SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): December 21, 1998
GALVESTON'S STEAKHOUSE CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 000-23739 94-3248672
(State of Incorporation) (Commission File Number) (IRS Employer Identification No.)
</TABLE>
10200 Willow Creek Road
San Diego, CA 92131
(Address of principal executive offices) (Zip Code)
(619) 689-2333
(Registrant's telephone number, including area code)
Former Address:
151 East Allesandro Boulevard
Riverside, CA 92508
(Former name or former address, if changed since last report)
<PAGE>
This Amendment No. 1 to the Registrant's Current Report on Form 8-K dated
January 5, 1999 (the "Report") relates to the Registrant's completion of the
acquisition of Paragon Steakhouse Restaurants, Inc. ("Paragon"). The purpose of
this Amendment is to amend Item 7(a) to provide the financial statements of
Paragon and Item 7(b) to provide the required pro forma financial information
relating to the business combination between the Registrant and Paragon on
September 30, 1998 which were unavailable at the time the Registrant filed the
Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
Consolidated Financial Statements
Paragon Steakhouse Restaurants, Inc.
and Subsidiaries
Years ended September 25, 1998 and
September 26, 1997
with Report of Independent Auditors
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Financial Statements
Years ended September 25, 1998 and September 26, 1997
CONTENTS
Report of Independent Auditors...............................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets..................................................F-2
Consolidated Statements of Operations and Accumulated Deficit................F-3
Consolidated Statements of Cash Flows........................................F-4
Notes to Consolidated Financial Statements...................................F-6
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholder
Paragon Steakhouse Restaurants, Inc.
We have audited the accompanying consolidated balance sheets of Paragon
Steakhouse Restaurants, Inc. (a wholly-owned subsidiary of Kyotaru Co., Ltd.)
and subsidiaries as of September 25, 1998 and September 26, 1997, and the
related consolidated statements of operations and accumulated deficit, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paragon
Restaurants, Inc. and subsidiaries at September 25, 1998 and September 26, 1997,
and the consolidated results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Paragon
Steakhouse Restaurants, Inc. and subsidiaries will continue as a going concern.
As more fully described in Note 1, the Company has incurred recurring operating
losses, has a working capital deficiency and, as a result of the Company's
Parent filing a petition for corporate reorganization procedures with the Tokyo
District Court in Japan on January 19, 1997, the Company may not have access to
adequate working capital during the coming year. These conditions raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
November 7, 1998
F-1
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
----------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 715,388 $ 1,392,921
Accounts receivable, less allowances of $49,585 in 1998 and
$82,510 in 1997 3,399,535 3,114,668
Inventories 5,180,141 4,448,067
Prepaid expenses, supplies and other current assets 3,282,651 3,374,014
----------------------------------------
Total current assets 12,577,715 12,329,670
Property and equipment, net 55,060,971 61,188,457
Other assets:
Liquor licenses 2,191,117 2,321,198
Cash - restricted under collateral agreements 1,679,194 2,927,960
Other 1,985,967 1,782,071
----------------------------------------
5,856,278 7,031,229
----------------------------------------
Total assets $73,494,964 $80,549,356
========================================
LIABILITIES AND DEFICIENCY IN ASSETS Current liabilities:
Accounts payable $11,206,188 $11,587,516
Advance from affiliate 272 1,808,085
Other accrued liabilities 9,122,574 9,972,920
Accrued salaries, wages and benefits 3,776,600 3,458,109
Current portion of capital lease obligations 1,152,143 1,404,202
Current portion of long-term debt 20,706,225 1,119,256
----------------------------------------
Total current liabilities 45,964,002 29,350,088
Capital lease obligations, less current portion 8,557,331 9,706,474
Long-term debt, less current portion - 20,621,781
Other long-term liabilities 4,350,877 4,133,203
Due to affiliate 20,626,103 19,001,135
Commitments and contingencies
Deficiency in assets:
Common stock, no par value:
