SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 28, 1999
Commission File Number: 000-23739
STEAKHOUSE PARTNERS, INC.
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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 92131
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(Address of principal executive offices and Zip Code)
(858) 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 28, 1999):
$167,800,573
Aggregate market value of voting and non-voting common stock held by
non-affiliates: $10,362,240
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
3,369,022 common shares were outstanding as of December 28, 1999.
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FORM 10-KSB
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STEAKHOUSE PARTNERS, INC.
Form 10-KSB for the Fiscal Year ended December 28, 1999
Table of Contents
Page of Report
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.............................................1
ITEM 2. DESCRIPTION OF PROPERTY............................................14
ITEM 3. LEGAL PROCEEDINGS..................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ..............14
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS. ......................................15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................16
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; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT. ..............................................25
ITEM 10. EXECUTIVE COMPENSATION.............................................29
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................35
(i)
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
Background
This Annual Report on form 10-KSB and the documents incorporated herein
by reference contain forward-looking statements based on current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by management. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Looking
Statements."
Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we",
"us" and "our"), currently operates 73 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's,
Hunter's Steakhouse, Mountain Jack's and Carvers. 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 78 steakhouse
restaurants and Pacific Basin Foods Inc., ("Pacific Basin") a restaurant food
distribution company. Paragon is now a wholly owned subsidiary of the Company.
Our Business Background
The steakhouse restaurant industry is expected to continue to expand
substantially over the next five years. We believe that this industry is highly
fragmented and presents an excellent opportunity for us to grow our business
nationwide by expanding Paragon's brand-name steakhouses through the
construction of new Hungry Hunter's, Hunter's Steakhouse, Mountain Jack's and
Carvers restaurants and the acquisition of other, large regional steakhouse
chains.
Restaurant Concepts
All of our restaurants are positioned as destination restaurants that
attract loyal clientele. By our use of the term destination restaurants, we mean
that we seek to establish our restaurants as the primary destination of our
clientele, rather than a destination or activity ancillary to another activity,
such as shopping or sight-seeing. All of our restaurants are full-service
steakhouses. Our restaurants feature only USDA Choice, midwestern corn-fed beef.
Unlike many of our competitors, we do not serve plastic-wrapped vacuum sealed
steaks but rather we hand-cut our steaks in-house from whole loins of beef for
superior freshness and taste. Prime rib is another "signature product" and is
the
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basis for our distinctive merchandising commitment to "The Best Prime Rib in
Town". Our prime rib, which is served in a herb crust, is slow roasted for seven
hours to enhance its flavor and tenderness. Portions are deliberately generous
and full liquor and bar service is available. Alcoholic beverage service
accounts for approximately 18% of our net sales.
Most of our 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.
We currently operate in three distinctive steakhouse markets.
Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's
We have 53 steakhouses operating under the brand names, Hungry
Hunter's, Hunter's Steakhouse and Mountain Jack's for which the average dinner
check is in the under $25.00 per guest range. Many of these steakhouses have
been in business for over 25 years, and, as such, have loyal clientele and have
the "look and feel" of a special restaurant. For this reason, we have been able
to position our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's
steakhouses as a step-above the lower ticket Outback and Lone Star restaurant
chains.
Our menu also features fresh fish and chicken in addition to steaks. A
complete meal includes salad and a choice of side dishes including baked potato,
french fries and steamed vegetables. The menu also includes appetizers and
desserts.
Our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack'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. Unlike a typical Outback or Lone Star, our restaurants typically have
one or more banquet rooms to accommodate private parties and corporate events.
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.
Carvers
We have 11 steakhouses operating in the upscale steakhouse dining
segment under the Carvers brand name with an average check per guest of slightly
less than $35.00. Carvers is a sophisticated, upper tier mid-priced 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 our other restaurants, but are
substantially lower than high-end steakhouses such as Morton's and Ruth's Chris.
Our Carvers restaurants are also typically housed in free-standing
buildings with dinner seating capacities ranging from 180 to 240 seats and an
average seating capacity of approximately
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220 seats. The Carvers restaurants also have one or more banquet rooms to
accommodate private parties and corporate events.
Unique Concepts
We have five unique formal restaurants housed in landmark buildings in
prime locations near or at tourist sites which also serve as the destination or
special occasion restaurant in their respective communities. The menu at these
restaurants is similar to Hungry Hunter's or Carvers and the average dinner
check per guest is between $25.00 and $35.00. These restaurants all have one or
more banquet rooms.
We are evaluating a new less expensive, casual steakhouse concept under
the name "Bushland Safari Steakhouse Restaurants" to compete directly with Lone
Star and Outback in the less expensive segment of the casual steakhouse market.
Corporate Strategy
We believe that a critical component to our success is to exceed the
expectations of each guest by providing a dining experience characterized by
high quality, personalized service and quality menu selections. We also believe
that ambiance, location and price-value relationship are keys to success in the
restaurant industry. We differentiate our restaurants by emphasizing the
following strategic elements:
* High-quality and attentive service.
* Consistent high-quality products achieved through careful ingredient
selection, generous food preparation and aging of steaks.
* Positioning in the mid-priced, full service steakhouse segment of the
restaurant industry.
* Strong emotional value through branding.
Growth Strategy
Our goal is to enhance our position as a leader in the steakhouse
restaurant industry by building through internal growth and through acquisitions
a national network of steakhouse restaurants. Key components of our strategy
include the following:
* Leverage established brands. Paragon has been in the steakhouse
business since 1967 and we believe our Hungry Hunter's, Hunter's
Steakhouse, Mountain Jack's and Carvers brands are well established in
the industry.
* Expand internal growth. We believe our management team has the ability
to recognize opportunities for further large steakhouse chain
acquisitions and the expertise to execute and
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improve on those acquisitions once they are acquired. We believe our
experienced management team can capitalize on the fragmented nature of
the successful steakhouse market.
* Operating Efficiencies. We believe our integration strategy affords us
the ability to achieve operating efficiencies and cost savings through
volume discounts on purchases. Also, with our increasing size, we can
lower costs and better manage our expenses. We provide centralized
accounting functions and administrative functions to enhance our
efficiencies.
* Efficient Penetration of New Markets. We believe we avoid many of the
costs and risks associated with entering new geographic markets. We
consider 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.
We also review potential competition and customer activity at other
restaurants operating in the area.
Marketing
We rely principally on our commitment to customer service and excellent
price-value relationship to attract and retain customers. Accordingly, we focus
our resources on seeking to provide customers with high-quality and attentive
service, value and an exciting and vibrant atmosphere.
Our 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. We have also successfully offered
discounts to encourage more people to try our restaurants, as well as to
increase weekday customer counts.
To promote local community awareness, each restaurant manager is
encouraged to become part of the local community. Many restaurants host meetings
with community leaders to solicit local input about the restaurants' potential
community participation.
For each new restaurant, we conduct a pre-opening awareness program
beginning approximately two to three weeks prior to, and ending four to six
weeks after, the opening of a restaurant. 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.
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Restaurant Operations and Management
We maintain quality and consistency in our 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 our 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.
We maintain financial and accounting controls for each of our
restaurants through the use of centralized accounting and management information
systems. All levels of our management participate in the ongoing process of
strategic and financial planning and our systems are continuously refined to
allow management to compare actual results with budgets and projections.
We also utilize modern management information systems to allow timely
information analysis and response. Our 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, we 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.
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 eight to 12
restaurants, and who, in turn, reports to our vice presidents of regional
operations. Restaurant managers complete an extensive training program during
which they are instructed in areas including food quality and preparation,
customer satisfaction, alcoholic beverage service, governmental regulations
compliance, liquor liability management and employee relations. Restaurant
managers are also provided with an operations manual relating to food and
beverage preparation, all areas of restaurant management and compliance with
governmental regulations. Working in concert with the individual restaurant
managers, our senior management define operations and performance objectives for
each restaurant and monitor implementation. Senior management regularly visit
various of our restaurants and meet with the respective management teams to
ensure compliance with our strategies and standards of quality in all respects
of restaurant operations and personnel development.
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Each of our new restaurant employees 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
We purchase a major portion of our food and beverage products from our
wholly owned subsidiary, Pacific Basin Foods, at market rates. Food and supplies
are shipped directly to the restaurants, although invoices for purchases are
sent to us for payment. Our emphasis on high-quality food requires frequent
deliveries of fresh food supplies.
Pacific Basin Foods
Our Pacific Basin Foods subsidiary is a wholesale food distributor
serving the restaurant industry. Its principal clients are Paragon, Garden
Fresh, Inc., a 46 unit chain of soup and salad bar restaurants, and Rusty
Pelican Restaurants, Inc., a 15 unit chain of upscale seafood restaurants.
However, Garden Fresh, Inc. is expected to terminate its relationship with
Pacific Basin Foods as of April 1 and Pelican Restaurant Inc. has substantially
reduced its business with Pacific Basin Foods. Pacific Basin Foods has
warehouses located in Urbana, Illinois and in San Diego, California, from which
it services its customers. In addition to the sale and distribution of food
supplies to restaurants, Pacific Basin Foods provides furniture, fixtures and
equipment to restaurants.
