AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1998
REGISTRATION NO. 333-_____
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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)
- ------------------------------------------------------------------------------
<PAGE>
COPY TO:
HANK GRACIN, ESQ.
LEHMAN & EILEN
SUITE 505
50 CHARLES LINDBERGH BLVD.
UNIONDALE, NY 11553
TELEPHONE: (516) 222-0888
FACSIMILE: (516) 222-0948
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC.
As soon as practicable after the registration statement
becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /x/
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 this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Title of each class of Proposed maximum Proposed maximum Amount
securities to be Amount to be offering price per aggregate offering of
registered registered share (1) (5) price registration
fee
- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock (2) 382,498 sh. $5.438 $ 2,080,024 $ 613.61
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Common Stock (3) 193,837 sh. $5.438 $ 1,054,086 $ 310.96
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Common Stock (4) 91,428 sh. $5.438 $ 497,185 $ 146.67
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Total 667,763 sh. $5.438 $ 3,631,295 $1,071.24
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as amended.
(2) Based upon 150% of the shares issuable upon the conversion of $1,100,000
aggregate principal amount of 6% Convertible Debentures on December 1, 1998 if
all such Debentures were converted on that date at 85% of the Market Price (as
such term is defined in the Debentures) of the Common Stock on the Conversion
Date (or $4.31375). The actual number of shares issuable upon conversion of the
Debentures cannot be predicted at this time, insofar as it will be based, among
other things, on the future market price of the Common Stock. This is not
intended to constitute a prediction as to the number of shares of Common Stock
into which the Debentures will be converted.
<PAGE>
(3) Based upon 150% of the shares issuable upon the exchange of $650,000
principal amount of the Secured Exchangeable Note on December 1, 1998 if the
full principal amount thereof was exchanged on that date at an Exchange Price
per share of 110% of $4.58 (or $5.03) which is the average closing price of the
Common Stock for the five days preceding September 28, 1998. The actual number
of shares issuable upon the exchange of the Secured Exchangeable Note cannot be
predicted at this time, insofar as it will be based, among other things, on the
future market price of the Common Stock. This is not intended to constitute a
prediction as to the number of shares of Common Stock for which the Secured
Exchangeable Note will be exchanged.
(4) Based upon 91,428 shares issuable upon exercise of Warrants to purchase
Common Stock of Registrant.
(5) The closing price of the Common Stock of the Registrant on December 14,
1998 on the NASDAQ SmallCap Market was $5.438 per share.
Pursuant to Rule 416, there are also registered hereby such additional
indeterminate number of shares as may become issuable as dividends or to prevent
dilution resulting from stock splits, stock dividends or similar transactions or
to provide for changes in the number of shares of Common Stock as are issuable
upon conversion of the Debentures and upon the exchange of the Secured Note.
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.
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 DECEMBER __, 1998
<PAGE>
PROSPECTUS
667,763 SHARES
GALVESTON'S STEAKHOUSE CORP.
COMMON STOCK
------------------------
The 667,763 shares of common stock of Galveston's Steakhouse Corp. offered
hereby are offered by the holders of 6% Convertible Debentures of the Company,
the holder of a Secured Exchangeable Note of the Company and the holders of
warrants to purchase shares of the Company's Common Stock. The shares of Common
Stock so offered are issuable upon the conversion of the Debentures, the
exchange of the Secured Note and the exercise of the Warrants. The Common Stock
is currently quoted on the NASDAQ SmallCap Market under the symbol "SIZL." On
December 14, 1998 the closing price on the NASDAQ SmallCap Market of the Common
Stock was $5.438 per share.
This Prospectus relates to an aggregate of 667,763 shares of Common Stock, which
is based on 150% of the shares issuable if $1,100,000 aggregate principal amount
of Debentures had been converted on December 1, 1998 at 85% of the Market Price
(as such term is defined in the Debentures) of the Common Stock on the
conversion date (or $4.31375), 150% of the shares issuable upon the exchange of
the Secured Note if the full $650,000 principal amount thereof was exchanged on
December 1, 1998 at an exchange price of 110% of $4.58 (or $5.03) per share, and
all of the Warrants had been exercised on that date. The exact number of shares
that will be issued on the conversion of the Debentures and/or the exchange of
the Secured Note will depend on the market price of the Common Stock on, or
immediately prior to, the date of the conversion and/or the exchange and is not
now known. All the Common Stock offered hereby is being sold by the Selling
Securityholders and may be offered to the public from time to time by the
Selling Securityholders. The Company will not receive any of the proceeds
received by the Selling Securityholders from the Common Stock sold.
The Company will pay all reasonable expenses of this offering estimated at
$40,000. The Selling Securityholders, however, will bear the cost of all
brokerage commissions and discounts incurred in connection with the sale of
their Common Stock. The Common Stock may be sold by the Selling Securityholders
directly or through underwriters, dealers or agents in market transactions or
privately negotiated transactions.
------------------------
This investment involves a high degree of risk. Carefully consider the risk
factors beginning on page 6 in this Prospectus.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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.
The date of this Prospectus is December __, 1998.
------------------------
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this Prospectus. It is not complete and may not contain all of the information
that is important to you. To understand this offering fully, you should read the
entire Prospectus carefully, including the risk factors and financial
statements.
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 and a subsequent forward
stock split of 1.650-for-1 on December 30, 1997.
GALVESTON'S STEAKHOUSE CORP.
Offices: 151 E. Alessandro Boulevard,
Riverside, California 92508
(Telephone) (909) 789-7606
(Facsimile) (909) 789-7699.
The Company currently owns and operates four (4) steakhouse restaurants
in Southern California, which together formerly comprised all of the restaurants
known as "Texas Loosey's Chili Parlor & Saloon" ("Texas Loosey's").
The Company has converted two of the Texas Loosey's restaurants into
Texas roadhouse style restaurants reminiscent of the late 1950's and early
1960's, with popular rock 'n roll music from that period. Route 66 road signs,
pictures of James Dean, wild beach saw grass and other Texas-style motifs
decorate the restaurant's casual setting. The Company's roadhouse restaurants
offer high quality, reasonably priced, mesquite-grilled steak, fresh fish,
hamburgers, chicken and other specialty items to a diverse clientele. The
Company has also recently purchased two additional restaurants that it
previously managed. The Company believes that the high quality, moderately
priced segment of the restaurant industry presents an opportunity for
significant growth.
On August 31, 1998, the Company entered into an agreement to acquire
Paragon Steakhouse Restaurants, Inc. ("Paragon"), which owns eighty (80) U.S.
based steakhouses and Pacific Basin Foods, a restaurant food distribution
company. Paragon is owned by Kyotaru Co., Ltd. of Japan. The closing of the
transaction is, however, subject to the fulfillment of certain conditions to
closing. The Company anticipates that the Paragon transaction will be
consummated in December, 1998. No assurance can be given as to when the Paragon
transaction will, in fact, be consummated.
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.
This Prospectus may be deemed to contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). The Company desires to avail itself of certain "safe harbor"
provisions of the Reform Act and is therefore including this special note to
enable the Company to do so. 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.
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by Selling Stockholders..... 667,763 shares, based upon 150% of the 254,999 shares
issuable upon the conversion of $1,100,000 aggregate
principal amount of the 6% Convertible Debentures, at 85%
of the Market Price (as such term is defined in the
Debentures) of the Common Stock on November 30, 1998 or
$4.31375, 150% of the 129,225 shares issuable upon exchange
of the Secured Note at an exchange price per share of 110%
of $4.58 (or $5.03) which is the average closing price of the
Common Stock for the five days preceding September 28,
1998, and 91,428 shares issuable upon exercise of the
Warrants.
Common Stock to be offered by the Company......... 0 shares
Common Stock Outstanding Prior to Offering (1).... 2,428,325 shares
Common Stock to be Outstanding Immediately
After Offering.................................... 3,096,088 shares based on all shares offered under this
Prospectus (assuming full conversion of the Debentures, full
exchange of the Secured Note and exercise of all the
Warrants).
Use of Proceeds................................... None of the proceeds of the sale of the Common Stock
registered hereunder will accrue to the Company. See "Use
of Proceeds."
Risk Factors...................................... The Securities offered hereby involve a high degree of
risk. Investors should purchase the securities offered
hereby only if they can afford the loss of their entire
investment.
NASDAQ SmallCap Market Symbol .................... "SIZL"
</TABLE>
- ---------------
(1) Based on shares outstanding as of November 30, 1998. 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 March 2, 1998, the closing date of the Company's initial public offering.
See "Description of Securities."
CURRENT FINANCING
On July 15, 1998, pursuant to a private placement, the Company (a) sold
to two (2) investors $600,000 principal amount of 6% Convertible Debentures (the
"Debentures") and (b) received a commitment from such two (2) investors, subject
to various conditions, to purchase additional Debentures in the aggregate
principal amount of $400,000 (the "Additional Debentures"). On July 23, 1998,
the Company sold an additional $100,000 principal amount of the Debentures to a
third investor, who also received warrants to purchase 6,303 shares of Common
Stock. The investors may convert the Debentures and Additional Debentures into
Common Stock (collectively, the "Debenture Conversion Shares"), and the Company
has the right, under certain circumstances, to require such conversion. In
connection with such private placement, the Company (a) issued warrants to
purchase 2,400 shares of its Common Stock to Joseph Donohue, Jr., (b) issued
warrants to purchase 1,600 shares of its Common Stock to Max Rockwell, (c)
issued warrants to purchase 2,400 shares of its Common Stock to Mark Angelo, (d)
issued warrants to purchase 1,600 shares of its Common Stock to Hunter Singer,
(e) issued warrants to purchase 1,600 shares of its Common Stock to John
Audiferren and (f) issued warrants to purchase 2,400 shares of its Common Stock
to AIBC Investment Services Corp. ("AIBC"). Such warrants are referred to herein
collectively as the Placement Warrants. The shares issuable under the Placement
Warrants, together with the shares issuable under the warrants described below,
are herein referred to as the "Warrant Shares."
<PAGE>
On September 28, 1998, pursuant to a private placement, the Company
sold to one investor a Secured Exchangeable Promissory Note in the principal
amount of $650,000 (the "Secured Note") and issued to such investor warrants to
purchase 73,125 shares of Common Stock. The investor may exchange all or a
portion of the Secured Note for Common Stock (the "Note Exchange Shares"). The
Debenture Conversion Shares, the Note Exchange Shares and the Warrant Shares
constitute the Common Stock being offered and sold by the Selling
Securityholders pursuant to this Prospectus. See "Description of Securities,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources" and "Selling Securityholders and
Plan of Distribution."
<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 period from December 31,
1995 through August 18, 1996 was for the period 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 twelve months ended December 31, 1996 of the Company, which
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:
1996 1996 1997
(Unaudited) (Audited)
-----------------------------------------------------------------------------
INCOME GALVESTON'S 1-1-97 TO 1-1-97 to 1-1-98 TO
STATEMENT TLC 12-31-95 6-3-96 TO PRO FORMA 12-31-97 9-30-97 9-30-98
CAPTION TO 8-18-96 12-31-96 ADJUSTMENTS PRO FORMA (Audited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 1,096,262 $ 416,544 $ -- $ 1,512,806 $ 1,867,671 $ 1,481,719 $ 841,476
Restaurant Costs 1,144,538 547,981 40,585 (1) 1,733,104 2,006,351 1,411,508 1,093,762
----------- --------------- ------------ ------------ ------------ ------------- -----------
(48,276) (131,437) (220,298) (138,680) 70,211
----------- --------------- ------------ ------------ ------------- -----------
Other Income/
(Expenses):
General & (103,271) (136,467) -- (239,738) (350,945) (264,103) (694,990)
Administrative.
Pre-opening & -- (433,694) -- (433,694) (65,155) (63,955) --
Start-up Costs
Other 1,312 30,419 (47,667)(2) (15,936) -- -- --
Operating Loss (150,235) (671,179) (909,666) (554,780) (257,847) (947,276)
Interest & (167,427)(3) (438,800) (523,187) (448,010) (275,140)
Financing Costs (10,459) (271,373)
----------- --------------- ------------ ------------ ------------ ------------- -----------
Net Loss $ (160,694) $ (942,552) $(1,348,466) $(1,077,967) (705,857) $(1,222,416)
Net Loss Per $ (16.07) $ (1.19) $ $ (1.70) $ (1.36) (0.91) $ (0.59)
Common Share
Weighted
average number
of common
shares 10,000 795,000 795,000 790,296 778,600 2,064,714
outstanding
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA 9/30/98 9/30/98
(Actual) (Proforma)
(Unaudited) (4) (Unaudited) (4)
----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Working Capital $ 1,931,145 $ 3,281,145
----------------------------- ----------------------------- -----------------------------
Total Assets 5,016,540 5,016,540
----------------------------- ----------------------------- -----------------------------
Current Portion of Notes 1,439,497 89,497
Payable
----------------------------- ----------------------------- -----------------------------
Notes Payable Net of 795,245 795,245
Current Portion
----------------------------- ----------------------------- -----------------------------
Accumulated Deficit (3,242,935) (3,242,935)
----------------------------- ----------------------------- -----------------------------
Stockholders' Equity Net of 2,634,775 3,984,775
Portion
----------------------------- ----------------------------- -----------------------------
</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 the conversion of the $700,000 principal amount of the
Debentures and the exchange of the $650,000 principal amount of the Secured
Note.
<PAGE>
RISK FACTORS
Investing in the Company's shares is very risky. You should be able to
bear a complete loss of your investment. You should carefully consider the
following factors, among others.
No History Of Earnings And Accumulated Deficit.
The Company has suffered substantial losses since inception. For the nine
months ending September 30, 1998, the Company had a net loss of $1,222,416. As
of September 30, 1998, the Company's accumulated deficit totaled $3,242,935.
There can be no assurance that it will achieve profitable 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. In this regard, the Company has
entered into an agreement to acquire Paragon, which owns eighty (80) U.S. based
steakhouses. There can be no assurance given, however, that the Company will, in
fact, be able to increase the number of restaurants owned and operated by it.
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 will
be adequate to satisfy its capital requirements for at least the next twelve
months. There can be no assurance, however, that the Company's cash requirements
during this period will not exceed its available resources. See "Management's
Discussion and Analysis or Plan of Operation -- Liquidity and Capital
Resources." 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
cash generated from operations is 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.
<PAGE>
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."
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.
<PAGE>
Geographic Concentration In California; Risk Of Earthquakes; Restaurant Base
All of the four (4) existing restaurants owned 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, 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 Texas roadhouse
restaurant 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, 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," "Business -- Expansion Strategy," and "--
Competition."
<PAGE>
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
Texas roadhouse 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."
<PAGE>
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."
Control By Principal Stockholders
The management of the Company beneficially owns 17.3% of the
outstanding shares of Common Stock of the Company and 41.6% 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.
Management therefore has 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."
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."
<PAGE>
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 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."
Effect Of Debenture Conversion, Exchange Of Secured
Note And Exercise Of Warrants
Upon the conversion of the Debentures and the Additional Debentures,
the exchange of the Secured Note and the exercise of the Warrants there will be
not less than 2,903,977 shares of Common Stock outstanding, consisting of
2,428,325 shares currently outstanding and a minimum of 475,652 shares (and
potentially substantially more depending upon the Market Price at the time of
conversion and/or exchange) issuable upon conversion of the Debentures and the
Additional Debentures, exchange of the Secured Note and exercise of the
Warrants, and available for offer by the Selling Securityholders, which shares
will be tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), as long as the
Prospectus covering such sales remains current and effective. No prediction can
be made as to the effect, if any, that future sales of shares of Common Stock,
whether offered by the Selling Securityholders or others, will have on the
market price of the shares of Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock, or the perception that these sales could
occur, could adversely affect prevailing market prices for the Common Stock and
could impair the ability of the Company to raise additional capital through the
sale of its equity securities or through debt financing. See "Market for Common
Equity and Related Stockholder Matters."
<PAGE>
Shares Eligible For Future Sale
Future sales of shares of Common Stock by the Company and its
stockholders could adversely affect the prevailing market price of the Common
Stock. The Company presently has outstanding an aggregate of 2,428,325 shares of
Common Stock. All of the 825,000 shares of Common Stock outstanding immediately
prior to the initial public offering of the Company (the "IPO") 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 IPO
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 for the IPO without the
prior written consent of the underwriters for the IPO (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.) 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 for the IPO without the prior written consent
of the Underwriters of such IPO.
The Company is unable to predict the effect that sales of the shares of
Common Stock outstanding prior to this offering, 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. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
may occur, could have a material adverse effect on the market price of the
Common Stock. Pursuant to its Certificate of Incorporation, the Company has the
authority to issue additional shares of Common Stock and Preferred Stock. The
issuance of such shares could result in the dilution of the voting power of the
Common Stock offered in this offering. See "Description of Securities," "Shares
Eligible for Future Sale," and "Principal Shareholders."
Possible Volatility Of Stock Price
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 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.
<PAGE>
Continued Nasdaq SmallCap Listing
While the Company's Common Stock meets the current NASDAQ SmallCap listing
requirements, 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.
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 this 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. The foregoing required penny stock
restrictions will not apply to the Company's Common Stock if the Common Stock
continues to be 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 continue to 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.
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been trading on the NASDAQ SmallCap
Market under the symbol "SIZL" since February 27, 1998, the date of the
Company's IPO. As of December 14, 1998, the last sale price as reported on
NASDAQ was $5.438 per share.
The following table sets forth the range of high and low closing prices
for the Company's Common Stock for each quarterly period indicated, as reported
by brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
COMMON STOCK
QUARTER ENDED HIGH LOW
September 30, 1998 $5.375 $2.50
June 30, 1998 $6.00 $4.25
March 31, 1998* $5.625 $4.844
*From initial time of trading in March 2, 1998, the closing price was $5.031.
REGISTRATION RIGHTS
In connection with the Company's private placement of $700,000
principal amount of 6% Convertible Debentures on July 15, 1998 and July 23, 1998
the Company is obligated to cause this registration statement to become
effective by November 12, 1998 and to keep the registration statement effective
for two years or until the Debentureholders may sell all registerable securities
under Rule 144 or until the Debentureholders no longer own any registerable
securities, whichever occurs first. The Company will bear the reasonable
expenses of the registration and qualification of the shares under the
Securities Act and state securities laws other than underwriting discounts and
commissions.
If the Registration Statement is not effective by November 12, 1998
(the "Required Effective Date"), then the Company must make payments to the
Debentureholders in such amounts and at such times as determined pursuant to
Section 2(b) of the Registration Rights Agreement, which states that the amount
to be paid by the Company to the Selling Securityholder shall be determined as
of each Computation Date, and such amount shall be equal to two percent (2%) of
the purchase price paid by the Selling Securityholder for the Debenture for the
period from the Required Effective Date to the date the Registration Statement
is declared effective by the SEC, except to the extent any delay in the
effectiveness of the Registration Statement occurs because of an act of, or a
failure to act or to act timely, by the Selling Securityholder or its counsel.
"Computation Date" means the date which is the earlier of (a) five days after
the Company is notified by the SEC that the Registration Statement may be
declared effective or (b) November 12, 1998, and, if the Registration Statement
has not theretofore been declared effective by the SEC, each date which is
thirty (30) days after the previous Computation Date until such Registration
Statement is so declared effective. Thus, if the registration statement is not
effective by November 12, 1998, and such delay is not related to an act, or a
failure to act or to act timely, by the Debentureholders or their counsel, then
for the period from November 13, 1998 to December 12, 1998, the Company must pay
to the Selling Securityholder a penalty of $12,000. If the registration
statement still is not effective on December 12, 1998, and such delay is not
related to an act, or a failure to act or to act timely, by the Debentureholders
or their counsel, then for the period from December 13, 1998 to January 12,
1999, the Company must pay to the Selling Securityholder an additional penalty
of $12,000, and so on.
In respect of the Company's private placement of the Secured Note, the
Company is required to include the shares issuable upon conversion of said
Secured Note in this Registration Statement, together with the 73,125 shares
issuable upon the exercise of the warrants issued in connection therewith. In
the event the effectiveness of such registration statement is suspended for more
than ten (10) days, the Company must pay a penalty equal to $13,000 for each
30-day period following the initial ten (10) days of suspension until
effectiveness.
<PAGE>
USE OF PROCEEDS FROM SALE OF DEBENTURES AND SECURED NOTE
None of the proceeds from the sale of the Common Stock registered
hereunder will accrue to the Company.
Through private placement, the Company has obtained $700,000 of
financing in the form of 6% Convertible Debentures and $650,000 in the form of
the Secured Note. The holders of these Debentures, who are also Selling
Securityholders, have agreed to purchase up to an additional $400,000 aggregate
principal amount of Debentures (the "Additional Debentures") upon the closing of
the Company's proposed acquisition of Paragon Steakhouse Restaurants, Inc.
("Paragon"). See "Business-Expansion".
The Company intends to apply the net proceeds of the Debentures and the
Secured Note for working capital purposes.
SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION
The Selling Securityholders whose Debenture Conversion Shares are being
registered hereby are JMG Capital Partners, L.P. ("JMG"), Triton Capital
Investments Limited ("Triton") and Barry Lebin ("Lebin").
As of the date of this Prospectus, each of JMG and Triton owned
$300,000 principal amount of 6% Convertible Debentures and each has committed to
purchase up to an additional $200,000 of Debentures. As of the date of this
Prospectus, Lebin owned $100,000 principal amount of 6% Convertible Debentures.
Upon conversion of the outstanding Debentures, each of JMG, Triton and Lebin
will acquire shares of Common Stock on the basis set forth in the following
paragraph, provided however, that neither JMG, Triton nor Lebin can ever own
more than 4.99% of the outstanding shares of Common Stock.
The Company has agreed to register the public offering of JMG's,
Triton's and Lebin's shares of Common Stock (including the shares of Common
Stock issuable to JMG and Triton upon conversion of the Additional Debentures)
under the Securities Act and to pay all expenses in connection therewith other
than brokerage commissions and discounts in connection with the sale of the
Debenture Conversion Shares. The aggregate number of Debenture Conversion Shares
that may be offered and sold pursuant to this Prospectus by JMG, Triton and
Lebin will be determined by how many shares are issued upon conversion of the
Debentures and the Additional Debentures, which will be determined by the
conversion price applicable to the Debenture Conversion Shares. See "Description
of Securities." The conversion price for a Debenture Conversion Share will be
85% of the Market Price (as such term is defined in the Debentures) on the
Conversion Date. Assuming that the Market Price on the Conversion Date is $5.075
(which is the Market Price calculated as of December 1, 1998) with respect to
all the Debentures and the Additional Debentures, and that all the Debentures
and the Additional Debentures are converted at 85% of the Market Price, the
aggregate number of Debenture Conversion Shares issued would be 254,999
(excluding any Debenture Conversion Shares issued with respect to accrued
interest on the Debentures at the time of conversion), and if all the Debenture
Conversion Shares are sold, neither JMG, Triton nor Lebin would have any
beneficial interest in the Common Stock of the Company, assuming neither JMG,
Triton nor Lebin acquired a beneficial interest in the Common Stock of the
Company otherwise than through the conversion of the Debentures and the
Additional Debentures.
The Selling Securityholder whose Note Exchange Shares and 73,125
Warrant Shares are being registered hereby is Talisman Capital Opportunity Fund
Ltd. ("Talisman"). As of the date of this Prospectus, Talisman owns the Secured
Note in the principal amount of $650,000. Upon the exchange of the Secured Note,
Talisman will acquire shares of Common Stock on the basis set forth in the
following paragraph.
<PAGE>
The Company has agreed to register the public offering of Talisman's shares
of Common Stock under the Securities Act and to pay all expenses in connection
therewith other than brokerage commissions and discounts in connection with the
sale of the Note Exchange Shares. The aggregate number of Note Exchange Shares
that may be offered and sold pursuant to this Prospectus by Talisman will be
determined by how many shares are issued upon exchange of the Secured Note,
which will be determined by the exchange price applicable to the Secured Note.
See "Description of Securities." The exchange price for a Note Exchange Share
will be 110% of the Closing Bid Price (as such term is defined in the Secured
Note). On and after December 28, 1998 the Exchange Price shall be the lesser of
(i) $4.6475; or (ii) the average of the four low trades in the primary market
for trading in the Common Stock over the 22 trading days immediately preceding
the Exchange Date, reduced by the Exchange Discount (as defined below) in effect
during that particular calendar month. The Exchange Discount shall be as
follows:
Days from September 28, 1998 Discount
---------------------------- --------
91-180 15.0%
181-270 20.0%
271-maturity 25.0%
Assuming that the Closing Bid Price is $4.58 (which is average of the
closing bid prices of the Common Stock for the five (5) trading days immediately
preceding September 28, 1998 (the "Closing Date")), the aggregate number of Note
Exchange Shares issued would be 129,225, and if all the Note Exchange Shares are
sold, Talisman would have no beneficial interest in the Common Stock of the
Company, assuming Talisman did not acquire a beneficial interest in the Common
Stock of the Company otherwise than through the exchange of the Secured Note
including, without limitation, through the exercise of its warrants.
This Prospectus also relates to the resale of 73,125 Warrant Shares by
Talisman, 6,303 Warrant Shares by Barry Lebin, 2,400 Warrant Shares by Joseph
Donohue, Jr., 1,600 Warrant Shares by Max Rockwell, 2400 Warrant Shares by Mark
Angelo, 1,600 Warrant Shares by Hunter Singer, 1,600 Warrant Shares by John
Audiferren and 2,400 Warrant Shares by AIBC Investment Services Corp., an NASD
member firm, which may be acquired upon the exercise of the Warrants
respectively held by them. AIBC Investment Services Corp. has no affiliation
with the Company, or its officers, directors, or principal shareholders.
The following table sets forth the names of the Selling Securityholders,
the number of shares of Common Stock owned beneficially by each of the Selling
Securityholders as of December 1, 1998, and the number of shares which may be
offered for resale pursuant to this Prospectus. For the purpose of calculating
the number of shares of Common Stock beneficially owned by JMG, Triton and
Lebin, the number of shares of Common Stock calculated to be issuable in
connection with the conversion of the 6% Convertible Debentures is based on a
conversion price that is derived from the average closing market price of the
Common Stock on the five trading days preceding December 1, 1998 (which was
$5.075). The calculation of the total number of shares of Common Stock to be
offered by the holders of such Convertible Debentures, however, is an estimate
based upon a hypothetical 150% of the shares of Common Stock issuable upon
conversion of $1,100,000 aggregate principal amount of 6% Convertible Debentures
at 85% of the average closing market price of the Common Stock for the five
trading days preceding December 1, 1998 (or $4.31375). For the purpose of
calculating the number of shares of Common Stock beneficially owned by Talisman,
the number of shares of Common Stock calculated to be issuable in connection
with the exchange of the Secured Note is based on a conversion price that is
derived from the average closing market price of the Common Stock on the five
trading days preceding September 28, 1998 (which was $4.58). The calculation of
the total number of shares of Common Stock offered by such holder, however, is
an estimate based upon a hypothetical 150% of the shares of Common Stock
issuable upon the exchange of the Secured Note at 110% of the average closing
market price of the Common Stock on the five trading days preceding September
28, 1998 (or $5.03). The actual number of shares issuable upon conversion of the
Debentures and the exchange of the Secured Note cannot be predicted at this time
insofar as it will be based, among other things, on the future market price of
the Common Stock. The use of such hypothetical number of shares of Common Stock
is not intended to constitute a prediction as to the number of shares of Common
Stock into which the Debentures will be converted or for which the Secured Note
will be exchanged. The information included below is based upon information
provided by the Selling Securityholders. Because the Selling Securityholders may
offer all, some or none of their Common Stock, no definitive estimate as to the
number of shares thereof that will be held by the Selling Securityholders after
such offering can be provided and the following table has been prepared on the
assumption that all shares of Common Stock offered under this Prospectus will be
sold.
<PAGE>
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO SHARES OF COMMON OWNED AFTER OFFERING
OFFERING (1)(2) STOCK BEING OFFERED (3)
NAME PERCENT (4)
------ ---------------- ------------------- --------------------- ----------
<S> <C> <C> <C> <C>
JMG Capital 0 173,863 0 0%
Partners, L.P. (5)
Triton Capital
Investments Limited (5) 0 173,863 0 0%
Barry Lebin (6) 0 41,076 0 0%
Talisman Capital
Opportunity Fund Ltd . (7) 266,963 266,963 0 0%
AIBC Investment 0%
Services Corp. (8) 2,400 2,400 0
Joseph Donohue, Jr. (9) 2,400 2,400 0 0%
Max Rockwell (10) 1,600 1,600 0 0%
Mark Angelo (11) 2,400 2,400 0 0%
Hunter Singer (12) 1,600 1,600 0 0%
John Audiferren (13) 1,600 1,600 0 0%
</TABLE>
(1) Each of the parties listed has sole voting and investment power with respect
to all shares of Common Stock indicated.
(2) As required by regulations of the Securities and Exchange Commission, the
number of shares shown as beneficially owned includes shares which can be
purchased within 60 days after December 1, 1998. The ownership of the shares of
Common Stock deemed to be held by JMG Capital Partners, L.P., Triton Capital
Investments Limited and Barry Lebin, due to their ownership of $700,000
aggregate principal amount of the Debentures is not reflected due to their
contractual obligations to the Company pursuant to which they are not entitled
to convert any Debentures to the extent that after such conversion the number of
shares of Common Stock beneficially owned by them and their respective
affiliates exceeds 4.99% of the outstanding Common Stock. The actual number of
shares shown as beneficially owned is subject to adjustment and could be
materially less or more than the estimated amount indicated depending upon
factors which cannot be predicted by the Company at this time, including, among
others, the market price of the Common Stock prevailing at the actual date of
conversion of the Debentures and the actual date of exchange of the Secured
Note.
(3) Assumes the sale of all shares offered hereby.
(4) Based upon 2,428,325 shares outstanding.
(5) The listed Selling Securityholder holds $300,000 principal amount of
Debentures. The Selling Securityholder has also committed to acquire up to an
additional $200,000 principal amount of Debentures. The Debentures are
convertible into Common Stock at a conversion price per share equal to 85% of
the Market Price of the Common Stock on the Conversion Date. The number of
shares shown as being offered in the table is based on a hypothetical 150% of
the shares of Common Stock issuable upon conversion of $500,000 of Debentures at
85% of the average of the closing market prices of the Common Stock on the five
trading days preceding December 1, 1998 (or $4.31375). Notwithstanding the
foregoing, the Selling Securityholder can convert Debentures into Common Stock
only to the extent the number of shares issued thereby, combined with the number
of Shares already held by it and its affiliates, would not exceed 4.99% of the
outstanding Common Stock.
