As filed with the Securities and Exchange Commission on August 16, 2002
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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BUFFETS, INC.
(Exact name of Registrant as specified in its charter)
<Table>
MINNESOTA 5812 41-1462294
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
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1460 BUFFET WAY
EAGAN, MINNESOTA 55121
(651) 994-8608
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
R. MICHAEL ANDREWS, JR.
1460 BUFFET WAY
EAGAN, MINNESOTA 55121
(651) 994-8608
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
JOHN C. KENNEDY, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
212-373-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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<Caption>
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TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
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11 1/4% Senior Subordinated Notes Due
2010............................... $230,000,000 100% $230,000,000 $21,160
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Guarantees of 11 1/4% Senior
Subordinated Notes Due 2010........ N/A N/A N/A N/A(3)
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) of the Securities Act of 1933.
(2) The registration fee has been calculated pursuant to Rule 457(f) under the
Securities Act of 1933.
(3) No additional consideration is being received for the guarantees, and,
therefore no additional fee is required.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
STATE OR OTHER PRIMARY STANDARD IRS
JURISDICTION OF INDUSTRIAL EMPLOYER
INCORPORATION OR CLASSIFICATION IDENTIFICATION
NAME ORGANIZATION CODE NUMBER NUMBER
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Distinctive Dining, Inc. ......................... Minnesota 5812 41-1923069
HomeTown Buffet, Inc. ............................ Delaware 5812 33-0463002
OCB Purchasing Co. ............................... Minnesota 5812 41-1777610
OCB Restaurant Co. ............................... Minnesota 5812 41-1777607
Restaurant Innovations, Inc. ..................... Minnesota 5812 41-1931394
</Table>
The address of each of the additional registrants is 1460 Buffet Way,
Eagan, Minnesota 55121, telephone: (651) 994-8608.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 16, 2002
PROSPECTUS
BUFFETS, INC.
Exchange Offer for $230,000,000
11 1/4% Senior Subordinated Notes due 2010
THE NOTES AND THE GUARANTEES
We are offering to exchange $230,000,000 of our outstanding 11 1/4% Senior
Subordinated Notes due 2010, which were issued on June 28, 2002 and which we
refer to as the initial notes, for a like aggregate amount of our registered
11 1/4% Senior Subordinated Notes due 2010, which we refer to as the exchange
notes. The exchange notes will be issued under an indenture dated as of June 28,
2002.
The exchange notes will mature on July 15, 2010. We will pay interest on
the exchange notes on January 15 and July 15, beginning on January 15, 2003.
The exchange notes are fully and unconditionally guaranteed on a senior
subordinated unsecured basis by some of our subsidiaries: Distinctive Dining,
Inc., HomeTown Buffet, Inc., OCB Purchasing Co., OCB Restaurant Co. and
Restaurant Innovations, Inc.
The exchange notes are subordinated to certain of our senior indebtedness,
including debt under our new credit facility, and effectively subordinated to
any secured debt and to any indebtedness of our subsidiaries that are not
guarantors. As of April 24, 2002, on a pro forma basis, after giving effect to
the Refinancing Transactions described in "Prospectus Summary," we and our
subsidiaries had approximately $254.5 million of senior indebtedness outstanding
that will rank effectively senior to the exchange notes. We currently have no
subordinated debt outstanding, other than the initial notes.
TERMS OF THE EXCHANGE OFFER
- It will expire at 5:00 p.m., New York City time, on 2002,
unless we extend it.
- If all the conditions to this exchange offer are satisfied, we will
exchange all of our outstanding initial notes, that are validly tendered
and not withdrawn for exchange notes.
- The exchange notes that we will issue you in exchange for your initial
notes will be substantially identical to your initial notes except that,
unlike your initial notes, the exchange notes will have no transfer
restrictions or registration rights.
- You may withdraw your tender of initial notes at any time before the
expiration of this exchange offer.
- The exchange notes that we will issue you in exchange for your initial
notes are new securities with no established market for trading.
BEFORE PARTICIPATING IN THIS EXCHANGE OFFER, PLEASE REFER TO THE SECTION IN
THIS PROSPECTUS ENTITLED "RISK FACTORS" COMMENCING ON PAGE 15.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is , 2002.
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TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................... 1
RISK FACTORS.......................... 15
FORWARD-LOOKING STATEMENTS............ 25
USE OF PROCEEDS....................... 26
CAPITALIZATION........................ 28
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL
INFORMATION......................... 29
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL DATA...................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 38
BUSINESS.............................. 48
MANAGEMENT............................ 59
PRINCIPAL SHAREHOLDER................. 62
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................ 63
</Table>
<Table>
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PAGE
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DESCRIPTION OF OTHER INDEBTEDNESS..... 65
THE EXCHANGE OFFER.................... 69
DESCRIPTION OF THE NOTES.............. 77
U.S. FEDERAL INCOME TAX
CONSIDERATIONS...................... 118
PLAN OF DISTRIBUTION.................. 123
LEGAL MATTERS......................... 123
EXPERTS............................... 123
WHERE YOU CAN FIND MORE INFORMATION... 124
INDEX TO FINANCIAL STATEMENTS......... F-1
SUPPLEMENTAL UNAUDITED PRO FORMA
COMBINING CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR FISCAL
YEAR ENDED JANUARY 3, 2001.......... S-1
</Table>
i
PRESENTATION OF FINANCIAL INFORMATION
We recently changed our fiscal year to 52 or 53 weeks ending on the
Wednesday nearest June 30 of each year. Each fiscal year is divided into four
periods of 12, 12, 16 and 12 or 13 weeks. Our fiscal year ended July 3, 2002
consisted of 26 weeks divided into two periods of 16 and 10 weeks. Prior to the
fiscal year ended July 3, 2002, our fiscal year was comprised of 52 or 53 weeks
ending on the Wednesday nearest December 31 of each year, and each fiscal year
was divided into four periods of 16, 12, 12 and 12 or 13 weeks. Fiscal 2002
refers to the 26 weeks ended July 3, 2002; fiscal 2001 refers to the 52 weeks
ended January 2, 2002; fiscal 2000 refers to the 53 weeks ended January 3, 2001;
and fiscal 1999 refers to the 52 weeks ended December 29, 1999.
On October 2, 2000, Buffets Holdings, Inc., a company organized by
Caxton-Iseman Capital, Inc., acquired us in a buyout from public shareholders.
Due to the effects of this transaction on the recorded bases of goodwill,
intangibles, property and shareholders' equity, our financial statements prior
to and subsequent to this transaction are not comparable. Periods prior to
October 2, 2000 represent the accounts of the predecessor. Accordingly, the
historical financial information for fiscal 2000 in this prospectus is presented
in two periods -- the period from December 30, 1999 to October 1, 2000 and the
period from October 2, 2000 to January 3, 2001. The pro forma combining
condensed consolidated statement of operations for the fiscal year ended January
3, 2001 reflects adjustments to give effect to the buyout from public
shareholders as if that transaction was completed on the first day of that
fiscal year. Management believes that the pro forma financial information is
particularly informative because it provides the pro forma annualized debt
burden impact of the transaction.
In this prospectus, EBITDA represents earnings before net interest expense,
taxes, depreciation, amortization, acquisition-related costs and non-cash
deferred rental expense. Adjusted EBITDA presented in this prospectus reflects
the pro forma effect of a sale and leaseback transaction relating to 24
restaurants committed to and substantially completed in late fiscal 2001.
We believe EBITDA and adjusted EBITDA are key financial measures. However,
they should not be construed as alternatives to operating income or cash flow
from operating activities as determined in accordance with accounting principles
generally accepted in the United States. We believe that EBITDA and adjusted
EBITDA are useful supplements to net income and other income statement data in
understanding cash flows generated from operations that are available for taxes,
debt service and capital expenditures. However, the EBITDA and adjusted EBITDA
measures presented below are not comparable to similarly titled measures of
other companies.
INDUSTRY AND MARKET DATA
Industry and market data used throughout this prospectus were obtained
through company research, surveys and studies conducted by third parties and
industry and general publications. We have not independently verified market and
industry data from third-party sources. While we believe internal company
surveys are reliable and market definitions are appropriate, neither these
surveys nor these definitions have been verified by any independent sources.
TRADEMARKS
We have proprietary rights to a number of trademarks important to our
business, including Old Country Buffet(R), HomeTown Buffet(R), Original
Roadhouse Grill(R), Granny's Buffet(R), Country Roadhouse Buffet & Grill(R),
Tahoe Joe's Famous Steakhouse(R), Country Buffet(R) and Soup 'N Salad
Unlimited(SM). All other trademarks or service marks referred to in this
prospectus are the property of their respective owners and are not our property.
ii
PROSPECTUS SUMMARY
The following summary highlights significant information in this prospectus
about Buffets, Inc. and the exchange offer. This summary is not complete and may
not contain all of the information that is important to you. You should read
this entire prospectus carefully, including the "Risk Factors" section and the
financial statements and notes to those financial statements contained in this
prospectus. Unless the context indicates or requires otherwise, (i) the terms
"Buffets," "we," "our" and "company" refer to Buffets, Inc., the issuer of the
notes, and its subsidiaries and (ii) the terms "parent company" and "Buffets
Holdings" refer to Buffets Holdings, Inc., our sole shareholder. The term
"initial notes" refers to the 11 1/4% Senior Subordinated Notes due 2010 that
were issued on June 28, 2002 in a private placement. The term "exchange notes"
refers to the 11 1/4% Senior Subordinated Notes due 2010 offered by this
prospectus. The term "notes" refers to the initial notes and the exchange notes,
collectively. The term "Refinancing Transactions" refers to our offering of
initial notes, the entering into of our new credit facility, the repayment of
all amounts outstanding under our former credit facility, the redemption of all
of our 14% senior subordinated notes due September 29, 2008, the redemption of
all of Buffets Holdings' 16% senior subordinated notes due September 29, 2008,
the payment of related prepayment fees, the distribution to our sole shareholder
and the payment of certain fees and expenses relating to these transactions, all
of which were completed on June 28, 2002.
OUR COMPANY
We are one of the largest restaurant operators in the United States and the
leader in the buffet/ cafeteria segment of the restaurant industry, as measured
in both sales and number of restaurants. Our restaurants are principally
operated under the names Old Country Buffet and HomeTown Buffet. As of April 24,
2002, we had 396 company-owned restaurants and 23 franchised locations in 39
states. We offer excellent customer service, together with a convenient,
value-priced selection of home-style cooked meals in a self-service buffet
format. Either Old Country Buffet or HomeTown Buffet has been ranked the #1 or
#2 restaurant chain for best value since 1992, according to surveys conducted by
Restaurants and Institutions magazine. We have been able to achieve consistent
profitable growth over the past 18 years and grow comparable store sales for 19
consecutive quarters since July 1997, except for the quarter ended July 3, 2002
in which comparable store sales were down 0.5%. For the 52 weeks ended April 24,
2002, we served over 150 million customers and generated net sales of over $1.0
billion and adjusted EBITDA of $124.6 million.
We maintain a high level of food quality and service in all of our
restaurants through uniform operational standards initiated at the corporate
level. Freshness is maintained by preparing food in small batches of six to
eight servings at a time, with preparations scheduled by monitoring current
customer traffic and applying our food production forecasting model. Our buffet
restaurants utilize uniform menus, recipes and ingredient specifications, except
for minor differences relating to regional preferences. We offer approximately
90 menu items at each meal, including entrees, soups, salads, fresh vegetables,
non-alcoholic beverages and desserts. Typical entrees include chicken, carved
roast beef, ham, shrimp, fish and casseroles.
Our buffet restaurants use an all-inclusive pricing strategy designed to
provide an exceptional dining value. As of January 2, 2002, the meal price at
our buffet restaurants for dinner ranged from $7.99 to $9.39 and for lunch from
$5.99 to $6.70, with discounts offered to senior citizens and children. The
average guest check in our buffet restaurants was $6.64 for fiscal 2001. In
order to further enhance our guests' dining experience, we have focused on
providing a level of customer service designed to supplement the self-service
buffet format, including such features as limited table-side service and our
scatter bar format.
Our buffet restaurants average approximately 10,000 square feet in size and
can seat between 225 and 400 people. On average, our buffet restaurants serve
approximately 7,500 customers per week. While we attract a broad variety of
customers, including singles, families and senior citizens, our customer surveys
1
indicate that approximately two-thirds of our guests are married and over half
are between the ages of 25 and 54 years old (the largest segment of the
population within the United States).
We have a national footprint of restaurant locations, which are
strategically concentrated in particular regions in order to maximize
penetration within those markets and achieve operating and advertising
synergies. For example, our advertising and marketing programs in 63 designated
market areas provided media coverage for 79% of our buffet restaurants in fiscal
2001. In addition, our restaurants are located in high customer traffic venues
and include both freestanding units as well as units located in strip shopping
centers and malls. As of April 24, 2002, 67% of our restaurants were located in
strip shopping centers or malls and 33% were freestanding units.
INDUSTRY OVERVIEW
The restaurant industry is among the largest industries in the United
States and has recorded ten consecutive years of real growth. According to
Technomic Information Services, an independent research organization, the
restaurant industry has grown at an average annual rate of 8.3% since 1972. In
2001, the industry grew by an estimated 2.9% to $252 billion. Technomic expects
the restaurant industry will reach $345 billion by 2005. We operate in the $4.4
billion buffet/cafeteria segment within the restaurant industry, which has grown
at a compound annual growth rate of 3.1% since 1992. Technomic expects the
buffet/cafeteria segment to grow at a compound annual growth rate of 4.0% over
the next five years to $5.3 billion. Within this segment, the buffet concept, of
which we are the largest participant, has experienced higher growth than the
cafeteria concept. The buffet concept has grown at a compound annual growth rate
of 10.0% since 1992. With sales of over $1.0 billion in fiscal 2001, we are the
leader of this segment.
The growth in the restaurant industry, and the buffet segment in
particular, has been driven by the increasing demands for dining ease and
convenience among today's consumers. The restaurant industry's portion of the
total food industry's dollar has grown significantly in the past two decades.
According to Technomic, the restaurant industry's share of total food sales has
increased from 23% in 1980 to approximately 30% in 2000. This growth is expected
to continue as a result of several key lifestyle and demographic trends,
including the continued increase in spending on food away from the home and on
restaurant dining and the continued growth in disposable incomes and key age
groups of the population that are frequent guests in our restaurants.
OUR COMPETITIVE STRENGTHS
We believe our leading market position, strong performance in all business
cycles, flexible cost structure, highly trained and motivated employees,
centralized control measures, attractive unit level economics, strong cash flow
and strong management team will allow us to continue to grow sales and increase
profitability.
Leading Market Position with National Scale. We are one of the largest
restaurant operators in the United States and the leader in the buffet/cafeteria
segment of the restaurant industry, as measured in both sales and number of
restaurants. We account for approximately 25% of total sales within this segment
and are nearly twice the size of our nearest competitor. With our large number
of restaurants and centralized corporate management structure, we benefit from
significant operational efficiencies and economies of scale. We are able to
achieve substantial levels of savings as a result of our size and related
purchasing power, particularly with respect to food and beverage goods and real
estate leases for our restaurants.
Strong Performance in All Business Cycles. Our exceptional value
proposition of quality food served fresh at an all-inclusive price has proven to
be a robust business model for all economic environments. We have increased
revenue and sustained profitability over the past 18 years, with record net
income being recorded in 15 of the 17 years prior to our buyout from public
shareholders in October 2000. During the difficult economic conditions of fiscal
2001, we were able to increase average weekly sales per restaurant by 3.3%
compared to the previous fiscal year and expand EBITDA margins to 12.0% for
fiscal 2001 from
2
11.7% in fiscal 2000. We believe our success in a recessionary environment is
based, in part, on the value we offer our customers, as this plays an important
role in consumers' decision-making process.
Flexible Cost Structure. As a buffet style restaurant with a broad
selection of food, we are able to quickly modify our menu in response to changes
in customer preferences and rising food costs. Our total food costs represented
31.4% of our restaurant sales in fiscal 2001, with no individual food product
purchase cost accounting for more than 7.5% of our restaurant sales. In the
event of an increase in the cost of a particular food product, we are able to
highlight other foods in order to reduce consumption of the higher cost item.
Highly Trained and Motivated Employees. Our most important asset is our
people. We believe a well trained and motivated workforce results in lower
turnover, lower operating costs and the ability to consistently grow sales in
existing units. Our general managers have an average of seven years experience
with us. In fiscal 2001, our buffet restaurant general manager turnover was
approximately 14% and total buffet restaurant management turnover was
approximately 23%, which we believe are among the lowest turnover rates in the
industry. We are deeply committed to the long-term development of our employees.
In fiscal 2001, we spent $5.6 million, or over 4.5% of EBITDA, on training and
development. All of our buffet restaurant managers receive extensive training
relating to all aspects of restaurant management at Buffets College, our
training program operated out of our corporate headquarters. We further seek to
reinforce our employees' commitment through targeted retention programs,
including a program that grants cash bonuses to general managers who stay in the
same restaurant for three years. Approximately 72% of our 370 buffet restaurant
general and senior managers currently participate in this program. We also
initiated a program in 1997 under which we reward managers with trips and other
benefits when they exceed specified operating benchmarks. The goal of these
programs is for our restaurant managers to develop a strong tie to their
community and instill a sense of ownership in their particular restaurant.
Centralized Control Measures. We maintain a high level of financial
controls, service and food quality in all of our buffet restaurants through
uniform operational standards initiated at the corporate level. Our centralized
systems enable management to evaluate weekly profit and loss statements, sales
reports and supplier invoices for each buffet restaurant, allowing us to quickly
identify performance trends and key profitability drivers. These systems are
supplemented by several performance audit and evaluation programs, including a
1-(800) guest service line, a secret-shopper evaluation program and detailed
quarterly restaurant performance audits by multi-unit managers. These ongoing
efforts assist management in tracking restaurant performance and customer
satisfaction at the individual restaurant level. Centralized coordination of our
nationwide network of buffet restaurants assures a consistent level of food
quality in our restaurants and enables us to negotiate pricing terms for major
product purchases directly with manufacturers.
Attractive Unit Level Economics. Our existing restaurants generated
average restaurant sales of approximately $2.6 million in 2001 and have
increased average weekly sales at a compound annual growth rate of 2.2% over the
past five years. Our buffet restaurants opened in fiscal 2001 generally became
profitable within eight weeks of opening and generated average annualized sales
of $3.5 million in their first year of operation. The increased sales volume is
due to improved site selection, a focus on freestanding units and expansion
primarily in our core markets, providing operating and marketing synergies. As
measured by cash-on-cash returns, defined as first year cash flow as a
percentage of initial cash investment, our restaurants opened in the last three
years have produced cash-on-cash returns of over 29% in their first year of
operation.
Strong Cash Flow Generation. Our strong operating results and historically
low maintenance capital expenditure and working capital requirements are key
drivers of our strong cash flow. Since 1997, our maintenance capital
expenditures have averaged approximately 1.6% of restaurant sales. We believe
our restaurants are well-maintained and will require a similar level of required
maintenance capital expenditures in the near future. In addition, we typically
generate cash flow from working capital as we receive cash for the majority of
our sales immediately at the point of service. Our new units initially generate
cash flow from working capital of approximately $160,000. As a result of these
factors and our
3
strong operational performance, our buffet restaurants that had been open for at
least 12 months at the beginning of fiscal 2001 generated average cash flow of
$499,000, or 19.4% of sales, in fiscal 2001.
Strong Management Team with Equity Ownership. Over the past 18 years, we
have attracted, built and retained an exceptionally talented and complementary
executive management team with an average of more than 22 years of restaurant
industry experience. Our executive management team has demonstrated strong
restaurant operating capabilities by consistently increasing profitability and
executing a disciplined growth strategy. In addition, our current executive
management team participated in the buyout from public shareholders by making
direct equity investments and has equity ownership of approximately 10% of
Buffets Holdings.
OUR BUSINESS STRATEGY
Our success has been driven by a focus on restaurant level operations and
efficiencies, uniform operational standards initiated at the corporate level and
success in identifying, acquiring and integrating new stores into our
organization. We plan to continue to improve our operating performance through
the principal strategies outlined below:
Continued Focus on Same Store Sales Growth and Margin Expansion. We have
experienced same store sales growth over each of the past 19 quarters since July
1997, except for the quarter ended July 3, 2002 in which same store sales were
down 0.5%. We are continuing to focus on the increase of same store sales growth
and margins through several operational initiatives at the restaurant level.
These initiatives include:
- our service enhancement program, which is designed to reduce our labor
costs while increasing customer service by instituting earned gratuities
as a component of wages, and
- the rollout of selected outsourced procurement and cooking processes
designed to reduce food preparation time and direct labor hours.
Continued Enhancement of Operational Systems. Our centralized financial
and accounting systems allow us to analyze cost, cash management, customer count
and non-financial data to understand key profitability drivers. We see
significant opportunities for further efficiency improvements through our
management information systems, including electronic food ordering, improved
food cost analysis tools and other restaurant data analyses, such as the ability
to monitor all aspects of customer satisfaction and ingredient and supply volume
usage. Improving these systems ensures a continued high level of food quality
and service across our entire nationwide network of restaurants, while providing
management with the tools necessary to monitor performance at each individual
restaurant.
Disciplined New Unit Expansion. We believe there is capacity for a
substantial number of new buffet-style restaurants in the United States. We plan
to slowly expand our new unit growth over the next several years. We strive for
a consistently high return on investments for each proposed restaurant. The
selection of our sites is a critical factor to the success of our restaurants.
We typically utilize the following key criteria for site selection:
- high level of customer traffic,
- convenience to both lunch and dinner customers in our target demographic
groups, and
- low occupancy cost.
We have established a consistent history of steady growth through disciplined
expansion. Recent store openings have outperformed the system average due to
continued focus on high quality real estate selection and operational execution.
New units will primarily be buffet-style restaurants and will be focused
geographically in areas where we believe we can expand our existing presence.
This will allow us to take advantage of advertising and marketing synergies and
increase media brand recognition and operating efficiency. This new unit
development will focus on freestanding buildings, which generated approximately
17% higher sales volumes than our restaurants located in strip shopping centers
or malls during fiscal 2001.
4
Unit Image Enhancement. In an ongoing effort to maintain our appeal among
existing customers and expand our guest base, we are developing an updated
interior and exterior design for our buffet restaurants. This new design is
intended to heighten exterior curb appeal and provide a more visually appealing
and comfortable restaurant interior. In conjunction with the facilities
enhancement, we intend to enhance food delivery and merchandising elements, such
as a feature bar with display cooking and the showcasing of signature food
items. We expect to test the re-design over the next 18 months at a limited
number of restaurants. Depending upon the success of our test units, the
re-design would be implemented at approximately 10% of our existing restaurants
annually over the next several years.
OUR BACKGROUND
We were founded in 1983 to develop buffet-style restaurants under the name
Old Country Buffet. In October 1985, Buffets successfully completed an initial
public offering with seven restaurants, and by 1988 had 47 company-owned units
and nine franchised units. In September 1996, Buffets merged with Hometown
Buffets, Inc., a similar publicly-held scatter-bar, buffet-style restaurant
company established and developed by one of our co-founders. The merger provided
us with additional management expertise and depth, increased purchasing power
and marketing efficiencies. The merger also added 80 company-owned restaurants
in 11 states and 19 franchised restaurants in eight states bringing the total
number of restaurants to 346 company-owned restaurants and 24 franchised
restaurants in 36 states at December 31, 1996. We have successfully achieved
long-term record growth and we have grown revenue and EBITDA at compound annual
growth rates, including acquisitions, of 19.6% and 18.3% from fiscal 1990
through fiscal 2001.
On October 2, 2000, Buffets Holdings, a company organized by Caxton-Iseman
Capital, Inc., acquired Buffets in a buyout from public shareholders.
Caxton-Iseman Investments L.P. and certain other investors, including members of
management, made an equity investment in Buffets Holdings and became the
beneficial owners of 100% of the common stock of Buffets.
Caxton-Iseman Capital is a New York-based private equity investment firm
specializing in leveraged buyouts. The firm's investment vehicles have current
equity capital in excess of $1.0 billion available for buyout investments.
Caxton-Iseman Capital's current portfolio companies have combined sales in
excess of $2.5 billion and combined earnings before net interest expense, taxes,
depreciation and amortization of approximately $250.0 million. The firm was
founded in 1993 by Frederick J. Iseman and Caxton Corporation. Caxton
Corporation is a New York investment management firm managing funds in excess of
$8.0 billion. Since the firm's inception in 1993, Caxton-Iseman Capital has made
equity investments in the following industries: restaurants, food service, IT
services, leisure and gaming, print and database publishing, defense, heavy and
light manufacturing, medical devices, hotel management and agribusiness.
INFORMATION ABOUT US
We are a corporation formed under Minnesota law in 1983. Our executive
offices are located at 1460 Buffet Way, Eagan, Minnesota 55121, and our
telephone number is (651) 994-8608.
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SUMMARY OF THE EXCHANGE OFFER
We are offering to exchange $230,000,000 aggregate principal amount of our
exchange notes for a like aggregate principal amount of our initial notes. In
order to exchange your initial notes, you must properly tender them and we must
accept your tender. We will exchange all outstanding initial notes that are
validly tendered and not validly withdrawn.
Exchange Offer................ We will exchange our exchange notes for a like
aggregate principal amount of our initial
notes.
Expiration Date............... This exchange offer will expire at 5:00 p.m.,
New York City time, on , 2002, unless
we decide to extend it.
Conditions to the Exchange
Offer......................... We will complete this exchange offer only if:
- there is no change in the laws and
regulations which would impair our ability to
proceed with this exchange offer,
- there is no change in the current
interpretation of the staff of the SEC which
permits resales of the exchange notes,
- there is no stop order issued by the SEC
which would suspend the effectiveness of the
registration statement which includes this
prospectus or the qualification of the
exchange notes under the Trust Indenture Act
of 1939,
- there is no litigation or threatened
litigation which would impair our ability to
proceed with this exchange offer, and
- we obtain all the governmental approvals we
deem necessary to complete this exchange
offer.
Please refer to the section in this prospectus
entitled "The Exchange Offer -- Conditions to
the Exchange Offer."
Procedures for Tendering
Initial Notes................. To participate in this exchange offer, you must
complete, sign and date the letter of
transmittal or its facsimile and transmit it,
together with your initial notes to be
exchanged and all other documents required by
the letter of transmittal, to U.S. Bank
National Association, as exchange agent, at its
address indicated under "The Exchange
Offer -- Exchange Agent." In the alternative,
you can tender your initial notes by book-entry
delivery following the procedures described in
this prospectus. For more information on
tendering your notes, please refer to the
section in this prospectus entitled "The
Exchange Offer -- Procedures for Tendering
Initial Notes."
Special Procedures for
Beneficial Owners............. If you are a beneficial owner of initial notes
that are registered in the name of a broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender your initial
notes in the exchange offer, you should contact
the registered holder promptly and instruct
that person to tender on your behalf.
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Guaranteed Delivery
Procedures.................... If you wish to tender your initial notes and
you cannot get the required documents to the
exchange agent on time, you may tender your
notes by using the guaranteed delivery
procedures described under the section of this
prospectus entitled "The Exchange
Offer -- Procedures for Tendering Initial
Notes -- Guaranteed Delivery Procedure."
Withdrawal Rights............. You may withdraw the tender of your initial
notes at any time before 5:00 p.m., New York
City time, on the expiration date of the
exchange offer. To withdraw, you must send a
written or facsimile transmission notice of
withdrawal to the exchange agent at its address
indicated under "The Exchange Offer -- Exchange
Agent" before 5:00 p.m., New York City time, on
the expiration date of the exchange offer.
Acceptance of Initial Notes
and Delivery of Exchange
Notes....................... If all the conditions to the completion of this
exchange offer are satisfied, we will accept
any and all initial notes that are properly
tendered in this exchange offer on or before
5:00 p.m., New York City time, on the
expiration date. We will return any initial
note that we do not accept for exchange to you
without expense as promptly as practicable
after the expiration date. We will deliver the
exchange notes to you as promptly as
practicable after the expiration date. Please
refer to the section in this prospectus
entitled "The Exchange Offer -- Acceptance of
Initial Notes for Exchange; Delivery of
Exchange Notes."
Federal Income Tax
Considerations Relating to the
Exchange Offer.............. Exchanging your initial notes for exchange
notes will not be a taxable event to you for
United States federal income tax purposes.
Please refer to the section of this prospectus
entitled "U.S. Federal Income Tax
Considerations."
Exchange Agent................ U.S. Bank National Association is serving as
exchange agent in the exchange offer.
Fees and Expenses............. We will pay all expenses related to this
exchange offer. Please refer to the section of
this prospectus entitled "The Exchange Offer --
Fees and Expenses."
Use of Proceeds............... We will not receive any proceeds from the
issuance of the exchange notes. We are making
this exchange offer solely to satisfy our
obligations under our registration rights
agreement entered into in connection with the
offering of the initial notes.
Consequences to Holders Who Do
Not Participate in the
Exchange Offer.............. If you do not participate in this exchange
offer:
- except as set forth in the next paragraph,
you will not be able to require us to
register your initial notes under the
Securities Act,
- you will not be able to resell, offer to
resell or otherwise transfer your initial
notes unless they are registered under the
7
Securities Act or unless you resell, offer to
resell or otherwise transfer them under an
exemption from the registration requirements
of, or in a transaction not subject to, the
Securities Act, and
- the trading market for your initial notes
will become more limited to the extent other
holders of initial notes participate in the
exchange offer.
You will not be able to require us to register
your initial notes under the Securities Act
unless:
- the initial purchasers request us to register
initial notes held by them that are not
eligible to be exchanged for exchange notes
in the exchange offer, or
- you are not eligible to participate in the
exchange offer or do not receive freely
tradable exchange notes in the exchange
offer.
In these cases, the registration rights
agreement requires us to file a registration
statement for a continuous offering in
accordance with Rule 415 under the Securities
Act for the benefit of the holders of the
initial notes described in this paragraph. We
do not currently anticipate that we will
register under the Securities Act any initial
notes that remain outstanding after completion
of the exchange offer.
Resales....................... It may be possible for you to resell the
exchange notes issued in the exchange offer
without compliance with the registration and
prospectus delivery provisions of the
Securities Act, subject to some conditions.
Please refer to the section of this prospectus
entitled "Risk Factors -- Risks Relating to the
Exchange Offer -- Some persons who participate
in the exchange offer must deliver a prospectus
in connection with resales of the exchange
notes" and "Plan of Distribution."
SUMMARY OF TERMS OF THE EXCHANGE NOTES
Issuer........................ Buffets, Inc.
Exchange Notes................ $230 million aggregate principal amount of
11 1/4% Senior Subordinated Notes due 2010. The
forms and terms of the exchange notes are the
same as the form and terms of the initial
notes, except that the issuance of the exchange
notes is registered under the Securities Act,
the exchange notes will not bear legends
restricting their transfer and the exchange
notes will not be entitled to registration
rights under our registration rights agreement.
The exchange notes will evidence the same debt
as the initial notes, and both the initial
notes and the exchange notes will be governed
by the same indenture.
Maturity Date................. July 15, 2010.
Interest Payment Dates........ January 15 and July 15, commencing on January
15, 2003.
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Ranking....................... The notes will be our unsecured senior
subordinated obligations. They will be
subordinated to our existing and future senior
indebtedness. Immediately after the closing of
the Refinancing Transactions, we, excluding our
subsidiaries, had $245.0 million of senior
indebtedness outstanding, with approximately
$30.0 million in revolving loan availability
and approximately $17.4 million in outstanding
letters of credit with a further $2.6 million
in letter of credit availability.
Guaranties.................... The payment of the principal, premium and
interest on the notes will be fully and
unconditionally guaranteed on a senior
subordinated basis by some of our existing and
future domestic subsidiaries. The guaranties by
these subsidiary guarantors will be senior to
any of their existing and future subordinated
obligations, equal in right of payment with any
of their existing and future senior
subordinated indebtedness and subordinated to
any of their existing and future senior
indebtedness. Immediately after the closing of
the Refinancing Transactions, the subsidiary
guarantors had $245.0 million of senior
indebtedness, virtually all of which represents
guarantees of indebtedness under our new credit
facility. See "Description of the
Notes -- Guaranties."
Optional Redemption........... Prior to July 15, 2005, we can choose to redeem
up to 35% of the original principal amount of
the notes, and any additional notes that have
been issued under the same indenture governing
the notes, at a redemption price of 111.25% of
the principal amount thereof, plus accrued and
unpaid interest to the date of redemption, with
money we raise in a specified initial public
equity offering, as long as:
- at least 65% of the original aggregate
principal amount of the notes, and any
additional notes, remains outstanding after
the redemption (other than notes held,
directly or indirectly, by us or our
affiliates); and
- the redemption occurs within 60 days after
the date of the specified initial public
equity offering.
On and after July 15, 2006, we can choose to
redeem some or all of the notes at the
redemption prices listed in the "Description of
the Notes -- Optional Redemption."
Offer to Purchase Upon Initial
Public Offering............... Upon the consummation of a specified initial
public equity offering by us or Buffets
Holdings prior to July 15, 2005, we will be
required to offer to purchase such aggregate
principal amount of notes as may be purchased
with funds equal in amount to 50% of the net
cash proceeds, if any, received by us or
Buffets Holdings from that initial public
equity offering at a price of 111.25% of the
outstanding principal amount of the notes, plus
any accrued and unpaid interest to the date of
repurchase; provided, however, that, in no
event will we be required to make an offer to
purchase more than $80.5 million aggregate
principal amount of the notes. See "Description
of the Notes -- Offer to Purchase Upon Initial
Public Offering." Our ability to complete
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the repurchase may be limited by the terms of
our new credit facility or our other
indebtedness.
Change of Control............. Upon the occurrence of specified change of
control events, we will be required to make an
offer to repurchase all of the notes. The
purchase price will be 101% of the outstanding
principal amount of the notes plus any accrued
and unpaid interest to the date of repurchase
on them. See "Description of the
Notes -- Change of Control." Our ability to
complete the change of control repurchase may
be limited by the terms of our new credit
facility or our other indebtedness.
Certain Covenants............. The indenture governing the notes contains
covenants that limit our ability and certain of
our restricted subsidiaries' ability to:
- incur additional indebtedness,
- pay dividends on our capital stock or redeem,
repurchase or retire our capital stock or
subordinated indebtedness,
- make certain investments,
- create restrictions on the payment of
dividends or other amounts to us from our
restricted subsidiaries,
- engage in certain transactions with
affiliates,
- sell assets, including capital stock of our
subsidiaries, and
- consolidate, merge or transfer assets.
These covenants are subject to important
qualifications and exceptions, which are
described under "Description of the Notes --
Certain Covenants."
Original Issue Discount....... The initial notes were issued with original
issue discount for U.S. Federal income tax
purposes. Consequently, original issue discount
will be included in the gross income of a U.S.
holder of exchange notes for U.S. Federal
income tax purposes in advance of the receipt
of cash payments on the exchange notes. For
more information, see "U.S. Federal Income Tax
Considerations."
Use of Proceeds............... We will not receive any proceeds from the
issuance of the exchange notes in exchange for
the outstanding initial notes. We are making
this exchange solely to satisfy our obligations
under the registration rights agreement entered
into in connection with the offering of the
initial notes.
Absence of a Public Market for
the Exchange Notes............ The exchange notes are new securities with no
established market for them. We cannot assure
you that a market for these exchange notes will
develop or that this market will be liquid.
Please refer to the section of this prospectus
entitled "Risk Factors -- Risks Related to the
Exchange Offer -- An active trading market may
not develop for the notes."
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Form of the Exchange Notes.... The exchange notes will be represented by one
or more permanent global securities in
registered form deposited on behalf of The
Depository Trust Company with U.S. Bank
National Association, as custodian. You will
not receive exchange notes in certificated form
unless one of the events described in the
section of this prospectus entitled
"Description of Notes -- Book Entry; Delivery
and Form -- Certificated Notes" occurs.
Instead, beneficial interests in the exchange
notes will be shown on, and transfers of these
exchange notes will be effected only through,
records maintained in book-entry form by The
Depository Trust Company with respect to its
participants.
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The table below provides a summary of:
- historical consolidated financial and other data for the fiscal years
ended December 30, 1998, December 29, 1999 and January 2, 2002,
- pro forma combined consolidated financial and other data for the fiscal
year ended January 3, 2001, reflecting adjustments to give effect to the
buyout from public shareholders completed in October 2000 as if that
transaction was completed on the first day of that fiscal year,
- historical consolidated financial and other data for the 16 weeks ended
April 25, 2001 and April 24, 2002, and
- historical consolidated financial and other data for the 52 weeks ended
April 24, 2002.
In addition, the table presents supplemental data for the fiscal year ended
January 2, 2002, the 16 weeks ended April 25, 2001 and April 24, 2002 and the 52
weeks ended April 24, 2002 and the pro forma balance sheet data at April 24,
2002, reflecting certain adjustments to give effect to a sale and leaseback
transaction relating to 24 restaurants or the Refinancing Transactions, as
applicable.
The summary operating data for the fiscal years ended December 30, 1998,
December 29, 1999 and January 2, 2002 are derived from our audited financial
statements. Our financial statements and related notes for the fiscal years
ended December 29, 1999 and January 2, 2002 were audited by Deloitte & Touche
LLP, independent auditors, whose report is contained elsewhere in this
prospectus. The pro forma combined financial and other data for the fiscal year
ended January 3, 2001 are unaudited. The historical financial data for the 52
weeks ended April 24, 2002 are unaudited and reflect the results of the 36 weeks
ended January 2, 2002 and the 16 weeks ended April 24, 2002. The pro forma
combined fiscal year ended January 3, 2001 included 53 weeks, and all other
fiscal years presented below included 52 weeks. The financial data as of and for
the 16 weeks ended April 25, 2001 and April 24, 2002 have been derived from our
unaudited consolidated financial statements for these periods, which in the
opinion of management, reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the data. The results for any
interim period are not necessarily indicative of the results that may be
expected for the full year.
The information presented below should be read in conjunction with "Use of
Proceeds," "Capitalization," "Unaudited Pro Forma Condensed Consolidated
Financial Information," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto and the
"Supplemental Unaudited Pro Forma Combining Condensed Consolidated Statement of
Operations for Fiscal Year Ended January 3, 2001" included elsewhere in this
prospectus.
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<Table>
<Caption>
PRO FORMA
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR 16 WEEKS 16 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 30, DECEMBER 29, JANUARY 3, JANUARY 2, APRIL 25, APRIL 24, APRIL 24,
1998 1999 2001(1) 2002 2001 2002 2002
------------ ------------ ----------- ----------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT AVERAGE GUEST CHECK AND AVERAGE WEEKLY SALES)
OPERATING DATA:
Restaurant sales.......... $868,858 $936,854 $1,020,523 $1,044,734 $318,901 $320,755 $1,046,588
Restaurant costs.......... 745,282 800,255 862,640 887,476 271,998 272,184 887,662
Marketing expenses........ 17,247 22,491 26,196 26,233 9,153 8,721 25,801
General and administrative
expenses................ 43,071 47,857 54,652 50,320 16,407 15,980 49,893
Goodwill amortization..... 459 637 10,676 10,942 3,493 -- 7,449
Impairment of assets and
site closing costs...... 1,538 1,966 -- -- -- -- --
Acquisition-related
costs................... -- -- 14,902 -- -- -- --
-------- -------- ---------- ---------- -------- -------- ----------
Operating income.......... $ 61,261 $ 63,648 $ 51,457 $ 69,763 $ 17,850 $ 23,870 $ 75,783
======== ======== ========== ========== ======== ======== ==========
OTHER FINANCIAL DATA:
EBITDA(2)................. $107,380 $110,139 $ 119,720 $ 125,042 $ 35,326 $ 37,759 $ 127,475
Capital expenditures(3)... 51,567 74,230 49,985 38,096 10,585 7,931 35,442
Depreciation and
amortization............ 42,206 43,026 50,934 53,404 16,795 13,000 49,609
SUPPLEMENTAL DATA:
Adjusted EBITDA(4)................................................... $ 120,842 $ 34,026 $ 37,759 $ 124,575
Pro forma cash interest expense(5)......................................................................... 45,794
Ratio of pro forma total debt to adjusted EBITDA(6)(7)..................................................... 3.8x
Ratio of adjusted EBITDA to pro forma cash interest expense................................................ 2.7x
PRO FORMA BALANCE SHEET DATA(AT END OF PERIOD)(8):
Cash and cash equivalents.................................................................................... $ --
Working capital(9)........................................................................................... (71,394)
Property and equipment, net.................................................................................. 199,803
Total debt(6)(7)............................................................................................. 475,755
HISTORICAL KEY OPERATING STATISTICS(10):
Number of company-owned
restaurants (at end of
period)................. 386 403 406 401 407 396 396
Average guest check....... $ 6.22 $ 6.42 $ 6.64 $ 6.89 $ 6.80 $ 7.00 $ 6.96
Average weekly sales...... $ 45,120 $ 46,323 $ 47,782 $ 49,368 $ 48,994 $ 50,394 $ 49,795
Same store sales growth... 2.5% 1.9% 2.4% 2.1% 2.4% 0.6% 1.5%
</Table>
- ---------------
(1) Presented on a pro forma combined basis to reflect adjustments to give
effect to the buyout from public shareholders completed on October 2, 2000
as if that transaction was completed on December 30, 1999. See "Supplemental
Unaudited Pro Forma Combining Condensed Consolidated Statement of Operations
for Fiscal Year Ended January 3, 2001."
(2) EBITDA represents earnings before net interest expense, taxes, depreciation,
amortization, acquisition-related costs and non-cash deferred rental
expense.
(3) Capital expenditures include restaurant facilities acquired through business
combinations in fiscal 1998 and fiscal 1999.
(4) Adjusted EBITDA reflects the pro forma effect of a $4.2 million increase in
cash rent expense from a sale and leaseback of 24 restaurant properties
committed to and substantially completed in late fiscal 2001. The
transaction had the effect of decreasing reported EBITDA by $1.3 million for
the 16 weeks ended April 24, 2002. Adjusted EBITDA reflects the annualized
impact of the sale and leaseback transaction by reducing reported EBITDA by
$4.2 million for fiscal 2001, $1.3 million for the 16 weeks ended April 25,
2001 and $2.9 million for the 52 weeks ended April 24, 2002.
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(5) Pro forma cash interest expense is total interest expense less accretion of
original issue discount and amortization of debt issuance costs after
giving effect to the Refinancing Transactions.
(6) Total debt represents the amount of our long-term debt and capital lease
obligations, including current maturities.
(7) Between April 24, 2002 and the closing of the Refinancing Transactions, we
generated sufficient free cash flow such that actual total debt at the
closing was $466.2 million and the ratio of actual total debt to adjusted
EBITDA was 3.7x.
(8) The pro forma balance sheet data reflects adjustments to give effect to the
Refinancing Transactions.
(9) Working capital is current assets, excluding cash, less current
liabilities, excluding the current portion of long-term debt.
(10) Reflects data relating to all of our company-owned restaurants, including
our buffet and non-buffet concepts.
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RISK FACTORS
In addition to the other information in this prospectus, you should
carefully consider the following factors before investing in the exchange notes.
Certain statements in "Risk Factors" are forward-looking statements. See
"Forward-Looking Statements" below.
RISKS RELATING TO OUR BUSINESS
Our core buffets restaurants are a maturing restaurant concept and accordingly
expose us to various vulnerabilities, including consumer preferences.
We have been operating our core buffet restaurant concept for 18 years, and
our restaurant locations have a median age of approximately eight years. As a
result, we are exposed to vulnerabilities associated with a mature concept.
These include vulnerability to innovations by competitors, out-positioning in
markets where the demographics have shifted since the original openings, changes
in consumer preferences, sales declines in the event we ever suspend or reduce
our marketing and higher capital requirements both for maintenance and repair as
well as refurbishments. Additionally, factors such as traffic patterns and the
type, number and location of competing restaurants may adversely affect the
performance of individual restaurants. Adverse changes in any of these factors
could reduce guest traffic or impose practical limits on pricing, which could
harm our earnings, financial condition, operating results or cash flow.
We face intense competition in the restaurant industry.
We operate in a highly competitive industry. Price, restaurant location,
food quality, service and attractiveness of facilities are important aspects of
competition, and the competitive environment is often affected by factors beyond
a particular restaurant management's control, including changes in the public's
taste and eating habits, population and traffic patterns and economic
conditions. Our restaurants compete with a large number of other restaurants,
including national and regional restaurant chains and franchised restaurant
operations, as well as locally-owned, independent restaurants. Many of our
competitors have greater financial resources than we have. In addition, the
restaurant industry has few non-economic barriers to entry, and therefore new
competitors may emerge at any time. Competitive pressures may have the effect of
limiting our ability to increase prices, with consequent pressure on operating
earnings. This environment makes it more difficult for us to continue to provide
high service levels while maintaining our reputation for superior value without
adversely affecting operating margins. We cannot assure you that we will be able
to compete successfully against our competitors in the future or that
competition will not have a material adverse effect on our operations.
We may not be able to open new restaurants profitably according to our plans,
which could negatively affect our growth strategy.
We have historically added, and plan to continue to add, new restaurants
each year either through new construction, acquisition or both. We have
traditionally used cash flow from operations as the primary funding for
restaurant additions. We cannot guarantee that this source of capital will be
sufficient to attain the desired development levels if adverse changes occur
affecting our revenues, profitability or cash flow from operations. In addition,
our recent focus on developing freestanding locations rather than mall locations
has reduced the frequency and amount of landlord contributions towards
construction costs which, when coupled with the inherently higher cost structure
of freestanding construction, increases our capital requirements for
development. Other variables that affect our restaurant development include:
- competition for restaurant sites,
- whether we will be able to identify suitable locations with acceptable
land covenants and signage restrictions at acceptable cost or at all,
- when appropriate sites become available,
15
- whether we will be able to negotiate acceptable leases or land purchases,
- how quickly we can obtain required permits,
- the availability of construction labor and materials, and
- how quickly we can staff the new restaurants.
These factors could make it difficult for us to open new restaurants in
accordance with our schedule.
Any new operational approaches or restaurant concepts that we launch in the
future may not be successful.
As part of our research and development activities, we seek to enhance our
food offerings, food preparation systems and general service delivery of our
existing restaurant concepts. These developments may not be well received by our
customers and may adversely affect our restaurant sales. In addition, from time
to time, we launch new restaurant concepts on our own or through acquisitions or
joint ventures. During the early period of a new restaurant concept's life, it
is often unclear whether it will turn into a major expansion vehicle or merely
be a limited unit test of short duration. As a result, we may have difficulty in
accurately assessing the long term potential of a new restaurant concept's life.
We are dependent on attracting and retaining qualified employees.
We operate in the service sector and are therefore extremely dependent upon
the availability of qualified restaurant personnel. Availability of staff varies
widely from location to location. Recent initiatives to lower restaurant
management and staff turnover in our restaurants have generated significant cost
savings which would be at risk if turnover trends increase. In such a case, we
would suffer higher direct costs associated with recruiting and retaining
replacement personnel. Moreover, we could suffer from significant indirect
costs, including restaurant disruptions due to management changeover, increased
above-store management staffing and potential delays in new store openings due
to staff shortages. Competition for qualified employees exerts pressure on wages
paid to attract qualified personnel, resulting in higher labor costs, together
with greater expense to recruit and train them.
The operation of buffet style restaurants is materially different from
other restaurant concepts. Consequently, the retention of executive management
who are familiar with our core buffets business is important to our continuing
success. The departure of one or more key operations executives or the departure
of multiple executives in a short period of time could have an adverse impact on
our business.
Increasing labor costs could adversely affect our profitability.
We are dependent upon an available labor pool of unskilled and semi-skilled
employees, many of whom are hourly employees whose wages may be impacted by an
increase in the federal or state minimum wage. Numerous proposals have been made
at federal and state levels to increase minimum wage levels. An increase in the
minimum wage may create pressure to increase the pay scale for our employees. A
shortage in the labor pool or other general inflationary pressures or changes
could also increase our labor costs. In 2001, a minimum wage increase in
California and in other Western states and a tight labor market in the first
half of the year led to a greater than anticipated rise in labor costs,
negatively impacting our profitability. Any further increases in labor costs
could have a material adverse effect on our income from operations and could
decrease our profitability and cash available to service our debt obligations if
we were unable to recover these increases by raising the prices we charge our
customers.
We are dependent on timely delivery of fresh ingredients by our suppliers.
Our restaurant operations are dependent on timely deliveries of fresh
ingredients, including fresh produce, dairy products and meat. We depend
exclusively on third party distributors and suppliers for such deliveries. The
number of distributors and suppliers capable of servicing our distribution needs
has declined recently, reducing our bargaining leverage and increasing
vulnerability to distributor interruptions. If our
16
food quality declines due to the lack of, or lower quality of, our ingredients
or due to interruptions in the flow of fresh ingredients and similar factors,
customer traffic may decline and negatively affect our restaurants' results.
Negative publicity relating to one of our restaurants, including our franchised
restaurants, could reduce sales at some or all of our other restaurants.
We are from time to time faced with negative publicity relating to food
quality, restaurant facilities, health inspection scores, employees
relationships or other matters at one of our restaurants. Adverse publicity may
adversely affect us, regardless of whether the allegations are valid or whether
we are liable. In addition, the negative impact of adverse publicity relating to
one restaurant may extend far beyond the restaurant involved to affect some or
all of our other restaurants. The risk of negative publicity is particularly
great with respect to our 23 franchised restaurants because we are limited in
the manner in which we can regulate them, especially on a real-time basis. If a
franchised restaurant fails to meet our franchiser operating standards, our own
restaurants could be adversely affected due to customer confusion or negative
publicity. A similar risk exists with respect to totally unrelated food service
businesses if customers mistakenly associate such unrelated businesses with our
own operations.
Food-borne illness incidents could reduce our restaurant sales.
