<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STAR BUFFET, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 5812 -
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
440 LAWNDALE DRIVE, SALT LAKE CITY, UTAH 84115-2917
(801) 463-5500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT E. WHEATON
CHIEF EXECUTIVE OFFICER AND PRESIDENT
STAR BUFFET, INC.
440 LAWNDALE DRIVE
SALT LAKE CITY, UTAH 84115-2917
(801) 463-5500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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C. CRAIG CARLSON, ESQ. PETER LILLEVAND, ESQ.
J. MICHAEL VAUGHN, ESQ. IAIN MICKLE, ESQ.
STRADLING YOCCA CARLSON & RAUTH, ORRICK, HERRINGTON & SUTCLIFFE LLP
A PROFESSIONAL CORPORATION OLD FEDERAL RESERVE BANK BUILDING
660 NEWPORT CENTER DRIVE, SUITE 1600 400 SANSOME STREET
NEWPORT BEACH, CALIFORNIA 92660 SAN FRANCISCO, CALIFORNIA 94111
(714) 725-4000 (415) 392-1122
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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==============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
CLASS OF SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(1)(2) FEE
- ------------------------------------------------------------------------------------------------------------------------------
Common Stock ($0.001 par value)......... 2,875,000 shares $12.00 $34,500,000 $10,455
==============================================================================================================================
</TABLE>
(1) Includes 375,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 28, 1997
2,500,000 SHARES
[LOGO] STAR BUFFET, INC.
COMMON STOCK
------------------------
Of the 2,500,000 shares of Common Stock offered hereby, 1,900,000 shares
are being sold by Star Buffet, Inc. ("Star Buffet" or the "Company") and 600,000
shares are being sold by a newly-formed subsidiary of CKE Restaurants, Inc. (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 Restaurants,
Inc. ("CKE") will beneficially own approximately 44.4% of the outstanding shares
of Common Stock (approximately 41.0% if the Underwriters' over-allotment option
is exercised in full).
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price of the Common Stock will be between $10.00 and $12.00 per share. See
"Underwriting" for a discussion of factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock approved for quotation on the Nasdaq National Market under the symbol
"STRZ," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDER(2)
- -------------------------------------------------------------------------------------------------
Per Share............ $ $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)............. $ $ $ $
=================================================================================================
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses estimated at $700,000, of which $532,000 are
payable by the Company and $168,000 are payable by the Selling Stockholder.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 375,000 shares of Common Stock at the Price to Public, less
the Underwriting Discount, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them. The
Underwriters reserve the right to reject orders in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be made on or about
, 1997.
EQUITABLE SECURITIES CORPORATION EVEREN SECURITIES, INC.
, 1997
<PAGE> 3
[MAP DEPICTING LOCATION OF THE COMPANY'S RESTAURANTS
AND PHOTOS OF INTERIOR AND EXTERIOR
OF REPRESENTATIVE 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> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including notes thereto, included elsewhere in this Prospectus.
Unless otherwise indicated, all information contained in this Prospectus assumes
(i) the consummation of the Formation Transactions described below under the
heading "The Formation Transactions" and (ii) that the Underwriters'
over-allotment option is not exercised. The restaurant holdings of Summit Family
Restaurants Inc. ("Summit") include 16 HomeTown Buffet restaurants operated by
HTB Restaurants, Inc., a wholly-owned subsidiary of Summit ("HTB"), and two Casa
Bonita Mexican-themed restaurants. Summit was acquired by CKE on July 15, 1996.
The operations of HTB prior to July 15, 1996 are referred to herein as the
Predecessor Company. The two Casa Bonita restaurants were acquired by CKE on
October 1, 1996. The combined operations of HTB subsequent to July 15, 1996 and
the two Casa Bonita restaurants subsequent to October 1, 1996 are referred to
herein as the Successor Company. For purposes hereof and unless the context
requires otherwise, the terms "Company" and "Star Buffet" refer to Star Buffet,
Inc. and the operations of the Predecessor Company and the Successor Company.
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, upon the completion of the North Acquisition, 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 segment of the restaurant industry.
Management estimates that, in 1996, the buffet and cafeteria segment of the
United States restaurant industry consisted of approximately 8,300 restaurants
with aggregate revenues of over $4.3 billion. Management believes that a
significant percentage of such revenues was generated by regional buffet 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.
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,
3
<PAGE> 5
following a 9.2% decline in same-store sales during the fiscal year ended
December 18, 1995. In addition, management lowered food costs to 35.3% of total
revenues during the sixteen weeks ended May 19, 1997 from 36.9% of total
revenues for the sixteen weeks ended May 20, 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 beneficially own approximately 44.4% of the outstanding Common Stock
(approximately 41.0% if the Underwriters' over-allotment option is exercised in
full). Pursuant to a three-year management service agreement (the "Service
Agreement"), CKE will provide the Company with multi-unit infrastructure
support, including purchasing, accounting, administrative, financial and real
estate services. The Company plans to leverage its relationship with CKE by
utilizing CKE's proven operating systems and corporate infrastructure.
Management believes that the services provided by CKE will enable the Company to
focus its resources on operational improvements, cost control and concept and
brand development. See "Business--Relationship with CKE."
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 twelve months ended December 31, 1996, the North's
Restaurants generated revenues of $10.8 million and income from operations of
$37,000.
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") simultaneously with 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.
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 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.
4
<PAGE> 6
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.
THE FORMATION TRANSACTIONS
The Company was incorporated as a Delaware corporation on July 28, 1997.
Prior to the completion of this offering, JB's Restaurants, Inc., a
newly-formed, wholly-owned subsidiary of CKE ("JB's"), 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 to JB's all of the assets of its JB's Restaurant system and Galaxy
Diner restaurants, and 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 relating to those restaurant operations. In addition, prior
to the Summit Exchange, Taco Bueno, Inc., an indirect wholly-owned subsidiary of
CKE, formerly known as Casa Bonita Incorporated ("Taco Bueno"), will sell
substantially all of the net assets relating to its two Casa Bonita restaurants
to Summit in exchange for a promissory note in the principal amount of $495,000
(the "Casa Bonita Note"). These transactions are collectively referred to herein
as the "Formation Transactions."
5
<PAGE> 7
THE OFFERING
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Common Stock offered by the Company.............. 1,900,000 shares
Common Stock offered by the Selling
Stockholder.................................... 600,000 shares
Common Stock to be outstanding after this
offering....................................... 4,500,000 shares(1)
Use of proceeds.................................. The Company intends to use approximately
$7.9 million of the net proceeds of this
offering to pay a declared and unpaid cash
dividend to the Selling Stockholder,
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 remaining
net proceeds are expected to be used to
finance the development or acquisition of
additional buffet restaurants and for
working capital and other general
corporate purposes. See "Use of Proceeds."
Proposed 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 602,500 shares of Common Stock reserved for issuance upon to 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 the right to
purchase warrants to acquire up to 150,000 shares of Common Stock issuable
in connection with the North Acquisition. Such options 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
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SUMMARY COMBINED HISTORICAL AND UNAUDITED PRO FORMA
FINANCIAL AND RESTAURANT OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table presents summary combined historical financial and
restaurant operating data of the Predecessor Company and the Successor Company.
The Company adopted a fiscal year ending on the last Monday in January. HTB's
HomeTown Buffet and Casa Bonita restaurants historically have operated on
different fiscal year end dates. For purposes of presentation and for purposes
of comparing the historical fifty-two week fiscal 1994 and 1995 results of the
Predecessor Company to the combined results of operations for the Successor
Company, the following table includes a 58-week period beginning from the end of
the Predecessor Company's fiscal year and ending on the Successor Company's
fiscal year end. This 58-week period is comprised of the combined results of HTB
from December 19, 1995 to July 15, 1996 (Predecessor Company) and July 16, 1996
to January 27, 1997 and the results of operations of Casa Bonita from October 1,
1996 to January 27, 1997 (Successor Company). Due to the combined nature of this
information, the period lengths and end dates are different. 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.
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<CAPTION>
SUCCESSOR
PREDECESSOR -------------------------------------------------------------------
---------------------------- SIXTEEN WEEKS ENDED
-------------------------------------
FIFTY-TWO WEEKS ENDED FIFTY-EIGHT WEEKS ENDED MAY 19, MAY 19,
---------------------------- JANUARY 27, 1997 1997 1997
DECEMBER 19, DECEMBER 18, --------------------------- MAY 20, ----------- -------------
1994 1995 COMBINED(1) PRO FORMA(2) 1996 COMBINED(1) PRO FORMA(2)
------------ ------------- ----------- ------------- ------- ----------- -------------
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COMBINED STATEMENT OF
EARNINGS DATA:
Total revenues............... $ 30,871 $36,741 $46,839 $57,669 $12,909 $16,581 $19,717
Income from operations....... 961 242 1,742 1,117 495 1,710 1,407
Income before income taxes... 758 50 1,491 2,075 411 1,648 1,718
Net income................... 457 28 881 1,245 246 989 1,031
Net income per common
share(3)................... $ 0.28 $ 0.23
======= =======
Common shares used in
computing per share amounts
(in thousands)(3).......... 4,500 4,500
======= =======
RESTAURANT OPERATING DATA:
Average annual sales per restaurant:
HomeTown Buffet............ $ 2,627 $ 2,455 $ 2,446
Casa Bonita................ -- -- 5,610
Percentage increase
(decrease) in
comparable store
revenues(4):
HomeTown Buffet............ 4.3% (9.2)% (0.4)% (3.1)% 2.2%
Casa Bonita................ -- -- 6.3 -- 0.4
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>
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<CAPTION>
MAY 19, 1997
-------------------------
ACTUAL PRO FORMA(2)
---------- ------------
(UNAUDITED)
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COMBINED BALANCE SHEET DATA:
Total assets........................................................................... $ 20,182 $ 38,422
Total long-term debt and capital lease obligations, including current portion.......... 2,534 9,534
Stockholders' equity................................................................... 13,732 24,257
</TABLE>
- ---------------
(1) The Company has adopted a 52-week fiscal year ending on the last Monday in
January. The combined fiscal 1997 results represent a 58-week period
comprised of the combined results of HTB from December 19, 1995 to July 15,
1996 (Predecessor Company) and July 16, 1996 to January 27, 1997 (Successor
Company) and the results of Casa Bonita from October 1, 1996 to January 27,
1997.
(2) 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."
(3) Share and per share data computations are based on the assumption that
4,500,000 shares of Common Stock were outstanding.
(4) Includes only restaurants open throughout the full periods being compared.
7
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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. 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.
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, results of operations and financial condition, 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."
8
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CONTROL BY AND DEPENDENCE ON CKE
CKE will beneficially own approximately 44.4% of the Company's outstanding
Common Stock following the completion of this offering (approximately 41.0% if
the Underwriters' over-allotment option is exercised in full) and will be able
to control or significantly influence substantially all matters requiring
approval by the stockholders of the Company, including the election of directors
and the approval of mergers or other business combination transactions. Such
concentration of ownership could discourage or prevent a change in control of
the Company. The Company's success is highly dependent on its continued
relationship with CKE. Pursuant to the three-year Service Agreement, CKE will
provide the Company with multi-unit infrastructure support, including
purchasing, accounting, administrative, financial and real estate services. The
expiration or termination of the Service Agreement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition to the Service Agreement, the Company may enter into additional
or modified agreements, arrangements and transactions with CKE. While the
Company expects that any such future agreements, arrangements and transactions
will be determined through negotiation between the two companies, there can be
no assurance that conflicts of interest will not occur with respect to 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 minority 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. Following the North Acquisition, the
combined companies will be more complex and diverse than any one of the
Successor 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. One
of the objectives of the Company's turnaround strategy for the North's
Restaurants will be to stem the recent negative operating trends experienced by
these restaurants, but there can be no assurance that this strategy will be
successful or 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
9
<PAGE> 11
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 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.
Although management of the Company believes that the foregoing contractual
and other restrictions are not binding upon the Company or any of its
subsidiaries other than HTB (and, with respect to certain provisions of the
Franchise Agreements, Summit), and that there are limitations under applicable
law on the enforceability of certain of such restrictions (such as
noncompetition provisions and provisions relating to the termination or renewal
of a franchise), there can be no assurance that the HomeTown Franchisor will not
threaten or 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
10
<PAGE> 12
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--Litigation."
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,
results of operation and financial condition.
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 has few noneconomic
barriers to entry and 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 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."
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
11
<PAGE> 13
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 inflation,
increased food, labor and employee benefits costs (including increases in hourly
wage and unemployment tax rates), increases in the number and locations of
competing buffet restaurants, regional weather conditions and the availability
of experienced management and hourly employees may also adversely affect the
food service industry in general and the Company's business, financial condition
and results of operations in particular. Changes in economic conditions
affecting the Company's guests could reduce traffic in some or all of the
Company's restaurants or impose practical limits on pricing, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The success of the Company will depend in
part on the ability of the Company's management to anticipate, identify and
respond to changing conditions. There can be no assurance that management will
be successful in this regard.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend in part on the continuing
services of its key executives, including Robert E. Wheaton, the Company's Chief
Executive Officer and President. The Company does not maintain any key man life
insurance. Mr. Wheaton is also an executive officer of CKE and a portion of his
time will continue to be devoted to CKE's business. The loss of the services of
Mr. Wheaton could have a material adverse effect on the Company's business,
financial condition and results of operations, and there can be no assurance
that a qualified replacement would be available in a timely manner, if at all.
The Company's continued growth will also depend in part on its ability to
attract and retain additional skilled management personnel. See "Management."
GOVERNMENT REGULATION
The restaurant industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and building and zoning requirements. In addition, the Company is subject
to laws governing its relationship with employees, including minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements. Many of the Company's employees are paid hourly rates based upon
the federal and state minimum wage laws. Recent legislation increasing the
minimum wage has resulted in higher labor costs to the Company. An increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees, could have a material adverse effect on the Company's business,
financial condition and results of operations.
NO PRIOR PUBLIC TRADING MARKET
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or, if one does develop, that it will be maintained. The initial public offering
price, which will be established by negotiations among the Company, the Selling
Stockholder and the representatives of the Underwriters, may not be indicative
of prices that will prevail in the trading market. See "Underwriting."
LITIGATION
The Company is from time to time the subject of complaints or litigation
from customers alleging illness, injury or other food quality, health or
operational concerns. Adverse publicity resulting from such allegations may
materially adversely affect the Company and its restaurants, regardless of
whether such allegations are valid or whether the Company is liable. The Company
also is the subject of complaints or allegations from employees from time to
time. 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.
12
<PAGE> 14
EFFECT 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
powers, preferences and rights and the qualifications, limitations or
restrictions granted to or imposed on any unissued series of Preferred Stock,
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."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock in the public market after this offering
could materially and adversely affect the market price of the Common Stock. Such
sales also might make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
the Company deems acceptable, or at all. Upon the completion of this offering,
the Company will have 4,500,000 shares of Common Stock outstanding, of which
only the 2,500,000 shares sold in this offering will be freely tradable without
restriction under the Securities Act of 1933, as amended (the "Securities Act"),
unless purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. The remaining shares of Common Stock, all of which
are beneficially 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. 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 $5.81 per share, assuming an initial public offering
price of $11.00 per share. In the event the Company issues additional Common
Stock in the future, including shares which may be issued in connection with
future acquisitions, purchasers of Common Stock in this offering may experience
further dilution. See "Dilution."
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,900,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $11.00 per share are estimated to be $18.9 million ($22.7 million if
the Underwriters' over-allotment option is exercised in full). The Company will
not receive any proceeds from the sale of Common Stock by the Selling
Stockholder.
Of the net proceeds received by the Company from this offering, the Company
intends to use (i) approximately $7.9 million to pay a cash dividend to the
Selling Stockholder (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 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> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
19, 1997 and on an unaudited pro forma basis to reflect the Formation
Transactions and to give effect to the North Acquisition, the Special Dividend
and the sale of 1,900,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $11.00 per share and the
application of the estimated net proceeds therefrom. The following table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements and
unaudited pro forma combined condensed financial statements of the Company, and
the related notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MAY 19, 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.......................................... $ 239 $ 1,639
======= =======
Long-term debt and capital lease obligations, less current portion... $ 2,295 $ 7,895
Stockholders' equity:
Preferred Stock: $0.001 par value, 1,500,000 shares authorized, no
shares outstanding, on a pro forma basis........................ --
Common Stock: $0.01 par value, 1,000 shares authorized, 10 shares
outstanding (Successor Company); and $0.001 par value,
18,500,000 shares authorized, 4,500,000 shares outstanding on a
pro forma basis(1).............................................. 0 5
Additional paid-in capital......................................... 12,192 22,712
Retained earnings.................................................. 1,540 1,540
------- -------
Total stockholders' equity......................................... 13,732 24,257
------- -------
Total capitalization....................................... $16,027 $33,152
======= =======
</TABLE>
- ---------------
(1) Excludes 602,500 shares of Common Stock reserved for issuance upon the
exercise of stock options to be granted under the Company's 1997 Stock
Incentive Plan to certain employees and non-employee directors of the
Company upon the closing of this offering. Also excludes the right to
purchase warrants to acquire up to 150,000 shares of Common Stock issuable
in connection with the North Acquisition. Such options 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> 17
DILUTION
The unaudited pro forma net tangible book value of the Company as of May
19, 1997, after giving effect to the Formation Transactions (and assuming the
Special Dividend and the Casa Bonita Note have been paid), was approximately
$5.0 million, or approximately $1.94 per share. Such unaudited pro forma net
tangible book value per share represents the tangible net worth (tangible assets
less total liabilities, assuming the Special Dividend and the Casa Bonita Note
have been paid) of the Company. The number of outstanding shares used for the
per share calculation was 2,600,000 shares, giving effect to the Formation
Transactions but prior to this offering.
Unaudited pro forma net tangible book value dilution per share represents
the difference between the amount per share paid by purchasers of shares of
Common Stock in this offering and the unaudited pro forma net tangible book
value per share of Common Stock immediately after completion of this offering.
After giving effect to the sale of the 1,900,000 shares of Common Stock offered
by the Company in this offering at an assumed initial public offering price of
$11.00 per share, and deducting the underwriting discount and estimated offering
expenses payable by the Company, the Company's unaudited pro forma net tangible
book value at May 19, 1997, would have been $23.4 million, or $5.19 per share.
This represents an immediate increase in unaudited pro forma net tangible book
value of $3.25 per share to the existing stockholder and an immediate dilution
in unaudited pro forma net tangible book value of $5.81 per share to new
investors purchasing Common Stock in this offering, as illustrated in the
following table:
<TABLE>
<S> <C> <C> <C>
Assumed initial public offering price per share....... $11.00
Unaudited pro forma net tangible book value per
share as of May 19, 1997......................... $ 5.16
Increase per share attributable to new investors.... 3.25
Decrease per share attributable to the Special
Dividend
and the Casa Bonita Note......................... (3.22)
------
Unaudited pro forma net tangible book value per share
after this offering................................. 5.19
------
Dilution per share to new investors................... $ 5.81
======
</TABLE>
The following table sets forth, on an unaudited pro forma basis as of May
19, 1997, the number of shares of Common Stock purchased from the Company, the
total consideration and the average price per share paid to the Company by the
existing stockholder and by the new investors purchasing shares of Common Stock
in this offering (at an assumed initial public offering price of $11.00 per
share and before deducting the estimated underwriting discount and offering
expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION(1)
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholder.... 2,600,000 57.8% $ 5,352,000 20.4% $ 2.06
New Investors........... 1,900,000 42.2 20,900,000 79.6 11.00
--------- ----- ----------- -----
Total......... 4,500,000 100.0% $26,252,000 100.0%
========= ===== =========== =====
</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 assumed initial
public offering price of $11.00 per share paid by new investors.
The foregoing tables assume no exercise of the Underwriters' over-allotment
option and excludes options to purchase 602,500 shares of Common Stock to be
granted to certain employees and non-employee directors of the Company upon the
closing of this offering. Also excludes the right to purchase warrants to
acquire up to 150,000 shares of Common Stock issuable in connection with the
North Acquisition. Such options 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> 18
SELECTED COMBINED FINANCIAL DATA
The following table presents selected combined historical financial data of
the Predecessor Company and the Successor Company. Prior to the Formation
Transactions, the companies comprising the Successor Company operated
independently and were not under common control or management until October 1,
1996. Accordingly, the data may not be comparable to or indicative of
post-combination results. Management believes that a combined presentation of
financial information is most meaningful to investors' understanding of the
results of operations, financial condition and cash flows of the Successor
Company. The Company has adopted a fiscal year ending on the last Monday in
January. The Company's HomeTown Buffet and Casa Bonita restaurants operated on
different fiscal year end dates. For purposes of presentation and for purposes
of comparing the historical 52-week fiscal 1994 and 1995 results of the
Predecessor Company to the combined results of operations for the Company, the
following table includes a 58-week period beginning from the Predecessor
Company's fiscal year end and ending on the Successor Company's fiscal year end.
This 58-week period is comprised of the combined results of HTB from December
19, 1995 to July 15, 1996 (Predecessor Company) and July 16, 1996 to January 27,
1997 and the results of operations of Casa Bonita from October 1, 1996 to
January 27, 1997 (Successor Company). Due to the combined nature of this
information, the period lengths and end dates are different. The Company's first
fiscal quarter consists of 16 weeks, and each of the remaining quarters consists
of 12 weeks. The Company has obtained audits for the Predecessor Company as of
December 18, 1995 and for the fifty-two weeks ended December 19, 1994 and
December 18, 1995 and the thirty weeks ended July 15, 1996 and for the Successor
Company as of January 27, 1997 and for the twenty-eight weeks ended January 27,
1997.
The Selected Combined Financial Data for the fifty-two weeks ended December
19, 1994 and December 18, 1995 and the thirty weeks ended July 15, 1996
(Predecessor Company) and the twenty-eight weeks ended January 27, 1997
(Successor Company) (except for pro forma amounts) has been derived from the
combined financial statements which 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 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
unaudited pro forma data gives effect to the sale of the shares of Common Stock
offered hereby and the application of the estimated net proceeds thereof as
described in "Use of Proceeds" and the consummation of the Formation
Transactions and the North Acquisition, as if each transaction had occurred at
the beginning of the periods presented. In addition, the unaudited pro forma
information is based on available information and certain assumptions and
adjustments. See "Selected Pro Forma Financial Data." 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> 19
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------------------------------- ----------------------------------------------
COMBINED
FIFTY-TWO WEEKS ENDED PERIOD FROM PERIOD FROM FIFTY-EIGHT SIXTEEN WEEKS
-------------------------------------- DEC. 19, JULY 16, WEEKS ENDED
DEC. DEC. DEC. 1995 TO 1996 TO ENDED ------------------
DEC. 21, 20, 19, 18, JULY 15, JAN. 27, JAN. 27, MAY 20, MAY 19,
1992 1993 1994 1995 1996 1997(1) 1997(2) 1996 1997
-------- ------- ------- ------- ----------- ----------- ----------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <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 $46,839 $12,909 $16,581
------- ------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Food costs............... 1,886 4,918 11,469 13,769 8,569 8,285 16,854 4,760 5,369
Labor costs.............. 1,617 3,732 9,089 10,878 6,810 7,514 14,324 3,740 5,169
Occupancy and other
expenses............... 824 2,695 6,769 8,954 5,030 5,173 10,203 2,727 3,343
General and
administrative......... 467 980 1,762 1,666 1,193 621 1,814 707 367
Depreciation and
amortization........... 168 384 821 1,232 914 988 1,902 480 623
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses......... 4,962 12,710 29,910 36,499 22,516 22,581 45,097 12,414 14,871
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations..... 252 457 961 242 691 1,051 1,742 495 1,710
Interest expense........... 54 110 203 192 145 106 251 84 62
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................... 198 348 758 50 546 945 1,491 411 1,648
Income taxes............... 80 139 301 22 216 394 610 165 659
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................. $ 118 $ 209 $ 457 $ 28 $ 330 $ 551 $ 881 $ 246 $ 989
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DEC. DEC. DEC.
DEC. 21, 20, 19, 18, JAN. 27, MAY 20, MAY 19,
1992 1993 1994 1995 1997 1996 1997
-------- ------- ------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET
DATA:
Total assets............... $13,003 $16,283 $19,784 $15,826 $20,182
Total long-term debt and
capital lease
obligations, including
current portion.......... 6,714 11,150 2,609 13,683 2,534
Stockholder's equity....... 1,801 1,806 12,743 2,143 13,732
</TABLE>
- ---------------
(1) Represents the operations of HTB since the acquisition of Summit by CKE on
July 15, 1996 and the operations of the Casa Bonita restaurants since their
acquisition by CKE on October 1, 1996.
(2) The Company has adopted a 52-week fiscal year ending on the last Monday in
January. The combined fiscal 1997 results represent a 58-week period
comprised of the combined results of HTB from December 19, 1995 to July 15,
1996 (Predecessor Company) and July 16, 1996 to January 27, 1997 (Successor
Company) and the results of Casa Bonita from October 1, 1996 to January 27,
1997.
18
<PAGE> 20
SELECTED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed financial information
is based upon the historical combined financial statements of the Predecessor
Company and Successor Company and has been prepared to illustrate the effects of
this offering and the North Acquisition.
The unaudited pro forma combined condensed balance sheet as of May 19, 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 May
19, 1997 and was prepared based upon the combined balance sheet of the Successor
Company as of May 19, 1997 and the balance sheet of North's Restaurants as of
March 31, 1997. The historical combined condensed statement of operations for
the period ended January 27, 1997 includes the thirty weeks of operations of the
Predecessor Company and the twenty-eight weeks of operations of the Successor
Company (the "Combined Results") and gives effect to the transactions described
above as if such transactions had been completed on December 19, 1995. 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 sixteen weeks ended May 19, 1997 was prepared based upon the
combined results of the Successor Company for the sixteen weeks ended May 19,
1997 and the statement of operations of North's Restaurants for the sixteen
weeks ended April 7, 1997.
