SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 29, 1998
COMMISSION FILE NUMBER: 000-23739
GALVESTON'S STEAKHOUSE CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3248672
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER I.D. NUMBER)
10200 WILLOW CREEK ROAD, SAN DIEGO, CALIFORNIA 91355
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(619) 689-2333
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: [X]
Registrant's revenues for its most recent fiscal year (ended December 29, 1998):
$6,519,421.
Aggregate market value of voting stock held by non-affiliates: $13,341,842.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
2,428,325 common shares were outstanding as of December 29, 1998.
Documents Incorporated by Reference: Not Applicable.
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FORM 10-KSB
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GALVESTON'S STEAKHOUSE CORP.
FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 29, 1998
TABLE OF CONTENTS
Page of Report
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PART I
ITEM 1. DESCRIPTION OF BUSINESS AND RISK FACTORS....................1
ITEM 2. DESCRIPTION OF PROPERTY....................................16
ITEM 3. LEGAL PROCEEDINGS..........................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............19
ITEM 7. FINANCIAL STATEMENTS.......................................24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS..............24
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS........................................25
ITEM 10. EXECUTIVE COMPENSATION.....................................28
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................................32
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............33
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...........................34
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
The Company currently operates seventy-four (74) full-service
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 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 seeks 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 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
and 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
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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, full service steakhouse segment
of the restaurant industry.
* Generous portions offered at moderate prices.
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
transaction. 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
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restaurant, which includes leasehold improvements, furniture, fixtures,
equipment, food and beverage inventory and other pre-opening expenses.
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.
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 and 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.
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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.
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.
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
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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 Paragon. 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.
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.
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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.
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. 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
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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.
EMPLOYEES
At March 31, 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.
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RESTAURANT LOCATIONS AS OF MARCH 31, 1999
The following table sets forth the location of the Company's existing
Mountain Jack's, Mountain Jack Steakhouse, Hungry Hunter and Hunter Steakhouse
(54) 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 Raleigh
Yuma Sacramento MICHIGAN
San Diego Auburn Hills OHIO
CALIFORNIA Santa Rosa Clinton Township Canton
Anaheim Temecula Dearborn Heights Elyria
Bakersfield Thousand Oaks Grandville Independence
Concord Torrance Kentwood Middleburg Heights
El Cajon (Red Oak Ventura Lansing North Olmstead
Steakhouse) Livonia Sharonville
Fairfield Okemos Toledo
Fremont ILLINOIS Roseville
Fullerton Springfield Taylor WISCONSIN
La Mesa Troy Madison (2)
Lafayette
Lake Forest
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
The Company's executive offices are located at 10200 Willow Creek Road,
San Diego California 91355. The telephone number is (619) 689-2333.
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RISK FACTORS
NO HISTORY OF EARNINGS AND ACCUMULATED DEFICIT
The Company has suffered substantial losses since inception. For the
twelve months ending December 29, 1998, the Company had a net loss of
$2,961,728. As of December 29, 1998, the Company's accumulated deficit totaled
$4,982,247. While the Company's acquisition of seventy- eight (78) restaurants
in late December 1998 from Paragon's former owner and the implementation of the
Company's strategic cost cutting programs following such acquisition are
expected to produce significant positive earnings results, there can be no
assurance given as to when the Company will, in fact, achieve profitable
operations. See "Risk Factors -- Business," and "Risk Factors -- Recent
Significant Increase in Company Operations."
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 has secured opportunities to refinance the Mortgage and has so
informed the financing company.
On December 23, 1998, the financing company declared an event of
default under the Mortgage agreement. Failure to refinance the Mortgage or to
obtain the agreement of the financing company to amend the terms of the Mortgage
agreement or 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 THE COMPANY
The Company has suffered substantial losses in recent years. As of
December 29, 1998, the Company had an accumulated deficit of $4,982,247 and
negative working capital of $39,122,838. In addition, Paragon, a subsidiary of
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
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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 financial statements regarding the Company included in this Annual
Report have been prepared assuming that the Company will continue as a going
concern; however, the financial condition of the Company raises substantial
doubt about the ability of the Company 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 and held
leasehold interests for five (5) additional restaurants which had ceased
operations. Prior to such acquisition, the Company operated only four (4)
steakhouse restaurants. At present, following the settlement of the J.W. Childs
litigation (see below), the Company operates a total of seventy-four (74)
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.
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 given as to 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 restaurants 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.
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
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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.
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.
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 a number of states, such as
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 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.
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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 occurring 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.
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.
12
<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.
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.
CONTROL BY PRINCIPAL STOCKHOLDERS
The management of the Company beneficially owns 17.1% of the
outstanding shares of Common Stock of the Company and 41.3% of the combined
stockholder voting power of the
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<PAGE>
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
substantial 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, subject to stockholder approval, 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.
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.
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.
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 Annual Report,
1,000,000 shares of Series B Convertible Preferred Stock of the Company (the
"Series B Preferred") are outstanding, all of which are owned
14
<PAGE>
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,
subject to stockholder approval, 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.
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 2,609,325 shares of
Common Stock.
The Company is unable to predict the effect that sales of the shares of
Common Stock currently outstanding, 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 currently outstanding.
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.
15
<PAGE>
CONTINUED NASDAQ SMALLCAP 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.
ITEM 2. DESCRIPTION OF PROPERTY.
As of March 31, 1999, the Company leased fifty-nine (59) and owned
twenty (20) of its restaurant locations. As of March 31, 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.
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<PAGE>
ITEM 3. 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 agreement to
assign its leasehold interests in three restaurants. On March 11, 1999, the
parties executed a mutual release with respect to the Action and entered into an
agreement whereby Paragon agreed to assign its leasehold interests in three
restaurants to a subsidiary of Childs, together with the liquor licenses and
other agreements and assets relating to the three restaurants. On March 12,
1999, Childs filed a Notice of Voluntary Dismissal with respect to the Action
which dismisses the Action with prejudice.
Except as discussed above, the Company is not involved in any material
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for shareholder approval during the fourth
quarter of the fiscal year covered by this Report.
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<PAGE>
PART II.
ITEM 5. 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 March 31, 1999, the last sale price as
reported on NASDAQ was $4.00 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.
As of March 31, 1999, there were approximately 800 record holders of
the Company's Common Stock.
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.
The following sets forth certain information regarding sales of, and
other transactions with respect to, securities of the Company issued within the
period covered by this Report, 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.
In March, 1998, 278,125 shares of Common Stock were issued upon
conversion of $1,112,500 aggregate principal amount of bridge notes. The shares
of Common Stock issued upon conversion of the $1,112,500 aggregate principal
amount of bridge notes were issued at a conversion rate of $4.00 per share.
In July, 1998, 55,200 shares of Common Stock were issued upon
conversion of $92,000 aggregate principal amount of convertible notes payable.
The shares of Common Stock issued upon conversion of the $92,000 aggregate
principal amount of convertible notes payable were issued, in accordance with
their terms, at a conversion rate of $1.67 per share.
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 ("Debentures"). On July 23, 1998, Barry Lebin purchased
$100,00 principal amount of the Company's Debentures. The Company paid a
placement fee of 10% to AIBC Investment Services Corp. in connection with this
placement.
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. The Company paid a
placement fee of 10% to May Davis Group in connection with this placement.
On December 21, 1998 Talisman Capital Opportunity Fund Ltd. purchased a
second Secured Exchangeable Note of the Company due and payable on or before
September 28, 2003 in the principal amount of $1,350,000. The Company paid a
placement fee of 10% to May Davis Group in connection with this placement.
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
Debentures. The Company paid a placement fee of 10% to May Davis Group in
connection with this placement.
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.
The $1,100,000 aggregate principal amount of Debentures provide that
they may be converted into shares of Common Stock at a rate of 85% of the Market
Price (as such term is defined in the Debentures) of the Common Stock on the
conversion date. The Company, however, believes that the holders of such
Debentures appear to have lost their right to convert the Debentures into Common
Stock by the holders' breach of the terms of the Securities Purchase Agreement
prohibiting the short sale of the Company's Common Stock while the Debentures
are outstanding. The first Secured Exchangeable Note may be exchanged for shares
of Common Stock at an exchange price of the lesser of $4.6475 per share or 85%
of the average of the four low trades for the Common Stock for the 22 days
preceding the exchange date. The second Secured Exchangeable Note may be
exchanged for shares of Common Stock at an exchange price of the lesser of $5.50
or 85% of the average of the four low trades for the Common Stock for the 22
days preceding the exchange date. The discount on the Secured Notes increases to
20%, once the Notes have been held for 181 days and to 25%, once the Notes have
been held for 271 days. 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.
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<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Report on Form 10-KSB. 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.
The Company currently operates 74 full-service steakhouse located in 11
states. The Company operates under the brand names of Carvers, Hungry Hunter
Steakhouse, Hunter Steakhouse, Mountain Jack's, Mountain Jack's Steakhouse Texas
Loosey's and Galveston's.
On December 21, 1998, the Company acquired Paragon Steakhouse
Restaurants, Inc. ("Paragon"), which owned 78 steakhouses, of which five were
closed, and Pacific Basin Foods, Inc., a restaurant food distribution company.
Prior to the acquisition of Paragon, the Company owned and operated four
restaurants. The Company is in the process of reopening one of the five closed
restaurants purchased from Paragon. In March 1999, the Company assigned the
leases of three restaurants to J. W. Childs Equity Partners, L.P. to settle a
lawsuit. See Item 3. Legal Proceedings contained elsewhere in this Report on
Form 10-KSB.
The Company believes that its restaurants are well positioned in a
high-quality, moderately priced segment of the restaurant industry. With the
acquisition of Paragon's Carvers restaurants, the Company has entered the
sophisticated, upscale restaurant market specializing in complete steak, chop,
prime rib and seafood meals. The Company plan to expand the number of
restaurants it owns either by building new restaurants or converting existing
restaurants. The Company believes that the location of each restaurant is
critical to its long-term success.
