<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 15, 1996
CKE RESTAURANTS, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 1-13192 33-0602639
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
1200 North Harbor Boulevard, Anaheim, California 92801
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (714) 774-5796
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On July 15, 1996, CKE Restaurants, Inc. (the "Company") acquired Summit
Family Restaurants Inc. ("Summit"). Summit has restaurant operations in nine
western states, including 77 company-operated and 24 franchised JB's
Restaurants, 16 HomeTown Buffet restaurants and six Galaxy Diner restaurants.
The acquisition was effected by the merger of Summit Merger, Inc., a
wholly-owned subsidiary of the Company, with and into Summit (the "Merger"),
with Summit surviving the Merger as a wholly-owned subsidiary of the Company. In
the Merger, each of the 4,809,446 outstanding shares of Summit Common Stock was
converted into the right to receive 0.1043 shares of the Company's Common Stock
(and cash in lieu of fractional shares) and cash in the amount of $2.63, subject
to the rights of the holders thereof to exercise appraisal rights under
applicable Delaware law. Accordingly, the aggregate number of shares of Common
Stock of the Company issued or to be issued by the Company in the Merger will
not exceed 501,625. The sources of funds for the cash portion of the Merger
consideration were cash on hand and borrowings under the Company's revolving
credit facilities.
The foregoing descriptions of the acquisition of Summit and the Merger are
qualified in their entirety by reference to the Agreement and Plan of Merger and
Reorganization, dated as of November 30, 1995, among the Company, Summit and
Summit Merger, Inc., which is attached as Appendix A to the Proxy
Statement/Prospectus, dated June 10, 1996, of the Company and Summit, a copy of
which was filed with the Commission pursuant to Rule 424(b) under the
Securities Act of 1933, as amended, on June 11, 1996 (the "Proxy
Statement/Prospectus").
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Business Acquired. The following financial
statements of Summit are incorporated by reference herein from pages F-2 through
F-20 of the Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors .................................................................. F-2
Consolidated Balance Sheets as of September 26, 1994, September 25, 1995
and March 11, 1996 (unaudited)................................................................ F-3
Consolidated Statements of Operations for the fiscal years ended September
27, 1993, September 26, 1994 and September 25, 1995 and for the
twenty-four weeks ended
March 13, 1995 and March 11, 1996 (unaudited)................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended
September 27, 1993, September 26, 1994 and September 25, 1995 and for the
twenty-four weeks ended March 11, 1996 (unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the fiscal years ended September
27, 1993, September 26, 1994 and September 25, 1995 and for the
twenty-four weeks ended
March 13, 1995 and March 11, 1996 (unaudited)................................................. F-6
Notes to Consolidated Financial Statements....................................................... F-8
</TABLE>
2
<PAGE> 3
(b) Pro Forma Financial Information.
The following Unaudited Pro Forma Combined Condensed Financial
Statements are based upon the consolidated financial statements of the Company
and Summit combined and adjusted to give effect to the acquisition of Summit by
the Company (the "Summit Acquisition"). In connection with the Summit
Acquisition, each of the 4,809,446 then outstanding shares of Summit Common
Stock was converted into the right to receive cash in the amount of $2.63 and
0.1043 shares of the Company's Common Stock, and cash in lieu of fractional
shares.
The Unaudited Pro Forma Combined Condensed Balance Sheet at May 20,
1996 gives effect to the Summit Acquisition as if it had occurred on such date
and was prepared based upon the consolidated balance sheets of the Company as of
May 20, 1996 and of Summit as of March 11, 1996. The Unaudited Pro Forma
Combined Condensed Statements of Operations for the fiscal year ended January
31, 1996 and for the 16 weeks ended May 20, 1996 give effect to the Summit
Acquisition as if it had occurred at the beginning of each period presented. The
Unaudited Pro Forma Combined Condensed Statement of Operations for the fiscal
year ended January 31, 1996 was prepared based upon the consolidated statements
of operations of the Company for the fiscal year ended January 31, 1996 and of
Summit for the 24 weeks ended March 11, 1996 and the 28 weeks ended September
25, 1995. The Unaudited Pro Forma Combined Condensed Statement of Operations for
the sixteen weeks ended May 20, 1996 was prepared based upon the consolidated
statements of operations of the Company for the 16 weeks ended May 20, 1996 and
of Summit for the 12 weeks ended March 11, 1996.
The Unaudited Pro Forma Combined Condensed Financial Statements are
provided for comparative purposes only and are not necessarily indicative of the
results of operations or financial position of the combined company that would
have occurred had the Summit Acquisition occurred at the beginning of the
periods presented or on the date indicated, nor are they necessarily indicative
of future operating results or financial position. The unaudited pro forma
adjustments are based upon certain assumptions included in the notes to the
Unaudited Pro Forma Combined Condensed Financial Statements. The Company
believes the pro forma assumptions are reasonable under the circumstances. The
Unaudited Pro Forma Combined Condensed Financial Statements are further based on
the assumption that none of the former holders of Summit Common Stock, if any,
who may be entitled to appraisal rights under the Delaware General Corporation
Law will seek to perfect such rights.
The Summit Acquisition will be accounted for using the purchase method
of accounting. Accordingly, the Company's cost to acquire Summit (the "Purchase
Consideration"), calculated to be $29.0 million, will be allocated to the assets
acquired and liabilities assumed according to their respective 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. Many operational and
strategic decisions with respect to the combined companies have not been made.
The Company currently intends to sell the JB's Restaurants. However, the Company
has not entered into any agreements providing for any such sale and there can be
no assurance that the Company will be able to sell such restaurants.
Accordingly, the purchase allocation adjustments made in connection with the
development of the Unaudited Pro Forma Combined Condensed Financial Statements
are preliminary, assume all Summit restaurants will be operated by the Company,
and have been made solely for the purpose of developing such Unaudited Pro Forma
Combined Condensed Financial Statements. Acquisition costs, including fees
payable to Summit's financial advisor, have been included in the Unaudited Pro
Forma Combined Condensed Financial Statements.
The Unaudited Pro Forma Combined Condensed Financial Statements do not
reflect certain cost savings that the Company expects to be realized primarily
through elimination of certain duplicative administrative costs. No assurances
can be made as to the amount of cost savings, if any, that actually will be
realized.
3
<PAGE> 4
CKE RESTAURANTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MAY 20, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------ PRO FORMA
CKE AT SUMMIT AT ACQUISITION
5/20/96 3/11/96 COMBINED ADJUSTMENTS PRO FORMA
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...... $ 19,219 $ 1,875 $ 21,094 $(13,606) (a)(f)(g) $ 7,488
Notes receivable............... 1,030 190 1,220 -- 1,220
Other receivables.............. 5,427 584 6,011 -- 6,011
Inventories.................... 7,208 1,466 8,674 -- 8,674
Current deferred taxes, net.... 10,005 -- 10,005 -- 10,005
Prepaid expenses and other..... 6,449 189 6,638 -- 6,638
--------- -------- --------- -------- ---------
Total current assets....... 49,338 4,304 53,642 (13,606) 40,036
Property, building and
equipment, net............. 123,305 44,636 167,941 (4,778) (d) 163,163
Real property and equipment
under capitalized leases... 27,662 7,091 34,753 -- 34,753
Notes receivable............... 6,319 2,241 8,560 -- 8,560
Related party notes
receivable................. 900 -- 900 -- 900
Long-term investments.......... 31,386 1,430 32,816 (4,989) (j) 27,827
Other assets................... 7,425 2,693 10,118 -- 10,118
--------- -------- --------- --------- ---------
Total assets............... $ 246,335 $ 62,395 $ 308,730 $ (23,373) $ 285,357
========= ======== ========= ========= =========
LIABILITIES
Current maturities of
long-term debt.............. $ 11,193 $ 871 $ 12,064 $ -- $ 12,064
Accounts payable............... 15,028 5,358 20,386 -- 20,386
Accrued liabilities............ 36,479 7,136 43,615 1,887 (c)(e)(f) 45,502
--------- -------- --------- --------- ---------
Total current liabilities... 62,700 13,365 76,065 1,887 77,952
Obligations under capitalized
leases...................... 39,369 9,981 49,350 -- 49,350
Long-term debt................. 23,066 345 23,411 -- 23,411
Other liabilities.............. 14,645 -- 14,645 -- 14,645
Deferred taxes, net............ -- 468 468 -- 468
Deferred compensation.......... -- 1,564 1,564 -- 1,564
--------- -------- --------- --------- ---------
Total liabilities........... 139,780 25,723 165,503 1,887 167,390
STOCKHOLDERS' EQUITY........... 106,555 36,672 143,227 (25,260) (a)(b)(j) 117,967
--------- -------- --------- --------- ---------
Total liabilities and
stockholders' equity........ $ 246,335 $ 62,395 $ 308,730 $ (23,373) $ 285,357
========= ======== ========= ========= =========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed
financial statements.
