Accounts payable 7,374 9,070 Reserves for restaurant relocations and abandoned sites 1,722 2,408 Accrued wages 1,523 3,334 Accrued liabilities 8,404 13,508 Senior notes, net of discount -- 45,848 --------- --------- Total current liabilities 28,385 83,649 Long-term debt, less current maturities 24,909 17,761 Obligations under capital leases, less current maturities 6,267 7,677 Long-term reserves for restaurant relocations and adandoned sites 3,596 4,685 Minority interests in joint ventures 532 535 Other long-term liabilities 11,375 4,683 --------- --------- Total liabilities 75,064 118,990 STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, authorized 2,000,000 shares, none issued at January 1, 2001 and January 3, 2000 -- -- Common stock, $.001 par value, authorized 175,000,000 shares, issued 9,653,623 at January 1, 2001 and 9,436,094 at January 3, 2000 10 9 Additional paid-in capital 138,650 136,622 Accumulated deficit (87,226) (89,568) --------- --------- 51,434 47,063 Less: Treasury stock, 48,242 at January 1, 2001 and January 3, 2000, at cost (400) (400) Note receivable - officer (100) -- --------- --------- Total stockholders' equity 50,934 46,663 --------- --------- $ 125,998 $ 165,653 ========= =========
See accompanying notes to the consolidated financial statements 23 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except per share amounts)
----------------------------------------- FISCAL YEAR ENDED JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 --------- --------- --------- REVENUES: Restaurant sales 162,804 192,340 139,602 Franchise revenues and other income 18,386 9,495 5,350 --------- --------- --------- Total revenues $ 181,190 $ 201,835 $ 144,952 COSTS AND EXPENSES: Restaurant food and paper costs 51,360 60,112 44,352 Restaurant labor costs 53,819 62,403 42,570 Restaurant occupancy expense 10,897 13,083 7,333 Restaurant depreciation and amortization 4,307 7,745 7,234 Other restaurant operating expenses 17,446 18,728 12,293 General and administrative expenses 17,027 18,301 12,838 Advertising 10,351 11,755 9,853 Bad debt expense 642 1,879 566 Non-cash compensation 1,733 -- -- Other depreciation and amortization 5,235 5,358 3,150 Impairment of long-lived assets 629 22,271 3,362 Gain on sales of markets (307) (2,616) -- --------- --------- --------- Total costs and expenses $ 173,139 $ 219,019 $ 143,551 --------- --------- --------- Operating income (loss) 8,051 (17,184) 1,401 OTHER INCOME (EXPENSE): Interest income 679 779 480 Interest expense (including interest-loan cost and bond discount amortization) (6,609) (8,648) (7,145) Loss on investment in affiliate -- (1,379) (2,019) --------- --------- --------- Income (loss) before minority interest, income taxes, and extraordinary item 2,121 (26,432) (7,283) Minority interest in operations of joint ventures (25) 31 -- --------- --------- --------- Income (loss) before income taxes and extraordinary item 2,096 (26,401) (7,283) Income tax (benefit) expense (475) 336 252 --------- --------- --------- Net income (loss) from continuing operations before extraordinary item 2,571 (26,737) (7,535) Extraordinary item-gain (loss) on early extinguishment of debt, net of income taxes (229) 849 -- --------- --------- --------- NET INCOME (LOSS) 2,342 (25,888) (7,535) ========= ========= ========= Comprehensive Income (loss) $ 2,342 $ (25,888) $ (7,535) ========= ========= ========= Basic earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.27 $ (4.02) $ (1.67) Extraordinary item (0.02) 0.13 -- ========= ========= ========= Net earnings (loss) $ 0.25 $ (3.89) $ (1.67) ========= ========= ========= Diluted earnings (loss) per share: Earnings (loss) before extraordinary item $ 0.25 $ (4.02) $ (1.67) Extraordinary item (0.02) 0.13 -- ========= ========= ========= Net earnings loss $ 0.23 $ (3.89) $ (1.67) ========= ========= ========= Weighted average number of common shares outstanding Basic 9,419 6,657 4,506 ========= ========= ========= Diluted 10,194 6,657 4,506 ========= ========= =========
24 See accompanying notes to the consolidated financial statements CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
NOTE ADDITIONAL COMMON PREFERRED TREASURY RECEIVABLE PAID-IN ACCUMULATED TOTAL STOCK STOCK STOCK - OFFICER CAPITAL DEFICIT EQUITY --------- --------- --------- ---------- ----------- ---------- --------- Balances at December 28, 1997 $ 4 $ 1 $ (2,108) $ -- $ 99,761 $ (56,145) 41,513 Exercise of 8,139 stock options -- -- -- -- 87 -- 87 Issuance of 25,871 shares of common stock in settlement of litigation -- -- -- -- 365 -- 365 Conversion of preferred shares -- -- to common stock 1 (1) -- -- -- -- -- Other equity funding, net -- -- -- -- 89 -- 89 Net loss -- -- -- -- -- (7,535) (7,535) --------- --------- --------- --------- --------- --------- --------- Balances at December 28, 1998 $ 5 $ -- $ (2,108) $ -- $ 100,302 $ (63,680) $ 34,519 Merger of Checkers & Rally's 4 -- 1,708 -- 36,320 -- 38,032 Net loss -- -- -- -- -- (25,888) (25,888) --------- --------- --------- --------- --------- --------- --------- Balances at January 3, 2000 $ 9 $ -- $ (400) $ -- $ 136,622 $ (89,568) $ 46,663 Non-cash compensation -- -- -- -- 1,733 -- 1,733 Exercise of 191,991 stock options 1 -- -- (100) 294 -- 195 Exercise of 1,140,640 stock warrants -- -- -- -- 1 -- 1 Net income -- -- -- -- -- 2,342 2,342 --------- --------- --------- --------- --------- --------- --------- Balances at January 1, 2001 $ 10 $ -- $ (400) $ (100) $ 138,650 $ (87,226) $ 50,934 ========= ========= ========= ========= ========= ========= =========
See accompanying notes to the consolidated financial statements 25 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
FISCAL YEAR ENDED ---------------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,342 $(25,888) $ (7,535) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 9,542 13,103 10,384 Impairment of long-lived assets 1,381 21,886 1,727 Provisions for losses on assets to be disposed of 181 385 1,635 Loss (gain) on early extinguishment of debt 229 (849) (163) Amortization of bond costs and discounts 304 466 390 Provisions for bad debt 642 1,879 566 Non-cash compensation 1,733 -- -- Loss, net of amortization, on investment in affiliate -- 1,379 2,019 Loss on disposal of property and equipment -- -- 211 Gain on market sales (307) (2,616) -- Minority interests in operations of joint ventures 25 (31) -- Changes in assets and liabilities: Increase in receivables (2,115) (31) (1,416) Increase in notes and leases receivable (3,791) -- -- Decrease in inventory 740 1,447 86 Decrease (increase) in prepaid expenses and other current assets 417 (2,114) 979 Decrease in other assets 429 1,360 45 Decrease in accounts payable (1,300) (281) (3,390) Increase (decrease) in accrued liabilities (9,143) 2,686 (3,053) -------- -------- -------- Net cash provided by operating activities $ 1,309 $ 12,781 $ 2,485 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (1,919) (7,173) (2,290) Acquisitions of restaurants -- (142) (855) Merger, net of cash acquired of $1,461 -- (434) -- Proceeds from sales of markets 33,200 15,568 -- (Increase) decrease in investments 2,193 (2,146) 399 Proceeds from sales leaseback -- 3,530 -- Proceeds from sale of property and equipment -- 1,160 615 Cash paid for additional investment in affiliates -- -- (32) -------- -------- -------- Net cash (used in) provided by investing activities $ 33,474 $ 10,363 $ (2,163) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease (increase) in restricted cash 3,511 (612) (500) Repayments of senior notes (45,601) (9,120) (2,168) Proceeds from exercise of stock options and warrants 196 -- -- Proceeds from issuance of long-term debt 35,020 -- 4,300 Deferred loan costs incurred (1,929) -- (290) Principal payments on long-term debt (29,400) (13,627) (1,247) Net proceeds from issuance of common stock -- -- 87 Distributions to minority interests (28) (15) 89 -------- -------- -------- Net cash provided by (used in) financing activities $(38,231) $(23,374) $ 271 -------- -------- -------- Net increase (decrease) in cash (3,448) (230) 593 CASH AT BEGINNING OF PERIOD 4,371 4,601 4,008 -------- -------- -------- CASH AT END OF PERIOD $ 923 $ 4,371 $ 4,601 ======== ======== ========
See accompanying notes to the consolidated financial statements 26 CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Tabular dollars in thousands, except per share amounts) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF PRESENTATION - The accompanying consolidated financial statements include the accounts of Checkers Drive-In Restaurants, Inc. and its wholly owned subsidiaries, collectively referred to as "the Company". On August 9, 1999, Checkers Drive-In Restaurants, Inc. ("Checkers") merged with Rally's Hamburgers, Inc. ("Rally's"). The merger was accounted for as a reverse acquisition whereby Rally's was treated as the acquirer and Checkers as the acquiree, as the former shareholders of Rally's owned a majority of the outstanding common stock of Checkers subsequent to the merger ("Merger"). The fair value of Checkers was based on the average per share value of Checkers' common stock which was $0.531 per share near January 29, 1999, the date the Merger agreement was signed. Additionally, since the Company assumed the stock options and warrants outstanding of Checkers, the fair value of these options and warrants was included in determining the valuation of Checkers (see Note 3: Merger). The 1998 financial information presented herein represents the financial results of Rally's only. The 1999 financial information includes the financial results of Rally's for the entire year and the financial results of Checkers for the period from August 9, 1999 to January 3, 2000. The 2000 financial information includes both Rally's and Checkers for the full year. The accounts of the joint ventures have been included with those of the Company in the accompanying consolidated financial statements. All significant intercompany accounts and transactions have been eliminated and minority interests have been established for the outside partners' interests. The Company reports on a fiscal year, which ends on the Monday closest to December 31st. Each quarter consists of three 4-week periods, with the exception of the fourth quarter, which consists of four 4-week periods. Our 1999 fiscal year included a 53rd week, thereby increasing the fourth quarter to seventeen weeks. B) PURPOSE AND ORGANIZATION - Our principal business is the operation and franchising of Checkers and Rally's restaurants. At January 1, 2001, there were 427 Rally's restaurants operating in 18 different states and there were 427 Checkers restaurants operating in 22 different states, the District of Columbia, Puerto Rico and the West Bank in the Middle East. Of those restaurants, 195 were Company operated (including 3 joint venture restaurants) and 659 were operated by franchisees, including 23 Company-owned restaurants in Western markets which are operated by CKE Restaurants, Inc. ("CKE"), a significant shareholder of the Company, under an operating agreement which began in July, 1996. C) CASH AND CASH EQUIVALENTS - We consider all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents. Restricted Cash consists of cash on deposit with various financial institutions as collateral to support the Company's obligations to certain states for potential workers' compensation claims. This cash is not available for the Company's use until such time that the respective states permit its release. D) INVESTMENTS - Our investment securities are deemed as "available-for-sale" under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, investments are reported at fair value with unrealized holding gains and losses, excluding those losses considered to be other than temporary, reported as a net amount in a separate component of stockholders' equity. Provisions for declines in market value are made for losses considered to be other than temporary. Realized gains or losses from the sale of investments are based on the specific identification method. No unrealized gains or losses were recorded for any period presented, due to the quoted market prices of investments approximating cost. Investments consisted of mortgage-backed securities at January 3, 2000 of approximately $2.2 million. No investments were held at January 1, 2001. E) RECEIVABLES - Receivables consist primarily of royalties, franchise fees, notes due from franchisees, owner fee income, and advances to one of the Company's advertising funds which provides broadcast creative production for use by Rally's corporate and franchise restaurants. A rollforward of the allowance for doubtful receivables is as follows: 27
ADDITIONS ----------------------- DEDUCTIONS BALANCE AT CHARGED TO CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER OTHER BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS ACCOUNTS END OF YEAR - ----------------------------------------------------------------------------------------------------- Year Ended December 28, 1998 Accounts Recievable $ 431 $ 471 $ -- $ 259 $ 643 Notes Receivable 231 95 -- -- 325 ------- ------- ------- ------- ------- $ 662 $ 566 $ -- $ 259 $ 968 ======= ======= ======= ======= ======= Year Ended January 3, 2000 Accounts Receivable $ 643 $ 1,702 $ 1,722 $ 169 $ 3,898 Notes Recievable 325 177 789 -- 1,291 ------- ------- ------- ------- ------- $ 968 $ 1,879 $ 2,511 $ 169 $ 5,189 ======= ======= ======= ======= ======= Year Ended January 1, 2001 Accounts Receivable $ 3,898 $ (517) $ -- $ 167 $ 3,214 Notes Recievable 1,291 1,159 -- -- 2,450 ------- ------- ------- ------- ------- $ 5,189 $ 642 $ -- $ 167 $ 5,664 ======= ======= ======= ======= =======
F) INVENTORY - Inventory, which consists principally of food and supplies are stated at the lower of cost (first-in, first-out (FIFO) method) or market. G) PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Assets under capital leases are stated at their fair value at the inception of the lease. Depreciation and amortization are computed on straight-line method over the estimated useful lives of the assets. Property and equipment held for sale includes excess restaurant facilities and land and is recorded at its estimated fair market value. The aggregate carrying value of property and equipment held for sale is periodically reviewed and adjusted downward to market value, when appropriate. Property and equipment are depreciated using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Expenditures for major renewals and betterments are capitalized. Maintenance and repairs are expensed as incurred. H) INTANGIBLE ASSETS - Intangible assets consists of the following and are being amortized using the straight-line method over the following periods:
JANUARY 1, 2001 JANUARY 3, 2000 --------------- --------------- GROSS ACCUM GROSS ACCUM ESTIMATED AMOUNT AMORT NET AMOUNT AMORT NET LIVES -------- --------- --------- -------- --------- -------- ---------- Goodwill $ 29,935 $ (2,901) $ 27,034) $ 33,920 $ (3,246) $ 30,674 5-25 years Tradename 19,923 (1,379) $ 18,544 19,923 (383) 19,540 20 years Reacquired franchise rights 2,772 (1,437) $ 1,335 4,301 (1,830) 2,471 5-20 years Other intangibles 2,279 (851) $ 1,428 5,078 (1,575) 3,503 3-25 years -------- -------- -------- -------- -------- -------- Total intangible assets $ 54,909 $ (6,568) $ 48,341) $ 63,222 $ (7,034) $ 56,188 ======== ======== ======== ======== ======== ========
I) DEFERRED LOAN COSTS - Deferred loan costs incurred in connection with the Company's primary debt facility with Textron Financial Corporation (Textron) and mortgages payable to FFCA Acquisition Corporation are amortized on the effective interest method over the life of the related debt. During fiscal 2000, $14.9 million of Textron debt (Loan C) was repaid. A loss on early extinguishment of debt of $490,000 was recorded related to the writeoff of unamortized deferred loan costs associated with this loan. J) IMPAIRMENT OF LONG-LIVED ASSETS - We account for long-lived assets under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121) which requires the write-down of certain intangibles and tangible property associated with under performing sites. In applying SFAS No. 121, we review 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 28 period. This period of time was selected based upon the lease term and the age of the building, which we believe is appropriate based upon its limited operating history and the estimated useful life of its restaurants. Impairments were recorded to adjust the asset values to the amount recoverable under the discounted cash flow analysis in the cases where the undiscounted cash flows were not sufficient for full asset recovery, in accordance with SFAS No. 121. The effect of applying SFAS No. 121 resulted in a reduction of property, equipment and intangible assets of approximately $0.6 million in 2000, $22.3 million in 1999, and $3.4 million in 1998. K) REVENUE RECOGNITION - Franchise fees and area development franchise fees are generated from the sale of rights to develop, own and operate restaurants. Such fees are based on the number of potential restaurants in a specific area which the franchisee agrees to develop pursuant to the terms of the franchise agreement between the Company and the franchisee and are recognized as income on a pro rata basis when substantially all of the Company's obligations per location are satisfied, (generally at the opening of the restaurant). Franchise fees are nonrefundable. Franchise fees and area development franchise fees received prior to substantial completion of the Company's obligations are deferred. The Company receives royalty fees from franchisees based on a percentage of each restaurant's gross revenues. Royalty fees are recognized as earned. L) STOCK-BASED COMPENSATION - We have chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees, and related interpretations (APB No. 25). We account for stock based compensation to non-employees using the fair value method prescribed by Statements of Financial Accounting Standards (SFAS) No. 123. Accordingly, compensation costs for stock options granted to employees are measured as the excess, if any, of the value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Compensation cost for stock options granted to non-employees is measured as the fair value of the option at the date of grant. Such compensation costs, if any, are amortized on a straight line basis over the underlying option vesting terms. M) INCOME TAXES - We account for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset or liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. N) EARNINGS (LOSS) PER COMMON SHARE - We calculate basic and diluted earnings (loss) per share in accordance with Statement of Financial Accounting Standard No. 128, "Earnings per Share". Although Checkers is the surviving legal entity after the Merger, for accounting purposes the Merger was treated as a reverse acquisition of Checkers by Rally's. Therefore, only the historical net income (loss) of Rally's is included in the historical financial results of the Company for all periods prior to the Merger. The weighted average number of common shares outstanding has been adjusted for all periods to reflect for the exchange ratio of 1.99 to 1 and the one-for-twelve reverse split that occurred on August 9, 1999. O) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
FISCAL YEAR ENDED ------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ------------ Interest paid $ 7,039 $ 7,862 $ 6,714 Income taxes paid $ 104 $ 165 $ 222 Capital lease obligations incurred $ -- $ 2,750 $ 627 Fair value of net assets acquired in the Merger $ -- $24,247 $ --
On April 26, 1999, we acquired three restaurants from a former franchisee. On April 24, 1998, we acquired two restaurants in a settlement of litigation with a former franchisee. No acquisitions were made in 2000. These acquisitions were recorded as follows: 29 FISCAL YEAR ENDED -------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ------------ Fair value of assets acquired $ -- $ 907 $ 949 Cash paid -- (142) $(855) Issuance of common stock -- -- (375) Issuance of note payable -- (765) (420) Utilization of bad debt and other reserves previously established -- -- 975 ----- ----- ----- Receivables forgiven $ -- $-- $ 274 ===== ===== ===== In conjunction with the sale of markets in fiscal 2000 and 1999, the Company accepted notes of approximately $3.4 million and $1.0 million, respectively, with maturities through December 2010. In addition, capital lease obligations receivable were assumed by the purchasers for approximately $8.0 million and $1.8 million, respectively. These capital lease obligations have maturities through January 2019. P) DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS - The balance sheets as of January 1, 2001 and January 3, 2000 reflect the fair value amounts which have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of cash and cash equivalents, investments, receivables, accounts payable, and long-term debt are a reasonable estimate of their fair value, based upon their short maturity or quoted market prices. Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt issues that are not quoted on an exchange. The fair value of Senior Notes was $45.8 million at January 3, 2000, based on quoted market prices. Q) SEGMENT REPORTING - As of January 1, 2001, the Company operated 195 Checkers Drive-In and Rally's Hamburgers restaurants in the United States as part of a single operating segment. The restaurants operate within the quick-service restaurant industry, providing similar products to similar customers. The restaurants also possess similar long-term expected financial performance characteristics. Revenues from Company-owned restaurants are derived principally from food and beverage sales. R) NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133) effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that derivatives be carried at fair value and provides for hedge accounting when certain conditions are met. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137) which deferred the effective date of adoption of SFAS 133 for one year. We do not believe the adoption of SFAS 133 will have a material effect upon the Company. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," (SFAS 140) effective for transfers after March 31, 2001. SFAS 140 is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. We do not believe the adoption of SFAS 140 will have a material effect upon the Company. S) 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. Certain of the more significant estimates include reserves for restaurant relocations and abandoned sites and allowances for doubtful accounts. T) RECLASSIFICATIONS - Certain items in the 1999 and 1998 consolidated financial statements have been reclassified to conform with the 2000 presentation. 30 NOTE 2: LIQUIDITY AND CAPITAL RESOURCES We have a working capital deficit of $9.0 million at January 1, 2001 as compared to $27.5 million deficit at January 3, 2000. The decrease in the deficit is primarily due to the repayment of $40.3 million in debt. Included in current liabilities is $5.9 million for Textron Financial Corporation debt coming due on June 15, 2001, which can be extended until June 15, 2002 at our option. Subsequent to year end, we received a commitment from Heller Financial, Inc. to refinance the $5.9 million over a 30 month term at a significantly reduced interest rate (see Note 15). The consolidated financial statements for the fiscal year ending January 3, 2000 were prepared on a going concern basis of accounting. The Company had previously suffered losses from operations and had a substantial amount of debt maturing during the first half of fiscal 2000. At January 3, 2000, the Company had $6.2 million outstanding under its Restated Credit Agreement maturing on April 30, 2000, $45.8 million of its 9 7/8% Senior Notes maturing June 15, 2000, and had a working capital deficit of $29.8 million. During fiscal 2000, the Company fully paid the Restated Credit Agreement and Senior Notes. Although there can be no assurance, we believe that our existing cash at January 1, 2001, together with cash provided from operations will be sufficient to meet our working capital and capital expenditure requirements for the next 12 months. NOTE 3: MERGER On August 9, 1999, Checkers completed its acquisition of Rally's (the " Merger"). The Merger transaction was accounted for under the purchase method of accounting and was treated as a reverse step acquisition as the stockholders of Rally's received the larger portion (51.8%) of the voting interests in the combined Company and Rally's previously owned 26.06% of Checkers. Accordingly, Rally's was considered the acquirer for accounting purposes and recorded Checkers' assets and liabilities based upon their fair market values. The operating results of Checkers' have been included in the accompanying consolidated financial statements from the date of acquisition. The excess of the purchase price over the estimated fair value of net assets acquired was approximately $27 million, including $11.5 million relating to Rally's original investment in Checkers, and is being amortized over 20 years using the straight-line method. The estimated fair value of assets acquired, liabilities assumed and resulting goodwill relating to the Merger, is summarized below: (In thousands) Purchase price (including direct costs) $ 40,068 Property and equipment held for sale $ 13,175 Current assets 6,872 Property and equipment 43,955 Trade name 19,923 Other assets 711 -------- Total assets $ 84,636 Total liabilities assumed (51,870) -------- Net assets acquired 32,766 Adjustment for Rally's original investment in Checkers (8,519) -------- Net assets acquired as adjusted for initial investment $ 24,247 -------- Goodwill resulting from Merger $ 15,821 Goodwill resulting from Rally's original investment in Checkers 11,476 -------- Total goodwill $ 27,297 ========
31 NOTE 4: OTHER ACQUISITIONS On April 26, 1999, the Company acquired substantially all the operating assets (excluding real property) of Memphis Development, Inc. ("MDI"), a former franchisee of three Rally's restaurants in Memphis, Tennessee, for approximately $900,000. Of the total purchase price, the Company paid approximately $135,000 in cash, and for the remaining $765,000, issued a five year promissory note bearing an initial interest rate of 7.75%. The interest rate is variable and is predetermined on an annual basis at prime plus 1%. The Company entered into ten-year leases with MDI for the underlying real property on which each of the three restaurants is situated. The acquisition of the assets from MDI was accounted for as a purchase. The Company believes that the $900,000 purchase price represents the fair value of the assets acquired. On April 24, 1998, in settlement of litigation with a franchisee, the Company purchased the franchisee's restaurants for total consideration of $1.9 million. The consideration consisted of $855,000 in cash, $274,000 in forgiveness of account receivable, $375,000 in restricted stock and $420,000 in notes payable. NOTE 5: ACCOUNTING CHARGES & LOSS PROVISIONS Certain charges in fiscal years 2000, 1999, 1998 have been referred to as impairment of long-lived assets. These items represent estimates of the impact of management decisions, which have been made at various points in time in response to the Company's sales and profit performance, and the then-current revenue and profit strategies. During 2000, impairment charges of approximately $0.6 million were recognized relating to the closing of six Company-owned restaurants, the closing of two franchised stores with associated intangibles, one under-performing Company-owned store and a provision for future occupancy costs. During the last quarter of 1999, the Company placed certain markets for sale in accordance with its plan to meet its short-term debt requirements. At the end of 1999, 5 major Rally's markets were written down to their estimated fair market values, based on purchase prices expected to be received during the first half of fiscal year 2000. The Company recorded an estimated $13 million impairment charge relating to property and equipment and intangibles assets associated with these market sales. Accordingly, $22.8 million of property and equipment has been reclassified to "Property and equipment held for sale" in the accompanying consolidated balance sheet. In addition, in connection with the Merger with Checkers, the Company plans to sell 3 existing Checkers' markets. As these assets have been recorded at their estimated fair market value in accordance with purchase accounting, the impact of these adjustments have been reflected in purchase accounting. During 1999, impairment charges of approximately $7.7 million were recognized relating to thirty-one under-performing restaurants. Additionally, the Company closed twenty-eight restaurants and recorded net provisions for future occupancy costs of approximately $385,000. In addition, as a result of the Merger, the Company recognized $1.2 million relating to a decline in the fair market value of Rally's initial investment in Checkers. In 1998, an impairment expense of $1.7 million related to four under-performing restaurants were incurred. The Company also closed five restaurants, resulting in the recording of losses on assets held for sale of $713,000 ($249,000 for fixed asset write-downs and $464,000 for future occupancy costs). Other losses were recorded upon the disposal of prior year's closures for $172,000. Losses on assets to be disposed of for the continued occupancy costs of other prior years closures was $750,000. 32 The following table summarizes the components of the provision for restaurant closures and other provisions, as well as, the year end balances of certain related reserves.
BALANCE ADDITIONS AT CHARGED BALANCE BEGINNING TO CASH OTHER AT END DESCRIPTION OF YEAR EXPENSE OUTLAYS CHANGES OF YEAR ----------- --------- --------- -------- -------- -------- Year ended January 1, 2001 Impairment of long-lived assets $ -- $ 629 $ -- $ (629) $ -- Accrual for restaurant closures included in restaurant occupancy expense 7,093 633 (2,408) -- 5,318 -------- -------- -------- -------- -------- $ 7,093 $ 1,262 $ (2,408) $ (629) $ 5,318 ======== ======== ======== ======== ======== Year ended January 3, 2000 Impairment of long-lived assets $ -- $ 22,271 $ -- $(22,271) $ -- Accrual for restaurant closures included in restaurant occupancy expense 5,423 3,780 (3,766) 1,656 7,093 -------- -------- -------- -------- -------- $ 5,423 $ 26,051 $ (3,766) $(20,615) $ 7,093 ======== ======== ======== ======== ======== Year ended December 28, 1998 Impairment of long-lived assets $ -- $ 3,362 $ -- $ (3,362) $ -- Accrual for restaurant closures included in restaurant occupancy expense 4,558 1,804 (939) -- 5,423 -------- -------- -------- -------- -------- $ 4,558 $ 5,166 $ (939) $ (3,362) $ 5,423 ======== ======== ======== ======== ========
As a result of the Merger, the Company assumed approximately $1.3 million relating to reserves for future lease obligations, and is reflected in 1999 "Other Changes" shown in the above table. The ending balance each year in the reserves for restaurant relocations and abandoned sites consists of our estimates for the ongoing costs of each location which has been closed or was never developed. Those costs include rent, property taxes, maintenance, utilities and in some cases the cost to relocate the modular restaurant to a storage facility. The cash outlays for these costs have been estimated for various terms ranging from three months to 9 years. NOTE 6: RELATED PARTY TRANSACTIONS A) MANAGEMENt SERVICES AGREEMENT - Effective November 30, 1997, Checkers and Rally's entered into a Management Services Agreement ("Agreement") whereby Checkers provided accounting, technology, and other functional and management services to predominantly all of the operations of Rally's. Checkers received fees from Rally's relative to the shared departmental costs times the respective store ratio. Upon completion of the Merger, this Agreement was terminated. During the period from December 29, 1998 through August 9, 1999 and the year ended December 28, 1998, Checkers charged Rally's $4.7 million and $5.6 million, respectively. B) ISSUANCE OF WARRANTS - On November 22, 1996, the Company issued warrants ("Restructuring Warrants") for the purchase of 20 million shares of the Company's Common Stock. The Restructuring Warrants were issued to the members of a lending group in connection with a restructuring of the Company's primary credit facility (See Note 10: Long-term Debt and Obligations under Capital leases). The lending group included CKE Restaurants, Inc., KCC Delaware, a wholly owned subsidiary of GIANT Group, LTD., Fidelity National Financial, Inc., William P. Foley, II and Burt Sugarman. The Restructuring Warrants were valued at $6.5 million, which was the value of the concessions given as consideration by the lending group. After giving effect to the one-for-twelve reverse stock split, the Restructuring Warrants permit the acquisition of 1,666,667 shares of the Company's Common Stock. The Restructuring Warrants were exercisable upon issuance and remain exercisable until November 22, 2002. The exercise price of each Restructuring Warrant was originally $0.75, which was the approximate market price of the common stock of Checkers prior to the announcement of the transfer and restructuring of the debt. After giving effect to a September 20, 1999 re-pricing by the Company, the current exercise price of each Restructuring Warrant is $0.25. Due to the one-for-twelve reverse stock split, twelve warrants must be exercised to acquire one share of the Company's common stock for an aggregated purchase price of $3.00 per share. During fiscal 2000, 1,139,592 of these warrants were exercised. C) WEST COAST OPERATING AGREEMENT - On July 1, 1996, the Company entered into a ten-year operating agreement with Carl Karcher Enterprises, Inc., the subsidiary of CKE that operates the Carl's Jr. restaurant chain. Pursuant to 33 the agreement, CKE began operating 29 Rally's owned restaurants located in California and Arizona, two of which were converted to a Carl's Jr. format. Including closures from prior periods, there are 23 remaining restaurants as of January 1, 2001 operating under the agreement. Such agreement is cancelable after an initial five-year period, or July 1, 2001, at the discretion of CKE. A portion of these restaurants, at the discretion of CKE, will be converted to the Carl's Jr. format. The agreement was approved by a majority of the independent Directors of the Company. Prior to the agreement, the Company's independent Directors had received an opinion as to the fairness of the agreement, from a financial point of view, from an investment banking firm of national standing. Under the terms of the operating agreement, CKE is responsible for any conversion costs associated with transforming restaurants to the Carl's Jr. format, as well as, the operating expenses of all the restaurants. The Company retains ownership of all the restaurants, two of which are Carl's Jrs. and is entitled to receive a percentage of gross revenues generated by each restaurant. In the event of a sale, by the Company, of any of the restaurants, the Company and CKE would share in the proceeds based upon the relative value of their respective capital investments in such restaurant. D) OTHER TRANSACTIONS - The Company also has had transactions with certain companies or individuals, which are, related parties by virtue of having stockholders in common, by being officers/directors or because they are controlled by significant stockholders or officers/directors of the Company. The Company and its franchisees each pay a percentage of sales to the Rally's National Advertising Fund and the Checkers National Production fund (the "Funds"), established for the purpose of creating and producing advertising for the chain. The Funds are not included in the consolidated financial statements, although the Company's contributions to the Funds are included in the advertising expenses in the consolidated statements of operations. Additionally, certain Company operated restaurants and franchises participate in coops, which are accounted for similarly to the Funds. During 2000, additional options were granted to members of the Board of Directors and shared executives at an exercise price below the market price of the common stock. Accordingly, non-cash compensation expense of $1.2 million and $0.5 million was recorded for members of the Board of Directors and shared executives, respectively. During fiscal 2000, certain shared executives exercised 90,000 stock options. Pursuant to our current employment agreement with Mr. Dorsch, the Company accepted a $100,000 note on December 14, 2000 in connection with the exercise of 100,000 stock options. The Company will receive 3 equal annual payments on January 1, beginning in 2002. Interest on the unpaid principal portion accumulates at a rate of 5% per annum. During fiscal 1999, we entered into four lease agreements, which have been recorded as capital lease obligations, with Granite Financial Inc., a wholly-owned subsidiary of Fidelity National Financial, Inc., whereby we purchased security equipment for our restaurants valued at $651,346. The lease agreements are payable monthly ranging from $3,065 to $10,785, including effective interest ranging from 13.381% to 14.04%. All of the leases have terms of 3 years. During 2000, 1999, and 1998, we incurred $457,000, $803,000 and $1,152,000, respectively in legal fees from a law firm for which a Director of the Company is a partner. Beginning in September 1999 the Company engaged Peter O'Hara, one of its current Directors, to provide consulting services at a monthly fee of $10,000. Fees for fiscal 2000 and 1999 totaled $60,000 and $40,000, respectively. Mr. O'Hara discontinued these services in June 2000. We also shared certain officers and directors with Santa Barbara Restaurant Group, Inc. (Santa Barbara) from 1999 through September 2000. In accordance with that agreement, we paid $274,338 and $104,408 for 2000 and 1999, respectively, to Santa Barbara for salary payments made on our behalf. During 2000, Mr. Foley was the Chairman of the Board of Directors for both Santa Barbara and Checkers Drive- In Restaurants, Inc. 34 SUMMARY OF RELATED PARTY TRANSACTIONS (IN THOUSANDS): FISCAL YEAR ENDED ----------------------------- JANUARY 1, JANUARY 3, 2001 2000 ---------- ---------- BALANCE SHEET AMOUNTS - --------------------- Accounts receivable $ 435 $ 1,128 Notes receivable $ 100 $ - Accounts payable $ 343 $ 103 Accrued liabilities $ - $ 353 Restated Credit Agreement $ - $ 6,202 Capital leases $ 1,068 $ 1,877
FISCAL YEAR ENDED ------------------------------------------------ JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ------------ REVENUE AND TRANSACTION AMOUNTS - ------------------------------- Owner fee income $ 685 $ 689 $ 714 Interest income - 141 117 ----- ----- ----- $ 685 $ 830 $ 831 ===== ===== =====
FISCAL YEAR ENDED ------------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ------------ EXPENSE AMOUNTS - --------------- Legal fees $ 457 $ 803 $1,152 Consulting fees 60 40 -- Rent expense -- 185 352 Owner depreciation 1,069 1,526 647 Interest expense 399 878 9 Non-cash compensation 1,679 -- -- Shared officer expenses 274 104 -- Loss on investment in affiliate -- 1,379 2,019 Management Services Agreement -- 4,696 5,593 ------ ------ ------ $3,938 $9,611 $9,772 ====== ====== ======
35 NOTE 7: LEASE RECEIVABLE As a result of the sale of Company-owned restaurants in 1999 and 2000, we have recorded capital lease receivables for those restaurants sold which are subject to capital lease and mortgage obligations. The amount of capital lease receivables as of January 1, 2001 was approximately $9.8 million. We have recorded deferred gains of $8.0 million from these sales since we continue to be responsible for the payment of these obligations to the original lessors and mortgagors. The gain will be recognized over the life of the related capital leases. The deferred gains are included in the balance sheet under the captions accrued liabilities-current and other long-term liabilities for $0.9 million and $7.1 million, respectively. We have subleased the property associated with the sale of Company-owned restaurants under operating leases. The revenue from these subleases is offset against rent expense, as we continue to be responsible for the rent payments to the original lessors. Following is a schedule, by year, of future minimum lease payments receivable for operating leases at January 1, 2001: FISCAL YEAR ENDED ----------------- 2001 $ 9,432 2002 8,281 2003 7,275 2004 5,937 2005 4,955 Thereafter 26,355 -------- Total $ 62,235 ======== NOTE 8: PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following:
JANUARY 1, JANUARY 3, ESTIMATED 2001 2000 USEFUL LIVES ---------- ---------- ------------ Land and improvements $ 27,702 $ 28,645 0-15 years Leasehold interest 1,855 1,855 15 years Building and leasehold improvements 25,334 26,495 20-39 years Equipment, furniture and fixtures 31,179 29,930 3-15 years -------- -------- 86,070 86,925 Less accumulated depreciation (45,517) (39,849) -------- -------- 40,553 47,076 -------- -------- Property held under capital leases 2,863 2,930 3-20 years Less accumulated amortization (894) (574) -------- -------- 1,969 2,356 -------- -------- Net property and equipment $ 42,522 $ 49,432 ======== ========
Depreciation expense of property and equipment was approximately $6.6 million, $10 million and $8.3 million for the fiscal years 2000, 1999 and 1998, respectively. NOTE 9: SENIOR NOTES On March 9, 1993, we sold approximately $85 million of 9 7/8% Senior Notes due June 15, 2000 (the "Senior Notes"). The Senior Notes were carried net of the related discount, which was being amortized over the life of the Senior Notes. Interest was payable June 15 and December 15 of each year until maturity. These notes were fully repaid in 2000. As of January 3, 2000, the amount outstanding net of discounts was $45.8. During fiscal 2000, we repurchased on the open market, 48.0 million face value of Senior Notes at prices ranging approximately from $925.00 to $983.80 per $1000 principal amount. These purchases resulted in extraordinary gains in fiscal 2000 of $261,000. 36 During fiscal 1999, we repurchased on the open market approximately $10 million face value of Senior Notes at prices ranging from $770.00 to $966.10 per $1000 principal amount. These purchases resulted in extraordinary gains in fiscal 1999 of approximately $849,000. During fiscal 1998, we repurchased on the open market approximately $1.7 million face value of our Senior notes at an average price of $887.90 per $1,000 principal amount. The resulting gain was immaterial. NOTE 10: LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES Long-term debt and obligations under capital leases consists of the following:
JANUARY 1, JANUARY 3, 2001 2000 ---------- ---------- Note payable (Loan A) to Textron Financial Corporation payable in 120 monthly installments, including interest at LIBOR plus 3.7% (10.27% at January 1, 2001) secured by property and equipment. $ 11,662 $ -- Revolving credit note payable (Loan B) to Textron Financial Corporation payable on June 15, 2001. Installment payments of interest only are due monthly at 30%, secured by real estate, property and equipment, and subordinate to Loan A (See Note 15). 5,873 -- Mortgages payable to FFCA Acquisition Corporation secured by thirty-two Company-owned restaurants, payable in 240 aggregate monthly installments of $133,295, including interest at 9.5%. 13,795 14,048 Obligations under capital leases, maturing at various dates through January 1, 2018, secured by property and equipment, bearing interest ranging from 10% to 17%. The leases are payable in monthly principal and interest installments averaging $197,000. 7,694 9,193 Notes payable to former Rally's franchise owners for acquisition of markets, secured by the related assets acquired, with maturities through May 1, 2004, bearing interest at 7.5% and 7.75%. The notes are payable in monthly principal and interest installments of $8,416 and $15,420. 769 4,247 Various notes payable to banks, maturing at various dates through November 20, 2005, secured by property and equipment, bearing interest ranging from 9% to 9.75%. The notes are payable in monthly principal and interest installments ranging from $1,531 to $13,333. 745 1,229 Note payable under Restated Credit Agreement. This note was fully repaid during 2000. -- 6,202 -------- -------- Total long-term debt and obligations under capital leases 40,538 34,919 Less current installments (9,362) (9,481) -------- -------- Long-term debt, less current maturities $ 31,176 $ 25,438 ======== ========
Although we continue to be obligated, approximately $9.8 million of the mortgage and capital lease obligations noted above pass directly through to franchisees as a result of Company-owned restaurant sales (See Note 7). The revolving credit note payable (Loan B) can be extended until June 15, 2002 at our option subject to certain conditions. Upon full repayment of the note, and after a 30 day waiting period, the note converts to a revolving line of credit with interest at LIBOR plus 4.5%. The facility for the line will be based upon 50% of the collateral pledged. The increase in the interest rate from 25% to 30% during the fourth quarter was the result of the sale of restaurants, reducing collateral. 37 Aggregate maturities of long-term debt for each of the five succeeding years are as follows: FISCAL YEAR ENDED ----------- 2001 $ 7,935 2002 1,379 2003 1,449 2004 1,451 2005 1,521 Thereafter 19,109 -------- $ 32,844 ======== The following are minimum lease payments that will have to be made in each of the years indicated based upon capital leases in effect as of January 1, 2001: FISCAL YEAR ENDED ----------- 2001 $ 1,961 2002 858 2003 1,010 2004 751 2005 897 Thereafter 7,413 ------- Total minimum lease payments 12,890 Less amount representing interest (5,196) ------- Present value of minimum lease payments $ 7,694 ======= As a result of the Merger, the Company assumed debt due to the CKE Group under the Amended and Restated Credit Agreement (the "Restated Credit Agreement"). The Restated Credit Agreement previously consolidated all of the debt under the Checkers' loan agreement and the credit line into a single obligation. This obligation was paid in full during 2000. Also, as a result of the Merger, we assumed a mortgage financing agreement with FFCA Acquisition Corporation ("FFCA"), which is collateralized by 24 restaurants. This mortgage financing is payable monthly at $93,213, including interest at 9.5% and has a term of 20 years. On December 18, 1998, the Company entered into a $4.3 million mortgage transaction with FFCA Acquisition Corporation ("FFCA") pursuant to which eight fee-owned properties were mortgaged. The terms of the transaction include a stated interest rate of 9.5% on the unpaid balance over a 20-year term with monthly payments totaling approximately $40,000. The Company is subject to certain restrictive financial and non-financial covenants under certain of its debt agreements, including EBITDA and a Fixed Charge Coverage ratio. We were not in compliance with one of the financial covenants for the fiscal year ending January 1, 2001. We have received a waiver for the financial covenant we were not in compliance with for the year ended January 1, 2001. If the thirty-two restaurants included in the FFCA Mortgage transactions are not in compliance with certain financial performance covenants, the Company is allowed to substitute another property as security for the debt. On December 23, 1999, we completed a sales leaseback agreement with FFCA involving nine properties for $3.5 million. As a result of this transaction, we recorded a $2 million capital lease obligation, payable in monthly amounts ranging from $1,134 to $5,409 with an interest rate of 10%. The leases have a term of 20 years. The Company leases various restaurant facilities, security equipment and a corporate telephone system which are recorded as capital leases with effective interest rates ranging from 7.0% to 16.03%. 38 NOTE 11: INCOME TAXES Under the provisions of SFAS No. 109, the components of the net deferred income tax assets and liabilities recognized in the Company's Consolidated Balance Sheet at January 1, 2001 and January 3, 2000 were as follows (in thousands):
JANUARY 1, JANUARY 3, 2001 2000 ---------- ---------- Deferred tax assets: Net operating loss carryforwards $ 10,825 $ 10,655 Excess of tax basis over book basis of property, equipment and intangibles 343 1,108 Accruals, reserves and other 13,513 14,468 Alternative minimum tax and tax credit carryforward 1,760 1,760 -------- -------- 26,441 27,991 Less valuation allowance (26,441) (27,991) -------- -------- Net deferred tax assets $ -- $ -- ======== ======== Deferred tax liabilities $ -- $ -- ======== ========
As a result of the Merger, and the Internal Revenue Code section 382 limitation (see below) certain deferred income tax assets of Rally's were reduced. This reduction of $ 14.6 million in deferred income tax assets required an adjustment to the Rally's valuation allowance that was recorded at December 28, 1998. Additionally, deferred income tax assets and liabilities of Checkers were recorded on the balance sheet of Rally's, as of the Merger date and are reflected in the January 3, 2000 amounts. The Checkers' deferred income tax assets of $13.5 million were subject to a 100% valuation allowance at the Merger date (see Note 3: Merger). As a result of the Merger, both companies experienced an ownership change as defined by Internal Revenue Code Section 382. As a result of this ownership change, the surviving entity or post-merger Checkers is significantly limited in utilizing the net operating loss carryforwards that were generated before the merger, before the ownership change, in offsetting taxable income arising after the ownership change. As of August 9, 1999 Rally's and Checkers had net operating loss carryforwards of approximately $49.8 million and $60.9 million, respectively for a combined total of $110.7 million. The Company believes that the limitations imposed by Internal Revenue Code Section 382 could restrict the prospective utilization of the total net operating loss carryforward to approximately $31.3 million over the carryforwards life of the net operating losses. The remaining net operating loss carryforward of $79.4 million could expire before becoming available under these limitations. The $31.3 million net operating loss carryforwards are subject to limitation in any given year and will expire in 2018. The Company had approximately $2 million of alternative minimum tax credit carryforwards for U.S. federal income tax purposes, which are available, indefinitely. A valuation allowance has been provided for 100 percent of the deferred tax assets since management can not determine that it is more likely than not that the deferred tax assets will be realized. When realization of the deferred tax assets are more likely than not to occur, the benefit related to the deductible temporary differences will be recognized as a reduction of income tax expense. 39 Income tax (benefit) expense consists of the following: FISCAL YEAR ENDED --------------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ------------ Current-State $ (475) $ 336 $ 252 Deferred $ - $ - $ - ------ ----- ----- Total income tax expense $ (475) $ 336 $ 252 ====== ===== ===== Income tax (benefit) expense for the years ended 2000, 1999 and 1998 consisted solely of state income taxes. The benefit for 2000 was the result of a favorable tax ruling during 2000. The following is a reconciliation of the income tax expense (benefit) computed by applying the federal statutory income tax rate to net income (loss) before income taxes to the income tax provision shown on the Consolidated Statement of Operations:
FISCAL YEAR ENDED ---------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ------------ Expense (benefit) computed at statutory rate $ 796 $(8,970) $(2,562) Tax effect of equity in loss of affiliate 8 469 687 State and local income taxes, net of federal income tax expense (benefit) (475) 336 252 Permanent differences 800 -- -- Change in deferred tax asset valuation allowance (1,550) 8,250 2,017 Other (54) 251 (142) ------- ------- ------- $ (475) $ 336 $ 252 ======= ======= =======