Shares authorized - 10,000
Issued and outstanding -1,794 shares in 1998 and 1997 49,000,000 49,000,000
Additional paid-in capital 32,349,089 32,349,089
Accumulated deficit (87,352,438) (83,612,414)
----------------------------------------
Total deficiency in assets (6,003,349) (2,263,325)
----------------------------------------
Total liabilities and deficiency in assets $73,494,964 $80,549,356
========================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
Revenues:
Restaurant $137,092,585 $150,111,596
Foodservice distribution 34,218,341 27,029,670
-----------------------------------------
171,310,926 177,141,266
Cost of sales:
Food and beverage costs - Restaurant 45,432,791 50,093,188
Food and beverage costs - Foodservice distribution 31,236,813 24,486,752
Personnel costs - Restaurant 44,217,500 49,252,549
Personnel costs - Foodservice distribution 2,228,836 2,081,952
-----------------------------------------
123,115,940 125,914,441
-----------------------------------------
48,194,986 51,226,825
Costs and expenses:
Other direct operating costs - Restaurant 30,967,471 37,322,943
Other direct operating costs - Foodservice distribution 1,665,933 1,528,439
General and administrative expenses 9,495,544 10,865,510
Depreciation and amortization 5,670,553 7,768,595
-----------------------------------------
47,799,501 57,485,487
-----------------------------------------
395,485 (6,258,662)
Other (income) and expenses:
Asset impairment losses 237,213 23,072,616
Amortization of intangibles 339 2,298,731
Interest expense, net 4,393,449 5,826,315
Other, net (481,431) 388,059
-----------------------------------------
(4,149,570) 31,585,721
-----------------------------------------
Loss before provision for income taxes (3,754,085) (37,844,383)
Provision (benefit) for income taxes (14,061) 222,790
-----------------------------------------
Net loss (3,740,024) (38,067,173)
Accumulated deficit at beginning of year (83,612,414) (45,545,241)
-----------------------------------------
Accumulated deficit at end of year $(87,352,438) $(83,612,414)
=========================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,740,024) $ (38,067,173)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 5,670,553 7,768,595
Amortization of intangibles 339 2,298,731
Related party interest 1,177,968 2,448,789
Related party income taxes not paid in cash - 5,333
Asset impairment loss - 23,072,616
Gains on disposal of assets, net (448,800) (753,552)
Provision for deferred income taxes (81,038) -
Write-off of unamortized capital lease 284,527 141,843
Deferred rent 63,860 249,595
Other 106,301 (101,205)
Changes in operating assets and liabilities:
Accounts receivable (284,867) (671,822)
Inventories (732,074) 41,504
Prepaid expenses, supplies and other current assets 570,471 3,692,010
Accounts payable (463,829) 762,098
Accrued salaries, wages and benefits 318,491 (319,232)
Other accrued liabilities (499,080) (75,760)
-----------------------------------------
Net cash provided by operating activities 1,942,798 492,370
INVESTING ACTIVITIES
Purchases of property and equipment (1,142,555) (5,444,110)
Proceeds from disposal of property and equipment 1,205,254 2,670,834
Loan acquisition costs - (16,096)
Cash - restricted under collateral agreements 1,248,766 222,040
Other 2,165 58,763
-----------------------------------------
Net cash provided by (used in) investing activities 1,313,630 (2,508,569)
FINANCING ACTIVITIES
Borrowings from affiliate - 3,308,085
Net payments on borrowings from affiliate (1,228,813) -
Payments on debt (1,303,946) (1,876,183)
Payments on financing obligations (1,401,202) (1,559,089)
-----------------------------------------
Net cash used in financing activities (3,933,961) (127,187)
-----------------------------------------
Net decrease in cash and cash equivalents (677,533) (2,143,386)
Cash and cash equivalents at beginning of year 1,392,921 3,536,307
-----------------------------------------
Cash and cash equivalents at end of year $ 715,388 $ 1,392,921
=========================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Paragon Steakhouse Restaurants, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
--------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Taxes paid $ 156,441 $ 66,815
Interest paid, net of amounts capitalized of $27,988
in 1997 $3,392,045 $ 3,334,439
</TABLE>
During 1997, the Company entered into a sale and leaseback agreement for land
and building with a fair market value of $1,500,000. The lease was treated as a
financing lease and capitalized.
