<PAGE> 1
This filing is made pursuant
to Rule 424(b)(1) under
the Securities Act of
1933 in connection with
Registrations No. 333-32249
and 333-36343
3,000,000 SHARES
[STAR BUFFET LOGO]
COMMON STOCK
------------------------
Of the 3,000,000 shares of Common Stock offered hereby, 2,400,000 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 40.0%
of the outstanding shares of Common Stock (approximately 36.7% 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. See "Underwriting" for a discussion of factors 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."
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.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER(2)
- -------------------------------------------------------------------------------------------------
Per Share............ $12.00 $0.84 $11.16 $11.16
- -------------------------------------------------------------------------------------------------
Total(3)............. $36,000,000 $2,520,000 $26,784,000 $6,696,000
=================================================================================================
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses estimated at $700,000, of which $560,000 are
payable by the Company and $140,000 are payable by the Selling Stockholder.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 450,000 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 $41,400,000, $2,898,000 and
$31,806,000, 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
September 30, 1997.
EQUITABLE SECURITIES CORPORATION
EVEREN SECURITIES, INC.
CRUTTENDEN ROTH INCORPORATED
September 24, 1997
<PAGE> 2
[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
<PAGE> 3
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
<PAGE> 4
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 40.0% of the outstanding Common Stock (approximately 36.7% 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 HTB has used to
improve the operations of its HomeTown Buffet restaurants. See "Risk
Factors -- Risks Associated with the North Acquisition."
4
<PAGE> 5
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 buffet 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
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.............. 2,400,000 shares
Common Stock offered by the Selling
Stockholder.................................... 600,000 shares
Common Stock to be outstanding after this
offering....................................... 5,000,000 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 up
to $7.0 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 Pro-
ceeds."
Nasdaq National Market symbol.................... STRZ
Risk Factors..................................... See "Risk Factors" for certain factors
that should be considered by prospective
purchasers of the Common Stock.
</TABLE>
- ---------------
(1) Excludes 608,308 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
<PAGE> 7
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 and unaudited pro
forma financial data 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.
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------------- SUCCESSOR
---------
TWENTY-
THIRTY EIGHT FIFTY-TWO PREDECESSOR SUCCESSOR
----------- ---------------------------
TWENTY-EIGHT WEEKS ENDED
FIFTY-TWO WEEKS -----------------------------------------
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)
-------- -------- ---------- --------- ------------ ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.................. $ 0.09 $ 0.30
Common shares used in
computing per share
amounts (in
thousands)............. 5,000 5,000
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
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR
------------------------
AUGUST 11, 1997
------------------------
ACTUAL PRO FORMA(1)
--------- ------------
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Total assets.......................................................................................... $17,745 $ 43,352
Total long-term debt and capital lease obligations, including current portion......................... 2,479 9,479
Stockholders' equity.................................................................................. 10,589 28,433
</TABLE>
- ---------------
(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
<PAGE> 8
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 40.0% of the Company's outstanding Common Stock following the
completion of this offering (approximately 36.7% 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
stockholders of the
8
<PAGE> 9
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
<PAGE> 10
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
<PAGE> 11
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
<PAGE> 12
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 was 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
<PAGE> 13
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 5,000,000 shares of Common Stock outstanding, of which
only the 3,000,000 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 608,308
shares of Common Stock will be outstanding, of which options to purchase 263,159
will be immediately exercisable. Shares issuable upon the exercise of any such
vested options which are held by officers or directors of the Company are
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 $6.56 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
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,400,000 shares of
Common Stock offered by the Company hereby are estimated to be $26.2 million
($31.2 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 up to $7.0 million
of the net proceeds to acquire the same 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
<PAGE> 15
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 2,400,000 shares of Common Stock offered by the Company hereby 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.
