SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
( ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
(X ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1997 to December 31, 1997
Commission file number 333-29093
GALVESTON'S STEAKHOUSE CORP.
-----------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 94-3248672
- ---------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
151 East Alessandro Blvd., Riverside, CA 92508
-------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(909) 789-7606
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. (X) Yes ( ) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Park III of this Form 10-K or any amendment to the
Form 10-K. [X]
The Issuer's revenues for its most recent fiscal year were $1,867,671.
The aggregate market value of the common equity held by non-affiliates as
of June 1, 1998, was $11,428,775.
PART III
Item 6. Exhibits, List and Reports on Form 8-K
(a) The following documents are filed as part of this report.
1. Financial Statements. The Registrant's Financial Statements for
the year ended December 31, 1997.
2. Financial Statement Schedules.
<PAGE>
3. Exhibits.
Exhibit 27- Financial Data Schedule
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 2nd day of June, 1998.
GALVESTON'S STEAKHOUSE CORP.
By: /s/ Richard M. Lee
--------------------------------
Chairman of the Board of Directors,
Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ RICHARD M. LEE Chairman of the Board June 2, 1998
Richard M. Lee Chief Executive Officer
and Director (Principal
Executive Officer)
/s/ HIRAM J. WOO President, Secretary June 2, 1998
Hiram J. Woo Treasurer and Director
(Principal Financial Officer)
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1997 AND
THE PERIOD FROM JUNE 3, 1996
(INCEPTION) TO DECEMBER 31, 1996
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
CONTENTS
December 31, 1997
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2 - 3
Statements of Operations 4
Statements of Stockholders' Deficit 5
Statements of Cash Flows 6 - 7
Notes to Financial Statements 8 - 23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Galveston's Steakhouse Corp.
We have audited the accompanying balance sheet of Galveston's Steakhouse Corp.
(a Delaware corporation) as of December 31, 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the year then ended, and
for the period from June 3, 1996 (inception) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Galveston's Steakhouse Corp. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, and for the period from June 3, 1996 (inception) to
December 31, 1996 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 2, 1998, except as to Notes
15 and 16, as to which the date
is May 29, 1998
<PAGE>
<TABLE>
<CAPTION>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET
December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 64,726
Other receivables 156,015
Advances to officers 179,739
Inventories 25,411
Prepaid expenses 10,452
Other 72,861
----------------
Total current assets 509,204
Furniture and equipment, net 905,084
Other assets
Intangible assets, net 498,921
Deferred offering costs 296,845
Liquor license and other assets 41,979
----------------
Total assets $ 2,252,033
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET (Continued)
December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C>
Current liabilities
Current portion of notes payable $ 2,340,001
Accounts payable 36,375
Accrued liabilities 76,190
Accrued interest 309,630
Accrued payroll costs 85,544
----------------
Total current liabilities 2,847,740
Notes payable, net of current portion 818,999
----------------
Total liabilities 3,666,739
Commitments and contingencies
Stockholders' deficit
Preferred stock, $.001 par value
4,000,000 shares authorized
0 shares issued and outstanding -
Preferred stock, Series B, Convertible, $.001 par value
1,000,000 shares authorized
1,000,000 shares issued and outstanding 1,000
Common stock, $.01 par value
10,000,000 shares authorized
825,000 shares issued and outstanding 8,250
Additional paid-in capital 596,563
Accumulated deficit (2,020,519)
----------------
Total stockholders' deficit (1,414,706)
Total liabilities and stockholders' deficit $ 2,252,033
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
Period from
June 3, 1996
Year Ended (Inception) to
December 31, December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Restaurants revenues $ 1,867,671 $ 416,544
--------------- ----------------
Restaurant costs and expenses
Food and beverage 627,165 153,590
Payroll and payroll related costs 757,232 255,463
Direct operating costs 400,217 116,819
Depreciation and amortization 221,737 41,669
General and administrative expenses 350,945 136,467
Pre-opening and start-up costs 65,155 433,694
--------------- ----------------
Total restaurant costs and expenses 2,422,451 1,137,702
--------------- ----------------
Loss from operations (554,780) (721,158)
--------------- ----------------
Other income (expense)
Interest and financing costs (523,187) (271,373)
Other - 49,979
--------------- ----------------
Total other income (expense) (523,187) (221,394)
--------------- ----------------
Net loss $ (1,077,967) $ (942,552)
=============== ================
Basic loss per share $ (1.36) $ (1.42)