4
<PAGE> 5
CKE RESTAURANTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
CKE SUMMIT
FISCAL YEAR 52 WEEKS PRO FORMA
ENDED ENDED ACQUISITION
1/31/96 3/11/96 COMBINED ADJUSTMENTS PRO FORMA
---------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES........................ $ 465,437 $ 120,897 $ 586,334 $ -- $ 586,334
OPERATING COSTS AND EXPENSES:
Restaurant Operations:
Food and packaging............... 121,029 39,563 160,592 -- 160,592
Payroll and other employee
benefits......................... 109,942 41,977 151,919 (1,600)(i) 150,319
Occupancy and other operating
expenses...................... 82,095 32,208 114,303 -- 114,303
Franchised and licensed
restaurants...................... 68,839 194 69,033 -- 69,033
Advertising........................ 19,940 3,316 23,256 -- 23,256
General and administrative......... 37,857 9,845 47,702 (478)(d) 47,224
---------- ---------- --------- ----------- ----------
Total operating costs and
expenses................... 439,702 127,103 566,805 (2,078) 564,727
---------- ---------- --------- ----------- ----------
Operating income (loss)............... 25,735 (6,206) 19,529 2,078 21,607
Interest expense...................... (10,004) (1,375) (11,379) -- (11,379)
Gain on sale of long-term
investment......................... -- 3,959 3,959 -- 3,959
Other income, net..................... 2,222 400 2,622 -- 2,622
---------- ---------- --------- ----------- ----------
Income (loss) before income taxes..... 17,953 (3,222) 14,731 2,078 16,809
Income tax expense (benefit).......... 7,001 900 7,901 (1,177)(h) 6,724
---------- ---------- --------- ----------- ----------
Net income (loss)..................... $ 10,952 $ (4,122) $ 6,830 $ 3,255 $ 10,085
========== ========== ========= =========== ==========
Net income per share.................. $ 0.59 $ 0.52
========== ==========
Weighted average shares
outstanding........................ 18,679 19,399
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined condensed
financial statements.
5
<PAGE> 6
CKE RESTAURANTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE 16 WEEKS ENDED MAY 20, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------
CKE SUMMIT
16 WEEKS 12 WEEKS PRO FORMA
ENDED ENDED ACQUISITION
5/20/96 3/11/96 COMBINED ADJUSTMENTS PRO FORMA
---------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
TOTAL REVENUES........................ $ 152,934 $ 27,397 $ 180,331 $ -- $ 180,331
OPERATING COSTS AND EXPENSES:
Restaurant Operations:
Food and packaging............... 39,755 8,782 48,537 -- 48,537
Payroll and other employee
benefits......................... 35,631 9,287 44,918 (1,600) (i) 43,318
Occupancy and other operating
expenses...................... 26,539 7,241 33,780 -- 33,780
Franchised and licensed
restaurants...................... 22,176 85 22,261 -- 22,261
Advertising........................ 7,571 680 8,251 -- 8,251
General and administrative......... 11,186 3,219 14,405 (147) (d) 14,258
---------- ---------- --------- ------------- ----------
Total operating costs and
expenses................... 142,858 29,294 172,152 (1,747) 170,405
Operating income (loss)............... 10,076 (1,897) 8,179 1,747 9,926
Interest expense...................... (2,595) (282) (2,877) -- (2,877)
Other income, net..................... 1,274 121 1,395 -- 1,395
---------- ---------- --------- ------------- ----------
Income (loss) before income taxes..... 8,755 (2,058) 6,697 1,747 8,444
Income tax expense (benefit).......... 3,422 (200) 3,222 156 (h) 3,378
---------- ---------- --------- ------------- ----------
Net income (loss)..................... $ 5,333 $ (1,858) $ 3,475 $ 1,591 $ 5,066
========== ========== ========= ============= ==========
Net income per share.................. $ 0.28 $ 0.26
========== ==========
Weighted average shares
outstanding........................ 19,109 19,611
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined
condensed financial statements.
6
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
(a) The pro forma combined condensed balance sheet and statements of
operations have been prepared to reflect the acquisition of Summit by the
Company for an aggregate estimated purchase price comprised of $17.6 million in
cash and shares of Common Stock having an aggregate fair market value of $11.4
million. The cash portion of the purchase price includes cash in the amount of
$5.0 million paid by the Company for the purchase of Summit preferred stock on
April 4, 1996; however, the pro forma cash acquisition adjustments exclude the
$5.0 million paid.
(b) The pro forma combined condensed balance sheet has been adjusted to
eliminate the stockholders' equity of Summit. See note (j) below.
(c) To record anticipated additional change of control and severance
costs of $1.3 million for employees of Summit expected to be terminated after
consummation of the Summit Acquisition. See note (i) below.
(d) To write down $1.2 million of certain leasehold improvements,
property and equipment which will not be used by the Company after the Summit
Acquisition, to allocate $3.6 million, the remaining excess of fair value of net
assets acquired over consideration paid, in accordance with APB No. 16 and to
record the related $0.5 million and $0.1 million impact on depreciation and
amortization expense calculated over ten years for the fiscal year ended January
31, 1996 and the 16 weeks ended May 20, 1996, respectively.
(e) To record reserves for the excess of master lease payments over
anticipated sublease rents of $0.3 million for Summit's corporate office lease,
$0.2 million for computer and equipment lease commitments and $0.2 million for
other integration costs.
(f) To record the use of cash of $0.7 million for investment banking
fees to be paid upon the closing of the Summit Acquisition and to reduce
liabilities by $0.1 million, representing investment banking fees previously
accrued by Summit.
(g) To record the use of $0.2 million in cash for the cancellation
of Summit options whose exercise price is below the market value of the Summit
Common Stock.
(h) To record the income tax effects of the pro forma adjustments at an
assumed rate of 40.0% and to utilize Summit's current net operating losses so
as to affect a pro forma tax rate of 40.0%.
(i) To exclude $1.6 million of change of control and severance costs,
for employees of Summit who have already been terminated and which are included
in Summit's results of operations for the 52 week and 12 week periods ended
March 11, 1996, as a non-recurring charge.
(j) To eliminate in consolidation the Company's $5.0 million investment
in Summit preferred stock.
7
<PAGE> 8
(c) Exhibits.
Exhibit Number
2.1 Agreement and Plan of Merger and Reorganization
dated as of November 30, 1995, by and among CKE
Restaurants, Inc., Summit Merger, Inc. and Summit
Family Restaurants Inc. (incorporated herein by
reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (Registration
No. 333-05305)).
23.1 Consent of KPMG Peat Marwick LLP
99.1 Press Release dated July 16, 1996
99.2 Financial Statements of Summit Family Restaurants
Inc. listed in Item 7 (a) above
8
<PAGE> 9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CKE RESTAURANTS, INC.