<TABLE>
<CAPTION>
AS OF AUGUST 11, 1997
---------------------------
ACTUAL PRO FORMA
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
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, 5,000,000 shares outstanding on a
pro forma basis(1).............................................. -- 5
Additional paid-in capital......................................... 9,272 27,111
Retained earnings.................................................. 1,317 1,317
------- -------
Total stockholders' equity......................................... 10,589 28,433
------- -------
Total capitalization....................................... $12,820 $36,264
======= =======
</TABLE>
- ---------------
(1) Excludes 608,308 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
<PAGE> 16
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 as of August 11, 1997. The number of outstanding
shares used for the per share calculation was 2,600,000, 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 2,400,000 shares of Common Stock offered
by the Company in this offering and after 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 $27.2
million, or $5.44 per share. This represents an immediate dilution in unaudited
pro forma net tangible book value of $6.56 per share to new investors purchasing
Common Stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................... $12.00
Unaudited pro forma net tangible book value per share
as of August 11, 1997............................................ $ 3.88
Increase per share attributable to new investors.................... 4.78
Decrease per share attributable to the payment of the
Special Dividend and the Casa Bonita Note........................ (3.22)
------
Unaudited pro forma net tangible book value per share after this
offering............................................................ 5.44
------
Dilution per share to new investors................................... $ 6.56
======
</TABLE>
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 (before deducting the estimated underwriting
discount and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholder(2)........ 2,600,000 52.0% $ 2,209,000 7.1% $ 0.85
New Investors(2)............... 2,400,000 48.0 28,800,000 92.9 12.00
--------- ----- ----------- -----
Total................ 5,000,000 100.0% $31,009,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(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 initial public
offering price of $12.00 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 40.0% of the outstanding shares of
Common Stock, and will increase the number of shares held by new investors
to 3,000,000, or 60.0% of the outstanding shares of Common Stock.
The foregoing tables assume no exercise of the Underwriters' over-allotment
option and excludes options to purchase 608,308 shares of Common Stock to be
granted to certain employees and non-employee directors of the Company upon the
closing of this offering. The foregoing tables also exclude 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
<PAGE> 17
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
<PAGE> 18
SELECTED COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
---------------------------------------------------- SUCCESSOR
---------
TWENTY-
THIRTY EIGHT
PREDECESSOR SUCCESSOR
----------- ---------
TWENTY-EIGHT WEEKS ENDED
FIFTY-TWO WEEKS ENDED WEEKS WEEKS
----------------------------------------- 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
18
<PAGE> 19
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
<PAGE> 20
STAR BUFFET, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF AUGUST 11, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------
SUCCESSOR
COMPANY NORTH'S
AUGUST RESTAURANTS
11, JUNE 30, PRO FORMA PRO FORMA
1997 1997 ADJUSTMENTS COMBINED
--------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Current assets:
Cash....................................................... $ 725 $ 17 $ 15,644A,D,K $ 16,386
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 15,699 17,394
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 $ 21,120 $ 43,352
======= ======= ======== =======
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) 27,782C,D 28,433
------- ------- -------- -------
Total liabilities and stockholders' equity......... $17,745 $ 4,487 $ 21,120 $ 43,352
======= ======= ======== =======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
20
<PAGE> 21
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)
<TABLE>
<CAPTION>
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
-------- --------- ----------- ------------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 350I 2,938
Depreciation and
amortization.... 914 (169) 745 988 1,733 635 301J,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 17E,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 $ 0.09
======= =======
Common shares used
in computing per
share amounts..... 2,600 5,000
======= =======
</TABLE>
- ---------------
(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
<PAGE> 22
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)
<TABLE>
<CAPTION>
HISTORICAL
-----------------------
SUCCESSOR
COMPANY NORTH'S
AUGUST RESTAURANTS
11, JUNE 30, PRO FORMA PRO FORMA
1997 1997 ADJUSTMENTS COMBINED
--------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
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 188I 1,421
Depreciation and amortization.................. 1,129 265 162J,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 $ 0.30
======= =======
Common shares used in computing per share
amounts........................................ 2,600 5,000
======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
22
<PAGE> 23
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 $26.224 million from the sale
of 2,400,000 shares of Common Stock offered by the Company (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) $26,224,000, ($7,885,000), ($495,000);
(K) ($1,700,000) = $15,644,000
(2) Stockholders' Equity: (C) $9,938,000; (D)
$17,844,000 = $27,782,000
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
<PAGE> 24
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
<PAGE> 25
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 weeks
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.