=============== ================
Diluted loss per share $ (1.36) $ (1.42)
=============== ================
Weighted-average shares outstanding 790,296 662,516
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
Series B, Convertible Common Stock
----------------------------------- -----------------------------------
Shares Amount Shares Amount
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance, June 3, 1996 - $ - - $ -
Issuance of common stock 713,849 7,138
Issuance of preferred stock 1,000,000 1,000
Net loss
---------------- --------------- --------------- ----------------
Balance, December 31, 1996 1,000,000 1,000 713,849 7,138
Issuance of common stock in
connection with $150,000
bridge loans 30,000 300
Issuance of common stock for
services rendered 24,950 249
Issuance of common stock in
connection with private
placement 56,201 563
Capital contribution
Net loss
---------------- --------------- --------------- ----------------
Balance, December 31, 1997 1,000,000 $ 1,000 825,000 $ 8,250
================ =============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
---------------- --------------- ---------------
<S> <C> <C> <C>
Balance, June 3, 1996 $ - $ - $ -
Issuance of common stock 169,225 176,363
Issuance of preferred stock 1,000
Net loss (942,552) (942,552)
---------------- --------------- ---------------
Balance, December 31, 1996 169,225 (942,552) (765,189)
Issuance of common stock in
connection with $150,000
bridge loans 149,700 150,000
Issuance of common stock for
services rendered 124,481 124,730
Issuance of common stock in
connection with private
placement 23,157 23,720
Capital contribution 130,000 130,000
Net loss (1,077,967) (1,077,967)
---------------- --------------- ---------------
Balance, December 31, 1997 $ 596,563 $ (2,020,519) $ (1,414,706)
================ =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
Period from
June 3, 1996
Year Ended (Inception) to
December 31, December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,077,967) $ (942,552)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 221,737 41,667
Amortization of discount on private placement proceeds 117,748 68,855
Issuance of common stock in exchange for services
rendered 124,730 14,480
(Increase) decrease in
Other receivables (112,170) (43,845)
Advances to officers (144,349) (35,390)
Inventories 4,880 (30,291)
Prepaid expenses (4,027) (6,425)
Liquor license and other assets 14,321 -
Increase (decrease) in
Accounts payable (643) 37,018
Accrued liabilities (1,972) 78,162
Accrued interest 240,142 69,488
Accrued payroll costs 44,690 40,854
--------------- ----------------
Net cash used in operating activities (572,880) (707,979)
--------------- ----------------
Cash flows from investing activities
Purchases of furniture and equipment (29,129) (159,582)
Increase in intangibles (15,000) -
Increase in other current assets (72,861) -
Purchase of Texas Loosey's restaurants - (275,000)
--------------- ----------------
Net cash used in investing activities (116,990) (434,582)
--------------- ----------------
Cash flows from financing activities
Proceeds from issuance of notes payable 701,282 1,026,117
Proceeds from issuance of common stock 23,720 162,883
Increase in deferred offering costs (296,845) -
Increase in common stock in connection with bridge loan 150,000 -
Capital contribution from officers 130,000 -
--------------- ----------------
Net cash provided by financing activities 708,157 1,189,000
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF CASH FLOWS (Continued)
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to December 31, 1996
- --------------------------------------------------------------------------------------------------------------------
Period from
June 3, 1996
Year Ended (Inception) to
December 31, December 31,
1997 1996
--------------- ----------------
<S> <C> <C>
Net increase in cash and cash equivalents $ 18,287 $ 46,439
Cash and cash equivalents, beginning of period 46,439 -
--------------- ----------------
Cash and cash equivalents, end of period $ 64,726 $ 46,439
=============== ================
Supplemental disclosures of cash flow information
Interest paid $ 13,523 $ 3,030
=============== ================
</TABLE>
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background and Operations
Galveston's Steakhouse Corp., a Delaware corporation (the "Company")
was incorporated on June 3, 1996. On December 19, 1996, the Board of
Directors adopted a resolution to change the Company's name from Texas
Loosey's Steakhouse & Saloon, Inc. to Galveston's Steakhouse Corp. The
Company owns and operates a Texas Loosey's Steakhouse and Saloon in
Torrance, California, and a Galveston's Steakhouse located in
Fullerton, California. Texas Loosey's is a casual dining restaurant
with a wide variety of menu choices, ranging from Mexican dishes to
steak dinners. Galveston's Steakhouse is a moderately priced steak and
seafood restaurant. Both of these restaurants were acquired from TLC
Restaurant Management Corp. on August 19, 1996, together with certain
intangible assets for a purchase price of $1,520,000, consisting of
notes payable of $1,245,000 and cash of $275,000. The acquisition was
recorded under the purchase method of accounting and resulted in the
Company recording $513,000 of goodwill.
