CHECKERS DRIVE IN RESTAURANTS INC /DE - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

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FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001

OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-19649

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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.)

4300 West Cypress Street, Suite 600 33607
Tampa, Florida (Zip Code)
(Address of principal executive
offices)

Registrant's telephone number, including area code: (813) 283-7000

Securities registered pursuant to 12(b) of the Act:

None

Securities registered pursuant to 12(g) of the Act:

Common Stock
(Title of Class)

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 25, 2002 was 10,933,069 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 25, 2002, was approximately $60.7 million. For purposes
of the foregoing calculation only, all directors, executive officers and
affiliated corporations through directors of the Registrant have been deemed
affiliates.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this 10-K incorporates information by reference from the
Registrant's definitive proxy statement, which will be filed on or before April
30, 2002.

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CHECKERS DRIVE-IN RESTAURANTS, INC.

2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS.................................................... 3

ITEM 2. PROPERTIES.................................................. 11

ITEM 3. LEGAL PROCEEDINGS........................................... 12

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 14

ITEM 6. SELECTED FINANCIAL DATA..................................... 15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 16

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS....................................................... 25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 25

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 54

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 54

ITEM 11. EXECUTIVE COMPENSATION...................................... 56

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 57

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 58

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 59

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PART I

ITEM 1. BUSINESS

General

Checkers Drive-In Restaurants, Inc. ("Checkers"), a Delaware corporation,
and its wholly-owned subsidiaries (collectively, the "Company") is in the
business of operating and franchising Checkers Restaurants and Rally's
restaurants. We are the single largest chain of double drive-thru restaurants
in the United States. Our Company is a combination of two similar quick-service
restaurant chains, Checkers and Rally's Hamburgers (Rally's), which were merged
in August 1999. Both companies were founded on a simple premise--serve the
highest quality food, made fresh-to-order, served quickly and at a fair price.

The Company has developed and owns a comprehensive system for developing and
operating double drive-thru restaurants, which includes trademarks, building
designs and layouts, equipment, ingredients, recipes and specifications for
authorized food products, methods of inventory control and certain operational
and business standards.

At December 31, 2001, there were 821 restaurant locations, consisting of 235
Company-owned restaurants and 586 franchisee-owned restaurants. Of the 821
locations, 404 are Rally's restaurants operating in 17 different states and 417
are Checkers restaurants operating in 22 different states, the District of
Columbia, Puerto Rico and the West Bank in the Middle East. Three of the owned
restaurants are owned by joint venture partnerships in which we have a 50%, 51%
and 75% ownership interest. Checkers was founded in 1986 and Rally's was
founded in 1985.

Recent Developments

On January 22, 2001, 34 Rally's restaurants in Detroit and 5 Checkers
restaurants in Kansas City, that were owned by Great Lakes Restaurants Company,
LLC, were placed under receivership. During 2001, two of the Detroit locations
were transferred back to us, and seven restaurants were sold to a non-Checkers
entity. We are currently negotiating with the receiver operating the remaining
restaurants to transfer them back to Company-owned and operated restaurants. At
this time we can not determine the exact number of additional locations that
will be returned to the Company.

In February 2001, 17 Checkers restaurants in Philadelphia were sold to
Quality Food Group of Washington, D.C., Inc., an affiliate of an existing
franchisee. On January 26, 2002, we reacquired these restaurants with one
having been closed during 2001.

On July 3, 2001, we repossessed and began operating eighteen Rally's
restaurants in California and three Rally's restaurants in Arizona. These
restaurants were previously operated by CKE Restaurants, Inc. under a
management agreement.

Concept and Strategy

The Company operates under two brands "Checkers(R)" and "Rally's
Hamburgers(R)". The Company's operating concept for both brands are very
similar which 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) unique and 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.

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Restaurant Locations

As of December 31, 2001, there were 235 Company-owned and operated
restaurants in eleven states (including three restaurants owned by joint
venture partnerships in which we have interests of 50%, 51% and 75%) and 586
restaurants operated by our franchisees in 28 states, the District of Columbia,
Puerto Rico and the West Bank in the Middle East. The following table sets
forth the locations of each restaurant:

Region State Name Company Franchise Grand Total
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Southeast Florida 84 107 191
Georgia 47 39 86
Alabama -- 39 39
Kentucky 1 35 36
Tennessee 14 5 19
Virginia -- 18 18
North Carolina -- 11 11
South Carolina -- 10 10
Mississippi 1 9 10
West Virginia -- 6 6
Washington, D.C. -- 2 2
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Southeast Total 147 281 428
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North Central Ohio 21 69 90
Indiana 21 34 55
Michigan 2 38 40
Missouri -- 23 23
Illinois -- 22 22
Wisconsin -- 4 4
Kansas -- 2 2
Iowa -- 2 2
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North Central Total 44 194 238
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Northeast Maryland -- 20 20
New York -- 15 15
New Jersey -- 13 13
Pennsylvania -- 12 12
Delaware -- 1 1
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Northeast Total -- 61 61
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Southwest California 18 24 42
Arizona 3 1 4
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Southwest Total 21 25 46
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South Central Louisiana 23 12 35
Arkansas -- 9 9
Texas -- 1 1
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South Central Total 23 22 45
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Other Puerto Rico -- 2 2
West Bank, Middle East -- 1 1
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Other Total -- 3 3
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Grand Total 235 586 821

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During fiscal 2001, we opened or reopened 13 restaurants, consisting of 12
franchisee operated restaurants and one Company-owned restaurant. During the
same period, we closed 46 restaurants, consisting of 44 franchisee operated
restaurants and two Company-owned restaurants. Also during fiscal 2001, we
reacquired or repossessed 58 restaurants from franchisees and sold 17 company-
owned 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, we consider various
factors including traffic count, speed of traffic, convenience of access, size
and configuration, demographics and density of population, visibility and cost.
We also review 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 we intend to continue
to use leased sites where possible.

Restaurant Design and Service

Our double drive-thru restaurants have a highly visible, distinctive and
uniform look that is intended to appeal to customers of all ages. 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. New and
many existing restaurants are moveable modular buildings. Our experience is
that the building component of a modular restaurant generally costs less than
comparably built outlets using conventional, on-site construction methods. 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.