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<PAGE>
RESULTS OF OPERATIONS
The following discussion of the results of operations only include the
operations of the restaurants purchased from Paragon from December 21, 1998 to
December 29, 1998. With a twenty-fold increase in the number of restaurants
being operated by the Company, revenues, cost of sales and operating expenses in
the future will increase substantially.
Year Ended December 29, 1998 Compared to the Year Ended December 30, 1997
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------- PERCENTAGE OF REVENUE
DECEMBER 29, DECEMBER 30, --------------------------
1998 1997 1998 1997
----------------- ---------------- ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $6,520 $ 1,868 100.0% 100.0%
Cost of sales
Food and beverage 2,570 627 39.4% 33.6%
Payroll and payroll related costs 2,002 757 30.7% 40.5%
Direct operating costs 1,441 400 22.1% 21.4%
Depreciation and amortization 148 222 2.3% 11.9%
----------------- ---------------- ------------ ------------
Gross profit 359 (138) 5.5% (7.4%)
Cost and expenses
General and administrative 2,220 351 34.0% 18.8%
Pre-opening costs - 65 - 3.5%
----------------- ---------------- ------------ ------------
Loss before other income (expense) (1,861) (554) (28.5%) (29.7%)
Other income (expense)
Interest income 68 - 1.0% -
Interest and financing costs (885) (523) (13.6%) (28.0%)
----------------- ---------------- ------------ ------------
Loss before taxes (2,678) (1,077) (41.1%) (57.7%)
Provision for taxes 6 - 0.1% -
----------------- ---------------- ------------ ------------
Loss before extraordinary item (2,684) (1,077) (41.2%) (57.7%)
Extraordinary loss 278 - 4.2% -
----------------- ---------------- ------------ ------------
Net loss $ (2,962) (1,077) (45.4%) (57.7%)
================= ================ ============ ============
</TABLE>
20
<PAGE>
Revenues for the year ended December 29, 1998 increased $4,652,000 or
249.0% from $1,868,000 for the year ended December 30, 1997 to $6,520,000 for
the same period in 1998. The 249.0% increase is attributed to the acquisition of
Paragon. Revenue from the Company's original restaurants actually decreased by
$602,000 principally due to the closing of the Torrance restaurant for
remodeling and the partial remodeling of the Fullerton restaurant. Revenues in
the future will increase substantially over the revenues historically reported
by the Company due to the twenty-fold increase in the number of restaurants
owned by the Company.
Food and beverage costs for the year ended December 29, 1998 increased
$1,943,000 or 309.9% from $627,000 for the year ended December 30, 1997 to
$2,570,000 for the same period in 1998. Food and beverage costs as a percentage
of revenues was 33.6% for the year ended December 30, 1997 compared to 39.4% for
the same period in 1998. This increase is a result of the acquisition of
Paragon's subsidiary Pacific Basin Foods, Inc. whose profit margin on the sale
of food products to restaurants is significantly less than the margin that can
be obtained from restaurant sales.
Payroll and payroll related costs for the year ended December 29, 1998
increased $1,245,000 or 165.5% from $757,000 for the year ended December 30,
1997 to $2,002,000 for the same period in 1998. Payroll and payroll related
costs as a percentage of revenues was 40.5% for the year ended December 30, 1997
compared to 30.7% for the same period in 1998. The decrease is principally due
to the acquisition of Paragon whose payroll costs as a percentage of revenue are
less than those of previously experience by the Company due to the economies of
scales of operating more restaurants. The Company expects payroll and related
costs as a percentage of revenue to be approximately 30% in the future.
Direct operating costs 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. Direct operating
costs for the year ended December 29, 1998 increased $1,041,000 or 260.3% from
$400,000 for the year ended December 30, 1997 to $1,441,000 for the same period
in 1998. These costs as a percentage of restaurant revenues were 21.4% for the
year ended December 30, 1997 compared to 22.1% for the same period in 1998. Even
with the acquisition of Paragon, the Company expects direct operating expenses
to remain approximately 21.5% of revenues.
Depreciation and amortization for the year ended December 29, 1998
decreased $74,000 or 33.3% from $222,000 for the year ended December 30, 1997 to
$148,000 for the same period in 1998. Depreciation and amortization will
increase in the future due to the significant increase in the fixed assets being
depreciated as a result of the Paragon purchase.
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<PAGE>
General and administrative expenses for the year ended December 29,
1998 increased $1,869,000 or 532.5% from $351,000 for the year ended December
30, 1997 to $2,220,000 for the same period in 1998. General and administrative
expenses as a percentage of restaurant revenues was 18.8% for the year ended
December 30, 1997 compared to 34.1% for the same period in 1998. This increase
in the actual amount is due to the acquisition of Paragon. The significant
increase as a percentage of revenue is due to the decline in restaurant revenues
while the remodeling of the two restaurants was undertaken, higher legal and
accounting costs due to the Company being a publicly traded company, and
increased compensation to senior management.
Pre-opening startup costs for the year ended December 29, 1998
decreased $65,000 or 100% from $65,000 for the year ended December 30, 1997 to
$0 for the same period in 1998. The adoption of Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" had minimal impact on the
Company, because it was generally the Company's policy to expense all start up
costs.
Net interest expense for the year ended December 29, 1998 increased
$294,000 or 56.2% from $523,000 for the year ended December 30, 1997 to $817,000
for the same period in 1998. The increase is principally due to interest charges
taken by the Company as a result of the conversion of $92,000 in convertible
debentures in July 1998 and the issuance of $1,100,000 of debt in July,
September and December 1998 that can be converted into common stock at 85% of
the market price at the date of conversion.
The extraordinary loss reported by the Company for the year ended
December 29, 1998 was due to the Company converting $1,112,500 of Private
Placement Notes Payable into shares of common stock at $4 per share.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 29, 1998 and December 30, 1997 the
Company has used, rather than provided, cash from operations of $4,575,000 and
$573,000, respectively. To finance its working capital deficit, the Company has
raised approximately, $4 million, net of commissions and expenses, from its
initial public offering in February 1998 and has raised approximately $5 million
from the issuance of debt from July to December 1998. Since doing public, the
Company's senior management has focused most of their attention on the
acquisition of Paragon. A significant portion of the equity and debt raised in
1998 was used to pay the purchase price and related transaction costs associated
with the acquisition of Paragon and to a lessor degree to fund the Company's
operating loss.
As a result of the completion of the initial public offering in
February 1998, and the issuance of debt in July, September and December, 1998,
the Company has a cash and cash equivalents balance of $755,141 at December 29,
1998, which together with anticipated cash from operations, management believes
is sufficient to cover operations for at least the next twelve 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 is currently in the process of obtaining additional
financing to repay an approximate $20.4million loan that is collateralized by 19
restaurants owned by the Company. The Company is currently in default of certain
loan covenants associated with this loan. The Company is negotiating a
sales-leaseback transaction that will provide the Company enough money to repay
the existing debt on the 19 restaurants and provide favorable lease rates for a
substantial period of time.
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations
include food and labor costs. The Company's restaurant personnel are paid at the
federal and state established minimum wage levels and accordingly, changes in
such wage level affect the Company' s labor costs. As costs of food and labor
have increased, the Company will be seeking to offset those increases through
economics of scale and/or increases in menu prices, although there is no
assurance that such offsets will continue. To date inflation has not had a
material impact on loss from operations.
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<PAGE>
YEAR 2000
The Company has begun to make 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 current accounting and restaurant management
systems, principally those acquired with the acquisition of Paragon has been
determined not to be Year 2000 compliant. The Company is in the process of
selecting a new accounting and restaurant management system that will be Year
2000 compliant. The software being considered by the Company is not expected to
require significant programming changes to meet the Company's needs. The Company
estimates the cost of a new accounting and restaurant management system to be
$250,000. If the Company is unable to convert to the new software in a timely
manner, the impact could be material to the Company's financial position and
results of operations. 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
judgment 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.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, amended. Stockholders are cautioned
that all forward-looking statements involve risks and uncertainty, including
without limitation, the ability of the Company to open new restaurants, general
market conditions, competition and pricing. Although the Company believes the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements contained in the report will
prove to be accurate.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements of Galveston's Steakhouse Corp.
and its subsidiaries, including the notes thereto and the report of independent
accountants thereon, commence at page F-1 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
24
<PAGE>
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS.
The following table sets forth the name, age and position with the
Company of each officer and director of the Company as of the date of this
Report.
The current directors, executive officers and key personnel of the
Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - -------------------------------------------------- --- ------------------------------------
<S> <C> <C>
Mr. Richard M. Lee................................ 32 Chairman of the Board and Chief
Executive Officer
Mr. Hiram J. Woo.................................. 63 President, Secretary, 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
</TABLE>
MR. RICHARD M. LEE has been the Chairman of the Board and Chief
Executive Officer of the Company since its inception in 1996. Mr. Lee began his
business career upon graduating high school at the age of 17, founding his first
company with a total of $3,500 of seed capital. By the age of 22, Mr. Lee was
recognized as a "young-millionaire" entrepreneur by the University of Southern
California. In addition, Mr. Lee was one of the youngest inductees into the
Young Presidents Organization of America. Mr. Lee has been featured in numerous
industry, local and national media publications. He was featured as a model
entrepreneur in the university textbook, Contemporary Business (Dryden Press:
1990). From 1983 to 1990, Mr. Lee was the founder and President of Audio-Chamber
International, Inc. based in Orange County, California, a manufacturer of high-
fidelity mobile sound systems. In 1990, Mr. Lee sold Audio-Chamber
International, Inc. to actively invest in real estate and securities. From 1991
to 1992, Mr. Lee co-founded and co-managed Aristotle Investments Ltd. as its
chief strategist for investments in franchise restaurant acquisitions. From 1992
to May 1996, Mr. Lee was the co-founder and Chairman/CEO of China Coast Foods,
Inc., a company formed to explore opportunities in the food industry in the
Peoples Republic of China. Mr. Lee has also been involved with and invested in
franchised restaurants, including, for example, Domino's Pizza Restaurants and
Popeyes Famous Fried Chicken. Since June 1996, Mr. Lee has devoted substantially
all his working time and energies to the affairs of the Company.
