UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 


 

x

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

For the fiscal year ended January 28, 2008

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

 

EXCHANGE ACT OF 1934

 

Commission file number: 0-6054

 

STAR BUFFET, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

 

84-1430786

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

1312 N. Scottsdale Rd.

 

 

Scottsdale, Arizona

 

85257

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (480) 425-0397

 


 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

(Title of Each Class):

Common Stock

$.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x   No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x .

 

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definition of “Large Accelerated Filer,” “Accelerated Filer” and “Smaller Reporting Company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer o   Accelerated Filer o   Non-Accelerated Filer o (Do not check if smaller reporting company)  Smaller Reporting Company x

 

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes o No x

 

At August 13, 2007, the last business day of the registrant’s second fiscal quarter, there were outstanding 3,170,675 shares of the registrant’s common stock, $.001 par value.  The aggregate market value of common stock held by non-affiliates of the registrant based on the last reported sale price of the common stock as reported on the NASDAQ Small Cap Market on August 13, 2007, ($7.95 per share) was $9,282,110.  For purposes of this computation, all executive officers, directors, and 10% beneficial owners of the registrant were deemed to be affiliates.  Such determination should not be deemed an admission that such executive officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

 

As of April 14, 2008, the registrant had 3,213,075 shares of common stock outstanding.

 

Documents incorporated by reference: Portions of the registrant’s Proxy Statement for the 2008 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after January 28, 2008, are incorporated by reference into Part III of this Form 10-K.

 

 



 

STAR BUFFET, INC., AND SUBSIDIARIES

 

Index to Annual Report on Form 10-K

 

For the Fiscal Year Ended January 28, 2008

 

 

 

Page

 

PART I

 

 

 

 

ITEM 1.

BUSINESS

1

 

 

 

ITEM 1A.

RISK FACTORS

6

 

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

8

 

 

 

ITEM 2.

PROPERTIES

9

 

 

 

ITEM 3.

LEGAL PROCEEDINGS

10

 

 

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

10

 

 

 

 

PART II

 

 

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

11

 

 

 

ITEM 6.

SELECTED FINANCIAL DATA

12

 

 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

14

 

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

22

 

 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

23

 

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

23

 

 

 

ITEM 9A(T).

CONTROLS AND PROCEDURES

23

 

 

 

ITEM 9B.

OTHER INFORMATION

25

 

 

 

 

PART III

 

 

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

25

 

 

 

ITEM 11.

EXECUTIVE COMPENSATION

25

 

 

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

25

 

 

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

25

 

 

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

25

 

 

 

 

PART IV

 

 

 

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

26

 

 

 

 

SIGNATURES

27

 

 

 

 

EXHIBIT INDEX

E-1

 

 

 

 

FINANCIAL STATEMENTS

F-1

 

i



 

Cautionary Statements Regarding Forward-Looking Statements

 

This annual report on Form 10-K contains forward-looking statements, within the meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933, which are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this annual report on Form 10-K. All these forward-looking statements are based on information available to the Company at this time, and the Company assumes no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in the section titled “Risk Factors” under Item 1A and elsewhere. You should review and consider the various disclosures made by the Company in this report, and those detailed from time to time in the Company’s filings with the Securities and Exchange Commission, that attempt to advise you of the risks and factors that may affect the Company’s future results.

 

PART I

 

Item 1. Business

 

Overview

 

Star Buffet, Inc., a Delaware corporation (“Star” and collectively with its subsidiaries, the “Company”), is a multi-concept restaurant holding company. As of January 28, 2008, the Company owned and operated 12 franchised HomeTown Buffets, seven JB’s restaurants, five Whistle Junction restaurants, three 4B’S restaurants, three Holiday House restaurants, three Western Sizzlin restaurants, two BuddyFreddys restaurants, two BuddyFreddys Country Buffets, two JJ North’s Grand Buffets, two K-BOB’S Steakhouses, one Pecos Diamond Steakhouse, one Bar-H Steakhouse and one Casa Bonita Mexican theme restaurant. The Company also had five restaurants currently closed for remodeling and repositioning, three restaurants leased to third-party operators and the net assets of another closed restaurant reported as property held for sale. The Company’s restaurants are located in Arkansas, Arizona, Colorado, Florida, Georgia, Idaho, Mississippi, Montana, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming.

 

Recent Developments

 

On March 12, 2008, the Board of Directors approved the Company’s fifth consecutive annual dividend.  This year the dividend is $0.60 per common share and is payable on June 4, 2008 to shareholders of record on May 6, 2008.

 

On February 29, 2008, Starlite Holdings, Inc. (“Starlite”), a newly formed, wholly-owned, independently capitalized subsidiary of Star Buffet, Inc. acquired certain assets and facility leases for four Barnhill’s Buffet restaurants from Barnhill’s Buffet, Inc. (“Barnhill’s”) for a purchase price of approximately $1,075,000.  Barnhill’s was in a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court of the Middle District of Tennessee and the acquisition was approved by the court.  The acquired restaurants are located in Florida (2) and Mississippi (2) and as part of the acquisition the Company acquired perpetual rights to use the Barnhill’s name and related intellectual property.

 

On February 29, 2008 the Company amended its Senior Secured Credit Facility (“Credit Facility”) dated January 31, 2008 with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000 to $8,000,000. The Credit Facility was issued on January 31, 2008.The increase in the Credit Facility was used to fund the acquisition of the four Barnhill’s Buffet restaurants as described above.  The Credit Facility is guaranteed by Star Buffet’s subsidiaries and bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus 2.00%.  The Credit Facility is secured by a first priority perfected lien on all of the Company’s assets, except for those assets that are currently pledged as security for existing obligations, in which case Wells Fargo will have a second lien.  The term loan matures on January 31, 2012 and provides for principal to be amortized at $175,000 per quarter for the initial six quarters; $225,000 for the next nine quarters; with any remaining balance due at maturity.  Interest is payable monthly.  A $2,000,000 revolving line of credit matures on January 31, 2012.  Interest on the revolver is payable monthly.  As of April 14, 2008, no balance was outstanding on the revolving line of credit.  There is a 0.50% fee for the unused portion of the revolving line of credit.   In connection with the Credit Facility, Wells Fargo was granted 42,440 shares of the Company’s restricted common stock.  The shares were valued at $252,094 and will be amortized over the life of the loan.  The Credit Facility can be prepaid in whole or part without penalty.

 

1



 

The Credit Facility contains a number of covenants and restrictions, including requirements to meet certain financial ratios and limitations with respect to the Company’s use of cash.  The Company’s quarterly financial covenants associated with this debt start May 19, 2008, the end our first quarter in fiscal 2009. The Company is required to obtain interest rate protection through an interest rate swap or cap arrangement with respect to not less than 50% of the term loan amount.  Furthermore, certain provisions of the Credit Facility require the Company to remit proceeds from asset dispositions, issuance of debt or equity, insurance proceeds, tax refunds and fifty percent (50%) of excess cashflow (as defined) to reduce the principal amount of the term loan and, thereafter, the revolving line of credit.  Under terms of the Credit Facility, the Company is permitted to pay an annual dividend.  However, restrictions imposed under terms of the Credit Facility may adversely impact the Company’s ability to pay an annual dividend as the Company has historically relied on multiple sources of cash to fund the dividend.  As of the date of this report, the Company was in compliance with all of such requirements.

 

On January 31, 2008, Star Buffet Management, Inc., a wholly-owned subsidiary of Star Buffet, Inc. acquired the assets and facility leases for sixteen (16) Barnhill’s Buffet restaurants from Barnhill’s for a purchase price of approximately $5 million.  The acquisition was approved by the court.  The acquired restaurants are located in the following states: Alabama (1), Arkansas (1), Florida (4), Louisiana (3), Mississippi (4), and Tennessee (3) and as part of  the acquisition the Company acquired perpetual rights to the use of the Barnhill’s name and related intellectual property.  This acquisition was funded through the Company’s Credit Facility dated January 31, 2008.

 

Business

 

The Company’s objective is to operate a portfolio of well-established, family-oriented restaurant brands primarily throughout the southeastern and western United States. The Company believes that certain management practices, when applied uniformly across a diversified base of restaurants concepts, will result in consistently profitable financial performance. Key elements of the Company’s management practices are:

 

·     Pay for Performance. The Company has developed food, labor and customer service performance measurements and reporting mechanisms that allow management to effectively monitor restaurant-level operations, benchmark restaurant performance and communicate best-practices across its restaurant operations. Through the use of brand specific bonus programs the Company seeks to motivate its employees, minimize turnover and foster an environment where employees are encouraged to maximize restaurant level profitability.

 

·     Low Overhead. The Company has been able to maintain a minimal corporate management structure by expanding the number of restaurants supervised by field managers, having corporate personnel oversee multiple administrative functions and by appropriate outsourcing of certain functions when cost effective. The Company’s corporate management provides purchasing, information systems, insurance, finance, accounting and payroll services directly to all restaurants so that managers can focus on restaurant operations and guest satisfaction.

 

·     Brand Management/Marketing Economies. The Company’s strategy is to separately manage each of its restaurant brands.  And, although each brand is positioned somewhat differently in the market, the Company seeks to achieve scale by utilizing marketing techniques, such as local store marketing, radio advertising and promotional mailers, across a spectrum of similar brands.

 

Segment and Related Reporting

 

The Company has four reporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division and Summit Restaurant Division. The Company’s reportable segments are based on brand similarities and certain contractual requirements. The HomeTown Buffet segment includes the Company’s 12 franchised HomeTown Buffet restaurants.  The HomeTown Buffet segment also includes one restaurant closed for repositioning.  In addition, another HomeTown Buffet restaurant was closed during the year.  The North’s Star segment includes three Western Sizzlin restaurants and two JJ North’s Grand Buffet restaurants.  The North’s Star segment also includes two non-operating restaurants, a North’s Star Buffet and an Oklahoma Steakhouse restaurant.  The North’s Star Buffet restaurant is leased to a third party.  The Florida Buffets Division includes two BuddyFreddys restaurants, two BuddyFreddys Country Buffet restaurants, three Holiday House restaurants and five Whistle Junction buffet restaurants. Results for fiscal 2008 also include 16 weeks of operations for one Whistle Junction restaurant that was closed

 

2



 

when the management contract was not renewed. In addition, another four restaurants in Florida Buffet Division are currently non-operating with two leased to third parties. The Summit Restaurants Division includes the Company’s seven JB’s Restaurants. The Summit Restaurants Division also includes three 4B’S restaurants, the Casa Bonita restaurant, two K-BOB’S Steakhouses, one Pecos Diamond Steakhouse and one Bar-H Steakhouse.  The Summit Restaurant Division also includes two temporarily closed K-BOB’S Steakhouse restaurants.   With the acquisition of 20 Barnhill’s Buffet restaurants in fiscal 2009, the Company will change its reporting segments to the Buffet Division and Non-Buffet Division.  (See Item 15, Financial Statements, Note 8.)

 

Growth Strategy

 

The Company seeks growth primarily through the acquisition of existing restaurants which can benefit from the Company’s management practices. The Company supplements its program of acquisitions with the purchase of restaurant properties that can be converted to the Company’s existing brands and minority investments in, or strategic alliances with, other restaurant chains.

 

·       Acquisitions. The Company believes that a number of acquisition opportunities exist in restaurant segments that include buffets, cafeterias, family dining and steakhouses. The Company believes that many restaurants in these segments are privately owned and may be available for acquisition particularly when the owners decide to retire.  Other restaurants may become available for purchase when corporate owners decide to convert from a company store to a franchisor business model or when a company is faced with a financial reorganization.

 

·       Restaurant Conversions. In recent years, a number of chains in the family dining and budget steakhouse segments of the restaurant industry have experienced operational difficulties and declining performance. The Company believes that these difficulties are the result of increasing competition from national casual dining and steakhouse chains which offer superior product quality and service at competitive prices. Many of these restaurants and steakhouses occupy desirable locations that the Company believes can be acquired and converted to one of its concepts at lower prices or leased at lower rates when compared to the cost of new construction.

 

·       Minority Investments and Strategic Alliances. The Company intends to seek minority investments in, or strategic alliances with, other restaurant chains. The Company believes that these investments can provide an attractive, lower risk opportunity for the Company and may facilitate the acquisition of such chains at a later date.

 

Restaurant Concepts

 

HomeTown Buffet Division

 

General. The Company, through its wholly-owned, independently capitalized HTB Restaurants, Inc. (“HTB”) subsidiary, has a franchise agreement with HomeTown Buffet, Inc., a wholly-owned subsidiary of Buffets Holdings, Inc.  HTB entered into a franchise agreement for each location which requires among other items, the payment of a continuing royalty fee to HomeTown Buffet, Inc. The royalty fee is based on 2% of the aggregate gross sales of each HomeTown Buffet restaurant.  Each of the franchise agreements has a 20-year term (with two five-year renewal options). The franchisor requires HTB to operate each restaurant in conformity with franchise operating manuals, recipe manuals and menus.   The franchise agreement restricts the Company from operating other buffet restaurant brands within a geographic radius of the Company’s or the franchisor’s HomeTown Buffet restaurants.  The HomeTown franchisor may terminate a franchise agreement for a number of reasons, including HTB’s failure to pay royalty fees when due, failure to comply with applicable laws or repeated failure to comply with one or more requirements of the franchise agreement.

 

HTB operates 12 HomeTown Buffet restaurants in Arizona (8), New Mexico (2), Utah (1) and Wyoming (1). The restaurants are approximately 10,000 square feet and seat approximately 375 customers.  HTB also has one restaurant closed for repositioning in Colorado.

 

North’s Star Division
 

General. The North’s Star Division consists of three Western Sizzlin restaurants in Arkansas, Georgia and Mississippi, two JJ North’s Grand Buffet restaurants and one North’s Star Buffet restaurant. The Company’s two JJ North’s Grand Buffet restaurants are

 

3



 

located in Oregon and Washington. The JJ North’s Country Buffet restaurant located in Boise, Idaho was closed and the lease expired March 31, 2008. The North’s Star Buffet restaurant located in Arizona is leased to a third party.  The North’s Star Division also has a Oklahoma Steakhouse in Weatherford, Oklahoma closed for repositioning.  The restaurants range from 4,000 to 10,000 square feet and seat approximately 125 to 325 customers.

 

Florida Buffets Division
 

General. The Company, through several transactions, acquired 16 properties in Florida which currently operate under the brand names BuddyFreddys Country Buffet (6), Whistle Junctions (5), BuddyFreddys (2) and Holiday House (3).  The Whistle Junction restaurants were acquired by the Company on November 28, 2006. Two of the six BuddyFreddys Country Buffet restaurants have been closed for repositioning; two of these closed restaurants have been leased to third-party operators and the net assets of one former BuddyFreddys Country Buffet closed restaurant are classified as property held for sale. BuddyFreddys restaurants and Whistle Junction restaurants average approximately 10,000 square feet with seating for approximately 325 guests. Holiday House restaurants average approximately 5,500 square feet with seating for approximately 170 guests.

 

Summit  Restaurants Division
 

General .  The Company, through its wholly-owned, independently capitalized Summit Family Restaurants, Inc., (“Summit”) subsidiary, operates six JB’s restaurants in Montana (2), Utah (3) and Idaho (1) and one Casa Bonita restaurant located in Denver, Colorado, four K-BOB’S restaurants located in Texas (3), New Mexico (1) and a Pecos Diamond Steakhouse in Artesia, New Mexico.  On May 29, 2007, Summit acquired a Bar-H Steakhouse in Dalhart, Texas.  Summit also acquired three 4B’S restaurants in Montana, two on July 31, 2007 and one on October 16, 2007.  Two of the four K-BOB’S Steakhouse restaurants were temporarily closed at the end of fiscal 2008.  The JB’s and 4B’S restaurants are approximately 4,000 to 5,500 square feet in size and seat approximately 110 to 175 customers.  The Casa Bonita facility is approximately 52,000 square feet with seating capacity for approximately 4,000 customers.  K-BOB’S Steakhouses, Pecos Diamond Steakhouse and Bar-H Steakhouse are approximately 5,000 square feet with seating capacity for 150 customers.

 

Subsequent to the acquisition of certain JB’s Family Restaurants in 1998 from JB’s Family Restaurants, Inc. (“JB’s”), a wholly-owned subsidiary of CKE Restaurants, Inc., the Company entered into a License Agreement for each newly acquired JB’s Family Restaurant.  In November 2002, the Company renewed the JB’s license agreement for $773,000. The license agreement is being amortized as an intangible asset.  Amortization expense for fiscal 2008, 2007 and 2006 was $78,000 each year.

 

Licenses, Trademarks and Service Marks

 

The Company owns the trademarks and service marks for BuddyFreddys, Casa Bonita, Holiday House, Pecos Diamond Steakhouse, Bar-H Steakhouse, 4B’S restaurants and Whistle Junction and has a license agreement with CKE Restaurants, Inc. for use of the “Star” name and design. The Company has an agreement with North’s Restaurants, Inc. for a perpetual, royalty-free, transferable license to use the intangible property of JJ North’s Grand Buffet. The Company utilizes the HomeTown Buffet and Western Sizzlin’ marks pursuant to various franchise and license agreements. The Company has a license agreement and, if exercised, one ten year option to use the JB’S trademark through August 31, 2022.  The Company has a perpetual license agreement to utilize, under certain circumstances, the K-BOB’S Steakhouse brand. The company has perpetual rights to the use of the Barnhill’s name and logo as part of its acquisition of 20 Barnhill’s Restaurants in January and February 2008.

 

Competition
 

The Company competes on the basis of the quality and value of food products offered, price, service, location, ambiance and overall dining experience.  The Company’s competitors include a large and diverse group of restaurant chains and individually owned restaurants.  The number of restaurants with operations similar to those of the Company has grown considerably in recent years.  As the Company and its principal competitors expand operations in various geographic areas, competition can be expected to increase.

 

Seasonality

 

The Company’s business is moderately seasonal in nature. For the majority of the Company’s restaurants, the highest volume periods are in the first and second fiscal quarters.

 

4



 

Employees

 

As of April 14, 2008, the Company employed approximately 2,800 persons, of whom approximately 2,790 were restaurant employees. Restaurant employees include salaried management and both full-time and part-time workers paid on an hourly basis. No Company employees are covered by collective bargaining agreements. The Company believes that its relations with its employees are generally good.

 

Directors and Executive Officers

 

The following table sets forth certain information regarding the Company’s directors and executive officers:

 

Name

 

Age

 

Position

Robert E. Wheaton

 

56

 

Chief Executive Officer, President and Chairman

Ronald E. Dowdy

 

51

 

Group Controller, Treasurer and Secretary

Thomas G. Schadt

 

66

 

Director

Phillip “Buddy” Johnson

 

56

 

Director

Craig B. Wheaton

 

51

 

Director

B. Thomas M. Smith, Jr.

 

73

 

Director

Todd S. Brown

 

51

 

Director

 

Robert E. Wheaton has served as the Chief Executive Officer and President and as a director of the Company since its formation in July 1997. Mr. Wheaton has been Chairman of the Board since September 1998. Mr. Wheaton served as Executive Vice President of CKE Restaurants, Inc. from January 1996 through January 1999. From April 1995 to January 1996, he served as Vice President and Chief Financial Officer of Denny’s Inc., a subsidiary of Flagstar Corporation. From 1991 to 1995, Mr. Wheaton served as President and Chief Executive Officer, and from 1989 to 1991 as Vice President and Chief Financial Officer of The Bekins Company. Mr. Wheaton is the brother of Craig B. Wheaton, a director of the Company.

 

Ronald E. Dowdy has served as the Group Controller since June 1998 and as Treasurer and Secretary since February 1999. Mr. Dowdy served as Controller to Holiday House Corporation for 19 years prior to joining the Company.

 

Thomas G. Schadt has served as a director of the Company since the completion of the Company’s initial public offering in September 1997. Mr. Schadt has been the Chief Executive Officer of a privately-held beverage distribution company, Bear Creek, L.L.C., since 1995. From 1976 to 1994, he held several positions with PepsiCo, Inc., most recently, Vice President of Food Service.

 

Phillip “Buddy” Johnson has served as a director of the Company since February 1999. Mr. Johnson has served as the Supervisor of Elections of Hillsborough County since March 2003. From March 2001 until March 2003, he served as the Director of the Division of Real Estate in the Florida Department of Business and Professional Regulations. Mr. Johnson served as President of the BuddyFreddys Division from April 1998 until March 2001. From 1980 until 1998, he was the founding Chairman and CEO of BuddyFreddys Enterprises. From 1991 to 1996, Mr. Johnson served as Republican floor leader in the Florida House of Representatives. Mr. Johnson also served on the executive committee of The Foundation for Florida’s Future, a non-profit corporation established in 1995 by former governor, Jeb Bush.

 

Craig B. Wheaton has served as a director of the Company since February 1999. Mr. Wheaton is a partner in the law firm Kilpatrick Stockton LLP. His main areas of practice include employee benefits, executive compensation and general corporate law. Mr. Wheaton received his B.A. degree, with honors, from the University of Virginia and his J.D. degree from Wake Forest University. From 1993 to 1998, Mr. Wheaton was a member of the Tax Council of the North Carolina Bar Association Section on Taxation and chair of its Employee Benefits Committee from 1995 to 1997. He is a member and former president of the Triangle Benefits Forum. He is a member of the Southern Employee Benefits Conference, the Employee Benefits Committee of the American Bar Association’s Section of Taxation, the National Pension Assistance Project’s National Lawyers Network, and the National Association of Stock Plan Professionals.

 

5



 

B. Thomas M. Smith, Jr. has served as a director of the Company since June 2002.  Mr. Smith was a consultant with ITT Corp. from January 1996 to December 1996 and is now retired.  From 1988 until 1995, he was Vice President and Director of Corporate Purchasing for ITT Corp.  Mr. Smith served as director of Republic Bancorp from June 1999 until April 2005.

 

Todd S. Brown has served as a director of the Company since June 2004.  Mr. Brown has served Brown Capital Advisors, Inc. as the President since November 1999. From 1994 to November 1999, Mr. Brown served as Senior Vice President, Chief Financial Officer and Director of Phoenix Restaurant Group, Inc. (formerly DenAmerica Corp.). Mr. Brown served as Senior Manager in Audit and Consulting at Deloitte Touche LLP from 1980 to 1994. Mr. Brown received an MBA from the University of Missouri in 1980 and a BA from Southern Methodist University in 1978.

 

The audit committee is comprised of Todd S. Brown, Thomas G. Schadt and B. Thomas M. Smith, Jr., of which Todd S. Brown is the audit committee financial expert and chairman. All three members of the audit committee are “independent” as determined in accordance with the NASDAQ listing standards.

 

Item 1A.  Risk Factors

 

Our Growth Strategy Depends Upon our Ability to Acquire and Successfully Integrate Additional Restaurants. During fiscal 2008 and subsequent to January 28, 2008 the Company acquired a total of 29 restaurants. These acquisitions represent a significant increase in the number of restaurants operated by the Company and involve risks that could adversely affect the Company’s business, results of operations and financial condition, including the diversion of management’s attention, the assimilation of the operations and personnel of the acquired restaurants and the potential loss of key employees. In particular, the failure to maintain adequate operating and financial control systems or unexpected difficulties encountered during assimilation of the acquired restaurants could materially and adversely affect the Company’s business financial condition and results of operations.

 

The Company intends continue to pursue a strategy of moderate growth, primarily through acquisitions. The success of this strategy will depend in part on the ability of the Company to acquire additional restaurants or to convert acquired sites into restaurants.  The success of the Company’s growth strategy is dependent upon numerous factors, including the availability of suitable acquisition opportunities, the availability of appropriate financing, and general economic conditions.  The Company must compete with other restaurant operators for acquisitions and with other restaurant operators, retail stores, companies and developers for desirable sites.  Many of these entities have substantially greater financial and other resources than the Company. Many of its acquired restaurants may be located in geographic markets in which the Company has limited or no operating experience. There can be no assurance that the Company will be able to identify, negotiate and consummate acquisitions or that acquired restaurants or converted restaurants can be operated profitably and successfully integrated into the Company’s operations.

 

Acquisitions involve a number of special risks that could adversely affect the Company’s business, results of operations and financial condition, including the diversion of management’s attention, the assimilation of the operations and personnel of the acquired restaurants and the potential loss of key employees.  In particular, the failure to maintain adequate operating and financial control systems or unexpected difficulties encountered during expansion could materially and adversely affect the Company’s business, financial condition and results of operations.  There can be no assurance that any acquisition will not materially and adversely affect the Company or that any such acquisition will enhance the Company’s business.  Furthermore, the Company is unable to predict the likelihood of any additional acquisitions being proposed or completed in the near future.

 

A strategy of growth through acquisitions requires access to significant capital resources. If the Company determines to make a sizeable acquisition, the Company may be required to obtain approval of creditors, or to sell additional equity or debt securities, or to obtain additional credit facilities.  The sale of additional equity or convertible debt securities could result in additional dilution to the Company’s stockholders. At present, the Company has only limited availability under its Credit Facility which expires on January 31, 2012.

 

Loans to third parties involve risk of non-payment.   Since inception, the Company’s acquisition strategy has, in certain circumstances, incorporated loans to sellers to facilitate certain transactions.  In most cases, these loans are secured and include, as part of terms and conditions, the Company’s right to convert the loan into ownership of the restaurants.  Also, certain of these loans contain favorable interest rates and repayment terms if the loans are not converted to ownership for one or more reasons.  This financing strategy entails significant risk.  Currently, the Company has two loans receivable outstanding and both are in default.  However, because the Company anticipates full recovery of amounts outstanding through either repayment or conversion to ownership, historically no provision for doubtful accounts has been established.  While estimates to date have been within our expectations, a change in the financial condition of specific restaurant companies or in overall industry trends may result in future adjustments to Company estimates of recoverability of these receivables.

 

Operating Results can be Adversely Impacted by the Failure to Renew Facility Leases. The majority of the Company’s facilities are leased. Certain of these leases contain limited or no renewal options and other leases contain escalating or fair market renewal clauses. There can be no assurance that these facility leases can renewed or if they are renewed, can be done so at lease rates that permit the restaurant to be operated at a profit.

 

6



 

Dependence Upon and Restrictions Resulting from HomeTown Franchise Agreements. The Company operates its 12 HomeTown Buffet Restaurants through its wholly-owned, independently capitalized HTB Restaurants, Inc. (“HTB”) subsidiary.  This subsidiary is  party to franchise agreements with the franchisor, HomeTown Buffet.

 

The performance of HTB’s HomeTown Buffet restaurants is directly related to the success of the HomeTown Buffet restaurant system and restrictions the franchiser imposes on the franchisee.  The success of HTB’s HomeTown Buffet restaurants depends in part on the effectiveness of the HomeTown franchisor’s marketing efforts, new product development initiatives, building retrofit designs, quality assurance and other operational programs over which HTB has little or no control.  Futhermore, HTB cannot open new HomeTown Buffets without the permission of the franchisor.

 

In recent years HTB’s HomeTown Buffet restaurants have not performed well.  The Company’s management believes this is due to the franchisor financial difficulties and because the franchisor has not permitted HTB to develop new restaurants.  The lack of investment in the brand on the part of the franchisor and the franchisor’s unwillingness to permit HTB to develop new locations has contributed to significant declines in restaurant level revenue and profitability.  As a result of these declines, HTB has closed a number of HomeTown Buffet restaurants and additional closures are possible.  On January 22, 2008 Buffets Holdings, Inc., parent of HTB’s franchisor, filed for Chapter 11 reorganization.  As a result the Company determined that it would make no further capital contributions to the HTB subsidiary at this time.  It is uncertain at this time what impact, if any, Buffet Holdings, Inc.’s filing will have on HTB.

 

The Company’s Quarterly Results are Likely to Fluctuate. The Company has in the past experienced, and expects to continue to experience, significant fluctuations in restaurant revenues and results of operations from quarter to quarter.  In particular, the Company’s quarterly results can vary as a result of acquisitions and costs incurred to integrate newly acquired entities.  Conversely, the Company’s restaurant revenue and results of operations can vary due to restaurant closures and associated costs connected with these closures.  A number of the Company’s restaurants are located in areas which are susceptible to severe winter weather conditions or tropical storm patterns which may have a negative impact on customer traffic and restaurant revenues.  Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and that such comparisons cannot be relied upon as indicators of future performance.  Seasonal and quarterly fluctuations can have a material adverse effect on the Company’s business, results of operation and financial condition.

 

The Restaurant Industry is Highly Competitive.   The Company competes on the basis of the quality and value of food products offered, price, service, location, ambiance and overall dining experience. As the Company and its principal competitors expand operations in various geographic areas, competition can be expected to intensify. Such intensified competition could increase the Company’s operating costs or adversely affect its revenues or operating margins. A number of competitors have been in existence longer than the Company and have substantially greater financial, marketing and other resources and wider geographical diversity than does the Company.  In addition, the restaurant industry has few non-economic barriers to entry and is affected by changes in consumer tastes, national, regional and local economic conditions and market trends.  The Company’s significant investment in, and long term commitment to, each of its restaurant sites limits its ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect the Company’s operations.

 

The Restaurant Industry is Complex and Volatile. Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends. The performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographic considerations and the type, number and location of competing restaurants.  Multi-unit food service businesses such as the Company’s can also be materially and adversely affected by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. The Company’s business could be adversely affected by terrorist attacks directed toward the food supply chain or public concerns about the safety of the food supply chain. Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses such as the Company’s to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients. The Company’s profitability is highly sensitive to increases in food, labor and other operating costs that cannot always be passed on to its guests in the form of higher prices or otherwise compensated for.  In addition, unfavorable trends or developments concerning factors such as inflation, increased food, labor, employee benefits, including increases in hourly wage and unemployment tax rates utility and  transportation costs, increases in the number and locations of competing buffet-style restaurants, regional weather conditions and the availability of experienced management and hourly employees may also adversely affect the food service industry in general and the Company’s business, financial condition and results of operations in particular.  Changes in economic conditions affecting the Company’s guests could reduce traffic in some or all of the Company’s restaurants or impose practical limits on pricing, either of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

7



 

The Company is Dependent on Its Key Personnel. The Company believes that its success will depend in part on the services of its key executives, including Robert E. Wheaton, Chairman of the Board, Chief Executive Officer and President.  The Company does not maintain key man life insurance.  The loss of the services of Mr. Wheaton could have a material adverse effect upon the Company’s business, financial condition and results of operations, as there can be no assurances that a qualified replacement would be available in a timely manner if at all.

 

The Restaurant Industry is Subject to Substantial Government Regulation. The restaurant industry is subject to federal, state and local government regulations, including those relating to the preparation and sale of food as well as building and zoning requirements.  In addition, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working and safety conditions and citizenship requirements.  The failure to obtain or retain food licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees, could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Effect of Certain Charter and Bylaw Provisions. Certain provisions of the Company’s Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of the Company.  Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company’s Common Stock.  The Company’s Certificate of Incorporation allows the Company to issue up to 1,500,000 shares of currently undesignated preferred stock, to determine the powers, preferences, rights, qualifications and limitations or restrictions granted to or imposed on any un-issued series of that preferred stock, and to fix the number of shares constituting any such series and the designation of such series, without any vote or future action by the stockholders.  The preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of the common stock.  The Certificate of Incorporation also prohibits the ability of stockholders to call special meetings.  The Company’s Bylaws require advance notice to nominate a director or take certain other actions.  Such provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company.  In addition, the Company has not elected to be excluded from the provisions of Section 203 of the Delaware General Corporation Law, which imposes certain limitations on transactions between a corporation and “interested” stockholders, as defined in such provisions.

 

Possible Volatility of Stock Price. The stock market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.  The volume of trading in the market for the Company’s common stock is limited, which may make it difficult to liquidate an investment and can increase price volatility.  Due to changes in the balance of buy and sell orders and other factors, the price of the Company’s common stock can change for reasons unrelated to the performance of the business of the Company.  Fluctuations in the Company’s operating results, failure of such operating results to meet the expectations of stock market analysts and investors, changes in stock market analyst recommendation regarding the Company, the success or perceived success of competitors of the Company, as well as changes in general economic or market conditions and changes in the restaurant industry may also have a significant adverse affect on the market price of the Common Stock.

 

Sale of a Substantial Number of Shares of Our Common Stock Could Cause the Market Price to Decline. Sales of a substantial number of shares of our common stock in the public market could substantially reduce the prevailing market price of our common stock. As of April 14, 2008, 3,213,075 shares of common stock were outstanding and 40,000 shares were issuable upon exercise of outstanding options at exercise prices of $5.00 and $6.70. The Company cannot predict the effect, if any, that sales of shares of the Company’s common stock or the availability of such shares for sale will have on prevailing market prices. However, substantial amounts of the Company’s common stock could be sold in the public market, which may adversely affect prevailing market prices for the common stock.

 

Control by One Principal Stockholder. Robert E. Wheaton, Chairman of the Board, Chief Executive Officer and President, currently beneficially owns approximately 44% of our total equity securities, assuming exercise of vested employee stock options, and possesses approximately 44% of the total voting power. Thus Mr. Wheaton has the ability to control or significantly influence all matters requiring the approval of our stockholders, including the election of our directors. Sales of a substantial number of shares of our common stock by Mr. Wheaton or other principal shareholders in the public market could substantially reduce the prevailing market price of our common stock.

 

Item 1B.  Unresolved Staff Comments

 

                The Company is not an accelerated filer, a large accelerated filer, or a well known seasoned issuer and consequently is not subject to the requirements of this item 1B.

 

8



 

Item 2. Properties

 

The Company’s corporate headquarters is in Scottsdale, Arizona.  A regional administrative office is located in Salt Lake City, Utah.

 

The Company’s restaurants are primarily freestanding locations. As of January 28, 2008, 36 of 53 of the Company’s restaurant facilities were leased. The leases expire on dates ranging from 2008 to 2013 with the majority of the leases providing for renewal options. All leases provide for specified periodic rental payments and many call for additional rent based upon revenue volume. Most leases provide for periodic rent increases and require the Company to maintain the property, carry property and general liability insurance and pay associated taxes and expenses.

 

The following is a summary of the Company’s restaurant properties as of January 28, 2008:

 

 

 

HomeTown
Buffet

 

North’s
Star

 

Florida
Buffets

 


Summit

 


Total

 

Owned

 

3

 

3

 

5

 

6

 

17

 

Leased

 

10

 

4

 

11

 

11

 

36

 

Total

 

13

 

7

 

16

 

17

 

53

 

 

As of January 28, 2008, the Company’s restaurants are located in the following states:

 

 

 

Number of Restaurants

 

 

 

 

 


State

 

HomeTown
Buffet

 

North’s
Star

 

Florida
Buffets

 


Summit

 


Total

 

Arkansas

 

 

1

 

 

 

1

 

Arizona

 

8

 

1

 

 

 

9

 

Colorado

 

1

 

 

 

1

 

2

 

Florida

 

 

 

16

 

 

16

 

Georgia

 

 

1

 

 

 

1

 

Idaho

 

 

 

 

1

 

1

 

Mississippi

 

 

1

 

 

 

1

 

Montana

 

 

 

 

5

 

5

 

New Mexico

 

2

 

 

 

2

 

4

 

Oklahoma

 

 

1

 

 

 

1

 

Oregon

 

 

1

 

 

 

1

 

Texas

 

 

 

 

4

 

3

 

Utah

 

1

 

 

 

4

 

5

 

Washington

 

 

1

 

 

 

1

 

Wyoming

 

1

 

 

 

 

1

 

Total

 

13

 

7

 

16

 

17

 

53

 

 

As of January 28, 2008, the Company’s non-operating restaurants are located in the following states:

 

 

 

Number of Non-Operating Restaurants

 

 

 

 

 


State

 

HomeTown
Buffet

 

North’s
Star

 

Florida
Buffets

 


Summit

 


Total

 

Arizona

 

 

1

 

 

 

1

 

Colorado

 

1

 

 

 

 

1

 

Florida

 

 

 

4

 

 

4

 

New Mexico

 

 

 

 

1

 

1

 

Oklahoma

 

 

1

 

 

 

1

 

Texas

 

 

 

 

1

 

1

 

Total

 

1

 

2

 

4

 

2

 

9

 

 

9



 

Three of the nine non-operating restaurants have been leased to third-party operators; five are closed for remodeling and/or repositioning; one is closed and classified as property held for sale.

 

Item 3. Legal Proceedings

 

In conjunction with the acquisition of certain JJ North’s restaurants from North’s Restaurants, Inc. (“North’s”) in 1997, the Company provided a credit facility to North’s and when North’s defaulted the Company sued for enforcement. In 1998, the Company’s suit with North’s resulted in a negotiated settlement in favor of the Company represented by an Amended and Restated Promissory Note (the “Star Buffet Promissory Note).  In a related proceeding, North’s other secured creditor, Pacific Mezzanine, initiated litigation against North’s seeking a monetary judgment and the appointment of a receiver.  In April, 2006 the Company noticed all relevant parties of its intent to foreclose to seek expedited liquidation of North’s assets and repay amounts owed to the Company.  Subsequent to the notice, the receiver moved to have the Company’s foreclosure of North’s assets set aside so that certain of North’s assets could be sold to a third party.  The motion was approved.  On August 7, 2006, the receiver paid the Company approximately $1,291,000 from a partial sale of the assets. In August 2007, the receiver notified the Company that he planned to turn control of the JJ North’s restaurant in Grants Pass, Oregon and associated assets over to the Company. On September 22, 2007, the Company hired North’s employees, notified North’s creditors of its intent to operate the business and negotiated a facility lease with North’s previous landlord. The transfer of assets from North’s to Star Buffet Management, Inc. was approved by the court. The Company’s note, together with the obligation to the other significant creditor of North’s, is secured by the real and personal property, trademarks and all other intellectual property owned by North’s. The Company believes current and future cash flows including asset sales are adequate for recovery of the remaining principal amount of the note receivable.  The Company has not provided an allowance for bad debts for the note as of January 28, 2008.

 

The Company is from time to time the subject of complaints or litigation from customers alleging injury on properties operated by the Company, illness or other food quality, health or operational concerns. Adverse publicity resulting from such allegations may materially adversely affect the Company and its restaurants, regardless of whether such allegations are valid or whether the Company is liable. The Company also is the subject of complaints or allegations from employees from time to time. The Company believes that the lawsuits, claims and other legal matters to which it has become subject in the course of its business are not material to the Company’s business, financial condition or results of operations, but an existing or future lawsuit or claim could result in an adverse decision against the Company that could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No matters were submitted to the shareholders of the Company during the fourth quarter of fiscal 2008.

 

10



 

PART II

 

Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Market Information and Holders. The Company’s Common Stock is listed on the NASDAQ Capital Market under the symbol “STRZ”. As of April 14, 2008, there were approximately 500 holders of record. The following table sets forth the high and low bid quotations for the Common Stock, as reported by NASDAQ.

 

 

 

2008

 

2007

 

Fiscal Year

 

High

 

Low

 

High

 

Low

 

First Quarter

 

$

9.23

 

$

7.80

 

$

9.46

 

$

6.98

 

Second Quarter

 

8.60

 

7.56

 

8.39

 

7.02

 

Third Quarter

 

8.08

 

6.50

 

8.85

 

7.80

 

Fourth Quarter

 

6.96

 

5.14

 

9.97

 

8.01

 

 

Dividends. On March 12, 2008, the Board of Directors approved the Company’s fifth consecutive annual dividend. The dividend this year is $0.60 per common share and is payable on June 4, 2008 to shareholders of record on May 6, 2008.

 

Equity Compensation Plan Information.

 

The following table gives information about our shares of Common Stock that may be issued under our equity compensation plans.

 

 

 

(a)

 

(b)

 

(c)

 

 

 

Number of securities to
be issued upon exercise
of outstanding options

 

Weighted-average
exercise price of
outstanding options

 

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))

 

Equity compensation plans approved by security holders

 

40,000

 

$

6.20

 

450,000

 

Equity compensation plans not approved by security holders

 

 

 

 

Total

 

40,000

 

$

6.20

 

450,000

 

 

The exercise price of the options granted and exercisable at January 28, 2008 is $5.00 for 12,000 options and $6.70 for 28,000 options.

 

11



 

Item 6. Selected Financial Data

 

The following paragraphs set forth selected consolidated financial data for the periods indicated. The selected consolidated financial data for each of the five fiscal years in the period ended January 28, 2008, has been derived from our consolidated financial statements for those years.

 

The selected and other data presented below should be read in conjunction with the “Consolidated Financial Statements”, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

 

The operating results for the 52-week period ended January 28, 2008 included 52 weeks of operations for the Company’s 12 franchised HomeTown Buffet restaurants, six JB’s restaurants, five Whistle Junction restaurants, two BuddyFreddys restaurants, two BuddyFreddys Country Buffet restaurants, two Western Sizzlin restaurants, two K-BOB’S Steakhouses, two Holiday House restaurants, one JJ North’s Grand Buffet restaurant one Pecos Diamond Steakhouse and one Casa Bonita Mexican theme restaurant.  The results also included the following, one Western Sizzlin restaurant for 32 weeks, one Holiday House restaurant for 40 weeks, one Bar-H Steakhouse for 35 weeks, one JB’S restaurant for 35 weeks, two 4B’S restaurants for 26 weeks, one 4B’S restaurant for 15 weeks and one JJ North’s Grand Buffet for 18 weeks.  In addition, operating results include 39 weeks for one K-BOB’S Steakhouse, 36 weeks for one K-BOB’S Steakhouse, 36 weeks for one HomeTown Buffet restaurant, 27 weeks for one HomeTown Buffet restaurant, 27 weeks for one Oklahoma Steakhouse restaurant and 16 weeks for one Whistle Junction restaurant closed during the fiscal year 2008.  Nine restaurants were closed at the end of the 2008 fiscal year for repositioning. Three of the nine closed restaurants have been leased to third-property operators, five restaurants remain closed for remodeling and repositioning and another closed restaurant was reported as property held for sale.

 

The operating results for the 52-week period ended January 29, 2007 included 52 weeks of operations for the Company’s 14 franchised HomeTown Buffet restaurants, six JB’s restaurants, three K-BOB’S Steakhouses, two BuddyFreddys restaurants, two BuddyFreddys Country Buffet restaurants, two Holiday House restaurants, one JJ North’s Country Buffet restaurant, and one Casa Bonita Mexican theme restaurant.  The results also included the following, one K-BOB’S Steakhouse for 48 weeks, one Pecos Diamond Steakhouse for 29 weeks, one Western Sizzlin restaurant for 16 weeks and five Whistle Junction restaurants for 9 weeks.  In addition, operating results include 19 weeks for one Buddy Freddy’s Country Buffet and 33 weeks for one JJ North’s Country Buffet restaurant closed during the fiscal year 2007.  Eight restaurants were closed at the end of the 2007 fiscal year for repositioning. Four of the eight closed restaurants have been leased to third-property operators, three restaurants remain closed for remodeling and repositioning and another closed restaurant was reported as property held for sale.

 

The operating results for the 52-week period ended January 30, 2006 included 52 weeks of operations for the Company’s 14 franchised HomeTown Buffet restaurants, six JB’s restaurants, three BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two JJ North’s Country Buffet restaurants, two Holiday House restaurants and one Casa Bonita Mexican theme restaurant.  In addition, operating results included 10 weeks for one JB’s restaurant and one Casa Bonita restaurant closed during the fiscal year 2006.  In addition to the above, the Company purchased in September 2005 a restaurant facility in Rexburg, Idaho.  The Company leases the restaurant facility to a JB’s franchisee. Eight restaurants were closed at the end of the 2006 fiscal year for repositioning. Three of the eight closed restaurants were leased to third-property operators, four restaurants were held for remodeling and repositioning and another closed restaurant was reported as property held for sale.  One of the four restaurants closed for remodeling and repositioning located in Laramie, Wyoming was sold in March 2006.

 

The operating results for the 53-week period ended January 31, 2005 included 53 weeks of operations for the Company’s 14 franchised HomeTown Buffet restaurants, seven JB’s restaurants, three BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two JJ North’s Country Buffet restaurants, two Casa Bonita Mexican theme restaurants, and two Holiday House restaurants.  In addition, operating results included 30, 34 and 52 weeks for three JJ North’s Country Buffet restaurants closed during fiscal year 2005 and 35 and 51 weeks for two HomeTown Buffet restaurants. Results for 2005 also included 34 weeks of operations for one North’s Star Buffet restaurant and 39 weeks of operations for one JB’s Restaurant . Eight restaurants were closed at the end of the 2005 fiscal year for repositioning. Four of the eight closed restaurants were leased to third-property operators, three restaurants were held for remodeling and repositioning and one closed restaurant was property held for sale.

 

The operating results for the 52-week period ended January 26, 2004 included 52 weeks of operations for 16 franchised HomeTown Buffet restaurants, eight JB’s restaurants, five JJ North’s Country Buffet restaurants, three BuddyFreddys Country Buffet restaurants, two BuddyFreddys restaurants, two Casa Bonita Mexican theme restaurants, two Holiday House restaurants and one North’s Star Buffet restaurant.  In addition, operating results included 19 and 2 weeks for two BuddyFreddys Country Buffet restaurants closed during fiscal year 2004 and 12 weeks of operations for one JJ North’s Country

 

12



 

Buffet restaurant and 5 weeks of operations for one JB’s Restaurant. Five restaurants were closed at the end of the 2004 fiscal year for repositioning. Three of the five closed restaurants were leased to third-property operators and one closed restaurant was property held for sale. One property was sold during fiscal 2004.

 

SELECTED FINANCIAL DATA

 

(In thousands except per share amounts and restaurant unit data)

 

 

 

Fifty-Two

 

Fifty-Two

 

Fifty-Two

 

Fifty-Three

 

Fifty-Two

 

 

 

Weeks

 

Weeks

 

Weeks

 

Weeks

 

Weeks

 

 

 

Ended

 

Ended

 

Ended

 

Ended

 

Ended

 

 

 

Jan. 28, 2008

 

Jan. 29, 2007

 

Jan. 30, 2006

 

Jan. 31, 2005

 

Jan. 26, 2004

 

Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

68,732

 

$

58,648

 

$

56,305

 

$

64,856

 

$

68,090

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

Food costs

 

25,356

 

20,789

 

19,429

 

22,336

 

23,275

 

Labor costs

 

23,913

 

19,674

 

18,260

 

21,712

 

23,015

 

Occupancy and other expenses

 

15,187

 

12,772

 

11,763

 

12,963

 

14,042

 

General and administrative expenses

 

3,549

 

2,426

 

2,179

 

2,694

 

2,433

 

Depreciation and amortization

 

2,098

 

2,069

 

2,120

 

2,440

 

2,670

 

Impairment of long-lived assets

 

1,401

 

 

369

 

2,838

 

1,083

 

Total costs and expenses

 

71,504

 

57,730

 

54,120

 

64,983

 

66,518

 

(Loss) income from operations

 

(2,772

)

918

 

2,185

 

(127

)

1,572

 

Interest expense

 

(858

)

(616

)

(648

)

(640

)

(569

)

Gain on sale of assets

 

31

 

230

 

 

 

 

Reversal of litigation accrual

 

 

 

 

 

400

 

Other income, net

 

283

 

422

 

680

 

427

 

319

 

(Loss) income before income taxes (benefit)

 

(3,316

)

954

 

2,217

 

(340

)

1,722

 

Income taxes (benefit)

 

(1,315

)

238

 

420

 

(168

)

609

 

Net income (loss)

 

$

(2,001

)

$

716

 

$

1797

 

$

(172

)

$

1,113

 

Net (loss) income per common share — basic

 

$

(0.63

)

$

0.23

 

$

0.60

 

$

(0.06

)

$

0.38

 

Net (loss) income per common share — diluted

 

$

(0.63

)

$

0.23

 

$

0.56

 

$

(0.06

)

$

0.38

 

Weighted average shares outstanding — basic

 

3,171

 

3,147

 

2,990

 

2,950

 

2,950

 

Weighted average shares outstanding — diluted

 

3,171

 

3,164

 

3,209

 

2,950

 

2,950

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

35,702

 

$

34,168

 

$

34,824

 

$

34,880

 

$

35,954

 

Total debt and capital lease obligations including current portion

 

9,447

 

7,621

 

7,815

 

8,207

 

7,967

 

Stockholders’ equity

 

$

15,275

 

$

19,178

 

$

20,284

 

$

19,775

 

$

20,790

 

 

 

 

 

 

 

 

 

 

 

 

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

Operating units (1) HomeTown Buffet

 

12

 

14

 

14

 

14

 

16

 

North’s Star

 

5

 

2

 

2

 

2

 

6

 

Florida Buffets

 

12

 

11

 

7

 

7

 

7

 

Summit Restaurants

 

15

 

12

 

7

 

9

 

10

 

Non-Operating

 

9

 

8

 

8

 

8

 

5

 

Total

 

53

 

47

 

38

 

40

 

44

 

 


(1) At the end of the respective periods.

 

13



 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements, and the notes thereto, presented elsewhere in this Form 10-K. The operating results for the 52-week period ended January 28, 2008 and for the 52-week period ended January 29, 2007 are based on the composition of restaurant operations as discussed in Item 6 – Selected Financial Data.

 

The Company’s sales were $68.7 million in fiscal 2008, a 17.2 percent increase from $58.6 million in fiscal 2007.  Sales from the Company’s nine new store openings in fiscal 2008 and the seven new store openings in fiscal 2007 that operated for only part of fiscal 2007 were a net increase of approximately $12.7 million. Sales lost from closed stores represented a net decrease of approximately $1.3 million.  Same store sales decreased approximately 2.5% due primarily to increased competition in some markets.  The net loss for fiscal 2008 was $2,001,000 (($0.63) per diluted share) compared with net income for fiscal 2007 of $716,000 ($0.23 per diluted share).  Fiscal 2008 was impacted by higher general and administrative expenses, higher interest expense and $1,401,000 in impairment expense.  In addition the Company had a lower gain on sale of assets when compared to fiscal 2007 and lower other income when compared to fiscal 2007, which is primarily rental income.

 

Results of Operations

 

The following table summarizes the Company’s results of operations as a percentage of total revenues for the fifty-two weeks ended January 28, 2008 (“fiscal 2008”), and for the fifty-two weeks ended January 29, 2007 (“fiscal 2007”).

 

 

 

Fifty-Two
Weeks
Ended
January 28,
2008

 

Fifty-Two
Weeks
Ended
January 29,
2007

 

Total revenues

 

100.0

%

100.0

%

Costs and expenses:

 

 

 

 

 

Food costs

 

36.9

 

35.5

 

Labor costs

 

34.8

 

33.6

 

Occupancy and other expenses

 

22.1

 

21.8

 

General and administrative expenses

 

5.2

 

4.1

 

Depreciation and amortization

 

3.0

 

3.5

 

Impairment of long-lived assets

 

2.0

 

0.0

 

Total costs and expenses

 

104.0

 

98.4

 

Income (loss) from operations

 

(4.0

)

1.6

 

 

 

 

 

 

 

Interest expense

 

(1.2

)

(1.1

)

Other income, net

 

0.4

 

0.6

 

Net (loss) income

 

(4.8

)

1.6

 

Income taxes (benefit)

 

(1.9

)

0.4

 

(Loss) income before income taxes (benefit)

 

(2.9

)%

1.2

%

 

     Summarized financial information concerning the Company’s reportable segments is shown in the following table. The other assets presented in the consolidated balance sheet and not in the reportable segments relate to the Company as a whole, and not individual segments. Also certain corporate overhead income and expenses in the consolidated statements of operations are not included in the reportable segments. With the acquisition of 20 Barnhill’s Buffet restaurants in fiscal 2009, the Company will change its reporting segments to the Buffet Division and Non-Buffet Division.

 

14



 

(Dollars in Thousands)

 

52 Weeks Ended
January 28, 2008

 

HomeTown
Buffet (1)

 

North’s
Star (2)

 

Florida
Buffets (3)

 


Summit (4)

 


Other

 


Total

 

Revenues

 

$

24,367

 

$

5,348

 

$

18,032

 

$

20,985

 

$

 

$

68,732

 

Food cost

 

9,276

 

2,248

 

7,161

 

6,671

 

 

25,356

 

Labor cost

 

8,088

 

1,999

 

6,443

 

7,383

 

 

23,913

 

Interest income

 

 

 

 

 

24

 

24

 

Interest expense

 

(151

)

 

 

 

(707

)

(858

)

Depreciation & amortization

 

960

 

170

 

341

 

557

 

70

 

2,098

 

Impairment of long-lived assets

 

275

 

 

1,034

 

92

 

 

1,401

 

Income (loss) before income taxes

 

(789

)

(382

)

(1,431

)

2,443

 

(3,157

)

(3,316

)

 

52 Weeks Ended
January 29, 2007

 

HomeTown
Buffet (1)

 

North’s
Star (2)

 

Florida
Buffets (3)

 

Summit (4)

 

Other

 

Total

 

Revenues

 

$

27,258

 

$

2,301

 

$

11,642

 

$

17,447

 

$

 

$

58,648

 

Food cost

 

10,302

 

970

 

4,312

 

5,205

 

 

20,789

 

Labor cost

 

8,797

 

876

 

3,913

 

6,088

 

 

19,674

 

Interest income

 

 

 

 

 

93

 

93

 

Interest expense

 

(167

)

 

 

 

(448

)

(615

)

Depreciation & amortization

 

989

 

88

 

419

 

509

 

64

 

2,069

 

Impairment of long-lived assets

 

 

 

 

 

 

 

Income (loss) before income taxes

 

117

 

(364

)

510

 

2,627

 

(1,936

)

954

 

 


(1) The same store sales declined this year resulting in higher labor costs for HomeTown Buffet as a percentage of sales. Food costs were higher as a percentage of sales this year primarily attributable to higher protein and grain prices in the current year.  Management believes sales decreased because of general economic conditions and increased competition in certain areas.  HomeTown Buffet also had higher labor costs as a percentage of sales compared to the prior year primarily from higher starting wages and higher minimum wages in certain markets.  The decline in income loss before income taxes in the current year which was primarily the result of higher food, labor and $275,000 in impairment expenses and lower sales.

 

(2) The same store sales increased this year resulting in lower food and labor cost for North’s Star as a percentage of sales. The North’s Star division had three new Western Sizzlin restaurants, one new Oklahoma Steakhouse and one new JJ North’s restaurant which more than offset the one closed JJ North’s Country Buffet restaurant and contributed to higher sales.  The Oklahoma Steakhouse closed on December 8, 2007.  The losses in the Oklahoma Steakhouse increased the loss for the year compared to the prior year.

 

(3) The decline in income (loss) before income taxes in the current year in the Florida Buffet segment was primarily impairment expense of $1,034,000 in the current year compared to none in the prior year. In addition the decline was the result of higher food costs, labor costs and higher occupancy and other expenses in the five new Whistle Junction restaurants and the one new Holiday House restaurant as compared to the existing restaurants in the same segment. The increase in revenues was the result of six new restaurants.  These new restaurants contributed approximately $6.4 million more in sales compared to the prior year.

 

(4) The increase in sales from the six new restaurants contributed approximately $3.2 million in sales including the Pecos Diamond Steakhouse contribution of approximately $684,000 more than last year when Pecos opened during the second quarter. The decrease in income before income taxes was primarily due to the $234,000 gain on selling the restaurant facility in Laramie, Wyoming in the prior year.

 

15



 

Comparison of Fiscal 2008 to Fiscal 2007

 

          Total revenues increased $10.1 million or 17.2% from $58.6 million in fiscal 2007 to $68.7 million in fiscal 2008.  Sales from the Company’s 16 new store openings in fiscal 2008 and fiscal 2007 were a net increase of approximately $12.7 million. Sales lost from closed stores represented a net decrease of approximately $1.3 million.  Same store sales decreased approximately 2.5% primarily due to increased competition in certain markets.

 

Food costs as a percentage of total revenues increased from 35.5% during in fiscal 2007 to 36.9% in fiscal 2008.  The increase in food costs as a percentage of total revenue was primarily attributable to the higher protein and grain prices in the current year.

 

Labor costs as a percentage of total revenues increased from 33.6% in fiscal 2007 to 34.8% in fiscal 2008 and actual labor costs increased by $4.2 million.  The increase in labor cost and as a percentage of revenue resulted primarily from higher starting wages in certain markets in fiscal 2008 as compared to the fiscal year 2007 and higher minimum wages in certain states in the current year.  In the fiscal year 2008 approximately 700 employees have had minimum wage increases from $0.10 to $0.70 per hour.

 

Occupancy and other expenses as a percent of total revenues increased from 21.8% in fiscal 2007 to 22.1% in fiscal 2008. The increase as a percentage of revenues for the 52-week period ended January 28, 2008 was primarily attributable to decreased revenues in the stores opened during both years and increased variable expenses. The fixed portion of occupancy costs is primarily fixed costs for property leases and related common area maintenance and property taxes.  Increases in variable costs were attributable to an increase of 0.5% in utility costs as a percentage of revenue in the current year compared to the prior year.

 

General and administrative expenses as a percentage of total revenues increased from 4.1% in fiscal 2007 to 5.2% in fiscal 2008 and actual costs increased by $1,123,000.  The increase for the 52-week period ended January 28, 2008 was primarily attributable to higher contingency expenses and higher field costs associated with acquisitions as compared to the prior fiscal year.

 

Depreciation and amortization as a percent of total revenues decreased from 3.5% in fiscal 2007 to 3.0% in fiscal 2008. The decrease as a percentage of revenue is primarily attributable to certain equipment and impaired assets being fully depreciated for the 52-week period ended January 28, 2008 as compared to the 52-week period ended January 29, 2007 and our depreciation per revenue for the new stores compared to existing stores.  The acquisition costs in certain new stores were on the average lower than existing stores resulting in lower depreciation expense in these new stores

 

Impairment of long-lived assets increased from 0.0% in fiscal 2007 to 2.0% in fiscal 2008. The impairment in fiscal 2008 totaled $238,000 for the impairment of one restaurant’s leasehold improvements and $8,000 for franchise costs where projected undiscounted cash flows were less than the net book value of the assets and approximately $29,000 of impairment to equipment held for future use and approximately $1,126,000 for the impairment of goodwill.

 

Interest expense as a percent of total revenues increased from 1.1% in fiscal 2007 to 1.3% in fiscal 2008. The increase as a percentage of total revenue was primarily attributable to higher debt balances in fiscal 2008 compared to fiscal 2007.  The higher debt balances resulted from the acquisitions in fiscal 2008 using real estate mortgages and a higher average revolving credit balance.

 

The income tax provision (benefit) totaled $(1,315,000) or (39.7%) of pre-tax income in fiscal 2008 as compared to $238,000 or 25% of pre-tax income in fiscal 2007.

 

Liquidity and Capital Resources

 

The Company has historically financed operations through a combination of cash on hand, cash provided from operations and available borrowings under bank lines of credit.

 

As of January 28, 2008, the Company had $736,000 in cash.  Cash and cash equivalents increased by $318,000 during the fiscal year ended January 28, 2008. The net working capital deficit was $(8,348,000) and $(4,913,000) at January 28, 2008 and January 29, 2007, respectively.  The Company spent approximately $4,400,000 on capital expenditures in fiscal 2008 to, among other things, acquire the equipment, building and land for the Western Sizzlin Restaurant in Magee, Mississippi, the equipment, building and land for the Bar H Steakhouse in Dalhart, Texas and the equipment, building and land for the Western Sizzlin Restaurant in Magnolia, Arkansas.  In connection with these acquisitions, the Company incurred a total of approximately $2,300,000 in new restaurant specific debt secured by the acquired assets.  The Company received net proceeds of approximately $746,000 in September 2007 when it sold its equipment, building and land in Spanish Fork, Utah.  The facility had been a non-operating unit leased to a third party.

 

16



 

Cash provided by operations was $3.0 million for fiscal 2008 and $2.7 million for fiscal 2007.

 

The Company had a $3,000,000 unsecured revolving line of credit with M&I Marshall & Ilsley Bank which provided working capital.  The M&I revolving line of credit bore interest at LIBOR plus two percent per annum.   The Company replaced the M&I revolving line of credit on January 31, 2008 with a Credit Facility with Wells Fargo Bank, N.A.   The Credit Facility included a $7,000,000 term loan and a $2,000,000 revolving line of credit.  The Credit Facility was utilized to retire the Company’s unsecured revolving line of credit with M&I Marshall & Ilsley Bank; to fund the acquisition of assets associated with sixteen (16) Barnhill’s Buffet restaurants; and to provide additional working capital.   On February 29, 2008 the Company amended its Credit Facility with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000 to $8,000,000. The increase in the Credit Facility was used to fund the acquisition of four Barnhill’s Buffet by its newly formed, wholly-owned, independently capitalized subsidiary, Starlite Holdings, Inc.  The Credit Facility is guaranteed by Star Buffet’s subsidiaries and bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus 2.00%.  The Credit Facility is secured by a first priority lien on all of the Company’s assets, except for those assets that are currently pledged as security for existing obligations, in which case Wells Fargo will have a second lien.  The term loan matures on January 31, 2012 and provides for principal to be amortized at $175,000 per quarter for the initial six quarters; $225,000 for the next nine quarters; with any remaining balance due at maturity.  Interest is payable monthly.  The term loan balance was $6,825,000 on April 14, 2008.  A $2,000,000 revolving line of credit matures on January 31, 2012.  Interest on the revolver is payable monthly.  As of April 14, 2008, no balance was outstanding on the revolving line of credit.

 

On February 1, 2001, the Company entered into a $460,000 15 year fixed rate first real estate mortgage with Victorium Corporation. The mortgage has monthly payments including interest of $6,319. The interest rate is 7.5%. The mortgage is secured  the Company’s restaurant in Ocala, Florida. The balance at January 28, 2008 and January 29, 2007 was $311,000 and $325,000, respectively.

 

On May 2, 2002, the Company entered into a $1,500,000 ten year fixed rate first real estate mortgage with M&I Marshall & Ilsley Bank.  The mortgage has monthly payments including interest of $17,894. The interest rate is7.5% for the first five years with interest for years six to ten calculated at the five year LIBOR rate plus 250 basis points with a floor of 7.5%. The mortgage is secured by the Company’s HomeTown Buffet restaurant in Scottsdale, Arizona. The balance at January 28, 2008 and January 29, 2007 was $624,000 and $877,000, respectively.

 

On December 19, 2003, the Company entered into a $1,470,000 six year fixed rate first real estate mortgage with Platinum Bank.  The mortgage has monthly payments including interest of $12,678 with a balloon payment of $475,000 due on December 19, 2009. The interest rate is 7.25%.  The mortgage is secured by the Company’s BuddyFreddys restaurant in Plant City, Florida.  The balance at January 28, 2008 and January 29, 2007 was $1,115,000 and $1,237,000, respectively.

 

On February 25, 2004, the Company entered into a $1,250,000 seven year fixed rate first real estate mortgage with M&I Marshall & Ilsley Bank.  The mortgage has monthly payments including interest of $18,396. The interest rate is 6.1%. The mortgage is secured by the Company’s HomeTown Buffet restaurant in Yuma, Arizona. The balance at January 28, 2008 and January 29, 2007 was $404,000 and $721,000, respectively.