Date: July 26, 1996 By: /s/ JOSEPH N. STEIN
-------------------
Joseph N. Stein,
Senior Vice President and
Chief Financial Officer
9
<PAGE> 10
EXHIBIT INDEX
The following exhibits are attached hereto and incorporated herein by
reference:
<TABLE>
<CAPTION>
Sequentially
Exhibit Number Description Numbered Page
- -------------- ----------- -------------
<S> <C> <C>
2.1 Agreement and Plan of Merger and Reorganization --
dated as of November 30, 1995, by and among CKE
Restaurants, Inc., Summit Merger, Inc. and Summit
Family Restaurants Inc. (incorporated herein by
reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4 (Registration
No. 333-05305)).*
23.1 Consent of KPMG Peat Marwick LLP
99.1 Press Release dated July 16, 1996
99.2 Financial Statements of Summit Family Restaurants
Inc. listed in Item 7 (a) above
</TABLE>
- -------------------
* Schedules omitted. The Registrant shall furnish supplementally to the
Securities and Exchange Commission a copy of any omitted schedule upon
request.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of
CKE Restaurants, Inc. and Subsidiaries
We consent to the incorporation by reference in the Registration Statements
(Nos. 33-56313 and 33-55337) on Forms S-8 of CKE Restaurants, Inc. ("CKE") of
our report dated November 3, 1995, except as to Note 15 which is as of May 16,
1996, relating to the consolidated balance sheets of Summit Family Restaurants
Inc. and Subsidiaries as of September 26, 1994 and September 25, 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended September 25, 1995,
which report appears on page F-2 of the Proxy Statement/Prospectus, dated June
10, 1996, of Summit Family Restaurants Inc. and CKE, a copy of which was filed
with the Commission pursuant to Rule 424(b) under the Securities Act of 1933, as
amended, on June 11, 1996, and is incorporated by reference in CKE's Current
Report on Form 8-K dated July 15, 1996.
/s/ KPMG Peat Marwick LLP
- -------------------------
Salt Lake City, Utah
July 26, 1996
<PAGE> 1
EXHIBIT 99.1
NEWS RELEASE
FOR: CKE Restaurants, Inc.
CONTACTS: Loren Pannier
714.778.7109
Bob Wheaton
714.490.3638
FOR IMMEDIATE RELEASE
CKE RESTAURANTS, INC. ANNOUNCES ACQUISITION OF
SUMMIT FAMILY RESTAURANTS INC.
ANAHEIM, Calif. -- July 16, 1996 -- CKE Restaurants, Inc. (NYSE:CKR) announced
today that it completed its acquisition of Summit Family Restaurants, Inc.
(NASDAQ-NMS:SMFR) on Monday, July 15, 1996. Stockholders of Summit approved the
merger on Friday, July 12, 1996 in Salt Lake City, Utah. Pursuant to the terms
of the merger agreement, Summit stockholders who have not validly asserted
dissenters rights will be entitled to receive $2.63 in cash and 0.1043 shares
of CKE common stock for each share of Summit common stock held on the effective
date of the merger.
Each former stockholder of Summit will be provided with the necessary
materials to facilitate the exchange of shares of Summit common stock for
the merger consideration. First Interstate Bank of California has been appointed
by CKE to act as the exchange agent to facilitate this process. Stockholders of
Summit should not send their stock certificates to either CKE or Summit but
rather should await receipt of the transmittal materials from the exchange
agent.
<PAGE> 2
2-2-2
CKE Restaurants, Inc. is the parent of Carl Karcher Enterprises, Inc.,
which along with its franchisees and licensees, operates approximately 660
Carl's Jr. quick service restaurants, primarily located in California, Nevada,
Oregon, Arizona, Mexico and the Pacific Rim. Summit Family Restaurants Inc. has
restaurant operations in nine western states including 77 Company-operated and
24 franchised JB's Restaurants, 6 Galaxy Diner restaurants and 16 HomeTown
Buffet restaurants.
###
<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors of
Summit Family Restaurants Inc., Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of Summit
Family Restaurants Inc. and subsidiaries as of September 26, 1994 and September
25, 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
September 25, 1995. These consolidated financial statements are the
responsibility of Summit's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Family Restaurants Inc. and subsidiaries as of September 26, 1994 and September
25, 1995, and the results of their operations and their cash flows for each of
the years in the three-year period ended September 25, 1995, in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 6 to the consolidated financial statements,
Summit changed its method of accounting for investments to adopt the provisions
of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" during the first quarter of fiscal 1994.
/s/ KPMG PEAT MARWICK LLP
- ---------------------------------------------------------
KPMG Peat Marwick LLP
Salt Lake City, Utah
November 3, 1995
except as to Note 15 which
is as of May 16, 1996
F-2
<PAGE> 2
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 11,
1996
SEPTEMBER 26, SEPTEMBER 25, ---------
1994 1995
------------- ------------- (UNAUDITED)
---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 5,303 $ 1,911 $ 1,875
Short-term investments................................... 2,160 -- --
Receivables
Short-term portion of notes receivable -- Note 4....... 173 190 190
Other receivables...................................... 3,404 1,898 584
Inventories.............................................. 1,386 1,411 1,466
Deferred Taxes, net -- Note 9............................ 78 76 --
Prepaid expenses......................................... 309 199 189
------- ------- -------
Total current assets................................. 12,813 5,685 4,304
------- ------- -------
Property, buildings and equipment, at cost, less
accumulated depreciation and amortization -- Notes 2 &
7........................................................ 45,672 46,797 44,636
------- ------- -------
Real property and equipment under capitalized leases at
cost, less accumulated amortization -- Notes 2, 7 & 8.... 7,480 6,731 7,091
------- ------- -------
Other assets
Notes receivable, net of current portion -- Note 4....... 2,580 2,696 2,241
Investment in HomeTown Buffet, Inc. -- Note 6............ 5,678 6,999 1,430
Deposits and other....................................... 986 827 1,641
------- ------- -------
Total other assets................................... 9,244 10,522 5,312
------- ------- -------
Intangible assets, at cost, less accumulated amortization
Lease acquisition costs.................................. 569 414 369
Other intangible assets.................................. 830 735 683
------- ------- -------
Total intangible assets.............................. 1,399 1,149 1,052
------- ------- -------
Total assets......................................... $76,608 $70,884 $62,395
======= ======= =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable -- trade................................ $ 6,874 $ 6,772 $ 5,358
Accrued liabilities
Payroll and related taxes.............................. 2,764 3,334 2,627
Sales and property taxes............................... 1,855 2,071 1,673
Rent and other......................................... 2,762 2,045 2,836
Current maturities of long-term debt -- Note 7........... 1,960 2,928 871
------- ------- -------
Total current liabilities............................ 16,215 17,150 13,365
------- ------- -------
Long-term debt, net of current maturities -- Notes 6, 7 & 8
Capitalized real property & equipment leases............. 10,609 9,795 9,981
Notes payable............................................ 2,484 355 345
------- ------- -------
Total long-term debt................................. 13,093 10,150 10,326
------- ------- -------
Deferred taxes, net -- Note 9.............................. 1,376 1,877 468
------- ------- -------
Deferred compensation -- Note 11........................... 1,588 1,580 1,564
------- ------- -------
Commitments and contingencies -- Notes 8, 14 & 15
Stockholders equity -- Notes 6, 7, 10, 11 & 12
Preferred stock, $1 par value; 1,000,000 shares
authorized;
946,714 issued and outstanding....................... 947 947 947
Junior common stock; $.01 par value; 500,000 shares
authorized;
none outstanding..................................... -- -- --
Common stock, $.10 par value; 10,000,000 shared
authorized;
5,288,759, 4,798,102 and 4,805,902 shared issued..... 529 480 481
Additional paid-in capital............................. 29,581 26,389 26,428
Unrealized gain on investment in HomeTown Buffet,
Inc., net of tax..................................... 2,773 3,565 702
Retained earnings...................................... 13,790 8,746 8,114
------- ------- -------
47,620 40,127 36,672
Less: 500,000 common stock treasury shares in 1994 at
cost..................................................... 3,284 -- --
------- ------- -------
Total stockholders equity............................ 44,336 40,127 36,672
------- ------- -------
Total liabilities and stockholders equity.................. $76,608 $70,884 $62,395
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 3
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS
YEARS ENDED ENDED
----------------------------------------- -------------------
SEPTEMBER SEPTEMBER SEPTEMBER MARCH MARCH
27, 26, 25, 13, 11,
1993 1994 1995 1995 1996
------------ ------------ ----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total Revenues........................... $114,768 $115,367 $ 121,099 $54,324 $54,122
-------- -------- -------- ------- -------
Costs and expenses:
Food costs............................. 36,610 37,678 40,018 17,924 17,469
Labor costs............................ 38,233 40,280 42,376 19,157 18,758
Occupancy and other expenses........... 26,168 26,846 28,809 12,902 13,051
General and administrative expenses.... 7,486 8,157 8,363 3,688 4,974
Depreciation and amortization.......... 6,658 6,065 6,585 2,830 3,201
Charge for property
dispositions -- Note 5.............. 4,264 1,982 -- -- --
-------- -------- -------- ------- -------
Total costs and expenses....... 119,419 121,008 126,151 56,501 57,453
-------- -------- -------- ------- -------
Loss from operations..................... (4,651) (5,641) (5,052) (2,177 ) (3,331 )
-------- -------- -------- ------- -------
Interest and other income (expense):
Interest expense....................... (2,486) (1,967) (1,535) (723 ) (563 )
Interest income........................ 487 668 452 282 180
Gain on sale of HomeTown Buffet, Inc.