Competition
Competition in the restaurant industry is increasingly intense. We
compete with other mid-priced, full service restaurants, which are not
necessarily steakhouse restaurants, primarily on the basis of quality of food
and service, ambiance, location and price-value relationship. We also compete
with a number of other steakhouse restaurants within our markets, including both
locally owned restaurants and regional or national chains. We believe that the
quality of our service, our well-regarded brands, attractive price-value
relationship and quality of food will enable us to differentiate ourselves from
our competitors. We also compete with other restaurants and retail
establishments for sites. Many of our competitors are well-established in the
mid-priced dining segment and certain competitors have substantially greater
financial, marketing and other resources than us. We believe that our ability to
compete effectively will continue to depend upon our ability to offer
high-quality, mid-priced food in a full service, distinctive dining environment.
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Government Regulation
Our 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. We are required to renew these licenses annually. In
addition, these licenses may be suspended or revoked at any time for cause,
including violation by us or our 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.
Our failure to obtain or retain liquor or food service licenses would likely
have a material adverse effect on our operations. In order to reduce this risk,
each of our 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 our ability to obtain such a license elsewhere.
We are 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. We carry liquor liability coverage as part of its
comprehensive general liability insurance.
Our 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 our 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 our 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 us or our restaurants to date.
The Federal Americans With Disabilities Act prohibits discrimination on
the basis of disability in public accommodations and employment. We intend to
ensure that our restaurants will be in full compliance with the Disabilities
Act, and we intend to review plans and specifications and make periodic
inspections to ensure continued compliance. Our current restaurants are designed
to be accessible to the disabled. We believe that we are in substantial
compliance with all current applicable regulations relating to restaurant
accommodations for the disabled. We do not anticipate that such compliance will
require us to expend substantial funds.
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Employees
At March 20, 2000, we employed 3,958 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 our employees is covered by a collective bargaining
agreement. We consider its relations with its employees to be good and has not
experienced any interruption of operations due to labor disputes.
Restaurant Locations as of March 20, 2000
The following table sets forth the location of our existing Hungry
Hunter's, Hunter's Steakhouse, Mountain Jack's, Carvers restaurants and our
unique formal restaurants:
Hungry Hunter's, Hunter's Steakhouse, and Mountain Jack's Locations:
ARIZONA Modesto INDIANA NEVADA
Phoenix (2) Oakland Indianapolis (2) Las Vegas
Tempe Oceanside Lafayette NORTH CAROLINA
Tucson Pleasanton MICHIGAN Raleigh
Yuma S. San Francisco Auburn Hills OHIO
CALIFORNIA S. San Jose Clinton Township Canton
Anaheim Sacramento Dearborn Heights Elyria
Bakersfield San Diego Grandville Independence
Concord Santa Rosa Kentwood Middleburg Heights
El Cajon (Red Oak Temecula Lansing North Olmstead
Steakhouse) Thousand Oaks Roseville Sharonville
Fairfield Ventura Taylor Toledo
Fremont ILLINOIS Troy WISCONSIN
La Mesa Springfield Portage Madison (2)
Lafayette Traverse City
Lake Forest
Milpitas
Carvers Locations:
Glendale, Arizona
Scottsdale, Arizona
Rancho Bernardo, California
Roseville, California
Greenwood, Indiana
Farmington Hills, Michigan
Henderson, Nevada
Beachwood, Ohio
Centerville, Ohio
Orem, Utah
Sandy, Utah
Unique Formal Locations:
Folson, California
Rancho Cordova, California
Peoria, Illinois
South Bend, Indiana
Williamsburg, Virginia
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The leases for the above locations 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 us if sales volumes at the related restaurants
exceed specified levels. Most of these lease agreements require payments of
taxes, insurance and maintenance costs by us.
Steakhouse Partners' executive offices are located at 10200 Willow
Creek Road, San Diego California 92131. The telephone number is (858) 689-2333.
Additional Factors That May Affect Future Results
The following risk factors and other information included in this
Annual Report should be carefully considered. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the following risks actually
occur, our business, financial condition and operating results could be
materially adversely affected.
If we are not successful in our expansion plans, our business operations could
be materially adversely affected.
We intend to expand our operations through the construction of new
restaurant properties and conversion of acquired restaurant properties to our
restaurant brand names. We also intend to expand through the targeted
acquisition of one or more large restaurant chains. Our ability to open
additional restaurants will depend upon our ability to identify and acquire
available new construction sites or restaurant conversions at favorable prices.
We must also have sufficient available funds from operations or otherwise to
support this expansion.
If we cannot successfully construct new restaurant properties or
convert acquired restaurant properties to our established brands within
projected budgets or time periods, our business will be adversely affected.
Construction delays or cost overruns could be caused by numerous factors, such
as shortages of materials and skilled labor, labor disputes, weather
interference, environmental problems, and construction or zoning problems.
Also, if we are not successful in identifying suitable restaurant
targets, measuring the fair value of the restaurant targets, or operating the
acquired restaurants, our business will be adversely affected.
Our growth strategy may also strain our management and other resources.
To manage our growth, we must:
* maintain a high level of quality and service at our existing and future
restaurants;
* enhance our operational, financial and management expertise; and
* hire and train experienced and dedicated operating personnel.
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We have incurred losses from inception and may never generate substantial
profits.
We were organized in May 1996 and have incurred losses from inception.
We may never generate profits. We incurred a net loss of approximately $3.9
million for the fiscal year ended December 28, 1999. We incurred a net loss of
approximately $3.0 million for the fiscal year ended December 29, 1998 and a net
loss of approximately $1.1 million for the fiscal year ended December 30, 1997.
As of December 28, 1999 we had an accumulated deficit of approximately $8.9
million.
In order to operate profitably, we must:
* further improve operating margins at our existing restaurants;
* successfully expand our operations in a cost effective manner; and
* capitalize on the general and administrative cost savings implemented
during the last fiscal year.
Failure to comply with government regulations could adversely affect our
operating performance.
Our restaurant operations are subject to certain federal and state laws
and government regulations:
* National and local health and sanitation laws and regulations;
* National and local employment and safety laws and regulations; and
* Local zoning, building code and land-use regulations.
We cannot assure you that we will be able to fully comply with all such
laws and regulations. Failure to comply with any of these laws or regulations,
or the loss of our liquor licenses, would have a material adverse effect on our
business. In addition, each of our restaurants must obtain licenses from
regulatory authorities allowing it to sell liquor, beer and wine, and each
restaurant must obtain a food service license from local health authorities.
Each restaurant's liquor license must be renewed annually and may be revoked at
any time for cause. Liquor accounts for a large percentage of our sales and the
loss of this traffic would materially adversely impact our revenues.
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We 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. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance, if we lost a lawsuit related to this liability, our
business could be materially harmed.
Adverse economic conditions in a limited number of states could have a negative
effect on our business.
Our restaurants are located in 11 states, predominantly on the West
Coast and in the Great Lakes region. Adverse economic conditions in these
regions could have an adverse effect on our financial results. Each of our
restaurants represents a significant investment and long-term commitment which
limits our ability to respond quickly or effectively to changes in local
competitive conditions or other changes that could affect our operations.
If we are unable to compete effectively with our competitors we will not be able
to increase revenues or generate profits.
Our ability to increase revenues and operate profitably is directly
related to our ability to compete effectively with our competitors. Many of our
competitors have been in existence longer than us, have a more established
market presence and have substantially greater financial, marketing and other
resources than us.
Key competitive factors include:
* the quality and value of the food products offered;
* the quality of service;
* the price of the food products offered;
* the restaurant locations; and
* the ambiance of facilities.
We compete with other steakhouse restaurants specifically and with all
other restaurants in general. We compete with national and regional chains, as
well as individually owned restaurants. The restaurant industry has few
non-economic barriers to entry. As our competitors expand operations,
competition from steakhouse restaurants with concepts similar to ours can be
expected to intensify. We cannot assure you that third parties will not be able
to successfully imitate and implement our concepts. Such increased competition
could adversely affect our revenues.
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Unforeseen cost increases could adversely affect our potential profitability.
Our potential profitability is highly sensitive to increases in food,
labor and other operating costs. Our dependence on frequent deliveries of fresh
food supplies means that shortages or interruptions in supply could materially
and adversely affect our operations. In addition, unfavorable trends or
developments concerning the following factors could adversely affect our
results:
* inflation, food, labor and employee benefit costs; and
* rent increases resulting from rent escalation provisions in our leases.
We may be unable to anticipate or react to changing prices. If we
cannot modify our purchase practices or quickly or readily pass on increased
costs to customers, our business could be materially affected.
Because it may be difficult to effect a change in control without current
management's consent, a potential suitor who otherwise might be willing to pay a
premium for acquiring us may decide not to attempt an acquisition of Steakhouse
Partners.
Our executive officers, directors, and their affiliates beneficially
own 1,579,462 shares of our common stock. This represents approximately 35.1% of
the common stock issued and outstanding. Our executive officers also
collectively own 1,000,000 shares of Series B Preferred Stock and 1,750,000
shares of Series C Preferred Stock, each of which carries voting rights with our
common stock on a one vote per share basis. Such concentration of ownership and
voting power may have the effect of delaying, deferring or preventing a change
in control of Steakhouse Partners.
In addition, the board of directors has the authority to issue up to
2,250,000 additional shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
such stock without further shareholder approval. The rights of the holders of
common stock will be subjected to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Issuance
of additional shares of preferred stock could have the effect of delaying,
deferring or preventing a change in control of Steakhouse Partners.