(6) The listed Selling Securityholder holds outstanding Warrants to purchase
6,303 shares of Common Stock at an exercise price of $5.00 per share and
$100,000 principal amount of Debentures. The Debentures are convertible into
Common Stock at a conversion price per share equal to 85% of the Market Price of
the Common Stock on the Conversion Date. The number of shares shown as being
offered in the table is based on a hypothetical 150% of the shares of Common
Stock issuable upon conversion of $100,000 of Debentures at 85% of the average
of the closing market prices of the Common Stock on the five trading days
preceding December 1, 1998 (or $4.31375). Notwithstanding the foregoing, the
Selling Securityholder can convert Debentures into Common Stock only to the
extent the number of shares issued thereby, combined with the number of Shares
already held by him and his affiliates, would not exceed 4.99% of the
outstanding Common Stock.
<PAGE>
(7) The listed Selling Securityholder holds outstanding Warrants to purchase
73,125 shares of Common Stock at an exercise price of $5.28125 per share and
$650,000 aggregate principal amount of the Secured Note. The Secured Note is
exchangeable for Common Stock at an exchange price per share equal to 110% of
the average closing price for the Common Stock for the five trading days
preceding September 28, 1998 (or $5.03). The number of shares shown as being
offered in the table is based on a hypothetical 150% of the shares of Common
Stock issuable upon exchange of the Secured Note at an exchange price per share
equal to 110% of the average closing price for the Common Stock for the five
trading days preceding September 28, 1998.
(8) The listed Selling Securityholder holds Warrants to purchase 2,400
shares of Common Stock at $5.00 per share.
(9) The listed Selling Securityholder holds Warrants to purchase 2,400
shares of Common Stock at $5.00 per share.
(10) The listed Selling Securityholder holds Warrants to purchase 1,600
shares of Common Stock at $5.00 per share.
(11) The listed Selling Securityholder holds Warrants to purchase 2,400
shares of Common Stock at $5.00 per share.
(12) The listed Selling Securityholder holds Warrants to purchase 1,600
shares of Common Stock at $5.00 per share.
(13) The listed Selling Securityholder holds Warrants to purchase 1,600
shares of Common Stock at $5.00 per share.
The Selling Securityholders' Shares may be offered and sold from time
to time as market conditions permit, provided that a registration statement
covering such Shares is effective at the time of such offer and/or sale. Under
Section 10(a)(3) of the Securities Act of 1933, as amended, when a prospectus is
used more than nine months after the effective date of the registration
statement, the information contained therein must be as of a date not more than
16 months prior to such use.
The Selling Securityholders' Shares may be offered and sold in the
NASDAQ SmallCap market, or otherwise, at prices and terms then prevailing or at
prices related to the then-current market price, or in negotiated transactions.
The Selling Securityholders' Shares may be sold by one or more of the following
methods, without limitation: (i) a block trade in which a broker or dealer so
engaged will attempt to sell the share as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (ii) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
accounts pursuant to this Prospectus; (iii) ordinary brokerage transactions and
transactions in which the broker solicits purchases; and (iv) transactions
between sellers and purchasers without a broker or dealer. In effecting sales,
brokers or dealers engaged by the Selling Securityholders may arrange for other
brokers or dealers to participate. Such brokers or dealers may receive
commissions or discounts from Selling Securityholders in amounts to be
negotiated. Such brokers and dealers and any other participating brokers and
dealers may be deemed to be "underwriters" within the meaning of the Securities
Act, in connection with such sales.
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company
at September 30, 1998, as adjusted for 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, 1998 September 30, 1998
Actual proforma
-------------------------------------------
(UNAUDITED) (UNAUDITED)
- ---------------------------------------------------------------------------
<S> <C> <C>
Debt $ 2,234,742 $ 884,742
- --------------------------------------- -----------------------------
Preferred Stock, $.001 par value,
5,000,000 shares authorized; 1,000 1,000
Series B Convertible Preferred Stock,
1,000,000 shares issued and
outstanding (actual and as adjusted)
- --------------------------------------- -----------------------------
Common Stock, $.01 par value,
10,000,000 shares authorized, 24,283 29,570
2,428,325 shares and 2,956,998
shares, respectively, issued and
outstanding.
- --------------------------------------- ------------------------------
Paid-in capital 5,852,427 7,197,140
- --------------------------------------- ------------------------------
Accumulated deficit (3,242,935) (3,242,935)
- --------------------------------------- ------------------------------
Total Stockholders' equity (deficit) 2,634,775 3,984,775
- --------------------------------------- -------------------------------
Total Capitalization 4,869,517 4,869,517
- --------------------------------------- -------------------------------
</TABLE>
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.
<PAGE>
OVERVIEW
The Company currently owns four (4) steakhouse restaurants in Southern
California, which together formerly comprised all of the restaurants known as
"Texas Loosey's Chili Parlor & Saloon."
The Company has converted two of the Texas Loosey's restaurants into
Texas roadhouse style restaurants reminiscent of the late 1950's and early
1960's, with popular rock 'n roll music from that period. Route 66 road signs,
pictures of James Dean, wild beach saw grass and other Texas-style motifs
decorate the restaurant's casual setting. The Company's roadhouse restaurants
offer high quality, reasonably priced, mesquite-grilled steak, fresh fish,
hamburgers, chicken and other specialty items to a diverse clientele. The
Company believes that the high quality, moderately priced segment of the
restaurant industry presents an opportunity for significant growth.
On August 31, 1998, the Company entered into an agreement to acquire
Paragon Steakhouse Restaurants, Inc. ("Paragon"), which owns eighty (80) U.S.
based steakhouses and Pacific Basin Foods, a restaurant food distribution
company. Paragon is owned by Kyotaru Co., Ltd. of Japan. The closing of the
transaction is, however, subject to the fulfillment of certain conditions to
closing. The Company anticipates that the Paragon transaction will be
consummated in December, 1998. No assurance can be given as to when the
Paragon transaction will, in fact, be consummated.
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 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, for the fiscal
year ended December 31, 1997 and for the nine months ended September 30, 1998.
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 roadhouse 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.
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS DATA (ON A PERCENTAGE BASIS):
1996
- ---------------------------------------------------------------------------------------------
GALVESTON'S GALVESTON'S
TLC 12/31/95 TLC 12/31/95 6/3/96 TO 6/3/96 TO
TO 8/18/96 8/18/96 12/31/96 12/31/96
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $1,096,262 100.0% $ 416,544 100.0%
- ---------------------------------------------------------------------------------------------
Restaurant Costs 1,144,538 104.4% $ 547,981 131.5%
---------- ------ ---------- ------
(48,276) (4.4%) (131,437) (31.5%)
- ---------------------------------------------------------------------------------------------
Other Income (Expenses):
General and Administrative (103,271) (9.4%) (136,467) (32.8%)
- ---------------------------------------------------------------------------------------------
Pre-Opening & Start-Up Costs -- -- (433,694) (104.1%)
- ---------------------------------------------------------------------------------------------
Other 1,312 0.1% 30,419 7.3%
- ---------------------------------------------------------------------------------------------
Operating Loss (150,235) (13.7%) (671,179) (161.1%)
- ---------------------------------------------------------------------------------------------
Interest & Financing Costs (10,459) (1.0%) (271,373) (65.1%)
- ---------------------------------------------------------------------------------------------
Net Loss $ (160,694) (14.7%) $ (942,552) (226.2%)
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS DATA (ON A PERCENTAGE BASIS) (continued):
1997 1998
(Audited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
GALVESTON'S GALVESTON'S GALVESTON'S GALVESTON'S GALVESTON'S GALVESTON'S
1/1/97 TO 1/1/97 TO 1/1/97 TO 1/1/97 TO 1/1/98 TO 1/1/98 TO
12/31/97 12/31/97 9/30/97 9/30/97 9/30/98 9/30/98
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,867,671 100.0% 1,481,719 100.0% $ 841,476 100.0%
- --------------------------------------------------------------------------------------------------------------------------------
Restaurant Costs 2,006,351 107.4% 1,411,508 95.3% 1,093,762 130.0%
----------- ------ --------- ------ ----------- ------
(138,680) (7.4%) 70,211 4.7% (252,286) (30.0%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Income (Expenses):
General and Administrative (350,945) (18.8%) (264,103) (17.8%) (694,990) (82.6%)
- --------------------------------------------------------------------------------------------------------------------------------
Pre-Opening & Start-Up Costs (65,155) (3.5%) (63,955) (4.3%) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Other -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Operating Loss (554,780) (29.7%) (257,847) (17.4%) (947,276) (112.6%)
- --------------------------------------------------------------------------------------------------------------------------------
Interest & Financing Costs (523,187) (28.0%) (448,010) (30.2%) (275,140) (32.7%)
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss $(1,077,967) (57.7%) (705,857) (47.6%) $(1,222,416) (145.3%)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR ENDED DECEMBER 30, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
<PAGE>
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 for these restaurants for the fiscal
period beginning on January 1, 1997 and ending on December 31, 1997 were
$1,867,671. Gross revenues increased by $354,865 or 23.5% from 1996 during
which gross revenues were $1,512,806. The Company believes that it has made
significant progress during 1997 in rebuilding the revenue base of the
restaurants it acquired from Texas Loosey's.
RESTAURANT COSTS.
The percentage of operating expenses to revenue in 1997 decreased from
1996 to 107.4% from 114.6%. The Company believes that the operating expenses
decreased as a percentage of revenue due to a small decrease in food costs and
better management of its workforce.
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 28.6% of gross
revenues for the year ended 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. These costs for 1997 were only
$65,155 or 3.5% of gross revenues.
The Company believes that the general and administrative expenses for
the year ended December 31, 1997 are unique to the previous owner of the
restaurants. Specifically, the general and administrative expenses for 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
less than what the Company has and expects to 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 fiscal period beginning
on January 1, 1997 and ending on December 31, 1997 were $350,945. 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 year ended December 31, 1997
increased $84,387 or 19.2% over the previous year principally due to
additional debt incurred prior to the Company's initial public offering.
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Restaurant revenues for the nine months ended September 30, 1998 decreased
$640,243 or 43.2% from $1,481,719 for the nine months ended September 30, 1997
to $841,476 for the same period in 1998. The 43.2% decrease was attributable
to the closing of the Torrance restaurant for remodeling and the partial
remodeling of the Fullerton restaurant. Also, the adverse weather (El Nino) has
affected the restaurant industry's sales as a whole in California.
Food and beverage costs for the nine months ended September 30, 1998 decreased
$241,330 or 47.2% from $510,983 for the nine months ended September 30, 1997
to $269,653 for the same period in 1998. Food and beverage costs as a percentage
of restaurant revenues was 34.5% for the nine months ended September 30, 1997
compared to 32.1% for the same period in 1998. This decrease resulted from
slight declines in the cost of meat and produce.
Payroll and payroll related costs for the nine months decreased $143,621 or
29.2% from $491,661 for the nine months ended September 30, 1997 to $348,040
for the same period in 1998. Payroll and payroll related costs as a
percentage of restaurant revenues were 33.2% for the nine months ended September
30, 1997 compared to 41.4% for the same period in 1998. The increase in these
costs was the result of ongoing payroll and payroll related costs incurred while
restaurant revenues declined during the remodeling.
Restaurant operating expenses include all other unit-level operating costs, the
major components of which are operating supplies, repairs and maintenance,
advertising expenses, utilities, and other occupancy costs. A substantial
portion of these expenses is fixed or indirectly variable. Restaurant operating
expenses for the nine months ended September 30, 1998 increased $57,688 or
18.7% from $308,640 for the nine months ended September 30, 1997 to $366,328 for
the same period in 1998. These costs as a percentage of restaurant revenues were
20.8% for the nine months ended September 30, 1997 compared to 43.5% for the
same period in 1998. The increase in these costs is attributable primarily to
ongoing fixed operating costs continuing to be incurred while the two
restaurant units were being remodeled.
Depreciation and amortization for the nine months ended September 30, 1998
increased $9,517 or 9.5% from $100,224 for the nine months ended September 30,
1997 to $109,741 for the same period in 1998. The increase in depreciation
and amortization is due to the addition of equipment and leasehold improvements
that must be depreciated and amortized over their useful lives.
General and administrative expenses for the nine months ended September 30, 1998
increased $430,887 or 163.2% from $264,103 for the nine months ended
September 30, 1997 to $694,990 for the same period in 1998. General and
administrative expenses as a percentage of restaurant revenues was 17.8% for the
nine months ended September 30, 1997 compared to 82.6% for the same period in
1998. This increase resulted from the decline in restaurant revenues while
the remodeling of the two restaurants was undertaken, the increased costs of
pursuing potential acquisitions, higher legal and accounting costs, and
increased compensation to management officers who were not compensated prior
to the completion of the initial public offering.
Pre-opening startup costs for the nine months ended September 30, 1998 decreased
$63,955 or 100% from $63,955 for the nine months ended September 30, 1997 to $0
for the same period in 1998. The Company incurred certain start up costs to open
certain restaurants in the third quarter of 1997. No such costs were incurred in
1998.
As a result of the above factors, loss from operations for the nine months ended
September 30, 1998 increased by $689,429 or 267.4% from $257,847 for the nine
months ended September 30, 1997 to $947,276 for the same period in 1998.
Net interest expense for the nine months ended September 30, 1998 decreased
$190,904 or 41.0% from $466,044 for the nine months ended September 30, 1997
to $275,140 for the same period in 1998. The decrease in net interest expense
was the result of using the proceeds from the initial public offering to pay off
short-term borrowings.
Net loss for the nine months ended September 30, 1998 increased $516,559 or
73.2% from $705,857 for the nine months ended September 30, 1997 to
$1,221,416 for the same period in 1998. Loss per share decreased to $0.59 for
the nine months ended September 30, 1998 as compared to a loss per share of
$0.91 for the same period in 1997. The decrease in loss per share is due to
the increase in the weighted average number of shares outstanding as a result
of the initial public offering.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As a result of the completion of the initial public offering in February 1998,
and the issuance of debt in July and September, 1998, the Company has a cash
and cash equivalents balance of $744,994 at September 30, 1998, which together
with anticipated cash from operations, management believes is sufficient to
cover operations for at least the next eighteen months. If existing cash and
cash equivalents and anticipated cash from operations is insufficient to
satisfy the Company's working capital and capital expenditures requirements, the
Company may have to sell additional equity or debt securities or obtain credit
facilities.
The Company expects to complete the remodeling of two restaurants by the end of
the fourth quarter of 1999 and does not expect to incur significant capital
expenditures in the near future.
During the last nine months the Company has paid deposits and other related fees
of approximately $1.9 million in connection with the planned acquisition of
Paragon Steakhouse Restaurant, Inc.
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 (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.
<PAGE>
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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement is not
applicable to the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities and is
effective for fiscal years beginning after June 15, 1999. Management believes
that SFAS No. 133 will not have an effect on the Company's financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Hold for Sale by a Mortgage Banking Enterprise." This statement is not
applicable to the Company.
YEAR 2000
The Company has not made a formal assessment of Year 2000 issues. Generally,
"Year 2000 issues" refers to problems that may arise due to the inability of
some computer software to distinguish between the early part of the present
century and the early part of the next because the software only uses two digits
to identify the year. Thus, 2001 would be indistinguishable from 1901. The
Company believes that there are three possible ways that it could be impacted
by this problem.
First, the Company's internal software could fail. If the Company's software
should fail it might disrupt accounting, the restaurant management system and
similar tasks. The Company believes that even if its software should fail,
remediation would not create a material expense. The second concern posed by
Year 2000 issues is the impact that such software failure would have on the
Company's suppliers. The Company is also contacting critical suppliers of
products and services to determine the extent to which the Company may be
vulnerable to such parties' failure to resolve their own Year 2000 issues.
Where practicable, the Company will assess and attempt to mitigate its risks
with respect to the failure of these entities to be Year 2000 compliant. The
effect, if any, on the Company's results of operations from the failure of such
parties to be Year 2000 compliant is not reasonably estimable. The third
possible threat posed to the Company by Year 2000 issues is one of a general
downturn in the economy due to software failures. The Company believes that this
is a remote possibility.
Although the Company believes that it will not suffer any material adverse
effects as a result of Year 2000 issues, it cannot be certain its judgement
regarding Year 2000 is correct. In the event that the Company, or its suppliers
experience a Year 2000 software failure such a failure could have a material
adverse impact on the Company's business financial condition and results of
operations. Similarly, if the economy as a whole should be adversely impacted by
Year 2000 problems, it could have a material adverse effect on the Company's
business financial condition and results of operations.
<PAGE>
BUSINESS
BACKGROUND
The Company currently owns four (4) steakhouse restaurants which
together formerly comprised all of the restaurants known as "Texas Loosey's
Chili Parlor & Saloon."
The Company has converted two of the Texas Loosey's restaurants into
Texas roadhouse style restaurants reminiscent of the late 1950's and early
1960's, with popular rock 'n roll music from that period. Route 66 road signs,
pictures of James Dean, wild beach saw grass and other Texas-style motifs
decorate the restaurant's casual setting. The Company's roadhouse restaurants
offer high quality, reasonably priced, mesquite- grilled steak, fresh fish,
hamburgers, chicken and other specialty items to a diverse clientele. 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 sight-seeing. The
Company intends to focus on a Texas roadhouse 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 Texas themes and other memorabilia, all of which is intended to
help establish a distinct identity for the restaurants. The Company's
restaurants 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.
<PAGE>
EXPANSION
The Company plans to remodel the three (3) Texas Loosey's restaurants
that have not yet been remodeled to reflect the Company's Texas roadhouse
concept. The Company expects that future acquired restaurants will also reflect
the new Texas roadhouse identity.
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.
On August 31, 1998, the Company entered into an agreement to acquire
Paragon Steakhouse Restaurants, Inc. ("Paragon"), which owns eighty (80) U.S.
based steakhouses and Pacific Basin Foods, a restaurant food distribution
company. Paragon is owned by Kyotaru Co., Ltd. of Japan. The closing of the
transaction is, however, subject to the fulfillment of certain conditions to
closing. The Company anticipates that the Paragon transaction will be
consummated in December, 1998. No assurance can be given as to when the
Paragon transaction will, in fact, be consummated.
MENU
The Company's steakhouse 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 ______________ percent
(_____%) of the first two (2) acquired Texas Loosey's restaurants' net sales
during 1997.
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 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, fixtures, 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 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 steakhouses will, on average, be of similar size.
<PAGE>
MARKETING
The Company believes that its roadhouse restaurants 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 Texas 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.
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-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.
<PAGE>
The management team for a typical steakhouse 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 the Company's roadhouse restaurants 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 the Company'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."
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."
<PAGE>
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 regulations relating to restaurant accommodations for the disabled.
The Company does not anticipate that such compliance will require the Company to
expend substantial funds.
<PAGE>
EMPLOYEES
At September 30, 1998, the Company employed approximately ___
individuals, of which ___ occupy executive or managerial positions,
approximately ___ 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 Riverside facility consists of 5,500 square feet
at a rent of $7,069 per month, and 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.
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The current directors, executive officers and key personnel of the
Company are as follows:
NAME AGE POSITION
---- --- --------
Mr. Richard M. Lee...... 32 Chairman of the Board and Chief Executive Officer
Mr. Hiram J. Woo........ 63 President, Chief Financial Officer, Director
Tom Edler............... -- Director
Mark W. Goudge.......... 38 Director
Mr. Michael R. Dunmire.. 32 Senior Operations Office
Ms. Rebecca L. Rotman... 27 Senior Training Officer
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 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.
<PAGE>
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 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.
MR. TOM EDLER has been a director of the Company since May, 1998. Mr.
Edler is a real estate broker in the Sacramento office of Grubb & Ellis Company,
specializing in the acquisition, disposition, development and leasing of
restaurant and hotel properties throughout California. Prior to joining Grubb &
Ellis, Mr. Edler was President of Edler & Associates/Pacific Leisure Properties,
a restaurant/hospitality consulting and brokering firm. Mr. Edler received his
Bachelor of Science degree from Indiana University with subsequent post-graduate
studies at the University of Southern California. He served as an officer in the
United States Air Force for 4 years immediately following college.
MR. MARK W. GOUDGE has been a director of the Company since September,
1998. Mr. Goudge has been a financial consultant in the private client
group at Merrill Lynch in Laguna Hills, California since June 1992. Prior to
joining Merrill Lynch, Mr. Goudge served from April 1990 to June 1992 as an
Assistant Vice President in the Commercial Lending Division at Orange
National Bank in Orange, California. Prior thereto Mr. Goudge worked at the
Landmark Bank in Whittier, California rising to the position of Assistant
Vice President of the Business Bank Group. Mr. Goudge graduated from the
University of Alaska-Fairbanks in December 1987 with a B.A. in Finance.
<PAGE>
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 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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation paid
from January 1, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------
NAME AND YEAR SALARY ($) BONUS ($) OTHER ANNUAL LONG TERM ALL OTHER
PRINCIPAL COMP. COMP. COMP.
POSITION SECURITIES
UNDERLYING
OPTIONS (#)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Lee,
Chairman and
Chief Executive 1997 0 0 0 82,500 (1) 0
Officer
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(1) Represents non-plan options granted to Mr. Lee in connection with his
Employment Agreement. See "MANAGEMENT Employment Agreements."
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
- --------------------------------------------------------------------------------------------------------------
NAME NUMBER PERCENT OF TOTAL EXERCISE OF BASE EXPIRATION DATE
SECURITIES OPTIONS GRANTED TO PRICE ($/SH)
UNDERLYING OPTION (#) EMPLOYEES IN FISCAL
YEAR
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard M. Lee 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
Hiram J. Woo 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
Michael Dunmire 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
Tom Edler 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
Mark W. Goudge 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
Rebecca L. Rotman 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL-YEAR AND FISCAL-YEAR END OPTION
VALUES
- --------------------------------------------------------------------------------------------------------------
NAME SHARES ACQUIRED ON VALUE REALIZED ($) NUMBER OF VALUE OF UNEXERCISED
EXERCISE (#) SECURITIES IN-THE-MONEY OPTIONS
UNDERLYING AT FISCAL YEAR END
UNDEREXERCISE ($) EXERCISABLE/
OPTIONS AT FISCAL YEAR UNEXERCISABLE
END (#) EXERCISABLE/ (1)
UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard M. Lee 0 -- 0 exercisable/ $0 exercisable/
82,500 $156,750
unexercisable unexercisable
- --------------------------------------------------------------------------------------------------------------
Hiram J. Woo 0 -- 0 exercisable/ $0 exercisable/
82,500 $156,750
unexercisable unexercisable
- --------------------------------------------------------------------------------------------------------------
Michael Dunmire 0 -- 0 exercisable/ $0 exercisable/$0
35,000 unexercisable
unexercisable
- --------------------------------------------------------------------------------------------------------------
Tom Edler 0 -- 0 exercisable/ $0 exercisable/$0
0 unexercisable
unexercisable
- --------------------------------------------------------------------------------------------------------------
Mark W. Goudge 0 -- 0 exercisable/ $0 exercisable/$0
0 unexercisable
unexercisable
- --------------------------------------------------------------------------------------------------------------
Rebecca L. Rotman 0 -- 0 exercisable/ $0 exercisable/$0
25,000 unexercisable
unexercisable
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) There was no public trading market for the Common Stock on December 31,
1997. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of fifty percent (50%) of the
initial public offering price, less the aggregate exercise price of the
options.
<PAGE>
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, which was
increased to $100,000 upon the closing of the 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 one year after the closing of the 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 the 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 the 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 the 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
the 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 the 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 the 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 assurance given as to the effect, if any, on the Company should a state court
so determine not to enforce such non-competitive provisions.
<PAGE>
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 converted the notes held by them into 55,200 shares
of Common Stock of the Company in July 1998.
Capital Contribution
In November 1997, Messrs. Lee and Woo contributed $130,000 to the
Company as additional 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.
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.
<PAGE>
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.
Number of Percentage
Shares Beneficially
Owned (5)
Richard M. Lee(2)..................... 256,920 10.7%
Hiram J. Woo(3)....................... 157,542 6.6%
Tom Edler............................. 0 0 %
Mark W. Goudge ....................... 0 0 %
JWJ International(4).................. 56,189 2.3%
All officers and directors as a group
(2 persons) (5)...................... 414,462 17.3%
- -------------
(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 10.7% of the combined stockholder
voting power of the Company. 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) Does not include the assumed exercise of any options outstanding since none
are exercisable within 60 days.
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.
<PAGE>
COMMON STOCK
As of the date of this Prospectus, there are 2,428,325 shares of Common
Stock issued and outstanding held by ___ 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 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 the 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 the 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 the Offering. Thereafter, if the above conversion
test 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.
<PAGE>
6% Convertible Debentures
The Company's 6% Convertible Debentures ("Debentures") bear an
interest rate of six percent (6%) per annum and mature on July 15, 2001 as
to $600,000 principal amount of the Debentures currently outstanding and on
July 23, 2001 as to $100,000 principal amount of the Debentures currently
outstanding. See "Use of Proceeds from Sale of Debentures." The Debentures are
issuable in denominations of $50,000 and integral multiples thereof and, at the
holder's request, are exchangeable for an equal aggregate principal amount of
debentures of different authorized denominations. Upon maturity of the
Debentures, payment for principal and accrued interest will be made either in
currency or in shares of the Company's Common Stock, at the option of the
holder.
The holder may convert the Debentures into Common Stock at any time.
The conversion price per share will be equal to 85% of the Market Price on the
Conversion Date. "Market Price," as used therein, means the average closing bid
price of the Common Stock on the five (5) trading days immediately preceding the
Conversion Date, as reported by the National Association of Securities Dealers.
The Company has the option to pay the interest accrued from the date of issuance
to the date of conversion either in cash or in shares of Common Stock.
The Company may redeem any Debentures for which a Notice of Conversion
has not been submitted by delivering a Notice of Redemption to the holder,
provided, however, that the holder shall have two (2) business days following
the issuance of any such Notice of Redemption to deliver a Notice of Conversion
to the Company in respect of the Debenture; provided, further, that in the event
the holder shall so determine to deliver a Notice of Conversion to the Company
following the Company's issuance of a Notice of Redemption, the applicable
Conversion Price for the Debenture shall be equal to 85% of the closing sales
price of the Common Stock on the last trading day preceding the Conversion Date
as reported by the National Association of Securities Dealers.
The Company must pay the redemption price to the holder within ten days
from the date of the Notice of Redemption. If the Company fails to make the
redemption payment within these ten days, the Company forfeits its right to
redeem those Debentures.
If the Company merges or consolidates with another corporation or sells
or transfers all or substantially all of its assets to another person and, as a
condition of such merger, consolidation or sale, the holders of the Company's
Common Stock are entitled to receive stock or securities in another corporation
or to receive property in exchange for the Company's Common Stock, then the
Debentures may be converted into the kind and amount of stock, securities or
property receivable by the holders of the Company's Common Stock pursuant to the
transaction. If, within 15 days of the holder's receipt of a notice from the
Company advising of a proposed merger, consolidation or sale, the holder has not
submitted a Notice of Conversion, then the Company may prepay all outstanding
principal and accrued interest and thereby terminate the holder's conversion
rights.
Secured Note
The Secured Note was issued on September 28, 1998 in the principal
amount of $650,000. The full principal amount of the Secured Note is due and
payable on September 28, 2003. The unpaid principal balance of the Secured Note
shall bear interest at the rate of 14.375% per annum based on a 360-day year,
with such interest to accrue from the date of issuance and to be payable upon
the exchange of the Secured Note for Common Stock. The interest rate payable
upon the unpaid principal balance of the Secured Note shall increase by 2.25%
every 360 days but shall not exceed 25% per annum.
Warrants
In connection with the Company's private placement of Debentures, on
July 23, 1998, the Company issued to Joseph Donohue, Jr., Max Rockwell, Mark
Angelo, Hunter Singer, John Audiferren and AIBC warrants to purchase 2400, 1600,
2400, 1600, 1600 and 2400 shares, respectively, of Common Stock at $5.00 per
share. On September 28, 1998, the Company issued to Talisman warrants to
purchase 73,125 shares of Common Stock at $5.28125 per share. On July 23, 1998,
the Company issued to Barry Lebin warrants to purchase 6,303 shares of Common
Stock at $5.00 per share.
<PAGE>
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 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.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Corporate Stock
Transfer, Inc..
SHARES ELIGIBLE FOR FUTURE SALE
The Company presently has outstanding an aggregate of 2,428,325 shares
of Common Stock, which excludes the 254,999 shares of common stock issuable upon
the conversion of the Debentures, 129,225 shares of Common Stock issuable upon
the exchange of the Secured Note and 91,428 shares issuable upon the exercise of
the Warrants. All of the 825,000 shares outstanding immediately prior to the
Company's initial public offering ("IPO") 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 the IPO 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 February 18, 1998 (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 327,075 shares of Common Stock
issued in 1998 upon the conversion of $92,000 in convertible notes payable and
of $1,087,500 of bridge notes are "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 February 18, 1998, without the prior
written consent of the underwriters for the IPO ("Underwriters").
<PAGE>
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, 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. See "Risk
Factors."
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for
the Company by Lehman & Eilen, Uniondale, New York. 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 and for the period from
January 1, 1997 through December 31, 1997 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 Company's' ability to continue as a going concern, as 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.
<PAGE>
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, a copy of any
exhibits to our registration statement incorporated by reference in this
prospectus. If you want more information, write or call us at:
Galveston's Steakhouse Corp.
151 East Alessandro Boulevard
Riverside, CA 92508
(Telephone) (909) 789-7606
(Facsimile) (909) 789-7699
Our fiscal year ends on December 31. We furnish our shareholders annual
reports containing audited financial statements and other appropriate reports.
In addition, we are a reporting company and file annual, quarterly and current
reports, proxy statements and other information with the SEC. You may read and
copy any reports, statements or other information we file at the SEC's public
reference room in Washington D.C. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings are also available to the public on the SEC Internet site
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.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Galveston's Steakhouse Corp. for the period from inception
(June 3, 1996) through December 31, 1996 and for the period
January 1, 1997 through December 31, 1997....................... 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, 1998 (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
</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 AND FOR THE PERIOD FROM JANUARY 1, 1997 THORUGH
DECEMBER 31, 1997
TOGETHER WITH REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders Galveston's Steakhouse Corp.
We have audited the accompanying balance sheet of Galveston's Steakhouse Corp.