stock -- Note 6..................... 1,727 14,700 -- -- 3,959
Gains on sales of restaurants to
franchisees and other............... 1,126 630 38 11 23
Loss on disposition of note
receivable -- Note 4................ -- (1,564) -- -- --
-------- -------- -------- ------- -------
Total interest and other income
(expense).................... 854 12,467 (1,045) (430 ) 3,599
-------- -------- -------- ------- -------
Income (loss) before income taxes and
extraordinary item..................... (3,797) 6,826 (6,097) (2,607 ) 268
-------- -------- -------- ------- -------
Income taxes (benefit) -- Note 9
Current................................ (369) 2,413 (1,028) (1,028 ) 324
Deferred............................... (1,114) 307 (25) (25 ) 576
-------- -------- -------- ------- -------
Total income taxes (benefit)............. (1,483) 2,720 (1,053) (1,053 ) 900
-------- -------- -------- ------- -------
Income (loss) before extraordinary
item................................... (2,314) 4,106 (5,044) (1,554 ) (632 )
-------- -------- -------- ------- -------
Extraordinary loss resulting from
extinguishment of debt (less tax
benefit of $233) -- Note 7............. -- 350 -- -- --
-------- -------- -------- ------- -------
Net income (loss)........................ $ (2,314) $ 3,756 $ (5,044) $(1,554 ) $ (632 )
======== ======== ======== ======= =======
Net income (loss) per common share before
extraordinary loss..................... $ (0.49) $ 0.72 $ (1.05) $ (0.32 ) $ (0.13 )
Extraordinary loss from early
extinguishment of debt, net of tax
benefit................................ -- (0.06) -- -- --
-------- -------- -------- ------- -------
Net income (loss) per common share....... $ (0.49) $ 0.66 $ (1.05) $ (0.32 ) $ (0.13 )
======== ======== ======== ======= =======
Weighted average shares outstanding...... 4,693 5,723 4,794 4,790 4,802
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 4
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK
--------------- ----------------- ADDITIONAL
PAR PAR PAID-IN UNREALIZED RETAINED TREASURY
SHARES VALUE SHARES VALUE CAPITAL GAIN EARNINGS STOCK TOTAL
------- ----- --------- ----- ---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 28, 1992....... -- $ -- 5,097,388 $510 $ 24,582 $ -- $12,348 $(3,284) $34,156
Common stock issued Under
options......................... -- -- 164,730 17 772 -- -- -- 789
Common stock redeemed and
retired......................... -- -- (6,359) (1) (32) -- -- (33)
Net loss.......................... -- -- -- -- (2,314) -- (2,314)
------- --- --------- --- ------ ------ ------ ------ ------
BALANCE, SEPTEMBER 27, 1993....... -- -- 5,255,759 526 25,322 -- 10,034 (3,284) 32,598
Common stock issued Under
options......................... -- -- 33,000 3 162 -- -- -- 165
Preferred stock issued............ 946,714 947 -- -- 4,097 -- -- -- 5,044
Unrealized gain on investment in
HomeTown Buffet, Inc., net of
tax............................. -- -- -- -- -- 2,773 -- -- 2,773
Net income........................ -- -- -- -- -- -- 3,756 -- 3,756
------- --- --------- --- ------ ------ ------ ------ ------
BALANCE, SEPTEMBER 26, 1994....... 946,714 947 5,288,759 529 29,581 2,773 13,790 (3,284) 44,336
Common stock contributed to
employee
benefit plan.................... -- -- 4,801 -- 13 -- -- 30 43
Treasury stock retired............ -- -- (495,458) (49) (3,205) -- -- 3,254 --
Unrealized gain on investment in
HomeTown Buffet, Inc., net of
tax............................. -- -- -- -- -- 792 -- -- 792
Net income........................ -- -- -- -- -- -- (5,044) -- (5,044)
------- --- --------- --- ------ ------ ------ ------ ------
BALANCE, SEPTEMBER 25, 1995....... 946,714 947 4,798,102 480 26,389 3,565 8,746 -- 40,127
Common stock issued under options
(unaudited)..................... -- -- 7,800 1 39 -- -- -- 40
Unrealized gain on investment in
HomeTown Buffet, Inc., net of
tax (unaudited)................. -- -- -- -- -- (2,863) -- -- (2,863)
Net income (unaudited)............ -- -- -- -- -- -- (632) -- (632)
------- --- --------- --- ------ ------ ------ ------ ------
BALANCE, MARCH 11, 1996
(UNAUDITED)..................... 946,714 $947 4,805,902 $481 $ 26,428 $ 702 $ 8,114 $ -- $36,672
======= === ========= === ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 5
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS
YEARS ENDED ENDED
--------------------------------------------- ---------------------
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 13, MARCH 11,
1993 1994 1995 1995 1996
------------- ------------- ------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................ $ (2,314) $ 3,756 $ (5,044) $(1,554) $ (632)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.......... 6,658 6,065 6,585 2,830 3,201
Charge for property dispositions....... 4,264 1,982 -- -- --
Provision for losses................... 108 1,697 -- -- 17
Loss on extinguishment of debt......... -- 583 -- -- --
(Gain) loss on disposal of assets...... (346) (592) 209 129 --
Gain on sale of HomeTown Buffet, Inc.
stock................................ (1,727) (14,700) -- -- (3,959)
Change in operating assets and
liabilities
Decrease (increase) in receivables... (1,230) 399 1,561 870 1,307
Decrease (increase) in inventories... 70 (72) (25) (321) (55)
Decrease (increase) in other
assets............................ 296 (338) 449 51 (394)
Increase (decrease) in accounts
payable........................... 292 1,910 (102) (2,554) (1,414)
Increase (decrease) in accrued
liabilities....................... (731) 475 319 531 (393)
Increase (decrease) in net deferred
taxes............................. (1,114) 308 (2) 265 577
-------- -------- -------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................... 4,226 1,473 3,950 247 (1,745)
-------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of HomeTown Buffet,
Inc. stock............................. 2,500 16,814 -- -- 4,756
Payments received on notes receivables... 297 2,580 135 61 59
Proceeds from sale of assets............. 2,762 1,865 3,028 630 --
Proceeds from sale of short-term
investments............................ -- -- 1,980 1,960 --
Purchase of short-term investments....... -- (2,160) -- -- --
Exercise of options in HomeTown Buffet,
Inc. stock............................. -- (120) -- -- --
Acquisition of intangible assets......... (222) (362) (45) -- --
Acquisition of property, buildings and
equipment.............................. (4,798) (13,935) (10,620) (4,566) (587)
-------- -------- -------- ------- -------
Net cash provided (used) by investing
activities............................... 539 4,682 (5,522) (1,915) 4,228
-------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line-of-credit
agreement.............................. 28,325 -- 815 -- --
Payments under line-of-credit
agreement.............................. (29,650) (762) (815) -- --
-------- -------- -------- ------- -------
Net payments on revolving
line-of-credit....................... (1,325) (762) -- -- --
Proceeds from issuance of preferred
stock.................................. -- 5,044 -- -- --
Proceeds from issuance of common stock,
net of redemptions..................... 756 165 -- -- 39
Principal payments on long-term debt and
capital leases......................... (5,354) (6,965) (1,820) (909) (2,558)
-------- -------- -------- ------- -------
NET CASH USED BY FINANCING ACTIVITIES.... (5,923) (2,518) (1,820) (909) (2,519)
-------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents.............................. (1,158) 3,637 (3,392) (2,577) (36)
Cash and cash equivalents at beginning of
period................................. 2,824 1,666 5,303 5,303 1,911
-------- -------- -------- ------- -------
Cash and cash equivalents at end of
period................................. $ 1,666 $ 5,303 $ 1,911 $ 2,726 $ 1,875
======== ======== ======== ======= =======
</TABLE>
F-6
<PAGE> 6
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS
YEARS ENDED ENDED
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 13, MARCH 11,
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information
Cash paid for interest..................... $ 2,552 $ 2,055 $ 1,535 $ 516 $ 283
Cash paid for income taxes................. 106 3,839 1 -- 268
-------- -------- -------- ------- -------
$ 2,658 $ 5,894 $ 1,536 $ 516 $ 551
======== ======== ======== ======= =======
Supplemental schedule of noncash investing
and financing activities
Debt incurred for acquisition of property,
buildings and equipment.................. $ 1,439 $ -- $ -- $ -- $ 677
Notes and other receivables from sale of
inventory, property and equipment........ 2,242 830 -- -- --
-------- -------- -------- ------- -------
$ 3,681 $ 830 $ -- $ -- $ 677
======== ======== ======== ======= =======
During each of the fiscal years, stores
were sold to franchisees and notes
receivable were recorded in exchange for
equipment as follows -- Note 4:
Notes receivable........................... $ 1,226 $ 647 $ 377 $ 377 $ --
Gain recognized............................ (1,073) (630) (38) 11 --
Gain deferred.............................. -- -- (207) (234) --
Cash received.............................. 312 157 98 98 --
-------- -------- -------- ------- -------
Net book value of equipment sold........... $ 465 $ 174 $ 230 $ 230 $ --
======== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 7
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Summit Family
Restaurants Inc. and its wholly owned subsidiaries (the "Company"). All
intercompany accounts and transactions have been eliminated in consolidation.