We cannot guarantee that our internal controls and training will be fully
effective in preventing all food-borne illnesses. Furthermore, our increasing
reliance on third party food processors makes it more difficult to monitor food
safety compliance and increases the risk that food-borne illness would affect
multiple locations rather than single restaurants. Some food borne illness
incidents could be caused by third party food suppliers and transporters outside
of our control. New illnesses resistant to our current precautions may develop
in the future, or diseases with long incubation periods could arise, such as
Bovine Spongiform Encephalopathy, that could give rise to claims or allegations
on a retroactive basis. One or more instances of food-borne illness in one of
our restaurants or a franchised restaurant could negatively affect our
restaurant sales and conceivably have a national impact if highly publicized.
This risk exists even if it were later determined that the illness was wrongly
attributed to one of our restaurants.
We are vulnerable to inflation and to fluctuations in the cost, availability
and quality of our ingredients.
The cost, availability and quality of the ingredients we use to prepare our
food are subject to a range of factors, many of which are beyond our control.
Fluctuations in weather, supply and demand and economic and political conditions
could adversely affect the cost, availability and quality of our ingredients. We
have no control over fluctuations in the price and availability of ingredients
or variations in product specifications caused by these factors. Historically,
when operating expenses increased due to inflation or increases in food costs,
we recovered increased costs by increasing our menu prices. However, we may not
be able to recover increased costs in the future because competition may limit
or prohibit such future increases.
Our restaurant sales are subject to seasonality and major world events.
Our restaurant sales volume fluctuates seasonally. Overall, restaurant
sales are generally higher in the summer months and lower in the winter months.
Positive or negative trends in weather conditions can have an exceptionally
strong influence on our business. This effect is heightened because most of our
restaurants are in geographic areas that experience extremes in weather,
including severe winter conditions and tropical storm patterns. Additionally,
major world events, including war, the Olympics and terrorist attacks may
adversely affect our business. For example, our sales were down 3.1% in the two
weeks immediately following the terrorist attacks of September 11, 2001.
17
We could have special charges if specific assets are under performing or if we
conclude that there is a need to close specific restaurants.
Impairment charges are required by accounting principles when an asset,
such as a restaurant, performs so poorly that we determine that the asset is
worth less than its value as stated in our accounting records. We periodically
review the operating results of individual restaurants to determine if
impairment charges on under-performing assets are necessary. In addition, we
expect that we will close some under-performing restaurants from time to time in
the future. We will incur special charges relating to the closing of
restaurants, including real estate lease termination costs. Impairment charges
and other special charges will reduce our profits.
We face risks because of the number of restaurants that we lease.
Our success depends in part on our ability to secure leases in desired
locations at rental rates we believe to be reasonable. We currently lease all of
our restaurants located in strip shopping centers and malls and we lease the
land for 127 of our freestanding restaurants. By December 2007, 106 of our
current leases will have expiring base lease terms and be subject to renewal
consideration. Each lease agreement also provides that the lessor may terminate
the lease for a number of reasons, including if we default in any payment of
rent or taxes or if we breach any covenant or agreement in the lease.
Termination of any of our leases could harm our results of operations. Although
we believe that we will be able to renew our existing leases, we can offer no
assurances that we will succeed in obtaining extensions in the future at rental
rates that we believe to be reasonable or at all. Moreover, if some locations
should prove to be unprofitable, we could remain obligated for lease payments
even if we decided to withdraw from those locations. See "Business -- Property."
We face risks associated with government regulations.
We are subject to extensive government regulation at a federal, state and
local government level. These include, but are not limited to, regulations
relating to the sale of food and alcoholic beverages in our full service
restaurants. We are required to obtain and maintain governmental licenses,
permits and approvals. Difficulty or failure in obtaining them in the future
could result in delaying or canceling the opening of new restaurants. Local
authorities may suspend or deny renewal of our governmental licenses if they
determine that our operations do not meet the standards for initial grant or
renewal. This risk would be even higher if there were a major change in the
licensing requirements affecting our types of restaurants.
The Federal Americans with Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. Mandated
modifications to our facilities in the future to make different accommodations
for disabled persons could result in material unanticipated expense.
Application of state "Dram Shop" statutes, which generally provide a person
injured by an intoxicated patron the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person, to our operations, or liabilities otherwise associated with liquor
service in some of our non-buffet restaurants, could negatively affect our
financial condition if not otherwise insured under our general liability
insurance policy.
Adverse changes in employment laws may affect our business.
Various federal and state labor laws govern the relationship with our
employees and affect operating costs. These laws include minimum wage
requirements, overtime, unemployment tax rates, workers' compensation rates and
citizenship requirements. Significant additional government-imposed increases in
the following areas could materially affect our business, financial condition,
operating results or cash flow:
- minimum wages,
- mandated health benefits,
18
- paid leaves of absence,
- tax reporting, and
- revisions in the tax payment requirements for employees who receive
gratuities.
We face risks associated with environmental laws.
We are subject to federal, state and local laws, regulations and ordinances
that:
- govern activities or operations that may have adverse environmental
effects, such as discharges to air and water, as well as handling and
disposal practices for solid and hazardous wastes, and
- impose liability for the costs of cleaning up, and certain damages
resulting from, sites of past spills, disposals or other releases of
hazardous materials.
In particular, under applicable environmental laws, we may be responsible
for remediation of environmental conditions and may be subject to associated
liabilities, including liabilities resulting from lawsuits brought by private
litigants, relating to our restaurants and the land on which our restaurants are
located, regardless of whether we lease or own the restaurants or land in
question and regardless of whether such environmental conditions were created by
us or by a prior owner or tenant. We cannot assure you that environmental
conditions relating to our prior, existing or future restaurants or restaurant
sites will not have a material adverse affect on us.
Any negative development relating to our self-service food service approach
would have a material adverse impact on our primary business.
Our buffet restaurants utilize a service format that is heavily dependent
upon self-service by our customers. Food tampering by customers or other events
affecting the self-service format could cause regulatory changes or changes in
our business pattern or customer perception. Any development that would
materially impede or prohibit our continued use of a self-service food service
approach, or reduce the appeal of self-service to our guests, would have a
material adverse impact on our primary business.
We may not be able to protect our trademarks and other proprietary rights.
We believe that our trademarks and other proprietary rights are important
to our success and our competitive position. Accordingly, we devote substantial
resources to the establishment and protection of our trademarks and proprietary
rights. However, the actions taken by us may be inadequate to prevent imitation
of our brands and concepts by others or to prevent others from claiming
violations of their trademarks and proprietary rights by us. In addition, others
may assert rights in our trademarks and other proprietary rights. Our exclusive
rights to our trademarks are subject to the common law rights of any other
person who began using the trademark (or a confusingly similar mark) prior to
the date of federal registration. For example, because of the common law rights
of such a pre-existing restaurant in certain portions of Colorado and Wyoming,
our restaurants in those states use the name "Country Buffet." Future actions by
third parties may diminish the strength of our restaurant concepts' trademarks
and decrease our competitive strength and performance.
Caxton-Iseman Investments L.P. controls our company and its interests may
conflict with yours.
All of our outstanding shares of capital stock are held by Buffets
Holdings. Through its ownership of 76.9% of the outstanding common stock of
Buffets Holdings, Caxton-Iseman Investments L.P. controls, and will likely
continue to exercise control over, our business by virtue of its voting power
with respect to the election of Buffets Holdings' directors. Caxton-Iseman
Investments L.P. may authorize actions that are not in your best interests, and,
in general, its interests may not be fully aligned with yours.
19
RISKS RELATING TO THE NOTES
Our substantial indebtedness may limit our cash flow available to invest in the
on-going needs of our business, which could prevent us from fulfilling our
obligations under the notes.
We have substantial debt service obligations. As of April 24, 2002, on a
pro forma basis, after giving effect to the Refinancing Transactions we had
approximately $475 million of indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." We may also incur additional debt in the future, subject to
some limitations contained in our debt instruments. Specifically, our new credit
facility permits us to borrow incremental term loans or to issue additional
notes in a combined aggregate principal amount of up to $25.0 million.
The degree to which we are leveraged could have important consequences,
including:
- the impairment of our ability to obtain additional financing in the
future for working capital, capital expenditures, for, among other items,
restaurant development and refurbishment, acquisitions, general corporate
purposes or other purposes,
- a significant portion of our cash flow from operations must be dedicated
to the payment of principal and interest on our debt, which reduces the
funds available to us for our operations,
- some of our debt is, and will continue to be, at variable rates of
interest, which may result in higher interest expense in the event of
increases in interest rates, and
- our debt contains, and any refinancing of our debt likely will contain,
financial and restrictive covenants, the failure to comply with which may
result in an event of default which, if not cured or waived, could have a
material adverse effect on us.
Despite our level of indebtedness, we will be able to incur substantially more
debt. This could further exacerbate the risks described above.
We will be able to incur significant additional indebtedness in the future.
Although the indenture governing the notes and the credit agreement governing
our new credit facility contain restrictions on the incurrence of additional
indebtedness, these restrictions are subject to a number of qualifications and
exceptions, and the indebtedness incurred in compliance with these restrictions
could be substantial. The restrictions do not prevent us from incurring
obligations that do not constitute indebtedness. Specifically, the new credit
facility will permit us to borrow, subject to availability, incremental term
loans or to issue additional notes in an amount up to $25.0 million. In
addition, our new credit facility provides for revolving loan availability of
$30.0 million and an additional $20.0 million letter of credit availability. To
the extent new debt is added to our currently anticipated debt levels, the
substantial leverage risks described above would increase. See "Description of
the Notes" and "Description of Other Indebtedness."
The terms of our new credit facility and the indenture relating to the notes
may restrict our current and future operations, particularly our ability to
respond to changes or to take certain actions.
The new credit facility contains, and any future refinancing of the new
credit facility likely would contain, a number of restrictive covenants that
impose significant operating and financial restrictions on us. The new credit
facility includes covenants restricting, among other things, our ability to:
- incur additional debt,
- pay dividends and make restricted payments,
- create liens,
- use the proceeds from sales of assets and subsidiary stock,
- enter into sale and leaseback transactions,
20
- enter into transactions with affiliates, and
- transfer all or substantially all of our assets or enter into merger or
consolidation transactions.
The indenture relating to the notes also contains numerous operating and
financial covenants including, among other things, restrictions on our ability
to:
- incur additional debt,
- create liens or other encumbrances,
- make various types of payments and investments, and
- sell or otherwise dispose of assets and merge or consolidate with another
entity.
The new credit facility also will include financial covenants, including
requirements that we maintain:
- a minimum coverage ratio, and
- a maximum leverage ratio.
A failure by us to comply with the covenants contained in the new credit
facility or the indenture could result in an event of default which could
materially and adversely affect our operating results and our financial
condition. In the event of any default under our new credit facility, the
lenders under our new credit facility could elect to declare all borrowings
outstanding, together with accrued and unpaid interest and fees, to be due and
payable, to require us to apply all of our available cash to repay these
borrowings or to prevent us from making debt service payments on the notes, any
of which would be an event of default under the notes. In addition, our other
debt could contain financial and other covenants more restrictive than those
applicable to the notes. See "Description of the Notes" and "Description of
Other Indebtedness."
We may not be able to generate sufficient cash flow to meet our debt service
obligations, including payments on the notes.
Our ability to generate sufficient cash flow from operations to make
scheduled payments on our debt obligations will depend on our future financial
performance, which will be affected by a range of economic, competitive,
regulatory, legislative and business factors, many of which are outside of our
control. If we do not generate sufficient cash flow from operations to satisfy
our debt obligations, including payments on the notes, we may have to undertake
alternative financing plans, such as refinancing or restructuring our debt,
selling assets, reducing or delaying capital investments or seeking to raise
additional capital. We cannot assure you that any refinancing would be possible,
that any assets could be sold, or, if sold, of the timing of the sales and the
amount of proceeds realized from those sales, or that additional financing could
be obtained on acceptable terms, if at all. Our inability to generate sufficient
cash flow to satisfy our debt obligations, or to refinance our obligations on
commercially reasonable terms, would have an adverse effect on our business,
financial condition and results of operations, as well as on our ability to
satisfy our obligations on the notes.
Your right to receive payments on the notes is unsecured and is junior to all
of our and our subsidiary guarantors' existing indebtedness and possibly all of
our future borrowings. Furthermore, the claims of creditors of our
non-guarantor subsidiaries will have priority with respect to the assets and
earnings of those subsidiaries over your claims.
The notes and the subsidiary guarantees are subordinated to the prior
payment in full of our and the subsidiary guarantors' current and future senior
debt. Immediately after the closing of the Refinancing Transactions, we and our
subsidiary guarantors had $245.0 million of senior indebtedness. We also had
approximately $30.0 million in revolving loan availability and approximately
$17.4 million in outstanding letters of credit with a further $2.6 million in
letter of credit availability, and all of those borrowings would be senior to
the notes. The indenture relating to the notes permits us and our subsidiary
guarantors to incur additional senior debt under specified circumstances.
Because the notes are unsecured and because of
21
the subordination provision of the notes, in the event of the bankruptcy,
liquidation or dissolution of us or any subsidiary guarantor, our assets and the
assets of the subsidiary guarantors would be available to pay obligations under
the notes only after all payments had been made on our and the subsidiary
guarantors' senior debt, including the new credit facility. We cannot assure you
that sufficient assets will remain after all these payments have been made to
make any payments on the notes, including payments of interest when due. Also,
because of these subordination provisions, you may recover less ratably than our
other creditors in a bankruptcy, liquidation or dissolution. In addition, all
payments on the notes and the guarantees will be blocked in the event of a
payment default on senior debt, including borrowings under our new credit
facility, and may be blocked for up to 179 of 360 consecutive days in the event
of specified non-payment defaults on senior debt. See "Description of the
Notes -- Ranking."
The notes are not secured by our assets nor those of our subsidiary guarantors,
and the lenders under our new credit facility will be entitled to remedies
available to a secured lender, which gives them priority over you to collect
amounts due to them.
In addition to being subordinated to all our existing and future senior
debt, the notes and the subsidiary guaranties are not secured by any of our
assets. Our obligations under our new credit facility are secured by, among
other things, a first priority pledge of all our capital stock, mortgages upon
all of the real property owned by us, substantially all our assets and
substantially all the assets of each of our existing and subsequently acquired
or organized material domestic subsidiaries (and, to the extent no adverse tax
consequences will result, foreign subsidiaries). If we become insolvent or are
liquidated, or if payment under the new credit facility or in respect of any
other secured senior indebtedness is accelerated, the lenders under the new
credit facility or holders of other secured senior indebtedness will be entitled
to exercise the remedies available to a secured lender under applicable law (in
addition to any remedies that may be available under documents pertaining to the
new credit facility or other senior debt). Upon the occurrence of any default
under the new credit facility (and even without accelerating the indebtedness
under the new credit facility), the lenders may be able to prohibit the payment
of the notes and subsidiary guaranties either by limiting our ability to access
our cash flow or under the subordination provisions contained in the indenture
governing the notes. See "Description of Other Indebtedness" and "Description of
the Notes."
A substantial portion of our assets are held by, and a substantial portion of
our income is derived from, our subsidiaries, and the senior debt of our
subsidiary guarantors may restrict payment on the notes.
We hold a substantial portion of assets through our subsidiaries and derive
a substantial portion of our operating income from our subsidiaries. We are
dependent on the earnings and cash flow of our subsidiaries to meet our
obligations with respect to the notes. We cannot assure you that our
subsidiaries will be able to, or be permitted to, pay to us amounts necessary to
service the notes. The indenture governing the terms of the notes permits our
subsidiary guarantors to enter into agreements that can limit our ability to
receive distributions from our subsidiaries. In the event we do not receive
distributions from our subsidiaries, we would be unable to make required
principal and interest payments on the notes.
We may not be able to fulfill our repurchase obligations in the event of a
change of control or upon specified initial public equity offerings.
Any change of control would constitute a default under the new credit
facility. Therefore, upon the occurrence of a change of control, the lenders
under the new credit facility would have the right to accelerate their loans,
and we would be required to prepay all of our outstanding obligations under the
new credit facility. In addition, our new credit facility will prohibit us from
purchasing any notes. If we do not repay all borrowings under our new credit
facility or obtain a consent from our lenders under the new credit facility, we
will be prohibited from purchasing the notes.
Moreover, upon the occurrence of any change of control, we will be required
to make a change of control offer under the notes. If a change of control offer
is made, there can be no assurance that we will have available funds sufficient
to pay the change of control purchase price for any or all of the notes that
22
might be delivered by holders of the notes seeking to accept the change of
control offer and, accordingly, none of the holders of the notes may receive the
change of control purchase price for their notes. Our failure to make or
consummate the change of control offer or pay the change of control purchase
price when due would give the trustee and the holders of the notes the rights
described under the section in this prospectus entitled "Description of the
Notes -- Defaults."
Additionally, upon the consummation of a specified initial public equity
offering by us or our parent company, Buffets Holdings, prior to July 15, 2005,
we will be required to offer to purchase such aggregate principal amount of
notes (but in no event more than $80.5 million aggregate principal amount of the
notes) as may be purchased with funds equal in amount to 50% of the net cash
proceeds, if any, received by us or Buffets Holdings in such initial public
equity offering. If Buffets Holdings consummates an initial public equity
offering that requires us to make an offer to repurchase notes, there can be no
assurance that Buffets Holdings will contribute to us, or that we will otherwise
have available, funds sufficient to pay the purchase price for any or all of the
notes that might be tendered by holders of the notes seeking to accept the
repurchase offer. Moreover, our new credit facility and other existing or future
indebtedness may prevent us from complying with this repurchase obligation at
the time such obligation arises. Our failure to make and consummate such a
required repurchase offer would constitute a default under the indenture
governing the notes, which would, in turn, constitute a default under our credit
facilities. In such circumstances, the subordination provisions of the indenture
would likely restrict payment to holders of the notes.
Not all of our subsidiaries are guarantors. As a result, your right to receive
payments on these notes could be adversely affected if any of our non-guarantor
subsidiaries declare bankruptcy, liquidate or reorganize.
Some but not all of our subsidiaries guarantee the notes. In the event of a
bankruptcy, liquidation or reorganization of any of the non-guarantor
subsidiaries, including Tahoe Joe's, holders of their indebtedness and their
trade creditors will generally be entitled to payment of their claims from the
assets of those subsidiaries before any assets are made available for
distribution to us. As of April 24, 2002, on a pro forma basis, after giving
effect to the Refinancing Transactions, these notes would have been effectively
junior to approximately $14.8 million of other liabilities, including trade
payables, of the non-guarantor subsidiaries. The non-guarantor subsidiaries
generated 2.6% of our consolidated net sales in the 52 weeks ended April 24,
2002 and held 2.8% of our consolidated assets as of April 24, 2002.
Fraudulent conveyance laws could void our obligations under the notes.
We have incurred substantial debt under the notes. Our incurrence of debt
under the notes and the incurrence by some of our subsidiaries of debt under
their guarantees may be subject to review under federal and state fraudulent
conveyance laws if a bankruptcy, reorganization or rehabilitation case or a
lawsuit, including circumstances in which bankruptcy is not involved, were
commenced by, or on behalf of, our unpaid creditors or unpaid creditors of our
subsidiary guarantors at some future date. Federal and state statutes allow
courts, under specific circumstances, to void the notes and the subsidiary
guarantees and require noteholders to return payments received from us or the
subsidiary guarantors.
An unpaid creditor or representative of creditors could file a lawsuit
claiming that the issuance of the notes constituted a "fraudulent conveyance."
To make such a determination, a court would have to find that we did not receive
fair consideration or reasonably equivalent value for the notes, and that, at
the time the notes were issued, we:
- were insolvent,
- were rendered insolvent by the issuance of the notes,
- were engaged in a business or transaction for which our remaining assets
constituted unreasonably small capital, or
23
- intended to incur, or believed that we would incur, debts beyond our
ability to repay those debts as they matured.
If a court were to make such a finding, it could void all or a portion of
our obligations under the notes, subordinate the claim in respect of the notes
to our other existing and future indebtedness or take other actions detrimental
to you as a holder of the notes, including in certain circumstances,
invalidating the notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property, or if the present
fair salable value of that company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they mature.
Moreover, regardless of solvency, a court could void an incurrence of
indebtedness, including the notes, if it determined that the transaction was
made with intent to hinder, delay or defraud creditors, or a court could
subordinate the indebtedness, including the notes, to the claims of all existing
and future creditors on similar grounds. We cannot determine in advance what
standard a court would apply to determine whether we were "insolvent" in
connection with the sale of the notes.
The making of the subsidiary guarantees might also be subject to similar
review under relevant fraudulent conveyance laws. A court could impose legal and
equitable remedies, including subordinating the obligations under the subsidiary
guarantees to our other existing and future indebtedness or taking other actions
detrimental to you as a holder of the notes.
Because the initial notes were issued with original issue discount, holders
will pay tax on amounts before such amounts are received.
The initial notes were issued with original issue discount for U.S. Federal
income tax purposes. Consequently, original issue discount will be included in
the gross income of a U.S. holder of exchange notes for U.S. Federal income tax
purposes in advance of the receipt of cash payments on the exchange notes. For
more information, see "U.S. Federal Income Tax Considerations."
RISKS RELATED TO THE EXCHANGE OFFER
The issuance of the exchange notes may adversely affect the market for the
initial notes.
If initial notes are tendered for exchange and accepted in the exchange
offer, the trading market for the untendered and tendered but unaccepted initial
notes could be adversely affected.
An active trading market may not develop for the notes.
There currently is only a limited trading market for the initial notes, and
we cannot be sure if an active trading market will develop for the exchange
notes. We do not intend to apply for listing of the exchange notes on any
securities exchange or on any automated dealer quotation system. The initial
purchasers of the notes were Credit Suisse First Boston Corporation, Morgan
Stanley & Co. Incorporated, Salomon Smith Barney Inc., UBS Warburg LLC and Fleet
Securities, Inc. Although we have been informed by the initial purchasers that
they currently intend to make a market for the exchange notes, they are not
obligated to do so, and any market making may be discontinued at any time
without notice. No affiliate of Buffets, Inc. will make a market in the notes.
In addition, market making activity may be limited during the pendency of the
exchange offer or the effectiveness of the exchange offer registration
statement.
Some persons who participate in the exchange offer must deliver a prospectus
in connection with resales of the exchange notes.
Based on interpretations of the staff of the SEC contained in Exxon Capital
Holdings Corp., SEC no-action letter (April 13, 1988), Morgan, Stanley & Co.
Inc., SEC no-action letter (June 5, 1991) and
24
Shearman & Sterling, SEC no-action letter (July 2, 1983), we believe that you
may offer for resale, resell or otherwise transfer the exchange notes without
compliance with the registration and prospectus delivery requirements of the
Securities Act. However, in some instances described in this prospectus under
"Plan of Distribution," you will remain obligated to comply with the
registration and prospectus delivery requirements of the Securities Act to
transfer your exchange notes. In these cases, if you transfer any exchange note
without delivering a prospectus meeting the requirements of the Securities Act
or without an exemption from registration of your exchange notes under the
Securities Act, you may incur liability under the Securities Act. We do not and
will not assume, or indemnify you against, this liability.
FORWARD-LOOKING STATEMENTS
This prospectus, particularly the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," includes both historical and
forward-looking statements. We have based these forward-looking statements on
our current expectations and projections about future results. When we use words
in this document, such as "anticipate," "intend," "plan," "believe," "estimate,"
"expect" and similar expressions, we do so to identify forward-looking
statements. Our actual results may differ materially from those anticipated in
these forward-looking statements. These forward-looking statements are affected
by risks, uncertainties and assumptions that we make, including, among other
things, the factors that are described in "Risk Factors" and:
- our level of debt,
- interest rate fluctuations,
- future cash flows,
- dependence on key employees,
- general economic conditions which may impact the level of consumer
spending,
- highly competitive nature of the restaurant industry,
- changes in consumer preferences,
- impact of weather conditions,
- adverse publicity and litigation,
- consumer perceptions of food safety,
- the impact of the price of gasoline and other energy costs on consumer
spending,
- our continued ability to find suitable restaurant locations and to
finance new restaurant development,
- labor and benefit costs, and
- future regulatory actions and conditions in our operating areas.
You should keep in mind that any forward-looking statement made by us in
this prospectus, or elsewhere, speaks only as of the date on which we make it.
New risks and uncertainties come up from time to time, and it is impossible for
us to predict these events or how they may affect us. We have no duty to, and do
not intend to, update or revise the forward-looking statements in this
prospectus after the date of this prospectus. In light of these risks and
uncertainties, you should keep in mind that any forward-looking statement made
in this prospectus or elsewhere might not occur.
25
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes in exchange for the outstanding initial notes. We are making this exchange
solely to satisfy our obligations under the registration rights agreements
entered into in connection with the offering of the initial notes. In
consideration for issuing the exchange notes, we will receive initial notes in
like aggregate principal amount.
The gross proceeds from the offering of initial notes were approximately
$221.2 million. Concurrently with the consummation of the offering of initial
notes, we entered into a new credit facility. See "Description of Other
Indebtedness."
At the closing, we used our cash on hand, the proceeds from the offering of
the initial notes and the term loan borrowing under the new credit facility to
repay all of our outstanding indebtedness under our former credit facility,
redeem all of our 14% senior subordinated notes due September 29, 2008, redeem
all of Buffets Holdings' 16% senior subordinated notes due September 29, 2008,
pay accrued interest, related prepayment fees and a portion of the related
redemption fees, make a distribution to Buffets Holdings and pay transaction
fees and expenses related to the Refinancing Transactions.
The following table presents a summary of the sources and uses of funds
relating to the Refinancing Transactions:
<Table>
<Caption>
SOURCES OF FUNDS:
(IN MILLIONS)
-------------
Cash on hand................. $ 15.4
New credit facility:
Revolver(1)................ --
Term loan(2)............... 245.0
11 1/4% senior subordinated
notes due 2010, referred to
as the initial notes in
this prospectus............ 221.2
------
Total sources........... $481.6
======
</Table>
<Table>
<Caption>
USES OF FUNDS:
(IN MILLIONS)
-------------
Repay former credit
facility(1)(3)............. $216.2
Redeem 14% senior
subordinated notes(4)(5)... 82.7
Redeem 16% senior
subordinated notes of
Buffets Holdings(5)(6)..... 17.6
Distribution to Buffets
Holdings(7)................ 150.0
Transaction fees and
expenses(5)(8)............. 15.1
------
Total uses.............. $481.6
======
</Table>
- ---------------
(1) Under the new credit facility, we have revolving loan availability of $30.0
million and a letter of credit facility of $20.0 million. As part of the
Refinancing Transactions, approximately $17.4 million of letters of credit
were issued under the new credit facility to replace our former letters of
credit. See "Description of Other Indebtedness."
(2) The term loan under our new credit facility matures in seven years, with
installment repayments equal to 1% of the principal amount during each of
the first six years and the balance payable in the final year of the loan.
See "Description of Other Indebtedness."
(3) The term loans under our former credit facility bore interest at floating
rates. As of April 24, 2002, the rate on the term loan A was 4.99%, and the
rate on the term loan B was 5.72%. The term loans had quarterly installment
payments. The term loan A would have matured on September 30, 2005, and the
term loan B would have matured on March 31, 2007.
(4) $80.0 million aggregate principal amount of 14% senior subordinated notes
due September 29, 2008 was issued on October 2, 2000.
(5) In connection with the early redemption of our 14% senior subordinated notes
and Buffets Holdings' 16% senior subordinated notes due September 29, 2008,
we agreed to pay redemption fees of $18.0 million. Of such redemption fees,
$1.0 million was paid at the closing of the Refinancing Transactions out of
the net proceeds from the Refinancing Transactions and is accounted for in
the table above as transaction fees and expenses. The remaining balance is
not included in the table above and will be
26
paid in periodic installments with the final payment deferrable at our
option until June 30, 2003. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(6) $15.0 million aggregate principal amount of, together with cumulative
accrued interest on, 16% senior subordinated notes due September 29, 2008
issued on October 2, 2000 by Buffets Holdings.
(7) Buffets Holdings applied the proceeds received from us to repurchase its
preferred stock warrants and redeem shares of its capital stock in a total
amount of approximately $115.4 million and to make distributions to its
stockholders.
(8) The transaction fees and expenses include the initial purchasers' discount.
27
CAPITALIZATION
The table below sets forth our actual cash and cash equivalents, debt and
shareholder's equity at April 24, 2002 and as adjusted to give effect to the
Refinancing Transactions, assuming they occurred on that date. See "Unaudited
Pro Forma Condensed Consolidated Financial Information," "Selected Historical
Consolidated Financial Data" and "Description of Other Indebtedness." The table
below is presented and should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
<Table>
<Caption>
AT APRIL 24, 2002
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
CASH AND CASH EQUIVALENTS................................... $ 13,894 $ --
======== ========
DEBT:
Former credit facility.................................... $222,444 $ --
New credit facility(1):
Revolver............................................... -- 9,539(2)
Term Loans............................................. -- 245,000
14% senior subordinated notes due September 29, 2008...... 76,442 --
16% senior subordinated notes due September 29, 2008 of
Buffets Holdings....................................... 16,316 --
11 1/4% senior subordinated notes due 2010(3)............. -- 221,216
-------- --------
Total debt............................................. 315,202 475,755
-------- --------
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock ($.01 par value, 100 shares authorized; 100
shares issued and outstanding)......................... 0 0
Additional paid-in capital................................ 129,957 --
Allocation to stock warrants(4)........................... 5,414 --
Retained earnings (accumulated deficit)................... 21,705 (14,259)
-------- --------
Total shareholder's equity (deficit)................... 157,076 (14,259)
-------- --------
Total capitalization................................... $472,278 $461,496
======== ========
</Table>
- ---------------
(1) Concurrent with the closing of the offering of initial notes, we entered
into a new credit facility that provides for a revolving loan facility of
$30.0 million, a letter of credit facility of $20.0 million and a term loan
of $245.0 million. See "Use of Proceeds" and "Description of Other
Indebtedness."
(2) Between April 24, 2002 and the closing of the offering of initial notes, we
generated sufficient free cash flow such that we did not incur any
borrowings under the new revolving facility in connection with the
Refinancing Transactions. At April 24, 2002, however, we would have had a
$9.5 million draw on our revolver under our new credit facility in order to
complete the Refinancing Transaction.
(3) Reflects the issuance of $230.0 million aggregate principal amount of
initial notes at 96.181% of the principal amount thereof.
(4) Our 14% senior subordinated notes due September 29, 2008 and Buffets
Holdings' 16% senior subordinated notes due September 29, 2008 were issued
with detachable warrants to purchase 205,696 shares of Buffets Holdings'
common stock and 61,709 shares of Buffets Holdings' preferred stock. Such
warrants were valued at $5.4 million and are reflected as a discount on the
notes and as a component of shareholder's equity (deficit).
28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following tables present our unaudited pro forma condensed consolidated
financial information as of and for the 52 weeks and the 16 weeks ended April
24, 2002 and the fiscal year ended January 2, 2002.
The unaudited pro forma financial information gives effect to the following
transactions:
- entering into the new credit facility to provide for a revolving loan
facility of $30.0 million, a letter of credit facility of $20.0 million
and a $245.0 million term loan,
- the offering of the initial notes, and
- the application of our cash on hand, the proceeds from the offering of
the initial notes and the $9.5 million drawdown on the revolver and the
borrowing of the $245.0 million term loan under our new credit facility
to repay all of the outstanding indebtedness under our former credit
facility, redeem all of our 14% senior subordinated notes due September
29, 2008, redeem all of Buffets Holdings' 16% senior subordinated notes
due September 29, 2008, pay a portion of the related redemption fees,
make a distribution to Buffets Holdings and pay transaction fees and
expenses related to the Refinancing Transactions.
The unaudited pro forma balance sheet as of April 24, 2002 gives effect to
the above transactions as if they had occurred on April 24, 2002. The unaudited
pro forma condensed consolidated statements of operations for the 52 weeks and
the 16 weeks ended April 24, 2002 and for the fiscal year ended January 2, 2002
give effect to the above transactions as if they had occurred at the beginning
of the period presented.
Preparation of the pro forma financial information was based on assumptions
deemed appropriate by our management. The pro forma information is unaudited and
is not necessarily indicative of the results which actually would have occurred
if the above transactions had been consummated at the beginning of the period
presented, nor does it purport to represent the future financial position and
results of operations for future periods. The unaudited pro forma condensed
consolidated financial information should be read in conjunction with
"Capitalization," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our historical consolidated financial statements and the related
notes included elsewhere in this prospectus.
29
BUFFETS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF APRIL 24, 2002
<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
Current assets:
Cash and cash equivalents........................... $ 13,894 $ (13,894)(1) $ --
Other current assets................................ 49,319 -- 49,319
-------- --------- ---------
Total current assets........................ 63,213 (13,894) 49,319
Property and equipment, net........................... 199,803 -- 199,803
Goodwill, net......................................... 312,163 -- 312,163
Other assets, net..................................... 41,243 3,348(2) 44,591
-------- --------- ---------
Total assets..................................... $616,422 $ (10,546) $ 605,876
======== ========= =========
Current liabilities:
Other current liabilities........................... $120,477 $ 236(3) $ 120,713
Current portion of long-term debt................... 21,132 (9,143)(4) 11,989
-------- --------- ---------
Total current liabilities........................ 141,609 (8,907) 132,702
Long-term debt, net of current maturities............. 294,070 169,696(5) 463,766
Other long-term liabilities........................... 23,667 -- 23,667
-------- --------- ---------
Total liabilities................................ 459,346 160,789 620,135
Shareholder's equity (deficit)........................ 157,076 (171,335)(6) (14,259)
-------- --------- ---------
Total liabilities and shareholder's equity
(deficit)...................................... $616,422 $ (10,546) $ 605,876
======== ========= =========
</Table>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Balance
Sheet.
30
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Adjustment to reflect the sources and uses of cash as follows:
<Table>
<Caption>
(DOLLARS IN THOUSANDS)
Gross proceeds from the offering of the initial notes, net
of original issue discount of $8.8 million................ $ 221,216
Term loan borrowing under the new credit facility........... 245,000
Draw on revolver under new credit facility(A)............... 9,539
Repayment of term loan A under former credit facility....... (96,428)
Repayment of term loan B under former credit facility....... (126,016)
Payment of accrued interest on former debt as of April 24,
2002...................................................... (3,123)
Redemption of 14% senior subordinated notes................. (80,000)
Redemption of 16% senior subordinated notes of Buffets
Holdings.................................................. (16,982)
Distribution to Buffets Holdings............................ (150,000)
Payment of transaction fees and expenses.................... (17,100)
---------
Total adjustment to cash and cash equivalents.......... $ (13,894)
=========
</Table>
--------------------
(A) Between April 24, 2002 and the closing of the Refinancing Transactions,
we generated sufficient free cash flow, such that we did not incur any
borrowings under the new revolving facility in connection with the
Refinancing Transactions. At April 24, 2002, however, we would have had a
$9.5 million draw on our revolver under our new credit facility in order to
complete the Refinancing Transaction.
(2) Adjustment to write-off former debt issuance costs of $11.6 million and
record new debt issuance costs of $14.9 million relating to the offering of
initial notes.
(3) Adjustment to reflect:
<Table>
<Caption>
(DOLLARS IN THOUSANDS)
Payment of accrued interest on existing debt as of April 24,
2002...................................................... $ (3,123)
Redemption fee payable on redemption of senior subordinated
notes..................................................... 17,000
Reduction of income tax payable associated with early
extinguishment of debt.................................... (13,641)
---------
Total adjustment to other current liabilities.......... $ 236
=========
</Table>
(4) Adjustment to reflect the repayment of the current portion of term loan
A under the former credit facility and the current portion of the term loan B
under the former credit facility of $21.1 million, net of borrowings under the
new line of credit facility of $9.5 million and current maturities under the new
term loan of $2.5 million.
(5) Adjustment to reflect the proceeds of the Refinancing Transactions as
follows:
<Table>
<Caption>
(DOLLARS IN THOUSANDS)
Gross proceeds from the offering of the initial notes, net
of original issue discount of $8.8 million................ $ 221,216
Term loan borrowing under the new credit facility........... 242,550
Repayment of term loan A under former credit facility
(excluding current portion)............................... (76,575)
Repayment of term loan B under former credit facility
(excluding current portion)............................... (124,737)
Redemption of 14% senior subordinated notes................. (76,442)
Redemption of 16% senior subordinated notes of Buffets
Holdings.................................................. (16,316)
---------
Total adjustment to long-term debt..................... $ 169,696
=========
</Table>
(6) Adjustment to reflect the following:
<Table>
<Caption>
(DOLLARS IN THOUSANDS)
Distribution to Buffets Holdings............................ $(150,000)
Extraordinary loss on early extinguishment of debt, net of
tax....................................................... (21,335)
---------
Total adjustment to shareholder's equity............... $(171,335)
=========
</Table>
31
BUFFETS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
52 WEEKS ENDED APRIL 24, 2002
<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
Restaurant sales...................................... $1,046,588 $ -- $1,046,588
Restaurant costs...................................... 887,662 -- 887,662
Marketing expenses.................................... 25,801 -- 25,801
General and administrative expenses................... 49,893 -- 49,893
Goodwill amortization................................. 7,449 -- 7,449
---------- -------- ----------
Operating income...................................... 75,783 -- 75,783
Interest expense, net................................. 38,362 10,151 (1) 48,513
Other (income)........................................ (899) -- (899)
---------- -------- ----------
Income before income tax expense (benefit) and
extraordinary item.................................. 38,320 (10,151) 28,169
Income tax expense (benefit).......................... 18,024 (4,133)(2) 13,891
---------- -------- ----------
Income (loss) before extraordinary item............... 20,296 (6,018) 14,278
Extraordinary loss on early extinguishment of debt,
net of tax benefit of $13,641....................... -- (21,335)(3) (21,335)
---------- -------- ----------
Net income (loss)..................................... $ 20,296 $(27,353) $ (7,057)
========== ======== ==========
</Table>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Operations.
32
BUFFETS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
16 WEEKS ENDED APRIL 24, 2002
<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(DOLLARS IN THOUSANDS)
Restaurant sales......................................... $320,755 $ -- $320,755
Restaurant costs......................................... 272,184 -- 272,184
Marketing expenses....................................... 8,721 -- 8,721
General and administrative expenses...................... 15,980 -- 15,980
-------- -------- --------
Operating income......................................... 23,870 -- 23,870
Interest expense, net.................................... 10,389 3,356 (1) 13,745
Other (income)........................................... (343) -- (343)
-------- -------- --------
Income before income tax expense (benefit) and
extraordinary item..................................... 13,824 (3,356) 10,468
Income tax expense (benefit)............................. 5,406 (1,323)(2) 4,083
-------- -------- --------
Income (loss) before extraordinary item.................. 8,418 (2,033) 6,385
Extraordinary loss on early extinguishment of debt, net
of tax benefit of $13,641.............................. -- (21,335)(3) (21,335)
-------- -------- --------
Net income (loss)........................................ $ 8,418 $(23,368) $(14,950)
======== ======== ========
</Table>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Operations.
33
BUFFETS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 2, 2002
<Table>
<Caption>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
Restaurant sales...................................... $1,044,734 $ -- $1,044,734
Restaurant costs...................................... 887,476 -- 887,476
Marketing expenses.................................... 26,233 -- 26,233
General and administrative expenses................... 50,320 -- 50,320
Goodwill amortization................................. 10,942 -- 10,942
---------- -------- ----------
Operating income...................................... 69,763 -- 69,763
Interest expense, net................................. 42,707 6,144 (1) 48,851
Other (income)........................................ (1,040) -- (1,040)
---------- -------- ----------
Income before income tax expense (benefit) and
extraordinary item.................................. 28,096 (6,144) 21,952
Income tax expense (benefit).......................... 15,388 (2,559)(2) 12,829
---------- -------- ----------
Income (loss) before extraordinary item............... 12,708 (3,585) 9,123
Extraordinary loss on early extinguishment of debt,
net of tax benefit of $14,148....................... -- (22,128)(3) (22,128)
---------- -------- ----------
Net income (loss)..................................... $ 12,708 $(25,713) $ (13,005)
========== ======== ==========
</Table>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Statement
of Operations.
34
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(1) Adjustment to account for changes in interest expense:
<Table>
<Caption>
52 WEEKS 16 WEEKS FISCAL YEAR
ENDED ENDED ENDED
APRIL 24, 2002 APRIL 24, 2002 JANUARY 2, 2002
-------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
Additional interest expense on the notes (at
11 1/4% per annum)........................ $ 25,875 $ 7,962 $ 25,875
Accretion of original issue discount on the
notes..................................... 671 206 671
Additional interest expense on term loan
borrowings under the new credit facility
(at 8.13% per annum for 52 weeks ended
April 24, 2002, 6.38% for 16 weeks ended
April 24, 2002 and 8.38% for fiscal year
ended January 2, 2002)(A)................. 19,919 4,810 20,531
Elimination of interest expense on term loan
A under former credit facility............ (9,382) (1,957) (12,041)
Elimination of interest expense on term loan
B under former credit facility............ (10,652) (2,618) (12,612)
Reduction in amortization of debt issue
costs associated with the Refinancing
Transactions and accretion of original
issue discount associated with former
debt...................................... (2,680) (825) (2,680)
Elimination of interest expense on 14%
senior subordinated notes................. (11,200) (3,484) (11,200)
Elimination of interest expense on 16%
senior subordinated notes of Buffets
Holdings.................................. (2,400) (738) (2,400)
-------- ------- --------
Total adjustment to interest expense,
net.................................. $ 10,151 $ 3,356 $ 6,144
======== ======= ========
</Table>
- ---------------
(A) If these rates were to be 0.25% higher or lower, cash interest expense
would increase or decrease by $612,500 for the 52 weeks ended April
24, 2002, $188,500 for the 16 weeks ended April 24, 2002 and $612,500
for the fiscal year ended January 2, 2002.
(2) Adjustments to reflect taxes on the lower pro forma income before
income taxes at an assumed tax rate of 39.0%.
(3) Adjustment to account for extraordinary loss on early extinguishment
of former debt:
<Table>
<Caption>
52 WEEKS 16 WEEKS FISCAL YEAR
ENDED ENDED ENDED
APRIL 24, 2002 APRIL 24, 2002 JANUARY 2, 2002
-------------- -------------- ---------------
(DOLLARS IN THOUSANDS)
Writeoff of unamortized original issue
discount on 14% senior subordinated
notes...................................... $ (3,558) $ (3,558) $ (3,758)
Writeoff of unamortized original issue
discount on 16% senior subordinated
notes...................................... (666) (666) (705)
Writeoff existing debt issuance costs........ (11,552) (11,552) (12,613)
Redemption and repayment fees................ (19,200) (19,200) (19,200)
Tax benefit (at an assumed tax rate of
39%)....................................... 13,641 13,641 14,148
-------- -------- --------
Total adjustment to extraordinary
loss.................................. $(21,335) $(21,335) $(22,128)
======== ======== ========
</Table>
35
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The table below presents our selected historical consolidated financial and
other data for the fiscal years ended December 31, 1997, December 30, 1998 and
December 29, 1999, the period from December 30, 1999 to October 1, 2000, the
period from October 2, 2000 to January 3, 2001, the fiscal year ended January 2,
2002 and the 16 weeks ended April 25, 2001 and April 24, 2002. The balance sheet
data as of December 31, 1997, December 30, 1998, December 29, 1999 and October 1
2000 and the income statement data for the fiscal years ended December 31, 1997
and December 30, 1998 were derived from our financial statements audited by
Deloitte & Touche LLP, which are not included in this prospectus. The balance
sheet data as of January 3, 2001 and January 2, 2002 and the income statement
data for the fiscal year ended December 29, 1999, for the period from December
30, 1999 to October 1, 2000, for the period from October 2, 2000 to January 3,
2001 and for the fiscal year ended January 2, 2002 were derived from our
financial statements audited by Deloitte & Touche LLP included in this
prospectus. The fiscal year ended January 3, 2001 included 53 weeks. All other
fiscal years presented below included 52 weeks. The financial data as of and for
the 16 weeks ended April 25, 2001 and April 24, 2002 have been derived from our
unaudited consolidated financial statements for these periods, which in the
opinion of management, reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the data. The results for any
interim period are not necessarily indicative of the results that may be
expected for the full year.
On October 2, 2000, Buffets Holdings, a company organized by Caxton-Iseman
Capital, acquired us in a buyout from public shareholders. Due to the effects of
this transaction on the recorded bases of goodwill, intangibles, property and
shareholder's equity, our financial statements prior to and subsequent to this
transaction are not comparable. Periods prior to October 2, 2000 represent the
accounts of the predecessor. Accordingly, the historical financial information
for fiscal 2000 in this prospectus is presented in two periods -- the period
from December 30, 1999 to October 1, 2000 and the period from October 2, 2000 to
January 3, 2001.
The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" and the audited consolidated financial statements and notes thereto
included elsewhere in this prospectus.
<Table>
<Caption>
PREDECESSOR SUCCESSOR
--------------------------------------------------------- -------------------------
PERIOD FROM PERIOD FROM
FISCAL YEAR FISCAL YEAR FISCAL YEAR DECEMBER 30, OCTOBER 2, FISCAL YEAR
ENDED ENDED ENDED 1999 TO 2000 TO ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1997 1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Restaurant sales...... $808,529 $868,858 $936,854 $781,153 $ 239,370 $1,044,734
Restaurant costs...... 712,004 745,282 800,255 657,873 204,767 887,476
Marketing expenses.... 9,368 17,247 22,491 20,858 5,338 26,233
General and
administrative
expenses............ 38,440 43,071 47,857 39,217 12,204 50,320
Goodwill
amortization........ 350 459 637 878 2,543 10,942
Impairment of assets
and site closing
costs............... 1,500 1,538 1,966 -- -- --
Acquisition-related
costs............... -- -- -- 14,902 -- --
-------- -------- -------- -------- --------- ----------
Operating income...... 46,867 61,261 63,648 47,425 14,518 69,763
Interest expense
(income)............ 1,873 (738) (1,915) (2,668) 12,811 42,707
Other (income)........ (1,514) (1,727) (1,679) (1,126) (340) (1,040)
-------- -------- -------- -------- --------- ----------
Income before income
taxes............... 46,508 63,726 67,242 51,219 2,047 28,096
Provision for income
tax................. 17,910 24,375 24,800 19,974 1,468 15,388
-------- -------- -------- -------- --------- ----------
Net income............ $ 28,598 $ 39,351 $ 42,442 $ 31,245 $ 579 $ 12,708
======== ======== ======== ======== ========= ==========
<Caption>
SUCCESSOR
---------------------
16 WEEKS 16 WEEKS
ENDED ENDED
APRIL 25, APRIL 24,
2001 2002
--------- ---------
INCOME STATEMENT DATA:
Restaurant sales...... $318,901 $320,755
Restaurant costs...... 271,998 272,184
Marketing expenses.... 9,153 8,721
General and
administrative
expenses............ 16,407 15,980
Goodwill
amortization........ 3,493 --
Impairment of assets
and site closing
costs............... -- --
Acquisition-related
costs............... -- --
-------- --------
Operating income...... 17,850 23,870
Interest expense
(income)............ 14,734 10,389
Other (income)........ (484) (343)
-------- --------
Income before income
taxes............... 3,600 13,824
Provision for income
tax................. 2,770 5,406
-------- --------
Net income............ $ 830 $ 8,418
======== ========
</Table>
36
<Table>
<Caption>
PREDECESSOR SUCCESSOR
--------------------------------------------------------- -------------------------
PERIOD FROM PERIOD FROM
FISCAL YEAR FISCAL YEAR FISCAL YEAR DECEMBER 30, OCTOBER 2, FISCAL YEAR
ENDED ENDED ENDED 1999 TO 2000 TO ENDED
DECEMBER 31, DECEMBER 30, DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1997 1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
CASH FLOW AND OTHER
FINANCIAL DATA:
EBITDA(1)............. $ 91,879 $107,380 $110,139 $ 96,577 $ 26,374 $ 125,042
Capital
expenditures(2)..... 42,452 51,567 74,230 35,596 14,389 38,096
Depreciation and
amortization........ 41,192 42,206 43,026 32,368 11,311 53,404
Cash flow from
operating
activities.......... 75,621 112,161 90,561 87,822 28,347 69,003
Cash flow from (used
in) investing
activities.......... (42,452) (51,567) (74,230) (37,013) (15,061) 2,575
Cash flow from (used
in) financing
activities.......... (911) (9,566) (38,129) 1,534 5,000 (59,719)
Cash flow used in
formation
activities(3)....... -- -- -- -- (127,193) --
Ratio of earnings to
fixed charges....... 7.5x 10.3x 10.6x 10.0x 1.2x 1.6x
Pro forma ratio of
earnings to fixed
charges(4).......... 1.4x
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash
equivalents......... $ 43,030 $ 94,058 $ 72,260 $124,603 $ 15,696 $ 27,555
Working capital(5).... (61,208) (63,709) (70,779) (78,902) (71,840) (67,717)
Total assets.......... 403,576 466,849 477,635 530,846 683,823 637,778
Total debt(6)......... 46,693 44,405 42,151 41,133 405,074 348,220
Total shareholder's
equity.............. 266,687 299,725 306,383 346,412 135,950 148,658
<Caption>
SUCCESSOR
---------------------
16 WEEKS 16 WEEKS
ENDED ENDED
APRIL 25, APRIL 24,
2001 2002
--------- ---------
CASH FLOW AND OTHER
FINANCIAL DATA:
EBITDA(1)............. $ 35,326 $ 37,759
Capital
expenditures(2)..... 10,585 7,931
Depreciation and
amortization........ 16,795 13,000
Cash flow from
operating
activities.......... 10,986 26,245
Cash flow from (used
in) investing
activities.......... (11,713) (6,246)
Cash flow from (used
in) financing
activities.......... (9,500) (33,660)
Cash flow used in
formation
activities(3)....... -- --
Ratio of earnings to
fixed charges....... 1.2x 2.1x
Pro forma ratio of
earnings to fixed
charges(4).......... 1.7x
BALANCE SHEET DATA
(AT END OF PERIOD):
Cash and cash
equivalents......... $ 5,469 $ 13,894
Working capital(5).... (63,227) (71,158)
Total assets.......... 663,865 616,422
Total debt(6)......... 396,205 315,202
Total shareholder's
equity.............. 136,780 157,076
</Table>
- ---------------
(1) EBITDA represents earnings before net interest expense, taxes, depreciation,
amortization, acquisition-related costs and non-cash deferred rental
expense.
