-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HuAe+rIXnWfoNXBw9k+9DTiNMV43GdV4+IwzpCAG9QM700ptZnjcHmSRt3K4cr6q 5OWVNxU913Blg3zb3nwxjQ== 0000892569-97-002593.txt : 19970923 0000892569-97-002593.hdr.sgml : 19970923 ACCESSION NUMBER: 0000892569-97-002593 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970922 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAR BUFFET INC CENTRAL INDEX KEY: 0001043156 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 841430786 STATE OF INCORPORATION: DE FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-32249 FILM NUMBER: 97683609 BUSINESS ADDRESS: STREET 1: 440 LAWNALE DR CITY: SALT LAKE CITY STATE: UT ZIP: 84115-2917 BUSINESS PHONE: 8014635500 MAIL ADDRESS: STREET 1: 440 LAWNDALE DR CITY: SALT LAKE CITY STATE: UT ZIP: 84115-2917 S-1/A 1 AMENDMENT #2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997 REGISTRATION NO. 333-32249 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 STAR BUFFET, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5812 84-1430786 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
440 LAWNDALE DRIVE, SALT LAKE CITY, UTAH 84115-2917 (801) 463-5500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ROBERT E. WHEATON CHIEF EXECUTIVE OFFICER AND PRESIDENT STAR BUFFET, INC. 440 LAWNDALE DRIVE SALT LAKE CITY, UTAH 84115-2917 (801) 463-5500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: C. CRAIG CARLSON, ESQ. PETER LILLEVAND, ESQ. J. MICHAEL VAUGHN, ESQ. IAIN MICKLE, ESQ. DAVID E. LAFITTE, ESQ. BRETT E. COOPER, ESQ. STRADLING YOCCA CARLSON & RAUTH, ORRICK, HERRINGTON & SUTCLIFFE LLP A PROFESSIONAL CORPORATION OLD FEDERAL RESERVE BANK BUILDING 660 NEWPORT CENTER DRIVE, SUITE 1600 400 SANSOME STREET NEWPORT BEACH, CALIFORNIA 92660 SAN FRANCISCO, CALIFORNIA 94111 (714) 725-4000 (415) 392-1122
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 22, 1997 2,500,000 SHARES [STAR BUFFET LOGO] COMMON STOCK ------------------------ Of the 2,500,000 shares of Common Stock offered hereby, 1,900,000 shares are being sold by Star Buffet, Inc. ("Star Buffet" or the "Company") and 600,000 shares are being sold by CKE Restaurants, Inc. ("CKE" or the "Selling Stockholder"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholder. Following completion of this offering, CKE will own approximately 44.4% of the outstanding shares of Common Stock (approximately 41.0% if the Underwriters' over-allotment option is exercised in full). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price of the Common Stock will be between $10.00 and $12.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "STRZ," subject to official notice of issuance. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER(2) - ------------------------------------------------------------------------------------------------- Per Share............ $ $ $ $ - ------------------------------------------------------------------------------------------------- Total(3)............. $ $ $ $ =================================================================================================
(1) See "Underwriting" for a description of the indemnification arrangements with the Underwriters. (2) Before deducting expenses estimated at $700,000, of which $532,000 are payable by the Company and $168,000 are payable by the Selling Stockholder. (3) The Company has granted to the Underwriters a 30-day option to purchase up to an additional 375,000 shares of Common Stock at the Price to Public, less the Underwriting Discount, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------ The Common Stock is offered by the several Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by them. The Underwriters reserve the right to reject orders in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of certificates representing the Common Stock will be made on or about , 1997. EQUITABLE SECURITIES CORPORATION EVEREN SECURITIES, INC. CRUTTENDEN ROTH INCORPORATED , 1997 3 [MAP DEPICTING LOCATION OF THE COMPANY'S RESTAURANTS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN ACTIVITIES THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON STOCK FOLLOWING THIS OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR MAINTAIN THE PRICE OF THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including notes thereto, included elsewhere in this Prospectus. Unless otherwise indicated, all information contained in this Prospectus assumes (i) the consummation of the Formation Transactions described below under the heading "The Formation Transactions" and (ii) that the Underwriters' over-allotment option is not exercised. The restaurant holdings of Summit Family Restaurants Inc. ("Summit") include 16 HomeTown Buffet restaurants operated by HTB Restaurants, Inc., a wholly-owned subsidiary of Summit ("HTB"), and two Casa Bonita Mexican-themed restaurants. Summit was acquired by CKE on July 15, 1996. The operations of HTB prior to July 15, 1996 are referred to herein as the Predecessor Company. The two Casa Bonita restaurants were acquired by CKE on October 1, 1996. The combined operations of HTB subsequent to July 15, 1996 and the two Casa Bonita restaurants subsequent to October 1, 1996 are referred to herein as the Successor Company. For purposes hereof and unless the context requires otherwise, the terms "Company" and "Star Buffet" refer to Star Buffet, Inc. and the operations of the Predecessor Company and the Successor Company. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Growth Strategy" and elsewhere in this Prospectus. THE COMPANY The Company, through its subsidiaries, owns and operates 16 franchised HomeTown Buffet restaurants, two Mexican-themed restaurants operated under the Casa Bonita name and has entered into a definitive agreement to acquire seven additional buffet restaurants which operate under the "JJ North's Grand Buffet" name (collectively, the "North's Restaurants"). The Company's restaurants, including the North's Restaurants, are located in nine western states and are focused upon providing customers with a wide variety of fresh, high quality food at modest prices in a warm, friendly atmosphere. The Company's strategic objective is to become a leading national operator of regional buffet restaurants through (i) acquisitions of existing buffet restaurants which management believes can benefit from the Company's management practices, (ii) new restaurant openings, particularly by acquiring existing restaurant locations which can be converted to buffet restaurants operated or under development by the Company and (iii) minority investments in or strategic alliances with other regional buffet restaurant chains. The Company's growth strategy is designed to capitalize on the opportunities management perceives in the fragmented buffet segment of the restaurant industry. The Company believes that regional buffet concepts have certain advantages in their market area over national buffet concepts due to their name recognition and ability to meet the specific taste preferences of their customers, but generally lack the management resources, purchasing power and capital to expand and capitalize on their regional market strength. The Company believes that its ability to reduce administrative expenses and achieve other strategic and financial benefits through increased purchasing power, shared product development and marketing efficiencies and its greater access to capital will provide the Company with significant competitive advantages. The Company plans to actively seek acquisition opportunities which exist due to the fragmentation of the buffet, cafeteria and grill-buffet segments of the restaurant industry, which are comprised of a substantial number of regional chains. The Company believes that most of these regional chains are privately owned and may be available for acquisition because they lack the financial and operational structure to compete with larger regional and national chains. Management believes that the Company will be able to offer these operators an attractive alternative by allowing them, in many cases, the opportunity to continue managing their business after acquisition and to increase their focus on customer service and quality rather than administration and finance. Following acquisition, management intends to integrate and improve the 3 5 operations and profitability of regional buffet chains by (i) enhancing food quality and service levels, (ii) implementing operational cost controls and management incentive structures and (iii) leveraging CKE's relationship to reduce overhead expenses. Acquisitions, however, also involve a number of special risks that could adversely affect the Company's business, financial condition and results of operations, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired restaurants, the amortization of acquired intangible assets and the potential loss of key employees. See "Risk Factors -- Risks Associated with Expansion and Acquisitions." The Company has benefited from its relationship with CKE through its access to certain operating systems and strategies which CKE successfully implemented in its Carl's Jr. chain. For the fifty-two weeks ended July 14, 1997, HTB's HomeTown Buffet restaurants experienced a 1.7% increase in same-store sales, following a 9.2% decline in same-store sales during the fiscal year ended December 18, 1995. In addition, management reduced HTB's food costs to 35.2% of total revenues for the twenty-eight weeks ended August 11, 1997 from 37.0% of total revenues for the twenty-eight weeks ended August 12, 1996. The Company believes that its ability to accomplish these cost reductions and operational improvements is due to the Company's customer focus and management practices. The Company believes that its ability to deliver high quality food to customers with superior service in clean and friendly environments has been central to its success at improving customer perceptions and sales. As part of CKE's desire to focus its management efforts and capital resources on quick-service restaurants, CKE has determined that the expansion of the Company will be enhanced through the creation of a separate publicly traded company focused on the buffet segment. After the completion of this offering, CKE will own approximately 44.4% of the outstanding Common Stock (approximately 41.0% if the Underwriters' over-allotment option is exercised in full). Pursuant to a three-year management service agreement (the "Service Agreement"), CKE will provide the Company with multi-unit infrastructure support, including purchasing, accounting, administrative, financial and real estate services. The Company plans to leverage its relationship with CKE by utilizing CKE's proven operating systems and corporate infrastructure. Management believes that the services provided by CKE will enable the Company to focus its resources on operational improvements, cost control and concept and brand development. See "Risk Factors -- Control by and Dependence on CKE," "Business -- Relationship with CKE" and "Certain Transactions." The Company's corporate headquarters is located at 440 Lawndale Drive, Salt Lake City, Utah 84115-2917, and its telephone number is (801) 463-5500. RECENT DEVELOPMENTS North's Restaurants. On July 24, 1997, CKE entered into an Asset Purchase Agreement (the "Acquisition Agreement") with North's Restaurants, Inc. ("North's") to acquire the North's Restaurants and the trademarks, menus, restaurant designs and other intangible assets used in connection with North's restaurant operations. These seven restaurants are located in Idaho, Oregon, Utah and Washington. For the fiscal year ended June 30, 1997, the North's Restaurants generated revenues of $10.5 million and a loss from operations of $24,000. Prior to the completion of this offering, CKE will assign to the Company all of CKE's rights and certain of its obligations under the Acquisition Agreement. The Company intends to acquire the North's Restaurants (the "North Acquisition") upon or promptly following the completion of this offering. The aggregate consideration to be paid by the Company for the North's Restaurants will be $4.5 million, subject to adjustment. The closing of the North Acquisition is subject to the satisfaction of certain conditions. See "Business -- The North Acquisition." The performance of the North's Restaurants has been adversely affected in recent years by operational difficulties and inadequate capital resources, the effects of which were compounded by increased competition in the industry. The Company believes that it can meaningfully improve the same-store sales and profitability levels at the North's Restaurants and has developed a plan to integrate the North's Restaurants into the Company and improve their operations by implementing certain of the strategies developed by CKE which 4 6 HTB has used to improve the operations of its HomeTown Buffet restaurants. See "Risk Factors -- Risks Associated with the North Acquisition." Stacey's Buffet. On July 18, 1997, CKE signed a non-binding letter of intent (the "LOI") with Stacey's Buffet, Inc. ("Stacey's") for a strategic alliance between the Company and Stacey's. Stacey's operates 24 buffet restaurants, 19 of which are located in Florida. For the fiscal year ended January 1, 1997, Stacey's reported revenues of $38.8 million and an operating loss of $1.9 million. The transactions contemplated by the LOI are subject to the negotiation of definitive agreements and approval of Stacey's and the Company's Boards of Directors. The LOI contemplates an arrangement whereby the Company would (i) provide certain purchasing, administrative and management services to 23 of the Stacey's buffet restaurants, (ii) loan Stacey's $2.0 million for remodeling or reconcepting several of Stacey's restaurants and (iii) receive management fees equal to 3.5% of Stacey's revenues and a warrant to purchase 30% of Stacey's fully diluted common stock. The Company would also have the right to designate two members of Stacey's five-member board of directors. The Company believes that the transactions contemplated by the LOI provide the Company with an opportunity to leverage its management expertise to improve Stacey's operations. The Company believes that Stacey's operations have suffered in recent years due to operational difficulties and inadequate capital resources. The Company believes that its management practices and purchasing economies could have a significant positive impact on Stacey's operations. The Company intends to work with Stacey's to implement labor and other cost saving programs developed by CKE and to convert certain units to the Company's prototype buffet restaurant. See "Risk Factors -- Risks Associated with Minority Investments." THE FORMATION TRANSACTIONS The Company was incorporated as a Delaware corporation on July 28, 1997. Prior to the completion of this offering, CKE will contribute to the Company all of the issued and outstanding shares of capital stock of Summit in exchange for 2,600,000 shares of Common Stock of the Company (the "Summit Exchange"). Summit is the parent corporation of HTB, which operates 16 HomeTown Buffet restaurants as a franchisee of HomeTown Buffet, Inc. (the "HomeTown Franchisor"). Summit was acquired by CKE in July 1996, at which time it was the owner, operator and franchisor of 101 JB's Restaurants and the owner and operator of six Galaxy Diner restaurants. Prior to the Summit Exchange, Summit will transfer substantially all of its net assets, including its JB's Restaurant system and Galaxy Diner restaurants, but excluding the shares of capital stock of HTB owned by Summit, to JB's Restaurants, Inc., a newly formed subsidiary of CKE ("JB's"), in exchange for a promissory note (the "JB's Note") with a principal amount equal to CKE's book value of those net assets as of the date of transfer, determined in accordance with generally accepted accounting principles ("GAAP"). JB's will continue to operate the JB's Restaurants and related franchise system and the Galaxy Diner restaurants and assume all of Summit's liabilities, other than liabilities incurred which specifically relate to the restaurant operations of HTB and the two Casa Bonita restaurants. Immediately following completion of such transfer, and prior to the Summit Exchange, Summit will assign the JB's Note and its rights to payment thereunder to CKE as a dividend. In addition, prior to the Summit Exchange, Taco Bueno Restaurants, Inc., an indirect wholly-owned subsidiary of CKE formerly known as Casa Bonita Incorporated ("Taco Bueno"), will transfer substantially all of the net assets relating to its two Casa Bonita restaurants to Summit in exchange for a promissory note (the "Casa Bonita Note") with a principal amount equal to CKE's book value of those net assets (which is estimated at $495,000 as of August 11, 1997) as of the date of transfer, determined in accordance with GAAP. Summit will continue to operate the Casa Bonita restaurants and assume substantially all of Taco Bueno's liabilities relating to those restaurant operations. Prior to the completion of this offering, all of the parties to the foregoing transactions are direct or indirect wholly-owned subsidiaries of CKE. The foregoing transactions represent a reorganization among entities under common control. These transactions are collectively referred to herein as the "Formation Transactions." See "Certain Transactions." 5 7 THE OFFERING Common Stock offered by the Company.............. 1,900,000 shares Common Stock offered by the Selling Stockholder.................................... 600,000 shares Common Stock to be outstanding after this offering....................................... 4,500,000 shares(1) Use of proceeds.................................. The Company intends to use approximately $7.9 million of the net proceeds of this offering to pay a declared and unpaid cash dividend to CKE, approximately $2.0 million for the loan to Stacey's contemplated by the LOI, approximately $1.7 million to acquire equipment under certain operating leases, approximately $500,000 to finance the cash portion of the consideration to be paid for the North Acquisition and $495,000 to repay the Casa Bonita Note. The Company may also use approximately $3.0 million of the net proceeds to repay indebtedness assumed in connection with the North Acquisition. The remaining net proceeds are expected to be used to finance the development or acquisition of additional buffet restaurants and for working capital and other general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.................... STRZ Risk Factors..................................... See "Risk Factors" for certain factors that should be considered by prospective purchasers of the Common Stock.
- --------------- (1) Excludes 602,500 shares of Common Stock reserved for issuance upon the exercise of stock options to be granted under the Company's 1997 Stock Incentive Plan to certain employees and non-employee directors of the Company upon the closing of this offering. Also excludes warrants to acquire up to 150,000 shares of Common Stock that may be purchased in connection with the North Acquisition. Such options and warrants will have an exercise price per share equal to the initial public offering price. See "Management -- 1997 Stock Incentive Plan" and "Business -- The North Acquisition." 6 8 SUMMARY COMBINED HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL AND RESTAURANT OPERATING DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The following table presents summary combined historical financial and restaurant operating data of the Predecessor Company and the Successor Company. The Successor Company has adopted a fiscal year ending on the last Monday in January. The Predecessor Company and the Casa Bonita restaurants historically have operated on different fiscal year end dates. The following data is derived from, and should be read in conjunction with, the historical financial statements and unaudited pro forma combined condensed financial statements, and the notes thereto, included elsewhere in this Prospectus.
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR --------- ----------- --------------------------- -------------------------------- TWENTY- TWENTY-EIGHT WEEKS ENDED FIFTY-TWO WEEKS THIRTY EIGHT FIFTY-TWO ----------------------------------------- ENDED WEEKS WEEKS WEEKS ENDED AUG. 11, ------------------- ENDED ENDED JAN. 27, 1997 DEC. 19, DEC. 18, JULY 15, JAN. 27, 1997 AUG. 12, AUG. 11, ------------- 1994 1995 1996 1997 PRO FORMA(1) 1996(2) 1997 PRO FORMA(1) -------- -------- ---------- --------- ------------ ----------- --------- ------------- COMBINED STATEMENT OF EARNINGS DATA: Total revenues.......... $ 30,871 $ 36,741 $ 23,207 $23,632 $ 53,318 $21,881 $29,306 $34,923 Income from operations............. 961 242 691 914 1,571 589 2,986 2,914 Income before income taxes.................. 758 50 546 808 781 466 2,878 2,498 Net income.............. $ 457 $ 28 $ 330 $ 470 $ 469 $ 280 $ 1,727 $ 1,499 Net income per common share.................. $ 0.10 $ 0.33 Common shares used in computing per share amounts (in thousands)............. 4,500 4,500 RESTAURANT OPERATING DATA: Average annual sales per Restaurant(3): HomeTown Buffet........ $ 2,627 $ 2,455 $ 2,466 Casa Bonita............ -- -- 5,742 Percentage increase (decrease) in comparable store sales(4): HomeTown Buffet........ 4.3% (9.2)% (2.4)% 1.9% Casa Bonita............ -- -- -- 0.5% Number of restaurants open (at end of period): HomeTown Buffet........ 14 16 16 16 16 16 16 Casa Bonita............ -- -- 2 2 -- 2 2 North's Restaurants.... -- -- -- 7 -- -- 7 ------- ------- ------- ------- ------- ------- ------- Total................ 14 16 18 25 16 18 25 ======= ======= ======= ======= ======= ======= =======
SUCCESSOR ------------------------ AUGUST 11, 1997 ------------------------ ACTUAL PRO FORMA(1) --------- ------------ COMBINED BALANCE SHEET DATA: Total assets.......................................................................................... $17,745 $ 36,033 Total long-term debt and capital lease obligations, including current portion......................... 2,479 9,479 Stockholders' equity.................................................................................. 10,589 21,114
- --------------- (1) Adjusted to give pro forma effect to this offering, the application of the estimated net proceeds thereof and the North Acquisition. See "Selected Pro Forma Financial Data." (2) Includes results of operations of the Successor Company from July 16, 1996 to August 12, 1996. (3) Calculated on a fifty-two week trailing basis. (4) Includes only restaurants open throughout the full periods being compared. 7 9 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating the Company and its business before purchasing shares of Common Stock. RISKS ASSOCIATED WITH EXPANSION AND ACQUISITIONS The Company intends to pursue an aggressive growth strategy, the success of which will depend in part on the ability of the Company to acquire or construct additional buffet restaurants or to convert acquired sites into buffet restaurants, within both existing and new markets. The success of the Company's growth strategy is dependent upon numerous factors, many of which are beyond the Company's control, including the availability of suitable acquisition opportunities, the lease or purchase of suitable sites on acceptable terms, the ability of the Company to obtain necessary governmental permits and approvals, the availability of appropriate financing and general economic conditions. The Company must compete with other restaurant operators for acquisition opportunities and with other restaurant operators, retail stores, companies and developers for desirable site locations. Many of these entities have substantially greater financial and other resources than the Company. There can be no assurance that the Company will be able to identify, negotiate and consummate acquisitions of additional buffet restaurants or new restaurant sites or that acquired restaurants or newly constructed or converted restaurants can be operated profitably and successfully integrated into the Company's operations. Many of its acquired and new restaurants will be located in geographic markets in which the Company has limited or no operating experience. In addition, the Company's acquisition strategy includes the identification of companies or properties that are viewed as underperforming by the Company. This element of the Company's strategy increases the risks involved with the Company's acquisitions. Acquisitions involve a number of special risks that could adversely affect the Company's business, financial condition and results of operations, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired restaurants, the amortization of acquired intangible assets and the potential loss of key employees. In particular, the failure to maintain adequate operating and financial control systems or unexpected difficulties encountered during expansion could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that any acquisition will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. The Company is unable to predict the likelihood of any additional acquisitions (other than the North Acquisition) being proposed or completed in the near future. If the Company determines to make any significant acquisition, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. There can be no assurance that adequate equity or debt financing would be available to the Company for any such acquisitions. LACK OF COMBINED OPERATING HISTORY The Company has only been in existence since July 1997. Prior to the Formation Transactions, the companies comprising the Successor Company operated independently and were not under common control or management until October 1, 1996. Therefore, the operations of the Company have a limited combined operating history upon which investors may evaluate the Company's performance. In view of its limited combined operating history, the Company remains vulnerable to a variety of business risks generally associated with young, growing companies. There can be no assurance that operating results of existing or future restaurants will be comparable to historical results of operations or that the Company will be profitable on a quarterly or annual basis in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONTROL BY AND DEPENDENCE ON CKE CKE will own approximately 44.4% of the Company's outstanding Common Stock following the completion of this offering (approximately 41.0% if the Underwriters' over-allotment option is exercised in full) and will be able to control or significantly influence substantially all matters requiring approval by the 8 10 stockholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. Such concentration of ownership could discourage or prevent a change in control of the Company. The Company's success is highly dependent on its continued relationship with CKE. Pursuant to the three-year Service Agreement, CKE will provide the Company with multi-unit infrastructure support, including purchasing, accounting, administrative, financial and real estate services. The expiration or termination of the Service Agreement could have a material adverse effect on the Company's business, financial condition and results of operations. In addition to the Service Agreement, the Company may enter into additional or modified agreements, arrangements and transactions with CKE. There can be no assurance that conflicts of interest will not occur with respect to the Service Agreement or such future business dealings and similar corporate matters. Conflicts may arise in connection with recruiting, site selection, and acquisition and expansion opportunities. There can be no assurance that any such conflicts will be resolved in a manner favorable to the Company or its non-controlling stockholders. See "Business -- Relationship with CKE," "Certain Transactions" and "Principal and Selling Stockholders." RISKS ASSOCIATED WITH THE NORTH ACQUISITION Consummation of the North Acquisition is subject to the satisfaction of certain conditions, such as obtaining lien releases, completion of this offering and other customary closing conditions. Accordingly, there can be no assurance that the North Acquisition will be consummated. If the North Acquisition is consummated, the combined companies will be more complex and diverse than any one of such companies individually, and the combination and continued operation of their distinct business operations will present difficult challenges for the Company's management due to the increased time and resources required in the management effort. The Company and North's Restaurants have different systems and procedures in many operational areas which must be integrated. There can be no assurance that integration will be successfully accomplished. The difficulties of such integration may be increased by the necessity of coordinating geographically diverse organizations. The integration of certain operations following the North Acquisition will require the dedication of management resources which may temporarily distract attention from the day-to-day business of the combined companies. The North's Restaurants have recently experienced declining same-store sales and significant net losses. There can be no assurance that the Company will be able to return the North's Restaurants to profitability. The failure to effectively integrate the operations of the Company and the North's Restaurants or to improve the results of operations of the North's Restaurants could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- The North Acquisition," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Selected Pro Forma Financial Data." DEPENDENCE UPON AND RESTRICTIONS RESULTING FROM RELATIONSHIP WITH THE HOMETOWN FRANCHISOR The performance of HTB's HomeTown Buffet restaurant operations is directly related to the success of the HomeTown Franchisor's buffet restaurant system, including the management and financial condition of the HomeTown Franchisor as well as restaurants operated by the HomeTown Franchisor and other franchisees of HomeTown Buffet restaurants. The inability of HTB's HomeTown Buffet restaurants to compete effectively with other buffet restaurants would have a material adverse effect on the Company's business, financial condition and results of operations. The success of HTB's HomeTown Buffet restaurants depends in part on the effectiveness of the HomeTown Franchisor's marketing efforts, new product development programs, quality assurance and other operational systems over which the Company has no control. For example, adverse publicity involving the HomeTown Franchisor or one or more HomeTown Buffet restaurants operated by HTB, the HomeTown Franchisor or its other franchisees could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Relationship with the HomeTown Franchisor," "-- Competition" and "-- Legal Proceedings." HTB operates each of its HomeTown Buffet restaurants pursuant to a franchise agreement with the HomeTown Franchisor (each, a "Franchise Agreement"). HTB's HomeTown Buffet operations are subject to certain restrictions imposed by the HomeTown Franchisor's policies and procedures as in effect from time to time, which restrictions include limitations on HTB's ability to modify the menu items and decor of its 9 11 HomeTown Buffet restaurants. In addition, the Company's HomeTown Buffet operations are subject to certain contractual and other restrictions, including the following: Noncompetition. Each of the Franchise Agreements includes a provision restricting HTB and certain of its affiliates, during the term of the Franchise Agreement and during the period of two years commencing on the expiration or termination thereof, from engaging in any business similar to the HomeTown Buffet restaurant, including any restaurant business that involves a pure buffet restaurant that does not include waitperson service or the service of separate entree menu items, within 25 miles of the location of any HomeTown Buffet restaurant, or hiring any person from, or soliciting or inducing any person to leave his or her employment with, the HomeTown Franchisor or any HomeTown Buffet restaurant. Change of Control of HTB; Issuance of Securities. Each Franchise Agreement provides that HTB shall not sell, assign, transfer or encumber (collectively, a "transfer") any right, license or franchise granted by the Franchise Agreement, or HTB's interest in the respective HomeTown Buffet restaurant, and shall not cause or permit any such transfer to occur by operation of law or otherwise without the express written consent of the HomeTown Franchisor. The issuance or transfer of 20% or more of the stock in HTB, by operation of law or otherwise, constitutes a transfer of the Franchise Agreement requiring the HomeTown Franchisor's consent. If the HomeTown Franchisor's consent is required but not obtained in connection with any such transfer or issuance, the HomeTown Franchisor could attempt to terminate the Franchise Agreements, which attempt, if successful, would have a material adverse effect on the Company's business, financial condition and results of operations. Proprietary Information. Each Franchise Agreement includes provisions to the effect that HTB will not use certain proprietary information, such as the HomeTown Franchisor's operating manual, standard recipe manual and standard menu and certain information set forth therein (including trade secrets, know-how methods and techniques), except with respect to the operation of a HomeTown Buffet restaurant, or disclose such proprietary information to any persons not permitted by the Franchise Agreement, and that HTB will conform to the common image and identity created by the foods, products, premiums, novelty items, recipes, ingredients, cooking techniques and processes and the services associated with the HomeTown Buffet restaurant system described in the Franchise Agreement. Right of First Refusal. Each Franchise Agreement includes a provision granting the HomeTown Franchisor a right of first refusal to purchase the HomeTown Buffet restaurant and the franchise granted thereby upon substantially the same terms and conditions of any bona fide offer for such franchise or any interest in the ownership thereof or of a substantial portion of the assets of such restaurant which HTB is ready and willing to accept. Following CKE's announcement of the Formation Transactions on July 28, 1997, the HomeTown Franchisor and its counsel requested additional information from HTB relating to the Formation Transactions and this offering for the purpose of assessing HTB's compliance with the foregoing contractual and other restrictions. HTB has provided certain of such information to the HomeTown Franchisor, and representatives of HTB and the HomeTown Franchisor have met to discuss the foregoing matters and to explore ways of resolving their differences, including the pending litigation with the HomeTown Franchisor. There can be no assurance that the HomeTown Franchisor will not pursue claims against the Company or its subsidiaries alleging noncompliance with the Franchise Agreements or other matters. If the Company is forced to defend itself against such claims, whether or not meritorious, the Company may be required to incur substantial expense and diversion of management attention, and there can be no assurance that such claims will not have a material adverse effect on the Company's business, financial condition and results of operations or on its ability to pursue its business plan. The existence of any such litigation could also have a material adverse effect on the trading price of the Company's Common Stock. HTB and the HomeTown Franchisor have recently been, and are currently, involved in arbitration and litigation proceedings with respect to certain matters. See "Business -- Legal Proceedings." 10 12 FLUCTUATIONS IN QUARTERLY RESULTS The Company has in the past experienced, and expects to continue to experience, significant fluctuations in restaurant revenues and results of operations from quarter to quarter. In particular, the Company's quarterly results can vary as a result of acquisitions and minority investments, costs incurred to integrate newly acquired entities, and seasonal patterns. A large number of the Company's restaurants are located in areas which are susceptible to severe winter weather conditions which may have a negative impact on customer traffic and restaurant revenues. Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance. There can be no assurance that future seasonal and quarterly fluctuations will not have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The restaurant industry is highly competitive. The Company competes on the basis of the quality and value of food products offered, price, service, location and overall dining experience. The Company's primary competitor in the buffet restaurant business is Buffets, Inc., which owns, operates and franchises the HomeTown Buffet and Old Country Buffet restaurant concepts. The Company also competes with a large and diverse group of restaurant chains and individually owned restaurants, including chains and individually owned restaurants that use a buffet format. The number of buffet restaurants with operations generally similar to the Company's has grown considerably in the last several years, and the Company believes competition among buffet restaurants is increasing. As the Company and its principal competitors expand operations in various geographic areas, competition, including competition among buffet restaurants, can be expected to intensify. Such intensified competition could increase the Company's operating costs or adversely affect its revenues. A number of competitors have been in existence longer than the Company and have substantially greater financial, marketing and other resources and wider geographical diversity than does the Company. In addition, the restaurant industry is affected by changes in consumer tastes, national, regional and local economic conditions and market trends. The Company's significant investment in, and long-term commitment to, each of its restaurant sites limits its ability to respond quickly or effectively to changes in local competitive conditions or other changes that could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH MINORITY INVESTMENTS As part of its growth strategy, the Company intends to seek minority investments in or strategic alliances with other regional buffet restaurant chains, like Stacey's, that the Company believes can be improved through the implementation of the Company's management practices. Such investments and alliances will not be easily liquidated, and the failure of the Company to improve the operating results of such restaurant chains could adversely affect the Company's ability to recoup or realize a return on its investments. There can be no assurance that the Company will be able to improve the operating results of those restaurant chains in which it makes a minority investment or with which it forms a strategic alliance. See "Business -- Growth Strategy" and " -- The Stacey's Strategic Alliance." RISKS ASSOCIATED WITH RESTAURANT INDUSTRY Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. The performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographic considerations and the type, number and location of competing restaurants. Multi-unit food service businesses such as the Company's can also be materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses such as the Company's to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients. The Company's profitability is highly sensitive to increases in food, labor and other operating costs that cannot always be passed on to its guests in the form of higher prices or otherwise compensated for. In addition, unfavorable trends or developments concerning factors such as 11 13 inflation, increased food, labor and employee benefits costs (including increases in hourly wage and unemployment tax rates), increases in the number and locations of competing buffet restaurants, regional weather conditions and the availability of experienced management and hourly employees may also adversely affect the food service industry in general and the Company's business, financial condition and results of operations in particular. Changes in economic conditions affecting the Company's guests could reduce traffic in some or all of the Company's restaurants or impose practical limits on pricing, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. The success of the Company will depend in part on the ability of the Company's management to anticipate, identify and respond to changing conditions. There can be no assurance that management will be successful in this regard. DEPENDENCE ON KEY PERSONNEL The Company believes that its success will depend in part on the continuing services of its key executives, including Robert E. Wheaton, the Company's Chief Executive Officer and President. The Company does not maintain any key man life insurance. Mr. Wheaton is also an executive officer of CKE and a portion of his time will continue to be devoted to CKE's business. The loss of the services of Mr. Wheaton could have a material adverse effect on the Company's business, financial condition and results of operations, and there can be no assurance that a qualified replacement would be available in a timely manner, if at all. The Company's continued growth will also depend in part on its ability to attract and retain additional skilled management personnel. See "Management." GOVERNMENT REGULATION The restaurant industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and building and zoning requirements. In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Many of the Company's employees are paid hourly rates based upon the federal and state minimum wage laws. Recent legislation increasing the minimum wage has resulted in higher labor costs to the Company. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could have a material adverse effect on the Company's business, financial condition and results of operations. NO PRIOR PUBLIC TRADING MARKET Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or, if one does develop, that it will be maintained. The initial public offering price, which will be established by negotiations among the Company, the Selling Stockholder and the representatives of the Underwriters, may not be indicative of prices that will prevail in the trading market. See "Underwriting." LITIGATION The Company is from time to time the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject of complaints or allegations from employees from time to time. An existing or future lawsuit or claim could result in an adverse decision against the Company that could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Legal Proceedings." POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS Certain provisions of the Company's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. The Company's Certificate of Incorporation allows the Company to issue up to 1,500,000 shares of currently undesignated Preferred Stock, to determine the preferences and rights and the qualifications, limitations or restrictions granted to or imposed on any unissued series of Preferred Stock, 12 14 and to fix the number of shares constituting any such series and the designation of such series, without any vote or future action by the stockholders. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to the rights of the Common Stock. The Certificate of Incorporation also eliminates the ability of stockholders to call special meetings. The Company's Bylaws require advance notice to nominate a director or take certain other actions. Such provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. In addition, the Company is subject to the provisions of Section 203 of the Delaware General Corporation Law, which imposes certain limitations on transactions between a corporation and "interested" stockholders, as defined in such provisions. See "Description of Capital Stock." EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON STOCK PRICE Sales of shares of Common Stock in the public market after this offering could materially and adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems acceptable, or at all. Upon the completion of this offering, the Company will have 4,500,000 shares of Common Stock outstanding, of which only the 2,500,000 shares sold in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining shares of Common Stock, all of which are owned by CKE, are subject to a lock-up agreement and will be eligible for sale, subject to Rule 144, beginning one year after the date of this Prospectus. In addition, upon the completion of this offering, options to purchase 602,500 shares of Common Stock will be outstanding, of which options to purchase 229,267 will be immediately exerciseable. Shares issuable upon the exercise of any such vested options will be subject to 180-day lock-up agreements and will thereafter be eligible for sale, subject to Rule 701. Equitable Securities Corporation, at any time and without notice, may release all or any part of the shares from these restrictions. See "Shares Eligible for Future Sale." POSSIBLE VOLATILITY OF STOCK PRICE The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. Factors such as fluctuations in the Company's operating results, failure of such operating results to meet the expectations of stock market analysts and investors, changes in stock market analyst recommendations regarding the Company, its competitors and other companies in the restaurant industry, as well as changes in general economic or market conditions and changes in the restaurant industry may have a significant adverse effect on the market price of the Common Stock. DILUTION The initial public offering price is substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in this offering will incur immediate and substantial net tangible book value dilution of $6.58 per share, assuming an initial public offering price of $11.00 per share. In the event the Company issues additional Common Stock in the future, including shares which may be issued in connection with future acquisitions, purchasers of Common Stock in this offering may experience further dilution. See "Dilution." 13 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,900,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.00 per share are estimated to be $18.9 million ($22.7 million if the Underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholder. Of the net proceeds received by the Company from this offering, the Company intends to use (i) approximately $7.9 million to pay a cash dividend to CKE (the "Special Dividend"); (ii) approximately $2.0 million for the loan to Stacey's contemplated by the LOI; (iii) approximately $1.7 million to acquire equipment under certain operating leases; (iv) approximately $500,000 to finance the cash portion of the consideration to be paid for the North Acquisition; and (v) approximately $495,000 to repay the Casa Bonita Note. The Casa Bonita Note was incurred by the Company in connection with the Formation Transactions to acquire the net assets of the two Casa Bonita restaurants from Taco Bueno, is payable on demand and does not bear interest. The Company may also use approximately $3.0 million of the net proceeds to acquire $3.0 million principal amount of indebtedness of North's from North's primary secured lender or, if the Company elects to assume such indebtedness in connection with the North Acquisition, to repay the principal amount of indebtedness so assumed. See "Business -- The North Acquisition." The remaining portion of the net proceeds will be used to finance the acquisition or development of additional restaurants and for working capital and other general corporate purposes. The Company may use a portion of the net proceeds for acquisitions of or investments in complementary businesses. The Company's management has from time to time made tentative proposals to, and entered into discussions with, other buffet restaurant operators with respect to a variety of business combinations, restaurant acquisitions or other investments; however, no agreements with respect to any such acquisition or investment currently exist other than the North Acquisition and the LOI. The amounts actually expended for each purpose and the timing of such expenditures may vary significantly depending upon numerous factors, including the progress of the Company's expansion plans and the results of operations of the Company's restaurants. Pending such uses, the Company intends to invest the net proceeds from this offering in short-term, investment grade money-market instruments. DIVIDEND POLICY Other than the Special Dividend, the Company has never declared or paid dividends on its Common Stock. The Company expects that future earnings, if any, will be retained to finance the operation and expansion of the Company's business and, accordingly, does not intend to declare or pay any cash dividends on the Common Stock in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 14 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of August 11, 1997 and on a pro forma basis to reflect the Formation Transactions and to give effect to the North Acquisition, the Special Dividend and the sale of 1,900,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. The following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the combined financial statements and unaudited pro forma combined condensed financial statements of the Company, and the related notes thereto, included elsewhere in this Prospectus.