Shareholders may not be able to resell their stock or may have to sell at prices
substantially lower than the price they paid for it.
The trading price for our common stock has been highly volatile and
could continue to be subject to significant fluctuations in response to
variations in our quarterly operating results, general conditions in the
restaurant 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
our common stock, as well as the price that holders may achieve for their shares
upon any future sale.
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ITEM 2. DESCRIPTION OF PROPERTY.
As of March 24, 2000, the Company leased 59 and owned 20 of its
restaurant locations. As of March 24, 2000, five of the Company's restaurants
were closed for renovations. Lease terms are generally 10 to 35 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.
On February 25, 2000, the Company executed a sale and leaseback
agreement with HS Realty Partners, LP with respect to 19 properties which is
expected to close in the second quarter, yielding net proceeds of approximately
$22 million. The Company intends to use a portion of these net proceeds to pay
down a $20 million loan that the Company is in default with respect to.
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.
ITEM 3. LEGAL PROCEEDINGS
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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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
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.
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:
HIGH LOW
Year ended December 31, 1998
First Quarter.......................................... $5.625 $4.844
Second Quarter......................................... 6.00 4.25
Third Quarter.......................................... 5.375 2.50
Fourth Quarter......................................... 7.375 4.125
HIGH LOW
Year ended December 31, 1999
First Quarter.......................................... $8.63 $4.13
Second Quarter......................................... 7.31 4.00
Third Quarter.......................................... 9.25 6.07
Fourth Quarter......................................... 7.375 4.875
Holders
As of March 25, 2000, there were approximately 800 record holders of
the Company's Common Stock.
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Dividends
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.
Recent Sales of Unregistered Securities
The Company did not issue within the period covered by this Report any
securities which were not registered pursuant to the Securities Act of 1933, as
amended (the "Securities Act").
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
This Annual Report on Form 10-KSB includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. This
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact made in this Annual Report on Form 10-KSB are forward looking.
In particular, the statements herein regarding industry prospects and future
results of operations or financial position are forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. The company's actual results may differ significantly from
management's expectations. The following discussion and the section entitled
"Business - - Additional Factors That May Affect Future Results" describes some,
but not all, of the factors that could cause these differences.
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and related footnotes for
the year ended December 28, 1999 included in this Annual Report. The discussion
of results, causes and trends should not be construed to imply any conclusion
that such results or trends will necessarily continue in the future.
Overview
The Company currently operate 73 full-service steakhouse restaurants
located in eleven states. On December 21, 1998, we consummated our acquisition
of Paragon Steakhouse Restaurants, Inc., which is referred to in this prospectus
as Paragon, which owned 78 steakhouse restaurants, of which five were closed,
and its subsidiary Pacific Basin Foods Inc., which is referred to in this
prospectus as Pacific Basin Foods, a restaurant wholesale food distribution
company. Paragon and Pacific Basin Foods are now our direct wholly owned
subsidiaries. Prior to the acquisition of Paragon, we owned and operated four
steakhouse restaurants.
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Our growth strategy is based on internal growth and growth through
acquisition. Internal growth focuses on improvement in same store sales and
construction of new restaurant properties. Acquisition growth focuses on
conversion of acquired restaurant properties to our steakhouse brand names and
the targeted acquisition of one or more large steakhouse chains.
To the extent we build steakhouses in new locations there is likely to
be a time lag between when the expenses of the startup are incurred and when the
newly constructed steakhouse are opened and begin to generate revenues, which
time lag could effect quarter-to-quarter comparisons and results.
Since acquiring Paragon in December 1998, the Company has focused on
reducing the general and administrative expenses. Prior to the acquisition, the
general and administrative expenses related to the restaurants operated by
Paragon was approximately $9 million annually. During the first fiscal quarter
of 1999, the Company identified areas in which the general and administrative
expenses could be reduced. During the second fiscal quarter of 1999, the Company
began making the necessary changes to reduce the general and administrative
expenses. The Company began to realize a reduction in general and administrative
expenses in the third quarter with the full effect of the reductions making a
significant impact in the fourth quarter of 1999.
Our overall steakhouse operations tend to experience seasonal
fluctuations, with the fourth quarter and first quarter of each year being our
strongest quarters, reflecting both the Christmas holiday season and the colder
weather at our Mid-West operations, and the third quarter being the slowest, as
people tend to eat less steak in the summer months. This seasonality, however,
is less pronounced at our California locations which do not experience the same
seasonal changes in weather that occur at our Mid-west locations.
We have three business units which have separate management and
reporting infrastructures 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 businesses
units--Paragon Steakhouse Restaurants, Inc. and Galveston Steakhouse
Restaurants--that operate specialty restaurants around the country. Our food
service distribution segment, which operates as Pacific Basin Foods, performs
distribution of restuarant foods and restaurant-related products for internal
operations, as well as customers outside our internal operations.
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Since our Pacific Basin Foods subsidiary is in the wholesale business
of providing food supplies to restaurants, its profit margin on the sale of food
products to restaurants is significantly less than the margin that can be
obtained through restaurant sales. In addition, since Pacific Basin Foods
maintains a large inventory of food supplies to service its wholesale customers,
its business is more susceptible to the risk of inventory obsolescence than our
other business operations.
Results of Operations
Year Ended December 28, 1999 Compared to the Year Ended December 29, 1998
Revenues for the year ended December 28, 1999 increased $161,281,152 or
2,474% from $6,519,421 for the year ended December 29, 1998 to $167,800,573 for
the same period in 1999. The increase is almost entirely attributable to the
acquisition of Paragon. Gross revenue for the restaurants purchased in the
Paragon acquisition increased by 3.3% for the year ended December 28, 1999
compared to the gross revenue for comparable restaurants for the same period in
1998.
Food and beverage costs for the year ended December 28, 1999 increased
$77,358,888 or 3,011% from $2,569,457 for the year ended December 29, 1998 to
$79,928,345 for the same period in 1999. Food and beverage costs for the
restaurants only as a percentage of restaurant revenues was 45.9% for the year
ended December 29, 1998 compared to 34.9% for the same period in 1999. The food
and beverage costs of Paragon's food distribution subsidiary, Pacific Basin
Foods, Inc., were 90.5% of the food distribution revenue for the year ended
December 28, 1999. The total food and beverage cost as a percentage of total
revenue was 47.6%, which includes the restaurants and the food distribution
subsidiary. The increase in the food and beverage costs at the restaurant level
is directly related to the acquisition of Paragon which carries traditional
steakhouse food and beverage costs, and higher meat prices experienced by the
restaurant industry in 1999.
Payroll and payroll related costs for the year ended December 28, 1999
increased $44,091,544 or 2,203% from $2,001,542 for the year ended December 29,
1998 to $46,093,086 for the same period in 1999. Payroll and payroll related
costs as a percentage of revenues were 30.7% for the year ended December 29,
1998 compared to 27.5% for the same period in 1999. The decrease in payroll
costs as a percentage of revenue is attributed to the cost cutting program
implemented by the Company in 1999. The Company believes that its labor cost is
in line with industry averages.
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 28, 1999 increased $27,072,296 or 1,878% from
$1,441,367 for the year ended December 29, 1998 to $28,513,663 for the same
period in 1999. These costs as a percentage of restaurant revenues were 22.11%
for the year ended December 29, 1998 compared to 17.0% for the same period in
1999. The decrease is principally due to the acquisition of Paragon whose direct
operating costs as a percentage of revenue are less than those previously
experienced by the Company due to the economies of scales of operating more
restaurants.
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Depreciation and amortization for the year ended December 28, 1999
increased $4,065,594 or 2,744% from $148,156 for the year ended December 29,
1998 to $4,213,750 for the same period in 1999. The increase is principally due
to the acquisition of Paragon, which significantly increased the depreciable
assets owned by the Company.
General and administrative expenses for the year ended December 28,
1999 increased $6,145,550 or 277% from $2,219,992 for the year ended December
29, 1998 to $8,365,542 for the same period in 1999. General and administrative
expenses as a percentage of revenues was 34.1% for the year ended December 29,
1998 compared to 5.0% for the same period in 1999. This increase in the dollar
amount of general and administrative expenses is principally due to the
acquisition of Paragon. The Company has significantly reduced its general and
administrative expenses throughout 1999. A majority of the reduction represents
salaries and benefits of employees who were terminated throughout the year, with
a significant reduction in the second fiscal quarter. The Company began to
realize a reduction in general and administrative expenses in the third and
fourth quarters.
Interest income, expense and financing costs, net, for the year ended
December 28, 1999 increased $3,754,373 or 460% from $816,466 for the year ended
December 29, 1998 to $4,570,839 for the same period in 1999. The increase is
principally due to an increase in outstanding indebtedness, which was assumed in
connection with the acquisition of Paragon and additional borrowings by the
Company in the fall of 1998 and spring of 1999.
Year Ended December 29, 1998 Compared to the Year Ended December 30, 1997
Revenues for the year ended December 29, 1998 increased $4.6 million
from $1.9 million for the year ended December 30, 1997 to $6.5 million. The
increase is wholly attributable to the acquisition of Paragon on December 21,
1998. Gross revenue for Pacific Basin Foods' operations for the year ended
December 28, 1998 was $918,000.
