-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TWCXE7XkizFvw2A0oxeY49qAe+5Vvxe1t1M/Ne1iAK00uMwJCxEImcZ8bTZtXTtw OiCX1xRy4Wxbb1yAk4qFJg== 0000892569-96-001329.txt : 19960729 0000892569-96-001329.hdr.sgml : 19960729 ACCESSION NUMBER: 0000892569-96-001329 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960715 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960726 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CKE RESTAURANTS INC CENTRAL INDEX KEY: 0000919628 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 330602639 STATE OF INCORPORATION: DE FISCAL YEAR END: 0130 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11313 FILM NUMBER: 96599843 BUSINESS ADDRESS: STREET 1: 1200 N HARBOR BLVD CITY: ANAHEIM STATE: CA ZIP: 92801 BUSINESS PHONE: 7147745796 8-K 1 FORM 8-K DATED JULY 15,1996 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) 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.
Page ---- 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
2 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 4 CKE RESTAURANTS, INC. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MAY 20, 1996 (IN THOUSANDS)
HISTORICAL ------------------------------------------------ PRO FORMA CKE AT SUMMIT AT ACQUISITION 5/20/96 3/11/96 COMBINED ADJUSTMENTS PRO FORMA --------- --------- --------- ----------- --------- 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 ========= ======== ========= ========= =========
See accompanying notes to unaudited pro forma combined condensed financial statements. 4 5 CKE RESTAURANTS, INC. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FISCAL YEAR ENDED JANUARY 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL ------------------------------------ CKE SUMMIT FISCAL YEAR 52 WEEKS PRO FORMA ENDED ENDED ACQUISITION 1/31/96 3/11/96 COMBINED ADJUSTMENTS PRO FORMA ---------- ---------- --------- ------------- ---------- 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 ========== ==========
See accompanying notes to unaudited pro forma combined condensed financial statements. 5 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)
HISTORICAL ------------------------------------ CKE SUMMIT 16 WEEKS 12 WEEKS PRO FORMA ENDED ENDED ACQUISITION 5/20/96 3/11/96 COMBINED ADJUSTMENTS PRO FORMA ---------- ---------- --------- ------------- ---------- 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 ========== ==========
See accompanying notes to unaudited pro forma combined condensed financial statements. 6 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 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 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 10 EXHIBIT INDEX The following exhibits are attached hereto and incorporated herein by reference:
Sequentially Exhibit Number Description Numbered Page - -------------- ----------- ------------- 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
- ------------------- * Schedules omitted. The Registrant shall furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule upon request. EX-23.1 2 CONSENT OF KPMG PEAT MARWICK LLP 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 EX-99.1 3 PRESS RELEASE DATED JULY 15, 1996 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. 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. ### EX-99.2 4 FINANCIAL STATEMENTS OF SUMMIT FAMILY RESTAURANTS 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 2 SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 11, 1996 SEPTEMBER 26, SEPTEMBER 25, --------- 1994 1995 ------------- ------------- (UNAUDITED) --------- 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 ======= ======= =======
See accompanying notes to consolidated financial statements. F-3 3 SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
TWENTY-FOUR WEEKS YEARS ENDED ENDED ----------------------------------------- ------------------- SEPTEMBER SEPTEMBER SEPTEMBER MARCH MARCH 27, 26, 25, 13, 11, 1993 1994 1995 1995 1996 ------------ ------------ ----------- -------- -------- (UNAUDITED) 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 ======== ======== ======== ======= =======
See accompanying notes to consolidated financial statements. F-4 4 SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK --------------- ----------------- ADDITIONAL PAR PAR PAID-IN UNREALIZED RETAINED TREASURY SHARES VALUE SHARES VALUE CAPITAL GAIN EARNINGS STOCK TOTAL ------- ----- --------- ----- ---------- ---------- -------- -------- ------- 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 ======= === ========= === ====== ====== ====== ====== ======
See accompanying notes to consolidated financial statements. F-5 5 SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
TWENTY-FOUR WEEKS YEARS ENDED ENDED --------------------------------------------- --------------------- SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 13, MARCH 11, 1993 1994 1995 1995 1996 ------------- ------------- ------------- --------- --------- (UNAUDITED) 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 ======== ======== ======== ======= =======
F-6 6 SUMMIT FAMILY RESTAURANTS INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
TWENTY-FOUR WEEKS YEARS ENDED ENDED SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 13, MARCH 11, 1993 1994 1995 1995 1996 -------- -------- -------- ------- ------- (UNAUDITED) 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 $ -- ======== ======== ======== ======= =======
See accompanying notes to consolidated financial statements. F-7 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 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 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):
MARCH 11, 1996 -------------- SEPTEMBER 26, 1994 SEPTEMBER 25, 1995 ------------------ ------------------ (UNAUDITED) -------------- 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 ======= ======= =======
3. OTHER RECEIVABLES The components of other receivables are as follows (in thousands):
MARCH 11, 1996 -------------- SEPTEMBER 26, 1994 SEPTEMBER 25, 1995 ------------------ ------------------ (UNAUDITED) -------------- 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 ====== ====== ======
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):
MARCH 11, 1996 -------------- SEPTEMBER 26, 1994 SEPTEMBER 25, 1995 ------------------ ------------------ (UNAUDITED) -------------- 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 ====== ====== ======
F-10 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):
MARCH 11, 1996 -------------- SEPTEMBER 26, 1994 SEPTEMBER 25, 1995 ------------------ ------------------ (UNAUDITED) -------------- 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 ==== ==== ====
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 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):
MARCH 11, 1996 SEPTEMBER 26, 1994 SEPTEMBER 25, 1995 -------------- ------------------ ------------------ (UNAUDITED) 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 ======= ======= =======
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 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):
FURNITURE FIXTURES REAL PROPERTY AND EQUIPMENT --------------------- ------------------ YEAR ENDED CAPITAL OPERATING OPERATING ------------------------------------------------ ------- --------- ------------------ 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 =======
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 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):
CURRENT DEFERRED TOTAL ------- -------- ------- 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 ======= ======= =======
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):
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 13, MARCH 11, 1993 1994 1995 1995 1996 ------------ ------------ ------------ -------- -------- (UNAUDITED) (UNAUDITED) 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 ======== ====== ======== ======= ======
F-14 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):
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) 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) === ======= ==== ======= ==== =======
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 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 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:
YEARS ENDED ------------------------------------------------- SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 11, 1993 1994 1995 1996 ------------- ------------- ------------- --------- (UNAUDITED) 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 ======= ======= ======= =======
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 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):
NET INCOME GROSS NET INCOME (LOSS) REVENUES PROFIT (LOSS) PER SHARE -------- ------- ---------- ---------- 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)
- --------------- (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 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 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 -----END PRIVACY-ENHANCED MESSAGE-----