The Company financed prepaid insurance policies of $269,134 and $660,137
through the issuance of short-term notes payable in 1998 and 1997, respectively.
See accompanying notes.
F-5
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that Paragon
Steakhouse Restaurants, Inc. and subsidiaries (the Company) will continue as a
going concern. This basis of accounting contemplates the recovery of the
Company's assets and the satisfaction of its liabilities in the normal course of
business. At September 25, 1998, the Company has an accumulated deficit of
$87,352,438, a deficiency in assets of $6,003,349 and negative working capital
of $33,386,287. In addition, at September 25, 1998, the Company is not in
compliance with certain loan covenants under the terms of its long-term
borrowing agreement and such covenants have not been waived or amended. If the
lender demanded payment of the balance outstanding it is likely the Company
would not have available funds to meet the lender's demand. The Company has
historically relied upon Kyotaru Co., Ltd. (the Parent) for operating capital
which may not be available during the coming year as the Parent filed a petition
for corporate reorganization procedures with the Tokyo District Court in Japan
on January 19, 1997, pursuant to Law No. 172 of June 7, 1952, known as the
Corporate Reorganization Law of Japan. The Tokyo District Court ordered
commencement of the Parent's corporate reorganization procedures on March 31,
1997. Due to the Company's recurring losses from operations, net deficiency in
assets, the covenant violations under the terms of its long-term borrowing
agreement and the financial status of its Parent, there can be no assurance that
the Company will be able to obtain additional operating capital, which may
impact the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern. Management is
pursuing various options to improve the Company's operating results and cash
flows, including closing under-performing operations, selling under-utilized
assets, reducing costs through various cut backs and considering the need to
dispose of part or all of its operations. The Company intends to begin
negotiations with its long-term lender to revise the terms and covenants under
its long-term borrowing agreement such that the Company will be able to be in
compliance in the future.
F-6
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION (CONTINUED)
DESCRIPTION OF BUSINESS
Paragon Steakhouse Restaurants, Inc. and its subsidiaries (Paragon of Michigan,
Inc., Paragon of Nevada, Inc. and Paragon of Wisconsin, Inc.) (collectively PSR)
own and operate restaurants located primarily throughout California, Arizona,
and the Great Lakes Region. PSR also owns Pacific Basin Foods, Inc. (PBF), a
company engaged in purchasing and selling food and other restaurant supplies to
PSR and nonaffiliated companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PSR and PBF
(collectively the Company). Significant intercompany amounts and transactions
have been eliminated in consolidation.
OWNERSHIP
PSR is a wholly-owned subsidiary of Kyotaru Co., Ltd. (KCL or the Parent).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates and such differences may
be material to the financial statements.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased and whose use is not restricted under collateral
agreements, to be cash equivalents. The carrying amount reported in the
consolidated balance sheets for cash equivalents approximates fair value.
INVENTORIES
Inventories, consisting primarily of food and beverages, are carried at the
lower of cost (first-in, first-out method) or market.
F-7
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION (CONTINUED)
SUPPLIES
When a restaurant is opened, the initial purchase of expendable equipment, such
as china, glassware and silverware, is recorded as prepaid supplies.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over their estimated useful lives (3 to
15 years for furniture, fixtures and equipment, 40 years for buildings) using
the straight-line method for financial reporting purposes. Costs of leasehold
rights and improvements are amortized on a straight-line basis over the
estimated useful lives of the assets, or the lease term, whichever is shorter.
INTANGIBLES
Trademarks and trade names were carried at acquisition cost and amortized using
the straight-line method over 10 years, prior to such costs being written-off
during 1997.
LIQUOR LICENSES
Transferable liquor licenses which have a market value are carried at cost and
are not amortized.