<TABLE>
<CAPTION>
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
-------- -------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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%
===== ===== ===== ===== ===== =====
</TABLE>
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 was primarily
25
<PAGE> 26
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 was 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 was 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 was primarily 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 weeks ended January 27, 1997 from 29.3% for the thirty weeks
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
<PAGE> 27
percentage of total revenues increased to 22.3% during the twenty-eight weeks
ended January 27, 1997 from 21.7% for the thirty weeks 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
twenty-eight weeks 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 weeks ended July
15, 1996. The increase was primarily attributable to the payment of severance
costs during the thirty weeks ended July 15, 1996. General and administrative
expenses as a percentage of total revenues decreased to 2.6% during the
twenty-eight weeks ended January 27, 1997 from 5.1% for the thirty weeks 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 weeks 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 weeks ended
January 27, 1997 as compared with 3.9% for the thirty weeks 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 weeks 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 weeks ended July 15,
1996 to 3.9% for the twenty-eight weeks 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% in Fiscal 1994 to
3.4% in Fiscal 1995. The increase as a percentage of total revenues was due to
the opening of
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<PAGE> 28
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 weeks ended
July 15, 1996 and the twenty-eight weeks ended January 27, 1997, respectively.
Cash provided by operations was approximately $1.6 million and $2.9 million for
the twenty-eight weeks 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. 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.
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<PAGE> 29
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.
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<PAGE> 30
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 40.0% of the
outstanding Common Stock (approximately 36.7% 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.
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<PAGE> 31
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:
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<PAGE> 32
- 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 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
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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 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
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under the Acquisition Agreement to the Company. The Company has also agreed to
enter into an employment 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. See "Risk Factors -- Risks
Associated with the North Acquisition."
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
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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 10,200 square feet with
seating for approximately 375 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:
<TABLE>
<CAPTION>
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
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(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.
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The chart below sets forth certain data with respect to the Company's Casa
Bonita restaurants:
<TABLE>
<CAPTION>
TWENTY-EIGHT
FIFTY-TWO WEEKS ENDED WEEKS ENDED
------------------------------ -------------------
DEC. 19, DEC. 18, JAN. 27, AUG. 12, AUG. 11,
1994 1995 1997 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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.
<TABLE>
<CAPTION>
NUMBER OF RESTAURANTS
-------------------------------------------
HOMETOWN
STATE BUFFET JJ NORTH'S CASA BONITA TOTAL
------------------------------------------ -------- ---------- ----------- -----
<S> <C> <C> <C> <C>
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
== == == ==
</TABLE>
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.
36
<PAGE> 37
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 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,
37
<PAGE> 38
(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 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 1,590 persons, of
whom approximately 1,510 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
38
<PAGE> 39
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.
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
<PAGE> 40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors, director nominees and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- ----------------------------------------------
<S> <C> <C>
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
</TABLE>
- ---------------
(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
<PAGE> 41
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
<PAGE> 42
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 $90,000 to Joseph J. Hollencamp, Senior
Vice President, Operations, of HTB. The following table sets forth the
compensation paid to the Company's executive officers by CKE and its
subsidiaries for the fiscal year ended January 27, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
-------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND TITLE ($) ($) ($) (#)(1)
- ---------------------------------------------- -------- ------- ------------- -------------------
<S> <C> <C> <C> <C>
Robert E. Wheaton............................. 200,000 70,000 9,344 30,000
Chief Executive Officer and President(2)
Theodore Abajian.............................. 78,092 3,000 1,846 1,500
Chief Financial Officer(3)
</TABLE>
- ---------------
(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 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
<PAGE> 43
Upon completion of the offering made hereby, the Company intends to grant
options to purchase an aggregate of 608,308 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:
<TABLE>
<CAPTION>
NUMBER OF
NAME OPTIONS
------------------------------------------------------------------ ---------
<S> <C>
William P. Foley II............................................... 143,543
Robert E. Wheaton................................................. 239,237
C. Thomas Thompson................................................ 95,695
John F. North, Jr. ............................................... 60,583
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................................................... 608,308
========
</TABLE>
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
<PAGE> 44
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 approximately $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
<PAGE> 45
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.