Fiscal Year-End
The Company reports its operations on a 52-53 week fiscal year ending
on the Sunday closest to December 31. The current fiscal year ended on
December 27, 1997; however, for financial statement presentation, the
fiscal year end has been designated as December 31, 1997.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenues and expenses during the reported periods. Actual results could
differ from those estimates.
Stock Split
Effective August 11, 1997, the Company effected a 1-for-3.671 reverse
stock split and on December 30, 1997, effected a 1.650-for-1 forward
stock split. The preferred stock and options to acquire common stock
were unaffected by the stock split. All share and per share data have
been retroactively restated to reflect the stock split.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks and
credit card receivables. Credit card receivables are considered cash
equivalents because of their short collection period. The carrying
amount of credit card receivables approximates their fair value.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories, consisting principally of food, beverages, and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or
market.
Escrow Deposit and Management Fee
The Company is currently in escrow for the purchase of the assets of
two franchised Texas Loosey's Chili Parlor and Saloon restaurants
located in Riverside and Norco, California. In connection with this
acquisition, the Company has deposited approximately $73,000 into an
escrow account. This deposit is being carried in other current assets
on the accompanying balance sheet at December 31, 1997. The Company
assumed responsibility for the day-to-day operations of these
restaurants on March 1, 1997. In return for managing these restaurants
until the purchase is consummated, the Company is receiving a
management fee equal to the net income generated by the restaurants. As
of December 31, 1997, the Company has earned a management fee of
approximately $43,000. This management fee is reflected in revenues on
the accompanying statement of operations for the year ended December
31, 1997.
Furniture and Equipment
Furniture and equipment, including leasehold improvements, are recorded
at cost, less accumulated depreciation and amortization. Depreciation
is provided using the straight-line method over the estimated useful
lives of the respective assets, generally five years. Leasehold
improvements are amortized using the straight-line method over the
shorter of the useful life of the improvements or the remaining lease
term.
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of
operations.
Intangibles
Intangibles consist of a covenant not to compete made with the former
owner of the Fullerton and Torrance restaurants and goodwill. The
covenant not to compete is being amortized over five years (the length
of the contract) and goodwill is being amortized over a fifteen-year
period. The Company continually evaluates whether events or
circumstances have occurred that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses
an estimate of the related restaurants' undiscounted cash flows over
the remaining life of the goodwill in measuring whether the goodwill is
recoverable.
Deferred Offering Costs
Costs incurred in connection with the Company's anticipated initial
public offering ("IPO") are capitalized at December 31, 1997 and will
be recorded as a reduction to additional paid-in capital upon
completion of the offering.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquor License and Other Assets
Liquor licenses and other assets consist of the Company's liquor
licenses for the Fullerton and Torrance restaurants and miscellaneous
rent deposits.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," establishes and encourages
the use of the fair value based method of accounting for stock-based
compensation arrangements under which compensation cost is determined
using the fair value of stock-based compensation determined as of the
date of grant and is recognized over the periods in which the related
services are rendered. The statement also permits companies to elect to
continue using the current implicit value accounting method specified
in Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the implicit value based
method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement requires
companies to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for financial statements
issued for fiscal years beginning after December 15, 1997. Management
believes that SFAS No. 130 will not have a material effect on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." This statement establishes
additional standards for segment reporting in the financial statements
and is effective for fiscal years beginning after December 15, 1997.
Management believes that SFAS No. 131 will not have an effect on the
Company's financial statements.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified
to conform with the current year presentation.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Net Loss Per Share
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully
diluted earnings per share. Basic earnings per share is computed using
the weighted-average number of common shares outstanding during the
period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive.