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 a second order before the prior order is completed and totaled
and thereby increasing the speed of service to the customer and the opportunity
to increasing sales per hour, providing 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.

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Menu

Extensive research and focus group testing indicates customers recognize the
uniqueness and superior quality of our food over other competing quick-serve
restaurant food products. The signature flavors and distinctive products that
our menus offer, keep people coming back, again and again.

The menu at Checkers is a hamburger product line including the original 1/4
pound all 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.

Marketing Program

Our award winning marketing campaign, launched in January 2001, focuses on
our demanding life styles: carting several kids to-and-from sporting events,
longer workdays, shorter lunch hours, pursuing numerous personal hobbies and
interests, etc. With all these demands, a lot of meals are eaten while on the
run. However, one fact remains constant--you gotta eat. That's the premise we
used as the blueprint to build our new marketing campaign. We took those three
words and made them our new tagline, "You Gotta Eat". The campaign developed
was music driven and centered around an energetic, singable, can't-get-it-out-
of-your-head song, with a message that resonated with our expanded target
audience while capturing the flavor and personality that Checkers and Rally's
has long been known for with its loyal customer base. But not just a television
advertising campaign, we put "You Gotta Eat" on everything--cups, bags,
wrappers, crew uniforms, and anything that had to deal with our brands. The
campaign proved to be very successful. When the campaign is launched in a given
market, same restaurant sales have quickly and significantly moved up
positively in an industry segment that remains relatively flat. We have more of
our markets on television than ever before. We will continue to build on the
tagline "You Gotta Eat" into 2002 and beyond. Our updated 2002 advertising
campaign creatively utilizes our extensive consumer research into how and why
our customers seek Checkers to satisfy their appetite. Television is the
primary medium for our advertising campaign, but is also promoted through
print, radio, point-of-purchase and outdoor signage.

Purchasing

All restaurants purchase 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.

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 20 hourly employees, many of whom
work part-time on various shifts. The management staff of a typical restaurant
operated by the Company consists of a General Manager, one Assistant Manager
and two Shift Managers. A General Manager is generally required to have prior
restaurant management experience, preferably within the quick-service industry,
and reports directly to an Area

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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
Managers and restaurant level managers that provides for a monthly bonus based
upon the achievement of certain sales and profit goals.

As of December 31, 2001, we employed approximately 4,500 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. In addition, continuing training
classes for both Company-operated and franchise restaurant personnel have been
developed. 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-owned 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. The information gathered allows management to better control labor
utilization, inventories and operating costs. Each system at Company-owned
restaurants, and many at our franchise restaurants, are polled daily by our
corporate office.

Joint Venture Restaurants

As of December 31, 2001, there were three restaurants owned by separate
general partnerships in which we own interests of 50%, 51% and 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,

7

maintenance, insurance, repairs and utility costs, all of which are expenses
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

The restaurant industry in general, operates with a working capital deficit
because most of our investments are in long-term restaurant operating assets.
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 three-to-five day supply to assure
freshness. We do not have significant levels of accounts receivable or
inventory, and receive credit from our trade suppliers. Funds available from
cash sales not needed immediately to pay our trade suppliers are used for non-
current capital expenditures.

We ended fiscal 2001 with a working capital deficit of $2.5 million as
compared to $9.0 million at January 1, 2001. The decrease in the deficit is
primarily due to the repayment of $2 million of the Textron note payable (Loan
B), operating profits for the year of $4.3 million, and additional capital
contributions of $4.3 million from the exercise of options and warrants into
1,261,104 shares of common stock.

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 586, or 71%, of the total restaurants
open at December 31, 2001. 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 2002, 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 have granted three franchise
agreements for the West Bank in the Middle East. We have registered our
trademarks in various foreign countries in the event we develop additional
international markets. 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.

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--

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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.

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. 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 restaurant, 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.

9

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.
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 Burger.Fries.Colas" 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.

Foreign Operations

The Company receives royalties from franchisees in two foreign markets.
Royalty revenues recorded for fiscal 2001 were approximately $63,000 and
$15,000 for Puerto Rico and Israel, respectively.

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

10

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 or were 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, tenant, or other third party.

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 anticipate the need to continue the improvement in
same restaurant 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 and
training 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 regulations; continued NASDAQ listing;
weather conditions; construction schedules, results of existing and future
litigation and other factors referenced in this Form 10-K.

ITEM 2. PROPERTIES

We owned 235 restaurants as of December 31, 2001, inclusive of the three
restaurants owned by joint venture partnerships. We held ground leases on 197
of these restaurants and owned the land on the remaining 38. 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.

11

As of December 31, 2001, we leased 410 parcels of land. Of these, we
operated 197 Company-owned restaurants on the land and subleased 181 of the
parcels. In addition, we owned seven vacant parcels of land which were leased
at December 31, 2001.

Thirty-three restaurants owned or subleased are subject to a mortgage in
favor of FFCA Acquisition Corporation. In addition, 54 restaurants secure our
primary debt with Textron Financial Corporation.

Our executive offices are located in approximately 19,300 square feet of
leased office space at 4300 West Cypress Street, Suite 600, Tampa, Florida
33607.

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.

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. The settlement has not yet been consummated,
and we intend to defend vigorously unless formal settlement is completed with
terms similar to those reached in the tentative settlement on January 11, 2001.

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.

A Complaint was originally filed by the Company in July of 1995 against Mr.
Gagne ("Gagne") and Tampa Checkmate Food Services, Inc. ("Tampa Checkmate"), a
company controlled by Mr. Gagne, to collect

12

on a promissory note in the original principal amount of $1,007,295 (the
"promissory note") and foreclose on a mortgage securing the promissory note
issued by Tampa Checkmate, enforce the terms of a personal guaranty executed by
Mr. Gagne, and obtain declaratory relief regarding the rights of the respective
parties under Tampa Checkmate's franchise agreement with the Company. The
counterclaim and third party complaint, as amended, generally alleged that Mr.
Gagne, Tampa Checkmate and Checkmate Food Services, Inc. ("Checkmate") were
induced into entering into various franchise agreements with personal
guarantees to the Company based upon misrepresentations by the Company and the
named individuals and 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.