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 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> 21
STAR BUFFET, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MAY 19, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------
NORTH'S
RESTAURANTS
SUCCESSOR COMPANY MARCH 31, PRO FORMA PRO FORMA
MAY 19, 1997 1997 COMBINED ADJUSTMENTS COMBINED
----------------- ------------ -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash..................................... $ 165 $ 36 $ 201 $ 6,325A,D,L,M $ 6,526
Short-term investments................... 180 -- 180 180
Trade receivables........................ 206 10 216 216
Inventories.............................. 384 69 453 453
Prepaid expenses......................... 141 4 145 55E 200
Deferred taxes, net...................... 118 -- 118 118
-------- -------- -------- -------- --------
Total current assets.................. 1,194 119 1,313 6,380 7,693
Notes receivable........................... -- -- -- 5,000A,L 5,000
Intercompany receivable.................... 2,863 -- 2,863 2,863
Property and equipment, net................ 13,260 4,443 17,703 1,700M 19,403
Capitalized leases, net.................... 2,509 -- 2,509 2,509
Deposits and other assets.................. 45 18 63 63
Franchise fees............................. 311 -- 311 311
Costs in excess of net assets of business
acquired, net............................ -- -- -- 580K 580
-------- -------- -------- -------- --------
Total assets..................... $20,182 $ 4,580 $ 24,762 $ 13,660 $ 38,422
======== ======== ======== ======== ========
Current liabilities:
Accounts payable......................... $ 1,716 $ 353 $ 2,069 $ $ 2,069
Accrued liabilities...................... 2,200 307 2,507 55E 2,562
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.................. -- 11,646 11,646 (11,646)B --
Current maturities of capital lease
obligations........................... 239 -- 239 239
-------- -------- -------- -------- --------
Total current liabilities............. 4,155 12,306 16,461 (10,191) 6,270
Notes payable.............................. -- -- -- 5,600A 5,600
North's debt for which North's Restaurants,
Inc. is jointly and severally liable..... -- 1,400 1,400 (1,400)B --
Capital lease obligations.................. 2,295 -- 2,295 2,295
-------- -------- -------- -------- --------
Total liabilities................ 6,450 13,706 20,156 (5,991) 14,165
-------- -------- -------- -------- --------
Total stockholders' equity................. 13,732 (9,126) 4,606 19,651B,C,D 24,257
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity........... $20,182 $ 4,580 $ 24,762 $ 13,660 $ 38,422
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
20
<PAGE> 22
STAR BUFFET, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE 58-WEEK PERIOD ENDED JANUARY 27, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------
SUCCESSOR NORTH'S
COMPANY RESTAURANTS
JANUARY 27, DECEMBER 31, PRO FORMA PRO FORMA
1997 1996 COMBINED ADJUSTMENTS COMBINED
----------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................... $46,839 $ 10,830 $57,669 $ $57,669
------- -------- ------- ------- -------
Costs and expenses:
Food costs........................... 16,854 4,013 20,867 20,867
Labor costs.......................... 14,324 3,290 17,614 17,614
Occupancy and other expenses......... 10,203 1,885 12,088 (746)M 11,342
General and administrative
expenses........................... 1,814 970 2,784 1,110J,N 3,894
Depreciation and amortization........ 1,902 635 2,537 298K,M 2,835
------- -------- ------- ------- -------
Total costs and expense....... 45,097 10,793 55,890 662 56,552
------- -------- ------- ------- -------
Income from operations................. 1,742 37 1,779 (662) 1,117
Interest (income) expense, net......... 251 554 805 (433) E,F,G,H,L 372
Other income, net...................... -- -- -- (1,330) N (1,330)
------- -------- ------- ------- -------
Income (loss) before income taxes...... 1,491 (517) 974 1,101 2,075
Income tax expense (benefit)........... 610 (174) 436 394I 830
------- -------- ------- ------- -------
Net income (loss)...................... $ 881 $ (343) $ 538 $ 707 $ 1,245
======= ======== ======= ======= =======
Net income per common share............ $ 0.34 $ 0.28
======= =======
Common shares used in computing per
share amounts........................ 2,600 4,500
======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
21
<PAGE> 23
STAR BUFFET, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE 16-WEEK PERIOD ENDED MAY 19, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------
SUCCESSOR NORTH'S
COMPANY RESTAURANTS
MAY 19, APRIL 7, PRO FORMA PRO FORMA
1997 1997 COMBINED ADJUSTMENTS COMBINED
--------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $16,581 $ 3,136 $19,717 $ $19,717
------- ------ ------- ----- -------
Costs and expenses:
Food costs.............................. 5,369 1,187 6,556 6,556
Labor costs............................. 5,169 944 6,113 6,113
Occupancy and other expenses............ 3,343 587 3,930 (207)M 3,723
General and administrative expenses..... 367 346 713 342J,N 1,055
Depreciation and amortization........... 623 149 772 91K,M 863
------- ------ ------- ----- -------
Total costs and expense.......... 14,871 3,213 18,084 226 18,310
------- ------ ------- ----- -------
Income (loss) from operations............. 1,710 (77) 1,633 (226) 1,407
Interest (income) expense, net............ 62 184 246 (148)E,F,G,H,L 98
Other income, net......................... -- -- -- (409)N (409)
------- ------ ------- ----- -------
Income (loss) before income taxes......... 1,648 (261) 1,387 331 1,718
Income tax expense........................ 659 -- 659 28I 687
------- ------ ------- ----- -------
Net income (loss)......................... $ 989 $ (261) $ 728 $ 303 $ 1,031
======= ====== ======= ===== =======
Net income per common share............... $ 0.38 $ 0.23
======= =======
Common shares used in computing per share
amounts................................. 2,600 4,500
======= =======
</TABLE>
See accompanying notes to unaudited pro forma combined condensed financial
information.
22
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION
A To record the acquisition of North's Restaurant 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 which will not be assumed by the Company,
except as noted in Footnote A.
C To eliminate the division equity of North's Restaurants.
D To reflect the estimated net cash proceeds of $18.9 million from the sale of
1,900,000 shares of Common Stock offered by the Company at an assumed
initial public offering price of $11.00 per share (less underwriting
discount and estimated offering expenses payable by the Company) and 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 the net assets
sold as described in the Formation 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 5
years of $11,000 for the fiscal year ended January 27, 1997 and $3,000 for
the sixteen weeks ended May 19, 1997.
F To record interest income on the $3.0 million note receivable from North's
at a variable rate assumed to be 8%. This results in interest income in the
amount of $240,000 for the fiscal year ended January 27, 1997 and $74,000
for the sixteen weeks ended May 19, 1997.
G 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
$172,000 for the sixteen weeks ended May 19, 1997. A 0.125%
increase/decrease in the estimated interest rate incrementally
increases/decreases income before taxes by $9,000 and $3,000 for the fiscal
year ended January 27, 1997 and the sixteen weeks ended May 19, 1997,
respectively.
H To eliminate the historical interest expense recorded by North's Restaurants
of $554,000 and $184,000 for the twelve months ended December 31, 1996 and
the sixteen weeks ended April 7, 1997, respectively, for related
indebtedness which would not have been in existence at the beginning of such
periods.
I 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%.
J To record the impact of management fees payable pursuant to the Service
Agreement with CKE. These fees amount to $350,000 and $108,000 for the year
ended January 27, 1997 and for the sixteen weeks ended May 19, 1997,
respectively.
K To record $580,000 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 $15,000 and $4,000 for the
fiscal year ended January 27, 1997 and the sixteen weeks ended May 19, 1997,
respectively.
L To record the note receivable from Stacey's in the amount of $2.0 million
and record interest income at the rate of prime (assumed to be 8.5%) plus 2%
in the amount of $210,000 and $65,000 for the fiscal year ended January 27,
1997 and the sixteen weeks ended May 19, 1997, respectively. For purposes of
this adjustment, no value has been ascribed to the warrants to be issued by
Stacey's to the Company.
M 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 $87,000 and ($207,000), respectively, for the sixteen
weeks ended May 19, 1997.
N To record (i) management fee income in connection with the Stacey's
strategic alliance at 3.5% of Stacey's annual revenue (estimated at $38.0
million) of $1.33 million and $409,000 for the year ended January 27, 1997
and the sixteen weeks ended May 19, 1997, respectively and (ii) the related
increase in general and administrative expenses (estimated at 2% of Stacey's
annual revenue) of $760,000 and $234,000 for the fiscal year ended January
27, 1997 and the sixteen weeks ended May 19, 1997, respectively, estimated
to be incurred in connection with such management services.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in connection with the
information set forth under "Selected Combined Financial Data," "Selected Pro
Forma Financial Data" and the financial statements of the Company and the
accompanying notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below, in
"Risk Factors," "Business--Growth Strategy" and elsewhere in this Prospectus.
OVERVIEW
Prior to the Formation Transactions, the HomeTown Buffet and Casa Bonita
restaurants were operated as part of separate subsidiaries of CKE. Prior to
their acquisition by CKE, these restaurants were operated as part of other
restaurant operating companies. The historical results of operations reflect
operations in these ownership forms and may not be indicative of their
operations as part of the Company. In particular, general and administrative
expenses reflect allocations from prior owners and may not be meaningful as a
basis of comparison to the general and administrative expenses the Company will
incur. See "Risk Factors--Lack of Combined Operating History."
The results of operations of the Casa Bonita restaurants have been included
in the Company's results of operations since the date of CKE's acquisition. The
financial statements therefore include results of operations of the Casa Bonita
restaurants since October 1, 1996, and the addition of revenues, expenses and
other components associated with the Casa Bonita restaurants is one of the
principal reasons for the significant differences when comparing results of
operations to prior periods, which do not include results of operations of the
Casa Bonita restaurants.
The North's Restaurants will be acquired simultaneously with this offering
and 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.
The Company adopted a fiscal year ending on the last Monday in January. The
Company's HomeTown Buffet and Casa Bonita restaurants all operated on different
fiscal year end dates. For purposes of presentation and for purposes of
comparing the historical 52-week fiscal 1994 and 1995 results of the Predecessor
Company to the combined results of operations for the Successor Company, the
following discussion includes a 58-week period beginning from the end of the
Predecessor Company's last fiscal year and ending on the Successor Company's
fiscal year-end. This 58-week period is comprised of the combined results of HTB
from December 19, 1995 to July 15, 1996 (Predecessor Company) and July 16, 1996
to January 27, 1997 (Successor Company) and the results of operations of Casa
Bonita from October 1, 1996 to January 27, 1997. Due to the combined nature of
this information, the period lengths and end dates are different. The Company's
first fiscal quarter consists of 16 weeks, and each of the remaining fiscal
quarters consists of 12 weeks.
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.
24
<PAGE> 26
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.
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. In addition, this
category also includes amortization of a new restaurant's pre-opening costs,
which include costs of hiring and training the initial staff and certain other
costs. The pre-opening costs are amortized over a one-year period commencing
with a restaurant's opening.
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") and the combined 58 weeks ended
January 27, 1997 ("Fiscal 1997") as well as the sixteen week periods ended May
20, 1996 and May 19, 1997. References to "Fiscal 1998" refer to the fiscal year
ending January 26, 1998.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------- -----------------------------------
COMBINED
FIFTY-TWO WEEKS FIFTY-EIGHT
ENDED WEEKS SIXTEEN WEEKS ENDED
--------------------- ENDED -------------------
DEC. 19, DEC. 18, JAN. 27, MAY 20, MAY 19,
1994 1995 1997(1) 1996 1997
-------- -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Total revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Costs and expenses:
Food costs............................... 37.2 37.5 36.0 36.9 32.4
Labor costs.............................. 29.4 29.6 30.6 29.0 31.2
Occupancy and other expenses............. 21.9 24.4 21.8 21.1 20.2
General and administrative............... 5.7 4.5 3.9 5.5 2.2
Depreciation and amortization............ 2.7 3.4 4.1 3.7 3.7
----- ----- ----- ----- -----
Total costs and expenses......... 96.9 99.4 96.4 96.2 89.7
----- ----- ----- ----- -----
Income from operations..................... 3.1 0.6 3.6 3.8 10.3
Interest expense........................... 0.6 0.5 0.5 0.6 0.3
----- ----- ----- ----- -----
Income before income taxes................. 2.5 0.1 3.1 3.2 10.0
Income taxes............................... 1.0 0.0 1.2 1.3 4.0
----- ----- ----- ----- -----
Net income................................. 1.5% 0.1% 1.9% 1.9% 6.0%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) For purposes of presentation and for purposes of comparing the historical
52-week fiscal 1994 and 1995 results of the Predecessor Company to the
combined results of operations for the Successor Company, the period ended
January 27, 1997, consists of a 58-week period beginning from the end of the
Predecessor Company's last fiscal year and ending on the Successor Company's
fiscal year-end. This 58-week period is comprised of the combined results of
HTB from December 19, 1995 to July 15, 1996 (Predecessor Company) and July
16, 1996 to January 27, 1997 (Successor Company) and the results of
operations of Casa Bonita from October 1, 1996 to January 27, 1997.
25
<PAGE> 27
COMPARISON OF SIXTEEN WEEKS ENDED MAY 19, 1997 TO SIXTEEN WEEKS ENDED MAY 20,
1996
Total revenues increased $3.7 million, or 28.4%, from $12.9 million in the
sixteen weeks ended May 20, 1996 to $16.6 million in the sixteen weeks ended May
19, 1997. The increase was primarily attributable to the inclusion of the
results of Casa Bonita in the first quarter of Fiscal 1998, which results were
not included in the first quarter of Fiscal 1997 comparable period.
Food costs increased $609,000, or 12.8%, from $4.8 million in the sixteen
weeks ended May 20, 1996 to $5.4 million in the sixteen weeks ended May 19,
1997. Food costs as a percentage of total revenues declined from 36.9% in the
sixteen weeks ended May 20, 1996 to 32.4% in the sixteen weeks ended May 19,
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 $1.4 million, or 38.2%, from $3.7 million in the
sixteen weeks ended May 20, 1996 to $5.2 million in the sixteen weeks ended May
19, 1997. Labor costs as a percentage of total revenues increased from 29.0% in
the sixteen weeks ended May 20, 1996 to 31.2% in the sixteen weeks ended May 19,
1997. The increase as a percentage of total revenues is primarily attributable
to the inclusion of Casa Bonita in the first quarter of Fiscal 1998, which
operates at a higher level of labor costs than HTB's HomeTown Buffet
restaurants.
Occupancy and other expenses increased $616,000, or 22.6%, from $2.7
million in the sixteen weeks ended May 20, 1996 to $3.3 million in the sixteen
weeks ended May 19, 1997. Occupancy and other expenses as a percentage of total
revenues decreased from 21.1% in the sixteen weeks ended May 20, 1996 to 20.2%
in the sixteen weeks ended May 19, 1997. The decrease as a percentage of total
revenues is primarily attributable to the inclusion of Casa Bonita in the first
quarter of Fiscal 1998 which operates at a lower level of occupancy and other
expenses due to the relatively fixed nature of certain of these expenses and the
higher average sales volumes of the Casa Bonita restaurants.
General and administrative expenses decreased $340,000, or 48.1%, from
$707,000 in the sixteen weeks ended May 20, 1996 to $367,000 in the sixteen
weeks ended May 19, 1997. General and administrative expenses as a percentage of
total revenues decreased from 5.5% in the sixteen weeks ended May 20, 1996 to
2.2% in the sixteen weeks ended May 19, 1997. The decrease as a percentage of
total revenues is a result of the elimination of certain costs following
acquisition by CKE and the inclusion of $259,000 of non-recurring severance
costs in the sixteen weeks ended May 20, 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 $143,000, or 29.8%, from $480,000
in the sixteen weeks ended May 20, 1996 to $623,000 in the sixteen weeks ended
May 19, 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 $1.2 million, or 245.5%, from $495,000 in
the sixteen weeks ended May 20, 1996 to $1.7 million in the sixteen weeks ended
May 19, 1997. Income from operations as a percentage of total revenues increased
from 3.8% in the sixteen weeks ended May 20, 1996 to 10.3% in the sixteen weeks
ended May 19, 1997. The increase in dollars and as a percentage of total
revenues is attributable to the cost reduction efforts implemented by CKE
following its acquisitions of Summit and the Casa Bonita restaurants and
inclusion of Casa Bonita in the first quarter of Fiscal 1998.
26
<PAGE> 28
COMPARISON OF FISCAL 1997 TO FISCAL 1995
Due to the change in the Company's fiscal year, the inclusion of Casa
Bonita since the date of acquisition on October 1, 1996 by CKE and the
comparison of periods of unequal length, the comparison of these periods may not
be meaningful or indicative of future results.
Total revenues in Fiscal 1997 increased $10.1 million, or 27.5%, from $36.7
million in Fiscal 1995 to $46.8 million in Fiscal 1997. The increase was
partially attributable to the inclusion of the results of the HomeTown Buffet
restaurants for six additional weeks in Fiscal 1997 and the inclusion of Casa
Bonita since October 1, 1996.
Food costs increased $3.1 million, or 22.4%, from $13.8 million in Fiscal
1995 to $16.9 million in Fiscal 1997. Food costs as a percentage of total
revenues declined from 37.5% in Fiscal 1995 to 36.0% in Fiscal 1997. The decline
as a percentage of total revenues was attributable to an overall 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 cost.
Labor costs increased $3.4 million, or 31.7%, from $10.9 million in Fiscal
1995 to $14.3 million in Fiscal 1997. Labor costs as a percentage of total
revenues increased from 29.6% in Fiscal 1995 to 30.6% in Fiscal 1997. 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 increased $1.2 million, or 13.9%, from $9.0
million in Fiscal 1995 to $10.2 million in Fiscal 1997. Occupancy and other
expenses as a percentage of total revenues decreased from 24.4% in Fiscal 1995
to 21.8% in Fiscal 1997. The decrease as a percentage of total revenues was
primarily attributable to the inclusion of Casa Bonita since its acquisition
which operates at a lower level of occupancy and other expenses due to the
relatively fixed nature of certain of these expenses and the high average
volumes of the Casa Bonita restaurants.
General and administrative expenses increased $148,000, or 8.9%, from $1.7
million in Fiscal 1995 to $1.8 million in Fiscal 1997. General and
administrative expenses as a percentage of total revenues decreased from 4.5% in
Fiscal 1995 to 3.9% in Fiscal 1997. 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 increased $670,000, or 54.4%, from $1.2
million in Fiscal 1995 to $1.9 million in Fiscal 1997. Depreciation and
amortization as a percentage of total revenues increased from 3.4% in Fiscal
1995 to 4.1% in Fiscal 1997. 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.
Income from operations increased $1.5 million, or 619.8%, from $242,000 in
Fiscal 1995 to $1.7 million in Fiscal 1997. Income from operations as a
percentage of total revenues increased from 0.6% in Fiscal 1995 to 3.6% in
Fiscal 1997. The increase in dollars and as a percentage of total revenues was
attributable to the inclusion of six additional weeks in Fiscal 1997 information
and certain cost reductions accomplished by CKE following its acquisition of
Summit and the inclusion of Casa Bonita in the Fiscal 1997 results.
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.
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<PAGE> 29
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 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. A majority of the Company's
employees are paid hourly rates related to federal and state minimum wage laws,
which rates were recently increased. 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 May 19,
1997, the Company had $165,000 in cash.
Cash provided by operations was approximately $2.7 million, $1.6 million,
$2.8 million and $828,000 in Fiscal 1994, Fiscal 1995 and Fiscal 1997 and the
sixteen weeks ended May 19, 1997, respectively.
The Company, with the assistance of CKE, is currently in negotiations for a
bank credit facility. Management anticipates that the Company will obtain a
revolving credit facility of at least $14.0 million which may be used for
operations, new restaurant openings and acquisitions. Management anticipates
that the credit facility will contain normal affirmative and negative covenants,
including maintaining certain minimum working capital, net worth and financial
ratios. There can be no assurance that the Company will be able to arrange a
credit facility 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
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<PAGE> 30
estimates the cost of opening its prototype restaurant to be approximately $1.5
million to $1.7 million assuming leased real estate. In many instances,
management believes that existing restaurant locations can be acquired and
converted to the Company's prototype concept at a lower cost than new unit
openings. Management believes that the cost of converting an existing restaurant
facility to the Company's prototype concept is approximately $400,000 to
$500,000 per unit. These costs consist primarily of exterior and interior
appearance modifications and certain kitchen and food service equipment. There
can be no assurance that the Company will be able to acquire additional
restaurant chains or locations or, if acquired, that these restaurants will have
a positive contribution to the Company's results of operations.
The Company believes that the net proceeds from this offering, together
with existing cash balances, funds expected to be generated from operations and
borrowings under its anticipated bank line of credit 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 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.
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.
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<PAGE> 31
BUSINESS
GENERAL
The Company, through its subsidiaries, owns and operates 16 franchised
HomeTown Buffet restaurants, two Mexican-themed restaurants operated under the
Casa Bonita name and, upon the completion of the North Acquisition, 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 an indirect wholly-owned
subsidiary of CKE, an operator, franchisor and licensor of over 4,000 branded
restaurants in the United States and abroad. See "Certain Transactions." The
Company has benefited from its relationship with CKE through its access to
certain operating systems and strategies which CKE successfully implemented in
its Carl's Jr. chain. Since acquiring Summit in July 1996, these systems and
procedures have been successful at increasing the overall revenues and
profitability of HTB's HomeTown Buffet restaurants. As part of CKE's desire to
focus its management efforts and capital resources on quick-service restaurants,
CKE has determined that the expansion of the Company will be enhanced through
the creation of a separate publicly traded company focused on the buffet
restaurant segment. After the completion of this offering, CKE will beneficially
own approximately 44.4% of the outstanding Common Stock (approximately 41.0% if
the Underwriters' over-allotment option is exercised in full).
OPERATING STRATEGY
Since the acquisition of Summit by CKE in July 1996, HTB's HomeTown Buffet
restaurants have experienced significant reductions in operating costs and
improvements in same-store revenues. The Company believes that its ability to
accomplish these cost reductions and operational improvements is due to the
Company's customer focus and management practices.
Customer Focus. The Company believes that its ability to deliver high
quality food to customers with superior service in clean and friendly
environments has been central to its success at improving customer perceptions
and sales at its buffet restaurants. The key elements of management's focus
include:
- High Quality Food. The Company seeks to differentiate itself by providing
higher quality and better tasting food than its competitors. Food items
are prepared frequently and in small batches to ensure the correct
temperature, texture and flavor. Management limits the number of items
prepared each day and frequently rotates selected specialty items to
maintain customer interest while ensuring that the Company's signature
items are offered at the highest possible quality.
- Superior Service. The Company provides a level of customer service which
it believes has helped it establish a higher level of customer
satisfaction than its competitors. Customers are greeted by an employee
who seats the customers and explains the features of the restaurant and
menu offerings. In addition, the restaurants' managers seek to visit each
customer table during peak meal periods to ensure guest satisfaction. The
Company's restaurants are inspected by independent "mystery shoppers"
several times each month, and restaurants not performing up to Company
standards receive additional inspection surveys until appropriate
standards are restored.
- Clean and Friendly Environment. The Company strives to offer a pleasant,
customer friendly environment at its restaurants by providing attractive,
updated restaurant decors and by emphasizing cleanliness in all areas of
its operations. Further, through regular maintenance, the Company seeks
to enhance the customer dining experience by keeping its restaurants
clean and pleasant.
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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 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 19, 1995. In addition, management lowered food costs to 35.3% of total
revenues during the sixteen weeks ended May 19, 1997 from 36.9% of total
revenues for the sixteen weeks ended May 20, 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.
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<PAGE> 33
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 segment of the restaurant industry. Management estimates that, in 1996,
the buffet and cafeteria segment of the industry consisted of approximately
8,300 restaurants with aggregate revenues of more than $4.3 billion. Management
believes that a significant percentage of such revenues was generated by
regional buffet chains. The Company believes that most of these regional chains
are privately owned and may be available for acquisition because they lack the
financial and operational structure to compete with larger regional and national
chains. Following acquisition, management intends to integrate and improve the
operations and profitability of the chain through the implementation of the
following key strategies:
- Enhance Food Quality and Service Levels. Management believes that, due to
the limited capital and management resources of many regional chains,
such restaurants often offer poor food quality and an 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.
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
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which are located in Idaho, Oregon, Utah and Washington, as well as the
trademarks, menus, restaurant designs and other intangible assets used in
connection with North's Restaurants.
The Company believes the North Acquisition is a significant first step in
its strategy of growth through acquisitions. The Company believes the increased
credibility and visibility resulting from the North Acquisition will position
the Company to pursue aggressively its strategy of growth through acquisitions
as regional buffet chains are pressured to consolidate. The performance of the
North's Restaurants has been adversely affected by operational difficulties and
inadequate capital resources, the effects of which were compounded by increased
competition in the industry. These difficulties resulted in net losses for the
year ended June 30, 1996 and the six months ended December 31, 1996, despite
increasing revenues. 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 term loan for North's by assuming an additional
$3.0 million of North's existing bank debt, in which case North will agree to
repay the principal amount thereof to the Company. The $7.0 million aggregate
principal amount of indebtedness expected 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. North's repayment obligations
with respect to the $3.0 million portion of such assumed indebtedness will, if
incurred, bear interest at a variable rate and will become payable over a
five-year period commencing twelve months after the closing of 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 the
Common Stock of the Company at an exercise price equal to the initial public
offering price per share of Common Stock.
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 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
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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. Prior
to the completion of this offering, CKE will assign to the Company its rights
and certain of its obligations under the Acquisition Agreement to the Company.
See "Risk Factors--Dependence Upon and Restrictions Resulting from Relationship
with the HomeTown Franchisor." 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. If the Company exercises its option to purchase additional
North's restaurants, the Company has agreed to issue to James E. North and John
F. North, Jr., collectively, options to purchase between .6667% and 2%,
depending on the number of additional restaurants acquired, of the Company's
outstanding shares of Common Stock on a fully diluted basis as of the date of
grant. The exercise price of any such options will be based on the last reported
sales price of the Common Stock on the date of grant.
The Acquisition Agreement contains certain customary representations,
warranties, covenants and indemnification provisions. In addition, the
consummation of the North Acquisition is subject to certain conditions,
including obtaining lien releases from North's creditors, the consummation of
this offering and other customary closing conditions.
THE STACEY'S STRATEGIC ALLIANCE
On July 18, 1997, CKE signed a non-binding letter of intent with Stacey's
for a strategic alliance between the Company and Stacey's. Stacey's operates 24
buffet restaurants, 19 of which are located in Florida. For the fiscal year
ended January 1, 1997, Stacey's reported revenues of $38.8 million and an
operating loss of $1.9 million.
The transactions contemplated by the LOI are subject to the negotiation of
definitive agreements and approval of Stacey's and the Company's Boards of
Directors. The LOI contemplates an arrangement whereby the Company would (i)
provide certain purchasing, administrative and management services to a majority
of the Stacey's buffet restaurants, (ii) loan Stacey's $2.0 million for
remodeling or reconcepting several of Stacey's restaurants and (iii) receive
management fees equal to 3.5% of Stacey's revenues and a warrant to purchase 30%
of Stacey's fully diluted common stock. The Company would also have the right to
designate two members of Stacey's five-member board of directors.
The Company believes that the transactions contemplated by the LOI provide
the Company with an opportunity to leverage its management expertise to improve
Stacey's operations. The Company believes that Stacey's operations have suffered
in recent years due to operational difficulties and inadequate capital
resources. The Company believes that its management practices and purchasing
economies could have a significant positive impact on Stacey's operations. The
Company intends to work with Stacey's to implement labor and other cost saving
programs developed by CKE and to convert certain units to the Company's
prototype buffet restaurant.
RESTAURANTS
HomeTown Buffet
HTB's HomeTown Buffet restaurants offer fixed price lunch, dinner and
weekend breakfast menus that entitle each customer to unlimited servings of all
menu items and beverages. Prices are approximately $5.50 for lunch and
approximately $7.45 for dinner, and may vary depending on restaurant location.
The restaurants offer reduced prices to children under age 12 and to senior
citizens.
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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 used for special functions. In addition to the
public areas, each restaurant has a food preparation and storage area, including
a fully-equipped kitchen.
HomeTown Buffet restaurants seek to differentiate themselves from other
buffet and cafeteria restaurants by the quality and variety of their food
offerings. Menus emphasize traditional American "home cooking" and include
soups, salads, entrees, vegetables, non-alcoholic beverages and desserts.
Customers can choose from multiple entree choices, including fried and baked
chicken and fish, roast beef, turkey and ham. Additional entrees, such as
lasagna, barbecued ribs and other regional or seasonal dishes, are featured on
particular days of the week. In addition to entrees, each meal includes two
freshly-prepared soups, assorted vegetable and potato dishes, hot bread and an
extensive salad bar. Dessert selections include pudding, assorted cobblers,
cakes, cookies and soft-serve frozen dairy desserts and various sundae toppings.
HTB uses high-quality ingredients, including fresh seasonal fruits and
vegetables, in its menu offerings, and all menu items are prepared in small
batches throughout the day. The items are served promptly in relatively small
serving pans in order to ensure that all items are fresh, visually appealing and
served at the proper temperature. HTB regularly tests new menu items and
upgrades ingredients and cooking methods in order to improve the quality and
consistency of its food offerings.
