AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1999
REGISTRATION NO. 333-69137
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GALVESTON'S STEAKHOUSE CORP.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
5812
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
94-3248672
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
10200 WILLOW CREEK ROAD
SAN DIEGO, CA 92131
(619) 689-2333
(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.
10200 WILLOW CREEK ROAD
SAN DIEGO, CA 92131
(619) 689-2333
(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) (6) price registration
fee (7)
- ----------------------- ----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock (2) 234,708 sh. $ 6.75 $ 1,584,279 $ 467.36
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Common Stock (3) 193,837 sh. $ 6.75 $ 1,308,400 $ 385.98
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Common Stock (4) 368,182 sh. $ 6.75 $ 2,485,228 $ 733.14
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Common Stock (5) 267,521 sh. $ 6.75 $ 1,805,767 $ 532.70
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
Total 1,064,248 sh. $ 6.75 $ 7,183,674 $ 2,119.18
- ------------------------ ----------------------- ----------------------- ----------------------- -----------------------
</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 February 1, 1999 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 $7.03). 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 a Secured Exchangeable Note on February 1, 1999 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 such 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 such Secured
Exchangeable Note will be exchanged.
(4) Based upon 150% of the shares issuable upon the exchange of $1,350,000
principal amount of a Secured Exchangeable Note on February 1, 1999 if the
full principal amount thereof was exchanged on that date at an Exchange Price
per share of $5.50. The actual number of shares issuable upon the exchange of
such 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 such Secured Exchangeable Note will be
exchanged.
(5) Based upon 267,521 shares issuable upon exercise of Warrants to
purchase Common Stock of Registrant.
(6) The closing price of the Common Stock of the Registrant on February 8,
1999 on the NASDAQ SmallCap Market was $6.75 per share.
(7) The unpaid balance of the registration fee equal to $1,047.94 is enclosed
herewith. The registrant previously paid a registration fee of $1,071.24.
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
Exchangeable Notes.
DATED FEBRUARY 10, 1999
<PAGE>
PROSPECTUS
1,064,248 SHARES
GALVESTON'S STEAKHOUSE CORP.
COMMON STOCK
------------------------
The 1,064,248 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 two Secured Exchangeable Notes 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 Notes and the exercise of the Warrants. The Common Stock
is currently quoted on the NASDAQ SmallCap Market under the symbol "SIZL." On
February 8, 1999 the closing price on the NASDAQ SmallCap Market of the Common
Stock was $6.75 per share.
This Prospectus relates to an aggregate of 1,064,248 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 February 1, 1999 at 85% of the
Market Price (as such term is defined in the Debentures) of the Common Stock
on the conversion date (or $7.03), 150% of the shares issuable upon the
exchange of the first Secured Note if the full $650,000 principal amount
thereof was exchanged on February 1, 1999 at an exchange price of 110% of $4.58
(or $5.03) per share, 150% of the shares issuable upon the exchange of the
second Secured Note if the full $1,350,000 principal amount thereof was
exchanged on February 1, 1999 at an exchange price of $5.50 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 Notes 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.
The date of this Prospectus is February 10, 1999.
------------------------
1
<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."
GALVESTON'S STEAKHOUSE CORP.
Offices: 10200 Willow Creek Road
San Diego, CA 92131
(Telephone) (619) 689-2333
(Facsimile) (619) 689-0231
The Company currently operates seventy-seven (77) full-service, high
quality steakhouse restaurants located in eleven states. The Company's
restaurants specialize in complete steak and prime rib meals, and also offer
fresh fish and other lunch and dinner dishes. The Company's average dinner
check is approximately $23.00 (including alcoholic beverages) and it currently
serves over 6.8 million meals annually. The Company operates principally under
the brand names of Hungry Hunter, Hunter Steakhouse, Mountain Jack's, Mountain
Jack's Steakhouse and Carvers.
The Mountain Jack's, Mountain Jack's Steakhouse, Hungry Hunter and
Hunter Steakhouse restaurants are mid-priced, full service, high quality
steakhouse restaurants. The Carvers restaurants are upscale, sophisticated
steakhouse restaurants. Company management believes that its emphasis on
quality service and the limited menu of its restaurants, with its concentration
on high quality USDA choice-graded steaks and prime ribs, distinguishes the
Company's restaurants and presents an opportunity for significant growth.
On December 21, 1998, the Company consummated its acquisition of Paragon
Steakhouse Restaurants, Inc. ("Paragon") which owned seventy-eight (78)
steakhouse restaurants and Pacific Basin Foods Inc., a restaurant food
distribution company. Paragon is now a wholly owned subsidiary of the Company.
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.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by Selling Stockholders..... 1,064,248 shares, based upon 150% of the 156,472 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 February 1, 1999 or
$7.03, 150% of the 374,679 shares issuable upon exchange
of the Secured Notes and 267,521 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.................................... 3,492,573 shares based on all shares offered under this
Prospectus (assuming full conversion of the Debentures, full
exchange of the Secured Notes 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 February 1, 1999. 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."
3
<PAGE>
CURRENT FINANCING
On July 15, 1998, pursuant to a private placement, the Company sold to
two (2) investors $600,000 principal amount of 6% Convertible 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. On December 21, 1998 the two (2) original investors
purchased additional Debentures in the aggregate principal amount of $400,000
(all of such such Debentures are collectively referred to herein as the
"Debentures"). The investors may convert the 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 placements, the Company issued warrants to purchase 18,666
shares of its Common Stock to the placement agents of the Debentures. Such
warrants are referred to herein collectively as the Debenture Placement
Warrants. The shares issuable under the Debenture Placement Warrants, together
with the shares issuable under the Note Placement Warrants, the warrants to
purchase 6,303 shares of Common Stock referred to above and the warrants to
purchase 225,000 shares of Common Stock referred to below are herein referred to
collectively as the "Warrant Shares."
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 "First Secured Note") and issued to such investor
warrants to purchase 73,125 shares of Common Stock. On December 21, 1998,
pursuant to a private placement, the Company sold to the same investor an
additional Secured Exchangeable Promissory Note in the principal amount of
$1,350,000 (the "Second Secured Note", and collectively with the First Secured
Note, the "Secured Notes") and issued to such investor warrants to purchase
151,875 shares of Common Stock. The investor may exchange all or a portion of
the Secured Notes for Common Stock (the "Note Exchange Shares"). In connection
with such private placements, the Company issued warrants to purchase 17,552
shares of its Common Stock to the placement agents of the Secured Notes. Such
warrants are referred to herein collectively as the Note Placement Warrants. 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."
4
<PAGE>
SUMMARY OF FINANCIAL DATA
The following information is qualified by reference to, and should be read
in conjunction with, the financial statements and the notes thereto and
"Management's Discussion and Analysis or Plan Of Operation" contained elsewhere
in this Prospectus. The following information for the 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 and the
unaudited financial statements for the nine months ended September 30, 1998 and
1997 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 Company has also presented the proforma
statements of operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998 assuming its acquisition of Paragon took place
on January 1, 1997. See the proforma financial statements and related notes
contained elsewhere in this prospectus. 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 1996 1997
(Audited) (Audited) (Unaudited) (Audited)
-------------- --------------------------------------------------------------
INCOME GALVESTON'S 1-1-97 TO
STATEMENT TLC 12-31-95 6-3-96 TO PRO FORMA 12-31-97
CAPTION TO 8-18-96 12-31-96 ADJUSTMENTS PRO FORMA (Audited)
<S> <C> <C> <C> <C> <C>
Revenues $ 1,096,262 $ 416,544 $ -- $ 1,512,806 $ 1,867,671
Restaurant Costs 1,144,538 547,981 40,585 (1) 1,733,104 2,006,351
----------- --------------- ------------ ------------ ------------
(48,276) (131,437) (40,585) (220,298) (138,680)
----------- --------------- ------------ ------------ ------------
Other Income/
(Expenses):
General &
Administrative (103,271) (136,467) -- (239,738) (350,945)
Pre-opening &
Start-up Costs -- (433,694) -- (433,694) (65,155)
Other 1,312 30,419 (47,667)(2) (15,936) --
----------- --------------- ------------ ------------ ------------
Operating Loss (150,235) (671,179) (88,252) (909,666) (554,780)
Interest &
Financing Costs (10,459) (271,373) (167,427)(3) (438,800) (523,187)
----------- --------------- ------------ ------------ ------------
Net Loss $ (160,694) $ (942,552) $(255,679) $(1,348,466) $(1,077,967)
Net Loss Per
Common Share $ (16.07) $ (1.19) $ (1.70) $ (1.36)
Weighted
average number
of common
shares 10,000 795,000 795,000 790,296
outstanding
</TABLE>
<TABLE>
<CAPTION>
Proforma Proforma
INCOME 1-1-97 TO 1-1-98 TO year ended 1-1-98 TO
STATEMENT 9-30-97 9-30-98 12-31-97 (4) 9-30-98 (4)(5)
CAPTION (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 1,481,719 $ 841,476 $ 175,479,478 $ 131,607,090
Restaurant Costs 1,411,508 1,093,762 170,581,275 125,131,107
------------- ----------- ------------- -------------
70,211 (252,286) 4,898,203 6,468,983
------------- ----------- ------------- -------------
Other Income/
(Expenses):
General &
Administrative (264,103) (694,990) (10,975,103) (7,967,383)
Pre-opening &
Start-up Costs (63,955) -- (65,155) --
Other -- -- (23,620,641) 255,383
------------- ----------- ------------- -------------
Operating Loss (257,847) (947,276) (29,761,669) (1,243,017)
Interest &
Financing Costs (448,010) (275,140) (3,969,080) (2,707,314)
------------- ----------- -------------- -------------
Net Loss $ (705,857) $(1,222,416) $(33,730,749) $(3,950,331)
Net Loss Per
Common Share $ (0.91) $ (0.59) $ (42.68) $ (1.91)
Weighted
average number
of common
shares 778,600 2,064,714 790,296 2,064,714
outstanding
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA 9/30/98 9/30/98 9/30/98
(Actual) (As Adjusted) (Proforma As Adjusted)
(Unaudited) (Unaudited)(4)(6) (Unaudited)(4)(5)(6)
----------------------------- ------------------ ---------------------- ---------------------------
<S> <C> <C> <C>
Working Capital (deficit) $ 1,931,145 $ (14,179,929) $ (12,829,924)
----------------------------- ------------------ ---------------------- ----------------------------
Total Assets 5,016,540 64,488,750 64,488,750
----------------------------- ------------------ ---------------------- ----------------------------
Current Portion of Notes 1,439,497 4,068,133 2,718,133
Payable
----------------------------- ------------------ ---------------------- ----------------------------
Notes Payable Net of 795,245 29,182,308 29,182,308
Current Portion
----------------------------- ------------------ ---------------------- ----------------------------
Accumulated Deficit (3,242,935) (3,242,935) (3,242,935)
----------------------------- ------------------ ---------------------- ----------------------------
Stockholders' Equity 2,634,775 2,634,775 3,984,775
----------------------------- ------------------ ---------------------- ----------------------------
</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 acquisition of Paragon.
(5) 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.
(6) Assumes that the secured indebtedness of Paragon under its long-term
borrowing agreement will not be accelerated. See "Risk Factors--Default Under
Paragon Mortgage Facility" and "Risk Factors--Going Concern Uncertainty
Regarding Paragon".
6
<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 -- Recent Significant Increase in Company
Operations," "Business" and "Financial Statements."
Default Under Paragon Mortgage Facility
On August 30, 1997, Paragon, a wholly owned subsidiary of the Company
since December 21, 1998, entered into a $22,624,000 secured mortgage financing
(the "Mortgage") with a financing company. Paragon is liable for the repayment
of such financing. The Mortgage bears interest at a rate of 10.39% per annum and
is payable in 180 equal installments of principal and interest, with the final
installment due in September 2011. The Mortgage is secured by substantially all
of Paragon's owned land, buildings, and improvements thereon. The terms of the
Mortgage include specific financial covenants, restrictions on obtaining other
financing and other limitations. On April 30, 1997, and on May 28, 1997, the
Mortgage agreement was amended primarily to modify the loan covenants. As of
September 25, 1998, Paragon was not in compliance with certain financial ratio
loan covenants and has not obtained a waiver for the covenant violations.
Accordingly, Paragon is in technical default under the terms of the Mortgage.
The Company is presently exploring opportunities to refinance the Mortgage and
has so informed the financing company.
To date, the financing company has not declared an event of default under
the Mortgage agreement. Failure to obtain the agreement of the financing company
to amend the terms of the Mortgage agreement or to waive the covenant violations
could have a material adverse effect on the Company, its operations, financial
results and prospects, including but not limited to foreclosure upon Paragon's
owned land, buildings and the improvements thereon. There can be no assurance
that the Company will be able to obtain the agreement of the financing company
to amend the terms of the Mortgage agreement or to waive the covenant violations
of Paragon before the Company effects a refinancing of the Mortgage or that the
Company will be able to consummate such refinancing.
Going Concern Uncertainty Regarding Paragon
Paragon has suffered substantial losses in recent years. As of September
25, 1998, Paragon had an accumulated deficit of $87,352,438, a deficiency in
assets of $6,003,349 and negative working capital of $33,386,287. In addition,
Paragon is not in compliance with certain loan covenants under the terms of its
long-term borrowing agreement and such covenants have not been waived or
amended. If the lender demanded payment of the balance outstanding, it is likely
Paragon would not have available funds to meet the lender's demand. The
financial statements regarding Paragon included in this Prospectus have been
prepared assuming that Paragon will continue as a going concern; however, the
financial condition of Paragon raises substantial doubt about the ability of
Paragon to continue as a going concern. See "Report of Independent Auditors".
Recent Significant Increase in Company Operations
On December 21, 1998 the Company consummated its acquisition of Paragon,
which then operated seventy-three (73) steakhouse restaurants. Prior to such
acquisition, the Company operated only four (4) steakhouse restaurants. At
present, the Company operates a total of seventy-seven (77) restaurants. The
Company's ability to successfully manage and operate a significantly larger
number of restaurants will depend on a number of factors, including but not
limited to, the availability, staffing, training and retention of skilled
management personnel, securing required governmental approvals and permits,
adequately supervising construction and renovations, securing adequate
financing, achieving profitable operations and other factors, some of which are
beyond the control of the Company. There can be no assurance that the Company
will be able to successfully manage and operate all of its restaurants or that
such restaurants can be operated profitably. See "Business -- Review of Paragon
Steakhouse Restaurants Results; Future Expansion."
7
<PAGE>
Need For Additional Working Capital
The Company has incurred substantial operating losses since commencing
operations in June 1996 and its newly acquired Paragon subsidiary has incurred
substantial operating losses in Paragon's two most recent fiscal years. 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 resturants 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. 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.
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 integrate the Paragon
restaurants into its operations, 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 operating a large chain
of restaurants or effectuating restaurant expansion, and the lack of success or
the closing of any restaurants developed or acquired by the Company, including
the restaurants acquired in the Paragon transaction, could have a material
adverse effect upon the Company. There can be no assurance that the Company will
be able to successfully operate the restaurants acquired in the Paragon
transaction or otherwise implement its business plan, or that unanticipated
expenses, problems or difficulties will not result in material delays in its
implementation. See "Business."
Upscale Strategy
As a result of the Paragon acquisition, the Company acquired an upscale
steakhouse restaurant concept, Carvers. Prior to the Paragon acquisition, the
Company did not operate in the upscale segment. There can be no assurance that
the Company will choose to develop additional Carvers restaurants beyond those
currently operating, or that any such restaurants, if and when developed or
operated, will achieve profitability or prove to be successful. See "Business --
Operations in Upscale Markets."
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."
8
<PAGE>
The Company may be subject to "dram-shop" liability, which generally
provides a person injured by an intoxicated person with the right to recover
damages from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. To address any such potential liability, the Company carries
liquor liability coverage as part of its comprehensive general liability
insurance.
Geographic Concentration of Restaurants
The Company's restaurants are located in eleven states, predominantly
on the West Coast and in the Great Lakes regions. Accordingly, the restaurants
are susceptible to fluctuations in their business caused by adverse economic or
other conditions occuring in such regions of the United States, including
natural disasters. Each of the Company's restaurants 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.
Limited Experience in Operating Large Number of Restaurants;
Future Restaurant Capital Financing Needs
The Company has limited experience in managing and operating a large
number of restaurants or restaurants which are geographically dispersed. The
Company's acquisition of the Paragon restaurants may over-burden the Company's
personnel and financial resources. The Company's success in managing and
operating a significantly larger restaurant base will depend on, among other
things, the hiring and retention 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 management and operation of an expanded restaurant
base. See "Business -- Significant Increase in Company Operations; Review of
Paragon Steakhouse Restaurants Results; Future Expansion"
The Company's ability to successfully manage and operate its increased
number of restaurants 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 integrate its operations with the Paragon operations, 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 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 -- Significant Increase
in Company Operations; Review of Paragon Steakhouse Restaurants Results; Future
Expansion" and "-- Competition."
9
<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 competes with national and regional
chains, as well as individually owned restaurants. The number of steakhouse
restaurants with operations generally similar to the concepts operated 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. 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 concepts. See "Business."
Company Profitability Highly Sensitive To Cost Increases
The Company's profitability is highly sensitive to increases in food, labor
and other operating costs. The Company's restaurants' dependence on frequent
deliveries of fresh food supplies subject them to the risk that shortages or
interruptions in supply caused by adverse weather or other conditions could
materially and adversely affect the availability, quality and cost of
ingredients. In addition, unfavorable trends or developments concerning factors
such as inflation, food, labor and employee benefit costs (including increases
in hourly wage and minimum unemployment tax rates), rent increases resulting
from the rent escalation provisions in the various restaurants' leases, and the
availability of experienced management and hourly employees may also adversely
affect the Company. The Company believes recent favorable inflation rates and
part-time labor supplies in its principal market area have contributed to
relatively stable food and labor costs in recent years. However, there can be no
assurance that these conditions will continue or that the Company will have the
ability to control costs in the future. See "Business."
10
<PAGE>
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. In addition, the Company intends to issue to senior management of the
Company 1,750,000 shares of a newly authorized Series C Convertible Preferred
Stock, which carries rights to vote with the Common Stock as one class on a one
vote-per-share basis. Issuance of the shares of the Series C Convertible
Preferred Stock to senior management of the Company will enhance the control of
senior management over the outcome of all matters submitted to the stockholders
for approval. 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".
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 and retain 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."
11
<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. In addition, the Company intends to
issue to senior management of the Company 1,750,000 shares of a newly authorized
Series C Convertible Preferred Stock, which carries rights to vote with the
Common Stock as one class on a one vote-per-share basis. The issuance of the
Series C Convertible Preferred Stock or any 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, the exchange of the Secured
Notes and the exercise of the Warrants there will be not less than 3,226,997
shares of Common Stock outstanding, consisting of 2,428,325 shares currently
outstanding and a minimum of 798,672 shares (and potentially substantially more
depending upon the Market Price at the time of conversion and/or exchange)
issuable upon conversion of the Debentures, exchange of the Secured Notes 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."
12
<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.
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.
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 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.
13
<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 initial public offering. As of February 8, 1999, the last sale price
as reported on NASDAQ was $6.75 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
December 31, 1998 $7.375 $4.125
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 entered into a Registration Rights Agreement with the holders of
such Debentures. Pursuant to the terms of such Registration Rights Agreement,
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 entered into a similar
registration rights agreement with the investors who purchased $400,000
aggregate principal amount of Debentures in December, 1998. 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 Notes, the
Company is required to include the shares issuable upon conversion of said
Secured Notes in this Registration Statement, together with the 225,000 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 $40,000 for each
30-day period following the initial ten (10) days of suspension until
effectiveness.
14
<PAGE>
USE OF PROCEEDS FROM SALE OF DEBENTURES AND SECURED NOTES
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 $1,100,000 of
financing in the form of 6% Convertible Debentures and $2,000,000 in the form of
the Secured Notes.
The Company has applied the net proceeds of the Debentures and the
Secured Notes 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, JMG owned $500,000 principal amount
of 6% Convertible Debentures and Triton owned $500,000 principal amount of 6%
Convertible 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 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, 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 $8.28 (which is the Market Price calculated as of February 1,
1999) with respect to all the Debentures, and that all the Debentures are
converted at 85% of the Market Price, the aggregate number of Debenture
Conversion Shares issued would be 156,472 (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.
The Selling Securityholder whose Note Exchange Shares and 225,000
Warrant Shares are being registered hereby is Talisman Capital Opportunity Fund
Ltd. ("Talisman"). As of the date of this Prospectus, Talisman owns the First
Secured Note in the principal amount of $650,000 and the Second Secured Note in
the principal amount of $1,350,000. Upon the exchange of the Secured Notes,
Talisman will acquire shares of Common Stock on the basis set forth in the
following paragraph.
15
<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 Notes, which will be determined by the exchange price applicable to the
Secured Notes. See "Description of Securities."
The initial exchange price for a Note Exchange Share issuable upon
exchange of the First Secured Note will be 110% of the average of the closing
bid prices of the Common Stock for the five (5) trading days immediately
preceding the September 28, 1998 closing date, or $4.6475. On and after December
28, 1998 such 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 for the First Secured Note shall be as
follows:
Days from September 28, 1998 Discount
---------------------------- --------
91-180 15.0%
181-270 20.0%
271-maturity 25.0%
Based on the foregoing, as of January 29, 1999 the exchange price would
be $4.6475 and the aggregate number of Note Exchange Shares issued upon exchange
of the First Secured Note would be 129,225.
The initial exchange price for a Note Exchange Share issuable upon
exchange of the Second Secured Note will be $5.50. On and after March 28, 1999
such exchange price shall be, at the option of the Noteholder, either (i) $5.50
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 calender month. The Exchange Discount for the Second Secured Note
shall be as follows:
Days from December 21,1998 Discount
--------------------------- ----------------
91-180 15.0%
181-270 20.0%
271-maturity 25.0%
Based on the foregoing, as of January 29, 1999 the exchange price would
be $5.50, and the aggregate number of Note Exchange Shares issued upon exchange
of the Second Secured Note would be 245,455.
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.
16
<PAGE>
This Prospectus also relates to the resale of 225,000 Warrant Shares by
Talisman, 6,303 Warrant Shares by Barry Lebin, 7,849 Warrant Shares by Joseph
Donohue, Jr., 7,049 Warrant Shares by Max Rockwell, 7,849 Warrant Shares by Mark
Angelo, 7,049 Warrant Shares by Hunter Singer, 1,600 Warrant Shares by John
Audiferren, 2,422 Warrrant Shares by May Davis Group 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. Neither May Davis Group
nor AIBC Investment Services Corp. has any 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 February 1, 1999, 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 February 1, 1999 (which was
$8.28). The calculation of the total number of shares of Common Stock to be
offered by the holders of such 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 February 1, 1999 (or $7.03). 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
First Secured Note is based on an exchange 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), and the number of shares of
Common Stock calculated to be issuable in connection with the exchange of the
Second Secured Note is based on an exchange price of $5.50 per share. 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 (i) issuable upon the exchange of the First 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) and (ii) issuable upon the exchange of
the Second Secured Note at an exchange price of $5.50 per share. The actual
number of shares issuable upon conversion of the Debentures and the exchange of
the Secured Notes 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 Notes 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.
17
<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
Partners, L.P. (5) 0 106,686 0 0%
Triton Capital
Investments Limited (6) 0 106,686 0 0%
Barry Lebin (7) 0 21,336 0 0%
Talisman Capital
Opportunity Fund Ltd . (8) 787,019 787,019 0 0%
AIBC Investment 0%
Services Corp. (9) 2,400 2,400 0
Joseph Donohue, Jr. (10) 7,849 7,849 0 0%
Max Rockwell (11) 7,049 7,049 0 0%
Mark Angelo (12) 7,849 7,849 0 0%
Hunter Singer (13) 7,049 7,049 0 0%
John Audiferren (14) 1,600 1,600 0 0%
May Davis Group (15) 2,422 2,422 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 January 1, 1999. 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 $1,100,000
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 $500,000 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 February 1, 1999
(or $7.03). 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 $500,000 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 February 1, 1999
(or $7.03). 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.
(7) 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 February 1, 1999 (or $7.03). 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.
18
<PAGE>
(8) The listed Selling Securityholder holds outstanding Warrants to
purchase 73,125 shares of Common Stock at an exercise price of $5.28125 per
share, outstanding Warrants to purchase 151,875 shares of Common Stock at an
exercise price of $6.00 per share and $2,000,000 aggregate principal amount of
Secured Notes. The First 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. The Second Secured Note is exchangeable for Common Stock at an exchange
price per share equal to $5.50. 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 Second Secured Note at an exchange price per share equal to
$5.50.
(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 2,400
shares of Common Stock at $5.00 per share, Warrants to purchase 1,418 shares of
Common Stock at $5.15625 per share, and Warrants to purchase 4,031 shares of
Common Stock at $6.00 per share.
(11) The listed Selling Securityholder holds Warrants to purchase 1,600
shares of Common Stock at $5.00 per share, Warrants to purchase 1,418 shares of
Common Stock at $5.15625 per share, and Warrants to purchase 4,031 shares of
Common Stock at $6.00 per share.
(12) The listed Selling Securityholder holds Warrants to purchase 2,400
shares of Common Stock at $5.00 per share, Warrants to purchase 1,418 shares of
Common Stock at $5.15625 per share, and Warrants to purchase 4,031 shares of
Common Stock at $6.00 per share.
(13) The listed Selling Securityholder holds Warrants to purchase 1,600
shares of Common Stock at $5.00 per share, Warrants to purchase 1,418 shares of
Common Stock at $5.15625 per share, and Warrants to purchase 4,031 shares of
Common Stock at $6.00 per share.
(14) The listed Selling Securityholder holds Warrants to purchase 1,600 shares
of Common Stock at $5.00 per share.
(15) The listed Selling Securityholder holds Warrants to purchase 631
shares of Common Stock at $5.15625 per share and Warrants to purchase 1,791
shares of Common Stock at $6.00 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.