AS OF AUGUST 11, 1997 --------------------------- ACTUAL PRO FORMA (UNAUDITED) (UNAUDITED) ----------- ----------- (IN THOUSANDS) Short-term debt, including current portion of long-term debt and capital lease obligations.......................................... $ 248 $ 1,648 ======= ======= Long-term debt and capital lease obligations, less current portion... $ 2,231 $ 7,831 Stockholders' equity: Preferred Stock: $0.001 par value, 1,500,000 shares authorized, no shares outstanding on a pro forma basis......................... -- Common Stock: $0.01 par value, 1,000 shares authorized, 10 shares outstanding (Successor Company); and $0.001 par value, 18,500,000 shares authorized, 4,500,000 shares outstanding on a pro forma basis(1).............................................. -- 5 Additional paid-in capital......................................... 9,272 19,792 Retained earnings.................................................. 1,317 1,317 ------- ------- Total stockholders' equity......................................... 10,589 21,114 ------- ------- Total capitalization....................................... $12,820 $28,945 ======= =======
- --------------- (1) Excludes 602,500 shares of Common Stock reserved for issuance upon the exercise of stock options to be granted under the Company's 1997 Stock Incentive Plan to certain employees and non-employee directors of the Company upon the closing of this offering. Also excludes warrants to acquire up to 150,000 shares of Common Stock that may be purchased in connection with the North Acquisition. Such options and warrants will have an exercise price per share equal to the initial public offering price. See "Management -- 1997 Stock Incentive Plan" and "Business -- The North Acquisition." 15 17 DILUTION The unaudited pro forma net tangible book value of the Company as of August 11, 1997, after giving effect to the Formation Transactions (and assuming the Special Dividend and the Casa Bonita Note have been paid), was approximately $1.7 million, or approximately $0.65 per share. Such unaudited pro forma net tangible book value per share represents the tangible net worth (tangible assets less total liabilities, assuming the Special Dividend and the Casa Bonita Note have been paid) of the Company. The number of outstanding shares used for the per share calculation was 2,600,000 shares, giving effect to the Formation Transactions but prior to this offering. Unaudited pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in this offering and the unaudited pro forma net tangible book value per share of Common Stock immediately after completion of this offering. After giving effect to the sale of the 1,900,000 shares of Common Stock offered by the Company in this offering at an assumed initial public offering price of $11.00 per share, and deducting the underwriting discount and estimated offering expenses payable by the Company, the Company's unaudited pro forma net tangible book value at August 11, 1997, would have been $19.9 million, or $4.42 per share. This represents an immediate dilution in unaudited pro forma net tangible book value of $6.58 per share to new investors purchasing Common Stock in this offering, as illustrated in the following table: Assumed initial public offering price per share...................... $11.00 Unaudited pro forma net tangible book value per share as of August 11, 1997........................................................ $ 3.88 Increase per share attributable to new investors................... 3.76 Decrease per share attributable to the Special Dividend and the Casa Bonita Note................................................ (3.22) ------ Unaudited pro forma net tangible book value per share after this offering........................................................... 4.42 ------ Dilution per share to new investors.................................. $ 6.58 ======
The following table sets forth, on an unaudited pro forma basis as of August 11, 1997, the number of shares of Common Stock purchased from the Company, the total consideration and the average price per share paid to the Company by the existing stockholder and by the new investors purchasing shares of Common Stock in this offering (at an assumed initial public offering price of $11.00 per share and before deducting the estimated underwriting discount and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION(1) -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing Stockholder(2)........ 2,600,000 57.8% $ 2,209,000 9.6% $ 0.85 New Investors(2)............... 1,900,000 42.2 20,900,000 90.4 11.00 --------- ----- ----------- ----- Total................ 4,500,000 100.0% $23,109,000 100.0% ========= ===== =========== =====
- --------------- (1) Based upon (a) the capital and net book value of the assets acquired by the Company in connection with the Formation Transactions, assuming payment of the Special Dividend and the Casa Bonita Note, and (b) the assumed initial public offering price of $11.00 per share paid by new investors. (2) Sales by the existing stockholder in this offering will reduce the number of shares it holds to 2,000,000 shares, or approximately 44.4% of the outstanding shares of Common Stock, and will increase the number of shares held by new investors to 2,500,000, or approximately 55.6% of the outstanding shares of Common Stock. The foregoing tables assume no exercise of the Underwriters' over-allotment option and excludes options to purchase 602,500 shares of Common Stock to be granted to certain employees and non-employee directors of the Company upon the closing of this offering. Also excludes warrants to acquire up to 150,000 shares of Common Stock that may be purchased in connection with the North Acquisition. Such options and warrants will have an exercise price equal to the initial public offering price. See "Management -- 1997 Stock Incentive Plan" and "Business -- The North Acquisition." 16 18 SELECTED COMBINED FINANCIAL DATA The following table presents selected combined historical financial data of the Predecessor Company and the Successor Company. Prior to the Formation Transactions, the companies comprising the Successor Company operated independently and were not under common control or management until October 1, 1996. Accordingly, the data may not be comparable to or indicative of post-combination results. Management believes that a combined presentation of financial information is most meaningful to investors' understanding of the results of operations, financial condition and cash flows of the Successor Company. The Successor Company has adopted a fiscal year ending on the last Monday in January. The Predecessor Company and the Casa Bonita restaurants historically have operated on different fiscal year end dates. The Company's first fiscal quarter consists of 16 weeks, while each of the remaining quarters consists of 12 weeks. The Selected Combined Financial Data for the fifty-two weeks ended December 19, 1994 and December 18, 1995, for the thirty weeks ended July 15, 1996 (Predecessor Company) and for the twenty-eight weeks ended January 27, 1997 (Successor Company) have been derived from combined financial statements, which appear elsewhere in this Prospectus and have been audited by KPMG Peat Marwick LLP, independent auditors. The Selected Combined Financial Data for the fiscal years ended December 21, 1992 and December 20, 1993 have been derived from unaudited combined financial statements of the Predecessor Company not included elsewhere in this Prospectus. The Selected Combined Financial Data for the twenty-eight weeks ended August 12, 1996 and August 11, 1997 have been derived from unaudited combined financial statements of the Predecessor Company and the Successor Company, respectively, appearing elsewhere in this Prospectus. The results of operations of the Predecessor Company for the twenty-eight weeks ended August 12, 1996 include the results of operations of the Successor Company from July 16, 1996 to August 12, 1996. The unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the combined financial position and combined results of operations for the periods presented. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements and unaudited pro forma combined condensed financial statements, and the notes thereto, included elsewhere in this Prospectus. 17 19 SELECTED COMBINED FINANCIAL DATA (DOLLARS IN THOUSANDS)
SUCCESSOR PREDECESSOR --------- --------------------------------------------------- TWENTY- PREDECESSOR SUCCESSOR THIRTY EIGHT ----------- --------- FIFTY-TWO WEEKS ENDED WEEKS WEEKS TWENTY-EIGHT WEEKS ENDED ----------------------------------------- ENDED ENDED ------------------------ DEC. 21, DEC. 20, DEC. 19, DEC. 18, JULY 15, JAN. 27, AUG. 12, AUG. 11, 1992 1993 1994 1995 1996 1997 1996 1997 -------- -------- -------- -------- -------- --------- ----------- --------- (UNAUDITED) (UNAUDITED) COMBINED STATEMENT OF EARNINGS DATA: Total revenues....................... $5,213 $13,167 $30,871 $36,741 $23,207 $23,632 $21,881 $29,306 ------- ------- ------- ------- ------- ------- ------- ------- Costs and expenses: Food costs......................... 1,886 4,918 11,469 13,769 8,569 8,285 8,096 9,283 Labor costs........................ 1,617 3,732 9,089 10,878 6,810 7,565 6,425 9,186 Occupancy and other expenses....... 824 2,695 6,769 8,954 5,030 5,259 4,778 6,110 General and administrative......... 467 980 1,762 1,666 1,193 621 1,116 612 Depreciation and amortization...... 168 384 821 1,232 914 988 877 1,129 ------- ------- ------- ------- ------- ------- ------- ------- Total costs and expenses..... 4,962 12,709 29,910 36,499 22,516 22,718 21,292 26,320 ------- ------- ------- ------- ------- ------- ------- ------- Income from operations............... 251 458 961 242 691 914 589 2,986 Interest expense..................... 54 110 203 192 145 106 123 108 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes........... 197 348 758 50 546 808 466 2,878 Income taxes......................... 80 139 301 22 216 338 186 1,151 ------- ------- ------- ------- ------- ------- ------- ------- Net income........................... $ 117 $ 209 $ 457 $ 28 $ 330 $ 470 $ 280 $ 1,727 ======= ======= ======= ======= ======= ======= ======= =======
PREDECESSOR SUCCESSOR ----------------------------------------- ------------------------------------ DEC. 21, DEC. 20, DEC. 19, DEC. 18, JAN. 27, AUG. 26, AUG. 11, 1992 1993 1994 1995 1997 1996 1997 -------- -------- -------- -------- --------- ----------- --------- (UNAUDITED) (UNAUDITED) COMBINED BALANCE SHEET DATA: Total assets......................... $5,424 $ 9,026 $13,003 $16,283 $16,783 $14,555 $17,745 Total long-term debt and capital lease obligations, including current portion.................... 446 5,076 6,714 11,150 2,609 2,269 2,479 Stockholder's equity................. 1,244 2,134 1,801 1,806 9,742 8,939 10,589
18 20 SELECTED PRO FORMA FINANCIAL DATA The following unaudited pro forma combined condensed financial information is based upon the historical combined financial statements of the Predecessor Company and Successor Company and has been prepared to illustrate the effects of this offering and the North Acquisition. The unaudited pro forma combined condensed balance sheet as of August 11, 1997 gives effect to the North Acquisition and application of the estimated net proceeds from this offering as if such transactions had been completed on August 11, 1997 and was prepared based upon the combined balance sheet of the Successor Company as of August 11, 1997 and the balance sheet of North's Restaurants as of June 30, 1997. The historical combined condensed statement of operations for the period ended January 27, 1997 is comprised of the results of operations of the Predecessor Company for the 24-week period ended July 15, 1996 and the results of operations of the Successor Company for the 28-week period ended January 27, 1997 (the "Combined Results") and gives effect to the transactions described above as if such transactions had been completed on January 30, 1996. The unaudited pro forma combined condensed statement of operations for the period ended January 27, 1997 was prepared based upon the Combined Results and the statement of operations of North's Restaurants for the 52-week period ended December 31, 1996. The unaudited pro forma combined condensed statement of operations for the twenty-eight weeks ended August 11, 1997 was prepared based upon the combined results of the Successor Company for the twenty-eight weeks ended August 11, 1997 and the statement of operations of North's Restaurants for the twenty-eight weeks ended June 30, 1997. See Note (7) of Notes to Financial Statements of North's Restaurants. The unaudited pro forma combined condensed financial information has been provided for comparative purposes only and does not purport to be indicative of results which would actually have been obtained had the North Acquisition been effected on the date indicated or of results which may be obtained in the future. These unaudited pro forma combined condensed financial statements should be read in conjunction with the combined financial statements, including the notes thereto, which appear elsewhere in this Prospectus. The unaudited pro forma adjustments are based upon information set forth in this Prospectus and certain assumptions included in the notes to the unaudited pro forma combined condensed financial statements. The Company is performing an ongoing evaluation regarding the nature and scope of its restaurant operations and various short- and long-term strategic considerations, including whether, and to what extent, integration, consolidation or other modification of its restaurant operations is appropriate following the North Acquisition. The Company believes the pro forma assumptions are reasonable under the circumstances. The unaudited pro forma combined condensed financial statements do not give effect to the transactions with Stacey's contemplated by the LOI and, accordingly, do not include net fee revenues and interest income, if any, which may be generated from the Company's strategic alliance with Stacey's. In addition, the unaudited pro forma combined condensed statements of operations do not include interest income, if any, which may arise from notes receivable from North's. The North Acquisition will be accounted for by the purchase method of accounting. Accordingly, the Company's cost to acquire the North's Restaurants (the "Purchase Consideration"), calculated to be $4.5 million (subject to adjustment), will be allocated to the assets acquired and liabilities assumed according to their estimated fair values. The final allocation of the Purchase Consideration is dependent upon certain valuations and other studies that have not progressed to a stage where there is sufficient information to make such an allocation in the accompanying unaudited pro forma combined condensed financial statements. 19 21 STAR BUFFET, INC. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF AUGUST 11, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL ------------------------ SUCCESSOR COMPANY NORTH'S AUGUST RESTAURANTS 11, JUNE 30, PRO FORMA PRO FORMA 1997 1997 ADJUSTMENTS COMBINED --------- ------------ ------------ ---------- Current assets: Cash....................................................... $ 725 $ 17 $ 8,325A,D,K $ 9,067 Short-term investments..................................... 180 -- 180 Trade receivables.......................................... 29 18 47 Inventories................................................ 385 69 454 Prepaid expenses........................................... 79 -- 55E 134 Deferred taxes, net........................................ 193 -- 193 ------- ------- -------- ------- Total current assets.................................... 1,591 104 8,380 10,075 Notes receivable............................................. -- -- 3,000A 3,000 Property and equipment, net.................................. 12,982 4,366 1,700K 19,048 Capitalized leases, net...................................... 2,435 -- 2,435 Deposits and other assets.................................... 225 17 242 Organizational costs......................................... 305 -- -- 305 Franchise fees............................................... 207 -- 207 Costs in excess of net assets of business acquired, net...... -- -- 721J 721 ------- ------- -------- ------- Total assets....................................... $17,745 $ 4,487 $ 13,801 $ 36,033 ======= ======= ======== ======= Current liabilities: Accounts payable........................................... $ 2,139 $ 390 $ $ 2,529 Accrued liabilities........................................ 2,379 318 55E 2,752 Current portion of notes payable........................... -- -- 1,400A 1,400 Current portion of North's debt for which North's Restaurants, Inc. is jointly and severally liable....... -- 12,417 (12,417)B -- Current maturities of capital lease obligations............ 248 -- 248 ------- ------- -------- ------- Total current liabilities............................... 4,766 13,125 (10,962) 6,929 Notes payable................................................ -- -- 5,600A 5,600 North's debt for which North's Restaurants, Inc. is jointly and severally liable....................................... -- 1,300 (1,300)B -- Capital lease obligations.................................... 2,231 -- 2,231 Other long-term liabilities.................................. 159 -- -- 159 ------- ------- -------- ------- Total liabilities.................................. 7,156 14,425 (6,662) 14,919 ------- ------- -------- ------- Total stockholders' equity................................... 10,589 (9,938) 20,463C,D 21,114 ------- ------- -------- ------- Total liabilities and stockholders' equity......... $17,745 $ 4,487 $ 13,801 $ 36,033 ======= ======= ======== =======
See accompanying notes to unaudited pro forma combined condensed financial information. 20 22 STAR BUFFET, INC. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE 52-WEEK PERIOD ENDED JANUARY 27, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------------------------------------------------------- PREDECESSOR ---------------------------------- SUCCESSOR RESULTING ------------- COMBINED THIRTY SIX WEEK TWENTY-FOUR TWENTY-EIGHT FIFTY-TWO WEEKS PERIOD WEEKS WEEKS WEEKS NORTH'S ENDED ENDED ENDED ENDED ENDED RESTAURANTS JULY 15, JAN. 29, JULY 15, JAN. 27, JAN. 27, DEC. 31, PRO FORMA PRO FORMA 1996 1996(1) 1996 1997 1997 1996 ADJUSTMENTS COMBINED -------- --------- ----------- ------------- ----------- ------------ ----------- --------- Total revenues...... $ 23,207 $(4,351) $18,856 $23,632 $42,488 $ 10,830 $ $53,318 ------- ------ ------- ------- ------- ------- ----- ------- Costs and expenses: Food costs........ 8,569 (1,596) 6,973 8,285 15,258 4,013 19,271 Labor costs....... 6,810 (1,270) 5,540 7,565 13,105 3,290 16,395 Occupancy and other expenses........ 5,030 (954) 4,076 5,259 9,335 1,885 (746)K 10,474 General and administrative expenses........ 1,193 (196) 997 621 1,618 970 350 I 2,938 Depreciation and amortization.... 914 (169) 745 988 1,733 635 301 J,K 2,669 ------- ------ ------- ------- ------- ------- ----- ------- Total costs and expenses... 22,516 (4,185) 18,331 22,718 41,049 10,793 (95) 51,747 ------- ------ ------- ------- ------- ------- ----- ------- Income from operations........ 691 (166) 525 914 1,439 37 95 1,571 Interest (income) expense, net...... 145 (32) 113 106 219 554 17 E,F,G 790 ------- ------ ------- ------- ------- ------- ----- ------- Income (loss) before income taxes...... 546 (134) 412 808 1,220 (517) 78 781 Income tax expense (benefit)......... 216 (54) 162 338 500 (174) (14)H 312 ------- ------ ------- ------- ------- ------- ----- ------- Net income (loss)... $ 330 $ (80) $ 250 $ 470 $ 720 $ (343) $ 92 $ 469 ======= ====== ======= ======= ======= ======= ===== ======= Net income per common share...... $ 0.28 $ 0.10 ======= ======= Common shares used in computing per share amounts..... 2,600 4,500 ======= =======
- --------------- (1) Adjustments necessary to present a 24-week period ended July 15, 1996. See accompanying notes to unaudited pro forma combined condensed financial information. 21 23 STAR BUFFET, INC. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE 28-WEEK PERIOD ENDED AUGUST 11, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ----------------------- SUCCESSOR COMPANY NORTH'S AUGUST RESTAURANTS 11, JUNE 30, PRO FORMA PRO FORMA 1997 1997 ADJUSTMENTS COMBINED --------- ----------- ----------- --------- Total revenues................................... $29,306 $ 5,617 $ $34,923 ------- ------ ----- ------- Costs and expenses: Food costs..................................... 9,283 2,150 11,433 Labor costs.................................... 9,186 1,699 10,885 Occupancy and other expenses................... 6,110 1,006 (402)K 6,714 General and administrative expenses............ 612 621 188 I 1,421 Depreciation and amortization.................. 1,129 265 162 J,K 1,556 ------- ------ ----- ------- Total costs and expenses............... 26,320 5,741 (52) 32,009 ------- ------ ----- ------- Income (loss) from operations.................... 2,986 (124) 52 2,914 Interest (income) expense, net................... 108 319 (11)E,F,G 416 ------- ------ ----- ------- Income (loss) before income taxes................ 2,878 (443) 63 2,498 Income tax expense............................... 1,151 (43) (109)H 999 ------- ------ ----- ------- Net income (loss)................................ $ 1,727 $ (400) $ 172 $ 1,499 ======= ====== ===== ======= Net income per common share...................... $ 0.66 $ 0.33 ======= ======= Common shares used in computing per share amounts........................................ 2,600 4,500 ======= =======
See accompanying notes to unaudited pro forma combined condensed financial information. 22 24 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION A To record the acquisition of North's Restaurants for an aggregate purchase price of $4.5 million, subject to adjustment. The purchase price will be paid in the form of $500,000 cash, assumption of $7.0 million of North's debt (the current portion of which is $1.4 million), and the recording of a $3.0 million note receivable from North's. B To eliminate the North's debt of $13.717 million, which will not be assumed by the Company, except as noted in Footnote A. C To eliminate North's Restaurants' division deficit of $9.938 million. D To reflect the estimated net cash proceeds of $18.905 million from the sale of 1,900,000 shares of Common Stock offered by the Company at an assumed initial public offering price of $11.00 per share (less the underwriting discount and estimated offering expenses payable by the Company), the payment of the Special Dividend of $7.885 million and the repayment of the Casa Bonita Note in the amount of $495,000 which represents CKE's book value of the net assets of the Casa Bonita restaurants to be transferred to Summit in connection with the Formation Transactions. See "Certain Transactions." E To record debt issuance costs of $55,000 related to the assumption of $7.0 million of North's debt and related amortization of debt issue costs over five years of $11,000 for the fiscal year ended January 27, 1997 and $6,000 for the twenty-eight weeks ended August 11, 1997. F To record interest expense on $7.0 million of North's debt assumed in the acquisition of North's Restaurants at a variable rate assumed to be 8% in the amount of $560,000 for the fiscal year ended January 27, 1997 and $302,000 for the twenty-eight weeks ended August 11, 1997. A 0.125% increase/decrease in the estimated interest rate incrementally increases/decreases income before taxes by $9,000 and $5,000 for the fiscal year ended January 27, 1997 and the twenty-eight weeks ended August 11, 1997, respectively. G To eliminate the historical interest expense recorded by North's of $554,000 and $319,000 for the twelve months ended December 31, 1996 and the twenty-eight weeks ended June 30, 1997, respectively, for related indebtedness which would not have been in existence at the beginning of such periods as this debt will not be assumed by the Company. H To record the income tax effects of the pro forma adjustments and combination of the entities at a pro forma tax rate of 40.0%. I To record the impact of management fees payable pursuant to the Service Agreement with CKE. These fees amount to $350,000 and $188,000 for the year ended January 27, 1997 and the twenty-eight weeks ended August 11, 1997, respectively. J To record $721,000 for the excess of consideration paid over the preliminary estimate of the fair value of net assets acquired, to be amortized over 40 years, and to record goodwill amortization of $18,000 and $10,000 for the fiscal year ended January 27, 1997 and the twenty-eight weeks ended August 11, 1997, respectively. K To record the purchase and buyout of certain HTB operating equipment leases in the amount of $1.7 million, the related depreciation expense using an estimated useful life of six years and the reduction in rent expense in the amount of $283,000 and ($746,000), respectively, for the fiscal year ended January 27, 1997, and $152,000 and ($402,000), respectively, for the twenty-eight weeks ended August 11, 1997. L Reconciliation to Unaudited Pro Forma Combined Condensed Financial Information Adjustments Balance Sheet: (1) Cash: (A) ($500,000); (D) $18,905,000, ($7,885,000), ($495,000); (K) ($1,700,000) = $8,325,000 (2) Stockholders' Equity: (C) $9,938,000; (D) $10,525,000 = $20,463,000 Statement of Operations (52-week period ended January 27, 1997): (1) Depreciation and amortization: (J) $18,000; (K) $283,000 = $301,000 (2) Interest (income) expense, net: (E) $11,000; (F) $560,000; (G) ($554,000) = $17,000 Statement of Operations (28-week period ended August 11, 1997): (1) Depreciation and amortization: (J) $10,000; (K) $152,000 = $162,000 (2) Interest (income) expense, net: (E) $6,000; (F) $302,000; (G) ($319,000) = ($11,000) M There are no material adjustments necessary to convert the Predecessor Company financial information to the new accounting basis. 23 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in connection with the information set forth under "Selected Combined Financial Data," "Selected Pro Forma Financial Data" and the financial statements of the Company and the accompanying notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below, in "Risk Factors," "Business -- Growth Strategy" and elsewhere in this Prospectus. OVERVIEW Prior to the Formation Transactions, the HomeTown Buffet and Casa Bonita restaurants were operated as part of separate subsidiaries of CKE. Prior to their acquisition by CKE, these restaurants were operated as part of other restaurant operating companies. The historical results of operations reflect operations in these ownership forms and may not be indicative of their operations as part of the Company. In particular, general and administrative expenses reflect allocations from prior owners and may not be meaningful as a basis of comparison to the general and administrative expenses the Company will incur. See "Risk Factors -- Lack of Combined Operating History." The results of operations of the Casa Bonita restaurants have been included in the Company's results of operations since the date of CKE's acquisition. The financial statements therefore include results of operations of the Casa Bonita restaurants since October 1, 1996, and the addition of revenues, expenses and other components associated with the Casa Bonita restaurants is one of the principal reasons for the significant differences when comparing results of operations to prior periods, which do not include results of operations of the Casa Bonita restaurants. The North's Restaurants will be acquired upon or promptly following the completion of this offering and such acquisition will be accounted for as a purchase transaction. The historical results of operations of the Company do not include the operations of the North's Restaurants. Due to the inclusion of the North's Restaurants following this offering, the Company's historical results of operations and period-to-period comparisons may not be meaningful or indicative of future results. See "Risk Factors -- Risks Associated with the North Acquisition." The Company expects to continue to acquire restaurants and may construct new restaurants. To the extent that the Company acquires underperforming or unprofitable restaurants or opens new restaurants, the Company's results of operations may be negatively affected due to the initial costs associated with such restaurants. COMPONENTS OF INCOME FROM OPERATIONS Total revenues include a combination of food and beverage sales and are net of applicable state and city sales taxes. Food costs primarily consist of the costs of food and beverage items. Various factors beyond the Company's control, including adverse weather and natural disasters, may affect food costs. Accordingly, the Company may incur periodic fluctuations in food costs. Generally, these temporary increases are absorbed by the Company and not passed on to customers; however, management may adjust menu prices to compensate for increased costs of a more permanent nature. Labor costs include restaurant management salaries, bonuses, hourly wages for unit level employees, various health, life and dental insurance programs, vacations and sick pay and payroll taxes. Occupancy and other expenses are primarily fixed in nature and generally do not vary with restaurant sales volume. Rent, insurance, property taxes, utilities, maintenance and advertising account for the major expenditures in this category. 24 26 General and administrative expenses include all corporate and administrative functions that serve to support the existing restaurant base and provide the infrastructure for future growth. Management, supervisory and staff salaries, employee benefits, data processing, training and office supplies are the major items of expense in this category. Following this offering, CKE will provide the Company with certain administrative and other services. See "Business -- Relationship with CKE." The Company records depreciation on its property and equipment on a straight-line basis over their estimated useful lives. RESULTS OF OPERATIONS The following table summarizes the Company's results of operations as a percentage of total revenues for the 52 weeks ended December 19, 1994 ("Fiscal 1994") and December 18, 1995 ("Fiscal 1995"), the thirty weeks ended July 15, 1996, the twenty-eight weeks ended January 27, 1997 and the twenty-eight week periods ended August 12, 1996 and August 11, 1997. References to "Fiscal 1998" refer to the fiscal year ending January 26, 1998. The results of operations of the Predecessor Company for the twenty-eight weeks ended August 12, 1996 include the results of operations of the Successor Company from July 16, 1996 to August 12, 1996.
PREDECESSOR --------------------------------- SUCCESSOR ------------ FIFTY-TWO WEEKS THIRTY TWENTY-EIGHT PREDECESSOR SUCCESSOR ----------- --------- TWENTY-EIGHT ENDED WEEKS WEEKS WEEKS ENDED ------------------- ENDED ENDED ----------------------- DEC. 19, DEC. 18, JULY 15, JAN. 27, AUG. 12, AUG. 11, 1994 1995 1996 1997 1996 1997 -------- -------- ----------- ------------ ----------- --------- Total revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- Costs and expenses: Food costs........................ 37.2 37.5 37.0 35.0 37.0 31.7 Labor costs....................... 29.4 29.6 29.3 32.0 29.4 31.3 Occupancy and other expenses...... 21.9 24.4 21.7 22.3 21.8 20.8 General and administrative........ 5.7 4.5 5.1 2.6 5.1 2.1 Depreciation and amortization..... 2.7 3.4 3.9 4.2 4.0 3.9 ----- ----- ----- ----- ----- ----- Total costs and expenses................ 96.9 99.4 97.0 96.1 97.3 89.8 ----- ----- ----- ----- ----- ----- Income from operations.............. 3.1 0.6 3.0 3.9 2.7 10.2 Interest expense.................... 0.6 0.5 0.6 0.5 0.6 0.4 ----- ----- ----- ----- ----- ----- Income before income taxes.......... 2.5 0.1 2.4 3.4 2.1 9.8 Income taxes........................ 1.0 0.0 1.0 1.4 0.8 3.9 ----- ----- ----- ----- ----- ----- Net income.......................... 1.5% 0.1% 1.4% 2.0% 1.3% 5.9% ===== ===== ===== ===== ===== =====
COMPARISON OF TWENTY-EIGHT WEEKS ENDED AUGUST 11, 1997 TO TWENTY-EIGHT WEEKS ENDED AUGUST 12, 1996 Total revenues increased $7.4 million, or 33.9%, from $21.9 million in the twenty-eight weeks ended August 12, 1996 to $29.3 million in the twenty-eight weeks ended August 11, 1997. The increase was primarily attributable to the inclusion of the results of Casa Bonita in the first and second quarters of Fiscal 1998, which results were not included in the comparable period of Fiscal 1997. Food costs increased $1.2 million, or 14.7%, from $8.1 million in the twenty-eight weeks ended August 12, 1996 to $9.3 million in the twenty-eight weeks ended August 11, 1997. Food costs as a percentage of total revenues declined from 37.0% in the twenty-eight weeks ended August 12, 1996 to 31.7% in the twenty-eight weeks ended August 11, 1997. The decline as a percentage of total revenues was attributable to an overall improvement in food cost at HTB since the acquisition of Summit by CKE and the inclusion of Casa Bonita since its acquisition by CKE, which operates at a lower level of food cost. Labor costs increased $2.8 million, or 43.0%, from $6.4 million in the twenty-eight weeks ended August 12, 1996 to $9.2 million in the twenty-eight weeks ended August 11, 1997. Labor costs as a percentage of total revenues increased from 29.4% in the twenty-eight weeks ended August 12, 1996 to 31.3% in the twenty-eight weeks ended August 11, 1997. The increase as a percentage of total revenues is primarily 25 27 attributable to the inclusion of Casa Bonita in the first and second quarters of Fiscal 1998, which operates at a higher level of labor costs than HTB's HomeTown Buffet restaurants. Occupancy and other expenses increased $1.3 million, or 27.9%, from $4.8 million in the twenty-eight weeks ended August 12, 1996 to $6.1 million in the twenty-eight weeks ended August 11, 1997. Occupancy and other expenses as a percentage of total revenues decreased from 21.8% in the twenty-eight weeks ended August 12, 1996 to 20.8% in the twenty-eight weeks ended August 11, 1997. The decrease as a percentage of total revenues is primarily attributable to the inclusion of Casa Bonita in the first and second quarters of Fiscal 1998. General and administrative expenses decreased $504,000, or 45.2%, from $1.1 million in the twenty-eight weeks ended August 12, 1996 to $612,000 in the twenty-eight weeks ended August 11, 1997. General and administrative expenses as a percentage of total revenues decreased from 5.1% in the twenty-eight weeks ended August 12, 1996 to 2.1% in the twenty-eight weeks ended August 11, 1997. The decrease as a percentage of total revenues is a result of the elimination of certain costs following the acquisition by CKE and the inclusion of $332,000 of non-recurring severance costs in the twenty-eight weeks ended August 12, 1996. Pursuant to the Service Agreement, CKE will provide the Company with multi-unit infrastructure support, including accounting and administrative, financial, purchasing and real estate services. See "Business -- Relationship with CKE." Depreciation and amortization increased $252,000, or 28.7%, from $877,000 in the twenty-eight weeks ended August 12, 1996 to $1.1 million in the twenty-eight weeks ended August 11, 1997, and remained constant as a percentage of total revenues. The increase in absolute dollars was attributable to the inclusion of the Casa Bonita restaurants. Income from operations increased $2.4 million, or 407.0%, from $589,000 in the twenty-eight weeks ended August 12, 1996 to $3.0 million in the twenty-eight weeks ended August 11, 1997. Income from operations as a percentage of total revenues increased from 2.7% in the twenty-eight weeks ended August 12, 1996 to 10.2% in the twenty-eight weeks ended August 11, 1997. The increase in dollars and as a percentage of total revenues is attributable to the cost reduction efforts implemented by CKE following its acquisitions of Summit and the Casa Bonita restaurants and inclusion of Casa Bonita in the first and second quarters of Fiscal 1998. COMPARISON OF TWENTY-EIGHT WEEKS ENDED JANUARY 27, 1997 TO THIRTY WEEKS ENDED JULY 15, 1996 AND THIRTY WEEKS ENDED JULY 15, 1996 TO FISCAL 1995 Due to the acquisition of Summit by CKE on July 15, 1996 and the inclusion of Casa Bonita since the date of acquisition on October 1, 1996 by CKE, the comparison of these periods may not be meaningful or indicative of future results. Food costs as a percentage of total revenues decreased slightly from 37.5% in Fiscal 1995 to 37.0% for the thirty weeks ended July 15, 1996. Food costs as a percentage of total revenues decreased to 35.0% during the twenty-eight weeks ended January 27, 1997 as compared to 37.0% for the thirty weeks ended July 15, 1996. The decline was attributable to a consistent improvement in food cost since the acquisition of Summit by CKE and the inclusion of Casa Bonita, which operates at a lower level of food costs. Labor costs as a percentage of total revenues remained consistent at 29.6% during Fiscal 1995 as compared to 29.3% for the thirty weeks ended July 15, 1996. Labor costs as a percentage of total revenues increased to 32.0% during the twenty-eight week period ended January 27, 1997 from 29.3% for the thirty week period ended July 15, 1996. The increase as a percentage of total revenues was primarily attributable to the inclusion of the two Casa Bonita restaurants since their acquisition on October 1, 1996 which operate at a higher level of labor costs than the Company's HomeTown Buffet restaurants. Occupancy and other expenses as a percentage of total revenues decreased from 24.4% in Fiscal 1995 to 21.7% during the thirty weeks ended July 15, 1996. The decrease as a percentage of total revenues was primarily attributable to overall reduced expenses and the relatively fixed nature of certain of these expenses and the high seasonal sales volumes during the period ended July 15, 1996. Occupancy and other expenses as a 26 28 percentage of total revenues increased to 22.3% during the twenty-eight week period ended January 27, 1997 from 21.7% for the thirty week period ended July 15, 1996. This increase was primarily attributable to the relatively fixed nature of certain of these expenses and the relatively low seasonal sales volumes during the period ended January 27, 1997. General and administrative expenses as a percentage of total revenues increased from 4.5% in Fiscal 1995 to 5.1% during the thirty week period ended July 15, 1996. The increase was primarily attributable to the payment of severance costs during the period ended July 15, 1996. General and administrative expenses as a percentage of total revenues decreased to 2.6% during the twenty-eight week period ended January 27, 1997 from 5.1% for the thirty week period ended July 15, 1996. The decrease as a percentage of total revenues was a result of the inclusion of Casa Bonita which operated with relatively lower general and administrative costs and the elimination of certain costs following acquisition by CKE. Depreciation and amortization as a percentage of total revenues increased from 3.4% in Fiscal 1995 to 3.9% during the thirty week period ended July 15, 1996. The increase as a percentage of total revenues was attributable to two restaurant openings in late Fiscal 1995 for which restaurant equipment was purchased rather than leased. Depreciation and amortization as a percentage of total revenues remained consistent at 4.2% during the twenty-eight week period ended January 27, 1997 as compared with 3.9% for the thirty week period ended July 15, 1996. Income from operations as a percentage of total revenues increased from 0.6% in Fiscal 1995 to 3.0% during the thirty week period ended July 15, 1996. The increase was attributable to reduced food, labor and occupancy and other expenses partially offset by increased general and administrative and depreciation and amortization expenses. Income from operations as a percentage of total revenues increased from 3.0% during the thirty week period ended July 15, 1996 to 3.9% for the twenty-eight week period ended January 27, 1997. The increase as a percentage of total revenues was attributable to certain cost reductions accomplished by CKE following its acquisition of Summit and the inclusion of Casa Bonita since October 1, 1996. COMPARISON OF FISCAL 1995 TO FISCAL 1994 Total revenues increased $5.9 million, or 19.0%, from $30.9 million in Fiscal 1994 to $36.7 million in Fiscal 1995. The increase was attributable to the opening of two additional restaurants during Fiscal 1995 and the full-year impact of seven restaurants which were opened during Fiscal 1994. Food costs increased $2.3 million, or 20.1%, from $11.5 million in Fiscal 1994 to $13.8 million in Fiscal 1995. Food costs as a percentage of total revenues increased from 37.2% in Fiscal 1994 to 37.5% in Fiscal 1995. The increase was attributable to the opening of two new restaurants during Fiscal 1995. New restaurants initially operate at a higher level of food costs than established restaurants. Labor costs increased $1.8 million, or 19.7%, from $9.1 million in Fiscal 1994 to $10.9 million in Fiscal 1995. Labor costs as a percentage of total revenues increased from 29.4% in Fiscal 1994 to 29.6% in Fiscal 1995. The increase was attributable to the opening of new restaurants which initially operate at a higher level of labor costs. Occupancy and other expenses increased $2.2 million, or 32.3%, from $6.8 million in Fiscal 1994 to $9.0 million in Fiscal 1995. Occupancy and other expenses as a percentage of total revenues increased from 21.9% in Fiscal 1994 to 24.4% in Fiscal 1995. The increase was attributable to the opening of seven additional restaurants during Fiscal 1994 which initially experienced significantly higher sales volumes than the sales generated by the existing restaurants open during Fiscal 1995. General and administrative expenses decreased $96,000, or 5.4%, from $1.8 million in Fiscal 1994 to $1.7 million in Fiscal 1995. General and administrative expenses as a percentage of total revenues decreased from 5.7% in Fiscal 1994 to 4.5% in Fiscal 1995. The decrease as a percentage of total revenues was attributable to the increase in revenue and the relatively fixed nature of these expenses. Depreciation and amortization increased $411,000, or 50.1%, from $821,000 in Fiscal 1994 to $1.2 million in Fiscal 1995. Depreciation and amortization expense as a percentage of total revenues increased from 2.7% 27 29 in Fiscal 1994 to 3.4% in Fiscal 1995. The increase as a percentage of total revenues was due to the opening of seven additional restaurants during Fiscal 1994 which initially experienced significantly higher sales volumes than the sales generated by the existing restaurants open during Fiscal 1995. Income from operations decreased $719,000, or 74.8%, from $961,000 in Fiscal 1994 to $242,000 in Fiscal 1995. Income from operations as a percentage of total revenues decreased from 3.1% in Fiscal 1994 to 0.7% in Fiscal 1995. IMPACT OF INFLATION The impact of inflation on the cost of food, labor, equipment, and construction could affect the Company's operations. Many of the Company's employees are paid hourly rates based on federal and state minimum wage laws. Recent legislation increasing the minimum wage has resulted in higher labor costs to the Company. In addition, most of the Company's leases require the Company to pay taxes, insurance, maintenance, repairs and utility costs, and these costs are subject to inflationary pressures. The Company may attempt to offset the effect of inflation through periodic menu price increases, economies of scale in purchasing and cost controls and efficiencies at existing restaurants. Management believes that inflation has had no significant impact on costs during the last three years, primarily because the largest single item of expense, food costs, has remained relatively stable during this period. LIQUIDITY AND CAPITAL RESOURCES The Predecessor and Successor Companies have historically financed their operations primarily through a combination of cash on hand, cash provided from operations and available borrowings under bank lines of credit. As of August 11, 1997, the Company had $725,000 in cash. Cash provided by operations was approximately $2.7 million, $1.6 million, $816,000 and $1.9 million in Fiscal 1994, Fiscal 1995, the thirty week period ended July 15, 1996 and the twenty-eight week period ended January 27, 1997, respectively. Cash provided by operations was approximately $1.6 million and $2.9 million for the twenty-eight week periods ended August 12, 1996 and August 11, 1997, respectively. The Company does not currently have a bank line of credit or other working capital facility available to it. The Company intends to obtain a bank credit facility to support its working capital requirements. Management anticipates that the credit facility will contain customary affirmative and negative covenants, including maintaining certain minimum working capital, net worth and financial ratios and restrictions on the Company's ability to pay dividends on the Common Stock. There can be no assurance that the Company will be able to arrange a credit facility when required or on terms acceptable to the Company. The Company intends to expand its operations through the opening of new restaurants and acquisitions of regional buffet restaurant chains. In addition, the Company may expand through the purchase of existing restaurant sites which would be converted to one of the Company's restaurant concepts. Management estimates the cost of opening its prototype restaurant to be approximately $1.5 million to $1.7 million assuming leased real estate. In many instances, management believes that existing restaurant locations can be acquired and converted to the Company's prototype concept at a lower cost than new unit openings. Management believes that the cost of converting an existing restaurant facility to the Company's prototype concept is approximately $400,000 to $500,000 per unit. These costs consist primarily of exterior and interior appearance modifications and certain kitchen and food service equipment. There can be no assurance that the Company will be able to acquire additional restaurant chains or locations or, if acquired, that these restaurants will have a positive contribution to the Company's results of operations. The Company believes that the net proceeds from this offering, together with existing cash balances and funds expected to be generated from operations, will provide the Company with sufficient funds to finance its operations for at least the next 12 months. The Company may require additional funds to support its working capital requirements or for other purposes, including acquisitions, and may seek to raise such additional funds through public or private equity and/or debt financings or from other sources. No assurance can be given that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to the Company. 28 30 NEW ACCOUNTING PRONOUNCEMENTS In March 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), effective for fiscal years ending after December 15, 1997. SFAS 128 introduces and requires the presentation of "basic" earnings per share which represents net earnings divided by the weighted average shares outstanding excluding all common stock equivalents. Dual presentation of "diluted" earnings per share, reflecting the dilutive effects of all common stock equivalents, will also be required. The diluted presentation is similar to the current presentation of fully diluted earnings per share. Management has not determined whether the adoption of SFAS 128 will have a material impact on the Company's combined financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general- purpose financial statements. SFAS 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management has not determined whether the adoption of SFAS 130 will have a material impact on the Company's combined financial position or results of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets, information about the revenues derived from the enterprise's products or services, and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has not determined whether the adoption of SFAS 131 will have a material impact on the Company's segment reporting. 