HTB's typical restaurant format is approximately 9,200 square feet with
seating for approximately 350 customers. The restaurant design is based upon
standardized construction plans, with modifications made for each particular
site.
The chart below sets forth certain data with respect to the HTB HomeTown
Buffet restaurants:
<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED FIFTY-EIGHT SIXTEEN
--------------------------------- WEEKS WEEKS
DEC. ENDED ENDED
20, DEC. 19, DEC. 18, JAN. 27, MAY 19,
1993 1994 1995 1997 1997
------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Number of restaurants open (end of
period)............................... 7 14 16 16 16
Revenues (in thousands)................. $13,167 $ 30,871 $ 36,741 $43,806 $13,174
Percentage increase (decrease) in
comparable store revenues(1).......... N/A 4.3% (9.2)% (0.4)% 2.2%
Average weekly customer count per
restaurant............................ 8,201 9,177 8,150 8,117 8,769
Average check(2)........................ $ 5.29 $ 5.57 $ 5.69 $ 5.79 $ 5.85
</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
35
<PAGE> 37
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.
The chart below sets forth certain data with respect to the Company's Casa
Bonita restaurants:
<TABLE>
<CAPTION>
FIFTY-EIGHT SIXTEEN
FIFTY-TWO WEEKS ENDED WEEKS WEEKS
--------------------- ENDED ENDED
DEC. 19, DEC. 18, JAN. 27, MAY 19,
1994 1995 1997 1997
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Number of restaurants (end of period)... 2 2 2 2
Revenues (in thousands)................. $ 10,856 $ 10,823 $ 12,024 $ 3,407
Percentage increase (decrease) in
comparable store revenues(1).......... (1.2%) (0.3%) 6.3% 0.4%
</TABLE>
- ---------------
(1) Includes only restaurants open throughout the full periods being compared.
SITE SELECTION, RESTAURANT LOCATIONS AND PROPERTIES
The Company and CKE entered into a Service Agreement pursuant to which the
Company utilizes 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.
36
<PAGE> 38
The Company's headquarters is located in 15,512 square feet of leased
office space in Salt Lake City, Utah. The base lease for this property expires
in 2000. The Company has the option to lease this property for an additional
five-year term upon the expiration of such lease.
HTB RESTAURANT OPERATIONS AND MANAGEMENT
HomeTown Buffet restaurant management is under the direction of Joseph J.
Hollencamp, Senior Vice President of HTB, who oversees staffing, training,
restaurant operations and local store marketing. The Senior 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 "--Legal
Proceedings."
RELATIONSHIP WITH CKE
In connection with the Formation Transactions, CKE and the Company entered
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
37
<PAGE> 39
10% per year based upon increases in CKE's cost of providing such services. Such
services will consist of (i) accounting and administrative services, such as
maintaining accounting records, performing accounting activities, preparing
financial reports, operating and maintaining the information technology system,
establishing and administering certain employee benefits and complying with
reporting obligations thereunder; (ii) financial services, including the
identification and analysis of possible transactions and related financial and
strategic advice, assistance in budget and forecast preparation, consultations
and advice as to presentations, discussions and disclosures to financial
analysts and the financial press and advice concerning crisis 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 has few non-economic barriers to entry and
is affected by changes in consumer tastes, national, regional and local economic
conditions and market trends. The performance of individual restaurants may be
affected by factors such as traffic patterns, demographic considerations and the
type, number and location of competing restaurants. The Company's significant
investment in and long-term commitment to each of its restaurant sites limits
its ability to respond quickly or effectively to changes in local competitive
conditions or other changes that could have a material adverse effect on the
Company's operations. The Company's continued success is dependent to a
substantial extent on its reputation for providing high quality and value and
this reputation may be affected not only by the performance of its restaurants
but also by the performance of franchisor-owned restaurants and restaurants
operated by other franchisees, over which the Company has no control.
GOVERNMENT REGULATION
The restaurant industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and building and zoning requirements. In addition, the Company is subject
to laws governing its relationship with employees, including minimum wage
requirements, overtime, working and safety conditions and citizenship
requirements. Many of the Company's employees are paid hourly rates based upon
the federal and state minimum wage laws. Recent legislation increasing the
minimum wage has resulted in higher labor costs to the Company. An increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees, could have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of July 28, 1997, the Company employed approximately 1,640 persons, of
whom approximately 1,560 were restaurant employees, and approximately 80 were
restaurant management, supervisory and corporate personnel. Restaurant employees
include both full-time and part-time workers and all are paid on an hourly
basis. No Company employees are covered by collective bargaining agreements. The
Company believes that its relations with its employees are generally good.
38
<PAGE> 40
LEGAL PROCEEDINGS
On August 9, 1996, HTB, Summit and CKE filed a complaint in the United
States District Court for the District of Utah, Central Division against
Buffets, Inc. and the HomeTown Franchisor, alleging violations of federal and
state antitrust laws, claims for unfair business practices, claims for tortious
interference with contract, and claims for breach of contract and breach of the
covenant of good faith and fair dealing. The litigation is continuing and is not
scheduled for trial until after January 21, 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.
Pursuant to a binding arbitration proceeding, it was determined that HTB has no
contractual or other right to develop any additional HomeTown Buffet
restaurants. HTB has appealed the arbitrator's award.
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.
39
<PAGE> 41
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., Checkers Drive-In Restaurants, 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 Finance for the family
restaurant division, which included 375 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. 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> 42
Thomas G. Schadt will serve as a director of the Company following this
offering. Mr. Schadt has been the Chief Executive Officer of a privately-held
beverage distribution company, Bear Creek, L.L.C., since 1995. From 1976 to
1994, he held several positions with Pepsico, Inc., most recently, Vice
President of Food Service.
Norman N. Habermann will serve as a director of the Company following this
offering. Mr. Habermann is the President of Scobrett Associates, Inc., which is
involved in venture capital and consulting activities. From December 1986 to
February 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 Chief Executive Officer and a director 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 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> 43
EXECUTIVE COMPENSATION
The Company was incorporated on July 25, 1997. 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.
1997 STOCK INCENTIVE PLAN
On , 1997, the Company's 1997 Stock Incentive Plan (the "1997
Plan") was adopted by the Company's stockholders and Board of Directors
effective as of , 1997. The 1997 Plan covers an aggregate of 602,500
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"), nonstatutory options and restricted stock
grants 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.
Upon completion of the offering made hereby, the Company intends to grant
options to purchase an aggregate of 602,500 shares of Common Stock under the
1997 Plan, at an exercise price equal to the initial public offering price, to
the persons and in the amounts set forth below:
<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. ......................... 54,775
Theodore Abajian............................ 15,000
Joseph J. Hollencamp........................ 12,500
Charlotte Miller............................ 4,250
Stuart W. Clifton........................... 7,500
Jack M. Lloyd............................... 7,500
Thomas G. Schadt............................ 7,500
Norman N. Habermann......................... 7,500
Other employees............................. 7,500
--------
Total............................. 602,500
========
</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
42
<PAGE> 44
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> 45
CERTAIN TRANSACTIONS
The Company was incorporated as a Delaware corporation on July 28, 1997.
Prior to the completion of this offering, JB's 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. Summit is the parent
corporation of HTB, which operates 16 HomeTown Buffet restaurants as a
franchisee of 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 to JB's all of the assets of its JB's Restaurant
system and Galaxy Diner restaurants, and 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 relating to those restaurant operations. In
addition, prior to the Summit Exchange, Taco Bueno will sell substantially all
of the net assets relating to its two Casa Bonita restaurants to Summit in
exchange for the Casa Bonita Note. As a result of the foregoing Formation
Transactions and the North Acquisition, the Company's restaurant holdings will
consist of the 16 HomeTown Buffet franchised restaurants operated by HTB, the
seven JJ North's Grand Buffet and the two Casa Bonita restaurants.
The Company has entered into a three-year Service Agreement, pursuant to
which CKE provides 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
"Business--Relationship with CKE."
Prior to this offering, the Company declared the Special Dividend to the
Selling Stockholder in an aggregate amount equal to $7.9 million. The Company
intends to pay the Special Dividend in September 1997 with a portion of the net
proceeds of this offering. See "Use of Proceeds."
44
<PAGE> 46
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of the date of this Prospectus, and
as adjusted to give effect to the sale of the shares of Common Stock offered
hereby, by (i) each person who is known by the Company to own beneficially more
than 5% of the Company's Common Stock, (ii) each director and director nominee
of the Company, (iii) each of the Company's executive officers, (iv) the Selling
Stockholder, and (v) all directors, director nominees and executive officers of
the Company as a group.
<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(1) 100.0% 600,000 2,000,000 44.4%
1200 North Harbor Boulevard
Anaheim, CA 92801
William P. Foley II 47,548(2) 1.8 -- 47,548 1.0
Robert E. Wheaton 79,746(2) 3.0 -- 79,746 1.7
Theodore Abajian 5,000(2) * -- 5,000 *
C. Thomas Thompson 31,898(2) 1.2 -- 31,898 *
Stuart W. Clifton 7,500(2) * -- 7,500 *
Jack M. Lloyd 7,500(2) * -- 7,500 *
Thomas G. Schadt 7,500(2) * -- 7,500 *
Norman N. Habermann 7,500(2) * -- 7,500 *
John F. North, Jr. 54,775(2) 2.1% 54,775 1.2%
All directors, director nominees and
executive officers as a group 229,267 8.1% -- 229,267 4.8%
(10 persons)
</TABLE>
- ---------------
* Less than one percent.
(1) The record owner of these shares is JB's Restaurants, Inc. a wholly-owned
subsidiary of CKE.
(2) 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."
44
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 18,500,000 shares
of Common Stock, par value $0.001 per share, and 1,500,000 shares of Preferred
Stock, par value $0.001 per share. As of August 11, 1997, there will be
2,600,000 shares of Common Stock outstanding, all of which were held by the
Selling Stockholder, and no shares of Preferred Stock 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 deferred by the Company in the Offering 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 -- Effect 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
45
<PAGE> 48
transaction resulting in a financial benefit to such interested stockholder. For
purposes of Section 203, an "interested" stockholder is a person who, together
with affiliates and associates, owns (or within three years prior, did own) 15%
or more of the corporation's voting stock.
The Certificate of Incorporation also eliminates the ability of
stockholders to call special meetings and requires advance notice to nominate a
director or take certain other actions. These provisions may be deemed to have a
potential anti-takeover effect and may delay or prevent a change of control of
the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
47
<PAGE> 49
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices and adversely affect the
Company's ability to raise additional capital in the capital markets at a time
and price favorable to the Company.
Upon completion of this offering, the Company will have 4,500,000 shares of
Common Stock outstanding. Of these shares, the 2,500,000 shares sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, unless they are purchased by "affiliates" of the
Company as that term is used under the Securities Act. The remaining 2,000,000
shares, all of which are beneficially 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 each of CKE 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 Agreement").
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Company's Common Stock (approximately 45,000 shares immediately after this
offering) or the average weekly trading volume during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and availability of current public
information about the Company. A person who is not an affiliate, has not been an
affiliate within three months prior to the sale and has beneficially owned the
Restricted Shares for a least two years is entitled to sell such shares under
Rule 144(k) as currently in effect without regard to any of the limitations
described above.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance under
its 1997 Stock Incentive Plan, thus permitting the resale of shares issued under
such plan by non-affiliates in the public market without restriction under the
Securities Act. Such registration statement will become effective immediately
upon filing, which is expected on or shortly after the closing of this offering.
As of the completion of this offering, options to purchase 602,500 shares of
Common Stock will be outstanding under the Company's 1997 Stock Incentive Plan,
595,000 of which will be subject to the Lock-up Agreements as described above.
47
<PAGE> 50
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Equitable
Securities Corporation and EVEREN Securities, Inc. 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.................................
EVEREN Securities, Inc...........................................
----------
Total.................................................. 2,500,000
==========
</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 $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain other dealers. After this offering, the offering price and other
selling terms may be changed.
The Company has granted the Underwriters a 30-day option to purchase up to
an additional 375,000 shares of Common Stock at the public offering price less
the underwriting discount set forth on the cover page of this Prospectus to
cover over-allotments, if any. If the Underwriters exercise their over-allotment
option to purchase any of the 375,000 additional shares of Common Stock from the
Company, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them as shown in the above table
bears to the 2,500,000 shares of Common Stock offered hereby. The Underwriters
may exercise this option only to cover over-allotments made to connection with
the sale of the Common Stock offered hereby.
Prior to this offering, there has been no market for the Common Stock. The
initial public offering price will be determined by negotiations among the
Company, the Selling Stockholder and the Representatives. The factors to be
considered in determining such initial public offering price include the
financial and operational history and trends of the Company, the history of and
the prospects for the industry in which the Company competes, an assessment of
the Company's management, its past and present operations, its past and present
earnings and the trend of such earnings, the general condition of the securities
markets at the time of this offering and the price-earnings multiples and market
prices of publicly traded securities of comparable companies. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales of Common Stock to any accounts over which they exercise
discretionary authority. The Representatives intend to make a market in the
Common Stock after completion of the offering.
Subject to certain exceptions, CKE and its subsidiaries for a period of one
year, and the Company and its directors and executive officers for a period of
180 days, after the date of this Prospectus have agreed not to offer, pledge,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of any shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock without the prior
written consent of Equitable Securities Corporation on behalf of the
Representatives,
48
<PAGE> 51
provided, however, the Company may grant stock options under, 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, CKE and the Selling Stockholder have agreed to indemnify the
Underwriters and controlling persons, if any, against, certain liabilities,
including liabilities under the Securities Act or to contribute to the payments
the Underwriters or any controlling persons may be required to make in respect
thereof.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the Underwriters to reclaim the selling concession otherwise accruing
to an Underwriter or dealer in connection with this offering if the Common Stock
originally sold by such Underwriter or dealer is purchased by the Underwriters
in a syndicate covering transaction and has therefore not been effectively
placed by such Underwriter or dealer. The Underwriters have advised the Company
that such transactions may be affected on the Nasdaq Stock Market or otherwise
and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Stradling Yocca Carlson & Rauth, a professional corporation, Newport
Beach, California. Certain legal matters in connection with this offering will
be passed upon for the Underwriters by Orrick, Herrington & Sutcliffe LLP, San
Francisco, California.
EXPERTS
The balance sheet of Star Buffet, Inc. as of July 28, 1997 has been
included herein and in the Registration Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The combined balance sheets of HTB Restaurants, Inc. as of December 18,
1995 (Predecessor Company) and January 27, 1997 (Successor Company), and the
related combined statements of earnings and retained earnings and cash flows for
the 52-week periods ended December 19, 1994 and December 18, 1995 and the
30-week period ended July 15, 1996 (Predecessor Company) and the 28-week period
ended January 27, 1997 (Successor Company), have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The statement of earnings of Casa Bonita Restaurants (a division of Casa
Bonita Incorporated) for the nine months ended September 30, 1996 has been
included herein and in the Registration Statement in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The balance sheets of North's Restaurants (a division of North's
Restaurants, Inc.) as of June 30, 1995 and 1996 and December 31, 1996 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, 1996 and for the six months
ended December 31, 1996, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
49
<PAGE> 52
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> 53
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 May 19, 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 16
Weeks Ended May 20, 1996 and May 19, 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 16 Weeks Ended May 20,
1996 and May 19, 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 Financial Statement......................................................... F-18
NORTH'S RESTAURANTS
Independent Auditors' Report......................................................... F-21
Balance Sheets as of June 30, 1995 and 1996, December 31, 1996 and March 31, 1997
(unaudited)....................................................................... F-22
Statements of Operations and Division's Equity for Each of the Years in the
Three-year Period Ended June 30, 1996 and for the Six Months Ended December 31,
1996 and for the Three Months Ended March 31, 1997 (unaudited).................... F-23
Statements of Cash Flows for Each of the Years in the Three-year Period Ended June
30, 1996 and for the Six Months Ended December 31, 1996 and for the Three Months
Ended March 31, 1997 (unaudited).................................................. F-24
Notes to Financial Statements........................................................ F-25
</TABLE>
F-1
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
The Stockholder and Board of Directors
Star Buffet, Inc.:
We have audited the accompanying balance sheet of Star Buffet, Inc. (an
indirect 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> 55
STAR BUFFET, INC.
(AN INDIRECT WHOLLY OWNED SUBSIDIARY OF CKE RESTAURANTS, INC.)
BALANCE SHEET
JULY 28, 1997
ASSETS
<TABLE>
<S> <C>
Total assets...................................................................... $ --
========
LIABILITIES AND STOCKHOLDER'S EQUITY
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; authorized 18,500,000 shares; no shares issued
or outstanding............................................................... --
Additional paid-in capital...................................................... --
Common stock subscribed (2,600,000 shares)...................................... $ 26,000
Less: stock subscriptions receivable............................................ (26,000)
--------
Total liabilities and stockholder's equity........................................ $ --
========
</TABLE>
See accompanying note to balance sheet.
F-3
<PAGE> 56
STAR BUFFET, INC.
(AN INDIRECT 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 an indirect wholly owned subsidiary of CKE Restaurants, Inc.
The Company intends to acquire all of the outstanding common stock of
Summit Family Restaurants Inc., whose subsidiary, HTB Restaurants, Inc., is the
franchisee of 16 Hometown Buffet restaurants, and the operations of two Casa
Bonita restaurants.
The Company is in the process of filing a Registration Statement with the
Securities and Exchange Commission to sell 1,900,000 shares of Common Stock in
an initial public offering.
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> 57
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 8, which is as
of July 28, 1997
F-5
<PAGE> 58
HTB RESTAURANTS, INC.
(A WHOLLY OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY SUCCESSOR
------------ ----------- COMPANY
DECEMBER 18, JANUARY 27, -----------
1995 1997 MAY 19,
------------ ----------- 1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash................................................ $ 117,000 $ 353,000 $ 165,000
Short-term investments.............................. -- 180,000 180,000
Trade receivables................................... 39,000 71,000 206,000
Inventories......................................... 242,000 383,000 384,000
Prepaid expenses.................................... 139,000 84,000 141,000
Deferred taxes, net (note 4)........................ 78,000 193,000 118,000
------------ ----------- -----------
Total current assets........................ 615,000 1,264,000 1,194,000
------------ ----------- -----------
Property and equipment, at cost, less accumulated
depreciation and amortization (note 2).............. 12,617,000 12,430,000 13,260,000
------------ ----------- -----------
Real property and equipment under capitalized leases,
at cost, less accumulated amortization (notes 2 and
3).................................................. 2,304,000 2,396,000 2,509,000
------------ ----------- -----------
Deposits and other assets............................. 280,000 375,000 45,000
------------ ----------- -----------
Intangible assets, at cost, less accumulated
amortization:
Franchise fees...................................... 356,000 318,000 311,000
Equipment lease acquisition costs................... 93,000 -- --
------------ ----------- -----------
Total intangible assets..................... 449,000 318,000 311,000
Deferred taxes, net (note 4).......................... 18,000 -- --
Intercompany receivable (notes 4 and 6)............... -- 3,001,000 2,863,000
------------ ----------- -----------
$ 16,283,000 $19,784,000 $20,182,000
============ =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable -- trade (note 6).................. $ 2,229,000 $ 2,226,000 $ 1,716,000
Accrued liabilities (note 6):
Payroll and related taxes........................ 667,000 1,207,000 1,074,000
Sales and property taxes......................... 371,000 632,000 384,000
Rent, insurance and other........................ 60,000 367,000 742,000
Current maturities of capital lease obligations
(note 3)......................................... 198,000 239,000 239,000
------------ ----------- -----------
Total current liabilities................... 3,525,000 4,671,000 4,155,000
------------ ----------- -----------
Long-term debt, net of current maturities:
Capital lease obligations (note 3).................. 2,276,000 2,370,000 2,295,000
Intercompany payable (notes 4 and 6)................ 8,676,000 -- --
------------ ----------- -----------
Total long-term debt........................ 10,952,000 2,370,000 2,295,000
Stockholder's equity:
Common stock, $0.01 par value. Authorized 1,000
shares; issued and outstanding 10 shares......... 0 0 0
Additional paid-in capital.......................... 1,000,000 12,192,000 12,192,000
Retained earnings................................... 806,000 551,000 1,540,000
------------ ----------- -----------
Total stockholder's equity.................. 1,806,000 12,743,000 13,732,000
Commitments and contingencies (notes 3 and 7)
Subsequent event (note 8)
------------ ----------- -----------
$ 16,283,000 $19,784,000 $20,182,000
============ =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE> 59
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 ENDED 52 WEEKS ENDED 30 WEEKS ENDED 28 WEEKS ENDED COMPANY COMPANY
DECEMBER 19, DECEMBER 18, JULY 15, JANUARY 27, -------------- --------------
1994 1995 1996 1997 16 WEEKS ENDED 16 WEEKS ENDED
-------------- -------------- -------------- -------------- MAY 20, MAY 19,
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 $ 12,909,000 $ 16,581,000
----------- ----------- ----------- ----------- ----------- -----------
Costs and expenses:
Food costs............... 11,469,000 13,769,000 8,569,000 8,285,000 4,760,000 5,369,000
Labor costs.............. 9,089,000 10,878,000 6,810,000 7,514,000 3,740,000 5,169,000
Occupancy and other
expenses............... 6,769,000 8,954,000 5,030,000 5,173,000 2,727,000 3,343,000
General and
administrative
expenses............... 1,762,000 1,666,000 1,193,000 621,000 707,000 367,000
Depreciation and
amortization........... 821,000 1,232,000 914,000 988,000 480,000 623,000
----------- ----------- ----------- ----------- ----------- -----------
Total costs and
expenses......... 29,910,000 36,499,000 22,516,000 22,581,000 12,414,000 14,871,000
----------- ----------- ----------- ----------- ----------- -----------
Income from operations..... 961,000 242,000 691,000 1,051,000 495,000 1,710,000
Interest expense (notes 2
and 3)................... 203,000 192,000 145,000 106,000 84,000 62,000
----------- ----------- ----------- ----------- ----------- -----------
Income before income
taxes.................... 758,000 50,000 546,000 945,000 411,000 1,648,000
Income tax expense (note
4)....................... 301,000 22,000 216,000 394,000 165,000 659,000
----------- ----------- ----------- ----------- ----------- -----------
Net income................. 457,000 28,000 330,000 551,000 $ 246,000 $ 989,000
=========== ===========
Retained earnings at
beginning of period...... 321,000 778,000 806,000 --
----------- ----------- ----------- -----------
Retained earnings at end of
period................... $ 778,000 $ 806,000 $ 1,136,000 $ 551,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE> 60
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 ENDED 52 WEEKS ENDED 30 WEEKS ENDED 28 WEEKS ENDED 16 WEEKS ENDED 16 WEEKS ENDED
DECEMBER 19, DECEMBER 18, JULY 15, JANUARY 27, MAY 20, MAY 19,
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 $ 551,000 $ 246,000 $ 989,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 821,000 1,232,000 914,000 988,000 480,000 623,000
Loss on disposal of
assets................. 84,000 100,000 -- -- -- --
Change in operating
assets and liabilities:
Receivables............ 238,000 (22,000) 21,000 (114,000) 23,000 (135,000)
Inventories............ (90,000) (48,000) 39,000 (5,000) 4,000 (1,000)
Prepaid expenses and
other assets......... (153,000) 138,000 (202,000) 36,000 -- (57,000)
Deferred tax assets.... 63,000 (136,000) (78,000) -- -- (75,000)
Accounts payable....... 896,000 183,000 (280,000) 273,000 459,000 (510,000)
Accrued liabilities.... 400,000 123,000 72,000 231,000 (15,000) (6,000)
------------ ------------ -------- ------------ ------------ ------------
Net cash provided by
operating
activities......... 2,716,000 1,598,000 816,000 1,960,000 1,197,000 828,000
------------ ------------ -------- ------------ ------------ ------------
Cash flows from investing
activities:
Acquisition of intangible
assets................... (155,000) (125,000) -- -- -- --
Acquisition of property and
equipment................ (6,057,000) (3,527,000) (68,000) (103,000) (28,000) (1,079,000)
Purchases of short-term
investments.............. -- -- -- (180,000) -- --
------------ ------------ -------- ------------ ------------ ------------
Net cash used in
investing
activities......... (6,212,000) (3,652,000) (68,000) (283,000) (28,000) (1,079,000)
------------ ------------ -------- ------------ ------------ ------------
Cash flows from financing
activities:
Net activity with parent
and affiliates........... 2,512,000 1,998,000 (546,000) (1,288,000) (781,000) 138,000
Proceeds from sales of
assets................... 1,140,000 -- -- -- -- --
Principal payments on
capital leases........... (24,000) (46,000) (110,000) (245,000) (381,000) (75,000)
------------ ------------ -------- ------------ ------------ ------------
Net cash provided by
(used in) financing
activities......... 3,628,000 1,952,000 (656,000) (1,533,000) (1,162,000) 63,000
------------ ------------ -------- ------------ ------------ ------------
Net increase
(decrease) in
cash............... 132,000 (102,000) 92,000 144,000 7,000 (188,000)
Cash at beginning of
period..................... 87,000 219,000 117,000 209,000 117,000 353,000
------------ ------------ -------- ------------ ------------ ------------
Cash at end of period........ $ 219,000 $ 117,000 $ 209,000 $ 353,000 $ 124,000 $ 165,000
============ ============ ======== ============ ============ ============
Supplemental disclosures of
cash flow
information -- cash paid
for interest............... $ 203,000 $ 192,000 $ 145,000 $ 110,000 $ 84,000 $ 62,000
============ ============ ======== ============ ============ ============
</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> 61
HTB RESTAURANTS, INC.
(A WHOLLY OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 18, 1995 (PREDECESSOR COMPANY) AND
JANUARY 27, 1997 (SUCCESSOR COMPANY)
(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.
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 8, 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 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.
INVENTORIES
Inventories consist of food, beverages and restaurant supplies and are
valued at cost, determined by the first-in, first-out method.
F-9
<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) AND
JANUARY 27, 1997 (SUCCESSOR COMPANY)
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 $808,000,
$951,000, $912,000 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
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.
F-10
<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) AND
JANUARY 27, 1997 (SUCCESSOR COMPANY)
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
COMPANY SUCCESSOR
----------- 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>
(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
F-11
<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) AND
JANUARY 27, 1997 (SUCCESSOR COMPANY)
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> 65
HTB RESTAURANTS, INC.
(A WHOLLY OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 18, 1995 (PREDECESSOR COMPANY) AND
JANUARY 27, 1997 (SUCCESSOR COMPANY)
<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................................................. $435,000 $(113,000) $322,000
State................................................... 56,000 16,000 72,000
-------- --------- --------
$491,000 $ (97,000) $394,000
======== ========= ========
</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 $321,000
State income taxes, net of Federal
benefit............................... 41,000 3,000 29,000 50,000
Other................................... 2,000 2,000 1,000 23,000
-------- ------- -------- --------
Actual income tax expense............... $301,000 $ 22,000 $216,000 $394,000
======== ======= ======== ========
</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> 66
HTB RESTAURANTS, INC.
(A WHOLLY OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 18, 1995 (PREDECESSOR COMPANY) AND
JANUARY 27, 1997 (SUCCESSOR COMPANY)
(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
F-14
<PAGE> 67
HTB RESTAURANTS, INC.
(A WHOLLY OWNED SUBSIDIARY OF SUMMIT FAMILY RESTAURANTS INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 18, 1995 (PREDECESSOR COMPANY) AND
JANUARY 27, 1997 (SUCCESSOR COMPANY)
contributions were made during the period ended July 15, 1996 (Predecessor
Company) or the period ended January 27, 1997 (Successor Company).
