**Exhibit 10.15**

 

 

**LOAN AGREEMENT**

 

**Senior Subordinated Promissory Note**

**Series I**

 

**$1,400,000.00**

 

**MADE BY AND BETWEEN**

 

**STAR BUFFET, INC.,**

**a Delaware corporation**

 

**AND**

 

**ROBERT E. WHEATON &**

**SUZANNE H. WHEATON,**

 

 

**Dated as of June 15, 2007**

 

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**LOAN AGREEMENT**

 

BY THIS AGREEMENT made and entered into as of the 15th dayof June, 2007, STAR BUFFET, INC., a Delaware corporation, whose address is 1312N. Scottsdale Road, Scottsdale, Arizona 85257 (hereinafter severally andcollectively called “Borrower”), and ROBERT E. WHEATON &SUZANNE H. WHEATON, whose address is 4716 East Valley Vista Lane, ParadiseValley, Arizona 85253 (hereinafter called “Lender”), for and inconsideration of the recitals and mutual promises contained herein, confirm andagree as follows:

 

**SECTION 1.**         RECITALS

** **

1.1           Loan.  Borrower has applied to Lender for a termloan in the amount of ONE MILLION FOUR HUNDRED THOUSAND AND NO/100THS DOLLARS($1,400,000.00), upon the terms, conditions and provisions set forth herein,for the sole purpose of providing working capital for Borrower in the ordinarycourse of business.

 

**SECTION 2.**         DEFINITIONS

** **

2.1           Defined Terms.  As used herein, the following capitalizedterms shall have the meanings specified below, unless the context otherwiserequires.

 

(a)           Adjusted TangibleNet Worth.  Tangible net worth plussubordinated debt, determined in accordance with GAAP, plus the amount of anyreductions in tangible net worth for non-cash charges required under FinancialAccounting Standard 144 and reserves for notes receivable.

 

(b)           Advance.  Omitted.

 

(c)           Affiliate.  Any person or entity (i) that directlyor indirectly controls, or is controlled by, or is under common control with,Borrower; (ii) that directly or indirectly beneficially owns or holds fivepercent (5%) or more of any class of voting stock of or membership in Borrower;(iii) five percent (5%) or more of the voting stock of or membership inwhich entity is directly or indirectly beneficially owned or held by Borrower; (iv) thatis an officer, director or manager of Borrower; (v) of which anotherAffiliate is an officer, director or manager; or (vi) who is related byblood, adoption, or marriage to another Affiliate.  The term “control” means the possession,directly or indirectly, of the power to direct or cause the direction of themanagement and policies of an entity, whether through the ownership of votingsecurities, by contract, or otherwise.

 

(d)           Business Day.  Any day other than a Saturday, Sunday, publicholiday, or other day when commercial banks in Arizona are authorized orrequired to close.

 

(e)           Capital Expenditures.  For a period, any expenditures of moneyduring such period for the lease, purchase or construction of assets that arecapitalized on Borrower’s balance sheet.

 

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(f)            Closing.  The satisfaction of all of the conditionsprecedent set forth in SECTION 5 hereof and the consummation of all of theloan transactions contemplated by this Loan Agreement.

 

(g)           Closing Date.  The date, on or before June 15, 2007, onwhich the Closing occurs.

 

(h)           Commitment.  As defined in Paragraph 3.1 hereof.

 

(i)            ComplianceCertificate. A certification of compliance in the form attached hereto as Exhibit “A.”

 

(j)            CPLTD.  The amount of principal payments on long termdebt and the amount of capitalized leases that are to be paid within one year.

 

(k)           Disbursement Account.  Omitted.

 

(l)            EBITDA.  Pretax earnings from continuing operationsplus interest expense, depreciation and amortization, impairment of long-livedassets and reserves for notes receivable, computed and calculated in accordancewith GAAP calculated on a rolling four (4) quarter basis.

 

(m)          Environmental Law.  Any federal, state or local statute,ordinance, or regulation pertaining to health, industrial hygiene, or theenvironment, including, without limitation, the Comprehensive EnvironmentalResponse, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601,etseq. (“CERCLA”); the Resource Conservation and RecoveryAct of 1976, 42 U.S.C. Section 6901, etseq. (“RCRA”);and the Arizona Environmental Quality Act, Title 49, Arizona Revised Statutes,and all rules adopted and guidelines promulgated pursuant to theforegoing.

 

(n)           ERISA.  The Employee Retirement Income Security Actof 1974, as amended and as in effect from time to time.

 

(o)           Event of Default.  As defined in Paragraph 11.1 hereof.

 

(p)           Facility.  Any real property and improvements owned oroccupied by Borrower in the conduct of its business.

 

(q)           Fixed ChargeCoverage.  The ratio of (a) EBITDA,less cash taxes and maintenance Capital Expenditures plus rent expense, to (b) CPLTD,plus interest expense plus rent expense calculated on a rolling four (4) quarterbasis.

 

(r)            GAAP.  Those generally accepted accountingprinciples and practices that are recognized as such by the American Instituteof Certified Public Accountants acting through its Accounting Principles Boardor by the Financial Accounting Standards Board or through other appropriateboards or committees thereof and which are consistently applied for all periodsafter the date thereof so as to properly reflect the financial condition, andthe results of operations and changes in the financial position, of Borrower.

 

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(s)           Hazardous Substance:  Includes:

 

(i)            those substancesincluded within the definitions of “hazardous substances,” “hazardousmaterials,” “toxic substances,” or “solid waste” in CERCLA, RCRA, and theHazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,and in the regulations promulgated pursuant thereto;

 

(ii)           those substancesdefined as “hazardous substances” in A.R.S. Section 49-201 and in rules adoptedor guidelines promulgated pursuant thereto;

 

(iii)          those substances listedin the United States Department of Transportation Table (49 CFR 172.101 andamendments thereto) or by the Environmental Protection Agency as hazardoussubstances (40 CFR Part 302 and amendments thereto); and

 

(iv)          all other substances,materials and wastes that are, or that become, regulated under, or that areclassified as hazardous or toxic under, any Environmental Law.