(2) Capital expenditures include restaurant facilities acquired through business
combinations in fiscal 1998 and fiscal 1999.
(3) Cash flow used in formation activities represents amounts paid to common
shareholders as part of our buyout from public shareholders in October 2000
less net debt incurred in that transaction.
(4) The pro forma ratio of earnings to fixed charges for the fiscal year ended
January 2, 2002 gives effect to the Refinancing Transactions as if they had
occurred at the beginning of the period presented.
(5) Working capital is current assets, excluding cash, less current liabilities,
excluding the current portion of long-term debt and capital lease
obligations.
(6) Total debt represents the amount of our long-term debt and capitalized lease
obligations, including current maturities.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Selected
Historical Consolidated Financial Data," our consolidated financial statements
and related notes and "Supplemental Unaudited Pro Forma Combining Condensed
Consolidated Statement of Operations for Fiscal Year Ended January 3, 2001"
included elsewhere in this prospectus. Some of the statements in the following
discussion are forward-looking statements. See "Forward-Looking Statements."
GENERAL
We are one of the largest restaurant operators in the United States and the
leader in the buffet/ cafeteria segment of the restaurant industry, as measured
in both sales and number of restaurants. Our restaurants are principally
operated under the names Old Country Buffet and HomeTown Buffet. As of April 24,
2002, we had 396 company-owned restaurant locations and 23 franchised locations
in 39 states.
We were founded in 1983 to develop buffet-style restaurants under the name
Old Country Buffet. In October 1985, we completed our initial public offering
and were listed on the Nasdaq National Market. In September 1996, we merged with
HomeTown Buffet, Inc., which was developed by one of our co-founders and had 80
company-owned HomeTown Buffet restaurants in 11 states and 19 franchised
restaurants in eight states. In October 2000, Buffets was acquired by Buffets
Holdings, a company organized by Caxton-Iseman Capital, in a buyout from public
shareholders. Due to the effects of this transaction on the recorded bases of
goodwill, intangibles, property and shareholder's equity, our financial
statements prior to and subsequent to this transaction are not comparable.
Periods prior to October 2, 2000 represent the accounts of the predecessor.
Accordingly, the historical financial information for fiscal 2000 in this
prospectus is presented in two periods -- the period from December 30, 1999 to
October 1, 2000 and the period from October 2, 2000 to January 3, 2001. See our
"Supplemental Unaudited Pro Forma Combining Condensed Consolidated Statement of
Operations for Fiscal Year Ended January 3, 2001" included elsewhere in this
prospectus.
Our fiscal year is comprised of 52 or 53 weeks divided into four fiscal
quarters of 12, 12, 16 and 12 or 13 weeks. Beginning July 3, 2002, we changed
our fiscal year so that it ends on the Wednesday nearest June 30 of each year.
Fiscal year 2001 consisted of 26 weeks and was divided into two periods of 16
and 10 weeks. Prior to that, our fiscal year ended on the Wednesday nearest
December 31 of each year and each fiscal year was divided into periods of 16,
12, 12 and 12 or 13 weeks.
The following is a description of certain line items from our income
statements:
- We recognize as restaurant sales the proceeds from the sale of food and
beverages at our company-owned restaurants at the time of such sale. We
recognize the proceeds from the sale of gift certificates when the gift
certificates are redeemed at our restaurants. Until redemption, the
unearned revenue from the sale of gift certificates is included in
accrued liabilities on our balance sheet. Our franchise income includes
royalty fees and initial franchise fees received from our franchisees.
Management recognizes royalty fees as other income based on the sales
reported at the franchise restaurants.
- Restaurant costs reflect only direct restaurant operating costs,
including food, labor and direct and occupancy costs. Labor costs include
compensation and benefits for both hourly and restaurant management
employees. Direct and occupancy costs consist primarily of costs of
supplies, maintenance, utilities, rent, real estate taxes, insurance,
depreciation and amortization.
- Marketing expenses reflect all advertising and promotional costs.
- General and administrative expenses reflect all costs, other than
marketing expenses, not directly related to the operation of restaurants.
These expenses consist primarily of corporate administrative compensation
and overhead, district and regional management compensation and related
management expenses and the costs of recruiting, training and supervising
restaurant management personnel.
38
- Goodwill amortization through January 2, 2002 reflects the amortization
of the excess of cost over fair market value of assets and is recognized
on a straight-line basis, over a 15- to 30-year life.
- Impairment of assets and site closing costs reflect fair market
adjustments to the carrying value of long-lived assets and anticipated
closure costs for units where management has determined a plan for
closure of a restaurant.
- Acquisition-related costs reflect transaction and other costs associated
with our buyout from public shareholders in October 2000.
- Interest expense (income) reflects interest costs incurred plus
amortization of debt issuance costs and accretion of original issuance
discount on our 14% senior subordinated notes and Buffets Holdings' 16%
senior subordinated notes, less interest income earned.
- Other (income) primarily reflects franchise fees earned, less minority
interest associated with our Tahoe Joe's joint venture.
- Provision for income taxes reflects the current and deferred tax
provision determined in accordance with the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with
accounting policies generally accepted in the United States. The preparation of
our financial statements requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
ongoing basis, management evaluates its estimates and assumptions, including
those related to recoverability of long-lived assets, revenue recognition and
goodwill. Management bases its estimates and assumptions on historical
experience and on various other factors that are believed to be reasonable at
the time the estimates and assumptions are made. Actual results may differ from
these estimates and assumptions under different circumstances or conditions.
We believe the following critical accounting policies affect management's
significant estimates and assumptions used in the preparation of our
consolidated financial statements.
Recoverability of Long-Lived Assets
Management periodically evaluates long-lived assets and goodwill related to
those assets for impairment whenever events or changes in circumstances indicate
the carrying value amount of an asset or group of assets may not be recoverable.
Management evaluates groups of assets together at the individual restaurant
level, which is considered to be the lowest level for which there are
identifiable cash flows. A specific restaurant is deemed to be impaired if a
forecast of undiscounted future operating cash flows directly relating to that
restaurant, including disposal value, if any, is less than the carrying amount
of that restaurant. If a restaurant is determined to be impaired, the loss is
measured as the amount by which the carrying amount of the restaurant exceeds
its fair value. Management determines fair value based on quoted market prices
in active markets, if available. If quoted market prices are not available,
management estimates the fair value of a restaurant based on either the best
information available, including prices for similar assets, or the results of
valuation techniques, such as discounted estimated future cash flows, as if the
decision to continue to use the impaired restaurant was a new investment
decision. Management measures the fair value of a restaurant by discounting
estimated future cash flows. Considerable management judgment is necessary to
estimate the discounted future cash flows. Accordingly, actual results could
vary significantly from such estimates. We had no impairment write-downs for the
fiscal year ended January 2, 2002 or for the 16 weeks ended April 24, 2002.
39
Goodwill and Other Intangible Assets
Through the end of the fiscal year ended January 2, 2002, we recorded
goodwill which represented the excess of our acquisition cost over the fair
market value of the net assets acquired. We amortized that goodwill on a
straight-line basis over a 15- to 30-year life. However, on January 3, 2002, we
began applying the new rules on accounting for goodwill and other intangible
assets issued by the Financial Accounting Standards Board in SFAS No. 142
"Goodwill and Other Intangible Assets." As a result of the application of these
new rules, amortization of goodwill was reduced by approximately $3.5 million
for the 16 weeks ended April 24, 2002 because intangible assets with indefinite
lives, such as goodwill, are no longer amortized. However, the assets will be
reviewed for impairments on an annual basis.
RESULTS OF OPERATIONS
The following discussion reflects our historical results for the 52-week
fiscal years ended December 29, 1999 and January 2, 2002, the pro forma combined
results for the 53-week fiscal year ended January 3, 2001 and the historical
results for the 16 weeks ended April 25, 2001 and April 24, 2002. The
"Supplemental Unaudited Pro Forma Combining Condensed Consolidated Statement of
Operations for Fiscal Year Ended January 3, 2001," which is included elsewhere
in this prospectus, reflects adjustments to give effect to the buyout from
public shareholders completed on October 2, 2000 as if that transaction was
completed on December 30, 1999. Management believes that the pro forma financial
information is particularly informative because it provides the pro forma
annualized debt burden impact of that transaction. Our future results may not be
consistent with our historical results. The following discussion should be read
in conjunction with our consolidated financial statements and related notes
included elsewhere in this prospectus. See our "Supplemental Unaudited Pro Forma
Combining Condensed Consolidated Statement of Operations for Fiscal Year Ended
January 3, 2001" included elsewhere in this prospectus.
The following table sets forth our results of operations based on the
percentage relationship of the items listed to our restaurant sales during the
periods shown:
<Table>
<Caption>
HISTORICAL YEAR PRO FORMA HISTORICAL YEAR 16 WEEKS 16 WEEKS
ENDED YEAR ENDED ENDED ENDED ENDED
DECEMBER 29, 1999 JANUARY 3, 2001 JANUARY 2, 2002 APRIL 25, 2001 APRIL 24, 2002
------------------ ------------------ ------------------ ---------------- ----------------
(DOLLARS IN THOUSANDS)
Restaurant sales..... $936,854 100.0% $1,020,523 100.0% $1,044,734 100.0% $318,901 100.0% $320,755 100.0%
Restaurant costs..... 800,255 85.4 862,640 84.5 887,476 84.9 271,998 85.3 272,184 84.9
Marketing expenses... 22,491 2.4 26,196 2.6 26,233 2.5 9,153 2.9 8,721 2.7
General and
administrative
expenses........... 47,857 5.1 54,652 5.4 50,320 4.9 16,407 5.1 15,980 5.0
Goodwill
amortization....... 637 0.1 10,676 1.0 10,942 1.0 3,493 1.1 -- --
Impairment and site
closing costs...... 1,966 0.2 -- -- -- -- -- -- -- --
Acquisition-related
costs.............. -- -- 14,902 1.5 -- -- -- -- -- --
-------- ---------- ---------- -------- --------
Operating income..... 63,648 6.8 51,457 5.0 69,763 6.7 17,850 5.6 23,870 7.4
Interest expense
(income)........... (1,915) (0.2) 46,684 4.5 42,707 4.1 14,734 4.6 10,389 3.2
Other (income)....... (1,679) (0.2) (1,466) (0.1) (1,040) (0.1) (484) (0.2) (343) (0.1)
-------- ---------- ---------- -------- --------
Income before income
taxes.............. 67,242 7.2 6,239 0.6 28,096 2.7 3,600 1.2 13,824 4.3
Provision for income
taxes.............. 24,800 2.7 6,596 0.6 15,388 1.5 2,770 0.9 5,406 1.7
-------- ---------- ---------- -------- --------
Net income
(loss)......... $ 42,442 4.5 $ (357) (0.0) $ 12,708 1.2 $ 830 0.3 $ 8,418 2.6
======== ========== ========== ======== ========
</Table>
40
For the 16 Weeks Ended April 24, 2002 Compared to the 16 Weeks Ended April 25,
2001
Restaurant Sales. Restaurant sales for the 16 weeks ended April 24, 2002
increased $1.9 million, or 0.6%, compared with the 16 weeks ended April 25,
2001. The increase in total revenues during the period was primarily due to
price increases partially offset by the closing of 19 under-performing
restaurants in the past year. Comparable store average weekly sales increased
0.6% relative to the prior year, while average weekly sales increased 2.9% to
$50,394. The comparable store average weekly sales increase was driven by a 2.0%
increase in comparable average guest checks partially offset by a 1.4% decrease
in comparable average weekly guest counts. Comparable store average weekly sales
for the prior year period were up 2.4% reflecting a 2.5% increase in comparable
average pricing partially offset by a 0.1% decline in comparable average weekly
guest traffic.
Restaurant Costs. Restaurant costs for the first quarter of fiscal 2002
improved by 0.4% as a percentage of sales compared with the prior year period
primarily due to a decrease in food costs, partially offset by an increase in
restaurant management compensation and an increase in workers compensation
insurance.
Marketing Expenses. Marketing and media costs decreased 0.2% as a
percentage of sales during the first quarter of 2002 compared to the prior year
period due to timing differences in the media plans between periods.
General and Administrative Expenses. General and administrative expenses
improved 0.1% as a percentage of sales due to cost savings initiatives completed
during fiscal 2001.
Goodwill Amortization. Goodwill amortization expense decreased 1.1% as a
percentage of sales for the 16 weeks ended April 24, 2002 due to the
non-amortization provisions of SFAS No. 142, "Goodwill and Intangible Assets,"
implemented during the period.
Interest Expense/(Income). Interest expense decreased 1.4% as a percentage
of sales during the 16 weeks ended April 24, 2002 compared to the same period of
fiscal 2001 due to $81.0 million in debt principal pay-downs since April 25,
2001 coupled with a drop in the senior credit facility's variable interest
rates.
Other (Income). Other income declined 0.1% as a percentage of sales for
the 16 weeks ended April 24, 2002 compared to the same period of fiscal 2001 due
to an increase in minority interest expense.
Income Taxes. Income taxes increased 0.8% as a percentage of sales for the
16 weeks ended April 24, 2002 compared to the same period of the prior year
principally due to a $10.2 million increase in pretax income. The effective tax
rate for the current period was 39.1% compared with 76.9% for the prior year
period, largely due to a decrease in goodwill amortization associated with the
buyout from public shareholders.
For the 52 Weeks Ended January 2, 2002 Compared to the Pro Forma Combined 53
Weeks Ended January 3, 2001
Restaurant Sales. Restaurant sales for the 52 weeks ended January 2, 2002
increased $24.2 million, or 2.4%, compared with the prior year pro forma
combined 53-week period. This increase was driven by a 2.1% increase in
comparable store average weekly sales, which was partially offset by $18.1
million in restaurant sales attributable to the additional 53rd week included in
the prior fiscal year. Restaurant sales for fiscal 2001 increased $42.3 million,
or 4.2%, compared to restaurant sales for the first 52 weeks of fiscal 2000. Our
comparable store average weekly sales results consisted of a 2.6% increase in
comparable store average guest checks, partially offset by a 0.5% decrease in
comparable average weekly guest traffic. Average weekly sales increased 3.3%, to
$49,368, compared to the prior year period. Comparable store average weekly
sales for the prior year pro forma combined 53-week period ended January 3, 2001
were up 2.4% reflecting a 2.1% increase in comparable pricing coupled with a
0.3% increase in comparable guest counts.
41
Restaurant Costs. Restaurant costs for the 52 weeks ended January 2, 2002
increased 0.4% as a percentage of sales compared with the prior year period.
Food costs as a percentage of sales for the 52-week period improved 0.2%
compared to the prior year. Labor costs increased 0.2% as a percentage of sales
as increases in average hourly wage rates slightly outpaced productivity
improvements for fiscal 2001. Direct and occupancy costs increased 0.4% as a
percentage of sales for fiscal 2001 as compared with the prior year largely due
to increased utility rates experienced during the first half of the year.
Marketing Expenses. Marketing and media costs increased $37,000, resulting
in a 0.1% decrease as a percentage of sales, during fiscal 2001 as compared to
fiscal 2000.
General and Administrative Expenses. General and administrative expenses
decreased 0.5% as a percentage of sales for fiscal 2001 as compared with the pro
forma prior year period with the majority of the decrease attributable to cost
savings initiatives completed during fiscal 2001, including certain corporate
staffing reductions made in 2001.
Goodwill Amortization. Goodwill amortization expense was flat as a
percentage of sales when comparing the 52 weeks ended January 2, 2002 and the
pro forma prior year period.
Interest Expense/(Income). Interest expense decreased 0.4% as a percentage
of sales between fiscal 2001 and pro forma combined fiscal 2000 due to nearly
$59 million in debt principal pay-downs during fiscal 2001 coupled with a drop
in the senior credit facility's variable interest rates.
Other (Income). Other income was flat as a percentage of sales when
comparing the 52 weeks ended January 2, 2002 and the pro forma prior year
period.
Income Taxes. Income taxes increased 0.9% as a percentage of sales for the
52 weeks ended January 2, 2002 compared to the pro forma combined prior year
period primarily due to a $21.9 million increase in pretax income. The effective
tax rate for the current period was 54.8% largely due to non-recurring,
deductible permanent differences between book income and taxable income
associated with the buyout from public shareholders.
For the Pro Forma Combined 53 Weeks Ended January 3, 2001 Compared to the 52
Weeks Ended December 29, 1999
Restaurant Sales. Restaurant sales for the pro forma combined 53 weeks
ended January 3, 2001 increased $83.7 million, or 8.9%, compared with the 52
weeks ended December 29, 1999. The increase in total revenues during the period
was primarily due to the effect of the 53rd week as well as price increases.
Excluding the 53rd week, restaurant sales for pro forma combined fiscal 2000
increased $65.5 million, or 7.0%, compared to restaurant sales for fiscal 1999.
Comparable store average weekly sales increased 2.4% relative to the prior year,
while average weekly sales were $47,782, a 3.1% increase over the prior period.
The comparable store average weekly sales increase was driven by a 2.1% increase
in comparable average guest checks coupled with a 0.3% increase in comparable
average weekly guest counts. Comparable store average weekly sales for the prior
year period were up 1.9% reflecting a 2.3% increase in comparable average
pricing partially offset by a 0.4% decline in comparable average weekly guest
traffic.
Restaurant Costs. Restaurant costs for pro forma combined fiscal 2000
improved by 0.9% as a percentage of sales compared with the 52 weeks ended
December 29, 1999 due to a reduction in direct operating and occupancy costs.
The reduction was largely attributable to a decrease in depreciation expense
related to fair value adjustments recorded as part of the purchase accounting
for the buyout from public shareholders during fiscal 2000.
Marketing Expenses. Marketing and media costs increased 0.2% as a
percentage of sales during pro forma combined fiscal 2000 as compared to fiscal
1999. The increased costs were largely attributable to an expansion in the
number of media markets in which we advertised.
General and Administrative Expenses. General and administrative expenses
increased 0.3% as a percentage of sales for pro forma combined fiscal 2000
compared with fiscal 1999. The increase was primarily due to increased corporate
headquarters rent and facility expense coupled with the
42
payment of management fees in connection with the buyout from public
shareholders.
Goodwill Amortization. Goodwill amortization expense increased 0.9% as a
percentage of sales during pro forma combined fiscal 2000 as compared to fiscal
1999. The increase was due to the goodwill booked as a result of the buyout from
public shareholders in fiscal 2000.
Impairment of Assets and Site Closing Costs. Impairment of asset and site
closing costs decreased $2.0 million, or 0.2% as a percentage of sales, during
pro forma combined fiscal 2000 as compared to the prior year.
Acquisition-Related Costs. We recorded acquisition-related costs of $14.9
million, or 1.5% as a percentage of sales, during pro forma combined fiscal 2000
in connection with the buyout from public shareholders in October 2000. The
acquisition-related costs for fiscal 2000 included transaction fees for the
buyout from public shareholders, the settlement of a shareholder lawsuit, which
was a condition to the transaction, and other transaction-related costs.
Interest Expense/(Income). Interest expense increased 4.7% as a percentage
of sales during pro forma combined fiscal 2000 compared to fiscal 1999 as a
result of the debt burden incurred in connection with the buyout from public
shareholders.
Other (Income). Other income declined 0.1% as a percentage of sales during
pro forma combined fiscal 2000 compared with fiscal 1999.
Income Taxes. Income taxes decreased 2.1% as a percentage of sales for the
pro forma combined fiscal 2000 compared to the prior year primarily due to a
$61.0 million decrease in pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Refinancing Transactions, we had a $30.0 million
revolving credit facility, of which up to $20.0 million was available in the
form of letters of credit, that was undrawn as of that date and a separate $20.0
million letter of credit facility with $2.6 million of availability.
Historically, our capital requirements have been for the development and
construction of new restaurants, restaurant refurbishment, the installation of
new corporate financial systems and debt service obligations, and we expect this
to continue in the foreseeable future. We expect our cash flow from operations
and the loan availability under our new credit facility to be our primary source
of funds. The undrawn portion of the new revolving credit facility is available
to us for general corporate purposes as revolving credit loans or as swingline
loans. Letters of credit issued under the revolving loan facility or the letter
of credit facility will be available to us to support payment obligations
incurred for our general corporate purposes. In connection with the Refinancing
Transactions, we issued approximately $17.4 million of letters of credit issued
under the new letter of credit facility to replace existing letters of credit.
Net cash provided by operating activities was $26.2 million for the 16
weeks ended April 24, 2002 compared to $11.0 million for the 16 weeks ended
April 25, 2001, and $69.0 million for fiscal 2001 compared to $91.2 million for
pro forma combined fiscal 2000. Net cash provided by operating activities
exceeded the net income for the periods due principally to the effect of
depreciation and amortization and an increase in accrued and other liabilities.
Net cash used in investment activities was $6.2 million for the 16 weeks
ended April 24, 2002 compared to $11.7 million for the 16 weeks ended April 25,
2001. Net cash provided by investing activities was $2.6 million for fiscal 2001
compared to net cash used in investing activities of $52.1 million for pro forma
combined fiscal 2000. In December 2001, we committed to a sale and leaseback
transaction with respect to 24 restaurant properties and completed the sale and
leaseback of 23 such properties on December 28, 2001. That transaction generated
net proceeds of $39.1 million, excluding $0.8 million in capitalized debt
issuance costs. In February 2002, we completed the sale and leaseback with
respect to the remaining restaurant property. Capital expenditures totaled $38.1
million for fiscal 2001 and $50.0 million for pro forma combined fiscal 2000.
43
Net cash used in financing activities totaled $33.7 million for the 16
weeks ended April 24, 2002, compared to $9.5 million for the 16 weeks ended
April 25, 2001, and $59.7 million for fiscal 2001 compared to $6.5 million of
net cash provided by financing activities for pro forma combined fiscal 2000.
Financing activities in fiscal 2001 consisted primarily of scheduled and
accelerated repayments of debt and repayment of amounts outstanding under our
revolving line of credit.
Net cash used in formation activities was $127.2 million for pro forma
combined fiscal 2000. On October 2000, we were acquired by Buffets Holdings in a
buyout from public shareholders. In connection with that transaction, we
obtained an aggregate principal amount of $310.0 million in term loans under a
$340.0 million senior credit agreement, issued an aggregate principal amount of
$80.0 million in 14% senior subordinated notes due September 29, 2008 and
completed a sale and leaseback transaction with respect to our headquarters
facility in Eagan, Minnesota for $19.6 million in net proceeds. In addition,
Buffets Holdings issued $15.0 million aggregate principal amount of 16% senior
subordinated notes due September 29, 2008.
On June 28, 2002, we entered into a new $295.0 million senior credit
facility which consists of a revolving loan facility of $30.0 million, of which
up to $20.0 million is available in the form of letters of credit, a separate
$20.0 million letter of credit facility and a $245.0 million term loan. See
"Description of Other Indebtedness" for further description of the new senior
credit facility. On June 28, 2002, the proceeds from the offering of the initial
notes and term loan, together with our cash on hand, were used to: (1) repay all
outstanding indebtedness under our former credit facility, (2) redeem all of our
14% senior subordinated notes due September 29, 2008, (3) redeem all of Buffets
Holdings' 16% senior subordinated notes due September 29, 2008, (4) pay accrued
interest, related prepayment fees and a portion of the related redemption fee on
our existing debt, (5) distribute $150.0 million to our sole shareholder,
Buffets Holdings, and (6) pay transaction fees and expenses related to these
transactions. As of April 24, 2002, on a pro forma basis, after giving effect to
the Refinancing Transactions, our debt would have been $475.8 million, of which
$254.5 million would have been senior indebtedness.
In connection with the redemption of our 14% senior subordinated notes and
Buffets Holdings' 16% senior subordinated notes, we agreed to pay $18.0 million
of redemption fees, of which $1.0 million was paid at closing out of the net
proceeds of the offering of the initial notes and is accounted for as part of
the transaction fees and expenses relating to the Refinancing Transactions. The
remaining balance of the redemption fees will be paid in periodic installments
as follows: $5.0 million on September 30, 2002; $5.0 million on December 31,
2002; and $7.0 million on January 2, 2003. The final payment of $7.0 million
may, at our option, be deferred until the earlier of June 30, 2003 and the date
that we first fail to make any payment, regardless of amount, in respect of
indebtedness for borrowed money in an outstanding aggregate principal amount in
excess of $5.0 million or such indebtedness is accelerated following any default
thereunder. We expect to make these periodic installment payments from our cash
flow generated from operations.
We are currently considering a sale and leaseback transaction with respect
to some of our leasehold interests. Under this sale and leaseback transaction,
we are proposing to transfer our leasehold interests with respect to
approximately 38 restaurants for not less than $28.0 million and to enter
simultaneously into a long-term lease for those properties with the initial
annual cash rent not to exceed $4.3 million. We are also considering the sale of
our 14 Original Roadhouse Grill restaurants. Those restaurants generated
approximately $42.4 million of restaurant sales and approximately $5.0 million
of EBITDA in fiscal 2001. The indenture permits these transactions, and the new
credit agreement requires us to make a special prepayment equal to the lesser of
the amount of the aggregate net cash proceeds received from these transactions
and approximately $34.0 million. See "Description of Other Indebtedness" and
"Description of the Notes." Under the new credit agreement, and subject to
compliance with the covenants of the indenture governing the notes, we are
permitted to make a distribution to our sole shareholder, Buffets Holdings, of
up to the sum of (1) the amount by which the net cash proceeds received from the
contemplated sale of the Original Roadhouse Grill exceeds 3.7 times the pro
forma reduction in EBITDA associated with the contemplated sale and (2) the
amount by which the net cash proceeds received from the contemplated sale and
leaseback transaction with respect to our leasehold interests in approximately
38
44
restaurants exceeds 3.7 times the average annual cash rent expense over the life
of the new credit agreement.
During calendar year 2002, we plan to open six buffet restaurants and one
non-buffet concept restaurant. We estimate that we will spend approximately $19
million to $20 million in the aggregate on construction of new restaurants,
principally for leasehold improvements. We anticipate spending $13 million to
$14 million in remodeling, relocation and improvement costs for existing
facilities and an additional $4 million to $5 million for corporate and system
investments, including the implementation of a new wide area network.
For the next twelve months, we believe that cash flow from operations and
available borrowing capacity will be adequate to finance these development
plans, our on-going operations as well as our debt service obligations. In
addition, we may fund restaurant openings through credit received by trade
suppliers and landlord contributions.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Our sales are seasonal, with a lower percentage of annual sales occurring
in most of our current market areas during the winter months. Our restaurant
sales may also be affected by unusual weather patterns, major world events or
matters of public interest that compete for customers' attention. Generally,
restaurant sales per unit are lower in the winter months, our third fiscal
quarter of each year. The impact of these reduced average weekly sales is
mitigated in our quarterly data presentations through the inclusion of 16 weeks
in the third fiscal quarter of each year, compared to only 12 or 13 weeks in
each of the other fiscal quarters.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of accounting.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives, but with no maximum life. The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, we
will apply the provisions of SFAS No. 142 beginning January 3, 2002. As of
January 2, 2002, we had unamortized goodwill of $312.2 million that will be
subject to the provisions of SFAS No. 142. Goodwill amortization expense
recorded during 2001 was $10.9 million. We do not believe any of our other
identifiable intangible assets have an indefinite life. We have determined the
impact of adopting SFAS No. 142 will not result in transitional impairment
losses as a cumulative effect of a change in accounting principle.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for reporting on the impairment or disposal of long-lived assets and
for segments of a business to be disposed of. The adoption of SFAS No. 144 is
effective for us beginning on January 3, 2002. The adoption of SFAS No. 144 will
not have a material effect on our historical consolidated results of operations,
financial position or cash flow.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risks. We have interest rate exposure relating to certain of
our long-term obligations. Prior to the Refinancing Transactions, the interest
rate on the $80.0 million outstanding principal amount of our 14% senior
subordinated notes and Buffets Holdings' 16% senior subordinated notes was fixed
and the interest rates on the term loan A and term loan B under our former
credit facility were affected by changes in the market interest rates. A 1%
change in interest rates on our variable rate debt would have resulted in our
interest rate expense fluctuating by approximately $3.1 million for fiscal 2000
and $2.9
45
million for fiscal 2001. The interest rate on the $245.0 million aggregate
principal amount of our term loan and the outstanding balance of our revolving
loan, if any, under the new credit facility will be affected by changes in the
market interest rates.
Food Commodity Risks. Many of the food products purchased by us are
affected by commodity pricing and are, therefore, subject to price volatility
caused by weather, production problems, delivery difficulties and other factors
that are outside our control. To control this risk in part, we have fixed price
purchase commitments with terms of one year or less for certain key food and
supplies from vendors who supply our national food distributor. In addition, we
believe that substantially all of our food and supplies are available from
several sources, which helps to control food commodity risks. We believe we have
the ability to increase menu prices, or vary the menu items offered, if needed,
in response to food product price increases within the range that has been
experienced historically. To compensate for a hypothetical price increase of 10%
for food and beverages, we would need to increase menu prices by an average of
3.3% percent, which is consistent with our average price increases of
approximately 3.7% in fiscal 2001, 3.4% in the period from October 2, 2000 to
January 3, 2001 and 2.1% in the period from December 30, 1999 to October 1,
2000. Accordingly, we believe that a hypothetical 10% increase in food product
costs would not have a material effect on our operating results.
CONTRACTUAL OBLIGATIONS
The following table provides aggregate information about our material
contractual payment obligations and the calendar year in which these payments
are due:
PAYMENTS DUE BY CALENDAR YEAR
<Table>
<Caption>
2002 2003 2004 2005 THEREAFTER TOTAL
------- ------- ------- ------- ---------- ----------
(IN THOUSANDS)
Long-term debt(1)....... $44,885 $ 2,450 $ 2,450 $ 2,450 $466,425 $ 518,660
Operating leases(2)..... 51,708 51,477 49,919 47,974 330,781 531,859
Advisory fees(3)........ 3,400 3,375 3,350 3,325 -- 13,450
------- ------- ------- ------- -------- ----------
Total Contractual
Cash
Obligations...... $99,993 $57,302 $55,719 $53,749 $797,206 $1,063,969
======= ======= ======= ======= ======== ==========
</Table>
- ---------------
(1) Long-term debt payments for 2002 include actual debt payments made on our
former credit facility, our 14% senior subordinated notes due 2008 and
Buffets Holdings' 16% senior subordinated notes due 2008 up until the
closing of the Refinancing Transactions, as well as the future required debt
payments under our new credit facility and the notes. The 2002 payment total
excludes the early re-payment of our former credit facility, our 14% senior
subordinated notes and Buffets Holdings' 16% senior subordinated notes made
as part of the Refinancing Transactions. Long-term debt payments for 2003
and beyond represent the required debt payments on our new credit facility
and the notes.
(2) See Note 10 to our consolidated financial statements included elsewhere in
this prospectus for details of our operating lease obligations.
(3) The advisory fees comprise our contractual obligation to pay annual advisory
fees to each of Roe H. Hatlen, Sentinel Capital Partners, L.L.C. and
Caxton-Iseman Capital. See "Certain Relationships and Related Transactions."
Under the terms of these agreements, Mr. Hatlen and Sentinel Capital are
each paid a fixed-price annual fee. The fee of Caxton-Iseman is calculated
as a percentage of our earnings before interest, taxes, depreciation and
amortization, which in fiscal 2001 resulted in a payment of $2.9 million.
This figure has been used as an estimate for our obligations under that
agreement for the year 2002 and each year thereafter. The agreements with
Caxton-Iseman and Sentinel Capital are of perpetual duration, and hence no
estimate of the aggregate amount of future obligations (represented in the
"Thereafter" column, above) is provided.
46
OTHER COMMERCIAL COMMITMENTS
The following table provides aggregate information about our commercial
commitments and the calendar year in which they expire:
AMOUNT OF COMMITMENT EXPIRATION BY CALENDAR YEAR
<Table>
<Caption>
2002 2003 2004 2005 THEREAFTER TOTAL
------ ------- ---- ---- ---------- -------
(IN THOUSANDS)
Letters of credit(1)............... $2,130 $15,275 $-- $-- $ -- $17,405
Management loan guarantees(2)...... -- -- -- -- 549 549
------ ------- -- -- ---- -------
Total Commercial
Commitments:................ $2,130 $15,275 $-- $-- $549 $17,954
====== ======= == == ==== =======
</Table>
- ---------------
(1) Contemporaneous with the closing of the Refinancing Transactions, we rolled
over $17.4 million of letters of credit into our new letter of credit
facility. The outstanding letters of credit are payable at various times
with final payments becoming due in May 2003. The new letter of credit
facility had $2.6 million of availability immediately after the closing of
the Refinancing Transactions.
(2) The management loan guarantees comprise our guarantee on loans provided by
U.S. Bank to each of David Goronkin and R. Michael Andrews, Jr. See "Certain
Relationships and Related Transactions."
47
BUSINESS
OUR COMPANY
We are one of the largest restaurant operators in the United States and the
leader in the buffet/ cafeteria segment of the restaurant industry, as measured
in both sales and number of restaurants. Our restaurants are principally
operated under the names Old Country Buffet and HomeTown Buffet. As of April 24,
2002, we had 396 company-owned restaurants and 23 franchised locations in 39
states. We offer excellent customer service, together with a convenient,
value-priced selection of home-style cooked meals in a self-service buffet
format. Either Old Country Buffet or HomeTown Buffet has been ranked the #1 or
#2 restaurant chain for best value since 1992, according to surveys conducted by
Restaurants and Institutions magazine. We have been able to achieve consistent
profitable growth over the past 18 years and grow comparable store sales for 19
consecutive quarters since July 1997, except for the quarter ended July 3, 2002
in which comparable store sales were down 0.5%. For the 52 weeks ended April 24,
2002, we served over 150 million customers and generated net sales of over $1.0
billion and adjusted EBITDA of $124.6 million.
We maintain a high level of food quality and service in all of our
restaurants through uniform operational standards initiated at the corporate
level. Freshness is maintained by preparing food in small batches of six to
eight servings at a time, with preparations scheduled by monitoring current
customer traffic and applying our food production forecasting model. Our buffet
restaurants utilize uniform menus, recipes and ingredient specifications, except
for minor differences relating to regional preferences. We offer approximately
90 menu items at each meal, including entrees, soups, salads, fresh vegetables,
non-alcoholic beverages and desserts. Typical entrees include chicken, carved
roast beef, ham, shrimp, fish and casseroles.
Our buffet restaurants use an all-inclusive pricing strategy designed to
provide an exceptional dining value. As of January 2, 2002, the meal price at
our buffet restaurants for dinner ranged from $7.99 to $9.39 and for lunch from
$5.99 to $6.70, with discounts offered to senior citizens and children. The
average guest check in our buffet restaurants was $6.64 for fiscal 2001. In
order to further enhance our guests' dining experience, we have focused on
providing a level of customer service designed to supplement the self-service
buffet format, including such features as limited table-side service and our
scatter bar format.
Our buffet restaurants average approximately 10,000 square feet in size and
can seat between 225 and 400 people. On average, our buffet restaurants serve
approximately 7,500 customers per week. While we attract a broad variety of
customers, including singles, families and senior citizens, our customer surveys
indicate that approximately two-thirds of our guests are married and over half
are between the ages of 25 and 54 years old (the largest segment of the
population within the United States).
We have a national footprint of restaurant locations, which are
strategically concentrated in particular regions in order to maximize
penetration within those markets and achieve operating and advertising
synergies. For example, our advertising and marketing programs in 63 designated
market areas provided media coverage for 79% of our buffet restaurants in fiscal
2001. In addition, our restaurants are located in high customer traffic venues
and include both freestanding units as well as units located in strip shopping
centers and malls. As of April 24, 2002, 67% of our restaurants were located in
strip shopping centers or malls and 33% were freestanding units.
INDUSTRY OVERVIEW
The restaurant industry is among the largest industries in the United
States and has recorded 10 consecutive years of real growth. According to
Technomic, the restaurant industry has grown at an average annual rate of 8.3%
since 1972. In 2001, the industry grew an estimated 2.9% to $252 billion.
Technomic expects that the restaurant industry will reach $345 billion by 2005.
48
Increasing demands for convenience by today's time-conscious consumers are
fundamentally changing the way meals are prepared in the United States. The
restaurant industry's portion of the total food industry's dollar has grown
significantly in the past two decades. According to Technomic, the restaurant
industry's share of total food sales was only 23% in 1980. This share has grown
to 30% in 2000 and is projected to continue increasing.
There are several lifestyle and demographic trends that are driving growth
in the restaurant industry:
- Increased Spending on Food Away from Home: Annual spending on food away
from home, which includes restaurant sales as well as food expenditures
at non-commercial cafeterias, hotels and food service sections of
supermarkets and convenience stores, has increased over the past five
years at a compound annual growth rate of 5.0% to $411.6 billion, or
48.9% of total food expenditures, in 2001 and is expected to grow to
$477.3 billion in 2010, or over 51% of total food expenditures;
- Increased Frequency in Restaurant Dining: The per capita number of
restaurant meals reached 139 in 1999 as compared to 122 meals in 1990;
- Continued Growth in Disposable Incomes: Dual-income households with
higher disposable incomes are projected to increase by nearly 20% through
2005, driven by an increasing number of women in the workplace;
- Growth in Key Age Groups: Individuals aged 45-64, representing 35% of
our customer base, account for the highest per capita spending on food
and are part of the fastest growing age group in the U.S.; and
- Population Growth: U.S. population is expected to continue increasing at
a rate of approximately 1% per year.
The restaurant industry can be divided into three broad categories:
quick-service restaurants, full-service restaurants and limited-service
restaurants, which include buffet and cafeteria style restaurants. Quick-service
restaurants are fast food establishments and generate average guest checks of
between $5.00 and $6.00. Full-service restaurants offer table service from a
menu and typically generate guest checks of more than $10.00, with a
proportionately higher cost structure. We operate in the buffet/cafeteria
segment, which includes self-service restaurants that offer moderately priced
meals, typically without table service.
The buffet/cafeteria segment has grown at a compound annual growth rate of
3.1% since 1992, reaching $4.4 billion in 2000. Technomic expects this growth to
continue at a compound annual growth rate of 4.0% over the next five years,
reaching $5.3 billion in 2005. Within this segment, the buffet concept, of which
we are the largest participant, has experienced much higher growth than the
cafeteria concept. The buffet concept has grown at a compound annual growth rate
of 10.0% from 1992 to 2000. We believe this growth is due to a unique
combination of convenience and variety, which appeals to value-oriented
consumers and engenders a loyal customer base. With sales of over $1.0 billion
in fiscal 2001, we are the leader in the segment.
OUR COMPETITIVE STRENGTHS
We believe our leading market position, strong performance in all business
cycles, flexible cost structure, highly trained and motivated employees,
centralized control measures, attractive unit level economics, strong cash flow
and strong management team will allow us to continue to grow sales and increase
profitability.
Leading Market Position with National Scale. We are one of the largest
restaurant operators in the United States and the leader in the buffet/cafeteria
segment of the restaurant industry, as measured in both sales and number of
restaurants. We account for approximately 25% of total sales within this segment
and are nearly twice the size of our nearest competitor. With our large number
of restaurants and centralized corporate management structure, we benefit from
significant operational efficiencies and economies of scale. We are able to
achieve substantial levels of savings as a result of our size and related
49
purchasing power, particularly with respect to food and beverage goods and real
estate leases for our restaurants.
Strong Performance in All Business Cycles. Our exceptional value
proposition of quality food served fresh at an all-inclusive price has proven to
be a robust business model for all economic environments. We have increased
revenue and sustained profitability over the past 18 years, with record net
income being recorded in 15 of the 17 years prior to our buyout from public
shareholders in October 2000. During the difficult economic conditions of fiscal
2001, we were able to increase average weekly sales per restaurant by 3.3%
compared to the previous fiscal year and expand EBITDA margins to 12.0% for
fiscal 2001 from 11.7% in fiscal 2000. We believe our success in a recessionary
environment is based, in part, on the value we offer our customers, as this
plays an important role in consumers' decision-making process.
Flexible Cost Structure. As a buffet style restaurant with a broad
selection of food, we are able to quickly modify our menu in response to changes
in customer preferences and rising food costs. Our total food costs represented
31.4% of our restaurant sales in fiscal 2001, with no individual food product
purchase cost accounting for more than 7.5% of our restaurant sales. In the
event of an increase in the cost of a particular food product, we are able to
highlight other foods in order to reduce consumption of the higher cost item.
Highly Trained and Motivated Employees. Our most important asset is our
people. We believe a well trained and motivated workforce results in lower
turnover, lower operating costs and the ability to consistently grow sales in
existing units. Our general managers have an average of seven years experience
with us. In fiscal 2001, our buffet restaurant general manager turnover was
approximately 14% and total buffet restaurant management turnover was
approximately 23%, which we believe are among the lowest turnover rates in the
industry. We are deeply committed to the long-term development of our employees.
In fiscal 2001, we spent $5.6 million, or over 4.5% of EBITDA, on training and
development. All of our buffet restaurant managers receive extensive training
relating to all aspects of restaurant management at Buffets College, our
training program operated out of our corporate headquarters. We further seek to
reinforce our employees' commitment through targeted retention programs,
including a program that grants cash bonuses to general managers who stay in the
same restaurant for three years. Approximately 72% of our 370 buffet restaurant
general and senior managers currently participate in this program. We also
initiated a program in 1997 under which we reward managers with trips and other
benefits when they exceed specified operating benchmarks. The goal of these
programs is for our restaurant managers to develop a strong tie to their
community and instill a sense of ownership in their particular restaurant.
Centralized Control Measures. We maintain a high level of financial
controls, service and food quality in all of our buffet restaurants through
uniform operational standards initiated at the corporate level. Our centralized
systems enable management to evaluate weekly profit and loss statements, sales
reports and supplier invoices for each buffet restaurant, allowing us to quickly
identify performance trends and key profitability drivers. These systems are
supplemented by several performance audit and evaluation programs, including a
1-(800) guest service line, a secret-shopper evaluation program and detailed
quarterly restaurant performance audits by multi-unit managers. These ongoing
efforts assist management in tracking restaurant performance and customer
satisfaction at the individual restaurant level. Centralized coordination of our
nationwide network of buffet restaurants assures a consistent level of food
quality in our restaurants and enables us to negotiate pricing terms for major
product purchases directly with manufacturers.
Attractive Unit Level Economics. Our existing restaurants generated
average restaurant sales of approximately $2.6 million in 2001 and have
increased average weekly sales at a compound annual growth rate of 2.2% over the
past five years. Our buffet restaurants opened in fiscal 2001 generally became
profitable within eight weeks of opening and generated average annualized sales
of $3.5 million in their first year of operation. The increased sales volume is
due to improved site selection, a focus on freestanding units and expansion
primarily in our core markets, providing operating and marketing synergies. As
measured by cash-on-cash returns, defined as first year cash flow as a
percentage of initial
50
cash investment, our restaurants opened in the last three years have produced
cash-on-cash returns of over 29% in their first year of operation.
Strong Cash Flow Generation. Our strong operating results and historically
low maintenance capital expenditure and working capital requirements are key
drivers of our strong cash flow. Since 1997, our maintenance capital
expenditures have averaged approximately 1.6% of restaurant sales. We believe
our restaurants are well-maintained and will require a similar level of required
maintenance capital expenditures in the near future. In addition, we typically
generate cash flow from working capital as we receive cash for the majority of
our sales immediately at the point of service. Our new units initially generate
cash flow from working capital of approximately $160,000. As a result of these
factors and our strong operational performance, our buffet restaurants that had
been open for at least 12 months at the beginning of fiscal 2001 generated
average cash flow of $499,000, or 19.4% of sales, in fiscal 2001.
Strong Management Team with Equity Ownership. Over the past 18 years, we
have attracted, built and retained an exceptionally talented and complementary
executive management team with an average of more than 22 years of restaurant
industry experience. Our executive management team has demonstrated strong
restaurant operating capabilities by consistently increasing profitability and
executing a disciplined growth strategy. In addition, our current executive
management team participated in the buyout from public shareholders by making
direct equity investments and has equity ownership of approximately 10% of
Buffets Holdings.
OUR BUSINESS STRATEGY
Our success has been driven by a focus on restaurant level operations and
efficiencies, uniform operational standards initiated at the corporate level and
our success in identifying, acquiring and integrating new stores into our
organization. We plan to continue to improve our operating performance through
the principal strategies outlined below:
Continued Focus on Same Store Sales Growth and Margin Expansion. We have
experienced same store sales growth over each of the past 19 quarters since July
1997, except for the quarter ended July 3, 2002 in which same store sales were
down 0.5%. We are continuing to focus on the increase of same store sales growth
and margins through several operational initiatives at the restaurant level.
These initiatives include:
- our service enhancement program, which is designed to reduce our labor
costs while increasing customer service by instituting earned gratuities
as a component of wages, and
- the rollout of selected outsourced procurement and cooking processes
designed to reduce food preparation time and direct labor hours.
Continued Enhancement of Operational Systems. Our centralized financial
and accounting systems allow us to analyze cost, cash management, customer count
and non-financial data to understand key profitability drivers. We see
significant opportunities for further efficiency improvements through our
management information systems, including electronic food ordering, improved
food cost analysis tools and other restaurant data analyses, such as the ability
to monitor all aspects of customer satisfaction and ingredient and supply volume
usage. Improving these systems ensures a continued high level of food quality
and service across our entire nationwide network of restaurants while providing
management with the tools necessary to monitor performance at each individual
restaurant.
Disciplined New Unit Expansion. We believe there is capacity for a
substantial number of new buffet-style restaurants in the United States. We plan
to slowly expand our new unit growth over the next several years. We strive for
a consistently high return on investments for each proposed restaurant. The
selection of our sites is a critical factor to the success of our restaurants.
We typically utilize the following key criteria for site selection:
- high level of customer traffic,
- convenience to both lunch and dinner customers in our target demographic
groups, and
51
- low occupancy cost.
We have established a consistent history of steady growth through disciplined
expansion. Recent store openings have outperformed the system average due to
continued focus on high quality real estate selection and operational execution.
New units will primarily be buffet-style restaurants and will be focused
geographically in areas where we believe we can expand our existing presence.
This will allow us to take advantage of advertising and marketing synergies and
increase media brand recognition and operating efficiency. This new unit
development will focus on freestanding buildings on leased sites, which
generated approximately 17% higher sales volumes than our restaurants located in
strip shopping centers or malls during fiscal 2001.
Unit Image Enhancement. In an ongoing effort to maintain our appeal among
existing customers and expand our guest base, we are developing an updated
interior and exterior design for our buffet restaurants. This new design is
intended to heighten exterior curb appeal and provide a more visually appealing
and comfortable restaurant interior. In conjunction with the facilities
enhancement, we intend to enhance food delivery and merchandising elements, such
as a feature bar with display cooking and the showcasing of signature food
items. We expect to test the re-design over the next 18 months at a limited
number of restaurants. Depending upon the success of our test units, the
re-design would be implemented at approximately 10% of our existing restaurants
annually over the next several years.
OUR BACKGROUND
We were founded in 1983 to develop buffet-style restaurants under the name
Old Country Buffet. In October 1985, Buffets successfully completed an initial
public offering with seven restaurants, and by 1988 had 47 company-owned units
and nine franchised units. In September 1996, Buffets merged with Hometown
Buffets, Inc., a similar publicly-held scatter-bar, buffet-style restaurant
company established and developed by one of our co-founders. The merger provided
us with additional management expertise and depth, increased purchasing power
and marketing efficiencies. The merger also added 80 company-owned restaurants
in 11 states and 19 franchised restaurants in eight states bringing the total
number of restaurants to 346 company-owned restaurants and 24 franchised
restaurants in 36 states at December 31, 1996. We have successfully achieved
long-term record growth and we have grown revenue and EBITDA at compound annual
growth rates, including acquisitions, of 19.6% and 18.3% from fiscal 1990
through fiscal 2001.
On October 2, 2000, Buffets Holdings, a company organized by Caxton-Iseman
Capital, Inc., acquired Buffets in a buyout from public shareholders.
Caxton-Iseman Investments L.P. and certain other investors, including members of
management, made an equity investment in Buffets Holdings and became the
beneficial owners of 100% of the common stock of Buffets.
Caxton-Iseman Capital is a New York-based private equity investment firm
specializing in leveraged buyouts. The firm's investment vehicles have current
equity capital in excess of $1.0 billion available for buyout investments.
Caxton-Iseman Capital's current portfolio companies have combined sales in
excess of $2.5 billion and combined earnings before net interest expense, taxes,
depreciation and amortization of approximately $250.0 million. The firm was
founded in 1993 by Frederick J. Iseman and Caxton Corporation. Caxton
Corporation is a New York investment management firm managing funds in excess of
$8.0 billion. Since the firm's inception in 1993, Caxton-Iseman Capital has made
equity investments in the following industries: restaurants, food service, IT
services, leisure and gaming, print and database publishing, defense, heavy and
light manufacturing, medical devices, hotel management and agribusiness.
BUFFET RESTAURANT OPERATIONS AND CONTROLS
In order to maintain a consistently high level of food quality and service
in all of our restaurants, we have established uniform operational standards
which are implemented by the managers of each restaurant. We require all
restaurants to be operated in accordance with rigorous standards and
specifications relating to the quality of ingredients, preparation of food,
maintenance of premises and employee conduct.
52
Each buffet restaurant typically employs a Senior General Manager or
General Manager, Kitchen Manager, Service Manager and one or two assistant
managers. Each of our restaurant General Managers has primary responsibility for
day-to-day operations in one of our restaurants, including customer relations,
food service, cost controls, restaurant maintenance, personnel relations,
implementation of our policies and the restaurant's profitability. A portion of
each general manager's and other restaurant manager's compensation depends
directly on the restaurant's profitability. Bonuses are paid to buffet
restaurant managers each period based on a formula percentage of controllable
restaurant profit. In 1997, we implemented a Founders Club program, which
rewards managers with, for example, trips or cars when they exceed certain
operating benchmarks. Additionally, the "PRIDE" bonus program pay-outs for
eligible managers commenced in 2000. This program, begun in 1997, provides
financial incentives to General Managers making a three-year service commitment
in a single restaurant. The program was designed to enhance the retention of
restaurant managers and to build a sense of proprietorship. We believe that our
compensation policies have been important in attracting, motivating and
retaining qualified operating personnel.