(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) 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> 68
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> 69
CASA BONITA RESTAURANTS
(A DIVISION OF CASA BONITA INCORPORATED)
STATEMENT OF EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<S> <C>
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> 70
CASA BONITA RESTAURANTS
(A DIVISION OF CASA BONITA INCORPORATED)
NOTES TO FINANCIAL STATEMENT
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> 71
CASA BONITA RESTAURANTS
(A DIVISION OF CASA BONITA INCORPORATED)
NOTES TO FINANCIAL STATEMENT (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> 72
CASA BONITA RESTAURANTS
(A DIVISION OF CASA BONITA INCORPORATED)
NOTES TO FINANCIAL STATEMENT (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> 73
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, 1995 and 1996 and December
31, 1996, 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, 1996
and for the six months ended December 31, 1996. 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, 1995 and 1996 and December
31, 1996, and the results of its operations and its cash flows for each of the
years in the three-year period ended June 30, 1996 and for the six months ended
December 31, 1996 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
May 8, 1997, except as to note 8,
which is as of July 24, 1997
F-21
<PAGE> 74
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, MARCH 31,
1995 1996 1996 1997
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 36,379 $ 40,910 $ 38,466 $ 35,671
Trade accounts receivable................. 52,728 3,414 11,087 9,793
Inventories............................... 45,431 73,111 68,385 69,473
Preopening costs, net..................... 15,414 33,761 -- --
Other current assets...................... -- -- 3,534 3,512
----------- ------------ ------------ ------------
Total current assets............ 149,952 151,196 121,472 118,449
Property and equipment, net (note 2)...... 3,868,699 4,727,210 4,530,228 4,443,228
Other assets.............................. 16,146 16,106 16,106 18,051
----------- ------------ ------------ ------------
$ 4,034,797 $ 4,894,512 $ 4,667,806 $ 4,579,728
=========== ============ ============ ============
LIABILITIES AND DIVISION'S DEFICIT
Current portion of North's Restaurants,
Inc. company debt for which Division is
jointly and severally liable (note 3)... $ 872,016 $ 3,892,082 $ 11,463,301 $ 11,646,084
Accounts payable.......................... 433,190 354,557 339,901 353,015
Other accrued expenses.................... 231,991 293,205 285,494 306,848
----------- ------------ ------------ ------------
Total current liabilities....... 1,537,197 4,539,844 12,088,696 12,305,947
North's Restaurants, Inc. company debt for
which Division is jointly and severally
liable, net of debt issuance costs, less
current portion (note 3)................ 7,920,126 8,553,302 1,400,000 1,400,000
----------- ------------ ------------ ------------
Total liabilities............... 9,457,323 13,093,146 13,488,696 13,705,947
----------- ------------ ------------ ------------
Division's deficit:
Division's equity....................... 3,369,616 4,246,750 4,042,411 3,919,865
North's Restaurants, Inc. company debt
for which Division is jointly and
severally liable, net of debt
issuance costs (note 3).............. (8,792,142) (12,445,384) (12,863,301) (13,046,084)
----------- ------------ ------------ ------------
Net Division's deficit.......... (5,422,526) (8,198,634) (8,820,890) (9,126,219)
Commitments and contingencies (note 5)
Subsequent event (note 8)
----------- ------------ ------------ ------------
$ 4,034,797 $ 4,894,512 $ 4,667,806 $ 4,579,728
=========== ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 75
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
STATEMENTS OF OPERATIONS AND DIVISION'S DEFICIT
<TABLE>
<CAPTION>
SIX
MONTHS THREE
YEAR ENDED JUNE 30, ENDED MONTHS
---------------------------------------- DECEMBER 31, ENDED
1994 1995 1996 1996 MARCH 31,
----------- ----------- ------------ ------------ 1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................... $ 4,676,004 $ 7,762,322 $ 10,533,999 $ 4,843,690 $ 2,303,490
----------- ----------- ------------ ------------ -----------
Costs and expenses:
Food costs.................. (1,646,917) (2,710,982) (3,792,056) (1,797,685) (869,485)
Labor costs................. (1,400,190) (2,317,741) (3,203,674) (1,446,367) (693,269)
Occupancy and other
expenses................. (811,335) (1,301,373) (1,786,573) (880,150) (442,249)
General and administrative
expenses................. (408,406) (810,362) (1,022,339) (393,080) (246,606)
Depreciation and
amortization............. (198,091) (346,650) (613,260) (265,111) (110,922)
----------- ----------- ------------ ------------ -----------
Total costs and
expenses.......... (4,464,939) (7,487,108) (10,417,902) (4,782,393) (2,362,531)
----------- ----------- ------------ ------------ -----------
Income (loss) from
operations.................. 211,065 275,214 116,097 61,297 (59,041)
Interest expense.............. (80,251) (212,842) (459,407) (273,188) (132,268)
----------- ----------- ------------ ------------ -----------
Income (loss) before income
tax expense benefit
(provision)................. 130,814 62,372 (343,310) (211,891) (191,309)
Income tax expense benefit
(provision) (note 4)........ (50,363) (24,013) 128,558 59,396 --
----------- ----------- ------------ ------------ -----------
Net income (loss)............. 80,451 38,359 (214,752) (152,495) (191,309)
Division's deficit at
beginning of period......... (1,537,726) (2,434,748) (5,422,526) (8,198,634) (8,820,890)
Contributions
(distributions)............. (98,026) 2,345,244 1,091,886 (51,844) 68,763
Net additions in North's
Restaurants, Inc. company
debt for which Division is
jointly and severally
liable...................... (879,447) (5,371,381) (3,653,242) (417,917) (182,783)
----------- ----------- ------------ ------------ -----------
Division's deficit at end of
period...................... $(2,434,748) $(5,422,526) $ (8,198,634) $ (8,820,890) $(9,126,219)
=========== =========== ============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 76
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE
SIX MONTHS MONTHS
YEAR ENDED JUNE 30, ENDED ENDED
-------------------------------------- DECEMBER 31, MARCH 31,
1994 1995 1996 1996 1997
--------- ----------- ------------ ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................ $ 80,451 $ 38,359 $ (214,752) $ (152,495) $ (191,309)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization................ 198,091 346,650 613,260 265,111 110,922
Changes in operating assets
and liabilities:
Trade accounts receivable... 1,749 (48,633) 49,314 (7,673) 1,294
Inventories................. 2,988 (9,265) (27,680) 4,726 (1,088)
Preopening costs............ (37,261) (99,909) (169,093) (2,641) (3)
Other assets................ 42,824 28,379 40 (3,534) (1,923)
Accounts payable and accrued
expenses................. (65,258) 368,059 (17,419) (22,367) 34,468
--------- ----------- ------------ ----------- ----------
Net cash provided by
(used in) operations... 223,584 623,640 233,670 81,127 (47,639)
--------- ----------- ------------ ----------- ----------
Cash flows from investing
activities:
Capital expenditures............. (134,787) (2,937,638) (1,321,025) (31,727) (23,919)
--------- ----------- ------------ ----------- ----------
Cash flows from financing
activities:
Contributions (distributions).... (98,026) 2,345,244 1,091,886 (51,844) 68,763
--------- ----------- ------------ ----------- ----------
Net increase (decrease)
in cash and cash
equivalents............ (9,229) 31,246 4,531 (2,444) (2,795)
Cash and cash equivalents at
beginning of period.............. 14,362 5,133 36,379 40,910 38,466
--------- ----------- ------------ ----------- ----------
Cash and cash equivalents at end of
period........................... $ 5,133 $ 36,379 $ 40,910 $ 38,466 $ 35,671
========= =========== ============ =========== ==========
Supplemental disclosure of cash
flow information:
Cash paid for:
Interest......................... $ 45,275 $ 184,698 $ 242,252 $ 136,938 $ --
========= =========== ============ =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 77
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED)
(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 December 31, 1996.
The Division's corporate administrative functions, including accounting,
data processing and other corporate services, were combined with the
administrative functions of NRI. The cost of these administrative functions was
allocated to the Division in proportion to the revenues of the Division in
relation to the total revenues of NRI. Management believes this allocation
method is reasonable; however, such allocated costs may not necessarily be
indicative of the cost of obtaining such services if the Division operated on a
stand-alone basis. Included in general and administrative expenses is
approximately $403,000, $787,000, $794,000, $371,000 and $235,000 in fiscal
years 1994, 1995, 1996, the six months ended December 31, 1996 and the three
months ended March 31, 1997 (unaudited), respectively, of allocated costs.
(b) Fiscal Year
The accompanying financial statements cover the fifty-two/fifty-three-week
periods ended June 27, 1994, July 3, 1995 and July 1, 1996, the six months
(twenty-four weeks) ended December 16, 1996 and the three months (twelve weeks)
ended March 10, 1997 (unaudited). 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, 1995 and 1996, December 31, 1996 and March 31, 1997
(unaudited) was approximately $47,000, $42,000, $-0- 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> 78
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED)
(g) Advertising Costs
Advertising costs are expensed when incurred. Advertising expense, included
in general and administrative expenses, was approximately $79,000, $186,000,
$169,000, $72,000 and $34,000 for the years ended June 30, 1994, 1995 and 1996,
the six months ended December 31, 1996 and the three months ended March 31, 1997
(unaudited), 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 combined balance sheet.
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 six
months ended December 31, 1996, the Division adopted this statement and
determined that no impairment loss need be recognized for property and
equipment.
F-26
<PAGE> 79
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED)
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER
JUNE 30, JUNE 30, 31, MARCH 31,
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Equipment....................................... $2,831,595 $3,526,944 $3,553,035 $3,576,954
Leasehold improvements.......................... 2,113,275 2,529,255 2,544,379 2,544,379
---------- ---------- ---------- ----------
4,944,870 6,056,199 6,097,414 6,121,333
Less accumulated depreciation................... 1,149,386 1,338,477 1,567,186 1,678,105
---------- ---------- ---------- ----------
3,795,484 4,717,722 4,530,228 4,443,228
Construction in progress........................ 73,215 9,488 -- --
---------- ---------- ---------- ----------
$3,868,699 $4,727,210 $4,530,228 $4,443,228
========== ========== ========== ==========
</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, NRI debt for
which the Division is jointly and severally liable, as a liability and reduction
of the Division's equity. NRI debt for which the Division is jointly and
severally liable, net of debt issuance costs, is comprised of the following:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31, MARCH 31,
1995 1996 1996 1997
---------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <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........................... $3,257,507 $ 2,913,757 $ 2,863,757 $ 2,863,757
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........................... 1,350,000 5,030,264 5,030,264 5,030,264
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 December 31,
1996....................................... 3,281,240 3,403,813 3,665,958 3,688,923
Subordinated debentures, interest due
quarterly at 10%........................... 1,400,000 1,400,000 1,400,000 1,400,000
Accrued interest............................. 81,395 298,550 434,800 594,618
Debt issuance costs.......................... (578,000) (601,000) (531,478) (531,478)
---------- ----------- ----------- -----------
Total long-term debt............... 8,792,142 12,445,384 12,863,301 13,046,084
Less current portion......................... 872,016 3,892,082 11,463,301 11,646,084
---------- ----------- ----------- -----------
Total long-term debt, less current
portion.......................... $7,920,126 $ 8,553,302 $ 1,400,000 $ 1,400,000
========== =========== =========== ===========
</TABLE>
F-27
<PAGE> 80
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED)
(4) INCOME TAXES
The (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
YEAR ENDED JUNE 30, ENDED ENDED
-------------------------------- DECEMBER 31, MARCH 31,
1994 1995 1996 1996 1997
-------- -------- -------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal........................... $(21,834) $ 21,834 $ -- $ -- $ --
State............................. (3,971) -- -- -- --
-------- -------- -------- -------- -------
Total current............. (25,805) 21,834 -- -- --
-------- -------- -------- -------- -------
Deferred:
Federal........................... (20,680) (43,090) 108,259 50,018 --
State............................. (3,878) (2,757) 20,299 9,378 --
-------- -------- -------- -------- -------
Total deferred............ (24,558) (45,847) 128,558 59,396 --
-------- -------- -------- -------- -------
Total..................... $(50,363) $(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:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED THREE MONTHS
YEAR ENDED JUNE 30, DECEMBER ENDED
-------------------------------- 31, MARCH 31,
1994 1995 1996 1996 1997
----- ----- ------------ ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax (provision)
benefit computed at statutory
rates.............................. (34.0)% (34.0)% 34.0% 34.0% 34.0%
State taxes, net of federal
benefit............................ (4.0) (4.0) 4.0 4.0 4.0
Increase in valuation allowance...... -- -- -- (9.5) (37.5)
Other................................ (.5) (.5) (.5) (.5) (.5)
----- ----- ---- ---- -----
Effective tax rate................... (38.5)% (38.5)% 37.5% 28.0% --%
===== ===== ==== ==== =====
</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, DECEMBER
--------------------- 31, MARCH 31,
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 10,576 $ 214,596 $ 336,950 $ 437,259
--------- --------- --------- ---------
Total gross deferred tax assets.............. 10,576 214,596 336,950 437,259
Valuation allowance............................. -- -- (19,945) (91,578)
--------- --------- --------- ---------
Total deferred tax assets.................... 10,576 214,596 317,005 345,681
--------- --------- --------- ---------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation.................. (198,530) (273,992) (317,005) (345,681)
--------- --------- --------- ---------
Total gross deferred tax liabilities......... (198,530) (273,992) (317,005) (345,681)
--------- --------- --------- ---------
Net deferred tax liability................... $(187,954) $ (59,396) $ -- $ --
========= ========= ========= =========
</TABLE>
F-28
<PAGE> 81
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED)
At December 31, 1996, the Division has net operating carryforwards, to be
utilized by NRI, for federal and state purposes of approximately $876,000 and
$944,000, respectively, which are available to offset future taxable income,
through 2011.
(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 December 31:
1997.............................................. $ 570,811
1998.............................................. 565,193
1999.............................................. 563,669
2000.............................................. 574,015
2001.............................................. 563,076
Thereafter........................................ 3,017,420
----------
$5,854,184
==========
</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:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED THREE MONTHS
YEAR ENDED JUNE 30, DECEMBER ENDED
-------------------------------------- 31, MARCH 31,
1994 1995 1996 1996 1997
-------- -------- ------------ ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Minimum rent.................... $215,700 $326,732 $512,485 $258,228 $129,114
Contingent rent................. 63,359 98,253 81,466 32,523 12,646
-------- -------- -------- -------- --------
$279,059 $424,985 $593,951 $290,751 $141,760
======== ======== ======== ======== ========
</TABLE>
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 1996 or 1995. 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> 82
NORTH'S RESTAURANTS
(A DIVISION OF NORTH'S RESTAURANTS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1996, DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED)
(7) SELECTED FINANCIAL INFORMATION (UNAUDITED)
The following statements of operations are provided for informational
purposes and are unaudited:
<TABLE>
<CAPTION>
SIXTEEN WEEKS ENDED
TWELVE MONTHS ---------------------------
ENDED APRIL 8, APRIL 7,
DECEMBER 31, 1996 1996 1997
----------------- ----------- -----------
<S> <C> <C> <C>
Revenues......................................... $ 10,830,045 $ 3,440,533 $ 3,136,413
------------ ----------- -----------
Costs and expenses:
Food costs..................................... (4,013,395) (1,275,686) (1,186,698)
Labor costs.................................... (3,289,756) (1,058,763) (943,729)
Occupancy and other expenses................... (1,885,141) (560,052) (587,255)
General and administrative expenses............ (970,170) (388,315) (346,197)
Depreciation and amortization.................. (634,965) (166,063) (149,221)
------------ ----------- -----------
Total costs and expenses............... (10,793,427) (3,448,879) (3,213,100)
------------ ----------- -----------
Income (loss) from operations............... 36,618 (8,346) (76,687)
Interest expense................................. (554,299) (188,953) (184,258)
------------ ----------- -----------
Loss before income tax benefit.............. (517,681) (197,299) (260,945)
Income tax benefit............................... 174,000 73,987 --
------------ ----------- -----------
Net loss.................................... $ (343,681) $ (123,312) $ (260,945)
============ =========== ===========
</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> 83
[Photos of Interior and Exterior
of Representative Restaurants]
<PAGE> 84
======================================================
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 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........................... 7
Use of Proceeds........................ 13
Dividend Policy........................ 13
Capitalization......................... 14
Dilution............................... 15
Selected Combined Financial Data....... 16
Selected Financial Data................ 17
Selected Pro Forma Financial Data...... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 29
Management............................. 39
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
Index to Financial Statements.......... F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS
IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
2,500,000 SHARES
STAR BUFFET, INC.
COMMON STOCK
---------------------------------
PROSPECTUS
---------------------------------
EQUITABLE SECURITIES
CORPORATION
EVEREN SECURITIES, INC.
, 1997
======================================================
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered hereunder. All of the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee...................................... $ 10,455
NASD filing fee........................................... 3,950
Nasdaq National Market application fee.................... 27,500
Printing expenses......................................... 125,000
Legal fees and expenses................................... 200,000
Accounting fees and expenses.............................. 200,000
Blue sky fees and expenses................................ 5,000
Transfer agent and registrar fees......................... 5,000
Miscellaneous............................................. 123,095
--------
Total........................................... $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by the Delaware General Corporation Law, the Certificate
of Incorporation of the Registrant (Exhibit 3.1 hereto) eliminates the liability
of directors to the Registrant or its stockholders for monetary damages for
breach of fiduciary duty as a directors, except to the extent otherwise required
by the Delaware General Corporation Law.
(b) The Certificate of Incorporation provides that the Registrant will
indemnify each person who was or is made a party to any proceeding by reason of
the fact that such person is or was a director or officer of the Registrant
against all expense, liability and loss reasonably incurred or suffered by such
person in connection therewith to the fullest extent authorized by the Delaware
General Corporation Law. The Registrant's Bylaws (Exhibit 3.2 hereto) provide
for a similar indemnity to directors and officers of the Registrant to the
fullest extent authorized by the Delaware General Corporation Law.
(c) The Certificate of Incorporation also gives the Registrant the ability
to enter into indemnification agreements with each of its directors and
officers. The Registrant has entered into indemnification agreements with
certain of its directors and officers (Exhibit 10.5 hereto), which provide for
the indemnification of such persons against any an all expenses, judgments,
fines, penalties and amounts paid in settlement, to the fullest extent permitted
by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On August , 1997, the Registrant issued 2,600,000 shares of Common Stock
to JB's Restaurants, Inc. in exchange for all the issued and outstanding stock
of Summit. The foregoing transaction was completed without registration under
the Act in reliance upon Section 4(2) of the Act for transactions not involving
a public offering, among others, on the basis that such transaction did not
involve any public offering and the purchaser was sophisticated with access to
the kind of information registration would provide.
II-1
<PAGE> 86
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.*
4.1 Form of Common Stock Certificate.*
5.1 Opinion of Stradling Yocca Carlson & Rauth, a professional corporation.*
10.1 Star Buffet, Inc. 1997 Stock Incentive Plan (the "1997 Plan").*
10.2 Form of Stock Option Agreement for the 1997 Plan.*
10.3 Form of Restricted Stock Purchase Agreement for the 1997 Plan.*
10.4 Form of Indemnification Agreement.
10.5 Management Services Agreement with CKE.
10.6 Form of Franchise Agreement with HomeTown Buffet, Inc.*
10.7 Asset Purchase Agreement with North's Restaurants, Inc. dated July 24, 1997.
10.8 Letter of Intent with Stacey's Buffet, Inc. dated July 18, 1997.*
10.9 Assignment Agreement between CKE and the Company.*
10.10 Headquarters Lease with dated , 199 .*
10.11 Contribution Agreement with CKE.*
10.12 Asset Purchase Agreement with Taco Bueno, Inc. dated July , 1997.*
10.13 Promissory Note with Taco Bueno, Inc.*
21.1 List of Subsidiaries.*
23.1 Consent of Stradling Yocca Carlson & Rauth, a professional corporation (see
Exhibit 5.1).*
23.2 Consents of KPMG Peat Marwick LLP.
23.3 Consents of director nominees.*
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedules.
</TABLE>
- ---------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions or otherwise, the Registrant has been
II-2
<PAGE> 87
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the Offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Salt Lake
City, Utah, on the 28th day of July, 1997.
STAR BUFFET, INC.
By: /s/ ROBERT E. WHEATON
------------------------------------
Robert E. Wheaton
Chief Executive Officer and
President
POWER OF ATTORNEY
We, the undersigned directors and officers of Star Buffet, Inc., do hereby
constitute and appoint Robert E. Wheaton and Theodore Abajian or either of them,
our true and lawful attorneys and agents, to do any and all acts and things in
our name and behalf in our capacities as directors and officers and to execute
any and all instruments for us and in our names in the capacities indicated
below, which said attorneys and agents, or either of them, may deem necessary or
advisable to enable said corporation to comply with the Securities Act of 1933,
as amended, and any rules, regulations, and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement, including
specifically, but without limitation, power and authority to sign for us or any
of us in our names and in the capacities indicated below, any and all amendments
(including post-effective amendments) to this Registration Statement, or any
related registration statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended; and we do hereby
ratify and confirm all that the said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------------ -------------------
<C> <C> <S>
/s/ WILLIAM P. FOLEY II Chairman of the Board July 28, 1997
- -----------------------------------------------
William P. Foley II
/s/ ROBERT E. WHEATON Chief Executive Officer July 28, 1997
- ----------------------------------------------- President and Director
Robert E. Wheaton (Principal Executive Officer)
/s/ THEODORE ABAJIAN Chief Financial Officer July 28, 1997
- ----------------------------------------------- (Principal Financial and
Theodore Abajian Principal Accounting Officer)
/s/ C. THOMAS THOMPSON Director July 28, 1997
- -----------------------------------------------
C. Thomas Thompson
</TABLE>
II-4
<PAGE> 89
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- -------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement.*....................................
3.1 Certificate of Incorporation of the Registrant. ....................
3.2 Bylaws of the Registrant.*..........................................
4.1 Form of Common Stock Certificate.*..................................
5.1 Opinion of Stradling Yocca Carlson & Rauth, a professional
corporation.*.......................................................
10.1 Star Buffet, Inc. 1997 Stock Incentive Plan (the "1997 Plan").*.....
10.2 Form of Stock Option Agreement for the 1997 Plan.*..................
10.3 Form of Restricted Stock Purchase Agreement for the 1997 Plan.*.....
10.4 Form of Indemnification Agreement. .................................
10.5 Management Services Agreement with CKE..............................
10.6 Form of Franchise Agreement with HomeTown Buffet, Inc.* ............
10.7 Asset Purchase Agreement with North's Restaurants, Inc. dated July
24, 1997. ..........................................................
10.8 Letter of Intent with Stacey's Buffet, Inc. dated July 18, 1997*....
10.9 Assignment Agreement between CKE and the Company.*..................
10.10 Headquarters Lease with dated , 199 .*.........
10.11 Contribution Agreement with CKE.*...................................
10.12 Asset Purchase Agreement with Taco Bueno, Inc. dated July ,
1997.*..............................................................
10.13 Promissory Note to Taco Bueno, Inc.*................................
21.1 List of Subsidiaries.*..............................................
23.1 Consent of Stradling Yocca Carlson & Rauth, a professional
corporation (see Exhibit 5.1).*.....................................
23.2 Consents of KPMG Peat Marwick LLP. .................................
23.3 Consents of director nominees.*.....................................
24.1 Power of Attorney (see page II-4). .................................
27.1 Financial Data Schedules............................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
STAR BUFFET, INC.
ARTICLE 1
The name of this Corporation is Star Buffet, Inc.
ARTICLE 2
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, Wilmington, Delaware 19805. The name of the
Corporation's registered agent at that address is The Prentice-Hall Corporation
System, Inc., New Castle County, 1013 Centre Road, Wilmington, Delaware 19805.
ARTICLE 3
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware, as amended from time to time.
ARTICLE 4
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 20,000,000, of which (i) 18,500,000
shares shall be designated "Common Stock" and shall have a par value of $0.001
per share; and (ii) 1,500,000 shares shall be designated "Preferred Stock" and
shall have a par value of $0.001 per share. The Board of Directors is
authorized, subject to limitations prescribed by law, to provide for the
issuance of the shares of Preferred Stock in one or more series, and by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions thereof.
The authority of the Board with respect to each series shall include, but not be
limited to, determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series,
whether dividends shall be cumulative and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends on shares of
that series;
(c) Whether that series shall have voting rights, in
addition to the voting rights provided by law and, if so, the terms of such
voting rights;
<PAGE> 2
(d) Whether that series shall have conversion privileges
and, if so, the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine;
(e) Whether or not the shares of that series shall be
redeemable and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series and, if so, the terms and amount
of such sinking fund; and
(g) The rights of the shares of that series in the event
of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series.
ARTICLE 5
1. BOARD OF DIRECTORS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
and elections of directors need not be by written ballot unless otherwise
provided in the Bylaws. The number of directors of the Corporation shall be
fixed from time to time by the Board of Directors either by a resolution or
Bylaw adopted by the affirmative vote of a majority of the entire Board of
Directors. Notwithstanding the foregoing, during any period in which the holders
of any one or more series of Preferred Stock, voting as a class, shall be
entitled to elect a specific number of directors by reason of dividend
arrearages or other contingencies giving them the right to do so, then and
during such time as such right continues, (a) the then otherwise authorized
number of directors shall be increased by such specified number of directors and
the holders of shares of such series of Preferred Stock, voting as a class,
shall be entitled to elect such specified number of directors in accordance with
the procedure set forth in the resolution or resolutions of the Board creating
such series and providing for the issuance of such shares and (b) each such
additional director shall serve until his or her successor shall be elected and
shall qualify, or until his or her right to hold such office terminates pursuant
to the resolution or resolutions of the Board creating such series of Preferred
Stock and providing for the issuance of shares of such series, whichever occurs
earlier. Whenever the holders of shares of such series of Preferred Stock are
divested of such right to elect directors pursuant to the resolution or
resolutions of the Board creating such series and providing for the issuance of
such shares, the terms of office of all directors elected by the holders of such
series of Preferred Stock pursuant to such rights, or elected to fill any
vacancies resulting from the death, resignation or removal of directors so
elected by the holders of such series, shall forthwith terminate and the
authorized number of directors shall be reduced accordingly.
2. MEETINGS OF STOCKHOLDERS. Meetings of the stockholders may be
held within or without the State of Delaware, as the Bylaws may provide. Special
meetings of stockholders of the Corporation for any purpose or purposes may be
called at any time by a majority of the members of the Board of Directors or by
a committee of the Board of Directors that has been duly designated by the Board
of Directors and whose power and authority, as provided in a resolution adopted
by the Board of Directors or in the Bylaws of the Corporation, includes the
power to call such meetings, but such special meetings of stockholders of the
Corporation may not be called by any other person or persons or in any other
manner; provided, however, that if and to the extent that any special meeting of
2
<PAGE> 3
stockholders may be called by any other person or persons specified in any
certificate of designations filed under Section 151(g) of the Delaware General
Corporation Law (or its successor statute as in effect from time to time), then
such special meeting may also be called by the person or persons, in the manner,
at the times and for the purposes so specified.
3. STOCKHOLDER ACTION BY WRITTEN CONSENT. Any election of
directors or other action by the stockholders of the Corporation may be effected
at an annual or special meeting of stockholders and may not be effected by
written consent without a meeting.
4. CORPORATE RECORDS. The books of the Corporation may be kept
(subject to any provision contained in the Delaware Statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or by the Bylaws of the Corporation.