19
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
September 30, 1998, the as adjusted capitalization to reflect the Paragon
acquisition and the proforma, as adjusted capitalization to reflect the
acquisition of Paragon and the conversion of the Debentures. This table should
be read in conjunction with the Financial Statements of the Company and the
Notes thereto, the audited financial statements of Paragon and Notes thereto and
the proforma financial statements and Notes thereto, all of which are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1998
September 30, 1998 September 30, 1998 proforma,
Actual as adjusted as adjusted
------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt $ 2,234,742 $ 33,250,441 $ 31,900,441
- --------------------------------------- ----------------------------------------------------------------
Preferred Stock, $.001 par value,
5,000,000 shares authorized; 1,000 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 24,283 29,570
2,428,325 shares, 2,428,325 shares and
2,956,998 shares, respectively,
issued and outstanding.
- --------------------------------------- ------------------------------------------------------------------
Paid-in capital 5,852,427 5,852,427 7,197,140
- --------------------------------------- ------------------------------------------------------------------
Accumulated deficit (3,242,935) (3,242,935) (3,242,935)
- --------------------------------------- ------------------------------------------------------------------
Total Stockholders' equity 2,634,775 2,634,775 3,984,775
- --------------------------------------- -------------------------------------------------------------------
Total Capitalization $ 4,869,517 $ 35,885,216 $35,885,216
- --------------------------------------- ------------ ------------ ------------
------------ ------------ ------------
</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.
20
<PAGE>
OVERVIEW
The Company currently operates seventy-seven (77) full-service, high
quality steakhouse restaurants located in eleven states. On December 21, 1998,
the Company consummated its acquisition of Paragon Steakhouse Restaurants, Inc.
("Paragon"), which owned seventy-eight (78) steakhouse restaurants and Pacific
Basin Foods Inc., a restaurant food distribution company. Paragon is now a
wholly-owned subsidiary of the Company. The discussion and operating results set
forth below concerns the operations of the Company prior to the consummation of
the Paragon acquisition.
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.
THE MANAGEMENT DISCUSSION AND ANALYSIS ONLY INCLUDES A DISCUSSION OF THE
COMPANY FOR THE PERIODS INDICATED AND DOES NOT INCLUDE A DISCUSSION OF THE
HISTORICAL FINANCIAL RESULTS OF PARAGON.
21
<PAGE>
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
STATEMENTS OF OPERATIONS DATA (IN DOLLARS AND 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 (IN DOLLARS AND 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>
22
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
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.
23
<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.
24
<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 (2) Texas Loosey's
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 acquisition of
Paragon Steakhouse Restaurant, Inc.
In December 1998 the Company raised an aggregate of $1,750,000 in cash through
the issuance and sale of additional debt securities.
In December 1998 the Company caused Paragon and its subsidiary, Pacific Basin
Foods, Inc., to enter into a new $6,000,000 revolving credit facility in
order to provide an additional source of liquidity and working capital for the
Company.
Paragon is not in compliance with certain loan covenants under the terms of its
long-term borrowing agreement and such covenants have not been waived or
amended. If the lender demanded payment of the balance outstanding, it is likely
Paragon would not have available funds to meet the lender's demand. The
financial statements regarding Paragon included in this Prospectus have been
prepared assuming that Paragon will continue as a going concern; however, the
financial condition of Paragon raises substantial doubt about the ability of
Paragon to continue as a going concern. See "Report of Independent Auditors."
25
<PAGE>
NEW ACCOUNTING STANDARDS
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 adopted the new standard in its
reporting for the year ended December 31, 1997. The adoption of this
statement had no effect on the existing financial statements but did
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 adopted the new standard in its reporting for the year ended
December 31, 1997. The adoption of this statement had a 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.
26
<PAGE>
BUSINESS
BACKGROUND
The Company currently operates seventy-seven (77) full-service, high
quality steakhouse restaurants located in eleven states. The Company's
restaurants specialize in complete steak and prime rib meals, and also offer
fresh fish and other lunch and dinner dishes. The Company's average dinner
check is approximately $23.00 (including alcoholic beverages) and it currently
serves over 6.8 million meals annually. The Company operates principally under
the brand names of Hungry Hunter, Hunter Steakhouse, Mountain Jack's, Mountain
Jack's Steakhouse and Carvers.
The Mountain Jack's, Mountain Jack's Steakhouse, Hungry Hunter, and
Hunter Steakhouse restaurants are mid-priced, full service, high quality
steakhouse restaurants. The Carvers restaurants are upscale, sophisticated
steakhouse restaurants. Company management believes that its emphasis on
quality service and the limited menu of its restaurants, with its concentration
on high quality USDA choice-graded steaks and prime ribs, distinguishes the
Company's restaurants and presents an opportunity for significant growth.
On December 21, 1998, the Company consummated its acquisition of Paragon
Steakhouse Restaurants, Inc. ("Paragon"), which owned seventy-eight (78)
steakhouse restaurants and Pacific Basin Foods Inc., a restaurant food
distribution company. Paragon is now a wholly owned subsidiary of the Company.
RESTAURANT CONCEPT
The Company's restaurants are positioned 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. All of the Company's
restaurants are full-service, high quality steakhouses. The Company's
restaurants are positioned above the less expensive, more casual restaurant
chains such as Outback and Lone Star, but below the more expensive steakhouses
such as Morton's or Ruth's Chris. All Company restaurants feature only USDA
Choice, midwestern corn-fed beef. Prime rib is the Company's "signature product"
and is the basis for the Company's distinctive merchandising commitment to "The
Best Prime Rib in Town". Portions are deliberately generous and full liquor and
bar service is available.
CORPORATE STRATEGY
The Company believes that a critical component to its success is to
exceed the expectations of each guest by providing a dining experience
characterized by high quality, personalized service and quality menu selections.
The Company also believes that ambiance, location and price-value relationship
are also keys to success in the restaurant industry. The Company differentiates
its restaurants by emphasizing the following strategic elements:
* High-quality and attentive service.
* Consistent high-quality products achieved through careful ingredient
selection, food preparation and aging of steaks.
* Positioning in the mid-priced, high-quality, full service, steakhouse
segment of the restaurant industry.
* Generous portions offered at moderate prices.
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SIGNIFICANT INCREASE IN COMPANY OPERATIONS;
REVIEW OF PARAGON STEAKHOUSE RESTAURANTS RESULTS;
FUTURE EXPANSION
During the 1999 calendar year, the Company intends to carefully analyze
the revenues and earnings produced by each restaurant acquired in the Paragon
acquisition. In addition, the Company intends to review and analyze the
aggregate revenues and earnings produced in each region in which the Company
operates, as well as the aggregate revenue and earnings results for each
restaurant concept under which the Company operates. Based on the foregoing
analysis, the Company will formulate its expansion plans for future years. The
Company intends to emphasize its expansion in those regions, and utilizing those
concepts, that evidence the greatest potential for future growth of revenues and
earnings.
MENU
All Company restaurants feature only USDA Choice, midwestern corn-fed
beef. Prime rib is the Company's "signature product" and is the basis for the
Company's distinctive merchandising commitment to "The Best Prime Rib in Town".
The Company's menu also features a selection of high-quality, char-grilled
steaks, fresh fish, hamburgers, and chicken. A complete meal includes a choice
of side dishes, including baked potato, baked sweet potato, french fries and
steamed vegetables. The menu also includes appetizers and desserts, together
with a full bar service. Alcoholic beverage service accounts for approximately
18% of the Company's net sales.
SITE SELECTION AND CONSTRUCTION
The Company considers the location of each restaurant to be critical
to its long-term success and management devotes significant effort to the
investigation and evaluation of potential sites. The site selection process
focuses 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 reviews
potential competition and customer activity at other restaurants operating in
the area.
The cost of opening each new restaurant ranges from $800,000 to $1,200,000
for the build-out of a brand-new facility and from $500,000 to $800,000 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 are typically free-standing buildings with
dinner seating capacities ranging from 150 to 475 seats and an average seating
capacity of approximately 220 seats. The bar in each restaurant is generally
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.
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OPERATIONS IN UPSCALE MARKETS
While the Company intends to continue to have a substantial presence
in the mid-priced, full service steakhouse restaurant market, the Company
believes considerable opportunities exist in the upscale steakhouse dining
segment.
The Company's Carvers steakhouse concept has an average check per
customer of approximately $30.00. Carvers is a sophisticated, upscale restaurant
specializing in complete steak, chop, prime rib and seafood meals. Most Carvers
are divided into distinctive dining areas to provide greater intimacy. Prices at
the Carvers restaurants are higher than those of the Company's other
restaurants, but are substantially lower than high-end steakhouses such as
Morton's or Ruth's Chris.
In addition to Carvers and its concept restaurants, the Company
operates five "unique" formal restaurants. These restaurants are housed in
landmark buildings in prime locations and serve as the destination or special
occasion restaurant in their respective communities.
MARKETING
The Company believes that its steakhouse restaurants are well
positioned as "destination steakhouse restaurants" that focus on the
moderately-priced, high-quality, full service, casual dining market segment.
The Company relies principally on its commitment to customer service and
excellent price-value relationship to attract and retain customers. Accordingly,
the Company focuses its resources on seeking to provide customers with superior
service, value and an exciting and vibrant atmosphere.
The Company's marketing efforts consist of local media advertising and
couponing. Local advertising and couponing consists of bulk mailers,
free-standing newspaper inserts and targeted direct mailers. The Company has
also successfully offered discounts to encourage more people to try its
restaurants, as well as to increase weekday customer counts.
To promote local community awareness of each restaurant, each
restaurant manager is encouraged to become part of the local community. Many
restaurants host meetings with community leaders to solicit local input about
the restaurants' potential community participation.
For each new restaurant, the Company conducts 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. 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 maintains 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. To achieve the Company's
service goals, each service employee completes an extensive training program,
which teaches employees to provide the level of quality service that encourages
guests to return and request the same server on subsequent visits. See "Risk
Factors -- Dependence on Key and Other Personnel."
The Company maintains financial and accounting controls for
each of its restaurants through the use of centralized accounting and management
information systems. All levels of Company management participate in the ongoing
process of strategic and financial planning and the Company's systems are
continuously refined to allow management to compare actual results with budgets
and projections.
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The Company also utilizes modern management information systems to
allow timely information analysis and response. The Company's computerized
point-of-sale (POS) data management system and related telecommunication
equipment permits daily polling of restaurant operations and rapid collection of
sales data and cash management information. Transaction level data is
electronically transferred from each restaurant location via POS systems on a
daily basis. By consolidating individual restaurant's sales, purchasing,
payroll, operating expenses, guest related statistics and other data, the
Company can regularly monitor restaurant operations.
Management uses real-time information and control systems to reduce labor
costs, to maintain constant surveillance of inventory usage and to analyze
various aspects of restaurant operations including ideal food costs, sales mix,
labor minutes per meal, promotional programs, restaurant costs and general
marketing data. Most of the Company's restaurants are open daily from 4:30 p.m.
to 9:30 p.m. on weekdays and from 4:00 p.m. to 10:00 p.m. on weekends. Some
restaurants are open for lunch beginning at 11:00 a.m. on weekdays; but most of
these restaurants are closed for lunch on weekends.
The management team for a typical steakhouse restaurant generally
consists of one general manager, two assistant managers and a kitchen manager.
Each restaurant also employs a staff consisting of approximately 50 to 70
hourly employees, many of whom work part-time. Typically, each general manager
reports directly to a director of operations (who each supervise four to nine
restaurants) who, in turn, reports to the Company's vice president of
regional operations. Restaurant managers complete an extensive training program
during which they are instructed in areas including food quality and
preparation, customer satisfaction, alcoholic beverage service, governmental
regulations compliance, liquor liability management and employee relations.
Restaurant managers are also 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 define operations and performance
objectives for each restaurant and monitor implementation. Senior management
regularly visit various Company 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 participates in a
training program during which the employee works under the close supervision of
a restaurant manager, or an experienced key employee. Management continuously
solicits employee feedback concerning restaurant operations and strive to be
responsive to the employees' concerns.
PURCHASING
The Company purchases a major portion of its food and beverage products
from Pacific Basin Foods, Inc., a wholly owned subsidiary of the Company. Food
and supplies are shipped directly to the restaurants, although invoices for
purchases are sent to the Company for payment. The Company's emphasis on
first-quality food requires frequent deliveries of fresh food supplies. See
"Risk Factors -- Cost Sensitivity."
PACIFIC BASIN FOODS, INC.
Pacific Basin Foods, Inc. ("PBFI"), a wholly owned subsidiary of Paragon,
is a wholesale food distributor serving the restaurant industry. Its principal
clients are Paragon, Rubio's Fish Tacos (a twenty-seven unit chain of fast food
taco restaurants), Garden Fresh, Inc. (a thirty-nine unit chain of soup and
salad bar restaurants) and Rusty Pelican Restaurants, Inc. (a fifteen unit chain
of upscale seafood restaurants). PBFI has warehouses located in Chicago,
Illinois and in San Diego, California, from which it services its customers. In
addition to the sale and distribution of food supplies to restaurants, PBFI
provides furniture, fixtures and equipment to restaurants. PBFI is a member of
EMCO 2000, a nationwide network of independent food distributors and North
America's largest independent restaurant food buying group.
COMPETITION
Competition in the restaurant industry is increasingly intense. The
Company competes with other mid-priced, full service restaurants primarily on
the basis of quality of food and service, ambiance, location and price-value
relationship. The Company also competes with a number of other restaurants
within its markets, including both locally-owned restaurants and regional or
national chains. The Company believes that the quality of its service, its
unique concepts, attractive price-value relationship and quality of food will
enable it to differentiate itself from its competitors. The Company also
competes 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."
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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 is subject 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 carries liquor liability coverage as part of its
comprehensive general liability insurance.
The Company's restaurant operations are also 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 are 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 Company'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 Company'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.
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EMPLOYEES
At February 1, 1999, the Company employed approximately 4,000
individuals, of which 258 occupy executive or managerial positions,
approximately 3,700 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.
RESTAURANT LOCATIONS AS OF FEBRUARY 1, 1999
The following table sets forth the location of the Company's existing
Mountain Jack's, Mountain Jack Steakhouse, Hungry Hunter and Hunter Steakhouse
(57) restaurants, its Carvers (11) restaurants, the steakhouse restaurants
operated by the Company prior to the Paragon acquisition (4) and the Company's
unique formal restaurants (5):
ARIZONA CALIFORNIA INDIANA NEVADA
Glendale Pleasanton Indianapolis (2) Las Vegas
Phoenix (2) Riverside Lafayette
Tempe S. San Francisco NORTH CAROLINA
Tucson S. San Jose MICHIGAN Raleigh
Yuma Sacramento Ann Arbor
San Diego Auburn Hills OHIO
CALIFORNIA Santa Rosa Bloomfield Hills Canton
Anaheim Temecula Clinton Township Elyria
Bakersfield Thousand Oaks Dearborn Heights Independence
Concord Torrance Grandville Middleburg Heights
El Cajon (Red Oak Ventura Kentwood North Olmstead
Steakhouse) Lansing Sharonville
Fairfield Livonia Toledo
Fremont ILLINOIS Okemos
Fullerton Springfield Portage WISCONSIN
La Mesa Roseville Madison (2)
Lafayette Taylor
Lake Forest Troy
Milpitas
Modesto
Norco
Oakland
Oceanside
CARVERS UNIQUE FORMAL
LOCATIONS: LOCATIONS:
Arrowhead, Arizona Henderson, Nevada Folsom, California
Scottsdale, Arizona Beachwood, Ohio Rancho Cordova, California
Rancho Bernardo, California Centerville, Ohio Peoria, Illinois
Roseville, California Orem, Utah South Bend, Indiana
Greenwood, Indiana Sandy, Utah Williamsburg, Virginia
Farmington Hills, Michigan
PROPERTIES AND LEASES
As of February 1, 1999, the Company leased sixty-two (62) and owned
twenty (20) of its restaurant locations. As of February 1, 1999, five of the
Company's restaurants were closed for renovations. Lease terms are generally
ten to twenty years, with renewal options. All of the Company's leases provide
for a minimum annual rent and some leases provide for additional rent based on
sales volume at the particular location over specified minimum levels.
Generally, the leases are net leases which require the Company to pay the costs
of insurance, taxes and maintenance. The Company intends to continue to purchase
restaurant locations where cost-effective.
The Company's executive offices are located at 10200 Willow Creek Road,
San Diego, California 92131. The Company believes that there is sufficient
office space available at favorable leasing terms in the San Diego, California
metropolitan area to satisfy the additional needs of the Company that may result
from future expansion.
LEGAL PROCEEDINGS
On or about May 7, 1998, J.W. Childs Equity Partners, L.P. ("Childs") filed a
lawsuit in the State of Delaware entitled J.W. Childs Equity Partners,L.P. v.
Paragon Steakhouse Restaurants, Inc. et. al., C.A. No. 16371 (Del. Ch.)(the
"Action"). In the Action, Childs claims that it entered into a letter agreement
with Paragon Steakhouse Restaurants, Inc., a Delaware corporation ("Paragon")
and wholly owned subsidiary of Galveston's Steakhouse Corp. ("Galveston's"),
Kyotaru U.S.A., Inc., and Kyotaru Co., Ltd. (Kyotaru U.S.A., Inc. and Kyotaru
Co., Ltd. are collectively referred to herein as "Kyotaru") pursuant to
which Childs or its subsidiary would acquire the operating assets of certain
restaurants owned and operated by Paragon. Childs further claims that Paragon
and Kyotaru materially breached the letter agreement by (i) failing to negotiate
in good faith to reach agreement as to the terms of a definitive purchase
agreement and related documents, (ii) entering into negotiations with a third-
party purchaser concerning the possible sale of Paragon's assets or stock, and
(iii) failing to give notice to Childs of the discussions with the potential
third-party purchaser. In the Action, Childs seeks the remedy of specific
performance, or, in the alternative, monetary damages.
On November 6, 1998, the Delaware Court of Chancery dismissed with prejudice
Childs' claim for specific performance, finding that the letter agreement cited
by Childs "is not a contract to sell property." Childs has appealed the Court's
decision.
On January 22, 1999, Paragon, Galveston's, Childs and Childs' subsidiary entered
into a Memorandum of Agreement pursuant to which Childs agreed to dismiss the
entire Action in exchange for Paragon's agreeement to assign its leasehold
interests in three restaurants. The consummation of the settlement reached
between the parties is subject to the satisfaction of certain conditions,
including, without limitation, the receipt of landlord consents and estoppel
statements, removal of any encumbrances and liens affecting the leaseholds and
any personal property contained therein, the transferring of liquor licenses,
permits, etc., entering into a management agreement to enable Childs' subsidiary
to operate the sites until all licenses are transferred and the execution of a
mutual release. The parties intend to consummate the assignment of the leasehold
interests and the dismissal of the Action by the end of February 1999.
Except as discussed above, the Company is not involved in any material
legal proceedings.
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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............... 55 Director
Mark W. Goudge.......... 36 Director
Tod Lindner............. 54 Director
David N. Treat.......... 36 Senior Director of Operations
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.
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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.
MR. TOD LINDNER has been a director of the Company since January, 1999.
Mr. Lindner has been a managing director of Ally Capital Group Inc., an
investment banking firm since 1996. Prior to joining Ally Capital Group Inc.,
Mr. Lindner founded and was President of Northwest Capital Corporation, an
originator of upper middle market commercial loans, from 1984 through 1996. From
1979 through 1983, Mr. Lindner served as a regional manager of Chemical Business
Credit Corp. Prior thereto, Mr. Lindner served as an executive at the Bank of
California, N.A. for twelve years. Mr. Lindner received his B.S. in finance and
banking from the University of Oregon in 1966. Mr. Lindner currently serves as a
director of Bay-Con, Inc. and as a director of Magnum Cinema, LLC.
MR. DAVID N. TREAT has been the Company's Senior Director of Operations
since December 15, 1998. Mr. Treat has substantial experience in managing
multiple restaurants for large steakhouse chains and in developing and
implementing new restaurant concepts. From 1992 through 1998 Mr. Treat managed
various restaurant operations at Coulter Enterprises, the operator of Lonestar
Steakhouse and Saloon, Sullivan's Steakhouse and Del Frisco's Double Eagle
Steakhouse. In 1995 Mr. Treat was appointed to the post of District Manager,
where he directed the day-to-day operations of the Sullivan's Steakhouse chain.
During his tenure at Coulter Enterprises, Mr. Treat developed the Sullivan's
Steakhouse concept and opened 54 new Lonestar Steakhouse and Saloon restaurants.
From 1990 to 1991, Mr. Treat managed the Ruth's Chris Steakhouse restaurant
located in Palm Desert, California. From 1988 to 1990, Mr. Treat was a manager
of card member services at the American Express Company. Mr. Treat received his
Bachelor of Business Administration degree from Drury College in Springfield,
Missouri in 1984.
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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 granted a total
of 400,000 options under the Plan to employees.
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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.
36
<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.
37
<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
- --------------------------------------------------------------------------------------------------------------
Tom Edler 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
Mark W. Goudge 0 0 % N/A N/A
- --------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL-YEAR AND FISCAL-YEAR END OPTION
VALUES
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------------------------
Tom Edler 0 -- 0 exercisable/ $0 exercisable/$0
0 unexercisable
unexercisable
- --------------------------------------------------------------------------------------------------------------
Mark W. Goudge 0 -- 0 exercisable/ $0 exercisable/$0
0 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.
39
<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 Company's initial public 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 on June 3, 1998. These options expire three (3)
months following any termination of employment with the Company. 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, which was
increased to $80,000 upon the closing of the Company's initial public 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 on June 3, 1998. These options expire three (3)
months following any termination of employment with the Company. 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 December 15, 1998, the Company entered into a five year employment
agreement with David N. Treat at an annual base salary of $80,000. Under the
employment agreement, Mr. Treat's employment may be terminated by the Company
without cause, in which case the Company is obligated to continue to pay him his
base salary for a period of six (6) months. In addition, Mr. Treat 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. The employment
agreement provides Mr. Treat with an option, vesting over a period of five
years, to purchase up to 75,000 shares of Common Stock at $4.96 per share.
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.
40
<PAGE>
CERTAIN TRANSACTIONS
Employment Agreements
The Company has entered into separate Employment Agreements with
Richard M. Lee, Hiram J. Woo and David N. Treat. 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. 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, California 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.
41
<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 %
Tod Lindner........................... 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 10200 Willow Creek
Road, San Diego, California 92131. 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 10200 Willow Creek Road, San Diego,
California 92131. 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.
42
<PAGE>
COMMON STOCK
As of the date of this Prospectus, there are 2,428,325 shares of Common
Stock issued and outstanding held by approximately 800 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 Company's initial public 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 currently plans to issue 1,750,000 shares of a
new series of preferred stock, to be designated as the Series C Convertible
Preferred Stock, to Richard M. Lee and Hiram J. Woo.
43
<PAGE>
The holders of shares of the Series C Preferred Stock will have the
right to vote on all matters with the holders of the Common Stock, voting
together as a single class, on a one vote per share basis. The shares of the
Series C Preferred Stock shall be convertible into shares of Common Stock, at
the option of the holder, at any time upon the earlier to occur of (i) March 2,
2006 or (ii) the date it is determined that the Company's net profits for any
fiscal year have equalled or exceeded $4.2 million (the "Conversion Test"). Upon
conversion of the Series C Preferred Stock, the holder will be required to pay
to the Company a conversion price per share equal to 110% of the closing bid
price of the Company's Common Stock on the date of conversion.
The shares of Series C Preferred Stock may not be redeemed by the
Company absent the unanimous consent of the holders thereof. The holders of
outstanding Series C Preferred Stock shall not be entitled to receive dividends
prior to March 2, 2000, the second anniversary of the closing date of the
Company's initial public offering. Thereafter, in the event the Conversion Test
is satisfied, the Series C Preferred Stock will participate in any dividends
declared on the Common Stock, on an "as converted" basis.
In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company prior to March 2, 2000, or at any time thereafter if
the Conversion Test is not satisfied, the holders of Series C Preferred Stock
shall be entitled to $0.001 per share. In the event of a voluntary or
involuntary liquidation, dissolution or winding up of the Company after the
satisfaction of the Conversion Test, the holders of Series C Preferred Stock
shall be entitled to share with the holders of Common Stock pari passu in the
assets of the Company, on an "as converted" basis.
If and to the extent that the shares of Common Stock issuable upon
conversion of the Series C Preferred Stock 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 C 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
C Preferred Stock. The Board of Directors may change or otherwise adjust the
terms of the above-described Series C Preferred Stock in its sole discretion.
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, on July 23, 2001 as to $100,000 principal
amount of the Debentures and on December 21, 2001 as to $400,000 principal
amount of the Debentures. See "Use of Proceeds from Sale of Debentures and
Secured Notes." 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.
44
<PAGE>
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 Notes
The First Secured Note was issued on September 28, 1998 in the
principal amount of $650,000. The full principal amount of the First Secured
Note is due and payable on September 28, 2003. The unpaid principal balance of
the First 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 First Secured Note for Common Stock.
The interest rate payable upon the unpaid principal balance of the First Secured
Note shall increase by 2.25% every 360 days but shall not exceed 25% per annum.
The Second Secured Note was issued on December 21, 1998 in the
principal amount of $1,350,000. The full principal amount of the Second Secured
Note is due and payable on September 28, 2003. The unpaid principal balance of
the Second Secured Note shall bear interest at the rate of 12% 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 Second Secured Note for Common Stock. The
interest rate payable upon the unpaid principal balance of the Second 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 July 23, 1998, the Company issued to Barry Lebin warrants to purchase
6,303 shares 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. In connection with the Company's private placement of the
First Secured Note, on September 28, 1998 the Company issued to Joseph Donohue,
Jr., Max Rockwell, Mark Angelo, Hunter Singer and May Davis Group warrants to
purchase 1,418, 1,418, 1,418, 1,418 and 631 shares, respectively, of Common
Stock at $5.15625 per share.