Each buffet restaurant general manager reports to a District
Representative, each of whom in turn reports to a Regional Director. Each
Regional Director reports to one of two divisional Vice Presidents, who in turn
report to our Chief Operating Officer. Our non-buffet restaurants and certain
test efforts are supervised by Division Heads reporting directly to our Chief
Executive Officer.
We maintain centralized financial and accounting controls for all of our
restaurants. On a daily basis, restaurant managers forward customer counts,
sales, labor costs and deposit information to our headquarters. On a weekly
basis, restaurant managers forward a summarized profit and loss statement, sales
report, supplier invoices and payroll data.
MANAGEMENT TRAINING
We have a series of training programs that are designed to provide managers
with the appropriate knowledge and skills necessary to be successful in their
current positions. All new restaurant managers hired from outside our
organization and hourly employees considered for promotion to restaurant
management are required to complete nine days of classroom training at our
corporate headquarters in Eagan, Minnesota. After their initial instruction, new
management candidates then continue their training for four weeks in a certified
training restaurant in the field. The information covered includes basic
management skills, food production, labor management, operating programs and
human resource management.
Advancement is tied to both current operational performance and training.
Individuals designated for promotion to the position of General Manager attend a
specialized eight-day training program conducted at our corporate headquarters.
This program focuses on advanced management skills with emphasis on team
building and performance accountability.
In addition to these programs, we conduct a variety of field training for
store management covering topics such as new product procedures, food safety and
management development.
RESEARCH AND DEVELOPMENT, MENU SELECTION AND PURCHASING
The processes of developing new food offerings and establishing standard
recipes and product specifications is handled on an interdisciplinary team basis
at our headquarters. Specialists drawn from the Research and Development,
Marketing, Operations and Purchasing Departments lead this effort. Before new
items are introduced or existing products modified, a program of testing within
limited markets is undertaken to assess customer acceptance and operational
implementation considerations. Food quality is maintained through centralized
coordination with suppliers and frequent restaurant visits by District
Representatives and other management personnel.
New product activity includes an ongoing roll-out of new items to keep the
guest experience fresh. Additionally, we have periodic theme promotions, wherein
a specific cuisine, such as Italian, Asian,
53
Seafood or Mexican, is highlighted on a given night. Each spring and fall, a
seasonal menu is introduced to provide variety and more seasonally appropriate
food. Furthermore, although most of the menu is similar for all buffet
restaurants, individual restaurants have the option to customize a portion of
the menu to satisfy local preferences.
Headquarters personnel negotiate major product purchases directly with
manufacturers on behalf of all of our restaurants the terms of all food,
beverage and supply purchasing, including quality specifications, delivery
schedules and pricing and payment terms. Each restaurant manager places orders
for inventories and supplies with, and receives shipments directly from,
distributors and local suppliers approved by us. Restaurant managers approve all
invoices before forwarding them to our headquarters for payment. To date, we
have not experienced any material difficulties in obtaining food and beverage
inventories or restaurant supplies.
NEW RESTAURANT DEVELOPMENT
Our ability to open new restaurants, and the allocation of new restaurants
among our currently available and future concepts, depends on a number of
factors, including our ability to find suitable locations and negotiate
acceptable leases and land purchases, our ability to attract and retain a
sufficient number of qualified restaurant managers, the comparative potential
return and risk associated with the particular restaurant concept and the
availability of capital.
We actively and continuously attempt to identify and negotiate leases and
land purchases for additional new locations. In an effort to better control
costs and improve quality, we are closely involved in the construction of our
restaurants and also in the acquisition and installation of fixtures and
equipment. Restaurants located in shopping centers typically open approximately
11 weeks after construction begins, while freestanding restaurants typically
open approximately 17 weeks after construction begins. Freestanding restaurants
opened in the fiscal year ended January 2, 2002 cost an average of approximately
$2.1 million for building and leasehold improvements, equipment and furnishings,
whereas similar improvements for a shopping center location cost approximately
$1.9 million.
NON-BUFFET RESTAURANT CONCEPTS
We currently operate two non-buffet restaurant concepts, totaling 22
restaurants under the names Tahoe Joe's Famous Steakhouse and Original Roadhouse
Grill. We purchased two Tahoe Joe's Famous Steakhouses in April 1999 and have
since opened six additional restaurants. Tahoe Joe's Famous Steakhouses are
upscale casual dining restaurants featuring steaks, seafood and various other
entrees served in large portions in a fun atmosphere. We also operate 14
Original Roadhouse Grill restaurants, which feature steaks, seafood and other
entrees ordered from a menu and prepared using an "on display" grill. The
Original Roadhouse Grill and Tahoe Joe's Famous Steakhouse restaurants currently
serve alcohol.
FRANCHISING AND JOINT VENTURES
We currently franchise 23 buffet restaurants under the Old Country Buffet
and HomeTown Buffet names. Franchisees must operate their restaurants in
compliance with our operating and recipe manuals. Franchisees are not required
to purchase food products or other supplies through us or our suppliers. Each
franchised restaurant is required at all times to have a designated Manager and
Assistant Manager who have completed the required manager training program. In
connection with the opening of a restaurant, we provide consultation and make
our personnel generally available to a franchisee. In addition, we send a team
of personnel to the restaurant for up to two weeks to assist the franchisee and
its managers in the opening and the initial marketing and training effort, as
well as in the overall operation of the restaurant. At present, we are not
actively seeking to grant additional franchises.
From time to time, we have entered into joint ventures, principally as a
means of entering new geographic markets or testing new restaurant concepts.
Currently, we have one joint venture, Tahoe Joe's Inc., which owns and operates
our Tahoe Joe's Famous Steakhouses. We have an 80% interest in Tahoe Joe's, and
a call option with respect to the remaining 20% interest of the minority holder.
The minority
54
holder of Tahoe Joe's has a corresponding put option with respect to his shares.
We may exercise our call option or the minority holder may exercise his put
option at the earlier of (1) April 8, 2004, (2) when the minority holder's
employment with Tahoe Joe's is terminated by him or for cause by us and (3) when
the number of Tahoe Joe's restaurant openings reaches 18. We also have the right
to call the minority holder's shares if he ceases to be substantially involved
in developing and operating Tahoe Joe's restaurants. The exercise price will be
(1) the minority holder's portion (20%) of five times the pre-tax income for the
prior 52 weeks generated by the Tahoe Joe's restaurants added since April 8,
1999, less (2) $1.25 million. Since our investment in the joint venture, we have
opened six additional restaurants, bringing the total number of restaurants to
eight, all in California, and we plan to open an additional location later this
calendar year. The eight Tahoe Joe's restaurants generated approximately $0.1
million of pre-tax income in fiscal 2001. Tahoe Joe's will not guarantee our
obligations under the notes. See "Description of the Notes -- Guaranties." At
present, we are not actively seeking to enter into additional joint ventures. We
may, however, continue to utilize joint ventures from time to time to test new
restaurant concepts.
ADVERTISING AND PROMOTION
We market our buffet restaurants through a two-tier marketing approach
including television advertising and community based marketing. Television
advertising is used when we can receive a profitable return on media
expenditures, while community based marketing is the responsibility of each
individual store. We believe our marketing efforts were one of the main factors
that contributed to same store sales increases of 2.4% and 2.1% in fiscal 2000
and fiscal 2001. Our advertising mix includes: television advertisements, print
advertisements, radio advertisements and tour bus marketing. Approximately 79%
of our buffet restaurants are in markets supported by our mass media
advertisements.
The existing markets in which we operate are becoming increasingly media
efficient. Although our restaurants are spread across 101 designated market
areas, we currently have 295 restaurants geographically focused in 63 designated
market areas, compared to only 187 restaurants in 39 designated market areas in
1997. Our local marketing efforts are designed to build relationships with the
community. Each restaurant employs a dedicated community marketing
representative that participates in a wide array of local events. Our community
representatives participated in more than 15,000 local events nationwide in
fiscal 2001, reaching over eight million people.
COMPETITION
The food service industry is highly competitive. Menu, price, service,
convenience, location and ambiance are all important competitive factors, with
the relative importance of many such factors varying among different segments of
the consuming public. By providing a wide variety of food and beverages at
reasonable prices in an attractive and informal environment, we seek to appeal
to a broad range of value-oriented consumers. We believe that our primary
competitors in this industry segment are other buffet and cafeteria restaurants,
as well as traditional family and casual dining restaurants with full menus and
table service. Secondary competition arises from many other sources, including
home meal replacement and fast food. We believe that our success to date has
been due to our particular approach combining pleasant ambiance, high food
quality, breadth of menu, cleanliness and reasonable prices with satisfactory
levels of service and convenience.
REGULATION
Each of our restaurants is subject to licensing and regulation by the
health, sanitation, safety, building and fire agencies of the respective states
and municipalities in which our restaurants are located. A failure to comply
with one or more regulations could result in the imposition of sanctions,
including the closing of facilities for an indeterminate period of time or
third-party litigation, any of which could have a material adverse effect on us
and our results of operations. Additionally, our restaurants must be constructed
to meet federal, state and local building and zoning requirements.
55
We are also subject to laws and regulations governing our relationships
with employees, including minimum wage requirements, overtime, reporting of tip
income, work and safety conditions and regulations governing employment. Because
a significant number of our employees are paid at rates tied to the federal
minimum wage, an increase in the minimum wage would increase our labor costs. An
increase in the minimum wage rate or employee benefits costs could have a
material adverse effect on us and our results of operations.
Additionally, our operations are regulated pursuant to state and local
sanitation and public health laws. Operating restaurants utilize electricity and
natural gas, which are subject to various federal and state regulations
concerning the allocation and pricing of energy. Our operating costs have been
and will continue to be affected by increases in the cost of energy, which have
undergone large cyclical swings in recent years and have had a disproportionate
impact in our most favorable markets.
Each of our full-service restaurants that sells alcoholic beverages is
further subject to licensing and regulation by a number of governmental
authorities, including alcoholic beverage control agencies, in the state, county
and municipality in which the restaurant is located. Difficulties or failures in
obtaining the required licenses or approvals could delay or prevent the opening
of a new restaurant in a particular area. Alcoholic beverage control regulations
require restaurants to apply to a state authority and, in certain locations, to
county or municipal authorities for a license or permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Typically, licenses or permits must be renewed annually and may be
revoked or suspended for cause at any time. Alcoholic beverage control
regulations relate to numerous aspects of a restaurant's operations, including
the minimum age of patrons and employees, the hours of operation, advertising,
wholesale purchasing, inventory control and handling, storage and dispensing of
alcoholic beverages.
In certain states, we may be subject to "dram-shop" statutes which
generally provide a person injured by an intoxicated patron the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of our existing
comprehensive general liability insurance.
ENVIRONMENTAL MATTERS
Our operations are also subject to federal, state and local laws and
regulations relating to environmental protection, including regulation of
discharges into the air and water. Under various federal, state and local laws,
an owner or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
Such liability may be imposed without regard to whether the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances. Although we are not aware of any material environmental conditions
that require remediation under federal, state or local law on our properties, we
have not conducted a comprehensive environmental review of our properties or
operations and no assurance can be given that we have identified all of the
potential environmental liabilities at our properties or that such liabilities
would not have a material adverse effect on our financial condition.
PROPERTY
All of our restaurants are located in urban and suburban areas, in a
variety of strip shopping centers, malls and freestanding buildings. We lease
all of the restaurant locations located in strip shopping centers and malls. Of
the 130 restaurants located in freestanding buildings, we own the building and
land for three of the restaurants, and the remainder are operated in
company-funded leasehold improvements located on leased land.
Our leases are generally for 10- or 15-year terms, with two to four options
exercisable at our discretion to renew for a period of five years each. The
leases provide for rent to be paid on a monthly basis.
56
As of April 24, 2002, we and our franchisees operated 419 locations as
follows:
<Table>
<Caption>
NUMBER OF NUMBER OF
COMPANY-OPERATED FRANCHISED TOTAL NUMBER OF
STATE RESTAURANTS RESTAURANTS RESTAURANTS
----- ---------------- ----------- ---------------
Arizona.......................................... 4 8 12
California....................................... 96 1 97
Colorado......................................... 11 2 13
Connecticut...................................... 6 -- 6
Delaware......................................... 1 -- 1
Florida.......................................... 2 -- 2
Georgia.......................................... 3 -- 3
Idaho............................................ 1 -- 1
Illinois......................................... 34 -- 34
Indiana.......................................... 14 -- 14
Iowa............................................. 5 -- 5
Kansas........................................... 3 1 4
Kentucky......................................... 5 -- 5
Maine............................................ 1 -- 1
Maryland......................................... 7 -- 7
Massachusetts.................................... 9 1 10
Michigan......................................... 22 -- 22
Minnesota........................................ 16 -- 16
Missouri......................................... 12 -- 12
Montana.......................................... 2 -- 2
Nebraska......................................... -- 3 3
New Jersey....................................... 9 -- 9
New Mexico....................................... -- 2 2
New York......................................... 16 -- 16
North Carolina................................... 1 -- 1
Ohio............................................. 28 -- 28
Oklahoma......................................... 2 1 3
Oregon........................................... 11 -- 11
Pennsylvania..................................... 22 -- 22
Rhode Island..................................... 1 -- 1
South Carolina................................... 2 -- 2
Tennessee........................................ 1 -- 1
Texas............................................ 7 -- 7
Utah............................................. -- 3 3
Virginia......................................... 12 -- 12
Washington....................................... 16 -- 16
West Virginia.................................... 1 -- 1
Wisconsin........................................ 12 -- 12
Wyoming.......................................... 1 1 2
--- -- ---
Total............................................ 396 23 419
</Table>
Our corporate headquarters is located in leased facilities in Eagan,
Minnesota.
57
The following table sets forth certain information concerning our owned
property as follows:
<Table>
<Caption>
LOCATION ACRES USE AND OWNERSHIP
- -------- ----- -----------------
Temecula, California........ 1.04 Original Roadhouse Grill restaurant owned by Distinctive
Dining, Inc.
Burnsville, Minnesota....... 2.00 Original Roadhouse Grill restaurant owned by OCB
Restaurant Co.
Houston, Texas.............. 1.75 HomeTown Buffet marketing property for sale.
Coon Rapids, Minnesota...... 4.00 OCB Restaurant Co. marketing undeveloped property for
sale.
Lee's Summit, Missouri...... 1.53 OCB Restaurant Co. marketing undeveloped property for
sale.
Tampa, Florida.............. 1.66 OCB Restaurant Co. marketing undeveloped property for
sale.
Marshfield, Wisconsin....... 5.04 Cabinet shop owned by OCB Restaurant Co.
Laguna Woods, California.... 1.13 HomeTown Buffet property under development for future
buffet restaurant.
</Table>
TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
Our restaurants operate principally under the following trademarks or
service marks:
- Old Country Buffet,
- HomeTown Buffet,
- Original Roadhouse Grill,
- Granny's Buffet,
- Country Roadhouse Buffet & Grill,
- Tahoe Joe's Famous Steakhouse, and
- Soup 'N Salad Unlimited.
We have registered with the United States Patent and Trademark Office the
above trademarks and service marks. In general, our trademarks and registered
service marks are valid and enforceable as long as the marks are used in
connection with our restaurants and services and the required registration
renewals are filed. We regard our service marks and trademarks as having
significant value and being an important factor in the development of our buffet
and other restaurant concepts. Our policy is to pursue and maintain registration
of our service marks and trademarks whenever possible and to oppose vigorously
any infringement or dilution of our service marks and trademarks.
We also have a proprietary interest in many of our recipes.
LITIGATION
We are not a party to and do not have any property that is the subject of
any legal proceedings pending or, to our knowledge, threatened, other than
ordinary routine litigation incidental to our business and proceedings which are
not material or as to which we believe we have adequate insurance.
EMPLOYEES
As of April 24, 2002, we had approximately 25,000 employees, of whom all
but approximately 350 corporate headquarters employees worked at our 396
company-owned restaurants. On average, each buffet restaurant operates with
three to five managers and assistant managers and 58 employees. Most restaurant
employees are paid on an hourly basis, except for restaurant managers. Our
employees are not unionized. We have never experienced any significant work
stoppages and believe that our employee relations are good.
Our wage costs have increased in recent years due to the expanding economy,
a tight labor market and increases in the federally mandated minimum wage.
Historically, we have been able to offset wage cost increases through increased
efficiencies in operations and, as necessary, through retail price increases,
although there can be no assurance that we will continue to be able to do so in
the future.
58
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our directors and
executive officers:
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
Frederick J. Iseman....................... 49 Chairman of the Board and Director of Buffets
Kerry A. Kramp............................ 46 President, Chief Executive Officer and Director of
Buffets
David Goronkin............................ 39 Chief Operating Officer and Director of Buffets
Glenn D. Drasher.......................... 50 Executive Vice President of Marketing
R. Michael Andrews, Jr.................... 38 Executive Vice President and Chief Financial Officer
H. Thomas Mitchell........................ 45 Executive Vice President, General Counsel and
Secretary
K. Michael Shrader........................ 56 Executive Vice President of Human Resources
Roe H. Hatlen............................. 57 Vice Chairman of the Board and Director of Buffets
Steven M. Lefkowitz....................... 37 Director of Buffets
Robert A. Ferris.......................... 59 Director of Buffets
David S. Lobel............................ 49 Director of Buffets
Robert M. Rosenberg....................... 64 Director of Buffets
</Table>
Frederick J. Iseman has served as Chairman of the Board and as a director
of our company and as Chairman of the Board and as a director of Buffets
Holdings since October 2000. Mr. Iseman is currently Chairman and Managing
Partner of Caxton-Iseman Capital, Inc., a private investment firm, which was
founded by Mr. Iseman in 1993. Prior to establishing Caxton-Iseman Capital, Mr.
Iseman founded Hambro-Iseman Capital Partners, a merchant banking firm, in 1990.
From 1988 to 1990, Mr. Iseman was a member of Hambro International Venture Fund.
Mr. Iseman is Chairman and a director of Anteon International Corporation, a
director of Vitality Beverages, Inc. and a member of the Advisory Board of Duke
Street Capital and STAR Funds.
Kerry A. Kramp has served as our President and Chief Executive Officer
since May 2000 and as a director of our company and as a director of Buffets
Holdings since October 2000. Prior to that, he served as our President and Chief
Operating Officer since our merger with HomeTown Buffet in 1996. Prior to the
merger, Mr. Kramp was President and a director of HomeTown Buffet since 1995.
David Goronkin has served as our Chief Operating Officer since October
2000, as a director of our company since June 2002 and as a director of Buffets
Holdings since October 2000. Prior to that, he served as our Executive Vice
President of Operations beginning in 1996.
Glenn D. Drasher has served as our Executive Vice President of Marketing
since 1997. He has over 25 years of operational, marketing and executive
restaurant industry experience. From 1994 until he joined us, Mr. Drasher was
Executive Vice President for Country Kitchen International and Vice President of
Marketing for Country Hospitality Worldwide, both divisions of The Carlson
Company.
R. Michael Andrews, Jr. has served as our Executive Vice President and
Chief Financial Officer since April 2000. Prior to joining us, Mr. Andrews
served as chief financial officer of Eerie World Entertainment, the parent
company to Jekyll & Hyde Clubs, from 1999 to 2000. He was chief financial
officer of Don Pablo's Restaurants from 1998 to 1999. Previously, Mr. Andrews
was with KPMG Peat Marwick LLP for approximately 12 years, serving most recently
as Senior Manager.
H. Thomas Mitchell has served as our Executive Vice President, General
Counsel and Secretary since 1998. He joined our company in 1994 and has 10 years
of executive restaurant industry experience and 18 years of legal practice. Mr.
Mitchell served in the further capacity of Chief Administrative Officer from
1998 until 2000.
K. Michael Shrader has served as our Executive Vice President of Human
Resources since our merger with HomeTown Buffet in 1996. Mr. Shrader is
responsible for all human resource functions,
59
including employee and organization development, staffing, human resource
systems, compensation, benefits, employment related dispute resolution and risk
management.
Roe H. Hatlen co-founded our company and has served as the Vice-Chairman of
the Board and as a director of our company since June 2002 and as the
Vice-Chairman of the Board and as a director of Buffets Holdings since October
2000. He served as our Chairman and Chief Executive Officer from our inception
in 1983 through May 2000 and also as President from May 1989 to September 1992.
He is a member of the Board of Regents of Pacific Lutheran University.
Steven M. Lefkowitz has served as a director of our company and of Buffets
Holdings since October 2000. Mr. Lefkowitz is a Managing Director of
Caxton-Iseman Capital, Inc. and has been employed by Caxton-Iseman Capital since
1993. From 1988 to 1993, Mr. Lefkowitz was employed by Mancuso & Company, a
private investment firm, and served in several positions including Vice
President and as a Partner of Mancuso Equity Partners. Mr. Lefkowitz is also
director of Anteon International Corporation and Vitality Beverages, Inc.
Robert A. Ferris has served as a director of our company since June 2002
and of Buffets Holdings since October 2000. Mr. Ferris is a Managing Director of
Caxton-Iseman Capital, Inc. and has been employed by Caxton-Iseman Capital since
March 1998. From 1981 to February 1998, Mr. Ferris was a General Partner of
Sequoia Associates (a private investment firm headquartered in Menlo Park,
California). Prior to founding Sequoia Associates, Mr. Ferris was a Vice
President of Arcata Corporation, a New York Stock Exchange-listed company. Mr.
Ferris currently is a director of Anteon International Corporation.
David S. Lobel has served as a director of our company since June 2002 and
of Buffets Holdings since October 2000. Mr. Lobel is currently Managing Partner
of Sentinel Capital Partners, a private equity investment firm, which was
founded by Mr. Lobel in 1995. Prior to establishing Sentinel Capital Partners,
Mr. Lobel spent 15 years at First Century Partners, Smith Barney's venture
capital affiliate. Mr. Lobel joined First Century in 1981 and served as a
general partner of funds managed by First Century from 1983 until his departure
in 1995. From 1979 to 1981, Mr. Lobel was a consultant at Bain & Company.
Robert M. Rosenberg has served as a director of our company since June 2002
and of Buffets Holdings since May 2001. He is the retired Chief Executive
Officer of Dunkin' Donuts, a position he held from 1963 until his retirement in
1998. He has been a member of the Board of Directors of Sonic Corp. since 1993
and Dominos Pizza since 1999.
BOARD OF DIRECTORS
Our board of directors is comprised of eight directors -- Frederick J.
Iseman, Kerry A. Kramp, David Goronkin, Roe H. Hatlen, Steven M. Lefkowitz,
Robert A. Ferris, David S. Lobel and Robert M. Rosenberg. The board typically
meets in joint session with the Buffets Holdings' board of directors. The board
of directors has four committees -- the audit committee, the compensation
committee, the capital expenditures committee and the executive committee.
Messrs. Hatlen, Lefkowitz and Rosenberg serve on the audit committee, which
meets with financial management, the internal auditors and the independent
auditors to review internal accounting controls and accounting, auditing, and
financial reporting matters. Messrs. Ferris, Kramp, Lefkowitz and Lobel serve on
the compensation committee, which reviews the compensation of our executive
officers, executive bonus allocations and other compensation matters. Messrs.
Hatlen, Kramp, Lefkowitz and Lobel serve on the capital expenditures committee,
which reviews and provides guidance to the board of directors and management
with respect to selecting and financing programs which require a large capital
outlay. Messrs. Iseman and Kramp serve on the executive committee, which has
been formed to take action on matters relating to the general governance of our
company when the board is not otherwise meeting.
The directors receive no cash compensation for serving on the board except
for reimbursement of reasonable expenses incurred in attending meetings.
60
EXECUTIVE COMPENSATION
The following table sets forth information relating to the compensation
awarded to, earned by or paid to our President and Chief Executive Officer,
Kerry A. Kramp, and each of the four other most highly compensated executive
officers whose individual compensation exceeded $100,000 during the fiscal year
ended January 2, 2002 for services rendered to us.
<Table>
<Caption>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)
- --------------------------- --------- -------- ---------------
Kerry A. Kramp............................................ 452,885 283,500 15,929
President, Chief Executive Officer and Director
David Goronkin............................................ 302,308 180,000 12,506
Chief Operating Officer and Director
Glenn D. Drasher.......................................... 217,308 89,880 11,086
Executive Vice President of Marketing
R. Michael Andrews, Jr.................................... 202,981 84,000 7,039
Executive Vice President and Chief Financial Officer
H. Thomas Mitchell........................................ 187,981 44,400 10,609
Executive Vice President, General Counsel and Secretary
</Table>
EMPLOYEE BENEFIT PLANS
We have a 401(k) plan covering all of our employees who have been employed
for at least one year, are 21 years or older and worked at least 1,000 hours in
the previous year. Our discretionary contributions to the plan are determined
annually by our board of directors and are used to match a portion of our
employees' voluntary contributions. Our partial matching contributions to the
401(k) fund vest over a five-year period so long as the employee remains
employed by us. We made matching contributions of $0.9 million in fiscal 2001
and $0.8 million in fiscal 2000.
EMPLOYMENT AGREEMENTS
Messrs. Kramp, Goronkin, Drasher, Andrews, Mitchell and Shrader have each
entered into a severance protection agreement with us dated as of September 29,
2000. Each agreement entitles the executive to continue to receive his base
salary, medical and health benefits, group term life insurance and long term
disability coverage on the same basis as prior to termination of employment with
us for 52 weeks following termination of employment with us for any reason other
than for cause, disability or death and execution of a release attached to the
agreements. The executives have no duty to mitigate the amounts payable under
the agreements.
61
PRINCIPAL SHAREHOLDER
Buffets Holdings is the sole holder of all 100 issued and outstanding
shares of our common stock.
The following table sets forth the number and percentage of outstanding
Buffets Holdings' common stock beneficially owned by (1) certain executive
officers and each director of Buffets individually, (2) all executive officers
and directors as a group and (3) certain principal stockholders as of April 24,
2002:
<Table>
<Caption>
NAME OF BENEFICIAL OWNER SHARES PERCENTAGE
- ------------------------ --------- ----------
Caxton-Iseman Investments L.P.(1)........................... 2,501,438 76.86%
Sentinel Capital Partners II, L.P. ......................... 225,106 6.92
Frederick J. Iseman(1)...................................... -- --
Kerry A. Kramp.............................................. 130,000 3.99
David Goronkin.............................................. 48,750 1.50
R. Michael Andrews, Jr...................................... 40,625 1.25
Roe H. Hatlen(2)............................................ 162,952 5.01
Robert M. Rosenberg......................................... 4,610 0.14
Steven M. Lefkowitz......................................... -- --
Robert A. Ferris............................................ -- --
David S. Lobel.............................................. -- --
All executive officers and directors as a group (9
persons).................................................. 3,113,481 95.66
</Table>
- ---------------
(1) By virtue of Mr. Iseman's indirect control of Caxton-Iseman Investments
L.P., he is deemed to beneficially own the 2,501,438 shares of common stock
held by that entity.
(2) Mr. Hatlen has sole voting and dispositive power over 65,012 shares of
common stock. Mr. Hatlen may be deemed to be the beneficial owner of 67,518
shares of common stock held by the Lars C. Hatlen Trust, the Erik R. Hatlen
Trust and Kari E. Hatlen, each such entity or person owning 22,506 shares of
common stock. By virtue of Mr. Hatlen's control over Eventyr Investments, he
is deemed to beneficially own the 30,422 shares of common stock held by that
entity.
62
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BUYOUT FROM PUBLIC SHAREHOLDERS
On October 2, 2000, Buffets Holdings acquired all outstanding shares of
Buffets in a buyout from public shareholders for a total of $639.8 million. The
buyout transaction was funded by:
- $85 million in cash held by Buffets,
- $310 million borrowed under Buffets' former credit facility,
- $80 million in proceeds from the issuance by Buffets of 14% senior
subordinated notes due 2008 with detachable warrants to purchase shares
of Buffets Holdings common and preferred stock,
- $15 million in proceeds from the issuance by Buffets Holdings of 16%
senior subordinated notes due 2008 with detachable warrants to purchase
shares of Buffets Holdings common and preferred stock,
- $20 million in proceeds from the sale and leaseback transaction of
Buffets' headquarters facility in Eagan, Minnesota, and
- $130 million in capital contributions from Caxton-Iseman Investments,
L.P. and certain other investors, including members of management.
In connection with the buyout from public shareholders, 16 members of our
management entered into a stockholders agreement covering their respective
interests in Buffets Holdings. This agreement governs the five-year vesting of
Buffets Holdings common stock, certain transfer restrictions and agreements not
to compete with us for two years after their employment terminates. We also
entered into an agreement with Caxton-Iseman Capital, Inc. relating to services
provided by them in connection with the buyout from public shareholders. Under
the agreement, we paid Caxton-Iseman Capital $6.4 million.
FOUNDER ADVISORY AGREEMENTS
Roe H. Hatlen has entered into an advisory arrangement with us and Buffets
Holdings that expires in 2005. Under his advisory agreement, Mr. Hatlen received
$325,000 in fiscal 2001 and will receive $300,000 in fiscal 2002; $275,000 in
fiscal 2003; $250,000 in fiscal 2004; and $225,000 in fiscal 2005. In addition,
Mr. Hatlen will receive health, medical and other benefits comparable to those
made available to our management employees through the end of fiscal year 2005.
Mr. Hatlen purchased approximately 5.0% of the shares of Buffets Holdings common
stock (1.0% of the outstanding shares of Buffets Holdings common stock acquired
by Mr. Hatlen was subject to vesting) and approximately 3.4% of the shares of
Buffets Holdings preferred stock. 32,501 shares of Buffets Holdings common stock
are subject to vesting over three years at the rate of one-third for each year
Mr. Hatlen completes as a member of Buffets Holdings' board of directors.
Buffets Holdings has certain rights to repurchase, at various prices depending
on whether Mr. Hatlen is terminated with cause or without cause, the unvested
shares of its common stock if Mr. Hatlen ceases to serve as a member of Buffets
Holdings' board of directors.
C. Dennis Scott has entered into an advisory arrangement with us and
Buffets Holdings that expires in 2005. Under Mr. Scott's advisory agreement, he
received no cash compensation after fiscal 2000. Mr. Scott purchased
approximately 0.5% of the shares of Buffets Holdings common stock. These shares
are subject to Buffets Holdings' right to repurchase these shares upon Mr.
Scott's termination as an advisor to Buffets Holdings at various prices
depending on whether Mr. Scott is terminated with or without cause. Mr. Scott
retains a San Diego office at our expense and receives health, medical and other
benefits comparable to those made available to our management employees through
fiscal year 2005. Mr. Scott is required to provide services to us for no more
than two days per month.
63
CAXTON-ISEMAN CAPITAL ADVISORY AGREEMENT
We entered an advisory agreement with Caxton-Iseman Capital under which
Caxton-Iseman Capital provides various advisory services to us in exchange for
an annual advisory fee equal to 2% of our annual consolidated earnings before
interest, taxes, depreciation and amortization and an additional 1% fee for
advisory services relating to particular transactions. Under this agreement, we
paid $2.9 million in fiscal 2001 and $0.4 million in the period from October 2,
2000 to January 3, 2001.
SENTINEL CAPITAL ADVISORY AGREEMENT
We entered into an advisory agreement with Sentinel Capital Partners,
L.L.C., under which Sentinel Capital provides various advisory services to us
for an annual advisory fee of $200,000. Under this agreement, we paid $200,000
in fiscal 2001 and $50,000 in the period from October 3, 2000 to January 3,
2001.
GUARANTEES, PROMISSORY NOTES AND PLEDGE AGREEMENTS
As part of the buyout from public shareholders described above, some of our
management investors obtained recourse loans from U.S. Bank which allowed them
to purchase shares in Buffets Holdings. In connection with these management
investor loans, we provided guarantees of these loans to U.S. Bank and we pay
interest to U.S. Bank, in excess of the interest paid by the management
investors, at the rate of 2.75% per annum, or approximately $33,000 per annum.
Concurrently, each of the management investors pledged a portion of his
respective ownership interests in the shares of Buffets Holdings and executed a
promissory note in favor of Buffets Holdings, whereby each agreed to repay the
corresponding amount of the guarantee, together with interest at the rate of 7%
per annum, at the earliest of (1) seven years, (2) termination of employment
with our company or (3) the sale, disposition or other transfer of the
management investor's ownership interests in the shares. The aggregate amount of
the guarantees was approximately $1.2 million, including guarantees which were
in excess of $60,000 to the following management investors:
<Table>
<Caption>
MANAGEMENT INVESTORS GUARANTEE AMOUNT
- -------------------- ----------------
Kerry A. Kramp.............................................. $407,000
David Goronkin.............................................. 195,786
R. Michael Andrews, Jr. .................................... 353,081
</Table>
As Mr. Kramp paid off the underlying loan in full in July, 2002, our
guarantee of Mr. Kramp's loan is no longer outstanding.
Additionally, coincident with David Goronkin's appointment to the Board of
Directors of Buffets Holdings in October 2000, an officer loan was approved for
Mr. Goronkin's use in the purchase of homestead property in Minnesota. Mr.
Goronkin was advanced $315,000 on February 20, 2002. Interest is payable
annually at a rate equal to the company's interest rate on its senior secured
borrowing, up to a maximum of 12% per annum. The principal plus accrued but
unpaid interest must be repaid by September 28, 2007 or at such earlier time
occasioned by Mr. Goronkin's termination of employment or sale of his residence.
PURCHASE OF PROPERTY BY ROE HATLEN
In November 2001, Mr. Hatlen purchased a portion of the land adjoining our
headquarters for $1.02 million. The land was sold by the entity that had
purchased the parcel at the time of the buyout from public shareholders. Mr.
Hatlen's purchase resulted in a reduction of the rental amount payable by us
under the sale and leaseback transaction relating to our corporate headquarters.
64
DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT FACILITY
Concurrently with the closing of the offering of the initial notes on June
28, 2002, we entered into a credit agreement with a syndicate of lenders. Credit
Suisse First Boston acted as sole and exclusive administrative agent and
collateral agent for the syndicate and as sole and exclusive lead arranger and
bookrunner under the new credit agreement. Pursuant to the new credit agreement,
and subject to certain conditions, the lenders provided to us a credit facility
of $295.0 million.
Structure
The new credit facility comprises:
- a revolving loan facility of $30.0 million, of which up to $20.0 million
is available in the form of letters of credit,
- a letter of credit facility of $20.0 million, and
- a term loan of $245.0 million.
Additionally, the terms of the new credit facility permit us to borrow, subject
to availability and certain conditions, incremental term loans from one or more
of the lenders or other financial institutions or to issue additional notes in
an aggregate amount up to $25.0 million. Our ability to borrow incremental term
loans or to issue additional notes is conditioned upon our compliance with
certain covenants in the new credit facility, including that there is no default
or event of default under the new credit facility, that certain financial ratios
are met, that the interest rate of any incremental term loans not exceed the
interest rate of the term loan under the new credit facility by more than 0.5%
and that any additional notes or incremental term loans must have a final
maturity no earlier than the notes and the initial term loan under the new
credit facility. Any such incremental term loans will be made and documented
under the new credit agreement, will be guaranteed and secured on a pari passu
basis with the other loans under the new credit facility and will participate
ratably with all prepayments made under the new credit facility.
Availability and Use of Proceeds
We used our cash on hand, the net proceeds from the offering of the initial
notes and the initial borrowings under the new credit facility to:
- repay all outstanding indebtedness under our former bank credit facility,
- redeem all of our 14% senior subordinated notes due September 29, 2008,
- redeem all of Buffets Holdings' 16% senior subordinated notes due
September 29, 2008,
- pay fees related to the repayment and redemption discussed above,
- make a distribution to our sole shareholder, Buffets Holdings, and
- pay transaction fees and expenses related to the offering of the initial
notes and the new credit facility.
The undrawn portion of the revolving loan facility is available to us for
general corporate purposes as revolving credit loans or as swingline loans.
Borrowings made as swingline loans will reduce availability under the revolving
loan facility on a dollar-for-dollar basis. Letters of credit issued under the
revolving loan facility or the letter of credit facility will be available to us
for our general corporate purposes.
Interest and Expenses
Borrowings under the term loan facility bear interest, at our option, at
either adjusted LIBOR plus 3.50% or at the alternate base rate plus 2.50%.
Borrowings under the revolving loan facility initially will
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bear interest, at our option, at either adjusted LIBOR plus 3.25% or at the
alternate base rate plus 2.25%. Outstanding letters of credit under the
revolving loan facility will be subject to a per annum fee equal to 3.25%.
Following the delivery of financial statements for the period ending on or
around December 31, 2002, the interest rates and letter of credit fee under the
revolving loan facility will be subject to adjustment according to a pricing
grid based on our leverage ratio (as defined in the new credit facility). The
alternate base rate is the higher of Credit Suisse First Boston's prime rate and
the federal funds effective rate plus 0.5%. The letter of credit facility is
subject to a per annum fee equal to 3.25% of the aggregate amount of the letter
of credit facility, whether letters of credit are outstanding or not. Following
the delivery of financial statements for the period ending on or around December
31, 2002, the letter of credit fee under the letter of credit facility will be
subject to adjustment according to a pricing grid based on our leverage ratio
(as defined in the new credit facility). The letter of credit fees are payable
in arrears at the end of each quarter and upon the termination of the revolving
loan facility and the letter of credit facility. In addition, we will pay a
fronting fee on outstanding letters of credit to the issuing bank in an amount
to be agreed and customary letter of credit issuance and administration fees.
In connection with the new credit facility, we also agreed to pay
administrative fees, commitment fees and certain expenses and to provide certain
indemnities, all of which we believe are customary for financings of this type.
Maturity and Amortization
The term loan will mature on June 28, 2009, and the amounts due under the
term loan will become due and payable in equal quarterly installments in an
annual amount equal to 1% of the term loan during each of the first six years of
the loan, with the balance payable in equal quarterly installments during the
seventh year of the loan.
The revolving facility and the letter of credit facility will mature on
June 28, 2007.
Mandatory Prepayments
We are required to prepay loans under the term loan with:
- 75% of our consolidated excess cash flow (as defined in the new credit
agreement) minus voluntary prepayments of the term loan made during the
applicable fiscal year (to be reduced to 50% of consolidated excess cash
flow if our total leverage ratio is less than 3 to 1),
- 100% of net cash proceeds of certain asset dispositions by Buffets
Holdings, us and our subsidiaries, subject to exceptions (including a
reinvestment option) to be agreed upon and subject to certain special
prepayments as discussed below,
- 100% of net cash proceeds of issuances of debt obligations by us, Buffets
Holdings and our subsidiaries, and
- 50% of the net cash proceeds of issuances of equity securities by us,
Buffets Holdings and our subsidiaries, in each case subject to certain
exceptions, including all equity issued to current equity holders and
their affiliates.
Mandatory prepayments will be applied on an equal basis to the remaining
amortization payments under the term loan.
Special Prepayments
If the contemplated sale and leaseback transaction relating to our
leasehold interests with respect to approximately 38 restaurants or the
contemplated sale of our Original Roadhouse Grill restaurants occurs within 270
days after we entered into the new credit agreement, the commitments under the
term loan will be reduced or the term loan must be prepaid, as applicable, by an
amount equal to the lesser of (i) the net cash proceeds from those transactions
and (ii) in the case of the sale and leaseback transaction, 3.7 times the
scheduled average annual cash rent expense over the life of the new credit
facility and, in the
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case of the sale of our Original Roadhouse Grill restaurants, 3.7 times the pro
forma reduction in EBITDA associated with the sale of those restaurants.
Voluntary Prepayments
We are permitted to make voluntary prepayments on outstanding borrowings
and reduce the commitments under the new credit facility in whole or in part, at
our option, in minimum amounts to be agreed upon, without premium or penalty,
subject to reimbursement of the lenders' redeployment costs in the case of a
prepayment of adjusted LIBOR borrowings other than at the end of an interest
period. All voluntary prepayments of the term loan will be applied on an equal
basis to the remaining amortization payments under the term loan.
Security and Guarantees
Buffets Holdings and all of our existing and future domestic subsidiaries,
other than Tahoe Joe's, Inc., have guaranteed, and, to the extent no adverse tax
consequences to us would result, all of our existing and future foreign
subsidiaries and under certain circumstances, Tahoe Joe's, Inc. will
unconditionally guarantee the repayment of the new credit facility and
obligations under any hedging arrangement entered into with a lender or an
affiliate of a lender. The new credit facility, such hedging arrangements and
the guarantees are secured by substantially all of the tangible and intangible
assets of ours, Buffets Holdings and each of the subsidiaries that guaranteed
the new credit facility. The assets pledged as security include, but are not
limited to:
- a first-priority pledge of (1) all of our capital stock and (2) all the
capital stock held by us or any subsidiary that guaranteed the new credit
facility, which pledge, in the case of any first-tier foreign subsidiary,
is limited to 65% of the voting stock of such foreign subsidiary to the
extent the pledge of any greater percentage would result in adverse tax
consequences to us,
- perfected first-priority security interests in substantially all tangible
and intangible personal assets of ours, Buffets Holdings, and each
subsidiary guarantor, whether owned now or in the future, and
- mortgages on all material real property hereafter acquired and on all
material real property owned on the closing date to the extent not sold
as part of the contemplated sale and leaseback transaction relating to
our leasehold interests with respect to approximately 38 restaurants
within 270 days of the closing date.
Covenants
The new credit agreement contains affirmative, negative and financial
covenants customary for such financings. The new credit agreement includes
covenants, subject to certain exceptions, relating to limitations on:
- dividends and interest on, and redemptions and repurchases of, capital
stock,
- entering into agreements with certain restrictions affecting our ability
to repay borrowings under the new credit facility,
- liens and sale and leaseback transactions,
- loans and investments,
- debt and hedging arrangements,
- mergers, acquisitions and asset sales,
- transactions with affiliates,
- changes in business activities conducted by Buffets Holdings, us and our
subsidiaries,
- changes in our fiscal year, and
- amendments to any of our debt or material agreements.
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The new credit agreement also prohibits us from prepaying, redeeming and
repurchasing certain debt, including the notes.
Events of Default
The new credit agreement contains events of default customary for such
financings, including, but not limited to:
- nonpayment of principal, interest, fees or other amounts when due,
- violation of covenants,
- failure of any representation or warranty to be true in all material
respects when made or deemed made,
- cross default and cross acceleration,
- invalid subordination of the notes offered hereby and of certain notes
issued by Buffets Holdings,
- default of performance by us or our subsidiaries of 10% or more of the
aggregate number of restaurant operating leases such that the landlords
under such leases are entitled to terminate such leases,
- certain ERISA events,
- change of control,
- bankruptcy events,
- material judgments, and
- actual or asserted invalidity of the guarantees or security documents.
Some of these events of default allow for some grace periods and
materiality concepts.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
We are offering to exchange our exchange notes for a like aggregate
principal amount of our initial notes.
The exchange notes that we propose to issue in this exchange offer will be
substantially identical to our initial notes except that, unlike our initial
notes, the exchange notes will have no transfer restrictions or registration
rights. You should read the description of the exchange notes in the section in
this prospectus entitled "Description of the Notes."
We reserve the right in our sole discretion to purchase or make offers for
any initial notes that remain outstanding following the expiration or
termination of this exchange offer and, to the extent permitted by applicable
law, to purchase initial notes in the open market or privately negotiated
transactions, one or more additional tender or exchange offers or otherwise. The
terms and prices of these purchases or offers could differ significantly from
the terms of this exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
This exchange offer will expire at 5:00 p.m., New York City time, on
, 2002, unless we extend it in our reasonable discretion. The
expiration date of this exchange offer will be at least 20 business days after
the commencement of the exchange offer in accordance with Rule 14e-1(a) under
the Securities Exchange Act of 1934.
We expressly reserve the right to delay acceptance of any initial notes,
extend or terminate this exchange offer and not accept any initial notes that we
have not previously accepted if any of the conditions described below under
"-- Conditions to the Exchange Offer" have not been satisfied or waived by us.
We will notify the exchange agent of any extension by oral notice promptly
confirmed in writing or by written notice. We will also notify the holders of
the initial notes by mailing an announcement or by a press release or other
public announcement communicated before 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date unless
applicable laws require us to do otherwise.
We also expressly reserve the right to amend the terms of this exchange
offer in any manner. If we make any material change, we will promptly disclose
this change in a manner reasonably calculated to inform the holders of our
initial notes of the change including providing public announcement or giving
oral or written notice to these holders. A material change in the terms of this
exchange offer could include a change in the timing of the exchange offer, a
change in the exchange agent and other similar changes in the terms of this
exchange offer. If we make any material change to this exchange offer, we will
disclose this change by means of a post-effective amendment to the registration
statement which includes this prospectus and will distribute an amended or
supplemented prospectus to each registered holder of initial notes. In addition,
we will extend this exchange offer for an additional five to ten business days
as required by the Exchange Act, depending on the significance of the amendment,
if the exchange offer would otherwise expire during that period. We will
promptly notify the exchange agent by oral notice, promptly confirmed in
writing, or written notice of any delay in acceptance, extension, termination or
amendment of this exchange offer.
PROCEDURES FOR TENDERING INITIAL NOTES
Proper Execution and Delivery of Letters of Transmittal
To tender your initial notes in this exchange offer, you must use one of
the three alternative procedures described below:
(1) Regular delivery procedure: Complete, sign and date the letter of
transmittal, or a facsimile of the letter of transmittal. Have the
signatures on the letter of transmittal guaranteed if required by
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the letter of transmittal. Mail or otherwise deliver the letter of
transmittal or the facsimile together with the certificates representing
the initial notes being tendered and any other required documents to the
exchange agent on or before 5:00 p.m., New York City time, on the
expiration date.
(2) Book-entry delivery procedure: Send a timely confirmation of a
book-entry transfer of your initial notes, if this procedure is available,
into the exchange agent's account at The Depository Trust Company in
accordance with the procedures for book-entry transfer described under
"-- Book-Entry Delivery Procedure" below, on or before 5:00 p.m., New York
City time, on the expiration date.
(3) Guaranteed delivery procedure: If time will not permit you to
complete your tender by using the procedures described in (1) or (2) above
before the expiration date and this procedure is available, comply with the
guaranteed delivery procedures described under "-- Guaranteed Delivery
Procedure" below.
The method of delivery of the initial notes, the letter of transmittal and
all other required documents is at your election and risk. Instead of delivery
by mail, we recommend that you use an overnight or hand-delivery service. If you
choose the mail, we recommend that you use registered mail, properly insured,
with return receipt requested. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO
ASSURE TIMELY DELIVERY. You should not send any letters of transmittal or
initial notes to us. You must deliver all documents to the exchange agent at its
address provided below. You may also request your broker, dealer, commercial
bank, trust company or nominee to tender your initial notes on your behalf.
Only a holder of initial notes may tender initial notes in this exchange
offer. A holder is any person in whose name initial notes are registered on our
books or any other person who has obtained a properly completed bond power from
the registered holder.
If you are the beneficial owner of initial notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you wish to tender your notes, you must contact that registered holder promptly
and instruct that registered holder to tender your notes on your behalf. If you
wish to tender your initial notes on your own behalf, you must, before
completing and executing the letter of transmittal and delivering your initial
notes, either make appropriate arrangements to register the ownership of these
notes in your name or obtain a properly completed bond power from the registered
holder. The transfer of registered ownership may take considerable time.
You must have any signatures on a letter of transmittal or a notice of
withdrawal guaranteed by:
(1) a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc.,
(2) a commercial bank or trust company having an office or
correspondent in the United States, or
(3) an eligible guarantor institution within the meaning of Rule
17Ad-15 under the Exchange Act, unless the initial notes are tendered:
(1) by a registered holder or by a participant in The Depository
Trust Company whose name appears on a security position listing as the
owner, who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the letter of
transmittal and only if the exchange notes are being issued directly to
this registered holder or deposited into this participant's account at
The Depository Trust Company, or
(2) for the account of a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution
within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934.
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If the letter of transmittal or any bond powers are signed by:
(1) the recordholder(s) of the initial notes tendered: the signature
must correspond with the name(s) written on the face of the initial notes
without alteration, enlargement or any change whatsoever.
(2) a participant in The Depository Trust Company: the signature must
correspond with the name as it appears on the security position listing as
the holder of the initial notes.
(3) a person other than the registered holder of any initial notes:
these initial notes must be endorsed or accompanied by bond powers and a
proxy that authorize this person to tender the initial notes on behalf of
the registered holder, in satisfactory form to us as determined in our sole
discretion, in each case, as the name of the registered holder or holders
appears on the initial notes.
(4) trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity: these persons should so indicate when signing. Unless waived by
us, evidence satisfactory to us of their authority to so act must also be
submitted with the letter of transmittal.
Book-Entry Delivery Procedure
Any financial institution that is a participant in The Depository Trust
Company's systems may make book-entry deliveries of initial notes by causing The
Depository Trust Company to transfer the initial notes into the exchange agent's
account at The Depository Trust Company in accordance with The Depository Trust
Company's procedures for transfer. To effectively tender notes through The
Depository Trust Company, the financial institution that is a participant in The
Depository Trust Company will electronically transmit its acceptance through the
Automatic Tender Offer Program. The Depository Trust Company will then edit and
verify the acceptance and send an agent's message to the exchange agent for its
acceptance. An agent's message is a message transmitted by The Depository Trust
Company to the exchange agent stating that The Depository Trust Company has
received an express acknowledgment from the participant in The Depository Trust
Company tendering the notes that this participation has received and agrees to
be bound by the terms of the letter of transmittal, and that we may enforce this
agreement against this participant. The exchange agent will make a request to
establish an account for the initial notes at The Depository Trust Company for
purposes of the exchange offer within two business days after the date of this
prospectus.