The action was tried before a jury in August of 1999. The Company's action
against Tampa Checkmate to collect the promissory note was stayed by virtue of
Tampa Checkmate's bankruptcy filing (see discussion below). The Court entered a
directed verdict and an involuntary dismissal as to all claims alleged against
Jared D. Brown, Robert G. Brown, and George W. Cook and also entered a directed
verdict and an involuntary dismissal as to certain other claims asserted
against the Company and the remaining individual Counterclaim Defendants,
Herbert G. Brown ("H. Brown"), James E. Mattei ("Mattei"), James F. White, Jr.
("White"). The jury rendered a verdict in favor of the Company, H. Brown,
Mattei, and White as to all claims asserted by Checkmate and in favor of Mattei
as to all claims asserted by Tampa Checkmate and Gagne. In response to certain
jury interrogatories, however, the jury made the following determinations: (i)
That Gagne was fraudulently induced to execute a certain Unconditional Guaranty
and that the Company was therefore not entitled to enforce its terms; (ii) That
Tampa Checkmate was fraudulently induced to execute a certain franchise
agreement by the actions of the Company, H. Brown, and White, jointly and
severally, and that Tampa Checkmate was damaged as a result thereof in the
amount of $151, 331; (iii) That the Company, H. Brown, and J. White, jointly
and severally, violated (S) 817.416(2)(a)(1) of the Florida Franchise Act
relating to the franchise agreement and that Tampa Checkmate was damaged as a
result thereof in the amount of $151, 331 and that Gagne was damaged as a
result thereof in the amount of $151,331; and (iv) That the Company, H. Brown,
and J. White did not violate Florida's Deceptive and Unfair Trade Practices Act
relating to the Ehrlich Road franchise agreement.

The foregoing jury determinations were adopted by the trial court and
judgments were entered accordingly. The judgments were appealed to the Second
District Court of Appeal and on November 14, 2001, the Appeals Court (i)
affirmed the $151,331 judgment, plus statutory interest from August of 1999,
entered in favor of Tampa Checkmate and against the Company and White for
fraudulent inducement, but reversed as to Brown and that portion of the
judgment awarding Tampa Checkmate statutory interest prior to the jury's
verdict in August of 1999; (ii) affirmed the $151,331 judgment, plus statutory
interest from August of 1999, entered in favor of Tampa Checkmate and against
the Company and White for violation of (S) 817.416(2)(a)(1) of the Florida
Franchise Act, but reversed as to Brown; and (iii) reversed, in toto, the
judgment entered in favor of Gagne. Reciprocal motions for attorney fees remain
pending in the state court.

On February 4, 2002, the state trial court granted a motion filed by Tampa
Checkmate entered summary judgment as to the Company's affirmative defenses of
setoff and recoupment, the legal significance of which is unclear, and
reciprocal motions for attorney fees remain pending in the state court. The
Company has appealed the before-described summary judgment to the Second
District Court of Appeal and that appeal remains pending. The two judgments, as
modified by the Second District Court of Appeal remain unsatisfied, but the
Company believes the liability to Tampa Checkmate under the two judgments, and
any liability for the payment of attorney fees, is subject to the Company's
right of setoff arising from Tampa Checkmate's liability to the Company under
the promissory note described above.

On or about July 15, 1997, Tampa Checkmate filed a Chapter 11 petition in
the United States Bankruptcy Court for the Middle District of Florida, Tampa
Division entitled In re: Tampa Checkmate Food Services, Inc., and numbered as
97-11616-8G-1 on the docket of said Court. As noted above, the bankruptcy
filing stayed the Company's claim against Tampa Checkmate to collect the
promissory note. The Company filed a motion in the Bankruptcy Court to
establish its right to set-off, or in the alternative, recoup, the full amount
due the Company under the promissory note against the judgments. On March 17,
2001 and May 23, 2001, the Bankruptcy Court

13

entered orders recognizing the Company's right to setoff the amount owed by
Tampa Checkmate under the promissory note against the judgments and lifting the
automatic stay to allow the Company to proceed "to effect the setoff and/or
recoupment permitted by this Court to include proceeding in state court or
other appropriate forum to determine the amounts owed, if any, by the Debtor
(Tampa Checkmate) to Checkers."

The Company has filed a motion in the Bankruptcy Court to determine the
amounts owed under the promissory note. Tampa Checkmate has opposed the motion
by asserting that the February 4, 2002 order entered in the state court
proceedings referenced above was dispositive of the Company's claim of setoff.
The Company disputes Tampa Checkmate's argument. The foregoing motion remains
pending in the Bankruptcy Court.

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 intends to defend this lawsuit
vigorously.

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

None.

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 February 25, 2002, there were
approximately 29,000 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.

2001
Quarter Ended
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

High....................................... $5.94 $6.40 $7.00 $7.11
Low........................................ 3.73 4.34 4.92 4.60

2000
Quarter Ended
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

High....................................... $2.56 $4.12 $5.50 $4.50
Low........................................ 1.81 1.47 3.12 2.94

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.

14

Future Registrations

We intend to register 1,500,000 shares of our common stock to Company
employees based upon the terms and conditions of the Company's 2001 Employee
Incentive Stock Option Plan (the "2001 Plan"). Said options to be granted at
the exercise price equal to the closing price of our common stock on the date
of grant in accordance with this and all other terms of the 2001 Plan.