(a Delaware corporation) as of December 31, 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the year then ended, and
for the period from June 3, 1996 (inception) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Galveston's Steakhouse Corp. as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, and for the period from June 3, 1996 (inception) to
December 31, 1996 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California April 2, 1998, except as to Notes 15 and 16, as to
which the date is May 29, 1998
F-3
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET
December 31, 1997
- -----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 64,726
Other receivables 156,015
Advances to officers 179,739
Inventories 25,411
Prepaid expenses 10,452
Other 72,861
----------
Total current assets 509,204
Furniture and equipment, net 905,084
Other assets
Intangible assets, net 498,921
Deferred offering costs 296,845
Liquor license and other assets 41,979
----------
Total assets $2,252,033
==========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
BALANCE SHEET (Continued)
December 31, 1997
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Current portion of notes payable $ 2,340,001
Accounts payable 36,375
Accrued liabilities 76,190
Accrued interest 309,630
Accrued payroll costs 85,544
-----------
Total current liabilities 2,847,740
Notes payable, net of current portion 818,999
-----------
Total liabilities 3,666,739
Commitments and contingencies
Stockholders' deficit
Preferred stock, $.001 par value
4,000,000 shares authorized
0 shares issued and outstanding -
Preferred stock, Series B, Convertible, $.001 par value
1,000,000 shares authorized
1,000,000 shares issued and outstanding 1,000
Common stock, $.01 par value
10,000,000 shares authorized
825,000 shares issued and outstanding 8,250
Additional paid-in capital 596,563
Accumulated deficit (2,020,519)
-----------
Total stockholders' deficit (1,414,706)
Total liabilities and stockholders' deficit $ 2,252,033
===========
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to December 31, 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
June 3, 1996
Year Ended (Inception) to
December 31, December 31,
1997 1996
------------ -------------
<S> <C> <C>
Restaurants revenues $ 1,867,671 $ 416,544
------------ -------------
Restaurant costs and expenses
Food and beverage 627,165 153,590
Payroll and payroll related costs 757,232 255,463
Direct operating costs 400,217 116,819
Depreciation and amortization 221,737 41,669
General and administrative expense 350,945 136,467
Pre-opening and start-up costs 65,155 433,694
------------ -------------
Total restaurant costs and expenses 2,422,451 1,137,702
------------ -------------
Loss from operations (554,780) (721,158)
------------ -------------
Other income (expense)
Interest and financing costs (523,187) (271,373)
Other - 49,979
------------ -------------
Total other income (expense) (523,187) (221,394)
------------ -------------
Net loss $ (1,077,967) $ (942,552)
============ =============
Basi loss per share $ (1.36) $ (1.42)
============ =============
Diluted loss per share $ (1.36) $ (1.42)
============ =============
Weighted-average shares outstanding 790,296 662,516
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to
December 31, 1996
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
Series B, Convertible Common Stock
--------------------------------- -----------------------------
Shares Amount Shares Amount
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance, June 3, 1996 $ - - $ -
Issuance of common stock 713,849 7,138
Issuance of preferred stock 1,000,000 1,000
Net loss
-------------- ------------- ------------- ------------
Balance, December 31, 1996 1,000,000 1,000 713,849 7,138
Issuance of common stock in
connection with $150,000
bridge loans 30,000 300
Issuance of common stock for
services rendered 24,950 249
Issuance of common stock in
connection with private
placement 56,201 563
Capital contribution
Net loss
-------------- ------------- ------------- ------------
Balance, December 31, 1997 1,000,000 $1,000 825,000 $ 8,250
============== ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, June 3, 1996 $ - $ - $ -
Issuance of common stock 169,225 176,363
Issuance of preferred stock 1,000
Net loss (942,552) (942,552)
-------------- ------------- -------------
Balance, December 31, 1996 169,225 (942,552) (765,189)
Issuance of common stock in
connection with $150,000
bridge loans 149,700 150,000
Issuance of common stock for
services rendered 124,481 124,730
Issuance of common stock in
connection with private
placement 23,157 23,720
Capital contribution 130,000 130,000
Net loss (1,077,967) (1,077,967)
-------------- ------------- -------------
Balance, December 31, 1997 $ 596,563 $ (2,020,519) $ (1,414,706)
================ ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to
December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
June 3, 1996
Year Ended (Inception) to
December 31, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,077,967) $ (942,552)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 221,737 41,667
Amortization of discount on private placement proceeds 117,748 68,855
Issuance of common stock in exchange for services
rendered 124,730 14,480
(Increase) decrease in
Other receivables (112,170) (43,845)
Advances to officers (144,349) (35,390)
Inventories 4,880 (30,291)
Prepaid expenses (4,027) (6,425)
Liquor license and other assets 14,321 -
Increase (decrease) in
Accounts payable (643) 37,018
Accrued liabilities (1,972) 78,162
Accrued interest 240,142 69,488
Accrued payroll costs 44,690 40,854
------------- ------------
Net cash used in operating activities (572,880) (707,979)
------------- ------------
Cash flows from investing activities
Purchases of furniture and equipment (29,129) (159,582)
Increase in intangibles (15,000) -
Increase in other current assets (72,861) -
Purchase of Texas Loosey's restaurants - (275,000)
------------- ------------
Net cash used in investing activities (116,990) (434,582)
------------- ------------
Cash flows from financing activities
Proceeds from issuance of notes payable 701,282 1,026,117
------------- ------------
Proceeds from issuance of common stock 23,720 162,883
Increase in deferred offering costs (296,845) -
Increase in common stock in connection with bridge loan 150,000 -
Capital contribution from officers 130,000 -
------------- ------------
Net cash provided by financing activities 708,157 1,189,000
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
STATEMENTS OF CASH FLOWS (Continued)
For the Year Ended December 31, 1997 and
From the Period from June 3, 1996 (Inception) to
December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
June 3, 1996
Year Ended (Inception) to
December 31, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Net increase in cash and cash equivalents $ 18,287 $ 46,439
Cash and cash equivalents, beginning of period 46,439 -
------------- ------------
Cash and cash equivalents, end of period $ 64,726 $ 46,439
============= ============
Supplemental disclosures of cash flow information
Interest paid $ 13,523 $ 3,030
============= ============
</TABLE>
F-9
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background and Operations Galveston's Steakhouse Corp., a
Delaware corporation (the "Company") was incorporated on June 3, 1996. On
December 19, 1996, the Board of Directors adopted a resolution to change the
Company's name from Texas Loosey's Steakhouse & Saloon, Inc. to Galveston's
Steakhouse Corp. The Company owns and operates a Texas Loosey's Steakhouse and
Saloon in Torrance, California, and a Galveston's Steakhouse located in
Fullerton, California. Texas Loosey's is a casual dining restaurant with a wide
variety of menu choices, ranging from Mexican dishes to steak dinners.
Galveston's Steakhouse is a moderately priced steak and seafood restaurant. Both
of these restaurants were acquired from TLC Restaurant Management Corp. on
August 19, 1996, together with certain intangible assets for a purchase price of
$1,520,000, consisting of notes payable of $1,245,000 and cash of $275,000. The
acquisition was recorded under the purchase method of accounting and resulted in
the Company recording $513,000 of goodwill.
Fiscal Year-End
The Company reports its operations on a 52-53 week fiscal year ending on the
Sunday closest to December 31. The current fiscal year ended on December 27,
1997; however, for financial statement presentation, the fiscal year end has
been designated as December 31, 1997.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Stock Split
Effective August 11, 1997, the Company effected a 1-for-3.671 reverse
stock split and on December 30, 1997, effected a 1.650-for-1 forward stock
split. The preferred stock and options to acquire common stock were unaffected
by the stock split. All share and per share data have been retroactively
restated to reflect the stock split.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks and
credit card receivables. Credit card receivables are considered cash
equivalents because of their short collection period. The carrying amount
of credit card receivables approximates their fair value.
F-10
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories, consisting principally of food, beverages, and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or market.
Escrow Deposit and Management Fee
The Company is currently in escrow for the purchase of the assets of
two franchised Texas Loosey's Chili Parlor and Saloon restaurants located in
Riverside and Norco, California. In connection with this acquisition, the
Company has deposited approximately $73,000 into an escrow account. This deposit
is being carried in other current assets on the accompanying balance sheet at
December 31, 1997. The Company assumed responsibility for the day-to-day
operations of these restaurants on March 1, 1997. In return for managing these
restaurants until the purchase is consummated, the Company is receiving a
management fee equal to the net income generated by the restaurants. As of
December 31, 1997, the Company has earned a management fee of approximately
$43,000. This management fee is reflected in revenues on the accompanying
statement of operations for the year ended December 31, 1997.
Furniture and Equipment
Furniture and equipment, including leasehold improvements, are recorded
at cost, less accumulated depreciation and amortization. Depreciation is
provided using the straight-line method over the estimated useful lives of the
respective assets, generally five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the useful life of the
improvements or the remaining lease term.
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of operations.
Intangibles
Intangibles consist of a covenant not to compete made with the former
owner of the Fullerton and Torrance restaurants and goodwill. The covenant not
to compete is being amortized over five years (the length of the contract) and
goodwill is being amortized over a fifteen-year period. The Company continually
evaluates whether events or circumstances have occurred that indicate the
remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company uses an
estimate of the related restaurants' undiscounted cash flows over the remaining
life of the goodwill in measuring whether the goodwill is recoverable.
Deferred Offering Costs
Costs incurred in connection with the Company's anticipated initial
public offering ("IPO") are capitalized at December 31, 1997 and will be
recorded as a reduction to additional paid-in capital upon completion of the
offering.
F-11
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquor License and Other Assets Liquor licenses and other assets
consist of the Company's liquor licenses for the Fullerton and Torrance
restaurants and miscellaneous rent deposits.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," establishes and encourages the use of
the fair value based method of accounting for stock-based compensation
arrangements under which compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and is recognized
over the periods in which the related services are rendered. The statement also
permits companies to elect to continue using the current implicit value
accounting method specified in Accounting Principles Bulletin ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the implicit value based method and
has disclosed the pro forma effect of using the fair value based method to
account for its stock-based compensation.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting comprehensive Income." This statement requires
companies to classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. SFAS No. 130 is effective
for financial statements issued for fiscal years beginning after December 15,
1997. Management believes that SFAS No. 130 will not have a material effect on
the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997. Management believes that SFAS
No. 131 will not have an effect on the Company's financial statements.
Reclassifications Certain amounts in the 1996 financial statements have been
reclassified to conform with the current year presentation.
F-12
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
Net Loss Per Share
In 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive.
Prior to SFAS No. 128, the Securities and Exchange Commission ("SEC")
required that, even where anti-dilutive, common and common equivalent shares
issued during the twelve-month period prior to the filing of an IPO be included
in the calculation of earnings per share as if they were outstanding for all
periods presented (using the treasury stock method and the IPO price). Because
of new requirements issued in 1998 by the SEC for companies that recently
completed an IPO and interpretation by FASB of the initial application of SFAS
No. 128, the number of shares used in the calculation of basic net loss per
share has changed to exclude common equivalent shares, even when anti-dilutive.
Net loss per share for all periods presented has been restated to conform with
SFAS No. 128 and Staff Accounting Bulletin No. 98.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the Company's
financial instruments, including cash and cash equivalents, accounts payable,
and accrued liabilities, the carrying amounts approximate fair value due to
their short maturities. The amounts shown for notes payable also approximate
fair value because current interest rates offered to the Company for debt of
similar maturities are substantially the same.
F-13
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- -------------------------------------------------------------------------------
NOTE 2 - OTHER RECEIVABLES
Accounts receivable includes a $138,810 receivable from restaurants in
Riverside and Norco, California for payroll expenses paid on behalf of the
restaurants by the Company, management fees, and a $12,000 receivable arising
from the sale of a liquor license during 1996.
NOTE 3 - FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1997 consisted of the
following:
Furniture, fixtures, and equipment $ 726,684
Leasehold improvements 367,725
-----------
1,094,409
Less accumulated depreciation and amortization 189,325
-----------
Total $ 905,084
===========
NOTE 4 - INTANGIBLES
Intangibles at December 31, 1997 consisted of the following
Goodwill $ 513,000
Covenant not to compete 45,000
Other 15,000
-----------
573,000
Less accumulated amortization 74,079
-----------
Total $ 498,921
===========
NOTE 5 - NOTES PAYABLE
As of December 31, 1997, notes payable consisted of the following:
<TABLE>
<S> <C>
Notes payable to 1996 private placement investors. Principal and accrued
interest at 8% is payable at the successful completion of the IPO.
Additionally, for each $25,000 note, these investors received 2,698 shares
of the Company's common stock. $ 1,000,000
</TABLE>
F-14
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE (Continued)
<TABLE>
<S> <C>
Notes payable to 1997 private placement investors. Principal and accrued
interest at 8% is payable at the successful completion of the IPO.
Additionally, for each $25,000 note, these investors received 2,698 shares of
the Company's common stock. $ 500,000
Note payable to the former owner in the amount of $375,000, bearing interest at
10% per annum accrued from the original note date (August 19, 1996) until either
February 19, 1997 or the successful completion of the Company's IPO, at which
principal and accrued interest is payable in full. Pursuant to an extension
agreement, the due date of this note has been extended to February 15, 1998. The
extension agreement also modified the interest rate to 15% per annum from
February 19, 1997 through February 15, 1998. At the date of this report, the
note is in default, and the Company is renegotiating the asset purchase
agreement relating to the Torrance and Fullerton restaurants as more fully
described in Note 15. 375,000
Note payable to the former owner in the amount of $870,000,
bearing interest at 8% per annum from the original note date (August 19, 1996).
No payments were due on this note until February 19, 1997, at which time
interest only payments of $6,032 are due monthly for one year. Monthly principal
and interest payments of $10,978 are due from February 19, 1998 through July 19,
2001, with the remaining principal balance due via a balloon payment on August
19, 2001. At the date of this report, the note is in default, and the Company is
renegotiating the asset purchase agreement relating to the Torrance and
Fullerton restaurants as more fully described in Note 15. 870,000
Notes payable to various individuals with interest rates ranging
from 9% to 14%, maturing in February 1998 or upon the successful
completion of the Company's IPO. 147,000
Convertible notes payable to various individuals which will
convert to the Company's common stock as more fully described in Note 6. This
conversion will only take place upon the successful completion of the Company's
IPO. 92,000
</TABLE>
F-15
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE (Continued)
<TABLE>
<S> <C>
The Company issued a $25,000 note payable. The note payable was comprised of a
$25,000 note from the Company and 2,249 shares of the Company's common stock.
The note bears interest at 8% per annum from the date of issuance until the
successful completion of the Company's IPO. Upon the successful completion of
the Company's IPO, accrued interest and principal are due in full (see Note 8).
$ 25,000
The Company obtained bridge loans in the amount of $150,000.
The bridge loan bears interest at a rate of 9% per annum from the original note
date until the successful completion of the Company's IPO. Upon the successful
completion of the Company's IPO, accrued interest and principal are due in full
(see Note 9). 150,000
-------------
3,159,000
Less current portion 2,340,001
-------------
Long-term portion $ 818,999
=============
</TABLE>
Future principal payments due on long-term debt are as follows:
Year Ending
December 31,
1998 $ 2,340,001
1999 65,847
2000 71,312
2001 681,840
-----------
Total $ 3,159,000
===========
F-16
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 6 - CONVERTIBLE DEBT
The Company has convertible debt in the amount of $92,000, payable to
various individuals which will convert to the Company's common stock upon the
successful completion of the Company's IPO. All note holders have elected to
convert their debt to equity. The note holders will receive shares of the
Company's common stock equal to the principal amount of their note multiplied by
a factor of three, divided by the IPO price per share. Consequently, the note
holders will receive common stock worth $276,000, in the aggregate. Although the
note holders have elected to convert their debt to the Company's common stock,
these amounts are carried in debt at December 31, 1997. The Company will record
the difference between the note amount of $92,000 and the conversion amount of
$276,000 as interest expense upon the closing date of the IPO at which time the
note holders will convert their debt to equity as noted above.
NOTE 7 - PRIVATE PLACEMENTS
1996 Private Placement
The Company raised $1,000,000 through a private placement during 1996.
Each private placement "unit" was a combination of debt and equity. For each
$25,000 unit, an individual received a $25,000 note from the Company and 2,698
shares of the Company's common stock. The notes bear interest at 8% per annum
from the original note date until the successful completion of the Company's
IPO. Upon the successful completion of the Company's IPO, accrued interest and
principal are due in full.
As each private placement participant received both debt (in the form
of the note payable from the Company) and equity (in the form of the Company's
common stock), a portion of the $1,000,000 face value of the debt was allocated
to equity based on an estimate of the relative fair value of the debt and
equity. As such, the Company has allocated $1,079 and $161,804 to common stock
and additional paid-in-capital, respectively. This allocation was determined
using an effective interest rate of 30%, as this is management's estimate of a
reasonable risk adjusted rate. The remainder was allocated to short-term debt.
The difference between the face value of $1,000,000 and the amount recorded in
short-term debt will be accreted to interest expense over the expected life of
the debt.
1997 Private Placement
The Company raised $500,000 through a private placement during 1997.
Each private placement "unit" was a combination of debt and equity. For each
$25,000 unit, an individual investor received a $25,000 note from the Company
and 2,698 shares of the Company's common stock. The notes bear interest at 8%
per annum from the original note date until the successful completion of the
Company's IPO. Upon the successful completion of the Company's IPO, accrued
interest and principal are due in full.
F-17
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 7 - PRIVATE PLACEMENTS (Continued)
1997 Private Placement (Continued)
As each private placement participant received both debt (in the form
of a note payable from the Company) and equity (in the form of the Company's
common stock), a portion of the $500,000 face value of the debt was allocated to
equity based on an estimate of the relative fair value of the debt and equity.
As such, the Company allocated $540 and $22,231 to common stock and additional
paid-in-capital, respectively. This allocation was determined using an effective
interest rate of 30%, as this is management's estimate of a reasonable risk
adjusted rate. The remainder was allocated to short-term debt. The difference
between the face value of $500,000 and the amount recorded in short-term debt
will be accreted to interest expense over the expected life of the debt.
NOTE 8 - NOTE PAYABLE
The Company issued a note payable in 1997 in the amount of $25,000,
payable to an individual. As this individual received both debt (in the form of
the note payable from the Company) and equity (in the form of the Company's
common stock), a portion of the $25,000 face value of the note was allocated to
equity based on an estimate of the relative fair value of the debt and equity.
As such, the Company has allocated $23 and $926 to common stock and additional
paid-in capital, respectively. This allocation was determined using an effective
interest rate of 30%, as this is management's estimate of a reasonable risk
adjusted rate. The remainder was allocated to short-term debt. The difference
between the face value of the $25,000 and the amount recorded in short-term debt
will be accreted to interest expense over the expected life of the debt.
NOTE 9 - BRIDGE LOANS
The Company raised bridge loans of $150,000 in 1997. In connection with
providing the bridge loan financing to the Company, the individual lenders
received an aggregate of 30,000 shares of the Company's common stock. Upon
issuance of this stock, the Company recorded an additional interest charge of
approximately $150,000 (30,000 shares x $5.00 per share, the proposed offering
price per share).
F-18
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 10 - PREFERRED STOCK
On June 3, 1996, the Company issued 1,000,000 shares of convertible
preferred stock (Series B) to the Chairman of the Board and Chief Executive
Officer of the Company for services rendered. The preferred stock has a par
value of $.001 per share and carries rights to vote with the common stock as one
class on a one-vote-per-share basis. The preferred stock is convertible into the
Company's common stock on a one-for-one basis at the option of the holder at the
earlier of eight years following the closing date of the Company's IPO or when
the Company's annual net income equals or exceeds $3,500,000. Upon conversion,
the holder of the preferred stock will be required to pay to the Company, in
cash, a conversion price (the "Conversion Price") per share equal to 150% of the
IPO price of the Company's common stock.
The preferred stock carries no dividends prior to the second
anniversary of the closing date of the proposed IPO, but thereafter, if the
above conversion test is satisfied, the preferred stock will participate in any
dividends declared on the Company's common stock, on an "as converted" basis. In
the event of a voluntary or involuntary liquidation or dissolution of the
Company prior to the second anniversary of the closing date of the proposed IPO,
or subsequent to the IPO if annual net profits of $3,500,000 have not been
achieved, the holder of the preferred stock would be entitled to the par value
of $.001 per share, or $1,000 in the aggregate. In the event of a voluntary or
involuntary liquidation or dissolution of the Company subsequent to the
Company's achieving $3,500,000 in annual net profits, the holder of the
preferred stock would be entitled to share with the holders of the Company's
common stock, the assets of the Company, on an as converted basis.
NOTE 11 - STOCK-BASED COMPENSATION
Issuance of Common Stock
During the year ended 1997, the Company issued 24,950 shares of common
stock in exchange for services rendered, of which 5,618 shares were issued to
officers.
Omnibus Stock Option Plan
In January 1997, the Board of Directors approved the adoption of an
Omnibus Stock Plan (the "Plan"). The Plan is intended to provide incentive to
key employees, officers, and directors of the Company who provide significant
services to the Company. There are 400,000 options available for grant under the
Plan. Options will vest over a period of time as determined by the Board of
Directors for up to ten years from the date of grant. However, no options may be
exercisable less than six months from the date of grant. The exercise price of
options granted under the Plan will be determined by the Board of Directors,
provided that, the exercise price is not less than the fair market value of the
Company's common stock on the date of grant. No options have been granted as of
December 31, 1997.
F-19
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Other Stock Options
During 1996, the Company granted certain stock options to employees and
directors. These grants were made outside the Omnibus Stock Plan. On inception
(June 3, 1996) of the Company, the Company's Chief Executive Officer and
President, who are both directors, were granted 82,500 stock options each. These
stock options vest at the earlier of one year following the successful
completion of the Company's IPO or June 3, 1998 and are exercisable at $0.60 per
share, which was management's estimate of the fair market value of the stock at
the date of grant. The stock options expire three months following any
termination of employment with the Company. At December 31, 1997, no stock
options were exercisable.
In October 1996, two employees of the Company were granted an aggregate
of 60,000 stock options. The stock options vest over a period of four years and
are exercisable at the IPO price per share of the Company's common stock. These
options expire three months following any termination of employment with the
Company. At December 31, 1997, 8,500 options were exercisable.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
restricted stock and options issued to outside third parties. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under this plan consistent with the methodology prescribed by
SFAS No. 123, the Company's net loss and loss per share would be reduced to the
pro forma amounts indicated below for the year ended December 31, 1997:
Net loss
As reported $ (1,077,967)
Pro forma $ (1,095,691)
Basic loss per common share
As reported $ (1.36)
Pro forma $ (1.39)
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.
F-20
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Other Stock Options (Continued)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and directors is
estimated using the Black-Scholes option-pricing model. The fair value is
computed as of the date of grant using the following assumptions: (i) dividend
yield of 0%, (ii) expected volatility of 44%, (iii) weighed-average risk-free
interest rate of approximately 6%, and (iv) expected life of 2.53 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
NOTE 12 - COMMITMENTS
Lease Commitments
The Company leases its Torrance and Fullerton facilities under
operating leases. These leases mature at various dates through 2004. Both the
Torrance and Fullerton leases have two, five-year options to renew. For the year
ended December 31, 1997 and the period from inception (June 3, 1996) through
December 31, 1996, total rent expense, including associated common area
maintenance charges, was $192,974 and $51,860, respectively.
Estimated future minimum lease payments, excluding common area
maintenance charges, for facilities under non-cancelable operating leases are as
follows:
Year Ending
December 31,
-----------
1998 $ 163,804
1999 165,900
2000 99,600
2001 99,600
2002 and thereafter 192,900
----------
Total $ 721,804
==========
In addition, the Company leases certain minor equipment under operating
leases.
F-21
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS (Continued)
Executive Compensation
Upon inception of the Company (June 3, 1996), the Company entered into
four-year employment agreements with both the Company's Chief Executive Officer
and President. These agreements are for annual base salaries of $50,000 and
$45,000, respectively. However, due to the limited cash flows from operations
for the periods ended December 31, 1997 and 1996, these individuals have agreed
to waive their salary compensation that would be earned up to the successful
completion of the Company's IPO. Had these individuals taken salaries for the
periods ended December 31, 1997 and 1996, the Company would have recognized
additional aggregate salary expense of approximately $95,000 and $55,000,
respectively, which would increase the Company's net loss from $1,077,967 and
$942,552 to $1,172,967 and $997,552 for the periods ended December 31, 1997 and
1996, respectively.
Consulting Agreement
In connection with the acquisition of the Torrance and Fullerton
restaurants, the Company entered into a Consulting Agreement (the "Agreement")
with the seller. The Agreement provides that the seller will render consulting
services for a period of two years in connection with the management, marketing,
development, and expansion of the Company's business. In consideration for such
consulting services, the Company will pay the seller $95,000 per year. Certain
disputes have arisen with respect to this agreement as more fully described in
Note 15.
NOTE 13 - INCOME TAXES
No current provision for federal and state income taxes has been
recorded as the Company incurred net operating losses through December 31, 1997
and the period ended December 31, 1996. At December 31, 1997, the Company has
approximately $2,018,000 and $1,009,000 of federal and state net operating loss
carryforwards, respectively, for tax reporting purposes available to offset
future taxable income; such carryforwards begin to expire in 2016 and 2001,
respectively.
Deferred tax assets, consisting primarily of the tax effect of net
operating loss carryforwards, are offset with a full valuation allowance because
of the uncertainty regarding the realizability of such assets. The valuation
allowance increased from $347,000 to $745,000 during the year ended December 31,
1997. Additionally, the effect of the valuation allowance represents the primary
reconciling item between tax expense computed using the federal statutory tax
rate of 34% and the Company's negligible effective tax rate.
F-22
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (Continued)
In February 1998, the Company raised gross proceeds of $6,250,000 in
additional capital through a public offering. As a result of bringing in
additional stockholders there may be a substantial annual limitation on the use
of net operating loss carryforwards for both federal and state tax purposes. In
general, an ownership change occurs when the major stockholders, which includes
groups of stockholders of the Company, have increased their ownership by more
than 50 percentage points. If there has been an ownership change, section 382 of
the Internal Revenue Code places a limitation on the amount of income that can
be offset by net operating loss carryforwards. The section 382 limitation is the
product of multiplying the Company's value (at the time of the ownership change)
by the highest federal long-term tax-exempt rate for the month of the change or
the two preceding months. The amount of the potential limitation, if any, is yet
to be determined.
NOTE 14 - RELATED PARTY TRANSACTIONS
In June 1996, the Company assumed $92,000 of convertible promissory
notes from Texas Loosey's Steakhouse Holdings, Inc., an affiliate of the
Company's Chief Executive Officer and President. The holders of the notes may
convert the notes into 55,200 shares of the Company's common stock upon the
successful completion of the Company's IPO (see Note 6).
During the year ended December 31, 1997 and the period from June 3,
1996 (inception) to December 31, 1996, the Company made advances to the
Company's Chief Executive Officer and President totaling $179,739, which are
recorded as advances to officers on the balance sheet.
In April 1997, the Company issued 2,809 shares of the Company's common
stock to the Company's Chief Executive Officer in exchange for services
rendered.
In April 1997, the Company issued 2,809 shares of the Company's common
stock to the President in exchange for services rendered.
In April 1997, the Company issued 4,495 shares of the Company's common
stock to its attorney in exchange for services rendered.
In November 1997, the Company's Chief Executive Officer and President
contributed a total of $130,000 to the Company as additional paid-in capital. No
shares of common stock were issued.
The President of the Company has personally guaranteed the operating
lease agreements for the Fullerton and Norco restaurant locations.
F-23
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 15 - CERTAIN TRANSACTIONS
Certain disputes have arisen with the sellers of the Torrance and
Fullerton restaurants resulting in an extended escrow closing period and which
may effect the ultimate purchase price and/or acquisition of the restaurants.
Additionally, certain disputes have arisen related to the Company's obligation
under its consulting agreement with a seller. The Company has notified the
sellers of material breaches of the sellers' representations and warranties with
respect to the acquisition agreement, and the sellers have notified the Company
of its default with respect to two notes payable issued in connection with the
purchase.
The disputes in this transaction relate primarily to the sellers' claim
that the Company is obligated to pay for certain unpaid federal income and state
sales taxes of approximately $287,000 and $193,000, respectively, and certain
liabilities to vendors of approximately $135,000. These amounts are not
reflected in the accompanying balance sheet or statements of operations and the
Company intends to vigorously defend itself, if necessary, against the claims of
the seller.
The Company has made certain payments in connection with its consulting
agreement (see note 12) with a seller and has withheld or deferred certain other
payments as a result of performance issues with the seller prior to and after
possession of the restaurants by the Company. At December 31, 1997, the Company
has a possible liability for unpaid amounts to the seller of up to approximately
$140,000. This amount is not reflected in the accompanying balance sheet or
statements of operations, and the Company intends to vigorously defend itself,
if necessary, against the seller.
As a result of these disputes, the Company has withheld payment on a
$375,000 note payable (see Note 5) due subsequent to the Company's IPO in
February 1998 and has withheld certain 1998 monthly payments due on a $870,000
note payable (see Note 5). The $375,000 note payable has been classified as a
current liability on the balance sheet as management believes that the
resolution of the disputes and payment of the note will occur during 1998.
Management and the Company's counsel believe that the default notice and the
acceleration payment clauses of the notes are not enforceable and that the
$870,000 note payable is reasonably classified in accordance with the original
payment terms of the note; accordingly, such note has been excluded from total
current liabilities on the balance sheet.
NOTE 16 - SUBSEQUENT EVENTS
In February 1998, the Company completed an IPO in which it sold
1,250,000 shares of common stock at $5.00 per share. Gross proceeds from the
sale were $6,250,000.
F-24
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 16 - SUBSEQUENT EVENTS (Continued)
In connection with the IPO in February 1998, the Company granted the
underwriters warrants to purchase 125,000 shares of common stock at an initial
exercise price of 140% of the IPO price. The warrants are exercisable for a
period of four years commencing one year from the IPO date.
In March 1998, $1,112,500 of the notes payable relating to the
$1,500,000 private placements discussed in Note 7 were converted into 278,125
shares of the Company's common stock. The remaining balance of $387,500 plus
accrued interest was paid-off.
In March 1998, the bridge loans of $150,000 plus accrued
interest discussed in Note 9 were paid-off.
In March 1998, certain other notes payable to various individuals of
$87,000 plus accrued interest were paid off.
This schedule contains summary financial information extracted from
Galveston's Steakhouse Inc. financial statements for the 12 months ended
December 31, 1997 and is qualified in its entirety be reference to such
financial statements.