NOTE 12: STOCKHOLDERS' EQUITY As a result of the Merger, Checkers was the surviving entity. As such, the stock based compensation plans that survived were those of Checkers. However, due to the fact that the Merger was accounted for as a reverse acquisition by Rally's, the historical financial information regarding the stock based compensation plans presented below are those of Rally's. All figures presented below have been adjusted to give effect to the Merger adjusted for the exchange ratio of 1.99 to 1 and the one-for-twelve reverse stock split, where applicable. A) STOCK-BASED COMPENSATION PLANS - In August 1991, the Company adopted the 1991 stock option plan ("1991 Plan"), as amended for employees whereby incentive stock options, nonqualified stock options, stock appreciation rights and restrictive shares can be granted to eligible salaried individuals. The plan was first amended on June 11, 1998 to increase the number of shares subject to the Plan to 791,667. A second amendment to the plan was made on September 15, 2000 to increase the number of shares to 1,500,000. In 1994, the Company adopted a Stock Option Plan for Non-Employee Directors, as amended (the "Directors Plan"). The Directors Plan was amended on August 6, 1997 by the approval of the Company's stockholders to increase the number of shares subject to the Directors Plan from 16,667 to 416,667. It provides for the automatic grant to each non-employee director upon election to the Board of Directors a non-qualified, ten-year option to acquire shares of the Company's common stock, with the subsequent automatic grant on the first day of each fiscal year thereafter during the time such person is serving as a non-employee director of a non-qualified ten-year option to acquire additional shares of common stock. Prior to the August 6, 1997 amendment, one-fifth of the shares of common stock subject to each initial option grant became exercisable on a cumulative basis on each of the first five anniversaries of the grant of such option. One-third of the shares of common stock subject to each subsequent option grant became exercisable on a cumulative basis on each of the first three anniversaries of the date of the grant of such option. Each Non-Employee Director serving on the Board as of July 26, 1994 received options to purchase 1,000 shares. Each new Non-Employee Director elected or appointed subsequent to that date also received options to purchase 1,000 shares. Each Non-Employee Director has also received additional options to purchase 250 shares of Common Stock on the first day of 40 each fiscal year. On August 6, 1997 the Directors Plan was first amended to provide: (i) an increase in the option grant to new Non-Employee Directors to 8,333 shares, (ii) an increase in the annual options grant to 1,667 shares and (iii) the grant of an option to purchase 25,000 shares to each Non-Employee Director who was a Director both immediately prior to and following the effective date of the amendment. Options granted to Non-Employee Directors on or after August 6, 1997 are exercisable immediately upon grant. On September 15, 2000, the Directors Plan was amended a second time to provide for a special one-time grant of 550,000 options to the members of the Board of Directors. It was also amended to allow the Board of Directors to make additional discretionary grants under the directors' plan, at their sole discretion. Both the 1991 Plan and the Directors Plan provide that the shares granted come from the Company's authorized but unissued or reacquired common stock. The exercise price of the options granted pursuant to these Plans will not be less than 100 percent of the fair market value of the shares on the date of grant. An option may vest and be exercisable immediately as of the date of the grant and all options will expire after ten years from the date granted. As a result of the Merger, the Company assumed: o 301,087 options previously issued to Checkers' employees under the 1991 Plan at prices ranging from $4.50 to $61.56 o 232,169 options previously issued to Checkers' non-employee directors under the Directors Plan at prices ranging from $3.76 to $68.25 o 116,669 options previously issued to officers and directors of Checkers which were not issued under any plan. A summary of the status of all options granted to employees, directors, and to non-employees at January 1, 2001, January 3, 2000 and December 28, 1998, and changes during the years then ended is presented in the table below. All references to number of shares and per share amounts have been adjusted for the exchange ratio of 1.99 to 1 and the subsequent one-for-twelve reverse split that was effected in August 1999. (Shares represented in thousands)
JANUARY 1, 2001 JANUARY 3, 2000 DECEMBER 28, 1998 ------------------- -------------------- ---------------------- WTD. AVG. WTD. AVG. WTD. AVG. EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ --------- ------ --------- ------ --------- Outstanding shares at beginning of year 1,605 $ 4.72 935 $ 8.20 640 $ 18.03 Assumed in Merger - - 650 9.56 - - Granted at price below market 945 2.00 - - - - Granted at price above market 400 5.50 - - - - Granted at price equal to market 142 2.03 562 1.85 1,091 7.60 Exercised (192) 2 - - (8) 9.83 Forfeited (110) 2.54 (487) 13.38 (277) 13.63 Expired (22) 8.60 (55) 9.87 (510) 15.32 ----- ------ ----- ------ ----- ------ Outstanding at end of year 2,768 $ 4.03 1,605 $ 4.72 935 $ 8.20 ===== ====== ===== ====== ===== ====== Exercisable at end of year 2,014 $ 4.05 1,092 $ 5.89 765 $ 9.29 Weighted average of fair value of options granted $ 2.96 $ 1.48 $ 5.43
41 The following table summarizes information about stock options outstanding at January 1, 2001:
WTD. AVG OUTSTANDING REMAINING WTD AVG. NUMBER WTD. AVG RANGE OF AS OF CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES JANUARY 1, 2001 LIFE (YRS) JANUARY 1, 2001 JANUARY 1, 2001 PRICE --------------- --------------- ----------- --------------- --------------- -------- $1.28-$2.00 840,000 9.1 1.814 840,000 1.814 $2.01-$4.00 1,104,751 7.3 2.752 768,669 3.017 $4.01-$8.00 670,448 7.9 5.081 251,995 4.457 8.01-$16.00 91,483 6.4 13.570 91,483 13.570 16.01-$61.56 61,533 3.0 31.628 61,533 31.628 --------- --- ------- --------- ------- 2,768,215 7.8 $ 4.031 2,013,680 $ 4.049 ========= === ======= ========= =======
If the compensation cost for all option grants to employees and directors had been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
FISCAL YEAR ENDED --------------------------------------------------- JANUARY 1, JANUARY 3, DECEMBER 28, 2001 2000 1998 ---------- ---------- ------------ Net income (loss) As reported $ 2,342 $ (25,888) $ (7,535) Pro forma $ 1,727 (26,293) (10,916) Basic earnings (loss) per common share As reported 0.25 (3.89) (1.67) Pro forma 0.18 (3.95) (2.42) Diluted earnings (loss) per common share As reported 0.23 (3.89) (1.67) Pro forma 0.17 (3.95) (2.42)
For purposes of the pro forma disclosures assuming the use of the fair value method of accounting, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
ASSUMPTIONS 2000 1999 1998 - ------------------------ ----------- ----------- ----------- Risk-free interest rates 5.22%-6.19% 4.95%-5.68% 4.18%-5.71% Volatility 83% 100% 86% Expected lives (months) 48 48 48
An expected dividend yield of zero percent was used for all periods based on the Company's history of no dividend payments. Because the Statement 123 method of accounting has not been applied to options granted prior to January 2, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Additionally, the pro forma amounts include approximately $10,000 in 1998 related to the purchase discount offered under the Rally's 1993 Stock Purchase Plan which was terminated in 1998. On August 5, 1999, the Company's shareholders approved a new employee stock purchase plan ("Stock Purchase Plan"). The Stock Purchase Plan offers eligible employees the opportunity to purchase common shares of the Company through voluntary regular payroll deductions. The Company will make matching contributions to the Stock Purchase Plan relating to the employees contributions made the previous year, and which have remained in the Stock Purchase Plan for the full year. The Company will make a matching contribution equal to one-half of the contributions by officers and employee-directors of the Company and one-third of contributions by those employees who are not officers or employee-directors subject to certain limitations. Any employee contributions, and any of the Company's matching contributions for that employee, are delivered to the broker administering the Stock Purchase Plan and the broker opens individual accounts for the participants. The broker utilizes the employee's voluntary contributions, and any matching contributions by the Company, 42 to purchase the Company's stock at prevailing market rates. The Company made $19,038 in matching contributions during 2000 for employee contributions made in 1999. No matching contributions were made by the Company during 1999. B) STOCK BASED COMPENSATION - Non-cash compensation resulted from three separate stock option transactions. On September 15, 2000, the vesting period and period to exercise for 209,916 of the shared executives options were modified. Concurrent to this modification, services from these shared executives ceased. Due to the modification, a new measurement date was set, resulting in the recognition of approximately $493,000 in compensation expense. On April 10, 2000, the Board of Directors approved the grant of 550,000 stock options to the non-employee directors and 25,000 stock options to one employee director. The grant price was set on April 10, 2000, however, shareholder approval took place on September 15, 2000. In accordance with APB No. 25, the measurement date for determining the market value of these options is on September 15, 2000, resulting in the recognition of approximately $1,186,000 in compensation expense. On June 1, 2000, the Board of Directors approved the grant of 160,229 stock options to officers and key employees. At the date of grant, additional shares of the stock had to be approved for allocation to the 1991 employee stock option plan by the shareholders' of the Company. The shareholders approved the additional allocation on September 15, 2000. The resulting compensation expense recognized in 2000 was approximately $54,000. Deferred compensation related to these options is $247,000, and will be recognized over the remaining three year vesting period. C) SHAREHOLDER RIGHTS OFFERING - A Shareholder Rights Offering (the "Offering") was completed by Rally's on September 26, 1996. Rally's distributed to holders of record of its common stock, as of the close of business on July 31, 1996 (the "Record Date"), transferable subscription rights to purchase units consisting of one share of Rally's common stock and one warrant (the "Rights Offering Warrant") to purchase an additional Share of Rally's common stock. Due to the fact that upon completion of the Merger, Rally's corporate existence ceased, the Rally's Rights Offering Warrants were exchanged for newly issued Checkers warrants (the "Checkers Rights Offering Warrants"). The Company issued Checkers Rights Offering Warrants to purchase 798,281 of the Company's common stock. The Checkers Rights Offering Warrants are exercisable from the date of issuance and continuing until September 26, 2001. The exercise price of each Checkers Rights Offering Warrant is $4.52, representing an exercise price reduction of two thirds from the original Rights Offering Warrants approved by the Company's Board of Directors on September 20, 1999. The Company may redeem the Checkers Rights Offering Warrants at $.01 per warrant, upon 30 days' prior written notice in the event the closing price of the Company's Common Stock equals or exceeds $36.18 per share for 20 out of 30 consecutive trading days ending not more than 30 days preceding the date of the notice of redemption. The Checkers Rights Offering Warrants are publicly held and are traded on the NASDAQ (trading symbol: CHKRZ). If all of the Checkers Rights Offering warrants were exercised, it would provide the Company with $3.6 million in proceeds. During fiscal 2000, 1,048 warrants were exercised. D) WARRANTS - As a result of the Merger, the Company assumed warrants previously issued by Checkers in settlement of litigation (the "Settlement Warrants"). The Settlement Warrants permit the acquisition of an aggregate 425,000 shares of the Company's Common Stock. The Settlement Warrants are exercisable at any time during the thirty day period beginning from the date approval is obtained from the Securities and Exchange Commission for this registration. The Company's Board of Directors reduced the original exercise price of $1.375 by two thirds effective September 20, 1999 to $0.4583. As a result of the one-for-twelve reverse stock split, it now requires the exercise of twelve warrants to receive one share of the Company's Common Stock for an aggregate exercise price of $5.50 per share. If all of the Settlement Warrants were to be exercised, they would provide approximately $2.3 million in additional proceeds. Also as a result of the Merger, the Company assumed 20 million warrants issued by Checkers on November 22, 1996 in connection with the restructuring of its primary credit facility (the "Restructuring Warrants"). The Restructuring Warrants are exercisable at any time from the date of issuance until November 22, 2002. The Company's Board of Directors reduced the original exercise price of $0.75 by two thirds effective September 20, 1999 to $0.25. As a result of the one-for-twelve reverse stock split, it now requires the exercise of twelve warrants to receive one share of the Company's Common Stock for an aggregate exercise price of $3.00 per share. If all of the Restructuring Warrants were to be exercised, they would provide approximately $5 million in additional proceeds. The Company registered the common stock issuable under the Restructuring Warrants and is obligated to maintain such registration for the life of the warrants. The holders of the Restructuring Warrants also have other registration rights relating to the common stock to be issued thereunder. The Restructuring Warrants contain customary anti-dilution provisions. During fiscal 2000, 1,139,592 warrants were exercised. 43 NOTE 13: QUARTERLY FINANCIAL DATA (UNAUDITED) The following table represents selected quarterly financial data for the periods indicated (in 000's except per share data). Earnings per share are computed independently for each of the quarters presented. Fiscal 1999 earnings per share have been impacted by the effects of the Merger. Accordingly, the sum of the quarterly earnings per share in fiscal 2000 and 1999 does not equal the total computed for the year:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL --------- --------- --------- --------- --------- YEAR ENDED JANUARY 1, 2001 Revenues $ 52,187 $ 47,106 $ 37,820 $ 44,077 $ 181,190 Income (loss) from operations 1,154 2,923 1,735 2,239 8,051 Net income (loss) before extraordinary item (534) 1,379 809 917 2,571 Extraordinary item 109 152 -- (490) (229) --------- --------- --------- --------- --------- Net income (loss) (425) 1,531 809 427 2,342 ========= ========= ========= ========= ========= Earnings (loss) per share before extraordinary item: Basic (0.06) 0.14 0.09 0.10 0.27 ========= ========= ========= ========= ========= Diluted (0.06) 0.14 0.08 0.09 0.25 ========= ========= ========= ========= ========= YEAR ENDED JANUARY 3, 2000 Revenues $ 30,119 $ 36,368 $ 45,604 $ 89,744 $ 201,835 Income (loss) from operations 109 2,205 803 (20,301) $ (17,184) Net income (loss) before extraordinary item (1,603) 355 (1,364) (24,125) (26,737) Extraordinary item -- -- -- 849 849 --------- --------- --------- --------- --------- Net income (loss) (1,603) 355 (1,364) (23,276) (25,888) ========= ========= ========= ========= ========= Earnings (loss) per share before extraordinary item: (basic and diluted) $ (0.38) $ 0.03 $ (0.20) $ (2.51) $ (4.02) ========= ========= ========= ========= =========
NOTE 14: COMMITMENTS AND CONTINGENCIES A) LEASE COMMITMENTS - The Company leases land and buildings generally under agreements with terms of, or renewable to, 15 to 20 years. Some of the leases contain contingent rental provisions based on percentages of gross sales. The leases generally obligate the Company for the cost of property taxes, insurance and maintenance. Rent expense totaled $7.0 million, $11.4 million and $5.0 million in 2000, 1999 and 1998, respectively. Following is a schedule, by year, of future minimum lease commitments for operating leases at January 1, 2001: YEAR ------------ 2001 $ 16,960 2002 14,768 2003 12,328 2004 9,457 2005 7,897 Thereafter 43,386 --------- Total $ 104,796 ========= B) SELF INSURANCE - For 2000 the Company was self-insured for most workers' compensation, general liability and automotive liability losses subject to per occurrence and aggregate annual liability limitations. Currently, for workers' compensation, the Company is insured, but maintains $2.1 million as collateral securing prior period self insured claims until they are settled. The Company is also self-insured, subject to umbrella policies, for health care claims for eligible 44 participating employees subject to certain deductibles and limitations. The Company determines its liability for claims incurred but not reported on an actuarial basis. C) EMPLOYMENT CONTRACT- Effective November 20, 2000, the Company entered into a new employment agreement with its Chief Executive Officer. This new contract terminates the agreement dated December 14, 1999. The CEO will continue to serve as a director of the Company. The term of the agreement is for three years with two additional one year options to extend at the Company's option. The annual base salary of $440,000 shall be increased by 5% each year. The CEO is entitled to participate in the Company's incentive bonus plan and was granted options to purchase 200,000 shares of the Company's common stock at $5.00 per share and 200,000 shares at $6.00 per share. The options cliff vest three years from the date of the agreement. The agreement may be terminated at any time for cause. If the CEO is terminated without cause, he will be entitled to receive a lump sum amount equal to the remaining term of the contract. The agreement contains confidentiality and non-competition provisions. D) LITIGATION - JONATHAN MITTMAN ET AL. V. RALLY'S HAMBURGERS, INC., ET AL. In January and February 1994, two putative class action lawsuits were filed, purportedly on behalf of the stockholders of Rally's, in the United States District Court for the Western District of Kentucky, Louisville division, against Rally's, Burt Sugarman and Giant Group, Ltd. and certain of Rally's former officers and directors and its auditors. The cases were subsequently consolidated under the case name Jonathan Mittman et. al. vs. Rally's Hamburgers, Inc., et. al. The complaints allege that the defendants violated the Securities Exchange Act of 1934, among other claims, by issuing inaccurate public statements about Rally's in order to arbitrarily inflate the price of its common stock. The plaintiffs seek unspecified damages. On April 15, 1994, Rally's filed a motion to dismiss and a motion to strike. On April 5, 1995, the Court struck certain provisions of the complaint but otherwise denied Rally's motion to dismiss. In addition, the Court denied plaintiffs' motion for class certification; the plaintiffs renewed this motion, and despite opposition by the defendants, the Court granted such motion for class certification on April 16, 1996, certifying a class from July 20, 1992 to September 29, 1993. In October 1995, the plaintiffs filed a motion to disqualify Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP as counsel for defendants based on a purported conflict of interest allegedly arising from the representation of multiple defendants as well as Ms. Glaser's position as both a former director of Rally's and a partner in Christensen, Miller. Defendants filed an opposition to the motion, and the motion to disqualify Christensen, Miller was denied. A settlement conference occurred on December 7, 1998, but was unsuccessful. Fact discovery was completed in August 1999. Expert discovery was completed in June 2000. Motions for Summary Judgment were filed by the parties in September, 2000, and rulings by the Court are pending. The defendants deny all wrongdoing and intend to defend themselves vigorously in this matter. Management is unable to predict the outcome of this matter at the present time or whether or not certain available insurance coverage's will apply. FIRST ALBANY CORP. V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET AL. This putative class action was filed on September 29, 1998, in the Delaware Chancery Court in and for New Castle County, Delaware by First Albany Corp., as custodian for the benefit of Nathan Suckman, an alleged stockholder of 500 shares of the Company's common stock. The complaint names the company and certain of its current and former officers and directors as defendants, including William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, Richard A. Peabody, James T. Holder, Terry N. Christensen, Frederick E. Fisher, Clarence V. McKee, Burt Sugarman, C. Thomas Thompson and Peter C. O'Hara. The complaint also names Rally's and Giant as defendants. The complaint arises out of the proposed merger announced on September 28, 1998 between Checkers, Rally's and Giant and alleges generally, that certain of the defendants engaged in an unlawful scheme and plan to permit Rally's to acquire the public shares of Checkers stock in a "going-private" transaction for grossly inadequate consideration and in breach of the defendants' fiduciary duties. The plaintiff allegedly initiated the complaint on behalf of all stockholders of Checkers as of September 28, 1998, and seeks, among other relief, certain declaratory and injunctive relief against the consummation of the proposed merger, or in the event the proposed merger is consummated, recission of the proposed merger and costs and disbursements incurred in connection with bringing the action. In view of a decision by Checkers, Giant and Rally's not to implement the transaction that had been announced on September 28, 1998, plaintiffs have agreed to provide Checkers and all other defendants with an open extension of time to respond to the complaint. Although, plaintiffs indicated that they would likely file an amended complaint in the event of the consummation of a merger between Checkers and Rally's, no amendment has been filed to date even though the merger of Checkers and Rally's was completed on August 9, 1999. We believe the lawsuit is without merit and intend to defend it vigorously in the event that plaintiffs seek to renew the lawsuit. DAVID J. STEINBERG AND CHAILE B. STEINBERG, INDIVIDUALLY AND ON BEHALF OF THOSE SIMILARLY SITUATED V. CHECKERS DRIVE-IN RESTAURANTS, INC., ET AL. This putative class action was filed on October 2, 1998, in the Delaware Chancery Court in and for New Castle County, Delaware by David J. Steinberg and Chaile B. Steinberg, alleged stockholders of an unspecified number of shares of our common stock. The complaint names Checkers and certain of its current and former officers and directors as defendants, including William P. Foley, II, James J. Gillespie, Harvey Fattig, Joseph N. Stein, Richard A. Peabody, James T. Holder, Terry N. Christensen, Frederick E. Fisher, Clarence V. McKee Burt Sugarman, C. Thomas Thompson and Peter C. O'Hara. The complaint also names Rally's and Giant as defendants. As with the FIRST ALBANY complaint described above, this complaint arises out of the proposed merger announced on September 28, 1998 45 between Checkers, Rally's and Giant and alleges generally, that certain of the defendants engaged in an unlawful scheme and plan to permit Rally's to acquire the public shares of Checkers's common stock in a "going-private" transaction for grossly inadequate consideration and in breach of the defendant's fiduciary duties. The plaintiffs allegedly initiated the complaint on behalf of all stockholders of Checkers as of September 28, 1998, and seeks, among other relief, certain declaratory and injunctive relief against the consummation of the proposed merger, or in the event the proposed merger is consummated, rescission of the proposed merger and costs and disbursements incurred in connection with bringing the action. For the reasons stated above in the description of the FIRST ALBANY action, plaintiffs have agreed to provide the company and all other defendants with an open extension of time to respond to the complaint. Although, plaintiffs indicated that they would likely file an amended complaint in the event of the consummation of a merger between Checkers and Rally's, no such amendment has been filed to date even though the merger of Checkers and Rally's was completed on August 9, 1999. The company believes the lawsuit is without merit and intends to defend these actions vigorously. GREENFELDER ET AL. V. WHITE, JR., ET AL. On August 10, 1995, a state court complaint was filed in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, Civil Division, entitled GAIL P. GREENFELDER AND POWERS BURGERS, INC. V. JAMES F. WHITE, JR., CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK. A companion complaint was also filed in the same Court on May 21, 1997, entitled GAIL P. GREENFELDER, POWERS BURGERS OF AVON PARK, INC., AND POWER BURGERS OF SEBRING, INC. V. JAMES F. WHITE, JR., CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK. The original complaint alleged, generally, that certain officers of Checkers intentionally inflicted severe emotional distress upon Ms. Greenfelder, who is the sole stockholder, president and director of Powers Burgers, Inc., a Checkers franchisee. The present versions of the amended complaints in the two actions assert a number of claims for relief, including claims for breach of contract, fraudulent inducement to contract, post-contract fraud and breaches of implied duties of "good faith and fair dealings" in connection with various franchise agreements and an area development agreement, battery, defamation, negligent retention of employees, and violation of Florida's Franchise Act. The parties reached a tentative settlement on January 11, 2001. In the event the settlement is not consummated, we intend to defend vigorously. CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES, INC., ET AL. On August 10, 1995, a state court counterclaim and third party complaint was filed in the Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, Florida, Civil Division, entitled TAMPA CHECKMATE FOOD SERVICES, INC., CHECKMATE FOOD SERVICES, INC. AND ROBERT H. GAGNE V. CHECKERS DRIVE-IN RESTAURANTS, INC., HERBERT G. BROWN, JAMES E. MATTEI, JAMES F. WHITE, JR., JARED D. BROWN, ROBERT G. BROWN AND GEORGE W. COOK. 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, Checkers sought to collect on a promissory note and foreclose on a mortgage securing the promissory note issued by Tampa Checkmate and Mr. Gagne and obtain declaratory relief regarding the rights of the respective parties under Tampa Checkmate's franchise agreement with Checkers. The counterclaim, as amended, alleged violations of Florida's Franchise Act, Florida's Deceptive and Unfair Trade Practices Act, and breaches of implied duties of "good faith and fair dealings" in connection with a settlement agreement and franchise agreement between various of the parties and sought a judgment for damages in an unspecified amount, punitive damages, attorneys' fees and such other relief as the court may deem appropriate. The case was tried before a jury in August of 1999. The court entered a directed verdict and an involuntary dismissal as to all claims alleged against Robert G. Brown, George W. Cook, and Jared Brown. The court also entered a directed verdict and an involuntary dismissal as to certain other claims alleged against Checkers and the remaining individual counterclaim defendants, James E. Mattei, Herbert G. Brown and James F. White, Jr. The jury returned a verdict in favor of Checkers, James E. Mattei, Herbert G. Brown and James F. White, Jr. as to all counterclaims brought by Checkmate Food Services, Inc. and in favor of Mr. Mattei as to all claims alleged by Tampa Checkmate and Mr. Gagne. In response to certain jury interrogatories, however, the jury made the following determination: (i) that Mr. Gagne was fraudulently induced to execute a certain unconditional guaranty and that Checkers was therefore not entitled to enforce its terms; (ii) that Checkers, H. Brown and Mr. White fraudulently induced Tampa Checkmate to execute a certain franchise agreement whereby Tampa Checkmate was damaged in the amount of $151,331; (iii) that Checkers, H. Brown and Mr. White violated a provision of the Florida Franchise Act relating to that franchise agreement whereby Tampa Checkmate and Mr. Gagne were each damaged in the amount of $151,331; and (iv) that none of the Defendants violated Florida's Deceptive and Unfair Trade Practices Act relating to that franchise agreement. We believe that the responses to the jury interrogatories described above are "advisory" because of certain pre-trial orders entered by the Court. As a result, we believe that the responses contained in the jury interrogatories are not binding on the trial court, and that it is incumbent on the trial court to weigh the evidence and enter its own verdict. The trial court nonetheless determined that the responses to the jury interrogatories described above are binding upon it and entered a final judgment accordingly. We believe that the entry of the judgment was erroneous and we have filed a notice of appeal to the Court of Appeals for the Second District of Florida. 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. In July 1997, 46 Checkers filed an Adversary Complaint in the Tampa Checkmate bankruptcy proceedings entitled CHECKERS DRIVE-IN RESTAURANTS, INC. V. TAMPA CHECKMATE FOOD SERVICES, INC. The Adversary Complaint sought a preliminary 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. Tampa Checkmate filed a counterclaim to Checkers complaint that essentially contained the same claims set forth in the amended counterclaim filed in the state court action. The court granted Checkers' motion for preliminary injunction on July 23, 1998, and Tampa Checkmate de-identified its restaurant. On December 15, 1998, the Court granted Checkers motion to convert Tampa Checkmate's bankruptcy proceedings from a Chapter 11 proceeding to a Chapter 7 liquidation. The bankruptcy court has granted Checkers' motion to lift the automatic stay imposed by 11 U.S.C. ss.362 to allow Checkers to proceed with the disposition of the property which is the subject of its mortgage. The counterclaim in the bankruptcy proceedings remains pending, but we believe the merits of the counterclaims were already determined by state court proceedings described above. TEX-CHEX, INC. ET AL V. CHECKERS DRIVE-IN RESTAURANTS, INC. ET. AL. On February 4, 1997, a petition was filed against Checkers and two former officers and directors of Checkers in the District Court of Travis County, Texas 98th Judicial District, entitled TEX-CHEX, INC., BRIAN MOONEY, AND SILVIO PICCINI V. CHECKERS DRIVE-IN RESTAURANTS, INC., JAMES MATTEI, AND HERBERT G. BROWN. The original petition generally alleged that Tex-Chex, Inc. and the individual plaintiffs were induced into entering into two franchise agreements and related personal guarantees with Checkers based on fraudulent misrepresentations and omissions made by Checkers. On October 2, 1998, the plaintiffs filed an amended petition realleging the fraudulent misrepresentations and omission claims set forth in the original petition and asserting additional causes of action for violation of Texas' Deceptive Trade Practices Act and violation of Texas' Business Opportunity Act. The parties reached a settlement in March 2001. DOROTHY HAWKINS V. CHECKERS DRIVE-IN RESTAURANTS, INC. AND KPMG PEAT MARWICK. On March 4, 1999, a state court complaint was filed in the Circuit Court in and for Pinellas County, Florida, Civil Division. The Complaint alleges that Mrs. Hawkins was induced into purchasing a restaurant site and entering into a franchise agreement with the Company based on misrepresentations and omissions made by Checkers. The Complaint asserts claims for breach of contract, breach of the implied convenant of good faith and fair dealing, violation of Florida's Deceptive Trade Practices Act, fraudulent concealment, fraudulent inducement, and negligent representation. The Company denies the material allegations of the Complaint and intends to defend the lawsuit vigorously. No estimate of any possible loss or range of loss resulting from the lawsuit can be made at this time. We are also 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 our consolidated financial position, results of operations or liquidity. E) PURCHASE COMMITMENTS -The Company has purchase agreements with various suppliers extending beyond one year. Subject to the suppliers' quality and performance, the purchases covered by those agreements aggregate approximately $80.9 million in 2001 and a total of approximately $61.3 million for the years 2002 through 2006. F) CHICAGO BANKRUPTCY - On December 27, 1999, a subsidiary of the Company, Checkers of Chicago, Inc., a Delaware corporation, discontinued operations in the Chicago metropolitan area and on January 7, 2000, filed for relief under Chapter 7 of the United States Bankruptcy Code. Checkers of Chicago, Inc. had operated eight restaurants as a general partner of certain limited partnerships and three Company-owned restaurants. During fiscal 2000, two of these restaurants were acquired by franchisees and are currently operating. The other Checkers and Rally's restaurants operated by Checkers Drive-In Restaurants and its franchisees are not affected by this action. NOTE 15: SUBSEQUENT EVENTS (UNAUDITED) A) REACQUIRED RESTAURANTS - On January 17, 2001, we reacquired 17 Checkers' restaurants in Philadelphia which were previously sold to a franchisee in 1999. In addition, 10 Rally's restaurants in Toledo, being operated by a franchisee, were reacquired. In February 2001, the Philadelphia restaurants were sold to a different franchisee for $2.1 million. We expect to realize a gain on the sale which will be recognized on an installment method through 2005, with a majority of the gain recognized in 2005. B) COMMITMENTS - On February 15, 2001, we committed to the purchase and installation of $2.3 million of point-of-sale systems in 149 Company-owned restaurants. C) REFINANCING - On March 16, 2001, we received a commitment from Heller Financial, Inc. to refinance the note payable to Textron Financial Corporation (Loan B) coming due on June 15, 2001. The balance of the note was $5.9 million on January 1, 2001. The commitment calls for 30 equal payments of principal and interest at 14% per annum, secured by equipment in 60 Company-owned restaurants. 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names and ages of our directors and the positions they hold:
NAME AGE POSITION - ---- --- -------- William P. Foley, II 56 Chairman of the Board of Directors Peter C. O'Hara 45 Director and Vice Chairman of the Board Daniel J. Dorsch 48 President, Chief Executive Officer and Director Terry N. Christensen 60 Director Willie D. Davis 66 Director David Gotterer 72 Director Ronald B. Maggard 51 Director Clarence V. McKee 58 Director Burt Sugarman 62 Director
WILLIAM P. FOLEY, II has served as a director since November 1996 and as Chairman of the Board since June 1997. Mr. Foley has been Chairman of the Board of Santa Barbara Restaurant Group, Inc. since July 1997. He has been the Chairman of the Board and Chief Executive Officer of Fidelity National Financial, Inc. which, through its subsidiaries, is a title insurance underwriting company, since its formation in 1984. He has been Chairman of the Board and Chief Executive Officer of Fidelity National Title Insurance Company since April 1981. Mr. Foley is also currently serving as Chairman of the Board of Directors of CKE Restaurants, Inc., owner, operator and franchisor of quick-service restaurants, primarily under the Carl's Jr. and Hardee's brand names, and is a director of Micro General Corporation, Miravant Medical Technologies and Fresh Foods, Inc. PETER C. O'HARA has served as a director since June 1998 and Vice Chairman since September 1999. He has served as president of Capital Management of L.I., N.Y., Inc., a Checkers franchise area developer for Long Island, New York, since March 1994. DANIEL J. DORSCH has served as the Chief Executive Officer, President and a director since December 1999. Mr. Dorsch is also a multi-unit franchise owner for Papa John's Pizza, earning franchisee of the year in 1998. Since 1994, Mr. Dorsch has also owned and operated franchises with Honda, Kawasaki, Yamaha, Suzuki, & Seadoo. TERRY N. CHRISTENSEN has served as a director since November 1996. Mr. Christensen has been a partner in the law firm of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP since May 1988. Mr. Christensen is a director of Giant Group, Ltd. and MGM Mirage. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP performed legal services for us in 1999 and 2000. Such services have related to litigation, compliance with securities laws and other business matters. WILLIE D. DAVIS has served as a director since August 1999. Mr. Davis has been the President and a director of All-Pro Broadcasting, Inc., a holding company operating several radio stations, for more than the past five years. Mr. Davis currently also serves on the board of directors of Sara Lee Corporation, K-Mart Corporation, Dow Chemical Company, Metro-Goldwyn-Mayer Inc., MGM Mirage, Basset Furniture Industries, Incorporated and the Strong Fund. DAVID GOTTERER has served as a director since August 1999. Mr. Gotterer has been a partner in the accounting firm of Mason & Company, LLP, New York, New York, for more than the past five years. Mr. Gotterer is a director and Vice Chairman of Giant Group, Ltd. RONALD B. MAGGARD has served as a director since August 1999. For more than the past five years, Mr. Maggard has been President of Maggard Enterprises, Newport Beach, CA, which owns 20 franchised Long John Silver Restaurants and President of Midstate Distributing, Lexington, Kentucky, which is a Miller Distributing Company. CLARENCE V. MCKEE has served as a director since June 1996. Mr. McKee has been the President and Chief Executive Officer of McKee Communications, Inc., a Tampa, Florida based company engaged in the acquisition and management of communications companies, since October 1992. He is a former chairman of the Florida Association of Broadcasters and former director of Florida Progress Energy Corporation and its subsidiary Florida Power Corporation. 48 BURT SUGARMAN has served as a director since June 1997. Mr. Sugarman has been the Chairman of the Board, President and Chief Executive Officer of Giant Group, Ltd. for the past five years. Mr. Sugarman served as Chairman of the Board of Rally's Hamburgers, Inc. from November 1994 to October 1997. EXECUTIVE OFFICERS Set forth below is a description of the business experience and the ages of our executive officers, other than Mr. Dorsch, whose experience is described above. Executive officers serve at the discretion of our Board of Directors. STEVE COHEN (49) has served as our Senior Vice President of Human Resources since December 1997. From May 1995 to December 1997, Mr. Cohen was the Field Human Resources Manager for EZCorp in Austin, Texas. WENDY A. BECK (36) has served as our Chief Financial Officer since November 2000. She has served as Vice President of Finance and Treasurer of Checkers since April 1997. She also served as Vice President of Finance and Treasurer of Rally's from December 1997 until August 1999. Since 1993, Ms. Beck has held the following positions with Checkers: Treasurer from November 1995 to April 1997; Senior Director of Tax and Treasury from August 1995 to April 1997; Director of Tax from November 1994 to August 1995; and Tax Manager from March 1993 to November 1994. ADAM NOYES (31) has served as Vice President of Purchasing and Operations since August 2000. He served as Vice President of Purchasing and Quality Assurance from October 1998 to August 2000. Senior Director of Purchasing from May 1998 to September 1998. Director of Purchasing from June 1996 to April 1998. Prior to this, Mr. Noyes served Checkers in the capacity of Restaurant Support Services from April 1991 to May 1996. KEITH SIROIS (49) has served as Vice President of Franchise Operations since September 1999. From September 1998 to September 1999, he served as Checkers' Director of Franchise Operations. Mr. Sirois served as a franchise business consultant with Checkers from August 1996 to September 1998. From March 1992 to September 1996, Mr. Sirois served as Vice President of Franchise Operations for Heartwise Express, Inc. in Chicago, Illinois. RICHARD SVEUM (44) has served as Vice President of Franchise Sales and Development since September 1999. Mr. Sveum has served in various capacities for Checkers since 1993, including: Director of Franchise Sales from July 1998 to September 1999; Senior Manager of Champion, formerly the modular restaurant division of Checkers, and Franchise Sales from September 1997 to July 1998; and franchise business consultant from October 1993 to September 1997. RICHARD TURER (39) has served as Vice President of Marketing since September 1999. From July 1998 to September 1999, Mr. Turer served as Director of Marketing for Checkers and Rally's. From May 1995 to July 1998, he was self-employed and operated Mill House McCabe, a marketing and promotional company, in Sparta, New Jersey. BRIAN R. DOSTER (41) has served as Vice President, Corporate Counsel and Secretary since November, 2000. He served previously as Assistant General Counsel and Assistant Secretary of Checkers since April 1999 and September 1999, respectively. From November 1985 to April 1999, he was an attorney for Amoco Corporation in Chicago, Illinois. 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 Annual Meeting of Stockholders, which will be filed with the commission on or before May 2, 2001. 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 Annual Meeting of Stockholders, which will be filed with the Commission on or before May 2, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Beginning in September 1999 the Company engaged Peter O'Hara, one of its current Directors, to provide consulting services at a monthly fee of $10,000. Mr. O'Hara discontinued these services in June 2000. Fees for 2000 and 1999 totaled $60,000 and $40,000, respectively. 49 We shared certain officers and directors with Santa Barbara Restaurant Group, inc. (Santa Barbara) beginning in 1999 through September 2000. We paid $274,338 and $104,408 to Santa Barbara for salary payments made on our behalf. During 2000, Mr. Foley was the chairman of the Board of Directors for both Santa Barbara and Checkers Drive-In restaurants, Inc. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro LLP, a law firm in which Mr. Christensen is a named partner, performed legal services for the Company during 2000 and 1999 amounting to $457,000 and $803,000, respectively. Such services have related to the defense of certain litigation, compliance with securities laws and other business matters. During 2000, additional options were granted to members of the Board of Directors and shared executives at an exercise price below the market price of the common stock. Accordingly, non-cash compensation expense of $1.2 million and $0.5 million was recorded for members of the Board of Directors and shared executives, respectively. During fiscal 2000, certain shared executives exercised 90,000 stock options. Pursuant to our current employment agreement with Mr. Dorsch, the Company accepted a $100,000 note on December 14, 2000 in connection with the exercise of 100,000 stock options. The Company will receive 3 equal annual payments on January 1, beginning in 2002. Interest on the unpaid principal portion accumulates at a rate of 5% per annum. Prior to the Merger in August 1999, the Company and Rally's Hamburgers, Inc. were parties to a management services agreement (the "Management Services Agreement") pursuant to which Checkers provided key services to Rally's, including executive management, financial planning and accounting, franchise, purchasing and human resources services. In addition, Checkers and Rally's shared certain of their executive officers, including the Chief Executive Officer and the Chief Operating Officer. The total cost of the services provided by Checkers to Rally's in 1999 was $4.7 million. During fiscal 1999, we entered into four lease agreements, which have been recorded as capital lease obligations, with Granite Financial Inc. whereby we purchased security equipment for our restaurants valued at $651,346. The lease agreements are payable monthly ranging from $3,065 to $10,785, including effective interest rates ranging from 13.381% to 14.04%. All of the leases have terms of 3 years. On July 1, 1996, the Company entered into a ten-year operating agreement with Carl Karcher Enterprises, Inc., the subsidiary of CKE that operates the Carl's Jr. restaurant chain. Pursuant to the agreement, CKE began operating 29 Rally's owned restaurants located in California and Arizona, two of which were converted to a Carl's Jr. format. Including closures from prior periods, there are 23 remaining restaurants as of January 1, 2001 operating under the agreement. Such agreement is cancelable after an initial five-year period, or July 1, 2001, at the discretion of CKE. A portion of these restaurants, at the discretion of CKE, will be converted to the Carl's Jr. format. The agreement was approved by a majority of the independent Directors of the Company. Prior to the agreement, the Company's independent Directors had received an opinion as to the fairness of the agreement, from a financial point of view, from an investment banking firm of national standing. Under the terms of the operating agreement, CKE is responsible for any conversion costs associated with transforming restaurants to the Carl's Jr. format, as well as, the operating expenses of all the restaurants. The Company retains ownership of all the restaurants, two of which are Carl's Jrs. and is entitled to receive a percentage of gross revenues generated by each restaurant. In the event of a sale, by the Company, of any of the restaurants, the Company and CKE would share in the proceeds based upon the relative value of their respective capital investments in such restaurant. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1.0 The following financial statements of the Registrant are included in Part II, Item 8: Index to Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets as of January 1, 2001 and January 3, 2000. Consolidated Statements of Operations and Comprehensive Income for each of the three years in the three-year period ended January 1, 2001. Consolidated Statements of Shareholders' Equity for each of the three years in the three-year period ended January 1, 2001. Consolidated Statements of Cash Flow for each of the three years in the three-year period ended January 1, 2001. Notes to Consolidated Financial Statements 50 2.0 All schedules have been omitted because the required information is not applicable, not required or is included elsewhere in the financial statements and notes thereto. 3.0 The list of exhibits set forth in Item 14, (c) below is incorporated herein by reference. (b) Reports on Form 8-K. None. (c) List of Exhibits 2.1 Agreement and Plan of Merger dated January 28, 1999 between the Company and Checkers Drive-In Restaurants, Inc. filed as exhibit 10.18 to the Company's 1998 Form 10-K and incorporated herein by reference. 3.1 Restated Certificate of Incorporation of the Company, as filed with the Commission as Exhibit 3.1 to the Company's Registration Statement on Form S-1 filed on September 26, 1991 (File No. 33-42996), is hereby incorporated herein by reference. 3.2 Certificate of Amendment to Restated Certificate of Incorporation of the Company, as filed with the Commission as Exhibit 3 to the Company's Form 10-Q for the quarter ended June 30, 1993, is hereby incorporated herein by reference. 3.3 Certificate of Amendment to Certificate of Incorporation of the Company dated August 9, 1999, as filed with the Commission as Exhibit 3.3 to the Registrant's Form 10-K for the year ended January 3, 2000. 3.4 Certificate of Merger of Domestic Corporations dated August 9, 1999, as filed with the Commission as Exhibit 3.4 to the Registrant's Form 10-K for the year ended January 3, 2000. 3.5 Certificate of Amendment to Certificate of Incorporation of the Company dated August 9, 1999, as filed with the Commission as Exhibit 3.5 to the Registrant's Form 10-K for the year ended January 3, 2000. 3.6 By-laws, as amended through February 16, 1995, of the Registrant, as filed with the Commission as Exhibit 3.3 to the Company's Form 10-Q for the quarter ended March 27, 1995, is hereby incorporated herein by reference. ** 3.7 Certificate of Incorporation of Checkers of Puerto Rico, Inc. a wholly-owned subsidiary of the Registrant, dated March 17, 2000. ** 3.8 Certificate of Merger of Merger Acquisition Corporation 1, a wholly-owned subsidiary of the Registrant, dated June 8, 2000. ** 3.9 Certificate of Merger of ZDT Corporation, a wholly-owned subsidiary of the Registrant, dated June 8, 2000. ** 3.10 Certificate of Merger of Hampton Foods, Inc., a wholly-owned subsidiary of the Registrant, dated June 9, 2000. 4.1 Indenture dated as of March 1, 1993, between Rally's, certain of its subsidiaries and PNC Bank Kentucky, Inc., as Trustee, relating to the issuance of $85,000,000 principal amount of the Company's 9 7/8% Senior Notes due 2000. (Filed as Exhibit 4.1 to Rally's Annual Report on Form 10-K for the year ended January 3, 1993, and incorporated herein by reference.) 4.2 Specimen form of 9 7/8% Senior Note due 2000. (Filed as Exhibit 4.2 to Rally's Annual Report on Form 10-K for the year ended January 3, 1993, and incorporated herein by reference.) 4.3 Form of Warrant Agreement dated August 9, 1999 between Checkers Drive-In Restaurants, Inc. and American Stock Transfer and Trust Company, Inc., as a Warrant Agent including form of Warrant Certificate, as filed with the Commission as Exhibit 4.3 to the Registrant's Form 10-K for the year ended January 3, 2000. 4.4 First Amendment to the Indenture (incorporated by reference to Exhibit 4.6 to Rally's 1996 10-K). 51 4.5 Collateral Assignment of Trademarks as Security from Borrower, dated April 12, 1995, between the Company and each of the banks party to the Amended and Restated Credit Agreement, dated as of April 12, 1995, as filed with the Commission as Exhibit 3 to the Company's Form 8-K dated April 12, 1995, is hereby incorporated by reference. 4.6 Amended and Restated Credit Agreement, dated as of November 22, 1996, between the Company, CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.1 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 4.7 Second Amended and Restated Security Agreement, dated as of November 22, 1996, between the Company and CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.2 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 4.8 Form of Warrant issued to lenders under the Amended and Restated Credit Agreement, dated November 22, 1996, between the Company and CKE Restaurants, Inc., as Agent, and the lenders listed therein, as filed with the Commission as Exhibit 4.3 on the Company's Form 8-K, dated November 22, 1996, is hereby incorporated by reference. 4.9 Warrant Agreement dated March 11, 1997, between the Registrant and Chasemellon Shareholder Services, L.L.C., as filed with the Commission as Exhibit 10.38 to the 10K dated December 29, 1997, is hereby incorporated by reference. 4.10 Other Debt Instruments - Copies of debt instruments for which the related debt is less than 10% of the Company's total assets will be furnished to the Commission upon request. 10.1 Form of Indemnification Agreement between the Company and its directors and certain officers, as filed with the Commission as Exhibit 4.4 to the Company's Registration Statement on Form S-1 filed on September 26, 1991 (File No. 33-42996), is hereby incorporated herein by reference. 10.2 1991 Stock Option Plan of the Company, as amended on May 10, 1994, as filed with the Commission as Exhibit 4 to the Company's Registration Statement on Form S-8 filed on June 15, 1994 (File No. 33-80236), is hereby incorporated herein by reference. 10.3 Amendment to 1991 Stock Option Plan, as filed with the Commission on page 18 of the Company's proxy statement dated May 15, 1998 is incorporated herein by reference. 10.4 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. 10.5 Lease between Blue Ridge Associates and the Company dated November 17, 1987. (Filed as Exhibit 10.6 to Rally's Registration Statement on Form S-1, dated October 11, 1989, and incorporated herein by reference). 10.6 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. 10.7 Operating Agreement by and between Rally's Hamburgers, Inc. and Carl Karcher Enterprises. (Filed as Exhibit 10.43 to CKE Restaurants, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 20, 1996, and incorporated herein by reference.) 10.8 Employment Agreement between the Company and Daniel J. Dorsch dated December 14, 1999, as filed with the Commission as Exhibit 10.17 to the Registrant's Form 10-K for the year ended January 3, 2000. 10.9 Checkers Drive-In Restaurants, Inc. Employee Stock Purchase Plan, as filed with the Commission as Exhibit 10.18 to the Registrant's Form 10-K for the year ended January 3, 2000. 10.10 Loan Agreement: Senior Credit Facility A between the Registrant and Textron Financial Corporation, dated June 15, 2000 as filed with the Commission as Exhibit 10.19 to the Registrant's Form 10-Q for the quarter ended June 19, 2000, is hereby incorporated by reference. 52 10.11 Loan Agreement: Subordinate Credit Facility B and C between the Registrant and Textron Financial Corporation, dated June 15, 2000, as filed with the Commission as Exhibit 10.20 to the Registrant's Form 10-Q for the quarter ended June 19, 2000, is hereby incorporated by reference. ** 10.12 Asset Purchase Agreement between the Registrant and Titan Holdings, LLC, dated January 26, 2000. ** 10.13 Asset Purchase Agreement between the Registrant and Altes, LLC, dated April 24, 2000. ** 10.14 Amended and restated 1994 Stock Option Plan, as amended and restated on September 15, 2000. ** 10.15 Amended and restated 1991 Stock Option Plan, as amended and restated on September 15, 2000. ** 10.16 Employment Agreement, dated November 20, 2000, between the Registrant and Daniel J. Dorsch. 21 Subsidiaries of the Company: (a) Rally's of Ohio, Inc., an Ohio corporation. (b) Self-Service Drive-Thru, Inc., a Louisiana corporation (merged with Rally's, effective December 28, 1998). (c) Rally's Finance, Inc., a Delaware corporation (merged with Rally's December 28, 1998). (d) Rally's Management, Inc., a Kentucky corporation. (e) ZDT Corporation, a Missouri corporation (merged with Checkers June 8, 2000). (f) RAR, Inc., a Delaware corporation (merged with Rally's effective December 28, 1998). (g) MAC1, Inc., a Delaware corporation (merged with Checkers June 8, 2000). (h) Hampton Roads Foods, Inc., a Louisiana corporation (merged with Checkers June 9, 2000). (i) Checkers of Puerto Rico, Inc. (j) Checkers of Chicago, Inc. ** 23.1 Consent of KPMG LLP. ** Filed herewith (d) Financial Statement Schedules: Described in Item 14 (a) (2) of this Form 10-K 53 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 30, 2001. CHECKERS DRIVE-IN RESTAURANTS, INC. By: /s/ DANIEL J. DORSCH ------------------------------------- Daniel J. Dorsch President and Chief Executive Officer Pursuant to requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities indicated on March 30, 2001.