25
<PAGE>
MR. HIRAM J. WOO has been the President, Secretary and a director of
the Company since its inception. Since 1976, he has owned and operated Hiram J.
Woo Accountancy Corporation, a San Francisco-based accounting firm with numerous
restaurateurs among his clients. Over the past 14 years, Mr. Woo has actively
invested in, owned or reorganized and restructured various restaurants, ranging
from large-scale casual dining establishments to night clubs to bar and grill
operations. In 1980, Mr. Woo founded and has since managed Regal Financial
Development Corporation ("RFDC"), a real estate development and planning firm
based in San Francisco. In the past 14 years, RFDC has managed over $300 million
of real estate development projects in the Western United States. From 1992 to
1996, Mr. Woo has owned and operated several large-scale restaurants in the San
Francisco area. Mr. Woo is active among the local Chinese community and has
served as a director of two Chinese-American financial institutions and several
business organizations. Mr. Woo is a Certified Public Accountant. Mr. Woo is a
past director of the Chinese Resources Development Center of San Francisco, a
past president of Park Presidio Optimist Club, and a member of the San
Francisco, Fairfield and Vacaville Chambers of Commerce.
MR. 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
26
<PAGE>
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.
No director or executive officer of the Company is related to any other
director or executive officer. Except for Mr. Lindner's positions as a director
of Bay-Con, Inc. and Magnum Cinema, LLC, none of the Company's officers or
directors hold any directorships in any other public company. There are
currently three outside directors on the Company's Board of Directors. The
Company's compensation committee is comprised of Messrs. Lindner, Goudge and
Edler. The Company's audit committee is comprised of Messrs. Woo, Goudge and
Edler.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16 (a) of the Securities Exchange Act of 1934, and
the rules issued thereunder, the Company's directors and executive officers are
required to file with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. reports of ownership and changes in
ownership of Common Stock and other equity securities of the Company. Copies of
such reports are required to be furnished to the Company. Based solely on a
review of the copies of such reports furnished to the Company, or written
representations that no other reports were required, the Company believes that,
during the Company's fiscal year ended December 31, 1998, all of its executive
officers and directors complied with the requirements of Section 16 (a).
27
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the annual compensation paid to
executive officers of the Company for the three fiscal years ended December 29,
1998.
<TABLE>
<CAPTION>
Long Term Compensation
Name and Other Annual Awards - Securities All Other
Principal Position Year Salary($) Bonus($) Compensation(2) Underlying Options (#) Compensation
- - ------------------- ---- --------- -------- --------------- ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Lee 1998 $ 100,000 $294,689 15,892 201,000 0
Chairman of the 1997 $ 100,000 0 5,809 - 0
Board and Chief 1996 $ 50,000 0 2,421 82,500 0
Executive Officer
Hiram J. Woo 1998 $ 80,000 $111,567 7,870 134,000 0
President and Chief 1997 $ 80,000 0 1,968 - 0
Financial Officer 1996 $ 45,000 0 0 82,500 0
David N. Treat 1998 $ 3,333 0 0 75,000 0
Senior Director of 1997 0 0 0 0 0
Operations (1) 1996 0 0 0 0 0
<FN>
- - -----------------------
(1 Mr. Treat commenced employment with the Company in December 1998.
(2) Other annual compensation consists in each case of the car allowance paid by
the Company for the named executive officer.
</FN>
</TABLE>
28
<PAGE>
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table contains information concerning stock option grants
made to each of the named executive officers in fiscal 1998. No stock
appreciation rights were granted to these individuals during such year.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Number of Securities Percent of Total Options
Underlying Options Granted to Employees in
Name Granted (#) Fiscal Year Exercise Price ($/Sh) Expiration Date
- - --------------- -------------------- ------------------------ ------------------------- ---------------
<S> <C> <C> <C> <C>
Richard M. Lee 201,000 49.0% 32,000 options with an August 2008
exercise price of $3.4375
169,000 options with an
exercise price of $3.125
Hiram J. Woo 134,000 32.7% $3.125 August 2008
David N. Treat 75,000 18.3% $4.96 December 2004 -
December 2008
</TABLE>
29
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option exercises
and option holdings for the fiscal year 1998 with respect to each of the named
executive officers. No named executive officers exercised any options during
such year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-
END OPTION VALUES
<TABLE>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-money
Shares Acquired Value Options at Fiscal Year End (#) Options at Fiscal Year End ($)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
- - ---------------- --------------- ------------ ------------------------------ ---------------------------------
<S> <C> <C> <C> <C>
Richard M. Lee 0 0 82,500 exercisable/ $486,750 exercisable/
201,000 unexercisable $678,375 unexercisable
Hiram J. Woo 0 0 82,500 exercisable/ $486,750 exercisable/
134,000 unexercisable $678,375 unexercisable
David N. Treat 0 0 0 exercisable/ $0 exercisable/
75,000 unexercisable $ 65,250 unexercisable
</TABLE>
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.
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 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
30
<PAGE>
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 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.
LIMITS ON LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation eliminates the personal
liability of its directors to the Company and its stockholders for monetary
damages for breach of the directors' fiduciary duties in certain circumstances.
The Certificate of Incorporation further provides that the Company will
indemnify its officers and directors to the fullest extent permitted by law. The
Company believes that such indemnification covers at least negligence and gross
negligence on the part of the indemnified parties. Insofar as indemnification
for liabilities 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.
31
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of December 29, 1998, 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 executive officers as a group.
<TABLE>
<CAPTION>
Number Percentage
of Shares (1) Beneficially Owned (7) (8)
------------- --------------------------
<S> <C> <C>
Richard M. Lee (2) (7).................................... 339,420 12.2%
Hiram J. Woo (3) (8)...................................... 240,042 8.7%
Tom Edler (4)............................................. 0 0%
Mark W. Goudge (5)........................................ 0 0%
Tod Lindner (6)........................................... 0 0%
All officers and directors as a group
(5 persons) (7) (8).................................... 579,462 20.9%
<FN>
- - ----------------------
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed above, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable.
(2) Does not include an aggregate of 1,000,000 shares of Series B
Convertible Preferred Stock issued to Richard M. Lee, which shares have
rights to vote with the Common Stock as one class on a
one-vote-per-share basis. After giving effect to such Series B
Convertible Preferred Stock, Mr. Lee currently holds 34.8% 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 201,000
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 134,000 shares of Common Stock.
(4) Mr. Edler's business address is c/o Grubb & Ellis Company, 770 L
Street, Suite 700, Sacramento, California.
(5) Mr. Goudge's business address is 24422 Avenida de la Carlta, Suite 400,
Laguna Hills, California 92653.
(6) Mr. Lindner's business address is 17 E. Sir Francis Drake Boulevard,
Suite 230, Larkspur, California 94939.
(7) Includes the assumed exercise of options to purchase 82,500 shares
which are exercisable within 60 days by Mr. Lee.
(8) Includes the assumed exercise of options to purchase 82,500 shares
which are exercisable within 60 days by Mr. Woo.
</FN>
</TABLE>
32
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
EMPLOYMENT AGREEMENTS
The Company has entered into separate Employment Agreements with
Richard M. Lee, Hiram J. Woo and David N. Treat. See "Employment Agreements."
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 embodies
terms no less favorable to the Company than those that could have been obtained
from unaffiliated parties. Any ongoing or future transactions between the
Company and its officers, directors, principal stockholders, or other affiliates
will be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties on an arms-length basis and will be approved by a
majority of the Company's independent and disinterested directors. Any future
loans to officers, directors, principal stockholders, or affiliates will be made
for a bonafide business purpose, on terms no less favorable than could be
obtained from unaffiliated third parties and will be approved by a majority of
the Company's independent and disinterested directors.
33
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following exhibits are filed as part of this Report:
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.
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.
34
<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
among 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
among 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
among 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.
10.29**** Secured Exchangeable Note dated September 28, 1998 in the
principal amount of $650,000 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.
35
<PAGE>
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.
10.38***** Secured Exchangeable Note dated December 21, 1998 in the principal
amount of $1,350,000 issued to Talisman Capital Opportunity Fund
Ltd.
10.39***** Employment Agreement between the Company and David N. Treat dated
December 15, 1998.+
16.0* Letter re: Change of Certifying Accountant.
23.1**** Consent of Singer Lewak Greenbaum & Goldstein 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.
**** Incorporated by reference from Registration Statement on Form SB-2 (File
#333-69137)
***** Filed herewith
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
REPORTS ON FORM 8-K
None.
36
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GALVESTON'S STEAKHOUSE CORP.