On December 21, 1998 the Company issued to Talisman warrants
to purchase 151,875 shares of Common Stock at $6.00 per share. In connection
with the Company's private placement of the Second Secured Note, on December 21,
1998 the Company issued to Joseph Donohue, Jr., Max Rockwell, Mark Angelo,
Hunter Singer and May Davis Group warrants to purchase 2,531, 2,531, 2,531,
2,531 and 1,125 shares, respectively, of Common Stock at $6.00 per share. In
connection with the Company's private placement of Debentures on December 21,
1998 the Company issued to Joseph Donohue, Jr., Max Rockwell, Mark Angelo,
Hunter Singer and May Davis Group warrants to purchase 1,500, 1,500, 1,500,
1,500 and 666 shares, respectively, of Common Stock at $6.00 per share.
45
<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 156,472 shares of common stock issuable upon
the conversion of the Debentures, 374,679 shares of Common Stock issuable upon
the exchange of the Secured Notes and 267,521 shares issuable upon the exercise
of the Warrants.
46
<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.
The consolidated financial statements of Paragon Steakhouse
Restaurants, Inc. as of September 25, 1998 and September 26, 1997, and for each
of the two years in the period ended September 25, 1998, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon, which contains an
explanatory paragraph describing conditions that raise substantial doubt about
the Company's ability to continue as a going concern as described in Note 1 to
the consolidated financial statements, appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
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.
47
<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.
10200 Willow Creek Road
San Diego, CA 92131
(Telephone) (619) 689-2333
(Facsimile) (619) 689-0231
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.
48
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<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:
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
Notes to Financial Statements............................... F-10
Galveston's Steakhouse Corp. for the nine months ended
September 30, 1998 (unaudited):
Balance Sheet............................................... F-26
Statement of Operations..................................... F-28
Statement of Cash Flows..................................... F-29
Notes to Financial Statements............................... F-30
Paragon Steakhouse Restaurants, Inc. and Subsidiaries for the
years ended September 25, 1998 and September 26, 1997:
Report of Independent Auditors ............................. F-33
Consolidated Balance Sheets................................. F-34
Consolidated Statements of Operations and Accumulated Deficit F-35
Consolidated Statements of Cash Flows ...................... F-36
Notes to Consolidated Financial Statements ................. F-38
Galveston's Steakhouse Corp. and Paragon Steakhouse Restaurants,
Inc. and Subsidiaries pro forma financial information:
Pro forma Consolidated Balance Sheet as of September 30, 1998 F-49
Pro forma Consolidated Statement of Operations for the year
ended December 31, 1997 .................................. F-51
Pro forma Consolidated Statement of Operations for the nine
months ended September 30, 1998 .......................... F-52
Notes to Pro forma Consolidated Financial Statements........ F-53
</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>
<TABLE>
GALVESTON'S STEAKHOUSE CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- ------------------------------------------------------------------------------
NOTE 5 - NOTES PAYABLE (Continued)
<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.
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>
Report of Independent Auditors
Board of Directors and Shareholder
Paragon Steakhouse Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Paragon
Steakhouse Restaurants, Inc. (a wholly-owned subsidiary of Kyotaru Co., Ltd.)
and subsidiaries as of September 25, 1998 and September 26, 1997, and the
related consolidated statements of operations and accumulated deficit, and cash
flows for the years then ended. 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 consolidated financial position of Paragon
Restaurants, Inc. and subsidiaries at September 25, 1998 and September 26, 1997,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Paragon
Steakhouse Restaurants, Inc. and subsidiaries will continue as a going concern.
As more fully described in Note 1, the Company has incurred recurring operating
losses, has a working capital deficiency and, as a result of the Company's
Parent filing a petition for corporate reorganization procedures with the Tokyo
District Court in Japan on January 19, 1997, the Company may not have access to
adequate working capital during the coming year. These conditions raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
November 7, 1998
F-33
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
----------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 715,388 $ 1,392,921
Accounts receivable, less allowances of $49,585 in 1998 and
$82,510 in 1997 3,399,535 3,114,668
Inventories 5,180,141 4,448,067
Prepaid expenses, supplies and other current assets 3,282,651 3,374,014
----------------------------------------
Total current assets 12,577,715 12,329,670
Property and equipment, net 55,060,971 61,188,457
Other assets:
Liquor licenses 2,191,117 2,321,198
Cash - restricted under collateral agreements 1,679,194 2,927,960
Other 1,985,967 1,782,071
----------------------------------------
5,856,278 7,031,229
----------------------------------------
Total assets $73,494,964 $80,549,356
========================================
LIABILITIES AND DEFICIENCY IN ASSETS
Current liabilities:
Accounts payable $11,206,188 $11,587,516
Advance from affiliate 272 1,808,085
Other accrued liabilities 9,122,574 9,972,920
Accrued salaries, wages and benefits 3,776,600 3,458,109
Current portion of capital lease obligations 1,152,143 1,404,202
Current portion of long-term debt 20,706,225 1,119,256
----------------------------------------
Total current liabilities 45,964,002 29,350,088
Capital lease obligations, less current portion 8,557,331 9,706,474
Long-term debt, less current portion - 20,621,781
Other long-term liabilities 4,350,877 4,133,203
Due to affiliate 20,626,103 19,001,135
Commitments and contingencies
Deficiency in assets:
Common stock, no par value:
Shares authorized - 10,000
Issued and outstanding -1,794 shares in 1998 and 1997 49,000,000 49,000,000
Additional paid-in capital 32,349,089 32,349,089
Accumulated deficit (87,352,438) (83,612,414)
----------------------------------------
Total deficiency in assets (6,003,349) (2,263,325)
----------------------------------------
Total liabilities and deficiency in assets $73,494,964 $80,549,356
========================================
</TABLE>
See accompanying notes.
F-34
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
Revenues:
Restaurant $137,092,585 $150,111,596
Foodservice distribution 34,218,341 27,029,670
-----------------------------------------
171,310,926 177,141,266
Cost of sales:
Food and beverage costs - Restaurant 45,432,791 50,093,188
Food and beverage costs - Foodservice distribution 31,236,813 24,486,752
Personnel costs - Restaurant 44,217,500 49,252,549
Personnel costs - Foodservice distribution 2,228,836 2,081,952
-----------------------------------------
123,115,940 125,914,441
-----------------------------------------
48,194,986 51,226,825
Costs and expenses:
Other direct operating costs - Restaurant 30,967,471 37,322,943
Other direct operating costs - Foodservice distribution 1,665,933 1,528,439
General and administrative expenses 9,495,544 10,865,510
Depreciation and amortization 5,670,553 7,768,595
-----------------------------------------
47,799,501 57,485,487
-----------------------------------------
395,485 (6,258,662)
Other (income) and expenses:
Asset impairment losses 237,213 23,072,616
Amortization of intangibles 339 2,298,731
Interest expense, net 4,393,449 5,826,315
Other, net (481,431) 388,059
-----------------------------------------
(4,149,570) 31,585,721
-----------------------------------------
Loss before provision for income taxes (3,754,085) (37,844,383)
Provision (benefit) for income taxes (14,061) 222,790
-----------------------------------------
Net loss (3,740,024) (38,067,173)
Accumulated deficit at beginning of year (83,612,414) (45,545,241)
-----------------------------------------
Accumulated deficit at end of year $(87,352,438) $(83,612,414)
=========================================
</TABLE>
See accompanying notes.
F-35
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,740,024) $ (38,067,173)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 5,670,553 7,768,595
Amortization of intangibles 339 2,298,731
Related party interest 1,177,968 2,448,789
Related party income taxes not paid in cash - 5,333
Asset impairment loss - 23,072,616
Gains on disposal of assets, net (448,800) (753,552)
Provision for deferred income taxes (81,038) -
Write-off of unamortized capital lease 284,527 141,843
Deferred rent 63,860 249,595
Other 106,301 (101,205)
Changes in operating assets and liabilities:
Accounts receivable (284,867) (671,822)
Inventories (732,074) 41,504
Prepaid expenses, supplies and other current assets 570,471 3,692,010
Accounts payable (463,829) 762,098
Accrued salaries, wages and benefits 318,491 (319,232)
Other accrued liabilities (499,080) (75,760)
-----------------------------------------
Net cash provided by operating activities 1,942,798 492,370
INVESTING ACTIVITIES
Purchases of property and equipment (1,142,555) (5,444,110)
Proceeds from disposal of property and equipment 1,205,254 2,670,834
Loan acquisition costs - (16,096)
Cash - restricted under collateral agreements 1,248,766 222,040
Other 2,165 58,763
-----------------------------------------
Net cash provided by (used in) investing activities 1,313,630 (2,508,569)
FINANCING ACTIVITIES
Borrowings from affiliate - 3,308,085
Net payments on borrowings from affiliate (1,228,813) -
Payments on debt (1,303,946) (1,876,183)
Payments on financing obligations (1,401,202) (1,559,089)
-----------------------------------------
Net cash used in financing activities (3,933,961) (127,187)
-----------------------------------------
Net decrease in cash and cash equivalents (677,533) (2,143,386)
Cash and cash equivalents at beginning of year 1,392,921 3,536,307
-----------------------------------------
Cash and cash equivalents at end of year $ 715,388 $ 1,392,921
=========================================
</TABLE>
See accompanying notes.
F-36
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
--------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes paid $ 156,441 $ 66,815
Interest paid, net of amounts capitalized of $27,988
in 1997 $3,392,045 $ 3,334,439
</TABLE>
During 1997, the Company entered into a sale and leaseback agreement for land
and building with a fair market value of $1,500,000. The lease was treated as a
financing lease and capitalized.
The Company financed prepaid insurance policies of $269,134 and $660,137
through the issuance of short-term notes payable in 1998 and 1997, respectively.
See accompanying notes.
F-37
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that Paragon
Steakhouse Restaurants, Inc. and subsidiaries (the Company) will continue as a
going concern. This basis of accounting contemplates the recovery of the
Company's assets and the satisfaction of its liabilities in the normal course of
business. At September 25, 1998, the Company has an accumulated deficit of
$87,352,438, a deficiency in assets of $6,003,349 and negative working capital
of $33,386,287. In addition, at September 25, 1998, the Company is not in
compliance with certain loan covenants under the terms of its long-term
borrowing agreement and such covenants have not been waived or amended. If the
lender demanded payment of the balance outstanding it is likely the Company
would not have available funds to meet the lender's demand. The Company has
historically relied upon Kyotaru Co., Ltd. (the Parent) for operating capital
which may not be available during the coming year as the Parent filed a petition
for corporate reorganization procedures with the Tokyo District Court in Japan
on January 19, 1997, pursuant to Law No. 172 of June 7, 1952, known as the
Corporate Reorganization Law of Japan. The Tokyo District Court ordered
commencement of the Parent's corporate reorganization procedures on March 31,
1997. Due to the Company's recurring losses from operations, net deficiency in
assets, the covenant violations under the terms of its long-term borrowing
agreement and the financial status of its Parent, there can be no assurance that
the Company will be able to obtain additional operating capital, which may
impact the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern. Management is
pursuing various options to improve the Company's operating results and cash
flows, including closing under-performing operations, selling under-utilized
assets, reducing costs through various cut backs and considering the need to
dispose of part or all of its operations. The Company intends to begin
negotiations with its long-term lender to revise the terms and covenants under
its long-term borrowing agreement such that the Company will be able to be in
compliance in the future.
F-38
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION (CONTINUED)
DESCRIPTION OF BUSINESS
Paragon Steakhouse Restaurants, Inc. and its subsidiaries (Paragon of Michigan,
Inc., Paragon of Nevada, Inc. and Paragon of Wisconsin, Inc.) (collectively PSR)
own and operate restaurants located primarily throughout California, Arizona,
and the Great Lakes Region. PSR also owns Pacific Basin Foods, Inc. (PBF), a
company engaged in purchasing and selling food and other restaurant supplies to
PSR and nonaffiliated companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PSR and PBF
(collectively the Company). Significant intercompany amounts and transactions
have been eliminated in consolidation.
OWNERSHIP
PSR is a wholly-owned subsidiary of Kyotaru Co., Ltd. (KCL or the Parent).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates and such differences may
be material to the financial statements.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased and whose use is not restricted under collateral
agreements, to be cash equivalents. The carrying amount reported in the
consolidated balance sheets for cash equivalents approximates fair value.
INVENTORIES
Inventories, consisting primarily of food and beverages, are carried at the
lower of cost (first-in, first-out method) or market.
F-39
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION (CONTINUED)
SUPPLIES
When a restaurant is opened, the initial purchase of expendable equipment, such
as china, glassware and silverware, is recorded as prepaid supplies.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over their estimated useful lives (3 to
15 years for furniture, fixtures and equipment, 40 years for buildings) using
the straight-line method for financial reporting purposes. Costs of leasehold
rights and improvements are amortized on a straight-line basis over the
estimated useful lives of the assets, or the lease term, whichever is shorter.
INTANGIBLES
Trademarks and trade names were carried at acquisition cost and amortized using
the straight-line method over 10 years, prior to such costs being written-off
during 1997.
LIQUOR LICENSES
Transferable liquor licenses which have a market value are carried at cost and
are not amortized.
PRE-OPENING COSTS
In September 1997, the Company changed its method of accounting for pre-opening
costs incurred with the start up of a new restaurant, and began expensing such
costs in the period incurred. As a result of changing the method of accounting
for pre-opening costs, the Company wrote-off unamortized pre-opening costs at
September 26, 1997 of $345,068.
GIFT CERTIFICATES
The Company sells gift certificates and recognizes a liability, included in
other accrued liabilities, for gift certificates outstanding until the gift
certificate is redeemed or deemed to have expired.
F-40
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION (CONTINUED)
ASSET IMPAIRMENT LOSS
During 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". As a result of adopting SFAS No. 121, the
Company wrote down property and equipment as a result of comparing the
discounted cash flows for under-performing restaurants to the net book value of
the restaurants' assets. The adjustment for the impairment was recorded by
increasing depreciation and amortization by $10,859,255 in 1997. No adjustment
for asset impairment was recorded during fiscal 1998. At September 26, 1997,
management concluded that due to continued losses from operations, trademarks,
trade names and other intangibles no longer had a continuing value based on an
updated fair market value assessment of the Company, and accordingly increased
the applicable accumulated amortization accounts by $12,240,949. The Company
also recorded reserves for future operating costs of properties which were
closed at or subsequent to the fiscal years ended September 25, 1998 and
September 26, 1997 of $237,213 and $652,037, respectively. The total of the
write-downs of the property and equipment, intangible assets and reserves for
future operating costs of closed restaurants is included in other expenses as
asset impairment losses.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are charged to expense as incurred.
Advertising and promotional costs for the years ended September 25, 1998 and
September 26, 1997 were $5,008,288 and $6,090,624, respectively.
OTHER DIRECT OPERATING COSTS
Other direct operating costs consist of those direct costs associated with
operating the restaurant locations, exclusive of depreciation and amortization
expense, and with costs associated with operating PBF's warehouse operations.
F-41
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
Land $11,832,771 $ 12,394,763
Buildings and improvements 52,106,657 56,403,736
Furniture, fixtures and equipment 28,314,128 30,310,898
Leased property under capital leases 13,881,126 15,131,151
Leasehold rights 3,041,000 3,358,040
Construction-in-progress - 2,744,346
-----------------------------------------
109,175,862 120,342,934
Less accumulated depreciation and amortization 54,114,711 59,154,477
-----------------------------------------
$55,060,971 $ 61,188,457
=========================================
</TABLE>
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
10.39% mortgage loan collateralized by land, building, and
improvements, due in monthly installments of principal and
interest through September 2011 $20,621,781 $21,335,990
Other 84,444 405,047
-----------------------------------------
20,706,225 21,741,037
Less current portion 20,706,225 1,119,256
-----------------------------------------
$ - $20,621,781
=========================================
</TABLE>
On August 30, 1997, PSR entered into a $22,624,000 secured mortgage financing
(the Mortgage) with a financing company. Paragon Steakhouse Restaurants, Inc.
and one of its subsidiaries, Paragon of Michigan, Inc. are liable for the
repayment of such financing. The Mortgage bears interest at 10.39% and is
payable in 180 equal installments of principal and interest, with the final
installment due September 2011. In 1997, the Company prepaid $626,779 of the
mortgage, reducing the original monthly payments of $248,545 to $241,470. The
prepayment was funded from the sale of a portion of the security. The Mortgage
is secured by substantially all of PSR's owned land, buildings and
F-42
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
3. LONG-TERM DEBT (CONTINUED)
the improvements thereon. The Mortgage was used to refinance existing debt,
finance restaurant remodels and pay fees and expenses associated with the
Mortgage. The terms of the Mortgage include specific financial covenants,
restrictions on obtaining other financing and limitations on payments to its
parent. On April 30, 1997, and on May 28, 1997, the mortgage agreement was
amended primarily to modify the loan covenants. As of September 25, 1998, the
Company is not in compliance with certain financial ratio loan covenants and has
not obtained a waiver for the covenant violations. As a result, the entire loan
balance has been included in the current portion of long-term debt for financial
statement presentation.
The maturities of long-term debt, assuming the Mortgage is not accelerated,
for the years succeeding fiscal 1998 are as follows:
1999 $ 876,494
2000 878,378
2001 974,115
2002 1,080,287
2003 1,198,032
Thereafter 15,698,919
---------------------
$20,706,225
=====================
4. LEASE COMMITMENTS
In January 1997, the Company received net cash proceeds of $1,263,650 relating
to the sale of a new restaurant property. Following the sale, the Company
obtained an additional $200,000 in financing for the property, completed
construction of the restaurant, and leased the property back for a period of 20
years at an initial annual rental of $163,500 subject to increases of 6%
beginning January 1, 2000 and every three years thereafter.
The lease, noted above, is renewable for two additional periods of 5 years at
the Company's option. The Company also has an option to purchase the property
for a fixed sum during the sixty-first full month of the lease. As a result of
the purchase option, the transaction has been recorded as a financing lease,
with the restaurant being included in property and equipment in the accompanying
financial statements along with the related lease obligation.
The Company leases various land and building sites for its restaurant
operations. These leases have initial terms generally ranging from 20 to 35
years and, in certain instances, provide for renewal options ranging from 5 to
25 years. Certain of these leases require
F-43
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
4. LEASE COMMITMENTS (CONTINUED)
additional (contingent) rental payments by the Company if sales volumes at the
related restaurants exceed specified levels. Most of these lease agreements
require payments of taxes, insurance and maintenance costs by the Company. The
Company also leases various restaurant and transportation equipment. Those
leases have initial terms generally ranging from 4 to 7 years and require a
fixed monthly payment or, in the case of transportation equipment, additional
payments on a per mile basis. Certain of the leases are accounted for as
operating leases while others are accounted for as capital leases.
Rental expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
Restaurant, land and buildings:
Minimum rents $6,259,019 $7,015,815
Percentage rentals 335,112 339,416
-----------------------------------------
6,594,131 7,355,231
Equipment rentals 1,397,386 1,600,959
-----------------------------------------
$7,991,517 $8,956,190
=========================================
</TABLE>
Future minimum lease payments for all leases (including sale/leasebacks) with
initial or remaining terms of one year or more at September 25, 1998 are as
follows :
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-----------------------------------------
<S> <C> <C>
1999 $ 2,142,562 $ 6,635,882
2000 1,602,565 5,919,155
2001 1,009,057 5,741,125
2002 939,301 5,379,601
2003 966,963 4,592,718
Thereafter 13,857,507 35,435,311
-----------------------------------------
Total minimum lease payments 20,517,955 $63,703,792
======================
Less amount representing interest 10,808,481
--------------------
9,709,474
Less current portion 1,152,143
--------------------
Long-term lease obligations $ 8,557,331
====================
</TABLE>
F-44
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
5. COMMITMENTS AND CONTINGENCIES
The Company has self-insured retention insurance programs for general liability,
workers' compensation and employee health plans up to varying deductibles and
certain maximum coverages under the Company's risk management program. Amounts
estimated to be payable with respect to existing claims for which the Company is
liable under its self-insured retention have been accrued as liabilities. The
Company is also required to maintain cash deposits securing future payments
under the programs and has entered into an arrangement with the insurance
companies, whereby they have placed cash deposits into money market funds
controlled by the insurance companies and granted the insurance companies a
security interest in the cash deposits. These deposits have been recorded in the
other asset section of the balance sheet as "Cash - restricted under collateral
agreements".
The Company is periodically a defendant in cases involving personal injury and
other matters which arise in the normal course of business. While any pending or
threatened litigation has an element of uncertainty, the Company believes that
the outcome of any pending lawsuits or claims, individually or combined, will
not materially affect the financial condition or results of operations.
At September 25, 1998, the Company had outstanding commitments to purchase
inventory of approximately $3.2 million. The inventory purchase commitments
approximate market value.
The Company is also contingently liable on operating leases of properties sublet
to third parties. The future minimum lease payments on these properties
aggregate $3,169,100 through December 2009 .
6. RELATED PARTY TRANSACTIONS
In 1997, the Company issued an additional 794 shares in the Company to its
Parent in exchange for a reduction in amount due to the Parent of $36,000,000.
In connection with the original acquisition of the Company's stock, debt
associated with the acquisition was pushed down to the Company. Such debt, along
with other borrowings and advances to the Company, is included in amounts due to
affiliate and is payable on demand. The affiliate has agreed not to call the
debt due during fiscal 1999, unless the Company has funds sufficient to meet the
demand for payment and meet certain financial ratio loan covenants of its
Mortgage. The interest rate on borrowings due to affiliate was 6.1% at September
25, 1998 and September 26, 1997. Interest expense includes $1,177,968 and
$2,448,789 for fiscal 1998 and 1997, respectively, related to borrowings due to
affiliate.
F-45
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
6. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company paid an affiliate prior years taxes relating to a tax sharing
agreement of $121,000 and $132,000 in 1998 and 1997, respectively.
7. INCOME TAXES
The provision for income taxes for the years ended September 25, 1998 and
September 26, 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Current:
Federal $ - $ (266)
State 66,977 223,056
-------------------------------------
66,977 222,790
Deferred:
Federal (877,764) (8,170,919)
State (81,038) -
-------------------------------------
(958,802) (8,170,919)
-------------------------------------
(891,825) (7,948,129)
Change in valuation reserve 877,764 8,170,919
=====================================
$ (14,061) $ 222,790
=====================================
</TABLE>
Through the period ended December 29, 1993, the Company filed consolidated
federal and combined state income tax returns with its former parent KII. On
December 30, 1993, the Company's ownership was transferred from KII to KCL.
Subsequent to the change in ownership, the Company has continued to file certain
combined state tax returns with affiliated companies, but began filing its own
consolidated federal tax return. Under the agreement the Company has with KCL,
the Company provides for income taxes, when filing with affiliated companies, on
a separate basis, as if it filed its own tax return.
The Company accounts for income taxes using the liability method required by
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-46
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
7. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $12,151,945 $ 8,996,109
FICA tax credit carryforward 1,813,506 1,813,506
Depreciation net of deferred gain on casualty loss 1,721,380 1,507,780
Deferred rent 669,824 633,854
Self-funded insurance accruals 479,151 793,753
Amortization on non-compete agreement 15,847 17,320
Salaries, wages and benefit accruals 130,143 198,921
Asset valuation reserves 4,648,751 7,092,886
Alternative minimum tax carryforward 136,318 136,318
Amortization of financing costs 271,727 292,754
State income taxes 68,991 117,606
Affiliated entity interest 400,509 -
Other 43,955 39,476
Inventory uniform capitalization costs 41,575 55,313
-------------------------------------
Total deferred tax assets 22,593,622 21,695,596
Deferred tax liabilities:
State income tax fixed asset deductions 207,585 288,623
Prepaid items 75,008 129,451
Deferred loss on sale/leaseback 23,640 23,640
Capital leases 65,760
Other 8,945 -
-------------------------------------
Total deferred tax liabilities 380,938 441,714
-------------------------------------
Net deferred tax assets before valuation allowance 22,212,684 21,253,882
Valuation allowance (22,420,269) (21,542,505)
=====================================
Net deferred tax liabilities $ (207,585) $ (288,623)
=====================================
</TABLE>
The Company recorded a net operating loss for tax purposes in 1998 and 1997 and
has remaining net operating loss carryforwards, after carrybacks, of $35,741,014
expiring in 2013. The Company also has FICA tip tax credit carryforwards of
$1,813,506 for income tax purposes that expire through 2011.
F-47
<PAGE>
PARAGON STEAKHOUSE RESTAURANTS, INC. AND SUBSIDIARIES
8. OTHER INCOME AND EXPENSES
During 1996, one of the Company's restaurants was partially destroyed by fire.
The loss, covered by the Company's replacement cost property insurance, resulted
in a gain of $418,280 and $459,526 in 1998 and 1997, respectively, included in
other income, as the carrying value of the assets destroyed was substantially
less than replacement cost.
9. YEAR 2000 ISSUE (UNAUDITED)
The Company has developed a plan to replace or modify portions of its software
so that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company does not expect this project to have a
significant effect on its balance sheet, the statements of operations or cash
flows. The Company believes that with modifications and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
F-48
<PAGE>
(b) Pro forma financial information.