FISCAL YEAR
Summit utilizes a 52/53 week fiscal year which ends on the last Monday in
September. Fiscal years 1995, 1994 and 1993 contain 52 weeks.
INVENTORIES
Inventories consist of food, beverages and restaurant supplies and are
valued at the lower of cost, determined by the first-in first-out method, or
market.
INVESTMENT SECURITIES
Summit adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" during the first quarter of fiscal 1994. As discussed in Note
6, Summit's investment in HomeTown Buffet, Inc. common stock is treated as an
available-for-sale security and is reported at fair market value in the
accompanying consolidated balance sheets. Unrealized holding gains are shown as
a separate component of stockholders equity, net of tax.
Short term investments in the accompanying consolidated balance sheets
(consisting primarily of certificates of deposits, with original maturities of
greater than three months) represent held-to-maturity securities, and
accordingly, have been stated at their cost.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings 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 leaseholds -- lesser of lease life or
20 years; equipment -- 5 to 8 years; capitalized leases -- lesser of lease life
or 20 years.
INTANGIBLE ASSETS
Lease acquisition costs are amortized using the straight-line method over
the remaining terms of the leases, which range from 3 1/2 to 25 years. Other
intangible assets are amortized using the straight-line method over the
estimated period of value, which ranges from 1 to 40 years.
At September 25, 1995 and September 26, 1994, accumulated amortization
totaled $1,913,000 and $1,901,000, respectively. At March 11, 1996 and March 13,
1995, accumulated amortization totaled $2,010,000 and $1,807,000, respectively.
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.
F-8
<PAGE> 8
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
FRANCHISING REVENUES AND EXPENSES
Summit is a franchisor of JB's Restaurants and a franchisee of HomeTown
Buffet restaurants. Gains or losses on Company operated JB's Restaurants sold to
franchisees are recognized as a gain or loss in the period the transaction is
completed provided the down payment received from the franchisee represents 20%
or more of the total purchase price. Otherwise, the gain or loss is deferred and
recognized over the period of the franchise agreement. Initial franchise fees
received are recognized as revenue in the period the franchised restaurant
opens. Franchise royalty revenues and all franchising costs are recognized on
the accrual basis.
Initial franchise fee payments related to HomeTown Buffet restaurants are
amortized using the straight-line method over the life of the franchise
agreement. Royalty costs and all other franchise costs are recognized as expense
on the accrual basis.
PROPERTY DISPOSITIONS
Assets which have been identified for closure and held for sale are written
down to management's best estimate of realizable value, including related costs
of disposition.
CASH EQUIVALENTS
Cash equivalents consist of short-term liquid assets with original
maturities of 3 months or less.
INCOME TAXES
Income taxes are recorded using the asset and liability method under which
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income or
expense in the period that includes the enactment date. A reserve is recorded
for net deferred tax assets that may not be realized in the future.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed using the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding during each period.
PRESENTATION
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
F-9
<PAGE> 9
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
2. PROPERTY, BUILDINGS AND EQUIPMENT AND REAL PROPERTY UNDER CAPITALIZED LEASES
The components of property, buildings and equipment and real property under
capitalized leases are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 11, 1996
--------------
SEPTEMBER 26, 1994 SEPTEMBER 25, 1995
------------------ ------------------ (UNAUDITED)
--------------
<S> <C> <C> <C>
Property, buildings and equipment
Land.................................. $ 5,705 $ 5,263 $ 5,263
Buildings and leasehold
improvements....................... 42,653 44,023 44,254
Equipment............................. 34,734 34,017 34,182
------- ------- -------
83,092 83,303 83,699
Less accumulated depreciation and
amortization....................... 37,420 36,506 39,063
------- ------- -------
$ 45,672 $ 46,797 $ 44,636
======= ======= =======
Real property under capitalized leases,
net................................... $ 16,055 $ 15,872 $ 16,578
Less accumulated amortization......... 8,575 9,141 9,487
------- ------- -------
$ 7,480 $ 6,731 $ 7,091
======= ======= =======
</TABLE>
3. OTHER RECEIVABLES
The components of other receivables are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 11, 1996
--------------
SEPTEMBER 26, 1994 SEPTEMBER 25, 1995
------------------ ------------------ (UNAUDITED)
--------------
<S> <C> <C> <C>
Income taxes............................ $2,045 $1,189 $ 37
Landlord receivables.................... 830 -- --
Franchise royalties and rents........... 142 326 334
Other................................... 387 383 213
------ ------ ------
$3,404 $1,898 $ 584
====== ====== ======
</TABLE>
4. NOTES RECEIVABLE
Notes receivable consist of amounts due from corporations and individuals
resulting primarily from the sale of property, buildings and equipment. The
components of notes receivable are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 11, 1996
--------------
SEPTEMBER 26, 1994 SEPTEMBER 25, 1995
------------------ ------------------ (UNAUDITED)
--------------
<S> <C> <C> <C>
Sales of restaurants to franchisees..... $2,254 $2,399 $1,945
Net investment in direct financing
lease................................. 499 487 486
------ ------ ------
2,753 2,886 2,431
Less short-term portion................. 173 190 190
------ ------ ------
$2,580 $2,696 $2,241
====== ====== ======
</TABLE>
F-10
<PAGE> 10
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
In August 1994, Summit accepted $2.5 million as full repayment of the note
receivable related to the sale of a combined restaurant and motel, resulting in
a loss of $1,564,000. The note had a principal and accrued interest balance of
$4.1 million and was due in October 1994. Summit had received no payments on the
note since January 1994 and elected to accept the lesser payment to eliminate
the risks of collection of the full amount and to generate cash for use in
restaurant operations.
Summit has 14 notes relating to the sales of restaurants to franchisees
which are unsecured or secured by receivables, inventory and equipment. Eleven
of the notes bear interest at 10.0%. Two notes bear interest at prime plus 3.0%
and another bears interest at prime plus 0.5%. Payments are made using a 15-year
amortization with 13 of the notes having a 5-year balloon payment and the other
note having a 10-year balloon payment.