29 31 BUSINESS GENERAL The Company, through its subsidiaries, owns and operates 16 franchised HomeTown Buffet restaurants, two Mexican-themed restaurants operated under the Casa Bonita name and has entered into a definitive agreement to acquire seven additional buffet restaurants which operate under the "JJ North's Grand Buffet" name. The Company's restaurants, including the North's Restaurants, are located in nine western states and are focused upon providing customers with a wide variety of fresh, high quality food at modest prices in a warm, friendly atmosphere. The Company's strategic objective is to become a leading national operator of regional buffet restaurants through the acquisition of established regional concepts and the development of additional restaurants within existing or new markets. The Company was formed on July 28, 1997 as a wholly-owned subsidiary of CKE, an operator, franchisor and licensor of over 4,000 branded restaurants in the United States and abroad. See "Certain Transactions." The Company has benefited from its relationship with CKE through its access to certain operating systems and strategies which CKE successfully implemented in its Carl's Jr. chain. Since acquiring Summit in July 1996, these systems and procedures have been successful at increasing the overall revenues and profitability of HTB's HomeTown Buffet restaurants. As part of CKE's desire to focus its management efforts and capital resources on quick-service restaurants, CKE has determined that the expansion of the Company will be enhanced through the creation of a separate publicly traded company focused on the buffet restaurant segment. After the completion of this offering, CKE will beneficially own approximately 44.4% of the outstanding Common Stock (approximately 41.0% if the Underwriters' over-allotment option is exercised in full). OPERATING STRATEGY Since the acquisition of Summit by CKE in July 1996, HTB's HomeTown Buffet restaurants have experienced significant reductions in operating costs and improvements in same-store revenues. The Company believes that its ability to accomplish these cost reductions and operational improvements is due to the Company's customer focus and management practices. Customer Focus. The Company believes that its ability to deliver high quality food to customers with superior service in clean and friendly environments has been central to its success at improving customer perceptions and sales at its buffet restaurants. The key elements of management's focus include: - High Quality Food. The Company seeks to differentiate itself by providing higher quality and better tasting food than its competitors. Food items are prepared frequently and in small batches to ensure the correct temperature, texture and flavor. Management limits the number of items prepared each day and frequently rotates selected specialty items to maintain customer interest while ensuring that the Company's signature items are offered at the highest possible quality. - Superior Service. The Company provides a level of customer service which it believes has helped it establish a higher level of customer satisfaction than its competitors. Customers are greeted by an employee who seats the customers and explains the features of the restaurant and menu offerings. In addition, the restaurants' managers seek to visit each customer table during peak meal periods to ensure guest satisfaction. The Company's restaurants are inspected by independent "mystery shoppers" several times each month, and restaurants not performing up to Company standards receive additional inspection surveys until appropriate standards are restored. - Clean and Friendly Environment. The Company strives to offer a pleasant, customer friendly environment at its restaurants by providing attractive, updated restaurant decors and by emphasizing cleanliness in all areas of its operations. Further, through regular maintenance, the Company seeks to enhance the customer dining experience by keeping its restaurants clean and pleasant. 30 32 Management Practices. The Company's management team has developed and implemented a series of management practices, many of which were developed by CKE, that have improved the operations of HTB's HomeTown Buffet restaurants. Management believes that many of these practices and policies can be applied to the North's Restaurants as well as other buffet restaurants. The key elements of these management practices are: - Restaurant Management. The Company has developed food, labor and customer service management practices and reporting mechanisms that allow management to effectively monitor restaurant-level operations, benchmark restaurant performance statistics and communicate best-practices across its restaurant operations. Management supports these practices through the use of its restaurant-level incentive and bonus programs oriented toward motivating employees. The Company believes that these incentive and bonus programs, as well as its traditional recognition programs, foster an environment where employees are encouraged to share their ideas and cost saving suggestions with management. - Cost Management. The Company's relationship with CKE has enabled it to maintain a lean corporate management structure. The Company believes that it can continue to leverage its corporate infrastructure and Service Agreement with CKE in order to achieve additional synergies in purchasing, information systems, finance and accounting, benefits and human resource management. The Company is committed to controlling costs at all levels of its operations. Through effective management of the Company's product mix, production quantities and staffing, the Company has significantly reduced its food, labor and other operating costs. - Brand Management. The Company promotes its restaurants and enhances its brand awareness through local promotions and advertising programs which convey a targeted, consistent message and build customer awareness and loyalty. The Company primarily utilizes local marketing representatives to promote the restaurants to local organizations and groups seeking facilities and services offered by buffet restaurants. The successful implementation of these management practices is best exemplified by the recent increases in same-store sales and operating margins at HTB's HomeTown Buffet restaurants. For the fifty-two weeks ending July 15, 1997, HTB's HomeTown Buffet restaurants experienced a 1.7% increase in same-store sales, following a 9.2% decline in same-store sales during the fiscal year ended December 19, 1995. In addition, management reduced food costs to 35.2% of total revenues during the twenty-eight weeks ended August 11, 1997 from 37.0% of total revenues for the twenty-eight weeks ended August 12, 1996. GROWTH STRATEGY The Company's strategic objective is to become a leading national operator of regional buffet restaurants through (i) acquisitions of existing buffet restaurants which management believes can benefit from the Company's management practices, (ii) new restaurant openings, particularly by acquiring existing restaurant locations which can be converted to buffet restaurants operated or under development by the Company and (iii) minority investments in or strategic alliances with other regional buffet restaurant chains. The Company's growth strategy is designed to capitalize on the opportunities management perceives in the fragmented buffet segment of the restaurant industry. Acquisition Strategy. Management believes that the Company will be able to capitalize on the successful attributes of acquired buffet chains while increasing their focus on customer service and quality. Management believes that a number of acquisition opportunities exist due to the fragmentation of the buffet, cafeteria and grill-buffet segments of the restaurant industry, which are comprised of a substantial number of regional chains. The Company believes that most of these regional chains are privately owned and may be available for acquisition because they lack the financial and operational structure to compete with larger regional and national chains. Following acquisition, management intends to integrate and improve the operations and profitability of the chain through the implementation of the following key strategies: - Enhance Food Quality and Service Levels. Management believes that, due to the limited capital and management resources of many regional chains, such restaurants often offer poor food quality and an 31 33 insufficient level of customer service. Management intends to increase the chains' customer focus and utilize the management practices which have proven successful at other CKE restaurants. - Implement Operational Cost Controls and Management Incentive Structures. Management believes that the management practices which have successfully lowered food, labor and other operating costs at other CKE restaurants can be implemented in other regional buffet chains. In addition, the Company believes that its management incentive programs can increase the customer service and profitability of acquired restaurants. - Leverage CKE Relationship to Reduce Overhead Expenses. The Company intends to achieve operating efficiencies by eliminating certain administrative functions and redundant operations. Management believes that significant savings can result through the implementation of CKE's purchasing, financial services, information systems and accounting functions. Acquisitions, however, involve a number of special risks that could adversely affect the Company's business, financial condition and results of operations, including the diversion of management's attention, the assimilation of the operations and personnel of acquired restaurants, the amortization of acquired intangible assets and the potential loss of key employees. See "Risk Factors -- Risks Associated with Expansion and Acquisitions." New Restaurant Opening Strategy. In order to increase the Company's presence in existing markets, or when acquisition opportunities are not available, the Company intends to expand through new restaurant openings. While the Company may construct new restaurant facilities, management intends to seek opportunities to convert locations currently occupied by other buffet, family dining or budget steakhouse restaurant concepts. The Company has developed its prototype design and menu for new restaurant openings which management believes will offer customers a dining environment and experience superior to existing buffet restaurants. Management believes that this design can be easily implemented at restaurants acquired by the Company. In recent years, a number of chains in the family dining and budget steakhouse segments of the restaurant industry have experienced operational difficulties and declining performance. Management believes that these difficulties are the result of increasing competition for these concepts from the rapid growth of lower priced casual dining chains and casual steakhouses which offer superior product quality and service at only moderately higher prices. Many of these family dining restaurants and budget steakhouses occupy desirable locations and provide opportunities to acquire desirable restaurant locations at attractive prices. Management believes that these locations can be acquired at lower prices or leased at rates lower than those available from a comparable undeveloped site. Minority Investments. Management intends to seek minority investments in other restaurant chains, like Stacey's, that the Company believes can be improved through the implementation of the Company's management practices. Management believes that minority investments can provide an attractive investment opportunity for the Company and may lower the acquisition cost of such chain should it ultimately be acquired by the Company. THE NORTH ACQUISITION On July 24, 1997, CKE entered into an Asset Purchase Agreement with North's, an operator and franchisor of 24 buffet restaurants in the western United States, to acquire certain of the North's Restaurants which are located in Idaho, Oregon, Utah and Washington, as well as the trademarks, menus, restaurant designs and other intangible assets used in connection with North's Restaurants. The Company believes the North Acquisition is a significant first step in its strategy of growth through acquisitions. The Company believes the increased credibility and visibility resulting from the North Acquisition will position the Company to pursue aggressively its strategy of growth through acquisitions as regional buffet chains are pressured to consolidate. The performance of the North's Restaurants has been adversely affected by operational difficulties and inadequate capital resources, the effects of which were compounded by increased competition in the industry. These difficulties resulted in net losses for the years 32 34 ended June 30, 1996 and 1997, despite an increase in revenues during the year ended June 30, 1996. See "Risk Factors -- Risks Associated with the North Acquisition." The Company believes that it can meaningfully improve the same-store sales and profitability levels at the North's Restaurants and has developed a plan to integrate the North's Restaurants into the Company and improve their operations by implementing the strategies which were used to improve the operations of other CKE restaurants. The key elements of these strategies are as follows: - Improve Food Quality. The Company believes that it can improve the quality of the food served at the North's Restaurants by implementing certain management practices utilized by other CKE restaurants. The Company intends to limit the number of items offered each day, frequently rotate selected specialty items and prepare items frequently and in small batches to ensure the correct temperature, texture and flavor. - Enhance Service Quality. The Company believes that the level of service provided at North's Restaurants falls below that provided at the Company's HomeTown Buffet restaurants. To address this situation, the Company will selectively utilize certain policies which were successfully implemented at other CKE restaurants to improve the quality of their service. - Implement Management Practices. The Company believes there is a significant opportunity to improve restaurant-level margins, which are lower than restaurant-level margins at HTB's HomeTown Buffet restaurants, by implementing labor scheduling and other management practices and incentive and bonus programs utilized by other CKE restaurants. The aggregate consideration to be paid by the Company for the North's Restaurants will be $4.5 million, subject to adjustment, consisting of $4.0 million of assumed liabilities and $500,000 in cash. Pursuant to the Acquisition Agreement, the Company agreed to use reasonable commercial efforts to secure a term loan of up to $3.0 million for North's, the proceeds of which are to be used to repay certain indebtedness of North's, and a credit line of up to $750,000 for North's, the proceeds of which North's may draw upon for working capital requirements. The Company anticipates that it will satisfy its obligation to secure the $3.0 million term loan for North's by assuming an additional $3.0 million principal amount of North's existing bank debt or acquiring such principal amount of indebtedness from North's primary secured lender with $3.0 million of the net proceeds of this offering. North's will agree to repay the $3.0 million principal amount of indebtedness assumed or acquired by the Company, together with interest at a variable rate, over a five-year period commencing twelve months after the closing of the North Acquisition. The indebtedness to be assumed by the Company in connection with the North Acquisition will bear interest at a variable rate and will be fully amortized over a five-year term. CKE has agreed to guarantee the payment of up to $7.0 million of the principal amount of indebtedness to be assumed by the Company in connection with the North Acquisition. In addition, the Company has agreed to offer to North's the right to purchase, upon the completion of this offering, 150,000 warrants at $3.50 per warrant. Each warrant will entitle the holder to purchase one share of Common Stock at an exercise price per share equal to the initial public offering price. Pursuant to the Acquisition Agreement, the Company and CKE have agreed to (a) license to North's certain intellectual property rights, which are to be acquired by the Company as part of the North Acquisition, for use in the remaining restaurants operated by North's and its franchisees, and new restaurants, if any, developed by North's; (b) enter into a business services agreement with North's pursuant to which CKE will provide certain purchasing, marketing, human resources, payroll and accounting services to North's; and (c) negotiate in good faith to enter into a development agreement pursuant to which North's would have the right to develop restaurants based on the buffet concept which the Company has developed. CKE also received an option to purchase the assets of nine additional restaurants operated by North's. There can be no assurance that the HomeTown Franchisor will not assert a claim that the Company's ability to exercise this option conflicts with the noncompetition provision in the Franchise Agreements since a majority of these nine restaurants are located within approximately 25 miles of an existing HomeTown Buffet restaurant. See "Risk Factors -- Dependence Upon and Restrictions Resulting from Relationship with the HomeTown Franchisor." Prior to the completion of this offering, CKE will assign to the Company its rights and certain of its obligations under the Acquisition Agreement to the Company. The Company has also agreed to enter into an employment 33 35 agreement with John F. North, Jr., the President of North's, at such time as the Company shall have acquired a total of 10 restaurants from North's. In addition, CKE has agreed to vote for the election of John F. North, Jr. to the Company's Board of Directors for one full term. Following the completion of this offering, the Company has agreed to grant to John F. North, Jr. fully vested options to purchase a number of shares of the Company's Common Stock, representing one percent of the outstanding shares on a fully diluted basis as of the date of the grant, at an exercise price equal to the initial public offering price. In addition, if the Company exercises its option to purchase additional North's restaurants, the Company has agreed to issue to James E. North and John F. North, Jr., collectively, options to purchase between .6667% and 2%, depending on the number of additional restaurants acquired, of the Company's outstanding shares of Common Stock on a fully diluted basis as of the date of grant. The exercise price of any such options will be based on the last reported sales price of the Common Stock on the date of grant. The Acquisition Agreement contains certain customary representations, warranties, covenants and indemnification provisions. In addition, the consummation of the North Acquisition is subject to certain conditions, including obtaining lien releases from North's creditors, the consummation of this offering and other customary closing conditions. THE STACEY'S STRATEGIC ALLIANCE On July 18, 1997, CKE signed a non-binding letter of intent with Stacey's for a strategic alliance between the Company and Stacey's. Stacey's operates 24 buffet restaurants, 19 of which are located in Florida. For the fiscal year ended January 1, 1997, Stacey's reported revenues of $38.8 million and an operating loss of $1.9 million. The transactions contemplated by the LOI are subject to the negotiation of definitive agreements and approval of Stacey's and the Company's Boards of Directors. The LOI contemplates an arrangement whereby the Company would (i) provide certain purchasing, administrative and management services to a majority of the Stacey's buffet restaurants, (ii) loan Stacey's $2.0 million for remodeling or reconcepting several of Stacey's restaurants and (iii) receive management fees equal to 3.5% of Stacey's revenues and a warrant to purchase 30% of Stacey's fully diluted common stock. The Company would also have the right to designate two members of Stacey's five-member board of directors. The Company believes that the transactions contemplated by the LOI provide the Company with an opportunity to leverage its management expertise to improve Stacey's operations. The Company believes that Stacey's operations have suffered in recent years due to operational difficulties and inadequate capital resources. The Company believes that its management practices and purchasing economies could have a significant positive impact on Stacey's operations. The Company intends to work with Stacey's to implement labor and other cost saving programs developed by CKE and to convert certain units to the Company's prototype buffet restaurant. RESTAURANTS HomeTown Buffet HTB's HomeTown Buffet restaurants offer fixed price lunch, dinner and weekend breakfast menus that entitle each customer to unlimited servings of all menu items and beverages. Prices are approximately $5.75 for lunch and approximately $7.65 for dinner, and may vary depending on restaurant location. The restaurants offer reduced prices to children under age 12 and to senior citizens. At HTB's buffet restaurants, customers pay for the meal upon entering the restaurant and are generally seated by restaurant personnel before proceeding to the food service area. The restaurants generally utilize "scatter bar" formats with approximately eight buffet islands located throughout the food service area. Each buffet island contains different courses or types of menu items. The "scatter bar" format enables guests to avoid waiting in long food lines. The food service areas are designed to be accessible from all dining areas. The large dining areas of the HomeTown Buffet restaurants are often divided into separate rooms which may be 34 36 used for special functions. In addition to the public areas, each restaurant has a food preparation and storage area, including a fully-equipped kitchen. HomeTown Buffet restaurants seek to differentiate themselves from other buffet and cafeteria restaurants by the quality and variety of their food offerings. Menus emphasize traditional American "home cooking" and include soups, salads, entrees, vegetables, non-alcoholic beverages and desserts. Customers can choose from multiple entree choices, including fried and baked chicken and fish, roast beef, turkey and ham. Additional entrees, such as lasagna, barbecued ribs and other regional or seasonal dishes, are featured on particular days of the week. In addition to entrees, each meal includes two freshly-prepared soups, assorted vegetable and potato dishes, hot bread and an extensive salad bar. Dessert selections include pudding, assorted cobblers, cakes, cookies and soft-serve frozen dairy desserts and various sundae toppings. HTB uses high-quality ingredients, including fresh seasonal fruits and vegetables, in its menu offerings, and all menu items are prepared in small batches throughout the day. The items are served promptly in relatively small serving pans in order to ensure that all items are fresh, visually appealing and served at the proper temperature. HTB regularly tests new menu items and upgrades ingredients and cooking methods in order to improve the quality and consistency of its food offerings. HTB's typical restaurant format is approximately 9,200 square feet with seating for approximately 350 customers. The restaurant design is based upon standardized construction plans, with modifications made for each particular site. The chart below sets forth certain data with respect to the HTB HomeTown Buffet restaurants:
FIFTY-TWO WEEKS ENDED TWENTY-EIGHT ---------------------------------------- WEEKS ENDED DEC. ------------------- 20, DEC. 19, DEC. 18, JAN. 27, AUG. 12, AUG. 11, 1993 1994 1995 1997 1996 1997 ------- -------- -------- -------- -------- -------- Number of restaurants open (end of period)................................ 7 14 16 16 16 16 Revenues (in thousands).................. $13,167 $ 30,871 $ 36,741 $ 39,455 $ 21,881 $ 22,270 Percentage increase (decrease) in comparable store sales(1).............. N/A 4.3% (9.2)% (0.4)% (2.4)% 1.9% Average weekly customer count per restaurant............................. 8,201 9,177 8,150 8,117 8,411 8,508 Average check(2)......................... $ 5.29 $ 5.57 $ 5.69 $ 5.79 $ 5.79 $ 5.83
- --------------- (1) Includes only restaurants open throughout the full periods being compared. (2) Net of discounts and promotions. Casa Bonita The Company's two Casa Bonita restaurants are located in Denver, Colorado and Tulsa, Oklahoma and contain 42,000 and 26,000 square feet, respectively. The restaurants are designed to recreate the atmosphere of a Mexican village at night. The restaurants also feature entertainment daily, including strolling mariachis, authentic Mexican dancers, magicians and games. The restaurant's entertainment, combined with high quality, authentic Mexican food, is designed to attract a diverse customer base, including tourists and local customers. In addition to typical Mexican menu offerings, these restaurants feature all-you-can-eat dinners which offer customers unlimited servings of selected menu items. The Company focuses on three primary target audiences in its advertising and promotional programs for its Casa Bonita restaurants: (i) local customers; (ii) tourists; and (iii) groups and parties. The Company markets aggressively to attract tourists by placing advertisements in local tourist and special event guides and by otherwise promoting each Casa Bonita restaurant as a local attraction. With its large dining areas and private rooms, the Company also promotes Casa Bonita as an ideal setting for banquets, private parties and other group events. 35 37 The chart below sets forth certain data with respect to the Company's Casa Bonita restaurants:
TWENTY-EIGHT FIFTY-TWO WEEKS ENDED WEEKS ENDED ------------------------------ ------------------- DEC. 19, DEC. 18, JAN. 27, AUG. 12, AUG. 11, 1994 1995 1997 1996 1997 -------- -------- -------- -------- -------- Number of restaurants (end of period)...... 2 2 2 2 2 Revenues (in thousands).................... $ 10,856 $ 10,823 $ 11,483 $7,004 $7,036 Percentage increase (decrease) in comparable store sales................... (1.2)% (0.3)% 6.1% 5.4% 0.5%
SITE SELECTION, RESTAURANT LOCATIONS AND PROPERTIES The Company and CKE entered into a Service Agreement pursuant to which the Company will utilize the services of CKE to assist management with respect to site selection and other real estate related activities. In selecting new restaurant locations, management considers target population density, local competition, household income levels and trade area demographics, as well as specific location characteristics, such as visibility, accessibility, parking capacity and traffic volume. An important factor in the site selection process is the convenience of the potential location to both lunch and dinner customers and the occupancy cost of the proposed site. In addition, management considers the success of chain restaurants in the area. Potential site locations are identified by Company personnel, consultants and independent real estate brokers. Executive management visits and approves or disapproves any proposed restaurant site. Upon consummation of the North Acquisition, the Company will operate 25 restaurants in nine states. The following table reflects the locations of the Company's restaurants.
NUMBER OF RESTAURANTS ------------------------------------------- HOMETOWN STATE BUFFET JJ NORTH'S CASA BONITA TOTAL ------------------------------------------ -------- ---------- ----------- ----- Arizona................................... 8 -- -- 8 Colorado.................................. 2 -- 1 3 Idaho..................................... -- 3 -- 3 New Mexico................................ 2 -- -- 2 Oklahoma.................................. -- -- 1 1 Oregon.................................... -- 1 -- 1 Utah...................................... 3 1 -- 4 Washington................................ -- 2 -- 2 Wyoming................................... 1 -- -- 1 -- -- -- -- Total........................... 16 7 2 25 == == == ==
The Company's restaurants are primarily freestanding locations. The Company prefers to lease its restaurant facilities in order to reduce the initial costs of development. In addition, the Company seeks to obtain construction allowances from the landlord in order to defray the cost of improvements. The Company currently leases the restaurant sites for all of its restaurants. The leases expire on dates ranging from 2000 to 2014 with the majority of the leases providing for renewal options. All leases provide for specified periodic rental payments, and most call for additional rental based upon revenue volume. Most of the leases require the Company to maintain the property and to pay for the cost of insurance and taxes. The Company's headquarters is located in 15,512 square feet of leased office space in Salt Lake City, Utah. The base lease for this property expires in 2000. The Company has the option to lease this property for an additional five-year term upon the expiration of such lease. HTB RESTAURANT OPERATIONS AND MANAGEMENT HomeTown Buffet restaurant management is under the direction of Joseph J. Hollencamp, Senior Vice President of HTB, who oversees staffing, training, restaurant operations and local store marketing. The Senior 36 38 Vice President relies on the support of corporate administrative services and a team of two regional managers who supervise eight restaurants each. The management staff of a typical restaurant consists of one General Manager, one Service Manager, one Kitchen Manager, one Assistant Service Manager and one Assistant Kitchen Manager. Individual restaurants typically employ between 70 and 110 non-management hourly employees (made up of a mix of part- and full-time workers), depending on restaurant size and traffic. HTB attempts to attract and train high quality employees at all levels of restaurant operations. Generally, restaurant management has been recruited from outside the Company and has had significant prior restaurant experience. The Company has in place strict operating standards and believes that strong standardized training processes are an important aspect of its operations. All management employees (including Assistant Managers), regardless of former experience, participate in a four- to seven-week formal course of training at one of the Company's training sites. Additional periodic training is provided as required. Non-management employees are trained at the local restaurant site. The General Manager of a restaurant has responsibility for day-to-day operation of the restaurant and acts independently to maximize restaurant performance, subject to Company-established management policies. The General Manager makes personnel decisions and determines orders for produce and dairy products as well as centrally-contracted food items and other supplies. The Company's management compensation program includes bonuses based on restaurant profit performance. RELATIONSHIP WITH THE HOMETOWN FRANCHISOR HTB was the first franchisee of the HomeTown Franchisor and entered into an initial franchise agreement and a Multiple Unit Development Agreement with the HomeTown Franchisor in October 1991. Each of the Franchise Agreements has a 20-year term (with two five-year renewal options) and provides for a one-time payment to the HomeTown Franchisor of an initial franchise fee and a continuing royalty fee at a variable rate of between 2% and 4% of gross sales. HTB provides weekly sales reports to the HomeTown Franchisor as well as periodic and annual financial statements. HTB is obligated to operate its Hometown Buffet restaurants in compliance with the HomeTown Franchisor's operating and recipe manuals, but is not required to purchase food products or other supplies through the HomeTown Franchisor's suppliers. The HomeTown Franchisor may terminate a franchise agreement for a number of reasons, including the failure to pay royalty fees when due, failure to comply with applicable laws or repeated failure to comply with one or more requirements of the Franchise Agreement. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. Generally, a franchisor may terminate a franchise agreement only if franchisee violates a material and substantial provision of the agreement and fails to remedy the violation within a specified period. See "Risk Factors -- Dependence Upon and Restrictions Resulting from Relationship with the HomeTown Franchisor" and "Business -- Legal Proceedings." RELATIONSHIP WITH CKE In connection with the Formation Transactions, CKE and the Company will enter into the Service Agreement pursuant to which CKE will provide the Company with certain multi-unit retail infrastructure support for a period of three years in exchange for an annual fee of $350,000, which fee may be increased up to 10% per year based upon increases in CKE's cost of providing such services. Such services will consist of (i) accounting and administrative services, such as maintaining accounting records, performing accounting activities, preparing financial reports, operating and maintaining the information technology system, establishing and administering certain employee benefits and complying with reporting obligations thereunder; (ii) financial services, including the identification and analysis of possible transactions and related financial and strategic advice, assistance in budget and forecast preparation, consultations and advice as to presentations, discussions and disclosures to financial analysts and the financial press and advice concerning crisis 37 39 management and control; (iii) real estate services, including site analysis and other real estate matters and (iv) purchasing services. COMPETITION The restaurant industry is highly competitive. The Company competes on the basis of the quality and value of food products offered, price, service, location and overall dining experience. The Company's primary competitor in the buffet restaurant business is Buffets, Inc., which owns, operates and franchises the HomeTown Buffet and Old Country Buffet restaurant concepts. The Company also competes with a large and diverse group of restaurant chains and individually owned restaurants, including chains and individually owned restaurants that utilize a buffet format. The number of buffet restaurants with operations generally similar to the Company's has grown considerably in the last several years and the Company believes competition among buffet restaurants is increasing. As the Company and its principal competitors expand operations in various geographic areas, competition, including competition among buffet restaurants with concepts similar to the Company's concepts, can be expected to intensify. Such intensified competition could increase the Company's operating costs or adversely affect its revenues. A number of competitors have been in existence longer than the Company and have substantially greater financial, marketing and other resources and wider geographical diversity than the Company. In addition, the restaurant industry is affected by changes in consumer tastes, national, regional and local economic conditions and market trends. The performance of individual restaurants may be affected by factors such as traffic patterns, demographic considerations and the type, number and location of competing restaurants. The Company's significant investment in and long-term commitment to each of its restaurant sites limits its ability to respond quickly or effectively to changes in local competitive conditions or other changes that could have a material adverse effect on the Company's operations. The Company's continued success is dependent to a substantial extent on its reputation for providing high quality and value and this reputation may be affected not only by the performance of its restaurants but also by the performance of franchisor-owned restaurants and restaurants operated by other franchisees, over which the Company has no control. GOVERNMENT REGULATION The restaurant industry is subject to numerous federal, state and local government regulations, including those relating to the preparation and sale of food and building and zoning requirements. In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements. Many of the Company's employees are paid hourly rates based upon the federal and state minimum wage laws. Recent legislation increasing the minimum wage has resulted in higher labor costs to the Company. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of July 28, 1997, the Company employed approximately 1,640 persons, of whom approximately 1,560 were restaurant employees, and approximately 80 were restaurant management, supervisory and corporate personnel. Restaurant employees include both full-time and part-time workers and all are paid on an hourly basis. No Company employees are covered by collective bargaining agreements. The Company believes that its relations with its employees are generally good. LEGAL PROCEEDINGS On August 9, 1996, HTB, Summit and CKE filed a complaint in the United States District Court for the District of Utah, Central Division against Buffets, Inc. and the HomeTown Franchisor, alleging violations of federal and state antitrust laws, claims for unfair business practices, claims for tortious interference with contract, and claims for breach of contract and breach of the covenant of good faith and fair dealing. The litigation is continuing and is not scheduled for trial until August 1998. 38 40 HTB's HomeTown Buffet restaurants were opened pursuant to the terms of a Multiple Unit Agreement entered into with the HomeTown Franchisor in October 1991, under which HTB was granted exclusive rights to develop and operate up to 27 HomeTown Buffet restaurants as a franchisee in eight western states, subject to HTB's compliance with a development schedule. In July 1996, the HomeTown Franchisor provided written notice to HTB of termination of the Multiple Unit Agreement, based upon HTB's alleged breach of its development obligations. As a result of an award entered in favor of the HomeTown Franchisor in a binding arbitration proceeding, which award was unsuccessfully appealed by HTB, HTB has no contractual or other right to develop any additional HomeTown Buffet restaurants. Although the loss of exclusive development rights exposes HTB to increased competitive risks relating to the HomeTown Franchisor's expansion and development activities, the Company does not believe that the result of these arbitration proceedings will have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence Upon and Restrictions Resulting from Relationship with the HomeTown Franchisor." The Company is from time to time the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject of complaints or allegations from employees from time to time. The Company believes that the lawsuits, claims and other legal matters to which it has become subject in the course of its business are not material to the Company's business, financial condition or results of operations, but an existing or future lawsuit or claim could result in an adverse decision against the Company that could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Litigation." 39 41 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the Company's directors, director nominees and executive officers:
NAME AGE POSITION - --------------------------- --- ---------------------------------------------- William P. Foley II(1)(2) 52 Chairman of the Board Robert E. Wheaton(2) 45 Chief Executive Officer, President and Director Theodore Abajian 33 Chief Financial Officer C. Thomas Thompson(2) 47 Director Stuart W. Clifton(3) 53 Director Nominee Jack M. Lloyd(3) 47 Director Nominee Thomas G. Schadt(1) 56 Director Nominee Norman N. Habermann(1)(3) 64 Director Nominee John F. North, Jr. 48 Director Nominee
- --------------- (1) Member of Compensation Committee (2) Member of Executive Committee (3) Member of Audit Committee William P. Foley II has served as the Chairman of the Board of the Company since its formation in July 1997. Mr. Foley has been the Chief Executive Officer of CKE since October 1994, the Chairman of the Board of Directors of CKE since March 1994, and has served as a director of CKE since December 1993. Since 1981, Mr. Foley has been Chairman of the Board, President (until January 1995) and Chief Executive Officer of Fidelity National Financial, Inc., a company engaged in title insurance and related services. Mr. Foley is also the Chairman of the Board of Checkers Drive-In Restaurants, Inc. and a member of the Boards of Directors of Rally's Hamburgers, Inc., DataWorks Corporation, Micro General Corporation and GB Foods Corporation. Robert E. Wheaton has served as the Chief Executive Officer and President and as a director of the Company since its formation in July 1997. Mr. Wheaton has served as an Executive Vice President of CKE since January 1996. From April 1995 to January 1996, he served as Vice President and Chief Financial Officer of Denny's Inc., a subsidiary of Flagstar Corporation. From 1991 to 1995, Mr. Wheaton served as President and Chief Executive Officer, and from 1989 to 1991 as Vice President and Chief Financial Officer of The Bekins Company. Theodore Abajian has served as the Chief Financial Officer of the Company since its formation in July 1997. Mr. Abajian has been the Vice President and Controller of Summit since 1994. From 1983 to 1994, he held several positions with Family Restaurants, Inc., including Director of Financial Analysis, Planning and Reporting for the family restaurant division, which included 350 Carrows and Coco's restaurants. C. Thomas Thompson has been a director of the Company since its formation in July 1997. Mr. Thompson has served as the President and Chief Operating Officer of CKE since October 1994. Mr. Thompson has been a franchisee of CKE since 1984, and currently operates 15 Carl's Jr. Restaurants in the San Francisco Bay Area. Mr. Thompson also currently serves as Vice Chairman of the Board and Chief Executive Officer of Checkers Drive-In Restaurants, Inc. and a member of the Board of Directors of Rally's Hamburgers, Inc. Mr. Thompson has more than 20 years of experience in the restaurant industry. He previously held positions with Jack-in-the-Box and Pacific Fresh Restaurants, a full-service restaurant chain in the Bay Area. Stuart W. Clifton will serve as a director of the Company following this offering. Since 1987, Mr. Clifton has been the Chief Executive Officer and President and a member of the Board of Directors of DataWorks Corporation, a supplier of information systems to manufacturing companies. 40 42 Thomas G. Schadt will serve as a director of the Company following this offering. Mr. Schadt has been the Chief Executive Officer of a privately-held beverage distribution company, Bear Creek, L.L.C., since 1995. From 1976 to 1994, he held several positions with Pepsico, Inc., most recently, Vice President of Food Service. Norman N. Habermann will serve as a director of the Company following this offering. Since February 1994, Mr. Habermann has been the President of Scobrett Associates, Inc., which is involved in venture capital and consulting activities. From December 1986 to January 1994, Mr. Habermann was President and Chief Executive Officer of the Restaurant Enterprises Group, Inc. and its predecessors. From November 1994 until its acquisition by CKE in July 1996, Mr. Habermann was a director of Summit. Mr. Habermann also serves as a director of International Food & Beverage, Inc. Jack M. Lloyd will serve as a director of the Company following this offering. Mr. Lloyd has served as Chairman of the Board of DenAmerica Corp. since July 9, 1996 and as President, Chief Executive Officer and a director of DenAmerica Corp. since March 29, 1996. Mr. Lloyd served as Chairman of the Board and Chief Executive Officer of Denwest Restaurant Corp. ("DRC") from 1987 until the March 1996 merger of DRC and DenAmerica and served as President of DRC from 1987 until November 1994. Mr. Lloyd engaged in commercial and residential real estate development and property management as President of First Federated Investment Corporation during the early and mid-1980's. Mr. Lloyd also currently serves as a director of Action Performance Companies, Inc. John F. North, Jr. will serve as a director of the Company following this offering. Mr. North is the co-founder of JJ North's Grand Buffet and, since 1978, has served as the President and Co-Chairman of the Board of Directors of North's Restaurants, Inc. BOARD COMMITTEES AND COMPENSATION The Audit Committee of the Board of Directors, which will be formed upon completion of this offering, will consist of Messrs. Clifton, Lloyd and Habermann. The Audit Committee will recommend to the Board of Directors the independent public accountants to be selected to audit the Company's annual financial statements and approves any special assignments given to such accountants. The Audit Committee will also review the planned scope of the annual audit and the independent accountants' letter of comments and management's response thereto, any major accounting changes made or contemplated and the effectiveness and efficiency of the Company's internal accounting staff. The Compensation Committee of the Board of Directors, which will be formed upon completion of this offering, will consist of Messrs. Foley, Habermann and Schadt. The Compensation Committee will establish remuneration levels for executive officers of the Company, review management organization and development and review executive compensation and significant employee benefit programs. The Executive Committee of the Board of Directors, which consists of Messrs. Foley, Wheaton and Thompson, exercises the powers and authority of the full Board of Directors on all matters, to the maximum extent permitted by law, between meetings of the Board, other than those functions which may from time to time be assigned to specific committees of the Board. Following consummation of this offering, the Company's non-employee directors will receive $2,000 per meeting of the Board of Directors and $500 per meeting of any committees thereof. In addition, in connection with their joining the Company's Board of Directors, each of Messrs. Clifton, Lloyd, Schadt and Habermann will be granted options to purchase 7,500 shares of Common Stock at an exercise price equal to the initial public offering price under the 1997 Stock Incentive Plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Currently, no executive officer of the Company, except for Mr. Foley, who is Chairman of the Board of the Company and will serve as a member of the Compensation Committee thereof, serves as a member of the compensation committee or as a director of any other entity, one of whose executive officers serves on the Compensation Committee or is a director of the Company. Mr. Foley is the Chairman of the Board and Chief Executive Officer of CKE. 41 43 EXECUTIVE COMPENSATION The Company was incorporated on July 28, 1997, and its activities to date have been limited to corporate organizational matters, the Formation Transactions and this offering. The Company's executive officers have been employed by CKE or its subsidiaries, and all or substantially all of their compensation paid prior to the Formation Transactions was paid by CKE or its subsidiaries primarily for services rendered to CKE or its subsidiaries other than Summit and HTB. Following the Formation Transactions, the Company expects to pay Robert E. Wheaton, the Chief Executive Officer and President of the Company, an allocated annual base salary of $187,000. In addition, the Company expects to pay annual base salaries of $95,000 to Theodore Abajian, the Company's Chief Financial Officer, and $90,000 to Joseph J. Hollencamp, Senior Vice President, Operations, of HTB. The following table sets forth the compensation paid to the Company's executive officers by CKE and its subsidiaries for the fiscal year ended January 27, 1997: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------------- -------------------------------- SECURITIES OTHER ANNUAL UNDERLYING FISCAL SALARY BONUS COMPENSATION OPTIONS NAME AND TITLE YEAR ($) ($) ($) (#)(1) - ---------------------------------------- ------ -------- ------- ------------- ------------------- Robert E. Wheaton....................... 1997 200,000 70,000 9,344 30,000 Chief Executive Officer and President(2) Theodore Abajian........................ 1997 78,092 3,000 1,846 1,500 Chief Financial Officer(3)