A delivery of initial notes through a book-entry transfer into the exchange
agent's account at The Depository Trust Company will only be effective if an
agent's message or the letter of transmittal or a facsimile of the letter of
transmittal with any required signature guarantees and any other required
documents is transmitted to and received by the exchange agent at the address
indicated below under "-- Exchange Agent" on or before the expiration date
unless the guaranteed delivery procedures described below are complied with.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY TRUST COMPANY DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
Guaranteed Delivery Procedure
If you are a registered holder of initial notes and desire to tender your
notes, and (1) your notes are not immediately available, (2) time will not
permit your notes or other required documents to reach the exchange agent before
the expiration date or (3) the procedures for book-entry transfer cannot be
completed on a timely basis and an agent's message delivered, you may still
tender in this exchange offer if:
(1) you tender through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent
in the United States, or an eligible guarantor institution within the
meaning of Rule 17Ad-15 under the Exchange Act,
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(2) on or before the expiration date, the exchange agent receives a
properly completed and duly executed letter of transmittal or facsimile of
the letter of transmittal, and a notice of guaranteed delivery,
substantially in the form provided by us, with your name and address as
holder of the initial notes and the amount of notes tendered, stating that
the tender is being made by that letter and notice and guaranteeing that
within three New York Stock Exchange trading days after the expiration date
the certificates for all the initial notes tendered, in proper form for
transfer, or a book-entry confirmation with an agent's message, as the case
may be, and any other documents required by the letter of transmittal will
be deposited by the eligible institution with the exchange agent, and
(3) the certificates for all your tendered initial notes in proper
form for transfer or a book-entry confirmation as the case may be, and all
other documents required by the letter of transmittal are received by the
exchange agent within three New York Stock Exchange trading days after the
expiration date.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Your tender of initial notes will constitute an agreement between you and
us governed by the terms and conditions provided in this prospectus and in the
related letter of transmittal.
We will be deemed to have received your tender as of the date when your
duly signed letter of transmittal accompanied by your initial notes tendered, or
a timely confirmation of a book-entry transfer of these notes into the exchange
agent's account at The Depository Trust Company with an agent's message, or a
notice of guaranteed delivery from an eligible institution is received by the
exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of tenders will be determined by us in our
sole discretion. Our determination will be final and binding.
We reserve the absolute right to reject any and all initial notes not
properly tendered or any initial notes which, if accepted, would, in our opinion
or our counsel's opinion, be unlawful. We also reserve the absolute right to
waive any conditions of this exchange offer or irregularities or defects in
tender as to particular notes. Our interpretation of the terms and conditions of
this exchange offer, including the instructions in the letter of transmittal,
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of initial notes must be cured within
such time as we shall determine. We, the exchange agent or any other person will
be under no duty to give notification of defects or irregularities with respect
to tenders of initial notes. We and the exchange agent or any other person will
incur no liability for any failure to give notification of these defects or
irregularities. Tenders of initial notes will not be deemed to have been made
until such irregularities have been cured or waived. The exchange agent will
return without cost to their holders any initial notes that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived as promptly as practicable following the expiration date.
If all the conditions to the exchange offer are satisfied or waived on the
expiration date, we will accept all initial notes properly tendered and will
issue the exchange notes promptly thereafter. Please refer to the section of
this prospectus entitled "-- Conditions to the Exchange Offer" below. For
purposes of this exchange offer, initial notes will be deemed to have been
accepted as validly tendered for exchange when, as and if we give oral or
written notice of acceptance to the exchange agent.
We will issue the exchange notes in exchange for the initial notes tendered
pursuant to a notice of guaranteed delivery by an eligible institution only
against delivery to the exchange agent of the letter of transmittal, the
tendered initial notes and any other required documents, or the receipt by the
exchange agent of a timely confirmation of a book-entry transfer of initial
notes into the exchange agent's account at The Depository Trust Company with an
agent's message, in each case, in form satisfactory to us and the exchange
agent.
If any tendered initial notes are not accepted for any reason provided by
the terms and conditions of this exchange offer or if initial notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or non-exchanged initial notes will be returned without expense
to the
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tendering holder, or, in the case of initial notes tendered by book-entry
transfer procedures described above, will be credited to an account maintained
with the book-entry transfer facility, as promptly as practicable after
withdrawal, rejection of tender or the expiration or termination of the exchange
offer.
By tendering into this exchange offer, you will irrevocably appoint our
designees as your attorney-in-fact and proxy with full power of substitution and
resubstitution to the full extent of your rights on the notes tendered. This
proxy will be considered coupled with an interest in the tendered notes. This
appointment will be effective only when, and to the extent that we accept your
notes in this exchange offer. All prior proxies on these notes will then be
revoked and you will not be entitled to give any subsequent proxy. Any proxy
that you may give subsequently will not be deemed effective. Our designees will
be empowered to exercise all voting and other rights of the holders as they may
deem proper at any meeting of note holders or otherwise. The initial notes will
be validly tendered only if we are able to exercise full voting rights on the
notes, including voting at any meeting of the note holders, and full rights to
consent to any action taken by the note holders.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw tenders
of initial notes at any time before 5:00 p.m., New York City time, on the
expiration date.
For a withdrawal to be effective, you must send a written or facsimile
transmission notice of withdrawal to the exchange agent before 5:00 p.m., New
York City time, on the expiration date at the address provided below under
"-- Exchange Agent" and before acceptance of your tendered notes for exchange by
us.
Any notice of withdrawal must:
(1) specify the name of the person having tendered the initial notes
to be withdrawn,
(2) identify the initial notes to be withdrawn, including, if
applicable, the registration number or numbers and total principal amount
of initial notes,
(3) be signed by the person having tendered the initial notes to be
withdrawn in the same manner as the original signature on the letter of
transmittal by which initial notes were tendered, including any required
signature guarantees, or be accompanied by documents of transfer sufficient
to permit the trustee for the initial notes to register the transfer of
initial notes into the name of the person having made the original tender
and withdrawing the tender,
(4) specify the name in which any of these initial notes are to be
registered, if this name is different from that of the person having
tendered the initial notes to be withdrawn, and
(5) if applicable because the initial notes have been tendered through
the book-entry procedure, specify the name and number of the participant's
account at The Depository Trust Company to be credited, if different than
that of the person having tendered the initial notes to be withdrawn.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of all notices of withdrawal and our determination
will be final and binding on all parties. Initial notes that are withdrawn will
be deemed not to have been validly tendered for exchange in this exchange offer.
The exchange agent will return without cost to their holders all initial
notes that have been tendered for exchange and are not exchanged for any reason,
as promptly as practicable after withdrawal, rejection of tender or expiration
or termination of this exchange offer.
You may retender properly withdrawn initial notes in this exchange offer by
following one of the procedures described under "-- Procedures for Tendering
Initial Notes" above at any time on or before the expiration date.
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CONDITIONS TO THE EXCHANGE OFFER
We will complete this exchange offer only if:
(1) there is no change in the laws and regulations which, in our
judgment, would reasonably be expected to impair our ability to proceed
with this exchange offer,
(2) there is no change in the current interpretation of the staff of
the Commission which permits resales of the exchange notes,
(3) there is no stop order issued by the Commission or any state
securities authority suspending the effectiveness of the registration
statement which includes this prospectus or the qualification of the
indenture for our exchange notes under the Trust Indenture Act of 1939 and
there are no proceedings initiated or, to our knowledge, threatened for
that purpose,
(4) there is no action or proceeding instituted or threatened in any
court or before any governmental agency or body that in our judgment would
reasonably be expected to prohibit, prevent or otherwise impair our ability
to proceed with this exchange offer, and
(5) we obtain all governmental approvals that we deem in our sole
discretion necessary to complete this exchange offer.
These conditions are for our sole benefit. We may assert any one of these
conditions regardless of the circumstances giving rise to it and may also waive
any one of them, in whole or in part, at any time and from time to time, if we
determine in our reasonable discretion that it has not been satisfied, subject
to applicable law. We will not be deemed to have waived our rights to assert or
waive these conditions if we fail at any time to exercise any of them. Each of
these rights will be deemed an ongoing right which we may assert at any time and
from time to time.
If we determine that we may terminate this exchange offer because any of
these conditions is not satisfied, we may:
(1) refuse to accept and return to their holders any initial notes
that have been tendered,
(2) extend the exchange offer and retain all initial notes tendered
before the expiration date, subject to the rights of the holders of these
initial notes to withdraw their tenders, or
(3) waive any condition that has not been satisfied and accept all
properly tendered initial notes that have not been withdrawn or otherwise
amend the terms of this exchange offer in any respect as provided under the
section in this prospectus entitled "-- Expiration Date; Extensions;
Amendments; Termination."
ACCOUNTING TREATMENT
We will record the exchange notes at the same carrying value as the initial
notes as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes. We
will amortize the costs of the exchange offer and the unamortized expenses
related to the issuance of the exchange notes over the term of the exchange
notes.
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EXCHANGE AGENT
We have appointed U.S. Bank National Association as exchange agent for this
exchange offer. You should direct all questions and requests for assistance on
the procedures for tendering and all requests for additional copies of this
prospectus or the letter of transmittal to the exchange agent as follows:
By mail, by hand or by overnight delivery:
U.S. Bank Trust Center
180 East Fifth Street
St. Paul, MN 55101
Attn: Specialized Finance Group
Facsimile Transmission: (651) 244-1537
Confirm by Telephone: (800) 934-6802
Attn: Specialized Finance Group
FEES AND EXPENSES
We will bear the expenses of soliciting tenders in this exchange offer,
including fees and expenses of the exchange agent and trustee and accounting,
legal, printing and related fees and expenses.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of this exchange offer. However, we will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with this
exchange offer. We will also pay brokerage houses and other custodians, nominees
and fiduciaries their reasonable out-of-pocket expenses for forwarding copies of
the prospectus, letters of transmittal and related documents to the beneficial
owners of the initial notes and for handling or forwarding tenders for exchange
to their customers.
We will pay all transfer taxes, if any, applicable to the exchange of
initial notes in accordance with this exchange offer. However, tendering holders
will pay the amount of any transfer taxes, whether imposed on the registered
holder or any other persons, if:
(1) certificates representing exchange notes or initial notes for
principal amounts not tendered or accepted for exchange are to be delivered
to, or are to be registered or issued in the name of, any person other than
the registered holder of the notes tendered,
(2) tendered initial notes are registered in the name of any person
other than the person signing the letter of transmittal, or
(3) a transfer tax is payable for any reason other than the exchange
of the initial notes in this exchange offer.
If you do not submit satisfactory evidence of the payment of any of these
taxes or of any exemption from this payment with the letter of transmittal, we
will bill you directly the amount of these transfer taxes.
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
The initial notes were not registered under the Securities Act or under the
securities laws of any state and you may not resell them, offer them for resale
or otherwise transfer them unless they are subsequently registered or resold
under an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your initial notes for
exchange notes in accordance with this exchange offer, or if you do not properly
tender your initial notes in this exchange offer, you will not be able to
resell, offer to resell or otherwise transfer the initial notes unless they are
registered under the Securities Act or unless you resell them, offer to resell
or otherwise transfer them under an exemption from the registration requirements
of, or in a transaction not subject to, the Securities Act.
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In addition, except as set forth in this paragraph, you will not be able to
obligate us to register the initial notes under the Securities Act. You will not
be able to require us to register your initial notes under the Securities Act
unless:
(1) the initial purchasers request us to register initial notes that
are not eligible to be exchanged for exchange notes in the exchange offer;
or
(2) you are not eligible to participate in the exchange offer or do
not receive freely tradable exchange notes in the exchange offer, in which
case the registration rights agreement requires us to file a registration
statement for a continuous offering in accordance with Rule 415 under the
Securities Act for the benefit of the holders of the initial notes
described in this sentence. We do not currently anticipate that we will
register under the Securities Act any notes that remain outstanding after
completion of the exchange offer.
DELIVERY OF PROSPECTUS
Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes, where such initial notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
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DESCRIPTION OF THE NOTES
We issued the initial notes under an Indenture dated as of June 28, 2002
(the "Indenture"), among us, the guarantors thereunder and U.S. Bank National
Association, as trustee (the "Trustee"). The terms of the initial notes and the
exchange notes (collectively, the "Notes") include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939 (the "Trust Indenture Act").
Certain terms used in this description are defined under the subheading
"-- Certain Definitions". In this description, the word "Company" refers only to
Buffets, Inc. and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the Indenture and the Registration Rights Agreement. We urge you to read the
Indenture and the Registration Rights Agreement because they, not this
description, define your rights as holders of the Notes. Copies of these
agreements were filed as exhibits to the Registration Statement of which this
prospectus forms a part. You may also request copies of these agreements at our
address set forth under the heading "Where You Can Find More Information".
BRIEF DESCRIPTION OF THE NOTES
The Notes:
- are unsecured senior subordinated obligations of the Company;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of the Company;
- are senior in right of payment to any future Subordinated Obligations of
the Company; and
- are guaranteed by each Subsidiary Guarantor.
PRINCIPAL, MATURITY AND INTEREST
The Company issued the initial notes in an aggregate principal amount of
$230.0 million. The Company will issue the Exchange Notes in denominations of
$1,000 and any integral multiple of $1,000. The Notes will mature on July 15,
2010. Subject to our compliance with the covenant described under the subheading
"-- Certain Covenants -- Limitation on Indebtedness", we are entitled to,
without the consent of the holders, issue more Notes under the Indenture on the
same terms and conditions as the Notes, except for issue date, issue price and
first interest payment date, in an unlimited aggregate principal amount (the
"Additional Notes"). The Notes and the Additional Notes, if any, will be treated
as a single class for all purposes of the Indenture, including waivers,
amendments, redemptions and offers to purchase. Unless the context otherwise
requires, for all purposes of the Indenture and this "Description of the Notes",
references to the Notes include any Additional Notes actually issued.
Interest on the Notes will accrue at the rate of 11 1/4% per annum and will
be payable semiannually in arrears on January 15 and July 15, commencing on
January 15, 2003. We will make each interest payment to the holders of record of
the Notes on the immediately preceding January 1 and July 1. We will pay
interest on overdue principal at 1% per annum in excess of the above rate and
will pay interest on overdue installments of interest at such higher rate to the
extent lawful.
Interest on the Notes will accrue from the date of original issuance.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Notes at
our option prior to July 15, 2006.
On and after July 15, 2006, we will be entitled at our option to redeem all
or a portion of the Notes upon not less than 30 nor more than 60 days' notice,
at the redemption prices (expressed in percentages of
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principal amount), plus accrued interest to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the 12-month period
commencing on July 15 of the years set forth below:
<Table>
<Caption>
REDEMPTION
PERIOD PRICE
- ------ ----------
2006........................................................ 105.625%
2007........................................................ 103.750%
2008........................................................ 101.875%
2009 and thereafter......................................... 100.000%
</Table>
In addition, before July 15, 2005, we may at our option redeem Notes (which
includes Additional Notes, if any) in an aggregate principal amount not to
exceed 35% of the aggregate principal amount of the Notes (which includes
Additional Notes, if any) originally issued at a redemption price (expressed as
a percentage of principal amount) of 111.25%, plus accrued and unpaid interest
to the redemption date, with the net cash proceeds received by the Company from
an Initial Public Equity Offering; (provided that, if the Initial Public Equity
Offering is an offering by Parent, a portion of the Net Cash Proceeds thereof
equal to the amount required to redeem any such Notes is contributed to the
equity capital of the Company or used to acquire from the Company Capital Stock
(other than Disqualified Stock) of the Company) provided that:
(1) at least 65% of such aggregate principal amount of Notes (which
includes Additional Notes, if any) remains outstanding immediately after
the occurrence of the redemption (other than Notes held, directly or
indirectly, by the Company or its Affiliates); and
(2) the redemption occurs within 60 days after the date of the Initial
Public Equity Offering.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all the Notes at any time, the Trustee will
select Notes on a pro rata basis, by lot or by such other method as the Trustee
in its sole discretion shall deem to be fair and appropriate.
We will redeem Notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at its registered address.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note will state the portion of the principal amount thereof to
be redeemed. We will issue a new Note in a principal amount equal to the
unredeemed portion of the original Note in the name of the holder upon
cancelation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
OFFER TO PURCHASE UPON INITIAL PUBLIC OFFERING
Within 30 days after the consummation of an Initial Public Equity Offering
prior to July 15, 2005, the Company shall be required to offer to purchase from
Holders such aggregate principal amount of Notes as may be purchased with funds
equal in amount to 50% of the Net Cash Proceeds received by the Company or
Parent from such Initial Public Equity Offering at a purchase price of 111.25%
of the aggregate principal amount of the Notes, plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that, in no event will the Company be
required to make an offer to purchase more than $80.5 million aggregate
principal amount of the Notes (which amount represents 35% of the aggregate
principal amount of the Notes originally issued). If the applicable Initial
Public Equity Offering is an offering by Parent, the Company will be required to
make an offer to
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repurchase Notes pursuant to the immediately preceding sentence regardless of
whether any of the Net Cash Proceeds, if any, received by Parent are contributed
by Parent to the equity capital of the Company.
Notwithstanding the foregoing, to the extent the Company redeems any Notes
pursuant to the third paragraph under "-- Optional Redemption", any Notes so
redeemed shall reduce the aggregate principal amount of Notes that the Company
shall be required to offer to purchase pursuant to this covenant.
In the event of an Initial Public Equity Offering that requires the
purchase of Notes pursuant to this covenant, the Company will purchase Notes
tendered pursuant to an offer by the Company for the Notes in accordance with
the procedures set forth in the Indenture. If the aggregate purchase price of
the Notes tendered exceeds the cash amount required to be allotted to their
purchase, the Company will select the Notes to be purchased on a pro rata basis
but in round denominations, which will be denominations of $1,000 principal
amount or multiples thereof.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this covenant by virtue of its compliance with such securities
laws or regulations.
The provisions under the Indenture relative to the Company's obligation to
make an offer to repurchase the Notes as a result of an Initial Public Equity
Offering may be waived or modified with the written consent of the holders of a
majority in principal amount of the Notes.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the Notes. However, under certain circumstances, we may
be required to offer to purchase Notes as described under the captions "-- Offer
to Purchase Upon Initial Public Offering", "-- Change of Control" and "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock". We may at any
time and from time to time purchase Notes in the open market or otherwise.
GUARANTIES
Initially, the Subsidiary Guarantors will be all of the Company's
Subsidiaries that guarantee the Company's obligations under the Credit
Agreement, except that Tahoe Joe's Inc. will not be a Subsidiary Guarantor. The
Subsidiary Guarantors will jointly and severally guarantee, on a senior
subordinated basis, our obligations under the Notes. The obligations of each
Subsidiary Guarantor under its Subsidiary Guaranty will be limited as necessary
to prevent that Subsidiary Guaranty from constituting a fraudulent conveyance
under applicable law. See "Risk Factors -- Risks Relating to the Offering and
the Notes -- Fraudulent conveyance laws could void our obligations under the
notes".
Each Subsidiary Guarantor that makes a payment under its Subsidiary
Guaranty will be entitled to a contribution from each other Subsidiary Guarantor
in an amount equal to such other Subsidiary Guarantor's pro rata portion of such
payment based on the respective net assets of all the Subsidiary Guarantors at
the time of such payment determined in accordance with GAAP.
If a Subsidiary Guaranty were rendered voidable, it could be subordinated
by a court to all other indebtedness, including guarantees and other contingent
liabilities, of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors -- Risks
Relating to the Offering and the Notes -- Fraudulent conveyance laws could void
our obligations under the notes".
The Subsidiary Guaranty of a Subsidiary Guarantor will be released:
(1) upon the sale or other disposition (including by way of
consolidation or merger) of a Subsidiary Guarantor;
79
(2) upon the sale or disposition of all or substantially all the
assets of a Subsidiary Guarantor;
(3) the designation of such Subsidiary Guarantor as an Unrestricted
Subsidiary pursuant to the terms of the Indenture; or
(4) at such time as such Subsidiary Guarantor (i) no longer Guarantees
any other Indebtedness of the Company or another Subsidiary Guarantor and
(ii) has no outstanding Indebtedness for borrowed money;
in the case of (1) and (2) above, other than to the Company or an Affiliate of
the Company and as permitted by the Indenture.
RANKING
Senior Indebtedness versus Notes
The payment of the principal of, premium, if any, and interest on the Notes
and the payment of any Subsidiary Guaranty will be subordinate in right of
payment to the prior payment in full of all Senior Indebtedness of the Company
or the relevant Subsidiary Guarantor, as the case may be, including the
obligations of the Company and such Subsidiary Guarantor under the Credit
Agreement.
As of April 24, 2002, after giving pro forma effect to the Refinancing
Transactions:
(1) the Company's Senior Indebtedness would have been approximately
$254.5 million, all of which would have been secured indebtedness; and
(2) the Senior Indebtedness of the Subsidiary Guarantors would have
been approximately $254.5 million, all of which would have been secured
indebtedness. All of the Senior Indebtedness of the Subsidiary Guarantors
consists of their respective guaranties of Senior Indebtedness of the
Company under the Credit Agreement.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company and the Subsidiary Guarantors may incur, under
certain circumstances the amount of such Indebtedness could be substantial and,
in any case, such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitation on Indebtedness".
Liabilities of Subsidiaries versus Notes
A substantial portion of our operations are conducted through our
subsidiaries. All of our existing subsidiaries, other than Tahoe Joe's Inc., are
guaranteeing the Notes. Future domestic Restricted Subsidiaries that have
Indebtedness are required to guarantee the Notes. Claims of creditors of any
non-guarantor subsidiaries, including trade creditors holding indebtedness or
guarantees issued by any such non-guarantor subsidiaries, and claims of
preferred stockholders of any such non-guarantor subsidiaries generally will
have priority with respect to the assets and earnings of any such non-guarantor
subsidiaries over the claims of our creditors, including holders of the Notes,
even if such claims do not constitute Senior Indebtedness. Accordingly, the
Notes will be effectively subordinated to creditors (including trade creditors)
and preferred stockholders, if any, of any non-guarantor subsidiaries.
At April 24, 2002, after giving pro forma effect to the Refinancing
Transactions, the total liabilities of our non-guarantor subsidiary would have
been approximately $14.8 million, including trade payables. Although the
Indenture limits the incurrence of Indebtedness and preferred stock of certain
of our subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness under the Indenture. See "-- Certain Covenants -- Limitation on
Indebtedness".
Other Senior Subordinated Indebtedness versus Notes
Only Indebtedness of the Company or a Subsidiary Guarantor that is Senior
Indebtedness will rank senior to the Notes and the relevant Subsidiary Guaranty
in accordance with the provisions of the
80
Indenture. The Notes and each Subsidiary Guaranty will in all respects rank pari
passu with all other Senior Subordinated Indebtedness of the Company and the
relevant Subsidiary Guarantor.
We and the Subsidiary Guarantors have agreed in the Indenture that we and
they will not Incur, directly or indirectly, any Indebtedness that is
contractually subordinate or junior in right of payment to our Senior
Indebtedness or the Senior Indebtedness of such Subsidiary Guarantors, unless
such Indebtedness is Senior Subordinated Indebtedness of the Company or the
Subsidiary Guarantors, as applicable, or is expressly subordinated in right of
payment to Senior Subordinated Indebtedness of the Company or the Subsidiary
Guarantors, as applicable. The Indenture does not treat unsecured Indebtedness
as subordinated or junior to Secured Indebtedness merely because it is
unsecured, and it does not treat Indebtedness secured by junior liens as
subordinated or junior merely because it is secured by junior liens.
Payment of Notes
We are not permitted to pay principal of, premium, if any, or interest on
the Notes or make any deposit pursuant to the provisions described under
"-- Defeasance" or "-- Satisfaction and Discharge" below and may not purchase,
redeem or otherwise retire any Notes (collectively, "pay the Notes") if either
of the following occurs (a "Payment Default"):
(1) any Designated Senior Indebtedness of the Company is not paid in
full in cash when due; or
(2) any other default on Designated Senior Indebtedness of the Company
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms;
unless, in either case, the Payment Default has been cured or waived and any
such acceleration has been rescinded or such Designated Senior Indebtedness has
been paid in full in cash. Regardless of the foregoing, we are permitted to pay
the Notes if we and the Trustee receive written notice approving such payment
from the Representatives of all Designated Senior Indebtedness with respect to
which the Payment Default has occurred and is continuing.
During the continuance of any default, other than a Payment Default, with
respect to any Designated Senior Indebtedness of the Company pursuant to which
the maturity thereof may be accelerated without further notice, except such
notice as may be required to effect such acceleration, or the expiration of any
applicable grace periods, we are not permitted to pay the Notes for a period (a
"Payment Blockage Period") commencing upon the receipt by the Trustee, with a
copy to us, of written notice (a "Blockage Notice") of such default from the
Representative of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter. The Payment
Blockage Period will end earlier if such Payment Blockage Period is terminated:
(1) by written notice to the Trustee and us from the Person or Persons
who gave such Blockage Notice;
(2) because the default giving rise to such Blockage Notice is cured,
waived or otherwise no longer continuing; or
(3) because such Designated Senior Indebtedness has been discharged or
repaid in full in cash.
Notwithstanding the provisions described above, unless the holders of such
Designated Senior Indebtedness or the Representative of such Designated Senior
Indebtedness have accelerated the maturity of such Designated Senior
Indebtedness, we are permitted to resume paying the Notes after the end of such
Payment Blockage Period. The Notes shall not be subject to more than one Payment
Blockage Period in any consecutive 360-day period irrespective of the number of
defaults with respect to Designated Senior Indebtedness of the Company during
such period, except that if any Blockage Notice is delivered to the Trustee by
or on behalf of holders of Designated Senior Indebtedness of the Company (other
than holders of the Bank Indebtedness), a Representative of holders of Bank
Indebtedness may give another Blockage Notice within such period. However, in no
event may the total number of days during which any Payment Blockage Period or
Periods is in effect exceed 179 days in the aggregate during any 360
81
consecutive day period, and there must be 181 days during any 360-day
consecutive period during which no Payment Blockage Period is in effect.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property:
(1) the holders of Senior Indebtedness of the Company will be entitled
to receive payment in full in cash of such Senior Indebtedness before the
holders of the Notes are entitled to receive any payment;
(2) until the Senior Indebtedness of the Company is paid in full in
cash, any payment or distribution to which holders of the Notes would be
entitled but for the subordination provisions of the Indenture will be made
to holders of such Senior Indebtedness as their interests may appear,
except that holders of Notes may receive certain Capital Stock and
subordinated debt obligations; and
(3) if a distribution is made to holders of the Notes that, due to the
subordination provisions, should not have been made to them, such holders
of the Notes are required to hold it in trust for the holders of Senior
Indebtedness of the Company and pay it over to them as their interests may
appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee must promptly notify the holders of Designated Senior
Indebtedness of the Company or the Representative of such Designated Senior
Indebtedness of the acceleration. If any Designated Senior Indebtedness of the
Company is outstanding, neither the Company, nor any Subsidiary Guarantor may
pay the Notes until five Business Days after the Representatives of all the
issues of such Designated Senior Indebtedness receive notice of such
acceleration and, thereafter, may pay the Notes only if the Indenture otherwise
permits payment at that time.
A Subsidiary Guarantor's obligations under its Subsidiary Guaranty are
senior subordinated obligations. As such, the rights of Noteholders to receive
payment by a Subsidiary Guarantor pursuant to its Subsidiary Guaranty will be
subordinated in right of payment to the rights of holders of Senior Indebtedness
of such Subsidiary Guarantor. The terms of the subordination provisions
described above with respect to the Company's obligations under the Notes apply
equally to a Subsidiary Guarantor and the obligations of such Subsidiary
Guarantor under its Subsidiary Guaranty.
By reason of the subordination provisions contained in the Indenture, in
the event of a liquidation or insolvency proceeding, creditors of the Company or
a Subsidiary Guarantor who are holders of Senior Indebtedness of the Company or
a Subsidiary Guarantor, as the case may be, may recover more, ratably, than the
holders of the Notes, and creditors of ours who are not holders of Senior
Indebtedness may recover less, ratably, than holders of our Senior Indebtedness
and may recover more, ratably, than the holders of the Notes.
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in trust
by the Trustee for the payment of principal of and interest on the Notes
pursuant to the provisions described under "-- Defeasance" or "-- Satisfaction
and Discharge".
BOOK-ENTRY, DELIVERY AND FORM
We will initially issue the Exchange Notes in the form of one or more
global notes (the "Global Note"). The Global Note will be deposited with, or on
behalf of, the Depository and registered in the name of the Depository or its
nominee. Except as set forth below, the Global Note may be transferred, in whole
and not in part, only to the Depository or another nominee of the Depository.
You may hold your beneficial interests in the Global Note directly through the
Depository if you have an account with the Depository or indirectly through
organizations which have accounts with the Depository.
The Depository has advised the Company as follows: the Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing
82
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The Depository was created to hold securities of institutions that have
accounts with the Depository ("participants") and to facilitate the clearance
and settlement of securities transactions among its participants in such
securities through electronic book- entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depository's participants include securities brokers and
dealers (which may include the Initial Purchaser, banks, trust companies,
clearing corporations and certain other organizations). Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies (collectively, the "indirect participants")
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
The Company expects that pursuant to procedures established by the
Depository, upon the deposit of the Global Note with the Depository, the
Depository will credit, on its book-entry registration and transfer system, the
principal amount of Notes represented by such Global Note to the accounts of
participants. The accounts to be credited shall be designated by the Initial
Purchaser. Ownership of beneficial interests in the Global Note will be limited
to participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and the
transfer of those ownership interests will be effected only through, records
maintained by the Depository (with respect to participants' interests), the
participants and the indirect participants (with respect to the owners of
beneficial interests in the Global Note other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of any related Notes
evidenced by the Global Note for all purposes of such Notes and the Indenture.
Except as set forth below, as an owner of a beneficial interest in the Global
Note, you will not be entitled to have the Notes represented by the Global Note
registered in your name, will not receive or be entitled to receive physical
delivery of certificated Notes and will not be considered to be the owner or
holder of any Notes under the Global Note. We understand that under existing
industry practice, in the event an owner of a beneficial interest in the Global
Note desires to take any action that the Depository, as the holder of the Global
Note, is entitled to take, the Depository would authorize the participants to
take such action, and the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
We will make payments of principal of, premium, if any, and interest on
Notes represented by the Global Note registered in the name of and held by the
Depository or its nominee to the Depository or its nominee, as the case may be,
as the registered owner and holder of the Global Note.
We expect that the Depository or its nominee, upon receipt of any payment
of principal of, premium, if any, or interest on the Global Note will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. We also expect that
payments by participants or indirect participants to owners of beneficial
interests in the Global Note held through such participants or indirect
participants will be governed by standing instructions and customary practices
and will be the responsibility of such participants or indirect participants. We
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in
the Global Note for any Note or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for any other aspect
of the relationship between the Depository and its participants or indirect
participants or the relationship between such participants or indirect
participants and the owners of beneficial interests in the Global Note owning
through such participants.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility or liability for the
performance by the Depository or
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its participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
CERTIFICATED NOTES
Subject to certain conditions, the Notes represented by the Global Note are
exchangeable for certificated Notes in definitive form of like tenor in
denominations of $1,000 and integral multiples thereof if:
(1) the Depository notifies us that it is unwilling or unable to
continue as Depository for the Global Note or the Depository ceases to be a
clearing agency registered under the Exchange Act and, in either case, we
are unable to locate a qualified successor within 90 days;
(2) we in our discretion at any time determine not to have all the
Notes represented by the Global Note; or
(3) an event of default entitling the holders of the Notes to
accelerate the maturity thereof has occurred and is continuing.
Any Note that is exchangeable as above is exchangeable for certificated
Notes issuable in authorized denominations and registered in such names as the
Depository shall direct. Subject to the foregoing, the Global Note is not
exchangeable, except for a Global Note of the same aggregate denomination to be
registered in the name of the Depository or its nominee. In addition, such
certificates will bear the legend referred to under "Transfer Restrictions"
(unless we determine otherwise in accordance with applicable law), subject, with
respect to such certificated Notes, to the provisions of such legend.
SAME-DAY PAYMENT
The Indenture requires us to make payments in respect of Notes, including
principal, premium and interest, by wire transfer of immediately available funds
to the U.S. dollar accounts with banks in the U.S. specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(1) prior to the earlier to occur of (A) the first public offering of
common stock of Parent or (B) the first public offering of common stock of
the Company, the Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of the
Voting Stock of the Company, whether as a result of issuance of securities
of Parent or the Company, any merger, consolidation, liquidation or
dissolution of the Company, or any direct or indirect transfer of
securities by Parent or otherwise (for purposes of this clause (1) and
clause (2) below, the Permitted Holders shall be deemed to beneficially own
any Voting Stock of a Person (the "specified person") held by any other
Person (the "parent entity") so long as the Permitted Holders beneficially
own (as so defined), directly or indirectly, in the aggregate a majority of
the voting power of the Voting Stock of the parent entity);
(2) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in clause (1) above, except that for
purposes of this clause (2) such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right
84
is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the Voting Stock
of the Company; provided, however, that the Permitted Holders beneficially
own (as defined in clause (1) above), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of the Company than such other person and do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors of the Company (for the purposes of this
clause (2), such other person shall be deemed to beneficially own any
Voting Stock of a specified person held by a parent entity, if such other
person is the beneficial owner (as defined in this clause (2)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent entity and the Permitted Holders beneficially own (as defined
in clause (1) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent entity
and do not have the right or ability by voting power, contract or otherwise
to elect or designate for election a majority of the board of directors of
such parent entity);
(3) individuals who on the Issue Date constituted the Board of
Directors of the Company or, so long as Parent owns a majority of the total
voting power of the Voting Stock of the Company, the Parent Board (together
with any new directors whose election by such Board of Directors of the
Company or the Parent Board or whose nomination for election by the
shareholders of the Company or Parent, as the case may be, was approved by
a vote of 66 2/3% of the directors of the Company or of Parent, as the case
may be, then still in office who were either directors on the Issue Date or
whose election or nomination for election was previously so approved or
whose election was approved by the Permitted Holders) cease for any reason
to constitute a majority of the Board of Directors of the Company or the
Parent Board then in office; or
(4) the merger or consolidation of Parent or the Company with or into
another Person or the merger of another Person with or into Parent or the
Company, or the sale of all or substantially all the assets of Parent or
the Company (determined on a consolidated basis) to another Person (other
than, in all such cases, a Person that is controlled by the Permitted
Holders), other than a transaction following which (A) in the case of a
merger or consolidation transaction, holders of securities that represented
100% of the Voting Stock of Parent or the Company immediately prior to such
transaction (or other securities into which such securities are converted
as part of such merger or consolidation transaction) own directly or
indirectly at least a majority of the voting power of the Voting Stock of
the surviving Person in such merger or consolidation transaction
immediately after such transaction and (B) in the case of a sale of assets
transaction, the transferee Person becomes the obligor in respect of the
Notes and a Subsidiary of the transferor of such assets; provided, however,
that (i) it shall not constitute a Change of Control under this clause (4)
if, after giving effect to such transaction, the Permitted Holders
beneficially own (as defined in clause (1) above) 35% or more of the total
voting power of the Voting Stock of the surviving Person in such
transaction immediately after such transaction and (ii) this clause (4)
shall not apply to Parent if at the time of the transaction, Parent owns
less than a majority of the total voting power of the Voting Stock of the
Company.
Within 30 days following any Change of Control, we will mail or otherwise
deliver a notice to each Holder with a copy to the Trustee (the "Change of
Control Offer") stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require us to purchase such Holder's Notes at a purchase price in
cash equal to 101% of the principal amount thereof on the date of purchase,
plus accrued and unpaid interest, if any, or premium, if any, to the date
of purchase (subject to the right of Holders of record on the relevant
record date to receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control;
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
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(4) the instructions, as determined by us, consistent with the
covenant described hereunder, that a Holder must follow in order to have
its Notes purchased.
We will not be required to make a Change of Control Offer following a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by us and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of Notes as a result of a Change of Control. To
the extent that the provisions of any securities laws or regulations conflict
with the provisions of the covenant described hereunder, we will comply with the
applicable securities laws and regulations and shall not be deemed to have
breached our obligations under the covenant described hereunder by virtue of its
compliance with such securities laws or regulations.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a sale or takeover of Parent and
the Company and, thus, the removal of incumbent management. The Change of
Control purchase feature is a result of negotiations between the Company and the
Initial Purchaser. Neither the Company nor Parent have the present intention to
engage in a transaction involving a Change of Control, although it is possible
that we or they could decide to do so in the future. Subject to the limitations
discussed below, we or Parent could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect our capital structure or credit ratings. Restrictions on our ability to
Incur additional Indebtedness are contained in the covenants described under
"-- Certain Covenants -- Limitation on Indebtedness". Such restrictions can only
be waived with the consent of the holders of a majority in principal amount of
the Notes then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford holders of the Notes protection in the event of a highly
leveraged transaction.
The Credit Agreement prohibits us from purchasing any Notes, and will also
provide that the occurrence of certain change of control events with respect to
the Parent or the Company would constitute a default thereunder. In the event
that at the time of such Change of Control the terms of any Senior Indebtedness
of the Company, including the Credit Agreement, restrict or prohibit the
purchase of Notes following such Change of Control, then prior to the mailing or
delivery of the notice to Holders but in any event within 30 days following any
Change of Control, we undertake to (i) repay in full all such Senior
Indebtedness or (ii) obtain the requisite consents under the agreements
governing such Senior Indebtedness to permit the repurchase of the Notes. If we
do not repay such Senior Indebtedness or obtain such consents, we will remain
prohibited from purchasing Notes. In such case, our failure to comply with the
foregoing undertaking, after appropriate notice and lapse of time would result
in an Event of Default under the Indenture, which would, in turn, constitute a
default under the Credit Agreement. In such circumstances, the subordination
provisions in the Indenture would likely restrict payment to the Holders of
Notes.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the holders of their right to require us to repurchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the holders of Notes following the occurrence of a
Change of Control may be limited by our then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any required repurchases.
The provisions under the Indenture relative to our obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the Notes.
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CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness
(a) The Company will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and each Restricted Subsidiary will be entitled to Incur Indebtedness
if, on the date of such Incurrence after giving effect thereto on a pro forma
basis, no Default has occurred and is continuing and, the Consolidated Coverage
Ratio exceeds (1) 2.0 to 1, if such Indebtedness is Incurred on or prior to July
15, 2004, (2) 2.25 to 1, if such Indebtedness is Incurred after July 15, 2004
and on or prior to July 15, 2006, and (3) 2.5 to 1, if such Indebtedness is
Incurred after July 15, 2006.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred by the Company and its Restricted
Subsidiaries pursuant to any Revolving Credit Facility; provided, however,
that, immediately after giving effect to any such Incurrence, the aggregate
principal amount of all Indebtedness Incurred under this clause (1) and
then outstanding does not exceed the greater of (A) $50.0 million and (B)
5% of the consolidated revenue of the Company and its Restricted
Subsidiaries for the most recent four consecutive fiscal quarters for which
internal financial statements are available prior to the date such
Indebtedness was Incurred;
(2) Indebtedness Incurred by the Company and its Restricted
Subsidiaries pursuant to any Term Loan Facility; provided, however, that,
after giving effect to any such Incurrence, the aggregate principal amount
of all Indebtedness Incurred under this clause (2) and then outstanding
does not exceed $245.0 million less the sum of all principal payments with
respect to such Indebtedness pursuant to paragraph (a)(3)(A) of the
covenant described under "-- Limitation on Sales of Assets and Subsidiary
Stock";
(3) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that (A) any subsequent issuance or transfer
of any Capital Stock which results in any such Restricted Subsidiary
ceasing to be a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Restricted Subsidiary) shall
be deemed, in each case, to constitute the Incurrence of such Indebtedness
by the obligor thereon and (B) if the Company is the obligor on such
Indebtedness owed to a Restricted Subsidiary, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Notes;
(4) the Notes and the Exchange Notes (other than any Additional
Notes);
(5) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2), (3) or (4) of this covenant);
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (4) or (5) or this clause
(6);
(7) Hedging Obligations of the Company or any Restricted Subsidiary
entered into not for the purpose of speculation;
(8) obligations in respect of one or more standby letters of credit,
performance, bid and surety bonds and completion guarantees provided by the
Company or any Restricted Subsidiary in the ordinary course of business;
(9) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business; provided, however,
that such Indebtedness is extinguished within three Business Days of its
Incurrence;
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(10) Indebtedness (including Capital Lease Obligations) Incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease, construction or improvement of property (real or personal) or
equipment (whether through the direct purchase of assets or the Capital
Stock of any Person owning such assets) within 180 days after such
purchase, lease or improvement in an aggregate principal amount which, when
added together with the amount of Indebtedness previously Incurred pursuant
to this clause (10) and then outstanding (including any Refinancing
Indebtedness with respect thereto) does not exceed $25.0 million;
(11) Indebtedness attributable to the Specified Sale/Leaseback
Transaction in an aggregate principal amount which, when added together
with the amount of Indebtedness previously Incurred pursuant to this clause
(11) and then outstanding (including any Refinancing Indebtedness with
respect thereto) does not exceed $35.0 million, provided, however, that the
Net Available Cash from the Specified Sale/Leaseback Transaction (other
than Designated Excess Asset Sale Proceeds) is applied to reduce
Indebtedness as required by the covenant described under "-- Limitation on
Sales of Assets and Subsidiary Stock;"
(12) Indebtedness attributable to Permitted Equipment Lease Financings
in an aggregate principal amount which, when added together with the amount
of Indebtedness Incurred pursuant to this clause (12) and then outstanding
(including any Refinancing Indebtedness with respect thereto) does not
exceed $25.0 million, provided, however, that the Net Available Cash from
such Permitted Equipment Lease Financings is applied to reduce Indebtedness
as required by the covenant described under "-- Limitation on Sales of
Assets and Subsidiary Stock";
(13) the Guarantee or co-issuance of any Indebtedness otherwise
permitted to be Incurred pursuant to the Indenture;
(14) Indebtedness of the Company or any Restricted Subsidiary
consisting of indemnification, adjustment of purchase price, earn-out or
similar obligations, in each case incurred in connection with the
acquisition or disposition of any assets, including shares of Capital Stock
or divisions or lines of business, of the Company or any Restricted
Subsidiary; and
(15) Indebtedness of the Company in an aggregate principal amount
which, when taken together with all other Indebtedness of the Company
outstanding on the date of such Incurrence (other than Indebtedness
permitted by clauses (1) through (14) above or paragraph (a)) does not
exceed $25.0 million.
(c) Notwithstanding the foregoing, neither the Company nor any Subsidiary
Guarantor will incur any Indebtedness pursuant to the foregoing paragraph (b) if
the proceeds thereof are used, directly or indirectly, to Refinance any
Subordinated Obligations of the Company or any Subsidiary Guarantor unless such
Indebtedness shall be subordinated to the Notes or the applicable Subsidiary
Guaranty to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, (1) in the
event that an item of Indebtedness meets the criteria of more than one of the
types of Indebtedness described above, the Company, in its sole discretion, will
classify such item of Indebtedness at the time of Incurrence and only be
required to include the amount and type of such Indebtedness in one of the above
clauses and (2) the Company will be entitled to divide and classify an item of
Indebtedness in more than one of the types of Indebtedness described above. In
addition, from time to time the Company may reclassify any Indebtedness Incurred
pursuant to any clause in paragraph (b) above such that it will be deemed as
having been Incurred under another clause in paragraph (b), so long as such
Indebtedness could have been Incurred under such new clause had such clause been
available to the Company at the time of the original Incurrence of such
Indebtedness. Indebtedness under the Revolving Credit Facility under the Credit
Agreement outstanding on the Issue Date shall be deemed to have been Incurred on
the Issue Date in reliance on clause (1) in paragraph (b) above. Indebtedness
under the Term Loan Facility under the Credit Agreement outstanding on the Issue
Date shall be deemed to have been Incurred on the Issue Date in reliance on
clause (2) in paragraph (b) above.
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(e) Notwithstanding paragraphs (a) and (b) above, neither the Company nor
any Subsidiary Guarantor will Incur (1) any Indebtedness if such Indebtedness is
subordinate or junior in right of payment in any respect to any Senior
Indebtedness of the Company or such Subsidiary Guarantor, as applicable, unless
such Indebtedness is Senior Subordinated Indebtedness or is expressly
subordinated in right of payment to Senior Subordinated Indebtedness of the
Company or such Subsidiary Guarantor, as applicable, or (2) any Secured
Indebtedness that is not Senior Indebtedness of such Person unless
contemporaneously therewith such Person makes effective provision to secure the
Notes or the relevant Subsidiary Guaranty, as applicable, senior to or equally
and ratably with such Secured Indebtedness for so long as such Secured
Indebtedness is secured by a Lien.
Limitation on Restricted Payments
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter immediately following the fiscal quarter during which the Issue
Date occurs to the end of the most recent fiscal quarter for which
internal financial statements are then available prior to the date of
such Restricted Payment (or, in case such Consolidated Net Income shall
be a deficit, minus 100% of such deficit); plus
(B) 100% of the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees), 100% of
any cash capital contribution received by the Company from its
shareholders subsequent to the Issue Date and 100% of the fair market
value (as determined in good faith by resolution of the Board of
Directors of the Company) of property (other than cash that would
constitute Temporary Cash Investments) of a Related Business received by
the Company or a Restricted Subsidiary subsequent to the Issue Date as a
contribution to its common equity capital (other than from a Subsidiary
or that was financed with loans from the Company or any of its
Restricted Subsidiaries); plus
(C) the amount by which Indebtedness of the Company or a Restricted
Subsidiary is reduced on the Company's consolidated balance sheet upon
the conversion or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the Company or a
Restricted Subsidiary convertible or exchangeable for Capital Stock
(other than Disqualified Stock) of the Company (less the amount of any
cash, or the fair value of any other property, distributed by the
Company upon such conversion or exchange); plus
(D) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by the Company or
any Restricted Subsidiary in any Person resulting from repurchases,
repayments or redemptions of such Investments by such Person, proceeds
realized on the sale of such Investment and proceeds representing the
return of capital (excluding dividends and distributions), in each case
received by the Company or any Restricted Subsidiary, and (y) to the
extent such Person is an Unrestricted Subsidiary, the portion
(proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Unrestricted Subsidiary
at the time such Unrestricted Subsidiary is
89
designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any such Person or
Unrestricted Subsidiary, the amount of Investments (excluding Permitted
Investments) previously made (and treated as a Restricted Payment) by
the Company or any Restricted Subsidiary in such Person or Unrestricted
Subsidiary.
(b) The preceding provisions do not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital Stock of
the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees) or a substantially
concurrent cash capital contribution received by the Company from its
shareholders; provided, however, that (A) such Restricted Payment shall be
excluded in the calculation of the amount of Restricted Payments and (B)
the Net Cash Proceeds from such sale or such cash capital contribution (to
the extent so used for such Restricted Payment) shall be excluded from the
calculation of amounts under clause (3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company or any Subsidiary Guarantor made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness which is
permitted to be Incurred pursuant to the covenant described under
"-- Limitation on Indebtedness"; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the
repurchase or other acquisition of shares of Capital Stock of the Company
or any of its Subsidiaries from employees, former employees, directors or
former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including employment,
severance, compensation or shareholder agreements) or plans (or amendments
thereto) approved by the Board of Directors of the Company under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such Capital Stock; provided, however, that the aggregate amount
of such repurchases and other acquisitions shall not exceed in any calendar
year the sum of (A) $5.0 million plus (B) the aggregate Net Cash Proceeds
received by the Company from the issuance of such Capital Stock to, or the
exercise of options to purchase such Capital Stock by, employees or
directors of the Company or any of its Subsidiaries that occurs after the
Issue Date (to the extent the Net Cash Proceeds from the sale of such
Capital Stock have not otherwise been applied to the payment of Restricted
Payments by virtue of clause (3)(B) of paragraph (a) above or applied
pursuant to clause (b)(1) above) plus (C) the Net Cash Proceeds actually
received by the Company after the Issue Date from insurance proceeds paid
in respect of the death or disability of any employee or director; provided
further, however, that such repurchases and other acquisitions shall be
excluded in the calculation of the amount of Restricted Payments;
(5) dividends, distributions or advances to Parent to be used by
Parent to pay Federal, state and local taxes payable by Parent and directly
attributable to (or arising as a result of) the operations of the Company
and its Restricted Subsidiaries; provided, however, that (A) the amount of
such dividends shall not exceed the amount that the Company and its
Restricted Subsidiaries would be required to pay in respect of such
Federal, state and local taxes were the Company to pay such taxes as a
stand-alone taxpayer and (B) such dividends pursuant to this clause (5) are
used by Parent for such purposes within 20 days of the receipt of such
dividends; provided further, however, that such dividends shall be excluded
in the calculation of the amount of Restricted Payments;
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(6) dividends, distributions or advances to Parent to the extent
necessary to pay (A) for general corporate and overhead expenses incurred
by Parent and (B) regularly scheduled interest on the Parent Note;
provided, however, that such dividends, distributions or advances shall not
exceed in any fiscal year of the Company the lesser of (i) $1,500,000 and
(ii) $250,000 plus the amount required to pay regularly scheduled interest
on the Parent Note; provided further, however, that such dividends,
distributions or advances shall be included in the calculation of the
amount of Restricted Payments;
(7) Permitted Closing Date Payments; provided, however, that such
payments shall be excluded in the calculation of the amount of Restricted
Payments;
(8) Payments of intercompany subordinated debt, the incurrence of
which was permitted under clause (3) of paragraph (b) of the covenant
described under "-- Limitation on Indebtedness"; provided, however, that no
Default or Event of Default has occurred and is continuing or would
otherwise result therefrom; provided further, however, that such payments
shall be excluded in the calculation of the amount of Restricted Payments;
or
(9) Restricted Payments not exceeding $10.0 million in the aggregate;
provided, however, that (A) at the time of such Restricted Payments, no
Default shall have occurred and be continuing (or result therefrom) and (B)
such Restricted Payments shall be included in the calculation of the amount
of Restricted Payments.