During 1991, Summit entered into a lease with a franchisee on the land and
building for a new JB's Restaurant. Summit's net investment in the direct
financing lease is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 11, 1996
--------------
SEPTEMBER 26, 1994 SEPTEMBER 25, 1995
------------------ ------------------ (UNAUDITED)
--------------
<S> <C> <C> <C>
Future minimum lease payments
receivable............................ $975 $913 $909
Less unearned income.................... 476 426 423
---- ---- ----
Investment in direct financing lease,
net................................... 499 487 486
Less current portion.................. 12 12 12
---- ---- ----
$487 $475 $474
==== ==== ====
</TABLE>
At September 25, 1995, future minimum lease payments are as follows:
$61,000 in 1996, $61,000 in 1997, $61,000 in 1998, $61,000 in 1999, $61,000 in
2000 and $608,000 thereafter.
5. CHARGE FOR PROPERTY DISPOSITIONS
In 1994, the charge for property dispositions of $1,982,000 is primarily
related to the disposition of certain JB's Restaurants. The charge of $4,264,000
for 1993 is primarily related to the disposition of certain JB's Restaurants,
Sbarro restaurants, and the termination of its exclusive area development rights
with Sbarro, Inc.
6. INVESTMENT IN HOMETOWN BUFFET, INC.
In November 1991, Summit invested $3.8 million with Americana Entertainment
Group, Inc., the predecessor of HomeTown Buffet, Inc. ("HTBB"), in exchange for
1,266,667 shares of convertible preferred stock. In July 1993, Summit sold
250,000 shares of its preferred stock investment in HTBB for $2.5 million,
resulting in a pre-tax gain of $1.7 million. In the fourth quarter of fiscal
1993, HTBB concluded an initial public offering ("IPO") of its common stock and
commenced trading on NASDAQ under the symbol HTBB. At the completion of the IPO
the outstanding preferred stock automatically was converted to common stock.
During the second quarter of fiscal 1994, Summit exercised its option to
purchase 60,000 shares of HTBB common stock and HTBB announced a three for two
stock split increasing Summit's ownership of HTBB common stock to 1,585,000
shares. In the third quarter of fiscal 1994, Summit sold 1,056,780 shares of
HTBB common stock as a selling shareholder in HTBB's secondary public offering
for $16.8 million resulting in a pre-tax gain of $14.7 million. Summit's
remaining 528,220 shares of HTBB common stock at September 25, 1995, is pledged
as security on certain notes payable (see Notes 7 and 15).
F-11
<PAGE> 11
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
On September 27, 1993, Summit reported its investment in HTBB at cost.
During the first quarter of fiscal 1994, Summit elected early adoption of
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities". In accordance with SFAS No.
115, Summit's investment in the common stock of HTBB meets the definition of
available-for-sale securities and, as such, is reported at fair value. On
September 25, 1995 and November 3, 1995, the estimated fair value of Summit's
528,220 shares of HTBB common stock was $13.25 and $12.88 per share or $7.0
million and $6.8 million respectively. The unrealized gain of $3.6 million (net
of tax) at the fiscal 1995 year-end is recorded as a separate component of
stockholders' equity.
In addition, Summit has a franchise and exclusive area development
agreement with HomeTown Buffet, Inc., under which, as amended, Summit has the
exclusive rights to develop and operate HomeTown Buffet restaurants, as a
franchisee, in eight western states. Under the terms of the agreement, Summit is
required to open a minimum of 17 HomeTown Buffet restaurants in these states
prior to June 30, 1996, and open an additional 5 HomeTown Buffet restaurants
prior to December 31, 1996.
7. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
MARCH 11, 1996
SEPTEMBER 26, 1994 SEPTEMBER 25, 1995 --------------
------------------ ------------------ (UNAUDITED)
<S> <C> <C> <C>
Debt secured by land, buildings,
equipment and investment in HomeTown
Buffet, Inc.:
Note payable to a bank in monthly
installments through June 1997,
interest at 9.13% per annum........... $ 2,612 $ 1,742 $ --
Note payable to a bank in monthly
nstallments through January 1997,
interest at 8.5% per annum............ 747 453 --
Capitalized real property and equipment
lease obligations payable in monthly
installments through 2013, interest at
8.9% to 13.9%......................... 11,249 10,485 10,808
Other notes payable to individuals,
financial institutions and other
companies in monthly, quarterly, and
annual installments through 2004,
interest at 8.25% to 13.5%; unsecured
or secured by land, buildings, and
equipment............................. 445 398 389
------- ------- -------
15,053 13,078 11,197
Less current maturities................. 1,960 2,928 871
------- ------- -------
$ 13,093 $ 10,150 $ 10,326
======= ======= =======
</TABLE>
Annual aggregate maturities as of September 25, 1995 of long-term debt,
including obligations under capitalized leases, are as follows: $2,928,000 in
1996; $799,000 in 1997; $848,000 in 1998; $863,000 in 1999; $918,000 in 2000;
and $6,722,000 thereafter.
On April 1, 1994, Summit used $5.1 million of the proceeds from the sale of
HomeTown Buffet, Inc. common stock to prepay outstanding 11.1% interest bearing
debt payable to financial institutions. The $5.1 million payment included a
prepayment premium of $442,000 and $85,000 of accrued interest. The $442,000
prepayment premium combined with the writeoff of unamortized loan acquisition
costs of $141,000
F-12
<PAGE> 12
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
are recorded as an extraordinary loss on extinguishment of debt of $350,000, net
of tax, in the accompanying 1994 consolidated statements of operations.
In connection with the issuance of certain secured notes payable to
financial institutions, Summit issued 8,000 nondetachable warrants, with each
warrant consisting of an option to purchase, as adjusted, 27.4 shares of
Summit's common stock. The warrants are exercisable until July 30, 1996 at
$203.25 per warrant ($7.42 per share of common stock). As of September 25, 1995,
no warrants had been exercised.
8. LONG-TERM LEASES
Summit occupies certain of its restaurants under long-term leases expiring
at various dates through 2035. Most restaurant leases have renewal options for
terms of five to twenty years, and substantially all require the payment of real
estate taxes and insurance. Certain of the leases provide for rent to be the
greater of a stipulated minimum rent or a specified percentage of sales.
Rent expense for fiscal years 1995, 1994 and 1993 was $6,942,000,
$5,938,000, and $5,696,000, respectively. Rent expense for the twenty-four weeks
ended March 11, 1996 and March 13, 1995 was $3,393,000 and $3,223,000,
respectively. Contingent rentals, measured as a percentage of sales, included in
rent expense for fiscal years 1995, 1994 and 1993 were $292,000, $615,000, and
$706,000, respectively. Contingent rentals included in rent expense for the
twenty-four weeks ended March 11, 1996 and March 13, 1995 were $192,000 and
$296,000, respectively.
Future aggregate minimum rental payments on noncancellable leases as of
September 25, 1995, exclusive of taxes, insurance and percentage rentals based
on sales are as follows (in thousands):
<TABLE>
<CAPTION>
FURNITURE FIXTURES
REAL PROPERTY AND EQUIPMENT
--------------------- ------------------
YEAR ENDED CAPITAL OPERATING OPERATING
------------------------------------------------ ------- --------- ------------------
<S> <C> <C> <C>
1996............................................ $ 1,837 $ 5,342 $1,556
1997............................................ 1,817 5,291 1,187
1998............................................ 1,776 5,115 1,050
1999............................................ 1,731 4,915 654
2000............................................ 1,728 4,783 74
Aggregate thereafter............................ 9,863 37,853 --
------ ------ -----
Total minimum lease payments.................... 18,752 $63,299 $4,521
======= ======
Less amount representing interest............... (8,267)
------
Present value of minimum lease payments......... $10,485
=======
</TABLE>
Gains related to sale and leaseback transactions have been deferred for
financial reporting purposes and are being amortized over the term of the
leases. Deferred gains of $560,000 at September 25, 1995, $620,000 at September
26, 1994, $531,000 at March 11, 1996 and $592,000 at March 13, 1995 are
reflected as a reduction of real property under capitalized leases in the
accompanying consolidated financial statements.