ARTICLE 6
A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this provision shall not eliminate or limit
the liability of a director (i) for any breach of his duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law, (iii)
under Section 174 of the General Corporation Law of the State of Delaware, or
(iv) for any transaction from which the director derives an improper personal
benefit. If the General Corporation Law of the State of Delaware is hereafter
amended to authorize corporate action further limiting or eliminating the
personal liability of directors, then the liability of the directors of the
Corporation shall be limited or eliminated to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as so amended from time to
time. Any repeal or modification of this Article 6 by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
ARTICLE 7
This Corporation shall, to the maximum extent permitted from time to
time under the law of the State of Delaware, indemnify and upon request shall
advance expenses to any person who is or was a party or is threatened to be made
a party to any threatened, pending or completed action, suit, proceeding or
claim, whether civil, criminal, administrative or investigative, by reason of
the fact that such person is or was or has agreed to be a director or officer of
this Corporation or while a director or officer is or was serving at the request
of this Corporation as a director, officer, partner, trustee, employee or agent
of any corporation, partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans, against expenses
(including attorney's fees and expenses), judgments, fines, penalties and
amounts paid in settlement incurred in connection with the investigation,
preparation to defend or defense of such action, suit, proceeding or claim;
provided; however, that the foregoing shall not require this Corporation to
indemnify or advance expenses to any person in connection with any action, suit,
proceeding, claim or counterclaim initiated by or on behalf of such person. Such
indemnification shall not be exclusive of other indemnification rights arising
under any by-law, agreement, vote of directors or stockholders or otherwise and
shall inure to the benefit of the heirs and legal representatives of such
person. Any person seeking indemnification under this Article 7 shall be deemed
to have met the standard of conduct required for such indemnification unless the
contrary shall be established. Any repeal or
3
<PAGE> 4
modification of the foregoing provisions of this Article 7 shall not adversely
affect any right or protection of a director or officer of this corporation with
respect to any acts or omissions of such director or officer occurring prior to
such repeal or modification.
ARTICLE 8
In furtherance and not in limitation of the power conferred upon the
Board of Directors by law, the Board of Directors shall have power to make,
adopt, alter, amend and repeal from time to time Bylaws of this Corporation,
subject to the right of the stockholders entitled to vote with respect thereto
to alter and repeal Bylaws made by the Board of Directors.
ARTICLE 9
The name and address of the Incorporator of the Corporation is as
follows:
Christopher D. Ivey
660 Newport Center Drive
Suite 1600
Newport Beach, California 92660-6441
I, THE UNDERSIGNED, being the Incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereunto set my hand this 25th day of July, 1997.
-------------------------------
Christopher D. Ivey
4
<PAGE> 1
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT ("Agreement") is made on ________, 1997,
between STAR BUFFET, INC., a Delaware corporation (the "Company"), and
_________________ ("Indemnitee"), an officer and/or member of the Board of
Directors of the Company.
WHEREAS, the Company desires the benefits of having Indemnitee serve as an
officer and/or director secure in the knowledge that expenses, liabilities and
losses incurred by him in his good faith service to the Company will be borne by
the Company or its successors and assigns in accordance with applicable law; and
WHEREAS, the Company desires that Indemnitee resist and defend against
what Indemnitee may consider to be unjustified investigations, claims, actions,
suits and proceedings which have arisen or may arise in the future as a result
of Indemnitee's service to the Company notwithstanding that conditions in the
insurance markets may make directors' and officers' liability insurance coverage
unavailable or available only at premium levels which the Company may deem
inappropriate to pay; and
WHEREAS, the parties believe it appropriate to memorialize and reaffirm
the Company's indemnification obligations to Indemnitee and, in addition, set
forth the indemnification agreements contained herein;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties agree as follows:
1. INDEMNIFICATION. Indemnitee shall be indemnified and held harmless
by the Company to the fullest extent permitted by its Certificate of
Incorporation, Bylaws and applicable law, as the same exists or may hereafter be
amended, against all expenses, liabilities and loss (including attorneys' fees,
judgments, fines, and amounts paid or to be paid in any settlement approved in
advance by the Company, such approval not to be unreasonably withheld)
(collectively, "Indemnifiable Expenses") actually reasonably incurred or
suffered by Indemnitee in connection with any present or future threatened,
pending or contemplated investigation, claim, action, suit or proceeding,
whether civil, criminal, administrative or investigative (collectively,
"Indemnifiable Litigation"), (i) to which Indemnitee is or was a party or is
threatened to be made a party by reason of any action or inaction in
Indemnitee's capacity as a director or officer of the Company, or (ii) with
respect to which Indemnitee is otherwise involved by reason of the fact that
Indemnitee is or was serving as a director, officer, employee or agent of the
Company, or of any subsidiary or division, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise. Notwithstanding the
foregoing, Indemnitee shall have no right to indemnification for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended.
<PAGE> 2
2. INTERIM EXPENSES. The Company agrees to pay Indemnifiable Expenses
incurred by Indemnitee in connection with any Indemnifiable Litigation in
advance of the final disposition thereof, provided that the Company has received
an undertaking by or on behalf of Indemnitee, substantially in the form attached
hereto as Exhibit A, to repay the amount so advanced to the extent that it is
ultimately determined that Indemnitee is not entitled to be indemnified by the
Company under this Agreement or otherwise. The advances to be made hereunder
shall be paid by the Company to Indemnitee within twenty (20) days following
delivery of a written request therefor by Indemnitee to the Company.
3. PROCEDURE FOR MAKING DEMAND. Indemnitee shall, as a condition
precedent to his right to be indemnified under this Agreement, give the Company
notice in writing as soon as practicable of any claim made against Indemnitee
for which indemnification will or could be sought under this Agreement. Notice
to the Company shall be directed to the Chief Executive Officer of the Company
at the address set forth in Section 10 hereof (or such other address as the
Company shall designate in writing to Indemnitee). Notice shall be deemed
received three business days after the date postmarked and sent by certified or
registered mail, properly addressed; otherwise notice shall be deemed received
when such notice shall actually be received by the Company. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power. Any
indemnification provided for in Section 1 shall be made no later than forty-five
(45) days after receipt of the written request of Indemnitee.
4. FAILURE TO INDEMNIFY.
(a) If a claim under this Agreement, or any statute, or under any
provision of the Company's Certificate of Incorporation or Bylaws providing for
indemnification, is not paid in full by the Company, within forty-five (45) days
after a written request for payment thereof has been received by the Company,
Indemnitee may, but need not, at any time thereafter bring an action against the
Company to recover the unpaid amount of the claim and, subject to Section 11 of
this Agreement, if successful in whole or in part, Indemnitee shall also be
entitled to be paid for the expense (including attorneys' fees) of bringing such
action.
(b) It shall be a defense to such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standard of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed, but the burden of
proving such defense shall be on the Company and Indemnitee shall be entitled to
receive interim payments of interim expenses pursuant to Section 2 hereof unless
and until such defense may be finally adjudicated by court order or judgment
from which no further right of appeal exists. It is the parties' intention that
if the Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be for the court to decide, and
neither the failure of the Company (including its board of directors,
independent legal counsel, or its stockholders) to have made a determination
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual determination by the Company (including its board of
directors, any committee or subgroup of the board of directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that
<PAGE> 3
Indemnitee has or has not met the applicable standard of conduct.
5. NOTICE TO INSURERS. If, at the time of the receipt of a notice of a
claim pursuant to Section 3 thereof, the Company has director and/or officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
6. RETENTION OF COUNSEL. In the event that the Company shall be
obligated to pay Indemnifiable Expenses as a result of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election to do so. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by that Indemnitee with respect to that same
proceeding, provided that (i) Indemnitee shall have the right to employ his or
her counsel in any such proceeding at Indemnitee's expense, and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not, in fact, have employed counsel to
assume defense of such proceeding, then the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
7. SUCCESSORS. This Agreement establishes contract rights which shall
be binding upon, and shall inure to the benefit of, the successors, assigns,
heirs and legal representatives of the parties hereto.
8. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company may be
required in the future to undertake to the Securities and Exchange Commission to
submit the question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee, and, in that event, the Indemnitee's rights and the Company's
obligations hereunder shall be subject to that determination.
9. CONTRACT RIGHTS NOT EXCLUSIVE. The contract rights conferred by this
Agreement shall be in addition to, but not exclusive of, any other right which
Indemnitee may have or may hereafter acquire under any statute, provision of the
Company's Certificate of Incorporation or Bylaws, agreement, vote of
shareholders or disinterested directors, or otherwise.
10. INDEMNITEE'S OBLIGATIONS. The Indemnitee shall promptly advise the
Company in writing of the institution of any investigation, claim, action, suit
or proceeding which is or may be subject to this Agreement and keep the Company
generally informed of, and consult with the Company with respect to, the status
of any such investigation, claim, action, suit or proceeding.
<PAGE> 4
Notices to the Company shall be directed to Star Buffet, Inc., 440 Lawndale
Drive, Salt Lake City, Utah, 84115-2917, Attn: Chief Executive Officer (or other
such address as the Company shall designate in writing to Indemnitee). Notice
shall be deemed received three days after the date postmarked if sent by
certified or registered mail, properly addressed. In addition, Indemnitee shall
give the Company such information and cooperation as it may reasonably require
and as shall be within Indemnitee's power.
11. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, a court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement, or to enforce
or interpret any other terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
12. SEVERABILITY. Should any provision of this Agreement, or any clause
hereof, be held to be invalid, illegal or unenforceable, in whole or in part,
the remaining provisions and clauses of this Agreement shall remain fully
enforceable and binding on the parties.
13. MODIFICATION AND WAIVER. No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether of
not similar) nor shall such waiver constitute a continuing waiver.
14. CHOICE OF LAW. The validity, interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
Delaware.
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
STAR BUFFET, INC.:
By:
-------------------------------
Its:
------------------------------
INDEMNITEE:
----------------------------------
Name:
<PAGE> 6
EXHIBIT A
UNDERTAKING AGREEMENT
This UNDERTAKING AGREEMENT is made on _______________, 19__, between STAR
BUFFET, INC., a Delaware corporation (the "Company") and __________________, an
officer and/or member of the board of directors of the Company ("Indemnitee").
WHEREAS, Indemnitee may become involved in investigations, claims,
actions, suits or proceedings which have arisen or may arise in the future as a
result of Indemnitee's service to the Company; and
WHEREAS, Indemnitee desires that the Company pay any and all expenses
(including, but not limited to, attorneys' fees and court costs) actually and
reasonably incurred by Indemnitee or on Indemnitee's behalf in defending or
investigating any such suits or claims and that such payment be made in advance
of the final disposition of such investigations, claims, actions, suits or
proceedings to the extent that Indemnitee has not been previously reimbursed by
insurance; and
WHEREAS, the Company is willing to make such payments but, in accordance
with Section 145 of the General Corporation Law of the State of Delaware, the
Company may make such payments only if it receives an undertaking to repay from
Indemnitee; and
WHEREAS, Indemnitee is willing to give such an undertaking;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. In regard to any payments made by the Company to Indemnitee pursuant to
the terms of the Indemnification Agreement dated __________, 19__, between the
Company and Indemnitee, Indemnitee hereby undertakes and agrees to repay to the
Company any and all amounts so paid promptly and in any event within thirty (30)
days after the disposition, including any appeals, of any litigation or
threatened litigation on account of which payments were made, but only to the
extent that Indemnitee is ultimately found not entitled to be indemnified by the
Company under the Bylaws of the Company and Section 145 of the General
Corporation Law of the State of Delaware, or other applicable law.
2. This Agreement shall not affect in any manner rights which Indemnitee
may have against the Company, any insurer or any other person to seek
indemnification for or reimbursement of any expenses referred to herein or any
judgment which may be rendered in any litigation or proceeding.
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
on the date first above written.
STAR BUFFET, INC.:
By:
-------------------------------
Its:
------------------------------
INDEMNITEE:
----------------------------------
(Print Name)
<PAGE> 1
EXHIBIT 10.5
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is made and entered
into as of this _____ day of ____________, 1997, by and between CKE RESTAURANTS,
INC., a Delaware corporation ("Manager"), and STAR BUFFET, INC., a Delaware
corporation ("STAR").
RECITALS:
A. Each of the companies listed on Exhibit A attached hereto
(individually, an "Operating Company" and collectively the "Operating
Companies") is a wholly-owned, direct or indirect subsidiary of STAR. Manager
and its subsidiaries employ a staff of administrative and professional personnel
that provide for certain administrative support services for certain
administrative functions, including, without limitation, management, financial,
real estate, purchasing, information technology, employee benefits, human
resources and record keeping services (collectively, the "Services"), and
Manager incurs expenses incident thereto for the benefit of the Operating
Companies and the businesses conducted by them; and
B. STAR desires to engage Manager to perform such Services for the
benefit of STAR and the Operating Companies, and Manager desires to perform such
Services, on the terms and provisions hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth herein, and for good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Engagement. STAR hereby engages Manager to provide those Services
requested from time to time by STAR or any Operating Company, and Manager shall
endeavor to render to STAR or such Operating Company those Services requested
that Manager determines to be of a nature and extent generally performed by
Manager and which can be performed by Manager within its authority from its
Board of Directors.
2. Standard of Conduct; Limitation of Liability/Damages. Manager
covenants that the Services shall be furnished to STAR and each Operating
Company in a professional and diligent manner and in accordance with reasonable
requests made by STAR or the Operating Company.
Notwithstanding the foregoing, Manager shall not be liable for any
direct, indirect or consequential damages suffered or incurred by STAR or the
Operating Company or to any third party, including, without limitation, lost
profits arising from or relating to any breach by Manager of its obligations
hereunder absent a finding in a final judgment of a court of competent
jurisdiction that such damages proximately resulted from the bad faith, gross
negligence or willful misconduct of Manager or its agents. In addition, Manager
shall not be liable to STAR or any Operating Company or to any third party on
account of any action or omission by Manager relating to its performance of the
Services based upon incorrect information supplied by STAR or any Operating
Company reasonably relied upon by Manager. Nothing herein contained shall
<PAGE> 2
authorize or empower Manager to supervise or manage STAR's personnel or any
Operating Company's personnel or to become involved in STAR's or any Operating
Company's day-to-day business decisions in the ordinary course of business.
3. Term. The initial term of this Agreement shall commence on September
15, 1997 and shall continue until midnight on September 15, 2002 (the "Initial
Term"). Upon the expiration of the Initial Term and of each succeeding term
hereunder, this Agreement shall automatically be renewed for an additional term
of one (1) year each unless terminated as herein provided, or unless either
party shall provide not less than ninety (90) days written notice prior to the
expiration of the Initial Term or any renewal term that such party does not
intend to renew this Agreement. Notwithstanding the foregoing, either party may
terminate this Agreement at any time (i) if the other party breaches the terms
and conditions and does not cure any such breach within thirty (30) days after
written notice, or (ii) upon ninety (90) days prior written notice to the other
party. The termination of this Agreement by or with respect to one or more
Operating Companies shall not terminate this Agreement with respect to any other
Operating Company.
4. Fees for Services.
(a) In consideration for the Services provided hereunder, STAR
agrees to pay to Manager an annual general management fee of $350,000 payable in
equal installments ten days following the close of each regular accounting
period (each, an "Accounting Period") during the term of this Agreement. Any
changes to STAR's current information system or an increase/decrease of 10 units
will represent a "significant" change in STAR's operation and upon such
significant change, the general management fee will be increased/decreased
$25,000. Such management fee may be increased cumulatively not more than 10% per
fiscal year at the sole discretion of Manager, effective upon written notice to
STAR.
(b) In addition to the payment of management fees as specified in
paragraph 4(a) above, STAR shall reimburse Manager for all non-ordinary,
out-of-product expenses incurred by or on behalf of Manager or its affiliates in
connection with the Services rendered hereunder, including, without limitation,
costs of replacement equipment, travel expenses, year-end employee/accounting
reporting matters (for example, Form 1099's, W-2's, etc.), and legal and
accounting and other professional fees and expenses. All such expenses which
exceed $50,000 must be approved by STAR prior to incurring such expense.
(c) Manager shall calculate all management fees and expense
reimbursements due to Manager for each Accounting Period hereunder, all of which
shall be paid by STAR within [30] days after receipt of Manager's invoice.
5. Representations, Warranties and Covenants of Manager. Manager hereby
represents, warrants and covenants to STAR as follows:
(a) Manager is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation and has all
requisite power and authority to own and operate its business as presently
conducted.
-2-
<PAGE> 3
(b) Manager has full power and authority to execute, deliver and
perform this Agreement. he execution, delivery and performance of this Agreement
have been duly authorized by Manager and no other action or proceeding in the
part of Manager is necessary to authorize this Agreement or the performance
thereof. This Agreement has been duly and validly executed and delivered by
Manager and constitutes a legal, valid and binding obligation of Manager,
enforceable in accordance with its terms.
(c) The execution, delivery and performance of this Agreement by
Manager will not (with or without the giving of notice or the lapse of time or
both) (i) violate or require any consent or approval under any applicable
provision of any order, injunction, rule, regulation or law; (ii) require any
consent under, conflict with, constitute a default under, or otherwise violate
the terms of any agreements, instruments or other obligations to which Manager
is a party or by which it or any of its property may be bound or affected; or
(iii) require any consent or approval by, notice to or registration with any
governmental authority. In the event at any time during the term of this
Agreement any consents, approvals, notices or registrations are required in
connection with the performance of this Agreement, Manager shall take all
necessary and appropriate steps to obtain or file such consents, approvals,
notices or registrations.
6. Representations, Warranties and Covenants of STAR. STAR hereby
represents, warrants and covenants to Manager as follows:
(a) STAR and each Operating Company is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation and has all requisite power and authority to own and operate the
business which it intends to operate.
(b) STAR has full power and authority to execute, deliver and
perform this Agreement. The execution, delivery and performance of this
Agreement have been duly authorized by STAR and no other action or proceeding on
the part of STAR is necessary to authorize this Agreement or the performance
thereof. This Agreement has been duly and validly executed and delivered by STAR
and constitutes a legal, valid and binding obligation of STAR, enforceable in
accordance with its terms.
(c) The execution, delivery and performance of this Agreement by
STAR will not (with or without the giving of notice or the lapse of time or
both) (i) violate or require any consent or approval under any applicable
provision of any order, injunction, rule, regulation or law; (ii) require any
consent under, conflict with, constitute default under, or otherwise violate the
terms of any agreements, instruments or other obligations to which STAR is a
party or by which it or any of its property may be bound or affected; or (iii)
require any consent or approval by, notice to or registration with any
governmental author it. In the event at any time during the term of this
Agreement any consents, approvals, notices or registrations are required in
connection with the performance of this Agreement, STAR shall take all necessary
and appropriate steps to obtain or file such consents, approvals, notices or
registrations.
7. No Right to Participate in Management; Independent Contractors. This
Agreement shall not be construed to grant Manager any right to control or
participate in the management or financial decisions of STAR or the Operating
Companies in the ordinary course of
-3-
<PAGE> 4
business. In the rendition of the Services, Manager shall provide the Services
based upon compliance with policies and procedures established by the Board of
Directors and officers of STAR or the Operating Companies. STAR and Manager
agree that, with respect to the subject matter of this Agreement, neither party
is an agent, employee or representative of the other and that nothing contained
herein shall be construed to create an agency, employment or representative
relationship or a relationship of partners or joint venturers.
8. Indemnification. Subject to the other terms and conditions hereof,
STAR agrees to indemnify and hold harmless Manager, and Manager agrees to
indemnify and hold harmless STAR (as the context requires, the "Indemnifying
Party" and the "Indemnified Party") of and from any and all claims, demands,
causes of action, liabilities, judgments, losses, deficiencies and expenses,
including court costs and reasonable attorneys' fees) incurred by the
Indemnified Party and arising out of or in any manner, directly or indirectly,
relating to the performance by the Indemnified Party of its obligations
hereunder (other than and excluding the respective indemnification obligations
under this Section) or relating to any act or omission of the Indemnifying
Party's employees or agents. Anything herein to the contrary notwithstanding, no
party shall be obligated to indemnify any other party hereto with respect to any
expenses, loss or damages incurred by the Indemnified Party to the extent that
the Indemnified Party has insurance coverage with respect to such expenses, loss
or damages.
9. General Terms.
(a) This Agreement shall not be assignable by any party, in whole
or in part, without the prior written consent of any other affected party.
(b) This Agreement sets forth the entire understanding and
agreement of the parties with respect to the subject matter hereof. except as
otherwise expressly provided herein, this Agreement may not be changed, modified
or amended except in a writing signed by the affected parties. All previous
negotiations and understandings among the parties are merged into this
Agreement, and there are no warranties, agreements or understandings, express or
implied, except such as are expressly set forth herein.
(c) Any notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
hand-delivered, delivered by facsimile or overnight courier, or if mailed by
certified or registered mail, postage prepaid and return receipt requested,
addressed as set forth hereinafter (or at such other address for a party as
shall be specified by like notice; provided that notice of a change of address
shall be effective only upon receipt thereof):
To Manager: CKE RESTAURANTS, INC.
1200 North Harbor Boulevard
Anaheim, California 92803
Attention: General Counsel
-4-
<PAGE> 5
To STAR or any
Operating Company: STAR BUFFET, INC.
440 Lawndale Drive
Salt Lake City, Utah 84115-2197
Attention: Ted Abajian
(d) This Agreement shall be binding upon and inure to the benefit
of the parties hereto, their respective successors and permitted assigns,
wherever the context admits or requires.
(e) This Agreement may be executed in two or more counterparts
each of which shall be deemed an original, but all of which, together, shall
constitute one and the same instrument.
(f) Any waiver of any provision of this Agreement by either party
may be made only by written notice to the other. No waiver of any breach or
default hereunder shall be deemed to constitute a waiver of any other breach or
default not of the same breach or default on a future occasion.
(g) This Agreement shall be interpreted, construed and enforced
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date above written.
CKE RESTAURANTS, INC.
By:
-------------------------------------
Name:
--------------------------
Title:
--------------------------
STAR BUFFET, INC.
By:
-------------------------------------
Name:
--------------------------
Title:
--------------------------
-5-
<PAGE> 6
EXHIBIT A
OPERATING COMPANIES
Summit Family Restaurants, Inc.
HTB Restaurants, Inc.
<PAGE> 1
EXHIBIT 10.7
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
NORTH'S RESTAURANTS, INC.,
AS SELLER,
AND
CKE RESTAURANTS, INC.,
AS BUYER
DATED JULY 24, 1997
<PAGE> 2
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made as of July 24,
1997, by and between NORTH'S RESTAURANTS, INC., an Oregon corporation (the
"Seller"), and CKE RESTAURANTS, INC., a Delaware corporation ("CKE" or the
"Buyer").
R E C I T A L S
A. Seller is engaged in the business of owning and operating JJ
North's Grand Buffet restaurants at the locations set forth on Exhibit A hereto
(the "Restaurants") and franchising JJ North's Grand Buffet and North's Chuck
Wagon restaurants at the locations set forth in Exhibit A-1 hereto
(collectively, the "Business").
B. Buyer desires to purchase from Seller, and Seller desires to
sell and transfer to Buyer, the assets used in the operation of the seven
Restaurants identified on Exhibit B hereto (the "Purchased Restaurants"),
including, without limitation, all right, title and interest of Seller in and to
substantially all of the assets related to the ownership and operation of such
Purchased Restaurants, and, in connection therewith, Buyer is willing to assume
certain liabilities of Seller relating to such Purchased Restaurants.
C. Concurrently herewith, and as a condition to this Agreement,
Buyer and Seller are executing: (1) an Option Agreement, pursuant to which Buyer
shall have the option to purchase nine additional restaurants; (2) a Stock
Purchase Warrant, pursuant to which Seller is entitled to purchase Common Stock
of Star Buffet, Inc.; (3) a Business Services Agreement, pursuant to which Buyer
will provide certain services to Seller; and (4) a License Agreement, pursuant
to which Buyer grants Seller a license to use the Intangible Property Rights (as
defined below). Copies of the Option Agreement, Stock Purchase Warrant, Business
Services Agreement and License Agreement are attached hereto as Exhibits D, F, G
and H, respectively, and are incorporated by reference herein.
NOW, THEREFORE, in consideration of the terms, covenants, and
conditions hereinafter set forth, the parties hereto agree as follows:
A G R E E M E N T
1. PURCHASED ASSETS. Subject to the terms and conditions of this
Agreement, Buyer hereby agrees to purchase from Seller, and Seller hereby agrees
to sell, transfer and assign to Buyer, free and clear of any and all Liens and
Encumbrances (as hereinafter defined), all of Seller's right, title and interest
in and to assets that are related to, used in the operation of or have been
generated by the Purchased Restaurants (collectively, the "Purchased Assets")
including, but not limited to, the following:
1.1 All of the equipment, furniture, fixtures, trade fixtures,
signs, sign poles, machinery, kitchen equipment, computers, cash registers,
menus, uniforms, small equipment, small wares and other tangible personal
property used in connection with the operation of the Purchased Restaurants,
wherever located and owned by Seller on the Closing Date, including, without
limitation, those assets identified on Schedule 1.1 attached hereto (the "Fixed
Assets");
1.2 All inventory of Seller purchased for use in connection with
the Purchased Restaurants, wherever located and owned by Seller on the Closing
Date (the "Inventory"), including, without limitation, the Inventory identified
on Schedule 1.2 hereto;
1.3 All of the agreements relating to the Purchased Restaurants
under which Seller owns or holds any leasehold interest in real property (each,
a "Real Property Lease"), including any buildings and improvements thereon, or
leases in personal property, whether tangible or intangible (each a "Personal
Property Lease") (collectively, the "Leases"), a true and complete list of which
is set forth in Schedule 1.3 hereto;
1.4 All of the agreements, contracts, licenses, instruments,
commitments and understandings, written or oral, that (in addition to the
Leases) are related to the Purchased Restaurants and listed (or, in the case of
oral agreements or understandings, that are described) under the caption
"Assigned Contracts" in Schedule 1.4 attached hereto (collectively, the
"Assigned Contracts");
1.5 All rights in and to any governmental and private permits,
licenses, certificates of occupancy, franchises and authorizations, to the
extent assignable, used in or relating to the Purchased Restaurants;
1.6 All rights in and to any processes, recipes, menus,
formulations, methods, software (including documentation), technology, know-how,
formulae, trade secrets, trade dress, inventions, patents, copyrights, copyright
registrations, trade names, trademarks and service marks (and federal and state
registrations thereof), and all applications therefor, owned or held by Seller
and used in connection with the operation of or relating to the Restaurants
(collectively, the "Intangible Property Rights"), which are more fully described
in Schedule 1.6 and which shall include, without limitation, all goodwill
associated therewith;
1.7 (intentionally omitted);
1.8 All financial books and accounting records, and all files,
lists, publications, and other records and data used in or relating to the
Purchased Restaurants, including, without limitation, lists of suppliers and
distributors and related files, environmental records, price lists, marketing
plans, sales records, labor relations and employee compensation records, and
maintenance records, regardless of the medium on which such information is
stored or maintained;
1.9 All cash on hand at the Purchased Restaurants as of the
Closing Date;
1.10 All prepaid fees and deposits associated with the Leases and
the utilities used in connection with the Purchased Restaurants, which are set
forth in Schedule 1.10 attached hereto;
1.11 Any cause of action, claim, suit, proceeding, judgment or
demand, of whatsoever nature, of or held by Seller against any third parties
arising out of the Purchased Assets or the Purchased Restaurants;
1.12 (intentionally omitted); and
1.13 All goodwill associated with the Purchased Restaurants and the
Purchased Assets, including any of the Intangible Property Rights.