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
and 1997 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 2001 and 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)

December 31, January 1, January 3, December 28, December 28,
2001 2001 2000 1998 1997
------------ ---------- ---------- ------------ ------------

Company restaurant
sales.................. $145,442 $162,804 $192,340 $139,602 $139,348
Other revenues.......... 16,170 18,386 9,495 5,350 5,582
-------- -------- -------- -------- --------
Total revenues......... 161,612 181,190 201,835 144,952 144,930
-------- -------- -------- -------- --------
Income (loss) from
operations(2).......... 7,431 8,051 (17,520) 1,401 3,343
Other expenses.......... (3,034) (5,955) (9,217) (8,684) (7,404)
-------- -------- -------- -------- --------
Income (loss) before
taxes and extraordinary
item................... 4,397 2,096 (26,737) (7,283) (4,061)
Income tax exense
(benefit).............. 62 (475) -- 252 455
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... 4,335 2,571 (26,737) (7,535) (4,516)
Extraordinary item(3)... -- (229) 849 -- --
-------- -------- -------- -------- --------
Net income (loss)...... $ 4,335 $ 2,342 $(25,888) $ (7,535) $ (4,516)
======== ======== ======== ======== ========
Basic earnings (loss)
per share:
Income (loss) before
extraordinary item.... $ 0.43 $ 0.27 $ (4.02) $ (1.67) $ (1.32)
Extraordinary item..... -- (0.02) 0.13 -- --
-------- -------- -------- -------- --------
Net income (loss)...... $ 0.43 $ 0.25 $ (3.89) $ (1.67) $ (1.32)
======== ======== ======== ======== ========
Diluted earnings (loss)
per share:
Income (loss) before
extraordinary item.... $ 0.36 $ 0.25 $ (4.02) $ (1.67) $ (1.32)
Extraordinary item..... -- (0.02) 0.13 -- --
-------- -------- -------- -------- --------
Net income (loss)...... $ 0.36 $ 0.23 $ (3.89) $ (1.67) $ (1.32)
======== ======== ======== ======== ========
Weighted average shares
outstanding
Basic.................. 10,139 9,419 6,657 4,506 3,434
======== ======== ======== ======== ========
Diluted................ 11,908 10,194 6,657 4,506 3,434
======== ======== ======== ======== ========

15

Selected Operating Data
As of and for the years ended
(In thousands)

December 31, January 1, January 3, December 28, December 28,
2001 2001 2000 1998 1997
------------ ---------- ---------- ------------ ------------

Systemwide sales (4).... $546,149 $536,511 $401,964 $286,876 $290,133
======== ======== ======== ======== ========
Restaurants open at end
of period:
Company................ 235 195 367 226 229
Franchised............. 586 659 540 249 248
-------- -------- -------- -------- --------
Total................. 821 854 907 475 477
======== ======== ======== ======== ========

Consolidated Balance Sheet Data (5)
(In thousands)

December 31, January 1, January 3, December 28, December 28,
2001 2001 2000 1998 1997
------------ ---------- ---------- ------------ ------------

Working capital......... $ (2,474) $ (8,990) $(27,451) $ (4,129) $ (9,825)
Total assets............ $127,260 $125,998 $165,653 $123,306 $134,297
Long-term debt and
obligations under
capital leases,
including current
portion................ $ 36,916 $ 40,538 $ 80,767 $ 70,307 $ 68,444
Total stockholders'
equity................. $ 59,624 $ 50,934 $ 46,663 $ 34,519 $ 41,513
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 and 1997
includes Rally's only. Fiscal 2001 and 2000 include the results of the
merged companies.
(2) Includes asset impairment charges of approximately $1.2 million, $0.6
million, $22.3 million and $3.4 million for fiscal 2001, 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 represents a gain on the early retirement of debt, net of tax
expense of $0.
(4) Systemwide sales consist of aggregate revenues of Company-owned and
franchised.
(5) The consolidated balance sheets presented as of December 31, 2001, January
1, 2001 and January 3, 2000 represent 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.

The Merger has had a significant impact on the Company's results of
operations and is the principal reason for the differences when comparing
results of operations for the periods ending December 31, 2001 and January 1,
2001 with the results of operations for the period ended January 3, 2000. As a
result of the Merger in fiscal 1999, the Company acquired 470 Checkers
restaurants.

16

At December 31, 2001, the Company's system included 821 restaurants,
comprised of 235 Company-owned and operated restaurants and 586 franchised
restaurants. At December 31, 2001, there were 404 Rally's restaurants operating
in 17 different states and there were 417 Checkers restaurants operating in 22
different states, the District of Columbia, Puerto Rico and the West Bank in
the Middle East. As of December 31, 2001, our ownership interest in Company-
operated restaurants is in one of two forms: (i) 100% ownership of 232
restaurants and (ii) a 50%, 51% and 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. In fiscal 2001, we opened one and closed two
restaurants. Franchisees opened 12 and closed 44 restaurants, in fiscal 2001.

Restaurants Operating in the System
For the Quarters Ended

March 27, June 19, Sept. 11, Jan. 1, March 26, June 18, Sept. 10, Dec. 31,
2000 2000 2000 2001 2001 2001 2001 2001
--------- -------- --------- ------- --------- -------- --------- --------

Company-operated:
Beginning of quarter... 367 367 287 224 195 207 207 236
Openings/transfers in.. -- -- 1 -- 29 -- 29 1
Closings/transfers
out................... -- (80) (64) (29) (17) -- -- (2)
--- --- --- --- --- --- --- ---
End of quarter......... 367 287 224 195 207 207 236 235
--- --- --- --- --- --- --- ---
Franchise:
Beginning of quarter... 540 537 601 649 659 638 640 606
Openings/transfers in.. 3 81 65 42 17 5 1 5
Closings/transfers
out................... (6) (17) (17) (32) (38) (3) (35) (25)
--- --- --- --- --- --- --- ---
End of quarter......... 537 601 649 659 638 640 606 586
--- --- --- --- --- --- --- ---
904 888 873 854 845 847 842 821
=== === === === === === === ===

We receive revenues from restaurant sales, franchise fees and royalties. Our
revenues also included payments resulting from an operating agreement with CKE
through July 3, 2001, at which time the agreement terminated. These revenues
are included in franchise fees and other 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. 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 restaurant ratio. Upon
completion of the Merger, this Agreement was terminated. During the period from
December 29, 1998 through August 9, 1999, Checkers charged Rally's $4.7 million
in accordance with the Agreement.

