AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1998
REGISTRATION NO. 333-29093
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GALVESTON'S STEAKHOUSE CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
5812
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
94-3248672
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
151 E. ALESSANDRO BOULEVARD
RIVERSIDE, CALIFORNIA 92508
(909) 789-7606
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES
AND PRINCIPAL PLACE OF BUSINESS)
---------------
RICHARD M. LEE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
GALVESTON'S STEAKHOUSE CORP.
151 E. ALESSANDRO BOULEVARD
RIVERSIDE, CALIFORNIA 92508
(909) 789-7606
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
HANK GRACIN, ESQ. DAVID N. FELDMAN, ESQ.
LEHMAN & EILEN LAW OFFICES OF DAVID N. FELDMAN
SUITE 505 SUITE 1201
50 CHARLES LINDBERGH BLVD. 36 W. 44TH STREET
UNIONDALE, NY 11553 NEW YORK, NEW YORK 10036
TELEPHONE: (516) 222-0888 TELEPHONE: (212) 869-7000
FACSIMILE: (516) 222-0948 FACSIMILE: (212) 997-4242
---------------
<PAGE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING
BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER
EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER
THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT
REGISTRATION STATEMENT NUMBER OF THE EARLIER REGISTRATION STATEMENT FOR THE SAME
OFFERING. / /
IF THE DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE
434, PLEASE CHECK THE FOLLOWING BOX.
/ /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Title of each class of Amount to be Proposed maximum offering Proposed maximum Amount of
securities to be registered registered price per share (1) aggregate offering price registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 1,437,500 shs.(2) $5.00 $7,187,500 $2,120.31
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriters' Warrants 125,000 wrts.(3) ----- ----- ------
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Underlying
Underwriters' Warrants 125,000 shs. $7.00 $ 875,000 $ 258.12
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,378.43
====================================================================================================================================
<FN>
- ------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457.
(2) Includes 187,500 shares which may be purchased by the Underwriters to cover over-allotments, if any.
(3) To be issued for nominal consideration to the Underwriters.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 14, 1998
PROSPECTUS
1,250,000 SHARES
GALVESTON'S STEAKHOUSE CORP.
COMMON STOCK
($.01 PAR VALUE)
------------------------
The 1,250,000 shares (the "Shares") of common stock, $.01 par value (the
"Common Stock"), of Galveston's Steakhouse Corp. (the "Company") offered hereby
are being sold by the Company.
It is currently anticipated that the initial public offering price of the
Shares will be approximately $5.00 per share. See "Underwriting" for information
regarding factors considered in determining the initial public offering price.
Prior to this offering (this "Offering"), there has been no public market for
the Common Stock and there can be no assurance that any significant trading
market will develop or be sustained. The Company intends to apply to have the
Shares approved for quotation on The Nasdaq SmallCap Market (the "Nasdaq
SmallCap") under the symbol "GALV".
------------------------
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. AN INVESTMENT IN THESE
SECURITIES SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. POTENTIAL PURCHASERS SHOULD CAREFULLY
CONSIDER THE MATTERS SET FORTH UNDER "RISK FACTORS" BEGINNING
ON PAGE 6 AND "DILUTION".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) ISSUER(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $5.00 $0.50 $4.50
- ------------------------------------------------------------------------------------------------------------
Total(3)............................... $6,250,000 $625,000 $5,625,000
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
<FN>
(1) Does not include additional compensation to be received by the Underwriters
in the form of (i) a non-accountable expense allowance of 3% of the gross
proceeds of this Offering, or $0.15 per share (for an aggregate amount of
$187,500, or $215,625 if the over-allotment option described in note 3 below
is exercised in full); and (ii) Underwriters' warrants to purchase 125,000
shares of Common Stock to be sold to such Underwriters for nominal
consideration, exercisable commencing one year after the date of this
Prospectus. In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering estimated at $275,000 payable by
the Company. See "Use of Proceeds" and "Underwriting."
(3) The Underwriters have been granted a 30-day option to purchase up to 187,500
additional shares of Common Stock from the Company on the same terms set
forth above, solely to cover over-allotments, if any. If the Underwriters'
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$7,187,500, $718,750 and $6,468,750, respectively.
</TABLE>
------------------------
The Shares are offered by the Underwriters on a "firm commitment" basis,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to the right of the Underwriters to reject any order in
whole or in part. It is expected that delivery of certificates representing the
Shares will be made at the offices of Tasin & Company, Inc., 40 Broad Street,
New York, New York 10004 on or about January , 1998.
------------------------
WILLIAM SCOTT & CO., L.L.C. TASIN & COMPANY, INC.
------------------------
THE DATE OF THIS PROSPECTUS IS JANUARY , 1998
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, ANY SUCH INFORMATION OR REPRESENTATION NOT CONTAINED
HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE,
ANY OF THE SECURITIES OFFERED BY THIS PROSPECTUS, IN ANY JURISDICTION TO OR FROM
ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF
AN OFFER, IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN SINCE THE DATE HEREOF.
The Company currently is not a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the
offering made hereby, the Company will become subject to the periodic and other
informational requirements of the Exchange Act. The Company intends to
distribute to its stockholders Annual Reports containing audited financial
statements and may distribute quarterly reports as determined by the Board of
Directors of the Company. The Company's fiscal year ends December 31.
This Prospectus may be deemed to contain forward-looking statements.
Forward-looking statements in this Prospectus or hereafter included in other
publicly available documents filed with the Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve known and unknown risks, uncertainties and other factors which
could cause the Company's actual results, performance (financial or operating)
or achievements to differ from the future results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements. Such future results are based upon management's best estimates based
upon current conditions and the most recent results of operations. These risks
include, but are not limited to, risks set forth herein, each of which could
adversely affect the Company's business and the accuracy of the forward-looking
statements contained herein.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION
OF THESE ACTIVITIES SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ SMALLCAP IN ACCORDANCE
WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Investors should carefully consider the information set forth under the heading
"Risk Factors." Unless otherwise indicated the information presented in this
Prospectus gives effect to a 1-for 3.671 reverse stock split of the Company's
common stock effected on August 11, 1997, a subsequent forward stock split of
1.650 for 1 on December 30, 1997 and assumes that the Underwriters'
over-allotment option will not be exercised.
THE COMPANY
The Company currently owns two (2) steakhouse restaurants and operates two
(2) others in Southern California, which together formerly comprised all of the
restaurants known as "Texas Loosey'st Chili Parlor & Saloon" ("Texas Loosey's").
The Company first acquired two (2) Texas Loosey's restaurants on August 19, 1996
pursuant to an Asset Purchase Agreement, dated April 10, 1996, and is in escrow
on a September 23, 1996 agreement to purchase the remaining two (2) Texas
Loosey's restaurants. The Company anticipates that escrow will close on these
two restaurants immediately following the closing of the offering.
The Company has converted one of the owned Texas Loosey's restaurants into
a Galveston'st steakhouse restaurant reminiscent of the late 1950's and early
1960's, with popular rock 'n roll music from that period. Maps of Galveston
Island, Route 66 road signs, pictures of James Dean, wild beach saw grass and
other Galveston Island and Texas-style motifs decorate the restaurant's casual
setting. The Company's Galveston's restaurant offers high quality, reasonably
priced, mesquite-grilled steak, fresh fish, hamburgers, chicken and other
specialty items to a diverse clientele. The Company intends to convert its other
restaurants into Galveston's steakhouses in this same manner at a total cost of
approximately $300,000. After the other three (3) existing restaurants are
remodeled, the Company intends to develop additional Galveston's steakhouses and
to identify and develop new markets. The Company believes that the high quality,
moderately priced segment of the restaurant industry presents an opportunity for
significant growth. There can be no assurance given, however, that such growth
will, in fact, be achieved.
The Company was incorporated under the laws of the State of Delaware on
June 3, 1996 under the name "Texas Loosey's Steakhouse & Saloon, Inc.". The
Company changed its name to "Galveston's Steakhouse Corp." on December 19, 1996.
Its executive offices are located at 151 E. Alessandro Boulevard, Riverside,
California 92508 and its telephone number is (909) 789-7606.
This Prospectus may be deemed to contain forward-looking statements.
Forward-looking statements in this Prospectus or hereafter included in other
publicly available documents filed with the Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve known and unknown risks, uncertainties and other factors which
could cause the Company's actual results, performance (financial or operating)
or achievements to differ from the future results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements. Such future results are based upon management's best estimates based
upon current conditions and the most recent results of operations. These risks
include, but are not limited to, risks set forth herein, each of which could
adversely affect the Company's business and the accuracy of the forward-looking
statements contained herein.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company..... 1,250,000 shares
Common Stock Outstanding Before the
Offering(2)........................... 825,000 shares
Common Stock to be Outstanding After the
Offering(1)(2)........................ 2,402,075 shares
Proposed Nasdaq SmallCap Symbol......... "GALV"
Use of Proceeds......................... Open six (6) to eight (8) additional Company-owned
restaurants, remodel three (3) of the Company's
four (4) existing restaurants (two of which are in
escrow), repay certain notes payable to the
Company's private placement bridge financing
investors, repay certain notes payable to the
sellers of the Texas Loosey's restaurants, repay
other notes payable, reduce accounts payable and
accrued expenses, and working capital and general
corporate purposes.
Risk Factors............................ The securities offered hereby involve a high degree
of risk and immediate and substantial dilution.
Investors should purchase the securities offered
hereby only if they can afford the loss of their
entire investment. See "Risk Factors" and
"Dilution."
<FN>
- ---------------
(1) Includes 1,250,000 shares of Common Stock offered hereby, 55,200 shares of
Common Stock issuable following the closing of this offering related to the
conversion of $92,000 of convertible notes payable and 271,875 shares of
Common Stock issuable following the closing of this offering related to the
conversion of $1,087,500 of bridge notes.
(2) Excludes 1,000,000 outstanding shares of Series B Convertible Preferred
Stock held by Richard M. Lee which are convertible into Common Stock, at the
option of the holder, at a conversion price per share equal to 150% of the
initial public offering price of the Company's Common Stock, upon the
earlier of: (a) the date the Company's net profits equal or exceed $3.5
million, or (b) the date which is eight (8) years from the closing date of
this Offering. See "Description of Securities."
</TABLE>
4
<PAGE>
SUMMARY OF FINANCIAL DATA
The following information is qualified by reference to, and should be read
in conjunction with, the financial statements and the notes thereto and
"Management's Discussion and Analysis or Plan Of Operation" contained elsewhere
in this Prospectus. The following information for the year ended December 30,
1995 and the period from December 31, 1995 through August 18, 1996 were for
periods under the ownership and operation of TLC Restaurant Management Corp.
("TLC"). The Company acquired and took over the operation of the two (2)
restaurants constituting the Texas Loosey's business from TLC effective August
19, 1996. The Company was incorporated on June 3, 1996. Also, in this Prospectus
are unaudited financial statements for the nine months ended September 30, 1997
of the Company, which have been prepared on the same basis as the audited
financial statements and in the opinion of management contain all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the information set forth therein. The financial statements of the Company and
its predecessor, TLC, are not comparable due to the significant amount of debt
incurred by the Company to consummate the acquisition and due to the significant
purchase accounting adjustments that resulted therefrom.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS DATA:
UNAUDITED
1997
1995 1996 ------------
---------- -------------------------- GALVESTON'S
TLC TLC GALVESTON'S UNAUDITED 1996 NINE
INCOME YEAR 12-31-95 6-3-96 ---------------------------- MONTHS
STATEMENT ENDED TO TO PRO FORMA ENDED
CAPTION 12-30-95 8-18-96 12-31-96 ADJUSTMENTS PRO FORMA 9/30/97
- ----------------------------------- ---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $2,063,364 $1,096,262 $ 416,544 $ -- $ 1,512,806 $$1,481,719
Restaurant Costs................... 2,166,209 1,144,538 547,981 40,585(1) 1,733,104 1,376,024
---------- ---------- ---------- ------------ ----------
(102,845) (48,276) (131,437) (220,298) 105,695
Other Income/(Expenses):
General & Administrative........... (408,179) (103,271) (136,467) -- (239,738) (264,103)
Pre-Opening & Start-Up Costs....... -- -- (433,694) -- (433,694) (63,955)
Other.............................. 2,110 1,312 30,419 (47,667)(2) (15,936) (17,450)
---------- ---------- ---------- ------------ ----------
Operating Loss..................... (508,914) (150,235) (671,179) (909,666) (239,813)
Interest & Financing Costs......... (11,605) (10,459) (271,373) (167,427)(3) (438,800) (466,044)
---------- ---------- ---------- ------------ ----------
Net Loss........................... $ (520,519) $ (160,694) $ (942,552) $(1,348,466) $ (705,857)
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
Net Loss per Common Share.......... $ (52.05) $ (16.07) $ (1.19) $ $ (1.70) $ (0.88)
Weighted average number of common
shares outstanding............... 10,000 10,000 795,000 795,000 800,073
</TABLE>
<TABLE>
<CAPTION>
9/30/97
12/31/96 ------------------------------
BALANCE SHEET DATA ACTUAL ACTUAL AS ADJUSTED(4)
-------------------------------------------------- ----------------- ----------- ---------------
<S> <C> <C> <C>
(UNAUDITED)
Working Capital................................... $(1,533,104) $(2,162,131) $ 4,309,869
Total Assets...................................... 1,800,305 2,429,350 6,612,350
Long Term Debt.................................... 870,000 870,000 870,000
Notes Payable..................................... 1,469,972 2,289,000 --
Accumulated Deficit............................... (942,552) (1,648,409) (1,832,409)
Stockholders' Equity (Deficit).................... (765,189) (1,172,596) 5,299,404
</TABLE>
FOOTNOTES TO SUMMARY OF FINANCIAL DATA
(1) The pro forma adjustment related to restaurant costs is for depreciation and
amortization of fixed assets and leasehold improvements. Had the Company
recorded depreciation and amortization expense for a full 12 months,
additional expense in the amount of $40,585 would have been recognized.
(2) The pro forma adjustment to other expenses is related to the amortization of
intangible assets. Had the Company recorded amortization expense for a full
12 months, additional expense in the amount of $47,667 would have been
recognized.
(3) The Company would have incurred an additional $167,427 in interest expense
if the debt that was raised from inception (June 3, 1996) through December
31, 1996 had been outstanding for a full 12 months.
(4) Gives effect to (i) net proceeds of $5,162,500 associated with the sale of
1,250,000 shares of the Company's Common Stock, (ii) conversion of $92,000
in convertible notes payable into shares of Common Stock and the related
interest charge of $184,000 associated with this conversion (iii) the
conversion of $1,087,500 of bridge notes to shares of Common Stock, (iv) the
contribution of $130,000 from certain stockholders and (v) repayment of
notes payable of $1,109,500.
5
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and substantial dilution. An investment in these securities
should be made only by investors who can afford the loss of their entire
investment. In addition to the factors set forth elsewhere in this prospectus,
prospective investors should give careful consideration to the following risk
factors in evaluating the Company and its business before purchasing the
securities offered hereby.
This prospectus may be deemed to contain forward-looking statements.
Forward-looking statements in this prospectus or hereafter included in other
publicly available documents filed with the commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve known and unknown risks, uncertainties and other factors which
could cause the Company's actual results, performance (financial or operating)
or achievements to differ from the future results, performance (financial or
operating) or achievements expressed or implied by such forward-looking
statements. Such future results are based upon management's best estimates based
upon current conditions and the most recent results of operations. These risks
include, but are not limited to, risks set forth herein, each of which could
adversely affect the Company's business and the accuracy of the forward-looking
statements contained herein.
GOING CONCERN UNCERTAINTY; NO HISTORY OF EARNINGS; ACCUMULATED DEFICIT; WORKING
CAPITAL DEFICIT AND STOCKHOLDERS' DEFICIT.
The Company has suffered substantial losses since inception. For the nine
months ending September 30, 1997, the Company had a net loss of $705,857. As of
September 30, 1997, the Company's accumulated deficit totaled $1,648,409. In
addition, as of September 30, 1997, the Company had a working capital deficit of
$2,162,131. Moreover, as of September 30, 1997, the Company had a stockholders'
deficit of $1,172,596. The financial statements included in this Prospectus have
been prepared assuming that the Company will continue as a going concern;
however, the financial condition of the Company at December 31, 1996 and at the
present time raises substantial doubt about the ability of the Company to
continue as a going concern. See "Report of Independent Public Accountants." The
ability of the Company to continue as a going concern is dependent upon the
Company's ability to raise sufficient capital to meet its needs and its ability
to achieve successful operations. There can be no assurance that the Company
will be successful in raising sufficient capital to meet its needs and even if
the Company does raise additional capital, there can be no assurance that it
will achieve successful operations. See "Risk Factors -- Business," "Risk
Factors -- Proposed Expansion; Future Restaurant Capital Financing Needs,"
"Business" and "Financial Statements."
LIMITED OPERATING HISTORY
The Company was organized on June 3, 1996, and, as such, has a limited
operating history on which investors may evaluate the Company's performance. In
general, the Company can provide no assurance of the success of its business
plan or management's strategies. See "Risk Factors -- Business." In view of its
lack of a significant operating history and inexperience, the Company remains
vulnerable to a variety of business risks generally associated with start-up
companies. The Company will be subject to numerous risks, expenses, problems and
difficulties typically encountered in establishing a new business. The Company
can provide no assurance that future operating results of existing restaurants
or those of future restaurants will be profitable. As stated above, the Company
has incurred substantial losses since inception. The Company expects that it
will continue to incur losses until the number of restaurants owned and operated
by the Company increase to between six (6) to eight (8) restaurants and, as
such, are sufficient to support its expenses. The Company expects to acquire the
additional restaurants to equal between six (6) to eight (8) units within twelve
(12) months from IPO. There can be no assurance, however, that the Company will,
in fact, be able to increase the number of restaurants owned and operated by it
within such time period. See "Risk Factors -- Restaurant Industry and
Competition," "Business -- Expansion," -- Marketing," and "-- Competition."
NEED FOR ADDITIONAL WORKING CAPITAL
The Company has incurred substantial operating losses since commencing
operations in June 1996. There can be no assurance if or when the Company will
achieve profitability. The Company anticipates that its capital resources,
including the $5,162,500 of net proceeds from this Offering, will be adequate to
satisfy its capital
6
<PAGE>
requirements for at least twelve (12) months following completion of the
Offering. The Company will use the net proceeds to retire $1,109,500 of current
debt. There can be no assurance, however, that the Company's cash requirements
during this period will not exceed its available resources. See "Use of
Proceeds" and "Management's Discussion and Analysis or Plan of Operation --
Liquidity and Capital Resources." During the next twelve (12) months, the
Company intends to remodel three (3) of its existing restaurants at a cost of
approximately $100,000 per restaurant and expand through acquisition and
enhancement of additional existing steakhouses, which remodeling and expansion
will require the expenditure of significant working capital. The Company's
future capital requirements will depend upon many factors, including the
Company's ability to operate its own stores successfully, as well as market
developments and cash flow from operations. In the event that the net proceeds
of this Offering and cash generated from operations are insufficient to fund the
Company's activities, the Company will be required to raise additional funds
through bank or other borrowings, or equity or debt financings. There can be no
assurance that additional financing, if required, will be available at all or in
amounts or on terms acceptable to the Company. In addition, any equity financing
could result in dilution to the Company's existing stockholders. Failure to
obtain additional working capital in a timely manner or on acceptable terms
could have a material adverse effect on the Company, its operations, financial
results and prospects and could cause the Company to amend or delay its
expansion plans. See "Business," "Management's Discussion and Analysis or Plan
of Operation -- Liquidity and Capital Resources" and the Financial Statements of
the Company included elsewhere herein.
EFFECT OF POSSIBLE DEFAULT UNDER THE ASSET PURCHASE AGREEMENT.
Pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement")
with TLC, Better Business Security, Inc., River Diego Investment Corp. and Ron
Walton ("Walton") (collectively, the "TL Sellers"), on August 19, 1996, the
Company acquired two (2) restaurants known as "Texas Loosey's Chili Parlor &
Saloon" for a purchase price of $1.52 million, with the cash portion of such
purchase price being $275,000 and the remainder of such purchase price being
payable in the form of two promissory notes in the amounts of $375,000 (the
"First TL Note") and $870,000 (the "Second TL Note"), respectively, secured by
the assets acquired by the Company. The First TL Note was originally due on the
earlier of: February 19, 1997, being the date which was six months following the
closing date of the acquisition of the Texas Loosey's restaurants (the "Six
Month Date") or the date that the Company filed a registration statement with
the Commission for an initial public offering of its securities. Pursuant to an
Extension Agreement, dated March 24, 1997, as amended, the due date for the
First TL Note has since been extended to February 15, 1998. The First TL Note
bears interest at the rate of ten percent (10%) per annum from August 19, 1996
through February 19, 1997 and at the rate of fifteen percent (15%) per annum
from February 19, 1997 through February 15, 1998. The Second TL Note bears
interest at the rate of eight percent (8%) per annum from August 19, 1996.
Commencing February 19, 1997 interest only payments of $6,032 are due monthly
for one year. Commencing February 19, 1998 through July 19, 2001, principal and
interest payments of $10,978 are due monthly. The remaining principal balance is
due via a balloon payment on August 19, 2001. See "Business -- Purchase of Texas
Loosey's Restaurants."
As secured creditors, the TL Sellers would have the right to foreclose on
the assets of the Company comprising the two acquired restaurants if the Company
defaulted on the payment of either promissory note. The Company intends to repay
the First TL Note with the proceeds of this Offering. See "Use of Proceeds."
BUSINESS
The Company's business plan and prospects are dependent upon, among other
things, the availability of suitable future restaurant sites, timely development
and construction of restaurants, the hiring of skilled management and other
personnel, the ability of the Company to successfully manage growth (including
monitoring its restaurants, controlling costs, and maintaining effective quality
controls), and the availability of adequate financing. The Company has no
significant experience in developing or operating restaurants or effectuating
restaurant expansion, and the lack of success or closing of any restaurants
developed or acquired by the Company (and in the case of the closing of a
restaurant, any continuing lease obligations or the resulting loss of the
Company's construction development costs), could have a material adverse effect
upon the Company. There can be no assurance that the Company will be able to
successfully implement its business plan or that unanticipated expenses,
problems or difficulties will not result in material delays in its
implementation. See "Business."
7
<PAGE>
GOVERNMENT REGULATION
The Company's restaurant operations are subject to numerous national and
local, health, sanitation, employment, safety and franchising regulations and
standards, as well as local authorities and local zoning, building code and
land-use regulations. There can be no assurance that the Company will be able,
for financial reasons or otherwise, to comply with any laws or regulations or
that amendments to existing laws and regulations or new laws and regulations
will not be enacted in the future that could require the Company to alter
methods of operations in the future at costs that could be substantial. In
addition, each restaurant must obtain appropriate licenses from regulatory
authorities allowing it to sell liquor, beer and wine, and each restaurant has
food service licenses from local health authorities. Each restaurant's liquor
license must be renewed annually and may be revoked at any time for cause.
Failure to comply with any such laws or regulations, or the loss of the
Company's liquor licenses, or inability to obtain any of the same, would likely
have a material adverse effect on the Company. In California, there is a set
number of alcoholic beverage licenses available, but there is an active market
through which new licenses can be obtained at the then-applicable market price.
The failure to receive or retain, or a delay in obtaining, a liquor license in a
particular location could adversely affect the Company's ability to obtain such
a license elsewhere. See "Business -- Government Regulation."
The Company may be subject to "dram-shop" liability, which generally
provides a person injured by an intoxicated person with the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. To address any such potential liability, the Company carries
liquor liability coverage as part of its comprehensive general liability
insurance.
GEOGRAPHIC CONCENTRATION IN CALIFORNIA; RISK OF EARTHQUAKES; RESTAURANT BASE
All of the four (4) existing restaurants owned and/or operated by the
Company are located in Southern California. Accordingly, the restaurants are
susceptible to fluctuations in their business caused by adverse economic or
other conditions in that region of the United States, including natural
disasters, such as earthquakes, or other acts of God. While the Company
maintains business interruption insurance, it does not maintain any earthquake
insurance. In the event the Company's restaurants were to suffer damage from an
earthquake the Company could be materially and adversely affected. California
has only recently begun to recover from an economic recession. Each restaurant
represents a significant investment and long-term commitment which limits the
Company's ability to respond quickly or effectively to changes in local
competitive conditions or other changes that could affect the Company's
operations. In addition, the Company has a small number of restaurants relative
to its competitors. Consequently, a decline in the profitability of an existing
restaurant or the introduction of an unsuccessful new restaurant could have a
more significant effect on the combined restaurants' results of operations than
would be the case in a company with a larger number of restaurants.
PROPOSED EXPANSION; FUTURE RESTAURANT CAPITAL FINANCING NEEDS
Although the Company intends to pursue a strategy of aggressive growth and
will seek to increase the number of Company-owned restaurants over the next
twelve (12) months to between six (6) and eight (8) restaurants at a cost of
approximately $550,000 per restaurant, the Company has limited experience in
effectuating rapid restaurant expansion or in managing a large number of
restaurants or restaurants which are geographically dispersed. The Company's
proposed expansion may over-burden the Company's personnel and financial
resources. The Company's proposed expansion will depend on, among other things,
market acceptance for the Company's Galveston's steakhouse concept, the
availability at a reasonable cost of suitable restaurant sites, timely
development and construction of restaurants, the hiring of skilled management
and other personnel, the general ability to successfully manage growth
(including monitoring restaurants, controlling costs and maintaining effective
quality controls) and the availability of adequate financing. There can be no
assurance that the Company will be successful in its proposed expansion. In view
of the currently small restaurant base, the closing of any single Company
restaurant could have an adverse effect upon the Company. The Company does not
currently intend to expand its operations through the sale of franchises. See
"Business -- Expansion."
The Company's ability to achieve its expansion plans will depend on a
variety of factors, many of which may be beyond the Company's control, including
but not limited to the Company's ability to identify suitable restaurant sites,
negotiate acceptable lease or purchase terms, obtain required governmental
approvals, construct new restaurants in a timely manner, attract, train and
retain qualified and experienced personnel and management,
8
<PAGE>
operate its restaurants profitably and obtain additional capital, as well as the
general economic conditions and degree of competition in the particular region
of expansion. The Company may experience delays in restaurant openings,
including delays caused by the remodeling of acquired restaurants, which may
result in lost revenues during periods of restaurant closures. The Company will
incur substantial costs in opening each new Company-owned restaurant, and new
restaurants experience fluctuating operational levels for some time after
opening. Should the Company's results of operations or its rate of growth fail
to be adequate to finance expansion or should costs of capital expenditures
rise, the Company may not have the ability to open new restaurants at its
desired pace or at all, and could be required to seek additional financing in
the future. There can be no assurance that the Company will be able to raise
such capital when needed on satisfactory terms or at all. In addition, there can
be no assurance that the Company will successfully expand or that the Company's
existing or new restaurants will be profitable. The Company expects to encounter
intense competition for restaurant sites, and may have difficulty buying or
leasing desirable sites on terms that are acceptable to the Company. In many
cases, the Company's competitors may be willing and able to pay more than the
Company for sites. The Company expects these difficulties with regard to
obtaining desirable sites to continue for the foreseeable future. See "--
Restaurant Industry and Competition," "Use of Proceeds," "Business -- Expansion
Strategy," and "-- Competition."
RESTAURANT INDUSTRY AND COMPETITION
The restaurant industry is highly competitive. Key competitive factors in
the industry include the quality and value of the food products offered, quality
of service, price, dining experience, restaurant locations and the ambiance of
facilities. The Company's competitors include various mid-price, full-service
casual dining restaurants. The Company will compete with national and regional
chains, as well as individually owned restaurants. The number of steakhouse
restaurants with operations generally similar to the concept planned by the
Company has grown substantially in the last several years, and the Company
believes competition among such restaurants is increasing. As the Company's
competitors expand operations in various geographic areas, competition,
including competition among steakhouse restaurants with concepts similar to the
Company's, can be expected to intensify. Such increased competition could
increase the Company's operating costs or adversely affect its revenues. Many of
the Company's competitors have been in existence longer than the Company, have a
more established market presence and have substantially greater financial,
marketing and other resources than the Company, which may give them certain
competitive advantages. The restaurant industry is affected by changes in
consumer tastes, national, regional and local economic conditions and
demographic trends. The Company's success will be dependent on acceptance of the
"Galveston's" concept. Consumer trends can shift rapidly. There can be no
assurance that the Company's restaurants will match trends in consumer tastes.
The performance of individual restaurants may be affected by factors such as
traffic patterns, demographic considerations and the type, number and location
of competing restaurants. Changes in economic conditions affecting the Company's
future customers could reduce traffic in some or all of the Company's
restaurants or impose practical limits on pricing, either of which could have a
material adverse effect on the profitability of the Company. In addition, the
restaurant industry has few non-economic barriers to entry. There can be no
assurance that third parties will not be able to successfully imitate and
implement the Company's concept. See "Business."
COMPANY PROFITABILITY HIGHLY SENSITIVE TO COST INCREASES
The Company's profitability is highly sensitive to increases in food, labor
and other operating costs. The Company's restaurants' dependence on frequent
deliveries of fresh food supplies subject them to the risk that shortages or
interruptions in supply caused by adverse weather or other conditions could
materially and adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, food, labor and employee benefit costs (including increases
in hourly wage and minimum unemployment tax rates), rent increases resulting
from the rent escalation provisions in the various restaurants' leases, and the
availability of experienced management and hourly employees may also adversely
affect the Company. The Company believes recent favorable inflation rates and
part-time labor supplies in its principal market area have contributed to
relatively stable food and labor costs in recent years. However, there can be no
assurance that these conditions will continue or that the Company will have the
ability to control costs in the future. See "Business."