 

(t)            Indebtedness.  The total outstanding indebtedness owedLender by Borrower under or in connection with the Loan, including principaland interest accrued but not previously paid.

 

(u)           Lien.  Any lien, mortgage, security interest, taxlien, pledge, encumbrance, conditional sale or title retention arrangement, orany other interest in property designed to secure the payment of anyindebtedness or performance of any obligation, whether arising by agreement orunder any statute or law, or otherwise.

 

(v)           Loan Documents.  This Agreement, the Note and all otherdocuments now or hereafter executed or delivered in connection with the Loan.

 

(w)          Loan.  As defined in Paragraph 3.1 hereof.

 

(x)            Long Term Debt.  Financing that has a maturity of greater thanone year.

 

(y)           Maintenance Capital.  Expenditures defined by GAAP to becapitalized that are necessary to maintain the operations of the existingrestaurants.

 

(z)            MaterialAdverse Effect.  Any event orcondition that either (i) would have a material adverse effect upon thevalidity, performance or enforceability of this Agreement, or any of the otherLoan Documents, (ii) is material and adverse to the properties, financialcondition, credit or business operations and prospects of Borrower or anySubsidiary, (iii) would impair the ability of Borrower to fulfill itsobligations under this Agreement, or any of the other Loan Documents, or (iv) causesan Event of Default or an event or condition that with notice or lapse of timeor both, would become an Event of Default.

 

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(aa)         Termination Date.  Shall mean June 5, 2012; provided,however, upon the request of Borrower, such date may be extended in writing byLender in its sole and absolute discretion.

 

(bb)         Note.  As defined in Paragraph 3.2 hereof.

 

(cc)         Obligations.  Any and all of the representations,warranties, covenants and other obligations made or undertaken by Borrower inthis Agreement or in any of the other Loan Documents.

 

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

 

(ee)         Permitted Liens.  (i) Liens granted to Lender; (ii) existingLiens approved by Lender and listed on Exhibit “B” hereto, (iii) futureLiens approved in writing by Lender in its sole discretion; (iv) Liens fortaxes, assessments and other governmental charges that are not past due ordelinquent; (v) Liens imposed by law, such as mechanics’ liens, arising inthe ordinary course of business and that secure payments not yet due; (vi) MortgageLiens secured by a Facility where Lender has been notified in writing inadvance of such lien being recorded; and (vii) Liens on other assets tothe extent that such Liens secure financing for the acquisition of that asset.

 

(ff)           Plan.  Each pension, profit sharing, stock bonus,thrift, savings, and employee stock ownership plan established or maintained,or to which contributions have been made, by Borrower or any trade or businesswhich together with Borrower would be treated as a single employer under ERISA.

 

(gg)         Primary Lender.  M&I Marshall & Ilsley Bank.

 

(hh)         SEC.  The United States Security and ExchangeCommission.

 

(ii)           Subsidiary.  Any corporation fifty percent (50%) or moreof which is owned, directly or indirectly, by Borrower.

 

(jj)           Total Funded Debt.  All financings, capitalized lease obligationsand outstanding letters of credit.

 

(kk)         Total Funded Debt to EBITDA.  The ratio Total Funded Debt to EBITDAcalculated on a rolling four (4) quarter basis.

 

2.2           Other Terms.  All accounting and financial terms used andnot otherwise defined in this Agreement shall have the meanings accorded themunder GAAP.

 

**SECTION 3.**         LOAN

** **

3.1           Loan.  Subject to the conditions herein set forth,Lender agrees to loan to or for the benefit of Borrower, and Borrower agrees toborrow, in the manner and upon the terms and conditions herein expressed,amounts that shall not exceed at any time the Commitment (the “Loan”).  The “Commitment” shall be theprincipal sum of $1,400,000.00.

 

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3.2           Note.  The Loan shall be evidenced by a promissorynote of Borrower, executed and delivered simultaneously with the execution ofthis Agreement, in the amount of the $1,400,000.00 payable to Lender upon theterms and conditions contained therein (the “Note”).

 

3.3           Advances.  Omitted.

 

3.4           Readvances.  Omitted.

 

3.5           Other Disbursementsby Lender.  Lender, from time to timein its sole discretion, may make disbursements in payment of interest accruedand payable upon the Loan and any charges and expenses that are the obligationof Borrower under this Agreement or any of the other Loan Documents and anycharges or matters necessary to cure any Event of Default, all of which shallbe added to and be part of the Indebtedness.

 

3.6           Repayment.  Borrower, from time to time, may repay theLoan in whole or in part at any time, without penalty, provided that anyrepayment complies with terms then in effect between borrow and PrimaryLender.  Borrower shall immediately repayto Lender, from time to time, an amount equal to any amount by which theoutstanding principal balance of the Loan exceeds the Commitment.

 

3.7           Termination.  The entire outstanding principal balance, allaccrued and unpaid interest, and all other sums payable in connection with theLoan shall be due and payable on that date.

 

3.8           Application ofPayments.  So long as no Event ofDefault exists, all payments shall be applied first to the payment of anycosts, fees and other charges incurred in connection with the Loan, next to thepayment of any accrued interest and then to the reduction of the principalbalance.  Upon the occurrence and duringthe continuation of any Event of Default, all payments shall be applied byLender to the Indebtedness and Obligations in such order and manner as Lendershall determine in its sole and absolute discretion.  All payments shall be applied to theIndebtedness and Obligations only when received in immediately available funds.