- --------------- (1) Represents options to purchase shares of common stock of CKE. (2) Represents compensation paid by CKE to Mr. Wheaton in his capacity as Executive Vice President of CKE. Other Annual Compensation for Mr. Wheaton represents auto related payments of $9,344. (3) Represents compensation paid by Summit to Mr. Abajian in his capacity as Vice President and Controller of Summit. Other Annual Compensation for Mr. Abajian represents auto related payments of $1,846. 1997 STOCK INCENTIVE PLAN The Company has recently adopted the 1997 Stock Incentive Plan (the "1997 Plan"), which provides for the grant of options to purchase an aggregate of 750,000 shares of Common Stock. The 1997 Plan provides for the granting of "incentive stock options," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and nonstatutory options to directors, officers, employees and consultants of the Company, except that incentive stock options may not be granted to non-employee directors or consultants. The purpose of the 1997 Plan is to provide participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company. The 1997 Plan is administered by the Board of Directors, which has sole discretion and authority, consistent with the provisions of the 1997 Plan, to determine which eligible participants will receive options, the time when options will be granted, the terms of options granted and the number of shares which will be subject to options granted under the 1997 Plan. No options have been issued under the 1997 Plan. 42 44 Upon completion of the offering made hereby, the Company intends to grant options to purchase an aggregate of 602,500 shares of Common Stock under the 1997 Plan, at an exercise price equal to the initial public offering price, to the persons and in the amounts set forth below:
NUMBER OF NAME OPTIONS ------------------------------------------------------------------ --------- William P. Foley II............................................... 143,543 Robert E. Wheaton................................................. 239,237 C. Thomas Thompson................................................ 95,695 John F. North, Jr. ............................................... 54,775 Theodore Abajian.................................................. 15,000 Joseph J. Hollencamp.............................................. 12,500 Charlotte Miller.................................................. 4,250 Stuart W. Clifton................................................. 7,500 Jack M. Lloyd..................................................... 7,500 Thomas G. Schadt.................................................. 7,500 Norman N. Habermann............................................... 7,500 Other employees................................................... 7,500 -------- Total................................................... 602,500 ========
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION The Company's Bylaws provide that the Company will indemnify its directors and officers and may indemnify its employees and other agents to the fullest extent permitted by law. The Company believes that indemnification under its Bylaws covers at least negligence and gross negligence by indemnified parties, and permits the Company to advance litigation expenses in the case of stockholder derivative actions or other actions, against an undertaking by the indemnified party to repay such advances if it is ultimately determined that the indemnified party is not entitled to indemnification. In addition, the Company's Certificate of Incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as a director to the Company and its stockholders. This provision in the Certificate of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Company has entered into separate indemnification agreements with its directors and executive officers. These agreements require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from actions not taken in good faith or in a manner the indemnitee believed to be opposed to the best interests of the Company) to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors' insurance if available on reasonable terms. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. The Company believes that its Certificate of Incorporation and Bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. 43 45 CERTAIN TRANSACTIONS The Company will enter into a three-year Service Agreement, pursuant to which CKE will provide the Company with certain multi-unit infrastructure support, including accounting and administration, purchasing services, financial services and real estate services, in exchange for which CKE will receive an annual management fee in the amount of $350,000, which may be increased up to 10% per year by CKE based upon increases in CKE's cost of providing such services. See "Risk Factors -- Control by and Dependence on CKE" and "Business -- Relationship with CKE." Prior to this offering, the Company declared the Special Dividend to the Selling Stockholder in an aggregate amount equal to $7.9 million. The Company intends to pay the Special Dividend in September 1997 with a portion of the net proceeds of this offering. See "Use of Proceeds." Pursuant to a Contribution Agreement (the "Contribution Agreement") that is being entered into between CKE, the Company and Summit in connection with the Formation Transactions, CKE will transfer to the Company all of the issued and outstanding shares of capital stock of Summit (after giving effect to other asset transfers among Summit, JB's and Taco Bueno described below) in exchange for 2,600,000 shares of Common Stock. Prior to the Summit Exchange to be effected pursuant to the Contribution Agreement, Taco Bueno will transfer the two Casa Bonita restaurants to Summit, and Summit will transfer to JB's all of its assets, other than HTB, and all of its liabilities, other than those relating to HTB and the two Casa Bonita restaurants, in each of the foregoing cases for CKE's book value of the net assets transferred determined in accordance with GAAP. Summit's restaurant holdings upon consummation of the Summit Exchange will include the 16 HomeTown Buffet restaurants operated by HTB (which will remain a direct wholly-owned subsidiary of Summit) and the two Casa Bonita Mexican theme restaurants being acquired from Taco Bueno. The assets of Summit being transferred to JB's primarily consist of all assets relating to Summit's JB's Restaurant system and Galaxy Diner restaurants, which include accounts receivable, inventories, property and equipment, real and personal property leases, franchise agreements and other contractual rights, and intangible assets, including trademarks, trade secrets, menus, and related properties. In addition, Summit will assign to JB's all of its interests in other real properties not currently used for restaurant operations, except for certain office leases. JB's has agreed with Summit to assume and be solely responsible for any liabilities that may arise from or which relate to the restaurant operations and assets of Summit transferred to JB's. CKE has also agreed to indemnify and hold the Company harmless from any income tax liability attributable to periods ending on or before the consummation of this offering. For periods ending after the consummation of this offering, the Company will pay its income tax liability directly to the appropriate taxing authorities. CKE generally will control audits and administrative and judicial proceedings with respect to periods ending on or before the consummation of this offering, although CKE cannot compromise or settle any issue that increases the Company's liability without the Company's prior written consent. The Company generally will control all other audits and administrative and judicial proceedings. CKE has agreed to guarantee the payment of up to $7.0 million of the principal amount of indebtedness to be assumed by the Company in connection with the North Acquisition. 44 46 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of the date of this Prospectus, and as adjusted to give effect to the sale of the shares of Common Stock offered hereby, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each director and director nominee of the Company, (iii) each of the Company's executive officers, (iv) the Selling Stockholder, and (v) all directors, director nominees and executive officers of the Company as a group.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO THIS OFFERING NUMBER AFTER THIS OFFERING NAME AND ADDRESS ----------------------- OF SHARES ---------------------- OF BENEFICIAL OWNERS SHARES PERCENTAGE BEING OFFERED SHARES PERCENTAGE - ------------------------------------ --------- ---------- ------------- --------- ---------- CKE Restaurants, Inc................ 2,600,000 100.0% 600,000 2,000,000 44.4% 1200 North Harbor Boulevard Anaheim, CA 92801 William P. Foley II................. 47,848(1) 1.8 -- 47,848 1.0 Robert E. Wheaton................... 79,746(1) 3.0 -- 79,746 1.7 Theodore Abajian.................... 5,000(1) * -- 5,000 * C. Thomas Thompson.................. 31,898(1) 1.2 -- 31,898 * Stuart W. Clifton................... 7,500(1) * -- 7,500 * Jack M. Lloyd....................... 7,500(1) * -- 7,500 * Thomas G. Schadt.................... 7,500(1) * -- 7,500 * Norman N. Habermann................. 7,500(1) * -- 7,500 * John F. North, Jr................... 54,775(1) 2.1 54,775 1.2 All directors, director nominees and executive officers as a group (9 persons)....................... 229,267 8.1% -- 229,267 4.8%
- --------------- * Less than one percent. (1) Represents options to purchase Common Stock to be granted upon the completion of this offering which will become immediately exercisable. See "Management -- 1997 Stock Incentive Plan." 45 47 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 18,500,000 shares of Common Stock, par value $0.001 per share, and 1,500,000 shares of Preferred Stock, par value $0.001 per share. As of September 24, 1997, 2,600,000 shares of Common Stock were outstanding, all of which were held by the Selling Stockholder, and no shares of Preferred Stock were outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders and do not have cumulative voting rights. Subject to preferences that may be applicable to the holders of outstanding shares of Preferred Stock, if any, at the time holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, the holders of Common Stock shall be entitled to assets of the Company remaining after payment of the Company's liabilities and the liquidation preference, if any, of any outstanding Preferred Stock. All outstanding shares of Common Stock, are, and the shares of Common Stock offered by the Company hereby will be, when issued and paid for, fully paid and nonassessable. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK The Board of Directors has the authority, without further vote or action by the stockholders, to provide for the issuance of up to 1,500,000 shares of Preferred Stock from time to time in one or more series with such designations, rights, preferences and privileges and limitations on the Board of Directors may determine, including the consideration received therefor. The Board of Directors also will have the authority to determine the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights and voting rights without approval by the holders of Common Stock. Although it is not possible to state the effect that any issuance of Preferred Stock might have on the rights of holders of Common Stock, the issuance of Preferred Stock may have one or more of the following effects: (i) to restrict the payment of dividends on the Common Stock, (ii) to dilute the voting power and equity interests of holders of Common Stock, (iii) to prevent holders of Common Stock from participating in any distribution of the Company's assets upon liquidation until any liquidation preferences granted to holders of Preferred Stock are satisfied, or (iv) to require approval by the holders of Preferred Stock for certain matters such as amendments to the Company's Certificate of Incorporation or any reorganization, consolidation, merger or other similar transaction involving the Company. As a result, the issuance of Preferred Stock may, under certain circumstances, have the effect of delaying, discouraging or preventing bids for the Common Stock at a premium over the market price thereof, or a change in control of the Company, and could have a material adverse effect on the market price for the Common Stock. See "Risk Factors -- Possible Anti-Takeover Effects of Certain Charter and Bylaw Provisions." DELAWARE LAW AND CERTAIN CHARTER PROVISIONS The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested" stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless either (i) prior to the date at which the person becomes an interested stockholder, the board of directors approves such transaction or business combination, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of such transaction, or (iii) the business combination is approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of stockholders (and not by written consent). A "business combination" includes a merger, asset sale or other 46 48 transaction resulting in a financial benefit to such interested stockholder. For purposes of Section 203, an "interested" stockholder is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. The Certificate of Incorporation also eliminates the ability of stockholders to call special meetings and requires advance notice to nominate a director or take certain other actions. These provisions may be deemed to have a potential anti-takeover effect and may delay or prevent a change of control of the Company. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services, L.L.C. SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices and adversely affect the Company's ability to raise additional capital in the capital markets at a time and price favorable to the Company. Upon completion of this offering, the Company will have 4,500,000 shares of Common Stock outstanding. Of these shares, the 2,500,000 shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless they are purchased by "affiliates" of the Company as that term is used under the Securities Act. The remaining 2,000,000 shares, all of which will be owned by CKE, will be "restricted securities" as defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 promulgated under the Securities Act, which is summarized below. Sales of Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. All officers and directors of the Company have agreed with the Underwriters that they will not sell any Common Stock owned or subsequently acquired by them for a period of 180 days after the date of this Prospectus, and the Selling Stockholder has agreed with the Underwriters that it will not sell any shares of Common Stock beneficially owned by it, other than in connection with this offering, for one year after the date of this Prospectus, in each case without the prior written consent of Equitable Securities Corporation (the "Lock-up Agreements"). In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of the Company's Common Stock (approximately 45,000 shares immediately after this offering) or the average weekly trading volume during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and availability of current public information about the Company. A person who is not an affiliate, has not been an affiliate within three months prior to the sale and has beneficially owned the Restricted Shares for a least two years is entitled to sell such shares under Rule 144(k) as currently in effect without regard to any of the limitations described above. The Company intends to file a registration statement on Form S-8 under the Securities Act to register shares of Common Stock reserved for issuance under its 1997 Stock Incentive Plan, thus permitting the resale of shares issued under such plan by non-affiliates in the public market without restriction under the Securities Act. Such registration statement will become effective immediately upon filing, which is expected shortly after the closing of this offering. As of the completion of this offering, options to purchase 602,500 shares of Common Stock will be outstanding under the Company's 1997 Stock Incentive Plan, 595,000 of which will be subject to the Lock-up Agreements as described above. 47 49 UNDERWRITING The Underwriters named below (the "Underwriters"), for whom Equitable Securities Corporation, EVEREN Securities, Inc. and Cruttenden Roth Incorporated are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of an underwriting agreement (the "Underwriting Agreement"), to purchase from the Company and the Selling Stockholder the numbers of shares of Common Stock set forth below opposite their respective names:
NUMBER UNDERWRITER OF SHARES ----------------------------------------------------------------- ---------- Equitable Securities Corporation................................. EVEREN Securities, Inc........................................... Cruttenden Roth Incorporated..................................... ---------- Total.................................................. 2,500,000 ==========
The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to the approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations is such that they are committed to purchase all of the shares of Common Stock offered hereby if any are purchased. The Underwriters propose to offer the shares of Common Stock being purchased directly to the public at the initial offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After this offering, the offering price and other selling terms may be changed. The Company has granted the Underwriters a 30-day option to purchase up to an additional 375,000 shares of Common Stock at the public offering price less the underwriting discount set forth on the cover page of this Prospectus to cover over-allotments, if any. If the Underwriters exercise their over-allotment option to purchase any of the 375,000 additional shares of Common Stock from the Company, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by each of them as shown in the above table bears to the 2,500,000 shares of Common Stock offered hereby. The Underwriters may exercise this option only to cover over-allotments made in connection with the sale of the Common Stock offered hereby. Prior to this offering, there has been no market for the Common Stock. The initial public offering price will be determined by negotiations among the Company, the Selling Stockholder and the Representatives. The factors to be considered in determining such initial public offering price include the financial and operational history and trends of the Company, the history of and the prospects for the industry in which the Company competes, an assessment of the Company's management, its past and present operations, its past and present earnings and the trend of such earnings, the general condition of the securities markets at the time of this offering and the price-earnings multiples and market prices of publicly traded securities of comparable companies. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of Common Stock to any accounts over which they exercise discretionary authority. The Representatives intend to make a market in the Common Stock after completion of the offering. Subject to certain exceptions, CKE and its subsidiaries for a period of one year, and the Company and its directors and executive officers for a period of 180 days, after the date of this Prospectus have agreed not to offer, pledge, issue, sell, contract to sell, grant any option for the sale of or otherwise dispose of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, any shares of Common Stock without the prior written consent of Equitable Securities Corporation on behalf of the Representatives, 48 50 provided, however, the Company may grant stock options, and issue shares of Common Stock upon the exercise of certain outstanding stock options granted, under the Company's 1997 Stock Incentive Plan. The Company and the Selling Stockholder have agreed to indemnify the Underwriters and controlling persons, if any, against, certain liabilities, including liabilities under the Securities Act or to contribute to the payments the Underwriters or any controlling persons may be required to make in respect thereof. The Underwriters have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the Underwriters to reclaim the selling concession otherwise accruing to an Underwriter or dealer in connection with this offering if the Common Stock originally sold by such Underwriter or dealer is purchased by the Underwriters in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or dealer. The Underwriters have advised the Company that such transactions may be affected on the Nasdaq Stock Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Orrick, Herrington & Sutcliffe LLP, San Francisco, California. EXPERTS The balance sheet of Star Buffet, Inc. as of July 28, 1997 has been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The combined balance sheets of HTB Restaurants, Inc. as of December 18, 1995 (Predecessor Company) and January 27, 1997 (Successor Company), and the related combined statements of earnings and retained earnings and cash flows for the 52-week periods ended December 19, 1994 and December 18, 1995 and the 30-week period ended July 15, 1996 (Predecessor Company) and the 28-week period ended January 27, 1997 (Successor Company), have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The statement of earnings of Casa Bonita Restaurants (a division of Casa Bonita Incorporated) for the nine months ended September 30, 1996 has been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The balance sheets of North's Restaurants (a division of North's Restaurants, Inc.) as of June 30, 1996 and 1997 and the related statements of operations and division's equity and cash flows for each of the years in the three-year period ended June 30, 1997, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 49 51 AVAILABLE INFORMATION A Registration Statement on Form S-1, including amendments thereto, relating to the Common Stock offered hereby has been filed by the Company with the Securities and Exchange Commission (the "Commission"). This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement and exhibits. A copy of the Registration Statement may be inspected by anyone without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and its public reference facilities in New York, New York and Chicago, Illinois, upon the payment of the prescribed fees. The Registration Statement is also available through the Commission's Website on the World Wide Web at the following address: http://www.sec.gov. 50 52 INDEX TO FINANCIAL STATEMENTS
PAGE ----- STAR BUFFET, INC. Independent Auditors' Report......................................................... F-2 Balance Sheet as of July 28, 1997.................................................... F-3 Note to Balance Sheet................................................................ F-4 HTB RESTAURANTS, INC. Independent Auditors' Report......................................................... F-5 Combined Balance Sheets as of December 18, 1995 (Predecessor Company), January 27, 1997 (Successor Company) and August 11, 1997 (unaudited).......................... F-6 Combined Statements of Earnings and Retained Earnings for the 52 Weeks Ended December 19, 1994 and December 18, 1995, the 30 Weeks Ended July 15, 1996 (Predecessor Company) and the 28 Weeks Ended January 27, 1997 (Successor Company) and the 28 Weeks Ended August 12, 1996 and August 11, 1997 (unaudited)....................... F-7 Combined Statements of Cash Flows for the 52 Weeks Ended December 19, 1994 and December 18, 1995, the 30 Weeks Ended July 15, 1996 (Predecessor Company) and the 28 Weeks Ended January 27, 1997 (Successor Company) and the 28 Weeks Ended August 12, 1996 and August 11, 1997 (unaudited).......................................... F-8 Notes to Combined Financial Statements............................................... F-9 CASA BONITA RESTAURANTS Independent Auditors' Report......................................................... F-16 Statement of Earnings for the Nine Months Ended September 30, 1996................... F-17 Notes to Statement of Earnings....................................................... F-18 NORTH'S RESTAURANTS Independent Auditors' Report......................................................... F-21 Balance Sheets as of June 30, 1996 and 1997.......................................... F-22 Statements of Operations and Division's Equity for Each of the Years in the Three-year Period Ended June 30, 1997............................................. F-23 Statements of Cash Flows for Each of the Years in the Three-year Period Ended June 30, 1997.......................................................................... F-24 Notes to Financial Statements........................................................ F-25
F-1 53 INDEPENDENT AUDITORS' REPORT The Stockholder and Board of Directors Star Buffet, Inc.: We have audited the accompanying balance sheet of Star Buffet, Inc. (a wholly-owned subsidiary of CKE Restaurants, Inc.) as of July 28, 1997. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit of a balance sheet includes examining, on a test basis, evidence supporting the amounts and disclosures in that balance sheet. An audit of a balance sheet also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Star Buffet, Inc. at July 28, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Orange County, California July 28, 1997 F-2 54 STAR BUFFET, INC. (A WHOLLY-OWNED SUBSIDIARY OF CKE RESTAURANTS, INC.) BALANCE SHEET JULY 28, 1997 ASSETS Total assets...................................................................... $ -- ======== LIABILITIES AND STOCKHOLDER'S EQUITY Total liabilities................................................................. $ -- -------- Stockholder's equity: Preferred stock, $0.001 par value; 1,500,000 shares authorized; no shares issued or outstanding............................................................... -- Common stock, $0.001 par value; 18,500,000 shares authorized; no shares issued or outstanding............................................................... -- Additional paid-in capital...................................................... -- Common stock subscribed (2,600,000 shares)...................................... 26,000 Less stock subscription receivable.............................................. (26,000) -------- Total liabilities and stockholder's equity........................................ $ -- ========
See accompanying note to balance sheet. F-3 55 STAR BUFFET, INC. (A WHOLLY-OWNED SUBSIDIARY OF CKE RESTAURANTS, INC.) NOTE TO BALANCE SHEET JULY 28, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Star Buffet, Inc. (the Company) was incorporated in the State of Delaware on July 28, 1997 as a wholly-owned subsidiary of CKE Restaurants, Inc. ("CKE"). The Company has filed a Registration Statement with the Securities and Exchange Commission with respect to an initial public offering of 2,500,000 shares of common stock, of which 1,900,000 shares of common stock are to be sold by the Company. Prior to the completion of such offering, CKE will contribute to the Company all of the issued and outstanding shares of capital stock of Summit Family Restaurants Inc. ("Summit") in exchange for 2,600,000 shares of common stock of the Company (the "Summit Exchange"). Summit is the parent corporation of HTB Restaurants, Inc. ("HTB"), which operates 16 HomeTown Buffet restaurants as a franchisee of HomeTown Buffet, Inc. Summit was acquired by CKE in July 1996, at which time it was the owner, operator and franchisor of 101 JB's Restaurants and the owner and operator of six Galaxy Diner restaurants. Prior to the Summit Exchange, Summit will transfer substantially all of its net assets, including its JB's Restaurant system and Galaxy Diner restaurants, but excluding the shares of capital stock of HTB owned by Summit, to JB's Restaurants, Inc., a newly formed subsidiary of CKE ("JB's"), in exchange for a promissory note (the "JB's Note") with a principal amount equal to CKE's book value of those net assets as of the date of transfer, determined in accordance with generally accepted accounting principles ("GAAP"). JB's will continue to operate the JB's Restaurants and related franchise system and the Galaxy Diner restaurants and assume all of Summit's liabilities, other than liabilities incurred which specifically relate to the restaurant operations of HTB and the two Casa Bonita restaurants. Immediately following completion of such transfer, and prior to the Summit Exchange, Summit will assign the JB's Note and its rights to payment thereunder to CKE as a dividend. In addition, prior to the Summit Exchange, Taco Bueno Restaurants, Inc., an indirect wholly-owned subsidiary of CKE formerly known as Casa Bonita Incorporated ("Taco Bueno"), will transfer substantially all of the net assets relating to its two Casa Bonita restaurants to Summit in exchange for a promissory note with a principal amount equal to CKE's book value of those net assets as of the date of transfer, determined in accordance with GAAP. Summit will continue to operate the Casa Bonita restaurants and will assume all of Taco Bueno's liabilities relating to those restaurant operations. Fiscal Year The Company will utilize a 52- or 53-week accounting period which ends on the last Monday of January each year. F-4 56 INDEPENDENT AUDITORS' REPORT The Stockholder and Board of Directors HTB Restaurants, Inc.: We have audited the accompanying combined balance sheets of HTB Restaurants, Inc. (a wholly-owned subsidiary of Summit Family Restaurants Inc.) as of December 18, 1995 (Predecessor Company) and January 27, 1997 (Successor Company) and the related combined statements of earnings and retained earnings and cash flows for the 52-week periods ended December 19, 1994 and December 18, 1995 and the 30-week period ended July 15, 1996 (Predecessor Company) and the 28-week period ended January 27, 1997 (Successor Company). These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of HTB Restaurants, Inc. as of December 18, 1995 (Predecessor Company) and January 27, 1997 (Successor Company) and the results of its operations and its cash flows for the 52-week periods ended December 19, 1994 and December 18, 1995 and the 30-week period ended July 15, 1996 (Predecessor Company) and the 28-week period ended January 27, 1997 (Successor Company) in conformity with generally accepted accounting principles. As discussed in note 1 to the combined financial statements, effective July 15, 1996, CKE Restaurants, Inc. acquired all of the outstanding common stock of Summit Family Restaurants Inc. in a business combination accounted for as a purchase. As a result of the acquisition, the combined financial information for the period after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG PEAT MARWICK LLP Orange County, California July 22, 1997, except as to note 9 which is as of July 28, 1997 F-5 57 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) COMBINED BALANCE SHEETS ASSETS
PREDECESSOR SUCCESSOR PRO FORMA COMPANY COMPANY SUCCESSOR SUCCESSOR ----------- ----------- COMPANY COMPANY DECEMBER JANUARY 27, ----------- ----------- 18, 1995 1997 AUGUST 11, AUGUST 11, ----------- ----------- 1997 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) (NOTE 8) Current assets: Cash............................................... $ 117,000 $ 353,000 $ 725,000 Short-term investments............................. -- 180,000 180,000 Trade receivables.................................. 39,000 71,000 29,000 Inventories........................................ 242,000 383,000 385,000 Prepaid expenses................................... 139,000 84,000 79,000 Deferred taxes, net (note 4)....................... 78,000 193,000 193,000 ----------- ----------- ----------- Total current assets....................... 615,000 1,264,000 1,591,000 ----------- ----------- ----------- Property and equipment, at cost, less accumulated depreciation and amortization (note 2)............. 12,617,000 12,430,000 12,982,000 ----------- ----------- ----------- Real property and equipment under capitalized leases, at cost, less accumulated amortization (notes 2 and 3)................................................. 2,304,000 2,396,000 2,435,000 ----------- ----------- ----------- Deposits and other assets............................ 280,000 375,000 225,000 ----------- ----------- ----------- Intangible assets, at cost, less accumulated amortization: Franchise fees..................................... 356,000 318,000 207,000 Equipment lease acquisition costs.................. 93,000 -- -- Organizational costs............................... -- -- 305,000 ----------- ----------- ----------- Total intangible assets.................... 449,000 318,000 512,000 Deferred taxes, net (note 4)......................... 18,000 -- -- ----------- ----------- ----------- $16,283,000 $16,783,000 $17,745,000 =========== =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable -- trade (note 6)................. $ 2,229,000 $ 2,226,000 $ 2,139,000 Accrued liabilities (note 6): Payroll and related taxes....................... 667,000 1,207,000 1,228,000 Sales and property taxes........................ 371,000 632,000 572,000 Rent, insurance and other....................... 60,000 367,000 579,000 Current maturities of capital lease obligations (note 3)........................................ 198,000 239,000 248,000 ----------- ----------- ----------- Total current liabilities.................. 3,525,000 4,671,000 4,766,000 ----------- ----------- ----------- Long-term debt, net of current maturities: Capital lease obligations (note 3)................. 2,276,000 2,370,000 2,231,000 Intercompany payable (notes 4 and 6)............... 8,676,000 -- -- Other long-term liabilities........................ -- -- 159,000 ----------- ----------- ----------- Total long-term debt....................... 10,952,000 2,370,000 2,390,000 Stockholder's equity (note 8): Common stock, $0.01 par value. Authorized 1,000 shares; issued and outstanding 10 shares................ 0 0 0 $ 8,000 Additional paid-in capital......................... 1,000,000 9,272,000 9,272,000 10,581,000 Retained earnings.................................. 806,000 470,000 1,317,000 -- ----------- ----------- ----------- ----------- Total stockholder's equity................. 1,806,000 9,742,000 10,589,000 10,589,000 Commitments and contingencies (notes 3 and 7) Subsequent event (note 9) ----------- ----------- ----------- $16,283,000 $16,783,000 $17,745,000 =========== =========== ===========
See accompanying notes to combined financial statements. F-6 58 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) COMBINED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
SUCCESSOR PREDECESSOR COMPANY COMPANY ------------------------------------------- ----------- PREDECESSOR SUCCESSOR 52 WEEKS 52 WEEKS 30 WEEKS 28 WEEKS COMPANY COMPANY ENDED ENDED ENDED ENDED ----------- ----------- DECEMBER 19, DECEMBER 18, JULY 15, JANUARY 27, 28 WEEKS 28 WEEKS 1994 1995 1996 1997 ENDED ENDED ------------ ------------ ----------- ----------- AUGUST 12, AUGUST 11, 1996 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) Total revenues......................... $30,871,000 $36,741,000 $23,207,000 $23,632,000 $21,881,000 $29,306,000 ----------- ----------- ----------- ----------- ----------- ----------- Costs and expenses: Food costs........................... 11,469,000 13,769,000 8,569,000 8,285,000 8,096,000 9,283,000 Labor costs.......................... 9,089,000 10,878,000 6,810,000 7,565,000 6,425,000 9,186,000 Occupancy and other expenses......... 6,769,000 8,954,000 5,030,000 5,259,000 4,778,000 6,110,000 General and administrative expenses........................... 1,762,000 1,666,000 1,193,000 621,000 1,116,000 612,000 Depreciation and amortization........ 821,000 1,232,000 914,000 988,000 877,000 1,129,000 ----------- ----------- ----------- ----------- ----------- ----------- Total costs and expenses....... 29,910,000 36,499,000 22,516,000 22,718,000 21,292,000 26,320,000 ----------- ----------- ----------- ----------- ----------- ----------- Income from operations................. 961,000 242,000 691,000 914,000 589,000 2,986,000 Interest expense (notes 2 and 3)....... 203,000 192,000 145,000 106,000 123,000 108,000 ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes............. 758,000 50,000 546,000 808,000 466,000 2,878,000 Income tax expense (note 4)............ 301,000 22,000 216,000 338,000 186,000 1,151,000 ----------- ----------- ----------- ----------- ----------- ----------- Net income............................. 457,000 28,000 330,000 470,000 $ 280,000 $ 1,727,000 =========== Retained earnings at beginning of period............................... 321,000 778,000 806,000 -- 470,000 Distributions to parent and affiliates........................... -- -- -- -- (880,000) ----------- ----------- ----------- ----------- ----------- Retained earnings at end of period..... $ 778,000 $ 806,000 $ 1,136,000 $ 470,000 $ 1,317,000 =========== =========== =========== =========== ===========
See accompanying notes to combined financial statements. F-7 59 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) COMBINED STATEMENTS OF CASH FLOWS
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR COMPANY COMPANY COMPANY COMPANY ----------------------------------------- ----------- ----------- ----------- 52 WEEKS 52 WEEKS 30 WEEKS 28 WEEKS 28 WEEKS 28 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED DECEMBER 19, DECEMBER 18, JULY 15, JANUARY 27, AUGUST 12, AUGUST 11, 1994 1995 1996 1997 1996 1997 ------------ ------------ --------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income.............................. $ 457,000 $ 28,000 $ 330,000 $ 470,000 $ 280,000 $ 1,727,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 821,000 1,232,000 914,000 988,000 877,000 1,129,000 Loss on disposal of assets............ 84,000 100,000 -- -- -- -- Change in operating assets and liabilities: Receivables......................... 238,000 (22,000) 21,000 (114,000) (10,000) 42,000 Inventories......................... (90,000) (48,000) 39,000 (5,000) (28,000) (2,000) Prepaid expenses and other assets... (153,000) 138,000 (202,000) 178,000 66,000 155,000 Deferred tax assets................. 63,000 (136,000) (78,000) 100,000 -- -- Accounts payable.................... 896,000 183,000 (280,000) 273,000 585,000 (87,000) Accrued liabilities................. 400,000 123,000 72,000 27,000 (138,000) 332,000 ------------ ------------ -------- ------------ ------------ ------------ Net cash provided by operating activities...................... 2,716,000 1,598,000 816,000 1,917,000 1,632,000 3,296,000 ------------ ------------ -------- ------------ ------------ ------------ Cash flows from investing activities: Acquisition of intangible assets........ (155,000) (125,000) -- -- -- (305,000) Acquisition of property and equipment... (6,057,000) (3,527,000) (68,000) (103,000) (57,000) (1,609,000) Purchases of short-term investments..... -- -- -- (180,000) (180,000) -- ------------ ------------ -------- ------------ ------------ ------------ Net cash used in investing activities...................... (6,212,000) (3,652,000) (68,000) (283,000) (237,000) (1,914,000) ------------ ------------ -------- ------------ ------------ ------------ Cash flows from financing activities: Net activity with parent and affiliates............................ 2,512,000 1,998,000 (546,000) (1,245,000) (1,239,000) (880,000) Proceeds from sales of assets........... 1,140,000 -- -- -- -- -- Principal payments on capital leases.... (24,000) (46,000) (110,000) (245,000) (112,000) (130,000) ------------ ------------ -------- ------------ ------------ ------------ Net cash provided by (used in) financing activities............ 3,628,000 1,952,000 (656,000) (1,490,000) (1,351,000) (1,010,000) ------------ ------------ -------- ------------ ------------ ------------ Net increase (decrease) in cash... 132,000 (102,000) 92,000 144,000 44,000 372,000 Cash at beginning of period............... 87,000 219,000 117,000 209,000 179,000 353,000 ------------ ------------ -------- ------------ ------------ ------------ Cash at end of period..................... $ 219,000 $ 117,000 $ 209,000 $ 353,000 $ 223,000 $ 725,000 ============ ============ ======== ============ ============ ============ Supplemental disclosures of cash flow information -- cash paid for interest... $ 203,000 $ 192,000 $ 145,000 $ 110,000 $ 147,000 $ 108,000 ============ ============ ======== ============ ============ ============
Supplemental disclosure of noncash financing and investing activities: A capital lease obligation of $677,000 was incurred in 1995 when the Company entered into a lease for restaurant equipment. See accompanying notes to combined financial statements. F-8 60 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 18, 1995 (PREDECESSOR COMPANY), JANUARY 27, 1997 (SUCCESSOR COMPANY) AND AUGUST 11, 1997 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are followed by HTB Restaurants, Inc. (the Company) in preparing and presenting its combined financial statements. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited combined financial statements have been prepared in accordance with generally accepted accounting principles. All adjustments, consisting of normal recurring accruals, necessary for a fair presentation of financial position and results of operations for the interim periods presented have been reflected herein. The results of operations for such interim periods are not necessarily indicative of results to be expected for the full year or for any other future periods. ORGANIZATION AND NATURE OF OPERATIONS The Predecessor Company has been a wholly-owned subsidiary of Summit Family Restaurants Inc. (Summit) since October 9, 1991. The Predecessor Company operated 16 buffet style restaurants in five western states as a franchisee of HomeTown Buffet, Inc. On July 15, 1996, CKE Restaurants, Inc. (CKE) acquired the outstanding common stock of Summit in a business combination accounted for as a purchase. On October 1, 1996, CKE acquired the outstanding Common Stock of Casa Bonita Incorporated (CBI). CBI operated approximately 110 restaurants primarily located in Texas and Oklahoma, including two casual dining Mexican-themed restaurants located in Denver, Colorado and Tulsa, Oklahoma (the Casa Bonita Restaurants). This transaction was accounted for as a purchase. As a result of these acquisitions and the subsequent transaction described in note 9, the financial information of the Company (the Successor Company) combines the results of operations for the Company's 16 buffet restaurants from July 16, 1996 and the results of the Casa Bonita Restaurants from October 1, 1996. Additionally, the financial information for periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition (Predecessor Company) and, therefore, is not comparable. The results of operations of the Predecessor Company for the twenty-eight weeks ended August 12, 1996 include the results of operations of the Successor Company from July 16, 1996 to August 12, 1996. The Predecessor Company financial statements are based on the historical cost basis of the Company. The Successor Company financial statements reflect push down accounting based on allocations by CKE. FISCAL YEAR The Successor Company utilizes a fiscal year which ends on the last Monday in January; the period ended January 27, 1997 contains 28 weeks. The Predecessor Company utilized a 52/53-week fiscal year which ends in December. The fiscal years ended December 19, 1994 and December 18, 1995 contained 52 weeks. The period ended July 15, 1996 contained 30 weeks. SHORT-TERM INVESTMENTS Short-term investments in the accompanying combined balance sheet (consisting primarily of certificates of deposits, with original maturities of greater than three months) are held-to-maturity securities and, accordingly, have been stated at cost. F-9 61 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 18, 1995 (PREDECESSOR COMPANY), JANUARY 27, 1997 (SUCCESSOR COMPANY) AND AUGUST 11, 1997 (UNAUDITED) INVENTORIES Inventories consist of food, beverages and restaurant supplies and are valued at cost, determined by the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment and real property under capitalized leases are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives: buildings and leasehold improvements -- lesser of lease life or 20 years; furniture, fixtures and equipment -- five to eight years; capitalized leases -- lesser of lease life or 20 years. Lease renewal option periods are included in determining leasehold improvement useful lives when, in management's opinion, such renewal options will be exercised. Repairs and maintenance are charged to operations as incurred. Remodeling costs are generally capitalized. INTANGIBLE ASSETS Franchise fees are amortized using the straight-line method over the remaining terms of the franchise agreements, which range from nine to 17 years. Lease acquisition costs are amortized using the straight-line method over the respective lease terms. Accumulated amortization of these intangible assets totaled $77,000 at December 18, 1995 (Predecessor Company) and $128,000 at January 27, 1997 (Successor Company). PRE-OPENING COSTS Pre-opening costs, which represent expenses incurred for hiring and training personnel relating to new restaurants and expenses for promotion of new store openings, are capitalized and amortized over the restaurant's first year of operation. FRANCHISE EXPENSES Royalty costs and all other franchise costs are charged to operations as incurred. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses include certain expenses directly related to the Company and other corporate overhead. Allocations of expenses are made by Summit (and subsequent to July 15, 1996 by Summit and CKE) for certain corporate services and overhead incurred on behalf of the Company. Total corporate allocations included in general and administrative expenses in the accompanying combined statements of earnings amounted to approximately $912,000, $951,000, $808,000 and $253,000 for the years ended December 19, 1994 and December 18, 1995 and the period ended July 15, 1996 (Predecessor Company) and the period ended January 27, 1997 (Successor Company), respectively. These allocations were based on, among other things, percentage of revenues, number of stores, number of employees or the amount of capital expenditures in relation to the total of the respective amounts of Summit on a combined basis. Included in the allocation for the period ended January 27, 1997 is $15,000 of general and administrative expenses relating to the two Casa Bonita Restaurants. This allocation was based upon the number of restaurants in the CBI chain. Allocations are made on a basis that management of the Company believes to be F-10 62 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 18, 1995 (PREDECESSOR COMPANY), JANUARY 27, 1997 (SUCCESSOR COMPANY) AND AUGUST 11, 1997 (UNAUDITED) reasonable; however, such allocations are not necessarily indicative of the expenses which might have been incurred by the Company had they operated on a stand-alone basis. INCOME TAXES The Company accounts for income taxes using the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, income tax assets and liabilities are recognized using enacted tax rates for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A change in tax rates is recognized in income in the period that includes the enactment date. The Company files a consolidated income tax return with Summit; accordingly, many of the tax assets or liabilities may be utilized or paid by its parent based upon the consolidated income tax return. In accordance with the tax allocation policy, current income taxes calculated by a subsidiary on an "as if" filing separately basis and subsidiary tax benefits utilized (including certain prior year benefits) by the consolidated group are recorded as amounts due to or from parent. ADVERTISING EXPENSES Advertising costs are charged to operations as incurred. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) PROPERTY AND EQUIPMENT AND REAL PROPERTY UNDER CAPITALIZED LEASES The components of property and equipment and real property under capitalized leases are as follows:
PREDECESSOR SUCCESSOR COMPANY COMPANY ------------ ----------- DECEMBER 18, JANUARY 27, 1995 1997 ------------ ----------- Property and equipment: Buildings and leasehold improvements.................... $ 10,444,000 $10,255,000 Furniture, fixtures and equipment....................... 4,446,000 3,012,000 ------------ ----------- 14,890,000 13,267,000 Less accumulated depreciation and amortization.......... (2,273,000) (837,000) ------------ ----------- $ 12,617,000 $12,430,000 ============ =========== Real property and equipment under capitalized leases.... $ 2,566,000 $ 2,547,000 Less accumulated amortization........................... (262,000) (151,000) ------------ ----------- $ 2,304,000 $ 2,396,000 ============ ===========