9
<PAGE>
CONTROL BY PRINCIPAL STOCKHOLDERS
Prior to the Offering, the management of the Company beneficially owned
50.2% of the outstanding shares of Common Stock of the Company and 77.5% of the
combined stockholder voting power of the Company, including all 1,000,000
outstanding shares of the Company's Series B Convertible Preferred Stock, which
carries rights to vote with the Common Stock as one class on a one
vote-per-share basis. After the Offering, such management will beneficially own
17.3% of the outstanding shares of Common Stock of the Company and 41.6% of the
combined stockholder voting power of the Company. Accordingly, after the
Offering, management will continue to have control over the outcome of all
matters submitted to the stockholders for approval, including the election of
the Company's board of directors. As a result, the stockholders of the Company
possess little practical ability to remove management or effect the operations
or business of the Company. See "Principal Stockholders" and "Description of
Securities."
MANAGEMENT'S BROAD DISCRETION IN USE OF PROCEEDS DESIGNATED FOR WORKING CAPITAL
The Company will have broad discretion with respect to the application of
approximately $375,330 or 7.3%, of the net proceeds of this Offering. While such
funds are to be applied for working capital and general corporate purposes in
furtherance of the Company's business, investors will be reliant on management
as to the specific application of these amounts. See "Use of Proceeds."
NO DIVIDENDS ON COMMON STOCK
The Company has never paid any dividends on its Common Stock and does not
expect to declare or pay any cash dividends for the foreseeable future. It is
anticipated that earnings, if any, will be used in the Company's operations and
to finance the expansion of its business. See "Dividend Policy" and
"Management's Discussion, Analysis or Plan of Operation -- Liquidity and Capital
Resources" and "Business -- Plan of Operations."
DEPENDENCE UPON KEY AND OTHER PERSONNEL
The success of the Company will be largely dependent on the efforts of
certain key personnel of the Company, including Richard M. Lee, its Chairman and
Chief Executive Officer and Hiram J. Woo, its President, Secretary and Chief
Financial Officer. On June 3, 1996, the Company entered into a four-year
employment contract with each of Messrs. Lee and Woo. See "Certain Transactions
- -- Employment Agreements." The loss of the services of either of Mr. Lee or Mr.
Woo would have a material adverse effect on the Company, and the Company does
not maintain, nor does it intend to maintain, any key-man life insurance.
Additionally, in order to implement its business plan, the Company will be
dependent upon its ability to hire experienced financial, marketing, and
restaurant management personnel. There can be no assurance that the Company will
be able to hire additional experienced personnel. The inability to hire and
retain additional experienced personnel could have a material adverse effect on
the Company. The Company will also be dependent on its ability to hire and train
restaurant managers and hourly employees from the local labor pool who are able
to operate the Company's restaurants in conformity with the required standards
of service and efficiency. The unavailability of an adequate number of qualified
local managers and hourly employees could have an adverse effect on the Company.
See "Business -- Restaurant Operations and Management" and "Management --
Employment Agreements."
BENEFITS TO RELATED PARTIES
A portion of the proceeds of this Offering may be used to pay the salaries
of the Company's executive officers and directors' fees, to the extent that cash
flow, if any, is not sufficient to fund these expenses. See "Management --
Employment Agreements" and "Principal Stockholders."
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
5,000,000 shares of "blank check" preferred stock with such designation, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of the holders of the Common Stock. As of the date of this Prospectus,
1,000,000 shares of
10
<PAGE>
Series B Convertible Preferred Stock of the Company (the "Series B Preferred")
are outstanding, all of which are owned by Richard M. Lee, the Company's
Chairman and Chief Executive Officer. The Series B Preferred carries voting
rights along with the Common Stock on a one-vote-per-share basis. If and to the
extent that the shares of Common Stock issuable upon conversion of the Series B
Preferred are not includable in a registration statement on Form S-8, at the
request of the holders thereof, delivered to the Company within three years of
any such conversion of the Series B Preferred shares, the Company will prepare
and file, at its own expense, one (1) registration statement on Form S-3 (to the
extent available) to enable such holders to resell shares of Common Stock
acquired upon conversion of the Series B Preferred. The Board of Directors may
change or otherwise adjust the terms of the above-described Series B Preferred
Stock in its sole discretion. The issuance of additional preferred stock, as
well as certain provisions of the Company's charter and Delaware law, could have
the effect of delaying, deferring or preventing a change of control of the
Company. See "Description of Securities."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding an
aggregate of 2,402,075 shares of Common Stock, which includes the 1,250,000
shares offered hereby, 55,200 shares of common stock issuable uponthe conversion
of $92,000 of convertible notes payable and 271,825 shares of common stock
issuable upon the conversion of $1,087,500 of bridge notes. See "Underwriting."
Upon completion of the Offering, the 1,250,000 shares issued in the Offering
will be freely transferable without restriction under the Securities Act
(excluding any Shares purchased in the Offering by any person who is or thereby
becomes an "affiliate" of the Company). All of the 825,000 shares of Common
Stock outstanding immediately prior to the Offering were issued without
registration under the Securities Act and are "restricted securities" as that
term is defined in Rule 144 under the Securities Act.
The 825,000 shares of Common Stock outstanding immediately prior to the
Offering are subject to the contractual restrictions that the holders thereof
may not sell, transfer, assign, pledge or hypothecate their shares until one (1)
year after the effective date of the Registration Statement of which this
Prospectus forms a part without the prior written consent of the Underwriters
(except that 30,000 shares issued in the third quarter of 1997 are subject to
these restrictions for a period of two (2) years.) The 55,200 and 271,875 shares
of Common Stock to be issued upon the conversion of $92,000 in convertible notes
payable and of $1,087,500 of bridge notes, respectively, will be "restricted
securities" and will be eligible for sale one year from the date the note
holders agreed to convert their notes to shares of Common Stock. See
"Underwriting". In addition, Messrs. Lee and Woo have agreed not to sell,
transfer, assign, pledge or hypothecate any securities of the Company owned by
them until two (2) years after the effective date of the Registration Statement
of which this Prospectus forms a part, without the prior written consent of the
Underwriters.
The Company is unable to predict the effect that sales of the shares of
Common Stock outstanding prior to this offering, the Underwriter's Warrants or
the shares underlying such Underwriters' Warrants or sales under Rule 144 may
have on the then prevailing market price of the Common Stock, but such sales may
have a substantial depressing effect on such market price. The 825,000 shares of
Common Stock that will be "restricted securities" immediately subsequent to the
Offering will become eligible for sale at various times beginning 90 days after
the date of this Prospectus. See "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering there has been no public market for the Company's
Common Stock and there can be no assurance that an active public trading market
for the Company's Common Stock will develop or be sustained. The absence of an
active trading market would adversely affect the liquidity of the Common Stock
and, consequently purchasers of Shares in the Offering could experience
substantial difficulty in selling these securities. The initial public offering
price has been determined by negotiation between the Company and the
Underwriters and may not bear any relationship to the market price for the
Common Stock subsequent to the Offering. See "-- Arbitrary Offering Price" and
"Underwriting." In addition, the trading price for the Common Stock may be
highly volatile and could be subject to significant fluctuations in response to
variations in the Company's quarterly operating results, general conditions in
the food service industry or the general economy, and other factors. In
addition, the stock market is subject to price and volume fluctuations affecting
the market price for public companies generally, or within broad industry
groups, which fluctuations may be unrelated to the
11
<PAGE>
operating results or other circumstances of a particular company. Such
fluctuations may adversely affect the liquidity of the Common Stock, as well as
the price that holders may achieve for their shares upon any future sale.
UNDERWRITERS' INFLUENCE ON THE MARKET
A significant number of shares of Common Stock offered hereby may be sold
to customers of the Underwriters. Such customers subsequently may engage in
transactions for the sale or purchase of such securities through or with the
Underwriters. Although they have no obligation to do so, the Underwriters intend
to make a market in the Common Stock and may otherwise effect transactions in
such securities. If they participate in such market, the Underwriters may exert
a dominating influence on the market, if one develops, for the Common Stock.
Such market-making activity may be discontinued at any time. Moreover, if the
Underwriters exercise the Underwriters' Warrants, they may be required under the
Exchange Act to temporarily suspend market-making activities. The price and
liquidity of the Common Stock may be significantly affected by the degree, if
any, of the Underwriters' participation in such market. See "UNDERWRITING."
CONTINUED NASDAQ SMALLCAP LISTING
While the Company's Common Stock meets the current Nasdaq SmallCap listing
requirements and expected to be initially included on the Nasdaq SmallCap, there
can be no assurance that the Company will at all times meet the criteria for
continued listing. Continued inclusion on the Nasdaq SmallCap generally requires
that a company have, among other things, (i) either net tangible assets of
$2,000,000, a market capitalization of $35,000,000, or net income for two of the
last three fiscal years of $500,000 and (ii) a minimum market value of public
float of $1,000,000. Additionally, for continued listing on the Nasdaq SmallCap,
companies are required to have at least two independent directors, and an Audit
Committee, a majority of the members of which would need to be independent
directors. If the Company is unable to satisfy the Nasdaq SmallCap's maintenance
requirements, its Common Stock may be delisted from the Nasdaq SmallCap. In
addition, Nasdaq has the right to review and reverse a decision to list a
security on the Nasdaq SmallCap Market before or after the completion of an
offering. In the event of any such delisting, trading, if any, in the Common
Stock would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. ("NASD") and it could be more difficult
to obtain quotations of the market price of the Company's Common Stock.
Consequently, the liquidity of the Company's Common Stock could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions, reduction in security analysts'
and the news media's coverage of the Company. The Company expects to meet the
Nasdaq SmallCap continued listing requirements immediately following this
Offering.
POTENTIAL ADVERSE EFFECTS OF DELISTING; "PENNY STOCK" RULES
If the Company's Common Stock were delisted from the Nasdaq SmallCap, it
could become subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker-dealers that sell such Common
Stock to persons other than established customers and "accredited investors"
(generally, individuals with a net worth in excess of $1,000,000 or annual
incomes exceeding $200,000 or $300,000 together with their spouses). For
transactions covered by such a rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's Common
Stock and may adversely affect the ability of purchasers in the Offering to sell
in the secondary market any of the Common Stock acquired.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.
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<PAGE>
The foregoing required penny stock restrictions will not apply to the
Company's Common Stock if the Common Stock is listed on the Nasdaq SmallCap and
has certain price and volume information provided on a current and continuing
basis or meets certain minimum net tangible assets or average revenue criteria.
There can be no assurance that the Company's Common Stock will qualify for
exemption from these restrictions. In any event, even if the Company's Common
Stock was exempt from such restrictions, it would remain subject to Section
15(b)(6) of the Exchange Act, which gives the Commission the authority to
prohibit any person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's Common
Stock were subject to the rules on penny stocks, the market liquidity for the
Company's Common Stock could be severely adversely affected.
SUBSTANTIAL DILUTION; DISPROPORTIONATE RISK OF LOSS
Based on the anticipated initial public offering price of $5.00 per share,
purchasers of the Shares offered hereby will incur immediate dilution in the net
tangible book value from the Offering price of $3.01 or (60.2%) per share. The
Company's current stockholders acquired their equity investments at an average
price of $0.58 per share. Accordingly, purchasers in the Offering will bear a
disproportionate portion of losses incurred by the Company in the future. See
"Dilution."
ARBITRARY OFFERING PRICE
The initial public offering price of the Common Stock has been determined
by negotiation between the Company and the Underwriters. See "Underwriting."
Such price will not necessarily relate to the Company's asset value, earnings,
net worth, financial condition or any other established criteria of value and
should not be regarded as an indication of the actual value or future market
price of the Common Stock.
DILUTION
At September 30, 1997 the Company had a negative net tangible book value of
$1,685,552 or approximately ($2.04) per share. The pro forma negative net
tangible book value of the Company as of September 30, 1997 was ($376,052) or
approximately ($0.33) per share, after giving effect to (i) the conversion of
$92,000 of convertible notes payable to 55,200 shares of the Company's Common
Stock, (ii) the conversion of $1,087,500 of bridge notes to 271,875 shares of
the Company's Common Stock and (iii) the contribution of $130,000 from certain
stockholders. "Net tangible book value" per share is equal to the tangible
assets of the Company, reduced by total liabilities, divided by the number of
shares of Common Stock outstanding. Assuming the sale by the Company of the
1,250,000 shares of Common Stock offered hereby (less underwriting discounts and
offering expenses, but before application of the net proceeds therefrom), the
pro forma net tangible book value of the Company at such date would have been
approximately $4,786,448 or $1.99 per share. This represents an immediate
increase in net tangible book value per share of $2.32 to existing owners of the
Common Stock and an immediate dilution in net tangible book value of $3.01 or
(60.2%) per share to purchasers of Common Stock in this Offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price........................................ $5.00
Pro forma net tangible book value per share before offering.......... (0.33)
Increase in net tangible book value per share attributable to new
investors.......................................................... 2.32
------
Pro forma net tangible book value per share after offering........... 1.99
-----
Dilution to new investors............................................ $3.01
-----
-----
</TABLE>
13
<PAGE>
The following table summarizes, as of September 30, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per common share paid by the
existing stockholders and the price per common share paid by the new investors
(before deducting the underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER
-------------------- --------------------- --------
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Present stockholders..................... 825,000 34.4% $ 474,813 6.0% $ 0.58
Conversion of $92,000 notes payable...... 55,200 2.3% 92,000 1.2% 1.67
Conversion of $1,087,500 of bridge
notes.................................. 271,875 11.3% 1,087,500 13.7% 4.00
Purchasers of shares in this Offering.... 1,250,000 52.0% 6,250,000 79.1% 5.00
--------- ------- ---------- -------
Total.......................... 2,402,075 100.0% $7,904,313 100%
--------- ------- ---------- -------
--------- ------- ---------- -------
</TABLE>
USE OF PROCEEDS
The Company intends to apply the net proceeds from this Offering, estimated
to be $5,162,500 ($5,978,125 if the Underwriters' over-allotment option is
exercised in full), to:
* open six (6) to eight (8) additional Company-owned restaurants
($2,626,200 or 50.9%)
* remodel three (3) of the Company's four (4) existing restaurants
($300,000 or 5.8%)
* repay the notes payable to the Company's private placement bridge
financing investors due upon consummation of this Offering bearing
interest at eight percent (8%) per annum ($412,500 or 8.0%)
* repay certain notes payable to the sellers of the Texas Loosey's
restaurants due upon consummation of this Offering bearing interest at
fifteen percent (15%) per annum ($375,000 or 7.3%)
* repay other notes payable ($322,000 or 6.2%) due upon consummation of
this Offering, of which $25,000 bears interest at eight percent (8%) per
annum, $200,000 bears interest at nine percent (9%) per annum, $37,000
bears interest at ten percent (10%) per annum, and $60,000 bears interest
at fourteen percent (14%) per annum
* repay accrued interest expense of ($308,700 or 6.0%)
* repay Small Business Administration ("SBA") loans on behalf of the
sellers of the restaurants ($353,724 or 6.9%) plus a cash payment to the
sellers ($89,046 or 1.6%) in connection with the Company's September 1996
agreement to purchase the remaining two restaurants
* provide funds for working capital and general corporate purposes
($375,330 or 7.3%). The proceeds from the Company's various notes payable
were used by the Company to acquire, enhance and operate its restaurants.
See "Description of Securities"
The Company anticipates, based on current plans and assumptions relating to
its operations, that the proceeds of this Offering, together with existing
resources and cash generated from operations will be sufficient to satisfy the
Company's contemplated cash requirements for at least the 12-month period
subsequent to completion of the Offering. There can be no assurance, however,
that the Company's cash requirements during this period will not exceed its
available resources causing the Company to amend or to delay its expansion
plans. See "Risk Factors -- Need for Additional Working Capital."
The allocation of the net proceeds of this Offering set forth above
represents the Company's best estimates based upon its current plans and certain
assumptions regarding industry and general economic conditions and the Company's
future revenues and expenditures. If any of these factors changes, the Company
may find it necessary or advisable to reallocate some of the proceeds within the
above-described categories or to use a portion thereof for other purposes. See
"Risk Factors -- Discretion in Use of Proceeds Designated for Working Capital."
Proceeds not immediately required for the purposes described above will be
invested in short-term United States government securities, short-term bank
certificates of deposit, money market funds or other investment grade
short-term, interest bearing instruments.
Any additional proceeds received upon exercise of the Underwriters'
over-allotment option will be added to working capital. There can be no
assurance that the Underwriters' over-allotment option will be exercised.
14
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1997, as adjusted to give effect to the sale of the Common Stock
offered hereby, and application of the net proceeds of the Offering as set forth
at "Use of Proceeds," the 1-for-3.671 reverse stock split effected by the
Company in August 1997 and the subsequent 1.650-for-1 forward stock split
effected by the Company in December 30, 1997. This table should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
ACTUAL AS ADJUSTED(1)
----------- ---------------
<S> <C> <C>
(UNAUDITED)
Long-term debt......................................... $ 870,000 $ 870,000
----------- -----------
Preferred Stock, $.001 par value, 5,000,000 shares
authorized;
Series B Convertible Preferred Stock, 1,000,000
shares issued and outstanding (actual and as
adjusted)............................................ 1,000 1,000
Common Stock, $.01 par value, 10,000,000 shares
authorized, 825,000 shares issued and outstanding,
actual: 2,402,075 shares outstanding, as adjusted.... 8,250 24,021(2)
Paid-in capital........................................ 466,563 7,106,792(3)
Accumulated deficit.................................... (1,648,409) (1,832,409)(4)
----------- -----------
Total stockholders' equity (deficit)................... (1,172,596) 5,299,404
----------- -----------
Total capitalization......................... $ (302,596) $ 6,169,404
----------- -----------
----------- -----------
</TABLE>
- ---------------
(1) Gives effect to the sale of 1,250,000 shares of Common Stock in this
Offering, net of expenses, and the application of the estimated net proceeds
therefrom.
(2) Includes (i) 55,200 shares of Common Stock to be issued upon the effective
date of this Offering related to the conversion of $92,000 of convertible
notes payable and (ii) 271,875 shares of Common Stock to be issued upon the
effective date of this offering related to the conversion of $1,087,500 of
bridge notes.
(3) Includes (i) conversion of debt in (2) above and (ii) $130,000 of additional
paid-in capital from certain stockholders.
(4) Includes expense charges of $184,000 related to conversion of $92,000 of
convertible notes payable.
15
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the expansion of its business. See "Risk
Factors -- No Dividends."
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the company's consolidated financial statements and the notes thereto included
elsewhere in this prospectus. The discussion of results, causes and trends
should not be construed to imply any conclusion that such results or trends will
necessarily continue in the future.
OVERVIEW
The Company currently owns and operates two (2) steakhouse restaurants in
Southern California and manages two others that are in escrow to be purchased,
which together formerly comprised all of the restaurants known as "Texas
Loosey's Chili Parlor & Saloon." The Company first acquired two (2) Texas
Loosey's restaurants on August 19, 1996, and has entered into an agreement
escrow on September 23, 1996 to purchase the remaining two (2) Texas Loosey's
restaurants. The Company anticipates that escrow will close on these two
restaurants immediately following the closing of this Offering.
The Company has converted one of the owned Texas Loosey's restaurants into
a Galveston's steakhouse restaurant reminiscent of the late 1950's and early
1960's, with popular rock 'n roll music from that period. The Company's
Galveston's restaurant offers high quality, reasonably priced, mesquite-grilled
steak, fresh fish, hamburgers, chicken and other specialty items to a diverse
clientele. The Company intends to convert its other restaurants into Galveston's
steakhouses in this same manner. After the other three (3) existing restaurants
are remodeled, the Company intends to develop additional Galveston's steakhouses
and to identify and develop new markets.
The Company believes that the high quality, moderately priced segment of
the restaurant industry presents an opportunity for significant growth. There
can be no assurance given, however, that such growth will, in fact, be achieved.
Set forth below is certain selected historical operating results for the
fiscal year ended December 30, 1995 and for the period from December 31, 1995
through August 18, 1996 for TLC Restaurant Management Corp. (the prior owner of
the first two (2) Texas Loosey's restaurants acquired by the Company) ("TLC")
and operating results for the Company from inception (June 3, 1996) through
December 31, 1996 and for the nine months ended September 30, 1997. Prior to the
Company's August 19, 1996 acquisition of these two (2) restaurants, the
restaurants experienced a substantial decline in revenues. The Company believes
that this decline in revenues was largely attributable to the absentee
management of the restaurants during the months preceding their acquisition. The
prior owner ceased, among other things, all advertising for the restaurants and
generally allowed the restaurants to operate with limited supervision, funds or
direction. As a result, patronage at the restaurants naturally declined. It
should be noted, however, that the Company's business concept is not to
replicate or resuscitate the Texas Loosey's theme but rather to convert these
acquired restaurants into Galveston's steakhouse restaurants. A second
contributing factor to the decline in revenues for this period was a fire which
occurred at one of the restaurants shortly after the August 19, 1996 acquisition
date, closing the restaurant for a period of three (3) months, and resulting in
a loss of revenues for that period.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain selected historical operating
results for the fiscal year ended December 30, 1995, and for the period from
December 31, 1995 through August 18, 1996 for TLC. Operating results for the
Company have been presented for the period from inception (June 3, 1996) through
December 31, 1996 and for the nine months ended September 30, 1997, as a
percentage of revenues.
STATEMENTS OF OPERATIONS DATA (ON A % BASIS):
<TABLE>
<CAPTION>
UNAUDITED 1997
1995 1996 --------------------------
---------------------- ---------------------------------------------------- GALVESTON'S GALVESTON'S
TLC TLC TLC TLC GALVESTON'S GALVESTON'S NINE NINE
STATEMENT OF YEAR YEAR 12/31/95 12/31/95 6/3/96 6/3/96 MONTHS MONTHS
OPERATIONS ENDED ENDED TO TO TO TO ENDED ENDED
CAPTION 12/30/95 12/30/95 8/18/96 8/18/96 12/31/96 12/31/96 9/30/97 9/30/97
- ------------------- ---------- -------- ---------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........... $2,063,364 100.0% $1,096,262 100.0% $ 416,544 100.0% $1,481,719 100.0%
Restaurant Costs... 2,166,209 105.0% 1,144,538 104.4% 547,981 131.5% 1,376,024 92.9%
---------- -------- ---------- -------- --------- --------- ----------- -------
(102,845) (5.0%) (48,276) (4.4%) (131,437) (31.5%) 105,695 7.1%
Other Income
(Expenses):
General &
Administrative... (408,179) (19.8%) (103,271) (9.4%) (136,467) (32.8%) (264,103) (17.8%)
Pre-Opening &
Start-Up
Costs.......... -- -- -- -- (433,694) (104.1%) (63,955) (4.3%)
Other............ 2,110 0.1% 1,312 0.1% 30,419 7.3% (17,450) (1.2%)
---------- -------- ---------- -------- --------- --------- ----------- -------
Operating Loss..... (508,914) (24.7%) (150,235) (13.7%) (671,179) (161.1%) (239,813) (16.2%)
Interest &
Financing
Costs............ (11,605) (0.6%) (10,459) (1.0%) (271,373) (65.1%) (466,044) (31.5%)
---------- -------- ---------- -------- --------- --------- ----------- -------
Net Loss........... $ (520,519) (25.3%) $ (160,694) (14.7%) $(942,552) (226.2%) $ (705,857) (47.7%)
---------- -------- ---------- -------- --------- --------- ----------- -------
---------- -------- ---------- -------- --------- --------- ----------- -------
</TABLE>
YEAR ENDED DECEMBER 30, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. The Company acquired its first two (2) Texas Loosey's restaurants
on August 19, 1996. Gross revenues for these restaurants for the fiscal period
beginning on January 1, 1996 (i.e, pre-dating the Company's acquisition) and
ending on December 31, 1996, were $1,512,806 (which represents gross revenues of
$1,096,262 prior to the acquisition and gross revenues of $416,544 subsequent to
the acquisition). Gross revenues declined by $550,558 or 26.7% from 1995 during
which gross revenues were $2,063,364. As noted above, the Company believes that
this decline in revenues was largely attributable to the absentee management of
the Texas Loosey's restaurants during the months preceding their acquisition. A
second contributing factor to the decline in revenues for this period was a fire
which occurred at one of the restaurant units shortly after the August 19, 1996
acquisition date, closing the restaurant for a period of three (3) months, and
resulting in a loss of revenues for that period.
RESTAURANT COSTS. The percentage of operating expenses to revenue in 1996
increased over 1995 to 114.6% from 105%. The Company believes that the operating
expenses increased as a percentage of revenue due to an inefficient use of basic
labor during the period of revenue decline under prior management, coupled with
the loss of revenue (without an offsetting deduction in operating expenses)
during the rebuilding of the restaurant unit after the fire described above.
OTHER INCOME/(EXPENSES). The Company incurred non-recurring pre-operating
and start-up costs in connection with its acquisition of the first two (2) Texas
Loosey's restaurants. These costs amounted to $433,694 and represent 104.1% of
gross revenues for the period from inception (June 3, 1996) through December 31,
1996. This amount included significant costs such as pre-opening, training and
organizational staffing; consulting, legal, and other professional fees,
incorporation and escrow fees; and travel and relocation expenses for management
personnel.
The Company believes that the general and administrative expenses for the
period preceding this acquisition are unique to the previous owner of the
restaurants. Specifically, the general and administrative expenses for the year
ended December 30, 1995 ($408,179) and the period ended August 18, 1996
($103,271) for TLC include corporate salaries and other corporate expenses that,
in current management's opinion, are not reflective of the necessary costs to
operate and manage the restaurants and is in excess of what the Company has and
expects to
17
<PAGE>
incur for general and administrative expenses. The Company's general and
administrative expenses for the period from inception (June 3, 1996) through
December 31, 1996 were $136,467 and include approximately $70,000 of auditing
fees for the Company and the predecessor business acquired from TLC Restaurant
Management Corp. The Company's general and administrative expenses for the
period from inception (June 3, 1996) through December 31, 1996, do not include
any salary compensation for the Company's Chief Executive Officer or its
President. Both of these individuals have agreed to waive their salary
compensation that would be earned up to the successful completion of this
Offering. Had these individuals taken a salary for the period from inception
(June 3, 1996) through December 31, 1996, the Company's general and
administrative expenses would have increased by approximately $55,000 to
approximately $191,000.
Interest and financing costs for the period from inception (June 3, 1996)
through December 31, 1996 for the Company increased significantly over prior
periods due to the debt incurred to transact the acquisition of the first two
(2) restaurants and to fund operations.
NINE MONTHS ENDED SEPTEMBER 30, 1997
Comparable results of operation for this period are not available from TLC
because TLC terminated its operations on August 18, 1996. Furthermore, the
financial statements of the Company and its predecessor, TLC, are not comparable
due to the significant amount of debt incurred by the Company to consummate the
acquisition of TLC's restaurants and the significant purchase accounting
adjustments that resulted therefrom.
REVENUES. The Company believes that it has made significant progress during
the first nine months of 1997 in rebuilding the revenue base of the restaurants
it acquired from TLC notwithstanding the Company's lack of funds for advertising
and the disruption caused by a fire in the fourth quarter of 1996 at one of the
restaurants. The $1,481,719 of revenue generated by the Company during the nine
month period ended September 30, 1997 subtantially exceeded the $1,096,262 of
revenues generated by TLC during the approximately 8 month period ended August
18, 1996.
RESTAURANT COSTS. The restaurant operating costs for the Company's first
nine months of 1997 were 92.9% of gross revenues. The Company believes that it
has made significant progress in controlling costs and increasing efficiency of
operations since assuming management on August 19, 1996. The Company's direct
labor cost for the first nine months of 1997 was 33.2% of gross revenues and the
cost of food and beverage was 34.5% of gross revenues.
GROSS MARGIN FROM OPERATIONS. As a result of the foregoing, the Company's
gross margin for the first nine months of 1997 was $105,695 as against a
negative gross margin in periods prior to 1997.
OTHER INCOME/(EXPENSES). A number of the expenses included under these
categories are non-recurring expenses such as consulting fees, private placement
bridge financing costs, accruals and/or payments of interest expenses on the
Company's $1.5 million of bridge financing debt, $1.25 million of TLC debt and
other debt incurred in connection with the acquisition of the remaining two (2)
Texas Loosey's restaurants and the Company's operation. The Company also
incurred pre-operating and start-up costs of $63,955 during the nine months
ended September 30, 1997. This amount included costs such as pre-opening,
training, organizational staffing, consulting, legal and other professional
fees. The Company expects its interest and financing costs to be significantly
reduced following the repayment and/or conversion to equity of its outstanding
indebtedness upon the completion of this Offering, but no assurance thereof can
be given. See "Use of Proceeds."
The Company's general and administrative expenses of $264,103 included
salaries for senior management personnel, which personnel have been employed in
anticipation of the Company's future growth, rather than as personnel necessary
to oversee the Company's current operations. However, the Company's general and
administrative expenses for the nine months ended September 30, 1997, do not
include any salary compensation for the Company's Chief Executive Officer or its
President. Both of these individuals have agreed to waive their salary
compensation that would be earned up to the successful completion of this
offering. Had these individuals taken a salary for the nine months ended
September 30, 1997, the Company's general and administrative expenses would have
increased by approximately $72,000 to approximately $336,103.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant capital to fund its working capital needs
and its planned expansion. Revenues are not yet sufficient to support the
Company's operating expenses and are not expected to reach such levels during
the next twelve (12) months. Cash used by operating activities for the period
following the Company's acquisition of the first two (2) Texas Loosey's
restaurants was $707,979 for the period ended December 31, 1996 and $290,273 for
the nine months ended September 30, 1997. Cash and cash equivalents at September
30, 1997 aggregated $221,006 and the Company had a working capital deficit of
$2,162,131. Additionally, the aggregate amount of accounts payable and accrued
expenses was $442,946 at September 30, 1997.
For the nine months ended September 30, 1997, the Company paid $71,500 to
Mr. Walton under his consulting agreement with the Company and $54,102 to two
(2) members of management under their employment agreements with the Company.
Messrs Lee and Woo, however, have not received (and have agreed to waive) any
salary compensation during this period.
Since its formation on June 3, 1996, the Company has funded its operations
and capital expenditures primarily through capital contributions from private
placements of its equity securities and by utilizing vendor credit.