/s/Richard M. Lee
----------------------------------
Richard M. Lee
Chairman of the Board of Directors
and Chief Executive Officer
In accordance with the requirements of the Exchange Act, this
report is signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Name and Capacity Date
- - ----------------- ----
/s/ Richard M. Lee April 13, 1999
- - --------------------------------------------
Name: Richard M. Lee
Title: Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ Hiram J. Woo April 13, 1999
- - --------------------------------------------
Name: Hiram J. Woo
Title: President, Secretary, Director and
Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Tom Edler April 13, 1999
- - --------------------------------------------
Name: Tom Edler
Title: Director
/s/ Mark W. Goudge April 13, 1999
- - --------------------------------------------
Name: Mark W. Goudge
Title: Director
/s/ Tod Lindner April 13, 1999
- - --------------------------------------------
Name: Tod Lindner
Title: Director
37
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 29, 1998 AND DECEMBER 30, 1997
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONTENTS
December 29, 1998
- - -------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2 - F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Galveston's Steakhouse Corp. and subsidiaries
We have audited the accompanying consolidated balance sheet of Galveston's
Steakhouse Corp. and subsidiaries (a Delaware corporation) as of December 29,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
29, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Galveston's Steakhouse Corp. and subsidiaries as of December 29, 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended December 29, 1998 in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended
December 29, 1998, the Company maintained a current ratio of 0.23-to-1, which
arose from a working capital deficit of $39,122,838. In addition, the Company is
in default with secured financing as of December 29, 1998. Recovery of the
Company's assets is dependent upon future events, the outcome of which is
indeterminable. In addition, successful completion of the Company's transition,
ultimately, to the attainment of profitable operations is dependent upon
obtaining adequate financing to fulfill its development activities and achieving
a level of sales adequate to support the Company's cost structure. These
factors, among others, as discussed in Note 1 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 31, 1999
F-1
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 29, 1998
- - -------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Current assets
Cash and cash equivalents $ 755,141
Accounts receivables, net of allowance for doubtful accounts
of $34,801 4,897,815
Inventories 5,555,289
Prepaid expenses and other current assets 1,011,056
------------
Total current assets 12,219,301
Property and equipment, net 52,100,123
Other assets
Intangible assets, net 483,920
Other 612,204
Note receivable 500,000
Cash - restricted under collateral agreements 1,531,429
------------
Total assets $ 67,446,977
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 29, 1998
- - -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current liabilities
Current portion of long-term debt $ 23,280,008
Current portion of capital lease obligations 1,140,676
Accounts payable 8,868,092
Accrued liabilities 2,807,048
Unearned revenue 6,039,984
Reserve for self insurance claims 2,507,991
Reserve for settlement 1,313,000
Sales and property taxes payable 1,557,566
Accrued payroll costs 3,827,774
------------
Total current liabilities 51,342,139
Long-term debt, net of current portion 4,010,705
Capital lease obligations, net of current portion 8,288,125
Deferred taxes 207,583
Deferred rent 2,046,720
------------
Total liabilities 65,895,272
------------
Commitments and contingencies
Stockholders' equity
Preferred stock, Series B, Convertible, $0.001 par value
1,000,000 shares authorized
1,000,000 shares issued and outstanding 1,000
Common stock, $0.01 par value
10,000,000 shares authorized
2,428,325 shares issued and outstanding 24,283
Additional paid-in capital 6,508,669
Accumulated deficit (4,982,247)
------------
Total stockholders' equity 1,551,705
Total liabilities and stockholders' equity $ 67,446,977
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 29, 1998 and December 30, 1997
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 6,519,421 $ 1,867,671
------------ ------------
Cost of sales
Food and beverage 2,569,457 627,165
Payroll and payroll related costs 2,001,542 757,232
Direct operating costs 1,441,367 400,217
Depreciation and amortization 148,156 221,737
------------ ------------
Total cost of sales 6,160,522 2,006,351
------------ ------------
Gross profit (loss) 358,899 (138,680)
------------ ------------
Costs and expenses
General and administrative expenses 2,219,992 350,945
Pre-opening start-up costs - 65,155
------------ ------------
Total costs and expenses 2,219,992 416,100
------------ ------------
Loss before other income (expense) (1,861,093) (554,780)
------------ ------------
Other income (expense)
Interest income 68,495 -
Interest and financing costs (884,961) (523,187)
------------ ------------
Total other income (expense) (816,466) (523,187)
------------ ------------
Loss before provision for income taxes (2,677,559) (1,077,967)
Provision for income taxes 6,044 -
------------ ------------
Loss before extraordinary item (2,683,603) (1,077,967)
Extraordinary loss on debt extinguishment (278,125) -
------------ ------------
Net loss $ (2,961,728) $ (1,077,967)
============ ============
Basic and diluted loss per share before extraordinary item $ (1.26) $ (1.36)
============ ============
Extraordinary loss per share $ (0.13) $ -
============ ============
Basic and diluted loss per share after extraordinary item $ (1.39) $ (1.36)
============ ============
Weighted-average shares outstanding 2,135,241 790,296
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 29, 1998 and December 30, 1997
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
Series B, Convertible Common Stock Additional
--------------------- -------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ------ ------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,000,000 $1,000 713,849 $ 7,138 $ 169,225 $ (942,552) $ (765,189)
Issuance of common stock in connection
with $150,000 bridge loans 30,000 300 149,700 150,000
Issuance of common stock for services
rendered 24,950 249 124,481 124,730
Issuance of common stock in connection
with private placement 56,201 563 23,157 23,720
Capital contribution 130,000 130,000
Net loss (1,077,967) (1,077,967)
---------- ------ --------- ---------- ----------- ----------- -----------
Balance, December 30, 1997 1,000,000 1,000 825,000 8,250 596,563 (2,020,519) (1,414,706)
Issuance of common stock in connection
with initial public offering 1,250,000 12,500 6,487,500 6,500,000
Issuance costs (2,532,603) (2,532,603)
Conversion of promissory notes 333,325 3,333 1,201,167 1,204,500
Issuance of stock in lieu of interest 20,000 200 99,800 100,000
Interest from fixed conversion features 378,117 378,117
Extraordinary loss on debt extinguishment 278,125 278,125
Net loss (2,961,728) (2,961,728)
---------- ------ --------- ---------- ----------- ----------- -----------
Balance, December 29, 1998 1,000,000 $1,000 2,428,325 $ 24,283 $ 6,508,669 $(4,982,247) $ 1,551,705
========== ====== ========= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 29, 1998 and December 30, 1997
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (2,961,728) $ (1,077,967)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 148,156 221,737
Interest paid with common stock 100,000 -
Interest charges on convertible debt 378,117 -
Non-cash bonuses paid to officers 406,256 -
Loss on debt extinguishment 278,125 -
Amortization of discount on private placement proceeds - 117,748
Issuance of common stock in exchange for services
rendered - 124,730
(Increase) decrease in
Accounts receivable (1,126,342) (112,170)
Advances to officers (226,517) (144,349)
Inventories 235,998 4,880
Prepaid expenses and other current assets (8,864) (4,027)
Other assets (404,904) 14,321
Intangibles, net 183,438 (15,000)
Increase (decrease) in
Accounts payable (1,985,311) (643)
Accrued liabilities 269,740 238,170
Unearned revenue 476,165 -
Reserve for self insurance claims 21,273 -
Sales and property taxes payable 134,659 -
Accrued payroll costs (492,168) 44,690
Deferred rent (923) -
------------ ------------
Net cash used in operating activities (4,574,830) (587,880)
------------ ------------
Cash flows from investing activities
Purchases of property and equipment (355,846) (29,129)
Increase in other current assets - (72,861)
Acquisition of Paragon Steakhouse Restaurants, Inc. and
subsidiaries and Pacific Basin Foods, Inc., net of cash
acquired (2,054,596) -
Execution of note receivable (500,000) -
------------ ------------
Net cash used in investing activities (2,910,442) (101,990)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 29, 1998 and December 30, 1997
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from financing activities
Proceeds from issuance of debt $ 5,096,367 $ 701,282
Principal payments on debt (1,184,924) -
Proceeds from issuance of common stock 6,500,000 23,720
Cash paid for offering costs (2,235,756) (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 8,175,687 708,157
------------ ------------
Net increase in cash and cash equivalents 690,415 18,287
Cash and cash equivalents, beginning of year 64,726 46,439
------------ ------------
Cash and cash equivalents, end of year $ 755,141 $ 64,726
============ ============
Supplemental disclosures of cash flow information
Interest paid $ 501,666 $ 13,523
============ ============
Income taxes paid $ 6,044 $ -
============ ============
</TABLE>
Supplemental schedule of non-cash investing and financing activities
During the year ended December 29, 1998, debt holders of the Company converted
$1,112,500 of promissory notes to 278,125 shares of the Company's common stock.
During the year ended December 29, 1998, the Company relieved advances to
officers in the form of bonuses aggregating $406,256.
During the year ended December 29, 1998, the Company issued a note payable in
the amount of $600,000 as part of consideration for the purchase of Paragon
Steakhouse Restaurants, Inc. and subsidiaries.
During the year ended December 29, 1998, the Company issued 20,000 shares of
common stock in payment of interest valued at $100,000.
During the year ended December 29, 1998, debt holders converted convertible
promissory notes in the amount of $92,000 to 55,200 shares of the Company's
common stock.
During the year ended December 29, 1998, the Company executed three promissory
notes aggregating $393,285 for the purchase of restaurants and their related
assets.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1998
- - -------------------------------------------------------------------------------
NOTE 1 - GOING CONCERN MATTERS
Basis of Presentation
The accompanying consolidated financial statements have been prepared
on a going concern basis which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
As shown in the financial statements, during the year ended December
29, 1998, the Company (as defined in Note 2) maintained a current ratio
of 0.23-to-1, which arose from a working capital deficit of
$39,122,838. In addition, the Company's cash flow requirements have
been met by the generation of capital through debt and equity
securities. No assurance can be given that this source of financing
will continue to be available to the Company and demand for the
Company's equity instruments will be sufficient to meet its capital
needs. If the Company is unable to generate profits and unable to
continue to obtain financing for its working capital requirements, it
may have to curtail its business sharply or cease business altogether.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis, to retain its current financing, to obtain additional
financing, and ultimately to attain profitability.
Management has evaluated its current operations, and it has focused the
Company's efforts and developed plans to generate operating income to
continue the Company's operations through the year ended December 1999.
Management's plans include the following:
1. Restructuring its long-term debt position.
2. Improving the Company's financial performance through
cost-reduction and restructuring of administrative overhead.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background and Operations
Galveston's Steakhouse Corp., a Delaware corporation was incorporated
on June 3, 1996 under the name "Texas Loosey's Steakhouse & Saloon,
Inc." On December 19, 1996, the Board of Directors adopted a resolution
to change its name to "Galveston's Steakhouse Corp." Up until December
18, 1998, Galveston's Steakhouse Corp. owned two steakhouse restaurants
and operated two others in Southern California which together formerly
comprised all of the restaurants known as "Texas Loosey's Chili Parlor
& Saloon" ("Texas Loosey's").
