Prepared by R.R. Donnelley Financial -- Amendment No. 2 to Form S-1
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As filed with the Securities and Exchange Commission on June 26, 2002
Registration No. 333-87044

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
 

 
RED ROBIN GOURMET BURGERS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
5812
 
84-1573084
(State or other jurisdiction of
incorporation or organization)
 
(Primary standard industrial
classification code number)
 
(I.R.S. employer
identification number)
 
5575 DTC Parkway, Suite 110
Greenwood Village, Colorado 80111
(303) 846-6000
(Address, including zip code, and telephone number, including area code,  of registrant’s principal executive offices)
 

 
Michael J. Snyder
Chief Executive Officer
5575 DTC Parkway, Suite 110
Greenwood Village, Colorado 80111
(303) 846-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
 

 
Copies To:
 
Thomas J. Leary
Brandi R. Steege
O’Melveny & Myers LLP
610 Newport Center Drive, Suite 1700
Newport Beach, California 92660
(949) 760-9600
 
Valerie Ford Jacob
Stuart H. Gelfond
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8000
 

 
Approximate date of proposed sale to the public:    As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”) 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, 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(c) 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.   ¨
 
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.   ¨
 
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.   ¨
 

 
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 the registration statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. Red Robin 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 Red Robin is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION DATED JUNE 26, 2002
 
PROSPECTUS
 
5,038,000 Shares
 
LOGO
 
Common Stock
 

 
Red Robin Gourmet Burgers, Inc. and the selling stockholders are offering shares of common stock in a firmly underwritten offering. This is Red Robin’s initial public offering, and no public market currently exists for our shares. Red Robin anticipates that the initial public offering price for its shares will be between $14.00 and $16.00 per share. Red Robin will not receive any of the proceeds from shares sold by the selling stockholders.
 

 
Our common stock has been approved for quotation on The Nasdaq Stock Market’s National Market under the symbol “RRGB.”
 

 
Investing in our common stock involves risks that are described under “Risk Factors” beginning on page 7 of this prospectus.
 

 
    
Per Share
  
Total





Offering Price
  
$
        
  
$
        
Discounts and Commissions to Underwriters
  
$
 
  
$
 
Offering Proceeds to Red Robin
  
$
 
  
$
 
Offering Proceeds to the Selling Stockholders
  
$
 
  
$
 
 

 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or has determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
Some of the selling stockholders have granted the underwriters the right to purchase up to an additional 755,700 shares of common stock to cover any over-allotments. The underwriters can exercise this right at any time from time to time within 30 days after the offering. Delivery of the shares of common stock will be made on or about                     , 2002.
 
 
Banc of America Securities LLC
 
U.S. Bancorp Piper Jaffray
 

 
Wachovia Securities
 
The date of this prospectus is                         , 2002


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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers or sales are permitted. The information in this document may only be accurate on the date of this document. Our business, financial condition or results of operations may have changed since that date.
 

 
Red Robin®, America’s Gourmet Burgers & Spirits® and Mad Mixology® are federally registered trademarks and service marks owned by Red Robin. Red Robin® is also registered in Canada. This prospectus also contains trademarks of companies other than Red Robin and use of such marks in this prospectus does not indicate an affiliation with or endorsement by such third parties.
 

 
ASSUMPTIONS USED IN THIS PROSPECTUS
 
Throughout this prospectus, our fiscal years ended December 28, 1997, December 27, 1998, December 26, 1999, December 31, 2000 and December 30, 2001 are referred to as years 1997, 1998, 1999, 2000 and 2001, respectively. Our fiscal year consists of 52 or 53 weeks and ends on the last Sunday in December in each fiscal year. Fiscal year 2000 included 53 weeks. All other fiscal years shown included 52 weeks. In 2001, our first quarter ended on April 22, 2001 and is referred to throughout this prospectus as first quarter 2001 and in 2002, our first quarter ended on April 21, 2002 and is referred to throughout this prospectus as first quarter 2002. Our first quarters include 16 weeks and our second, third and fourth quarters each include 12 weeks.
 
Unless we indicate otherwise, all of the information in this prospectus assumes:
 
 
 
the underwriters will not exercise their over-allotment option to purchase up to 755,700 additional shares of our common stock from some of the selling stockholders at the price set forth on the cover of this prospectus;
 
 
 
an initial offering price of $15.00 per share, the midpoint of the range set forth on the cover of this prospectus;
 
 
 
no exercise of options to purchase an aggregate of 504,466 shares of common stock which were outstanding as of May 19, 2002 under our stock option plans; and
 
 
 
that we have completed a one-for-2.9 reverse stock split that we intend to complete prior to the consummation of this offering.

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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the “Risk Factors” section and our consolidated financial statements and the related notes. References in this prospectus to “Red Robin,” “company,” “we,” “us” and “our” refer to the business of Red Robin Gourmet Burgers, Inc. and its subsidiaries.
 
OUR BUSINESS
 
Red Robin is a casual dining restaurant chain focused on serving an imaginative selection of high quality gourmet burgers in a family-friendly atmosphere. We currently own and operate 90 restaurants in 12 states, and have 99 additional restaurants operating under franchise or license agreements in 19 states and Canada.
 
Our menu is centered around our signature product, the gourmet burger, which we make from beef, chicken, veggie, fish, turkey and pot roast and serve in a variety of recipes. We offer a wide selection of toppings for our gourmet burgers, including fresh guacamole, roasted green chilies, honey mustard dressing, grilled pineapple, crispy onion straws, sautéed mushrooms and a choice of six different cheeses. In addition to our gourmet burgers, which accounted for approximately 44.0% of our total food sales in 2001, we also serve an array of other food items that are designed to appeal to a broad group of guests, including salads, soups, appetizers, other entrees such as rice bowls and pasta, desserts and our signature Mad Mixology® alcoholic and non-alcoholic specialty beverages.
 
Our restaurants are designed to create a fun and memorable dining experience in a family-friendly atmosphere and provide our guests with an exceptional dining value. Our concept attracts a broad guest base by appealing to the entire family.
 
OUR CONCEPT AND BUSINESS STRATEGY
 
Our objective is to be the leading gourmet burger and casual dining restaurant destination. To achieve our objective, we have developed the following strategies.
 
 
 
Focus on our key guiding principals, or “cornerstones,” that drive our success.    Values, people, burgers and time.
 
 
 
Offer high quality, imaginative menu items.    Our restaurants feature imaginative menu items that showcase recipes and capture tastes and flavors that our guests do not typically associate with burgers, salads and sandwiches.
 
 
 
Create a fun, festive and memorable dining experience.    We promote an exciting, high-energy and family-friendly atmosphere by decorating our restaurant interiors with an eclectic selection of celebrity posters, three-dimensional artwork, carousel horses and statues of our mascot “Red”.
 
 
 
Provide an exceptional dining value with broad consumer appeal.    We offer generous portions of high quality, imaginative food and beverages for a per person average check of approximately $10.00, which we believe differentiates us from many of our competitors who have significantly higher average guest checks.
 
 
 
Deliver strong unit economics.    Our comparable company-owned restaurants generated average sales of approximately $3.0 million and restaurant-level operating profit of approximately $618,000, or 20.5% of comparable company-owned restaurant sales in 2001. The average cash investment cost for

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our free-standing restaurants opened in 2001 was approximately $1.7 million, excluding pre-opening costs and land. Our comparable company-owned restaurants generated average sales of approximately $2.9 million and restaurant-level operating profit of approximately $533,000, or 18.4% of comparable company-owned restaurant sales in 2000. The average cash investment cost for our free-standing restaurants opened in 2000 was approximately $1.8 million, excluding pre-opening costs and land.
 
 
 
Pursue disciplined restaurant and franchise growth.    Our disciplined expansion strategy includes both company-owned and franchised development. In 2002, we have opened four new company-owned restaurants, expect to open six additional new company-owned restaurants and relocate one restaurant. Our franchisees have opened four new restaurants and we expect them to open three additional restaurants this year.
 
 
 
Build awareness of the Red Robin® America’s Gourmet Burgers & Spirits® brand.    We believe we have become well known within our markets for our signature menu items and we intend to strengthen this brand loyalty by continuing to offer new menu items and deliver a consistently memorable guest experience.
 
 
 
Continue to capitalize on favorable lifestyle and demographic trends.    We believe we have benefited from several key trends that have helped drive our business. These trends include the expected increase in consumption of food away from home and the large and growing teen population.
 
OUR GROWTH STRATEGIES
 
We believe that there are significant opportunities to grow our concept and brand on a nationwide basis through both new company-owned and franchised restaurants. We believe that our concept and brand can support as many as 850 additional company-owned or franchised restaurants throughout the United States.
 
Company-owned restaurants.    Our primary source of expansion and growth in the near term will be the addition of new company-owned restaurants. We are pursuing a disciplined growth strategy and intend to develop many of our new restaurants in our existing markets, and selectively enter into new markets. Our growth strategy incorporates a cluster strategy for market penetration, which we believe will enable us to gain operating efficiencies, increase brand awareness and enhance convenience and ease of access for our guests, all of which we believe will lead to significant repeat business. Our site selection criteria for new restaurants is flexible and allows us to adapt to a variety of locations near high activity areas such as retail centers, big box shopping centers and entertainment centers.
 
Franchised Restaurants.    The other key aspect of our growth strategy is the continued development of our franchise restaurants. We expect the majority of our new franchise restaurant growth to occur through the development of new restaurants by new franchisees, primarily in the Northeast, Midwest and the South. We intend to continue to strengthen our franchise system by attracting experienced and well-capitalized area developers who are quality-conscious restaurant operators and who possess the expertise and resources to execute the development of new restaurants on a large scale.
 
OUR HISTORY
 
Red Robin opened its first restaurant in 1969, in Seattle, Washington near the University of Washington campus. In 1996, Mike Snyder, then our leading franchisee, became our president and implemented a number of strategic initiatives, including strengthening our gourmet burger concept, recruiting a new management team, upgrading management information systems, streamlining operations and improving guest service. As a result of these and other initiatives, we increased the average annual restaurant sales of our comparable company-owned

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restaurants from $2.1 million in 1995 to $3.0 million in 2001 and expanded comparable restaurant-level operating profit margins from 15.8% in 1995 to 20.5% in 2001. In 2000, we completed a recapitalization of our company, and acquired Mike Snyder’s 14-unit franchise company, The Snyder Group Company. In addition, Quad-C, a private equity firm whose principals have substantial restaurant experience, made an equity investment of $25.0 million in our company through its affiliates.
 
RISK FACTORS
 
An investment in our common stock involves a high degree of risk. The following risks, as well as the risks discussed in “Risk Factors,” should be carefully considered before investing in our common stock:
 
 
 
our ability to open new restaurants, secure sufficient new space and manage our planned expansion;
 
 
 
the continued service of key management personnel;
 
 
 
changes in consumer preferences or consumer discretionary spending;
 
 
 
health concerns regarding beef or other food products;
 
 
 
the effect of competition in the restaurant industry;
 
 
 
the ability of our franchisees to take actions that could harm our business;
 
 
 
adverse economic and other developments in the Western United States where 83.3% of our company-owned restaurants are located; and
 
 
 
Quad-C, Skylark Co., Ltd., Mike Snyder and our other officers, directors and principal stockholders will hold approximately 58.0% of our common stock after this offering and, acting individually or together, will be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and significant business transactions.
 

 
Our principal executive offices are located at 5575 DTC Parkway, Suite 110, Greenwood Village, Colorado 80111. Our telephone number is (303) 846-6000. Our website is www.redrobin.com. The information on our website is not part of this prospectus.

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THE OFFERING
 
Common stock offered by:
    
Red Robin Gourmet Burgers, Inc. 
  
4,000,000 shares
Selling stockholders
  
1,038,000 shares
Common stock to be outstanding after this offering
  
15,025,654 shares
Use of proceeds
  
We intend to use the proceeds of this offering:
    
•      to repay approximately $47.9 million of indebtedness under our term loan, including related fees;
    
•      to repay approximately $3.5 million of indebtedness under our revolving credit facility; and
    
•      to repay approximately $2.1 million of indebtedness under one real estate and three equipment loans, including related fees.
    
The remaining net proceeds will be used for general corporate purposes, which may include the opening of new restaurants or the acquisition of existing restaurants from franchisees if we receive sufficient proceeds. We will not receive any of the proceeds from the sale of shares by the selling stockholders. See “Use of Proceeds.”
Proposed Nasdaq National Market symbol
  
RRGB
 
The number of shares of common stock to be outstanding after this offering is based on our shares outstanding as of May 19, 2002. This information excludes:
 
 
 
1,475,690 shares of common stock reserved for issuance under our stock option plans, of which 504,466 shares are subject to options outstanding at a weighted average exercise price of $5.83 per share; and
 
 
 
300,000 shares of common stock reserved for issuance under our employee stock purchase plan.

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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
 
    
Fiscal Year Ended

    
First Quarter Ended

 
    
1999

    
2000(1)

    
2001

    
2001

    
2002

 
    
(in thousands, except per share data, restaurant-related data and footnotes)
 
Statement of Income Data:
                             
(unaudited)
Revenues:
                                            
Restaurant
  
$
121,430
 
  
$
180,413
 
  
$
214,963
 
  
$
64,572
 
  
$
76,317
 
Franchise royalties and fees
  
 
8,249
 
  
 
8,247
 
  
 
9,002
 
  
 
2,822
 
  
 
2,757
 
Rent revenue
  
 
333
 
  
 
510
 
  
 
520
 
  
 
120
 
  
 
127
 
    


  


  


  


  


Total revenues
  
 
130,012
 
  
 
189,170
 
  
 
224,485
 
  
 
67,514
 
  
 
79,201
 
Income from operations
  
 
7,145
 
  
 
8,805
 
  
 
18,740
 
  
 
5,127
 
  
 
5,993
 
Interest expense
  
 
4,156
 
  
 
6,482
 
  
 
7,850
 
  
 
2,500
 
  
 
2,217
 
Interest income
  
 
(186
)
  
 
(742
)
  
 
(746
)
  
 
(208
)
  
 
(100
)
Other expense
  
 
391
 
  
 
191
 
  
 
190
 
  
 
63
 
  
 
25
 
(Provision) benefit for income taxes(2)
  
 
1,596
 
  
 
12,557
 
  
 
(3,722
)
  
 
(901
)
  
 
(1,374
)
Net income(2)
  
 
4,380
 
  
 
15,431
 
  
 
7,724
 
  
 
1,871
 
  
 
2,476
 
                                              
Net income per common share(2)
                                            
Basic
  
$
1.47
 
  
$
2.07
 
  
$
0.77
 
  
$
0.19
 
  
$
0.25
 
Diluted
  
$
1.47
 
  
$
2.07
 
  
$
0.75
 
  
$
0.18
 
  
$
0.23
 
Shares used in computing net income per common share
                                            
Basic
  
 
2,971
 
  
 
7,444
 
  
 
10,085
 
  
 
10,076
 
  
 
10,090
 
Diluted
  
 
2,971
 
  
 
7,444
 
  
 
10,236
 
  
 
10,170
 
  
 
10,650
 
                                              
Selected Operating Data:
                                            
System-wide restaurants open at end of period
  
 
144
 
  
 
164
 
  
 
182
 
  
 
165
 
  
 
186
 
Company-owned restaurants open at end of period
  
 
46
 
  
 
73
 
  
 
77
 
  
 
72
 
  
 
88
 
Average annual comparable company-owned restaurant sales(3)
  
$
2,664
 
  
$
2,890
 
  
$
3,020
 
                 
Comparable company-owned restaurant sales increase(3)
  
 
5.8
%
  
 
6.9
%
  
 
2.0
%
  
 
2.6
%
  
 
0.4
%
Restaurant-level operating profit(4)
  
$
20,340
 
  
$
32,423
 
  
$
41,215
 
  
$
11,497
 
  
$
14,298
 
EBITDA(5)
  
 
12,539
 
  
 
16,870
 
  
 
29,231
 
  
 
8,279
 
  
 
9,592
 
EBITDA margin(5)
  
 
9.6
%
  
 
8.9
%
  
 
13.0
%
  
 
12.3
%
  
 
12.1
%
 
    
April 21, 2002

    
Actual

  
As Adjusted(6)

    
(unaudited)
Balance Sheet Data:
             
Cash and cash equivalents
  
$
6,547
  
$
10,695
Total assets
  
 
154,188
  
 
156,168
Long-term debt, including current portion
  
 
78,743
  
 
30,122
Total stockholders’ equity
  
 
49,475
  
 
100,076

(1)
 
In May 2000, we purchased all of the outstanding capital stock of one of our franchisees, The Snyder Group Company, for approximately $23.7 million plus liabilities assumed of $20.0 million, thereby acquiring 14 restaurants and significantly changing our capital structure. See the financial statements of The Snyder Group Company and the related notes included elsewhere in this prospectus.
 
    
 
In addition, in May 2000, we sold 4,310,344 shares of our common stock to affiliates of Quad-C, a private equity firm, for $25.0 million. The proceeds were used to pay off debentures and promissory notes, as well as pay down bank debt and fund new restaurant construction.

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(2)
 
Net income in 1999 included a benefit for income taxes of $1.6 million and net income in 2000 included a benefit for income taxes of $12.6 million, in each case as a result of the reversal of previously recorded deferred tax asset valuation allowance. Due to our improved profitability, the deferred tax asset valuation allowance was reversed because it became more likely than not that the deferred tax asset would be realized in the future.
 
(3)
 
Company-owned restaurants become comparable in the first period following the first full fiscal year of operations. For example, the restaurants we acquired in May 2000 from The Snyder Group Company are included in comparable company-owned restaurants in 2002.
 
(4)
 
We define restaurant-level operating profit to be restaurant sales minus restaurant operating costs, excluding restaurant closures and impairment costs. It does not include general and administrative costs, depreciation and amortization, franchise development costs and pre-opening costs. Although restaurant-level operating profit is a measure commonly used in the restaurant industry to evaluate operating performance, it is not a measurement determined in accordance with generally accepted accounting principles and should not be considered in isolation or as an alternative to net income, cash flows generated by operations, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity. Restaurant-level operating profit as presented may not be comparable to other similarly titled measures of other companies. The following table sets forth our calculation of restaurant-level operating profit:
 
                   
First Quarter Ended

    
1999

  
2000

  
2001

  
2001

  
2002

    
(in thousands)
  
(unaudited)
Restaurant revenue
  
$
121,430
  
$
180,413
  
$
214,963
  
$
64,572
  
$
76,317
Cost of sales
  
 
30,159
  
 
43,945
  
 
50,914
  
 
15,952
  
 
17,897
Labor
  
 
43,504
  
 
64,566
  
 
74,854
  
 
22,639
  
 
27,428
Operating
  
 
19,429
  
 
27,960
  
 
33,195
  
 
10,317
  
 
11,412
Occupancy
  
 
7,998
  
 
11,519
  
 
14,785
  
 
4,167
  
 
5,282
    

  

  

  

  

Restaurant-level operating profit
  
$
20,340
  
$
32,423
  
$
41,215
  
$
11,497
  
$
14,298
    

  

  

  

  

 
(5)
 
EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is another measure commonly used to evaluate operating performance. EBITDA is not a measurement determined in accordance with generally accepted accounting principles and should not be considered in isolation or as an alternative to net income, cash flows generated by operations, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity. EBITDA as presented may not be comparable to other similarly titled measures of other companies. EBITDA margin is calculated as EBITDA divided by total revenues. The following table sets forth our calculation of EBITDA:
 
                   
First Quarter Ended

    
1999

  
2000

  
2001

  
2001

  
2002

    
(in thousands)
  
(unaudited)
Income from operations
  
$
7,145
  
$
8,805
  
$
18,740
  
$
5,127
  
$
5,993
Depreciation and amortization
  
 
5,394
  
 
8,065
  
 
10,491
  
 
3,152
  
 
3,599
    

  

  

  

  

EBITDA
  
$
12,539
  
$
16,870
  
$
29,231
  
$
8,279
  
$
9,592
    

  

  

  

  

 
(6)
 
As adjusted information gives effect to the application of the net proceeds from the sale of 4,000,000 shares of our common stock offered by us in this offering at an initial offering price of $15.00 per share, less the underwriting discount and estimated offering expenses payable by us, and the use of the proceeds from this offering to repay approximately $47.9 million of indebtedness under our term loan, including related fees, approximately $3.5 million of indebtedness under our revolving credit facility and approximately $2.1 million of indebtedness under one real estate and three equipment loans, including related fees. This information also reflects the non-cash charge to earnings of approximately $2.2 million from the write-off of deferred loan fees and the cash charge of approximately $1.9 million from pre-payment penalty fees related to the repayment of the indebtedness noted above.

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RISK FACTORS
 
An investment in our common stock involves a high degree of risk. You should carefully read and consider the risks described below before deciding to invest in our common stock. If any of the following risks actually occurs, our business, financial condition, results of operation or cash flows could be materially harmed. In any such case, the trading price of our common stock could decline, and you could lose all or part of your investment. When determining whether to buy our common stock, you should also refer to the other information in this prospectus, including our consolidated financial statements and the related notes.
 
Risks related to our business
 
Our growth strategy depends on opening new restaurants. Our ability to expand our restaurant base is influenced by factors beyond our control, which may slow restaurant development and expansion and impair our growth strategy.
 
We are pursuing an accelerated but disciplined growth strategy which, to be successful, will depend in large part on our ability and the ability of our franchisees to open new restaurants and to operate these restaurants on a profitable basis. We anticipate that our new restaurants will generally take several months to reach planned operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, the need to hire and train sufficient team members and other factors. We cannot guarantee that we or our franchisees will be able to achieve our expansion goals or that new restaurants will be operated profitably. Further, we cannot assure you that any restaurant we open will obtain operating results similar to those of our existing restaurants. The success of our planned expansion will depend upon numerous factors, many of which are beyond our control, including the following:
 
 
 
the hiring, training and retention of qualified operating personnel, especially managers;
 
 
 
reliance on the knowledge of our executives and franchisees to identify available and suitable restaurant sites;
 
 
 
competition for restaurant sites;
 
 
 
negotiation of favorable lease terms;
 
 
 
timely development of new restaurants, including the availability of construction materials and labor;
 
 
 
management of construction and development costs of new restaurants;
 
 
 
securing required governmental approvals and permits in a timely manner, or at all;
 
 
 
competition in our markets; and
 
 
 
general economic conditions.
 
Our success depends on our ability to locate and secure a sufficient number of suitable new restaurant sites.
 
One of our biggest challenges in meeting our growth objectives will be to locate and secure an adequate supply of suitable new restaurant sites. There can be no assurance that we will be able to find sufficient suitable locations, or suitable leases, for our planned expansion in any future period. We have experienced delays in opening some of our restaurants and may experience delays in the future. Delays or failures in opening new restaurants could materially adversely affect our planned growth.

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Our restaurant expansion strategy focuses primarily on further penetrating existing markets. This strategy could cause sales in some of our existing restaurants to decline.
 
Our areas of highest concentration are California, Colorado, Washington and Oregon. In accordance with our expansion strategy, we intend to open new restaurants primarily in our existing markets. Because we typically draw guests from a relatively small radius around each of our restaurants, the sales performance and guest counts for restaurants near the area in which a new restaurant opens may decline due to the opening of new restaurants.
 
Our expansion into new markets may present increased risks due to our unfamiliarity with the area.
 
Some of our new restaurants will be located in areas where we have little or no meaningful experience. Those markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets, which may cause our new restaurants to be less successful than restaurants in our existing markets. An additional risk in expansion into new markets is the lack of market awareness of the Red Robin brand. Restaurants opened in new markets typically open at lower average weekly sales volumes than do restaurants opened in existing markets, initially resulting in higher restaurant-level operating expense ratios than in existing markets. Sales at restaurants opened in new markets may take longer to reach average annual company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants.
 
Our expansion may strain our infrastructure and other resources, which could slow our restaurant development or cause other problems.
 
We face the risk that our existing systems and procedures, restaurant management systems, financial controls, information systems, management resources and human resources will be inadequate to support our planned expansion of company-owned and franchised restaurants. We may not be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on our infrastructure and other resources. If we fail to continue to improve our infrastructure or to manage other factors necessary for us to achieve our expansion objectives, our operating results could be materially negatively affected.
 
Our ability to raise capital in the future may be limited, which could adversely impact our business.
 
Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses or other events, including those described in this section, may cause us to need to seek additional debt or equity financing on an accelerated basis. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth and other plans as well as our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
 
If our franchisees cannot develop or finance new restaurants or build them on suitable sites or open them on schedule, our growth and success may be impeded.
 
Under our current form of area development agreement, franchisees must develop a predetermined number of restaurants in their area according to a schedule that lasts for the term of their development agreement. Franchisees may not have access to the financial or management resources that they need to open the restaurants required by their development schedules, or be able to find suitable sites on which to develop them. Franchisees may not be able to negotiate acceptable lease or purchase terms for the sites, obtain the necessary permits and government approvals or meet construction schedules. In the past, we have agreed to extend or modify development schedules for certain areas developers, and we may do so in the future. Any of these problems could slow our growth and reduce our franchise revenues.

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Additionally, our franchisees depend upon financing from banks and other financial institutions in order to construct and open new restaurants. Over the past several years, financing has been difficult for small operators to obtain. Should these conditions continue into the future, the lack of adequate availability of debt financing could adversely affect the number and rate of new restaurant openings by our franchisees and adversely affect our future franchise revenues.
 
Our franchisees could take actions that could harm our business.
 
Franchisees are independent contractors and are not our employees. We provide training and support to franchisees, but the quality of franchised restaurant operations may be diminished by any number of factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other restaurant personnel. If franchisees do not, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could significantly decline.
 
The acquisition of existing restaurants from our franchisees may have unanticipated consequences that could harm our business and financial condition.
 
We may seek to selectively acquire existing restaurants from our franchisees. To do so, we would need to identify suitable acquisition candidates, negotiate acceptable acquisition terms and obtain appropriate financing. Any acquisition that we pursue, whether or not successfully completed, may involve risks, including:
 
 
 
material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as it is integrated into our operations;
 
 
 
risks associated with entering into markets or conducting operations where we have no or limited prior experience; and
 
 
 
the diversion of management’s attention from other business concerns.
 
Future acquisitions of existing restaurants from our franchisees, which may be accomplished through a cash purchase transaction or the issuance of our equity securities, or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business and financial condition.
 
Our operations are susceptible to changes in food availability and costs which could adversely affect our operating results.
 
Our profitability depends in part on our ability to anticipate and react to changes in food costs. We rely on SYSCO Corporation, a national food distributor, as the primary supplier of our food. Any increase in distribution prices or failure to perform by SYSCO could cause our food costs to increase. There also could be a significant short-term disruption in our supply chain if SYSCO failed to meet our distribution requirements or our relationship was terminated at the end of the contract term on June 30, 2004 or earlier by SYSCO upon breach or material deterioration of our financial position. Further, various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability and seasonality may affect our food costs or cause a disruption in our supply chain. Chicken represented approximately 19.6% and beef represented approximately 10.0% of our food purchases in 2001. We enter into annual contracts with our beef and chicken suppliers. Our contracts for chicken are fixed price contracts. Our contracts for beef are generally based on current market prices plus a processing fee. Changes in the price or availability of chicken or beef could materially adversely affect our profitability. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, because we provide a “value-priced” product, we may not be able to pass along price increases to our guests.

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Our quarterly operating results may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, resulting in a decline in our stock price.
 
Our quarterly operating results may fluctuate significantly because of several factors, including:
 
 
 
the timing of new restaurant openings and related expenses;
 
 
 
restaurant operating costs and pre-opening costs for our newly-opened restaurants, which are often materially greater during the first several months of operation than thereafter;
 
 
 
labor availability and costs for hourly and management personnel;
 
 
 
profitability of our restaurants, especially in new markets;
 
 
 
franchise development costs;
 
 
 
increases and decreases in comparable restaurant sales;
 
 
 
impairment of long-lived assets, including goodwill, and any loss on restaurant closures;
 
 
 
general economic conditions;
 
 
 
changes in consumer preferences and competitive conditions; and
 
 
 
fluctuations in commodity prices.
 
Our business is also subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season of each fiscal year. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease.
 
A decline in visitors to any of the retail centers, big box shopping centers or entertainment centers near the locations of our restaurants could negatively affect our restaurant sales.
 
Our restaurants are primarily located near high activity areas such as retail centers, big box shopping centers and entertainment centers. We depend on high visitor rates at these centers to attract guests to our restaurants. If visitors to these centers decline due to economic conditions, changes in consumer preferences or shopping patterns, changes in discretionary consumer spending or otherwise, our restaurant sales could decline significantly and adversely affect our results of operations.
 
If we lose the services of any of our key management personnel, our business could suffer.
 