The Company's independent certified public accountants issued a going
concern opinion with regard to the most recent audited financial statements
based in part upon an operating loss of $942,552 for the period from inception
(June 3, 1996) through December 31, 1996, an accumulated deficit of $942,552 and
a working capital deficit of $1,533,104 at December 31, 1996. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The continuation of the Company as a going concern is dependent upon
its ability to generate sufficient cash flows from operations and financing
activities and achieving successful operations. Management's plans to address
the foregoing included and include the following:
1. The closing of this Offering with anticipated net proceeds of
approximately $5,162,500, a portion of which will be used to satisfy
certain outstanding obligations of the Company. See "Use of Proceeds."
2. An increase in revenues by substantially increasing the number of
Company-owned restaurants.
The Company believes that the increase in capital obtained in this Offering
will enhance the Company's potential for a transition to profitable operations
in the future.
The Company believes that these plans can be effectively implemented in the
next twelve months. There can be no assurance, however, that the Company will be
successful in these endeavors. The Company's ability to continue as a going
concern is dependent on the implementation and success of these plans. The
financial statements do not include any adjustments in the event the Company is
unable to continue as a going concern.
NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). This standard, if fully adopted, changes the
methods of accounting for employee stock-based compensation plans to the fair
value based method. For stock options, fair value is determined using an option
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option, the volatility of the
underlying stock (not applicable for private entities), expected dividends and
the risk-free interest rate over the expected life of the option. Compensation
expense, if any, is recognized over the applicable service period, which is
usually the vesting period. The full adoption of the accounting methodology of
SFAS No. 123 is optional and the Company has elected to continue accounting for
stock-based compensation issued to employees using APB No. 25; however, pro
forma disclosures as if the Company adopted the cost recognition requirements
under SFAS No. 123 are required to be presented if the effect is material to the
financial statements. 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.
The FASB has issued SFAS No. 128, "Earnings per Share." This statement is
effective for both interim and annual reporting periods ending after December
15, 1997. SFAS No. 128 replaces primary earnings per share
19
<PAGE>
(EPS) with basic EPS and fully diluted EPS with diluted EPS. Basic EPS is
computed by dividing reported earnings by the weighted average number of shares
outstanding. Diluted EPS is computed in the same way as fully diluted EPS,
except that the calculation now uses the average share price for the reporting
period to compute dilution from options under the treasury stock method. The
Company will adopt the new standard in its reporting for the year ended December
31, 1997. Management does not believe that the adoption of this standard will
have a significant impact on EPS.
The FASB has issued SFAS No. 129, "Disclosure of Information about Capital
Structure." This statement is effective for annual reporting periods ending
after December 15, 1997. SFAS No. 129 continues the existing requirements to
disclose the pertinent rights and privileges of all securities other than
ordinary common stock but expands the number of companies subject to portions of
its requirements. The Company will adopt the new standard in its reporting for
the year ended December 31, 1997. The adoption of this statement will have no
effect on the financial statements.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." This
statement is effective for annual reporting periods ending after December 15,
1997. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company will adopt the new standard in its reporting
for the year ended December 31, 1997. The adoption of this statement will have
no effect on the existing financial statements but may establish additional
disclosure requirements.
The FASB has also issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement is effective for annual
reporting periods ending after December 15, 1997. SFAS No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions permitted under current standards. The Company will
adopt the new standard in its reporting for the year ended December 31, 1997.
The adoption of this statement will have limited effect since the Company
operates in only one business segment.
20
<PAGE>
BUSINESS
BACKGROUND
The Company currently owns and operates two (2) steakhouse restaurants and
manages two (2) others that it is in escrow to purchase in Southern California,
which together formerly comprised all of the restaurants known as "Texas
Loosey's Chili Parlor & Saloon." The Company first acquired two (2) Texas
Loosey's restaurants on August 19, 1996, pursuant to an Asset Purchase
Agreement, dated April 10, 1996, and is in escrow on a September 23, 1996
agreement to purchase the remaining two (2) Texas Loosey's restaurants. The
Company anticipates that escrow will close on these two restaurants immediately
following the closing of this Offering.
The Company has converted one of the Texas Loosey's restaurants into a
Galveston's steakhouse restaurant reminiscent of the late 1950's and early
1960's, with popular rock 'n roll music from that period. Maps of Galveston
Island, Route 66 road signs, pictures of James Dean, wild beach saw grass and
other Galveston Island and Texas-style motifs decorate the restaurant's casual
setting. The Company's Galveston's restaurant offers high quality, reasonably
priced, mesquite- grilled steak, fresh fish, hamburgers, chicken and other
specialty items to a diverse clientele. The Company intends to convert its other
restaurants into Galveston's steakhouses in this same manner. After the other
three (3) existing restaurants are remodeled, the Company intends to develop
additional Galveston's steakhouses and to identify and develop new markets. The
Company believes that the high quality, moderately priced segment of the
restaurant industry presents an opportunity for significant growth. There can be
no assurance given, however, that such growth will, in fact, be achieved.
RESTAURANT CONCEPT
The Company will seek to position its restaurants as "destination
restaurants" that attract loyal clientele. By its use of the term "destination
restaurants," the Company means that it will seek to establish its restaurants
as the primary destination of its clientele, rather than a destination or
activity ancillary to another activity, such as shopping or site-seeing. The
Company also intends to emphasize the steakhouse aspect of its restaurants,
including changing the name of the restaurants from "Texas Loosey's Chili Parlor
& Saloon" to "Galveston's Steakhouse." The Company intends to focus on a
Galveston's Island steakhouse concept that features Texas artifacts with late
1950's and early 1960's music intended to capitalize on popular themes. The
restaurants' decor will include weathered wood panels, wall murals depicting
Galveston Island themes and other Texas memorabilia, all of which is intended to
help establish a distinct identity for the restaurants. Galveston's will serve
USDA choice-graded steaks, hand-cut fresh daily at each restaurant and
mesquite-grilled to order. Portions will be deliberately generous and full
liquor and bar service will be available.
CORPORATE STRATEGY
The Company believes that excellence in operations, quality of food and
service, ambiance, location and price-value relationship are keys to success in
the restaurant industry. The Company intends to differentiate its restaurants by
emphasizing the following strategic elements:
* Positioning in the moderately-priced, high-quality, full service, steakhouse
segment of the restaurant industry.
* The association with nostalgia, early rock 'n roll and Texas themes.
* Generous portions offered at moderate prices.
* High-quality and attentive service.
* Consistent high-quality products through careful ingredient selection, food
preparation and aging of steaks.
EXPANSION
Following the closing of this Offering, the Company plans to remodel the
three (3) Texas Loosey's restaurants that have not yet been remodeled to reflect
the Company's Galveston's steakhouse concept. The Company expects that future
acquired restaurants will also reflect the new Galveston's steakhouse identity.
21
<PAGE>
The Company intends to direct its initial expansion efforts primarily on
the West Coast of the United States to areas away from tourist or major
metropolitan centers. The Company plans to target smaller cities in lower
density areas where a new theme restaurant is a major attraction. The Company
believes that, demographically, the target market for this initial expansion
strategy has a minimum population of 25,000 people within a 4.5 mile radius and
an average annual household income between $14,000 and $57,000. The Company
currently intends to expand solely through the acquisition and development of
additional Company-owned restaurants.
MENU
The Galveston's menu features a selection of high-quality, specially
seasoned char-grilled steaks, fresh fish, hamburgers, and mesquite chicken. A
complete meal would include a choice of side dishes, including baked potato,
baked sweet potato, french fries and steamed vegetables. The menu will also
include appetizers and desserts, together with a full bar service. Alcoholic
beverage service accounted for approximately thirty six and one-half percent
(36 1/2%) of the first two (2) acquired Texas Loosey's restaurants' net sales
during 1996.
SITE SELECTION AND CONSTRUCTION
The Company considers the location of each restaurant to be critical to its
long-term success and management intends to devote significant effort to the
investigation and evaluation of potential sites. The site selection process will
focus on regional and trade area demographics, target population density,
household income and educational levels and traffic patterns, as well as
specific site characteristics such as visibility, accessibility, traffic volume
and the availability of adequate parking. The Company also intends to review
potential competition and customer activity at other restaurants operating in
the area.
The Company anticipates that the cost of opening each new Galveston's
steakhouse will range from $600,000 to $800,000 for the build-out of a brand-new
facility and from $350,000 to $530,000 for the conversion of an existing
restaurant, which includes leasehold improvements, furniture, fixture,
equipment, food and beverage inventory and other pre-opening expenses. There can
be no assurance given, however, that the Company's costs of opening additional
Galveston's steakhouses will not exceed the foregoing estimates.
RESTAURANT SIZE
The Company's restaurants currently average approximately 4,500 to 5,800
square feet and include a dining area with seating for approximately 210
customers at between 35 and 55 tables. The bar is located adjacent to the dining
room primarily to accommodate customers waiting for dining tables and up to
approximately 30 additional diners at between six and nine tables. The Company
anticipates that future Galveston's steakhouses will, on average, be of similar
size.
MARKETING
The Company believes that Galveston's steakhouses will be well positioned
as "destination steakhouse restaurants" that focus on the moderately-priced,
high-quality, full service, casual dining market segments. The Company intends
to rely principally on its commitment to customer service, excellent price-value
relationship and the "Galveston Island" ambiance of its restaurants to attract
and retain customers. Accordingly, the Company intends to focus its resources on
seeking to provide customers with superior service, value and an exciting and
vibrant atmosphere.
The Company's restaurants currently rely on positive word-of-mouth and
in-store promotions to generate consumer interest. However, as the number of
restaurants expand, the Company intends to utilize advertising to promote its
restaurants and build customer awareness, including but not limited to print,
direct-mail and radio advertising, and to conduct some local restaurant
promotions. To create additional Galveston's name recognition and customer
identification, the Company may sell Galveston's T-shirts, hats, steak sauces
and other items bearing the Galveston's name and logo.
A portion of the Company's external marketing effort is expected to consist
of attracting customers through the use of free-standing inserts ("FSIs"). FSIs
contain descriptive information regarding the restaurants and would be
distributed by direct mail and through newspapers. In addition, the Company may
initiate a "business-to-
22
<PAGE>
business" program under which it would mail promotions to local businesses for
distribution to their employees. In addition, each restaurant would periodically
co-sponsor fund-raising events for local charitable and other community
organizations.
For each new restaurant, the Company intends to conduct a pre-opening
awareness program beginning approximately two to three weeks prior to, and
ending four to six weeks after, the opening of a restaurant. The Company
anticipates that a given program typically would include special promotions,
site signs, sponsorship of a fund-raising event for a local charity to establish
ties to local community leaders and increase awareness of the new restaurant,
and pre-opening trial operations, to which the family and friends of new
employees would be invited.
RESTAURANT OPERATIONS AND MANAGEMENT
The Company plans to maintain quality and consistency in its restaurants
through the careful hiring, training and supervision of personnel and the
establishment of standards relating to food and beverage preparation,
maintenance of facilities and conduct of personnel. See "Risk Factors --
Dependence on Key and Other Personnel."
The Company plans to maintain financial and accounting controls for each of
its restaurants through the use of centralized accounting and management
information systems. Sales information would be collected semi-weekly from each
restaurant, and restaurant managers would be provided with weekly and monthly
operating statements for their locations. In addition, the Company intends that
all of the sales information would be available via network or other "on-line"
service, and the Company would be able to inspect each restaurant's sales data
at any time, unannounced. Most of the Company's restaurants are expected to be
open daily from 11:00 a.m. to 11:00 p.m. weekdays and until 12:00 p.m. on
weekends. The bar would customarily remain open for an additional hour.
The management team for a typical Galveston's restaurant is expected to
consist of one general manager, two assistant managers and a kitchen manager.
Each restaurant also would be expected to employ a staff consisting of
approximately 50 to 70 hourly employees, many of whom work part-time. Typically,
each general manager would report directly to a district manager who, in turn,
would report to the Company's vice president of regional operations. As the
number of Galveston's steakhouses expands, the Company anticipates having one
district manager for every five restaurants. Restaurant managers (and, if a
franchise program is instituted, franchisees) would complete an extensive
training program during which they would be instructed in areas including food
quality and preparation, customer satisfaction, alcoholic beverage service,
governmental regulations compliance, liquor liability management and employee
relations. Restaurant managers would also be provided with an operations manual
relating to food and beverage preparation, all areas of restaurant management
and compliance with governmental regulations. Working in concert with the
individual restaurant managers, the Company's senior management would define
operations and performance objectives for each restaurant and monitor
implementation. Senior management would regularly visit various Galveston's
restaurants and meet with the respective management teams to ensure compliance
with the Company's strategies and standards of quality in all respects of
restaurant operations and personnel development.
Each new restaurant employee of the Company would participate in a training
program during which the employee works under the close supervision of a
restaurant manager, or an experienced key employee. Management would
continuously solicit employee feedback concerning restaurant operations and
strive to be responsive to the employees' concerns.
PURCHASING
The Company intends to negotiate directly with suppliers for food and
beverage products to ensure consistent quality and freshness of products and to
obtain competitive prices. Food and supplies would be shipped directly to the
restaurants, although invoices for purchases would be sent to the Company for
payment. The Company's emphasis on first-quality food will require frequent
deliveries of fresh food supplies. Because of the need for freshness of
products, the Company does not intend to maintain a central product warehouse or
commissary. See "Risk Factors -- Cost Sensitivity."
23
<PAGE>
COMPETITION
Competition in the restaurant industry is increasingly intense. The Company
will compete with other moderate to mid-priced, full service restaurants
primarily on the basis of quality of food and service, ambiance, location and
price-value relationship. The Company will also compete with a number of other
restaurants within its markets, including both locally-owned restaurants and
regional or national chains. The Company believes that its "Galveston's Island"
concept, attractive price-value relationship and quality of food and service
will enable it to differentiate itself from its competitors. While the Company
believes that its restaurants are distinctive in design and operating concept,
it is aware of restaurants that operate with similar concepts, such as the
Lonestar and Outback steakhouses. The Company will also compete with other
restaurants and retail establishments for sites. Many of the Company's
competitors are well-established in the mid-priced dining segment and certain
competitors have substantially greater financial, marketing and other resources
than the Company. The Company believes that its ability to compete effectively
will continue to depend upon its ability to offer high-quality, moderately
priced food in a full service, distinctive dining environment. See "Risk Factors
- -- Restaurant Industry and Competition."
GOVERNMENT REGULATION
The Company's restaurants are subject to numerous federal, state and local
laws affecting health, sanitation and safety standards, as well as to state and
local licensing regulation of the sale of alcoholic beverages. Each restaurant
currently has appropriate licenses from regulatory authorities allowing it to
sell liquor, beer and wine, and each restaurant has food service licenses from
local health authorities. The Company is required to renew these licenses
annually. In addition, those licenses may be suspended or revoked at any time
for cause, including violation by the Company or its employees of any law or
regulation pertaining to alcoholic beverage control, such as those regulating
the minimum age of patrons or employees, advertising, wholesale purchasing and
inventory control. The failure of the Company to obtain or retain liquor or food
service licenses would likely have a material adverse effect on its operations.
See "Risk Factors -- Government Regulation." In order to reduce this risk, each
of the Company's restaurants is expected to be operated in accordance with
standardized procedures designed to assure compliance with all applicable codes
and regulations. Difficulties in obtaining or failures to obtain the required
licenses or approvals could delay or prevent the development of a new restaurant
in a particular area. In California, there is a set number of alcoholic beverage
licenses available, but there is an active market through which new licenses can
be obtained at the then-applicable market price. The failure to receive or
retain, or a delay in obtaining, a liquor license in a particular location could
adversely affect the Company's ability to obtain such a license elsewhere.
The Company will be subject, as the Company expands, in certain states to
"dram-shop" statutes, which generally provide a person injured by an intoxicated
person the right to recover damages from an establishment that wrongfully served
alcoholic beverages to the intoxicated person. The Company expects to carry
liquor liability coverage as part of its comprehensive general liability
insurance.
The Company's future restaurant operations will also be subject to federal
and state minimum wage laws governing such matters as working conditions,
overtime and tip credits and other employee matters. Significant numbers of the
Company's food service and preparation personnel will be paid at rates related
to the federal minimum wage. Government-imposed increases in minimum wages, paid
leaves of absence and mandated health benefits, or increased tax reporting and
tax payment requirements for employees who receive gratuities, could be
detrimental to the economic viability of the Galveston's restaurants.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
Management is not aware of any environmental regulations that have had a
material effect on the Company or the Texas Loosey's restaurants to date.
The Federal Americans With Disabilities Act (the "Disabilities Act")
prohibits discrimination on the basis of disability in public accommodations and
employment. The Company intends to ensure that its restaurants will be in full
compliance with the Disabilities Act, and the Company intends to review plans
and specifications and make periodic inspections to ensure continued compliance.
The Company's current restaurants are designed to be accessible to the disabled.
The Company believes that it is in substantial compliance with all current
applicable
24
<PAGE>
regulations relating to restaurant accommodations for the disabled. The Company
does not anticipate that such compliance will require the Company to expend
substantial funds.
EMPLOYEES
At September 30, 1997, the Company employed approximately 135 individuals,
of which 14 occupy executive or managerial positions, approximately 119 hold
non-managerial restaurant-related positions and the balance occupy clerical and
office positions. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relations with its employees to
be good and has not experienced any interruption of operations due to labor
disputes.
PROPERTIES AND LEASES
All of the existing restaurants are situated on leased property. These
leases mature at various dates through 2004. The owned restaurants are as
follows: The Fullerton facility consists of 8,285 square feet at a rent of
$8,300 per month and the Torrance facility consists of 6,000 square feet at a
rent of $7,093 per month. The restaurants to be purchased are as follows: The
Riverside facility consists of 5,500 square feet at a rent of $7,069 per month;
the Norco facility consists of 4,260 square feet at a rent of $6,177 per month.
The Company expects that future restaurants will be developed on leased
property, but it may also develop future restaurants on property owned by the
Company or any to-be-formed subsidiaries.
The Company's executive offices are located at its Riverside facility at
151 E. Alessandro Boulevard, Riverside, California. The Company believes that
there is sufficient office space available at favorable leasing terms in the
Orange County, California area to satisfy the additional needs of the Company
that may result from future expansion.
LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
PURCHASE OF TEXAS LOOSEY'S RESTAURANTS
On August 19, 1996, the Company acquired two (2) restaurants known as
"Texas Loosey's Chili Parlor & Saloon" for a purchase price of $1.52 million,
pursuant to the Asset Purchase Agreement. The cash portion of such purchase
price was $275,000 and the remainder of the purchase price was paid in the form
of the First TL Note and the Second TL Note, secured by the assets acquired by
the Company. The First TL Note was originally due on the earlier of: February
19, 1997, being the date which was six months following the closing date of the
acquisition of the Texas Loosey's restaurants (the "Six Month Date") or the date
that the Company filed a registration statement with the Commission for an
initial public offering of its securities. Pursuant to an Extension Agreement,
dated March 24, 1997, as amended, the due date for the First TL Note has since
been extended to February 15, 1998. The First TL Note bears interest at the rate
of ten percent (10%) per annum from August 19, 1996 through February 19, 1997
and at the rate of fifteen percent (15%) per annum from February 19, 1997
through February 15, 1998. The Second TL Note bears interest at the rate of
eight percent (8%) per annum from August 19, 1996. Commencing February 19, 1997,
interest only payments of $6,032 are due monthly for one year. Commencing
February 19, 1998 through July 19, 2001, monthly principal and interest payments
of $10,978 are due. The remaining principal balance is due via a balloon payment
on August 19, 2001.
As secured creditors, the TL Sellers would have the right to foreclose on
such assets if the Company defaulted on the payment of either promissory note.
See "Risk Factors -- Effect of Possible Default Under the Asset Purchase
Agreement." In addition, pending the Company's payment of the First TL Note from
the proceeds of this Offering, the liquor licenses for the restaurants are being
held in escrow.
Under the Asset Purchase Agreement, the Company entered into a consulting
agreement with Walton (the "Consulting Agreement"). The Consulting Agreement
provides that Walton will render consulting services, on an "as needed" basis,
for a period of approximately two (2) years in connection with the management,
marketing, development and expansion of the business and operations of the
restaurants through consultation with the
25
<PAGE>
officers and employees of the Company as the Company's Chief Executive Officer
or President may reasonably request. In consideration for such consulting
services, the Company will pay Walton $95,000 each year.
The Company is in escrow on a September 23, 1996 agreement to acquire
substantially all of the assets of two Texas Loosey's restaurants in Norco,
California and Riverside, California, respectively, from the franchisee of the
restaurants for a purchase price of $563,177, excluding inventory and escrow
costs. A cash payment of $77,835 was paid into escrow, of which $45,735 will be
used to reduce the purchase price, $20,000 will be used for the purchase of
inventory and $12,100 will be used for the payment of escrow costs. The Company
anticipates that escrow will close on these two restaurants immediately
following the closing of this Offering.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The current directors, executive officers and key personnel of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------ --- --------
<S> <C> <C>
Mr. Richard M. Lee....................... 31 Chairman of the Board and Chief Executive
Officer
Mr. Hiram J. Woo......................... 62 President, Secretary, Chief Financial
Officer, Director
Mr. Michael R. Dunmire................... 31 Senior Operations Officer
Ms. Rebecca L. Rotman.................... 26 Senior Training Officer
</TABLE>
MR. RICHARD M. LEE has been the Chairman of the Board and Chief Executive
Officer of the Company since its inception in 1996. Mr. Lee began his business
career upon graduating high school at the age of 17, founding his first company
with a total of $3,500 of seed capital. By the age of 22, Mr. Lee was recognized
as a "young-millionaire" entrepreneur by the University of Southern California.
In addition, Mr. Lee was one of the youngest inductees into the Young Presidents
Organization of America. Mr. Lee has been featured in numerous industry, local
and national media publications. He was featured as a model entrepreneur in the
university textbook, Contemporary Business (Dryden Press: 1990). From 1983 to
1990, Mr. Lee was the founder and President of Audio-Chamber International, Inc.
based in Orange County, California, a manufacturer of high-fidelity mobile sound
systems. In 1990, Mr. Lee sold Audio-Chamber International, Inc. to actively
invest in real estate and securities. From 1991 to 1992, Mr. Lee co-founded and
co-managed Aristotle Investments Ltd. as its chief strategist for investments in
franchise restaurant acquisitions. From 1992 to May 1996, Mr. Lee was the co-
founder and Chairman/CEO of China Coast Foods, Inc., a company formed to explore
opportunities in the food industry in the Peoples Republic of China. Mr. Lee has
also been involved with and invested in franchised restaurants, including, for
example, Domino's Pizza Restaurants and Popeyes Famous Fried Chicken. Since June
1996, Mr. Lee has devoted substantially all his working time and energies to the
affairs of the Company.
MR. HIRAM J. WOO has been the President, Secretary and a director of the
Company since its inception. Since 1976, he has owned and operated Hiram J. Woo
Accountancy Corporation, a San Francisco-based accounting firm with numerous
restaurateurs among his clients. Over the past 14 years, Mr. Woo has actively
invested in, owned or reorganized and restructured various restaurants, ranging
from large-scale casual dining establishments to night clubs to bar and grill
operations. In 1980, Mr. Woo founded and has since managed Regal Financial
Development Corporation ("RFDC"), a real estate development and planning firm
based in San Francisco. In the past 14 years, RFDC has managed over $300 million
of real estate development projects in the Western United States. From 1992 to
1996, Mr. Woo has owned and operated several large-scale restaurants in the San
Francisco area. Mr. Woo is active among the local Chinese community and has
served as a director of two Chinese-American financial institutions and several
business organizations. Mr. Woo is a Certified Public Accountant. Mr. Woo is a
past director of the Chinese Resources Development Center of San Francisco, a
past president of Park Presidio Optimist Club, and a member of the San
Francisco, Fairfield and Vacaville Chambers of Commerce.
MR. MICHAEL R. DUNMIRE has been the Company's Senior Operations Officer
since October 15, 1996. He has substantial experience during the past five years
in training and developing kitchen and other restaurant staff, and is
responsible for overseeing all operations at the Company's restaurants. Mr.
Dunmire began his career in the restaurant business in 1982 as a busboy, and
worked his way up through the ranks as a dishwasher, server, head cook, kitchen
manager and general manager. From December 1992 to December 1993, he was a
Kitchen
26
<PAGE>
Manager/General Manager at Garfield's Restaurant & Pub, in Nashville, Tennessee.
From December 1993 to April 1994, Mr. Dunmire was the General Manager of
Garfield's Restaurant & Pub in Laredo, Texas. In April 1994, Mr. Dunmire
co-founded Out Yonder Catfish House in Yeoman, Indiana, and as General Manager
created the theme and identity for the restaurant and was responsible for
overseeing all restaurant operations. In July 1995, Mr. Dunmire sold his
interest in Out Yonder and joined the Lonestar Steakhouse & Saloon restaurant
chain as a Service Manager at its Lafeyette, Indiana location where he was
responsible for training and supervising all service staff. In December 1995, he
took over as Kitchen Manager of Lonestar's New Orleans, Louisiana location where
he was responsible for training the kitchen personnel and controlling all costs,
budgets and profit and loss projections at the restaurant. Mr. Dunmire left
Lonestar in October 1996 to join the Company.
MS. REBECCA L. ROTMAN has been the Company's Senior Training Officer since
October 15, 1996. She has had substantial experience during the past five years
in the training of restaurant service staff. Ms. Rotman began her career in the
restaurant business in February 1991 as a member of the service staff for the
Lonestar Steakhouse & Saloon restaurant chain in Asheville, North Carolina. Ms.
Rotman eventually became a Corporate Trainer, at which time she assisted in
opening some of the first twenty (20) Lonestar restaurants. In February 1992,
she took over as the Service Manager of Lonestar's Ft. Myers, Florida location.
From August 1993 through December 1995, Ms. Rotman was a Training Manager for
Lonestar's new store openings, in which capacity she trained the service staff
of over twenty (20) Lonestar steakhouses. In that capacity, she was responsible
for creating and implementing training manuals, policies and procedures for the
opened locations. From January 1996 to September 1996, Ms. Rotman was the Senior
Manager of Lonestar's New Orleans, Louisiana location. Ms. Rotman left Lonestar
in October 1996 to join the Company.
The Company intends to appoint three (3) independent directors to the Board
following the closing of this offering, one of whom will be the designee of the
Underwriters. Until such time, as these directors are appointed and agree to
serve, the Company will not have any independent oversight of Company management
by members of the Board, and/or by its Audit or Compensation Committees.
BOARD OF DIRECTORS
Directors are elected at the annual meeting of the Company's stockholders
to hold office until the next annual meeting and until their successors are
elected and qualified. Officers serve at the discretion of the Board. Directors
may receive such compensation for their services as is fixed from time to time
by resolution of the Board.
DIRECTORS' COMPENSATION
Directors of the Company currently receive no compensation for their
service as such.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted pursuant to the corporate law of the State of Delaware, the
Company's state of incorporation, the Certificate of Incorporation and By-Laws
require that the Company indemnify its directors and officers against certain
liabilities and expenses incurred in their service in such capacities to the
fullest extent permitted by applicable law. These provisions would provide
indemnification for liabilities arising under the federal securities laws to the
extent that such indemnification is found to be enforceable under, and to be in
accordance with applicable law. Additionally, the Company intends to enter into
an indemnity agreement with each director which generally provides that
directors are indemnified with respect to actions taken in good faith.
Furthermore, the personal liability of the directors is limited as provided in
the Company's Certificate of Incorporation.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore unenforceable.
OMNIBUS STOCK PLAN
In January 1997, the Company adopted the Galveston's Steakhouse Omnibus
Stock Plan (the "Plan") to promote the long-term growth and profitability of the
Company by (i) providing key directors, officers and
27
<PAGE>
employees of the Company and its subsidiaries with incentives to improve
stockholder value and contribute to the growth and financial success of the
Company and (ii) enabling the Company to attract, retain and reward the best
available persons for positions of substantial responsibility. As described more
fully below, the Plan provides for grants of options to purchase specified
numbers of shares of Common Stock at predetermined prices.
The following discussion represents only a summary of certain of the plan
terms and is qualified in its entirety by reference to the complete plan, a copy
of which has been filed as an exhibit to the registration statement of which
this prospectus forms a part.
Shares Available; Maximum Awards; Participants. A total of 400,000 shares
of the Company's Common Stock has been reserved for issuance upon exercise of
options granted pursuant to the Plan. The Plan allows the Company to grant
options to employees, officers and directors of the Company and its
subsidiaries; provided that only employees of the Company and its subsidiaries
may receive incentive stock options under the Plan. The Company has not granted,
and prior to completion of the Offering does not expect to grant, any options
under the Plan.
Stock Option Features. Under the Plan, options to purchase the Company's
Common Stock may take the form of incentive stock options ("ISOs") under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code") or
nonqualified stock options ("NQSOs"). As required by Section 422 of the Code,
the aggregate fair market value (as defined in the Plan) of shares of Common
Stock (determined as of the date of grant of the ISO) with respect to which ISOs
granted to an employee are exercisable for the first time in any calendar year
may not exceed $100,000. The foregoing limitation does not apply to NQSOs.
Initially, each option will be exercisable over a period, determined by the
Board of Directors or the Compensation Committee of the Board of Directors of
the Company, in its discretion, of up to ten years from the date of grant.
Options may be exercisable during the option period at such time, in such
amounts, and in accordance with such terms and conditions and subject to such
restrictions as are determined by the Board or the Compensation Committee and
set forth in option agreements evidencing the grant of such options; provided
that no option may be exercisable less than six months from its date of grant.