F-25
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
CONDENSED BALANCE SHEET
September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 744,994
Accounts receivable 148,649
Advances to officers 461,047
Inventories 39,775
Acquisition deposits 1,954,519
Prepaid and other current assets 168,681
------------
Total current assets 3,517,665
Furniture and equipment, net 935,127
Debt issuance costs 50,000
Intangible assets, net 469,714
Other assets 44,034
------------
Total assets $ 5,016,540
===========
</TABLE>
See the accompanying notes
F-26
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
CONDENSED BALANCE SHEET (continued)
September 30, 1998
(unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities
Current portion of notes payable $ 1,439,497
Accounts payable 67,184
Other accrued liabilities 79,839
------------
Total current liabilities 1,586,520
Notes payable, net of current portion 795,245
------------
Total liabilities 2,381,765
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par value -
4,000,000 shares authorized
0 shares issued and outstanding
Preferred stock, Series B, Convertible, $.001 par value
1,000,000 shares authorized
1,000,000 shares issued and outstanding 1,000
Common stock, $.01 par value
10,000,000 shares authorized
2,428,325 shares issued and outstanding 24,283
Additional paid-in capital 5,852,427
Accumulated deficit (3,242,935)
------------
Total stockholders' equity 2,634,775
Total liabilities and stockholders' equity $ 5,016,540
============
</TABLE>
See the accompanying notes
F-27
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
CONDENSED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Restaurant revenues $ 841,476 $ 1,481,719
Restaurant costs and expenses
Food and beverage 269,653 510,983
Payroll and payroll related costs 348,040 491,661
Restaurant operating expenses 366,328 308,640
Depreciation and amortization 109,741 100,224
General and administrative expenses 694,990 264,103
Pre-opening startup costs - 63,955
----------- --------------
Total restaurant costs and expenses 1,788,752 1,739,566
----------- --------------
Loss from operations (947,276) (257,847)
----------- --------------
Other income (expense)
Interest expense, net (275,140) (466,044)
Other income - 18,034
----------- --------------
Total other income (expense) (275,140) (448,010)
----------- --------------
Net loss $ (1,222,416) $ (705,857)
=============== =================
Basic loss per share $ (0.59) $ (0.91)
=============== =================
Diluted loss per share $ (0.59) $ (0.91)
=============== =================
Weighted-average shares outstanding 2,064,714 778,600
=============== =================
</TABLE>
F-28
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,222,416) $ (705,857)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and amortization 109,741 100,224
Amortization of discount on private placement proceeds - 117,746
Issuance of common stock in exchange for
services rendered - 124,730
Issuance of common stock for additional
financing cost on notes payable 100,000 -
(Increase) decrease in operating assets (446,535) (144,540)
Increase (decrease) in operating liabilities (360,716) 217,424
------------- -------------
Net cash used in operating activities (1,819,926) (290,273)
------------- -------------
Cash flows from investing activities
Purchases of furniture and equipment (100,146) (28,784)
Deposit on future acquisitions (1,883,713) -
Other (10,431) (82,861)
------------- -------------
Net cash used in investing activities (1,994,290) (111,645)
------------- -------------
Cash flows from financing activities
Proceeds from issuance of notes payable, net 1,300,000 701,282
Repayment of notes payable (1,069,758)
Payment of offering costs (298,517)
Proceeds from issuance of common stock 4,264,242 173,720
------------- -------------
Net cash provided by financing activities 4,494,484 576,485
------------- -------------
Net increase in cash and cash
Equivalents 680,268 174,567
Cash and cash equivalents, beginning of period 64,726 46,439
------------- -------------
Cash and cash equivalents, end of period $ 744,994 $ 221,006
============= =============
</TABLE>
See the accompanying notes
F-29
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO CONSENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited Condensed Financial Statements have been prepared by the Company,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments) which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The results
of the nine months ended September 30, 1998 are not necessarily indicative of
the results to be expected for the full year ending December 31, 1998.
NOTE 2 - LOSS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. Net loss per share amounts for all periods have
been restated to conform to SFAS No. 128 requirements.
Prior to SFAS No. 128, the Securities and Exchange Commission ("SEC") required
that, even where anti-dilutive, common and common equivalent shares issued
during the twelve-month period prior to the filing of an initial public offering
("IPO") be included in the calculation of earnings per share as if they were
outstanding for all periods presented (using the treasury stock method and the
IPO price). Because of new requirements issued in 1998 by the SEC for companies
that recently completed an IPO and interpretation by FASB of the initial
application of SFAS No. 128, the number of shares used in the calculation of
basic net loss per share has changed to exclude common equivalent shares, even
when anti-dilutive. Net loss per share for the three and nine months ended
September 30, 1997 have been restated to conform with SFAS No. 128 and Staff
Accounting Bulleting No. 98.
F-30
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO CONSENSED FINANCIAL STATEMENTS
NOTE 3 - STOCKHOLDERS' EQUITY
In February 1998, the Company received approximately $4.2 million, net of
offering costs, from the issuance of 1,250,000 shares in common stock in
connection with the Company's IPO. In connection with the IPO in February 1998,
the Company granted the underwriters warrants to purchase 125,000 shares of
common stock at an initial exercise price of 140% of the IPO price. The warrants
are exercisable for a period of four years commencing one year from the IPO
date.
NOTE 4 - NOTES PAYABLE
In March 1998, $ 1,112,500 of the notes payable relating to the $1,500,000
private placements were converted into 278,125 shares of the Company's common
stock. The remaining balance of $387,500 plus accrued interest was paid off.
In March 1998, the bridge loans of $150,000 plus accrued interest were paid off.
In March through July 1998, certain other notes payable to various individuals
of $147,000 plus accrued interest were paid off.
In July 1998, the acquisition note payable of $375,000 plus accrued interest
were paid off (See note 6). In addition, the $92,000 convertible notes payable
was converted into 55,200 shares of the Company's common stock.
On July 15, 1998, pursuant to a private placement, the Company sold to two
investors $600,000 principal amount of 6% Convertible Debentures ("Debentures")
and received a commitment from such investors, subject to various conditions, to
purchase additional Debentures in the aggregate principal amount of $400,000. On
July 23, 1998, the Company sold an additional $100,000 principal amount of
Debentures to a third investor, who also received warrants to purchase 6,303
shares of common stock. The investors may convert the Debentures into common
stock, and the Company has the right, under certain circumstances, to require
such conversion. In connection with such private placement, the Company issued
warrants to purchase 12,000 shares of its common stock to the placement agents.
On September 28, 1998, pursuant to a private placement, the Company sold to one
investor a Secured Exchangeable Promissory Note in the principal amount of
$650,000 (the "Secured Note") and issued such investor warrants to purchase
73,125 shares of common stock at an exercise price of $5.28125 per share. The
investor may exchange all or a portion of the Secured Note for common stock.
F-31
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO CONSENSED FINANCIAL STATEMENTS
NOTE 5 - RELATED PARTY TRANSACTIONS
Through September 30, 1998, the Company had advanced $461,047 to certain
officers of the Company. These advances are non-interest bearing and are
expected to be repaid by December 31, 1998.
NOTE 6 - CONTINGENCIES
Certain disputes arose with the sellers of the Torrance and Fullerton
restaurants following the closing of the Company's IPO resulting in an extended
escrow closing period. Additionally, certain disputes arose related to the
Company's obligation under its consulting agreement with the principal of the
sellers. The disputes in this transaction related primarily to the sellers'
claim that the Company should be obligated to pay for certain unpaid federal
income and state sales taxes of the sellers of approximately $287,000 and
$193,000, respectively, and certain liabilities to vendors of approximately
$135,000.
The Company made various, but not all scheduled payments in connection with the
above mentioned consulting agreement and withheld or deferred certain other
payments as a result of performance issues relating to the restaurants.
As a result of these disputes, the Company withheld payment on a $375,000 note
payable due subsequent to the Company's IPO in February 1998 and withheld five
(5) monthly payments due on a $870,000 note payable. On July 21, 1998, the
Company and the sellers of the Torrance and Fullerton restaurants settled the
matter which resulted in the Company paying the $375,000 note payable plus
accrued interest, paying the five (5) monthly payments on the $870,000 note
payable that were in arrears, and paying the amounts due under the consulting
agreement. The sellers in turn, paid their federal income and state sales taxes,
and the amounts due to the vendors.
F-32
<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
PAGE
Prospectus Summary...................... 3
Risk Factors............................ 6
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
Legal Matters........................... 36
Experts................................. 36
Additional Information.................. 37
Index to Financial Statements.......... F-1
----------------------
- ------------------------------------------
- ------------------------------------------
667,763 SHARES
GALVESTON'S
STEAKHOUSE CORP.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
DECEMBER ____ , 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 has entered into Indemnification Agreements with its
executive officers and directors. These Indemnification Agreements 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.
<PAGE>
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.
SEC registration fee......................... $ 1,071.24
Legal fees and expenses (1).................. 30,000
Accounting fees and expenses (1)............. 3,000
Blue sky fees and expenses (including
counsel fees) (1).......................... 1,000
Printing and engraving expenses (1).......... 1,000
Miscellaneous (1)............................ 3,928.76
----------
Total........................................ $40,000
==========
- ----------
(1) Estimates.
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 January 1997, 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 $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 1997, Messrs. Lee and Woo contributed $130,000 to the
Company as additional paid-in capital. No shares of Common Stock were issued.
In July, 1998, 55,200 shares of Common Stock were issued upon
conversion of $92,000 aggregate principal amount of convertible notes payable.
In March, 1998, 278,125 shares of Common Stock were issued upon
conversion of $1,112,500 aggregate principal amount of bridge notes.
On July 15, 1998 each of JMG Capital Partners, L.P. and Triton Capital
Investments Limited purchased $300,000 principal amount of the Company's 6%
Convertible Debentures. On July 23, 1998, Barry Lebin purchased $100,000
principal amount of the Company's 6% Convertible Debentures.
On September 28, 1998 Talisman Capital Opportunity Fund Ltd. purchased
a Secured Exchangeable Note of the Company due and payable on or before
September 28, 2003 in the principal amount of $650,000.
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 Lehman & Eilen, counsel to the Company
concerning the 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.
<PAGE>
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.
10.18** Merger Agreement dated March 31, 1998 by and among
the Company, Tri-Core Steakhouse, Inc., Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co. Ltd.
10.19***Form of Securities Purchase Agreement by and between
the Company and each of JMG Capital Partners, L.P.,
Triton Capital Investments Limited, and Barry Lebin.
10.20***Form of Registration Rights by and between the
Company and each of JMG Capital Partners, L.P.,
Triton Capital Investments Limited, and Barry Lebin.
10.21***Form of Debenture issued to JMG Capital Partners,
L.P., Triton Capital Investments Ltd and Barry Lebin.
10.22***Form of Note Purchase Agreement by and between the
Company and Talisman Capital Opportunity Fund Ltd.
10.23***Form of Secured Exchangeable Note issued to Talisman
Capital Opportunity Fund Ltd.
10.24***Form of Warrant issued to Talisman Capital
Opportunity Fund Ltd.
10.25***Form of Collateral, Pledge and Security Agreement by
and between the Company and Talisman Capital
Opportunity Fund Ltd.
10.26***Form of Warrant issued to Joseph Donohue, Jr., Max
Rockwell, Mark Angelo, Hunter Singer, John
Audiferren, AIBC Investment Services Corp. and Barry
Lebin.
16.0* Letter re: Change of Certifying Accountant
23.1****Consent of Singer Lewak Greenbaum & Goldstein LLP
23.2****Consent of Lehman & Eilen, counsel to the Company
(included in their opinion filed as Exhibit 5.1).
27.1* Financial Data Schedule.
99.1** Press release dated September 1, 1998.
- ----------
* Incorporated by reference from Registration Statement on Form SB-2 (File
#333-29093).
** Incorporated by reference from Form 8-K, Current Report, filed with the
SEC on September 14, 1998.
*** Filed herewith
**** To be filed by amendment
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 17TH DAY OF DECEMBER, 1998.
GALVESTON'S STEAKHOUSE CORP.
By: ----------------------------------
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Chairman of the Board of Directors and December 17, 1998
- ---------------------------------------- Chief Executive Officer
Richard M. Lee
Director, President, Secretary and December 17, 1998
- ---------------------------------------- Chief Financial Officer (Principal
Hiram J. Woo Financial and Accounting Officer)
Director December 17, 1998
- ----------------------------------------
Tom Edler
- ---------------------------------------- Director December 17, 1998
Mark W. Goudge
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
1.1* Form of Underwriting Agreement.
3.1* Restated Certificate of Incorporation of the Company.
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 Lehman & Eilen, counsel to the Company
concerning the 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.
<PAGE>
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.
10.18** Merger Agreement dated March 31, 1998 by and among
the Company, Tri-Core Steakhouse, Inc., Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co. Ltd.
10.19***Form of Securities Purchase Agreement by and between
the Company and each of JMG Capital Partners, L.P.,
Triton Capital Investments Limited, and Barry Lebin.
10.20***Form of Registration Rights by and between the
Company and each of JMG Capital Partners, L.P.,
Triton Capital Investments Limited, and Barry Lebin.
10.21***Form of Debenture issued to JMG Capital Partners,
L.P., Triton Capital Investments Ltd and Barry Lebin.
10.22***Form of Note Purchase Agreement by and between the
Company and Talisman Capital Opportunity Fund Ltd.
10.23***Form of Secured Exchangeable Note issued to Talisman
Capital Opportunity Fund Ltd.
10.24***Form of Warrant issued to Talisman Capital
Opportunity Fund Ltd.
10.25***Form of Collateral, Pledge and Security Agreement by
and between the Company and Talisman Capital
Opportunity Fund Ltd.
10.26***Form of Warrant issued to Joseph Donohue, Jr., Max
Rockwell, Mark Angelo, Hunter Singer, John
Audiferren, AIBC Investment Services Corp. and Barry
Lebin.
16.0* Letter re: Change of Certifying Accountant
23.1****Consent of Singer Lewak Greenbaum & Goldstein LLP
23.2****Consent of Lehman & Eilen, counsel to the
Company (included in their opinion filed as
Exhibit 5.1).
27.1* Financial Data Schedule.
99.1** Press release dated September 1, 1998.
- ----------
* Incorporated by reference from Registration Statement on Form SB-2 (File
#333-29093).
** Incorporated by reference from Form 8-K, Current Report, filed with the
SEC on September 14, 1998.
*** Filed herewith
**** To be filed by amendment
EXHIBIT 10.19
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of
acceptance set forth below, is entered into by and between GALVESTON'S
STEAKHOUSE CORP., a Delaware corporation, with headquarters located at 151 East
Alessandro Blvd., Riverside, California 92508 (the "Company"), and the
undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and
delivering this Agreement in accordance with and in reliance upon the exemption
from securities registration afforded, inter alia, by Rule 506 under Regulation
D ("Regulation D" as promulgated by the United States Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"), and/or Section 4(2) of the 1933 Act; and
WHEREAS, the Buyer wishes to purchase, upon the terms and
subject to the conditions of this Agreement, 6% Convertible Debentures (the
"Debentures"), of the Company which will be convertible into shares of Common
Stock, $.01 par value per share of the Company (the "Common Stock"), upon the
terms and subject to the conditions of such Debentures (the Common Stock and the
Debentures sometimes referred to herein as the "Securities"), and subject to
acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase. The undersigned hereby agrees to purchase from
the Company, the Debentures of the Company, in the principal amount of $100,000
having the terms and conditions and being in the form attached hereto as Annex
I. The purchase price for the Debentures shall be as set forth on the signature
page hereto and shall be payable in United States Dollars.
b. Form of Payment. The Buyer shall pay the purchase price for
the Debentures by delivering immediately available good funds in United States
Dollars to the Company in an amount equal to the principal amount of Debentures
being so purchased. Promptly following payment by the Buyer to the Company of
the purchase price of the Debentures, the Company shall deliver the Debentures
duly executed on behalf of the Company to the Buyer.
<PAGE>
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO
INFORMATION; INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees
with, the Company as follows:
a. Without limiting Buyer's right to sell the Common Stock
pursuant to the Registration Statement (as defined below), the Buyer is
purchasing the Debentures and will be acquiring the shares of Common Stock
issuable upon conversion of the Debentures for its own account for investment
only and not with a view towards the public sale or distribution thereof and not
with a view to or for sale in connection with any distribution thereof;
b. The Buyer is (i) an "accredited investor" as that term is
defined in Rule 501 of the General Rules and Regulations under the 1933 Act by
reason of Rule 501(a)(3), and (ii) experienced in making investments of the kind
described in this Agreement and the related documents, (iii) able, by reason of
the business and financial experience of its officers (if an entity) and
professional advisors (who are not affiliated with or compensated in any way by
the Company or any of its affiliates or selling agents), to protect its own
interests in connection with the transactions described in this Agreement, and
the related documents, and (iv) able to afford the entire loss of its investment
in the Securities;
c. All subsequent offers and sales of the Debentures and the
shares of Common Stock issuable upon conversion of, or issued as dividends on,
the Debentures (the "Shares" or "Common Stock") by the Buyer shall be made
pursuant to registration of the Shares under the 1933 Act or pursuant to an
exemption from registration;
d. The Buyer understands that the Debentures are being offered
and sold, and the Shares are being offered, to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of the Buyer
to acquire the Debentures and to receive an offer of the Shares;
e. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Debenture and the
offer of the Shares which have been requested by the Buyer. The Buyer and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and have received complete and satisfactory answers to any such
inquiries. Without limiting the generality of the foregoing, the Buyer has also
had the opportunity to obtain and to review the Company's (1) Special Transition
Report for the fiscal year ended December 31, 1997. (2) Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1998 and (2) Form SB-2, dated
February 27, 1998 (the "Company's SEC Documents").
<PAGE>
f. The Buyer understands that its investment in the
Securities involves a high degree of risk;
g. The Buyer understands that no United States federal or
state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities;
h. This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable in accordance with its terms, subject as to
enforceability to general principles of equity and to bankruptcy, insolvency,
moratorium and other similar laws affecting the enforcement of creditors' rights
generally.
i. Neither the Buyer, nor any affiliate of the Buyer, will
enter into, any put option, short position, or other similar position with
respect to the Debentures or the Shares.
j. Notwithstanding the provisions hereof or of the Debentures,
in no event (except with respect to an Event of Mandatory Conversion upon the
maturity of the Debentures) shall the holder be entitled to convert any
Debenture to the extent after such conversion, the sum of (1) the number of
shares of Common Stock beneficially owned by the Buyer and its affiliates on the
date of the requested conversion (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unconverted portion of
the Debenture), and (2) the number of shares of Common Stock issuable upon the
requested conversion of the Debenture with respect to which the determination of
this proviso is being made, would result in beneficial ownership by the Buyer
and its affiliates on that date of more than 4.99% of the outstanding shares of
Common Stock. For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), except as
otherwise provided in clause (1) of such proviso. In addition, the Company and
Buyer agree that until the Company either obtains shareholder approval of the
issuance of the shares of Common Stock upon conversion of the Debentures and
exercise of the Warrants herein described, or an exemption from Nasdaq's
corporate governance rules as they may apply to such issuable shares, the Buyer
may not and will not convert the Debentures into more than 19.9% of the shares
of Company's Common Stock outstanding on the date hereof (the "Common Share
Limit").
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
a. Concerning the Shares. There are no preemptive
rights of any stockholder of the Company, as such, to acquire the Common
Stock.
b. Reporting Company Status. The Company is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware, and has the requisite
<PAGE>
corporate power to own its properties and to carry on its business as now being
conducted. The Company is duly qualified as a foreign corporation to do business
and is in good standing in each jurisdiction where the nature of the business
conducted or property owned by it makes such qualification necessary other than
those jurisdictions in which the failure to so qualify would not have a material
and adverse effect on the business, operations, properties, prospects or
condition (financial or otherwise) of the Company. The Company has registered
its Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the Common Stock is listed and traded on
the NASDAQ/Small Cap Market. The Company shall promptly provide to Buyer copies
of any notices it receives regarding the continued eligibility of the Common
Stock for listing on the NASDAQ/Small Cap Market.
c. Authorized Shares. The Company has sufficient authorized
and unissued Shares as may be reasonably necessary to effect the conversion of
the Debentures. The Shares have been duly authorized and, when issued upon
conversion of, or as interest on, the Debentures, will be duly and validly
issued, fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder.
d. Securities Purchase Agreement; Registration Rights
Agreement and Stock. This Agreement and the Registration Rights Agreement, the
form of which is attached hereto as Annex II (the "Registration Rights
Agreement"), and the transactions contemplated thereby, have been duly and
validly authorized by the Company, this Agreement has been duly executed and
delivered by the Company and this Agreement is, and the Registration Rights
Agreement, when executed and delivered by the Company, will be, valid and
binding agreements of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium, and other similar laws affecting the
enforcement of creditors' rights generally; and the Debentures will be duly and
validly authorized and, when executed and delivered on behalf of the Company in
accordance with this Agreement, will be a valid and binding obligation of the
Company in accordance with its terms, subject to general principles of equity
and to bankruptcy, insolvency, moratorium, or other similar laws affecting the
enforcement of creditors' rights generally.
<PAGE>
e. Non-contravention. The execution and delivery of this
Agreement and the Registration Rights Agreement by the Company, the issuance of
the Securities, and the consummation by the Company of the other transactions
contemplated by this Agreement, the Registration Rights Agreement, and the
Debentures do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under (i)
the articles of incorporation or by-laws of the Company, (ii) any indenture,
mortgage, deed of trust, or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
including any listing agreement for the Common Stock except as herein set forth,
(iii) to its knowledge, any existing applicable law, rule, or regulation or any
applicable decree, judgment, or (iv) to its knowledge, order of any court,
United States federal or state regulatory body, administrative agency, or other
governmental body having jurisdiction over the Company or any of its properties
or assets, except such conflict, breach or default which would not have a
material adverse effect on the transactions contemplated herein. The Company is
not in violation of any material laws, governmental orders, rules, regulations
or ordinances to which its property, real, personal, mixed, tangible or
intangible, or its businesses related to such properties, are subject.
f. Approvals. No authorization, approval or consent of any
court, governmental body, regulatory agency, self-regulatory organization, or
stock exchange or market is required to be obtained by the Company for the
issuance and sale of the Securities to the Buyer as contemplated by this
Agreement, except such authorizations, approvals and consents that have been
obtained.
g. SEC Documents, Financial Statements. The Common Stock of
the Company is registered pursuant to Section 12(g) of the Exchange Act and the
Company has filed on a timely basis all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Exchange Act, including material filed pursuant to
Section 13(a) or 15(d), in addition to one or more registration statements and
amendments thereto heretofore filed by the Company with the SEC under the Act
(all of the foregoing including filings incorporated by reference therein being
referred to herein as the "SEC Documents"). The Company, through its agent, has
delivered to the Buyer true and complete copies of the SEC Documents (except for
exhibits and incorporated documents). The Company has not provided to the Buyer
any information which, according to applicable law, rule or regulation, should
have been disclosed publicly by the Company but which has not been so disclosed,
other than with respect to the transactions contemplated by this Agreement.
As of their respective dates, the SEC Documents complied in
all material respects with the requirements of the Act or the Exchange Act as
the case may be and the rules and regulations of the SEC promulgated thereunder
and other federal, state and local laws, rules and regulations applicable to
such SEC Documents, and none of the SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the SEC Documents comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC or other applicable rules and regulations with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
h. Absence of Certain Changes. Since December 31, 1997, there
has been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, or results of operations
of the Company.
<PAGE>
i. Full Disclosure. There is no fact known to the Company
(other than general economic conditions known to the public generally) or as
disclosed in the documents referred to in Section 2(e), that has not been
disclosed in writing to the Buyer that (i) would reasonably be expected to have
a material adverse effect on the business or financial condition of the Company
or (ii) would reasonably be expected to materially and adversely affect the
ability of the Company to perform its obligations pursuant to this Agreement.
j. Absence of Litigation. Except as disclosed in the SEC
Documents referred to in Section 2(e), which the Buyer has reviewed, there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board or body pending or, to the knowledge of the Company, threatened
against or affecting the Company, wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the business or financial
condition of the Company or the transactions contemplated by this Agreement or
any of the documents contemplated hereby or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents.
k. Absence of Events of Default. No Event of Default, as
defined in the respective agreement to which the Company is a party, and no
event which, with the giving of notice or the passage of time or both, would
become an Event of Default (as so defined), has occurred and is continuing,
which would have a material adverse effect on the Company's financial condition
or results of operations.
l. Prior Issues. Except for the $600,000 of 6% Convertible
Debentures of the Company issued on July 15, 1998, during the twelve (12) months
preceding the date hereof, the Company has not issued any convertible
securities.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the
Debentures have not been and are not being registered under the provisions of
the 1933 Act and, except as provided in the Registration Rights Agreement, the
Shares have not been and are not being registered under the 1933 Act, and may
not be transferred unless (A) subsequently registered thereunder or (B) the
Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Securities made in
reliance on Rule 144 promulgated under the 1933 Act may be made only in
accordance with the terms of said Rule and further, if said Rule is not
applicable, any resale of such Securities under circumstances in which the
seller, or the person through whom the sale is made, may be deemed to be an
underwriter, as that term is used in the 1933 Act, may require compliance with
some other exemption under the 1933 Act or the rules and regulations of the SEC
thereunder; and (3) neither the Company nor any other person is under any
obligation to register the Securities (other than pursuant to the Registration
Rights Agreement) under the 1933 Act or to comply with the terms and conditions
of any exemption thereunder.
<PAGE>
b. Restrictive Legend. The Buyer acknowledges and agrees that
the Debentures, and, until such time as the Common Stock has been registered
under the 1933 Act as contemplated by the Registration Rights Agreement and sold
in accordance with an effective registration statement ("Registration
Statement"), the Shares issued to the Holder upon conversion of the Debentures
shall bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of the Debentures and such
Shares):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD
OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF
COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
c. Registration Rights Agreement. The parties hereto agree to
enter into the Registration Rights Agreement, in substantially the form attached
hereto as Annex II, on or before the Closing Date.
d. Filings. The Company undertakes and agrees to make all
necessary filings in connection with the sale of the Debentures to the Buyer
under any United States laws and regulations, or by any domestic securities
exchange or trading market, and to provide a copy thereof to the Buyer promptly
after such filing.
e. Reporting Status. So long as the Buyer beneficially owns
any of the Debentures, the Company shall file all reports required to be filed
with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.
f. Special Redemption. In the event the proposed Paragon
transaction is terminated by the seller and the Company receives and/or is
entitled to receive a break-up fee or other compensatory payment from Paragon by
reason of such seller's termination of its agreement with the Company, the
Company hereby covenants and agrees to first apply any and all such monies
received from the seller to effect a prompt redemption, in cash, of the Buyer's
Debentures.
g. Available Shares. The Company shall have at all times
authorized and reserved for issuance, free from preemptive rights, shares of
Common Stock sufficient to yield the number of shares of Common Stock issuable
at conversion as may be required to satisfy the conversion rights of the Buyer
pursuant to the terms and conditions of the Debentures.
<PAGE>
h. Non-Public Information. The Company shall in no event
disclose non-public information to the Buyer, advisors to or representatives of
the Buyer unless prior to disclosure of such information the Company marks such
information as "Non-Public Information - Confidential" and provides the Buyer,
such advisors and representatives with a reasonable opportunity to accept or
refuse to accept such non-public information for review. Nothing herein shall
require the Company to disclose non-public information to the Buyer or its
advisors or representatives, and the Company represents that it does not
disseminate non-public information to any Buyers who purchase stock in the
Company in a public offering, to money managers or to securities analysts;
provided, however, that notwithstanding anything herein to the contrary, the
Company will, as hereinabove provided, immediately notify the advisors and
representatives of the Buyer and, if any, underwriters, of any event or the
existence of any circumstance (without any obligation to disclose the specific
event or circumstance) of which it becomes aware, constituting non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the registration statement, would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein, in light
of the circumstances in which they were made, no misleading. Nothing herein
shall be construed to mean that such persons or entities other than the Buyer
(without the written consent of the Buyer prior to disclosure of such
information) may not obtain non-public information in the course of conducting
due diligence in accordance with the terms of this Agreement and nothing herein
shall prevent any such persons or entities from notifying the Company of their
opinion that based on such due diligence by such persons or entities, that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading.
5. TRANSFER AGENT INSTRUCTIONS.
(a) In order to effect the conversion of all or part of the
Debenture, the Debentureholder shall issue a notice of conversion substantially
in the form attached hereto (the "notice of conversion") which may be by
facsimile and surrender the Debenture for conversion if the Debenture is not
already in possession of the Company. Each conversion of all or any portion of
the Debenture will be deemed to have been effected as of the close of business
on the date on which such notice of conversion is delivered to the principal
office of the Company via facsimile. At such time as such conversion has been
effected, to the extent that any portion of the Debenture is converted, the
rights of the Debentureholder with respect to such portion of the Debenture
shall cease and the Debentureholder shall be deemed to have become the holder o
record of the shares of conversion Shares represented thereby.
(b) No fractional shares of Common Stock shall be issued upon
conversion of the Debenture. In lieu of any fractional share to which the holder
would otherwise be entitled, the Company shall round up to the nearest whole of
Common Share.
<PAGE>
(c) The Company shall, immediately upon receipt of a notice of
conversion, issue and deliver to or upon the order of such Debentureholder,
against delivery of the Debentures which have been converted, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled and such certificate or certificates shall not bear any restrictive
legend; provided (a) the Common Stock evidenced thereby are sold pursuant to an
effective registration statement under the Securities Act, (b) the holder
provides the Company with an opinion of counsel reasonably acceptable to the
Company to the effect that a public sale of such shares may be made without
registration under the Securities Act, or (c) such holder provides the Company
with reasonable assurance that such shares can be sold free of any limitations
imposed by Rule 144, promulgated under the Securities Act. The Company shall
cause such issuance and delivery to be effected within five (5) business days
and shall transmit the certificates by messenger or overnight delivery service,
or via the DWAC system, to reach the address designated by such holder within
five (5) business days after the receipt of such notice.
6. GOVERNING LAW: MISCELLANEOUS.
This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non conveniens, to the bringing of any such
proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
7. NOTICES. Any notice required or permitted hereunder shall
be given in writing (unless otherwise specified herein) and shall be deemed
effectively given, (i) on the date delivered, (a) by personal delivery, or (b)
if advance copy is given by fax, (ii) seven business days after deposit in the
United States Postal Service by regular or certified mail, or (iii) three
business days mailing by international express courier, with postage and fees
prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
days advance written notice to each of the other parties hereto.
<PAGE>
COMPANY: GALVESTON'S STEAKHOUSE CORP.
151 E. Alessandro Blvd.
Riverside, CA 92500
ATTN: Richard M. Lee
Telecopier No.: (714) 557-4651
with a copy to:
Lehman & Eilen, Esqs.
50 Charles Lindbergh Blvd.
Uniondale, New York 11553
Attention: Hank Gracin, Esq.
Telecopier No.: (516) 222-0948
BUYER: At the address set forth on the signature page of this
Agreement.
8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Company's
representations and warranties shall survive the execution and delivery hereof
of this Agreement and the delivery of the Debentures and the Purchase Price, and
shall inure to the benefit of their respective successors and assigns.
9. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
IN WITNESS WHEREOF, this Agreement has been duly executed by
the Buyer or one of its officers thereunto duly authorized as of the date set
forth below.
AGGREGATE PURCHASE PRICE OF SUCH DEBENTURE: $__________
SIGNATURES FOR ENTITIES
IN WITNESS WHEREOF, the undersigned represents that the foregoing
statements are true and correct and that it has caused this Agreement to be duly
executed on its behalf this ____ day of July, 1998.
- --------------------------- ------------------------------------
Printed Name of Subscriber
- ---------------------------
By: --------------------------------
Telecopier No. ------------ (Signature of Authorized Person)
------------------------------------
Printed Name and Title
This Agreement has been accepted as of the date set forth
below.