PRE-OPENING COSTS
In September 1997, the Company changed its method of accounting for pre-opening
costs incurred with the start up of a new restaurant, and began expensing such
costs in the period incurred. As a result of changing the method of accounting
for pre-opening costs, the Company wrote-off unamortized pre-opening costs at
September 26, 1997 of $345,068.
GIFT CERTIFICATES
The Company sells gift certificates and recognizes a liability, included in
other accrued liabilities, for gift certificates outstanding until the gift
certificate is redeemed or deemed to have expired.
F-8
<PAGE>
1. SIGNIFICANT ACCOUNTING POLICIES AND GENERAL INFORMATION (CONTINUED)
ASSET IMPAIRMENT LOSS
During 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". As a result of adopting SFAS No. 121, the
Company wrote down property and equipment as a result of comparing the
discounted cash flows for under-performing restaurants to the net book value of
the restaurants' assets. The adjustment for the impairment was recorded by
increasing depreciation and amortization by $10,859,255 in 1997. No adjustment
for asset impairment was recorded during fiscal 1998. At September 26, 1997,
management concluded that due to continued losses from operations, trademarks,
trade names and other intangibles no longer had a continuing value based on an
updated fair market value assessment of the Company, and accordingly increased
the applicable accumulated amortization accounts by $12,240,949. The Company
also recorded reserves for future operating costs of properties which were
closed at or subsequent to the fiscal years ended September 25, 1998 and
September 26, 1997 of $237,213 and $652,037, respectively. The total of the
write-downs of the property and equipment, intangible assets and reserves for
future operating costs of closed restaurants is included in other expenses as
asset impairment losses.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are charged to expense as incurred.
Advertising and promotional costs for the years ended September 25, 1998 and
September 26, 1997 were $5,008,288 and $6,090,624, respectively.
OTHER DIRECT OPERATING COSTS
Other direct operating costs consist of those direct costs associated with
operating the restaurant locations, exclusive of depreciation and amortization
expense, and with costs associated with operating PBF's warehouse operations.
F-9
<PAGE>
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
Land $11,832,771 $ 12,394,763
Buildings and improvements 52,106,657 56,403,736
Furniture, fixtures and equipment 28,314,128 30,310,898
Leased property under capital leases 13,881,126 15,131,151
Leasehold rights 3,041,000 3,358,040
Construction-in-progress - 2,744,346
-----------------------------------------
109,175,862 120,342,934
Less accumulated depreciation and amortization 54,114,711 59,154,477
-----------------------------------------
$55,060,971 $ 61,188,457
=========================================
</TABLE>
3. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
10.39% mortgage loan collateralized by land, building, and
improvements, due in monthly installments of principal and
interest through September 2011 $20,621,781 $21,335,990
Other 84,444 405,047
-----------------------------------------
20,706,225 21,741,037
Less current portion 20,706,225 1,119,256
-----------------------------------------
$ - $20,621,781
=========================================
</TABLE>
On August 30, 1997, PSR entered into a $22,624,000 secured mortgage financing
(the Mortgage) with a financing company. Paragon Steakhouse Restaurants, Inc.
and one of its subsidiaries, Paragon of Michigan, Inc. are liable for the
repayment of such financing. The Mortgage bears interest at 10.39% and is
payable in 180 equal installments of principal and interest, with the final
installment due September 2011. In 1997, the Company prepaid $626,779 of the
mortgage, reducing the original monthly payments of $248,545 to $241,470. The
prepayment was funded from the sale of a portion of the security. The Mortgage
is secured by substantially all of PSR's owned land, buildings and
F-10
<PAGE>
3. LONG-TERM DEBT (CONTINUED)
the improvements thereon. The Mortgage was used to refinance existing debt,
finance restaurant remodels and pay fees and expenses associated with the
Mortgage. The terms of the Mortgage include specific financial covenants,
restrictions on obtaining other financing and limitations on payments to its
parent. On April 30, 1997, and on May 28, 1997, the mortgage agreement was
amended primarily to modify the loan covenants. As of September 25, 1998, the
Company is not in compliance with certain financial ratio loan covenants and has
not obtained a waiver for the covenant violations. As a result, the entire loan
balance has been included in the current portion of long-term debt for financial
statement presentation.