F-8
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1998
- - -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Company Background and Operations (Continued)
Galveston's Steakhouse Corp. first acquired two Texas Loosey's
restaurants on August 19, 1996 pursuant to an Asset Purchase Agreement,
dated April 10, 1996, which was subsequently amended on November 1,
1998, and is to close escrow on the remaining two Texas Loosey's
restaurants on May 1, 2000. Galveston's Steakhouse Corp. has converted
one of the restaurants into a Galveston's Steakhouse Restaurant
reminiscent of the late 1950's and early 1960's with popular rock `n'
roll music from that period, which offers high quality, reasonably
priced, mesquite-grilled steak, fresh fish, hamburgers, chicken, and
other specialty items to a diverse clientele.
On December 21, 1998, Galveston's Steakhouse Corp. acquired Paragon
Steakhouse Restaurants, Inc. and subsidiaries (Paragon of Michigan,
Inc., Paragon of Nevada, Inc., and Paragon of Wisconsin, Inc.)
(collectively, "PSR") through its acquisition of all of the outstanding
capital stock of PSR. PSR owns and operates 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
Galveston's Steakhouse Corp. and subsidiaries, PSR, and PBF
(collectively, the "Company"). Significant intercompany amounts and
transactions have been eliminated in consolidation.
Fiscal Year-End
The Company reports its operations on a 52-53 week fiscal year ending
on the Tuesday closest to December 31. The current fiscal year ended on
December 29, 1998.
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.
F-9
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1998
- - -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
The Company maintains its cash deposits at numerous banks located
throughout the United States. Deposits at each bank are insured by the
Federal Deposit Insurance Corporation up to $100,000. As of December
29, 1998, uninsured portions of the balances at those banks aggregated
to $3,791,338. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant risk on cash
and cash equivalents.
Unearned Revenue
The Company sells gift certificates and recognizes a liability,
included in unearned revenue, for gift certificates outstanding until
the gift certificate is redeemed or deemed to have expired.
Advertising and Promotional Costs
Advertising and promotional costs are charged to expense as incurred.
Advertising and promotional costs for the years ended December 29, 1998
and December 30, 1997 were $63,129 and $42,638, 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.
Inventories
Inventories, consisting principally of food, beverages, and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property 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.
F-10
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1998
- - -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangibles
Intangibles consist of covenants not to compete, franchise contracts,
and goodwill. The covenants not to compete and franchise contracts are
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 Rent
The leases on various facilities include certain rent relief and
scheduled increasing monthly payments thereafter. In accordance with
generally accepted accounting principles, the Company has accounted for
the lease to provide for even charges to operations over the life of
the lease.
Segment Reporting
The Company accounts for segments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company's
reportable segments are strategic business units that offer different
products and services (see Note 14).
Stock-Based Compensation
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.
F-11
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1998
- - -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
For the year ended December 29, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards
for reporting comprehensive income and its components in a financial
statement. Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Examples of
items to be included in comprehensive income, which are excluded from
net income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's financials
statements since the Company did not have any of the items of
comprehensive income in any period presented.
Recently Issued Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for financial statements with fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not expect adoption of SFAS No. 133 to
have a material effect, if any, on its financial position or results of
operations.
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," is effective for financial statements with the
first fiscal quarter beginning after December 15, 1998. The Company
does not expect adoption of SFAS No. 134 to have a material effect, if
any, on its financial position or results of operations.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," is effective for financial statements with fiscal years
beginning February 1999. This statement is not applicable to the
Company.
Reclassifications
Certain amounts in the 1997 financial statements have been reclassified
to conform with the current year presentation.
F-12
<PAGE>
GALVESTON'S STEAKHOUSE CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1998
- - -------------------------------------------------------------------------------
NOTE 2 - 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 Financial Accounting Standards Board ("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. As
such, basic and diluted loss per share are the same.
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 receivable, 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.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29, 1998
- - -------------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 29, 1998 consisted of the following:
Land $ 11,832,771
Buildings and improvements 25,949,066
Furniture, fixtures, and equipment 5,590,789
Leased property under capital leases 9,985,803
------------
53,358,429
Less accumulated depreciation and amortization 3,527,632
------------
49,830,797
Small kitchenwares 2,269,326
------------
Total $ 52,100,123
============
NOTE 4 - INTANGIBLES
Intangibles at December 29, 1998 consisted of the following:
Goodwill $ 313,000
Covenants not to compete 75,000
Franchise contract 145,000
Other 70,000
------------
603,000
Less accumulated amortization 119,080
------------
Total $ 483,920
============
NOTE 5 - NOTE RECEIVABLE
In order to obtain a letter of credit required by one of the Company's
lessors, the Company was required to place a $500,000 deposit with the
issuer of the letter of credit. The Company in turn was able to secure
its deposit with the issuer of the letter of credit with a
non-negotiable promissory note that bears no interest.
F-14
<PAGE>
NOTE 6 - LONG-TERM DEBT
As of December 29, 1998, long-term debt consisted of the following:
<TABLE>
<S> <C>
Convertible debt (see Note 9). $ 1,100,000
Secured exchangeable notes (see Note 8). 2,000,000
10.39% mortgage loan collateralized by the majority of the
Company's property and equipment, due in monthly
installments of principal and interest through September
2011 (see Note 7). The Company is currently in default on
this obligation. 20,431,383
Prime (7.75% at December 29, 1998), plus 1.25% revolving
credit line collateralized by substantially all of the
tangible assets and accounts receivable of PBF (see Note 7). 1,646,369
Notes payable to 1997 private placement investors. Principal
and accrued interest at 8%. Additionally, for each $25,000
note, these investors received 2,698 shares of the
Company's common stock. 15,000
Note payable to the former owner in the amount of $870,000,
bearing interest at 8% per annum. Monthly principal and
interest payments of $10,912 are due from February 19,
1998 through July 19, 2001, with the remaining principal
balance due via a balloon payment on August 19, 2001. 844,096
Note payable in the amount of $600,000 bearing interest at
6.9% per annum from the original note date (December 21,
1998). The note has been executed and delivered pursuant
to and in accordance with the terms and conditions of the
business combination described in Note 13. The principal
amount of the note shall be due in one installment on
December 21, 1999. Interest on the principal balance of
this note shall be due and payable quarterly. 600,000
Note payable, dated December 21, 1998, due in one year,
bearing no interest. The note requires the Company to
issue 50,000 shares of common stock upon maturity of the
note. 80% of the proceeds on unearned shares (up to a
maximum of 25,000 shares) are to be returned to the
Company upon early payment of the note. 250,000
</TABLE>
F-15
<PAGE>
NOTE 6 - LONG-TERM DEBT (Continued)
<TABLE>
<S> <C>
Note payable, dated December 21, 1998, due in one year,
bearing no interest. The note requires the Company to
issue 20,000 shares of common stock upon maturity of the
note. 80% of the proceeds on unearned shares are to be
returned to the Company upon early payment of the note. $ 100,000
Note payable, dated March 1, 1997, bearing interest at 11.25%
per annum with an original principal of $125,373 and
maturing on May 1, 2000. The note requires monthly
payments of $4,063 and is secured by the assets of
two restaurants. 53,943
Note payable, dated March 1, 1997, bearing interest at 11.25%
per annum with an original principal of $230,997 and
maturing on May 1, 2000. The note requires monthly
payments of $3,895 and is secured by the assets of
two restaurants. 188,746
Unsecured note payable, dated December 1, 1998, bearing no
interest with an original principal of $131,249 and
maturing on February 28, 2000. 61,176
27,290,713
Less current portion 23,280,008
-----------
Long-term portion $ 4,010,705
===========
</TABLE>
The maturities of long-term debt for the years succeeding December 29,
1998, are as follows:
Year Ending
December
----------
1999 $23,280,008
2000 388,497
2001 1,230,944
2002 130,944
2003 2,130,944
Thereafter 129,376
-----------
Total $27,290,713
===========
F-16
<PAGE>
NOTE 7 - LINE OF CREDIT AND SECURED FINANCING
On December 21, 1998, PBF entered into a $6,000,000 revolving line of
credit (the "Revolver") with a financing company. The Revolver bears
interest at prime, plus 1.25%. Borrowings and required payments under
the Revolver are based upon a formula utilizing accounts receivable and
inventories. The revolver is collateralized by substantially all of
PBF's tangible property and accounts receivable. The Parent ("GSC") has
also pledged as additional collateral a $250,000 certificate of
deposit. The Revolver was used to pay down accounts payable and advance
funds to Parent and for working capital requirements. The terms of the
Revolver include specific financial covenants, restrictions on loans to
Parent and other affiliates, and maintenance of a specified level of
tangible net worth. The Company was in compliance with these covenants
at December 29, 1998.
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 in 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 the
improvements thereon. The Mortgage proceeds were 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 December 29, 1998, the Company is not
in compliance with certain financial ratio loan covenants and therefore
has reclassified the entire loan balance as current.
NOTE 8 - SECURED EXCHANGEABLE NOTES
On September 29, 1998, the Company issued a secured exchangeable note
of $650,000 that provides warrants for the purchase of outstanding
shares of the Company's common stock at any time during the period
commencing on the date of the note through September 23, 2003 at an
exercise price per share equal to $6. The warrants may be
exercised whole or in part. Interest on the note at 14.75% per annum
based on a 360-day year will accrue from the date of the note and is
payable upon exchange of the note into common stock. The coupon rate of
the note shall increase by 2.25% every 360 days, up to a maximum of
25%. The note may also be exchanged for the Company's common stock at
an exchange price equal to a predetermined formula.
F-17
<PAGE>
NOTE 8 - SECURED EXCHANGEABLE NOTES (Continued)
On December 21, 1998, the Company issued a secured exchangeable note of
$1,350,000 that provides warrants for the purchase of outstanding
shares of the Company's common stock at any time during the period
commencing on the date of the note through September 28, 2003 at an
exercise price per share equal to $5.28125. The warrants may be
exercised whole or in part. Interest on the note at 12% per annum based
on a 360-day year will accrue from the date of the note and is payable
upon exchange of the note into common stock. The coupon rate of the
note shall increase by 2.25% every 360 days, up to a maximum of 25%.
The note may also be exchanged for the Company's common stock at an
exchange price equal to a predetermined formula.