Prior to SFAS No. 128, the Securities and Exchange Commission ("SEC")
required that, even where anti-dilutive, common and common equivalent
shares issued during the twelve-month period prior to the filing of an
IPO be included in the calculation of earnings per share as if they
were outstanding for all periods presented (using the treasury stock
method and the IPO price). Because of new requirements issued in 1998
by the SEC for companies that recently completed an IPO and
interpretation by FASB of the initial application of SFAS No. 128, the
number of shares used in the calculation of basic net loss per share
has changed to exclude common equivalent shares, even when
anti-dilutive. Net loss per share for all periods presented has been
restated to conform with SFAS No. 128 and Staff Accounting Bulletin No.
98.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts payable, and accrued liabilities, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for notes payable also approximate fair value because current interest
rates offered to the Company for debt of similar maturities are
substantially the same.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 2 - OTHER RECEIVABLES
Accounts receivable includes a $138,810 receivable from restaurants in
Riverside and Norco, California for payroll expenses paid on behalf of
the restaurants by the Company, management fees, and a $12,000
receivable arising from the sale of a liquor license during 1996.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1997 consisted of the
following:
<TABLE>
<S> <C>
Furniture, fixtures, and equipment $ 726,684
Leasehold improvements 367,725
----------------
1,094,409
Less accumulated depreciation and amortization 189,325
----------------
Total $ 905,084
================
</TABLE>
NOTE 4 - INTANGIBLES
Intangibles at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Goodwill $ 513,000
Covenant not to compete 45,000
Other 15,000
----------------
573,000
Less accumulated amortization 74,079
----------------
Total $ 498,921
================
</TABLE>
NOTE 5 - NOTES PAYABLE
As of December 31, 1997, notes payable consisted of the following:
<TABLE>
<S> <C>
Notes payable to 1996 private placement investors. Principal
and accrued interest at 8% is payable at the successful
completion of the IPO. Additionally, for each $25,000
note, these investors received 2,698 shares of the
Company's
common stock. $ 1,000,000
</TABLE>
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE (Continued)
<TABLE>
<S> <C>
Notes payable to 1997 private placement investors. Principal
and accrued interest at 8% is payable at the successful
completion of the IPO. Additionally, for each $25,000
note, these investors received 2,698 shares of the
Company's common stock. $ 500,000
Note payable to the former owner in the amount of $375,000,
bearing interest at 10% per annum accrued from the
original note date (August 19, 1996) until either February
19, 1997 or the successful completion of the Company's
IPO, at which principal and accrued interest is payable in
full. Pursuant to an extension agreement, the due date of
this note has been extended to February 15, 1998. The
extension agreement also modified the interest rate to 15%
per annum from February 19, 1997 through February 15,
1998. At the date of this report, the note is in default,
and the Company is renegotiating the asset purchase
agreement relating to the Torrance and Fullerton
restaurants as more fully
described in Note 15. 375,000
Note payable to the former owner in the amount of $870,000,
bearing interest at 8% per annum from the original note
date (August 19, 1996). No payments were due on this note
until February 19, 1997, at which time interest only
payments of $6,032 are due monthly for one year. Monthly
principal and interest payments of $10,978 are due from
February 19, 1998 through July 19, 2001, with the
remaining principal balance due via a balloon payment on
August 19, 2001. At the date of this report, the note is
in default, and the Company is renegotiating the asset
purchase agreement relating to the Torrance and Fullerton
restaurants as more fully described
in Note 15. 870,000
Notes payable to various individuals with interest rates
ranging from 9% to 14%, maturing in February 1998 or upon
the successful completion of the Company's IPO. 147,000
Convertible notes payable to various individuals which will
convert to the Company's common stock as more fully
described in Note 6. This conversion will only take place
upon the successful completion of the Company's IPO. 92,000
</TABLE>
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE (Continued)
<TABLE>
<S> <C>
The Company issued a $25,000 note payable. The note payable
was comprised of a $25,000 note from the Company and 2,249
shares of the Company's common stock. The note bears
interest at 8% per annum from the date of issuance until
the successful completion of the Company's IPO. Upon the
successful completion of the Company's IPO, accrued
interest and principal are due in full (see Note 8). $ 25,000
The Company obtained bridge loans in the amount of $150,000.