 

On July 29, 2004, the Company entered into a $550,000 ten year fixed rate first real estate mortgage with Heritage Bank.  The mortgage has monthly payments including interest of $6,319. The interest rate is 6.75%. The mortgage is secured by the Company’s JB’s Family Restaurant in Great Falls, Montana. The balance at January 28, 2008 and January 29, 2007 was $391,000 and $430,000, respectively.

 

On October 27, 2004, the Company entered into a $1,275,000 five year fixed rate first real estate mortgage with Bank of Utah.  The mortgage has monthly payments including interest of $14,371 with a balloon payment of $752,000 due on October 26, 2009. The interest rate is 6.25%. The mortgage requires the Company to maintain specified minimum levels of net worth, limits the amount of capital expenditures and requires the maintenance of certain fixed charge coverage ratios.  The mortgage is secured by the Company’s HomeTown Buffet restaurant in Layton, Utah. The balance at January 28, 2008 and January 29, 2007 was $840,000 and $1,008,000, respectively.

 

On September 16, 2005, the Company entered into a $300,000 five year fixed rate real estate mortgage with Naisbitt Investment Company.  The mortgage has monthly payments including interest of $5,870. The interest rate is 6.5%.  The mortgage is secured by the Company’s JB’s Restaurant in Rexburg, Idaho.  The balance at January 28, 2008 and January 29, 2007 was $169,000 and $206,000, respectively.

 

17



 

On June 1, 2006, the Company entered into a $564,000 five year fixed rate first real estate mortgage with Dalhart Federal Savings and Loans.  The mortgage has monthly payments including interest of $6,731. The interest rate is 7.63%. The mortgage is secured by the Company’s K-BOB’S Steakhouse in Dumas, Texas. The balance at January 28, 2008 and January 29, 2007 was $497,000 and $525,000, respectively.

 

On November 8, 2006, the Company entered into a $595,000 five year fixed rate first real estate mortgage with Wells Fargo Bank.  The mortgage has monthly payments including interest of $8,055. The interest rate is 7.5%. The mortgage is secured by the Company’s Pecos Diamond Steakhouse in Artesia, New Mexico. The balance at January 28, 2008 and January 29, 2007 was $461,000 and $560,000, respectively.

 

On January 30, 2007, the Company entered into a $900,000 five year fixed rate real estate mortgage with Fortenberry’s Beef of Magee, Inc.  The mortgage has monthly payments including interest of $17,821. The interest rate is 7%.  The mortgage is secured by the Company’s Western Sizzlin restaurant in Magee, Mississippi. The balance at January 28, 2008 was $740,000.

 

On May 29, 2007, the Company entered into a $500,000 five year fixed rate real estate mortgage with Dalhart Federal Savings and Loan Association.  The mortgage has monthly payments including interest of 5,903 with a balloon payment of $301,345 due on June 1, 2012.  The interest rate is 7.38%.  The mortgage is secured by the Company’s Bar H Steakhouse restaurant in Dalhart, Texas.  The balance at January 28, 2008 was $477,000.

 

On June 19, 2007, the Company entered into a $520,000 five year fixed rate real estate mortgage with Farmers Bank and Trust.  The mortgage has monthly payments including interest of $4,676 with a balloon payment of $407,313 due on June 19, 2012.  The interest rate is 7%.  The mortgage is secured by the Company’s Western Sizzlin restaurant in Magnolia, Arkansas.    The balance at January 28, 2008 was $508,000.

 

During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company.  This loan dated June 15, 2007 is subordinated to the obligation to Wells Fargo Bank, N.A. bears interest at 8.5%. The Company expensed and paid $78,458 to Mr. Wheaton for interest during the fiscal year. The principal balance and any unpaid interest is due and payable in full on June 5, 2012. The Company used the funds to acquire restaurants and provide working capital.

 

The Company believes that available cash, availability under the revolving line of credit and cash flow from operations will be sufficient to satisfy its working capital and capital expenditure requirements during the next 12 months.  Management does not believe the net working capital deficit will have any effect on the Company’s ability to operate the business and meet obligations as they come due in the next 12 months.  The Company projects that operating cash flows will exceed planned capital expenditures in the next 12 months and that funds will be available to return capital to stockholders in the form of dividends, share repurchases or both.  There can be no assurance, however, that cash and cash flow from operations will be sufficient to satisfy its working capital and capital requirements for the next 12 months or beyond.

 

It is possible that changes in the Company’s operating results, unavailable loan capacity from the existing credit facility, acceleration of the Company’s capital expenditure plans, potential acquisitions or other events may cause the Company to seek additional financing.  Additional financing may be raised through public or private equity and/or debt financing or from other sources.

 

Off-balance Sheet Arrangements
 

As of January 28, 2008, the Company did not have any off-balance sheet arrangements as defined in Item 303(a) (4) (ii) of Regulation S-K.

 

Commitments and Contractual Obligations

 

The Company’s contractual obligations and commitments principally include obligations associated with our outstanding indebtedness and future minimum operating and capital lease obligations as set forth in the following table:

 

18



 

Contractual Obligations:

 

Total

 

Less than
one year

 

One to
three years

 

Three to
five years

 

Greater than
five years

 

 

 

(Dollars in thousands)

 

Long-term debt (1)(2)

 

$

7,995

 

$

1,038

 

$

3,412

 

$

2,699

 

$

846

 

Operating leases (3)

 

11,079

 

2,691

 

3,197

 

2,224

 

2,967

 

Capital leases (3)

 

110

 

55

 

55

 

 

 

Purchase commitments

 

 

 

 

 

 

Total contractual cash obligations

 

$

19,184

 

$

3,784

 

$

6,664

 

$

4,923

 

$

3813

 

 


(1) See Note 5 to the consolidated financial statements for additional information.

(2) Long-term debt includes note payable to officer.

(3) See Note 6 to the consolidated financial statements for additional information.

 

Impact of Inflation

 

Management recognizes that inflation has an impact on food, construction, labor and benefit costs, all of which can significantly affect the Company’s operations. Historically, the Company has been able to pass on certain associated costs due to these inflationary factors along to its customers because those factors have impacted nearly all restaurant companies.

 

Critical Accounting Policies and Judgments
 

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The Company’s condensed consolidated financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1—Summary of Significant Accounting Policies to the audited consolidated financial statements for the year ended January 28, 2008, included in the Company’s Annual Report filed on Form 10-K. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect the Company’s reported results and financial position for the current period or future periods. Changes in the underlying factors, assumptions or estimates in any of these areas could have a material impact on the Company’s future financial condition and results of operations. The Company considers the following policies to be the most critical in understanding the judgments that are involved in preparing its consolidated financial statements.

 

Receivables

 

Receivables are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts.  Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances.  A receivable is written off when it is determined that all collection efforts have been exhausted.  The Company did not have any reserves for the fiscal year ending January 28, 2008 and January 29, 2007.

 

Notes Receivable

 

Notes receivable are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts.  Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances.  A note receivable is written off when it is determined that all collection efforts have been exhausted.  The Company did not have any reserves for the fiscal year ending January 28, 2008 and January 29, 2007.

 

Income Taxes

 

Periodically, the Company records (or reduces) the valuation allowance against deferred tax assets to the amount that is more likely than not to be realized based upon recent past financial performance, tax reporting positions, and expectations of future taxable income.  The Company expects to continue to record a valuation allowance on certain future tax benefits as required under SFAS 109. 

 

19



 

The assets are evaluated each period under the requirements of SFAS 109. Currently, the Company does not have a valuation allowance against deferred tax assets since the Company expects to utilize all deferred tax assets.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires the recognition, in the financial statements, of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The Company does not have any tax positions that require recognition under Fin 48 as of April 14, 2008.

 

Property, Buildings and Equipment

 

Property and equipment and real property under capitalized leases are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives:

 

 

 

Years

Buildings

 

40

Building and leasehold improvements

 

15 – 20

Furniture, fixtures and equipment

 

5 – 8

 

Building and leasehold improvements are amortized over the lesser of the life of the lease or estimated economic life of the assets. The life of the lease includes renewal options determined by management at lease inception. If a previously scheduled lease option is not exercised, any remaining unamortized leasehold improvements may be required to be recognized immediately which could result in a significant charge adversely affecting the operating results of that period.

 

Repairs and maintenance are charged to operations as incurred. Remodeling costs are generally capitalized.

 

The Company’s accounting policies regarding buildings and equipment include certain management judgments regarding the estimated useful lives of such assets, the residual values to which the assets are depreciated and the determination as to what constitutes increasing the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used. As discussed further below, these judgments may also impact the Company’s need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized.

 

Impairment of Goodwill

 

Goodwill and other intangible assets primarily represent the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions. As of January 29, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). In accordance with SFAS 142, the Company has ceased amortizing goodwill recorded in past business combinations effective as of January 29, 2002. As a result, there is no charge for goodwill amortization expense contained in the Company’s statements of operations for the year ended January 29, 2007.  The Company recorded impairment expense of $1,401,000 for goodwill in fiscal year ended January 28, 2008.

 

SFAS 142 requires that goodwill be tested for impairment by comparing the fair value of each reporting unit that included goodwill to the carrying amount of the reporting unit.  The Company performed the transitional impairment test and determined that the carrying amount of relevant reporting units was in excess of the fair value of those units.  This resulted in a transitional impairment loss of $849,000 which was reported as a cumulative effect of a change in accounting principle, net of a tax benefit of $289,000 in the first quarter of fiscal 2003.  Subsequent to the adoption of SFAS 142, the Company evaluates goodwill for impairment annually or when a triggering event occurs that indicates a potential impairment may have occurred in accordance with SFAS 142.  Future impairments of goodwill, if any, will adversely affect the results of operations in the periods recognized.

 

Impairment of Long-Lived Assets

 

The Company determines that an impairment write-down is necessary for locations whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of January 29, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). In accordance with SFAS 144, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the

 

20



 

amount by which the carrying amount of the assets exceed the fair value of the assets.  Any impairment which would adversely affect operating results in the affected period.

 

Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted net cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the Company assesses the ongoing expected net cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge and could adversely affect operating results in any period.

 

Insurance Programs
 

Historically, the Company was self-insured for casualty claims, retaining commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Effective January 1, 2008 the company purchased commercial insurance for casualty claims in excess of $100,000 per claim.  Accruals for self-insured losses include estimates based on historical information and expected future developments. Differences in estimates and assumptions could result in actual liabilities that are materially different from the calculated accruals.

 

Recently Adopted Accounting Pronouncements

 

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140. SFAS 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS 155 also clarifies and amends certain other provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities , and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement 125. Our adoption of SFAS 155 at the beginning of fiscal 2008 had no impact on our consolidated financial position or results of operations.

 

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140. SFAS 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. Our adoption of SFAS 156 at the beginning of fiscal 2008 had no impact on our consolidated financial position or results of operations.

 

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 , which clarifies the accounting for uncertainty in income taxes recognized in financial statements. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires the recognition, in the financial statements, of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. We adopted FIN 48 at the beginning of fiscal 2008 and it has had no impact on our consolidated financial position or results of operation.

 

In June 2006, the FASB ratified EITF consensus 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). This EITF addresses the presentation of taxes in the income statement. Gross or net presentation may be elected for each different type of tax, but similar taxes should be presented consistently. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. Our accounting policy is to present the taxes within the scope of EITF 06-3 on a net basis. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, which for us is the first quarter of fiscal 2008. EITF 06-3 has not had an impact on our consolidated financial position or results of operations in fiscal 2008.

 

In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS 158 requires the balance sheet recognition of the funded status of defined benefit pension and other postretirement plans, along with a corresponding after-tax adjustment to stockholders’ equity. Our adoption of SFAS 158 at the end of fiscal 2007 did not have a material impact on our consolidated financial position or results of operations.

 

21



 

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement for the purpose of the materiality assessment. Our adoption of SAB 108 at the end of fiscal 2007 did not have a material impact on our consolidated financial position or results of operations.

 

New Accounting Pronouncements Not Yet Adopted

 

In December 2007, the FASB issued FAS 141 (revised 2007), Business Combinations . This standard requires the new acquiring entity to recognize all assets acquired and liabilities assumed in the transactions; establishes an acquisition-date fair value for said assets and liabilities; and fully discloses to investors the financial effect the acquisition will have. FAS 141 (R) is effective for fiscal years beginning after December 15, 2008, which for us is fiscal 2010. We are currently evaluating the impact of FAS 141 (R) on our consolidated financial position and results of operations.

 

In December 2007, the FASB issued FAS 160, Noncontrolling Interests in Consolidated Financial Statements, and amendment of ARB No. 51 (FAS 160) . This standard requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements, and requires that transactions between entities and noncontrolling interests be treated as equity. FAS 160 is effective for fiscal years beginning after December 15, 2008, which for us is fiscal 2010. We are currently evaluating the impact of FAS 160 on our consolidated financial position and results of operations.

 

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurement. SFAS 157 also creates consistency and comparability in fair value measurements among the many accounting pronouncements that require fair value measurements but does not require any new fair value measurements. SFAS 157 is effective for fiscal years (including interim periods) beginning after November 15, 2007, which for us is the first quarter of fiscal 2009. We are currently evaluating the impact of SFAS 157 on our consolidated financial position and results of operations.

 

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 . This standard amends SFAS 115, Accounting for Certain Investment in Debt and Equity Securities , with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securities electing the fair value option. This standard allows companies to elect fair value accounting for many financial instruments and other items that currently are not required to be accounted as such, allows different applications for electing the option for a single item or groups of items, and requires disclosures to facilitate comparisons of similar assets and liabilities that are accounted for differently in relation to the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which for us is fiscal 2009. We are currently evaluating the impact of SFAS 159 on our consolidated financial position and results of operations.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk

 

The Company’s principal exposure to financial market risks relates to interest rate changes on the Revolving Line of Credit, of which $1,349,000 and $0 was outstanding as of January 28, 2008 and April 14, 2008, respectively.  The current Revolving Line of Credit interest rate is LIBOR plus two percent or approximately 5.3% on January 28, 2008. A hypothetical increase of 100 basis points in short-term interest rates would result in a reduction of pre-tax earnings, the amount of which would depend on the amount outstanding on the line of credit. All of our business is transacted in U.S. dollars. Accordingly, foreign exchange rate fluctuations have never had a significant impact on the Company and are not expected to in the foreseeable future.

 

Commodity Price Risk

 

The Company purchases a number of food items and utilizes utilities, most of which are influenced by the associated commodity prices. Although many of the products and utilities purchased are subject to changes in the associated commodity prices, certain purchasing contract arrangements containing risk management techniques designed to minimize price volatility in the short-term are

 

22



 

available to the Company. Typically the Company uses these types of purchasing techniques to minimize price volatility.  The Company does not utilize financial instruments to hedge commodity price. The Company believes it will be able to address significant commodity cost increases by adjusting its menu pricing, menu mix or changing our product delivery strategy. However, rapid increases in commodity prices would likely result in lower operating margins for our restaurant concepts, particularly in the short-term.

 

Item 8. Financial Statements and Supplementary Data             

 

See the Index to Consolidated Financial Statements included at “Item 15. Exhibits and Financial Statement Schedules”

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A (T). Controls and Procedures

 

Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements and Notes to the consolidated financial statements. The financial statements were prepared in accordance with the accounting principles generally accepted in the U.S. and include certain amounts based on management’s judgment and best estimates. Other financial information presented is consistent with the financial statements.

 

Management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed under the supervision of the Company’s principal executive and financial officers in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

 

(i)       Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company;

 

(ii)      Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

(iii)     Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our principal executive officer and principal financial officer assessed the effectiveness of the Company’s internal control over financial reporting as of January 28, 2008. In making this assessment, management used the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on this evaluation, our principal executive officer and principal financial officers have concluded that the internal controls over financial reporting were not effective as of  January 28, 2008 and that certain significant deficiencies and material weaknesses existed for the period covered by this Annual Report on Form 10-K. The one significant deficiency and two material weaknesses identified included:

 

·       Inadequate segregation of duties (significant deficiency);

·       Untimely account reconciliations (material weakness); and an

·       Inadequate documentation of cash disbursements (material weakness). 

 

A significant deficiency is a deficiency, or combination of deficiencies in internal control over financial reporting, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected by the entity’s internal control. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

 

23



 

This is a small public company. Effective internal control contemplates segregation of duties so that no one individual handles a transaction from inception to completion. Currently, there are not enough accounting personnel to permit an adequate segregation of duties in all respects and thus a significant deficiency in our internal control exists. Management has commenced an evaluation of staffing levels and responsibilities so as to comply with the segregation of duties requirements.

 

With respect to account reconciliation and cash disbursements, management has instituted additional internal control procedures to insure that: a) account reconciliations are completed earlier in the accounting cycle; and b) disbursements are not made prior to submission and approval of adequate supporting documentation.

 

The annual report on internal control over financial reporting does not include an attestation report of our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in our annual report on Form 10-K for the fiscal year ended January 28, 2008.

 

24



 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Director, Executive Officers and Corporate Governance

 

Certain information concerning the current directors and executive officers of the Company is contained in Item 1 of Part I of this Annual Report on Form 10-K.

 

The remaining information is hereby incorporated by reference to the Company’s definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2008.

 

Item 11. Executive Compensation

 

The information pertaining to executive compensation is hereby incorporated by reference to the Company’s definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2008.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information pertaining to security ownership of certain beneficial owners and management and equity compensation plan information is hereby incorporated by reference to the Company’s definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2008.

 

Item 13. Certain Relationships and Related Transaction, and Director Independence

 

The information pertaining to certain relationships and related transactions is hereby incorporated by reference to the Company’s definitive Proxy Statement to for our 2008 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2008.

 

Item 14. Principal Accountant Fees and Services

 

The information with respect to principal accountant fees and services is hereby incorporated by reference to the Company’s definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, to be filed with the Commission within 120 days of January 28, 2008.

 

25



 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

(a)(1) Index to Consolidated Financial Statements:

 

 

 

Page Number

 

Report of Management Responsibilities

 

F-1

 

Report of Independent Registered Public Accounting Firm

 

F-2

 

Consolidated Balance Sheets — as of January 28, 2008 and January 29, 2007

 

F-3

 

 

 

 

 

Consolidated Statements of Operations — for the 52-weeks ended January 28, 2008 and January 29, 2007

 

F-5

 

Consolidated Statements of Stockholders’ Equity — for the 52-weeks ended January 28, 2008 and January 29, 2007

 

F-6

 

 

 

 

 

Consolidated Statements of Cash Flows — for the 52-weeks ended January 28, 2008 and January 29, 2007

 

F-7

 

Notes to Consolidated Financial Statements

 

F-8

 

 

(a)(2)    Index to Financial Statement Schedules:

 

All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto.

 

(a)(3)    Exhibits:

 

An “Exhibit Index” has been filed as a part of this Form 10-K beginning on Page E-1 hereof and is incorporated herein by reference.

 

26



 

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, thereunto duly authorized.

 

 

 

STAR BUFFET, INC.

 

 

(Registrant)

 

 

 

April 24, 2008

 

By:

/s/

ROBERT E. WHEATON

 

 

 

 

Robert E. Wheaton

 

 

 

 

Chief Executive Officer and President

 

 

 

 

(principal executive officer)

 

 

 

 

 

April 24, 2008

 

By:

/s/

RONALD E. DOWDY

 

 

 

 

Ronald E. Dowdy

 

 

 

 

Group Controller, Treasurer and Secretary

 

 

 

 

(principal financial officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

 

 

 

 

 

 

/s/

ROBERT E. WHEATON

 

Chief Executive Officer,

 

April 24, 2008

 

 

Robert E. Wheaton

 

President and Director

 

 

 

 

 

 

 

 

 

 

/s/

RONALD E. DOWDY

 

Group Controller, Treasurer

 

April 24, 2008

 

 

Ronald E. Dowdy

 

and Secretary

 

 

 

 

 

 

 

 

 

 

/s/

THOMAS G. SCHADT

 

Director

 

April 14, 2008

 

 

Thomas G. Schadt

 

 

 

 

 

 

 

 

 

 

 

 

/s/

PHILLIP “BUDDY” JOHNSON

 

Director

 

April 14, 2008

 

 

Phillip “Buddy” Johnson

 

 

 

 

 

 

 

 

 

 

 

 

/s/

CRAIG B. WHEATON

 

Director

 

April 14, 2008

 

 

Craig B. Wheaton

 

 

 

 

 

 

 

 

 

 

 

 

/s/

B. THOMAS M. SMITH, JR.

 

Director

 

April 14, 2008

 

 

B. Thomas M. Smith, Jr.

 

 

 

 

 

 

 

 

 

 

 

 

/s/

TODD S. BROWN

 

Director

 

April 14, 2008

 

 

Todd S. Brown

 

 

 

 

 

27



 

REPORT OF MANAGEMENT RESPONSIBILITIES

 

The management of Star Buffet, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, using management’s best estimates and judgments where appropriate. The financial information throughout this report is consistent with our consolidated financial statements.

 

Management has established a system of internal controls that provides reasonable assurance that assets are adequately safeguarded, and transactions are recorded accurately, in all material respects, in accordance with management’s authorization. We maintain a strong audit program that independently evaluates the adequacy and effectiveness of internal controls. Our internal controls provide for appropriate separation of duties and responsibilities, and there are documented policies regarding utilization of Company assets and proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

The Audit Committee of the Board of Directors meets regularly to determine that management and independent auditors are properly discharging their duties regarding internal control and financial reporting. The independent auditors and employees have full and free access to the Audit Committee at any time.

 

Mayer Hoffman McCann P.C. , independent registered public accountants, are retained to audit the Company’s consolidated financial statements.

 

/s/ Robert E. Wheaton

 

Robert E. Wheaton, Chairman of the Board and Chief Executive Officer

 

F-1



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders

 

STAR BUFFET, INC. AND SUBSIDIARIES

 

We have audited the accompanying consolidated balance sheets of Star Buffet, Inc. and Subsidiaries (a Delaware Corporation) as of January 28, 2008 and January 29, 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three fiscal years in the period ended January 28, 2008. These consolidated financial statements are the responsibility of the Company’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 auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  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 Star Buffet, Inc. and Subsidiaries as of January 28, 2008 and January 29, 2007, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 2008, in conformity with U.S. generally accepted accounting principles.

 

 

/s/ Mayer Hoffman McCann P.C.

 

MAYER HOFFMAN MCCANN P.C.

 

Phoenix, Arizona

April 24, 2008

 

F-2



 

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

January 28,
2008

 

January 29,
2007

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

736,000

 

$

418,000

 

Current portion of notes receivable

 

 

58,000

 

Receivables, net

 

431,000

 

435,000

 

Income tax receivables

 

665,000

 

 

Inventories

 

412,000

 

548,000

 

Deferred income taxes

 

319,000

 

310,000

 

Prepaid expenses

 

166,000

 

320,000

 

Total current assets

 

2,729,000

 

2,089,000

 

 

 

 

 

 

 

Property, buildings and equipment:

 

 

 

 

 

Property, buildings and equipment, net

 

20,816,000

 

17,479,000

 

Property and equipment under capitalized leases, net

 

71,000

 

751,000

 

Property and equipment leased to third parties, net

 

3,126,000

 

4,291,000

 

Property, buildings and equipment held for future use

 

2,547,000

 

1,892,000

 

Property held for sale

 

931,000

 

931,000

 

Total property, buildings and equipment

 

27,491,000

 

25,344,000

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Notes receivable, net of current portion

 

704,000

 

1,873,000

 

Deposits and other

 

623,000

 

245,000

 

Total other assets

 

1,327,000

 

2,118,000

 

 

 

 

 

 

 

Deferred income taxes

 

2,765,000

 

2,097,000

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

Goodwill

 

551,000

 

1,677,000

 

Other intangible assets, net

 

839,000

 

843,000

 

Total intangible assets

 

1,390,000

 

2,520,000

 

 

 

 

 

 

 

Total assets

 

$

35,702,000

 

$

34,168,000

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F- 3



 

 

 

January 28,
2008

 

January 29,
2007

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable-trade

 

$

4,959,000

 

$

2,657,000

 

Payroll and related taxes

 

1,401,000

 

1,281,000

 

Sales and property taxes

 

1,297,000

 

901,000

 

Rent, licenses and other

 

808,000

 

608,000

 

Income taxes payable

 

176,000

 

628,000

 

Revolving line of credit

 

1,349,000

 

336,000

 

Current maturities of obligations under long-term debt

 

1,038,000

 

434,000

 

Current maturities of obligations under capital leases

 

49,000

 

157,000

 

Total current liabilities

 

11,077,000

 

7,002,000

 

 

 

 

 

 

 

Deferred rent payable

 

1,846,000

 

1,294,000

 

Other long-term liability

 

493,000

 

 

Note payable to officer

 

1,400,000

 

 

Capitalized lease obligations, net of current maturities

 

54,000

 

1,239,000

 

Long-term debt, net of current maturities

 

5,557,000

 

5,455,000

 

Total liabilities

 

20,427,000

 

14,990,000

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.001 par value; authorized 1,500,000 shares; none issued or outstanding

 

 

 

Common stock, $.001 par value; authorized 8,000,000 shares; issued and outstanding 3,170,675 and 3,170,675 shares

 

3,000

 

3,000

 

Additional paid-in capital

 

17,491,000

 

17,491,000

 

(Accumulated deficit) Retained earnings

 

(2,219,000

)

1,684,000

 

Total stockholders’ equity

 

15,275,000

 

19,178,000

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

35,702,000

 

$

34,168,000

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-4



 

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Fifty-Two

 

Fifty-Two

 

Fifty-Two

 

 

 

Weeks

 

Weeks

 

Weeks

 

 

 

Ended

 

Ended

 

Ended

 

 

 

January 28, 2008

 

January 29, 2007

 

January 30, 2006

 

 

 

 

 

 

 

 

 

Total revenues

 

$

68,732,000

 

$

58,648,000

 

$

56,305,000

 

Costs and expenses

 

 

 

 

 

 

 

Food costs

 

25,356,000

 

20,789,000

 

19,429,000

 

Labor costs

 

23,913,000

 

19,674,000

 

18,260,000

 

Occupancy and other expenses

 

15,187,000

 

12,772,000

 

11,763,000

 

General and administrative expenses

 

3,549,000

 

2,426,000

 

2,179,000

 

Depreciation and amortization

 

2,098,000

 

2,069,000

 

2,120,000

 

Impairment of long-lived assets

 

1,401,000

 

 

369,000

 

Total costs and expenses

 

71,504,000

 

57,730,000

 

54,120,000

 

(Loss) income from operations

 

(2,772,000

)

918,000

 

2,185,000

 

 

 

 

 

 

 

 

 

Interest expense

 

(858,000

)

(616,000

)

(648,000

)

Interest income

 

24,000

 

93,000

 

361,000

 

Gain on sale of assets

 

31,000

 

230,000

 

 

Other income

 

259,000

 

329,000

 

319,000

 

(Loss) income before income taxes (benefit)

 

(3,316,000

)

954,000

 

2,217,000

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

(1,315,000

)

238,000

 

420,000

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,001,000

)

$

716,000

 

$

1,797,000

 

 

 

 

 

 

 

 

 

Net (loss) income per common share— basic

 

$

(0.63

)

$

0.23

 

$

0.60

 

Net (loss) income per common share— diluted

 

$

(0.63

)

$

0.23

 

$

0.56

 

Weighted average shares outstanding — basic

 

3,171,000

 

3,147,000

 

2,990,000

 

Weighted average shares outstanding — diluted

 

3,171,000

 

3,164,000

 

3,209,000

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-5



 

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Officer’s

 

Earnings

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Notes

 

(Accumulated)

 

Treasury

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Receivable

 

Deficit)

 

Stock

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 31, 2005

 

2,950,000

 

3,000

 

16,351,000

 

(698,000

)

4,119,000

 

 

19,775,000

 

Exercised stock options

 

53,000

 

 

267,000

 

 

 

 

267,000

 

Dividend

 

 

 

 

 

(2,253,000

)

 

(2,253,000

)

Payment by officer

 

 

 

 

698,000

 

 

 

698,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

1,797,000

 

 

1,797,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 30, 2006

 

3,003,000

 

3,000

 

16,618,000

 

 

3,663,000

 

 

20,284,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised stock options

 

168,000

 

 

873,000

 

 

 

 

873,000

 

Dividend

 

 

 

 

 

(2,695,000

)

 

(2,695,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

716,000

 

 

716,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 29, 2007

 

3,171,000

 

$

3,000

 

$

17,491,000

 

$

 

$

 1,684,000

 

$

 

$

19,178,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend

 

 

 

 

 

(1,902,000

)

 

(1,902,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

(2,001,000

)

 

(1,302,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 28, 2008

 

3,171,000

 

$

3,000

 

$

17,491,000

 

$

 

$

(2,219,000

)

$

 

$

15,275,000

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-6



 

STAR BUFFET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Fifty-Two
Weeks Ended
January 28,
2008

 

Fifty-Two
Weeks Ended
January 29,
2007

 

Fifty-Two
Weeks Ended
January 30,
2006

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

 

$

(2,001,000

)

$

716,000

 

$

1,797,000

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation

 

1,980,000

 

1,956,000

 

2,003,000

 

Amortization of franchise and licenses

 

95,000

 

91,000

 

94,000

 

Amortization of loan costs

 

23,000

 

22,000

 

23,000

 

Gain on sale of assets

 

(31,000

)

(230,000

)

 

Impairment of long-lived assets

 

1,401,000

 

 

369,000

 

Deferred income taxes, net

 

(677,000

)

41,000

 

(439,000

)

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

(51,000

)

(138,000

)

123,000

 

Inventories

 

136,000

 

(119,000

)

36,000

 

Prepaid expenses

 

154,000

 

(188,000

)

(58,000

)

Deposits and other

 

(378,000

)

(112,000

)

91 ,000

 

Deferred rent payable

 

(38,000

)

(23,000

)

(3,000

)

Accounts payable-trade

 

2,302,000

 

479,000

 

441,000

 

Income taxes receivable

 

(665,000

)

 

 

Income taxes payable

 

(452,000

)

(263,000

)

170,000

 

Other accrued liabilities

 

1,210,000

 

451,000

 

(781,000

)

Total adjustments

 

5,009,000

 

1,967,000

 

2,069,000

 

Net cash provided by operating activities

 

3,008,000

 

2,683,000

 

3,866,000

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments on notes receivable

 

20,000

 

1,323,000

 

82,000

 

Acquisition of property, buildings and equipment

 

(4,392,000

)

(2,505,000

)

(493,000

)

Interest income

 

(1,000

)

(2,000

)

(1,000

)

Issuance of note receivable

 

 

(100,000

)

(1,640,000

)

Proceeds from the sale of assets

 

746,000

 

171,000

 

 

Purchase of license and trademarks

 

(35,000

)

(230,000

)

(25,000

)

Payments by officer

 

 

 

698,000

 

Net cash used in investing activities

 

(3,662,000

)

(1,343,000

)

(1,379,000

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt

 

1,988,000

 

1,159,000

 

 

Payments on long-term debt

 

(1,282,000

)

(929,000

)

(577,000

)

Proceeds from stock options exercised

 

 

873,000

 

267,000

 

Loan from officer

 

1,400,000

 

 

698,000

 

Proceeds from line of credit, net

 

1,013,000

 

336,000

 

 

Capitalized loan costs

 

(87,000

)

(14,000

)

(10,000

)

Principal payments on capital leases

 

(158,000

)

(143,000

)

(115,000

)

Dividends paid

 

(1,902,000

)

(2,695,000

)

(2,253,000

)

Net cash provided by (used) in financing activities

 

972,000

 

(1,413,000

)

(2,688,000

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

318,000

 

(73,000

)

(201,000

)

Cash and cash equivalents at beginning of period

 

418,000

 

491,000

 

692,000

 

Cash and cash equivalents at end of period

 

$

736,000

 

$

418,000

 

$

491,000

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

F-7



 

STAR BUFFET, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of certain significant accounting policies not disclosed elsewhere in the footnotes to the consolidated financial statements is set forth below.

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts for Star Buffet, Inc., together with its direct and indirect wholly owned subsidiaries Summit Family Restaurants Inc. (“Summit”), HTB Restaurants, Inc. (“HTB”), Northstar Buffet, Inc. (“NSBI”) and Star Buffet Management, Inc. (“SBMI”) (collectively the “Company”). The accompanying consolidated financial statements include the results of operations and assets and liabilities of the Company’s operations. Certain estimates, assumptions and allocations were made in preparing such financial statements. Significant intercompany transactions and balances have been eliminated in consolidation.

 

Organization and Nature of Operations

 

The Company was formed by CKE Restaurants, Inc. (“CKE”) in July 1997 in connection with the reorganization of CKE’s buffet-style restaurant business. Pursuant to a contribution agreement among the Company and CKE and certain respective subsidiaries, CKE transferred to Summit the net assets of its two Casa Bonita Mexican theme restaurants, and Summit transferred substantially all of its assets and liabilities (primarily those relating to the JB’s Restaurant system and Galaxy Diner restaurants, but excluding 16 HomeTown Buffet restaurants operated by HTB) to a newly formed subsidiary of CKE. All of the parties to the foregoing transactions (the “Formation Transactions”) were, upon completion thereof, direct or indirect wholly owned subsidiaries of CKE, and such Formation Transactions were accounted for as reorganization among companies under common control.

 

The operating results for the 52-week period ended January 28, 2008 included 52 weeks of operations for the Company’s 12 franchised HomeTown Buffets, seven JB’s restaurants, five Whistle Junction restaurants, three 4B’S restaurants, three Holiday House restaurants, three Western Sizzlin restaurants, two JJ North’s Grand Buffets, two BuddyFreddys restaurants, two BuddyFreddys Country Buffets, two K-BOB’S Steakhouses, one Pecos Diamond Steakhouse, one Bar-H Steakhouse and one Casa Bonita Mexican theme restaurant. The Company also had five restaurants currently closed for remodeling and repositioning, three restaurants leased to third-party operators and the net assets of another closed restaurant reported as property held for sale. The Company’s restaurants are located in Arkansas, Arizona, Colorado, Florida, Georgia, Idaho, Mississippi, Montana, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming.

 

The operating results for the 52-week period ended January 29, 2007 included 52 weeks of operations for the Company’s 14 franchised HomeTown Buffet restaurants, six JB’s restaurants, three K-BOB’S Steakhouses, two BuddyFreddys restaurants, two BuddyFreddys Country Buffets, two Holiday House restaurants, one JJ North’s Grand Buffet restaurant, and one Casa Bonita Mexican theme restaurant.  The Company also opened the following during the year, one K-BOB’S Steakhouse for 48 weeks, one Pecos Diamond Steakhouse for 29 weeks, one Western Sizzlin restaurant for 16 weeks and five Whistle Junction restaurants for 9 weeks.  In addition, operating results include 19 weeks for one Buddy Freddy’s Country Buffet closed during the fiscal year 2007 .  Results also include 33 weeks for one JJ North’s Country Buffet restaurant closed during the fiscal year 2007.  Eight restaurants were closed at the end of the 2007 fiscal year for repositioning. Four of the eight closed restaurants have been leased to third-property operators, three restaurants remain closed for remodeling and repositioning and another closed restaurant was reported as property held for sale.

 

Fiscal Year

 

The Company utilizes a 52/53 week fiscal year which ends on the last Monday in January. The first quarter of each year contains 16 weeks while the other three quarters each contain 12 weeks except in the 53 week fiscal year, when the fourth quarter has 13 weeks.

 

F-8



 

Cash Equivalents

 

Highly liquid investments with original maturities of three months or less when purchased are considered cash equivalents. The carrying amounts reported in the consolidated balance sheets for these instruments approximate their fair value.

 

Revenue Recognition

 

The Company’s principal source of revenue is from customer dining transactions.  Revenue is recognized at the time the meal is purchased, primarily by cash or credit card.

 

Receivables
 

Receivables are stated at an amount management expects to collect and provides for an adequate reserve for probable uncollectible amounts.  Amounts deemed to be uncollectible are written off through a charge to earnings and a credit to a valuation allowance based on management’s assessment of the current status of individual balances.  A receivable is written off when it is determined that all collection efforts have been exhausted.  The Company did not have any valuation allowance for the years ending January 28, 2008 and January 29, 2007.

 

Consideration Received from Vendors
 

The Company records vendor rebates on products purchased as a reduction of cost of sales. The allowances are recognized as earned in accordance with the written agreements with vendors.

 

Inventories

 

Inventories consist of food, beverage, gift shop items and restaurant supplies and are valued at the lower of cost or market, determined by the first-in, first-out method.

 

Property, Buildings and Equipment

 

Property and equipment and real property under capitalized leases are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives:

 

 

 

Years

 

Buildings

 

40

 

Building and leasehold improvements

 

15 – 20

 

Furniture, fixtures and equipment

 

5 – 8

 

 

Building and leasehold improvements are amortized over the lesser of the life of the lease or estimated economic life of the assets. The life of the lease includes renewal options determined by management at lease inception as reasonably likely to be exercised. If a previously scheduled lease option is not exercised, any remaining unamortized leasehold improvements may be required to be recognized immediately which could result in a significant charge adversely affecting the operating results of that period.

 

Property and equipment placed on the market for sale is not depreciated and is reclassed on the balance sheet as property held for sale. Property and equipment in non-operating units held for remodeling or repositioning is not depreciated.

 

Repairs and maintenance are charged to operations as incurred. Remodeling costs are generally capitalized.

 

Goodwill
 

Goodwill and other intangible assets primarily represent the excess of the purchase price paid over the fair value of the net assets acquired in connection with business acquisitions.

 

The Company reviews goodwill for possible impairment on an annual basis or when triggering events occur in accordance with

 

F-9



 

SFAS 142. Goodwill is tested for impairment at the reporting unit level. Because SFAS 142 defines a reporting unit as an operating segment or one level below an operating segment, the Company reviews goodwill for possible impairment at the individual restaurant level. Six reporting units (restaurants) had recorded goodwill associated with them for fiscal 2008 and fiscal 2007.

 

The Company utilizes a two-part impairment test.  First, the fair value of the reporting unit is compared to the carrying value (including goodwill).  If the carrying value is greater than the fair value, the second step is performed.  In the second step, the implied fair value of the reporting unit goodwill is compared to the carrying amount of goodwill.  If the carrying value is greater, a loss is recognized. The goodwill impairment test considers the impact of current conditions and the economic outlook for the restaurant industry, the general overall economic outlook including market data, governmental and environmental factors, in establishing the assumptions used to compute the fair value of each reporting unit.  We also take into account the historical, current and future (based on probability) operating results of the six reporting units and any other facts and data pertinent to valuing the reporting units in our impairment test. In fiscal 2007 the Company determined that there was no goodwill impairment.  In fiscal 2008, the impairment expense for goodwill was $1,126,000.

 

The Company has an independent evaluation of goodwill conducted every three years.  The most recent independent valuation was conducted as of February 1, 2008.

 

Other Intangible Assets

 

Other intangible assets are comprised of franchise fees, loan acquisition costs, and the JB’s license agreement. Franchise fees are amortized using the straight-line method over the terms of the franchise agreements, which typically range from 8 to 20 years.  Loan costs are amortized using the straight-line method over the lesser of the life of the loan or five years (which approximates the effective interest method). The JB’s license agreement is being amortized using the straight-line method over 11 years.  The Company has the trademarks and intangible assets of Whistle Junction, Holiday House and 4B’s for $230,000, $25,000 and $25,000, respectively.  These assets have an indefinite asset life and are subject to possible impairment on an annual basis or when triggering events occur in accordance with SFAS 142.

 

 

 

Gross

 

Accumulated

 

 

 

 

 

Carrying Amt

 

Amortization

 

Net

 

Fiscal 2008

 

 

 

 

 

 

 

 

 

 

Franchise and license fees

 

$

1,363,000

 

$

(631,000

)

$

732,000

 

Loan acquisition costs

 

200,000

 

(93,000

)

107,000

 

Total

 

$

1,563,000

 

$

(716,000

)

$

839,000

 

Fiscal 2007

 

 

 

 

 

 

 

Franchise and license fees

 

$

1,378,000

 

$

(578,000

)

$

800,000

 

Loan acquisition costs

 

113,000

 

(70,000

)

43,000

 

Total

 

$

1,491,000

 

$

(648,000

)

$

843,000

 

 

The table below shows expected amortization for purchased finite intangibles as of January 28, 2008 for the next five years:

 

Fiscal Year

 

 

 

2009

 

130,000

 

2010

 

122,000

 

2011

 

117,000

 

2012

 

114,000

 

2013

 

64,000

 

Thereafter

 

12,000

 

Total

 

$

559,000

 

 

The Company acquired the JB’s license agreement in November 2002 for $773,000.  Amortization expense for the JB’s license agreement was $78,000 in fiscal 2008 and 2007.  Amortization of franchise and license fees were $95,000 and $91,000 for the fiscal years ending January 28, 2008 and January 29, 2007, respectively.  Amortization of loan costs were $23,000 and $22,000 for the fiscal years ending January 28, 2008 and January 29, 2007, respectively.

 

F-10



 

Impairment of Long-Lived Assets

 

The Company determines that an impairment write down is necessary for long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.   The impairment expense in fiscal 2008 was for goodwill, leasehold improvement, equipment and franchise fees of $1,126,000, $238,000, $29,000 and $8,000, respectively.  Impairment expense charged to operations was $1,401,000 and $0 for the years ended January 28, 2008 and January 29, 2007, respectively.

 

Fair Value of Financial Instruments
 

The carrying amounts of the Company’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximates fair value because of the short maturity of these instruments.

 

The carrying amounts of the Company’s notes receivable, long-term debt and capital lease obligations approximate fair value and are based on discounted cash flows using market rates at the balance sheet date. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument.

 

Pre-Opening Costs

 

Pre-opening costs are expensed when incurred. The Company incurred and charged to operations approximately $0 of pre-opening costs during fiscal 2008 and 2007.

 

Income Taxes

 

The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. An allowance against deferred tax assets is recorded in whole or in part when it is more likely than not that such tax benefits will not be realized.

 

Advertising Expenses

 

Advertising costs are charged to operations as incurred. Amounts charged to operations totaled $916,000 and $670,000, for the years ended January 28, 2008 and January 29, 2007, respectively.

 

Insurance Programs

 

Historically, the Company was self-insured for most casualty claims, with commercial insurance for casualty claims in excess of $2 million per claim and $3 million per year as a risk reduction strategy. Effective January 1, 2008 the Company purchased commercial insurance for casualty claims in excess of $100,000 per claim.  Accruals for self-insured losses include estimates based on historical information and expected future developments.  Differences in estimates and assumptions could result in actual liabilities that are materially different from the calculated accruals.  Valuation reserves for the years ended January 28, 2008 and January 29, 2007, consisted of the following:

 

Insurance and claims reserves

 

Balance at Beginning
of Period

 

Expense Recorded

 

Payments Made

 

Balance at End of
Period

 

Year ended January 28, 2008

 

$

66,500

 

$

2,080

 

$

(14,580

)

$

54,000

 

Year ended January 29, 2007

 

$

50,000

 

$

27,500

 

$

(11,000

)

$

66,500

 

 

F-11



 

Leases

 

The Company has various lease commitments on store locations. Expenses of operating leases with escalating payment terms are recognized on a straight-line basis over the lives that conform to the related term used to depreciate leasehold improvements on the leased property.  Contingent rental payments are triggered by surpassing annual base revenue levels set forth in certain of our lease agreements.  Contingent rental expense is recorded in each month that our revenue exceeds the monthly base revenue levels as set forth in the relevant lease agreement.  In situations where the contingent rent is based on annual sales or cumulative sales to date, contingent rental expense is recorded when it is determined probable that we will exceed the established threshold.

 

Use of Estimates

 

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Earnings (Loss) per Share

 

The Company applies Statement of Financial Accounting Standards No. 128 (SFAS No. 128), which requires the calculation of basic and diluted income (loss) per share.  Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the fiscal year.  Diluted income (loss) per share is computed on the basis of the average number of common shares outstanding plus the dilutive effect of outstanding stock options and warrants using the “treasury stock” method. The following is a reconciliation of the denominators used to calculate diluted earnings (loss) per share on net income (loss) for the respective fiscal years:

 

 

 

Fifty-Two

 

Fifty-Two

 

 

 

Weeks

 

Weeks

 

 

 

Ended

 

Ended

 

 

 

January 28, 2008

 

January 29, 2007

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic

 

3,170,675

 

3,146,974

 

Dilutive effect of stock options

 

 

17,361

 

Anti-dilutive stock options

 

 

 

Weighted average common shares outstanding – diluted

 

3,170,675

 

3,164,335

 

 

Weighted average common shares used in the year ended January 28, 2008 to calculate diluted loss per share exclude stock options to purchase 40,000 shares of common stock as their effect was anti-dilutive.  Weighted average common shares used in the year ended January 29, 2007 to calculate diluted earnings per share exclude stock options to purchase 488,000 shares of common stock due to the market price of the underlying stock being less than the exercise price.

 

Segment Reporting
 

The Company’s reportable segments are based on brand similarities. Business results are based on the Company’s management accounting practices.

 

Comprehensive Income
 

The Company does not have any components of comprehensive income other than net income (loss) and, therefore, comprehensive income equaled net income (loss) for all periods presented.

 

F-12



 

Stock-Based Compensation

 

Periods prior to the adoption of SFAS 123(R)

 

Prior to January 1, 2006, the Company accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employee, and related interpretations. The intrinsic value method of accounting resulted in compensation expense for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were forfeited prior to vesting, any previously recognized expense was reversed as an offset to operating expenses in the period of forfeiture.

 

The following table illustrates the effects on net loss and net loss per share as if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock Based Compensation , as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure to options granted under the Company’s stock-based compensation plans prior to the adoption. For purposes of this pro forma disclosure, the value of the options was estimated using the Black-Scholes-Merton (“BSM”) option-pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards. Disclosure for the year ended December 31, 2006 is not presented because stock-based payments were accounted for under SFAS 123 (R)’s fair value method during this period.

 

 

 

Fifty-Two

 

 

 

Weeks Ended

 

 

 

January 30, 2006

 

 

 

(dollars in thousands except per share amounts)

 

Net income (loss) attributable to common stockholders

 

 

 

As reported

 

$

1,797

 

Employee stock compensation expense included in net income (loss) as reported

 

 

Pro forma compensation expense

 

(61

)

Pro forma net income (loss)

 

$

1,736

 

Per share – basic

 

 

 

As reported

 

$

.60

 

Pro forma compensation expense

 

(.02

)

Pro forma net income (loss)

 

$

.58

 

Per share – diluted

 

 

 

As reported

 

$

.56

 

Pro forma compensation expense

 

(.02

)

Pro forma net income (loss)

 

$

.54

 

 

Adoption of SFAS 123(R)

 

As of January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes-Merton (“BSM”) valuation model, which is consistent with our valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123 .   Such value is recognized as an expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123(R).

 

The adoption of SFAS 123(R) did not result in a cumulative benefit from accounting change, which reflects the net cumulative impact of estimating future forfeitures in the determination of period expense, rather than recording forfeitures when they occur as previously permitted, as we did not have unvested employee stock awards for which compensation expense was recognized prior to adoption of SFAS No. 123(R).

 

New Accounting Pronouncements

 

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140. SFAS 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS 155 also clarifies and amends certain other provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities , and SFAS 140, Accounting for

 

F-13



 

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement 125. Our adoption of SFAS 155 at the beginning of fiscal 2008 had no impact on our consolidated financial position or results of operations.

 

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140. SFAS 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. Our adoption of SFAS 156 at the beginning of fiscal 2008 had no impact on our consolidated financial position or results of operations.

 

In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 , which clarifies the accounting for uncertainty in income taxes recognized in financial statements. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 requires the recognition, in the financial statements, of the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. We adopted FIN 48 at the beginning of fiscal 2008 and it has had no impact on our consolidated financial position or results of operation.

 

In June 2006, the FASB ratified EITF consensus 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). This EITF addresses the presentation of taxes in the income statement. Gross or net presentation may be elected for each different type of tax, but similar taxes should be presented consistently. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer, for example, sales taxes, use taxes, value-added taxes, and some types of excise taxes. Our accounting policy is to present the taxes within the scope of EITF 06-3 on a net basis. EITF 06-3 is effective for interim and annual periods beginning after December 15, 2006, which for us is the first quarter of fiscal 2008. EITF 06-3 has not had an impact on our consolidated financial position or results of operations in fiscal 2008.

 

In September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS 158 requires the balance sheet recognition of the funded status of defined benefit pension and other postretirement plans, along with a corresponding after-tax adjustment to stockholders’ equity. Our adoption of SFAS 158 at the end of fiscal 2007 did not have a material impact on our consolidated financial position or results of operations.

 

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement for the purpose of the materiality assessment. Our adoption of SAB 108 at the end of fiscal 2007 did not have a material impact on our consolidated financial position or results of operations.

 

Reclassifications

 

None.

 

NOTE 2 — ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

 

In December 2007, the FASB issued FAS 141 (revised 2007), Business Combinations . This standard requires the new acquiring entity to recognize all assets acquired and liabilities assumed in the transactions; establishes an acquisition-date fair value for said assets and liabilities; and fully discloses to investors the financial effect the acquisition will have. FAS 141 (R) is effective for fiscal years beginning after December 15, 2008, which for us is fiscal 2010. We are currently evaluating the impact of FAS 141 (R) on our consolidated financial position and results of operations.

 

In December 2007, the FASB issued FAS 160, Noncontrolling Interests in Consolidated Financial Statements, and amendment of ARB No. 51 (FAS 160) . This standard requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements, and requires that transactions between entities and noncontrolling interests be treated as equity. FAS 160 is effective for fiscal years beginning after December 15, 2008, which for us is fiscal 2010. We are currently evaluating the impact of FAS 160 on our consolidated financial position and results of operations.

 

F-14



 

In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurement. SFAS 157 also creates consistency and comparability in fair value measurements among the many accounting pronouncements that require fair value measurements but does not require any new fair value measurements. SFAS 157 is effective for fiscal years (including interim periods) beginning after November 15, 2007, which for us is the first quarter of fiscal 2009. We are currently evaluating the impact of SFAS 157 on our consolidated financial position and results of operations.

 

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115 . This standard amends SFAS 115, Accounting for Certain Investment in Debt and Equity Securities , with respect to accounting for a transfer to the trading category for all entities with available-for-sale and trading securities electing the fair value option. This standard allows companies to elect fair value accounting for many financial instruments and other items that currently are not required to be accounted as such, allows different applications for electing the option for a single item or groups of items, and requires disclosures to facilitate comparisons of similar assets and liabilities that are accounted for differently in relation to the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which for us is fiscal 2009. We are currently evaluating the impact of SFAS 159 on our consolidated financial position and results of operations.

 

NOTE 3 — NOTES RECEIVABLE

 

Notes receivable consist of the following:

 

 

 

January 28, 2008

 

January 29, 2007

 

Notes receivable from North’s Restaurants, Inc.

 

$

490,000

 

$

1,475,000

 

Notes receivable from strategic partners

 

214,000

 

436,000

 

Notes receivable from landlord

 

 

20,000

 

Total notes receivable

 

704,000

 

1,931,000

 

Less current portion

 

 

58,000

 

Notes receivable, net of current portion

 

$

704,000

 

$

1,873,000

 

 

Since inception, the Company’s acquisition strategy has incorporated the utilization of loans to sellers to facilitate certain proposed transactions.  In most cases, these loans are secured and include, as part of terms and conditions, the Company’s right to convert the loan into ownership of the restaurants.  Also, certain of these loans contain favorable interest rates and repayment terms if the loans are not converted to ownership for one or more reasons.  This financing strategy entails significant risk.  Currently, the Company has two loans outstanding and both are in default.  However, because the Company anticipates full recovery of amounts outstanding through either repayment or conversion to ownership, historically no provision for doubtful accounts has been established.  Management is continually evaluating the collectibility on an ongoing basis. While estimates to date have been within our expectations, a change in the financial condition of specific restaurant companies or in overall industry trends may result in future adjustments to Company estimates of recoverability of receivables.

 

On February 1, 2005, the Company announced in a press release that it had entered into a strategic alliance with K-BOB’S USA Inc. and related affiliates (“K-BOB’S”). In accordance with the terms of the strategic alliance, Star Buffet agreed to lend K-BOB’S up to $1.5 million on a long-term basis.  The Company loaned K-BOB’S $1.5 million and the current balance is $214,500.  In exchange, K-BOB’S granted Star Buffet an option to purchase as many as five corporate owned and operated K-BOB’S restaurants located in New Mexico and Texas, as well as rights to develop K-BOB’S in other areas in the United States.  On January 31, 2006, the Company exercised its option under the terms of the strategic alliance and purchased three K-BOB’S restaurants.  In addition, the Company acquired another K-BOB’S location in Texas for cash of $700,000 in February 2006.

 

In conjunction with the acquisition of certain JJ North’s restaurants from North’s Restaurants, Inc. (“North’s”) in 1997, the Company provided a credit facility to North’s and when North’s defaulted the Company sued for enforcement. In 1998, the Company’s suit with North’s resulted in a negotiated settlement in favor of the Company represented by an Amended and Restated

 

F-15



 

Promissory Note (the “Star Buffet Promissory Note).  In a related proceeding, North’s other secured creditor, Pacific Mezzanine, initiated litigation against North’s seeking a monetary judgment and the appointment of a receiver.  In April, 2006 the Company noticed all relevant parties of its intent to foreclose to seek expedited liquidation of North’s assets and repay amounts owed to the Company.  Subsequent to the notice, the receiver moved to have the Company’s foreclosure of North’s assets set aside so that certain of North’s assets could be sold to a third party.  The motion was approved.  On August 7, 2006, the receiver paid the Company approximately $1,291,000 from a partial sale of the assets. In August 2007, the receiver notified the Company that he planned to turn control of the JJ North’s restaurant in Grants Pass, Oregon and associated assets over to the Company. On September 22, 2007, the Company hired North’s employees, notified North’s creditors of its intent to operate the business and negotiated a facility lease with North’s previous landlord.  The transfer of assets from North’s to Star Buffet Management, Inc. was approved by the court.  The Company’s note, together with the obligation to the other significant creditor of North’s, is secured by the real and personal property, trademarks and all other intellectual property owned by North’s. The Company believes current and future cash flows including asset sales are adequate for recovery of the remaining principal amount of the note receivable.  The Company has not provided an allowance for bad debts for the note as of January 28, 2008.

 

NOTE 4 — PROPERTY, BUILDINGS AND EQUIPMENT AND REAL PROPERTY UNDER CAPITALIZED LEASES

 

The components of property, buildings and equipment used in restaurant operations, not including property under capitalized leases, are as follows:

 

 

 

January 28,
2008

 

January 29,
2007

 

Property, buildings and equipment:

 

 

 

 

 

Furniture, fixtures and equipment

 

$

13,708,000

 

$

13,372,000

 

Land

 

4,185,000

 

3,410,000

 

Buildings and leasehold improvements

 

23,478,000

 

21,501,000

 

 

 

41,371,000

 

38,283,000

 

 

 

 

 

 

 

Less accumulated depreciation

 

(20,555,000

)

(20,804,000

)

 

 

$

20,816,000

 

$

17,479,000

 

 

The components of property under capitalized leases are as follows:

 

Property and equipment under capitalized leases

 

$

706,000

 

$

3,193,000

 

Less accumulated amortization

 

(635,000

)

(2,442,000

)

 

 

$

71,000

 

$

751,000

 

 

In January 2008, the Company modified two existing capital leases.  The lease modifications resulted in property and equipment under capitalized leases being reduced approximately $2,500,000 since these leases are now treated as operating leases.  Total property, buildings and equipment includes the following land, equipment and buildings and leaseholds currently in nine non-operating units. Three of the nine non-operating restaurants have been leased to third-party operators; five are closed for remodeling and/or repositioning; one is closed and classified as property held for sale at January 28, 2008. The components are as follows:

 

 

 

January 28,
2008

 

January 29,
2007

 

Property, buildings and equipment leased to third parties:

 

 

 

 

 

 

 

Equipment

 

$

974,000

 

$

1,111,000

 

Land

 

1,266,000

 

1,594,000

 

Buildings and leaseholds

 

2,631,000

 

3,752,000

 

 

 

4,871,000

 

6,457,000

 

 

 

 

 

 

 

Less accumulated depreciation

 

(1,745,000

)

(2,166,000

)

 

 

$

3,126,000

 

$

4,291,000

 

 

F-16



 

 

 

January 28,
2008

 

January 29,
2007

 

Property, buildings and equipment held for future use:

 

 

 

 

 

Equipment

 

$

8,033,000

 

$

6,398,000

 

Land

 

517,000

 

517,000

 

Buildings and leaseholds

 

2,066,000

 

852,000

 

 

 

10,616,000

 

7,767,000

 

 

 

 

 

 

 

Less accumulated depreciation

 

(8,069,000

)

(5,875,000

)

 

 

$

2,547,000

 

$

1,892,000

 

 

 

 

January 28,
2008

 

January 29,
2007

 

Property and buildings held for sale:

 

 

 

 

 

 

 

Land

 

$

567,000

 

$

567,000

 

Buildings

 

364,000

 

364,000

 

 

 

$

931,000

 

$

931,000

 

 

Depreciation expense for fiscal 2008 and 2007 totaled $1,980,000 and $1,956,000, respectively.  Impairment expense for fiscal 2008 and 2007 totaled $267,000 and $0, respectively.

 

NOTE 5 — LONG-TERM DEBT

 

The Company had a $3,000,000 unsecured revolving line of credit with M&I Marshall & Ilsley Bank which provided working capital for the Company. The M&I revolving line of credit bore interest at LIBOR plus two percent per annum.   The Company replaced the M&I revolving line of credit on January 31, 2008 with a Credit Facility with Wells Fargo Bank, N.A.   The Credit Facility included a $7,000,000 term loan and a $2,000,000 revolving line of credit.  The credit facility was utilized to retire the Company’s unsecured revolving line of credit with M&I Marshall & Ilsley Bank; to fund the acquisition of assets associated with sixteen (16) Barnhill’s Buffet restaurants; and to provide additional working capital to the Company.   On February 29, 2008 the Company amended the Credit Facility, increasing the term loan principal from $7,000,000 to $8,000,000. The increase in the Credit Facility was used to fund the acquisition of four additional Barnhill’s Buffet restaurants by a newly formed, wholly-owned, independently capitalized subsidiary, Starlite Holdings, Inc.  The Credit Facility is guaranteed by Star Buffet’s subsidiaries and bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus 2.00%.  The Credit Facility is secured by a first priority perfected lien on all of the Company’s assets, except for those assets that are currently pledged as security for existing obligations, in which case Wells Fargo will have a second priority lien.  The term loan matures on January 31, 2012 and provides for principal to be amortized at $175,000 per quarter for the initial six quarters; $225,000 for the next nine quarters; with any remaining balance due at maturity.  Interest is payable monthly.  The term loan balance was $6,825,000 on April 14, 2008.  A $2,000,000 revolving line of credit matures on January 31, 2012.  Interest on the revolver is payable monthly.  As of April 14, 2008, no balance was outstanding on the revolving line of credit.  The Credit Facility contains a number of covenants and restrictions, including requirements to meet certain financial ratios and limitations with respect to the Company’s ability to make capital expenditures or to pay dividends.  The Companny’s quarterly financial covenants associated with this debt start May 19, 2008  The Company is required to obtain interest rate protection through an interest rate swap or cap arrangement with respect to not less than 50% of the term loan amount.  There is a 0.50% fee for the unused portion of the revolving line of credit and the Company has agreed to maintain its principal cash management services with Wells Fargo.  In connection with the Credit Facility, Wells Fargo was granted 42,440 shares of the Company’s restricted common stock.  The shares were valued at $252,094 and will be amortized over the life of the loan.  The credit facility can be prepaid in whole or part without penalty.  Furthermore, certain provisions of the Credit Facility require the Company to remit proceeds from asset dispositions, issuance of debt or equity, insurance proceeds, tax refunds and fifty percent (50%) of excess cash flow (as defined) to reduce the principal amount of the term loan and, thereafter, the revolving line of

 

F-17



 

credit.  Under terms of the Credit Facility, the Company is permitted to pay an annual dividend.  However, restrictions imposed under terms of the Credit Facility may adversely impact the Company’s ability to pay an annual dividend as the Company has historically relied on multiple sources of cash to fund the dividend.

 

The Company intends to modestly expand operations through the acquisition of restaurants. During fiscal 2008, the Company acquired three 4B’S restaurants, two Western Sizzlin restaurants and one Bar-H Steakhouse. In addition, the Company opened one JB’S restaurant, one Holiday House restaurant and one one JJ North’s Country Buffet restaurant during the year.  The Company has some of this equipment available from stores closed in previous periods. There can be no assurance that the Company will be able to acquire additional restaurants or locations or, if acquired, that these restaurants will have a positive contribution to the Company’s results of operations.

 

    The Company believes that available cash, availability under the revolving line of credit and cash flow from operations will be sufficient to satisfy its working capital and capital expenditure requirements during the next 12 months. Management does not believe the net working capital deficit will have any effect on the Company’s ability to operate the business and meet obligations as they come due in the next 12 months. The Company projects that operating cash flows will exceed planned capital expenditures in the next 12 months and that funds will be available to return capital to stockholders in the form of dividends, share repurchases or both. There can be no assurance, however, that cash and cashflow from operations will be sufficient to satisfy its working capital and capital requirements for the next 12 months or beyond.

 

It is possible that changes in the Company’s operating results, unavailable loan capacity from the existing credit facility, acceleration of the Company’s capital expenditure plans, potential acquisitions or other events may cause the Company to seek additional financing. Additional financing may be raised through public or private equity and/or debt financing or from other sources.

 

On February 1, 2001, the Company entered into a $460,000 15 year fixed rate first real estate mortgage with Victorium Corporation. The mortgage has monthly payments including interest of $6,319. The interest rate is 7.5%. The mortgage is secured the Company’s restaurant in Ocala, Florida. The balance at January 28, 2008 and January 29, 2007 was $311,000 and $325,000, respectively.

 

On May 2, 2002, the Company entered into a $1,500,000 ten year fixed rate first real estate mortgage with M&I Marshall & Ilsley Bank.  The mortgage has monthly payments including interest of $17,894. The interest rate is7.5% for the first five years with interest for years six to ten calculated at the five year LIBOR rate plus 250 basis points with a floor of 7.5%. The mortgage is secured by the Company’s HomeTown Buffet restaurant in Scottsdale, Arizona. The balance at January 28, 2008 and January 29, 2007 was $624,000 and $877,000, respectively.

 

On December 19, 2003, the Company entered into a $1,470,000 six year fixed rate first real estate mortgage with Platinum Bank.  The mortgage has monthly payments including interest of $12,678 with a balloon payment of $475,000 due on December 19, 2009. The interest rate is 7.25% .  The mortgage is secured by the Company’s BuddyFreddys restaurant in Plant City, Florida.  The balance at January 28, 2008 and January 29, 2007 was $1,115,000 and $1,237,000, respectively.