GALVESTON'S STEAKHOUSE CORP.
By: -----------------------------------
Richard M. Lee, Chairman & CEO
<PAGE>
EXHIBIT 10.20
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 15, 1998
(this "Agreement"), is made by and between GALVESTON'S STEAKHOUSE CORP., a
Delaware corporation (the "Company"), and the entity named on the signature page
hereto (the "Initial Investor").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the
Securities Purchase Agreement, dated as of July 15, 1998, between the Initial
Investors and the Company (the "Securities Purchase Agreement"), the Company has
agreed to issue and sell to the Initial Investors one or more 6% Convertible
Debentures of the Company, in an aggregate principal amount not exceeding
$1,000,000 (collectively, the "Debentures"), which Debentures will be
convertible into shares of the common stock, $.01 par value (the "Common
Stock"), of the Company (the "Conversion Shares") upon the terms and subject to
the conditions of such Debentures; and
WHEREAS, to induce the Initial Investors to execute and
deliver the Securities Purchase Agreement, the Company has agreed to provide
certain registration rights under the Securities Act of 1933, as amended, and
the rules and regulations thereunder, or any similar successor statute
(collectively, the "Securities Act"), with respect to the Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Initial Investors hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have
the following meanings:
(i) "Investor" means the Initial Investors and any permitted
transferee or assignee who agrees to become bound by the provisions of this
Agreement in accordance with Section 9 hereof.
(ii) "Register," "Registered," and "Registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
<PAGE>
(iii) Potential Material Event means any of the following: (a)
the possession by the Company of material information not ripe for disclosure in
a registration statement, which shall be evidenced by determinations in good
faith by the Board of Directors of the Company that disclosure of such
information in the registration statement would be detrimental to the business
and affairs of the Company; or (b) any material engagement or activity by the
Company which would, in the good faith determination of the Board of Directors
of the Company, be adversely affected by disclosure in a registration statement
at such time, which determination shall be accompanied by a good faith
determination by the Board of Directors of the Company that the registration
statement would be materially misleading absent the inclusion of such
information.
(iv) "Registrable Securities" means the Conversion Shares.
(v) "Registration Statement" means a registration statement of
the Company under the Securities Act.
(b) Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare and file
with the SEC, no later than forty-five (45) days following the initial Closing
Date under the Securities Purchase Agreement, either a Registration Statement on
Form SB-2 registering for resale by the Investor the number of shares into which
the Debentures would be convertible at the time of filing of the Form SB-2,
which Registration Statement shall be declared effective no later than 120 days
after the Closing Date.
(b) Payments by the Company. If the Registration Statement
covering the Registrable Securities required to be filed by the Company pursuant
to Section 2(a) hereof is not effective within the earlier of (a) 5 days after
notice by the SEC that it may be declared effective or (b) one hundred twenty
(120) days following the initial Closing Date (the Required Effective Date"), or
after a Suspension Period (except as provided by the last sentence of section
2a), then the Company will make payments to the Initial Investor in such amounts
and at such times as shall be determined pursuant to this Section 2(b). The
amount to be paid by the Company to the Initial Investor shall be determined as
of each Computation Date, and such amount shall be equal to two (2%) percent of
the cash purchase price paid by the Initial Investor for all Debentures then
purchased and outstanding pursuant to the Securities Purchase Agreement for any
period from the Required Effective Date to each Computation Date thereafter,
until the Registration Statement is declared effective by the SEC (the "Periodic
Amount"). The full Periodic Amount shall be paid by the Company in immediately
available funds within three business days after each Computation Date.
Notwithstanding the foregoing, the amounts payable by the Company pursuant to
this provision shall not be payable to the extent any delay in the effectiveness
of the Registration Statement occurs because of an act of, or a failure to act
or to act timely by the Initial Investor or its counsel, or in the event all of
the Registrable Securities may be sold pursuant to Rule 144 or another available
exemption under the Act.
As used in this Section 2(b), the following terms shall have
the following meanings:
<PAGE>
"Computation Date" means the date which is thirty (30) days
after the Required Effective Date (except as provided by the last sentence of
section 2(a)), and, if the Registration Statement required to be filed by the
Company pursuant to Section 2(a) has not theretofore been declared effective by
the SEC, each date which is thirty (30) days after the previous Computation Date
(pro rated for partial periods) until such Registration Statement is so declared
effective.
3. Obligations of the Company. In connection with the
registration of the Registrable Securities, the Company shall do each of the
following.
(a) Prepare promptly, and file with the SEC by forty-five (45)
days after the initial Closing Date, a Registration Statement with respect to
not less than the number of Registrable Securities provided in Section 2(a),
above, and thereafter use its reasonable best efforts to cause each Registration
Statement relating to Registrable Securities to become effective the earlier of
(a) 5 days after notice by the SEC that it may be declared effective or (b) one
hundred twenty (120) days following the initial Closing Date, and keep the
Registration Statement effective at all times until the earliest (the
"Registration Period") of (i) the date that is two years after the Closing Date
(ii) the date when the Investors may sell all Registrable Securities under Rule
144 or (iii) the date the Investors no longer own any of the Registrable
Securities, which Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) The Company shall permit a single firm of counsel
designated by the Initial Investors to review the Registration Statement and all
amendments and supplements thereto a reasonable period of time prior to their
filing with the SEC, and not file any document in a form to which such counsel
reasonably objects;
(d) Furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel identified to the
Company, (i) promptly after the same is prepared and publicly distributed, filed
with the SEC, or received by the Company, one (1) copy of the Registration
Statement, each preliminary prospectus and prospectus, and each amendment or
supplement thereto, and (ii) such number of copies of a prospectus, and all
amendments and supplements thereto and such other documents, as such Investor
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor;
<PAGE>
(e) As promptly as practicable after becoming aware of such
event, notify each Investor of the happening of any event of which the Company
has knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a 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, and use its best efforts promptly to prepare a supplement
or amendment to the Registration Statement or other appropriate filing with the
SEC to correct such untrue statement or omission, and deliver a number of copies
of such supplement or amendment to each Investor as such Investor may reasonably
request;
(f) As promptly as practicable after becoming aware of such
event, notify each Investor who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing underwriters) of the
issuance by the SEC of a Notice of Effectiveness or any notice of effectiveness
or any stop order or other suspension of the effectiveness of the Registration
Statement at the earliest possible time;
(g) Notwithstanding the foregoing, if at any time or from time
to time after the date of effectiveness of the Registration Statement, the
Company notifies the Investors in writing of the existence of a Potential
Material Event, the Investors shall not offer or sell any Registrable Shares, or
engage in any other transaction involving or relating to the Registrable Shares,
from the time of the giving of notice with respect to a Potential Material Event
until such Investor receives written notice from the Company that such Potential
Material Event either has been disclosed to the public or no longer constitutes
a Potential Material Event; provided, however, that the Company may not so
suspend the right to such holders of Registrable Shares for more than two twenty
(20) day period in the aggregate during any 12-month period ("Suspension
Period") with at least a ten (10) business day interval between such periods,
during the periods the Registration Statement is required to be in effect;
(h) Provide a transfer agent and registrar, which may be a
single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(i) Cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates for the Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates for the Registrable
Securities to be in such denominations or amounts as the case may be, as the
Investors may reasonably request, and, within three (3) business days after a
Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal counsel
selected by the Company to deliver, to the transfer agent for the Registrable
Securities (with copies to the Investors whose Registrable Securities are
included in such Registration Statement) an appropriate instruction and opinion
of such counsel; and
(j) Take all other reasonable actions necessary to expedite
and facilitate disposition by the Investor of the Registrable Securities
pursuant to the Registration Statement.
4. Obligations of the Investors. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
<PAGE>
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of the Registrable
Securities held by it, as shall be reasonably required to effect the
registration of such Registrable Securities and shall execute such documents in
connection with such registration as the Company may reasonably request. At
least five (5) days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor (the "Requested
Information") if such Investor elects to have any of such Investor's Registrable
Securities included in the Registration Statement.
(b) Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(e)
or 3(f), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or 3(f) and, if
so directed by the Company, such Investor shall deliver to the Company (at the
expense of the Company) or destroy (and deliver to the Company a certificate of
destruction) all copies in such Investor's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
5. Expenses of Registration. All expenses, other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 3, but including,
without limitation, all registration, listing, and qualifications fees, printers
and accounting fees, the fees and disbursements of counsel for the Company,
shall be borne by the Company.
6. Indemnification. In the event any Registrable
Securities are included in a Registration Statement under this Agreement:
<PAGE>
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act (each, an "Indemnified Person" or
"Indemnified Party"), against any losses, claims, damages, liabilities or
expenses (joint or several) (including reasonable attorneys fees) incurred
(collectively, "Claims") to which any of them may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof, or any prospectus included therein: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any post-effective amendment thereof or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the final prospectus (as
amended or supplemented, if the Company files any amendment thereof or
supplement thereto with the SEC) or the omission or alleged omission to state
therein any material fact necessary to make the statements made therein, in
light of the circumstances under which the statements therein were made, not
misleading or (iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to clause (b) of this Section 6, the Company shall
reimburse the Investors, promptly as such expenses are incurred and are due and
payable, for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a) shall not (I) apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Indemnified Person expressly for use in connection with the preparation of the
Registration Statement or any such amendment thereof or supplement thereto, (II)
be available to the extent such Claim is based on a failure of the Investor to
deliver or cause to be delivered the prospectus made available by the Company;
or (III) apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Each Investor will indemnify the Company and its
officers, directors and agents against any claims arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company, by or on behalf of such Investor, expressly
for use in connection with the preparation of the Registration Statement,
subject to such limitations and conditions as are applicable to the
Indemnification provided by the Company to this Section 6. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9;
<PAGE>
(b) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action (including any governmental action), such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be. In case any such action is brought against any Indemnified Person
or Indemnified Party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with any other indemnifying party similarly
notified, assume the defense thereof, subject to the provisions herein stated
and after notice from the indemnifying party to such Indemnified Person or
Indemnified Party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such Indemnified Person or Indemnified
Party under this Section 6 for any legal or other reasonable out-of-pocket
expenses subsequently incurred by such Indemnified Person or Indemnified Party
in connection with the defense thereof other than reasonable costs of
investigation, unless the indemnifying party shall not pursue the action of its
final conclusion. The Indemnified Person or Indemnified Party shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and reasonable out-of-pocket expenses of such
counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the Indemnified Person or Indemnified Party. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent permitted by
law; provided, however, that (a) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 6; (b) no seller of Registrable
Securities guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any seller
of Registrable Securities who was not guilty of such fraudulent
misrepresentation; and (c) contribution by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. Reports under Exchange Act. With a view to making available
to the Investors the benefits of Rule 144 promulgated under the Securities Act
or any other similar rule or regulation of the SEC that may at any time permit
the Investors to sell securities of the Company to the public without
registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
Securities Act and the Exchange Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
<PAGE>
9. Assignment of the Registration Rights. The rights to have
the Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee of the Registrable
Securities (or all or any portion of any Debenture of the Company which is
convertible into such securities) only if: (a) the Investor agrees in writing
with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such
assignment, (b) the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (i) the name and address of such
transferee or assignee and (ii) the securities with respect to which such
registration rights are being transferred or assigned, (c) immediately following
such transfer or assignment the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act and applicable
state securities laws, and (d) at or before the time the Company received the
written notice contemplated by clause (b) of this sentence the transferee or
assignee agrees in writing with the Company to be bound by all of the provisions
contained herein. In the event of any delay in filing or effectiveness of the
Registration Statement as a result of such assignment, the Company shall not be
liable for any damages arising from such delay, or the payments set forth in
Section 2(c) hereof.
10. Amendment of Registration Rights. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Investors who
hold an eighty (80%) percent interest of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall
be in writing and shall be deemed to be sufficiently given when personally
delivered (by hand, by courier, by telephone line facsimile transmission,
receipt confirmed, or other means) or sent by certified mail, return receipt
requested, properly addressed and with proper postage pre-paid (i) if to the
Company, GALVESTON'S STEAKHOUSE CORP., 151 E. Alessandro Blvd., Riverside,
California 92500, ATTN: Mr. Richard Lee, Telecopier No.: (714)557-4651; with a
copy to Lehman & Eilen, Esqs., 50 Charles Lindbergh Blvd., Uniondale, New York
11553, Attention: Hank Gracin, Esq., Telecopier No.: (516) 222-0948; (ii) if to
the Initial Investor, at the address set forth under its name in the Securities
Purchase Agreement and (iii) if to any other Investor, at such address as such
Investor shall have provided in writing to the Company, or at such other address
as each such party furnishes by notice given in accordance with this Section
11(b), and shall be effective, when personally delivered, upon receipt and, when
so sent by certified mail, four (4) calendar days after deposit with the United
states Postal Service.
(c) Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
<PAGE>
(d) This Agreement shall be governed by and interpreted in
accordance with the laws of the State of New York. Each of the parties consents
to the jurisdiction of the federal courts whose districts encompass any part of
the City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non coveniens, to the bringing of any such
proceeding in such jurisdictions. A facsimile transmission of this signed
Agreement shall be legal and binding on all parties hereto. This Agreement may
be signed in one or more counterparts, each of which shall be deemed an
original. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement. If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction. This Agreement may
be amended only by an instrument in writing signed by the party to be charged
with enforcement. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(e) This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties hereto.
(g) All pronouns and any variations thereof refer to the
masculine, feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by telephone line facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.
(j) Neither party shall be liable for consequential damages.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
GALVESTON'S STEAKHOUSE CORP.
By: /s/ Richard M. Lee
Name: Richard M. Lee
Title: Chairman & CEO
------------------------------------
By: --------------------------------
Name: ------------------------------
Title: -----------------------------
------------------------------------
By: --------------------------------
Name: ------------------------------
Title: -----------------------------
<PAGE>
EXHIBIT 10.21
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
No. US $ ___________
GALVESTON'S STEAKHOUSE CORP.
6% CONVERTIBLE DEBENTURE DUE JULY 15, 2001
THIS DEBENTURE is one of a duly authorized issue of up to $1,000,000 in
Debentures of GALVESTON'S STEAKHOUSE CORP., a corporation duly organized and
existing under the laws of the State of Delaware (the "Company") designated as
its 6% Convertible Debenture Due July 15, 2001.
FOR VALUE RECEIVED, the Company promises to pay to __________., the
registered holder hereof (the "Holder"), the principal sum of
_________________ THOUSAND and 00/100 (US $_________) Dollars on July 15, 2001
(the "Maturity Date") and to pay interest, in arrears on the principal sum
outstanding from time to time in arrears, on a quarterly basis on, September 30,
December 31, March 31 and June 30 of each year, at the rate of 6% per annum
accruing from the date of initial issuance. Accrual of interest shall commence
on the first such business day to occur after the date hereof until payment in
full of the principal sum has been made or duly provided for. Subject to the
provisions of #4 below, the principal of, and interest on, this Debenture are
payable at the option of the Holder, in shares of Common Stock $.01 par value
per share of the Company ("Common Stock"), or in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts, at the address last appearing on the Debenture
Register of the Company as designated in writing by the Holder from time to
time. The Company will pay the principal of and interest upon this Debenture on
the Maturity Date, less any amounts required by law to be deducted, to the
registered holder of this Debenture as of the tenth day prior to the Maturity
Date and addressed to such holder as the last address appearing on the Debenture
Register. The forwarding of such check shall constitute a payment of principal
and interest hereunder and shall satisfy and discharge the liability for
principal and interest on this Debenture to the extent of the sum represented by
such check plus any amounts so deducted.
<PAGE>
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Fifty Thousand
Dollars (US$50,000) and integral multiples thereof. The Debentures are
exchangeable for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holders surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Debenture any amounts required to be
withheld under the applicable provisions of the United States income tax laws or
other applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This Debenture has been issued subject to investment representations
of the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Debenture, the Company may require, prior to issuance of a new
Debenture in the name of such other person, that it receive reasonable transfer
documentation including opinions that the issuance of the Debenture in such
other name does not and will not cause a violation of the Act or any applicable
state or foreign securities laws. Prior to due presentment for transfer of this
Debenture, the Company and any agent of the Company may treat the person in
whose name this Debenture is duly registered on the Company's Debenture Register
as the owner hereof for the purpose of receiving payment as herein provided and
for all other purposes, whether or not this Debenture be overdue, and neither
the Company nor any such agent shall be affected by notice to the contrary.
<PAGE>
4. A. Subject to Section 4B and 4C, the Holder of this Debenture is
entitled, at its option, to convert at any time, the principal amount of this
Debenture, provided that the principal amount is at least US $10,000 (unless if
at the time of such election to convert the aggregate principal amount of all
Debentures registered to the Holder is less that Ten Thousand Dollars (US
$10,000), then the whole amount thereof) into shares of Common Stock of the
Company at a conversion price for each share of Common Stock equal to 85% of the
Market Price (as herein defined) on the Conversion Date; provided, further, that
if such conversion is effected prior to the effective date of the Registration
Statement filed pursuant to the Registration Rights Agreement between the
Company and the Holder, or the Holder's predecessor in interest, the restrictive
legend required by the Act shall be applied to the shares of Common Stock so
issued. For purposes of this Section 4, the "Market Price" shall mean the
average closing sales price of the Company's Common Stock for the five days
preceding the Conversion Date as reported by the National Association of
Securities Dealers. Conversion shall be effectuated by surrendering the
Debentures to be converted to the Company with the form of conversion notice
attached hereto as Exhibit A, executed by the Holder of the Debenture evidencing
such Holder's intention to convert this Debenture or a specified portion (as
above provided) hereof, and accompanied, if required by the Company, by proper
assignment hereof in blank. Interest (and penalties) accrued or accruing from
the date of issuance to the date of conversion shall, at the option of the
Company, be paid in cash or Common Stock upon conversion at the Conversion Rate.
No fraction of Shares or scrip representing fractions of shares will be issued
on conversion, but the number of shares issuable shall be rounded to the nearest
whole share. The date on which notice of conversion is given (the "Conversion
Date") shall be deemed to be the date on which the Holder has delivered this
Debenture, with the conversion notice duly executed, to the Company or, the date
set forth in such facsimile delivery of the notice of conversion if the
Debenture is received by the Company within three (3) business days therefrom.
Facsimile delivery of the conversion notice shall be accepted by the Company at
telephone number (714-557-4651); ATTN: R. Lee). Certificates representing Common
Stock upon conversion will be delivered within three (3) business days from the
date the notice of conversion with the original Debenture is delivered to the
Company.
B. (i) The Company shall have the right to redeem any Debentures
for which a Notice of Conversion has not theretofore been
submitted by delivering a Notice of Redemption to the Holder
of the Debenture; provided, however, that the Holder shall
have two (2) business days following the issuance of any
such Notice of Redemption to deliver a Notice of Conversion
to the Company in respect of the Debenture; provided,
further, that in the event the Holder shall so determine to
deliver a Notice of Conversion to the Company following the
Company's issuance of a Notice of Redemption,
notwithstanding anything to the contrary contained in this
Debenture, the applicable Conversion Price for the Debenture
shall be equal to 85% of the closing sales price of the
Company's Common Stock on last trading day preceding the
Conversion Date as reported by the National Association of
Securities Dealers.
(ii) The redemption price shall be equal to 115% of the then
outstanding principal amount of the Debenture.
(iii) The redemption price shall be paid to the Holder in cash
within ten (10) days from the date of the Notice of
Redemption. In the event such payment is not timely made,
the Notice of Redemption shall be null and void.
C. The Company shall have the right to require, by written
notice to the Holder of this Debenture no more than thirty (30) days, and no
less than ten (10) days, prior to the Maturity Date, that the Holder of this
Debenture exercise its right of conversion with respect to all or that portion
of the principal amount and interest outstanding on the Maturity Date.
<PAGE>
5. No provision of this Debenture shall alter or impair the obligation
of the Company, which is absolute and unconditional, to pay the principal of,
and interest on, this Debenture at the time, place, and rate, and in the coin or
currency, herein prescribed. This Debenture and all other Debentures now or
hereafter issued of similar terms are direct obligations of the Company.
6. No recourse shall be had for the payment of the principal of, or the
interest on, this Debenture, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
7. If the Company merges or consolidates with another corporation or
sells or transfers all or substantially all of its assets to another person and
the holders of the Common Stock are entitled to receive stock, securities or
property in respect of or in exchange for Common Stock, then as a condition of
such merger, consolidation, sale or transfer, the Company and any such
successor, purchaser or transferee agree that the Debenture may thereafter be
converted on the terms and subject to the conditions set forth above into the
kind and amount of stock, securities or property receivable upon such merger,
consolidation, sale or transfer by a holder of the number of shares of Common
Stock into which this Debenture might have been converted immediately before
such merger, consolidation, sale or transfer, subject to adjustments which shall
be as nearly equivalent as may be practicable. In the event of any proposed
merger, consolidation or sale or transfer of all or substantially all of the
assets of the Company (a "Sale"), the Holder hereof shall have the right to
convert by delivering a Notice of Conversion to the Company within fifteen (15)
days of receipt of notice of such Sale from the Company. In the event the Holder
hereof shall elect not to convert, the Company may prepay all outstanding
principal and accrued interest on this Debenture, less all amounts required by
law to be deducted, upon which tender of payment following such notice, the
right of conversion shall terminate.
8. The Holder of the Debenture, by acceptance hereof, agrees that this
Debenture is being acquired for investment and that such Holder will not offer,
sell or otherwise dispose of this Debenture or the Shares of Common Stock
issuable upon conversion thereof except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
9. This Debenture shall be governed by and construed in accordance with
the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this Agreement and
hereby waives, to the maximum extent permitted by law, any objection, including
any objection based on forum non coveniens, to the bringing of any such
proceeding in such jurisdictions.
10. The following shall constitute an "Event of Default":
<PAGE>
a. The Company shall default in the payment of principal
or interest on this Debenture and such default shall
remain unremedied for three (3) business days after
the Company has been notified of the default in
writing by a Holder; or
b. Any of the representations or warranties made by the
Company herein, in the Securities Purchase Agreement,
or in any certificate or financial or other written
statements furnished by the Company in connection
with the execution and delivery of this Debenture or
the Securities Purchase Agreement shall be false or
misleading in any material respect at the time made;
or
c: The Company fails to issue shares of Common Stock to the Holder
or to cause its Transfer Agent to issue shares of Common Stock
upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Debenture, fails
to transfer or to cause its Transfer Agent to transfer any
certificate for shares of Common Stock issued to the Holder upon
conversion of this Debenture and when required by this Debenture
or the Registration Rights Agreement, or fails to remove any
restrictive legend or to cause its Transfer Agent to transfer on
any certificate or any shares of Common Stock issued to the
Holder upon conversion of this Debenture as and when required by
this Debenture, the Securities Purchase Agreement or the
Registration Rights Agreement and any such failure shall
continue uncured for three (3) business days after the Company
has been notified of such failure in writing by Holder.
d. The Company shall fail to perform or observe, in any
material respect, any other covenant, term,
provision, condition, agreement or obligation of the
Company under this Debenture and such failure shall
continue uncured for a period of thirty (30) days
after written notice from the Holder of such failure;
or
e. The Company shall (1) admit in writing its inability
to pay its debts generally as they mature; (2) make
an assignment for the benefit of creditors or
commence proceedings for its dissolution; or (3)
apply for or consent to the appointment of a trustee,
liquidator or receiver for its or for a substantial
part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its
property or business without its consent and shall
not be discharged within sixty (60) days after such
appointment; or
<PAGE>
g. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental
agency shall assume custody or control of the whole
or any substantial portion of the properties or
assets of the Company and shall not be dismissed
within sixty (60) days thereafter; or
h. Any money judgment, writ or warrant of attachment, or
similar process in excess of Five Hundred Thousand
($500,000) Dollars in the aggregate shall be entered
or filed against the Company or any of its properties
or other assets and shall remain unpaid, unvacated,
unbonded or unstayed for a period of sixty (60) days
or in any event later than five (5) days prior to the
date of any proposed sale thereunder; or
i. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors
shall be instituted by or against the Company and, if
instituted against the Company, shall not be
dismissed within sixty (60) days after such
institution or the Company shall by any action or
answer approve of, consent to, or acquiesce in any
such proceedings or admit the material allegations
of, or default in answering a petition filed in any
such proceeding; or
j. The Company shall have its Common Stock suspended or
delisted from an exchange or over-the-counter market
from trading for a period in excess of five trading
days.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider this
Debenture immediately due and payable, without presentment, demand, protest or
notice of any kinds, all of which are hereby expressly waived, anything herein
or in any note or other instruments contained to the contrary notwithstanding,
and the Holder may immediately enforce any and all of the Holder's rights and
remedies provided herein or any other rights or remedies afforded by law.
11. Nothing contained in this Debenture shall be construed as
conferring upon the Holder the right to vote or to receive dividends or to
consent or receive notice as a shareholder in respect of any meeting of
shareholders or any rights whatsoever as a shareholder of the Company, unless
and to the extent converted in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: July 15, 1998
GALVESTON'S STEAKHOUSE CORP.
By:/s/ ------------------------
/s/ ---------------------------
(Print Name)
---------------------------
(Title)
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Debenture)
The undersigned hereby irrevocably elects to convert $ ________________
of the principal amount of the above Debenture No. ___ into shares of Common
Stock of GALVESTON'S STEAKHOUSE CORP. (the "Company") according to the
conditions hereof, as of the date written below. In converting the Debenture No.
______________, the undersigned hereby confirms and acknowledges that the shares
of Common Stock are being acquired solely for the account of the undersigned and
not a nominee for any other party, and that the undersigned will not offer, sell
or otherwise dispose of any such shares of Common Stock, except under
circumstances that will not result in a violation of the Securities Act of 1933,
as amended.
Date of Conversion* ------------------------------------------------------------
Applicable Conversion Price ----------------------------------------------------
Signature ----------------------------------------------------------------------
[Name]
Address: -----------------------------------------------------------------------
-----------------------------------------------------------------------
* This original Debenture and Notice of Conversion must be received by the
Company by the third business date following the Date of Conversion.
<PAGE>
EXHIBIT 10.22
NOTE PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is made this 28th day of September 1998, between
Galveston's Steakhouse Corp. and its assignees and/or successors (the "Company")
and Talisman Capital Opportunity Fund Ltd. (the "Purchaser").
RECITAL
WHEREAS, the Company has authorized, the issuance and sale of the Company's
Secured Convertible Note in the amount of one million four hundred thousand
dollars ($1,400,000.00) (the "Note").
WHEREAS, the Purchaser desires to purchase the Note set forth on Schedule I
hereto.
NOW, THEREFORE, in consideration of the foregoing and of the terms and
conditions contained in this Agreement, the Company and Purchaser agree as
follows:
NOTE.The Company agrees to sell and the Purchaser agrees to buy a Note, for a
price of 100% of the face value. Subject to the terms and conditions
contained in this Agreement and in the Note, at the Closing (as hereinafter
defined) the Purchaser shall purchase from the Company and the Company
shall sell to the Purchaser the Note set forth on Schedule I hereto.
CLOSING.
Date of Closing. The Closing of the purchase and sale of the Notes (the
"Closing") shall take place on or before October 9, 1998.
2.1 Items to be Delivered to Purchaser. The following shall be delivered
by the Company to each Purchaser on the Closing Date:
a) An executed copy of the Note Purchase Agreement;
b) The Note purchased by such Purchaser (Exhibit A);
c) A legal opinion of counsel to the Company covering the due
execution, delivery and binding effect of this Agreement and the
Notes; and
d) A certificate of the secretary of the Company certifying (i)
an attached complete and correct copy of its articles of
incorporation, (ii) an attached complete and correct copy of
its bylaws, and (iii) an attached complete and correct copy of
resolutions duly adopted by its board of directors authorizing
the execution, delivery and performance of this Agreement and
the Notes;
e) Properly executed and duly authorized Collateral Assignment
Agreement.
<PAGE>
2.2 Items to be Delivered to the Company. The following shall be delivered
by each Purchaser to the Company on the Closing Date:
a) The purchase price set forth on Schedule I by wire transfer to
the account designated by the Company.
b) Executed copy of the Note Purchase Agreement.
REPRESENTATIONS AND WARRANTIES.
3.1 Representations and Warranties of the Company. The Company represents
and warrants that as of the date of this Agreement:
a) Existence. The Company is a corporation duly organized and in
good standing under the laws of the State of Delaware and is
duly qualified to do business and is in good standing in all
states where such qualification is necessary, except for those
jurisdictions in which the failure to qualify would not, in
the aggregate, have a material adverse effect on the Company's
financial condition, results of operations or business.
b) Authority. The execution and delivery by the Company of this
Agreement and the Notes (i) are within the Company's corporate
powers; (ii) are duly authorized by the Company's board of
directors; (iii) are not in contravention of the terms of the
Company's certificate of incorporation or bylaws; (iv) are not in
contravention of any law or laws: (v) except for the filing of a
Form D Notice with the Securities and Exchange Commission and any
exemption filing related thereto which may be required pursuant to
applicable state securities or "blue sky" laws, do not require any
governmental consent, registration or approval; (vi) do not
contravene any contractual or governmental restriction binding upon
the Company; and (vii) will not result in the imposition of any
lien, charge, security interest or encumbrance upon any property of
the Company under any existing indenture, mortgage, deed of trust,
loan or credit agreement or other material agreement or instrument
to which the Company is a party or by which the Company or any of
the Company's property may be bound or affected.
c) Binding Effect. This Agreement and Notes have been duly
authorized, executed and delivered by the Company and
constitute the valid and legally binding obligation of the
Company, enforceable in accordance with their respective
terms, subject to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
d) Litigation. There is neither pending nor, to the Company's
knowledge and belief, threatened any action, suit, proceeding
or claim, or any basis therefor, to which the Company is or
may be named as a party or its property is or may be subject
or which calls into question any of the transactions
contemplated by this Agreement.
f) Securities Matters. Subject to the accuracy of the
representations of the Purchaser set forth in Section 3.2
hereof, the offer, sale and issuance of the Notes and the
Shares as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act of 1933 as
amended (The "Securities Act"). The Company has complied and
will comply with all applicable state "blue sky" or securities
laws in connection with the offer, sale and issuance of the
Notes and the Shares as contemplated by this Agreement.