F-11 63 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 18, 1995 (PREDECESSOR COMPANY), JANUARY 27, 1997 (SUCCESSOR COMPANY) AND AUGUST 11, 1997 (UNAUDITED) (3) LEASES The Company occupies certain restaurants under long-term leases expiring at various dates through 2014. Most restaurant leases have renewal options for terms of 5 to 20 years, and substantially all require the payment of real estate taxes and insurance. Certain leases require for rent to be the greater of a stipulated minimum rent or a specified percentage of sales. Rent expense for the years ended December 19, 1994, December 18, 1995, the period ended July 15, 1996 (Predecessor Company) and the period ended January 27, 1997 (Successor Company) was approximately $2,477,000, $3,316,000, $1,617,000 and $1,345,000, respectively. Contingent rentals, measured as a percentage of sales, included in rent expense for the years ended December 19, 1994, December 18, 1995, the period ended July 15, 1996 (Predecessor Company) and the period ended January 27, 1997 (Successor Company) was approximately $99,000, $46,000, $28,000 and $55,000, respectively. Future minimum payments on noncancelable leases as of January 27, 1997 (Successor Company), exclusive of taxes, insurance and percentage rentals are as follows:
FURNITURE, FIXTURES AND REAL PROPERTY EQUIPMENT -------------------------- ---------- TYPE OF PROPERTY CAPITAL OPERATING OPERATING - ------------------------------------------------------ ---------- ----------- ---------- Fiscal year ended January 31: 1998................................................ $ 439,000 $ 2,021,000 $ 942,000 1999................................................ 439,000 2,052,000 942,000 2000................................................ 405,000 2,103,000 467,000 2001................................................ 235,000 2,083,000 39,000 2002................................................ 235,000 2,017,000 -- Thereafter.......................................... 2,518,000 18,379,000 -- ---------- ----------- ---------- Total minimum lease payments................ 4,271,000 $28,655,000 $2,390,000 =========== ========== ---------- Less amount representing interest................... (1,662,000) ---------- Present value of minimum lease payments..... 2,609,000 Less current portion................................ (239,000) ---------- Capital lease obligations, excluding current portion................................... $2,370,000 ==========
(4) INCOME TAXES Components of income tax expense are as follows:
PREDECESSOR COMPANY CURRENT DEFERRED TOTAL - ---------------------------------------------------------- -------- --------- -------- Year ended December 19, 1994: Federal................................................. $189,000 $ 50,000 $239,000 State................................................... 49,000 13,000 62,000 -------- ------ ------- $238,000 $ 63,000 $301,000 ======== ====== ======= Year ended December 18, 1995: Federal................................................. $132,000 $(115,000) $ 17,000 State................................................... 26,000 (21,000) 5,000 -------- --------- -------- $158,000 $(136,000) $ 22,000 ======== ========= ========
F-12 64 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 18, 1995 (PREDECESSOR COMPANY), JANUARY 27, 1997 (SUCCESSOR COMPANY) AND AUGUST 11, 1997 (UNAUDITED)
CURRENT DEFERRED TOTAL -------- --------- -------- Period ended July 15, 1996: Federal................................................. $226,000 $ (55,000) $171,000 State................................................... 68,000 (23,000) 45,000 -------- --------- -------- $294,000 $ (78,000) $216,000 ======== ========= ========
SUCCESSOR COMPANY CURRENT DEFERRED TOTAL - ---------------------------------------------------------- -------- --------- -------- Period ended January 27, 1997: Federal................................................. $388,000 $(113,000) $275,000 State................................................... 47,000 16,000 63,000 -------- --------- -------- $435,000 $ (97,000) $338,000 ======== ========= ========
A reconciliation of "expected" income tax expense computed at the U.S. Federal rate of 34% to actual income tax expense follows:
SUCCESSOR COMPANY PREDECESSOR COMPANY ------------ ---------------------------------------------- PERIOD YEAR ENDED YEAR ENDED PERIOD ENDED ENDED DECEMBER 19, DECEMBER 18, JULY 15, JANUARY 27, 1994 1995 1996 1997 ------------ ------------ ------------ ------------ Computed "expected" income tax expense............................... $258,000 $ 17,000 $186,000 $275,000 State income taxes, net of Federal benefit............................... 41,000 3,000 29,000 43,000 Other................................... 2,000 2,000 1,000 20,000 -------- ------- -------- -------- Actual income tax expense............... $301,000 $ 22,000 $216,000 $338,000 ======== ======= ======== ========
The tax effect of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 18, 1995 (Predecessor Company) and January 27, 1997 (Successor Company) is as follows:
PREDECESSOR SUCCESSOR COMPANY COMPANY ------------ ----------- DECEMBER 18, JANUARY 27, 1995 1997 ------------ ----------- Deferred tax assets: Accrued liabilities............................... $ 78,000 $ 65,000 Building and equipment, depreciation.............. 20,000 128,000 Credit carryforwards.............................. 34,000 -- -------- -------- Total deferred tax assets................. 132,000 193,000 Less valuation allowance.......................... -- -- -------- -------- Net deferred tax assets................... 132,000 193,000 Deferred tax liabilities............................ 36,000 -- -------- -------- Net deferred tax assets................... $ 96,000 $ 193,000 ======== ========
While there can be no assurance that the Company will generate any earnings or any specific level of earnings in future years, management believes it is more likely than not that the Company will realize the majority of the benefit of the existing net deferred tax assets at January 27, 1997, based on the Company's current, historical and future pretax earnings. F-13 65 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 18, 1995 (PREDECESSOR COMPANY), JANUARY 27, 1997 (SUCCESSOR COMPANY) AND AUGUST 11, 1997 (UNAUDITED) (5) EMPLOYEE BENEFIT PLANS Eligible employees participated in the following Summit employee benefit plans until July 15, 1996 (Predecessor Company). Subsequent to July 15, 1996 (Successor Company), eligible employees of the Company may participate in the employee benefit and retirement plans of CKE. EMPLOYEE STOCK OWNERSHIP PLAN Employees participated in Summit's employee stock ownership plan where the Company contributed funds authorized by the Board of Directors of Summit. The plan could purchase shares of Summit's common stock as directed by the Board of Directors. All employees who had one year of service and were over 21 participated in the plan. Participant vesting began after the third year of participation in the plan at 20% per year. Funds contributed to the plan were used to retire debt previously incurred, to pay participants who were entitled to benefits under the plan and to purchase shares of Summit's common stock. Allocated shares within the plan were 92,737 at December 18, 1995 (Predecessor Company). Contributions to the employee stock ownership plan totaled $85,000 for the year ended December 19, 1994 (Predecessor Company). There were no contributions made during the year ended December 18, 1995 (Predecessor Company) and the period ended July 15, 1996 (Predecessor Company). Subsequent to the acquisition of Summit by CKE, Summit commenced actions to terminate this plan. STOCK OPTION PLANS Employees and directors participated in Summit's stock option plans to purchase Summit's common stock were granted at the fair market value at the date of grant. Under the plans, options were for a term of not more than ten years. Incentive stock options granted to employees through April 7, 1994, become exercisable over a four-year period. Incentive stock options granted after April 7, 1994 become exercisable over a five-year period. CKE Restaurants, Inc. assumed the options outstanding under Summit's existing stock option plans. Options under these Summit plans became fully vested on July 15, 1996 (Predecessor Company). No further shares may be granted under these plans. EXECUTIVE LONG-TERM STOCK AWARD PLAN Summit had an Executive Stock Award Plan (the Plan) adopted in September 1992 by the Board of Directors and approved in February 1993 by Summit's shareholders. There were 100,000 shares authorized under the Plan to be awarded to key employees of Summit and the Company based on the achievement of certain performance objectives established by the Compensation Committee of the Board of Directors. No shares were awarded under this Plan for the years ended December 19, 1994, December 18, 1995 and the period ended July 15, 1996 (Predecessor Company). This Plan was terminated upon the acquisition of Summit by CKE. 401(K) PLAN The Company has a 401(k) plan covering all employees who attained age 21 and completed one year of service. The plan allows participants to allocate up to 10% of their annual compensation before taxes for investment in several investment alternatives. The Company provided contributions of $24,000 and $26,000 during the years ended December 19, 1994 and December 18, 1995 (Predecessor Company), respectively. No contributions were made during the period ended July 15, 1996 (Predecessor Company) or the period ended January 27, 1997 (Successor Company). F-14 66 HTB RESTAURANTS, INC. (A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 18, 1995 (PREDECESSOR COMPANY), JANUARY 27, 1997 (SUCCESSOR COMPANY) AND AUGUST 11, 1997 (UNAUDITED) (6) RELATED PARTY TRANSACTIONS The Company participated in the cash management system of Summit through July 15, 1996 (Predecessor Company). The intercompany amounts to and from Summit are non-interest bearing. Subsequent to July 15, 1996 (Successor Company) the Company participated in the cash management systems of CKE and Summit. Certain amounts relating to the Casa Bonita Restaurants are allocated by CBI. Accounts payable -- trade and accrued liabilities aggregating $337,000 and $839,000, respectively, have been allocated by CBI to the Casa Bonita Restaurants and are included in the accompanying January 27, 1997 combined balance sheet. These allocations are based on a percentage of revenues in the CBI chain. (7) COMMITMENTS AND CONTINGENCIES The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any resolution will require payments that will have a material effect on the Company's combined statement of operations or financial position or liquidity. (8) UNAUDITED PRO FORMA FINANCIAL INFORMATION The accompanying unaudited pro forma financial information is included for purposes of additional analysis and is prepared in accordance with Staff Accounting Bulletin 1:B.3. The pro forma information reflects the equity section after giving effect to the payment of a special dividend payable to CKE in the amount of $7,885,000; a $495,000 payment to CKE for the net assets of two Casa Bonita restaurants and issuance of a sufficient number of shares of common stock, at an assumed offering price of $11.00 per share, to fund these payments. (9) SUBSEQUENT EVENT On July 28, 1997, CKE formed Star Buffet, Inc. as an indirect wholly-owned subsidiary to acquire the outstanding shares of capital stock of Summit and the Casa Bonita restaurants. F-15 67 INDEPENDENT AUDITORS' REPORT The Board of Directors Casa Bonita Incorporated: We have audited the accompanying statement of earnings of Casa Bonita Restaurants (a division of Casa Bonita Incorporated) for the nine months ended September 30, 1996. This financial statement is the responsibility of the Division's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the results of operations of Casa Bonita Restaurants for the nine months ended September 30, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orange County, California February 14, 1997 F-16 68 CASA BONITA RESTAURANTS (A DIVISION OF CASA BONITA INCORPORATED) STATEMENT OF EARNINGS NINE MONTHS ENDED SEPTEMBER 30, 1996 Total revenues................................................................... $8,990,724 ---------- Costs and expenses: Food costs..................................................................... 2,144,998 Labor costs.................................................................... 2,913,458 Occupancy and other expenses................................................... 1,860,411 General and administrative expenses (notes 2 and 6)............................ 335,525 Depreciation and amortization.................................................. 460,411 ---------- Total costs and expenses............................................... 7,714,803 ---------- Income from operations........................................................... 1,275,921 Other income, net................................................................ 779 ---------- Earnings before pro forma income tax provision................................... 1,276,700 Pro forma income tax provision (note 3).......................................... 511,000 ---------- Net earnings..................................................................... $ 765,700 ==========
See accompanying notes to financial statement. F-17 69 CASA BONITA RESTAURANTS (A DIVISION OF CASA BONITA INCORPORATED) NOTES TO STATEMENT OF EARNINGS SEPTEMBER 30, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statement includes the accounts of Casa Bonita Restaurants (the Division), a division of Casa Bonita Incorporated (CBI). The Division operates two casual dining Mexican themed restaurants located in Denver, Colorado and Tulsa, Oklahoma. The Division has no separate legal status or existence. CBI was a subsidiary of Beck Holdings, Inc. (BHI or the Parent -- formerly Casa Bonita Holdings, Inc.), which is wholly owned by Beck Restaurants, Inc. (BRI -- formerly Casa Bonita Restaurants, Inc.). CBI operates approximately 110 restaurants primarily located in Texas and Oklahoma. CBI maintains a note payable to the Parent. As the Division is not jointly and severally liable for this debt, no debt or related interest expense has been allocated to the Division for the period presented. On October 1, 1996, CBI was sold to CKE Restaurants, Inc. (see note 7). FISCAL YEAR The accompanying financial statement covers the nine months (36 weeks) ended September 30, 1996. INVENTORIES Inventories, consisting mainly of food, beverages and supplies, are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives, principally on a straight-line basis for financial reporting purposes, while accelerated methods are used for tax purposes. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Lease renewal option periods are included in determining leasehold improvement useful lives when, in management's opinion, such renewal options will be exercised. Leasehold interests are amortized on a straight-line basis over the remaining life of the leases. Repairs and maintenance are charged to operations as incurred. Remodeling costs are generally capitalized. PRO FORMA INCOME TAXES Certain of the assets and liabilities comprising the Division are not stand alone taxable entities. The taxable income from the Division was included in the consolidated Federal tax returns of BRI. For the purposes of the accompanying financial statement, a pro forma income tax provision has been provided at 40% of reported pretax earnings. ADVERTISING EXPENSES The Company expenses advertising production costs and media costs as incurred. F-18 70 CASA BONITA RESTAURANTS (A DIVISION OF CASA BONITA INCORPORATED) NOTES TO STATEMENT OF EARNINGS (CONTINUED) SEPTEMBER 30, 1996 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (2) EMPLOYEE RETIREMENT PLANS BHI has a qualified defined contribution retirement plan covering eligible employees of BHI and subsidiaries who have reached the age of 21 and completed one year of service. On April 1, 1990, BHI and subsidiaries adopted a nonqualified defined contribution retirement plan for highly compensated employees as defined. Under these plans, CBI makes discretionary contributions each year. Expense is allocated to the Division in the form of contributions by CBI for these plans. The allocation is based on the level of sales and aggregated approximately $16,000 for the nine months ended September 30, 1996. (3) PRO FORMA TAXES The Division reported income before income tax provision for the nine months ended September 30, 1996. For financial reporting purposes, a pro forma tax provision equal to 40% of reported earnings has been provided in the accompanying statement of earnings. (4) LEASES The Division leases its restaurant facilities under operating leases covering initial periods of five to ten years with renewal options of five to ten years. In addition to fixed lease obligations, the Division pays a percentage of sales for various restaurants and additional costs for property taxes and certain other expenses. A summary of rental expense for these operating leases for the nine months ended September 30, 1996 follows: Minimum rentals................................... $101,000 Contingent rentals................................ 51,000 -------- $152,000 ========
(5) CONTINGENCIES CBI is engaged in various legal proceedings and has certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. Management of CBI and the Division, based upon consultation with legal counsel, is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect on the Division's financial condition, results of operations or liquidity. (6) TRANSACTIONS WITH AFFILIATES The Division's corporate administrative functions, including accounting, data processing and other corporate services, were combined with the administrative functions of certain affiliates. The cost of these administrative functions was allocated to divisions or affiliates in proportion to the budgeted net revenues of each division or affiliate, number of units, number of employees or the amount of capital expenditures in relation to the total of the respective amounts on a consolidated basis. Employee retirement plan expense is allocated based on the level of sales. Management believes these allocation methods are reasonable; however, F-19 71 CASA BONITA RESTAURANTS (A DIVISION OF CASA BONITA INCORPORATED) NOTES TO STATEMENT OF EARNINGS (CONTINUED) SEPTEMBER 30, 1996 such allocated costs may not necessarily be indicative of the cost of obtaining such services if the Division operated on a stand-alone basis. Included in general and administrative expenses for the nine months ended September 30, 1996 is approximately $287,000 of allocated costs. (7) SALE OF COMPANY On August 27, 1996, BHI entered into a Stock Purchase Agreement (the Agreement) with CKE Restaurants, Inc., an unrelated third party, to sell BHI's interest in CBI, including the Division. The final closing of the sale occurred on October 1, 1996 at which time CKE Restaurants, Inc. paid $42 million cash for BHI's interest in CBI. F-20 72 INDEPENDENT AUDITORS' REPORT The Board of Directors Summit Family Restaurants Inc.: We have audited the accompanying balance sheets of North's Restaurants (a Division of North's Restaurants, Inc.) as of June 30, 1996 and 1997, and the related statements of operations and division's deficit and cash flows for each of the years in the three-year period ended June 30, 1997. These financial statements are the responsibility of North's Restaurants, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of North's Restaurants (a Division of North's Restaurants, Inc.) as of June 30, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 1997 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Portland, Oregon September 9, 1997 F-21 73 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) BALANCE SHEETS ASSETS
JUNE 30, JUNE 30, 1996 1997 ----------- ------------ Cash and cash equivalents........................................ $ 40,910 $ 17,683 Trade accounts receivable........................................ 3,414 18,108 Inventories...................................................... 73,111 68,707 Preopening costs, net............................................ 33,761 -- ------------ ------------ Total current assets................................... 151,196 104,498 Property and equipment, net (note 2)............................. 4,727,210 4,365,870 Other assets..................................................... 16,106 16,939 ------------ ------------ $ 4,894,512 $ 4,487,307 ============ ============ LIABILITIES AND DIVISION'S DEFICIT Current portion of North's Restaurants, Inc. company debt for which Division is jointly and severally liable (note 3)........ $ 3,892,082 $ 12,416,558 Accounts payable................................................. 354,557 389,673 Other accrued expenses........................................... 293,205 318,345 ------------ ------------ Total current liabilities.............................. 4,539,844 13,124,576 North's Restaurants, Inc. company debt for which Division is jointly and severally liable, net of debt issuance costs, less current portion (note 3)....................................... 8,553,302 1,300,000 ------------ ------------ Total liabilities...................................... 13,093,146 14,424,576 ------------ ------------ Division's deficit: Division's equity.............................................. 4,246,750 3,779,289 North's Restaurants, Inc. company debt for which Division is jointly and severally liable, net of debt issuance costs (note 3).................................................... (12,445,384) (13,716,558) ------------ ------------ Net Division's deficit................................. (8,198,634) (9,937,269) Commitments and contingencies (note 5) ------------ ------------ $ 4,894,512 $ 4,487,307 ============ ============
See accompanying notes to financial statements. F-22 74 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) STATEMENTS OF OPERATIONS AND DIVISION'S DEFICIT
YEAR ENDED JUNE 30, -------------------------------------------- 1995 1996 1997 ----------- ----------- ------------ Total revenues..................................... $ 7,762,322 $10,533,999 $ 10,460,347 ----------- ------------ ------------ Costs and expenses: Food costs....................................... (2,710,982) (3,792,056) (3,902,672) Labor costs...................................... (2,317,741) (3,203,674) (3,137,537) Occupancy and other expenses..................... (1,301,373) (1,786,573) (1,901,602) General and administrative expenses.............. (810,362) (1,022,339) (1,012,619) Depreciation and amortization.................... (346,650) (613,260) (530,059) ----------- ------------ ------------ Total costs and expenses................. (7,487,108) (10,417,902) (10,484,489) ----------- ------------ ------------ Income (loss) from operations...................... 275,214 116,097 (24,142) Interest expense................................... (212,842) (459,407) (591,889) ----------- ------------ ------------ Income (loss) before income tax expense benefit (provision)...................................... 62,372 (343,310) (616,031) Income tax expense benefit (provision) (note 4).... (24,013) 128,558 59,396 ----------- ------------ ------------ Net income (loss).................................. 38,359 (214,752) (556,635) Division's deficit at beginning of year............ (2,434,748) (5,422,526) (8,198,634) Contributions...................................... 2,345,244 1,091,886 89,174 Net additions in North's Restaurants, Inc. company debt for which Division is jointly and severally liable........................................... (5,371,381) (3,653,242) (1,271,174) ----------- ------------ ------------ Division's deficit at end of year.................. $(5,422,526) $(8,198,634) $ (9,937,269) =========== ============ ============
See accompanying notes to financial statements. F-23 75 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30, ----------------------------------------- 1995 1996 1997 ----------- ----------- --------- Cash flows from operating activities: Net income (loss).................................. $ 38,359 $ (214,752) $(556,635) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................... 346,650 613,260 530,059 Changes in operating assets and liabilities: Trade accounts receivable..................... (48,633) 49,314 (14,694) Inventories................................... (9,265) (27,680) 4,404 Preopening costs.............................. (99,909) (169,093) -- Other assets.................................. 28,379 40 (833) Accounts payable and accrued expenses......... 368,059 (17,419) 60,256 ----------- ----------- --------- Net cash provided by operations............ 623,640 233,670 22,557 ----------- ----------- --------- Cash flows from investing activities: Capital expenditures............................... (2,937,638) (1,321,025) (134,958) ----------- ----------- --------- Cash flows from financing activities: Contributions...................................... 2,345,244 1,091,886 89,174 ----------- ----------- --------- Net increase (decrease) in cash and cash equivalents.............................. 31,246 4,531 (23,227) Cash and cash equivalents at beginning of year....... 5,133 36,379 40,910 ----------- ----------- --------- Cash and cash equivalents at end of year............. $ 36,379 $ 40,910 $ 17,683 =========== =========== ========= Supplemental disclosure of cash flow information: Cash paid for interest.......................... $ 184,698 $ 242,252 $ -- =========== =========== =========
See accompanying notes to financial statements. F-24 76 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995, 1996 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The financial statements present the financial position and operations of North's Restaurants (the Division), a division of North's Restaurants, Inc. (NRI). The Division consists of seven of NRI's twenty buffet style restaurants located in California, Idaho, Oregon, Utah and Washington. The Division has no separate legal status or existence. As of June 30, 1995 the Division operated six restaurants and operated seven restaurants at June 30, 1996 and 1997. The Division's corporate administrative functions, including accounting, data processing and other corporate services, were combined with the administrative functions of NRI. The cost of these administrative functions was allocated to the Division in proportion to the revenues of the Division in relation to the total revenues of NRI. Management believes this allocation method is reasonable; however, such allocated costs may not necessarily be indicative of the cost of obtaining such services if the Division operated on a stand-alone basis. Included in general and administrative expenses is approximately $787,000, $974,000 and $966,000 in fiscal years 1995, 1996 and 1997, respectively, of allocated administrative costs. Interest expense represents the allocated financing costs. (b) Fiscal Year The accompanying financial statements cover the fifty-two/fifty-three-week periods ended July 3, 1995, July 1, 1996 and June 30, 1997. For clarity of presentation, all periods are presented as if the period ended on the last day of the month-end. (c) Cash and Cash Equivalents Cash and cash equivalents include amounts on hand at restaurant locations. (d) Inventories Inventories consist of food and beverages and are stated at the lower of cost or market, determined on the first-in, first-out method. (e) Pre-opening costs Certain costs associated with hiring, training, and other direct costs as incurred in connection with opening new restaurants are capitalized and amortized over the first year of the restaurants' operations. Accumulated amortization at June 30, 1996 and 1997, was approximately $42,000 and $-0-, respectively. (f) Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are being accounted for primarily on the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Leasehold improvements are amortized over the shorter of the estimated useful life of the asset or the term of the related lease. Depreciation begins on construction in progress at the time the related asset is placed in service. Maintenance and repairs, including replacement of minor items, are expensed as incurred. F-25 77 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1995, 1996 AND 1997 (g) Advertising Costs Advertising costs are expensed when incurred. Advertising expense, included in general and administrative expenses, was approximately $186,000, $169,000 and $194,000 for the years ended June 30, 1995, 1996 and 1997, respectively. (h) Income Taxes The Division, or any restaurant individually contained therein, presented in the accompanying financial statements is not a separate legal or taxable entity. The taxable income or loss from the Division is included in the federal and state tax returns of NRI. Income tax expense is calculated on a separate basis as if the Division were a stand alone entity. Any current or deferred assets and liabilities have been recorded through net divisional equity. (i) Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (j) Financial Instruments The carrying amounts of cash equivalents, trade accounts receivable, and accounts payable approximate fair value because of the short-term nature of these instruments. The fair value of long-term debt was estimated by discounting the future cash flows using market interest rates and does not differ significantly from the carrying value reflected in the accompanying balance sheets. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (k) Impairment of Long-Lived Assets In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the year ended June 30, 1997, the Division adopted this statement and determined that no impairment loss need be recognized for property and equipment. F-26 78 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1995, 1996 AND 1997 (2) PROPERTY AND EQUIPMENT
JUNE 30, --------------------------- 1996 1997 ---------- ---------- Equipment......................................... $3,526,944 $3,519,614 Leasehold improvements............................ 2,529,255 2,547,429 ---------- ---------- 6,056,199 6,067,043 Less accumulated depreciation..................... 1,338,477 1,765,860 ---------- ---------- 4,717,722 4,301,183 Construction in progress.......................... 9,488 64,687 ---------- ---------- $4,727,210 4,365,870 ========== ==========
(3) LONG-TERM DEBT NRI and the Division are jointly and severally liable for the outstanding balance of certain debt of NRI. As such, the Division has reported the outstanding balance for this debt in its financial statements, NRI debt for which the Division is jointly and severally liable, as a liability and reduction of the Division's equity. NRI debt for which the Division is jointly and severally liable, net of debt issuance costs, is comprised of the following:
JUNE 30, --------------------------- 1996 1997 ----------- ----------- Note payable, interest due monthly at 2% over the bank's prime rate, collateralized by all tangible and intangible, real and personal property and stock of NRI, guaranteed unconditionally by two shareholders of NRI, principal payable on October 15, 1997. NRI is in violation of certain financial covenants as of June 30, 1997................................... $ 2,913,757 $ 2,913,757 Note payable, interest due monthly at 2% over the bank's prime rate, collateralized by all tangible and intangible, real and personal property and stock of NRI, guaranteed unconditionally by two shareholders of NRI, principal payable on October 15, 1997. NRI is in violation of certain financial covenants as of June 30, 1997................................... 5,030,264 4,950,264 Note payable to Pacific Mezzanine Fund, interest due quarterly at 13%, collateralized by all tangible and intangible, real and personal property and stock of NRI, principal payable on October 15, 1997. NRI is in violation of certain financial covenants as of June 30, 1997......... 3,403,813 3,552,212 Subordinated debentures, interest due quarterly at 10%............................................. 1,400,000 1,400,000 Accrued interest.................................. 298,550 1,143,897 Debt issuance costs............................... (601,000) (243,572) ----------- ----------- Total long-term debt.................... 12,445,384 13,716,558 Less current portion.............................. 3,892,082 12,416,558 ----------- ----------- Total long-term debt, less current portion............................... $ 8,553,302 $ 1,300,000 =========== ===========
F-27 79 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1995, 1996 AND 1997 (4) INCOME TAXES The (provision) benefit for income taxes consists of the following for the year ended June 30:
1995 1996 1997 -------- -------- ------- Current: Federal...................................... $ 21,834 $ -- $ -- State........................................ -- -- -- -------- -------- ------- Total current........................ 21,834 -- -- -------- -------- ------- Deferred: Federal...................................... (43,090) 108,259 50,018 State........................................ (2,757) 20,299 9,378 -------- -------- ------- Total deferred....................... (45,847) 128,558 59,396 -------- -------- ------- Total................................ $(24,013) $128,558 $59,396 ======== ======== =======
The (provision) benefit for income taxes vary from the amounts computed by applying the federal statutory rate to income before pro forma taxes as follows for the year ended June 30:
1995 1996 1997 ----- ----- ----- Federal income tax (provision) benefit computed at statutory rates............................. (34.0)% 34.0% 34.0% State taxes, net of federal benefit.............. (4.0) 4.0 4.0 Increase in valuation allowance.................. -- -- (27.9) Other............................................ (.5) (.5) (.5) ----- ----- ----- Effective tax rate............................... (38.5)% 37.5% 9.6% ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
JUNE 30, ----------------------- 1996 1997 --------- --------- Deferred tax assets: Net operating loss carryforwards.................... $ 214,596 $ 520,622 --------- --------- Total gross deferred tax assets.................. 214,596 520,622 Valuation allowance................................. -- 171,580 --------- --------- Total deferred tax assets........................ 214,596 349,042 --------- --------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation...................... (273,992) (349,042) --------- --------- Total gross deferred tax liabilities............. (273,992) (349,042) --------- --------- Net deferred tax liability....................... $ (59,396) $ -- ========= =========
At June 30, 1997, the Division has net operating carryforwards, to be utilized by NRI, for federal and state purposes of approximately $1,360,000 and $1,428,000, respectively, which are available to offset future taxable income, through 2011. F-28 80 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1995, 1996 AND 1997 (5) COMMITMENTS AND CONTINGENCIES The Division leases restaurant facilities and equipment under several operating leases, expiring through 2010. Most leases contain renewal options. Minimum rentals under operating leases are as follows: Year ending June 30: 1998.............................................. $ 568,988 1999.............................................. 562,858 2000.............................................. 567,971 2001.............................................. 579,032 2002.............................................. 550,609 Thereafter........................................ 2,739,671 ---------- $5,569,129 ==========
Each restaurant facility lease contains a percentage rent clause which requires additional rent based on a percentage of gross sales in excess of specified amounts. Total rent expense for all operating leases is comprised of the following for the year ended June 30:
1995 1996 1997 -------- -------- -------- Minimum rent....................... $326,732 $512,485 $514,204 Contingent rent.................... 98,253 81,466 79,268 -------- -------- -------- $424,985 $593,951 $593,472 ======== ======== ========
NRI's corporate office facility is leased from a partnership in which NRI shareholders are partners. Rent paid to the partnership amounted to approximately $100,500, $108,000 and $106,800 for the years 1995, 1996 and 1997, respectively. Said amounts are included in the general and administrative expense allocated to the Division. The Division is subject to various legal proceedings and certain unresolved claims pending of NRI. The ultimate liability, if any, for the aggregate amounts claimed against NRI cannot be determined at this time. Management of NRI and the Division, based on consultation with legal counsel, is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect on the Division's financial condition or results of operations. (6) PROFIT-SHARING PLAN NRI had a 401(k) profit-sharing plan (the Plan) which covered substantially all of its employees. NRI's annual contribution to the Plan was fixed by a resolution of its Board of Directors. No contributions were made to the Plan for the years 1995 or 1996. The Plan was terminated as of December 29, 1995. Upon termination, all participants became 100% vested. Net plan assets were distributed to participants, according to Plan provisions. F-29 81 NORTH'S RESTAURANTS (A DIVISION OF NORTH'S RESTAURANTS, INC.) NOTES TO FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1995, 1996 AND 1997 (7) SELECTED FINANCIAL INFORMATION (UNAUDITED) The following statements of operations are provided for informational purposes and are unaudited:
TWELVE MONTHS TWENTY-EIGHT WEEKS ENDED ENDED ------------------------------ DECEMBER 31, 1996 JULY 1, 1996 JUNE 30, 1997 ----------------- ------------ ------------- Total revenues............................ $10,830,045 $ 5,986,355 $ 5,616,657 ----------- ----------- ----------- Costs and expenses: Food costs.............................. 4,013,395 2,196,355 2,149,852 Labor costs............................. 3,289,756 1,839,275 1,699,028 Occupancy and other expenses............ 1,885,141 1,012,928 1,005,968 General and administrative expenses..... 970,170 577,076 621,040 Depreciation and amortization........... 634,965 353,258 264,821 ----------- ----------- ----------- Total costs and expenses........ 10,793,427 5,978,892 5,740,709 ----------- ----------- ----------- Income (loss) from operations........ 36,618 7,463 (124,052) Interest expense.......................... (554,299) 281,101 318,709 ----------- ----------- ----------- Loss before income tax benefit....... (517,681) (273,638) (442,761) Income tax benefit........................ 174,000 102,614 42,505 ----------- ----------- ----------- Net loss............................. $ (343,681) $ (171,024) $ (400,256) =========== =========== ===========
(8) SUBSEQUENT EVENT On July 24, 1997, NRI signed a definitive agreement to sell certain assets and liabilities of the Division to CKE Restaurants, Inc. for $4,500,000, subject to adjustment. The transaction is subject to normal closing conditions and events. F-30 82 [Photos of Representative Restaurants] 83 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO SUCH CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary..................... 3 Risk Factors........................... 8 Use of Proceeds........................ 14 Dividend Policy........................ 14 Capitalization......................... 15 Dilution............................... 16 Selected Combined Financial Data....... 17 Selected Pro Forma Financial Data...... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 24 Business............................... 30 Management............................. 40 Certain Transactions................... 44 Principal and Selling Stockholders..... 45 Description of Capital Stock........... 46 Shares Eligible for Future Sale........ 47 Underwriting........................... 48 Legal Matters.......................... 49 Experts................................ 49 Available Information.................. 50 Index to Financial Statements.......... F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 2,500,000 SHARES [STAR BUFFET LOGO] COMMON STOCK --------------------------------- PROSPECTUS --------------------------------- EQUITABLE SECURITIES CORPORATION EVEREN SECURITIES, INC. CRUTTENDEN ROTH INCORPORATED , 1997 ====================================================== 84 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered hereunder. All of the amounts shown are estimates except for the SEC registration fee and the NASD filing fee. SEC registration fee...................................... $ 10,455 NASD filing fee........................................... 3,950 Nasdaq National Market application fee.................... 27,500 Printing expenses......................................... 125,000 Legal fees and expenses................................... 200,000 Accounting fees and expenses.............................. 200,000 Blue sky fees and expenses................................ 5,000 Transfer agent and registrar fees......................... 5,000 Miscellaneous............................................. 123,095 -------- Total........................................... $700,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (a) As permitted by the Delaware General Corporation Law, the Certificate of Incorporation of the Registrant (Exhibit 3.1 hereto) eliminates the liability of directors to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a directors, except to the extent otherwise required by the Delaware General Corporation Law. (b) The Certificate of Incorporation provides that the Registrant will indemnify each person who was or is made a party to any proceeding by reason of the fact that such person is or was a director or officer of the Registrant against all expense, liability and loss reasonably incurred or suffered by such person in connection therewith to the fullest extent authorized by the Delaware General Corporation Law. The Registrant's Bylaws (Exhibit 3.2 hereto) provide for a similar indemnity to directors and officers of the Registrant to the fullest extent authorized by the Delaware General Corporation Law. (c) The Certificate of Incorporation also gives the Registrant the ability to enter into indemnification agreements with each of its directors and officers. The Registrant has entered into indemnification agreements with certain of its directors and officers (Exhibit 10.4 hereto), which provide for the indemnification of such persons against any an all expenses, judgments, fines, penalties and amounts paid in settlement, to the fullest extent permitted by law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On September 23, 1997, the Registrant issued 2,600,000 shares of Common Stock to CKE in exchange for all the issued and outstanding capital stock of Summit. The foregoing transaction was completed without registration under the Act in reliance upon Section 4(2) of the Act for transactions not involving a public offering, among others, on the basis that such transaction did not involve any public offering and the purchaser was an accredited investor with access to the kind of information registration would provide. II-1 85 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NO. DESCRIPTION ------- ------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement.* 3.1 Certificate of Incorporation of the Registrant.* 3.2 Bylaws of the Registrant.* 4.1 Form of Common Stock Certificate. 5.1 Opinion of Stradling Yocca Carlson & Rauth, a professional corporation. 10.1 Star Buffet, Inc. 1997 Stock Incentive Plan (the "1997 Plan").* 10.2 Form of Stock Option Agreement for the 1997 Plan.* 10.3 Commercial and Industrial Lease between Gordon Yates and Tracy Collins Bank and Trust dated July 25, 1979 and Sublease Agreement between West One Bank, Utah (successor in interest to Tracy Collins Bank and Trust) and Summit Family Restaurants Inc. dated May 18, 1995.* 10.4 Form of Indemnification Agreement.* 10.5 Management Services Agreement with CKE.* 10.6 Form of Franchise Agreement with HomeTown Buffet, Inc.* 10.7 Asset Purchase Agreement with North's Restaurants, Inc. dated July 24, 1997.* 10.8 Form of Credit Agreement With Stacey's Buffet, Inc. 10.9 Form of Contribution Agreement among CKE Restaurants, Inc., Summit Family Restaurants Inc. and the Registrant. 10.10 Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and Taco Bueno Restaurants, Inc. (formerly known as Casa Bonita Incorporated). 10.11 Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and JB's Restaurants, Inc. 21.1 List of Subsidiaries. 23.1 Consent of Stradling Yocca Carlson & Rauth, a professional corporation (see Exhibit 5.1). 23.2 Consents of KPMG Peat Marwick LLP. 23.3 Consents of director nominees.* 24.1 Power of Attorney.* 27.1 Financial Data Schedules.*
- --------------- * Previously filed. (B) FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. II-2 86 ITEM 17. UNDERTAKINGS The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 87 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Salt Lake City, Utah, on the 22nd day of September, 1997. STAR BUFFET, INC. By: /s/ THEODORE ABAJIAN ------------------------------------ Theodore Abajian Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 2 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------ ------------------- * Chairman of the Board September 22, 1997 - ----------------------------------------------- William P. Foley II * Chief Executive Officer September 22, 1997 - ----------------------------------------------- President and Director Robert E. Wheaton (Principal Executive Officer) /s/ THEODORE ABAJIAN Chief Financial Officer September 22, 1997 - ----------------------------------------------- (Principal Financial and Theodore Abajian Principal Accounting Officer) * Director September 22, 1997 - ----------------------------------------------- C. Thomas Thompson *By: /s/ THEODORE ABAJIAN - ----------------------------------------------- Theodore Abajian, Attorney-in-fact
II-4 88 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE ------- -------------------------------------------------------------------- ------------ 1.1 Form of Underwriting Agreement*..................................... 3.1 Certificate of Incorporation of the Registrant*..................... 3.2 Bylaws of the Registrant*........................................... 4.1 Form of Common Stock Certificate.................................... 5.1 Opinion of Stradling Yocca Carlson & Rauth, a professional corporation......................................................... 10.1 Star Buffet, Inc. 1997 Stock Incentive Plan (the "1997 Plan")*...... 10.2 Form of Stock Option Agreement for the 1997 Plan*................... 10.3 Commercial and Industrial Lease between Gordon Yates and Tracy Collins Bank and Trust dated July 25, 1979 and Sublease Agreement between West One Bank, Utah (successor in interest to Tracy Collins Bank and Trust) and Summit Family Restaurants Inc. dated May 18, 1995*............................................................... 10.4 Form of Indemnification Agreement*.................................. 10.5 Management Services Agreement with CKE*............................. 10.6 Form of Franchise Agreement with HomeTown Buffet, Inc.*............. 10.7 Asset Purchase Agreement with North's Restaurants, Inc. dated July 24, 1997*........................................................... 10.8 Form of Credit Agreement With Stacey's Buffet, Inc.................. 10.9 Form of Contribution Agreement among CKE Restaurants, Inc., Summit Family Restaurants Inc. and the Registrant.......................... 10.10 Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and Taco Bueno Restaurants, Inc. (formerly known as Casa Bonita Incorporated)........................................... 10.11 Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and JB's Restaurants, Inc.......................... 21.1 List of Subsidiaries................................................ 23.1 Consent of Stradling Yocca Carlson & Rauth, a professional corporation (see Exhibit 5.1)....................................... 23.2 Consents of KPMG Peat Marwick LLP................................... 23.3 Consents of director nominees*...................................... 24.1 Power of Attorney*.................................................. 27.1 Financial Data Schedules*...........................................