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Unaudited Pro forma Consolidated Balance Sheet
As of September 30, 1998
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 744,994 $ 715,388 $ - $ 1,460,382
Accounts receivable 148,649 3,399,535 - 3,548,184
Advances to officers 461,047 - - 461,047
Inventories 39,775 5,180,141 - 5,219,916
Acquisition deposits 1,954,519 - b (1,954,519) -
Prepaid and other current assets 168,681 3,282,651 - 3,451,332
------------------ ------------------ ----------------- ------------------
Total current assets 3,517,665 12,577,715 (1,954,519) 14,140,861
Property and equipment, net 935,127 55,060,971 b (9,877,118) 46,118,980
Debt issuance costs 50,000 - - 50,000
Intangible assets, net 469,714 2,191,117 b (2,191,117) 469,714
Other assets 44,034 3,665,161 - 3,709,195
------------------ ------------------ ----------------- ------------------
Total assets $ 5,016,540 $ 73,494,964 $ (14,022,754) $ 64,488,750
================== ================== ================= ==================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-49
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Unaudited Pro forma Consolidated Balance Sheet (continued)
As of September 30, 1998
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable $ 1,439,497 $ 2,028,636 b $ 600,000 $ 4,068,133
Accounts payable 67,184 11,206,188 - 11,273,372
Other accrued liabilities 79,839 12,899,446 - 12,979,285
------------------ ------------------ ----------------- ------------------
Total current liabilities 1,586,520 26,134,270 600,000 28,320,790
Notes payable, net of current portion 795,245 28,387,063 - 29,182,308
Other long term liabilities - 4,350,877 - 4,350,877
Due to affiliate - 20,626,103 a (20,626,103) -
------------------ ------------------ ----------------- ------------------
Total liabilities 2,381,765 79,498,313 (20,026,103) 61,853,975
Commitments and contingencies
Stockholders' equity
Preferred stock
Preferred stock, Series B, Convertible 1,000 - - 1,000
Common stock 24,283 49,000,000 b (49,000,000) 24,283
Additional paid-in capital 5,852,427 32,349,089 a,b (32,349,089) 5,852,427
Accumulated deficit (3,242,935) (87,352,438) b 87,352,438 (3,242,935)
------------------ ------------------ ----------------- ------------------
Total stockholders' equity 2,634,775 (6,003,349) 6,003,349 2,634,775
------------------ ------------------ ----------------- ------------------
Total liabilities and stockholders' equity $ 5,016,540 $ 73,494,964 $ (14,022,754) $ 64,488,750
================== ================== ================= ==================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-50
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Pro forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Revenues $ 1,867,671 $ 173,611,807 $ - $ 175,479,478
Costs and expenses
Food and beverage 627,165 73,553,690 - 74,180,855
Payroll and payroll related costs 757,232 49,597,925 - 50,355,157
Operating expenses 400,217 36,278,467 - 36,678,684
Depreciation and amortization 221,737 9,144,842 - 9,366,579
General and administrative expenses 350,945 10,624,158 - 10,975,103
Pre-opening startup costs 65,155 - - 65,155
------------------ ------------------ ----------------- ------------------
Total costs and expenses 2,422,451 179,199,082 - 181,621,533
------------------ ------------------ ----------------- ------------------
Loss from operations (554,780) (5,587,275) - (6,142,055)
Other income (expense)
Interest expense, net (523,187) (4,965,444) c 1,520,551 (3,968,080)
Write down of assets - (23,072,616) - (23,072,616)
Other - (547,998) - (547,998)
------------------ ------------------ ----------------- ------------------
Total other income (expense) (523,187) (28,586,058) 1,520,551 (27,588,694)
------------------ ------------------ ----------------- ------------------
Net loss $ (1,077,967) $ (34,173,333) $ 1,520,551 $ (33,730,749)
================== ================== ================= ==================
Basic loss per share $ (1.36) $ (42.68)
================== ==================
Diluted loss per share $ (1.36) $ (42.68)
================== ==================
Weighted-average shares outstanding
basic and diluted 790,296 790,296
================== ==================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-51
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Pro forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Revenues $ 841,476 $ 130,765,614 $ - $ 131,607,090
Costs and expenses
Food and beverage 269,653 59,070,334 - 59,339,987
Payroll and payroll related costs 348,040 35,615,142 - 35,963,182
Operating expenses 366,328 25,019,078 - 25,385,406
Depreciation and amortization 109,741 4,339,791 - 4,449,532
General and administrative expenses 694,990 7,272,393 - 7,967,383
------------------ ------------------ ----------------- ------------------
Total costs and expenses 1,788,752 131,316,738 - 133,105,490
------------------ ------------------ ----------------- ------------------
Loss from operations (947,276) (551,124) - (1,498,400)
Other income (expense)
Interest expense, net (275,140) (3,339,713) c 907,539 (2,707,314)
Other income - 255,383 - 255,383
------------------ ------------------ ----------------- ------------------
Total other income (expense) (275,140) (3,084,330) 907,539 (2,451,931)
------------------ ------------------ ----------------- ------------------
Net loss $ (1,222,416) $ (3,635,454) $ 907,539 $ (3,950,331)
================== ================== ================= ==================
Basic loss per share $ (0.59) $ (1.91)
================== ==================
Diluted loss per share $ (0.59) $ (1.91)
================== ==================
Weighted-average shares outstanding
basic and diluted 2,064,714 2,064,714
================== ==================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-52
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Notes to Pro forma Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying pro forma consolidated balance sheet presents the accounts of
Galveston's Steakhouse Corp. ("Galveston's") and Paragon Steakhouse Restaurants,
Inc. and Subsidiaries ("Paragon") as if the acquisition of Paragon by
Galveston's occurred on September 30, 1998. The accompanying pro forma
consolidated statements of operations present the accounts of Galveston's and
Paragon for the year ended December 31, 1997 and the nine months ended September
30, 1998 as if the acquisition occurred on January 1, 1997.
The following adjustments would be required if the acquisition occurred as
indicated above:
a. To remove the amount due to affiliate that was forgiven in connection
with the acquisition.
b. To record the purchase price which consists of a $600,000 note payable,
$600,000 in cash that was previously paid the sellers and included in
acquisition deposits and $1,354,519 in transaction fees that were also
included in the acquisition deposit account. In addition, due to the
forgiveness of the amount due to affiliate as mentioned in item a.
above, the $1.2 million purchase price was less than the net book value
of Paragon. This purchase discount of $12,068,235 is being used to
reduce the basis of intangible assets and property and equipment of
$2,191,117 and $9,877,118, respectively.
c. To remove the interest expense incurred on the amount due to
affiliate that was forgiven in connection with the acquisition.
F-53
<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
----------------------
- ------------------------------------------
- ------------------------------------------
1,064,248 SHARES
GALVESTON'S
STEAKHOUSE CORP.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
FEBRUARY 10, 1999
- ------------------------------------------
- ------------------------------------------
<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 presently has in effect directors and officers liability
insurance which it believes is adequate in amount and scope of coverage.
<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 are set forth in the following table.
SEC registration fee......................... $ 2,119.18
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)............................ 2,880.82
----------
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 February 1998,
in connection with the Company's initial public offering, these three (3)
persons returned their shares to the Company.
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.
On December 21, 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 $1,350,000.
On December 21, 1998 each of JMG Capital Partners, L.P. and Triton
Capital Investments Limited purchased $200,000 principal amount of the Company's
6% Convertible Debentures.
On or about December 31, 1998, the Company issued 26,000 shares of
restricted common stock to Winchester Investment Securities, Inc. for services
rendered to the Company.
II-2
<PAGE>
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.
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.
II-3
<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 August 31, 1998 by and among
the Company, Tri-Core Steakhouse, Inc., Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co. Ltd.
10.19*** First Amendment to Merger Agreement dated August 31,
1998, by and amoung the Company and Tri-Core
Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on
the other hand.
10.20*** Second Amendment to Merger Agreement dated August 31,
1998, by and amoung the Company and Tri-Core
Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on
the other hand.
10.21*** Third Amendment to Merger Agreement dated August 31,
1998, by and amoung the Company and Tri-Core
Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on
the other hand.
10.22*** Form of Agreement Not to Compete.
10.23*** Form of Management Agreement.
10.24*** Form of Non-negotiable Promissory Note.
10.25****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.
10.26****Form of Registration Rights Agreement by and between
the Company and each of JMG Capital Partners, L.P.,
Triton Capital Investments Limited, and Barry Lebin.
10.27****Form of Debenture issued to JMG Capital Partners,
L.P., Triton Capital Investments Ltd and Barry Lebin.
10.28****Form of Note Purchase Agreement by and between the
Company and Talisman Capital Opportunity Fund Ltd.
II-4
<PAGE>
10.29****Form of Secured Exchangeable Note issued to Talisman
Capital Opportunity Fund Ltd.
10.30****Form of Warrant issued to Talisman Capital
Opportunity Fund Ltd.
10.31****Form of Collateral, Pledge and Security Agreement by
and between the Company and Talisman Capital
Opportunity Fund Ltd.
10.32****Form of Warrant issued to Joseph Donohue, Jr., Max
Rockwell, Mark Angelo, Hunter Singer, John
Audiferren, AIBC Investment Services Corp., May Davis
Group and Barry Lebin.
10.33****Loan and Security Agreement dated December 21, 1998
by and between Pacific Basin Foods, Inc. and The CIT
Group/Credit Finance, Inc.
10.34****Security Agreement dated December 21, 1998 by and
between the Company and The CIT Group/Credit
Finance, Inc.
10.35****Secured Continuing Guaranty dated December 21, 1998
executed by the Company.
10.36****Security Agreement (Intellectual Property) dated
December 21, 1998 by and between the Company and The
CIT Group/Credit Finance, Inc.
10.37****Grant of Security Interest (Trademarks) dated
December 21, 1998 executed by the Company.
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).
23.3**** Consent of Ernst & Young LLP.
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.
*** Incorporated by reference from Form 8-K, Current Report, filed with the
SEC on January 4, 1999.
**** Filed herewith.
II-5
<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.
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 AMENDMENT NO. 1 TO
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED IN SAN DIEGO, CALIFORNIA, ON THIS 10TH DAY OF FEBRUARY, 1999.
GALVESTON'S STEAKHOUSE CORP.
By: /S/ Richard M. Lee
----------------------------------
RICHARD M. LEE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to 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>
/s/ Richard M. Lee Chairman of the Board of Directors and February 10, 1999
- ---------------------------------------- Chief Executive Officer
Richard M. Lee
/s/ Hiram J. Woo Director, President, Secretary and February 10, 1999
- ---------------------------------------- Chief Financial Officer (Principal
Hiram J. Woo Financial and Accounting Officer)
/s/ Tom Edler Director February 10, 1999
- ----------------------------------------
Tom Edler
/s/ Mark W. Goudge
- ---------------------------------------- Director February 10, 1999
Mark W. Goudge
/s/ Tod Lindner
- ---------------------------------------- Director February 10, 1999
Tod Lindner
</TABLE>
II-6
<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 August 31, 1998 by and among
the Company, Tri-Core Steakhouse, Inc., Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co. Ltd.
10.19*** First Amendment to Merger Agreement dated August 31,
1998, by and amoung the Company and Tri-Core
Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on
the other hand.
10.20*** Second Amendment to Merger Agreement dated August 31,
1998, by and amoung the Company and Tri-Core
Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on
the other hand.
10.21*** Third Amendment to Merger Agreement dated August 31,
1998, by and amoung the Company and Tri-Core
Steakhouse, Inc., on the one hand, and Paragon
Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on
the other hand.
10.22*** Form of Agreement Not to Compete.
10.23*** Form of Management Agreement.
10.24*** Form of Non-negotiable Promissory Note.
10.25****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.
10.26****Form of Registration Rights Agreement by and between
the Company and each of JMG Capital Partners, L.P.,
Triton Capital Investments Limited, and Barry Lebin.
10.27****Form of Debenture issued to JMG Capital Partners,
L.P., Triton Capital Investments Ltd and Barry Lebin.
10.28****Form of Note Purchase Agreement by and between the
Company and Talisman Capital Opportunity Fund Ltd.
<PAGE>
10.29****Form of Secured Exchangeable Note issued to Talisman
Capital Opportunity Fund Ltd.
10.30****Form of Warrant issued to Talisman Capital
Opportunity Fund Ltd.
10.31****Form of Collateral, Pledge and Security Agreement by
and between the Company and Talisman Capital
Opportunity Fund Ltd.
10.32****Form of Warrant issued to Joseph Donohue, Jr., Max
Rockwell, Mark Angelo, Hunter Singer, John
Audiferren, AIBC Investment Services Corp., May Davis
Group and Barry Lebin.
10.33****Loan and Security Agreement dated December 21, 1998
by and between Pacific Basin Foods, Inc. and The CIT
Group/Credit Finance, Inc.
10.34****Loan and Security Agreement dated December 21, 1998
by and between the Company and The CIT Group/Credit
Finance, Inc.
10.35****Secured Continuing Guaranty dated December 21, 1998
executed by the Company.
10.36****Security Agreement (Intellectual Property) dated
December 21, 1998 by and between the Company and The
CIT Group/Credit Finance, Inc.
10.37****Grant of Security Interest (Trademarks) dated
December 21, 1998 executed by the Company.
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).
23.3****Consent of Ernst & Young LLP.
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.
*** Incorporated by reference from Form 8-K, Current Report, filed with the
SEC on January 4, 1999.
**** Filed herewith.
LEHMAN & EILEN LLP
50 Charles Lindbergh Blvd., Suite 505
Uniondale, New York 11553
February 10, 1999
Board of Directors
Galveston's Steakhouse Corp.
10200 Willow Creek Road
San Diego, CA 92131
Re: Amendment No. 1 to Registration Statement on Form SB-2
Ladies and Gentlemen:
At your request, this letter relates to Amendment No. 1 to the Registration
Statement on Form SB-2 filed by Galveston's Steakhouse Corp. (the "Company")
with the Securities and Exchange Commission on February 10, 1999 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 1,064,248 shares of common stock issuable
(i) upon the conversion of $1,100,000 aggregate principal amount of the
Company's 6% Convertible Debentures, (ii) upon the exchange of $2,000,000
aggregate principal amount of the Company's Secured Exchangeable Notes, and
(iii) upon the exercise of Warrants to purchase 267,521 shares of the Company's
common stock (collectively herein, the "Shares"). Capitalized terms utilized
herein and not defined herein shall have the respective meanings ascribed to
such terms in the Registration Statement.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the proceedings taken by the
Company in connection with the issuance of the Shares, the Registration
Statement and such corporate records, agreements, documents and other
instruments, and such certificates or comparable documents of public officials
and of officers and representatives of the Company, and have made such inquiries
of such officers and representatives, as we have deemed relevant or necessary as
a basis for the opinions hereinafter set forth.
In such examination, we have assumed without independent verification,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to original documents of documents submitted
to us as certified or photostatic copies and the authenticity of the originals
of such latter documents. As to all questions of fact material to this opinion
that have not been independently established, we have relied upon
representations of the Company in the Registration Statement, certificates or
comparable documents of officers of the Company and of public officials. Our
examination of matters of law has been limited to the Delaware General
Corporation Law.
<PAGE>
Board of Directors
Galveston's Steakhouse Corp.
February 10, 1999
Page 2
Based on the foregoing, and subject to the qualifications stated
herein, as of the date hereof, it is our opinion that upon the issuance and sale
in the manner described in the Registration Statement, such Shares will be
validly issued, fully paid and non-assessable. This opinion is being provided
solely to the Company and may not be relied upon by any other person. This
opinion relates only to the number of Shares set forth above.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
Lehman & Eilen LLP
EXHIBIT 10.25
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 10.26
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 10.27
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 10.28
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 10.29
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 10.30
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 10.31
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 10.32
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
<PAGE>
EXHIBIT 10.33
LOAN AND SECURITY AGREEMENT
This Agreement is between the undersigned Borrower and the undersigned
Lender concerning loans and other credit accommodations to be made by Lender to
Borrower.
SECTION 1. PARTIES
1.1 The "Borrower" is identified in Section 10.5(c) and its successors
and assigns. If more than one Borrower is specified in Section 10.5(c), all
references to Borrower shall mean each of them, jointly and severally,
individually and collectively, and the successors and assigns of each.
1.2 The "Lender" is The CIT Group/Credit Finance, Inc. and its agents,
designees, representatives, successors and assigns.
SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS
2.1 Revolving Loans. Lender shall, subject to the terms and conditions
contained herein, make revolving loans to Borrower ("Revolving Loans") in
amounts requested by Borrower from time to time, but not in excess of the Net
Availability existing immediately prior to the making of the requested loan and
provided the requested loan would not cause the outstanding Obligations to
exceed the Maximum Credit.
(a) The "Maximum Credit" is set forth in Section 10.1(a).
(b) The "Gross Availability" is at any time (i) the product of the
outstanding amount of Eligible Accounts, multiplied by the Eligible Accounts
Percentage set forth in Section 10.1(b), plus: (ii) the product(s) obtained by
multiplying the applicable Eligible Inventory Percentage(s), if any, set forth
in Section 10.1(b) by the values (based on the lower of cost, market or
appraised value) of Eligible Inventory, but the amount so added shall not exceed
any sublimits set forth in Section 10.1(c).
(c) The "Net Availability" shall be calculated at any time as an amount
equal to the Gross Availability minus the aggregate amount of all
then-outstanding Obligations to Lender other than the then outstanding principal
balance of the Term Loan, if any.
(d) "Eligible Accounts" are accounts created by Borrower in the
ordinary course of its business which are and remain acceptable to Lender for
lending purposes. General criteria for Eligible Accounts are set forth below but
may be revised from time to time by Lender, in its sole judgment, on fifteen
(15) days' prior written notice to Borrower. Lender shall, in general, deem and
continue to deem accounts to be Eligible Accounts if: (1) such accounts arise
from bona fide completed transactions and have not remained unpaid for more than
the number of days after the invoice date set forth in Section 10.1(d); (2) the
amounts of the accounts reported to Lender are absolutely owing to Borrower and
payment is not conditional or contingent, (such as consignments, guaranteed
sales or right of return or other similar terms); (3) the account debtor's chief
executive office or principal place of business is located in the United States;
<PAGE>
(4) such accounts do not arise from progress billings, retainages or bill and
hold sales; (5) there are no contra relationships, setoffs, counterclaims or
disputes existing with respect thereto and there are no other facts existing or
threatened which would impair or delay the collectibility of all or any portion
thereof; (6) the goods giving rise thereto were not at the time of the sale
subject to any liens except those permitted in this Agreement; (7) such accounts
are not accounts with respect to which the account debtor or any officer or
employee thereof is an officer, employee or agent of or is affiliated with
Borrower, directly or indirectly, whether by virtue of family membership,
ownership, control, management or otherwise; (8) there has been compliance with
the Assignment of Claims Act or similar State or local law, if applicable, if
the account debtor is the United States or any domestic governmental unit; (9)
Borrower has delivered to Lender such documents as Lender may have requested
pursuant to Section 5.9 hereof in connection with such accounts and Lender shall
have received verifications of such accounts, satisfactory to it, if sent to the
account debtors or any other obligors or any bailees pursuant to Section 5.5
hereof; (10) there are no facts existing or threatened which might result in any
adverse change in the account debtor's financial condition; (11) accounts owed
by an account debtor and its affiliates do not represent more than twenty
percent (20%) of all otherwise Eligible Accounts (the amount exceeding twenty
percent (20%) shall not be eligible; except for Souplantation and Rubios for
which the percentages shall be 35% provided payment of such accounts is made
directly to Lender on notification by Lender to these account debtors; (12) not
more than fifty percent (50%) of the accounts of an account debtor or its
affiliates owed to Borrower are more than the number of days set forth in
Section 10.1(d); (13) such accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the amount of any customer credit
limits as established from time to time on notice to Borrower (the amount
exceeding the credit limit shall not be eligible); and (14) such accounts are
owed by account debtors deemed creditworthy at all times by Lender. Solely for
the purpose of calculating Eligible Accounts pursuant to clause (11) above,
Lender will include receivables owed by Paragon to Borrower (which receivables
would not otherwise constitute Eligible Accounts) in an amount not exceeding
$250,000 to the extent that Borrower has complied with the requirements of
Section 6.19.
(e) "Eligible Inventory" is inventory owned by Borrower which is and remains
acceptable to Lender for lending purposes and is located at one of the addresses
set forth in Section 10.5(e); provided, that dairy products, slow moving
inventory, drop shipped inventory and customized paper supply products shall not
constitute "Eligible Inventory" for purposes of this Agreement.
(f) Lender shall have a continuing right to reduce the Gross Availability by
implementing Reserves ("Reserves"), and to increase and decrease such Reserves
from time to time, if and to the extent that, in Lender's sole judgment, such
Reserves are necessary to protect Lender against any state of facts which does,
or would, with notice or passage of time or both, constitute an Event of Default
or have an adverse effect on any Collateral. Such Reserves include without
limitation, any amounts necessary to protect against any agricultural liens or
priority (including by way of illustration priorities under the Perishable
Agricultural and Commodities Act and in connection with the sale of meat or
poultry) in favor of the vendors of any inventory.
(g) If a voluntary or involuntary petition under the Bankruptcy Code is
filed against the Borrower, then Lender need not make loans.
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<PAGE>
(h) Revolving Loans will not at any time exceed the Gross Availability
unless Lender has consented in writing.
SECTION 3. INTEREST AND FEES
3.1 Interest.
(a) Interest on the Revolving Loans and Term Loans shall be payable by
Borrower on the first day of each month, calculated upon the closing daily
balances in the loan account of Borrower for each day during the immediately
preceding month, at the per annum rate set forth as the Interest Rate in Section
10.3(a). The Interest Rate shall increase or decrease by an amount equal to each
increase or decrease, respectively, in the Prime Rate (as defined below),
effective as of the date of each such change. On and after any Event of Default
or termination or non-renewal hereof, interest on all unpaid Obligations shall
accrue at a rate equal to two percent (2%) per annum in excess of the Interest
Rate otherwise payable until such time as all Obligations are indefeasibly paid
in full (notwithstanding entry of any judgment against Borrower or the exercise
of any other right or remedy by Lender), and all such interest shall be payable
on demand. Interest shall in no month be less than the Interest Rate multiplied
by the Minimum Borrowing set forth in Section 10.1(e). In no event shall charges
constituting interest exceed the rate permitted under any applicable law or
regulation, and if any provision of this Agreement is in contravention of any
such law or regulation, such provision shall be deemed amended to conform
thereto.
(b) The "Prime Rate" is the rate of interest publicly announced by The
Chase Manhattan Bank in New York, New York, or its successors and assigns from
time to time as its prime rate.
3.2 Fees. Borrower shall pay to Lender:
(a) Closing Fee. At closing and at the beginning of each renewal term a
Closing Fee in the amount set forth in Section 10.3(c).
(b) Facility Fee. A Facility Fee (fully earned at closing or the
beginning of any renewal term) in installments at each anniversary of closing or
renewal term as set forth in Section 10.3(d).
SECTION 4. GRANT OF SECURITY INTEREST
4.1 Grant of Security Interest. To secure the payment and performance
in full of all Obligations, Borrower hereby grants to Lender a continuing
security interest in and lien upon, and a right of setoff against, and Borrower
hereby assigns and pledges to Lender, all of the Collateral, including any
Collateral not deemed eligible for lending purposes.
4.2 "Obligations" shall mean any and all Revolving Loans and all other
indebtedness, liabilities and obligations of every kind, nature and description
owing by Borrower to Lender and/or its affiliates, including principal,
interest, charges, fees and expenses, however evidenced, whether as principal,
surety, endorser, guarantor or otherwise, whether arising under this Agreement
-3-
<PAGE>
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal Term or after the commencement of any
case with respect to Borrower under the United States Bankruptcy Code or any
similar statute, whether direct or indirect, absolute or contingent, joint or
several, due or not due, primary or secondary, liquidated or unliquidated,
secured or unsecured, original, renewed or extended and whether arising directly
or howsoever acquired by Lender including from any other entity outright,
conditionally or as collateral security, by assignment, merger with any other
entity, participations or interests of Lender in the obligations of Borrower to
others, assumption, operation of law, subrogation or otherwise and shall also
include all amounts chargeable to Borrower under this Agreement or in connection
with any of the foregoing.
4.3 "Collateral" shall mean all of the following property of Borrower:
(a) All now owned and hereafter acquired right, title and interest of
Borrower in, to and in respect of all: accounts, interests in goods represented
by accounts, returned, reclaimed or repossessed goods with respect thereto and
rights as an unpaid vendor; contract rights; chattel paper; investment property;
general intangibles (including, but not limited to, tax and duty refunds,
registered and unregistered patents, trademarks, service marks, copyrights,
trade names, applications for the foregoing, trade secrets, goodwill, processes,
drawings, blueprints, customer lists, licenses, whether as licensor or licensee,
choses in action and other claims, and existing and future leasehold interests
in equipment and fixtures); documents; instruments; letters of credit, bankers'
acceptances or guaranties; cash moneys, deposits, securities, bank accounts,
deposit accounts, credits and other property now or hereafter held in any
capacity by Lender, its affiliates or any entity which, at any time,
participates in Lender's financing of Borrower or at any other depository or
other institution; agreements or property securing or relating to any of the
items referred to above;
(b) All now owned and hereafter acquired right, title and interest of
Borrower in, to and in respect of goods, including, but not limited to:
(i) All inventory, wherever located, whether now owned or hereafter
acquired, of whatever kind, nature or description, including all raw materials,
work-in-process, finished goods, and materials to be used or consumed in
Borrower's business; and all names or marks affixed to or to be affixed thereto
for purposes of selling same by the seller, manufacturer, lessor or licensor
thereof;
(ii) All equipment and fixtures, wherever located, whether now owned or
hereafter acquired, including, without limitation, all machinery, equipment,
motor vehicles, furniture and fixtures, and any and all additions,
substitutions, replacements (including spare parts), and accessions thereof and
thereto; and
(iii) All consumer goods, farm products, crops, timber, minerals or the
like (including oil and gas), wherever located, whether now owned or hereafter
acquired, of whatever kind, nature or description;
(c) All now owned and hereafter acquired right, title and interests of
Borrower in, to and in respect of any personal property in or upon which
Borrower has or may hereafter have a security interest, lien or right of setoff,
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<PAGE>
including, without limitation, Borrower's security interest in the cash
collateral or the proceeds of irrevocable standby letters of credit provided by
Paragon Steakhouse Restaurants, Inc. ("Paragon") pursuant to Section 6.19;
(d) All present and future books and records relating to any of the
above including, without limitation, all computer programs, printed output and
computer readable data in the possession or control of the Borrower, any
computer service bureau or other third party; and
(e) All products and proceeds of the foregoing in whatever form and
wherever located, including, without limitation, all insurance proceeds and all
claims against third parties for loss or destruction of or damage to any of the
foregoing.
SECTION 5. COLLECTION AND ADMINISTRATION
5.1 Collections. Borrower will, at its expense as Lender requests,
direct that all remittances and all other proceeds of accounts and other
Collateral be sent to a lock box designated by Lender, and deposited into a bank
account selected by Lender with arrangements with the bank providing that all
funds deposited in the bank account are to be transferred solely to Lender.