 

3.9           Prior Performance.  Although Lender shall have no obligation tomake any Advance unless and until all of the requirements and conditionsprecedent set forth herein have been satisfied, Lender, at its sole discretion,may make any Advance prior to that time without waiving or releasing any of therequirements or conditions precedent of this Agreement; Borrower shall continueto be strictly obligated to perform, and shall be subject to, all such requirementsand conditions notwithstanding any such disbursement.

 

3.10         Right to Advance.  Omitted.

 

**SECTION 4.**         LOAN FEE

** **

4.1           Loan Fee.  Omitted.

 

4.2           Commitment Fee.  Omitted.

 

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**SECTION 5.**         CONDITIONS PRECEDENT FOR CLOSING

** **

The obligation of Lender to make the Loan, and to make any Advance atClosing, is subject to the following express conditions precedent, all of whichshall have been satisfied prior to Closing:

 

5.1           Documents Required.  Borrower shall have executed (or obtained theexecution or issuing of) and delivered to Lender the following documents, allin form satisfactory to Lender:

 

(a)           This Agreement

 

(b)           The Note

 

5.2           Loan Fee.  Omitted.

 

5.3           Items Required.  Borrower, at its expense, shall have obtainedand delivered to Lender the following items, all of which shall be in form andcontent satisfactory to Lender and shall be subject to approval in writing byLender:

 

(a)           A copy of the articlesof incorporation and bylaws of Borrower and each Subsidiary, including allamendment thereto, certified by the secretary of Borrower or each Subsidiary,as appropriate, as being true, complete and correct as of the date ofcertification.

 

(b)           Certificates of goodstanding for Borrower and each Subsidiary issued by the Secretary of State ofthe state of incorporation of that corporation.

 

(c)           Resolutions of Borrowerapproving the execution, delivery and performance of this Agreement and theother Loan Documents and the transaction contemplated thereby, duly adopted byBorrower’s board of directors and accompanied by a certificate of the Secretaryof Borrower stating that such resolutions are true and correct and are in fullforce and effect.

 

(d)           A signed certificate ofthe secretary of Borrower which shall certify the names of the officers ofBorrower authorized to sign each of the Loan Documents, together with the truesignature of each such officer.

 

5.4           Representative andWarranties True.  All representationsand warranties by Borrower shall remain true and correct in all materialrespects and all agreements that Borrower is to have performed or complied withby the date hereof shall have been performed or complied with.

 

5.5           No Default.  No Event of Default exists, and no event hasoccurred and no condition exists that, after notice or lapse of time, or both,would constitute an Event of Default.

 

**SECTION 6.**         ADDITIONAL CONDITIONS

** **

The obligation of Lender to make the Loan shall be subject to thefollowing additional conditions precedent, all of which shall have beensatisfied and remain satisfied at the time of each Advance of the Loan:

 

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6.1           Prior Conditions.  All of the conditions precedent provided in SECTION 5hereof shall have been satisfied.

 

6.2           Request for Advance.  Omitted.

 

6.3           Representatives andWarranties True.  All representationsand warranties by Borrower shall remain true and correct in all materialrespects and all agreements that Borrower is to have performed or complied withby the date of the requested Advance shall have been performed or compliedwith.

 

6.4           No Default.  No Event of Default exists, and no event hasoccurred and no condition exists that, after notice or lapse of time, or both,would constitute an Event of Default.

 

**SECTION 7.**         REPRESENTATIONS AND WARRANTIES

** **

Borrower represents and warrants to Lender as follows:

 

7.1           Recitals True.  The recitals appearing in this Agreement aretrue and correct.

 

7.2           Organization andGood Standing.  Borrower and eachSubsidiary is a corporation duly organized, validly existing and in goodstanding under the laws of the state of its incorporation and is qualified todo business and is in good standing in each state in which the nature of itsbusiness and property makes such qualification necessary or appropriate.

 

7.3           Power and Authority.  Borrower and each Subsidiary has full powerand authority to own its properties and assets and to carry on its business asnow being conducted.  Borrower has fullpower and authority to execute, deliver and perform this Agreement and theother Loan Documents to which Borrower is a party.

 

7.4           Authorization.  Borrower is fully authorized and permitted toenter into this Agreement, to execute any and all documentation requiredherein, to borrow the amounts contemplated herein upon the terms set forthherein, and to perform the terms of this Agreement.

 

7.5           No Breach or Defaultas to Borrower.  The execution,delivery and performance by Borrower of this Agreement and the other LoanDocuments to which it is a party will not conflict with or result in a defaultunder:  (i) any law, rule orregulation applicable to Borrower, (ii) the organizational documents ofBorrower, or (iii) the terms, conditions or provisions of any agreement orinstrument under which Borrower is a party or is obligated.

 

7.6           EnforceableObligations.  This Agreement and eachof the other Loan Documents to which Borrower is a party are valid and bindinglegal obligations of Borrower and each is enforceable in accordance with itsterms, except as limited by bankruptcy, insolvency or other laws of generalapplication relating to the enforcement of creditors’ rights.

 

7.7           No Liens.  Except for Permitted Liens, all of theproperties and assets of Borrower and its Subsidiaries are free and clear ofall Liens and other adverse claims of any nature, and such corporations havegood and marketable title to such properties and assets.

 

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7.8           No AdverseProceedings.  No actions, suits orproceedings are pending or, to the knowledge of Borrower, threatened againstBorrower or any Subsidiary that could result in a Material Adverse Effect.  Neither Borrower nor any Subsidiary is indefault with respect to any order, writ, injunction or decree, of any court,governmental department, commission, board, agency or official, which defaultcould result in a Material Adverse Effect. No actions, suits or proceedings are pending or threatened againstBorrower or any Subsidiary other than as set forth in Exhibit “C.”