The maturities of long-term debt, assuming the Mortgage is not accelerated,
for the years succeeding fiscal 1998 are as follows:
1999 $ 876,494
2000 878,378
2001 974,115
2002 1,080,287
2003 1,198,032
Thereafter 15,698,919
---------------------
$20,706,225
=====================
4. LEASE COMMITMENTS
In January 1997, the Company received net cash proceeds of $1,263,650 relating
to the sale of a new restaurant property. Following the sale, the Company
obtained an additional $200,000 in financing for the property, completed
construction of the restaurant, and leased the property back for a period of 20
years at an initial annual rental of $163,500 subject to increases of 6%
beginning January 1, 2000 and every three years thereafter.
The lease, noted above, is renewable for two additional periods of 5 years at
the Company's option. The Company also has an option to purchase the property
for a fixed sum during the sixty-first full month of the lease. As a result of
the purchase option, the transaction has been recorded as a financing lease,
with the restaurant being included in property and equipment in the accompanying
financial statements along with the related lease obligation.
The Company leases various land and building sites for its restaurant
operations. These leases have initial terms generally ranging from 20 to 35
years and, in certain instances, provide for renewal options ranging from 5 to
25 years. Certain of these leases require
F-11
<PAGE>
4. LEASE COMMITMENTS (CONTINUED)
additional (contingent) rental payments by the Company if sales volumes at the
related restaurants exceed specified levels. Most of these lease agreements
require payments of taxes, insurance and maintenance costs by the Company. The
Company also leases various restaurant and transportation equipment. Those
leases have initial terms generally ranging from 4 to 7 years and require a
fixed monthly payment or, in the case of transportation equipment, additional
payments on a per mile basis. Certain of the leases are accounted for as
operating leases while others are accounted for as capital leases.
Rental expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-----------------------------------------
<S> <C> <C>
Restaurant, land and buildings:
Minimum rents $6,259,019 $7,015,815
Percentage rentals 335,112 339,416
-----------------------------------------
6,594,131 7,355,231
Equipment rentals 1,397,386 1,600,959
-----------------------------------------
$7,991,517 $8,956,190
=========================================
</TABLE>
Future minimum lease payments for all leases (including sale/leasebacks) with
initial or remaining terms of one year or more at September 25, 1998 are as
follows :
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-----------------------------------------
<S> <C> <C>
1999 $ 2,142,562 $ 6,635,882
2000 1,602,565 5,919,155
2001 1,009,057 5,741,125
2002 939,301 5,379,601
2003 966,963 4,592,718
Thereafter 13,857,507 35,435,311
-----------------------------------------
Total minimum lease payments 20,517,955 $63,703,792
======================
Less amount representing interest 10,808,481
--------------------
9,709,474
Less current portion 1,152,143
--------------------
Long-term lease obligations $ 8,557,331
====================
</TABLE>
F-12
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
The Company has self-insured retention insurance programs for general liability,
workers' compensation and employee health plans up to varying deductibles and
certain maximum coverages under the Company's risk management program. Amounts
estimated to be payable with respect to existing claims for which the Company is
liable under its self-insured retention have been accrued as liabilities. The
Company is also required to maintain cash deposits securing future payments
under the programs and has entered into an arrangement with the insurance
companies, whereby they have placed cash deposits into money market funds
controlled by the insurance companies and granted the insurance companies a
security interest in the cash deposits. These deposits have been recorded in the
other asset section of the balance sheet as "Cash - restricted under collateral
agreements".
The Company is periodically a defendant in cases involving personal injury and
other matters which arise in the normal course of business. While any pending or
threatened litigation has an element of uncertainty, the Company believes that
the outcome of any pending lawsuits or claims, individually or combined, will
not materially affect the financial condition or results of operations.