SIGNATURE TITLE - --------- ----- /s/ WILLIAM P. FOLEY, II - ------------------------------------------------ William P. Foley II Director and Chairman of the Board /s/ PETER C. O'HARA - ------------------------------------------------ Peter C. O'Hara Director, Vice Chairman of the Board /s/ DANIEL J. DORSCH President, Chief Executive Officer and Director - ------------------------------------------------ (Principal Executive Officer) Daniel J. Dorsch /s/ WENDY A. BECK Treasurer and Chief Financial Officer - ------------------------------------------------ (Principal Financial and Accounting Officer) Wendy A. Beck /s/ TERRY N. CHRISTENSEN - ------------------------------------------------ Terry N. Christensen Director /s/ CLARENCE V. MCKEE - ------------------------------------------------ Clarence V. McKee Director /s/ BURT SUGARMAN - ------------------------------------------------ Burt Sugarman Director /s/ RONALD B. MAGGARD - ------------------------------------------------ Ronald B. Maggard Director /s/ WILLIE D. DAVIS - ------------------------------------------------ Willie D. Davis Director /s/ DAVID GOTTERER - ------------------------------------------------ David Gotterer Director
54 EXHIBIT INDEX EXHIBIT DESCRIPTION ------- ----------- ** 3.7 Certificate of Incorporation of Checkers of Puerto Rico, Inc. a wholly-owned subsidiary of the Registrant, dated March 17, 2000. ** 3.8 Certificate of Merger of Merger Acquisition Corporation 1, a wholly-owned subsidiary of the Registrant, dated June 8, 2000. ** 3.9 Certificate of Merger of ZDT Corporation, a wholly-owned subsidiary of the Registrant, dated June 8, 2000. ** 3.10 Certificate of Merger of Hampton Foods, Inc., a wholly-owned subsidiary of the Registrant, dated June 9, 2000. ** 10.12 Asset Purchase Agreement between the Registrant and Titan Holdings, LLC, dated January 26, 2000. ** 10.13 Asset Purchase Agreement between the Registrant and Altes, LLC, dated April 24, 2000. ** 10.14 Amended and restated 1994 Stock Option Plan, as amended and restated on September 15, 2000. ** 10.15 Amended and restated 1991 Stock Option Plan, as amended and restated on September 15, 2000. ** 10.16 Employment Agreement, dated November 20, 2000, between the Registrant and Daniel J. Dorsch. ** 23.1 Consent of KPMG LLP. ** Filed herewith EX-3.7 2 0002.txt EXHIBIT 3.7 [seal] GOVERNMENT OF PUERTO RICO DEPARTMENT OF STATE SAN JUAN, PUERTO RICO I, Gricel Falgas Rodriguez, Assistant Director, Corporate and Trademark Registries of the Department of State of the Government of Puerto Rico. CERTIFY: That "CHECKERS OF PUERTO RICO, INC.", file 113,703, is a corporation organized under the laws of Puerto Rico on MARCH 17, 2000 AT 3:02 P.M.. [seal] IN WITNESS WHEREOF, the undersigned by virtue of the authority vested by law, hereby issues this certificate and affixes the Great Seal of the Commonwealth of Puerto Rico, in the City of San Juan, today 15th June of the year two-thousand. /s/ GRICEL FALGAS RODRIGUEZ [ILLEGIBLE] --------------------------------------- Gricel Falgas Rodriguez Assistant Director Corporate and Trademark Registries /cv EX-3.8 3 0003.txt EXHIBIT 3.8 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE --------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF OWNERSHIP, WHICH MERGES: "MERGER ACQUISITION CORPORATION 1", A KENTUCKY CORPORATION, WITH AND INTO "CHECKERS DRIVE-IN RESTAURANTS, INC." UNDER THE NAME OF "CHECKERS DRIVE-IN RESTAURANTS, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE EIGHTH DAY OF JUNE, A.D. 2000, AT 9 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ EDWARD J. FREEL ----------------------------------- EDWARD J. FREEL, SECRETARY OF STATE AUTHENTICATION: 0488615 DATE: 06-09-00 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 06/08/2000 001293933 - 2272161 CERTIFICATE OF OWNERSHIP AND MERGER MERGING MERGER ACQUISITION CORPORATION 1 INTO CHECKERS DRIVE-IN RESTAURANTS, INC. (Pursuant to Section 253 of the Delaware General Corporation Law) CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation (the "Corporation"), does hereby certify: FIRST, that the Corporation is incorporated pursuant to the Delaware General Corporation Law. SECOND, that the Corporation owns all of the outstanding shares of each class of the capital stock of Merger Acquisition Corporation 1, a Kentucky corporation (the "Subsidiary"), the laws of which state permit a corporation of such state to merge with a corporation of another state. THIRD, that the Corporation, by the following resolutions of its Board of Directors, duly adopted on May 31, 2000, determined to merge into itself the Subsidiary, effective at 11:59pm on May 31, 2000, on the conditions set forth in such resolutions: RESOLVED, that the Corporation merge into itself the Subsidiary, and assume all of the Subsidiary's liabilities and obligations, effective at 11:59pm on May 31, 2000, in accordance with the Agreement of Merger and Plan of Reorganization presented to the Board; FURTHER RESOLVED, that Theodore Abajian, Senior Vice President and Chief Financial Officer of the Corporation, be and he hereby is directed to make, execute, and acknowledge a Certificate of Ownership and Merger for the State of Delaware and Articles of Merger for the State of Kentucky setting forth a copy of the resolution to merge the Subsidiary into the Corporation and to assume the Subsidiary's liabilities and obligations and the date of adoption thereof and to file the same in the offices of the Secretaries of State of Delaware and Kentucky, respectively. IN WITNESS WHEREOF, Checkers Drive-In Restaurants, Inc. has caused its corporate seal to be affixed and this Certificate to be signed by Theodore Abajian, its authorized officer, this 31st day of May, 2000. CHECKER DRIVE-IN RESTAURANTS, INC. By: /s/ THEODORE ABAJIAN ------------------------------------------- Theodore Abajian, Senior Vice President and Chief Financial Officer Attest: /s/ ANDREW D. SIMONS ---------------------------------------- Andrew D. Simons, Senior Vice President, General Counsel and Secretary [SEAL] STATE OF FLORIDA COUNTY OF PINELLAS The foregoing instrument was acknowledged before me on this 31st day of May, 2000, by THEODORE ABAJIAN, Senior Vice President and Chief Financial Officer and ANDREW D. SIMONS, Senior Vice President, General Counsel and Secretary of CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation, on behalf of the corporation, who states that the foregoing is the act and deed of the corporation and that the facts stated therein are true. They are personally known to me. /s/ BRIAN R. DOSTER --------------------------------------- NOTARY PUBLIC Name: ---------------------------------- My Commission Expires: ----------------- [NOTARY SEAL] EX-3.9 4 0004.txt EXHIBIT 3.9 STATE OF DELAWARE OFFICE OF THE SECRETARY OF THE STATE ------------------------------------------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF OWNERSHIP, WHICH MERGES: "ZDT CORPORATION", A MISSOURI CORPORATION, WITH AND INTO "CHECKERS DRIVE-IN RESTAURANTS, INC." UNDER THE NAME OF "CHECKERS DRIVE-IN RESTAURANTS, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE EIGHTH DAY OF JUNE, A.D. 2000, AT 9:01 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ EDWARD J. FREEL ----------------------------------- EDWARD J. FREEL, SECRETARY OF STATE AUTHENTICATION: 0488621 DATE: 06-09-00 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:01 AM 06/08/2000 001293953 - 2272161 CERTIFICATE OF OWNERSHIP AND MERGER MERGING ZDT CORPORATION INTO CHECKERS DRIVE-IN RESTAURANTS, INC. (Pursuant to Section 253 of the Delaware General Corporation Law) CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation (the "Corporation"), does hereby certify: FIRST, that the Corporation is incorporated pursuant to the Delaware General Corporation Law. SECOND, that the Corporation owns all of the outstanding shares of each class of the capital stock of ZDT Corporation, a Missouri corporation (the "Subsidiary"), the laws of which state permit a corporation of such state to merge with a corporation of another state. THIRD, that the Corporation, by the following resolutions of its Board of Directors, duly adopted on May 31, 2000, determined to merge into itself the Subsidiary, effective at 11:59pm on May 31, 2000, on the conditions set forth in such resolutions: RESOLVED, that the Corporation merge into itself the Subsidiary, and assume all of the Subsidiary's liabilities and obligations, effective at 11:59pm on May 31, 2000, in accordance with the Agreement of Merger and Plan of Reorganization presented to the Board; FURTHER RESOLVED, that Theodore Abajian, Senior Vice President and Chief Financial Officer of the Corporation, be and he hereby is directed to make, execute, and acknowledge a Certificate of Ownership and Merger for the State of Delaware and Articles of Merger for the State of Missouri setting forth a copy of the resolution to merge the Subsidiary into the Corporation and to assume the Subsidiary's liabilities and obligations and the date of adoption thereof and to file the same in the offices of the Secretaries of State of Delaware and Missouri, respectively. IN WITNESS WHEREOF, Checkers Drive-In Restaurants, Inc. has caused its corporate seal to be affixed and this Certificate to be signed by Theodore Abajian, its authorized officer, this 31st day of May, 2000. CHECKERS DRIVE-IN RESTAURANTS, INC. By: /s/ THEODORE ABAJIAN ------------------------------------------- Theodore Abajian, Senior Vice President and Chief Financial Officer Attest: /s/ ANDREW D. SIMONS ---------------------------------------- Andrew D. Simons, Senior Vice President, General Counsel and Secretary [SEAL] STATE OF FLORIDA COUNTY OF PINELLAS The foregoing instrument was acknowledged before me on this 31st day of May, 2000, by THEODORE ABAJIAN, Senior Vice President and Chief Financial Officer and ANDREW D. SIMONS, Senior Vice President, General Counsel and Secretary of CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation, on behalf of the corporation, who states that the foregoing is the act and deed of the corporation and that the facts stated therein are true. They are personally known to me. /s/ BRIAN R. DOSTER -------------------------------------- NOTARY PUBLIC Name: --------------------------------- My Commission Expires: --------------- [NOTARY SEAL] EX-3.10 5 0005.txt EXHIBIT 3.10 STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE ----------------------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF OWNERSHIP, WHICH MERGES: "HAMPTON ROADS FOODS, INC.", A LOUISIANA CORPORATION, WITH AND INTO "CHECKERS DRIVE-IN RESTAURANTS, INC." UNDER THE NAME OF "CHECKERS DRIVE-IN RESTAURANTS, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE NINTH DAY OF JUNE, A.D. 2000, AT 9 O'CLOCK A.M. A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS. [SEAL] /s/ EDWARD J. FREEL ----------------------------------- EDWARD J. FREEL, SECRETARY OF STATE AUTHENTICATION: 0490712 DATE: 06-12-00 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 06/09/2000 001295960 - 2272161 CERTIFICATE OF OWNERSHIP AND MERGER MERGING HAMPTON ROADS FOODS, INC. INTO CHECKERS DRIVE-IN RESTAURANTS, INC. (Pursuant to Section 253 of the Delaware General Corporation Law) CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation (the "Corporation"), does hereby certify: FIRST, that the Corporation is incorporated pursuant to the Delaware General Corporation Law. SECOND, that the Corporation owns all of the outstanding shares of each class of the capital stock of Hampton Roads Foods, Inc., a Louisiana corporation (the "Subsidiary"), the laws of which state permit a corporation of such state to merge with a corporation of another state. THIRD, that the Corporation, by the following resolutions of its Board of Directors, duly adopted on May 18, 2000, determined to merge into itself the Subsidiary, effective at 11:59pm on May 31, 2000, on the conditions set forth in such resolutions: RESOLVED, that the Corporation merge into itself the Subsidiary, and assume all of the Subsidiary's liabilities and obligations, effective at 11:59pm on May 31, 2000: FURTHER RESOLVED, that Theodore Abajian, Senior Vice President and Chief Financial Officer of the Corporation, be and he hereby is directed to make, execute, and acknowledge a Certificate of Ownership and Merger for the State of Delaware and a Certificate of Merger for the State of Louisiana setting forth a copy of the resolution to merge the Subsidiary into the Corporation and to assume the Subsidiary's liabilities and obligations and the date of adoption thereof and to file the same in the offices of the Secretaries of State of Delaware and Louisiana, respectively. IN WITNESS WHEREOF, Checkers Drive-In Restaurants, Inc. has caused its corporate seal to be affixed and this Certificate to be signed by Theodore Abajian, its authorized officer, this 31st day of May, 2000. CHECKERS DRIVE-IN RESTAURANTS, INC. By: /s/ THEODORE ABAJIAN --------------------------------------- Theodore Abajian, Senior Vice President and Chief Financial Officer Attest: /s/ ANDREW D. SIMONS ---------------------------------------- Andrew D. Simons, Senior Vice President, General Counsel and Secretary [seal] STATE OF FLORIDA COUNTY OF PINELLAS The foregoing instrument was acknowledged on this 31st day of May, 2000, by THEODORE ABAJIAN, Senior Vice President and Chief Financial Officer and ANDREW D. SIMONS, Vice President, General Counsel and Secretary of CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation, on behalf of the corporation, who states that the foregoing is the act and deed of the corporation and that the facts stated therein are true. He is personally known to me. /s/ BRIAN R. DOSTER ---------------------------------- NOTARY PUBLIC Name: ----------------------------- My Commission Expires: ------------ [notary seal] EX-10.12 6 0006.txt EXHIBIT 10.12 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into effective as of the 26th day of January, 2000, by and among TITAN HOLDINGS, L.L.C., a Michigan Limited Liability Company ("Buyer"), MARK MITCHELL ("Owner") and CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation ("Seller") (Buyer, Owner and Seller are referred to herein individually as a "Party" and collectively as the "Parties"). RECITALS WHEREAS, Seller is the owner and operator of the Checkers Drive-In Restaurants and/or Rally's Restaurants described on Exhibit A (each of the Restaurants listed on Exhibit A are referred to herein individually as a "Restaurant" and collectively as the "Restaurants"); WHEREAS, Seller desires to sell and transfer to Buyer and Buyer desires to purchase from Seller substantially all of the assets attributable or pertaining to the Restaurants, Seller desires to sell, lease and/or sublease to Buyer, and Buyer desires to purchase, lease and/or sublease from Seller, the real properties on which the Restaurants are situated, all upon the terms and subject to the conditions set forth in this Agreement, and Seller and Buyer desire to enter into Checkers Drive-In Restaurant's, Inc. Franchise Agreements and/or Rally's Restaurant Franchise Agreements, whichever is/are applicable, for the continued operation of the Restaurants by Buyer as Checkers Drive-In Restaurants and/or Rally's Restaurants (the "Franchise Agreements"), and Seller and Buyer desire to enter into Checkers Drive-In Restaurant's, Inc. Area Development Agreements and/or Rally's Area Development Agreements, whichever is/are applicable, for development by Buyer of new properties as Checkers Drive-In Restaurants and/or Rally's Restaurants (the "Area Development Agreements"); and WHEREAS, Owner is the principal owner of Buyer and will realize substantial benefits from the transactions contemplated by this Agreement and, as an inducement for Seller to enter into this Agreement, has agreed to guarantee the obligations of Buyer under the Franchise Agreements to be issued and executed pursuant to this Agreement and otherwise only as specifically and explicitly set forth and agreed in writing in Section 13.11 of this Agreement or elsewhere. NOW, THEREFORE, in consideration of the premises, of the mutual covenants, agreements, representations and warranties contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows: ARTICLE I PURCHASE AND SALE 1.01 PURCHASE AND SALE OF ASSETS. At the Closing (as hereinafter defined), Seller hereby agrees to sell, transfer, convey, assign and deliver to Buyer and Buyer agrees to purchase, acquire and assume from Seller, all of Seller's right, title and interest in and to the following assets of Seller (collectively, the "Purchased Assets"): (a) FIXED ASSETS. All machinery, equipment, furniture, fixtures, tools, signs and other items of tangible personal property (excluding Inventory) physically located at the Restaurants as of the effective date of this Agreement (the "Fixed Assets"). (b) INVENTORY. All inventories of food products, paper products, operational supplies, uniforms, disposable items, heating fuel, cleaning materials and other items of consumable and/or expendable materials and supplies in the Restaurants on the Closing Date (as hereinafter defined) (the "Inventory"). (c) PERMITS AND LICENSES. All permits, licenses, consents and authorizations which are necessary or required for the operation, use and/or ownership of the Restaurants and/or Purchased Assets, but only to the extent that the same are transferable and assignable by Seller to Buyer (the "Permits and Licenses"). (d) CHANGE FUND. All cash in the cash registers of the Restaurants at the close of business on the day immediately prior to the Closing Date (the "Change Fund"). (e) CONTRACT RIGHTS. All of Seller's right, title and interest in and to the contracts, leases and commitments listed on EXHIBIT 1.01(e) together with any other unexpired, executory contract rights directly pertaining to the operation of any of the Restaurants that Seller has entered into in the ordinary course of that Restaurant's business (the "Assumed Contracts"). Seller will, during the Due Diligence Review process (as hereinafter defined), make a good faith effort to present all contracts, leases and commitments that exist to Buyer, and Seller will, during the preparation of the Exhibits to this Agreement make a good faith effort to include all contracts, leases and commitments that exist on the EXHIBIT 1.01(e) list. Except as limited by operation of Section 1.05 hereof, the contract rights and obligations hereby transferred shall, however, include all unexpired, executory rights and obligations that have arisen in the ordinary course of business at the Restaurants even if omitted from the Due Diligence Review materials or the EXHIBIT 1.01(e) list, provided that such omission is inadvertent by Seller and the omitted right or obligation is not material given the scope of this transaction. (f) FEE PROPERTY. All of Seller's right, title and interest in and to each parcel of real property, together with all buildings, improvements and fixtures thereon, identified on EXHIBIT A as a "Fee Real Property" (collectively, the "Fee Real Properties"). (g) COMPUTER SOFTWARE. Any computer software to the extent now loaded onto any of the above Fixed Assets or stored at any of the Restaurants, including specifically a license to any copies of Seller's proprietary CHAMPS/BOS located at any of the Restaurants, excluding however any third-party software the license for which precludes such transfer. In order to acquire the license to the CHAMPS/BOS software, Buyer shall 2 execute Seller's standard Software License Agreement, a copy of which is attached hereto as Exhibit l.01(g), which, except as specifically provided herein shall govern the rights and obligations of the Parties concerning the installation of, training for, use of, performance of, upgrades to, and payment for, said CHAMPS/BOS software. Seller warrants that its CHAMPS/BOS software has been properly installed at each Restaurant, and that it functions, and may be utilized, to the extent provided in the Software License Agreement. With respect to the Restaurants, Seller agrees that the normal one-time charge for installation of the CHAMPS/BOS software is set forth in Section 3(a) of the Software License Agreement is included in the Purchase Price. Seller also agrees that the training charges set forth in Section 3(b) of the Software License Agreement for the use of this software are included in the Purchase Price except insofar as Buyer may elect to avail itself of training on the use of this software. Monthly software maintenance charges shall, however, be due from Buyer in accordance with Section 3(c) of the Software License Agreement so long as Buyer continues to utilize this software. The license for and rights to any third party software that may have been installed at any of the Restaurants shall also transfer at no charge to Buyer to the extent transferable under the third-party license for such software; however, the existence of any such third-party software is agreed by the Parties to be fortuitous and immaterial to the value and functional use of any of the Restaurants, and Seller does not itself make any representation or warranty with regard to the proper installation or functionality of any third-party software. (h) BUSINESS RECORDS. All of the business records related to each of the Restaurants (the "Business Records") physically located at the Restaurants as of the effective date of this Agreement. Buyer shall also have the right to make keep copies of any other business records that are received or reviewed during the course of Buyer's Due Diligence Review (described below in Section 5.03). (i) COMPUTERS AND OFFICE EQUIPMENT. All of the laptop computers, fax machines, copy machines and printers now owned by Seller that are either now physically located at the Restaurants, or are now in the possession of any Seller's area managers now assigned to the Restaurants, or are now in the possession of either David Berlin or Tom Butts. 1.02 EXCLUDED ASSETS. The Purchased Assets shall include only the assets expressly listed in Section l.01 and, except as specifically provided, shall not include any other assets of any kind, including but not limited to, the following assets of Seller: cash on hand or in banks, other than the Change Fund; checks, drafts or other negotiable instruments; accounts receivable; refunds, rebates and credits due to Seller; and executory commitments for the purchase of materials, services or supplies or other real or personal property not related to or physically present at the Restaurants (collectively, the "Excluded Assets"). 1.03 CONDITION OF ASSETS. Except as otherwise warranted by Seller in this Agreement, all of the Purchased Assets are being sold and transferred by Seller to Buyer and purchased by Buyer from Seller in "AS IS" condition and "with all faults." EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, SELLER DISCLAIMS ALL WARRANTIES CONCERNING THE 3 PURCHASED ASSETS, STATUTORY, EXPRESS, AND IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND ANY OTHER WARRANTY OF QUALITY IN RESPECT OF THE PURCHASED ASSETS, AND THERE ARE NO OTHER WARRANTIES, STATUTORY, EXPRESS, OR IMPLIED THAT EXTEND BEYOND THE WARRANTIES CONTAINED IN THIS AGREEMENT. Buyer and Owner acknowledge that they are in the business of operating restaurants and that they have examined the Purchased Assets to their satisfaction in light of Seller's foregoing disclaimer of warranties. 1.04 TRANSFERS OF REAL PROPERTY. At Closing, Seller shall convey to Buyer each parcel of Fee Real Property pursuant to a deed, generally known as a "special warranty deed", substantially in the form attached hereto as EXHIBIT 1.04(i) (the "Deeds") conveying all right, title and interest in and to such Fee Real Property, subject only to the Permitted Title Exceptions (as hereinafter defined) applicable to such Fee Real Property, and containing no warranty for any acts of any person other than Seller. Each Deed shall contain such modifications from the form attached hereto as EXHIBIT 1.04(i) as may be legally required or customary in the jurisdiction to which such Deed relates. At Closing, Seller shall lease to Buyer each parcel of real property designated on EXHIBIT A as a "Mortgaged Real Property" (collectively, the "Mortgaged Real Properties"), together with all buildings, improvements and fixtures thereon, pursuant to a lease substantially in the form attached hereto as EXHIBIT 1.04(ii) (the "Leases"). The Mortgaged Real Properties are those properties where Seller's fee ownership is encumbered by a mortgage that will not be removed at or prior to Closing. At Closing, Seller shall sublease to Buyer each parcel of real designated on EXHIBIT A as a "Leased Real Property" (collectively, the "Leased Real Properties"), together with all buildings, improvements and fixtures thereon, pursuant to a sublease substantially in the form attached hereto as EXHIBIT 1.04(iii) (the "Subleases"). Fee Real Properties, Mortgaged Real Properties and Leased Real Properties are referred to collectively as the "Properties". Except for the above referenced mortgage applicable to the Mortgaged Real Properties, the ongoing contractual obligations referenced herein, and the Permitted Title Exceptions (as hereinafter defined), all transfers of Real Property shall be free and clear of all mortgages and of all financing, tax, judgment, mechanics and other liens. Owner shall not be required to personally guaranty any of the Leases or Subleases. 1.05 ASSUMPTION OF LIABILITIES. At the Closing, Buyer shall assume, discharge and become liable for all liabilities and obligations arising after the Closing Date under the Assumed Contracts, but only to the extent that such liabilities or obligations are based upon or attributable to goods or services provided or benefits received on or after the Closing Date under such Assumed Contracts (the "Post-Closing Obligations). The Buyer shall indemnify the Seller from any claims, losses, liabilities, damages or expenses (including attorney's fees) incurred by the Seller as a result of the failure of the Buyer to pay and perform any such Post-Closing Obligations when and as due. The Seller shall remain responsible for and shall pay and perform when and as due all liabilities and obligations under the Assumed Contracts to the extent that such liabilities or obligations are based upon or attributable to goods or services provided or benefits received under the Assumed Contracts prior to the Closing Date (the "Pre-Closing Obligations"). The Seller shall indemnify the Buyer from any claims, losses, liabilities, damages or expenses (including attorney's fees), incurred by the Buyer as a result of the failure of the Seller to pay and perform any such Pre-Closing Obligations 4 when and as due. Except for the Post-Closing Obligations under the Assumed Contracts, the Buyer is not assuming and shall not be responsible for any other liabilities or obligations of the Seller with respect to any of the Restaurants or the Purchased Assets (the "Unassumed Obligations"). The Seller agrees to indemnify the Buyer from any claims, losses, liabilities, damages or expenses (including attorney's fees) incurred by the Buyer as a result of the failure of the Seller to pay, perform or otherwise satisfy any such Unassumed Obligations. ARTICLE II PURCHASE PRICE 2.01 PURCHASE PRICE. (a) The purchase price ("Purchase Price") for the Purchased Assets shall be the value of the Inventory and the Change Fund on the Closing Date plus the sum of Ten Million Two Hundred Fifty Thousand Dollars ($10,250,000.00), which shall be payable by Buyer to Seller as follows: (i) Buyer has deposited into escrow with Seller's attorney Twenty Thousand Dollars ($20,000.00), which shall be applied to the Purchase Price at the Closing (the "Initial Escrow Deposit"); (ii) Buyer shall deposit into escrow with Fidelity (as defined below) within seventy-two (72) hours of the execution of this Agreement (but not later than Closing) the sum of One Hundred Thousand Dollars ($100,000.00), which shall be applied to the Purchase Price at the Closing (the "Subsequent Escrow Deposit," and together with the Initial Escrow Deposit, the "Escrow Deposit"); (iii) Buyer shall execute and deliver to Seller at the Closing a five (5) year Promissory Note, not personally guaranteed, amortized over eight (8) years, in the form attached hereto as EXHIBIT 2.01(a), in the original principal amount of One Million Five Hundred Thousand Dollars ($1,500,000.00), at 8.75% interest, accrual of which interest and payments of interest and principal shall commence six (6) months after Closing (the "Promissory Note"); (iv) Buyer shall pay to Seller at the Closing the sum of Eight Million Six Hundred Thirty Thousand Dollars ($8,630,000.00) by wire transfer of immediately available funds; and (v) Buyer shall pay to Seller, on or before the dates specified in Section 2.01(b), the values of the Inventory and of the Change Fund as of the Closing Date (the "Inventory Value and Change Fund Value). Contemporaneously with the execution of this Agreement, the Escrow Deposit component payments shall be sent to Fidelity National Title Insurance Company, to the attention of Patty Beverly, 1300 Dove Street, Suite 300, Newport Beach CA 92660 ("Fidelity"), and held by Fidelity in one or more interest bearing escrow accounts pursuant to Section 2.06 hereof. If the deposits are paid by check, these checks should be made out to Fidelity. Any deposits paid by checks made out to Seller or Seller's Attorney shall be voided and returned and replaced with checks made out to Fidelity. (b) The Inventory Value and Change Fund Value shall be determined as follows: (i) On or before the Closing Date, pursuant to a mutually agreed upon schedule, representatives of both Buyer and Seller shall conduct a physical inventory of all cash 5 registers and all items of Inventory at the Restaurants. Alternatively, if the Parties elect and agree, the performance of this inventory process may be delegated to a third-party (with any expense for such split evenly between Buyer and Seller). Not less than one (1) day prior to the Closing Date, Seller shall present to Buyer a written document setting forth Seller's estimations of the Inventory and of the Inventory Value and of the Change Fund Value. The Inventory Value as of such time shall then be determined by the then current price lists of the then current vendors to the Restaurants; provided, however, that with respect to new uniforms included in the Inventory, Buyer shall pay the full invoice price paid by Seller for such new uniforms, and with respect only to uniforms currently used by Restaurant employees included in the Inventory, Buyer shall pay one-half of the full invoice price paid by Seller for such uniforms. Buyer shall thereafter have eight (8) business days within which to review the written documents setting forth the Inventory and the estimated Inventory Value and the estimated Change Fund Value and the work papers of Seller utilized in calculating the Inventory and these estimates (which will be furnished to Buyer promptly on request) for purposes of verifying the accuracy and fairness of the Inventory Value and Change Fund Value. The Inventory Value and Change Fund Value estimated by Seller shall both be binding on Buyer unless Buyer presents to Seller written notice of disagreement on or before the eighth (8th) business day following the Closing Date, specifying in reasonable detail, insofar as feasible, the nature and extent of Buyer's disagreement. If Buyer does not provide to Seller such written notice of disagreement on or before such date, or if Buyer does deliver such written notice of disagreement on or before such date but does not pay to the Seller the amount required under Section 2.01(b)(ii) in connection with the delivery of such notice, then the Inventory Value and Change Fund Value determined by the Seller shall be binding upon the Buyer and shall not be subject to any further challenge or disagreement. If the Buyer does provide to Seller such written notice of disagreement on or before such date and pays to the Seller the amount specified in Section 2.01(b)(ii) in connection with the delivery of such notice, then the parties agree to use their good faith efforts to resolve any disagreement regarding the Inventory Value and Change Fund Value within fifteen (15) business days after the Seller receives written notice of such disagreement. If the Parties do not resolve such disagreement on or before the twentieth (20th) business day following the Closing Date, then the final determination of the Inventory Value and Change Fund Value shall be submitted to a mutually acceptable, independent, certified public accountant (the "Accountant") for resolution. To that end, on or before the twenty-fifth (25th) business day following the Closing Date, each Party shall submit to the Accountant a written statement of its computation of the Inventory Value and Change Fund Value. The Accountant, based upon such written statements and upon such other information as an Accountant deems necessary or appropriate, shall choose either the Seller's or the Buyer's computation of the Inventory Value and Change Fund Value (but not any compromise of those computations) as the more accurate computation of the Inventory Value and Change Fund Value. The fees payable to the Accountant for such determination to be paid by the Party whose proposed computation of the Inventory Value and Change Fund Value was not chosen by the Accountant as the more accurate computation. The determination of the Accountant shall be conclusive and binding upon the Seller and the Buyer and shall not be subject to any challenge or appeal. (ii) The Change Fund Value shall be paid in full on the eighth (8th) business 6 day following the Closing Date, and the Inventory Value shall be paid in full on the thirtieth (30th) calendar day following the Closing Date; provided, however, that if, on or before the eighth business day following the Closing Date, the Buyer (pursuant to Section 2.01(b)(i) delivers a written notice of disagreement to the Seller, then the Buyer shall pay to the Seller not later than by the deadlines set forth above in this section those portions of the Inventory Value and Change Fund Value with which Buyer does not disagree, and the Buyer shall pay to the Seller any remaining portion of the Inventory Value and Change Fund Value ultimately determined to be payable upon resolution of such disagreement within two (2) business days following the date of resolution of that disagreement. (iii) The amount payable by the Buyer to the Seller for the Inventory Value shall be paid directly to Seller by check or wire transfer of immediately available funds not later than the date provided in Section 2.01(b)(2) above. 2.02 FRANCHISE FEES; DEVELOPMENT FEES. The Purchase Price includes the Twenty Five Thousand Dollar ($25,000.00) Initial Franchise Fee per Restaurant set forth in Section 6.01 of the Franchise Agreements to be entered into at Closing, and no additional consideration for Initial Franchise Fees shall be owed by Buyer under said Franchise Agreements. The Purchase Price also includes the Five Thousand Dollar ($5,000.00) Development Fee per Restaurant set forth in Section 2.01 and EXHIBIT A to the Development Agreements attached hereto for each restaurant listed therein, and no additional consideration for Development Fees shall be owed by Buyer under said Development Agreements. Any Franchise Fees and Development Fees other than the above referenced fees are not waived, and shall be due from Buyer in accordance with the provisions of the applicable Franchise Agreements and Development Agreements respectively. If Buyer elects to franchise or develop any additional restaurants beyond those listed in the Franchise Agreements and Development Agreements attached hereto, and Buyer and Seller reach agreement regarding such additional restaurants, Buyer shall pay the identified Franchise Fees and Development Fees set forth in the Franchise Agreements and/or Development Agreements applicable to those additional restaurants. 2.03 PRORATIONS AND ADJUSTMENTS. The Purchase Price shall be subject to adjustment at Closing for payments due under the Assumed Contracts, real and personal property taxes and assessments, utilities and other similar items. The prorations shall be calculated based on the actual amounts of the 1999/2000 real and personal property taxes and assessments. The prorations shall be computed as of the Closing Date based upon the fiscal periods to which such property taxes and assessments apply under statute or ordinance (or if the fiscal periods are not specified under such statute or ordinance, in accordance with the prevailing practice of the municipalities in which the Restaurants are located). If such amounts are not available, the prorations shall be calculated based on the 1998 amounts, subject to re-proration when the actual amounts become available. Rents and other charges paid or due under any Assumed Contract and any other expense for the month of Closing will be prorated between Seller and Buyer, and Buyer shall in addition provide a _________________ (____) short-term promissory note in the form attached hereto as EXHIBIT 2.03, at 8.75% interest and personally guaranteed by Owner, for payment of the first full month's rent (the "Short-Term Promissory Note"). Buyer shall pay to Seller at the Closing an amount equal to the 7 sum of all prepaid expenses and deposits associated with any Restaurant. In addition, Buyer shall pay Seller a prorated amount, as of the Closing Date, for all prepaid real and personal property taxes and assessments for the calendar year 2000. A credit will also be issued at Closing to reflect whether the Seller's contributions into the cooperative advertising funds for the applicable markets on behalf of the Restaurants then exceed or are deficient with respect to the net amounts then due. Seller shall be entitled to a credit for any monies that Seller has already paid that are not yet due; Buyer shall be entitled to a credit for any monies then due from Seller that have not yet been paid. Buyer will thereafter assume responsibility to make all cooperative advertising payments on behalf of the Restaurants into the applicable funds, including making up any shortfalls that may have existed as of the Closing Date. 2.04 TRANSFER AND OTHER EXPENSES AND OTHER TAXES. Transfer fees, taxes and expenses, if any, on the Leases and Subleases and the transfer of the Purchased Assets by Seller to Buyer shall be paid by Buyer. All costs associated with title commitment, title insurance and related matters, surveys, environmental reviews, inspections and similar due diligence and other items shall be paid by Buyer. All applicable federal, state and local taxes payable in connection with the transactions contemplated by this Agreement other than those for which some specific provision is made in this Agreement shall be paid by the Party against which such tax is assessed under the provisions of that statute, or under the regulations implementing that statute; provided, however, that if provision is not made in such statute or regulation for the party by whom such tax is payable, then that tax will be divided equally between the Buyer and the Seller. 2.05 ALLOCATION OF PURCHASE PRICE. Seller and Buyer agree that for U.S. federal income tax purposes, the Purchase Price shall be allocated as set forth on EXHIBIT 2.05. Seller and Buyer agree that said allocation of the Purchase Price shall be used by Seller and Buyer in reporting the transactions covered by this Agreement for income tax purposes and that each shall file an Asset Acquisition Statement (Form 8594) with the Internal Revenue Service consistent with EXHIBIT 2.05. 2.06 ESCROW, ESCROWED FUNDS AND CLOSING STATEMENT. All payments due between the parties in connection with completing and closing this transaction shall be paid to or forwarded through Fidelity, which shall hold the monies, in one or more interest bearing escrow accounts, and which shall pay the net proceeds due to Seller hereunder upon Closing, or refund monies to Buyer, pursuant to Section 5.01 and as otherwise provided herein. Payments at Closing (as defined in Section 5.01) shall be made pursuant to a closing statement that has been agreed to by the Parties at time of Closing, which closing statement shall have been prepared by Fidelity from information supplied by the Parties. Escrow fees shall be paid in equal parts by Buyer and Seller. The Parties shall, in good faith, provide any tax ID and other information and execute any documents or instructions reasonably required to facilitate the handling of this matter by Fidelity. Where documents or monies are delivered directly between the parties, whether prior to, at or subsequent to Closing, they shall provide confirmation of such if and as reasonably requested by Fidelity. Interest earned in any account shall be paid to the Party who eventually receives the principal contained therein and shall be paid to said party by Fidelity together with the principal due from the account. Where the paying party and the receiving Party are different, the paying Party shall receive credit for 8 the principal amount. Fidelity shall not be required to assess the adequacy and sufficiency or the Parties' respective performances or documents, and may rely upon the Parties' respective representations concerning such, which representations in good faith shall be given by the Parties when due. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer (each of which shall be deemed material and independently relied upon by Buyer and each of which is as of the date of this Agreement and shall be as of the Closing Date accurate and complete in all material respects) as follows: 3.01 ORGANIZATION AND STANDING. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and assets and to conduct its business as now conducted or proposed to be conducted. 3.02 CORPORATE AUTHORITY. Seller has the full power and authority to enter into and perform this Agreement and to consummate the transactions contemplated by this Agreement in accordance with the terms of this Agreement. 3.03 CORPORATE AUTHORIZATION; BINDING AGREEMENT. Seller has taken all necessary corporate actions to authorize and approve the execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement. This Agreement constitutes a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms. 3.04 TITLE TO PURCHASED ASSETS. As of the Closing Date, Seller will have good title to all of the Purchased Assets, free of any lien, encumbrance or charge except, in the case of the Assumed Contracts, the charge for the Post Closing Obligations. 3.05 FINANCIAL STATEMENTS. Seller has provided to Buyer the financial statements (balance sheet, income statement, cash flow statement and related schedules) for each Restaurant for the 1998 calendar year and for the most recent thirteen (13) monthly periods (the "Financial Statements"). Each of those Financial Statements is accurate and complete in all material respects. 3.06 ASSUMED CONTRACTS. Seller has delivered to Buyer copies of each of the Assumed Contracts. Each copy of an Assumed Contract delivered by Seller to Buyer is accurate and complete in all respects and no commitments or waivers, oral or written, have been made with respect to any such Assumed Contracts which are not expressly set forth in such copies. Seller is not as of the date of this Agreement and will not be as of the Closing Date in breach of any of its obligations under any Assumed Contract. To Seller's knowledge, the other party to each Assumed Contract is not as of the date of this Agreement and will not be as of the Closing Date in breach of any of its obligations under such Assumed Contract. 9 3.07 COMPLIANCE WITH APPLICABLE LAWS. The conduct of the business at each of the Restaurants prior to the Closing Date will have complied in all material respects with all federal, state and local laws, statutes, ordinances and regulations. Without limiting the generality of the foregoing, Seller, in its conduct of the business of each of the Restaurants prior to the Closing Date, will have complied in all material respects with all statutes, ordinances and regulations pertaining to the employment of personnel at the Restaurants and all statutes, ordinances and regulations pertaining to the receipt, handling and disposal of materials which may result in any contamination to the environment. 3.08 GENERAL REPRESENTATIONS AND REPRESENTATIONS CONCERNING LITIGATION. Buyer and Owner have been provided the Checkers Drive-In Restaurants, Inc. Uniform Franchise Offering Circular dated September 29, 1999, and the Rally's Restaurant Uniform Franchise Offering Circular dated September 29, 1999 (the "UFOCs"). Neither Seller nor any representative of Seller makes any representations or statements of projected or forecasted sales, profits or earnings of the Restaurants or any other Seller restaurants, and Seller reminds Buyer that future sales, profits and earnings at the Restaurants may be more or less than past sales, profits and earnings. In making its decision to proceed with this transaction, Seller relies upon Buyer's representation that it has not relied on any financial information provided by Seller or any other third-party other than what is contained in the above Financial Statements and in the UFOCs. Seller acknowledges, contrary to what is reported in the UFOCs, that Daniel J. Dorsch is now the Chief Executive Officer of Seller. Except as set forth in the UFOCs, there is no suit, action, proceeding (legal, administrative, or otherwise), claim, investigation, or inquiry (by an administrative agency, governmental body, or otherwise) pending or, to Seller's knowledge, threatened by, against, or otherwise involving Seller as a party, or any of the Restaurants, assets, or the transactions contemplated by this Agreement, at law or in equity, or before or by any federal, state, municipal, or other governmental department, commission, board, agency, instrumentality, arbitration tribunal, or other authority, domestic or foreign, or to which Seller is or may become a party which, if determined adversely to Seller, would have a material adverse effect on the Restaurants, and, to Seller's knowledge, there is no factual basis upon which any suit, action, proceeding, claim, investigation, or inquiry could be asserted or based. Except as set forth in the UFOCs there is no material outstanding judgment, order, writ, injunction, or decree of any court, administrative agency, governmental body, or arbitration tribunal against or affecting the Restaurants. 3.09 EMPLOYEE DATA, RELATIONS AND BENEFIT PLANS. Seller represents that it shall remain liable with respect to any Restaurant employee's employee relations claims that relate to the time period that Seller operated the Restaurants and employed the particular employee, provided that Buyer has done nothing subsequently that results in such claim. Seller further represents that it shall remain liable with respect to any Restaurant employee's employee benefit claims that relate to the time period that Seller operated the Restaurants and employed the particular employee, provided that Buyer has done nothing subsequently that results in such claim. 10 3.10 TAX MATTERS. Seller has prepared and timely filed all federal, state and local tax returns and reports as are or have been required to be filed by Seller with respect to each of the Restaurants and has paid when and as due all taxes shown thereon to be due and payable. No claims are pending and, to Seller's knowledge, no claims are threatened by any federal, state or local governmental agency for any taxes relating to any of the Restaurants or the Purchased Assets. 3.11 BROKERS' FEES. Seller has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Buyer could become liable or obligated, other than fees and commissions owed to National Franchise Sales, which shall be the sole responsibility of Seller. 3.12 DISCLOSURE. To the best of Seller's knowledge, no representation or warranty by Seller in this Agreement or any Exhibits attached to this Agreement, and no other information furnished or to be furnished by Seller pursuant to this Agreement, contains or will contain any untrue statement of a material fact or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. 11 3.13 KNOWLEDGE AND OTHER LIMITATIONS. Certain of the representations and warranties of Seller are stated to be made "to the knowledge" of Seller or refer to what is "known" to Seller or of what Seller is "aware." All representations and warranties are made based upon, and limited to, the knowledge of Seller, whether expressly so stated in the particular representation and warranty or not. The Parties hereto agree that the meaning of such expressions shall with respect to Seller in all cases be understood as comprising the knowledge and belief of the corporate officers of Seller without any type of additional investigation thereof. All representations and warranties are limited in scope to the Restaurants, rather than to any other operations or assets of Seller, unless expressly so stated to the contrary in the particular representation or warranty, and all are limited in scope to material components thereof. Attached hereto as EXHIBIT 3.13 is a Disclosure Statement that lists certain facts that are exceptions or qualifications to various of the general Representations and Warranties or other factual statements recited in this Agreement. Seller does not imply by inclusion of any item on EXHIBIT 3.13 that Seller believes such to be material to this transaction or to any of the Purchased Assets. Any exceptions, qualifications, or other facts or events actually reported by Seller to Buyer, or discovered by Buyer, or otherwise actually known to Buyer, prior to expiration of the relevant time period prescribed below for Buyer's Due Diligence Review shall be deemed to have been included on EXHIBIT 3.13 whether or not they specifically there appear. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND OWNER Buyer and Owner, jointly and severally, represent and warrants to Seller (each of which shall be deemed material and independently relied upon by Seller and each of which is as of the date of this Agreement and shall be as of the Closing Date accurate and complete in all material respects) as follows: 4.01 ORGANIZATION AND STANDING OF BUYER. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Michigan with full power and authority to own its properties and assets and to conduct its business as now conducted or proposed to be conducted. 4.02 COMPANY AUTHORITY. Buyer has the full power and authority to enter into and perform this Agreement and to consummate the transactions contemplated by this Agreement in accordance with the terms of this Agreement. 4.03 COMPANY AUTHORIZATION; BINDING AGREEMENT. Buyer has taken all necessary corporate actions to authorize and approve the execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement. This Agreement constitutes a legal, valid and binding obligation of Buyer and Owner, enforceable against Buyer and Owner in accordance with its terms. 4.04 REPRESENTATIONS OF SELLER. Buyer and Owner have received and reviewed the 12 information contained in the Checkers Drive-In Restaurants, Inc. Uniform Franchise Offering Circular dated September 29, 1999, and in the Rally's Restaurant Uniform Franchise Offering Circular dated September 29, 1999, whichever is/are applicable (the "UFOCs"). Neither Seller nor any representative of Seller has made any representations or statements of projected or forecasted sales, profits or earnings of the Restaurants or any other Seller restaurants, and Buyer acknowledges that future sales, profits and earnings at the Restaurants may be more or less than past sales, profits and earnings. In making its decision to proceed with this transaction, Buyer has not relied on any information provided by Seller or any other third party other than what is contained in the UFOCs and/or this Agreement. 