Food and beverage costs for the year ended December 29, 1998 increased
$1.9 million from $627,000 for the year ended December 30, 1997 to $2.5 million.
The total food and beverage costs as a percentage of total revenue was 33.6% for
the year ended December 30, 1997 compared to 39.4% for the same period in 1998.
This increase was primarily the result of our acquisition of Pacific Basin Foods
and its wholesale food distribution business in connection with our acquisition
of Paragon. Food and Beverage costs of the restaurants for the year ended
December 29, 1998 was $1,763,000 compared to $627,165 for the same period in
1997. Food and beverage costs of the restaurants as a percentage of restaurant
revenues was 31.5% for the year ended December 29, 1998 compared to 33.6% for
the same period in 1997. Food and beverage costs of Pacific Basin Foods was
$807,000 for the year ended December 29, 1998. No comparison is made for Pacific
Basin Foods to the fiscal year ended December 30, 1997 because we did not
acquire Pacific Basin Foods until December 1998 and we were not operating in the
wholesale food distribution business prior to that acquisition.
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Payroll and payroll related costs for the year ended December 29, 1998
increased $1.2 million from $757,000 for the year ended December 30, 1997 to $2
million. 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. This decrease is principally due to the economies of scale of operating
more restaurants. Payroll and payroll related costs for the restaurants was
34.5% of restaurant revenues for the year ended December 29, 1998. Payroll and
payroll related costs of Pacific Basin Foods for the year ended December 28,
1998 were $69,000, and constituted 7.5% of Pacific Basin Foods' revenues.
Direct operating costs for the year ended December 29, 1998 increased
$1 million from $400,000 for the year ended December 30, 1997 to $1.4 million.
Direct operating costs as a percentage of revenues were 22.1% for the year ended
December 29, 1998 compared to 21.4% for the same period in 1997. These costs as
a percentage of restaurant revenues were 21.4% for the year ended December 30,
1997 compared to 24.8% for the same period in 1998. Direct operating costs of
Pacific Basin Foods were $55,000 for the year ended December 29, 1998 and
constituted 6.0% of Pacific Basin Foods' revenues. Direct operating costs of
Pacific Basin Foods were $55,000 for the year ended December 28, 1998 and
constituted 6.0% of Pacific Basin Foods' 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.
General and administrative expenses for the year ended December 29,
1998 increased $1.9 million from $351,000 for the year ended December 30, 1997
to $2.2 million. General and administrative expenses as a percentage of revenues
was 34.1% for the year ended December 29, 1998 compared to 18.8% for the year
ended December 30, 1997. General and administrative expenses of the restaurants
only was $2,192,00 for the year ended December 29, 1998 compared to $350,945 for
the year ended December 30, 1997. 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 and its subsidiary, Pacific Basin
Foods. The significant increase as a percentage of revenue is due to the decline
in restaurant revenues while the remodeling of two of our then four existing
restaurants was undertaken, higher legal and accounting costs related to being a
publicly traded company, and increased compensation expenses. General and
administrative expenses of Pacific Basin Foods was $27,000 for the year ended
December 29, 1998 and constituted 2.9% of the Pacific Basin Foods' revenues.
Pre-opening startup costs for the year ended December 29, 1998 were $0
as compared to $65,000 for the year ended December 30, 1997. In lieu of opening
new restaurants in 1998, we acquired Paragon and its 78 then operating
restaurants. The adoption of Statement of Position 98-5, "Reporting on the Costs
of Start-up Activities" had minimal impact on us, because it was generally our
policy to expense all start up costs.
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Net interest expense for the year ended December 29, 1998 increased
$294,000 from $523,000 for the year ended December 30, 1997 to $817,000. The
increase is principally due to interest charges taken by us as a result of the
conversion of $92,000 in convertible debentures in July 1998 and the issuance of
$1.1million of debt in July, September and December 1998.
The extraordinary loss reported by the Company for the year ended
December 29, 1998 was due to our conversion of $1.1 million of private placement
notes payable into shares of common stock at $4 per share.
Liquidity and Capital Resources
Our initial public offering was commenced on February 27, 1998. In
addition to the approximately $9.3 million raised by us in 1998 in equity and
debt financing, we raised $1.5 million under a promissory note in March 1999 and
$4.0 million in private placement equity offerings in June and July 1999. A
significant portion of the equity and debt financing raised in 1998 was used to
pay the purchase price and related transaction costs associated with the
acquisition of Paragon and to a lesser degree to fund the our operating loss.
The Company has a cash and cash equivalents balance of $1,590,467 at
December 28, 1999. Management of the Company believes that such cash and cash
equivalents together with anticipated cash from operations is sufficient to
cover the cost of 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. In order for the Company to expand its operations through the
purchase or construction of new restaurants, the Company will require additional
debt and equity financing.
The Company is currently in default with respect to certain loan
covenants associated with a $20 million loan that is collateralized by 19
restaurants owned by the Company. The Company intends to use a portion of the
proceeds from its sale leaseback with HS Realty Partners, LP, if completed, to
pay down this $20 million loan.
On December 21, 1998, Pacific Basin Foods entered into a $6,000,000
revolving line of credit with a financing company. The line of credit bears
interest at prime, plus 1.25%. Borrowings and required payments under the line
of credit are based upon a formula utilizing accounts receivable and
inventories. The line of credit is collateralized by substantially all of
Pacific Basin Foods' tangible property and accounts receivable. We have also
pledged as additional collateral a $250,000 certificate of deposit. The line of
credit was used to pay down accounts payable and advance funds to us and for
working capital requirements. The terms of the line of credit include specific
financial covenants, restrictions on loans to us and other affiliates, and
maintenance of a specified level of tangible net worth. In connection with the
acquisition of Paragon, we assumed repayment of this obligation. We were in
compliance with these covenants at December 28, 1999.
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On August 30, 1996, Paragon entered into a $22.6 million secured
mortgage financing with a financing company. Paragon and one of its
subsidiaries, Paragon of Michigan, Inc., are liable for the repayment of such
financing. In connection with the acquisition of Paragon, we assumed repayment
of this obligation. The facility 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, we prepaid $627,000 of the mortgage, reducing the
original monthly payments of $249,000 to $241,000. The prepayment was funded
from the sale of a portion of the security. The facility is secured by
substantially all of Paragon's owned land, buildings, and the improvements
thereon. The facility proceeds were used to refinance existing debt, finance
restaurant remodels, and pay fees and expenses associated with the facility. The
terms of the facility include specific financial covenants, restrictions on
obtaining other financing, and limitations on payments to us. On April 30, 1997
and on May 28, 1997, the facility was amended primarily to modify the loan
covenants. As of each of September 7, 1999 and December 29, 1998, we were not in
compliance with certain financial ratio loan covenants and therefore we have
reclassified the entire loan balance as current.
Our operating activities for the year ended December 28, 1999 used $2.5
million of cash. This was chiefly the result of the net loss for the year. In
addition, the use of cash of approximately $1.3 million for investing activities
relates primarily to the capital purchase of furniture and equipment for the
steakhouses.
The major source of cash provided by financing activities for the year
ended December 28, 1999 were two private placement offerings of a total of
705,197 shares of common stock with gross proceeds of $4.3 million. In June
1999, we issued 363,818 shares of common stock in a private placement offering
that resulted in gross proceeds to us of $2.0 million. In July 1999, we issued
341,379 shares of common stock in a private placement offering that resulted in
gross proceeds to us of $2,325,000.
The cost of opening each new restaurant ranges from $800,000 to
$1,200,000 for the build-out of a brand-new facility and from $500,000 to
$800,000 for the conversion of an existing restaurant, which includes leasehold
improvements, furniture, fixtures, equipment, food and beverage inventory and
other start-up expenses. Our capital expenditures for the year ended December
28, 1999 were $1,346,661 compared to $355,846 for the same period in 1998.
We lease restaurant and transportation equipment under operating and
capital leases. These leases have initial terms generally ranging from five to
seven years and require a fixed monthly payment, or in the case of
transportation equipment, additional payments on a per mile basis.
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We may need additional sources of financing during the next 12 months.
Any required additional financing may not be available on terms favorable to us,
or at all. If adequate funds are not available on acceptable terms, we may be
unable to fund our growth strategy, including any potential additional
acquisitions, which could lower our revenues and net income, if we achieve
profitability in the future. If we raise additional funds by issuing equity
securities, shareholders may experience dilution of their ownership interest and
the newly issued securities may have rights superior to those of the common
stock. If we issue or incur debt to raise funds, we may be subject to
limitations on our operations.
We intend to continue our aggressive acquisition program with a
combination of cash, common stock on some debt used to finance the primary
portion of consideration. We expect the cash needed for these acquisitions to
come from additional financing facilities and potential debt or equity
offerings.
In June 1999 the FASB issued SFAS No. 136, "Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust That Raises or Holds
Contributions for Others" and SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133." These statements are not applicable to us.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not expect adoption of
SFAS No. 137 to have a material impact, if any, on its financial position or
results of operations.
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ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements of Steakhouse Partners, Inc. 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.