<TABLE>
<CAPTION>
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
- ---------------------------------- --------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
CKE Restaurants, Inc.............. 2,600,000 100.0% 600,000 2,000,000 40.0%
1200 North Harbor Boulevard
Anaheim, CA 92801
William P. Foley II............... 47,848(1) 1.8 -- 72,848(2) 1.4
Robert E. Wheaton................. 79,746(1) 3.0 -- 117,746(2) 2.3
Theodore Abajian.................. 5,000(1) * -- 7,000(2) *
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................. 60,583(1) 2.3 60,583 1.2
All directors, director nominees
and executive officers as a
group
(9 persons)..................... 255,075 8.9% -- 320,075 6.1%
</TABLE>
- ---------------
* 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."
(2) Includes 25,000 shares, 38,000 shares and 2,000 shares which are to be
purchased by Messrs. Foley, Wheaton and Abajian, respectively, from the
Underwriters in this offering.
45
<PAGE> 46
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
<PAGE> 47
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 5,000,000 shares of
Common Stock outstanding. Of these shares, the 3,000,000 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 50,000 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
the 1997 Plan, thus permitting the resale of shares issued under the 1997 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 608,308 shares of Common Stock
will be outstanding under the 1997 Plan, 600,808 of which will be subject to the
Lock-up Agreements as described above.
47
<PAGE> 48
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:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Equitable Securities Corporation.................................. 796,499
EVEREN Securities, Inc............................................ 796,501
Cruttenden Roth Incorporated...................................... 177,000
BT Alex. Brown Incorporated....................................... 90,000
A.G. Edwards & Sons, Inc.......................................... 90,000
Robertson, Stephens & Company LLC................................. 90,000
Advest, Inc....................................................... 60,000
George K. Baum & Company.......................................... 60,000
Crowell, Weedon & Co.............................................. 60,000
Fahnestock & Co. Inc.............................................. 60,000
Hanifen, Imhoff Inc............................................... 60,000
Johnson Rice & Company L.L.C...................................... 60,000
Neuberger & Berman, LLC........................................... 60,000
Pauli & Company, Incorporated..................................... 60,000
Piper Jaffray Inc................................................. 60,000
Principal Financial Securities, Inc............................... 60,000
The Robinson-Humphrey Company, Inc................................ 60,000
Scott & Stringfellow, Inc......................................... 60,000
The Seidler Companies Incorporated................................ 60,000
Sutro & Co. Incorporated.......................................... 60,000
Wedbush Morgan Securities Inc..................................... 60,000
Wheat, First Securities, Inc...................................... 60,000
----------
Total................................................... 3,000,000
==========
</TABLE>
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 $0.50 per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $0.10 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 450,000 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 450,000 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 3,000,000 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.
48
<PAGE> 49
Prior to this offering, there has been no market for the Common Stock. The
initial public offering price was determined by negotiations among the Company,
the Selling Stockholder and the Representatives. The factors 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, 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
49
<PAGE> 50
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.
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
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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 Deficit 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
</TABLE>
F-1
<PAGE> 52
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
<PAGE> 53
STAR BUFFET, INC.
(A WHOLLY-OWNED SUBSIDIARY OF CKE RESTAURANTS, INC.)
BALANCE SHEET
JULY 28, 1997
ASSETS
<TABLE>
<S> <C>
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........................................ $ --
========
</TABLE>
See accompanying note to balance sheet.