<PAGE>
g) Independent Auditors. The Company shall, until at least three
(3) years after the Closing Date, maintain as its independent
auditors an accounting firm authorized to practice before the
SEC.
h) Registration Rights. The Company will enter into a
registration rights agreement covering the resale of the
Conversion Shares and the Warrant Shares having the terms set
forth in Section 4 of this Agreement.
i) Asset Transfers. The Company shall not transfer, sell, convey,
use as collateral or otherwise dispose of any of its material
assets to any Subsidiary or affiliate except for a cash or
cash equivalent consideration and for a proper business
purpose, while any of the Notes are outstanding, without
written consent from the Purchaser.
j) Right of First Offer. The Company agrees that, during the period
beginning on the date hereof and terminating on the second
anniversary of the date of the Closing, the Company will not,
without the prior written consent of the Investor issue or sell, or
agree to issue or sell any equity or debt securities of the Company
or any of its subsidiaries (or any security convertible into or
exercisable or exchangeable, directly or indirectly, for equity or
debt securities of the Company or any of its subsidiaries) ("Future
Offerings") unless the Company shall have first delivered to the
Investor at least ten (10) trading days prior to the closing of
such Future Offering, written notice describing the proposed Future
Offering, including the terms and conditions thereof, and providing
the Investor and its affiliates an option during the five (5)
trading day period following delivery of such notice to purchase up
to the full amount of the securities being offered in the Future
Offering on the same terms as contemplated by such Future Offering.
The Investor shall notify the Company, in writing, prior to the end
of such ten (10) trading day period if it desires to participate in
the Future Offering.
k) Payment of Taxes and Other Claims. The Company shall pay or
discharge or cause to be paid or discharged, before the same shall
become delinquent, (i) in all material taxes, assessments and
governmental charges (including withholding taxes and any
penalties, interest and additions to taxes) levied or imposed upon
it or any of its Subsidiaries or properties of it or any of its
Subsidiaries and (ii) all lawful claims for labor, materials, and
supplies that, if unpaid, might by law become a Lien upon the
property of it or any of its Subsidiaries; provided, however, that
the Company shall not be required to pay or discharge any such tax,
assessment, charge or claim whose amount, applicability or validity
is being contested in good faith by appropriate proceedings
properly instituted and diligently conducted for which adequate
reserves, to the extent required under GAAP, have been taken.
<PAGE>
l) Compliance Certificate; Notice of Default. The Company shall
deliver to the Buyer, within 90 days after the end of the
Company's fiscal year, an Officer's Certificate stating that a
review of its activities and the activities of its
Subsidiaries during the preceding fiscal year has been made
under the supervision of the signing officers with a view to
determining whether each of the Company and its Subsidiary has
kept, observed, performed and fulfilled its obligations under
this agreement.
m) Compliance with Laws. The Company shall comply, and shall
cause each of its Subsidiaries to comply, with all applicable
statutes, rules, regulations, orders and restrictions of the
United States of America, all states and municipalities
thereof, and of any instrumentality of the foregoing, in
respect of the conduct of their respective businesses and the
ownership of their respective properties, expect for
noncompliances as are not in the aggregate reasonably likely
to have a material adverse effect on the financial condition
or results of operations of the Company and its Subsidiaries,
taken as a whole.
n) Waiver of Stay, Extension of Usury Laws. The Company covenants that
it will not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or
extension law or any usury law or other law that would prohibit or
forgive the Company from paying all or any portion of the principal
of or interest on the Notes as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect
the covenants or the performance if this Indenture; and (to the
extent that it may lawfully do so) the Company hereby expressly
waives all benefit or advantage of any such law, and covenants
that it will not hinder, delay or impede the execution of any power
herein granted to the Buyer, but will permit the execution of every
such power as though no such law had been enacted.
o) Limitation on Dividend and Other Payment Restricitons
Affecting Subsidiaries. The Company shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly,
create or otherwise cause or permit to exist or become
effective any encumbrance or restriction on the ability of any
Subsidiary to (a) pay dividend or make any other distributions
on or in respect of its Capital Stock; or (b) make loans or
advances or to pay any Indebtedness or other obligation owed
to the Company or any Subsidiary.
p) Change of Control. Upon the occurrence of a Change of Control, the
Company shall make an offer to purchase the outstanding Note at a
purchase price equal to the greater of: (i) 150% of the principal
amount thereof plus accrued interest to the date of purchase; or
(ii) the intrinsic value of the Note on the date the change of
control occurs. As defined herein and in Exhibits A and B hereto,
intrinsic value is defined as: (applicable market price - maximum
conversion price) x ((principal amount of Note outstanding + any
and all accrued and unpaid interest + fees)/ (maximum conversion
price)). Change of Control shall be defined as: (i) a purchase of a
majority of the Company's Common Stock; (ii) a merger of the
Company with another entity which results in shareholders of the
Company owning less than 50.01% of the Company; (iii) the removal
of Richard M. Lee as Chairman or Chief Executive Officer; (iv) the
sale of the Company to another entity.
<PAGE>
3.2 Representations and Warranties of the Purchasers. Each Purchaser
represents and warrants that as of the date of the execution of this
Agreement:
a) Authorization. This Agreement constitutes a valid and legally
binding obligation of such Purchaser.
b) Investment Representations.
(i) The Purchaser has received and reviewed the Company's
disclosure documents and the Purchaser or the
Purchaser's designated representatives have concluded
a satisfactory due diligence investigation of the
Company and have had an opportunity to have all their
questions regarding the Company satisfactorily
answered.
(ii) The Purchaser (or its members and/or officers) have
previously invested in unregistered securities and
have sufficient financial and investing expertise to
evaluate and understand the risks of the Notes and
the Shares.
(iii) The Purchaser has received financial information and
general business information from the Company, and is
relying on, representations (except as set forth in
the Agreement) and projections with respect to the
Company's business and prospects.
(iv) The Purchaser is an "accredited investor" within the
meaning of Regulation D under the Securities Act.
(v) The Purchaser is acquiring the Notes and the Shares
for investment purposes only without intent to
distribute the same, and acknowledges that the Notes
and the Shares have not been registered under the
Securities Act and applicable state securities laws,
and accordingly, constitute "restricted securities"
for purposes of the Securities Act and such state
securities laws.
(vi) The Purchaser acknowledges that it will not be able
to transfer the Notes and Shares except upon
compliance with the registration requirements of the
Securities Act and applicable state securities laws
or exemptions therefrom.
(vii) The certificates and/or instruments evidencing the
Notes will contain a legend to the foregoing effect.
(viii) Neither the Buyer, nor any affiliate of the Buyer,
will enter into, any put option, short position, or
other similar position with respect to the Notes or
the shares, nor shall Buyer lend the Notes or the
shares to any person, whether or not an affiliate, so
as to enable or assist such person to enter into, any
put option, short position, or other similar position
with respect to the Notes or the shares, except that
margin accounts used by the Buyer to hold the Notes
or shares shall not be deemed to be a lending of
notes or shares.
<PAGE>
3.3 Obligations of the Buyer. All obligations entered into by the Buyer
are contingent on successful completion of due diligence by the Buyer.
REGISTRATION RIGHTS.
4.1 Registration of Shares.
a) The Company shall prepare and file with the SEC a registration
statement as soon as practical, which registration statement shall
include shares issuable upon conversion of the Notes, and shall
thereafter use its best efforts to have such registration statement
declared effective within 120 days after the Closing Date (the
"Target Date") and remain effective until the earlier of the date on
which all the Notes are sold or for the life of the Note (the
"Effective Period"). Such Registration Statement shall initially
cover at least 150% of the shares issuable upon conversion of the
Notes into Common Stock and shall cover, to the extent allowed by
applicable law, such additional indeterminate number of shares of
Common Stock as are required to effect conversion of the Notes due to
fluctuations in the price of the Company's Common Stock, in
accordance with Rule 416 of the Act. The Company shall prepare and
file with the SEC such amendments and supplements necessary to keep
such registration statement effective throughout the Effective Period
and to comply with the provisions of the Securities Act with respect
to the sale of other disposition of the Shares covered by such
registration statement whenever the Purchaser shall desire to sell or
otherwise dispose of the same.
b) If the effectiveness of the Registration statement is suspended or a
current prospectus meeting the requirements of Section 10 of the Act
is not available for delivery by the Purchaser for a period of more
than ten (10) calendar days (either referred to herein as a
"suspension"), the Company shall pay to the Purchasers as
liquidated damages an aggregate amount equal to two percent (2%) of
the total purchase price of the Notes for each thirty (30) day period
following the initial ten (10) days of the suspension. Such amounts
shall be pro-rated daily and paid to each Purchaser by cashier's
check or wire transfer in immediately available funds to such account
as shall be designated in writing by the Purchaser. Failure to make
such payments within three (3) business days of the end of each
calendar month shall be considered under the terms of the Note an
Event of Default.
c) Any amount payable pursuant to the foregoing provisions shall
be delivered on or before the third (3rd) day following the
end of the calendar month in which such payment or delivery
obligation arose.
d) The Company shall file a request for acceleration of
effectiveness of the registration statement within five days
after it has received a no review/no further comment
determination from the SEC.
4.2 Participation in Registered Offerings ("Piggyback Rights" for Shares).
If the Company at any time after the date of this Agreement and prior
to the maturity or full conversion of the Notes proposes or is
required to register any of its shares or other equity securities for
public sale for cash under the Securities Act, it will at each such
time or times give written notice to the Purchaser of its intention to
do so. Upon the written request of the Purchaser given within twenty
(20) days after receipt of any such notice, the Company shall use its
best efforts to cause to be included in such registration any Shares
held by the Purchaser or Shares obtainable upon conversion of the Note
and requested to be registered under the Securities Act and any
applicable state securities laws; provided, that if the managing
underwriter advises that less than all of the shares to be registered
should be offered for sale so as not materially and adversely to
affect the price or salability of the offering being registered by the
company, the Purchaser (but not the Company to the extent it desires
to include shares for its own account) shall reduce the number of its
shares to be included in the registration statement, but in no case
should the share reduction be more than 50% of the shares initially
proposed to be registered by the Purchaser as required by the
underwriter to the extent requisite to permit the sale or other
disposition (in accordance with the intended method of disposition
thereof as aforesaid) by the prospective seller or sellers of the
securities so registered. The registration requested pursuant to this
Section 4.2 is referred to herein as the "Piggyback Registration".
<PAGE>
4.3 Demand Registration Rights. If the Holders of a majority of the Notes
so elect, an offering of Registrable Securities pursuant to the
Registration Statement may be effected in an Underwritten Offering of
the Company. In such event, the investment banker that will administer
the offering will be selected by the Holders of a majority of the
Registrable Securities to be included in such offering. In connection
with any Underwritten Offering, if the managing underwriters advise
the Company and the participating Holders in writing that in their
opinion the amount of Registrable Securities proposed to be sold in
such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there
shall be included in such Underwritten Offering the amount of such
Registrable Securities which in the opinion of such managing
underwriters can be sold, and such amount shall be allocated pro rata
among the Holders proposing to sell Registrable Securities in such
Underwritten Offering. No Holder may participate in any Underwritten
Offering hereunder unless such Holder (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting
agreements approved by the Persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other
documents required under the terms of such arrangements.
4.4 Obligations of the Purchaser. It shall be a condition precedent to the
obligation of the company to register any Shares pursuant to this
Section 4 that Purchaser shall furnish to the Company such information
regarding the Shares held and the intended method of disposition
thereof and other information concerning the Purchaser as the Company
shall reasonably request and as shall be required in connection with
the registration statement to be filed by the company. If after a
registration statement becomes effective the Company advises the
Purchaser that the Company considers it appropriate to amend or
supplement the applicable registration statement, the Purchaser shall
suspend further sales of the Shares until the Company advises the
Purchaser that such registration statement has been amended or
supplemented.
4.5 Registration Proceedings. Whenever the Company is required by the
provisions of this Section 4 to effect the registration of the Shares
under the Securities Act, the Company shall:
(i) Prepare and file with the SEC a registration statement with
respect to such securities and use its best efforts to cause
such registration statement to become and remain effective;
(ii) Prepare and file with the SEC such amendments to such
registration statement and supplements to the prospectus
contained therein as may be necessary to keep such
registration statement effective;
(iii) Furnish to the Purchaser and to the underwriters of the
securities being registered such reasonable number of copies
of the registration statement, preliminary prospectus, final
prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering
of such securities;
(iv) Use its best efforts to register or qualify the securities
covered by such registration statement under such state
securities or Blue Sky Laws of such jurisdictions as the
Purchaser may reasonably request within twenty (20) days
following the original filing of such registration statement,
except that the Company shall not for any purpose be required
to execute a general consent to service of process or to
qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified.
(v) Notify the Purchaser, within three (3) business days after it
shall receive notice thereof, of the time when such
registration statement has become effective or a supplement to
any prospectus forming a part of such registration statement
has been filed;
(vi) Notify the Purchaser within three (3) business days of any
request by the SEC for the amending or supplementing of such
registration statement or prospectus or for additional
information; and
(vii) Prepare and promptly file with the SEC and promptly notify the
Purchaser of the filing of such amendment or supplement to such
registration statement or prospectus as may be necessary to
correct any statements or omissions if, at the time when a
prospectus relating to such securities is required to be delivered
under the Securities Act, any event shall have occurred as the
result of which any such prospectus or any other prospectus as then
in effect would include an untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading. Notwithstanding any provision herein to the contrary,
the Company shall not be required to amend, supplement, or update a
prospectus contained in any registration statement if to do so
would result in an unduly burdensome expense to the Company.
<PAGE>
4.6 Expenses. If registration pursuant to Section 4 does not occur, with
respect to the inclusion of the Shares in a registration statement
pursuant to this Section 4, all registration expenses, fees, costs and
expenses of and incidental to such registration, inclusion and public
offering in connection therewith shall be borne by the Company. The
fees, costs and expenses of registration to be borne by the Company
shall include, without limitation, all registration, filing, printing
expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or
underwriters of such securities (if the Company and/or selling
security holders are required to bear such fees and disbursements),
and all legal fees and disbursements and other expenses of complying
with state securities or Blue Sky Laws of any jurisdiction in which
the securities to be offered are to be registered or qualified.
4.7 Indemnification of the Holder. Subject to the conditions set forth
below, in connection with any registration of the Shares pursuant to
this Section 4, the Company agrees to indemnify and hold harmless the
Purchaser, any underwriter for the Company or acting on behalf of the
Purchaser and each person, if any, who controls the Purchaser, within
the meaning of Section 15 of the Securities Act, as follows:
(i) Against any and all loss, claim, damage and expense whatsoever
arising out of or based upon (including, but not limited to, any and
all expense whatsoever reasonable incurred in investigating,
preparing or defending any litigation, commenced or threatened, or
any claim whatsoever based upon) any untrue or alleged untrue
statement of a material fact contained in any preliminary
prospectus (if used prior to the effective date of the registration
statement), the registration statement or the prospectus (as from
time to time amended and supplemented), or in any application or
other document executed by the Company or based upon written
information furnished by the Company filed in any jurisdiction in
order to qualify the Company's securities under the Securities laws
thereof, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or any other violation of applicable federal
or state statutory or regulatory requirements or limitations
relating to action or inaction by the Company in the course of
preparing, filing, or implementing such registered offering;
provided, however, that the indemnity agreement contained in this
section shall not apply to any loss, claim, damage, liability or
action arising out of or based upon any untrue or alleged untrue
statement or omission made in reliance upon and in conformity with
any information furnished in writing to the company by or on behalf
of the Purchaser expressly for use in connection therewith or
arising out of any action or inaction of the Purchaser;
(ii) Subject to the provision contained in Subsection 4.6 (i)
above, against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid
in settlement of any litigation, commenced or threatened, or
of any claim whatsoever based upon any untrue statement or
omission (including, but not limited to, any and all expense
whatsoever reasonable incurred in investigating, preparing or
defending against any such litigation or claim) if such
settlement is effected with the written consent of the
Company;
<PAGE>
(iii) In no case shall the Company be liable under this indemnity
agreement with respect to any claim made against such seller,
underwriter or any such controlling person unless the Company shall
be notified, by letter or by facsimile confirmed by letter, of any
action commenced against such persons, promptly after such person
shall have been served with the summons or other legal process
giving information as to the nature and basis of the claim. The
failure to so notify the Company, if prejudicial in any material
respect to the Company's ability to defend such claim, shall relieve
the Company from its liability to the indemnified person under this
Section 4, but only to the extent that the Company was prejudiced.
The failure to so notify the Company shall not relieve the Company
from any liability which it may have otherwise than on account of
this indemnity agreement. The Company shall be entitled to
participate at its own expense in the defense of any suit brought to
enforce any such claim, but if the company elects to assume the
defense, such defense shall be conducted by counsel chosen by it,
provided such counsel is reasonably satisfactory to the sellers or
controlling persons, defendants in any suit so brought. In the event
the Company elects to assume the defense of any such suit and retain
such counsel, the sellers, underwriter or controlling persons,
defendants in the suit, shall, after the date they are notified of
such election, bear the fees and expenses of any counsel thereafter
retained by them, as well as any other expenses thereafter incurred
by them in connection with the defense thereof; provided, however,
that if the sellers, underwriter or controlling persons reasonably
believe that there may be available to them any defense or
counterclaim different than those available to the Company or that
representation of such sellers, underwriters or controlling persons
by counsel for the Company presents a conflict of interest for such
counsel, then such sellers, underwriter and controlling person shall
be entitled to defend such suit with counsel of their own choosing
and the Company shall bear the fees, expenses and other costs of
such separate counsel.
4.8 Indemnification of the Company. Each Purchaser agrees to indemnify and
hold harmless the Company, each underwriter for the offering, and each
of their officers and directors and agents and each other person, if
any, who controls the Company and underwriter within the meaning of
Section 15 of the Securities Act against any and all such losses,
liabilities, claims, damages and expenses as are indemnified against
by the Company under Section 4.6 above; provided, however, that such
indemnification by Purchaser hereunder shall be limited to any losses,
liabilities, claims, damages, or expenses to the extent caused by any
untrue statement of a material fact or omission of a material fact
(required to be stated therein or necessary to make statements therein
not misleading), if any are made (or in settlement of any litigation
effected with the written consent of such sellers, alleged to have
been made) in any preliminary prospectus, in the registration
statement or prospectus or in any amendment or supplement thereof or
in any report furnished in respect to such seller by or on behalf of
such seller expressly for use in any preliminary prospectus, in the
registration statement or prospectus or in any amendment or supplement
thereof or in any such application or other document or arising out of
any action or inaction of such seller in implementing such registered
offering. Notwithstanding the foregoing, the indemnification
obligation of each Purchaser shall not exceed the purchase price of
the Notes paid by such Purchaser. In case any action shall be brought
against the Company, or any other person so indemnified, in respect of
which indemnity may be sought against any seller, such seller shall
have the rights and duties given to the Company, and each other person
so indemnified shall have the rights and duties given to the
Purchaser, by the provisions of Section 4.6. The person indemnified
agrees to notify the sellers promptly after the assertion of any claim
against the person indemnified in connection with the sale of
securities.
<PAGE>
4.9 Contribution. If the indemnification provided for in Sections 4.6 and
4.7 above are unavailable or insufficient to hold harmless an
indemnified party in respect of an losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then
each indemnifying party shall contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages
or liabilities (or actions in respect thereof) in such proportion as
is appropriate to reflect the relative fault of the indemnified party,
on one hand, and such indemnifying party, on the other hand, in
connection with the statements or omissions which resulted in such
losses, claims, damages, or liabilities (or actions in respect
thereof). The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of
a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnified
party, on one hand, or such indemnifying party, on the other hand, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. No
person who has committed fraudulent misrepresentation (within the
meaning of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation.
The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions in respect thereof
referred to above in this Section) shall be deemed to include any
legal or other expenses reasonable incurred by such indemnified party
in connection with investigating or defending any such action or
claim.
LIQUIDATED DAMAGES
The Company agrees that the Purchaser will suffer damages if the
Registration Statement covering all Registrable Securities is not filed
with and declared effective by the SEC and maintained in the manner and
within the time period contemplated by Article 4 hereof, or if the
Company has insufficient authorized and issuable shares necessary to
honor tendered Notices of Conversion, and it would not be feasible to
ascertain the extent of such damages with precision. Accordingly, if
(i) the Registration Statement is not filed and declared effective by
the Commission on or prior to the date that is 120 days after the
Closing Date, or (ii) the Registration Statement is filed and declared
effective but shall thereafter cease to be effective (without being
succeeded immediately by an additional Registration Statement filed and
declared effective) for a period of time which shall exceed 10 days in
the aggregate per year (defined as a period of 365 days commencing on
the date the Registration Statement is declared effective) (each such
event referred to in clauses (i) and (ii) is referred to herein as a
"Registration Default"), then, for so long as such default shall
continue, the Company shall pay in cash as Liquidated Damages to each
Holder of Restricted Securities who has complied with such Holder's
obligations hereunder an amount equal to two (2%) percent for the first
30 day period past the Target Date and three (3%) percent for each
thirty (30) day period thereafter (or fraction thereof) of the
aggregate principal amount of Notes then owned of record by such Holder
under the Securities Purchase Agreement immediately following the
occurrence of such Registration Default. Such payment shall be made to
each Purchaser within three (3) calendar days of the end of each month
by cashier's check or wire transfer in immediately available funds to
such account as shall be designated in writing by the Purchaser and
shall be paid irrespective of the amount of Shares held by Purchaser on
the Target Date and thereafter. Failure to make such payments shall be
considered under the terms of the Note an Event of Default.
<PAGE>
6. MISCELLANEOUS.
6.1 Confidentiality.
(a) The Purchaser agrees to keep confidential any and all non-public
information delivered or made available to the Purchase by the
Company except for disclosures, as necessary, made by the
Purchaser to the Purchaser's officers, directors, employees,
agents, counsel and accountants each of whom shall be notified by
the Purchaser of this confidentiality covenant and for whom
the Purchaser shall be liable in the event of any breach of this
covenant by any such individual or individuals; provided,
however, that nothing herein shall prevent the Purchaser
from disclosing such information (a) upon the order of any court
or administrative agency, (b) upon the request or demand of any
regulatory agency or authority having jurisdiction over the
Purchaser, (c) which has been publicly disclosed or (d) to any of
its members provided that any such members agree in writing (with
a copy provided to the Company) to be bound by confidentiality
provision in form and substance substantially as are contained
herein. In the event of a mandatory disclosure as described in
clause (a) and/or (b) of the preceding sentence, the Purchaser
shall promptly notify the Company in writing of any applicable
order, request or demand for such information, cooperate with the
Company if and to the extent that the Company elects to seek an
appropriate protective order or other relief from such order,
request, or demand, and disclose only the minimal amount of
information ultimately required to be disclosed. The Purchaser
shall not use for its own benefit, nor permit any other person to
use for such person's benefit, any of the Company's non-public
information including, without limitation, in connection with the
purchase and/or sale of the Company's securities.
(b) The Company shall in no event disclose non-public information to
the Purchaser, advisors to or representatives of the Purchaser
unless prior to disclosure of such information the Company
marks such information as "Non-Public Information - Confidential"
and provides the Purchaser, such advisors and representatives
with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a
condition to disclosing any non-public information hereunder,
require the Purchaser's advisors and representatives to enter
into a confidentiality agreement in form reasonably satisfactory
to the Company and the Purchaser.
(c) Nothing herein shall require the Company to disclose non-public
information to the Purchaser or its advisors or representatives,
and the Company represents that it does not disseminate
non-public information to any Purchasers who purchase stock in
the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as herein
above provided, immediately notify the advisors and
representatives of the Purchaser and, if any, underwriters, of
any event or the existence of any circumstance (without any
obligation to disclose the specific event or circumstance) of
which it becomes aware, constituting non-public information
(whether or not requested of the Company specifically or
generally during the course of due diligence by such person or
entities), which, if not disclosed in the prospectus included in
the Registration Statement would cause such prospectus to include
a material misstatement or to omit a material fact required to be
stated therein in order to make the statements, therein, in light
of the circumstances in which they were made, not misleading.
Nothing herein shall be construed to mean that such persons or
entities other than the Purchaser (without the written consent of
the Purchaser prior to disclosure of such information) may not
obtain non-public information in the course of conducting due
diligence in accordance with the terms of this Agreement and
nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due
diligence by such persons or entities, that a Registration
Statement contains an untrue statement of a material fact or
omits a material fact required to be stated in the Registration
Statement or necessary to make the statements contained therein,
in light of the circumstances in which they were made, nor
misleading.
<PAGE>
6.2 Costs and Expenses. The Company shall bear their own costs and
expenses in connection with the preparation, execution and
delivery of this Agreement. The Company shall reimburse the
Purchaser, pursuant to Section 3.1(j) for its expenses in
connection with this transaction.
6.3 Assignability; Successors. The provisions of the Agreement
shall inure to the benefit of and be binding upon the
permitted successors and assigns of the parties hereto.
6.4 Survival. All agreements, covenants, representations and
warranties made by the Company or by the Purchaser herein
shall survive the execution and delivery of this Agreement for
the life of the Notes or until the Notes are fully converted
or fully redeemed.
6.5 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED ACCORDING TO
THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE
PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAWS.
6.6 Counterparts: Headings. This Agreement may be executed in
several counterparts, each of which shall be deemed an
original, but such counterparts shall together constitute but
one and the same agreement. The descriptive headings in this
Agreement are inserted for convenience of reference only and
shall not affect the construction of this Agreement.
6.7 Entire Agreement, Amendments. This Agreement and the Exhibits
hereto contain the entire understanding of the parties with
respect to the subject matter hereof, and supersede all other
representations and understandings, oral or written, with respect
to the subject matter hereof. No amendment, modification,
alteration, or waiver of the terms of this Agreement or
consent required under the terms of this Agreement shall be
effective unless made in a writing, which makes specific
reference to this Agreement and which has been signed by the
Company and each Purchaser. Any such amendment, modification,
alteration, waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
6.8 Notices. All communications or notices required or permitted by
this Agreement shall be in writing and shall be deemed to have
been given or made when delivered in hand, deposited in the mail,
or sent by facsimile, with confirmation (if sent by facsimile on
a non-business day, receipt shall be deemed to have occurred on
the next succeeding business day). Communications or notices
shall be delivered personally or by certified or registered mail,
postage, or by facsimile and addressed as follows, unless and
until either of such parties notifies the other in accordance
with this Section of a change of address:
<PAGE>
if to the Company: Galveston's Steakhouse Corp.
151 East Alessandro Blvd.
Riverside, CA 92508
Attn: Richard Lee
Phone: 714.444.2295
Fax: 714.557.4651
with copies to: Hank Gracin, Esq.
Lehman & Eilen
Suite 505
50 Charles Lindbergh Boulevard
Uniondale, NY 11553-3600
Phone: 516.222.0888
Fax: 516.222.0948
if to the Purchasers: Talisman Capital Opportunity Fund Ltd.
16101 LaGrande Drive, Suite 100
Little Rock, AR 72211
Attn: Brian Ladin
Tel: 501.821.6800
Fax: 501.821.6888
6.9 Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision
of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating
the remainder of such provision or the remaining provisions of
this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day
and year first above written.
GALVESTON'S STEAKHOUSE CORP.
By:__________________________________________
Its:_________________________________________
TALISMAN CAPITAL OPPORTUNITY FUND LTD.
By:__________________________________________
Its:_________________________________________
<PAGE>
EXHIBIT 10.23
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE COMPANY AND ITS COUNSEL AND FROM ATTORNEYS REASONABLY
ACCEPTABLE TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
No. 1 September 28, 1998
GALVESTON'S STEAKHOUSE CORP.
SECURED EXCHANGEABLE NOTE
DUE SEPTEMBER 28, 2003
FOR VALUE RECEIVED, GALVESTON'S STEAKHOUSE CORP., a Delaware
corporation (the "Company") hereby promises to pay to Talisman Capital
Opportunity Fund Ltd. having an address at 16101 La Grande Drive, Suite 100,
Little Rock, Arkansas, 72211 (the "Noteholder"), or registered assigns, on or
before September 28, 2003 (the "Maturity Date"), the principal sum of
$650,000.00 (six hundred fifty thousand dollars) and to pay interest from the
date hereof on the principal sum remaining unpaid at the rate of 14.375% per
annum based on a 360-day year, such interest to accrue from the date hereof and
to be payable upon exchange of the Note into common stock, until the whole
amount of principal hereof shall be paid. The Coupon Rate of the Debenture shall
increase by 225 basis points every 360 days, up to a maximum of 25%. Principal
shall be payable in lawful money of the United States of America at the
principal office of the Noteholder or at such other place as the registered
holder may designate from time to time in writing to the Company.
1. EXCHANGE.
(a) For the first 90 calendar days following Closing, the Exchange
Price shall be 110% of the Closing Bid Price as defined below. The
Closing Bid Price shall mean the 5 trading day average closing bid
price for the 5 trading days immediately preceding Closing. On the
91st calendar day following Closing, the Exchange Price shall be
the lesser of:
(i) $4.6475; or
(ii) The average of the four low trades in the primary
market for trading in the Company's common stock
(as defined by Bloomberg L.P.) over the 22
trading days immediately preceding the Exchange
Date, reduced by the Exchange Discount (as
defined below) in effect during that particular
calendar month. The Exchange Discount shall be as
follows:
Days From Close Discount
91-180 15.0%
181-270 20.0%
271- maturity 25.0%
<PAGE>
(b) In order to effect the exchange of all or part of the Note, the
Noteholder shall issue a Notice of Exchange substantially in the
form attached hereto (the "Notice of Exchange") which may be sent via
facsimile or regular mail and surrender the Note for exchange within
three (3) business days if the Note is not already in possession of
the Company. The Notice of Exchange pertaining to any portion of the
Note may be tendered for exchange up to 12:00 p.m. Central Standard
Time (the "Exchange Date") and is deemed to have been tendered upon
confirmation of facsimile being sent or deposit into the mail.
Exchange occurs once the Notice of Exchange has been delivered to
the Company (which delivery may be by facsimile). The Notice of
Exchange will include all pricing observations up to and including
the trading date immediately preceding the Exchange Date. To the
extent that any portion of the Note is converted, the rights of the
Noteholder with respect to such portion of the Note shall cease and
the Noteholder shall be deemed to have become the holder of record
of the shares of Exchange Shares represented thereby.
(c) No fractional Common shares shall be issued upon exchange of the
Note. In lieu of any fractional share to which the holder would
otherwise be entitled, the Company shall round up to the nearest
whole Common Size. In the case of a dispute as to the calculation
of the Exchange Price, the Purchaser's calculation shall be deemed
conclusive absent manifest error.
(d) Within five days after exchange has been effected, the Company
will deliver, either via Express Mail or DTC/DWAC electronic
transfer to the Noteholder:
(i) a certificate or certificates representing
the number of Exchange Shares issuable by
reason of exchange in the name of the
Noteholder and in such denomination or
denominations as the Noteholder has
specified; and
(ii) a new Note representing any principal
balance which was not converted into
Exchange Shares in connection with such
exchange.
(e) The issuance of certificates for Exchange Shares upon exchange of
the Note and/or interest will be delivered by the Company within
five business days of the Notice of Exchange or the interest
payment due date and will be made without charge to the Noteholder
for any issuance tax in respect thereof or other cost incurred by
the Company in connection with such exchange and the related
issuance of Exchange Shares. In the event the certificates are not
delivered within such five business day period, the Company shall
pay to the Noteholder Liquidated Damages as listed below for
each day until the date such certificates are delivered to the
Noteholder. Such Liquidated Damages shall be paid within three (3)
days of delivery of the shares or within three (3) days of the end
of each 30 day period.