For purposes of determining compliance with this covenant, in the event
that a proposed Restricted Payment meets the criteria of more than one of the
categories of Restricted Payments described in clauses (1) through (9) in
paragraph (b) above, or is entitled to be incurred pursuant to paragraph (a)
above, the Company will be entitled to classify such item of Restricted Payment
on the date of its payment in any manner that complies with this covenant.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company
or a Subsidiary Guarantor, (b) make any loans or advances to the Company or (c)
transfer any of its property or assets to the Company, except:
(1) with respect to clauses (a), (b) and (c),
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary on or prior to the date on which
such Restricted Subsidiary was acquired by the Company (other than
Indebtedness Incurred as consideration in, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by
the Company) and outstanding on such date;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of clause (1) of this
covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of clause (1) of this
covenant or this clause (iii); provided, however, that the encumbrances
and restrictions with respect to such Restricted Subsidiary contained in
any such refinancing agreement or amendment are no less favorable to the
Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
91
(iv) any encumbrance or restriction consisting of any restriction
on the sale or other disposition of assets or property securing
Indebtedness as a result of a Lien permitted to be Incurred under the
Indenture on such asset or property;
(v) any encumbrance or restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or a portion of the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition;
(vi) any restriction arising under applicable law, regulation or
order;
(vii) any restriction on cash or other deposits or net worth
imposed by suppliers or landlords under contracts entered into in the
ordinary course of business; and
(viii) any restriction in any agreement that is not more
restrictive than the restrictions under the terms of the Credit
Agreement as in effect on the Issue Date.
(2) with respect to clause (c) only,
(i) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the
extent such provisions restrict the transfer of the lease or the
property leased thereunder;
(ii) restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements or mortgages; and
(iii) provisions with respect to the disposition or distribution of
assets or property in joint venture agreements, asset sale agreements,
stock sale agreements and other similar agreements entered into in the
ordinary course of business.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value (including as to the value of all non-cash consideration), as
determined in good faith by the Board of Directors of the Company, of the
shares and assets subject to such Asset Disposition;
(2) at least 75% of the consideration thereof received by the Company
or such Restricted Subsidiary is in the form of cash or cash equivalents
(provided that such 75% requirement shall not apply to any Asset
Disposition in which the cash or cash equivalents portion of the
consideration received therefor is no less than an amount equal to the
product of (x) 4.5 and (y) the amount of EBITDA for the previously
completed four fiscal quarters directly attributable to the assets or
Capital Stock included in such Asset Disposition); and
(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as
the case may be)
(A) first, to the extent the Company elects (or is required by the
terms of any Indebtedness), to prepay, repay, redeem or purchase Senior
Indebtedness of the Company or Indebtedness (other than any Disqualified
Stock) of a Wholly Owned Subsidiary (in each case other than
Indebtedness owed to the Company or an Affiliate of the Company) within
one year from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to the extent the
Company elects, to acquire Additional Assets within one year from the
later of the date of such Asset Disposition or the receipt of such Net
Available Cash;
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(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make an
offer to the holders of the Notes (and to holders of other Senior
Subordinated Indebtedness of the Company designated by the Company) to
purchase Notes (and such other Senior Subordinated Indebtedness of the
Company) pursuant to and subject to the conditions contained in the
Indenture; and
(D) fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C), for any
purpose not prohibited by the terms of the Indenture;
provided, however, that in connection with any prepayment, repayment or
purchase of Indebtedness pursuant to clause (A) or (C) above, the Company
or such Restricted Subsidiary shall permanently retire such Indebtedness
and shall cause the related loan commitment (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid, repaid or
purchased.
Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this covenant exceeds $10.0 million. In addition, (i) the Company and the
Restricted Subsidiaries will not be required to apply any Designated Excess
Asset Sale Proceeds in accordance with this covenant to the extent such proceeds
are paid out as a Restricted Payment within 270 days following the Issue Date in
compliance with the covenant described under "-- Limitation on Restricted
Payments" and (ii) other than any Designated Excess Asset Sale Proceeds, any Net
Available Cash received in respect of the Specified Sale/Leaseback Transaction
or in respect of Permitted Equipment Lease Financings Incurred pursuant to
clause (b)(12) of the covenant described under "-- Limitation on Indebtedness"
may not be applied pursuant to clause (3)(B) above. Pending application of Net
Available Cash pursuant to this covenant, such Net Available Cash may be
invested in Temporary Cash Investments or applied to temporarily reduce Senior
Indebtedness.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company or any Restricted
Subsidiary and the release of the Company or such Restricted Subsidiary
from all liability on such Indebtedness in connection with such Asset
Disposition; and
(2) securities received by the Company or any Restricted Subsidiary
from the transferee that are converted by the Company or such Restricted
Subsidiary into cash within 90 days of receipt thereof.
(b) In the event of an Asset Disposition that requires the purchase of
Notes (and other Senior Subordinated Indebtedness of the Company) pursuant to
clause (a)(3)(C) above, the Company will purchase Notes tendered pursuant to an
offer by the Company for the Notes (and such other Senior Subordinated
Indebtedness) at a purchase price of 100% of their principal amount (or, in the
event such other Senior Subordinated Indebtedness of the Company was issued with
significant original issue discount, 100% of the accreted value thereof),
without premium, plus accrued but unpaid interest (or, in respect of such other
Senior Subordinated Indebtedness of the Company, such lesser price, if any, as
may be provided for by the terms of such Senior Subordinated Indebtedness) in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the Notes tendered exceeds the Net Available Cash allotted to their purchase,
the Company will select the Notes to be purchased on a pro rata basis but in
round denominations, which in the case of the Notes will be denominations of
$1,000 principal amount or multiples thereof. The Company shall not be required
to make such an offer to purchase Notes (and other Senior Subordinated
Indebtedness of the Company) pursuant to this covenant if the Net Available Cash
available therefor is less than $10.0 million (which lesser amount shall be
carried forward for purposes of determining whether such an offer is required
with respect to the Net Available Cash from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes
93
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, the Company will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this clause by virtue of its
compliance with such securities laws or regulations.
Limitation on Affiliate Transactions
(a) The Company will not, and will not permit any Restricted Subsidiary to,
enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or the
rendering of any service) with, or for the benefit of, any Affiliate of the
Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary than those that could be obtained
at the time of the Affiliate Transaction in arm's-length dealings with a
Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of $2.0
million, the material terms of the Affiliate Transaction are set forth in
writing and a majority of the directors of the Company disinterested with
respect to such Affiliate Transaction have determined in good faith that
the criteria set forth in clause (1) are satisfied and have approved the
relevant Affiliate Transaction as evidenced by a Board resolution; and
(3) if such Affiliate Transaction involves an amount in excess of
$10.0 million, the Board of Directors of the Company shall also have
received a written opinion from an Independent Qualified Party to the
effect that the financial terms of such Affiliate Transaction are fair,
from a financial standpoint, to the Company and its Restricted Subsidiaries
or not less favorable to the Company and its Restricted Subsidiaries than
could reasonably be expected to be obtained at the time in an arm's-length
transaction with a Person who was not an Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to, or not
prohibited by, the covenant described under "-- Limitation on Restricted
Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment,
compensation or severance arrangements, stock options and stock ownership
plans approved by the Board of Directors of the Company;
(3) loans or advances to employees in the ordinary course of business
in accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $5.0 million in the aggregate
outstanding at any one time;
(4) the payment of reasonable compensation or employee benefit
arrangements to and indemnity provided for the benefit of directors,
officers or employees of the Company or its Restricted Subsidiaries in the
ordinary course of business;
(5) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries;
(6) the payment of fees to Caxton-Iseman Capital, Inc. pursuant to the
terms of the Management Agreement as in effect on the Issue Date, provided
that in connection with an Initial Public Equity Offering, the Company may
terminate the Management Agreement and pay a termination fee from the
proceeds of such Initial Public Equity Offering;
(7) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction solely
because the Company or a Restricted Subsidiary owns an equity interest in
or otherwise controls such Restricted Subsidiary, joint venture or similar
entity;
94
(8) the entering into of a registration rights agreement with the
stockholders of the Company or Parent;
(9) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of the Company; and
(10) any merger, consolidation or reorganization with Parent, solely
for the purposes of reorganizing to facilitate the initial public offering
of the Company or Parent.
Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries
The Company:
(1) will not, and will not permit any Restricted Subsidiary to, sell,
lease, transfer or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than the Company or a Wholly Owned
Subsidiary), and
(2) will not permit any Restricted Subsidiary to issue any of its
Capital Stock (other than, if necessary, shares of its Capital Stock
constituting directors' or other legally required qualifying shares) to any
Person (other than to the Company or a Wholly Owned Subsidiary),
unless
(A) immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own any
Capital Stock of such Restricted Subsidiary; or
(B) immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after
giving effect thereto is treated as a new Investment by the Company and
such Investment would be permitted to be made under the covenant
described under "-- Limitation on Restricted Payments" if made on the
date of such issuance, sale or other disposition.
Notwithstanding the foregoing, the issuance or sale of shares of Capital
Stock of any Restricted Subsidiary of the Company will not violate the
provisions of the immediately preceding sentence if such shares are issued or
sold in connection with (x) the formation or capitalization of a Restricted
Subsidiary or (y) a single transaction or a series of substantially
contemporaneous transactions whereby such Restricted Subsidiary becomes a
Restricted Subsidiary of the Company by reason of the acquisition of securities
or assets from another Person.
Merger and Consolidation
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia and
the Successor Company (if not the Company) shall expressly assume, by an
indenture supplemental thereto, executed and delivered to the Trustee, in
form reasonably satisfactory to the Trustee, all the obligations of the
Company under the Notes and the Indenture;
(2) immediately after giving pro forma effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing;
(3) immediately after giving pro forma effect to such transaction, (A)
the Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant
95
described under "-- Limitation on Indebtedness" or (B) the Consolidated
Coverage Ratio for the Successor Company and its Restricted Subsidiaries
would be equal to or greater than such ratio for the Company and its
Restricted Subsidiaries immediately prior to such transaction; and
(4) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture;
provided, however, that clause (3) will not be applicable to (A) a Restricted
Subsidiary consolidating with, merging into or transferring all or part of its
properties and assets to the Company or any Restricted Subsidiary or (B) the
Company merging with an Affiliate of the Company solely for the purpose and with
the sole effect of reincorporating the Company in another jurisdiction.
The Successor Company will be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and the predecessor Company, except in the case
of a lease, shall be released from the obligation to pay the principal of and
interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all of its assets to any Person unless:
(1) except in the case of a Subsidiary Guarantor that has been
disposed of in its entirety to another Person (other than to the Company or
an Affiliate of the Company), whether through a merger, consolidation or
sale of Capital Stock or assets, if in connection therewith the Company
provides an Officers' Certificate to the Trustee to the effect that the
Company will comply with its obligations under the covenant described under
"-- Limitation on Sales of Assets and Subsidiary Stock" in respect of such
disposition, the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State thereof or the District of
Columbia, and such Person shall expressly assume, by a Guaranty Agreement,
in a form reasonably satisfactory to the Trustee, all the obligations of
such Subsidiary, if any, under its Subsidiary Guaranty;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as a
result of such transaction as having been issued by such Person at the time
of such transaction), no Default shall have occurred and be continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such Guaranty Agreement, if any, complies with the Indenture.
Notwithstanding the foregoing, any Subsidiary Guarantor may consolidate
with or merge with or into or convey, transfer or lease, in one transaction or a
series of transactions, all or substantially all of its assets to the Company.
Pursuant to the Indenture, if at any time Parent Guarantees the Notes,
Parent will covenant in its Guaranty Agreement not to merge with or into, or
convey, transfer or lease, in one transaction or a series of transactions, all
or substantially all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person (if not Parent)
shall be a Person organized and existing under the laws of the jurisdiction
under which Parent was organized or under the laws of the United States of
America, or any State thereof or the District of Columbia, and such Person
shall expressly assume all the obligations of Parent, if any, under the
Parent Guaranty;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person
96
as a result of such transaction as having been issued by such Person at the
time of such transaction), no Default shall have occurred and be
continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such Guaranty Agreement, if any, complies with the Indenture.
Future Guarantors
The Company will cause each domestic Restricted Subsidiary of the Company
(other than Tahoe Joe's Inc.) and any other domestic Restricted Subsidiary
formed or acquired after the Issue Date, in each case, that (i) Guarantees any
other Indebtedness of the Company or a Subsidiary Guarantor or (ii) Incurs or
has outstanding any Indebtedness for borrowed money, to, at the same time,
execute and deliver to the Trustee a Guaranty Agreement pursuant to which such
Restricted Subsidiary will Guarantee payment of the Notes on the same terms and
conditions as those set forth in the Indenture.
If at any time, Tahoe Joe's Inc. Guarantees any other Indebtedness of the
Company or a Subsidiary Guarantor, the Company shall cause Tahoe Joe's Inc. to
execute a Guaranty Agreement pursuant to which Tahoe Joe's Inc. will become a
Subsidiary Guarantor and fully and unconditionally Guarantee the Company's
obligations with respect to the Notes on a senior subordinated basis.
If at any time, Parent Guarantees any other Indebtedness of the Company or
a Subsidiary Guarantor (other than Indebtedness Incurred pursuant to clauses (1)
or (2) in paragraph (b) of the covenant described under "-- Limitation on
Indebtedness"), the Company shall cause Parent to execute a Guaranty Agreement
pursuant to which Parent will fully and unconditionally Guarantee the Company's
obligations with respect to the Notes on a senior subordinated basis.
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will, after
effectiveness of the Exchange Offer Registration Statement, file with the SEC
and, in any event, provide the Trustee and Noteholders with such annual reports
and such information, documents and other reports as are specified in Sections
13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to
such Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filings of such information, documents
and reports under such Sections.
If Parent has Guaranteed the Notes and has complied with the reporting
requirements of Section 13 or 15(d) of the Exchange Act, if applicable, and has
provided the Trustee, the holders of the Notes and prospective investors with
the reports described herein with respect to Parent (including any financial
information required by Regulation S-X 3-10 and a separate "Management's
Discussion and Analysis of Financial Condition and Results of Operations" with
respect to the Company and its Restricted Subsidiaries on a consolidated basis),
the Company shall be deemed to be in compliance with the provisions of this
section.
DEFAULTS
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due,
continued for 30 days;
(2) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required purchase, upon
declaration of acceleration or otherwise;
(3) the failure by the Company or Parent to comply with its
obligations under "-- Certain Covenants -- Merger and Consolidation" above;
97
(4) the failure by the Company to comply for 30 days after notice with
any of its obligations in the covenants described above under "Offer to
Purchase Upon Initial Public Offering" (other than a failure to purchase
Notes), "Change of Control" (other than a failure to purchase Notes) or
under "-- Certain Covenants" under "-- Limitation on Indebtedness",
"-- Limitation on Restricted Payments", "-- Limitation on Restrictions on
Distributions from Restricted Subsidiaries", "-- Limitation on Sales of
Assets and Subsidiary Stock" (other than a failure to purchase Notes),
"-- Limitation on Affiliate Transactions", "-- Limitation on the Sale or
Issuance of Capital Stock of Restricted Subsidiaries", "-- Future
Guarantors", or "-- SEC Reports";
(5) the failure by the Company or a Subsidiary Guarantor to comply for
60 days after notice with its other agreements contained in the Indenture;
(6) Indebtedness of the Company, any Guarantor or any Significant
Subsidiary is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and
the total amount of such Indebtedness unpaid or accelerated exceeds $10.0
million (the "cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of the
Company, a Guarantor or a Significant Subsidiary (the "bankruptcy
provisions");
(8) any judgment or decree for the payment of money in excess of $10.0
million is entered against the Company, a Guarantor or a Significant
Subsidiary, remains outstanding for a period of 60 consecutive days
following such judgment and is not discharged, waived or stayed within 10
days after notice (the "judgment default provision"); or
(9) the Parent Guaranty, if applicable, or any Subsidiary Guaranty
ceases to be in full force and effect (other than in accordance with the
terms of such Guaranty) and such default continues for 10 days or any
Guarantor denies or disaffirms its obligations under its Guaranty.
However, a default under clauses (4), (5) and (8) will not constitute an Event
of Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless:
(1) such holder has previously given the Trustee notice that an Event
of Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
98
(4) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity; and
(5) holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder of a Note or that would involve the Trustee in personal liability.
If a Default occurs, is continuing and is known to the Trustee, the Trustee
must mail to each holder of the Notes notice of the Default within 90 days after
it occurs. Except in the case of a Default in the payment of principal of or
interest on any Note, the Trustee may withhold notice if and so long as a
committee of its trust officers determines that withholding notice is not
opposed to the interest of the holders of the Notes. In addition, we are
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. We are required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action we
are taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, an amendment or waiver may not,
among other things:
(1) reduce the amount of Notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Note;
(3) reduce the principal of or extend the Stated Maturity of any Note;
(4) reduce the amount payable upon the redemption of any Note or
change the time at which any Note may be redeemed as described under
"-- Optional Redemption" above;
(5) make any Note payable in money other than that stated in the Note;
(6) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note or any
Guaranty that would adversely affect the Noteholders; or
(9) make any change in any Guaranty that would adversely affect the
Noteholders in any material respect.
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Notwithstanding the preceding, without the consent of any holder of the
Notes, the Company, the Guarantors and Trustee may amend the Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor person of the
obligations of the Company or any Guarantor under the Indenture;
(3) to provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of
the Code);
(4) to add guarantees with respect to the Notes, including any
Subsidiary Guaranties, or to secure the Notes;
(5) to add to the covenants of the Company or a Subsidiary Guarantor
for the benefit of the holders of the Notes or to surrender any right or
power conferred upon the Company or a Subsidiary Guarantor;
(6) to make any change that does not adversely affect the rights of
any holder of the Notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior Indebtedness
of the Company or a Guarantor then outstanding unless the holders of such Senior
Indebtedness (or their Representative) consent to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, we are required
to mail to holders of the Notes a notice briefly describing such amendment.
However, the failure to give such notice to all holders of the Notes, or any
defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
We may require payment of a sum sufficient to cover any tax, assessment or other
governmental charge payable in connection with certain transfers and exchanges.
DEFEASANCE
At any time, we may terminate all our obligations under the Notes, the
Guaranties and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes.
In addition, at any time we may terminate our obligations under "Offer to
Purchase Upon Initial Public Offering" and "-- Change of Control" and under the
covenants described under "-- Certain Covenants" (other than the covenant
described under "-- Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries and the judgment default provision described under "-- Defaults"
above and the limitations contained in clause (3) of the first paragraph under
"-- Certain Covenants -- Merger and Consolidation" above ("covenant
defeasance").
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We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the Notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default
specified in clause (4), (6), (7) (with respect only to Significant
Subsidiaries) or (8) under "-- Defaults" above or because of the failure of the
Company to comply with clause (3) of the first paragraph under "-- Certain
Covenants -- Merger and Consolidation" above. If we exercise our legal
defeasance option or our covenant defeasance option, each Guarantor will be
released from all of its obligations with respect to its Guaranty.
In order to exercise either of our defeasance options, we must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amounts and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
SATISFACTION AND DISCHARGE
When (1) we deliver to the Trustee all outstanding Notes for cancelation or
(2) all outstanding Notes have become due and payable, whether at maturity or on
a redemption date as a result of the mailing of a notice of redemption, or (3)
all outstanding Notes will become due and payable within one year or are to be
called for redemption within one year under arrangements reasonably satisfactory
to the Trustee and, in the case of clauses (2) and (3), we irrevocably deposit
with the Trustee funds sufficient to pay at maturity or upon redemption all
outstanding Notes, including interest thereon to maturity or such redemption
date, and if in any case we pay all other sums payable hereunder by us, then the
Indenture shall, subject to certain exceptions, cease to be of further effect.
CONCERNING THE TRUSTEE
U.S. Bank National Association is to be the Trustee under the Indenture and
the Registrar and Paying Agent with regard to the Notes. An affiliate of the
Trustee is a lender under the new credit facility.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest it must
either eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. If an Event of Default occurs (and is not cured), the Trustee will
be required, in the exercise of its power, to use the degree of care of a
prudent man in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense and then only to the extent required by
the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Subsidiary Guarantor will have any liability for any obligations of the
Company or any Subsidiary Guarantor under the Notes, any Subsidiary Guaranty or
the Indenture or for any claim based on, in respect of, or by reason of such
obligations or their creation. Each Holder of the Notes by accepting a Note
waives and releases all
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such liability. The waiver and release are part of the consideration for
issuance of the Notes. Such waiver and release may not be effective to waive
liabilities under the U.S. Federal securities laws, and it is the view of the
SEC that such a waiver is against public policy.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property, plant or equipment useful in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by the Company or
another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person that
at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "-- Certain Covenants -- Limitation on
Restricted Payments", "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of:
(1) any shares of Capital Stock of a Restricted Subsidiary (other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary);
(2) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary;
other than, in the case of clauses (1), (2) and (3) above,
(A) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary;
(B) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, (x)
a disposition that constitutes a Restricted Payment
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permitted by the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments" or a Permitted Investment
and (y) a disposition of all or substantially all the assets of the Company
in accordance with the covenant described under "-- Certain
Covenants -- Merger and Consolidation";
(C) a disposition of assets with a fair market value of less than $1.0
million;
(D) entering into Hedging Obligations; and
(E) the granting of a lien permitted under the Indenture.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
borne by the Notes, compounded annually) of the total obligations of the lessee
for net rental payments during the remaining term of the lease included in such
Sale/Leaseback Transaction (including any period for which such lease has been
extended); provided, however, that if such Sale/Leaseback Transaction results in
a Capital Lease Obligation, the amount of Indebtedness represented thereby will
be determined in accordance with the definition of "Capital Lease Obligation".
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of or redemption or similar payment with respect to such Indebtedness
multiplied by the amount of such payment by
(2) the sum of all such payments.
"Bank Indebtedness" means all Obligations pursuant to the Credit Agreement.
"Board of Directors" with respect to a Person means the Board of Directors
of such Person or any committee thereof duly authorized to act on behalf of such
Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which internal financial statements are
available prior to the date of such determination to (y) Consolidated Interest
Expense for such four fiscal quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or
if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and
Consolidated Interest Expense for such period shall be calculated after
giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period (except
that, in making such computation, the amount of Indebtedness under any
revolving credit facility outstanding on the date of such calculation shall
be computed based on (A) the average daily
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balance of such Indebtedness during such four fiscal quarters or such
shorter period when such facility was outstanding or (B) if such facility
was created after the end of such four fiscal quarters, the average balance
of such Indebtedness during the period from the date of creation of such
facility to the date of the computation);
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the
date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for
such period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period and as if the Company or such
Restricted Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness;
(3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, EBITDA for
such period shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of
the Company or any Restricted Subsidiary repaid, repurchased, defeased or
otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale);
(4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring
a calculation to be made hereunder, which constitutes all or substantially
all of an operating unit of a business, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such
period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company
(and may include any applicable Pro Forma Cost Savings). If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest on such Indebtedness shall be calculated as if the rate in effect on
the date of determination had been the applicable rate for the entire period
(taking into account any Interest Rate Agreement applicable to such Indebtedness
if such Interest Rate Agreement has a remaining term in excess of 12 months).
104
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest expense attributable to capital leases and the interest
expense attributable to leases constituting part of a Sale/Leaseback
Transaction;
(2) amortization of debt discount and debt issuance cost;
(3) capitalized interest;
(4) non-cash interest expenses;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Hedging Obligations;
(7) dividends paid in cash or Disqualified Stock in respect of all
Preferred Stock of Restricted Subsidiaries and Disqualified Stock of the
Company held by Persons other than the Company or a Wholly Owned
Subsidiary;
(8) interest incurred in connection with Investments in discontinued
operations;
(9) interest actually paid by the Company or a Restricted Subsidiary
under a Guarantee of Indebtedness of any other Person; and
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person (other than the Company) in
connection with Indebtedness Incurred by such plan or trust; and
less, to the extent included in such total interest expense, (A) the
amortization during such period of capitalized financing costs associated with
the Refinancing Transactions and (B) the amortization during such period of
other capitalized financing costs; provided, however, that, in the case of (B),
the aggregate amount of amortization relating to such capitalized financing
costs deducted in calculating Consolidated Interest Expense shall not exceed 5%
of the aggregate amount of the financing giving rise thereto.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash actually distributed by such Person during such period to
the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution
paid to a Restricted Subsidiary, to the limitations contained in clause
(3) below); and
(B) the Company's equity in a net loss of any such Person for such
period shall be included in determining such Consolidated Net Income but
only to the extent the Company or a Restricted Subsidiary funded such
net loss with cash;
(2) solely for purposes of determining the aggregate amount available
for Restricted Payments under clause (a)(3) of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments", any net income
(or loss) of any Person acquired by the Company or a Subsidiary in a
pooling of interests transaction for any period prior to the date of such
acquisition;
105
(3) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (4) below, the
Company's equity in the net income of any such Restricted Subsidiary for
such period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend or other distribution (subject, in the case of
a dividend or other distribution paid to another Restricted Subsidiary,
to the limitation contained in this clause); and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(4) any gain or loss realized upon the sale or other disposition of
any assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and
any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person;
(5) extraordinary gains or losses;
(6) to the extent included in total interest expense, any amortization
or write-offs of debt issuance costs and prepayment penalties realized
during such period to the extent attributable to the Indebtedness being
Refinanced in connection with the Refinancing Transactions; and
(7) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described under
"Certain Covenants -- Limitation on Restricted Payments" only, there shall be
excluded from Consolidated Net Income any repurchases, repayments or redemptions
of Investments, proceeds realized on the sale of Investments or return of
capital to the Company or a Restricted Subsidiary to the extent such
repurchases, repayments, redemptions, proceeds or returns increase the amount of
Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D)
thereof.
"Credit Agreement" means the Credit Agreement entered into on June 28, 2002
by and among the Company, the guarantors referred to therein, the lenders
referred to therein and Credit Suisse First Boston, together with the related
documents thereto (including the term loans, revolving loans and letter of
credit facility thereunder, any guarantees and security documents), as amended,
extended, renewed, replaced, restated, supplemented or otherwise modified (in
whole or in part, and without limitation as to amount, terms, conditions,
covenants and other provisions) from time to time, and any agreement (and
related document or instrument) governing Indebtedness incurred to Refinance, in
whole or in part, the borrowings and commitments then outstanding or permitted
to be outstanding under such Credit Agreement or a successor Credit Agreement,
whether by the same or any other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to protect
such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Excess Asset Sale Proceeds" means the sum of (i) the amount, if
any, by which the Net Available Cash received by the Company from the sale of
Original Roadhouse Grill restaurants exceeds 3.7 times the pro forma reduction
in EBITDA associated with such sale for the period of the most recent four
consecutive fiscal quarters for which internal financial statements are
available prior to the date of the sale and (ii) the amount, if any, by which
the Net Available Cash received by the Company from the Specified Sale/Leaseback
Transaction exceeds 3.7 times the scheduled average annual cash rent expense
over the life of the Notes.
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"Designated Senior Indebtedness", with respect to a Person, means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness of such Person which, at the date of
determination, has an aggregate principal amount outstanding of, or under
which, at the date of determination, the holders thereof are committed to
lend up to, at least $25.0 million and is specifically designated by such
Person in the instrument evidencing or governing such Senior Indebtedness
as "Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the occurrence
of certain events or otherwise, in whole or in part;
in each case on or prior to the first anniversary of the Stated Maturity of the
Notes; provided, however, that any Capital Stock that would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to purchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
first anniversary of the Stated Maturity of the Notes shall not constitute
Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable to
such Capital Stock are not more favorable to the holders of such Capital
Stock than the terms applicable to the Notes and described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary
Stock" and "-- Certain Covenants -- Change of Control"; and
(2) any such requirement only becomes operative after compliance with
such terms applicable to the Notes, including the purchase of any Notes
tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed redemption,
repayment or repurchase price will be calculated in accordance with the terms of
such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
will be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in cash in
a prior period); and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (including, without limitation, deferred rental
expense, but excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash expenditures in any future
period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall
107
be added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the debt securities of the Company issued pursuant
to the Indenture in exchange for, and in an aggregate principal amount at
maturity equal to, the Notes, in compliance with the terms of the Registration
Rights Agreement.
"Existing Credit Agreement" means the Credit Agreement dated as of
September 29, 2000, as amended, among Parent, the Company, Lehman Commercial
Paper Inc., as administrative agent, Fleet National Bank, as syndication agent,
First Union National Bank, as documentation agent, and the financial
institutions and other lenders from time to time party thereto.
"Existing Mezzanine Indebtedness" means the Company's 14% Senior
Subordinated Notes due September 29, 2008 and Parent's 16% Senior Notes due
September 29, 2008.
"Facilities" means the Term Loan Facilities and the Revolving Credit
Facilities.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board; and
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Guarantor" means Parent and each Subsidiary Guarantor, as applicable.
"Guaranty" means the Parent Guaranty and each Subsidiary Guaranty, as
applicable.
"Guaranty Agreement" means a supplemental indenture, in a form reasonably
satisfactory to the Trustee, pursuant to which Parent or a Subsidiary Guarantor
guarantees the Company's obligations with respect to the Notes on the terms
provided for in the Indenture.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
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"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative meaning. Solely for
purposes of determining compliance with "-- Certain Covenants -- Limitation on
Indebtedness", (1) amortization of debt discount or the accretion of principal
with respect to a non-interest bearing or other discount security and (2) the
payment of regularly scheduled interest in the form of additional Indebtedness
of the same instrument or the payment of regularly scheduled dividends on
Capital Stock in the form of additional Capital Stock of the same clause and
with the same terms will not be deemed to be the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/ Leaseback Transactions entered into by such
Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in clauses (1)
through (3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the
tenth Business Day following payment on the letter of credit);
(5) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock of such
Person or, with respect to any Preferred Stock of any Subsidiary of such
Person, the principal amount of such Preferred Stock to be determined in
accordance with the Indenture (but excluding, in each case, any accrued
dividends);
(6) all obligations of the type referred to in clauses (1) through (5)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(7) all obligations of the type referred to in clauses (1) through (6)
of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets and the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
Notwithstanding the foregoing, in connection with the purchase by the Company or
any Restricted Subsidiary of any business, the term "Indebtedness" will exclude
post-closing payment adjustments to which the seller may become entitled to the
extent such payment is determined by a final closing balance sheet or such
payment depends on the performance of such business after the closing; provided,
however, that, at the time of closing, the amount of any such payment is not
determinable and, to the extent such payment thereafter becomes fixed and
determined, the amount is paid within 30 days thereafter.
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The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided,
however, that in the case of Indebtedness sold at a discount, the amount of such
Indebtedness at any time will be the accreted value thereof at such time.
Notwithstanding the foregoing, Indebtedness shall not include any liability for
Federal, state, local or other taxes owed or owing to any governmental entity.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing; provided, however, that such firm
is not an Affiliate of the Company.
"Initial Public Equity Offering" means the first underwritten initial
public offering of common stock by one of Parent or the Company pursuant to an
effective registration statement under the Securities Act, which offering (i)
has a primary component and (ii) results in at least $50.0 million of aggregate
gross proceeds (whether primary or secondary).
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. Except as otherwise provided for
herein, the amount of an Investment shall be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary", the definition
of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Company shall be deemed to continue to have a permanent "Investment" in
an Unrestricted Subsidiary equal to an amount (if positive) equal to (A)
the Company's "Investment" in such Subsidiary at the time of such
redesignation less (B) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors of the
Company.
"Issue Date" means the date on which the Initial Notes were originally
issued, such date being June 28, 2002.
"Lenders" has the meaning specified in the Credit Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise and proceeds
from the sale or other disposition of any securities received as consideration,
but only as and when received, but excluding any other consideration received in
the form of
110
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form), in each
case net of:
(1) all legal, title and recording tax expenses, underwriting
discounts, commissions and other fees and expenses incurred (including,
without limitation, fees and expenses of counsel, accountants and
investment bankers), and all Federal, state, provincial, foreign and local
taxes required to be accrued as a liability under GAAP, as a consequence of
such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Obligations" means with respect to any Indebtedness all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Parent" means Buffets Holdings, Inc., a Delaware corporation.
"Parent Board" means the Board of Directors of the Parent or any committee
thereof duly authorized to act on behalf of such Board.
"Parent Guaranty" means the Guarantee of the Notes by Parent pursuant to a
Guaranty Agreement.
"Parent Note" means (i) the $7.9 million aggregate principal amount of 3%
Series A Subordinated Notes issued by Parent with an initial term maturity of
six months from the Issue Date, which will be extended to June 15, 2011 with an
interest rate of 4.75% if such notes are not paid in full on the initial
maturity date, and (ii) the $20.0 million aggregate principal amount of 3%
Series B Subordinated Notes issued by Parent with an initial term maturity of
six months from the Issue Date, which will be extended to June 15, 2011 with an
interest rate of 4.75% if such notes are not paid in full on the initial
maturity date.
"Permitted Closing Date Payments" means, without duplication, the following
payments and distributions: (i) redemption of the Existing Mezzanine
Indebtedness and the payment of accrued interest thereon, (ii) repayment of all
amounts outstanding under the Existing Credit Agreement, including, but not
limited to, fees and accrued interest thereon, (iii) cash payments (including,
but not limited to, redemption fees of $18.0 million) made or agreed to be made
in connection with the redemption of the Existing Mezzanine Indebtedness, (iv)
the distribution of up to $150.0 million in cash to Parent and (v) the payment
of transaction fees and expenses relating to the Refinancing Transactions of up
to $17.1 million.
"Permitted Equipment Lease Financings" means one or more Sale/Leaseback
Transactions relating to equipment and/or leasehold improvements.
"Permitted Holders" means (i) Caxton-Iseman Investments L.P., Caxton
Associates, LLC, Sentinel Capital Partners, II, L.P., Frederick J. Iseman,
Robert M. Rosenberg, Steven M. Lefkowitz, Robert A, Ferris, Roe H. Hatlen and
David S. Lobel and any other Person who is a controlled Affiliate of any of the
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foregoing and any member of senior management of the Company and (ii) any
Related Party of any of the foregoing.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in:
(1) the Company, a Restricted Subsidiary or a Person that will, upon
the making of such Investment, become a Restricted Subsidiary; provided,
however, that the primary business of such Restricted Subsidiary is a
Related Business;
(2) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related
Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of
business;
(6) loans or advances to employees made in the ordinary course of
business of the Company or such Restricted Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as permitted
pursuant to the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock";
(9) any Person where such Investment was acquired by the Company or
any of its Restricted Subsidiaries (a) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted
Subsidiary in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization of the issuer of such other Investment
or accounts receivable or (b) as a result of a foreclosure by the Company
or any of its Restricted Subsidiaries with respect to any secured
Investment or other transfer of title with respect to any secured
Investment in default; and
(10) additional Investments made after the Issue Date in an aggregate
amount which, together with all other Investments made pursuant to this
clause (10) that are then outstanding, do not exceed the greater of (a)
$25.0 million and (b) 5% of Total Assets.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
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"Pro Forma Cost Savings" means, with respect to any period, the reduction
in costs or other adjustments (including, solely in the case of clause (3)(i)
below, an annualization of EBITDA), as applicable, that are
(1) directly attributable to an asset acquisition and calculated on a
basis that is consistent with Regulation S-X under the Securities Act in
effect and as applied as of the Issue Date,
(2) implemented by the Company or the business that was the subject of
any such asset acquisition, in each case, within one year prior to the date
of the asset acquisition and that are supportable and quantifiable by the
underlying accounting records of the Company or such business, or
(3) in connection with any acquisition of restaurants or a Person
engaged in a Related Business, (i) the EBITDA reasonably estimated by the
Company's chief financial officer associated with any such acquired
restaurants that were operated for at least three months but no longer than
twelve months by the business that was the subject of any such acquisition
and (ii) cost savings reasonably estimated by the Company's chief financial
officer and reasonably expected by such chief financial officer to be
implemented within six months of the consummation of such acquisition
directly attributable to closing such acquired restaurants or to
headquarters consolidation, including consolidation of functions.
as if, in the case of each of clauses (1), (2) and (3), all such reductions in
costs or other adjustments had been effected as of the beginning of such period.
"Rating Agency" means Standard & Poor's, a division of the McGraw-Hill
Companies and Moody's Investors Service, Inc. or if Standard & Poor's or Moody's
Investors Service, Inc. or both shall not make a rating on the Notes publicly
available, a nationally recognized statistical rating agency or agencies, as the
case may be, selected by the Company (as certified by a resolution of the Board
of Directors of the Company) which shall be substituted for Standard & Poor's or
Moody's Investors Service, Inc. or both, as the case may be.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, in whole or in part, such
indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced; and
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus (i) accrued interest on the Indebtedness
being Refinanced not to exceed the amount of such accrued interest for one
fiscal quarter and (ii) fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights Agreement
dated the Issue Date, among the Company, the Subsidiary Guarantors and Credit
Suisse First Corporation, Morgan Stanley &
113
Co. Incorporated, Salomon Smith Barney Inc., UBS Warburg LLC and Fleet
Securities, Inc. and any similar registration rights agreement entered into in
connection with the issuance of Additional Notes.
"Related Business" means any business in which the Company was engaged on
the Issue Date and any business that in the good faith judgement of the Board of
Directors is related, ancillary or complementary thereto, arises therefrom or is
necessary or desirable to facilitate such business.
"Related Party" means (1) any controlling stockholder, controlling member,
general partner, majority owned Subsidiary, or spouse or immediate family member
(in the case of an individual) of any Permitted Holder, (2) any estate, trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons holding a controlling interest of which consist
solely of one or more Permitted Holders and/or such other Persons referred to in
the immediately preceding clause (1) or (3) any executor, administrator,
trustee, manager, director or other similar fiduciary of any Person referred to
in the immediately preceding clause (2) acting solely in such capacity.
"Representative" means with respect to a Person any trustee, agent or
representative (if any) for an issue of Senior Indebtedness of such Person.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its Capital
Stock (other than dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) and dividends or distributions
payable solely to the Company or a Restricted Subsidiary, and other than
pro rata dividends or other distributions made by a Subsidiary that is not
a Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a Subsidiary that is an entity other
than a corporation));
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated Obligations
of such Person (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due
within one year of the date of such purchase, repurchase or other
acquisition); or
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Revolving Credit Facility" means the revolving credit facility and letter
of credit facility contained in the Credit Agreement and any other facilities or
financing arrangements (including commercial paper facilities, revolving credit
loans, term loans, receivables financing letters of credit, or any debt
securities or other form of debt, convertible debt or exchangeable debt
financing) that Refinance or replace, in whole or in part, any such revolving
credit facility, letter of credit facility or financing arrangement.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
114
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue Date
or thereafter Incurred; and
(2) accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to such Person whether or not post-filing interest is allowed in
such proceeding) in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such obligations are subordinate or pari passu in right of payment to the
Notes or the Subsidiary Guaranty of such Person, as the case may be; provided,
however, that Senior Indebtedness shall not include:
(1) any obligation of such Person to any Subsidiary;
(2) any liability for Federal, state, local or other taxes owed or owing by
such Person;
(3) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities);
(4) any Indebtedness of such Person (and any accrued and unpaid interest in
respect thereof) which is subordinate or junior in right of payment to any other
Indebtedness or other obligation of such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence is
Incurred in violation of the Indenture.
"Senior Subordinated Indebtedness" means, with respect to a Person, the
Notes (in the case of the Company), the Subsidiary Guaranty (in the case of a
Subsidiary Guarantor) and any other Indebtedness of such Person that
specifically provides that such Indebtedness is to rank pari passu with the
Notes or such Subsidiary Guaranty, as the case may be, in right of payment and
is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of such Person which in each case is not Senior Indebtedness of
such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Specified Sale/Leaseback Transaction" means a Sale/Leaseback Transaction
relating to leasehold interests with respect to up to 38 restaurants owned by
the Company or a Restricted Subsidiary having an aggregate net book value of
approximately $37.4 million and identified on the Issue Date on a schedule to
the Indenture.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to a Person, any Indebtedness
of such Person (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Notes or a Subsidiary
Guaranty of such Person, as the case may be, pursuant to a written agreement to
that effect.
115
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means Distinctive Dining, Inc., HomeTown Buffet,
Inc., OCB Restaurant Co., OCB Purchasing Co. and Restaurant Innovations, Inc.
and each other Subsidiary of the Company that executes the Indenture as a
guarantor and each other Subsidiary of the Company that thereafter guarantees
the Notes pursuant to the terms of the Indenture.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Notes.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof;
(2) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within one year of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States of America, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of $50.0
million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by
a registered broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a person (other than an Affiliate
of the Company) organized and in existence under the laws of the United
States of America or any foreign country recognized by the United States of
America with a rating at the time as of which any investment therein is
made of "P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard and Poor's, a division of the
McGraw-Hill Companies; and
(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's, a division of the McGraw-Hill Companies, or "A" by
Moody's Investors Service, Inc.
"Term Loan Facility" means the term loan facility initially contained in
the Credit Agreement and any other facility or financing arrangement (including
commercial paper facilities, revolving credit loans, term loans, receivables
financing, letters of credit, or any debt securities or other form of debt,
convertible debt or exchangeable debt financing) that Refinances or replaces, in
whole or in part, any such facility or financing arrangement.
"Total Assets" means the total consolidated assets of the Company and its
Restricted Subsidiaries, as set forth on the Company's consolidated balance
sheet for the most recently ended fiscal quarter for which internal financial
statements are available.
116
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors of
the Company in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments".
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (A) (i) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" or (ii) the Consolidated
Coverage Ratio for the Company and its Restricted Subsidiaries would be greater
than the Consolidated Coverage Ratio for the Company and its Restricted
Subsidiaries immediately before giving effect to such designation and (B) no
Default shall have occurred and be continuing. Any such designation by the Board
of Directors of the Company shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the resolution of the Board of Directors of the
Company giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain material United States federal
income tax consequences of the exchange of initial notes for exchange notes
pursuant to the exchange offer as well as the ownership and disposition of the
exchange notes by U.S. and Non-U.S. Holders, each as defined below, who acquire
such exchange notes pursuant to the exchange offer. This discussion is based on
the Internal Revenue Code of 1986, as amended (the "Code"), administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, and interpretations of the foregoing, all as of the date hereof,
and changes to any of which subsequent to the date of this prospectus may affect
the tax consequences described herein, possibly with retroactive effect.
The following discusses only exchange notes held as capital assets within
the meaning of Section 1221 of the Code. It does not discuss all of the tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, tax-exempt entities, real estate investment trusts,
regulated investment companies, insurance companies, dealers in securities or
foreign currencies and persons holding exchange notes in connection with a
hedging transaction, "straddle," conversion transaction or other integrated
transaction. This discussion also does not address the tax consequences to
persons who have a functional currency other than the United States dollar or to
persons who have ceased to be United States citizens or to be taxed as resident
aliens. Further, it does not include any description of any alternative minimum
tax consequences or the tax laws of any state, local or foreign government that
may be applicable to the exchange notes. PROSPECTIVE INVESTORS SHOULD CONSULT
THEIR TAX ADVISORS WITH REGARD TO THE APPLICATION OF UNITED STATES FEDERAL TAX
LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
As used herein, the term "U.S. Holder" means a beneficial owner of an
exchange note that is, for United States federal income tax purposes:
- a citizen or resident of the United States;
- a corporation, or other entity taxable as a corporation for United States
federal income tax purposes, created or organized in or under the laws of
the United States, any state thereof or the District of Columbia;
- an estate, the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust and (B) one or
more United States persons have the authority to control all substantial
decisions of the trust.
If a partnership, or other entity taxable as a partnership for United
States federal income tax purposes, holds exchange notes, the tax treatment of a
partner will generally depend on the status of the partner and the activities of
the partnership. Prospective purchasers that are partnerships or who would hold
exchange notes through a partnership or similar pass-through entity should
consult their tax advisors regarding the United States federal income tax
consequences of holding such notes.
U.S. HOLDERS
The Exchange Offer
The exchange of initial notes for exchange notes pursuant to the exchange
offer will not be treated as an exchange or otherwise as a taxable event to
holders. Consequently, (1) no gain or loss will be realized by a holder upon
receipt of an exchange note, (2) the holding period of the exchange note will
include the holding period of the initial note exchanged therefor and (3) the
adjusted tax basis of the exchange note will be the same as the adjusted tax
basis of the initial note exchanged therefor immediately before the exchange.
Further, any market discount or bond premium (as discussed below) applicable to
the initial notes should carry over to the exchange notes. The U.S. federal
income tax consequences of holding and
118
disposing of an exchange note generally should be the same as the U.S. federal
income tax consequences of holding and disposing of an initial note.
Stated Interest and Original Issue Discount
A U.S. Holder generally will be required to include in gross income as
ordinary interest income the stated interest on an exchange note at the time
that the interest accrues or is received, in accordance with the U.S. Holder's
regular method of accounting for United States federal income tax purposes.
The initial notes were issued with original issue discount ("OID") that
exceeds a de minimis amount. Each exchange note will be treated as having OID
equal to the excess of (i) the "stated redemption price at maturity" of the note
over (ii) its "issue price". For purposes of the foregoing, the general rule is
that the stated redemption price at maturity of a debt instrument is the sum of
all payments provided by the debt instrument other than payments of qualified
stated interest. The issue price of an exchange note should be the first price
at which a substantial amount of the initial notes were sold.
Each exchange note will be issued with OID that exceeds a de minimis
amount. Consequently, each U.S. Holder will be required to include in income
each year, without regard to whether any cash payments of interest are made with
respect to the exchange note and without regard to the holder's method of
accounting for U.S. federal income tax purposes, a portion of the OID on the
exchange note so as to provide a constant yield to maturity. The amount included
in the income of a U.S. Holder each year in this way will be treated as ordinary
income. Any amount of such OID included in income will increase a U.S. Holder's
adjusted tax basis in an exchange note, and any payment (other than a payment of
qualified stated interest) on the exchange note will decrease a U.S. Holder's
adjusted tax basis in such note. In compliance with U.S. Treasury regulations,
we will provide certain information to the IRS and U.S. Holders that is relevant
to determining the amount of OID in each accrual period.
MARKET DISCOUNT AND BOND PREMIUM
If a U.S. Holder purchased an initial note prior to this exchange offer for
an amount that is less than its principal amount, then, subject to a statutory
de minimis rule, the difference generally will be treated as market discount. If
a U.S. Holder exchanges an initial note, with respect to which there is market
discount, for an exchange note pursuant to the exchange offer, the market
discount applicable to the initial note should carry over to the exchange note
so received. In that case, any partial principal payment on, or any gain
realized on the sale, exchange, retirement or other disposition of (including
dispositions which are nonrecognition transactions under certain provisions of
the Code), the exchange note will be included in gross income and characterized
as ordinary income to the extent of the market discount that (1) has not
previously been included in income and (2) is treated as having accrued on the
exchange note prior to the payment or disposition. Market discount generally
accrues on a straight-line basis over the remaining term of the exchange note.
Upon an irrevocable election, however, market discount will accrue on a constant
yield basis. A U.S. Holder might be required to defer all or a portion of the
interest expense on indebtedness incurred or continued to purchase or carry an
exchange note. If a U.S. Holder elects to include market discount in gross
income currently as it accrues, the preceding rules relating to the recognition
of market discount and deferral of interest expense will not apply. An election
made to include market discount in gross income as it accrues will apply to all
debt instruments acquired by the U.S. Holder on or after the first day of the
taxable year to which the election applies and may be revoked only with the
consent of the IRS.
If a U.S. Holder purchased an initial note prior to this exchange offer for
an amount that is in excess of all amounts payable on the initial note after the
purchase date, other than payments of qualified stated interest, the excess will
be treated as bond premium. If a U.S. Holder exchanges an initial note, with
respect to which there is a bond premium, for an exchange note pursuant to the
exchange offer, the bond premium applicable to the initial note should carry
over to the exchange note so received. In general, a U.S. Holder may elect to
amortize bond premium over the remaining term of the exchange note on a constant
yield method. The amount of bond premium allocable to any accrual period is
offset against the
119
qualified stated interest allocable to the accrual period. If, following the
offset determination described in the immediately preceding sentence, there is
an excess allocable bond premium remaining, that excess may, in some
circumstances, be deducted. An election to amortize bond premium applies to all
taxable debt instruments held at the beginning of the first taxable year to
which the election applies and thereafter acquired by the U.S. Holder and may be
revoked only with the consent of the IRS.
Sale, Exchange or Disposition of the Exchange Notes
Upon the sale, exchange or other disposition of an exchange note (other
than the exchange of an initial note for an exchange note pursuant to the
exchange offer), a U.S. Holder will generally recognize capital gain or loss in
an amount equal to the difference between the amount of cash plus the fair
market value of any property received (not including any amount attributable to
accrued but unpaid interest not previously included in income or OID, which will
be taxable as ordinary income) and such holder's adjusted tax basis in the
exchange note. A U.S. Holder's tax basis in an exchange note generally will be
its cost for the note increased by any OID and any accrued market discount
previously included in income through the date of disposition and decreased by
any payments on the notes (other than a payment of qualified stated interest).
Subject to the discussion of market discount above, gain or loss recognized on
such sale, exchange, retirement or other taxable disposition of an exchange note
will generally be long-term capital gain or loss if the holder held such note
for more than one year. The deductibility of capital losses is subject to
limitations.
Backup Withholding and Information Reporting
Backup withholding (at the then applicable rate) and information reporting
requirements apply in the case of certain non-corporate U.S. Holders to certain
payments of principal of, and interest (including OID) on, an exchange note, and
of proceeds on the sale of an exchange note before maturity. Backup withholding
applies if a holder fails to provide a correct taxpayer identification number,
fails to report interest income (including OID) in full or fails to certify that
the holder is not subject to withholding. An individual's taxpayer
identification number is generally the individual's social security number. Any
amount withheld from payment to a holder under the backup withholding rules will
be allowed as a credit against the holder's federal income tax liability and may
entitle the holder to a refund, provided the required information is furnished
to the IRS.