Borrower shall bear all risk of loss of any funds deposited into such account.
In connection therewith, Borrower shall execute such lock box and bank account
agreements as Lender shall specify. Any collections or other proceeds received
by Borrower shall be held in trust for Lender and immediately remitted to Lender
in kind.
5.2 Charges to Loan Account. At Lender's option, all payments of
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement, or in any other agreement now or hereafter existing between
Lender and Borrower, may be charged on the date when due, as principal to any
loan account of Borrower maintained by Lender. Interest, fees for
Accommodations, the Unused Line Fee and any other amounts payable by Borrower to
Lender based on a per annum rate shall be calculated on the basis of actual days
elapsed over a 360-day year.
5.3 Payments. All Obligations shall be payable at Lender's Office set
forth in Section 10.5(a) or at Lender's bank designated in Section 10.5(b) or at
such other bank or place as Lender may expressly designate from time to time for
purposes of this Section. Lender shall apply all proceeds of accounts or other
Collateral received by Lender and all other payments in respect of the
Obligations to the Revolving Loans or to any other Obligations then due, in
whatever order or manner Lender shall determine. For purposes of determining
Gross Availability and Net Availability and for the calculation of the Minimum
Borrowing, remittances and other payments will be treated as credited to the
loan account of Borrower maintained by Lender and Collateral balances to which
they relate, upon the date of Lender's receipt of advice from Lender's bank that
such remittances or other payments have been credited to Lender's account or in
the case of remittances or other payments received directly in kind by Lender,
upon the date of Lender's deposit thereof at Lender's bank, subject to final
payment and collection. In computing interest charges, the loan account of
Borrower will be credited with remittances and other payments for the number of
days set forth in Section 10.3(b) after the day Lender has received advice of
receipt of remittances in Lender's account at Lender's Bank. For purposes of
this Agreement, "Business Day" shall mean any day other than a Saturday, Sunday
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<PAGE>
or any other day on which Lender or banks located in states where Lender has its
offices, are authorized to close.
5.4 Loan Account Statements. Lender shall render to Borrower monthly a
loan account statement. Each statement shall be considered correct and binding
upon Borrower as an account stated, except to the extent that Lender receives,
within sixty (60) days after the mailing of such statement, written notice from
Borrower of any specific exceptions by Borrower to that statement.
5.5 Direct Collections. Lender may, at any time, (a) notify any account
debtor that the accounts and other Collateral which includes a monetary
obligation have been assigned to Lender by Borrower and that payment thereof is
to be made to the order of and directly to Lender, (b) send, or cause to be sent
by its designee, requests (which may identify the sender by a pseudonym) for
verification by telephone, in writing or otherwise of accounts and other
Collateral directly to any account debtor or any other obligor or any bailee
with respect thereto, (c) demand, collect or enforce payment of any accounts or
such other Collateral, but without any duty to do so, and Lender shall not be
liable for any failure to collect or enforce payment thereof, (d) take or bring,
in the name of Lender or Borrower, all steps, actions, suits or proceedings
deemed by Lender necessary or desirable to effect collection of or other
realization upon the accounts and other Collateral, (e) after an Event of
Default, change the address for delivery of mail to Borrower and to receive and
open mail addressed to Borrower, and (f) after an Event of Default, extend the
time of payment of, compromise or settle for cash, credit, return of
merchandise, and upon any terms or conditions, any and all accounts or other
Collateral which includes a monetary obligation and discharge or release the
account debtor or other obligor, without affecting any of the Obligations. At
Lender's request, all invoices and statements sent to any account debtor, other
obligor or bailee, shall state that the accounts and such other Collateral have
been assigned to Lender and are payable directly and only to Lender .
5.6 Attorney-in-Fact. Borrower hereby irrevocably appoints Lender as
Borrower's attorney-in-fact and authorizes Lender at Borrower's sole expense, to
exercise at any times in Lender's discretion all or any of the powers necessary
for Lender to obtain information about the Collateral or to enforce Lender's
rights.
5.7 Liability. Borrower hereby releases and exculpates Lender, its
officers and employees from any liability arising from any acts under this
Agreement or in furtherance thereof, except for gross negligence or willful
misconduct. Lender will not have any liability to Borrower for lost profits or
other special or consequential damages.
5.8 Administration of Accounts. After written notice by Lender to
Borrower or without notice after an Event of Default, Borrower shall not, (a)
amend, modify, settle or compromise any of the accounts or any other Collateral
which includes a monetary obligation, (b) release in whole or in part any
account debtor or other person liable for the payment of any of the accounts or
any such other Collateral, or (c) grant any credits, discounts, allowances,
deductions, return authorizations or the like with respect to any of the
accounts or any such other Collateral.
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5.9 Documents. Borrower shall deliver to Lender, as Lender may request,
all documents, schedules, invoices, proofs of delivery, purchase orders,
statements, contracts and all other information evidencing or relating to the
Collateral, in form and substance satisfactory to Lender and duly executed by
Borrower; provided, that Borrower shall deliver to Lender, not later than three
days after the execution thereof, copies of all contracts relating to accounts
and all amendments, supplements, modifications, renewals or extensions of such
contracts. Without limiting the provisions of Section 5.5, Borrower's granting
of credits, discounts, allowances, deductions, return authorizations or the like
will be promptly reported to Lender in writing. In no event shall any schedule
or confirmatory assignment (or the absence thereof or omission of any of the
accounts or other Collateral therefrom) limit or in any way be construed as a
waiver, limitation or modification of the security interests or rights of Lender
or the warranties, representations and covenants of Borrower under this
Agreement. Any documents, schedules, invoices or other paper delivered to Lender
by Borrower may be destroyed or otherwise disposed of by Lender six (6) months
after receipt by Lender, unless Borrower requests their return in writing in
advance and makes prior arrangements for their return at Borrower's expense.
5.10 Access. Lender shall have access, prior to an Event of Default
during reasonable business hours and on or after an Event of Default at any
time, to all of the premises where Collateral is located for the purposes of
inspecting or copying the Collateral, and all Borrower's books and records.
Lender, at no charge, may use such of Borrower's personnel, equipment, including
computer equipment, programs, printed output and computer readable media,
supplies and premises for the collection of accounts and realization on other
Collateral as Lender, in its sole discretion, deems appropriate. Borrower hereby
irrevocably authorizes all accountants and third parties to disclose and deliver
to Lender at Borrower's expense all financial information, books and records,
work papers, management reports and other information in their possession
regarding Borrower.
5.11 Environmental Audits. From time to time, but not more frequently
than semi-annually (provided Borrower is not in default) as requested by Lender,
at the sole expense of Borrower, Borrower shall provide Lender, or its designee,
complete access to all of Borrower's facilities for the purpose of conducting an
environmental audit of such facilities as Lender may deem necessary.
SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Borrower hereby represents, warrants and covenants to Lender the
following, the truth and accuracy of which, and compliance with which, shall be
continuing conditions of the making of loans or other credit accommodations by
Lender to Borrower:
6.1 Financial and Other Reports. Borrower shall keep and maintain its
books and records in accordance with generally accepted accounting principles,
consistently applied. Borrower shall, at its expense on or before Wednesday of
each week, deliver to Lender true and complete weekly perpetual inventory
reports relating to the prior week. Borrower shall, at its expense on or before
the tenth (10th) day of each four week accounting cycle, deliver to Lender: (a)
true and complete monthly agings of its accounts receivable and accounts
payable, (b) a certificate setting forth Borrower's Tangible Net Worth in form
reasonably satisfactory to Lender, (c) daily inventory reports; (d) copies of
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contract with account debtors (if not previously delivered to Lender) and any
amendments thereto; and by the twentieth (20th) day of each four week accounting
cycle internally prepared interim financial statements. Quarterly, Borrower
shall deliver internal consolidated and consolidating financial statements
within twenty (20) days after the end of each quarter, which statements shall be
tied to Borrower's publicly reported corporate statements. Annually, Borrower
shall deliver audited financial statements of Borrower and its affiliates (on a
consolidated and consolidating basis) accompanied by the report and opinion
thereon of independent certified public accountants acceptable to Lender, as
soon as available, but in no event later than ninety (90) days after the end of
Borrower's fiscal year. Borrower shall also provide cash flow projections in a
format acceptable to Lender as Lender may request and, as filed, copies of all
quarterly and annual filings and reports with the S.E.C. by Borrower, Galveston
or Paragon. All of the foregoing shall be in such form and together with such
information with respect to the business of Borrower or any guarantor, as Lender
may in each case request.
6.2 Trade Names. Borrower may from time to time render invoices under
its trade names set forth in Section 10.5(g) and, Borrower represents that: (a)
each trade name does not refer to another corporation or other legal entity, (b)
all accounts and proceeds thereof (including any returned merchandise) invoiced
under any such trade names are owned exclusively by Borrower and (c) Lender may
receive, endorse and deposit to any loan account of Borrower maintained by
Lender all checks or other remittances made payable to any trade name of
Borrower representing payment with respect to such sales or services.
6.3 Losses. Borrower shall promptly notify Lender in writing of any
loss, damage, investigation, action, suit, proceeding or claim relating to a
material portion of the Collateral or which may result in any material adverse
change in Borrower's business, assets, liabilities or condition, financial or
otherwise.
6.4 Books and Records. Borrower's books and records concerning accounts
and its chief executive office are and shall be maintained only at the address
set forth in Section 10.5(d). Borrower's only other places of business and the
only other locations of Collateral, if any, are and shall be the addresses set
forth in Section 10.5(f) hereof, except Borrower may change such locations or
open a new place of business after thirty (30) days prior written notice to
Lender. Borrower shall execute and deliver or cause to be executed and delivered
to Lender such financing statements, amendments, financing documents and
security and other agreements as Lender may reasonably require.
6.5 Title. Borrower has and at all times will continue to have good and
marketable title to all of the Collateral, free and clear of all liens, security
interests, claims or encumbrances of any kind except in favor of Lender and
except, if any, those set forth on Schedule A hereto.
6.6 Disposition of Assets. Borrower shall not directly or indirectly:
(a) sell, lease, transfer, assign, abandon or otherwise dispose of any part of
the Collateral or any material portion of its other assets (other than sales of
inventory to buyers in the ordinary course of business) or (b) consolidate with
or merge with or into any other entity, or permit any other entity to
consolidate with or merge with or into Borrower or (c) form or acquire any
interest in any firm, corporation or other entity. Notwithstanding the
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foregoing, Borrower may dispose of up to $20,000 of equipment per year after
written notice to Lender. All proceeds from such disposition shall be remitted
to Lender upon Borrower's receipt thereof.
6.7 Insurance. Borrower shall at all times maintain, with financially
sound and reputable insurers, adequate insurance (including, without limitation,
at the option of Lender, earthquake and flood insurance) with respect to the
Collateral and other assets. All such insurance policies shall be in such form,
substance, amounts and coverage as may be satisfactory to Lender and shall
provide for thirty (30) days' prior written notice to Lender of cancellation or
reduction of coverage. Lender may obtain at Borrower's expense, any such
insurance should Borrower fail to do so and adjust or settle any claim or other
matter under or arising pursuant to such insurance or to amend or cancel such
insurance. Borrower shall provide evidence of such insurance and a lender's loss
payable endorsement satisfactory to Lender. Borrower shall deliver to Lender, in
kind, all instruments representing proceeds of insurance received by Borrower.
Lender may apply any insurance proceeds received at any time to the cost of
repairs to or replacement of any portion of the Collateral and/or, at Lender's
option, to payment of or as security for any of the Obligations in any order or
manner as Lender determines.
6.8 Compliance With Laws. Borrower is and at all times will continue to
be in compliance with the requirements of all material laws, rules, regulations
and orders of any governmental authority relating to its business (including
laws, rules, regulations and orders relating to income, withholding, excise,
property and social security taxes, minimum wages, employee retirement and
welfare benefits, employee health and safety, or environmental matters) and all
material agreements or other instruments binding on Borrower or its property.
Borrower shall pay and discharge all taxes, assessments and governmental charges
against Borrower or any Collateral when due, unless the same are being contested
in good faith. Lender may establish Reserves for the amount contested and
penalties which may accrue thereon.
6.9 Accounts. With respect to each account deemed an Eligible Account,
except as reported in writing to Lender, Borrower has no knowledge that any of
the criteria for eligibility are not or are no longer satisfied and the
Eligibility criteria will continue to be satisfied. All statements made and all
unpaid balances and other information appearing in the invoices, agreements,
proofs of rendition of services and delivery of goods and other documentation
relating to the accounts, and all confirmatory assignments, schedules,
statements of account and books and records with respect thereto, are true and
correct and in all respects what they purport to be.
6.10 Equipment. With respect to Borrower's equipment, Borrower shall
keep the equipment in good order and repair, and in running and marketable
condition, ordinary wear and tear excepted.
6.11 Financial Covenants. Borrower shall at all times maintain working
capital and net worth (each as determined in accordance with generally accepted
accounting principles, in effect on the date hereof, consistently applied) in
the amounts set forth in Section 10.4(a) and (b) respectively and Borrower shall
not, directly or indirectly, expend or commit to expend, for fixed or capital
assets (including capital lease obligations) an amount in excess of the capital
expenditure limit set forth in Section 10.4(c) in any fiscal year of Borrower.
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6.12 Affiliated Transactions. Borrower will not, directly or
indirectly: (a) lend or advance money or property to, guarantee or assume
indebtedness of, pay any fees or provide other accommodations in any form
whatsoever to, or invest (by capital contribution or otherwise) in, any person,
firm, corporation or other entity; or (b) declare, pay or make any dividend,
redemption or other distribution on account of any shares of any class of stock
of Borrower now or hereafter outstanding; or (c) make any payment of the
principal amount of or interest on any indebtedness owing to any officer,
director, shareholder, or affiliate of Borrower; or (d) make any loans or
advances to any officer, director, employee, shareholder or affiliate of
Borrower, (e) enter into any sale, lease or other transaction with any officer,
director, employee, shareholder or affiliate of Borrower on terms that are less
favorable to Borrower than those which might be obtained at the time from
persons who are not an officer, director, employee, shareholder or affiliate of
Borrower. Additionally, Borrower shall not increase its intercompany accounts
receivable and notes receivable from Paragon, measured on an average daily basis
for each month, by more than 10% from that existing on the date hereof. All
notes receivable due from Paragon shall be endorsed to the order of Lender and
shall be retained in Lender's possession as additional Collateral.
Notwithstanding anything to the contrary contained herein, Borrower may declare,
pay or make a dividend or distribution on account of any shares of any class of
stock of Borrower, provided (1) such distribution is paid out of Borrower's net
income, (2) Borrower has a minimum Net Availability of Five Hundred Thousand
Dollars ($500,000) after the distribution is made, (3) Borrower is current on
all trade payables, (4) no Event of Default is continuing and (5) on the date
any such dividend or distribution is paid or made, Borrower shall deliver to
Lender a certificate executed by an authorized officer of Borrower certifying
that each of the foregoing conditions has been satisfied and describing in
reasonable detail the dividend or distribution to be paid or made on such date.
Any distribution of funds otherwise permitted herein must otherwise be in
compliance with law including, without limitation, the California Corporations
Code. In addition to the foregoing, Borrower may lend or advance money or
property to Paragon or Galveston's Steakhouse Corp. ("Galveston") if Borrower's
Tangible Net Worth is at least Five Hundred Thousand Dollars ($500,000) both
before and immediately after the loan or advance and no Event of Default is
continuing. Prior to any such loan or advance Borrower shall deliver to Lender
in writing a certification that such loan or advance will be in accordance with
the requirements of this Section 6.12 and describing in reasonable detail the
loan or advance to be made. Tangible Net Worth is defined as shareholder's
equity, less goodwill, patents, trademarks, copyrights, franchises, formulas,
leasehold interests, leasehold improvements, non-compete agreements, engineering
plans, deferred tax benefits, organization costs, prepaid items and any other
assets of Borrower that would be treated as intangible assets on Borrower's
balance sheet prepared in accordance with GAAP and minus (without duplication)
(i) notes receivable from affiliated companies and (ii) accounts receivable from
affiliated companies except to the extent such accounts receivable are fully
secured by cash collateral. Without affecting Borrower's right to advance funds
to affiliates to the extent permitted hereunder, Borrower acknowledges and
agrees that none of the fees and expenses associated with the transaction
involving the merger agreement among Paragon, Galveston etc. shall be charged to
or payable by Borrower.
6.13 Fees and Expenses. Borrower shall pay, on Lender's demand, all
costs, expenses, filing fees and taxes payable in connection with the
preparation, execution, delivery, recording, administration, collection,
liquidation, enforcement and defense of the Obligations, Lender's rights in the
Collateral, this Agreement and all other existing and future agreements or
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documents contemplated herein or related hereto, including any amendments,
waivers, supplements or consents which may hereafter be made or entered into in
respect hereof, or in any way involving claims or defense asserted by Lender or
claims or defense against Lender asserted by Borrower, any guarantor or any
third party directly or indirectly arising out of or related to the relationship
between Borrower and Lender or any guarantor and Lender, including, but not
limited to the following, whether incurred before, during or after the initial
or any renewal Term or after the commencement of any case with respect to
Borrower or any guarantor under the United States Bankruptcy Code or any similar
statute: (a) all costs and expenses of filing or recording (including Uniform
Commercial Code financing statement filing taxes and fees, documentary taxes,
intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all
title insurance and other insurance premiums, appraisal fees, fees incurred in
connection with any environmental report, audit or survey and search fees; (c)
all fees as then in effect relating to the wire transfer of loan proceeds and
other funds and fees then in effect for returned checks, lock box, collateral
proceeds accounts and credit reports; (d) all expenses and costs heretofore and
from time to time hereafter incurred by Lender during the course of periodic
field examinations of the Collateral and Borrower's operations including field
examiner travel, food and lodging, plus a per diem charge at the rate set forth
in Section 10.3(g) for Lender's examiners in the field and office; and (e) the
costs, disbursements and fees of in-house and outside counsel to Lender,
including but not limited to such fees and disbursements incurred as a result of
a workout, restructuring, reorganization, liquidation, insolvency proceeding or
litigation between the parties hereto, any third party and in any appeals
arising therefrom.
6.14 Further Assurances. At the request of Lender, at any time and from
time to time, at Borrower's sole expense, Borrower shall execute and deliver or
cause to be executed and delivered to Lender, such agreements, documents and
instruments, including waivers, consents and subordination agreements from
mortgagees or other holders of security interests or liens, landlords or
bailees, and do or cause to be done such further acts as Lender, in its
discretion, deems necessary or desirable to create, preserve, perfect or
validate any security interest of Lender in the Collateral and otherwise to
effectuate the provisions and purposes of this Agreement. Borrower hereby
authorizes Lender to file financing statements or amendments against Borrower in
favor of Lender with respect to the Collateral, without Borrower's signature and
to file as financing statements any carbon, photographic or other reproductions
of this Agreement or any financing statements signed by Borrower.
6.15 Environmental Condition. None of Borrower's properties or assets
has ever been designated or identified in any manner pursuant to any
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by
Borrower. Borrower has not received a summons, citation, notice, or directive
from the Environmental Protection Agency or any other federal or state
governmental agency or any action or omission by Borrower resulting in the
releasing, or otherwise exposing of hazardous waste or hazardous substances into
the environment. Borrower is and will continue to be in compliance (in all
material respects) with all statutes, regulations, ordinances and other legal
requirements pertaining to the production, storage, handling, treatment,
release, transportation or disposal of any hazardous waste or hazardous
substance.
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6.16 State of Incorporation. If Borrower is a corporation, it is duly
organized, existing and in good standing under the laws of the state set forth
in Section 10.5(h).
6.17 Year 2000 Compliance. Borrower shall take all action necessary to
assure that its computer-based systems are able to effectively process data
including dates and date sensitive functions. Borrower represents and warrants
that the Year 2000 problem will not result in a material adverse effect on
Borrower's business condition. Not later than July 1, 1999, Borrower shall
provide assurance acceptable to Lender that Borrower's computer systems and
software are or will be Year 2000 compliant on a timely basis. Borrower shall
immediately advise Lender in writing of any material changes in Borrower's Year
2000 plan, timetable or budget.
6.18 Appraisals of Inventory. At any time and from time to time, at
Borrower's sole expense, Lender may hire an appraiser satisfactory to Lender to
appraise any or all of the inventory owned by Borrower.
6.19 Special Provisions Relating to Paragon Accounts. At all times not
less than $250,000 of the accounts receivable owed by Paragon to Borrower shall
be secured by cash collateral of not less than $250,000 and invested by Lender
in a money market account or a certificate of deposit in Lender's name at a
financial institution designated by Lender in its sole discretion. In the
absence of the occurrence and continuance of an Event of Default, interest paid
on the account or certificate of deposit will be credited to the loan account of
Borrower.
SECTION 7. EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default. All Obligations shall be immediately due and
payable, without notice or demand, and any provisions of this Agreement as to
future loans and credit accommodations by Lender shall terminate automatically,
upon the termination or non-renewal of this Agreement or, at Lender's option,
upon or at any time after the occurrence or existence of any one or more of the
following "Events of Default":
(a) Borrower fails to pay when due any of the Obligations or fails to
perform any of the terms of this Agreement or any other existing or future
financing, security or other agreement between Borrower and Lender or any
affiliate of Lender;
(b) Any representation, warranty or statement of fact made by Borrower
to Lender in this Agreement or any other agreement, schedule, confirmatory
assignment or otherwise, or to any affiliate of Lender, shall prove inaccurate
or misleading;
(c) Any guarantor revokes, terminates or fails to perform any of the
terms of any guaranty, endorsement or other agreement of such party in favor of
Lender or any affiliate of Lender;
(d) Any judgment or judgments aggregating in excess of the amount set
forth in Section 10.5(i) or any injunction or attachment is obtained against
Borrower or any guarantor, which remains unstayed for a period of ten (10) days
or is enforced;
(e) Borrower or any guarantor dies or ceases to exist or the usual
business of Borrower or any guarantor ceases or is suspended;
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(f) Any change in the chief executive officer, chief operating officer,
or controlling ownership of Borrower or Galveston;
(g) Borrower or any guarantor becomes insolvent, makes an assignment
for the benefit of creditors, makes or sends notice of a bulk transfer or calls
a general meeting of its creditors or principal creditors;
(h) Any petition or application for any relief under the bankruptcy
laws of the United States now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed by or against Borrower or any guarantor;
(i) The indictment or threatened indictment of Borrower or any
guarantor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any guarantor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such guarantor which
Lender believes may have a material adverse effect on the Collateral or
Borrower's business;
(j) Any default or event of default occurs on the part of Borrower
under any material agreement, document or instrument to which Borrower is a
party or by which Borrower or any of its property is bound;
(k) Lender in good faith believes that either (i) the prospect of
payment or performance of the Obligations is impaired or (ii) the Collateral is
not sufficient to secure fully the Obligations;
(l) Any material change occurs in the nature or conduct of Borrower's
business; or
(m) Paragon shall fail to pay its account with Borrower on the same
terms and conditions as Paragon pays its other suppliers.
7.2 Remedies. Upon the occurrence of an Event of Default and at any
time thereafter, Lender shall have all the default rights and remedies provided
in this Agreement, any other agreements between Borrower and Lender, the Uniform
Commercial Code and other applicable law, all of which rights and remedies may
be exercised without notice to Borrower, all such notices being hereby waived,
except such notice as is expressly provided for hereunder or is not waivable
under applicable law. All rights and remedies of Lender are cumulative and not
exclusive and are enforceable, in Lender's discretion, alternatively,
successively, or concurrently on any one or more occasions and in any order
Lender may determine. Without limiting the foregoing, Lender may (a) accelerate
the payment of all Obligations and demand immediate payment thereof to Lender,
(b) with or without judicial process or the aid or assistance of others, enter
upon any premises on or in which any of the Collateral may be located and take
possession of the Collateral or complete processing, manufacturing and repair of
all or any portion of the Collateral, (c) require Borrower, at Borrower's
expense, to assemble and make available to Lender any part or all of the
Collateral at any place and time designated by Lender, (d) collect, foreclose,
receive, appropriate, setoff and realize upon any and all Collateral, (e) sell,
lease, transfer, assign, deliver or otherwise dispose of any and all Collateral
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(including, without limitation, entering into contracts with respect thereto, by
public or private sales at any exchange, broker's board, any office of Lender or
elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon
credit or for future delivery, with the Lender having the right to purchase the
whole or any part of the Collateral at any such public sale, all of the
foregoing being free from any right or equity of redemption of Borrower, which
right or equity of redemption is hereby expressly waived and released by
Borrower. If any of the Collateral is sold or leased by Lender upon credit terms
or for future delivery, the Obligations shall not be reduced as a result thereof
until payment therefor is finally collected by Lender. If notice of disposition
of Collateral is required by law, five (5) days prior notice by Lender to
Borrower designating the time and place of any public sale or the time after
which any private sale or other intended disposition of Collateral is to be
made, shall be deemed to be reasonable notice thereof and Borrower waives any
other notice. In the event Lender institutes an action to recover any Collateral
or seeks recovery of any Collateral by way of prejudgment remedy, Borrower
waives the posting of any bond which might otherwise be required.
7.3 Application of Proceeds. Lender may apply the cash proceeds of
Collateral other than accounts actually received by Lender from any sale, lease,
foreclosure or other disposition of the Collateral to payment of any of the
Obligations, in whole or in part and in such order as Lender may elect, whether
or not then due. Borrower shall remain liable to Lender for the payment of any
deficiency together with interest at the highest rate provided for herein and
all costs and expenses of collection or enforcement, including reasonable
attorneys' fees and legal expenses.
7.4 Lender's Cure of Third Party Agreement Default. Lender may, at its
option, cure any default by Borrower under any agreement with a third party or
pay or bond on appeal any judgment entered against Borrower, discharge taxes,
liens, security interests or other encumbrances at any time levied on or
existing with respect to the Collateral and pay any amount, incur any expense or
perform any act which, in Lender's sole judgment, is necessary or appropriate to
preserve, protect, insure, maintain, or realize upon the Collateral. Lender may
charge Borrower's loan account for any amounts so expended, such amounts to be
repayable by Borrower on demand. Lender shall be under no obligation to effect
such cure, payment, bonding or discharge, and shall not, by doing so, be deemed
to have assumed any obligation or liability of Borrower.
SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS
8.1 JURY TRIAL WAIVER. BORROWER AND LENDER EACH WAIVE ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY EITHER OF THEM AGAINST
THE OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE
OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR LENDER,
OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE
RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR
LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
8.2 Counterclaims. Borrower waives all rights to interpose any claims,
deductions, setoffs or counterclaims of any kind, nature or description in any
action or proceeding instituted by Lender with respect to this Agreement, the
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Obligations, the Collateral or any matter arising therefrom or relating thereto,
except compulsory counterclaims.
8.3 Jurisdiction. Borrower hereby irrevocably submits and consents to
the nonexclusive jurisdiction of the State and Federal Courts located in the
State in which the office of Lender designated in Section 10.5(a) is located and
any other State where any Collateral is located with respect to any action or
proceeding arising out of this Agreement, the Obligations, the Collateral or any
matter arising therefrom or relating thereto. In any such action or proceeding,
Borrower waives personal service of the summons and complaint or other process
and papers therein and agrees that the service thereof may be made by mail
directed to Borrower at its chief executive office set forth herein or other
address thereof of which Lender has received notice as provided herein, service
to be deemed complete five (5) days after mailing, or as permitted under the
rules of either of said Courts. Any such action or proceeding commenced by
Borrower against Lender will be litigated only in a Federal Court located in the
district, or a State Court in the State and County, in which the office of
Lender designated in Section 10.5(a) is located and Borrower waives any
objection based on forum non conveniens and any objection to venue in connection
therewith.
8.4 No Waiver by Lender. Lender shall not, by any act, delay, omission
or otherwise be deemed to have expressly or impliedly waived any of its rights
or remedies unless such waiver shall be in writing and signed by an authorized
officer of Lender. A waiver by Lender of any right or remedy on any one occasion
shall not be construed as a bar to or waiver of any such right or remedy which
Lender would otherwise have on any future occasion, whether similar in kind or
otherwise.
SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS
9.1 Term. This Agreement shall only become effective upon execution and
delivery by Borrower and Lender and shall continue in full force and effect for
a term set forth in Section 10.6 from the date hereof and shall be deemed
automatically renewed, based upon all of the terms and provisions of this
Agreement, for successive terms of equal duration thereafter unless terminated
as of the end of the initial or any renewal term (each a "Term") by either party
giving the other written notice at least sixty (60) days' prior to the end of
the then current Term.
9.2 Early Termination. Borrower may also terminate this Agreement by
giving Lender at least thirty (30) days prior written notice and payment in full
of all of the Obligations as provided herein, including the Early Termination
Fee, unpaid Facility Fee and any other fees. Notwithstanding the foregoing,
after one year from the date hereof, if no Event of Default is then continuing,
no early termination fee shall be due nor shall Borrower be obligated to pay any
earned but unpaid Facility Fee if Borrower repays its Obligations to Lender from
proceeds of a sale of all the stock or all the assets of Borrower to an
unrelated third party. Thirty days after receipt of such early termination
notice, Lender need not make any further loans or accommodations. Lender shall
also have the right to terminate this Agreement at any time upon or after the
occurrence of an Event of Default. If Lender terminates this Agreement upon or
after the occurrence of an Event of Default, Borrower shall pay Lender
forthwith, in full, payment in all Obligations, including Early Termination Fee,
Facility Fee and any other fees. In view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties
-15-
<PAGE>
as to a reasonable calculation of Lender's lost profits, the Early Termination
fee shall be the percentage of the Maximum Credit set forth in Section 10.3(h).
9.3 Termination Indemnity Deposit. Upon termination of this Agreement
by Borrower, as permitted herein, in addition to payment of all Obligations
which are not contingent, Borrower shall deposit such amount of cash collateral
as Lender determines is necessary to secure Lender from loss, cost, damage or
expense, including reasonable attorneys' fees, in connection with any open
Accommodations or remittance items or other payments provisionally credited to
the Obligations and/or to which Lender has not yet received final and
indefeasible payment.
9.4 Notices. Except as otherwise provided, all notices, requests and
demands hereunder shall be (a) made to Lender at its address set forth in
Section 10.5(a) and to Borrower at its chief executive office set forth in
Section 10.5(d), or to such other address as either party may designate by
written notice to the other in accordance with this provision, and (b) deemed to
have been given or made: if by hand, immediately upon delivery; if by telex,
telegram or telecopy (fax), immediately upon receipt; if by overnight delivery
service, one day after dispatch; and if by first class or certified mail, three
(3) days after mailing.
9.5 Severability. If any provision of this Agreement is held to be
invalid or unenforceable, such provision shall not affect this Agreement as a
whole, but this Agreement shall be construed as though it did not contain the
particular provision held to be invalid or unenforceable.
9.6 Entire Agreement; Amendments; Assignments. This Agreement contains
the entire agreement of the parties as to the subject matter hereof, all prior
commitments, proposals and negotiations concerning the subject matter hereof
being merged herein. Neither this Agreement nor any provision hereof shall be
amended, modified or discharged orally or by course of conduct, but only by a
written agreement signed by an authorized officer of Lender. This Agreement
shall be binding upon and inure to the benefit of each of the parties hereto and
their respective successors and assigns, except that any obligation of Lender
under this Agreement shall not be assignable nor inure to the successors and
assigns of Borrower.
9.7 Discharge of Borrower. No termination of this Agreement shall
relieve or discharge Borrower of its Obligations, grants of Collateral, duties
and covenants hereunder or otherwise until such time as all Obligations to
Lender have been indefeasibly paid and satisfied in full, including, without
limitation, the continuation and survival in full force and effect of all
security interests and liens of Lender in and upon all then existing and
thereafter-arising or acquired Collateral and all warranties and waivers of
Borrower.
9.8 Usage. All terms used herein which are defined in the Uniform
Commercial Code shall have the meanings given therein unless otherwise defined
in this Agreement and all references to the singular or plural herein shall also
mean the plural or singular, respectively.
9.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State in which the office of Lender set forth in
Section 10.5(a) below is located.
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<PAGE>
SECTION 10. ADDITIONAL DEFINITIONS AND TERMS
<TABLE>
<S> <C> <C>
10.1 (a) Maximum Credit: $6,000,000
(b) Gross Availability Formulas:
Eligible Accounts Percentage: 85% provided that the Dilution
Percentage does not exceed 4%. The Dilution Percentage is the
sum of Borrower's credits, allowances, discounts, write-offs,
contra-accounts, offsets and deductions deemed necessary by
Lender in its sole judgment which reduce the value of accounts
receivable divided by gross invoices. The Dilution Percentage
shall be calculated on a rolling 90 day average. If the
Dilution Percentage exceeds 4% then the Eligible Accounts
Percentage shall be reduced by such excess Dilution
Percentage.
Eligible Inventory Percentages:
Finished Goods 50%
(c) Inventory Sublimit(s): $3,000,000
(d) Maximum days after Invoice
Date for Eligible Accounts: 45 Days
(e) Minimum Borrowing: $2,000,000
10.2 Intentionally Deleted
10.3 Interest, Fees & Charges:
(a) Interest Rate: Prime Rate plus % per annum 1.25%
(b) Clearance: 3 Business Days
(c) Closing Fee: $45,000
(d)(1) Facility Fee for Initial Term:
First Anniversary: .75% of the Maximum Credit
Second Anniversary: .75% of the Maximum Credit
</TABLE>
-17-
<PAGE>
<TABLE>
<S> <C> <C>
(e) Account Servicing Fee: $N/A
(f) Unused Line Fee: per annum N/A%
(g) Field Examination per diem charge per examiner then prevailing rate (currently
(h) Early Termination Fee: $650 subject to change)
First year and thereafter: 1% of the Maximum Credit;
provided, that after the first
anniversary of closing, no Early
Termination Fee shall be payable
by Borrower if this Agreement is
terminated and Borrower repays
all Obligations to Lender in
full with the proceeds of a sale
of all of Borrower's stock or
assets to an unrelated third
party.
10.4 Financial Covenants:
(a) Working Capital: $N/A
(b) Net Worth: $N/A
(c) Capital Expenditures: per fiscal year $N/A
10.5 (a) Lender's Office: 300 S. Grand Ave., Third Floor
Los Angeles, CA 90071
(b) Lender's Bank: Bank of America National Trust and Savings
Association
(c) Borrower: Pacific Basin Foods, Inc.
(d) Borrower's Chief Executive Office:
9586 Distribution Ave., Suite D
San Diego, CA 92121
(e) Locations of Eligible Inventory Collateral:
9586 Distribution Ave., Suite D
San Diego, CA 92121
2333 Arthur Ave.
Elk Grove, IL 60007
(f) Borrower's Other Offices and Locations of Collateral: none
(g) Borrower's Trade Names for Invoicing: PBF
</TABLE>
-18-
<PAGE>
<TABLE>
<S> <C> <C>
(h) Borrower's State of Incorporation: California
(i) Judgment Amount $25,000
10.6 Term: 3 Years
</TABLE>
IN WITNESS WHEREOF, Borrower and Lender have duly executed this
Agreement this ____ day of December, 1998.
LENDER BORROWER:
THE CIT GROUP/CREDIT FINANCE, INC. PACIFIC BASIN FOODS, INC.
By: ____________________________________ By: ______________________________
Title: _________________________________ Title: ___________________________
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<PAGE>
SCHEDULE A
Permitted Liens
1. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clark Credit Corp
as Secured Party. (File number 94-106410, filed 5/27/94)
2. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego Inc. as Secured Party. (File number 94-142513, filed 7/13/94)
3. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego Inc. as Secured Party. (File number 9436460274, filed 12/12/94)
4. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego, Inc. as Secured Party. (File number 9502060335, filed 1/9/95)
5. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Yale Financial
Services, Inc. as Secured Party. (File number 9508860462, filed 3/24/95)
6. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego, Inc. as Secured Party. (File number 9510060541, filed 4/5/95)
7. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Yale Financial
Services, Inc. as Secured Party. (File number 9607360806, filed 3/11/96)
8. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Associates
Commercial Corporation as Secured Party. (File number 9611560297, filed
4/22/96)
9. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Associates
Commercial Corporation as Secured Party. (File number 9619260159, filed
7/5/96)
10. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego Co as Secured Party. (File number 9632460700, filed 11/15/96)
11. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego Co as Secured Party. (File number 9632460707, filed 11/15/96)
A-1
<PAGE>
12. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego Inc as Secured Party. (File number 9632460710, filed 11/15/96)
13. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Associates
Commercial Corporation as Secured Party. (File number 9705760322, filed
2/20/97)
14. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego, Inc. as Secured Party. (File number 9721061159, filed 7/24/97)
15. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego, Inc. as Secured Party. (File number 9805560118, filed 2/17/98)
16. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego, Inc. as Secured Party. (File number 9811160888, filed 4/20/98)
17. Financing Statement filed with the Secretary of State of the State of
California naming Pacific Basin Foods, Inc. as Debtor and Clarklift of San
Diego, Inc. as Secured Party. (File number 9834360633, filed 12/7/98)
18. Financing Statement filed with the Secretary of State of the State of
Illinois naming Pacific Basin Foods, Inc. as Debtor and Yale Financial
Services Inc. as Secured Party. (File number 3379802,filed 3/23/95)
19. Financing Statement filed with the Secretary of State of the State of
Illinois naming Pacific Basin Foods, Inc. as Debtor and Yale Financial
Services Inc. as Secured Party. (File number 3514805, filed 3/11/96)
20. Financing Statement filed with the Secretary of State of the State of
Illinois naming Pacific Basin Foods, Inc. as Debtor and Associates Leasing
Inc. as Secured Party. (File number 3873137, filed 6/30/98)
A-2
<PAGE>
EXHIBIT 10.34
SECURITY AGREEMENT
This Security Agreement is entered into as December 21, 1998 by and
between GALVESTON'S STEAKHOUSE CORP., a Delaware corporation ("Debtor"), located
at 1752 Clement Street, San Francisco, California 94121, and THE CIT
GROUP/CREDIT FINANCE, INC. ("Secured Party"), located at 300 South Grand Avenue,
Third Floor, Los Angeles, California 90071.
1. Grant of Security Interest. Debtor hereby grants to Secured Party a
continuing lien on and security interest in the property described or referred
to in Paragraph 2 below (collectively, the "Collateral") to secure prompt
payment and full performance of the liabilities described in Paragraph 3 below
(collectively, the "Liabilities").
2. Collateral. The Collateral consists of all of Debtor's now owned and
hereafter acquired accounts, inventory, equipment, fixtures, contract rights,
general intangibles, chattel paper, instruments, investment property,
documents, and other property; including without limitation, the property
described below and the proceeds and products thereof:
(a) all goods of Debtor, including without limitation, machinery,
equipment, furniture, furnishings, fixtures, tools, parts, supplies and motor
vehicles of every kind and description and all improvements thereto which the
Debtor now owns or in which Debtor may have or may hereafter acquire any
interest, together with all customer lists and records of Debtor's business;
(b) all inventory of Debtor, including, but not limited to, all
merchandise, raw materials, parts, supplies, work in process, and finished
products, of every kind and description now or at any time hereafter owned by
and in the custody or possession actual or constructive, of Debtor, including
such inventory as is temporarily out of Debtor's custody or possession;
(c) all contract rights and general intangibles of Debtor, including
without limitation, goodwill, trademarks, trade styles, trade names, patents,
patent applications, copyrights, bank deposits, deposit accounts, income tax
refunds and property in the possession, deposited with or under the control of
Secured Party or any of its affiliates;
(d) all present and future accounts, accounts receivable and other
receivables and all books and records relating thereto;
(e) all documents, instruments, investment property, pledged assets
and chattel paper;
(f) all farm products; and
<PAGE>
(g) all the products and proceeds of the foregoing, and any
replacements, additions, accessions, or substitutions thereof, all after
acquired property, all accounts or proceeds arising from the sale or
disposition of any inventory of Debtor including any returns thereof and
including, where applicable, the proceeds of insurance covering said Collateral
or tort claims in connection with the Collateral;
whether such Collateral shall be presently in existence or whether it shall be
acquired or created by Debtor at any time hereafter, wherever located, to
remain in force so long as Debtor is, in any manner, obligated to Secured
Party.
3. Liabilities. The liabilities ("Liabilities") secured under this
Security Agreement are all liabilities of Debtor to Secured Party from time to
time, including, without limitation, the "Liabilities" under and as defined in
that certain Secured Continuing Guaranty dated the date hereof ("Guaranty")
made by Debtor in favor of Secured Party with respect to the obligations of
Pacific Basin Foods, Inc., a California corporation ("Borrower"), Debtor's
affiliate, to Secured Party, arising under or related to that certain Loan and
Security Agreement dated the date hereof between Borrower and Secured Party
("Loan Agreement").
4. Covenants of Debtor. Until the Liabilities are paid in full, Debtor
agrees that it shall:
(a) not sell or otherwise dispose of the Collateral except for the
sale of inventory in the ordinary course of business;
(b) not create, incur, assume or permit to exist any liens,
encumbrances, security interests, levies, assessments or charges on or in any
of the Collateral, without Secured Party's consent;
(c) appear in and defend, at Debtor's own expense, any action or
proceeding which may affect Debtor's title to or Secured Party's interest in
the Collateral;
(d) procure or execute and deliver, from time to time, in form and
substance satisfactory to Secured Party, any endorsements, assignments,
financing statements or other writings deemed necessary or appropriate by
Secured Party to perfect, maintain or protect Secured Party's security interest
in the Collateral and the priority thereof, and take such other action and
deliver such other documents, instruments and agreements pertaining to the
Collateral as Secured Party may request to effectuate the intent of this
Security Agreement;
(e) notify Secured Party in writing at least thirty (30) days prior
to any change in Debtor's name, identity or corporate structure, or any
addition or change to the address of Debtor specified in the introductory
paragraph hereof;
(f) keep separate, accurate and complete records of the Collateral
and provide Secured Party during normal business hours with access thereto and
to Debtor's financial records, in each case with the right to make extracts
therefrom;
2
<PAGE>
(g) provide Secured Party during normal business hours with access to
the Collateral, and with such other information as Secured Party may reasonably
request from time to time;
(h) maintain and preserve its corporate existence, and all rights,
privileges, franchises and other authority necessary for the conduct of its
business;
(i) continue operations in the same form and structure of business as
currently conducted, and not merge or consolidate with or acquire or be
acquired by any other corporation, partnership, entity or person, without
Secured Party's prior written consent; and
(j) comply with each of the covenants and agreements set forth in
Sections 4, 6.1-6.14, 6.16 and 6.17 of the Loan Agreement as if such covenants
were applicable to Debtor and fully set forth herein provided that
notwithstanding Section 6.6, Debtor may acquire the stock or assets of another
corporation or entity and may enter into a transaction resulting in a merger so
long as Debtor is the surviving corporation.
5. Authorized Action By Secured Party. (a) After the occurrence of any
"Event of Default" (as defined below) and while it is continuing, Debtor hereby
irrevocably appoints Secured Party as its attorney-in-fact to do (but Secured
Party shall not be obligated to and shall not incur any liability to Debtor or
any third party for failure so to do) any act which Debtor is obligated by this
Security Agreement to do, and to exercise such rights and powers as Debtor
might exercise with respect to the Collateral, including, without limitation,
the right to:
(i) collect by legal proceedings or otherwise and endorse, receive
and receipt for all payments, proceeds and other sums and property now or
hereafter payable on or on account of the Collateral;
(ii) enter into any extension, deposit or other agreement pertaining
to, or deposit, surrender, accept, hold or apply other property in exchange
for, the Collateral;
(iii) process and preserve the Collateral; and
(iv) make any compromise, settlement or adjustment, and take any
action it deems advisable, with respect to the Collateral.
(b) Debtor agrees to reimburse Secured Party upon demand for any
costs and expenses, including attorneys' fees, Secured Party may incur while
acting as Debtor's attorney-in-fact hereunder, all of which costs and expenses
are included in the Liabilities secured hereby and are payable upon demand,
with interest thereon at the interest rate then applicable to revolving loans
under the Loan Agreement.
(c) It is further agreed and understood between the parties hereto
that such care as Secured Party gives to the safekeeping of its own property of
like kind shall constitute reasonable care of the Collateral when in Secured
Party's possession; provided,
3
<PAGE>
however, that Secured Party shall not be required to make any presentment,
demand or protest, or give any notice and need not take any action to preserve
any rights against any prior party or any other person in connection with the
Liabilities or with respect to the Collateral.
(d) Whether or not Debtor is in default, Debtor agrees that Secured
Party may at any time send verification requests, and so long as an Event of
Default has not occurred, such requests will not identify Secured Party to any
account debtor on any Collateral.
(e) If Debtor's records are prepared or retained by a computer
service company or any accountant or accounting service, so long as any
Liabilities are outstanding, Debtor grants Secured Party the absolute and
irrevocable right, with reasonable notice to Debtor, to inspect such records
(including Debtor's internal work papers), receive duplicate copies of all
information furnished to Debtor and prepared by such company, accountant or
accounting service, and agrees to furnish such consents as may be necessary to
effectuate the same. Debtor further agrees to promptly notify Secured Party of
the name and address of such company, accountant or accounting service and of
any change in respect thereof.
(f) All the foregoing powers authorized herein, being coupled with an
interest, are irrevocable so long as any Liabilities are outstanding.
6. Default. The occurrence of any of the following events or conditions
(herein "Events of Default") shall constitute an Event of Default hereunder:
(a) breach, violation or nonperformance of any covenant on Debtor's
part hereunder or under the Guaranty;
(b) non-payment of any of the Liabilities as and when due and payable
to Secured Party;
(c) any bankruptcy or other insolvency proceeding is commenced by
Debtor, or any such proceeding is commenced against Debtor and remains
undischarged or unstayed for forty-five (45) days; or
(d) any Event of Default under and as defined in the Loan Agreement.
7. Remedies. Upon the occurrence and during the continuation of any Event
of Default, Secured Party may, at its option, without notice to or demand on
Debtor, declare all Liabilities immediately due and payable, and Secured Party
shall have all the default rights and remedies of a secured party under the
Uniform Commercial Code as in effect in the State of California and other
applicable law as well as the following rights and remedies, all of which may
be exercised with or without further notice to Debtor:
(a) to the extent permitted by law, to notify any and all obligors
and account debtors on the Collateral that the same has been assigned to
Secured Party and that all payments thereon are to be made directly to Secured
Party;
4
<PAGE>
(b) to settle, compromise or release, on terms acceptable to Secured
Party, in whole or in part, any amounts owing on the Collateral, and to extend
the time of payment, make allowances and adjustments and to issue credits in
Secured Party's name or in the name of Debtor in respect thereof;
(c) to enter any premises where any Collateral may be located and to
take possession of and remove the Collateral, with or without judicial process;
(d) to sell or otherwise dispose of the Collateral or any part
thereof, for cash, on credit or otherwise, with or without representations or
warranties, and upon such terms as shall be acceptable to Secured Party;
(e) to remove from any premises where the same may be located, any
and all documents, instruments, files and records relating to the collateral,
and Secured Party may, at Debtor's expense, use the supplies and space of
Debtor at its places of business as may be necessary to properly administer and
control the Collateral or the handling of collections and realizations thereon;
(f) receive, open and dispose of all mail addressed to Debtor and
notify postal authorities to change the address for delivery thereof to such
address as Secured Party may designate; and
(g) take or bring, in Secured Party's name or in the name of Debtor,
all steps, actions, suits or proceedings deemed by Secured Party necessary or
desirable to effect collection of or to realize upon the Collateral,
all at Secured Party's sole option and as Secured Party in its sole discretion
may deem advisable.
8. Application of Proceeds of Collateral. The net cash proceeds resulting
from the collection, liquidation, sale or other disposition of the Collateral
shall be applied first to the expenses (including all attorneys' fees) of
retaking, holding, processing and preparing for sale, selling, collecting,
liquidating and the like, and then to the satisfaction of all Liabilities
secured hereby, application as to any particular obligation or indebtedness or
against principal or interest to be in Secured Party's discretion. Debtor shall
be liable to Secured Party and shall pay to Secured Party on demand any
deficiency which may remain after such sale, disposition, collection or
liquidation of Collateral.
9. Cumulative Rights. The rights, powers and remedies of Secured Party
under this Security Agreement shall be in addition to all rights, powers and
remedies given to Secured Party under any statute or rule of law or any other
document, instrument or agreement, all of which rights, powers and remedies
shall be cumulative and may be exercised successively or concurrently.
10. Waiver. Any forbearance, failure or delay by Secured Party in
exercising any right, power or remedy shall not preclude the further exercise
thereof, and every right, power or remedy of Secured Party shall continue in
full force and effect until such right, power or
5
<PAGE>
remedy is specifically waived in a writing executed by Secured Party. Debtor
waives any right to require Secured Party to proceed against any person or to
exhaust any Collateral or to pursue any remedy in Secured Party's power prior
to pursuing Debtor in respect of the Liabilities.
11. Setoff. Debtor agrees that Secured Party may exercise its rights of
setoff with respect to the Liabilities in the same manner as if the Liabilities
were unsecured.
12. Binding Upon Successors. All rights of Secured Party under this
Security Agreement shall inure to the benefit of its successors and assigns,
and all obligations of Debtor shall bind the representatives, executors,
administrators, heirs, successors and assigns of the Debtor.
13. Entire Agreement; Severability. This Security Agreement contains the
entire security agreement between Secured Party and Debtor with respect to the
Collateral. If any of the provisions of this Security Agreement shall be held
invalid or unenforceable, this Security Agreement shall be construed as if not
containing those provisions and the rights and obligations of the parties
hereto shall be construed and enforced accordingly.
14. References. The captions or titles of the paragraphs of this Security
Agreement are for convenience of reference only and shall not define or limit
the provisions hereof.
15. Governing Law; Waivers. This Agreement shall be interpreted in
accordance with the internal laws (and not the conflict of laws rules) of the
State of California governing contracts to be performed entirely within such
state. Debtor hereby consents to the exclusive jurisdiction of any state or
federal court located within the County of Los Angeles in the State of
California or, at the sole option of Secured Party, in any other court in which
Secured Party shall initiate legal or equitable proceedings and which has
subject matter jurisdiction over the matter in controversy. Debtor waives any
objection of forum non conveniens and venue. Debtor further waives personal
service of any and all process upon it, and consents that all such service of
process be made in the manner set forth in Section 17 hereof for the giving of
notice. BOTH DEBTOR AND SECURED PARTY WAIVE ANY RIGHT TO TRIAL BY JURY TO THE
EXTENT PERMITTED BY LAW.
16. Attorneys' Fees. If any legal action or proceeding shall be commenced
at any time by any party to this Agreement in connection with the
interpretation of this Agreement or the enforcement of any rights or remedies
hereunder, the prevailing party or parties in such action or proceeding shall
be entitled to reimbursement of its reasonable attorneys' fees and costs in
connection therewith, in addition to all other relief to which the prevailing
party or parties may be entitled.
17. Notice. Any written notice, consent or other communication provided
for in this Security Agreement shall be delivered personally (effective upon
delivery), via overnight courier (effective the next day after dispatch) or via
U.S. Mail (effective 3 days after mailing, postage prepaid, first class) to
each party at its address set forth above, or to such other address as
6
<PAGE>
either party shall specify to the other; provided, that all notices to Secured
Party shall be copied to any assignee of Secured Party's rights hereunder.
18. Counterparts. This Security Agreement may be executed in any number of
counterparts, and by the parties hereto in separate counterparts, each of which
when so executed and delivered shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
SECURED PARTY: DEBTOR:
THE CIT GROUP/CREDIT FINANCE, INC. GALVESTON'S STEAKHOUSE CORP.