-2-
<PAGE> 3
2. EXCLUDED ASSETS. Seller is not selling, and the Purchased Assets do not
include, the following assets (the "Excluded Assets"):
2.1 Any corporate and financial records of Seller; other than with
respect to the Purchased Restaurants, provided, however, that Buyer shall be
entitled to receive copies of the same to the extent reasonably necessary for
any purpose;
2.2 Any rights under operating contracts, other than the Assigned
Contracts;
2.3 Any prepaid expenses, preopening costs or loan acquisition
fees except as set forth on Schedule 1.10;
2.4 Any assets (other than Intangible Property Rights) used in
connection with Restaurants other than Purchased Restaurants, which are
specifically set forth on Schedule 2.4 hereto; and
2.5 Any contracts or agreements pursuant to which Seller has
granted any person or entity any franchise, license or other right to operate a
Restaurant.
3. OBLIGATIONS BEING ASSUMED; LIABILITIES NOT BEING ASSUMED.
3.1 ASSUMED OBLIGATIONS. Buyer hereby agrees to assume only: (i)
those liabilities and obligations specifically set forth in Schedule 3.1
including, but not limited to, accrued vacation and all disclosed, liquidated
trade payables relating to the Purchased Restaurants; (ii) those executory
obligations arising after the Closing Date under the Assigned Contracts; and
(iii) the obligations arising after the Closing Date under the Leases
(collectively, the "Assumed Obligations"). Except as set forth in Schedule 3.1,
Seller represents and warrants that Seller is not in default of any Assumed
Obligation, and Buyer shall not be obligated to assume any Assumed Obligation
which is in default as of the date hereof.
3.2 LIABILITIES NOT BEING ASSUMED. Except for the Assumed
Obligations, Seller agrees that Buyer shall not be obligated to assume or
perform and is not assuming or performing any, and Seller shall remain
responsible for and shall indemnify, defend (with counsel reasonably acceptable
to Buyer and paid for by Seller) and hold harmless Buyer from and against all,
liabilities and obligations of Seller, whether known or unknown, and regardless
of when such liabilities or obligations may arise or may have arisen or when
they are or were asserted (the "Retained Liabilities"), which shall include,
without limitation, any and all of the following obligations or liabilities of
Seller:
(a) Any compensation or benefits payable to employees of
Seller, other than payroll expenses expressly assumed and listed on Schedule
3.1, including without limitation, any liabilities arising under any employee
pension or profit sharing plan or other employee benefit plan or retirement plan
and any of Seller's obligations for insurance, sick pay or any non-cash employee
compensation arrangement;
(b) Subject to the proration of real and personal
property taxes at Closing relating to the Purchased Restaurants, all federal,
state, local, foreign or other taxes that have arisen out of the Restaurants or
may arise hereafter out of Seller's other operations;
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(c) Any intercompany obligations between Seller and any
of its subsidiaries or affiliates;
(d) Any Liens or Encumbrances on any of the Purchased
Assets and all obligations and liabilities secured thereby that are not set
forth on Schedule 3.1 hereto;
(e) All obligations of Seller, either for borrowed money
or incurred in connection with the purchase, lease or acquisition of any assets,
that are not set forth on Schedule 3.1 hereto (collectively, the "Retained
Debt");
(f) Any accounts or notes payable of Seller that are not
set forth on Schedule 3.1 hereto (the "Retained Payables");
(g) Any claims, demands, actions, suits or legal
proceedings that have arisen or may arise hereafter from or in connection with
Seller's operation of the Restaurants, including, but not limited to, those
arising out of any act or omission or default of Seller under any Assigned
Contracts, regardless of when such liability was incurred or when the obligation
is asserted, those set forth in Schedule 6.15, or arising from any business or
business activities engaged in by Seller other than in connection with the
Purchased Restaurants, whether engaged in prior to or after the date hereof, and
whether such claims, demands, actions, suits or legal proceedings are presently
pending or threatened or are threatened or asserted at any time after the date
hereof;
(h) Any obligations under any employment or consulting
agreement, or any union or other organized labor obligation, whether written or
oral, that is not listed on Schedule 3.1 and any liabilities or obligations
arising out of the termination by Seller of any of its employees in anticipation
or as a consequence of, or following, consummation of the transactions
contemplated hereby; and
(i) Any obligations or liabilities arising out of or
relating to the Excluded Assets.
4. PURCHASE PRICE AND PURCHASE PRICE ADJUSTMENT;TERMS OF PAYMENT.
4.1 PURCHASE PRICE. In addition to the assumption by Buyer of the
Assumed Obligations, the aggregate purchase price for the Purchased Assets shall
be Four Million Five Hundred Thousand Dollars ($4,500,000) plus the Purchased
Restaurants' cash on hand as of the Closing (as defined below), lease deposits
identified in Schedule 1.10 and Inventory valued at Seller's cost acquired by
Buyer at the Closing minus the aggregate amount of all trade payables and
payroll obligations assumed by Buyer at the Closing, as set forth on Schedule
3.1 hereto (the "Purchase Price").
4.2 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be paid by
Buyer to Seller as follows:
(a) At the Closing (as defined below) Buyer shall, at
Buyer's discretion, either (i) assume the principal amount of $4,000,000 under
that certain Promissory Note (the "Note") executed by Seller in favor of U.S.
Bank of Oregon ("U.S. Bank"), pursuant to that certain Loan Agreement dated as
of February 27, 1995, as modified by that certain Modification Agreement dated
as of December 7, 1995, between Seller and U.S. Bank (the "Seller Credit
Agreement") or (ii) make a cash payment in the amount of $4,000,000 to U.S. Bank
to reduce the outstanding principal under the Seller Credit Agreement. In the
event that Buyer assumes the principal amount of $4,000,000 pursuant to clause
(i) above, concurrently
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with the Closing, Seller and Buyer shall execute and deliver an Assignment and
Assumption Agreement (the "Assumption Agreement") in a form mutually agreeable
to the parties. The parties agree and acknowledge that the Buyer's assumption of
an additional $3,000,000 of outstanding principal under the Note issued pursuant
to the Seller Credit Agreement, as described in Section 9.8 below, shall not
constitute a part of the Purchase Price payable to Seller for the Purchased
Assets.
(b) At the Closing, Buyer shall pay to Seller by wire
transfer of immediately available funds to an account designated by Seller the
sum of $500,000, as adjusted in accordance with Section 4.1 above, which amount
shall be used by Seller to pay trade payables and payroll obligations not
otherwise assumed by Buyer at the Closing.
4.3 ALLOCATION OF PURCHASE PRICE. The Purchase Price shall be
allocated among the Purchased Assets as set forth in Exhibit C attached hereto,
subject to adjustment by mutual agreement of the parties. Each of the parties,
when reporting the transactions consummated hereunder in their respective Tax
Returns (as hereinafter defined), shall allocate the Purchase Price paid or
received, as the case may be, in a manner that is consistent with the Purchase
Price allocation set forth in Exhibit C hereto, as adjusted. Additionally, each
of the parties will comply with, and furnish the information required by,
Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"), and
any regulations thereunder.
5. CLOSING.
Provided that all conditions precedent set forth in this
Agreement have been satisfied or waived, the closing of the transactions
contemplated hereby (the "Closing") shall occur at 10:00 a.m. Pacific Daylight
Savings Time within three (3) business days following the satisfaction or waiver
of all conditions to closing set forth herein (the "Closing Date") at the
offices of Stradling, Yocca, Carlson & Rauth, a Professional Corporation,
located 660 Newport Center Drive, Suite 1600, Newport Beach, California 92660,
unless another time or place is mutually agreed upon by the parties; provided,
however, that in no event shall the Closing Date be a date after December 31,
1997.
6. REPRESENTATIONS AND WARRANTIES OF SELLER.
Except as set forth in disclosure schedules (the "Seller's Disclosure
Schedules") to be prepared by Seller and delivered to Buyer no later than
fourteen calendar days from the execution and delivery of this Agreement, Seller
hereby represents and warrants to Buyer as follows:
6.1 AUTHORITY AND BINDING EFFECT.
(a) Seller has the full power and authority to execute and
deliver this Agreement and the ancillary agreements to which it will be a party.
This Agreement and the ancillary agreements, and the consummation by Seller of
its respective obligations contained herein and therein, have been duly
authorized by all necessary actions of Seller and such Agreements have been duly
executed and delivered by Seller.
(b) This Agreement is, and the ancillary agreements, when
executed and delivered by Seller, will be, binding agreements of Seller
enforceable against it in accordance with their respective terms, except as
enforceability may be limited by (i) bankruptcy, insolvency, moratorium or
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other similar laws affecting creditors' rights generally, and (ii) general
principles of equity relating to the availability of equitable remedies.
(c) Except as set forth in Schedule 6.1(c), it is not
necessary for Seller to take any action or to obtain any approval, consent or
release by or from any third persons, governmental or other, to enable Seller to
enter into or perform his obligations under this Agreement and the ancillary
agreements.
6.2 ORGANIZATION AND STANDING.
(a) Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Oregon. Seller is
duly licensed or qualified to transact business as a foreign corporation in each
of the jurisdictions in which a Purchased Restaurant is located, and neither the
scope of Seller's business, nor the location of any of its assets, properties or
employees, requires that Seller be licensed or qualified to transact business in
any other jurisdiction. Seller has the requisite corporate power and authority
to operate the Purchased Restaurants as now conducted and to own or lease (as
the case may be) the Purchased Assets, and to use such Purchased Assets in the
operation of the Purchased Restaurants;
(b) No actions or proceedings have been commenced or
threatened against Seller that, if adversely determined, and no agreements or
transactions have been entered into by any of Seller that, if consummated, would
give rights to any person, other than Buyer, in or to acquire any of the
Purchased Assets or otherwise interfere with the consummation of the
transactions contemplated by this Agreement.
6.3 FINANCIAL STATEMENTS. Seller has delivered to Buyer true and
correct copies of the audited financial statements of Seller consisting of
balance sheets and related statements of income and cash flows as of and for
each of the years in the three-year period ended June 30, 1996 (the "Financial
Statements"). True and correct copies of the Financial Statements, are attached
as Schedule 6.3 hereto. The Financial Statements were prepared in accordance
with GAAP, consistently applied, and fairly present the financial condition of
Seller and the results of its operations as at the relevant dates thereof and
for the respective periods covered thereby. Seller has also delivered true and
correct copies of its internal financial statements and records relating to the
results of operations of each of the Purchased Restaurants as of and for the
periods covered by the Financial Statements and for any subsequent periods,
which fairly present the results of operations of such Purchased Restaurants for
such periods.
6.4 UNDISCLOSED LIABILITIES. Except as set forth in Schedule 6.4,
Seller does not have any debts, obligations, liabilities or commitments of any
nature arising out of or relating to the Restaurants, whether due or to become
due, absolute, contingent or otherwise, that, in accordance with GAAP, should be
disclosed in a balance sheet or the footnotes thereto, and are not shown on the
1996 Balance Sheet (the "Undisclosed Liabilities"), other than liabilities
incurred after March 31, 1997 in the ordinary course of the business of the
Restaurants and consistent with past practice which, in any event, are not
material in amount and have not had and are not expected to have, individually
or in the aggregate, a Material Adverse Effect on the Restaurants. As to each
Undisclosed Liability set forth on Schedule 6.4, Seller has provided the
following information in or as an attachment to such Schedule 6.4: (i) a summary
description of such Undisclosed Liability, together with copies of all relevant
documentation relating thereto, the amounts claimed and any other action or
relief sought and, the identity of the claimant and of any other parties
involved party and, if the Undisclosed Liability is one
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that may arise from a suit, action or other proceeding, the court or agency in
which such suit, action or other proceeding is being prosecuted, and (ii) the
best estimate of Seller of the maximum amount, if any, which is likely to become
payable with respect to any such contingent Undisclosed Liability. For purposes
hereof, if no written estimate is provided, such best estimate shall be deemed
to be zero.
6.5 ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
6.5, since December 31, 1996, there has not been:
(a) The execution of or commencement of performance by
Seller under any default or breach, or anticipated default or breach, or any
amendment, termination or revocation or, to the knowledge of Seller, any
threatened amendment, termination, or revocation of, any of the Assigned
Contracts or the Leases to which Seller now is, or at any time since January 1,
1994 was, a party;
(b) Any actual or threatened amendment, termination or
revocation of any license, permit or franchise required for the continued
operation by Seller of any of the Purchased Restaurants;
(c) Any sale, transfer, or other disposition of, or the
incurrence or imposition of any Lien or Encumbrance of any kind on or affecting,
any of the Purchased Assets except (i) sales or utilization of inventory and
obsolete equipment in the ordinary course of business and consistent with past
practices of the Seller and (ii) Liens for current taxes not yet due and
payable;
(d) Any disputes with, or any action of or notice from
the suppliers of the Restaurants which has led or could lead to a reduction in
or termination of the supplies to the Restaurants by any such suppliers, or to a
decrease in contracted rates of payment under any sales contract, rental
agreement or service contract under which Seller purchases goods or services;
(e) Any damage, destruction or loss, whether or not
covered by insurance, of any of the Purchased Assets in an amount that exceeds
$10,000 or which adversely affects Seller's ability to continue to conduct the
Purchased Restaurants in any material respect as the Purchased Restaurants were
conducted during the year ended December 31, 1996;
(f) The incurrence by Seller of any indebtedness of more
than $5,000 individually or $10,000 in the aggregate, either for borrowed money
or in connection with any purchase or other acquisition of assets, or otherwise
for the operation of the Purchased Restaurants, that is not reflected in the
1996 Balance Sheet;
(g) Any purchase or lease, or commitment for the purchase
or lease, of equipment, machinery leasehold improvements or other capital items
not disclosed in the Financial Statements which involves amounts exceeding
$5,000 individually or $10,000 in the aggregate, or which is in excess of or
represents a departure from the normal, ordinary and usual requirements of the
Restaurants;
(h) Any increase in salaries or wages other than in the
ordinary course of business and there has been no increase in benefits of or the
awarding or payment of any bonuses to any employees, the adoption of any new or
amendment of any existing employee benefit plan, or the execution of any new, or
the renewal, extension, or amendment of any existing, employment or consulting
agreements relating to the Purchased Restaurants;
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(i) The entry or violation of any judgment, order, writ
or decree that has had or could reasonably be expected to have a Material
Adverse Effect on Seller or on the Purchased Restaurants;
(j) The threat, assertion or commencement of any legal
action or other proceeding or investigation against Seller or the Restaurants
which, if adversely determined, could reasonably be expected to have a Material
Adverse Effect on Seller or the Restaurants or the occurrence of any event that
could reasonably be expected to result in the commencement of any such legal
action or other proceeding or investigation; or
(k) The occurrence of any other event or circumstance
which has had or could reasonably be expected to have a Material Adverse Effect
on Seller or on the Restaurants.
6.6 THE PURCHASED ASSETS.
(a) Fixed Assets. There is contained in Schedule 1.1 a
list of all of the Fixed Assets used in the Purchased Restaurants. To the best
of Seller's knowledge, the Fixed Assets are in good working order and condition,
ordinary wear and tear excepted, have been properly maintained, are suitable for
the uses for which they are being utilized in the Purchased Restaurants, do not
require more than regularly scheduled maintenance to keep them in good operating
condition and comply with all requirements under applicable laws, regulations
and licenses which govern the use and operation thereof.
(b) The Leases.
(i) Schedule 1.3 contains a complete and
accurate list, and Seller has furnished to Buyer accurate and complete copies,
of all of the Real Property Leases and Personal Property Leases related to the
Purchased Restaurants, as amended to date, together with a brief description of
(A) each of the real properties that are leased by Seller under the Real
Property Leases (the "Leased Properties"), including the respective addresses
and the names and addresses of the landlords thereof, (B) any improvements made
by Seller to any of the Leased Properties that will not revert to any of the
landlords upon termination of the Real Property Leases and (C) the costs or
expenses, if any, necessary for the assignment by Seller to Buyer of the Leases.
Seller has delivered to Buyer accurate and complete copies of all environmental
studies and reports with respect to any of the Leased Properties that are in the
possession of or are readily available to Seller. The zoning of each of the
Leased Properties permits the presently existing improvements thereon and
continuation of the business presently conducted thereon and no changes therein
are pending or are threatened. No condemnation or similar proceedings are
pending or, to the best knowledge of Seller, threatened against any of the
Leased Properties. Seller does not own any fee interest in any real property
relating to or used for the Purchased Restaurants.
(ii) Seller is not in default, and no facts or
circumstances have occurred which, with the passage of time or the giving of
notice, or both, would constitute a default, under any of the Leases and the
assignment by Seller to Buyer of the Leases included in the list of Assigned
Contracts on Schedule 1.4 will not adversely affect Buyer's quiet enjoyment and
use, without disturbance, of the Leased Properties or of the personal properties
or assets that are the subject of the Personal Property Leases (the "Leased
Personal Property"). None of the Leases contains any provisions which, after the
date hereof, would (A) hinder or prevent Buyer from continuing to use any
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of the Leased Properties or Leased Personal Property in the manner in which they
are currently used, or (B) impose any additional costs (other than scheduled
rental increases or except as set forth on Schedule 1.3 hereto) or burdensome
requirements as a condition to their continued use which are not currently in
effect. Except as otherwise set forth in Schedule 1.3 hereto, none of the
Purchased Assets are held under, or used by Seller pursuant to, any lease or
conditional sales contract.
(c) Intangible Property Rights. Except as set forth in
Schedule 6.6(c), to the best of Seller's knowledge, Seller has not infringed,
and Seller is not now infringing, on any patent, trade name, trade dress,
trademark, service mark, copyright, trade secret, technology, know-how or
process belonging to any other person, firm or corporation. Seller has not
received any written notice or other indication of any such claim of
infringement. Seller owns, or holds adequate licenses or other rights to use,
all Intangible Property Rights used in or necessary for the operation of the
Restaurants as now conducted and, to the best of Seller's knowledge, such use
does not and will not conflict with, infringe on or otherwise violate any rights
of others. Except as disclosed in Schedule 6.6(c), all of such licenses and
rights are transferable to Buyer without cost or liability to Buyer and will be
included in the Purchased Assets being sold to Buyer hereunder.
(d) Title to and Adequacy of Purchased Assets. Except as
disclosed on Schedule 6.6(d) hereto, Seller has, and on the Closing Date will
convey and transfer to Buyer, good, complete and marketable title to all of the
Purchased Assets, free and clear of all mortgages, security interests, liens,
options, pledges, equities, claims, charges, restrictions, conditions,
conditional sale contracts and any other encumbrances or adverse interests of
any kind or nature whatsoever (collectively "Liens or Encumbrances"). Except as
set forth on Schedule 6.6(d), all of the Purchased Assets are in the exclusive
possession and control of Seller and Seller has the unencumbered right to use,
and to sell to Buyer in accordance with the terms and provisions of this
Agreement, all of the Purchased Assets without interference from and free of the
rights and claims of others. The Purchased Assets constitute all the assets,
properties, rights, privileges and interests necessary for Buyer to own and
operate the Purchased Restaurants.
6.7 LABOR AND EMPLOYMENT AGREEMENTS.
(a) Schedule 6.7 sets forth the name of each employee of
the Purchased Restaurants, together with a description of all compensation and
benefits that are payable to such individuals as a result of their employment by
or association with Seller. Seller also has furnished to Buyer a true and
complete copy of its employee handbook. Buyer shall not have any obligation to
continue, nor shall Buyer have or incur any liability or obligation whatsoever
arising out of, any personnel policies or practices, either written or oral,
promulgated or followed by Seller.
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(b) Seller is not a party or subject to any collective
bargaining or other labor, employment, deferred compensation, bonus, retainer,
consulting, or incentive agreement, plan or contract related to the Purchased
Restaurants. Except to the extent set forth in Schedule 6.7, (i) there has been
no strike or other work stoppage by, nor has there been any union organizing
activity among, any of the employees of Seller during the past five (5) years;
(ii) to the best of Seller's knowledge, Seller is in compliance with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, and is not engaged in any unfair
labor practice; and (iii) there is no unfair labor practice complaint pending
or, to the best knowledge of Seller, threatened against Seller, nor, to the best
knowledge of Seller, is there any factual basis for any such complaint.
6.8 THE ASSIGNED CONTRACTS AND OTHER AGREEMENTS. Schedule 1.4
contains accurate and complete list of the Assigned Contracts and Schedule 6.8
hereto contains accurate and complete list of, each contract, agreement,
indenture, note, lease, or other instrument or commitment, written or oral, to
which Seller is a party or is bound or which relates to or affects or could
affect any of the Purchased Assets, the Assumed Obligations or the Purchased
Restaurants or the consummation of the transactions contemplated by this
Agreement and is not already listed on Schedule 1.3, Schedule 1.4 or Schedule
6.7 (collectively the "Other Contracts"). Accurate and complete copies of all of
Assigned Contracts and the Other Contracts (collectively, the "Material
Contracts") have been furnished by Seller to Buyer. The Material Contracts
include, without limitation, each contract, agreement, license, instrument
commitment or understanding, written or oral (other than the Leases), which:
(a) Provides for the sale, lease or rental of any
products goods, or equipment or other assets or properties to or by Seller
related to the Purchased Restaurants (other than purchase orders issued or
received by Seller in the ordinary course of business and consistent with past
practices);
(b) Provides for the payment of monies to or by Seller
which arise out of or relate to the Purchased Restaurants;
(c) Provides for the licensing by or to Seller, or the
use or possession by Seller, of any software, trademarks, trade names, service
marks, copyrights, know-how, patents or other intellectual property rights used
in connection with the operation of the Restaurants;
(d) Grants a security interest or permit or provide for
the imposition of any other Lien or Encumbrance on, or provide for the
disposition of, any of the Purchased Assets;
(e) Requires the consent of any third party to or would
terminate as a result of the consummation by Seller of the transactions
contemplated by this Agreement;
(f) Restricts or would restrict the conduct of any
aspects of the Purchased Restaurants or the use or disposition by Buyer after
the date hereof of any of the Purchased Assets;
(g) Governs or relates to any of the Assumed Obligations
or which evidences any other liability or obligation, whether for borrowed money
or otherwise, that would be accelerated by reason of the consummation of the
transactions contemplated hereby; or
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(h) If terminated or breached would have a Material
Adverse Effect on the Purchased Restaurants.
Except for the Assigned Contracts, the Leases, the Agreements listed on
Schedule 6.7 and the Other Contracts, there is no contract, lease, license or
other agreement, commitment or understanding that is material to the Purchased
Restaurants or the breach, termination or loss of which would have a Material
Adverse Effect on Seller or the Purchased Restaurants. Each of the Material
Contracts is a valid and binding obligation of Seller and the other parties
thereto, enforceable in accordance with its terms, except as may be affected by
bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights
generally and general principles of equity relating to the availability of
equitable remedies. Except as otherwise set forth in Schedule 6.8 hereto, there
have not been any defaults by Seller or defaults or any claims of default or
claims of nonenforceability by the other party or parties under or with respect
or any of Material Contracts which, individually or in the aggregate, would have
a Material Adverse Effect on the Purchased Restaurants, and there are no facts
or conditions that have occurred or that are anticipated to occur which, with
the passage of time or the giving of notice, or both, would constitute a default
by Seller or by the other party or parties under any of the Material Contracts
or would cause a creation or imposition of any Lien or Encumbrance upon any of
the Purchased Assets or otherwise would have a Material Adverse Effect on Seller
or on the Purchased Restaurants.
6.9 CONFLICTS. Except as described on Schedule 6.9 hereto, neither
the execution and delivery of, nor the consummation of the transactions
contemplated by, this Agreement will or could result in any of the following:
(a) A default or an event that, with notice or lapse of
time, or both, would be a default, breach or violation of the respective
charter, bylaws or other governing instruments of Seller, or any Material
Contract;
(b) The termination of any Material Contract, or the
acceleration of the maturity of any indebtedness or other obligation of Seller
which would have a Material Adverse Effect on the Purchased Restaurants, Seller
or Buyer;
(c) The creation or imposition of any Lien or Encumbrance
on any of the Purchased Assets;
(d) The creation or imposition of any new, or a violation
or breach of any existing, writ, injunction or decree that would become or is
now applicable to or binding on Seller or any of the Purchased Assets or the
Purchased Restaurants;
(e) A loss or adverse modification of any license,
franchise, permit or other authorization or right (contractual or other) to
operate the Purchased Restaurants, granted to or otherwise held by Seller or
used in the operation of the Purchased Restaurants, which would have a Material
Adverse Effect on the Purchased Restaurants, Seller or Buyer;
(f) The cessation or termination of any other business
relationship or arrangement between Seller and any third party that would have a
Material Adverse Effect on the Purchased Restaurants, Seller or Buyer; or
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(g) Any other consequence that would have or reasonably
could be expected to have a Material Adverse Effect on the Purchased
Restaurants, Seller or Buyer.
6.10 VENDORS AND SUPPLIERS. Schedule 6.10 attached hereto contains
correct and current list of the five (5) largest vendors and suppliers of the
Purchased Restaurants in terms of purchases or sales made by Seller during the
fiscal year ended December 31, 1996, showing the approximate aggregate dollar
amounts of purchases by Seller from each such vendor and supplier during that
fiscal period. Except as set forth on Schedule 6.10, since December 31, 1996
there has been no change in the business relationship of Seller with any vendor
or supplier named in Schedule 6.10 and Seller is not aware of any intention of
any of the vendors or suppliers listed in Schedule 6.10 to cease, or of any
event or circumstance that has occurred during the past twelve (12) months which
might reasonably be expected to cause any such vendor or supplier to cease,
doing business with Seller, or alter materially the amount of the business that
any of them is presently doing with Seller, or will require, as a condition to
the continuation of its business relationship with Seller, a change in the
prices or rents at or any other material terms under which any of such vendors
and suppliers have been doing business with Seller.
6.11 LIABILITIES. Except as otherwise set forth in Schedule 6.11,
Seller does not have any knowledge of any fact or of the occurrence of any event
forming the basis of any present or future claim against Seller, whether or not
fully covered by insurance, for liability on account of negligence which would
have, individually or in the aggregate, a Material Adverse Effect on Seller or
the Purchased Restaurants.
6.12 INSURANCE. Schedule 6.12 contains an accurate description
(including liability limits, deductibles and coverage exclusions) of all
policies of fire, general liability, worker's compensation, errors and
omissions, malpractice and other forms of insurance maintained by or on behalf
of Seller in connection with the Purchased Restaurants as protection for the
Purchased Assets and the Purchased Restaurants. Except as set forth in Schedule
6.12 hereto, all of such policies are now in full force and effect and policies
covering the same risks and in substantially the same amounts have been in full
force and effect continuously for the past five (5) years. Seller has not
received any notice of cancellation or material amendment of any such policies;
no coverage thereunder is being disputed; and all material claims thereunder
have been filed in a timely fashion. Seller has furnished to Buyer a schedule of
all insurance claims filed by Seller within the past three (3) years that were
related to the Purchased Restaurants and the disposition thereof. No such claims
have been denied by any of Seller's insurers and Seller has not failed to comply
with the requirements of any insurance policies which would provide any insurers
the right to deny any claim related to the Purchased Restaurants.
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6.13 COMPLIANCE WITH LAW/PERMITS.