NOTE 9 - CONVERTIBLE DEBT
The Company issued convertible debt, as summarized below, payable to
various individuals, which is convertible at the option of the holder
to the Company's common stock. Interest at 6% per annum is payable on a
quarterly basis. If the note holders elect to covert their debt to
common stock, the conversion price for each share shall equal 85% of
the average closing price of the Company's common stock for the five
days preceding the conversion date. The debt was convertible to an
aggregate of approximately 167,000 shares of common stock at December
29, 1998.
The Company had convertible debt in the amount of $92,000 at December
30, 1997, payable to various individuals, which converted to the
Company's common stock upon the successful completion of the Company's
initial public offering ("IPO"). All note holders elected to convert
their debt to equity. The note holders received 55,200 shares of the
Company's common stock. Consequently, the note holders received common
stock worth $276,000 in the aggregate. The Company recorded 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 and
the conversion of the debt to common stock.
F-18
<PAGE>
NOTE 9 - CONVERTIBLE DEBT (Continued)
The terms associated with each series and the related amounts raised
and converted during the years ended December 29, 1998 and December 30,
1997 are as follows:
<TABLE>
<CAPTION>
Outstanding Outstanding
as of Raised Converted as of
December 30, During During December 29,
1997 1998 1998 1998
--------------- ---------------- --------------- ----------------
Non-interest-bearing
<S> <C> <C> <C> <C>
notes a $ 92,000 $ - $ 92,000 $ -
6% notes b - 100,000 - 100,000
6% notes c - 600,000 - 600,000
6% notes d - 400,000 - 400,000
--------------- ---------------- --------------- ----------------
Total $ 92,000 $ 1,100,000 $ 92,000 $ 1,100,000
=============== ================ =============== ================
</TABLE>
a Converted on March 5, 1998.
b Due July 23, 2001.
c Due July 3, 2001.
d Due July 15, 2001.
In accordance with generally accepted accounting principles, the
discount on the conversion feature of the above notes, arising from the
85% conversion feature, is considered to be interest expense and is
recognized in the statement of operations during the period from the
issuance of the debt to the time at which the debt becomes convertible.
In connection with the issuance of the above notes, the Company
recorded interest expense in the amount of $194,117 in the accompanying
statement of operations for the year ended December 29, 1998.
NOTE 10 - STOCKHOLDERS' EQUITY
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 $0.001 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.
F-19
<PAGE>
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
The preferred stock carries no dividends prior to the second
anniversary of the closing date of the proposed IPO, but thereafter, if
the above conversion test is satisfied, the preferred stock will
participate in any dividends declared on the Company's common stock, on
an "as converted" basis. In the event of a voluntary or involuntary
liquidation or dissolution of the Company prior to the second
anniversary of the closing date of the proposed IPO, or subsequent to
the IPO if annual net profits of $3,500,000 have not been achieved, the
holder of the preferred stock would be entitled to the par value of
$0.001 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.
Common Stock
During the year ended December 29, 1998, the Company completed an IPO
of its common stock. In connection with the IPO, the Company issued
1,250,000 shares of its $0.01 par value common stock at $5.00 per share
for total proceeds of $6,500,000. Stock issuance costs incurred related
to the IPO were $2,532,603.
During the year ended December 29, 1998, the Company negotiated the
conversion of certain promissory notes aggregating to $1,112,500 to
278,125 shares of the Company's common stock. The conversion rate of
the debt was provided at a discount for the debt holders in order to
elicit their conversion. The conversion resulted in a loss on debt
extinguishment of $278,125, which represents the difference between the
carrying value of the debt extinguishment and the fair market value of
the securities issued to extinguish the debt.
NOTE 11 - STOCK-BASED COMPENSATION
Issuance of Common Stock
During the year ended December 30, 1997, the Company issued 24,950
shares of common stock (of which 5,618 shares were issued to officers)
in exchange for services rendered valued at $124,730.
F-20
<PAGE>
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
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 10 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.
On August 19, 1998, the Company granted options to purchase an
aggregate of 400,000 shares of the Company's common stock. The options
were granted under the Plan and are exercisable at prices between
$3.125 and $3.438 per share. During the year ended December 29, 1998,
one employee was terminated, and in accordance with the Plan, options
to purchase 65,000 shares of stock expired upon termination.
Other Stock Options Issued Outside of the Plan
During the year ended December 29, 1998, the Company issued options to
one employee of the Company to purchase 75,000 shares of common stock.
The options were issued outside of any formal plan and vest ratably
over five years. The options are exercisable at $4.96 per share and
approximated the fair value of the Company's common stock at the
issuance date. As such, no compensation expense has been recognized on
the Company's financial statements.
F-21
<PAGE>
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Stock Options
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB Opinion No. 25 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 years
ended December 29, 1998 and December 30, 1997:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Net loss
As reported $ (2,961,728) $ (1,077,967)
Pro forma $ (3,026,783) $ (1,095,691)
Basic loss per common share
As reported $ (1.39) $ (1.36)
Pro forma $ (1.42) $ (1.39)
</TABLE>
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.
F-22
<PAGE>
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Stock Options (Continued)
A summary of the Company's stock option plans and changes in
outstanding options for the years ended December 29, 1998 and December
30, 1997 are as follows:
<TABLE>
<CAPTION>
Omnibus Stock Plan Outside of Plan
--------------------------------- ---------------------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
------------- ---------------- -------------- ------------------
<S> <C> <C> <C> <C>
Outstanding at December
30, 1997 - $ - 225,000 $ 1.77
Granted 400,000 $ 3.15 75,000 $ 4.96
Expired (65,000) $ 3.125 - $ -
--------------- ---------------
Outstanding at
December 29, 1998 335,000 $ 3.155 300,000 $ 2.57
=============== ===============
Exercisable at
December 29, 1998 - $ - 182,000 $ 1.01
=============== ===============
</TABLE>
As of December 29, 1998, all outstanding options granted outside of the
Plan have a remaining life of approximately 9.67 years.
Warrants
A summary of the Company's outstanding warrants and activity for the
years ended December 29, 1998 and December 30, 1997 are as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Under Exercise
Warrant Price
----------- ----------------
<S> <C> <C>
Outstanding at December 30, 1997 - $ -
Granted 261,218 $ 5.35
---------------
Outstanding at December 29, 1998 261,218 $ 5.35
===============
Exercisable at December 29, 1998 261,218 $ 5.35
===============
</TABLE>
F-23
<PAGE>
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Warrants (Continued)
The following table summarizes information about warrants outstanding
at December 29, 1998:
<TABLE>
<CAPTION>
Weighted-
Average
Warrants Warrants Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
$ 5.00 12,000 12,000 5 years
$ 5.16 6,303 6,303 3 years
$ 5.28 73,125 73,125 5 years
$ 6.00 169,790 169,790 3 years
------------------ ------------------
261,218 261,218
================== ==================
</TABLE>
NOTE 12 - COMMITMENTS
Leases
The Company leases 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 five to 25 years. Certain of these leases require
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 restaurant and transportation
equipment under operating and capital leases. Those leases have initial
terms generally ranging from four to seven years and require a fixed
monthly payment or, in the case of transportation equipment, additional
payments on a per mile basis.
For the years ended December 29, 1998 and December 30, 1997, rent
expense was $347,772 and $192,974, respectively.
F-24
<PAGE>
NOTE 12 - COMMITMENTS (Continued)
Leases (Continued)
Future minimum lease payments for all leases with initial or remaining
terms of one year or more at December 29, 1998 are as follows :
<TABLE>
<CAPTION>
Year Ending Capital Operating
December Leases Leases
---------- ------------- ---------------
<S> <C> <C>
1999 $ 2,091,515 $ 6,964,640
2000 1,368,584 6,514,347
2001 985,964 6,324,239
2002 947,500 5,796,661
2003 969,563 5,076,581
Thereafter 13,614,904 35,887,369
--------------- ----------------
Total minimum lease payments 19,978,030 $ 66,563,837
================
Less amount representing interest 10,549,229
---------------
9,428,801
Less current portion 1,140,676
---------------
Long-term lease obligations $ 8,288,125
===============
</TABLE>
Self Insurance
The Company has self-insured retention insurance programs for general
liability, workers' compensation, and employee health plans with
varying deductibles and certain maximum coverage 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." Estimated liabilities
related to self insurance were $2,507,991 at December 29, 1998 and are
recorded in the accompanying balance sheet.
Other
At December 29, 1998, the Company had outstanding commitments to
purchase inventory of approximately $3,100,000. The inventory purchase
commitments approximate market value.
F-25
<PAGE>
NOTE 12 - COMMITMENTS (Continued)
Other (Continued)
The Company is also contingently liable on operating leases of property
sold to third parties. The future minimum lease payments on these
properties aggregate $3,083,552 through December 2009.
Employment Agreements
The Company has entered into two, four-year employment agreements,
expiring June 3, 2000, with officers of the Company. Aggregate annual
payments required under the agreement were $50,000 and $45,000 and
increased to $100,000 and $80,000, respectively, at the close of the
Company's IPO.
On December 15, 1998, the Company entered into a five-year employment
agreement with an executive of the Company. The agreement requires
annual gross salary payments of $80,000 and may be terminated without
cause. However, in the event the agreement is terminated, the Company
is obligated to pay six months' salary to the executive.
Litigation
The Company is periodically a defendant in cases involving personal
injury and other matters that 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.
Settlement
The Company has established a reserve in the amount of $1,313,000 for a
settlement agreement with another company. The settlement, dated
January 22, 1999, requires the Company to assign its leasehold
interests in three restaurants. The reserve represents the value of
leasehold improvements and other equipment at these locations.
NOTE 13 - BUSINESS COMBINATION
On December 21, 1998, the Company acquired all of the outstanding
shares of Paragon Steakhouse Restaurants, Inc., a company engaged in
the business of restaurant and food services, in exchange for cash and
notes payable. The total acquisition cost was $3,846,215. There was no
excess of total acquisition cost over fair value of the net assets
associated with the acquisition. As such, no goodwill has been recorded
on the records of the Company for this transaction.