The exercise price of options granted pursuant to the Plan is determined by
the Board or the Compensation Committee, in its discretion; provided that the
exercise price of an ISO may not be less than 100% of the fair market value (as
defined in the Plan) of the shares of the Company Common Stock on the date of
grant. The exercise price of options granted pursuant to the Plan is subject to
adjustment as provided in the Plan to reflect stock dividends, splits, other
recapitalizations or reclassifications or changes in the market value of the
Company Common Stock. In addition, the Plan provides that, in the event of a
proposed change in control of the Company (as defined in the Plan), the Board or
the Compensation Committee is to take such actions as it deems appropriate to
effectuate the purposes of the Plan and to protect the grantees of options,
which action may include (i) acceleration or change of the exercise dates of any
option; (ii) arrangements with grantees for the payment of appropriate
consideration to them for the cancellation and surrender of any option; and
(iii) in any case where equity securities other than Common Stock are proposed
to be delivered in exchange for or with respect to Common Stock, arrangements
providing that any option shall become one or more options with respect to such
other equity securities. Further, in the event the Company dissolves and
liquidates (other than pursuant to a plan of merger or reorganization), then
notwithstanding any restrictions on exercise set forth in the Plan or any grant
agreement pursuant thereto (i) each grantee shall have the right to exercise his
option at any time up to ten days prior to the effective date of such
liquidation and dissolution; and (ii) the Board or the Compensation Committee
may make arrangements with the grantees for the payment of appropriate
consideration to them for the cancellation and surrender of any option that is
so canceled or surrendered at any time up to ten days prior to the effective
date of such liquidation and dissolution. The Board or the Compensation
Committee also may establish a different period (and different conditions) for
such exercise, cancellation, or surrender to avoid subjecting the grantee to
liability under Section 16(b) of the Exchange Act.
The shares purchased upon the exercise of an option are to be paid for by
the optionee in cash or cash equivalents acceptable to the Compensation
Committee. In addition, the Plan provides for broker-assisted cashless exercises
in the discretion of the Compensation Committee.
28
<PAGE>
Except as permitted pursuant to Rule 16b-3 under the Exchange Act, and in
any event in the case of an ISO, an option is not transferable except by will or
the laws of descent and distribution. In no case may the options be exercised
later than the expiration date specified in the option agreement.
Plan Administration. The Plan will be administered by the Board of
Directors or a Compensation Committee of the Board of Directors in accordance
with the provisions of Rule 16b-3.
The Compensation Committee will decide when and to whom to make grants, the
number of shares to be covered by the grants, the vesting schedule, the type of
awards and the terms and provisions relating to the exercise of the awards. The
Compensation Committee may interpret the Plan and may at any time adopt such
rules and regulations for the Plan as it deems advisable. The Board of Directors
may at any time amend or terminate the Plan and change its terms and conditions,
except that, without stockholder approval, no such amendment may (i) materially
increase the maximum number of shares as to which awards may be granted under
the Plan; (ii) materially increase the benefits accruing to Plan participants;
or (iii) materially change the requirements as to eligibility for participation
in the Plan.
Accounting Effects. Under current accounting rules, neither the grant of
options at an exercise price not less than the current fair market value of the
underlying Common Stock, nor the exercise of options under the Plan, is expected
to result in any charge to the earnings of the Company.
Certain Federal Income Tax Consequences. The following is a brief summary
of certain Federal income tax aspects of awards under the Plan based upon the
Federal income tax laws in effect on the date hereof. This summary is not
intended to be exhaustive and does not describe state or local tax consequences.
Incentive Stock Options. An optionee will not realize taxable income upon
the grant of an ISO. In addition, an optionee will not realize taxable income
upon the exercise of an ISO, provided that such exercise occurs no later than
three months after the optionee's termination of employment with the Company
(one year in the event of a termination on account of disability). However, an
optionee's alternative minimum taxable income will be increased by the amount
that the fair market value of the shares acquired upon exercise of an ISO,
generally determined as of the date of exercise, exceeds the exercise price of
the option. If an optionee sells the shares of Common Stock acquired upon
exercise of an ISO, the tax consequences of the disposition depend upon whether
the disposition is qualifying or disqualifying. The disposition of the shares is
qualifying if made more than two years after the date the ISO was granted and
more than one year after the date the ISO was exercised. If the disposition of
the shares is qualifying, any excess of the sale price of the shares over the
exercise price of the ISO would be treated as long-term capital gain taxable to
the option holder at the time of the sale. If the disposition is not qualifying,
i.e., a disqualifying disposition, the excess of the fair market value of the
shares on the date the ISO was exercised over the exercise price would be
compensation income taxable to the optionee at the time of the disposition, and
any excess of the sale price of the shares over the fair market value of the
shares on the date the ISO was exercised would be capital gain.
Unless an optionee engages in a disqualifying disposition, the Company will
not be entitled to a deduction with respect to an ISO. However, if an optionee
engages in a disqualifying disposition, the Company generally will be entitled
to a deduction equal to the amount of compensation income taxable to the
optionee.
Nonqualified Stock Options. An optionee will not realize taxable income
upon the grant of an NQSO. However, when the optionee exercises the NQSO, the
difference between the exercise price of the NQSO and the fair market value of
the shares acquired upon exercise of the NQSO on the date of exercise is
compensation income taxable to the optionee. The Company generally will be
entitled to a deduction equal to the amount of compensation income taxable to
the optionee.
29
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid from
the Company's inception in June 1996 through December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------- SECURITIES
SALARY BONUS OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION OPTIONS (#) COMPENSATION
- --------------------------------- ----- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Lee, Chairman and
Chief Executive Officer........ 1996 -0 - -0 - -0 - 82,500(1) -0 -
<FN>
- ---------------
(1) Represents non-plan options granted to Mr. Lee in connection with his
Employment Agreement. See "MANAGEMENT -- Employment Agreements."
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
PERCENT OF
NUMBER TOTAL OPTIONS
SECURITIES GRANTED TO EXERCISE OF
UNDERLYING EMPLOYEES IN BASE PRICE
NAME OPTION (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- --------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Richard M. Lee....... 82,500(1) 36.7% $ .60 N/A
Hiram J. Woo......... 82,500(1) 36.7% $ .60 N/A
Michael Dunmire...... 35,000(1) 15.5% $ 5.00 N/A
Rebecca L. Rotman.... 25,000(1) 11.1% $ 5.00 N/A
<FN>
- ---------------
(1) Represents non-plan options granted to the employees in connection with
their respective Employment Agreements. See "MANAGEMENT -- Employment
Agreements."
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL-YEAR AND FISCAL-YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR AT FISCAL YEAR
SHARES ACQUIRED VALUE END (#) EXERCISABLE/ END($) EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1)
- --------------------- ---------------- ------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Richard M. Lee....... -0 - -- 0 exercisable/ $0 exercisable/
82,500 unexercisable $156,750
unexercisable
Hiram J. Woo......... -0 - -- 0 exercisable/ $0 exercisable/
82,500 unexercisable $156,750
unexercisable
Michael Dunmire...... -0 - -- 0 exercisable/ $0 exercisable/
35,000 unexercisable $0 unexercisable
Rebecca L. Rotman.... -0 - -- 0 exercisable/ $0 exercisable/
25,000 unexercisable $0 unexercisable
<FN>
- ---------------
(1) There was no public trading market for the Common Stock on December 31,
1996. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of fifty percent (50%) of the
proposed initial public offering price, less the aggregate exercise price of
the options.
</TABLE>
EMPLOYMENT AGREEMENTS
On June 3, 1996, the Company entered into a four-year employment agreement
with Richard M. Lee at an annual base salary of $50,000, to be increased to
$100,000 upon the closing of this Offering. Under the employment agreement, Mr.
Lee's employment may not be terminated by the Company without cause. In
addition, Mr. Lee has agreed in his employment agreement not to compete with the
Company for a period of one (1) year following his termination of employment for
any reason. On June 3, 1996, the Company also issued to Mr. Lee options to
purchase up to 82,500 shares of Common Stock at $0.60 per share, exercisable at
the earlier of
30
<PAGE>
one year after the closing of this Offering or June 3, 1998. These options
expire three (3) months following any termination of employment with the
Company. Mr. Lee has waived his salary compensation until the closing date of
this Offering. In April 1997, the Company issued 6,250 shares of Common Stock to
Mr. Lee in consideration for services rendered by him to the Company.
On June 3, 1996, the Company entered into a four-year employment agreement
with Hiram Woo at an annual base salary of $45,000, to be increased to $80,000
upon the closing of this Offering. Under the employment agreement, Mr. Woo's
employment may not be terminated by the Company without cause. In addition, Mr.
Woo has agreed in his employment agreement not to compete with the Company for a
period of one (1) year following his termination of employment for any reason.
On June 3, 1996, the Company also issued to Mr. Woo options to purchase up to
82,500 shares of Common Stock at $0.60 per share, exercisable at the earlier of
one year after the closing of this Offering or June 3, 1998. These options
expire three (3) months following any termination of employment with the
Company. Mr. Woo has waived his salary compensation until the closing date of
this Offering. In April 1997, the Company issued 6,250 shares of Common Stock to
Mr. Woo in consideration for services rendered by him to the Company.
On October 15, 1996, the Company entered into a four-year employment
agreement with Michael Dunmire at an annual base salary of $40,000, to be
increased to $60,000 upon the closing of this Offering. Under the employment
agreement, Mr. Dunmire's employment may not be terminated by the Company without
cause. In addition, Mr. Dunmire has agreed in his employment agreement not to
compete with the Company for a period of three (3) years following his
termination of employment for any reason. The employment agreement provides Mr.
Dunmire with an option, vesting over a period of four years, to purchase up to
35,000 shares of Common Stock at the initial public offering price per share.
These options expire three (3) months following any termination of employment
with the Company.
On October 15, 1996, the Company entered into a four-year employment
agreement with Rebecca L. Rotman at an annual base salary of $32,000, to be
increased to $50,000 upon the closing of this Offering. Under the employment
agreement, Ms. Rotman's employment may not be terminated by the Company without
cause. In addition, Ms. Rotman has agreed in her employment agreement not to
compete with the Company for a period of three (3) years following her
termination of employment for any reason. The employment agreement provides Ms.
Rotman with an option, vesting over a period of four years, to purchase up to
25,000 shares of Common Stock at the initial public offering price per share.
These options expire three (3) months following any termination of employment
with the Company.
A state court may determine not to enforce (or only partially enforce) the
non-compete provisions of the foregoing employment agreements. There can be no
assurrance given as to the effect, if any, on the Company should a state court
so determine not to enforce such non-competitive provisions.
CERTAIN TRANSACTIONS
EMPLOYMENT AGREEMENTS
The Company has entered into separate Employment Agreements with Richard M.
Lee, Hiram J. Woo, Michael Dunmire and Rebecca L. Rotman. See "Management --
Employment Agreements."
CONVERTIBLE NOTES
In June 1996, the Company assumed $92,000 in principal amount of
convertible promissory notes from Texas Loosey's Steakhouse Holdings, Inc.
("Holdings"), an affiliate of Messrs. Lee and Woo, to acquire from Holdings its
right to purchase two (2) Texas Loosey's restaurants from the TL Sellers. The
holders of such notes may convert the notes held by them into 55,200 shares of
Common Stock of the Company following the closing of this Offering.
CAPITAL CONTRIBUTION
In November 1998, Messrs. Lee and Woo contributed $130,000 to the Company
as additonal paid-in capital. No shares of Common Stock were issued.
PERSONAL GUARANTEES
Mr. Woo has personally guaranteed the Company's lease agreements for its
Fullerton and Norco locations, as well as the Company's vendor debt with Sysco
Food Services and various other vendors.
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<PAGE>
COMPANY POLICY
The Company believes that each of the foregoing transactions has been on
terms no less favorable to the Company than those that could have been obtained
from unaffiliated parties. It is the Company's intent that, in the future,
transactions with affiliated parties will be approved by a majority of the
Company's disinterested directors or otherwise as permitted by applicable law.
Any such future transactions are expected to be on terms no less favorable to
the Company than could be obtained from unaffiliated parties.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of the date of this Prospectus, by
(i) each person known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock of the Company, (ii) each director of the
Company and (iii) all directors and officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NUMBER BENEFICIALLY BENEFICIALLY
OF OWNED PRIOR OWNED AFTER
NAME SHARES(1) TO OFFERING OFFERING(5)
- ------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Richard M. Lee(2)................................ 256,920 31.1% 10.7%
Hiram J. Woo(3).................................. 157,542 19.1% 6.6%
JWJ International(4)............................. 56,189 6.8% 2.3%
All officers and directors as a group (2 persons)
(6)............................................ 414,462 50.2% 17.3%
<FN>
- ---------------
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed above, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
(2) Does not include an aggregate of 1,000,000 shares of Series B Convertible
Preferred Stock issued to Richard M. Lee, which shares have rights to vote
with the Common Stock as one class on a one-vote-per-share basis. See
"Description of Securities -- Preferred Stock". After giving effect to such
Series B Convertible Preferred Stock, Mr. Lee currently holds 77.5% of the
combined stockholder voting power of the Company prior to the offering and
would hold 41.6% thereafter. Mr. Lee's business address is at 151 E.
Alessandro Boulevard, Riverside, California 92508. Does not include options
held by Mr. Lee to acquire up to 82,500 shares of Common Stock.
(3) Mr. Woo's business address is at 151 E. Alessandro Boulevard, Riverside,
California 92508. Does not include options held by Mr. Woo to acquire up to
82,500 shares of Common Stock.
(4) JWJ International's business address is at 2242 Mesa Drive, Newport Beach,
California 92660.
(5) Assumes that the Underwriters' over-allotment option will not be exercised.
(6) Does not include the assumed exercise of any options outstanding since none
are exercisable within 60 days.
</TABLE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares
of common stock, $.01 par value (the "Common Stock"), and 5,000,000 shares of
preferred stock, $.001 par value (the "Preferred Stock").
The following summaries of certain terms of the company's common stock and
preferred stock do not purport to be complete and are subject to, and qualified
in their entirety by, the provisions of the company's certificate of
incorporation and the provisions of applicable law.
COMMON STOCK
As of the date of this Prospectus, there are 825,000 shares of Common Stock
issued and outstanding held by 68 holders of record. Holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders. Subject to preferences that may be applicable to any
then outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy." In the event of a
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<PAGE>
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no right to convert their Common Stock into
any other securities. The Common Stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are duly authorized,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company has issued 1,000,000 shares of Series B Preferred Stock
("Series B Preferred") to Richard M. Lee. The Series B Preferred is not
redeemable and carries rights to vote with the Common Stock as one class on a
one-vote-per-share basis. The Series B Preferred is convertible into Common
Stock, at the option of the holder, upon the earlier of: (i) eight (8) years
after the closing date of this Offering; or (ii) the first fiscal year of the
Company in which the Company's annual net profits equal or exceed $3.5 million.
Upon conversion of the Series B Preferred, the holder will be required to pay to
the Company, in cash, a conversion price (the "Conversion Price") per share
equal to 150% of the initial public offering price of the Company's Common
Stock.
The Series B Preferred carries no dividends prior to the second anniversary
of the closing of this Offering, but thereafter, if the above conversion test is
satisfied, the Series B Preferred will participate in any dividends declared on
the Common Stock, on an "as-converted" basis. The Series B Preferred carries a
liquidation value of $0.001 per share prior to the second anniversary of the
closing of this Offering. Thereafter, if the above conversion test is satisfied,
the Series B Preferred will upon liquidation participate pari passu with the
Common Stock, on an "as-converted" basis.
If and to the extent that the shares of Common Stock issuable upon
conversion of the Series B Preferred are not includable in a registration
statement on Form S-8, at the request of the holders thereof, delivered to the
Company within three years of any such conversion of the Series B Preferred
shares, the Company will prepare and file, at its own expense, one (1)
registration statement on Form S-3 (to the extent available) to enable such
holders to resell shares of Common Stock acquired upon conversion of the Series
B Preferred. The Board of Directors may change or otherwise adjust the terms of
the above-described Series B Preferred Stock in its sole discretion.
The Board of Directors of the Company, without further action by the
stockholders, has authority to issue all or any portion of the additional
4,000,000 shares of authorized but unissued Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of the Common Stock and could have
the effect of delaying, deferring or preventing a change in control of the
Company. The Board of Directors of the Company currently has no plans to issue
any additional shares of Preferred Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate or associate of such person who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting in
a person's becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder, (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares held by directors, officers
and certain employee stock ownership plans); or (iii) on or after the date the
person becomes an interested stockholder, the business combination is approved
by the corporation's board of directors and by the holders of at least 66 2/3%
of the corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined to include any person, and the affiliates and associates
of such person that (i) is the owner of 15% or more of the outstanding voting
stock of the corporation or (ii) is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time
33
<PAGE>
within the three-year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder.
WARRANTS
In connection with the completion of this Offering, for nominal
consideration the Company will grant to the Underwriters, Underwriters' Warrants
to purchase 125,000 shares of Common Stock at an initial exercise price of 140%
of the initial public offering price of the Shares sold in this Offering. The
Underwriters' Warrants are exercisable for a period of four years commencing one
year from the date of this Prospectus. The shares of Common Stock issuable upon
exercise of the Underwriters' Warrants are identical to the Shares being sold in
this Offering. The Underwriters' Warrants contain anti-dilution provisions
providing for adjustment in the number of Warrants and the exercise price
thereof under certain circumstances. The Underwriters' Warrants also grant the
holders thereof certain rights of registration of the shares of Common Stock
issuable upon exercise of such Warrants. The Company is registering the
Underwriters' Warrants, as well as the underlying Common Stock, pursuant to the
Registration Statement of which this Prospectus forms a part. See
"Underwriting."
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Corporate Stock
Transfer, Inc..
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding an
aggregate of 2,402,075 shares of Common Stock, which includes the 1,250,000
shares offered hereby 55,200 shares of common stock issuable upon the conversion
of $92,000 of convertible notes payable and 271,825 shares of common stock
issuable upon the conversion of $1,087,500 of bridge notes. See "Underwriting."
Upon completion of the Offering, the 1,250,000 Shares issued in the Offering
will be freely transferable without restriction under the Securities Act
(excluding any shares purchased in the Offering by any person who is or thereby
becomes an "affiliate" of the Company). All of the 825,000 shares outstanding
immediately prior to the Offering were issued in private placements without
registration under the Securities Act and, therefore, are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
The 825,000 shares of Common Stock outstanding prior to this Offering are
subject to the contractual restrictions that the holders thereof may not sell,
transfer, assign, pledge or hypothecate their shares without the prior written
consent of the Underwriters until one (1) year after the effective date of the
Registration Statement of which this Prospectus forms a part (except that the
30,000 shares issued in the third quarter of 1997 are subject to these
restrictions for a period of two (2) years.) The 55,200 and 271,875 shares of
Common Stock to be issued upon the conversion of $92,000 in convertible notes
payable and of $1,087,500 of bridge notes, respectively, will be "restricted
securities" and will be eligible for sale one year from the date the note
holders agreed to convert their notes to shares of Common Stock. In addition,
Messrs. Lee and Woo have agreed not to sell, transfer, assign, pledge or
hypothecate any securities of the Company owned by them until two (2) years
after the effective date of the Registration Statement of which this Prospectus
forms a part, without the prior written consent of the Underwriters.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has satisfied a one-year holding period may
sell within any three-month period a number of restricted shares which does not
exceed the greater of 1% of the then outstanding shares of such class of
securities or the average weekly trading volume during the four calendar weeks
prior to such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. Rule 144 also permits, under certain
circumstances, the sale of shares by a person who is not an affiliate of the
Company with respect to restricted securities that satisfy a two-year holding
period, without regard to the volume or other resale limitations.
The Company is unable to predict the effect that sales of the shares of
Common Stock outstanding prior to this offering, the Underwriter's Warrants or
the shares underlying such Underwriters' Warrants or sales under Rule 144 may
have on the then prevailing market price of the Common Stock, but such sales may
have a
34
<PAGE>
substantial depressing effect on such market price. The 825,000 shares of Common
Stock that will be "restricted securities" immediately subsequent to the
Offering will become eligible for sale at various times beginning 90 days after
the date of this Prospectus. See "Risk Factors."
UNDERWRITING
The underwriters named below (the "Underwriters") have further agreed,
subject to the terms and conditions of the Underwriting Agreement among the
Company and William Scott & Co., L.L.C., as Representative of the several
Underwriters, to purchase from the Company the number of Shares set forth below
opposite their names:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ----------
<S> <C>
William Scott & Co. L.L.C...................................
Tasin & Company, Inc........................................
Total.............................................
</TABLE>
Underwriters are committed to purchase and pay for all of the Shares
offered hereby if any are purchased. The Common Stock is being offered by the
Underwriters subject to prior sale, when, as and if delivered to and accepted by
the Underwriters and subject to approval of certain legal matters by counsel and
to certain other conditions, such as no adverse changes in the Company and
market conditions.
The Underwriters have advised the Company that they propose to offer the
Common Stock to the public at the initial public offering price set forth on the
cover page of this Prospectus. The Underwriters may allow to certain dealers who
are members of the NASD concessions, not in excess of $0. per share, of which
not in excess of $0. per share may be reallowed to other dealers who are
members of the NASD. After the initial distribution of the Shares is completed,
the public offering price, concession and reallowance may be changed by the
Underwriters.
The Company has granted the Underwriters an over-allotment option,
exercisable during the 30-day period commencing with the date of the
Underwriting Agreement, to purchase from the Company and such stockholders at
the initial offering price less underwriting discounts, up to an aggregate of
187,500 additional shares of Common Stock from the Company for the sole purpose
of covering over-allotments, if any. The Company and such stockholders will be
obligated, pursuant to this over-allotment option, to sell such additional
shares to the Underwriters.
The Company has agreed to pay to the Underwriters a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, of which $20,000 has been
paid as of the date of this Prospectus. The Company has also agreed to pay all
expenses in connection with qualifying the Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriters.
In connection with the Offering, the Company has agreed to sell to the
Underwriters, for $0.001 per Warrant, the Underwriter's Warrants. The
Underwriter's Warrants initially are exercisable at a price of 140% of the per
share initial public offering price of the Shares offered hereby, for a period
of four years commencing one year from the date of this Prospectus. The shares
of Common Stock issuable upon exercise of the Underwriter's Warrants are
identical to the Shares being sold in this Offering. The Underwriter's Warrants
contain anti-dilution provisions providing for adjustment in the number of
Warrants and the exercise price thereof under certain circumstances. The
Underwriter's Warrants also grant the holders thereof certain rights of
registration of the shares of Common Stock issuable upon exercise of such
Warrants. The Company is registering the Underwriter's Warrants, as well as the
underlying Common Stock, pursuant to the Registration Statement of which this
Prospectus forms a part. The Underwriter's Warrants may not be sold,
transferred, assigned, pledged or hypothecated for a period of one year
following the Offering, except to NASD members participating in the Offering and
the bona fide officers or partners thereof.
The Underwriters have the right to designate one member of the Board of
Directors for a period of three (3) years commencing with the closing of the
Offering or, at their option, to designate a non-director observer to the Board
of Directors.
35
<PAGE>
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Underwriters have informed the Company that they do not expect sales to
any accounts over which they exercise discretionary authority to exceed 5% of
the shares of Common Stock offered by the Company.
In addition, Messrs. Lee and Woo have agreed not to transfer, assign or
sell any securities of the Company to be owned by them after the Offering for a
period of two (2) years, without the Underwriters' prior written consent.
The Company has agreed with the Underwriters that, except as described in
this Prospectus, for a period of 90 days from the date of this Prospectus, it
will not issue any securities or grant options or warrants to purchase any
securities of the Company without the consent of the Underwriters.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
affected on Nasdaq or otherwise and, if commenced, may be discontinued at any
time and will, in any event, be discontinued thirty (30) days after settlement
of this Offering.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement and related documents, copies of which
are on file at the offices of the Company and the Commission. See "Additional
Information."
PRICING THE OFFERING
Prior to this Offering, there has been no public market for any of the
Company's securities. Consequently, the initial public offering price of the
Common Stock has been determined by negotiation between the Company and the
Underwriters. Factors to be considered in determining such price, in addition to
prevailing market conditions, include an assessment of the Company's prospects.
The public offering price of the Shares does not necessarily bear any
relationship to the Company's asset value, earnings, net financial condition, or
other established criteria of value applicable to the Company and should not be
regarded as an indication of the actual value or future market price of the
Shares. Such prices are subject to change as a result of market conditions and
other factors, and no assurance can be given that the Shares can be resold at
its public offering price.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Lehman & Eilen, Uniondale, New York. The Law Offices of David N.
Feldman, Esq., New York, New York, will pass upon certain legal matters for the
Underwriters. Hank Gracin, Esq., counsel to Lehman & Eilen, owns 4,496 shares of
common stock of the Company.
EXPERTS
The audited financial statements of TLC Restaurant Management Corp. for the
period from December 31, 1995 through August 18, 1996 and the year ended
December 30, 1995 and of Galveston's Steakhouse Corp. for the period from
inception (June 3, 1996) through December 31, 1996 included in this Prospectus
and elsewhere in the registration statement have been audited by Singer Lewak
Greenbaum & Goldstein LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports. Reference is made to
said reports which include explanatory paragraphs that state substantial doubt
about the Companys' ability to continue as a going concern, as
36
<PAGE>
described in Notes 1 and 2 to the audited financial statements of TLC Restaurant
Management Corp. and Galveston's Steakhouse Corp., respectively.
Effective January 7, 1998, the Company, by action of its Board of
Directors, terminated Arthur Andersen LLP as the Company's independent certified
public accountants. The reports previously issued by Arthur Andersen LLP did not
include an adverse opinion or disclaimer of opinion and were not modified as to
uncertainty, audit scope or accounting principles, except to include an
explanatory paragraph concerning Galveston's Steakhouse Corp. and TLC Restaurant
Management Corp.'s ability to continue as a going concern.
In connection with the above mentioned audits and during any subsequent
interim periods preceding such termination, there has not developed any
disagreements between Arthur Andersen LLP and the Company or other reportable
events which have not been resolved to Arthur Andersen LLP's satisfaction.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement under
the Securities Act with respect to the securities offered by this Prospectus. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto, which may be examined without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the Regional Offices of the Commission at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission in
Washington, D.C. upon payment of the prescribed fees. In addition, such
materials may be accessed electronically at the Commission's site on the World
Wide Web, located at http://www.sec.gov. Statements contained in this Prospectus
as to the contents of any contract or other documents referred to herein are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Company will, upon completion of the Offering, be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
and, in accordance therewith, will file reports and other information with the
Commission. Such reports and other information may be inspected and copied at
the public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such materials can be obtained at prescribed
rates from the Commission at such address.
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Galveston's Steakhouse Corp. for the period from inception
(June 3, 1996) through December 31, 1996....................... F-2
Report of Independent Certified Public Accountants.......... F-3
Balance Sheet............................................... F-4
Statement of Operations..................................... F-6
Statement of Stockholders' Deficit.......................... F-7
Statement of Cash Flows..................................... F-8
Supplemental Disclosure of Cash Flow........................ F-9
Notes to Financial Statements............................... F-10
Galveston's Steakhouse Corp. for the nine months ended
September 30, 1997 (unaudited)................................. F-19
Balance Sheet............................................... F-20
Statement of Operations..................................... F-22
Statement of Stockholders' Deficit.......................... F-23
Statement of Cash Flows..................................... F-24
Supplemental Disclosure of Cash Flow........................ F-25
Notes to Financial Statements............................... F-26
TLC Restaurant Management Corp. for the period from
December 31, 1995 through August 18, 1996, and the year
ended December 30, 1995........................................ F-28
Report of Independent Certified Public Accountants.......... F-29
Balance Sheet............................................... F-31
Statements of Operations.................................... F-32
Statement of Stockholder's Deficit.......................... F-33
Statements of Cash Flow..................................... F-34
Supplemental Disclosure of Cash Flow........................ F-35
Notes to Financial Statements............................... F-36
</TABLE>
F-1
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
(FORMERLY TEXAS LOOSEY'S STEAKHOUSE
AND SALOON, INC.)
FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION (JUNE 3, 1996)
THROUGH DECEMBER 31, 1996
TOGETHER WITH REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Management of
Galveston's Steakhouse Corp.:
We have audited the accompanying balance sheet of Galveston's Steakhouse
Corp. (a Delaware corporation) as of December 31, 1996, and the related
statements of operations, stockholders' deficit and cash flows for the period
from inception (June 3, 1996) through 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 audit.
We conducted our audit 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 audit provides 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, 1996 and the results of its operations and its cash flows for
the period from inception (June 3, 1996) through December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since commencing operations, the
Company has incurred substantial losses, resulting in a deficiency in
stockholders' equity. As further discussed in Note 2, the Company has plans to
raise approximately $5 million to $6 million in additional capital through a
public offering of its common stock. There can be no assurance that the Company
will be successful in raising sufficient capital to meet its needs and even if
the Company does raise additional capital, there can be no assurance that it
will achieve successful operations. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January , 1998
F-3
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET -- DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash....................................................... $ 46,439
Receivables................................................ 79,235
Inventories................................................ 30,291
Prepaid expenses........................................... 6,425
----------
Total current assets............................... 162,390
----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment.......................... 701,753
Leasehold improvements..................................... 363,529
----------
1,065,282
Less--Accumulated depreciation and amortization............ (22,107)
----------
1,043,175
----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$19,560.................................................... 538,440
Liquor licenses and other.................................. 56,300
----------
Total assets....................................... $1,800,305
----------
----------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-4
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET--DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Notes payable......................................................... $1,469,972
Accounts payable...................................................... 37,018
Accrued liabilities................................................... 78,162
Accrued interest...................................................... 69,488
Accrued payroll costs................................................. 40,854
----------
Total current liabilities..................................... 1,695,494
----------
LONG-TERM DEBT.......................................................... 870,000
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 5,000,000 shares authorized,
1,000,000 shares issued and outstanding............................ 1,000
Common stock, $.01 par value, 10,000,000 shares authorized,
713,849 shares issued and outstanding.............................. 7,138
Paid-in capital....................................................... 169,225
Accumulated deficit................................................... (942,552)
----------
Total stockholders' deficit................................... (765,189)
----------
Total liabilities and stockholders' deficit................... $1,800,305
----------
----------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-5
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENT OF OPERATIONS FOR THE PERIOD
FROM INCEPTION (JUNE 3, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES................................................................ $ 416,544
----------
RESTAURANT COSTS:
Food and beverage.................................................. 153,592
Payroll............................................................ 255,463
Direct operating................................................... 116,819
Depreciation and amortization...................................... 22,107
----------
547,981
----------
(131,437)
OTHER INCOME (EXPENSES):
General and administrative expenses................................ (136,467)
Pre-opening and start-up costs..................................... (433,694)
Amortization expense............................................... (19,560)
Other.............................................................. 49,979
----------
OPERATING LOSS.......................................................... (671,179)
INTEREST AND FINANCING COSTS............................................ (271,373)
----------
NET LOSS................................................................ $ (942,552)
----------
----------
NET LOSS PER SHARE...................................................... $ (1.19)
----------
----------
WEIGHTED AVERAGE SHARES OUTSTANDING..................................... 795,000
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM INCEPTION (JUNE 3, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------- ------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- --------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 3,
1996................ -- $ -- -- $ -- $ -- $ -- $ --
Issuance of
common stock... 713,849 7,138 -- -- 169,225 -- 176,363
Issuance of
preferred
stock.......... -- -- 1,000,000 1,000 -- -- 1,000
Net loss......... -- -- -- -- -- (942,552) (942,552)
--------- ------- --------- ------ -------- --------- ---------
BALANCE, December 31,
1996............. 713,849 $ 7,138 1,000,000 $1,000 $169,225 $(942,552) $(765,189)
--------- ------- --------- ------ -------- --------- ---------
--------- ------- --------- ------ -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENT OF CASH FLOWS FOR THE PERIOD
FROM INCEPTION (JUNE 3, 1996) THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $ (942,552)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 41,667
Amortization of discount on private placement proceeds........... 68,855
Issuance of common stock in exchange for services rendered....... 14,480
Increase in:
Receivables................................................... (79,235)
Inventories................................................... (30,291)
Prepaid expenses.............................................. (6,425)
Increase in:
Accounts payable.............................................. 37,018
Accrued liabilities........................................... 78,162
Accrued interest.............................................. 69,488
Accrued payroll costs......................................... 40,854
----------
Net cash used in operating activities.................... (707,979)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................ (159,582)
Purchase of Texas Loosey's restaurants............................. (275,000)
----------
Net cash used in investing activities.................... (434,582)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable.......................................... 1,026,117
Issuance of common and preferred stock............................. 162,883
----------
Net cash provided by financing activities................ 1,189,000
----------
NET INCREASE IN CASH.................................................... 46,439
CASH, beginning of year................................................. --
----------
CASH, end of year....................................................... $ 46,439
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<S> <C>
Cash paid during the year for--
Interest......................................................... $ 3,030
Income taxes..................................................... $ --
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On August 19, 1996, the Company acquired two restaurants together with certain
franchise contracts and certain other intangible assets. In conjunction with the
acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired........................................... $1,520,000
Cash paid for assets.................................................... (275,000)
----------
Notes payable issued to seller.......................................... $1,245,000
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. 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 (see
Notes 6 and 11), and cash of $275,000.