 

7.9           Licenses; Permits;Agreements.  Borrower and itsSubsidiaries have obtained, and there remains in full force and effect, alllicenses, permits, rights, approvals and agreements necessary or appropriatefor the operation of their respective businesses.  Neither Borrower nor any Subsidiary is indefault under any material agreement to which it is a party or by which it orany of its properties is bound.

 

7.10         Compliance with Laws.  Borrower and each of its Subsidiaries are incompliance with all material laws, rules, regulations, orders and decrees thatare applicable to Borrower or any Subsidiary, or its or their properties.

 

7.11         No Violation ofEnvironmental Laws.  To the best oftheir respective knowledge, neither Borrower nor any Subsidiary, nor anyFacility owned by them or any Affiliate thereof, is in violation of anyEnvironmental Law and neither Borrower or any Subsidiary, nor any Facilityowned by them or any Affiliate thereof is subject to any existing, pending or,to the best of their respective knowledge, threatened investigation by anyfederal, state or local governmental authority under or in connection with anyEnvironmental Law.  Borrower has notobtained as the result of the requirements of any Environmental Law, and is notrequired by any Environmental Law to obtain, any permit or license to constructor use any improvements, fixtures or equipment that are a part of, or arelocated on, any Facility or to operate any business that is being conducted orintended to be conducted on any Facility. Borrower has not caused or permitted the Release of, or has anyknowledge of the Release or presence of, any Hazardous Substance on anyFacility or the migration of any Hazardous Substance from or to any otherproperty adjacent to, or in the vicinity of, any Facility.  Borrower’s prior and present use of eachFacility has not resulted in, and its future use of each Facility will notresult in, the Release of any Hazardous Substance on the Facility.

 

7.12         Statements Correct.  All financial statements, profit and lossstatements, statements as to ownership and other statements or reportspreviously or hereafter given to Lender by or on behalf of Borrower and itsSubsidiaries are and shall be true, complete and correct in all materialrespects as of the date thereof.  Therehas been no change since the latest financial statements of Borrower and itsSubsidiaries given to Lender that could have a Material Adverse Effect.  There is no material fact that Borrower hasnot disclosed to Lender that would have a Material Adverse Effect.

 

7.13         Tax Returns Filed.  Borrower and its Subsidiaries have properlyprepared, executed and filed (unless an extension of time has been granted bythe proper authorities) all federal, state and local tax returns required bylaw and has paid all of its respective current obligations before delinquent,including all federal, state and local taxes and all other payments requiredunder federal, state or local law.

 

7.14         No Margin Security.  Borrower does not own any “margin security”as that term is defined in Regulation U of the Board of Governors of theFederal Reserve System except

 

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amounts thereof that donot and will not in the aggregate constitute a substantial part of Borrower’sassets.

 

7.15         ERISA Compliance.  Borrower is in compliance in all materialrespects with all applicable provisions of ERISA.  Neither a “reportable event” as defined inERISA nor a “prohibited transaction” as set forth in ERISA or in the InternalRevenue Code has occurred and is continuing with respect to any Plan.  No notice of intent to terminate a Plan hasbeen filed nor has any Plan been terminated; no circumstances exist thatconstitute grounds under ERISA entitling PBGC to institute proceedings toterminate, or appoint a trustee to administer, a Plan, nor has the PBGCinstituted any such proceedings. Borrower is not a party to, and has no employees who are covered by, amulti-employer pension or benefit plan. Borrower has met its minimum funding requirements under ERISA withrespect to each Plan and the present value of all vested benefits under eachPlan did not exceed the fair market value of all Plan assets allocable to suchbenefits, as determined on the most recent valuation date of ERISA forcalculating the potential liability of Borrower to the PBGC or the Plan underERISA.  Borrower has not incurred anyliability to the PBGC under ERISA.

 

7.16         Principal Office.  The principal office of Borrower is atBorrower’s address at 1312 North Scottsdale Road, Scottsdale, Arizona85257.  Borrower maintains its principalbooks and records at that address.

 

7.17         Subsidiaries.  Borrower does have Subsidiaries.

 

7.18         Affirmation.  Each request by Borrower for an Advance shallconstitute an affirmation on the part of Borrower that the representations andwarranties contained herein are true and correct in all material respects as ofthe time of such request and that the conditions precedent for that Advancehave been satisfied.

 

7.19         Survival.  All representations and warranties madeherein shall survive the execution of this Agreement, all Advances, and theexecution and delivery of all other Loan Documents, so long as Lender has anycommitment to lend to Borrower hereunder and until the Indebtedness has beenfully paid and all of the Obligations have been fully performed.

 

**SECTION 8.**         AFFIRMATIVE COVENANTS

** **

Until the Indebtedness as been fully paid and all of the Obligationshave been fully performed:

 

8.1           No Change inDocuments.  Borrower shall, and shallcause each of its Subsidiaries to, maintain its corporate existence with nomaterial amendments or changes in its organizational documents without theprior written approval of the Lender, which consent shall not be unreasonablywithheld.

 

8.2           Licenses, Permits;Agreements.  Borrower shall, andshall cause each of its Subsidiaries, to comply with and maintain in full forceand effect all licenses, permits, rights, approvals and agreements necessary ordesirable to conduct its business and to comply with its obligations under thisAgreement and the other Loan Documents.

 

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8.3           Maintain Business.  Borrower shall, and shall cause each of itsSubsidiaries, to act prudently and in accordance with customary industrystandards in managing and operating its properties, assets and business.  Borrower shall, and shall cause each of itsSubsidiaries, to keep all of its properties in good condition and repair(subject to ordinary wear and tear) and shall make all needed and proper repairsand improvements to its properties in order to properly conduct its business.

 

8.4           Comply With Laws.  Borrower shall comply in all materialrespects with all applicable laws, including without limitation, all applicableEnvironmental Laws.  Borrower will not,and will not permit any third party to, use, generate, manufacture, produce,store, or Release on, under or about any Facility, or transfer to or from anyFacility, any Hazardous Substance except in compliance with all applicableEnvironmental Laws.