 

On February 25, 2004, the Company entered into a $1,250,000 seven year fixed rate first real estate mortgage with M&I Marshall & Ilsley Bank.  The mortgage has monthly payments including interest of $18,396. The interest rate is 6.1%. The mortgage is secured by the Company’s HomeTown Buffet restaurant in Yuma, Arizona. The balance at January 28, 2008 and January 29, 2007 was $404,000 and $721,000, respectively.

 

On July 29, 2004, the Company entered into a $550,000 ten year fixed rate first real estate mortgage with Heritage Bank.  The mortgage has monthly payments including interest of $6,319. The interest rate is 6.75%. The mortgage is secured by the Company’s JB’s Restaurant in Great Falls, Montana. The balance at January 28, 2008 and January 29, 2007 was $391,000 and $430,000, respectively.

 

On October 27, 2004, the Company entered into a $1,275,000 five year fixed rate first real estate mortgage with Bank of Utah.  The mortgage has monthly payments including interest of $14,371 with a balloon payment of $752,000 due on October 26, 2009. The interest rate is 6.25%. The mortgage requires the Company to maintain specified minimum levels of net worth, limits the amount of capital expenditures and requires the maintenance of certain fixed charge coverage ratios.  The mortgage is secured by the Company’s HomeTown Buffet restaurant in Layton, Utah. The balance at January 28, 2008 and January 29, 2007 was $840,000 and $1,008,000, respectively.

 

F-18



 

On September 16, 2005, the Company entered into a $300,000 five year fixed rate real estate mortgage with Naisbitt Investment Company.  The mortgage has monthly payments including interest of $5,870. The interest rate is 6.5%.  The mortgage is secured by the Company’s JB’s Restaurant in Rexburg Idaho.  The balance at January 28, 2008 and January 29, 2007 was $169,000 and $206,000, respectively.

 

On June 1, 2006, the Company entered into a $564,000 five year fixed rate first real estate mortgage with Dalhart Federal Savings and Loans.  The mortgage has monthly payments including interest of $6,731. The interest rate is 7.63%. The mortgage is secured by the Company’s K-BOB’S Steakhouse in Dumas, Texas. The balance at January 28, 2008 and January 29, 2007 was $497,000 and $525,000, respectively.

 

On November 8, 2006, the Company entered into a $595,000 five year fixed rate first real estate mortgage with Wells Fargo Bank.  The mortgage has monthly payments including interest of $8,055. The interest rate is 7.5%. The mortgage is secured by the Company’s Pecos Diamond Steakhouse in Artesia, New Mexico. The balance at January 28, 2008 and January 29, 2007 was $461,000 and $560,000, respectively.

 

On January 30, 2007, the Company entered into a $900,000 five year fixed rate real estate mortgage with Fortenberry’s Beef of Magee, Inc.  The mortgage has monthly payments including interest of $17,821. The interest rate is 7%.  The mortgage is secured by the Company’s Western Sizzlin restaurant in Magee, Mississippi. The balance at January 28, 2008 was $740,000.

 

On May 29, 2007, the Company entered into a $500,000 five year fixed rate real estate mortgage with Dalhart Federal Savings and Loan Association.  The mortgage has monthly payments including interest of 5,903 with a balloon payment of $301,345 due on June 1, 2012.  The interest rate is 7.38%.  The mortgage is secured by the Company’s Bar H Steakhouse restaurant in Dalhart, Texas.  The balance at January 28, 2008 was $477,000.

 

On June 19, 2007, the Company entered into a $520,000 five year fixed rate real estate mortgage with Farmers Bank and Trust.  The mortgage has monthly payments including interest of $4,676 with a balloon payment of $407,313 due on June 19, 2012.  The interest rate is 7%.  The mortgage is secured by the Company’s Western Sizzlin restaurant in Magnolia, Arkansas.    The balance at January 28, 2008 was $508,000.

 

During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company.  The loan dated June 15, 2007 was subordinated to the obligation to M&I Marshall & Ilsley Bank and is now subordinated to Wells Fargo Bank, N.A. and bears interest at 8.5%. The Company expensed and paid $78,458 for interest during the fiscal year. The principal balance and any unpaid interest is due and payable in full on June 5, 2012. The Company used the funds to acquire restaurants and provide working capital.

 

Long term debt and note payable to officer matures in fiscal years ending after January 28, 2008 as follows:

 

Fiscal Year

 

 

 

2009

 

1,038,000

 

2010

 

2,682,000

 

2011

 

730,000

 

2012

 

572,000

 

2013

 

2,127,000

 

Thereafter

 

846,000

 

Total

 

$

7,995,000

 

 

NOTE 6 — LEASES

 

The Company occupies certain restaurants under long-term capital and operating leases expiring at various dates through 2013. Most restaurant leases have renewal options for terms of 5 to 20 years, and substantially all require payment of real estate taxes and insurance. Certain leases require the rent to be the greater of a stipulated minimum rent or a specified percentage of sales. Certain operating lease agreements contain scheduled rent escalation clauses which are being amortized over the terms of the lease, ranging from 5 to 11 years using the straight line method.

 

F-19



 

Minimum lease payments for all leases and the present value of net minimum lease payments for capital leases as of January 28, 2008 are as follows:

 

Fiscal year

 

Capital

 

Operating

 

2009

 

55,000

 

2,691,000

 

2010

 

55,000

 

1,904,000

 

2011

 

 

1,293,000

 

2012

 

 

1,201,000

 

2013

 

 

1,024,000

 

Thereafter

 

 

2,967,000

 

Total minimum lease payments:

 

110,000

 

$

 11,079,000

 

Less amount representing interest:

 

7,000

 

 

 

Present value of minimum lease payments:

 

103,000

 

 

 

Less current portion

 

49,000

 

 

 

Capital lease obligations excluding current portion

 

$

54,000

 

 

 

 

Aggregate rent expense under non-cancelable operating leases during fiscal 2008 and 2007 are as follows:

 

 

 

Fifty-Two
Weeks Ended
January 28,
2008

 

Fifty-Two
Weeks Ended
January 29,
2007

 

Minimum rentals

 

$

3,213,000

 

$

2,778,000

 

Straight-line rentals

 

(38,000

)

(23,000

)

Contingent rentals

 

102,000

 

104,000

 

 

 

$

3,277,000

 

$

2,859,000

 

 

The Company reduces the deferred rent payable for stores in the year that were purchased or closed.  The $0 and $0 decrease in rent expense for stores purchased or closed in 2008 and 2007, respectively, is recognized in the straight-line rentals disclosed above.

 

The Company currently leases three non-operating units to tenants. The rental income for fiscal 2008 and 2007 was $261,000 and $279,000, respectively. Rental income is recognized on a straight-line basis over the term of the lease and is included in other income in the accompanying statements of operations.

 

Future minimum lease payments receivable in fiscal years ending after January 28, 2008 is as follows:

 

Fiscal Year

 

 

 

2009

 

208,000

 

2010

 

110,000

 

2011

 

60,000

 

2012

 

60,000

 

2013

 

60,000

 

Thereafter

 

55,000

 

Total

 

$

553,000

 

 

NOTE 7 — INCOME TAXES

 

Income tax provision (benefit) is comprised of the following:

 

F-20



 

 

 

Fifty-Two

 

Fifty-Two

 

 

 

Weeks Ended

 

Weeks Ended

 

 

 

January 28, 2008

 

January 29, 2007

 

Current:

 

 

 

 

 

Federal

 

$

(563,000

)

$

144,000

 

State

 

(75,000

)

54,000

 

 

 

(638,000

)

198,000

 

Deferred:

 

 

 

 

 

Federal

 

(609,000

)

36,000

 

State

 

(68,000

)

4,000

 

 

 

(677,000

)

40,000

 

 

 

$

(1,315,000

)

$

238,000

 

 

A reconciliation of income tax provision (benefit) at the federal statutory rate of 34% to the Company’s provision (benefit) for taxes on income is as follows:

 

 

 

Fifty-Two

 

Fifty-Two

 

 

 

Weeks Ended

 

Weeks Ended

 

 

 

January 28, 2008

 

January 29, 2007

 

Income tax provision (benefit) at statutory rate

 

$

(1,127,000

)

$

324,000

 

State income taxes

 

(115,000

)

41,000

 

Nondeductible expenses

 

60,000

 

60,000

 

Federal income tax credits

 

(176,000

)

(175,000

)

Adjustment of estimated income tax accruals

 

43,000

 

(12,000

)

 

 

$

(1,315,000

)

$

238,000

 

 

The adjustment of estimated income tax accruals in fiscal 2007 included adjustments from an IRS exam which lowered the income tax expense for the year.

 

Temporary differences give rise to a significant amount of deferred tax assets and liabilities as set forth below:

 

.

 

 

January 28, 2008

 

January 29, 2007

 

Current deferred tax assets:

 

 

 

 

 

Accrued vacation

 

$

96,000

 

$

83,000

 

Accrued expenses and reserves

 

223,000

 

227,000

 

Total deferred tax assets

 

319,000

 

310,000

 

Long-term deferred tax assets:

 

 

 

 

 

Leases

 

734,000

 

1,000,000

 

Depreciation, amortization and impairments

 

1,678,000

 

1,084,000

 

Other

 

353,000

 

13,000

 

Total deferred tax assets, net

 

2,765,000

 

2,097,000

 

Valuation allowance

 

 

 

Net long term asset

 

2,765,000

 

2,097,000

 

Deferred tax assets

 

$

3,084,000

 

$

2,407,000

 

 

While there can be no assurance that the Company will generate any earnings or any specific level of earnings in the future years,

 

F-21



 

management believes it is more likely than not that the Company will be able to realize the benefit of the deferred tax assets existing at January 28, 2008 based on the Company’s expected future pre-tax earnings. The determination of deferred tax assets is subject to estimates and assumptions. We periodically evaluate our deferred tax assets to determine if our assumptions and estimates should change.

 

NOTE 8 — SEGMENT AND RELATED REPORTING

 

The Company has four reporting segments: HomeTown Buffet, North’s Star, Florida Buffets Division and Summit Restaurant Division. The Company’s reportable segments are aggregated based on brand similarities of operating segments. With the acquisition of 20 Barnhill’s Buffet restaurants in fiscal 2009, the Company will change its reporting segments to the Buffet Division and Non-Buffet Division.

 

As of January 28, 2008, the Company owned and operated 12 franchised HomeTown Buffets, seven JB’s Family restaurants, five Whistle Junction restaurants, four BuddyFreddys restaurants, three 4B’S restaurants, three Holiday House Family restaurants, three Western Sizzlin restaurants,  two JJ North’s Grand Buffet,  two K-BOB’S Steakhouses, one Pecos Diamond Steakhouse, one Bar-H Steakhouse and one Casa Bonita Mexican restaurant. The Company also had six restaurants currently closed for remodeling and repositioning, three restaurants leased to third-party operators and the net assets of another closed restaurant reported as property held for sale. The Company’s restaurants are located in Arkansas, Arizona, Colorado, Florida, Georgia, Idaho, Mississippi, Montana, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming.

 

The accounting policies of the reportable segments are the same as those described in Note 1. The Company evaluates the performance of its operating segments based on income before income taxes.

 

Summarized financial information concerning the Company’s reportable segments is shown in the following table. The other assets presented in the consolidated balance sheet and not in the reportable segments relate to the Company as a whole, and not individual segments. Also certain corporate overhead income and expenses in the consolidated statements of operations are not included in the reportable segments.

 

(Dollars in Thousands)

 

52 Weeks Ended
January 28, 2008

 

HomeTown
Buffet

 

North’s
Star

 

Florida
Buffets

 

Summit

 

Other

 

Total

 

Revenues

 

$

24,367

 

$

5,348

 

$

18,032

 

$

20,985

 

$

 

$

68,732

 

Interest income

 

 

 

 

 

24

 

24

 

Interest expense

 

(151

)

 

 

 

(707

)

(858

)

Depreciation & amortization

 

960

 

170

 

341

 

557

 

70

 

2,098

 

Impairment of long-lived assets

 

275

 

 

1,034

 

92

 

 

1,401

 

Income (loss) before income taxes

 

(789

)

(382

)

(1,431

)

2,443

 

(3,157

)

(3,316

)

Total assets

 

9,727

 

5,139

 

6,884

 

9,291

 

4,661

 

35,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52 Weeks Ended
January 29, 2007

 

HomeTown
Buffet

 

North’s
Star

 

Florida
Buffets

 

Summit

 

Other

 

Total

 

Revenues

 

$

27,258

 

$

2,301

 

$

11,642

 

$

17,447

 

$

 

$

58,648

 

Interest income

 

 

 

 

 

93

 

93

 

Interest expense

 

(167

)

 

 

 

(449

)

(616

)

Depreciation & amortization

 

989

 

88

 

419

 

509

 

64

 

2,069

 

Impairment of long-lived assets

 

 

 

 

 

 

 

Income (loss) before income taxes

 

117

 

(364

)

510

 

2,627

 

(1,936

)

954

 

Total assets

 

11,173

 

2,965

 

8,201

 

8,611

 

3,218

 

34,168

 

 

F-22



 

NOTE 9 — STOCKHOLDERS’ EQUITY

 

Common Stock

 

Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders and do not have cumulative voting rights. Subject to preferences that may be applicable to the holders of outstanding shares of Preferred Stock, if any, at the time, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefore. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock shall be entitled to assets of the Company remaining after payment of the Company’s liabilities and the liquidation preference, if any, of any outstanding Preferred Stock. All outstanding shares of Common Stock, are fully paid and non-assessable. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock, which the Company may designate and issue in the future. The Company paid an annual cash dividend of $0.60 for both fiscal 2008 and fiscal 2007, respectively. The Company also paid a special dividend of $0.25 in fiscal 2007.

 

Preferred Stock

 

The Board of Directors has the authority, without further vote or action by the stockholders, to provide for the issuance of up to 1,500,000 shares of Preferred Stock from time to time in one or more series with such designations, rights, preferences and privileges and limitations as the Board of Directors may determine, including the consideration received therefore. The Board of Directors also has authority to determine the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights and voting rights without approval by the holders of Common Stock. Although it is not possible to state the effect that any issuance of Preferred Stock might have on the rights of holders of Common Stock, the issuance of Preferred Stock may have one or more of the following effects: (i) to restrict the payment of dividends on the Common Stock, (ii) to dilute the voting power and equity interests of holders of Common Stock, (iii) to prevent holders of Common Stock from participating in any distribution of the Company’s assets upon liquidation until any liquidation preferences granted to holders of Preferred Stock are satisfied, or (iv) to require approval by the holders of Preferred Stock for certain matters such as amendments to the Company’s Certificate of Incorporation or any reorganization, consolidation, merger or other similar transaction involving the Company. As a result, the issuance of Preferred Stock may, under certain circumstances, have the effect of delaying, discouraging or preventing bids for the Common Stock at a premium over the market price thereof, or a change in control of the Company, and could have a material adverse effect on the market price for the Common Stock.

 

Officer’s Notes Receivable

 

In connection with the Company’s employment contract with Mr. Robert E. Wheaton, the Company’s President and Chief Executive Officer, the Company agreed to provide Mr. Wheaton with certain loans solely for the purchase of the Company’s common stock prior to the enactment of Sarbanes-Oxley Act of 2002.  Mr. Wheaton owns approximately 44% of the Company’s outstanding common shares and may have the effective power to elect members of the board of directors and to control the vote on substantially all other matters, without the approval of the other stockholders.  The loans were secured by the common stock and bore interest at the prevailing rate set forth in the Company’s credit facility with M&I Marshall & Ilsley Bank.  Repayment terms stipulate that the president would repay principal and interest on or before the later of the fifth anniversary date of the initial advance under the loan agreement, or the date he received a lump sum payment per a termination clause or six month’s after the termination of his employment.  Management has elected not to record any interest income on the loans until the interest income was paid.  Mr. Wheaton paid $698,000 in principal and $250,000 in interest in June 2005.  Mr. Wheaton paid the last interest payment of $43,713 on May 22, 2006.

 

Common Stock Repurchase

 

On January 4, 2006, the Company announced that it had received necessary approval from its lender to commence with a buyback program to purchase up to 250,000 common shares.  As of January 28, 2008, the Company had repurchased 0 shares.  The timing and

 

F-23



 

amount of shares purchased will be based on prevailing market conditions and other factors.  As of April 14, 2008, the Company had 3,213,075 common shares outstanding.

 

NOTE 10 — EMPLOYEE BENEFIT PLANS

 

401(k) Plan

 

In May 1998, the Company established a 401(k) plan available to certain employees who have attained age 21, work 30 hours or more per week, and have met certain minimum service requirements. The plan allows participants to allocate up to 15% of their annual compensation before taxes for investment in several investment alternatives. Employer contributions are at the discretion of the Company. The Company’s contributions to the plan were approximately $5,000 and $9,000, in administration costs for fiscal 2008 and 2007, respectively.  The plan had fewer than 50 participants as of April 18, 2006 and the Board of Directors authorized the termination of the plan.  As of April 17, 2007, the plan had 0 participants and had been terminated.

 

1997 Stock Incentive Plan

 

In fiscal year 1998, the Company adopted the 1997 Stock Incentive Plan (the “1997 Plan”), which authorizes the grant of options to purchase up to 750,000 shares of Common Stock. The 1997 Plan provides for the award of “incentive stock options,” within the meaning of section 422 of the Internal Revenue Code of 1986, as amended (the “Code”) and non-statutory options to directors, officers, employees and consultants of the Company, except that incentive stock options may not be granted to non-employee directors or consultants. The 1997 Plan provides participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the Company.  A special committee appointed by the Board of Directors, has sole discretion and authority, consistent with the provisions of the 1997 Plan, to determine which eligible participants will receive options, the time when options will be granted, the terms of options granted and the number of shares which will be subject to options granted under the 1997 Plan.

 

On January 31, 2006 we adopted Statement of Financial Accounting Standards No. 123(R), “Share Based Payment” (SFAS 123(R)).  SFAS 123(R) requires the recognition of compensation costs relating to share based payment transactions in the financial statements.  We have elected the modified prospective application method of reporting.  Prior to the adoption of SFAS 123(R) we elected to account for stock-based compensation plans using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” under which no compensation cost is recognized and the pro forma effects on earnings and earnings per share are disclosed as if the fair value approach had been adopted.  Our stock-based compensation plans are summarized in the table below:

 

 

 

Shares

 

Shares

 

Plan

 

Name of Plan

 

Authorized

 

Available

 

Expiration

 

 

 

 

 

 

 

 

 

1997 Stock Incentive Plan

 

750,000

 

488,000

 

February 2015

 

 

Stock options issued under the terms of the plans have, or will have, an exercise price equal to, or greater than, the fair market value of the common stock at the date of the option grant, and expire no later than ten years from the date of grant, with the most recent grant expiring in 2015.

 

The stock option transactions and the options outstanding are summarized as follows:

 

F-24



 

 

 

52 Weeks Ended

 

 

 

January 28, 2008

 

January 29, 2007

 

 

 

Options

 

Weighted
Average
Exercise Price

 

Options

 

Weighted
Average
Exercise Price

 

Outstanding at beginning of period

 

528,000

 

$

11.56

 

696,000

 

$

8.90

 

Granted

 

 

 

 

 

Exercised

 

 

 

168,000

 

$

5.22

 

Forfeited

 

488,000

 

$

12.00

 

 

 

Outstanding at end of period

 

40,000

 

$

6.20

 

528,000

 

$

11.56

 

 

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

40,000

 

$

6.20

 

528,000

 

$

11.56

 

 

There were no options granted during the 52 weeks ended January 28, 2008 and January 29, 2007.

 

The following summarizes information about stock options outstanding at January 28, 2008:

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of
Exercise
Prices

 

Number
Outstanding

 

Remaining
Contractual
Life

 

Weighted
Average
Exercise Price

 

Number
Exercisable

 

Weighted
Average Exercise
Price

 

$

5.00

 

12,000

 

1.7

 

$

5.00

 

12,000

 

$

5.00

 

$

6.70

 

28,000

 

7.0

 

$

6.70

 

28,000

 

$

6.70

 

 

 

40,000

 

 

 

 

 

40,000

 

 

 

 

NOTE 11 — SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

Fifty-Two

 

Fifty-Two

 

Fifty-Two

 

 

 

Weeks

 

Weeks

 

Weeks

 

 

 

Ended

 

Ended

 

Ended

 

 

 

January 28,
2008

 

January 29,
2007

 

January 30,
2006

 

Cash paid for income taxes

 

$

479,000

 

$

460,000

 

$

688,000

 

Cash paid for interest

 

687,000

 

772,000

 

631,000

 

Non-cash investing and financing activities are as follows:

 

 

 

 

 

 

 

Exchange of other receivable for equipment and leaseholds

 

$

55,000

 

$

 

$

 

Acquisition of property with debt financing

 

 

 

300,000

 

Exchange of note receivable for equipment and leaseholds

 

1,207,000

 

1,285,000

 

 

Transfer of debt as a part of the sale of assets

 

 

616,000

 

 

Adjustment relating to lease modification for capital lease obligation

 

1,136,000

 

 

 

Adjustment relating to lease modification for deferred taxes

 

590,000

 

 

 

Adjustment relating to lease modification for fixed assets

 

546,000

 

 

 

 

F-25



 

NOTE 12 — RELATED PARTY TRANSACTIONS

 

In connection with the Company’s employment contract with Mr. Robert E. Wheaton, the Company’s President and Chief Executive Officer, the Company agreed to provide Mr. Wheaton with certain loans solely for the purchase of the Company’s common stock prior to the enactment of Sarbanes-Oxley Act of 2002. Mr. Wheaton owns approximately 44% of the Company’s outstanding common shares including exercisable options which have vested and may have the effective power to elect members of the board of directors and to control the vote on substantially all other matters, without the approval of the other stockholders. The loans were secured by the common stock and bore interest at the prevailing rate set forth in the Company’s credit facility with M&I Marshall & Ilsley Bank. Repayment terms stipulate that the president would repay principal and interest on or before the later of the fifth anniversary date of the initial advance under the loan agreement, the date he received a lump sum payment per a termination clause or six month’s after the termination of his employment. Management elected not to record any interest income on the loans until the interest income was paid.  Mr. Wheaton paid $698,000 in principal and $250,000 in interest in June 2005.   There was no remaining principal balance due at January 30, 2006.  Mr. Wheaton paid the final interest payment of $43,713 on May 22, 2006.

 

During fiscal 2008, the Company borrowed approximately $1,400,000 from Mr. Robert E. Wheaton, a principal shareholder, officer and director of the Company.  The loan dated June 15, 2007 was subordinated to the obligation to M&I Marshall & Ilsley Bank and is now subordinated to Wells Fargo Bank, N.A. and bears interest at 8.5%. The Company expensed and paid $78,458 for interest during the fiscal year. The principal balance and any unpaid interest is due and payable in full on June 5, 2012. The Company used the funds to acquire restaurants and provide working capital.

 

NOTE 13 — COMMITMENTS AND CONTINGENCIES

 

HTB entered into a franchise agreement for each HomeTown Buffet location which requires among other items, the payment of a continuing royalty fee to HomeTown Buffet, Inc. The royalty fee is based on 2% of the aggregate gross sales of all the Company’s HomeTown Buffet restaurants. Each of the franchise agreements has a 20-year term (with two five-year renewal options). HTB provides weekly sales reports to the HomeTown franchisor as well as periodic and annual financial statements. HTB is obligated to operate its Hometown Buffet restaurants in compliance with the franchisor’s requirements. The franchisor requires HTB to operate each restaurant in conformity with Franchise Operating Manuals and Recipe Manuals and Menus and restricts operating restaurants within a geographic radius of the franchisor’s restaurants.  These agreements also require HTB is to use it best efforts to achieve the highest practicable level of sales, and requires HTB to promptly make royalty payments. The HomeTown franchisor may terminate a franchise agreement for a number of reasons, including HTB’s failure to pay royalty fees when due, failure to comply with applicable laws or repeated failure to comply with one or more requirements of the franchise agreement. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. Generally, a franchisor may terminate a franchise agreement only if the franchisee violates a material and substantial provision of the agreement and fails to remedy the violation within a specified period.

 

On February 1, 2005, the Company announced in a press release that it had entered into a strategic alliance with K-BOB’S USA Inc. and related affiliates. In accordance with the terms of the strategic alliance, the Company agreed to lend K-BOB’S up to $1.5 million on a long-term basis. In exchange, K-BOB’S granted the Company an option to purchase as many as five corporate owned and operated K-BOB’S restaurants located in New Mexico and Texas.  On January 30, 2006, the Company exercised its option under the terms of the strategic alliance and purchased three K-BOB’S restaurants. In connection with the purchase, the Company entered into license agreements which require the payment of certain fees to K-BOB’S based on the restaurant gross sales.

 

On April 21, 2006, the Company announced in a press release that it had entered into a strategic alliance with Western Sizzlin Corporation. In connection with the strategic alliance, the Company acquired three Western Sizzlin franchised restaurants and entered into license agreements with Western Sizzlin Corporation for each. The license agreements require the payment of certain fees to Western Sizzlin Corporation based on the restaurant gross sales.

 

In connection with the Company’s employment contract with Robert E. Wheaton, the Company’s Chief Executive Officer and President, the Company has agreed to pay Mr. Wheaton six years salary and bonus if he resigns related to a change of control of the Company or is terminated, unless the termination is for cause.

 

In addition to the foregoing, the Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that the resolution of any of these routine proceedings will require payments that will have a material effect on the Company’s consolidated statements of operations or financial position or liquidity.

 

F-26



 

NOTE 14 — SUBSEQUENT EVENTS

 

On March 12, 2008, the Board of Directors approved the Company’s fifth consecutive annual dividend.  This year the dividend is $0.60 per common share and is payable on June 4, 2008 to shareholders of record on May 6, 2008.

 

On February 29, 2008, Starlite Holdings, Inc. (“Starlite”), a newly formed, wholly-owned, independently capitalized subsidiary of Star Buffet, Inc. acquired certain assets and facility leases for four Barnhill’s Buffet restaurants from Barnhill’s Buffet, Inc. (“Barnhill’s”) for a purchase price of approximately $1,075,000.  Barnhill’s was in a Chapter 11 bankruptcy proceeding in the U.S. Bankruptcy Court of the Middle District of Tennessee and the acquisition was approved by the court.  The acquired restaurants are located in Florida (2) and Mississippi (2) and as part of the acquisition the Company acquired perpetual rights to use the Barnhill’s name and related intellectual property.

 

On February 29, 2008 the Company amended its Senior Secured Credit Facility (“Credit Facility”) with Wells Fargo Bank N.A., increasing the term loan principal from $7,000,000 to $8,000,000. The Credit Facility was issued on January 31 , 2008.The increase in the Credit Facility was used to fund the acquisition of the four Barnhill’s Buffet restaurants as described above.  The Credit Facility is guaranteed by Star Buffet’s subsidiaries and bears interest, at the Company’s option, at Wells Fargo’s base rate plus 0.25% or at LIBOR plus 2.00%.  The Credit Facility is secured by a first priority perfected lien on all of the Company’s assets, except for those assets that are currently pledged as security for existing obligations, in which case Wells Fargo will have a second lien.  The term loan matures on January 31, 2012 and provides for principal to be amortized at $175,000 per quarter for the initial six quarters; $225,000 for the next nine quarters; with any remaining balance due at maturity.  Interest is payable monthly.  A $2,000,000 revolving line of credit matures on January 31, 2012.  Interest on the revolver is payable monthly.  As of April 11, 2008, no balance was outstanding on the revolving line of credit.  There is a 0.50% fee for the unused portion of the revolving line of credit.   In connection with the Credit Facility, Wells Fargo was granted 42,440 shares of the Company’s restricted common stock.  The shares were valued at $252,094 and will be amortized over the life of the loan.  The Credit Facility can be prepaid in whole or part without penalty.

 

The Credit Facility contains a number of covenants and restrictions, including requirements to meet certain financial ratios and limitations with respect to the Company’s use of cash.  The Company’s quarterly financial covenants associated with this debt start May 19, 2008, the end our first quarter in fiscal 2009. The Company is required to obtain interest rate protection through an interest rate swap or cap arrangement with respect to not less than 50% of the term loan amount.  The Company has elected to not perform the necessary procedures in order to apply hedge accounting. Therefore, changes in the fair market value of the interest rate swap will be reflected as an adjustment to interest expense within the consolidated statement of operations. Furthermore, certain provisions of the Credit Facility require the Company to remit proceeds from asset dispositions, issuance of debt or equity, insurance proceeds, tax refunds and fifty percent (50%) of excess cash  flow (as defined) to reduce the principal amount of the term loan and, thereafter, the revolving line of credit.  Under terms of the Credit Facility, the Company is permitted to pay an annual dividend.  However, restrictions imposed under terms of the Credit Facility may adversely impact the Company’s ability to pay an annual dividend as the Company has historically relied on multiple sources of cash to fund the dividend.  As of the date of this report, the Company was in compliance with all of such requirements.

 

On January 31, 2008, Star Buffet Management, Inc., a wholly-owned subsidiary of Star Buffet, Inc. (collectively, the “Company”) acquired the assets and facility leases for sixteen (16) Barnhill’s Buffet restaurants from Barnhill’s Buffet, Inc. (“Barnhill’s”) for a purchase price of approximately $5 million.  The acquisition was approved by the court.  The acquired restaurants are located in the following states: Alabama (1), Arkansas (1), Florida (4), Louisiana (3), Mississippi (4), and Tennessee (3) and as part of the acquisition, the Company acquired perpetual rights to the use of the Barnhill’s name and related intellectual property.  This acquisition was funded through the Company’s Credit Facility dated January 31, 2008.

 

F-27



 

EXHIBIT INDEX

 

Exhibit
No.

 

Description

3.1

 

Certificate of Incorporation*

3.2

 

Bylaws, as amended on September 22, 1997*

4.1

 

Form of Common Stock Certificate**

10.1

 

Star Buffet, Inc. 1997 Stock Incentive Plan (the “1997 Plan”)**

10.2

 

Form of Stock Option Agreement for the 1997 Plan**

10.3

 

Form of Indemnification Agreement**

10.4

 

Management Services Agreement with CKE Restaurants, Inc.**

10.5

 

Form of Franchise Agreement with HomeTown Buffet, Inc.**

10.6

 

Asset Purchase Agreement with North’s Restaurants, Inc. dated July 24, 1997**

10.6.1

 

Amendment No. 1 to Asset Purchase Agreement dated as of September 30, 1997 (incorporated by reference to the Company’s filing on Form 8-K on October 17, 1997)

10.6.2

 

Amended and Restated Credit Agreement dated as of September 30, 1997 between the Company and North’s Restaurants, Inc. (incorporated by reference to the Company’s filing on Form 8-K on October 17, 1997)

10.7

 

Form of Contribution Agreement among CKE Restaurants, Inc., Summit Family Restaurants Inc. and the Company*

10.8

 

Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and Taco Bueno Restaurants, Inc. (formerly known as Casa Bonita Incorporated)*

10.9

 

Form of Bill of Sale and Assumption Agreement between Summit Family Restaurants Inc. and JB’s Restaurants, Inc.*

10.10

 

License Agreement with CKE Restaurants, Inc. (incorporated by reference to the Company’s filing on Form 10-K on April 24, 1998)

10.11

 

Settlement Agreement with HomeTown Buffet, Inc. (incorporated by reference to the Company’s filing on Form 10-K on April 24, 1998)

10.12

 

Asset Purchase Agreement among Summit Family Restaurants Inc. and JB’s Family Restaurants, Inc., dated February 10, 1998 (incorporated by reference to the Company’s filing on Form 8-K on March 9, 1998)

10.13

 

Stock Repurchase Agreement between Star Buffet, Inc. and CKE Restaurants, Inc., dated September 10, 1998 (incorporated by reference to the Company’s filing on Form 10-K on September 28, 1998)

10.14

 

Credit Agreement dated as of January 31, 2008 with Wells Fargo Bank N. A. including First Amendment

10.15

 

Loan Agreement dated June 15, 2007 with Robert E. Wheaton and Suzanne H. Wheaton

10.16

 

Asset Purchase Agreement dated December 2, 2007 with Barnhill’s Buffet, Inc. and Star Buffet Management, Inc. including First Amendment

14.1

 

Code of Ethics (incorporated by reference to the Company’s filing on Form 10-K on January 31, 2005)

21.1

 

List of Subsidiaries*

23.1

 

Consent of Mayer Hoffman McCann P.C.

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002

31.2

 

Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002

32.1

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

32.2

 

Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

99.1

 

Press Release dated April 25, 2008 reporting earnings for fiscal 2008

 


*             Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 1 (Registration No. 333- 32249).

**      Previously filed as an exhibit to the Registration Statement on Form S-1, Amendment No. 2 (Registration No. 333- 32249).

 

E-1


Exhibit 10.14

 

CREDIT AGREEMENT

 

dated as of

 

January 31, 2008

 

among

 

STAR BUFFET, INC. and its

 

SUBSIDIARIES PARTY HERETO, as Borrowers,

 

THE LENDERS PARTY HERETO,

 

WELLS FARGO BANK, N.A., as Administrative Agent,

 

WELLS FARGO BANK, N.A., as Syndication Agent

 

and

 

WELLS FARGO BANK, N.A., as Lead Arranger

 

Loan Nos. 93-0908116 and 93-0908117

 



 

SECTION I DEFINITIONS

1

1.1 Definitions

1

1.2 Rules of Interpretation

23

SECTION II DESCRIPTION OF CREDIT

24

2.1 Loans

24

2.2 The Notes

28

2.3 Notice and Manner of Borrowing or Conversion of Loans

28

2.4 Funding of Loans

29

2.5 Interest Rates and Payments of Interest

30

2.6 Fees

31

2.7 Repayment of Loans

32

2.8 Prepayments

32

2.9 Method and Allocation of Payments

34

2.10 LIBOR Indemnity

36

2.11 Computation of Interest and Fees

37

2.12 Changed Circumstances; Illegality

37

2.13 Increased Costs

38

2.14 Capital Requirements

38

2.15 Taxes

39

2.16 Parent as Agent for Borrowers; Contribution

41

SECTION III LETTERS OF CREDIT

42

3.1 Issuance

42

3.2 Reimbursement Obligation of the Borrowers

42

3.3 Letter of Credit Payments

43

3.4 Obligations Absolute

43

3.5 Reliance by the LC Issuer and the Administrative Agent

44

SECTION IV CONDITIONS OF LOANS AND LETTERS OF CREDIT

44

4.1 Conditions Precedent to Initial Loans and Letters of Credit

44

4.2 Conditions Precedent to all Revolving Credit Loans and Letters of Credit after the Closing Date

49

SECTION V REPRESENTATIONS AND WARRANTIES

51

5.1 Existence, Qualification and Power

51

5.2 Authorization; No Contravention

51

5.3 Governmental Authorization; Other Consents

51

5.4 Binding Effect

51

5.5 Financial Statements; No Material Adverse Effect

52

5.6 Litigation

53

5.7 No Default

53

5.8 Ownership of Property; Encumbrances; Investments

53

5.9 Environmental Compliance

54

5.10 Insurance

54

5.11 Taxes

54

5.12 ERISA Compliance

55

5.13 Subsidiaries; Equity Interests; Loan Parties

55

5.14 Margin Regulations; Investment Company Act

56

5.15 Disclosure

56

 

i



 

5.16 Compliance with Laws

56

5.17 Intellectual Property; Licenses, Etc

56

5.18 Solvency

56

5.19 Casualty, Etc

57

5.20 Labor Matters

57

5.21 Security Documents

57

5.22 Intentionally Deleted

57

5.23 Compliance with OFAC Rules and Regulations

57

5.24 Foreign Assets Control Regulations, Etc

57

5.25 Parent Public Filings

57

SECTION VI AFFIRMATIVE COVENANTS

58

6.1 Financial Statements

58

6.2 Conduct of Business

59

6.3 Maintenance and Insurance

59

6.4 Taxes

60

6.5 Inspection Rights; Lender Meeting

60

6.6 Maintenance of Books and Records

61

6.7 Use of Proceeds

61

6.8 Further Assurances

61

6.9 Notification Requirements

61

6.10 ERISA Reports

62

6.11 Environmental Compliance

62

6.12 Covenant to Guarantee Obligations and Give Security

63

6.13 Interest Rate Protection

65

6.14 Cash Accounts

65

6.15 Post-Closing Deliveries

65

SECTION VII FINANCIAL COVENANTS

66

7.1 Total Lease Adjusted Leverage Ratio

66

7.2 Consolidated Pre-Distribution Fixed Charge Coverage Ratio

66

7.3 Consolidated Post-Distribution Fixed Charge Coverage Ratio

66

7.4 Consolidated EBITDA

67

7.5 Growth Capital Expenditures

67

SECTION VIII NEGATIVE COVENANTS

67

8.1 Indebtedness

67

8.2 Contingent Liabilities

68

8.3 Encumbrances

68

8.4 Merger; Dispositions; Liquidation

69

8.5 Subsidiaries

69

8.6 Restricted Payments

70

8.7 Investments; Purchases of Assets

70

8.8 ERISA Compliance

71

8.9 Transactions with Affiliates

71

8.10 Fiscal Year

71

8.11 Payments on Junior Subordinated Debt

71

SECTION IX DEFAULTS

71

9.1 Events of Default

71

 



 

9.2 Remedies upon Event of Default

74

9.3 Application of Funds

74

9.4 Remedies Cumulative

75

SECTION X ASSIGNMENT AND PARTICIPATION

76

10.1 Successors and Assigns

76

10.2 Replacement of Lenders

79

SECTION XI THE ADMINISTRATIVE AGENT

80

11.1 Appointment of Administrative Agent

80

11.2 Exculpatory Provisions

81

11.3 Rights as a Lender

82

11.4 Actions by Administrative Agent

82

11.5 Reliance by Administrative Agent

82

11.6 Delegation of Duties

82

11.7 Indemnification

83

11.8 Reimbursement

83

11.9 Non-Reliance on Administrative Agent and New Lenders

83

11.10 Resignation of Administrative Agent

84

11.11 No Other Duties, etc

84

SECTION XII GENERAL

84

12.1 Notices; Effectiveness of Signatures

84

12.2 Expenses

86

12.3 Indemnification

86

12.4 Survival of Covenants, Etc

87

12.5 Set-Off

87

12.6 No Waivers

88

12.7 Amendments, Waivers, etc.

88

12.8 Treatment of Certain Information; Confidentiality

90

12.9 Lost Note, Etc

91

12.10 Captions; Counterparts

91

12.11 Entire Agreement, Etc

91

12.12 Waiver of Jury Trial

91

12.13 Governing Law

92

12.14 Jurisdiction; Consent to Service of Process

92

12.15 USA PATRIOT Act Notice

93

12.16 Severability

93

 

EXHIBITS

 

Form of

 

A-1

 

Revolving Credit Note

A-2

 

Term Note

B

 

Notice of Borrowing or Conversion

C

 

Commitment Increase Supplement

D

 

Additional Lender Supplement

 



 

E

 

Assignment and Assumption

F

 

Compliance Certificate

G-1

 

Security Agreement

G-2

 

Collateral Assignment of Contracts

G-3

 

Fee Property Security Documents

G-4

 

Form of Mortgage/Deed of Trust

G-5

 

Form of Collateral Assignment of Leases and Rents

G-6

 

Intellectual Property Security Agreement

H

 

Pledge Agreement by Parent

I

 

Opinion Matters – Counsel to Loan Parties

J-1

 

Term Loan Payment Request

J-2

 

Revolving Loan Payment Request

 

SCHEDULES

 

1

 

Commitments and Applicable Percentages

4.1(e)

 

Sources and Uses

5.3

 

Consents

5.5

 

Material Liabilities and Indebtedness

5.8(b)

 

Encumbrances

5.8(c)

 

Owned Real Property

5.8(d)(i)

 

Leased Real Property (Lessee)

5.8(d)(ii)

 

Leased Real Property (Lessor)

5.8(e)

 

Existing Investments

5.13

 

Subsidiaries and Other Equity Investments; Loan Parties

5.17

 

Intellectual Property Matters

6.15

 

Post-Closing Deliveries

8.1(e)

 

Existing Indebtedness

8.3(h)

 

Existing Encumbrances

12.1

 

Administrative Agent’s Office, Certain Addresses for Notices

 



 

CREDIT AGREEMENT

 

THIS CREDIT AGREEMENT is made as of January 31, 2008, by and among STAR BUFFET, INC., STAR BUFFET MANAGEMENT, INC., SUMMIT FAMILY RESTAURANTS, INC., HTB RESTAURANTS, INC. and NORTHSTAR BUFFET, INC., each a Delaware corporation (each individually, a “ Borrower ”, and collectively, the “ Borrowers ”), WELLS FARGO BANK, N.A., a national banking association (“ Wells Fargo ”), and the other financial institutions from time to time parties hereto as Lenders (together with Wells Fargo, each individually, a “ Lender ”, and collectively, the “ Lenders ”), WELLS FARGO BANK, N.A., as administrative agent for the Lenders (in such capacity, the “ Administrative Agent ”) and in its capacity as LC Issuer (as hereinafter defined), WELLS FARGO BANK, N.A., as Syndication Agent (in such capacity, the “ Syndication Agent ”), and WELLS FARGO BANK, N.A., as Lead Arranger (in such capacity, the “ Lead Arranger ”).

 

WHEREAS, the Borrowers, other than Parent, are direct or indirect wholly owned Subsidiaries of the Parent;

 

WHEREAS, the relationship of the other Borrowers to the Parent provides numerous benefits, including shared purchasing strength and other economies of scale, which benefits will be increased by the Acquisition;

 

WHEREAS, the Borrowers have requested that the Lenders provide a term loan facility and a revolving credit facility, and the Lenders have indicated their willingness to lend and the LC Issuer has indicated its willingness to issue Letters of Credit, in each case, on the terms and subject to the conditions set forth herein;

 

WHEREAS, each Borrower is jointly and severally liable for the Obligations arising hereunder and under the other Loan Documents; and

 

WHEREAS, by virtue of the foregoing and after giving effect to the probable liability of each Borrower hereunder and under the Loan Documents, each Borrower considers that it is receiving at least fair consideration and reasonably equivalent value from the Lenders for the Obligations.

 

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

 

SECTION I

 

DEFINITIONS

 

1.1            Definitions .

 

All capitalized terms used in this Agreement or in the Notes or in any certificate, report or other document made or delivered pursuant to this Agreement (unless otherwise defined therein) shall have the meanings assigned to them below:

 

1



 

Acquisition .  The transactions contemplated by the Asset Purchase Agreement.

 

Additional Lender .  See Section 2.1(a)(iii).

 

Additional Lender Supplement .  See Section 2.1(a)(iii).

 

Administrative Agent .  See Preamble.

 

Administrative Questionnaire .  An administrative questionnaire in a form supplied by the Administrative Agent to any Lender.

 

Affected Loans .  See Section 2.12(a).

 

Affiliate .  With reference to any Person (i) any director or officer of that Person, (ii) any other Person controlling, controlled by or under direct or indirect common control of that Person, (iii) any other Person directly or indirectly holding 5% or more of any class of the capital stock or other equity interests (including options, warrants, convertible securities and similar rights) of that Person and (iv) any other Person 5% or more of any class of whose capital stock or other equity interests (including options, warrants, convertible securities and similar rights) is held directly or indirectly by that Person.

 

Agreement .  This Credit Agreement, including the Exhibits and Schedules hereto, as the same may be supplemented or amended or restated from time to time.

 

Alternate Base Rate .  The greater of (i) the rate of interest announced from time to time by the Administrative Agent at its head office as its “Base Rate” or “Prime Rate”, and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/8 of 1%).  The Base Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer.  Any change in the Base Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change.

 

Anti-Terrorism Order .  The Executive Order 13224 issued on September 24, 2001.

 

Applicable Percentage .   With respect to (a) any Term Lender at any time, the percentage (carried out to the ninth decimal place) of the Total Term Loan Commitment represented by such Term Lender’s Term Commitment at such time, and (b) any Revolving Credit Lender at any time, the percentage (carried out to the ninth decimal place) of the Total Revolving Credit Commitment represented by such Revolving Credit Lender’s Revolving Credit Commitment at such time.  If the commitment of each Revolving Credit Lender to make Revolving Credit Loans and the obligation of the LC Issuer to issue Letters of Credit have been terminated pursuant to Section 9.2, or if the Revolving Credit Commitments have expired, then the Applicable Percentage of each Revolving Credit Lender shall be determined based on the Applicable Percentage of such Revolving Credit Lender most recently in effect, giving effect to any subsequent assignments.  The initial Applicable Percentage of each Lender in respect of each credit facility hereunder is set forth opposite the name of such Lender on Schedule 1 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable.

 

2



 

Approved Fund .  Any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

 

Asset Purchase Agreement .  The Asset Purchase Agreement, dated as of December 2, 2007, between the Parent and Barnhill’s Buffet, Inc., as amended on January 21, 2008.

 

Assignee Group .  Two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.

 

Assignment and Assumption .  An assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 10.1(b)(iii)), and accepted by the Administrative Agent, in substantially the form of Exhibit E or any other form approved by the Administrative Agent.

 

Attributable Indebtedness .  On any date, (a) in respect of any Capitalized Lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease or similar payments under the relevant lease or other applicable agreement or instrument that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease or other agreement or instrument were accounted for as a Capitalized Lease and (c) all Synthetic Debt of such Person.

 

Bankruptcy Court .  The United States Bankruptcy Court for the Middle District of Tennessee, Nashville Division.

 

Base Rate Loan .  Any Loan bearing interest determined with reference to the Alternate Base Rate.

 

Borrowers .  See Preamble.

 

Borrowers’ Accountants .  Mayer Hoffman McCann P.C., or such other independent certified public accountants as are selected by the Borrowers and are reasonably acceptable to the Administrative Agent.

 

Business Day . (i) For all purposes other than as covered by clause (ii) below, any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts and  Los Angeles, California are open for the conduct of a substantial part of their commercial banking business; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, LIBOR Loans, any day that is a Business Day described in clause (i) and that is also a day on which dealings in U.S. dollar deposits are also carried on in the London interbank market and banks are open for business in London.

 

Capital Expenditures .  With respect to any Person for any period, any expenditure in respect of the purchase or other acquisition of any fixed or capital asset (excluding normal replacements and maintenance which are properly charged to current operations).

 

3



 

Capitalized Leases .  All leases that have been or should be, in accordance with GAAP, recorded as capitalized leases.

 

Cash Collateralize .   To pledge and deposit with or deliver to the Administrative Agent, for the benefit of the LC Issuer and the Lenders, as collateral for the Maximum Drawing Amount, cash or deposit account balances pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent and the LC Issuer.

 

Cash Management Agreement .   Any agreement to provide cash management services, including treasury, depository, overdraft, credit or debit card, electronic funds transfer and other cash management arrangements.

 

Cash Management Bank .  Any Person that, at the time it enters into a Cash Management Agreement, is a Lender or an Affiliate of a Lender, in its capacity as a party to such Cash Management Agreement.

 

CFC .  A Person that is a controlled foreign corporation under Section 957 of the Code.

 

Change of Control .   An event or series of events by which:  (a) Robert E. Wheaton shall have ceased to hold the office, and engage in the duties and have the responsibilities thereof, in the Parent that he holds as of the Closing Date and a successor reasonably satisfactory to the Majority Lenders shall not have been appointed within 30 days thereafter; (b) Robert E. Wheaton shall have ceased to hold beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of at least 40% of the fully diluted equity interests of the Parent; or (c) any Person or two or more Persons acting in concert (other than Robert E. Wheaton (or Persons of which Robert E. Wheaton would be deemed to have beneficial ownership)) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of more than 10% of the fully diluted equity interests of the Parent outstanding on the date hereof.

 

Closing Date .  The first date on which the conditions set forth in Sections 4.1 have been satisfied and the initial Loans are to be made hereunder.

 

Code .  The Internal Revenue Code of 1986 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect.

 

Collateral .  All of the property, rights and interests of the Borrowers, their Subsidiaries and any other Person that are or are intended to be subject to the security interests and liens created by the Security Documents.

 

Communications .  See Section 12.1.

 

Commitment Fee .  See Section 2.6(a).

 

Commitment Increase Supplement .  See Section 2.1(a)(iii).

 

Commitments .  In relation to any particular Lender, the Revolving Credit Commitment and/or the Term Loan Commitment of such Lender.

 

4



 

Consolidated EBITDA .  At any date of determination for any fiscal period, an amount equal to Consolidated Net Income of the Borrowers and their Subsidiaries for such fiscal period plus (a) the following to the extent excluded or deducted in calculating such Consolidated Net Income:  (i) Consolidated Interest Charges, (ii) the provision for Federal, state, local and foreign income taxes paid or payable, (iii) depreciation (including, without limitation, depreciation of leasehold improvements) and amortization expense, (iv) other non-recurring expenses reducing such Consolidated Net Income which do not represent a cash item in such period or any future period (in each case of or by the Borrowers and their Subsidiaries for such fiscal period), (v) Consolidated Restaurant Pre-Opening Expenses and (vi) fees and expenses incurred by the Borrowers in connection with the transactions contemplated by this Agreement and the Asset Purchase Agreement, including, without limitation, attorneys’ fees, minus (b) the following to the extent included in calculating such Consolidated Net Income:  (i) Federal, state, local and foreign income tax credits and (ii) all non-recurring items increasing Consolidated Net Income (in each case of or by the Borrowers and their Subsidiaries for such fiscal period).

 

Consolidated EBITDAR .  For any fiscal period, the sum of (i) the Consolidated EBITDA for such fiscal period, plus (ii) the Consolidated Rent Expense for such fiscal period, but only to the extent such Consolidated Rent Expense was excluded or deducted in computing such Consolidated EBITDA.

 

Consolidated Funded Indebtedness .  As of any date of determination, for the Borrowers and their Subsidiaries on a consolidated basis and without duplication, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, (b) all purchase money Indebtedness, (c) all direct obligations arising under letters of credit, bankers’ acceptances, bank guaranties, surety bonds and similar instruments, (d) all monetary obligations secured by any mortgage, pledge, security interest or other Encumbrance on property owned or acquired by the Borrowers or any Subsidiary, whether or not the obligations secured thereby shall have been assumed, (e) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business), (f) all Attributable Indebtedness, (g) without duplication, all Guarantees with respect to outstanding Indebtedness of the types specified in clauses (a) through (f) above of Persons other than the Borrowers or any Subsidiary, and (h) all Indebtedness of the types referred to in clauses (a) through (g) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Borrowers or a Subsidiary is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to such Borrower or such Subsidiary.

 

Consolidated Interest Charges .   For any fiscal period, the sum of (a) all interest, premium payments, debt discount, fees, charges and related expenses in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, (b) all interest paid or payable with respect to discontinued operations and (c) the portion of rent expense under Capitalized Leases that is treated as interest in accordance with GAAP, in each case, of or by the Borrowers and their Subsidiaries on a Consolidated basis for such fiscal period.

 

5



 

Consolidated Net Income .  At any date of determination for any fiscal period, the net income (or loss) of the Borrowers and their Subsidiaries on a Consolidated basis for such fiscal period; provided that Consolidated Net Income shall exclude, without duplication: (a) extraordinary gains and extraordinary losses for such fiscal period; (b) the net income of any Subsidiary during such fiscal period to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such income is not permitted by operation of the terms of its organization documents or any agreement, instrument or law applicable to such Subsidiary during such fiscal period, except that the Borrowers’ equity in any net loss of any such Subsidiary for such fiscal period shall be included in determining Consolidated Net Income; (c) any income (or loss) for such Period of any Person if such Person is not a Subsidiary, except that the Borrowers’ equity in the net income of any such Person for such fiscal period shall be included in Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such Period to the Borrowers or a Subsidiary as a dividend or other distribution (and in the case of a dividend or other distribution to a Subsidiary, such Subsidiary is not precluded from further distributing such amount to the Borrowers as described in clause (b) of this proviso); (d) any gain or loss arising from any write-up of assets, except to the extent inclusion thereof shall be approved in writing by the Administrative Agent; (e) earnings of any Subsidiary accrued prior to the date it became a Subsidiary; (f) any non-cash stock based compensation income or expense related to restricted stock or stock options; (g) any deferred or other credit representing any excess of the equity of any Subsidiary at the date of acquisition thereof over the amount invested in such Subsidiary; and (h) the proceeds of any life insurance policy.

 

Consolidated Pre-Distribution Fixed Charge Coverage Ratio .   At any date of determination for any fiscal period, the ratio of (a) the total of (i) Consolidated EBITDAR for such fiscal period, less (ii) the aggregate amount of Federal, state, local and foreign income taxes paid in cash, in each case, of or by the Borrowers and their Subsidiaries for such fiscal period, and less (iii) the aggregate amount of all Maintenance Capital Expenditures made during such fiscal period to (b) the sum of (i) Consolidated Interest Charges for such fiscal period, plus (ii) the aggregate principal amount of all regularly scheduled principal payments or redemptions or similar acquisitions for value of outstanding debt for borrowed money during such fiscal period (excluding, however, the repayment of the Indebtedness under the Existing Credit Agreement on the Closing Date), plus (iii) the Consolidated Rent Expense for such fiscal period.

 

Consolidated Post-Distribution Fixed Charge Coverage Ratio .   At any date of determination for any fiscal period, the ratio of (a) the total of (i) Consolidated EBITDAR for such fiscal period, less (ii) the aggregate amount of Federal, state, local and foreign income taxes paid in cash, in each case, of or by the Borrowers and their Subsidiaries for such fiscal period, and less (iii) the aggregate amount of all Maintenance Capital Expenditures made during such fiscal period to (b) the sum of (i) Consolidated Interest Charges for such fiscal period, plus (ii) the aggregate principal amount of all regularly scheduled principal payments or redemptions or similar acquisitions for value of outstanding debt for borrowed money during such fiscal period (excluding, however, the repayment of the Indebtedness under the Existing Credit Agreement on the Closing Date), plus (iii) the Consolidated Rent Expense for such fiscal period, and plus (iv) any dividend, distribution, loan, advance, guaranty, extension of credit or other payment, whether in cash or property, made by any Borrower to or for the benefit of any Person (other

 

6



 

than another Borrower) who holds an Equity Interest in any Borrower or any of their Subsidiaries, whether or not such interest is evidenced by a security, and any purchase, redemption, retirement or other acquisition for value of any Equity Interest of the Borrower or any of its Subsidiaries, whether now or hereafter outstanding, or of any options, warrants or similar rights to purchase such Equity Interest or any security convertible into or exchangeable for such Equity Interest.

 

Consolidated Rent Expense .   For any fiscal period, the sum of all rental obligations (payable in cash) incurred by the Borrowers or any Subsidiary during such fiscal period with respect to all operating leases (not Capitalized Leases) of real and personal property, calculated in accordance with GAAP on a Consolidated basis.

 

Consolidated Restaurant Pre-Opening  Expenses .  “Start-up Costs” (as defined in SOP 98-5 published by the American Institute of Certified Public Accountants) of the Borrowers related to the acquisition, opening and organizing of New Operating Units, such costs including, without limitation, the cost of feasibility studies, initial marketing costs, construction period rents, staff training, and recruiting and travel costs for employees engaged in such start-up activities.

 

Default .  An Event of Default or event or condition that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default.

 

Defaulting Lender .  Any Lender that (a) has failed to fund any portion of the Term Loans, Revolving Credit Loans, participations in LC Disbursements required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.

 

Disposition or Dispose .  The sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person (or the granting of any option or other right to do any of the foregoing), including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.

 

Drawdown Date .  The Business Day on which any Loan is made or is to be made.

 

Eligible Assignee .   Any Person that meets the requirements to be an assignee under Section 10.1(b)(iii), (v) and (vi) (subject to such consents, if any, as may be required under Section 10.1(b)(iii)).

 

Eligible Swap Agreements .  Swap Agreements purchased by the Borrowers from a Lender.

 

Encumbrances .  See Section 8.3.

 

7



 

Environmental Laws .  Any and all applicable federal, state and local environmental, health or safety statutes, laws, regulations, rules and ordinances (whether now existing or hereafter enacted or promulgated), and all applicable judicial, administrative and regulatory decrees, judgments, orders and interpretations, including common law rulings and determinations, relating to injury to, or the protection of, human health or the environment, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation, remediation and removal of emissions, discharges, releases or threatened releases of Hazardous Materials into the environment or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of such Hazardous Materials.

 

Equity Interests .  With respect to any Person, all of the shares of capital stock of, or membership, partnership or other ownership or profits interest in, such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of, or membership, partnership or other ownership or profits interest in, such Person, all of the securities convertible into or exchangeable for shares of capital stock of, or membership, partnership or other ownership or profits interest in, such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares or such other interests, and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

 

ERISA .  The Employee Retirement Income Security Act of 1974 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect.

 

ERISA Affiliate .  Any trade or business, whether or not incorporated, that is treated as a single employer with the Borrowers under Section 414(b), (c), (m) or (o) of the Code and Section 4001(a)(14) of ERISA.

 

ERISA Event .  (a) Any “reportable event,” as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of the Borrowers or any ERISA Affiliate from any Plan or Multiemployer Plan; (f) the receipt by the Borrowers or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the receipt by the Borrowers or any ERISA Affiliate of any notice concerning the imposition of Withdrawal Liability (as defined in Part I of Subtitle E of Title IV of ERISA) with respect to any Multiemployer Plan or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a Prohibited Acquisition with respect to which the Borrowers or any of their Subsidiaries is a “disqualified person” (within the meaning of Section 

 

8



 

4975 of the Code) or with respect to which the Borrowers or any such Subsidiary could otherwise be liable; and (i) any other event or condition with respect to a Plan or Multiemployer Plan that could reasonably be expected to result in material liability of the Borrowers.

 

Event of Default .  Any event described in Section 9.1.

 

Excess Cash Flow .  For any Fiscal Year of the Borrowers, the excess (if any) of (a) the sum of Consolidated EBITDA for such Fiscal Year, over (b) the sum (for such Fiscal Year) of (i) Consolidated Interest Charges actually paid in cash by the Borrowers and their Subsidiaries, (ii) the aggregate principal amount of all principal payments, redemptions and acquisitions for value of Consolidated Funded Indebtedness actually made during such Fiscal Year to the extent permitted by this Agreement, including principal payments of Term Loans, but excluding principal payments of Revolving Loans except to the extent that the Total Revolving Credit Commitment is permanently reduced in connection with any such payment of Revolving Loans, (iii) all income taxes actually paid in cash by the Borrowers and their Subsidiaries, and (iv) Capital Expenditures (including Growth Capital Expenditures) actually made by the Borrowers and their Subsidiaries in such Fiscal Year to the extent permitted by this Agreement (net of the proceeds of Indebtedness other than Loans permitted by this Agreement or of contributions to the capital of the Borrowers, to the extent such proceeds are applied to fund such Capital Expenditures).

 

Exchange Act .  The Securities Exchange Act of 1934, as amended.

 

Excluded Taxes .  With respect to the Administrative Agent, any Lender, the LC Issuer or any other recipient of any payment to be made by or on account of any obligation of the Borrowers hereunder, (a) taxes imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction in which the Borrowers are located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrowers under Section 10.2), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party hereto (or designates a new lending office) or is attributable to such Foreign Lender’s failure or inability (other than as a result of a change in law) to comply with Section 2.15(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrowers with respect to such withholding tax pursuant to Section 2.15(a).

 

Existing Credit Agreement .  The Credit Agreement dated as of October 28, 2003, as amended, between the Parent and M&I Marshall & Ilsley Bank.

 

Extraordinary Receipt .  Any cash received by or paid to or for the account of any Person not in the ordinary course of business, including tax refunds, pension plan reversions, proceeds of insurance (other than proceeds of business interruption insurance), condemnation and eminent domain awards (and payments in lieu thereof), and indemnity payments.

 

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Facility .  The Term Facility or the Revolving Credit Facility, as the context may require.

 

Federal Funds Effective Rate .  For any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by the Administrative Agent.

 

Fee Letter .  See Section 12.11.

 

Fee Property .  The properties listed on Schedule 5.8(c)  hereto and such other real property assets in which Borrower or a Subsidiary may acquire fee simple title from and after the date hereof .

 

Fee Property Security Documents .  The documents listed on Exhibit G-3 hereto.

 

Financial Statements .  See Section 5.5(b)

 

Fiscal Month .  Any of the thirteen periods of time, having approximately the same number of days, which comprise the Fiscal Year of the Borrowers.

 

Fiscal Quarter .  Any of the four periods of time, three of which consist of three Fiscal Months and one of which consists of four Fiscal Months, which comprise the Fiscal Year of the Borrowers.

 

Fiscal Year .  The 52-53 week fiscal period of the Borrowers ending on the last Monday in January of each calendar year.

 

Fixed Rate Election .  The Interest Period selected for a particular LIBOR Loan pursuant to Section 2.3.

 

Foreign Lender .  Any Lender that is organized under the laws of a jurisdiction other than that in which any Borrower is resident for tax purposes.  For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

 

FRB .  See Section 2.5(d).

 

Fund .  Any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

 

GAAP .  Generally accepted accounting principles, consistently applied.

 

Governmental Authority .  The government of the United States of America or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority,

 

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instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).

 

Growth Capital Expenditures .  Capital Expenditures for growth, including, but not limited to, expenditures for remodeling or re-imaging any Operating Unit that is not a New Operating Unit, New Construction and the acquisition of restaurants.

 

Guarantees .  As applied to the Borrowers and their Subsidiaries, all guarantees, endorsements or other contingent or surety obligations with respect to obligations of others whether or not reflected on the consolidated balance sheet of the Borrowers and their Subsidiaries, including any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other Person.

 

Hazardous Material .  Any substance (i) the presence of which requires or then requires notification, investigation, a removal or remediation under any Environmental Law; (ii) which is or becomes defined as a “hazardous waste”, “hazardous material” or “hazardous substance” or “pollutant” or “contaminant” under any present or future Environmental Law or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and any applicable local statutes and the regulations promulgated thereunder; (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and which is or becomes regulated pursuant to any Environmental Law by any Governmental Authority, agency, department, commission, board, agency or instrumentality of the United States, any state of the United States, or any political subdivision thereof; or (iv) without limitation, which contains gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls (“ PCB’ s”).

 

Hazardous Materials Indemnity Agreement .  The Hazardous Materials Indemnity Agreement, dated as of the date hereof, made by the Borrowers in favor of the Administrative Agent, as amended and in effect from time to time.

 

Increasing Lender .  See Section 2.1(a)(iii).

 

Indebtedness .  As to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) the maximum amount of all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments; (c) net obligations of such Person under any Swap Agreement; (d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business and not past due for more than 60 days

 

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after the date on which such trade account was created); (e) indebtedness (excluding prepaid interest thereon) secured by an Encumbrance on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (f) all Attributable Indebtedness in respect of Capitalized Leases and Synthetic Lease Obligations of such Person and all Synthetic Debt of such Person; (g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person or any warrant, right or option to acquire such Equity Interest, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and (h) all Guarantees of such Person in respect of any of the foregoing. For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person.  The amount of any net obligation under any Swap Agreement on any date shall be deemed to be the Swap Termination Value thereof as of such date.

 

Indemnified Taxes .  All Taxes other than Excluded Taxes.