NON-U.S. HOLDERS
As used herein, the term "Non-U.S. Holder" means a beneficial owner of an
exchange note that is, for the United States federal income tax purposes, not a
U.S. Holder.
The rules governing United States federal income taxation of Non-U.S.
Holders are complex and no attempt will be made herein to provide more than a
summary of those rules. Non-U.S. Holders should consult with their own tax
advisors to determine the effect of federal, state, local and foreign income tax
laws, as well as treaties, with regard to an investment in the exchange notes,
including any reporting requirements.
This discussion assumes that the notes or interest payments on the exchange
notes are not subject to the rules of Section 871(h)(4)(A) of the Code, relating
to interest payments that are determined by reference to income, profits,
changes in value of property or other attributes of the issuer or a related
party.
The Exchange Offer
The exchange of initial notes for exchange notes pursuant to the exchange
offer by a Non-U.S. Holder will not be treated as an exchange or otherwise as a
taxable event.
120
Payment of Interest on Exchange Notes
Subject to the discussion below concerning backup withholding, payments of
interest (including OID) on the exchange notes by us or our paying agent to any
Non-U.S. Holder will not be subject to United States federal withholding tax,
provided that:
- such holder (1) does not own, actually or constructively, 10% or more of
the total combined voting power of all classes of our voting stock, (2)
is not a controlled foreign corporation related, directly or indirectly,
to us through stock ownership and (3) is not a bank receiving interest
described in Section 881(c)(3)(A) of the Code; and
- the certification requirement, as described below, has been fulfilled
with respect to the beneficial owner.
The certification requirement referred to above will be fulfilled if either
(A) the Non-U.S. Holder provides to us or our paying agent an IRS Form W-8BEN
(or successor form), signed under penalties of perjury, that includes such
holder's name and address and certifies as to its non-U.S. status or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business holds the
exchange note on behalf of the beneficial owner and provides a statement to us
or our paying agent signed under penalties of perjury in which the organization,
bank or financial institution certifies that an IRS Form W-8BEN (or successor
form) has been received by it from the Non-U.S. Holder or from another financial
institution acting on behalf of the Non-U.S. Holder and furnishes us or our
paying agent with a copy. Other methods might be available to satisfy the
certification requirements described above, depending upon the circumstances
applicable to the Non-U.S. Holder.
The gross amount of payments of interest (including OID) that do not
qualify for the exception from withholding described above (the "portfolio
interest exemption") will be subject to United States withholding tax at a rate
of 30% unless (i) the Non-U.S. Holder provides us with a properly-executed IRS
Form W-8BEN (or successor form) claiming an exemption from or reduction in
withholding under an applicable tax treaty or (ii) such interest (including OID)
is effectively connected with the conduct of a United States trade or business
by such Non-U.S. Holder and a properly-executed IRS Form W-8ECI (or successor
form) is provided to us or our paying agent.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and if interest (including OID) on the note or gain realized on the disposition
of the note is effectively connected with such trade or business, then the
Non-U.S. Holder generally will be subject to regular United States federal
income tax on such interest (including OID) or gain on a net basis in the same
manner as if it were a U.S. Holder, unless an applicable tax treaty provides
otherwise. If the Non-U.S. Holder is a foreign corporation, it may also be
subject to a branch profits tax at a rate of 30%, unless reduced or eliminated
by an applicable tax treaty. Even though such effectively connected income is
subject to income tax, and may be subject to the branch profits tax, it is not
subject to withholding tax if the Non-U.S. Holder satisfies the certification
requirements described above.
Sale, Exchange or Disposition of the Notes
Subject to the discussion below concerning backup withholding, a Non-U.S.
Holder of an exchange note will not be subject to United States federal income
tax on gain realized on the sale, exchange or other taxable disposition of such
note, unless:
- such holder is an individual who is present in the United States for 183
days or more in the taxable year of disposition and certain other
conditions are met;
- such gain is effectively connected with the conduct of a United States
trade or business by such Non-U.S. Holder; or
- such gain represents accrued but unpaid interest not previously included
in income or OID, in which case the rules for interest would apply.
121
United States Federal Estate Tax
The note will not be included in the estate of a deceased Non-U.S. Holder
for United States federal estate tax purposes if interest on the exchange notes
is exempt from withholding of United States federal income tax under the
portfolio interest exemption (without regard to the certification requirement).
Backup Withholding and Information Reporting
Unless certain exceptions apply, we must report annually to the IRS and to
each Non-U.S. Holder any interest paid and OID accrued to the Non-U.S. Holder.
Copies of these information returns may also be made available under the
provisions of a specific treaty or other agreement to the tax authorities of the
country in which the Non-U.S. Holder resides.
Under current United States federal income tax law, backup withholding tax
will not apply to payments of interest (including OID) by us or our paying agent
on an exchange note if the certifications described above under "Payment of
Interest" are received, provided that we or our paying agent, as the case may
be, do not have actual knowledge or reason to know that the payee is a United
States person.
Payments on the sale, exchange or other disposition of an exchange note
made to or through a foreign office of a foreign broker generally will not be
subject to backup withholding or information reporting. However, if such broker
is for United States federal income tax purposes a United States person, a
controlled foreign corporation, a foreign person 50% or more of whose gross
income is effectively connected with a United States trade or business for a
specified three-year period or a foreign partnership with certain connections to
the United States, then information reporting will be required unless the broker
has in its records documentary evidence that the beneficial owner is not a
United States person and certain other conditions are met or the beneficial
owner otherwise establishes an exemption. Backup withholding may apply to any
payment that such broker is required to report if the broker has actual
knowledge or reason to know that the payee is a United States person. Payments
to or through the United States office of a broker will be subject to backup
withholding and information reporting unless the holder certifies, under
penalties of perjury, that it is not a United States person or otherwise
establishes an exemption.
Backup withholding is not an additional tax: any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be allowed
as a credit against such holder's United States federal income tax liability and
may entitle such holder to a refund, provided that the required information is
furnished to the IRS. Non-U.S. Holders of exchange notes should consult their
tax advisors regarding the application of information reporting and backup
withholding in their particular situations, the availability of an exemption
therefrom and the procedure for obtaining such an exemption, if available.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX
ADVICE. ACCORDINGLY, YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES TO YOU OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-UNITED STATES
TAX LAWS AND ANY RECENT OR PROPOSED CHANGES IN APPLICABLE TAX LAWS.
122
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer in exchange for initial notes acquired by such
broker-dealer as a result of market making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales, offers to resell or other transfers of the
exchange notes received by it in connection with the exchange offer.
Accordingly, each such broker-dealer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such exchange notes. The letter of transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for initial notes where such
initial notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration of this exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of such exchange notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of exchange notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The letter of transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York and Faegre &
Benson LLP, Minneapolis, Minnesota have passed upon the validity of the exchange
notes and the related guarantees.
EXPERTS
The consolidated financial statements of Buffets, Inc. and its subsidiaries
as of January 3, 2001 and January 2, 2002 and for the year ended December 29,
1999 (Predecessor Company), for the period from December 30, 1999 through
October 1, 2000 (Predecessor Company), for the period from inception (October 2,
2000) through January 3, 2001 and for the year ended January 2, 2002 included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
123
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-4 to register
the exchange notes. This prospectus, which forms part of the registration
statement, does not contain all of the information included in that registration
statement. For further information about us and the exchange notes offered in
this prospectus, you should refer to the registration statement and its
exhibits. We are not currently subject to the informational requirements of the
Securities Exchange Act of 1934. Under the indenture relating to the notes, we
agreed to file annual, quarterly and special reports and other information with
the SEC. You may read and copy any reports or other information filed by us at
the SEC's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the SEC's regional office in Chicago
(Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois 60661).
Copies of these filed reports, proxy statements and other information may be
obtained at prescribed rates from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. You may call the SEC at
1-800-SEC-0330 for further information contained in the public reference room.
Our filings with the SEC will also be available to the public from commercial
document retrieval services and at the SEC's Web site at "http://www.sec.gov."
In addition, anyone who receives a copy of this prospectus may obtain a
copy of any of these filings or a copy of the indenture, at no cost, by writing
or telephoning us at the following address or telephone number:
Buffets, Inc.
1460 Buffet Way
Eagan, Minnesota 55121
(651) 994-8608
Attention: General Counsel
124
INDEX TO FINANCIAL STATEMENTS
BUFFETS, INC. AND SUBSIDIARIES
<Table>
<Caption>
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of January 3, 2001 and
January 2, 2002........................................... F-3
Consolidated Statements of Income for the Year Ended
December 29, 1999, for the Period from December 30, 1999
through October 1, 2000, for the Period from October 2,
2000 through January 3, 2001 and for the Year Ended
January 2, 2002........................................... F-4
Consolidated Statements of Shareholder's Equity for the Year
Ended December 29, 1999 and for the Period from December
30, 1999 through October 1, 2000, for the Period from
October 2, 2000 through January 3, 2001 and for the Year
Ended January 2, 2002..................................... F-5
Consolidated Statements of Cash Flows for the Year Ended
December 29, 1999, for the Period from December 30, 1999
through October 1, 2000, for the Period from October 2,
2000 through January 3, 2001 and for the Year Ended
January 2, 2002........................................... F-6
Notes to Consolidated Financial Statements.................. F-8
Condensed Consolidated Balance Sheet as of April 24, 2002
(Unaudited)............................................... F-27
Condensed Consolidated Statements of Income for the Sixteen
Weeks Ended April 25, 2001 and April 24, 2002
(Unaudited)............................................... F-28
Condensed Consolidated Statement of Shareholder's Equity for
the Sixteen Weeks Ended April 24, 2002 (Unaudited)........ F-29
Condensed Consolidated Statements of Cash Flows for the
Sixteen Weeks Ended April 25, 2001 and April 24, 2002
(Unaudited)............................................... F-30
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-31
</Table>
F-1
INDEPENDENT AUDITORS' REPORT
To the Shareholder of Buffets, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Buffets,
Inc. (a Minnesota corporation) and Subsidiaries as of January 2, 2002 and
January 3, 2001, and the related consolidated statements of income,
shareholder's equity and cash flows for the year ended January 2, 2002, the
period from inception (October 2, 2000) through January 3, 2001, the period from
December 30, 1999 through October 1, 2000 (Predecessor Company) and the year
ended December 29, 1999 (Predecessor Company). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Buffets, Inc. and
Subsidiaries as of January 2, 2002 and January 3, 2001, and the results of their
operations and their cash flows for the year ended January 2, 2002, the period
from inception (October 2, 2000) through January 3, 2001, the period from
December 30, 1999 through October 1, 2000 (Predecessor Company) and the year
ended December 29, 1999 (Predecessor Company), in conformity with accounting
principles generally accepted in the United States.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
May 22, 2002
F-2
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JANUARY 3, JANUARY 2,
2001 2002
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 15,696 $ 27,555
Receivables............................................... 6,889 7,958
Inventories............................................... 19,091 18,439
Prepaid expenses and other current assets................. 7,110 8,529
Deferred income taxes..................................... 14,800 15,027
Due from parent........................................... 54 135
-------- --------
Total current assets.............................. 63,640 77,643
PROPERTY AND EQUIPMENT, net................................. 272,914 203,742
GOODWILL, net............................................... 322,953 312,163
ASSETS HELD FOR SALE........................................ 5,115 28,352
DEFERRED INCOME TAXES....................................... 1,248 1,000
OTHER ASSETS, net........................................... 17,953 14,878
-------- --------
Total assets...................................... $683,823 $637,778
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 36,967 $ 29,028
Accrued liabilities (Note 3).............................. 80,898 83,654
Income taxes payable...................................... 1,919 5,123
Current maturities of long-term debt...................... 24,875 42,224
-------- --------
Total current liabilities......................... 144,659 160,029
LONG-TERM DEBT, net of current maturities................... 380,199 305,996
DEFERRED LEASE OBLIGATIONS.................................. 18,226 18,463
OTHER LONG-TERM LIABILITIES................................. 4,789 4,632
-------- --------
Total liabilities................................. 547,873 489,120
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDER'S EQUITY:
Common stock, $.01 par value, 100 shares authorized; 100
shares issued
and outstanding........................................ -- --
Additional paid-in capital................................ 129,957 129,957
Stock warrants............................................ 5,414 5,414
Retained earnings......................................... 579 13,287
-------- --------
Total shareholder's equity........................ 135,950 148,658
-------- --------
Total liabilities and shareholder's equity........ $683,823 $637,778
======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
(PREDECESSOR)
FOR THE (SUCCESSOR)
PERIOD FOR THE PERIOD
(PREDECESSOR) FROM FROM INCEPTION (SUCCESSOR)
FOR THE YEAR DECEMBER 30, (OCTOBER 2, FOR THE YEAR
ENDED 1999 THROUGH 2000) THROUGH ENDED
DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1999 2000 2001 2002
------------- -------------- -------------- ------------
(IN THOUSANDS)
RESTAURANT SALES.......................... $936,854 $781,153 $239,370 $1,044,734
RESTAURANT COSTS:
Food.................................... 296,452 247,434 76,144 327,678
Labor................................... 290,716 239,950 75,972 326,423
Direct and occupancy.................... 213,087 170,489 52,651 233,375
-------- -------- -------- ----------
Total restaurant costs.......... 800,255 657,873 204,767 887,476
MARKETING EXPENSES........................ 22,491 20,858 5,338 26,233
GENERAL AND ADMINISTRATIVE EXPENSES....... 47,857 39,217 12,204 50,320
GOODWILL AMORTIZATION..................... 637 878 2,543 10,942
IMPAIRMENT OF ASSETS AND SITE CLOSING
COSTS................................... 1,966 -- -- --
ACQUISITION-RELATED COSTS................. -- 14,902 -- --
-------- -------- -------- ----------
OPERATING INCOME.......................... 63,648 47,425 14,518 69,763
OTHER EXPENSE (INCOME):
Interest expense (income), net.......... (1,915) (2,668) 12,811 42,707
Other................................... (1,679) (1,126) (340) (1,040)
-------- -------- -------- ----------
INCOME BEFORE INCOME TAXES................ 67,242 51,219 2,047 28,096
PROVISION FOR INCOME TAXES................ 24,800 19,974 1,468 15,388
-------- -------- -------- ----------
Net income...................... $ 42,442 $ 31,245 $ 579 $ 12,708
======== ======== ======== ==========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<Table>
<Caption>
COMMON STOCK
------------------- ADDITIONAL STOCK RETAINED
SHARES AMOUNT PAID-IN CAPITAL WARRANTS EARNINGS TOTAL
---------- ------ --------------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, DECEMBER 28, 1998
(PREDECESSOR)..................... 45,020,661 $450 $119,792 $ -- $179,483 $299,725
Net income........................ -- -- -- -- 42,442 42,442
Common stock issued under
employees' stock option plans... 94,698 1 765 -- -- 766
Purchase of common stock.......... (3,570,000) (36) (9,496) -- (27,109) (36,641)
Tax benefit from early disposition
of common stock issued under
employees' stock option plans... -- -- 91 -- -- 91
---------- ---- -------- ------ -------- --------
BALANCE, DECEMBER 29, 1999
(PREDECESSOR)..................... 41,545,359 415 111,152 -- 194,816 306,383
Net income........................ -- -- -- -- 31,245 31,245
Common stock issued under
employees' stock option plans... 313,435 3 2,549 -- -- 2,552
Tax benefit from early disposition
of common stock issued under
employees' stock option plans... -- -- 6,231 -- -- 6,231
---------- ---- -------- ------ -------- --------
BALANCE, OCTOBER 1, 2000
(PREDECESSOR)..................... 41,858,794 $418 $119,932 $ -- $226,061 $346,411
========== ==== ======== ====== ======== ========
INITIAL CAPITALIZATION, BALANCE,
OCTOBER 2, 2000 (SUCCESSOR)....... 100 $ -- $129,957 $5,414 $ -- $135,371
Net income........................ -- -- -- -- 579 579
---------- ---- -------- ------ -------- --------
BALANCE, JANUARY 3, 2001
(SUCCESSOR)....................... 100 -- 129,957 5,414 579 135,950
Net income........................ -- -- -- -- 12,708 12,708
---------- ---- -------- ------ -------- --------
BALANCE, JANUARY 2, 2002
(SUCCESSOR)....................... 100 $ -- $129,957 $5,414 $ 13,287 $148,658
========== ==== ======== ====== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
(PREDECESSOR) (SUCCESSOR)
FOR THE PERIOD FOR THE PERIOD
(PREDECESSOR) FROM FROM INCEPTION (SUCCESSOR)
FOR THE YEAR DECEMBER 30, (OCTOBER 2, FOR THE YEAR
ENDED 1999 THROUGH 2000) THROUGH ENDED
DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1999 2000 2001 2002
------------- -------------- -------------- ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................... $ 42,442 $ 31,245 $ 579 $ 12,708
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization............... 43,026 32,368 11,311 53,404
Amortization of debt issuance costs......... 228 174 1,042 3,905
Accretion of original issue discount........ -- -- 179 773
Deferred interest........................... -- -- 310 1,269
Impairment of assets and site closing
costs..................................... 1,966 -- -- --
Tax benefit from early disposition of common
stock..................................... 91 6,231 -- --
Deferred income taxes....................... (3,404) (7,968) 1,377 21
Asset write-down............................ -- -- -- 491
Loss on disposal of assets.................. -- 544 -- 361
Changes in assets and liabilities:
Receivables............................... (4,477) 3,299 (3,093) (1,069)
Inventories............................... (60) 341 235 690
Prepaid expenses and other assets......... 124 (1,832) 383 (1,571)
Due from parent........................... -- -- (54) (81)
Accounts payable.......................... 1,048 3,511 5,456 (7,939)
Accrued and other liabilities............. 6,624 14,204 10,531 2,837
Income taxes payable/refundable........... 2,953 5,705 91 3,204
-------- -------- -------- --------
Net cash provided by operating
activities........................... 90,561 87,822 28,347 69,003
-------- -------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transaction...... -- -- -- 39,075
Purchase of fixed assets...................... (57,626) (35,596) (14,389) (38,096)
Purchase of restaurants, less cash acquired... (16,604) -- -- --
Proceeds from sale of other assets............ -- -- -- 1,651
Purchase of other assets...................... -- (1,417) (672) (55)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities................. (74,230) (37,013) (15,061) 2,575
-------- -------- -------- --------
FINANCING ACTIVITIES:
Repayment of debt............................. -- (332) -- (53,896)
Payments of capital leases.................... (2,254) (686) -- --
Repurchase of common stock.................... (36,641) -- -- --
Proceeds from exercise of employee stock
options..................................... 766 2,552 -- --
Proceeds from (repayment of) revolving credit
facility.................................... -- -- 5,000 (5,000)
Debt issuance costs........................... -- -- -- (823)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities................. (38,129) 1,534 5,000 (59,719)
-------- -------- -------- --------
FORMATION ACTIVITIES:
Net cash used in formation activities (see
page F-7)................................... -- -- (127,193) --
-------- -------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS......... (21,798) 52,343 (108,907) 11,859
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 94,058 72,260 124,603 15,696
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of period........ $ 72,260 $124,603 $ 15,696 $ 27,555
======== ======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
BUFFETS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (SUPPLEMENTAL DATA)
<Table>
<Caption>
(PREDECESSOR) (SUCCESSOR)
FOR THE PERIOD FOR THE PERIOD
(PREDECESSOR) FROM FROM INCEPTION (SUCCESSOR)
FOR THE YEAR DECEMBER 30, (OCTOBER 2, FOR THE YEAR
ENDED 1999 THROUGH 2000) THROUGH ENDED
DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1999 2000 2001 2002
------------- -------------- -------------- ------------
(IN THOUSANDS)
FORMATION ACTIVITIES:
Proceeds from issuance of subordinated
notes, net........................... $ -- $ -- $ 46,181 $ --
Proceeds from Credit Facility........... -- -- 310,000 --
Settlement of stockholder suit.......... -- -- (3,000) --
Proceeds from sale leaseback
transaction.......................... -- -- 19,601 --
Purchase of public stock................ -- -- (579,720) --
Proceeds from issuance of common stock,
net.................................. -- -- 124,202 --
Payments of employee stock options...... -- -- (16,753) --
Transaction-related costs............... -- -- (27,704) --
------- ------- --------- -------
Net cash used in formation
activities.................... $ -- $ -- $(127,193) $ --
======= ======= ========= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for-
Interest (net of capitalized interest
of $392, $368, $170 and $369,
respectively)........................ $ 3,010 $ 2,457 $ 10,288 $35,546
======= ======= ========= =======
Income taxes......................... $18,161 $16,039 $ 602 $11,725
======= ======= ========= =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 NATURE OF ORGANIZATION
Company Background
Buffets Holdings, Inc., a Delaware corporation, was formed to acquire 100
percent of the common stock of Buffets, Inc. and its subsidiaries (the Company)
in a buyout (the Acquisition) from public shareholders. On October 2, 2000,
pursuant to a sale agreement dated September 29, 2000 between Buffets Holdings,
Inc. and Caxton-Iseman Investments LLP (Caxton-Iseman), Buffets Holdings, Inc.
acquired the common stock of Buffets, Inc. for a total of $639.8 million funded
by (i) $85 million in cash held by the Company, (ii) $310 million borrowed under
a $340 million senior credit agreement, (iii) 14 percent senior subordinated
notes due September 29, 2008 in the principal amount of $80 million, (iv) 16
percent senior subordinated notes due September 29, 2008 in the principal amount
of $15 million, (v) warrants to purchase 205,696 shares of common stock and
61,700 shares of preferred stock, (vi) $20 million in proceeds from the sale and
leaseback of the Company's Eagan, Minnesota, headquarters facility, and (vii)
$130 million of capital contributions from Caxton-Iseman, Sentinel Capital and
members of management.
The Acquisition was accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed by Buffets Holdings,
Inc. were recorded at fair value as of the date of the Acquisition. The excess
of the purchase price over the fair value of the assets acquired and liabilities
assumed totaling $325.5 million was recorded as goodwill and pushed down to the
Company.
Description of Business
The Company owns and operates a chain of restaurants under the names of Old
Country Buffet, Country Buffet, HomeTown Buffet, Original Roadhouse Grill,
Granny's Buffet, Country Roadhouse Buffet & Grill, Tahoe Joe's Famous Steakhouse
and Soup 'N Salad Unlimited in the United States. The Company operates
principally in the midscale family dining industry segment. The Company had 401
Company-owned restaurants (378 family buffet restaurants) and 23 franchised
restaurants operating as of January 2, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Fiscal Year
The Company's fiscal year, which ends on the Wednesday nearest December 31,
is comprised of 52 or 53 weeks divided into four interim periods of 16, 12, 12,
and 12 or 13 weeks, respectively. All references herein to "2001" and "1999"
represent the 52-week periods ended January 2, 2002 and December 29, 1999,
respectively.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Investments with original maturities of three months or less are considered
to be cash equivalents and are recorded at cost, which approximates market
value. Cash equivalents consist principally of commercial paper and money market
funds.
F-8
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Receivables
Receivables primarily consist of credit card receivables, landlord
receivables and vendor rebates. Landlord receivables represent the portion of
costs for leasehold improvements remaining to be reimbursed by landlords at
year-end. Vendor rebates result from discounts on purchases negotiated with the
vendors.
Inventories
Inventories, consisting primarily of food, beverage, china and smallwares
for each restaurant location, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method for food and beverage inventories.
China and smallwares are stated at their original cost and subsequent additions
are expensed as purchased.
Assets Held For Sale
Assets held for sale include net assets such as land, buildings and
equipment that are in the process of being sold and are recorded at the lower of
carrying value or fair market value less costs to sell.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method for financial reporting purposes and accelerated
methods for income tax reporting purposes. Equipment is depreciated over
estimated useful lives, ranging from 3 to 10 years. Leasehold improvements are
amortized over the terms of the related leases, generally 10 to 15 years.
Buildings are depreciated over estimated useful lives, generally 39 1/2 years.
Maintenance and repairs are charged to expense as incurred. Major
improvements, which extend the useful life of the item, are capitalized and
depreciated. The cost and accumulated depreciation of property and equipment
retired or otherwise disposed of are removed from the related accounts, and any
residual values are charged or credited to income.
Property and equipment are as follows (in thousands):
<Table>
<Caption>
JANUARY 3, JANUARY 2,
2001 2002
---------- ----------
Land.................................................... $ 18,253 $ 745
Buildings............................................... 30,524 --
Equipment............................................... 89,224 104,505
Leasehold improvements.................................. 142,817 144,571
Less- Accumulated depreciation and amortization......... 7,904 46,079
-------- --------
$272,914 $203,742
======== ========
</Table>
In December 2001, the Company consummated a sale and leaseback agreement to
sell 23 of its stand-alone restaurant locations and then lease the restaurants
back, applying provisions of Statement of Financial Accounting Standards (SFAS)
No. 98, "Accounting for Leases." Net proceeds from the transaction were
approximately $39 million. The Company did not recognize a gain or loss relating
to this transaction. Additionally, the Company does not have any continuing
involvement with these locations. These leases are accounted for as operating
leases.
F-9
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill, a result of the Acquisition, represents the excess of cost over
net assets acquired. Goodwill is amortized on a straight-line basis over 15 to
30 years. Accumulated amortization for goodwill was $2.5 million and $13.5
million as of January 3, 2001 and January 2, 2002, respectively.
Recoverability of Long-Lived Assets
The Company periodically evaluates long-lived assets and goodwill related
to those assets for impairment whenever events or changes in circumstances
indicate the carrying value amount of an asset or group of assets may not be
recoverable. The Company considers a history of operating losses and the other
factors described to be its primary indicator of potential impairment. Assets
are grouped and evaluated for impairment at the lowest level for which there are
identifiable cash flows, namely individual restaurants. A restaurant is deemed
to be impaired if a forecast of undiscounted future operating cash flows
directly related to the restaurant, including disposal value, if any, are less
than its carrying amount. If a restaurant is determined to be impaired, the loss
is measured as the amount by which the carrying amount of the restaurant exceeds
its fair value. Fair value is based on quoted market prices in active markets,
if available. If quoted market prices are not available, an estimate of fair
value is based on the best information available, including prices for similar
assets or the results of valuation techniques such as discounted estimated
future cash flows as if the decision to continue to use the impaired restaurant
was a new investment decision. The Company generally measures fair value by
discounting estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows. Accordingly, actual results
could vary significantly from such estimates. There were no impairment charges
in 2000 or 2001.
Other Assets
Other assets consist principally of debt issuance costs, notes receivable
and other intangibles net of accumulated amortization of $1.1 million and $5.1
million as of January 3, 2001 and January 2, 2002, respectively. Debt issuance
costs relate to the costs incurred to enter into the senior credit agreement and
issue the senior subordinated notes. The debt issuance costs are being amortized
over the terms of the financing arrangements using the effective interest
method. Other intangibles include trademarks, liquor licenses and franchise
fees. The other intangible assets are being amortized on a straight-line basis
over 10 years. Notes receivable represents the long-term portion of notes that
arose from the sale of certain restaurant facilities. The long-term and
short-term notes receivable collectively totaled $2.1 million as of January 3,
2001 and $1.6 million as of January 2, 2002. The notes receivable had due dates
between 2003 and 2010.
Preopening Costs
Costs incurred in connection with the opening of new restaurants are
expensed as incurred in accordance with Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." SOP 98-5 requires companies to
expense as incurred all start-up and preopening costs that are not otherwise
capitalized as long-lived assets.
Marketing Costs
Marketing and advertising costs are charged to expense as incurred.
F-10
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes." Under
SFAS No. 109, the deferred tax provision is determined under the liability
method. Under this method, deferred tax assets and liabilities are recognized
based on differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
Revenue Recognition
Company restaurant sales include proceeds from the sale of food and
beverages at Company-owned restaurants.
The Company recognizes franchise income for royalty fees and initial
franchise fees received from franchisees. Initial fees are recognized as income
when required obligations under the terms of the franchise agreement are
fulfilled. Royalty fees are based on gross sales and are recognized in income as
sales are generated. Franchise income was $1.5 million for 1999, $1.2 million
for the period from December 30, 1999 through October 1, 2000, $0.3 million for
the period from inception (October 2, 2000) through January 3, 2001, and $1.3
million for 2001. Franchise income is included in other income in the
accompanying consolidated statements of income. Franchise fees and the related
expenses are recognized as the Company's obligations regarding services to be
performed are fulfilled, which generally is at the time a restaurant is opened.
The Company sells gift certificates at its restaurants. Revenues are
recognized upon the redemption of the gift certificates. Unearned revenue
represents gift certificates sold and not yet redeemed and is included in
accrued liabilities in the accompanying consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value Disclosure of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
receivables, accounts payable and long-term debt for which current carrying
amounts are equal to or approximate fair market values.
Reclassifications
Certain amounts shown in the prior-period consolidated financial statements
have been reclassified to conform with the current year consolidated financial
statement presentation. These reclassifications had no effect on net income or
shareholder's equity as previously presented.
F-11
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3 ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
<Table>
<Caption>
JANUARY 3, JANUARY 2,
2001 2002
---------- ----------
Accrued compensation................................... $22,459 $20,043
Accrued workers' compensation.......................... 12,622 12,749
Accrued insurance...................................... 8,112 9,883
Accrued store closing costs............................ 9,142 9,378
Unearned revenue....................................... 7,314 8,063
Accrued sales taxes.................................... 5,079 5,058
Accrued other.......................................... 16,170 18,480
------- -------
$80,898 $83,654
======= =======
</Table>
The store closing cost accrual is recorded to recognize all expenses
related to store closings in the period the closing is approved.
4 RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of accounting.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives, but with no maximum life. The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001. With
respect to goodwill and intangible assets acquired prior to July 1, 2001, the
Company will apply the provisions of SFAS No. 142 beginning January 3, 2002. As
of January 2, 2002, the Company has unamortized goodwill of $312.2 million that
will be subject to the provisions of SFAS No. 142. Had SFAS No. 142 been in
effect for 2001, net income would have been $10.9 million higher.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for reporting on the impairment or disposal of long-lived assets and
for segments of a business to be disposed of. The adoption of SFAS No. 144 is
effective for the Company beginning on January 3, 2002. The adoption of SFAS No.
144 will not have a material effect on our historical consolidated results of
operations, financial position and cash flows.
F-12
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 LONG-TERM DEBT
Long-term debt outstanding was as follows (in thousands):
<Table>
<Caption>
JANUARY 3, JANUARY 2,
2001 2002
---------- ----------
Credit Facility:
Revolving credit facility................................. $ 5,000 $ --
Tranche A, interest at LIBOR plus 3.25%, due quarterly
through September 30, 2005 (interest rates from 5.8% to
7.0% as of January 2, 2002)............................ 160,000 117,762
Tranche B, interest at LIBOR plus 3.75%, due quarterly
through March 31, 2007 (interest rates from 6.3% to
7.5% as of January 2, 2002)............................ 150,000 138,342
-------- --------
Total Credit Facility............................. 315,000 256,104
Senior subordinated notes, interest at 14% and 16%, due
September 29, 2008, net of discount of $5,235 at January
3, 2001 and $4,463 at January 2, 2002..................... 90,074 92,116
-------- --------
Total long-term debt.............................. 405,074 348,220
Less -- Current maturities.................................. 24,875 42,224
-------- --------
$380,199 $305,996
======== ========
</Table>
As of January 2, 2002, future maturities of long-term debt by year were as
follows (in thousands):
<Table>
2002........................................................ $ 42,224
2003........................................................ 27,242
2004........................................................ 34,114
2005........................................................ 49,968
2006........................................................ 80,122
Thereafter.................................................. 114,550
--------
$348,220
========
</Table>
Credit Facility
On October 2, 2000, the Company entered into a senior credit agreement (the
Credit Facility) which provided for total borrowings of up to $340,000,000,
including (i) $160,000,000 Tranche A term loan (Tranche A), (ii) $150,000,000
Tranche B term loan (Tranche B), and (iii) a $30,000,000 revolving credit
facility. As of January 2, 2002, the total borrowing availability under the
revolving credit facility was $18,595,000. As of January 2, 2002, the Company
had outstanding letters of credit of $11,405,000, which expire through May 2,
2002. Borrowings under the Tranche A and Tranche B term loans are payable in
quarterly installments beginning on March 31, 2001. Borrowings under the Credit
Facility are secured by substantially all of the Company's assets. The Credit
Facility requires the Company to maintain certain financial ratios including
leverage, interest coverage and fixed charge coverage. The Credit Facility also
limits capital expenditures and has a prepayment penalty clause that
approximates 1% of the total facility borrowing capacity. The Company was in
compliance with all covenants as of January 2, 2002.
The Company has the option of tying its borrowings to LIBOR or a base rate
when calculating the interest rate for the Tranche A and Tranche B. The base
rate is the greater of the prime rate or the federal funds effective rate plus
one-half of 1 percent.
F-13
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14 Percent Senior Subordinated Notes
On October 2, 2000, the Company issued $80 million principal amount of 14
percent senior subordinated notes due September 29, 2008, with detachable
warrants to purchase 173,218 shares of Buffets Holdings' common stock and 51,965
shares of Buffets Holdings' preferred stock. Such warrants were valued at $4.6
million and are reflected as a discount on the notes. Interest is payable
quarterly through September 29, 2008. Accretion of the original issue discount
was approximately $0.2 million during 2000 and approximately $0.7 million during
2001. These amounts are included in interest expense in the accompanying
consolidated statements of income. The notes have a prepayment penalty clause
that initially charges a 7% prepayment penalty on the outstanding balance if we
choose to prepay prior to September 29, 2004. The prepayment penalty declines by
1.75% per year until September 29, 2007 after which point there is no prepayment
penalty.
16 Percent Senior Subordinated Notes
On October 2, 2000, Buffets Holdings, Inc. issued $15 million principal
amount of 16 percent senior subordinated notes due September 29, 2008, with
detachable warrants to purchase 32,478 shares of common stock and 9,744 shares
of preferred stock. Such warrants were valued at $854,921 and are reflected as a
discount on the notes. Accretion of the original issue discount was
approximately $28,000 during 2000 and approximately $122,000 during 2001. These
amounts are included in interest expense in the accompanying consolidated
statements of income. Interest of 8 percent on the notes is payable quarterly
through September 28, 2008. Payment of the remaining 8 percent interest is
deferred until the repayment of the notes. Deferred interest of approximately
$310,000 and $1.3 million is included in the balance of the debt as of January
3, 2001 and January 2, 2002, respectively. The notes have a prepayment penalty
clause that initially charges an 8% prepayment penalty on the outstanding
balance if we choose to prepay prior to September 29, 2004. The prepayment
penalty declines by 2.0% per year until September 29, 2007 after which point
there is no prepayment penalty. The debt has been pushed down to the Company in
accordance with Emerging Issues Task Force No. 84-42.
6 SHAREHOLDER'S EQUITY
Authorized Shares
The Company has 100 authorized shares, which consist of 100 shares of
common stock.
7 RETIREMENT PLAN
The Company has a 401(k) plan covering all employees with one year of
service, age 21 or older, who worked at least 1,000 hours in the prior year. The
Company's discretionary contributions to the plan are determined annually by the
board of directors and are used to match a portion of employees' voluntary
contributions. Participants are 100 percent vested in their own contributions
immediately and are vested in the Company's contributions 20 percent per year of
service with the Company, such that they are fully vested at the end of five
years of service with the Company. The board of directors authorized and
recognized matching contributions of $0.8 million for 1999, $0.8 million for the
combined period from December 30, 1999 through January 3, 2001, and $0.9 million
for 2001. These contributions were paid during the first quarter of the
succeeding fiscal year.
F-14
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8 INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<Table>
<Caption>
(PREDECESSOR) (SUCCESSOR)
FOR THE PERIOD FOR THE PERIOD
(PREDECESSOR) FROM FROM INCEPTION (SUCCESSOR)
FOR THE YEAR DECEMBER 30, (OCTOBER 2, FOR THE YEAR
ENDED 1999 THROUGH 2000) THROUGH ENDED
DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1999 2000 2001 2002
------------- -------------- -------------- ------------
Federal:
Current...................... $24,436 $18,452 $ (460) $11,966
Deferred..................... (2,928) (6,744) 1,212 18
------- ------- ------ -------
21,508 11,708 752 11,984
State:
Current...................... 3,677 3,259 551 3,401
Deferred..................... (476) (1,224) 165 3
------- ------- ------ -------
3,201 2,035 716 3,404
Tax effect from early
disposition of common
stock........................ 91 6,231 -- --
------- ------- ------ -------
Total income tax provision... $24,800 $19,974 $1,468 $15,388
======= ======= ====== =======
</Table>
Deferred income taxes are provided to record the income tax effect of
temporary differences that occur when transactions are reported in one period
for financial statement purposes and in another period for tax purposes. The tax
effect of the temporary differences giving rise to the Company's deferred tax
assets and liabilities was as follows (in thousands):
<Table>
<Caption>
JANUARY 3, 2001 JANUARY 2, 2002
---------------------- ----------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
ASSET ASSET ASSET ASSET
------- ----------- ------- -----------
Property and equipment................. $ -- $(11,742) $ -- $(9,657)
Deferred rent.......................... -- 7,134 -- 7,124
Self-insurance reserve................. 3,088 -- 3,349 --
Accrued workers' compensation.......... 4,580 -- 4,642 --
Accrued payroll and related benefits... 1,982 -- 2,373 --
Accrued store closing costs............ 3,444 -- 3,611 --
Net operating loss and tax credit
carryforwards........................ -- 2,035 -- 100
Deferred gain on sale leaseback
transaction.......................... -- 1,713 -- 1,620
Goodwill............................... -- 1,455 -- 1,312
Other.................................. 1,706 653 1,052 501
------- -------- ------- -------
Total........................ $14,800 $ 1,248 $15,027 $ 1,000
======= ======== ======= =======
</Table>
As of January 2, 2002, the Company had a tax credit carryforward of
$100,000 that can be carried forward indefinitely.
F-15
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's provision for income taxes at the federal
statutory rate to the reported income tax provision was as follows (in
thousands):
<Table>
<Caption>
(PREDECESSOR) (SUCCESSOR)
FOR THE PERIOD FOR THE PERIOD
(PREDECESSOR) FROM FROM INCEPTION (SUCCESSOR)
FOR THE YEAR DECEMBER 30, (OCTOBER 2, FOR THE YEAR
ENDED 1999 THROUGH 2000) THROUGH ENDED
DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1999 2000 2001 2002
-------------- -------------- -------------- ------------
Federal income tax provision
at statutory rate of 35%.... $23,535 $17,927 $ 716 $ 9,834
State income taxes, net of
federal benefit............. 2,081 1,323 549 2,204
Settlement of prior years' tax
audit issues................ (700) --
General business credits...... (597) (821) (272) (932)
Goodwill amortization......... 75 45 808 3,767
Other......................... 406 1,500 (333) 515
------- ------- ------ -------
$24,800 $19,974 $1,468 $15,388
======= ======= ====== =======
</Table>
9 RELATED-PARTY TRANSACTIONS
The Company pays management fees for certain consulting services to
Caxton-Iseman and Sentinel Capital. Total expenses under these arrangements were
$0.6 million for the period from inception (October 2, 2000) through January 3,
2001 and $3.0 million for 2001. There were no such expenses under these
arrangements for fiscal 1999 or the period from December 30, 1999 through
October 1, 2000.
As part of the buyout from public shareholders, certain management
investors obtained recourse loans to purchase shares in Buffets Holdings, Inc.
which were guaranteed by the Company. The guarantees totaled $1.2 million as of
January 3, 2001 and January 2, 2002.
10 COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various legal actions rising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position or the results of operations.
Operating Leases
The Company conducts most of its operations from leased restaurant
facilities, all of which are classified as operating leases.
F-16
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of future minimum lease payments required under
noncancellable operating leases as of January 2, 2002 (in thousands):
<Table>
2002........................................................ $ 51,708
2003........................................................ 51,477
2004........................................................ 49,919
2005........................................................ 47,974
2006........................................................ 45,530
Thereafter.................................................. 285,251
--------
Total future minimum lease payments............... $531,859
========
</Table>
Certain of these leases require additional rent based on a percentage of
net sales and may require additional payments for real estate taxes and common
area maintenance on the properties. Many of these leases also contain renewal
options exercisable at the election of the Company.
Rent expense was as follows (in thousands):
<Table>
<Caption>
(PREDECESSOR) (SUCCESSOR)
FOR THE PERIOD FOR THE PERIOD
(PREDECESSOR) FROM FROM INCEPTION (SUCCESSOR)
FOR THE YEAR DECEMBER 30, (OCTOBER 2, FOR THE YEAR
ENDED 1999 THROUGH 2000) THROUGH ENDED
DECEMBER 29, OCTOBER 1, JANUARY 3, JANUARY 2,
1999 2000 2001 2002
------------- -------------- -------------- ------------
Minimum rents.................. $39,710 $31,851 $ 9,931 $43,732
Deferred rents................. 1,558 756 205 835
Percentage rents............... 2,329 2,186 239 2,559
------- ------- ------- -------
$43,597 $34,793 $10,375 $47,126
======= ======= ======= =======
</Table>
11 CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
As a result of the Company's decision to refinance a portion of its
existing long-term debt with senior subordinated notes in fiscal 2002 which are
expected to be fully and unconditionally guaranteed, jointly and severally, on a
senior subordinated unsecured basis by the following wholly-owned subsidiaries
of Buffets, Inc.: HomeTown Buffets, Inc., OCB Restaurant Co., OCB Purchasing
Co., Restaurant Innovations, Inc., and Distinctive Dining, Inc., the condensed
consolidating financial statements for Buffets, Inc. and the Subsidiary
Guarantors are presented below. The guarantees by these subsidiary guarantors
will be senior to any of their existing and future subordinated obligations,
equal in right of payment with any of their existing and future senior
subordinated indebtedness and subordinated to any of their existing and future
senior indebtedness.
The only existing subsidiary of Buffets, Inc. that is not expected to
guarantee the senior subordinated notes is Tahoe Joe's Inc., which is minor (the
subsidiary's total assets, shareholder's equity, revenues, income from
operations and cash flows from operations is less than 3% of the Company's
consolidated amounts) for purposes of the Securities and Exchange Commission's
rules regarding presentation of the condensed consolidating financial statements
below. As such, the financial position, results of operations and cash flow
information of Tahoe Joe's have been included in the Subsidiary Guarantors
column.