Our future success significantly depends on the continued services and performance of our key management personnel, particularly Mike Snyder, our chief executive officer and president; Jim McCloskey, our chief financial officer; Mike Woods, our senior vice president of franchise development; Bob Merullo, our senior vice president of restaurant operations; Todd Brighton, our vice president of development; and Eric Houseman, our vice president of restaurant operations. Our future performance will depend on our ability to motivate and retain these and other executive officers and key team members, particularly regional operations directors, restaurant general managers and kitchen managers. Competition for these employees is intense. The loss of the services of members of our senior management or key team members or the inability to attract additional qualified personnel as needed could materially harm our business.

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Approximately 83.3% of our company-owned restaurants are located in the Western United States and, as a result, we are sensitive to economic and other trends and developments in this region.
 
We currently operate a total of 75 company-owned restaurants in the Western United States. As a result, we are particularly susceptible to adverse trends and economic conditions in this region, including its labor market. In addition, given our geographic concentration, negative publicity regarding any of our restaurants in the Western United States could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, energy shortages or increases in energy prices, droughts or earthquakes or other natural disasters.
 
Our future success depends on our ability to protect our proprietary information.
 
Our business prospects will depend in part on our ability to develop favorable consumer recognition of the Red Robin name and logo. Although Red Robin®, America’s Gourmet Burgers & Spirits® and Mad Mixology® are federally registered trademarks with the United States Patent and Trademark Office and in Canada, our trademarks could be infringed in ways that leave us without redress, such as by imitation. In addition, we rely on trade secrets and proprietary know-how, and we employ various methods, to protect our concepts and recipes. However, such methods may not afford adequate protection and others could independently develop similar know-how or obtain access to our know-how, concepts and recipes. Moreover, we may face claim(s) of infringement that could interfere with our use of our proprietary know-how, concepts, recipes or trade secrets. Defending against such claim(s) may be costly and, if we are unsuccessful, we may be prevented from continuing to use such proprietary information in the future and/or be forced to pay damages. We do not maintain confidentiality and non-competition agreements with all of our executives, key personnel or suppliers. In the event competitors independently develop or otherwise obtain access to our know-how, concepts, recipes or trade secrets, the appeal of our restaurants could be reduced and our business could be harmed. We franchise our system to various franchisees. While we try to ensure that the quality of our brand and compliance with our operating standards, and the confidentiality thereof are maintained by all of our franchisees, we cannot assure that our franchisees will avoid actions that adversely affect the reputation of Red Robin or the value of our proprietary information.
Risks related to the food service industry
 
Changes in consumer preferences or discretionary consumer spending could negatively impact our results of operations.
 
Our restaurants feature burgers, salads, soups, appetizers, other entrees such as rice bowls and pasta, desserts and our signature Mad Mixology® alcoholic and non-alcoholic beverages in a family-friendly atmosphere. Our continued success depends, in part, upon the popularity of these foods and this style of casual dining. Shifts in consumer preferences away from this cuisine or dining style could materially adversely affect our future profitability. The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and eating and purchasing habits. While burger consumption in the United States has grown over the past 20 years, the demand may not continue to grow or taste trends may change. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well as other factors affecting the food service industry, including new market entrants and demographic changes. Also, our success depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could harm our results of operations.

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Health concerns relating to the consumption of beef or other food products could affect consumer preferences and could negatively impact our results of operations.
 
Like other restaurant chains, consumer preferences could be affected by health concerns about the consumption of beef, the key ingredient in many of our menu items, or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning e-coli, “mad cow” or “foot-and-mouth” disease, publication of government or industry findings concerning food products served by us, or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants. This negative publicity may adversely affect demand for our food and could result in a decrease in guest traffic to our restaurants. If we react to the negative publicity by changing our concept or our menu, we may lose guests who do not prefer the new concept or menu, and may not be able to attract a sufficient new guest base to produce the revenue needed to make our restaurants profitable. In addition, we may have different or additional competitors for our intended guests as a result of a concept change and may not be able to compete successfully against those competitors. A decrease in guest traffic to our restaurants as a result of these health concerns or negative publicity or as a result of a change in our menu or concept could materially harm our business.
 
Labor shortages could slow our growth or harm our business.
 
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified, high energy team members. Qualified individuals of the requisite caliber and number needed to fill these positions are in short supply in some areas. The inability to recruit and retain these individuals may delay the planned openings of new restaurants or result in high employee turnover in existing restaurants, which could harm our business. Additionally, competition for qualified team members could require us to pay higher wages to attract sufficient team members, which could result in higher labor costs. Most of our employees are paid in accordance with minimum wage regulations. Accordingly, any increase, whether state or federal, could have a material adverse impact on our business.
 
We are subject to extensive government laws and regulations that govern various aspects of our business. Our operations and our ability to expand and develop our restaurants may be adversely affected by these laws and regulations, which could cause our revenues to decline and adversely affect our growth strategy.
 
The restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food and alcoholic beverages. While at this time we have been able to obtain and maintain the necessary governmental licenses, permits and approvals, the failure to maintain these licenses, permits and approvals, including food and liquor licenses, could adversely affect our operating results. Difficulties or failure in obtaining the required licenses and approvals could delay or result in our decision to cancel the opening of new restaurants. Local authorities may suspend or deny renewal of our food and liquor licenses if they determine that our conduct does not meet applicable standards or if there are changes in regulations.
 
We are subject to “dram shop” statutes in some states. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. A judgment substantially in excess of our insurance coverage could harm our financial condition.
 
Various federal and state labor laws govern our relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates, workers’ compensation rates, citizenship requirements and sales taxes. Additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, increased tax reporting and tax payment requirements for employees who receive gratuities, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results.
 
The Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. Although our restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service to, or make reasonable accommodations for, disabled persons.

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We are also subject to federal regulation and state laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationship. Many state franchise laws impose restrictions on the franchise agreement, including limitations on non-competition provisions and the termination or non-renewal of a franchise. Some states require that franchise materials be registered before franchises can be offered or sold in the state.
 
A significant increase in litigation could have a material adverse effect on our results of operations, financial condition and business prospects.
 
As a participant in the restaurant industry, we are sometimes the subject of complaints or litigation from guests alleging illness, injury or other food quality, health or operational concerns. Adverse publicity resulting from these allegations could harm our restaurants, regardless of whether the allegations are valid or whether we are liable. In fact, we are subject to the same risks of adverse publicity resulting from these sorts of allegations even if the claim actually involves one of our franchisees. Further, employee claims against us based on, among other things, discrimination, harassment or wrongful termination may divert our financial and management resources that would otherwise be used to benefit the future performance of our operations.
 
Our success depends on our ability to compete effectively in the restaurant industry.
 
Competition in the restaurant industry is increasingly intense. We compete on the basis of the taste, quality, and price of food offered, guest service, ambiance and overall dining experience. We believe that our operating concept, attractive dining value and quality of food and guest service, enable us to differentiate ourselves from our competitors. Our competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators that have opened restaurants in various markets, to well-capitalized national restaurant companies. In addition, we compete with other restaurants and with retail establishments for real estate. Many of our competitors are well-established in the casual dining market segment and some of our competitors have substantially greater financial, marketing and other resources than do we.
 
Risks related to this offering
 
Our stock price may be volatile, and you may not be able to resell your shares at or above the initial offering price.
 
Prior to this offering, there has been no public market for shares of our common stock. An active trading market may not develop or be sustained following completion of this offering. The initial public offering price of the shares has been determined by negotiations between us and representatives of the underwriters. The price may bear no relationship to the price at which our common stock will trade upon completion of this offering. The stock market has experienced significant price and volume fluctuations. Fluctuations or decreases in the trading price of our common stock may adversely affect your ability to trade your shares.
 
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert management’s attention and resources that would otherwise be used to benefit the future performance of our operations.
 
Approximately 66.5% of our outstanding shares of common stock may be sold into the public market in the future, which could depress our stock price.
 
The 5,038,000 shares of common stock sold in this offering (and any shares sold upon exercise of the underwriters’ over-allotment option) will be freely tradable without restriction under the Securities Act of 1933, except for any shares held by our officers, directors and principal stockholders. After this offering, approximately an additional 614,927 shares of common stock will be freely tradable under Rule 144(k) under the Securities Act, unless any of such shares are purchased by one of our existing affiliates as that term is defined in Rule 144 under the Securities Act.

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After this offering, approximately 9,372,727 shares of our common stock which are outstanding and held by our affiliates will be subject to the volume and other limitations of Rule 144 or Rule 701 under the Securities Act. Our directors, officers and a significant number of our stockholders, who together will own a majority of the shares of our common stock outstanding after this offering, have entered or will enter into lock-up agreements prior to the consummation of this offering under which the holders have agreed or will agree not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of Banc of America Securities LLC. In its sole discretion and at any time without notice, Banc of America Securities LLC may release all or any portion of the shares subject to the lock-up agreements. All of the shares subject to lock-up agreements will become available for sale in the public market immediately following expiration of the 180 day lock-up period, subject (to the extent applicable) to the volume and other limitations of Rule 144 or Rule 701 under the Securities Act. After expiration of the lock-up period, some of our stockholders have the contractual right to require us to register 9,679,435 shares of common stock for future sale.
 
In addition, following this offering, we intend to file registration statements under the Securities Act registering an aggregate of 1,980,156 shares under our option plans and up to 300,000 shares under employee stock purchase plan. Shares included in such registration statements will be available for sale in the public market immediately after the 180-day lock-up period expires.
 
Sales of substantial amounts of common stock in the public market, or the perception that these sales may occur, could adversely affect the prevailing market price of our common stock and our ability to raise capital through a public offering of our equity securities. See “Shares Eligible for Future Sale” which describes the circumstances under which restricted shares or shares held by affiliates may be sold in the public market.
 
Some of our stockholders could exert significant influence or control over us, and may not make decisions that are in the best interests of all stockholders.
 
After this offering, Quad-C, through its affiliates, will own approximately 28.7% of our outstanding common stock, Skylark Co., Ltd., through its affiliates, will own approximately 15.7% of our outstanding common stock, Mike Snyder will own approximately 9.9% of our outstanding common stock, and our officers, directors and principal stockholders, i.e., stockholders holding more than 5.0% of our common stock, including Quad-C, Skylark and Mike Snyder, will together hold approximately 58.0% of our outstanding common stock. See “Principal and Selling Stockholders.” These stockholders, acting individually or together, could exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions and, acting together, could control any vote of our stockholders requiring approval of a majority of our outstanding common stock. This concentration of ownership may delay or prevent a change in control of our company, and make some transactions more difficult or impossible without the support of these stockholders. Also, the interests of these stockholders may not always coincide with our interests as a company or the interest of other stockholders. Accordingly, Quad-C, Skylark, Mike Snyder and these other stockholders could cause us to enter into transactions or agreements that you would not approve. Our certificate of incorporation and bylaws require a supermajority vote of our stockholders, i.e. 66 2/3%, only to remove a director or to amend our bylaws or specified provisions of our certificate of incorporation.
 
As a new investor, you will experience immediate and substantial dilution in net tangible book value.
 
Investors purchasing shares of our common stock in this offering will pay more for their shares than the amount paid by existing stockholders who acquired shares prior to this offering. Accordingly, if you purchase common stock in this offering, you will incur immediate dilution in pro forma net tangible book value of approximately $10.33 per share. If the holders of outstanding options or warrants exercise these options or warrants, you will incur further dilution. See “Dilution.”

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Provisions in Delaware law and our charter may prevent or delay a change of control, even if that change of control may be beneficial to our stockholders.
 
We are subject to the Delaware anti-takeover laws regulating corporate takeovers. These anti-takeover laws prevent Delaware corporations from engaging in business combinations with any stockholder, including all affiliates and associates of the stockholder, who owns 15.0% or more of the corporations’ outstanding voting stock, for three years following the date that the stockholder acquired 15.0% or more of the corporation’s voting stock unless specified conditions are met, as further described in “Description of Capital Stock.”
 
Prior to the consummation of this offering, we intend to amend and restate our certificate of incorporation and bylaws. Our amended and restated certificate of incorporation and bylaws will include a number of provisions that may deter or impede hostile takeovers or changes of control of management. These provisions will:
 
 
 
authorize our board of directors to establish one or more series of preferred stock, the terms of which can be determined by the board of directors at the time of issuance;
 
 
 
divide our board of directors into three classes of directors, with each class serving a staggered three-year term. As the classification of the board of directors generally increases the difficulty of replacing a majority of the directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may maintain the composition of the board of directors;
 
 
 
not provide for cumulative voting in the election of directors unless required by applicable law. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors;
 
 
 
provide that a director may be removed from our board of directors only for cause, and then only by a supermajority vote of the outstanding shares;
 
 
 
require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing;
 
 
 
state that special meetings of our stockholders may be called only by the chairman of the board of directors, our chief executive officer, by the board of directors after a resolution is adopted by a majority of the total number of authorized directors, or by the holders of not less than 10.0% of our outstanding voting stock;
 
 
 
provide that the chairman or other person presiding over any stockholder meeting may adjourn the meeting whether or not a quorum is present at the meeting;
 
 
 
establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting;
 
 
 
provide that certain provisions of our certificate of incorporation can be amended only by supermajority vote of the outstanding shares, and that our bylaws can be amended only by supermajority vote of the outstanding shares or our board of directors;
 
 
 
allow our directors, not our stockholders, to fill vacancies on our board of directors; and
 
 
 
provide that the authorized number of directors may be changed only by resolution of the board of directors.
 
Your ability to seek potential recoveries from Arthur Andersen LLP with respect to claims arising from its work on The Snyder Group Company financial statements may be significantly limited.
 
Investors’ ability to seek potential recoveries from Arthur Andersen LLP related to any claim such investors may assert as a result of the work performed by Arthur Andersen on The Snyder Group Company financial statements included in this prospectus may be significantly limited.

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FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology.
 
These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including those relating to:
 
 
Ÿ
 
our ability to achieve and manage our planned expansion;
 
 
Ÿ
 
our ability to raise capital in the future;
 
 
Ÿ
 
the ability of our franchisees to open and manage new restaurants;
 
 
Ÿ
 
our franchisees’ adherence to our practices, policies and procedures;
 
 
Ÿ
 
changes in the availability and costs of food;
 
 
Ÿ
 
potential fluctuation in our quarterly operating results due to seasonality and other factors;
 
 
Ÿ
 
the continued service of key management personnel;
 
 
Ÿ
 
the concentration of our restaurants in the Western United States;
 
 
Ÿ
 
our ability to protect our name and logo and other proprietary information;
 
 
Ÿ
 
changes in consumer preferences or consumer discretionary spending;
 
 
Ÿ
 
health concerns about our food products;
 
 
Ÿ
 
our ability to attract, motivate and retain qualified team members;
 
 
Ÿ
 
the impact of federal, state or local government regulations relating to our team members or the sale of food and alcoholic beverages;
 
 
Ÿ
 
the impact of litigation; and
 
 
Ÿ
 
the effect of competition in the restaurant industry.
 
Other risks, uncertainties and factors, including those discussed under “Risk Factors,” could cause our actual results to differ materially from those projected in any forward-looking statements we make.
 
We assume no obligation to publicly update or revise these forward-looking statements for any reason, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

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USE OF PROCEEDS
 
We estimate that we will receive net proceeds from the sale of 4,000,000 shares of common stock in this offering of $54.7 million, based on an assumed initial public offering price of $15.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares by the selling stockholders.
 
We intend to use the net proceeds of this offering as follows:
 
 
Ÿ
 
approximately $47.9 million to repay the outstanding amounts under our term loan with Finova Capital Corporation, including a prepayment penalty of 4.0%, which bears interest at 9.9% and has a maturity date of September 1, 2012.
 
 
Ÿ
 
approximately $3.5 million to repay the outstanding amounts under our revolving credit facility with U.S. Bank National Association, which bears interest at the London Interbank Offered Rate, or LIBOR, plus 3.0% and has a maturity date of March 31, 2003. We entered into this revolving credit facility for working capital and capital expenditure needs.
 
 
Ÿ
 
approximately $1.6 million to repay the outstanding amounts under one real estate loan with Captec Financial Group, including a prepayment penalty of 1.0%, which bears interest at 10.1% and has a maturity date of January 1, 2012.
 
 
Ÿ
 
approximately $0.5 million to repay the outstanding amounts under two equipment loans with Captec and one equipment loan with General Electric Capital Corporation, which bear interest at rates ranging from 9.6% to 11.6% and have maturity dates between April 1, 2003 and December 1, 2003.
 
We intend to use the balance of the net proceeds for general corporate purposes, which may include the opening of new restaurants or the acquisition of existing restaurants from our franchisees if we receive sufficient proceeds. We regularly consider acquisitions of existing restaurants from our franchisees in the ordinary course of business, although we currently have no agreements regarding any future acquisitions. Pending use for general corporate purposes, opening new restaurants or making acquisitions, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities. We cannot predict whether the proceeds invested will yield a favorable return. We have entered into a commitment letter with Wachovia Bank, N.A. to enter into a new revolving credit facility of up to $35.0 million contingent upon the consummation of this offering. Wachovia Bank, N.A. has committed $15.0 million to the new revolving credit facility and intends to use its reasonable best efforts to syndicate the remainder of the credit facility to other lenders. If the net proceeds from this offering are less than $54.7 million, we intend to borrow from our new revolving credit facility to fund the transactions listed above and for general corporate purposes, including opening new restaurants and the acquisition of existing restaurants from franchisees. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for additional information regarding our sources and uses of capital.

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DIVIDEND POLICY
 
We did not declare or pay any cash dividends on our common stock in 2000 or 2001. We currently anticipate that we will retain any future earnings for the operation and expansion of our business. Accordingly, we do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future.
 
The credit agreement relating to our new revolving credit facility will prohibit us from declaring or paying any dividends or making any other distributions on any shares of our capital stock, subject to specified exceptions.
 
Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

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CAPITALIZATION
 
The following table sets forth our cash, cash equivalents and capitalization as of April 21, 2002:
 
 
 
on an actual basis; and
 
 
 
on an as adjusted basis to give effect to the application of the net proceeds from the sale of 4,000,000 shares of our common stock offered by us in this offering at an offering price of $15.00 per share, less the underwriting discount and estimated offering expenses payable by us, and the use of proceeds from this offering to repay approximately $47.9 million of indebtedness under our term loan, including related fees, approximately $3.5 million of indebtedness under our revolving credit facility and approximately $2.1 million of indebtedness under one real estate and three equipment loans, including related fees. This information also reflects the non-cash charge to earnings of approximately $2.2 million from the write-off of deferred loan fees and the cash charge of approximately $1.9 million from pre-payment penalty fees related to the repayment of the indebtedness noted above.
 
You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
 
    
April 21, 2002

 
    
Actual

    
As
Adjusted

 
           
(unaudited)
 
    
(in thousands)
 
Cash and cash equivalents
  
$
6,547
 
  
$
10,695
 
    


  


Current portion of long-term debt(1)(2)
  
$
4,660
 
  
$
4,660
 
Long-term debt(1)(2)
  
 
74,083
 
  
 
25,462
 
Stockholders’ equity:
                 
Common stock, $.001 par value: 50,000,000 shares authorized, 10,090,485 shares issued and outstanding, actual; 50,000,000 shares authorized, 14,090,485 shares issued and outstanding, as adjusted(3)
  
 
10
 
  
 
14
 
Additional paid-in capital
  
 
53,745
 
  
 
108,391
 
Deferred compensation
  
 
(269
)
  
 
(269
)
Note receivable from stockholder/officer
  
 
(600
)
  
 
(600
)
Retained earnings (accumulated deficit)
  
 
(3,411
)
  
 
(7,460
)
    


  


Total stockholders’ equity
  
 
49,475
 
  
 
100,076
 
    


  


Total capitalization
  
$
128,218
 
  
$
130,198
 
    


  



(1)
 
We have entered into a commitment letter with Wachovia Bank, N.A. to enter into a new revolving credit facility of up to $35.0 million contingent upon the consummation of this offering. Wachovia Bank, N.A. has committed $15.0 million to the new revolving credit facility and intends to use its reasonable best efforts to syndicate the remainder of the credit facility to other lenders.
 
(2)
 
Long-term debt includes capital leases.
 
(3)
 
Excludes 1,443,086 shares of common stock issuable on the exercise of stock options outstanding as of April 21, 2002.

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Table of Contents
DILUTION
 
Our net tangible book value at April 21, 2002 was approximately $15.2 million. Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of April 21, 2002. Our pro forma net tangible book value as of April 21, 2002 would have been approximately $65.8 million, or approximately $4.67 per share, after giving effect to the sale of shares of common stock offered by us at an assumed initial public offering price of $15.00 and our receipt of the estimated net proceeds, after deducting estimated underwriting discounts and estimated offering expenses, and repayment of approximately $47.9 million of indebtedness under our term loan, including related fees, approximately $3.5 million of indebtedness under our revolving credit facility and approximately $2.1 million of indebtedness under one real estate and three equipment loans, including related fees. This information also reflects the non-cash charge to earnings of approximately $2.2 million from the write-off of deferred loan fees and the cash charge of approximately $1.9 million from pre-payment penalty fees related to the indebtedness noted above. This represents an immediate increase in net tangible book value of $3.16 per share to existing stockholders and an immediate dilution of $10.33 per share to new investors purchasing shares of common stock in this offering. If the initial public offering price is higher or lower, the dilution to investors will be greater or less. The following table illustrates this per share dilution.
 
Assumed initial public offering price per share
       
$
15.00
Net tangible book value per share as of April 21, 2002
  
$1.51
      
Increase in net tangible book value per share attributable to new investors
  
3.16
      
    
      
Pro forma net tangible book value per share after the offering
       
 
4.67
         

Dilution per share to new investors
       
$
10.33
         

 
The following table summarizes the difference between the existing stockholders and new stockholders with respect to the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid. The information is presented as of April 21, 2002 and is based on an assumed initial public offering price of $15.00 per share, before deducting the underwriting discount and commissions and our estimated offering expenses:
 
    
Shares Purchased

    
Total Consideration

      
Average Price Per Share

    
Number

  
Percent

    
Amount

  
Percent

      
Existing stockholders
  
10,090,485
  
71.6
%
  
$
55,425,757
  
48.0
%
    
$
5.49
New stockholders
  
4,000,000
  
28.4
 
  
 
60,000,000
  
52.0
 
    
 
15.00
    
  

  

  

        
Total
  
14,090,485
  
100.0
%
  
$
115,425,757
  
100.0
%
        
    
  

  

  

        
 
The foregoing discussion and tables are based upon the number of shares actually issued and outstanding on April 21, 2002 and exclude 2,410,862 shares of common stock reserved for issuance under our stock option plans, of which 1,443,086 shares were subject to options outstanding on April 21, 2002, at a weighted average exercise price of $5.82 per share, and 300,000 shares of common stock reserved for issuance under our employee stock purchase plan. The issuance of common stock in connection with these plans will result in further dilution to new investors.

20


Table of Contents
 
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
 
The following table contains selected consolidated financial and operating data. Statement of income and balance sheet data for each fiscal year is derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP, independent auditors. Statement of income and balance sheet data for each fiscal quarter is derived from our unaudited consolidated financial statements which, in the opinion of management, reflects all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States, the information for the periods. The operating results for any interim period are not necessarily indicative of results for a full year. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.
    
Fiscal Year Ended

    
First Quarter Ended

 
    
1997

    
1998

    
1999

    
2000(1)

    
2001

    
2001

    
2002

 
    
(in thousands, except per share data,
restaurant-related data and footnotes)
    
(unaudited)
 
Statement of Income Data:
                                                              
Revenue:
                                                              
Restaurant
  
$
108,604
 
  
$
110,953
 
  
$
121,430
 
  
$
180,413
 
  
$
214,963
 
  
$
64,572
 
  
$
76,317
 
Franchise royalties and fees
  
 
7,078
 
  
 
7,193
 
  
 
8,249
 
  
 
8,247
 
  
 
9,002
 
  
 
2,822
 
  
 
2,757
 
Rent revenue
  
 
36
 
  
 
69
 
  
 
333
 
  
 
510
 
  
 
520
 
  
 
120
 
  
 
127
 
    


  


  


  


  


  


  


Total revenues
  
 
115,718
 
  
 
118,215
 
  
 
130,012
 
  
 
189,170
 
  
 
224,485
 
  
 
67,514
 
  
 
79,201
 
Costs and expenses:
                                                              
Restaurant operating costs:
                                                              
Cost of sales
  
 
28,471
 
  
 
27,679
 
  
 
30,159
 
  
 
43,945
 
  
 
50,914
 
  
 
15,952
 
  
 
17,897
 
Labor
  
 
40,261
 
  
 
39,089
 
  
 
43,504
 
  
 
64,566
 
  
 
74,854
 
  
 
22,639
 
  
 
27,428
 
Operating
  
 
16,550
 
  
 
17,382
 
  
 
19,429
 
  
 
27,960
 
  
 
33,195
 
  
 
10,317
 
  
 
11,412
 
Occupancy
  
 
6,433
 
  
 
6,379
 
  
 
7,998
 
  
 
11,519
 
  
 
14,785
 
  
 
4,167
 
  
 
5,282
 
Restaurant closures and impairment
  
 
6,342
 
  
 
140
 
  
 
(330
)
  
 
1,302
 
  
 
36
 
  
 
—  
 
  
 
—  
 
Depreciation and amortization
  
 
7,135
 
  
 
5,008
 
  
 
5,394
 
  
 
8,065
 
  
 
10,491
 
  
 
3,152
 
  
 
3,599
 
General and administrative
  
 
10,974
 
  
 
13,578
 
  
 
13,434
 
  
 
17,116
 
  
 
16,845
 
  
 
4,545
 
  
 
5,712
 
Franchise development
  
 
870
 
  
 
1,982
 
  
 
2,508
 
  
 
3,386
 
  
 
3,704
 
  
 
1,610
 
  
 
1,362
 
Pre-opening costs
  
 
159
 
  
 
—  
 
  
 
771
 
  
 
2,506
 
  
 
921
 
  
 
5
 
  
 
517
 
    


  


  


  


  


  


  


Total costs and expenses
  
 
117,195
 
  
 
111,237
 
  
 
122,867
 
  
 
180,365
 
  
 
205,745
 
  
 
62,387
 
  
 
73,208
 
    


  


  


  


  


  


  


Income (loss) from operations
  
 
(1,477
)
  
 
6,978
 
  
 
7,145
 
  
 
8,805
 
  
 
18,740
 
  
 
5,127
 
  
 
5,993
 
Other (income) expense:
                                                              
Interest expense
  
 
4,785
 
  
 
4,460
 
  
 
4,156
 
  
 
6,482
 
  
 
7,850
 
  
 
2,500
 
  
 
2,217
 
Interest income
  
 
(127
)
  
 
(282
)
  
 
(186
)
  
 
(742
)
  
 
(746
)
  
 
(208
)
  
 
(100
)
Other expense
  
 
559
 
  
 
595
 
  
 
391
 
  
 
191
 
  
 
190
 
  
 
63
 
  
 
25
 
    


  


  


  


  


  


  


Total other expense
  
 
5,217
 
  
 
4,773
 
  
 
4,361
 
  
 
5,931
 
  
 
7,294
 
  
 
2,355
 
  
 
2,143
 
    


  


  


  


  


  


  


Income (loss) before income taxes
  
 
(6,694
)
  
 
2,205
 
  
 
2,784
 
  
 
2,874
 
  
 
11,446
 
  
 
2,772
 
  
 
3,850
 
(Provision) benefit for income taxes(2)
  
 
(1,899
)
  
 
33
 
  
 
1,596
 
  
 
12,557
 
  
 
(3,722
)
  
 
(901
)
  
 
(1,374
)
    


  


  


  


  


  


  


Net income (loss)(2)
  
$
(8,593
)
  
$
2,238
 
  
$
4,380
 
  
$
15,431
 
  
$
7,724
 
  
$
1,871
 
  
$
2,476
 
    


  


  


  


  


  


  


Net income (loss) per common share(2)
                                                              
Basic
  
$
(3.02
)
  
$
0.78
 
  
$
1.47
 
  
$
2.07
 
  
$
0.77
 
  
$
0.19
 
  
$
0.25
 
Diluted
  
$
(3.02
)
  
$
0.78
 
  
$
1.47
 
  
$
2.07
 
  
$
0.75
 
  
$
0.18
 
  
$
0.23
 
Shares used in computing net income per common share
                                                              
Basic
  
 
2,847
 
  
 
2,903
 
  
 
2,971
 
  
 
7,444
 
  
 
10,085
 
  
 
10,076
 
  
 
10,090
 
Diluted
  
 
2,847
 
  
 
2,903
 
  
 
2,971
 
  
 
7,444
 
  
 
10,236
 
  
 
10,170
 
  
 
10,650
 
Selected Operating Data:
                                                              
System-wide restaurants open at end of period
  
 
128
 
  
 
131
 
  
 
144
 
  
 
164
 
  
 
182
 
  
 
165
 
  
 
186
 
Company-owned restaurants open at end of period
  
 
46
 
  
 
44
 
  
 
46
 
  
 
73
 
  
 
77
 
  
 
72
 
  
 
88
 
Average annual comparable company-owned restaurant sales(3)
  
$
2,309
 
  
$
2,496
 
  
$
2,664
 
  
$
2,890
 
  
$
3,020
 
                 
Comparable company-owned restaurant sales increase(3)
  
 
9.2
%
  
 
4.9
%
  
 
5.8
%
  
 
6.9
%
  
 
2.0
%
  
 
2.6
%
  
 
0.4
%
Restaurant-level operating profit(4)
  
$
16,889
 
  
$
20,424
 
  
$
20,340
 
  
$
32,423
 
  
$
41,215
 
  
$
11,497
 
  
$
14,298
 
EBITDA(5)
  
 
5,658
 
  
 
11,986
 
  
 
12,539
 
  
 
16,870
 
  
 
29,231
 
  
 
8,279
 
  
 
9,592
 
EBITDA margin(5)
  
 
4.9
%
  
 
10.1
%
  
 
9.6
%
  
 
8.9
%
  
 
13.0
%
  
 
12.3
%
  
 
12.1
%
    
Fiscal Year

    
First Quarter

 
    
1997

    
1998

    
1999

    
2000

    
2001

    
2001

    
2002

 
                                       
(unaudited)
 
Balance Sheet Data:
                                                              
Cash and cash equivalents
  
$
3,414
 
  
$
5,645
 
  
$
5,176
 
  
$
8,317
 
  
$
18,992
 
  
$
14,083
 
  
$
6,547
 
Total assets(1)
  
 
52,555
 
  
 
55,338
 
  
 
70,706
 
  
 
141,184
 
  
 
154,441
 
  
 
148,759
 
  
 
154,188
 
Long-term debt, including current portion
  
 
58,418
 
  
 
57,509
 
  
 
66,120
 
  
 
78,413
 
  
 
80,087
 
  
 
82,330
 
  
 
78,743
 
Total stockholders’ equity (deficit)(1)
  
 
(22,248
)
  
 
(19,291
)
  
 
(14,861
)
  
 
39,773
 
  
 
46,978
 
  
 
41,401
 
  
 
49,475
 

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Table of Contents

(1)
 
In May 2000, we purchased all of the outstanding capital stock of one of our franchisees, The Snyder Group Company, for approximately $23.7 million plus liabilities assumed of $20.0 million, thereby acquiring 14 restaurants and significantly changing our capital structure. See the financial statements of The Snyder Group Company and the related notes included elsewhere in this prospectus.
 