 

Interest Period .  With respect to each LIBOR Loan, the period commencing on the date of the making or continuation of or conversion to such LIBOR Loan and ending one (1) month, two (2) months or three (3) months thereafter, as the Borrowers may elect in the applicable Notice of Borrowing or Conversion; provided that:

 

(i)  any Interest Period (other than an Interest Period determined pursuant to clause (ii) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day;

 

(ii)  any Interest Period that would otherwise end after the Maturity Date, shall end on the Maturity Date;

 

(iii)  notwithstanding clause (ii) above, no Interest Period shall have a duration of less than one (1) month, and if any Interest Period applicable to a Loan would be for a shorter period, such Interest Period shall not be available hereunder; and

 

(iv)  the Borrowers may not select any Interest Period for a Term Loan, if, after giving effect to such selection, the aggregate principal amount of all Term Loans having Interest Periods ending after any date on which an installment of the Term Loans is scheduled to be repaid would exceed the aggregate principal amount of the Term Loans scheduled to be outstanding after giving effect to such repayment.

 

Investment .  As applied to the Borrowers and their Subsidiaries, the purchase or acquisition of any share of capital stock, partnership interest, evidence of indebtedness or other equity security of any other Person (including any Subsidiary), any loan, advance or extension of credit (excluding accounts receivable arising in the ordinary course of business) to, or contribution to the capital of, any other Person (including any Subsidiary), any real estate held

 

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for sale or investment, any securities or commodities futures contracts held, any other investment in any other Person (including any other Subsidiary of the Borrowers), and the making of any commitment or acquisition of any option to make an Investment.

 

IP Rights .  See Section 5.17.

 

Junior Subordinated Debt .  All Indebtedness and other obligations of the Parent under or in respect of the Junior Subordinated Note and the Junior Subordinated Debt Documents.

 

Junior Subordinated Debt Documents .  The Junior Subordinated Note, the Loan Agreement dated June 15, 2007 between the Parent and the Junior Subordinated Lender, as amended as of the date hereof, and any other agreements evidencing, securing or otherwise made pursuant to or in connection with the Junior Subordinated Note, in each case as in effect on the Closing Date without any amendment to or modification thereof, except as permitted by the Subordination Agreement.

 

Junior Subordinated Lender .  Collectively, Robert E. Wheaton and Suzanne H. Wheaton.

 

Junior Subordinated Note .  That certain Note, dated as of June 15, 2007, in the original principal amount of $1,400,000 made by the Parent payable to the Junior Subordinated Lender.

 

LC Disbursement .  A payment made by the LC Issuer pursuant to a Letter of Credit.

 

LC Exposure .   At any time, the sum of (a) the Maximum Drawing Amount at such time, and (b) the aggregate LC Disbursements that at such time have not been reimbursed by or on behalf of the Borrowers to the LC Issuer.  The LC Exposure of any Revolving Credit Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time.

 

LC Issuer .  Wells Fargo.

 

Landlord Waivers .  Landlord’s consent and estoppel certificates (in form reasonably acceptable to the Administrative Agent) in favor of the Administrative Agent specified therein and covering those leased real properties as specified on Schedule 5.8(d)(i)  and any leased real properties that are acquired by the Borrowers or any Subsidiary after the date hereof.

 

Lead Arranger .  See Preamble.

 

Lenders .  Wells Fargo, the other financial institutions parties hereto and listed on Schedule 1 attached hereto and each other Person that may after the date hereof become an assignee of a Lender pursuant to Section 10.1 and, thereby a party to this Agreement as a “Lender” hereunder, but from and after the effective date that any Person shall have assigned its entire Commitment pursuant to Section 10.1, “Lenders” shall no longer include such Person.

 

Letter of Credit Applications .  Applications for Letters of Credit in such form as may be required by the LC Issuer from time to time which are executed and delivered by the Borrowers to the LC Issuer pursuant to Section 3.1, as the same may be amended or supplemented from time to time.

 

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Letter of Credit Fee .  See Section 2.6(b).

 

Letter of Credit Participation .  See Section 3.1(b).

 

Letter of Credit Sublimit .  $500,000.

 

Letters of Credit .  See Section 3.1(a).

 

LIBOR Loan .  Any Loan bearing interest at a rate determined with reference to the LIBOR Rate.

 

LIBOR Rate .  With respect to any LIBOR Loan for any Interest Period, the rate per annum as determined by the Administrative Agent on the basis of the offered rates for deposits in U.S. dollars, for a period of time comparable to such Interest Period, which appears on Reuters page LIBOR01 (formerly Telerate page 3750) as of 11:00 a.m. London time on the day that is two Business Days preceding the Drawdown Date of such LIBOR Loan (or, if for any reason such rate is unavailable from Reuters, from any other similar company or service that provides rate quotations comparable to those currently provided by Reuters); provided, however, that if the rate described above is not provided by Reuters or such other similar company or service on any applicable interest determination date, the LIBOR Rate shall be the rate (rounded upward, if necessary, to the nearest one hundred-thousandth of a percentage point) determined on the basis of the offered rates for deposits in U.S. dollars for a period of time comparable to such Interest Period which are offered by four major banks in the London interbank market at approximately 11:00 a.m. London time, on the day that is two (2) Business Days preceding the first day of such Interest Period as selected by the Administrative Agent.  The principal London office of each of the four major London banks will be requested to provide a quotation of its U.S. dollar deposit offered rate.  If at least two such quotations are provided, the LIBOR Rate for that date will be the arithmetic mean of the quotations.  If fewer than two quotations are provided as requested, the rate for that date will be determined on the basis of the rates quoted for loans in U.S. dollars to leading European banks for a period of time comparable to such Interest Period offered by major banks in New York City at approximately 11:00 a.m. New York City time, on the day that is two Business Days preceding the first day of such Interest Period.

 

Loan Documents .  This Agreement, the Notes, the Letter of Credit Applications, any Subsidiary Guaranty, the Eligible Swap Agreements, Secured Cash Management Agreements, the Fee Letter and the Security Documents, together with any agreements, instruments or documents executed and delivered pursuant to or in connection with any of the foregoing; provided that for purposes of the definition of “Material Adverse Effect” and Sections V through IX, “Loan Documents” shall not include Eligible Swap Agreements or Secured Cash Management Agreements.

 

Loan Parties .  Collectively, the Borrowers and each Subsidiary Guarantor.

 

Loans .  The loans made or to be made by the Lenders to the Borrowers pursuant to this Agreement, including Revolving Credit Loans and Term Loans.

 

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Maintenance Capital Expenditures .  Any Capital Expenditure that is not a Growth Capital Expenditure.

 

Majority Lenders .  As of any date, one (1) or more Lenders (that are not Defaulting Lenders) holding more than fifty percent (50%) of the Total Commitments, or if the Total Revolving Credit Commitments shall have terminated, one (1) or more Lenders (that are not Defaulting Lenders) holding more than fifty percent (50%) of the outstanding principal amount of the Loans and Letter of Credit Participations; provided that the portion of the Total Commitments, or the outstanding principal amount of the Loans and Letter of Credit Participations, as the case may be, that are held or deemed held by, any Defaulting Lender will be excluded for purposes of making a determination of Majority Lenders.

 

Majority Revolving Credit Lenders .  As of any date of determination, one (1) or more Lenders holding more than fifty percent (50%) of the Total Revolving Credit Outstandings; provided that the portion of the Total Revolving Credit Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Majority Revolving Credit Lenders.

 

Majority Term Lenders .  As of any date of determination, one (1) or more Lenders holding more than fifty percent (50%) of the outstanding principal amount of Term Loans on such date; provided that the portion of the outstanding principal amount of Term Loans held by any Defaulting Lender shall be excluded for purposes of making a determination of the Majority Term Lenders.

 

Material Adverse Effect .  Any of (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) of the Borrowers and their Subsidiaries taken as a whole; (b) a material impairment of the rights and remedies of the Administrative Agent or any Lender under any Loan Document or of the ability of any Loan Party to perform its obligations under any Loan Document to which it is a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document (including with respect to the lien priority of any Security Document), to which it is a party.

 

Maturity Date .  January 31, 2012.

 

Maximum Drawing Amount .  At any time, the aggregate undrawn amount of all then outstanding Letters of Credit.

 

Measurement Period .  At any date of determination, the most recently completed four Fiscal Quarters of the Borrower.

 

Multiemployer Plan .  Any Plan which is a Multiemployer Plan as defined in Section 4001(a)(3) of ERISA.

 

Net Cash Proceeds .  With respect to:

 

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(a)            any Disposition by the Borrowers or any of their Subsidiaries, or any Extraordinary Receipt received or paid to the account of the Borrowers or any of their Subsidiaries, the excess, if any, of (i) the sum of cash and cash equivalents received in connection with such transaction (including any cash or cash equivalents received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) over (ii) the sum of (A) the amount of any Indebtedness that is secured by the applicable asset and that is required to be repaid in connection with such transaction (other than Indebtedness under the Loan Documents), (B) the reasonable and customary out-of-pocket expenses incurred by the Borrowers or a Subsidiary in connection with such transaction and (C) income taxes reasonably estimated to be actually payable within two years of the date of the relevant transaction as a result of any gain recognized in connection therewith; provided that, if the amount of any estimated taxes pursuant to subclause (C) exceeds the amount of taxes actually required to be paid in cash in respect of such Disposition, the aggregate amount of such excess shall constitute Net Cash Proceeds; and

 

(b)            the sale or issuance of any Equity Interest by the Borrowers or any of their Subsidiaries, or the incurrence or issuance of any Indebtedness by the Borrower or any of their Subsidiaries, the excess of (i) the sum of the cash and cash equivalents received in connection with such transaction over (ii) the underwriting discounts and commissions, and other reasonable and customary out-of-pocket expenses, incurred by the Borrowers or such Subsidiaries in connection therewith.

 

New Construction . Construction by the Borrowers or any of their Subsidiaries related to the opening of a New Operating Unit or the meaningful expansion of capacity at an Operating Unit which is not a New Operating Unit.

 

New Lender .  See Section 2.1(a)(ii).

 

New Operating Unit .  A restaurant owned or operated by the Borrowers or any of their Subsidiaries whose ownership or operation by the Borrowers or any of their Subsidiaries starts on a date after the Closing Date.

 

Note Record .  Any internal record, including a computer record, maintained by any Lender with respect to any Loan.

 

Notes .  Collectively, the Revolving Credit Notes and the Term Notes.

 

Notice of Borrowing or Conversion .  The notice, substantially in the form of Exhibit B hereto, to be given by the Borrowers to the Administrative Agent to request a Loan or to convert an outstanding Loan of one Type into a Loan of another Type, in accordance with Section 2.3.

 

Obligations .  The following:

 

(a)            the due and punctual payment by the Borrowers of (i) the principal of and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, when and as due, whether at maturity, by acceleration,

 

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upon one or more dates set for prepayment or otherwise, (ii) each payment required to be made by the Borrowers in respect of any Letter of Credit, when and as due, including the unreimbursed amount of any LC Disbursement, interest thereon (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) and obligations to provide cash collateral, and (iii) all other monetary obligations of the Borrowers under this Agreement and under the other Loan Documents (including, without limitation, under each Eligible Swap Agreement and Secured Cash Management Agreement), including obligations to pay fees, expense reimbursement obligations and indemnification obligations, whether primary, secondary, direct, contingent, fixed or otherwise, arising under the Loan Documents (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), and

 

(b)            the due and punctual payment of all the monetary obligations of each other Loan Party under or pursuant to this Agreement and each of the other Loan Documents.

 

OFAC.   The U.S. Department of the Treasury’s Office of Foreign Assets Control.

 

Operating Units .   All restaurants operated by the Borrowers or any of their Subsidiaries, which for avoidance of doubt, shall include all New Operating Units.

 

Other Taxes .  All present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

 

Overpaying Borrower .  See Section 2.16(b).

 

Parent .  Star Buffet, Inc., a Delaware corporation.

 

Parent Financial Statements .  See Section 5.25.

 

Parent SEC Documents .  The Parent’s (a) Annual Report on Form 10-K for its most recent fiscal year for which such a report has been filed, (b) Quarterly Report on Form 10-Q for its most recent fiscal quarter for which such a report has been filed, (c) most recent Proxy Statement on Schedule 14A, and (d) all Current Reports on Form 8-K filed since the end of the most recent fiscal year for which it has filed its Annual Report on Form 10-K.

 

Participant .  See Section 10.1(d).

 

Patriot Act .  See Section 12.15.

 

Payment Date .  The first Business Day of each calendar quarter.

 

PBGC .  The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

 

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Pension Plan .  Any Plan which is an “employee pension benefit plan” (as defined in ERISA).

 

Permitted Encumbrances .  See Section 8.3.

 

Person .  Any individual, corporation, partnership, trust, unincorporated association, business or other legal entity, and any government or governmental agency or political subdivision thereof.

 

Plan .  Any “employee pension benefit plan” or “employee welfare benefit plan” (each as defined in ERISA) maintained by the Borrowers or any Subsidiary of the Borrowers.

 

Platform .  An electronic delivery system (which may be provided by the Administrative Agent, an Affiliate of the Administrative Agent or any Person that is not an Affiliate of the Administrative Agent), such as IntraLinks or a substantially similar electronic system.

 

Pledge Agreement .  See Section 4.1(a)(iii).

 

Pro Forma Financial Statements .  See Section 4.1(h).

 

Prohibited Acquisition .  Any “prohibited transaction” within the meaning of Section 406 of ERISA or Section 4975 of the Code.

 

Qualified Investments .  As applied to the Borrowers and their Subsidiaries, investments in (i) notes, bonds or other obligations of the United States of America or any agency thereof that as to principal and interest constitute direct obligations of or are guaranteed by the United States of America and that have maturity dates not more than one year from the date of acquisition, (ii) certificates of deposit, demand deposit accounts or other deposit instruments or accounts maintained in the ordinary course of business with banks or trust companies organized under the laws of the United States or any state thereof that have capital and surplus of at least $500,000,000 which certificates of deposit and other deposit instruments, if not payable on demand, have maturities of not more than one year from the date of acquisition, (iii) commercial paper that is rated not less than prime-one or A-1 or their equivalents by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively, or their successors, and in each case maturing not more than one year from the date of acquisition, (iv) any repurchase agreement secured by any one or more of the foregoing.

 

Register .  See Section 10.1(c).

 

Related Parties .  With respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Person’s Affiliates.

 

Reserve Percentage .  For any Interest Period, the aggregate of the maximum reserve percentages (including all basic, marginal, special, emergency and supplemental reserves), expressed as a decimal, established by the Board of Governors of the Federal Reserve System and any other banking authority, domestic or foreign, to which any Lender is subject with respect to “Eurocurrency Liabilities” (as defined in regulations issued from time to time by such Board

 

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of Governors).  The Reserve Percentage shall be adjusted automatically on and as of the effective date of any change in any such reserve percentage.

 

Responsible Officer .  The chief executive officer, president, chief financial officer, treasurer or controller of a Loan Party.  Any document delivered hereunder that is signed by a Responsible Officer of a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Loan Party.

 

Restricted Payment .  Any of the following: (a) any dividend, distribution, loan, advance, guaranty, extension of credit or other payment, whether in cash or property to or for the benefit of any Person who holds an Equity Interest in the Borrowers or any of their Subsidiaries, whether or not such interest is evidenced by a security, and any purchase, redemption, retirement or other acquisition for value of any Equity Interest of the Borrowers or any of their Subsidiaries, whether now or hereafter outstanding, or of any options, warrants or similar rights to purchase such Equity Interest or any security convertible into or exchangeable for such Equity Interest and (b) any payment or prepayment of any kind, whether in cash or property, to or for the benefit of any Person that is an Affiliate of (i) the Borrowers or any of their Subsidiaries or (ii) any holder of an Equity Interest in or any beneficiary of the Parent.

 

Revolving Credit Commitment .  In relation to any particular Revolving Credit Lender, the maximum dollar amount which such Lender has agreed to loan to the Borrowers as Revolving Credit Loans or to make available to the Borrowers pursuant to Letter of Credit Participations upon the terms and subject to the conditions of this Agreement, initially as set forth on Schedule 1 attached hereto, as such Lender’s Revolving Credit Commitment may be modified pursuant hereto and in effect from time to time.  Schedule 1 shall be amended from time to time to reflect any changes in the Revolving Credit Commitments of the Revolving Credit Lenders, and the Administrative Agent shall promptly provide copies of revised Schedule 1 to the Lenders.

 

Revolving Credit Facility .  The credit facility provided under Section 2.1(a).

 

Revolving Credit Lender .  Each Lender having a Revolving Credit Commitment.

 

Revolving Credit Loans .  See Section 2.1(a)(i).

 

Revolving Credit Note .  See Section 2.2(a).

 

Sanctioned Country .  A country subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/eotffc/ofac/sanctions/ index.html, or as otherwise published from time to time.

 

Sanctioned Person .  Any of the following:  (i) a Person named on the list of “Specially Designated Nationals and Blocked Persons” maintained by OFAC available at http://www.treas.gov/offices/ eotffc/ofac/sdn/index.html, or as otherwise published from time to time, or (ii) (A) an agency of the government of a Sanctioned Country, (B) an organization

 

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controlled by a Sanctioned Country, or (C) a person resident in a Sanctioned Country, to the extent subject to a sanctions program administered by OFAC.

 

SEC .  United States Securities and Exchange Commission.

 

Secured Cash Management Agreement .  Any Cash Management Agreement entered into between or among any Borrower and any Cash Management Bank.

 

Secured Parties .  Collectively, the Administrative Agent, the Lenders, the LC Issuer, the Swap Banks, the Cash Management Banks, and the other Persons the Obligations owing to which are or are purported to be secured by the Collateral under the terms of the Security Documents.

 

Securities Act .  The Securities Act of 1933, as amended.

 

Security Agreement .  See Section 4.1(a)(iii).

 

Security Documents .  The Security Agreement, the Hazardous Materials Indemnity Agreement, the Fee Property Security Documents, the Landlord Waivers, and the deposit account control agreements referenced in Section 4.1(a)(iii)(E), each in favor of the Administrative Agent to secure Obligations, in each case as amended and/or restated and in effect from time to time, and any additional documents evidencing or perfecting the Administrative Agent’s lien on the Collateral.

 

Solvent and Solvency .  With respect to any Person on any date of determination, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities pursuant to GAAP, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay such debts and liabilities as they mature, (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s property would constitute an unreasonably small capital, and (e) such Person is able to pay its debts and liabilities, contingent obligations and other commitments as they mature in the ordinary course of business.  The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.

 

Subordinated Debt .  Indebtedness of the Borrowers or any of their Subsidiaries, including, without limitation, the Junior Subordinated Debt, which is expressly subordinated and made junior to the payment and performance in full of the Obligations on terms and conditions reasonably satisfactory to the Majority Lenders.

 

Subordination Agreement .  The Subordination Agreement, dated the Closing Date, by and among the Administrative Agent, the Junior Subordinated Lender and the Parent, as amended, restated, supplemented or modified from time to time.

 

Subordination Provisions .  See Section 9.1(m).

 

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Subsidiary .  With respect to any Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person.  Unless otherwise specified, all references herein to a “ Subsidiary ” or to “ Subsidiaries ” shall refer to a Subsidiary or Subsidiaries of the Borrower.

 

Subsidiary Guarantor .  Each Subsidiary of any Borrower required to execute and deliver a Subsidiary Guaranty pursuant to Section 6.12.

 

Subsidiary Guaranty .  See Section 6.12.

 

Summary of Sources and Uses .  The summary of sources and uses of funds set forth on Schedule 4.1(e)  attached hereto.

 

Swap Agreement .   Any and all (a) rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.

 

Swap Bank .  Any Person that at the time it entered into a Swap Agreement was a Lender, an Affiliate of a Lender, or a bank or trust company organized under the laws of the United States or any state thereof that has capital and surplus of at least $1,000,000,000.

 

Swap Termination Value .   In respect of any one or more Swap Agreements, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Agreements, (a) for any date on or after the date such Swap Agreements have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Agreements, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Agreements (which may include a Lender or any Affiliate of a Lender).

 

Syndication Agent .  See Preamble.

 

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Synthetic Debt .  With respect to any Person as of any date of determination thereof, all obligations of such Person in respect of transactions entered into by such Person that are intended to function primarily as a borrowing of funds (including any minority interest transactions that function primarily as a borrowing) but are not otherwise included in the definition of “ Indebtedness ” or as a liability on the consolidated balance sheet of such Person and its Subsidiaries in accordance with GAAP.

 

Synthetic Lease Obligation .   The monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property (including sale and leaseback transactions), in each case, creating obligations that do not appear on the balance sheet of such Person but which, upon the application of any bankruptcy or similar law to such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).

 

Taxes   All present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

 

Term Lender .  Each Lender having a Term Loan Commitment.

 

Term Loans .  See Section 2.1(b).

 

Term Loan Commitment .  With respect to any Lender, the maximum dollar amount which such Lender has agreed to loan to the Borrower as a Term Loan upon the terms and subject to the conditions of this Agreement, initially as set forth on Schedule 1 attached hereto and as such Lender’s Term Loan Commitment may be modified pursuant hereto from time to time.  Schedule 1 shall be amended from time to time to reflect any changes in the Term Loan Commitments of the Term Lenders, and the Administrative Agent shall promptly provide copies of revised Schedule 1 to the Lenders.

 

Term Facility .  The credit facility provided under Section 2.1(b).

 

Term Notes .  See Section 2.2(b).

 

Title Company .  LandAmerica Title Insurance Company.

 

Title Policy .  For each Fee Property, an ALTA 1992 loan policy of title insurance providing coverage for each such property at least in the amount set forth on Schedule 5.8(c)  hereto, issued by the Title Company to Administrative Agent and its successors and assigns, insuring the Fee Property Security Documents for such Fee Property in accordance with the requirements of Section 4.1(a)(v).

 

Total Commitment .  The sum of the Total Revolving Credit Commitment and the Total Term Loan Commitment.

 

Total Lease Adjusted Leverage Ratio .  As of the end of any fiscal period, the ratio of (a) the sum of (i) Consolidated Funded Indebtedness as of the end of such fiscal period, plus (ii) the

 

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product of eight (8)  times the Consolidated Rent Expense for such fiscal period, to (b) Consolidated EBITDAR for such fiscal period.

 

Total Revolving Credit Commitment .  The sum of the Revolving Credit Commitments of the Revolving Credit Lenders as in effect from time to time, which as of the Closing Date shall be $2,000,000.

 

Total Revolving Credit Outstandings .  At any time, the sum of (i) the aggregate outstanding principal balance of the Revolving Credit Loans at the time and (ii) the LC Exposure at the time.

 

Total Term Loan Commitment .  The sum of the Term Loan Commitments of the Term Lenders as in effect from time to time, which as of the Closing Date shall be $7,000,000.

 

Type .  A LIBOR Loan or a Base Rate Loan.

 

Wells Fargo .  See Preamble.

 

Working Capital .  As of any date of determination, the excess of consolidated current assets over consolidated current liabilities of the Borrowers and their Subsidiaries.

 

1.2            Rules of Interpretation .

 

(a)            All terms of an accounting character used herein but not defined herein shall have the meanings assigned thereto by GAAP.  All calculations for the purposes of Section VII hereof shall be made in accordance with GAAP.

 

(b)            A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented and in effect from time to time in accordance with its terms and the terms of this Agreement.

 

(c)            The singular includes the plural and the plural includes the singular.  A reference to “Borrowers” shall include any single Borrower.  Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.

 

(d)            A reference to any Person includes its permitted successors and permitted assigns.

 

(e)            The words “include”, “includes” and “including” are not limiting.

 

(f)             The words “herein”, “hereof”, “hereunder” and words of like import shall refer to this Agreement as a whole and not to any particular section or subdivision of this Agreement.

 

(g)            All terms not specifically defined herein or by GAAP, which terms are defined in the Uniform Commercial Code as in effect in the State of New York, shall have the meanings assigned to them in such Uniform Commercial Code.

 

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SECTION II

 

DESCRIPTION OF CREDIT

 

2.1            Loans .

 

(a)            Revolving Credit Loans .

 

(i)             Upon the terms and subject to the conditions of this Agreement, and in reliance upon the representations, warranties and covenants of the Borrowers herein, each of the Lenders agrees, severally and not jointly, to make revolving credit loans (the “ Revolving Credit Loans ”) to the Borrowers and to acquire Letter of Credit Participations at the Borrowers’ request from time to time from and after the Closing Date and prior to the Maturity Date, provided that the Total Revolving Credit Outstandings (after giving effect to all requested Revolving Credit Loans and Letters of Credit) shall not exceed $250,000 on the Closing Date and shall not at any time exceed the Total Revolving Credit Commitment, and provided , further that the sum of the aggregate principal amount of outstanding Revolving Credit Loans made by each Lender and all outstanding Letter of Credit Participations of such Lender shall not at any time (after giving effect to all requested Revolving Credit Loans) exceed such Lender’s Revolving Credit Commitment.  Subject to the terms and conditions of this Agreement, the Borrowers may borrow, repay, prepay and reborrow amounts, up to the limits imposed by this Section 2.1, from time to time between the Closing Date and the Maturity Date upon request given to the Administrative Agent pursuant to Section 2.3.  Each request for a Revolving Credit Loan or a Letter of Credit hereunder shall constitute a representation and warranty by the Borrowers that the conditions set forth in Sections 4.1 or 4.2 (as the case may be) have been satisfied as of the date of such request.

 

(ii)            The Borrowers may (A) request any of one or more of the Revolving Credit Lenders to increase the amount of its Revolving Credit Commitment (which request shall be in writing and sent to the Administrative Agent to forward to such Lender) and/or (B) request the Administrative Agent to arrange for any of one or more banks or financial institutions not a party hereto (a “ New Lender ”) to become a party to and a Lender under this Agreement, provided that the identification and arrangement of such New Lender to become a party hereto and a Lender under this Agreement shall be reasonably acceptable to the Administrative Agent and will be made by the Administrative Agent in consultation with the Borrowers, and provided further that such New Lender is an Eligible Assignee, and provided further that in no event shall the amount of the Total Revolving Credit Commitment as increased pursuant to this Section 2.1(a) exceed $3,000,000.  In no event may any Lender’s Revolving Credit Commitment be increased without the prior written consent of such Lender, and the failure of any Lender to respond to the Borrowers’ request for an increase shall be deemed a rejection by such Lender of the Borrowers’ request.  The Total Revolving Credit Commitment may not be increased if, at the time of any proposed increase hereunder, a Default has occurred and is continuing.  Upon any request by the Borrowers to increase the Total Revolving Credit Commitment, the Borrowers shall be deemed to have represented and warranted on and as of the date of such request that no Default has occurred and is

 

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continuing, giving effect to such increase.  Notwithstanding anything contained in this Agreement to the contrary, no Lender shall have any obligation whatsoever to increase the amount of its Revolving Credit Commitment, and each Lender may at its option, unconditionally and without cause, decline to increase its Revolving Credit Commitment.

 

(iii)           If any Lender is willing, in its sole and absolute discretion, to increase the amount of its Revolving Credit Commitment hereunder (such a Lender hereinafter referred to as an “ Increasing Lender ”), it shall enter into a written agreement to that effect with the Borrowers and the Administrative Agent, substantially in the form of Exhibit C (a “ Commitment Increase Supplement ”), which agreement shall specify, among other things, the amount of the increased Revolving Credit Commitment of such Increasing Lender.  Upon the effectiveness of such Increasing Lender’s increase in its Revolving Credit Commitment, Schedule 1 shall, without further action, be deemed to have been amended appropriately to reflect the increased Revolving Credit Commitment and of such Increasing Lender.  Any New Lender which is willing to become a party hereto and a Lender hereunder shall enter into a written agreement with the Borrowers and the Administrative Agent, substantially in the form of Exhibit D (an “ Additional Lender Supplement ”), which agreement shall specify, among other things, its Revolving Credit Commitment hereunder.  When such New Lender becomes a Lender hereunder as set forth in the Additional Lender Supplement, Schedule 1 shall, without further action, be deemed to have been amended as appropriate to reflect the Revolving Credit Commitment of such New Lender.  Upon the execution by the Administrative Agent, the Borrowers and such New Lender of such Additional Lender Supplement, such New Lender shall become and be deemed a party hereto and a “Lender” hereunder for all purposes hereof and shall enjoy all rights and assume all obligations on the part of the Lenders set forth in this Agreement, and its Revolving Credit Commitment shall be the amount specified in its Additional Lender Supplement.  Each New Lender which executes and delivers an Additional Lender Supplement and becomes a party hereto and a “Lender” hereunder pursuant to such Additional Lender Supplement is hereinafter referred to as an “ Additional Lender .”

 

(iv)           In no event shall an increase in a Lender’s Revolving Credit Commitment or the Revolving Credit Commitment of a New Lender which results in the Total Revolving Credit Commitment exceeding the amount which is authorized at such time in resolutions previously delivered to the Administrative Agent become effective until the Administrative Agent shall have received a copy of the resolutions, in form and substance reasonably satisfactory to the Administrative Agent, of the boards of directors of the Borrowers authorizing the borrowings contemplated pursuant to such increase, certified by the secretary or an assistant secretary of such Borrower.  Upon the effectiveness of the increase in a Lender’s Revolving Credit Commitment or the Revolving Credit Commitment of a New Lender pursuant to the preceding sentence and execution by an Increasing Lender of a Commitment Increase Supplement or by an Additional Lender of an Additional Lender Supplement, the Borrowers shall make such borrowing from such Increasing Lender or Additional Lender, and/or shall make such prepayment of outstanding Revolving Credit Loans, as applicable, as shall be required to cause the aggregate outstanding principal amount of such Loans owing to each Lender (including

 

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each such Increasing Lender and Additional Lender) to be proportional to such Lender’s share of the relevant Total Revolving Credit Commitment after giving effect to any increase thereof.

 

(v)            Notwithstanding anything herein to the contrary, in no event may the Total Revolving Credit Commitment be increased hereunder unless (A) after giving effect to such increase (and assuming the Total Revolving Credit Commitment, as so increased, is fully utilized by the Borrowers), no Default will have occurred and be continuing and the Borrowers will be in compliance on a pro forma basis with all financial covenants under Section VII and (B) the Administrative Agent shall have received a certificate of a Responsible Officer of each Borrower certifying that the condition in clause (A) has been satisfied (with calculations demonstrating compliance with such financial covenants on a pro forma basis, in reasonable detail).

 

(vi)           No New Lender may become an Additional Lender unless an Additional Lender Supplement (or counterparts thereof) has been signed by such bank or financial institution and which Additional Lender Supplement has been agreed to and acknowledged by the Borrowers and acknowledged by the Administrative Agent.  No consent of any Lender or acknowledgment of any of the other Lenders hereunder shall be required therefor.  In no event shall the Revolving Credit Commitment of any Lender be increased by reason of any bank or financial institution becoming an Additional Lender, or otherwise, but the Total Revolving Credit Commitment shall be increased by the amount of each Additional Lender’s Revolving Credit Commitment.  Upon any Lender entering into a Commitment Increase Supplement or any Additional Lender becoming a party hereto, the Administrative Agent shall notify each other Lender thereof and shall deliver to each Lender a copy of the Additional Lender Supplement executed by such Additional Lender, agreed to and acknowledged by the Borrowers and acknowledged by the Administrative Agent, and the Commitment Increase Supplement executed by such Increasing Lender, agreed to and acknowledged by the Borrowers and acknowledged by the Administrative Agent.

 

(b)            Term Loans .  Upon the terms and subject to the conditions of this Agreement, and in reliance upon the representations, warranties and covenants of the Borrowers herein, each of the Lenders having a Term Loan Commitment agrees, severally and not jointly, to make a term loan (individually, a “ Term Loan ”, and collectively, the “ Term Loans ”) to the Borrowers on the Closing Date in the principal amount equal to such Lender’s Term Loan Commitment, provided that the aggregate outstanding principal amount of the Term Loans shall not at any time exceed the Total Term Loan Commitment.

 

(c)            Limitations .  Each LIBOR Loan shall be in a minimum principal amount of $100,000 or in integral multiples of $25,000 in excess of such minimum amount, and each Base Rate Loan shall be in a minimum principal amount of $100,000 or in integral multiples of $25,000 in excess of such minimum amount.  No more than five (5) LIBOR Loans may be outstanding at any time.

 

(d)            Conversions of Loans .  Upon the terms and subject to the conditions and limitations of this Agreement, the Borrowers may convert all or any part of any outstanding Loan

 

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into a Loan of another Type on any Business Day (which, in the case of a conversion of an outstanding LIBOR Loan shall be the last day of the Interest Period applicable to such LIBOR Loan).  The Borrowers shall give the Administrative Agent prior notice of each such conversion (which notice shall be effective upon receipt) in accordance with Section 2.3.  Notwithstanding the foregoing, the Borrowers may not convert any Loan into a LIBOR Loan or continue a LIBOR Loan if there is a continuing Default.

 

(e)            Termination or Reduction of Commitments .

 

(i)             The Total Revolving Credit Commitment shall terminate on the Maturity Date.

 

(ii)            The Total Term Loan Commitment shall be reduced upon and by the amount of each mandatory or optional payment or prepayment of the Term Loan.

 

(iii)           The Borrowers shall have the right at any time and from time to time upon five (5) Business Days’ prior written notice to the Administrative Agent to reduce by $100,000, and in integral multiples of $50,000 if in excess thereof, the Total Revolving Credit Commitment or to terminate entirely the Lenders’ Commitments to make Revolving Credit Loans hereunder, whereupon the Revolving Credit Commitments of the Lenders shall be reduced pro rata in accordance with their respective Applicable Percentages by the aggregate amount specified in such notice or shall, as the case may be, be terminated entirely.

 

(iv)           Any mandatory payment of Revolving Credit Loans made pursuant to the provisions of Section 2.8(b) shall permanently reduce the Total Revolving Credit Commitment (allocated ratably to each Lender based on each Lender’s Revolving Credit Commitment) by the amount of such payment.

 

(v)            If, as a result of any such reduction of the Total Revolving Credit Commitment, the LC Exposure at the time would exceed the Total Revolving Credit Commitment or the amount of Letters of Credit permitted to be outstanding under Sections 2.1(a) and 3.1(a), the Borrowers shall, in connection with any such reduction, deposit with and pledge to the Administrative Agent for the benefit of the Lenders and the LC Issuer cash in an amount equal to 105% of such excess.  If any Letters of Credit would remain outstanding after the effective date of any such termination of the Total Revolving Credit Commitment, in addition to satisfaction of all other applicable terms and conditions of this Agreement, the Borrowers shall deposit with and pledge to the Administrative Agent for the benefit of the Lenders and the LC Issuer cash in an amount equal to 105% of the Maximum Drawing Amount of under all Letters of Credit at the effective date of such termination.

 

(vi)           No such reduction or termination of any Commitment may be reinstated.

 

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2.2            The Notes .

 

(a)            The Revolving Credit Loans shall be evidenced by a separate promissory note for each Revolving Credit Lender, each such note to be in substantially the form of Exhibit A-1 hereto, dated as of the Closing Date and completed with appropriate insertions (each such note being referred to herein as a “ Revolving Credit Note ” and collectively as the “ Revolving Credit Notes ”).  One Revolving Credit Note shall be payable to the order of each Revolving Credit Lender in a principal amount equal to such Lender’s Revolving Credit Commitment.

 

(b)            The Term Loans shall be evidenced by a separate promissory note for each Term Lender in the principal amount equal to such Lender’s Term Loan Commitment, each such note to be in substantially the form of Exhibit A-2 hereto, dated as of the Closing Date and completed with appropriate insertions (each such note being referred to as a “ Term Note ” and collectively as the “ Term Notes ”).

 

(c)            The Borrowers irrevocably authorize each of the Lenders to make or cause to be made, at or about the time of the Drawdown Date of any Loan or at the time of receipt of any payment of principal on any Note, an appropriate notation on its Note Record reflecting (as the case may be) the making of such Loan or the receipt of such payment.  The outstanding amount of the Loans set forth on the Note Records shall be prima facie evidence of the principal amount thereof owing and unpaid to such Lenders, absent manifest error, but the failure to record, or any error in so recording, any such amount on any Lender’s Note Record shall not limit or otherwise affect the obligations of the Borrowers hereunder or under any Note to make payments of principal of or interest on any Note when due.

 

2.3            Notice and Manner of Borrowing or Conversion of Loans .

 

(a)            Whenever the Borrowers desire to obtain or continue a Loan hereunder or convert an outstanding Loan into a Loan of another Type, the Borrowers shall give the Administrative Agent a telephonic notice promptly confirmed by a written Notice of Borrowing or Conversion, which telephonic notice shall be irrevocable and which must be received no later than 11:00 a.m. Pacific time on the date (i) one Business Day before the day on which the requested Loan is to be made as or converted to a Base Rate Loan, and (ii) three Business Days before the day on which the requested Loan is to be made or continued as or converted to a LIBOR Loan.  Such Notice of Borrowing or Conversion shall specify (i) the effective date and amount of each Loan or portion thereof requested to be made, continued or converted, subject to the limitations set forth in Section 2.1, (ii) the interest rate option requested to be applicable thereto, and (iii) the duration of the applicable Interest Period, if any (subject to the provisions of the definition of the term “Interest Period”).  If such Notice fails to specify the interest rate option to be applicable to the requested Loan, then the Borrowers shall be deemed to have requested a Base Rate Loan.  If the written confirmation of any telephonic notification differs in any material respect from the action taken by the Administrative Agent, the records of the Administrative Agent shall be prima facie evidence of terms of the Loan requested absent manifest error.

 

(b)            Subject to the provisions of the definition of the term “Interest Period” herein, the duration of each Interest Period for a LIBOR Loan shall be as specified in the applicable Notice of Borrowing or Conversion.  If no Interest Period is specified in a Notice of Borrowing or Conversion with respect to a requested LIBOR Loan, then the Borrowers shall be

 

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deemed to have selected an Interest Period of one month’s duration.  If the Administrative Agent receives a Notice of Borrowing or Conversion after the time specified in subsection (a) above, such Notice shall not be effective.  If the Administrative Agent does not receive an effective Notice of Borrowing or Conversion with respect to an outstanding LIBOR Loan, or if, when such Notice must be given prior to the end of the Interest Period applicable to such outstanding Loan, the Borrowers shall have failed to satisfy any of the conditions hereof, the Borrowers shall be deemed to have elected to convert such outstanding Loan in whole into a Base Rate Loan on the last day of the then current Interest Period with respect thereto.

 

2.4            Funding of Loans .

 

(a)            Loans shall be made by the Lenders pro rata in accordance with their respective Applicable Percentages for such Loans, provided , however that the failure of any Lender to make any Loan required to be made by it hereunder shall not relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender).

 

(b)            The Administrative Agent shall notify the Term Lenders or Revolving Credit Lenders, as the case may be, of each requested Loan and of the Drawdown Date thereof and the amount of each Term Lender’s or Revolving Credit Lender’s pro rata share of such Loan.  If such notice is given by the close of the Administrative Agent’s business on the Business Day on which the Administrative Agent receives an effective Notice of Borrowing or Conversion as provided in Section 2.3, each Lender will, not later than 1:00 p.m. Pacific time on the proposed Drawdown Date of such Loan, make available to the Administrative Agent, at its head office, in immediately available funds, the amount of such Lender’s pro rata share of the amount of such requested Loan.  Upon receipt by the Administrative Agent of such amount, and upon the satisfaction of the conditions set forth in Section 4.1 or 4.2 (to the extent applicable), the Administrative Agent will make available to the Borrowers the aggregate amount of such Loan.

 

(c)            The Administrative Agent may, unless notified to the contrary by any Term Lender or Revolving Credit Lender, as the case may be, prior to a Drawdown Date, assume that each Term Lender or Revolving Credit Lender, as the case may be, has made available to the Administrative Agent on such Drawdown Date the amount of such Lender’s Applicable Percentage of the Loans to be made on such Drawdown Date, and the Administrative Agent may (but it shall not be required to), in reliance upon such assumption, make available to the Borrowers a corresponding amount.  If any such Lender makes available to the Administrative Agent such amount on a date after such Drawdown Date, such Lender shall pay to the Administrative Agent on demand an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Administrative Agent for federal funds acquired by the Administrative Agent during each day included in such period, times (ii) the amount of such Lender’s Applicable Percentage of any such Loans times (iii) a fraction, the numerator of which is the number of days that elapse from and including such Drawdown Date to the date on which the amount of such Lender’s Applicable Percentage of such Revolving Credit Loans shall become immediately available to the Administrative Agent, and the denominator of which is 365.  A statement of the

 

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Administrative Agent submitted to such Lender with respect to any amounts owing under this paragraph shall be prima facie evidence of the amount due and owing to the Administrative Agent by such Lender absent manifest error.  If the amount of such Lender’s Applicable Percentage of such Loans is not made available to the Administrative Agent by such Lender within three (3) Business Days following such Drawdown Date, the Administrative Agent shall be entitled to recover such amount from the Borrowers on demand, with interest thereon at the rate per annum applicable to the Loans made on such Drawdown Date.

 

2.5            Interest Rates and Payments of Interest .

 

(a)            Each Loan which is a Base Rate Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the Alternate Base Rate plus 0.25%, which rate shall change contemporaneously with any change in the Alternate Base Rate.  Such interest shall be payable monthly in arrears on the first Business Day of each calendar month following the Closing Date.

 

(b)            Each Loan which is a LIBOR Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the LIBOR Rate plus 2.00%.  Such interest shall be payable for such Interest Period on the last day thereof.

 

(c)            (i)             If an Event of Default shall occur, then (x) the unpaid balance of Loans shall bear interest, to the extent permitted by law, compounded daily at an interest rate equal to 2% per annum above the interest rate applicable to such Loans (determined pursuant to subsections (a) and (b) above) in effect on the day such Event of Default occurs, until such Event of Default is cured or waived, and (y) the Letter of Credit Fees shall be increased by 2.00% per annum until such Event of Default is cured or waived, and such interest shall be payable upon the demand of the Administrative Agent.

 

(d)            So long as any Lender shall be required under regulations of the Board of Governors of the Federal Reserve System (“ FRB ”) (or any other banking authority, domestic or foreign, to which such Lender is subject) to maintain reserves with respect to liabilities or assets consisting of or including “Eurocurrency Liabilities” (as defined in regulations issued from time to time by such Board of Governors), the Borrowers shall pay to the Administrative Agent for the account of each such Lender additional interest on the unpaid principal amount of each LIBOR Loan made by such Lender from the date of such Loan until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder (rounded upwards, if necessary, to the next higher 1/100 of 1%) obtained by subtracting (i) the LIBOR Rate for the Interest Period for such LIBOR Loan from (ii) the rate obtained by dividing such LIBOR Rate by a percentage equal to 100% minus the Reserve Percentage of such Lender for such Interest Period.  Such additional interest shall be determined by such Lender and notified to the Borrowers through the Administrative Agent, and shall be payable on each date on which interest is payable on such LIBOR Loan.

 

(e)            All agreements between or among the Borrowers and the Lenders are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the Obligations or otherwise, shall the amount paid or agreed to be

 

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paid to the Lenders for the use or the forbearance of the Obligations exceed the maximum permissible under applicable law.  As used herein, the term “applicable law” shall mean the law in effect as of the date hereof provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then the Loan Documents shall be governed by such new law as of its effective date.  In this regard, it is expressly agreed that it is the intent of the Borrowers and the Lenders in the execution, delivery and acceptance of the Loan Documents to contract in strict compliance with the laws of the State of New York from time to time in effect.  If, under or from any circumstances whatsoever, fulfillment of any provision of any of the Loan Documents at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the Obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from circumstances whatsoever the Lenders should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance of the Obligations and not to the payment of interest.  This provision shall control every other provision of all Loan Documents.

 

2.6            Fees .

 

(a)            The Borrowers shall pay to the Administrative Agent for the benefit of the Lenders a commitment fee (the “ Commitment Fee ”), computed on the basis of a 360-day year and payable quarterly in arrears on each Payment Date following the Closing Date and on the Maturity Date, at a rate per annum equal to 0.50% multiplied by the average obtained by dividing (i) the excess of (A) the Total Revolving Credit Commitment for each day in the calendar quarter immediately preceding such Payment Date over (B) the Total Revolving Credit Outstandings for each day in the calendar quarter immediately preceding such Payment Date, by (ii) the number of days in such period.

 

(b)            The Borrowers shall pay to the Administrative Agent for the benefit of the Lenders a fee (the “ Letter of Credit Fee ”) at a rate per annum equal to (i) the Maximum Drawing Amount under each Letter of Credit multiplied by (ii) 2.00%.  The Letter of Credit Fee shall be paid quarterly in arrears on each Payment Date following the Closing Date.

 

(c)            Without limiting any of the Lenders’ other rights hereunder or by law, if any Loan or any portion thereof or any interest thereon or any other amount payable hereunder or under any other Loan Document is not paid within ten (10) days after its due date, the Borrowers shall pay to the Administrative Agent for the benefit of the Lenders on demand a late payment charge equal to 5% of the amount of the payment due.

 

(d)            The Borrowers shall pay to the Administrative Agent, such other fees as the Borrowers and the Administrative Agent shall agree in writing.

 

(e)            The Borrowers authorize the Administrative Agent and the Lenders to charge to their Note Records or to any deposit account which the Borrowers may maintain with any of them the interest, fees, charges, taxes and expenses provided for in this Agreement, the other Loan Documents or any other document executed or delivered in connection herewith or therewith.  The Administrative Agent or the Lenders (with respect to any deposit account held by

 

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any Lender) shall provide to the Borrowers written notice of any such charge promptly following such charge.

 

2.7            Repayment of Loans .

 

(a)            Term Loans .  The Borrowers shall repay the principal amount of the Term Loans in equal quarterly installments of $150,000 for the first six full calendar quarters after the Closing Date and equal quarterly installments of $200,000 for the next nine full calendar quarters, payable on each Payment Date commencing April 1, 2008, and the aggregate principal amount of all Term Loans outstanding on the Maturity Date shall be paid on such date.

 

(b)            Revolving Credit Loans .  The Borrowers shall repay to the Revolving Credit Lenders on the Maturity Date the aggregate principal amount of all Revolving Credit Loans outstanding on such date.

 

2.8            Prepayments .

 

(a)            Optional .  The Borrowers may, upon notice to the Administrative Agent in substantially the form of Exhibits J-1 or J-2 , as the case may be, at any time or from time to time voluntarily prepay Term Loans and Revolving Credit Loans in whole or in part without premium or penalty (except as provided in Section 2.10); provided that (A) such notice must be received by the Administrative Agent not later than 11:00 a.m. Pacific time (1) three Business Days prior to any date of prepayment of LIBOR Loans and (2) on the date of prepayment of Base Rate Loans; (B) any prepayment of LIBOR Loans shall be in a principal amount of $500,000 or a whole multiple of $500,000 in excess thereof; and (C) any prepayment of Base Rate Loans shall be in a principal amount of $100,000 or a whole multiple of $25,000 in excess thereof or, in each case, if less, the entire principal amount thereof then outstanding.  Each such notice shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid and, if LIBOR Loans are to be prepaid, the Interest Period(s) of such Loans.  The Administrative Agent will promptly notify each Lender of its receipt of each such notice, and of the amount of such Lender’s ratable portion of such prepayment (based on such Lender’s Applicable Percentage in respect of the relevant Facility).  If such notice is given by the Borrowers, the Borrowers shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein.  Any prepayment of a Loan shall be accompanied by all accrued interest on the amount prepaid, and if such Loan is a LIBOR Loan, any additional amounts required pursuant to Section 2.10.  Each prepayment of Term Loans pursuant to this Section 2.8(a) shall be applied to the principal repayment installments of the Term Loans (including, without limitation, the installment due on the Maturity Date) in inverse order of maturity.

 

(b)            Mandatory .

 

(i)             Within the earlier of (x) 95 days after the end of each Fiscal Year (commencing with the Fiscal Year ending on January 26, 2009), or (y) five Business Days after financial statements have been delivered pursuant to Section 6.1(a) and the related certificate has been delivered pursuant to Section 6.1(d) for such Fiscal Year, the Borrowers shall prepay an aggregate principal amount of Loans equal to fifty percent

 

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(50%) of Excess Cash Flow for the Fiscal Year covered by such financial statements (such prepayments to be applied as set forth in clauses (vi) and (viii) below).

 

(ii)            If the Borrowers or any of their Subsidiaries Dispose of any property (other than any Disposition of any property permitted by Section 8.4(b)) which results in the realization by such Person of Net Cash Proceeds, the Borrowers shall prepay an aggregate principal amount of Loans equal to 100% of such Net Cash Proceeds on the fifth Business Day following the receipt thereof by such Person (such prepayments to be applied as set forth in clauses (vi) and viii) below).

 

(iii)           Upon the sale or issuance by the Borrowers of any of their Equity Interests, unless otherwise agreed in writing by the Majority Lenders, the Borrowers shall prepay an aggregate principal amount of Loans equal to 100% of all Net Cash Proceeds received therefrom promptly upon receipt thereof by the Borrowers (such prepayments to be applied as set forth in clauses (vi) and (viii) below).

 

(iv)           Upon the incurrence or issuance by the Borrowers or any of their Subsidiaries of any Indebtedness (other than Indebtedness expressly permitted to be incurred or issued pursuant to clauses (a) through (f) and (i) of Section 8.1), the Borrowers shall prepay an aggregate principal amount of Loans equal to 100% of all Net Cash Proceeds received therefrom promptly upon receipt thereof by the Borrowers or such Subsidiaries (such prepayments to be applied as set forth in clauses (vi) and (viii) below).

 

(v)            Upon any Extraordinary Receipt received by or paid to or for the account of the Borrowers or any of their Subsidiaries, and not otherwise included in clause (ii), (iii) or (iv) of this Section 2.8(b), the Borrowers shall prepay an aggregate principal amount of Loans equal to 100% of all Net Cash Proceeds received therefrom promptly upon receipt thereof by the Borrowers or such Subsidiaries (such prepayments to be applied as set forth in clauses (vi) and (viii) below); provided , however , that with respect to any proceeds of casualty insurance or condemnation or eminent domain awards (or payments in lieu thereof), at the election of the Borrowers (as notified by the Borrowers to the Administrative Agent on or prior to the date of receipt of such insurance proceeds, condemnation awards or indemnity payments), and so long as no Default shall have occurred and be continuing, the Borrowers or such Subsidiaries may apply such cash proceeds within one year after the receipt thereof to replace or repair the equipment, fixed assets or real property in respect of which such Net Cash Proceeds were received; and provided , further , however , that any Net Cash Proceeds not so applied shall be promptly applied to the prepayment of the Loans as set forth above in this Section 2.8(b)(v).

 

(vi)           Each prepayment of Loans pursuant to the foregoing provisions of this Section 2.8(b) shall be applied, first , to payment of the unpaid installments of principal of the Term Loans in inverse order of maturity, until the Term Loans are paid in full; and second , to the Revolving Credit Facility in the manner set forth in clause (viii) of this Section 2.8(b).

 

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(vii)          If for any reason the Total Revolving Credit Outstandings at any time exceed the Total Revolving Credit Commitment at such time, the Borrowers shall immediately prepay Revolving Credit Loans and LC Disbursements and/or Cash Collateralize the Maximum Drawing Amount, in an aggregate amount equal to such excess.

 

(viii)         Prepayments of the Revolving Credit Facility made pursuant to this Section 2.8(b), first , shall be applied ratably to any unpaid LC Disbursements, second , shall be applied ratably to the outstanding Revolving Credit Loans, and, third , shall be used to Cash Collateralize the remaining Maximum Drawing Amount; and, in the case of prepayments of the Revolving Credit Facility required pursuant to clauses (i), (ii), (iii), (iii) and (iv) of this Section 2.8(b), the amount remaining, if any, after the prepayment in full of all LC Disbursements and Revolving Credit Loans outstanding at such time and the cash collateralization of the remaining Maximum Drawing Amount in full may be retained by the Borrowers for use in the ordinary course of its business.  Upon a drawing under any Letter of Credit that has been cash collateralized, the funds held as Cash Collateral shall be applied (without any further action by or notice to or from the Borrowers or any other Loan Party) to reimburse the LC Issuer or the Revolving Credit Lenders, as applicable.

 

2.9            Method and Allocation of Payments .

 

(a)            All payments by the Borrowers hereunder and under any of the other Loan Documents shall be made in lawful money of the United States in immediately available funds, and shall be deemed to have been made only when made in compliance with this Section 2.9.  All such payments shall be made without set-off or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature (other than Excluded Taxes) now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrowers are compelled by law to make such deduction or withholding.  If any such obligation is imposed upon the Borrowers with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrowers will pay to each Lender such additional amount in U.S. Dollars as shall be necessary to enable such Lender to receive the same net amount which such Lender would have received on such due date had no such obligation been imposed upon the Borrowers.  The Borrowers will deliver promptly to each Lender certificates or other valid vouchers or other evidence of payment reasonably satisfactory to the Administrative Agent for all taxes or other charges deducted from or paid with respect to payments made by the Borrowers hereunder or under such other Loan Document.  The Lenders may, and the Borrowers hereby authorize the Lenders to, debit the amount of any payment not made by such time to the demand deposit accounts of the Borrowers with the Lenders or to their Note Records.

 

(b)            Subject to the provisions of Section 2.9(c), all payments hereunder shall be made and allocated as follows:

 

(i)             all payments of principal of and interest in respect of Revolving Credit Loans shall be made to the Administrative Agent for the benefit of the Revolving Credit

 

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Lenders, pro rata in accordance with the outstanding principal balance of Revolving Credit Loans made by each;

 

(ii)            all payments of principal of and interest in respect of Term Loans shall be made to the Administrative Agent for the benefit of the Term Lenders, pro rata in accordance with the outstanding principal balance of Term Loans made by each such Term Lender;

 

(iii)           all payments of Commitment Fees and Letter of Credit Fees shall be made to the Administrative Agent for the benefit of the Revolving Credit Lenders, pro rata in accordance with their Revolving Credit Commitments; and

 

(iv)           payments of any other amounts due hereunder shall be made to the Administrative Agent to be allocated among the Administrative Agent, the Lenders and the LC Issuer as their respective interests appear.

 

All such payments shall be made at the Administrative Agent’s head office or at such other location that the Administrative Agent may from time to time designate, in each case in immediately available funds.

 

(c)            If the Commitments shall have been terminated or the Obligations shall have been declared immediately due and payable pursuant to Section 9.2, proceeds of Collateral and all other funds received from or on behalf of the Borrowers by any Lender or the LC Issuer in respect of Obligations (except funds received by any Lender as a result of a purchase of a participant interest pursuant to Section 2.9(d) below) shall be remitted to the Administrative Agent, and all such funds, together with all other funds received by the Administrative Agent from or on behalf of the Borrowers (including proceeds of Collateral) in respect of Obligations, shall be applied by the Administrative Agent in the following manner and order:  (i) first, to reimburse the Administrative Agent, the LC Issuer and the Lenders, in that order, for any amounts payable pursuant to Sections 12.2 and 12.3 hereof; (ii) second, to the payment of Commitment Fees, Letter of Credit Fees, and any other fees payable to the Administrative Agent or the Lenders hereunder; (iii) third, to the payment of interest due on the Loans and the LC Disbursements; (iv) fourth, to the payment of the outstanding principal balance of the Loans; (v) fifth, to the payment of any other Obligations payable by the Borrowers, pro rata to the outstanding principal balance of each; and (vi) any remaining funds shall be paid to whoever shall be entitled thereto or as a court of competent jurisdiction shall direct.

 

(d)            Each of the Lenders hereby agrees that if it should receive any amount (whether by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker’s lien, by counterclaim or cross action, by the enforcement of any right under the Loan Documents, or otherwise) in respect of principal of, or interest on, the Loans or any fees which are to be shared pro rata among the Lenders, which, as compared to the amounts theretofore received by the other Lenders with respect to such principal, interest or fees, is in excess of such Lender’s Applicable Percentage of such principal, interest or fees, such Lender shall share such excess, less the costs and expenses (including, reasonable attorneys’ fees and disbursements) incurred by such Lender in connection with such realization, exercise, claim or action, pro rata with all other Lenders in proportion to their respective Applicable Percentage for

 

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such Loans, and such sharing shall be deemed a purchase (without recourse) by such sharing party of participant interests in such Loans or such fees, as the case may be, owed to the recipients of such shared payments to the extent of such shared payments; provided , however , that (i) if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest and (ii) the provisions of this paragraph shall not be construed to apply to (x) any payment made by the Borrowers pursuant to and in accordance with the express terms of this Agreement or (y) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or Letter of Credit Participations to any assignee or participant, other than to the Borrowers or any Subsidiary thereof (as to which the provisions of this paragraph shall apply).  The Borrowers consent to the foregoing and agree, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrowers rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrowers in the amount of such participation.

 

2.10          LIBOR Indemnity .  If the Borrowers for any reason make any payment of principal with respect to any LIBOR Loan on any day other than the last day of an Interest Period applicable to such LIBOR Loan, or fail to borrow or continue or convert to a LIBOR Loan after giving a Notice of Borrowing or Conversion thereof pursuant to Section 2.3, or fail to prepay a LIBOR Loan after having given notice thereof, the Borrowers shall pay to the Administrative Agent for the benefit of the Lenders any amount required to compensate the Lenders for any additional losses, costs or expenses which they may reasonably incur as a result of such payment or failure, including, without limitation, any loss (including loss of anticipated profits), costs or expense incurred by reason of the liquidation or re-employment of deposits or other funds required by the Lenders to fund or maintain such LIBOR Loan.  Without limiting the foregoing, the Borrowers shall pay to the Administrative Agent a “yield maintenance fee” for the benefit of the Lenders in an amount computed as follows:  the current rate for United States Treasury securities (bills on a discounted basis shall be converted to a bond equivalent) with a maturity date closest to the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made, shall be subtracted from the interest rate applicable (pursuant to Section 2.5(b)) to each LIBOR Loan in effect at the time of prepayment.  If the result is zero or a negative number, there shall be no yield maintenance fee.  If the result is a positive number, then the resulting percentage shall be multiplied by the amount of the principal balance being prepaid.  The resulting amount shall be divided by 360 and multiplied by the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which the prepayment is made.  Said amount shall be reduced to present value calculated by using the above referenced United States Treasury securities rate and the number of days remaining in the term chosen pursuant to the Fixed Rate Election as to which prepayment is made.  The resulting amount shall be the yield maintenance fee due to the Lenders upon the payment of a LIBOR Loan under the circumstances described in the first sentence of this Section.  The Borrowers shall pay such amount upon presentation by the Administrative Agent of a statement setting forth the amount and the Administrative Agent’s (or the affected Lenders’) calculation thereof pursuant hereto, which statement shall be prima facie evidence of the amounts owed hereunder absent manifest error.  If the Obligations are declared immediately due and payable pursuant to Section 8.2, then any

 

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amount provided for in this Section shall be due and payable in the same manner as though the Borrowers had made a prepayment of the LIBOR Loans.

 

2.11          Computation of Interest and Fees .  All computations of interest for Base Rate Loans when the Alternate Base Rate is determined by Wells Fargo’s “Base Rate” shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed.  All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year).  If the due date for any payment of principal is extended by operation of law, interest shall be payable for such extended time.  If any payment required by this Agreement becomes due on a day that is not a Business Day such payment may be made on the next succeeding Business Day (subject to the definition of the term “Interest Period”), and such extension shall be included in computing interest in connection with such payment.

 

2.12          Changed Circumstances; Illegality .

 

(a)            Notwithstanding any other provision of this Agreement, in the event that:

 

(i)             on any date on which the LIBOR Rate would otherwise be set the Administrative Agent shall have determined in good faith (which determination shall be final and conclusive) that adequate and fair means do not exist for ascertaining the LIBOR Rate, or

 

(ii)            at any time the Administrative Agent or any Lender shall have determined in good faith (which determination shall be final and conclusive and, if made by any Lender, shall have been communicated to the Administrative Agent in writing) that:

 

(A)           the making or continuation of or conversion of any Loan to a LIBOR Loan has been made impracticable or unlawful by (1) the occurrence of a contingency that materially and adversely affects the interbank LIBOR market or (2) compliance by the Administrative Agent or such Lender in good faith with any applicable law or governmental regulation, guideline or order or interpretation or change thereof by any Governmental Authority charged with the interpretation or administration thereof or with any request or directive of any such Governmental Authority (whether or not having the force of law); or
 
(B)            the LIBOR Rate shall no longer represent the effective cost to the Administrative Agent or such Lender for U.S. dollar deposits in the interbank market for deposits in which it regularly participates;
 

then, and in any such event, the Administrative Agent shall forthwith so notify the Borrowers thereof.  Until the Administrative Agent notifies the Borrowers that the circumstances giving rise to such notice no longer apply, the obligation of the Lenders to allow selection by the Borrowers of the Type of Loan affected by the contingencies described in this Section (herein called “ Affected Loans ”) shall be suspended.  If at the time the Administrative Agent so notifies the Borrowers, the Borrowers have previously given the Administrative Agent a Notice of

 

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Borrowing or Conversion with respect to one or more Affected Loans but such Loans have not yet gone into effect, such notification shall be deemed to be a request for Base Rate Loans.

 

(b)            In the event of a determination of illegality pursuant to Section 2.12(a)(ii)(A) above, the Borrowers shall, with respect to the outstanding Affected Loans, prepay the same, together with interest thereon and any amounts required to be paid pursuant to Section 2.9, on such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) and may, subject to the conditions of this Agreement, borrow a Loan of another Type in accordance with Section 2.1 by giving a Notice of Borrowing or Conversion pursuant to Section 2.3.

 

2.13          Increased Costs .  In case any change made after the Closing Date in any law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any Governmental Authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other Governmental Authority (whether or not having the force of law):

 

(i)  subjects any Lender or the LC Issuer to any tax with respect to payments of principal or interest or any other amounts payable hereunder by the Borrowers or otherwise with respect to the transactions contemplated hereby (except for Indemnified Taxes or Other Taxes covered by Section 2.15 and the imposition of, or any change in the rate of, and Excluded Tax payable by such Lender or the LC Issuer), or

 

(ii)  imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or credit extended or participated in by, any Lender (other than such requirements as are already included in the determination of the LIBOR Rate) or the LC Issuer, or

 

(iii)  imposes upon any Lender or the LC Issuer any other condition with respect to its obligations or performance under this Agreement or in respect of any Letter of Credit,

 

and the result of any of the foregoing is to increase the cost to such Lender or the LC Issuer, reduce the income receivable by such Lender or the LC Issuer or impose any expense upon such Lender or the LC Issuer with respect to any Loans or its obligations under this Agreement or in respect of any Letter of Credit, such Lender or the LC Issuer shall notify the Borrowers and the Administrative Agent thereof.  The Borrowers agree to pay to such Lender or the LC Issuer the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by such Lender or the LC Issuer of a statement in the amount and setting forth in reasonable detail such Lender’s or the LC Issuer’s calculation thereof and the assumptions upon which such calculation was based, which statement shall be prima facie evidence of the amounts owing hereunder absent manifest error.