4.05 BROKERS' FEES. Buyer and Owner have no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Seller could become liable or obligated. 4.06 DISCLOSURE. To the best of Buyer's knowledge, no representation or warranty by Buyer in this Agreement or any Exhibits attached to this Agreement, and no other information furnished or to be furnished by Buyer pursuant to this Agreement, contains or will contain any untrue statement of material fact or omit to state a material fact necessary to make the statements contained herein or therein not misleading. 4.07 KNOWLEDGE AND OTHER LIMITATIONS. Certain of the representations and warranties of Buyer and Owner are stated to be made "to the knowledge" of Buyer and Owner or refer to what is "known" to Buyer and Owner or of what Buyer and Owner is "aware." A11 representations and warranties are made based upon, and limited to, the knowledge of Buyer and Owner, whether expressly so stated in the particular representation and warranty or not. The Parties hereto agree that the meaning of such expressions shall with respect to Buyer and Owner in all cases be understood as comprising the knowledge and belief of the company officers of Buyer without any type of additional investigation thereof. ARTICLE V COVENANTS OF SELLER AND BUYER Seller and Buyer each covenant with the other as follows: 5.01 THE CLOSING. The Closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Fidelity National Title Insurance Company, 1300 Dove Street, Suite 300, Newport Beach CA 92660 at noon local time on February 24, 2000, or such other place and time a$ Seller and Buyer may agree in writing (the "Closing Date"). All prorations and adjustments pursuant to Section 2.03 shall be calculated effective as of midnight (12 hours later) on the Closing Date. The actual changeover of operations, inventory, employment of personnel, receipts, expenses, and change fund entitlement shall be done effective either as of midnight (12 hours later) on the Closing Date or as of the end of business that night for each individual Restaurant, whichever is later. Any or all Parties may elect not to be physically present, including 13 having persons with adequate signing authority present, in the offices where the Closing is to take place on the Closing Date; however, in such case it shall be the responsibility of each not attending Party to have provided whatever executed and other documents, funds, and authorizations are necessary so that the Closing may properly and timely take place. The obligations of the Parties to close or effect the transactions contemplated by this Agreement will be subject to satisfaction, unless duly waived, of the applicable conditions set forth in this Agreement. If the Closing has not occurred by February 29, 2000, then Seller shall have the right, at any time thereafter, but prior to Closing, to terminate this Agreement pursuant to Section 11.01 and, in the absence of a material default by Seller, to retain the Deposit. Seller's right to retain the deposit is conditioned upon Seller then being prepared to close, and conditioned further upon the various contingencies and conditions set forth in Article VII then having been materially satisfied. 5.02 CONDUCT OF BUSINESS PRIOR TO CLOSING. From the date of this Agreement through and including the Closing Date and except as otherwise consented to or approved by Buyer in writing, Seller shall operate the Restaurants and maintain the Purchased Assets in the usual and ordinary course and substantially in the same manner as heretofore conducted. 5.03 DUE DILIGENCE REVIEW. From the date of this Agreement through and including the earlier of the Closing Date or the date of termination of this Agreement or any specifically applicable deadline date prescribed below, (a) Seller will afford to the officers, attorneys, accountants and other representatives of Buyer reasonable access during normal business hours to all books and records of Seller relating to the Restaurants and the Purchased Assets, including, but not limited to, all information and records with respect to any contracts, leases, permits, employee benefit plans, insurance, financial and operating data, worker's compensation experience, non-privileged litigation files, environmental reports, title reports and surveys, in each case to the extent related to the Restaurants and the Purchased Assets (excepting only trade secrets, attorney work product or privileged materials, and other confidential materials); and (b) Seller will afford to the officers, attorneys, accountants and other representatives of Buyer reasonable access to the Restaurants and related facilities, at all reasonable times during normal business hours, for the purpose of conducting inspections of the Restaurants and related facilities and all equipment located therein and assessing the day-to-day operations of the Restaurants; provided such access is discreet and controlled by Seller and does not unreasonably interfere with the business of Seller operated at the Restaurants. (c) If the transaction contemplated by this Agreement fails to close for any reason, Buyer shall return to Seller all documentation, test results, surveys and other information furnished to Buyer by or on behalf of Seller. Buyer agrees to reimburse, indemnify and hold Seller harmless from and against any and all damages, injuries, liabilities, claims, demands or liens, including, without limitation, any property damage, personal injury or claim of lien against the Restaurants, resulting from the activities permitted by this Section (including, without limitation, 14 reasonable attorneys' fees and expenses paid or incurred by Seller during litigation, if any), which indemnity shall survive the Closing or earlier termination of this Agreement. (d) Buyer shall procure title insurance commitments from Fidelity agreeing to issue to Buyer one or more owner policies of title insurance insuring its ownership interests created pursuant to the Deeds, and one or more leasehold policies of title insurance insuring its leasehold interests created pursuant to the Leases and the Subleases (the "Commitments"). Buyer shall pay the title insurance expenses and premiums at Closing. Buyer will, within fifteen (15) days after receipt of the title commitments, notify Seller in writing specifying the matters to which Buyer objects (the "Title Objections"), otherwise Buyer shall be deemed to have no Title Objections. If Seller cannot or elects not to correct the Title Objections on or prior to the Closing Date, Buyer will have the option of either accepting the title as it then is or terminating this Agreement on or before the Closing Date, in which event the Deposit (less the cost of any title insurance expenses) shall be returned to Buyer without any further liability to either Party. All easements, rights of way, restrictions and other matters of record, including, but not limited to, property taxes not yet due and payable, the matters, if any, which would be disclosed by a current and accurate survey and the exceptions listed in the Commitments to which Buyer does not object, as well as all exceptions to which it objects but the correction of which is waived by Buyer at or prior to Closing, are referred to herein as the "Permitted Title Exceptions". Fidelity shall be used as the title company for purposes of obtaining the above-referenced title commitments. (e) At its sole option and expense, Buyer may procure "AS BUILT" surveys of the Properties (the "Surveys"). If the Surveys show any encroachments on the Properties or that improvements located on the Properties encroach on setback lines, easements, lands of others or violate any restrictions, covenants of this Agreement or applicable governmental regulation, the same shall constitute a title defect to which Buyer may object pursuant to the terms of Section 5.03(d) (f) At its sole option and expense, Buyer may procure Phase I environmental assessment reports for the Properties within twenty (20) days of the effective date of this Agreement. Buyer shall, within said twenty (20) day period, notify Seller in writing, specifying the matters on the report to which Buyer objects (the "Environmental Objections"). Otherwise Buyer shall be deemed to have no Environmental Objections. If Seller cannot or elects not to correct the Environmental Objections on or prior to the Closing Date, Buyer will have the option of either accepting the environmental condition of the Properties as it or they exist, or terminating this Agreement on or before the Closing Date, in which event the Deposit (less the costs of any title insurance expenses) shall be returned to Buyer without any further liability to either Party. 15 (g) Notwithstanding anything to the contrary contained herein, Buyer shall have the right to terminate this Agreement on or before the twentieth (20th) day after the effective date of this Agreement (the "Due Diligence Deadline") if Buyer is not satisfied for any reason with its due diligence investigation of the Restaurants and the Purchased Assets. Buyer shall exercise such right by delivering written notice thereof to Seller on or before the Due Diligence Deadline, in which event the Agreement shall terminate and the Deposit (less the costs of any title examination and cancellation expenses) shall be returned to Buyer without any further liability to either Party. Should Buyer fail to provide Seller with written notice of its election to terminate this Agreement on or before the Due Diligence Deadline, then Buyer shall be deemed to be satisfied with the above items and its due diligence, and, subject to the fulfillment and satisfaction any Title Objections, Environmental Objections and of Seller's obligations herein, Buyer shall close and settle this transaction pursuant to the terms of this Agreement. (h) As required by Florida law in the documents for all Florida real property sales, Seller hereby discloses to Buyer and Owner that radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in some buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. 5.04 EMPLOYEES. As provided in Section 5.01, the actual changeover of employment of personnel shall be done effective either as of midnight on the Closing Date or as of the end of business that night for each individual Restaurant, whichever is later. Seller shall terminate all employees ("Employees") employed at the Restaurants effective as of then. At a mutually agreed time prior to Closing, Buyer, with the permission and accompanied by a representative of Seller, may discuss with Seller's employees at the Restaurants offers of employment following consummation of the transactions contemplated by this Agreement. Buyer shall thereafter have the right to offer employment to or to hire such employees of Seller effective after the Closing Date. Notwithstanding the foregoing, Seller shall have the right, but not the obligation, to retain and reassign all management employees employed at the Restaurants on the Closing Date and Seller shall have the right, but not the obligation, to retain any Employees not hired by Buyer. Seller shall be liable for failure to provide any notice required under the Worker Adjustment in Retraining Notification Act of 1988 ("WARN") in connection with the transaction contemplated by this agreement. Purchaser does not assume, adopt or ratify in any manner whatsoever any collective bargaining agreements between Seller and its employees or collective bargaining representatives of its employees and Purchaser does not assume and has no responsibility for any present or past employment practices, policies or procedures of Seller. The Parties are all aware that Seller's current employee David Berlin may be offered a position with Buyer, and any such offer or acceptance is solely between him, Buyer and Owner. 16 5.05 ASSUMED CONTRACTS. Seller and Buyer, at such time and in such manner as is mutually agreed between them, shall contact each of the third parties to each of the Assumed Contracts to secure any required consents to Seller's assignment and delegation to Buyer of Seller's rights and obligations under those Assumed Contracts. 5.06 ESTOPPELS. Seller and/or Buyer, at such time and in such manner as is mutually agreed between them, shall contact each lessor/owner of each Leased Real Property to secure estoppels in form and substance satisfactory to Seller and Buyer assuring Buyer's right to occupy those Properties following the Closing. Seller has previously received approval from Buyer for the model formats for the estoppel documents, and Seller has already mailed these out to the various lessors/owners. Seller shall diligently pursue the execution and return of these estoppels, assisted by Buyer and/or Buyer's lender if Seller and Buyer shall agree that such a cooperative effort will facilitate such execution and return. 5.07 CONFIDENTIALITY. Except as provided in Sections 5.04, 5.05, 5.06 and 13.02, the Buyer shall not disclose the transaction contemplated by this Agreement or any information regarding such transaction to any employee of Seller, including, but not limited to, employees at the Restaurants or any employee of any vendor of Seller without Seller's prior consent. All information concerning this contemplated transaction or the financial terms of this Agreement shall be kept confidential by each Party, its attorneys, accountants and representatives. All information furnished by one Party to the other in connection with this Agreement or the transactions contemplated by this Agreement shall be kept confidential by such other Party (and shall be used by it and its officers, attorneys, accountants, financiers, and representatives only in connection with this Agreement and the transactions contemplated by this Agreement) except to the extent that such information (1) already is known to such other Party when received, (ii) thereafter becomes lawfully obtainable from other sources, (iii) is required to be disclosed in any document filed by Seller or its affiliate with the Securities and Exchange Commission or any other agency of any government or (iv) is otherwise required to be disclosed pursuant to any federal or state law, rule or regulation or by any applicable judgment, order or decree of any court or by any governmental body or agency having jurisdiction after such other Party has given reasonable prior written notice to the other Parties to this Agreement of the pending disclosure of any such information. In the event that the transactions contemplated by this Agreement shall fail to be consummated, each Party shall promptly cause all copies of documents or extracts thereof containing information and data as to another Party to be returned to such other Party. 5.08 MECHANICS' LIENS. Seller shall furnish to Buyer at Closing an affidavit (the "Mechanics' Lien and Possession Affidavit") attesting to the absence, unless otherwise provided for herein, of any claims of mechanics' liens known to Seller relating to the Properties and further attesting that the costs of any improvements or repairs to the Properties have been or will be paid prior to the applicable Closing Date. 5.09 MISCELLANEOUS AGREEMENTS. Subject to terms and conditions herein provided, each Party shall use its commercially reasonable best efforts to take or cause to be taken, all action and to 17 do or cause to be done, all things necessary, appropriate or desirable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. 5.10 INSURANCE. Between the date of this Agreement and the Closing Date, Seller shall continue in force its existing insurance policies with respect to the Restaurants and the Purchased Assets. 5.11 SHOPPING. Notwithstanding the existence of this Agreement, Seller shall have the right to continue to solicit, initiate, encourage and participate in negotiations and discussions and enter into any agreement, including, but not limited to, a back-up agreement in the event the transactions contemplated by this Agreement are not ultimately consummated, regarding the sale of any or all of the Restaurants and the Purchased Assets. 5.12 BEVERAGE EQUIPMENT. The parties acknowledge that the beverage dispensing equipment located in the Restaurants (the "Beverage Equipment"), which is leased by Seller from The Coca-Cola Company and from Dr Pepper/Seven Up, Inc., is not included in the Purchased Assets. At the Closing, Seller shall assign to Buyer all of Seller's rights under the leases with The Coca-Cola Company and with Dr Pepper/Seven Up, Inc. with respect to such Beverage Equipment and Buyer shall assume from Seller the Beverage Equipment and shall comply with all of Seller's obligations under such leases. In particular, Buyer shall comply with Seller's obligations under such leases with respect to the prohibition on the dispensing of competitive soft drink products through the Beverage Equipment. Such assignment shall be evidenced by assignment and assumption agreements in the forms provided by the respective beverage manufacturers. Alternatively, Buyer shall have the right to elect to enter into a direct relationship with either or both of the bottlers regarding leasing the Beverage Equipment, providing that the bottlers are willing to enter into such direct relationships without prejudice to Seller. 5.13 BUSINESS PLAN. Buyer shall deliver to Seller, for Seller's approval, within ten (10) days after the effective date of this Agreement a detailed marketing and business plan with respect to the Restaurants (the "Business Plan"), which shall include a description of Buyer's sources of financing, financing terms (including copies of all commitment letters), organization and management structure, and a three-year financial and operational forecast. 5.14 BULK SALES ACT. It will not be practicable to comply or to attempt to comply with the procedures of the Uniform Commercial Code or other bulk sales or similar law of the state or states in which the restaurants are located. Accordingly, Seller hereby agrees to defend, indemnify and hold Buyer harmless from and against any and all costs, losses, liabilities, claims and expenses (including reasonable attorneys' fees) arising out of or resulting from the failure of Buyer or Seller to comply with or perform any actions in connection with the provisions of any such law. 5.15 ANTITRUST CLEARANCES. If required by law, Seller and Buyer shall, promptly after the execution and delivery of this Agreement, file with the Federal Trade Commission and the 18 United States Department of Justice the notification required to be filed with respect to the transactions provided in this Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and the rules and regulations promulgated thereunder. All parties hereto shall use their best efforts (i) to respond promptly to any requests for additional information made by such agencies and (ii) to resist vigorously at their respective cost and expense any assertion that the transactions provided herein constitute a violation of the antitrust laws, all to the end of expediting the Closing. Seller shall pay all of the cost incurred in complying with the provisions of the HSR Act. ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER AND BUYER The respective obligations of each Party to effect the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver at or prior to the Closing Date of the following conditions: 6.01 LITIGATION. Neither Seller nor Buyer shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the transactions contemplated by this Agreement. 6.02 SUBLEASE CONSENTS. All required consents to the Subleases from the landlords of the Leased Real Properties shall have been obtained. 6.03 ANTITRUST CLEARANCES. If HSR Act filings are required for lawful completion of this transaction, the filings shall have been made and either approval shall have been received for an early termination of the review waiting period or the specified review waiting period shall have transpired without objection from any government entity. 6.04 APPROVAL BY CURRENT MORTGAGEE. The holder of the current mortgage encumbering the Mortgaged Real Properties shall have approved the transaction and the documents utilized to effect the transaction. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER The obligations of Buyer to effect the transactions contemplated by this Agreement shall be subject to fulfillment or waiver at or prior to the Closing Date of the following conditions: 7.01 REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller set forth in Article III of this Agreement shall be true and correct in all material respects as of the date of 19 this Agreement and as of the Closing Date (as though made on and as of the Closing Date) except (i) to the extent such representations and warranties are by their expressed provisions made as of a specified date and (ii) for the effect of transactions contemplated by this Agreement. 7.02 PERFORMANCE OF OBLIGATIONS. Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement on or prior to the Closing Date. 7.03 OFFICER'S CERTIFICATE. Seller shall have furnished to Buyer a certificate dated the Closing Date, to the effect that the conditions set forth in Sections 7.01 and 7.02 have been satisfied. 7.04 TITLE OBJECTIONS AND ENVIRONMENTAL OBJECTIONS. All Title Objections and Environmental Objections shall have been corrected to Buyer's reasonable satisfaction. 7.05 DOCUMENTS. Buyer shall have received the documents specified in Article IX of this Agreement. 7.06 PERMITS AND AUTHORIZATIONS. Buyer shall have obtained any and all consents or waivers from third parties required for the consummation of the transactions contemplated by this Agreement and Buyer hall have obtained any and all permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the transactions contemplated by this Agreement. 7.07 FIFTEEN YEAR REMAINING LEASE PERIODS. With respect to the Leased Real Properties, the average remaining term length of all such leases shall extend at least fifteen (15) years after the Closing Date. With respect to any Leased Real Properties that do not already have remaining lease periods, including any lessee options, in excess of fifteen (15) years, Seller shall in good faith attempt to re-negotiate their leases on commercially reasonable terms so that each the renegotiated leases, including lessee options, shall be at least fifteen (15) years after the Closing Date. Seller shall in good faith attempt to have the remaining period of each such lease exceed fifteen (15) years. This condition precedent shall be satisfied if the result is that some of these leases still do not have remaining fifteen (15) year periods, provided that Seller has made the above-described good faith efforts, and provided that the average remaining term length of the leases, including lessee options, for all of the Leased Real Properties shall extend at least fifteen (15) years after the Closing Date. 7.08 DUE DILIGENCE APPROVAL. Buyer, based upon its due diligence review pursuant to Section 5.03, shall have determined to its satisfaction that the Restaurants and the Purchased Assets are acceptable for its intended purposes. 7.09 NO MATERIAL ADVERSE CHANGE. There shall have occurred no material adverse change in the business of any Restaurant or the status or condition of any Purchased Asset from the date of this Agreement to the Closing Date. 20 7.10 FINANCING. Buyer shall have secured from a lending institution selected by Buyer (the "Lender") a commitment for financing in an amount and upon such terms as Buyer, in its discretion, deems necessary and appropriate for the purchase of the Purchased Assets and the operation of the Restaurants. If and as required by the Lender, this condition shall include receipt of business valuations for the Restaurants acceptable to the Lender. 7.11 CONSENTS/ESTOPPELS. Buyer shall have received all required consents from third parties to Seller's assignment and delegation of the Assumed Contracts and Buyer shall have received estoppel certificates from each mortgagee (if any) of each Leased Real Property and each owner/lessor of each Leased Real Property, confirming the status and authority of Seller to enter into each such Sublease and Lease and confirming that there is no default by Seller in its obligations with respect to the property subject to each Lease and Sublease. 7.12 AREA DEVELOPMENTS AGREEMENT. Seller shall have agreed to one or more of Seller's standard Area Development Agreements containing terms and conditions regarding the territory, number of restaurants and timing requirements that are satisfactory to Buyer in its discretion. 7.13 INVENTORY. As of the Closing Date, the level and the mix of Inventory at each Restaurant will be sufficient to permit the continued operation of that Restaurant immediately following the Closing in a normal manner consistent with prior practices. ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligations of Seller to effect the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver at or prior to the Closing Date of the following conditions: 8.01 REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer and Owner set forth in Article IV of this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date (as though made on and as of the Closing Date) except (i) to the extent such representations and warranties are by their expressed provisions made as of a specified date and (ii) for the effect of transactions contemplated by this Agreement. 8.02 PERFORMANCE OF OBLIGATIONS. Buyer and Owner shall have performed in all material respects all obligations required to be performed by them under this Agreement on or prior to the Closing Date. 8.03 OFFICER'S CERTIFICATE. Buyer shall have furnished to Seller certificates dated the Closing Date to the effect that the conditions set forth in Sections 8.01 and 8.02 have been satisfied. 21 8.04 DOCUMENTS. Seller shall have received the documents specified in Article X of this Agreement. 8.05 BUSINESS PLAN. Seller shall have received the Business Plan, in form and substance reasonably satisfactory to Seller. 8.06 PERMITS AND AUTHORIZATIONS. Seller shall have obtained any and all consents or waivers from third parties required for the consummation of the transactions contemplated by this Agreement and Seller hall have obtained any and all permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the transactions contemplated by this Agreement. ARTICLE IX DOCUMENTS TO BE DELIVERED BY SELLER At or prior to Closing, Seller shall deliver to Buyer the following documents duly executed by Seller: 9.01 LEASES. The Leases. 9.02 SUBLEASES. The Subleases. 9.03 DEEDS. The Deeds. 9.04 OFFICER'S CERTIFICATE. The certificate referred to in Section 7.03 of this Agreement, which shall include any exceptions to the representations and warranties of Seller which have arisen or of which Seller has learned since the date hereof in addition to those set forth in EXHIBIT 3. 13. 9.05 BILL OF SALE. A bill of sale conveying ownership of the Fixed Assets, Inventory, Permits and Licenses and Change Fund in the form attached hereto as EXHIBIT 9.05 (the "Bill of Sale"). 9.06 ASSUMPTION AGREEMENT. An assignment and assumption agreement assigning the Assumed Contracts to Buyer in the form attached hereto as EXHIBIT 9.06 (the "Assumption Agreement"). 9.07 ASSIGNMENTS AND TRANSFERS. Such good and sufficient instruments of assignment and transfer as shall be necessary to assign and transfer to Buyer all of Seller's right, title and interest in and to the remaining Purchased Assets not conveyed by the Bill of Sale, the Assumption Agreement and the Beverage Sublease. 9.08 OTHER INSTRUMENTS OF TRANSFER. Such other instruments of assignment or transfer 22 as shall be reasonably requested by Buyer to confirm and vest in Buyer ownership of all of the Purchased Assets and other documents and instruments as required by the terms and conditions of this Agreement. 9.09 CONSENTS TO ASSIGNMENTS. To the extent obtained, copies of all consents of third parties that are necessary to effect the transfer from Seller to Buyer of any of the Purchased Assets and to consummate the transactions contemplated by this Agreement. 9.10 MECHANICS' LIEN AND POSSESSION AFFIDAVIT. The Mechanics' Lien and Possession Affidavit. 9.11 OTHER AFFIDAVITS. Such other affidavits or certificates as are reasonably required by the title company to insure title to Buyer's leasehold interest in the Mortgaged Real Properties and the Leased Real Properties as required under this Agreement. 9.12 FRANCHISE AGREEMENTS. The Franchise Agreements, which shall be in the form set forth in the UFOCs and shall include a personal guarantee issued by Owner guaranteeing all of Buyer's obligations under the Franchise Agreements. 9.13 AREA DEVELOPMENT AGREEMENTS. The Area Development Agreements, which shall be in the form set forth in the UFOCs (except that Owner shall not have had to execute a personal guarantee of Buyer's obligations under the Development Agreements). 9.14 SOFTWARE LICENSE AGREEMENT. The Software License Agreement. 9.15 BEVERAGE EQUIPMENT ASSIGNMENT. The Beverage Equipment Assignment if required pursuant to Section 5.11. 9.16 ESTOPPELS. Signed original copies of Estoppel Certificates from each mortgagee (if any) of each Leased Real Property and each owner/lessor of each Leased Real Property. 9.17 OTHER DOCUMENTS. Other documents as are provided in the UFOCs or as shall be reasonably requested by Buyer and its counsel or required to be delivered pursuant to this Agreement. ARTICLE X DOCUMENTS TO BE DELIVERED BY BUYER At Closing, Buyer shall deliver to Seller the following documents duly executed by Buyer: 10.01 LEASES. The Leases. 10.02 SUBLEASES. The Subleases. 23 10.03 DEEDS. The Deeds. 10.04 ASSUMPTION AGREEMENT. The Assumption Agreement. 10.05 OFFICER'S CERTIFICATE. The certificate referred to in Section 8.03 of this Agreement, which shall include any exceptions to the representations and warranties of Buyer and/or Owner which have arisen or of which Buyer and/or Owner have learned since the date hereof. 10.06 GUARANTY. A guaranty of Buyer's obligations in the form attached hereto as EXHIBIT 10.06 (the "Guaranty") executed by Owner. 10.07 FRANCHISE AGREEMENTS. The Franchise Agreements, which shall be in the form set forth in the UFOCs and shall include a personal guarantee issued by Owner guaranteeing all of Buyer's obligations under the Franchise Agreements. 10.08 THE AREA DEVELOPMENT AGREEMENTS. The Area Development Agreements, which shall be in the form set forth in the UFOCs (except that Owner shall not have had to execute a personal guarantee of Buyer's obligations under the Development Agreements). 10.09 SOFTWARE LICENSE AGREEMENT. The Software License Agreement. 10.10 BEVERAGE EQUIPMENT ASSIGNMENT. The Beverage Equipment Assignment if required pursuant to Section 5.1 1. 10.11 PROMISSORY NOTES. The EXHIBIT 2.01 five (5) year Promissory Note plus the EXHIBIT 2.03 Short-Term Promissory Note. 10.12 OTHER DOCUMENTS. Other documents as are provided in the UFOCs or as shall be reasonably requested by Seller and its counsel or required to be delivered pursuant to this Agreement. ARTICLE XI TERMINATION 11.01 EVENTS OF TERMINATION. This Agreement may be terminated, without liability on the part of the terminating Party to the other Parties, at any time before the Closing Date: (i) by mutual consent of Buyer, Owner and Seller; (ii) by Buyer if any of the conditions precedent found in Articles VI and VII of this Agreement shall have become incapable of fulfillment through no fault of Buyer and have not been waived in writing by Buyer; (iii) by Seller if any of the conditions precedent found in Articles VI and VIII of this Agreement shall have become incapable of fulfillment through no fault of Seller and have not been waived in writing by Seller; (iv) by Buyer if there is a breach of or failure by Seller to perform in any material respect any of the 24 representations, warranties, commitments, covenants or conditions under this Agreement, which breach or failure is not cured within five (5) business days after written notice thereof is given to Seller and prior to the Closing Date; (v) by Seller if there is a breach of or failure by Buyer or Owner to perform in any material respect any of the representations, warranties, commitments, covenants or conditions under this Agreement, which breach or failure is not cured within five (5) business days after written notice thereof is given to the Party committing such breach and prior to the Closing Date; (vi) by Buyer if it is not satisfied with its due diligence investigation of Seller and provides written notice to Seller of such dissatisfaction prior to expiration of the applicable time period prescribed in Section 5.03; or (vii) by Seller at any time on or after February 4, 2000 if the Closing has not theretofore been consummated and completed. In the event of termination and abandonment by any Party as above provided in clauses (ii), (iii), (iv), (v), (vi) or (vii) of this Section, written notice shall forthwith be given to the other Party, which notice shall clearly specify the reason of such Party for terminating this Agreement. 11.02 SURVIVAL AFTER TERMINATION. If this Agreement is terminated and the transactions contemplated hereby are abandoned pursuant to Section 11.01, then this Agreement shall become null and void and of no effect, except for the provisions of Sections 5.03(c), 5.07, 11.02, 11.03, 13.06, 13.07, 13.09, 13.10, 13.11, 3.13, 13.14, 13.15 and 13.16 of this Agreement which shall survive the termination of this Agreement; provided, however, that such termination shall not affect the right of any Party (a) to bring an action against another Party for a breach occurring prior to the termination or for a wrongful termination, (b) to bring an action based on a misrepresentation or breach of warranty in Section 3.05 or 4.05, or (c) to be indemnified under Article 12 with respect to any Damages attributable to any such breach or misrepresentation. 11.03 RETURN OF ESCROW DEPOSIT. If this Agreement is terminated by Seller pursuant to Sections 5.01 or 11.01 (v) or 11.01 (vii) and Seller is not then in default of this Agreement, then Seller shall be entitled to the Escrow Deposit and any interest earned thereupon. If this Agreement is terminated pursuant to any other provision, Buyer shall be entitled to the Escrow Deposit and any interest earned thereupon. ARTICLE XII INDEMNIFICATION 12.01 SURVIVAL AFTER CLOSING. The representations and warranties of the Parties contained in tl1is Agreement shall survive the Closing and continue in full force and effect for a period of three (3) years following the Closing Date. All covenants and agreements contained in this Agreement shall survive the Closing in accordance with their terms. 25 12.02 INDEMNIFICATION. (a) BY SELLER. By execution of this Agreement, Seller hereby agrees to indemnify Buyer and its successors and assigns and hold them harmless against and in respect of: (i) any and all losses, liabilities, damages, costs and expenses (including without limitation judgments and settlement payments) incurred by any of them directly or indirectly incident to, arising in connection with or resulting from or relating to any material misrepresentation, breach, nonperformance or inaccuracy of any representation, warranty or covenant by Seller made or contained in this Agreement or in any Exhibit, certificate or other document executed and delivered to Buyer under or pursuant to this Agreement or the transactions contemplated herein; (ii) any and all losses, liabilities, damages, costs and expenses (including without limitation judgments and; settlement payments) incurred by them directly or indirectly - incident to, arising in connection with, resulting from or relating to any liabilities of Seller, other than those assumed by Buyer pursuant to this Agreement; and (iii) any and all losses, liabilities, damages, costs and expenses incurred by Buyer in claiming, contesting or remedying any breach, misrepresentation, non-performance, inaccuracy or other matter described above, or in enforcing its right of indemnification hereunder, including, by way of illustration and not limitation, all reasonable legal, accounting and other professional fees and expenses, filing fees, collection costs and all fees, costs and expenses incurred in defending claims which, if successfully prosecuted, would have resulted in Damages (as defined herein). (b) BY BUYER. By execution of this Agreement, Buyer agrees to indemnify Seller and its parent corporation and their successors and assigns and hold them harmless from and against and in respect of: (i) any and all losses, liabilities, damages, costs and expenses (including without limitation judgments and settlement payments) incurred by them directly or indirectly incident to, arising in connection with or resulting from any material misrepresentation, breach, non-performance or inaccuracy of any representation, warranty or covenant by Buyer or Owner made or contained in this Agreement or in any Exhibit, certificate 26 or document executed and delivered to Seller under or pursuant to this Agreement or the transactions contemplated herein; (ii) any and all losses, liabilities, damages, costs and expenses (including without limitation judgments and settlement payments) incurred by them directly or indirectly incident to, arising in connection with, resulting from or relating to any liabilities assumed by Buyer pursuant to this Agreement; and (iii) any and all losses, liabilities, damages, costs and expenses incurred by Seller in claiming, contesting or remedying any breach, misrepresentation, non-performance, inaccuracy or other matter described above, or in enforcing its right of indemnification hereunder, including, by way of illustration and not limitation, all reasonable legal, accounting and other professional fees and expenses, filing fees, collection costs and all fees, costs and expenses incurred in defending claims which, if successfully prosecuted would have resulted in Damages (as defined herein). (c) DAMAGES. Any and all of the items set forth in Sections 12.02(a) and 12.02(b) for which a Party is entitled to be indemnified hereunder are called "Damages." (d) INITIAL CLAIM NOTICE. When a Party becomes aware of a situation which may result in Damages for which it would be entitled to be indemnified hereunder, such Party (the "Indemnitee") shall submit a written notice (the "Initial Claim Notice") to the other Party or Parties (the "Indemnitor") to such effect within thirty (30) days after it first becomes aware of such matter and shall furnish the Indemnitor with such information as it has available demonstrating its right or possible right to receive indemnity. If the potential claim is predicated on, or later results in, the filing by a third party of any action at law or in equity (a "Third Party Claim"), the Indemnitee shall provide the Indemnitor with a supplemental Initial Claim Notice not later than ten (10) days prior to the date on which a responsive pleading must be filed, and shall also furnish a copy of such claim (if made in writing) and of all documents received from the third party in support of such claim. Every Initial Claim Notice shall, if feasible, contain a reasonable estimate by the Indemnitee of the losses, costs, liabilities and expenses (including, but not limited to, costs and expenses of litigation and attorneys' fees) which the Indemnitee may incur. In addition, each Initial Claim Notice shall name, when known, the person or persons making the assertions that are the basis for such claim. Failure by the Indemnitee to deliver an Initial Claim Notice or an update thereof in a timely manner shall not relieve the Indemnitor of any of its obligations under this Agreement except to the extent that actual monetary prejudice to the Indemnitor can be demonstrated, including, without limitation, prejudice due to failure to provide notice to applicable insurers. 27 (e) RIGHTS OF INDEMNITOR. If, prior to the expiration of thirty (30) days from the date of the delivery to the Indemnitor of an Initial Claim Notice (the "Claim Answer Period"), the Indemnitor delivers a written notice to the Indemnitee (an "Acknowledgment") acknowledging its obligation to the Indemnitee for the claim identified in that Initial Claim Notice, providing reasonable assurances to the Indemnitee of its intention and ability to satisfy its obligation of indemnification with respect to that claim and requesting that such claim not be paid, the same shall not be paid, and the Indemnitor shall settle, compromise or litigate in good faith such claim, and employ attorneys of its choice to do so; provided, however, that Indemnitee shall not be required to refrain from paying any claim which has matured by court judgment or decree, unless appeal is taken therefrom and proper appeal bond posted by the Indemnitor, nor shall it be required to refrain from paying any claim where such action would result in the foreclosure of a lien upon any of its assets or a default in a lease or other contract except a lease or other contract which is the subject of the dispute, nor shall it be required to agree to the settlement or compromise of a claim which involves any admission of wrongdoing on the part of the Indemnitee or involves any order or commitment which in any way restricts the future activities of the Indemnity. If the Indemnitor elects to settle, compromise or litigate such claim, all reasonable expenses, including but not limited to all amounts paid in settlement or to satisfy judgments or awards and reasonable attorney's fees and costs, incurred by the Indemnitor in settling, compromising or litigating such claim shall be secured to the reasonable satisfaction of Indemnitee. Indemnitee shall cooperate fully to make available to the Indemnitor and its attorneys, representatives and agents, all pertinent information under its control. Indemnitee shall have the right to elect to settle or compromise all other contested claims with respect to which the Indemnitor has not, within the Claim Answer Period, acknowledged in writing (i) liability therefor, and (ii) its election to assume full responsibility for the settlement, compromise, litigation and payment of such claim. (f) FINAL CLAIMS STATEMENT. At such time as Damages for which the Indemnitor is liable hereunder are incurred by Indemnitee by actual payment thereof or by entry of a final judgment, Indemnitee shall deliver to the Indemnitor a statement setting forth the amount of such Damages in reasonable detail on an itemized basis (a "Final Claims Statement"). Indemnitee shall supplement the Final Claims Statement with such supporting proof of loss (e.g. vouchers, canceled checks, accounting summaries, judgments, settlement agreement, etc.) as the Indemnitor may reasonably request in writing within twenty (20) days after date of delivery of the Final Claims Statement. All amounts itemized in the Final Claims Statement, together with interest on such amounts at the rate of 12% per annum (or the maximum rate of interest allowed by law, whichever is less) from the date paid by the Indemnitee to the date reimbursed by the Indemnitor, shall be paid by the Indemnitor to the Indemnitee within thirty (30) days after the date of delivery to the Indemnitor of that Final Claims Statement. (g) LIMITATIONS ON INDEMNIFICATION. (i) TIME LIMITATION. Notwithstanding the other provisions of this Article XII, neither Party shall be liable to indemnify the other Party following the Closing Date for Damages arising out of any misrepresentation, breach or inaccuracy of any 28 representation or warranty unless the Party seeking indemnification delivers an Initial Claim Notice to the other Party of its claim for indemnification hereunder prior to the end of the applicable survival period set forth in Section 12.01. (II) MINIMUM DOLLAR LIMIT ON INDEMNIFICATION. Except as provided below, neither Party shall be liable for a claim for Damages hereunder unless and until the aggregate Damages incurred by the other Party exceeds the sum of Twenty five Thousand Dollars ($25,000) (the "Threshold Amount"), in which event the Indemnitor shall indemnify the Indemnitee in accordance with this Article XII for all Damages arising hereunder in excess of the Threshold Amount. As exceptions to the foregoing, Damages for the following claims shall not be subject to the Threshold Amount (and shall be payable by the Indemnitor from the first dollar of Damages): (A) any claim based upon a misrepresentation or breach of warranty by Seller under Article III or Buyer under Article IV which, as of the Closing Date, constituted an intentional and willful misrepresentation or breach of warranty or (B) any breach by Seller or Buyer of any commitment under this Agreement to perform following the Closing Date, including, without limitation, the failure of Buyer to pay any installment of the Promissory Note when and as due, the failure of either Buyer or Seller to pay any differential in the Actual Inventory/Change Fund Value when and as due, the failure of Seller to pay or perform any Pre-Closing Obligations under the Assumed Contracts when and as due, or the failure of Buyer to pay or perform any Post Closing Obligations under the Assumed Contracts when and as due. (H) EXCLUSIVE REMEDY. The remedies provided for in this Article 12 are exclusive and shall be in lieu of all other remedies for any breach of any representation, warranty, covenant, obligation or other provision of this Agreement, except for any other remedy for which express provision is made in this Agreement; PROVIDED, HOWEVER, that the foregoing clause of this sentence shall not be deemed a waiver by any Party of any right to specific performance or injunctive relief. 29 ARTICLE XIII MISCELLANEOUS 13.01 BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the company Parties and their respective successors and permitted assigns and of the individual Parties and their respective heirs, personal representatives and permitted assigns. 13.02 PUBLICITY. Subject to the other provisions of this Agreement, press releases and other publicity materials relating to the transactions contemplated by this Agreement shall be released by the Parties only after review and with the consent of the other Parties; provided, however, Seller shall have the right, after consulting with Buyer, to make a public announcement of the execution of this Agreement and a disclosure of the basic terms and conditions of this Agreement if advised to do so by its legal counsel in connection with the reporting and disclosure obligations of Seller or any affiliate of Seller under the federal securities laws and/or the NASDAQ National Market System. 13.03 LIST OF EXHIBITS. As mentioned in this Agreement, there are attached hereto or delivered herewith, the following Exhibits: EXHIBITS EXHIBIT NO. EXHIBIT CAPTION - ------- --------------- A Properties 1.01(e) Assumed Contracts 1.01(g) Software License Agreement 1.04(i) Form of Deed 1.04(ii) Form of Lease 1.04(iii) Form of Sublease 2.01(a) Form of Promissory Note 2.05 Purchase Price Allocation 3.13 Disclosure Statement 9.05 Form of Bill of Sale 9.06 Form of Assumption Agreement 10.06 Form of Guaranty 13.04 HEADINGS. The headings in this Agreement have been inserted solely for ease of reference and shall not be considered in the interpretation or construction of this Agreement. 13.05 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. 13.06 GOVERNING LAW/EXCLUSIVE JURISDICTION. This Agreement shall be construed, and exclusive jurisdiction over any case or controversy shall exist, as prescribed in Section 18.06 of the Franchise Agreements. 30 13.07 EXPENSES. Except as otherwise herein provided, each of the Parties shall pay its respective costs and expenses incurred or to be incurred by it in connection with the negotiations respecting this Agreement and the transactions contemplated by this Agreement, including preparation of documents, obtaining any necessary approvals and the consummation of the other transactions contemplated by this Agreement. 13.08 ASSIGNMENT. Seller may assign any or all of its rights hereunder. Buyer may not assign any of its rights and obligations hereunder without the written consent of Seller. Subject to the foregoing, this Agreement and the terms and provisions hereof shall inure to the benefit of and be binding upon the heirs, successors and permitted assigns of the parties hereto. 13.09 ENTIRE AGREEMENT. This Agreement contains the entire agreement among the Parties with respect to the transactions contemplated by this Agreement and supersedes all other prior agreements, understandings and letters related to this Agreement. 13.10 NOTICES. Any notice or other communications required or permitted by this Agreement shall be in writing and shall be deemed to have been duly given on the date mailed if sent by registered or certified mail (return receipt requested) or by commercial overnight service to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice): (a) if to Seller, to: Checkers Drive-In Restaurants, Inc. 3916 State Street, Suite 300 Santa Barbara, California 93105 Attn: W. Fillmore Wood, Jr. (b) if to Buyer to: Titan Holdings, L.L.C. 24681 Northwestern Hwy., Suite 400 Southfield, Michigan 48975 Attn: Mark Mitchell 13.11 GUARANTY OF OWNER. Owner irrevocably and unconditionally solely guaranties the prompt, faithful and complete performance by Buyer of its liabilities and obligations under the Franchise Agreements, and under Article IV and section 5.07 of this Agreement, without counterclaim or set-off. 13.12 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties. 13.13 ATTORNEY FEES. In the event that a Party to this Agreement brings an action against 31 the other Party to this Agreement, by reason of the breach of any condition, covenant, representation or warranty in this Agreement, or otherwise arising out of this Agreement, the prevailing party in such action shall be entitled to recover from the other reasonable attorneys' fees plus costs of suit, as well as all such fees and costs incurred in any appeal or in any collection effort. 13.14 WAIVER. Any Party may, by written notice to the other Parties, (i) waive any inaccuracies in the representations or warranties of such other Party contained in this Agreement or in any document delivered pursuant to this Agreement, (ii) waive compliance with any of the conditions and covenants of such other Party contained in this Agreement or (iii) waive or modify performance of any of the obligations of such other Party under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement shall be deemed to constitute a waiver by the Party taking such action of compliance with any of the representations, warranties, covenants, conditions or agreements contained in the Agreement. The waiver by any Party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 13.15 CONSTRUCTION. Each Party acknowledges and agrees that it has read and understands each and every provision of this Agreement, the Schedules and the Exhibits hereto and has considered all relevant business and tax aspects related thereto. The Parties hereto further acknowledge and agree that each Party has had the opportunity to consult with and obtain legal advice and counseling from an attorney in relation to each and every provision of this Agreement, the Schedules and the Exhibits hereto, and each Party acknowledges and agrees for itself it has either availed itself of that opportunity or has knowingly and willfully declined such representation. Therefore, the language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against either Party. 13.16 SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement, whether in whole or in part, shall not in any way affect the validity and/or enforceability of any other provision of this Agreement. Any invalid or unenforceable provisions shall be deemed severable to the extent of any such invalidity or unenforceability. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 32 IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be executed by their respective duly authorized representatives and Guarantor has executed this Agreement, as of the day and year first above written. "SELLER" ATTEST: CHECKERS DRIVE-IN RESTAURANTS, INC. /s/ W. FILLMORE WOOD, JR. By /s/ WILLIAM P. FOLEY II - ---------------------------------- -------------------------------- Print Name: W. Fillmore Wood, Jr. Print Name: William P. Foley II ---------------------- ----------------------- SVP & Assistant Secretary Title: Chairman - ---------------------------------- ---------------------------- "BUYER" ATTEST: TITAN HOLDINGS, L.L.C. /s/ ROBERT J. SOWISLO By /s/ MARK MITCHELL - ---------------------------------- -------------------------------- Print Name: Robert J. Sowislo Print Name: Mark Mitchell ---------------------- ----------------------- Title: ---------------------------- "OWNER" ATTEST: MARK MITCHELL /s/ ROBERT J. SOWISLO By /s/ MARK MITCHELL - ---------------------------------- -------------------------------- Print Name: Robert J. Sowislo Print Name: Mark Mitchell ---------------------- ----------------------- 33 EXHIBIT A ORLANDO RESTAURANTS FEE [UNMORTGAGED] REAL PROPERTIES TO BE DEEDED TO BUYER