(a) Except as set forth in Schedule 6.13(a) hereto,
Seller is in compliance with all, and is not in violation of any, law,
ordinance, order, decree, rule or regulation of any governmental agency or
authority. Except as disclosed in Schedule 6.13(a) hereto, no unresolved (i)
charges of violations of laws or regulations have been made or threatened, (ii)
proceedings or investigations are pending or, to the best knowledge of Seller,
have been threatened, and (iii) citations or notices of deficiency have been
issued or have been threatened, against Seller or the Restaurants by any
governmental agencies or authorities; and, to the best knowledge of Seller,
there are no facts or circumstances upon which any such charges, proceedings,
investigations, or citations or deficiency notices, may be instituted, issued or
brought hereafter.
(b) Schedule 6.13(b) contains a true, correct and
complete list of all governmental licenses, permits, authorizations, franchises,
or certificates or rights (contractual or other) to operate the Purchased
Restaurants that are held by Seller (collectively, "Licenses and Permits"). Such
Licenses and Permits are the only licenses, permits, authorizations, franchises,
certificates and rights to operate required for operation of the Purchased
Restaurants and all of such Licenses and Permits are in full force and effect at
the date hereof. Seller has provided Buyer with true, correct and complete
copies of each License and Permit listed in Schedule 6.13(b). Except as
otherwise set forth in Schedule 6.13(b), the Purchased Restaurants are in
compliance with the conditions and requirements imposed by or in connection with
such Licenses and Permits. Seller has not received any notice, nor does Seller
have any knowledge or reason to believe, that any governmental agency or
authority intends to cancel, terminate or modify any of such Licenses or Permits
or that there are valid grounds for any such cancellation, termination or
modification. Seller has delivered or made available to Buyer a true, correct
and complete copy of the most recent safety inspection and quality assurance
reports, prepared by any employees or consultants of Seller or by any
governmental agencies or authorities relating to the Purchased Restaurants.
6.14 TAXES AND TAX RETURNS. Seller has duly filed all Tax Returns
(as hereinafter defined) which are required by law to be filed by it and has
duly and properly paid, or withheld for payment and paid, when due, all foreign,
federal, state and local Taxes (as hereinafter defined) due or claimed to be due
from it, and there are no assessments or claims for payment of Taxes (as
hereinafter defined) now pending or, to the best knowledge of Seller,
threatened, nor any audit of Seller's records presently being made by any taxing
authority. For purposes of this Agreement, (i) the term "Tax" or "Taxes" means
any federal, state, local or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits,
environmental (including taxes under Code Section 59A), customs duties, capital
stock, franchise, profits, withholding, social security, unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not; and (ii) the term "Tax Return" means any
return, declaration, report, claim for refund, or information return or
statement (including, but not limited to, information returns or reports related
to back-up withholding and any payments to third parties) relating to any Taxes,
including any schedule or attachment thereto, and including any amendment
thereof. Buyer shall have no liability or obligation whatsoever, and shall not
incur any loss, expense or cost, and none of the Purchased Assets, or any assets
of Buyer, shall be subjected to any Lien or Encumbrance, by reason of any Taxes
arising out of any operations or activities of Seller whether conducted prior to
the date hereof or hereafter.
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6.15 LITIGATION AND PROCEEDINGS. Except as set forth in Schedule
6.15 hereto, there is no action, suit, proceeding or investigation, or any
counter or cross-claim in an action brought by or on behalf of any of Seller,
whether at law or in equity, or before or by any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, or
before any arbitrator of any kind, that is pending or, to the best knowledge of
Seller, threatened, against Seller, which (i) could reasonably be expected to
affect adversely Seller's ability to perform his obligations under this
Agreement or complete any of the transactions contemplated hereby or thereby, or
(ii) involves the possibility of any judgment or liability, or which may become
a claim, against Buyer, the Purchased Restaurants or the Purchased Assets.
Except as set forth in Schedule 6.15, Seller is not subject to any judgment,
order, writ, injunction, decree or award of any court, arbitrator or
governmental department, commission, board, bureau, agency or instrumentality
having jurisdiction over Seller or any of the Purchased Assets or the Purchased
Restaurants. All of the legal actions or other proceedings that are pending or
threatened against Seller, the Purchased Restaurants or the Purchased Assets
involve only routine claims for monetary damages that are incidental to and have
arisen out of the ordinary course of the business of the Purchased Restaurants
and any liability, damage, cost or expense that may be incurred in any of such
actions or proceedings will be fully covered by insurance, except as expressly
stated to the contrary on Schedule 6.15.
6.16 CERTAIN TRANSACTIONS. Except as set forth in Schedule 6.16,
there are no existing or pending transactions, nor are there any agreements or
understandings, with any employees of Seller, or any person that is related to,
or any person or entity that is affiliated with, any of them (collectively,
"Affiliates"), relating to, arising from or affecting the Purchased Restaurants,
or any of the Purchased Assets, including, without limitation, any transactions,
arrangements or understandings relating to the purchase of services, the lending
of monies, or the sale, lease or use of any of the Purchased Assets, with or
without adequate compensation, in any amount whatsoever. No existing or former
employee of Seller has any claims against or disputes with Seller which could
result in the imposition of any liability, judgment, lien or encumbrance against
the Purchased Restaurants or any of the Purchased Assets.
6.17 ENVIRONMENTAL AND SAFETY MATTERS. Except as set forth in
Schedule 6.17, Seller has complied with, and the operation of the Purchased
Restaurants and the use of the Purchased Assets are in compliance with, in all
material respects, all federal, state, regional and local statutes, laws,
ordinances, rules, regulations and orders relating to the protection of human
health and safety, natural resources or the environment, including, but not
limited to, air pollution, water pollution, noise control, on-site or off-site
hazardous substance discharge, disposal or recovery, toxic or hazardous
substances, training, information and warning provisions relating to toxic or
hazardous substances, and employee safety relating to the Purchased Restaurants
or the Purchased Assets (collectively the "Environmental Laws"); and no notice
of violation of any Environmental Laws or of any permit, license or other
authorization relating thereto has been received or threatened against Seller,
and to the best knowledge of Seller, is there any factual basis for the giving
of any such notice. Except as set forth in Schedule 6.17, no underground or
above-ground storage tanks or surface impoundments are located on any of the
real properties that are or have been used, operated, leased or owned by Seller
in connection with or for the Purchased Restaurants and (i) except in compliance
with applicable Environmental Laws and any licenses or permits relating thereto,
there has been no generation, use,
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treatment, storage, transfer, disposal, release or threatened release in, at,
under, from, to or into, or on such properties of toxic or hazardous substances
during the ownership or occupancy thereof by Seller or, to the best knowledge of
Seller, prior to such ownership or occupancy, and (ii) in no event has there
been any generation, use, treatment, storage, transfer, disposal, release or
threatened release in, at, under, from, to or into, or on such properties of
toxic or hazardous substances that has resulted in or is reasonably likely to
result in a Material Adverse Effect on the Purchased Restaurants or on Seller.
Seller has not received any notice or claim to the effect that Seller or the
Purchased Restaurants is or may be liable to any governmental authority or
private party as a result of the release or threatened release of any toxic or
hazardous substances in connection with the conduct or operation of the
Purchased Restaurants, and none of the operations of the Purchased Restaurants
and none of the Purchased Assets is the subject of any federal, state or local
investigation evaluating whether any remedial action is needed to respond to a
release or a threatened release of any toxic or hazardous substances at any of
the Leased Properties or any other real properties leased, used, operated or
owned by Seller in connection with the Purchased Restaurants. Seller has not
disposed, or had disposed of on its behalf, toxic or hazardous substances at any
site other than a federal and state licensed hazardous waste treatment, storage
and disposal facility and, to the best knowledge of Seller, each such facility
is not currently listed, or threatened to be listed, on any state or federal
"superfund" list. For the purposes of this Section 6.17, "toxic or hazardous
substances" shall include any material, substance or waste that, because of its
quantity, concentration or physical or chemical characteristics, is deemed under
any federal, state, local or regional statute, law, ordinance, regulation or
order, or by any governmental agency pursuant thereto, to pose a present or
potential hazard to human health or safety or the environment, including, but
not limited to, (i) any material, waste or substance which is defined as a
"hazardous substance" pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (42 U.S.C. Section 9601, et seq.), as
amended, and its related state and local counterparts, (ii) asbestos and
asbestos containing materials and polychlorinated biphenyls, and (iii) any
petroleum hydrocarbon including oil, gasoline (refined and unrefined) and their
respective constituents and any wastes associated with the exploration,
development or production of crude oil, natural gas or geothermal energy.
6.18 BROKERS. Seller has not retained or used the services of an
agent, finder or broker other than Vrolyk & Company in connection with the
transactions contemplated by this Agreement. Seller shall pay, and shall
indemnify, hold harmless and defend Buyer from and against, all commissions,
finder's and other fees and expenses charged or asserted by any agent, finder or
broker, by reason of any such retention or use of the services of any such
agent, finder or broker by Seller.
6.19 REPRESENTATIONS AND WARRANTIES OF SELLER. The representations
and warranties of Seller contained herein, and the disclosures contained in
Seller's Disclosure Schedules, do not contain any statement of a material fact
that was untrue when made or omits any information necessary to make any such
statement contained therein, in light of the circumstances under which such
statement was made, not misleading.
7. REPRESENTATIONS AND WARRANTIES OF BUYER.
Buyer makes the following representations and warranties to Seller as
of the date of this Agreement:
7.1 ORGANIZATION. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
7.2 CORPORATE POWER. Buyer possesses the requisite corporate power
and authority to enter into and perform its obligations under this Agreement and
the ancillary agreements.
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7.3 NECESSARY ACTIONS; BINDING EFFECT. Buyer has taken all
corporate action necessary to authorize the execution and delivery of, and the
performance of its obligations under, this Agreement and the ancillary
agreements. This Agreement constitutes, and upon its execution and delivery the
ancillary agreements will constitute, valid obligations of Buyer that are
legally binding on and enforceable against Buyer in accordance with their
respective terms, except (in each case) as such enforceability may be limited by
(i) bankruptcy, insolvency, moratorium or other similar laws affecting
creditors' rights, and (ii) general principles of equity relating to the
availability of equitable remedies (regardless of whether such agreements are
sought to be enforced in a proceeding at law or in equity).
7.4 BROKER. Buyer has not retained or used the services of an
agent, finder or broker in connection with the transactions contemplated by this
Agreement. Buyer shall pay, and shall indemnify, hold harmless and defend Seller
from and against all commissions, finder's and other fees and expenses charged
or asserted by any agent, finder or broker, by reason of any such retention or
use of the services of any agent, finder or broker by Buyer.
8. COVENANTS AND AGREEMENTS OF SELLER.
8.1 CONDUCT OF THE BUSINESS BEFORE THE CLOSING.
(a) Diligent Conduct. Between the date hereof and the
Closing Date, Seller will operate the Purchased Restaurants diligently in the
ordinary course and consistent with past practices, will not change in any
material respect its methods of business operations or its accounting practices,
and will preserve intact its organization, use its best efforts to retain in its
employ all of its employees related to the Purchased Restaurants and to preserve
its relationships with the suppliers of the Purchased Restaurants.
(b) Properties and Assets. Between the date hereof and
the Closing Date, Seller (i) will not, without the prior written consent of
Buyer, sell or otherwise dispose of (except in the ordinary course of business
consistent with past practices), and will not mortgage, pledge or subject to
lien, charge or encumbrance of any kind, except liens for taxes not due, any of
the Purchased Assets, and (ii) will keep all of its fixtures, equipment and
other tangible personal property related to the Purchased Restaurants in good
working order and repair and continue to perform all normal repairs and
maintenance in the ordinary course of business.
(c) Contracts. Between the date hereof and the Closing
Date, Seller will not, without the prior written consent of Buyer, amend or
terminate any Lease, Assigned Contract or other contract or agreement to which
it is a party and that relates to the Purchased Restaurants, except as
contemplated by this Agreement. Seller shall not enter into or become a party to
any contract, commitment, lease or agreement related to the Purchased
Restaurants.
(d) Insurance. Between the date hereof and the Closing
Date, Seller will continue in force its existing insurance policies covering the
Purchased Assets and the Purchased Restaurants, subject only to variations in
amounts required by the ordinary operations of its business.
(e) Compensation of Employees. Between the date hereof
and the Closing Date, Seller will not, without the prior written consent of
Buyer, increase the compensation payable or to become payable to any of its
managing persons, employees or agents, nor will Seller make any bonus
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payment or similar arrangement to or with any of its managing persons, employees
or agents employed by the Purchased Restaurants, or adopt any new or amend any
existing employee benefit plan.
(f) Payment of Liabilities and Waiver of Claims. Between
the date hereof and the Closing Date, Seller will not do, or agree to do, any of
the following acts relating to the Purchased Restaurants: (i) pay any obligation
or liability, fixed or contingent, other than current liabilities as and when
the same become due; and (ii) except in the ordinary course of business, waive
or compromise any right or claim, or cancel, without full payment, any note,
loan, or other obligation owing to Seller.
8.2 CERTAIN CHANGES. Without the prior written consent of Buyer,
Seller will not (in relation to the Purchased Restaurants):
(a) Incur any liability for borrowed funds, and will not
incur any such borrowings except in the ordinary course and for the benefit of
the Purchased Restaurants and consistent with past borrowing practices of Seller
during the corresponding periods of prior years;
(b) Incur, assume or become subject to, whether directly
or by way of guarantee or otherwise, any obligation or liability (absolute or
contingent), except borrowings permitted under Subsection 8.2(a) above and
obligations and liabilities (other than for borrowed money) incurred in the
ordinary course of business which are not material in amount and are consistent
with past practice;
(c) Write-down the value of any inventory or write-off as
uncollectible any notes or accounts receivable;
(d) Make any capital expenditures or commitments for
additions to property, plant or equipment, except for those set forth in
Schedule 8.2(d) hereto;
(e) Pay, loan or advance any amount to, or sell, transfer
or lease any properties or assets to, or enter into any agreement or arrangement
with, any of its employees, independent contractors or any affiliates thereof;
or
(f) Agree, whether in writing or otherwise, to do any of
the foregoing.
8.3 CONSENTS. As soon as reasonably practicable after the date
hereof, Seller shall use its best efforts, and Buyer will cooperate with Seller,
to obtain all consents, approvals and authorizations required to be obtained
from other parties in order to consummate the transactions contemplated hereby.
8.4 EXCLUSIVITY.
(a) From the date hereof until the expiration of the
Option Agreement, Seller will not, nor will it permit its officers, directors,
affiliates, representatives or agents, directly or indirectly, to do any of the
following:
(i) discuss, negotiate, undertake, authorize,
recommend, propose or enter into, either as the proposed surviving, merged,
acquiring or acquired corporation, any transaction involving any disposition or
other change of ownership of Seller's stock or assets (an "Acquisition
Transaction");
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(ii) facilitate, encourage, solicit or initiate
or in any way engaged in any discussion, negotiation or submission of a proposal
or offer in respect of an Acquisition Transaction;
(iii) furnish or cause to be furnished to any
person or entity any information concerning the business, operations, properties
or assets of Seller's in connection with an Acquisition Transaction; or
(iv) otherwise cooperate in any way with, or
assist or participate in, facilitate or encourage, any effort or attempt by any
other person or entity to do or seek any of the foregoing.
Seller will inform Buyer by telephone within 24 hours of its receipt of
any proposal or bid (including the terms thereof and the person or entity making
such proposal or bid) in respect of any Acquisition Transaction.
9. ADDITIONAL COVENANTS.
9.1 SELLER'S DISCLOSURE SCHEDULES; ACCESS AND INFORMATION. No
later than fourteen calendar days from the date hereof, Seller shall deliver to
Buyer Seller's Disclosure Schedules. In addition, between the date hereof and
the Closing Date, Seller shall afford to Buyer and its counsel, accountants and
other representatives, reasonable access to all of the properties, books,
contracts and records, of Seller, and will furnish Buyer and such other parties
with all information, including updated financial statements referenced in
Section 6.3 above, and copies of books, contracts and records, concerning
Seller's affairs which they may reasonably request.
9.2 COOPERATION. Seller will use its best efforts to cause all the
representations and warranties of Seller contained in this Agreement to be true
and correct on and as of the Closing Date and to cause all of the conditions
precedent disclosed in Section 12 to be satisfied on or prior to the Closing
Date.
9.3 RETAINED EMPLOYEES. Buyer and Seller shall jointly notify all
Retained Employees (as hereinafter defined) that their employment by Seller will
be terminated as of the Closing Date by reason of the transactions contemplated
by this Agreement and that Buyer will hire only those employees of Seller
engaged in the operation of the Purchased Restaurants designated on Schedule 9.3
hereto (the "Retained Employees"). On the Closing Date, Seller shall (i)
terminate all Retained Employees, and (ii) waive any rights it may have to
prohibit the Retained Employees from being employed by the Buyer.
9.4 ADVERSE CHANGES. Seller shall promptly notify Buyer in writing
of any material adverse facts or developments affecting or which may affect the
Purchased Restaurants including, without limitation, (i) any damage, destruction
or loss (whether or not covered by insurance) affecting any of the Purchased
Assets or the Purchased Restaurants, or (ii) anything which, if not corrected
prior to Closing, could prevent Seller from fulfilling any condition precedent
described in Section 12 below.
9.5 PUBLICITY. Buyer, Seller and their respective affiliates agree
that (i) any public disclosure of the transactions contemplated hereby shall be
by mutual agreement of the parties and in a form and manner agreed to by the
parties; provided, however, that either party shall, after reasonable notice, be
entitled to make any disclosure required by applicable law, rule or regulation
of any
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governmental authority or securities exchange, and (ii) except as provided in
clause (i) above, each party and its respective affiliates shall maintain the
confidentiality of any and all information relating to this Agreement and the
transactions contemplated hereby and any and all confidential information of the
other party received in connection with this Agreement and the transactions
contemplated hereby.
9.6 PURCHASE OPTION OF BUYER. Buyer shall have the option (the
"Option") to purchase from Seller the assets used in the operation of the nine
additional Restaurants listed on Schedule 9.6 hereto (the "Additional
Restaurants"), on the terms and conditions set forth in the Option Agreement
(the "Option Agreement") attached as Exhibit D hereto, which shall be executed
and delivered by Seller and Buyer at the Closing. Buyer shall have a minimum of
eighteen (18) months from the Closing Date from time to time to exercise such
Option to purchase any or all the Additional Restaurants; provided, however,
that, if this Agreement and contemplated transactions hereunder are impacted in
any way by litigation, Buyer shall have a maximum of twenty-four (24) months
from the Closing Date to exercise its Option to purchase any or all of the
Additional Restaurants. The closing of the purchase of an Additional Restaurant
may occur after expiration of the option period so long as Buyer has given
notice of exercise prior to the expiration of the option, and Buyer uses its
best efforts to close a transaction relating to such purchase within ninety days
after providing notice to Seller; provided, however, that in no event shall such
notice cause the option period to be extended beyond the 24 month period
following the Closing Date of this Agreement. Seller agrees to use the proceeds
received from any sale of Additional Restaurants to pay accrued and unpaid
interest and to prepay the principal balance of the new indebtedness described
in Section 9.8(a) and 9.8(b) below.
9.7 STAR BUFFET. Buyer has advised Seller that Buyer intends to
assign its rights hereunder to Star Buffet, Inc., a Delaware corporation in
formation ("Star Buffet"), which Buyer intends to form as a successor to Buyer's
buffet-style restaurant division, and that Buyer intends to cause Star Buffet to
complete an underwritten initial public offering of securities registered under
the Securities Act of 1933, as amended (the "IPO"). Seller agrees to cooperate
with Buyer in connection with the organization of Star Buffet and the IPO and to
provide Buyer and Star Buffet all information and audited financial statements
(including consents of Seller's independent public accountants) concerning the
Restaurants which Buyer or Star Buffet, or their attorneys and accountants, may
reasonably require in connection therewith. Buyer shall cause Star Buffet to
offer to Seller, upon consummation of the IPO, the right to purchase 150,000
Warrants at a purchase price of $3.50 per warrant, which right must be exercised
by Seller no later than 5 days after consummation of the IPO by Seller's
delivery of an Investment Representation Letter in the form of Exhibit E
attached hereto and incorporated herein by this reference. Each warrant will
entitle the holder to purchase one share of the Common Stock of Star Buffet at
an exercise price equal to the initial public offering price per share of Common
Stock, all on the terms and conditions set forth in the Warrant to Purchase
Common Stock (the "Stock Purchase Warrant") in substantially the form attached
hereto as Exhibit F.
9.8 SELLER'S FINANCING.
(a) Buyer shall use reasonable commercial efforts to
secure financing for Seller from a third party lender of up to Three Million
Dollars ($3,000,000) (the "Term Loan"), the proceeds of which shall be used to
repay Seller's indebtedness to U.S. Bank. In the event that the Term Loan is
obtained by Buyer for the benefit of Seller through Buyer's assumption of an
additional $3,000,000 of outstanding principal under the Note issued pursuant to
the Seller Credit Agreement, Buyer and Seller shall enter into an Assumption
Agreement for such additional amount of principal and Buyer shall use its
commercially reasonable efforts to release Jim North and John North and their
respective spouses
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from any personal guarantees related to the Seller Credit Agreement, which are
set forth on Schedule 9.8. Buyer shall indemnify Jim North and John North and
their respective spouses from any liabilities that arise from claims made
pursuant to the personal guarantees set forth on Schedule 9.8. Subject to any
intercreditor arrangements between the lenders of the Term Loan and the Credit
Line (as defined below), the Term Loan shall be secured by a first priority
security interest in all of Seller's assets and shall rank senior to all other
indebtedness of Seller for money borrowed (the holders of which shall execute
and deliver to the party providing such new financing reasonable subordination
agreements). The Term Loan, which shall bear interest at a rate equal to the
most favorable rate at which Buyer can secure for such Term Loan, shall be
payable over a six year period in the following manner: (i) interest shall be
deferred for the first six months of the term thereof, which interest shall be
added to the principal amount of the Term Loan, (ii) monthly payments of
interest only for the second six months of the term of the Term Loan, and (iii)
monthly installments of principal and interest amortized over a five-year period
commencing on the first anniversary of the date of the Term Loan and continuing
to and including the sixth anniversary of the date of the Term Loan, on which
date all outstanding principal and accrued and unpaid interest shall be due and
payable.
(b) Buyer shall use reasonable commercial efforts to
secure financing for Seller from a third party lender of up to Seven Hundred
Fifty Thousand Dollars ($750,000) (the "Credit Line"), the proceeds of which
Seller may draw upon on an as needed basis to be used for store closure and
lease termination costs and severance costs. Subject to any intercreditor
arrangements between the lenders of the Term Loan and the Credit Line, the
Credit Line shall be secured by a first priority security interest in all of
Seller's assets. The Credit Line shall require (i) monthly payments of interest
only commencing on the first day of the month following the date on which Seller
draws upon the Credit Line, and (ii) quarterly payments in amounts equal to the
lesser of (x) $250,000 or (y) the principal amount then outstanding under the
Credit Line, such payments commencing on the seventh quarter following the date
on which Seller draws upon the Credit Line and continuing until such time as all
outstanding principal and interest is paid in full. The Credit Line shall bear
interest at the same rate as the Term Loan.
9.9 SELLER'S DEVELOPMENT RIGHTS. Concurrently with the execution
hereof, Buyer and Seller shall enter into a license agreement (the "License
Agreement"), in the form of Exhibit G attached hereto, pursuant to which Buyer
shall grant to Seller a license to use the Intangible Property Rights for the
operation of all of the Restaurants (other than the Purchased Restaurants), the
four restaurants operated by franchisees of Seller which are listed on Exhibit
A-1 hereto (the "Franchised Restaurants") and for the development of new
restaurants, all on the terms and conditions set forth in the License Agreement.
9.10 BUSINESS SERVICES AGREEMENT; RELATED AGREEMENTS. Upon Closing,
Buyer (or Buyer's assignee) and Seller shall enter into a business services
agreement (the "Business Services Agreement") in the form of Exhibit H hereto.
The Business Services Agreement, the License Agreement, the Stock Purchase
Warrant and the Option Agreement hereinafter may be referred to collectively as
the "Related Agreements."
9.11 EMPLOYMENT AGREEMENT. Concurrently with the closing of the
tenth Restaurant (which would include the seven Purchased Restaurants pursuant
to the terms of this Agreement and three of the Additional Restaurants pursuant
to the Option Agreement), Buyer shall cause Star Buffet
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to enter into an employment agreement (the "Employment Agreement") with John
North in substantially the form attached hereto as Exhibit I.
9.12 DEVELOPMENT OF WESTERN BUFFET. Upon the successful development
of the Western Buffet or comparable concept, Buyer and Seller will negotiate in
good faith to enter into a development agreement pursuant to which Seller would
have the right to develop restaurants based upon such concept in selected areas
of the following eleven states: Arizona, California, Colorado, Idaho, Montana,
Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.
9.13 BOARD OF DIRECTORS; OPTIONS. Upon the formation of Star
Buffet, Buyer, as the sole stockholder of Star Buffet, shall elect John North to
serve on the Board of Directors of Star Buffet for one full term. As soon as
practicable following the consummation of the IPO, and in no event later than
the first meeting of the Board of Directors of Star Buffet following the
consummation of the IPO, Buyer shall cause Star Buffet to issue to John North
fully vested options to purchase an aggregate of 1% of the shares of Common
Stock of Star Buffet outstanding on a fully diluted basis as of the date of
grant at an exercise price equal to the price per share at which shares of
Common Stock of Star Buffet initially are sold in the IPO. In addition, in
consideration of the cooperation and services to be rendered by Jim North and
John North in connection with the IPO and the transfer of the Purchased Assets,
Buyer shall cause Star Buffet to issue to Jim North and John North,
collectively, options to purchase the Common Stock of Star Buffet in the
following amounts and upon the following conditions: (i) upon the purchase of
the second Additional Restaurant pursuant to the Option Agreement, .6667% of the
Common Stock of Star Buffet outstanding on a fully diluted basis as of the date
of grant at an exercise price equal to the Market Price Per Share (as
hereinafter defined); (ii) upon the purchase of the fourth Additional Restaurant
pursuant to the Option Agreement, .6667% of the Common Stock of Star Buffet
outstanding on a fully diluted basis as of the date of grant at an exercise
price equal to the Market Price Per Share; and (iii) upon the purchase of the
sixth Additional Restaurant, .6667% of the Common Stock of Star Buffet
outstanding on a fully diluted basis as of the date of grant at an exercise
price equal to the Market Price Per Share; provided, however, that,
notwithstanding anything herein to the contrary, (i) the foregoing option shall
not be granted unless and until Star Buffet has consummated the IPO, and (ii)
such options shall not vest until such time as any and all monetary obligations
owing to Buyer pursuant to Section 9.8 shall have been paid in full in
accordance with the terms of Section 9.8. Buyer shall cause the foregoing
options to be granted to Jim North and John North, collectively, as soon as
practicable following the satisfaction of the foregoing conditions and in no
event later than the first meeting of the Board of Directors of Star Buffet
following the satisfaction of such conditions. As used herein, "Market Price Per
Share" shall be the last reported sale price of the Common Stock on a national
securities exchange or on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), as the case may be, on the last business
day prior to the date of grant, or if no such sale is made on such day, the mean
of the closing bid and asked prices for such day on such exchange or NASDAQ, as
the case may be. For purposes of Section 9.13, the number of shares of Common
Stock of Star Buffet outstanding on a fully diluted basis shall exclude any
options granted or issued to Seller, Jim North or John North pursuant to this
Section 9.13.
9.14 BULK TRANSFERS. Seller shall provide Buyer with such data and
information and take such actions (including giving and publishing or recording
appropriate notices) as Buyer may reasonably require in order to comply with all
bulk transfer laws of the respective jurisdictions in which the Purchased Assets
are located.