 

8.5           Management.  Borrower shall, and shall cause each of itsSubsidiaries, to at all times hire and retain executive and managementpersonnel adequate for the proper management, supervision and conduct of itsbusiness, operations and properties.

 

8.6           Maintain Insurance.  Borrower shall at all times maintaininsurance with responsible and reputable insurers in such amounts and againstsuch risks as may from time to time be required by Lender, but in all events insuch amounts and against such risks, including public liability, propertydamage and worker’s compensation insurance, as is usually carried by companiesengaged in similar business and owning properties in the same general areas inwhich Borrower operates.

 

8.7           Loan Payments.  Borrower shall make all payments of interestand principal on the Loan and shall keep and comply with all terms, conditionsand provisions of the Loan Documents.

 

8.8           Pay Obligations.  Borrower shall pay all of its currentobligations before they become delinquent, including all federal, state andlocal taxes, assessments, levies and governmental charges and all otherpayments required under any federal, state or local law.

 

8.9           Statements andReports.  Borrower shall maintain astandard, modern system of accounting that reflects the application of GAAP,consistently applied, and shall furnish to Lender the following:

 

(a)           Omitted.

 

(b)           Omitted.

 

(c)           Omitted.

 

(d)           Omitted.

 

(e)           Omitted.

 

(f)            Omitted.

 

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8.10         Records.  Borrowershall maintain, in a safe place, proper and accurate books, ledgers,correspondence and other records relating to its operations and businessaffairs.

 

8.11         No Margin Security.  Borrowershall not use any proceeds of the Loan, or any proceeds of any other or futureloan from Lender to Borrower, directly or indirectly, to purchase or carry any “marginsecurity” as that term is defined in Regulation U of the Board ofGovernors of the Federal Reserve System or to reduce or retire any indebtednessundertaken for such purposes within the meaning of said Regulation U, andwill not use such proceeds in a manner that would cause Borrower to be inviolation of Regulation G, T, or X of such Board, nor use suchproceeds for any purpose not permitted by Section 7 of the SecuritiesExchange Act of 1934, as amended, or any of the rules or regulationsrespecting the extensions of credit promulgated thereunder.

 

8.12         Further Assurance.  Borrowershall execute and deliver such additional documents and do such other acts asLender may reasonably require in connection with this Loan.

 

**SECTION 9.**         NEGATIVE COVENANTS

** **

Until the Indebtedness as been fully paid andall of the Obligations have been fully performed, without receiving the priorwritten consent of Lender, Borrower shall not, and shall not permit anySubsidiary to:

 

9.1           Incur Debt.  Become orremain obligated either directly or as a guarantor or surety for anyindebtedness for borrowed money or for any indebtedness incurred in connectionwith the acquisition of any property, real or personal, tangible or intangible,except:

 

(a)           Indebtedness to Primary Lender;

 

(b)           Indebtedness to Lender;

 

(c)           Indebtedness secured by Permitted Liens;

 

(d)           Current liabilities for taxes and assessments incurredin the ordinary course of business; unsecured trade, utility ornon-extraordinary accounts payable arising in the ordinary course of itsbusiness;

 

(e)           Real estate debt in connection with the purchase ofrestaurant properties.

 

9.2           Negative Pledge.  Create or permitto be created or exist any Lien on any of its property or assets which it nowowns or hereafter acquires except Permitted Liens.

 

9.3           Loans.  Make anyloan, advance, extension of credit, or gift to any person or entity exceptitems not to exceed $10,000.00 in the aggregate for Borrower and allSubsidiaries in any fiscal year.

 

9.4           Investments.  Omitted.

 

9.5           Dissolution; Management Change. Dissolve or liquidate, or merge or consolidate with or into any otherentity; sell, transfer, lease or otherwise dispose of all or any substantial

 

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part of its property,assets or business; or, turn over the management or operation of its property,assets or business to any other person, firm or corporation or make any othermaterial change in its management or operations.

 

9.6           Fiscal Year.  Change thetimes of commencement or termination of its fiscal year or other accountingperiods; or change its methods of accounting other than to conform to GAAP.

 

9.7           Guarantees.  Guarantee,directly or indirectly, or otherwise become contingently liable or obligatedfor, any indebtedness or obligation of any other person or entity except forthe endorsement in the ordinary course of business of negotiable instrumentsfor deposit or collection.

 

9.8           Dividends.  Omitted.

 

9.9           Acquisitions.  Omitted.

 

9.10         Nature of Business.  Engage in anyline of business materially different from that in which it is presentlyengaged, or purchase, lease or otherwise acquire assets not related to theoperation of its business.

 

9.11         Capital Expenditures.  Omitted.

 

9.12         Salaries.  Pay excessiveor unreasonable salaries, bonuses, commissions or other compensation; orincrease the salary, bonus, commissions or other compensation of any director, officer,or consultant, or any member of their families, by more than 20% in any onefiscal year, either individually or in the aggregate for all such persons.

 

9.13         Financial Covenants.  For Borrowerand its Subsidiaries, on a combined basis, as determined as of end of eachfiscal quarter from the financial statements included in Borrower’s Form 10Kand Form 10-Qs filed with the SEC, permit:

 

(a)           Adjusted Tangible Net Worth to be less than$17,000,000.00.

 

(b)           The ratio of Total Funded Debt to EBITDA to be greaterthan 2.75 to 1.0.

 

(c)           The Fixed Charge Coverage to exceed 1.00 to 1.00.

 

All computations made to determine compliance withthe requirements contained in this paragraph shall be made in accordance withGAAP and shall be certified as true and correct by Borrower.