- ------------------------------------------------------------------------------------------------------------------------------------ REST NEW DATE ADDRESS CITY STATE ZIP COUNTY COMMENTS # STORE # OPENED - ------------------------------------------------------------------------------------------------------------------------------------ 437C 8120 08/04/93 1035 Lee Road Orlando FL 32810 Orange Morgan File pays Checkers $90 per month for dumpster usage - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGED REAL PROPERTIES TO BE LEASED TO BUYER - ------------------------------------------------------------------------------------------------------------------------------------ REST NEW DATE ADDRESS CITY STATE ZIP COUNTY COMMENTS # STORE # OPENED - ------------------------------------------------------------------------------------------------------------------------------------ 149C 8111 10/12/92 7604 E. Colonial Drive Orlando FL 32807 Orange $49,328.00 - ------------------------------------------------------------------------------------------------------------------------------------ 447C 8123 12/31/92 912 W. University Ave. Gainesville FL 32601 Alachua $53,475.00 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ LEASED REAL PROPERTIES TO BE SUBLEASED TO BUYER - ------------------------------------------------------------------------------------------------------------------------------------ REST NEW DATE ADDRESS CITY STATE ZIP COUNTY COMMENTS # STORE # OPENED - ------------------------------------------------------------------------------------------------------------------------------------ 446C 8122 12/19/92 3520 SW Archer Road Gainesville FL 32608 Alachua $110,316 Land & Building - ------------------------------------------------------------------------------------------------------------------------------------ 230C 8115 12/31/91 1239 E. Silver Springs Ocala FL 32770 Marion $28,248 Land - ------------------------------------------------------------------------------------------------------------------------------------ 345C 8118 03/24/93 8585 SW Highway 200 Ocala FL 34481 Marion $30,000 Land - ------------------------------------------------------------------------------------------------------------------------------------ 461C 8124 3/31/93 5497 US Hwy. 441 Belleview FL 34420 Marion $20,700 Land - ------------------------------------------------------------------------------------------------------------------------------------ 496C 8128 11/24/93 2701 SW College Road Ocala FL 34478 Marion $38,912 Land - ------------------------------------------------------------------------------------------------------------------------------------ 521C 8130 6/29/93 11193 N. Williams St. Dunnellon FL 34432 Marion $21,600 Land - ------------------------------------------------------------------------------------------------------------------------------------ 148C 8110 6/30/93 6371 W. Colonial Drive Orlando FL 32818 Orange $44,268 Land - ------------------------------------------------------------------------------------------------------------------------------------ 185C 8112 3/30/93 2495 S. Orange Ave. Orlando FL 32806 Orange $74,256 Land - ------------------------------------------------------------------------------------------------------------------------------------ 208C 8113 6/30/93 202 E. S.R. 436 Casselberry FL 32707 Seminole $49,704 Land - ------------------------------------------------------------------------------------------------------------------------------------ 209C 8114 10/12/92 1070 W. S.R. 434 Longwood FL 32750 Seminole $35,388 Land - ------------------------------------------------------------------------------------------------------------------------------------ 314C 8116 10/12/92 1501 S. French Ave. Sanford FL 32771 Seminole $33,000 Land - ------------------------------------------------------------------------------------------------------------------------------------ 337C 8117 6/30/93 431 State Road 436 W Altamonte Sprgs.FL 32714 Seminole $52,992 Land - ------------------------------------------------------------------------------------------------------------------------------------ 401C 8119 2/20/93 13495 W. Colonial Dr. Winter Garden FL 34787 Orange $38,532 Land - ------------------------------------------------------------------------------------------------------------------------------------ 438C 8121 8/24/93 1000 Willa Springs Dr. Willa Springs FL 32708 Seminole $46,344 Land - ------------------------------------------------------------------------------------------------------------------------------------ 468C 8125 10/30/93 133 S. Woodland Blvd. DeLand FL 32720 Volusia $53,2220 Land - ------------------------------------------------------------------------------------------------------------------------------------ 469C 8126 1/19/94 11816 E. Colonial Dr. Orlando FL 32826 Orange $46,320 Land - ------------------------------------------------------------------------------------------------------------------------------------ 470C 8127 8/6/93 480 E. Burleigh Blvd. Tavares FL 32778 Lake $27,600 Land - ------------------------------------------------------------------------------------------------------------------------------------ 502C 8129 10/29/93 2750 W. Colonial Drive Orlando FL 32804 Orange $63,096 Land - ------------------------------------------------------------------------------------------------------------------------------------ 522C 8131 8/6/93 355 E. Main Street Apopka FL 32703 Orange $27,996 Land - ------------------------------------------------------------------------------------------------------------------------------------ 564C 8132 6/28/93 2490 S. Woodlawn Blvd. DeLand FL 32720 Volusia $45,000 Land - ------------------------------------------------------------------------------------------------------------------------------------ 586C 8133 9/20/93 2508 N. Citrus Blvd. Leesburg FL 34748 Lake $42,720 Land - ------------------------------------------------------------------------------------------------------------------------------------ 722C 8134 1/12/94 5503-A S. Semoran Blvd. Orlando FL 32822 Orange $61,080 Land - ------------------------------------------------------------------------------------------------------------------------------------ 806C 8135 12/21/94 4345 W. Lake Mary Blvd. Lake Mary FL 32746 Orange $68,888 Land - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
34 WEST PALM BEACH RESTAURANTS FEE [UNMORTGAGED] REAL PROPERTIES TO BE DEEDED TO BUYER
- ------------------------------------------------------------------------------------------------------------------------------------ REST NEW DATE ADDRESS CITY STATE ZIP COUNTY COMMENTS # STORE # OPENED - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGED REAL PROPERTIES TO BE LEASED TO BUYER - ------------------------------------------------------------------------------------------------------------------------------------ REST NEW DATE ADDRESS CITY STATE ZIP COUNTY COMMENTS # STORE # OPENED - ------------------------------------------------------------------------------------------------------------------------------------ 187 8076 7/24/91 2270 S. Military Trail West Palm Beach FL 33406 Palm Beach $48,000 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ LEASED REAL PROPERTIES TO BE SUBLEASED TO BUYER - ------------------------------------------------------------------------------------------------------------------------------------ REST NEW DATE ADDRESS CITY STATE ZIP COUNTY COMMENTS # STORE # OPENED - ------------------------------------------------------------------------------------------------------------------------------------ 164 8074 1/25/91 1495 US Highway 1 Vero Beach FL 32960 Indian River - ------------------------------------------------------------------------------------------------------------------------------------ 176 8075 5/23/91 2529 Okeechobee Blvd. West Palm Beach FL 33409 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 205 8077 12/30/91 10461 S. Federal Hwy. Port St. Lucie FL 34952 St. Lucie - ------------------------------------------------------------------------------------------------------------------------------------ 231 8078 12/27/91 7050 S. Military Trail Lake Worth FL 33463 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 236 8079 3/9/92 3483 US Highway 1 Stuart FL 34995 Martin - ------------------------------------------------------------------------------------------------------------------------------------ 313 8080 6/30/93 6239 Lake Worth Rd. Lake Worth FL 33463 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 316 8081 6/30/92 524 S. Dixie Highway Lake Worth FL 33460 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 327 8082 1/15/93 3568 Northlake Blvd. Lake Park FL 33403 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 350 8083 10/30/93 500 NE 51st Street Boca Raton FL 33431 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 464 8084 5/26/93 2050 S. US 1 Ft. Pierce FL 34950 St. Lucie - ------------------------------------------------------------------------------------------------------------------------------------ 497 8085 12/1/93 450 W. Atlantic Ave. Delray Beach FL 33444 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 587 8086 2/24/94 7850 Roseland Rd. Roseland FL 32958 Indian River - ------------------------------------------------------------------------------------------------------------------------------------ 632 8087 5/16/94 755 W. Baynton Beach Blvd. Baynton Beach FL 33426 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 1129 8088 9/30/92 1318 Royal Palm Beach Blvd. Royal Palm Beach FL 33411 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ 1130 8089 3/31/91 12790 Forest Hills Blvd. West Palm Beach FL 33406 Palm Beach - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
35 EX-10.13 7 0007.txt EXHIBIT 10.13 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into effective as of the 24th day of April, 2000, by and among ALTES, LLC, a Delaware limited liability company ("Buyer"), ALDOR, LLC, AND PENTLAND USA, INC., a Delaware corporation (collectively, herein defined as, and nominally referred to as, "Owners") and CHECKERS DRIVE-IN RESTAURANTS, INC., a Delaware corporation ("Seller") (Buyer, Owners and Seller are referred to herein individually as a "Party" and collectively as the "Parties"). RECITALS WHEREAS, Seller is the owner and operator of the Checkers Drive-In Restaurants and/or Rally's Restaurants on the properties identified on EXHIBIT A (each of the Restaurant properties listed on EXHIBIT A is referred to herein individually as a "Property" or "Restaurant" and collectively as the "Properties" or "Restaurants"); WHEREAS, Seller desires to sell and transfer to Buyer and Buyer desires to purchase from Seller substantially all of the assets attributable or pertaining to the Restaurants, Seller desires to sell, lease and/or sublease to Buyer, and Buyer desires to purchase, lease and/or sublease from Seller, the real properties on which the Restaurants are situated, all upon the terms and subject to the conditions set forth in this Agreement, and Seller and Buyer desire to enter into Checkers Drive-In Restaurant's, Inc. Franchise Agreements and/or Rally's Restaurant Franchise Agreements, whichever is/are applicable, for the continued operation of the Restaurants by Buyer as Checkers Drive-In Restaurants and/or Rally's Restaurants (the "Franchise Agreements"), and Seller and Buyer desire to enter into Checkers Drive-In Restaurant's, Inc. Area Development Agreements and/or Rally's Area Development Agreements, whichever is/are applicable, for development by Buyer of new properties as Checkers Drive-In Restaurants and/or Rally's Restaurants (the "Area Development Agreements"); and WHEREAS, Owners (herein nominally defined as such) are in fact the principal members of Buyer and will realize substantial benefits from the transactions contemplated by this Agreement; NOW, THEREFORE, in consideration of the premises, of the mutual covenants, agreements, representations and warranties contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows: ARTICLE I PURCHASE AND SALE 1.01 PURCHASE AND SALE OF ASSETS. At the Closing (as hereinafter defined in Section 5.01), Seller hereby agrees that it (either directly and/or through various of its subsidiaries and affiliates) shall sell, transfer, convey, assign and deliver to Buyer and Buyer agrees to purchase, acquire and assume from Seller, all of Seller's right, title and interest in and to the following assets of Seller (collectively, the "Purchased Assets"): 1 (a) FIXED ASSETS. All machinery, equipment, furniture, fixtures, tools, signs and other items of tangible personal property (excluding Inventory) located at the Restaurants as of the effective date of this Agreement, plus any laptop computers, transferable software, cell phones and office materials and supplies provided to and in the possession of Seller's area managers (collectively, the "Fixed Assets"), but excluding any pagers as they are agreed to have little or no real economic value, but including any uniforms belonging to Seller located at the Restaurants (which shall all be deemed to be assets included in the Purchase Price so long as still owned by Seller whether new or previously worn, rather than deemed to be inventory for which a separate payment is due). (b) INVENTORY. All inventories of food products, paper products, operational supplies, disposable items, heating fuel, cleaning materials and other items of consumable and/or expendable materials and supplies in the Restaurants on the Closing Date (as hereinafter defined) (the "Inventory"). (c) PERMITS AND LICENSES. All permits, licenses, consents and authorizations which are necessary or required for the operation, use and/or ownership of the Restaurants and/or Purchased Assets, but only to the extent that the same are transferable and assignable by Seller to Buyer (the "Permits and Licenses"). (d) CHANGE FUND. All cash in the cash registers of the Restaurants at the close of business on the day immediately prior to the Closing Date (the "Change Fund"). (e) CONTRACT RIGHTS. All of Seller's right, title and interest in and to the contracts, leases and commitments listed on EXHIBIT 1.01(e) together with any other unexpired, executory contract rights directly pertaining to the operation of any of the Restaurants that Seller has entered into in the ordinary course of that Restaurant's business (the "Assumed Contracts"). Seller has made, as of the date hereof, and will, during the Due Diligence Review process (as hereinafter defined), make a good faith effort to present all contracts, leases and commitments that exist to Buyer, and Seller has made, as of the date hereof, and will, during the preparation of the Exhibits to this Agreement, make a good faith effort to include all contracts, leases and commitments that exist on the EXHIBIT 1.01(e) list. Except as limited by operation of Section 1.05 hereof, the contract rights and obligations hereby transferred shall, however, include all unexpired, executory rights and obligations that have arisen in the ordinary course of business at the Restaurants even if omitted from the Due Diligence Review materials or the EXHIBIT 1.01(e) list, provided that such omission is inadvertent by Seller and the omitted right or obligation is not material given the scope of this transaction. (f) FEE REAL PROPERTY. All of Seller's right, title and interest in and to each parcel of real property designated on EXHIBIT A as a "Fee Real Property" (collectively, the "Fee Real Properties"), together with all buildings, improvements and fixtures thereon. (g) COMPUTER SOFTWARE. Any computer software to the extent now loaded onto any of the above Fixed Assets or stored at any of the Restaurants, including specifically a license to any copies of Seller's proprietary CHAMPS/BOS located at any of the Restaurants, excluding however any third-party software the license for which precludes such transfer. In order to acquire the license to the CHAMPS/BOS software, Buyer shall 2 execute Seller's standard Software License Agreement, a copy of which is attached hereto as EXHIBIT 1.01(g), which, except as specifically provided herein shall govern the rights and of the Parties concerning the installation of, training for, use of, performance of, upgrades to, and payment for, said CHAMPS/BOS software. Seller warrants that its CHAMPS/BOS software has been properly installed at each Restaurant, and that it functions, and may be utilized, to the extent provided in the Software License Agreement. With respect to the Restaurants, Seller agrees that the normal one-time charge for installation of the CHAMPS/BOS software is set forth in Section 3(a) of the Software License Agreement is included in the Purchase Price. Seller also agrees that the training charges set forth in Section 3(b) of the Software License Agreement for the use of this software are included in the Purchase Price except insofar as Buyer may elect to avail itself of training on the use of this software. Monthly software maintenance charges shall, however, be due from Buyer in accordance with Section 3(c) of the Software License Agreement so long as Buyer continues to utilize this software. The license for and rights to any third-party software that may have been installed at any of the Restaurants shall also transfer at no charge to Buyer to the extent transferable under the third-party license for such software; however, the existence of any such third-party software is agreed by the Parties to be fortuitous and immaterial to the value and functional use of any of the Restaurants, and Seller does not itself make any representation or warranty with regard to the proper installation or functionality of any third-party software. 1.02 EXCLUDED ASSETS. The Purchased Assets shall include only the assets identified in Section 1.01 and, except as specifically provided, shall not include any other assets of any kind, including but not limited to, the following assets of Seller: cash on hand or in banks, other than the Change Fund; checks, drafts or other negotiable instruments; accounts receivable; refunds, rebates and credits due to Seller; any pagers in the possession of Seller's area managers (which are agreed to have little or no real economic value); and executory commitments for the purchase of materials, services or supplies or other real or personal property not related to or physically present at the Restaurants (collectively, the "Excluded Assets"). 1.03 CONDITION OF ASSETS. All of the Purchased Assets are being sold and transferred by Seller to Buyer and purchased by Buyer from Seller in "AS IS" condition and "with all faults." EXCEPT AS OTHERWISE PROVIDED IN ARTICLE III OR ELSEWHERE HEREIN, SELLER DISCLAIMS ALL WARRANTIES CONCERNING THE PURCHASED ASSETS, STATUTORY, EXPRESS, AND IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND ANY OTHER WARRANTY OF QUALITY IN RESPECT OF THE PURCHASED ASSETS, AND THERE ARE NO OTHER WARRANTIES, STATUTORY, EXPRESS, OR IMPLIED THAT EXTEND BEYOND THE WARRANTIES CONTAINED IN THIS AGREEMENT. Buyer and Owners acknowledge that they are in the business of operating restaurants and that they have examined the Purchased Assets to their satisfaction in light of Seller's foregoing disclaimer of warranties. 3 1.04 TRANSFERS OF REAL PROPERTY. At Closing, Seller shall convey to Buyer each parcel of Fee Real Property pursuant to a deed, generally known as a "special warranty deed", substantially in the form attached hereto as EXHIBIT 1.04(i) (the "Deeds") conveying all right, title and interest in and to such Fee Real Property, subject only to the Permitted Title Exceptions (as hereinafter defined) applicable to such Fee Real Property, and containing no warranty for any acts of any person other than Seller. Each Deed shall contain such modifications from the form attached hereto as EXHIBIT 1.04(i) as may be legally required or customary in the jurisdiction to which such Deed relates. At Closing, Seller shall sublease to Buyer each parcel of real designated on EXHIBIT A as a "Leased Real Property" (collectively, the "Leased Real Properties"), together with all buildings, improvements and fixtures thereon, pursuant to a sublease substantially in the form attached hereto as EXHIBIT 1.04(ii) (the "Subleases"). Fee Real Properties and Leased Real Properties are referred to collectively as the "Properties". Except for the ongoing contractual obligations referenced herein, and the Permitted Title Exceptions (as hereinafter defined), all transfers of Real Property shall be free and clear of all mortgages and of all financing, tax, judgment, mechanics and other liens. Notwithstanding anything appearing on EXHIBIT A or elsewhere in this Agreement, regarding Property 1310 in Russellville, Arkansas, the term of the lease pursuant to which Seller occupies this Property has already expired, and Seller occupies this Property as a holdover tenant. The Parties agree that Buyer shall enter into a new lease directly with the landlord for this Property, that this Property shall accordingly not be subleased to Buyer, that Seller will transfer to Buyer at Closing its interest in this Property, and that the Purchase Price shall not be further adjusted as a result of this situation. 1.05 ASSUMPTION OF LIABILITIES. At the Closing, Buyer shall assume, discharge and become liable for all liabilities and obligations arising after the Closing Date under the Assumed Contracts, but only to the extent such liabilities and obligations are required to be performed and satisfied after the Closing Date and excluding liabilities and obligations arising as a result of any obligation to perform under any Assumed Contract with respect to the period prior to the Closing Date. Buyer agrees to use its best efforts to obtain releases of Seller from all future obligations under the Assumed Contracts upon their assignment to Buyer by Seller. To the extent that Buyer is unable to obtain such releases of Seller under the Assumed Contracts, Owners shall additionally guaranty the obligations of Buyer in connection with the Assumed Contracts until such time as releases have been obtained or the obligations have terminated. ARTICLE II PURCHASE PRICE 2.01 PURCHASE PRICE. (a) The purchase price ("Purchase Price") for the Purchased Assets shall be the value of the Inventory and the Change Fund on the Closing Date plus the sum of Sixteen Million Five Hundred Thousand Dollars ($16,500,000.00), which shall be payable by Buyer to Seller as follows: (i) Buyer has deposited into escrow with Seller's attorney Ten Thousand Dollars ($10,000.00), which shall be applied to the Purchase Price at the Closing (the "Initial Escrow Deposit"), (ii) Buyer shall deposit into escrow with Fidelity (as defined below) contemporaneously with the execution of this Agreement the sum of Forty Thousand Dollars ($40,000.00), which shall be applied to the Purchase Price at the Closing (the "Subsequent Escrow Deposit," and together with the Initial Escrow Deposit, the "Escrow Deposit"), (iii) Buyer shall pay to Seller at the Closing the 4 sum of Sixteen Million Four Hundred Fifty Thousand Dollars ($16,450,000.00) plus the estimated value of the Change Fund as of the Closing Date (the "Estimated Change Fund Value") by wire transfer of immediately available funds, and (iv) Buyer shall pay to Seller not later than twenty (20) days following the Closing the estimated value of the Inventory as of the Closing Date (the "Estimated Inventory Value") by wire transfer of immediately available funds. Contemporaneously with the execution of this Agreement, the Escrow Deposit component payments shall be sent to Fidelity National Title Insurance Company, to the attention of Patty Beverly, 1300 Dove Street, Suite 300, Newport Beach CA 92660 ("Fidelity"), and held by Fidelity in one or more interest bearing escrow accounts pursuant to Section 2.06 hereof. If the deposits are paid by check, these checks should be made out to Fidelity. If the Initial Escrow Deposit was paid by a check made out other than to Fidelity, it shall be cancelled and returned to the Buyer and replaced contemporaneously with the execution of this Agreement. (b) The value of the Change Fund and the Inventory shall be determined as follows: (i) Within three (3) days prior to the Closing Date, Seller shall prepare the Estimated Inventory Value and the Estimated Change Fund Value. Seller shall adjust the value of the Inventory and of the Change Fund in accordance with any reasonable request made by Buyer at least five days prior to Closing. (ii) On or about the Closing Date, pursuant to a mutually agreed upon schedule, representatives of both Buyer and Seller shall conduct a physical inventory of all cash registers and all items of Inventory at the Restaurants. Alternatively, if the Parties elect and agree, the performance of this inventory process may be delegated to a third-party (with any expense for such split evenly between Buyer and Seller). Promptly after the completion of such physical inventory, Seller shall present to Buyer a written document setting forth the Inventory and the value of the Inventory and the value of the Change Fund (the "Actual Inventory Value" and the "Actual Change Fund Value"). The value of the Inventory as of such time shall then be determined by the then current price lists of the then current vendors to the Restaurants. Buyer shall thereafter have fifteen (15) business days within which to review the written document setting forth the Inventory and the Actual Inventory Value and the Actual Change Fund Value and the work papers of Seller utilized in calculating these (which will be furnished to Buyer promptly on request) for purposes of verifying the accuracy and fairness of the Actual Inventory Value and the Actual Change Fund Value. (iii) The Actual Inventory Value and the Actual Change Fund Value determined by Seller shall be binding on Buyer unless Buyer presents to Seller written notice of disagreement within such fifteen (15) business day period, specifying in reasonable detail, insofar as feasible, the nature and extent of Buyer's disagreement. If Buyer does not provide to Seller such written notice of disagreement within such time period, Buyer shall pay to Seller, within twenty (20) business days of its receipt of the Actual Inventory Value and the Actual Change Fund Value, the amount, if any, by which the Actual Inventory Value and the Actual Change Fund Value exceed the Estimated Inventory Value and the Estimated Change Fund Value, in cash or other immediately available funds. On the other hand, if Buyer does not provide to Seller such written notice of disagreement within such time period, and if the Actual Inventory Value and the Actual Change Fund Value are less than the Estimated Inventory Value and Estimated Change Fund Value, Seller shall pay to Buyer, within the said twenty (20) 5 business days of its delivery of the Actual Inventory Value and the Actual Change Fund Value, the amount, if any, by which the Actual Inventory Value and the Actual Change Fund Value is less than the Estimated Inventory Value and the Estimated Change Fund Value, in cash or other immediately available funds. If Buyer does provide to Seller such written notice of disagreement, Buyer shall pay to Seller, concurrently with delivery of such written notice the amount, if any, by which that portion of the Actual Inventory Value and the Actual Change Fund Value with which Buyer does not disagree exceeds the Estimated Inventory Value and the Estimated Change Fund Value, in cash or other immediately available funds. Otherwise, Buyer's written notice of disagreement shall have no effect, as if it had never been given, and the Actual Inventory Value and the Actual Change Fund Value determined by Seller shall be binding on Buyer. The parties agree to use their good faith efforts to resolve such disagreement within fifteen (15) days after Seller receives written notice of such disagreement and partial payment (if applicable) from Buyer, at which time the applicable Party shall make a payment to the other Party in cash or other immediately available funds in accordance with the resolution of such disagreement. If the parties do not resolve such disagreement within such fifteen (15) day period, each party may pursue all legal remedies available to it. 2.02 FRANCHISE FEES; DEVELOPMENT FEES. The Purchase Price includes the Twenty Five Thousand Dollar ($25,000.00) Initial Franchise Fee per Restaurant set forth in Section 6.01 of the Franchise Agreements to be entered into at Closing, and no additional consideration for Initial Franchise Fees shall be owed by Buyer under said Franchise Agreements. The Purchase Price also includes the Five Thousand Dollar ($5,000.00) Development Fee per Restaurant set forth in Section 2.01 and EXHIBIT A to the Development Agreements attached hereto for each restaurant listed therein, and no additional consideration for Development Fees shall be owed by Buyer under said Development Agreements. Any Franchise Fees and Development Fees other than the above referenced fees are not waived, and shall be due from Buyer in accordance with the provisions of the applicable Franchise Agreements and Development Agreements respectively. If Buyer elects to franchise or develop any additional restaurants beyond those listed in the Franchise Agreements and Development Agreements attached hereto, and Buyer and Seller reach agreement regarding such additional restaurants, Buyer shall pay the identified Franchise Fees and Development Fees set forth in the Franchise Agreements and/or Development Agreements applicable to those additional restaurants. 2.03 PRORATIONS AND ADJUSTMENTS. The Purchase Price shall be subject to adjustment at Closing for payments due under the Assumed Contracts, real and personal property taxes and assessments, utilities and other similar items. The prorations shall be calculated based on the actual amounts of the 1999 and/or 2000 real and personal property taxes and assessments. If such amounts are not available, the prorations shall be calculated based on the 1998 amounts, subject to reproration when the actual amounts become available. Rents and other charges paid or due under any Assumed Contract and any other expense for the month of Closing will be prorated between Seller and Buyer, and Buyer shall in addition pay for the first full month's rent if the closing shall occur during the last ten days of the month in which the closing occurs. Buyer shall pay to Seller at the Closing an amount equal to the sum of all prepaid expenses and deposits associated with any Restaurant. In addition, Buyer shall pay Seller a prorated amount, as of the Closing Date, for all prepaid real and personal property taxes and assessments for the current year. Seller's employee benefit plans for health coverage and other insurance will be left in place through the end of the monthly period for which premiums have already been paid, and any prepaid premiums for such period shall be prorated at Closing between Seller and Buyer. 6 2.04 TAXES. Buyer shall pay all applicable federal, state and local sales taxes applicable to the transaction contemplated by this Agreement except for real estate transfer taxes, if any, which shall be divided equally between Buyer and Seller. The Purchase Price does not include any applicable federal, state and local taxes, including, but not limited to, tariffs, duties, impact fees, occupational taxes or other charges which may be payable upon the sale or use of the Purchased Assets. All such tariffs, duties, fees, taxes and other charges and the payment thereof to the appropriate taxing authority are the sole responsibility of Buyer. 2.05 ALLOCATION OF PURCHASE PRICE. Seller and Buyer agree that for U.S. federal income tax purposes, the Purchase Price shall be allocated as set forth on EXHIBIT 2.05. Seller and Buyer agree that said allocation of the Purchase Price shall be used by Seller and Buyer in reporting the transactions covered by this Agreement for income tax purposes and that each shall file an Asset Acquisition Statement (Form 8594) with the Internal Revenue Service consistent with EXHIBIT 2.05. 2.06 ESCROW, ESCROWED FUNDS AND CLOSING STATEMENT. All payments due between the parties in connection with completing and closing this transaction shall be paid to or forwarded through Fidelity, which shall hold the monies, in one or more interest bearing escrow accounts, and which shall pay the net proceeds due to Seller hereunder upon Closing, or refund monies to Buyer, pursuant to Section 5.01 and as otherwise provided herein. Payments at Closing (as defined in Section 5.01) shall be made pursuant to a closing statement that has been agreed to by the Parties at time of Closing, which closing statement shall have been prepared by Fidelity from information supplied by the Parties. Escrow fees shall be paid in equal parts by Buyer and Seller. The Parties shall, in good faith, provide any tax ID and other information and execute any documents or instructions reasonably required to facilitate the handling of this matter by Fidelity. Where documents or monies are delivered directly between the parties, whether prior to, at or subsequent to Closing, they shall provide confirmation of such if and as reasonably requested by Fidelity. Interest earned in any account shall be paid to the Party who eventually receives the principal contained therein and shall be paid to said party by Fidelity together with the principal due from the account. Where the paying party and the receiving Party are different, the paying Party shall receive credit for the principal amount. Fidelity shall not be required to assess the adequacy and sufficiency or the Parties' respective performances or documents, and may rely upon the Parties' respective representations concerning such, which representations in good faith shall be given by the Parties when due. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer (each of which shall be deemed material and independently relied upon by Buyer) as follows: 3.01 ORGANIZATION AND STANDING. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and assets and to conduct its business as now conducted or proposed to be conducted, and is moreover in good standing in each of the states where any of the Properties are located. This representation and warranty is made effective as of the Closing Date (as hereinafter defined). The representations and warranties made in this sub-section are not limited to or by the knowledge of Seller. 7 3.02 CORPORATE AUTHORITY. Seller has the full power and authority to enter into and perform this Agreement and to consummate the transactions contemplated by this Agreement in accordance with the terms of this Agreement. This representation and warranty is made effective as of the Closing Date (as hereinafter defined). The representations and warranties made in this subsection are not limited to or by the knowledge of knowledge of Seller. 3.03 CORPORATE AUTHORIZATION; BINDING AGREEMENT. Seller has taken all necessary corporate actions to authorize and approve the execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement. This Agreement constitutes a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms. This representation and warranty is made effective as of the Closing Date (as hereinafter defined). The representations and warranties made in this sub-section are not limited to or by the knowledge of knowledge of Seller. 3.04 TITLE TO ASSETS; ASSUMED CONTRACTS. (a) Seller shall warrant ownership of the Purchased Assets other than real estate assets to the extent set forth in the Bills of Sale (as hereinafter defined). (b) Seller shall warrant ownership of the Fee Real Properties to the extent set forth in the Deeds (as hereinafter defined). (c) To the knowledge of Seller: (i) there has not occurred any material default under any of the Assumed Contracts on the part of Seller or any of the other parties thereto; and (ii) no event has occurred which with the giving of notice or the lapse of time or both, would constitute a material default under any of the Assumed Contracts on the part of Seller or any of the other parties thereto. 3.05 CONDITION OF ASSETS AND COMPLIANCE WITH LAWS. Except as disclosed in EXHIBIT 3.11: (a) there are no material defects to structures, HVAC or equipment; (b) each of the Properties and Restaurant operations complies with all applicable laws, codes and regulations; (c) no changes or modifications will be required upon transfer of control to continue operation under any local building codes, zoning laws or other applicable laws or regulations; and (d) Seller agrees that, and hereby represents and warrants that, all assignable permits to operate each Property as a Rally's Restaurant are hereby assigned and transferred to Buyer effective as of the Closing Date, and Seller agrees to execute any reasonable documents presented by Buyer to effectuate any such assignments. Seller shall bear the expense of satisfying any such legal requirements existing as of Closing whether or not any such deficiencies or obligations are presently known by Seller. 3.06 BROKERS' FEES. Seller has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Buyer could become liable or obligated, other than fees and commissions owed to National Franchise Sales, which shall be the sole responsibility of Seller. The representations and warranties made in this sub-section are not limited to or by the knowledge of knowledge of Seller. 8 3.07 EMPLOYEES. Buyer shall not be subject to any liability after Closing in connection with any employee compensation or benefits, any union obligations, or any employee ERISA benefits or entitlements, based upon employment prior to the Closing Date (as hereinafter defined), including, without limitation, outstanding claims or liabilities not presented for payment until after the closing date with respect to the Seller's self-insured management medical plan (i.e., "run out claims") The representations and warranties made in this sub-section are not limited to or by the knowledge of knowledge of Seller. 3.08 TAXES AND LIENS. Buyer shall not be subject to any liability after Closing in connection with any federal, state or local taxes or assessments due with respect to the period prior to the Closing Date (as hereinafter defined); all such obligations shall be paid by Seller as part of its obligations at Closing. Similarly, Buyer shall not be subject to any liability after Closing in connection with any mortgage or other liens existing with respect to the period prior to the Closing Date (as hereinafter defined); all such obligations shall be paid by Seller as part of its obligations at Closing. The representations and warranties made in this sub-section are not limited to or by the knowledge of knowledge of Seller. 3.09 PENDING CLAIMS, LITIGATION, ARBITRATIONS, AND OTHER PROCEEDINGS. Buyer shall not be subject to any liability after Closing in connection with any pending litigation, arbitration, or other proceeding purportedly asserting claims due with respect to the period prior to the Closing Date (as hereinafter defined). Except as disclosed in the Most Recent UFOC (as hereinafter defined) or in EXHIBIT 3.11, there are no material pending claims, demands, litigation, arbitrations, or government proceedings. This representation includes, but is not limited to, any environmental claims, demands, litigation, arbitrations and government proceedings. The representations and warranties made in this sub-section are not limited to or by the knowledge of knowledge of Seller. 3.10 SELLER'S FINANCIAL DATA. For each Restaurant, copies of the financial statements for the most recent trailing thirteen (13) periods (collectively, the "Financial Statements") have been provided to Buyer. Seller represents and warrants that the Financial Statements, including the notes to the Financial Statements, if any, fairly and in good faith reflect Seller's transactions, assets, liabilities, and financial position with respect to the Restaurants in all material respects, and that they are generally consistent with Seller's accounting methods that are utilized in its overall audited financial statements. Neither Seller nor any representative of Seller makes any representations or statements of projected or forecasted sales, profits or earnings of the Restaurants or any other Seller restaurants, and Seller reminds Buyer that Buyer's future sales, profits and earnings at the Restaurants may be more or less than past sales, profits and earnings. 3.11 KNOWLEDGE AND OTHER LIMITATIONS. Certain of the representations and warranties of Seller are stated to be made "to the knowledge" of Seller or refer to what is "known" to Seller or of what Seller is "aware." All representations and warranties are made based upon, and limited to, the knowledge of Seller, whether expressly so stated in the particular representation and warranty or not, except in the case of any representations and warranties that are expressly stated herein not to be so limited. The Parties hereto agree that the meaning of such expressions shall with respect to Seller in all cases be understood as comprising the knowledge and belief of any of the corporate officers of Seller without any type of additional investigation thereof, except that these corporate officers shall be deemed to have knowledge of any facts that reasonably should have been known to any of them whether or not any of them in fact had such 9 knowledge. All representations and warranties are moreover limited in scope to the Restaurants, rather than to any other operations or assets of Seller, unless expressly so stated to the contrary in the particular representation or warranty, and all are limited in scope to material components thereof. Attached hereto as EXHIBIT 3.11 is a Disclosure Statement that lists certain facts that are exceptions or qualifications to various of the general Representations and Warranties or other factual statements recited in this Agreement. Seller does not imply by inclusion of any item on EXHIBIT 3.11 that Seller believes such to be material to this transaction or to any of the Purchased Assets. Any exceptions, qualifications, or other facts or events actually reported by Seller to Buyer, or discovered by Buyer, or otherwise actually known to Buyer, prior to expiration of the relevant time period prescribed below for Buyer's Due Diligence Review shall be deemed to have been included on EXHIBIT 3.11 whether or not they specifically there appear. 3.12 RENT PAYMENTS: Upon Seller's timely receipt of payment from Buyer, by automated clearing house pre-authorized withdrawals ("ACH" withdrawals, as authorized by Section 6.04 of the Franchise Agreements) or otherwise, of the monthly payments due under each of the Subleases, Seller represents and warrants that all corresponding sums due under the prime leases shall be paid on or before the dates such sums are due to the prime landlords. In the event of Seller's failure to pay any such sums Buyer shall have the right thereafter to make the payments on the applicable Properties directly to the prime landlords and to offset each such payment against the rents that would otherwise be due to Seller under the applicable Sublease. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER AND OWNERS Buyer and Owners, jointly and severally, represent and warrant to Seller (each of which shall be deemed material and independently relied upon by Seller) as follows: 4.01 ORGANIZATION AND STANDING OF BUYER. Buyer is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware with full power and authority to own its properties and assets and to conduct its business as now conducted or proposed to be conducted. 4.02 COMPANY AUTHORITY. Buyer has the full power and authority to enter into and perform this Agreement and to consummate the transactions contemplated by this Agreement in accordance with the terms of this Agreement. 4.03 COMPANY AUTHORIZATION; BINDING AGREEMENT. Buyer has taken all necessary corporate actions to authorize and approve the execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement. This Agreement constitutes a legal, valid and binding obligation of Buyer and Owners, enforceable against Buyer and Owners in accordance with its terms. 4.04 REVIEW OF CERTAIN MATERIALS. Buyer and Owners have received and reviewed the information contained in the most recent Rally's Restaurant Uniform Franchise Offering Circular dated on or about September 9, 1999, as amended January 14, 2000, and Buyer understands that it will probably soon receive an updated version dated and filed in April 2000 (collectively the "UFOCs"). Neither Seller nor any representative of Seller has made any representations or 10 statements of projected or forecasted sales, profits or earnings of the Restaurants or any other Seller restaurants, and Buyer acknowledges that future sales, profits and earnings at the Restaurants may be more or less than past sales, profits and earnings. In making its decision to proceed with this transaction, Buyer has not relied on any information provided by Seller or any other third-party other than what is contained in the UFOCs it has received previously or receives prior to Closing and what is contained in the representations, warranties and other information set forth in this Agreement. Buyer and Owners acknowledge that they are in the business of operating restaurants and that they have examined the Purchased Assets to their satisfaction in light of Seller's foregoing disclaimer of warranties. 4.05 BROKERS' FEES. Buyer has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Seller could become liable or obligated. 4.06 ANTITRUST "SAFE HARBOR". The size and prior business activities and ownership and affiliations of Buyer are such as do not require any filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and the rules and regulations promulgated thereunder. 4.07 KNOWLEDGE AND OTHER LIMITATIONS. Certain of the representations and warranties of Buyer and/or Owners are stated to be made "to the knowledge" of Buyer and/or Owners or refer to what is "known" to Buyer and/or Owners or of what Buyer and/or Owners are "aware." A11 representations and warranties are made based upon, and limited to, the knowledge of Buyer and/or Owners, whether expressly so stated in the particular representation and warranty or not. The Parties hereto agree that the meaning of such expressions shall with respect to Buyer and/or Owners in all cases be understood as comprising the knowledge and belief of the company officers of Buyer and/or Owners without any type of additional investigation thereof. ARTICLE V COVENANTS OF SELLER, BUYER AND OWNERS Seller, Buyer and Owners each covenant with the others as follows: 5.01 THE CLOSING. The Closing of the transactions contemplated by this Agreement (the "Closing") will take place at the offices of Fidelity National Title Insurance Company, 1300 Dove Street, Suite 300, Newport Beach CA 92660 at noon local time on May 11, 2000, or such other place and time as Seller and Buyer may agree in writing (the "Closing Date"). All prorations and adjustments pursuant to Section 2.03 shall be calculated effective as of midnight (12 hours later) on the Closing Date. The actual changeover of operations, inventory, employment of personnel, receipts, expenses, and change fund entitlement shall be done effective either as of midnight (12 hours later) on the Closing Date or as of the end of business that night for each individual Restaurant, whichever is later. Any or all Parties may elect not to be physically present, including having persons with adequate signing authority present, in the offices where the Closing is to take place on the Closing Date; however, in such case it shall be the responsibility of each not attending Party to have provided whatever executed and other documents, funds, and authorizations are necessary so that the Closing may properly and timely take place. The obligations of the Parties to close or effect the transactions contemplated by this Agreement will be subject to satisfaction, unless 11 duly waived, of the applicable conditions set forth in this Agreement. If the Closing has not occurred by May 26, 2000, then Seller shall have the right, at any time thereafter, but prior to Closing, to terminate this Agreement pursuant to Section 11.01 and, in the absence of a material default by Seller or any material failure to satisfy any of the conditions precedent to the obligations of Buyer and Owners to close contained in Articles VI or VII, to retain the Deposit. 5.02 CONDUCT OF BUSINESS PRIOR TO CLOSING. From the date of this Agreement through and including the Closing Date and except as otherwise consented to or approved by Buyer in writing, Seller shall operate the Restaurants and maintain the Purchased Assets in the usual and ordinary course and substantially in the same manner as heretofore conducted. 