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10. SURVIVAL OF COVENANTS, REPRESENTATIONS AND WARRANTIES.
All of the representations and warranties set forth in this Agreement
shall remain in full force and effect regardless of any investigation,
verification or approval by any party hereto or by anyone on behalf of any party
hereto, and shall survive for a period of two years following the Closing,
regardless of any investigation, verification or approval by any party hereto.
The covenants and agreements of the parties contained in this Agreement shall
survive the Closing.
11. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER.
The obligations of Seller to consummate this Agreement are subject to
the satisfaction of the following conditions on or prior to the Closing Date,
each of which shall be deemed independent, severable and waivable in whole or in
part at the option of Seller.
11.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE. All
representations and warranties of Buyer contained herein shall be true and
accurate in all material respects at and as of the Closing Date, as though said
representations and warranties were made at and as of that time, and Buyer shall
have performed all covenants and agreements on its part required to be performed
prior to the Closing, and Seller shall have received a certificate dated as of
the Closing Date and executed by an officer of Buyer, to the effect of the
foregoing matters.
11.2 APPROVALS, ETC. All required regulatory approvals shall have
been received with respect to the transactions contemplated by this Agreement.
No action or proceeding shall be completed or pending against Buyer that has
resulted or is likely to result in a judgment, decree or order that would
prevent or make unlawful the consummation of the transactions under this
Agreement, and there shall be in effect no order restraining or prohibiting the
consummation of the transactions contemplated by this Agreement, nor any
proceedings pending with respect thereto.
11.3 RELATED AGREEMENTS. Buyer shall have executed and delivered
each of the Related Agreements.
11.4 SELLER'S FINANCING. Buyer shall have obtained for the benefit
of Seller the Term Loan and the Credit Line as described in Sections 9.8(a) and
9.8(b) above.
12. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER.
The obligations of Buyer to consummate the transactions contemplated by
this Agreement are subject to the satisfaction of the following conditions on or
prior to the Closing Date, each of which shall be deemed independent, severable
and waivable in whole or in part at the option of Buyer.
12.1 NO ADVERSE CHANGE. There shall not have occurred since the
date hereof (a) any material adverse change in the financial condition,
properties or assets, business, prospects or operations concerning any of the
Purchased Restaurants, (b) any material breach or default by any party thereto
of any of the Assigned Contracts, or (c) any other event or condition or state
of facts of any character affecting Seller which could have a Material Adverse
Effect on the Purchased Restaurants.
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<PAGE> 23
12.2 COMPLIANCE WITH LAW. At the Closing Date, there shall exist no
violations of federal, state or local law or regulation materially or adversely
affecting the value of the Purchased Assets to be sold under this Agreement or
Buyer's ability to operate the Purchased Restaurants after the Closing in
substantially the same manner as they were operated by Seller prior hereto.
12.3 LITIGATION. As of the Closing Date, no material litigation,
governmental action or other proceeding shall be threatened or commenced against
Seller with respect to any matter or against any person with respect to any
transactions contemplated herein which would adversely affect any of the
Purchased Assets or the Purchased Restaurants.
12.4 DELIVERY OF DOCUMENTS. Buyer shall have received from Seller
all instruments, consents, approvals, deeds, assignments, policies and other
documents called for in this Agreement including, without limitation, a good and
sufficient bill of sale, assignments of the Assigned Contracts, assignments of
the Intangible Property Rights and such other assignments of title, certificates
of title properly executed and acknowledged for transfer, and where applicable,
in duly recordable form, and all other instruments and legal opinions necessary
to effectuate the transfer of the Purchased Assets as provided for herein, all
in form and substance satisfactory to Buyer.
12.5 REPRESENTATIONS AND WARRANTIES; PERFORMANCE. All of the
representations and warranties of Seller contained in this Agreement shall be
true and accurate in all material respects at the Closing Date, as though made
at and as of the Closing Date, and all of the covenants and agreements of Seller
contained in this Agreement and required to be performed before the Closing
shall have been performed, and Buyer shall have received a certificate, dated
the Closing Date and executed by the President and Secretary of Seller to the
effect of the foregoing.
12.6 DUE DILIGENCE REVIEW. Except for the environmental reports
described in Section 12.12 below, within fourteen calendar days following
Buyer's receipt of Seller's Disclosure Schedules, Buyer shall be reasonably
satisfied with the results of its due diligence review, and, in Buyer's sole
discretion, Buyer shall have approved Seller's Disclosure Schedules.
12.7 CONSENTS AND APPROVALS, ETC. All required third party consents
and regulatory approvals shall have been received with respect to the
transactions contemplated by this Agreement. No action or proceeding shall be
completed or pending against Seller that has resulted or is likely to result in
a judgment, decree or order that would prevent or make unlawful the consummation
of the transactions under this Agreement, and there shall be in effect no order
restraining or prohibiting the consummation of the transactions contemplated by
this Agreement, nor any proceedings pending with respect thereto. 12.8 OPINION
OF SELLER'S COUNSEL. Buyer shall have received an opinion, dated the Closing
Date, of Sussman, Shank, Wapnick, Caplan & Stiles, counsel for Seller,
substantially in the form of Exhibit J hereto.
12.9 RELATED AGREEMENTS. Seller shall have executed and delivered
each of the Related Agreements.
12.10 STAR BUFFET. Buyer and Star Buffet shall have completed the
IPO as described in Section 9.7 above.
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<PAGE> 24
12.11 BOARD APPROVAL. Buyer's Board of Directors shall have approved
the transactions contemplated by this Agreement.
12.12 ENVIRONMENTAL REPORT. Buyer shall have received and approved
the Phase I environmental site assessment of its environmental consultant in
form and substance reasonably satisfactory to Buyer with respect to any real
property used for or in connection with the Purchased Restaurants which Seller
owns or holds any leasehold interest. To the extent a Phase II environmental
report is recommended by a consultant, Buyer, in its sole discretion, may order,
review and accept the findings of such report given prior to the Closing. The
costs of the environmental reports shall be borne by the Buyer.
13. CLOSING DELIVERIES.
13.1 SELLER'S DELIVERIES. In connection with and at the time of the
Closing, Seller shall deliver to Buyer the following:
(a) Bill of Sale. A bill of sale in the form attached
hereto as Exhibit K and all other instruments and documents of transfer
necessary to transfer and vest in Buyer good title to the Purchased Assets, free
and clear of any liabilities, liens, encumbrances or restrictions whatsoever
except as set forth herein, in the form and substance satisfactory to Buyer's
counsel.
(b) Other Documents. Each of the certificates and other
documents and instruments required to be delivered by Seller to Buyer pursuant
to Section 12 above.
13.2 BUYER'S DELIVERIES. In connection with and at the time of the
Closing, Buyer shall deliver to Seller the following:
(a) Purchase Price. The Purchase Price, in the manner set
forth in Section 4 above.
(b) Other Documents. Each of the certificates and other
documents and instruments required to be delivered by Buyer pursuant to Section
11 above.
14. OBLIGATIONS SURVIVING THE DATE OF THIS AGREEMENT AND THE CLOSING.
14.1 TERMINATION OF LIENS AND ENCUMBRANCES. Seller hereby covenants
that it shall have arranged for and shall have caused all Liens and Encumbrances
on any of the Purchased Assets to be terminated, released or otherwise removed
as of the Closing Date in exchange for the payment to the holders of such Liens
or Encumbrances of the indebtedness or other obligations secured thereby, a list
of which is attached hereto as Schedule 14.1 (the "Secured Obligations"). If it
is determined at any time hereafter that Seller failed to remove or cause to be
removed, without liability or cost or expense to Buyer and without the
disposition of any of the Purchased Assets, any Lien or Encumbrance on any of
the Purchased Assets that was in existence on or prior to the date hereof, or if
any Lien or Encumbrance is imposed or placed on any of the Purchased Assets (or
any replacements thereof) after the date hereof as a result of any act or
omission of Seller, occurring on, prior to or after the date hereof, then,
without limiting any other right or remedy that Buyer may have, Seller shall
cause such Lien or Encumbrance to be removed at no expense or liability to
Buyer, and without any reduction or disposition of any of the Purchased Assets.
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<PAGE> 25
14.2 FURTHER ASSURANCES. Each party hereto shall execute and
deliver after the date hereof such instruments and take such other actions as
the other party may reasonably request in order to carry out the intent of this
Agreement or to better evidence or effectuate the transactions contemplated
herein.
14.3 COSTS AND EXPENSES. Each party shall pay all costs and
expenses incurred or to be incurred by it in negotiating and preparing this
Agreement and Related Agreements and in carrying out and closing the
transactions contemplated by this Agreement. Buyer agrees to pay the reasonable
costs and expenses necessary for the assignment by Seller to Buyer of the Leases
included in the list of Assigned Contracts on Schedule 1.4, which costs and
expenses shall be set forth in Schedule 1.3; provided, however, that Buyer shall
not be obligated to pay any costs and expenses in excess of an aggregate of
$5,000.
14.4 TAXES. Seller shall pay all Taxes of any kind or nature
arising from (i) the conduct or operation of the Purchased Restaurants up to the
Closing Date and the conduct or operation by Seller, prior to or after the date
hereof, of any other business or business activities operations; and (ii)
consummation of the transactions contemplated hereby, including, without
limitation, all sales, use or similar Taxes, if any, that may arise from or be
assessed by reason of the sale of the Purchased Assets by Seller to Buyer. If
any taxes required under this Section 14.4 to be borne by Seller are assessed
against Buyer or any of the Purchased Assets, Buyer shall notify Seller in
writing promptly thereafter and Seller shall be entitled to contest, in good
faith, such assessment or charge so long as such assessment does not adversely
affect Buyer or the Purchased Assets or the Purchased Restaurants.
Notwithstanding the foregoing, Buyer may (but shall not be obligated to) pay any
such Taxes assessed against it, the Purchased Restaurants or any of the
Purchased Assets, but which are payable by Seller pursuant hereto, if Buyer's
failure to do so, in the judgment of Buyer, could result in the imposition of a
Lien or Encumbrance on any of the Purchased Assets or any other assets of Buyer
or would constitute a violation of any agreement to which Buyer is subject, or
if Seller fails to contest such assessment or charge diligently and in good
faith. If Buyer pays any Taxes which pursuant hereto are required to be borne by
Seller, Buyer shall be entitled to reimbursement thereof from Seller on demand.
14.5 FINANCIAL BOOKS AND RECORDS. For a period of five (5) years
hereafter, Buyer shall provide Seller with access during normal business hours
to any books or records relating to the Purchased Restaurants or the Purchased
Assets, which Seller may need solely to file tax returns or other filings or to
defend litigation, filed prior or subsequent to the date hereof, which relate to
periods prior to the date hereof.
15. INDEMNIFICATION PROVISIONS.
15.1 OBLIGATIONS OF SELLER. Seller hereby agrees that it will
indemnify, hold harmless and defend Buyer and each of its directors, officers,
stockholders, employees and agents and their respective successors and assigns,
from and against any and all demands, claims, actions, suits, judgments
liabilities, damages, losses, Taxes, costs and expenses, including, without
limitation, reasonable attorneys' fees, and whether or not they have arisen from
or were incurred in or as a result of any demand, claim, action, suit,
assessment or other proceeding or any settlement or judgment (collectively, the
"Liabilities") that arise from or are in connection with:
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<PAGE> 26
(a) Any facts, circumstances or events, the existence or
happening of which constitutes a breach of or material inaccuracy in any of the
representations or warranties of Seller contained in this Agreement or in
Seller's Disclosure Schedules or Closing Deliveries;
(b) Any breach or default by Seller of any of his
respective covenants or agreements contained in this Agreement, including,
without limitation, any of the covenants of Seller set forth in Section 3.2 with
respect to the Retained Liabilities;
(c) Any claim, lawsuit, action or other proceeding that
(i) is pending against Seller or to which the Purchased Restaurants or any of
the Purchased Assets is subject on the date hereof, or (ii) is brought against
Buyer or to which any of the Purchased Restaurants or any of the Purchased
Assets may become subject hereafter as a result of or arising from any acts or
omissions of Seller that have occurred on or before the date hereof or any acts
or omissions of Seller that may occur after the date hereof, and whether or not
the bringing or assertion of any such claim, lawsuit, action or other proceeding
constitutes a breach of Seller representations or warranties contained in the
Agreement;
(d) Any breach of or inaccuracy in any of the
representations or warranties contained in Section 6.13 hereof or any violation
of or non-compliance with any applicable laws or regulations applicable to
Seller or the Purchased Restaurants prior to the Closing, whether or not such
violation or non-compliance constitutes a breach of the representations or
warranties contained in Section 6.13 hereof;
(e) The presence on or in or the discharge from any real
properties owned or leased now or in the past by Seller of any toxic or
hazardous substances (as defined in Section 6.17 above) that originated or took
place prior to the date hereof, whether or not disclosed in this Agreement or
Seller's Disclosure Schedules hereto; and
(f) The failure to have paid or to pay, when due, any
Taxes that arose out of the operations of the Seller or the consummation of the
transactions contemplated by this Agreement or the failure to have filed, when
due, any Tax Returns related to any such Taxes or any period up to the Closing
Date.
15.2 OBLIGATIONS OF BUYER. Buyer agrees that it will indemnify,
hold harmless and defend Seller and each of its directors, officers,
stockholders, employees and agents from and against any and all Liabilities that
arise from or are in connection with:
(a) a breach or default by Buyer of any of his respective
covenants or agreements contained in this Agreement;
(b) the operation of the Purchased Restaurants from and
after the Closing, other than any act or omission of Seller;
(c) the Assumed Obligations and any amounts of
outstanding principal under the Note issued pursuant to the Seller Credit
Agreement that Buyer agrees to assume pursuant to Sections 4.2(a) and 9.8
hereof; and
(d) any litigation arising from this transaction which is
brought by or on behalf of Buyer's franchisor, Hometown Buffet, Inc.
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<PAGE> 27
15.3 CLAIMS. If any party (the "Indemnitee) receives notice of
circumstances that would give rise to a claim by such party or notice of any
claim or the commencement of any action or proceeding with respect to which any
other party (or parties) is obligated to provide indemnification (the
"Indemnifying Party") pursuant to Sections 15.1 or 15.2 (a "Claim"), the
Indemnitee shall promptly give the Indemnifying party notice thereof; provided,
however, that failure to so notify shall not affect the right of indemnification
hereunder unless such failure has prejudiced the rights of the Indemnifying
Party. Within 30 days after such notice, the Indemnifying Party will notify the
Indemnitee whether it irrevocably elects to make payment of the amount claimed
or, with respect to third party claims, to contest such claim by appropriate
legal proceedings. The failure of the Indemnifying Party to notify the
Indemnitee of its intention within such 30 days shall constitute an irrevocable
election by them that it will pay the amount claimed. Any defense of a claim
shall be conducted by counsel of good standing chosen by Indemnitee and
satisfactory to Indemnifying Party. Such defense shall be conducted at the
expense of Indemnifying Party, except that if any proceeding involves both
claims against which indemnity is granted hereunder and other claims for which
indemnification is not granted hereunder, the expenses of defending against such
claims shall be borne by the Indemnifying Party and the Indemnitee in respective
proportions to the dollar amount of the claims for which they may be liable
based on he aggregate dollar amount of the claims.
16. MISCELLANEOUS.
16.1 NOTICES. All notices, requests, demands or other
communications hereunder shall be in writing and shall be deemed to have been
duly given, (i) on the date of delivery if delivered in person; (ii) on the
second business day after being sent by fax, provided that the successful
transmission of the fax has been confirmed through a confirmation function sheet
provided by the fax machine used for such transmission and a true and correct
copy thereof is sent by first class mail to the party to which the fax was sent
within one (1) business day thereafter; or (iii) on the third business day
following the deposit thereof in the United States Mails, provided it is mailed
by certified mail, return-receipt requested and postage prepaid and properly
addressed as follows:
If to Seller: North's Restaurants, Inc.
1005 N. Riverside, Suite 100
Medford, Oregon 97501
Fax No.: (541) 734-7151
Attn: John North, President
With a copy to: Sussman, Shank, Wapnick, Caplan & Stiles
1000 Southwest Broadway, Suite 1400
Portland, Oregon 97205-3089
Fax No.: (503) 248-0130
Attn: Barry Caplan
If to Buyer, addressed to: CKE Restaurants, Inc.
1200 North Harbor Boulevard
Anaheim, California 92801
Fax No.: (714) 490-3695
Attn: Robert Wilson
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<PAGE> 28
With a copy to: Stradling, Yocca, Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660-6441
Fax No. (714) 725-4100
Attn: C. Craig Carlson, Esq.
Any party hereto may from time to time, by written notice to the other
parties, designate a different address, which shall be substituted for the one
specified above.
16.2 MATERIAL ADVERSE EFFECT. When used in this Agreement, the
phrase "Material Adverse Effect" shall mean a circumstance, state of facts,
event, consequence or result that, individually or in the aggregate, materially
and adversely affects, or could reasonably be expected to materially and
adversely affect the Purchased Assets or the Purchased Restaurants or the
condition (financial or other), operating results or future prospects of Buyer
or Seller, as the case may be, or the ability of Buyer or Seller to consummate
the transactions which it is required to consummate hereunder.
16.3 ASSIGNMENT. Seller may not assign this Agreement, or assign
its rights or delegate its duties hereunder, without the prior written consent
of Buyer. Buyer shall have the right, without Seller's consent, to assign its
rights and delegate its duties hereunder to any corporation which, in the sole
discretion of Buyer, is adequately capitalized to consummate the transactions
contemplated by this Agreement, from and after which Buyer shall be relieved of
its duties and obligations hereunder; provided, however, in no event shall Buyer
be relieved from its duties and obligations set forth in Section 15.2.
16.4 SEVERABILITY. Any provision of this Agreement which is
illegal, invalid or unenforceable shall be ineffective to the extent of such
illegality, invalidity or unenforceability, without affecting in any way the
remaining provisions hereof.
16.5 GOVERNING LAW. This Agreement is deemed to have been entered
into and is to be performed in the State of California and its interpretation,
its construction and the remedies for its enforcement or breach are to be
applied pursuant to, and in accordance with, the laws of the State of California
for contracts made and to be performed in that state.
16.6 ENTIRE AGREEMENT; AMENDMENT. This Agreement, and the Exhibits
and Schedules hereto, and each additional agreement and document to be executed
and delivered pursuant hereto, constitute all of the agreements of the parties
with respect to, and supersede all prior agreements and understandings relating
to the subject matter of, this Agreement or the transactions contemplated by
this Agreement. This Agreement may not be modified or amended except by a
written instrument specifically referring to this Agreement signed by the
parties hereto.
16.7 WAIVER. No waiver by one party of the other party's
obligations, or of any breach or default hereunder by any other party, shall be
valid or effective, unless such waiver is set forth in writing and is signed by
the party giving such waiver; and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature or any other breach
or default by such other party.
16.8 INTERPRETATION; HEADINGS. This Agreement is the result of
arms'-length negotiations between the parties hereto and no provision hereof,
because of any ambiguity found to be contained
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<PAGE> 29
therein or otherwise, shall be construed against a party by reason of the fact
that such party or its legal counsel was the draftsman of that provision. The
section, subsection and any paragraph headings contained herein are for the
purpose of convenience only and are not intended to define or limit or affect,
and shall not be considered in connection with, the interpretation of any of the
terms or provisions of this Agreement.
16.9 COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16.10 ARBITRATION All claims, controversies, differences or disputes
between or among any of the parties hereto arising from or relating to this
Agreement, or any of the agreements entered into pursuant to any of the express
provisions hereof, shall be determined solely and exclusively by arbitration in
accordance with the rules of commercial arbitration then in effect of the
American Arbitration Association, or any successors thereto. Each of the parties
consent to venue for such arbitrations in the County of Orange, California, and
to service of process by certified or registered mail to their respective
addresses where notices may be sent pursuant to Subsection 16.1. Either party
may initiate any such arbitration and, if initiated, the parties shall jointly
select a mutually acceptable arbitrator therefor. In the event the parties fail
to agree upon such an arbitrator within twenty (20) days after written
notification of the initiation of the arbitration has been given to all of the
parties, then each party shall select an arbitrator and such arbitrators shall
then select a third arbitrator to serve as the sole arbitrator, provided that
if, in such event, either party fails to select such an arbitrator within seven
(7) days, such party's arbitrator shall be selected by the American Arbitration
Association, or any successor thereto, upon application of either party.
Judgment upon the award of the agreed upon arbitrator or the so chosen third
arbitrator, as the case may be, shall be binding and may be entered in any court
of competent jurisdiction. The parties agree to abide by any decision rendered
in any such arbitration as final and binding and waive the right to submit the
dispute to a public tribunal for jury or non-jury trial. Notwithstanding the
foregoing, any party may bring an action in any court of competent jurisdiction
when the remedy sought is limited to injunctive relief of a breach or threatened
breach of this Agreement by another party hereto or specific performance of any
of the obligations of any of the other parties thereto. The prevailing party in
any such arbitration or other proceeding brought in accordance with this
Subsection 16.10, shall be reimbursed for its reasonable attorneys' fees and
disbursements and costs incurred in connection therewith by the non-prevailing
party as determined by the arbitrator.
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<PAGE> 30
IN WITNESS WHEREOF, the undersigned have caused this Asset Purchase
Agreement to be executed by officers thereunto duly authorized as of the date
first above stated.
BUYER: CKE RESTAURANTS, INC.,
a Delaware corporation
By:
-------------------------------
Its:
SELLER: NORTH'S RESTAURANTS, INC.,
an Oregon corporation
-----------------------------------
John North, President
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<PAGE> 31
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
Exhibit A Lists of Restaurants
Exhibit A-1 Franchised Restaurants
Exhibit B The Purchased Restaurants
Exhibit C Allocation of Purchase Price
Exhibit D Form of Option Agreement
Exhibit E Form of Investment Representation Letter
Exhibit F Form of Stock Purchase Warrant
Exhibit G Form of License Agreement
Exhibit H Form of Business Services Agreement
Exhibit I Form of Employment Agreement
Exhibit J Form of Opinion of Seller's Counsel
Exhibit K Bill of Sale
SCHEDULES
Schedule 1.1 Tangible Personal Property and Fixtures
Schedule 1.2 Inventory
Schedule 1.3 Real Property and Personal Property Leases
Schedule 1.4 Assigned Contracts
Schedule 1.6 Intangible Property Rights
Schedule 1.10 Prepaid Fees and Deposits
Schedule 2.4 Excluded Assets
Schedule 3.1 Assumed Obligations
Schedule 6.1(c) Consents, Releases, etc.
Schedule 6.3 Financial Statements
Schedule 6.4 Undisclosed Liabilities
Schedule 6.5 Certain Changes
Schedule 6.6(c) Intangible Property Right Infringements
Schedule 6.6(d) Exceptions to Title
Schedule 6.7 Labor and Employment Matters
Schedule 6.8 Material Contracts
Schedule 6.9 Conflicts
</TABLE>
<PAGE> 32
<TABLE>
<S> <C>
Schedule 6.10 Vendors and Suppliers
Schedule 6.11 Liabilities
Schedule 6.12 Insurance
Schedule 6.13(a) Compliance With Laws
Schedule 6.13(b) Licenses and Permits
Schedule 6.15 Litigation
Schedule 6.16 Certain Transactions
Schedule 6.17 Environmental and Safety Matters
Schedule 8.2(d) Permitted Expenditures and Commitments
Schedule 9.3 Retained Employees
Schedule 9.8 Personal Guarantees
Schedule 14.1 The Secured Obligations
</TABLE>
<PAGE> 33
EXHIBIT A
LISTING OF LOCATIONS OF RESTAURANTS
1. JJ North's Grand Buffet
2050 Diamond Avenue
Concord, California 94520
2. JJ North's Grand Buffet
1315 Gateway Blvd. #D2
Fairfield, California 94533
3. JJ North's Grand Buffet
5999 Florin Road
(Florin Mall)
Sacramento, California 95823
4. JJ North's Grand Buffet
704 Southland Mall
Hayward, California 94545
5. JJ North's Grand Buffet
3647 Wall Ave.
(Newgate Mall)
Ogden, Utah 84405
6. JJ North's Grand Buffet
1030 Howe Avenue
Sacramento, California 95825
7. JJ North's Grand Buffet
10520 N.E. Halsey
Portland, Oregon 97220
8. JJ North's Grand Buffet
1150 N.E. "E" Street
(Grants Pass Shopping Center)
Grants Pass, Oregon 97526
9. JJ North's Grand Buffet
4575 Sonoma Hwy.
Santa Rosa, California 95409
10. JJ North's Grand Buffet
2342 Sunrise Blvd. #35
Rancho Cordova, California 95670
Exhibit A
<PAGE> 34
11. JJ North's Grand Buffet
3650 Kietzke Lane
Reno, Nevada 89502
12. JJ North's Grand Buffet
188 W. 7200 S.
Midvale, Utah 84047
13. JJ North's Grand Buffet
1016 N. Riverside
Medford, Oregon 97501
14. JJ North's Grand Buffet
Boise, Idaho
15. JJ North's Grand Buffet
Olympia, Washington
16. JJ North's Grand Buffet
Kelso, Washington
17. JJ North's Grand Buffet
Logan, Utah
18. JJ North's Grand Buffet
Pocatello, Idaho
19. JJ North's Grand Buffet
Idaho Falls, Idaho
20. JJ North's Grand Buffet
Bend, Oregon
Exhibit A
<PAGE> 35
EXHIBIT A-1
LISTING OF FRANCHISED RESTAURANTS
1. North's Chuck Wagon
1720 N.W. 9th Street
Corvallis, Oregon 97330
2. North's Chuck Wagon
2864 S. Williamette St.
Eugene, Oregon 97405
3. JJ North's Grand Buffet
1050 W. Baseline, #C1
Hillsboro, Oregon 97123
4. North's Chuck Wagon
1839 Kimberly Road
Twin Falls, Idaho 83301
Exhibit A-1
<PAGE> 36
EXHIBIT B
NORTH'S RESTAURANTS INC.
<TABLE>
<CAPTION>
VALUATION
($ IN 000S)
-----------
<S> <C>
JJ North's Grand Buffet $1,476
Boise, Idaho
JJ North's Grand Buffet 1,036
Olympia, Washington
JJ North's Grand Buffet 501
Kelso, Washington
JJ North's Grand Buffet 617
Logan, Utah
JJ North's Grand Buffet 412
Pocatello, Idaho
JJ North's Grand Buffet 55
Idaho Falls, Idaho
JJ North's' Grand Buffet 403
Bend, Oregon ------
Total $ 4,500
</TABLE>
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
CKE Restaurants, Inc.:
We consent to the use of our report for Casa Bonita Restaurants included herein
and to the reference to our firm under the headings "Selected Combined Financial
Data" and "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
July 28, 1997
<PAGE> 2
EXHIBIT 23.2
The Board of Directors
CKE Restaurants, Inc.:
We consent to the use of our report for North's Restaurants included herein and
to the reference to our firm under the headings "Selected Combined Financial
Data" and "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Portland, Oregon
July 28, 1997
<PAGE> 3
EXHIBIT 23.2
The Board of Directors
CKE Restaurants, Inc.:
We consent to the use of our report for Star Buffet, Inc. included herein and to
the reference to our firm under the headings "Selected Combined Financial Data"
and "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
July 28, 1997
<PAGE> 4
EXHIBIT 23.2
The Board of Directors
CKE Restaurants, Inc.:
We consent to the use of our report for HTB Restaurants, Inc. included herein
and to the reference to our firm under the headings "Selected Combined Financial
Data" and "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Orange County, California
July 28, 1997
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