 

**SECTION 10.**       WAIVER

** **

10.1         Notice Waivers.  Borrowerwaives presentment, demand, protest and notices of protest, nonpayment, partialpayment and all other notices and formalities except as expressly called for inthis Agreement or in the Note.  Borrowerconsents to and waives notice of: (i) the granting of indulgences orextensions of time of payment, (ii) the taking or releasing of security,and (iii) the addition or release of persons who may be or becomeprimarily or secondarily liable

 

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on or with respect to theIndebtedness or any part thereof, and all in such manner and at such time asLender may deem advisable.

 

10.2         No Waivers By Lender.  No delay oromission by Lender in exercising any right, power or remedy hereunder, and noindulgence given to Borrower, with respect to any term, condition or provisionset forth herein, shall impair any right, power or remedy of Lender under thisAgreement, or be construed as a waiver by Lender of, or acquiescence in, anyEvent of Default.  Likewise, no suchdelay, omission or indulgence by Lender shall be construed as a variation orwaiver of any of the terms, conditions or provisions of this Agreement.  Any actual waiver by Lender of any Event ofDefault shall not be a waiver of any other prior or subsequent Event of Defaultor of the same Event of Default after notice to Borrower demanding strictperformance.

 

**SECTION 11.**       DEFAULT

** **

11.1         Events of Default.  Theoccurrence of any of the following events or conditions shall constitute an “Eventof Default” under this Agreement:

 

(a)           Any failure to pay any interest or principal or anyother part of the Indebtedness when the same becomes due and payable.

 

(b)           Any failure or neglect to perform or observe any ofthe terms, provisions, conditions or covenants of this Agreement or any otherLoan Document, other than those referred to in the other provisions of thisParagraph 11.1, and such failure or neglect either (i) cannot beremedied,  (ii) can be remediedwithin fifteen (15) days by prompt and diligent action, but it continuesunremedied for a period of fifteen (15) days after notice thereof to Borrower,or (iii) can be remedied, although not within fifteen (15) days even byprompt and diligent action, but such remedy is not commenced within fifteen(15) days after notice thereof to Borrower or is not diligently prosecuted tocompletion within a total of thirty (30) days from the date of such notice.

 

(c)           Any warranty, representation or statement contained inthis Agreement, in the Note, in any other Loan Document, or made or furnishedto Lender by or on behalf of Borrower that shall be or shall prove to have beenfalse or misleading in any material respect as of the time made or furnished.

 

(d)           The filing by Borrower or any Subsidiary of anyproceeding under the federal bankruptcy laws now or hereafter existing or anyother similar statute now or hereafter in effect; or the entry of an order forrelief under such laws with respect to Borrower or any Subsidiary.

 

(e)           The commencement of any proceeding described insubparagraph (d)above against Borrower or any Subsidiary unless dismissalof such proceeding is promptly sought and diligently prosecuted and suchproceeding is in fact dismissed within sixty (60) days from the date of suchcommencement; the acquiescence by Borrower or such Subsidiary to suchproceedings; or the appointment of a receiver, trustee, custodian orconservator for all or any part of the assets of Borrower or any Subsidiary.

 

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(f)            The insolvency of Borrower or any Subsidiary; or theexecution by Borrower or any Subsidiary of an assignment for the benefit ofcreditors; or the convening by Borrower or any Subsidiary of a meeting of its creditors,or any class thereof, for purposes of affecting a moratorium upon or extensionor composition of its debts; or the failure of Borrower or any Subsidiary topay its debts as they mature; or if Borrower or any Subsidiary is generally notpaying its debts as they mature.

 

(g)           The admission in writing by Borrower or any Subsidiarythat it is unable to pay its debts as they mature or that it is generally notpaying its debts as they mature.

 

(h)           The liquidation, termination or dissolution ofBorrower or any of its Subsidiaries.

 

(i)            Any final judgment for the payment of money in excessof $500,000.00 (other than a judgment covered by insurance where coverage hasbeen acknowledged by the insurer) is entered against Borrower or any Subsidiaryand such judgment is not satisfied or discharged with thirty (30) days afterthe entry thereof.

 

(j)            The existence or the filing of any Lien, other thanPermitted Liens, in excess of $500,000.00 against any property or assets ofBorrower or any Subsidiary that is not removed, released, bonded or stayed tothe satisfaction of Lender within thirty (30) days after its creation.

 

(k)           Any levy or execution upon, or judicial seizure of,any property of Borrower or any Subsidiary that has a fair market value inexcess of $250,000.00.

 

(l)            The entry of any judgment, order or decree, or anyother type of adverse ruling, against Borrower or any Subsidiary that couldhave a Material Adverse Effect.

 

(m)          The abandonment by Borrower or any Subsidiary of allor any material part of its property or assets.

 

(n)           The loss, theft or destruction of, or any substantialdamage to, any material part of the property of Borrower or any Subsidiary thatis not adequately covered by insurance.

 

(o)           The occurrence of any event or condition, that withthe giving of notice or passage of time, or both, could result in a materialdefault by Borrower under any other contract, loan, obligation or agreement ofany kind to which Borrower is a party that results in a Material AdverseEffect.

 

(p)           The issuance of any order or decree enjoining orprohibiting Lender or Borrower from performing under this Agreement or any ofthe other Loan Documents, which order or decree is not vacated within fifteen(15) days after the granting thereof.

 

(q)           The occurrence of any default under any of the otherLoan Documents that is not cured within any period for cure set forth therein.

 

(r)            Any failure or neglect to satisfy any of the financialcovenants set forth in Paragraph 9.12 hereof which failure or neglect isnot fully remedied and cured by the end of the next calendar month.

 

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(s)           The occurrence of any event or condition that Lender,in its reasonably judgment, believes results in a Material Adverse Effect.