- --------------- * Previously filed.
EX-4.1 2 FORM OF COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 NUMBER SHARES STAR BUFFET COMMON STOCK [LOGO] COMMON STOCK INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS CUSIP 855086 10 4 This Certifies that Is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE, OF - -------------------------- STAR BUFFET, INC. ---------------------------- transferable on the books of the Corporation by the holder hereof in person or by a duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: STAR BUFFET, INC. CORPORATE SEAL 1997 DELAWARE [SIG] [SIG] SECRETARY CHIEF EXECUTIVE OFFICER AND PRESIDENT COUNTERSIGNED AND REGISTERED: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 2 The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - ..............Custodian............... TEN ENT - as tenants by the entireties (Cust.) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act................................... in common (State) UNIF TRF MIN ACT - ...........Custodian (until age......) (Cust.) ............., under Uniform Transfers (Minor) to Minors Act......................... (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ______________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ____________________________ X ______________________________________ X ______________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS NOTICE: WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By_____________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EX-5.1 3 OPINION OF STRADLING YOCCA CARLSON & RAUTH 1 EXHIBIT 5.1 [STRADLING YOCCA CARLSON & RAUTH LETTERHEAD] September 22, 1997 Star Buffet, Inc. 440 Lawndale Drive Salt Lake City, Utah 84115-2917 Re: Registration Statement on Form S-1 Gentlemen: At your request, we have examined the form of Amendment No. 2 to Registration Statement on Form S-1, Registration No. 333-32249 (the "Registration Statement"), being filed by Star Buffet, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission on September 22, 1997, in connection with the registration under the Securities Act of 1933, as amended, of 2,875,000 shares of Common Stock, par value $.001 per share, of the Company (the "Common Stock"). Such shares of Common Stock, which include 375,000 shares that will be subject to an over-allotment option to be granted to the underwriters by the Company, are to be sold to the underwriters as described in the Registration Statement for sale to the public. We have examined the proceedings heretofore taken and are familiar with the additional proceedings proposed to be taken by the Company in connection with the authorization, issue and sale of the shares of Common Stock. Based upon such examination, and subject to compliance with applicable state securities and "blue sky" laws, it is our opinion that the 2,875,000 shares of Common Stock, when issued and sold in the manner described in the Registration Statement, will be legally issued, fully paid and non-assessable. We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus, which is a part of the Registration Statement. Respectfully Submitted, /s/ STRADLING YOCCA CARLSON & RAUTH EX-10.8 4 FORM OF CREDIT AGREEMENT W/STACEY'S BUFFET 1 EXHIBIT 10.8 CREDIT AGREEMENT dated as of _____________, 1997 between STACEY'S BUFFET, INC. and STAR BUFFET, INC. 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS Section 1.1. Definitions.....................................................................................1 Section 1.2. Accounting Terms and Determinations.............................................................8 Section 1.3. References......................................................................................9 Section 1.4. Use of Defined Terms............................................................................9 Section 1.5. Terminology ..............................................................................9 ARTICLE II THE CREDIT Section 2.1. Loan............................................................................................9 Section 2.2. Miscellaneous Matters...........................................................................9 Section 2.3. Maturity of Loan...............................................................................10 Section 2.4. Interest.......................................................................................10 Section 2.5. Optional Prepayments...........................................................................10 Section 2.6 Prepayment at Election of Lender Upon Change of Control........................................10 Section 2.7. General Provisions as to Payments..............................................................10 Section 2.8. Collateral.....................................................................................11 ARTICLE III CONDITIONS TO CLOSING Section 3.1.Conditions to Closing................................................................................12 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1. Corporate Existence and Power..................................................................13 Section 4.2. Corporate and Governmental Authorization; No Contravention.....................................13 Section 4.3. Binding Effect.................................................................................13 Section 4.4. Financial Information..........................................................................13 Section 4.5. No Litigation..................................................................................14 Section 4.6. Compliance with ERISA..........................................................................14 Section 4.7. Compliance with Laws; Payment of Taxes.........................................................14 Section 4.8. No Subsidiaries................................................................................14 Section 4.9. Investment Company Act.........................................................................14 Section 4.10. Public Utility Holding Company Act.............................................................14 Section 4.11. Ownership of Property; Liens...................................................................15 Section 4.12. No Default.....................................................................................15 Section 4.13. Full Disclosure................................................................................15 Section 4.14. Environmental Matters..........................................................................15 Section 4.15. Capital Stock..................................................................................15 Section 4.16. Margin Stock...................................................................................15 Section 4.17. Insolvency.....................................................................................16
i 3
ARTICLE V COVENANTS Section 5.1. Information....................................................................................16 Section 5.2. Inspection of Property, Books and Records......................................................18 Section 5.3. Restricted Payments............................................................................18 Section 5.4. Limitation on Indebtedness.....................................................................18 Section 5.5. Loans or Advances..............................................................................19 Section 5.6. Investments....................................................................................19 Section 5.7. Negative Pledge................................................................................20 Section 5.8. Maintenance of Existence.......................................................................20 Section 5.9. Dissolution....................................................................................20 Section 5.10. Consolidations, Mergers and Sales of Assets....................................................20 Section 5.11. Use of Proceeds................................................................................21 Section 5.12. Compliance with Laws; Payment of Taxes; SEC Filings............................................21 Section 5.13. Insurance......................................................................................21 Section 5.14. Change in Fiscal Year..........................................................................21 Section 5.15. Maintenance of Property........................................................................21 Section 5.16. Environmental Notices..........................................................................21 Section 5.17. Environmental Matters..........................................................................22 Section 5.18. Environmental Release..........................................................................22 Section 5.19. Transactions with Affiliates...................................................................22 ARTICLE VI DEFAULTS Section 6.1. Events of Default..............................................................................22 ARTICLE VII MISCELLANEOUS Section 7.1. Notices........................................................................................24 Section 7.2 No Waivers.....................................................................................25 Section 7.3 Expenses, Documentary Taxes....................................................................25 Section 7.4. Indemnification................................................................................25 Section 7.5. Amendments and Waivers.........................................................................25 Section 7.6. Successors and Assigns.........................................................................26 Section 7.7. Confidentiality................................................................................27 Section 7.8. California Law.................................................................................27 Section 7.9. Severability...................................................................................27 Section 7.10. Interest.......................................................................................27 Section 7.11. Interpretation.................................................................................28 Section 7.12. Waiver of Jury Trial; Consent to Jurisdiction..................................................28 Section 7.13. Counterparts...................................................................................28
ii 4 EXHIBITS -------- EXHIBIT A Form of Promissory Note - --------- EXHIBIT B Form of Warrant - --------- EXHIBIT C Form of Registration Rights Agreement - --------- EXHIBIT D Form of Borrower Security Agreement - --------- EXHIBIT E Form of Opinion Borrower's Counsel - --------- SCHEDULES --------- Schedule 4.4 Material Adverse Effects - ------------ Schedule 4.5 Litigation - ------------ Schedule 5.4 Indebtedness - ------------ Schedule 5.5 Loans - ------------ Schedule 5.7 Liens - ------------ iii 5 CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is entered into as of this ___ day of __________, 1997, by and between STACEY'S BUFFET, INC. a Florida corporation (the "Borrower") and STAR BUFFET, INC., a Delaware corporation ("Lender"). WHEREAS, the Borrower has requested that lender make a loan of Two Million Dollars ($2,000,000) to Borrower, and lender is willing to make such loan to Borrower, upon the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained and other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto covenant and agree as follows: ARTICLE I DEFINITIONS SECTION 1.1. Definitions. The terms as defined in this Section 1.01 shall, for all purposes of this Agreement and any amendment hereto (except as herein otherwise expressly provided or unless the context otherwise requires), have the meanings set forth herein: "Affiliate" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "Controlling Person"), (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person, or (iii) any Person (other than a Subsidiary) of which the Borrower owns, directly or indirectly, 20% or more of the common stock or equivalent equity interests, excluding existing joint ventures. As used herein, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. It is acknowledged and agreed that Lender is not an Affiliate of Borrower. "Agreement" means this Credit Agreement, together with all amendments and supplements hereto and all exhibits and schedules hereto. "Assignee" has the meaning set forth in Section 7.6(c). "Assignment Agreement" means an Assignment Agreement executed in accordance with Section 7.6(c). "Base Rate" shall be an interest rate per annum equal to the sum of (i) the Prime Rate from time to time in effect, plus (ii) two percent (2.0%), which shall change as and when the Prime Rate changes. "Borrower" means Stacey's Buffet, Inc., a Florida corporation, and its successors and its permitted assigns. 6 "Borrower Security Agreement" shall mean the Security Agreement, substantially in the form of Exhibit D hereto, executed and delivered by the Borrower to the Lender, together with all amendments and modifications thereto. "Capital Stock" means any nonredeemable capital stock of the Borrower or any Consolidated Subsidiary (to the extent issued to a Person other than the Borrower), whether common or preferred. "CERCLA" means the Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. ss. 9601 et. seq. and its implementing regulations and amendments. "CERCLIS" means the Comprehensive Environmental Response Compensation and Liability Inventory System established pursuant to CERCLA. "Change of Control" means the occurrence of any of the following events: (a) the acquisition after the Closing Date, in one or more transactions, of "beneficial ownership" (within the meaning of Section 13(d) under the Exchange Act and the rules and regulations promulgated thereunder) by (i) any Person or entity, or (ii) any group of Persons or entities who constitute a group (within the meaning of Section 13 of the Exchange Act), in either case, of any securities of the Borrower such that, as a result of such acquisition, such Person, entity or group either (A) "beneficially owns" (within the meaning of Rule 13 under the Exchange Act), directly or indirectly 20% or more of the Borrower's then outstanding voting securities entitled to vote on the election of directors of the Borrower ("Voting Securities") (it being understood that this clause (A) shall not apply if the Lender or its Affiliates acquire beneficial ownership of 20% or more of Borrower's than outstanding Voting Securities) or (B) otherwise has the ability to elect, directly or indirectly, a majority of the members of the Borrower's Board of Directors; (b) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Borrower (together with any new directors selected by such Board of Directors or whose nomination for election by the stockholders of the Borrower was approved by a vote of 66-2/3 % of the directors of the Borrower then still in office who are either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors of the Borrower then in office; (c) the sale, lease, transfer or other disposition of all or substantially all of the assets of the Borrower as entirety or substantially as an entirety in one transaction or a series of related transactions; (d) the liquidation or dissolution of the Borrower; or (e) any transaction permitted under Section 5.10 which results in any of the foregoing. "Closing Certificate" has the meaning set forth in Section 3.1(f). "Closing Date" means the date on which all matters set forth in Section 3.1 are satisfied. "Code" means the Internal Revenue Code of 1986, as amended, or any successor Federal tax code. "Collateral" has the meaning set forth in the Borrower Security Agreement. 2 7 "Compliance Certificate" has the meaning set forth in Section 5.1(a)(iii). "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which, in accordance with GAAP, would be consolidated with those of the Borrower in its consolidated financial statements as of such date. "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "Default" has the meaning set forth in Section 6.1. "Default Rate" means a rate per annum equal to the sum of the then applicable Base Rate plus two percent (2%). "Dollars" or "$" means dollars in lawful currency of the United States of America. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the State of California are authorized by law to close. "Environmental Authority" means any foreign, federal, state, local or regional government that exercises any form of jurisdiction or authority under any Environmental Requirement. "Environmental Authorizations" means all licenses, permits, orders, approvals, notices, registrations or other legal prerequisites for conducting the business of the Borrower or any Wholly Owned Subsidiary required by any Environmental Requirement. "Environmental Judgments and Orders" means all judgments, decrees or orders arising from or in any way associated with any Environmental Requirements, whether or not entered upon consent or written agreements with an Environmental Authority or other entity arising from or in any way associated with any Environmental Requirement. "Environmental Liabilities" means any liabilities, whether accrued, contingent or otherwise, arising from and in any way associated with any Environmental Requirements. "Environmental Notices" means notice from any Environmental Authority, of possible or alleged noncompliance with or liability under any Environmental Requirement, including without limitation any complaints, citations, demands or requests from any Environmental Authority or from any other person or entity for correction of any, violation of any Environmental Requirement or any investigations concerning any violation of any Environmental Requirement. "Environmental Proceedings" means any judicial or administrative proceedings arising from or in any way associated with any Environmental Requirement. "Environmental Releases" means releases as defined in CERCLA or under any applicable state or local environmental law or regulation. 3 8 "Environmental Requirements" means any legal requirement relating to health, safety or the environment and applicable to the Borrower, any Wholly Owned Subsidiary or the Properties, including but not limited to any such requirement under CERCLA or similar state legislation and all federal, state and local laws, ordinances, regulations, orders, writs, decrees and common law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor law. Any reference to any provision of ERISA shall also be deemed to be a reference to any successor provision or provisions thereof. "Event of Default" has the meaning set forth in Section 6.1. "Fiscal Quarter" means any fiscal quarter of the Borrower, it being understood that each of the first, second and fourth fiscal quarters of each Fiscal Year consists of three Reporting Periods and the third fiscal quarter consists of four Reporting Periods. "Fiscal Year" means any fiscal year of the Borrower consisting of the 52 or 53 week period generally ending on the Wednesday closest to December 31. "GAAP" means generally accepted accounting principles applied on a basis consistent with those which, in accordance with Section 1.2, are to be used in making the calculations for purposes of determining compliance with the terms of this Agreement. "Hazardous Materials" includes, without limitation, (a) solid or hazardous waste, as defined in the Resource Conservation and Recovery Act of 1980, 42 U.S.C. ss. 6901 et seq. and its implementing regulations and amendments, or in any applicable state or local law or regulation, (b) "hazardous substance", "pollutant", or "contaminant" as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, including, crude oil or any fraction thereof or (d) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "Indebtedness" shall have the meaning set forth in Section 5.4. "Interest Period" means the period commencing on the first day of each calendar month and ending on the last day of such calendar month; provided, that: (a) any Interest Period (other than an Interest Period determined pursuant to paragraph (b) below) which would otherwise end on a day which is not a Domestic Business Day shall be extended to the next succeeding Domestic Business Day; (b) the first Interest Period shall commence on the date of this Agreement and shall end on [September 30], 1997; and (c) any Interest Period which begins before the Termination Date and would otherwise end after the Termination Date shall end on the Termination Date. 4 9 "Investment" means any investment in any Person, whether by means of purchase or acquisition of obligations or securities of such Person, capital contribution to such Person, loan or advance to such Person, making of a time deposit with such Person, Guarantee or assumption of any obligation of such Person or otherwise. "Lender" means Star Buffet, Inc., a Delaware corporation, and its successors and assigns. "Lending Office" means, as to Lender, its office located at its address set forth on the signature pages hereof or identified on the signature pages hereof as its Lending Office or such other office as such Lender may hereafter designate as its Lending Office by notice to the Borrower. "Lien" means, with respect to any asset, any mortgage, deed to secure debt, deed of trust, lien, pledge, charge, security interest, security title, or encumbrance or servitude of any kind in respect of such asset to secure or assure payment of a Indebtedness or a Guarantee, whether by consensual agreement or by operation of statute or other law, or by any agreement, contingent or otherwise, to provide any of the foregoing. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease (as determined under GAAP) or other title retention agreement relating to such asset. Provided, however, an operating lease (as determined under GAAP) shall not constitute a Lien. "Loan" shall have the meaning set forth in Section 2.1 below . "Loan Documents" means this Agreement, the Note, the Warrants, the Borrower Security Agreement, the Post-Closing Collateral Documents, the Registration Rights Agreement, the Mortgage Documents and any other document evidencing, relating to or securing the obligations of the Borrower hereunder, and any other document or instrument delivered from time to time in connection with the foregoing documents, or the obligations of the Borrower hereunder, as such documents and instruments may be amended, modified or supplemented from time to time. "Margin Stock" means "margin stock" as defined in Regulations G, T, U or X. "Material Adverse Effect" means, with respect to any event, act, condition or occurrence, of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding that is not a judgment giving rise to a Default), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, a material adverse change in, or a material adverse effect upon, any of (a) the financial condition, operations, business, properties or prospects of the Borrower and its Consolidated Subsidiaries taken as a whole, (b) the rights and remedies of the Lender under the Loan Documents, or (c) the legality, validity or enforceability of any Loan Document. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) of ERISA. 5 10 "Note" means the Promissory Note, in the form attached hereto as Exhibit A, delivered to Lender to evidence the Loan together with all amendments, consolidations, modifications, renewals and supplements thereto, and replacements thereof. "Participant" has the meaning set forth in Section 7.6(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an unincorporated association, a trust or any other entity or organization, including, but not limited to, a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by a member of the Controlled Group for employees of any member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five (5) plan years made contributions. "Post-Closing Collateral" has the meaning set forth in Section 2.8(a). "Post-Closing Collateral Documents" has the meaning set forth in Section 2.8(a). "Prime Rate" shall mean, for any.day, a floating rate equal to the rate publicly quoted from time to time by The Wall Street Journal as the "base rate on corporate loans at large U.S. money center commercial banks" (or, if The Wall Street Journal ceases quoting a base rate of the type described, the highest per annum rate of interest published by the Federal Reserve Board in Federal Reserve statistical release H.15 (519) entitled "Selected Interest Rates" as the Bank prime loan rate or its equivalent). Each change in any interest rate provided for in the Agreement based upon the Prime Rate shall take effect at the time of such change in the Prime Rate. "Properties" means all real property owned, leased or otherwise used or occupied by the Borrower or any Consolidated Subsidiary, wherever located. "Registration Rights Agreement" means the Registration Rights Agreement, in the form of Exhibit C hereto, executed and delivered by the Borrower and Lenders. "Regulation G" means Regulation G of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. 6 11 "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System, as in effect from time to time, together with all official rulings and interpretations issued thereunder. "Reporting Period" means, with respect to any Fiscal Year, each consecutive 4 week period beginning on the first day of such Fiscal Year. "Restricted Payment" means (i) any dividend or other distribution on any shares of the Borrower's capital stock (except dividends payable solely in shares of its capital stock) or (ii) any cash payment on account of the purchase, redemption, retirement or acquisition (excluding therefrom any nominal amount of cash paid in lieu of fractional shares of Capital Stock issued in the ordinary course of business) of (a) any shares of the Borrower's capital stock (except shares acquired upon the conversion thereof into other shares of its capital stock) or (b) any option, warrant or other right to acquire shares of the Borrower's capital stock. "Retail Building" means any removable restaurant building owned by the Borrower and operated under the "Stacey's" trade name and all related equipment and moveable site improvements. "Rights Agreement" shall mean that certain Rights Agreement dated November 1, 1996 by and between Stacey's Buffet, Inc. and American Stock Transfer and Trust Company. "Stacey's Restaurant" shall mean any and all restaurants operated as a Stacey's Buffet, whether owned or operated by the Borrower or any other Person. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower, and any partnership in which the Borrower or any Consolidated Subsidiary is a general partner. "Termination Date" means the fifth (5th) anniversary of the date of this Agreement. "Transferee" has the meaning set forth in Section 7.6(d). "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all vested nonforfeitable benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "Warrants" mean the warrants to purchase shares of Borrower's Common Stock in the form attached hereto as Exhibit B to be issued to the Lender on the Closing Date pursuant to Section 2.1(a). 7 12 "Wholly Owned Subsidiary" means any Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. Section 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all terms of an accounting character used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP, applied on a basis consistent (except for changes with which the Borrower's independent public accountants concur or that are otherwise required by a change in GAAP) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Lenders except for any change in which the Borrower's independent public accountants concur or is required by GAAP, in determining compliance with any of the provisions of this Agreement or any of the other Loan Documents: (i) the Borrower shall have objected to determining such compliance on such basis at the time of delivery of such financial statements, or (ii) the Required Lenders shall so object in writing within 30 days after the delivery of such financial statements, in either of which events such calculations shall be made on a basis consistent with those used in the preparation of the latest financial statements as to which such objection shall not have been made (which, if objection is made in respect of the first financial statements delivered under Section 5.1 hereof, shall mean the financial statements referred to in Section 4.4). Section 1.3. References. Unless otherwise indicated, references in this Agreement to "Articles", "Exhibits", "Schedules", "Sections" and other Subdivisions are references to articles, exhibits, schedules, sections and other subdivisions hereof. Section 1.4. Use of Defined Terms. All terms defined in this Agreement shall have the same defined meanings when used in any of the other Loan Documents, unless otherwise defined therein or unless the context shall require otherwise. Section 1.5. Terminology. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and the plural shall include the singular. Titles of Articles and Sections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. 8 13 ARTICLE II THE CREDIT Section 2.1. Loan. Lender agrees, subject to the terms and conditions set forth herein and based on the representations and warranties set forth herein, to loan to Borrower, and Borrower agrees to borrow from Lender, the principal amount of Two Million Dollars ($2,000,000.00) on the Closing Date (the "Loan"). In consideration for making the Loan, on the Closing Date, the Borrower shall grant to the Lender warrants for the purchase of an aggregate of 1,342,422 shares of the Borrower's Common Stock at an exercise price of $1.00 each, which warrants may be exercised in accordance with and subject to the terms and conditions of the Warrants. Section 2.2. Miscellaneous Matters. (a) Prior to the Closing Date, Borrower has amended, or will amend prior to the Closing Date, the Borrower's Rights Agreement to provide that neither the acquisition of shares of Borrower by Lender or any of its affiliates nor the execution, delivery and performance of this Agreement and the Loan Documents, including the Warrants, or the consummation of the transactions contemplated thereby will (i) cause Lender or any of its affiliates to become an Acquiring Person (as such term is defined in the Rights Agreement), or (ii) otherwise affect the rights of the holders of Rights (as such term is defined in the Rights Agreement), including by causing such Rights to separate from the underlying shares or by giving such holders the right to acquire securities of any party hereto. (b) Upon the closing, the Borrower shall take all corporate actions necessary to (i) increase the size of Borrower's Board of Directors to five (5) from three (3); and (ii) elect to the Board of Directors of the Borrower two (2) designees of the Lender, and such Board of Directors shall consist of five (5) Persons, of whom two (2) Persons shall have been designated by the Lender. At each election of directors from and after the Closing Date, the Borrower shall nominate for election to its Board of Directors and recommend to its stockholders the election of two (2) designees of the Lender to the Board of Directors. No change in the actual number of directors of the Borrower shall be made without the prior written consent of the Lender. Section 2.3. Maturity of Loan. The Loan shall mature, and the principal amount thereof, if any, together with all accrued but unpaid interest thereon, if any, shall be due and payable on the applicable Termination Date without notice to or demand upon the Borrower. Section 2.4. Interest. The Borrower agrees to pay interest in respect of the principal amount of the Loan, for each day from the date such Loan is made until such Loan shall be paid in full at a rate per annum equal to the Base Rate from time to time in effect, such interest rate to change as and when the Base Rate changes and to be computed on the basis of a 360-day year and paid for the actual number of days elapsed. Interest on the Loan shall accrue from and including the making of the Loan and shall be payable monthly in arrears, for each Interest Period, on the 15th day of the calendar month immediately following the end of such Interest Period. Any overdue principal of and, to the extent permitted by applicable law, overdue interest on the Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the 9 14 Default Rate. After the occurrence and during the continuance of a Default, the principal amount of the Loans (and, to the extent permitted by applicable law, all accrued interest thereon) shall, at the election of the Lender, bear interest at the Default Rate. Section 2.5. Optional Prepayments The Borrower may, upon at least five Domestic Business Day's notice to the Lender, prepay the Loan by an aggregate amount of at least $100,000 or any larger multiple of $100,000, without premium or penalty. Section 2.6. Prepayment at Election of Lender Upon Change of Control. Upon the occurrence of a Change of Control, Lender shall have the right to require the Borrower to prepay the then outstanding principal amount thereof, plus accrued and unpaid interest, if any, to the date of prepayment. Within five Domestic Business Days following any Change of Control, the Borrower will mail a notice thereof to Lender, (a "Change of Control Notice"). Lender, by written notice to the Borrower within 30 days following receipt of such Change of Control Notice, may elect prepayment of its Notes and the Borrower shall prepay such Notes at the price specified above no later than 30 days thereafter. Section 2.7. General Provisions as to Payments. The Borrower shall make each payment of principal of, and interest on, the Loan not later than 11:00 A.M. (Pacific Time) on the date when due, in Federal or other funds immediately available. Whenever any payment of principal of, or interest on, the Loans or of fees hereunder shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Section 2.8. Collateral. (a) In addition to the collateral security granted by the Borrower and the Guarantors under the Security Agreements the Borrower shall, at the sole cost and expense of the Borrower, grant to the Lender and do all things requested to maintain, for the benefit of the Lender to secure all obligations of the Borrower under the loan documents, a continuing, blanket and general lien upon and security interest and title in and to all real property, equipment, inventory, general intangibles, personal property and assets of the Borrower and the Guarantors, or other assets as the Lenders shall designate in its reasonable discretion (the "Post-Closing Collateral") and shall deliver (or cause to be delivered) to the Lender such duly executed security agreements, security deeds, mortgages, deeds of trust, estoppels, subordination agreements, pledge agreements, stock powers, Uniform Commercial Code financing statements, title certificates, affidavits, and other documents, as are reasonably necessary or desirable in the judgment of the Lender to perfect first priority liens (as such first priority may be available) against the Post-Closing Collateral (collectively, the "Post-Closing Collateral Documents"). (b) The Borrower shall (and shall cause each of the Guarantors to), after an Event of Default, at the sole cost and expense of the Borrower, deliver (or cause to be delivered) to the Lender such appraisals, surveys, title searches, title policies, environmental audits and other documents, all of which shall be satisfactory to the Lender in all respects, as are deemed reasonably necessary or desirable by the Lender in connection with the Collateral. (c) The Borrower agrees to pay all costs and expenses incurred by the Lender in connection with the actions contemplated by this Section 2.8, including, without limitation, all 10 15 filing fees, lien search fees, intangible taxes (whether incurred before or after payment in full of the Loan), documentary stamp taxes (whether incurred before or after payment in full of the Loan), surveys, environmental surveys, and title reports. All such documentation shall be reasonable and customary and in form and substance satisfactory to the Lender in its discretion. The Borrower hereby irrevocably appoints the Lender as the Borrower's attorney-in-fact to (i) deliver and record in the appropriate filing office any instrument contemplated or required hereby (including, without limitation, the relevant security deeds, mortgages, deeds of trust, and Uniform Commercial Code financing statements) and to pay the related recording expenses and (ii) from time to time in the Lender's discretion, to take any other action which the Lender may deem reasonably necessary or advisable to accomplish the purposes of this Section 2.8 with respect to the Collateral. At each time Lender exercises the foregoing power of attorney it shall provide notice thereof to Borrower, including a copy of any documentation so executed. ARTICLE III CONDITIONS TO CLOSING Section 3.1. Conditions to Closing. The obligation of Lender to make the Loan is subject to the satisfaction of the conditions set forth below and receipt by the Lender of the documents, instruments, agreements and certificates set forth below: (a) duly executed original of the Note; (b) duly executed original of the Warrants; (c) duly executed Registration Rights Agreement; (d) duly executed Security Agreements; (e) a certificate (the "Closing Certificate") dated as of the Closing Date, signed by the chief executive officer and the chief financial officer of the Borrower, to the effect that (i) the representations and warranties of the Borrower contained in Article IV are true on and as of the Closing Date; (ii) Borrower and each of its Subsidiaries has complied with or performed with all covenants and agreements which is required to have performed or complied with on or prior to the Closing Date; and (iii) no event, act or condition has occurred after January 1, 1997 which has had or could have a Material Adverse Effect. (f) an opinion letter (together with any opinions of local counsel relied on therein) of, counsel for the Borrower, dated as of the Closing Date, substantially in the form of Exhibit E and covering such additional matters relating to the transactions contemplated hereby as the Lender may reasonably request; (g) all documents which the Lender may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of this Agreement, the Note, the Warrants and the other Loan Documents and any other matters relevant hereto, or thereto, all in form and substance reasonably satisfactory to the Lender, including, without limitation, a certificate of incumbency of each of the Borrower and the Guarantors, signed by the Secretary or an Assistant Secretary of the Borrower and the Guarantors, certifying as to the 11 16 names, true signatures and incumbency of the officer or officers, respectively, of the Borrower and the Guarantors authorized to execute and deliver the Loan Documents, and certified copies of the following items, for the Borrower and each of the Guarantors, respectively: (i) Certificate/Articles of Incorporation, (ii) Bylaws, (iii) a certificate of the Secretary of State of the state of incorporation of each as to the good standing of each as a corporation in that state, and (iv) the action taken by the Board of Directors authorizing the execution, delivery and performance of this Agreement, the Note, the Warrants and the other Loan Documents to which the Borrower or any of the Guarantors is a party; (h) a certificate of insurance evidencing, of all insurance required by Section 5.13 showing the insurer, the face amount and the nature of coverage, and the Lender as a loss payee (or beneficiary, as the case may be) under each policy then in force; and (i) all mortgages and security interests securing the Borrower's obligations hereunder shall be duly perfected and validly recorded. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: Section 4.1. Corporate Existence and Power. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to transact business in every jurisdiction where, by the nature of its business, such qualification is necessary, except where the failure to qualify could not reasonably be expected to have or cause a Material Adverse Effect, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except where the failure to have any license, authorization, consent or approval could not reasonably be expected to have or cause a Material Adverse Effect. Section 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement, the Note, the Warrants and the other Loan Documents delivered as of the Closing Date (i) are within the Borrower's corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) require no action by or in respect of or filing with, any governmental body, agency or official, (iv) do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other material instrument binding upon the Borrower or any Guarantor, and (v) do not result in the creation or imposition of any Lien on any asset of the Borrower or any Guarantor other than Liens created or imposed pursuant to the Loan Documents. Section 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower enforceable in accordance with its terms, the Note, the Warrants and the other Loan Documents, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower enforceable in accordance with their respective terms; provided that the enforceability hereof and thereof is subject in each case to general 12 17 principles of equity and to bankruptcy, insolvency and similar laws affecting the enforcement of creditors' rights generally. Section 4.4. Financial Information. The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of January 1, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the Fiscal Year then ended, reported on by KPMG Peat Marwick, LLP and the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries of March 26, 1997, and the related consolidated statements of operations and cash flows for the Fiscal Quarter then ended, copies of which have been delivered Lender, fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such dates and their consolidated results of operations and cash flows for such periods stated. Since January 1, 1997 and excepted as disclosed in Schedule 4.4 attached hereto, there has been no event, act, condition or occurrence having a Material Adverse Effect. Section 4.5. No Litigation. Except as disclosed as Schedule 4.5, there is no action, suit or proceeding pending, or to the knowledge of the Borrower threatened, against or affecting the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to have or cause a Material Adverse Effect. Section 4.6. Compliance with ERISA. The Borrower and each member of the Controlled Group have fulfilled their obligations in all material respects under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA. Neither the Borrower nor any member of the Controlled Group is or ever has been obligated to contribute to any Multiemployer Plan. Section 4.7. Compliance with Laws; Payment of Taxes. The Borrower and its Consolidated Subsidiaries are in compliance with all applicable laws, regulations and similar requirements of governmental authorities, except where such compliance is being contested in good faith through appropriate proceedings and except where the failure to comply could not reasonably be expected to have or cause a Material Adverse Effect. There have been filed on behalf of the Borrower and its Consolidated Subsidiaries all Federal and state income, excise, property and other tax returns which are required to be filed by them and all taxes due pursuant to such returns or pursuant to any assessment received by or on behalf of the Borrower or any Consolidated Subsidiary have been paid. There have been filed on behalf of the Borrower and its Consolidated Subsidiaries all local income, excise, property and other tax returns that are required to be filed by them and all taxes due pursuant to the returns or any assessment received by Borrower or any Consolidated Subsidiary have been paid. The charges, accruals and reserves on the books of the Borrower and its Consolidated Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate, except for any changes in taxes which are imposed retroactively. Section 4.8. No Subsidiaries. The Borrower has no Subsidiaries. Section 4.9. Investment Company Act. Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 13 18 Section 4.10. Public Utility Holding Company Act. Neither the Borrower nor any of its Consolidated Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. Section 4.11. Ownership of Property; Liens. Each of the Borrower and its Consolidated Subsidiaries has title to its properties sufficient for the conduct of its business, and none of such property is subject to any Lien except as permitted in Section 5.7. Section 4.12. No Default. Borrower is not in default under or with respect to any agreement, instrument or undertaking to which it is a party or by which it or any of its property is bound which could have or cause a Material Adverse Effect. Section 4.13. Full Disclosure. All written information heretofore furnished by the Borrower to the Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to Lender will be, true, accurate and complete in every material respect or based on reasonable estimates on the date as of which such information is stated or certified. The Borrower has disclosed to the Lenders in writing any and all facts which could have or cause a Material Adverse Effect. Section 4.14. Environmental Matters. (a) Borrower is not subject to any Environmental Liability which could have or cause a Material Adverse Effect as the Environmental Liability becomes due and the Borrower has not been designated as a potentially responsible party under CERCLA or under any state statute similar to CERCLA. None of the Properties has been identified on any current or proposed (i) National Priorities List under 40 C.F.R. ss. 300, (ii) CERCLIS list or (iii) any list arising from a state statute similar to CERCLA. (b) No Hazardous Materials are being used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed or otherwise handled at, or shipped or transported to or from the Properties except in material compliance with Environmental Requirements. No Hazardous Materials are present at, on, in or under the Properties, or, to the best of the knowledge of the Borrower, at or from any adjacent site or facility (except for Hazardous Materials, such as cleaning solvents, pesticides and other materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed of, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements) in such quantities that the cost to monitor, investigate, and/or remediate the Hazardous Materials in compliance with Environmental Requirements could not reasonably be expected to have or cause a Material Adverse Effect. (c) The Borrower in all material respects is in compliance with all Environmental Requirements in connection with the operation of the Properties and the Borrower's businesses. Section 4.15. Capital Stock. All Capital Stock, debentures, bonds, notes and all other securities of the Borrower presently issued and outstanding are validly and properly issued in 14 19 accordance with all applicable laws, including but not limited to, the "Blue Sky" laws of all applicable states and the federal securities laws. Section 4.16. Margin Stock. The Borrower is not engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock, and no part of the proceeds of the Loan will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X. Section 4.17. Insolvency. After giving effect to the execution and delivery of this Agreement, the Note and the other Loan Documents, the Borrower will not be "insolvent," within the meaning of such term as defined in ss. 101 of Title 11 of the United States Code or Section 2 of the Uniform Fraudulent Transfer Act, or any other applicable state law pertaining to fraudulent transfers, as amended from time to time, or be unable to pay its debts generally as such debts become due, or have an unreasonably small capital to engage in any business or transaction, whether current or contemplated. 