The bridge loan bears interest at a rate of 9% per annum
from the original note date until the successful
completion of the Company's IPO. Upon the successful
completion of the Company's IPO, accrued interest and
principal are due in full (see Note 9). 150,000
----------------
3,159,000
Less current portion 2,340,001
----------------
Long-term portion $ 818,999
================
Future principal payments due on long-term debt are as follows:
Year Ending
December 31,
1998 $ 2,340,001
1999 65,847
2000 71,312
2001 681,840
----------------
Total $ 3,159,000
================
</TABLE>
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 6 - CONVERTIBLE DEBT
The Company has convertible debt in the amount of $92,000, payable to
various individuals which will convert to the Company's common stock
upon the successful completion of the Company's IPO. All note holders
have elected to convert their debt to equity. The note holders will
receive shares of the Company's common stock equal to the principal
amount of their note multiplied by a factor of three, divided by the
IPO price per share. Consequently, the note holders will receive common
stock worth $276,000, in the aggregate. Although the note holders have
elected to convert their debt to the Company's common stock, these
amounts are carried in debt at December 31, 1997. The Company will
record the difference between the note amount of $92,000 and the
conversion amount of $276,000 as interest expense upon the closing date
of the IPO at which time the note holders will convert their debt to
equity as noted above.
NOTE 7 - PRIVATE PLACEMENTS
1996 Private Placement
The Company raised $1,000,000 through a private placement during 1996.
Each private placement "unit" was a combination of debt and equity. For
each $25,000 unit, an individual received a $25,000 note from the
Company and 2,698 shares of the Company's common stock. The notes bear
interest at 8% per annum from the original note date until the
successful completion of the Company's IPO. Upon the successful
completion of the Company's IPO, accrued interest and principal are due
in full.
As each private placement participant received both debt (in the form
of the note payable from the Company) and equity (in the form of the
Company's common stock), a portion of the $1,000,000 face value of the
debt was allocated to equity based on an estimate of the relative fair
value of the debt and equity. As such, the Company has allocated $1,079
and $161,804 to common stock and additional paid-in-capital,
respectively. This allocation was determined using an effective
interest rate of 30%, as this is management's estimate of a reasonable
risk adjusted rate. The remainder was allocated to short-term debt. The
difference between the face value of $1,000,000 and the amount recorded
in short-term debt will be accreted to interest expense over the
expected life of the debt.
1997 Private Placement
The Company raised $500,000 through a private placement during 1997.
Each private placement "unit" was a combination of debt and equity. For
each $25,000 unit, an individual investor received a $25,000 note from
the Company and 2,698 shares of the Company's common stock. The notes
bear interest at 8% per annum from the original note date until the
successful completion of the Company's IPO. Upon the successful
completion of the Company's IPO, accrued interest and principal are due
in full.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 7 - PRIVATE PLACEMENTS (Continued)
1997 Private Placement (Continued)
As each private placement participant received both debt (in the form
of a note payable from the Company) and equity (in the form of the
Company's common stock), a portion of the $500,000 face value of the
debt was allocated to equity based on an estimate of the relative fair
value of the debt and equity. As such, the Company allocated $540 and
$22,231 to common stock and additional paid-in-capital, respectively.
This allocation was determined using an effective interest rate of 30%,
as this is management's estimate of a reasonable risk adjusted rate.
The remainder was allocated to short-term debt. The difference between
the face value of $500,000 and the amount recorded in short-term debt
will be accreted to interest expense over the expected life of the
debt.
NOTE 8 - NOTE PAYABLE
The Company issued a note payable in 1997 in the amount of $25,000,
payable to an individual. As this individual received both debt (in the
form of the note payable from the Company) and equity (in the form of
the Company's common stock), a portion of the $25,000 face value of the
note was allocated to equity based on an estimate of the relative fair
value of the debt and equity. As such, the Company has allocated $23
and $926 to common stock and additional paid-in capital, respectively.
This allocation was determined using an effective interest rate of 30%,
as this is management's estimate of a reasonable risk adjusted rate.
The remainder was allocated to short-term debt. The difference between
the face value of the $25,000 and the amount recorded in short-term
debt will be accreted to interest expense over the expected life of the
debt.
NOTE 9 - BRIDGE LOANS
The Company raised bridge loans of $150,000 in 1997. In connection with
providing the bridge loan financing to the Company, the individual
lenders received an aggregate of 30,000 shares of the Company's common
stock. Upon issuance of this stock, the Company recorded an additional
interest charge of approximately $150,000 (30,000 shares x $5.00 per
share, the proposed offering price per share).