 

11.2         Remedies.  Upon theoccurrence of any Event of Default, and at any time thereafter while such Eventof Default is continuing, Lender may do one or more of the following[except that in the case of an Event of Default described insubparagraphs 11.1(d) through 11.1(g) above relating toBorrower, acceleration shall be automatic]:

 

(a)           Declare the entire Loan and the rest of theIndebtedness immediately due and payable, without notice or demand.

 

(b)           Proceed to protect and enforce its rights under thisAgreement, the Note and all other Loan Documents.

 

(c)           Avail itself of any other relief to which Lender maybe legally or equitably entitled.

 

11.3         Payment of Costs.  Borrowershall pay all costs and expenses including, without limitation, court costs andreasonable attorneys’ fees incurred in enforcing payment of the Indebtednessand performance of the Obligation or in exercising the rights and remedies ofLender hereunder.  In the event of anycourt proceedings, court costs and reasonable attorneys’ fees shall be set bythe court and not by jury and shall be included in any judgment obtained byLender.

 

11.4         Right to Pay and Perform. If Borrower shall fail to pay any amount as required herein or in any ofthe other Loan Documents, to satisfy any requirement hereof or of any of theother Loan Documents, or to perform otherwise as required herein or in any ofthe other Loan Documents, Lender may advance the moneys necessary to pay thesame, to satisfy such requirements or to so perform.

 

11.5         No Prejudice to Lender.  No failure onthe part of Lender to exercise any of its rights hereunder arising upon anyEvent of Default shall be construed to prejudice its rights upon the occurrenceof any other or subsequent Event of Default. No delay on the part of Lender in exercising any such rights shall beconstrued to preclude it from the exercise thereof at any time during thecontinuance of that Event of Default. Lender may enforce any one or more remedies or rights hereunder successivelyor concurrently.  By accepting payment ofany of the Indebtedness or performance of any of the Obligation after its duedate, Lender shall not thereby waive the agreement contained herein that timeis of the essence, nor shall Lender waive either its right to require promptpayment when due of the remainder of the Indebtedness or performance when dueof the remainder of the Obligation or its right to consider the failure to sopay or perform an Event of Default.

 

**SECTION 12.**       ACTION UPON AGREEMENT

** **

12.1         No Third Party Beneficiaries. This Agreement is made for the sole protection and benefit of theparties hereto and no other person or organization shall have any right ofaction hereon or be a third party beneficiary hereof.

 

12.2         Entire Agreement.  ThisAgreement, together with the documents and instruments referred to herein,embodies the entire Agreement of the parties with regard to the

 

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subject matterhereof.  There are no representations,promises, warranties, understandings or agreements expressed or implied, oralor otherwise, in relation thereto, except those expressly referred to or setforth herein.  Borrower acknowledges thatthe execution and delivery of this Agreement is its free and voluntary act anddeed, and that said execution and delivery have not been induced by, nor donein reliance upon, any representations, promises, warranties, understandings oragreements made by Lender, its agents, officers, employees or representatives,other than as set forth herein.

 

12.3         Changes in Writing.  No promise,representation, warranty or agreement made subsequent to the execution anddelivery of this Agreement by either party hereto, and no revocation, partialor otherwise, or change, amendment or addition to, or alteration or modificationof, this Agreement shall be valid unless the same shall be in writing signed byall parties hereto.

 

12.4         Separate Entities.  Lender andBorrower have separate and independent rights and obligations under thisAgreement.  Nothing contained herein shallbe construed as creating, forming or constituting any partnership, jointventure, merger or consolidation of Lender and Borrower for any purpose or inany respect.

 

**SECTION 13.**       GENERAL

** **

13.1         Agreement to Continue.  ThisAgreement, and the representations, warranties, and covenants contained hereinshall survive the making of the Loan and shall remain in full force and effectuntil the Indebtedness as been fully paid and all of the Obligations have beenfully performed.

 

13.2         Lender’s Investigations.  Borrowershall be solely responsible for all aspects of Borrower’s business andactivities.  Any investigation or reviewby Lender or its counsel shall be solely for Lender’s benefit, including todetermine whether Borrower is properly discharging its obligations to Lender,and may not be relied upon by Borrower or any third party.  Neither Lender, nor Lender’s counsel, owesany duty of care to Borrower or to any third party to protect against, or toinform Borrower or any third party of, any matters disclosed by anyinvestigation or review by Lender or its counsel.

 

13.3         Rights to Protect Lender. All rights, powers and remedies granted Lender herein, or otherwiseavailable to Lender, are for the sole benefit and protection of Lender, andLender may exercise any such right, power or remedy at its option and in itssole and absolute discretion without any obligation to do so.  In addition, if, under the terms hereof,Lender is given two or more alternative courses of action, Lender may elect anyalternative or combination of alternatives, at its option and in its sole andabsolute discretion.  All monies advancedby Lender under the terms hereof and all amounts paid, suffered or incurred byLender in exercising any authority granted herein, including reasonable attorneys’fees, shall bear interest at the highest rate payable on any of theIndebtedness until paid, and shall be due and payable by Borrower to Lenderimmediately without demand.

 

13.4         Indemnity.  Borrowershall indemnify and hold Lender harmless from and against all claims, costs,expenses, actions, suits, proceedings, losses, damages and liabilities of anykind whatsoever, including but not limited to reasonable attorneys’ fees andexpenses, arising out of any matter relating, directly or indirectly, to theLoan, whether resulting from internal disputes of the Borrower or whetherinvolving other third persons or entities, or out of any other

 

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matter whatsoever relatedto this Agreement, the other Loan Documents, or any Facility, including but notlimited to (i) any use, generation, manufacture, production, storage,Release, threatened Release, or presence of a Hazardous Substance; (ii) anyviolation or claim of violation of any Environmental Law; or (iii) anybreach of any of the warranties, representations and covenants containedherein, but excluding any claim or liability which arises as the direct resultof the gross negligence or willful misconduct of Lender.  This indemnity provision shall continue infull force and effect and shall survive not only the making of the Loan butshall also survive the payment of the Indebtedness and the performance of theObligations.