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PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
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 employees of the
Company are as follows:
NAME AGE POSITION
EXECUTIVE OFFICERS AND DIRECTORS:
Richard M. Lee................. 34 Chairman of the Board and Chief
Executive Officer
Hiram J. Woo................... 64 President, Corporate Secretary,
and Director
Joseph L. Wulkowicz............ 49 Chief Financial Officer
KEY EMPLOYEES:
Michael F. Maloney............. 35 Vice President of Operations
Michael W. Morehead............ 50 Vice President of Marketing
OUTSIDE DIRECTORS:
Tom Edler...................... 55 Director
Mark W. Goudge................. 36 Director
Tod Lindner.................... 54 Director
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RICHARD M. LEE has been our Chairman of the Board and Chief Executive
Officer since our 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
Domino's Pizza Restaurants and Popeyes Famous Fried Chicken.
HIRAM J. WOO has been our President and Corporate Secretary, and a
Director since our inception. He has devoted the substantial portion of his
entire business time and attention exclusively to our business and affairs since
our inception. Since 1976, he has also owned an accounting firm with numerous
restaurateurs among its 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.
In the past 14 years, RFDC has managed over $300 million of real estate
development projects in the Western United States. Mr. Woo is a Certified Public
Accountant. Mr. Woo received his Bachelor of Science Degree in Accounting from
the University of California at Berkley in 1957.
JOSEPH L. WULKOWICZ became our Chief Financial Officer in 1999. Prior
to joining us, Mr. Wulkowicz served for two years as the Vice President and
Chief Financial Officer of McArthur HTC International, Inc., a leading importer
and marketer of licensed products to the gift, sports and promotional industry.
From 1994 to 1997, Mr. Wulkowicz was the Vice President and Controller of Planet
Polymer Technologies, Inc., a publicly held manufacturer of biodegradable
resins. Mr. Wulkowicz received his Bachelors of Art from De Paul University in
1973 and completed his Masters of Business Administration in 1977 at De Paul
University Graduate School of Business.
MICHAEL F. MALONEY has been our Vice President of Operations since
January 1999. Between 1997 and 1999, Mr. Maloney was the Director of Franchise
Operations for Jimmy Johns Gourmet Sandwiches throughout the Midwest. Mr.
Maloney joined the leadership team of Lone Star Steakhouse and Saloon, Inc. in
1991 and was promoted in 1996 to Regional Vice President of Operations,
supervising one hundred and five restaurants with a combined volume of
approximately $260 million. Prior to joining Lone Star, Mr. Maloney had managed
restaurants for Steak and Ale Corporation and King Family Restaurants. He
received his computer science and math education at the University of
Pittsburgh.
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MICHAEL W. MOREHEAD became our Vice President of Marketing in 1999. Mr.
Morehead returned to us in 1994, and was our Vice President of Business
Development since 1995. Prior to 1994, Mr. Morehead was the Vice President of
Marketing for Rusty Pelican Restaurants, Inc. between 1989 and 1993 and for
Carlo's Murphy's Restaurants between 1981 and 1988. Mr. Morehead has been
affiliated with the restaurant industry for over 28 years. Prior to focusing on
marketing and concept development, Mr. Morehead worked for over ten years in
restaurants operations, including multi-unit supervision. He received his
engineering education at Southern Illinois University.
TOM EDLER has been a Director since May, 1998. Mr. Edler is a Senior
Vice President of Capitol Bay Securities, a regional investment banking firm.
Prior to joining Capitol Bay Securities, Mr. Edler was a real estate broker at
Grubb & Ellis Company, specializing in the acquisition, disposition, development
and leasing of restaurant and hotel properties throughout California. Prior
thereto, 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 four years immediately following
college.
MARK W. GOUDGE has been a Director 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. Mr. Goudge graduated from the
University of Alaska-Fairbanks in December 1987 with a B.A. in Finance.
TOD LINDNER has been a Director since January, 1999. Mr. Lindner has
been a managing director of Pentech Capital Markets Group since May, 1999. Prior
to joining Pentech Capital Markets Group, Mr. Lindner was a managing director of
Ally Capital Group Inc., an investment banking firm from 1996 to April, 1999.
Prior thereto, Mr. Lindner founded and was President of Northwest Capital
Corporation, an originator of upper middle market commercial loans, from 1984
through 1996. Mr. Lindner received his Bachelor of Science 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.
None of our directors, executive officers or key employees is related
to any other of our directors, executive officers or key employees. Our
compensation committee is comprised of Messrs. Lindner, Goudge and Edler. Our
audit committee is comprised of Messrs. Woo, Goudge and Edler.
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BOARD OF DIRECTORS
The number of directors is currently fixed at five. Our certificate of
incorporation provides that the Board of Directors shall be divided into three
classes. The members of each class of directors serve for staggered three-year
terms. The member of the Class I Directors is Mr. Goudge; the members of the
Class II Directors are Messrs. Edler and Lindner; and the members of the Class
III Directors are Messrs. Woo and Lee. The initial terms of office of the Class
I Directors, Class II Directors and Class III Directors will expire upon the
election and qualification of directors at the annual meeting of stockholders
held following the fiscal years ending in December, 2000, 2001 and 2002,
respectively. At each subsequent annual meeting of stockholders, stockholders
will elect or re-elect directors for a full term of three years to succeed those
directors whose terms are expiring. Any alteration, amendment or repeal of the
staggered board requirement in the certificate of incorporation would require
the affirmative vote of stockholders owning at least 66 2/3% of the total shares
outstanding and entitled to vote generally in the election of directors, voting
together as a single class.
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, 1999, all of its executive
officers and directors complied with the requirements of Section 16 (a).
28
<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 28,
1999.
<TABLE>
<CAPTION>
Long Term
Name and Other Annual Compensation Awards
Principal Position Year Salary($) Bonus($) Compensation(1) Securities Underlying
Options (#)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Richard M. Lee 1999 $100,000 $175,500 19,248 -
Chairman of the 1998 $ 87,500 $294,689 15,892 201,000
Board and Chief 1997 $ 50,000 - 5,809 -
Executive Officer 1996 $ 50,000 - 2,421 82,500
Hiram J. Woo 1999 $ 80,000 $ 94,500 7,870 -
President and Chief 1998 $ 71,250 $111,567 7,870 134,000
Financial Officer 1997 $ 45,000 - 1,968 -
1996 $ 45,000 - - 82,500
<FN>
- ------------------
(1) Other annual compensation consists of a car allowance paid by the Company.
</FN>
</TABLE>
29
<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 1999. 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 554,137 43.7% 70,087 options with an May 2009
exercise price of $5.95
484,050 options with an
exercise price of $6.90 July 2009
Hiram J. Woo 287,462 22.7% 42,412 options with an May 2009
exercise price of $5.40
245,050 options with an
exercise price of $6.25 July 2009
</TABLE>
30
<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option exercises
and option holdings for the fiscal year 1999 with respect to each of the named
executive officers. No named executive officers exercised any options during
such year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-
END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised In-the-money
Shares Acquired Value Options at Fiscal Year End (#) Options at Fiscal Year End ($)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Richard M. Lee 0 0 283,500 exercisable/ $694,438 exercisable/
554,137 unexercisable $0 unexercisable
Hiram J. Woo 0 0 216,500 exercisable/ $587,188 exercisable/
287,462 unexercisable $0 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 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
31
<PAGE>
employment agreement not to compete with the Company for a period of one (1)
year following his termination of employment for any reason.
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.
32
<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 28, 1999, 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
------------- --------------------------
<S> <C> <C>
Richard M. Lee (2) (8).................................... 540,420 14.8%
Hiram J. Woo (3) (9)...................................... 374,042 10.4%
Joseph L. Wulkowicz (10).................................. 0 0%
Tom Edler (4) (11)........................................ 0 0%
Mark W. Goudge (5) (12)................................... 0 0%
Tod Lindner (6)........................................... 0 0%
RS Investment Management Co. LLC (7)...................... 815,800 24.2%
All officers and directors as a group 914,462 23.6%
(6 persons) (8) (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 and 1,050,000 shares of Series C
Convertible Preferred Stock, 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 and Series C Convertible Preferred Stock, Mr.
Lee currently holds 42.3% 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 554,137 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 287,462 shares of Common Stock. Does not include 700,000 shares
of Series C Convertible Preferred Stock, 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 C Convertible Preferred Stock, Mr.
Woo currently holds 17.6% of the combined stockholders voting power of
the Company.
(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) RS Investment Management Co. LLC's business address is 388 Market
Street, Suite 200, San Francisco, California 94111.
(8) Includes the assumed exercise of options to purchase 283,500 shares
which are exercisable within 60 days by Mr. Lee.
(9) Includes the assumed exercise of options to purchase 216,500 shares
which are exercisable within 60 days by Mr. Woo.
(10) Does not include options held by Mr. Wulkowicz to acquire up to
45,000 shares of Common Stock.
(11) Does not include options held by Mr. Edler to acquire up to 15,000
shares of Common Stock.
(12) Does not include options held by Mr. Goudge to acquire up to 15,000
shares of Common Stock.
</FN>
</TABLE>
33
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Employment Agreements
The Company has entered into separate Employment Agreements with
Richard M. Lee and Hiram J. Woo. 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.
34
<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.
35
<PAGE>
10.13* Asset Purchase Agreement between the Company as buyer and Kent & Jenny
Andersen as sellers dated September 23, 1996.