    
 
In addition, in May 2000, we sold 4,310,344 shares of our common stock to affiliates of Quad-C, a private equity firm, for $25.0 million. The proceeds were used to pay off debentures and promissory notes, as well as pay down bank debt and fund new restaurant construction.
 
(2)
 
Net income in 1999 included a benefit for income taxes of $1.6 million and net income in 2000 included a benefit for income taxes of $12.6 million, in each case as a result of the reversal of previously recorded deferred tax asset valuation allowance. Due to our improved profitability, the deferred tax asset valuation allowance was reversed because it became more likely than not that the deferred tax asset would be realized in the future.
 
(3)
 
Company-owned restaurants become comparable in the first period following the first full fiscal year of operations. For example, the restaurants we acquired in May 2000 from The Snyder Group Company are included in comparable company-owned restaurants in 2002.
 
(4)
 
We define restaurant-level operating profit to be restaurant sales minus restaurant operating costs, excluding restaurant closures and impairment costs. It does not include general and administrative costs, depreciation and amortization, franchise development costs and pre-opening costs. Although restaurant-level operating profit is a measure commonly used in the restaurant industry to evaluate operating performance, it is not a measurement determined in accordance with generally accepted accounting principles and should not be considered in isolation or as an alternative to net income, cash flows generated by operations, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity. Restaurant-level operating profit as presented may not be comparable to other similarly titled measures of other companies. The following table sets forth our calculation of restaurant-level operating profit:
 
                             
First Quarter Ended

    
1997

  
1998

  
1999

  
2000

  
2001

  
2001

  
2002

    
(in thousands)
  
(unaudited)
Restaurant revenue
  
$
108,604
  
$
110,953
  
$
121,430
  
$
180,413
  
$
214,963
  
$
64,572
  
$
76,317
Cost of sales
  
 
28,471
  
 
27,679
  
 
30,159
  
 
43,945
  
 
50,914
  
 
15,952
  
 
17,897
Labor
  
 
40,261
  
 
39,089
  
 
43,504
  
 
64,566
  
 
74,854
  
 
22,639
  
 
27,428
Operating
  
 
16,550
  
 
17,382
  
 
19,429
  
 
27,960
  
 
33,195
  
 
10,317
  
 
11,412
Occupancy
  
 
6,433
  
 
6,379
  
 
7,998
  
 
11,519
  
 
14,785
  
 
4,167
  
 
5,282
    

  

  

  

  

  

  

Restaurant-level operating profit
  
$
16,889
  
$
20,424
  
$
20,340
  
$
32,423
  
$
41,215
  
$
11,497
  
$
14,298
    

  

  

  

  

  

  

 
(5)
 
EBITDA represents earnings before interest, taxes, depreciation and amortization. EBITDA is another measure commonly used to evaluate operating performance. EBITDA is not a measurement determined in accordance with generally accepted accounting principles and should not be considered in isolation or as an alternative to net income, cash flows generated by operations, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity. EBITDA as presented may not be comparable to other similarly titled measures of other companies. EBITDA margin is calculated as EBITDA divided by total revenues. The following table sets forth our calculation of EBITDA:
 
                          
First Quarter Ended

   
1997

   
1998

 
1999

 
2000

 
2001

  
2001

  
2002

   
(in thousands)
  
(unaudited)
Income (loss) from operations
 
($
1,477
)
 
$
6,978
 
$
7,145
 
$
8,805
 
$
18,740
  
$
5,127
  
$
5,993
Depreciation and amortization
 
 
7,135
 
 
 
5,008
 
 
5,394
 
 
8,065
 
 
10,491
  
 
3,152
  
 
3,599
   


 

 

 

 

  

  

EBITDA
 
$
5,658
 
 
$
11,986
 
$
12,539
 
$
16,870
 
$
29,231
  
$
8,279
  
$
9,592
   


 

 

 

 

  

  

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Table of Contents
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
We currently own and operate 90 casual dining restaurants under the name “Red Robin® America’s Gourmet Burgers & Spirits®” in 12 states and have 99 additional restaurants operating under franchise or license agreements in 19 states and Canada. During our more than 33 years of operating history, we believe we have developed strong brand awareness and demonstrated the appeal of our concept in a wide variety of geographic areas.
 
We opened our first restaurant in 1969 in Seattle, Washington. In 1985, Skylark Co., Ltd., a large publicly-traded restaurant company based in Japan, purchased a majority interest in our company. At that time, we had seven company-owned restaurants and 15 franchised restaurants.
 
During the 11-year period following Skylark’s investment, we expanded aggressively by opening or purchasing from franchisees 56 restaurants, but we were unable to establish a focused and consistent concept or profitable operating results at our restaurants. As a result, we experienced slower sales growth than our franchised restaurants. In an attempt to improve our operating results, we implemented several changes in management but were unable to find a successful management team. During this period, we also closed seven of these 56 restaurants.            
 
By 1995, average restaurant sales at company-owned restaurants were 22.6% below our United States franchisees’ average restaurant sales. Despite the problems we were experiencing, our leading franchisee at the time, The Snyder Group Company, led by Mike Snyder, continued to expand profitably by staying focused on our core menu of gourmet burgers and emphasizing superior guest service, dining experience and profitability.
 
In 1996, Skylark named Mike Snyder to the position of president, and granted him a minority ownership interest in our company. Under his leadership, we implemented a number of turnaround initiatives, including strengthening our gourmet burger concept, recruiting a new management team, upgrading management information systems, streamlining in-restaurant operations and improving guest service. We closed ten under performing restaurants between 1996 and March 1998. These closures resulted in costs and impairments of approximately $14.5 million in 1996 and $6.3 million in 1997, and enabled us to improve our infrastructure and to focus on successful locations.
 
In 1997 and 1998, we did not open any new restaurants. Instead, we continued to focus on operational improvements, the development of our service-oriented culture, and improving the profitability at our existing restaurants. During this time, our operating results improved from a loss before income taxes of $22.2 million in 1996 to income before incomes taxes of $2.2 million in 1998. In 1999, we opened four new restaurants, and our income before income taxes grew to $2.8 million.
 
In May 2000, we completed a recapitalization of our company. We acquired Mike Snyder’s 14-unit franchise company, The Snyder Group Company, in exchange for equity, cash and notes. In addition, Quad-C, a private equity firm whose principals have substantial experience in the restaurant industry, made an equity investment of $25.0 million in our company through its affiliates. As a result of these two transactions, Quad-C became our largest stockholder and Mike Snyder acquired a significant equity interest in our company.

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Table of Contents
 
In the last three years, we have instituted a disciplined growth plan and focused largely on further penetrating our existing markets. During 2000 and 2001, we opened 21 new company-owned restaurants. In 2002, we intend to relocate one restaurant and open approximately ten new company-owned restaurants, in addition to the acquisition of ten franchised restaurants completed in January and February.
 
In early 2001, we implemented a number of initiatives which were focused on improving our performance in each major cost category on our operating statement. The improvement in restaurant operating results, combined with these cost savings, improved EBITDA margins from 8.9% in 2000 to 13.0% in 2001.
 
Overall, as a result of the turnaround initiatives and the growth and cost-control strategies implemented by Mike Snyder beginning in 1996, we have increased average restaurant sales at our comparable company-owned restaurants from $2.1 million in 1995 to $3.0 million in 2001, and have expanded comparable restaurant-level operating profit margins from 15.8% in 1995 to 20.5% in 2001.
 
Critical accounting policies and estimates
 
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on various other factors that are believed to be reasonable.
 
Accounts significantly impacted by estimates and assumptions include, but are not limited to, franchise receivables, assets held for sale, fixed asset lives, goodwill, intangible assets, income taxes, self-insurance and worker’s compensation reserves, closed restaurant reserves, utilities, and contingencies and litigation.
 
We believe that the following represent our more critical accounting policies and estimates used in the preparation of our consolidated financial statements, although not inclusive.
 
Revenue recognition—franchise operations
 
We typically grant franchise rights to private operators for a term of 20 years, with the right to extend the term for an additional ten years if certain conditions are satisfied. We provide management expertise, training, pre-opening assistance and restaurant operating assistance in exchange for area development fees, franchise fees, license fees and royalties of 3.0% to 4.0% of the franchised restaurant’s adjusted sales. Franchise fee revenue from individual franchise sales is recognized when all material obligations of and initial services to be provided by us have been performed, generally upon the opening of the restaurant. Until earned, these fees are accounted for as deferred revenue, a liability. Area franchise fees are dependent upon the number of restaurants in the territory as are our obligations under the area franchise agreement. Consequently, as our obligations are met, area franchise fees are recognized proportionately with the opening of each new restaurant. Royalties are accrued as earned, and are calculated each period based on the reporting franchisee’s adjusted sales.
 
Valuation of long-lived assets
 
In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, management assesses for impairment both those assets for which management has committed to a plan of disposal and long-lived assets to be held and used in continuing operations whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. This assessment is performed on a restaurant-by-restaurant basis. We will recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such assets. The measurement for such an impairment loss is then based on the fair value of the asset as determined by discounted cash flows or appraisals, if available. As of December 30, 2001, we had not adopted the Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Effective in 2002, we will adopt Financial Accounting Standards No. 142 and Financial Accounting Standards No. 144. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Recent Accounting Developments.”

24


Table of Contents
 
Income taxes
 
We recognize deferred tax liabilities and assets for the future consequences of events that have been recognized in our consolidated financial statements or tax returns. In the event the future consequences of differences between financial reporting bases and tax bases of our assets and liabilities result in a deferred tax asset, an evaluation is made of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Measurement of the deferred items is based on enacted tax laws. Due to our improved profitability, in 1999 and 2000, we reversed a valuation allowance on deferred taxes due to management’s conclusion that it was more likely than not that we would realize a net operating loss carryforward to offset future taxes. As of December 31, 2000, we had no valuation allowance for deferred taxes.
 
Our accounting policies are more fully described in note 1 to our consolidated financial statements included elsewhere in this prospectus.
 
Financial definitions
 
Revenues.     Our revenues are comprised of restaurant sales, franchise royalties and fees and rent. Our restaurant sales are comprised almost entirely of food and beverage sales. In 2001, alcohol sales represented 9.5% of restaurant sales. Our franchise royalties and fees represented 4.0% of our total revenues in 2001 and consisted primarily of royalty income and initial franchise fees. Rent revenue is comprised of rents received from leasing properties to franchisees and others. In 2001, rent revenue accounted for 0.2% of our total revenues.
 
Cost of sales; labor; operating; and occupancy.     Cost of sales is composed of food and beverage expenses. The components of cost of sales are variable and increase with sales volume. Labor costs include direct hourly and management wages, bonuses, taxes and benefits for restaurant team members. Operating and occupancy costs include restaurant supplies, marketing costs, fixed rent, percentage rent, common area maintenance charges, utilities, real estate taxes, repairs and maintenance and other related costs. Operating and occupancy costs generally increase with sales volume but decline as a percentage of restaurant sales.
 
Depreciation and amortization.     Depreciation and amortization principally includes depreciation on capital expenditures for restaurants. Pre-opening costs, which are expensed as incurred, consist of the costs of hiring and training the initial work force, travel, the cost of food and beverages used in training, marketing costs and other direct costs related to the opening of a new restaurant.
 
General and administrative.     General and administrative costs include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include management, supervisory and staff salaries, bonuses and related employee benefits, travel, information systems, training, corporate rent, professional and consulting fees and marketing costs.
 
Franchise development.     Franchise development costs include corporate and administrative costs that support franchise operations, including menu development, site selection and prototype plans for new restaurants, marketing services and analysis, franchise team member training, equipment and food purchasing and franchise bad debts. These costs also include ongoing franchise site visits, meetings and conferences, financial studies and analysis and other operational assistance as necessary.
 
Comparable restaurant sales.     In calculating company-owned comparable restaurant sales, restaurants become comparable in the first period following the first full fiscal year of operations. As of May 19, 2002, we had 70 company-owned restaurants that met this criteria.

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Results of operations
 
Our operating results for 1999, 2000 and 2001 and for the first quarters of 2001 and 2002 are expressed as a percentage of total revenues below, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant sales:
 
    
Fiscal Year Ended

    
First Quarter Ended

 
    
1999

    
2000

    
2001

    
2001

    
2002

 
                         
(unaudited)
 
Revenue:
                                  
Restaurant
  
93.4
%
  
95.4
%
  
95.8
%
  
95.6
%
  
96.3
%
Franchise royalties and fees
  
6.3
 
  
4.3
 
  
4.0
 
  
4.2
 
  
3.5
 
Rent revenue
  
0.3
 
  
0.3
 
  
0.2
 
  
0.2
 
  
0.2
 
    

  

  

  

  

Total revenues
  
100.0
 
  
100.0
 
  
100.0
 
  
100.0
 
  
100.0
 
Costs and expenses:
                                  
Restaurant operating costs:
                                  
Cost of sales
  
24.8
 
  
24.4
 
  
23.7
 
  
24.7
 
  
23.5
 
Labor
  
35.8
 
  
35.8
 
  
34.8
 
  
35.0
 
  
35.9
 
Operating
  
16.0
 
  
15.5
 
  
15.4
 
  
16.0
 
  
15.0
 
Occupancy
  
6.6
 
  
6.4
 
  
6.9
 
  
6.5
 
  
6.9
 
Restaurant closures and impairment
  
(0.3
)
  
0.7
 
  
—  
 
  
—  
 
  
—  
 
    

  

  

  

  

Total restaurant operating costs
  
82.9
 
  
82.8
 
  
80.8
 
  
82.2
 
  
81.3
 
Depreciation and amortization
  
4.1
 
  
4.3
 
  
4.7
 
  
4.7
 
  
4.5
 
General and administrative
  
10.3
 
  
9.0
 
  
7.5
 
  
6.7
 
  
7.2
 
Franchise development
  
1.9
 
  
1.8
 
  
1.6
 
  
2.4
 
  
1.7
 
Pre-opening costs
  
0.6
 
  
1.3
 
  
0.4
 
  
—  
 
  
0.7
 
    

  

  

  

  

Income from operations
  
5.5
 
  
4.7
 
  
8.3
 
  
7.6
 
  
7.6
 
Other (income) expense:
                                  
Interest expense
  
3.2
 
  
3.4
 
  
3.5
 
  
3.7
 
  
2.8
 
Interest income
  
(0.1
)
  
(0.4
)
  
(0.3
)
  
(0.3
)
  
(0.1
)
Other expense
  
0.3
 
  
0.1
 
  
0.1
 
  
0.1
 
  
—  
 
    

  

  

  

  

Total other expense
  
3.4
 
  
3.1
 
  
3.2
 
  
3.5
 
  
2.7
 
    

  

  

  

  

Income before income taxes
  
2.1
 
  
1.5
 
  
5.1
 
  
4.1
 
  
4.9
 
(Provision) benefit for income taxes
  
1.2
 
  
6.6
 
  
(1.7
)
  
(1.3
)
  
(1.7
)
    

  

  

  

  

Net income
  
3.4
%
  
8.2
%
  
3.4
%
  
2.8
%
  
3.1
%
    

  

  

  

  

 
First quarter 2002 (16 weeks) compared to first quarter 2001 (16 weeks)
 
Total revenues.    Total revenues increased by $11.7 million, or 17.3%, to $79.2 million in the first quarter of 2002 from $67.5 million in the first quarter of 2001 due to an $11.7 million increase in restaurant sales. The increase in restaurant sales was due to $6.9 million in sales derived from ten restaurants acquired from two franchisees in the first quarter of 2002, $4.7 million in additional sales from a full quarter of operations for the six restaurants that opened in 2001, $978,000 of sales from new restaurants opened in the first quarter of 2002 and $241,000 from comparable restaurant sales increases of 0.4%. We believe that the economic downturn in the telecommunications and technology industries adversely affected sales in three of our markets, Seattle, Portland and Denver, which combined represented 47.5% of our comparable sales. Excluding these markets, comparable restaurant sales increased 2.8%. These increases in restaurant sales were offset by one restaurant closure in the first quarter of 2002 and two restaurant closures in the first quarter of 2001 that contributed $1.1 million more in revenue in the first quarter of 2001 than in the first quarter of 2002. The increase in comparable restaurant sales

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was driven by an increase in the average guest check of approximately 0.4% compared to the first quarter of 2001. Franchise royalties and fees and rent revenue did not significantly change in the first quarter of 2002 from the first quarter of 2001. Franchise revenues were unchanged because royalty revenue from new franchise openings was offset by our acquisition of franchise restaurants early in the year.
 
Cost of sales.    Cost of sales increased by $1.9 million, or 12.2%, to $17.9 million in the first quarter of 2002 from $16.0 million in the first quarter of 2001 due to more restaurants being operated during the first quarter of 2002. Cost of sales as a percentage of restaurant sales decreased to 23.5% in the first quarter of 2002 from 24.7% in the first quarter of 2001. This reduction in cost of sales as a percentage of restaurant sales was primarily a result of management initiatives to reduce the cost of food and beverage products, reduce waste in our restaurants and improve margins.
 
Labor.    Labor expenses increased by $4.8 million, or 21.2%, to $27.4 million in the first quarter of 2002 from $22.6 million in the first quarter of 2001 due to more restaurants being operated in the first quarter of 2002. Labor expenses as a percentage of restaurant sales increased to 35.9% in the first quarter of 2002 from 35.0% in the first quarter of 2001. This increase was due in part to minimum wage increases in the first quarter of 2002 in Washington and California and turnover and training of team members at the restaurants acquired in the first quarter of 2002.
 
Operating.    Operating expenses increased by $1.1 million, or 10.6%, to $11.4 million in the first quarter of 2002 from $10.3 million in the first quarter of 2001 due to more restaurants being operated in the first quarter of 2002. Operating expenses as a percentage of restaurant sales decreased to 15.0% in the first quarter of 2002 from 16.0% in the first quarter of 2001. Utility expenses were 2.5% of restaurant sales in the first quarter of 2002, 0.6% lower than in the first quarter of 2001. In 2001, utility expenses were higher all over the country, but especially in Southern California, where electricity costs were significantly higher during the first quarter of 2001. We were also able to lower service and maintenance costs 0.3% through managing repairs, maintenance and service contracts more closely. We also lowered supply costs.
 
Occupancy.    Occupancy expenses increased by $1.1 million, or 26.8%, to $5.3 million in the first quarter of 2002 from $4.2 million in the first quarter of 2001 due to more restaurants being operated in the first quarter of 2002. Occupancy expenses as a percentage of sales increased 0.4% to 6.9% in the first quarter of 2002 from 6.5% in the first quarter of 2001, primarily from higher occupancy expenses on new restaurants opened in 2002 and 2001 as well as the restaurants acquired in the first quarter 2002.
 
Restaurant closures and impairment.    There were no impairments in either the first quarter of 2002 or the first quarter of 2001.
 
Depreciation and amortization.    Depreciation and amortization increased $447,000, or 14.2%, to $3.6 million in the first quarter of 2002 from $3.2 million in the first quarter of 2001. The increase was primarily due to the additional depreciation on six new restaurants opened during 2001, 10 restaurants acquired in the first quarter of 2002 and two new restaurants opened in the first quarter of 2002. Depreciation and amortization expenses as a percentage of total revenues decreased 0.2% to 4.5% in the first quarter of 2002 from 4.7% in the first quarter of 2001. The decrease was primarily due to the change in accounting rules that resulted in ceasing amortization of goodwill at the beginning of 2002.
 
General and administrative.    General and administrative expenses increased by $1.2 million, or 25.7%, to $5.7 million in the first quarter of 2002 from $4.5 million in the first quarter of 2001. General and administrative expenses as a percentage of total revenues increased 0.5% to 7.2% in the first quarter of 2002 from 6.7% in the first quarter of 2001. These increases were primarily a result of a large marketing program in the first quarter of 2002, which included television and radio spots in many parts of the country. There was no related marketing program in 2001. The increase in marketing costs was 0.5% of sales.

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Franchise development.    Franchise development expenses decreased $248,000 to $1.4 million in the first quarter of 2002 from $1.6 million in the first quarter of 2001 and decreased 0.7% as a percentage of total revenues to 1.7% in the first quarter of 2002 from 2.4% in the first quarter of 2001. The decrease in franchise development expenses was primarily due to the write-off of receivables from one franchisee who filed for bankruptcy in the first quarter of 2001.
 
Pre-opening costs.    Pre-opening costs increased by $511,000 to $516,000 in the first quarter of 2002 from $5,000 in the first quarter of 2001. The increase was due in part to opening two new restaurants in the first quarter of 2002. In addition, because pre-opening costs are expensed as incurred, we had increased pre-opening expenses in the first quarter of 2002 relating to two additional restaurants opened early in the second quarter of 2002. We did not open any restaurants in the first quarter of 2001.
 
Interest expense.    Interest expense decreased by $283,000, or 11.3%, to $2.2 million in the first quarter of 2002 from $2.5 million in the first quarter of 2001. The decrease was due primarily to a reduction in the interest rate of our variable rate debt, which was an average interest rate of 5.3% in the first quarter of 2002 compared to 8.7% in the first quarter of 2001. In addition, we had a 1.2% reduction in average outstanding debt during the first quarter of 2002 compared to the first quarter of 2001.
 
Interest income.    Interest income decreased by $108,000 to $100,000 in the first quarter of 2002 from $208,000 in the first quarter of 2001. Interest income as a percentage of total revenues was 0.1% in the first quarter of 2002 and 0.3% in the first quarter of 2001. The decreases were directly related to the average cash balance, 38.9% lower in the first quarter of 2002 than in the first quarter of 2001. In addition, lower interest rates reduced our earnings on those balances.
 
Other expense.    Other expense, which principally includes holding costs associated with real estate held for sale, decreased $38,000, or 59.7%, to $25,000 in the first quarter of 2002 from $63,000 in the first quarter of 2001. The reduction was primarily related to the disposal of two properties during 2001, which represented nearly half the total real estate held for sale in the first quarter of 2001. Other expense as a percentage of total revenues was 0.0% in the first quarter of 2002 and 0.1% in the first quarter of 2001.
 
Income before income taxes.    Income before income taxes increased $1.1 million, or 38.9%, to $3.9 million in the first quarter of 2002 from $2.8 million in the first quarter of 2001. Income before income taxes as a percentage of total revenues was 4.9% in the first quarter of 2002 and 4.1% in the first quarter of 2001. The increases were due to increased sales and proportionately lower operating costs and the combination of general and administrative costs and franchise development cost.
 
Provision for income taxes.    The provision for income taxes increased $473,000, or 52.5%, to $1.4 million in the first quarter of 2002 from $901,000 in the first quarter of 2001. The provision for income taxes as a percentage of total revenues was 1.7% in the first quarter of 2002 and 1.3% in the first quarter of 2001. The increases were due primarily to a higher effective tax rate resulting from our increased earnings.
 
Net income.    Net income increased by $604,000, or 32.3%, to $2.5 million in the first quarter of 2002 from $1.9 million in the first quarter of 2001. Net income as a percentage of total revenues increased to 3.1% in the first quarter of 2002 from 2.8% in the first quarter of 2001.
 
2001 (52 Weeks) compared to 2000 (53 Weeks)
 
Total revenues.     Total revenues increased by $35.3 million, or 18.7%, to $224.5 million in 2001 from $189.2 million in 2000 due to a $34.6 million increase in restaurant sales and a $765,000 increase in franchise and other revenues. The increase in restaurant sales was due to $17.6 million in additional sales from a full year of operations for the 15 restaurants that opened in 2000, $15.7 million in restaurant sales from a full year of operations for the 13 remaining restaurants we acquired from The Snyder Group Company in 2000 and operated

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all of 2001, $6.7 million in sales derived from the six restaurants opened in 2001 and $2.5 million from comparable company-owned restaurant sales increases of 2.0%. This increase in restaurant sales was offset by two restaurant closures in 2001 and two restaurant closures in 2000 that contributed an additional $3.7 million more in revenue in 2000 than in 2001. The increase in restaurant sales was also offset by the impact of one additional week of sales in 2000 that contributed $4.3 million of revenue in 2000. The increase in comparable company-owned restaurant sales was driven primarily by an increase in the average guest check of approximately 2.3% compared to 2000, which was partially offset by a 0.3% decrease in guest counts. Franchise royalties and fees growth was due to 16 new franchise restaurants that opened in 2001 and a full year of operations for the ten franchise restaurants that opened in 2000. Rent revenue did not significantly change in 2001 from 2000.
 
Cost of sales.    Cost of sales increased by $7.0 million, or 15.9%, to $50.9 million in 2001 from $43.9 million in 2000 due primarily to more restaurants being operated in 2001. Cost of sales as a percentage of restaurant sales decreased to 23.7% in 2001 from 24.4% in 2000. This reduction in cost of sales as a percentage of restaurant sales was primarily a result of management initiatives to reduce the cost of food and beverage products and improve margins. The reduction of food and beverage costs was achieved by lowering product cost through favorable price changes, entering into more favorable long-term contracts and decreasing waste in the restaurants.
 
Labor.    Labor expenses increased by $10.3 million, or 15.9%, to $74.9 million in 2001 from $64.6 million in 2000 due primarily to more restaurants being operated in 2001. Labor expenses as a percentage of restaurant sales decreased to 34.8% in 2001 from 35.8% in 2000. The decrease in labor as a percentage of restaurant sales was primarily due to management focus and the use of new tools to reduce excessive staffing levels, particularly at the new restaurants opened in 2000 and 2001. This reduction was achieved despite minimum wage increases in 2001 in Washington and California that increased our average hourly wage.
 
Operating.    Operating expenses increased by $5.2 million, or 18.7%, to $33.2 million in 2001 from $28.0 million in 2000 due primarily to more restaurants being operated in 2001. Operating expenses as a percentage of restaurant sales decreased to 15.4% in 2001 from 15.5% in 2000. Utility expenses were 3.1% of restaurant sales in 2001, 0.8% higher than 2000. Utility expenses were higher all over the country, but especially in Southern California, where electricity costs were significantly higher during certain periods in 2001 compared to 2000. To offset these uncontrollable increases, we were able to lower service and maintenance costs 0.5% through managing repairs, maintenance and service contracts more closely. We also lowered supply costs.
 
Occupancy.    Occupancy expenses increased by $3.3 million, or 28.4%, to $14.8 million in 2001 from $11.5 in 2000 due primarily to more restaurants being operated in 2001. Occupancy expenses as a percentage of sales increased to 6.9% in 2001 from 6.4% in 2000, primarily from higher occupancy expenses on new restaurants opened in 2001.
 