 

2.14          Capital Requirements .  If after the date hereof any Lender reasonably determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or

 

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(ii) compliance by such Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on such Lender’s or such holding company’s capital as a consequence of such Lender’s Commitment to make Loans hereunder or its obligations in respect of any Letter of Credit to a level below that which such Lender or such holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such holding company’s then existing policies with respect to capital adequacy and assuming the full utilization of such entity’s capital) by any amount deemed by such Lender to be material, then such Lender shall notify the Borrowers and the Administrative Agent thereof.  The Borrowers agree to pay to such Lender the amount of such reduction of return on capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender’s calculation thereof and the assumptions upon which such calculation was based (which statement shall be prima facie evidence of amounts payable hereunder absent manifest error) unless within such 90 day period the Borrowers shall have prepaid in full all Obligations to such Lender, in which event no amount shall be payable to such Lender under this Section.  In determining such amount, such Lender may use any reasonable averaging and attribution methods.

 

2.15          Taxes .  (a)  Payments Free of Taxes .  Any and all payments by or on account of any obligation of the Borrowers hereunder or under any other Loan Document shall be made free and clear of and without reduction or withholding for any Indemnified Taxes or Other Taxes, provided that if the Borrowers shall be required by applicable law to deduct any Indemnified Taxes (including any Other Taxes) from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, any Lender or the LC Issuer, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrowers shall make such deductions and (iii) the Borrowers shall timely pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

 

(b)            Payment of Other Taxes by the Borrowers .  Without limiting the provisions of subsection (a) above, the Borrowers shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

 

(c)            Indemnification by the Borrowers .  The Borrowers shall indemnify the Administrative Agent, each Lender and the LC Issuer, within 10 days after demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent, such Lender or the LC Issuer, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority.  A certificate as to the amount of such payment or liability delivered to the Borrowers by a Lender or the LC Issuer (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender or the LC Issuer, shall be conclusive absent manifest error.

 

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(d)            Evidence of Payments .  Upon request of the Administrative Agent, as soon as reasonably practicable after any payment of Indemnified Taxes or Other Taxes by the Borrowers to a Governmental Authority, the Borrowers shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

 

(e)            Status of Lenders .  Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrowers are resident for tax purposes, or any treaty to which such jurisdiction is a party, with respect to payments hereunder or under any other Loan Document shall deliver to the Borrowers (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrowers or the Administrative Agent, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate of withholding.  In addition, any Lender, if requested by the Borrowers or the Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrowers or the Administrative Agent as will enable the Borrowers or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements.

 

Without limiting the generality of the foregoing, if any Borrower is resident for tax purposes in the United States, any Foreign Lender shall deliver to the Borrowers and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Borrowers or the Administrative Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable:

 

(i)             duly completed copies of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party,

 

(ii)            duly completed copies of Internal Revenue Service Form W-8ECI,

 

(iii)           in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Code, (A) a certificate to the effect that such Foreign Lender is not (1) a “bank” within the meaning of section 881(c)(3)(A) of the Code, (2) a “10 percent shareholder” of any Borrower within the meaning of section 881(c)(3)(B) of the Code, or (3) a “controlled foreign corporation” described in section 881(c)(3)(C) of the Code and (B) duly completed copies of  Internal Revenue Service Form W-8BEN, or

 

(iv)           any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in United States Federal withholding tax duly completed together with such supplementary documentation as may be prescribed by applicable law to permit the Borrowers to determine the withholding or deduction required to be made.

 

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(f)             Treatment of Certain Refunds .  If the Administrative Agent, any Lender or the LC Issuer determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrowers or with respect to which the Borrowers have paid additional amounts pursuant to this Section, it shall pay to the Borrowers an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrowers under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent, such Lender or the LC Issuer, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrowers upon the request of the Administrative Agent, such Lender or the LC Issuer, shall repay the amount paid over to the Borrowers ( plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent, such Lender or the LC Issuer if the Administrative Agent, such Lender or the LC Issuer is required to repay such refund to such Governmental Authority.  This subsection shall not be construed to require the Administrative Agent, any Lender or the LC Issuer to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrowers or any other Person.

 

2.16          Parent as Agent for Borrowers; Contribution .

 

(a)            Each Borrower (other than Parent) hereby appoints Parent as its agent with respect to the receiving and giving of any notices, requests, instructions, reports, schedules, revisions, financial statements or any other written or oral communications hereunder.  Parent shall keep complete, correct and accurate records of all Loans and the application of proceeds thereof, and all payments in respect of Loans and other amounts due hereunder.  The Lenders are hereby entitled to rely on any communications given or transmitted by Parent as if such communication were given or transmitted by each and every Borrower; provided , however , that any communication given or transmitted by any Borrower other than Parent shall be binding with respect to such Borrower.  Any communication given or transmitted by the Administrative Agent or any Lender to Parent shall be deemed given and transmitted to each and every Borrower.

 

(b)            The Borrowers hereby agree that, as among themselves, the ultimate responsibility for repayment of the Obligations in the event of a Default by any or all of the Borrowers on their respective Obligations shall be equitably apportioned among the Borrowers in the proportion that each has benefited from the making by the Lenders of the Loans, or if such equitable apportionment cannot reasonably be determined, then in proportion to their respective net worths, determined in a manner such that none of the Obligations of any Borrower would be subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any comparable provisions of applicable state law.  If any Borrower shall pay an amount with respect to the Obligations in excess of its proportionate share, determined as set forth in this subparagraph (b) (an “ Overpaying Borrower ”), each other Borrower shall make a payment to such Overpaying Borrower in an amount such that the aggregate amount of each Borrower’s payments hereunder and in respect of the Obligations reflects its proportionate share of the Obligations, as so determined.  The foregoing agreement is intended to set forth only the rights and obligations of the Borrowers among themselves and shall in no way affect the obligations of any Borrower to the Lenders in respect of the Obligations.  Until the Obligations have been indefeasibly paid in full (except for contingent indemnification and expense

 

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reimbursement obligations for which a claim has not yet been made) and the Commitments shall have terminated and all Letters of Credit shall have expired or been canceled, each Borrower shall withhold exercise of any right of contribution hereunder against any other Borrower.

 

SECTION III

 

LETTERS OF CREDIT

 

3.1            Issuance .

 

(a)            Upon the terms and subject to the conditions hereof, the LC Issuer in reliance upon the representations, warranties and covenants of the Borrowers contained herein, agrees to issue letters of credit (the “ Letters of Credit ”) for the account of the Borrowers in such form as may be requested from time to time by the Borrowers and agreed to by the LC Issuer, provided that the Maximum Drawing Amount (after giving effect to all requested Letters of Credit) shall not at any time exceed the Letter of Credit Sublimit, provided , further that the Total Revolving Credit Outstandings (after giving effect to all requested Revolving Credit Loans and Letters of Credit) shall not at any time exceed the Total Revolving Credit Commitment, and provided further that no Letter of Credit shall have an expiration date later than five (5) Business Days prior to the Maturity Date.  At least three (3) Business Days prior to the proposed issuance date of any Letter of Credit, the Borrowers shall deliver to the LC Issuer a Letter of Credit Application setting forth the Maximum Drawing Amount of all Letters of Credit (including the requested Letter of Credit), the requested language of the requested Letter of Credit and such other information as the LC Issuer shall require.  Each request for the issuance of a Letter of Credit hereunder shall constitute a representation and warranty by the Borrowers that the conditions set forth in Sections 4.1 or 4.2 (as the case may be) have been satisfied as of the date of such request.

 

(b)            Effective upon the issuance of each Letter of Credit and without any further action on the part of the LC Issuer or the Lenders in respect thereof, the LC Issuer hereby grants to each Lender, and each Lender hereby acquires from the LC Issuer, a participating interest in such Letter of Credit in an amount equal to the product of (i) the amount of such Letter of Credit, times (ii) the quotient of (A) such Lender’s Revolving Credit Commitment, divided by (B) the Total Revolving Credit Commitment (the amount so calculated, the “ Letter of Credit Participation ”), and each Lender severally agrees that it shall be absolutely liable, without regard to the occurrence of any Default or Event of Default, to the extent of such Lender’s pro rata share thereof, to reimburse the LC Issuer on demand for the amount of each draft paid by the LC Issuer under each Letter of Credit to the extent that such amount is not reimbursed by the Borrowers.

 

3.2            Reimbursement Obligation of the Borrowers .  In order to induce the LC Issuer to issue, extend and renew each Letter of Credit, the Borrowers shall reimburse or pay to the Administrative Agent, for the account of the LC Issuer or (as the case may be) the Lenders, with respect to each Letter of Credit issued, extended or renewed by the LC Issuer hereunder as follows:

 

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(a)            on each date that any draft presented under any Letter of Credit is honored by the LC Issuer or the LC Issuer otherwise makes payment with respect thereto, (i) the amount paid by the LC Issuer under or with respect to such Letter of Credit, and (ii) the amount of any taxes, fees, charges or other costs and expenses whatsoever incurred by the LC Issuer or any Lender in connection with any payment made by the LC Issuer under, or with respect to, such Letter of Credit; and

 

(b)            upon the Maturity Date or the acceleration of the Maximum Drawing Amount pursuant to Section 9.2, an amount equal to 105% of the then Maximum Drawing Amount of all Letters of Credit, which amount shall be held by the LC Issuer as cash collateral for all LC Disbursements.

 

Each such payment shall be made to the Administrative Agent at its head office in immediately available funds.  Interest on any and all amounts remaining unpaid by the Borrowers under this Section 3.2 at any time from the date such amounts become due and payable (whether as stated in this Section 3.2, by acceleration or otherwise) until payment in full (whether before or after judgment) shall be payable to the Administrative Agent, for the account of LC Issuer or (as the case may be) the Lenders, on demand at a rate per annum equal to 2% above the Alternate Base Rate.

 

3.3            Letter of Credit Payments .  If any draft shall be presented or other demand for payment shall be made under any Letter of Credit, the LC Issuer shall notify the Borrowers of the date and amount of the draft presented or demand for payment and of the date and time when it expects to pay such draft or honor such demand for payment.  The responsibility of the LC Issuer to the Borrowers shall be only to determine that the documents (including each draft) delivered under each Letter of Credit in connection with such presentment shall be in conformity in all material respects with such Letter of Credit.  On the date that such draft is paid or other payment is made by the LC Issuer, the LC Issuer shall promptly notify the Lenders of the amount of any unpaid LC Disbursement.  All such unpaid LC Disbursements with respect to Letters of Credit shall be deemed to be Revolving Credit Loans.  No later than 1:00 p.m. Pacific time on the Business Day next following the receipt of such notice, each Lender shall make available to the Administrative Agent, at the Administrative Agent’s head office, in immediately available funds, such Lender’s pro rata share of such unpaid LC Disbursements, together with an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Administrative Agent for federal funds acquired by the Administrative Agent during each day included in such period, times (ii) the amount equal to such Lender’s pro rata share of such unpaid LC Disbursement, times (iii) a fraction, the numerator of which is the number of days that have elapsed from and including the date the LC Issuer paid the draft presented for honor or otherwise made payment until the date on which such Lender’s pro rata share of such unpaid LC Disbursement shall become immediately available to the Administrative Agent, and the denominator of which is 365.

 

3.4            Obligations Absolute .

 

(a)            The Borrowers’ obligations to reimburse the LC Issuer for all LC Disbursements shall be absolute and unconditional under any and all circumstances and irrespective of the occurrence of any Default or Event of Default or any condition precedent

 

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whatsoever or any set off, counterclaim or defense to payment which the Borrowers may have or have had against the LC Issuer, the Administrative Agent, the Lenders or any beneficiary of a Letter of Credit.  The Borrowers further agree that the LC Issuer, the Administrative Agent and the Lenders shall not be responsible for, and the Borrowers’ obligations in respect of the LC Disbursements shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, fraudulent or forged, or any dispute between or among the Borrowers, the beneficiary of any Letter of Credit or any financing institution or other party to which any Letter of Credit may be transferred or any claims or defenses whatsoever of the Borrowers, against the beneficiary of any Letter of Credit or any such transferee.

 

(b)            The LC Issuer, the Administrative Agent and the Lenders shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit.  The Borrowers agree that any action taken or omitted by the LC Issuer, the Administrative Agent or the Lenders under or in connection with each Letter of Credit and the related drafts and documents, if done in good faith, shall be binding upon the Borrowers and shall not result in any liability on the part of the LC Issuer, the Administrative Agent or the Lenders to the Borrowers.

 

(c)            Notwithstanding the foregoing, this Section 3.4 shall not be construed to excuse the LC Issuer from liability to the Borrowers to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrowers to the extent permitted by applicable law) suffered by the Borrowers that are caused by the LC Issuer’s gross negligence or willful misconduct.

 

3.5            Reliance by the LC Issuer and the Administrative Agent .  To the extent not inconsistent with Section 3.4, the LC Issuer and the Administrative Agent shall be entitled to rely, and shall be fully protected in relying upon, any Letter of Credit, draft writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel, independent accountants and other experts selected by the LC Issuer or the Administrative Agent.

 

SECTION IV

 

CONDITIONS OF LOANS AND LETTERS OF CREDIT

 

4.1            Conditions Precedent to Initial Loans and Letters of Credit .  The obligation of the Lenders to make the initial Loans and of the LC Issuer to issue the initial Letter of Credit is subject to the satisfaction of the following conditions precedent on or prior to the Closing Date:

 

(a)            The Administrative Agent’s receipt of the following, each of which shall be originals, ‘PDF’ format or telecopies (followed promptly by originals), each properly executed by a Responsible Officer of the signing Loan Party unless otherwise specified, each dated the Closing Date (or, in the case of certificates of governmental officials, a recent date

 

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before the Closing Date) and each in form and substance satisfactory to the Administrative Agent:

 

(i)             executed counterparts of this Agreement, sufficient in number for distribution to the Administrative Agent, each Lender and the Borrowers;

 

(ii)            Notes executed by the Borrowers in favor of each Lender requesting Notes;

 

(iii)           a security agreement in substantially the form of Exhibit G-1, a collateral assignment of contracts in the form of Exhibit G-2 and an intellectual property security agreement in the form of Exhibit G-6 (together with each other security agreement and security agreement supplement delivered pursuant to Section 6.12, in each case as amended, collectively, the “ Security Agreement ”), duly executed by each Loan Party, and a pledge agreement (the “ Pledge Agreement ”) duly executed by the Parent in substantially the form of Exhibit H , together with (subject to the provisions of Section 4.1(m)):

 

(A)           certificates representing the pledged Equity Interests referred to in the Pledge Agreement (if certificated) accompanied by undated stock powers executed in blank,
 
(B)            stamped receipt copies of proper financing statements, duly filed on or before the Closing Date under the Uniform Commercial Code of all jurisdictions that the Administrative Agent may deem reasonably necessary or desirable in order to perfect the Encumbrances created under the Security Agreement and the Pledge Agreement, covering the Collateral described in the Security Agreement, and the Pledge Agreement,
 
(C)            completed requests for information, dated on or before the date of the initial Credit Extension, listing the financing statements referred to in clause (B) above and all other effective financing statements filed in the jurisdictions referred to in clause (B) above that name any Loan Party as debtor, together with copies of such other financing statements,
 
(D)           evidence of the completion of all other actions, recordings and filings of or with respect to the Security Agreement that the Administrative Agent may deem reasonably necessary or desirable in order to perfect the Encumbrances created thereby,
 
(E)            account control agreements, duly executed by the appropriate parties, with respect to all bank accounts of the Loan Parties, other than bank accounts with Wells Fargo,
 
(F)            copies of the assigned agreements subject to the collateral assignment of contracts referred to above, together with any reasonably necessary

 

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consents to such assignment, duly executed by each party to such assigned agreements other than the Loan Parties, and
 
(G)            evidence that all other action that the Administrative Agent may deem reasonably necessary or desirable in order to perfect the Encumbrances created under the Security Agreement has been taken (including receipt of duly executed payoff letters and UCC-3 termination statements);
 

(iv)           the Fee Property Security Documents;

 

(v)            Title Policies, issued by the Title Company, insuring the liens of the Fee Property Security Documents as a valid first liens upon the fee interests of each of the Fee Properties, subject only to the Permitted Encumbrances.  Each Title Policy when issued shall be reasonably acceptable to Administrative Agent following a review of all title exception documents cited in therein and shall specifically include by endorsement or affirmative coverage (if permitted by Administrative Agent in its discretion), an ALTA 9 comprehensive endorsement, a deletion of creditors’ rights exception (if available), and such other endorsements and coverages as Administrative Agent may reasonably require, provided such endorsements and coverages are available;

 

(vi)           the Subordination Agreement;

 

(vii)          Landlord Waivers as required by and in form and substance satisfactory to the Administrative Agent, executed by each of the Borrowers’ lessors, unless waived by the Administrative Agent;

 

(viii)         such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of each Loan Party as the Administrative Agent may require evidencing the authority of each Loan Party to consummate the transactions contemplated hereby and the identity, authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents to which such Loan Party is a party or is to be a party;

 

(ix)            such documents and certifications as the Administrative Agent may reasonably require to evidence that each Loan Party is duly organized or formed, is validly existing, in good standing and qualified to engage in business in each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect;

 

(x)             an opinion of Kilpatrick Stockton LLP counsel to the Loan Parties addressed to the Administrative Agent and each Lender, as to the matters set forth in Exhibit I and such other matters concerning the Loan Parties and the Loan Documents as the Majority Lenders may reasonably request;

 

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(xi)            opinion(s) of local counsel to the Loan Parties (as applicable) with respect to the enforceability of the Fee Property Security Documents in their local jurisdictions and such other matters as the Administrative Agent may reasonably require;

 

(xii)           a certificate of a Responsible Officer of each Loan Party either (A) attaching copies of all consents, licenses and approvals required in connection with the execution, delivery and performance by such Loan Party and the validity against such Loan Party of the Loan Documents to which it is a party, and such consents, licenses and approvals shall be in full force and effect, or (B) stating that no such consents, licenses or approvals are so required;

 

(xiii)          a certificate signed by a Responsible Officer of each Borrower certifying that the conditions specified in paragraphs (d), (e), (f), (g), (i), (k), (l), (m) and (n) and clause (A) of paragraph (h) of this Section 4.1 have been satisfied;

 

(xiv)         certificates attesting to the Solvency of each Loan Party before and after giving effect to the Acquisition, from its chief financial officer;

 

(xv)          evidence that all insurance required to be maintained pursuant to the Loan Documents has been obtained and is in effect, together with the certificates of insurance, naming the Administrative Agent, on behalf of the Lenders, as an additional insured or loss payee, as the case may be, under all insurance policies maintained with respect to the assets and properties of the Loan Parties that constitute Collateral;

 

(xvi)         evidence that the Existing Credit Agreement and all outstanding Indebtedness for money borrowed of the Borrowers, other than the Indebtedness set forth on Schedule 8.1(e)  attached hereto, has been, or concurrently with the transactions contemplated hereby is being, paid and all Encumbrances securing such Indebtedness have been, or concurrently with the transactions contemplated hereby are being, released or assigned to the Administrative Agent, which requirement may be satisfied by delivery of payoff letters in form and substance reasonably satisfactory to the Administrative Agent;

 

(xvii)        a certificate of a Responsible Officer of the Parent certifying that the Parent has previously delivered to the Administrative Agent true and correct copies of the Asset Purchase Agreement and all schedules, documents and agreements ancillary thereto as in effect on the Closing Date;

 

(xviii)       with respect to any Fee Property, such other, papers, instructions, documents, instruments or certificates as the Title Company may reasonably require for the issuance of Title Policies;

 

(xix)          such other assurances, certificates, documents, consents or opinions as the Administrative Agent, the LC Issuer or any Lender reasonably may require;

 

(xx)           a certificate reasonably satisfactory to Administrative Agent, for benefit of itself and the Lenders, provided by the Borrowers that sets forth information required by

 

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the Patriot Act including the identity of each Borrower, the name and address of each Borrower and other information that will allow the Administrative Agent or any Lender, as applicable, to identify each Borrower in accordance with the Patriot Act; and

 

(xxi)          all amendments to the Junior Subordinated Debt Documents necessary to replace references to M&I Marshall & Ilsley Bank with references to the Administrative Agent, and any other amendments reasonably requested by the Administrative Agent.

 

(b)            All fees required to be paid to the Administrative Agent, the Lead Arranger and the Lenders on or before the Closing Date shall have been paid or will be paid on the Closing Date from the proceeds of the Loans pursuant to a closing statement directive from the Borrowers to the Administrative Agent.

 

(c)            The Borrowers shall have paid all fees, charges and disbursements of counsel to the Administrative Agent (directly to such counsel if requested by the Administrative Agent) to the extent invoiced prior to or on the Closing Date, plus such additional amounts of such fees, charges and disbursements as shall constitute its reasonable estimate of such fees, charges and disbursements incurred or to be incurred by it through the closing proceedings ( provided that such estimate shall not thereafter preclude a final settling of accounts between the Borrowers and the Administrative Agent) or will be paid on the Closing Date from the proceeds of the Loans pursuant to a closing statement directive from the Borrowers to the Administrative Agent.

 

(d)            There shall not have occurred, since December 2, 2007, any change, effect or circumstance that would constitute a “Material Adverse Effect” as that term is defined in the Asset Purchase Agreement.

 

(e)            The Borrowers shall have delivered to the Administrative Agent (i) a certified copy of the final order by the Bankruptcy Court approving the Acquisition on the Closing Date, in form reasonably satisfactory to counsel to the Administrative Agent, and (ii) a certificate of no appeal issued by the clerk of such court.

 

(f)             The Acquisition shall have been consummated (or substantially simultaneously with the borrowing of the initial Loans on the Closing Date shall be consummated) (i) substantially in accordance with the Summary of Sources and Uses and (ii) in accordance with the terms of the Asset Purchase Agreement without giving effect to (x) any amendments or waivers to the Asset Purchase Agreement or (y) the delivery of any updated disclosure schedules to the Asset Purchase Agreement, in any case to the extent that such amendments, waivers or updated disclosure schedules (taken as a whole) are material and adverse to the interests of the Lenders and not consented to in writing by the Administrative Agent.

 

(g)            After giving effect to the Acquisition, the Borrowers will have outstanding no Indebtedness for money borrowed other than the Loans, the Junior Subordinated Debt and the Indebtedness set forth on Schedule 8.1(e) .

 

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(h)            The Administrative Agent shall have received the Borrowers’ projections for each of the five Fiscal Years following the Closing Date, including consolidated balance sheets and statements of income, retained earnings and cash flows in form and substance satisfactory to the Administrative Agent.

 

(i)             After giving effect to the consummation of the Acquisition, the making of any Loans, the issuance of any Letters of Credit, and the application of proceeds of the foregoing (including the payment of all fees and expenses in connection therewith) on the Closing Date, substantially in accordance with the Summary of Sources and Uses, the sum of (x) the Borrowers’ unrestricted cash and Qualified Investments, plus (y) the excess of the Total Revolving Credit Commitment over Total Revolving Credit Outstandings shall be at least $2,000,000.

 

(j)             The Administrative Agent shall not have become aware, after November 30, 2007, of any new or inconsistent information or other matter not previously disclosed to it relating to the Borrowers or the transactions contemplated by the Commitment Letter dated as of January 3, 2008 addressed to the Parent that the Administrative Agent, in its reasonable business judgment, deems material and adverse relative to the information or other matters disclosed to it prior to such date, including matters covered by any third-party diligence reports, background checks or other financial, accounting, insurance or legal review.

 

(k)            The representations made by the Barnhill’s Buffet, Inc. in the Asset Purchase Agreement shall be true and accurate on and as of the Closing Date (but without giving effect to the delivery of any amendments, waivers or updated disclosure schedules pursuant to the Asset Purchase Agreement to the extent that such amendments, waivers or Updated Schedules are not consented to in writing by the Administrative Agent).

 

(l)             The representations and warranties contained in Section IV and all other representations and warranties made by the Borrowers under any other Loan Document shall be true and accurate on and as of the Closing Date as though made at and as of the Closing Date.

 

(m)           All documents and instruments required to perfect the Administrative Agent’s security interest in the Collateral shall have been executed and delivered and, if applicable, be in proper form for filing, in each case as contemplated by the foregoing provisions of this Section 4.1, and none of the Collateral will be subject to any other pledges, security interests or liens except for Permitted Encumbrances.

 

(n)            No litigation, arbitration, proceeding or investigation shall be pending or, to the Borrowers’ knowledge, threatened which questions the validity or legality of the transactions contemplated by any Loan Document or the Asset Purchase Agreement or seeks a restraining order, injunction or damages in connection therewith, or which, in the reasonable judgment of the Administrative Agent, might adversely affect the transactions contemplated hereby or thereby or might reasonably be expected to have a Material Adverse Effect.

 

4.2            Conditions Precedent to all Revolving Credit Loans and Letters of Credit after the Closing Date .  The obligation of the Lenders to make any Revolving Credit Loan, to continue LIBOR Loans or to convert Loans of one Type to Loans of another Type, and of the LC Issuer to

 

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issue any Letter of Credit, in each case after the Closing Date, is further subject to the following conditions:

 

(a)            timely receipt by the Administrative Agent of the Notice of Borrowing or Conversion with respect to any Revolving Credit Loan, or by the LC Issuer of the Letter of Credit Application with respect to any Letter of Credit;

 

(b)            the outstanding Loans and Letters of Credit do not and, after giving effect to any requested Revolving Loan, will not exceed the limitations set forth in Sections 2.1 and 3.1 hereof;

 

(c)            the representations and warranties contained in Section V hereof and all representations and warranties made by the Borrowers and each other Loan Party under any other Loan Document shall be true and accurate in all material respects on and as of the date of such Notice of Borrowing or Conversion or Letter of Credit Application and on the effective date of the making, continuation or conversion of each Revolving Credit Loan or issuance of each Letter of Credit as though made at and as of each such date (except to the extent that such representations and warranties expressly relate to an earlier date in which case such representations and warranties shall be true and correct as of such earlier date);

 

(d)            no Default or Event of Default shall have occurred and be continuing at the time of, and immediately after, the making of such requested Revolving Credit Loan or the issuance of such requested Letter of Credit;

 

(e)            no litigation, arbitration, proceeding or investigation shall be pending or threatened which questions the validity or legality of the transactions contemplated by any Loan Document or seeks a restraining order, injunction or damages in connection therewith, or which, in the judgment of the Administrative Agent, might adversely affect the transactions contemplated hereby or thereby or might have a Material Adverse Affect on the Borrowers; and

 

(f)             no change shall have occurred in any law or regulation or interpretation thereof that, in the opinion of counsel for any Lender, would make it illegal or against the policy of any governmental agency or authority for such Lender to make Loans hereunder or, in the opinion of counsel for the LC Issuer, for the LC Issuer to issue Letters of Credit hereunder (as the case may be).

 

The making, continuation or conversion of each Loan and the issuance of each Letter of Credit shall be deemed to be a representation and warranty by the Borrowers on the date of the making, continuation or conversion of such Loan as to the accuracy of the facts referred to in subsection (c) of this Section 4.2 and of the satisfaction of all of the conditions set forth in this Section 4.2.

 

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SECTION V

 

REPRESENTATIONS AND WARRANTIES

 

The Borrowers, jointly and severally, represent and warrant to the Administrative Agent and the Lenders that:

 

5.1            Existence, Qualification and Power .  Each Loan Party and each of its Subsidiaries (a) is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation, organization or formation, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own or lease its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents and the Senior Debt Documents to which it is a party, and (c) is duly qualified and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license; except in each case referred to in clause (b)(i) or (c), to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.

 

5.2            Authorization; No Contravention .  The execution, delivery and performance by each Loan Party of each Loan Document to which such Person is or is to be a party have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of such Person’s organization documents; (b) conflict with or result in any breach or contravention of, or the creation of any Encumbrance under, or require any payment to be made under (i) any contractual obligation to which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any law, rule or regulation.

 

5.3            Governmental Authorization; Other Consents .  Except as set forth on Schedule 5.3 , no approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with (a) the execution, delivery or performance by, or enforcement against, any Loan Party of this Agreement or any other Loan Document, or for the consummation of the Acquisition, (b) the grant by any Loan Party of the Encumbrances granted by it pursuant to the Security Documents, (c) the perfection or maintenance of the Encumbrances created under the Security Documents (including with respect to the lien priority thereof) or (d) the exercise by the Administrative Agent or any Lender of its rights under the Loan Documents or the remedies in respect of the Collateral pursuant to the Security Documents.  All applicable waiting periods in connection with the Acquisition have expired without any action having been taken by any Governmental Authority restraining, preventing or imposing materially adverse conditions upon the Acquisition or the rights of the Loan Parties or its Subsidiaries freely to transfer or otherwise dispose of, or to create any Encumbrance on, any properties now owned or hereafter acquired by any of them.

 

5.4            Binding Effect .  This Agreement has been, and each other Loan Document, when delivered hereunder, will have been, duly executed and delivered by each Loan Party that is party thereto.  This Agreement constitutes, and each other Loan Document when so delivered will constitute, a legal, valid and binding obligation of such Loan Party, enforceable against each

 

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Loan Party that is party thereto in accordance with its terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights generally, and except as the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought.

 

5.5            Financial Statements; No Material Adverse Effect .  (a)  The audited consolidated balance sheet of the Borrowers as of the end of, and the related consolidated statements of operations, retained earnings and cash flows for, the Fiscal Year ended January 29, 2007 (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby; (ii) fairly present the financial condition of the Borrowers and their Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, in each case except as otherwise expressly noted therein; (iii) show all material indebtedness and other liabilities, direct or contingent, of the Borrowers and their Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness; and (iv) have been delivered to the Administrative Agent.

 

(b)            The unaudited consolidated balance sheet of the Borrowers and their Subsidiaries as of the end of, and the related consolidated statements of operations, retained earnings and cash flows for, the Fiscal Month ended  November 5, 2007 and for the 13 Fiscal Months then ended (the “ Financial Statements ”) (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby; (ii) fairly present the financial condition of the Borrowers and their Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, in each case except as otherwise expressly noted therein and subject to normal, recurring year-end adjustments that shall not in the aggregate be material in amount and the absence of notes thereto; and (iii) have been delivered to the Administrative Agent.  Schedule 5.5 sets forth all material Indebtedness and other liabilities, direct or contingent, of the Borrowers and their consolidated Subsidiaries as of the date of such Financial Statements, including liabilities for taxes, material commitments and Indebtedness, not set forth in such Financial Statements.

 

(c)            Since the date of the Financial Statements, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect.

 

(d)            The Pro Forma Financial Statements, copies of which have been furnished to the Administrative Agent, fairly present the consolidated pro forma financial condition of the Borrowers and their Subsidiaries as at the date thereof and the consolidated pro forma results of operations of the Borrowers and their Subsidiaries for the period ended on such date, in each case giving effect to the Acquisition, all in accordance with GAAP.

 

(e)            The projected financial information of the Borrowers and their Subsidiaries that has been provided by the Borrowers to the Lenders prior to the date hereof was prepared in good faith on the basis of the assumptions stated therein, which assumptions were reasonable in light of the conditions known to the Borrowers at the time of delivery of such forecasts, and represented, at the time of delivery, the reasonable estimate by the Borrowers of

 

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the Borrowers’ future financial condition and performance with respect to the time periods stated therein.

 

5.6            Litigation .  There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Borrowers, overtly threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, by or against the Borrowers or any of their Subsidiaries or against any of their properties or revenues that (a) purport to affect or pertain to this Agreement, any other Loan Document or the consummation of the Acquisition, or (b) either individually or in the aggregate, if determined adversely, could reasonably be expected to have a Material Adverse Effect.

 

5.7            No Default .  No Loan Party or any Subsidiary thereof is in default under or with respect to, or a party to, any contractual obligation that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.  No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement, any other Loan Document or the Junior Subordinated Debt Documents.

 

5.8            Ownership of Property; Encumbrances; Investments .  (a)  Each Loan Party and each of its Subsidiaries has good record and marketable title in fee simple to, or valid leasehold interests in all real property necessary or used in the ordinary conduct of its business, except for Permitted Encumbrances and such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

 

(b)            Schedule 5.8(b)  sets forth a complete and accurate list of all Encumbrances on the property or assets of each Loan Party and each of its Subsidiaries, showing as of the date hereof the lienholder thereof, the principal amount of the obligations secured thereby and the property or assets of such Loan Party or such Subsidiary subject thereto.  The property of each Loan Party and each of its Subsidiaries is subject to no Encumbrances, other than Permitted Encumbrances and Encumbrances set forth on Schedule 5.8(b) .

 

(c)            Schedule 5.8(c)  sets forth a complete and accurate list of all real property owned in fee by each Loan Party and each of its Subsidiaries (each a “ Fee Property ”), showing as of the date hereof the street address, county or other relevant jurisdiction, state, record owner and book and estimated fair value thereof and noting any contractual obligations, whether contingent or otherwise, to sell such Fee Property.  Each Loan Party and each of its Subsidiaries has good, marketable and insurable fee simple title to each Fee Property owned by such Loan Party or such Subsidiary, free and clear of all Encumbrances, other than Encumbrances created or permitted by the Loan Documents or set forth on such Schedule.

 

(d)            (i)  Schedule 5.8(d)(i)  sets forth a complete and accurate list of all leases of real property under which any Loan Party or any Subsidiary of a Loan Party is the lessee, showing as of the date hereof the street address, county or other relevant jurisdiction, state, lessor, lessee and expiration date thereof.  Each such lease is the legal, valid and binding obligation of the lessor thereof, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights generally, and except as the remedy of specific performance or of injunctive

 

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relief is subject to the discretion of the court before which any proceeding therefor may be brought.

 

(ii)  Schedule 5.8(d)(ii)  sets forth a complete and accurate list of all leases of real property under which any Loan Party or any Subsidiary of a Loan Party is the lessor, showing as of the date hereof the street address, county or other relevant jurisdiction, state, lessor, lessee and expiration date thereof.  Each such lease is the legal, valid and binding obligation of the lessee thereof, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors’ rights generally, and except as the remedy of specific performance of injunctive relief is subject to the discretion of the court before which any proceeding therefore may be brought.

 

(e)            Schedule 5.8(e)  sets forth a complete and accurate list of all Investments held by any Loan Party or any Subsidiary of a Loan Party on the date hereof, showing as of the date hereof the amount, obligor or issuer and maturity, if any, thereof.

 

5.9            Environmental Compliance .  The Borrowers and its Subsidiaries have obtained all permits, licenses and other authorizations and have made all filings, registrations and other submittals which are required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a Material Adverse Effect.  The Borrowers and its Subsidiaries are in compliance with the terms and conditions of all such permits, licenses and authorizations, and are also in compliance with all applicable orders, decrees, judgments and injunctions issued, entered, promulgated or approved under any Environmental Law, except to the extent failure to comply would not have a Material Adverse Effect.  The Loan Parties and their respective Subsidiaries conduct in the ordinary course of business a review of claims they receive alleging potential liability or responsibility for violation of any Environmental Law on their respective businesses, operations and properties, and as a result thereof the Borrowers have reasonably concluded that such Environmental Laws and claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.  The Borrowers and their Subsidiaries have made available to Administrative Agent copies of all existing environmental reports, reviews and audits and all documents pertaining to actual or potential environmental liabilities, in each case to the extent such reports, reviews, audits and documents are in their possession, custody or control.

 

5.10          Insurance .  The properties of the Borrowers and their Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Borrowers, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the applicable Borrower or Subsidiary operates.

 

5.11          Taxes .  The Borrowers and their Subsidiaries have filed all Federal, state and other material tax returns and reports required to be filed, and have paid all Federal, state and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves have been provided in accordance with GAAP.  There is no proposed tax

 

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assessment against the Borrowers or any Subsidiary that would, if made, have a Material Adverse Effect.  No Loan Party or any Subsidiary thereof is party to any tax sharing agreement.

 

5.12          ERISA Compliance .  (a)  Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state laws.  Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of the Borrowers, nothing has occurred which would prevent, or cause the loss of, such qualification.  The Borrowers and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan.

 

(b)            There are no pending or, to the best knowledge of the Borrowers, overtly threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that could reasonably be expected to have a Material Adverse Effect.  There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect.

 

(c)            (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Borrowers nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Borrowers nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Borrowers nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA.

 

5.13          Subsidiaries; Equity Interests; Loan Parties .  The Borrowers have no Subsidiaries other than those specifically disclosed in Part (a) of Schedule 5.13 .  All of the outstanding Equity Interests in such Subsidiaries have been validly issued, are fully paid and non-assessable and are owned by a Loan Party in the amounts specified on Part (a) of Schedule 5.13 free and clear of all Encumbrances except those created under the Security Documents.  The Borrowers have no equity investments in any other corporation or entity other than those specifically disclosed in Part (b) of Schedule 5.13 .  All of the outstanding Equity Interests in the Borrowers have been validly issued, are fully paid and non-assessable and, except with respect to the Parent’s Equity Interests, are owned by the Persons in the amounts specified on Part (c) of the Schedule 5.13 free and clear of all Encumbrances except those created under the Security Documents.  Schedule 5.13 is a complete and accurate list of all Loan Parties, showing as of the Closing Date (as to each Loan Party) the jurisdiction of its incorporation or formation, the address of its principal place of business and its U.S. taxpayer identification number or, in the case of any non-U.S. Loan Party that does not have a U.S. taxpayer identification number, its unique identification number issued to it by the jurisdiction of its incorporation.  The copy of the charter or other organizational document of each Loan Party and each amendment thereto provided pursuant to Section 4.1(a)(ix) is a true and correct copy of each such document, each of which is valid and in full force and effect.

 

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5.14          Margin Regulations; Investment Company Act .  (a)  The Borrowers are not engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the FRB), or extending credit for the purpose of purchasing or carrying margin stock.

 

(b)            None of the Borrowers, any Person controlling of the Borrowers, or any Subsidiary is or is required to be registered as an “investment company” under the Investment Company Act of 1940.

 

5.15          Disclosure .  The Borrowers have disclosed to the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which they or any of their Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect.  No report, financial statement, certificate or other information furnished (whether in writing or orally) by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or under any other Loan Document (in each case as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrowers represent only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.

 

5.16          Compliance with Laws .  Each Loan Party and each Subsidiary thereof is in compliance in all material respects with the requirements of all laws, rules and regulations and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.

 

5.17          Intellectual Property; Licenses, Etc .  Each Loan Party and each of its Subsidiaries owns, or possesses the right to use, all of the trademarks, service marks, trade names, copyrights, patents, patent rights, franchises, licenses and other intellectual property rights (collectively, “ IP Rights ”) that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person, and Schedule 5.17 sets forth a complete and accurate list of all such IP Rights owned, licensed to or used by each Loan Party and each of its Subsidiaries (other than “off the shelf” software products used in the ordinary course of business).  To the knowledge of the Borrowers, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by any Loan Party or any of its Subsidiaries infringes upon any rights held by any other Person.  No claim or litigation regarding any of the foregoing is pending or, to the knowledge of the Borrowers, threatened, which, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

 

5.18          Solvency .  Each Loan Party is, individually and together with its Subsidiaries on a consolidated basis, Solvent.

 

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5.19          Casualty, Etc.   Neither the businesses nor the properties of any Loan Party or any of its Subsidiaries are affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance) that, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

 

5.20          Labor Matters .  There are no collective bargaining agreements or Multiemployer Plans covering the employees of the Borrowers or any of their Subsidiaries as of the Closing Date and neither the Borrowers nor any of their Subsidiaries has suffered any strikes, walkouts, work stoppages or other material labor difficulty within the last five years.

 

5.21          Security Documents .  The provisions of the Security Documents are effective to create in favor of the Administrative Agent for the benefit of the Secured Parties a legal, valid and enforceable first priority Encumbrance (subject to Permitted Encumbrances) on all right, title and interest of the respective Loan Parties in the Collateral described therein.  Except for filings completed prior to the Closing Date as contemplated hereby and by the Security Documents or addressed in Section 4.1(m), no filing will be necessary to perfect or protect such Encumbrances.

 

5.22          Intentionally Deleted .

 

5.23          Compliance with OFAC Rules and Regulations .  Neither the Borrowers, nor any Subsidiary nor any Affiliate of the Borrowers (i) is a Sanctioned Person, (ii) has any assets in Sanctioned Countries, or (iii) derives any of its operating income from investments in, or transactions with Sanctioned Persons or Sanctioned Countries.  No part of the proceeds of any Loan hereunder will be used directly or indirectly to fund any operations in, finance any investments or activities in or make any payments to, a Sanctioned Person or a Sanctioned Country.

 

5.24          Foreign Assets Control Regulations, Etc .  Neither the Borrowers nor any of their Subsidiaries is an “enemy” or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act of the United States of America (50 U.S.C. App. §§ 1 et seq.), as amended.  Neither the Borrowers nor any of their Subsidiaries is in violation of (a) the Trading with the Enemy Act, as amended, (b) any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto or (c) the Patriot Act.  Neither the Borrowers nor any of their Subsidiaries (i) is a blocked person described in Section 1 of the Anti-Terrorism Order or (ii) to the best of the Borrowers’ knowledge, engages in any dealings or transactions, or is otherwise associated, with any such blocked person.

 

5.25          Parent Public Filings .  As of the respective dates thereof, the Parent SEC Documents were prepared in all material respects in accordance with the Exchange Act and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.  Parent has timely filed all forms, reports and documents with the SEC required to be filed by it pursuant to the Securities Act and the Exchange Act.  The Parent SEC Documents complied as to form, at the time such form, document or report was filed, in all material respects with the applicable requirements of the Securities Act and the

 

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Exchange Act.  The consolidated financial statements of Parent included in the Parent SEC Documents (the “ Parent Financial Statements ”), including in each case the notes thereto, have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, except as otherwise noted therein, are true, accurate and complete in all material respects, and fairly present the consolidated financial condition and the consolidated results of operations and cash flow of Parent, on the bases therein stated, as of the respective dates thereof, and for the respective periods covered thereby subject, in the case of unaudited financial statements, to normal nonmaterial year-end audit adjustments and accruals.

 

SECTION VI

 

AFFIRMATIVE COVENANTS

 

The Borrowers covenant that so long as any Loan, Letter of Credit or other Obligation, remains outstanding or the Lenders or the LC Issuer have any obligation to lend or to issue any Letter of Credit hereunder:

 

6.1            Financial Statements .  The Borrowers shall furnish to the Administrative Agent and each Lender:

 

(a)            as soon as available to the Borrowers, but in any event within 90 days after the end of each Fiscal Year, the consolidated balance sheet of the Borrowers and all of their Subsidiaries as of the end of such year and related consolidated statements of income, retained earnings and cash flow of the Borrowers and all of their Subsidiaries for such year, prepared in accordance with GAAP and audited and certified without qualification by the Borrowers’ Accountants; and concurrently with such financial statements, a copy of the Borrowers’ Accountants management report and a written statement by the Borrowers’ Accountants that, in the making of the audit necessary for their report and opinion upon such financial statements they have obtained no knowledge of any Default or, if in the opinion of such accountants any such Default exists, they shall disclose in such written statement the nature and status thereof;

 

(b)            as soon as available to the Borrowers, but in any event within 45 days after the end of each Fiscal Quarter of each Fiscal Year, a consolidated balance sheet of the Borrowers and all their Subsidiaries as of the end of, and related consolidated statements of income, retained earnings and cash flow of the Borrowers and all of their Subsidiaries for, the Fiscal Quarter then ended and portion of the Fiscal Year then ended, prepared in accordance with GAAP and certified on behalf of the Borrowers by the chief financial officer of the Parent, subject to normal, recurring year-end adjustments that shall not in the aggregate be material in amount;

 

(c)            as soon as available to the Borrowers, but in any event within 30 days following the end of each Fiscal Month, a restaurant by restaurant statement of revenue, cash flow and Consolidated EBITDA, for such Fiscal Month, for all restaurants owned or operated by the Borrowers or their Subsidiaries (including a statement of revenue, cash flow and Consolidated EBITDA comparing year over year performance for all restaurants operated for more than one year), prepared in accordance with GAAP and certified on behalf of the Borrowers by the chief financial officer of the Parent;

 

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(d)            concurrently with the delivery of each financial statement pursuant to subsections (a) and (b) of this Section 6.1, a report in substantially the form of Exhibit F hereto signed on behalf of the Borrowers by the chief financial officer of the Parent;

 

(e)            at least fifteen (15) days prior to the first day of each Fiscal Year, the Borrowers’ projections for such Fiscal Year, prepared on a Fiscal Month basis and including consolidated balance sheets and statements of income, retained earnings and cash flows;

 

(f)             concurrently with their filing, true and correct copies of the Borrowers’ federal and material state income tax returns and each amendment thereto;

 

(g)            promptly after the receipt thereof by the Borrowers, copies of any reports (including any so-called management letters) submitted to the Borrowers by independent public accountants in connection with any annual or interim audit or review of the accounts of the Borrowers and/or their Subsidiaries made by such accountants;

 

(h)            promptly after the same are delivered to its equity holders or the SEC, copies of all proxy statements, financial statements and reports as the Borrowers shall send to their equity holders, or as the Borrowers may file with the SEC or any Governmental Authority at any time having jurisdiction over the Borrowers or their Subsidiaries, or, in lieu of such delivery, prompt notice after the same are made publicly available on the Internet; and

 

(i)             from time to time, such other financial data and information about the Borrowers, their Subsidiaries and their businesses and properties as the Administrative Agent or the Lenders may reasonably request, including, without limitation, periodic sales reports relating to restaurants and any accounts receivables information (including aging).

 

6.2            Conduct of Business .  (a)  The Borrowers and their Subsidiaries shall duly observe and comply in all material respects with all material contracts and with all applicable laws, regulations, decrees, orders, judgments and valid requirements of any Governmental Authorities applicable to their corporate existence, rights and franchises, to the conduct of their business and to their property and assets (including without limitation all Environmental Laws and ERISA), except in any case where the failure to observe and comply would not have a Material Adverse Effect, and shall maintain and keep in full force and effect and comply in all material respects with all licenses and permits reasonably necessary to the proper conduct of their business.

 

(b)            The Borrowers and their Subsidiaries shall, except as otherwise permitted by this Agreement, maintain their corporate or other entity type existence, comply with their respective charters, by-laws, operating agreements and other organizational documents, and remain or engage substantially in the same business as that in which they are now engaged and in no unrelated business.

 

6.3            Maintenance and Insurance .

 

(a)            The Borrowers and each of their Subsidiaries shall maintain (i) their properties and the Collateral in good repair, working order and condition as required for the

 

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normal conduct of their business, and (ii) all material rights, permits, licenses, approvals and privileges necessary in the conduct of its business, whether because of its ownership, lease, sublease or other operation or occupation of a property or other conduct of its business, and shall make all reasonably necessary or appropriate filings with, and give all required notices to, Governmental Authorities.

 

(b)            The Borrowers and each of their Subsidiaries shall at all times maintain liability, casualty and business interruption insurance on their properties (including all Collateral) with financially sound and reputable insurers in such amounts and with such coverages, endorsements, deductibles and expiration dates as the officers of the Borrowers, in the exercise of their reasonable judgment deem to be adequate, as are customary in the industry for companies of established reputation engaged in the same or similar business and owning or operating similar properties and as shall be reasonably satisfactory to the Administrative Agent.  The Administrative Agent shall be named as loss payee, additional insured and/or mortgagee under such insurance as the Administrative Agent shall reasonably require from time to time, and the Borrowers shall provide to the Administrative Agent lender’s loss payable endorsements in form and substance reasonably satisfactory to the Administrative Agent.  In addition, the Administrative Agent shall be given thirty (30) days advance notice of any cancellation of insurance.  In the event of failure to provide and maintain insurance as herein provided, the Administrative Agent may, at its option, obtain such insurance and charge the amount thereof to the Borrowers as a Revolving Credit Loan.  The Borrowers shall furnish to the Administrative Agent certificates or other evidence satisfactory to the Administrative Agent of compliance with the foregoing insurance provisions.  The Administrative Agent shall not, by the fact of approving, disapproving or accepting any such insurance, incur any liability for the form or legal sufficiency of insurance contracts, solvency of insurance companies or payment of law suits, and the Borrowers hereby expressly assumes full responsibility therefor and liability, if any, thereunder.

 

6.4            Taxes .  Each Borrower shall pay or cause to be paid all taxes, assessments or governmental charges on or against it or any of its Subsidiaries or their properties on or prior to the time when they become delinquent; except for any tax, assessment or charge that is being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been established and are being maintained in accordance with GAAP if no Encumbrance shall have been filed (the enforcement of which shall not have been stayed) to secure such tax, assessment or charge.

 

6.5            Inspection Rights; Lender Meeting .

 

(a)            Each Borrower shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties of such Borrower or of any of its Subsidiaries (i) to inspect, copy and take extracts from their books and records, and to discuss their affairs, finances and accounts with their officers and independent public accountants, and (ii) to inspect, review, evaluate and make physical verifications and appraisals of any improvements, inventory and other Collateral in any manner that such Lender considers reasonably advisable, all at the expense of the Borrowers and all upon reasonable notice and at such reasonable times during normal business hours and as often as may

 

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reasonably be requested, but at any time or from time to time following the occurrence and during the continuation of an Event of Default.

 

(b)            The Borrowers will, upon the request of the Administrative Agent or Majority Lenders, participate in a meeting of the Administrative Agent and Lenders once during each Fiscal Year to be held at the Borrowers’ principal offices (or at such other location as may be agreed to by the Borrowers and Administrative Agent) at such time as may be agreed to by the Borrowers and the Administrative Agent.

 

6.6            Maintenance of Books and Records .  The Borrowers and each of their Subsidiaries shall keep adequate books and records of account, in which true and complete entries will be made reflecting all of their business and financial transactions, and such entries will be made in accordance with GAAP consistently applied and applicable law.

 

6.7            Use of Proceeds .

 

(a)            The Borrowers will use the proceeds of the Term Loans to finance the Acquisition, to repay all outstanding Indebtedness under the Existing Credit Agreement and to pay fees and expenses associated with the Acquisition and the other transactions contemplated hereby.  Thereafter, the remainder of the Term Loans and the Revolving Credit Loans shall be available, subject to the terms of the Loan Documents, for working capital, to finance Capital Expenditures and for other general corporate or limited liability company purposes.

 

(b)            No portion of any Loan shall be used for the “purpose of purchasing or carrying” any “margin stock” or “margin security” as such terms are used in Regulations T, U and X of the Board of Governors of the Federal Reserve System, or otherwise in violation of such regulations.

 

6.8            Further Assurances .  At any time and from time to time, promptly following the written request of the Administrative Agent, the Borrowers shall, and shall cause each of their Subsidiaries to, execute and deliver such further documents and take such further action as may reasonably be requested by the Administrative Agent (a) to obtain the full benefits of this Agreement and the other Loan Documents, (b) to protect, preserve, maintain and enforce the Lenders’ rights in (and the priority of the Lenders’ lien on) any Collateral or (c) to enable the Administrative Agent and each Lender to exercise all or any of the rights, remedies and powers granted herein or in any other Loan Document.

 

6.9            Notification Requirements .  The Borrowers shall furnish to the Administrative Agent:

 

(a)            promptly upon becoming aware of the existence of any condition or event that constitutes a Default, written notice thereof specifying the nature and duration thereof and the action being or proposed to be taken with respect thereto;

 

(b)            promptly upon becoming aware of (i) any litigation or (ii) of any investigative proceedings by a Governmental Authority commenced or threatened against the Borrowers or any of their Subsidiaries or any of the Collateral of which either has notice, the

 

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outcome of which could reasonably be expected to have a Materially Adverse Effect, written notice thereof and the action being or proposed to be taken with respect thereto; and

 

(c)            promptly after becoming aware of any occurrence or any condition affecting the Borrowers or any of their Subsidiaries or any of the Collateral which could reasonably be expected to have a Material Adverse Effect, written notice thereof.

 

6.10          ERISA Reports .

 

(a)            Each Plan shall comply in all material respects with ERISA and the Code, except to the extent failure to comply in any instance would not have a Material Adverse Effect on Borrowers and their Subsidiaries.

 

(b)            With respect to any Plan, the Borrowers shall, or shall cause their Affiliates to, furnish to the Administrative Agent promptly (i) as soon as possible and in any event within 10 days after the Borrowers or any of their ERISA Affiliates know that any ERISA Event has occurred or is expected to occur, a statement of a Responsible Officer of the Borrowers, describing such ERISA Event, including copies of any notice concerning an ERISA Event received from PBGC, a plan administrator, or from a Multiemployer Plan sponsor, and the action, if any, the Borrowers or such ERISA Affiliate proposes to take with respect thereto; and (ii) promptly after filing thereof, a copy of the annual report of each Pension Plan (Form 5500 or comparable form) required to be filed with the IRS and/or the Department of Labor.  Promptly after the adoption of any Pension Plan, the Borrowers shall notify the Administrative Agent of such adoption.

 

6.11          Environmental Compliance .

 

(a)            Each Borrower and its Subsidiaries shall comply in all material respects with all applicable Environmental Laws in all jurisdictions in which any of them operates now or in the future, and each Borrower and its Subsidiaries shall comply in all material respects with all such Environmental Laws that may in the future be applicable to such Borrower’s or any of its Subsidiaries’ business, properties and assets.

 

(b)            If any Borrower or any Subsidiary shall (i) receive notice that any material violation of any Environmental Law may have been committed or is about to be committed by a Borrower or any Subsidiary, (ii) receive notice that any administrative or judicial complaint or order has been filed or is about to be filed against a Borrower or any Subsidiary alleging a material violation of any Environmental Law requiring a Borrower or any Subsidiary to take any action in connection with the release of Hazardous Materials into the environment, (iii) receive any notice from a federal, state or local government agency or private party alleging that a Borrower or any Subsidiary may be liable or responsible for any material amount of costs associated with a response to or cleanup of a release of Hazardous Materials into the environment or any damages caused thereby, (iv) become aware of any investigative proceedings by a governmental agency or authority commenced or threatened against a Borrower or any Subsidiary regarding any potential material violation of Environmental Laws or any spill, release, discharge or disposal of any Hazardous Material or (v) notify any Governmental Authority regarding any potential material violation of Environmental Laws or any spill, release,

 

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discharge or disposal of any Hazardous Material by a Borrower or a Subsidiary, the Borrower shall promptly notify the Administrative Agent thereof (together with a copy of any such notice) and of any action being or proposed to be taken with respect thereto and thereafter shall continue to furnish to the Administrative Agent all further notices, demands, reports and other information regarding the foregoing.

 

6.12          Covenant to Guarantee Obligations and Give Security .  (a) Upon the formation or acquisition of any new direct or indirect Subsidiary by any Loan Party, the Borrowers shall, at the Borrowers’ expense:

 

(i)             within 10 days after such formation or acquisition, cause such Subsidiary (other than any CFC or a Subsidiary that is held directly or indirectly by a CFC), and cause each direct and indirect parent of such Subsidiary (if it has not already done so), to duly execute and deliver to the Administrative Agent a guaranty or guaranty supplement, in form and substance reasonably satisfactory to the Administrative Agent, guaranteeing the other Loan Parties’ obligations under the Loan Documents (each such guaranty or guaranty supplement, a “ Subsidiary Guaranty ”);

 

(ii)            within 10 days after such formation or acquisition, furnish to the Administrative Agent a description of the real and personal properties of such Subsidiary, in detail reasonably satisfactory to the Administrative Agent;

 

(iii)           within 15 days after such formation or acquisition, cause such Subsidiary (other than any CFC or a Subsidiary that is held directly or indirectly by a CFC) and each direct and indirect parent of such Subsidiary (if it has not already done so) to execute and deliver to the Administrative Agent a joinder to the Security Agreement and the other security agreements and pledge agreements, as specified by and in form and substance reasonably satisfactory to the Administrative Agent (including delivery of all Pledged Collateral (as defined in the Pledge Agreement) in and of such Subsidiary (except that the Pledged Collateral shall be limited to 65% of the equity of such Subsidiary in the case of a CFC or a Subsidiary that is held directly or indirectly by a CFC), and other instruments of the type specified in Section 4.1(a)(iii)), securing payment of all the Obligations of such Subsidiary or such parent, as the case may be, under the Loan Documents and constituting Encumbrances on all such personal properties;

 

(iv)           deliver to the Administrative Agent, within 15 days after such formation or acquisition, Landlord Waivers, executed by each of the lessors of any of the leased real properties of such Subsidiary (other than any CFC or a Subsidiary that is held directly or indirectly by a CFC), unless waived by the Administrative Agent;

 

(v)            within 30 days after such formation or acquisition, cause such Subsidiary (other than any CFC or a Subsidiary that is held directly or indirectly by a CFC) and each direct and indirect parent of such Subsidiary (if it has not already done so) to take whatever additional action (including the filing of Uniform Commercial Code financing statements and the giving of notices) as may be reasonably necessary or advisable in the reasonable opinion of the Administrative Agent to vest in the Administrative Agent (or in any representative of the Administrative Agent designated by it) valid and subsisting

 

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Encumbrances on the properties purported to be subject to the Security Agreement and the other security agreements and pledge agreements delivered pursuant to this Section 6.12(a), enforceable against all third parties in accordance with their terms;

 

(vi)           within 45 days after such formation or acquisition, cause such Subsidiary (other than any CFC or a Subsidiary that is held directly or indirectly by a CFC) to comply with the requirements of Sections 4.1(a)(iv), (v), (xi) and (xviii) with respect to any Fee Property held thereby; and

 

(vii)          within 60 days after such formation or acquisition, deliver to the Administrative Agent, upon the request of the Administrative Agent in its sole discretion, a signed copy of one or more opinions, in form and substance reasonably acceptable to the Administrative Agent, addressed to the Administrative Agent and the other Secured Parties, of counsel for the Loan Parties acceptable to the Administrative Agent as to the matters contained in clauses (i), (ii) and (v) above, and as to such other matters set forth on Exhibit I attached hereto as the Administrative Agent may reasonably request.

 

(b)            Upon the acquisition of any property by any Borrower or any Subsidiary, if such property, in the reasonable judgment of the Administrative Agent, shall not already be subject to a perfected first priority security interest in favor of the Administrative Agent for the benefit of the Secured Parties, then such Borrower shall, at the Borrowers’ expense:

 

(i)             within 10 days after such acquisition, furnish to the Administrative Agent a description of the property so acquired in detail satisfactory to the Administrative Agent,

 

(ii)            within 15 days after such acquisition, deliver to the Administrative Agent Landlord Waivers, executed by each of the lessors of any newly acquired leased real properties, unless waived by the Administrative Agent,

 

(iii)           within 15 days after such acquisition, cause the applicable Loan Party to duly execute and deliver to the Administrative Agent, a joinder to the Security Agreement and the other security agreements and pledge agreements, as specified by and in form and substance satisfactory to the Administrative Agent, securing payment of all the Obligations of the applicable Loan Party under the Loan Documents and constituting Encumbrances on all such properties,

 

(iv)           within 30 days after such acquisition, cause the applicable Loan Party to take whatever action (including the filing of Uniform Commercial Code financing statements and the giving of notices) may be reasonably necessary or advisable in the reasonable opinion of the Administrative Agent to vest in the Administrative Agent (or in any representative of the Administrative Agent designated by it) valid and subsisting Encumbrances on the properties purported to be subject to the Security Agreement and the other security agreements and pledge agreements delivered pursuant to this Section 6.12(b), enforceable against all third parties in accordance with their terms, and

 

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(v)            if the acquired property is a Fee Property, within 45 days after such acquisition, cause the applicable Loan Party to comply with the requirements of Sections 4.1(a)(iv), (v), (xi) and (xviii) with respect thereto; and

 

(vi)           within 60 days after such acquisition, deliver to the Administrative Agent, upon the request of the Administrative Agent in its sole discretion, a signed copy of one or more opinions, in form and substance reasonably acceptable to the Administrative Agent, addressed to the Administrative Agent and the other Secured Parties, of counsel for the Loan Parties reasonably acceptable to the Administrative Agent as to the matters contained in clauses (iii) and (iv) above and as to such other matters set forth on Exhibit I attached hereto as the Administrative Agent may reasonably request.

 

(c)            At any time upon request of the Administrative Agent, the Borrowers shall promptly execute and deliver any and all further instruments and documents and take all such other action as the Administrative Agent may reasonably deem necessary or desirable in obtaining the full benefits of, or (as applicable) in perfecting and preserving the Encumbrances of, the Security Documents.

 

6.13          Interest Rate Protection .  The Borrowers shall obtain on or before the tenth (10) Business Day after the Closing Date, and maintain in effect at all times until the third anniversary of the Closing Date, Swap Agreements between themselves and a Swap Bank with respect to not less than fifty percent (50.00%) of the Term Loans outstanding under the Term Facility.

 

6.14          Cash Accounts .  As promptly as reasonably practicable after the Closing Date the Borrowers will establish and maintain, and cause each of the other Loan Parties to maintain, their primary depository and disbursement accounts and their treasury management relationships with Wells Fargo pursuant to a Secured Cash Management Agreement, except for secondary depository accounts with another commercial bank located in the United States that has entered into a deposit account control agreement in form reasonably acceptable to the Administrative Agent.

 

6.15          Post-Closing Deliveries .  Because of the short period of time between the issuance of the final order of the Bankruptcy Court approving the Acquisition and the date mandated by the Bankruptcy Court that the Acquisition shall close, the Borrowers represent, and the Administrative Agent acknowledges, that the Borrowers cannot deliver by the Closing Date (a) the Fee Property Security Documents and the related Title Policies, opinions of local counsel and other documents referred to in clauses (v), (xi) and (xviii) of Section 4.1(a) hereof with respect to the Fee Properties listed on Schedule 6.15 attached hereto, (b) the other items listed on Schedule 6.15 attached hereto and (c) any other documents, instruments or deliveries reasonably requested by the Administrative Agent in connection with the foregoing.  Accordingly, the Borrowers covenant and agree that they shall deliver such Fee Property Security Documents and related Title Policies, legal opinions and other documents and other items on or before the date specified on Schedule 6.15 .

 

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SECTION VII

 

FINANCIAL COVENANTS

 

The Borrowers covenant that so long as any Loan, Letter of Credit or other Obligation (other than contingent indemnification obligations) remains outstanding or the Lenders or the LC Issuer have any obligation to make any Loan or issue any Letter of Credit hereunder:

 

7.1            Total Lease Adjusted Leverage Ratio .  The Borrowers will not permit the Total Lease Adjusted Leverage Ratio (a) as of the end of Fiscal Year 2009 (taken as a single fiscal period) to be greater than 5.00:1.00, and (b) as of the end of each Measurement Period ending at the end of each Fiscal Quarter ending thereafter to be greater than 5.00:1.00.