5.03 DUE DILIGENCE REVIEW. From the date of this Agreement through and including the earlier of the Closing Date or the date of termination of this Agreement or any specifically applicable deadline date prescribed below: (a) Seller will afford to the officers, attorneys, accountants and other representatives of Buyer reasonable access during normal business hours to the following books and records of Seller relating to the Restaurants and the Purchased Assets: information and records with respect to any contracts, leases, permits, litigation files, environmental reports, title reports and surveys, in each case to the extent related to the Restaurants and the Purchased Assets (excepting only general company trade secrets not limited to these Restaurants and attorney work product or privileged materials); and (b) Seller will afford to the officers, attorneys, accountants and other representatives of Buyer reasonable access to the Restaurants and related facilities, at all reasonable times during normal business hours, for the purpose of conducting inspections of the Restaurants and related facilities and all equipment located therein and assessing the day-to-day operations of the Restaurants; provided such access is discreet and controlled by Seller and does not unreasonably interfere with the business of Seller operated at the Restaurants. (c) If the transaction contemplated by this Agreement fails to close for any reason, Buyer shall return to Seller all documentation, test results, surveys and other information furnished to Buyer by or on behalf of Seller. Buyer agrees to reimburse, indemnify and hold Seller harmless from and against any and all damages, injuries, liabilities, claims, demands or liens, including, without limitation, any property damage, personal injury or claim of lien against the Restaurants, resulting directly from the activities by Buyer and/or Buyer's agents permitted by this Section (including, without limitation, reasonable attorneys' fees and expenses paid or incurred by Seller during litigation, if any), which indemnity shall survive the Closing or earlier termination of this Agreement. (d) Seller shall procure, on behalf of Buyer, title insurance commitments agreeing to issue to Buyer one or more owner policies of title insurance insuring its ownership interests created pursuant to the Deeds, and one or more leasehold policies of title insurance insuring its leasehold interests created pursuant to the Leases and the Subleases (the "Commitments"). Buyer shall pay the title insurance expenses and premiums at Closing. Buyer will, within fifteen (15) days after receipt of the title commitments, notify Seller in writing specifying the matters to which Buyer objects (the "Title Objections"), otherwise Buyer shall be deemed to have no Title Objections. If Seller cannot or elects not to correct the Title Objections on or prior to the Closing Date, Buyer will 12 have the option of either accepting the title as it then is or terminating this Agreement on or before the Closing Date, in which event the Deposit shall be returned to Buyer without any further liability to either Party. All easements, rights of way, restrictions and other matters of record, including, but not limited to, property taxes not yet due and payable, the matters, if any, which would be disclosed by a current and accurate survey and the exceptions listed in the Commitments to which Buyer does not object, as well as all exceptions to which it objects but the correction of which is waived by Buyer at or prior to Closing, are referred to herein as the "Permitted Title Exceptions". Fidelity shall be used as the title company for purposes of obtaining the above-referenced title commitments. (e) At its sole option and expense, Buyer may procure "AS BUILT" surveys of the Properties (the "Surveys"). If the Surveys show any encroachments on the Properties or that improvements located on the Properties encroach on setback lines, easements, lands of others or violate any restrictions, covenants of this Agreement or applicable governmental regulation, the same shall constitute a title defect to which Buyer may object pursuant to the terms of Section 5.03(d) (f) At its sole option and expense, Buyer may procure Phase I environmental assessment reports for the Properties within twenty (20) days of the effective date of this Agreement. Buyer shall, within said twenty (20) day period, notify Seller in writing, specifying the matters on the report to which Buyer objects (the "Environmental Objections"). Otherwise Buyer shall be deemed to have no Environmental Objections. If Seller cannot or elects not to correct the Environmental Objections on or prior to the Closing Date, Buyer will have the option of either accepting the environmental condition of the Properties as it or they exist, or terminating this Agreement on or before the Closing Date, in which event the Deposit (less the costs of any title insurance expenses) shall be returned to Buyer without any further liability to either Party. (g) Notwithstanding anything to the contrary contained herein, Buyer shall have the right to terminate this Agreement on or before the twentieth (20) day after the effective date of this Agreement (the "Due Diligence Deadline") if Buyer is not satisfied for any reason with its due diligence investigation of the Restaurants and the Purchased Assets. Buyer shall exercise such right by delivering written notice thereof to Seller on or before the Due Diligence Deadline, in which event the Agreement shall terminate and the Deposit (less the costs of any title examination and cancellation expenses) shall be returned to Buyer without any further liability to either Party. Should Buyer fail to provide Seller with written notice of its election to terminate this Agreement on or before the Due Diligence Deadline, then Buyer shall be deemed to be satisfied with the above items and its due diligence, and, subject to the fulfillment and satisfaction any Title Objections, Environmental Objections and of Seller's obligations herein, Buyer shall close and settle this transaction pursuant to the terms of this Agreement. 5.04 EMPLOYEES. As provided in Section 5.01, the actual changeover of employment of personnel shall be done effective either as of midnight on the Closing Date or as of the end of business that night for each individual Restaurant, whichever is later. Seller shall terminate all employees ("Employees") employed at the Restaurants effective as of then. At a mutually agreed time prior to Closing, Buyer, with the permission and accompanied by a representative of Seller, may discuss with Seller's employees at the Restaurants offers of employment following consummation of the transactions contemplated by this Agreement. Buyer shall thereafter have the right to offer employment to or to hire such employees of Seller effective after the Closing Date. Seller shall be liable for failure to provide any notice required under the Worker Adjustment in 13 Retraining Notification Act of 1988 ("WARN") in connection with the transaction contemplated by this agreement. Buyer does not assume, adopt or ratify in any manner whatsoever any collective bargaining agreements between Seller and its employees or collective bargaining representatives of its employees and Buyer does not assume and has no responsibility for any present or past employment practices, policies or procedures of Seller. 5.05 TRANSFER AND OTHER EXPENSES. Transfer fees, taxes and expenses, if any, on the Leases and Subleases and the transfer of the Purchased Assets by Seller to Buyer shall be paid by Buyer. All costs associated with title commitment, title insurance and related matters, surveys, environmental reviews, inspections and similar due diligence and other items shall be paid by Buyer. 5.06 CONFIDENTIALITY. Except as provided in Sections 5.04 and 13.02, or as may be required to complete this transaction, neither Buyer nor Owners shall disclose the transaction contemplated by this Agreement or any information regarding such transaction to any employee of Seller, including, but not limited to, employees at the Restaurants or any employee of any vendor of Seller without Seller's prior consent. All information concerning this contemplated transaction or the financial terms of this Agreement shall be kept confidential by each Party, its attorneys, accountants and representatives. All information furnished by one Party to the other in connection with this Agreement or the transactions contemplated by this Agreement shall be kept confidential by such other Party (and shall be used by it and its officers, attorneys, accountants, financiers, and representatives only in connection with this Agreement and the transactions contemplated by this Agreement) except to the extent that such information (i) already is known to such other Party when received, (ii) thereafter becomes lawfully obtainable from other sources, (iii) is required to be disclosed in any document filed by Seller or its affiliate with the Securities and Exchange Commission or any other agency of any government or (iv) is otherwise required to be disclosed pursuant to any federal or state law, rule or regulation or by any applicable judgment, order or decree of any court or by any governmental body or agency having jurisdiction after such other Party has given reasonable prior written notice to the other Parties to this Agreement of the pending disclosure of any such information. In the event that the transactions contemplated by this Agreement shall fail to be consummated, each Party shall promptly cause all copies of documents or extracts thereof containing information and data as to another Party to be returned to such other Party. 5.07 MECHANICS' LIENS. Seller shall furnish to Buyer at Closing an affidavit (the "Mechanics' Lien and Possession Affidavit") attesting to the absence, unless otherwise provided for herein, of any claims of mechanics' liens relating to the Properties and further attesting that the costs of any improvements or repairs to the Properties have been or will be paid prior to the applicable Closing Date. 5.08 MISCELLANEOUS AGREEMENTS. Subject to terms and conditions herein provided, each Party shall use its commercially reasonable best efforts to take or cause to be taken, all action and to do or cause to be done, all things necessary, appropriate or desirable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. 5.09 INSURANCE. Between the date of this Agreement and the Closing Date, Seller shall continue in force its existing insurance policies with respect to the Restaurants and the Purchased Assets. 14 5.10 SHOPPING. Notwithstanding the existence of this Agreement, Seller shall have the right to continue to solicit, initiate, encourage and participate in negotiations and discussions and enter into any agreement, including, but not limited to, a back-up agreement in the event the transactions contemplated by this Agreement are not ultimately consummated, regarding the sale of any or all of the Restaurants and the Purchased Assets. 5.11 BEVERAGE EQUIPMENT. The parties acknowledge that the beverage dispensing equipment located in the Restaurants (the "Beverage Equipment"), which is leased by Seller from The Coca-Cola Company and from Dr Pepper/Seven Up, Inc., is not included in the Purchased Assets. Buyer shall enter into a direct relationship with both of these beverage companies regarding leasing the Beverage Equipment. 5.12 FINANCING AND ORGANIZATIONAL PLANS. Buyer shall deliver to Seller, for Seller's approval, within ten (10) days after the effective date of this Agreement if not previously provided, a detailed financing and organizational plans with respect to the Restaurants (the "Financing and Organizational Plans"), which shall include a description of Buyer's sources of financing, financing terms (including copies of all commitment letters), and Buyer's organization and management structure. 5.13 BULK SALES ACT. It will not be practicable to comply or to attempt to comply with the procedures of the Uniform Commercial Code or other bulk sales or similar law of the state or states in which the restaurants are located. Accordingly, Seller hereby agrees to defend, indemnify and hold Buyer harmless from and against any and all costs, losses, liabilities, claims and expenses (including reasonable attorneys' fees) arising out of or resulting from the failure of Buyer or Seller to comply with or perform any actions in connection with the provisions of any such law. ARTICLE VI CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER, BUYER AND OWNERS The respective obligations of each Party to effect the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver at or prior to the Closing Date of the following conditions: 6.01 LITIGATION. Neither Seller nor Buyer shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the transactions contemplated by this Agreement. 6.02 SUBLEASE CONSENTS. All required consents to the Subleases from the landlords of the Leased Real Property shall have been obtained. 15 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER The obligations of Buyer to effect the transactions contemplated by this Agreement shall be subject to fulfillment or waiver at or prior to the Closing Date of the following conditions: 7.01 REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller set forth in Article III of this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date (as though made on and as of the Closing Date) except (i) to the extent such representations and warranties are by their express provisions made as of a specified date and (ii) for the effect of transactions contemplated by this Agreement. 7.02 PERFORMANCE OF OBLIGATIONS. Seller shall have performed in all material respects all obligations required to be performed by it under this Agreement on or prior to the Closing Date. 7.03 OFFICER'S CERTIFICATE. Seller shall have furnished to Buyer a certificate dated as of the Closing Date, to the effect that the conditions set forth in Sections 7.01 and 7.02 have been satisfied. 7.04 TITLE OBJECTIONS AND ENVIRONMENTAL OBJECTIONS. All Title Objections and Environmental Objections shall have been corrected to Buyer's reasonable satisfaction. 7.05 DOCUMENTS. Buyer shall have received the documents specified in Article IX of this Agreement. 7.06 PERMITS AND AUTHORIZATIONS. Buyer shall have obtained any and all consents or waivers from third parties required for the consummation of the transactions contemplated by this Agreement and Buyer hall have obtained any and all permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the transactions contemplated by this Agreement. 7.07 FIFTEEN YEAR REMAINING LEASE PERIODS. With respect to the Leased Restaurants, the average remaining term length of all such leases shall extend at least fifteen (15) years after the Closing Date. With respect to any Leased Restaurants that do not already have remaining lease periods, including any lessee options, in excess of fifteen (15) years, Seller shall in good faith attempt to re-negotiate their leases on commercially reasonable terms so that each the re-negotiated leases, including lessee options, shall be at least fifteen (15) years after the Closing Date. Seller shall in good faith attempt to have the remaining period of each such lease exceed fifteen (15) years. This condition precedent shall be satisfied if the result is that some of these leases still do not have remaining fifteen (15) year periods, provided (i) that Seller has made the above-described good faith efforts, and provided that the remaining term length of ninety percent (90%) the leases, including lessee options, for all of the Leased Restaurants shall extend at least fifteen (15) years after the Closing Date and (ii) that Buyer's lender is agreeable to extending the contemplated acquisition financing without any material adverse adjustment attributable to any failure to have at least fifteen (15) year terms on all of the leases. The Restaurants individually identified in Section 1.04 as not in fact being subleased to Buyer shall not be counted with reference to determining whether the ninety percent (90%) requirement, or any other criteria set forth in this section, have been satisfied. 16 ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER The obligations of Seller to effect the transactions contemplated by this Agreement shall be subject to the fulfillment or waiver at or prior to the Closing Date of the following conditions: 8.01 REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer and Owners set forth in Article IV of this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date (as though made on and as of the Closing Date) except (i) to the extent such representations and warranties are by their express provisions made as of a specified date and (ii) for the effect of transactions contemplated by this Agreement. 8.02 PERFORMANCE OF OBLIGATIONS. Buyer shall have performed in all material respects all obligations required to be performed by it under this Agreement on or prior to the Closing Date. 8.03 OFFICER'S CERTIFICATE. Buyer and Owners shall have furnished to Seller certificates dated as of the Closing Date to the effect that the conditions set forth in Sections 8.01 and 8.02 have been satisfied. 8.04 DOCUMENTS. Seller shall have received the documents specified in Article X of this Agreement. 8.05 FINANCING AND ORGANIZATIONAL PLANS. Seller shall have received the Financing and Organizational Plans, in form and substance reasonably satisfactory to Seller. 8.06 PERMITS AND AUTHORIZATIONS. Seller shall have obtained any and all consents or waivers from third parties required for the consummation of the transactions contemplated by this Agreement and Seller hall have obtained any and all permits, authorizations, consents, waivers and approvals required for the lawful consummation by it of the transactions contemplated by this Agreement. ARTICLE IX DOCUMENTS TO BE DELIVERED BY SELLER At or prior to Closing, Seller shall deliver to Buyer the following documents duly executed by Seller: 9.01 INTENTIONALLY OMITTED. 9.02 SUBLEASES. The Subleases. 9.03 DEEDS. The Deeds. 17 9.04 OFFICER'S CERTIFICATE. The certificate referred to in Section 7.03 of this Agreement, which shall include any exceptions to the representations and warranties of Seller which have arisen or of which Seller has learned since the date hereof. 9.05 BILL OF SALE. A bill of sale conveying ownership of the Fixed Assets, Inventory, Permits and Licenses and Change Fund in the form attached hereto as EXHIBIT 9.05 (the "Bill of Sale"). 9.06 ASSUMPTION AGREEMENT. An assignment and assumption agreement assigning the Assumed Contracts to Buyer in the form attached hereto as EXHIBIT 9.06 (the "Assumption Agreement"). 9.07 ASSIGNMENTS AND TRANSFERS. Such good and sufficient instruments of assignment and transfer as shall be necessary to assign and transfer to Buyer all of Seller's right, title and interest in and to the remaining Purchased Assets not conveyed by the Bill of Sale, the Assumption Agreement and the Beverage Sublease. 9.08 OTHER INSTRUMENTS OF TRANSFER. Such other instruments of assignment or transfer as shall be reasonably requested by Buyer to confirm and vest in Buyer ownership of all of the Purchased Assets and other documents and instruments as required by the terms and conditions of this Agreement. 9.09 CONSENTS TO ASSIGNMENTS. To the extent obtained, copies of all consents of third parties that are necessary to effect the transfer from Seller to Buyer of any of the Purchased Assets and to consummate the transactions contemplated by this Agreement, including the lease modifications extending lease terms (as required to satisfy Section 7.07), landlord consents to subleasing, memoranda of lease and/or sublease, landlord estoppels, and landlord subordination and non-disturbance agreements. 9.10 MECHANICS' LIEN AND POSSESSION AFFIDAVIT. The Mechanics' Lien and Possession Affidavit. 9.11 OTHER AFFIDAVITS. Such other affidavits or certificates as are reasonably required by Fidelity to insure title to Buyer's leasehold interest in the Leased Real Property as required under this Agreement. 9.12 BEVERAGE EQUIPMENT ASSIGNMENT AGREEMENT. Intentionally omitted. 9.13 SOFTWARE LICENSE AGREEMENT. The Software License Agreement. 9.14 FRANCHISE AGREEMENTS. The Franchise Agreements, which shall be in the form set forth in the Most Recent UFOC. 9.15 AREA DEVELOPMENT AGREEMENTS. The Area Development Agreements, which shall be in the form set forth in the Most Recent UFOC. 9.16 OTHER DOCUMENTS. Any other documents for which provision is made in the Most 18 Recent UFOC, or which shall have reasonably been requested by Buyer or its counsel, or which shall have reasonably requested by Fidelity, or which are required to be delivered pursuant to any provision of this Agreement. ARTICLE X DOCUMENTS TO BE DELIVERED BY BUYER At Closing, Buyer shall deliver to Seller the following documents duly executed by Buyer: 10.01 INTENTIONALLY OMITTED. 10.02 SUBLEASES. The Subleases. 10.03 DEEDS. The Deeds, if and to the extent that Buyer's signature is required on such. 10.04 ASSUMPTION AGREEMENT. The Assumption Agreement. 10.05 OFFICER'S CERTIFICATE. The certificate referred to in Section 8.03 of this Agreement, which shall include any exceptions to the representations and warranties of Buyer and Owners which have arisen or of which Buyer and Owners have learned since the date hereof. 10.06 PERSONAL GUARANTY. Intentionally omitted. 10.07 BEVERAGE EQUIPMENT ASSIGNMENT AGREEMENT. Intentionally omitted. 10.08 SOFTWARE LICENSE AGREEMENT. The Software License Agreement. 10.09 FRANCHISE AGREEMENTS. The Franchise Agreements, which shall be in the form set forth in the Most Recent UFOC. 10.10 THE AREA DEVELOPMENT AGREEMENTS. The Area Development Agreements, which shall be in the form set forth in the most recent UFOC. 10.11 OTHER DOCUMENTS. Any other documents for which provision is made in the most recent UFOC, or which shall have reasonably been requested by Seller or its counsel, or which shall have reasonably requested by Fidelity, or which are required to be delivered pursuant to any provision of this Agreement. ARTICLE XI TERMINATION 11.01 EVENTS OF TERMINATION. This Agreement may be terminated, without liability on the 19 part of the terminating Party to the other Parties, at any time before the Closing Date: (i) by mutual consent of Buyer, Owners and Seller; (ii) by Buyer if any of the conditions precedent found in Articles VI and VII of this Agreement shall have become incapable of fulfillment through no fault of Buyer and have not been waived in writing by Buyer; (iii) by Seller if any of the conditions precedent found in Articles VI and VIII of this Agreement shall have become incapable of fulfillment through no fault of Seller and have not been waived in writing by Seller; (iv) by Buyer if there is a breach of or failure by Seller to perform in any material respect any of the representations, warranties, commitments, covenants or conditions under this Agreement, which breach or failure is not cured within five (5) business days after written notice thereof is given to Seller and prior to the Closing Date; (v) by Seller if there is a breach of or failure by Buyer or Owners to perform in any material respect any of the representations, warranties, commitments, covenants or conditions of Buyer or Owners under this Agreement, which breach or failure is not cured within five (5) business days after written notice thereof is given to the Party committing such breach and prior to the Closing Date; (vi) by Buyer if it is not satisfied with its due diligence investigation of Seller and provides written notice to Seller of such dissatisfaction prior to expiration of the applicable time period prescribed in Section 5.03; or (vii) by Seller at any time on or after May 12, 2000, if the Closing has not theretofore been consummated and completed. In the event of termination and abandonment by any Party as above provided in clauses (ii), (iii), (iv), (v), (vi) or (vii) of this Section, written notice shall forthwith be given to the other Party, which notice shall clearly specify the reason of such Party for terminating this Agreement. 11.02 SURVIVAL AFTER TERMINATION. If this Agreement is terminated and the transactions contemplated hereby are abandoned pursuant to Section 11.01, then this Agreement shall become null and void and of no effect, except for the provisions of Sections 5.03(c), 5.06, 11.02, 11.03, 13.06, 13.07, 13.09, 13.10, 13.11, 3.13, 13.14, 13.15 and 13.16 of this Agreement which shall survive the termination of this Agreement; provided, however, that such termination shall not affect the right of any Party (a) to bring an action against another Party for a breach occurring prior to the termination or for a wrongful termination, (b) to bring an action based on a misrepresentation or breach of warranty in Section 3.05 or 4.05, or (c) to be indemnified under Article XII with respect to any Damages attributable to any such breach or misrepresentation. 11.03 RETURN OF ESCROW DEPOSIT. If this Agreement is terminated by Seller pursuant to Sections 5.01 or 11.01(v) or 11.01(vii), and Seller is not then in material default of this Agreement, and there is no material failure to satisfy any of the conditions precedent to the obligations of Buyer and Owners to close contained in Articles VI or VII, then Seller shall be entitled to the Escrow Deposit and any interest earned thereupon. If this Agreement is terminated pursuant to any other provision, Buyer shall be entitled to the Escrow Deposit and any interest earned thereupon. 20 ARTICLE XII INDEMNIFICATION 12.01 SURVIVAL AFTER CLOSING. The representations and warranties of the Parties contained in this Agreement shall survive the Closing and continue in full force and effect for a period of one (l) year following the Closing Date, except that the representations and warranties of Seller pursuant to Sections 3.04(a) and 3.07 through 3.09 shall survive until the expiration of any applicable statute of limitations. All covenants and agreements contained in this Agreement shall survive the Closing in accordance with their terms. 12.02 INDEMNIFICATION. (a) BY SELLER. By execution of this Agreement, Seller hereby agrees to indemnify Buyer and its successors and assigns and hold them harmless against and in respect of: (i) any and all losses, liabilities, costs and expenses (including without limitation judgments and settlement payments) incurred by any of them directly or indirectly incident to, arising in connection with or resulting from or relating to any material misrepresentation, breach, nonperformance or inaccuracy of any representation, warranty or covenant by Seller made or contained in this Agreement or in any Exhibit, certificate or other document executed and delivered to Buyer under or pursuant to this Agreement or the transactions contemplated herein; (ii) any and all losses, liabilities, costs and expenses (including without limitation judgments and settlement payments) incurred by them directly or indirectly incident to, arising in connection with, resulting from or relating to any liabilities of Seller, other than those assumed by Buyer pursuant to this Agreement; and (iii) any and all losses, liabilities, costs and expenses incurred by Buyer in claiming, contesting or remedying any breach, misrepresentation, non-performance, inaccuracy or other matter described above, or in enforcing its right of indemnification hereunder, including, by way of illustration and not limitation, all reasonable legal, accounting and other professional fees and expenses, filing fees, collection costs and all fees, costs and expenses incurred in defending claims which, if successfully prosecuted, would have resulted in Damages (as defined herein). (b) BY BUYER AND OWNERS. By execution of this Agreement, Buyer agrees to indemnify Seller and its parent corporation and their successors and assigns and to hold them harmless from and against and in respect of: 21 (i) any and all losses, liabilities, costs and expenses that are actual damages (including without limitation judgments and settlement payments) incurred by them directly or indirectly incident to, arising in connection with or resulting from any material misrepresentation, breach, non-performance or inaccuracy of any representation, warranty or covenant by Buyer made or contained in this Agreement or in any Exhibit, certificate or document executed and delivered to Seller under or pursuant to this Agreement or the transactions contemplated herein; (ii) any and all losses, liabilities, costs and expenses (including without limitation judgments and settlement payments) incurred by them directly or indirectly incident to, arising in connection with, resulting from or relating to any liabilities assumed by Buyer pursuant to this Agreement; and (iii) any and all losses, liabilities, costs and expenses incurred by Seller in claiming, contesting or remedying any breach, misrepresentation, non-performance, inaccuracy or other matter described above, or in enforcing its right of indemnification hereunder, including, by way of illustration and not limitation, all reasonable legal, accounting and other professional fees and expenses, filing fees, collection costs and all fees, costs and expenses incurred in defending claims which, if successfully prosecuted would have resulted in Damages (as defined herein). (c) DAMAGES. Any and all of the items set forth in Sections 12.02(a) and 12.02(b) for which a Party is entitled to be indemnified hereunder are called "Damages." (d) INITIAL CLAIM NOTICE. When a Party becomes aware of a situation which may result in Damages for which it would be entitled to be indemnified hereunder, such Party (the "Indemnitee") shall submit a written notice (the "Initial Claim Notice") to the other Party or Parties (the "Indemnitor") to such effect within thirty (30) days after it first becomes aware of such matter and shall furnish the Indemnitor with such information as it has available demonstrating its right or possible right to receive indemnity. If the potential claim is predicated on, or later results in, the filing by a third-party of any action at law or in equity (a "Third-Party Claim"), the Indemnitee shall provide the Indemnitor with a supplemental Initial Claim Notice not later than ten (10) days prior to the date on which a responsive pleading must be filed, and shall also furnish a copy of such claim (if made in writing) and of all documents received from the third-party in support of such claim. Every Initial Claim Notice shall, if feasible, contain a reasonable estimate by the Indemnitee of the losses, costs, liabilities and expenses (including, but not limited to, costs and expenses of litigation and attorneys' fees) which the Indemnitee may incur. In addition, each Initial Claim Notice shall name, when known, the person or persons making the assertions that are the basis for such claim. Failure by the Indemnitee to deliver an Initial Claim Notice or an update thereof in a timely manner shall not relieve the Indemnitor of any of its obligations under this Agreement except to the extent that actual monetary prejudice to 22 the Indemnitor can be demonstrated, including, without limitation, prejudice due to failure to provide notice to applicable insurers. (e) RIGHTS OF INDEMNITOR. If, prior to the expiration of thirty (30) days from the mailing of an Initial Claim Notice (the "Claim Answer Period"), the Indemnitor shall request in writing that such claim not be paid, the same shall not be paid, and the Indemnitor shall settle, compromise or litigate in good faith such claim, and employ attorneys of its choice to do so; provided, however, that Indemnitee shall not be required to refrain from paying any claim which has matured by court judgment or decree, unless appeal is taken therefrom and proper appeal bond posted by the Indemnitor, nor shall it be required to refrain from paying any claim where such action would result in the foreclosure of a lien upon any of its assets or a default in a lease or other contract except a lease or other contract which is the subject of the dispute. If the Indemnitor elects to settle, compromise or litigate such claim, all reasonable expenses, including but not limited to all amounts paid in settlement or to satisfy judgments or awards and reasonable attorney's fees and costs, incurred by the Indemnitor in settling, compromising or litigating such claim shall be secured to the reasonable satisfaction of Indemnitee. Indemnitee shall cooperate fully to make available to the Indemnitor and its attorneys, representatives and agents, all pertinent information under its control. Indemnitee shall have the right to elect to settle or compromise all other contested claims with respect to which the Indemnitor has not, within the Claim Answer Period, acknowledged in writing (i) liability therefor, and (ii) its election to assume full responsibility for the settlement, compromise, litigation and payment of such claim. (f) FINAL CLAIMS STATEMENT. At such time as Damages for which the Indemnitor is liable hereunder are incurred by Indemnitee by actual payment thereof or by entry of a final judgment, Indemnitee shall forward a Final Claims Statement to the Indemnitor setting forth the amount of such Damages in reasonable detail on an itemized basis. Indemnitee shall supplement the Final Claims Statement with such supporting proof of loss (e.g. vouchers, canceled checks, accounting summaries, judgments, settlement agreement, etc.) as the Indemnitor may reasonably request in writing within thirty (30) days after receipt of a Final Claims Statement. All amounts reflected on Final Claims Statements shall be paid promptly by Indemnitor to Indemnitee. (g) LIMITATIONS ON INDEMNIFICATION. (i) TIME LIMITATION. Notwithstanding the other provisions of this Article XII, neither Party shall be liable to indemnify the other Party following the Closing Date for Damages arising out of any misrepresentation, breach or inaccuracy of any representation or warranty unless the Party seeking indemnification delivers an Initial Claim Notice to the other Party of its claim for indemnification hereunder prior to the end of the applicable survival period set forth in Section 12.01. (ii) MINIMUM DOLLAR LIMIT ON INDEMNIFICATION. Neither Seller nor Buyer shall be liable for a claim for Damages hereunder unless and until the aggregate Damages incurred by the other party exceeds the sum of Twenty Five Thousand Dollars ($25,000) (the "Threshold Amount"), in which event the Indemnitor shall indemnify the Indemnitee in accordance with this Article 12 for all Damages arising hereunder in excess of the Threshold Amount. 23 (h) EXCLUSIVE REMEDY. The remedies provided for in this Article 12 are exclusive and shall be in lieu of all other remedies for any breach of any representation, warranty, covenant, obligation or other provision of this Agreement, except for any other remedy for which express provision is made in this Agreement; provided, however, that the foregoing clause of this sentence shall not be deemed a waiver by any Party of any right to specific performance or injunctive relief. ARTICLE XIII MISCELLANEOUS 13.01 BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the company Parties and their respective successors and permitted assigns and of the individual Parties and their respective heirs, personal representatives and permitted assigns. 13.02 PUBLICITY. Subject to the other provisions of this Agreement, press releases and other publicity materials relating to the transactions contemplated by this Agreement shall be released by any of the Parties only after review and with the consent of the other Parties; provided, however, Seller shall have the right to make a public announcement of the execution of this Agreement and/or the Closing of this transaction and a disclosure of the basic terms and conditions of this Agreement. 13.03 LIST OF EXHIBITS. As mentioned in this Agreement, there are attached hereto or delivered herewith, the following Exhibits: EXHIBITS EXHIBIT NO. EXHIBIT CAPTION - ------- --------------- A Restaurant Properties 1.01(e) Assumed Contracts 1.01 (g) Software License Agreement 1.04(i) Form of Deed 1.04(ii) Form of Sublease 1.04(iii) Form of Management Agreement 2.05 Purchase Price Allocation 3.11 Disclosure Statement 9.05 Form of Bill of Sale 9.06 Form of Assumption Agreement 10.06 Form of Guaranty 13.04 HEADINGS. The headings in this Agreement have been inserted solely for ease of reference and shall not be considered in the interpretation or construction of this Agreement. 13.05 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same instrument. 24 13.06 GOVERNING LAW/EXCLUSIVE JURISDICTION. This Agreement shall be construed, and exclusive jurisdiction over any case or controversy shall exist, as prescribed in Section 18.06 of the Franchise Agreements. 13.07 EXPENSES. Except as otherwise herein provided, each of the Parties shall pay its respective costs and expenses incurred or to be incurred by it in connection with the negotiations respecting this Agreement and the transactions contemplated by this Agreement, including preparation of documents, obtaining any necessary approvals and the consummation of the other transactions contemplated by this Agreement. 13.08 NON-ASSIGNMENT. This Agreement shall not be assignable by any Party without the written consent of the other Parties, which consent shall not unreasonably be withheld. Subject to the foregoing, this Agreement and the terms and provisions hereof shall inure to the benefit of and be binding upon the heirs, successors and permitted assigns of the parties hereto. 13.09 ENTIRE AGREEMENT. This Agreement contains the entire agreement among the Parties with respect to the transactions contemplated by this Agreement and supersedes all other prior agreements, understandings and letters related to this Agreement. Except as set forth in this Article, in the event of a conflict between this Agreement and the Franchise Agreements or Development Agreement, the specific provisions of the Franchise Agreements and Development Agreement shall prevail over this Agreement. Notwithstanding the above, The Parties hereby expressly agree upon and adopt the following constructions of certain rights and obligations set forth in the Franchise Agreements, Development Agreements and Software License Agreement, and agree that these, together with any other explicit clarifications, modifications or waivers thereof set forth in this section, Sections 13.11, 13.17, 13.18, other sections of this Article, or elsewhere in this Agreement (whether listed in this Section 13.09 or not), shall govern the rights of the Parties: (a) to the extent set forth in Agreement Section 1.01(g), certain fees under the Software License Agreement are included in the Purchase Price; (b) to the extent set forth in Agreement Section 2.02, certain Franchise Fees, Royalty fees and Development Fees are included in the Purchase Price; (c) The requirements set forth in Sections 3.01 - 3.05 of the Franchise Agreements are deemed satisfied or waived as of the Closing Date concerning each of the Properties sold hereby; (d) solely to the extent set forth in Agreement Sections 3.09, 3.10 and 4.04, Buyer and Owners have relied, and are entitled to have relied, upon the Financial Statements as well as the UFOCs; (e) contrary to any other possible interpretation of the various provisions of the Franchise Agreements and Development Agreements, no business shall be deemed to be a "Competing Businesses" as defined in either Section 1.04 of the Franchise Agreement or in the Development Agreement unless it is a restaurant business where fifty percent (50%) or more of entree gross sales are of hamburgers, cheeseburgers, and hotdogs; (f) neither Buyer nor Owners nor any member of an Owner's family nor any company directly or indirectly owned or controlled by Buyer or an Owner nor any Operating Partner of Buyer nor any investor in or financier of Buyer, shall be required to devote fulltime effort to the operation of the Restaurants; (g) no member of the immediate family of an Owner that does not share the residence of said Owner shall, unless acting in concert with such Owner with respect to such matters, be bound by any provisions of the Franchise Agreements or the Development Agreements, including without limitation those related to any Competitive Business; (h) notwithstanding the provisions of Section 3.02 et al. of the Franchise Agreements, Seller's approval is hereby given to all the provisions, terms and conditions of the various financing 25 documents and other documents being utilized by Buyer to complete this transaction, and Seller waives any rights it might otherwise be deemed to have subsequently to take actions under this Section in contravention of any of these financing documents and other documents, provided that the documents in question have been presented to Seller not less than five (5) business days prior to Closing and Seller has not expressed a written objection thereto within three (3) days following such receipt, and Seller further agrees to not unreasonably withhold its consent to any subsequent financing or security interest documents Buyer presents for use in connection with any further financing provided that Seller's financial and franchise system interests are not materially harmed thereby; (i) notwithstanding any language used in the body of the Development Agreements, the actual geographical area covered by the Development Agreements shall be that specified in the respective EXHIBIT As attached thereto; (j) notwithstanding any other possible interpretation of Section 7.02(e) of the Development Agreements, Buyer shall only be required to transfer all of its rights to the restaurants within the market or markets covered by the Development Agreements being transferred; (k) notwithstanding any language in the Franchise Agreement, as set forth in Section 1.01 (g) of this Agreement, regarding the in-restaurant computer hardware and the CHAMPS/BOS software, Seller warrants that they, as of Closing, do perform adequately to permit Buyer to satisfy the franchise fee payment timing obligations set forth in the Franchise Agreement, and with respect to the CHAMPS/BOS software that, as upgraded, throughout the term of the Franchise Agreement, it will continue to perform adequately to permit this, and if this specific warranty is not satisfied, Buyer and Seller shall in good faith cooperate to develop an alternative timing schedule for franchise fee payments that is in fact supported by the computer hardware and CHAMPS/BOS software; (1) notwithstanding Section 3.02 of the Franchise Agreements, it is understood that the final sentence of that section shall not be applicable between the Parties since it might violate Buyer's financing agreement if Seller were ever to exercise the rights purportedly granted under this sentence, and Seller hereby waives any right to exercise such rights during the term of the Franchise Agreements; (m) notwithstanding anything appearing to the contrary in Section 5.03 of the Franchise Agreements or elsewhere in the Franchise Agreements or in the Development Agreements, a default or breach of the Development Agreements shall not constitute a default or breach of the Franchise Agreements or of the Asset Purchase Agreement; (n) it is hereby stipulated that the five (5) year minimum period before Seller may require the remodeling of any Property sold hereunder shall be deemed to commence on the Closing Date; (o) notwithstanding any provision appearing in the Franchise Agreements, Development Agreements, or ancillary documents, neither Party shall be entitled to treat the other unreasonably, however, Seller's uniform criteria and procedures that are then currently enforced by Seller uniformly against all franchisees under the same Franchise and Development Agreements shall not be deemed unreasonable; (p) regarding Seller's right of first refusal set forth in Section 13.06 of the Franchise Agreements, Franchisee need only obtain an earnest money deposit in the amount of three percent (3%) of the offering price in advance of presenting such offer, and contrary to any other possible reading thereof, the Parties stipulate that it shall not be reasonable for Seller to require representations and warranties, closing documents or indemnities that are materially different from any that were part of the original, matched arrangement, and the final sentence of Section 13.06 of the Franchise Agreements shall be construed such that the only material changes that trigger the provisions of that sentence are material changes that are more favorable to the proposed transferee; (q) regarding Seller's right to purchase set forth in Section 16.04 of the Franchise Agreements, item "a" in the fourth paragraph of that section shall be interpreted only to require that Buyer transfer to Seller good and merchantable title that is free and clear of liens to the extent Buyer then holds the Property on that basis; (r) Section 17.02 of the Franchise Agreements shall be interpreted so as to require that Seller tender defense to Buyer of, and liability for, any claim or suit as to which Buyer is required to 26 indemnify Seller pursuant to the first sentence of Section 17.02, and only if Buyer is unwilling or unable to accept the tender is Seller entitled to defend and/or settle such claims and suits without Buyer's consent and then to seek reimbursement from Buyer; (s) Section 17.03 of the Franchise Agreements shall not be construed to make Buyer responsible for any income taxes imposed upon Seller's receipt of royalties, rents or other revenues to Seller related to the leased and/or franchised Properties; (t) Sections 18.03 - 18.05 of the Franchise Agreements insofar as is meaningful and practical shall be construed to create mutual rights and liabilities between the Parties, and where the Franchise Agreements terms appear to be more favorable to the claims brought by one party than those by the other party, the version that is more favorable to an aggrieved party shall be available to whichever is the aggrieved Party in our situation (e.g., consequential damages shall be available to the aggrieved Party no matter whether that Party is Buyer or Seller); (u) notices delivered pursuant to the Franchise Agreements in the manner contemplated by clause "b" of Section 18.11 thereof shall be deemed delivered on the same day of the transmission if such day is a regular business day at the address to which the notice is delivered (generally Mondays through Fridays, inclusive, except for customary holidays) or, if not, on the next business day at that address; (v) the final sentence of Section 10.02 of the Franchise Agreements shall be construed as if it read: "Any such special regional promotion advertising fees shall be in addition to, and not credited towards, the 5% advertising expenditure required by this Section"; (w) the automated clearing house ("ACH") withdrawals by Seller/Franchisor authorized by Section 6.04 of the Franchise Agreement are only with respect to rents and royalties that are then due and payable, and the Parties agree that Seller/Franchisor shall not be entitled to make ACH withdrawals of any other obligations of Buyer/Franchisee and instead agree that these other obligations shall be timely paid by Buyer/Franchisee by wire transfer or check; (x) the provisions of clauses (d), (e) and (f) in Franchise Agreement Section 8.01 shall not be applicable in the event the Franchisee entity or a successor thereto conducts a public offering and becomes a reporting company under the Securities Exchange Act; (y) Franchisee advises, and Franchisor acknowledges, that it may be part of Franchisee's business strategy ultimately to conduct a public offering, become a reporting company under the Securities Exchange Act and conduct other business activities, including the operation of other restaurants which will not be Competitive Businesses. Accordingly, Franchisor agrees that upon request of Franchisee as to such matters it will not withhold its consent and will waive any inconsistent provisions of the Franchise Agreement or Development Agreement provided that Franchisee provides copies to Franchisor in advance of any offering materials for Franchisor's review of the accuracy of any descriptions of the Rally's franchised system, and Franchisee's Rally's restaurants and the nature of the relationship between Franchisor and Franchisee and Franchisee reimburses all of Franchisor's reasonable out-of-pocket expenses incurred in such review, agrees to indemnify Franchisor and its affiliates against any liability in connection with such offering and satisfies Franchisor as to either the continuity by Owners in the management position of Franchisee following such offering or the suitability of any additional of successor management in connection with such offering; (z) where the various provisions of the Development Agreements correspond to provisions of the Franchise Agreements that are construed, interpreted or modified in this Section 13.09, those provisions of the Development Agreements shall be similarly construed, interpreted or modified insofar as is reasonable and logical just as if those corresponding Development Agreements provisions had been specifically identified in this Section 13.09. 13.10 NOTICES. Any notice or other communications required or permitted by this Agreement shall be in writing and shall be deemed to have been duly given on the date mailed if sent by registered or certified mail (return receipt requested) or by commercial overnight service or 27 by facsimile (with delivery receipt retained) to the Parties at the following addresses (or at such other address for a Party as shall be specified by like notice): (a) if to Seller, to: Checkers Drive-In Restaurants, Inc. 3916 State Street, Suite 300 Santa Barbara, California 93105 Attn: W. Fillmore Wood, Jr. Fax: 805-569-6699 (b) if to Buyer or Owners, to: Altes, LLC 621 N. W. 53rd Street, Suite 650 Boca Raton, FL 33487-8220 Attn.: Robert H. Alrod Fax: 561-995-0925 13.11 SECURITY FUND. In lieu of providing any personal guaranty from Owners, Buyer shall establish and maintain a security fund (the "Fund") in an amount not less than Two Hundred Ten Thousand Dollars ($210,000.00) (the "Fund Amount"), in a form, institution and manner reasonably satisfactory to Seller, to secure Buyer's monetary obligations established under the Franchise Agreements, Subleases and ancillary agreements. Half of the total Fund Amount shall be established as such not later than thirty (30) days following the Closing Date. The other half of the total Fund Amount shall be established as such not later than ninety (90) days following the Closing Date. This Fund shall be established and maintained such that Seller shall be entitled and able to withdraw against it to satisfy any monetary obligations of Buyer that are not timely paid without any requirement that Buyer concur that the amount has not been timely paid. Buyer's obligation to establish and maintain this Fund includes the obligation to restore the balance of the Fund to not less than the full Fund Amount within ten (10) days following written notification that Seller is withdrawing all or a portion of the Fund Amount. Seller shall be required to send written notice (sent by facsimile or other method) to Buyer and also to the escrow holder or other trustee of the Fund not less than one (1) business day in advance of a planned withdrawal from the Fund, and to specify in such notice the amount to be withdrawn, the date that the amount will be withdrawn, and the particular monetary obligation of Buyer that has not been timely paid with respect to which nonpayment the withdrawal is being made. One (1) business day following the sending of such written notice, Seller shall be entitled to withdraw the noticed amount, and the escrow holder or other trustee of the Fund is hereby instructed and directed to deliver or allow such withdrawal without any requirement that Buyer indicate its concurrence in the withdrawal. The withdrawal shall be delivered or allowed unless Buyer shall have prior to the withdrawal communicated by written notice sent to Seller as well as to the escrow holder or trustee of the Fund that it disputes in good faith that the applicable amount was not timely paid and accordingly disputes that the withdrawal is permitted. If Seller shall be determined to have wrongfully withdrawn an amount from the Fund, or if Buyer shall be determined to have wrongfully blocked a withdrawal, then the party thus determined to have acted wrongfully shall, be entitled to receive from the other double the amount wrongfully withdrawn or blocked. It shall be no defense to this double payment obligation that the party determined to have acted wrongfully shall have acted in good faith if it shall be determined 28 that said withdrawal or blockage was nevertheless wrongful or unjustified in fact. Notwithstanding the above, Buyer shall be entitled to terminate the Security Fund effective after the second anniversary of the Closing Date provided that Buyer has not been notified by Seller in writing that it is in breach of, and in default under, this Agreement or any agreement referenced herein (other than for any failure to maintain any required pace of development under the Development Agreements) more than two (2) times collectively during this two year period, and provided further that Buyer is not then insolvent and moreover that Buyer's net worth is not less than it was ninety (90) days following the Closing Date. 13.12 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Parties. 