17

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:

December 31, January 1, January 3,
2001 2001 2000(3)
------------ ---------- ----------

Revenues:
Restaurant sales........................... 90.0% 89.9% 95.3%
Franchise royalty revenue.................. 9.6% 7.9% 3.5%
Franchise fees and other income............ 0.4% 2.2% 1.2%
----- ----- ------
100.0% 100.0% 100.0%
===== ===== ======
Cost and expenses:
Restaurant food and paper costs(1)......... 32.6% 31.6% 31.3%
Restaurant labor costs(1).................. 32.2% 33.1% 32.4%
Restaurant occupancy expense(1)............ 8.1% 6.4% 4.9%
Restaurant depreciation and
amortization(1)........................... 3.1% 2.6% 4.0%
Other restaurant operating expenses(1)..... 12.9% 12.1% 10.8%
General and administrative expenses........ 7.3% 8.0% 8.1%
Advertising(1)............................. 5.6% 6.4% 6.1%
Bad debt expense........................... 0.5% 0.4% 0.9%
Non-cash compensation...................... 0.0% 1.0% 0.0%
Other depreciation and amortization........ 2.1% 2.9% 2.7%
Impairment of long-lived assets............ 0.7% 0.0% 11.0%
Loss from restaurant closures.............. 0.4% 0.3% 1.9%
Gain on sales of assets.................... (0.6)% (0.0)% (1.3)%
----- ----- ------
Operating income (loss).................... 4.6% 4.4% (8.6)%
===== ===== ======
Other income (expense):
Interest income............................ 1.1% 0.4% 0.4%
Loss on investment in affiliate............ 0.0% 0.0% (0.7)%
Interest expense (including interest-loan
cost and bond discount amortization)...... (3.0)% (3.6)% (4.3)%
----- ----- ------
Income (loss) before minority interest,
income taxes and extraordinary item...... 2.7% 1.2% (13.2)%
Minority interest in operations of joint
ventures.................................. 0.0% 0.0% 0.0%
----- ----- ------
Income (loss) before income taxes and
extraordinary item....................... 2.7% 1.2% (13.2)%
Income tax expense (benefit)............... 0.0% (0.2)% 0.0%
----- ----- ------
Net income (loss) from continuing
operations before extraordinary item..... 2.7% 1.4% (13.2)%
===== ===== ======
Extraordinary gains (losses)--net of income
taxes..................................... 0.0% (0.1)% 0.4%
----- ----- ------
Net income (loss)......................... 2.7% 1.3% (12.8)%
===== ===== ======
Number of restaurants-Company owned and
franchised(2):
Restaurants open at the beginning of
period................................... 854 907 475
----- ----- ------
Restaurants acquired through merger....... -- -- 470
Company-owned restaurants opened, closed
or transferred, net during period........ 40 (172) (95)
Franchised restaurants opened, closed or
transferred, net during period........... (73) 119 57
----- ----- ------
Total restaurants acquired,opened, closed
or transferred, net during period........ (33) (53) 432
----- ----- ------
Total restaurants open at end of period... 821 854 907
===== ===== ======

- -------
(1) As a percentage of restaurant sales.
(2) Number of restaurants open at end of period.
(3) Includes the results of operations for Rally's only, through August 9,
1999.

18

Results of Operations

Comparison of Historical Results--Fiscal Years 2001 and 2000

Revenues. Total revenues were $161.6 million for the year ended December 31,
2001, compared to $181.2 million for the year ended January 1, 2001. Company-
owned restaurant sales decreased by $17.4 million for the year, from $162.8
million in fiscal 2000, to $145.4 million in fiscal 2001. The primary reason
for the decrease was the result from the sale of 89 restaurants to franchisees
during the third and fourth quarters of fiscal 2000.

Sales at comparable restaurants, which include only the units that were in
operation for the full years being compared, increased 11.2% in 2001 as
compared with 2000.

Franchise royalties increased by $1.1 million primarily as a result of the
Company-owned restaurants sold to franchisees during the third and fourth
quarters of fiscal 2000. Royalties on these restaurants were recognized for a
full year during 2001. The increase can also be attributed to increased average
restaurant sales during fiscal 2001 as compared to 2000.

Franchise fees and other income decreased from $4.0 million, in fiscal 2000,
to $0.7 million for fiscal 2001. The decrease is due primarily to the sale of
167 Company-owned restaurants to franchisees during fiscal year 2000.

Costs and expenses. Restaurant food and paper costs totaled $47.4 million or
32.6% of restaurant sales in fiscal 2001 compared with 31.6% in fiscal 2000.
The increase in these costs as a percentage of restaurant sales was due to
increased beef and cheese prices during the current fiscal year as compared to
the prior fiscal year.

Restaurant labor costs, which include restaurant employees' salaries, wages,
benefits, bonuses and related taxes totaled $46.9 million or 32.2% of
restaurant sales for fiscal 2001 compared with $53.8 million or 33.1% for
fiscal 2000. The primary reason for the decrease as a percentage of sales is
the result of volume efficiencies gained from increased average restaurant
sales.

Restaurant occupancy expense, which includes rent, property taxes, licenses
and insurance totaled $11.8 million or 8.1% of restaurant sales in 2001
compared with $10.5 million or 6.4% in 2000. The increase in restaurant
occupancy expense as a percentage of restaurant sales is due to higher rental
rates in the California market, as a result of taking back 21 locations from
CKE in July of 2001, and increasing insurance costs.

Restaurant depreciation and amortization of $4.5 million in 2001 remained
consistent with $4.3 million in 2000. The slight increase of 0.5% of restaurant
sales is due to the sale of 167 restaurants in 2000 that were considered held
for sale assets, and are therefore, not being depreciated. The sale of these
restaurants decreased Company-owned restaurant sales without an offsetting
decrease in depreciation expense.

Other restaurant operating expenses include all other restaurant level
operating expenses and specifically includes utilities, maintenance and other
costs. These expenses totaled $18.7 million or 12.9% of restaurant sales in
fiscal 2001 compared with $19.7 million or 12.1% in fiscal 2000. The increase
as a percentage of sales was primarily related to increased repairs and
maintenance during the first half of the current year as compared to the
previous year, as we continued the refurbishment of our restaurants that began
in late fiscal 2000. In addition, utilities costs also increased during fiscal
2001.

General and administrative expenses were $11.7 million, or 7.3% of total
revenues for fiscal 2001 compared to $14.6 million, or 8.0% of total revenues
for fiscal 2000. The decrease in costs is due primarily to a decrease in
corporate payroll by approximately $1.7 million.

Advertising expense decreased approximately $2.3 million to $8.1 million, or
5.6% of restaurant sales for 2001 compared with 6.4% for 2000. The decrease in
dollars spent was due to a decrease in the average number

19

of Company-owned restaurants operated during fiscal 2001 as compared to fiscal
2000. The decrease as a percentage of sales was due primarily to the increase
in average restaurant sales for the fiscal year 2001.