Restaurant closures and impairment.    Loss on restaurant closures and impairment decreased by $1.3 million to $36,000 in 2001 from $1.3 million in 2000. The loss in 2000 was due to the write down of one under performing restaurant. The loss in 2001 represented residual write down of value related to this restaurant.
 
Depreciation and amortization.    Depreciation and amortization increased $2.4 million, or 30.1%, to $10.5 million in 2001 from $8.1 million in 2000. The increase was primarily due to the additional depreciation on 15 new restaurants opened during 2000, additional depreciation on 13 restaurants acquired in 2000 and operated for a full year in 2001 and six new restaurants opened in 2001.
 
General and administrative.    General and administrative expenses decreased by $271,000, or 1.6%, to $16.8 million in 2001 from $17.1 million in 2000. We had lower general and administrative expenses in 2001 due to a reduction in the number of managers in training from 2000. General and administrative expenses as a percentage of total revenues decreased to 7.5% in 2001 from 9.0% in 2000. This decrease was primarily a result of increasing the number of our restaurants without proportionately increasing general and administrative costs or administrative personnel.

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Franchise development.    Franchise development expenses increased $318,000 to $3.7 million in 2001 from $3.4 million in 2000 but decreased as a percentage of total revenues to 1.6% in 2001 from 1.8% in 2000. The increase in franchise development expenses was due to franchisees opening 16 new restaurants in 2001 compared to opening ten restaurants in 2000.
 
Pre-opening costs.    Pre-opening costs decreased by $1.6 million to $921,000 in 2001 from $2.5 million in 2000. The decrease was due to opening six new restaurants in 2001 compared to opening 15 restaurants in 2000. Pre-opening costs per restaurant decreased to $154,000 in 2001 from $167,000 in 2000. This decrease was primarily due to opening restaurants in established markets, thereby incurring lower travel costs for trainers.
 
Interest expense.    Interest expense increased by $1.4 million, or 21.1%, to $7.9 million in 2001 from $6.5 million in 2000. The increase was primarily a result of new debt issued to GE Capital Corporation in 2001 for restaurants built in both 2001 and 2000, as well as higher interest rates under our credit facility with Finova Capital Corporation beginning in September 2000.
 
Interest income.    Interest income increased by $4,000 to $746,000 in 2001 from $742,000 in 2000. Interest income as a percentage of total revenues was 0.3% in 2001 and 0.4% in 2000.
 
Other expense.    Other expense, which principally includes holding costs associated with real estate held for sale, did not significantly change in 2001 from 2000. Other expense as a percentage of total revenues was 0.1% in both 2001 and 2000.
 
Income before income taxes.    Income before income taxes increased $8.6 million, or 298.3%, to $11.4 million in 2001 from $2.9 million in 2000 due to increased sales and proportionately lower operating and general and administrative costs.
 
(Provision) benefit for income taxes.    Income tax expense in fiscal year 2001 was 32.5% of income before taxes. In 2000, we realized a significant tax benefit due to the reversal of $13.1 million of valuation allowances previously provided against deferred tax assets. These valuation allowances were recorded in prior years when we were not profitable. Upon returning to profitability, we reversed these valuation allowances. This resulted in a tax benefit of $12.6 million in 2000 compared to a tax expense of $3.7 million in 2001.
 
Net income.    Net income decreased by $7.7 million, or 50.0%, to $7.7 million in 2001 from $15.4 million in 2000. Net income as a percentage of total revenues decreased to 3.4% in 2001 from 8.2% in 2000. The decrease was due primarily to the income tax benefit of $12.6 million in 2000 and the income tax expense of $3.7 million in 2001. This tax effect was offset by an increase in income before income taxes of $8.6 million.
 
2000 (53 Weeks) compared to 1999 (52 Weeks)
 
Total revenues.    Total revenues increased by $59.2 million, or 45.5%, to $189.2 million in 2000 from $130.0 million in 1999. The increase was due almost entirely to the increase in restaurant sales of $59.0 million. The increase in restaurant sales was due to $27.7 million in additional restaurant sales from the 14 restaurants we acquired from The Snyder Group Company in 2000, $16.5 million in sales from 15 restaurants that opened in 2000, $4.3 million from the impact of an additional operating week in 2000, $5.7 million of additional sales from four restaurants opened in 1999 and $7.5 million from comparable company-owned restaurant sales increases of 6.9%. This increase in restaurant revenue was offset by two restaurant closures in 2000 and two restaurant closures in 1999 that contributed $2.7 million more in 1999 than in 2000. The increase in comparable company-owned restaurant sales was driven by an increase in guest counts of approximately 4.8% and an increase in the average guest check of approximately 2.1% compared to 1999. Franchise royalties and fees were unchanged in 2000 from 1999. Rent revenue increased $177,000 to $510,000 in 2000 from $333,000 in 1999. We entered into two new leases of properties to franchisees in 1999. Those leases were in effect for all of 2000, but only seven months of 1999, which accounted for the increase.

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Cost of sales.    Cost of sales increased by $13.8 million, or 45.7%, to $43.9 million in 2000 from $30.2 million in 1999 due primarily to more restaurants being operated in 2000. Cost of sales as a percentage of restaurant sales decreased to 24.4% in 2000 from 24.8% in 1999. This reduction was primarily a result of management initiatives to reduce the cost of food and beverage products and improve margins.
 
Labor.    Labor expenses increased by $21.1 million, or 48.4%, to $64.6 million in 2000 from $43.5 million in 1999 due primarily to more restaurants being operated in 2000. Labor expenses as a percentage of restaurant sales was unchanged at 35.8% in 2000 and 1999. Labor remained unchanged as a percentage of restaurant sales despite large increases in the minimum wage in Washington and Oregon. We made improvements in managing labor costs, which offset the minimum wage increase.
 
Operating.    Operating expenses increased by $8.5 million, or 43.9%, to $28.0 million in 2000 from $19.4 million in 1999 due primarily to more restaurants being operated in 2000. Operating expenses as a percentage of restaurant sales decreased to 15.5% in 2000 from 16.0% in 1999. The decrease was due primarily to better control of services and maintenance costs at the restaurants.
 
Occupancy.    Occupancy expenses increased by $3.5 million, or 44.0%, to $11.5 million in 2000 from $8.0 million in 1999 due primarily to more restaurants being operated in 2000. Occupancy expenses as a percentage of restaurant sales decreased to 6.4% in 2000 from 6.6% in 1999. Occupancy expenses were slightly lower as a percentage of restaurant sales due primarily to additional sales from the extra week in 2000, with no related increase in base rent.
 
Restaurant closures and impairment.    Loss on restaurant closures and impairments increased by $1.6 million to $1.3 million in 2000 from a gain of $330,000 in 1999. The increase was due to the write down of one under performing restaurant in 2000, while we had a change in the estimate of restaurant closure costs in 1999.
 
Depreciation and amortization.    Depreciation and amortization increased $2.7 million, or 49.5%, to $8.1 million in 2000 from $5.4 million in 1999. The increase was due to the depreciation on 15 new restaurants opened during 2000, the depreciation on the 14 restaurants acquired in 2000, and the additional depreciation on the four new restaurants opened in 1999 and operated for a full year in 2000.
 
General and administrative.    General and administrative expenses increased by $3.7 million, or 27.4%, to $17.1 million in 2000 from $13.4 million in 1999. This increase was due to costs incurred to support 15 restaurants opened in 2000 and the acquisition of 14 restaurants in 2000. General and administrative expenses as a percentage of total revenues decreased to 9.0% in 2000 from 10.3% in 1999. This decrease was primarily a result of increasing the number of our restaurants without proportionately increasing general and administrative costs or administrative personnel.
 
Franchise development.    Franchise development expenses increased $878,000 to $3.4 million in 2000 from $2.5 million in 1999, but decreased as a percentage of total revenues to 1.8% in 2000 from 1.9% in 1999. The increase in franchise development expenses was partially due to adding team members and designating selected managers on a full time basis to assist our franchisees in improving their results. In 2000, we also wrote off almost $600,000 more of bad debt expense of royalties and rent than in 1999 due to one franchisee, who became insolvent.
 
Pre-opening costs.    Pre-opening costs increased by $1.7 million to $2.5 million in 2000 from $771,000 in 1999. The increase was due to opening 15 new restaurants in 2000 compared to opening four restaurants in 1999. Pre-opening costs per restaurant opening decreased to $167,000 in 2000 from $192,500 in 1999. In 1999, we opened our first new restaurant since 1996. In 2000, we implemented cost controlling efforts based on our experience in 1999.
 
Interest expense.    Interest expense increased by $2.3 million, or 56.0%, to $6.5 million in 2000 from $4.2 million in 1999. The increase was primarily a result of new debt issued in 2000 for 15 new restaurants built, and a full year of interest on debt issued to build four new restaurants in 1999.

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Interest income.    Interest income increased by $556,000 in 2000 to $742,000 of income in 2000 from $186,000 in 1999. Interest income as a percentage of total revenues was 0.4% in 2000 and 0.1% in 1999. The increase in income was due to an increase in interest income of $556,000 due to earnings from the cash infused by Quad-C’s equity investment through its affiliates.
 
Other expense.    Other expense, which principally includes holding costs associated with real estate held for sale, decreased by $200,000 in 2000 to $191,000 from $391,000 in 1999. Other expense as a percentage of total revenues decreased to 0.1% in 2000 from 0.3% in 1999.
 
Income before income taxes.    Income before income taxes increased $90,000, or 3.2%, to $2.9 million in 2000 from $2.8 million in 1999. Increased restaurant sales and proportionately lower operating and general and administrative expenses in 2000 were offset by higher pre-opening costs from more new restaurant openings than in 1999.
 
(Provision) benefit for income taxes.    We recognized a benefit for income tax of $12.6 million in 2000 and $1.6 million in 1999, despite having earned income before income taxes. These benefits differed from the amount of income tax expense that would be expected by applying statutory tax rates because of the reversal of previously recorded valuation allowances related to our deferred income tax assets. These valuation allowances were recorded in prior years when we were not profitable. Upon returning to profitability, we reversed these valuation allowances. The reversals totalled $13.1 million in 2000 and $2.3 million in 1999.
 
Net income.    Net income increased by $11.1 million, or 252.3%, to $15.4 million in 2000 from $4.4 million in 1999. Net income as a percentage of total revenues increased to 8.2% in 2000 from 3.4% in 1999. The increase was primarily due to the increased income tax benefit received in 2000 as a result of the reduction in the previously provided deferred income tax asset valuation allowance.
 
Potential fluctuations in quarterly results and seasonality
 
Our quarterly operating results may fluctuate significantly as a result of a variety of factors, including:
 
 
Ÿ
 
the timing of new restaurant openings and related expenses;
 
 
Ÿ
 
restaurant operating costs and pre-opening costs for our newly-opened restaurants, which are often materially greater during the first several months of operation than thereafter;
 
 
Ÿ
 
labor availability and costs for hourly and management personnel;
 
 
Ÿ
 
profitability of our restaurants, especially in new markets;
 
 
Ÿ
 
franchise development costs;
 
 
Ÿ
 
increases and decreases in comparable restaurant sales;
 
 
Ÿ
 
impairment of long-lived assets, including goodwill, and any loss on restaurant closures;
 
 
Ÿ
 
general economic conditions;
 
 
Ÿ
 
changes in consumer preferences and competitive conditions; and
 
 
Ÿ
 
fluctuations in commodity prices.
 
Our business is also subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease.

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Liquidity and capital resources
 
Our primary liquidity and capital requirements have been for new restaurant construction, working capital and general corporate needs. Prior to May 2000, our main sources of liquidity and capital were cash flows from operations and borrowings under three lines of credit with Shinsei Bank, Ltd., Dai-Ichi Kangyo Bank, and Fiji Bank, Ltd. In May 2000, Quad-C, through its affiliates, made a $25.0 million equity investment in our company, which we used to pay down part of the lines of credit. At that same time, we issued $9.2 million in debentures and approximately $1.8 million in promissory notes for the purchase of The Snyder Group Company.
 
In September 2000, we entered into a $50.0 million term loan with Finova Capital Corporation that allowed us to retire the remaining balances of the three revolving lines of credit described above and to retire the debentures and promissory notes issued in conjunction with our acquisition of The Snyder Group Company. The Finova Capital term loan bears interest at a fixed rate of 9.9% and is paid in equal monthly installments with the final payment due September 1, 2012. As of December 30, 2001, we had $47.3 million outstanding and as of April 21, 2002, we had $46.5 million outstanding with Finova Capital. The term loan requires that we maintain a minimum debt service coverage ratio, a minimum fixed charge coverage ratio and a maximum leverage ratio. The Finova Capital term loan also contains covenants that, subject to specified exceptions, restrict our ability to incur additional debt, incur liens, engage in mergers or acquisitions, incur contingent liabilities, make dividends or distributions, pay indebtedness for borrowed money, make investments or loans and sell assets, develop new restaurants, change facility sites, sell or transfer assets, amend specified agreements, acquire additional properties, issue capital stock and engage in transactions with affiliates. As of the date of this prospectus, we are in compliance with all financial ratios and covenants. The Finova Capital term loan is secured by a first security priority in substantially all of our assets and a pledge of the common stock of Red Robin International, Inc. We intend to use approximately $47.9 million of the proceeds of this offering to repay the outstanding amounts under this term loan, including a 4.0% pre-payment penalty.
 
Between December 2000 and April 2000, we entered into real estate and equipment loans with General Electric Capital Corporation. As of December 30, 2001, we had $9.9 million outstanding and as of April 21, 2002, we had $9.6 million outstanding under the real estate and equipment loans with GE Capital. These loans bear interest at the 30-day commercial paper rate, plus 3.5% and mature between May 1, 2006 and April 1, 2016 and are secured by buildings, equipment and improvements on ten properties. In addition, from time to time, we have entered into real estate and equipment loans with various parties, including Captec Financial Group, with interest rates ranging from 2.1% to 13.4% and having varying maturity dates. As of December 30, 2001, we had $22.9 million outstanding and as of April 21, 2002, we had $22.3 million outstanding under these real estate and equipment loans with various parties, including Captec. The GE Capital loans, together with certain of our other loans, require that we maintain a maximum debt to net worth ratio, a minimum debt coverage ratio, a minimum EBITDA ratio and a maximum funded indebtedness ratio. As of the date of this prospectus, we are in compliance with all of these financial ratios. We intend to use approximately $2.1 million of the proceeds of this offering to repay the outstanding amounts under one real estate loan with Captec, two equipment loans with Captec and one equipment loan with GE Capital, including related fees.
 
In April 2002, we entered into a credit agreement with U.S. Bank National Association for a revolving credit facility of up to $10.0 million to fund short-term capital needs for the construction and acquisition of new restaurants and for general corporate purposes, including working capital. Amounts up to the maximum may be borrowed and repaid through March 31, 2003, when all outstanding principal will be due. Loans outstanding under the U.S. Bank credit agreement bear interest at LIBOR plus 3.0%, payable monthly, in arrears. As of April 21, 2002, we had not made any borrowings under the U.S. Bank revolving credit facility. As of May 19, 2002, we had $3.5 million of indebtedness outstanding under this credit facility. Within 30 days following the consummation of this offering, we are required to reduce the outstanding balance on this loan to zero for a period of 60 days. Collateral for the U.S. Bank credit agreement is a first lien on personal tangible and intangible property at 14 of our restaurant sites, including a fee interest in three properties to be developed in 2002. If we do not reduce the outstanding balance on this loan to zero by June 30, 2002, we are required to provide U.S. Bank

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with leasehold mortgages, if requested. The U.S. Bank credit agreement requires that we maintain a maximum cash flow leverage ratio and a minimum fixed charge coverage ratio as well as a minimum tangible net worth requirement and a liquidity requirement. This credit agreement also contains covenants that, subject to specified exceptions, restrict our ability to incur debt, create various liens, engage in mergers or acquisitions, sell assets, and enter into non-subordinated debt. As of the date of this prospectus, we are in compliance with all of these financial ratios and covenants. We intend to use approximately $3.5 million of the proceeds of this offering to repay the outstanding amounts under this revolving credit facility and to terminate this facility upon repayment.
 
In June 2002, we entered into a commitment letter with Wachovia Bank, N.A. to enter into a new revolving credit facility of up to $35.0 million, contingent upon the consummation of this offering, to fund the construction and acquisition of new restaurants and for general corporate purposes, including working capital. Wachovia Bank, N.A. has committed $15.0 million to the new revolving credit facility and intends to use its reasonable best efforts to syndicate the remainder of the facility to other lenders. At our option, loans outstanding under this new revolving credit facility will bear interest at (i) Wachovia’s base rate in effect from time to time plus the applicable base rate margin in effect at such time, or (ii) LIBOR plus the applicable LIBOR margin in effect at such time. The applicable margins will be determined on the basis of a specified leverage ratio. Interest on base rate loans will be payable quarterly in arrears. Interest on LIBOR loans will be payable at the end of each applicable interest period or at three-month intervals, if earlier. This facility will be guaranteed by us and each of our subsidiaries and secured by a first priority pledge of all of the outstanding capital stock of our subsidiaries and by a first priority lien on all or substantially all of our tangible and intangible assets. The credit agreement will require that we comply with a maximum level of capital expenditures restriction and that we maintain a maximum leverage ratio, to be initially set at 2.0 to 1.0, as well as a minimum fixed charge coverage ratio, to be initially set at 1.15 to 1.0, and a minimum EBITDA requirement, to be initially set at $29.0 million and 90.0% of the prior twelve month period. The facility will require mandatory repayment from the proceeds of non-ordinary course asset sales which are not reinvested in the business and insurance proceeds and the issuance of specified debt. The credit agreement will also contain covenants that, subject to specified exceptions, restrict our ability to engage in mergers, acquisitions, joint ventures or sale-leaseback transactions, sell assets, incur indebtedness, make investments, create liens, pay dividends with respect to our capital stock and such other additional negative covenants as may be deemed reasonably necessary by Wachovia. The credit documentation will also contain customary borrowing conditions.
 
For the first quarter of 2002, net cash flows from operating activities were $5.8 million compared to $5.0 million in the first quarter of 2001, or an increase of $0.8 million. This increase was primarily due to higher net income. Net cash provided by operating activities was $25.5 million in 2001 and $8.1 million in 2000. The approximate $17.4 million increase from 2000 to 2001 was primarily a result of improved restaurant operating profits obtained while holding corporate overhead costs steady. Furthermore, we experienced a reduction in accounts and income taxes receivable, an increase in trade payables and accrued liabilities, and lower non-cash adjustments to net income in 2001 that also led to increased cash flows in 2001.
 
In the first quarter of 2002, we used $17.0 million of net cash for investing activities compared to $3.3 million in the first quarter of 2001. During the first quarter of 2002, we spent $10.1 million for the acquisition of Western Franchise Development, Inc. and the acquisition of the assets of three restaurants from Le Carnassier LLC, and $6.8 million for new restaurant construction, remodels and capital maintenance, while in the first quarter of 2001, we used approximately $3.4 million for new restaurant construction, remodels and capital maintenance. Net cash used by investing activities was $16.4 million in 2001 and $20.9 million in 2000, and primarily related to capital expenditures for new restaurant openings, remodels of existing restaurants and the acquisition of The Snyder Group Company. In 2001, we opened six new restaurants for a total cost of $9.0 million, spent approximately $4.5 million on remodels and capital maintenance, paid $1.6 million for new 2000 restaurant construction and spent $3.7 million on restaurants that will open in 2002. In 2000, we opened 15 new restaurants at a cost of approximately $16.0 million and spent approximately $4.0 million on remodels and capital maintenance. We also paid $12.5 million for the purchase of The Snyder Group Company in 2000. Throughout the remainder of 2002, we expect to spend approximately $13.0 to $14.0 million for new restaurants and approximately $3.0 to $4.0 million for restaurant remodels and capital maintenance.

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Net cash used by financing activities was $1.3 million in the first quarter of 2002, primarily for payments on long-term debt. Net cash provided by financing activities was $4.0 million in the first quarter of 2001, from borrowings of $5.4 million, offset by $1.4 million of debt repayments. Net cash provided by financing activities was $1.5 million in 2001 and $15.9 million in 2000. Net financing activities in 2001 consisted primarily of new borrowings from GE Capital offset by principal payments on long-term debt and capital leases. Net financing activities in 2000 were the result of the equity investment by affiliates of Quad-C of $25.0 million for 4,310,344 shares of our common stock, net of offering costs of $1.3 million, offset primarily by the retirement of the debentures and promissory notes issued in conjunction with The Snyder Group Company acquisition, and debt issuance costs for the term loan with Finova Capital. As a condition of the Quad-C transaction, we converted $4.5 million in debt owed to an affiliate of Skylark Co., Ltd. into 775,862 shares of our common stock.
 
We believe that the net proceeds of this offering, together with anticipated cash flows from operations and funds available from our new revolving credit facility, will be sufficient to satisfy our working capital and capital expenditure requirements, including restaurant construction, pre-opening costs and potential initial operating losses related to new restaurant openings, for at least the next 12 months. Beyond the next 12 months, additional financing may be needed to fund working capital and capital expenditures. Changes in our operating plans, acceleration of our expansion plans, lower than anticipated sales, increased expenses or other events, including those described in “Risk Factors,” may cause us to need to seek additional debt or equity financing on an accelerated basis. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth plans and our financial condition and results of operations. Additional equity financing may be dilutive to the holders of our common stock and debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business.
 
Other commitments
 
    
Payments Due As of December 30, 2001

Contractual Obligations

  
Total

  
Less Than 1 year

  
1-3 years

  
3-5 years

  
After 5 years

    
(in thousands)
Term loan and notes payable(1)
  
$
66,835
  
$
4,635
  
$
9,499
  
$
12,366
  
$
40,336
Capital lease obligations
  
 
13,252
  
 
443
  
 
795
  
 
1,098
  
 
10,917
Operating lease obligations
  
 
107,315
  
 
9,676
  
 
18,654
  
 
16,300
  
 
62,686

(1)
 
We intend to repay $48.1 million of this amount with the net proceeds of this offering.
 
We are obligated under non-cancelable operating leases for our restaurants and our administrative offices. Lease terms are generally for ten to 20 years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds.
 
In accordance with the provisions of our employment agreement with Mike Snyder, in the event his employment is terminated due to death or disability, his estate has the right to require us to purchase common stock held by the estate having a fair market value of up to $5.0 million. If this event occurs, we may use our $5.0 million supplemental key man life insurance policy on Mike Snyder’s life to purchase the common stock from his estate. This commitment is not reflected in the table above. See “Management—Employment Agreements” for additional information.
 
Quantitative and qualitative disclosures about market risk
 
Our market risk exposures are related to our cash, cash equivalents and investments. We invest our excess cash in highly liquid short-term investments with maturities of less than one year. We anticipate using our net

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proceeds from this offering, after repayment of our debt obligations described in “Use of Proceeds,” in similar investment grade and highly liquid investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations.
 
Under our secured term loans with GE Capital and revolving credit facility with U.S. Bank, we are exposed to market risk from changes in interest rates on borrowing, which bear interest at the 30-day commercial paper rate plus a fixed percentage of 3.0% to 3.5% under our loans with GE Capital and LIBOR plus a fixed percentage of 3.0% under our revolving credit facility with U.S. Bank. As of May 19, 2002, we had $3.5 million outstanding under our U.S. Bank revolving credit facility. At the end of 2001, we had $12.1 million of variable rate borrowings under our loans with GE Capital and a 1.0% change in the 30-day commercial paper rate would have resulted in interest expense fluctuating approximately $121,000. At the end of 2000, we had $7.6 million of variable rate borrowings under our loans with GE Capital and a 1.0% change in the 30-day commercial paper rate would have resulted in interest expense fluctuating approximately $76,000. Our new revolving credit facility will also be subject to market risk because it will bear interest at variable rates. Primarily all of our transactions are conducted, and our accounts are denominated, in United States dollars. Accordingly, we are not exposed to foreign currency risk.
 
Many of the food products purchased by us are affected by changes in weather, production, availability, seasonality and other factors outside our control. In an effort to control some of this risk, we have entered into some fixed price purchase commitments with terms of no more than a year. In addition, we believe that almost all of our food and supplies are available from several sources, which helps to control food commodity risks.
 
Inflation
 
The primary inflationary factors affecting our operations are food and labor costs. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases. We believe inflation has not had a material impact on our results of operations in recent years.
 
Recent accounting developments
 
        On January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” or SFAS No. 133. SFAS No. 133 requires derivative instruments to be recorded in the balance sheet at their fair value with changes in fair value being recognized in earnings unless specific hedge accounting criteria are met. Our adoption of SFAS No. 133 in 2001 did not have a material impact on our consolidated financial statements.
 
In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, “Business Combinations,” or SFAS No. 141. SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001, eliminates the pooling-of-interests method and modifies the criteria for recognition of intangible assets. We have adopted SFAS No. 141 effective in 2002. Such adoption will result in the reclassification of the carrying amount of workforce assets totaling approximately $1.2 million to goodwill.
 
Beginning in 2002, we are subject to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or SFAS No. 142. Under the provisions of SFAS No. 142, goodwill and certain intangibles are no longer subject to amortization over their estimated useful life. Instead, impairment is assessed on an annual basis (or more frequently if circumstances indicate a possible impairment) by means of a fair-value-based test. In 2001, we had approximately $1.7 million in amortization related to goodwill and certain intangibles. Beginning in 2002, these assets will no longer be amortized. We have not assessed the impact of the initial impairment analysis on our consolidated financial statements.

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In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144. SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of and also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. SFAS No. 144 is effective beginning in 2002, and did not have a material impact on our consolidated financial statements.
 
In April 2002, FASB issued SFAS 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 provides new guidance on the criteria used to classify debt extinguishments as extraordinary items and requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 is effective beginning in 2003. The effect to our consolidated financial statements of adopting this standard, if any, has not yet been determined.

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BUSINESS
 
Overview
 
We are a casual dining restaurant chain focused on serving an imaginative selection of high quality gourmet burgers in a family-friendly atmosphere. We currently own and operate 90 restaurants in 12 states, and have 99 additional restaurants operating under franchise or license agreements in 19 states and Canada.
 
Our menu is centered around our signature product, the gourmet burger, which we make from beef, chicken, veggie, fish, turkey and pot roast and serve in a variety of recipes. We offer a wide selection of toppings for our gourmet burgers, including fresh guacamole, roasted green chilies, honey mustard dressing, grilled pineapple, crispy onion straws, sautéed mushrooms and a choice of six different cheeses. In addition to our gourmet burgers, which accounted for approximately 44.0% of our total food sales in 2001, we also serve an array of other food items that are designed to appeal to a broad group of guests, including salads, soups, appetizers, other entrees such as rice bowls and pasta, desserts and our signature Mad Mixology® alcoholic and non-alcoholic specialty beverages.
 
Our restaurants are designed to create a fun and memorable dining experience in a family-friendly atmosphere and provide our guests with an exceptional dining value. Our concept attracts a broad guest base by appealing to the entire family, particularly women, teens, kids ages eight to 12 whom we refer to as tweens, and children. Our mascot “Red” appeals to toddlers, and our carousel horses, televisions in the floors, three dimensional art and humorous posters appeal to children of all ages. We believe that our quick meal preparation, upbeat, popular music and enthusiastic team members enable us to achieve high sales productivity and create a sense of activity and excitement. All of our menu items are designed to be delivered to guests in a time-efficient manner, and we have a per person average check of approximately $10.00, which includes alcoholic beverages.
 
To increase guest traffic, we locate our restaurants near high activity areas such as retail centers, big box shopping centers and entertainment centers. Women, teens and tweens are extremely attractive consumers to real estate developers in these types of locations as they often strive to attract a similar consumer base to ours. We believe that these individuals are the primary visitors to the high activity areas where our restaurants are located and are predominantly responsible for family dining decisions. Recent data from an independent source indicates that approximately 28.0% of our guests are in the highly desirable under 18 consumer segment, which compares to 20% in the major casual dining bar and grill chains and 24% in the major fast food burger competitors. In addition, approximately 57.0% of our guests are females. We believe our unique guest demographic mix provides us with a major competitive advantage over other casual dining chains and fast food restaurants, enhancing our ability to enter into real estate locations favorable to us.
 
We believe that the appeal of our imaginative, high quality product offering, our fun, family-friendly atmosphere, and our ability to operate in a wide variety of real estate formats and geographic locations have created an attractive restaurant model, providing us with significant opportunities for continued growth through both new company-owned and franchised restaurants.
 
History
 
Our history
 
In 1969, we opened our first restaurant in Seattle, Washington near the University of Washington campus. In 1979, Mike Snyder and his brother, Steve Snyder, opened our first franchised Red Robin restaurant in Yakima, Washington.
 