 

7.2            Consolidated Pre-Distribution Fixed Charge Coverage Ratio .

 

(a)            The Borrowers will not permit the Consolidated Pre-Distribution Fixed Charge Coverage Ratio as of the end of any period specified below to be less than the ratio set forth below opposite each such period:

 

Period

 

Minimum Consolidated
Fixed Pre-Distribution
Charge Coverage Ratio

 

 

 

1 st Fiscal Quarter 2009

 

1.20:1.00

1 st and 2 nd Fiscal Quarters 2009 (taken as a single period)

 

1.20:1.00

1 st , 2 nd and 3 rd Fiscal Quarters 2009 (taken as a single period)

 

1.20:1.00

Fiscal Year 2009 (taken as a single period)

 

1.20:1.00

 

(b)            The Borrowers will not permit the Consolidated Pre-Distribution Fixed Charge Coverage Ratio to be less than 1.20:1.00 for each Measurement Period ending at the end of each Fiscal Quarter in the Fiscal Year 2010 and in each Fiscal Year thereafter.

 

7.3            Consolidated Post-Distribution Fixed Charge Coverage Ratio .

 

(a)            The Borrowers will not permit the Consolidated Post-Distribution Fixed Charge Coverage Ratio as of the end of any period specified below to be less than the ratio set forth below opposite each such period:

 

Period

 

Minimum Consolidated
Fixed Post-Distribution
Charge Coverage Ratio

 

 

 

1 st Fiscal Quarter 2009

 

1.05:1.00

1 st and 2 nd Fiscal Quarters 2009 (taken as a single period)

 

0.90:1.00

1 st , 2 nd and 3 rd Fiscal Quarters 2009 (taken as a single period)

 

0.95:1.00

Fiscal Year 2009 (taken as a single period)

 

1.00:1.00

 

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(b)            The Borrowers will not permit the Consolidated Post-Distribution Fixed Charge Coverage Ratio to be less than 1.05:1.00 for each Measurement Period ending at the end of each Fiscal Quarter in Fiscal Year 2010 and in each Fiscal Year thereafter.

 

7.4            Consolidated EBITDA .  The Borrowers will not permit the Consolidated EBITDA for each Fiscal Quarter (taken as a separate fiscal period) ending during Fiscal Year 2009 to be less than the amount set forth below opposite each such Fiscal Quarter:

 

Fiscal Quarter

 

Minimum Consolidated
EBITDA

 

 

 

 

 

Q1 2009

 

$

2,300,000

 

Q2 2009

 

$

1,750,000

 

Q3 2009

 

$

1,300,000

 

Q4 2009

 

$

1,400,000

 

 

7.5            Growth Capital Expenditures .  The Borrowers and their Subsidiaries will not make or commit to make (by entering into a lease or other agreement) any Growth Capital Expenditures during any Fiscal Year in excess of $2,000,000 in the aggregate.

 

SECTION VIII

 

NEGATIVE COVENANTS

 

The Borrowers covenant that so long as any Loan, Letter of Credit or other Obligation, remains outstanding or the Lenders or the LC Issuer have any obligation to make any Loan or to issue any Letter of Credit hereunder:

 

8.1            Indebtedness .  Neither of the Borrowers nor any of their Subsidiaries shall create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness other than the following:

 

(a)            Obligations;

 

(b)            Indebtedness for taxes, assessments or governmental charges to the extent that payment therefor shall at the time not be required to be made in accordance with Section 6.4;

 

(c)            current liabilities on open account for the purchase price of services, materials and supplies incurred by the Borrowers in the ordinary course of business (not as a result of borrowing), so long as all of such open account current liabilities shall be promptly paid and discharged when due or in conformity with customary trade terms and practices, except for

 

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any such open account Indebtedness which is being contested in good faith by the Borrowers, as to which adequate reserves required by GAAP have been established and are being maintained and as to which no Encumbrance has been placed on any property of the Borrowers or any of their Subsidiaries (other than Permitted Encumbrances);

 

(d)            Guarantees permitted under Section 8.1(h) hereof;

 

(e)            Indebtedness of the Borrowers existing on the date of this Agreement and set forth on Schedule 8.1(e) ;

 

(f)             Indebtedness of any Borrower or Subsidiary to another Borrower or Subsidiary;

 

(g)            Subordinated Debt;

 

(h)            Indebtedness (of a type of described in subclauses (a), (d), (e), (f) or (h) of the term Indebtedness but not otherwise included in clauses (a) through (g) of this Section 8.1) incurred hereafter in the ordinary course of business; provided that such Indebtedness does not exceed $250,000 in the aggregate at any time outstanding; and

 

(i)             Indebtedness of Parent consisting of declared, but unpaid, dividends on its common stock, or authorized repurchases of its common stock, to the extent permitted under Section 8.6(d).

 

8.2            Contingent Liabilities .  Neither of the Borrowers nor any of their Subsidiaries shall create, incur, assume, guarantee or be or remain liable with respect to any Guarantees other than (i) Subsidiary Guarantees and (ii) Guarantees resulting from the endorsement of negotiable instruments for deposit or collection in the ordinary course of business.

 

8.3            Encumbrances .  Neither of the Borrowers nor any of their Subsidiaries shall create, incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or encumbrance of any kind, including the lien or retained security title of a conditional vendor upon or with respect to any of its property or assets (“ Encumbrances ”), or assign or otherwise convey any right to receive income, including the sale or discount of accounts receivable with or without recourse, except the following (“ Permitted Encumbrances ”):

 

(a)            Encumbrances created under the Security Documents;

 

(b)            liens for taxes, fees, assessments and other governmental charges to the extent that payment of the same may be postponed or is not required in accordance with the provisions of Section 6.4;

 

(c)            landlords’ and lessors’ liens in respect of rent not in default; liens in respect of pledges or deposits made in the ordinary course of business in compliance with workmen’s compensation, unemployment insurance, social security laws, or similar legislation (other than ERISA) or in connection with appeal and similar bonds incidental to litigation; mechanics’, warehouseman’s, laborers’ and materialmen’s and similar liens, if the obligations secured by such liens are not then delinquent for more than 30 days or are being contested in

 

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good faith by appropriate proceedings and with respect to which adequate reserves have been established and are being maintained in accordance with GAAP; liens securing the performance of bids, tenders, contracts (other than for the payment of money); and liens securing statutory obligations or surety, indemnity, performance, or other similar bonds incidental to the conduct of the Borrowers’ or any of their Subsidiaries’ business in the ordinary course and that do not in the aggregate materially detract from the value of their property or materially impair the use thereof in the operation of their business;

 

(d)            judgment liens securing judgments that (i) are fully covered by insurance, and (ii) shall not have been in existence for a period longer than 45 days after the creation thereof or, if a stay of execution shall have been obtained, for a period longer than 10 days after the expiration of such stay;

 

(e)            rights of lessors under Capitalized Leases, to the extent such Capitalized Leases are permitted hereunder;

 

(f)             easements, rights of way, restrictions and other similar charges or Encumbrances relating to real property and not interfering in a material way with the ordinary conduct of the Borrowers’ business;

 

(g)            Encumbrances constituting a renewal, extension or replacement of any Permitted Encumbrance if otherwise permitted hereby and not in conflict with the terms hereof; and

 

(h)            Encumbrances existing on the date of this Agreement and set forth on Schedule 8.3(h) .

 

8.4            Merger; Dispositions; Liquidation .

 

(a)            The Borrowers shall not, and shall not permit any Subsidiary to, merge or consolidate into or with any other Person or entity or liquidate or dissolve, other than a merger of a Subsidiary into another Subsidiary or into a Borrower (or a liquidation of a Subsidiary into another Subsidiary or into a Borrower under Section 332 of the Code), provided that both immediately before and immediately after any such merger, no Default shall have occurred and be continuing.

 

(b)            The Borrowers shall not, and shall not permit any Subsidiary to, Dispose of any assets or properties, except for sales of Qualified Investments, inventory and obsolete or worn out furniture, fixtures and equipment, in each case in the ordinary course of business and consistent with past practices.

 

8.5            Subsidiaries .  The Borrowers shall not permit any of their Subsidiaries to issue any additional shares of their capital stock or other equity securities, any options therefor or any securities convertible thereto other than to Borrowers or any of their Subsidiaries.  Neither of the Borrowers nor any of their Subsidiaries shall sell, transfer or otherwise dispose of any of the capital stock or other equity securities of a Subsidiary, except to Borrowers or any of their Subsidiaries.  The Borrowers shall not, and shall not permit any of their Subsidiaries to, create or

 

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suffer to exist any consensual Encumbrances or restrictions on the ability of any Subsidiary to pay dividends or make any other distributions on its equity interests held by the Borrowers or pay any Indebtedness owed to the Borrowers or any Subsidiary of the Borrowers or to make loans or advances or transfer any of its assets to the Borrowers or any other Subsidiary of the Borrowers.

 

8.6            Restricted Payments.   The Borrowers will not, and will not permit any of their Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except

 

(a)            Parent may declare and pay dividends in common stock to its equity holders;

 

(b)            Parent may declare and pay dividends on the Parent’s common stock in cash to its equity holders or purchase its common stock from its equity holders, provided that the total amount of such dividends and the amount paid in connection with such purchases shall not exceed $1,900,000 in any Fiscal Year, provided , further , that (i) both at the time any such cash dividend is declared and paid and any such purchase is authorized and made, and after giving effect to the payment in connection therewith, no Default shall have occurred and be continuing and (ii) ten Business Days prior to any such payment the Administrative Agent shall have received a certificate of a Responsible Officer of Parent certifying on a pro forma basis that the conditions set forth in clause (i) have been satisfied with respect to such payment;

 

(c)            Subsidiaries of the Borrowers may declare and pay dividends to the Borrowers;

 

(d)            compensation, expense reimbursements and perquisites paid to employees, officers and directors in the ordinary course of business and consistent with past practices; and

 

(e)            payments with respect to Junior Subordinated Debt to the extent permitted under Section 8.11 below.

 

8.7            Investments; Purchases of Assets .  Neither of the Borrowers nor any of their Subsidiaries shall make or maintain any Investments or purchase or otherwise acquire any material amount of assets other than:

 

(a)            Investments existing on the date hereof in Subsidiaries as described on Schedule 5.8(e) ;

 

(b)            Qualified Investments;

 

(c)            purchases of inventory in the ordinary course of business;

 

(d)            normal trade credit extended in the ordinary course of business and consistent with past practice; and

 

(e)            Indebtedness permitted by Section 8.1(f).

 

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8.8            ERISA Compliance .  Neither of the Borrowerss nor any of their ERISA Affiliates nor any Plan shall (i) engage in any Prohibited Acquisition which would have a Material Adverse Effect on the Borrowers and their Subsidiaries, (ii) incur any “accumulated funding deficiency” (within the meaning of Section 412(a) of the Code and Section 302 of ERISA) whether or not waived, (iii) permit to exist any material amount of “unfunded benefit liabilities” (within the meaning of Section 4001(a)(18) of ERISA, (iv) terminate any Pension Plan in a manner which could result in the imposition of a lien on any property of the Borrowers or any of its Subsidiaries, (v) fail to make any required contribution to any Multiemployer Plan or (vi) completely or partially withdraw from a Multiemployer Plan if such complete or partial withdrawal will result in any material withdrawal liability under Title IV of ERISA.

 

8.9            Transactions with Affiliates .  The Borrowers will not, and will not permit any of their Subsidiaries to, directly or indirectly, enter into any purchase, sale, lease or other transaction with any Affiliate except (i) transactions in the ordinary course of business on terms that are no less favorable to the Borrowers or their Subsidiaries than those which might be obtained at the time in a comparable arm’s-length transaction with any Person who is not an Affiliate, (ii) transactions between or among the Borrowers and their Subsidiaries or between Subsidiaries, and (iii) employment contracts with senior management of the Borrowers entered into in the ordinary course of business and consistent with past practices.  Notwithstanding the foregoing, the Borrowers will not, and will not permit any Subsidiary to, directly or indirectly, pay any management, consulting, overhead, indemnity, guarantee or other similar fee or charge to any Affiliate (other than a Borrower).

 

8.10          Fiscal Year .  The Borrowers and their Subsidiaries shall not change their Fiscal Year without the prior written consent of the Administrative Agent, which will not be unreasonably withheld.

 

8.11          Payments on Junior Subordinated Debt .  The Borrowers shall not make any payment or prepayment of principal of or interest on, or any other payment in respect of, the Junior Subordinated Debt, except to the extent permitted by the Subordination Agreement.

 

SECTION IX

 

DEFAULTS

 

9.1            Events of Default .  Any of the following shall constitute an Event of Default:

 

(a)            Non-Payment .  Any Borrower or any other Loan Party fails to (i) pay when and as required to be paid herein, any amount of principal of any Loan or any LC Disbursement or deposit any funds as cash collateral in respect of the Maximum Drawing Amount, or (ii) pay within three (3) Business Days after the same becomes due, any interest on any Loan or on any LC Disbursement, any fee due hereunder or any other amount payable hereunder or under any other Loan Document; or

 

(b)            Specific Covenants .  (i) The Borrowers fail to perform or observe any term, covenant or agreement contained in any of Sections 6.1(a), (b), (c), (d), (h) or (i), Sections 6.2(b), 6.3, 6.5, 6.6, 6.7, 6.8, 6.9, 6.12, 6.13 or 6.14 or Section VII or VIII, (ii) any of the

 

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Subsidiary Guarantors fails to perform or observe any term, covenant or agreement contained in any Subsidiary Guaranty, (iii) any of the Loan Parties which is a party to the Security Agreement fails to perform or observe any term, covenant or agreement contained in Sections 3 or 4 of the Security Agreement, (iv) any of the Loan Parties which is a party to the Pledge Agreement fails to perform or observe any term, covenant or agreement contained in Sections 4, 6 or 7 of the Pledge Agreement or (v) any of the Loan Parties which is a party to a Fee Property Security Agreement that is a mortgage or deed of trust fails to observe any prohibition on assignments of Rents (as defined therein) contained therein; or

 

(c)            Other Defaults .  Any Loan Party fails to perform or observe any other covenant or agreement (not specified in Section 9.1(a) or 9.1(b) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days; or

 

(d)            Representations and Warranties .  Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of the Borrowers or any other Loan Party herein, in any other Loan Document or in any document delivered in connection herewith or therewith shall be materially incorrect or misleading when made or deemed made; or

 

(e)            Cross-Default .  (i) Any Loan Party or any Subsidiary thereof (A) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness or Guarantee (other than Indebtedness hereunder and Indebtedness under Swap Agreements) having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $500,000, or (B) fails to observe or perform any other agreement or condition relating to any such Indebtedness or Guarantee of more than $500,000 or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness or the beneficiary or beneficiaries of such Guarantee (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to be demanded or to become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity, or such Guarantee to become payable or cash collateral in respect thereof to be demanded; (ii) the Borrowers or any Loan Party shall fail to pay when due (after any applicable period of grace) any amount payable under one or more agreements for the use of real or personal property requiring aggregate payments in excess of $25,000 in any twelve month period, or fail to observe or perform any term, covenant or agreement or relating to such agreement(s) for the use of real or personal property, and the result of any such failure is to permit any other party to such agreement(s) to exercise remedies under or terminate such agreement(s) prior to the expiration date thereof; or (iii) there occurs under any Swap Agreement an Early Termination Date (as defined in such Swap Agreement) resulting from (A) any event of default under such Swap Agreement as to which a Loan Party or any Subsidiary thereof is the Defaulting Party (as defined in such Swap Agreement) or (B) any Termination Event (as so defined) under such Swap Agreement as to which a Loan Party or any Subsidiary thereof is an Affected Party (as so defined).

 

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(f)             Insolvency Proceedings, Etc .  Any Loan Party or any Subsidiary thereof institutes or consents to the institution of any proceeding under any bankruptcy, insolvency, reorganization, receivership or other debtor relief law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for 45 calendar days; or any proceeding under any bankruptcy, insolvency, reorganization, receivership or other debtor relief law relating to any such Person or to all or any material part of its property is instituted without the consent of such Person and continues undismissed or unstayed for 45 calendar days, or an order for relief is entered in any such proceeding; or

 

(g)            Inability to Pay Debts; Attachment .  (i) Any Loan Party or any Subsidiary thereof becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 30 days after its issue or levy; or

 

(h)            Judgments .  There is entered against any Loan Party or any Subsidiary thereof (i) one or more final judgments or orders for the payment of money in an aggregate amount (as to all such judgments and orders) exceeding $250,000 (to the extent not covered by independent third-party insurance as to which the insurer is rated at least “A” by A.M. Best Company, has been notified of the potential claim and does not dispute coverage), or (ii) any one or more non-monetary final judgments that have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor upon such judgment or order, or (B) there is a period of 10 consecutive days while such judgment shall not have been discharged during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or

 

(i)             ERISA .  (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Borrowers under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC; or (ii) any Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan; or

 

(j)             Invalidity of Loan Documents .  Any material provision of any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all the Obligations, ceases to be in full force and effect; or any Loan Party contests in any manner the validity or enforceability of any provision of any Loan Document; or any Loan Party denies that it has any or further liability or obligation under any provision of any Loan Document, or purports to revoke, terminate or rescind any provision of any Loan Document; or

 

(k)            Change of Control .  There occurs any Change of Control; or

 

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(l)             Security Documents .  Any Security Document after delivery thereof pursuant to Section 4.1 or 6.12 shall for any reason (other than pursuant to the terms thereof or solely as a result of action or inaction of the secured party thereunder) cease to create a valid and perfected first priority Encumbrance (subject to Permitted Encumbrances) on the Collateral purported to be covered thereby; or

 

(m)           Subordination .  (i) The subordination provisions of the Subordination Agreement (the “ Subordination Provisions ”) shall, in whole or in part, terminate, cease to be effective or cease to be legally valid, binding and enforceable against any holder of the Subordinated Debt; or (ii) the Borrowers or any other Loan Party shall, directly or indirectly, disavow or contest in any manner (A) the effectiveness, validity or enforceability of any of the Subordination Provisions, (B) that the Subordination Provisions exist for the benefit of the Administrative Agent, the Lenders and the L/C Issuer or (C) that all payments of principal of or premium and interest on the Subordinated Debt, or realized from the liquidation of any property of any Loan Party, shall be subject to any of the Subordination Provisions.

 

9.2            Remedies upon Event of Default .  If any Event of Default occurs and is continuing, the Administrative Agent may, or at the request of the Majority Lenders shall, take any or all of the following actions:

 

(a)            declare the commitment of each Lender to make Loans and any obligation of the LC Issuer to issue or extend any Letter of Credit to be terminated, whereupon such commitments and obligation shall be terminated;

 

(b)            declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrowers;

 

(c)            require that the Borrowers Cash Collateralize the Maximum Drawing Amount; and

 

(d)            exercise on behalf of itself, the Lenders and the LC Issuer all rights and remedies available to it, the Lenders and the LC Issuer under any of the Loan Documents and at law;

 

provided , however , that upon the occurrence of an actual or deemed entry of an order for relief with respect to the Borrowers under the Bankruptcy Code of the United States, the obligation of each Lender to make Loans and any obligation of the LC Issuer to issue or extend any Letter of Credit shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, and the obligation of the Borrowers to Cash Collateralize the Maximum Drawing Amount as aforesaid shall automatically become effective, in each case without further act of the Administrative Agent or any Lender.

 

9.3            Application of Funds .  After the exercise of remedies provided for in Section 9.2 (or after the Loans have automatically become immediately due and payable and the Maximum

 

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Drawing Amount has automatically been required to be Cash Collateralized as set forth in the proviso to Section 9.2), any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order:

 

First , to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent ) payable to the Administrative Agent in its capacity as such;

 

Second , to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal, interest and Letter of Credit Fees) payable to the Lenders and the LC Issuer (including fees, charges and disbursements of counsel to the respective Lenders and the LC Issuer, including fees and time charges for attorneys who may be employees of any Lender or the LC Issuer) and amounts payable under Sections 2.10, 2.12, 2.13, 2.14 and 2.15, ratably among them in proportion to the respective amounts described in this clause Second payable to them;

 

Third , to payment of that portion of the Obligations constituting accrued and unpaid Letter of Credit Fees and interest on the Loans, LC Disbursements and other Obligations, ratably among the Lenders and the LC Issuer in proportion to the respective amounts described in this clause Third payable to them;

 

Fourth , to payment of that portion of the Obligations constituting unpaid principal of the Loans, LC Disbursements and amounts owing under Eligible Swap Agreements, ratably among the Lenders, the LC Issuer and the Swap Banks in proportion to the respective amounts described in this clause Fourth held by them;

 

Fifth , to the Administrative Agent for the account of the LC Issuer, to Cash Collateralize the Maximum Drawing Amount;

 

Sixth , to payment of that portion of the Obligations constituting unpaid amounts owing under Secured Cash Management Agreements, ratably among the Cash Management Banks in proportion to the respective amounts described in this clause Sixth held by them; and

 

Last , the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrowers or as otherwise required by Law.

 

Subject to Section 3.2, amounts used to Cash Collateralize the Maximum Drawing Amount pursuant to clause Fifth above shall be applied to satisfy drawings under the then outstanding Letters of Credit as they occur.  If any amount remains on deposit as cash collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above.

 

9.4            Remedies Cumulative .  No remedy conferred upon the Administrative Agent, the LC Issuer and the Lenders in the Loan Documents is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be an addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or by any

 

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other provision of law.  Without limiting the generality of the foregoing or of any of the terms and provisions of any of the Security Documents, if and when the Administrative Agent exercises remedies under the Security Documents with respect to Collateral, the Administrative Agent may, in its sole discretion, determine which items and types of Collateral to dispose of and in what order and may dispose of Collateral in any order the Administrative Agent shall select in its sole discretion, and the Borrowers consent to the foregoing and waive all rights of marshalling with respect to all Collateral.

 

SECTION X

 

ASSIGNMENT AND PARTICIPATION

 

10.1          Successors and Assigns .

 

(a)            Successors and Assigns Generally .  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that neither the Borrowers nor any other Loan Party may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of Section 10.1(b), (ii) by way of participation in accordance with the provisions of Section 10.1(d), or (iii) by way of pledge or assignment of a security interest subject to the restrictions of Section 10.1(f) (and any other attempted assignment or transfer by any party hereto shall be null and void).  Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the LC Issuer and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

 

(b)            Assignments by Lenders .  Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment(s) and the Loans (including for purposes of this Section 10.1(b), participations in the Maximum Drawing Amount) at the time owing to it); provided that any such assignment shall be subject to the following conditions:

 

(i)             Minimum Amounts .

 

(A)           in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment under any Facility and the Loans at the time owing to it under such Facility or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
 
(B)            in any case not described in Section 10.1(b)(i)(A), the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding

 

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balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $2,000,000, in the case of any assignment in respect of the Revolving Credit Facility, or $2,000,000, in the case of any assignment in respect of the Term Facility, unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrowers otherwise consent (each such consent not to be unreasonably withheld or delayed); provided , however , that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met;
 

(ii)            Proportionate Amounts .  Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loans or the Commitment assigned, except that this clause (ii) shall not prohibit any Lender from assigning all or a portion of its rights and obligations among separate Facilities on a non-pro rata basis;

 

(iii)           Required Consents .  No consent shall be required for any assignment except to the extent required by Section 10.1(b)(i)(B) and, in addition:

 

(A)           the consent of the Borrowers (such consent not to be unreasonably withheld or delayed unless the assignment is to an entity in the same business as a Borrower that is a direct competitor of such Borrower, in which event the consent may be withheld in the sole discretion of Borrowers) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund;
 
(B)            the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of (i) any Term Commitment or Revolving Credit Commitment if such assignment is to a Person that is not a Lender with a Commitment in respect of the applicable Facility, an Affiliate of such Lender or an Approved Fund with respect to such Lender or (ii) any Term Loan to a Person that is not a Lender, an Affiliate of a Lender or an Approved Fund; and
 
(C)            the consent of the LC Issuer (such consent not to be unreasonably withheld or delayed) shall be required for any assignment that increases the obligation of the assignee to participate in exposure under one or more Letters of Credit (whether or not then outstanding).
 

(iv)           Assignment and Assumption .  The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, and the

 

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assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

 

(v)            No Assignment to Borrowers .  No such assignment shall be made to any Borrower or any of the Borrowers’ Affiliates or Subsidiaries.

 

(vi)           No Assignment to Natural Persons .  No such assignment shall be made to a natural person.

 

(vii)          Assignment Fees .  An assignment fee of $3,500 shall be charged to the assigning Lender with respect to each assignment, except with respect to an assignment to an Affiliate of the assigning Lender.

 

Subject to acceptance and recording thereof by the Administrative Agent pursuant to Section 10.1(c), from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.10, 2.12, 2.13, 2.15 and 12.2 with respect to facts and circumstances occurring prior to the effective date of such assignment).  Upon request, the Borrowers (at their expense) shall execute and deliver Notes to the assignee Lender.  Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with Section 10.1(d).

 

Notwithstanding anything to the contrary in this Section 10.1(b), each Lender will also have the right, without consent of the Borrowers or the Administrative Agent, to assign as security all or part of its rights under the Loan Documents to any Federal Reserve Bank.

 

(c)            Register .  The Administrative Agent, acting solely for this purpose as an agent of the Borrowers, shall maintain at the Administrative Agent’s office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans and Letter of Credit Participations owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”).  The entries in the Register shall be conclusive absent manifest error, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for inspection by the Borrowers and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

 

(d)            Participations .  Any Lender may at any time, without the consent of, or notice to, the Borrowers or the Administrative Agent, sell participations to any Person (other than a natural person or any Borrower or any of the Borrowers’ Affiliates or Subsidiaries) (each,

 

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a “ Participant ”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender’s Letter of Credit Participations) owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrowers, the Administrative Agent, the Lenders and the LC Issuer shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement.  Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 12.7(b) that affects such Participant.  Subject to Section 10.1(e), the Borrowers agree that each Participant shall be entitled to the benefits of Sections 2.10, 2.12, 2.13, 2.15 and 12.2 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 10.1(b).  To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 12.5 as though it were a Lender, provided such Participant agrees to be subject to Section 2.9(d) as though it were a Lender.

 

(e)            Limitations upon Participant Rights .  A Participant shall not be entitled to receive any greater payment under Section 2.13 or 2.15 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrowers’ prior written consent.  A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.15 unless the Borrowers are notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrowers, to comply with Section 2.15(e) as though it were a Lender.

 

(f)             Certain Pledges .  Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Notes, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

 

(g)            Electronic Execution of Assignments .  The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.

 

10.2          Replacement of Lenders .  If any Lender requests compensation under Section 2.13, or if the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15, or if any other

 

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circumstance exists hereunder that gives the Borrowers the right to replace a Lender as a party hereto, then the Borrowers may, at their sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 10.1), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:

 

(a)            the Borrowers shall have paid to the Administrative Agent the assignment fee specified in Section 10.1(b);

 

(b)            such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and its Applicable Percentage of all unpaid LC Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 2.10) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrowers (in the case of all other amounts);

 

(c)            in the case of any such assignment resulting from a claim for compensation under Section 2.13 or payments required to be made pursuant to Section 2.15, such assignment will result in a reduction in such compensation or payments thereafter;

 

(d)            in the case of any such assignment required by the Borrowers pursuant to the penultimate sentence of Section 12.7, the assignee shall have agreed in writing to consent to the proposed amendment, waiver, consent or release, as the case may be, that the assigning Lender has not consented to; and

 

(e)            such assignment does not conflict with applicable Laws.

 

A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrowers to require such assignment and delegation cease to apply.

 

SECTION XI

 

THE ADMINISTRATIVE AGENT

 

11.1          Appointment of Administrative Agent .  Each Lender and the LC Issuer hereby irrevocably appoints and authorizes the Administrative Agent to act as its agent hereunder and under the other Loan Documents and to execute the Loan Documents (other than this Agreement) and all other instruments relating thereto.  Each Lender and the LC Issuer irrevocably authorizes the Administrative Agent to take such action on behalf of each of the Lenders and the LC Issuer and to exercise all such powers as are expressly delegated to the Administrative Agent hereunder and in the other Loan Documents and all related documents, together with such other powers as are reasonably incidental thereto.  The Administrative Agent shall also act as the “Agent” or “Administrative Agent” under the Security Documents, and each of the Lenders (in its capacities as a Lender, Swap Bank and potential Cash Management Bank)

 

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and the LC Issuer hereby irrevocably appoints and authorizes the Administrative Agent to act as the agent of such Lender and the LC Issuer for purposes of acquiring, holding and enforcing any and all Encumbrances on Collateral granted by any of the Loan Parties to secure any of the Obligations, together with such powers and discretion as are reasonably incidental thereto.  In this connection, the Administrative Agent, as “Agent” or “Administrative Agent” under the Security Documents, and any sub-agent appointed by it, shall be entitled to the benefits of all provisions of this Section XI as if set forth in full herein with respect thereto.  The Administrative Agent may, and the Borrowers hereby authorizes the Administrative Agent to, include references to the Borrowers and their Subsidiaries, and utilize any logo or other distinctive symbol associated with the Borrowers or any of its Subsidiaries, in connection with any advertising, promotion or marketing undertaken by the Administrative Agent.

 

11.2          Exculpatory Provisions .  The Administrative Agent shall not have any duties or obligations except those expressly set forth herein.  Without limiting the generality of the foregoing, (i) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (ii) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing as directed by the Majority Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 12.7)), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law, and (iii) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to any Loan Party or any Subsidiary thereof that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity.  The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Majority Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 12.7) or in the absence of its own gross negligence or willful misconduct.  The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrowers or a Lender.  The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (A) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (B) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (C) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (D) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, (E) the satisfaction of any condition set forth in Section IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent, (F) the existence, value, collectibility or adequacy of the Collateral or any part thereof or the validity, effectiveness, perfection or relative priority of the liens and security interests of the Lenders and the LC Issuer therein, or (G) the filing, recording, refiling, continuing or re-recording of any financing statement or other document or instrument evidencing or relating to the security interests or liens of the Lenders and the LC Issuer in the Collateral.

 

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11.3          Rights as a Lender .  The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity.  Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with any Loan Party or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.

 

11.4          Actions by Administrative Agent .

 

(a)            The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement as it reasonably deems appropriate unless it shall first have received such advice or concurrence of the Lenders and shall be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action.  The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any of the Loan Documents in accordance with a request of the Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and all future holders of the Notes.

 

(b)            Whether or not an Event of Default shall have occurred, the Administrative Agent may from time to time exercise such rights of the Administrative Agent, the LC Issuer and the Lenders under the Loan Documents as it determines may be necessary or desirable to protect the Collateral and the interests of the Administrative Agent, the LC Issuer and the Lenders therein and under the Loan Documents.

 

11.5          Reliance by Administrative Agent .   The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person.  The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon.  In determining compliance with any condition hereunder to the making of a Loan, or the issuance of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or the LC Issuer, the Administrative Agent may presume that such condition is satisfactory to such Lender or the LC Issuer unless the Administrative Agent shall have received notice to the contrary from such Lender or the LC Issuer prior to the making of such Loan or the issuance of such Letter of Credit.  The Administrative Agent may consult with legal counsel (who may be counsel for the Borrowers), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

 

11.6          Delegation of Duties .  The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or

 

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through any one or more sub-agents appointed by the Administrative Agent.  The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties.  The exculpatory provisions of this Section shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

 

11.7          Indemnification .  Without limiting the obligations of the Borrowers hereunder or under any other Loan Document, the Lenders agree to indemnify the Administrative Agent and the LC Issuer, ratably in accordance with their Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against the Administrative Agent or the LC Issuer in any way relating to or arising out of this Agreement or any other Loan Document or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or thereof or of any such other documents; provided , that no Lender shall be liable for any of the foregoing to the extent it results from the gross negligence or willful misconduct of the Administrative Agent or the LC Issuer, as the case may be.

 

11.8          Reimbursement .  Without limiting the provisions of Section 11.7, the Lenders, the LC Issuer and the Administrative Agent hereby agree that the Administrative Agent shall not be obliged to make available to any Person any sum which the Administrative Agent is expecting to receive for the account of that Person until the Administrative Agent has determined that it has received that sum.  The Administrative Agent may, however, disburse funds prior to determining that the sums which the Administrative Agent expects to receive have been finally and unconditionally paid to the Administrative Agent if the Administrative Agent wishes to do so.  If and to the extent that the Administrative Agent does disburse funds and it later becomes apparent that the Administrative Agent did not then receive a payment in an amount equal to the sum paid out, then any Person to whom the Administrative Agent made the funds available shall, on demand from the Administrative Agent, refund to the Administrative Agent the sum paid to that Person.  If the Administrative Agent in good faith reasonably concludes that the distribution of any amount received by it in such capacity hereunder or under the other Loan Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction.  If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Administrative Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Administrative Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court.

 

11.9          Non-Reliance on Administrative Agent and New Lenders .  Each Lender represents that it has, independently and without reliance on the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of the financial condition and affairs of the Borrowers and decision to enter into this Agreement and the other Loan Documents and agrees that it will, independently and without

 

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reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decision in taking or not taking action under this Agreement or any other Loan Document.    Unless any Lender shall promptly object to any action taken by the Administrative Agent hereunder (other than actions to which the provisions of Section 12.7(b) are applicable and other than actions which constitute gross negligence or willful misconduct by the Administrative Agent), such Lender shall conclusively be presumed to have approved the same.

 

11.10        Resignation of Administrative Agent .  The Administrative Agent may resign at any time by giving 30 days prior written notice thereof to the Lenders and the Borrowers.  Upon any such resignation, the Lenders shall have the right to appoint a successor Administrative Agent which shall be reasonably acceptable to the Borrowers (whose consent shall not be unreasonably withheld or delayed) and shall be a financial institution having a combined capital and surplus in excess of $150,000,000.  If no successor Administrative Agent shall have been so appointed by the Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent’s giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be reasonably acceptable to the Borrowers (whose consent shall not be unreasonably withheld or delayed) and shall be a Lender or other financial institution having a combined capital and surplus in excess of $150,000,000.  Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder.  After any retiring Administrative Agent’s resignation, the provisions of this Agreement shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent.

 

11.11        No Other Duties, etc .  Anything herein to the contrary notwithstanding, neither the Lead Arranger nor the Syndication Agent listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent, a Lender or the LC issuer hereunder.

 

SECTION XII

GENERAL

 

12.1          Notices; Effectiveness of Signatures .

 

Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile in complete and legible form, or three Business Days after depositing it in the United States mail to be sent by certified or registered mail with postage prepaid and properly addressed; provided that notices to the Administrative Agent and the LC Issuer shall not be effective until received.  For the purposes hereof, the address of each party hereto shall be as set forth on Schedule 12.1 hereof or

 

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(subject to said Schedule) in its Administrative Questionnaire or (i) as to the Borrowers and the Administrative Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to the Administrative Agent.  The Administrative Agent or the Borrowers may, in their discretion, agree to accept notices and other communications to such parties hereunder by electronic communications pursuant to procedures approved by such parties, provided that approval of such procedures may be limited to particular notices or communications.

 

Loan Documents and notices under the Loan Documents may be transmitted and/or signed by telefacsimile and by signatures delivered in ‘PDF’ format by electronic mail.  The effectiveness of any such documents and signatures shall, subject to applicable law, have the same force and effect as an original copy with manual signatures and shall be binding on all Loan Parties, the Administrative Agent and the Lenders.  The Administrative Agent may also require that any such documents and signature be confirmed by a manually-signed copy thereof; provided , however , that the failure to request or deliver any such manually-signed copy shall not affect the effectiveness of any facsimile document or signature.

 

Notwithstanding the foregoing, the Borrowers agree that the Administrative Agent may make any material delivered by the Borrowers to the Administrative Agent, as well as any amendments, waivers, consents and other written information, documents, instruments and other materials relating to the Borrowers, any of their Subsidiaries, or any other materials or matters relating to the Loan Documents or any of the transactions contemplated hereby that the Administrative Agent is required or authorized pursuant to the terms hereof or of any Loan Document to provide to the Lenders (collectively, the “ Communications ”) available to the Lenders by posting such notices on a Platform.  THE BORROWERS ACKNOWLEDGE THAT (A) THE DISTRIBUTION OF MATERIAL THROUGH AN ELECTRONIC MEDIUM IS NOT NECESSARILY SECURE AND THAT THERE ARE CONFIDENTIALITY AND OTHER RISKS ASSOCIATED WITH SUCH DISTRIBUTION, (B) A PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE” AND (C) NEITHER THE ADMINISTRATIVE AGENT NOR ANY OF ITS AFFILIATES WARRANTS THE ACCURACY, COMPLETENESS, TIMELINESS, SUFFICIENCY, OR SEQUENCING OF THE COMMUNICATIONS POSTED ON A PLATFORM.  THE ADMINISTRATIVE AGENT AND ITS AFFILIATES EXPRESSLY DISCLAIM WITH RESPECT TO A PLATFORM ANY LIABILITY FOR ERRORS IN TRANSMISSION, INCORRECT OR INCOMPLETE DOWNLOADING, DELAYS IN POSTING OR DELIVERY, OR PROBLEMS ACCESSING THE COMMUNICATIONS POSTED ON SUCH PLATFORM AND ANY LIABILITY FOR ANY LOSSES, COSTS, EXPENSES OR LIABILITIES THAT MAY BE SUFFERED OR INCURRED IN CONNECTION WITH SUCH PLATFORM.  NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY THE ADMINISTRATIVE AGENT OR ANY OF ITS AFFILIATES IN CONNECTION WITH ANY PLATFORM.

 

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Each Lender agrees that notice to it (as provided in the next sentence) specifying that any Communication has been posted to a Platform shall for purposes of this Agreement constitute effective delivery to such Lender of such information, documents or other materials comprising such Communication.  Each Lender agrees (1) to notify, on or before the date such Lender becomes a party to this Agreement, the Administrative Agent in writing of such Lender’s e-mail address to which a notice may be sent (and from time to time thereafter to ensure that the Administrative Agent has on record an effective e-mail address for such Lender) and (2) that any notice may be sent to such e-mail address.

 

12.2          Expenses .  Whether or not the transactions contemplated herein shall be consummated, the Borrowers, jointly and severally, promise to reimburse the Administrative Agent, the LC Issuer and the Lenders for all reasonable out-of-pocket fees and disbursements (including all reasonable attorneys’ fees and collateral evaluation costs) incurred or expended in connection with the preparation, filing or recording, or interpretation of this Agreement and the other Loan Documents, or any amendment, modification, approval, consent or waiver hereof or thereof, or in connection with the enforcement of any Obligations or the satisfaction of any indebtedness of the Borrowers hereunder or thereunder, or in connection with any litigation, proceeding or dispute in any way related to the credit hereunder, the Obligations, the Loan Documents or the Collateral, including, without limitation, reasonable fees and disbursements of the outside counsel and the allocated costs of in-house legal counsel of the Administrative Agent; accounting, consulting, appraisal, brokerage or other similar professional fees or expenses; any fees or expenses (including the Administrative Agent’s per diem charges) relating to any inspections, appraisals or examinations conducted in connection with the Loans or any Collateral; and all costs and expenses relating to any attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate or otherwise dispose of or realize upon any Collateral.  The amount of all such costs, charges and expenses shall, until paid, bear interest at the rate applicable to Base Rate Loans and shall be an Obligation secured by the Collateral.  The Borrowers will pay any taxes (including any interest and penalties in respect thereof), other than the Lenders’ federal and state income taxes and other Excluded Taxes, payable on or with respect to the transactions contemplated by the Loan Documents (the Borrowers, jointly and severally, hereby agreeing, to indemnify the Administrative Agent, the LC Issuer and the Lenders with respect thereto).

 

12.3          Indemnification .  The Borrowers, jointly and severally, agree to indemnify and hold harmless the Administrative Agent, the LC Issuer and the Lenders, as well as their respective shareholders, directors, offices, agents, attorneys, subsidiaries and Affiliates, from and against all damages, losses, settlement payments, obligations, liabilities, claims, suits, penalties, assessments, citations, directives, demands, judgments, actions or causes of action, whether statutorily created or under the common law, all reasonable costs and expenses (including, without limitation, reasonable fees and disbursements of attorneys, engineers and consultants) and all other liabilities whatsoever (including, without limitation, liabilities under Environmental Laws) which shall at any time or times be incurred, suffered, sustained or required to be paid by any such indemnified Person (except any of the foregoing which result from the gross negligence or willful misconduct of the indemnified Person) on account of or in relation to or any way in connection with any of the arrangements or transactions contemplated by, associated with or ancillary to this Agreement, the other Loan Documents or any other documents executed or

 

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delivered in connection herewith or therewith, all as the same may be amended from time to time, or with respect to any Letters of Credit, whether or not all or part of the transactions contemplated by, associated with or ancillary to this Agreement, any of the Loan Documents or any such other documents are ultimately consummated.  In any investigation, proceeding or litigation, or the preparation therefor, the Administrative Agent and the Lenders shall select their own counsel and, in addition to the foregoing indemnity, the Borrowers shall pay promptly the reasonable fees and expenses of such counsel.  In the event of the commencement of any such proceeding or litigation, the Borrowers shall be entitled to participate in such proceeding or litigation with counsel of their choice at their own expense, provided that such counsel shall be reasonably satisfactory to the Administrative Agent.  The Borrowers authorize the Administrative Agent, the LC Issuer and the Lenders to charge any deposit account or Note Record which it may maintain with any of them for any of the foregoing.  The covenants of this Section 12.3 shall survive payment or satisfaction of payment of all amounts owing with respect to the Notes, any other Loan Document or any other Obligation.

 

12.4          Survival of Covenants, Etc .  All covenants, agreements, representations and warranties made herein, in the other Loan Documents or in any documents or other papers delivered by or on behalf of the Borrowers pursuant hereto shall be deemed to have been relied upon by the Administrative Agent, the LC Issuer and the Lenders, notwithstanding any investigation heretofore or hereafter made by any of them, and shall survive the making by the Lenders of the Loans as herein contemplated, and shall continue in full force and effect so long as any Obligation remains outstanding and unpaid or any Lender has any obligation to make any Loans hereunder or the LC Issuer has any obligation to issue any Letter of Credit.  All statements contained in any certificate or other writing delivered by or on behalf of the Borrowers pursuant hereto or in connection with the transactions contemplated hereby shall constitute joint and several representations and warranties by the Borrowers hereunder.

 

12.5          Set-Off .  If a Default shall have occurred and be continuing, each Lender, the LC Issuer and each of their respective Affiliates is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent, to the fullest extent permitted by applicable law and regardless of the adequacy of any Collateral or other means of obtaining repayment of the Obligations, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender, the LC Issuer or any such Affiliate to or for the credit or the account of the Borrowers or any other Loan Party against any and all of the obligations of the Borrowers or such Loan Party now or hereafter existing under this Agreement or any other Loan Document to such Lender or the LC Issuer, irrespective of whether or not such Lender or the LC Issuer shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrowers or such Loan Party may be contingent or unmatured or are owed to a branch or office of such Lender or the LC Issuer different from the branch or office holding such deposit or obligated on such indebtedness.  The rights of each Lender, the LC Issuer and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender, the LC Issuer or their respective Affiliates may have.  Each Lender and the LC Issuer agrees to notify the Borrowers and the Administrative Agent promptly after any such setoff and application,

 

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provided that the failure to give such notice shall not affect the validity of such setoff and application.

 

12.6          No Waivers .  No failure or delay by the Administrative Agent, the LC Issuer or any Lender in exercising any right, power or privilege hereunder, under the Notes or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.  No waiver shall extend to or affect any Obligation not expressly waived or impair any right consequent thereon.  No course of dealing or omission on the part of the Administrative Agent, the LC Issuer or the Lenders in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto.  No notice to or demand upon the Borrowers shall entitle the Borrowers to other or further notice or demand in similar or other circumstances, except as otherwise specifically provided in the Loan Documents.  The rights and remedies herein and in the Notes and the other Loan Documents are cumulative and not exclusive of any rights or remedies otherwise provided by agreement or law.

 

12.7          Amendments, Waivers, etc .

 

(a)            Neither this Agreement nor the Notes nor any other Loan Document nor any provision hereof or thereof may be amended, waived, discharged or terminated except by a written instrument signed by the Administrative Agent on behalf of the Lenders and, with respect to Letters of Credit, the LC Issuer or, as the case may be, by the Lenders and, with respect to Letters of Credit, the LC Issuer and also, in the case of amendments, by the Borrowers.

 

(b)            Except where this Agreement or any of the other Loan Documents authorizes or permits the Administrative Agent to act alone and except as otherwise expressly provided in this Section 12.7(b), any action to be taken (including the giving of notice) by the Lenders may be taken, and any consent or approval required or permitted by this Agreement or any other Loan Document to be given by the Lenders may be given, and any term of this Agreement, any other Loan Document or any other instrument, document or agreement related to this Agreement or the other Loan Documents or mentioned therein may be amended, and the performance or observance by the Borrowers or any other Person of any of the terms thereof and any Default or Event of Default (as defined in any of the above-referenced documents or instruments) may be waived (either generally or in a particular instance and either retroactively or prospectively), in each case only with the written consent of the Majority Lenders; provided , however , that no such amendment, consent or waiver shall

 

(i)             extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 9.2) without the written consent of such Lender;

 

(ii)            postpone any date fixed by this Agreement or any other Loan Document for any payment (excluding mandatory prepayments under subparagraphs (ii) through (v) of Section 2.8(b)) of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under such other Loan Document without the written consent of each Lender entitled to such payment;

 

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(iii)           reduce the principal of, or the rate of interest specified herein on, any Loan or (subject to clause (iii) of the second proviso to this Section 12.7(b) ) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender entitled to such amount; provided , however , that only the consent of the Majority Lenders shall be necessary (x) to amend the provisions of Section 2.5(c) or to waive any obligation of the Borrowers to pay interest or fees in respect of Letters of Credit at the rate provided in said Section therein following the occurrence of an Event of Default or (y) to amend Section VII hereof (or any defined term used therein) even if the effect of such amendment would be to reduce the rate of interest on any Loan or to reduce any fee payable hereunder;

 

(iv)           change (x) Section 2.9(d) or 9.3 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender or (y) the order of application of any reduction in the Commitments or any prepayment of Loans among the Facilities from the application thereof set forth in the applicable provisions of Section 2.1(e) and 2.9(b), respectively, in any manner that materially and adversely affects the Lenders under a Facility without the written consent of (A) if such Facility is the Term Facility, the Majority Term Lenders and (B) if such Facility is the Revolving Credit Facility, the Majority Revolving Credit Lenders;

 

(v)            change (x) any provision of this Section 12.7 or the definition of “Majority Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder (other than the definitions specified in clause (y) of this subparagraph (v)), without the written consent of each Lender or (y) the definition of “Majority Revolving Credit Lenders,” or “Majority Term Lenders,” without the written consent of each Lender under the applicable Facility;

 

(vi)           release any Subsidiary Guaranty or any portion of the value of any Subsidiary Guaranty, without the written consent of each Lender;

 

(vii)          impose any greater restriction on the ability of any Lender under a Facility to assign any of its rights or obligations hereunder without the written consent of (x) if such Facility is the Term Facility, the Majority Term Lenders, and (y) if such Facility is the Revolving Credit Facility, the Majority Revolving Credit Lenders; or

 

(viii)         foreclose on any real property Collateral without first obtaining reasonable and customary environmental studies and reports regarding such Collateral, without the consent of each Lender;

 

and provided , further , that (i) no amendment, waiver or consent shall, unless in writing and signed by the LC Issuer in addition to the Lenders required above, affect the rights or duties of the LC Issuer under this Agreement or any Application relating to any Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; and (iii) the Fee Letter

 

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may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto.

 

If any Lender does not consent to a proposed amendment, waiver, consent or release with respect to any Loan Document that requires the consent of each Lender and that has been approved by the Majority Lenders, the Borrowers may replace such non-consenting Lender in accordance with Section 10.2; provided that such amendment, waiver, consent or release can be effected as a result of the assignment contemplated by such Section (together with all other such assignments required by the Borrowers to be made pursuant to this paragraph).  Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender.

 

12.8          Treatment of Certain Information; Confidentiality .  Each of the Administrative Agent, the Lenders and the LC Issuer agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrowers and its obligations, (g) with the consent of the Borrowers or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, any Lender, the LC Issuer or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrowers.

 

For purposes of this Section, “ Information ” means all information received from any Loan Party or any Subsidiary thereof relating to any Loan Party or any Subsidiary thereof or their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the LC Issuer on a nonconfidential basis prior to disclosure by any Loan Party or any Subsidiary thereof, provided that, in the case of information received from a Loan Party or any such Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential.  Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

 

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Each of the Administrative Agent, the Lenders and the LC Issuer acknowledges that (a) the Information may include material non-public information concerning the Borrowers or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with applicable law, including Federal and state securities laws.

 

12.9          Lost Note, Etc.   Upon receipt of an affidavit of an officer of any Lender as to the loss, theft, destruction or mutilation of any Note or any Security Document which is not a public record and, in the case of any such loss, theft, destruction or mutilation, upon cancellation of such Note or Security Document, if available, the Borrowers will issue, in lieu thereof, a replacement Note or other Security Document in the same principal amount thereof and otherwise of like tenor.

 

12.10        Captions; Counterparts .  The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof.  This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument.  In proving this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought.  Except as provided in Section 4.1, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto.

 

12.11        Entire Agreement, Etc .  The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby and supersede all prior agreements with respect to the subject matter hereof, except for the letter agreement dated January 3, 2008 between the Parent and the Administrative Agent with respect to certain fees payable to the Administrative Agent and other parties identified therein (as amended from time to time, the “ Fee Letter ”), which Fee Letter shall continue in full force and effect and shall not be superseded by any of the Loan Documents.

 

12.12        Waiver of Jury Trial .  THE BORROWERS AND EACH OF THE LENDERS HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THEIR RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE ADMINISTRATION AGENT OR ANY LENDER RELATING TO THE ADMINISTRATION OR ENFORCEMENT OF THE LOANS AND THE LOAN DOCUMENTS, AND AGREE THAT THEY WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED.

 

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EXCEPT AS PROHIBITED BY LAW, THE BORROWERS AND EACH OF THE LENDERS HEREBY WAIVE ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES.

 

THE BORROWERS (a) CERTIFY THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDERS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDERS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGE THAT THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH EACH IS A PARTY BECAUSE OF, AMONG OTHER THINGS, THE BORROWERS’ WAIVERS AND CERTIFICATIONS CONTAINED HEREIN.

 

12.13        Governing Law .  This Agreement and each of the other Loan Documents are contracts under the laws of the State of New York and shall for all purposes be construed in accordance with and governed by the laws of said State (excluding the laws applicable to conflicts or choice of law).

 

12.14        Jurisdiction; Consent to Service of Process .  (a) The Borrowers hereby irrevocably and unconditionally submit, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court.  Each of the parties hereto agrees that a final, non-appealed judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Agreement or any other Loan Document shall affect any right that the Borrowers, the Administrative Agent, the LC Issuer or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against any other party hereto or their properties in the courts of any jurisdiction.

 

(b)            The Borrowers hereby irrevocably and unconditionally waive, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (a) of this Section.  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

 

(c)            Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 12.1.  Nothing in this Agreement or any other Loan

 

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Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

 

12.15        USA PATRIOT Act Notice .  Each Lender that is subject to the Patriot Act (as defined below) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrowers that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Patriot Act ”), it is required to obtain, verify and record information that identifies each Loan Party, which information includes the name and address of each Loan Party and other information that will allow such Lender or the Administrative Agent, as applicable, to identify each Loan Party in accordance with the Patriot Act.

 

12.16        Severability .  The provisions of this Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction.

 

[ Remainder of page intentionally left blank ]

 

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IN WITNESS WHEREOF, the undersigned have duly executed this Credit Agreement under seal as of the date first above written.

 

 

STAR BUFFET, INC.

 

 

 

 

 

By:

/s/ Ron Dowdy

 

          Name: Ron Dowdy

 

          Title: Secretary

 

 

 

 

 

STAR BUFFET MANAGEMENT, INC.

 

 

 

 

 

By:

/s/ Ron Dowdy

 

         Name: Ron Dowdy

 

         Title: Secretary

 

 

 

SUMMIT FAMILY RESTAURANTS, INC.

 

 

 

 

 

By:

/s/ Ron Dowdy

 

         Name: Ron Dowdy

 

         Title: Secretary

 

 

 

 

 

HTB RESTAURANTS, INC.

 

 

 

 

 

By:

/s/ Ron Dowdy

 

         Name: Ron Dowdy

 

         Title: Secretary

 

 

 

 

 

NORTHSTAR BUFFET, INC.

 

 

 

 

 

By:

/s/ Ron Dowdy

 

          Name: Ron Dowdy

 

          Title:Secretary

 



 

 

WELLS FARGO BANK, N.A., individually and as
Administrative Agent, LC Issuer, Lead Arranger and
Syndication Agent

 

 

 

 

 

By:

/s/ J. Nicholas Cole

 

       Name:  J. Nicholas Cole

 

       Title: Managing Director

 



 

Schedule 1

Commitments and Applicable Percentages

 

Lender

 

Revolving
Credit
Commitment

 

Applicable
Percentage

 

Term
Commitment

 

Applicable
Percentage

 

Total
Commitment

 

Total
Percentage

 

Wells Fargo Bank, N.A.

 

$

2,000,000

 

100

%

$

7,000,000

 

100

%

$

9,000,000

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

$

2,000,000

 

100

%

$

7,000,000

 

100

%

$

9,000,000

 

100

%

 



 

AGREEMENT AND

 

AMENDMENT NO. 1 TO CREDIT AGREEMENT

 

THIS AGREEMENT AND AMENDMENT NO. 1 TO CREDIT AGREEMENT (this “ Amendment ”) is entered into as of February 29, 2008, by and among STAR BUFFET, INC., STAR BUFFET MANAGEMENT, INC., SUMMIT FAMILY RESTAURANTS, INC., HTB RESTAURANTS, INC., NORTHSTAR BUFFET, INC. and STARLITE HOLDINGS, INC. (“ Starlite ”), each a Delaware corporation (each individually, a “ Borrower ”, and collectively, the “ Borrowers ”), and WELLS FARGO BANK, N.A., a national banking association (“ Wells Fargo ”).

 

WITNESSETH:

 

WHEREAS, the Borrowers (other than Starlite) and Wells Fargo are parties to a certain Credit Agreement, dated as of January 31, 2008 (as amended, restated or otherwise modified from time to time, the “ Credit Agreement ”; terms defined in the Credit Agreement are used herein with the same meanings); and

 

WHEREAS, Starlite wishes to become a party to the Credit Agreement as a “Borrower”, and the Borrowers and the Administrative Agent wish to amend the Credit Agreement;

 

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

 

Section 1.                Starlite Holdings, Inc .  Starlite and the other parties hereto agree that Starlite as of the date hereof shall become a party to the Credit Agreement as a “Borrower”, and that accordingly the definitions of “ Borrower ” and “ Borrowers ” are hereby amended to include Starlite.

 

Section 2.                Amendments .  Effective as of the date hereof, the Credit Agreement is hereby amended as follows:

 

(a)           The definition of “Total Term Loan Commitment” in Section 1.1 of the Credit Agreement is amended in full to read as follows:

 

Total Term Loan Commitment .  The sum of the Term Loan Commitments of the Term Lenders as in effect from time to time, which as of February 29, 2008 shall be $8,000,000.”

 

(b)          Section 2.7(a) of the Credit Agreement is amended in full to read as follows:

 

Term Loans .  The Borrowers shall repay the principal amount of the Term Loans in equal quarterly installments of $175,000 for the first six full calendar quarters after the Closing Date and in equal quarterly installments of $225,000 for the next nine full

 



 

calendar quarters, payable on each Payment Date commencing April 1, 2008, and the aggregate principal amount of all Term Loans outstanding on the Maturity Date shall be paid on such date.”

 

(c)           Section 6.13 of the Credit Agreement is amended in full to read as follows:

 

Interest Rate Protection .  The Borrowers shall obtain on or before March 13, 2008, and maintain in effect at all times until the third anniversary of the Closing Date, Swap Agreements between themselves and a Swap Bank with respect to not less than fifty percent (50.00%) of the Term Loans outstanding under the Term Facility.”

 

(d)          The schedules to the Credit Agreement and, to the extent applicable, the other Loan Documents are hereby amended and restated in the forms attached hereto as Exhibit A .

 

Section 3.                Loan Documents .  In addition to Starlite becoming a Borrower under the Credit Agreement pursuant to Section 1 above, by its execution hereof, Starlite agrees to become a party to and bound by, and each of the other parties hereto hereby agrees that Starlite shall become a party to, as of the date hereof, the following Loan Documents in the same manner as the other Borrowers:

 

(i)             Revolving Credit Note;

 

(ii)            Term Note;

 

(iii)           Security Agreement;

 

(iv)           Collateral Assignment of Contracts;

 

(v)            Trademark Security Agreement;

 

(vi)           Pledge Agreement (as a Borrower, not a Pledgor);

 

(vii)          Indemnity Agreement Regarding Hazardous Materials; and

 

(viii)         Collateral Assignment of Licenses and Permits.

 

Section 4.                Consent to Asset Purchase Agreement .  The Lender hereby consents to the transactions contemplated by that certain Asset Purchase Agreement, dated as of February 5, 2008 between Starlite and Barnhill’s Buffet, Inc. (the “ Purchase Agreement ”) and the Guaranty by Star Buffet, Inc. in favor of Spirit Master Funding, LLC (the “ Guaranty ”).

 

Section 5.                Representations and Warranties .  The Borrowers represent and warrant as follows:

 

(a)           Except as set forth on the updated schedules to the Credit Agreement attached hereto as Exhibit A , the representations and warranties contained in Section V of the Credit Agreement, after giving effect to this Amendment, are true and correct in all material respects on and as of the date hereof, as though made on and as of such date, except to the extent that such

 

2



 

representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties were true and accurate on and as of such earlier date).

 

(b)          No Default or Event of Default has occurred or is continuing on the date hereof and no Default or Event of Default will occur or be continuing immediately after the date hereof.

 

Section 6.                Conditions to Effectiveness .  This Amendment shall become effective only when the Administrative Agent shall have received:

 

(a)           counterparts of this Amendment duly executed by the Borrowers;

 

(b)          a duly executed certificate of a Responsible Officer of the Borrowers confirming (i) that the Borrowers have delivered to the Administrative Agent true and correct copies of the Purchase Agreement and the Guaranty and all schedules, documents and agreements ancillary thereto as in effect on the date hereof, (ii) that all conditions to the effectiveness of the transactions contemplated by the Purchase Agreement have been satisfied, (iii) that the transactions contemplated by the Purchase Agreement have been consummated, (iv) that the conditions in Section 5 above and Section 4.2 of the Credit Agreement have been satisfied, (v) delivery to the Administrative Agent of a certified copy of the final order by the Bankruptcy Court approving the transactions contemplated by the Purchase Agreement, including without limitation the Guaranty, in form reasonably satisfactory to the Administrative Agent and (vi) such other matters as the Administrative Agent shall require, in form and substance satisfactory to the Administrative Agent;

 

(c)           allonges to the Notes in form and substance satisfactory to the Administrative Agent,

 

(d)          original certificates representing the pledged Equity Interests referred to in the Pledge Agreement, including of Starlite, accompanied by undated stock powers executed in blank to the extent not previously delivered to the Administrative Agent;

 

(e)           stamped receipt copies of a proper financing statement, duly filed on or before the date hereof under the Uniform Commercial Code of Delaware with respect to all assets of Starlite;

 

(f)           a duly executed certificate of the Secretary of Starlite as to authorizing resolutions of its Board of Directors, its Certificate of Incorporation, bylaws, and incumbency and signatures of its authorized officers, in form and substance satisfactory to the Administrative Agent;

 

(g)          a certificate of good standing of Starlite issued by the Secretary of State of the State of Delaware;

 

(h)          an opinion of Kilpatrick Stockton LLP counsel to the Borrowers addressed to the Administrative Agent and each Lender in form and substance satisfactory to the Administrative Agent; and

 

(i)            such other certificates, instruments and documents as the Administrative Agent shall reasonably require.

 

3



 

Section 7.                General .  The foregoing amendments to the Credit Agreement and consent are limited as provided herein and do not extend to any other provisions of the Credit Agreement not specified herein or to any other matter.  The Credit Agreement is hereby ratified and confirmed and shall continue in full force and effect as amended hereby.  This Amendment may be executed in any number of counterparts with the same effect as if the signatures hereto were upon the same instrument.  Telecopied signatures hereto shall be of the same force and effect as an original of a manually signed copy.

 

Section 8.                Governing Law .  The laws of the State of New York shall govern the construction of this Amendment and the rights and duties of the parties hereto.

 

Section 9.                Headings . The descriptive headings of the various provisions of this Amendment are for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.

 

[Signature page follows.]

 

4



 

IN WITNESS WHEREOF, this Agreement and Amendment No. 1 to Credit Agreement has been executed as an instrument under seal as of the date first set forth above.

 

WELLS FARGO BANK, N.A., individually and as Administrative Agent, LC Issuer, Lead Arranger and Syndication Agent

STAR BUFFET, INC.

 

 

 

By:

          /s/ Ron Dowdy

 

          Name: Ron Dowdy

 

          Title: Secretary

By:

          /s/ Darcy McLaren

 

 

          Name: Darcy McLaren

STAR BUFFET MANAGEMENT, INC.

          Title:  Vice President

 

 

 

 

By:

         /s/ Ron Dowdy

 

         Name: Ron Dowdy

 

         Title: Secretary

 

 

 

SUMMIT FAMILY RESTAURANTS, INC.

 

 

 

 

 

By:

         /s/ Ron Dowdy

 

         Name: Ron Dowdy

 

         Title: Secretary

 

 

 

HTB RESTAURANTS, INC.

 

 

 

 

 

By:

         /s/ Ron Dowdy

 

         Name: Ron Dowdy

 

         Title: Secretary

 

 

 

NORTHSTAR BUFFET, INC.

 

 

 

 

 

By:

          /s/ Ron Dowdy

 

          Name: Ron Dowdy

 

          Title: Secretary

 

 

 

STARLITE HOLDINGS, INC.

 

 

 

 

 

By:

          /s/ Ron Dowdy

 

          Name: Ron Dowdy

 

          Title:Secretary

 

[Signature Page to Amendment No. 1 to Credit Agreement]

 


Exhibit 10.15

 

 

LOAN AGREEMENT

 

Senior Subordinated Promissory Note

Series I

 

$1,400,000.00

 

MADE BY AND BETWEEN

 

STAR BUFFET, INC.,

a Delaware corporation

 

AND

 

ROBERT E. WHEATON &

SUZANNE H. WHEATON,

 

 

Dated as of June 15, 2007

 



 

LOAN AGREEMENT

 

BY THIS AGREEMENT made and entered into as of the 15 th day of June, 2007, STAR BUFFET, INC., a Delaware corporation, whose address is 1312 N. Scottsdale Road, Scottsdale, Arizona 85257 (hereinafter severally and collectively called “ Borrower ”), and ROBERT E. WHEATON & SUZANNE H. WHEATON, whose address is 4716 East Valley Vista Lane, Paradise Valley, Arizona 85253 (hereinafter called “ Lender ”), for and in consideration of the recitals and mutual promises contained herein, confirm and agree as follows:

 

SECTION 1.          RECITALS

 

1.1            Loan .  Borrower has applied to Lender for a term loan in the amount of ONE MILLION FOUR HUNDRED THOUSAND AND NO/100THS DOLLARS ($1,400,000.00), upon the terms, conditions and provisions set forth herein, for the sole purpose of providing working capital for Borrower in the ordinary course of business.