15 20 ARTICLE V COVENANTS The Borrower agrees that, so long as any amount payable hereunder or under the Note remains unpaid: Section 5.1. Information. (a) The Borrower will deliver to the Lender: (i) as soon as available and in any event within 120 days after the end of each Fiscal Year, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such Fiscal Year and the related consolidated statements of operations, stockholders' equity and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous fiscal year, all certified by independent public accountants of nationally recognized standing, with such certification to be free of exceptions and qualifications not acceptable to the Lender; (ii) as soon as available and in any event within 45 days after the end of each of the first three Fiscal Quarters of each Fiscal Year, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such Fiscal Quarter and the related statements of operations and statements of cash flows for such Fiscal Quarter and for the portion of the Fiscal Year ended at the end of such Fiscal Quarter, setting forth in each case in comparative form the figures for the corresponding Fiscal Quarter and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of the Borrower, except to the extent that interim financial statements on Form 10-Q do not require footnotes and other disclosures that would otherwise be required by GAAP; (iii) simultaneously with the delivery of each set of financial statements referred to in paragraphs (i) and (ii) above, a certificate (a "Compliance Certificate") of the chief financial officer stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (iv) within two (2) Domestic Business Days after the Borrower has knowledge of the occurrence of any Default, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; 16 21 (v) promptly upon the mailing thereof to the stockholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; and (vi) promptly upon the filing thereof, copies of all registration statements, proxy statements, and annual, quarterly or other reports and other information and documents which the Borrower shall have filed with the Securities and Exchange Commission. (b) Upon the request of the Lender, the Borrower will deliver to the Lender: (i) if and when any member of the Controlled Group (A) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (B) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (C) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; and (ii) as soon as available and in any event within 25 days after the end of each of the first 12 Reporting Periods of each Fiscal Year, a consolidated statement of income and balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such Reporting Period and for the portion of the Fiscal Year ended at the end of such Reporting Period, setting forth in each case in comparative form the figures for the corresponding Reporting Period and the corresponding portion of the previous Fiscal Year, all certified (subject to normal year-end adjustments) as to fairness of presentation, GAAP and consistency by the chief financial officer or the chief accounting officer of the Borrower, except to the extent that interim financial statements do not require footnotes and that such financial statements are subject to normal year-end adjustments; (iii) promptly upon receipt or obtaining knowledge thereof, any and all bona fide offers or expressions of interest (whether verbal or written, solicited or unsolicited) to merge with or to acquire all or any part of the assets or capital stock of the Borrower; (iv) within 25 days after the end of each Reporting Period: (A) a variance report which reconciles the performance of the Borrower for the immediately preceding Reporting Period to the projected budget of the Borrower for such period; (B) an accounts payable schedule for the Borrower; (C) a written schedule of the revenues, profit contributions and other operating and financial information with respect to each Stacey's Restaurant, on an individual and regional basis; and (D) a written summary of the Borrower's advertising and promotional activities, including a summary of amounts expended in connection therewith and a cost/benefit analysis of such expenditures 17 22 (v) within five days after the end of each calendar week, written weekly sales reports with respect to each Stacey's Restaurant, on an individual and regional basis; and (vi) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as may be reasonably requested. Section 5.2. Inspection of Property, Books and Records. The Borrower will (i) keep, and cause each Consolidated Subsidiary to keep, proper books of record and account in which full, true and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities; and (ii) permit, and cause each Wholly Owned Subsidiary to permit, representatives of Lender, at the Borrower's expense, to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants. The Borrower agrees to cooperate and assist in such visits and inspections, in each case at such reasonable times and as often as may reasonably be desired. Section 5.3. Restricted Payments. The Borrower will not declare or make any Restricted Payments. Section 5.4. Limitation on Indebtedness. Neither the Borrower nor any of its Subsidiaries will create, incur, assume, or become, be or remain liable in any manner in respect of, or allow to exist, any Indebtedness (which term shall include: all indebtedness, obligations and liabilities which in accordance with generally accepted accounting principles would be reflected on the balance sheet of the Borrower as a liability; all indebtedness, obligations and liabilities, whether or not assumed by Borrower or any Subsidiary, secured by any mortgage, pledge or lien existing on property owned by the Borrower or any Subsidiary; and all amounts representing rental payments which, in accordance with generally accepted accounting principles, would be classified as a liability on its balance sheet), except for: (a) the Note and any other obligations owed to the Lender under this Agreement or otherwise; (b) Indebtedness of the Borrower existing as of the date of this Agreement which is specifically disclosed in Schedule 5.5 attached hereto; (c) Indebtedness representing trade debt, wages, employee benefits, advance payments on sales contracts and other indebtedness incurred in the ordinary course of business; (d) Indebtedness existing as of the date of this Agreement secured by liens permitted by subsection (a) of Section 5.7; (e) Liabilities for taxes, assessments, governmental charges, liens or claims described in Section 5.12 hereof to the extent that payment thereof is not required by such Section 5.12; and 18 23 (f) Indebtedness in respect of final judgments for the payment of money not in excess of $10,000 in the aggregate at any time outstanding (excluding sums covered by insurance) remaining unsatisfied and in effect for any period of less than thirty (30) days or in respect of which a stay of execution shall have been obtained pending an appeal or proceeding for review. Section 5.5. Loans or Advances. Neither the Borrower nor any Guarantor shall make loans or advances to any Person except (without duplication): (a) loans or advances to employees not exceeding $5,000 in the aggregate principal amount outstanding at any time, in each case made in the ordinary course of business and consistent with practices existing on the Closing Date; (b) deposits required by government agencies or public utilities; (c) loans, advances or monetary capital contributions from the Borrower or a Guarantor to any Guarantor, or from any Guarantor to the Borrower; (d) loans in existence on the Closing Date not exceeding a total aggregate principal amount of outstanding as described on Schedule 5.5 attached hereto, which are evidenced by legally enforceable promissory notes and subject to the Lender's perfected Liens; and (e) loans or advances consented to by the Lender in connection with asset sales under Section 5.10 or loans or advances in connection with asset sales which do not require the consent of the Lender; provided that after giving effect to the making of any loans, advances or deposits permitted by this Section, the Borrower will be in full compliance with all the provisions of this Agreement. Section 5.6. Investments. Neither the Borrower nor any Guarantor shall make Investments in any Person except as permitted by Section 5.5 and except Investments (i) in direct obligations of the United States Government maturing within one year, (ii) in certificates of deposit issued by a commercial bank whose long-term certificates of deposit are rated at least AA or the equivalent thereof by Standard & Poor's Corporation and Aa or the equivalent thereof by Moody's Investors Service, Inc., (iii) in commercial paper rated A1 or the equivalent thereof by Standard & Poor's Corporation or P1 or the equivalent thereof by Moody's Investors Service, Inc. and in either case maturing within 6 months after the date of acquisition, and (iv) in tender bonds the payment of the principal of and interest on which is fully supported by a letter of credit issued by a United States bank whose long-term certificates of deposit are rated at least AA or the equivalent thereof by Standard & Poor's Corporation and Aa or the equivalent thereof by Moody's Investors Service, Inc. Section 5.7. Negative Pledge. Neither the Borrower nor any Wholly Owned Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement and identified on Schedule 5.7; (b) any Lien on any asset securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset (so long as the asset so acquired or constructed constitutes a capital expenditure permitted hereunder); (c) Liens securing Indebtedness owing by any Subsidiary to the Borrower; (d) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing paragraphs of this Section, 19 24 provided that (i) such Indebtedness is not secured by any additional assets, and (ii) the amount of such Indebtedness secured by any such Lien is not increased or, if increased, the excess of the amount of the Indebtedness secured by any such lien over the amount of the Indebtedness so refinanced extended, renewed, or refunded shall be tendered to the Lender as a prepayment of the Loan; (e) Liens incidental to the conduct of its business or the ownership of its assets which (i) do not secure Indebtedness and (ii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (f) Liens in favor of the Lenders created under the Loan Documents; and (g) Liens incurred by Borrower in the ordinary course of business for items not past due and payable, including mechanics' and materialmen's liens and deposits and charges for workers' compensation and liens for taxes and assessments not past due and payable. Section 5.8. Maintenance of Existence. The Borrower shall, and shall cause each Subsidiary to, maintain its corporate existence and carry on its business in substantially the same manner and in substantially the same fields as such business is now carried on and maintained. Section 5.9. Dissolution. Neither the Borrower nor any of its Wholly Owned Subsidiaries shall suffer or permit dissolution or liquidation either in whole or in part or redeem or retire any shares of its own stock or that of any Wholly Owned Subsidiary, except through corporate reorganization to the extent permitted by Section 5.12. Section 5.10. Consolidations, Mergers and Sales of Assets. The Borrower will not, nor will it permit any Consolidated Subsidiary to, consolidate or merge with or into, or sell, lease or otherwise transfer all or any substantial part of its assets to, any other Person, or discontinue or eliminate any business line or segment; provided, however, that if no Default has occurred and is continuing (i) the Borrower may merge with another Person if (A) such Person was organized under the laws of the United States of America or one of its states, (B) the Borrower is the corporation surviving such merger, and (C) immediately after giving effect to such merger, no Default shall have occurred and be continuing, and (ii) solvent Subsidiaries of the Borrower may merge with one another or, if the Borrower is the surviving corporation, the Borrower. Section 5.11. Use of Proceeds. The proceeds of the Loan shall be used by Borrower for the purpose of remodeling Stacey's Restaurants or for the costs of converting Stacey's Restaurants to any regional buffet restaurant concept which is approved by Lender, and for general working capital purposes. No portion of the proceeds of the Loan will be used by the Borrower or any Subsidiary (i) in connection with, whether directly or indirectly, any tender offer for, or other acquisition of, stock of any corporation with a view towards obtaining control of such other corporation, (ii) directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any Margin Stock, or (iii) for any purpose in violation of any applicable law or regulation. Section 5.12. Compliance with Laws; Payment of Taxes; SEC Filings. The Borrower will, and will cause each of its Wholly Owned Subsidiaries and each member of the Controlled Group to, comply with applicable laws (including but not limited to ERISA), regulations and 20 25 similar requirements of governmental authorities (including but not limited to PBGC) in all material respects, except where the necessity of such compliance is being contested in good faith through appropriate proceedings. The Borrower will, and will cause each of its Wholly Owned Subsidiaries to, pay promptly before past due all taxes, assessments, governmental charges, claims for labor, supplies, rent and other obligations which, if unpaid, might become or remain a lien against the property of the Borrower or any Wholly Owned Subsidiary, except liabilities being contested in good faith and against which, if requested by the Lender, the Borrower will set up reserves in accordance with GAAP. The Borrower will timely file all reports, statements and other information and documents with the Securities and Exchange Commission required to be filed under, and will otherwise comply in all respects with, applicable securities laws. Section 5.13. Insurance. The Borrower will maintain, and will cause each of its Wholly Owned Subsidiaries to maintain (either in the name of the Borrower or in such Subsidiary's own name), with financially sound and reputable insurance companies, insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or similar business, and as required by the other Loan Documents. Section 5.14. Change in Fiscal Year. The Borrower will not change its Fiscal Year. Section 5.15. Maintenance of Property. The Borrower shall, and shall cause each Wholly Owned Subsidiary to, maintain all of its properties and assets in good condition, repair and working order, except for ordinary wear and tear and loss by casualty. Section 5.16. Environmental Notices. The Borrower shall furnish to the Lender prompt written notice of all Environmental Liabilities, pending, threatened or anticipated Environmental Proceedings, Environmental Notices, Environmental Judgments and Orders, and Environmental Releases at, on, in, under or in any way affecting the Properties or any adjacent property, and all facts, events, or conditions that could lead to any of the foregoing. Section 5.17. Environmental Matters. The Borrower and its Wholly Owned Subsidiaries will not, and will not permit any Third Party to, use, produce, manufacture, process, treat, recycle, generate, store, dispose of, manage at, or otherwise handle, or ship or transport to or from the Properties any Hazardous Materials except for Hazardous Materials such as cleaning solvents, pesticides and other similar materials used, produced, manufactured, processed, treated, recycled, generated, stored, disposed, managed, or otherwise handled in minimal amounts in the ordinary course of business in compliance with all applicable Environmental Requirements. Section 5.18. Environmental Release. The Borrower agrees that upon the occurrence of an Environmental Release at or on any of the Properties it will act immediately to investigate the extent of, and to take appropriate remedial action to eliminate, such Environmental Release, whether or not ordered or otherwise directed to do so by any Environmental Authority. Section 5.19. Transactions with Affiliates. Neither the Borrower nor any of its Consolidated Subsidiaries shall enter into, or be a party to (and the Borrower shall use its best efforts to cause any other Subsidiary to not enter into or be a party to), any transaction with any Affiliate of the Borrower or such Subsidiary (which Affiliate is not the Borrower or a Subsidiary), except (i) such transactions between and/or among the Borrower and its Consolidated Subsidiaries 21 26 which are permitted by law, consistent with its past practices, in the ordinary course of business and pursuant to reasonable terms which are no less favorable to Borrower or such Consolidated Subsidiary than would be obtained in a comparable arm's length transaction with a Person which is not an Affiliate or (ii) such transactions as are otherwise fully disclosed to the Lender and consented to in writing in advance by the Lender. ARTICLE VI DEFAULTS Section 6.1. Events of Default. If one or more of the following events (each, a "Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of the Loan or shall fail to pay any interest on the Loan within two (2) Domestic Business Days after such interest shall become due; or (b) the Borrower shall fail to observe or perform any covenant contained in: (i) Section 5.1 and such failure shall continue for ten (10) Business Days after the earlier to occur of (x) written notice thereof has been given to the Borrower by the Lender or (y) the Borrower obtains knowledge of any such failure; or (ii) Sections 5.2, 5.3 to 5.12, inclusive, Sections 5.14 or 5.19; or (c) the Borrower shall fail to observe or perform any covenant or agreement contained or incorporated by reference in this Agreement (other than those covered by paragraph (a) or (b) above) and such failure shall not have been cured within 30 days after the earlier to occur of (i) written notice thereof has been given to the Borrower by the Lender or (ii) the Borrower otherwise becomes aware of any such failure; or (d) any representation, warranty, certification or statement made by the Borrower in Article IV of this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect or misleading in any material respect when made (or deemed made); or (e) the Borrower or any Consolidated Subsidiary shall fail to make any payment in respect of Indebtedness outstanding in an aggregate amount in excess of $500,000 (other than the Notes) when due or within any applicable grace period; or (f) any event or condition shall occur which results in the acceleration of the maturity of Indebtedness of the Borrower or any Consolidated Subsidiary outstanding in an aggregate amount in excess of $500,000 (including, without limitation, any required mandatory prepayment or "put" of such Indebtedness to the Borrower or any Consolidated Subsidiary) or enables (or, with the giving of notice or lapse of time or both, would enable) the holders of such Indebtedness or any Person acting on such holders' behalf to accelerate the maturity thereof (including, without limitation, any required mandatory prepayment or "put" of such Indebtedness to the Borrower or any Consolidated Subsidiary); or 22 27 (g) the Borrower or any Consolidated Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Consolidated Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Consolidated Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or (i) the Borrower or any member of the Controlled Group shall fail to pay when due any material amount which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by the Borrower, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or the Borrower or any other member of the Controlled Group shall enter into, contribute or be obligated to contribute to, terminate or incur any withdrawal liability with respect to, a Multiemployer Plan; (j) one or more final, nonappealable judgments or orders for the payment of money in an aggregate amount in excess of $250,000 shall be rendered against the Borrower or any Consolidated Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (k) a federal tax lien for a claimed amount in excess of $100,000 shall be filed against the Borrower or any Consolidated Subsidiary under Section 6323 of the Code or a lien of the PBGC shall be filed against the Borrower or any Consolidated Subsidiary under Section 4068 of ERISA and in either case such lien shall remain undischarged for a period of 25 days after the date of filing; or (l) except as a result of the election of designees of Lender to Borrower's Board of Directors on the Closing Date pursuant to this Agreement, as of any date a majority of the Board of Directors of the Borrower consists of individuals who were not either (A) directors of the Borrower as of the corresponding date of the previous year, (B) selected or nominated to become 23 28 directors by the Board of Directors of the Borrower of which a majority consisted of individuals described in clause (A), or (C) selected or nominated to become directors by the Board of Directors of the Borrower of which a majority consisted of individuals described in clause (A) and individuals described in clause (B); or (m) (i) any default by the Borrower or any of the Guarantors under any of the Loan Documents shall exist after the satisfaction of any applicable grace, notice or cure periods, if any, (ii) any Loan Documents (including, without limitation, the Guaranty) shall cease to be enforceable, or (iii) any Guarantor or the Borrower shall assert that any Loan Document (including, without limitation, the Guaranty) shall cease to be enforceable then, and in every such event (an "Event of Default"), the Lender may by notice to the Borrower declare the Note (together with accrued interest thereon) to be, and the Note shall thereupon become, immediately due and payable without presentment, demand, protest or additional notice of any kind, all of which are hereby waived by the Borrower, together with interest at the Default Rate accruing on the principal amount thereof from and after the date of such Event of Default; provided that if any Event of Default specified in paragraph (g) or (h) above occurs with respect to the Borrower, without any notice to the Borrower or any other act by the Lender, the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower together with interest thereon at the Default Rate accruing on the principal amount thereof from and after the date of such Event of Default. Notwithstanding the foregoing, the Lender shall have available to it all other remedies at law or equity, and may any one or all of them. ARTICLE VII MISCELLANEOUS Section 7.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telecopier or similar writing) and shall be given to such party at its address or telecopier number set forth on the signature pages hereof or such other address or telecopier number as such party may hereafter specify for the purpose by notice to each other party. Each such notice, request or other communication shall be effective (i) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means, when delivered at the address specified in this Section. Section 7.2. No Waivers. No failure or delay by the Lender in exercising any right, power or privilege hereunder or under the Note or other Loan Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 7.3. Expenses; Documentary Taxes. If a Default occurs, the Borrower shall pay or reimburse lender, as the case may be, for all out-of-pocket expenses incurred by the Lender, including fees and disbursements of counsel, in connection with such Default and collection and other enforcement proceedings resulting therefrom, including out-of-pocket expenses incurred in enforcing this Agreement and the other Loan Documents. The Borrower shall indemnify the 24 29 Lender against any transfer taxes, documentary taxes, assessments or charges made by any Authority by reason of the execution and delivery of this Agreement or the other Loan Documents. Section 7.4. Indemnification. The Borrower shall indemnify the Lender and its directors, officers, partners, trustees, beneficiaries, controlling persons, shareholders, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from (i) any actual or proposed use by the Borrower of the proceeds of any extension of credit by Lender hereunder, or (ii) breach by the Borrower of this Agreement (including, without limitation, representations, warranties and covenants relating to environmental matters) or any other Loan Document, or from any investigation, litigation (including, without limitation, any actions taken by Lender to enforce this Agreement or any of the other Loan Documents) or other proceeding (including, without limitation, any threatened investigation or proceeding) relating to the foregoing, and the Borrower shall reimburse Lender, and its directors, officers, employees and agents, upon demand for any expenses (including, without limitation, legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. Section 7.5. Amendments and Waivers. Any provision of this Agreement, the Note or any other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Lender. The Borrower will not solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions of this Agreement unless Lender shall be informed thereof by the Borrower and shall be afforded an opportunity of considering the same and shall be supplied by the Borrower with sufficient information to enable it to make an informed decision with respect thereto. 25 30 Section 7.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that the Borrower may not assign or otherwise transfer any of its rights under this Agreement. (b) Lender (or successor or assignee of any Lender) may at any time sell to one or more Affiliates (each a "Participant") participating interests in Loan owing to such Lender, any Note held by such Lender, or any other interest of such Lender hereunder. In the event of any such sale by the Lender of a participating interest to a Participant, Lender's obligations under this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note for all purposes under this Agreement, and the Borrower shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. In no event shall a Lender that sells a participation be obligated to the Participant to take or refrain from taking any action hereunder except that such Lender may agree that it will not (except as provided below), without the consent of the Participant, agree to (i) the change of any date fixed for the payment of principal of or interest on the related loan or loans, (ii) the change of the amount of any principal, interest or fees due on any date fixed for the payment thereof with respect to the related loan or loans, (iii) the change of the principal of the related loan or loans, (iv) any change in the rate at which either interest is payable thereon or (if the Participant is entitled to any part thereof) fee is payable hereunder from the rate at which the Participant is entitled to receive interest or fee (as the case may be) in respect of such participation, (v) the release or substitution of all or any substantial part of the collateral (if any) held as security for the Borrower's obligations hereunder, or (vi) the release of any Guarantee given to support payment of the Borrower's obligations hereunder. Each Lender selling a participating interest in any Loan, Note, or other interest under this Agreement shall provide the Borrower with written notification stating that such sale has occurred and identifying the Participant and the interest purchased by such Participant. (c) Lender or assignee of any Lender (in either case, a "Transferor") may at any time assign to one or more Affiliates of Lender (each an "Assignee") all, or a proportionate part of all, of its rights and obligations under this Agreement, the Note and the other Loan Documents and such Assignee shall assume all rights and obligations of the Transferor hereunder pursuant to an agreement executed by such Assignee and such Transferor in form and substance satisfactory to the Transferor (an "Assignment Agreement"). Upon (a) execution of the Assignment Agreement by and such Transferor, such Assignee and (b) payment by such Assignee to and Transferor of an amount equal to the purchase price agreed between such Transferor and such Assignee, and (c) payment of a such Assignee shall for all purposes be a Lender party to this Agreement and shall have all the rights and obligations of a Lender under this Agreement to the same extent as if it were an original party hereto with a pro rata share as set forth in the Assignment Agreement, and the Transferor shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by the Borrower, or the Lender shall be required. Upon the consummation of any transfer to an Assignee pursuant to this paragraph (c), the Transferor, and the Borrower shall make appropriate arrangements so that, if required, a new Note (or Notes) is (are) issued to such Assignee. 26 31 (d) Subject to the provisions of Section 7.7, the Borrower authorizes each Lender to disclose to any Participant, Assignee or other transferee (each a "Transferee") and any prospective Transferee who has agreed in writing to be bound by Section 7.7 any and all financial information in such Lender's possession concerning the Borrower which has been delivered to such Lender by the Borrower pursuant to this Agreement or which has been delivered to such Lender by the Borrower in connection with such Lender's credit evaluation prior to entering into this Agreement. (e) Anything in this Section 7.6 to the contrary notwithstanding, any Lender may assign and pledge all or any portion of the Loan and/or obligations owing to it to as collateral security, provided that any payment in respect of such assigned Loan and/or obligations made by the Borrower to the assigning and/or pledging Lender in accordance with the terms of this Agreement shall satisfy the Borrower's obligations hereunder in respect of such assigned Loan and/or obligations to the extent of such payment. No such assignment shall release the assigning and/or pledging Lender from its obligations hereunder. Section 7.7. Confidentiality. Lender agrees to keep any information delivered or made available by the Borrower to it which is clearly indicated to be confidential information, confidential from anyone other than persons employed or retained by Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Borrower's obligations hereunder provided, that, such individuals shall be subject to the agreement contained in this Section 7.7; provided, however that nothing herein shall prevent Lender from disclosing such information (i) to any other Lender, (ii) upon the order of any court or administrative agency after notice to the Borrower, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Lender after notice to the Borrower, (iv) which has been publicly disclosed by Borrower, (v) to the extent reasonably required in connection with any litigation to which the Lender or its Affiliates may be a party, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vii) to Lender's legal counsel and independent auditors and (viii) to any actual or proposed Participant, Assignee or other Transferee of all or part of its rights hereunder, provided that such proposed Participant, Assignee or other Transferee agrees in writing to be bound by this Section. Section 7.8. California Law. This Agreement and each of the loan documents shall be construed in accordance with and governed by the law of the State of California. Section 7.9. Severability. In case any one or more of the provisions contained in this Agreement, the Note or any of the other Loan Documents should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby and shall be enforced to the greatest extent permitted by law. Section 7.10. Interest. In no event shall the amount of interest due or payable hereunder or under the Notes exceed the maximum rate of interest allowed by applicable law, and in the event any such payment is inadvertently made to Lender by the Borrower or inadvertently received by Lender, then such excess sum shall be credited as a payment of principal, unless the Borrower shall notify such Lender in writing that it elects to have such excess sum returned forthwith. It is the express intent hereof that the Borrower not pay and the Lender not receive, directly or 27 32 indirectly in any manner whatsoever, interest in excess of that which may legally be paid by the Borrower under applicable law. Section 7.11. Interpretation. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. Section 7.12. Waiver of Jury Trial; Consent to Jurisdiction. Each of the Borrower and the Lender irrevocably (a) waives any and all right to trial by jury in any legal proceeding arising out of this Agreement, any of the other Loan Documents, or any of the transactions contemplated hereby or thereby, (b) submits to the nonexclusive personal jurisdiction in the State of California, the courts thereof and the United States District Courts sitting therein, for the enforcement of this Agreement, the Note and the other Loan Documents, (c) waives any and all personal rights under the law of any jurisdiction to object on any basis (including, without limitation, inconvenience of forum) to jurisdiction or venue within the State of California for the purpose of litigation to enforce this Agreement, the Notes or the other Loan Documents, and (d) agrees that service of process may be made upon it in the manner prescribed in Section 7.1 for the giving of notice to the Borrower. Nothing herein contained, however, shall prevent the Lender from bringing any action or exercising any rights against any security and against the Borrower personally, and against any assets of the Borrower, within any other state or jurisdiction. Section 7.13. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 28 33 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. STACEY'S BUFFET, INC By: ------------------------------------ Name: Title: 801 West Bay Drive Suite 704 Largo, Florida 33770 Attention: --------------------- Telecopier number: ------------- Telephone number: -------------- STAR BUFFET, INC., By: ------------------------------------ Name: Tile: 440 Lawndale Drive Salt Lake City, Utah 84115-1917 Attention: --------------------- Telecopier No.: (801) 463-5500 Telephone No.: (801) 463-5585 29
EX-10.9 5 FORM OF CONTRIBUTION AGREEMENT 1 EXHIBIT 10.9 CONTRIBUTION AGREEMENT This CONTRIBUTION AGREEMENT (this "Agreement") is entered into as of September __, 1997 by and among CKE RESTAURANTS, INC., a Delaware corporation ("CKE"), SUMMIT FAMILY RESTAURANTS INC., a Delaware corporation and, as of the date of this Agreement, a wholly-owned subsidiary of CKE ("Summit"), STAR BUFFET, INC., a Delaware corporation and, as of the date of this Agreement, a wholly-owned subsidiary of CKE ("Star"). CASA BONITA INCORPORATED, a Texas corporation and indirect wholly-owned subsidiary of CKE ("Casa Bonita"), and JB's RESTAURANTS, INC., a Delaware corporation and wholly-owned subsidiary of CKE ("JB's"). RECITALS: A. CKE is engaged, through its subsidiaries listed in Schedule 1 attached hereto (the "CKE Subsidiaries"), in the primary business, among others, of owning, operating, franchising and licensing quick-service restaurants, primarily consisting of the Carl's Jr.(R), Hardee's(R) and Taco Bueno(R) concepts (CKE and the CKE Subsidiaries other than members of the Star Group (as such term is hereinafter defined) are collectively referred to as the "CKE Group"); B. CKE has determined to reorganize and consolidate the assets and operations of the buffet-style restaurant business of certain of its subsidiaries (collectively, the "Buffet Restaurant Business"), which is currently comprised of 16 HomeTown Buffet restaurants currently operated by HTB Restaurants, Inc., a Delaware corporation and wholly-owned subsidiary of Summit ("HTB"), as a franchisee of HomeTown Buffet, Inc. (the "Franchisor"), two (2) Casa Bonita Mexican theme restaurants currently operated by Casa Bonita, and seven (7) JJ North's Grand Buffet restaurants to be acquired pursuant to an Asset Purchase Agreement, dated July 24, 1997 (the "North Purchase Agreement"), between CKE and North's Restaurants, Inc., an Oregon corporation ("North's"), into Star and Star's subsidiaries listed in Schedule 2 attached hereto (the "Star Subsidiaries") (Star and the Star Subsidiaries, after giving effect to the Asset Transfers (as such term is hereinafter defined) and the consummation of the transactions contemplated by this Agreement, are collectively referred to herein as the "Star Group"); and C. Star has filed a registration statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"), relating to an initial public offering of 2,500,000 shares of Star Common Stock, of which 600,000 shares are to be offered and sold by CKE (the "Offering") pursuant to an Underwriting Agreement to be entered into by and among Star, CKE and Equitable Securities Corporation, EVEREN Securities, Inc. and Cruttenden Roth Incorporated, as representatives of the Underwriters (the "Underwriting Agreement"), on or promptly following the date on which the Registration statement is declared effective by the SEC; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual covenants and conditions contained herein, the parties hereby agree as follows: 2 1. FORMATION TRANSACTIONS 1.1 Exchange of Summit Shares for Star Shares; Section 351. Effective as of the Effective Time (as defined in Section 1.3 below), CKE agrees to contribute and transfer to Star all of the issued and outstanding shares of capital stock of Summit (the "Summit Shares"), free and clear of any and all liens, claims, pledges, options, security interests, encumbrances and restrictions on transfer (other than restrictions imposed pursuant to applicable federal and state securities laws), in exchange for, and Star agrees to issue to CKE, Two Million Six Hundred Thousand (2,600,000) newly issued shares of common stock, par value $0.001 per share (the "Common Stock) of Star (the "Star Shares"). This Agreement is being entered into by the parties as part of a unified plan of contribution and exchange of stock (the "Plan") that is intended by the parties to qualify for non-recognition treatment under Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"). Such Plan is comprised of the transactions contemplated by this Agreement provided that none of the parties to this Agreement or such other agreements have made or are making any representations or warranties with respect to whether the transactions being consummated pursuant to and as part of such Plan will comply with the requirements of Code Section 351 or as to the consequences, under applicable federal, state or other tax laws, of such transactions to the parties to this Agreement or the parties to the other agreements and transactions that are part of the Plan. 1.2 Asset Transfers and Assumption of Liabilities. Prior to the Effective Time, Star, Summit and CKE shall, and shall cause their respective subsidiaries to, execute and deliver such agreements, instruments and other documents as may be necessary or appropriate to evidence the transactions contemplated by this Agreement. Notwithstanding the generality of the foregoing, prior to the closing of the Offering, CKE, Star and Summit shall cause (i) the entities, assets, operations and corresponding liabilities of the Buffet Restaurant Business to be included as part of the Star Group, and (ii) the entities, assets and operations and liabilities of the Star Group to be limited to the Buffet Restaurant Business. (a) Casa Bonita. Prior to the Effective Time, Casa Bonita shall transfer to Summit, and Summit shall accept from Casa Bonita, substantially all of the assets of Casa Bonita used in connection with the operation of the two Casa Bonita Restaurants described in Schedule 1.2(a) attached hereto (the "Casa Bonita Assets"), subject to the Casa Bonita Liabilities (as such term is defined in Section 1(d)(i) below, in consideration for an amount (subject to adjustment as provided in Section 1.5 below) equal to $495,000, representing the estimated net asset value of the Casa Bonita Restaurants (the "Casa Bonita Asset Transfer") pursuant to a Bill of Sale and Assumption of Liabilities in the form attached hereto as Exhibit A (the "Casa Bonita Bill of Sale"). The foregoing amount shall be paid by delivery of an interest free promissory note to Casa Bonita (the "Casa Bonita Note"). Star shall cause the Casa Bonita Note to be repaid in full from the net proceeds of the Offering. (b) Summit. Prior to the Effective Time, Summit shall transfer to JB's, and JB's shall accept from Summit, substantially all of Summit's assets (other than the outstanding shares of HTB and the Casa Bonita Assets), including, without limitation, all assets used by Summit relating to its JB's Restaurants and related franchise system and its Galaxy Diner restaurants and all interests (including leasehold interests) of Summit in and to any real property (collectively, the "JB's Assets"), subject to the JB's Liabilities (as such term is defined in Section 1(e) in consideration for an amount (subject to adjustment as provided in Section 1.5 below) equal to $________, representing the estimated net asset value of the JB's Assets (the "JB's Asset Transfer"), pursuant to a Bill of Sale and Assumption of Liabilities in the form attached hereto as Exhibit B (the "JB's Bill of Sale"). The foregoing amount shall be paid by delivery of a promissory note of JB's to Summit (the "JB's Note"). (c) Transfer of JB's Note. After the effectiveness of the JB's Asset Transfer, but prior to the Effective Time, Summit shall transfer to CKE, as a dividend, all of Summit's right, title and interest in and to -2- 3 the JB's Note (the "Note Transfer" and, collectively with the Casa Bonita Asset Transfer and the JB's Asset Transfer, the "Asset Transfers"). (d) Assumption of Liabilities by Star and Summit. (i) Casa Bonita Liabilities. As of the Effective Time, Summit agrees to assume and pay all contracts, obligations and liabilities of Casa Bonita or any other member of the CKE Group associated in any way with the Casa Bonita Assets or the operation of the Casa Bonita restaurants, whether accrued, absolute, contingent or otherwise, and whether due or to become due (collectively, the "Casa Bonita Liabilities"), except as provided herein as in the Casa Bonita Bill of Sale. The Casa Bonita Liabilities shall include, without limitation, all obligations of any member of the CKE Group acting as a guarantor of obligations of Casa Bonita which relate to the Casa Bonita Assets and all obligations of Casa Bonita under leases for real or personal property and other executory contracts and liabilities, whether arising as a result of the transactions contemplated hereby, existing on the date hereof or based on facts or actions arising on or prior to the Effective Date. (ii) Buffet Restaurant Liabilities. As of the Effective Time, Star agrees to assume and pay, or to cause a subsidiary entity included within the Star Group to assume and pay, all contracts, obligations and liabilities of each member of the CKE Group associated in any way with the Buffet Restaurant Business, whether accrued, absolute, contingent or otherwise, and whether due or to become due, including, without limitation, all obligations of any member of the CKE Group acting as a guarantor of obligations of the Buffet Restaurant Business, all obligations under leases and other executory contracts and liabilities, whether arising as a result of the transactions contemplated hereby, existing on the date hereof or based on facts or actions arising on or prior to the Effective Date, and all Retained Summit Liabilities (as defined below) (collectively, the "Assumed Liabilities"). (e) Assumption of Liabilities by JB's. As of the Effective Time, JB's agrees to assume and pay all contracts, obligations and liabilities of Summit and each member of the CKE Group associated in any way with the JB's Assets, whether accrued, absolute, contingent or otherwise, and whether due or to become due, including, without limitation, all obligations of Summit under any lease agreement for real or personal property and other executory contracts and liabilities, whether arising as a result of the transactions contemplated hereby, existing on the date hereof or based on facts or actions arising on or prior to the Effective Date (collectively, the "JB's Liabilities"); provided, however, that Summit shall retain full responsibility for the payment or performance and satisfaction of, and none of the CKE Group shall be deemed to have assumed, any obligation of Summit which, by the terms and provisions thereof, relates specifically to the Buffet Restaurant Business (the "Retained Summit Liabilities"). By way of example, the Retained Summit Liabilities include, without limitation, certain agreements executed by Summit in favor of the Franchisor with respect to the operations of the HomeTown Buffet restaurants operated by HTB, guarantees executed by Summit of any obligation of HTB, and Casa Bonita Liabilities. (f) Casa Bonita Name Change. Casa Bonita shall take all corporate actions necessary to amend its charter documents to change its name to "Taco Bueno Restaurants, Inc." (g) Special Dividend. Star agrees to declare prior to the issuance of shares of Common Stock of Star to the Underwriters pursuant to the Underwriting Agreement (subject to the completion of the Offering), and to pay to CKE, as sole stockholder of Star, a dividend in cash in an amount equal to $7,885,000. Such dividend shall be paid by Star upon completion of the Offering. 1.3 Effective Time. The "Effective Time" shall mean 6:00 a.m. Pacific Time on Tuesday, September 23, 1997, or such later time and date as CKE and Star may mutually agree. 1.4 Delayed Transfers. To the extent that any required consent with respect to the assignment, transfer or bifurcation of a contract, agreement, lease or other instrument included in the Casa Bonita Assets or the JB's Assets has not been obtained on or prior to the Effective Time and the transferor is unable (by sublease or otherwise) to transfer the legal benefit thereof to the transferee, such contract, agreement, lease or instrument (a "Delayed Asset") shall not be transferred and any related liability (a "Delayed Liability") shall not be assumed by the transferee as an Assumed Liability -3- 4 hereunder, unless and until such required consent has been obtained or the transferor is otherwise able to transfer the legal benefit thereof. Notwithstanding the foregoing, if such required consent to transfer is not obtained, CKE shall cause Casa Bonita to use its best efforts to attempt to provide to Summit the benefits of any such Delayed Assets which are Casa Bonita Assets and Star shall cause Summit to use its best efforts to attempt to provide to JB's the benefits of any such Delayed Assets which are JB's Assets. At such time and on each occasion after the Effective Time that a required consent shall be obtained with respect to a Delayed Asset, such Delayed Asset shall forthwith be deemed transferred and assigned as contemplated hereunder, and all related Delayed Liabilities shall be simultaneously assumed by the transferee hereunder, whereupon (i) such delayed asset shall constitute a JB's Asset or a Casa Bonita Asset, as the case may be, for all purposes hereunder and (ii) such delayed liability shall constitute an Assumed Liability for all purposes hereunder. 