In 1985, Skylark Co., Ltd., a large publicly-traded restaurant company based in Japan, purchased a majority interest in our company. At that time, we had seven company-owned restaurants and 15 franchised restaurants. Following Skylark’s investment, we expanded aggressively but were unable to establish a focused and consistent concept or profitable operating results at our restaurants. As a result, we experienced slower sales growth than

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our franchised restaurants. In an attempt to improve our operating results, we implemented several changes in management but were unable to find a successful management team. By 1995, average restaurant sales at company-owned restaurants were 22.6% below our United States franchisees’ average restaurant sales. Despite the problems we were experiencing, our leading franchisee at the time, The Snyder Group Company, led by Mike Snyder, continued to expand profitably by staying focused on our core menu of gourmet burgers and emphasizing superior guest service, dining experience and profitability.
 
In 1996, Skylark named Mike Snyder to the position of president, and granted him a minority ownership interest in our company. Under his leadership, we implemented a number of turnaround initiatives, including strengthening our gourmet burger concept, recruiting a new management team, upgrading management information systems, streamlining in-restaurant operations, improving guest service and closing ten under performing restaurants. As a result of these and other initiatives, we increased the average annual restaurant sales of our comparable company-owned restaurants from $2.1 million in 1995 to $3.0 million in 2001 and expanded comparable restaurant-level operating profit margins from 15.8% in 1995 to 20.5% in 2001.
 
In 2000, we completed a recapitalization of our company to position our company for future growth. We acquired Mike Snyder’s 14-unit franchise company, The Snyder Group Company, in exchange for equity, cash and notes. In addition, Quad-C, a private equity firm whose principals have substantial experience in the restaurant industry, made an equity investment of $25.0 million in our company through its affiliates. As a result of these two transactions, Quad-C became our largest stockholder and Mike Snyder acquired a significant equity interest in our company.
 
Our corporate history
 
Red Robin Gourmet Burgers, Inc. was founded in September 1969. From September 1969 until December 1983, Red Robin operated as Red Robin Enterprises, Inc., a Washington corporation, and from December 1983 until June 1990, Red Robin operated as Red Robin International, Inc., a Washington corporation. In June 1990, Red Robin reincorporated in Nevada as Red Robin International, Inc., a Nevada corporation. In January 2001, our management formed Red Robin Gourmet Burgers, Inc., a Delaware corporation, to facilitate a reorganization of the company. The reorganization was consummated in August 2001, and since that time, Red Robin Gourmet Burgers, Inc. has owned all of the outstanding capital stock of Red Robin International, Inc. Our business is operated primarily through Red Robin International, Inc.
 
Concept and business strategy
 
Our objective is to be the leading gourmet burger and casual dining restaurant destination. To achieve our objective, we have developed the following strategies.
 
 
 
Focus on key guiding principals, or “cornerstones,” that drive our success.    In managing our operations, we focus on four cornerstones that we believe are essential to our business. Our four cornerstones are:
 
— Values.    To enhance the dining experience of our guests, we strive to maintain our core values-honor, integrity, seeking knowledge and having fun.
 
— People.    We recognize that our team members are our strongest asset. We seek to hire high quality team members and provide them with comprehensive training programs to ensure that we deliver superior service to our guests.
 
— Burgers.    We strive to be the number one casual dining destination for gourmet burgers in the markets in which we operate.
 
— Time.    We believe in giving our guests the “gift of time.” Our service sequence is designed to consistently deliver every menu item in less than nine minutes, which allows guests to enjoy time-efficient lunches and dinners. We strive to provide guests with a 37-minute dining experience at lunch and 42 minutes at dinner.

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Offer high quality, imaginative menu items.    Our restaurants feature menu items that use imaginative toppings and showcase recipes that capture tastes and flavors that our guests do not typically associate with burgers, salads and sandwiches. We believe the success of our concept is due to our ability to interpret the latest food trends and incorporate them into our gourmet burgers, pastas, rice bowls, appetizers, salads, sandwiches and beverages. Our menu items are cooked to order, using high-quality, fresh ingredients and premium meats and based on unique recipes. One of our signature menu items is our Royal Red Robin Burger, which features a gourmet burger topped with a fried egg, along with bacon, cheese, lettuce, tomato and mayonnaise. We offer a wide selection of toppings for our gourmet burgers, including fresh guacamole, roasted green chilies, honey mustard dressing, grilled pineapple, crispy onion straws, sautéed mushrooms and a choice of six different cheeses. We serve all of our gourmet burgers and sandwiches with “bottomless” french fries.
 
 
 
Create a fun, festive and memorable dining experience.    We promote an exciting, high-energy and family-friendly atmosphere by decorating our restaurant interiors with an eclectic selection of celebrity posters, three-dimensional artwork, carousel horses and statues of our mascot “Red.” We enhance the excitement and energy levels in our restaurants by placing televisions in our main dining areas, in our floors and in our bathrooms and by playing upbeat, popular music throughout the day.
 
 
 
Provide an exceptional dining value with broad consumer appeal.    We offer generous portions of high quality, imaginative food and beverages for a per person average check of approximately $10.00, which includes alcoholic beverages. We believe this price-to-value relationship differentiates us from our competitors, many of whom have significantly higher average guest checks, and allows us to appeal to a broad base of consumers with a wide range of income levels. In addition to attracting families and groups, our restaurant features seating in the bar area, which is often used by our single diners. Our restaurants are popular during both the day and evening hours as evidenced by our almost equal split between lunch and dinner sales. We believe that our diverse menu further enhances our broad appeal by accommodating groups with different tastes.
 
 
 
Deliver strong unit economics.    We believe our company-owned restaurants provide strong unit-level economics. In 2001, our comparable company-owned restaurants generated average sales of approximately $3.0 million and restaurant-level operating profit of approximately $618,000, or 20.5% of total comparable company-owned restaurant sales. The average cash investment cost for our free-standing restaurants opened in 2001 was approximately $1.7 million, excluding pre-opening costs, which averaged approximately $146,000 per restaurant, and land. In 2000, our comparable company-owned restaurants generated average sales of approximately $2.9 million and restaurant-level operating profit of approximately $533,000, or 18.4% of total comparable company-owned restaurant sales. The average cash investment cost for our free-standing restaurants opened in 2000 was approximately $1.8 million, excluding pre-opening costs, which averaged approximately $144,000 per restaurant, and land.
 
 
 
Pursue disciplined restaurant and franchise growth.    We are pursuing a disciplined growth strategy, including both company-owned and franchised development. In 2001, we opened six company-owned restaurants and our franchisees opened 16 restaurants and expanded into two new states. In 2002, we have opened four new company-owned restaurants and expect to open an additional six new company-owned restaurants and relocate one restaurant, and our franchisees have opened four new restaurants and we expect our franchisees to open three additional new restaurants. We intend to continue to expand by opening new company-owned and franchised restaurants at a comparable pace in future years. Our site selection criteria focuses on identifying markets, trade areas and other specific sites that are likely to yield the greatest density of desirable demographics, heavy retail traffic and a highly visible site.
 
 
 
Build awareness of the Red Robin® America’s Gourmet Burgers & Spirits® brand.    We believe that the Red Robin name has achieved substantial brand equity among our guests and has become well known within our markets for our signature menu items. We intend to strengthen this brand loyalty by continuing to offer new menu items and deliver a consistently memorable guest experience. Additionally, we believe that Red Robin is recognized for the family-friendly, high-energy and exciting

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atmosphere our restaurants offer. Key brand attributes that we continue to build upon are our high-quality imaginative food items, commitment to guest service and a strong price-to-value relationship.
 
 
 
Continue to capitalize on favorable lifestyle and demographic trends.    We believe that we have benefited from several key lifestyle and demographic trends that have helped drive our business. These trends include:
 
— Increase in consumption of food away from home.    The National Restaurant Association estimates that the restaurant industry captured 45.3% of all consumer dollars spent on food in 2000 and projects the restaurant industry’s share to increase to 53.0% by 2010. Given our attractive average guest check, family-friendly atmosphere and fun, festive and memorable dining experience, we believe we are well-positioned to continue to benefit from this expected increase in food consumed away from home.
 
— The large and growing teen population.    According to the United States Census Bureau, the teen segment of the population, persons 12 to 19 years old, is expected to grow 36.6% faster than the overall population from 31.6 million in 2000 to 33.6 million by 2005. Given that our concept attracts a significant number of teens and tweens, we believe we will continue to benefit from the strong growth in this segment of the population.
 
We believe these and other lifestyle and demographic trends will continue to be favorable to us and offer us strong opportunities for future restaurant expansion.
 
Growth strategies
 
We believe that there are significant opportunities to grow our concept and brand on a nationwide basis through both new company-owned and franchised restaurants. We believe that our concept and brand can support as many as 850 additional company-owned or franchised restaurants throughout the United States.
 
Company-owned restaurants
 
Our primary source of expansion and growth in the near term will be the addition of new company-owned restaurants. We are pursuing a disciplined growth strategy and intend to develop many of our new restaurants in our existing markets, and selectively enter into new markets. Our growth strategy incorporates a cluster strategy for market penetration, which we believe will enable us to gain operating efficiencies, increase brand awareness and enhance convenience and ease of access for our guests, all of which we believe will lead to significant repeat business. Our site selection criteria for new restaurants is flexible and allows us to adapt to a variety of locations near high activity areas such as retail centers, big box shopping centers and entertainment centers. In 2002, we have opened four new company-owned restaurants in our existing regional markets. We plan to open approximately an additional six new restaurants and relocate one restaurant in 2002, all of which are also in our existing regional markets. We have identified the sites and have entered into letters of intent or leases for all of these restaurants. In 2003, we intend to open approximately 16 new restaurants.
 
Franchised restaurants
 
The other key aspect of our growth strategy is the continued development of our franchise restaurants. We expect the majority of our new franchise restaurant growth to occur through the development of new restaurants by new franchisees, primarily in the Northeast, Midwest and the South. We intend to continue to strengthen our franchise system by attracting experienced and well-capitalized area developers who are quality-conscious restaurant operators and who possess the expertise and resources to execute the development of new restaurants on a large scale. Similarly, we have chosen not to pursue relationships with franchisees that would involve only a limited number of restaurants in a limited territory, because we believe that this would consume too much of our time and attention for the return we would expect to achieve. In 2002 our franchises have opened four new restaurants and our contracts with our franchisees currently provide for the development of three additional new restaurants in 2002, 13 new restaurants in 2003 and the development of additional restaurants over a specified period of time.

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Unit level economics
 
In 2001, our comparable company-owned restaurants generated average sales of approximately $3.0 million and restaurant-level operating profit of approximately $618,000, or 20.5% of total comparable company-owned restaurant sales. The average cash investment cost for our free-standing restaurants opened in 2001 was approximately $1.7 million, excluding pre-opening costs, which averaged approximately $146,000 per restaurant, and land. In 2000, our comparable company-owned restaurants generated average sales of approximately $2.9 million and restaurant-level operating profit of approximately $533,000, or 18.4% of total comparable company-owned restaurant sales. The average cash investment cost for our free-standing restaurants opened in 2000 was approximately $1.8 million, excluding pre-opening costs, which averaged approximately $144,000 per restaurant, and land.
 
Currently, our existing restaurants range in size from 3,800 square feet to 10,700 square feet. Our prototype restaurant is typically a free-standing building with approximately 6,400 square feet, approximately 200 seats and a patio. Based on this prototype, we expect that in the future our total cash investment per restaurant will average approximately $1.8 million, excluding pre-opening costs, which are estimated to be approximately $170,000 per restaurant.
 
Expansion strategy and site selection
 
Our restaurant expansion strategy focuses primarily on further penetrating existing markets with a cluster strategy and selectively entering into new markets. This clustering approach enables us to increase brand awareness and improve our operating efficiencies. For example, clustering enables us to reduce costs associated with regional supervision of restaurant operations. We also believe this approach reduces the risks involved with opening new restaurants given that we better understand the competitive conditions, consumer tastes, demographics and discretionary spending patterns in our existing markets. In addition, our ability to hire qualified team members is enhanced in markets in which we are well-known.
 
We believe that our site selection strategy is critical to our success and we devote substantial time and effort to evaluating each site. Our site selection criteria focuses on identifying markets, trade areas and other specific sites that are likely to yield the greatest density of desirable demographic characteristics, heavy retail traffic and a highly visible site.
 
In order to maximize our market penetration potential, we have developed a flexible physical site format that allows us to operate in a range of real estate venues located near high activity areas such as retail centers, big box shopping centers and entertainment centers. Approved sites generally have a population of at least 70,000 people within a three-mile radius and at least 100,000 people within a five-mile radius. Sites generally require a strong daytime and evening population, adequate parking, a visible and easy entrance and exit. Our prototype restaurant is typically a free-standing building with approximately 6,400 square feet, approximately 200 seats and a patio.
 
In 2001, we hired Todd Brighton, a seasoned real estate professional with 20 years of experience to focus on site selection and future development. Mr. Brighton and his team thoroughly analyze each prospective site before signing a lease or purchase agreement. Prior to committing to a restaurant site, the site is thoroughly evaluated, visited and approved by our senior management team. Our chief executive officer, Mike Snyder, and/or our chief financial officer, Jim McCloskey, personally visit and approve all new sites.
 
With the exception of the ten sites for which we own the real estate, we operate our restaurants under leases. Our primary site objective is to secure a superior site, with the decision to buy or lease as a secondary objective. We believe that our unique guest demographic mix provides us with a major competitive advantage in securing sites. Our long-standing relationships with several major mall developers and owners and our favorable demographics afford us the opportunity to negotiate additional sites in new malls that they are developing. Our format provides us with a great deal of flexibility in these negotiations, because our concept is suitable for a wide variety of real estate venues.

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Current restaurant locations
 
We currently have 90 company-owned restaurants and 99 franchised restaurants in 24 states and two Canadian provinces as shown in the chart below.
 
      
Number of Restaurants

      
Company-owned

    
Franchised

  
Total

Alaska
    
    
3
  
3
Arizona
    
2
    
3
  
5
California
    
31
    
15
  
46
Colorado
    
14
    
  
14
Florida
    
    
1
  
1
Idaho
    
    
3
  
3
Illinois
    
    
5
  
5
Indiana
    
1
    
  
1
Maryland
    
4
    
  
4
Michigan
    
    
8
  
8
Minnesota
    
    
2
  
2
Missouri
    
1
    
  
1
Montana
    
    
1
  
1
Nevada
    
2
    
1
  
3
New Mexico
    
    
2
  
2
Ohio
    
3
    
3
  
6
Oregon
    
10
    
3
  
13
Pennsylvania
    
1
    
7
  
8
Tennessee
    
    
1
  
1
Texas
    
    
3
  
3
Utah
    
    
4
  
4
Virginia
    
5
    
  
5
Washington
    
16
    
11
  
27
Wisconsin
    
    
2
  
2
      
    
  
Total United States
    
90
    
78
  
168
Canada
    
    
21
  
21
      
    
  
Total
    
90
    
99
  
189
      
    
  
 
Menu
 
Our menu is centered around our signature product, the gourmet burger, that we define as “anything that can go in, on or between two buns.” We make our gourmet burgers from beef, chicken, veggie, fish, turkey and pot roast, and serve them in a variety of recipes. We offer a wide selection of toppings for our gourmet burgers, including fresh guacamole, roasted green chilies, honey mustard dressing, grilled pineapple, crispy onion straws, sautéed mushrooms and a choice of six different cheeses. For example, one of our signature creations, the Banzai Burger, is marinated in teriyaki and topped with grilled pineapple, cheddar cheese, lettuce, tomato and mayonnaise.
 
In addition to gourmet burgers, which accounted for approximately 44.0% of our total food sales in 2001, we serve an array of other food items that are designed to appeal to a broad group of guests, including a variety of salads, soups, appetizers, other entrees such as rice bowls and pasta and desserts. One of our top selling non-burger items is the Baja Turkey Club, which features turkey, pepper-jack and cheddar cheeses, bacon, roasted green chilies, tomato and roasted pepper mayonnaise on grilled Texas toast. We serve all of our burgers and

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sandwiches with “bottomless” french fries. Our guests can also choose from a wide variety of beverages, including Pepsi products, smoothies, monster milkshakes, our proprietary Strawberry Ecstasy and our signature Mad Mixology® alcoholic and non-alcoholic specialty beverages like our Freckled Lemonade.
 
All of our menu items are prepared to order in our restaurants. The food items on our menu range in price from $2.99 to $12.49, with a per person average check of approximately $10.00, including alcoholic beverages. Sales of alcoholic beverages represented approximately 9.5% of total restaurant sales in 2001.
 
We continuously experiment with food and beverage items and flavor combinations to create selections that are imaginative and exciting to our guests. Ideas for new menu items are generated at the restaurant level as well as through consumer research and franchisees. In 2001, we held our first annual Gourmet Burger Recipe Contest. This contest allowed our guests to submit their favorite burger recipes for a chance to have their recipe become a part of the Red Robin menu. Last year’s winner, Lauren’s Portobello Burger, is currently on our menu and a portion of the sales from this burger will be donated to charity.
 
Menu items are consistently rotated on and off the menu based on the changing tastes of our guests. Every new recipe idea goes through our test menu development process. The proposed menu item must appeal to a sufficient number of guests and require a preparation time of less than nine minutes to be added to our menu. In addition, the corresponding ingredients must retain or improve the overall menu quality while meeting our gross profit margin targets. All new menu items are then test marketed for eight to 12 weeks in various geographic regions. Our franchisees are given the opportunity to review proposed menu items and offer feedback before the recipes are finalized and added to the menu.
 
Guest loyalty and experience
 
Through our unique guest service philosophy, which we describe as “unbridled,” we feel we have created a culture that has enabled us to build a strong and loyal guest base. Unbridled acts are common in our company, as our team members have a history of going far beyond the customary level of guest service. In 2002, we were proud to be recognized as a gold winner of Restaurants & Institutions 2002 Choice in Chains Award for excellence in customer service, food quality and overall dining experience, as voted on by a nationally representative sample of consumers.
 
We use many industry standard techniques to measure our guests’ experiences at our restaurants. These include comment cards, mystery shoppers, internet feedback, market area and in-restaurant consumer research. We also employ several additional techniques at the restaurant level, including a “systems check” performed each week by our general managers to track and measure our guests’ experiences. This “systems check” evaluates our speed of service, our food preparation times and our seating utilization for each week. The key measurement criteria evaluated in our “systems check” contribute to our ability to give our guests the “gift of time.” We strive to provide guests with a 37-minute dining experience at lunch and 42 minutes at dinner. Our regional operations directors utilize these and other reports to determine which restaurants in their region may need additional support to address any problems or determine which restaurants need additional support.
 
Marketing and advertising
 
Our marketing strategy focuses on: 1) driving comparable restaurant sales through attracting new guests and increasing the frequency of visits by current guests; 2) supporting new restaurant openings to achieve their sales and profit goals; and 3) communicating a unique, powerful, and consistent brand. We accomplish these objectives through four major initiatives.

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In-restaurant marketing
 
A significant portion of our marketing funds are spent in communicating with our guests while they are in our restaurants. The core of our strategy revolves around keeping our menu fresh, with innovative “celebrations” or promotions that occur two to three times throughout the year. These promotions typically involve multiple new food and beverage menu items that are presented through posters, table tents, danglers, menus and other printed materials to provide variety and excitement to our guests, which we believe drives frequency of visits.
 
Local restaurant area marketing
 
We believe we are a wholesome, values-focused leader in family dining. With our focus on women, teens and tweens, we have a unique opportunity to market our restaurants at a local level. With this positioning, we are able to achieve favored advertising positions within local middle schools and high schools, including tours, mascot visits and advertising, which we believe is a very effective and efficient approach to communicate our brand and drive sales. These events tend to attract families, teens and tweens and illustrate our fun-loving, family-friendly atmosphere.
 
Advertising
 
Although our restaurant concept is not media driven, we do spend a limited amount of our marketing dollars in select markets on various media advertising, including billboard, print, radio and television to build brand awareness. Our media advertisements are generally designed to support themed food and beverage celebrations occurring in our restaurants and reflect our fun and festive atmosphere. We also attempt to promote brand awareness in our billboard, print and television advertising by highlighting the distinctive features of our red, black and yellow logo.
 
New restaurant openings
 
We use new restaurant openings as opportunities to reach out to the local media. Our openings are often featured on live local radio broadcasts and receive coverage in local newspapers. We employ a variety of marketing techniques in connection with our new restaurant openings, including community “VIP” parties, with invitations to media personalities and community leaders. We also typically tie our openings to a charitable event.
 
During 2001, we spent an aggregate of 3.2% of restaurant sales on marketing efforts. We expect to continue investing a similar percentage of restaurant sales in marketing efforts in the future, primarily in connection with driving comparable restaurant sales and new restaurant openings.
 
Operations
 
Restaurant management
 
Our restaurant operations are divided into three distinct, self-sufficient geographic regions, which are overseen by a senior regional operations director, each with over 12 years of experience in our restaurants. Each geographic region contains three to four regional operations directors, one to two regional recruiters, a regional training manager and one to two regional kitchen managers. Our regional directors oversee five to eight company-owned restaurants each, which we believe enables them to better support the general managers and achieve sales and cash flow targets for each restaurant within their region. In addition, the regional operations directors invest a portion of their time on franchised operations in their respective regions.            
 
Our typical restaurant management team consists of a general manager, an assistant general manager, a kitchen manager and one to two assistant managers. Most of our restaurants employ approximately 85 hourly team members, many of whom work part-time. The general manager of each restaurant is responsible for the day-to-day operation of that restaurant including hiring, training and development of team members, as well as

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operating results. The kitchen manager is responsible for product quality, daily production, shift execution, food costs and kitchen labor costs. Our restaurants are generally open Sunday through Thursday from 11:00 AM until 10:00 PM and on Friday and Saturday from 11:00 AM to 11:00 PM.
 
Operational tools and programs
 
We utilize a customized food and beverage analysis program that determines the optimal food and beverage costs for each restaurant and provides additional tools and reports to help us identify opportunities, such as waste management, which we believe affords us lower than industry average food and beverage costs. We also utilize a labor program to determine the optimal staffing needs of each restaurant based on its actual guest flow and demand.
 
We employ several additional operational tools, for example, each week, every general manager performs a “systems check” which tracks and measures our guests’ experiences based upon key criteria. This “systems check” evaluates our speed of service, our food preparation times and our seating utilization for each week. Our regional operations directors utilize these and other reports to determine which restaurants in their region may need additional support to address any problems or to determine which restaurants need additional support.
 
Training
 
We strive to maintain quality and consistency in each of our restaurants through the careful training and supervision of team members and the establishment of, and adherence to, high standards relating to personnel performance, food and beverage preparation and maintenance of our restaurants. Each location has eight to ten certified trainers who provide classroom and on-the-job instruction for new team members. All of our trainers participate in an eight hour training seminar on good training skills, which provides them with knowledge and tactics to enable them to be better trainers and coaches. We provide all new team members with complete orientation and one-on-one training for their positions to ensure they are able to meet our high standards. All of our new team members are trained by partnering with a certified designated trainer to assure that the training and information they receive is complete and accurate. Team members are certified for their positions by passing a series of tests.
 
New restaurant managers are required to complete an eight-week training program that includes service, kitchen and management responsibilities. Newly trained managers are then assigned to their home restaurant where they spend one additional training week with their general manager. We place a high priority on our continuing management development programs in order to ensure that qualified managers are available for our future openings. We conduct semi-annual performance reviews with each manager to discuss prior performance and future performance goals. Once a year we hold a general manager conference in which all of our general managers receive additional training on financial management, food preparation, hospitality and other relevant topics.
 
When we open a new restaurant, we provide varying levels of training to team members in each position to ensure the smooth and efficient operation of the restaurant from the first day it opens to the public. Prior to opening a new restaurant, our dedicated training and opening team travels to the location to prepare for an intensive seven-day training program for all team members hired for the new restaurant opening. Part of the training teams stay on site during the first week of operation and an additional team of training support arrives for on-site support during the second and third weeks. We believe this additional investment in our new restaurants is important, because it helps us provide our guests with a quality dining experience from day one. We also make on-site training teams available when our franchisees open new restaurants. After a restaurant has been opened and is operating smoothly, the general manager supervises the training of new team members.

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Recruiting and retention
 
We seek to hire experienced general managers and team members. We support our team members by offering competitive wages and benefits, including a 401(k) plan, medical insurance and stock options for general managers. We motivate and prepare our team members by providing them with opportunities for increased responsibilities and advancement, as well as significant performance-based incentives tied to sales, profitability and certain qualitative measures. For example, we provide our general managers with the use of a Jeep Wrangler for two years if they are able to increase restaurant sales in a single restaurant by 15.0% for four consecutive quarters. If this increase is maintained for eight consecutive quarters, we give the manager outright title to the Jeep Wrangler. We also provide various other incentives, including vacations, car allowances and quarterly sales and profit bonuses. Our most successful general managers are eligible for promotion to senior general manager or training general manager status and are entitled to receive more lucrative compensation packages based on various performance criteria. We also provide monetary rewards for general managers who develop future managers for our restaurants.
 
Restaurant franchise and licensing arrangements
 
We intend to grow the number of new company-owned restaurants in a measured and disciplined manner. As a result, many areas of the United States are available for potential development by franchisees. As of May 19, 2002, we had 22 franchisees that operated 98 restaurants in 19 states and two Canadian provinces. Of the 22 franchisees, ten have exclusive franchise development arrangements, including one international franchisee. Our two largest franchisees are Red Robin Restaurants of Canada, Ltd., with 21 restaurants throughout Alberta and British Columbia, Canada, and Top Robin Ventures, Inc., with 14 restaurants in Southern California. In 2002, our francisees have opened four new restaurants and we expect our franchisees to open three additional new restaurants. The success of our current franchisees and the popularity of our concept have created significant interest by potential franchisees. In 2002, we have added three new franchisees who have agreed to develop 19 new restaurants over the next six years. We have also granted a current franchisee a second development territory in exchange for the franchisee’s commitment to open five new restaurants in that second territory over the next six years, and we extended the term of that franchisee’s existing development agreement in exchange for the franchisee’s agreement to open ten restaurants in the next six years.
 
Each franchise arrangement typically consists of an area development agreement and a separate franchise agreement for each restaurant. Our current form of area development agreement grants exclusive rights to a franchisee to develop a minimum number of restaurants in a defined area, typically over a five-year period. Individual franchise agreements relate to the operation of each restaurant opened and typically have a term of 20 years with a renewal option for an additional ten years if certain conditions are satisfied.
 
Under our current form of area development agreement, we collect a $10,000 development fee for each restaurant the franchisee agrees to develop at the time we enter into the area development agreement. We may charge lower development fees and franchise fees for existing franchisees. We credit $10,000 from the total development fee against the $35,000 franchise fee for each restaurant opened. Our current form of franchise agreement requires the franchisee to pay a royalty fee equal to 4.0% of adjusted restaurant sales. Adjusted restaurant sales does not include:
 
 
 
employee discounts or other discounts;
 
 
 
any federal, state, municipal or other sales, value added or retailer’s excise taxes; or
 
 
 
adjustments for net returns on salable goods and discounts allowed to customers on sales.
 
Franchisees are required to spend a minimum of 1.5% of adjusted restaurant sales on local advertising or promotional activities and to pay an advertising fee of 0.5% of adjusted restaurant sales to a cooperative advertising fund for marketing studies and the development of commercials or other print and electronic media promotional material. In addition, franchisees are required to pay 0.3% of adjusted restaurant sales to a national advertising and marketing fund for the development of advertising materials and related marketing efforts.

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We have the ability under our agreements to increase the required national advertising and marketing fund contribution up to 4.0% of adjusted sales. The royalty fee and advertising and marketing contributions of our franchisees vary depending on when the agreements were executed and the number of restaurants that the franchisee committed to open during the term of the area development agreement.
 
Franchise compliance assurance
 
We have instituted a comprehensive system to ensure the selection of quality franchisees and compliance with our systems and standards, both during the development and operating of franchise restaurants.
 
 
 
Selection process.    We generally select franchisees that are experienced, well-capitalized, multi-unit restaurant operators or who have demonstrated the ability to raise capital and rapidly grow a multi-unit retail or service organization. During the selection process, we conduct comprehensive background, financial, and reference checks on all candidates. Key department heads will typically meet with each franchisee candidate and often visit their current business operations to assess his or her level of relevant expertise. References are obtained from the candidates as well as through industry sources, such as former suppliers, executives, managers, or other business associates. We will generally not grant development rights for the development of a single restaurant.
 
 
 
Development and operations.    After a franchise agreement is signed, we actively work with and monitor our franchisees to ensure successful franchise operations as well as compliance with Red Robin systems and procedures. During the development phase, we assist in the selection of restaurant sites and the development of prototype and building plans, including all required changes by local municipalities and developers. After construction is completed, we review the building for compliance with our standards and provide eight trainers to assist in the opening of the restaurant. We advise the franchisee on menu, management training, and equipment and food purchases. At least once a year, we review all menu items and descriptions to ensure compliance with our requirements and standards. We require all suppliers of ground beef, if different than ours, to pay for and pass an annual inspection performed by third party auditors. Finally, on an ongoing basis, we conduct brand equity reviews on all franchise restaurants to determine their level of effectiveness in executing our concept at a variety of operational levels. Reviews are conducted by seasoned operations teams, last approximately two to three days, and focus on seven key areas including health, safety, brand foundation, and execution proficiency.
 