F-13
<PAGE> 13
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
9. INCOME TAXES
The income tax expense (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
Year ended September 27, 1993
U.S. federal.......................................... $ (310) $ (935) $(1,245)
State and local....................................... (59) (179) (238)
------- ------- -------
$ (369) $ (1,114) $(1,483)
======= ======= =======
Year ended September 26, 1994
U.S. federal.......................................... $ 2,026 $ 258 $ 2,284
State and local....................................... 387 49 436
------- ------- -------
$ 2,413 $ 307 $ 2,720
======= ======= =======
Year ended September 25, 1995
U.S. federal.......................................... $ (950) $ (22) $ (972)
State and local....................................... (78) (3) (81)
------- ------- -------
$(1,028) $ (25) $(1,053)
======= ======= =======
Twenty-four weeks ended March 11, 1996 (unaudited)
U.S. federal.......................................... $ 316 $ 416 $ 732
State and local....................................... 8 160 168
------- ------- -------
$ 324 $ 576 $ 900
======= ======= =======
</TABLE>
The income tax expense (benefit) attributable to income (loss) before
income taxes and extraordinary item differs from the amounts computed by
applying the U.S. federal statutory tax rate as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 13, MARCH 11,
1993 1994 1995 1995 1996
------------ ------------ ------------ -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" income tax
expense (benefit)................. $ (1,291) $2,321 $ (2,073) $ (886) $ 91
State Income Taxes.................. (238) 436 (81) (81) 168
General Business Credits............ (90) (230) (231) (115) (119)
Change in the valuation allowance
for deferred tax assets........... -- -- 1,356 -- 636
Other, net.......................... 136 193 (24) 29 124
-------- ------ -------- ------- ------
$ (1,483) $2,720 $ (1,053) $(1,053) $ 900
======== ====== ======== ======= ======
</TABLE>
F-14
<PAGE> 14
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are summarized below (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 26, 1994 SEPTEMBER 25, 1995 MARCH 11, 1996
------------------------ ------------------------ ------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT CURRENT NON-CURRENT
DEFERRED DEFERRED DEFERRED DEFERRED DEFERRED DEFERRED
-------- ----------- -------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Deferred compensation.... $ -- $ 520 $ -- $ 491 $ -- $ 488
Deferred gain............ -- 251 -- 216 -- 205
Compensated absences,
principally due to
accrual for financial
reporting purposes..... 63 -- 134 -- 126 --
Provision for store
dispositions........... -- 1,078 -- 605 -- 585
State net operating loss
carryforward........... -- -- -- 225 -- 120
General business
credits................ -- 739 -- 2,214 -- 1,634
Alternative minimum tax
credits................ -- 537 -- 508 -- 928
Other.................... 26 117 84 70 65 67
--- ------- ---- ------- ---- -------
Total gross deferred
tax assets........ 89 3,242 218 4,329 191 4,027
Less valuation
allowance........... (11) (379) (142) (1,783) (191) (2,456)
--- ------- ---- ------- ---- -------
Net deferred tax
assets................. 78 2,863 76 2,546 -- 1,571
Deferred tax liabilities
Plant and equipment,
principally due to
differences in
depreciation and
capitalized interest... -- (1,435) -- (1,478) -- (1,296)
Market valuation of
investment in HomeTown
Buffet, Inc............ -- (1,848) -- (2,377) -- (468)
Other.................... -- (956) -- (568) -- (275)
--- ------- ---- ------- ---- -------
Total gross deferred
tax liabilities... -- (4,239) -- (4,423) -- (2,039)
--- ------- ---- ------- ---- -------
Net deferred tax asset
(liability)............ $ 78 $(1,376) $ 76 $(1,877) $ -- $ (468)
=== ======= ==== ======= ==== =======
</TABLE>
The valuation allowance for deferred tax assets as of September 25, 1995,
September 26, 1994 and March 11, 1996 was $1,925,000, $390,000 and $2,647,000,
respectively.
F-15
<PAGE> 15
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
At September 25, 1995, Summit has general business credit carryforwards for
federal income tax purposes of approximately $2,214,000 which are available to
reduce future federal income taxes, if any, through 2006. In addition, Summit
has alternative minimum tax credit carryforwards of approximately $508,000 which
are available to reduce future federal regular income taxes, if any, over an
indefinite period.
10. PREFERRED STOCK
In October 1993, Summit issued 946,714 shares of Series A Convertible
Preferred Stock to ABS MB (JB) Limited Partnership ("ABS"), the general partner
of which is ABS MB Ltd., a merchant banking affiliate of Alex. Brown & Sons
Incorporated for approximately $5.0 million. The preferred stock has a par value
of $1.00, is nondividend bearing and is convertible to common stock on a
one-for-one basis at the option of ABS subject to certain conditions. The
946,714 preferred shares represent an approximate 17% ownership position in
Summit. As holder of the preferred stock, ABS is entitled to liquidation
preferences, rights to approve certain significant corporate transactions and
certain registration rights. Also, as holder of the preferred stock ABS has the
right to elect two of Summit's nine Board members.
11. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
Summit has an employee stock ownership plan to which Summit contributes
funds as authorized by the Board of Directors. The plan has the authority to
purchase shares of Summit's common stock. All employees of Summit who have one
year of service and are over age 21 participate in the plan. Participant vesting
begins with the third year of participation in the plan at the rate of 20
percent per year. Funds contributed to the plan are used to retire debt
previously incurred, to pay participants who are entitled to benefits under the
plan and to purchase shares of Summit's common stock. Allocated shares within
the plan were 92,737 and 114,857 at September 25, 1995, and September 26, 1994,
respectively. Contributions to the employee stock ownership plan totaled $0,
$85,000 and $90,000 in fiscal years 1995, 1994, and 1993, respectively, and $0
in the twenty-four week periods ended March 11, 1996 and March 13, 1995.
401(K) PLAN
Summit has a 401(k) plan covering all employees who have 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. From January 1, 1995, until September 25, 1995, and in
calendar 1994 and 1993, Summit made annual matching contributions of Summit's
stock to the employees' investment portfolio of up to 25% of the first 3% of
annual compensation contributed by the employee. An employee must be employed on
December 31 to receive a matching contribution. Summit provided contributions of
$26,000 and $27,000 in fiscal years 1995 and 1994, respectively, and Summit made
no contribution in fiscal 1993. On September 26, 1995, Summit suspended annual
matching contributions.
DEFERRED COMPENSATION PLAN
Summit has a deferred compensation plan covering the Chairman and certain
former executives, which requires payment upon retirement or disability. Under
the plan, participants receive benefits based upon a multiple of compensation
prior to retirement and years of service (not to exceed 50 percent of average
annual compensation for the highest five-year period) reduced for benefits
payable from Summit's profit sharing and employee stock ownership plans. Summit
expects that participation in the plan will be limited to those individuals with
previously approved deferred compensation agreements. Accruals for this plan
were $133,000,
F-16
<PAGE> 16
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
$158,000 and $153,000 for fiscal years 1995, 1994, and 1993, respectively and
$78,000 and $73,000 in the twenty-four week periods ended March 11, 1996 and
March 13, 1995, respectively.
12. STOCK OPTION AND AWARD PLANS
STOCK OPTION PLANS
Summit has stock option plans under which options to purchase Summit's
common stock may be granted to employees and directors at the fair market value
of the stock at the date of grant. Under the plans, options may be granted 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. Nonqualified stock options issued to directors are not subject to
vesting. As of September 25, 1995, shares under option total 782,400 shares of
which 395,900 shares were exercisable at prices ranging from $4.00 to $7.88 per
share. As of March 11, 1996, shares under option total 744,000 shares of which
432,200 shares were exercisable at prices ranging from $3.63 to $7.88 per share.
The following table presents, for the periods indicated, activity with respect
to Summit's stock option plans:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 11,
1993 1994 1995 1996
------------- ------------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Shares under option, beginning of
period................................. 574,430 527,600 679,700 782,400
Options granted (March 11, 1996 at prices
from $4.50 to $5.50 (unaudited); 1995
at prices from $3.63 to $6.00 per
share; 1994 at prices from $4.00 to
$7.75 per share; 1993 at prices from
$5.00 to $7.88 per share).............. 207,000 237,000 261,000 11,500
Options expired due to terminations
(March 11, 1996 at prices from $3.88 to
$7.75 (unaudited); 1995 at prices from
$4.50 to $7.75 per share; 1994 at
prices from $4.88 to $7.75 per share;
1993 at prices from $4.63 to $7.25 per
share)................................. 89,100 51,900 158,300 42,100
Options exercised (March 11, 1996 at
prices from $4.00 to $5.13 (unaudited);
1995, none; 1994 at prices from $4.13
to $6.88 per share; 1993 at prices from
$4.13 to $6.87 per share).............. 164,730 33,000 -- 7,800
------- ------- ------- -------
Shares under option, end of period....... 527,600 679,700 782,400 744,000
======= ======= ======= =======
</TABLE>
EXECUTIVE LONG-TERM STOCK AWARD PLAN
Summit has 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 are 100,000 shares authorized under the Plan to be awarded
to key employees based on the achievement of certain performance objectives
established by the Compensation Committee of the Board of Directors. There were
no shares awarded in the twenty-four weeks ended March 11, 1996 and for fiscal
years 1995, 1994 and 1993 under this Plan.