13.13 ATTORNEY FEES. In the event that a Party to this Agreement brings an action against the other Party to this Agreement, by reason of the breach of any condition, covenant, representation or warranty in this Agreement, or otherwise arising out of this Agreement, the prevailing party in such action shall be entitled to recover from the other reasonable attorneys' fees to be fixed by the court which shall render a judgment, plus costs of suit, as well as all such fees and costs incurred in any appeal or in any collection effort. 13.14 WAIVER. Any Party may, by written notice to the other Parties, (i) waive any inaccuracies in the representations or warranties of such other Party contained in this Agreement or in any document delivered pursuant to this Agreement, (ii) waive compliance with any of the conditions and covenants of such other Party contained in this Agreement or (iii) waive or modify performance of any of the obligations of such other Party under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement shall be deemed to constitute a waiver by the Party taking such action of compliance with any of the representations, warranties, covenants, conditions or agreements contained in the Agreement. The waiver by any Party of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach. 13.15 CONSTRUCTION. Each Party acknowledges and agrees that it has read and understands each and every provision of this Agreement, the Schedules and the Exhibits hereto and has considered all relevant business and tax aspects related thereto. The Parties hereto further acknowledge and agree that each Party has had the opportunity to consult with and obtain legal advice and counseling from an attorney in relation to each and every provision of this Agreement, the Schedules and the Exhibits hereto, and each Party acknowledges and agrees for itself it has either availed itself of that opportunity or has knowingly and willfully declined such representation. Therefore, the language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against either Party. 13.16 SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement, whether in whole or in part, shall not in any way affect the validity and/or enforceability of any other provision of this Agreement. Any invalid or unenforceable provisions shall be deemed severable to the extent of any such invalidity or unenforceability. 13.17 CROSS-DEFAULTS. Notwithstanding anything to the contrary set forth in this Agreement, or in any of the documents listed in EXHIBIT 13.03, or in any other document delivered 29 by Seller pursuant to Article IX, where any of these documents provides that a direct default of one agreement shall constitute the basis for exercising a cross-default remedy with respect to some other agreement, it is expressly understood that the Parties' cross-default rights shall be limited to material breaches of the directly breached agreement. Monetary defaults shall not be deemed material for cross-default purposes unless the amount in question exceeds Seventy Five Hundred Dollars ($7,500.00) per affected Property. The following is stipulated to be a non-exclusive list of examples of non-monetary matters that are agreed not to constitute material defaults for cross-default purposes: violations of health and safety codes; violations of zoning codes; violations of other city and other local government laws; general building, maintenance, landscaping, and structural compliance problems; uncollected trash; and unlawful signage. This provision shall moreover be construed solely as a limitation upon broader cross-default rights otherwise afforded, and shall not be deemed to create cross-default rights where such are not elsewhere expressly provided, nor to broaden any specific cross-default rights that are elsewhere limited to an even greater extent. The Parties further agree that Seller must provide thirty (30) days prior written notice specifically stating that Seller intends to treat the default of any particular agreement as the basis for exercising its cross-default rights against any other agreement, and that Seller shall not be entitled to pursue a cross-default if Buyer either cures the default within the thirty (30) days or, in the case of, a default that cannot be cured within thirty (30) days, Buyer commences in good faith to commence to cure and thereafter diligently continues to pursue cure until completed. 13.18. RESTAURANT CLOSURES AND DEVELOPMENT AGREEMENT OBLIGATIONS. (A) The following language will be added as a new section at the end of EXHIBIT A to each of the three Development Agreements [and, in that document and section, "you" or "your" refer to Buyer, and "we" or "our" refer to Seller]: "You shall initially make a good faith effort to operate each of the existing units transferred by the Asset Purchase Agreement profitably. But you shall have the right in your sole discretion to conclude, at any time after making such efforts, that any of the units thereby transferred are not profitable for you and moreover not likely to become profitable for you, and thence to close these specific units at any time, provided that each of the following conditions is satisfied: (a) prior to closing a unit, you provide written notice to us that you are have determined that a specific unit is unprofitable and cannot be made profitable, and declaring that you are electing to close and replace that unit with a new unit not yet open, which will be covered by the Development Agreement; (b) you continue to make all rent, tax and other payments required under your sublease from us; (c) the closed unit is one where continued operation is not a legal requirement based upon our prime lease or otherwise and you, specifically and in writing, agree to indemnify and hold us harmless from any liabilities to our landlord or anyone else in connection with the closing and non-operation of the unit and in connection with the ongoing obligations to make payments; and (d) any unit so closed is afterwards replaced by a new unit (on a one-new-forone-closed basis), which is opened and conducting regular daily restaurant operations within a period that shall not exceed 90 calendar days after the closed unit ceases regular daily restaurant operations. Provided that all of the above criteria are met, each replacement unit shall count as half a new unit against your requirements to open and operate new Rally's Restaurants under this Development Agreement. Thus, two substituted new replacement units (for closed units) shall be required to replace the substituted for obligation under the Development Agreement for a new non-replacement unit. You shall not be deemed in breach of the Asset Purchase Agreement, the Franchise Agreements, the Development Agreements, or the various subleases, provided that each of the above criteria is satisfied. The Parties specifically recognize that should Buyer elect to 30 utilize the procedures provided in this section, the total number of Rally's Restaurants that Buyer is expected and required to operate pursuant to all of the above referenced agreements will be reduced by operation of this section. (B) Concerning Property #872, in Carbondale, Illinois, Buyer will acquire from Seller the subleases for this Property as is provided elsewhere in this Agreement, but Buyer shall have the right prior to Closing to designate that it does not wish to operate a Restaurant at this location provided that (a) Buyer continues to make all rent, tax and other payments required under Buyer's sublease from Seller; and (b) the closed unit is one where continued operation is not a legal requirement based upon the Seller's prime lease or otherwise and Buyer, specifically and in writing, agrees to indemnify and hold Seller harmless from any liabilities to Seller's landlord or anyone else in connection with the closing and non-operation of the unit and in connection with the ongoing obligations to make payments. If Buyer elects this right to declare prior to Closing that it does not wish to operate this Restaurant #872, and complies with the criteria prescribed in this Subsection 13.18 (B), then Buyer shall be under no obligation to replace it with a new operating unit. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 31 IN WITNESS WHEREOF, Seller and Buyer have caused this Agreement to be executed by their respective duly authorized representatives and Owners have executed this Agreement, as of the day and year first above written. "SELLER" ATTEST: CHECKERS DRIVE-IN RESTAURANTS, INC. /s/ W. FILLMORE WOOD, JR. By /s/ WILLIAM P. FOLEY II - --------------------------------- -------------------------------- Print Name: W. Fillmore Wood, Jr. Print Name: William P. Foley II --------------------- ----------------------- SVP & Assitant Secretary Title: Chairman - --------------------------------- ---------------------------- "BUYER" ATTEST: ALTES, LLC Print Name: /s/ [ILLEGIBLE] By /s/ ROBERT ALROD --------------------- -------------------------------- Secretary Print Name: - --------------------------------- ----------------------- Title: ---------------------------- "OWNERS" WITNESS: ALDOR, LLC /s/ [ILLEGIBLE] By /s/ ROBERT H. ALROD - --------------------------------- -------------------------------- Secretary Print Name: Robert H. Alrod - --------------------------------- ----------------------- ATTEST: ALTES, LLC By /s/ ROBERT ALROD - --------------------------------- -------------------------------- Print Name: Print Name: Robert H. Alrod ---------------------- ----------------------- Secretary Title: Director - --------------------------------- ---------------------------- 32 EXHIBIT A ST. LOUIS, MO FEE REAL PROPERTIES TO BE DEEDED TO BUYER - -------------------------------------------------------------------------------- REST # NEW # F # ADDRESS CITY STATE ZIP - -------------------------------------------------------------------------------- 851 8136 1427 10334 PAGE AVENUE ST. LOUIS MO 63114 - -------------------------------------------------------------------------------- 852 8137 1428 826 FIRST CAPITAL DRIVE ST. CHARLES MO 63301 - -------------------------------------------------------------------------------- 856 8141 1432 3730 GOODFELLOW ST. LOUIS MO 63120 - -------------------------------------------------------------------------------- 858 8142 1434 1220 TRUMAN BLVD. CRYSTAL CITY MO 63019 - -------------------------------------------------------------------------------- 863 8147 1439 930 NORTH KINGS HIGHWAY ST. LOUIS MO 63108 - -------------------------------------------------------------------------------- 864 8148 1440 6008 NORTH ILLINOIS FAIRVIEW HEIGHTS IL 62208 - -------------------------------------------------------------------------------- 874 8154 1446 1501 TROY ROAD EDWARDSVILLE IL 62025 - -------------------------------------------------------------------------------- 878 8157 1497 2182 N HWY 67 FLORISSANT MO 63033 - -------------------------------------------------------------------------------- 894 8165 1766 305 N. VANDEVENTER ST. LOUIS MO 63108 - -------------------------------------------------------------------------------- 9 TOTAL RESTAURANTS 33 ST. LOUIS, MO LEASED REAL PROPERTIES TO BE SUBLEASED TO BUYER
- ------------------------------------------------------------------------------------------------------- REST # NEW # F # ADDRESS CITY STATE ZIP MO. RENT COMMENT - ------------------------------------------------------------------------------------------------------- 853 8138 1249 10004 HALLS FERRY ROAD ST. LOUIS MO 63136 51,096 Land Lease - ------------------------------------------------------------------------------------------------------- 854 8139 1430 2807 SOUTH JEFFERSON ST. LOUIS MO 63118 39,200 Land Lease - ------------------------------------------------------------------------------------------------------- 855 8140 1431 #1 FOX VALLEY CENTER ARNOLD MO 63010 48,000 Land Lease - ------------------------------------------------------------------------------------------------------- 859 8143 1435 506 SOUTH MAIN O'FALLON MO 63166 63,480 Land Lease - ------------------------------------------------------------------------------------------------------- 860 8144 1436 6710 WEST FLORISSANT JENNINGS MO 63136 49,300 Land Lease - ------------------------------------------------------------------------------------------------------- 861 8145 1437 8106 MANCHESTER BRENTWOOD MO 63140 51,870 Land Lease - ------------------------------------------------------------------------------------------------------- 862 8146 1438 1999 SOUTH CENTER DRIVE ALTON IL 62002 40,350 Land Lease - ------------------------------------------------------------------------------------------------------- 865 8149 1441 4949 NATURAL BRIDGE ST. LOUIS MO 63115 63,000 Land Lease - ------------------------------------------------------------------------------------------------------- 866 8150 1442 3553 CHOUTEAU ST. LOUIS MO 63103 50,400 Land Lease - ------------------------------------------------------------------------------------------------------- 871 8151 1443 1600 CAMP JACKSON ROAD CAHOKIA IL 62206 33,600 Land Lease - ------------------------------------------------------------------------------------------------------- 872A 8152 1444 709 SOUTH ILLINOIS CARBONDALE IL 62901 30,800 Land Lease - ------------------------------------------------------------------------------------------------------- 872B 5,100 Parking Lease - ------------------------------------------------------------------------------------------------------- 873 8153 1445 2220 MADISON AVENUE GRANITE CITY IL 62040 36,048 Land Lease - ------------------------------------------------------------------------------------------------------- 876 8155 1448 1105 SOUTH ILLINOIS BELLEVILLE IL 62222 22,464 Land Lease - ------------------------------------------------------------------------------------------------------- 877 8156 1449 167 EAST MCARTHUR DRIVE BETHALTO IL 62010 40,890 Land Lease - ------------------------------------------------------------------------------------------------------- 879 8158 1604 7430 LINDBERGH MO 63042 29,700 Land Lease - ------------------------------------------------------------------------------------------------------- 880 8159 1646 1015 S. BROADWAY ST. LOUIS MO 63104 30,000 Land Lease - ------------------------------------------------------------------------------------------------------- 886 8160 1433 9520 ST. CHARLES ROCK ROAD ST. LOUIS MO 63114 28,800 Land Lease - ------------------------------------------------------------------------------------------------------- 888 8161 1654 660 CARLISLE BELLEVILLE IL 62221 38,496 Land Lease - ------------------------------------------------------------------------------------------------------- 890 8162 1465 3605 N. GRAND ST. LOUIS MO 63107 48,000 Land Lease - ------------------------------------------------------------------------------------------------------- 892 8163 1767 4527 W. MAIN BELLEVILLE IL 62223 30,000 Land Lease - ------------------------------------------------------------------------------------------------------- 893 8164 1768 4400 S KINGS HWY ST. LOUIS MO 63109 36,000 Land Lease - ------------------------------------------------------------------------------------------------------- 21 TOTAL RESTAURANTS
34 VIRGINIA BEACH, VA LEASED REAL PROPERTIES TO BE SUBLEASED TO BUYER
- ------------------------------------------------------------------------------------------------------------------------------------ REST# NEW# F# ADDRESS CITY STATE ZIP TELEPHONE # COUNTY MONTHLY RENT - ------------------------------------------------------------------------------------------------------------------------------------ 1501 8176 1060 1094 FREDERICK BLVD. PORTSMOUTH VA 23707 757 397-1560 Portsmouth City $2,504.67 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1502 8177 1078 935 VULCAN AVENUE NORFOLK VA 23502 757 455-5854 Norfolk City $3,703.00 Land/$1,000 Imprvmts - ------------------------------------------------------------------------------------------------------------------------------------ 1503 8178 1089 4022 WEST MERCURY BLVD. HAMPTON VA 23666 757 827-8672 Hampton City $2,472.50 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1504 8179 1146 692 J. CLYDE MORRIS BLVD. NEWPORT NEWS VA 23601 757 626-0889 Newport News City $5,840.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1505 8180 1149 1208 MONTICELLO NOROFLK VA 23510 757 625-8303 Norfolk City $6,350.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1506 8181 1165 4305-A INDIAN RIVER ROAD CHEASAPEAKE VA 23325 757 523-6231 Chesapeake City $2,190.26 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1507 8182 1186 845 LYNHAVEN PARKWAY VIRGINIA BEACH VA 23452 757 468-3299 Virginia Beach $2,424.58 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1509 8183 1262 410 DENBEIGH BLVD. NEWPORT NEWS VA 23602 757 874-7669 Newport News City $6,400.00 Land & Building Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1510 8184 1495 5101 VIRGINIA BEACH BLVD. VIRGINIA BEACH VA 23462 757 497-2220 Virginia Beach $8,333.33.00 Land Building Equip - ------------------------------------------------------------------------------------------------------------------------------------ 1513 8185 1513 1520 N. MAIN STREET SUFFOLK VA 23434 757 934-0602 Suffolk City $3,000.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1511 8186 1529 3101 WESTERN BRANCH ROAD CHEASAPEAKE VA 23321 757 483-6168 Chesapeake City $6,250.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1514 8187 1714 1064 W. MERCURY BLVD. HAMPTION VA 23666 757 826-3290 Hampton City $4,233.33 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 12 TOTAL RESTAURANTS
35 LITTLE ROCK, AR LEASED REAL PROPERTIES TO BE SUBLEASED TO BUYER
- ------------------------------------------------------------------------------------------------------------------------------------ REST# NEW# F# ADDRESS CITY ST ZIP AC PHONE COUNTY MONTHLY RENT - ------------------------------------------------------------------------------------------------------------------------------------ 1301 8166 1071 712 BROADWAY LITTLE ROCK AR 72201 501 374-544 Pulaski $2500.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1302 8167 1088 2301 WEST 28TH STREET PINE BLUFF AR 71603 870 534-676 Jefferson $2500.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1303 8168 1118 4523 CAMP ROBINSON ROAD LITTLE ROCK AR 72118 501 758-394 Pulaski $5,190.00 Land & Building - ------------------------------------------------------------------------------------------------------------------------------------ 1304 8169 1141 403 NORTH BLAKE STREET PINE BLUFF AR 71601 870 534-302 Jefferson $1,000.00 Land/$2,000.00 Bboard - ------------------------------------------------------------------------------------------------------------------------------------ 1305 8170 1175 11406 W. MARKHAM LITTLE ROCK AR 72211 501 221-350 Pulaski $3,585.60 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1306 8171 1199 2211 NORTH FIRST STREET JACKSONVILLE AR 72026 501 982-202 Pulaski $1,587.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1307 8172 1256 420 OAK STREET CONWAY AR 72032 501 327-260 Faulkner $2,175.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1308 8173 1364 5921 BASE LINE LITTLE ROCK AR 72209 501 562-588 Pulaski $5,626 Land & Bldg/$500 Esmnt - ------------------------------------------------------------------------------------------------------------------------------------ 1309 8174 1411 5400 WEST 12TH STREET LITTLE ROCK AR 72204 501 661-055 Pulaski $2,500.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 1310 8175 1541 311 S. ARKANSAS AVENUE RUSSELLVILLE AR 72801 501 967-552 Pope $1,150.00 Land Lease - ------------------------------------------------------------------------------------------------------------------------------------ 10 TOTAL RESTAURANTS
PROPERTY 1301 WILL NOT IN FACT BE SUBLEASED FROM SELLER TO BUYER. INSTEAD, PURSUANT TO SECTION 1.04, BECAUSE SELLER'S LEASE HAS ALREADY EXPIRED, BUYER WILL ENTER INTO A NEW LEASE DIRECTLY FROM THE PROPERTY OWNER. 36 EX-10.14 8 0008.txt EXHIBIT 10.14 CHECKERS DRIVE-IN RESTAURANTS, INC. 1994 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS AMENDED AND RESTATED THROUGH SETPEMBER 15, 2000 1. PURPOSE OF THE PLAN. Checkers Drive-In Restaurants, Inc., a Delaware corporation, hereby adopts this 1994 Stock Option Plan for Non-Employee Directors, as amended, providing for the granting of stock options to directors of the Company who are not employees of the Company or any of its Subsidiaries. The general purpose of the Plan is to secure for the Company and its stockholders the benefits of the incentive inherent in increased ownership of Common Stock of the Company by members of the Board of Directors of the Company who are not employees of the Company or any of its Subsidiaries. It is expected that such ownership will provide such Non-Employee Directors with a more direct stake in the future welfare of the Company and encourage them to remain directors of the Company. It is also expected that the Plan will encourage qualified persons to become directors of the Company. 2. CERTAIN DEFINITIONS. In addition to the words and terms elsewhere defined in this Plan, certain capitalized terms used in this Plan shall have the meanings given to them by the definitions and descriptions in this Section 2. Unless the context or use indicates another or different meaning or intent, then such definition shall be equally applicable to both the singular and plural forms of any of the capitalized words and terms herein defined. The following words and terms are defined terms under this Plan: 2.1 ANNUAL OPTION GRANT means, in the case of an Annual Option Grant granted prior to the Amendment Approval, an Option to purchase 3,000 shares of Common Stock and, in the case of an Annual Option Grant granted after the Amendment Approval, an Option to Purchase 20,000 shares of Common Stock (subject, in each case, to adjustment as provided in Section 11 hereof). 2.2 AMENDMENT APPROVAL means the approval of the holders of the Common Stock of the amendments to the Plan proposed in the Company's Proxy Statement dated July 17, 1997 and the Company's Proxy Statement dated August 24, 2000. 2.3 AWARD means grants of an Option under this Plan. 2.4 BOARD means the Board of Directors of the Company. 2.5 CODE means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. 2.6 COMMITTEE means the Committee of the Board appointed pursuant to Section 4 hereof. 2.7 COMMON STOCK means the Common Stock, par value $.001 per share, of the Company. Page 1 of 9 2.8 COMPANY means Checkers Drive-In Restaurants, Inc., a Delaware corporation. 2.9 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. 2.10 FAIR MARKET VALUE of a share of Common Stock shall mean the last reported closing sale price of a share of Common Stock as reported on a national securities exchange or the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), or the average of the last closing bid and asked prices in the over-the-counter market as reported by NASDAQ or as furnished by a broker-dealer making a market in the Common Stock as selected by the Board, as the case may be. If there shall be any material alteration in the present system of reporting sales prices of the Common Stock, or if the Common Stock shall no longer be traded or listed as set forth above, the Fair Market Value of the Common Stock as of a particular date shall be determined under such method as shall be determined by the Committee. 2.11 HOLDER means a Non-Employee Director who has received an Award under this Plan. 2.12 ISO means an incentive stock option within the meaning of Section 422A(b), or any successor section, of the Code. 2.13 INITIAL OPTION GRANT means, in the case of an Initial Option Grant granted prior to the date of the Amendment Approval, an Option to purchase 12,000 shares of Common Stock and, in the case of an Initial Option Grant granted on or after the date of the Amendment Approval, an Option to Purchase 100,000 shares of Common Stock (subject, in each case, to adjustment as provided in Section 11 hereof). 2.14 NON-EMPLOYEE DIRECTOR means a member of the Board of Directors of the Company who is not an employee of the Company or any of its Subsidiaries and who has not been an employee of the Company or any of its Subsidiaries for a period of at least one year. 2.15 NONQUALIFIED STOCK OPTION means a stock option that does not qualify as an ISO. 2.16 OPTION means a right granted to a Non-Employee Director pursuant to the Plan to purchase a specified number of shares of Common Stock at a specified price during a specified period and on such other terms and conditions as may be specified pursuant to the Plan. All Options granted under this Plan shall be Nonqualified Stock Options. 2.17 PLAN means this Amended and Restated 1994 Stock Option Plan for Non-Employee Directors, as it may be amended from time to time. Page 2 of 9 2.18 SEC means the Securities and Exchange Commission. 2.19 STOCK OPTION AGREEMENT means the agreement specified in Section 10 hereof. 2.20 STOCKHOLDERS' MEETING means the meeting of the Company's stockholders at which the Amendment Approval takes place. 2.21 SUBSEQUENT OPTION GRANT means an Option to purchase 300,000 shares of Common Stock (subject to adjustment as provided in Section 11 hereof) and an Option to purchase 550,000 shares of Common Stock as set forth in the amendment to the Plan in the Company's Proxy Statement dated August 24, 2000. 2.22 SUBSIDIARY means any present or future subsidiary of the Company as such term is defined in Section 425, or any successor section, of the Code. 2.23 TOTAL DISABILITY means a permanent and total disability as defined in Section 22(e)(3) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 hereof and this Section 3, the maximum aggregate number of shares of Common Stock which may be issued upon exercise of Options under the Plan shall be 5,000,000. Such shares may be, in whole or in part, authorized and unissued shares of Common Stock or issued shares of Common Stock which shall have been reacquired by the Company. If any Option shall expire or terminate for any reason without having been exercised in full, the unexercised shares subject thereto shall again be available for purposes of the Plan. 4. ADMINISTRATION. 4.1 POWERS. The Plan shall be administered by the Board, which shall have all of the powers vested in it by the terms of the Plan, such powers to include authority (within the limitations described herein) to prescribe the form of the agreement embodying Awards made under the Plan. Subject to the express provisions of the Plan, the Board shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the Plan. Any decision of the Board in the administration of the Plan, as described herein, shall be final and conclusive. 4.2 DELEGATION TO COMMITTEE. Notwithstanding anything to the contrary contained herein, the Board may at any time, or from time to time, appoint a Committee of at least two members, who shall be members of the Compensation Committee of the Board (or such other directors as the Board may designate), and delegate to the Committee the authority of the Board to administer the Plan. Upon such appointment and delegation, the Committee shall have all the powers, privileges and duties of the Board, and shall be substituted for the Board, in the administration of the Plan, except the power to appoint members of the Committee and to terminate, modify or amend the Plan. Page 3 of 9 The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed, may fill vacancies in the Committee and may discharge the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum and all determinations shall be made by a majority of such quorum. Any determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. 5. ELIGIBILITY. Options shall be granted hereunder only to Non-Employee Directors. 6. OPTIONS. 6.1 GRANT OF OPTIONS. (a) Each Non-Employee Director serving on the Board as of July 26, 1994, shall automatically be granted an Initial Option Grant, effective July 26, 1994, subject to approval of the Plan by the stockholders of the Company as required under Section 13 hereof. (b) Each new Non-Employee Director who is appointed or elected to the Board after July 26, 1994, shall automatically be granted an Initial Option Grant on the day he or she is appointed or elected to the Board, subject to approval of the Plan by the stockholders of the Company as required under Section 13 hereof. (c) Each Non-Employee Director serving on the Board as of the first day of each fiscal year, beginning with fiscal year 1995, shall automatically be granted an Annual Option Grant on such date, subject to approval of the Plan by the stockholders of the Company as required under Section 13 hereof. (d) Each Non-Employee Director serving on the Board both immediately prior to and immediately following the Stockholders' Meeting shall automatically be granted a Subsequent Option Grant as of such date, subject to approval of the Plan by the stockholders of the Company as required under Section 13 hereof. 6.2 OPTION PRICES. The purchase price of the Common Stock under each Option shall be 100% of the Fair Market Value of the Common Stock on the grant date (subject to adjustment as provided in Section 11 hereof). 6.3 TERM OF OPTIONS; LIMITATIONS ON EXERCISE. The term of each Option shall be for ten years from the date of grant, and, except as set forth in Section 8 hereof, shall be exercisable whether or not such Non-Employee Director is at the time of exercise or member of the Board and in the event of the death of the Non-Employee Director, may Page 4 of 9 be exercised by his or her estate. All Options granted on or after the date of the Stockholders' Meeting shall be immediately exercisable. All options granted prior to the date of the Stockholders' Meeting shall vest as follows: (i) one-fifth of the shares of Common Stock subject to each Initial Option Grant shall become exercisable on a cumulative basis on each of the first five anniversaries of the date of the grant of such Option; and (ii) one-third of the shares of Common Stock subject to each Annual Option Grant shall become exercisable on a cumulative basis on each of the first three anniversaries of the date of the grant of such Option. With respect to the Initial Option Grant granted to each Non-Employee Director on July 26, 1994, pursuant to Section 6.1 hereof, solely for the purpose of determining the exercisability of such Option, the date of grant shall be deemed to have been the later of (i) the date such Non-Employee Director was appointed to the Board or (ii) November 15, 1991; provided however, that no Options may be exercised until and unless the Plan is approved by the stockholders of the Company as required under Section 13 hereof. 6.4 EXERCISE OF OPTIONS. Any part of an Option granted and presently exercisable under the Plan shall be exercisable in whole, or in part, at any time during the term of the Option. Payment shall be made in cash or in whole shares of Common Stock already owned by the Holder of the Option or partly in cash and partly in such Common Stock. Such notice shall state that the Holder of the Option elects to exercise the Option, the number of shares in respect of which it is being exercised and the manner of payment for such shares, and shall either (i) be accompanied by payment of the full purchase price of such shares or (ii) fix a date (not more than 10 business days from the date of exercise) for the payment of the full purchase price of such shares. Cash payment shall be made by wire transfer, certified or bank check or personal check, in each case payable to the order of the Company; provided, however, that the Company shall not be required to deliver certificates for shares with respect to which an Option is exercised until the Company has confirmed the receipt of good and available funds in payment of the purchase price thereof. Common Stock payments (valued at the Fair Market Value of a share of Common Stock on the date of exercise) shall be made by delivery of stock certificates in negotiable form. If certificates representing Common Stock are used to pay all or part of the purchase price of an Option, separate certificates shall be delivered by the Company representing the same number of shares as each certificate so used, and an additional certificate shall be delivered representing any additional shares to which the Holder of the Option is entitled as a result of the exercise of the Option. 6.5 NONTRANSFERABILITY OF OPTIONS. No Options shall be transferable otherwise than by will or the laws of descent and distribution, and an Option may be exercised during the lifetime of the Holder thereof only by such Holder. A breach by the Holder of any of the restrictions, terms or conditions provided in the Plan or in the Holder's Stock Option Agreement will cause the Options covered thereby to be terminated. 7. ACCELERATION OF OPTIONS. Notwithstanding any contrary waiting period set forth herein, each outstanding Option granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby in the event (i) the Page 5 of 9 Board and, if required by law, the stockholders of the Company shall approve (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (ii) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any Subsidiary) (a) shall purchase any Common Stock of the Company (or securities convertible into the Company's Common Stock) for such, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, and (b) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company's securities), or (iii) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the periods. Any transaction referred to in the foregoing clause (i) is herein called an Approved Transaction, any purchase pursuant to a tender offer or exchange offer or otherwise as described in the foregoing clause (ii) is herein called a Control Purchase and the cessation of individuals constituting a majority of the Board as described in the foregoing clause (iii) is herein call a Board Change. The Stock Option Agreement evidencing Options granted under the Plan may contain such provisions limiting the acceleration of the exercise of options as provided in this Section 7 as the Board deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock received by the Holder from the Company. 8. REMOVAL BY THE STOCKHOLDERS FOR CAUSE. If a Holder is removed from the Board by the stockholders of the Company for cause prior to the exercise of any Option (for these purposes, cause shall include, but not be limited to, dishonesty, incompetence, moral turpitude, other misconduct of any kind and the refusal to perform his or her duties and responsibilities for any reason other than illness or incapacity), then all unexercised Options held by such Holder shall immediately be cancelled and terminate; provided, however, that if such removal occurs within 12 months after a Control Purchase or Board Change, termination for cause shall only mean a felony conviction for fraud, misappropriation or embezzlement, and if removed for any other reason, all outstanding Options may be exercised at any time during the remainder Page 6 of 9 of the period during which such Holder would have been able to exercise such Option had the Holder not been removed from office. 9. NONALIENATION OF BENEFITS. No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. 10. WRITTEN AGREEMENT. Each grant of an Option hereunder shall be evidenced by a Stock Option Agreement, each in such form and containing such terms and provisions not inconsistent with the provisions of the Plan as the Board from time to time shall approve. A written Stock Option Agreement shall be promptly executed and delivered by the Company and the grantee, provided that such grant of Options shall terminate if such written agreement is not signed by such grantee (or his or her attorney) and delivered to the Company within 90 days after the delivery of such agreement to the grantee. Any such written agreement may contain such provisions as the Board deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto, will not apply to any stock received by the Holder from the Company. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The Stock Option Agreement evidencing Awards may contain such provisions as the Board shall determine to be appropriate for the adjustment of the number and class of shares subject to each outstanding Option and the option prices thereof in the event of changes in the outstanding Common Stock of the Company by reason of any stock dividend, distribution, split-up, recapitalization, combination or exchange of shares, merger, consolidation or liquidation and the like, and, in the event of any such change in the outstanding Common Stock of the Company, the aggregate number and class of shares available under the Plan shall be appropriately adjusted by the Board, whose determination shall be conclusive. 12. TERMINATION AND AMENDMENT. Unless the Plan shall theretofore have been terminated as hereinafter provided, no Awards may be made under the Plan after July 26, 2004. The Board may at any time prior to July 26, 2004 terminate the Plan, and the Board may at any time also modify or amend the Plan in such respects as it shall deem advisable; provided, however, that the Board may not (i) amend the provisions of Sections 5, 6.1, 6.2 or 6.3 more often than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder, or (ii) without the approval of the Holders of a majority of the voting securities of the Company present, either in person or by proxy, and entitled to vote (a) materially increase (except as provided in Section 11 hereof) the maximum number of shares which may be issued under the Plan, (b) materially modify the requirements as to eligibility for participation in the Plan, or (c) materially increase the benefits accruing to participants under the Plan. No termination, modification or amendment of the Plan or any outstanding Stock Option Agreement may, without the consent of the Holder to Page 7 of 9 whom any Award shall theretofore have been granted, adversely affect the rights of such Holder with respect to such Award. The Plan shall automatically terminate in the event that it is not approved by the stockholders of the Company as required under Section 13 hereof. 13. EFFECTIVENESS OF THE PLAN. The Plan shall become effective as of July 26, 1994, provided that the Plan shall have been approved at the 1995 Annual Stockholders' Meeting of the Company (or at any earlier special meeting of stockholders) by the holders of a majority of the shares of Common Stock represented at the meeting (in person or by proxy) and entitled to vote thereon. If the Plan is not so approved it shall automatically terminate, and all Options shall automatically be cancelled and be of no further force or effect. 14. RIGHTS OF A HOLDER OR A STOCKHOLDER. The Holder of an Option shall have none of the rights of a stockholder with respect to the shares subject to the Option until such shares shall be transferred to the Holder upon the exercise of the Option. 15. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company with respect to Awards shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including without limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended, and (ii) the rules and regulations of any securities exchange on which the Common Stock may be listed. 16. WITHHOLDING. The Company's obligation to deliver shares of Common Stock upon the exercise of any Option granted under the Plan shall be subject to applicable Federal, state and local tax withholding requirements. Federal, state and local withholding tax due upon the exercise of any Option may be paid in shares of Common Stock upon such terms and conditions as the Board shall determine; provided, however, that the Board in its sole discretion may disapprove such payment and require that such taxes be paid in cash. 17. SEPARABILITY. The Plan is intended to qualify for an exemption from the operations of Section 16(b) of the Exchange Act, pursuant to Rule 16b-3. If any of the terms or provisions of this Plan conflict with the requirements of Rule 16b-3 under the Exchange Act (as the same shall be amended from time to time), then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of said Rule 16b-3. 18. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Page 8 of 9 Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 19. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance of an Award, each Holder shall be deemed to have agreed that the grant of any Option and the exercise thereof are special incentive compensation and that they will not be taken into account as "salary" or "compensation" or "bonus" in determining the amount of any payment under any pension, retirement or other qualified employee benefit plan of the Company. 20. GOVERNING LAW. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. Page 9 of 9 EX-10.15 9 0009.txt EXHIBIT 10.15 CHECKERS DRIVE-IN RESTAURANTS, INC. 1991 STOCK OPTION PLAN (AS AMENDED THROUGH SEPTEMBER 15, 2000) 1. PURPOSE OF THE PLAN. Checkers Drive-In Restaurants, Inc., a Delaware corporation ("Company"), hereby adopts this 1991 Stock Option Plan ("Plan") providing for the granting of stock options, stock appreciation rights and restricted shares to salaried employees (including officers) of the Company and any Subsidiaries (as hereinafter defined). The general purpose of the Plan is to promote the interests of the Company and its stockholders by providing to employees of the Company and any subsidiaries additional incentives to continue and to increase their efforts with respect to, and to remain in the employ of, the Company or any Subsidiaries. 2. CERTAIN DEFINITIONS. In addition to the words and terms elsewhere defined in this Plan, certain capitalized words and terms used in this Plan shall have the meanings given to them by the definitions and descriptions in this Section 2. Unless the context or use indicates another or different meaning or intent, then such definition shall be equally applicable to both the singular and plural forms of any of the capitalized words and terms herein defined. The following words and terms are defined terms under this Plan: 2.1 AMENDMENT APPROVAL means the approval of holders of the Common Stock of the amendments to the Plan proposed in the Company's Proxy Statement dated August 24, 2000. 2.2 AWARD means grants of an Option, SAR and/or Restricted Shares under this Plan. 2.3 BOARD means the Board of Directors of the Company. 2.4 CASH AWARD means the amount of cash, if any, to be paid to an employee pursuant to Section 7.4 hereof. 2.5 CODE means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto. 2.6 COMMITTEE means the Committee of the Board appointed pursuant to Section 4 hereof. 2.7 COMMON STOCK means the Common Stock, par value $.001 per share, of the Company. 2.8 COMPANY means Checkers Drive-In Restaurants, Inc., a Delaware corporation. Page 1 of 16 2.9 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. 2.10 EXERCISE PERIODS shall have the meaning ascribed thereto in Section 6.5 hereof. 2.11 FAIR MARKET VALUE of a share of Common Stock shall mean the average of the reported closing bid and asked prices of a share of Common Stock as reported on a national securities exchange or the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), or the over-the-counter market as reported by NASDAQ or as furnished by a broker-dealer regularly making a market in the Common Stock as selected by the Board, as the case may be; provided that the Fair Market Value of a share of Common Stock under the Exchange Act shall be deemed to be no greater than the price to the public as indicated on the cover page of the final prospectus relating to the initial public offering of shares of Common Stock. 2.12 HOLDER means an employee of the Company or a Subsidiary who has received an Award under this Plan. 2.13 ISO means an incentive stock option within the meaning of Section 422A(b), or any successor section, of the Code. 2.14 MATURITY VALUE means, unless the Board shall determine otherwise, the average of the Fair Market Value of a share of Common Stock for a period of 60 consecutive trading days ending on the Valuation Date with respect to each award of Restricted Shares, or if the Valuation Date is not a trading day, the 60 consecutive trading days prior thereto. 2.15 NONQUALIFIED STOCK OPTION means a stock option that does not qualify as an ISO. 2.16 OPTION means any option granted under this Plan. 2.17 PLAN means this 1991 Stock Option Plan of the Company. 2.18 RESTRICTED SHARES means shares of Common Stock awarded to an employee of the Company or a Subsidiary pursuant to Section 7 hereof. 2.19 RESTRICTED SHARE AGREEMENT means the agreement specified in Section 12 hereof. 2.20 RESTRICTED PERIOD means a period of time beginning on the date of each award of Restricted Shares and ending on the Valuation Date with respect to each such award. Page 2 of 16 2.21 RETAINED DISTRIBUTION means distributions with respect to Restricted Shares that are retained by the Company pursuant to Section 7.3 hereof. 2.22 SARS shall mean stock appreciation rights as defined in Section 6.5 hereof. 2.23 SEC means the Securities and Exchange Commission. 2.24 STOCK OPTION AGREEMENT means the agreement specified in Section 12 hereof. 2.25 SUBSIDIARY means any present or future subsidiary of the Company as such term is defined in Section 425, or any successor section, of the Code. 2.26 TOTAL DISABILITY means a permanent and total disability as defined in Section 22(e)(3) of the Code. 2.27 VALUATION DATE with respect to any Restricted Shares awarded hereunder means the date designated in the Restricted Shares Agreement with respect to each award of Restricted Shares pursuant to Section 7.1 hereof. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 hereof and this Section 3, the maximum aggregate number of shares of Common Stock which may be issued upon exercise of Options and SARs and which may be granted as Restricted Shares under the Plan shall be 1,500,000. Such shares may be, in whole or in part, authorized and unissued shares of Common Stock or issued shares of Common Stock which shall have been reacquired by the Company. If any Option shall expire or terminate for any reason without having been exercised (or without having been considered to have been exercised as provided in Sections 6.5 and 6.6 hereof) in full, the unexercised shares subject thereto shall again be available for purposes of the Plan. In addition, any Restricted Shares which are forfeited by the terms of the Plan or any Restricted Shares Agreement shall again become available for purposes of the Plan. 4. ADMINISTRATION. 4.1 POWERS. The Plan shall be administered by the Board. Subject to the express provisions of the Plan, the Board shall have plenary authority, in its discretion, to grant Options and award Restricted Shares under the Plan and to determine the terms and conditions (which need not be identical), of all Options and Restricted Shares granted or awarded under the Plan, including, without limitation, (i) the purchase price, if any, of each Restricted Share and of each share of Common Stock under an Option, (ii) the individuals to whom, and the time or times at which, Options and Restricted Shares shall be granted or awarded, (iii) subject to the provisions of Section 6.7, the number of shares to be subject to each Option or award of Restricted Shares, (iv) whether an Option shall be an ISO or a Nonqualified Stock Option, (v) when an Option can be exercised and Page 3 of 16 whether in whole or in installments, (vi) the time or times and the conditions subject to which Restricted Shares shall become vested and any Cash Awards shall become payable, and (vii) the form, terms and provisions of any Stock Option Agreement and Restricted Shares Agreement evidencing a grant of Options or Awards of Restricted Shares hereunder (which terms may be amended, subject to Section 15 hereof). In making such determinations, the Board may take into account the nature of the services rendered by the respective employees, their present and potential contributions to the success of the Company and its Subsidiaries and such other factors as the Board in its discretion shall deem relevant. Subject to the express provisions of the Plan, the Board shall have plenary authority to interpret the Plan, to prescribe, amend and rescind the rules and regulations relating to it and to make all other determinations deemed necessary or advisable for the administration of the Plan. The determination of the Board on the matters referred to in this Section 4 shall be conclusive. 4.2 DELEGATION TO COMMITTEE. Notwithstanding anything to the contrary contained herein, the Board may at any time, or from time to time, appoint a Committee of at least two members, who shall be members of the Compensation Committee of the Board (or such other persons as the Board may designate), each of whom shall be a "disinterested person" within the meaning set forth in Rule 16b-3 as promulgated by the SEC under the Exchange Act, or any successor definition adopted by the SEC, and delegate to the Committee the authority of the Board to administer the Plan. Upon such appointment and delegation, the Committee shall have all the powers, privileges and duties of the Board, and shall be substituted for the Board, in the administration of the Plan, except the power to appoint members of the Committee and to terminate, modify or amend the Plan. The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed, may fill vacancies in the Committee and may discharge the Committee. The Committee shall select one of its members as its chairman and shall hold its meetings at such times and places as it shall deem advisable. A majority of its members shall constitute a quorum and all determinations shall be made by a majority of such quorum. Any determination reduced to writing and signed by a majority of the members shall be fully as effective as if it had been made by a majority vote at a meeting duly called and held. 5. ELIGIBILITY. Options and Restricted Shares may be awarded only to salaried employees (including officers), whether or not employed on a full-time basis, of the Company and its Subsidiaries. A director of the Company or of a Subsidiary who is not also an officer or employee of the Company or of one of its Subsidiaries will not be eligible to receive any Awards under the Plan. No ISO shall be granted to any employee who, at the time the ISO is granted, owns (or is considered as owning within the meaning of Section 425(d), or any successor section, of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless at the time the ISO is granted the option price is at least 110% of the Fair Market Value of the Common Stock subject to the ISO and the ISO by its terms is not exercisable after the expiration of five years from the date it is granted. Awards may be made to employees who hold or have held Options and/or Restricted Shares under this Plan or any other plans of the Company. An employee who has received Awards under Page 4 of 16 this Plan may be granted additional Options and Restricted Shares under this Plan or any other Plan. 6. OPTIONS. 