To continuously improve our operations, we maintain a franchise marketing advisory council, a franchise business advisory council and a food and beverage council. These councils provide advice to us regarding operations and consist of three franchisee representatives and three members of our senior management. In addition, several times each year we solicit feedback and insights on specific topics from the broad group of franchisees and then get together with them to discuss and share their insights. These gatherings, which we call “headwater meetings,” are an effort to attain a high level of franchisee buy-in and to assure the system is evolving in a positive direction through the exchange of best practices.
 
Management information systems
 
All of our restaurants use computerized management information systems, which are designed to improve operating efficiencies, provide corporate management with timely access to financial and marketing data, and reduce restaurant and corporate administrative time and expense. In October 1999, Nation’s Restaurant News and the Food Service Technology Exposition recognized the quality and distinction of our information systems by presenting us with its Team Excellence Award. We believe our management information systems are sophisticated and are sufficient to support our restaurant expansion plans.
 
With the data provided by our information systems, we can report daily, weekly and period-to-date numbers on an automated daily report that is delivered via e-mail to our restaurants and our field personnel. On a weekly

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and a periodic basis, we issue other electronic reports that provide comparative data regarding food, labor and other cost information. Our information systems also enable us to automatically post restaurant level data, such as restaurant sales, cash and credit card receipts and promotion usage into our corporate accounting software. We also use our information systems to capture information regarding our payroll and the status of new and existing team members. Specifically, we use Menulink, a Windows-based product, to perform our bookkeeping, electronic ordering and food cost and management functions. Our Aloha Technologies point-of-sale system facilitates the supply of data to Menulink and also assists with labor scheduling and credit card authorizations. We have developed several in-house products to assist with our information systems. Our Scheduling Team Members and Reporting System, or STaRs, helps our managers schedule the optimal amount of team members at any time. We believe these systems enable both restaurant-level and corporate-level management to adequately supervise the operational and financial performance of our restaurants as necessary to support our planned expansion.
 
Food preparation, quality control and purchasing
 
We believe that we have some of the highest food quality standards in the industry. Our systems are designed to protect our food supply throughout the preparation process. We provide detailed specifications to suppliers for our food ingredients, products and supplies. We inspect specific qualified manufacturers and growers. Our purchasing team and restaurant managers are certified in a comprehensive safety and sanitations course by the National Restaurant Association. Minimum cook temperature requirements and twice-a-day line checks ensure the safety and quality of both burgers and other items we use in our restaurants.
 
We rely on SYSCO Corporation, a national food distributor, as the primary supplier of our food. To maximize our purchasing efficiencies and obtain the lowest possible prices for our ingredients, products, and supplies, while maintaining the highest quality, our centralized purchasing team generally negotiates all prices in one of two formats: 1) fixed price contracts with terms of between one month and one year or 2) monthly commodity pricing formulas. In order to provide the freshest ingredients and products, and to maximize operating efficiencies between purchase and usage, each restaurant’s kitchen manager determines its daily usage requirements for food ingredients, products, and supplies. The kitchen manager orders accordingly from approved local suppliers and our national master distributor and all deliveries are inspected to ensure that the items received meet our quality specifications and negotiated prices. We believe that competitively priced, high quality alternative manufacturers, suppliers, growers and distributors are available should the need arise.
 
Team members
 
As of May 19, 2002, we have approximately 8,200 employees, who we refer to as team members, consisting of approximately 8,100 team members at company-owned restaurants and 76 team members at our corporate headquarters. During our higher volume summer months, we experience an increase in the number of hourly team members in our restaurants of approximately 10.0%. None of our team members are covered by any collective bargaining agreement. We consider our team member relations to be good.
 
Competition
 
The restaurant industry is highly competitive. We compete on the basis of the taste, quality, price of food offered, guest service, ambiance, location and overall dining experience. We believe that our gourmet burger concept, attractive price-value relationship, and the quality of our food and service enable us to differentiate ourselves from our competitors. Although we believe we compete favorably with respect to each of these factors, many of our direct and indirect competitors are well-established national, regional or local chains, and some have substantially greater financial, marketing, and other resources than we do. We also compete with many other restaurant and retail establishments for site locations and restaurant-level team members.

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Properties
 
Our corporate headquarters are located in Greenwood Village, Colorado. We occupy this facility under a lease that terminates in January 2004. We lease the majority of our restaurant facilities, although we own restaurants in: Moreno Valley, California; Yuba City, California; Glen Allen (Richmond), Virginia; Potomac Mills, Virginia; Fairlakes, Virginia; Mesa, Arizona; Oxford Valley, Pennsylvania; North Olmstead, Ohio; and sites under development in Peoria and Prescott, Arizona. The majority of our leases are for 20-year terms and include options to extend the terms. The majority of our leases also include both minimum rent and percentage-of-sales rent provisions.
 
Trademarks
 
Our registered trademarks and service marks include, among others, the marks “Red Robin®,” “America’s Gourmet Burgers & Spirits®” and “Mad Mixology®” and our stylized logo set forth on the front and back pages of this prospectus. We have registered all of our marks with the United States Patent and Trademark Office. We have registered or have registrations pending for our most significant trademarks and service marks in Canada. In order to better protect our brand, we have also registered the Internet domain name “www.redrobin.com.” We believe that our trademarks, service marks, and other proprietary rights have significant value and are important to our brand-building efforts and the marketing of our restaurant concepts. We have in the past, and expect to continue to vigorously protect our proprietary rights. We cannot predict, however, whether steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our concept. It may be difficult for us to prevent others from copying elements of our concept and any litigation to enforce our rights will likely be costly and may not be successful. Although we believe that we have sufficient rights to all of our trademarks and service marks, we may face claims of infringement that could interfere with our ability to market our restaurants and promote our brand. Any such litigation may be costly and divert resources from our business. Moreover, if we are unable to successfully defend against such claim(s), we may be prevented from using our trademarks and/or service marks in the future and may be liable for damages.
 
Government regulation
 
Our restaurants are subject to licensing and regulation by state and local health, safety, fire and other authorities, including licensing and regulation requirements for the sale of alcoholic beverages and food. To date, we have not experienced an inability to obtain or maintain any necessary licenses, permits or approvals, including restaurant, alcoholic beverage and retail licensing. The development and construction of additional restaurants will also be subject to compliance with applicable zoning, land use, and environmental regulations. We are also subject to federal regulation and state laws that regulate the offer and sale of franchises and substantive aspects of a franchisor-franchisee relationship. Various federal and state labor laws govern our relationship with our team members and affect operating costs. These laws include minimum wage requirements, overtime, unemployment tax rates, workers’ compensation rates, citizenship requirements and sales taxes. In addition, the Federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment.
 
Litigation
 
Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims resulting from “slip and fall” accidents, employment related claims and claims from guests or team members alleging illness, injury or other food quality, health or operational concerns. To date, none of these types of litigation, all of which are covered by insurance, has had a material effect on us, and as of the date of this prospectus, we are not a party to any litigation which we believe would have a material adverse effect on our business.

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MANAGEMENT
 
Executive officers and directors
 
The following table sets forth information about our directors, executive officers and other key officers as of May 19, 2002:
 
Name

  
Age

  
Position

Executive Officers:                            
         
Michael J. Snyder
  
52
  
Chairman of the Board, Chief Executive Officer, President and Director
James P. McCloskey
  
51
  
Chief Financial Officer
Michael E. Woods
  
52
  
Senior Vice President of Franchise Development
Robert J. Merullo
  
47
  
Senior Vice President of Restaurant Operations
Todd A. Brighton
  
44
  
Vice President of Development
Eric C. Houseman
  
34
  
Vice President of Restaurant Operations
Other Key Officers:
         
Neil A. Culbertson
  
46
  
Vice President of Marketing
John W. Grant
  
55
  
Vice President and General Counsel
Charles K. Dusenberry II
  
48
  
Vice President of Design and Construction
Mark K. Eggen
  
48
  
Vice President of Franchise Operations
Robert F. Fix
  
49
  
Vice President of Franchise Sales
Michael I. Speck
  
42
  
Vice President of Human Resources
Lisa A. Dahl
  
43
  
Controller
Howard C. Jenkins
  
59
  
Vice President of Management Information Systems
Ray S. Masters
  
42
  
Vice President of Purchasing
Scott A. Schooler
  
34
  
Vice President of Food and Beverage
Other Directors:
         
Tasuku Chino
  
67
  
Director
Terrence D. Daniels
  
59
  
Director
Edward T. Harvey
  
54
  
Director
Gary J. Singer
  
49
  
Director
 
Michael J. Snyder.    Mr. Snyder was elected as our president, chief operating officer and as a director in April 1996. In March 1997, Mr. Snyder was elected as our chief executive officer. In May 1997, Mr. Snyder was elected as our chairman of the board. From 1979 to May 2000, Mr. Snyder also served as president of The Snyder Group Company.
 
James P. McCloskey.    Mr. McCloskey was elected as our chief financial officer and secretary in June 1996. From March 1994 to January 1996, Mr. McCloskey served as chief financial officer for Avalon Software in Tucson, Arizona. From July 1988 to March 1994, Mr. McCloskey served as chief financial officer for Famous Amos Cookies in San Francisco, California.
 
Michael E. Woods.    Mr. Woods joined us in January 1997 as our vice president of franchise development and was appointed senior vice president in January 1999. From 1992 to June 1999, Mr. Woods also served as director of corporate development for The Snyder Group Company.
 
Robert J. Merullo.    Mr. Merullo joined us in April 2000 as our senior vice president of restaurant operations. Mr. Merullo was the director of operations for The Snyder Group Company from November 1991 to April 2000.

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Todd A. Brighton.    Mr. Brighton joined us in April 2001 as our vice president of development with management responsibility over real estate and design and construction. From August 1999 to April 2001, Mr. Brighton was director of real estate with RTM Restaurant Group and was responsible for strategic analysis and market planning for three restaurant chains. From November 1996 to July 1999, Mr. Brighton was the western development manager for Blockbuster Entertainment, Inc. and was responsible for all real estate development in 17 states and select international markets.
 
Eric C. Houseman.    Mr. Houseman joined us in 1993 and has served as our vice president of restaurant operations since March 2000. From 1993 to March 2000, he served in various regional operations management positions with our company.
 
Neil A. Culbertson.    Mr. Culbertson joined us in January 1999 as our vice president of marketing. From September 1998 to December 1998, he was executive vice president of marketing for The Weather Channel in Atlanta, Georgia. From March 1994 to August 1998, he served as vice president of marketing for Boston Chicken, Inc. in Golden, Colorado. Mr. Culbertson has over 20 years of consumer brand marketing experience gained at Fortune 500 companies, including Kraft General Foods and General Mills.
 
John W. Grant.    Mr. Grant joined us in January 1995 and has served as our vice president and general counsel since August 1996. From December 1993 to December 1994, Mr. Grant was self-employed as an attorney in Santa Barbara, California.
 
Charles K. Dusenberry II.    Mr. Dusenberry joined us in March 2002 as our vice president of design and construction. From 1996 to March 2002, Mr. Dusenberry was the vice president of construction, design and facilities for Pizzeria Uno.
 
Mark K. Eggen.    Mr. Eggen joined us in March 1994 as our vice president of operations. In March 2000, he was appointed vice president of franchise operations.
 
Robert F. Fix.    Mr. Fix joined us in March 2001 as our vice president of franchise sales. From 1996 until March 2001, Mr. Fix was director of U.S. franchise development for Boston Pizza International of Richmond in British Columbia, Canada.
 
Michael I. Speck.    Mr. Speck joined us in June 1998 as our director of human resources and was promoted to vice president of human resources in July 1999. Prior to June 1998, Mr. Speck was vice president of training and human resources for Mayfair Partners, L.P., a franchisee of Boston Market and Einstein Bros. Bagels. Mr. Speck has served as chairperson for the National Restaurant Association Human Resources Executive Group.
 
Lisa A. Dahl.    Ms. Dahl joined us in March 1997 as our corporate controller. Prior to joining us, Ms. Dahl was an accounting director for Vicorp Restaurants. Ms. Dahl is a certified public accountant. Ms. Dahl has also served as chairperson for the National Restaurant Association Finance Executive Group.
 
Howard C. Jenkins.    Mr. Jenkins joined us in December 1996 as our vice president of management information systems. Prior to 1996, Mr. Jenkins held various senior management positions in information technology, material management, and manufacturing for defense and commercial corporations. He has also performed various consulting services involving the implementation of enterprise resource planning systems. Mr. Jenkins has served as the chairman for the National Restaurant Association MIS Executive Study Group.
 
Ray S. Masters.    Mr. Masters joined us in May 1996 as director of purchasing and was promoted to vice president of purchasing in October 1998. Prior to joining us, Mr. Masters held multi-unit national account executive sales positions with SYSCO Foods and Johnsonville Foods.

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Scott A. Schooler.    Mr. Schooler joined us in April 2000 as vice president of food and beverage. He was the director of food and beverage for The Snyder Group Company from March 1987 to April 2000.
 
Tasuku Chino.    Mr. Chino joined us as a director in January 2001. Since January 2001, Mr. Chino has served as a director of Skylark Co., Ltd. From 1962 through December 2000, Mr. Chino served as chief executive officer and president of Skylark Co., Ltd., a publicly held Japanese corporation, which operates 1,807 restaurants in Japan.            
 
Terrence D. Daniels.    Mr. Daniels joined us as a director in May 2000. Mr. Daniels has been a partner with Quad-C in Charlottesville, Virginia since its formation in November 1989. Prior to November 1989, Mr. Daniels served as vice chairman and director of W.R. Grace & Co., as chairman, president and chief executive officer of Western Publishing Company, Inc. and as senior vice president for corporate development of Mattel, Inc.
 
Edward T. Harvey.    Mr. Harvey joined us as a director in May 2000. Mr. Harvey has been a partner with Quad-C in Charlottesville, Virginia since April 1990. From 1975 to April 1990, Mr. Harvey held various positions at W.R. Grace & Co., principally in corporate development, acquisitions and planning.
 
Gary J. Singer.    Mr. Singer joined us as a director in June 1993. Mr. Singer has been a partner at the law firm of O’Melveny & Myers LLP, an international law firm, since February 1985 and has been associated with O’Melveny & Myers since 1977.
 
Board composition
 
We currently have five directors. Each director was elected to serve until the next annual meeting of stockholders or until a successor is elected and qualified. These directors have been nominated and elected pursuant to a voting arrangement in our amended and restated shareholders agreement among us and certain of our stockholders, including certain entities affiliated with Quad-C, certain entities affiliated with Skylark Co., Ltd., Mike Snyder and certain other of our stockholders. The parties to this agreement agreed to vote their shares in favor of board nominees of Skylark and Quad-C. The stockholders also agreed to vote their shares in favor of Mr. Snyder as a director as long as he remains our chief executive officer. The amended and restated shareholders agreement will terminate upon consummation of this offering.            
 
Upon the closing of this offering, in accordance with the terms of our amended and restated bylaws and our amended and restated certificate of incorporation, our board of directors will consist of six directors, the terms of office of which will be divided into three classes:
 
 
 
Class I directors, whose term will expire at the annual meeting of stockholders to be held in 2003;
 
 
 
Class II directors, whose term will expire at the annual meeting of stockholders to be held in 2004; and
 
 
 
Class III directors, whose term will expire at the annual meeting of stockholders to be held in 2005.
 
Our Class I directors will be Tasuku Chino and Terrence D. Daniels, our Class II directors will be  Edward T. Harvey and Gary J. Singer and our Class III director will be Mike Snyder.
 
At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our board of directors may have the effect of delaying or preventing changes in control or management of our company.

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Board committees
 
Audit committee
 
Our board of directors has established an audit committee that reviews, acts on, and reports to our board with respect to various auditing and accounting matters, including the recommendation of our auditors, the scope of our annual audits, fees to be paid to the auditors, evaluating the performance of our independent auditors and our accounting practices. The members of the audit committee are Terrence D. Daniels, Edward T. Harvey and Gary J. Singer. No later than 90 days after this offering, we will comply with Nasdaq Stock Market’s independent director and audit committee composition requirements.
 
Compensation committee
 
Our board of directors has established a compensation committee that recommends, reviews and oversees the salaries, benefits, and option plans for our team members, consultants, and other individuals compensated by us. The compensation committee also administers our stock option plans, including determining the stock option grants for our team members, consultants, directors and other individuals. The members of the compensation committee as of the date of this prospectus are Terrence D. Daniels, Edward T. Harvey and Gary J. Singer.
 
Compensation committee interlocks and insider participation
 
During 2001, our compensation committee consisted of Mike Snyder, Edward T. Harvey and Gary J. Singer. Mr. Snyder is, and was during 2001, our president and chief executive officer. Other than service on our board of directors, we did not employ any of the other members of the compensation committee during 2001. No member of our compensation committee and none of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Certain transactions and relationships between us and Mr. Snyder, Mr. Harvey or Mr. Singer are described below.
 
Transactions involving Mr. Snyder
 
In February 2000, our operating subsidiary, Red Robin International, Inc., entered into an agreement and plan of merger with The Snyder Group Company and the stockholders of The Snyder Group Company, whereby we agreed to acquire all of the outstanding capital stock of The Snyder Group Company in exchange for approximately 1.9 million shares of our common stock, $9.2 million in debentures and $1.8 million in cash and promissory notes payable to the stockholders of The Snyder Group Company. We completed this acquisition in May 2000. In connection with this transaction, Mr. Snyder, our chief executive officer and a member of our compensation committee during 2001, received $4,100 in cash, $5.5 million in debentures repaid by us in August 2001, $18,870 in debentures repaid by us in May 2001 and approximately 793,647 shares of our common stock.
 
In connection with our acquisition of The Snyder Group Company in May 2000, we entered into a non-interference, non-disclosure and non-competition agreement with Mr. Snyder. Pursuant to this agreement, Mr. Snyder has agreed that he will not engage in any activity relating to the casual dining business anywhere in the United States until May 2005. Mr. Snyder has also agreed that he will not disclose any confidential information relating to us or our business. Finally, Mr. Snyder has agreed that, until March 2005, he will not (i) solicit or induce any employee at the level of assistant restaurant manager or higher to terminate employment with us, (ii) hire any employee at the level of assistant restaurant manager or higher who was employed with us within the prior 12 months, or (iii) induce or attempt to induce any supplier or other business relationship of ours to cease doing business with us or otherwise interfere with our relationship with such suppliers or business relations.
 
In April 2002, our board of directors approved the early exercise of options to purchase up to 775,862 shares of our common stock held by certain of our executive officers under our 2000 management performance common stock option plan, including Mr. Snyder. Mr. Snyder elected to early exercise options to purchase an

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aggregate of 517,241 shares of common stock. Mr. Snyder paid the exercise price by delivering a full recourse promissory note in the aggregate principal amount of $3.0 million. This promissory notes bear interest at 4.65% per annum with principal and interest due and payable on the original expiration date of the underlying option or earlier if the employment of the respective executive officer is terminated for any reason. Mr. Snyder has pledged the shares acquired by him as collateral for repayment of his full recourse promissory note and the shares acquired by him are subject to a right of repurchase in our favor at the lower of the price paid by Mr. Snyder for the shares acquired by him upon the early exercise of stock options or the fair market value of these shares on the date that we exercise our right of repurchase. This right lapses as the shares underlying the original options vest. An aggregate of 379,310 shares acquired by Mr. Snyder vest based on internal rate of return calculations to be applied upon the sale of 100% of our common stock, our initial public offering or on December 31, 2003 based upon the satisfaction of specified EBITDA targets applied annually on each of the preceding three years. Any shares that remain unvested under the EBITDA targets or the internal rate of return calculations will vest on April 15, 2007. An additional 68,966 shares acquired by Mr. Snyder vested in May 2002 and the remaining 68,965 shares will vest in May 2003.
 
Mr. Snyder has a 31.0% ownership interest in one of our franchisees, Mach Robin, LLC. We recognized franchise and royalty fees from Mach Robin in the amounts of $204,969 in 1999, $415,649 in 2000 and $803,198 in 2001 and $283,704 in the first quarter of 2002. Mach Robin has a 40.0% ownership interest and a right to share in up to 60.0% of the profits of one of our other franchisees, Red Robin Restaurants of Canada, Ltd. We recognized franchise and royalty fees from Red Robin Restaurants of Canada in the amounts of $913,718 in 1999, $940,670 in 2000 and $849,801 in 2001 and $228,868 in the first quarter of 2002.
 
Pursuant to our employment agreement with Mr. Snyder, we extended two loans to Mr. Snyder, each in the aggregate principal amount of $300,000. The first loan is evidenced by a promissory note dated June 30, 2000, which bears interest at the greater of 6.6% or the prime rate plus 2.0%. The second loan is evidenced by a promissory note, dated February 27, 2001, which also bears interest at the greater of 6.6% or the prime rate plus 2.0%. Interest on both notes is waived if we achieve certain financial benchmarks. These loans are secured by a pledge of 150,000 shares of common stock owned by Mr. Snyder to us, and are payable in May 2005.
 
Pursuant to a registration rights agreement between us and certain of our stockholders, if we propose to register any of our securities under the Securities Act, Mr. Snyder is entitled to notice of the registration and to include his registrable shares in the offering; provided that the consent of the underwriters is required to participate in an initial public offering. We are required to bear substantially all costs incurred in these registrations, other than underwriting discounts and commissions.
 
We have entered into an indemnification agreement with Mr. Snyder. This agreement requires us, among other things, to indemnify Mr. Snyder against amounts actually and reasonably incurred in connection with actual or threatened proceedings if he is made a party because of his role as one of our officers and directors.
 
We lease our restaurant building located at 9130 South Crown Crest Boulevard, Parker, Colorado 80138, from 2J Crown Point, LLC indirectly from one of Mr. Snyder’s brothers, Steve Snyder. Stol Operating, Ltd. is the manager of 2J Crown Point and Steve Snyder is the president and the sole owner of Stol Operating. The lease is for a term of 20 years, ending in January 2022, and rent due under the lease is currently $20,663 per month.
 
Our indoor plant maintenance supplier, Tropical Interiors, is operated by one of Mr. Snyder’s brothers, Brad Snyder. We paid Tropical Interiors $132,711 in 2001, $152,279 in 2000 and $44,596 in 1999 and $36,629 in the first quarter of 2002.
 
Transactions involving Mr. Harvey
 
In May 2000, we sold an aggregate of 4,310,344 shares of our common stock to RR Investors, LLC and RR Investors II, LLC, two entities affiliated with Quad-C and its principals, for a purchase price of $25.0 million.

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Edward T. Harvey, one of our directors, is the president and a director of RR Investors. In addition, Mr. Harvey holds a membership interest in Quad-C Advisors V, the general partner of RR Investor’s sole member, Quad-C Partners V, L.P. Mr. Harvey is also the president and a director of RR Investors II, LLC. Mr. Harvey indirectly owns membership interests of RR Investors II.
 
Concurrently with this sale of our common stock to RR Investors and RR Investors II, we entered into a consulting services agreement with Quad-C Management, Inc. In accordance with this agreement, we are required to pay Quad-C Management an aggregate of $200,000 per year, payable quarterly, for consulting services. Fees paid under this agreement were $78,000 in 2000 and $200,000 in 2001 and $100,000 in the first quarter of 2002. This agreement will terminate upon the consummation of this offering. Mr. Harvey is a principal of and maintains an ownership interest in Quad-C Management.
 
Transactions involving Mr. Singer
 
Mr. Singer is a partner of O’Melveny & Myers LLP. We have engaged O’Melveny & Myers to represent us on various legal matters, including acquisitions, financings, this offering and general corporate matters.
 
Director compensation
 
As compensation for their services on our board of directors, our directors receive reimbursement for reasonable out-of-pocket expenses they incur in attending board and committee meetings. In addition, Mr. Singer, one of our non-employee directors, receives compensation for his attendance at board and committee meetings in an amount equal to $20,000 per year. We also have granted, and expect to continue to grant, non-employee director options to purchase shares of our common stock. In each of 1997, 1998 and 1999, we granted Mr. Singer options to purchase 345 shares of our common stock at an exercise price of $5.80 per share. These options are fully vested. In 2000, we granted Mr. Singer options to purchase 862 shares of our common stock at an exercise price of $5.80 per share and in 2001, we granted Mr. Singer options to purchase 862 shares of our common stock at an exercise price of $6.53 per share. These options vested immediately when granted.
 
As described in more detail below under “—Stock Plans—2002 Stock Incentive Plan,” we intend to adopt a 2002 stock incentive plan prior to the consummation of this offering. We expect that the 2002 stock incentive plan will provide that each person who is not one of our employees or officers and who becomes a member of our board of directors after the adoption of the plan will automatically be granted a stock option covering 5,000 shares of our common stock. Additionally, we expect that the 2002 stock incentive plan will provide that immediately following each annual meeting of our stockholders during the term of the plan and commencing in 2003, each member of our board of directors then continuing in office and who is not one of our employees or directors will automatically be granted a stock option covering 1,000 shares of our common stock. A director would not receive more than one option grant under these provisions in any one calendar year. The per share purchase price of each of these options would equal the fair market value of a share of our common stock determined under the plan at the time of grant of the option and the exercise price could be paid in cash, check, or by shares of our common stock that were already owned for at least six months prior to the date of exercise. Each 5,000-share option grant is expected to have a two-year vesting schedule and each 1,000-share option grant is expected to have a one-year vesting schedule. These options would automatically vest upon a change of control, as that term is used for purposes of the plan. Our board of directors could amend these grant provisions under the plan from time to time without stockholder approval unless stockholder approval was required by law.

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Executive compensation
 
The following table sets forth summary information concerning compensation awarded to, earned by, or accrued for services rendered to us in all capacities by our chief executive officer and our other executive officers during 2001. The individuals listed in the table below are collectively referred to as the named executive officers.
 
Summary Compensation Table
 
             
Long-Term Compensation

      
    
Annual Compensation(1)

      
Securities Underlying Options/SARs (#)

    
All Other Compensation ($)(2)

Name and Principal Position

  
Year

  
Salary($)

    
Bonus($)

           
Michael J. Snyder, Chief Executive Officer
  
2001
  
$
340,609
 
  
$
347,288
 
    
—  
    
$
4,620
James P. McCloskey, Chief Financial Officer
  
2001
  
 
226,861
 
  
 
162,068
(3)
    
—  
    
 
2,793
Michael E. Woods, Senior Vice President of Franchise Development
  
2001
  
 
196,568
 
  
 
140,498
(3)
    
—  
    
 
2,562
Robert J. Merullo, Senior Vice President of Restaurant Operations
  
2001
  
 
207,563
 
  
 
147,630
(3)
    
—  
    
 
5,600
Todd A. Brighton, Vice President of Development
  
2001
  
 
95,192
(4)
  
 
30,000
 
    
150,000
    
 
1,400
Eric C. Houseman, Vice President of Restaurant Operations
  
2001
  
 
128,942
 
  
 
48,300
 
    
25,000
    
 
1,391

(1)
 
In accordance with the rules of the SEC, the compensation described in this table does not include a) medical, group life insurance or other benefits received by the named executive officers that are available generally to all of our salaried employees, or b) perquisites and other personal benefits received by the named executive officers that do not exceed the lesser of $50,000 or 10.0% of the officer’s salary and bonus disclosed in this table.
 
(2)
 
Represents premiums paid for supplemental life insurance.
 
(3)
 
Includes $20,000 of bonus compensation earned during 2001 that has been deferred at the election of the named executive officer.
 
(4)
 
Mr. Brighton joined Red Robin in April 2001. His annualized salary for 2001 was $150,000.

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Option grants during 2001
 
The table below sets forth the options granted to our named executive officers during 2001. We have never issued restricted stock or stock appreciation rights.
 
    
Individual Grants

         
    
Number of Securities Underlying Options Granted(2)

  
% of Total Options Granted to Employees in 2001(3)

      
Exercise Price per Share ($/Share)(4)

  
Expiration Date(5)

  
Potential Realizable Value at Assumed Annual Rate of Stock Price Appreciation for Option Year(1)

Name

                
5.0%($)

  
10.0%($)

Michael J. Snyder
  
—  
  
—  
 
    
 
—  
  
—  
  
—  
  
—  
James P. McCloskey
  
—  
  
—  
 
    
 
—  
  
—  
  
—  
  
—  
Michael E. Woods
  
—  
  
—  
 
    
 
—  
  
—  
  
—  
  
—  
Robert J. Merullo
  
—  
  
—  
 
    
 
—  
  
—  
  
—  
  
—  
Todd A. Brighton
  
25,862
  
19.0
%
    
$
6.53
  
5/8/2011
  
274,875
  
437,694
    
25,862
  
19.0
 
    
 
6.53
  
10/23/2011
  
274,875
  
437,694
Eric C. Houseman
  
8,621
  
6.3
 
    
 
6.53
  
10/23/2011
  
91,625
  
145,898

(1)
 
The potential realizable values are based on an assumption that the stock price of our common stock will appreciate at the annual rate shown, compounded annually, from the date of grant until the end of the option term. These values do not take into account amounts required to be paid as income taxes under the Internal Revenue Code and any applicable state laws or option provisions providing for termination of an option following termination of employment, non-transferability or vesting. These amounts are calculated based on the requirements promulgated by the SEC and do not reflect our estimate of future stock price growth of the shares of our common stock.
 