2. RISK FACTORS
Since commencing operations, the Company has incurred substantial operating
losses, resulting in a deficiency in stockholders' equity. Additionally, the
predecessor company from whom the Company purchased the Torrance and Fullerton
restaurants, has a history of operating losses, resulting in an accumulated
stockholder's deficit. The Company was organized on June 3, 1996. As such, it
has a limited operating history and experience; therefore, it is vulnerable to a
variety of business risks generally associated with start up companies.
Additionally, both of the Company's restaurants are located in Southern
California and are therefore susceptible to fluctuations in their business
caused by adverse economic conditions or other conditions in that region. The
Company operates in a highly competitive industry. Many of the Company's
competitors have been in existence longer than the Company, have a more
established market presence and have substantially greater financial, marketing,
and other resources than the Company, which may give them certain competitive
advantages. To fund the acquisition and operations of the restaurants, the
Company has incurred a substantial amount of debt (see Note 6). Due to the
limited operating history and risk associated with the Company, the debt was
structured such that the Company has incurred significant interest charges.
These interest charges have significantly impacted the operating results of the
Company.
The Company has plans to raise approximately $5 million to $6 million in
additional capital through a public offering of its common stock. There can be
no assurance that the Company will be successful in raising sufficient capital
to meet its needs and even if the Company does raise additional capital, there
can be no assurance that it will achieve successful operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
3. PENDING ACQUISITION
On September 23, 1996, the Company entered into an agreement with two
individuals for the purchase of the assets of two franchised Texas Loosey's
Chili Parlor and Saloon restaurants located in Riverside and Norco, California.
This transaction is expected to close in February 1998. In accordance with SEC
Rules and Regulations, the financial statements of these restaurants to be
acquired have been excluded from the Company's prospectus as the restaurants are
(i) below the 50% significance level (i.e. the proposed purchase price of the
restaurants is less than 50% of the assets of the Company at December 31, 1996)
and (ii) have not yet been acquired. Accordingly, pro forma financial
information related to the effects of this pending acquisition have also been
omitted. The net book value of the assets to be acquired are approximately
$600,000 at December 31, 1996.
F-10
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. 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 29, 1996; however, for financial statement presentation, the
fiscal year end has been designated as December 31, 1996.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at
the date of the financial statements, and the reported amounts of revenue
and expenses during the reported period. Actual results could differ from
those estimates.
c. 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.
d. Inventories
Inventories, consisting principally of food, beverages and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or market.
e. Property and Equipment
Property and equipment, including leasehold improvements, are recorded
at cost. 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.
f. 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 5 years (the length of the contract)
and goodwill is being amortized over a 15 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.
g. 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.
h. Stock-Based Compensation
The Company accounts for stock-based compensation issued to employees
using the intrinsic value based method as prescribed by APB Opinion No. 25
"According for Stock Issued to Employees" (APB No. 25). Under the intrinsic
value based method, compensation is the excess, if any, of the fair value
of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. Compensation, if any, is recognized
over the applicable service period, which is usually the vesting period.
F-11
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). This standard, if fully adopted,
changes the methods of accounting for employee stock-based compensation
plans to the fair value based method. For stock options and warrants, fair
value is determined using an option pricing model that takes into account
the stock price at the grant date, the exercise price, the expected life of
the option or warrant, the volatility of the underlying stock (not
applicable for private entities), expected dividends and the risk-free
interest rate over the expected life of the option or warrant. Compensation
expense, if any, is recognized over the applicable service period, which is
usually the vesting period.
The adoption of the accounting methodology of SFAS No. 123 is optional
and the Company has elected to continue accounting for stock-based
compensation issued to employees using APB. No. 25; however, pro forma
disclosures as if the Company adopted the cost recognition requirements
under SFAS 123 are required to be presented if the effect is material to
the financial statements (see Note 10).
i. New Accounting Pronouncements
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" on June 3,
1996. This standard requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
standard did not have a material impact on the financial statements.
The Financial Accounting Standards Board (FASB) has issued SFAS No.
128, "Earnings per Share". This statement is effective for both interim and
annual reporting periods ending after December 15, 1997. SFAS No. 128
replaces primary earnings per share (EPS) with basic EPS and fully diluted
EPS with diluted EPS. Basic EPS is computed by dividing reported earnings
by the weighted average number of shares outstanding. Diluted EPS is
computed in the same way as fully diluted EPS, except that the calculation
now uses the average share price for the reporting period to compute
dilution from options under the treasury stock method. The Company will
adopt the new standard in its reporting for the year ended December 31,
1997. Management does not believe that the adoption of this standard will
have a significant impact on EPS.
The FASB has also issued SFAS No. 129, "Disclosure of Information
about Capital Structure". This statement is effective for annual reporting
periods ending after December 15, 1997. SFAS No. 129 continues the existing
requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. The Company will adopt
the new standard in its reporting for the year ended December 31, 1997. The
adoption of this statement will have no effect on the financial statements.
j. Income Taxes
The Company accounts for income taxes using the asset and liability
method as prescribed by Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes." Under the asset and liability
method, deferred income tax assets and liabilities are determined based on
the differences between the financial reporting and tax basis of assets and
liabilities and are measured using the currently enacted tax rates and
laws.
k. Net Loss Per Share
Net loss per share is computed based on the weighted average number of
shares of common stock outstanding during the period. In connection with
the Company's IPO, common stock issued for consideration below the IPO
share price during the twelve months before the filing of the registration
statement, plus options to purchase the Company's common stock issued for
consideration below the IPO per share price during the same period (using
the treasury stock method), have been included in the calculation of common
shares outstanding as if they had been outstanding for all periods
presented.
F-12
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RECEIVABLES
Receivables include the following items: employee advances of approximately
$35,000, an insurance receivable of approximately $30,000 for business
interruption due to a fire in the Fullerton restaurant, and a $12,000 receivable
arising from the sale of a liquor license during 1996.
6. NOTES PAYABLE
At December 31, 1996 the Company's notes payable consisted of the
following:
<TABLE>
<S> <C>
Notes payable to private placement investors: principal and accrued
interest at 8% is payable at the successful completion of the IPO
(see Note 2). Additionally, for each $25,000 note, these investors
received 2,698 shares of the Company's common stock (see Note 8)... $ 905,972
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 (see Note 2), upon which principal
and accrued interest is payable in full. Pursuant to an extension
agreement (the "Agreement"), the due date of this note has been ex-
tended to February 15, 1998. The Agreement also modified the
interest rate to 15% per annum from February 19, 1997 through
February 13, 1998.................................................. 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 are due on this note until February 19, 1997, at
which time interest only payments of $6,032 are due monthly for one
year. 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..... 870,000
Notes payable to various individuals with interest rates ranging
from 10 to 14 percent, maturing in February 1998 or upon the
successful completion of the Company's IPO (see Note 2)............ 97,000
Convertible notes payable (see Note 7) to various individuals which
will convert to the Company's common stock by dividing the original
note amount by the IPO price per share multiplied by a factor of
three. This conversion will only take place upon the successful
completion of the Company's IPO (see Note 2)....................... 92,000
----------
Total notes payable................................. 2,339,972
Less: short-term notes payable...................... 1,469,972
----------
Long-term debt...................................... $ 870,000
----------
----------
</TABLE>
F-13
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future principal payments due on long-term debt are as follows:
<TABLE>
<S> <C>
Year ending:
December 31, 1998................................................ $ 51,001
December 31, 1999................................................ 65,847
December 31, 2000................................................ 71,312
December 31, 2001................................................ 681,840
----------
$ 870,000
----------
----------
</TABLE>
7. 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 (see Note 2). 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 noteholders will receive common stock worth $276,000, in the
aggregate. Although the noteholders have elected to convert their debt to the
Company's common stock, these amounts are carried in debt at December 31, 1996,
due to the uncertainty of the pricing of the IPO. 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
noteholders will convert their debt to equity, as noted above.
8. 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 percent per annum from
the original note date until the successful completion of the Company's IPO (see
Note 2). 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 percent, 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.
9. PREFERRED STOCK
On June 3, 1996, the Company issued 1,000,000 shares of preferred stock 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 (see Note 2) or
when the Company's annual net income equals or exceeds $3.5 million. 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.
F-14
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $3.5 million 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 $3.5 million
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.
10. STOCK-BASED COMPENSATION
During 1996, the Company granted certain options to employees and
directors. These grants were made outside the Omnibus Stock Plan (see Note 14).
On inception (June 3, 1996) of the Company, the Company's Chief Executive
Officer and President, who are both directors, were granted 82,500 options each.
These options vest at the earlier of one year following the successful
completion of the Company's IPO or June 3, 1998 (see Note 2), and are
exercisable at $0.60 per share. These options expire three months following any
termination of employment with the Company.
In October 1996, two employees of the Company were granted an aggregate of
60,000 options. The options vest over a period of four years, and are
exercisable at the initial public offering price per share of the Company's
common stock. These options expire three months following any termination of
employment with the Company.
For purposes of computing the pro forma disclosures required by SFAS No.
123, the fair value of each option granted during 1996 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)
no dividend yield, (ii) volatility of effectively zero (required for public
companies only), (iii) weighed-average risk-free interest rate of approximately
6.24% and 6.21%, and (iv) expected lives of two and four years.
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.
11. 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 period from
inception (June 3, 1996) through December 31, 1996, total rental expense,
including associated common area maintenance charges, was $51,860.
F-15
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments for facilities under noncancellable operating
leases are as follows:
<TABLE>
<S> <C>
Year ending:
December 31, 1997................................................ $ 173,784
December 31, 1998................................................ 163,804
December 31, 1999................................................ 165,900
December 31, 2000................................................ 99,600
December 31, 2001................................................ 99,600
Thereafter....................................................... 192,900
----------
$ 895,588
----------
----------
</TABLE>
In addition, the Company leases certain minor equipment under operating
leases.
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
period from inception (June 3, 1996) through December 31, 1996, these
individuals have agreed to waive their salary compensation that would be earned
up to the successful completion of the Company's IPO (see Note 2). Had these
individuals taken salaries for the period from inception (June 3, 1996) through
December 31, 1996, the Company would have recognized additional aggregate salary
expense of approximately $55,000, which would increase the Company's net loss
from $942,552 to $997,552 for 1996.
Consulting Agreement
In connection with the acquisition of the Torrance and Fullerton
restaurants (more fully discussed in Note 12 below), 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.
12. ACQUISITION OF RESTAURANTS
On August 19, 1996, the Company acquired substantially all the assets of
TLC Restaurant Management Corp. ("TLC") including two restaurants located in
Torrance and Fullerton, California, and certain intangible assets.
The acquisition was accounted for by the purchase method of accounting, and
accordingly the purchase price has been allocated to the assets acquired based
on the estimated fair values at the date of the acquisition. The excess of the
purchase price over the estimated fair values of the assets acquired has been
recorded as goodwill, which is being amortized over 15 years.
F-16
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The estimated fair values of assets as of the date of the acquisition is
summarized as follows:
<TABLE>
<S> <C>
Liquor licenses............................................. $ 36,000
Furniture, fixtures and equipment........................... 604,000
Leasehold improvements...................................... 322,000
Covenant not to compete..................................... 45,000
Goodwill.................................................... 513,000
----------
$1,520,000
----------
----------
</TABLE>
The following table presents the unaudited pro forma condensed statement of
operations for the period ended December 31, 1996, and reflects the results of
operating the Company as if the acquisition had been effective January 1, 1996.
The pro forma amounts are not necessarily indicative of the combined results of
operations had the acquisition been effective as of that date, or of the
anticipated results of operations, due to cost reductions and operating
efficiencies that are expected as a result of the acquisition.
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
-----------
<S> <C>
Revenues................................................... $ 1,512,806
-----------
Restaurant Costs........................................... 1,733,104
-----------
(220,298)
Other Expenses............................................. (689,368)
-----------
Operating Loss............................................. (909,666)
Interest and Financing Costs............................... (438,800)
-----------
Net Loss................................................... $(1,348,466)
-----------
-----------
Net Loss Per Share......................................... $ (1.70)
-----------
-----------
Weighted Average Shares Outstanding........................ 795,000
-----------
-----------
</TABLE>
13. INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company incurred net operating losses through December 31, 1996. At December 31,
1996, the Company has approximately $940,000 and $470,000 of federal and state
net operating loss carryforwards, respectively, for tax reporting purposes
available to offset future taxable income; such carryforwards expire in 2011 and
2001, respectively.
Deferred tax assets, consisting primarily of the tax effect of net
operating loss carryforwards are offset with a valuation allowance because of
the uncertainty regarding realizability.
As discussed in Note 2, the Company has plans to raise approximately $5
million to $6 million in additional capital through a public offering. As a
result of bringing in additional shareholders there may be a substantial annual
limitation on the use of these net operating loss carryforwards for both federal
and state purposes.
In general, an ownership change occurs when the major shareholders, which
includes groups of shareholders 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.
F-17
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS
a. Private Placement
The Company raised $500,000 through a private placement subsequent to year
end. Each private placement unit is 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 percent per annum from the original note date until the
successful completion of the Company's IPO (see Note 2). Upon the
successful completion of the Company's IPO, accrued interest and principal
are due in full.
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 percent, 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.
b. 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. The Company has not granted, and prior to the successful
completion of the Company's IPO (see Note 2) does not expect to grant, any
options 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.
c. 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 spit.
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.
F-18
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
(FORMERLY TEXAS LOOSEY'S STEAKHOUSE
AND SALOON, INC.)
FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
F-19
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET -- SEPTEMBER 30, 1997
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash.................................................... $ 221,006
Receivables............................................. 220,199
Inventories............................................. 28,252
Prepaid expenses........................................ 23,787
Other................................................... 76,571
----------
Total current assets.......................... 569,815
----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment....................... 726,341
Leasehold improvements.................................. 367,725
----------
1,094,066
Less -- Accumulated depreciation and amortization....... (86,847)
----------
1,007,219
----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$55,044............................................... 512,956
Liquor licenses and other............................... 339,360
----------
Total assets.................................. 2,429,350
----------
----------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-20
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET -- SEPTEMBER 30, 1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Notes payable.......................................... $ 2,289,000
Accounts payable....................................... 40,699
Accrued liabilities.................................... 75,287
Accrued interest....................................... 254,735
Accrued payroll and sales tax.......................... 72,225
-----------
Total current liabilities.................... 2,731,946
-----------
LONG-TERM DEBT.............................................. 870,000
-----------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 5,000,000 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
Paid-in capital........................................ 466,563
Accumulated deficit.................................... (1,648,409)
-----------
Total stockholders' deficit.................. (1,172,596)
-----------
Total liabilities and stockholders'
deficit...................................... $ 2,429,350
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-21
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENT OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
REVENUES..................................................... $1,481,719
----------
RESTAURANT COSTS:
Food and beverage....................................... 510,983
Payroll................................................. 491,661
Direct operating........................................ 308,640
Depreciation and amortization........................... 64,740
----------
1,376,024
----------
105,695
OTHER EXPENSES:
General and administrative expenses..................... (264,103)
Pre-opening and start-up costs.......................... (63,955)
Amortization expense.................................... (35,484)
Other................................................... 18,034
----------
OPERATING LOSS............................................... (239,813)
INTEREST AND FINANCING COSTS................................. (466,044)
----------
NET LOSS..................................................... (705,857)
----------
----------
NET LOSS PER SHARE........................................... $ (0.88)
----------
----------
WEIGHTED AVERAGE SHARES OUTSTANDING.......................... 800,073
----------
----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-22
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------- ------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996............... 713,849 $7,138 1,000,000 $1,000 $169,225 $ (942,552) $ (765,189)
Issuance of common
stock in
connection with
$150,000 bridge
loans........... 30,000 300 -- -- 149,700 -- 150,000
Issuance of common
stock for
services
rendered........ 24,950 249 -- -- 124,481 -- 124,730
Issuance of common
stock in
connection with
Private
Placement....... 56,201 563 -- -- 23,157 -- 23,720
Net loss........... -- -- -- -- -- (705,857) (705,857)
------- ------ --------- ------ -------- ----------- -----------
BALANCE, September
30, 1997........... 825,000 $8,250 1,000,000 $1,000 $466,563 $(1,648,409) $(1,172,596)
------- ------ --------- ------ -------- ----------- -----------
------- ------ --------- ------ -------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-23
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENT OF CASH FLOWS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................ $(705,857)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 100,224
Amortization of discount on private placement proceeds............ 117,746
Issuance of common stock in exchange for services rendered........ 124,730
(Increase) decrease in:
Receivables.................................................... (140,964)
Inventories.................................................... 2,039
Prepaid expenses............................................... (21,072)
Liquor licenses and other...................................... 15,457
Increase (decrease) in:
Accounts payable............................................... 3,681
Accrued liabilities............................................ (2,875)
Accrued interest............................................... 185,247
Accrued payroll and sales tax.................................. 31,371
---------
Net cash used in operating activities..................... (290,273)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................. (28,784)
Intangibles......................................................... (10,000)
Increase in other current assets.................................... (72,861)
---------
Net cash used in investing activities..................... (111,645)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable........................................... 701,282
Issuance of common stock in connection with private placement....... 23,720
Increase in deferred offering costs................................. (298,517)
Increase in common stock in connection with bridge loans............ 150,000
---------
Net cash provided by financing activities................. 576,485
---------
NET INCREASE IN CASH..................................................... 174,567
CASH, December 31, 1996.................................................. 46,439
---------
CASH, September 30, 1997................................................. $ 221,006
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-24
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<S> <C>
Cash paid during the nine months for --
Interest............................................................... $ 13,523
Income taxes........................................................... $ --
</TABLE>
The accompanying notes are an integral part of this statement.
F-25
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information refer to the financial statements and
footnotes thereto included elsewhere in this prospectus, for the period from
inception (June 3, 1996) through December 31, 1996.
Galveston's Steakhouse Corp. (the "Company") was incorporated on June 3,
1996. The Company acquired certain assets of TLC Restaurant Management Corp. on
August 19, 1996, including two restaurants located in Fullerton and Torrance,
California, and certain intangible assets.
2. INVENTORIES
Inventories, consisting principally of food, beverages and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or market.
3. ESCROW DEPOSIT
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 $78,000 into an escrow account. This deposit is
being carried in other current assets on the accompanying balance sheet at
September 30, 1997.
4. MANAGEMENT FEE
As discussed in Note 3, the Company is in escrow for the purchase of two
restaurants in Riverside and Norco, California. This transaction is expected to
close in February 1998; however, the aquisition is contingent on the Company
raising capital through the planned public offering or from other sources.
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 September 30, 1997, the Company
has earned a management fee approximating $33,290. This management fee is
reflected in other expenses on the accompanying statement of operations for the
nine months ended September 30, 1997.
5. PRIVATE PLACEMENT
The Company raised $500,000 through a private placement during the nine
months ended September 30, 1997. Each private placement unit consisted of 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 percent 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 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 has allocated $540 and $22,231 to common stock and additional
paid-in-capital, respectively. This allocation was
F-26
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(UNAUDITED)
determined using an effective interest rate of 30 percent, as this is
management's estimate of a reasonable risk adjusted rate. The remainder of the
proceeds 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.
6. NOTE PAYABLE
On January 30, 1997, 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 percent 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 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 $22 and $927 to common stock and additional paid-in-capital,
respectively. This allocation was determined using an effective interest rate of
30 percent, 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.
On August 15, 1997, the Company obtained a bridge loan in the amount of
$150,000. The bridge loan bears interest at at rate of 9 percent 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.
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)).
7. LIQUOR LICENSES AND OTHER
At September 30, 1997, the Company had deferred stock offering-related
costs of approximately $298,000. Such costs will be offset against the proceeds
of the offering upon consummation.
8. SUBSEQUENT EVENT
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.
F-27
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 31, 1995
THROUGH AUGUST 18, 1996 AND
THE YEAR ENDED DECEMBER 30, 1995
TOGETHER WITH REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Management of the
TLC Restaurant Management Corp.:
We have audited the accompanying balance sheet of TLC Restaurant Management
Corp. (a California corporation) as of December 30, 1995, and the related
statements of operations, stockholder's deficit and cash flows for the period
from December 31, 1995 through August 18, 1996 and the year ended December 30,
1995. 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 TLC Restaurant Management
Corp. as of December 30, 1995, and the results of its operations and its cash
flows for the period from December 31, 1995 through August 18, 1996 and the year
ended December 30, 1995, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since commencing operations, the
Company has incurred substantial operating losses, resulting in a deficiency in
stockholder's equity. As further discussed in Note 1, on August 19, 1996,
Galveston's Steakhouse Corp. ("Galveston's") purchased all the assets of the
Company. Under the new ownership of Galveston's, the Company continued to incur
operating losses during the period from August 19, 1996 through December 31,
1996. Galveston's has plans to raise approximately $5 million to $6 million of
additional capital through a public offering of its common stock. There can be
no assurance that Galveston's will be successful in raising sufficient capital
to meet its needs and even if it does raise additional capital, there can be no
assurance that it will achieve successful operations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
January , 1998
F-29
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
BALANCE SHEET -- DECEMBER 30, 1995
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash................................................... $ 6,367
Inventories............................................ 30,511
Prepaid expenses....................................... 2,757
Other current assets................................... 3,975
-----------
Total current assets.............................. 43,610
-----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment...................... 561,232
Leasehold improvements................................. 471,892
-----------
1,033,124
Less--Accumulated depreciation and amortization........ (1,012,827)
-----------
20,297
-----------
OTHER ASSETS:
Liquor licenses and other.............................. 38,546
-----------
Total assets...................................... $ 102,453
-----------
-----------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-30
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
BALANCE SHEET -- DECEMBER 30, 1995
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Note payable............................................. $ 5,619
Accounts payable......................................... 49,995
Accrued liabilities...................................... 30,642
Accrued payroll and sales tax............................ 202,543
---------
Total current liabilities........................... 288,799
---------
LONG-TERM LIABILITIES:
Pre-petition liabilities................................. 283,657
Note payable-officer..................................... 161,749
---------
Total long-term liabilities......................... 445,406
---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Common stock, $.05 par value, 1,000,000 shares
authorized, 10,000 shares issued and outstanding....... 500
Paid-in capital.......................................... 152,660
Accumulated deficit...................................... (784,912)
---------
Total stockholder's deficit......................... (631,752)
---------
Total liabilities and stockholder's deficit......... $ 102,453
---------
---------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-31
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
STATEMENTS OF OPERATIONS FOR THE PERIOD FROM
DECEMBER 31, 1995 THROUGH AUGUST 18, 1996
AND THE YEAR ENDED DECEMBER 30, 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUES................................................. $1,096,262 $2,063,364
---------- ----------
RESTAURANT COSTS:
Food and beverage................................... 340,556 600,244
Payroll............................................. 457,182 780,365
Direct operating.................................... 324,910 698,569
Depreciation and amortization....................... 21,890 87,031
---------- ----------
1,144,538 2,166,209
---------- ----------
(48,276) (102,845)
OTHER INCOME (EXPENSES):
General and administrative expenses................. (103,271) (408,179)
Other............................................... 1,312 2,110
---------- ----------
Operating Loss........................................... (150,235) (508,914)
Interest expense.................................... (10,459) (11,605)
---------- ----------
NET LOSS................................................. $ (160,694) $ (520,519)
---------- ----------
---------- ----------
NET LOSS PER SHARE....................................... $ (16.07) $ (52.05)
---------- ----------
---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING...................... 10,000 10,000
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
STATEMENT OF STOCKHOLDER'S DEFICIT
FOR THE PERIOD FROM DECEMBER 31, 1995
THROUGH AUGUST 18, 1996
AND THE YEAR ENDED DECEMBER 30, 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994................ 10,000 $500 $152,660 $(264,393) $(111,233)
Net loss................................ -- -- -- (520,519) (520,519)
------- ---- -------- --------- ---------
BALANCE, December 30, 1995................ 10,000 500 152,660 (784,912) (631,752)
Net loss................................ -- -- -- (160,694) (160,694)
------- ---- -------- --------- ---------
BALANCE, August 18, 1996.................. 10,000 $500 $152,660 $(945,606) $(792,446)
------- ---- -------- --------- ---------
------- ---- -------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-33
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM
DECEMBER 31, 1995 THROUGH AUGUST 18, 1996
AND THE YEAR ENDED DECEMBER 30, 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(160,694) $(520,519)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 21,890 87,031
(Increase) decrease in:
Accounts receivable............................... -- 77,251
Inventories....................................... 987 30,811
Prepaid expenses.................................. (6,670) 6,598
Other current assets.............................. 2,143 (3,975)
Liquor licenses and other......................... -- 65,449
Increase (decrease) in:
Accounts payable.................................. 18,421 12,596
Accrued liabilities............................... 15,446 (3,277)
Accrued payroll and sales tax..................... 131,765 185,256
Pre-petition liabilities.......................... -- (4,739)
--------- ---------
Net cash provided by (used in) operating
activities...................................... 23,288 (67,518)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... -- (5,404)
Purchase of leasehold improvements........................ -- (2,371)
--------- ---------
Net cash used in investing activities........... -- (7,775)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in note payable.................................. (3,567) (5,363)
(Decrease) increase in note payable-officer............... (13,933) 73,634
--------- ---------
Net cash provided by (used in) financing
activities...................................... (17,500) 68,271
--------- ---------
NET INCREASE (DECREASE) IN CASH............................. 5,788 (7,022)
CASH, beginning of year..................................... 6,367 13,389
--------- ---------
CASH, end of year........................................... $ 12,155 $ 6,367
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-34
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest............................................... $ 10,459 $ 11,605
Income taxes........................................... $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-35
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
NOTES TO FINANCIAL STATEMENTS
AUGUST 18, 1996 AND DECEMBER 30, 1995
1. COMPANY BACKGROUND AND RISK FACTORS
TLC Restaurant Management Corp. (the "Company"), a California corporation,
was organized on March 25, 1987. The Company owns and operates two Texas
Loosey's restaurants located in Fullerton and Torrance, California. Texas
Loosey's is a casual dining restaurant with a wide variety of menu choices,
ranging from mexican dishes to steak dinners.
On August 19, 1996, Galveston's Steakhouse Corp., purchased substantially
all of the assets of the Company and certain intangible assets for a purchase
price of $1,520,000. The operating results of the restaurants through August 18,
1996, are included in the accompanying financial statements. The operating
results of the two restaurants from August 19, 1996 through December 31, 1996,
are included in the Galveston's Steakhouse Corp. financial statements.
The Company has incurred operating losses of $160,694 and $520,519 for the
period from December 31, 1995 through August 18, 1996 and the year ended
December 30, 1995, respectively, and has an accumulated deficit of $784,912 at
December 30, 1995. Additionally, the Company has negative working capital of
$245,189 at December 30, 1995. Under the new ownership of Galveston's, the
Company continued to incur operating losses during the period from August 19,
1996 through December 31, 1996. Galveston's has plans to raise approximately $5
million to $6 million of additional capital through a public offering of its
common stock. There can be no assurance that Galveston's will be successful in
raising sufficient capital to meet its needs and even if it does raise
additional capital, there can be no assurance that it will achieve successful
operations.
Both of the Company's restaurants are located in Southern California and
are therefore susceptible to fluctuations in their business caused by adverse
economic conditions or other conditions in that region. The Company operates in
a highly competitive industry. Many of the Company's competitors have been in
existence longer than the Company, have a more established market presence and
have substantially greater financial, marketing, and other resources than the
Company, which may give them certain competitive advantages.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Fiscal Year-End
The Company reports its operations on a 52-53 week fiscal year ending
on the Sunday closest to December 31.
b. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reported period. Actual results could differ from those
estimates.
c. 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.