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 10 - PREFERRED STOCK
On June 3, 1996, the Company issued 1,000,000 shares of convertible
preferred stock (Series B) to the Chairman of the Board and Chief
Executive Officer of the Company for services rendered. The preferred
stock has a par value of $.001 per share and carries rights to vote
with the common stock as one class on a one-vote-per-share basis. The
preferred stock is convertible into the Company's common stock on a
one-for-one basis at the option of the holder at the earlier of eight
years following the closing date of the Company's IPO or when the
Company's annual net income equals or exceeds $3,500,000. Upon
conversion, the holder of the preferred stock will be required to pay
to the Company, in cash, a conversion price (the "Conversion Price")
per share equal to 150% of the IPO price of the Company's common stock.
The preferred stock carries no dividends prior to the second
anniversary of the closing date of the proposed IPO, but thereafter, if
the above conversion test is satisfied, the preferred stock will
participate in any dividends declared on the Company's common stock, on
an "as converted" basis. In the event of a voluntary or involuntary
liquidation or dissolution of the Company prior to the second
anniversary of the closing date of the proposed IPO, or subsequent to
the IPO if annual net profits of $3,500,000 have not been achieved, the
holder of the preferred stock would be entitled to the par value of
$.001 per share, or $1,000 in the aggregate. In the event of a
voluntary or involuntary liquidation or dissolution of the Company
subsequent to the Company's achieving $3,500,000 in annual net profits,
the holder of the preferred stock would be entitled to share with the
holders of the Company's common stock, the assets of the Company, on an
as converted basis.
NOTE 11 - STOCK-BASED COMPENSATION
Issuance of Common Stock
During the year ended 1997, the Company issued 24,950 shares of common
stock in exchange for services rendered, of which 5,618 shares were
issued to officers.
Omnibus Stock Option Plan
In January 1997, the Board of Directors approved the adoption of an
Omnibus Stock Plan (the "Plan"). The Plan is intended to provide
incentive to key employees, officers, and directors of the Company who
provide significant services to the Company. There are 400,000 options
available for grant under the Plan. Options will vest over a period of
time as determined by the Board of Directors for up to ten years from
the date of grant. However, no options may be exercisable less than six
months from the date of grant. The exercise price of options granted
under the Plan will be determined by the Board of Directors, provided
that, the exercise price is not less than the fair market value of the
Company's common stock on the date of grant. No options have been
granted as of December 31, 1997.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Other Stock Options
During 1996, the Company granted certain stock options to employees and
directors. These grants were made outside the Omnibus Stock Plan. On
inception (June 3, 1996) of the Company, the Company's Chief Executive
Officer and President, who are both directors, were granted 82,500
stock options each. These stock options vest at the earlier of one year
following the successful completion of the Company's IPO or June 3,
1998 and are exercisable at $0.60 per share, which was management's
estimate of the fair market value of the stock at the date of grant.
The stock options expire three months following any termination of
employment with the Company. At December 31, 1997, no stock options
were exercisable.
In October 1996, two employees of the Company were granted an aggregate
of 60,000 stock options. The stock options vest over a period of four
years and are exercisable at the IPO price per share of the Company's
common stock. These options expire three months following any
termination of employment with the Company. At December 31, 1997, 8,500
options were exercisable.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
plans and does not recognize compensation expense for its stock-based
compensation plans other than for restricted stock and options issued
to outside third parties. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for
awards under this plan consistent with the methodology prescribed by
SFAS No. 123, the Company's net loss and loss per share would be
reduced to the pro forma amounts indicated below for the year ended
December 31, 1997:
<TABLE>
<S> <C>
Net loss
As reported $(1,077,967)
Pro forma $(1,095,691)
Basic loss per common share
As reported $ (1.36)
Pro forma $ (1.39)
</TABLE>
The effects of applying SFAS No. 123 to the Company's option grants in
1996 is immaterial to the Company's net loss and net loss per share;
therefore, pro forma disclosures for 1996 have been omitted as allowed
by SFAS No. 123.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Other Stock Options (Continued)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model.
The fair value is computed as of the date of grant using the following
assumptions: (i) dividend yield of 0%, (ii) expected volatility of 44%,
(iii) weighed-average risk-free interest rate of approximately 6%, and
(iv) expected life of 2.53 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 12 - COMMITMENTS
Lease Commitments
The Company leases its Torrance and Fullerton facilities under
operating leases. These leases mature at various dates through 2004.