At September 25, 1998, the Company had outstanding commitments to purchase
inventory of approximately $3.2 million. The inventory purchase commitments
approximate market value.
The Company is also contingently liable on operating leases of properties sublet
to third parties. The future minimum lease payments on these properties
aggregate $3,169,100 through December 2009 .
6. RELATED PARTY TRANSACTIONS
In 1997, the Company issued an additional 794 shares in the Company to its
Parent in exchange for a reduction in amount due to the Parent of $36,000,000.
In connection with the original acquisition of the Company's stock, debt
associated with the acquisition was pushed down to the Company. Such debt, along
with other borrowings and advances to the Company, is included in amounts due to
affiliate and is payable on demand. The affiliate has agreed not to call the
debt due during fiscal 1999, unless the Company has funds sufficient to meet the
demand for payment and meet certain financial ratio loan covenants of its
Mortgage. The interest rate on borrowings due to affiliate was 6.1% at September
25, 1998 and September 26, 1997. Interest expense includes $1,177,968 and
$2,448,789 for fiscal 1998 and 1997, respectively, related to borrowings due to
affiliate.
F-13
<PAGE>
6. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company paid an affiliate prior years taxes relating to a tax sharing
agreement of $121,000 and $132,000 in 1998 and 1997, respectively.
7. INCOME TAXES
The provision for income taxes for the years ended September 25, 1998 and
September 26, 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Current:
Federal $ - $ (266)
State 66,977 223,056
-------------------------------------
66,977 222,790
Deferred:
Federal (877,764) (8,170,919)
State (81,038) -
-------------------------------------
(958,802) (8,170,919)
-------------------------------------
(891,825) (7,948,129)
Change in valuation reserve 877,764 8,170,919
=====================================
$ (14,061) $ 222,790
=====================================
</TABLE>
Through the period ended December 29, 1993, the Company filed consolidated
federal and combined state income tax returns with its former parent KII. On
December 30, 1993, the Company's ownership was transferred from KII to KCL.
Subsequent to the change in ownership, the Company has continued to file certain
combined state tax returns with affiliated companies, but began filing its own
consolidated federal tax return. Under the agreement the Company has with KCL,
the Company provides for income taxes, when filing with affiliated companies, on
a separate basis, as if it filed its own tax return.
The Company accounts for income taxes using the liability method required by
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-14
<PAGE>
7. INCOME TAXES (CONTINUED)
Significant components of the Company's net deferred tax assets consist of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
-------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $12,151,945 $ 8,996,109
FICA tax credit carryforward 1,813,506 1,813,506
Depreciation net of deferred gain on casualty loss 1,721,380 1,507,780
Deferred rent 669,824 633,854
Self-funded insurance accruals 479,151 793,753
Amortization on non-compete agreement 15,847 17,320
Salaries, wages and benefit accruals 130,143 198,921
Asset valuation reserves 4,648,751 7,092,886
Alternative minimum tax carryforward 136,318 136,318
Amortization of financing costs 271,727 292,754
State income taxes 68,991 117,606
Affiliated entity interest 400,509 -
Other 43,955 39,476
Inventory uniform capitalization costs 41,575 55,313
-------------------------------------
Total deferred tax assets 22,593,622 21,695,596
Deferred tax liabilities:
State income tax fixed asset deductions 207,585 288,623
Prepaid items 75,008 129,451
Deferred loss on sale/leaseback 23,640 23,640
Capital leases 65,760
Other 8,945 -
-------------------------------------
Total deferred tax liabilities 380,938 441,714
-------------------------------------
Net deferred tax assets before valuation allowance 22,212,684 21,253,882
Valuation allowance (22,420,269) (21,542,505)
=====================================
Net deferred tax liabilities $ (207,585) $ (288,623)
=====================================
</TABLE>
The Company recorded a net operating loss for tax purposes in 1998 and 1997 and
has remaining net operating loss carryforwards, after carrybacks, of $35,741,014
expiring in 2013. The Company also has FICA tip tax credit carryforwards of
$1,813,506 for income tax purposes that expire through 2011.