By:_______________________________ By:_____________________________
Its:______________________________ Its:____________________________
7
<PAGE>
EXHIBIT 10.35
SECURED CONTINUING GUARANTY
FOR VALUE RECEIVED, and in consideration of any loan or other
financial accommodation heretofore or hereafter at any time made or granted to
PACIFIC BASIN FOODS, INC., a California corporation ("Borrower"), by THE CIT
GROUP/CREDIT FINANCE, INC. ("Lender"), the undersigned, GALVESTON'S STEAKHOUSE
CORP., a Delaware corporation ( "Guarantor"), hereby agrees as follows:
1. GUARANTY OF OBLIGATIONS. Guarantor unconditionally,
absolutely and irrevocably guarantees the full and prompt payment and
performance when due, whether by acceleration or otherwise, and at all times
thereafter, of all obligations of Borrower to Lender, howsoever created, arising
or evidenced, whether direct or indirect, absolute or contingent, or now or
hereafter existing or due or to become due, including, without limitation, under
or in connection with that certain Loan and Security Agreement of even date,
between Borrower and Lender (the "Loan Agreement") and each of the documents,
instruments and agreements executed and delivered in connection therewith, as
each may be modified, amended, supplemented or replaced from time to time (all
such obligations are herein referred to collectively as the "Liabilities", and
all documents evidencing or securing any of the Liabilities are herein referred
to, collectively, as the "Loan Documents"). This Secured Continuing Guaranty
(this "Continuing Guaranty") is a guaranty of payment and performance when due
and not of collection.
In the event of any default by Borrower in making payment of,
or default by Borrower in performance of, any of the Liabilities, Guarantor
agrees on demand by Lender to pay and perform all of the Liabilities as are then
or thereafter become due and owing or are to be performed under the terms of the
Loan Documents. Guarantor further agrees to pay all expenses (including
reasonable attorneys' fees and expenses) paid or incurred by Lender in
endeavoring to collect the Liabilities, or any part thereof, and in enforcing
this Continuing Guaranty.
2. SECURITY FOR CONTINUING GUARANTY. This Continuing Guaranty
is secured by that certain Security Agreement of even date herewith between
Galveston's Steakhouse Corp. and Lender (the "Security Document").
3. CONTINUING NATURE OF GUARANTY AND LIABILITIES. This
Continuing Guaranty shall be continuing and shall not be discharged, impaired or
affected by:
(a) the insolvency of Borrower or the payment in full
of all of the Liabilities at any time or from time to time;
(b) the power or authority or lack thereof of
Borrower to incur the Liabilities;
(c) the validity or invalidity of any of the Loan
Documents or the documents securing the same;
(d) the existence or non-existence of Borrower as a
legal entity;
<PAGE>
(e) any transfer by Borrower of all or any part of
any collateral in which Lender has been granted a lien or security
interest pursuant to the Loan Documents;
(f) any statute of limitations affecting the
liability of Guarantor under this Continuing Guaranty or the Loan
Documents or the ability of Lender to enforce this Continuing Guaranty
or any provision of the Loan Documents or the Security Documents; or
(g) any right of offset, counterclaim or defense of
Guarantor, including, without limitation, those which have been waived
by Guarantor pursuant to Paragraph 7 hereof.
4. INSOLVENCY OF BORROWER OR GUARANTOR. Without limiting the
generality of any other provision hereof, Guarantor agrees that, in the event of
the dissolution or insolvency of Borrower or Guarantor or the inability of
Borrower or Guarantor to pay their respective debts as they mature, or an
assignment by Borrower or Guarantor for the benefit of creditors, or the
institution of any proceeding by or against Borrower or Guarantor alleging that
Borrower or Guarantor is insolvent or unable to pay their respective debts as
they mature, Guarantor will pay to Lender forthwith the full amount which would
be payable hereunder by Guarantor if all of the Liabilities were then due and
payable, whether or not such event occurs at a time when any of the Liabilities
are otherwise due and payable.
5. PAYMENT OF THE LIABILITIES. Any amounts received by Lender
from whatever source on account of the Liabilities may be applied by Lender
toward the payment of such of the Liabilities, and in such order of application,
as Lender may from time to time elect, and notwithstanding any payments made by
or for the account of Guarantor pursuant to this Continuing Guaranty.
Guarantor agrees that, if at any time all or any part of any
payment theretofore applied by Lender to any of the Liabilities is or must be
rescinded or returned by Lender for any reason whatsoever (including, without
limitation, the insolvency, bankruptcy or reorganization of Borrower), such
Liabilities shall, for the purposes of this Continuing Guaranty and to the
extent that such payment is or must be rescinded or returned, be deemed to have
continued in existence notwithstanding such application by Lender, and this
Continuing Guaranty shall continue to be effective or be reinstated, as the case
may be, as to such Liabilities, all as though such application by Lender had not
been made.
6. PERMITTED ACTIONS OF LENDER. Lender may from time to time,
in its sole discretion and without notice to Guarantor, take any or all of the
following actions:
(a) retain or obtain a security interest in any
assets of Borrower or any third party to secure any of the Liabilities
or any obligations of Guarantor hereunder;
(b) retain or obtain the primary or secondary
obligation of any obligor or obligors, in addition to Guarantor, with
respect to any of the Liabilities;
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(c) extend or renew for one or more periods (whether
or not longer than the original period), alter or exchange any of the
Liabilities;
(d) waive, ignore or forbear from taking action or
otherwise exercising any of its default rights or remedies with respect
to any default by Borrower under the Loan Documents;
(e) release, waive or compromise any obligation of
Borrower or any obligation of any nature of any other obligor primarily
or secondarily obligated with respect to any of the Liabilities;
(f) release its security interest in, or surrender,
release or permit any substitution or exchange for, all or any part of
any collateral now or hereafter securing any of the Liabilities or any
obligation hereunder, or extend or renew for one or more periods
(whether or not longer than the original period) or release, waive,
compromise, alter or exchange any obligations of any nature of any
obligor with respect to any such property; and
(g) demand payment or performance of any of the
Liabilities from Guarantor at any time or from time to time, whether or
not Lender shall have exercised any of its rights or remedies with
respect to any property securing any of the Liabilities or any
obligation hereunder or proceeded against any other obligor primarily
or secondarily liable for payment or performance of any of the
Liabilities.
7. SPECIFIC WAIVERS. Without limiting the generality of any
other provision of this Continuing Guaranty, Guarantor hereby expressly waives:
(a) notice of the acceptance by Lender of this
Continuing Guaranty;
(b) notice of the existence, creation, payment,
nonpayment, performance or nonperformance of all or any of the
Liabilities;
(c) presentment, demand, notice of dishonor, protest,
notice of protest and all other notices whatsoever with respect to the
payment or performance of the Liabilities or the amount thereof or any
payment or performance by Guarantor hereunder;
(d) all diligence in collection or protection of or
realization upon the Liabilities or any thereof, any obligation
hereunder or any security for or guaranty of any of the foregoing;
(e) any right to direct or affect the manner or
timing of Lender's enforcement of its rights or remedies;
(f) any and all defenses which would otherwise arise
upon the occurrence of any event or contingency described in Paragraph
1 hereof or upon the taking of any action by Lender permitted
hereunder;
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(g) any defense, right of set-off, claim or
counterclaim whatsoever and any and all other rights, benefits,
protections and other defenses available to Guarantor now or at any
time hereafter, including, without limitation, under California Civil
Code Sections 2787 to 2855, inclusive, and California Code of Civil
Procedure Sections 580a, 580b, 580d or 726, and all successor sections;
and
(h) all other principles or provisions of law, if
any, that conflict with the terms of this Continuing Guaranty,
including, without limitation, the effect of any circumstances that may
or might constitute a legal or equitable discharge of a guarantor or
surety.
8. IRREVOCABILITY. Guarantor hereby further waives all rights
to revoke this Continuing Guaranty at any time, and all rights to revoke any
agreement executed by Guarantor at any time to secure the payment and
performance of Guarantor's obligations under this Continuing Guaranty,
including, without limitation, the Security Documents.
9. STATUTORY WAIVER OF RIGHTS AND DEFENSES REGARDING ELECTION
OF REMEDIES. Guarantor waives all rights and defenses arising out of an election
of remedies by Lender, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation,
has destroyed Guarantor's rights of subrogation and reimbursement against
Borrower by the operation of any applicable law, including without limitation
Section 580d of the California Code of Civil Procedure, or otherwise.
10. SUBORDINATION. Guarantor hereby subordinates any and all
indebtedness of Borrower to Guarantor to the full and prompt payment and
performance of all of the Liabilities. Guarantor agrees that Lender shall be
entitled to receive payment of all Liabilities prior to Guarantor's receipt of
payment of any amount of any indebtedness of Borrower to Guarantor. Any payments
on such indebtedness to Guarantor, if Lender so requests, shall be collected,
enforced and received by Guarantor, in trust, as trustee for Lender and shall be
paid over to Lender on account of the Liabilities, but without reducing or
affecting in any manner the liability of Guarantor under the other provisions of
this Guaranty. Lender is authorized and empowered, but not obligated, in its
discretion, (a) in the name of Guarantor, to collect and enforce, and to submit
claims in respect of, any indebtedness of Borrower to Guarantor and to apply any
amounts received thereon to the Liabilities, and (b) to require Guarantor (i) to
collect and enforce, and to submit claims in respect of, any indebtedness of
Borrower to Guarantor, and (ii) to pay any amounts received on such indebtedness
to Lender for application to the Liabilities.
11. SUBROGATION. Guarantor will not exercise any rights which
it may acquire by way of subrogation under this Continuing Guaranty, by any
payment hereunder or otherwise, until all of the Liabilities have been paid in
full, in cash, and Lender shall have no further obligations to Borrower under
the Loan Documents or otherwise. If any amount shall be paid to Guarantor on
account of such subrogation rights at any other time, such amount shall be held
in trust for the benefit of Lender and shall be forthwith paid to Lender to be
credited and applied to the Liabilities, whether matured or unmatured, in such
manner as Lender shall determine in its sole discretion.
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12. ASSIGNMENT OF LENDER'S RIGHTS. Lender may, from time to
time, without notice to Guarantor, assign or transfer any or all of the
Liabilities or any interest therein and, notwithstanding any such assignment or
transfer of the Liabilities or any subsequent assignment or transfer thereof,
the Liabilities shall be and remain the Liabilities for the purpose of this
Continuing Guaranty. Each and every immediate and successive assignee or
transferee of any of the Liabilities or of any interest therein shall, to the
extent of such party's interest in the Liabilities, be entitled to the benefits
of this Continuing Guaranty to the same extent as if such assignee or transferee
were Lender; provided, however, that unless Lender shall otherwise consent in
writing, Lender shall have an unimpaired right, prior and superior to that of
any such assignee or transferee, to enforce this Continuing Guaranty for its own
benefit as to those of the Liabilities which Lender has not assigned or
transferred.
13. INDULGENCES NOT WAIVERS. No delay in the exercise of any
right or remedy shall operate as a waiver thereof, and no single or partial
exercise by Lender of any right or remedy shall preclude other or further
exercise thereof or the exercise of any other right or remedy; nor shall any
modification or waiver of any of the provisions of this Continuing Guaranty be
binding upon Lender, except as expressly set forth in a writing duly signed and
delivered by Lender. No action of Lender permitted hereunder shall in any way
affect or impair the rights of Lender or the obligations of Guarantor under this
Continuing Guaranty.
14. FINANCIAL CONDITION OF BORROWER. Guarantor represents and
warrants that it is fully aware of the financial condition of Borrower, and
Guarantor delivers this Continuing Guaranty based solely upon its own
independent investigation of Borrower's financial condition and in no part upon
any representation or statement of Lender with respect thereto. Guarantor
further represents and warrants that it is in a position to and hereby does
assume full responsibility for obtaining such additional information concerning
Borrower's financial condition as Guarantor may deem material to its obligations
hereunder, and Guarantor is not relying upon, nor expecting Lender to furnish it
any information in Lender's possession concerning Borrower's financial condition
or concerning any circumstances bearing on the existence or creation, or the
risk of nonpayment or nonperformance of the Liabilities.
Guarantor hereby waives any duty on the part of Lender to
disclose to Guarantor any facts it may now or hereafter know about Borrower,
regardless of whether Lender has reason to believe that any such facts
materially increase the risk beyond that which Guarantor intends to assume or
has reason to believe that such facts are unknown to Guarantor.
Guarantor hereby knowingly accepts the full range of risk
encompassed within a contract of "Continuing Guaranty" which includes, without
limitation, the possibility that Borrower will contract for additional
indebtedness for which Guarantor may be liable hereunder after Borrower's
financial condition or ability to pay its lawful debts when they fall due has
deteriorated.
15. REPRESENTATIONS AND WARRANTIES. Guarantor represents and
warrants to Lender that each of the following statements is accurate and
complete as of the date of this Continuing Guaranty:
(a) this Continuing Guaranty has been duly executed
and delivered by Guarantor and constitutes a legal, valid and binding
obligation of Guarantor, enforceable against Guarantor in accordance
with its terms, except as limited by bankruptcy, insolvency or other
laws of general application relating to or affecting the enforcement of
creditors' rights generally;
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(b) the execution, delivery and performance of this
Continuing Guaranty do not (i) violate any provisions of law or any
order of any court or other agency of government (each, a "Requirement
of Law"), (ii) contravene any provision of any material contract or
agreement to which Guarantor is a party or by which Guarantor or
Guarantor's assets are bound (each, a "Contractual Obligation"), or
(iii) result in the creation or imposition of any lien, charge or
encumbrance of any nature upon any property, asset or revenue of
Guarantor except pursuant to or as set forth in the Security Documents;
(c) all consents, approvals, orders and
authorizations of, and registrations, declarations and filings with,
any governmental agency or authority or other person or entity
(including, without limitation, the shareholders or partners of any
entity), if any, which are required to be obtained in connection with
the execution and delivery of this Continuing Guaranty or the
performance of Guarantor's obligations hereunder have been obtained,
and each is in full force and effect;
(d) Guarantor has paid all taxes and other charges
imposed by any governmental agency or authority due and payable by
Guarantor other than those which are being challenged in good faith by
appropriate proceedings;
(e) Guarantor is not in violation of any Requirement
of Law or Contractual Obligation other than any violation the
consequences of which could not have a material adverse effect on
Guarantor's ability to perform its obligations hereunder (a "Material
Adverse Effect"); and
(f) no action, proceeding, investigation or
litigation is pending or, to the knowledge of Grantor, overtly
threatened against Guarantor by any person or entity which, if
adversely determined, could have a Material Adverse Effect.
16. GUARANTOR FINANCIAL INFORMATION. Guarantor will provide
Lender in writing such financial and other information with respect to
Guarantor's assets and liabilities as Lender shall reasonably request from time
to time, in form satisfactory to Lender.
17. BINDING UPON SUCCESSORS. This Continuing Guaranty shall be
binding upon Guarantor and Guarantor's successors and assigns and shall inure to
the benefit of Lender and its successors and assigns.
All references herein to Borrower shall be deemed to include
its successors and assigns, and all references herein to Guarantor shall be
deemed to include Guarantor and Guarantor's successors and assigns.
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<PAGE>
In addition and notwithstanding anything to the contrary
contained in this Continuing Guaranty or in any other document, instrument or
agreement between or among any of Lender, Borrower, Guarantor or any third
party, the obligations of Guarantor with respect to the Liabilities shall be
joint and several with any other person or entity that now or hereafter executes
a guaranty of any of the Liabilities separate from this Continuing Guaranty.
18. NOTICES. All notices required or permitted to be given
hereunder shall be in writing and shall be either personally delivered,
transmitted by facsimile to the facsimile numbers provided herein or sent by
United States certified or registered mail, return receipt requested, addressed
to Guarantor or Lender at their respective addresses stated below or at such
other address as either party hereafter notifies the other party as herein
provided. Notices shall be deemed received on the earlier of (i) the date noted
on the return receipt as delivered if mail delivery of the notice is successful
or the date inscribed on a confirmation of successful transmission, if sent by
facsimile; (ii) the last date of attempted delivery, as noted by the United
States Postal Service on the envelope containing the notice, if mail delivery is
unsuccessful; or (iii) the date of the actual delivery if personally delivered.
19. GOVERNING LAW; ADDITIONAL WAIVERS. This Continuing
Guaranty has been delivered and shall be governed by and construed in accordance
with the internal laws (as opposed to the conflicts of law provisions) of the
State of California.
GUARANTOR HEREBY
(i) WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO
ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS CONTINUING
GUARANTY, AND ACKNOWLEDGES THAT LENDER ALSO WAIVES SUCH RIGHT;
(ii) IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED IN LOS ANGELES COUNTY, CALIFORNIA, OVER ANY
ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR
RELATED TO THIS CONTINUING GUARANTY;
(iii) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT GUARANTOR MAY
EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING;
(iv) agrees that a final judgment in any such action or
proceeding shall be conclusive and may be enforced in any other
jurisdictions by suit on the judgment or in any other manner provided
by law; and
(v) agrees not to institute any legal action or proceeding
against Lender or any of Lender's directors, officers, employees,
agents or property concerning any matter arising out of or relating to
this Continuing Guaranty in any court other than one located in Los
Angeles County, California.
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(vi) Nothing herein shall affect or impair Lender's right to
serve legal process in any manner permitted by law or Lender's right to
bring any action or proceeding against Guarantor or its property in the
courts of any other jurisdiction. Wherever possible each provision of
this Continuing Guaranty shall be interpreted as to be effective and
valid under applicable law, but if any provision of this Continuing
Guaranty shall be prohibited by or invalid under such law, such
provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or
the remaining provisions of this Continuing Guaranty.
20. ADVICE OF COUNSEL. GUARANTOR ACKNOWLEDGES THAT GUARANTOR
HAS EITHER OBTAINED THE ADVICE OF COUNSEL OR HAS HAD THE OPPORTUNITY TO OBTAIN
SUCH ADVICE IN CONNECTION WITH THE TERMS AND PROVISIONS OF THIS CONTINUING
GUARANTY.
21. ENTIRE AGREEMENT. This Continuing Guaranty contains the
complete understanding of the parties hereto with respect to the subject matter
herein. Guarantor acknowledges that Guarantor is not relying upon any statements
or representations of Lender not contained in this Continuing Guaranty and that
such statements or representations, if any, are of no force or effect and are
fully superseded by this Continuing Guaranty. This Continuing Guaranty may only
be modified by a writing executed by Guarantor and Lender.
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IN WITNESS WHEREOF, Guarantor has executed this Continuing
Guaranty this day of December, 1998.
"Guarantor"
GALVESTON'S STEAKHOUSE CORP.,
a California corporation
FEIN#_________________
By:_________________________________
Its:________________________________
Address for notices:
1752 Clement Street
San Francisco, California 94121
Facsimile:
Lender's address for notices:
The CIT Group/Credit Finance, Inc.
300 S. Grand Ave.
Third Floor
Los Angeles, CA 90071
Facsimile: (213) 613-2566
<PAGE>
EXHIBIT 10.36
SECURITY AGREEMENT
(INTELLECTUAL PROPERTY)
THIS SECURITY AGREEMENT (INTELLECTUAL PROPERTY) ("Security
Agreement"), dated as of December ___, 1998, is executed by Galveston's
Steakhouse Corp., a Delaware corporation ("Grantor"), in favor of The CIT
Group/Credit Finance, Inc. ("Lender").
RECITALS
A. Pursuant to a Loan and Security Agreement dated as of the
date hereof ("Loan Agreement") between Pacific Basin Foods, Inc. ("Borrower")
and Lender, Lender has agreed to extend certain credit facilities to Borrower
upon the terms and subject to the conditions set forth therein.
B. Lender's obligations to extend the credit facilities to
Borrower under the Loan Agreement is subject, among other conditions, to receipt
by Lender of (i) a Secured Continuing Guaranty duly executed by Grantor (the
"Guaranty"), (ii) a Security Agreement duly executed by Guarantor (the "General
Security Agreement") and (iii) this Security Agreement duly executed by Grantor.
All of Grantor's obligations and liabilities to Lender of whatsoever kind or
nature, including, without limitation, its obligations under the Guaranty, the
General Security Agreement and this Security Agreement, shall be collectively
referred to herein as the "Obligations."
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Grantor hereby agrees with Lender as follows:
1. Definitions and Interpretation. When used in this Security
Agreement, the following terms shall have the following respective meanings:
"Collateral" shall have the meaning given to that
term in Paragraph 2 hereof.
"Copyright Office" shall mean the United States
Copyright Office or any successor office or agency thereto.
"Copyrights" shall have the meaning given to that
term in Attachment I hereto and any other copyrights, now existing or
hereafter arising.
"Mask Works" shall have the meaning given to that
term in Attachment I hereto.
"Patent and Trademark Office" shall mean the United
States Patent and Trademark Office or any successor office or agency
thereto.
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"Patent Applications" means and refers to all
applications made by, or on behalf of, Grantor to the Patent and
Trademark Office or to any similar office or agency of any foreign
country or political subdivision thereof for the registration of
Patents.
"Patent Registrations" means and refers to all
Patents registered with the Patent and Trademark Office or with any
similar office or agency of any foreign country or political
subdivision thereof and all Patent Applications.
"Patents" shall have the meaning given to that term
in Attachment I hereto.
"Trade Secrets" shall have the meaning given to that
term in Attachment I hereto.
"Trademarks" shall have the meaning given to that
term in Attachment I hereto.
"UCC" shall mean the Uniform Commercial Code as in
effect in the State of California from time to time.
Unless otherwise defined herein, all other capitalized terms used herein and
defined in the Loan Agreement shall have the respective meanings given to those
terms in the Loan Agreement, and all terms defined in the UCC shall have the
respective meanings given to those terms in the UCC.
2. Grant of Security Interest.
(a) As security for the Obligations, Grantor hereby
pledges and grants to Lender a security interest in all right, title and
interest of Grantor in and to the property described in Attachment I annexed
hereto (collectively and severally, the "Collateral"), which Attachment I is
incorporated herein by this reference.
(b) Any assignment, transfer and conveyance of any
Trademark to Lender shall be deemed to have occurred with a contemporaneous
assignment, transfer and conveyance to Lender of the goodwill, business and/or
means of production, associated with the goods produced or sold or the services
rendered in connection with such Trademark.
3. Representations and Warranties. Grantor represents and
warrants to Lender that:
(a) Grantor is the owner of the Collateral (or, in
the case of after-acquired Collateral, at the time Grantor acquires rights in
the Collateral, will be the owner thereof) and that no other Person has (or, in
the case of after-acquired Collateral, at the time Grantor acquires rights
therein, will have) any right, title, claim or interest (by way of Lien or
otherwise) in, against or to the Collateral;
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(b) Lender has (or in the case of after-acquired
Collateral, at the time Grantor acquires rights therein, will have) a first
priority perfected security interest in the Collateral;
(c) Grantor has full corporate power and authority to
make the conditional assignment and to grant the security interest herein
granted;
(d) Grantor does not own any Patents, Trademarks,
Copyrights or Mask Works registered in, or the subject of pending applications
in, the Patent and Trademark Office or the Copyright Office or any similar
offices or agencies in any other country or any political subdivision thereof,
other than those described in Schedules A - F to Attachment I hereto;
(e) Grantor has:
(i) the sole, full and unencumbered right,
title and interest in and to the Trademarks shown on Schedule A to
Attachment I for the goods and services covered by the registrations
thereof and such registrations are valid and enforceable and in full
force and effect;
(ii) the sole, full and unencumbered right,
title and interest in and to each of the Patents shown on Schedule B to
Attachment I, and the registrations thereof are valid and enforceable
and in full force and effect;
(iii) the sole, full and unencumbered
right, title and interest in and to each of the Copyrights shown on
Schedule E to Attachment I, and according to the records of the
Copyright Office, each of said copyrights is valid and enforceable and
in full force and effect;
(iv) the sole, full and encumbered right,
title and interest in and to the Mask Works shown on Schedule F to
Attachment I, and according to the records of the Copyright Office,
each of said Mask Works is valid and enforceable and in full force and
effect;
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(f) There is no claim by any third party that any
Patents, Trademarks, Copyrights or Mask Works are invalid or unenforceable or do
or may violate the rights of any Person;
(g) All licenses of Patents, Trademarks, Copyrights,
Mask Works and Trade Secrets which Grantor has granted to any Person are set
forth in Schedule G to Attachment I hereto;
(h) All licenses of Patents, Trademarks, Copyrights,
Mask Works and Trade Secrets which any Person has granted to Grantor are set
forth in Schedule H to Attachment I hereto;
(i) Grantor has obtained from each employee who may
be considered the inventor of patentable inventions (invented within the scope
of such employee's employment) an assignment to Grantor of all rights to such
inventions, including Patents; and
(j) Grantor has taken all steps necessary to protect
the secrecy and the validity under applicable law of all material Trade Secrets.