Both the Torrance and Fullerton leases have two, five-year options to
renew. For the year ended December 31, 1997 and the period from
inception (June 3, 1996) through December 31, 1996, total rent expense,
including associated common area maintenance charges, was $192,974 and
$51,860, respectively.
Estimated future minimum lease payments, excluding common area
maintenance charges, for facilities under non-cancelable operating
leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
-------------
<S> <C>
1998 $ 163,804
1999 165,900
2000 99,600
2001 99,600
2002 and thereafter 192,900
-----------
Total $ 721,804
===========
</TABLE>
In addition, the Company leases certain minor equipment under operating
leases.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS (Continued)
Executive Compensation
Upon inception of the Company (June 3, 1996), the Company entered into
four-year employment agreements with both the Company's Chief Executive
Officer and President. These agreements are for annual base salaries of
$50,000 and $45,000, respectively. However, due to the limited cash
flows from operations for the periods ended December 31, 1997 and 1996,
these individuals have agreed to waive their salary compensation that
would be earned up to the successful completion of the Company's IPO.
Had these individuals taken salaries for the periods ended December 31,
1997 and 1996, the Company would have recognized additional aggregate
salary expense of approximately $95,000 and $55,000, respectively,
which would increase the Company's net loss from $1,077,967 and
$942,552 to $1,172,967 and $997,552 for the periods ended December 31,
1997 and 1996, respectively.
Consulting Agreement
In connection with the acquisition of the Torrance and Fullerton
restaurants, the Company entered into a Consulting Agreement (the
"Agreement") with the seller. The Agreement provides that the seller
will render consulting services for a period of two years in connection
with the management, marketing, development, and expansion of the
Company's business. In consideration for such consulting services, the
Company will pay the seller $95,000 per year. Certain disputes have
arisen with respect to this agreement as more fully described in Note
15.
NOTE 13 - INCOME TAXES
No current provision for federal and state income taxes has been
recorded as the Company incurred net operating losses through December
31, 1997 and the period ended December 31, 1996. At December 31, 1997,
the Company has approximately $2,018,000 and $1,009,000 of federal and
state net operating loss carryforwards, respectively, for tax reporting
purposes available to offset future taxable income; such carryforwards
begin to expire in 2016 and 2001, respectively.
Deferred tax assets, consisting primarily of the tax effect of net
operating loss carryforwards, are offset with a full valuation
allowance because of the uncertainty regarding the realizability of
such assets. The valuation allowance increased from $347,000 to
$745,000 during the year ended December 31, 1997. Additionally,
the effect of the valuation allowance represents the primary
reconciling item between tax expense computed using the federal
statutory tax rate of 34% and the Company's negligible effective tax
rate.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (Continued)
In February 1998, the Company raised gross proceeds of $6,250,000 in
additional capital through a public offering. As a result of bringing
in additional stockholders there may be a substantial annual limitation
on the use of net operating loss carryforwards for both federal and
state tax purposes. In general, an ownership change occurs when the
major stockholders, which includes groups of stockholders of the
Company, have increased their ownership by more than 50 percentage
points. If there has been an ownership change, section 382 of the
Internal Revenue Code places a limitation on the amount of income that
can be offset by net operating loss carryforwards. The section 382
limitation is the product of multiplying the Company's value (at the
time of the ownership change) by the highest federal long-term
tax-exempt rate for the month of the change or the two preceding
months. The amount of the potential limitation, if any, is yet to be
determined.
NOTE 14 - RELATED PARTY TRANSACTIONS
In June 1996, the Company assumed $92,000 of convertible promissory
notes from Texas Loosey's Steakhouse Holdings, Inc., an affiliate of
the Company's Chief Executive Officer and President. The holders of the
notes may convert the notes into 55,200 shares of the Company's common
stock upon the successful completion of the Company's IPO (see Note 6).
During the year ended December 31, 1997 and the period from June 3,
1996 (inception) to December 31, 1996, the Company made advances to the
Company's Chief Executive Officer and President totaling $179,739,
which are recorded as advances to officers on the balance sheet.
In April 1997, the Company issued 2,809 shares of the Company's common
stock to the Company's Chief Executive Officer in exchange for services
rendered.