Bad debt expense remained relatively consistent at 0.5% of total revenues
for fiscal 2001 as compared to 0.4% for fiscal 2000.

Non-cash compensation resulted from certain options granted and modified in
fiscal 2000. Non-cash compensation recognized in fiscal 2001 was $0.1 million
for those options granted with a vesting period through 2003. Non-cash
compensation recognized in fiscal 2000 was $1.7 million for both those option
which immediately vested and those with vesting periods through 2003.

Other depreciation and amortization decreased to $3.4 million or 2.1% of
total revenues for fiscal 2001 as compared to $5.2 million or 2.9% for fiscal
2000. The decrease was due primarily to decreased depreciation expense for the
property and equipment for the 21 locations taken back from CKE in July 2001.
While they were operated by CKE, Checkers continued to own and depreciate the
property. Depreciation expense was recorded as other depreciation because it
was associated with other income. Once we began operating the restaurants in
2001, restaurant sales were recognized and depreciation was recorded as
restaurant depreciation.

During 2001, the Company realized $1.2 million in total impairment charges
relating to the closing of two Company-owned restaurants, the closing of twelve
franchised restaurants with associated intangibles, and eleven under-performing
Company-owned restaurants. During fiscal 2000, the Company recorded impairment
charges of $0.6 million.

During 2001, the Company recognized losses of $.6 million from restaurant
closures related to the estimated future cost of surplus properties. The
Company maintains a consist practice of reviewing the reserve for future
expenses and recognizes additional loss to ensure the reserve is sufficient to
meet estimated future requirements.

Interest Income. Interest income increased to $1.9 million during fiscal
2001 as compared to $0.7 million during fiscal 2000 primarily as the result of
a large cash balance maintained during the current year for anticipated new
restaurant openings.

Interest Expense. Interest expense decreased to $4.8 million, or 3.0% of
total revenues for fiscal 2001 from $6.6 million, or 3.6% of total revenues for
fiscal 2000. This decrease was due to the net reduction of debt by $3.6 million
and the restructuring of our capital during the current year and fiscal 2000.

Income Tax. The Company's 2001 tax expense represents federal alternative
minimum tax based upon estimated federal alternative minimum taxable income
after utilizing the allowable portion of our net operating loss carryforwards.
The Company's 2000 tax benefit was approximately $475,000 resulting primarily
from a $623,000 favorable tax ruling in fiscal 2000.

Comparison of Historical Results--Fiscal Years 2000 and 1999

Revenues. Total revenues were $181.2 million for the year ended December 31,
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 restaurants, 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 royalties increased by $7.3 million, primarily as a result of the
Company-owned restaurant sales to franchisees during fiscal 2000.

20

Franchise fees and other income increased to $4.0 million from $2.4 million
in fiscal 2000 as compared to fiscal 1999. The increase is due primarily to the
sale of 167 Company-owned restaurants to franchisees during fiscal year 2000 as
compared to the sale of 73 in 1999.

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
continued to benefit from its participation in the purchasing co-op with CKE
Restaurants, Inc. and Santa Barbara Restaurant Group, Inc. This purchasing co-
op expired during 2001.

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 $10.5 million or 6.4% of restaurant sales in 2000
compared with $9.5 million or 4.9% in 1999. Restaurant occupancy expense
increased primarily due to a full year of Checkers' operations being recognized
in fiscal 2000, as Checkers' occupancy costs are higher than Rally's.

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 $19.7 million or 12.1% of restaurant sales in
2000 compared with $20.8 million or 10.8% 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 $1.7 million in 2000 to $14.6
million, or 8.0% of revenues as compared to $16.3 million, or 8.1% 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.

During 2000, the Company recognized losses of $.6 million from restaurant
closures related to the estimated future cost of surplus properties. The
Company maintains a consist practice of reviewing the reserve for future
expenses and recognizes additional loss to ensure the reserve is sufficient to
meet estimated future requirements.

21

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.

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.

Income Tax. The Company's 2000 tax benefit was approximately $475,000
resulting primarily from a $623,000 favorable tax ruling in fiscal 2000.

Liquidity and Capital Resources

The restaurant industry in general, operates with a working capital deficit
because most of our investments are in long-term restaurant operating assets.
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 three-to-five day supply to assure
freshness. We do not have significant levels of accounts receivable or
inventory, and receive credit from our trade suppliers. Funds available from
cash sales not needed immediately to pay our trade suppliers are used for non-
current capital expenditures.

We have a working capital deficit of $2.5 million at December 31, 2001 as
compared to a $9.0 million deficit at January 1, 2001. The decrease in the
deficit is primarily due to the repayment of $2 million of the Textron note
payable (Loan B), operating profits for the year of $4.3 million, and
additional capital contributions of $4.3 million from the exercise of options
and warrants into 1,261,104 shares of common stock.

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 December 31, 2001. However, we have
received a waiver for the financial covenant for the year ended December 31,
2001, and through December 31, 2002. If the thirty-three 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.

Cash and cash equivalents increased approximately $6.3 million to $7.2
million during the year ended December 31, 2001. Cash from operating activities
was $16.0 million, compared to $1.3 million during the same period last year.
The increase of $14.7 million is largely attributed to current profits and an
increase in accrued liabilities.

Cash flow used for investing activities was $5.6 million related primarily
to capital expenditures at existing restaurants and the acquisition of 8
restaurants from a former franchisee. The capital expenditures related
primarily to point-of-purchase menu boards and building refurbishments.

Cash used by financing activities was $4.2 million. We paid down $2 million
of the Textron note payable (Loan B) prior to refinancing the remaining $3.9
million, in addition to monthly principal payments of approximately $5.2
million. We received $594,000 from the issuance of long-term debt and $4.3
million from the issuance of common stock from the exercise of stock options
and warrants during fiscal 2001.

We have capital lease receivables for certain restaurants previously sold
which are subject to capital lease and mortgage obligations for which we
continue to be the primary obligor, and have equivalent liabilities recorded.
The amount of capital lease receivables as of December 31, 2001 was
approximately $7.2 million.

The Company, as original lessee, has also subleased certain land 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.