1.5 Post-Closing Adjustments. As soon as practicable, but in no event later than 45 days following the Effective Time, CKE shall prepare and deliver to Star statements of the net assets setting forth (a) with respect to the Casa Bonita Asset Transfer, the book values of the Casa Bonita Assets and the Casa Bonita Liabilities as of the Effective Time, and (b) with respect to the JB's Asset Transfer, the book values of the JB's Assets and the Assumed Liabilities as of the Effective Time (which shall be subject to adjustment pursuant to Section 1.7 below) Star shall provide CKE and its representatives with full access to the books, records, facilities and employees of the Star Group and corporate fully with CKE and CKE's representatives, including the provision on a timely basis of all necessary as useful information, in connection with the preparation of the foregoing statements of net assets. Upon receipt of such statements, Star shall have 30 days to review the statements and related work papers, and shall be deemed to have accepted and agreed to the statements and the adjustments resulting therefrom. Otherwise, CKE and Star shall use reasonable commercial efforts to resolve any differences, and any resolution by them as to any disputed amounts shall be final, binding and conclusive. Within ten Business Days following agreement by CKE and Star to the statements of net assets, (a) Summit shall pay to Casa Bonita the amount, if any, by which the net asset value of the Casa Bonita Assets and Casa Bonita Liabilities exceeds $495,000, or Casa Bonita shall pay to Summit the amount, if any, by which $495,000 exceeds such net asset value, and (b) JB's shall pay to Summit the amount, if any, by which the net asset value of the JB's Assets and Assumed Liabilities exceeds $_______, or Summit shall pay to JB's the amount, if any, by which $________ exceeds such net asset value. Any such payments made pursuant to this Section 1.5 shall be accompanied by interest, accrued from the Effective Time up to and including the date of payment, at the Base Rate of interest provided under CKE's primary secured credit facility. 1.6 Adjustments and Prorations. The parties agree to prorate as of the Effective Time, as appropriate, rents, taxes, insurance, utilities and similar items and to make such adjustments to the statements of net assets to be prepared pursuant to Section 1.5 above or to provide for direct reimbursement, as the case may be, in order to reasonably allocate to the party for whose benefit payments or accruals are made all such payments or accruals made prior to the Effective Time but which relate to periods from and after the Effective Time and for which no assumption of liabilities is provided in the Casa Bonita Bill of Sale or the JB's Bill of Sale, as the case may be. 1.7 Special Summit Adjustment. The net asset value of the JB's Assets to be determined pursuant to Section 1.5 above shall be adjusted, as appropriate, to the extent that the balance as of the Effective Time of the intercompany account balance between Summit and HTB is different than $7,885,000 million. Such difference, if a positive number, shall result in an increase to the net asset value of the JB's Assets and, if a negative number, shall result in a decrease to the net asset value of the JB's Assets. 2. OTHER AGREEMENTS 2.1 Letters of Credit. Star shall use its best efforts to cause the beneficiaries of all letters of credit, guarantees and other contingent liabilities relating to the Buffet Restaurant Business (including, without limitation, commercial letters of credit, financing guarantees, performance guarantees, and insurance and workers' compensation liabilities) which will not have expired on or prior to the Effective Date to release and terminate all such letters of credit, guarantees and contingent liabilities on or prior to the Effective Date and, where necessary or appropriate, to accept substitute letters of credit, guarantees or contingent liabilities issued for the account of Star or to post sufficient cash collateral on behalf of Star. From and after the Effective Date, Star will pay to CKE a fee based upon the maximum exposure related to any such letters of credit, guarantees and contingent liabilities which were not released, terminated or replaced prior to the Effective Date. Such fee will be structured consistent with the pricing for letter of credit fees under CKE's senior credit facility from time to time in effect, and shall at all times indemnify and hold each member of the CKE Group harmless from and against all losses, liabilities and obligations incurred with respect to such letters of credit, guarantees or contingent liabilities and shall pay or reimburse CKE, upon demand, within ten days for any amounts actually paid by any member of the CKE Group with respect thereto. -4- 5 2.2 Insurance. All policies of liability, fire, workers' compensation and other forms of insurance maintained by the CKE Group insuring the properties, assets and/or operations of the Buffet Restaurant Business or the Star Group shall continue in full force and effect up to and through the Effective Date and, shall be terminated effective 11:59 p.m. Pacific Time on the Effective Date. Any refunds of prepaid premiums with respect to such terminated insurance shall be for CKE's account. Star shall be liable for payment of all claims arising out of incidents, known or unknown, reported or unreported, which occur prior to, on or after the Effective Date with respect to any insurance programs relating to the Star Group. 2.3 Further Assurances. Each party shall execute and deliver such further instruments and take such further actions as the other party may reasonably request in order to carry out the intent of this Agreement and to consummate the transactions contemplated hereby. 2.4 Cooperation. Each of CKE, Star and Summit acknowledge and agree that because of the relationship between the parties prior to the Effective Time, a very high degree of cooperation between the parties will be necessary subsequent to the Effective Time in order to ensure a smooth and efficient transition. Each party therefore agrees to cooperate in good faith with the other party for the purpose of ensuring a smooth transition. Such cooperation shall be without charge (other than reimbursement of expenses) and shall include, but shall not be limited to, cooperating by each party in preparing, reviewing, analyzing and responding to inquiries, claims, requests, threats of litigation or actual litigation involving the business or the assets of the other party. 3. TAX MATTERS 3.1 Liability for Taxes and Related Matters. (a) CKE's Indemnification of Star. CKE shall be liable for and indemnify Star for all Taxes (as hereinafter defined) (including, without limitation, any obligation to contribute to the payment of a tax determined on a consolidated, combined or unitary basis with respect to a group of corporations that includes or included the Star Group and Taxes resulting from the members of the Star Group ceasing to be members of the CKE Group) (i) imposed on the CKE Group (other than the members of the Star Group) for any taxable year and (ii) imposed on the Star Group or for which the Star Group may otherwise be liable for any taxable year or period that ends on or before the Effective Date and, with respect to any taxable year or period beginning before and ending after the Effective Date, the portion of such taxable year ending on and including the Effective Date. CKE shall also indemnify, defend and hold harmless Star from all costs and expenses incurred by Star (including reasonable attorneys' fees and expenses) in connection with any liability to, or claim by, any taxing authority, for Taxes for which CKE is required to indemnify Star under this Section 3.1(a). Except as set forth in Section 3.1(d), CKE shall be entitled to any refund of Taxes of the Star Group received for such periods. (b) Star's Indemnification of CKE. Star shall be liable for and indemnify CKE for the Taxes of the Star Group for any taxable year or period that begins after the Effective Date and, with respect to any taxable year or period beginning before and ending after the Effective Date, the portion of such taxable year beginning after the Effective Date. Star shall also indemnify, defend and hold harmless CKE from all costs and expenses incurred by CKE (including reasonable attorneys' fees and expenses) in connection with any liability to, or claim by, any taxing authority, for Taxes for which Star is required to indemnify CKE under this Section 3.1(b). Star shall be entitled to any refund of Taxes of the Star Group received for such periods. (c) Taxes for Short Taxable Year. For purposes of paragraphs (a) and (b), whenever it is necessary to determine the liability for Taxes of the Star Group for a portion of a taxable year or period that begins before and ends after the Effective Date, the determination of the Taxes of the Star Group for the portion of the year or period ending on, and the portion of the year or period beginning after, the Effective Date shall be determined by assuming that the Star Group had a taxable year or period which ended at the close of the Effective Date, except that exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned on a time basis. (d) Refunds from Carrybacks. If CKE becomes entitled to a refund or credit of Taxes for any period for which it is liable under Section 3.1(a) to indemnify Star and such Taxes are attributable solely to the carryback of losses, credits or similar items attributable to the Star Group and from a taxable year or period that begins after the Effective Date, CKE shall promptly pay to Star the amount of such refund or credit together with any interest thereon. In the event that any refund or credit of Taxes for which a payment has been made is subsequently reduced or disallowed, Star shall indemnify and hold harmless CKE for any tax liability, including interest and penalties, assessed against CKE by reason of the reduction or disallowance. -5- 6 (e) Tax Returns. CKE shall file or cause to be filed when due all Tax Returns (as hereinafter defined) that are required to be filed by or with respect to the Star Group for taxable years or periods ending on or before the Effective Date and shall pay any Taxes due in respect of such Tax Returns, and Star shall file or cause to be filed when due all Tax Returns that are required to be filed by or with respect to the Star Group for taxable years or periods ending after the Effective Date and shall pay any Taxes due in respect of such Tax Returns. CKE shall pay Star the Taxes for which CKE is liable pursuant to Section 3.1(a) but which are payable with Tax Returns to be filed by Star pursuant to the previous sentence within ten days prior to the due date for the filing of such Tax Returns. (f) Contest Provisions. Star shall promptly notify CKE in writing upon receipt by Star, any of its affiliates or the Star Group of notice of any pending or threatened federal, state, local or foreign income or franchise tax audits or assessments which may materially affect the tax liabilities of the Star Group for which CKE would be required to indemnify Star pursuant to Section 3.1(a), provided that failure to comply with this provision shall not affect Star's right to indemnification hereunder. CKE shall have the sole right to represent the Star Group's interests in any tax audit or administrative or court proceeding relating to taxable periods ending on or before the Effective Date, and to employ counsel of its choice at its expense. Notwithstanding the foregoing, CKE shall not be entitled to settle, either administratively or after the commencement of litigation, any claim for Taxes which would adversely affect the liability for Taxes of Star or the Star Group for any period after the Effective Date to any extent (including, but not limited to, the imposition of income tax deficiencies, the reduction of asset basis or cost adjustments, the lengthening of any amortization or depreciation periods, the denial of amortization or depreciation deductions, or the reduction of loss or credit carry forwards) without the prior written consent of CKE. Such consent shall not be unreasonably withheld. CKE shall be entitled to participate at its expense in the defense of any claim for Taxes for a year or period ending after the Effective Date which may be the subject of indemnification by CKE pursuant to Section 3.1(a) and, with the written consent of Star, and at its sole expense, may assume the entire defense of such tax claim. Neither Star nor Summit nor any of the Star Group may agree to settle any tax claim for the portion of the year or period ending on the Effective Date which may be the subject of indemnification by CKE under Section 3.1(a) without the prior written consent of CKE, which consent shall not be unreasonably withheld. (g) Certain Definitions. For purposes of this Section 3, (i) the term "Tax" shall mean all federal, state, local or foreign income, gross receipts, windfall or excess profits, severance, property, production, sales, use, license, excise, franchise, employment, withholding or similar taxes, together with any interest, additions or penalties with respect thereto and any interest in respect of such additions or penalties, and (ii) the term "Tax Return" shall mean all federal, state, local or foreign tax returns, tax reports, and declarations of estimated tax, including without limitation consolidated federal income tax returns of the Star Group. 3.2 Assistance and Cooperation. After the Effective Date, each of CKE and Star shall: (i) assist (and cause their respective affiliates to assist) the other party in preparing any Tax Returns or reports which such other party is responsible for preparing and filing in accordance with this Agreement; (ii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Star Group; (iii) make available to the other and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Star Group; (iv) provide timely notice to the other in writing of any pending or threatened tax audits or -6- 7 assessments of the Star Group for taxable periods for which the other may have a liability under this Agreement, provided, that failure to comply with this provision shall not affect the other party's rights to indemnification hereunder; and (v) furnish the other with copies of all correspondence received from any taxing authority in connection with any tax audit or information request with respect to any such taxable period. 3.3 Tax Sharing Agreements. Any and all tax sharing, tax indemnity, or tax allocation agreements with respect to which Summit or any of its subsidiaries was a party at any time prior to the Effective Date shall terminate upon the Closing Date. No further amounts shall be payable by Star or any of its subsidiaries under such agreements following the Closing. 3.4 Survival of Obligations. The obligations of the parties set forth in this Section shall be unconditional and absolute and shall remain in effect without limitation as to time. 4. CONDITIONS PRECEDENT 4.1 Conditions Precedent to the Obligations of the Parties. The obligations of each of the parties to effect the transactions contemplated hereby are subject to the condition that, at the Effective Time, no (i) threatened, instituted or pending action, proceeding, application, claim or counterclaim by or before any court or governmental authority or agency seeking to restrain or prohibit the consummation of the transactions contemplated hereby or described in the Registration Statement or (ii) statute, rule, regulation, decree, order of injunction promulgated, enacted, entered or enforced by any court or governmental agency or authority restraining or prohibiting the consummation of such transactions. 5. INDEMNIFICATION 5.1 Indemnification. (a) CKE shall indemnify and hold harmless the Star Group and their respective officers, directors, employees, representatives, agents, successors and assigns (collectively, the "Star Group Indemnitees") against and in respect of any and all damages, claims, liabilities, expenses as incurred (including reasonable attorneys' fees) and losses (collectively "Damages") incurred by the Star Group Indemnitees that arise out of or relate to (i) any breach or violation of this Agreement by CKE; (ii) the conduct of CKE's business (excluding the Buffet Restaurant Business) prior to the Effective Time, or (iii) the conduct of CKE's business after the Effective Time; excluding therefrom any Damages relating to any Assumed Liabilities. (b) Star and Summit shall indemnify and hold harmless the CKE Group their respective officers, directors, employees, representatives, agents, successors and assigns (collectively, the "CKE Group Indemnitees") against and in respect of any and all Damages incurred by the CKE Group Indemnitees that arise out of or relate to (i) any breach or violation of this Agreement -7- 8 by Star or Summit or their respective subsidiaries, (ii) the conduct of the Buffet Restaurant Business after the Effective Time , and (iii) the Assumed Liabilities. 5.2 Indemnification Procedure. (a) Claims for Indemnification. Whenever any claim shall arise for indemnification hereunder, the party entitled to indemnification (the "indemnified party") shall promptly notify the other party or parties (the "indemnifying party") of the claim and, when known, the facts constituting the basis for such claim; provided that the indemnified party's failure to give such notice shall not affect any rights or remedies of an indemnified party hereunder with respect to indemnification for damages except to the extent that the indemnifying party is materially prejudiced thereby. In the event of any claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a third party, the notice to the indemnifying party shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The indemnified party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder without the prior written consent of the indemnifying party (which shall not be unreasonably withheld) unless suit shall have been instituted against it and the indemnifying party shall not have taken control of such suit after notification thereof as provided in Section 5.2(b) of this Agreement. (b) Defense by Indemnifying Party. In connection with any claim giving rise to indemnity hereunder or resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the indemnifying party at its sole cost and expense may, upon written notice to the indemnified party, assume the defense of any such claim or legal proceeding if it acknowledges to the indemnified party in writing its obligations to indemnify the indemnified party with respect to such claim, and thereafter diligently conducts the defense thereof with counsel reasonably acceptable to the indemnified party. The indemnified party shall be entitled to participate in (but not control) the defense of any such action, with its counsel and at its own expense. If the indemnifying party does not assume or fails to conduct in a diligent manner the defense of any such claim or litigation resulting therefrom, (a) the indemnified party may defend against such claim or litigation, in such manner as it may deem appropriate, including, but not limited to, settling such claim or litigation, after giving notice of the same to the indemnifying party, on such terms as the indemnified party may deem appropriate, and (b) the indemnifying party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the indemnifying party thereafter seeks to question the manner in which the indemnified party defended such third party claim or the amount or nature of any such settlement, the indemnifying party shall have the burden to prove by a preponderance of the evidence that the indemnified party did not defend or settle such third party claim in a reasonably prudent manner. Each party agrees to cooperate fully with the other, such cooperation to include, without limitation, attendance at depositions and the provision of relevant documents as may be reasonably requested by the indemnifying party, provided that the indemnifying party will hold the indemnified party harmless from all of its expenses, including reasonable attorney's fees, incurred in connection with such cooperation by the indemnified party. 6. MISCELLANEOUS 6.1 Notices. All notices, requests, demands and other communications provided for hereunder shall be in writing (including telegraphic or facsimile communications)) and shall be mailed (return receipt requested), telegraphed, sent by facsimile or hand delivered to each party at the address set forth as follows, or at such other address as either party may designate by notice to the others, and any such notice, request, demand or other communications shall be effective upon receipt: -8- 9 If to CKE: CKE Restaurants, Inc. 1200 North Harbor Boulevard Anaheim, California 92801 Attn: Chief Financial Officer If to Summit: Summit Family Restaurants Inc. 440 Lawndale Drive Salt Lake City, Utah 84115-2917 Attn: Chief Financial Officer If to Star: Star Buffet, Inc. 440 Lawndale Drive Salt Lake City, Utah 84115-2917 Attn: Chief Financial Officer 6.2 Amendments. This Agreement shall not be amended, changed, modified, terminated or discharged in whole or in part except by an instrument in writing signed by all parties, or their respective successors or assigns, or otherwise as provided herein. 6.3 Attorneys' Fees. In the event of any dispute arising out of or in connection with this Agreement, and any other documents executed pursuant, the prevailing party, in addition to any other amounts which it may be entitled to, shall be entitled to recover from the other party reasonable attorneys' fees and court costs as shall be awarded in the resolution of such dispute. 6.4 Entire Agreement. This Agreement contains the entire agreement between the parties pertaining to the subject matter hereof. This Agreement supersedes all prior written agreements and all prior or contemporaneous verbal agreements with respect to the subject matter hereof. 6.5 Waiver. Any forbearance by a party to this Agreement in exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of that or any other right or remedy. 6.6 Headings. The section headings hereof have been inserted for convenience of reference only and shall not be construed to affect the meaning, construction or effect of this Agreement. 6.7 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity of any other provision, and all other provision, and all other provisions shall remain in full force and effect. 6.8 Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State, without regard to conflicts of laws principles. 6.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original, and all of which taken together shall counterparts, each of which when so executed shall be deemed an original, and all of which taken together shall constitute one and the same instrument. -9- 10 IN WITNESS WHEREOF, this Agreement is executed on behalf of the parties by duly authorized representatives as of the date first above written. CKE RESTAURANTS, INC. By: -------------------------------- Name: Title: SUMMIT FAMILY RESTAURANTS INC. By: -------------------------------- Name: Title STAR BUFFET, INC. By: -------------------------------- Name: Title: CASA BONITA INCORPORATED By: -------------------------------- Name: Title: JB'S RESTAURANTS, INC. By: -------------------------------- Name: Title: -10- EX-10.10 6 FORM OF BILL OF SALE AND ASSUMPTION 1 EXHIBIT 10.10 BILL OF SALE AND ASSUMPTION OF LIABILITIES ------------------------------------------ (Casa Bonita Incorporated to Summit Family Restaurants Inc.) This Bill of Sale and Assumption of Liabilities, entered into effective as of 6:00 a.m., Pacific time, on September 23, 1997 ("Bill of Sale"), is executed and delivered between (i) Casa Bonita Incorporated, a Texas corporation ("CB") and indirect wholly-owned subsidiary of CKE Restaurants, Inc. ("CKE"), and (ii) Summit Family Restaurants Inc., a Delaware corporation ("Summit") and a wholly-owned subsidiary of CKE pursuant to the Contribution Agreement, dated as of September , 1997, by and among CKE, Summit, CB and others (the "Contribution Agreement"). ARTICLE 1 --------- Definitions ----------- The following definitions shall for all purposes apply to the terms used in this Bill of Sale. (a) "Assets" means all of CB's assets, properties and rights of every kind, character and description, whether tangible or intangible, whether real, personal or mixed, whether accrued or contingent, and wherever located that are related to or used in the operation of the Casa Bonita Restaurants (other than Excluded Assets), including, without limitation, CB's entire right, title and interest in and to the following, as the same shall exist at and as of the time and date hereof: (1) All of the equipment, furniture, fixtures, trade fixtures, signs, sign poles, machinery, kitchen equipment, computers, cash registers, menus, uniforms, small equipment, small wares and other tangible personal property located at and used in connection with the operation of the Casa Bonita Restaurants; (2) All inventories of food products and supplies purchased by CB for use in connection with the Casa Bonita Restaurants; (3) All of the agreements relating to the Casa Bonita Restaurants under which CB owns or holds any leasehold interest in real property, including any buildings and improvements thereon, or leases in personal property, whether tangible or intangible (collectively, the "Leases"); (4) All of the agreements, contracts, licenses, instruments, commitments and understandings, written or oral, that are related to or required for the operation of the Casa Bonita Restaurants (collectively, the "Assigned Contracts"); (5) All rights in and to any governmental and private permits, licenses, certificates of occupancy, franchises and authorizations, to the extent assignable, used in or relating to the Casa Bonita Restaurants; (6) All rights in and to any processes, recipes, menus, formulations, methods, software (including documentation), technology, know-how, formulae, trade secrets, trade dress, inventions, patents, copyrights, copyright registrations, trade names, trademarks and service marks (and federal and state registrations thereof), and all applications therefor, owned or held by CB and 2 used in connection with the operation of or relating to the Casa Bonita Restaurants which shall include, without limitation, all goodwill associated therewith; (7) All financial books and accounting records, and all files, lists, publications, and other records and data used in or relating to the Casa Bonita Restaurants, including, without limitation, lists of suppliers and distributors and related files, environmental records, price lists, marketing plans, sales records, labor relations and employee compensation records, and maintenance records, regardless of the medium on which such information is stored or maintained; (8) All cash on hand (store drawer and safe) at the Casa Bonita Restaurants; (9) All prepaid fees and deposits associated with any Assigned Contracts or with the operation of the Casa Bonita Restaurants (including, without limitation, a $50,000 deposit with Sygma), and all prepaid rents, property taxes and repairs and maintenance supplies and similar prepaid expense items (subject to proration as provided in the Contribution Agreement); (10) Any cause of action, claim, suit, proceeding, judgment or demand, of whatsoever nature, of or held by CB against any third parties arising out of the Assets or the Casa Bonita Restaurants; and (11) All goodwill associated with the Casa Bonita Restaurants and the Assets. (b) "Assumed Liabilities" means all of CB's liabilities, duties and obligations, other than Excluded Liabilities, of every kind, character and description, whether known or unknown, whether matured or unmatured and whether accrued or contingent related to the Assets and the Casa Bonita Restaurants (other than Excluded Liabilities) and including, without limitation, the following: (1) All current liabilities of CB arising out of the operation of the Casa Bonita Restaurants; (2) All unperformed and unfulfilled obligations of CB under all Assigned Contracts and all purchase orders, commitments and undertakings related to the Casa Bonita Restaurants; (3) all accrued vacation and bonus, and workers' compensation general liability reserves related to the Casa Bonita Restaurants; and (4) All other liabilities, duties and obligations arising from CB's operations of the Casa Bonita Restaurants including, without limitation, those executory obligations arising after the date hereof under the Assigned Contracts and the Leases. (c) "Casa Bonita Restaurants" means the two Mexican-themed restaurants operated under the Casa Bonita name which are located at the addresses set forth on Schedule 1 attached hereto. (d) "Excluded Assets" shall mean, and CB shall retain all of its right, title and interest in and to, all Unit Depository Accounts maintained by CB and all accounts receivable arising from the Casa Bonita Restaurants to and including the date of this Bill of Sale. (e) "Excluded Liabilities" shall mean, and CB shall remain solely responsible for the payment of, all of CB's obligations as of the date of this Bill of Sale for trade accounts payable and accrued payroll and taxes. -2- 3 ARTICLE 2 --------- Conveyances ----------- (a) For the consideration described in the Contribution Agreement, in consideration of the assumption by Summit of the Assumed Liabilities and the delivery by Summit to CB of a promissory note in the principal amount of [$495,000], which reflects CB's book value of the net Assets (i.e., the sum of the book values of the Assets less the book value of the Assumed Liabilities), and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, CB hereby grants, assigns, transfers and delivers to Summit all of its right, title and interest to the Assets, at and as of the time and date hereof. TO HAVE AND TO HOLD all the foregoing Assets to its own use forever. (b) In the event that the transfer and assignment attempted to be made hereunder of any right, title or interest in, to or under any agreement, easement, right-of-way, lease, permit, license, right, claim or other Asset would be ineffective as between CB and Summit or would violate any applicable law or regulation without the order, approval, waiver or consent of any person or entity, or would serve as a cause for modifying, terminating or invalidating any such agreement, easement, right-of-way, lease, permit, license, right, claim or other Assets, or would cause or serve as a cause for the loss, or the modification of the terms, or ownership thereof or the right, title of interest therein, then, notwithstanding the foregoing, such Asset shall be temporarily excluded from the aforesaid conveyance and assignment; provided, however, that, in any event, CB shall, to the greatest extent permitted, hold such right, title or interest for the exclusive use and benefit of Summit and its successors and assigns until such order, approval, waiver or consent has been obtained or until, following the exhaustion of all challenges and appeals, it is finally determined that no such order, approval, waiver or consent will be obtained, at which time such right, title or interest shall automatically and with no further action or consideration in respect thereof be excluded from this Bill of Sale; and provided, further, that, without further consideration therefor, CB and Summit shall execute such other and further documents, and shall take such other and further actions, as shall be reasonably necessary to transfer, convey and assign to Summit any right, title or interest excluded from this Bill of Sale pursuant to the preceding proviso. Upon the obtaining of such order, approval, wavier or consent, no further conveyance or assignment shall be required, but such right, title or interest shall automatically and with no further action or consideration therefor become fully and completely vested in Summit by virtue of this Bill of Sale. ARTICLE 3 --------- Assumption of Liabilities ------------------------- For the consideration described in the Contribution Agreement, in consideration of the contribution of the Assets to Summit and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Summit hereby assumes the Assumed Liabilities at and as of the time and date hereof, and agrees to pay, perform and discharge all of the Assumed Liabilities promptly when due or when required to be performed. -3- 4 ARTICLE 4 --------- Power of Attorney ----------------- CB does hereby constitute and appoint Summit, its successors and assigns the true and lawful attorney-in-fact of CB with full power and substitution for it and in its name, place and stead or otherwise by or on behalf of CB, its successors and assigns and for the benefit of Summit, its successors and assigns, to demand and receive from time to time any and all moneys, property and assets, real, personal and mixed, tangible and intangible, hereby transferred and assigned or intended so to be and to make, execute, acknowledge, swear to and file in the name of the CB and its successors and assigns any deeds, assignments, notices, filings, applications, registrations and other instruments of further assurance and transfer and registration of the same and to give receipts and releases in respect of the same, and from time to time, to institute and prosecute in the name of Summit, or CB for the benefit of Summit, any and all proceedings at law, in equity or otherwise which Summit, its successors and assigns may deem proper in order to collect, assert, perfect, improve or enforce any claims, rights, interest or title of any kind in and to the Assets, and to defend and compromise any and all actions, suits or proceedings in respect of any of the Assets and to do any and all such acts and things in furtherance of the purposes of this Bill of Sale as Summit, its successors or assigns shall deem advisable. CB hereby declares that the appointment hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by an act of CB or its successors or assigns, by the bankruptcy, insolvency or dissolution of CB or any successor thereto or assign thereof or otherwise by operation of law. ARTICLE 5 --------- Governing Law ------------- This Bill of Sale shall be governed by and construed and enforced in accordance with the laws of the State of California. IN WITNESS WHEREOF, this Bill of Sale has been duly executed by the parties hereto as of the date first above written. CASA BONITA INCORPORATED, a Texas corporation By: ------------------------------------- Its: -------------------------------- SUMMIT FAMILY RESTAURANTS INC., a Delaware corporation By: ------------------------------------- Its: -------------------------------- -4- EX-10.11 7 FORM OF BILL OF SALE AND ASSUMPTION 1 EXHIBIT 10.11 BILL OF SALE AND ASSUMPTION OF LIABILITIES (Summit Family Restaurants Inc. to JB's Restaurants, Inc.) This Bill of Sale and Assumption of Liabilities, entered into effective as of 6:00 a.m., Pacific time, on September 22, 1997 ("Bill of Sale"), is executed and delivered between (i) Summit Family Restaurants Inc., a Delaware corporation ("Summit") and a wholly-owned subsidiary of CKE Restaurants, Inc. ("CKE"), and (ii) JB's Restaurants, Inc., a Delaware corporation and a wholly-owned subsidiary of CKE ("JB's") pursuant to the Contribution Agreement, dated as of September , 1997, by and among CKE, Summit, JB's and others (the "Contribution Agreement"). ARTICLE 1 Definitions The following definitions shall for all purposes apply to the terms used in this Bill of Sale. (a) "Assets" means all of Summit's assets, properties and rights of every kind, character and description, whether tangible or intangible, whether real, personal or mixed, whether accrued or contingent, and wherever located, including, without limitation, all such assets, properties and rights relating to Summit's JB's Restaurants and related franchise system and its Galaxy Diner restaurants (the "Restaurant Operations"), all interests (including leasehold interests) of Summit in and to any real property, and Summit's entire right, title and interest in and to the following, as the same shall exist at and as of the time and date hereof: (1) All of the equipment, furniture, fixtures, trade fixtures, signs, sign poles, machinery, kitchen equipment, computers, cash registers, menus, uniforms, small equipment, small wares and other tangible personal property; (2) All inventories of food products and supplies; (3) All of the agreements under which Summit owns or holds any leasehold interest in real property, including any buildings and improvements thereon, or leases in personal property, whether tangible or intangible (collectively, the "Leases"); (4) All of the Franchise Agreements and other agreements, contracts, licenses, instruments, commitments and understandings, written or oral, that are related to or required for the operation of the Restaurant Operations (collectively, the "Assigned Contracts"); (5) All rights in and to any governmental and private permits, licenses, certificates of occupancy, franchises and authorizations, to the extent assignable, used in or relating to the Restaurant Operations; (6) All rights in and to any processes, recipes, menus, formulations, methods, software (including documentation), technology, know-how, formulae, trade secrets, trade dress, inventions, patents, copyrights, copyright registrations, trade names, trademarks and service marks (and federal and state registrations thereof), and all applications therefor, owned or held by Summit and 2 used in connection with the operation of or relating to the Restaurant Operations which shall include, without limitation, all goodwill associated therewith; (7) All financial books and accounting records, and all files, lists, publications, and other records and data used in or relating to the Restaurant Operations, including, without limitation, lists of suppliers and distributors and related files, environmental records, price lists, marketing plans, sales records, labor relations and employee compensation records, and maintenance records, regardless of the medium on which such information is stored or maintained; (8) All cash on hand; (9) All prepaid fees and deposits associated with any Assigned Contracts or with the Restaurant Operations and all prepaid rents, property taxes and repairs and maintenance supplies and similar prepaid expense items; (10) Any cause of action, claim, suit, proceeding, judgment or demand, of whatsoever nature, of or held by Summit against any third parties arising out of the Assets; and (11) All goodwill associated with the Assets. provided, however, that the Assets shall not include the assets, rights or properties identified on Annex A hereto (the "Excluded Assets"), which shall be retained by Summit. (b) "Assumed Liabilities" means all of Summit's liabilities, duties and obligations, other than Excluded Liabilities, of every kind, character and description, whether known or unknown, whether matured or unmatured and whether accrued or contingent, and including, without limitation, the following: (1) All liabilities of Summit arising out of the Restaurant Operations (including, without limitation, liabilities arising under all Franchise Agreements and obligations to Franchisees); (2) All unperformed and unfulfilled obligations of Summit under all Assigned Contracts and all purchase orders, commitments and undertakings; and (3) All other liabilities, duties and obligations arising from the Restaurant Operations including, without limitation, those executory obligations arising after the date hereof under the Assigned Contracts and the Leases; provided, however, that the Liabilities shall not include the liabilities, duties and obligations identified on Annex B hereto (the "Excluded Liabilities"), for which Summit shall remain solely responsible. (c) "Franchise Agreements" shall mean all agreements pursuant to which Summit has granted to any other person or entity (a "Franchisee") the right or license to operate any JB's Restaurant. -2- 3 ARTICLE 2 Conveyances (a) For the consideration described in the Contribution Agreement, in consideration of the assumption by JB's of the Assumed Liabilities and the delivery by JB's to Summit of a promissory note in the principal amount of $___________, which reflects Summit's book value of the net Assets (i.e., the sum of the book values of the Assets less the book value of the Assumed Liabilities), and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Summit hereby grants, assigns, transfers and delivers to JB's all of its right, title and interest to the Assets, at and as of the time and date hereof. TO HAVE AND TO HOLD all the foregoing Assets to its own use forever. (b) In the event that the transfer and assignment attempted to be made hereunder of any right, title or interest in, to or under any agreement, easement, right-of-way, lease, permit, license, right, claim or other Asset would be ineffective as between Summit and JB's or would violate any applicable law or regulation without the order, approval, waiver or consent of any person or entity, or would serve as a cause for modifying, terminating or invalidating any such agreement, easement, right-of-way, lease, permit, license, right, claim or other Assets, or would cause or serve as a cause for the loss, or the modification of the terms, or ownership thereof or the right, title of interest therein, then, notwithstanding the foregoing, such Asset shall be temporarily excluded from the aforesaid conveyance and assignment; provided, however, that, in any event, Summit shall, to the greatest extent permitted, hold such right, title or interest for the exclusive use and benefit of JB's and its successors and assigns until such order, approval, waiver or consent has been obtained or until, following the exhaustion of all challenges and appeals, it is finally determined that no such order, approval, waiver or consent will be obtained, at which time such right, title or interest shall automatically and with no further action or consideration in respect thereof be excluded from this Bill of Sale; and provided, further, that, without further consideration therefor, Summit and JB's shall execute such other and further documents, and shall take such other and further actions, as shall be reasonably necessary to transfer, convey and assign to JB's any right, title or interest excluded from this Bill of Sale pursuant to the preceding proviso. Upon the obtaining of such order, approval, wavier or consent, no further conveyance or assignment shall be required, but such right, title or interest shall automatically and with no further action or consideration therefor become fully and completely vested in JB's by virtue of this Bill of Sale. ARTICLE 3 Assumption of Liabilities For the consideration described in the Contribution Agreement, in consideration of the contribution of the Assets to JB's and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, JB's hereby assumes the Assumed Liabilities at and as of the time and date hereof, and agrees to pay, perform and discharge all of the Assumed Liabilities promptly when due or when required to be performed. -3- 4 ARTICLE 4 Power of Attorney Summit does hereby constitute and appoint JB's, its successors and assigns the true and lawful attorney-in-fact of Summit with full power and substitution for it and in its name, place and stead or otherwise by or on behalf of Summit, its successors and assigns and for the benefit of JB's, its successors and assigns, to demand and receive from time to time any and all moneys, property and assets, real, personal and mixed, tangible and intangible, hereby transferred and assigned or intended so to be and to make, execute, acknowledge, swear to and file in the name of Summit and its successors and assigns any deeds, assignments, notices, filings, applications, registrations and other instruments of further assurance and transfer and registration of the same and to give receipts and releases in respect of the same, and from time to time, to institute and prosecute in the name of JB's, or Summit for the benefit of JB's, any and all proceedings at law, in equity or otherwise which JB's, its successors and assigns may deem proper in order to collect, assert, perfect, improve or enforce any claims, rights, interest or title of any kind in and to the Assets, and to defend and compromise any and all actions, suits or proceedings in respect of any of the Assets and to do any and all such acts and things in furtherance of the purposes of this Bill of Sale as JB's, its successors or assigns shall deem advisable. Summit hereby declares that the appointment hereby made and the powers hereby granted are coupled with an interest and are and shall be irrevocable and perpetual and shall not be terminated by an act of Summit or its successors or assigns, by the bankruptcy, insolvency or dissolution of Summit or any successor thereto or assign thereof or otherwise by operation of law. ARTICLE 5 Governing Law This Bill of Sale shall be governed by and construed and enforced in accordance with the laws of the State of California. IN WITNESS WHEREOF, this Bill of Sale has been duly executed by the parties hereto as of the date first above written. SUMMIT FAMILY RESTAURANTS INC., a Delaware corporation By:______________________________ Its:__________________________ JB'S RESTAURANTS, INC., a Delaware corporation By:______________________________ Its:__________________________ -4- 5 ANNEX A ------- EXCLUDED ASSETS --------------- 1. All of the issued and outstanding shares of capital stock of HTB Restaurants, Inc. ("HTB") owned, beneficially as of record, by Summit. 2. The Casa Bonita Assets (as such term is defined in the Contribution Agreement). 3. Leases and Assigned Contracts, to the extent subleased or otherwise held by Summit for the benefit of or used by HTB in connection with the operation of its restaurants. 6 ANNEX B ------- EXCLUDED LIABILITIES -------------------- 1. All obligations of Summit assumed pursuant to the Contribution Agreement with respect to the Casa Bonita Restaurants. 2. All obligations of Summit under Leases and Assigned Contracts included in Item 3 of the definition of Excluded Assets in Annex A. 3. All obligations and liabilities of Summit, if any, arising under or relating to the franchise agreements between HTB Restaurants, Inc. ("HTB") and HomeTown Buffet, Inc. or the restaurant operations of HTB. EX-21.1 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES
Jurisdiction Percentage Name of Incorporation Ownership - ---- ---------------- ---------- Summit Family Restaurants Inc. Delaware 100% HTB Restaurants, Inc. Delaware 100%(1) Northstar Buffet, Inc. Delaware 100% Star Buffet Management, Inc. Delaware 100%
- ---------- (1) Owned by Summit Family Restaurants, Inc.
EX-23.2 9 CONSENTS OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.2 The Board of Directors Star Buffet, Inc.: We consent to the use of our report for Casa Bonita Restaurants included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Orange County, California September 22, 1997 2 EXHIBIT 23.2 The Board of Directors Star Buffet, Inc.: We consent to the use of our report for North's Restaurants included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Portland, Oregon September 22, 1997 3 EXHIBIT 23.2 The Board of Directors Star Buffet, Inc.: We consent to the use of our report for Star Buffet, Inc. included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Orange County, California September 22 1997 4 EXHIBIT 23.2 The Board of Directors Star Buffet, Inc.: We consent to the use of our report for HTB Restaurants, Inc. included herein and to the reference to our firm under the headings "Selected Combined Financial Data" and "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Orange County, California September 22, 1997
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