F-17
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 3, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 11,806 $ 3,890 $ -- $ 15,696
Receivables.................................. 2,560 218,169 (213,840) 6,889
Inventories.................................. 732 18,359 -- 19,091
Prepaid expenses and other current assets.... 2,919 4,191 -- 7,110
Deferred income taxes........................ 14,800 -- -- 14,800
Due from parent.............................. 54 -- -- 54
--------- -------- --------- --------
Total current assets...................... 32,871 244,609 (213,840) 63,640
PROPERTY AND EQUIPMENT, net.................... 5,207 267,707 -- 272,914
GOODWILL, net.................................. 19,377 303,576 -- 322,953
ASSETS HELD FOR SALE........................... -- 5,115 -- 5,115
DEFERRED INCOME TAXES.......................... 1,248 -- -- 1,248
OTHER ASSETS, net.............................. 148,691 6,763 (137,501) 17,953
--------- -------- --------- --------
Total assets.............................. $ 207,394 $827,770 $(351,341) $683,823
========= ======== ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................. $ 219,455 $ 32,425 $(214,913) $ 36,967
Accrued liabilities.......................... 39,771 41,117 10 80,898
Income taxes payable......................... 1,919 -- -- 1,919
Current maturities of long-term debt......... 1,493 23,382 -- 24,875
--------- -------- --------- --------
Total current liabilities................. 262,638 96,924 (214,903) 144,659
LONG-TERM DEBT, net of current maturities...... 22,812 357,387 -- 380,199
DEFERRED LEASE OBLIGATIONS..................... 52 18,174 -- 18,226
OTHER LONG-TERM LIABILITIES.................... 4,337 129 323 4,789
--------- -------- --------- --------
Total liabilities......................... 289,839 472,614 (214,580) 547,873
--------- -------- --------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock................................. -- -- -- --
Additional paid-in capital................... 67,829 199,494 (137,366) 129,957
Stock warrants............................... 5,414 -- -- 5,414
Retained earnings (accumulated deficit)...... (155,688) 155,662 605 579
--------- -------- --------- --------
Total shareholder's equity (deficit)...... (82,445) 355,156 (136,761) 135,950
--------- -------- --------- --------
Total liabilities and shareholder's equity
(deficit)............................... $ 207,394 $827,770 $(351,341) $683,823
========= ======== ========= ========
</Table>
F-18
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JANUARY 2, 2002
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 15,672 $ 11,883 $ -- $ 27,555
Receivables.................................. 406 201,677 (194,125) 7,958
Inventories.................................. 702 17,737 18,439
Prepaid expenses and other current assets.... 3,987 4,542 -- 8,529
Deferred income taxes........................ 15,008 19 -- 15,027
Due from parent.............................. 135 -- -- 135
--------- -------- --------- --------
Total current assets...................... 35,910 235,858 (194,125) 77,643
PROPERTY AND EQUIPMENT, net.................... 10,979 192,763 -- 203,742
GOODWILL, net.................................. 18,730 293,433 -- 312,163
ASSETS HELD FOR SALE........................... -- 28,352 -- 28,352
DEFERRED INCOME TAXES.......................... 1,000 -- -- 1,000
OTHER ASSETS, net.............................. 145,604 6,775 (137,501) 14,878
--------- -------- --------- --------
Total assets.............................. $ 212,223 $757,181 $(331,626) $637,778
========= ======== ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................. $ 219,854 $ 2,345 $(193,171) $ 29,028
Accrued liabilities.......................... 42,952 40,694 8 83,654
Income taxes payable......................... 5,123 -- -- 5,123
Current maturities of long-term debt......... 2,533 39,691 -- 42,224
--------- -------- --------- --------
Total current liabilities................. 270,462 82,730 (193,163) 160,029
LONG-TERM DEBT, net of current maturities...... 18,360 287,636 -- 305,996
DEFERRED LEASE OBLIGATIONS..................... 376 18,087 -- 18,463
OTHER LONG-TERM LIABILITIES.................... 3,967 326 339 4,632
--------- -------- --------- --------
Total liabilities......................... 293,165 388,779 (192,824) 489,120
--------- -------- --------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY (DEFICIT):
Common stock................................. -- -- -- --
Additional paid-in capital................... 67,829 199,494 (137,366) 129,957
Stock warrants............................... 5,414 -- -- 5,414
Retained earnings (accumulated deficit)...... (154,185) 168,908 (1,436) 13,287
--------- -------- --------- --------
Total shareholder's equity (deficit)...... (80,942) 368,402 (138,802) 148,658
--------- -------- --------- --------
Total liabilities and shareholder's equity
(deficit)............................... $ 212,223 $757,181 $(331,626) $637,778
========= ======== ========= ========
</Table>
F-19
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 29, 1999
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES.............................. $41,327 $895,527 $ -- $936,854
RESTAURANT COSTS:
Food........................................ 13,593 282,859 -- 296,452
Labor....................................... 13,664 277,052 -- 290,716
Direct and occupancy........................ 5,442 207,645 -- 213,087
------- -------- ----- --------
Total restaurant costs................... 32,699 767,556 -- 800,255
MARKETING EXPENSES............................ 992 21,499 -- 22,491
GENERAL AND ADMINISTRATIVE EXPENSES........... 2,111 45,930 (184) 47,857
GOODWILL AMORTIZATION......................... 38 599 -- 637
IMPAIRMENT OF ASSETS AND SITE CLOSING COSTS... -- 1,966 -- 1,966
------- -------- ----- --------
OPERATING INCOME.............................. 5,487 57,977 184 63,648
OTHER EXPENSE (INCOME):
Interest expense (income), net.............. (115) (1,800) -- (1,915)
Other....................................... (606) (1,083) 10 (1,679)
------- -------- ----- --------
INCOME BEFORE INCOME TAXES.................... 6,208 60,860 174 67,242
PROVISION FOR INCOME TAXES.................... 2,282 22,518 -- 24,800
------- -------- ----- --------
Net income............................... $ 3,926 $ 38,342 $ 174 $ 42,442
======= ======== ===== ========
</Table>
F-20
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD FROM DECEMBER 30, 1999 THROUGH OCTOBER 1, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES.............................. $32,497 $748,656 $ -- $781,153
RESTAURANT COSTS:
Food........................................ 10,655 236,779 -- 247,434
Labor....................................... 10,593 229,357 -- 239,950
Direct and occupancy........................ 4,080 166,409 -- 170,489
------- -------- ----- --------
Total restaurant costs................... 25,328 632,545 -- 657,873
MARKETING EXPENSES............................ 868 19,990 -- 20,858
GENERAL AND ADMINISTRATIVE EXPENSES........... 1,631 37,775 (189) 39,217
GOODWILL AMORTIZATION......................... 53 825 -- 878
ACQUISITION-RELATED COSTS..................... 13,006 1,896 -- 14,902
------- -------- ----- --------
OPERATING INCOME (LOSS)....................... (8,389) 55,625 189 47,425
OTHER EXPENSE (INCOME):
Interest expense (income), net.............. (160) (2,508) -- (2,668)
Other....................................... (314) (886) 74 (1,126)
------- -------- ----- --------
INCOME (LOSS) BEFORE INCOME TAXES............. (7,915) 59,019 115 51,219
PROVISION (BENEFIT) FOR INCOME TAXES.......... (3,015) 22,989 -- 19,974
------- -------- ----- --------
Net income (loss)........................ $(4,900) $ 36,030 $ 115 $ 31,245
======= ======== ===== ========
</Table>
F-21
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 2000) THROUGH JANUARY 3, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES.............................. $9,709 $229,661 $ -- $239,370
RESTAURANT COSTS:
Food........................................ 3,263 72,881 -- 76,144
Labor....................................... 3,233 72,739 -- 75,972
Direct and occupancy........................ 1,294 51,357 -- 52,651
------ -------- ---- --------
Total restaurant costs................... 7,790 196,977 -- 204,767
MARKETING EXPENSES............................ 217 5,121 -- 5,338
GENERAL AND ADMINISTRATIVE EXPENSES........... 494 11,774 (64) 12,204
GOODWILL AMORTIZATION......................... 153 2,390 -- 2,543
------ -------- ---- --------
OPERATING INCOME.............................. 1,055 13,399 64 14,518
OTHER EXPENSE (INCOME):
Interest expense (income), net.............. 769 12,042 -- 12,811
Other....................................... (90) (233) (17) (340)
------ -------- ---- --------
INCOME BEFORE INCOME TAXES.................... 376 1,590 81 2,047
PROVISION FOR INCOME TAXES.................... 169 1,299 -- 1,468
------ -------- ---- --------
Net income............................... $ 207 $ 291 $ 81 $ 579
====== ======== ==== ========
</Table>
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED JANUARY 2, 2002
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES............................ $40,483 $1,004,251 $ -- $1,044,734
RESTAURANT COSTS:
Food...................................... 13,487 314,191 -- 327,678
Labor..................................... 13,066 313,357 -- 326,423
Direct and occupancy...................... 5,256 228,119 -- 233,375
------- ---------- ----- ----------
Total restaurant costs................. 31,809 855,667 -- 887,476
MARKETING EXPENSES.......................... 1,017 25,216 -- 26,233
GENERAL AND ADMINISTRATIVE EXPENSES......... 1,949 48,672 (301) 50,320
GOODWILL AMORTIZATION....................... 657 10,285 -- 10,942
------- ---------- ----- ----------
OPERATING INCOME............................ 5,051 64,411 301 69,763
OTHER EXPENSE (INCOME):
Interest expense (income), net............ 2,562 40,145 -- 42,707
Other..................................... (420) (638) 18 (1,040)
------- ---------- ----- ----------
INCOME BEFORE INCOME TAXES.................. 2,909 24,904 283 28,096
PROVISION FOR INCOME TAXES.................. 1,406 13,982 -- 15,388
------- ---------- ----- ----------
Net income............................. $ 1,503 $ 10,922 $ 283 $ 12,708
======= ========== ===== ==========
</Table>
F-22
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1999
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income................................. $ 3,926 $ 38,342 $ 174 $ 42,442
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 1,947 41,079 -- 43,026
Amortization of debt issuance costs..... 228 -- -- 228
Impairment of assets and site closing
costs................................. -- 1,966 -- 1,966
Tax benefit from early disposition of
common stock.......................... 91 -- -- 91
Deferred income taxes................... (313) (3,091) -- (3,404)
Changes in assets and liabilities:
Receivables........................... 3,791 (8,268) -- (4,477)
Inventories........................... 11 (71) -- (60)
Prepaid expenses and other assets..... (465) 589 -- 124
Accounts payable...................... 426 622 -- 1,048
Accrued and other liabilities......... 4,282 2,342 -- 6,624
Income taxes payable/refundable....... 2,953 -- -- 2,953
-------- -------- ----- --------
Net cash provided by operating
activities....................... 16,877 73,510 174 90,561
-------- -------- ----- --------
INVESTING ACTIVITIES:
Purchase of fixed assets................... (1,426) (56,200) -- (57,626)
Corporate cash advances (payments)......... 26 148 (174) --
Purchase of restaurants, less cash
acquired................................ -- (16,604) -- (16,604)
-------- -------- ----- --------
Net cash used in investing
activities....................... (1,400) (72,656) (174) (74,230)
-------- -------- ----- --------
FINANCING ACTIVITIES:
Payments of capital leases................. -- (2,254) -- (2,254)
Repurchase of common stock................. (36,641) -- -- (36,641)
Proceeds from exercise of employee stock
options................................. 766 -- -- 766
-------- -------- ----- --------
Net cash used in financing
activities....................... (35,875) (2,254) -- (38,129)
-------- -------- ----- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS...... (20,398) (1,400) -- (21,798)
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 92,635 1,423 -- 94,058
-------- -------- ----- --------
CASH AND CASH EQUIVALENTS, end of period..... $ 72,237 $ 23 $ -- $ 72,260
======== ======== ===== ========
</Table>
F-23
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 30, 1999 THROUGH OCTOBER 1, 2000
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss).......................... $ (4,900) $ 36,030 $ 115 $ 31,245
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization........... 1,422 30,946 -- 32,368
Amortization of debt issuance costs..... 174 -- -- 174
Tax benefit from early disposition of
common stock.......................... 6,231 -- -- 6,231
Deferred income taxes................... 1,202 (9,170) -- (7,968)
Loss on disposal of assets.............. -- 544 -- 544
Changes in assets and liabilities:
Receivables........................... 536 2,763 -- 3,299
Inventories........................... (556) 897 -- 341
Prepaid expenses and other assets..... (1,240) (592) -- (1,832)
Accounts payable...................... 3,365 146 -- 3,511
Accrued and other liabilities......... 2,830 11,374 -- 14,204
Income taxes payable/refundable....... 5,705 -- -- 5,705
-------- -------- ----- --------
Net cash provided by operating
activities....................... 14,769 72,938 115 87,822
-------- -------- ----- --------
INVESTING ACTIVITIES:
Purchase of fixed assets................... (2,543) (33,053) -- (35,596)
Corporate cash advances (payments)......... 41,464 (41,349) (115) --
Purchase of other assets................... -- (1,417) -- (1,417)
-------- -------- ----- --------
Net cash provided by (used in)
investing activities............. 38,921 (75,819) (115) (37,013)
-------- -------- ----- --------
FINANCING ACTIVITIES:
Repayment of debt.......................... -- (332) -- (332)
Payments of capital leases................. -- (686) -- (686)
Proceeds from exercise of employee stock
options................................. 2,552 -- -- 2,552
-------- -------- ----- --------
Net cash provided by (used in)
financing activities............. 2,552 (1,018) -- 1,534
-------- -------- ----- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS...... 56,242 (3,899) -- 52,343
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 72,237 23 -- 72,260
-------- -------- ----- --------
CASH AND CASH EQUIVALENTS, end of period..... $128,479 $ (3,876) $ -- $124,603
======== ======== ===== ========
</Table>
F-24
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (OCTOBER 2, 2000) THROUGH JANUARY 3, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................. $ 207 $ 291 $ 81 $ 579
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 534 10,777 -- 11,311
Amortization of debt issuance costs...... 63 979 -- 1,042
Accretion of original issue discount..... 11 168 -- 179
Deferred interest........................ 19 291 -- 310
Deferred income taxes.................... 159 1,218 -- 1,377
Changes in assets and liabilities:
Receivables............................ (2,159) (934) -- (3,093)
Inventories............................ 235 -- 235
Prepaid expenses and other assets...... (292) 675 -- 383
Due from parent........................ (54) -- -- (54)
Accounts payable....................... (2,513) 7,969 -- 5,456
Accrued and other liabilities.......... 14,662 (4,142) 11 10,531
Income taxes payable/refundable........ 91 -- -- 91
--------- --------- ---- ---------
Net cash provided by operating
activities........................ 10,728 17,527 92 28,347
--------- --------- ---- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets.................... (223) (14,166) -- (14,389)
Corporate cash advances (payments).......... 334,525 (334,433) (92) --
Purchase of other assets.................... -- (672) -- (672)
--------- --------- ---- ---------
Net cash provided by (used in)
investing activities.............. 334,302 (349,271) (92) (15,061)
--------- --------- ---- ---------
FINANCING ACTIVITIES --
Proceeds from revolving Credit Facility..... 300 4,700 -- 5,000
--------- --------- ---- ---------
FORMATION ACTIVITIES:
Proceeds from issuance of subordinated
notes, net............................... 2,771 43,410 -- 46,181
Proceeds from Credit Facility............... 18,600 291,400 -- 310,000
Settlement of stockholder lawsuit........... (3,000) -- -- (3,000)
Proceeds from sale leaseback transaction.... 19,601 -- -- 19,601
Purchase of public stock.................... (579,720) -- -- (579,720)
Proceeds from issuance of common stock,
net...................................... 124,202 -- -- 124,202
Payments of employee stock options.......... (16,753) -- -- (16,753)
Transaction-related costs................... (27,704) -- -- (27,704)
--------- --------- ---- ---------
Net cash provided by (used in)
formation activities.............. (462,003) 334,810 -- (127,193)
--------- --------- ---- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... (116,673) 7,766 -- (108,907)
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 128,479 (3,876) -- 124,603
--------- --------- ---- ---------
CASH AND CASH EQUIVALENTS, end of period...... $ 11,806 $ 3,890 $ -- $ 15,696
========= ========= ==== =========
</Table>
F-25
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 2, 2002
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................... $ 1,503 $ 10,922 $ 283 $ 12,708
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 3,113 50,291 -- 53,404
Amortization of debt issuance costs........ 234 3,671 -- 3,905
Accretion of original issue discount....... 46 727 -- 773
Deferred interest.......................... 76 1,193 -- 1,269
Deferred income taxes...................... 2 19 -- 21
Asset writedown............................ -- 491 -- 491
Loss on disposal of assets................. -- 361 -- 361
Changes in assets and liabilities:
Receivables.............................. 2,152 (3,221) -- (1,069)
Inventories.............................. 30 660 -- 690
Prepaid expenses and other assets........ (1,068) (503) -- (1,571)
Due from parent.......................... (81) -- -- (81)
Accounts payable......................... 22,141 (30,080) -- (7,939)
Accrued and other liabilities............ 3,181 (341) (3) 2,837
Income taxes payable/refundable.......... 3,204 -- -- 3,204
-------- -------- ----- --------
Net cash provided by operating
activities.......................... 34,533 34,190 280 69,003
-------- -------- ----- --------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transaction...... -- 39,075 -- 39,075
Purchase of fixed assets...................... (8,228) (29,868) -- (38,096)
Corporate cash advances (payments)............ (18,856) 19,136 (280)
Proceeds from sale of other assets............ -- 1,651 -- 1,651
Purchase of other assets...................... -- (55) -- (55)
-------- -------- ----- --------
Net cash provided by (used in)
investing activities................ (27,084) 29,939 (280) 2,575
-------- -------- ----- --------
FINANCING ACTIVITIES:
Repayment of debt............................. (3,234) (50,662) -- (53,896)
Repayment of revolving credit facility........ (300) (4,700) -- (5,000)
Debt issuance costs........................... (49) (774) -- (823)
-------- -------- ----- --------
Net cash used in financing
activities.......................... (3,583) (56,136) -- (59,719)
-------- -------- ----- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS......... 3,866 7,993 -- 11,859
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 11,806 3,890 -- 15,696
-------- -------- ----- --------
CASH AND CASH EQUIVALENTS, end of period........ $ 15,672 $ 11,883 $ -- $ 27,555
======== ======== ===== ========
</Table>
F-26
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<Table>
<Caption>
APRIL 24,
2002
------------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 13,894
Receivables............................................... 7,879
Inventories............................................... 18,481
Prepaid expenses and other current assets................. 7,030
Deferred income taxes..................................... 15,767
Due from parent........................................... 162
------------------
Total current assets.............................. 63,213
PROPERTY AND EQUIPMENT, net................................. 199,803
GOODWILL, net............................................... 312,163
ASSETS HELD FOR SALE........................................ 25,346
DEFERRED INCOME TAXES....................................... 1,918
OTHER ASSETS, net........................................... 13,979
------------------
Total assets...................................... $ 616,422
==================
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 30,556
Accrued liabilities....................................... 79,220
Income taxes payable...................................... 10,701
Current maturities of long-term debt...................... 21,132
------------------
Total current liabilities......................... 141,609
LONG-TERM DEBT, net of current maturities................... 294,070
DEFERRED LEASE OBLIGATIONS.................................. 18,825
OTHER LONG-TERM LIABILITIES................................. 4,842
------------------
Total liabilities................................. 459,346
SHAREHOLDER'S EQUITY:
Common stock; $.01 par value, 100 shares authorized; 100
shares issued and outstanding.......................... --
Additional paid-in capital................................ 129,957
Stock warrants............................................ 5,414
Retained earnings......................................... 21,705
------------------
Total shareholder's equity........................ 157,076
------------------
Total liabilities and shareholder's equity........ $ 616,422
==================
</Table>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
F-27
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
SIXTEEN WEEKS ENDED
----------------------
APRIL 25, APRIL 24,
2001 2002
--------- ---------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE DATA)
RESTAURANT SALES............................................ $318,901 $320,755
RESTAURANT COSTS:
Food...................................................... 101,756 99,838
Labor..................................................... 99,607 100,527
Direct and occupancy...................................... 70,635 71,819
-------- --------
Total restaurant costs............................ 271,998 272,184
MARKETING EXPENSES.......................................... 9,153 8,721
GENERAL AND ADMINISTRATIVE EXPENSES......................... 16,407 15,980
GOODWILL AMORTIZATION....................................... 3,493 --
-------- --------
OPERATING INCOME............................................ 17,850 23,870
OTHER EXPENSE (INCOME):
Interest expense, net..................................... 14,734 10,389
Other..................................................... (484) (343)
-------- --------
INCOME BEFORE INCOME TAXES.................................. 3,600 13,824
PROVISION FOR INCOME TAXES.................................. 2,770 5,406
-------- --------
Net income........................................ $ 830 $ 8,418
======== ========
</Table>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
F-28
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
<Table>
<Caption>
COMMON STOCK
---------------- ADDITIONAL STOCK RETAINED
SHARES AMOUNT PAID-IN CAPITAL WARRANTS EARNINGS TOTAL
------ ------ --------------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
BALANCE, JANUARY 2, 2002.... 100 $-- $129,957 $5,414 $13,287 $148,658
Net income................ -- -- -- -- 8,418 8,418
--- --- -------- ------ ------- --------
BALANCE, APRIL 24, 2002..... 100 $-- $129,957 $5,414 $21,705 $157,076
=== === ======== ====== ======= ========
</Table>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
F-29
BUFFETS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
SIXTEEN WEEKS ENDED
----------------------
APRIL 25, APRIL 24,
2001 2002
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income................................................ $ 830 $ 8,418
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 16,795 13,000
Amortization of debt issuance cost..................... 1,201 1,061
Deferred taxes......................................... -- (1,581)
Accretion of original issue discount................... 238 238
Deferred interest...................................... 393 404
Loss on disposal of assets............................. 78 28
Changes in assets and liabilities:
Receivables.......................................... 1,284 79
Inventories.......................................... 99 (42)
Prepaid expenses and other assets.................... 1,948 1,423
Due from parent...................................... 39 (27)
Accounts payable..................................... (6,871) 1,528
Accrued and other liabilities........................ (6,558) (3,862)
Income tax payable................................... 1,510 5,578
-------- --------
Net cash provided by operating activities......... 10,986 26,245
-------- --------
INVESTING ACTIVITIES:
Proceeds from sale leaseback.............................. -- 2,281
Purchase of fixed assets.................................. (10,585) (7,931)
Purchase of other assets, net............................. (1,128) (596)
-------- --------
Net cash used in investing activities............. (11,713) (6,246)
-------- --------
FINANCING ACTIVITIES:
Repayment of debt......................................... (4,500) (33,660)
Repayment of revolving credit facility.................... (5,000) --
-------- --------
Net cash used in financing activities............. (9,500) (33,660)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (10,227) (13,661)
CASH AND CASH EQUIVALENTS, beginning of period.............. 15,696 27,555
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,469 $ 13,894
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for --
Interest (net of capitalized interest of $102 in 2001
and $88 in 2002)...................................... $ 12,948 $ 8,588
======== ========
Income taxes........................................... $ 1,061 $ 1,407
======== ========
</Table>
The accompanying notes are an integral part of this condensed consolidated
financial statement.
F-30
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1 NATURE OF ORGANIZATION
Description of Business
The Company owns and operates a chain of restaurants under the names of Old
Country Buffet, Country Buffet, HomeTown Buffet, Original Roadhouse Grill,
Granny's Buffet, Country Roadhouse Buffet & Grill, Tahoe Joe's Famous
Steakhouse, and Soup 'N Salad Unlimited in the United States. The Company
operates principally in the midscale family dining industry segment. The Company
had 396 Company-owned restaurants (373 family buffet restaurants) and 23
franchised restaurants operating as of April 24, 2002.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
Fiscal Year
The Company's fiscal year, which ends on the Wednesday nearest December 31,
is comprised of fifty-two or fifty-three weeks divided into four interim periods
of sixteen, twelve, twelve, and twelve or thirteen weeks, respectively.
2 RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Effective July 1, 2001,
the Company adopted SFAS No. 141. The adoption of SFAS No. 141 did not have an
impact on the results of operations, financial position or cash flows of the
Company.
Effective for fiscal years beginning after December 15, 2001, SFAS No. 142
requires that goodwill and intangible assets deemed to have indefinite lives no
longer be amortized and that their carrying value be reviewed annually (at a
minimum) for impairment. The Company adopted SFAS No. 142 effective January 3,
2002. Based on the Company's current cash flows, the fair value of its goodwill
exceeds the carrying amount of this asset. The effect of SFAS No. 142 on the
results of operations for the sixteen-week periods ended April 25, 2001 and
April 24, 2002 was as follows (in thousands):
<Table>
<Caption>
2001 2002
------ ------
Reported net income........................................ $ 830 $8,418
Add: goodwill amortization................................. 3,493 --
------ ------
Adjusted net income........................................ $4,323 $8,418
====== ======
</Table>
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, which superceded SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed of",
and APB 30.
SFAS 144 amended accounting and reporting standards for the disposal of
segments of a business and addressed various issues related to the accounting
for impairments or disposals of long-lived assets. We
F-31
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adopted SFAS 144 effective January 3, 2002. SFAS No. 144 had no impact on our
consolidated results of operations, financial position and cash flows for the
first quarter of 2002.
3 LONG-TERM DEBT
As of April 24, 2002, long-term debt outstanding was as follows (in
thousands):
<Table>
Credit Facility:
Revolver.................................................. $ --
Tranche A, interest at LIBOR plus 3.25%, due quarterly
through September 30, 2005 (interest rates from 4.9% to
5.3%).................................................. 96,428
Tranche B, interest at LIBOR plus 3.75%, due quarterly
through March 31, 2007 (interest rates from 5.7% to
5.8%).................................................. 126,016
--------
Total Credit Facility............................. 222,444
Senior subordinated notes, interest at 14% and 16%, due
September 29, 2008, net of discount of $4,224............. 92,758
--------
Total long-term debt.............................. 315,202
Less-Current maturities..................................... 21,132
--------
$294,070
========
</Table>
Credit Facility
On October 2, 2000, the Company entered into a senior credit agreement (the
Credit Facility) which provided for total borrowings of up to $340,000,000,
including (a) $160,000,000 Tranche A term loan, (b) $150,000,000 Tranche B term
loan, and (c) a $30,000,000 revolving credit facility. As of April 24, 2002, the
total borrowing availability under the revolving credit facility was
$18,595,000. As of April 24, 2002, the Company had outstanding letters of credit
of $11,405,000, which expire through May 2, 2002. Borrowings under the Tranche A
and Tranche B term loans are payable in quarterly installments beginning on
March 31, 2001. Borrowings under the Credit Facility are secured by
substantially all of the Company's assets. The Credit Facility requires the
Company to maintain certain financial ratios including leverage, interest
coverage and fixed charge coverage. The Credit Facility also limits capital
expenditures and has a prepayment penalty clause that approximates 1% of the
total facility borrowing capacity. The Company was in compliance with all
covenants as of April 24, 2002.
The Company has the option of tying its borrowings to LIBOR or a base rate
when calculating the interest rate for the Tranche A and Tranche B Credit
Facility. The base rate is the greater of the prime rate or the federal funds
effective rate plus 1/2 of 1 percent.
4 CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
As a result of the Company's decision to refinance a portion of its
existing long-term debt with senior subordinated notes in fiscal 2002 which are
expected to be fully and unconditionally guaranteed, jointly and severally, on a
senior subordinated unsecured basis by the following wholly-owned subsidiaries
of Buffets, Inc.: HomeTown Buffets, Inc., OCB Restaurant Co., OCB Purchasing
Co., Restaurant Innovations, Inc., and Distinctive Dining, Inc., the condensed
consolidating financial statements for Buffets, Inc. and the Subsidiary
Guarantors are presented below. The guarantees by these subsidiary guarantors
will be senior to any of their existing and future subordinated obligations,
equal in right of payment with any of their existing and future senior
subordinated indebtedness and subordinated to any of their existing and future
senior indebtedness.
F-32
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The only existing subsidiary of Buffets, Inc. that is not expected to
guarantee the senior subordinated notes is Tahoe Joe's Inc., which is minor (the
subsidiary's total assets, shareholder's equity, revenues, income from
operations and cash flows from operations is less than 3% of the Company's
consolidated amounts) for purposes of the Securities and Exchange Commission's
rules regarding presentation of the condensed consolidating financial statements
below. As such, the financial position, results of operations and cash flow
information of Tahoe Joe's have been included in the Subsidiary Guarantors
column.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF APRIL 24, 2002
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 8,982 $ 4,912 $ -- $ 13,894
Receivables................................... 493 189,928 (182,542) 7,879
Inventories................................... 710 17,771 -- 18,481
Prepaid expenses and other current assets..... 5,177 1,853 -- 7,030
Deferred income taxes......................... 14,281 1,486 -- 15,767
Due from parent............................... 162 -- -- 162
-------- -------- --------- --------
Total current assets....................... 29,805 215,950 (182,542) 63,213
PROPERTY AND EQUIPMENT, net..................... 11,256 188,547 -- 199,803
GOODWILL, net................................... 18,730 293,433 -- 312,163
ASSETS HELD FOR SALE............................ -- 25,346 -- 25,346
DEFERRED INCOME TAXES........................... 1,918 -- -- 1,918
OTHER ASSETS, net............................... 409,650 6,830 (402,501) 13,979
-------- -------- --------- --------
Total assets............................... $471,359 $730,106 $(585,043) $616,422
======== ======== ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.............................. $209,888 $ 1,695 $(181,027) $ 30,556
Accrued liabilities........................... 42,095 37,035 90 79,220
Income taxes payable.......................... 11,295 -- (594) 10,701
Current maturities of long-term debt.......... 1,268 19,864 -- 21,132
-------- -------- --------- --------
Total current liabilities.................. 264,546 58,594 (181,531) 141,609
LONG-TERM DEBT, net of current maturities....... 17,644 541,426 (265,000) 294,070
DEFERRED LEASE OBLIGATIONS...................... 383 18,442 -- 18,825
OTHER LONG-TERM LIABILITIES..................... 3,954 392 496 4,842
-------- -------- --------- --------
Total liabilities.......................... 286,527 618,854 (446,035) 459,346
-------- -------- --------- --------
SHAREHOLDER'S EQUITY:
Common stock.................................. -- -- -- --
Additional paid-in capital.................... 67,829 199,494 (137,366) 129,957
Stock warrants................................ 5,414 -- -- 5,414
Retained earnings (accumulated deficit)....... 111,589 (88,242) (1,642) 21,705
-------- -------- --------- --------
Total shareholder's equity................. 184,832 111,252 (139,008) 157,076
-------- -------- --------- --------
Total liabilities and shareholder's
equity................................... $471,359 $730,106 $(585,043) $616,422
======== ======== ========= ========
</Table>
F-33
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIXTEEN WEEKS ENDED APRIL 25, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES................................. $12,250 $306,651 $ -- $318,901
RESTAURANT COSTS:
Food........................................... 4,105 97,651 -- 101,756
Labor.......................................... 3,972 95,635 -- 99,607
Direct and occupancy........................... 1,697 68,938 -- 70,635
------- -------- ---- --------
Total restaurant costs...................... 9,774 262,224 -- 271,998
MARKETING EXPENSES............................... 352 8,801 -- 9,153
GENERAL AND ADMINISTRATIVE EXPENSES.............. 629 15,871 (93) 16,407
GOODWILL AMORTIZATION............................ 210 3,283 -- 3,493
------- -------- ---- --------
OPERATING INCOME................................. 1,285 16,472 93 17,850
OTHER EXPENSE (INCOME):
Interest expense (income), net................. 884 13,850 -- 14,734
Other.......................................... (104) (371) (9) (484)
------- -------- ---- --------
INCOME BEFORE INCOME TAXES....................... 505 2,993 102 3,600
PROVISION FOR INCOME TAXES....................... 279 2,491 -- 2,770
------- -------- ---- --------
Net income.................................. $ 226 $ 502 $102 $ 830
======= ======== ==== ========
</Table>
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIXTEEN WEEKS ENDED APRIL 24, 2002
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
RESTAURANT SALES.............................. $12,300 $308,455 $ -- $320,755
RESTAURANT COSTS:
Food........................................ 4,083 95,755 -- 99,838
Labor....................................... 3,939 96,588 -- 100,527
Direct and occupancy........................ 1,545 70,274 -- 71,819
------- -------- ----- --------
Total restaurant costs................... 9,567 262,617 -- 272,184
MARKETING EXPENSES............................ 334 8,387 -- 8,721
GENERAL AND ADMINISTRATIVE EXPENSES........... 613 15,478 (111) 15,980
------- -------- ----- --------
OPERATING INCOME.............................. 1,786 21,973 111 23,870
OTHER EXPENSE (INCOME):
Interest expense (income), net.............. 623 9,766 -- 10,389
Other....................................... (108) (392) 157 (343)
------- -------- ----- --------
INCOME BEFORE INCOME TAXES.................... 1,271 12,599 (46) 13,824
PROVISION FOR INCOME TAXES.................... 497 4,909 -- 5,406
------- -------- ----- --------
Net income............................... $ 774 $ 7,690 $ (46) $ 8,418
======= ======== ===== ========
</Table>
F-34
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIXTEEN WEEKS ENDED APRIL 25, 2001
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income.................................. $ 226 $ 502 $ 102 $ 830
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 895 15,900 -- 16,795
Amortization of debt issuance costs...... 72 1,129 -- 1,201
Accretion of original issue discount..... 14 224 -- 238
Deferred interest........................ 24 369 -- 393
Loss on disposal of assets............... 20 58 -- 78
Changes in assets and liabilities:
Receivables............................ 1,205 79 -- 1,284
Inventories............................ 10 89 -- 99
Prepaid expenses and other assets...... (845) 2,793 -- 1,948
Due from parent........................ 39 -- -- 39
Accounts payable....................... (347) (6,524) -- (6,871)
Accrued and other liabilities.......... (2,635) (3,999) 76 (6,558)
Income taxes payable................... 1,510 -- -- 1,510
------- -------- ----- --------
Net cash provided by operating
activities........................ 188 10,620 178 10,986
------- -------- ----- --------
INVESTING ACTIVITIES:
Purchase of fixed assets.................... (211) (10,374) -- (10,585)
Corporate cash advances (payments).......... 13,518 (13,340) (178) --
Purchase of other assets.................... -- (1,128) -- (1,128)
------- -------- ----- --------
Net cash provided by (used in)
investing activities.............. 13,307 (24,842) (178) (11,713)
------- -------- ----- --------
FINANCING ACTIVITIES:
Repayment of debt........................... (270) (4,230) -- (4,500)
Repayment of revolving credit facility...... (300) (4,700) -- (5,000)
------- -------- ----- --------
Net cash used in financing
activities........................ (570) (8,930) -- (9,500)
------- -------- ----- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS....... 12,925 (23,152) -- (10,227)
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 11,806 3,890 -- 15,696
------- -------- ----- --------
CASH AND CASH EQUIVALENTS, end of period...... $24,731 $(19,262) $ -- $ 5,469
======= ======== ===== ========
</Table>
F-35
BUFFETS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIXTEEN WEEKS ENDED APRIL 24, 2002
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income................................. $ 774 $ 7,690 $ (46) $ 8,418
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 1,053 11,947 -- 13,000
Amortization of debt issuance costs..... 64 997 -- 1,061
Deferred income taxes................... (95) (1,486) -- (1,581)
Accretion of original issue discount.... 14 224 -- 238
Deferred interest....................... 24 380 -- 404
Loss on disposal of assets.............. -- 28 -- 28
Changes in assets and liabilities:
Receivables........................... (85) 164 -- 79
Inventories........................... (8) (34) -- (42)
Prepaid expenses and other assets..... (1,190) 2,613 -- 1,423
Due from parent....................... (27) -- -- (27)
Accounts payable...................... 2,178 (650) -- 1,528
Accrued and other liabilities......... (857) (3,087) 82 (3,862)
Income taxes payable.................. 6,172 -- (594) 5,578
-------- -------- ----- --------
Net cash provided by operating
activities....................... 8,017 18,786 (558) 26,245
-------- -------- ----- --------
INVESTING ACTIVITIES:
Proceeds from sale leaseback transaction... 2,281 -- -- 2,281
Purchase of fixed assets................... (1,241) (6,690) -- (7,931)
Corporate cash advances (payments)......... (13,727) 13,169 558 --
Purchase of other assets................... -- (596) -- (596)
-------- -------- ----- --------
Net cash provided by (used in)
investing activities............. (12,687) 5,883 558 (6,246)
-------- -------- ----- --------
FINANCING ACTIVITIES:
Repayment of debt.......................... (2,020) (31,640) -- (33,660)
-------- -------- ----- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS...... (6,690) (6,971) -- (13,661)
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 15,672 11,883 -- 27,555
-------- -------- ----- --------
CASH AND CASH EQUIVALENTS, end of period..... $ 8,982 $ 4,912 $ -- $ 13,894
======== ======== ===== ========
</Table>
F-36
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINING CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR FISCAL YEAR ENDED JANUARY 3, 2001
On October 2, 2000, Buffets Holdings, an affiliate of Caxton-Iseman
Capital, acquired us in a buyout from public shareholders. Due to the effects of
this transaction on the recorded bases of goodwill, intangibles, property and
shareholder's equity, our financial statements prior to and subsequent to this
transaction are not comparable. Periods prior to October 2, 2000 represent the
accounts of the predecessor. Accordingly, the historical financial information
for fiscal 2000 is presented in two periods -- the period from December 30, 1999
to October 1, 2000 and the period from October 2, 2000 to January 3, 2001.
The pro forma combined results for fiscal year ended January 3, 2001
reflect adjustments to give effect to the buyout from public shareholders
completed on October 2, 2000 as if that transaction was completed on December
30, 1999. Management believes that the pro forma combined financial information
is particularly informative because it provides the pro forma annualized debt
burden impact of the October 2, 2000 buyout from public shareholders.
Preparation of the pro forma financial information was based on assumptions
deemed appropriate by our management.
The pro forma information is unaudited and is not necessarily indicative of
the results which actually would have occurred if the above transactions had
been consummated at the beginning of the period presented, nor does it purport
to represent the future financial position and results of operations for future
periods. The unaudited pro forma financial information should be read in
conjunction with "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Certain Relationships and Related Transactions -- Buyout from
Public Shareholders" and our historical consolidated financial statements and
the related notes included elsewhere in this prospectus.
The following sets forth our unaudited pro forma combining condensed
consolidated statement of operations for the fiscal year ended January 3, 2001:
<Table>
<Caption>
COMBINED
PERIOD FROM PERIOD FROM PERIOD FROM PRO FORMA
DECEMBER 30, 1999 OCTOBER 2, 2000 DECEMBER 30, 1999 COMBINED FISCAL
TO TO TO PRO FORMA YEAR ENDED
OCTOBER 1, 2000 JANUARY 3, 2001 JANUARY 3, 2001 ADJUSTMENTS JANUARY 3, 2001
----------------- --------------- ----------------- ----------- ---------------
(DOLLARS IN THOUSANDS)
Restaurant sales........ $ 781,153 $ 239,370 $ 1,020,523 $ -- $ 1,020,523
Restaurant costs........ 657,873 204,767 862,640 -- 862,640
Marketing expenses...... 20,858 5,338 26,196 -- 26,196
General and
administrative
expense............... 39,217 12,204 51,421 3,231 (1) 54,652
Goodwill amortization... 878 2,543 3,421 7,255 (2) 10,676
Acquisition-related
costs................. 14,902 -- 14,902 -- 14,902
----------------- --------------- ----------------- ----------- ---------------
Operating income........ 47,425 14,518 61,943 (10,486) 51,457
Interest expense
(income).............. (2,668) 12,811 10,143 36,541 (3) 46,684
Other expense
(income).............. (1,126) (340) (1,466) -- (1,466)
----------------- --------------- ----------------- ----------- ---------------
Income before income
taxes................. 51,219 2,047 53,266 (47,027) 6,239
Provision for income
tax................... 19,974 1,468 21,442 (14,846)(4) 6,596
----------------- --------------- ----------------- ----------- ---------------
Net income(loss)........ $ 31,245 $ 579 $ 31,824 $ (32,181) $ (357)
================= =============== ================= =========== ===============
</Table>
- ---------------
(1) Adjustments represent additional management fees of $1.9 million and minimum
rent payments and deferred rent expense relating to our corporate
headquarters of approximately $1.3 million.
S-1
(2) Adjustment represents the annualized amount of amortization of goodwill
based on the amortization amount for the period from October 1, 2000 to
January 3, 2001. Goodwill is amortized on a straight-line basis over 30
years.
(3) Adjustments to account for:
<Table>
<Caption>
(IN THOUSANDS)
Additional cash interest expense on term loan A (interest at
LIBOR plus 3.25%, ranging from 9.4% to 10.3%)............. $11,614
Additional cash interest expense on term loan B (interest at
LIBOR plus 3.75%, ranging from 9.9% to 10.8%)............. 11,451
Additional cash interest expense on incremental borrowings
under our revolving credit facility (interest at assumed
rate of 10%).............................................. 537
Additional cash interest expense on senior subordinated
notes (interest ranging from 14% to 16%).................. 10,200
Elimination of interest expense on existing convertible
debentures................................................ (2,063)
Elimination of interest income on invested cash............. 4,802
-------
$36,541
=======
</Table>
(4) Adjustment for lower pro forma combined income before income taxes at an
assumed blended statutory tax rate of 39.0%.
S-2
BUFFETS, INC.
EXCHANGE OFFER FOR ITS
$230,000,000 11 1/4%
SENIOR SUBORDINATED NOTES
DUE 2010
------------------
PROSPECTUS
, 2002
------------------
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus, and, if given or
made, any information or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
these securities in any circumstances in which this offer or solicitation is
unlawful. Neither the delivery of this prospectus nor any sale made under this
prospectus shall, under any circumstances, create any implication that there has
been no change in the affairs of Buffets, Inc. since the date of this
prospectus. We will update the information contained in this prospectus to the
extent required by law during such time as this prospectus is required to be in
use.
Until , 2002, broker-dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the broker-dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are subject to the Minnesota Business Corporation Act (the "Corporation
Act"). Section 302A.521 of the Corporation Act provides that, unless prohibited
by its articles of incorporation or bylaws, a corporation must indemnify an
officer or director who is made or threatened to be made a party to a proceeding
by reason of such person's present or former official capacity against
judgments, penalties, fines, settlements and reasonable expenses, including
attorneys' fees and disbursements, incurred by such person in connection with
the proceeding, if certain criteria are met. These criteria, all of which must
be met by the person seeking indemnification, are (a) that such person has not
been indemnified by another organization or employee benefit plan for the same
judgments, penalties, fines, settlements and expenses; (b) that such person
acted in good faith; (c) that no improper personal benefit was obtained by such
person and such person satisfied certain statutory conflicts of interest
provisions, if applicable; (d) that, in the case of a criminal proceeding, such
person had no reasonable cause to believe that the conduct was unlawful; and (e)
that such person acted in a manner he reasonably believed was in the best
interests of the corporation, or, in the case of conduct while serving as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, not opposed to the best interests of the corporation.
Section 302A.521 of the Corporation Act also provides that, unless prohibited by
the corporation's articles of incorporation or bylaws, if a director or officer
is made or threatened to be made a party to a proceeding, such person is
entitled to payment or reimbursement by the corporation of reasonable expenses,
including attorneys' fees and disbursements, incurred by such person in advance
of the final disposition of the proceeding (x) upon receipt by the corporation
of a written affirmation by such person of a good faith belief that the criteria
for indemnification have been satisfied and a written undertaking by such person
to repay all amounts so paid or reimbursed if it is ultimately determined that
the criteria for indemnification have not been satisfied; and (y) after a
determination that the facts then known would not preclude indemnification. The
determination as to eligibility for indemnification and advancement of expenses
is required to be made by the members of the corporation's board of directors or
a committee of the board who are at the time not parties to the proceeding under
consideration, by special legal counsel, by the shareholders who are not parties
to the proceeding, or by a court.
Article 6 of our Bylaws requires us to provide indemnification to our
officers, directors, employees and agents to the full extent permitted by the
laws of the State of Minnesota.
Article 6 of our Restated Articles of Incorporation eliminates the personal
liability of our directors to us and our shareholders for monetary damages for
breach of fiduciary duty, other than liability of a director (a) for breach of
the director's duty of loyalty to us or our shareholders; (b) for acts or
omissions not in good faith that involve intentional misconduct or a knowing
violation of law; (c) under Section 302A.559 (liability for illegal
distributions to shareholders) or 80A.23 (liability for violations of the
anti-fraud or registration provisions of state securities laws) of the Minnesota
Statutes; (d) for any transaction from which the director derived an improper
personal benefit; or (e) for any act or omission occurring prior to the
effective date of Article 6.
We maintain directors' and officers' liability insurance for our officers
and directors.
The charter or similar documents of the subsidiary guarantors listed as
registrants under this registration statement contain similar provisions.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Articles of Incorporation of Buffets, Inc.
3.2 Bylaws of Buffets, Inc.
3.3 Articles of Incorporation of Distinctive Dining, Inc.
3.4 Bylaws of Distinctive Dining, Inc.
3.5 Certificate of Incorporation of HomeTown Buffet, Inc.
3.6 Bylaws of HomeTown Buffet, Inc.
3.7 Articles of Incorporation of OCB Purchasing Co.
3.8 Bylaws of OCB Purchasing Co.
3.9 Articles of Incorporation of OCB Restaurant Co.
3.10 Bylaws of OCB Restaurant Co.
3.11 Articles of Incorporation of Restaurant Innovations, Inc.
3.12 Bylaws of Restaurant Innovations, Inc.
4.1 Indenture, dated as of June 28, 2002, among Buffets, Inc.,
the Guarantors and U.S. Bank National Association, as
Trustee.
4.2 Form of Exchange Note (see Exhibit A to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of June 28, 2002,
among Buffets, Inc., the Guarantors and Credit Suisse First
Boston Corporation.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
regarding the legality of the securities being registered.
5.2* Opinion of Faegre & Benson LLP regarding the legality of the
securities being registered.
8.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
certain tax matters.
10.1 Credit Agreement, dated as of June 28, 2002, among Buffets,
Inc., Buffets Holdings, Inc., the lenders party thereto and
Credit Suisse First Boston, as administrative agent and as
collateral agent for the lenders.
10.2 Management and Fee Agreement, dated October 2, 2000, by and
among Buffets, Inc. and Caxton-Iseman Capital, Inc.
10.3 Management and Fee Agreement, dated October 2, 2000, by and
among Buffets, Inc. and Sentinel Capital Partners, L.L.C.
10.4 Advisory Agreement, dated September 28, 2000, by and among
Buffets Holdings, Inc., Buffets, Inc. and Roe E. Hatlen.
10.5 Advisory Agreement, dated September 28, 2000, by and among
Buffets Holdings, Inc., Buffets, Inc. and C. Dennis Scott.
10.6 Guaranty, dated September 28, 2000, from Buffets, Inc. to
U.S. Bank National Association in connection with a
Promissory Note and Pledge Agreement between U.S. Bank
National Association and Kerry A. Kramp.
10.7 Guaranty, dated September 28, 2000, from Buffets, Inc. to
U.S. Bank National Association in connection with a
Promissory Note and Pledge Agreement by and among U.S. Bank
National Association and David Goronkin.
10.8 Guaranty, dated September 28, 2000, from Buffets, Inc. to
U.S. Bank National Association in connection with a
Promissory Note and Pledge Agreement by and among U.S. Bank
National Association and R. Michael Andrews, Jr.
10.9 Promissory Note and Pledge Agreement, dated February 20,
2002, among David Goronkin, Pamela Goronkin and Buffets,
Inc.
</Table>
II-2
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.10 Severance Protection Agreements, dated September 29, 2000,
between Buffets, Inc. and each of Kerry A. Kramp, David
Goronkin, R. Michael Andrews, Jr., Glenn D. Drasher, K.
Michael Shrader and H. Thomas Mitchell.
12* Statement of Computation of Ratios of Earnings of Fixed
Charges.
21 List of Subsidiaries of Buffets, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibits 5.1 and 8.1 to this Registration
Statement).
23.3* Consent of Faegre & Benson LLP (included in Exhibit 5.2 to
this Registration Statement).
24 Powers of Attorney (included on signature pages of this Part
II).
25 Form T-1 Statement of Eligibility of U.S. Bank National
Association to act as trustee under the Indenture.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
</Table>
- ---------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(c) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrants
pursuant to the foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrants of expenses incurred
or paid by a director, officer or controlling person of the registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned registrant hereby undertakes (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the
II-3
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; (2) that, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Eagan, State of
Minnesota, on August 16, 2002.
BUFFETS, INC.
By: /s/ R. MICHAEL ANDREWS, JR.
------------------------------------
Name: R. Michael Andrews, Jr.
Title: Executive Vice President and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Kerry A. Kramp or R. Michael
Andrews, Jr. or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KERRY A. KRAMP President, Chief Executive Officer
- ------------------------------------------------ (Principal Executive Officer) and
Kerry A. Kramp Director August 16, 2002
/s/ R. MICHAEL ANDREWS, JR. Executive Vice President and Chief
- ------------------------------------------------ Financial Officer (Principal
R. Michael Andrews, Jr. Financial and Accounting Officer) August 16, 2002
/s/ ROBERT A. FERRIS Director
- ------------------------------------------------
Robert A. Ferris August 16, 2002
/s/ DAVID GORONKIN Director
- ------------------------------------------------
David Goronkin August 16, 2002
</Table>
II-5
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROE H. HATLEN Director (Vice Chairman of the
- ------------------------------------------------ Board of Directors)
Roe H. Hatlen August 16, 2002
/s/ FREDERICK J. ISEMAN Director (Chairman of the Board of
- ------------------------------------------------ Directors)
Frederick J. Iseman August 16, 2002
/s/ STEVEN M. LEFKOWITZ Director
- ------------------------------------------------
Steven M. Lefkowitz August 16, 2002
/s/ DAVID S. LOBEL Director
- ------------------------------------------------
David S. Lobel August 16, 2002
/s/ ROBERT M. ROSENBERG Director
- ------------------------------------------------
Robert M. Rosenberg August 16, 2002
</Table>
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Eagan, State of
Minnesota, on August 16, 2002.
DISTINCTIVE DINING, INC.
By: /s/ R. MICHAEL ANDREWS, JR.
------------------------------------
Name: R. Michael Andrews, Jr.
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Kerry A. Kramp or R. Michael
Andrews, Jr. or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KERRY A. KRAMP Chief Executive Officer (Principal
- ------------------------------------------------ Executive Officer) and Director
Kerry A. Kramp August 16, 2002
/s/ R. MICHAEL ANDREWS, JR. Executive Vice President, Chief
- ------------------------------------------------ Financial Officer (Principal
R. Michael Andrews, Jr. Financial and Accounting Officer) August 16, 2002
and Director
</Table>
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Eagan, State of
Minnesota, on August 16, 2002.
HOMETOWN BUFFET, INC.
By: /s/ R. MICHAEL ANDREWS, JR.
------------------------------------
Name: R. Michael Andrews, Jr.
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Kerry A. Kramp or R. Michael
Andrews, Jr. or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KERRY A. KRAMP Chief Executive Officer (Principal
- ------------------------------------------------ Executive Officer) and Director
Kerry A. Kramp August 16, 2002
/s/ R. MICHAEL ANDREWS, JR. Executive Vice President, Chief
- ------------------------------------------------ Financial Officer (Principal
R. Michael Andrews, Jr. Financial and Accounting Officer) August 16, 2002
and Director
</Table>
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Eagan, State of
Minnesota, on August 16, 2002.
OCB PURCHASING CO.
By: /s/ R. MICHAEL ANDREWS, JR.
------------------------------------
Name: R. Michael Andrews, Jr.
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Kerry A. Kramp or R. Michael
Andrews, Jr. or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KERRY A. KRAMP Chief Executive Officer (Principal
- ------------------------------------------------ Executive Officer) and Director
Kerry A. Kramp August 16, 2002
/s/ R. MICHAEL ANDREWS, JR. Chief Financial Officer (Principal
- ------------------------------------------------ Financial and Accounting Officer)
R. Michael Andrews, Jr. and Director August 16, 2002
</Table>
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Eagan, State of
Minnesota, on August 16, 2002.
OCB RESTAURANT CO.
By: /s/ R. MICHAEL ANDREWS, JR.
------------------------------------
Name: R. Michael Andrews, Jr.
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Kerry A. Kramp or R. Michael
Andrews, Jr. or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KERRY A. KRAMP Chief Executive Officer (Principal August 16, 2002
- ------------------------------------------------ Executive Officer) and Director
Kerry A. Kramp
/s/ R. MICHAEL ANDREWS, JR. Chief Financial Officer (Principal August 16, 2002
- ------------------------------------------------ Financial and Accounting Officer)
R. Michael Andrews, Jr. and Director
</Table>
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Eagan, State of
Minnesota, on August 16, 2002.
RESTAURANT INNOVATIONS, INC.
By: /s/ R. MICHAEL ANDREWS, JR.
------------------------------------
Name: R. Michael Andrews, Jr.
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below hereby constitutes and appoints Kerry A. Kramp or R. Michael
Andrews, Jr. or either of them his true and lawful agent, proxy and
attorney-in-fact, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to (i) act on, sign
and file with the Securities and Exchange Commission any and all amendments
(including post-effective amendments) to this registration statement together
with all schedules and exhibits thereto and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, together with all schedules and exhibits thereto, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this registration statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and (iv) take any and all actions
which may be necessary or appropriate in connection therewith, granting unto
such agent, proxy and attorney-in-fact full power and authority to do and
perform each and every act and thing necessary or appropriate to be done, as
fully for all intents and purposes as he might or could do in person, hereby
approving, ratifying and confirming all that such agents, proxies and
attorneys-in-fact or any of their substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ KERRY A. KRAMP Chief Executive Officer (Principal
- ------------------------------------------------ Executive Officer) and Director
Kerry A. Kramp August 16, 2002
/s/ R. MICHAEL ANDREWS, JR. Chief Financial Officer (Principal
- ------------------------------------------------ Financial and Accounting Officer)
R. Michael Andrews, Jr. and Director August 16, 2002
</Table>
II-11
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
3.1 Articles of Incorporation of Buffets, Inc.
3.2 Bylaws of Buffets, Inc.
3.3 Articles of Incorporation of Distinctive Dining, Inc.
3.4 Bylaws of Distinctive Dining, Inc.
3.5 Certificate of Incorporation of HomeTown Buffet, Inc.
3.6 Bylaws of HomeTown Buffet, Inc.
3.7 Articles of Incorporation of OCB Purchasing Co.
3.8 Bylaws of OCB Purchasing Co.
3.9 Articles of Incorporation of OCB Restaurant Co.
3.10 Bylaws of OCB Restaurant Co.
3.11 Articles of Incorporation of Restaurant Innovations, Inc.
3.12 Bylaws of Restaurant Innovations, Inc.
4.1 Indenture, dated as of June 28, 2002, among Buffets, Inc.,
the Guarantors and U.S. Bank National Association, as
Trustee.
4.2 Form of Exchange Note (see Exhibit A to Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of June 28, 2002,
among Buffets, Inc., the Guarantors and Credit Suisse First
Boston Corporation.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
regarding the legality of the securities being registered.
5.2* Opinion of Faegre & Benson LLP regarding the legality of the
securities being registered.
8.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison as to
certain tax matters.
10.1 Credit Agreement, dated as of June 28, 2002, among Buffets,
Inc., Buffets Holdings, Inc., the lenders party thereto and
Credit Suisse First Boston, as administrative agent and as
collateral agent for the lenders.
10.2 Management and Fee Agreement, dated October 2, 2000, by and
among Buffets, Inc. and Caxton-Iseman Capital, Inc.
10.3 Management and Fee Agreement, dated October 2, 2000, by and
among Buffets, Inc. and Sentinel Capital Partners, L.L.C.
10.4 Advisory Agreement, dated September 28, 2000, by and among
Buffets Holdings, Inc., Buffets, Inc. and Roe E. Hatlen.
10.5 Advisory Agreement, dated September 28, 2000, by and among
Buffets Holdings, Inc., Buffets, Inc. and C. Dennis Scott.
10.6 Guaranty, dated September 28, 2000, from Buffets, Inc. to
U.S. Bank National Association in connection with a
Promissory Note and Pledge Agreement between U.S. Bank
National Association and Kerry A. Kramp.
10.7 Guaranty, dated September 28, 2000, from Buffets, Inc. to
U.S. Bank National Association in connection with a
Promissory Note and Pledge Agreement by and among U.S. Bank
National Association and David Goronkin.
10.8 Guaranty, dated September 28, 2000, from Buffets, Inc. to
U.S. Bank National Association in connection with a
Promissory Note and Pledge Agreement by and among U.S. Bank
National Association and R. Michael Andrews, Jr.
10.9 Promissory Note and Pledge Agreement, dated February 20,
2002, among David Goronkin, Pamela Goronkin and Buffets,
Inc.
</Table>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION PAGE
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10.10 Severance Protection Agreements, dated September 29, 2000,
between Buffets, Inc. and each of Kerry A. Kramp, David
Goronkin, R. Michael Andrews, Jr., Glenn D. Drasher, K.
Michael Shrader and H. Thomas Mitchell.
12* Statement of Computation of Ratios of Earnings of Fixed
Charges.
21 List of Subsidiaries of Buffets, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2* Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in Exhibits 5.1 and 8.1 to this Registration
Statement).
23.3* Consent of Faegre & Benson LLP (included in Exhibit 5.2 to
this Registration Statement).
24 Powers of Attorney (included on signature pages of this Part
II).
25 Form T-1 Statement of Eligibility of U.S. Bank National
Association to act as trustee under the Indenture.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
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* To be filed by amendment.