Liquidated Damages For Each $10,000 of
Note Principal
No. Business Days Late Amount Being Exchanged
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1000
>10 1000 + $200 for each Business Day Late beyond
10 days.
(f) The Company shall at all times have authorized, reserved and set
aside a sufficient number of Common Shares for the exchange of all
shares with respect to the Note and interest then outstanding to
facilitate exchange thereof.
(g) The Exchange Price in effect at any time and the number and kind
of securities issuable upon the exercise of the Note shall be
subject to adjustment from time to time upon the happening of
certain events as follows after the date hereof and through and
including the Maturity Date:
<PAGE>
(i) In case the Company shall (1) declare a dividend or make a
distribution to its outstanding shares of Common Stock in
shares of Common Stock, (2) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of
shares, or (3) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares,
the Exchange Price in effect at the time of the record
date for such dividend or distribution or of the effective
date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price
determined by multiplying the Exchange Price by a
fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the
number of shares of Common Stock immediately prior to such
action. Such adjustment shall be made each time any event
listed above shall occur.
(ii) Whenever the Exchange Price is adjusted pursuant to
Subsection (i) above, the number of Exchange Shares
purchasable upon exchange of the Note shall be
simultaneously be adjusted by multiplying the number of
Exchange Shares initially issuable upon exchange of the
Note by the Exchange Price in effect on the date hereof
and dividing the product so obtained by the Exchange
Price, as adjusted.
(iii) All calculations under this Section 1.3(g)
shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the
case may be.
(iv) Whenever the Exchange Price is adjusted, as herein
provided, the Company shall promptly cause a notice
setting forth the adjusted Exchange Price and adjusted
number of Exchange Shares issuable upon exercise of the
Note to be mailed to the Noteholder, at its last address
appearing in the Company's register. The Company may
retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any
computation required by this Section 1.3(g)(iii), and a
certificate signed by such firm or the Company's Chief
Financial Officer shall be conclusive evidence of the
correctness of such adjustment.
(h) In the event of a merger, reorganization, recapitalization or
similar event of or with respect to the Company (a "Corporate
Change") (other than a Corporate Change in which all or
substantially all of the consideration received by the holders of
the Company's equity securities upon such Corporate Change
consists of cash or assets other than securities issued by the
acquiring entity or any affiliate thereof), this Note shall be
convertible into such class and type or securities as the holder
would have received had the holder converted the Note immediately
prior to such Corporate Change, as appropriately adjusted to
equitably reflect the Exchange Price and any stock dividend, stock
split or share combination of the Common Stock after such
corporate event.
(i) Effective as of September 28, 2003, all remaining principal amount
of this Note not converted plus all accrued and unpaid interest
and fees shall automatically and without further action on the
part of such holders, be paid in cash.
<PAGE>
(j) If the Common Stock issuable upon exchange of this Note at any time
or from time to time after the Issuance Date shall be changed into
the same or different number of shares of any class or classes
of stock, whether by reclassification, exchange, substitution or
otherwise (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections 1g(i) and g(ii),
or a reorganization, merger, consolidation or sale of assets provided
for in Section 1h, then, and in each event, an appropriate revision
to the Exchange Price shall be made and provisions shall be
made (by adjustments of Exchange Price or otherwise) so that the
holder of this Note shall have the right thereafter to convert such
Note into the kind and amount of shares of stock and other
securities receivable upon reclassification, exchange, substitution
or other change, by the Holder of the number of shares of Common
Stock into which such Note might have been converted immediately
prior to such reclassifications, exchange, substitution or other
change, all subject to further adjustment as provided herein.
(k) For the life of the Note, if there shall be a capital reorganization
of the Company (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections g(i) and (ii), or
a reorganization, merger, consolidation or sale of assets provided
for in Section h, then, and in each event, an appropriate revision to
the Exchange Price shall be made and provisions shall be made (by
adjustments of Exchange Price or otherwise) so that the holder of
this Note shall have the right thereafter to convert this Note into
the kind and amount of shares of stock and other securities or
property of the Company or any successor corporation resulting from
such reorganization, merger, consolidation, or sale, to which a
holder of Common Stock deliverable upon exchange of such shares would
have been entitled upon such reorganization, merger, consolidation,
or sale. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section 1(k) with respect
to the rights of the Holder of this Note after the reorganization,
merger, consolidation or sale to the end that the provisions of this
Section 1(k) (including any adjustment in the applicable Exchange
Ratio then in effect and the number of shares of stock or other
securities deliverable upon exchange of this Note) shall be applied
after that event in as nearly an equivalent manner as may be
practicable.
(l) For 36 months following the Issuance Date, if the Company shall issue
or sell any shares of Common Stock to any party other than Company
Employees for a consideration per share which shall be less than
eighty (80%) percent of the Average Closing Bid Price per share of
Common Stock for the five (5) consecutive trading days immediately
prior to the time of such issue or sale (the "Trigger Price"), then
forthwith upon such issue or sale, the number of shares of Common
Stock issuable upon exchange of the Note in effect immediately prior
to such issue or sale shall be adjusted by multiplying the number of
shares of Common Stock issuable upon exchange of the Note in effect
immediately prior to the time of such issue or sale by a fraction:
(A) the numerator of which shall be (i) the total number
of shares of Common Stock issued and outstanding
immediately after such issue or sale, multiplied by
(ii) the Trigger Price; and
(B) the denominator of which shall be the sum of (i) the
number of shares of Common Stock outstanding
immediately prior to such issue or sale multiplied by
the Trigger Price, plus (ii) the consideration
received by the Company upon such issue or sale.
<PAGE>
(m) In case at any time the Company shall grant, issue or sell (whether
directly or by assumption in a merger or otherwise) any rights or
warrants to subscribe for or to purchase, or any options for the
purchase of Common Stock or any stock or securities convertible into
or exchangeable for Common Stock, whether or not such rights or
warrants or options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon the exercise of such
rights or warrants or options or upon exchange or exchange of such
Convertible Securities shall be less than the Trigger Price as of the
date of granting such rights or warrants or options as the case may
be, then the total maximum number of shares of Common Stock issuable
upon the exercise of such rights (other than rights issued pursuant
to a stockholders rights plan adopted by the Company) or warrants or
options or upon exchange or exchange of the total maximum amount of
such Convertible Securities issuable upon the exercise of such rights
or warrants or options shall (as of the date of granting of such
rights or warrants or options) be deemed to be outstanding and to
have been issued for such price per share.
(n) No further adjustments of the number of shares of Common Stock
issuable upon exchange of this Note shall be made upon the actual
issue of such Common Stock or of such Convertible Securities upon
exercise of such rights or warrants or options or upon the actual
issue of such Common Stock upon exchange or exchange of such
Convertible Securities.
(o) The Company shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith,
assist in the carrying out of all the provisions herein and in the
Note Purchase Agreement in the taking of all such action as may be
necessary or appropriate in order to protect the Exchange Rights
of the Holder against impairment.
(p) Upon occurrence of each adjustment or readjustment of the Exchange
Price or number of shares of Common Stock issuable upon exchange of
the Note pursuant to this Section 1, the Company at its expense shall
promptly compute such adjustment or readjustment in accordance with
the terms hereof and furnish notice to each holder of such Note, a
certificate setting forth such adjustment and readjustment. The
Company shall, upon written request of the Holder, furnish or cause
to be furnished to such Holder a like certificate setting forth such
adjustments and readjustments, the applicable Exchange Price in
effect at the time and the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time
would be received upon the exchange of such Note.
(q) The Company shall pay any and all issue and other taxes, excluding
federal, state or local income taxes, that may be payable in
respect of any issue or delivery of shares of Common Stock on
exchange of this Note pursuant hereto; provided that the Company
shall not be obligated to pay any transfer taxes resulting from
any transfer requested by any holder in connection with any such
exchange.
<PAGE>
(r) The Company shall at all times reserve and keep available, out of its
authorized but unused shares of Common Stock, solely for the purpose
of effecting the exchange of the Note, the full number of shares
deliverable upon exchange of all the Note from time to time
outstanding. The Company shall, from time to time in accordance with
the Delaware General Corporations Law, as amended, increase the
authorized number of shares of Common Stock if at any time the unused
number of authorized shares shall not be sufficient to permit the
exchange of all of the Note at the time outstanding. In such
connection, the Company shall hold a special meeting of stockholders
for the purpose of authorizing additional shares of Common Stock not
later than 120 days after any date in which the Company shall have
insufficient shares of Common Stock so reserved. Failure to keep
available and authorized unissued shares available to facilitate
exchanges of the Notes shall constitute an Event of Default hereunder.
(s) At any time after the Closing Date, the Company may call the Note
from the Holder at the greater of: (a) 150% premium to par value of
the Note plus all accrued and unpaid interest and fees; or (b)
the intrinsic value of the Note plus accrued interest and any unpaid
fees and expenses; intrinsic value is herein defined as: (applicable
market price - maximum exchange price) x ((principal amount of Note
outstanding + any and all accrued and unpaid interest + fees)/
(maximum exchange price)). The Company must give the Holder ten (10)
trading days notice, via facsimile and overnight courier prior to
calling the Note. The company expressly warrants that by the issuance
of a Call for Redemption of the Note, that it has cash available to
make such redemption. A Call for Redemption of the Note is
irrevocable once issued by the Company. Redemptions must be paid in
cash on the 10th trading day following its issuance. Failure to pay
such redemption shall constitute an Event of Default under the terms
of this Note.
(t) Once the Holder submits a Notice of Exchange, as described in
Section 1(b) herein, the Company may not Call that portion of the
Note tendered for exchange.
(u) In no event shall any Holder of the Note be entitled to receive
Common Shares upon a exchange to the extent that the sum of (x) the
number of Common Shares beneficially owned by that Holder and its
affiliates (exclusive of shares issuable upon exchange of the
unconverted portion of the Note or the unexercised or unconverted
portion of any other securities of the Corporation subject to a
limitation on exchange or exercise analogous to the limitations
contained herein) and (y) the number of Common Shares issuable upon
exchange of the Note with respect to which the determination of this
subclause is being made, would result in beneficial ownership by the
Holder and its affiliates of more than 4.9% of the outstanding Common
Shares (the "Five Percent Limitation"), and for purposes of this
subclause, beneficial ownership shall be determined in accordance
with section 13(d) of the Securities and Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise
provided in clause (x) above. To the extent the Five Percent Limitation
applies, the determination of whether the Notes shall be convertible
(vis-a-vis other securities owned by a Holder) shall be in the sole
discretion of the Holder and submission of a Notice of Exchange shall
be deemed to be the Holder's determination of whether the Note is
convertible, in whole or in part, subject to such aggregate Five
Percent Limitation. No prior inability to convert the Preferred
Shares pursuant to this clause shall have any effect on the
applicability of the provisions of this clause with respect to any
subsequent determination of ability to convert. The provisions of
this clause may be amended and/or implemented in a manner otherwise
than in strict conformity with the terms of this clause with the
approval of the Board of Directors of the Company and the affected
Holder. The limitations contained in this clause shall apply to a
successor Holder concurrently with its acquisition of such Note, such
election to be promptly confirmed in writing to the Company (provided
no transfers to a successor Holder or Holders shall be used by a
Holder to evade the limitations contained herein).
<PAGE>
2. REGISTRAR. The Company shall maintain at its principal office a register
of the Notes and shall record therein the names and addresses of the
registered holders of the Notes, the address to which notices are to
be sent and the address to which payments are to be made as designated by
the registered holder if other than the address of the holder, and the
particulars of all transfers, exchanges and replacements of Notes. No
transfer of a Note shall be valid unless the registered holder or his or
its duly appointed attorney request such transfer to be made on such
register, upon surrender thereof for exchange as hereinafter provided,
accompanied by an instrument in writing, in form and execution reasonably
satisfactory to the Company. Each Note issued hereunder, whether
originally or upon transfer, exchange or replacement of a Note, shall be
registered on the date of execution thereof by the Company. The
registered holder of a Note shall be that person or entity in whose name
the Note has been so registered by the Company. A registered holder shall
be deemed the owner of a Note for all purposes, and the Company shall not
be affected by any notice to the contrary.
3. TRANSFER AND EXCHANGE. Subject to compliance with the restriction on
transfer set forth in the Notice Purchase Agreement, the registered
holder of any Note or Notes may, prior to maturity, surrender such Note
or Notes at the principal office of the Company for holder of its
intention to make such exchange and without expense (other than
applicable transfer taxes, if any) to such registered holder, the Company
shall issue in exchange therefor another Note or Notes dated the date to
which interest has been paid on, and for the unpaid principal amount of,
the Note or Notes so surrendered, containing the same provisions and
subject to the same terms and conditions as the Note or Notes so
surrendered. Subject to the restrictions on transfer set forth in the
Note Purchase Agreement, each new Note shall be made payable to such
person or entity, as the registered holder of such surrendered Note or
Notes may designate.
4. REPLACEMENT. Upon receipt of evidence satisfactory to the Company of the
loss, theft, destruction, or mutilation of any Note and, if requested by
the Company in the case of any such loss, theft or destruction, upon
delivery of an indemnity bond or other agreement or security reasonably
satisfactory to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of such Note, the Company will issue a new Note,
of like tenor, in the amount of unpaid principal of such Note, and dated
the date to which interest has been paid, in lieu of such lost, stolen,
destroyed or mutilated Note.
5. DEFAULT. The Company shall be in default under this Note upon the
occurrence of: (i) any of the events specified in Section 5 hereof and
failure to cure such default within five (5) days after receipt of written
notice thereof from the Noteholder; (ii) any of the events specified in
Section 5(b) or 5(d) hereof and the failure to cure such default within ten
(10) days after receipt of written notice thereof from the Noteholder; or
(iii) any of the events specified in Section 5(c) hereof (any of the
foregoing being an "Event of Default"):
(a) Failure to make any principal or interest payment required
under this Note on the due date of such payment;
(b) If the Company shall default in the performance of or
compliance with any of its material covenants or
agreements contained herein, whether expressed or
implied, or in the Purchase Agreement, and such
default shall not have been remedied within ten (10)
calendar days after written notice thereof shall have
been delivered to the Company by the Holder of this
Note;
(c) Insolvency of, business failure of, or an assignment
for the benefit of creditors by or the filing of a
petition under bankruptcy, insolvency or debtor's
relief law, or for any readjustment of indebtedness,
composition or extension by the Company, or commenced
against the Company which is not discharged within
thirty (30) days;
<PAGE>
(d) If the Company shall not, at the time of receipt of a
Exchange Notice hereunder, have a sufficient number
of authorized and unissued shares of its Common Stock
available for issuance to the holder of this Note
upon exchange of all or any portion of this Note in
accordance with the terms hereof, and such default
shall not have been remedied within thirty (30)
calendar days from the date of such Exchange Notice;
(e) If any representation or warranty made in writing by
or on behalf of the Company in the Purchase Agreement
shall prove to have been false or incorrect in any
material respect on the date as of which made;
(f) If the Company shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its
debts as they become due, or shall file a voluntary petition in
bankruptcy or shall have an order for relief under the
Bankruptcy Act granted against it or them, or shall be
adjudicated bankrupt or insolvent, or shall file any answer
seeking for itself any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief
under any present or future statute, law or regulation, or shall
file any answer admitting or not contesting the material
allegations of a petition filed against the Company in any such
proceeding, or shall seek or consent to or acquiesce in the
appointment of any trustee, custodian, receiver or liquidator of
the Company or of all or any substantial part of the properties
of the Company, or the Company or its directors shall take any
action looking to the dissolution or liquidation of the Company.
(g) If the Company fails to deliver Exchange Shares
within 10 days from the Notice of Exchange Date;
(h) If the Company fails to pay Liquidated Damage amounts
due to lack of registration or late SEC registration
of underlying common shares.
(i) If the Company fails to pay Liquidated Damages due to
the Noteholder due to the late delivery of shares.
(j) If the Company fails to pay the Redemption amount
within 10 days as specified in Section 1(s) herein.
<PAGE>
6. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default,
the Company agrees that monetary damages may be difficult or impossible to
determine, and alone are inadequate protections for the Noteholders.
Therefore, the Purchaser may, in its sole determination upon the occurrence
of an Event of Default, declare the Note immediately due and payable.
The Noteholder shall have all the rights and remedies, at law and in
equity, by statue or otherwise, and no remedy herein conferred upon the
Noteholder is intended to be exclusive of any other remedy and each remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law, in, equity by statue or
otherwise. Furthermore, the Noteholder shall been able to call on
injunctive relief and/or a specific order for compliance as determined by
the Noteholders in their sole discretion and as so ordered by a court of
law.
7. CHANGES: PARTIES. This Note can only be changed by an agreement in writing
signed by he Company and the Noteholder. This Note shall inure to the
benefit of and be binding upon the Company and the Noteholder and
their respective successors and assigns.
8. WAIVER OF PRESENTMENT. The Company hereby waives, presentment, demand,
notice, protest and all other demands and notices in connection with the
delivery acceptance, performance, default or enforcement of this Note.
9. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED ACCORDING TO THE LAWS OF
THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF
RELATING TO CONFLICTS OF LAWS.
IN WITNESS WHEREOF, the Company has executed this Note as of the day
and year set forth above.
GALVESTON'S STEAKHOUSE
CORP.
By: ________________________________
Its: ________________________________
<PAGE>
EXHIBIT 10.24
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF GALVESTON'S STEAKHOUSE CORP.
As of October 9, 1998
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") AND SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
VOID AFTER 5:00 P.M., NEW YORK TIME
ON OCTOBER 9, 2003
THIS CERTIFIES THAT for value received, Talisman Capital Opportunity
Fund Ltd., a holder of a Note (as such term is hereinafter defined), or their
registered permitted assigns (sometimes hereinafter referred to as the
"Holder"), may subscribe for and purchase, subject to the terms and conditions
hereof, from Galveston's Steakhouse Corp., a Delaware corporation (the
"Company"), 112,500 shares of common stock, per $1,000,000.00 face amount of the
Note of the Company, par value $0.01 per share (the "Common Stock"), at any time
during the period (the "Exercise Period") commencing at 9:00 a.m. New York Time
on the Effective Date (as such term is hereinafter defined) and ending at 5:00
p.m. New York Time, on September 28, 2003 (the "Expiration Date"), at an
exercise price per share (the "Exercise Price") equal to $5.28125.
Exercise Price and Expiration. (a) This Warrant may be exercised in
whole or in part on any Business Day (as such term is hereinafter defined) at
any time during the Exercise Period upon surrender to the Company, at its
address for notices set forth in Section 8 of this Warrant (or at such other
office of the Company, if any, or such other office of the Company's duly
authorized agent for such purpose, as may be maintained by the Company for such
purpose and so designated by the Company by written notice to the Holders prior
to such exercise), together with the following: (i) a duly completed and
executed Notice of Warrant Exercise in the form annexed hereto, and (ii) payment
of the full Exercise Price for this Warrant or the portion thereof then being
exercised. This Warrant and all rights and options hereunder shall expire on,
and shall be immediately wholly null and void to the extent the Warrant is not
properly exercised prior to the Expiration Date. As used in this Warrant the
term "Business Day" shall mean the time period between 9:00 a.m. New York, New
York Time and 5:00 p.m. New York, New York Time on any day other than any
Saturday, Sunday, or other day on which commercial banks in New York, New York
are required or are authorized by law to close.
(b) Such Exercise Price shall be paid in lawful money of the United
States of America by bank cashier's check or by wire transfer of immediately
available funds to such account as shall have been designated in writing by the
Company to the Holders from time to time.
<PAGE>
(c) Upon the Holders' surrender of the Warrant and payment of the
Exercise Price as set forth above, the Company shall promptly issue and cause to
be delivered to the Holders a certificate or certificates for the total number
of whole shares of Common Stock for which this Warrant is then so exercised, as
the case may be (adjusted to reflect the effect of the anti-dilution provisions
contained in Section 2 of this Warrant, if any) in such denominations as are
requested for delivery to the Holders, and the Company shall thereupon deliver
such certificates to the Holders. The Holders shall be deemed to be the Holders
of record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holders. If, at the time this Warrant is
exercised, a registration statement under the Securities Act is not then in
effect to register under said Securities Act the Warrant Shares issuable upon
exercise of this Warrant (together with any applicable state securities law
registrations), the Company may require the Holders to make such
representations, and may place such legends on certificates representing the
Warrant Shares, as may be reasonably required in the opinion of counsel to the
Company to permit the Warrant Shares to be issued without such registration,
unless the Company receives an opinion of counsel reasonably satisfactory to
counsel to the Company to the effect that said securities may be freely traded
without registration under the Securities Act.
(d) If the Holders shall exercise this Warrant with respect to less
than all of the Warrant Shares that may then be purchased under this Warrant,
having taken into account any prior exercise of the Warrant, the Company shall
promptly execute and deliver to the Holders a new warrant in the form of this
Warrant for the balance of such Warrant Shares.
(e) For purposes of the Warrant, the term "Effective Date" shall mean
the date that the holder of this Warrant shall have purchased from the Company
$1,400,000 principal amount of the Company's Note pursuant to the Securities
Purchase Agreement, dated as of October 9, 1998 (the "Securities Purchase
Agreement"). Unless otherwise defined herein, all capitalized terms used in this
Warrant shall have the same meaning as is defined in the Securities Purchase
Agreement or in the Note.
2. Anti-dilution.
If the Company shall (A) pay a dividend or make a distribution to
holders of shares of Company Common Stock in the form of additional shares of
Common Stock, (B) subdivide or split or reverse split or consolidate the
outstanding shares of Common Stock into a larger or smaller number of shares,
(C) or otherwise effect an increase or decrease in the number of shares of
Common Stock without consideration, or (D) effect a recapitalization which shall
reclassify the outstanding shares of Common Stock into one or more classes of
common stock, the number of shares of Common Stock issuable upon exercise of
this Warrant and the Exercise Price shall be equitably and proportionately
adjusted immediately following the occurrence of any such event, and the Holder
of record of this Warrant shall be given notice of the same at such Holder's
address in the Company's books and records. An adjustment made pursuant to this
Section shall become effective immediately after the record date in the case of
a dividend or distribution and immediately after the effective date in the case
of a subdivision, split, combination or reclassification; provided, if such
record date shall have been fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the exercise price
shall be recomputed accordingly as of the close of business on such record date
and thereafter such exercise price in effect shall be as adjusted pursuant to
this Section as of the time of actual payment of such dividend or distribution.
<PAGE>
3. Reorganization and Asset Sales.
If any capital reorganization or reclassification of the capital stock
of the Company, or any consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of the capital stock of the
Company to another corporation, or the sale of all or substantially all of the
assets or properties of the Company to another corporation, shall be effected in
such a manner so that holders of Company Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Company
Common Stock, then, and in such event, the following provisions shall apply:
(i) Not more than 90 or less than 30 days prior to the consummation of
any such reorganization, reclassification, consolidation, merger or
sale (collectively, "Reorganization Transactions"), the Company shall
notify the Holders of the Reorganization Transaction (at the same time
notice of same shall be made generally available to other holders of
Company Common Stock), describing in such notice in reasonable detail
the terms of the Reorganization Transaction and the stock, securities
or assets to be received with respect to or in exchange for Common
Stock of the Company. In the event the Holders exercise this Warrant
not more than 90 or less than 30 days prior to the consummation of the
Reorganization Transaction, such Holders shall be entitled to receive
stock, securities or assets with respect to or in exchange for Common
Stock (collectively, "Reorganization Consideration") on the same basis
as the other holders of Company Common Stock participating in the
Reorganization Transaction as if such Holders had previously exercised
this Warrant and held such number of Warrant Shares to which they are
entitled based on the Exercise Price.
(ii) The Company shall not effect any such Reorganization Transaction
unless prior to or simultaneous with the consummation thereof, the
successor corporation (if other than the Company) resulting therefrom
shall assume by written instrument executed and made available to the
Holders at the last address of the Holders appearing on the books of
the Company, the obligation to deliver to the Holders such shares of
stock, securities or assets, as, in accordance with the foregoing
provisions, the Holders may be entitled to receive, and all other
liabilities and obligations of the Company hereunder. In the event the
Holders of this Warrant shall not exercise the Warrant prior to or
simultaneous with consummation of the Reorganization Transaction, such
Holders shall be entitled to receive a warrant to purchase common stock
in the successor corporation (if other than the Company) which shall be
appropriately adjusted as to exercise price, number of shares which may
be purchased thereunder and other terms, so as to equitably reflect the
Reorganization Transaction and entitle the Holder to purchase that
number of shares of common stock of the successor corporation
equivalent in value to the consideration that such Holder would have
received had Holder exercised this Warrant immediately prior to or
simultaneously with such Reorganization Transaction. In the event the
successor corporation (if other than the Company) resulting from the
Reorganization Transaction shall be a privately-held company and the
Reorganization Consideration, in part or in whole, shall be in the form
of securities for which there is no readily ascertainable market value
by virtue of not being traded on any national market or exchange, the
Company shall not effect any such Reorganization Transaction unless
prior to or simultaneous with the consummation thereof, the successor
corporation shall agree by written instrument executed and made
available to the Holders at the last address of the Holders appearing
on the books of the Company to pay to the Holder a cash amount
equivalent in value to the difference between the Exercise Price and
the Fair Market Value multiplied by the number of Warrant Shares that
such Holder would have received had the Holder exercised this Warrant
immediately prior to or simultaneously with such Reorganization
Transaction.
<PAGE>
(iii) If a purchase, tender or exchange offer is made to and accepted
by the holders of more than 50 percent of the outstanding shares of
Common Stock of the Company, the Company shall, prior to the
consummation of any consolidation, merger or sale to or with the
person, firm or corporation having made such offer or any affiliate of
such person, firm or corporation, use its best efforts to give the
Holders a reasonable opportunity of not less than 10 days to elect to
receive upon the exercise of this Warrant, either the stock, securities
or assets then issuable with respect to the Common Stock of the Company
or the stock, securities or assets, or the equivalent, issued to
previous holders of the Common Stock in accordance with such purchase
tender or exchange offer. The Holders will have the right to convert
into common stock upon any corporate event.
4. Notice of Adjustment.
Whenever the Exercise and the number of Warrant Shares issuable upon
the exercise of this Warrant shall be adjusted as herein provided, or the rights
of the Holders shall change by reason of other events specified herein, the
Company shall compute the adjusted Exercise Price and the number of adjusted
Warrant Shares in accordance with the provisions hereof and shall prepare a
certificate signed by its Chief Executive Officer, or its President, or its
Chief Financial Officer, setting forth the adjusted Exercise Price and the
adjusted number of Warrant Shares issuable upon the exercise of this Warrant or
specifying the other shares of stock, securities, or assets receivable as a
result of such changes in rights, and showing in reasonable detail the facts and
calculations upon which such adjustments or other changes are based. The Company
shall caused to be mailed to the Holders copies of such officer's certificate
together with a notice stating that the Exercise Price and the number of Warrant
Shares purchasable upon exercise of this Warrant have been adjusted and setting
forth the adjusted Exercise Price and the adjusted number of Warrant Shares
purchasable upon the exercise of this Warrant.
5. Certain Representations of the Company.
Throughout the Exercise Period, the Company has (i) all requisite power
and authority to issue this Warrant and the Exercised Shares, and (ii)
sufficient authorized and unissued securities of Common Stock to permit exercise
of this Warrant.
6. Certain Covenants of the Company.
(a) The Company shall take such steps as are necessary to cause the
Company to continue to have sufficient authorized and unissued shares of Common
Stock reserved in order to permit the exercise of the unexercised and unexpired
portion of this Warrant, if any.
(b) The Company covenants and agrees that all Warrant Shares issued
upon the due exercise of this Warrant will, upon issuance in accordance with the
terms hereof, be duly authorized, validly issued, fully paid and non-assessable
and free and clear of all taxes, liens, charges, and security interests created
by the Company with respect to the issuance thereof.
(c) The Company will pay all documentary stamp taxes, if any,
attributable to the initial issuance of Warrant Shares upon the exercise of this
Warrant; provided, that the Company shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issue of this Warrant
or of any certificates for Warrant Shares in a name other than that of the
Holders upon the exercise of this Warrant, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax, or shall have established to the satisfaction of the Company that such
tax has been paid.
<PAGE>
(d) This Warrant and, when so issued, the shares of Common Stock
which may be issued upon exercise of the Warrants, will have been issued,
pursuant to an available exemption from registration under the Securities Act.
(e) The Company covenants and agrees that if it fails (i) to register
the Warrant Shares as provided in a Registration Rights Agreement between the
Holders and the Company, dated of even date herewith, or (ii) to issue the
shares of Common Stock upon the proper exercise of the Warrant, then the Holders
may immediately commence an action for specific performance and/or damages.
7. No Shareholder Rights. No Holders of this Warrant shall, as such, be
entitled to vote or be deemed the holder of Common Stock or any other kind of
securities of the Company, nor shall anything contained herein be construed to
confer upon the Holders the rights of a shareholder of the Company or the right
to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or give or withhold consent to any
corporate action or to receive notice of meetings or other actions affecting
shareholders (except as otherwise expressly provided herein), or to receive
dividends or subscription rights or otherwise, until the date of Holders' proper
exercise of this Warrant as described herein.
8. Notices. Any notice, demand, request, waiver or other communication
under this Agreement must be in writing and will be deemed to have been duly
given (i) on the date of delivery if delivered by hand to the address of the
party specified below (including delivery by courier), or (ii) on the fifth day
after deposit in the U.S. Mail if mailed to the party to whom notice is to be
given to the address specified below, by first class mail, certified or
registered, return receipt requested, First Class postage prepaid, to the
Company and to the Holder at the addresses specified in the Securities Purchase
Agreement.
with a copy sent concurrently to:
Hank Gracin, Esq.
Lehman & Eilen
Suite 505
50 Charles Lindbergh Boulevard
Uniondale, NY 11553-3600
Phone: 516.222.0888
Fax: 516.222.0948.
Any party may from time to time change its address for the purpose of notices to
that party by a similar notice specifying a new address, but no such change will
be deemed to have been given until it is actually received by the party sought
to be charged with its contents.
9. General.
(a) This Warrant shall be governed by and construed in accordance
with the laws of the State of New York without regard to its conflict of laws
provisions.
(b) Section and subsection headings used herein are included herein
for convenience of reference only and shall not affect the construction of this
Warrant or constitute a part of this Warrant for any other purpose.
(c) This Warrant may be executed simultaneously in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument when instruments
originally executed by each party shall have been received by the Company.
IN WITNESS WHEREOF, the Company has duly executed this Warrant on and
as of the date first set forth above.
GALVESTON'S STEAKHOUSE CORP.