 

SECTION 2.          DEFINITIONS

 

2.1            Defined Terms .  As used herein, the following capitalized terms shall have the meanings specified below, unless the context otherwise requires.

 

(a)            Adjusted Tangible Net Worth .  Tangible net worth plus subordinated debt, determined in accordance with GAAP, plus the amount of any reductions in tangible net worth for non-cash charges required under Financial Accounting Standard 144 and reserves for notes receivable.

 

(b)            Advance .  Omitted.

 

(c)            Affiliate .  Any person or entity (i) that directly or indirectly controls, or is controlled by, or is under common control with, Borrower; (ii) that directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of or membership in Borrower; (iii) five percent (5%) or more of the voting stock of or membership in which entity is directly or indirectly beneficially owned or held by Borrower; (iv) that is an officer, director or manager of Borrower; (v) of which another Affiliate is an officer, director or manager; or (vi) who is related by blood, adoption, or marriage to another Affiliate.  The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract, or otherwise.

 

(d)            Business Day .  Any day other than a Saturday, Sunday, public holiday, or other day when commercial banks in Arizona are authorized or required to close.

 

(e)            Capital Expenditures .  For a period, any expenditures of money during such period for the lease, purchase or construction of assets that are capitalized on Borrower’s balance sheet.

 

1



 

(f)             Closing .  The satisfaction of all of the conditions precedent set forth in SECTION 5 hereof and the consummation of all of the loan transactions contemplated by this Loan Agreement.

 

(g)            Closing Date .  The date, on or before June 15, 2007, on which the Closing occurs.

 

(h)            Commitment .  As defined in Paragraph 3.1 hereof.

 

(i)             Compliance Certificate . A certification of compliance in the form attached hereto as Exhibit “A.”

 

(j)             CPLTD .  The amount of principal payments on long term debt and the amount of capitalized leases that are to be paid within one year.

 

(k)            Disbursement Account .  Omitted.

 

(l)             EBITDA .  Pretax earnings from continuing operations plus interest expense, depreciation and amortization, impairment of long-lived assets and reserves for notes receivable, computed and calculated in accordance with GAAP calculated on a rolling four (4) quarter basis.

 

(m)           Environmental Law .  Any federal, state or local statute, ordinance, or regulation pertaining to health, industrial hygiene, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“ CERCLA ”); the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901, et seq. (“ RCRA ”); and the Arizona Environmental Quality Act, Title 49, Arizona Revised Statutes, and all rules adopted and guidelines promulgated pursuant to the foregoing.

 

(n)            ERISA .  The Employee Retirement Income Security Act of 1974, as amended and as in effect from time to time.

 

(o)            Event of Default .  As defined in Paragraph 11.1 hereof.

 

(p)            Facility .  Any real property and improvements owned or occupied by Borrower in the conduct of its business.

 

(q)            Fixed Charge Coverage .  The ratio of (a) EBITDA, less cash taxes and maintenance Capital Expenditures plus rent expense, to (b) CPLTD, plus interest expense plus rent expense calculated on a rolling four (4) quarter basis.

 

(r)             GAAP .  Those generally accepted accounting principles and practices that are recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods after the date thereof so as to properly reflect the financial condition, and the results of operations and changes in the financial position, of Borrower.

 

2



 

(s)            Hazardous Substance :  Includes:

 

(i)             those substances included within the definitions of “hazardous substances,” “hazardous materials,” “toxic substances,” or “solid waste” in CERCLA, RCRA, and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et   seq. , and in the regulations promulgated pursuant thereto;

 

(ii)            those substances defined as “hazardous substances” in A.R.S. Section 49-201 and in rules adopted or guidelines promulgated pursuant thereto;

 

(iii)           those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302 and amendments thereto); and

 

(iv)           all other substances, materials and wastes that are, or that become, regulated under, or that are classified as hazardous or toxic under, any Environmental Law.

 

(t)             Indebtedness .  The total outstanding indebtedness owed Lender by Borrower under or in connection with the Loan, including principal and interest accrued but not previously paid.

 

(u)            Lien .  Any lien, mortgage, security interest, tax lien, pledge, encumbrance, conditional sale or title retention arrangement, or any other interest in property designed to secure the payment of any indebtedness or performance of any obligation, whether arising by agreement or under any statute or law, or otherwise.

 

(v)            Loan Documents .  This Agreement, the Note and all other documents now or hereafter executed or delivered in connection with the Loan.

 

(w)           Loan .  As defined in Paragraph 3.1 hereof.

 

(x)             Long Term Debt .  Financing that has a maturity of greater than one year.

 

(y)            Maintenance Capital .  Expenditures defined by GAAP to be capitalized that are necessary to maintain the operations of the existing restaurants.

 

(z)             Material Adverse Effect .  Any event or condition that either (i) would have a material adverse effect upon the validity, performance or enforceability of this Agreement, or any of the other Loan Documents, (ii) is material and adverse to the properties, financial condition, credit or business operations and prospects of Borrower or any Subsidiary, (iii) would impair the ability of Borrower to fulfill its obligations under this Agreement, or any of the other Loan Documents, or (iv) causes an Event of Default or an event or condition that with notice or lapse of time or both, would become an Event of Default.

 

3



 

(aa)          Termination Date .  Shall mean June 5, 2012; provided, however, upon the request of Borrower, such date may be extended in writing by Lender in its sole and absolute discretion.

 

(bb)          Note .  As defined in Paragraph 3.2 hereof.

 

(cc)          Obligations .  Any and all of the representations, warranties, covenants and other obligations made or undertaken by Borrower in this Agreement or in any of the other Loan Documents.

 

(dd)          PBGC .  The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

 

(ee)          Permitted Liens .  (i) Liens granted to Lender; (ii) existing Liens approved by Lender and listed on Exhibit “B” hereto, (iii) future Liens approved in writing by Lender in its sole discretion; (iv) Liens for taxes, assessments and other governmental charges that are not past due or delinquent; (v) Liens imposed by law, such as mechanics’ liens, arising in the ordinary course of business and that secure payments not yet due; (vi) Mortgage Liens secured by a Facility where Lender has been notified in writing in advance of such lien being recorded; and (vii) Liens on other assets to the extent that such Liens secure financing for the acquisition of that asset.

 

(ff)            Plan .  Each pension, profit sharing, stock bonus, thrift, savings, and employee stock ownership plan established or maintained, or to which contributions have been made, by Borrower or any trade or business which together with Borrower would be treated as a single employer under ERISA.

 

(gg)          Primary Lender .  M&I Marshall & Ilsley Bank.

 

(hh)          SEC .  The United States Security and Exchange Commission.

 

(ii)            Subsidiary .  Any corporation fifty percent (50%) or more of which is owned, directly or indirectly, by Borrower.

 

(jj)            Total Funded Debt .  All financings, capitalized lease obligations and outstanding letters of credit.

 

(kk)          Total Funded Debt to EBITDA .  The ratio Total Funded Debt to EBITDA calculated on a rolling four (4) quarter basis.

 

2.2            Other Terms .  All accounting and financial terms used and not otherwise defined in this Agreement shall have the meanings accorded them under GAAP.

 

SECTION 3.          LOAN

 

3.1            Loan .  Subject to the conditions herein set forth, Lender agrees to loan to or for the benefit of Borrower, and Borrower agrees to borrow, in the manner and upon the terms and conditions herein expressed, amounts that shall not exceed at any time the Commitment (the “ Loan ”).  The “ Commitment ” shall be the principal sum of $1,400,000.00.

 

4



 

3.2            Note .  The Loan shall be evidenced by a promissory note of Borrower, executed and delivered simultaneously with the execution of this Agreement, in the amount of the $1,400,000.00 payable to Lender upon the terms and conditions contained therein (the “ Note ”).

 

3.3            Advances .  Omitted.

 

3.4            Readvances .  Omitted.

 

3.5            Other Disbursements by Lender .  Lender, from time to time in its sole discretion, may make disbursements in payment of interest accrued and payable upon the Loan and any charges and expenses that are the obligation of Borrower under this Agreement or any of the other Loan Documents and any charges or matters necessary to cure any Event of Default, all of which shall be added to and be part of the Indebtedness.

 

3.6            Repayment .  Borrower, from time to time, may repay the Loan in whole or in part at any time, without penalty, provided that any repayment complies with terms then in effect between borrow and Primary Lender.  Borrower shall immediately repay to Lender, from time to time, an amount equal to any amount by which the outstanding principal balance of the Loan exceeds the Commitment.

 

3.7            Termination .  The entire outstanding principal balance, all accrued and unpaid interest, and all other sums payable in connection with the Loan shall be due and payable on that date.

 

3.8            Application of Payments .  So long as no Event of Default exists, all payments shall be applied first to the payment of any costs, fees and other charges incurred in connection with the Loan, next to the payment of any accrued interest and then to the reduction of the principal balance.  Upon the occurrence and during the continuation of any Event of Default, all payments shall be applied by Lender to the Indebtedness and Obligations in such order and manner as Lender shall determine in its sole and absolute discretion.  All payments shall be applied to the Indebtedness and Obligations only when received in immediately available funds.

 

3.9            Prior Performance .  Although Lender shall have no obligation to make any Advance unless and until all of the requirements and conditions precedent set forth herein have been satisfied, Lender, at its sole discretion, may make any Advance prior to that time without waiving or releasing any of the requirements or conditions precedent of this Agreement; Borrower shall continue to be strictly obligated to perform, and shall be subject to, all such requirements and conditions notwithstanding any such disbursement.

 

3.10          Right to Advance .  Omitted.

 

SECTION 4.          LOAN FEE

 

4.1            Loan Fee .  Omitted.

 

4.2            Commitment Fee .  Omitted.

 

5



 

SECTION 5.          CONDITIONS PRECEDENT FOR CLOSING

 

The obligation of Lender to make the Loan, and to make any Advance at Closing, is subject to the following express conditions precedent, all of which shall have been satisfied prior to Closing:

 

5.1            Documents Required .  Borrower shall have executed (or obtained the execution or issuing of) and delivered to Lender the following documents, all in form satisfactory to Lender:

 

(a)            This Agreement

 

(b)            The Note

 

5.2            Loan Fee .  Omitted.

 

5.3            Items Required .  Borrower, at its expense, shall have obtained and delivered to Lender the following items, all of which shall be in form and content satisfactory to Lender and shall be subject to approval in writing by Lender:

 

(a)            A copy of the articles of incorporation and bylaws of Borrower and each Subsidiary, including all amendment thereto, certified by the secretary of Borrower or each Subsidiary, as appropriate, as being true, complete and correct as of the date of certification.

 

(b)            Certificates of good standing for Borrower and each Subsidiary issued by the Secretary of State of the state of incorporation of that corporation.

 

(c)            Resolutions of Borrower approving the execution, delivery and performance of this Agreement and the other Loan Documents and the transaction contemplated thereby, duly adopted by Borrower’s board of directors and accompanied by a certificate of the Secretary of Borrower stating that such resolutions are true and correct and are in full force and effect.

 

(d)            A signed certificate of the secretary of Borrower which shall certify the names of the officers of Borrower authorized to sign each of the Loan Documents, together with the true signature of each such officer.

 

5.4            Representative and Warranties True .  All representations and warranties by Borrower shall remain true and correct in all material respects and all agreements that Borrower is to have performed or complied with by the date hereof shall have been performed or complied with.

 

5.5            No Default .  No Event of Default exists, and no event has occurred and no condition exists that, after notice or lapse of time, or both, would constitute an Event of Default.

 

SECTION 6.          ADDITIONAL CONDITIONS

 

The obligation of Lender to make the Loan shall be subject to the following additional conditions precedent, all of which shall have been satisfied and remain satisfied at the time of each Advance of the Loan:

 

6



 

6.1            Prior Conditions .  All of the conditions precedent provided in SECTION 5 hereof shall have been satisfied.

 

6.2            Request for Advance .  Omitted.

 

6.3            Representatives and Warranties True .  All representations and warranties by Borrower shall remain true and correct in all material respects and all agreements that Borrower is to have performed or complied with by the date of the requested Advance shall have been performed or complied with.

 

6.4            No Default .  No Event of Default exists, and no event has occurred and no condition exists that, after notice or lapse of time, or both, would constitute an Event of Default.

 

SECTION 7.          REPRESENTATIONS AND WARRANTIES

 

Borrower represents and warrants to Lender as follows:

 

7.1            Recitals True .  The recitals appearing in this Agreement are true and correct.

 

7.2            Organization and Good Standing .  Borrower and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is qualified to do business and is in good standing in each state in which the nature of its business and property makes such qualification necessary or appropriate.

 

7.3            Power and Authority .  Borrower and each Subsidiary has full power and authority to own its properties and assets and to carry on its business as now being conducted.  Borrower has full power and authority to execute, deliver and perform this Agreement and the other Loan Documents to which Borrower is a party.

 

7.4            Authorization .  Borrower is fully authorized and permitted to enter into this Agreement, to execute any and all documentation required herein, to borrow the amounts contemplated herein upon the terms set forth herein, and to perform the terms of this Agreement.

 

7.5            No Breach or Default as to Borrower .  The execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to which it is a party will not conflict with or result in a default under:  (i) any law, rule or regulation applicable to Borrower, (ii) the organizational documents of Borrower, or (iii) the terms, conditions or provisions of any agreement or instrument under which Borrower is a party or is obligated.

 

7.6            Enforceable Obligations .  This Agreement and each of the other Loan Documents to which Borrower is a party are valid and binding legal obligations of Borrower and each is enforceable in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to the enforcement of creditors’ rights.

 

7.7            No Liens .  Except for Permitted Liens, all of the properties and assets of Borrower and its Subsidiaries are free and clear of all Liens and other adverse claims of any nature, and such corporations have good and marketable title to such properties and assets.

 

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7.8            No Adverse Proceedings .  No actions, suits or proceedings are pending or, to the knowledge of Borrower, threatened against Borrower or any Subsidiary that could result in a Material Adverse Effect.  Neither Borrower nor any Subsidiary is in default with respect to any order, writ, injunction or decree, of any court, governmental department, commission, board, agency or official, which default could result in a Material Adverse Effect.  No actions, suits or proceedings are pending or threatened against Borrower or any Subsidiary other than as set forth in Exhibit “C.”

 

7.9            Licenses; Permits; Agreements .  Borrower and its Subsidiaries have obtained, and there remains in full force and effect, all licenses, permits, rights, approvals and agreements necessary or appropriate for the operation of their respective businesses.  Neither Borrower nor any Subsidiary is in default under any material agreement to which it is a party or by which it or any of its properties is bound.

 

7.10          Compliance with Laws .  Borrower and each of its Subsidiaries are in compliance with all material laws, rules, regulations, orders and decrees that are applicable to Borrower or any Subsidiary, or its or their properties.

 

7.11          No Violation of Environmental Laws .  To the best of their respective knowledge, neither Borrower nor any Subsidiary, nor any Facility owned by them or any Affiliate thereof, is in violation of any Environmental Law and neither Borrower or any Subsidiary, nor any Facility owned by them or any Affiliate thereof is subject to any existing, pending or, to the best of their respective knowledge, threatened investigation by any federal, state or local governmental authority under or in connection with any Environmental Law.  Borrower has not obtained as the result of the requirements of any Environmental Law, and is not required by any Environmental Law to obtain, any permit or license to construct or use any improvements, fixtures or equipment that are a part of, or are located on, any Facility or to operate any business that is being conducted or intended to be conducted on any Facility.  Borrower has not caused or permitted the Release of, or has any knowledge of the Release or presence of, any Hazardous Substance on any Facility or the migration of any Hazardous Substance from or to any other property adjacent to, or in the vicinity of, any Facility.  Borrower’s prior and present use of each Facility has not resulted in, and its future use of each Facility will not result in, the Release of any Hazardous Substance on the Facility.

 

7.12          Statements Correct .  All financial statements, profit and loss statements, statements as to ownership and other statements or reports previously or hereafter given to Lender by or on behalf of Borrower and its Subsidiaries are and shall be true, complete and correct in all material respects as of the date thereof.  There has been no change since the latest financial statements of Borrower and its Subsidiaries given to Lender that could have a Material Adverse Effect.  There is no material fact that Borrower has not disclosed to Lender that would have a Material Adverse Effect.

 

7.13          Tax Returns Filed .  Borrower and its Subsidiaries have properly prepared, executed and filed (unless an extension of time has been granted by the proper authorities) all federal, state and local tax returns required by law and has paid all of its respective current obligations before delinquent, including all federal, state and local taxes and all other payments required under federal, state or local law.

 

7.14          No Margin Security .  Borrower does not own any “margin security” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System except

 

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amounts thereof that do not and will not in the aggregate constitute a substantial part of Borrower’s assets.

 

7.15          ERISA Compliance .  Borrower is in compliance in all material respects with all applicable provisions of ERISA.  Neither a “reportable event” as defined in ERISA nor a “prohibited transaction” as set forth in ERISA or in the Internal Revenue Code has occurred and is continuing with respect to any Plan.  No notice of intent to terminate a Plan has been filed nor has any Plan been terminated; no circumstances exist that constitute grounds under ERISA entitling PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings.  Borrower is not a party to, and has no employees who are covered by, a multi-employer pension or benefit plan.  Borrower has met its minimum funding requirements under ERISA with respect to each Plan and the present value of all vested benefits under each Plan did not exceed the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of ERISA for calculating the potential liability of Borrower to the PBGC or the Plan under ERISA.  Borrower has not incurred any liability to the PBGC under ERISA.

 

7.16          Principal Office .  The principal office of Borrower is at Borrower’s address at 1312 North Scottsdale Road, Scottsdale, Arizona 85257.  Borrower maintains its principal books and records at that address.

 

7.17          Subsidiaries .  Borrower does have Subsidiaries.

 

7.18          Affirmation .  Each request by Borrower for an Advance shall constitute an affirmation on the part of Borrower that the representations and warranties contained herein are true and correct in all material respects as of the time of such request and that the conditions precedent for that Advance have been satisfied.

 

7.19          Survival .  All representations and warranties made herein shall survive the execution of this Agreement, all Advances, and the execution and delivery of all other Loan Documents, so long as Lender has any commitment to lend to Borrower hereunder and until the Indebtedness has been fully paid and all of the Obligations have been fully performed.

 

SECTION 8.          AFFIRMATIVE COVENANTS

 

Until the Indebtedness as been fully paid and all of the Obligations have been fully performed:

 

8.1            No Change in Documents .  Borrower shall, and shall cause each of its Subsidiaries to, maintain its corporate existence with no material amendments or changes in its organizational documents without the prior written approval of the Lender, which consent shall not be unreasonably withheld.

 

8.2            Licenses, Permits; Agreements .  Borrower shall, and shall cause each of its Subsidiaries, to comply with and maintain in full force and effect all licenses, permits, rights, approvals and agreements necessary or desirable to conduct its business and to comply with its obligations under this Agreement and the other Loan Documents.

 

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8.3            Maintain Business .  Borrower shall, and shall cause each of its Subsidiaries, to act prudently and in accordance with customary industry standards in managing and operating its properties, assets and business.  Borrower shall, and shall cause each of its Subsidiaries, to keep all of its properties in good condition and repair (subject to ordinary wear and tear) and shall make all needed and proper repairs and improvements to its properties in order to properly conduct its business.

 

8.4            Comply With Laws .  Borrower shall comply in all material respects with all applicable laws, including without limitation, all applicable Environmental Laws.  Borrower will not, and will not permit any third party to, use, generate, manufacture, produce, store, or Release on, under or about any Facility, or transfer to or from any Facility, any Hazardous Substance except in compliance with all applicable Environmental Laws.

 

8.5            Management .  Borrower shall, and shall cause each of its Subsidiaries, to at all times hire and retain executive and management personnel adequate for the proper management, supervision and conduct of its business, operations and properties.

 

8.6            Maintain Insurance .  Borrower shall at all times maintain insurance with responsible and reputable insurers in such amounts and against such risks as may from time to time be required by Lender, but in all events in such amounts and against such risks, including public liability, property damage and worker’s compensation insurance, as is usually carried by companies engaged in similar business and owning properties in the same general areas in which Borrower operates.

 

8.7            Loan Payments .  Borrower shall make all payments of interest and principal on the Loan and shall keep and comply with all terms, conditions and provisions of the Loan Documents.

 

8.8            Pay Obligations .  Borrower shall pay all of its current obligations before they become delinquent, including all federal, state and local taxes, assessments, levies and governmental charges and all other payments required under any federal, state or local law.

 

8.9            Statements and Reports .  Borrower shall maintain a standard, modern system of accounting that reflects the application of GAAP, consistently applied, and shall furnish to Lender the following:

 

(a)            Omitted.

 

(b)            Omitted.

 

(c)            Omitted.

 

(d)            Omitted.

 

(e)            Omitted.

 

(f)             Omitted.

 

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8.10          Records .  Borrower shall maintain, in a safe place, proper and accurate books, ledgers, correspondence and other records relating to its operations and business affairs.

 

8.11          No Margin Security .  Borrower shall not use any proceeds of the Loan, or any proceeds of any other or future loan from Lender to Borrower, directly or indirectly, to purchase or carry any “margin security” as that term is defined in Regulation U of the Board of Governors of the Federal Reserve System or to reduce or retire any indebtedness undertaken for such purposes within the meaning of said Regulation U, and will not use such proceeds in a manner that would cause Borrower to be in violation of Regulation G, T, or X of such Board, nor use such proceeds for any purpose not permitted by Section 7 of the Securities Exchange Act of 1934, as amended, or any of the rules or regulations respecting the extensions of credit promulgated thereunder.

 

8.12          Further Assurance .  Borrower shall execute and deliver such additional documents and do such other acts as Lender may reasonably require in connection with this Loan.

 

SECTION 9.          NEGATIVE COVENANTS

 

Until the Indebtedness as been fully paid and all of the Obligations have been fully performed, without receiving the prior written consent of Lender, Borrower shall not, and shall not permit any Subsidiary to:

 

9.1            Incur Debt .  Become or remain obligated either directly or as a guarantor or surety for any indebtedness for borrowed money or for any indebtedness incurred in connection with the acquisition of any property, real or personal, tangible or intangible, except:

 

(a)            Indebtedness to Primary Lender;

 

(b)            Indebtedness to Lender;

 

(c)            Indebtedness secured by Permitted Liens;

 

(d)            Current liabilities for taxes and assessments incurred in the ordinary course of business; unsecured trade, utility or non-extraordinary accounts payable arising in the ordinary course of its business;

 

(e)            Real estate debt in connection with the purchase of restaurant properties.

 

9.2            Negative Pledge .  Create or permit to be created or exist any Lien on any of its property or assets which it now owns or hereafter acquires except Permitted Liens.

 

9.3            Loans .  Make any loan, advance, extension of credit, or gift to any person or entity except items not to exceed $10,000.00 in the aggregate for Borrower and all Subsidiaries in any fiscal year.

 

9.4            Investments .  Omitted.

 

9.5            Dissolution; Management Change .  Dissolve or liquidate, or merge or consolidate with or into any other entity; sell, transfer, lease or otherwise dispose of all or any substantial

 

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part of its property, assets or business; or, turn over the management or operation of its property, assets or business to any other person, firm or corporation or make any other material change in its management or operations.

 

9.6            Fiscal Year .  Change the times of commencement or termination of its fiscal year or other accounting periods; or change its methods of accounting other than to conform to GAAP.

 

9.7            Guarantees .  Guarantee, directly or indirectly, or otherwise become contingently liable or obligated for, any indebtedness or obligation of any other person or entity except for the endorsement in the ordinary course of business of negotiable instruments for deposit or collection.

 

9.8            Dividends .  Omitted.

 

9.9            Acquisitions .  Omitted.

 

9.10          Nature of Business .  Engage in any line of business materially different from that in which it is presently engaged, or purchase, lease or otherwise acquire assets not related to the operation of its business.

 

9.11          Capital Expenditures .  Omitted.

 

9.12          Salaries .  Pay excessive or unreasonable salaries, bonuses, commissions or other compensation; or increase the salary, bonus, commissions or other compensation of any director, officer, or consultant, or any member of their families, by more than 20% in any one fiscal year, either individually or in the aggregate for all such persons.

 

9.13          Financial Covenants .  For Borrower and its Subsidiaries, on a combined basis, as determined as of end of each fiscal quarter from the financial statements included in Borrower’s Form 10K and Form 10-Qs filed with the SEC, permit:

 

(a)            Adjusted Tangible Net Worth to be less than $17,000,000.00.

 

(b)            The ratio of Total Funded Debt to EBITDA to be greater than 2.75 to 1.0.

 

(c)            The Fixed Charge Coverage to exceed 1.00 to 1.00.

 

All computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with GAAP and shall be certified as true and correct by Borrower.

 

SECTION 10.        WAIVER

 

10.1          Notice Waivers .  Borrower waives presentment, demand, protest and notices of protest, nonpayment, partial payment and all other notices and formalities except as expressly called for in this Agreement or in the Note.  Borrower consents to and waives notice of: (i) the granting of indulgences or extensions of time of payment, (ii) the taking or releasing of security, and (iii) the addition or release of persons who may be or become primarily or secondarily liable

 

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on or with respect to the Indebtedness or any part thereof, and all in such manner and at such time as Lender may deem advisable.

 

10.2          No Waivers By Lender .  No delay or omission by Lender in exercising any right, power or remedy hereunder, and no indulgence given to Borrower, with respect to any term, condition or provision set forth herein, shall impair any right, power or remedy of Lender under this Agreement, or be construed as a waiver by Lender of, or acquiescence in, any Event of Default.  Likewise, no such delay, omission or indulgence by Lender shall be construed as a variation or waiver of any of the terms, conditions or provisions of this Agreement.  Any actual waiver by Lender of any Event of Default shall not be a waiver of any other prior or subsequent Event of Default or of the same Event of Default after notice to Borrower demanding strict performance.

 

SECTION 11.        DEFAULT

 

11.1          Events of Default .  The occurrence of any of the following events or conditions shall constitute an “Event of Default” under this Agreement:

 

(a)            Any failure to pay any interest or principal or any other part of the Indebtedness when the same becomes due and payable.

 

(b)            Any failure or neglect to perform or observe any of the terms, provisions, conditions or covenants of this Agreement or any other Loan Document, other than those referred to in the other provisions of this Paragraph 11.1, and such failure or neglect either (i) cannot be remedied,  (ii) can be remedied within fifteen (15) days by prompt and diligent action, but it continues unremedied for a period of fifteen (15) days after notice thereof to Borrower, or (iii) can be remedied, although not within fifteen (15) days even by prompt and diligent action, but such remedy is not commenced within fifteen (15) days after notice thereof to Borrower or is not diligently prosecuted to completion within a total of thirty (30) days from the date of such notice.

 

(c)            Any warranty, representation or statement contained in this Agreement, in the Note, in any other Loan Document, or made or furnished to Lender by or on behalf of Borrower that shall be or shall prove to have been false or misleading in any material respect as of the time made or furnished.

 

(d)            The filing by Borrower or any Subsidiary of any proceeding under the federal bankruptcy laws now or hereafter existing or any other similar statute now or hereafter in effect; or the entry of an order for relief under such laws with respect to Borrower or any Subsidiary.

 

(e)            The commencement of any proceeding described in subparagraph (d)above against Borrower or any Subsidiary unless dismissal of such proceeding is promptly sought and diligently prosecuted and such proceeding is in fact dismissed within sixty (60) days from the date of such commencement; the acquiescence by Borrower or such Subsidiary to such proceedings; or the appointment of a receiver, trustee, custodian or conservator for all or any part of the assets of Borrower or any Subsidiary.

 

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(f)             The insolvency of Borrower or any Subsidiary; or the execution by Borrower or any Subsidiary of an assignment for the benefit of creditors; or the convening by Borrower or any Subsidiary of a meeting of its creditors, or any class thereof, for purposes of affecting a moratorium upon or extension or composition of its debts; or the failure of Borrower or any Subsidiary to pay its debts as they mature; or if Borrower or any Subsidiary is generally not paying its debts as they mature.

 

(g)            The admission in writing by Borrower or any Subsidiary that it is unable to pay its debts as they mature or that it is generally not paying its debts as they mature.

 

(h)            The liquidation, termination or dissolution of Borrower or any of its Subsidiaries.

 

(i)             Any final judgment for the payment of money in excess of $500,000.00 (other than a judgment covered by insurance where coverage has been acknowledged by the insurer) is entered against Borrower or any Subsidiary and such judgment is not satisfied or discharged with thirty (30) days after the entry thereof.

 

(j)             The existence or the filing of any Lien, other than Permitted Liens, in excess of $500,000.00 against any property or assets of Borrower or any Subsidiary that is not removed, released, bonded or stayed to the satisfaction of Lender within thirty (30) days after its creation.

 

(k)            Any levy or execution upon, or judicial seizure of, any property of Borrower or any Subsidiary that has a fair market value in excess of $250,000.00.

 

(l)             The entry of any judgment, order or decree, or any other type of adverse ruling, against Borrower or any Subsidiary that could have a Material Adverse Effect.

 

(m)           The abandonment by Borrower or any Subsidiary of all or any material part of its property or assets.

 

(n)            The loss, theft or destruction of, or any substantial damage to, any material part of the property of Borrower or any Subsidiary that is not adequately covered by insurance.

 

(o)            The occurrence of any event or condition, that with the giving of notice or passage of time, or both, could result in a material default by Borrower under any other contract, loan, obligation or agreement of any kind to which Borrower is a party that results in a Material Adverse Effect.

 

(p)            The issuance of any order or decree enjoining or prohibiting Lender or Borrower from performing under this Agreement or any of the other Loan Documents, which order or decree is not vacated within fifteen (15) days after the granting thereof.

 

(q)            The occurrence of any default under any of the other Loan Documents that is not cured within any period for cure set forth therein.

 

(r)             Any failure or neglect to satisfy any of the financial covenants set forth in Paragraph 9.12 hereof which failure or neglect is not fully remedied and cured by the end of the next calendar month.

 

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(s)            The occurrence of any event or condition that Lender, in its reasonably judgment, believes results in a Material Adverse Effect.

 

11.2          Remedies .  Upon the occurrence of any Event of Default, and at any time thereafter while such Event of Default is continuing, Lender may do one or more of the following [except that in the case of an Event of Default described in subparagraphs 11.1(d) through 11.1(g) above relating to Borrower, acceleration shall be automatic]:

 

(a)            Declare the entire Loan and the rest of the Indebtedness immediately due and payable, without notice or demand.

 

(b)            Proceed to protect and enforce its rights under this Agreement, the Note and all other Loan Documents.

 

(c)            Avail itself of any other relief to which Lender may be legally or equitably entitled.

 

11.3          Payment of Costs .  Borrower shall pay all costs and expenses including, without limitation, court costs and reasonable attorneys’ fees incurred in enforcing payment of the Indebtedness and performance of the Obligation or in exercising the rights and remedies of Lender hereunder.  In the event of any court proceedings, court costs and reasonable attorneys’ fees shall be set by the court and not by jury and shall be included in any judgment obtained by Lender.

 

11.4          Right to Pay and Perform .  If Borrower shall fail to pay any amount as required herein or in any of the other Loan Documents, to satisfy any requirement hereof or of any of the other Loan Documents, or to perform otherwise as required herein or in any of the other Loan Documents, Lender may advance the moneys necessary to pay the same, to satisfy such requirements or to so perform.

 

11.5          No Prejudice to Lender .  No failure on the part of Lender to exercise any of its rights hereunder arising upon any Event of Default shall be construed to prejudice its rights upon the occurrence of any other or subsequent Event of Default.  No delay on the part of Lender in exercising any such rights shall be construed to preclude it from the exercise thereof at any time during the continuance of that Event of Default.  Lender may enforce any one or more remedies or rights hereunder successively or concurrently.  By accepting payment of any of the Indebtedness or performance of any of the Obligation after its due date, Lender shall not thereby waive the agreement contained herein that time is of the essence, nor shall Lender waive either its right to require prompt payment when due of the remainder of the Indebtedness or performance when due of the remainder of the Obligation or its right to consider the failure to so pay or perform an Event of Default.

 

SECTION 12.        ACTION UPON AGREEMENT

 

12.1          No Third Party Beneficiaries .  This Agreement is made for the sole protection and benefit of the parties hereto and no other person or organization shall have any right of action hereon or be a third party beneficiary hereof.

 

12.2          Entire Agreement .  This Agreement, together with the documents and instruments referred to herein, embodies the entire Agreement of the parties with regard to the

 

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subject matter hereof.  There are no representations, promises, warranties, understandings or agreements expressed or implied, oral or otherwise, in relation thereto, except those expressly referred to or set forth herein.  Borrower acknowledges that the execution and delivery of this Agreement is its free and voluntary act and deed, and that said execution and delivery have not been induced by, nor done in reliance upon, any representations, promises, warranties, understandings or agreements made by Lender, its agents, officers, employees or representatives, other than as set forth herein.

 

12.3          Changes in Writing .  No promise, representation, warranty or agreement made subsequent to the execution and delivery of this Agreement by either party hereto, and no revocation, partial or otherwise, or change, amendment or addition to, or alteration or modification of, this Agreement shall be valid unless the same shall be in writing signed by all parties hereto.

 

12.4          Separate Entities .  Lender and Borrower have separate and independent rights and obligations under this Agreement.  Nothing contained herein shall be construed as creating, forming or constituting any partnership, joint venture, merger or consolidation of Lender and Borrower for any purpose or in any respect.

 

SECTION 13.        GENERAL

 

13.1          Agreement to Continue .  This Agreement, and the representations, warranties, and covenants contained herein shall survive the making of the Loan and shall remain in full force and effect until the Indebtedness as been fully paid and all of the Obligations have been fully performed.

 

13.2          Lender’s Investigations .  Borrower shall be solely responsible for all aspects of Borrower’s business and activities.  Any investigation or review by Lender or its counsel shall be solely for Lender’s benefit, including to determine whether Borrower is properly discharging its obligations to Lender, and may not be relied upon by Borrower or any third party.  Neither Lender, nor Lender’s counsel, owes any duty of care to Borrower or to any third party to protect against, or to inform Borrower or any third party of, any matters disclosed by any investigation or review by Lender or its counsel.

 

13.3          Rights to Protect Lender .  All rights, powers and remedies granted Lender herein, or otherwise available to Lender, are for the sole benefit and protection of Lender, and Lender may exercise any such right, power or remedy at its option and in its sole and absolute discretion without any obligation to do so.  In addition, if, under the terms hereof, Lender is given two or more alternative courses of action, Lender may elect any alternative or combination of alternatives, at its option and in its sole and absolute discretion.  All monies advanced by Lender under the terms hereof and all amounts paid, suffered or incurred by Lender in exercising any authority granted herein, including reasonable attorneys’ fees, shall bear interest at the highest rate payable on any of the Indebtedness until paid, and shall be due and payable by Borrower to Lender immediately without demand.

 

13.4          Indemnity .  Borrower shall indemnify and hold Lender harmless from and against all claims, costs, expenses, actions, suits, proceedings, losses, damages and liabilities of any kind whatsoever, including but not limited to reasonable attorneys’ fees and expenses, arising out of any matter relating, directly or indirectly, to the Loan, whether resulting from internal disputes of the Borrower or whether involving other third persons or entities, or out of any other

 

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matter whatsoever related to this Agreement, the other Loan Documents, or any Facility, including but not limited to (i) any use, generation, manufacture, production, storage, Release, threatened Release, or presence of a Hazardous Substance; (ii) any violation or claim of violation of any Environmental Law; or (iii) any breach of any of the warranties, representations and covenants contained herein, but excluding any claim or liability which arises as the direct result of the gross negligence or willful misconduct of Lender.  This indemnity provision shall continue in full force and effect and shall survive not only the making of the Loan but shall also survive the payment of the Indebtedness and the performance of the Obligations.

 

13.5          Joint and Several; Context .  If Borrower consists of more than one person or entity their liability shall be joint and several.  The provisions hereof shall apply to the parties according to the context thereof and without regard to the number or gender of words or expressions used.

 

13.6          Time of the Essence .  Time is expressly made of the essence of this Agreement.

 

13.7          Notices .  All notices required or permitted to be given hereunder shall be in writing and may be given in person or by United States mail, by commercial delivery service or by electronic transmission with verified receipt.  Any notice directed to a party to this Agreement shall become effective upon the earliest of the following:  (i) actual receipt by that party; (ii) delivery to the designated address of that party, addressed to that party; or (iii) if given by certified or registered United States mail, the earlier of the date of delivery shown on the return receipt or twenty-four (24) hours after deposit with the United States Postal Service, postage prepaid, addressed to that party at its designated address.  The designated address of a party shall be the address of the party shown below or such other address within the continental United States as that party, from time to time, may specify by notice to the other parties:

 

Borrower:

 

Star Buffet, Inc.

 

 

1312 N. Scottsdale Road

 

 

Scottsdale, AZ 85257

 

 

 

Lender:

 

Robert E. Wheaton and

 

 

Suzanne H. Wheaton

 

 

4716 E. Valley Vista Lane

 

 

Paradise Valley, AZ 85253

 

13.8          Costs and Expenses .  Borrower shall pay all costs and expenses arising from the preparation of this Agreement, the closing of the Loan and the making of the Advance, including but not limited to, Lender’s attorneys’ fees, any other charges that may be imposed on Lender as a result of this transaction.

 

13.9          Choice of Law .  This Agreement shall be governed by and construed according to the laws of the State of Arizona.

 

13.10        Venue .  Lender may bring any action or proceeding to enforce or arising out of this Agreement in any court of competent jurisdiction.  If Lender commences such an action in a court located in the County of Maricopa, State of Arizona, or the United States District Court for the District of Arizona, Borrower hereby agrees that it will submit and does hereby irrevocably submit to the personal jurisdiction of such courts and will not attempt to have such action dismissed, abated, or transferred on the ground of forum non convenience or similar grounds; provided, however, that nothing contained herein shall prohibit Borrower from seeking, by

 

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appropriate motion, to remove any action brought in a Arizona state court to the United States District Court for the District of Arizona.  If such action is so removed, however, Borrower shall not seek to transfer such action to any other district, nor shall Borrower seek to transfer to any other district any action which Lender originally commences in such federal court.  Any action or proceeding brought by Borrower arising out of this Agreement or any of the other Loan Documents shall be brought solely in a court of competent jurisdiction located in the County of Maricopa, State of Arizona, or in the United States District Court for the District of Arizona.  Borrower waives any objection which it may now or hereafter have to venue of any such action or proceeding and waives any right to seek removal of any action or proceeding commenced in accordance herewith.

 

13.11        WAIVER OF TRIAL BY JURY .  BORROWER AND LENDER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE DEALINGS OF THE PARTIES WITH RESPECT THE TRANSACTION THAT IS THE SUBJECT OF THIS AGREEMENT WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.  THIS WAIVER HAS BEEN NEGOTIATED BY THE PARTIES AND IS AN ESSENTIAL PART OF THEIR BARGAIN.  EITHER PARTY MAY FILE A COPY OF THIS PROVISION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES TO THE WAIVER OF ANY RIGHT THEY MIGHT OTHERWISE HAVE TO TRIAL BY JURY.

 

13.12        Successors and Assigns .  Except as otherwise provided herein, this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their successors and assigns.

 

13.13        Headings .  The headings or captions of sections and paragraphs in this Agreement are for convenience and reference only, do not define, control or limit the provisions of such sections or paragraphs, and shall not affect the interpretation of this Agreement.

 

13.14        Participations .  Lender, at any time, shall have the right to sell, assign, or grant participations in all or any portion of the Loan and in any of the Loan Documents.  Lender is authorized to furnish any purchaser or participant, or prospective purchaser or participant, any documents or information provided to Lender or that Lender may have obtained relating to Borrower or relating to the Loan.

 

13.15        Loan Agreement to Prevail .  In the event of any direct conflict between the provisions of this Agreement and those of the Note or any other Loan Document, the provisions of this Agreement shall prevail.

 

18



 

IN WITNESS WHEREOF, these presents are executed as of the date indicated above.

 

 

BORROWER :

 

 

 

STAR BUFFET, INC., a Delaware corporation

 

 

 

 

 

By:

/s/ Ron Dowdy

 

Name:     Ron Dowdy

 

Title:       Secretary

 

 

 

 

 

LENDER :

 

 

 

Robert E. Wheaton and Suzanne H. Wheaton

 

 

 

 

 

By:

/s/ Robert E. Wheaton

 

Name:

Robert E. Wheaton

 

 

 

 

 

By:

/s/ Suzanne H. Wheaton

 

Name:

Suzanne H. Wheaton

 

19


Exhibit 10.16

 

ASSET PURCHASE AGREEMENT

 

Dated as of

 

December 2, 2007,

 

By and among

 

Barnhill’s Buffet, Inc.

as Seller

 

And

 

Star Buffet Management, Inc.,

as

Buyer

 



 

ASSET PURCHASE AGREEMENT (this “ Agreement ”), dated as of December 2, 2007, is by and among BARNHILL’S BUFFET, INC., a Tennessee corporation (the “ Seller or the Company ”) and STAR BUFFET MANAGEMENT, INC., a wholly owned subsidiary of Star Buffet, Inc., a Delaware corporation, (together with any successor and assigns, the “ Buyer ”).

 

RECITALS

 

A.            The Seller is engaged in the business of operating a chain of restaurants known as Barnhill’s Buffet that specialize in Southern-style buffet dining and catering.

 

B.            On the terms and subject to the conditions set forth in this Agreement, the Seller desires to sell, and the Buyer desires to acquire certain assets and assume certain liabilities of Seller’s restaurants listed on Exhibit A attached hereto (collectively, the “ Restaurants ”), and to assume certain real property and personal property leases as well as certain contracts related thereto necessary for the operation of the Restaurants.

 

C.            In connection with this Agreement, the Seller will commence a proceeding (the “ Bankruptcy Case ”) in the United States Bankruptcy Court for the Middle District of Tennessee (the “ Bankruptcy Court ”) by filing a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code (the “ Bankruptcy Code ”) (the date of such filing being the “ Petition Date ”).

 

D.            The Seller and the Buyer have agreed that the transactions contemplated hereby shall be accomplished through a sale and assignment of assets to the Buyer pursuant to Sections 363 and 365 of the Bankruptcy Code.

 

E.             The Seller and the Buyer contemplate a closing of the transactions on the Target Date (as defined in Section 2.3 herein) following the entry of the Sale Order (as defined in Section 7.2 ), which Sale Order shall not be subject to any stay, as of the Closing Date (as defined in Section 2.3 ).

 

F.             All disclosure schedules and exhibits referred to herein are hereby incorporated by reference and, taken together with this Agreement (including the foregoing Recitals) shall constitute but a single agreement.

 

ARTICLE 1

 

PURCHASE AND SALE

 

1.1            Assets .   Subject to the terms of this Agreement and pursuant to Sections 363 and 365 of the Bankruptcy Code, Seller agrees to sell, transfer, convey and/or assign to Buyer, and Buyer agrees to purchase and acquire from Seller at the Closing (as defined in Section 2.3 ), all of Seller’s right, title and interest, whatsoever, in and to the assets described below and in the following manner (collectively, the “ Assets ”) free and clear of all Encumbrances (as defined in Article 10 ):

 



 

(a)           Store Inventory .  At the Closing but effective as of the Effective Time (as defined in Section 2.6 ), Seller shall sell, transfer and assign to Buyer all of Seller’s right, title and interest in and to all of the inventory on hand (including raw materials, work in process and finished goods) at the Restaurant Sites.

 

(b)           Real Property Lease Assignments .  Described in Exhibit A are locations of certain restaurant sites leased by Seller (the “ Restaurant Sites ”) that constitute all of the sites on which the Restaurants are located.  Subject to Section 1.6 , at the Closing but effective as of the Effective Time, Seller shall transfer, sell and assign to Buyer all of Seller’s right, title and interest in and to the leases for the Restaurant Sites (the “ Assumed Leases ”) free and clear of all Encumbrances.

 

(c)           Tangible Personal Property .  At the Closing but effective as of the Effective Time, Seller shall sell, transfer and assign to Buyer, free and clear of all Encumbrances, all of Seller’s right, title and interest in and to all tangible personal property owned or leased by Seller and located at the Restaurant Sites, including, without limitation, certain leasehold improvements and fixtures located at the Restaurant Sites and further including, without limitation, the items described on Exhibit B (the “ Tangible Personal Property ”).

 

(d)           Personal Property Leases and Executory Contract Assignments .  Described in Exhibit C are certain personal property leases (“ Personal Property Leases ”) as well as certain licenses (including, without limitation, licenses relating to computer hardware and software), contracts, third-party warranties, arrangements and other agreements that may constitute executory contracts under Section 365 of the Bankruptcy Code (“ Executory Contracts ” and together with the Assumed Leases and the Personal Property Leases, the “ Assigned Agreements ”) to which the Seller is a party, relating to the business conducted at the Restaurant Sites.

 

(e)           Books and Records .  At the Closing, Seller shall sell, convey, transfer and assign to Buyer all of Seller’s right, title and interest in and to all “Books and Records” (including the right of possession) located at the Restaurants and/or Seller’s corporate headquarters that relate to the business conducted at the Restaurant Sites and/or the ownership of the Assets.  Following the Closing, Seller shall have the right to retain copies of any Books and Records transferred to Buyer.    “ Books and Records ” means all sales records, purchase records, customer lists, supplier lists, advertising and promotional materials, health inspection records including all records regarding the Occupational Safety and Health Act and similar government examinations and clearances , correspondence and other records, real estate and developmental data, blueprints.

 

(f)            Perpetual License of Trade names .  At the Closing but effective as of the Effective Time, Seller shall grant to Buyer a perpetual license to use any trade names, trademarked names, or graphics owned by Seller for purposes of operating the Restaurants (the “ License ”).

 

1.2            Excluded Assets .  Except for the Assets set forth in Section 1.1 , all other assets of Seller are excluded from the purchase and sale contemplated by this Agreement.  For the avoidance of doubt, subject to Section 9.3 , a ll security deposits, refunds, deposits and prepaid expenses of Seller, whether or not they relate to a property subject to an Assignment Agreement, are not Assets to be transferred to Buyer (the “ Prepaid Charges ”).

 

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1.3            Assumed Liabilities .  On the Closing Date, but effective as of the Effective Time, Buyer shall assume and agree to discharge only the following specifically enumerated obligations and liabilities of Seller (the “ Assumed Liabilities ”):

 

(a)           All liabilities and obligations arising after the Closing Date with respect to or arising under the Assets;

 

(b)           All liabilities, obligations and commitments under the Assigned Agreements accruing with respect to any periods after the Effective Time or requiring payment of an obligation which becomes due and payable after the Effective Time and which, in any event, is attributable to the period after the Effective Time; and

 

(c)           All liabilities, obligations and commitments accruing with respect to any periods after the Effective Time requiring payment of an obligation which, in any event, becomes due and payable after the Effective Time resulting from, caused by or arising out of, directly or indirectly, the conduct by Buyer in operating the business at the Restaurant Sites.

 

1.4            Retained Liabilities .  Notwithstanding anything contained in this Agreement to the contrary, Buyer does not assume or agree to pay, satisfy, discharge or perform, and shall not be deemed by virtue of the execution and delivery of this Agreement or any document delivered at the Closing pursuant to this Agreement, to have assumed, or to have agreed to pay, satisfy, discharge or perform, any liability, obligation or indebtedness of Seller, whether primary or secondary, direct or indirect, other than the Assumed Liabilities.  Seller shall retain all liabilities and obligations of Seller other than the Assumed Liabilities to the extent specifically provided in Section 1.3   subject to the prorations set forth in Section 9.3 (all such liabilities and obligations retained by Seller being referred to herein as the “ Retained Liabilities ”).  By way of illustration, and not of limitation, Retained Liabilities include:

 

(a)           All liabilities, obligations and commitments of Seller or any predecessor(s) or Affiliate(s) of Seller relating to Taxes (as defined in Article 10 ) with respect to the Assets or otherwise, for all periods, or portions thereof, on or prior to the Closing Date, subject to the prorations set forth in Section 9.4 ;

 

(b)           All liabilities, obligations and commitments for any legal, accounting, investment banking, brokerage or similar fees or expenses incurred by Seller in connection with, resulting from or attributable to the transactions contemplated by this Agreement;

 

(c)           Liabilities, obligations and commitments for which Buyer does not expressly assume an obligation or liability as described in Section 1.3 ;

 

(d)           Liabilities, obligations and commitments for any borrowed money incurred by Seller or any predecessor(s) or Affiliate(s) of Seller; and

 

(e)           All liabilities, obligations and commitments of Seller, whether known or unknown, disclosed or undisclosed, resulting from, caused by or accruing out of, at any time, directly or indirectly, the conduct of its business or ownership or lease of any of its properties or assets or any properties or assets previously used by Seller at any time prior to or on the Closing Date.

 

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1.5            Sale and Assignment Pursuant to Bankruptcy Code .   All the sales, assumptions and assignments contemplated by this Article 1 shall be subject to Bankruptcy Court approval pursuant to, among other things, Sections 363 and 365 of the Bankruptcy Code.

 

1.6            Assigned Agreements . Seller shall assume and assign to the Buyer all of the Assigned Agreements.  Set forth on Exhibits A and C is certain information describing the monetary obligations associated with the Assigned Agreements and any monetary defaults there under as of the Petition Date (the “ Cure Amounts ”). To the extent required by the Bankruptcy Court under the Bankruptcy Code in order to permit the assumption and assignment of the Assigned Agreements to the Buyer pursuant to this Agreement, (i) the Buyer hereby agrees to pay the Cure Amounts listed in Exhibits A and C , (ii) the Buyer shall provide adequate assurances of future performance as required by the Bankruptcy Code with respect to each Assigned Agreement and (iii) at the Closing, any obligations that have accrued but are not yet due for payment under the Assigned Agreements shall be pro-rated between the Seller and Buyer as of the Closing in accordance with Section 9.3 .

 

ARTICLE 2

 

CONSIDERATION; ALLOCATION; PAYMENT

 

2.1            Assumption; Purchase; Consideration .   In consideration of the sale, conveyance, transfer and/or assignment of the Assets as provided in Article 1, and subject to the provisions of this Agreement, at the Closing Buyer shall:

 

(a)           assume the Assumed Liabilities; and

 

(b)           purchase the Assets for the Purchase Price (as defined below).

 

2.2            Purchase Price .  The purchase price for the sale of the Assets shall be $7,500,000.00 in cash (the “Purchase Price”).

 

2.3            Closing .  The “ Closing ” of the transactions contemplated herein, including payment of the Purchase Price, shall take place at the offices of the Company or such other location in Nashville, TN as may be agreed upon, no later than five (5) days following the entry of the Sale Order (the “ Target Date ”) (or such earlier date as Buyer and Seller may mutually agree, the “ Closing Date ”); provided, that no stay of the Sale Order shall be in effect and provided, further, that the Sale Order shall contain a waiver of the automatic ten (10) day stay under Rule 6004(h) of the Federal Rules of Bankruptcy Procedure; provided , further , however , that in no event unless otherwise agreed in writing shall the Closing take place on a date which is after February 1, 2008 (the “ Termination Date ”) .  At the Closing, Buyer shall pay the Purchase Price to Seller by wire transfer of immediately available funds to one or more bank accounts of Seller, or as directed by Seller in accordance with the terms of the Sale Order approved by the Bankruptcy Court.

 

2.4            Allocation On or before the date that is five (5) days before the Closing Date, the Seller and the Buyer will agree upon an allocation of the Purchase Price covering the Assets for federal, state and local Tax purposes.  The Seller and the Buyer will implement, report and accept such allocation for federal, state and local Tax purposes.  The parties agree that such allocations

 

4



 

will not in any way limit their respective rights and obligations under the Sale Documents (as defined in Section 3.2 ) in respect of representations, warranties, covenants and agreements and the breach thereof or damages therefore.

 

2.5            Transfer Taxes Buyer shall pay all sales, transfer and use taxes, if any, that arise from the Transaction.   The parties will reasonably cooperate to minimize any such taxes.

 

2.6            Effective Time .  The effective time of the transactions contemplated hereby shall be 12:01 a.m. (Nashville, Tennessee time) on the first day following the Closing (the “ Effective Time ”), notwithstanding the fact that the actual physical exchange of documents shall take place at the Closing.

 

2.7            Deposit .  Upon the execution of this Agreement, Buyer shall place in escrow with Seller’s counsel a refundable purchase price deposit of $100,000 in cash.  Two weeks prior to the Sale Hearing, an additional refundable purchase price deposit in an amount such that the total cash deposits placed in escrow with Seller’s counsel is equal to five percent (5%) of the Purchase Price (all such cash placed in escrow hereinafter referred to as the “ Deposit ”), all of which shall be placed in an interest-bearing account.  Upon Closing, the Deposit will be applied against the Purchase Price.  Otherwise, the deposit will either be returned to Buyer or paid to Seller in satisfaction of Buyer’s obligation to pay the Seller Termination Fee as specified in Section 7.4 .

 

ARTICLE 3

 

REPRESENTATIONS AND WARRANTIES OF SELLER

 

Except (i) as set forth in the schedules referenced herein, to the extent (ii) it would not reasonably be expected to result in a Material Adverse Effect, (iii) the Bankruptcy Court determines otherwise, and (iv) the Bankruptcy Code provides otherwise, as an inducement to Buyer to enter into and perform its obligations under this Agreement, Seller hereby represents and warrants to Buyer as follows:

 

3.1            Organization and Good Standing .   Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of Tennessee and has full organizational power and organizational authority to conduct its business as it is now being conducted and to own, operate or lease the properties and assets it currently owns, operates or holds under lease.

 

3.2            Power and Authorization Subject to approval by the Bankruptcy Court, Seller has full power and authority to execute and deliver this Agreement and any agreement, document, certificate or instrument being delivered pursuant to or in connection with the transactions contemplated by this Agreement (collectively, the “ Sale Documents ”) to perform its obligations hereunder and there under and to consummate the transactions contemplated hereby and thereby.  The execution and delivery of this Agreement and the other Sale Documents, and the performance by Seller of its obligations hereunder and there under, and the consummation of the transactions contemplated hereunder and there under, have been duly authorized by Seller.  This Agreement and the other Sale Documents upon execution and delivery by Seller and upon approval of the Bankruptcy Court will constitute the legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms.

 

5



 

3.3            No Violation .   Except as set forth on Schedule 3.3 hereto, the execution, delivery and performance by Seller of this Agreement and the other Sale Documents and the consummation or performance of the transactions contemplated herein and therein do not and will not:

 

(a)           conflict with, result in the breach, modification, termination or violation of, or loss of any benefit under, constitute a default under, accelerate the performance required by, result in or give rise to a right to amend or modify the terms of, result in the creation of any lien upon any assets or properties, or in any manner release any party thereto from any obligation under, any material mortgage, note, bond, indenture, contract, agreement, lease, license or other instrument or obligation of any kind or nature by which Seller, or any of its properties or assets, may be bound or affected;

 

(b)           contravene or conflict with, or result in a violation of, result in any loss of benefit under, or give any Person the right to challenge any of the transactions contemplated by this Agreement and the other Sale Documents or to exercise any remedy or obtain any relief under, any permit, concession, franchise, order, judgment, writ, injunction, law, rule, ordinance, regulation, statute or decree applicable to Seller; or

 

(c)           conflict with or violate any provision of the certificate of incorporation, bylaws or resolutions adopted by the board of directors or stockholders, each as heretofore amended, of Seller.

 

3.4            No Consent Required .   Except for Bankruptcy Court approval or as otherwise contemplated by this Agreement [or as set forth on Schedule 3.4 hereto], no consent, approval, order or authorization of, or declaration, filing or registration with, any Person, entity or governmental authority is required to be made or obtained by Seller in connection with the authorization, execution, delivery or performance of this Agreement, the other Sale Documents or the transactions contemplated hereby and thereby.

 

3.5            Compliance with Laws; Permits .   To the Knowledge of the Seller, Seller is in material compliance with all laws, regulations, rules, ordinances, orders and other requirements applicable to the operation, conduct or ownership of the business conducted at the Restaurant Sites.  Seller holds all of the required permits, licenses, approvals and authorizations of any Governmental Unit (as defined in Article 10 ) or third parties (collectively, “ Permits ”) necessary or appropriate for the conduct of its business at the Restaurant Sites.   To the Knowledge of the Seller, all such Permits are in full force and effect, and will remain with Seller upon, and will not be affected by, the Closing; there is no condition, nor has any event occurred, which constitutes or with the giving of notice or passage of time or both would constitute a violation of the terms of any Permit and no cancellation, modification or revocation of any of the Permits is pending or threatened.

 

3.6            Property .

 

(a)           Seller has good and marketable title or rights as lessee to all real, personal, mixed, tangible and intangible property of any kind or nature owned or used by Seller at the Restaurant Sites, constituting the Assets, in each case free and clear of all Encumbrances, except for Encumbrances identified on Schedule 3.6(a)  hereto on the date hereof.  The Assets located at the Restaurant Sites (a) constitute all the assets, of any nature whatsoever, necessary at the

 

6



 

Restaurant Sites in order for Seller to operate its business at the Restaurant Sites in the manner such business is presently operated by Seller, and (b) include all of the operating assets of Seller at the Restaurant Sites.  Upon the execution of this Agreement, Buyer shall have the right to communicate with landlords (and other parties in the leasehold chain) regarding the leaseholds related to the Restaurant Sites.

 

(b)           Seller has a valid leasehold interest to all of the Assumed Leases.  Each of the Assumed Leases is the subject of a written lease agreement and there are no oral terms inconsistent with the written terms thereof.  Except as set forth on Schedule 3.6(b) , to the Knowledge of the Seller, no work has been performed on, or materials supplied to, any of the Assumed Leases within the applicable statutory period which would give rise to any mechanic’s or materialmen’s liens for any amount in excess of $1,000.

 

3.7            Condition of Property and Related Matters .

 

(a)           All buildings, machinery, equipment and other tangible assets constituting the Assets and used by Seller in the conduct of its business at the Restaurant Sites, including but not limited to the Tangible Personal Property, are in fair or good operating condition and repair, reasonable wear and tear excepted, are usable in the ordinary course of business and are adequate and suitable for the uses to which they are being put.  All such assets and property are located at real property locations constituting the Restaurant Sites.

 

3.8            Material Contracts .   With respect to the business conducted at the Restaurant Sites, Seller has not entered into nor is it bound by any contract, agreement or commitment of an amount or value in excess of $50,000 in the aggregate, written or oral, including without limitation any obligations for money borrowed (the “ Material Contracts ”); true, correct and complete copies of all written Material Contracts previously have been furnished to Buyer.  Except as set forth on Schedule 3.8 , to the Knowledge of the Seller, Seller is not in default, and no event has occurred or circumstances exists that, with or without which, the giving of notice or the passage of time or both, may contravene, conflict with, result in a breach of or constitute a default by Seller, or any other party under any Material Contract or any other obligation owed by Seller, and no event has occurred which, with the giving of notice or the passage of time or both, would constitute a default by any other party to any such Material Contract or obligation.  The consummation of the transactions contemplated by the Sale Documents will not result in a breach of or constitute a default under, any Material Contract or the right of any other party to the Material Contract to terminate the same and there are no negotiations pending to revise the terms of any such Material Contracts.

 

3.9            Employee Matters .

 

(a)           Seller is not a party to or bound by any collective bargaining agreement and there are no labor unions or other organizations representing, purporting to represent or, to the Knowledge of Seller, attempting to represent any employees employed in the operation of the business conducted at the Restaurant Sites.  Since February 11, 2005, there has not occurred or, to the Knowledge of Seller, been threatened any material strike, slowdown, picketing, work stoppage, concerted refusal to work overtime or other similar labor activity with respect to any employees employed in the operation of the business conducted at the Restaurant Sites.  There are

 

7



 

no labor disputes currently subject to any grievance procedure, arbitration or litigation and there is no representation petition pending or, to the Knowledge of Seller, threatened with respect to any employee employed in the operation of the business conducted at the Restaurant Sites.  The Seller has complied with all provisions of all Legal Requirements (as defined in Article 10 ) pertaining to the employment of employees, including, without limitation, all such Legal Requirements relating to labor relations, equal employment, fair employment practices, entitlements, prohibited discrimination or other similar employment practices, entitlements, prohibited discrimination or other similar employment practices or acts, except for any failure so to comply that, individually or together with all such other failures, has not and will not result in a material Liability or obligation on the part of the Buyer, and has not had or resulted in, and is not expected to have or result in, a Material Adverse Effect (as defined in Article 10 ).

 

(b)           Buyer shall have no Liability on account or with respect to any benefits due Seller’s employees (including without limitation any Liability arising in connection with or with respect to any of the following: compensation, unemployment insurance contributions, termination payments, severance payments, retirement, pension, profit-sharing, retirement plans, bonus, vacation, disability, health, accrued sick leave or other employee benefit plans, agreements or understandings).  The terms and conditions (including the scope and amount of all benefits) under which any employment will be offered to employees of Seller by Buyer shall be determined by Buyer in its sole discretion.

 

3.10          Books and Records .   All the books, records and accounts of Seller relating to the Restaurant Sites, all of which have been made available to Buyer, are in all material respects accurate and complete, accurately reflect all matters normally recorded in the books, records or accounts of Seller in accordance with Seller’s historical practices, are in all material respects in compliance with all laws and regulations applicable to Seller as they relate to the business conducted at the Restaurant Sites and accurately present and reflect in all material respects the transactions described therein.

 

3.11          Taxes .   Except as set forth on Schedule 3.11 , all Tax returns, reports and declarations required by any governmental authority to be filed in connection with Seller’s ownership or lease of the Assets or the operation of the business conducted at the Restaurant Sites have been timely filed and, to the Knowledge of Seller, are complete and correct in all material respects and all Taxes related thereto have been paid.

 

3.12          Litigation .   Except as set forth in Schedule 3.12 , there is no claim, counter-claim, action, suit, order, proceeding or investigation pending, in law or in equity, or, to the Knowledge of Seller, threatened against or involving Seller, with respect to the business conducted at the Restaurant Sites (or pending or, to the Knowledge of Seller, threatened against any of the officers, directors or key employees of Seller with respect to business activities (including any products sold) at the Restaurant Sites conducted on behalf of Seller) with respect to or affecting Seller, its accounts, business, properties, assets or rights, or relating to the transactions contemplated hereby, before any court, agency, regulatory, administrative or other governmental body or officer or before any arbitrator; nor to the Knowledge of Seller, is there any reasonable basis for any such claim, action, suit, proceeding or governmental, administrative or regulatory investigation that would result in a Material Adverse Effect.  Seller is not directly subject to or affected by any order, judgment, decree or ruling of any court or governmental agency relating to affecting the

 

8



 

Restaurant Sites.  Seller has not received any written opinion or memorandum of legal advice from legal counsel to the effect that it is exposed to any liability which may be material to the business, prospects, results of operations, financial condition or assets of Seller at the Restaurant Sites.