F-36
<PAGE>
TLC RESTAURANT MANAGEMENT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
d. Inventories
Inventories, consisting principally of food, beverages and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or market.
e. Property and Equipment
Property and equipment, including leasehold improvements, are recorded
at cost. Depreciation is computed by the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the shorter of the useful life of the
improvements or the remaining lease term.
f. 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.
g. Pre-petition Liabilities
Pre-petition liabilities represent the remaining liabilities of the
Company after its 1993 bankruptcy filing.
h. New Accounting Pronouncements
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" on December
31, 1995. This standard requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
standard did not have a material effect on the financial statements.
3. COMMITMENTS
Texas Loosey's 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 30, 1995, total rental expense, including associated common area
maintenance charges, was $182,188.
Future minimum lease payments for facilities under noncancellable operating
leases are as follows:
<TABLE>
<S> <C>
Year ending:
December 29, 1996.......................................... $ 185,000
December 28, 1997.......................................... 174,000
December 27, 1998.......................................... 164,000
December 26, 1999.......................................... 166,000
December 31, 2000.......................................... 100,000
Thereafter................................................. 293,000
----------
$1,082,000
----------
----------
</TABLE>
In addition, the Company leases certain minor equipment under operating
leases.
F-37
<PAGE>
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, BY ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER,
SOLICITATION OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Dilution............................. 13
Use of Proceeds...................... 14
Capitalization....................... 15
Dividend Policy...................... 16
Management's Discussion and Analysis
or Plan of Operation............... 16
Business............................. 21
Management........................... 26
Certain Transactions................. 31
Principal Stockholders............... 32
Description of Securities............ 32
Shares Eligible for Future Sale...... 34
Underwriting......................... 35
Legal Matters........................ 36
Experts.............................. 36
Additional Information............... 37
Index to Financial Statements........ F-1
</TABLE>
------------------------
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
1,250,000 SHARES
GALVESTON'S
STEAKHOUSE CORP.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
WILLIAM SCOTT & CO., L.L.C.
TASIN & COMPANY, INC.
, 1998
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware sets
forth the conditions and limitations governing the indemnification of officers,
directors and other persons. References are made to Article VI of the
Registrant's Bylaws, a copy of which is incorporated herein by reference as
Exhibit 3.4, which provides for indemnification of officers and directors of the
Registrant to the full extent authorized by the aforesaid section of the General
Corporation Law of the State of Delaware.
Section 102(b) of the General Corporation Law of the State of Delaware
permits corporations to eliminate or limit the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of the
fiduciary duty of care as a director. Reference is made to Article Tenth of the
Registrant's Restated Certificate of Incorporation, as amended, a copy of which
is incorporated herein by reference as Exhibit 3.1, which limits a director's
liability in accordance with the aforesaid section of the General Corporation
Law of the State of Delaware.
The Registrant intends to enter into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements will provide
that the executive officers and directors will be indemnified to the fullest
extent permitted by law against all expenses (including attorneys' fees),
judgments, fines and amounts paid or incurred by them for settlement in any
action or proceeding, including any derivative action, on account of their
service as a director or officer of the Company or of any subsidiary of the
Company or of any other company or enterprise in which they are serving at the
request of the Company. No indemnity will be provided to any director or officer
under these agreements on account of conduct which is finally adjudged to be
knowingly fraudulent or deliberately dishonest or willful misconduct. In
addition, no indemnification will be provided if there is a final adjudication
that such indemnification is not lawful, or in respect of any suit in which
judgment is rendered against a director or officer for an accounting of profits
made from a purchase or sale of securities of the Company in violation of
Section 16(b) of the Securities Exchange Act of 1934, or of any similar
statutory law, or on account of any compensation paid to a director or officer
which is adjudicated to have been in violation of law, and in certain other
circumstances.
The Registrant intends to acquire directors and officers liability
insurance prior to the completion of the Offering. The amount and scope of
coverage will depend upon the Company's analysis of the cost and appropriateness
thereof.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses for the issuance and distribution of the shares of
Common Stock registered hereby, other than underwriting commissions, fees and
Underwriters' non-accountable expense allowance are set forth in the
following table.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee......................... $ 2,378
Nasdaq listing fee........................... 15,000
NASD registration fee........................ 1,680
Legal fees and expenses...................... 100,000
Accounting fees and expenses................. 50,000
Blue sky fees and expenses (including
counsel fees).............................. 20,000
Printing and engraving expenses.............. 50,000
Transfer agent fees and expenses............. 10,000
Miscellaneous................................ 25,942
---------
Total........................................ $ 275,000
---------
---------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth certain information regarding sales of, and other
transactions with respect to, securities of the Company issued within the past
three years, which sales and other transactions were not registered pursuant to
the Securities Act of 1933, as amended (the "Securities Act"). All of such sales
and transactions were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof or as otherwise indicated
herein. The information set forth below has been adjusted to reflect the
Company's 1 for 3.671 reverse stock split effected in August 1997 and a
subsequent 1.650 for 1 forward stock split effected in December 1997.
In June 1996, the Company issued for nominal consideration 605,944
shares of Common Stock to its founding shareholders, namely, Richard M. Lee,
Hiram J. Woo, James Maguire, James Djen, Paul Cassidy, Khalil Mayeri , JWJ
International, Shelly Singhal and Marcus Goudge, and 1,000,000 shares of
Series B convertible preferred stock to Mr. Lee. Each of these investors was:
(i) a California resident; and (ii) an "accredited investor."
In June 1996, the Company assumed $92,000 in principal amount of convertible
promissory notes in connection with its acquisition from Texas Loosey's
Steakhouse Holdings, Inc. of its right to purchase the Texas Loosey's business.
The notes are convertible into 55,200 shares of the Company's common stock.
In June 1996, the Company commenced a private placement bridge financing
under Rule 506 of Regulation D through William Scott & Co., L.L.C. pursuant to
which it raised $1,000,000 by issuing to thirty four (34) accredited investors
forty (40) $25,000 units, consisting of a $25,000 promissory note bearing
interest at eight percent (8%) per annum and 2,698 shares of its common stock.
The Company paid a ten percent (10%) sales commission and a three percent
non-accountable expense allowance (3%) in connection with such financing. Each
of the investors in the bridge financing was an "accredited investor."
In January 1997, the Company commenced a second private placement bridge
financing under Rule 506 of Regulation D through William Scott & Co., L.L.C.
pursuant to which it raised $500,000 by issuing to eighteen (18) accredited
investors twenty (20) $25,000 units, consisting of a $25,000 promissory note
bearing interest at eight percent (8%) per annum and 2,698 shares of its common
stock. The Company paid a ten percent (10%) sales commission and a three
percent (3%) non-accountable expense allowance in connection with such
financing. Each of the investors in the bridge financing was an "accredited
investor."
In January 1997, the Company borrowed $25,000 from Kenneth W. Larson, Esq.
and issued to him a $25,000 promissory note bearing interest at eight percent
(8%) per annum and 2,249 shares of its common stock. Mr. Larson was an
"accredited investor."
In February 1997, the Company issued 14,833 shares of common stock (valued at
$74,167.50) to three (3) persons associated with Winchester Investment
Securities, Inc., a NASD member, for services rendered to the Company. Each of
these persons was an "accredited investor."
In April 1997, the Company issued 4,496 shares of common stock (valued at
$22,481.25) to its counsel, Hank Gracin, Esq. of Lehman & Eilen, in payment for
legal services rendered.
In April 1997, the Company issued 2,810 shares of common stock to Mr. Lee and
2,810 shares of common stock to Mr. Woo (each valued at $14,049.75) in
consideration for services rendered by them to the Company.
On August 11, 1997, the Company borrowed an aggregate of $150,000 from
Alexander Majewski, Eileen Kaplan and Universal Partners, L.P. and issued
to them $150,000 of promissory notes bearing interest at nine percent (9%)
per annum and 30,000 shares of its common stock. Each of the investors in the
bridge financing was an "accredited investor."
In November 1998, Messrs. Lee and Woo contributed $130,000 to the Company as
additional paid-in capital. No shares of Common Stock were issued.
ITEM 27. EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
1.1* Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of the Company.
II-2
<PAGE>
3.2** Certificate of Correction to Restated Certificate of
Incorporation of the Company.
3.3** Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
3.4** By-Laws of the Company.
3.5** Certificate of Amendment to Restated Certificate
of Incorporation of the Company.
3.6* Certificate of Amendment to Restated Certificate
of Incorporation of the Company.
4.1** Form of Specimen of Common Stock Certificate.
4.2** Form of Underwriter's Warrant Agreement.
5.1* Opinion of Counsel re: legality of securities being
registered.
10.1** Lease between Walter Bollenbacher Family
Trust and TLC Corp. (Seller) dated November
1, 1994 and assigned to the Company June 25, 1996.
(re: Torrance)
10.2** Lease between University Plaza, Ltd. and
the Company dated September 4, 1996.
(re: Fullerton)
10.3** Lease between Mission Grove Plaza, LP and
Kent Andersen (Seller) dated March 8, 1993
and assigned to the Company March 1, 1997.
(re: Riverside)
10.4** Lease between E & R Co-ownership (The Family
Corner) and the Company dated February 1,
1997. (re: Norco)
10.5** Employment Contract between the Company and Michael
R. Dunmire dated October 15, 1996.
10.6** Employment Contract between the Company and Rebecca
L. Rotman dated October 15, 1996.
10.7** Employment Contract between the Company and Hiram J.
Woo dated June 3, 1996.
10.8** Employment Contract between the Company and Richard
M. Lee dated June 3, 1996.
10.9** Asset Purchase Agreement between the Company as
buyer and TLC Restaurant Management Corp., Better
Business Security, Inc., River Diego Investment
Corp. and Ron Walton, collectively as seller dated
April 10, 1996.
10.10** Escrow Instruction with Jean Allen Escrow Co., Inc.
dated February 20, 1996 reference to Asset Purchase
Agreement cited in 10.9 above.
10.11** Note Payable in the amount of $375,000 to Ron
Walton, et. al. with extension of Due Date to August
29, 1997.
10.12** Note Payable in the amount of $870,000 to Ron
Walton, et. al.
10.13** Asset Purchase Agreement between the Company as
buyer and Kent & Jenny Andersen as sellers dated
September 23, 1996.
10.14** Escrow Instruction with Jean Allen Escrow Co., Inc.
dated December 3, 1996 with Estimated Closing
Statement dated March 3, 1997 reference to Asset
Purchase Agreement cited in 10.13 above.
10.15** Galveston Steakhouse Corp. Omnibus Stock Plan.
10.16** Richard M. Lee Stock Option Agreement.
10.17** Hiram J. Woo Stock Option Agreement.
16.0+ Letter re: Change of Certifying Accountant
23.1* Consent of Singer Lewak Greenbaum & Goldstein LLP
23.2* Consent of Counsel (including in their opinion filed
as Exhibit 5.1).
27.1* Financial Data Schedule.
- ----------
* Filed herewith.
** Previously filed.
+ To be filed.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission") such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
(b) The undersigned registrant hereby undertakes:
(1) For determining any liability under the Act, to treat the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant under Rule 424(b)(1), or (4), or 497(h) under the Act as part of this
Registration Statement as of the time the Commission declared it effective.
(2) For determining any liability under the Act, to treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and the offering of the
securities at that time as the initial bona fide offering of those securities.
(c) The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered by the Underwriters to permit prompt delivery to
each purchaser.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL THE
REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN RIVERSIDE, CALIFORNIA, ON THIS 14TH DAY OF JANUARY, 1998.
GALVESTON'S STEAKHOUSE CORP.
By: /s/ Richard M. Lee
----------------------------------
RICHARD M. LEE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE Title Date
/s/ RICHARD M. LEE Chairman of the Board of January 14, 1998
- -------------------------------- Directors and Chief
Richard M. Lee Executive Officer
/s/ HIRAM J. WOO Director, President, January 14, 1998
- -------------------------------- Secretary and Chief
Hiram J. Woo* Financial Officer
(Principal Financial and
Accounting Officer)
II-4
EXHIBIT 1.1
<PAGE>
UNDERWRITING AGREEMENT
January , 1998
William Scott & Co., L.L.C., as representative of the
Several Underwriters Named in Schedule I
1030 Salem Road
Union, NJ 07083
Tasin & Company, Inc.
40 Broad Street
New York, New York 10004
Dear Sirs:
Galveston's Steakhouse Corp., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the several underwriters named in Schedule A (the "Underwriters"), who are
acting severally and not jointly, 1,250,000 shares of the common stock, $.01
par value (the "Common Stock") of the Company (the "Firm Shares"). In addition,
solely for the purpose of covering over-allotments, (i) the Company proposes to
issue and sell to you 187,500 shares of Common Stock (the "Additional Shares").
The Firm Shares and the Additional Shares are hereinafter collectively referred
to as the "Shares". The Shares are more fully described in the Registration
Statement and Prospectus referred to below.
The Company confirms as follows its agreement with you:
1. REGISTRATION STATEMENT AND PROSPECTUS: The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission"), in
accordance with the Securities Act of 1933, as amended, and the rules and
regulations of the Commission promulgated thereunder (the "Rules and
Regulations", and together with said Act, the "Act"), a registration statement
on Form SB-2 (File No. 333-29093) and may have filed one or more amendments
thereto, including in such registration statement and in certain amendments
thereto a related preliminary prospectus for the registration under the Act of
the Shares. In addition, subject to the provisions of Section 4(e) hereof, the
Company has filed or will promptly file a further amendment to such registration
statement prior to the effectiveness of such registration statement, unless an
amendment is not required pursuant to Rule 430A of the Rules and Regulations. As
used in this Agreement, the term "Registration Statement" means such
registration statement, including the prospectus, financial statements and
schedules thereto, exhibits and other documents filed as part thereof, as
amended when, and in the form in which, it is declared effective by the
Commission, and, in the event any post-effective amendment thereto is filed
thereafter and on or before the Closing Date (as hereinafter defined), shall
also mean (from and after the date such post-effective amendment is effective
under the Act) such registration statement as so amended, provided that such
Registration Statement, at the time it becomes effective, may omit such
information as is permitted to be omitted from the Registration Statement when
it becomes effective pursuant to Rule 430A of the Rules and Regulations, which
1
<PAGE>
information ("Rule 430 Information") shall be deemed to be included in such
Registration Statement when a final prospectus is filed with the Commission in
accordance with Rules 430A and 424(b)(1) or (4) of the Rules and Regulations;
the term "Preliminary Prospectus" means each prospectus included in the
Registration Statement, or any amendments thereto, before it becomes effective
under the Act, the form of prospectus omitting Rule 430A Information included in
the Registration Statement when it becomes effective, if applicable (the "Rule
430A Prospectus"), and any prospectus filed by the Company with your consent
pursuant to Rule 424(a) of the Regulations; the term "Prospectus" means the
final prospectus included as part of the Registration Statement, except that (i)
if any prospectus (including any preliminary prospectus) which differs from such
prospectus included in the Registration Statement is provided to you for use in
connection with the offering of the Shares (whether or not such differing
prospectus is required to be filed by the Company pursuant to Rule 424(b) under
the Act), the term "Prospectus" as used herein shall mean such differing
prospectus from and after the date on which it shall have been first used, and
(ii) in the event any supplement to or amendment of such prospectus is made
after the date on which the Registration Statement is declared effective and on
or prior to the Closing Date, the term "Prospectus" shall also mean (with
respect to any supplement, from and after the date such supplement is first used
or, with respect to any amendment, the date such amendment is effective under
the Act) such prospectus as so supplemented or amended; and the term "Effective
Date" means (i) if the Company and you have determined not to proceed pursuant
to Rule 430A under the Act, the date on which the Registration Statement becomes
effective, or (ii) if the Company and you have determined to proceed pursuant to
Rule 430A under the Act, the date of this Agreement.
2. AGREEMENTS TO SELL AND PURCHASE: Subject to the terms and conditions
herein set forth, the Company agrees to sell to you and each of you agree,
severally and not jointly, to purchase from the Company, at a purchase price of
$5.00 per Firm Share (net of underwriting discounts and commissions) or, as
applicable, solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares, Additional Shares, the
number of Shares (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying the aggregate number of Firm Shares or Additional
Shares to be sold by a fraction, the numerator of which is the aggregate
number of Firm Shares or Additional Shares to be purchased by each of
you as set forth opposite your respective names in Schedule I hereto and the
denominator of which is the aggregate number of Firm Shares or Additional
Shares to be purchased hereunder.
2
<PAGE>
Additional Shares may be purchased at any time and from time to time on
or before the thirtieth business day following the date of this Agreement
upon written notice from you to the Company specifying the number of Additional
Shares to be purchased by each Underwriter. You agree that, if any Additional
Shares are to be purchased, they will be purchased first from Messrs. Lee and
Woo as Additional Selling Stockholder Shares prior to the purchase from the
Company of any Additional Company Shares.
The Underwriters will offer the Shares for sale at the initial public
offering price set forth on the cover of the Prospectus. After the initial
public offering, you may from time to time increase or decrease the public
offering price, in your sole discretion, by reason of changes in general market
conditions or otherwise.
3. DELIVERY AND PAYMENT: Delivery of and payment for the Firm Shares
shall be made at the offices of Tasin & Company, Inc. ("Tasin") at 40 Broad
Street, New York, NY 10004 (or such other place as shall be mutually agreed
upon) at such time and date, not later than the third full business day
following the Effective Date (unless the time of effectiveness is
after 4:00 P.M. New York time, in which case the date of closing shall be no
later than four business days following the Effective Date), as you shall
designate by at least forty-eight hours prior notice to the Company (the
"Closing Date").
Delivery of and payment for Additional Shares shall be made at said
offices of Tasin, or at such other place, and at such time(s)and date(s)(each an
"Optional Closing Date") as may be agreed upon in writing by you and the
Company; provided, however, that in no event may an Optional Closing Date be (i)
earlier than the Closing Date or (ii) later than three business days after the
date on which the related notice to purchase Additional Shares is given.
The Closing Date and the time and place of delivery of and payment
for the Shares may be varied by agreement between you and the Company. The
Optional Closing Date and the time and place of delivery of and payment for the
Additional Shares may be varied by agreement between you and the Company.
Delivery of certificates for the Shares (in definitive form, registered in such
names and in such denominations as you shall request at least two business days
prior to the Closing Date by written notice to the Company) shall be made to you
against payment of the purchase price therefor by certified or official bank
check or checks payable in New York Clearing House funds to the order of the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at the offices of Tasin at least 24 hours prior to the
Closing Date and each Optional Closing Date, as the case may be.
On the Closing Date, at the time of the delivery and payment for the
Firm Shares, (i) the Company shall pay to you as a non-accountable expense
allowance a sum equal to three percent (3%) of the gross proceeds of the sale of
the Firm Shares purchased by you hereunder less the $20,000 heretofore paid to
you in respect thereof, by certified or official bank check or checks payable
in New York Clearing House funds payable to
3
<PAGE>
the order of, and in accordance with instructions from, you and (ii) the Company
shall issue, sell and deliver to you, for an aggregate purchase price of $10, a
warrant to purchase up to an aggregate of 125,000 Shares (the "Underwriters'
Warrant") in substantially in the form filed as an exhibit to the Registration
Statement. Any unaccounted for portion of any monies advanced to the Underwriter
for non-accountable expenses will be returned to the Company in the event the
offering is not consummated. Further, in the event the offering is terminated,
the Underwriter will be reimbursed only for its actual accountable out-of-pocket
expenses. The shares of Common Stock issuable upon exercise of the Underwriters'
Warrant are hereinafter referred to collectively as the "Underwriters' Warrant
Shares". The Underwriters' Warrant will be exercisable at an initial exercise
price equal to 140% of the initial public offering sale price Share at any time
and from time to time, in whole or in part, during a four-year period commencing
one year following the Effective Date. The Company has granted you certain
registration rights with respect to the Underwriters' Warrant and the securities
issuable upon exercise thereof, as set forth in said Underwriters' Warrant.
On each Additional Closing Date, at the time of the delivery and
payment for the Additional Shares, the Company shall pay to you as a
non-accountable expense allowance, a sum equal to three percent (3%) of the
gross proceeds of the sale of the Additional Shares purchased by you hereunder
on such date by certified or official bank check or checks payable in New York
Clearing House funds payable to the order of, and in accordance with
instructions from, you.
4. COVENANTS AND AGREEMENTS OF THE COMPANY: (A) The Company covenants
and agrees with you as follows:
(a) The Company will notify you promptly by telephone and (if requested by you)
will confirm such advice in writing, (1) when the Registration Statement
has become effective and when any post-effective amendment thereto becomes
effective, (2) if Rule 430A under the Act is used, or the Prospectus is
otherwise required to be filed with the Commission pursuant to Rule 424(b)
under the Act, when the Prospectus is filed with the Commission pursuant to
Rule 424(b) under the Act, (3) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus
or for additional information, (4) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement,
preventing or suspending the use of the Preliminary Prospectus, the
Prospectus, the Registration Statement or any amendment or supplement
thereto, or refusing to permit the effectiveness of the Registration
Statement ("Stop Order"), or the initiation of any proceedings for any of
those purposes, (5) of the happening of any event during the period
mentioned in paragraph (f) below which in the reasonable judgment of the
Company makes any statement made in the Registration Statement or the
Prospectus untrue or which requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements
therein not misleading, and (6) of the receipt of any comments from the
Commission or the Blue Sky or securities authorities of any jurisdiction
regarding the Registration Statement, any post-effective amendment thereto,
the Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto. The Company will use its best efforts to prevent the issuance of
any Stop Order by the Commission or any notification from the Blue Sky or
securities authorities of any jurisdiction suspending the qualification or
registration of the Shares for sale in such jurisdictions, and if at any
time the Commission shall
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issue any Stop Order, or if the Blue Sky or securities authorities of any
jurisdiction shall issue notification suspending the qualification or
registration of the Shares, the Company will make every reasonable effort
to obtain the withdrawal of such Stop Order or notification at the earliest
possible moment. The Company will promptly advise you of its receipt of any
notification with respect to the suspension of the qualification or
registration of the Shares for offer or sale in any jurisdiction or the
initiation or threatening of any action or proceeding for such purpose.
(b) Prior to any public offering of the Shares by you, the Company will
cooperate with you and your counsel (or, at your discretion, our counsel)
in registering or qualifying the Shares for offer or sale under the Blue
Sky or securities laws, rules or regulations of such jurisdictions as you
may reasonably request; provided that in no event shall the Company be
obligated to register or qualify to do business as a foreign corporation in
any jurisdiction where it is not now so registered or qualified or to take
any action which would subject it to general service of process, or to
taxation as a foreign corporation doing business, in any jurisdiction where
it is not now so subject. The Company will pay all fees and expenses
relating to the registration or qualification of the Shares under such Blue
Sky or securities laws of such jurisdictions as you may designate
(including the legal fees, expenses and disbursements of counsel to you,
or, in your discretion, counsel to the Company, for the registration or
qualifi cation of the Shares in such jurisdictions as you shall determine).
After registration, qualification or exemption of the Shares for offer and
sale in such jurisdictions, and for as long as any offering pursuant to
this Agreement continues, the Company, at your reasonable request, will
file and make such statements or reports, and pay the fees applicable
thereto, at such times as are or may be required by the laws, rules or
regulations of such jurisdictions in order to maintain and continue in full
force and effect the registration, qualification or exemption for offer or
sale of the Shares in such jurisdictions. After the termination of the
offering contemplated hereby, and as long as any of the Shares are
outstanding, the Company will file and make, and pay all fees applicable
thereto, such statements and reports and renewals of registration as are or
may be required by the laws, rules or regulations of such jurisdictions to
maintain and continue in full force and effect the registration,
qualification or exemption for secondary market transactions in the Shares,
in the various jurisdictions in which the Shares were originally
registered, qualified or exempted for offer or sale.
(c) The Company will furnish to you, without charge, four manually-signed
copies, and such reasonable number of conformed copies, of the Registration
Statement as originally filed on Form SB-2 and of any amendments (including
post-effective amendments thereto), including financial statements and
schedules, if any, and all consents, certificates and exhibits (including
those incorporated therein by reference to the extent not previously
furnished to you), heretofore or hereafter made, signed by or on behalf of
its officers whose signatures are required thereon and a majority of its
board of directors.
(d) The Company will use its best efforts to cause the Registration Statement
to become effective under the Act. Upon such effectiveness, if the Company
and you have determined not to proceed pursuant to Rule 430A under the Act,
the Company will timely file a Prospectus
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pursuant to, and in conformity with, Rule 424(b), if required, and if the
Company and you have determined to proceed pursuant to Rule 430A under the
Act, the Company will timely file a Prospectus pursuant to, and in
conformity with, Rules 424(b) and 430A under the Act.
(e) The Company will give you and your counsel advance notice of its intention
to file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus, whether before or after the effective date of
the Registration Statement, and will not file any such amendment or
supplement unless the Company shall have first delivered copies of such
amendment or supplement to you and your counsel and you and your counsel
shall have given your consent to the filing of such amendment or
supplement. Any such amendment or supple ment shall comply with the Act.
(f) From and after the Effective Date, the Company will deliver to you, without
charge, as many copies of the Prospectus or any amendment or supplement
thereto as you may reasonably request. The Company consents to the use of
the Prospectus or any amendment or supplement thereto by you and by all
dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for such period of time thereafter as
the Prospectus is required by law to be delivered in connection therewith.
If during such period of time any event shall occur which in the judgment
of you or your counsel should be set forth in the Prospectus in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading, or if it is necessary to supplement or amend the
Pro spectus to comply with law, the Company will forthwith prepare and duly
file with the Commission an appropriate supplement or amendment thereto,
and will deliver to you, without charge, such number of copies thereof as
you may reasonably request.
(g) The Company will promptly pay all expenses in connection with (1) the
preparation, printing, filing, distribution and mailing (including, without
limitation, express delivery service) of the Registration Statement, each
preliminary prospectus, the Prospectus, and the preliminary and final forms
of Blue Sky memoranda (if any); (2) the issuance and delivery of the
Shares; (3) the fees and expenses of legal counsel and independent
accountants for the Company relating to, among other things, opinions of
counsel, audits, review of unaudited financial statements and cold comfort
review; (4) the fees and expenses of a registrar or transfer agent for the
Common Stock; (5) the printing, filing, distribution and mailing
(including, without limitation, express delivery service) of this
Agreement, the Agreement Among Underwriters, if any, and the Selected
Dealers Agreement; (6) furnishing such copies of the Registration
Statement, the Prospectus and any preliminary prospectus, and all
amendments and supplements thereto, as may be requested for use in
connection with the offering and sale of the Shares by you or by dealers to
whom Shares may be sold; (7) any fees and communication expenses with
respect to filings required to be made by you with the National Association
of Securities Dealers Regulatory, Inc. (the "NASDR"); and (8) the quotation
of the Shares on NASDR's Automated Quotation System ("NASDAQ").
(h) On the Closing Date, the Company shall sell to you the Underwriters'
Warrant to purchase 100,000 Shares for an aggregate purchase price of $10.
The Underwriters' Warrant shall be
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divided between you and your designees in such manner as you shall jointly
direct by written instruction to the Company at least two business days
prior to the Closing Date.
(i) If this Agreement shall be terminated pursuant to any of the provisions
hereof (otherwise than by notice given by you pursuant to Section 8 hereof)
or if for any reason the Company shall be unable to perform its obligations
hereunder, the Company will reimburse you for all of your out-of-pocket
expenses (including the fees and expenses of your counsel) reasonably
incurred by you in connection herewith; provided, however, the Company
shall not be so obligated to reimburse you if this Agreement is terminated
by reason of a failure to satisfy the condition set forth in Section 7(k)
hereinbelow by reason of your unwillingness to modify the underwriting
arrangements pertaining to sale of the Shares and/or the participation by
you in the sale of the Shares, as may be requested by the NASDR.
(j) For a period of ninety (90) days after the commencement of the public
offering of the Shares by you, without your prior written consent, the
Company will not offer, issue, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any
securities of the Company, except as provided for and as contemplated by
this Agreement, as specifically disclosed in the Registration Statement
respecting certain post-offering issuances to Company employees, or for
stock options granted to employees pursuant to the Company's Omnibus Stock
Plan attached as an exhibit to the Registration Statement.
(k) On or prior to the Closing Date, the Company shall obtain from each of its
officers and directors, his or her enforceable written agreement, in form
and substance satisfactory to your counsel, that for a period of
twenty-four (24) months after the Effective Date (or any longer period
required by NASDAQ or any jurisdiction in which the offer and sale of the
Shares is to be registered or qualified), he or she will not offer for
sale, sell, contract to sell, assign, pledge, transfer, grant any option
for the sale of, or otherwise dispose of, directly or indirect ly, any
securities of the Company (including without limitation any shares of
Common Stock), owned by him or her as of the Closing Date, whether upon
exercise of warrants, stock options or otherwise, without WS's prior
written consent (the "Lock- up Letter").
(l) The Company has reserved and shall continue to reserve and keep available
the maximum number of shares of its authorized but unissued Common Stock
and other securities for issuance upon exercise of the Underwriters'
Warrant.
(m) For a period of five years after the date of this Agreement, the Company
shall:
(1) retain Arthur Andersen LLP or another nationally recognized
firm of independent public accountants, as its auditors, and
at its own expense, shall cause such indepen dent certified
public accountants to review the Company's financial
statements for each of the first three fiscal quarters of each
fiscal year prior to the announcement of quarterly financial
information, the filing of the Company's Form 10-QSB quarterly
reports and the mailing of quarterly financial information to
its stockholders;
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(2) cause the Company's Board of Directors to meet not less
frequently than quarterly, upon proper notice, and cause an
agenda and minutes of the preceding meeting to be distributed
to directors prior to each such meeting;
(3) distribute to its security holders, within 120 days after the
end of each fiscal year, an annual report (containing
certified financial statements of the Company) prepared in
accordance with those required under Rule 14a-3(b) of
Regulation 14A promulgated by the Commission under the
Securities Exchange Act of 1934, as amended; and
(4) appoint a transfer agent for the Common Stock, in each case
acceptable to you.