 

13.5         Joint and Several; Context. If Borrower consists of more than one person or entity their liabilityshall be joint and several.  Theprovisions hereof shall apply to the parties according to the context thereofand without regard to the number or gender of words or expressions used.

 

13.6         Time of the Essence.  Time isexpressly made of the essence of this Agreement.

 

13.7         Notices.  All noticesrequired or permitted to be given hereunder shall be in writing and may begiven in person or by United States mail, by commercial delivery service or byelectronic transmission with verified receipt. Any notice directed to a party to this Agreement shall become effectiveupon the earliest of the following:  (i) actualreceipt by that party; (ii) delivery to the designated address of thatparty, addressed to that party; or (iii) if given by certified orregistered United States mail, the earlier of the date of delivery shown on thereturn receipt or twenty-four (24) hours after deposit with the United StatesPostal Service, postage prepaid, addressed to that party at its designatedaddress.  The designated address of aparty shall be the address of the party shown below or such other addresswithin the continental United States as that party, from time to time, mayspecify by notice to the other parties:

 
| Borrower: |   | Star Buffet, Inc.    |
|-----------|--------|---------------------------|
|      |   | 1312 N. Scottsdale Road   |
|      |   | Scottsdale, AZ 85257      |
|      |   |                      |
| Lender:   |   | Robert E. Wheaton and     |
|      |   | Suzanne H. Wheaton        |
|      |   | 4716 E. Valley Vista Lane |
|      |   | Paradise Valley, AZ 85253 |

 

13.8         Costs and Expenses.  Borrowershall pay all costs and expenses arising from the preparation of thisAgreement, the closing of the Loan and the making of the Advance, including butnot limited to, Lender’s attorneys’ fees, any other charges that may be imposedon Lender as a result of this transaction.

 

13.9         Choice of Law.  ThisAgreement shall be governed by and construed according to the laws of the Stateof Arizona.

 

13.10       Venue.  Lender maybring any action or proceeding to enforce or arising out of this Agreement inany court of competent jurisdiction.  IfLender commences such an action in a court located in the County of Maricopa,State of Arizona, or the United States District Court for the District ofArizona, Borrower hereby agrees that it will submit and does hereby irrevocablysubmit to the personal jurisdiction of such courts and will not attempt to havesuch action dismissed, abated, or transferred on the ground of forum nonconvenience or similar grounds; provided, however, that nothing containedherein shall prohibit Borrower from seeking, by 

 

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appropriate motion, toremove any action brought in a Arizona state court to the United StatesDistrict Court for the District of Arizona. If such action is so removed, however, Borrower shall not seek totransfer such action to any other district, nor shall Borrower seek to transferto any other district any action which Lender originally commences in suchfederal court.  Any action or proceedingbrought by Borrower arising out of this Agreement or any of the other LoanDocuments shall be brought solely in a court of competent jurisdiction locatedin the County of Maricopa, State of Arizona, or in the United States DistrictCourt for the District of Arizona. Borrower waives any objection which it may now or hereafter have tovenue of any such action or proceeding and waives any right to seek removal ofany action or proceeding commenced in accordance herewith.

 

13.11       WAIVER OF TRIAL BY JURY.  BORROWER ANDLENDER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTTHAT IT MAY HAVE TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OFACTION ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE DEALINGS OFTHE PARTIES WITH RESPECT THE TRANSACTION THAT IS THE SUBJECT OF THIS AGREEMENTWHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT ORTORT OR OTHERWISE.  THIS WAIVER HAS BEENNEGOTIATED BY THE PARTIES AND IS AN ESSENTIAL PART OF THEIR BARGAIN.  EITHER PARTY MAY FILE A COPY OF THISPROVISION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES TOTHE WAIVER OF ANY RIGHT THEY MIGHT OTHERWISE HAVE TO TRIAL BY JURY.

 

13.12       Successors and Assigns.  Except asotherwise provided herein, this Agreement shall be binding upon, and shallinure to the benefit of, the parties hereto and their successors and assigns.

 

13.13       Headings.  The headingsor captions of sections and paragraphs in this Agreement are for convenienceand reference only, do not define, control or limit the provisions of suchsections or paragraphs, and shall not affect the interpretation of thisAgreement.

 

13.14       Participations.  Lender, atany time, shall have the right to sell, assign, or grant participations in allor any portion of the Loan and in any of the Loan Documents.  Lender is authorized to furnish any purchaseror participant, or prospective purchaser or participant, any documents orinformation provided to Lender or that Lender may have obtained relating toBorrower or relating to the Loan.

 

13.15       Loan Agreement to Prevail. In the event of any direct conflict between the provisions of thisAgreement and those of the Note or any other Loan Document, the provisions ofthis Agreement shall prevail.

 

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IN WITNESS WHEREOF, thesepresents are executed as of the date indicated above.

 
|   | BORROWER:                                            |
|--------|------------------------------------------------------|
|   |                                                 |
|   | STAR BUFFET, INC., a Delaware corporation            |
|   |                                                 |
|   |                                                 |
|   | By:                                                  | /s/ Ron Dowdy |
|   | Name:     Ron Dowdy              |
|   | Title:       Secretary |
|   |                                                 |
|   |                                                 |
|   | LENDER:                                              |
|   |                                                 |
|   | Robert E. Wheaton and Suzanne H. Wheaton             |
|   |                                                 |
|   |                                                 |
|   | By:                                                  | /s/ Robert E. Wheaton |
|   | Name:                                                | Robert E. Wheaton |
|   |                                                 |
|   |                                                 |
|   | By:                                                  | /s/ Suzanne H. Wheaton |
|   | Name:                                                | Suzanne H. Wheaton |
|        |                                                      |  |  |

 

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