F-26
<PAGE>
NOTE 13 - BUSINESS COMBINATION (Continued)
The acquisition has been accounted for as a purchase, and the results
of operations of PSR since the date of acquisition (December 21, 1998)
are included in the consolidated financial statements.
A summary of the assets purchased in the business combination is as
follows:
Working capital deficit $(40,428,669)
Property and equipment 50,715,926
Other assets 2,248,352
Other liabilities (8,689,394)
-------------
Total price 3,846,215
Cash acquired (1,191,519)
Purchase price, net of cash acquired $ 2,654,696
============
The following are the unaudited pro forma consolidated results of
operations for the years ended December 29, 1998 and December 30, 1997
as though Paragon Steakhouse Restaurants, Inc. had been acquired as of
January 1, 1997:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Net sales $ 173,477,000 $ 179,008,000
Net loss $ (6,187,000) $ (39,145,000)
Basic and diluted loss per share $ (2.90) $ (49.52)
</TABLE>
NOTE 14 - SEGMENT INFORMATION
The Company has three business units which have separate management and
reporting infra-structures that offer different products and services.
The business units have been aggregated into two reportable segments
(restaurant services and food service distribution) since the long-term
financial performance of these reportable segments is affected by
similar economic conditions. The restaurant services segment consists
of two business units - Paragon Steakhouse Restaurants, Inc. and
Galveston Steakhouse Restaurants - that operate specialty restaurants
around the country. The food service distribution segment performs
distribution of restaurant foods and restaurant-related products for
internal operations, as well as customers outside the Company's
internal operations.
F-27
<PAGE>
NOTE 14 - SEGMENT INFORMATION (Continued)
The accounting policies of the reportable segments are the same as
those described in Note 1. The Company evaluates the performance of its
operating segments based on income from operations, before income
taxes, accounting changes, non-recurring items, and interest income and
expense.
Summarized financial information concerning the Company's reportable
segments is shown in the following table for the year ended December
29, 1998:
<TABLE>
<CAPTION>
Food
Restaurant Service
Service Distribution Total
---------------- --------------- ----------------
<S> <C> <C> <C>
Segment sales $ 5,601,800 $ 917,621 $ 6,519,421
Segment loss from operations $ (1,259,603) $ (602,490) $ (1,861,838)
Segment total assets $ 58,084,129 $ 9,939,257 $ 68,023,386
</TABLE>
During the year ended December 30, 1997, the Company operated only the
restaurant service segment.
NOTE 15 - INCOME TAXES
Significant components of the provision for taxes based on income for
the years ended December 29, 1998 and December 30, 1997 are as follows:
1998 1997
-------- --------
Current
Federal $ - $ -
State 6,044 -
-------- --------
6,044 -
-------- --------
Deferred
Federal - -
State - -
-------- --------
- -
-------- --------
Provision for income taxes $ 6,044 $ -
======== ========
F-28
<PAGE>
NOTE 15 - INCOME TAXES (Continued)
A reconciliation of the provision for income tax expense with the
expected income tax computed by applying the federal statutory income
tax rate to income before provision for income taxes for the years
ended December 29, 1998 and December 30, 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Income tax provision (benefit) computed at
federal statutory tax rate 34.0% 34.0%
State taxes, net of federal benefit 6.0 6.0
Increase in valuation reserve and other (39.0) (40.0)
------------ -------------
Total 1.0% - %
============ =============
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities for federal income taxes consisted of the following at
December 29, 1998 and December 30, 1997:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
Deferred tax assets
<S> <C> <C>
Net operating losses $ 6,378,000 $ 745,000
Tax credit carryforwards 1,813,000 -
Asset valuation reserves 5,751,000 -
Property and equipment 1,627,000 -
Other 3,982,791 -
--------------- ----------------
Total deferred tax assets 19,551,791 745,000
--------------- ----------------
Deferred tax liabilities
Property and equipment (208,000) -
Other (148,469) -
--------------- ----------------
Total deferred tax liabilities (356,469) -
--------------- ----------------
19,195,322 745,000
Valuation allowance (19,402,905) (745,000)
--------------- ----------------
Net deferred tax liability $ (207,583) $ -
=============== ================
</TABLE>
F-29
<PAGE>
NOTE 15 - 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.
The Company has remaining net operating loss carryforwards, after
carrybacks, of approximately $16,800,000, expiring in 2018. The Company
also has FICA tip tax credit carryforwards of $1,813,506 for income tax
purposes that expire through 2011.
NOTE 16 - RELATED PARTY TRANSACTIONS
During the year ended December 29, 1998, the Company advanced certain
amounts to officers of the Company. These advances were subsequently
distributed to the officers in the form of bonuses in the aggregate
amount of $406,256.
An officer has personally guaranteed the leases of two of the Company's
California locations, as well as trade accounts payable with certain of
the Company's vendors.
NOTE 17 - YEAR 2000 ISSUE
The Company has conducted a review of its computer systems to dentify
the systems that could be affected by the Year 2000 Issue and is
developing an implementation plan to resolve the Issue. The
systems are currently not year 2000 compliant.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Based on the review of the computer systems, management believes the
cost of implementation will be immaterial to the Company.
F-30
<PAGE>
NOTE 18 - SUBSEQUENT EVENTS (UNAUDITED)
In March 1999, the Company executed a five-year promissory note for
$1,500,000 with a finance company. The note bears interest at 12.5% and
is payable in monthly installments of $15,625. At maturity, all unpaid
principal and interest are due and payable in full.
Subsequent to the year ended December 29, 1998, the Company issued
181,000 shares of common stock for consulting services.
F-31
Exhibit 10.38
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 December 21, 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
$1,350,000.00 (one million three hundred fifty thousand dollars) and to pay
interest from the date hereof on the principal sum remaining unpaid at the rate
of 12.000% 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 Note
shall increase by 225 basis points every 360 days, up to a maximum of 25%.
Principal and interest 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 $ 5.50. On the 91st calendar day following Closing,
the Exchange Price shall be the Noteholders option of:
(i) $5.500; 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:
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DAYS FROM DECEMBER 21,1998 DISCOUNT
91-180 15.0%
181-270 20.0%
271- maturity 25.0%
(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 exchanged, 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 exchanged 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
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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:
(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
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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
exchangeable into such class and type or securities as the holder
would have received had the holder exchanged 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 exchanged plus all accrued and unpaid interest
and fees shall automatically and without further action on the
part of such holders, be paid in cash.
(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 exchanged immediately prior to such reclassifications,
exchange, substitution or other change, all subject to further
adjustment as provided herein.
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(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.
(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
exchangeable into or exchangeable for Common Stock, whether or not
such rights or warrants or options or the right to convert or
exchange any such Exchangeable Securities are immediately
exercisable, and the price per share for which Common Stock is
issuable upon the exercise of
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such rights or warrants or options or upon exchange or exchange of
such Exchangeable 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 Exchangeable 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 Exchangeable Securities upon
exercise of such rights or warrants or options or upon the actual
issue of such Common Stock upon exchange of such Exchangeable
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.
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<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 Buyer 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.
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
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<PAGE>
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,
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<PAGE>
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;
(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;
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(k) If the Company fails to deliver to the Purchaser
completed collateral security documentation with
regard to the Collateral, Pledge and Security
Agreement, and such default shall not have been
remedied within five (5) calendar days after written
notice thereof shall have been delivered to the
Company by the Holder of this Note.
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 the 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.
[The remainder of this page left intentionally blank.]
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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: ___________________________
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EXHIBIT 10.39
EMPLOYMENT AGREEMENT
AGREEMENT made as of December 15, 1998, by and between
GALVESTON'S STEAKHOUSE CORP., a Delaware corporation having its principal office
at 151 E. Alessandro Boulevard, Riverside, California 92508 (hereinafter
referred to as the "Company"), and DAVID N.
TREAT (hereinafter referred to as "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ Executive, and
Executive desires to be employed by the Company, pursuant to the terms and
conditions hereof;
NOW THEREFORE, in consideration of the premises and of the
mutual promises herein contained, the parties hereto agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive and
Executive hereby agrees to be employed by the Company, subject to the terms and
conditions hereinafter set forth.
2. TERM. The initial term of this Agreement shall begin on the
date hereof (the "Employment Date") and shall continue for a period of five (5)
years from that date, subject to prior termination in accordance with the terms
hereof. Thereafter, the term of this Agreement may be extended for such
additional period or periods as shall be mutually agreed to in writing by
Executive and the Company.
3. DUTIES. The Executive shall perform such duties and
functions as Senior Director of Operations for the Company as are determined
from time to time by the Board of Directors of the Company. Executive
acknowledges that the Company intends to promote him to the position of Vice
President of Operations for the Company as soon as the Company's stated
streamline savings program goals are achieved, for which goals he will be
responsible for implementing within six months. In the performance of his
duties, Executive shall comply with the policies of and be subject to the
reasonable direction of the Board of Directors of the Company.
The Executive agrees to devote his entire working time,
attention and energies to the performance of the business of the Company and of
any of its subsidiaries or affiliates by which he may be employed; and Executive
shall not, directly or indirectly, alone or as a member of any partnership, or
as an officer, director or employee of any other corporation, partnership or
other organization, be actively engaged in or concerned with any other duties or
pursuits which interfere
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with the performance of his duties hereunder, or which, even if non-interfering,
may be inimical to or contrary to the best interests of the Company.
4. COMPENSATION. As compensation for the services to be
rendered by Executive hereunder, the Company agrees to pay or cause to be paid
to Executive, and Executive agrees to accept, an annual salary of Eighty
Thousand ($80,000.00) Dollars payable in bi-weekly installments. Following the
Executive's promotion to the position of Vice President of Operations for the
Company, the Company agrees to pay or cause to be paid to Executive, and
Executive agrees to accept, an annual salary of One Hundred Fifty Thousand
($150,000.00) Dollars payable in bi-weekly installments.