10.14* Escrow Instruction with Jean Allen Escrow Co., Inc. dated December 3,
1996 with Estimated Closing Statement dated March 3, 1997 reference to
Asset Purchase Agreement cited in 10.13 above.
10.15* Galveston Steakhouse Corp. Omnibus Stock Plan.
10.16* Richard M. Lee Stock Option Agreement.
10.17* Hiram J. Woo Stock Option Agreement.
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****Form of Secured Exchangeable Note issued to Talisman Capital
Opportunity Fund Ltd.
10.30****Form of Warrant issued to Talisman Capital Opportunity Fund Ltd.
10.31****Form of Collateral, Pledge and Security Agreement by and between the
Company and Talisman Capital Opportunity Fund Ltd.
36
<PAGE>
10.32****Form of Warrant issued to Joseph Donohue, Jr., Max Rockwell, Mark
Angelo, Hunter Singer, John Audiferren, AIBC Investment Services Corp.,
May Davis Group and Barry Lebin.
10.33****Loan and Security Agreement dated December 21, 1998 by and between
Pacific Basin Foods, Inc. and The CIT Group/Credit Finance, Inc.
10.34****Security Agreement dated December 21, 1998 by and between the Company
and The CIT Group/Credit Finance, Inc.
10.35****Secured Continuing Guaranty dated December 21, 1998 executed by the
Company.
10.36****Security Agreement (Intellectual Property) dated December 21, 1998 by
and between the Company and The CIT Group/Credit Finance, Inc.
10.37****Grant of Security Interest (Trademarks) dated December 21, 1998
executed by the Company.
10.38*****Purchase and Sale Agreement between Paragon Steakhouse Restaurants,
Inc. and HS Realty Partners, LP
16.0* Letter re: Change of Certifying Accountant.
23.1**** Consent of Singer Lewak Greenbaum & Goldstein LLP.
23.2**** Consent of Ernst & Young LLP.
27.1***** Financial Data Schedule.
99.1** Press release dated September 1, 1998.
- --------------
* Incorporated by reference from Registration Statement on Form SB-2
(File #333-29093).
** Incorporated by reference from Form 8-K, Current Report, filed with
the SEC on September 14, 1998.
*** Incorporated by reference from Form 8-K, Current Report, filed with
the SEC on January 4, 1999.
**** Incorporated by reference from Registration Statement on Form SB-2
(File #333-69137)
***** Filed herewith
REPORTS ON FORM 8-K
None.
37
<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.
STEAKHOUSE PARTNERS, INC.
/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 March 24, 2000
Name: Richard M. Lee
Title: Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/Hiram J. Woo March 24, 2000
Name: Hiram J. Woo
Title: President, Secretary and Director
/s/Joseph L. Wulkowicz March 24, 2000
Name: Joseph L. Wulkowicz
Title: Chief Financial Officer (Principal Financial
and Accounting Officer)
/s/Tom Edler March 24, 2000
Name: Tom Edler
Title: Director
/s/Mark W. Goudge March 24, 2000
Name: Mark W. Goudge
Title: Director
/s/Tod Lindner March 24, 2000
Name: Tod Lindner
Title: Director
38
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONTENTS
December 31, 1999
- ------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet 2 - 4
Consolidated Statements of Operations 5 - 6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 8 - 10
Notes to Consolidated Financial Statements 11 - 40
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Steakhouse Partners, Inc.
(formerly Galveston's Steakhouse Corp.) and subsidiaries
We have audited the accompanying consolidated balance sheet of Steakhouse
Partners, Inc. (formerly Galveston's Steakhouse Corp.) (a Delaware corporation)
and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1999. 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 financial position of Steakhouse Partners,
Inc. (formerly Galveston's Steakhouse Corp.) and subsidiaries as of December 31,
1999, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1999 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 31, 1999, the Company maintained a current ratio of 0.25-to-1, which
arose from a working capital deficit of $34,765,903. In addition, the Company is
in default with secured financing as of December 31, 1999. 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 7, 2000
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
- -----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,590,467
Accounts receivables, net of allowance for
doubtful accounts of $61,264 3,498,401
Inventories 5,173,175
Advances to officers 150,000
Prepaid expenses and other current assets 1,439,021
-----------
Total current assets 11,851,064
Property, plant, and equipment, net 47,608,117
Other assets
Intangible assets, net 443,722
Other 1,568,207
Cash - restricted under collateral agreements 1,609,503
-----------
Total assets $63,080,613
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $22,434,042
Current portion of capital lease obligations 542,569
Line of credit 2,775,435
Accounts payable 4,925,479
Accrued liabilities 2,522,281
Unearned revenue 6,567,589
Reserve for self insurance claims 2,499,339
Sales and property taxes payable 1,261,181
Accrued payroll costs 3,089,052
-----------
Total current liabilities 46,616,967
Long-term debt, net of current portion 3,681,566
Capital lease obligations, net of current portion 7,909,068
Deferred taxes 162,970
Deferred rent 2,208,696
Total liabilities 60,579,267
-----------
Commitments and contingencies
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
- -------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, $0.001 par value
2,250,000 shares authorized
0 shares issued and outstanding $ -
Preferred stock, Series B, Convertible, $0.001 par value
1,000,000 shares authorized
1,000,000 shares issued and outstanding 1,000
Preferred stock, Series C, Convertible, $0.001 par value
1,750,000 shares authorized
1,750,000 shares issued and outstanding 1,750
Common stock, $0.01 par value
10,000,000 shares authorized
3,369,022 shares issued and outstanding 33,690
Subscription receivable (10,000)
Treasury stock, 28,845 shares, at cost (175,000)
Additional paid-in capital 11,527,192
Accumulated deficit (8,877,286)
-----------
Total stockholders' equity 2,501,346
-----------
Total liabilities and stockholders' equity $63,080,613
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------
1999 1998
------------ ------------
Revenues $167,800,573 $ 6,519,421
------------ ------------
Cost of sales
Food and beverage 79,928,345 2,569,457
Payroll and payroll related costs 46,093,086 2,001,542
Direct operating costs 28,513,663 1,441,367
Depreciation and amortization 4,213,750 148,156
------------ ------------
Total cost of sales 158,748,844 6,160,522
------------ ------------
Gross profit 9,051,729 358,899
Costs and expenses
General and administrative expenses 8,365,542 2,219,992
------------ ------------
Income (loss) before other income (expense) 686,187 (1,861,093)
------------ ------------
Other income (expense)
Interest income 36,942 68,495
Interest and financing costs (4,607,781) (884,961)
------------ ------------
Total other income (expense) (4,570,839) (816,466)
------------ ------------
Loss before provision for income taxes and
extraordinary loss on debt extinguishment (3,884,652) (2,677,559)
Provision for income taxes 10,387 6,044
------------ ------------
Loss before extraordinary item (3,895,039) (2,683,603)
Extraordinary loss on debt extinguishment - (278,125)
------------ ------------
Net loss $ (3,895,039) $ (2,961,728)
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------
1999 1998
---------- ----------
Basic and diluted loss per share
before extraordinary item $ (1.39) $ ( 1.26)
========== ==========
Extraordinary loss per share $ - $ (0.13)
========== ==========
Basic and diluted loss per share after
extraordinary item $ (1.39) $ (1.39)
========== ==========
Weighted-average shares outstanding 2,800,805 2,135,241
========== ==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock Preferred Stock
Series B, Convertible Series C, Convertible Common Stock
------------------------- ---------------------- ----------------------- Subscriptions
Shares Amount Shares Amount Shares Amount Receivable
----------- ----------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,000,000 $ 1,000 - $ - 825,000 $ 8,250 $ -
Issuance of common stock in
connection with initial public
offering 1,250,000 12,500
Issuance costs
Conversion of promissory notes 333,325 3,333
Issuance of common stock in lieu
of interest 20,000 200
Interest from fixed conversion
features
Extraordinary loss on debt
extinguishment
Net loss
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 1,000,000 1,000 - - 2,428,325 24,283 -
Issuance of common stock for
services rendered 146,000 1,460
Issuance of common stock in lieu
of interest 52,500 525
Issuance of common stock for
cash in connection with private
placements 705,197 7,052
Issuance costs
Issuance of warrants in lieu of
interest
Issuance of Series C convertible
preferred stock 1,750,000 1,750
Purchase of stock options
Exercise of stock options 35,000 350
Purchase of treasury stock
Issuance of common stock for
subscriptions receivable 2,000 20 (10,000)
Net loss
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 1,000,000 $ 1,000 1,750,000 $ 1,750 $ 3,369,022 $ 33,690 $ (10,000)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Additional
Treasury Paid-in Accumulated
Stock Capital Deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ 596,563 $(2,020,519) $(1,414,706)
Issuance of common stock in
connection with initial public
offering 6,487,500 6,500,000
Issuance costs (2,532,603) (2,532,603)
Conversion of promissory notes 1,201,167 1,204,500
Issuance of common stock in lieu
of interest 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 31, 1998 - 6,508,669 (4,982,247) 1,551,705
Issuance of common stock for
services rendered 546,040 547,500
Issuance of common stock in lieu
of interest 205,725 206,250
Issuance of common stock for
cash in connection with private
placements 4,318,948 4,326,000
Issuance costs (306,820) (306,820)
Issuance of warrants in lieu of
interest 60,000 60,000
Issuance of Series C convertible
preferred stock 1,750
Purchase of stock options 10,000 10,000
Exercise of stock options 174,650 175,000
Purchase of treasury stock (175,000) (175,000)
Issuance of common stock for
subscriptions receivable 9,980 -
Net loss (3,895,039) (3,895,039)
----------- ----------- ----------- -----------
Balance, December 31, 1999 $ (175,000) $11,527,192 $(8,877,286) $ 2,501,346
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------
1999 1998
------------ ------------
Cash flows from operating activities
Net loss $ (3,895,039) $ (2,961,728)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 4,213,750 148,156
Interest paid with common stock 266,250 100,000
Interest charges on convertible debt - 378,117
Non-cash bonuses paid to officers - 406,256
Loss on debt extinguishment - 278,125