22

Although there can be no assurance, we believe that our existing cash at
December 31, 2001, the expected cash provided from operations, and the
available $2.8 million line of credit will be sufficient to meet our working
capital and capital expenditure requirements for the next 12 months.

Critical Accounting Policies:

Our critical accounting policies are as follows:

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.

Gains associated with the sale of certain Company-owned restaurants to
franchisees with associated mortgages and capital leases are recognized over
the life of the related capital leases. During fiscal years 1999 and 2000,
several Company-owned restaurants were sold to franchisees with associated
mortgages and capital leases. As a result of the sales, we have recorded lease
receivables for those restaurants sold which are subject to capital lease and
mortgage obligations. The amount of capital lease receivables as of December
31, 2001 was approximately $7.2 million. We have recorded deferred gains of
$5.3 million from these sales since we continue to be responsible for the
payment of the obligations to the original lessors and mortgagors. The deferred
gains are included in the balance sheet under the captions accrued liabilities-
current and deferred revenues for $0.5 million and $4.8 million, respectively.

Valuation of Long-Lived and Intangible Assets and Goodwill--We assess the
impairment of long-lived, identifiable intangible assets and related goodwill
and enterprise level goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors we consider
important which could trigger an impairment review include the following:

. significant underperformance relative to expected historical or projected
future operating results;

. significant negative industry or economic trends;

. significant decline in our stock price for a sustained period; and

. our market capitalization relative to net book value.

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS
No. 121) requires the write-down of certain intangibles and tangible property
associated with under performing sites. In applying SFAS No. 121, we reviewed
all restaurants that recorded losses in the applicable fiscal years and
performed a discounted cash flow analysis where indicated for each restaurant
based upon such results projected over a five to fifteen year period. This
period of time was selected based upon the lease term and the age of the
building, which we believe is appropriate. Impairments or recoveries are
recorded to adjust the asset values to the amount recoverable under the
discounted cash flow analysis, 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 $1.2 million in 2001, $0.6 million in 2000,
$22.3 million in 1999.

In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we
will cease to amortize approximately $24 million of goodwill and $17.5 million
for the intangible value of our tradename. We recorded approximately $2.4
million of amortization on these amounts during 2001 and would have recorded
approximately $2.4 million of

23

amortization during 2002. In lieu of amortization, we are required to perform
an initial impairment review of our goodwill in 2002, and an annual impairment
review thereafter. We expect to complete our initial review during the first
quarter of 2002. In addition, we will assess the value of the tradename in
accordance with SFAS No. 121.

We currently do not expect to record an impairment charge upon completion of
the initial impairment review. However, there can be no assurance that at the
time the review is completed a material impairment charge will not be recorded.

Allowance for doubtful accounts and accrued liabilities--The preparation of
financial statements requires management make estimates and assumptions that
affect the reported amount of assets 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. Specifically, our management
must make estimates of the collectability of our accounts receivables.
Management specifically analyzes accounts receivable and analyzes historical
bad debts, franchise concentrations, franchise credit-worthiness, and current
economic trends when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $2.6 million, net of allowance
for doubtful accounts of $3.6 million as of December 31, 2001.

Management's current estimated range of liability related to some of the
pending litigation is based on claims for which we can estimate the amount and
range of loss. We have recorded the minimum estimated liability related to
those claims, where there is a range of loss. Because of the uncertainties
related to both the amount and range of loss on the remaining pending
litigation, management is unable to make a reasonable estimate of the liability
that could result from an unfavorable outcome. As additional information
becomes available, we will assess the potential liability related to our
pending litigation and revise our estimates accordingly. Such revisions in our
estimates of the potential liability could materially impact our results of
operation and financial position.

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 2 to 8 years.

New Accounting Standards

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets. SFAS 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that are
required to be recognized and reported separately from goodwill. SFAS 142 will
require that goodwill and certain intangibles no longer be amortized, but
instead tested for impairment at least annually. SFAS 142 is required to be
applied starting with fiscal years beginning after December 15, 2001, with
early application permitted in certain circumstances.

The Company adopted SFAS 142 on January 1, 2002, and does not expect any
impairment of goodwill upon adoption. Goodwill amortization was approximately
$1.4 million in fiscal 2001 and 2000.

Identifiable intangible assets are amortized using the straight-line method
over their estimated period of benefit. We periodically evaluate the
recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that an impairment exists. Effective January 1, 2002, we will cease to amortize
the value recorded for our tradename, as we have assessed its life to be
indefinite. Amortization expense recorded for the tradename was approximately
$1.0 million in fiscal 2001 and 2000.

In August of 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 144, Accounting for Impairment or
Disposal of Long-lived Assets. SFAS 144 establishes

24

methods of accounting and reporting for the impairment of long-lived assets
other than goodwill and intangible assets not being amortized. The Company is
currently reviewing this statement and the impact of its adoption on its
financial position, results of operations and cash flows. The Company will
implement SFAS 144 beginning in the first quarter of its fiscal year ending
December 30, 2002.

Future Commitments

The Company is obligated under future commitments as part of its normal
business operations, which are not included as liabilities on the consolidated
balance sheet. The future commitments are for operating lease payments and
product purchases, summarized as follows:

Year(s)
------------------------
2002 2003-Thereafter
-------- ---------------
(000's)

Lease payments.................................... $ 16,634 $ 83,720
Product purchases................................. 104,569 116,792
-------- --------
$121,203 $200,512
======== ========

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 5.8% to 16.3%. 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(1) Index to Consolidated Financial Statements:

Page
----

Independent Auditors' Report........................................ 26

Consolidated Balance Sheets--December 31, 2001 and January 1, 2001.. 27

Consolidated Statements of Operations and Comprehensive Income--
Years ended December 31, 2001, January 1, 2001 and January 3,
2000............................................................... 28

Consolidated Statements of Stockholders' Equity--Years ended
December 31, 2001, January 1, 2001 and January 3, 2000............. 29

Consolidated Statements of Cash Flows--Years ended December 31,
2001, January 1, 2001 and January 3, 2000.......................... 30

Notes to Consolidated Financial Statements.......................... 31

25

Independent Auditors' Report
The Board of Directors and Stockholders
Checkers Drive-In Restaurants, Inc.:

We have audited the accompanying consolidated balance sheets of Checkers
Drive-In Restaurants, Inc. and subsidiaries as of December 31, 2001 and January
1, 2001, 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 December 31, 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 December 31, 2001 and January
1, 2001, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.