4. Covenants of Grantor. Grantor hereby agrees:
(a) Grantor will perform all acts and execute all
documents, including notices of security interest for each relevant type of
intellectual property in forms suitable for filing with the Patent and Trademark
Office or the Copyright Office, as applicable, substantially in the form of
Attachment II (appropriately revised) annexed hereto, that may be necessary or
desirable to record, maintain, preserve, protect and perfect Lender's interest
in the Collateral, the Lien granted to Lender in the Collateral and the first
priority of such Lien;
(b) Except to the extent that Lender shall give its
prior written consent,
(i) Grantor (either itself or through
licensees) will continue to use the Trademarks in connection with each
and every trademark class of goods or services applicable to its
current line of products or services as reflected in its current
catalogs, brochures, price lists or similar materials in order to
maintain the Trademarks in full force and effect free from any claim of
abandonment for nonuse, and Grantor will not (and will not permit any
licensee thereof to) do any act or knowingly omit to do any act whereby
any Trademark may become invalidated;
(ii) Grantor will not do any act or omit to
do any act whereby the Patent Registrations may become abandoned or
dedicated or the remedies available against potential infringers
weakened and shall notify Lender immediately if it knows of any reason
or has reason to know that any Patent Registration may become abandoned
or dedicated;
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(iii) Grantor will not do any act or omit
to do any act whereby the Copyrights or Mask Works may become abandoned
or dedicated or the remedies available against potential infringers
weakened and shall notify Lender immediately if it knows of any reason
or has reason to know that any Copyright or Mask Work may become
abandoned or dedicated; and
(iv) Grantor will not assign, sell,
mortgage, lease, transfer, pledge, hypothecate, grant a security
interest in or Lien upon, encumber, grant an exclusive or non-exclusive
license, or otherwise dispose of any of the Collateral, and nothing in
this Security Agreement shall be deemed a consent by Lender to any such
action except as expressly permitted herein;
(c) Except as may be expressly limited by the Loan
Agreement, Grantor will promptly pay Lender for any and all sums, costs, and
expenses which Lender may pay or incur pursuant to the provisions of this
Security Agreement or in enforcing the Obligations, the Collateral or the
security interest and assignments granted hereunder, including all filing or
recording fees, court costs, collection charges, travel, and reasonable
attorneys' fees and expenses, all of which together with interest at the highest
rate then payable on the Obligations shall be part of the Obligations and be
payable on demand;
(d) Grantor will promptly notify Lender upon the
filing, either by Grantor or through any agent, employee, licensee or designee,
of (i) an application for the registration of any Patent, Trademark, Copyright
or Mask Work with the Patent and Trademark Office or the Copyright Office or any
similar office or agency in any other country or any political subdivision
thereof, (ii) any assignment of any Patent or Trademark, which Grantor may
acquire from a third party, with the Patent and Trademark Office or any similar
office or agency in any other country or any political subdivision thereof, or
(iii) any assignment of any Copyright or Mask Work, which Grantor may acquire
from a third party, with the Copyright Office or any similar office or agency in
any other country or any political subdivision thereof. Upon the request of
Lender, Grantor shall execute and deliver any and all assignments, agreements,
instruments, documents and papers as Lender may request to evidence Lender's
interest in such Patent, Trademark (and the goodwill and general intangibles of
Grantor relating thereto or represented thereby), Copyright or Mask Work, and
Grantor authorizes Lender to amend an original counterpart of the applicable
notice of security interest executed pursuant to Subparagraph 4(a) of this
Security Agreement without first obtaining Grantor's approval of or signature to
such amendment and to record such assignment with the Patent and Trademark
Office or Copyright Office, as applicable;
(e) Grantor will keep the Collateral free of all
Liens, except in favor of Lender;
(f) Grantor will take all necessary steps in any
proceeding before the Patent and Trademark Office, the Copyright Office or any
5
<PAGE>
similar office or agency in any other country or any political subdivision
thereof, to diligently prosecute or maintain, as applicable, each application
and registration of the Patents, Trademarks, Copyrights and Mask Works,
including filing of renewals, affidavits of use, affidavits of incontestability
and opposition, interference and cancellation proceedings (except to the extent
that dedication, abandonment or invalidation is permitted hereunder);
(g) During the term of the Loan Agreement, Grantor
shall (i) make application to the Patent and Trademark Office (and assign such
application to Lender as security) to register any material unpatented but
patentable inventions developed by Grantor or its employees (within the scope of
their employment), unless Grantor, in the exercise of its prudent business
judgment, deems any such Patent not to have any significant commercial value or
determines that its rights thereunder are better preserved as a Trade Secret;
(ii) make application to the Patent and Trademark Office to register any
registerable but unregistered material Trademarks used by Grantor in connection
with its products or services; and (iii) make application to the Copyright
Office to register any material unregistered Copyright or Mask Work to which
Grantor has rights;
(h) Grantor shall (i) use proper statutory notice in
connection with its use of the Patents, Trademarks, Copyrights and Mask Works,
(ii) maintain consistent standards of quality in its manufacture of products
sold under the Trademarks or provision of services in connection with the
Trademarks, and (iii) take all steps necessary to protect the secrecy and the
validity under applicable law of all material Trade Secrets;
(i) Grantor agrees that if it or any Affiliate,
learns of any use by any Person of any term or design likely to cause confusion
with any Trademark, Grantor shall promptly notify Lender of such use and of all
steps taken and to be taken to remedy any infringement of any Trademark;
(j) Grantor shall maintain with each employee who may
have access to the Trade Secrets of Grantor an agreement by which such employee
agrees not to disclose such Trade Secrets and with each employee who may be the
inventor of patentable inventions (invented within the scope of such employee's
employment) an invention assignment agreement requiring such employee to assign
all rights to such inventions, including patents and patent applications, to
Grantor and further requiring such employee to cooperate fully with Grantor, its
successors in interest, including Lender, and their counsel, in the prosecution
of any patent application or in any litigation involving the invention, whether
such cooperation is required during such employee's employment with Grantor or
after the termination of such employment;
(k) Grantor shall at all times keep at least one
complete set of its records concerning the Collateral at its chief executive
office and shall make such records available for inspection by Lender in
accordance with the terms of the Loan Agreement.
6
<PAGE>
5. Authorized Action by Lender.
(a) Lender may, in its sole discretion, pay any
amount or do any act required of Grantor hereunder or requested by Lender to
preserve, defend, protect, maintain, record or enforce Grantor's obligations
contained herein, the Obligations, the Collateral, or the right, title and
interest granted Lender by this Security Agreement, and which Grantor fails to
do or pay, and any such payment shall be deemed an advance by Lender to Grantor
and shall be payable on demand together with interest at the highest rate then
payable on the Obligations.
(b) Grantor agrees to execute and deliver to Lender
three originals of a Special Power of Attorney in substantially the form of
Attachment III to this Agreement for the implementation of the recording, giving
of notice, preservation, assignment, sale or other disposal of the Collateral
pursuant to Subparagraphs 2(a), 2(b), 5(a) and 7(a).
(c) Grantor hereby grants to Lender and its employees
and agents the right to visit Grantor's business facilities at which Grantor
manufactures products or provides services, which products or services are sold
under or provided in connection with any of the Trademarks, and to inspect such
products and the quality control records relating thereto or observe the
provision of such services.
6. Litigation and Other Proceedings.
(a) Grantor shall have the right and obligation to
commence and diligently prosecute such suits, proceedings or other actions for
infringement or other damage, or reexamination or reissue proceedings, or
opposition or cancellation proceedings as are reasonable to protect any of the
Patents, Trademarks, Copyrights, Mask Works or Trade Secrets. No such suit,
proceeding or other actions shall be settled or voluntarily dismissed, nor shall
any party be released or excused of any claims of or liability for infringement,
without the prior written consent of Lender, which consent shall not be
unreasonably withheld.
(b) Upon the occurrence and during the continuation
of an Event of Default, Lender shall have the right but not the obligation to
bring suit or institute proceedings in the name of Grantor or Lender to enforce
any rights in the Collateral, including any license thereunder, in which event
Grantor shall at the request of Lender do any and all lawful acts and execute
any and all documents required by Lender in aid of such enforcement. If Lender
elects not to bring suit to enforce any right under the Collateral, including
any license thereunder, Grantor agrees to use all reasonable measures, whether
by suit, proceeding or other action, to prevent the infringement of any right
under the Collateral by any Person and for that purpose agrees to diligently
maintain any action, suit or proceeding against any Person so infringing
necessary to prevent such infringement.
7
<PAGE>
7. Default and Remedies.
(a) Grantor shall be deemed in default under this
Security Agreement upon the occurrence of an Event of Default, as that term is
defined in the Loan Agreement. Upon the occurrence and during the continuation
of any such Event of Default, Lender may, at its option, and (except if
otherwise specified below) without notice to or demand on Grantor, and in
addition to all rights and remedies available to Lender under the Loan Agreement
or the other Loan Documents, do any one or more of the following:
(i) upon ten (10) days' prior notice to
Grantor, direct Grantor not to make any further use of the Patents, the
Trademarks (or any mark similar thereto), the Copyrights (or any work
deriving therefrom), or the Mask Works for any purpose;
(ii) at any time and from time to time,
upon ten (10) days' prior notice to Grantor, license, whether general,
special or otherwise, and whether on an exclusive or nonexclusive
basis, any of the Patents, Trademarks, Copyrights or Mask Works,
throughout the world for such term or terms, on such conditions, and in
such manner, as Lender shall in its sole discretion determine;
(iii) at any time and from time to time,
enforce (and upon notice to Grantor have the exclusive right to
enforce) against any licensee or sublicensee all rights and remedies of
Grantor in, to and under any one or more license agreements with
respect to the Collateral (without assuming any obligations or
liability thereunder), and take or refrain from taking any action under
any thereof;
(iv) at any time and from time to time,
upon ten (10) days' prior notice to Grantor, assign, sell, or otherwise
dispose of, the Collateral or any of it, either with or without special
or other conditions or stipulations, with power to buy the Collateral
or any part of it, and with power also to execute assurances, and do
all other acts and things for completing the assignment, sale or
disposition which Lender shall, in its sole discretion, deem
appropriate or proper; and
(v) in addition to the foregoing, in order
to implement the assignment, sale or other disposal of any of the
Collateral pursuant to clause (a)(iv) hereof, Lender may, at any time,
pursuant to the authority granted in the Power of Attorney executed
pursuant to Subparagraph 5(b) hereof, execute and deliver on behalf of
Grantor, one or more instruments of assignment of the Patents,
Trademarks, Copyrights or Mask Works (or any application or
registration thereof), in form suitable for filing, recording or
registration in any country.
(b) Grantor agrees to pay when due all reasonable
costs incurred in any such transfer of the Patents, Trademarks, Copyrights or
Mask Works, including any taxes, fees and reasonable attorneys' fees and
8
<PAGE>
expenses, and all such costs shall be added to the Obligations. Lender may apply
the proceeds actually received from any such license, assignment, sale or other
disposition to the reasonable costs and expenses thereof, including reasonable
attorneys' fees and all legal, travel and other expenses which may be incurred
by Lender, and then to the Obligations, in such order as to principal or
interest as Lender may desire; and Grantor shall remain liable and will pay
Lender on demand any deficiency remaining, together with interest thereon at a
rate equal to the highest rate then payable on the Obligations and the balance
of any expenses unpaid. Nothing herein contained shall be construed as requiring
Lender to take any such action at any time. In the event of any such license,
assignment, sale or other disposition of the Collateral, or any of it, after the
occurrence or continuation as hereinabove provided of an Event of Default,
Grantor shall supply its know-how and expertise relating to the manufacture and
sale of the products bearing or in connection with which the Trademarks,
Patents, Copyrights or Mask Works are used, and its customer lists and other
records relating to the Trademarks, Patents, Copyrights or Mask Works and to the
distribution of products or the provisions of services, to Lender or its
designee.
8. Indemnification and Release.
(a) Grantor assumes all responsibility and liability
arising from the use of the Patents, Trademarks, Copyrights and Mask Works, and
Grantor hereby indemnifies and holds Lender and its directors, officers,
employees, agents and any of its Affiliates ("Indemnitees") harmless from and
against any claim, suit, loss, damage or expense (including reasonable
attorneys' fees and expenses) arising out of or in connection with any alleged
infringement of any patent, trademark, service mark, trade name, trade secret,
copyright or mask work of a third party or alleged defect in any product
manufactured, promoted or sold by Grantor (or any Affiliate of Grantor) in
connection with any Patent, Trademark, Copyright or Mask Work or out of the
manufacture, promotion, labeling, sale or advertisement of any product or
service by Grantor (or any Affiliate of Grantor). Grantor agrees that Lender
does not assume, nor shall Lender have any responsibility for, the payment of
any sums due or to become due under any agreement or contract included in the
Collateral or the performance of any obligations to be performed under or with
respect to any such agreement or contract by Grantor, and Grantor hereby agrees
to indemnify and hold each Indemnitee harmless with respect to any and all
claims by any Person relating thereto.
(b) Grantor agrees to indemnify and hold each
Indemnitee harmless and against any claim, suit, loss, damage or expense
(including reasonable attorneys' fees and expenses) arising out of or in
connection with (i) any claim, suit or proceeding instituted by or against
Grantor, (ii) any action taken or omitted to be taken by Lender pursuant to
Subparagraph 6(b), or (iii) any action taken or omitted to be taken by Lender
pursuant to clause 7(a)(iii) hereof with respect to any license agreement of
Grantor; provided, however, that Grantor shall not be required to indemnify any
Indemnitee to the extent such liability arises from the willful misconduct or
gross negligence of such Indemnitee.
9
<PAGE>
(c) Grantor hereby releases each Indemnitee from any
claims, causes of action and demands at any time arising out of or with respect
to any actions taken or omitted to be taken by the Indemnitees, or any of them,
under the powers of attorney granted under the Special Power of Attorney
executed pursuant to Subparagraph 5(b) herein, other than actions taken or
omitted to be taken through the gross negligence or willful misconduct of such
Indemnitees.
(d) Grantor agrees to cause Lender to be named as an
additional insured with respect to any policy of insurance held by Grantor from
time to time covering product liability or intellectual property infringement
risk.
9. Miscellaneous.
(a) Notices. Except as otherwise provided herein, all
notices, requests, demands, consents, instructions or other communications to or
upon Grantor or Lender under this Security Agreement shall be made and deemed
received in accordance with Section 9.4 of the Loan Agreement.
(b) Nonwaiver. No failure or delay on Lender's part
in exercising any right hereunder shall operate as a waiver thereof or of any
other right nor shall any single or partial exercise of any such right preclude
any other further exercise thereof or of any other right.
(c) Amendments and Waivers. Except with respect to
action by the Lender pursuant to Subparagraph 4(d), this Security Agreement may
not be amended or modified, nor may any of its terms be waived, except by
written instruments signed by Grantor and Lender as required by the Loan
Agreement. Each waiver or consent under any provision hereof shall be effective
only in the specific instances and for the purpose for which given.
(d) Assignments. This Security Agreement shall be
binding upon and inure to the benefit of Lender and Grantor and their respective
successors and assigns; provided, however, that Grantor and Lender may sell,
assign and delegate their respective rights and obligations hereunder only as
permitted by the Loan Agreement.
(e) Cumulative Rights, etc. The rights, powers and
remedies of Lender under this Security Agreement shall be in addition to all
rights, powers and remedies given to Lender by virtue of any applicable law,
rule or regulation of any Governmental Authority, the Loan Agreement, any other
Credit Document or any other agreement, all of which rights, powers, and
remedies shall be cumulative and may be exercised successively or concurrently
without impairing Lender's rights hereunder. Grantor waives any right to require
Lender to proceed against any Person or to exhaust any Collateral or to pursue
any remedy in Lender's power.
10
<PAGE>
(f) Payments Free of Taxes, Etc. All payments made by
Grantor under this Security Agreement shall be made by Grantor free and clear of
and without deduction for any and all present and future taxes, levies, charges,
deductions and withholdings. In addition, Grantor shall pay upon demand any
stamp or other taxes, levies or charges of any jurisdiction with respect to the
execution, delivery, registration, performance and enforcement of this Security
Agreement. Upon request by Lender, Grantor shall furnish evidence satisfactory
to Lender that all requisite authorizations and approvals by, and notices to and
filings with, governmental authorities and regulatory bodies have been obtained
and made and that all requisite taxes, levies and charges have been paid.
(g) Partial Invalidity. If any time any provision of
this Security Agreement is or becomes illegal, invalid or unenforceable in any
respect under the law of any jurisdiction, neither the legality, validity or
enforceability of the remaining provisions of this Security Agreement nor the
legality, validity or enforceability of such provision under the law of any
other jurisdiction shall in any way be affected or impaired thereby.
(h) Governing Law. This Security Agreement shall be
governed by and construed in accordance with the laws of the State of California
without reference to conflicts of law rules.
(i) Submission to Jurisdiction. Grantor hereby
irrevocably and unconditionally:
(i) Submits for itself and its property in
any legal action or proceeding relating to this Security Agreement, or
for recognition and enforcement of any judgment in respect thereof, to
the non-exclusive jurisdiction of the courts of the State of California
and the courts of the United States of America for the County of Los
Angeles, and consents and agrees to suit being brought in such courts
as Lender may elect;
(ii) Waives any objection that it may now
or hereafter have to the venue of any such action or proceeding in any
such court or that such proceeding was brought in an inconvenient court
and agrees not to plead or claim the same; and
(iii) Waives personal service of the
summons, complaint and other process issued in any such action or suit
and agrees that service of such summons, complaint and other process
may be made by registered or certified mail addressed to Grantor at the
address set forth in the Loan Agreement and that service so made shall
be deemed completed upon the earlier of Grantor's actual receipt
thereof or 3 business days after deposit in the U.S. Mails, proper
postage prepaid. Nothing in this Security Agreement shall be deemed or
operate to affect the right of Lender to serve legal process in any
other manner permitted by law, or to preclude the enforcement by Lender
of any judgment or order obtained in such forum or the taking of any
action under this Security Agreement to enforce same in any other
appropriate forum or jurisdiction.
11
<PAGE>
(j) Jury Trial. EACH OF GRANTOR AND LENDER, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT.
IN WITNESS WHEREOF, Grantor and Lender have caused this
Security Agreement to be executed as of the day and year first above written.
GALVESTON'S STEAKHOUSE CORP.
By:_________________________________
Name:_______________________________
Title:______________________________
___________________________________
___________________________________
___________________________________
THE CIT GROUP/CREDIT FINANCE, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
12
<PAGE>
ATTACHMENT I
TO SECURITY AGREEMENT
(a) All copyrights including (i) all original works
of authorship fixed in any tangible medium of expression, all right,
title and interest therein and thereto, and all registrations and
recordings thereof, including all applications, registrations and
recordings in the Copyright Office or in any similar office or agency
of the United States, any state thereof, or any foreign country or any
political subdivision thereof, all whether now owned or hereafter
acquired by Grantor, including those described on Schedule E to this
Attachment I annexed hereto, which Schedule E is incorporated herein by
this reference, and (ii) all extensions or renewals thereof and all
licenses thereof (collectively, the "Copyrights");
(b) All patentable inventions, patent rights, shop
rights, letters patent of the United States or any other country, all
right, title and interest therein and thereto, and all registrations
and recordings thereof, including (i) all Patent Registrations and
recordings in the Patent and Trademark Office or in any similar office
or agency of the United States, any state thereof or any foreign
country or political subdivision thereof, all whether now owned or
hereafter acquired by Grantor, including those described in Schedules B
and D to this Attachment I annexed hereto, which Schedules B and D are
incorporated herein by this reference, and (ii) all reissues,
continuations, continuations-in-part or extensions thereof and all
licenses thereof (collectively, the "Patents");
(c) All trademarks, trade names, trade styles and
service marks, and all prints and labels on which said trademarks,
trade names, trade styles and service marks have appeared or appear,
and all designs and general intangibles of like nature, now existing or
hereafter adopted or acquired, all right, title and interest therein
and thereto, all registrations and recordings thereof, including (i)
all applications, registrations and recordings in the Patent and
Trademark Office or in any similar office or agency of the United
States, any state thereof, or any foreign country or any political
subdivision thereof, all whether now owned or hereafter acquired by
Grantor, including those described in Schedules A and C to this
Attachment I, which Schedules A and C are incorporated herein by this
reference, and (ii) all reissues, extensions or renewals thereof and
all licenses thereof (collectively, the "Trademarks");
(d) All goodwill of Grantor's business symbolized by
the Trademarks and all customer lists and other records of Grantor
relating to the distribution of products or provision of services
bearing or covered by the Trademarks;
I-1
<PAGE>
(e) All mask works including all series of related
images, however fixed or encoded, in final or intermediate form, having
or representing the predetermined, three dimensional pattern of
metallic, insulating, or semiconductor material present or removed from
the layers of a semiconductor chip product, in which series the
relation of the images to one another is that each image has the
pattern of the surface of one form of the semiconductor chip product,
and all right, title and interest therein and thereto, and all
registrations and recordings thereof, including all applications,
registrations and recordings in the Copyright Office or in any similar
office or agency of the United States, any state thereof, or any
foreign country or any political subdivision thereof, all whether now
owned or hereafter acquired by the Grantor, including those described
on Schedule F to this Attachment I annexed hereto, which Schedule F is
incorporated herein by this reference, and (ii) all extensions or
renewals thereof and all licenses thereof (collectively, the "Mask
Works").
(f) All information, including formulas, patterns,
compilations, programs, devices, methods, techniques or processes, that
derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means
by other Persons who can obtain economic value from its disclosure or
use, all whether now owned or hereafter acquired by the Grantor
(collectively, the "Trade Secrets").
(g) All claims by Grantor against any Person for
past, present or future infringement of the Patents, Trademarks,
Copyrights, Mask Works or Trade Secrets;
(h) All proceeds of the foregoing (including whatever
is receivable or received when Collateral or proceeds is (are) sold,
collected, exchanged, licensed or otherwise disposed of, whether such
disposition is voluntary or involuntary, including rights to payment
and return premiums and insurance proceeds under insurance with respect
to any Collateral, and all rights to payment with respect to any cause
of action affecting or relating to the Collateral).
I-2
<PAGE>
SCHEDULE A TO ATTACHMENT I
TO SECURITY AGREEMENT
TRADEMARKS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Trademark Jurisdiction Reg. Date Reg. No.
----------- -------------- --------- ---------
GALVESTON'S AND DESIGN FEDERAL 9/30/86 1,411,804
</TABLE>
A-I-1
<PAGE>
EXHIBIT 10.37
GRANT OF SECURITY INTEREST
TRADEMARKS
THIS GRANT OF SECURITY INTEREST, dated as of December , 1998,
is executed by Galveston's Steakhouse Corp., a Delaware corporation ("Grantor"),
in favor The CIT Group/Credit Finance, Inc. ("Lender").
A. Pursuant to a Loan and Security Agreement dated as of the
date hereof ("Loan Agreement") between certain of Pacific Basin Foods, Inc.
("Borrower") and Lender, Lender has agreed to extend certain credit facilities
to Borrower upon the terms and subject to the conditions set forth therein.
B. Grantor has adopted, used and is using the trademarks, more
particularly described on Schedules 1-A and 1-B annexed hereto as part hereof,
which trademarks are registered or subject to an application for registration in
the United States Patent and Trademark Office (collectively, the "Trademarks");
C. Grantor has entered into a secured Continuing Guaranty of
Borrower's obligations to Lender in connection with the contemplated credit
facilities and as security therefor has executed, without limitation, a Security
Agreement (Intellectual Property) dated the date hereof (the "Security
Agreement") in favor of Lender; and
D. Pursuant to the Security Agreement, Grantor has granted to
Lender a security interest in all right, title and interest of Grantor in and to
the Trademarks, together with the goodwill of the business symbolized by the
Trademarks and the customer lists and records related to the Trademarks and the
applications and registrations thereof, and all proceeds thereof, including any
and all causes of action which may exist by reason of infringement thereof (the
"Collateral"), to secure the payment, performance and observance of the
Obligations, as defined in the Security Agreement;
NOW, THEREFORE, for good and valuable consideration, receipt
of which is hereby acknowledged, Grantor does hereby further grant to Lender a
security interest in the Collateral to secure the prompt payment, performance
and observance of the Obligations.
<PAGE>
Grantor does hereby further acknowledge and affirm that the
rights and remedies of Lender with respect to the security interest in the
Collateral granted hereby are more fully set forth in the Security Agreement,
the terms and provisions of which are hereby incorporated herein by reference as
if fully set forth herein.
Lender's address is:
The CIT Group/Credit Finance, Inc.
300 South Grand Avenue
Third Floor
Los Angeles, California 90071
Telecopier No.: (213) 613-2566
IN WITNESS WHEREOF, Grantor has caused this Assignment to be
executed as of the day and year first above written.
GALVESTON'S STEAKHOUSE CORP.
By: ___________________________________
Name:__________________________________
Title:_________________________________
<PAGE>
ALL-PURPOSE ACKNOWLEDGMENT
STATE OF _______________ )
) ss.
COUNTY OF ______________ )
On ____________, 1998, before me, ____________________________________________
(Name and Title of Officer)
personally appeared __________________________________________________________
/ / personally known to me
-or-
/ / proved to me on the basis of satisfactory evidence to be the
person(s) whose name(s) is/are subscribed to the within
instrument and acknowledged to me that he/she/they executed
the same in his/her/their authorized capacity(ies), and that
by his/her/their signature(s) on the instrument the person(s),
or the entity upon behalf of which the person(s) acted,
executed the instrument.
WITNESS my hand and official seal.
---------------------------------------------------------
Signature Of Notary
OPTIONAL
Though the data below is not required by law, it may prove valuable to persons
relying on the document and could prevent fraudulent reattachment of this form.
<TABLE>
<CAPTION>
CAPACITY CLAIMED BY SIGNER DESCRIPTION OF ATTACHED DOCUMENT
<S> <C>
/ / Individual
/ / Corporate Officer
--------------------------------------------------- ----------------------------------------------------------
Title(s) Title Or Type Of Document
/ / Partner(s) / / Limited
/ / General
/ / Attorney-In-Fact __________________________________________________________
/ / Trustee(s) Number Of Pages
/ / Guardian/Conservator
/ / Other:_____________________________________________
Signer is representing: __________________________________________________________
Date Of Document
Name Of Person(s) Or Entity(ies)
- --------------------------------------------------------
----------------------------------------------------------
________________________________________________________ Signer(s) Other Than Named Above
</TABLE>
<PAGE>
SCHEDULE 1-A TO GRANT OF SECURITY INTEREST
TRADEMARKS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Trademark Jurisdiction Reg. Date Reg. No.
--------- ------------ --------- --------
GALVESTON'S AND DESIGN FEDERAL 9/30/86 1,411,804
</TABLE>
1-A-1
<PAGE>
SCHEDULE 1-B TO GRANT OF SECURITY INTEREST
TRADEMARK APPLICATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Trademark Jurisdiction Reg. Date Reg. No.
--------- ------------ --------- --------
None.
</TABLE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 2, 1998 (except for Note 15 and 16, as to
which the date is May 29, 1998) accompanying the financial statements of
Galveston's Steakhouse Corp. contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 10, 1999
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 7, 1998 with respect to the consolidated
financial statements of Paragon Steakhouse Restaurants, Inc. included in the
Amendment No. 1 to the Registration Statement (Form SB-2 No. 333-69137) and the
related Prospectus of Galveston's Steakhouse Corp. for the registration of
1,064,248 shares of its common stock.
ERNST & YOUNG LLP
Woodland Hills, California
February 4, 1999