By: ______________________________________________
Its: _____________________________________________
<PAGE>
NOTICE
OF
WARRANT EXERCISE
TO Galveston's Steakhouse Corporation:
The undersigned hereby irrevocably elects to exercise the Warrant and
to purchase thereunder ____ full shares of Common Stock issuable upon
the exercise of such Warrant. The Exercise Price for this warrant
shall be paid by delivery of $___________ in cash as provided for in
the Warrant.
The undersigned requests that certificates for such Warrant Shares be
issued in the name of:
Name: --------------------------------
Address: -----------------------------
Employer I.D. or S.S. #: -------------
If such number of Warrants shall not be all the Warrants evidenced by
the Warrant document, the undersigned requests that a new document evidencing
the Warrants not so exercised issued and registered in the name of and delivered
to:
----------------------------------------
Name
----------------------------------------
Address
----------------------------------------
Employer I.D. or Social Security Number
Date: ________________ ________________________________________
Signature
(Signature must conform in all respects to name
of holder as specified on the face of this
Warrant Certificate)
<PAGE>
EXHIBIT 10.25
COLLATERAL, PLEDGE AND SECURITY AGREEMENT, dated September 28th, 1998
(this "Security Agreement"), by and among GALVESTON'S STEAKHOUSE CORP., a
Delaware corporation, with headquarters located at 151 East Alessandro Blvd.,
Riverside, CA 92508 (the "Debtor"), and Talisman Capital Opportunity Fund Ltd.
(the "Secured Party").
WITNESSETH:
WHEREAS, reference is made to (i) that certain Note Purchase Agreement
of even date (the "Note Purchase Agreement") between the Debtor and the Secured
Party, (ii) the Secured Exchangeable Note (the "Note") originally issued on the
Closing Date (as those terms are defined in the Note Purchase Agreement) by the
Debtor to the Secured Party (together with any replacements thereof, the
"Debenture"), and (iii) the other documents and instruments contemplated by
either the Note Purchase Agreement, the Note or any Attachments thereto, and
executed by the Debtor with or in favor of the Secured Party. All of the
documents and instruments referred to in this paragraph are hereinafter referred
to collectively as the "Debtor Agreements." Unless otherwise specified, all
capitalized terms not otherwise defined herein shall have the meanings ascribed
to them in the Note Purchase Agreement.
WHEREAS, as collateral security for the Company's performance of
certain of its obligations under the Note dated September 28, 1998, the Company
is granting to the Investor a security interest in, and a second lien on, the
rights to all real assets including, but not limited, to liquor licenses, land,
buildings, equipment, furniture and fixtures, accounts receivable, inventory,
subsidiary shares, either currently existing or acquired in the future as long
as the Note, or any portion thereof, is outstanding.
WHEREAS, the Debtor shall grant the Secured Party a first lien or
mortgage where such security interest is unencumbered, and the Company shall
grant the purchaser a second lien or mortgage where such security interest has
prior and pre-existing claims.
WHEREAS, the Debtor agrees to file and perfect all UCC, mortgage and
other documentation to perfect the Secured Party's security interest in all of
the real assets (as defined herein) of the Debtor concurrently with the Closing
of the Paragon Transaction.
Section 1. The Security Interests.
(a) In order (i) to secure the due and punctual fulfillment of its
obligations under the Debtor Agreements, and (ii) to secure
any and all other obligations of the Debtor to the Secured
Party whether now existing or hereafter arising (all of the
foregoing hereinafter called "Obligations"), the Debtor hereby
grants to the Secured Party a continuing security interest in
the following described property and any proceeds thereof
(hereinafter collectively called the "Collateral"):
<PAGE>
and all accessions, additions or improvements to, all replacements,
substitutions and parts for, and all proceeds and products of the foregoing; all
books, records and documents relating to the foregoing located at the principal
place of business or any other place of business of the Debtor, or at such other
location as the business may hereafter be located, or held by any agent,
representative or bailee of the Debtor wherever located.
(b) The security interests granted pursuant to this Section 1 (the
"Security Interests") are granted as security only and shall
not subject the Secured Party to, or transfer or in any way
affect or modify, any obligation or liability of the Debtor
under any of the Collateral or any transaction which gave rise
thereto.
Section 2. Filing; Further Assurances. The Debtor will, at its expense,
execute, deliver, file and record (in such manner and form as the Secured Party
may require), or permit the Secured Party to file and record, any financing
statements, any carbon, photographic or other reproduction of a financing
statement or this Security Agreement (which shall be sufficient as a financing
statement hereunder), any specific assignments or other paper that may be
reasonably necessary or desirable, or that the Secured Party may request, in
order to create, preserve, perfect or validate any Security Interest or to
enable the Secured Party to exercise and enforce its rights hereunder with
respect to any of the Collateral. The Debtor hereby appoints Secured Party as
Debtor's attorney-in-fact to execute in the name and behalf of Debtor such
additional financing statements as Secured Party may request.
Section 3. Representations and Warranties of Debtor. The Debtor hereby
represents and warrants to the Secured Party that, except as detailed on
Attachment A hereto,
(a) the Debtor is, or to the extent that certain of the Collateral is
to be acquired after the date hereof, will be, the owner of the Collateral free
from any adverse lien, security interest or encumbrance;
(b) no financing statement covering the Collateral is on file in any
public office, other than the financing statements filed pursuant to this
Security Agreement;
(c) no other person or entity has any beneficial or security interest in
any of the Collateral; and
(d) all additional information, representations and warranties
contained in Exhibit 2 attached hereto and made a part hereof are true, accurate
and complete on the date hereof.
Section 4. Covenants of Debtor. The Debtor hereby covenants and agrees
with the Secured Party that the Debtor,
(a) will, at the Debtor's sole cost and expense, defend the Collateral
against all claims and demands of all persons at any time claiming any interest
therein junior to the Secured Party's interest;
(b) will provide the Secured Party with prompt written notice of (i)
any change in the chief executive officer of the Debtor or the office where the
Debtor maintains its books and records pertaining to the Collateral; (ii) the
movement or location of any part of the Collateral to or at any address other
than as set forth herein; and (iii) any facts which constitute an Event of
Default, or which, with the giving of notice and/or the passage of time, could
or would constitute an Event of Default (as defined below);
<PAGE>
(c) will promptly pay any and all taxes, assessments and governmental
charges upon the Collateral prior to the date penalties are attached thereto,
except to the extent that such taxes, assessments and charges shall be contested
in good faith by the Debtor;
(d) will immediately notify the Secured Party of any event causing a
substantial loss or diminution in the value of all or any material part of the
Collateral and the amount or an estimate of the amount of such loss or
diminution;
(e) will not sell or offer to sell or otherwise assign, transfer or
dispose of the Collateral or any interest therein, without the prior written
consent of the Secured Party, and
(f) will keep the Collateral free from any adverse lien, security
interest or encumbrance, and will not waste or destroy the Collateral or any
part thereof.
Section 5. Records Relating To Collateral. The Debtor will keep its
records concerning the Collateral at its principal offices designated in the
caption of this Security Agreement or at such other place or places of business
of which the Secured Party shall have been notified in writing no less than ten
(10) days prior thereto. The Debtor will hold and preserve such records and
chattel paper and will permit representatives of the Secured Party at any time
during normal business hours upon reasonable notice to examine and inspect the
Collateral and to make abstracts from such records and chattel paper, and will
furnish to the Secured Party such information and reports regarding the
Collateral as the Secured Party may from time to time reasonably request.
Section 6. General Authority. The Debtor hereby appoints the Secured
Party the Debtor's lawful attorney, with full power of substitution, in the name
of the Debtor, for the sole use and benefit of the Secured Party, but at the
Debtor's expense, to exercise, all or any of the following powers with respect
to all or any of the Collateral during the existence of any Event of Default:
(a) to demand, sue for, collect, receive and give acquittance for any and
all monies due or to become due;
(b) to receive, take, endorse, assign and deliver all checks, notes,
drafts, documents and other negotiable and non- negotiable instruments and
chattel paper taken or received by the Secured Party;
(c) to settle, compromise, prosecute or defend any action or proceeding
with respect thereto;
(d) to sell, transfer, assign or otherwise deal in or with the same or
the proceeds thereof or the related goods securing the Collateral, as fully and
effectually as if the Secured Party were the sole and absolute owner thereof;
(e) to extend the time of payment of any or all thereof and to make any
allowance and other adjustments with reference thereto; and
(f) to discharge any taxes, liens, security interests or other
encumbrances at any time placed thereon;
provided that the Secured Party shall give the Debtor not less than five (5)
business days' prior written notice of the time and place of any sale or other
intended disposition of any of the Collateral.
<PAGE>
Section 7. Events of Default. The Debtor shall be in default under this
Security Agreement upon the occurrence of any of the following events (an
"Event of Default"):
(A) if any representation or warranty made by the Debtor in this
Security Agreement or in any other document delivered by Debtor to the Secured
Party shall be false or misleading in any material respect;
(B) if the Debtor fails to duly observe or perform any covenant,
condition or agreement contained in this Security Agreement on the Debtor's part
to be observed or performed, which default continues unremedied for five (5)
days after the earlier to occur of (i) the Debtor's discovery of such default or
(ii) written notice thereof from the Secured Party to the Debtor;
(C) the occurrence of an Event of Default, as defined in the Note,
after giving effect to any relevant grace periods provided therein;
(D) the occurrence of an default under any of the Debtor Agreements
other than the Debenture, after giving effect to any relevant grace periods
provided therein;
(E) if the Debtor shall (i) apply for or consent to the appointment of
a receiver, trustee, custodian or liquidator of the Debtor or any of its
property, (ii) admit in writing its inability to pay its debts as they mature,
(iii) make a general assignment for the benefit of creditors, (iv) be
adjudicated a bankrupt or insolvent or be the subject of an order for relief
under Title 11 of the United States Code, (v) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors or to take advantage of any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against the
Debtor in any proceeding under any such law, or (vi) if corporate action shall
be taken by the Debtor, its shareholder or directors for the purpose of
effecting any of the foregoing;
(F) if an order, judgment or decree shall be entered, without the
application, approval or consent of the Debtor by any court of competent
jurisdiction, approving a petition seeking reorganization of the Debtor or
appointing a receiver, trustee, custodian or liquidator of the Debtor or of all
or a substantial part of the assets of the Debtor, and such order, judgment or
decree shall continue unstayed and in effect for any period of thirty (30) days.
<PAGE>
Section 8. Remedies Upon Event of Default. If any Event of Default
shall have occurred, the Secured Party may exercise all the rights and remedies
of a Secured Party under the Uniform Commercial Code. The Secured Party may
require the Debtor to assemble all or any part of the Collateral and make it
available to the Secured Party at a place to be designated by the Secured Party
which is reasonably convenient. The Secured Party shall give the Debtor five (5)
days' prior written notice of the Secured Party's intention to make any public
or private sale or sale, at a broker's board or on a securities exchange or
otherwise, of the Collateral. At any such sale the Collateral may be sold in one
lot as an entirety or in separate parcels, as the Secured Party, in its sole
discretion, may determine. The Secured Party shall not be obligated to make any
such sale pursuant to any such notice. The Secured Party may, without notice or
publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the same may be
adjourned. The Secured Party, instead of exercising the power of sale herein
conferred upon it, may proceed by a suit or suits at law or in equity to
foreclose the Security Interests and sell the Collateral, or any portion
thereof, under a judgment or decree of a court or courts of competent
jurisdiction.
Section 9. Application of Collateral and Proceeds. The proceeds of any
sale of, or other realization upon, all or any part of the Collateral shall be
applied in the following order of priorities: (a) first, to pay the reasonable
expenses of such sale or other realization, including, without limitation,
reasonable attorneys' fees, and all expenses, liabilities and advances
reasonably incurred or made by the Secured Party in connection therewith, and
any other unreimbursed expenses for which the Secured Party is to be reimbursed
pursuant to Section 10 of this Security Agreement or the provision of any of the
Debtor Agreements; (b) second, to the payment of the Obligations first to
accrued but unpaid interest and then to principal on the Debentures or in such
order of priority as the Secured Party, in its sole discretion, shall determine;
and (c) finally, to pay to the Debtor, or its successors or assigns, or as a
court of competent jurisdiction may direct, any surplus then remaining from such
proceeds.
Section 10. Expenses; Secured Party's Lien. The Debtor will forthwith
upon demand pay to the Secured Party: (a) the amount of any taxes which the
Secured Party may have been required to pay by reason of the Security Interests
(including, without limitation, any applicable transfer taxes) or to free any of
the Collateral from any lien thereon; and (b) the amount of any and all
reasonable out-of-pocket expenses, including, without limitation, the reasonable
fees and disbursements of its counsel, and of any agents not regularly in its
employ, which the Secured Party may incur in connection with (i) the preparation
of any amendments or modifications of this Security Agreement, (ii) the
collection, sale or other disposition of any of the Collateral; (iii) the
exercise by the Secured Party of any of the powers conferred upon it hereunder,
or (iv) any default by the Debtor hereunder.
Section 11. Termination of Security Interests; Release of Collateral.
Upon the repayment and performance in full of all the Obligations, the Security
Interests shall terminate and all rights to the Collateral shall revert to the
Debtor. Upon any such termination of the Security Interests or release of
Collateral, the Secured Party will, at the Debtor's expense, to the extent
permitted by law, execute and deliver to the Debtor such documents as the Debtor
shall reasonably request to evidence the termination of the Security Interests
or the release of such Collateral, as the case may be. The Security Interest and
this Security Agreement shall become and be void, and the security interest in
the items listed in Section 3 shall be deemed null and void, ad initio, without
any further action on the part of the Company, the Investor or any affiliate of
any such person if all of the following conditions are sequentially and
cumulatively met:
<PAGE>
(i) The registration statement covering the Notes, as set
out in Exhibit A of the Exchangeable Secured Note
becomes effective; And
(ii) The Common Stock of Galveston's Steakhouse Corp. closes at or
above ten ($10) dollars or more for ten (10) consecutive
trading days; And
(iii) The Common Stock of Galveston's Steakhouse Corp. (ticker symbol
"SIZL") trades greater than or equal to 25,000 shares for sixty
(60) consecutive trading days according to Bloomberg, L.P.
("Bloomberg").
Section 12. Notices. Any notice required or permitted hereunder shall
be given in writing (unless otherwise specified herein) and shall be deemed
effectively given upon personal delivery or seven business days after deposit in
the United States Postal Service, by fax, by express courier or by postage
prepaid mail (with return receipt requested or its equivalent), addressed to
each of the other parties thereunto entitled at its address at found in the Note
Purchase Agreement.
Section 13. Miscellaneous.
(A) No failure on the part of the Secured Party to exercise, and no
delay in exercising, and no course of dealing with respect to, any right, power
or remedy under this Security Agreement shall operate as a waiver thereof; nor
shall any single or partial exercise by the Secured Party of any right, power or
remedy under this Security Agreement preclude the exercise, in whole or in part,
of any other right, power or remedy. The remedies in this Security Agreement are
cumulative and are not exclusive of any other remedies provided by law. Neither
this Security Agreement nor any provision hereof may be changed, waived,
discharged or terminated orally but only by a statement in writing signed by the
party against which enforcement of the change, waiver, discharge or termination
is sought.
(B) This Security Agreement shall be governed by, and construed,
interpreted and enforced in accordance with, the laws of the State of Delaware
except as otherwise required by mandatory provisions of law. Unless otherwise
defined herein, or unless the context otherwise requires, all terms used herein
which are defined in the Delaware Uniform Commercial Code have the meanings
therein stated. For purposes of settling any dispute or controversy hereunder or
in connection herewith, the Debtor hereby consents to the jurisdiction of any
court, federal or state, sitting in the State of Delaware, as well as to the
jurisdiction of all courts from which an appeal may be taken from the aforesaid
courts, and hereby expressly waives any and all objections the Debtor may now or
hereafter have as to the venue in any such courts. The Debtor also waives trial
by jury in any such action or proceeding.
Section 14. Separability. If any provision of this Agreement is held invalid or
unenforceable, either in its entirety or by virtue of its scope or application
to given circumstances, such provision shall thereupon be deemed modified only
to the extent necessary to render same valid, or not applicable to given
circumstances, or exercised from this Agreement, as the situation may require,
this Agreement shall be construed and enforced as if such provision had been
included herein as so modified in scope or application, or had not been included
herein, as the case may be.
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute this Agreement as of the date first set forth
above.
GALVESTON'S STEAKHOUSE CORP.
By:______________________________________
TALISMAN CAPITAL OPPORTUNITY FUND LTD.
By:______________________________________
<PAGE>
STATE OF ________________
COUNTY OF
On the ______ day of ________, 1998, before me personally came
_________________________, to me known, who being by me duly sworn, did depose
and say that he resides at _____________________________________,
__________________; that he is the _______________ of GALVESTON'S STEAKHOUSE
CORP. the corporation described in and which executed the foregoing instrument;
that he was authorized to execute the foregoing instrument on behalf of said
corporation by the Board of Directors of said corporation; and that he executed
the foregoing instrument voluntarily and of his own free will on behalf of said
corporation.
--------------------------------------
Notary Public
My commission expires:
<PAGE>
EXHIBIT 10.26
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF THIS
WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR ANY OTHER SECURITIES
LAWS (THE "ACTS"). NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK
PURCHASABLE HEREUNDER MAY BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THIS WARRANT OR COMMON
STOCK PURCHASABLE HEREUNDER, AS APPLICABLE, UNDER THE ACTS, OR (B) AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT REGISTRATION IS NOT
REQUIRED UNDER SUCH ACTS.
GALVESTON'S STEAKHOUSE CORP.
WARRANT AGREEMENT
Issue Date: July ____, 1998
Basic Terms. This Warrant Agreement (the "Warrant") certifies that,
for value received, the registered holder specified below or its registered
assigns ("Holder"), is entitled, subject to the terms and conditions of this
Warrant, including adjustments as provided herein, to purchase one thousand six
hundred (1,600) shares of the Common Stock (the "Common Stock")of the
Corporation from the Corporation at the price per share shown below (the
"Exercise Price").
Holder: _______________
Exercise Price per share: Five Dollars ($5.00) per share
Except as specifically provided otherwise, all references in this Warrant to the
Exercise Price and the number of shares of Common Stock purchasable hereunder
shall be to the Exercise Price and number of shares after any adjustments are
made thereto pursuant to this Warrant.
2. Corporation's Representations/Covenants. The Corporation represents
and covenants that the shares of Common Stock issuable upon the exercise of this
Warrant shall at delivery be fully paid and non-assessable and free from taxes,
liens, encumbrances and charges with respect to their purchase. The Corporation
shall take any necessary actions to assure that the par value per share of the
Common Stock is at all times equal to or less than the then current Exercise
Price per share of Common Stock issuable pursuant to this Warrant. The
Corporation shall at all times reserve and hold available sufficient shares of
Common Stock to satisfy all conversion and purchase rights of outstanding
convertible securities, options and warrants of the Corporation, including this
Warrant.
<PAGE>
3. Method of Exercise; Fractional Shares. This Warrant is exercisable
at the option of the Holder in whole at any time or in part from time to time by
surrendering this Warrant, on any business day during the period (the "Exercise
Period") beginning on the issue date of this Warrant specified above and ending
at 5:00 p.m. (New York time) five (5) years after the issue date. To exercise
this Warrant, the Holder shall surrender this Warrant at the principal office of
the Corporation or that of the duly authorized and acting transfer agent for its
Common Stock, together with the executed exercise form (substantially in the
form of that attached hereto) and together with payment for the Common Stock
purchased under this Warrant. The principal office of the Corporation is located
at the address specified on the signature page of this Warrant; provided,
however, that the Corporation may change its principal office upon notice to the
Holder. At the option of the Holder payment shall be made either by check
payable to the order of the Corporation or by wire transfer, or the Holder may
elect to receive shares of Common Stock calculated pursuant to paragraph ____.
Upon the partial exercise of this Warrant, the Corporation shall issue to the
Holder a new Warrant of the same tenor and date, and for the balance of the
number of shares of Common Stock not purchased upon such partial exercise and
any previous exercises. This Warrant is not exercisable with respect to a
fraction of a share of Common Stock. In lieu of issuing a fraction of a share
remaining after exercise of this Warrant as to all full shares covered by this
Warrant, the Corporation shall either at its option (a) pay for the fractional
share cash equal to the same fraction at the fair market price for such share;
or (b) issue scrip for the fraction in the registered or bearer form which shall
entitle the Holder to receive a certificate for a full share of Common Stock on
surrender of scrip aggregating a full share.
4. Cashless Exercise.
(a) If the Corporation consents, the Holder may, upon any full
or partial exercise of this Warrant, pay the Exercise Price applicable to such
exercise by delivering this Warrant and receiving from the Corporation in return
therefor the number of shares of Common Stock as to which the Warrant is being
exercised which have a fair market value on the date of exercise equal to the
fair market value of the Warrant as established in paragraph 4(b).
(b) The fair market value of this Warrant shall mean the fair
market value of the Common Stock purchasable under this Warrant minus the
Exercise Price of this Warrant.
(c) The fair market value of the Common Stock is, if the
Common Stock is traded on a national securities exchange or in the
over-the-counter market as reported by the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the average of the daily market
prices of such stock on the ten (10) trading days immediately preceding the date
as of which such value is to be determined. The market price for each such
trading day shall be average of the closing prices on such day of the Common
Stock on all domestic exchanges on which the Common Stock is then listed, or if
there have not been sales on any such exchange on such day, the average of the
highest bid and lowest asked prices on all such exchanges at the end of such
day, or, if the Common Stock is not so listed, the average of the high and low
bid and asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization. If at any time the Common Stock is not listed on any
domestic exchange or quoted in the NASDAQ System or the domestic
over-the-counter market, the fair market value shall be the higher of (i) the
book value thereof, as determined by any firm of independent public accountants
of recognized standing selected by the Corporation (which may be the
Corporation's regular independent accountants), as of the last day of any month
ending within sixty days preceding the date as of which the determination is to
be made; or (ii) the fair market value thereof, which shall be reasonably
determined by the Corporation and the Holder as of a date which is within
fifteen days of the date as of which the determination is to be made.
5. Protection Against Dilution. The number of shares of Common Stock
purchasable under this Warrant, and the Exercise Price, shall be adjusted as set
forth as follows. If at any time or from time to time after the date of this
Warrant, the Corporation:
(i) takes a record of the holders of its outstanding shares of
Common Stock for the purposes of entitling them to receive a dividend payable
in, or other distribution of, Common Stock, or
(ii) subdivides its outstanding shares of Common Stock into a
larger number of shares of Common Stock. or
<PAGE>
(iii) combines its outstanding shares of Common Stock into a
smaller number of shares of Common Stock;
then, and in each such case, the Exercise Price shall be adjusted to that price
determined by multiplying the Exercise Price in effect immediately prior to such
event by a fraction (A) the numerator of which is the total number of
outstanding shares of Common Stock immediately prior to such event and (B) the
denominator of which is the total number of outstanding shares of Common Stock
immediately after such event.
Upon each adjustment in the Exercise Price under this Warrant
such number of shares of Common Stock purchasable under this Warrant shall be
adjusted by multiplying the number of shares of Common Stock by a fraction, the
numerator of which is the Exercise Price immediately prior to such adjustment
and the denominator of which is the Exercise Price in effect upon such
adjustment.
6. Adjustment for Reorganization, Consolidation, Merger, Etc.
(a) During the Exercise Period, the Corporation shall, prior to
consummation of a consolidation with or merger into another corporation, or
conveyance of all or substantially all of its assets to any other corporation or
corporations, whether affiliated or unaffiliated (any such corporation being
included within the meaning of the term "successor corporation"), or agreement
to so consolidate, merge or convey assets, require the successor corporation to
assume, by written instrument delivered to the Holder, the obligation to issue
and deliver to such Holder such shares of stock, securities or property as, in
accordance with the provisions of paragraph 6(b), the Holder shall be entitled
to purchase or receive.
(b) In the case of any capital reorganization or reclassification of
the Common Stock of the Corporation (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
during the Exercise Period or in case, during the Exercise Period, the
Corporation (or any such other corporation) shall consolidate with or merge into
another corporation or convey all or substantially all its assets to another
corporation, the Holder, upon exercise, at any time after the consummation of
such reorganization, consolidation, merger or conveyance, shall be entitled to
receive, in lieu of the Common Stock of the Corporation (or such other
corporation), the proportionate share of all stock, securities or other property
issued, paid or delivered for or on all of the Common Stock of the Corporation
(or such other corporation) as is allocable to the shares of Common Stock then
called for by this Warrant as if the Holder had exercised the Warrant
immediately prior thereto, all subject to further adjustment as provided in
paragraph 5 of this Warrant.
7. Notice of Adjustment. On the happening of an event requiring an
adjustment of the Exercise Price or the shares purchasable under this Warrant,
the Corporation shall immediately give written notice to the Holder stating the
adjusted Exercise Price and the adjusted number and kind of securities or other
property purchasable under this Warrant resulting from the event and setting
forth in reasonable detail the method of calculation and the facts upon which
the calculation is based.
8. Dissolution, Liquidation. In case the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation (other than in
connection with a reorganization, consolidation, merger, or other transaction
covered by paragraph 6 above) is at any time proposed, the Corporation shall
give at least thirty days prior written notice to the Holder. Such notice shall
contain: (a) the date on which the transaction is to take place; (b) the record
date (which shall be at least thirty (30) days after the giving of the notice)
as of which holders of Common Stock will be entitled to receive distributions as
a result of the transaction; (c) a brief description of the transaction, (d) a
brief description of the distributions to be made to holders of Common Stock as
a result of the transaction; and (d) an estimate of the fair value of the
distributions. On the date of the transaction, if it actually occurs, this
Warrant and all rights under this Warrant shall terminate.
<PAGE>
9. Rights of Holder. The Corporation shall deliver to the Holder all
notices and other information provided to its holders of shares of Common Stock
or other securities which may be issuable hereunder concurrently with the
delivery of such information to the holders. This Warrant does not entitle the
Holder to any voting rights or, except for the foregoing notice provisions, any
other rights as a shareholder of the Corporation. No dividends are payable or
will accrue on this Warrant or the Shares purchasable under this Warrant until,
and except to the extent that, this Warrant is exercised. Upon the surrender of
this Warrant and payment of the Exercise Price as provided above, the person or
entity entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the record holder of such shares
as of the close of business on the date of the surrender of this Warrant for
exercise as provided above. Upon the exercise of this Warrant, the Holder shall
have all of the rights of a shareholder in the Corporation.
10. Exchange for Other Denominations. This Warrant is exchangeable, on
its surrender by the Holder to the Corporation, for a new Warrant of like tenor
and date representing in the aggregate the right to purchase the balance of the
number of shares purchasable under this Warrant in denominations and subject to
restrictions on transfer contained herein, in the names designated by the Holder
at the time of surrender.
11. Substitution. Upon receipt by the Corporation of evidence
satisfactory (in the exercise of reasonable discretion) to it of the ownership
of and the loss, theft or destruction or mutilation of the Warrant, and (in the
case or loss, theft or destruction) of indemnity satisfactory (in the exercise
of reasonable discretion) to it, and (in the case of mutilation) upon the
surrender and cancellation thereof, the Corporation will issue and deliver, in
lieu thereof, a new Warrant of like tenor.
12. Restrictions on Transfer. Neither this Warrant nor the shares of
Common Stock issuable on exercise of this Warrant have been registered under
the Securities Act or any other securities laws (the "Acts"). Neither this
Warrant nor the shares of Common Stock purchasable hereunder may be sold,
transferred, pledged or hypothecated in the absence of (a) an effective
registration statement for this Warrant or Common Stock purchasable hereunder,
as applicable, under the Acts, or (b) an opinion of counsel reasonably
satisfactory to the Corporation that registration is not required under such
Acts. If the Holder seeks an opinion as to transfer without registration from
Holder's counsel, the Corporation shall provide such factual information to
Holder's counsel as Holder's counsel reasonably request for the purpose of
rendering such opinion. Each certificate evidencing shares of Common Stock
purchased hereunder will bear a legend describing the restrictions on transfer
contained in this paragraph unless, in the opinion of counsel reasonably
acceptable to the Corporation, the shares need no longer to be subject to the
transfer restrictions.
13. Transfer. Except as otherwise provided in this Warrant, this
Warrant is transferable only on the books of the Corporation by the Holder in
person or by attorney, on surrender of this Warrant, properly endorsed.
14. Recognition of Holder. Prior to due presentment for registration of
transfer of this Warrant, the Corporation shall treat the Holder as the person
exclusively entitled to receive notices and otherwise to exercise rights under
this Warrant. All notices required or permitted to be given to the Holder shall
be in writing and shall be given by first class mail, postage prepaid, addressed
to the Holder at the address of the Holder appearing in the records of the
Corporation.
15. Payment of Taxes. The Corporation shall pay all taxes and other
governmental charges, other than applicable income taxes, that may be imposed
with respect to the issuance of shares of Common Stock pursuant to the exercise
of this Warrant.
<PAGE>
16. Headings. The headings in this Warrant are for purposes of
convenience in reference only, shall not be deemed to constitute a part of this
Warrant and shall not affect-the meaning or construction of any of the
provisions of this Warrant.
17. Miscellaneous. This Warrant may not be changed, waived, discharged
or terminated except by an instrument in writing signed by the Corporation and
the Holder. This Warrant shall inure to the benefit of and shall be binding upon
the successors and assigns of the Corporation and the Holder.
18. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to its
principles governing conflicts of law.
GALVESTON'S STEAKHOUSE CORP.
a Delaware corporation
By:________________________________________
Authorized Officer
Printed Name:______________________________
Title:_______________________________________
151 E. Alessandro Blvd.
Riverside, California 92508
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
Form of Transfer
(To be executed by the Holder to transfer the Warrant)
For value received the undersigned registered holder of the attached Warrant
hereby sells, assigns, and transfers the Warrant to the Assignee(s) named
below:
Names of Number of shares
Assignee Address Taxpayer ID No. subject to transferred
Warrant
The undersigned registered holder further irrevocably appoints ----------------
- -------------------------- attorney (with full power of substitution) to
transfer this Warrant as aforesaid on the books of the Corporation.
Date: ------------------------- ---------------------------------
Signature
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
Exercise Form
(To be executed by the Holder to purchase
Common Stock pursuant to the Warrant)
The undersigned holder of the attached Warrant hereby: (1) irrevocably
elects to exercise purchase rights represented by such Warrant for, and to
purchase, ___________ shares of Common Stock of Galveston's Steakhouse Corp., a
Delaware corporation, and encloses a check or has wired payment of
$___________________________ therefor; (2) requests that a certificate for the
shares be issued in the name of the undersigned; and (3) if such number of
shares is not all of the shares purchasable under this Warrant, that a new
Warrant of like tenor for the balance of the remaining shares purchasable under
this Warrant be issued.
Date: ------------------------- ---------------------------------
Signature