(n) For a period of five years after the date of this Agreement, the
Company shall furnish you, free of charge, with the following:
(1) within 90 days after the end of each fiscal year, financial
statements for the Company certified by the independent
certified public accountants referred to in Section 4(m)(1)
above, including a balance sheet, statement of operations,
statement of stockholders' equity and statement of cash flows,
for the Company, with supporting schedules, prepared in
accordance with generally accepted accounting principles, as
at the end of such fiscal year and for the twelve months then
ended, accompanied by a copy of the certificate or report
thereon of such independent certified public accountants;
(2) (x) for so long as the Company is a reporting company under
any of Sections 12(b), 12(g) or 15(d) of the Securities
Exchange Act, as amended, and the rules and regulations of the
Commission promulgated thereunder (collectively, the "Exchange
Act"), promptly after filing with the Commission, copies of
all reports and proxy soliciting material which the Company is
required to file under the Exchange Act, or (y) at such times
as the Company is not a reporting company under the aforesaid
provisions of the Exchange Act, as soon as practicable after
the end of each of the first three fiscal quarters of each
fiscal year, financial statements of the Company, including a
balance sheet, statement of operations, statement of
stockholders' equity and statement of cash flows as at the end
of, or for each such fiscal quarter and the comparable period
of the preceding year, which statements need not be audited;
(3) as soon as practicable after they have first been distributed
to stockholders of the Company, copies of each annual and
interim financial or other report or communica tion sent by
the Company to its stockholders (except to the extent
duplicative of information furnished pursuant to any other
clause of this Section 4(n));
(4) as soon as practicable following release or other
dissemination, copies of every press release and every
material news item and article in respect of the Company or
its affairs released or otherwise disseminated by the Company;
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(5) promptly following receipt thereof, copies of the Company's
daily transfer sheets prepared by the Company's transfer agent
and a list of stockholders; and
(6) such additional documents and information with respect to the
Company and its affairs, if any, as you may from time to time
reasonably request.
(o) [Intentionally deleted].
(p) On or prior to the Effective Date, the Company will have accomplished the
quotation of the Shares on the NASDAQ SmallCap Market, subject only to
notice of issuance and the registra tion of such securities under the
Exchange Act. For a period of five years from the date of this Agreement,
the Company agrees, at its sole cost and expense, to take all necessary and
appropriate action such that its securities continue to be quoted on
NASDAQ, provided that the Company otherwise complies with the prevailing
requirements of NASDAQ.
(q) For a period of two years after the date of this Agreement, the Company
will not seek to amend its certificate of incorporation or file a
certificate of designation to authorize the issuance of any other class or
series of its capital stock, including, without limitation, any preferred
stock, without your prior written consent.
(r) The Company agrees, at its own cost and expense, to deliver to you and your
counsel, within a reasonable period after the Optional Closing Date, or the
expiration of the period in which you may exercise the over-allotment
option, five bound volumes containing copies of all documents and
correspondence filed with, or received from, the Commission, NASDAQ and the
NASDR relating to the offering of the Shares and the closing thereof,
including related matters.
(s) The Company will make generally available to its security holders and
deliver to you as soon as it is practicable to do so (but in no event later
than the 45th day after the end of the twelve- month period beginning at
end of the fiscal quarter of the Company during which the Registration
Statement becomes effective, or, if the Registration Statement becomes
effective during the Company's last fiscal quarter, the 90th day after the
end of such twelve-month period), an earnings statement of the Company
(which need not be audited) covering a period of at least twelve
consecutive months commencing after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the
Act.
(t) The Company will, promptly upon your request, prepare and file with the
Commission any amendments or supplements to the Registration Statement, any
Preliminary Prospectus or the Prospectus and take any other action, which
in the reasonable opinion of Law Offices of David N. Feldman, counsel to
you, may be reasonably necessary or advisable in connection with the
distribution of the Shares, and will cause the same to become effective as
promptly as possible.
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(u) The Company will furnish to you as early as practicable prior to the
Closing Date and any Optional Closing Date, as the case may be, but no less
than two full business days prior thereto, a copy of the latest available
unaudited interim financial statements of the Company which have been
reviewed by the Company's independent certified public accountants, as
stated in their letters to be furnished pursuant to Section 7(e) hereof.
(v) The Company will apply the net proceeds from the issuance and sale of the
Shares for the purposes and in the manner set forth under the caption "Use
of Proceeds" in the Prospectus, and will file on a timely basis such
reports with the Commission with respect to the sale of the Shares and the
application of the proceeds therefrom as may be required pursuant to Rule
463 under the Act. The Company will operate its business in such a manner
and, pending application of the net proceeds of the offering for the
purposes and in the manner set forth under the caption "Use of Proceeds" in
the Prospectus, will invest such net proceeds in certain types of
securities so as not to become an "investment company" as such term is
defined under the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(w) The Company has filed a registration statement on Form 8-A covering the
Shares pursuant to Section 12(b) of the Exchange Act and will use its best
efforts to cause said registration statement to become effective on the
Effective Date. The Company will comply with all reg istration, filing and
reporting requirements of the Exchange Act, which may from time to time be
applicable to the Company. The Company shall comply with the provisions of
all under takings contained in the Registration Statement.
(x) Prior to the Closing Date or any Optional Closing Date, as the case may be,
the Company shall neither issue any press release or other communication,
directly or indirectly, nor hold any press conference with respect to the
offering of the Shares, the Company or its business, results of operations,
condition (financial or otherwise), property, assets, liabilities or
prospects of the Company, without your prior written consent.
(y) For a period of ninety (90) days after the date hereof, the Company will
not, directly or indirectly, take any action designed, or which will
constitute or which might reasonably be expected to cause or result in,
stabilization or manipulation of the market price of the Shares, or the
facilitation of the sale or resale of the Shares.
(aa) The Company maintains a system of internal accounting controls sufficient
to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to maintain asset accountability; (iii) access to cash and cash equivalents
is per mitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for cash and cash
equivalents is compared with the existing cash and cash equivalents at
reasonable intervals and appropriate action is taken with respect to any
differences.
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(bb) There are no business relationships or related party transactions of the
nature described in Item 404 of Regulation S-B of the Rules and Regulations
involving the Company and any person referred to in Items 401 or 404,
except as required to be described in the Prospectus and as so described.
(cc) The Company will not grant any person or entity registration rights with
respect to any of its securities, except such rights as are subordinate to
the registration rights contained in the Underwriters' Warrant and are
exercisable no earlier than six months after the securities to be
registered upon exercise of such registration rights have been offered for
sale pursuant to an effective registration statement under the Act and
registered or qualified for sale under the Blue Sky or state securities
law, rules or regulations of the jurisdictions in which such securities are
to be offered for sale.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY: The Company
represents and warrants to you that:
(a) When the Registration Statement becomes effective, and at all times
subsequent thereto to and including the Closing Date and each Optional
Closing Date, and during such longer period as the Prospectus may be
required to be delivered in connection with sales by you or any dealer, and
during such longer period until any post-effective amendment thereto shall
become effective, the Registration Statement (and any post-effective
amendment thereto) and the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment or supplement to
the Registration Statement or the Prospectus) will contain all statements
which are required to be stated therein in accordance with the Act, will
comply with the Act, and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and no
event will have occurred which should have been set forth in an amendment
or supplement to the Registration Statement or the Prospectus which has not
then been set forth in such an amendment or supplement; if a Rule 430A
Prospectus is included in the Registration Statement at the time it becomes
effective, the Prospectus filed pursuant to Rules 430A and 424(b) (1) or
(4) will contain all Rule 430A Information and all
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statements which are required to be stated therein in accordance with the
Act, will comply with the Act, and will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and
each Preliminary Prospectus, as of the date filed with the Commission, did
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; except that no representation or warranty is made in
this Section 5(A)(a) with respect to statements or omissions made in
reliance upon and in conformity with written information furnished to the
Company as stated in Section 6(b) with respect to you expressly for
inclusion in any Preliminary Prospectus, the Registration Statement, or the
Prospectus, or any amendment or supplement thereto.
(b) Neither the Commission nor the Blue Sky or securities authorities of any
jurisdiction has issued an order suspending the effectiveness of the
Registration Statement, preventing or suspending the use of any Preliminary
Prospectus, the Prospectus, the Registration Statement, or any amendment or
supplement thereto, refusing to permit the effectiveness of the
Registration Statement, or suspending the registration or qualification of
the Shares, nor has the Commission or any of such authorities instituted or
threatened to institute any proceedings with respect to such an order.
(c) The Company is a corporation duly incorporated and validly existing in good
standing under the laws of Delaware, its jurisdiction of incorporation. The
Company has full corporate power and authority and has obtained all
necessary consents, authorizations, approvals, orders, licenses,
certificates, declarations and permits of and from, and have made all
required filings with, all federal, state, local and other governmental
authorities and all courts and other tribunals, to own, lease, license and
use its properties and assets and to carry on its business in the manner
described in the Prospectus. All such consents, authorizations, approvals,
orders, licenses, certificates, declarations, permits and filings are in
full force and effect and the Company is in all material respects complying
therewith. The Company is duly registered or qualified to do business as a
foreign corporation and is in good standing in each other jurisdiction in
which their ownership, leasing, licensing, or use of property and assets or
the conduct of its business requires such registration or qualification.
(d) The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, $.01 par value, of which 500,000 shares are outstanding,
and 5,000,000 shares of Preferred Stock, $.001 par value, of which
1,000,000 shares of Series B Convertible Preferred Stock are outstanding.
The Company does not have any subsidiaries or own any capital stock or
equity interest in any other corporation, partnership, limited liability
company or other entity. Each outstanding share of Common Stock, are
validly authorized, validly issued, fully paid, and nonassessable without
any personal liability attaching to the ownership thereof, and has not been
issued and is not owned or held in violation of any preemptive rights of
stockholders. There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance of, any
share of
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capital stock of the Company or any security or other instrument which by
its terms is convertible into, exercisable for, or exchangeable for capital
stock of the Company, except as disclosed in the Prospectus. There is
outstanding no security or other instrument which by its terms is
convertible into or exchangeable for capital stock of the Company.
(e) The financial statements of the Company included in the Registration
Statement and the Prospectus fairly present the financial position, the
results of operations and the other information purported to be shown
therein at the respective dates and for the respective periods to which
they apply. Such financial statements have been prepared in accordance with
generally accepted accounting principles and are prepared in accordance
with the books and records of the Company. The accountants whose reports on
the audited financial statements are filed with the Commission as a part of
the Registration Statement are, and during the periods covered by their
report(s) included in the Registration Statement and the Prospectus were,
independent certified public accountants with respect to the Company within
the meaning of the Act. No other financial statements are required by Form
SB-2 or otherwise to be included in the Registration Statement or the
Prospectus. Except as disclosed in the Prospectus, there has at no time
been a material adverse change in the condition (financial or otherwise),
results of operations, business, property, assets, liabilities or prospects
of the Company from the latest information set forth in the Registration
Statement or the Prospectus.
(f) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, threatened, or
in prospect (or any basis therefor known to the Company) with respect to or
affecting the Company, its operation, business, property or assets, except
as disclosed in the Prospectus or such as individually or in the aggregate
do not now have and are not expected to have a material adverse effect upon
the operations, businesses, property, assets, condition (financial or
otherwise) or prospects of the Company. The Company is not in violation of,
or in default with respect to, any law, rule, regulation, order, judgment,
or decree, except as disclosed in the Prospectus or such as individually or
in the aggregate do not now have and are not expected to have a material
adverse effect upon the operations, businesses, property, assets, condition
(financial or otherwise) or prospects of the Company; nor is the Company
required to take any action in order to avoid any such violation or
default.
(g) The Company has good and marketable title in fee simple absolute to all
real properties and good title to all other properties and assets which the
Prospectus indicates are owned by it, free and clear of all liens, security
interests, pledges, charges, mortgages and other encumbrances (except as
may be required to be and are disclosed in the Prospectus). The properties
held under lease by the Company are held by it under valid and enforceable
leases and the interests of the Company in such leases are free and clear
of all liens, encumbrances and defects, except as disclosed in the
Prospectus, and the Company is in full compliance with all material terms
and conditions thereunder and such leases are in full force and effect. No
real property owned, leased, licensed or used by the Company is situated in
an area which is, or to the knowledge of the Company, will be, subject to
zoning, use or building code
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restrictions which would prohibit (and no state of facts relating to the
actions or inaction of another person or entity or his or its ownership,
leasing, licensing, or use of any real or personal property exists or will
exist which would prevent) the continued effective ownership, leasing,
licensing, or use of such real property in the business of the Company as
presently conducted or as the Prospectus indicates any of them contemplate
conducting, except as disclosed in the Prospectus).
(h) Neither the Company nor any other party is now or is expected by the
Company to be in violation or breach of, or in default with respect to
complying with, any material provision of any indenture, mortgage, deed of
trust, debenture, note or other evidence of indebtedness, contract,
agreement, instrument, lease or license, or arrangement or understanding
which is material to the Company, and each such indenture, mortgage, deed
of trust, debenture, note or other evidence of indebtedness, contract,
agreement, instrument, lease or license is in full force and is the legal,
valid and binding obligation of the Company, and to the knowledge of the
Company, of the other contracting party and is enforceable as to them in
accordance with its terms. The Company enjoys peaceful and undisturbed
possession under all leases and licenses under which they are operating.
The Company is not a party to or bound by any contract, agreement,
instrument, lease, license, arrangement or understanding, or subject to any
charter or other restriction, which has had or is expected in the future to
have a material adverse effect on the condition (financial or otherwise),
results of operations, businesses, property, assets or liabilities of the
Company. The Company is not in violation or breach of, or in default with
respect to, any term of its Certificate of Incorporation or By-laws, in
each case as amended to date.
(i) The Company does not own or have any licensed rights to, in or under any
patents, patent applications, trademarks, service marks, trademark or
service mark applications, trade names, service marks, copyrights,
technology, know-how or other intangible properties or assets (all of the
foregoing being herein called "Intangibles") that are material to the
business of the Company, except to the extent disclosed in the Prospectus.
There is no right under any Intan gibles of the Company necessary to the
business of the Company as presently conducted or as proposed to be
conducted as indicated in the Prospectus, except as may be disclosed in the
Prospectus. The Company has not received notice of infringement with
respect to asserted Intangibles of others, except as disclosed in the
Prospectus. To the knowledge of the Company, there is no infringement by
others of Intangibles of the Company. To the knowledge of the Company,
there is no Intangible of others which has had or may in the future have a
materially adverse effect on the condition (financial or otherwise),
results of operations, businesses, property, assets, liabilities or
prospects of the Company.
(j) Neither the Company, any director or officer of the Company, or to the best
knowledge of the Company, any agent, employee, or other person authorized
to act on behalf of the Company have, directly or indirectly: used any
corporate funds of the Company for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds of the Company;
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violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended, as relates to the business of the Company or its predecessor in
interest; or made any bribe, rebate, payoff, influence payment, kickback,
or other unlawful payment in connection with the business of the Company or
its predecessor in interest.
(k) Any contract, agreement, instrument, lease or license required to be
described in the Registration Statement or the Prospectus has been properly
described therein. Any contract, agreement, instrument, lease or license
required to be filed as an exhibit to the Registration Statement has been
filed with the Commission as an exhibit to or has been incorporated as an
exhibit by reference into the Registration Statement.
(l) The Company has all requisite corporate power and authority to execute,
deliver and perform under the terms and conditions of this Agreement and
the Underwriters' Warrant. All necessary corporate proceedings of the
Company have been duly taken to authorize the execution, delivery and
performance by the Company of this Agreement and the Underwriters' Warrant.
This Agreement has been duly authorized, executed and delivered by the
Company, is a legal, valid, and binding agreement of the Company, and is
enforceable as to the Company in accordance with its terms. The
Underwriters' Warrant has been duly authorized by the Company and, when
executed and delivered by the Company, assuming the due execution and
delivery thereof by the other parties thereto, will be a legal, valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms. No consent, authorization, approval, order,
license, certificate, declaration or permit of or from, or filing with, any
governmental or regulatory authority, agent, board or other body is
required for the issue and sale of the Shares by the Company and the
execution, delivery or performance by the Company of this Agreement or the
Underwriters' Warrant (except filings with and orders of the Commission
pursuant to the Act which have been or will be made or obtained prior to
the Closing Date, and such filings, consents or permits as are required
under Blue Sky or securities laws in connection with the transactions
contemplated by this Agreement). No consent of any party to any contract,
agreement, instrument, lease, license, arrangement or understanding to
which the Company is a party, or to which any of their properties or assets
are subject, is required for the execution, delivery or performance of this
Agreement or the Underwriters' Warrant; and the execution, delivery and
performance of this Agreement and the Underwriters' Warrant will not
violate, result in a breach of, conflict with, or (with or without the
giving of notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract, agreement, instrument,
lease, license, arrangement or understanding, result in the creation or
imposition of, any lien, security interest, pledge, charge, or other
encumbrance upon any of the property or assets of the Company pursuant to
the terms of any indenture, mortgage, deed of trust, loan or credit
agreement, lease or other agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the property or
assets of the Company is subject or violate or result in a breach of any
term of the Certificate of Incorporation or By-laws of the Company, or
violate, result in a breach of, or conflict with any law, rule, regulation,
order, judgment or decree binding on the Company or to which its
operations, business, properties or assets are subject.
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(m) The Shares are validly authorized, and when issued, paid for and delivered
in accordance with this Agreement, will be validly issued, fully paid, and
nonassessable, without any personal liability attaching to the ownership
thereof, and will not be issued in violation of any preemptive rights of
stockholders. You will receive good title to the Shares and the
Underwriters' Warrant purchased by it, upon payment of the purchase price
therefor in accordance with the provisions of this Agreement, free and
clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements and voting trusts (collectively, "Encumbrances").
(n) The Underwriters' Warrant Shares are validly authorized and reserved for
issuance and, when issued, paid for and delivered upon exercise of the
Underwriters' Warrant, in accordance with the provisions of the
Underwriters' Warrant will be validly issued, fully paid and non-assessable
and will not be issued in violation of any preemptive rights of
stockholders; and the holders of the Underwriters' Warrant Shares will
receive good title to them, free and clear of all Encumbrances.
(o) The Shares and the Underwriters' Warrant conform to all statements relating
thereto contained in the Registration Statement and the Prospectus.
(p) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as otherwise may be
stated therein, (i) the Company has not entered into any transaction or
incurred any liability or obligation, contingent or otherwise, which is
material to the Company, except in the ordinary course of business, (ii)
there has not been any change in the outstanding capital stock of the
Company, or any issuance of options, warrants or rights to purchase the
capital stock of the Company, or any material increase in the long-term
debt of the Company, or any material adverse change in the business,
condition (financial or otherwise) or results of operations of the Company,
(iii) no loss or damage (whether or not insured) to the properties of the
Company has been sustained which is material to the Company, (iv) the
Company has not paid or declared any dividend or other distribution with
respect to its capital stock, and (v) there has not been any change,
contingent or otherwise, in the direct or indirect control of the Company
nor, to the best knowledge of the Company, do there exist any circumstances
which would likely result in such a change.
(q) Neither the Company nor any officers or directors of the Company or
Affiliates (as defined in Rule 405 of the Rules and Regulations), have
taken or will take, directly or indirectly, prior to the termination of the
offering contemplated by this Agreement, any action designed to stabilize
or manipulate the price of any security of the Company, or which has caused
or resulted in, or which might in the future reasonably be expected to
cause or result in, stabi lization or manipulation of the price of any
security of the Company, to facilitate the sale or resale of any of the
Shares.
(r) The Company has not incurred, directly or indirectly, any liability for a
fee, commission or other compensation on account of the employment of a
broker or finder in connection with
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the offering of the Shares contemplated by this Agreement, except as
contemplated by this Agreement or as disclosed in the Registration
Statement.
(s) The Company is not, and does not intend to conduct its business in a manner
in which it would become, an "investment company" as defined in Section
3(a) of the Investment Company Act.
(t) The Company has obtained, or prior to the Closing Date will obtain a
Lock-up Letter, from each of its officers and directors who owns shares of
Common Stock.
(u) No person or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the filing or
effectiveness of the Registration Statement.
(v) The Company has and will continue to (i) adequately insure its properties
against loss or damage by fire, (ii) maintain adequate insurance against
liability for negligence and (iii) maintain such other insurance as is
usually maintained by companies engaged in the same or similar businesses,
including without limitation, product liability insurance.
(w) The Company has filed all federal, state and local tax returns required to
be filed (or have obtained extensions therefor) and have paid all taxes
shown on such returns and all assessments received by it to the extent that
payment has become due. The Company has made adequate accruals for all
taxes which may be owed by it but has not been paid.
(y) Singer Lewak Greenbaum & Goldstein LLP, who have certified certain
financial statements of the Company, are independent public accountants as
required by the Act and the rules and regulations of the Commission
thereunder.
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6. INDEMNIFICATION AND CONTRIBUTION:
(a) The Company agrees to indemnify and hold harmless you and each
Underwriter, and each of your and the Underwriters' officers, directors,
partners, employees, agents and counsel, and each person, if any, who controls
you and each Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any and all loss, liability, claim, damage
and expense whatsoever (which shall include, for all purposes of this Section 6,
but not be limited to, attorneys' fees and any and all expense whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever and any and all amounts paid in
settlement of any claim or litigation) as and when incurred arising out of,
based upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained in (1) any Preliminary Prospectus, the
Rule 430A Prospectus, the Registration
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Statement, or the Prospectus (as from time to time amended and supplemented), or
any amendment or supplement thereto, or (2) any application or other document or
communication (in this Section 6 collectively called an "application") executed
by or on behalf of the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to qualify the
Shares under the Blue Sky or securities laws thereof (or the rules and
regulations promulgated thereunder) or filed with the Commission or any
securities exchange or automated quotation system; or any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, unless such statement or omission
was made in reliance upon and in conformity with written information furnished
to the Company as stated in Section 6(b) by you or an Underwriter for inclusion
in any Preliminary Prospectus, the Rule 430A Prospectus, the Registration
Statement, of the Prospectus, or any amendment or supplement thereto, or in any
application, as the case may be, or (ii) any breach of any representation,
warranty, covenant or agreement of the Company contained in this Agreement. The
foregoing agreement to indemnify shall be in addition to any liability the
Company may otherwise have, including liabilities arising under this Agreement.
If any action is brought against you or an Underwriter or any of your
or their respective officers, directors, partners, employees, agents or counsel,
or any of your controlling persons (each, an "indemnified party") in respect of
which indemnity may be sought against the Company pursuant to the foregoing
paragraph, such indemnified party or parties shall promptly notify the Company
in writing of the institution of such action (but the failure so to notify shall
not relieve the Company from any liability it may have pursuant to this Section
6(a)) and the Company shall promptly assume the defense of such action,
including the employment of counsel (satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party or
parties, unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have promptly employed counsel satisfactory to such
indemnified party or parties to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded that there may
be one or more legal defenses available to it or them or to other indemnified
parties which are different from or additional to those available to the
Company, in any of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this paragraph
to the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written consent. The
Company agrees promptly to notify you of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the sale of the Shares, any Preliminary Prospectus, the Rule
430A Prospectus, the Registration Statement, or the Prospectus, or any amendment
or supplement thereto, or any application.
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<PAGE>
(b) You agree to indemnify and hold harmless the Company, each director
of the Company, each officer of the Company who shall have signed the
Registration Statement, and each other person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, to the same extent as the foregoing indemnity from the Company to you
in Section 6(a), but only with respect to statements or omissions, if any, made
in any Preliminary Prospectus, the Rule 430A Prospectus, the Registration
Statement, or the Prospectus (as from time to time amended and supplemented), or
any amendment or supplement thereto, or in any application, in reliance upon and
in conformity with written information furnished to the Company by you expressly
for inclusion in any Preliminary Prospectus, the Rule 430A Prospectus, the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto, or in any application, as the case may be. For all purposes of this
Agreement, the public offering price, the amounts of the selling concession and
reallowance set forth in the Prospectus and the information in the third
paragraph under "Underwriting" constitute the only information furnished in
writing by or on your behalf expressly for inclusion in any Preliminary
Prospectus, the Rule 430A Prospectus, the Registration Statement or the
Prospectus (as from time to time amended or supplemented), or any amendment or
supplement thereto, or in any application, as the case may be. If any action
shall be brought against the Company or any other person so indemnified based
upon any Preliminary Prospectus, the Rule 430A Prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement thereto, or any
application, and in respect of which indemnity may be sought against you
pursuant to this Section 6(b), you shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the indemnified parties, by the provisions of
Section 6(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 6(a) or
6(b) (subject to the limitations thereof) but it is found in a final
judicial determination, not subject to further appeal, that such indemnification
may not be enforced in such case, even though this Agreement expressly provides
for indemnification in
20
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such case, or (ii) any indemnified or indemnifying party seeks contribution
under the Act, the Exchange Act, or otherwise, then the Company (including for
this purpose any contribution made by or on behalf of any director of the
Company, any officer of the Company who signed the Registration Statement, and
any controlling person of the Company), as one entity, and you, as a second
entity, shall contribute to the losses, liabilities, claims, damages and
expenses whatsoever to which any of them may be subject, so that you are
responsible for the proportion thereof equal to the percentage which the
aggregate underwriting discount set forth on the cover page of the Prospectus
represents of the initial public offering price of the Shares set forth on the
cover page of the Prospectus and the Company is responsible for the remaining
portion, in proportion to the net proceeds from the offering received by them;
provided, however, that if applicable law does not permit such allocation, then
other relevant equitable considerations such as the relative fault of the
Company, Lee and Woo and you in the aggregate in connection with the facts which
resulted in such losses, liabilities, claims, damages and expenses shall also be
considered. The relative fault, in the case of an untrue statement, alleged
untrue statement, omission, or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or you, and the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent such statement, alleged statement, omission or alleged omission. The
Company and you agree that it would be unjust and inequitable if the respective
obligations of the Company and you for contribution were determined by pro rata
or per capita allocation of the aggregate losses, liabilities, claims, damages
and expenses or by any other method of allocation that does not reflect the
equitable considerations referred to in this Section 6(d). No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 6(d), each person, if
any, who controls you within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company, shall have the same
rights to contribution as the Company, subject in each case to the provisions of
this Section 6(d). Anything in this Section 6(d) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
Section 6(d) is intended to supersede any right to contribution under the Act,
the Exchange Act, or otherwise.
7. CONDITIONS OF YOUR OBLIGATIONS: Your obligations hereunder are
subject to the continuing accuracy of the representations and warranties of the
Company contained herein and in each certificate and document contemplated
under this Agreement to be delivered to you, as of the date hereof, as of the
Closing Date, and each Optional Closing Date, as the case may be, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
(a) Notification that the Registration Statement has become effective shall be
received by you not later than 6:30 p.m., New York City time, on the date
of this Agreement or at such later date and time as shall be consented to
in writing by you. If the Company has elected to rely upon Rule 430A of the
Rules and Regulations, the price of the Shares and any price-related infor
mation previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission
for filing pursuant to Rule 424(b) of the Rules and Regulations within the
prescribed time period, and prior to the Closing Date the Company shall
have provided evidence satisfactory to you of such timely filing, or a
post-ef fective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements
of Rule 430A of the Rules and Regulations.
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<PAGE>
(b) The Commission shall not have issued a Stop Order and no Blue Sky or
securities authority of any jurisdiction shall have issued an order
suspending the registration or qualification of the Shares, and no
proceedings for such purpose shall have been instituted or shall be
pending, or to the knowledge of the Company, be threatened or contemplated
by the Commission or the Blue Sky or securities authorities of any such
jurisdiction.
(c) You shall have received an opinion, dated the Closing Date and satisfactory
in form and substance to your counsel from Lehman & Eilen, counsel to the
Company, to the effect that:
(1) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of Delaware, its
jurisdiction of incorporation, with full corporate power and
authority to own its property and conduct its business in the
manner described in the Prospectus. To the knowledge of such
counsel, the Company has obtained all necessary consents,
authorizations, approvals, orders, licenses, certificates,
declarations and permits of and from, and has made all
required filings with, all federal, state, local and other
governmental authorities and all courts and other tribunals,
to own, lease, license and use its properties and assets and
to carry on its business in the manner described in the
Prospectus. The Company is duly registered or qualified to do
business as a foreign corporation and is in good standing in
each other jurisdiction in which the ownership, leasing,
licensing, or use of its property and assets or the conduct of
its business require such registration or qualification.
(2) The authorized capital stock of the Company consists of
10,000,000 shares of Common Stock, $.01 par value, of which
825,000 shares are outstanding, and 5,000,000 shares of
Preferred Stock, $.001 par value ("Preferred Stock"), of which
1,000,000 shares of Series B Convertible Preferred Stock are
outstanding. Each outstanding share of Common Stock and
Preferred Stock is validly authorized, validly issued, fully
paid, and nonassessable, with no personal liability attaching
to the ownership thereof, has not been issued and is not owned
or held in violation of any preemptive right of stockholders.
There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the
issuance of, any share of capital stock of the Company or any
security or other instrument which by its terms is convertible
into, exercisable for, or exchangeable for capital stock of
the Company, except as disclosed in the Prospectus. There is
outstanding no security or other instrument which by its terms
is convertible into or exchangeable for capital stock of the
Company except for the outstanding shares of Preferred Stock.
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(3) To the knowledge of such counsel, there is no litigation,
arbitration, claim, governmental or other proceeding (formal
or informal), or investigation pending or threatened, with
respect to the Company or any of its operations, business,
property or assets, except as disclosed in the Prospectus or
such as individually or in the aggregate do not now have and
are not expected to have a material adverse effect on the
operations, business, property, assets or condition (financial
or otherwise) of the Company. The Company is not in violation
of, or in default with respect to, any law, rule or
regulation, or to the knowledge of such counsel, after
reasonable investigation, any order, judgment or decree,
except as disclosed in the Prospectus or such as individually
or in the aggregate do not now have and are not expected to
have a material adverse effect on the operations, businesses,
property, assets or condition (financial or otherwise) of the
Company; nor is the Company required to take any action in
order to avoid any such violation or default.
(4) Except as disclosed in the Prospectus, the Company is not
now in violation or breach of, or in default with respect to
complying with, any material provision of any indenture,
mortgage, deed of trust, debenture, note or other evidence
of indebtedness, contract, agreement, instrument, lease or
license, or arrangement or understanding which is material
to the Company, and each such indenture, mortgage, deed of
trust, debenture, note or other evidence of indebtedness,
contract, agreement, instrument, lease or license is in full
and force and is the legal, valid and binding obligation of
the Company.