 

3.13          Environmental and Safety Requirements .

 

(a)           To the Knowledge of Seller, Seller is in material compliance with all applicable Environmental and Safety Requirements (as defined below) at the Restaurant Sites and Seller possesses all required permits, licenses and certificates for the Restaurants, and has filed all notices or applications, required thereby.   To the Knowledge of Seller, Seller has not received any notice or other communication from any party with respect to Seller’s failure to comply with Environmental and Safety Requirements.  For purposes of this Agreement, “ Environmental and Safety Requirements ” means all federal, state, provincial, foreign and local laws, bylaws, rules, regulations, ordinances, decrees, orders, statutes, actions, guidelines, standards, arrangements, injunctions, policies and requirements relating to public health and safety, worker health and safety, disabilities, pollution and protection of the environment (including without limitation the handling of any polluted, toxic or hazardous materials), all as amended;

 

(b)           To the Knowledge of the Seller, the properties at the Restaurant Sites are not subject to any, nor are there any facts or circumstances which Seller reasonably believes could form the basis for any, Liability, contingent or otherwise arising out of any Environmental and Safety Requirements.  There are no pending or, to the Knowledge of Seller, threatened claims or Encumbrances for Seller’s failure to comply with any Environmental and Safety requirements.  Seller does not have in its possession or under its control at the Restaurant Sites any hazardous substances, except those hazardous substances as are used in the ordinary course of the business of Seller and are used or maintained in compliance with the Environmental and Safety Requirements;

 

(c)           To the Knowledge of the Seller, during the period Seller has occupied the Restaurant Sites, there has been no Release (as defined in Article 10 ) or threat of Release, of any hazardous materials at or from the Restaurant Sites or at any other locations where any hazardous materials were generated, manufactured, refined, transferred, produced, imported, used, or processed from or by the Restaurant Sites, or from any other properties and assets (whether real, personal, or mixed) in which Seller has or had an interest or, to the Knowledge of Seller, any geologically or hydrologically adjoining property, whether by Seller or any other Person; and

 

(d)           Seller has delivered to Buyer true and complete copies and results of any reports, studies, analyses, tests, or monitoring possessed or initiated by Seller pertaining to hazardous materials or hazardous activities in, or, or under the Restaurant Sites, or concerning compliance by Seller or any other Person for whose conduct it is or may be held responsible, with Environmental and Safety Requirements.

 

3.14          Store Inventory .  All of the Store Inventory is located at one or more of the Restaurant Sites.

 

3.15          No Undisclosed Liabilities .   Seller has not incurred any liabilities or obligations of any nature, whether known or unknown, absolute, accrued, contingent or otherwise and whether due or to become due, arising out of or related to the business conducted at the Restaurant Sites,

 

9



 

except (a) as set forth in Schedule 3.15 , (b) as and to the extent disclosed or reserved against in the most recent balance sheet of Seller provided to Buyer, and (c) for liabilities and obligations that were (i) incurred in the ordinary course of business consistent with past practice and (ii) individually or in the aggregate are not material to the business conducted at the Restaurant Sites and have not had or resulted in, and would not reasonably be expected to result in, a Material Adverse Effect.

 

3.16          Disclosure .  No representation or warranty or other statement made by Seller in this Agreement or in connection with the transactions contemplated hereby omits to state a material fact necessary to make any of them, in light of the circumstances in which it was made, not misleading.

 

3.17          Brokers, Finders, etc .  Other than Brookwood Associates, retained by the Seller as its investment banker in connection with the transactions set forth in this Agreement, all negotiations relating to this Agreement and the transactions contemplated hereby, have been carried on without the participation of any Person acting on behalf of Seller in such manner as to give rise to any valid claim against the Buyer or any of its subsidiaries for any brokerage or finder’s commission, fee or similar compensation, or for any bonus payable to any officer, director, employee, agent or sale representative of or consultant to Seller upon consummation of the transactions contemplated hereby or thereby.  Buyer shall have no obligation to pay the fees and expenses of Brookwood Associates.

 

3.18          Notice of Sale .  Notice of this Agreement and Notice of the Sale Order and the hearings therefore will be duly and properly given to all known creditors and parties in interest in the Bankruptcy Case, including but not limited to, any parties holding consensual or nonconsensual liens on the Assets, the non-Seller parties to the Assigned Agreements being assumed pursuant to this Agreement, the employees at the Restaurant Sites, and applicable taxing and governmental authorities.

 

ARTICLE 4

 

REPRESENTATIONS AND WARRANTIES OF BUYER

 

As an inducement to Seller to enter into and perform its respective obligations under this Agreement, Buyer hereby represents and warrants to Seller as follows:

 

4.1            Organization and Good Standing; Power .   Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of [Delaware] and has full power and authority to conduct its business as it is now being conducted and to own, operate or lease the properties and assets it currently owns, operates or holds under lease.

 

4.2            Authorization .   Buyer has full power and authority to execute and deliver this Agreement and any agreement, document, certificate or instrument being delivered pursuant to or in connection with the transactions contemplated by this Agreement, to perform its obligations hereunder and there under and to consummate the transactions contemplated hereby and thereby.  The execution and delivery of this Agreement and the other Sale Documents, and the performance by Buyer of its obligations hereunder and there under, and the consummation of the transactions

 

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contemplated hereunder and there under, have been duly authorized by Buyer.  This Agreement and the other Sale Documents upon execution and delivery by Buyer shall constitute the legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms.

 

4.3            No Violation The execution, delivery and performance by Buyer of this Agreement and the other Sale Documents and the consummation of the transactions contemplated herein and therein do not and will not:

 

(a)           conflict with, result in the breach, modification, termination or violation of, or loss of any benefit under, constitute a default under, accelerate the performance required by, result in or give rise to a right to amend or modify the terms of, result in the creation of any Encumbrance upon any assets or properties, or in any manner release any party thereto from any obligation under, any mortgage, note, bond, indenture, contract, agreement, lease, license or other instrument or obligation of any kind or nature by which Buyer or any of its properties or assets may be bound or affected;

 

(b)           conflict with, violate or result in any loss of benefit under, any permit, concession, franchise, order, judgment, writ, injunction, regulation, statute or decree; or

 

(c)           conflict with or violate any provision of the articles of organization or operating agreement, each as heretofore amended, of Buyer.

 

4.4            No Consent Required .  Except as otherwise contemplated by this Agreement, no consent, approval, order or authorization of, or declaration, filing or registration with, any person, entity or governmental authority is required to be made or obtained by Buyer in connection with the authorization, execution, delivery or performance of this Agreement, the other Sale Documents or the transactions contemplated hereby.

 

4.5            Financing Commitment .   Buyer has sufficient funds to pay the Purchase Price or, alternatively, has secured a financing commitment from a third party in an amount sufficient to pay the Purchase Price.

 

4.6            “AS IS” Transaction .  BUYER HEREBY ACKNOWLEDGES AND AGREES THAT, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ARTICLE 3 ABOVE, THE SELLER MAKES NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY MATTER RELATING TO THE ASSETS.  BUYER FURTHER ACKNOWLEDGES THAT BUYER HAS CONDUCTED AN INDEPENDENT INSPECTION AND INVESTIGATION OF THE PHYSICAL CONDITION OF THE ASSETS AND ALL SUCH OTHER MATTERS RELATING TO OR AFFECTING THE ASSETS AS BUYER DEEMED NECESSARY OR APPROPRIATE AND THAT, EXCEPT FOR ANY REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN ARTICLE 3 AND THE CONDITION OF TITLE TO THE ASSETS CONFERRED BY THE SALE ORDER, BUYER IS PROCEEDING WITH ITS ACQUISITION OF THE ASSETS BASED SOLELY UPON SUCH INDEPENDENT INSPECTIONS AND INVESTIGATIONS.  ACCORDINGLY, BUYER WILL ACCEPT THE ASSETS AT THE CLOSING “AS IS,” “WHERE IS,” AND “WITH ALL FAULTS.”

 

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ARTICLE 5

 

COVENANTS AND OTHER TERMS

 

Except (i) to the extent it would not reasonably be expected to result in a Material Adverse Effect, (ii) to the extent the Bankruptcy Court determines otherwise, and (iii) to the extent the Bankruptcy Code provides otherwise, Seller and Buyer covenant and agree as follows:

 

5.1            Conduct of Business Seller agrees that from the date of this Agreement through the earlier to occur of (x) the Closing Date, and (y) the date on which this Agreement is terminated in accordance with the provisions of Section 8.1 hereof, the Seller will:

 

(a)           Conduct of Business .  Use commercially reasonable efforts to conduct the business at the Restaurant Sites in the ordinary course and in substantially the same manner as such business has previously been carried out, without limiting the foregoing, the Seller will use commercially reasonable efforts to maintain adequate inventory levels and adequate staffing levels, and the Seller will not engage in any transactions not in the ordinary course.

 

(b)           Representations and Warranties; Conditions .  Use commercially reasonable efforts not to engage in any practice, take any action, fail to take any action or enter into any transaction that could reasonably be expected to (i) cause any of the representations and warranties herein to be untrue, inaccurate or incorrect at any time, or (ii) result in any of the conditions set forth in Section 6.1 not being satisfied on or prior to the Termination Date.

 

(c)           Sale of Assets; Liens .  Not (i) transfer, convey, sell or encumber any of the Assets, except inventory sold in the ordinary course of its business, or Encumbrances granted under the Seller’s post-petition financing facility or otherwise authorized by the Bankruptcy Court, or (ii) dispose of, or trade in, any of the Tangible Personal Property.

 

(d)           Maintenance of Relationships .  Subject to Seller’s responsibilities as a debtor-in-possession under the Bankruptcy Code, use commercially reasonable efforts to preserve its current relationships with its customers, suppliers, vendors and other Persons with which it has significant business relationships.  Subject to Bankruptcy Court approval, continue to honor gift certificates / coupons tendered by customers and take all commercially reasonable steps to ensure that the Seller’s suppliers and vendors continue to provide product and services to the Seller during the pendency of the Bankruptcy Case and to the Buyer after Closing on ordinary trade and credit terms.  The Seller shall notify Buyer in writing within five (5) Business Days of the receipt of any written notice or Knowledge of the Seller (without due inquiry) to the effect that any current material vendor or supplier of the Seller or other party to any Assigned Agreement could reasonably be expected to terminate or materially alter its business relations with the Seller, either as a result of the Bankruptcy Case, the transactions contemplated herein or otherwise.

 

5.2            Non-Interference .  Seller shall not take any actions that impair or interfere with the rights of Buyer hereunder.

 

5.3            Notices and Consents .  Seller shall be responsible for obtaining prior to the Closing all waivers, permits, consents, approvals or other authorizations from third Persons and Governmental Units, if any, and to effect all such registrations, filings with and notices to third

 

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Persons and Governmental Units, including all local, county, state and federal taxing authorities, as may be necessary in order to permit the consummation of the transactions contemplated by this Agreement free and clear of all Encumbrances.  Buyer shall use reasonable efforts to assist Seller in obtaining such waivers, permits, consents, approvals and authorizations and in making such registrations and filings.

 

5.4            Solicitation of Employees .  Upon execution of this Agreement by both Buyer and Seller, Buyer may discuss with any of Seller’s employees at the Restaurants their employment by Buyer after the Closing.  Buyer may discuss employment with other Seller employees only upon written request and approval.  Upon the Closing, Seller shall terminate all of the employees employed by Seller at the Restaurants.   Buyer will have the right, but not the obligation, to interview and hire any such employee of Seller, and Seller and Buyer shall cooperate to effect an orderly transition of any present or former employees of Seller to be hired by Buyer, in its sole discretion, upon or after the Closing.

 

5.5            Reasonable Efforts .  Subject to the terms and conditions herein provided, each of the parties hereto agrees to use reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done as promptly as practicable, all things necessary to consummate the transactions contemplated by this Agreement, including, without limitations, the prompt preparation and filing by Seller of all necessary pleadings, motions and notices in connection with the approval by the Bankruptcy Court of this Agreement.

 

ARTICLE 6

 

CONDITIONS PRECEDENT TO THE CLOSING

 

6.1            Conditions Precedent to Obligations of Buyer .   The obligations of Buyer under this Agreement to consummate the transactions contemplated hereby shall be subject to the satisfaction, at or prior to the Closing, of all of the following conditions, any one or more of which may be waived at the option of Buyer (provided, however, that (1)  the parties acknowledge and agree that any representations and warranties of the Seller contained in Article 3 of this Agreement and referenced in this Section 6.1 are qualified in their entirety by those qualifications set forth in clauses (i) through (iv) of the introductory paragraph to such Article 3, and (2) any covenants of the Seller contained in this Agreement and referenced in this Section 6.1 are qualified in their entirety by those qualifications set forth in clauses (i) through (iii) of the introductory paragraph to Article 5):

 

(a)           Representations and Warranties; Performance of Agreements .  Subject to the acknowledgments set forth in Section 4.6 , (i) all of the representations and warranties of the Seller set forth herein and any related Sale Documents shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date (or, if made as of a specified date, as of such date); (ii) the Seller shall have performed and complied in all material respects with all of their covenants and other obligations contained in this Agreement required to be performed or complied with by Seller at or before the Closing; and (iii) the Buyer shall have received a certificate on behalf of the Seller as to the fulfillment of the conditions set forth in clauses (i) and (ii) above, which certificate shall have the effect of a representation and warranty of the Seller as to the matters set forth therein.

 

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Required Consents .  The Buyer shall have received copies of all of the consents, permits, and regulatory approvals necessary to consummate the transactions contemplated by this Agreement; provided the failure to obtain the consent of Spirit Master Funding, LLC to the assumption and/or assignment of the lease(s) for the restaurants in Apopka, Ocala, Columbus, Gulfport and Moss Point shall excuse Buyer from closing under this Agreement but shall not entitle Buyer to a Buyer Termination Fee.

 

(b)            Ancillary Agreements .  The Buyer shall have received the following Sale Documents, each dated as of the Closing Date and in full force and effect as of the Closing Date:

 

(i)             one or more Bills of Sale, duly executed by the Seller, the forms of which shall be submitted by Buyer on or before such date that is five (5) Business Days prior to the Sale Hearing (each, a “ Bill of Sale ”);

 

(ii)            the License, duly executed by the Seller, the form of which shall be submitted by Buyer on or before such date that is five (5) Business Days prior to the Sale Hearing; and

 

(iii)           all other instruments of transfer, duly executed by the Seller as shall be reasonably necessary or appropriate to vest in the Buyer good and indefeasible title to the Assets and to permit the Buyer to conduct the business at the Restaurant Sites without interruption.

 

(c)            No Legal Obstruction .  Except as is otherwise contemplated by the Bankruptcy Case, no suit, action or proceeding not disclosed in the schedules to this Agreement by any Person, entity or governmental agency shall be pending or threatened in writing, which if determined adverse to Seller, or Buyer’s interests, could reasonably be expected to have a Material Adverse Effect.  No injunction, restraining order or order of any nature shall have been issued by or be pending before any court of competent jurisdiction or any governmental agency challenging the validity or legality of the transactions contemplated hereby or restraining or prohibiting the consummation of such transactions or compelling Buyer to dispose of or discontinue or materially restrict the operations of a significant portion of Seller’s business conducted at the Restaurants.

 

(d)            Damage or Destruction From the date hereof until the Closing, there shall have been no loss or destruction of any portion of the properties or assets of Seller at the Restaurants, nor any institution or threat of any condemnation or other proceedings to acquire or limit the use of any of the properties or assets of Seller at the Restaurants, which (in any such case) could reasonably be expected to result in a Material Adverse Effect.

 

(e)            Bankruptcy Court Approval .  The Sale Order shall have been entered and shall be in form and substance reasonably satisfactory to Seller and Buyer, and shall have become a Final Order (as defined in Article 10 ); provided , however , that Buyer will use its reasonable efforts to consummate the transactions contemplated hereby under circumstances where an appeal of the Sale Order is pending, no stay has been obtained, and Buyer reasonably believes that closing the transaction will moot any such appeal(s).  Any other orders of the Bankruptcy Court with respect to this Agreement shall be in form and substance reasonably satisfactory to Buyer.

 

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6.2            Conditions Precedent to Obligations of Seller .   The obligations of Seller under this Agreement to consummate the transactions contemplated hereby will be subject to the satisfaction, at or prior to the Closing, of all the following conditions, any one or more of which may be waived at the option of Seller:

 

(a)           No Breach of Covenants; True and Correct Representations and Warranties .   There shall have been no material breach by Buyer in the performance of any of the covenants herein to be performed by it in whole or in part prior to the Closing, and the representations and warranties of Buyer contained in this Agreement, if specifically qualified by materiality, shall be true and correct in all respects as of the date hereof and as of the Closing Date and, if not so qualified, shall be true and correct in all material respects as of the date hereof and as of the Closing Date, except for representations or warranties that are made by their terms as of a date specified by month, day and year, which shall be true and correct or true and correct in all material respects, as applicable, as of such specified date.  Seller shall receive at the Closing a certificate dated as of the Closing and executed on behalf of Buyer, certifying in such detail as Seller may reasonably require, the fulfillment of the foregoing conditions, and restating and reconfirming as of the Closing all of the covenants, representations and warranties of Buyer contained in this Agreement, specifying in detail the extent of any breaches thereof.

 

(b)           No Legal Obstruction .   Except as is otherwise contemplated by the Bankruptcy Case, no suit, action or proceeding not disclosed in this Agreement by any person, entity or governmental agency shall be pending or threatened in writing, which could reasonably be expected to have a material adverse effect upon (i) Buyer or (ii) the benefits to Seller of the transactions contemplated hereby.  No injunction, restraining order or order of any nature shall have been issued by or be pending before any court of competent jurisdiction or any governmental agency challenging the validity or legality of the transactions contemplated hereby or restraining or prohibiting the consummation of such transactions or compelling the disposition of or discontinue or materially restrict the operations of a significant portion of Buyer.

 

(c)           Cure of Defaults .  Buyer shall have satisfied its obligations, if any, under Section 1.6 .

 

(d)           Sale Order .  The Sale Order shall have been entered, shall be in form and substance reasonably satisfactory to Buyer, and shall have each become a Final Order; provided , however , that Buyer will use its reasonable efforts to consummate the transactions contemplated hereby under circumstances where an appeal of the Sale Order is pending, no stay has been obtained, and Buyer reasonably believes that closing the transaction will moot any such appeal(s).  Any other orders of the Bankruptcy Court with respect to this Agreement shall be in form and substance reasonably satisfactory to Buyer.

 

6.3            Waiver of Conditions .  Buyer may unilaterally waive any of the conditions to closing set forth in Section 6.1 of this Agreement.  Seller may unilaterally waive any of the condition to closing set forth in Section 6.2 of this Agreement.

 

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ARTICLE 7

 

BANKRUPTCY ACTIONS

 

7.1            Commencement of the Case.   Seller shall file voluntary petitions under chapter 11 of the Bankruptcy Code as soon as practicable after the execution of this Agreement, but no later than five (5) days thereafter.

 

7.2            Bankruptcy Court Approvals .

 

(a)            As soon as practicable following the Petition Date, Seller shall file with the Bankruptcy Court and serve motions seeking (the “ Sale Motion ”): (i) a hearing before the Bankruptcy Court on an expedited basis (the “ Initial Hearing ”) for an order (the “ Bid Procedures Order ”) approving, among other things, (A) procedural matters related to the transactions contemplated hereby (including the process by which higher and better offers to purchase the Assets may be presented to the Seller), (B) the Seller’s obligations with respect to the Buyer protections described in this Article 7, (C) the adequacy of notice to creditors and parties in interest of the final hearing to approve the sale of the Assets and the assumption of the Assumed Liabilities (the “ Sale Hearing ”) and (D) setting a date for the Sale Hearing; and (ii) an order (the “ Sale Order ”) authorizing, among other things, (A) Seller to sell the Assets to Buyer pursuant to this Agreement and Sections 363 and 365 of the Bankruptcy Code, free and clear of all interests in or to the Assets within the meaning of Bankruptcy Code Section 363(f), and otherwise free and clear of all other liens, encumbrances, claims and liabilities, except for the Assumed Liabilities, and (B) Buyer to assume the Assumed Liabilities and Seller to be relieved of liability therefrom.

 

(b)            Seller shall request an expedited hearing on shortened notice to cause the Initial Hearing on the Sale Motion to be held as soon as ten (10) Business Days, but no later than twenty (20) Business Days after the Petition Date, and shall on the Petition Date serve a notice of the Sale Motion, the Sale Motion, the proposed form of the Bid Procedures Order and the request for an expedited hearing date by first-class mail, postage prepaid, upon:  all Persons known to have expressed an interest in a transaction with respect to the Assets or a portion thereof during the past six (6) months; all entities known to have asserted any Encumbrance or interest in the Assets or Assigned Agreements; all non-Seller parties to the Assigned Agreements; the United States Trustee; any Governmental Unit that may have a claim in the Bankruptcy Case, and the twenty largest unsecured creditors identified by Seller in its chapter 11 petition.  The Seller shall use reasonable efforts to cause the Bankruptcy Court to enter the Bid Procedures Order as promptly as practicable but no later than three (3) Business Days after the commencement of the initial hearing on the Sale Motion.

 

(c)            Bid Procedures Order .  The Bid Procedures Order shall provide, among other things, that:

 

(i)             Within two (2) Business Days after the entry of the Bid Procedures Order (the “ Mailing Date ”), the Seller shall serve a copy of the Bid Procedures Order and a notice of sale, approved by the Bankruptcy Court by first-class mail, postage prepaid, upon:  all Persons known to have expressed an interest in a transaction with respect to the Assets or a portion thereof during the past six (6) months; all entities known to have asserted any Encumbrance or interest in the Assets; all non-Seller parties to the Assigned Agreements; the United States Trustee; and counsel to an Official Creditors’ Committee, if one has been appointed (or if no counsel has been

 

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retained, then on the members of such committee); all other known creditors and equity security holders of the Seller; all Persons that have requested special notice in the Bankruptcy Case; and all other Persons as directed by the Bankruptcy Court;

 

(ii)            On or before the Mailing Date, the Seller shall serve on all non-Seller parties to the Assigned Agreements a notice of cure amount (the “ Cure Notice ”) stating as to each the Cure Amount necessary, if any, to cure defaults and compensate the non-Seller party under Section 365 of the Bankruptcy Code in order for the Seller to assume and assign the Assigned Agreements.  The non-Seller party to an Assigned Agreement shall have until 4:00 p.m. Central Time five (5) Business Days prior to the Sale Hearing (the “ Contract Objection Deadline ”) to file with the Bankruptcy Court and serve its objection on any grounds to the assumption or assignment of any Assigned Agreement to which it is a party or to the amount or terms of payment of the Cure Amount, and shall state the grounds for its objection with specificity (with appropriate documentation in support thereof), including what alternative Cure Amount it contends is required.  Such objections shall be served so as to be actually received by counsel for the Seller and counsel for the Buyer on or before the Contract Objection Deadline.  If no objection is timely received, the Cure Amount set forth in the Cure Notice shall be controlling, notwithstanding anything to the contrary in any Assigned Agreement or any other document, and each non-Seller party to an Assigned Agreement that has received actual or constructive notice of the Cure Objection Deadline shall be deemed (x) to have waived and released any right to assert an objection to the Cure Amount set forth in the Cure Notice and (y) to have consented to the assumption and assignment of such Assigned Agreement to the Buyer, and shall be forever barred from asserting any other claims against the Seller or its bankruptcy estate, the Buyer, or the property of either of them, with respect to such Assigned Agreements as to amounts (other than the Cure Amount set forth in the Cure Notice) that were due or defaults that existed or other performance that was due from the Seller under such Assigned Agreements prior to the Closing.  At the Sale Hearing, the Court will consider and resolve any objections to assumption and assignment of the Assigned Agreements, including objections to the Cure Amounts or to the provision of adequate assurance of future performance that were timely raised by the non-Seller party;

 

(iii)           The Buyer Termination Fee (as defined in Section 7.4 ) is approved and shall be afforded administrative expense priority status pursuant to Section 503(b)(1)(A) of the Bankruptcy Code, and shall be authorized and directed to be paid at the time and under the circumstances set forth in this Agreement;

 

(iv)           Each prospective bidder (each a “ Potential Bidder ”) must deliver to the Seller (x) financial statements, financing commitments or other satisfactory evidence which the Seller determines may be necessary to demonstrate the Potential Bidder’s ability to perform if its bid is accepted and (y) an executed confidentiality agreement in form and substance satisfactory to the Seller and substantially similar to the confidentiality agreement previously entered into between Buyer and the Company.  After a Potential Bidder delivers all such materials and the executed confidentiality agreement, the Seller shall determine whether the Potential Bidder has demonstrated the financial capacity to consummate the purchase of the Assets and to be otherwise reasonably likely to be able and willing to consummate the contemplated transactions and, if, so, shall designate the Potential Bidder as a “ Qualified Bidder .”  The Seller shall promptly notify the Buyer of the identity of any Qualified Bidder;

 

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(v)            The Seller shall make available to each Qualified Bidder the form of purchase agreement which must be used to make a Qualified Bid (the “ Form Agreement ”), which form shall be substantially similar to and in no material term shall it differ from this Agreement and shall be the template used by such Qualified Bidder in submitting a bid;

 

(vi)           A “ Qualified Bid ” is a written contract offer signed by a Qualified Bidder and received by the Seller no later than 4:00 p.m. Central Time on the date that is four (4) Business Days prior to the date of the Sale Hearing (the “ Qualified Bid Deadline ”) and satisfies all of the requirements set forth in this Clause (vi).  Such offer must be in the form of and substantially the same in all material respects as the Form Agreement, and accompanied by a black-lined version showing changes from the Form Agreement, which changes must be immaterial and acceptable to the Seller; provided, however, that such offer must require the parties to consummate the transactions on the same timing as set forth in this Agreement, and may not be subject to any representations, warranties, covenants, contingencies or conditions that are not set forth in this Agreement, including any financing, diligence, board approval or similar contingencies or conditions.  Such offer shall specify the purchase price that the Qualified Bidder proposes, which shall be payable entirely (x) in cash at least equal to $7,850,000 (the sum of the Purchase Price, the Buyer Termination Fee, and $125,000), and (y) in the assumption of liabilities equal to or greater than those to be undertaken by the Buyer under the Assigned Agreements (the “ Minimum Overbid ”).  The Seller shall promptly provide the Buyer and any other Qualified Bidder with copies of all Qualified Bids.  In order to be a Qualified Bid, such offer must be accompanied by a cash deposit equal to or greater than 5% of the cash consideration set forth in such bid (such deposited amount, the “ Bid Deposit ”) in immediately available funds as “earnest money” which shall be deposited in an escrow account under an escrow agreement with an escrow agent, on terms and conditions substantially similar to the terms contained in this Agreement.  If such Qualified Bidder’s bid is not approved as the Successful Bid at the Sale Hearing, the Bid Deposit plus accrued interest will be returned to such Qualified Bidder;

 

(vii)          If the Seller receives at least one (1) Qualified Bid prior to the Qualified Bid Deadline, then the Seller shall notify the Buyer and any Qualified Bidder who has submitted a Qualified Bid prior to the Qualified Bid deadline that the Seller shall consider at an auction to be held at the offices of the Company or such other location in Nashville, TN as may be specified , subject to such reasonable rules and regulations as may be established by Seller’s counsel, at 10:00 a.m. Central time two (2) Business Days prior to the Sale Hearing, any bids that may be submitted by the Buyer or a Qualified Bidder.  Only the Buyer and Qualified Bidders that have submitted Qualified Bids prior to the Qualified Bid Deadline may participate at the auction.  Copies of all Qualified Bids shall be provided to Buyer and any other Qualified Bidder at least two (2) Business Days before the auction.  The Seller at the commencement of the auction shall identify the bid that they have deemed the highest and best offer. The Seller shall permit the Buyer and Qualified Bidders to submit subsequent bids, provided that each subsequent bid must exceed the amount of the preceding bid by not less than $125,000.  In determining the amount of any subsequent bid by the Buyer, credit in the amount of the Buyer Termination Fee shall be given. The Seller, subject to oversight and approval by the Bankruptcy Court, shall supervise the bidding process and conduct the bidding in such a manner to provide the Buyer and Qualified Bidders fair and equal opportunity to participate in the auction. When the Seller has reasonably determined that the bidding process is concluded, then the Seller shall determine which bid (that is in compliance with the requirements of clause (vi)) is to be recommended to the Bankruptcy Court for approval.

 

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The Bankruptcy Court shall at the Sale Hearing authorize the Seller to complete a sale to the highest and best bid (the “ Successful Bid ”); and

 

(viii)         If the Seller does not receive at least one (1) Qualified Bid prior to the Qualified Bid Deadline, then no auction shall be scheduled or conducted, and the Bankruptcy Court at the Sale Hearing shall proceed solely to consider approval of this Agreement and the transactions contemplated herein and will not consider any competing or alternative offers or proposals to purchase assets from the Seller, nor shall the Bankruptcy Court consider any objections to the Sale Motion that are based on the existence or potential for other or different offers or proposals to purchase the Seller’s assets.

 

(d)            Sale Order .  The Seller shall request a Sale Hearing, such hearing to be regularly noticed under applicable rules of procedure, to be held as soon as thirty (30), but no later than ninety (90) days, after the Petition Date, and shall on the Petition Date serve a notice of the Sales Motion, the proposed form of the Sale Order and the date of the Sale Hearing by first-class mail, postage prepaid, upon: all Persons known to have expressed an interest in a transaction with respect to the Purchased Assets or a portion thereof during the past six (6) months; all entities known to have asserted any Encumbrance or interest in or upon the Assets or Assigned Agreements; all non-Seller parties to the Assigned Agreements; the United States Trustee; and the twenty (20) largest unsecured creditors identified by Seller in its chapter 11 petition. The Seller shall use all reasonable efforts to cause the Bankruptcy Court to enter the Sale Order as promptly as practicable, but in no event later than three (3) Business Days after the commencement of the Sale Hearing.

 

(i)             The Sale Order shall provide, among other things, that:

 

(A)           The Sale Motion is granted and the sale of the Assets (including the assumption and assignment of the Assigned Agreements), in accordance with the terms and conditions of this Agreement, is approved.  The sale of the Assets is necessary, essential and appropriate under the circumstances of the Seller’s bankruptcy estate, which (together with the Seller’s creditors) would suffer immediate and irreparable harm if the Seller were not permitted to sell the Assets (including assumption and assignment of the Assigned Agreements) at this time.  The transactions contemplated by this Agreement are permissible under Sections 363 and 365 of the Bankruptcy Code, and do not amount to a sub rosa plan of reorganization.  The Seller has engaged in fair and reasonable marketing, advertising and other sale efforts and procedures in connection with the transactions, both before and after the Petition Date, and has complied with the Bid Procedures Order.

 

(B)            The Sellers have obtained a fair and reasonable price for the Assets.

 

(C)            Notice of the Sale Motion was appropriate and adequate in the circumstances and complied in all respects with the requirements of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the Local Bankruptcy Rules for the Bankruptcy Court and the Bid Procedures Order, and is approved.  No further notice of, or hearing on the Sale Motion is required.  Adequate notice of and an opportunity to be heard with respect to the Sale Motion has been given to all parties in interest, including all Persons claiming any interest in or Lien on the

 

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Assets, including landlords under any Assumed Leases, non-Seller parties to any Assigned Agreements and governmental taxing authorities that may, as a result of the transactions authorized hereby have claims, whether contingent, unliquidated, unknown or otherwise.

 

(D)           The Assets (including the Assigned Agreements) will be sold to the Purchaser free and clear of all Encumbrances, and of any other interests in the Assets because, in each case as appropriate, the requirements of Section 363(f) of the Bankruptcy Code have been satisfied.  The sale free and clear and the assumptions and assignments shall be self-executing and neither the Seller nor the Buyer shall be required to execute or file releases, termination statements, assignments, consents or other instruments in order to effectuate the sale of the Assets free and clear, or to bind the non-Seller parties to the assumption and assignment of the Assigned Agreements.  Any Encumbrances and other interests in the Seller’s interest in the Assets shall attach to the proceeds from the sale in the order of their priority, with the same validity, force and effect which they now have against the Assets.

 

(E)            The Assigned Agreements to be assumed and assigned under this Agreement and the Sale Order shall be in full force and effect, with no oral or other modifications or waivers thereof, and all payments due there under are current.  If the Closing occurs, the Buyer shall pay the portion of the Cure Amounts, if any, due under Section 1.6 of this Agreement.  If the Closing occurs, the Seller, not the Buyer, shall be solely responsible for satisfying any other obligations that accrue before the Effective Time under the Assigned Agreements, and the Buyer, not the Sellers, shall be solely responsible for satisfying any obligations accruing there under after the Effective Time.   Subject to Section 7.5 herein, no consents are necessary for the assumption and assignment of any of the Assigned Agreements, and the assumption and assignment of each of the Assigned Agreements shall be effective at the Closing notwithstanding any provisions therein or in applicable law that restrict the assignability thereof.

 

(F)            This Agreement was proposed, negotiated and entered into by the Sellers and the Purchaser without collusion, in good faith and from arms’-length bargaining positions.

 

(G)            The terms and conditions of the transactions set forth in this Agreement are approved, this Agreement and the other Sale Documents (when executed) will constitute valid and binding agreements of the Seller, enforceable against them in accordance with their terms, and the Seller is authorized, empowered and directed to take all such action as may be necessary or appropriate to consummate the transactions, all without further order of the Bankruptcy Court.

 

(H)           The Bankruptcy Court shall retain jurisdiction to implement and enforce the terms of this Agreement and the Sale Order, including the terms on which the Assigned Agreements are assumed and assigned.  The Buyer has furnished adequate assurance of future performance.

 

(I)             No bulk sales law or any similar law of any state or other jurisdiction shall apply in any way to the transactions authorized herein.

 

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(J)             The Sale Order is a final, appealable order, which shall be effective immediately upon entry, except to the extent stayed by its terms.  The ten (10) day stay of the Sale Order, as provided in Rule 6004(h) and 6006(d) or any other Rule of the Federal Rules of Bankruptcy Procedure, shall not apply.  Absent judicial imposition of a stay of the Sale Order pending appeal, the Seller and the Buyer may immediately consummate the Transactions approved hereby, notwithstanding whether an appeal of the Sale Order is pending at any time.

 

7.3            Time Periods .  Subject to Section 8.1 , any of the time periods set forth in Sections 7.2(b)  and (d)  may be extended for a period aggregating not more than fifteen (15) calendar days as a result of delays in scheduling or conduct of court hearings that arise, notwithstanding the reasonable efforts of the Seller, due to the lack of availability of a hearing date on the calendar of the Bankruptcy Court or extensions or continuances granted by the Bankruptcy Court at the request of third parties.

 

7.4            Payment of Termination Fee .

 

(a)            Subject to approval of the Bankruptcy Court, if a Qualified Bid submitted in accordance with the Bid Procedures Order is approved by Order of the Bankruptcy Court and Buyer is not in breach under this Agreement, the Buyer shall be paid a termination fee of Two Hundred Twenty-five Thousand Dollars ($225,000) (the “ Buyer Termination Fee ”).  Similarly, Buyer shall pay Seller a termination fee equal to the amount of the Deposit (the “ Seller Termination Fee ”) in the event Seller has satisfied its conditions to closing under the Agreement (or is prevented from doing so by Buyer’s actions) and Buyer fails to close the transactions contemplated by this Agreement.  Payment of the Seller Termination Fee to Seller by Buyer shall constitute liquidated and agreed damages in respect of this Agreement and the transactions contemplated by this Agreement, and Buyer shall have no further liability to Seller.  Seller believes that it is impossible to determine accurately the amount of all damages that Seller would incur by virtue of a breach by Buyer of its obligations to proceed with the transactions contemplated by this Agreement, and its sole and exclusive remedy for any such breach shall be to receive payment of the Seller Termination Fee.  Buyer’s obligation to pay the Seller Termination Fee to Seller shall be discharged upon the release to Seller from the escrow described in Section 2.8 of the full amount of the Deposit.  If this Agreement is terminated for any reason that does not result in the payment of the Seller Termination Fee, the Deposit shall be released from escrow and refunded to Buyer not later than five (5) business days following such termination.

 

(b)            Payment of the Buyer Termination Fee to Buyer shall (i) be full consideration for the Buyer’s efforts and expenses in connection with the bidding process, this Agreement and the transactions contemplated hereby, including the due diligence efforts of the Buyer and its professionals and advisors and (ii) constitute liquidated and agreed damages in respect of this Agreement and the transactions contemplated by this Agreement, and Seller shall have no further liability to Buyer.  Buyer believes that it is impossible to determine accurately the amount of all damages that Buyer would incur by virtue of a breach by Seller of its obligations to proceed with the transactions contemplated by this Agreement, and its sole and exclusive remedy for any such breach shall be to receive payment of the Buyer Termination Fee.  Except as provided in this Section 7.4 , Buyer shall have no right nor remedy against Seller, at law or in equity, by reason of a breach by Seller of its obligation to proceed with the transactions contemplated by this Agreement.

 

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(c)            The Buyer Termination Fee shall be afforded administrative expense priority status pursuant to Section 503(b)(1)(A) of the Bankruptcy Code and shall be paid upon the earlier of (i) the closing of the transactions contemplated by an accepted Qualified Bid and (ii) entry of any Order of the Bankruptcy Court directing payment by Seller of such amounts.

 

(d)            Notwithstanding anything contained in this Agreement to the contrary, no Buyer Termination Fee or Seller Termination Fee shall be payable to any party to this Agreement if such party is in material breach of any provision of this Agreement.

 

7.5            Adequate Assurance of Future Performance; Cooperation .   The Buyer shall be responsible for providing evidence and argument in support of the Sale Motion in order to establish its ability to provide “adequate assurance of future performance” (within the meaning of Section 365(f)(2)(B) of the Bankruptcy Code) of each Assigned Agreement.  The Seller agrees to use commercially reasonable efforts to cooperate with the Buyer in the presentation of such evidence and argument. The Bankruptcy Court’s refusal to approve the assumption by the Buyer of any Assigned Agreement on the grounds that “adequate assurance of future performance” by the Buyer of such Assigned Agreement has not been provided shall not constitute grounds for termination pursuant to Section 8.1 hereof.  In addition, the Buyer shall reasonably cooperate with the Seller in the Seller’s efforts to obtain the approval of the Sale Motion.

 

ARTICLE 8

 

TERMINATION RIGHTS; CLOSING DELIVERIES

 

8.1            Termination of Agreement .   The parties may terminate this Agreement and the transactions contemplated hereby may be abandoned at any time prior to the Closing:

 

(a)            by mutual written consent of each of Seller and Buyer at any time prior to the Closing;

 

(b)            by Seller, if (i) the Bankruptcy Court approves a Qualified Bid (provided, that no termination under this Section 8.1(b)  shall be effective unless and until the Buyer Termination Fee shall have been paid to Buyer);

 

(c)            by Seller, if (i) the Closing shall not have occurred on or prior to the Termination Date (as defined in Section 2.3 ), unless such failure to consummate the transactions herein is the result of a material breach of any representation, warranty, covenant or other agreement contained in the Sale Documents by the Seller, or (ii)  upon written notice to Buyer at any time prior to the Closing, and following written notice thereof and a cure period of five (5) business days thereafter, if Buyer shall have breached any representation, warranty or covenant contained in this Agreement in any material respect;

 

(d)            by Buyer, if (i) the Closing shall not have occurred on or prior to the Termination Date, unless such failure to consummate the transactions herein is the result of a material breach of any representation, warranty, covenant or other agreement contained in the Sale Documents by the Buyer, or (ii)  upon written notice to Seller at any time prior to the Closing, and following written notice thereof and a cure period of five (5) business days thereafter, if Seller shall have breached any representation, warranty or covenant contained in this Agreement in any material respect (provided, however, that (1) for purposes of this Section 8.1(d) , any

 

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representations and warranties of the Seller contained in Article 3 of this Agreement are qualified in their entirety by those qualifications set forth in clauses (i) through (iv) of the introductory paragraph to such Article 3 , and (2) any covenants of the Seller contained in this Agreement are qualified in their entirety by those qualifications set forth in clauses (i) through (iii) of the introductory paragraph to Article 5 );

 

(e)            by either party, upon written notice to the other and following a cure period of three (3) business days, if the Closing has not occurred by 5:00 p.m. Central Time on the day that is two (2) business days following the entry of the Sale Order; provided, that (i) no stay of the Sale Order shall be in effect, (ii) the Sale Order shall contain a waiver of the automatic ten (10) day stay under Rule 6004(h) of the Federal Rules of Bankruptcy Procedure, and (iii) the terminating party is not then in material breach of this Agreement; and

 

(f)             by either party, upon written notice to the other, if (i) the Bid Procedures Order shall not have been entered by the Bankruptcy Court by 5:00 p.m. Central Time on December 31, 2007, or (ii) the Sale Order shall not have been entered by the Bankruptcy Court on or prior to 5 p.m. Central Time on January 31, 2007.

 

8.2            Procedure and Effect of Termination .  In the event that either Buyer or Seller terminates this Agreement pursuant to Section 8.1 , written notice thereof shall forthwith be given to the other parties to this Agreement, specifying the particular provision of Section 8.1 upon which such termination is based, and this Agreement shall terminate (subject to the payment of any Buyer Termination Fee or Seller Termination Fee in accordance with Section 8.1(b) ) and the transactions contemplated hereby shall be cancelled, without further action by any of the parties hereto.  If this Agreement is terminated as provided herein:

 

(a)            upon request therefor, each party shall redeliver (or, at the option of the party holding such documents, destroy the same) all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same; and

 

(b)            no party hereto shall have any liability or further obligation to any other party to this Agreement resulting from such termination except that the provisions of this Section 8.2 shall remain in full force and effect.

 

ARTICLE 9

 

OTHER AGREEMENTS

 

9.1            Cooperation .   Buyer and Seller will, at any time, and from time to time, after the execution of this Agreement, execute and deliver such further instruments of conveyance and transfer and take such additional action as may be reasonably necessary to effect, consummate, confirm or evidence the transactions contemplated by this Agreement and the other Sale Documents (including the exercise of good faith in the Bankruptcy Case and related proceedings).

 

9.2            Risk of Loss Seller assumes all risk of loss due to fire or other casualty up to the Effective Time and Buyer shall assumes all risk of loss subsequent to the Effective Time.

 

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9.3            Apportionment .   Any unpaid rents, taxes, assessments, common area maintenance charges, expenses and other charges (“ Unpaid Charges ”) for which Seller is directly or indirectly responsible and which relate to the Restaurant Sites for periods both before and after the Effective Time shall be prorated between Seller and Buyer on a daily basis, with Seller responsible for payment of all such Unpaid Charges allocable to the time period up to and including the Effective Time and with Buyer responsible for payment of all such Unpaid Charges allocable to the time period thereafter.  Seller and Buyer agree that all such Unpaid Charges (except to the extent reasonably disputed) shall be paid in full by either Seller or Buyer, as the case may be, within sufficient time to prevent any taxing agency or other creditor from making any claim.  If Seller or Buyer pays any Unpaid Charges in full in accordance with the preceding sentence, the other shall promptly reimburse its pro rata portion to the paying party upon receipt of written notice of the fact and amount of such payment (subject, in Seller’s case, to the approval of the Bankruptcy Court).  Buyer agrees to reimburse Seller for any Prepaid Charges, including prepayments of rents, security deposits (but only to the extent of the aggregate amount of security deposits with respect to which the estoppel certificates for the lease to which the security deposit relates states that no claim then exists against such deposits), taxes, expenses and other charges made by Seller to the extent and in the proportion that such Prepaid Charges are retained for the benefit of Buyer or relate to periods after the Effective Time.

 

ARTICLE 10

 

DEFINITIONS

 

For purposes of this Agreement, the following terms have the meaning set forth below:

 

Affiliate ” has the meaning ascribed to that term in Rule 405 of the Securities Act of 1933, as amended.

 

Encumbrance ” means, with regard to any asset, a mortgage, deed of trust, pledge, lien, collateral agreement, security interest, claim (including, without limitation, as that term is defined in Section 101(5) of the Bankruptcy Code), security arrangement, liability, encumbrance, accrued but unpaid taxes, tax liens or any other interest of any nature whatsoever in respect of such asset to the fullest extent any such interest can be eliminated under Section 363(f) of the Bankruptcy Code; provided, however, that the term Encumbrance shall not include the rights pursuant to Section 365(n) of the Bankruptcy Code of any licensee under a license of “intellectual property” (as such term is defined in Section 101(35A) of the Bankruptcy Code) or fee interests in real property such as easements or rights of way.

 

Final Order ” means an order or judgment of the Bankruptcy Court which has not been reversed, stayed, modified or amended and is no longer subject to appeal, certiorari proceeding or other proceeding for review or rehearing (giving effect to any reduction or elimination of the appeal period pursuant to an order of the Bankruptcy Court), and as to which no appeal, certiorari proceeding, other proceeding for review or rehearing shall then be pending.

 

Governmental Unit ” means the United States of America; any state; commonwealth; district; territory; municipality or foreign state; and any department, agency or

 

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instrumentality (including but not limited to any regulatory or administrative authority or agency, court or arbitrational tribunal thereof) of the United States of America (but not a United States Trustee while serving as a trustee in a case under the Bankruptcy Code), or any state, commonwealth, district, territory, municipality or foreign state; or other foreign or domestic government.

 

Knowledge ” means the actual knowledge by Craig Barber or Bob Langford in their capacity as officers and directors of Seller.

 

Legal Requirement ” means any federal, state, local, municipal, foreign, international, multinational, or other administrative order, constitution, law, ordinance, principle of common law, regulation, statute, or treaty.

 

Liability ” means, with respect to any Person, any Liability or obligation of such Person of any kind, character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise and whether or not the same is required to be accrued on the financial statements of such Person.

 

Material Adverse Effect ” means an event, change or occurrence which, individually or together with any other event, change, or occurrence, has a material adverse impact on (i) the business conducted by Seller at the Restaurant Sites (taken as a whole), (ii) the ability of Seller to perform its obligations under this Agreement or to consummate the transactions contemplated by this Agreement, or (iii) the Assets taken as a whole.

 

Person ” means any shareholder, individual, corporation, partnership, firm, joint venture, association, joint-stock seller, trust, unincorporated organization, regulatory body or other entity.

 

 “ Release ” means any release, spill, emission, leaking, plumbing, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching, or migration on or into the environment or into or out of any property.

 

 “ Taxes ”  means (whether or not disputed) taxes of any kind, levies or other like assessments, customs, duties, imposts, charges or fees, including, without limitation, income taxes, gross receipts, ad valorem, value added, excise, real property, personal property, occupancy, asset, sales, use, license, payroll, transaction, capital, capital stock, net worth, estimated, withholding, employment, social security, unemployment, unemployment compensation, workers’ compensation, disability, utility, severance, production, environmental, energy, business, occupation, mercantile, franchise, premium, profits, windfall profits, documentary, stamp, registration, transfer and gains taxes, toll charges (for example, toll charges under Sections 367 and 1492 of the Bankruptcy Code), or other taxes of any kind whatsoever, imposed by or payable to the United States, or any state, country, local or foreign government or subdivision, instrumentality, authority or agency thereof or under any treaty, convention or compact between or among any of them, and in each instance such term shall include any interest (including interest on deferred tax liability under Section 453A(c) of the Bankruptcy Code and “look-back” interest under Section 460 of the Bankruptcy Code and similar amounts of interest imposed by the

 

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Bankruptcy Code), penalties, additions to tax or similar charges imposed in lieu of a Tax or attributable to any Tax, other than taxes imposed on or payable by Seller that are, or that are in the nature of taxes that are, based upon, measured by or imposed with respect to capital, net worth, net receipts or net income (including without limitation minimum taxes, tax preference items, alternative minimum taxes, capital gains taxes, excise taxes, personal holding company taxes and excess profits taxes).

 

ARTICLE 11

 

MISCELLANEOUS

 

11.1          Notices, Consents, etc .   Any notices, consents or other communication required to be sent or given hereunder by any of the parties shall in every case be in writing and shall be deemed properly served if (a) delivered personally, (b) delivered by registered or certified mail, in all such cases with first class postage prepaid, return receipt requested, (c) delivered by courier, at the addresses as set forth below or at such other addresses as may be furnished in writing, or (d) delivered by facsimile transmission with confirmation of successful transmission, at the numbers as set forth below or at such other numbers as may be furnished in writing.   Any notice required herein shall be in writing (to the individuals listed in Section 11.1 , unless specified otherwise pursuant to Section 11.1 ) unless specifically permitted to be given orally.  All such notices and communications shall be deemed received upon the actual delivery thereof in accordance with the foregoing.

 

(a)            If to Seller:

 

Barnhill’s Buffet, Inc.

1210 Briarville Road

Madison, TN 37115

Attn:  W. Craig Barber, President

Facsimile:  (615) 277-1220

 

With a copy to Seller’s counsel:

 

The Hancock Law Firm

102 Woodmont Boulevard, Suite 200

Nashville, TN 37205

Attn:  Caldwell Hancock, Esq.

Facsimile: (615) 345-0203

 

(b)            If to Buyer:

 

Star Buffet Management, Inc.

 

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Star Buffet Management, Inc.

1312 N. Scottsdale Road

Scottsdale, AZ 85257

Attn:  Robert E. Wheaton, Chief Executive Officer

Facsimile:  (480) 425-0494

 

With a copy to:

 

CRAIG B. WHEATON

Kilpatrick Stockton LLP

3737 Glenwood Ave., # 400

Raleigh, NC 27612

Attn: Craig B. Wheaton, Esq.

Facsimile:  (919) 510-6115

 

11.2          Severability .  The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision that shall remain in full force and effect and be enforceable to the fullest extent permitted by law.

 

11.3          Amendment and Waiver .   This Agreement may not be amended, modified or waived except by an instrument in writing signed on behalf of each of the parties hereto.

 

11.4          Actions Necessary to Complete Transaction .  Each party will execute all documents and take such other actions as any other party may reasonably request in order to consummate the transactions provided for herein and to accomplish the purposes of this Agreement, provided that Seller’s obligations hereunder shall be subject to any limitations imposed by the Bankruptcy Court or in connection with the Bankruptcy Case.

 

11.5          Counterparts .   For the convenience of the parties, any number of counterparts of this Agreement may be executed by the parties hereto.  Each such counterpart shall be, and shall be deemed to be, an original instrument, but all such counterparts taken together shall constitute one and the same agreement.  Delivery of an executed counterpart of this Agreement by facsimile shall be equally as effective as delivery of the original executed counterpart of this Agreement.

 

11.6          Expenses .   Except as otherwise provided herein, each party to this Agreement agrees to pay its own reasonable costs and expenses incurred or to be incurred in negotiating and preparing this Agreement and in closing and carrying out the transactions contemplated by this Agreement and the other Sale Documents.  Each party will be responsible for their respective Taxes, directly or indirectly attributable to the transactions contemplated by the Agreement.

 

11.7          Governing Law .   This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of Tennessee, without giving effect to provisions thereof regarding conflicts of law.  Each party and each Person claiming hereunder hereby designates the Bankruptcy Court as the only court of proper jurisdiction and venue for any actions or proceedings relating to this Agreement, hereby irrevocably consents to such designation, jurisdiction and venue; and hereby waives any objections or defenses relating to jurisdiction or venue with respect to any action or proceeding initiated in the Bankruptcy Court;

 

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and hereby consents to service of process under the statutes and rules applicable to the Bankruptcy Court.

 

11.8          Headings .   The subject headings of Articles and Sections of this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions.

 

11.9          Incorporation of Schedules and Exhibits .   The Schedules and Exhibits hereto are incorporated into this Agreement and will be deemed a part hereof as if set forth herein in full.  References to “this Agreement” and the words “herein”, “hereof” and words of similar import refer to this Agreement (including the Schedules and Exhibits) as an entirety.  In the event of any conflict between the provisions of this Agreement and any Schedule or Exhibit, the provisions of this Agreement will control.  Capitalized terms used in the Schedules have the meanings assigned to them in this Agreement.  The Section references referred to in the Schedules are to Sections of this Agreement, unless otherwise expressly indicated.

 

11.10        Assignment .  This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned or delegated by Buyer or Seller in any manner whatsoever, whether directly or by operation of law or otherwise, without the prior written consent of the other party.  Any assignment or attempted assignment of all or any portion of this Agreement which is not expressly permitted hereby shall be null and void and of no force or effect.

 

11.11        Entire Agreement .   This Agreement, the other Sale Documents, and the documents, schedules and exhibits described herein or attached or delivered pursuant hereto collectively constitute the sole and only agreement among the parties with respect to the subject matter hereof.  Any agreements, representations or documentation respecting the transactions contemplated by this Agreement, and any correspondence, discussions or course of dealing which are not expressly set forth in this Agreement, the other Sale Documents, or the documents, schedules and exhibits described herein or attached or delivered pursuant hereto or are null and void, it being understood that no party has relied on any representation not set forth in this Agreement, the other Sale Documents or the documents, schedules and exhibits described herein or attached or delivered pursuant hereto.

 

11.12        Third Parties .  Nothing herein express or implied is intended or shall be construed to confer upon or give to any Person or entity, other than the parties to this Agreement and their respective permitted successors and assigns, any rights or remedies under or by reason of this Agreement.

 

11.13        Interpretative Matters Unless the context otherwise requires, (a) all references to Articles, Sections, schedules or exhibits are to Articles, Sections, schedules or exhibits in this Agreement, and (b) words in the singular or plural include the singular and plural, pronouns stated in either the masculine, the feminine or neuter gender shall include the masculine, feminine and neuter, and (c) the term “including” shall mean by way of example and not by way of limitation.

 

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11.14       No Strict Construction The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto.

 

11.15       Time of Essence .  Time is of the essence with respect to this Agreement.

 

11.16       Survival of Representations and Warranties .  All representations and warranties of the parties set forth herein shall not survive the Closing and shall not be of any force or effect thereafter.  Without limiting the foregoing, the parties agree and acknowledge that (a) any representations and warranties of the Seller contained in Article 3 of this Agreement and referenced in this Section 11.16 are qualified in their entirety by those qualifications set forth in clauses (i) through (iv) of the introductory paragraph to such Article 3, and (b) Seller’s liability with respect to representations and warranties made by Seller hereunder are subject to the limitations set forth herein and in Section 8.1.

 

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IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.

 

 

 

BARNHILL’S BUFFET, INC.

 

 

 

 

 

By:

/s/ W. CRAIG BARBER

 

 

Name:

W. CRAIG BARBER

 

 

Its:

PRESIDENT

 

 

 

 

 

 

 

 

STAR BUFFET MANAGEMENT, INC.

 

 

 

 

 

By:

/s/ Robert E. Wheaton

 

 

Name:

Robert E. Wheaton

 

Its:

PRESIDENT

 

 

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SCHEDULES TO ASSET PURCHASE AGREEMENT

 

The following schedules (each a “ Schedule ” and together the “ Schedules ”) to the Asset Purchase Agreement (the “ Agreement ”), dated as of the 2 nd day of December, 2007, by and among Star Buffet Management, Inc., a Delaware corporation (the “ Buyer ”), and Barnhill’s Buffet, Inc., a Tennessee corporation (the “ Seller ”), are incorporated by reference in and made a part of the Agreement.  Capitalized terms used but not defined in the Schedules have the meanings ascribed thereto in the Agreement.

 

Each disclosure in a particular Schedule is made specifically, and a disclosure made in any particular Schedule or section thereof shall not be deemed to have been disclosed in any other section of such Schedule or in any other Schedule.

 

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EXHIBIT A

 

Restaurant Locations

 

1. Huntsville, AL

2. Jonesboro, AR

3. Apopka, FL

4. Leesburg, FL

5. New Port Richey, FL

6. Ocala, FL

7. Tallahassee, FL

8. Warrington, FL

9. Bossier City, LA

10. Monroe, LA

11. Shreveport, LA

12. Columbus, MS

13. Gulfport, MS

14. Jackson, MS

15. Meridian, MS

16. Moss Point, MS

17. Starkville, MS

18. Tupelo, MS

19. Barlett, TN

20. Collierville, TN

21. Jackson, TN

 

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EXHIBIT B

 

Tangible Personal Property

 



 

EXHIBIT C

 

Personal Property Leases; Executory Contract; Additional Contracts

 



 

FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT

 

This First Amendment to the ASSET PURCHASE AGREEMENT (this “ Agreement ”), dated as of December 2, 2007, is by and among BARNHILL’S BUFFET, INC., a Tennessee corporation (the “ Seller or the Company ”) and STAR BUFFET MANAGEMENT, INC., a wholly owned subsidiary of Star Buffet, Inc., a Delaware corporation, (together with any successor and assigns, the “ Buyer ”).

 

RECITALS

 

WHEREAS , the Company and the Buyer entered into the Agreement, such agreement being subject to terms and conditions set forth therein; and

 

WHEREAS , the Company and the Buyer desire to make modifications to certain terms within the Agreement;

 

NOW, THEREFORE , for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows:

 

1.             Section 2.2 of the Agreement is hereby deleted in its entirety and replaced with the following:

 

Purchase Price .  The purchase price for the sale of the Assets shall be $5,000,000.00 in cash (the “Purchase Price”).”

 

2.             Section 2.3 of the Agreement is hereby deleted in its entirety and replaced with the following:

 

Closing .  The “ Closing ” of the transactions contemplated herein, including payment of the Purchase Price, shall take place at the offices of the Company or such other location in Nashville, TN as may be agreed upon, no later February 5, 2008 (the “ Target Date ”) (or such earlier date as Buyer and Seller may mutually agree, the “ Closing Date ”); provided, that no stay of the Sale Order shall be in effect and provided, further, that the Sale Order shall contain a waiver of the automatic ten (10) day stay under Rule 6004(h) of the Federal Rules of Bankruptcy Procedure; provided , further , however , that in no event unless otherwise agreed in writing shall the Closing take place on a date which is after February 12, 2008 (the “ Termination Date ”) .  At the Closing, Buyer shall pay the Purchase Price to Seller by wire transfer of immediately available funds to one or more bank accounts of Seller, or as directed by Seller in accordance with the terms of the Sale Order approved by the Bankruptcy Court.”

 



 

3.              Exhibit A attached to the Agreement is hereby modified to exclude the following Restaurant Locations:

 

  3. Apopka, FL

  6. Ocala, FL

12. Columbus, MS

13. Gulfport, MS

16. Moss Point, MS

 

4.             Capitalized terms used in this Amendment which are not defined in this Amendment shall have the meaning assigned to such term or terms in the Agreement.

 

5.             No other term or terms of the Agreement are changed, altered, modified or amended, except as specifically set forth in this Amendment.  The Agreement, as amended and modified by this Amendment, is hereby ratified and remains in full force and effect.

 

 

IN WITNESS WHEREOF , the parties have executed this Agreement as of January 21, 2008.

 

 

 

BARNHILL’S BUFFET, INC.

 

 

 

By: /s/ W. Craig Barber

 

Name: W. Craig Barber

 

Its: President

 

 

 

 

 

 

 

STAR BUFFET MANAGEMENT, INC.

 

 

 

By: /s/ Ron Dowdy

 

Name: Ron Dowdy

 

Its: Secretary

 


EXHIBIT 23.1

 

Consent of Independent Registered Public Accounting Firm

 

As independent registered public accountants, we hereby consent to the incorporation by reference in Registration Statement Nos. 333-46939 and 333-50767 on Form S-8 of our report dated April 24, 2008, relating to the consolidated financial statements of Star Buffet, Inc. and Subsidiaries as of January 28, 2008 and January 29, 2007 and for each of the three fiscal years in the period ended January 28, 2008, included in the Annual Report on Form 10-K for the year ended January 28, 2008.

 

/s/ MAYER HOFFMAN MCCANN P.C.

 

 

 

Mayer Hoffman McCann P.C.

 

Phoenix, Arizona

April 24, 2008

 


EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Robert E. Wheaton, President and Chief Executive Officer of Star Buffet, Inc., certify that:

 

1. I have reviewed this annual report on Form 10-K of Star Buffet, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.  The registrant’s other certifying officer  (s)and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:

 

a)              designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)             design such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted principles;

 

c)              evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

 

d)             disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

a)              all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

April 24, 2008

/s/ Robert E. Wheaton

 

Robert E. Wheaton

 

President and

 

Chief Executive Officer

 


EXHIBIT 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Ronald E. Dowdy, Group Controller, Treasurer, Secretary and Principal Financial Officer of Star Buffet, Inc., certify that:

 

1. I have reviewed this annual report on Form 10-K of Star Buffet, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

 

4. The registrant’s other certifying officer (s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have:

 

a)              designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,  to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

b)             design such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted principles;;

 

c)              evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

 

d)             disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

a)              all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

April 24, 2008

/s/ Ronald E. Dowdy

 

Ronald E. Dowdy

 

Group Controller,

 

Treasurer, Secretary and

 

Principal Financial Officer

 


EXHIBIT 32.1

 

The following certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will the certification be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Robert E. Wheaton, President and Chief Executive Officer of Star Buffet, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

1.             The accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 28, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

 

2.             The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

April 24, 2008

/s/ Robert E. Wheaton

 

Robert E. Wheaton

 

President and

 

Chief Executive Officer

 

A signed original of the above certification has been provided to Star Buffet, Inc. and will be retained by Star Buffet, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 


EXHIBIT 32.2

 

The following certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section, nor will the certification be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates it by reference.

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Ronald E. Dowdy, Group Controller, Treasurer, Secretary and Principal Financial Officer of Star Buffet, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

1.             The accompanying Annual Report on Form 10-K of the Company for the fiscal year ended January 28, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

 

2.             The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

April 24, 2008

/s/ Ronald E. Dowdy

 

Ronald E. Dowdy

 

Group Controller,

 

Treasurer, Secretary and

 

Principal Financial Officer

 

A signed original of the above certification has been provided to Star Buffet, Inc. and will be retained by Star Buffet, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 


EXHIBIT 99.1

 

Contact:

Robert E. Wheaton

 

President, CEO

 

Star Buffet, Inc.

 

(480) 425-0397

 

FOR IMMEDIATE RELEASE:  Friday, April 25, 2008

 

STAR BUFFET, INC. FILES FORM 10-K FOR FY 2008

 

SCOTTSDALE, AZ – April 25, 2008 – Star Buffet, Inc. (NASDAQ: STRZ) today filed a Form 10-K with the Securities and Exchange Commission for its fiscal year ending January 28, 2008.  Following are the highlights:

 

Star Buffet, Inc. had revenues of $68.7 million and net loss of $2,001,000, or $(0.63) per share on a diluted basis, for the fifty-two weeks ended January 28, 2008.

 

About Star Buffet

 

Star Buffet is a multi-concept restaurant operator.  As of April 25, 2008, Star Buffet, through its subsidiaries, operates 20 Barnhill’s Buffet restaurants, 12 franchised HomeTown Buffets, six JB’s restaurants, five Whistle Junction restaurants, three 4B’s restaurants, three Holiday House restaurants, three Western Sizzlin restaurants, two BuddyFreddys restaurants, two BuddyFreddys Country Buffets, two K-BOB’S Steakhouses, two JJ North’s Grand Buffets, one Pecos Diamond Steakhouse, one Bar-H Steakhouse and one Casa Bonita Mexican theme restaurant.