/s/ KPMG LLP
Tampa, Florida
March 5, 2002

26

CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

December 31, January
2001 1, 2001
------------ --------

Current Assets:
Cash and cash equivalents............................... $ 7,159 $ 923
Restricted cash......................................... 3,482 1,847
Accounts, notes and leases receivable, net.............. 3,420 4,666
Inventory............................................... 1,122 996
Prepaid expenses and other current assets............... 2,337 2,189
Property and equipment held for sale.................... 3,230 8,774
-------- --------
Total current assets.................................. 20,750 19,395
Property and equipment, net............................. 49,136 42,522
Notes receivable, net--less current portion............. 3,527 4,610
Lease receivable, net--less current portion............. 6,669 8,957
Intangible assets, net.................................. 45,189 48,341
Other assets, net....................................... 1,989 2,173
-------- --------
$127,260 $125,998
======== ========
Current Liabilities:
Current maturities of long-term debt and obligations
under capital leases................................... $ 4,743 $ 9,362
Accounts payable........................................ 6,645 7,374
Reserves for restaurant relocations and abandoned
sites.................................................. 1,879 1,722
Accrued wages and benefits.............................. 2,271 1,523
Accrued liabilities..................................... 7,686 8,404
-------- --------
Total current liabilities............................. 23,224 28,385
Long-term debt, less current maturities................. 25,192 24,909
Obligations under capital leases, less current
maturities............................................. 6,981 6,267
Long-term reserves for restaurant relocations and
abandoned sites........................................ 2,549 3,596
Minority interests in joint ventures.................... 312 532
Deferred revenue........................................ 5,440 7,174
Other long-term liabilities............................. 3,938 4,201
-------- --------
Total liabilities..................................... 67,636 75,064

Stockholders' Equity:
Preferred stock, $.001 par value, authorized 2,000,000
shares, none issued at December 31, 2001 and January 1,
2001................................................... -- --
Common stock, $.001 par value, authorized 175,000,000
shares, issued 10,914,727 at December 31, 2001 and
9,653,623 at January 1, 2001........................... 11 10
Additional paid-in capital.............................. 143,004 138,650
Accumulated deficit..................................... (82,891) (87,226)
-------- --------
60,124 51,434
Less: Treasury stock, 48,242 at December 31, 2001 and at
January 1, 2001, at cost............................... (400) (400)
Note receivable--officer.............................. (100) (100)
-------- --------
Total stockholders' equity............................ 59,624 50,934
-------- --------
$127,260 $125,998
======== ========

See accompanying notes to the consolidated financial statements

27

CHECKERS DRIVE-IN RESTAURANTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)

Fiscal Year Ended
-------------------------------
December 31, January January
2001 1, 2001 3, 2000
------------ -------- --------

REVENUES:
Restaurant sales............................. $145,442 $162,804 $192,340
Franchise royalty revenue.................... 15,457 14,377 7,071
Franchise fees and other income.............. 713 4,009 2,424
-------- -------- --------
Total revenues............................. $161,612 $181,190 $201,835
COSTS AND EXPENSES:
Restaurant food and paper costs.............. 47,422 51,360 60,112
Restaurant labor costs....................... 46,873 53,819 62,403
Restaurant occupancy expense................. 11,771 10,452 9,491
Restaurant depreciation and amortization..... 4,472 4,307 7,745
Other restaurant operating expenses.......... 18,740 19,709 20,832
General and administrative expenses.......... 11,730 14,576 16,345
Advertising.................................. 8,098 10,351 11,755
Bad debt expense............................. 819 642 1,879
Non-cash compensation........................ 100 1,733 --
Other depreciation and amortization.......... 3,398 5,235 5,358
Impairment of long-lived assets.............. 1,170 629 22,271
Loss from restaurant closures................ 573 633 3,780
Gain on sales of assets...................... (985) (307) (2,616)
-------- -------- --------
Total costs and expenses................... $154,181 $173,139 $219,355
-------- -------- --------
Operating income (loss).................... 7,431 8,051 (17,520)
OTHER INCOME (EXPENSE):
Interest income.............................. 1,851 679 779
Interest expense (including interest-loan
cost and bond discount amortization)........ (4,821) (6,609) (8,648)
Loss on investment in affiliate.............. -- -- (1,379)
-------- -------- --------
Income (loss) before minority interest,
income taxes, and extraordinary item....... 4,461 2,121 (26,768)
Minority interest in operations of joint
ventures.................................... (64) (25) 31
-------- -------- --------
Income (loss) before income taxes and
extraordinary item......................... 4,397 2,096 (26,737)
Income tax expense (benefit)................. 62 (475) --
-------- -------- --------
Net income (loss) from continuing operations
before extraordinary item.................. 4,335 2,571 (26,737)
Extraordinary gains (losses)--net of income
taxes....................................... -- (229) 849
-------- -------- --------
NET INCOME (LOSS)........................... $ 4,335 $ 2,342 $(25,888)
======== ======== ========
COMPREHENSIVE INCOME (LOSS)................. $ 4,335 $ 2,342 $(25,888)
======== ======== ========
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item... $ 0.43 $ 0.27 $ (4.02)
Extraordinary item.......................... -- (0.02) 0.13
======== ======== ========
Net earnings (loss)......................... $ 0.43 $ 0.25 $ (3.89)
======== ======== ========
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item... $ 0.36 $ 0.25 $ (4.02)
Extraordinary item.......................... -- (0.02) 0.13
======== ======== ========
Net earnings (loss)......................... $ 0.36 $ 0.23 $ (3.89)
======== ======== ========
Weighted average number of common shares
outstanding:
Basic....................................... 10,139 9,419 6,657
======== ======== ========
Diluted..................................... 11,908 10,194 6,657
======== ======== ========

See accompanying notes to the consolidated financial statements

28

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,
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
Non-cash compensation... -- -- -- -- 100 -- 100
Exercise of 583,480
stock options.......... -- -- -- -- 1,309 --