F-15
<PAGE>
8. OTHER INCOME AND EXPENSES
During 1996, one of the Company's restaurants was partially destroyed by fire.
The loss, covered by the Company's replacement cost property insurance, resulted
in a gain of $418,280 and $459,526 in 1998 and 1997, respectively, included in
other income, as the carrying value of the assets destroyed was substantially
less than replacement cost.
9. YEAR 2000 ISSUE (UNAUDITED)
The Company has developed a plan to replace or modify portions of its software
so that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company does not expect this project to have a
significant effect on its balance sheet, the statements of operations or cash
flows. The Company believes that with modifications and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
F-16
<PAGE>
(b) Pro forma financial information.
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Unaudited Pro forma Consolidated Balance Sheet
As of September 30, 1998
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 744,994 $ 715,388 $ - $ 1,460,382
Accounts receivable 148,649 3,399,535 - 3,548,184
Advances to officers 461,047 - - 461,047
Inventories 39,775 5,180,141 - 5,219,916
Acquisition deposits 1,954,519 - b (1,954,519) -
Prepaid and other current assets 168,681 3,282,651 - 3,451,332
------------------ ------------------ ----------------- ------------------
Total current assets 3,517,665 12,577,715 (1,954,519) 14,140,861
Property and equipment, net 935,127 55,060,971 b (9,877,118) 46,118,980
Debt issuance costs 50,000 - - 50,000
Intangible assets, net 469,714 2,191,117 b (2,191,117) 469,714
Other assets 44,034 3,665,161 - 3,709,195
------------------ ------------------ ----------------- ------------------
Total assets $ 5,016,540 $ 73,494,964 $ (14,022,754) $ 64,488,750
================== ================== ================= ==================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-17
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Unaudited Pro forma Consolidated Balance Sheet (continued)
As of September 30, 1998
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of notes payable $ 1,439,497 $ 2,028,636 b $ 600,000 $ 4,068,133
Accounts payable 67,184 11,206,188 - 11,273,372
Other accrued liabilities 79,839 12,899,446 - 12,979,285
------------------ ------------------ ----------------- ------------------
Total current liabilities 1,586,520 26,134,270 600,000 28,320,790
Notes payable, net of current portion 795,245 28,387,063 - 29,182,308
Other long term liabilities - 4,350,877 - 4,350,877
Due to affiliate - 20,626,103 a (20,626,103) -
------------------ ------------------ ----------------- ------------------
Total liabilities 2,381,765 79,498,313 (20,026,103) 61,853,975
Commitments and contingencies
Stockholders' equity
Preferred stock
Preferred stock, Series B, Convertible 1,000 - - 1,000
Common stock 24,283 49,000,000 b (49,000,000) 24,283
Additional paid-in capital 5,852,427 32,349,089 a,b (32,349,089) 5,852,427
Accumulated deficit (3,242,935) (87,352,438) b 87,352,438 (3,242,935)
------------------ ------------------ ----------------- ------------------
Total stockholders' equity 2,634,775 (6,003,349) 6,003,349 2,634,775
------------------ ------------------ ----------------- ------------------
Total liabilities and stockholders' equity $ 5,016,540 $ 73,494,964 $ (14,022,754) $ 64,488,750
================== ================== ================= ==================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-18
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Pro forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Revenues $ 1,867,671 $ 173,611,807 $ - $ 175,479,478
Costs and expenses
Food and beverage 627,165 73,553,690 - 74,180,855
Payroll and payroll related costs 757,232 49,597,925 - 50,355,157
Operating expenses 400,217 36,278,467 - 36,678,684
Depreciation and amortization 221,737 9,144,842 - 9,366,579
General and administrative expenses 350,945 10,624,158 - 10,975,103
Pre-opening startup costs 65,155 - - 65,155
------------------ ------------------ ----------------- ----------------
Total costs and expenses 2,422,451 179,199,082 - 181,621,533
------------------ ------------------ ----------------- ----------------
Loss from operations (554,780) (5,587,275) - (6,142,055)
Other income (expense)