Deferred taxes (44,613) -
Issuance of common stock in exchange for
services rendered 547,500 -
Adjustment to purchase price of
Paragon Steakhouse Restaurants, Inc. 435,830 -
(Increase) decrease in
Accounts receivable 1,399,414 (1,126,342)
Advances to officers (150,000) (226,517)
Inventories 382,114 235,998
Prepaid expenses and other current assets (667,548) (8,864)
Intangibles, net - 183,438
Other assets (300,135) (904,904)
Cash - restricted under collateral agreements (78,074) -
Increase (decrease) in
Accounts payable (3,942,613) (1,985,311)
Accrued liabilities (284,767) 269,740
Unearned revenue 527,605 476,165
Reserve for self insurance claims (8,652) 21,273
Sales and property taxes payable (296,385) 134,659
Accrued payroll costs (738,722) (492,168)
Deferred rent 161,976 (923)
------------ ------------
Net cash used in operating activities (2,472,109) (5,074,830)
------------ ------------
Cash flows from investing activities
Purchases of property, plant, and equipment (1,346,661) (355,846)
Acquisition of Paragon Steakhouse Restaurants,
Inc. and subsidiaries and Pacific Basin
Foods, Inc., net of cash acquired - (2,054,596)
------------ ------------
Net cash used in investing activities (1,346,661) (2,410,442)
------------ ------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------
1999 1998
----------- -----------
Cash flows from financing activities
Proceeds from issuance of debt $ 1,500,000 $ 5,096,367)
Principal payments on debt and capital leases (2,005,900) (1,184,924)
Proceeds from issuance of stock 4,327,750 6,500,000
Cash paid for offering costs (306,820) (2,235,756)
Cash received on sale of stock options 10,000 -
Net borrowing on line of credit 1,129,066 -
----------- -----------
Net cash provided by financing
activities 4,654,096 8,175,687
----------- -----------
Net increase in cash and cash
equivalents 835,326 690,415
Cash and cash equivalents, beginning of year 755,141 64,726
----------- -----------
Cash and cash equivalents, end of year $ 1,590,467 $ 755,141
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 4,266,122 $ 501,666
----------- -----------
Income taxes paid $ 10,387 $ 6,044
=========== ===========
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 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 31, 1998, the Company relieved advances to
officers in the form of bonuses aggregating $406,256.
During the year ended December 31, 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 31, 1998, the Company issued 20,000 shares of
common stock in payment of interest valued at $100,000.
The accompanying notes are an integral part of these financial statements.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities (Continued)
During the year ended December 31, 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 31, 1998, the Company executed three promissory
notes aggregating $393,285 for the purchase of restaurants and their related
assets.
During the year ended December 31, 1999, the Company issued 52,500 shares of
common stock as payment of interest valued at $206,250.
During the year ended December 31, 1999, the Company issued 20,000 warrants as
payment of interest valued at $60,000.
During the year ended December 31, 1999, the Company issued 146,000 shares of
common stock in exchange for services rendered valued at $547,500.
During the year ended December 31, 1999, a previous employee of the Company
exercised his options to purchase 35,000 shares of the Company's common stock at
$5 per share for a total value of $175,000. As payment for this exercise, the
employee surrendered 28,845 shares of the Company's common stock with a fair
market value on the date of exercise of $6.0669. In connection with this
transaction, the Company recorded treasury stock of $175,000 as of December 31,
1999.
During the year ended December 31, 1999, the Company recorded subscriptions
receivable of $10,000 for the purchase of 2,000 shares of the Company's common
stock.
During the year ended December 31, 1999, the Company settled a lawsuit for
approximately $1,313,000. In lieu of payment, the Company gave up three
restaurants with the same value.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
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
31, 1999, the Company (as defined in Note 2) maintained a current ratio
of 0.25-to-1, which arose from a working capital deficit of
$34,765,903. 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 31,
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.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Background and Operations
Steakhouse Partners, Inc. (formerly 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").
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 closed escrow on the remaining two Texas Loosey's restaurants
on May 1, 1999.
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.
During the year ended December 31, 1999, Galveston's Steakhouse Corp.
changed its name to Steakhouse Partners, Inc.
Principles of Consolidation
The consolidated financial statements include the accounts of
Steakhouse Partners, Inc. (formerly 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. For financial statement
purposes, the Company reports all years as ending December 31.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks and
credit card receivables.
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
31, 1999, uninsured portions of the balances at those banks aggregated
to $3,106,886. 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.
Accounts Receivable
Accounts receivable consist primarily of amounts due from customers.
The Company has provided for an allowance for doubtful accounts
totaling $61,264. Management believes this to be sufficient to account
for all uncollectible accounts.
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 considered to be unredeemable.
Advertising and Promotional Costs
Advertising and promotional costs are charged to expense as incurred.
Advertising and promotional costs for the years ended December 31, 1999
and 1998 were $2,647,008 and $63,129, respectively.
Direct Operating Costs
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.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventories
Inventories, consisting principally of food, beverages, and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or
market.
Property, Plant, and Equipment
Property, plant, 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 as follows:
Buildings 20 years
Furniture, fixtures, and equipment 5 years
Improvements to leased property are amortized over the lesser of the
life of the lease or the life of the improvements. Amortization expense
on assets acquired under capital leases is included with depreciation
and amortization expense on owned assets.
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of
operations.
Intangibles
Intangibles consist of 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 15-year period. The Company
continually evaluates whether events or circumstances have occurred
that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related
restaurants' undiscounted cash flows over the remaining life of the
goodwill in measuring whether the goodwill is recoverable.
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
these leases to provide for even charges to operations over the lives
of the leases.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Comprehensive Income
The Company utilizes 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
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 136, "Transfer of Assets to a Not-for-Profit Organization or
Charitable Trust that Raises or Holds Contributions for Others." This
statement is not applicable to the Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." The Company does not expect
adoption of SFAS No. 137 to have a material impact, if any, on its
financial position or results of operations.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified
to conform with the current year presentation.
Revenue Recognition
Revenues are generally recognized when services are rendered.
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
The Company utilizes SFAS No. 128, "Earnings per Share." SFAS No. 128
replaced the previously reported primary and fully diluted loss per
share with basic and diluted loss per share. Unlike primary loss per
share, basic loss per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted loss per share is very
similar to the previously reported fully diluted loss per share. Basic
loss 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 long-term debt also approximate fair value
because current interest rates offered to the Company for debt of
similar maturities are substantially the same.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risk Concentrations
Substantially all of the Company's accounts receivable are generated
from two customers. As of December 31, 1999, accounts receivable from
the two significant customers were 46% and 36% of the Company's total
accounts receivable.
NOTE 3 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1999 consisted of the
following:
Land $11,832,771
Buildings 24,137,881
Furniture, fixtures, and equipment 3,190,868
Leased property under capital leases 9,665,525
-----------
48,827,045
Less accumulated depreciation and amortization 3,398,837
-----------
45,428,208
Small kitchenwares 2,179,909
-----------
Total $47,608,117
===========
Depreciation and amortization expense was $4,089,837 and $148,156 for
the years ended December 31, 1999 and 1888, respectively.
NOTE 4 - INTANGIBLES
Intangibles at December 31, 1999 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 159,278
-----------
Total $ 443,722
===========
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 5 - NOTE RECEIVABLE
To obtain a letter of credit for $2,600,000 required by one of the
Company's lessors, the Company placed a $500,000 deposit with the
issuer of the letter of credit on November 8, 1998. 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. In
exchange for the letter of credit, the Company is required to pay to
the issuer $118,000 and issue 20,000 warrants annually on the
anniversary date of the letter of credit, pro rata for each year the
letter of credit is outstanding. Any money drawn on the letter of
credit will incur an interest charge of 12% per annum, and repayment of
the drawn down and interest charges are due within 90 days. The letter
of credit matures in five years from the date of issuance and is
callable after two years from the date of issuance by the Company upon
payments of amounts due to the issuer. During the year ended December
31, 1999, the Company reduced the note receivable by the $118,000. The
note receivable is included in other assets in the accompanying balance
sheet.