(2)
 
Represents options we granted under our 2000 management performance common stock option plan. These options vest over a three-year period, with 50.0% vesting on the second anniversary of the grant date and the remaining 50.0% vesting on the third anniversary of the grant date.
 
(3)
 
Based on an aggregate of 136,361 shares of our common stock that are subject to options granted to employees during 2001.
 
(4)
 
We granted options at an exercise price equal to the fair market value of our common stock as determined by our board of directors at the date of grant. In determining the fair market value of our common stock, the board considered various factors, including our financial condition and business prospects, operating results, the absence of a market for our common stock and the risks normally associated with investments in companies engaged in similar businesses.
 
(5)
 
The term of each option we grant is generally ten years from the date of grant. Our options may terminate before their expiration date if the option holder’s status as an employee is terminated or upon the option holder’s death or disability.

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Aggregated option exercises in 2001 and year-end option values
 
None of our named executive officers exercised stock options during 2001. The following table sets forth the number of shares subject to both exercisable and unexercisable stock options held by our named executive officers as of December 30, 2001. The table also reports values for “in-the-money” options that represent the positive spread between the exercise prices of outstanding options and the assumed initial offering price of $15.00 per share.
 
    
Number of
Securities Underlying
Unexercised Options at
December 30, 2001(1)

  
Value of Unexercised
In-the-Money Options at
December 30, 2001

Name

  
Exercisable

  
Unexercisable

  
Exercisable($)

  
Unexercisable($)

Michael J. Snyder
  
—  
  
517,241
  
—  
  
4,758,617
James P. McCloskey(2)
  
103,448
  
34,483
  
951,722
  
317,244
Michael E. Woods
  
43,103
  
103,448
  
396,548
  
951,722
Robert J. Merullo
  
—  
  
86,207
  
—  
  
793,104
Todd A. Brighton
  
—  
  
51,724
  
—  
  
438,102
Eric C. Houseman
  
3,448
  
22,414
  
31,722
  
199,915

(1)
 
This table does not give effect to the exercise of stock options by certain of our executive officers in April 2002. See “Related Party Transactions—Option Exercises.”
 
(2)
 
Excludes options to purchase 34,483 shares of our common stock that we granted to Mr. McCloskey in January 2002.
 
Stock plans
 
As of May 19, 2002, our employees held outstanding stock options for the purchase of up to 504,466 shares of our common stock. Those options were granted under our 1990 stock option plan, our 1996 stock option plan, and our 2000 management performance common stock option plan. As of May 19, 2002, 229,742 of those options had vested and the balance were not vested. The exercise prices of those options ranged from $5.80 per share to $7.25 per share and each of those options had a maximum term of ten years from the applicable date of grant.
 
The following sections provide more detailed information concerning these option plans and the shares that are available for future awards under these plans.
 
Incentive Stock Option and Nonqualified Stock Option Plan—1990; 1996 Stock Option Plan; 2000 Management Performance Common Stock Option Plan
 
Our 1990 stock option plan was effective April 3, 1990, our 1996 stock option plan was effective September 6, 1996, and our 2000 management performance common stock option plan was effective May 11, 2000. Under each of these plans, we are generally authorized to grant options to purchase shares of our common stock to certain of our employees, directors, officers and consultants and certain employees, officers and consultants of our subsidiaries, except that consultant grants are authorized only under the 1996 stock option plan.
 
Options under these plans are either incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, or nonqualified stock options, except that only nonqualified stock options are authorized under our 2000 management performance common stock option plan.
 
Of the aggregate 504,466 shares that were subject to outstanding employee stock options as of May 19, 2002, 71,035 shares remained subject to awards then outstanding under our 1990 stock option plan, 149,828 shares remained subject to awards then outstanding under our 1996 stock option plan and 283,603 shares

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remained subject to awards then outstanding under our 2000 stock option plan. Our authority to grant new awards under the 1990 stock option plan terminated on April 2, 2000. No new awards will be granted under the 1996 stock option plan or under the 2000 management performance common stock option plan after the consummation of this offering.
 
Our board of directors administers each of these plans. Our board of directors may delegate its authority under any of these plans to a committee appointed by the board. The administrator of the applicable plan, either our board of directors or a committee appointed by the board, has the power to, among other things, interpret and administer the plan, determine the exercise price of the options, determine the number of shares subject to each option, determine the exercise or vesting period for each option, determine eligibility for participation in the plan and accelerate the time during which an option may be exercised. The purchase price for any shares acquired upon exercise of an option generally may be paid in cash or, subject to certain restrictions, shares of our common stock or by delivery of a promissory note. All options granted under these plans expire no later than ten years from their date of grant. Options granted under these plans are generally non-transferable other than by will or the laws of descent and distribution, except certain transfers for tax or estate planning purposes may be permitted.
 
As is customary in incentive plans of this nature, the share limit under each of these plans, as well as the number of shares subject to outstanding awards and the exercise prices of those awards, are subject to adjustment in the event of changes in our capital structure, reorganizations and other extraordinary events.
 
Each of these plans contains various change of control provisions. Stock options under our 1990 and 1996 stock option plans automatically vested as a result of the change of control that occurred following our issuance of common stock in connection with the acquisition of The Snyder Group Company and Quad-C’s $25.0 million equity investment in May 2000 through its affiliates. Outstanding options under our 2000 management performance common stock option plan may become fully vested in connection with the sale or disposition of substantially all of our common stock or our assets. In addition, the plan administrator may provide for the assumption, substitution or settlement of the outstanding options under the 2000 management performance common stock option plan in the event of a “control transfer.” A control transfer is defined in the 2000 management performance common stock option plan and generally includes any person or group of persons who were not our stockholders on April 30, 2000 becoming the owner of 50.0% or more of our outstanding voting shares, our merger, consolidation, or other reorganization in which any such person or group owns 50.0% or more of the outstanding voting shares of the surviving or resulting entity, or all or substantially all of our assets are sold or otherwise transferred to any such person or group.
 
Our board of directors may amend, suspend or discontinue these plans at any time, however, no such action may adversely alter any outstanding stock option without the consent of the optionholder. Plan amendments will generally not be submitted to stockholders for their approval unless applicable law requires such approval.
 
2002 Stock Incentive Plan
 
We intend to adopt a 2002 stock incentive plan prior to consummation of this offering to provide an additional means to attract, motivate, reward and retain key personnel. We expect our board of directors and our stockholders to approve this plan prior to the consummation of this offering. The 2002 stock incentive plan will give our board of directors, or a committee appointed by our board of directors, the authority to determine who may participate in the plan and to grant different types of stock incentive awards. Our employees, officers, directors and consultants may be selected to receive awards under the plan.
 
We expect that a total of approximately 900,000 shares of common stock will be authorized for issuance with respect to awards granted under the 2002 stock incentive plan. Any shares subject to awards that are not paid or exercised before they expire or are terminated will become available for other award grants under the 2002 stock incentive plan.

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Awards under the plan may be in the form of nonqualified stock options, incentive stock options, stock appreciation rights, or SARs, limited stock appreciation rights or SARs limited to specific events, such as in a change in control or other special circumstances, restricted stock, performance share awards, or stock bonuses. Awards under the plan generally will be nontransferable other than by will or the laws of descent and distribution, except that the plan administrator may authorize certain transfers for tax or estate planning purposes.
 
Nonqualified stock options and other awards may be granted at prices below the fair market value of the common stock on the date of grant. Restricted stock awards can be issued for nominal or the minimum lawful consideration. Incentive stock options must have an exercise price that is at least equal to the fair market value of the common stock, or 110.0% of fair market value of the common stock for any 10.0% owner of our common stock, on the date of grant. These and other awards may also be issued solely or in part for services.
 
Our board of directors, or a committee of directors appointed by our board of directors, will have the authority to administer the plan. The administrator of the plan will have broad authority to:
 
 
 
designate recipients of awards;
 
 
 
determine or modify, subject to any required consent, the terms and provisions of awards, including the price, vesting provisions, terms of exercise and expiration dates;
 
 
 
approve the form of award agreements;
 
 
 
determine specific objectives and performance criteria with respect to performance awards;
 
 
 
construe and interpret the 2002 stock incentive plan; and
 
 
 
re-price, accelerate and extend the exercisability or term, and establish the events of termination or reversion of outstanding awards.
 
Each award granted under the 2002 stock incentive plan may, in the discretion of the plan administrator, become fully vested, exercisable, and/or payable, as applicable, upon a change of control event if the award will not be assumed or substituted for or otherwise continued after the event. A change of control, as defined in the 2002 stock incentive plan, will generally include:
 
 
 
stockholder approval of our dissolution or liquidation;
 
 
 
certain changes in a majority of the membership of our board of directors over a period of two years or less;
 
 
 
the acquisition of more than 30.0% of our outstanding voting securities by any person other than a person who held more than 20.0% of our outstanding voting securities as of the date that the 2002 stock incentive plan was approved, a company benefit plan, or one of their affiliates, successors, heirs, relatives or certain donees or certain other affiliates;
 
 
 
certain transfers of all or substantially all of our assets; and
 
 
 
a merger, consolidation or reorganization (other than with an affiliate) whereby our stockholders do not own more than 50.0% of the outstanding voting securities of the resulting entity after such event.
 
In addition, if we terminate any participant’s employment for any reason other than for cause either in express anticipation of, or within one year after a change in control event, then all awards held by that participant will vest in full immediately before his or her termination date. The plan administrator may also provide for alternative settlements (including cash payments), the assumption or substitution of awards or other adjustments in the event of a change in control event or in the context of any other reorganization of the company.
 
Our board of directors may amend, suspend or discontinue the plan at any time, but no such action will affect any outstanding award in any manner materially adverse to a participant without the consent of the participant. Plan amendments will be submitted to stockholders for their approval as required by applicable law. The 2002 stock incentive plan will not be exclusive—our board of directors and compensation committee may grant stock and performance incentives or other compensation, in stock or cash, under other plans or authority.

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The plan will terminate on the tenth anniversary of its adoption; however, the committee will retain its authority until all outstanding awards are exercised or terminated. The maximum term of options, SARs and other rights to acquire common stock under the plan is ten years after the initial date of the award, subject to provisions for further deferred payment in certain circumstances.
 
The exercise price of options or other awards will generally be payable in cash or, subject to certain restrictions, shares of our common stock or, if authorized by the plan administrator, by delivery of a promissory note. Subject to any applicable limits, we may finance or offset shares to cover any minimum withholding taxes due in connection with an award.
 
Employee Stock Purchase Plan
 
We intend to adopt an employee stock purchase plan prior to consummation of this offering to provide certain of our employees with an incentive to advance the best interests of our company by providing a method whereby they may voluntarily purchase our common stock at a favorable price and upon favorable terms. We expect our board of directors and our stockholders to approve this plan prior to the consummation of this offering. Generally, all of our officers and employees who have been employed by us for at least one year and who are regularly scheduled to work more than twenty hours per week will be eligible to participate in the plan.
 
The plan will generally operate in successive six-month periods, or offering periods, commencing on each January 1 and July 1. We expect that the first offering period will be a short offering period and will commence after this offering and will end December 31, 2002. On the first day of each offering period, or grant date, each employee eligible to participate in the plan who has timely filed a valid election to participate for that offering period will be granted an option to purchase shares of our common stock. A participant must designate in his or her election the percentage of his or her compensation (subject to certain limits in the plan and limits under the Internal Revenue Code) to be withheld from his or her pay during that offering period on an after-tax basis and credited to a bookkeeping account maintained under the plan in his or her name.
 
Each option granted with respect to an offering period will automatically be exercised on the last day of that offering period, or the exercise date. The number of shares of our common stock acquired by the holder of the option will be determined by dividing the participant’s plan account balance as of the exercise date by the option price. The option price for an offering period will equal 85.0% of the fair market value of a share of our common stock on the first day of that offering period or 85.0% of the fair market value of a share of our common stock on the last day of that offering period, whichever amount is less.
 
Generally, a participant’s plan participation will terminate during an offering period, and his or her plan account balance will be paid to him or her in cash, if the participant elects a withdrawal of his of her contributions or if the participant’s employment by us or one of our participating subsidiaries terminates.
 
We expect that a total of approximately 300,000 shares of our common stock will be available under our employee stock purchase plan. As required by the Internal Revenue Code, a participant cannot purchase more than $25,000 of stock (valued at the start of the applicable offering period) under the plan in any one calendar year. Subject to this $25,000 limit, our board of directors may impose other purchase limits under the plan from time to time. In the event of a merger, consolidation, recapitalization, stock split, stock dividend, combination of shares, or other change affecting our common stock, a proportionate and equitable adjustment will be made to the number of shares subject to the plan and outstanding plan options.
 
The plan will be administered by our board of directors or a committee appointed by our board of directors. The plan will not limit the authority of our board of directors or the compensation committee to grant awards or authorize any other compensation, with or without reference to our common stock, under any other plan or authority.

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Our board of directors may amend, modify or terminate the plan at any time and in any manner, provided that the existing rights of participants are not materially adversely affected thereby. Stockholder approval for any amendment will only be required to the extent necessary to meet the requirements of Section 423 of the Internal Revenue Code or to the extent otherwise required by law. Unless previously terminated by our board of directors, no new offering periods will commence on or after the tenth anniversary of the plan’s adoption or, if earlier, when no shares remain available for options under the plan.
 
Employment agreements
 
Mike Snyder
 
We have an employment agreement with Mike Snyder. Pursuant to this agreement, Mr. Snyder serves as the chairman of our board, our chief executive officer and our president and receives an annual base salary of $330,750. Mr. Snyder is also entitled to participate in our annual incentive compensation plan and all other incentive, savings and retirement plans, practices, policies and programs to the same extent as other senior executive employees. The employment agreement has an initial term ending in May 2005, which will be automatically extended for additional one-year periods unless either we or Mr. Snyder give written notice not to extend the agreement.
 
In the event Mr. Snyder is terminated other than for cause as defined in the agreement to include, among other things, neglect in the performance of his duties, engaging willfully in misconduct in the performance of his duties and failure to follow lawful directives from the board of directors, or Mr. Snyder terminates his employment with us for a substantial breach as defined in the agreement to include a reduction in his base salary, the removal of Mr. Snyder from his current officer positions other than for cause and a change in control, Mr. Snyder will receive severance pay which includes: payment of his base salary for one year, the bonus he would have received on the next bonus payment date, and participation in our health and welfare benefit plans for himself and his family for one year. In the event Mr. Snyder’s employment is terminated by reason of his death or disability, Mr. Snyder’s estate will receive all accrued but unpaid and deferred compensation and shall have the right to require us to purchase common stock held by the estate having a fair market value of up to $5.0 million and Mr. Snyder’s family shall have the right to participate in our health and other welfare benefit plans for one year.
 
Mr. Snyder has agreed not to engage in any activity relating to the casual dining business anywhere in the United States until the later of May 11, 2005 and two years following the termination of his employment.
 
Mike Woods
 
We also have an employment agreement with Mike Woods, our senior vice president of franchise development. Pursuant to the agreement, if Mr. Woods is terminated without cause he is entitled to severance pay equal to his then current base salary paid monthly for one year. We also negotiate a bonus arrangement for Mr. Woods on an annual basis. Mr. Woods’ current base annual salary is $208,739. Mr. Woods’ employment agreement does not have a termination date.
 
Indemnification of directors and executive officers and limitation on liability
 
Our bylaws currently provide and, upon the closing of this offering our amended and restated bylaws will provide, that we shall indemnify our directors and officers to the fullest extent permitted by Delaware law, provided that, with respect to proceedings initiated by our officers and directors, we are only required to indemnify these persons if the proceeding was authorized by our board of directors. Our bylaws permit us, by action of our board of directors, to indemnify our other employees and agents to the same extent as we are required to indemnify our officers and directors. We are also empowered under our bylaws to enter into indemnification agreements with our directors, officers, employees or agents and to purchase insurance on behalf of any of our director, officer, employee or agent whether or not we are required or permitted to indemnify such persons under Delaware law.

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We have entered into indemnification agreements with certain of our directors and executive officers and intend to enter into indemnification agreements with all of our other directors and executive officers prior to the consummation of this offering. Under these agreements, we will indemnify our directors and executive officers against amounts actually and reasonably incurred in connection with actual or threatened proceedings if any of them may be made a party because of their role as one of our directors or officers. We are obligated to pay these amounts only if the officer or director acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to our best interests. For any criminal proceedings, we are obligated to pay these amounts only if the officer or director had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth procedures that will apply in the event of a claim for indemnification thereunder.
 
In addition, upon the closing of this offering, our amended and restated bylaws will provide that our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability:
 
 
 
for any breach of the director’s duty of loyalty to us or our stockholders;
 
 
 
for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
 
 
 
under Section 174 of the Delaware General Corporation Law; or
 
 
 
for any transaction from which the director derives an improper personal benefit.
 
There is no pending litigation or proceeding involving any of our directors or officers for which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

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RELATED PARTY TRANSACTIONS
 
Acquisition of The Snyder Group Company
 
In February 2000, our operating subsidiary, Red Robin International, Inc., entered into an agreement and plan of merger with The Snyder Group Company and the stockholders of The Snyder Group Company, whereby we agreed to acquire all of the outstanding capital stock of The Snyder Group Company in exchange for approximately 1.9 million shares of our common stock, $9.2 million in debentures and $1.8 million in cash and promissory notes payable to the stockholders of The Snyder Group Company. We completed this acquisition in May 2000.
 
In connection with this transaction, certain stockholders of The Snyder Group Company who are also one of our directors, officers or principal stockholders received the following:
 
 
 
Mike Snyder, our chief executive officer, received $4,100 in cash, $5.1 million in debentures repaid by us in August 2001, $18,870 in debentures repaid by us in May 2001 and 793,647 shares of our common stock.
 
 
 
Mike Woods, our senior vice president of franchise development, received $2,241 in cash, $399,934 pursuant to a promissory note repaid by us in August 2001 and 69,340 shares of our common stock.
 
 
 
Bob Merullo, our senior vice president of operations, received $2,241 in cash, $399,934 pursuant to a promissory note repaid by us in August 2001 and 69,340 shares of our common stock.
 
 
 
Steve Snyder, Mike Snyder’s brother and the president of OTL, Ltd., one of our principal stockholders, and his wife each received $2,050 in cash, $2.1 million in debentures repaid by us in August 2001, $9,435 in debentures repaid by us in May 2001 and 396,824 shares of our common stock.
 
Transactions with Quad-C
 
In May 2000, we sold an aggregate of 4,310,344 shares of our common stock to RR Investors, LLC and RR Investors II, LLC, two entities affiliated with Quad-C and its principals, for a purchase price of $25.0 million. Edward T. Harvey, one of our directors, is the president and a director of RR Investors. In addition, Mr. Harvey holds a membership interest in Quad-C Advisors V, the general partner of RR Investor’s sole member, Quad-C Partners V, L.P. Terrence D. Daniels, one of our other directors, is the vice president and secretary of RR Investors. In addition, Mr. Daniels holds a membership interest in Quad-C Advisors V. Mr. Harvey is also the president and a director and Mr. Daniels is the vice president and secretary of RR Investors II, LLC. Mr. Harvey, Mr. Daniels and certain members of their immediate families own, directly or indirectly, membership interests of RR Investors II.
 
Concurrently with this sale of our common stock to RR Investors and RR Investors II, we entered into a consulting services agreement with Quad-C Management, Inc. In accordance with this agreement, we are required to pay Quad-C Management an aggregate of $200,000 per year, payable quarterly, for consulting services. Fees paid under this agreement were $78,000 in 2000 and $200,000 in 2001 and $100,000 in the first quarter of 2002. This agreement will terminate upon the consummation of this offering. Mr. Harvey and Mr. Daniels are principals of and maintain ownership interests in Quad-C Management.
 
Option exercises
 
In April 2002, our board of directors approved the early exercise of options to purchase up to 775,862 shares of our common stock held by certain of our executive officers under our 2000 management performance common stock option plan and the exercise of options to purchase an additional 146,552 shares of our common stock subject to currently exercisable options held by certain of our executive officers under our 1990 and 1996 stock option plans.

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Mike Snyder elected to exercise options to purchase an aggregate of 517,241 shares of common stock. Mr. Snyder paid the exercise price by delivering a full recourse promissory note in the principal amount of $3,000,000. This promissory note bears interest at 4.65% per annum, with principal and accrued and unpaid interest due and payable on December 31, 2009.
 
 
 
Jim McCloskey elected to exercise options to purchase an aggregate of 172,415 shares of common stock. Mr. McCloskey paid the exercise price by delivering three full recourse promissory notes in the aggregate principal amount of $1,050,000. These promissory notes bear interest at 4.65% per annum, with principal and accrued and unpaid interest due and payable as follows: June 26, 2006 with respect to $600,000 principal amount, December 31, 2009 with respect to $200,000 principal amount and January 29, 2012 with respect to $250,000 principal amount.
 
 
 
Bob Merullo elected to exercise options to purchase 86,207 shares of common stock. Mr. Merullo paid the exercise price by delivering a full recourse promissory note in the principal amount of $500,000. This promissory note bears interest at 4.65% per annum, with principal and accrued and unpaid interest due and payable on December 31, 2009.
 
 
 
Mike Woods elected to exercise options to purchase an aggregate of 146,551 shares of common stock. Mr. Woods paid the exercise price by delivering two full recourse promissory notes in the aggregate principal amount of $850,000. These promissory notes bear interest at 4.65% per annum, with principal and accrued and unpaid interest due and payable as follows: January 6, 2007 with respect to $250,000 principal amount and December 31, 2009 with respect to $600,000 principal amount.
 
The indebtedness represented by each executive officer’s promissory note or notes becomes immediately due and payable in the event that the executive officer’s employment is terminated for any reason. Each executive officer has pledged the shares acquired by him as collateral for repayment of his respective full recourse promissory note or notes. The shares acquired by each executive officer upon the early exercise of stock options are subject to a right of repurchase in our favor at the lower of the price paid by the executive officers for the shares acquired by them upon the early exercise of their stock options or the fair market value of these shares on the date that we exercise our right of repurchase. This right lapses on the same schedule that the shares underlying the original options would have become vested and exercisable as follows:
 
 
 
379,310 shares acquired by Mr. Snyder, 103,448 shares acquired by Mr. Woods, 34,483 shares acquired by Mr. McCloskey and 86,207 shares acquired by Mr. Merullo vest and become exercisable based on internal rate of return calculations to be applied upon the sale of 100% of our common stock, our initial public offering or on December 31, 2003 based upon the satisfaction of specified EBITDA targets applied annually on each of the preceding three years. Any shares that remain unvested under the EBITDA targets or the internal rate of return calculations will vest and become exercisable on April 15, 2007.
 
 
 
68,966 shares acquired by Mr. Snyder vested and became exercisable in May 2002 and the remaining 68,965 shares will vest and become exercisable in May 2003.
 
 
 
11,494 shares acquired by Mr. McCloskey will vest and become exercisable in January 2004, an additional 11,494 shares will vest and become exercisable in January 2005 and the remaining 11,495 shares will vest and become exercisable in January 2006.
 
Board representation and registration rights
 
Pursuant to an amended and restated shareholders agreement between us, entities affiliated with Quad-C, entities affiliated with Skylark Co., Ltd., and certain other of our stockholders, including Mike Snyder, the parties to the agreement agreed to vote their shares in favor of certain board nominees. See “Management—Board Composition.” The stockholders party to the agreement are also subject to certain restrictions on transfer of their securities. The amended and restated shareholders agreement will terminate upon consummation of this offering.
 
Pursuant to a registration rights agreement, certain Quad-C affiliated entities and Skylark affiliated entities each has the right to demand that we register their shares of common stock two times; provided that the board of directors has the right to postpone a demand registration in certain circumstances. We have agreed to pay for all expenses in connection with the registration.

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In addition, if we propose to register any of our securities under the Securities Act, including in this offering, certain Quad-C affiliated entities, certain Skylark affiliated entities and certain of our other stockholders are entitled to notice of the registration and to include their registrable shares in the offering. The underwriters have the right to limit the number of shares included in the registration in their discretion. We are required to bear substantially all costs incurred in these registrations, other than underwriting discounts and commissions.            
 
After this offering, the following stockholders will have registration rights with respect to the number of shares identified below:
 
Name

    
Number of
Registrable Securities(1)

RR Investors, LLC(2)
    
4,144,562
Skylark Co., Ltd.
    
1,603,448
Michael J. Snyder
    
1,448,819
Hibari Guam Corporation
    
754,690
OTL, Ltd.(3)
    
673,648
Gerald R. Kingen
    
293,345
Michael E. Woods
    
212,444
RR Investors II, LLC(4)
    
165,782
Robert J. Merullo
    
150,375
Shamrock Investment Company
    
137,548
Amalfi Kapital, LLC
    
34,483
Katelyn Kingen(5)
    
14,655
L.V. Brown, Jr.
    
10,437
Beverly C. Brown
    
9,265
George D. Hansen
    
8,750
Deborah Hansen
    
8,564
Chelsea Merullo(6)
    
1,724
Jaclynn Merullo(6)
    
1,724
Robert John Merullo, Jr.(6) 
    
1,724
Julia Woods(7)
    
1,724
Marielle Woods(7)
    
1,724
      
Total
    
9,679,435
      

(1)
 
This table reflects the early exercise of stock options by certain of our executive officers in April 2002. See “Related Party Transactions—Option Exercises.”
 
(2)
 
Quad-C Partners V, L.P. is the sole member of RR Investors, LLC, and as such, controls the disposition of the shares held by RR Investors, LLC and the exercise of the registration rights.
 
(3)
 
Stephen S. Snyder, as president and the sole shareholder of OTL, Ltd. controls the disposition of shares held by OTL, Ltd. and the exercise of the registration rights.
 
(4)
 
Edward T. Harvey, Terrence D. Daniels and certain other principals and employees of Quad-C collectively control the disposition of the shares held by RR Investors II, LLC and the exercise of the registration rights.
 
 
(5)
 
Gerald R. Kingen controls the disposition of these shares held by his daughter and the exercise of the registration rights.
 
(6)
 
Robert J. Merullo controls the disposition of these shares held by his minor children and the exercise of the registration rights.
 
(7)
 
Michael E. Woods controls the disposition of these shares held by his minor children and the exercise of the registration rights.
 
Indemnification agreements
 
For a description of our indemnification arrangements with our directors and executive officers, see “Management—Indemnification of Directors and Executive Officers and Limitation on Liability.”

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Other related party transactions
 
Mike Snyder and Bob Merullo have an ownership interest in one of our franchisees, Mach Robin, LLC. Mike Snyder owns 31.0% and Bob Merullo owns 7.0%. We recognized franchise and royalty fees from Mach Robin in the amounts of $204,969 in 1999, $415,649 in 2000 and $803,198 in 2001 and $283,704 in the first quarter of 2002. Mach Robin has a 40.0% ownership interest and a right to share in up to 60.0% of the profits of one of our other franchisees, Red Robin Restaurants of Canada, Ltd. We recognized franchise and royalty fees from Red Robin Restaurants of Canada in the amounts of $913,718 in 1999, $940,670 in 2000 and $849,801 in 2001 and $288,868 in the first quarter of 2002.
 
We lease our restaurant building located at 9130 South Crown Crest Boulevard, Parker, Colorado 80138, from 2J Crown Point, LLC. Stol Operating, Ltd. is the manager of 2J Crown Point, and Steve Snyder, Mike Snyder’s brother and the president of OTL, Ltd., one of our principal stockholders, is the president and the sole owner of Stol Operating. The lease is for a term of 20 years, ending in January 2022, and rent due under the lease is currently $20,663 per month.
 
We lease our restaurant building located at 3272 Fuhrman Avenue East, Seattle, Washington 98102, from Gerald R. Kingen, who previously served on our board of directors until May 2000. The lease is for a term of nine years, ending in April 2009, and rent due under the lease is currently $11,068 per month.
 
On May 11, 2000, we sold an aggregate of 775,862 shares of our common stock to Hibari Guam Corporation, an affiliate of Skylark Co., Ltd., which holds in excess of 5.0% of our common stock, in exchange for the satisfaction, forgiveness and cancellation of a promissory note executed in favor of Hibari Guam in the principal amount of $4.5 million pursuant to a common stock subscription agreement.
 