5. COMPENSATION. The Company shall grant to the Executive,
effective as of the date hereof, stock options (the "Options") to purchase up to
75,000 shares of the Company's common stock at an exercise price of $4.96 per
share, being the average of the closing market prices of the Company's common
stock for the seven (7) business days prior to the date hereof. The Options
shall not be exercisable in any respect until the first anniversary of their
date of grant and shall thereafter be exercisable over a five-year period in
accordance with the following vesting schedule:
Anniversary Date of Grant Number of Vested Shares
- - --------------------------------------------------------------------------------
First Anniversary Date 15,000 (or 20%)
Second Anniversary Date 30,000 (or 40%)
Third Anniversary Date 45,000 (or 60%)
Fourth Anniversary Date 60,000 (or 80%)
Fifth Anniversary Date 75,000 (or 100%)
The Company may also pay Executive such other additional
compensation as may from time to time be determined by the Company.
6. EMPLOYEE BENEFITS. During the period Executive is employed
hereunder, Executive shall be permitted to participate in all group health,
hospitalization and disability insurance programs, pension plans and similar
benefits that are now or may become available to employees of the Company. In
addition, the Company shall purchase a term life insurance policy on the life of
Executive with a death benefit in the amount of $100,000 as to which Executive
shall have the right to designate one or more beneficiaries. During the period
Executive is employed hereunder, Executive shall be entitled to vacations in
accordance with the vacation policy of the Company.
7. REIMBURSEMENT OF EXPENSES. During the period Executive is
employed hereunder, the Company shall reimburse Executive for reasonable and
necessary out-of-pocket expenses advanced or expended by Executive or incurred
by him for or on behalf of the Company in connection with his duties hereunder
in accordance with its customary policies and practices, including but not
limited to, the out-of-pocket expenses for a national pager, a cellular
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phone and a leased automobile; provided however, that the reimbursement for the
leased automobile (exclusive of gas and insurance) shall not exceed $500 per
month.
8. TERMINATION OF EMPLOYMENT; EFFECT OF TERMINATION.
(a) The Executive's employment hereunder may be
terminated at any time upon written notice by the Company, upon the occurrence
of any of the following events:
(i) the death of Executive;
(ii) the disability of Executive (as defined
in paragraph (b)); or
(iii) the determination that there is cause
(as hereinafter defined) for such termination upon ten (10) days' prior written
notice to Executive.
(b) For purposes hereof, the term "disability"
shall mean the inability of Executive, due to illness, accident or any other
physical or mental incapacity, to perform his duties in a normal manner for a
period of three (3) consecutive months or for a total of six (6) months (whether
or not consecutive) in any twelve (12) month period during the term of this
Agreement.
(c) For purposes hereof, "cause" shall mean and be
limited to (i) Executive's conviction (which, through lapse of time or
otherwise, is not subject to appeal) of any crime or offense involving money or
other property of the Company or its subsidiaries or which constitutes a felony
in the jurisdiction involved; (ii) Executive's performance of any act or his
failure to act, for which if he were prosecuted and convicted, a crime or
offense involving money or property of the Company or its subsidiaries, or which
would constitute a felony in the jurisdiction involved would have occurred,
(iii) Executive's breach of any of the representations, warranties or covenants
set forth in this Agreement, or (iv) Executive's continuing, repeated, wilful
failure or refusal to perform his duties required by this Agreement. Whether or
not "cause" shall exist in each case shall be determined by the Board of
Directors of the Company in its sole discretion.
(d) In the event that the Executive's employment
is terminated by the Company pursuant to the provisions of clause (i), (ii) or
(iii) of subparagraph 8(a), Executive (or his estate, as the case may be) will
be entitled to only his accrued salary through the termination date and nothing
more.
(e) Notwithstanding anything to the contrary set
forth above, the Company shall also have the right to terminate Executive's
employment hereunder at any time without cause, in which case the Company, as
payment in full of all amounts due and owing by the Company to Executive, shall
continue to pay Executive his salary for the period commencing on the effective
date of such termination and ending on the date which is six (6) months
thereafter.
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9. REPRESENTATIONS AND AGREEMENTS OF EXECUTIVE.
The Executive represents and warrants that he is free to enter
into this Agreement and to perform the duties required hereunder, and that there
are no employment contracts, restrictive covenants or other restrictions
preventing the performance of his duties hereunder.
10. NON-COMPETITION.
(a) Executive agrees that if his employment is
terminated for any reason or if he leaves the employ of the Company for any
reason, for a period of one (1) year from the date of such termination of
employment, he will not directly or indirectly, as owner, partner, joint
venturer, stockholder, employee, broker, agent, principal, trustee, corporate
officer or director, licensor or in any capacity whatsoever engage in, become
financially interested in, be employed by, render consulting services to, or
have any connection with, any business which is competitive with the business
activities of the Company or its subsidiaries ("Competitive Business"), in any
geographic area where, during the time of his employment, the business of the
Company or any of its subsidiaries is being or had been conducted in any manner
whatsoever, or hire or attempt to hire for any Competitive Business any employee
of the Company or any subsidiary thereof, or solicit, call on or induce others
to solicit or call on, directly or indirectly, any customers or prospective
customers of the Company for the purpose of inducing them to purchase or lease a
product or service which may compete with any product or service of the Company;
provided, however, that Executive may own any securities of any corporation
which is engaged in such business and is publicly owned and traded but in an
amount not to exceed at any one time one percent of any class of stock or
securities of such company.
(b) If any portion of the restrictions set forth
in paragraph (a) should, for any reason whatsoever, be declared invalid by a
court of competent jurisdiction, the validity or enforceability of the remainder
of such restrictions shall not thereby be adversely affected.
(c) The Executive declares that the foregoing
territorial and time limitations are reasonable and properly required for the
adequate protection of the business of the Company. In the event any such
territorial or time limitation is deemed to be unreasonable by a court of
competent jurisdiction, Executive agrees to the reduction of either said
territorial or time limitation to such area or period which said court shall
have deemed reasonable.
(d) The existence of any claim or cause of
action by Executive against the Company or any subsidiary other than under this
Agreement shall not constitute a defense to the enforcement by the Company or
any subsidiary of the foregoing restrictive covenants, but such claim or cause
of action shall be litigated separately.
11. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
(a) The Executive shall not, during the term of
this Agreement, and at any time following termination of this Agreement,
directly or indirectly, disclose or permit to be known, to any person, firm or
corporation, any confidential information acquired by him during the course
4
<PAGE>
of or as an incident to his employment hereunder, relating to the Company or any
of its subsidiaries, the directors of the Company or its subsidiaries, any
client of the Company or any of its subsidiaries, or any corporation,
partnership or other entity owned or controlled, directly or indirectly, by any
of the foregoing, or in which any of the foregoing has a beneficial interest,
including, but not limited to, the business affairs of each of the foregoing.
Such confidential information shall include, but shall not be limited to,
proprietary information, trade secrets, know-how, market studies and forecasts,
competitive analyses, the substance of agreements with clients and others,
client lists and any other documents embodying such confidential information.
(b) All information and documents relating to
the Company, its affiliates as hereinabove described (or other business affairs)
shall be the exclusive property of the Company, and Executive shall use his best
efforts to prevent any publication or disclosure thereof. Upon termination of
Executive's employment with the Company, all documents, records, reports,
writings and other similar documents containing confidential information,
including copies thereof, then in Executive's possession or control shall be
returned and left with the Company.
12. RIGHT TO INJUNCTION. The Executive recognizes that the
services to be rendered by him hereunder are of a special, unique, unusual,
extraordinary and intellectual character involving skill of the highest order
and giving them peculiar value, the loss of which cannot be adequately
compensated for in damages. In the event of a breach of this Agreement by
Executive, the Company shall be entitled to injunctive relief or any other legal
or equitable remedies. Executive agrees that the Company may recover by
appropriate action the amount of the actual damage caused the Company by any
failure, refusal or neglect of Executive to perform his agreements,
representations and warranties herein contained. The remedies provided in this
Agreement shall be deemed cumulative and the exercise of one shall not preclude
the exercise of any other remedy at law or in equity for the same event or any
other event.
13. AMENDMENT OR ALTERATION. No amendment or alteration of the
terms of this Agreement shall be valid unless made in writing and signed by both
of the parties hereto.
14. GOVERNING LAW. All matters concerning the validity,
construction, enforcement, interpretation and performance under this Agreement
shall be governed by the laws of the State of California, without giving effect
to any conflict of laws principles thereunder.
15. SEVERABILITY. The holding of any provision of this
Agreement to be illegal, invalid or unenforceable by a court of competent
jurisdiction shall not affect any other provision of this Agreement, which shall
remain in full force and effect.
16. NOTICES. Any notices required or permitted to be given
hereunder shall be sufficient if in writing, and if delivered by hand or sent by
certified mail to the addresses set forth above or such other address as either
party may from time to time designate in writing to the other, and shall be
deemed given as of the date of the delivery or mailing.
5
<PAGE>
17. WAIVER OR BREACH. It is agreed that a waiver by either
party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any subsequent breach by that same party.
18. ENTIRE AGREEMENT AND BINDING EFFECT. This Agreement
contains the entire agreement of the parties with respect to the subject matter
hereof and shall be binding upon and inure to the benefit of the parties hereto
and their respective legal representatives, heirs, distributees, successors and
assigns.
19. ASSIGNMENT. This Agreement may not be transferred or
assigned by either party without the prior written consent of the other party.
20. SURVIVAL. The termination of Executive's employment
hereunder shall not affect the enforceability of Sections 10 and 11 hereof.
21. FURTHER ASSURANCES. The parties agree to execute and
deliver all such further instruments and take such other and further action as
may be reasonably necessary or appropriate to carry out the provisions of this
Agreement.
22. HEADINGS. The Section headings appearing in this Agreement
are for purposes of easy reference and shall not be considered a part of this
Agreement or in any way modify, amend or affect its provisions.
23. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of which
together, shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written.
GALVESTON'S STEAKHOUSE CORP.
By: ------------------------------------
Richard M. Lee
Chairman and Chief Executive Officer
- - -----------------------------------------
DAVID N. TREAT
6
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