Interest expense, net (523,187) (4,965,444) c 1,520,551 (3,968,080)
Write down of assets - (23,072,616) - (23,072,616)
Other - (547,998) - (547,998)
------------------ ------------------ ----------------- -----------------
Total other income (expense) (523,187) (28,586,058) 1,520,551 (27,588,694)
------------------ ------------------ ----------------- -----------------
Net loss $ (1,077,967) $ (34,173,333) $ 1,520,551 $ (33,730,749)
================== ================== ================= =================
Basic loss per share $ (1.36) $ (42.68)
================== =================
Diluted loss per share $ (1.36) $ (42.68)
================== =================
Weighted-average shares outstanding
basic and diluted 790,296 790,296
================== =================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-19
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Pro forma Consolidated Statement of Operations
For the Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
GALVESTON'S PARAGON ADJUSTMENTS PRO FORMA
<S> <C> <C> <C> <C>
Revenues $ 841,476 $ 130,765,614 $ - $ 131,607,090
Costs and expenses
Food and beverage 269,653 59,070,334 - 59,339,987
Payroll and payroll related costs 348,040 35,615,142 - 35,963,182
Operating expenses 366,328 25,019,078 - 25,385,406
Depreciation and amortization 109,741 4,339,791 - 4,449,532
General and administrative expenses 694,990 7,272,393 - 7,967,383
------------------ ------------------ ----------------- ------------------
Total costs and expenses 1,788,752 131,316,738 - 133,105,490
------------------ ------------------ ----------------- ------------------
Loss from operations (947,276) (551,124) - (1,498,400)
Other income (expense)
Interest expense, net (275,140) (3,339,713) c 907,539 (2,707,314)
Other income - 255,383 - 255,383
------------------ ------------------ ----------------- ------------------
Total other income (expense) (275,140) (3,084,330) 907,539 (2,451,931)
------------------ ------------------ ----------------- ------------------
Net loss $ (1,222,416) $ (3,635,454) $ 907,539 $ (3,950,331)
================== ================== ================= ==================
Basic loss per share $ (0.59) $ (1.91)
================== ==================
Diluted loss per share $ (0.59) $ (1.91)
================== ==================
Weighted-average shares outstanding
basic and diluted 2,064,714 2,064,714
================== ==================
</TABLE>
See the accompanying notes to the pro forma financial statements.
F-20
<PAGE>
Galveston's Steakhouse Corp. and
Paragon Steakhouse Restaurants, Inc and Subsidiaries
Notes to Pro forma Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying pro forma consolidated balance sheet presents the accounts of
Galveston's Steakhouse Corp. ("Galveston's") and Paragon Steakhouse Restaurants,
Inc. and Subsidiaries ("Paragon") as if the acquisition of Paragon by
Galvesont's occurred on September 30, 1998. The accompanying pro forma
consolidated statements of operations present the accounts of Galveston's and
Paragon for the year ended December 31, 1997 and the nine months ended September
30, 1998 as if the acquisition occurred on January 1, 1997.
The following adjustments would be required if the acquisition occurred as
indicated above:
a. To remove the amount due to affiliate that was forgiven in connection
with the acquisition.
b. To record the purchase price which consists of a $600,000 note payable,
$600,000 in cash that was previously paid the sellers and included in
acquisition deposits and $1,354,519 in transaction fees that were also
included in the acquisition deposit account. In addition, due to the
forgiveness of the amount due to affiliate as mentioned in item a.
above, the $1.2 million purchase price was less than the net book value
of Paragon. This purchase discount of $12,068,235 is being used to
reduce the basis of intangible assets and property and equipment of
$2,191,117 and $9,877,118, respectively.
c. To remove the interest expense incurred on the amount due to
affiliate that was forgiven in connection with the acquisition.
F-21
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Dated: January 25, 1999
GALVESTON'S STEAKHOUSE CORP.
By: /s/ Hiram J. Woo
Name: Hiram J. Woo
Title: President and Chief Financial Officer
F-22