At our request, the underwriters may offer some of our directors, executive officers and their family members the right to purchase shares of our common stock in the offering. For a further description of our directed share program, see “Underwriting.”
 
For a further description of transactions between us and some of our directors, see “Management—Compensation Committee Interlocks and Insider Participation.”

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PRINCIPAL AND SELLING STOCKHOLDERS
 
The following table contains information about the beneficial ownership of our common stock before and after the consummation of this offering for:
 
 
 
each person who beneficially owns more than 5.0% of our capital stock;
 
 
 
each of our directors;
 
 
 
each named executive officer;
 
 
 
all directors and executive officers as a group; and
 
 
 
each selling stockholder.
 
Unless otherwise indicated, the address for each person or entity named below is c/o Red Robin Gourmet Burgers, Inc., 5575 DTC Parkway, Suite 110, Greenwood Village, Colorado 80111.
 
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and except for community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The percentage of beneficial ownership before the offering is based on 11,025,654 shares of common stock outstanding as of May 19, 2002.
 
    
Shares Beneficially
Owned Prior to the
Offering(1)

        
Shares Beneficially
Owned After the
Offering(1)

 
Name

  
Number

  
Percent(2)

   
Shares
Being
Offered

  
Number

  
Percent(2)

 
Quad-C Partners V, L.P.(3)
  
4,144,562
  
37.6
%
 
—  
  
4,144,562
  
27.6
%
Skylark Co., Ltd.(4)
  
2,379,310
  
21.6
 
 
21,172
  
2,358,138
  
15.7
 
OTL, Ltd.(5)
  
793,648
  
7.2
 
 
120,000
  
673,648
  
4.5
 
Gaishoku System Kenkyujo Company, Ltd.
(Gaiken)(6)
  
775,862
  
7.0
 
 
775,862
  
—  
  
—  
 
Hibari Guam Corporation(7)
  
775,862
  
7.0
 
 
21,172
  
754,690
  
5.0
 
Michael J. Snyder
  
1,483,302
  
13.5
 
 
—  
  
1,483,302
  
9.9
 
James P. McCloskey(8)
  
172,412
  
1.6
 
 
—  
  
172,412
  
1.1
 
Michael E. Woods(9)
  
215,892
  
2.0
 
 
—  
  
215,892
  
1.4
 
Robert J. Merullo(10)
  
155,547
  
1.4
 
 
—  
  
155,547
  
1.0
 
Todd A. Brighton
  
—  
  
—  
 
 
—  
  
—  
  
—  
 
Eric C. Houseman(11)
  
17,241
  
*
 
 
—  
  
17,241
  
*
 
Tasuku Chino(12)
  
—  
  
—  
 
 
—  
  
—  
  
—  
 
Terrence D. Daniels(13)
  
4,310,344
  
39.1
 
 
—  
  
4,310,344
  
28.7
 
Edward T. Harvey(14)
  
4,310,344
  
39.1
 
 
—  
  
4,310,344
  
28.7
 
Gary J. Singer(15)
  
5,518
  
*
 
 
—  
  
5,518
  
*
 
Directors and Executive Officers as a group
(10 persons)(16)
  
6,360,256
  
       57.6
 
 
—  
  
6,360,256
  
       42.3
 
Gerald Kingen(17)
  
360,000
  
3.3
 
 
52,000
  
308,000
  
2.0
 
Kiwamu Yokokawa(18)
  
68,966
  
*
 
 
68,966
  
—  
  
—  
 

*
 
Represents beneficial ownership of less than one percent (1.0%) of the outstanding shares of our common stock.
 
(1)
 
This table gives effect to the exercise of stock options by certain of our executive officers. See “Related Party Transactions—Option Exercises.”
 
(2)
 
If a stockholder holds options or other securities that are exercisable or otherwise convertible into our common stock within 60 days of May 19, 2002, we treat the common stock underlying those securities as owned by that stockholder, and as outstanding shares when we calculate the stockholder’s percentage ownership of our common stock. However, we do not consider that common stock to be outstanding when we calculate the percentage ownership of any other stockholder.

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  (3)
 
4,144,562 shares of our common stock are owned of record by RR Investors, LLC. As the sole member of RR Investors, Quad-C Partners V, L.P. has the sole power to vote and dispose of the shares held by RR Investors. Quad-C Advisors V, L.L.C. is the general partner of Quad-C Partners V. Edward T. Harvey, one of our directors, is the president and a director of RR Investors. In addition, Mr. Harvey has an indirect management interest in RR Investors as a holder of a 15.0% membership interest in Quad-C Advisors V. Terrence D. Daniels, one of our other directors, is the vice president and secretary of RR Investors. In addition, Mr. Daniels has an indirect membership interest in RR Investors as a holder of a 40.0% membership interest in Quad-C Advisors V. This amount excludes 165,782 shares of common stock held by RR Investors II, LLC. See footnotes 13 and 14, below, for more information regarding RR Investors II. The address of this stockholder is c/o Quad-C Management, Inc., 230 East High Street, Charlottesville, Virginia 22902.
 
  (4)
 
Includes 775,862 shares of common stock held by Hibari Guam Corporation, an indirect wholly owned subsidiary of Skylark Co., Ltd. In this offering, Hibari Guam Corporation will sell 21,172 shares of common stock. Skylark Co., Ltd.’s address is Shacho-Shitsu Branch, 16th Floor, Shinjuku Green Tower, 6-14-1 Nishi Shinjuku, Shinjuku, Tokyo 160-0023 Japan.
 
  (5)
 
Consists of 793,648 shares of common stock borrowed from Stephen S. Snyder, as trustee of the Stephen S. Snyder Intervious Trust. If the over-allotment option is exercised in full, OTL, Ltd. will hold 672,638 shares of common stock after the offering. OTL, Ltd.’s address is 2300 River Road, #17, Yakima, Washington 98902.
 
  (6)
 
Gaishoku System Kenkyujo’s address is 1-25-8 Nishikubo, Musashino-shi, Tokyo, 180 Japan.
 
  (7)
 
If the over-allotment option is exercised in full, Hibari Guam Corporation will not own any shares after the offering. Hibari Guam Corporation’s address is 9999 South Marine Drive, Temuning, Guam 96911.
 
  (8)
 
Includes 3,034 shares held by the Claire C. McCloskey Trust, 3,034 shares held by the Megan L. McCloskey Trust and 3,034 shares held by the James P. McCloskey, Jr. Trust, the sole beneficiaries of which are Mr. McCloskey’s children. This amount also includes 11,586 shares held by the James P. McCloskey Retained Annuity Trust.
 
  (9)
 
Includes an aggregate of 3,448 shares held by Mr. Woods’ minor children.
 
(10)
 
Includes an aggregate of 5,172 shares held by Mr. Merullo’s minor children.
 
(11)
 
Consists of 3,448 shares of common stock subject to options exercisable within 60 days of May 19, 2002 and 13,793 shares of common stock subject to performance-vested options which we expect to become exercisable upon consummation of the offering.
 
(12)
 
Excludes 775,862 shares of common stock held by Gaishoku System Kenkyujo Company, Ltd. Mr. Chino owns approximately 25.0% of the outstanding capital stock of Gaishoku System Kenkyujo and his three brothers own the remaining 75.0% of the outstanding capital stock of Gaishoku System Kenkyujo. Mr. Chino and his three brothers are each members on the board of directors of Gaishoku System Kenkyujo. One of Mr. Chino’s brothers is also the president of Gaishoku System Kenkyujo. Mr. Chino disclaims beneficial ownership of these shares.
 
Also excludes 2,379,310 shares of common stock held by Skylark Co., Ltd. Mr. Chino owns approximately 4.9% of the outstanding capital stock of Skylark. Mr. Chino’s three brothers own an additional 14.7% of Skylark’s outstanding capital stock. Mr. Chino and his three brothers are each members on the board of directors of Skylark. Mr. Chino disclaims beneficial ownership of these shares.
 
(13)
 
Consists of 4,144,562 shares of common stock held by RR Investors, LLC and 165,782 shares of common stock held by RR Investors II, LLC. Mr. Daniels is the vice president and secretary of each of RR Investors and RR Investors II and, as such, shares voting and dispositive power as to the shares held by RR Investors and RR Investors II. In addition, Mr. Daniels has an indirect membership interest in RR Investors as a holder of a 40.0% membership interest in Quad-C Advisors V, L.L.C., the general partner of the sole member of RR Investors, Quad-C Partners V, L.P. Mr. Daniels also has a membership interest in RR Investors II equal to 22.5% and his four children collectively own an additional 20.8% of the outstanding membership interests of RR Investors II. Mr. Daniels disclaims beneficial ownership of these shares except to the extent of Mr. Daniels’ pecuniary interest therein.

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(14)
 
Consists of 4,144,562 shares of common stock held by RR Investors, LLC and 165,782 shares of common stock held by RR Investors II, LLC. Mr. Harvey is the president and a director of each of RR Investors and RR Investors II and, as such, shares voting and dispositive power as to the shares held by RR Investors and RR Investors II. In addition, Mr. Harvey has an indirect membership interest in RR Investors as a holder of a 15.0% membership interest in Quad-C Advisors V, L.L.C., the general partner of the sole member of RR Investors, Quad-C Partners V, L.P. Mr. Harvey also has an indirect membership interest in RR Investors II through High Street Holdings, L.C., in which he is the manager and has an 80.0% ownership interest. Mr. Harvey disclaims beneficial ownership of these shares except to the extent of Mr. Harvey’s pecuniary interest therein.
 
(15)
 
Includes 2,759 shares of common stock subject to options exercisable within 60 days of May 19, 2002.
 
(16)
 
Includes 6,207 shares of common stock subject to options exercisable within 60 days of May 19, 2002 and 13,793 shares of common stock subject to performance-vested options which we expect to become exercisable upon consummation of the offering.
 
(17)
 
Includes 14,655 shares held by Mr. Kingen’s minor child.
 
(18)
 
Consists of 68,966 shares of common stock subject to options exercisable within 60 days of May 19, 2002. Mr. Yokokawa has notified us that he intends to exercise these options prior to the offering.

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DESCRIPTION OF CAPITAL STOCK
 
Prior to the consummation of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock consists of 50,000,000 shares of common stock, $0.001 par value per share, and 1,000,000 shares of preferred stock, $0.001 par value per share. Immediately following the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 50,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As of May 19, 2002, there were 11,025,654 shares of common stock outstanding, held of record by 75 stockholders, and options to purchase 504,466 shares of common stock.
 
Common stock
 
Under our amended and restated certificate of incorporation, the holders of common stock are entitled to one vote per share on all matters to be voted on by the stockholders. After payment of any dividends due and owing to the holders of preferred stock, holders of common stock are entitled to receive dividends declared by the board of directors out of funds legally available for dividends. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share in all assets remaining after payment of liabilities and liquidation preferences of outstanding shares of preferred stock. Holders of common stock have no preemptive, conversion, subscription or other rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable.
 
Preferred stock
 
In accordance with our amended and restated certificate of incorporation, our board of directors has the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock. Our board of directors may issue preferred stock in one or more series and may determine the rights, preferences, privileges, qualifications and restrictions granted to or imposed upon the preferred stock, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that common stockholders will receive dividend payments and payments upon liquidation. The issuance of preferred stock could also have the effect of decreasing the market price of the common stock and could delay, deter or prevent a change in control of our company. We have no present plans to issue any shares of preferred stock.
 
Registration rights
 
Pursuant to a registration rights agreement between us and certain of our stockholders, if at any time we propose to register our common stock under the Securities Act for our own account or the account of any of our stockholders or both, the stockholders party to the registration rights agreement are entitled to notice of the registration and to include registrable shares in the offering, provided that the underwriters of that offering do not limit the number of shares included in the registration. After this offering, the stockholders with these registration rights will hold an aggregate of 9,679,435 shares of our common stock. We are required to bear substantially all costs incurred in these registrations, other than underwriting discounts and commissions. The registration rights described above could result in substantial future expenses for us and adversely affect any future equity or debt offerings.
 
Anti-takeover provisions
 
Delaware law
 
We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became

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an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sales or other transactions resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years, did own) 15.0% or more of the company’s voting stock. The statute could delay, defer or prevent a change in control of our company.
 
Certificate of incorporation and bylaw provisions
 
Various provisions contained in our amended and restated certificate of incorporation and bylaws could delay or discourage some transactions involving an actual or potential change in control of us or our management and may limit the ability of stockholders to remove current management or approve transactions that stockholders may deem to be in their best interests and could adversely affect the price of our common stock. These provisions:
 
 
Ÿ
 
authorize our board of directors to establish one or more series of preferred stock, the terms of which can be determined by the board of directors at the time of issuance;
 
 
Ÿ
 
divide our board of directors into three classes of directors, with each class serving a staggered three-year term. As the classification of the board of directors generally increases the difficulty of replacing a majority of the directors, it may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of us and may maintain the composition of the board of directors;
 
 
Ÿ
 
do not provide for cumulative voting in the election of directors unless required by applicable law. Under cumulative voting, a minority stockholder holding a sufficient percentage of a class of shares may be able to ensure the election of one or more directors;
 
 
Ÿ
 
provide that a director may be removed from our board of directors only for cause, and then only by a supermajority vote of the outstanding shares;
 
 
Ÿ
 
require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing;
 
 
Ÿ
 
state that special meetings of our stockholders may be called only by the chairman of the board of directors, our chief executive officer, by the board of directors after a resolution is adopted by a majority of the total number of authorized directors, or by the holders of not less than 10.0% of our outstanding voting stock;
 
 
Ÿ
 
provide that the chairman or other person presiding over any stockholder meeting may adjourn the meeting whether or not a quorum is present at the meeting;
 
 
Ÿ
 
establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting;
 
 
Ÿ
 
provide that certain provisions of our certificate of incorporation can be amended only by supermajority vote of the outstanding shares, and that our bylaws can be amended only by supermajority vote of the outstanding shares or our board of directors;
 
 
Ÿ
 
allow our directors, not our stockholders, to fill vacancies on our board of directors; and
 
 
Ÿ
 
provide that the authorized number of directors may be changed only by resolution of the board of directors.
 
Listing
 
Our common stock has been approved for quotation on The Nasdaq Stock Market’s National Market under the trading symbol “RRGB.”
 
Transfer agent and registrar
 
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.

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SHARES ELIGIBLE FOR FUTURE SALE
 
Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect market prices prevailing from time to time. Upon completion of this offering, we will have outstanding an aggregate of 15,025,654 shares of common stock. Of these shares, the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by our “affiliates”, as that term is defined in Rule 144 of the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below.
 
Sales of restricted shares
 
The 11,025,654 shares of common stock held by existing stockholders as of May 19, 2002 are “restricted securities” under Rule 144. The number of shares of common stock available for sale in the public market is limited by restrictions under the Securities Act. Our directors, officers and a significant number of our stockholders, who together will own a majority of the shares of our common stock outstanding after the offering, have entered or will enter into lock-up agreements with the underwriters prior to the consummation of this offering, pursuant to which we and those holders of stock and options have agreed or will agree not to, directly or indirectly, sell, dispose of or hedge any shares of common stock or securities convertible into or exchangeable for shares of common stock without the prior consent of Banc of America Securities LLC for a period of 180 days after the date of this prospectus. This consent may be given at any time without public notice.
 
In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year (including the holding period of any prior owner, except if the prior owner was an affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (a) one percent of the number of shares of common stock then outstanding (which will equal approximately 150,257 shares immediately after the offering); or (b) the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owners except a prior owner who was an affiliate), is entitled to sell its shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144; therefore, unless otherwise restricted, “144(k) shares” could be sold immediately upon the completion of this offering. After this offering, an aggregate of approximately 614,927 shares qualified as 144(k) shares which are not otherwise restricted.
 
Registration rights
 
Upon completion of this offering, holders of 9,679,435 shares of our common stock will be entitled to certain rights with respect to the registration of their shares under the Securities Act. See “Description of Capital Stock—Registration Rights.” Except for shares purchased by affiliates, registration of their shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. These stockholders are not permitted to exercise their registration rights for at least six months following this offering.

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Stock options and stock plans
 
Immediately after the offering, we intend to file registration statements under the Securities Act covering:
 
 
 
up to 504,466 shares of common stock reserved for issuance upon exercise of options outstanding as of May 19, 2002;
 
 
 
up to 1,475,690 shares of common stock that may be issued with respect to awards that may be granted in the future under our stock option plans; and
 
 
 
up to 300,000 shares of common stock that may be issued to our employees pursuant to our employee stock purchase plan.
 
We expect the registration statements to be filed and become effective as soon as practicable after the closing of the offering. Shares registered under these registration statements will, once issued, be available for sale in the open market after the effective date of the applicable registration statement, subject to prohibitions on sales or transfers for a period of 180 days after the date of this prospectus under lock-up arrangements that we have entered into with some holders of these securities, or that some holders have entered into with the underwriters, and subject to the timing and volume limitations of Rule 144 with regard to our affiliates or Rule 701 under the Securities Act.

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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
 
The following is a general discussion of certain U.S. federal income and estate tax consequences of the acquisition, ownership, and disposition of our common stock purchased pursuant to this offering by a beneficial owner that, for U.S. federal income tax purposes, is a non-U.S. holder. As used in this prospectus, the term “non-U.S. holder” is a person that is not, for U.S. Federal income tax purposes:
 
 
 
an individual who is a citizen or resident of the United States;
 
 
 
a corporation (including any entity treated as a corporation for U.S. tax purposes) or partnership (including any entity treated as a partnership for U.S. tax purposes) created or organized in the United States or under the laws of the United States or of any political subdivision of the United States, other than a partnership treated as foreign under U.S. Treasury regulations;
 
 
 
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
 
 
 
a trust, in general, if its administration is subject to the primary supervision of a U.S. court and one or more U.S. persons have the authority to control all of its substantial decisions, or if it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
 
This discussion assumes that you will hold our common stock issued pursuant to this offering as a capital asset within the meaning of the Internal Revenue Code of 1986, as amended, or the Code. This discussion does not address all aspects of taxation that may be relevant to particular non-U.S. holders in light of their personal investment or tax circumstances or to persons that are subject to special tax rules. In particular, this description of U.S. tax consequences does not address:
 
 
 
U.S. state and local or non-U.S. tax consequences;
 
 
 
specific facts and circumstances that may be relevant to a particular non-U.S. holder’s tax position, including, if the non-U.S. holder is an entity that is treated as a partnership for U.S. tax purposes, the U.S. tax consequences of holding and disposing our common stock may be affected by determinations made at the partner level;
 
 
 
the tax consequences for the shareholders, partners or beneficiaries of a non-U.S. holder;
 
 
 
special tax rules that may apply to some non-U.S. holders, including without limitation, banks, insurance companies, financial institutions, broker-dealers, tax-exempt entities, or U.S. expatriates; or
 
 
 
special tax rules that may apply to a non-U.S. holder that holds our common stock as part of a straddle, hedge or conversion transaction.
 
This discussion is based on current provisions of the Code, U.S. Treasury regulations, judicial opinions, published positions of the U.S. Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect on the date hereof and all of which are subject to differing interpretations or change, possibly with retroactive effect. We have not sought, and will not seek, any ruling from the IRS or any opinion of counsel with respect to the tax consequences discussed herein, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained. Furthermore, this discussion does not give a detailed discussion of any state, local or foreign tax considerations.
 
We urge you to consult your tax advisor about the U.S. federal tax consequences of acquiring, holding or disposing our common stock, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction or under any applicable tax treaty.
 
Dividends
 
We do not anticipate paying cash dividends on our common stock in the foreseeable future. If dividends are paid to non-U.S. holders on shares of our common stock, however, such dividends will generally be subject to

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withholding of U.S. federal income tax at the rate of 30.0% or such lower rate as may be specified by an applicable income tax treaty. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under an applicable income tax treaty and the manner of claiming the benefits of such treaty (including, without limitation, the need to obtain a U.S. taxpayer identification number).
 
Dividends that are effectively connected with a non-U.S. holder’s conduct of a trade or business in the United States, directly or through an entity treated as a partnership for U.S. tax purposes, or, if provided in an applicable income tax treaty, dividends that are attributable to a permanent establishment in the United States, are not subject to the U.S. withholding tax, but instead are subject to U.S. federal income tax on a net income basis at applicable graduated rates. Certain certification and disclosure requirements must be complied with in order for effectively connected income or income attributable to a permanent establishment to be exempt from withholding. Any effectively connected dividends or dividends attributable to a permanent establishment received by a non-U.S. holder that is treated as a foreign corporation for U.S. tax purposes may be subject to an additional “branch profits tax” at a 30.0% rate or such lower rate as may be specified by an applicable income tax treaty.
 
A non-U.S. holder who claims the benefit of an applicable income tax treaty rate generally will be required to satisfy applicable certification and other requirements. However,
 
 
 
in the case of common stock held by a foreign partnership, the certification requirement will generally be applied to the partners of the partnership and the partnership will be required to provide certain information;
 
 
 
in the case of common stock held by a foreign trust, the certification requirement will generally be applied to the trust or the beneficial owners of the trust depending on whether the trust is a “foreign complex trust,” “foreign simple trust,” or “foreign grantor trust” as defined in the U.S. Treasury regulations; and
 
 
 
look-through rules will apply for tiered partnerships, foreign simple trusts and foreign grantor trusts.
 
A non-U.S. holder that is a foreign partnership or a foreign trust is urged to consult its own tax advisor regarding its status under these U.S. Treasury regulations and the certification requirements applicable to it.
 
A non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS.
 
Gain on disposition
 
A non-U.S. holder will generally not be subject to U.S. federal income tax, including by way of withholding, on gain recognized on a sale, exchange or other disposition of our common stock unless any one of the following is true:
 
 
1.
 
The non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the sale, exchange or other disposition and certain other requirements are met;
 
 
2.
 
The gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States, directly or through an entity treated as a partnership for U.S. tax purposes and, if an applicable tax treaty requires, attributable to a U.S. permanent establishment of such non-U.S. holder; or
 
 
3.
 
Our common stock constitutes a U.S. real property interest by reason of our status as a “U.S. real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of (i) the period during which the non-U.S. holder holds our common stock or (ii) the 5-year period ending

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on the date the non-U.S. holder disposes of our common stock. As long as our common stock is regularly traded on an established securities market for tax purposes, our common stock will not be treated as a U.S. real property interest with respect to a non-U.S. holder that has not beneficially owned more than 5.0% of such regularly traded common stock at any time within the five-year period preceding such disposition. We believe that we are a U.S. real property holding corporation and will remain a U.S. real property holding corporation for the foreseeable future. See discussion below.
 
Non-U.S. holders described in clause (1) above are taxed on their gains (including gains from sales of our common stock and net of applicable U.S. losses from sales or exchanges of other capital assets incurred during the year) at a flat rate of 30.0% or such lower rate as may be specified by an applicable income tax treaty. Non-U.S. holders described in clause (2) or (3) above will be subject to tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates. If a non-U.S. holder described in clause (2) is a corporation, it may be subject to the branch profits tax at a rate equal to 30.0% of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty.
 
In general, we will be treated as a “U.S. real property holding corporation” if the fair market value of our “U.S. real property interests” equals or exceeds 50.0% of the sum of the fair market value of our worldwide real property interests and our other assets used or held for use in a trade or business. The determination of the fair market value of our assets and, therefore, whether we are a U.S. real property holding corporation at any given time, will depend on the particular facts and circumstances applicable at the time.
 
However, even if we are or have been a U.S. real property holding corporation, a non-U.S. holder which did not beneficially own, directly or indirectly, more than 5.0% of the total fair market value of our common stock at any time during the shorter of the five-year period ending on the date of disposition or the period that our common stock was held by the non-U.S. holder (a “non-5.0% holder”) and which is not otherwise taxed under any other circumstances described above, generally will not be taxed on any gain realized on the disposition of our common stock if, at any time during the calendar year of the disposition, our common stock was regularly traded on an established securities market within the meaning of the applicable U.S. Treasury regulations.            
 
We have applied to have our common stock listed on the NASDAQ. Although not free from doubt, our common stock should be considered to be regularly traded on an established securities market for any calendar quarter during which it is regularly quoted on NASDAQ by brokers or dealers that hold themselves out to buy or sell our common stock at the quoted price. If our common stock were not considered to be regularly traded on NASDAQ at any time during the applicable calendar year, then a non-5.0% holder would be taxed for U.S. federal income tax purposes on any gain realized on the disposition of our common stock on a net income basis as if the gain were effectively connected with the conduct of a U.S. trade or business by the non-5.0% holder during the taxable year and, in such case, the person acquiring our common stock from a non-5.0% holder generally would have to withhold 10.0% of the amount of the proceeds of the disposition. Such withholding may be reduced or eliminated pursuant to a withholding certificate issued by the IRS in accordance with applicable U.S. Treasury regulations. We urge all non-U.S. holders to consult their own tax advisors regarding the application of these rules to them.
 
U.S. federal estate taxes
 
Our common stock beneficially owned or treated as beneficially owned by an individual who at the time of death is a non-U.S. holder will be included in his or her estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax.
 
Information reporting and backup withholding
 
Under U.S. Treasury regulations, we must report annually to the IRS and to each non-U.S. holder the amount of dividends paid to such non-U.S. holder and the tax withheld with respect to those dividends. These

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information reporting requirements apply even if withholding was not required because the dividends were effectively connected dividends or withholding was reduced or eliminated by an applicable tax treaty. Pursuant to an applicable tax treaty, that information may also be made available to the tax authorities in the country in which the non-U.S. holder resides.
 
The gross amount of dividends paid to a non-U.S. holder that fails to certify its non-U.S. holder status in accordance with applicable U.S. Treasury regulations generally will be reduced by backup withholding at the applicable rate (currently 30.0%, subject to a schedule that reduces the rate over time to 28.0% in 2006).
 
A non-U.S. holder is required to certify its non-U.S. status in order to avoid information reporting and backup withholding on disposition proceeds where the transaction is effected by or through a U.S. office of a broker.
 
U.S. information reporting and backup withholding generally will not apply to a payment of proceeds of a disposition of common stock where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. However, information reporting requirements, but not backup withholding, generally will apply to such a payment if the broker is (i) a U.S. person; (ii) a foreign person that derives 50.0% or more of its gross income for certain periods from the conduct of a trade or business in the United States; (iii) a controlled foreign corporation as defined in the Code; or (iv) a foreign partnership with certain U.S. connections, unless the broker has documentary evidence in its records that the holder is a non-U.S. holder and certain conditions are met or the holder otherwise establishes an exemption.
 
Backup withholding is not an additional tax. Amounts that we withhold under the backup withholding rules may be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability if certain required information is furnished to the IRS. Non-U.S. holders should consult their own tax advisors regarding application of backup withholding in their particular circumstance and the availability of and procedure for obtaining an exemption from backup withholding under current U.S. Treasury regulations.
 
The foregoing discussion is only a summary of certain U.S. federal income and estate tax consequences of the ownership, sale or other disposition of our common stock by non-U.S. holders. You are urged to consult your own tax advisor with respect to the particular tax consequences to you of ownership and disposition of our common stock, including the effect of any U.S., state, local, non-U.S. or other tax laws and any applicable income or estate tax treaty.

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UNDERWRITING
 
We are offering the shares of common stock described in this prospectus through a number of underwriters. Banc of America Securities LLC, U.S. Bancorp Piper Jaffray Inc. and First Union Securities, Inc. are acting as representatives of the underwriters. We have entered into a firm commitment underwriting agreement with the representatives. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:
 
Underwriter

  
Number of Shares

Banc of America Securities LLC
    
U.S. Bancorp Piper Jaffray Inc.
    
First Union Securities, Inc.
    
    
Total
  
5,038,000
    
 
The underwriters initially propose to offer shares to the public at the price specified on the cover page of this prospectus. The underwriters may allow some dealers a concession of no more than $            per share. The underwriters also may allow, and any dealer may reallow, a concession of no more than $            per share to some other dealers. If all the shares are not sold at the initial public offering price, the underwriters may change the offering price and the other selling terms. The common stock is offered subject to a number of conditions, including:
 
 
 
receipt and acceptance of our common stock by the underwriters, and
 
 
 
the right to reject orders in whole or in part.
 
The underwriters have an option to buy up to 755,700 additional shares of common stock from some of the selling stockholders to cover sales of shares by the underwriters which exceed the number of shares specified in the table above at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. The underwriters have 30 days from the date of this prospectus to exercise this option. If the underwriters exercise this option, they will each be obligated, subject to certain conditions, to purchase additional shares approximately in proportion to the amounts specified in the table above. If any additional shares are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered. We will pay the expenses associated with the exercise of the over-allotment option.
 
The underwriting fee is equal to the public offering price per share of the common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is     % of the initial public offering price. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares.
 
      
Paid by Red Robin

      
No Exercise

    
Full Exercise

Per Share
             
Total
             
 
      
Paid by the
Selling Stockholders

      
No Exercise

    
Full Exercise

Per Share
             
Total
             

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