(5) The Company is not in violation or breach of, or in default
with respect to, any term of its Certificate of Incorporation
or By-laws, in each case as amended to date.
(6) The Company has all requisite corporate power and authority to
execute, deliver and perform this Agreement and the
Underwriters' Warrant. All necessary corporate proceedings of
the Company have been taken to authorize the execution,
delivery, and performance by the Company of this Agreement and
the Underwriters' Warrant. This Agreement and the
Underwriters' Warrant have been duly authorized, executed and
delivered by the Company, constitute legal, valid, and binding
agreements of the Company, and (subject to applicable
bankruptcy, insolvency, reorganization and other laws
affecting the enforceability of creditors' rights generally,
and the application of equitable principles affecting the
enforceability of remedies in the nature of specific
enforcement, and except as the enforceability of the
indemnification and contribution provisions of this Agreement
and the Underwriters' Warrant may be limited under applicable
securities laws) is enforceable as to the Company in
accordance with its terms. The Underwriters' Warrant has been
duly authorized by the Company and, when executed, issued and
delivered by the Company and paid for by you in accor dance
with the provisions of this Agreement, will be a legal, valid
and binding obligation of the Company, enforceable against the
Company in accordance with their respective terms, except as
may be limited by applicable bankruptcy, insolvency,
registration and other laws affecting the enforceability of
creditors' rights generally
23
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and the application of equitable principles affecting the
availability of remedies in the nature of specific
enforcement.
(7) All legally required proceedings in connection with the
authorization, issue and sale of the Shares by the Company in
accordance with the provisions of this Agreement have been
taken, and no consent, authorization, approval, order,
license, certificate, declaration or permit of or from, or
filing with, any governmental or regulatory authority, agency,
board, bureau or other body or is required for the execution,
deliv ery or performance by the Company of this Agreement and
the Underwriters' Warrant (except filings with and orders of
the Commission pursuant to the Act which have been made or
received and matters under Blue Sky or state securities laws,
rules or regulations, as to which such counsel need not
express an opinion).
(8) No consent of any party to any material contract, agreement,
instrument, lease or license, or arrangement or understanding
known to such counsel, after due inquiry, to which the Company
is a party, or to which any of the property or assets of the
Company is subject, is required for the execution, delivery or
performance of this Agreement or the Underwriters' Warrant;
and the execution, delivery and performance of this Agreement
and the Underwriters' Warrant will not violate, result in a
breach of, conflict with, or (with or without the giving of
notice or the passage of time or both) entitle any party to
terminate or call a default under any such contract,
agreement, instrument, lease, license, arrangement or
understanding, result in the creation or imposition of any
lien, security interest, pledge, charge or other encumbrance
upon any of the property or assets of the Company pursuant to
the terms of any indenture, mortgage, deed of trust, loan or
credit agreement, lease or other agreement or instrument to
which the Company is a party or by which the Company is bound
or to which any of the property or assets of the Company is
subject, known to such counsel, or violate or result in a
breach of any term of the Certificate of Incorporation or
By-laws of the Company, or violate, result in a breach of, or
conflict with any law, rule, regulation, order, judgment or
decree binding on the Company or to which the operations,
business, property or assets of the Company are subject to.
(9) The Shares are validly authorized. Upon payment of the
purchase price thereunder in accordance with the provisions of
this Agreement, the Underwriters' Warrant will be duly
delivered. The Shares, when issued, paid for and delivered in
accordance with the provisions of this Agreement, will be
validly issued, fully paid and nonassessable, without any
personal liability attaching to the ownership thereof, and
will not be issued in violation of any preemptive rights of
stockholders. Upon payment of the purchase price therefor in
accordance with the provisions of this Agreement, you will
receive good title to the Shares and the Underwriters' Warrant
purchased by it from the Company, free and clear of all
Encumbrances.
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(10) The Underwriters' Warrant Shares are validly authorized and
have been duly and validly reserved for issuance, and when
issued, paid for and delivered upon exercise of the
Underwriters' Warrant in accordance with the provisions of the
Underwriters' Warrant will be validly authorized, validly
issued, fully paid, and nonassessable, with no personal
liability attaching to the ownership thereof, and will not
have been issued in violation of any preemptive rights of
stockholders, and the holders of the Underwriters' Warrant
Shares will receive good title to them, free and clear of all
Encumbrances.
(11) The Shares and the Underwriters' Warrant Shares conform to all
statements relating thereto contained in the Registration
Statement and the Prospectus.
(12) To the knowledge of such counsel, any contract, agreement,
instrument, lease or license required to be described in the
Registration Statement or the Prospectus has been properly
described therein. To the knowledge of such counsel, any
contract, agreement, instrument, lease, or license required to
be filed as an exhibit to the Registration Statement has been
filed with the Commission as an exhibit to or has been
incorporated as an exhibit by reference into the Registration
Statement.
(13) The Shares are duly authorized for quotation on the NASDAQ
SmallCap Market, subject to notice of issuance.
(14) To the knowledge of such counsel, no person or entity has the
right to require registration of shares of Common Stock or
other securities of the Company because of the filing or
effectiveness of the Registration Statement who has not waived
such right.
(15) The Company is not an "investment company" by reason of its
assets and operations as defined in Section 3(a) of the
Investment Company Act.
(16) None of the shares of Common Stock issued by the Company prior
to the date hereof have been offered and sold by the Company
in violation of the Act or applicable Blue Sky or state
securities laws or rules or regulations. All shares of Common
Stock outstanding as of the date hereof have been duly
authorized and validly issued, and are fully paid and
non-assessable, with no personal liability attaching to the
ownership thereof, and have not been issued in violation of
any preemptive rights of stockhold ers.
(17) The statements in the Prospectus under captions "Business",
"Risk Factors", "Use of Proceeds", "Management" and
"Description of Securities" have been reviewed by such counsel
and insofar as such statements refer to descriptions of
agreements, instruments or leases, summarize the status of
litigation or other proceedings, or the provisions of orders,
judgments or decrees, or constitute statements of law,
descriptions of statutes, rules or regulations, or conclusions
of law, such statements
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fairly present the information called for and are accurate and
complete in all material respects.
(18) Except for liabilities and obligations incurred in the
ordinary course of business, to the knowledge of such counsel,
after due inquiry, there are no claims (absolute, accrued,
contingent or otherwise), except as disclosed in the
Prospectus or such as individually or in the aggregate do not
have and are not expected to have a material adverse effect
upon the operations, businesses, property, assets or condition
(financial or otherwise) of the Company.
(19) The Registration Statement has become effective under the Act,
and to the knowledge of such counsel, no Stop Order has been
issued and no proceedings for that purpose have been
instituted or threatened.
(20) The Registration Statement, any Rule 430A Prospectus, and the
Prospectus, and any amendment or supplement thereto (except
for the financial statements and the notes and schedules
related thereto, and other financial information and
statistical data contained therein or omitted therefrom, as to
which such counsel need express no opinion), comply as to form
in all material respects with the applicable requirements of
the Act.
(21) Such counsel has participated in the preparation of the
Registration Statement and the Prospectus and any amendments
or supplements thereto, and in the course thereof participated
in conferences with officers and other representatives of the
Company, representatives of the independent certified public
accountants for the Company and your representatives at which
the contents of the Registration Statement and Prospec tus and
related matters were discussed and, although such counsel is
not passing upon and does not assume any responsibility for
the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus, or any
amendment or supplement thereto, on the basis of the
foregoing, no facts have come to the attention of such counsel
which lead them to believe that either the Registration
Statement or any amendment thereto at the time such
Registration Statement or such amendment became effective or
the Prospectus as of its date or any amendment or supplement
thereto as of its date contained an untrue statement of a
material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading (it being understood that such counsel need
express no comment with respect to the financial statements,
and the notes and schedules related thereto, and other
financial information and statistical data included in the
Registration Statement or Prospectus).
(22) To the knowledge of such counsel, since the effective date of
the Registration Statement, no event has occurred which should
have been set forth in an amendment or supplement to the
Registration Statement or the Prospectus which has not been
set forth in such an amendment or supplement.
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In rendering such opinion, counsel for the Company may rely (i) as to
matters involving the application of laws other than the laws of the United
States, to the extent counsel for the Company deems proper and to the extent
specified in such opinion, upon an opinion or opinions of local counsel (in form
and substance satisfactory to your counsel) acceptable to your counsel, familiar
with the applicable laws, in which case the opinion of counsel for the Company
shall state that the opinion or opinions of such other counsel are satisfactory
in scope, form and substance to counsel for the Company and that reliance
thereon by counsel for the Company is reasonable; (ii) as to matters of fact, to
the extent they deem proper, on certificates of responsible officers of the
Company; and (iii) to the extent they deem proper, upon written statements or
certificates of officers of departments of various jurisdictions having custody
of documents respecting the corporate existence or good standing of the Company,
provided that copies of any such statements or certificates shall be delivered
to your counsel.
27
<PAGE>
(d) You shall have received letters addressed to you and dated the date
hereof and the Closing Date from Singer Lewak Greenbaum & Goldstein
LLP, independent certified public accountants for the Company,
addressed to you, and in form and substance satisfactory to you, to
the effect that:
(1) Such accountants are independent public accountants as
required by the Act and the rules and regulations of the
Commission thereunder and no information need be supplied with
respect to them in answer to Item 13 of Form SB-2.
(2) In their opinion, the financial statements and related notes
of the Company examined by them, at all dates and for all
periods referred to in their report therein, and included in
the Registration Statement and the Prospectus on their
authority as experts comply as to form in all material
respects with the applicable accounting requirements of the
Act and the Rules and Regulations of the Commission
promulgated thereunder.
(3) On the basis of limited procedures not constituting an
audit, including a reading of the latest available unaudited
interim financial statements of the Company and the finan-
cial data and accounting records of the Company, inquiries
of officials of the Com pany and others responsible for
financial and accounting matters, a reading of the minute
books of the Company, including without limitation the
minutes (if any) of meetings or consents in lieu of meetings
of the stockholders and of the Board of Directors (and any
committees thereof) of the Company, and other specified
procedures and inquiries requested by you, if any, nothing
has come to their attention which causes them to believe
that:
(i) except as disclosed in or contemplated by the
Registration Statement and the Prospectus, during the
period from the date of the last audited balance sheet
of the Company included in the Registration Statement
and Prospectus to a specified date not more than five
(5) days prior to the date of such letter, there were
any decreases, as compared with the corresponding
period of the preceding year, in net sales, cost of
goods sold, operating, selling, general and
administrative expenses, earnings from operations, the
total or per share amounts of net earnings, or the
weighted average number of shares outstand ing;
28
<PAGE>
(ii) except as disclosed in or contemplated by the
Registration Statement and the Prospectus, during the
period from the date of the last audited balance sheet
of the Company included in the Registration Statement
and Prospectus to a specified date not more than five
(5) days prior to the date of such letter, there has
been any change in the capital stock or other
securities of the Company or any payment or declaration
of any dividend or other distribution in respect
thereof or in exchange therefor, or any increase in the
long-term debt of the Company or any decrease in the
net current assets or net assets of the Company as
compared with the amounts shown on the last audited
balance sheet of the Company, included in the
Registration Statement and the Prospectus (other than
in the ordinary course of business); and
(iii)On the basis of their examinations referred to in
their report and consent included in the Registration
Statement and Prospectus and the indicated procedures
and inquiries referred to above, nothing has come to
their attention which, in their judgment, would cause
them to believe or indicate that the financial
statements and related notes and schedules of the
Company included in the Registration Statement and
Prospectus do not present fairly the financial position
and results of operations of the Company, as at the
dates and for the periods indicated, in conformity with
generally accepted account ing principles applied on a
consistent basis, and are not in all material respects
a fair presentation of the information purported to be
shown.
(4) In addition to their examination referred to in their report
included in the Registration Statement and the Prospectus and
the inquiries and limited procedures referred to in clause
(ii) of this Section 7(e), they have performed other
procedures, not constituting an audit, with respect to certain
numerical data, percentages, dollar amounts and other
financial information appearing in the Registration Statement
and the Prospectus, which are derived from the general
accounting records of the Company, and have compared certain
of such data and information with the accounting records of
the Company and found them to be in agreement.
(5) Such other matters as you may have reasonably requested.
(f) The representations and warranties of the Company in this Agreement
shall be true and correct with the same effect as if made on
and as of the Closing Date and the Company shall have complied
with all agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Closing Date.
(g) The Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be
stated therein in accordance with the Act and the Rules and Regulations,
and shall in all material respects conform to the requirements thereof, and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto shall contain any untrue statement of a material fact or
omit to state any
29
<PAGE>
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(h) There shall have been, since the respective dates as of which information
is given in the Registration Statement and the Prospectus, no material
adverse change in the business, property, condition (financial or
otherwise), results of operations, capital stock, long-term or short-term
debt or general affairs of the Company, except changes which the
Registration Statement and the Prospectus indicate might occur after the
effective date of the Registration Statement, and the Company shall not
have incurred any material liabilities or entered into any agreements not
in the ordinary course of business, except as disclosed in the Registration
Statement and the Prospectus.
(i) No action, suit or proceeding, at law or in equity, shall be pending or
threatened against the Company which would be required to be set forth in
the Registration Statement, and no proceedings shall be pending or
threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would have a materially adverse
affect on the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company.
(j) The Company shall have furnished to you or caused to be furnished to you at
the Closing Date, certificates of the President and chief financial officer
of the Company in form and substance satisfactory to you, as to the
accuracy of the representations and warranties of the Company herein at and
as of the Closing Date and as to the performance by the Company of all its
obligations hereunder to be performed at or prior to the Closing Date and
the Company shall have furnished to you a certificate of the President and
chief financial officer of the Company satisfactory to you as to the
matters set forth in Sections 7(a) and (b) above.
(k) The NASDR, upon review of the terms of the public offering of the Shares,
shall have indicated that it has no objections to the underwriting
arrangements pertaining to the sale of the Shares and the participation by
you in the sale of the Shares.
(l) Prior to or on the Closing Date, the Company shall have executed and
delivered the Underwriters' Warrant to you.
(m) Prior to or on the Closing Date, the Company shall have delivered to you
executed copies of the Lock-up Letters.
(n) Subsequent to the date hereof, there shall not have occurred any change, or
any development involving a prospective change, in or affecting
particularly the business or financial affairs of the Company which would
materially and adversely affect the market for the Shares.
30
<PAGE>
(o) Subsequent to the date hereof, no executive officer of the Company listed
as such in the Prospectus shall have died, become physically or mentally
disabled, resigned or have been removed or discharged.
(p) The Company shall furnish you with such further certificates and documents
as you or your counsel shall have reasonably requested.
All opinions, certificates, letters and other documents required by
this Section 7 to be delivered to you by the Company will be in compliance
with the provisions hereof only if they are satisfactory in form and substance
to you and your counsel. The Company will furnish you with such conformed copies
of such opinions, certificates, letters and other documents as you shall
reasonably request.
(q) Upon the exercise, in whole or in part, by you of the option to purchase
the Additional Shares, referred to in Section 2 hereof, your obligations to
purchase and pay for the Additional Shares will be subject to the
continuing accuracy of the representations and warranties of the Company
contained herein and in each certificate and document contem plated under
this Agreement to be delivered to you, as of the date hereof and as of each
Optional Closing Date, to the performance by the Company of its obligations
hereunder, and the following additional conditions:
(1) The Registration Statement shall remain effective at the
Optional Closing Date, and no Stop Order shall have been
issued by the Commission and no proceedings for that purpose
shall have been instituted or shall be pending, or to your
knowledge or the knowledge of the Company, shall be
contemplated by the Commission, and any rea sonable request on
the part of the Commission for additional information shall
have been complied with to the satisfaction of Law Offices of
David N. Feldman, your counsel.
(2) You shall have received an opinion, dated the Optional Closing
Date and satisfactory in form and substance to counsel to you,
from Lehman & Eilen, counsel to the Company, which opinion
shall be substantially the same in scope and substance as the
opinion furnished to you on the Closing Date pursuant to
Section 7(c) hereof, except that such opinion, where
appropriate, shall cover the Additional Shares.
31
<PAGE>
(3) You shall have received a letter in form and substance
satisfactory to you from Singer Lewak Greenbaum & Goldstein
LLP, independent certified public accountants for the Company,
dated the Optional Closing Date and addressed to you
confirming the information in their letter referred to in
Section 7(e) hereof and stating that nothing has
come to their attention during the period from the
ending date of their review referred to in said letter to a
date not more than five (5) days prior to the Optional Closing
Date, which would re quire any change in said letter if it
were required to be dated the Optional Closing Date.
(4) You shall have received a certificate of the President and
chief financial officer of the Company, dated the Optional
Closing Date, in form and substance satisfactory to you,
substantially the same in scope and substance as the
certificate furnished to you on the Closing Date pursuant to
Section 7(j) hereof.
32
<PAGE>
8. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective at 9:30 A.M., New York City
time, on the first full business day following the day on which the Registration
Statement becomes effective or at the time of the initial public offering by you
of the Shares, whichever is earlier. The time of the initial public offering
shall mean the time, after the Registration Statement becomes effective, of the
release by you for publication of the first newspaper advertisement which is
subsequently published relating to the Shares or the time, after the
Registration Statement becomes effective, when the Shares are first released by
you for offering by you or dealers by letter or telegram, whichever shall first
occur. You or the Company, may prevent this Agreement from becoming effective
without liability of any party to any other party, except as noted below in this
Section 8, by giving the notice indicated in Section 8(c) before the time this
Agreement becomes effective.
(b) In addition to the right to terminate this Agreement pursuant to
Section 7 hereof by reason of the Company's failure, refusal or inability
to perform all obligations and satisfy all conditions on their part to be
performed or satisfied hereunder prior to the Closing Date or Optional Closing
Date, as the case may be, you shall have the right to terminate this Agreement
at any time prior to the Closing Date or any Optional Closing Date, as the case
may be, by giving notice to the Company, if the Company shall have sustained a
material loss or material adverse interference with its business or properties
from fire, flood, accident, hurricane, earthquake, theft, sabotage, or other
calamity or malicious act, whether or not covered by insurance, or from any
labor dispute or any court or governmental action, order or decree, of such a
character as to have a material adverse effect with the conduct of the business
and operations of the Company; or if there shall have been a general suspension
of, or a general limitation on prices for, trading in securities on the New York
Stock Exchange, the American Stock Exchange or in the over-the-counter market;
or if a banking moratorium has been declared by a state or federal authority; or
if there shall have been an outbreak of major hostilities between the United
States and any foreign power, or any other insurrection, armed conflict or
national calamity, which in your judgment makes it impracticable or inadvisable
to proceed with the offering, sale or delivery of the Firm Shares or the
Additional Shares, as the case may be.
(c) If you elect to prevent this Agreement from becoming effective as
provided in this Section 8, or to terminate this Agreement pursuant to Section 7
or this Section 8, you shall notify the Company promptly by telephone,
telecopier, telex, or telegram, confirmed by letter. If, as so provided in this
Section 8, the Company elects to prevent this Agreement from becoming effective,
the Company shall notify you promptly by telephone, telecopier, telex, or
telegram, confirmed by letter.
33
<PAGE>
(d) Anything in this Agreement to the contrary notwithstanding other
than Section 8(e), if this Agreement shall not become effective by reason of an
election pursuant to this Section 8 or if this Agreement shall terminate or
shall otherwise not be carried out within the time specified herein by reason of
any failure on the part of the Company to perform any covenant or agreement or
satisfy any condition of this Agreement by it to be performed or satisfied, the
sole liability of the Company to you, in addition to the obligations the Company
assumed pursuant to Section 4(g), will be to reimburse you for such
out-of-pocket expenses (including the fees and disbursements of their counsel)
as shall have been incurred by them in connection with this Agreement or the
proposed offer, sale, and delivery of the Shares, and upon demand the Company
agrees to pay promptly the full amount thereof to you.
(e) Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Sections 4(b), 4(g), 6, 10(b) and 10(c) shall not be in any way
affected by such election or termination or failure to carry out the terms of
this Agreement or any part hereof.
9. SUBSTITUTION OF UNDERWRITERS.
If any one or more of the Underwriters shall fail or refuse to purchase
any of the Shares which it or they have agreed to purchase hereunder, and the
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one-tenth of the aggregate number
of Shares, the other Underwriters shall be obligated, severally, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Shares which they
have respectively agreed to purchase pursuant to Section 2 hereof bears to the
aggregate number of Shares which all such non-defaulting Underwriters have so
agreed to purchase or in such other proportions as you may specify, provided
that in no event shall the maximum number of Shares which any Underwriter has
become obligated to purchase pursuant to Section 2 hereof be increased pursuant
to this Section 9 by more than one-ninth of such number of Shares, without the
written consent of such Underwriter. If any Underwriter or Underwriters shall
fail or refuse to purchase any Shares and the aggregate number of Shares which
such defaulting Underwriter or Underwriters agreed but failed or refused to
purchase exceeds one-tenth of the aggregate number of Shares and arrangements
satisfactory to you and the Company for the purchase of such Shares are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company for the
34
<PAGE>
purchase or sale of any Shares under this Agreement. In any such case either you
or the Company shall have the right to postpone the Closing Date, but in no
event for longer than five business days, in order that the required changes, if
any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. Any action taken under this paragraph
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. MISCELLANEOUS: (a) Notices required to be in writing shall be
mailed or delivered (i) to the Company at the Company's office at 1752 Clement
Street, San Francisco, CA 94121, Attention: Hiram Woo, with copies to Hank
Gracin, Esq., Lehman & Eilen, Suite 505, 50 Charles Lindbergh Blvd., Uniondale,
NY 11553 or (ii) to you, at the office of William Scott & Co., L.L.C., 1030
Salem Road, Union, NJ 07083 and Tasin & Company, Inc., 40 Broad Street, New
York, New York, 10004, with a copy to David N. Feldman, Esq., Law Offices of
David N. Feldman, 36 West 44th Street, Suite 1201, New York, NY 10036, and shall
be deemed given when received. Any notice not required to be in writing,
including but not limited to notices under Section 7(a) or 8 hereof, may be made
by telex, telecopier or telephone and shall be deemed given at the time the
telex, or telecopied communication is received or the telephone call is made,
but if so made shall be subsequently confirmed in writing.
(b) The representations, warranties, covenants and agreements of the
Company and the indemnity and contribution agreements, contained in
Sections 4, 5 and 6 of this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of you, the Company or any
of its officers or directors or any controlling persons of you or the Company
and will survive acceptance of and payment for any of the Shares and the
termination of this Agreement.
(c) This Agreement has been and is made solely for the benefit of you
and the Company and the controlling persons, directors and officers
referred to in Section 6 hereof and their respective successors and assigns, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall not
include a purchaser, as such purchaser, of Shares from you.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the
35
<PAGE>
State of New York, applicable to contracts made and to be performed entirely
with such State, without regard to conflict of laws provisions thereof.
Please confirm that the foregoing correctly sets forth the agreement
among the Company and you.
Very truly yours,
GALVESTON'S STEAKHOUSE CORP.
By:________________________________
Hiram J. Woo, President
Confirmed, as of the date first above mentioned.
WILLIAM SCOTT & CO., L.L.C.
as Representative of the several Underwriters
By:___________________________
Joseph S. Glodek
36
<PAGE>
SCHEDULE I
Underwriting Agreement, dated
<TABLE>
<CAPTION>
Underwriter No. of Firm Shares No. of Addtl. Shares
- ----------------------------------- -------------------- ----------------------------
<S> <C> <C>
William Scott & Co., L.L.C.
Tasin & Company, Inc.
Total 1,250,000 shares 187,500 shares
</TABLE>
37
<PAGE>
Galveston's Steakhouse Corp.
151 East Alessandro Boulevard
Riverside, CA 92508
William Scott & Company, L.L.C.
1030 Salem Road
Union, NJ 07083
RE: GALVESTON'S STEAKHOUSE CORP.
COMMON STOCK
Dear Sir or Madam:
The undersigned is the record owner of shares of Common Stock, par value
$.01 per share (the "Common Stock") of Galveston's Steakhouse Corp. (the
"Company"). The undersigned has been advised that the Company intends to effect
a public offering of approximately $8,250,000 of gross proceeds (the "Public
Offering") through William Scott & Company L.L.C., as Representative of the
several Underwriters (the "Underwriters"). The undersigned further understands
that it is a condition of the successful completion of the Public Offering that
the undersigned execute and deliver this Letter Agreement. The undersigned
hereby agrees that until two (2) years after the effective date of the Public
Offering, the undersigned will not, without the prior written consent of the
Underwriters or, if required, The Nasdaq Stock Market, offer, pledge, sell,
contract to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock currently owned by the
undersigned (collectively "Lockup Securities").
The undersigned acknowledges and agrees that the Company will request
that the Company's transfer agent place a stop transfer instruction on all
Lockup Securities of Galveston's Steakhouse Corp.
held by the undersigned, reflecting this agreement.
Dated: ________________________________
---------------------------------------
Signature
---------------------------------------
Print Name and Capacity
Please date, sign exactly as name appears on the records of the Company, and
promptly return. When signing as a guardian, executor, administrator, attorney,
trustee, custodian, or in any other similar capacity, please give full title. If
a corporation, sign in full corporate name by president or other authorized
officer, giving title. If a partnership, sign in partnership name by authorized
person. In the case of joint ownership, each joint owner must sign.
<PAGE>
EXHIBIT 3.6
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
GALVESTON'S STEAKHOUSE CORP.
GALVESTON'S STEAKHOUSE CORP., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
FIRST: That the Restated Certificate of Incorporation of the
Corporation is hereby amended by the addition of a new paragraph to the end of
Article Fourth to read as follows:
"At the effective time of this amendment to the Restated Certificate of
Incorporation, each share of outstanding Common Stock shall be
automatically increased to 1.650 shares of Common Stock (the "Forward
Stock Split"), with the number of shares of Common Stock held by each
shareholder: (i) being rounded up to the next whole number of shares in
any case where the operation of the Forward Stock Split otherwise would
result in the holding of a fractional share"
SECOND: That the foregoing amendment was duly adopted in accordance
with the provisions of Section 228 and 242 of the General Corporation Law of
the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, said GALVESTON'S STEAKHOUSE CORP. has caused
this Certificate to be signed by Richard M. Lee, its Chief Executive Officer,
and attested to by Hiram J. Woo, its Secretary, this 24th day of December, 1997.
GALVESTON'S STEAKHOUSE CORP.
By: /s/ Richard M. Lee
------------------------
Richard M. Lee
Chief Executive Officer
CORPORATE SEAL
ATTEST:
By: /s/ Hiram J. Woo
------------------------
Hiram J. Woo
Secretary
December 31, 1997
Board of Directors
Galveston's Steakhouse Corp.
151 East Alessandro Boulevard
Riverside, CA 92508
RE: REGISTRATION STATEMENT ON FORM SB-2
Gentlemen:
We have acted as counsel to Galveston's Steakhouse Corp., a
Delaware corporation ("Company"), in connection with the preparation and filing
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), of the Company's registration
statement on Form SB-2 (together with all amendments, the "Registration
Statement"). The Registration Statement relates to the registration under the
Act of 1,562,000 shares of the Company's common stock ("Common Stock").
In rendering this opinion, we have reviewed the Registration
Statement, as well as a copy of the Company's Certificate of Incorporation and
Bylaws, each as amended to date. We have also reviewed such documents and such
statutes, rules and judicial precedents as we have deemed necessary for the
opinions expressed herein.
In rendering this opinion, we have assumed the genuineness of
all signatures, the legal capacity of natural persons, the authenticity of
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified or photostatic copies, and the
authenticity of originals of such photostatic copies.
Based upon and in reliance upon the foregoing, and subject to
the qualifications and limitations herein set forth, we are of the opinion that
the shares of Common Stock have been duly and validly authorized and, when sold,
will be legally issued, fully paid and nonassessable.
This opinion is limited to the corporate law of Delaware, and
we express no opinion with respect to the laws of any other jurisdiction.
<PAGE>
We consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement.
This opinion is based upon our knowledge of law and facts as
of its date. We assume no duty to communicate to you with respect to any matter
which comes to our attention hereafter.
Sincerely,
LEHMAN & EILEN
Exhibit 23.1
Consent of Independent Certified Public Accountants
We have issued our report dated January , 1998 accompanying the financial
statements of Galveston's Steakhouse Corp. and our report dated January , 1998
accompanying the financial statements of TLC Restaurant Management Corp.
contained in the Registration Statement and Prospectus. We consent to the use
of the aforementioned reports in the Registration Statement and Prospectus, and
to the use of our name as it appears under the caption "Experts."
/s/ Singer Lewak Greenbaum & Goldstein LLP
Singer Lewak Greenbaum & Goldstein LLP
Los Angeles, California
January 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001017156
<NAME> GALVESTON'S STEAKHOUSE CORP.
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 46,439 221,006
<SECURITIES> 0 0
<RECEIVABLES> 79,235 220,199
<ALLOWANCES> 0 0
<INVENTORY> 30,291 28,252
<CURRENT-ASSETS> 162,390 569,815
<PP&E> 629,610 658,394
<DEPRECIATION> 17,089 62,794
<TOTAL-ASSETS> 1,800,305 2,429,350
<CURRENT-LIABILITIES> 1,695,494 2,731,946
<BONDS> 870,000 870,000
0 0
1,000 1,000
<COMMON> 7,138 8,250
<OTHER-SE> (773,327) (1,181,846)
<TOTAL-LIABILITY-AND-EQUITY> 1,800,305 2,429,350
<SALES> 416,544 1,481,719
<TOTAL-REVENUES> 416,544 1,481,719
<CGS> 153,592 510,988
<TOTAL-COSTS> 542,963 1,356,989
<OTHER-EXPENSES> 408,293 100,440
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 271,373 466,043
<INCOME-PRETAX> (942,552) (705,857)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (942,552) (705,857)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (942,552) (705,857)
<EPS-PRIMARY> (1.19) (0.88)
<EPS-DILUTED> (1.19) (0.88)
</TABLE>