F-3
<PAGE> 54
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
<PAGE> 55
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
<PAGE> 56
HTB RESTAURANTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE> 57
HTB RESTAURANTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
COMBINED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE> 58
HTB RESTAURANTS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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
============ ============ ======== ============ ============ ============
</TABLE>
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
<PAGE> 59
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
<PAGE> 60
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
<PAGE> 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)
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:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
------------ -----------
DECEMBER 18, JANUARY 27,
1995 1997
------------ -----------
<S> <C> <C>
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
============ ===========
</TABLE>
F-11
<PAGE> 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)
(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:
<TABLE>
<CAPTION>
FURNITURE,
FIXTURES
AND
REAL PROPERTY EQUIPMENT
-------------------------- ----------
TYPE OF PROPERTY CAPITAL OPERATING OPERATING
- ------------------------------------------------------ ---------- ----------- ----------
<S> <C> <C> <C>
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
==========
</TABLE>
(4) INCOME TAXES
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY CURRENT DEFERRED TOTAL
- ---------------------------------------------------------- -------- --------- --------
<S> <C> <C> <C>
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
======== ========= ========
</TABLE>
F-12
<PAGE> 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)
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- --------
<S> <C> <C> <C>
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
======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR COMPANY CURRENT DEFERRED TOTAL
- ---------------------------------------------------------- -------- --------- --------
<S> <C> <C> <C>
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
======== ========= ========
</TABLE>
A reconciliation of "expected" income tax expense computed at the U.S.
Federal rate of 34% to actual income tax expense follows:
<TABLE>
<CAPTION>
SUCCESSOR
COMPANY
PREDECESSOR COMPANY ------------
---------------------------------------------- PERIOD
YEAR ENDED YEAR ENDED PERIOD ENDED ENDED
DECEMBER 19, DECEMBER 18, JULY 15, JANUARY 27,
1994 1995 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
======== ======= ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
------------ -----------
DECEMBER 18, JANUARY 27,
1995 1997
------------ -----------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 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)
(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
<PAGE> 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)
(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
<PAGE> 66
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
<PAGE> 67
CASA BONITA RESTAURANTS
(A DIVISION OF CASA BONITA INCORPORATED)
STATEMENT OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
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
==========
</TABLE>
See accompanying notes to financial statement.
F-17
<PAGE> 68
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
<PAGE> 69
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:
<TABLE>
<S> <C>
Minimum rentals................................... $101,000
Contingent rentals................................ 51,000
--------
$152,000
========
</TABLE>
(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
<PAGE> 70
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
<PAGE> 71
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
<PAGE> 72
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1997
----------- ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 73
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
STATEMENTS OF OPERATIONS AND DIVISION'S DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
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)
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 74
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- ---------
<S> <C> <C> <C>
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 $ --
=========== =========== =========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 75
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 and financing functions, including
accounting, data processing and other corporate services, were combined with the
administrative and financing functions of NRI. The cost of these administrative
and financing 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
<PAGE> 76
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
<PAGE> 77
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
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
(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, 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:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
F-27
<PAGE> 78
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:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- -------
<S> <C> <C> <C>
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
======== ======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1997
--------- ---------
<S> <C> <C>
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) $ --
========= =========
</TABLE>
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
<PAGE> 79
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:
<TABLE>
<S> <C>
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
==========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Minimum rent....................... $326,732 $512,485 $514,204
Contingent rent.................... 98,253 81,466 79,268
-------- -------- --------
$424,985 $593,951 $593,472
======== ======== ========
</TABLE>
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
<PAGE> 80
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:
<TABLE>
<CAPTION>
TWELVE MONTHS TWENTY-EIGHT WEEKS ENDED
ENDED ------------------------------
DECEMBER 31, 1996 JULY 1, 1996 JUNE 30, 1997
----------------- ------------ -------------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
(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
<PAGE> 81
[Photos of Representative Restaurants]
<PAGE> 82
======================================================
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
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
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
</TABLE>
------------------------
UNTIL OCTOBER 19, 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.
======================================================
======================================================
3,000,000 SHARES
[STAR BUFFET LOGO]
COMMON STOCK
---------------------------------
PROSPECTUS
---------------------------------
EQUITABLE SECURITIES
CORPORATION
EVEREN SECURITIES, INC.
CRUTTENDEN ROTH INCORPORATED
September 24, 1997
======================================================