In April 1997, the Company issued 2,809 shares of the Company's common
stock to the President in exchange for services rendered.
In April 1997, the Company issued 4,495 shares of the Company's common
stock to its attorney in exchange for services rendered.
In November 1997, the Company's Chief Executive Officer and President
contributed a total of $130,000 to the Company as additional paid-in
capital. No shares of common stock were issued.
The President of the Company has personally guaranteed the operating
lease agreements for the Fullerton and Norco restaurant locations.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 15 - CERTAIN TRANSACTIONS
Certain disputes have arisen with the sellers of the Torrance and
Fullerton restaurants resulting in an extended escrow closing period
and which may effect the ultimate purchase price and/or acquisition of
the restaurants. Additionally, certain disputes have arisen related to
the Company's obligation under its consulting agreement with a seller.
The Company has notified the sellers of material breaches of the
sellers' representations and warranties with respect to the acquisition
agreement, and the sellers have notified the Company of its default
with respect to two notes payable issued in connection with the
purchase.
The disputes in this transaction relate primarily to the sellers' claim
that the Company is obligated to pay for certain unpaid federal income
and state sales taxes of approximately $287,000 and $193,000,
respectively, and certain liabilities to vendors of approximately
$135,000. These amounts are not reflected in the accompanying balance
sheet or statements of operations and the Company intends to vigorously
defend itself, if necessary, against the claims of the seller.
The Company has made certain payments in connection with its consulting
agreement (see note 12) with a seller and has withheld or deferred
certain other payments as a result of performance issues with the
seller prior to and after possession of the restaurants by the Company.
At December 31, 1997, the Company has a possible liability for unpaid
amounts to the seller of up to approximately $140,000. This amount is
not reflected in the accompanying balance sheet or statements of
operations, and the Company intends to vigorously defend itself, if
necessary, against the seller.
As a result of these disputes, the Company has withheld payment on a
$375,000 note payable (see Note 5) due subsequent to the Company's IPO
in February 1998 and has withheld certain 1998 monthly payments due on
a $870,000 note payable (see Note 5). The $375,000 note payable has
been classified as a current liability on the balance sheet as
management believes that the resolution of the disputes and payment of
the note will occur during 1998. Management and the Company's counsel
believe that the default notice and the acceleration payment clauses of
the notes are not enforceable and that the $870,000 note payable is
reasonably classified in accordance with the original payment terms of
the note; accordingly, such note has been excluded from total current
liabilities on the balance sheet.
NOTE 16 - SUBSEQUENT EVENTS
In February 1998, the Company completed an IPO in which it sold
1,250,000 shares of common stock at $5.00 per share. Gross proceeds
from the sale were $6,250,000.
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 16 - SUBSEQUENT EVENTS (Continued)
In connection with the IPO in February 1998, the Company granted the
underwriters warrants to purchase 125,000 shares of common stock at an
initial exercise price of 140% of the IPO price. The warrants are
exercisable for a period of four years commencing one year from the IPO
date.
In March 1998, $1,112,500 of the notes payable relating to the
$1,500,000 private placements discussed in Note 7 were converted into
278,125 shares of the Company's common stock. The remaining balance of
$387,500 plus accrued interest was paid-off.
In March 1998, the bridge loans of $150,000 plus accrued interest
discussed in Note 9 were paid off.
In March 1998, certain other notes payable to various individuals of
$87,000 plus accrued interest were paid off.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Galveston's
Steakhouse Inc. financial statements for the 12 months ended December 31, 1997
and is qualified in its entirety be reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 64,726
<SECURITIES> 0
<RECEIVABLES> 156,015
<ALLOWANCES> 0
<INVENTORY> 25,411
<CURRENT-ASSETS> 509,204
<PP&E> 905,084
<DEPRECIATION> 167,219
<TOTAL-ASSETS> 2,252,033
<CURRENT-LIABILITIES> 2,847,740
<BONDS> 0
0
1,000
<COMMON> 8,250
<OTHER-SE> 596,563
<TOTAL-LIABILITY-AND-EQUITY> (1,414,706)
<SALES> 1,867,671
<TOTAL-REVENUES> 1,867,671
<CGS> 0
<TOTAL-COSTS> 2,422,451
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 523,187
<INCOME-PRETAX> (1,077,967)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,077,967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,077,963)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