6.1 OPTION PRICES. Except as otherwise specifically provided in Section 5 hereof, the purchase price of the Common Stock under each Option shall be determined by the Board, but shall not be less than 100% of the Fair Market Value of the Common Stock at the time of the granting of such Option in the case of each ISO. 6.2 TERM OF OPTIONS. The term of each Option shall be for such period as the Board shall determine, but not more than ten years from the date of grant in the case of each ISO, and, except as set forth in Section 9 hereof, shall expire upon termination of employment with the Company or any Subsidiary. 6.3 EXERCISE OF OPTIONS. Unless otherwise provided in the Stock Option Agreement, an Option granted under the Plan shall be exercisable in whole, or in part, at any time during the term of the Option. Payment shall be made in cash or, unless otherwise provided in the Stock Option Agreement, in whole shares of Common Stock already owned by the Holder of the Option or, unless otherwise provided in the Stock Option Agreement, partly in cash and partly in such Common Stock. Such notice shall state that the Holder of the Option elects to exercise the Option, the number of shares in respect of which it is being exercised and the manner of payment for such shares, and shall either (i) be accompanied by payment of the full purchase price of such shares or (ii) fix a date (not more than 10 business days from the date of exercise) for the payment of the full purchase price of such shares. Cash payments shall be made by wire transfer, certified or bank check or personal check, in each case payable to the order of the Company; provided, however, that the Company shall not be required to deliver certificates for shares with respect to which an Option is exercised until the Company has confirmed the receipt of good and available funds in payment of the purchase price thereof. Common Stock payments (valued at the Fair Market Value of a share of Common Stock on the date of exercise) shall be made by delivery of stock certificates in negotiable form. If certificates representing Common Stock are used to pay all or part of the purchase price of an Option, separate certificates shall be delivered by the Company representing the same number of shares as each certificate so used, and an additional certificate shall be delivered representing any additional shares to which the Holder of the Options is entitled as a result of the exercise of the Option. Except as provided in Section 9 hereof, no Option may be exercised at any time unless the Holder thereof is then an employee of the Company or of a Subsidiary. The Holder of an Option shall have none of the rights of a stockholder with respect to the shares subject to the Option until such shares shall be transferred to the Holder upon the exercise of the Option. 6.4 ISOS. Notwithstanding anything to the contrary contained herein, but subject to Section 8 hereof, in the case of ISOs, the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Common Stock covered by ISOs which first become exercisable in any calendar year under the Plan by any Page 5 of 16 individual employee (and under all other plans of the Company or any Subsidiary which provide for the granting of ISOs) shall not exceed $100,000. 6.5 SARS. The Board may (but shall not be obligated to) grant SARs pursuant to the provisions of this Section 6.5 to the Holder of any Option granted under the Plan (hereinafter in this Section 6.5 called a related Option) with respect to all or a portion of the shares subject to the related Option. An SAR may only be granted concurrently with the grant of the related Option. Subject to the terms and provisions of this Section 6.5, each SAR shall be exercisable only at the same time and to the same extent the related Option is exercisable, and in no event after the termination or exercise of the related Option. Notwithstanding the foregoing, no SAR may be exercised within a period of six months after the date of grant of the SAR. SARs granted under the Plan shall be exercisable in whole or in part by notice to the Company. Such notice shall state that the Holder of the SARs elects to exercise the SARs, the number of shares in respect of which the SARs are being exercised and the form of payment the Holder requests. Subject to the terms and provisions of this Section 6.5, upon the exercise of SARs, the Holder thereof shall be entitled to receive from the Company consideration (in the form hereinafter provided) equal in value to the excess of the Fair Market Value as of the date of exercise of the SARs of each share of Common Stock with respect to which such SARs have been exercised over the option price per share of Common Stock subject to the related Option. Upon the exercise of an SAR, the Holder may specify the form of consideration to be received by such Holder, which shall be in shares of Common Stock (valued at Fair Market Value on the date of exercise of the SAR), or in cash, or partly in cash and partly in shares of Common Stock as the Holder shall request; provided, however, that the Board in its sole discretion may disapprove the form of consideration requested and instead authorize the payment of such consideration in shares of Common Stock (valued as aforesaid), or in cash, or partly in cash and partly in shares of Common Stock. Any election by the Holder of an SAR to receive cash in full or partial settlement of the SAR, as well as any exercise of an SAR for such cash, shall be made only during the period beginning on the third business day following the date of release of the financial data specified in paragraph (e)(1)(ii) of Rule 16b-3, or any successor thereto, under the Exchange Act and ending on the twelfth business day following such date ("Exercise Period"). Unless the Board determines otherwise, the number of SARs which may be exercised for cash, or partly for cash and partly for shares of Common Stock, during any Exercise Period may not exceed twenty percent of the aggregate number of shares of Common Stock originally subject to the related Option (as such original number, without giving effect to the exercise of any portion of the related Option, shall have been retroactively adjusted by application of the adjustment(s), if any, determined in accordance with Section 13 hereof or the corresponding provisions of any outstanding Stock Option Agreement), but such SARs shall be exercisable only to the extent the related Option is exercisable. For purposes of this Section 6.5, the date of exercise of an SAR shall mean the date on which the Company shall have received notice from the Holder of the SAR of the exercise of such SAR, except that, upon exercise during the Exercise Period of an SAR granted in tandem with a Nonqualified Stock Option, the date of exercise of such SAR shall be deemed to be the date during the Exercise Period on Page 6 of 16 which the highest reported closing sales price of share of Common Stock as reported on the Composite Tape occurred and the Fair Market Value of such shares shall be deemed to be such highest report closing sales price. Upon the exercise of SARs, the related Option shall be considered to have been exercised to the extent of the number of shares of Common Stock with respect to which such SARs are exercised, and shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock available for the grant of Options under the Plan. Upon the exercise or termination of the related Option, the SARs with respect to such related Option shall be considered to have been exercised or terminated to the extent of the number of shares of Common Stock with respect to which the related Option was so exercised or terminated. The provisions of Sections 4, 6.2 and 9 through 22 of the Plan (to the extent that such provisions are applicable to Options) shall also be applicable to SARs unless the context otherwise requires. The effective date of the grant of an SAR shall be the date on which the Board approves the grant of such SAR. Each grantee of an SAR shall be notified promptly of the grant of an SAR. Notwithstanding anything to the contrary contained in this Section 6.5, SARs shall not be exercisable unless at the time of the exercise of an SAR the Holder of the related Option shall then be, directly or indirectly, subject to Section 16(b), or any successor thereto, of the Exchange Act. 6.6 NONTRANSFERABILITY OF OPTIONS. No Option shall be transferable otherwise than by will or the laws of descent and distribution, and an Option may be exercised during the lifetime of the Holder thereof only by such Holder. A breach by the Holder of any of the restrictions, terms or conditions provided in the Plan or in the Holder's Stock Option Agreement will cause the Options covered thereby to be terminated. 6.7 NUMBER OF SHARES. The number of shares of Common Stock subject to each Option granted under this Plan shall be as determined by the Board. Notwithstanding the preceding sentence, the total number of shares with respect to which Options (or SARs) may be granted to any employee during any one fiscal year of the Company beginning on or after January 1, 1994, may not exceed 300,000 shares (or such adjusted annual limitation as may be approved by the Board pursuant to Section 13 hereof). 7. RESTRICTED SHARES. 7.1 VALUATION DATE AND PRICE. The Board shall designate a Valuation Date with respect to each award of Restricted Shares and may prescribe restrictions, terms and conditions applicable to the vesting of such Restricted Shares in addition to those provided in this Plan. The Board shall determine the price, if any, to be paid by the Holder for the Restricted Shares. Page 7 of 16 7.2 ISSUANCE OF RESTRICTED SHARES. Restricted Shares, when issued, will be represented by a stock certificate or certificates registered in the name of the Holder to whom such Restricted Shares shall have been awarded. During the Restriction Period, certificates representing the Restricted Shares and any securities constituting Retained Distributions shall bear a restrictive legend to the effect that ownership of the Restricted Shares (and such Retained Distributions), and the enjoyment of all rights appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan and the applicable Restricted Shares Agreement. Such certificates shall be deposited by such Holder with the Company, together with stock powers or other instruments of assignment, each endorsed in blank, which will permit transfer to the Company of all or any portion of the Restricted Shares and any securities constituting Retained Distributions that shall be forfeited or that shall not become vested in accordance with the Plan and the applicable Restricted Shares Agreement. 7.3 RESTRICTIONS. Restricted Shares shall constitute issued and outstanding shares of Common Stock for all corporate purposes. The Holder will have the right to vote such Restricted Shares, to receive and retain all regular cash dividends, and such other distributions as the Board may in its sole discretion designate, paid or distributed on such Restricted Shares and to exercise all other rights, powers and privileges of a Holder of Common Stock with respect to such Restricted Shares, with the exception that (i) the Holder will not be entitled to delivery of the stock certificate or certificates representing such Restricted Shares until the Restriction Period shall have expired and unless all other vesting requirements with respect thereto shall have been fulfilled; (ii) the Company will retain custody of the stock certificate or certificates representing the Restricted Shares during the Restriction Period; (iii) other than regular cash dividends and such other distributions as the Board may in its sole discretion designate, the Company will retain custody of all distributions ("Retained Distributions") made or declared with respect to the Restricted Shares (and such Retained Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Shares) until such time, if ever, as the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared shall have become vested, and such Retained Distributions shall not bear interest or be segregated in separate accounts; (iv) the Holder may not sell, assign, transfer, pledge, exchange, encumber or dispose of the Restricted Shares of any Retained Distributions during the Restrictions Period; and (v) a breach of any restrictions, terms or conditions provided in the Plan or established by the Board with respect to any Restricted Shares or Retained Distributions will cause a forfeiture of such Restricted Shares and any Retained Distributions with respect thereto. 7.4 CASH AWARDS. In connection with any award of Restricted Shares, the Board may authorize the payment of a cash amount to the Holder of such Restricted Shares at any time after such Restricted Shares shall have become vested; provided, however, that the amount of the cash payment, if any, that a Holder shall be entitled to receive shall not exceed 100% of the aggregate Maturity Value of the Restricted Shares awarded to such Holder hereunder. Such Cash Awards shall be payable in accordance with such additional restrictions, terms and conditions as shall be prescribed by the Board and shall be in addition to any other salary, incentive, bonus or other compensation Page 8 of 16 payments which Holder shall be otherwise entitled or eligible to receive from the Company. 7.5 COMPLETION OF RESTRICTION PERIOD. On the Valuation Date with respect to each award of Restricted Shares, and the satisfaction of any other applicable restrictions, terms and conditions (i) all or part of such Restricted Shares shall become vested, (ii) any Retained Distributions with respect to such Restricted Shares shall become vested to the extent that the Restricted Shares related thereto shall have become vested, and (iii) any Cash Award to be received by the Holder with respect to such Restricted Shares shall become payable, all in accordance with the terms of the applicable Restricted Shares Agreement. Any such Restricted Shares and Retained Distributions that shall not have become vested shall be forfeited to the Company and the Holder shall not thereafter have any rights (including dividend and voting rights) with respect to such Restricted Shares and Retained Distributions that shall have been so forfeited. 8. ACCELERATION OF OPTIONS AND RESTRICTED SHARES. Notwithstanding any contrary waiting period or installment period in any Stock Option Agreement or any Restriction Period in any Restricted Shares Agreement or in the Plan, each outstanding Option granted under the Plan shall, except as otherwise provided in the Stock Option Agreement, become exercisable in full for the aggregate number of shares covered thereby, and each Restricted Share, except as otherwise provided in the Restricted Shares Agreement, shall vest unconditionally, in the event (i) the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company, shall approve (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the Holders of Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or (c) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (ii) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than the Company or any employee benefit plan sponsored by the Company or any Subsidiary) (a) shall purchase any Common Stock of the Company (or securities convertible into the Company's Common Stock) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, and (b) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire the Company's securities), or (iii) during any period of two consecutive years, individuals who at the beginning of such period constitute the entire Board shall cease for any reason to constitute a majority thereof unless the election, or the nomination for election by the Page 9 of 16 Company's stockholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. Any transaction referred to in the foregoing clause (i) is herein called an Approved Transaction, any purchase pursuant to a tender offer or exchange offer or otherwise as described in the foregoing clause (ii) is herein called a Control Purchase and the cessation of individuals constituting a majority of the Board as described in the foregoing clause (iii) is herein called a Board Change. The Stock Option Agreement and Restricted Shares Agreement evidencing Options or Restricted shares granted under the Plan may contain such provisions limiting the acceleration of the exercise of Options and the acceleration of the vesting of Restricted Shares as provided in this Section 8 as the Board deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto in effect at the time of such acceleration, will not apply to any stock or cash received by the Holder from the Company, 9. TERMINATION OF EMPLOYMENT. 9.1 DEATH OF HOLDER. If a Holder shall die during the Restriction Period with respect to any Restricted Shares or prior to the exercise of any Option, then: (a) unless otherwise provided in a Restricted Shares Agreement, the Restriction Period applicable to each award of Restricted Shares shall be deemed to have expired and all such Restricted Shares and Retained Distributions shall become vested and any Cash Award payable pursuant to the applicable Restricted Shares Agreement shall be adjusted in such manner as provided in the Restricted Shares Agreement; (b) unless otherwise provided in a Stock Option Agreement, the waiting period or installment period in any Stock Option Agreement shall be deemed to have expired and each outstanding Option granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby; (c) in the case of either an ISO or a Nonqualified Stock Option, if the Holder dies while employed by the Company or a Subsidiary, then such Option (subject to clause (g) below) may be exercised by the legatee(s) or personal representative(s) of such Holder at any time within three years after such Holder's death; (d) in the case of either an ISO or Nonqualified Stock Option, if the Holder's employment with the Company or any Subsidiary was terminated due to Total Disability and such Holder dies within one year after termination of employment, then such Option (subject to clause (g) below) may be exercised by the legatee(s) or personal representative(s) of such Holder at any time during the remainder of the period during which such Holder would have been able to exercise such Option had the Holder not died; Page 10 of 16 (e) in the case of either an ISO or a Nonqualified Stock Option, if the Holder retires pursuant to any retirement plan of the Company or a Subsidiary or in the absence of a retirement plan a Holder retires and the Committee determines that such Holder should have the benefit of this clause (e) and such Holder dies during the period after retirement when such Option was still exercisable by such Holder, then such Option (subject to clause (g) below) may be exercised by the legatee(s) or personal representative(s) during the remainder of the period during which such Holder would have been able to exercise such Option had the Holder not died; (f) in the case of either an ISO or a Nonqualified Stock Option, if the Holder dies within three months after termination of employment and clauses (d) and (e) are not applicable, then such Option (subject to clause (g) below) may be exercised by the legatee(s) or personal representative(s) of such Holder at any time within one year after such Holder's death; and (g) the exercise of Options after the termination of employment of the Holder for any reason is subject to the following: (i) no Option may be exercised after the expiration date of such Option; (ii) only Options exercisable by the Holder at the time of such termination (after taking into account the provisions of clause (b) above) may be exercised after such termination; and (iii) any Stock Option Agreement may provide a shorter period of time for the exercise of Options than provided in clauses (c) through (f) above. 9.2 TOTAL DISABILITY. If a Holder's employment with the Company or any Subsidiary shall terminate during the Restriction Period with respect to any Restricted Shares or prior to the exercise of any Option as a result of Total Disability; then: (a) in the case of Restricted Shares, Section 9.1(a) above shall apply; and (b) in the case of either an ISO or a Nonqualified Stock Option, such Option (subject to Section 9.1(g) above) may be exercised by such Holder (or his or her personal representative(s)) at any time within one year after such termination of employment; provided, however, that unless otherwise provided in a Stock Option Agreement the waiting period or installment period of any Stock Option Agreement shall be deemed to have expired and each outstanding Option granted under the Plan shall become exercisable in full for the aggregate number of shares covered thereby from and after the date of such termination of employment. 9.3 RETIREMENT. If a Holder's employment with the Company or any Subsidiary shall terminate during the Restriction Period with respect to any Restricted Shares or prior to the exercise of any option as a result of retirement pursuant to any retirement plan Page 11 of 16 of the Company or any Subsidiary or in the absence of a retirement plan upon such Holder's retirement the Committee determines that such Holder should have the benefit of this Section 9.3, then: (a) unless the Board determines otherwise, in the case of Restricted Shares, all Restricted Shares, Retained Distributions and rights to any Cash Awards will be forfeited; (b) in the case of an ISO, such ISO (subject to Section 9.1(g) above) may be exercised at any time within three months after such Holder's termination of employment; and (c) in the case of a Nonqualified Stock Option, such Option (subject to Section 9.1(g) above) may be exercised at any time within three years after such Holder's termination of employment. 9.4 TERMINATION BY COMPANY FOR CAUSE. If a Holder's employment within the Company or any Subsidiary shall be terminated by the Company or such Subsidiary during the Restriction Period, with respect to any Restricted Shares or prior to the exercise of any Option for cause (for these purposes, cause shall have the meaning ascribed thereto in any employment agreement to which such Holder is a party or, in the absence thereof, shall include but not be limited to, insubordination, dishonesty, incompetence, moral turpitude, other misconduct of any kind and the refusal to perform his or her duties and responsibilities for any reason other than illness or incapacity; provided, however, that if such termination occurs within 12 months after an Approved Transaction, Control Purchase or Board Change, termination for cause shall only mean a felony conviction for fraud, misappropriation or embezzlement), then: (a) all Options held by such Holder shall immediately terminate; and (b) such Holder's rights to all Restricted Shares, Retained Distributions and any Cash Awards shall be forfeited immediately. 9.5 TERMINATION BY COMPANY WITHOUT CAUSE. If during the Restriction Period with respect to any Restricted Shares or prior to the exercise of any Option, a Holder's employment with the Company or any Subsidiary shall be terminated by the Company or Subsidiary without cause as the same may be defined in any employment agreement to which the Holder is a party or in the absence thereof, as determined by the Board, then: (a) in the case of Restricted Shares, the provisions of Section 9.1(a) above shall apply; and (b) in the case of either an ISO or a Nonqualified Stock Option, such Option (subject to Section 9.1(g) above) held by such Holder may be exercised at any time within three months after such Holder's termination of employment. Page 12 of 16 9.6 TERMINATION FOR OTHER REASON. If during the Restriction Period with respect to any Restricted Shares or prior to the exercise of any Option, a Holder's employment with the Company or any Subsidiary shall be terminated for any reason other than as set forth in Sections 9.1 through 9.5 above, then: (a) all such Holder's Rights to Restricted Shares, Retained Distributions and any Cash Awards shall be forfeited immediately; and (b) in the case of either an ISO or a Nonqualified Stock Option, the provisions of Section 9.5(b) above shall apply. 9.7 GENERAL. A leave of absence, unless otherwise determined by the Board prior to the commencement thereof, shall not be considered a termination of employment. Awards made under this Plan shall not be affected by any change of employment so long as the Holder continues to be an employee of the Company or a Subsidiary. 10. RIGHT OF COMPANY TO TERMINATE EMPLOYMENT. Nothing contained in the Plan or in any Award shall confer on any Holder any right to continue in the employ of the Company or any of its Subsidiaries or interfere in any way with the right of the Company or a Subsidiary to terminate the employment of the Holder at any time, with or without cause. 11. NONALIENATION OF BENEFITS. No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge, and any attempt to anticipate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefit. 12. WRITTEN AGREEMENT. Each award of Restricted Shares and any right to a Cash Award hereunder shall be evidenced by a Restricted Shares Agreement and each grant of an Option shall be evidenced by a Stock Option Agreement, each in such form and containing such terms and provisions not inconsistent with the provisions of the Plan as the Board from time to time shall approve. The effective date of the granting of an Option shall be the date on which the Board approves the granting of such Option. Each grantee of an Option or Restricted Shares shall be notified promptly of such grant and a written Stock Option Agreement and/or Restricted Shares Agreement shall be promptly executed and delivered by the Company and the grantee, provided that such grant Options or Restricted Shares shall terminate if such written agreement is not signed by such grantee (or his or her attorney) and delivered to the Company within 60 days after the date the Board approved such grant. Any such written agreement may contain provisions as the Board deems appropriate to ensure that the penalty provisions of Section 4999 of the Code, or any successor thereto, will not apply to any stock or cash received by the Holder from the Company. Page 13 of 16 13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The Stock Option Agreements and Restricted Shares Agreements evidencing awards may contain such provisions as the Board shall determine to be appropriate for the adjustment of the number and class of all Restricted Shares and the terms applicable to any Cash Awards and the number and class of shares subject to each outstanding Option and the option prices thereof in the event of changes in the outstanding Common Stock of the Company by reason of any stock dividend, distribution, split-up, recapitalization, combination or exchange of shares, merger, consolidation or liquidation and the like, and, in the event of any such change in the outstanding Common Stock of the Company, the aggregate number and class of shares available under the Plan shall be appropriately adjusted by the Board, whose determination shall be conclusive. 14. RIGHT OF FIRST REFUSAL. The Stock Option Agreements and Restricted Shares Agreements may contain such provisions as the Board shall determine to the effect that if a Holder elects to sell al or any shares of Common Stock that such Holder acquired upon the exercise of an Option or upon the vesting of Restricted Shares awarded under the Plan, then such Holder shall not sell such shares unless such Holder shall have first offered in writing to sell such shares to the Company at Fair Market Value on a date specified in such offer (which date shall be at least three business days and not more than ten business days following the date of such offer). In any such event, certificates representing shares issued upon exercise of Options and the vesting of Restricted Shares shall bear a restrictive legend to the effect that transferability of such shares are subject to the restrictions contained in the Plan and the applicable Stock Option Agreement or Restricted Shares Agreement and the Company may cause the registrar of its Common Stock to place a stop transfer order with respect to such shares. 15. TERMINATION AND AMENDMENT. Unless the Plan shall theretofore have been terminated as hereinafter provided, no Awards may be made under the Plan after September, 2001. The Board may at any time prior to September, 2001 terminate the Plan, and the Board may at any time also modify or amend the Plan in such respects as it shall deem advisable; provided, however, that the Board may not, without the approval of the Holders of a majority of the voting securities of the Company present, either in person or by proxy, and entitled to vote at a meeting (i) materially increase (except as provided in Section 13 hereof) the maximum number of shares which may be issued under the Plan, (ii) materially modify the requirements as to eligibility for participation in the Plan, or (iii) materially increase the benefits accruing to participants under the Plan. No termination, modification or amendment of the Plan or any outstanding Restricted Shares Agreement or Stock Option Agreement may, without the consent of the employee to whom any Award shall theretofore have been granted, adversely affect the rights of such employee with respect to such Award. 16. EFFECTIVENESS OF THE PLAN. The Plan shall become effective upon the unanimous written consent of the stockholders of the Company entitled to vote thereon. Page 14 of 16 17. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company with respect to Awards shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended, and (ii) the rules and regulations of any securities exchange on which the Common Stock may be listed. 18. WITHHOLDING. The Company's obligation to deliver shares of Common Stock or to pay cash upon the exercise of any Nonqualified Stock Option or any SAR granted under the Plan and to deliver stock certificates or to pay cash upon the vesting of Restricted Shares or Cash Awards shall be subject to applicable Federal, state and local tax withholding requirements. Federal, state and local withholding tax due upon the exercise of any Nonqualified Stock Option and upon the vesting of Restricted Shares may be paid in shares of Common Stock upon such terms and conditions as the Board shall determine; provided, however, that the Board in its sole discretion may disapprove such payment and require that such taxes be paid in cash. 19. SEPARABILITY. If any of the terms or provisions of this Plan conflict with the requirements of Rule 16b-3 under the Exchange Act (as the same shall be amended from time to time) and/or Section 422A of the Code (as the same shall be amended from time to time), then such terms or provisions shall be deemed inoperative to the extent they so conflict with the requirements of said Rule 16b-3, and/or with respect to ISOs, Section 422A of the Code. With respect to ISOs, if this Plan does not contain any provision required to be included herein under Section 422A of the Code (as the same shall be amended from time to time), such provision shall be deemed to be incorporated herein with the same force and effect as if such provision had been set out at length herein. 20. NON-EXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options and the awarding of stock and cash otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 21. EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance of an Award, each Holder shall be deemed to have agreed that the award of Restricted Shares and any right to a Cash Award and the grant of any Option and the exercise thereof or any SAR are special incentive compensation and that they will not be taken into account as "salary" or "compensation" or "bonus" in determining the amount of any payment under any pension, retirement or other qualified employee benefit plan of the Company or any Subsidiary. In addition, each beneficiary of a deceased Holder shall be deemed to have agreed that such Award will not affect the amount of any life insurance coverage provided by the Company on the life of the Holder Page 15 of 16 which is payable to such beneficiary under any life insurance plan covering employees of the Company or any Subsidiary. 22. GOVERNING LAW. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware. Page 16 of 16 EX-10.16 10 0010.txt EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is effective as of November 20, 2000 (the "Effective Date"), by and between CHECKERS DRIVE-IN RESTAURANTS, INC., a Florida corporation ("Checkers"), and Daniel Dorsch, an individual (the "Executive"). Checkers is sometimes referred to herein singularly as the "Company". BACKGROUND INFORMATION The Company and the Executive previously entered into that certain Employment Agreement effective as of December 14, 1999 (the "1999 Agreement "). The Executive and the Company wish to terminate the 1999 Agreement and enter into a new agreement upon the terms set forth herein Accordingly, in consideration of the mutual covenants and agreements set forth herein, the parties hereto agree as follows: OPERATIVE PROVISIONS 1. TERMINATION OF 1999 AGREEMENT. The Executive and the Company hereby terminate the 1999 Agreement pursuant to Section 4.2 thereof, effective on the Effective Date; provided however that, as of the Effective Date, the Company shall have no further payment obligations to the Executive with respect to the 1999 Agreement, except that upon execution of this Agreement the Company shall pay the Executive an incentive bonus equal to thirty-five percent (35%) of the Executive's $200,000 base salary, or $70,000, pursuant to Section 3.2(a) of the 1999 Agreement. 2. EMPLOYMENT AND DUTIES. Subject to the terms and conditions of this Agreement, the Company employs the Executive to serve in an executive and managerial capacity as the Chief Executive Officer, and the Executive accepts such employment and agrees to perform such reasonable responsibilities and duties commensurate with the aforesaid position, as directed by the Board of Directors of the Company or as set forth in the Articles of Incorporation and/or the Bylaws of the Company; for all locations in which the Company has offices or stores. In addition, the Board of Directors of the Company, or any appropriate committee of such Board, shall recommend to the shareholders of the Company that the Executive be elected to serve as a director on the Board of the Company for each year during the Term (as defined below). The Executive agrees to devote his full time efforts to his employment duties at Checkers. 3. TERM. The term of employment under this Agreement shall be for a period of three (3) years (the "Term") commencing on the Effective Date, subject to termination pursuant to Section 5, below. The Term may be extended at the Company's option for two additional one (1) year periods, and the Company shall provide written notice of renewal or non-renewal within ninety (90) days of the expiration of the Term, either initial or as extended. 4. COMPENSATION. 4.1 ANNUAL SALARY. During the first year of the Term, the Company shall pay the Executive an aggregate minimum base annual salary, before deducting all applicable withholdings, of Four Hundred Forty Thousand Dollars ($440,000) (the "Base Salary"), payable at the times and in the manner dictated by the Company's standard payroll policies. In each successive year of the Term, the Base Salary shall be increased by five percent (5%) over the prior year's Base Salary. 4.2 OTHER COMPENSATION AND BENEFITS. During the Term, as additional compensation, the Executive shall be entitled to participate in and receive the following: (a) INCENTIVE BONUS. The Executive shall be entitled to participate in the Company's Incentive Bonus Plan, pursuant to which the Executive shall be entitled to earn a bonus of 50% of his Base Salary, the award of which is to be determined by the compensation committee of the Company's Board of Directors (the "Incentive Bonus"), payable fifty percent (50%) in cash and fifty percent (50%) in Checkers Common Stock, the value of which stock shall be determined by utilizing an average of the Closing Price of Checkers Common Stock publicly traded on NASDAQ, as stated in the Wall Street Journal, during the ten (10) business days prior to the payment date. The Incentive Bonus will be based on the Executive's achievement of certain performance criteria determined in good faith by the Company's Boards of Directors. The Incentive Bonus if any, shall be pro-rated for any partial employment period. Any Incentive Bonus due for a given year of the Term shall be paid no later than April 15th of the following year. (b) BENEFITS. The Executive shall be entitled to choose to participate in and receive all benefits under the Checker's employee benefit plans or programs (including, without limitation, medical, dental, disability, and group life) any retirement savings plans or programs (including, without limitation, employee stock purchase plans), and such other prerequisites of offices as Checkers may, from time to time and in its 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. (i) Checkers hereby grants to the Executive options to purchase 400,000 shares of Checkers Common Stock, in accordance with and pursuant to the terms of the Checkers Stock Option Plan. The exercise price shall be $5.00 per share for the first 200,000 shares purchased and $6.00 per share for any additional shares purchased, up to 200,000. The above described options shall all be vested three (3) years from the Effective Date. (ii) The Executive shall exercise the 100,000 stock options granted to him on December 14, 1999 at the exercise price of $1.28 per share within thirty (30) days of the Effective Date. The Company shall make a loan to the Executive in the amount of $100,000 in connection with the exercise of such options. Such loan shall be payable by the Executive in three (3) equal principal installments; the first installment shall be payable on January 1, 2002; the second installment shall be payable on January 1, 2003; and the final installment shall be payable on January 1, 2004. Interest shall accrue on any unpaid principal obligation at the rate of five percent (5%) per annum and shall be payable at -2- maturity, January 1, 2004. If this Agreement is terminated without cause or by reason of the Executive's disability or death, the stock options granted herein shall be vested immediately, and the Executive or the legal representatives or designated beneficiary, as appropriate, shall have two years from the date of termination to exercise such options. If the Executive terminates this Agreement or this Agreement is terminated for cause, all stock options not vested as of the date of termination shall be forfeited. 4.3 VACATION. The Executive will be entitled to paid vacation time in accordance with the Company's personnel policies and procedures made available to the Company's executive employees of similar rank, as the same may change from time to time, or as otherwise determined by the Board of Directors of the Company. In addition, the Executive shall be entitled to such holidays consistent with the Company's standard policies or as the Company's Board of Directors may approve. 4.4 EXPENSE REIMBURSEMENT. In addition to the compensation and benefits provided herein, the Company shall, upon receipt and approval of appropriate documentation, reimburse the Executive each month for his reasonable travel, lodging, entertainment, promotion and other ordinary and necessary business expenses. The arrangement set forth in this Section 4.4 is intended to constitute an accountable plan within the meaning of Section 162 of the Internal Revenue Code, as amended (the "Code") and the accompanying regulations, and the Executive agrees to comply with all reasonable guidelines established by the Company from time to time to meet the requirements of Section 162 of the Code and the accompanying regulations. 5. TERMINATION. 5.1 FOR CAUSE. Notwithstanding any other provisions of the contrary contained herein, the Company may terminate this Agreement immediately for cause upon written notice to the Executive, in which event the Company shall be obligated to pay the Executive that portion of the Base Salary and the Incentive Bonus, if any, due him through the date of termination. For purposes of this Agreement, "cause" shall mean: (a) material default or other material breach by the Executive of the Executive's obligations hereunder; (b) the willful and habitual failure by the Executive to perform the duties that the Executive is required to perform under this Agreement or the Company's corporate policies, provided such corporate policies have previously been delivered to the Executive; or (c) misconduct, dishonesty, insubordination, or other act by the Executive that in any way has a direct, substantial and adverse effect on either Company's reputation or its respective relationships with its 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 the Executive to comply with applicable laws or governmental regulations pertaining to the Executive's employment hereunder. 5.2 WITHOUT CAUSE. Notwithstanding any other provisions to the contrary contained herein, the Company, on the one hand, and the Executive, on the other hand, may terminate this Agreement without cause by giving ninety (90) days written notice to the other. If the Company -3- terminates this Agreement under this Section 5.2, it shall continue to pay the Executive through the balance of the unexpired term. The amount payable to the Executive hereunder shall be paid to the Executive in lump sum or as otherwise directed by the Executive. If the Executive terminates this Agreement under this Section 5.2, the Executive agrees that he will also terminate his position as a director of the company and the Company shall only be obligated to pay to the Executive the Base Salary due him through the date of termination. 5.3 DISABILITY. Notwithstanding any other provisions to the contrary contained herein, if the Executive fails to perform his duties hereunder on account of illness or other incapacity for a period of six (6) consecutive months, the Company shall have the right upon written notice to the Executive to terminate this Agreement, without further obligation, by paying the Executive an amount equal to his annual Base Salary then in effect, in a lump sum or as otherwise directed by the Executive. 5.4 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 accrued to the date of the Executive's death, in addition to a bonus based upon a percentage of such accrued Base Salary as determined by the compensation committee of the Company's Board of Directors, payable in a lump sum or as otherwise directed by the Executive's legal representatives or designated beneficiary, whichever the case may be. 5.5 TERMINATION BY THE COMPANY FOLLOWING CHANGE OF CONTROL. In the event of a Change of Control (as defined below) of the Company, the Company shall require any Successor (as defined below) to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if the Change of Control had not occurred. Notwithstanding the assumption of this Agreement by the Successor, and its agreement to perform the duties and obligations of the Company hereunder, the Company shall remain jointly liable with the Successor with respect to any breach of such duties and obligations. As used herein, a "Change of Control" of the Company shall mean the acquisition by a "Successor," whether directly or indirectly, by purchase, merger, consolidation or otherwise, of all or substantially all of the common stock, business and/or assets of such Company; provided, however, that a Change of Control shall not be deemed to have occurred as a result of an increased ownership interest of the Company by Carl Karcher Enterprises, Inc. or 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. 5.6 EFFECT OF TERMINATION. Termination for any cause shall not constitute a waiver of the Company's rights under this Agreement as specified in Section 7 nor a release of the Executive from any obligation hereunder except his obligation to perform his day-to-day duties as an Executive. -4- 6. NON-DELEGATION OF EXECUTIVE'S RIGHTS. The obligations, rights and benefits of the 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. 7. COVENANTS OF EXECUTIVE. 7.1 CONFIDENTIALITY. The Executive acknowledges that in his capacity as an Executive of the Company he will occupy a position of trust and confidence, and he further acknowledges that he will have access to and learn substantial information about the Company and its respective operations that is confidential or not generally known in the industry including, without limitation, information that relates to purchasing, sales, customers, marketing, such Company's financial position and financing arrangements. The Executive agrees that all such information is proprietary or confidential or constitutes trade secrets and is the sole property of the Company. Accordingly, during the Executive's employment by the Company and for a period of two (2) years thereafter, the Executive will keep confidential, and will not without the Company's permission reproduce, copy or disclose to any other person or firm, any such information or any documents or information relating to the Company's methods, processes, customers, accounts, analyses, systems, charts, programs, procedures, correspondence, or records, or any other documents used or owned by the Company, nor will the Executive advise, discuss with or in any way assist any other person or firm in obtaining or learning about any of the items described in this section, either alone or with others, outside the scope of his duties and responsibilities with the Company unless otherwise required by law or court ordered subpoena. 7.2 COMPETITIVE ACTIVITIES DURING EMPLOYMENT. The Executive agrees that during his employment by the Company, he will devote substantially all his business time and effort to and give undivided loyalty to the Company. The Executive will not, during his employment by the Company, engage in any way whatsoever, directly or indirectly, in any business that is competitive with the Company, nor solicit, or in any other manner work for or assist any business which is competitive with the Company. During his employment by the Company, the Executive will undertake no planning for or organization of any business activity competitive with the work he performs as an executive of the Company, and the Executive will not, during his employment by the Company, combine or conspire with any other employee of the Company or any other person for the purpose of organizing any such competitive business activity. 7.3 REMEDY FOR BREACH. The Executive acknowledges that the Company will be irrevocably damaged if all of the provisions of this Section 7 are not specifically enforced. Accordingly, the Executive agrees that, in addition to any other relief to which the Company may be entitled, the Company will be entitled to seek and obtain injunctive relief from a court of competent jurisdiction for the purpose of restraining the Executive from any actual or threatened breach of this Section 7 The Executive's obligations under this Section 7 shall survive the Executive's termination of employment with the Company for the periods of time specified in this Section 7. -5- 8. RETURN OF DOCUMENTS. UPON TERMINATION OF THIS Agreement, the Executive shall return immediately to the Company all records and documents of or pertaining to the Company and shall not make or retain any copy or extract of any such record or document. 9. IMPROVEMENTS AND INVENTIONS. Any and all improvements or inventions which the Executive may conceive, make or participate in during the period of his employment shall be the sole and exclusive property of the Company. The Executive will, whenever requested by the Company during the period of his employment, execute and deliver any and all documents which the Company shall deem appropriate in order to apply for and obtain patents for improvements or inventions or in order to assign and convey to the Company the sole and exclusive right, title and interest in and to such improvements, inventions, patents or applications. 10. MISCELLANEOUS. 10.1 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between the parties with respect to the Executive's employment with the Company and supersedes any and all prior or contemporaneous agreements or understandings, whether oral or written, relating to the such employment. This Agreement may be amended, modified, supplemented, or changed only by a written document signed by all parties to this Agreement. 10.2 DISPUTES AND GRIEVANCES. The Executive agrees that the exclusive forum for any dispute or grievance arising from or relating to this Agreement or the Executive's employment at the Company, shall be governed by the Company's "Fast Track Resolution Program", a copy of which will be made available to the Executive. 10.3 NOTICES. Any notice, request, or instruction to be given hereunder shall be in writing and shall be deemed given when personally delivered or three (3) days after being sent by United States certified mail, postage prepaid, with return receipt requested, to the parties at their respective addresses set forth below: To Checkers: Checkers Drive-In Restaurants, Inc. 14255 49th Street North, Building 1 Clearwater, Florida 33762 Attn: William P. Foley, II To Executive: Daniel J. Dorsch 15310 Amberly Drive Suite 320 Tampa, FL 33647 -6- 10.4 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. 10.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties and their permitted assigns. Neither this Agreement nor any of the rights of the parties hereunder may be transferred or assigned by either party, except that if there is a Change of Control of the Company and the Successor assumes, either expressly or by operation of law, such Company's obligations under this Agreement, then the Company shall assign its rights and obligations hereunder to such Successor subject to the terms of Section 5.5 of this Agreement. Any assignment or transfer in violation of this Section 10.5 shall be void. 10.6 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. IN WITNESS WHEREOF the parties have executed this Employment Agreement as of the date set forth above. CHECKERS: CHECKERS DRIVE-IN RESTAURANTS, INC., a Florida Corporation By: ------------------------------- Its: ------------------------------- EXECUTIVE: /s/ DANIEL J. DORSCH ----------------------------------- Daniel J. Dorsch -7- EX-23.1 11 0011.txt EXHIBIT 23.1 ACCOUNTANTS' CONSENT The Board of Directors and Stockholders Checkers Drive-In Restaurants, Inc.: We consent to incorporation by reference in the registration statement (No. 333-55825) on Form S-3, the registration statement (No. 333-81295) on Form S-4 and the registration statements (Nos. 33-47063, 33-63992, and 33-80236) on Form S-8 of Checkers Drive-In Restaurants, Inc. of our report dated March 9, 2001, relating to the consolidated balance sheets of Checkers Drive-In Restaurants, Inc. and subsidiaries as of January 1, 2001 and January 3, 2000, and the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended January 1, 2001, which report appears in the January 1, 2001, annual report on Form 10-K of Checkers Drive-In Restaurants, Inc. Tampa, Florida March 9, 2001 -----END PRIVACY-ENHANCED MESSAGE-----