F-17
<PAGE> 17
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
13. QUARTERLY FINANCIAL INFORMATION ( UNAUDITED)
The following summarizes financial information by quarter for the
twenty-four weeks ended March 11, 1996 and the two years ended September 25,
1995 and September 26, 1994 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
NET INCOME
GROSS NET INCOME (LOSS)
REVENUES PROFIT (LOSS) PER SHARE
-------- ------- ---------- ----------
<S> <C> <C> <C> <C>
1994
1st quarter............................. $ 24,228 $16,520 $ (537) $ (.11)
2nd quarter............................. 25,681 17,321 (290) (.06)
3rd quarter............................. 36,948 24,932 5,765(1) .99
4th quarter............................. 28,510 18,916 (1,182) (.25)
-------- ------- ------- ------
$115,367 $77,689 $ 3,756 $ .66
======== ======= ======= ======
1995
1st quarter............................. $ 27,263 $18,296 $ (876) $ (.18)
2nd quarter............................. 27,061 18,104 (678) (.14)
3rd quarter............................. 38,095 25,413 (1,309) (.27)
4th quarter............................. 28,680 19,268 (2,181) (.45)
-------- ------- ------- ------
$121,099 $81,081 $ (5,044) $(1.05)
======== ======= ======= ======
1996
1st quarter............................. $ 26,725 $18,038 $ 1,226(2) $ 0.21
2nd quarter............................. 27,397 18,615 (1,858)(3) (0.39)
</TABLE>
- ---------------
(1) Includes a charge for property dispositions of $1,982,000, a loss on the
disposition of a note receivable of $1,564,000, an extraordinary loss of
$350,000 (net of tax benefit) resulting from the extinguishment of debt and
a gain on the sale of HomeTown Buffet, Inc., common stock of $14,700,000.
See Notes 4, 5, 6 and 7.
(2) Includes a gain on the sale of HomeTown Buffet, Inc. common stock of
$3,959,000.
(3) Includes a charge for change of control and other severance costs of
$1,600,000.
Each quarter of the 52 week fiscal years 1995 and 1994 contain 12 weeks,
except for the third quarter, which contains 16 weeks.
14. COMMITMENTS AND CONTINGENCIES
In connection with the sale of restaurants, Summit has assigned its rights
and obligations under real property leases to the buyer. As such, Summit remains
contingently liable for these obligations. Future minimum payments under these
leases as of September 25, 1995 amount to $1,294,000 in 1996; $1,245,000 in
1997; $1,202,000 in 1998; $1,164,000 in 1999; $1,069,000 in 2000; and $3,287,000
thereafter.
In addition, Summit is engaged in ordinary and routine litigation
incidental to its business. Management does not anticipate that any amounts
which it may be required to pay by reason thereof will have a material effect on
Summit's consolidated statements of operations or financial position.
F-18
<PAGE> 18
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
15. SUBSEQUENT EVENTS
PLAN OF MERGER AND REORGANIZATION
On April 2, 1996, a Second Amendment to the Agreement and Plan of Merger
and Reorganization (the "Merger Agreement") was executed between the Company and
CKE Restaurants, Inc., a Delaware corporation ("CKE"), pursuant to which the
Company will merge with a wholly-owned subsidiary of CKE with the Company being
the surviving entity. Consideration for the merger to be paid to the Company's
shareholders for each share of common stock will consist of $2.63 in cash and
.165 shares of CKE common stock, provided that the average CKE common stock
price is between $15.00 per share and $17.00 per share at the closing. If the
average CKE common stock price is higher than $17.00 or lower than $15.00 at the
closing, the exchange ratio will be adjusted accordingly. If the average CKE
common stock price is below $13.25, the exchange ratio may be adjusted at the
option of CKE. If CKE elects to not adjust the exchange ratio, Summit has the
right to terminate the agreement. In addition, the consideration may be
increased if CKE enters into agreements to sell certain assets and the total
consideration to be received by CKE exceeds a specified level. Any such increase
would be allocated one-half to the cash portion of the consideration and
one-half to the common stock portion of the consideration. The transaction is
conditioned upon the Company's shareholders approving the transaction and the
usual and customary conditions to closing, including, without limitation,
accuracy of the parties' representations and warranties, performance of the
parties' covenants and obligations under the Merger Agreement and obtaining
proper consents of third parties as necessary.
CHANGE OF CONTROL AGREEMENTS
The Company has change of control agreements with the President and seven
Senior Vice Presidents under which the Company may be obligated to pay benefits
in the event of a significant change in ownership of the Company.
Pursuant to these change of control agreements, the Company paid $1,236,000
to the President and four senior vice presidents upon their termination in April
1996. The Merger Agreement described above triggered a provision in the change
of control agreements that requires the Company to place in escrow accounts an
additional $450,000 for three additional senior vice presidents. Payment of
benefits is made upon involuntary termination of any or all of the three senior
vice presidents between the signing of the Merger Agreement and one year after
consummation of the merger or upon the voluntary termination of employment
during the second 90 days following consummation of the merger. The Company has
not yet funded these escrow accounts.
PREFERRED STOCK
On April 4, 1996, CKE purchased 946,714 shares of the Series A Convertible
Preferred Stock (the "Preferred Stock") of the Company from ABS MB (JB) Limited
Partnership ("ABS") for $5.27 per share. The shares purchased by CKE represent
100% of the Company's issued and outstanding Preferred Stock, and approximately
16.5% of the Company's total issued and outstanding voting securities. On April
2, 1996 the Company's Board of Directors specifically approved the acquisition
of the Preferred Stock by CKE as part of the Second Amendment and also approved
a waiver of the Company's right of first refusal to purchase the Preferred
Stock. CKE also acquired ABS' rights under the Registration Rights Agreement
dated October 27, 1993 between the Company and ABS.
The holder of the Preferred Stock has the right to appoint two members to
the Company's Board of Directors. The two directors appointed by ABS, William L.
Paternotte and Frederick L. Bryant, have resigned
F-19
<PAGE> 19
SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF AND FOR THE TWENTY-FOUR WEEKS ENDED
MARCH 11, 1996 AND MARCH 13, 1995 IS UNAUDITED)
from the Company's Board effective April 4, 1996. The Company understands that
it is CKE's intention to fill the two vacancies on the Company's Board upon
consummation of the Merger Agreement, as amended.
LEASE COMMITMENT
In August 1994, the Company entered into a master lease agreement (the
"Agreement") to finance equipment for new HomeTown Buffet restaurants. The
agreement, among other things, required the Company to maintain minimum tangible
net worth of at least $40 million. On January 5, 1996, the master lease
agreement was amended to require a minimum tangible net worth of $33 million. In
exchange for this reduced covenant, the Company has deposited $365,000 with the
leasing company. This deposit is to be applied against payments due for the
final year of the lease subject to earlier release if certain financial
performance objectives are achieved.
INVESTMENT IN HOMETOWN BUFFET, INC. COMMON STOCK
As of September 25, 1995, the Company held 528,220 shares of HTBB common
stock. Between September 25, 1995, and December 11, 1995, the Company sold
398,220 shares of HTBB common stock generating net proceeds of $4.8 million
resulting in a pre-tax gain of $4.0 million. $2.1 million of these proceeds were
used to repay the Company's bank loans in full, $700,000 remains in escrow as
partial security against $2.0 million in letters of credit with the remaining
$2.0 million retained by the Company. The letters of credit are secured by
certain properties owned by the Company, by the remaining 130,000 shares of HTBB
common stock and by the escrow account noted above.
F-20