NOTE 6 - LONG-TERM DEBT
Long-term debt at December 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Convertible debt (see Note 8). $ 1,100,000
Secured exchangeable notes (see Note 9). 2,000,000
10.39% mortgage loan collateralized by the majority of the
Company's property, plant, 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. 19,618,578
Notepayable to the former owner in the amount of $870,000,
bearing interest at 8% per annum from the original note
date (August 19, 1996). Monthly principal and interest
payments of $10,978 are due from February 19, 1998 through
July 19, 2001, with the remaining principal balance due
via a balloon payment on August 19, 2001. 778,303
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT (Continued)
<TABLE>
<S> <C>
Notepayable 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 was due in one installment on December
21, 1999. Interest on the principal balance of this note
shall be due and payable quarterly. The Company is
currently in default on this obligation. $ 600,000
Note payable, dated December 21, 1998, due in one year, bearing
no interest (see Notes 7 and 18). Subsequent to the year
ended December 31, 1999, the amount was paid off. 250,000
Bridge loan, dated December 21, 1998, due in one year, bearing
no interest (see Notes 7 and 18). Subsequent to the year
ended December 31, 1999, the amount was paid off. 100,000
Notepayable, dated March 1, 1997, bearing interest at 11.25%
per annum with an original principal of $125,373 and
maturing in February 2000. The note requires monthly
payments of $4,063 and is secured by the assets of two
restaurants. 6,678
Notepayable, dated March 1, 1997, bearing interest at 11.25%
per annum with an original principal of $230,997 and
maturing in July 2004. The note requires monthly payments
of $3,895 and is secured by the assets of two restaurants. 162,049
Notepayable, dated March 22, 1999, bearing interest at 12.5%
per annum with an original principal of $1,500,000. The
note requires monthly payments of $15,625 through February
2004 with the remaining principal balance due in a balloon
payment in March 2004. The note is secured by the assets
of two restaurants. The Company is currently in default on
this obligation. 1,500,000
-----------
26,115,608
Less current portion 22,434,042
-----------
Long-term portion $ 3,681,566
===========
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT (Continued)
The maturities of long-term debt for the year succeeding December 31,
1999 are as follows:
Year Ending
December
-----------
2000 $22,434,042
2001 1,230,944
2002 130,944
2003 2,130,944
2004 130,944
Thereafter 57,790
-----------
Total $26,115,608
===========
NOTE 7 - LINE OF CREDIT AND SECURED FINANCING
Line of Credit
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 Company 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 the
Company and for working capital requirements. The terms of the Revolver
include specific financial covenants, restrictions on loans to Company
and other affiliates, and maintenance of a specified level of tangible
net worth. The Company was in compliance with these covenants at
December 31, 1999. As of December 31, 1999, the outstanding balance was
$2,775,435; therefore, $3,224,565 was unused on the line of credit.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 7 - LINE OF CREDIT AND SECURED FINANCING (Continued)
Line of Credit (Continued)
In order to obtain the $250,000 as collateral, the Company entered into
a $250,000 loan agreement on November 18, 1998 with an unrelated third
party, maturing one year from the date of the loan. In lieu of
interest, the Company agreed to immediately issue 50,000 shares of
common stock upon receipt by the Company of $250,000. These shares vest
pro rate over the course of one year from the date of issuance of the
letter of credit. The minimum vesting percentage is 25%, and the final
vesting percentage will be the actual number of days that the letter of
credit is outstanding divided by 360. If the loan balance is not paid
off by the maturity date, the Company will issue an additional 50,000
shares of common stock, pro rata for the days outstanding.
The share beneficiaries also have the ability to put or sell all of
their shares in this transaction back to the Company at $5 per share
over a 90-day window, beginning one year from the issuance date of the
letter of credit or beginning from the date of the termination of the
letter of credit, whichever is earlier. Any monies drawn on this letter
of credit will immediately become due and payable in full by the
Company, and interest will accrue on the any unpaid monies at an annual
interest rate of 12%. Any monies not paid after 30 days will be charged
at an annual interest rate of 18%. The loan is guaranteed by the
Company and personally guaranteed by the Company's Chairman of the
Board and President. In relation to this loan, the Company recorded
interest expense of $250,000 as of December 31, 1999. Subsequent to the
year ended December 31, 1999, the note was paid off (see Note 18).
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 7 - LINE OF CREDIT AND SECURED FINANCING (Continued)
Secured Financing
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 31, 1999, the Company is not
in compliance with certain financial ratio loan covenants and therefore
has reclassified the entire loan balance as current. As of December 31,
1999, the outstanding balance was $19,618,578.
Bridge Loan
On December 9, 1998, the Company obtained a $100,000 bridge loan from
an unrelated third party, with a maturity date of one year from the
date of the agreement. In lieu of interest, the agreement calls for the
immediate issuance of 5,000 shares of common stock and 15,000 warrants
to purchase common stock at zero cost. These shares and warrants vest
pro rata over the course of one year from the date of receipt by the
Company of the $100,000. The minimum vesting percentage is 25%, and the
final vesting percentage will be the actual number of days until the
$100,000 is paid, divided by 360.
Upon the one-year maturity date and on each annual anniversary
thereafter, as long as the $100,000 balance owed remains unpaid, the
Company will issue an additional 20,000 shares of common stock, which
will vest immediately. Additionally, those unpaid monies will accrue
interest after the one-year maturity date at an annual interest rate of
25%. The share beneficiaries also have the ability to put or sell all
their shares in this transaction back to the Company at $5 per share
over a 90-day window, beginning one year from the receipt of the
$100,000. The loan is guaranteed by the Company and personally
guaranteed by the Company's Chairman of the Board and President. In
relation to this loan, the Company recorded interest expense of
$100,000 as of December 31, 1999. Subsequent to the year ended December
31, 1999, the note was paid off (see Note 18).
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 8 - 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 convert 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. There were no conversions to common
stock during the year ended December 31, 1999.
The terms associated with each series for the year ended December 31,
1999 are as follows:
6% notes, due July 23, 2001 $ 100,000
6% notes, due June 3, 2001 600,000
6% notes, due July 15, 2001 400,000
-----------
Total $ 1,100,000
===========
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.
NOTE 9 - SECURED EXCHANGEABLE NOTES
On September 29, 1998, the Company issued a secured exchangeable note
of $650,000, maturing on September 28, 2003. Interest on the note at
14.375% 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 increases 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 $4.65 or the average of the four
low trades in the primary market for trading in the Company's common
stock over the 22 trading days immediately proceeding the exchange
date, reduced by an exchange discount. This note also provides warrants
for the purchase of 73,125 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 $5.28. The
warrants may be exercised whole or in part.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 9 - SECURED EXCHANGEABLE NOTES (Continued)
On December 21, 1998, the Company issued a secured exchangeable note of
$1,350,000, maturing on September 28, 2003. 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 increases 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 $5.50 or the average of the four low trades
in the primary market for trading in the Company's common stock over
the 22 trading days immediately proceeding the exchange date, reduced
by an exchange discount. This note also 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.
NOTE 10 - STOCKHOLDERS' EQUITY
Preferred Stock
On June 4, 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 initial public
offering ("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 per
share equal to 150% of the IPO price of the Company's common stock.
The preferred stock carries no dividends prior to the second
anniversary of the closing date of the 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 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.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Preferred Stock (Continued)
On July 26, 1999, the Company issued 1,750,000 shares of convertible
preferred stock (Series C) to the Chief Executive Officer and President
of the Company for services rendered. The preferred stock has a par
value of $0.001 per share and carries the right 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 March 2, 2006 or the date
the Company's annual net profits equal or exceed $4,200,000. Upon
conversion, the holder of the preferred stock will be required to pay
to the Company a conversion price per share equal to $8.53.
The shares of Series C may not be redeemed by the Company without the
unanimous consent of the holders. The preferred stock carries no
dividends prior to March 2, 2000, the second anniversary of the closing
date of the 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
IPO, or any time thereafter if the conversion test is not satisfied,
the holder of the preferred stock would be entitled to the par value of
$0.001 per share, or $1,750 in the aggregate. In the event of a
voluntary or involuntary liquidation or dissolution of the Company
subsequent to the Company's achieving $4,200,000 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 31, 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 per share
for total proceeds of $6,500,000. Stock issuance costs incurred related
to the IPO were $2,532,603.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
During the year ended December 31, 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. In addition, holders of
promissory notes aggregating to $92,000 were converted to 55,200 shares
of 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 of the IPO and
the conversion of debt to common stock.
In connection with a private placement of the Company's common stock on
June 14, 1999, the Company issued 182,000 shares of its $0.01 par value
common stock at $5.50 per share for total proceeds of $1,001,000. Stock
issuance costs incurred in relation to this placement totaled $95,070.
In connection with a private placement of the Company's common stock on
June 16, 1999, the Company issued 181,818 shares of its $0.01 par value
common stock at $5.50 per share for total proceeds of $1,000,000. Stock
issuance costs incurred in relation to this placement totaled $70,000.
In connection with a private placement of the Company's common stock on
July 15, 1999, the Company issued 300,000 shares of its $0.01 par value
common stock at $6.75 per share for total proceeds of $2,025,000. Stock
issuance costs incurred in relation to this placement totaled $141,750.
In connection with a private placement of the Company's common stock on
July 21, 1999, the Company issued 41,379 shares of its $0.01 par value
common stock at $7.25 per share for total proceeds of $300,000.
During the year ended December 31, 1999, the Company issued 146,000
shares of common stock in exchange for services rendered valued at
$547,500.
During the years ended December 31, 1999 and 1998, the Company issued
52,500 and 20,000 shares, respectively, of common stock in lieu of
interest payments on certain notes. In connection with these issuances,
the Company recorded interest expense totaling $350,000 as of December
31, 1999 (see Note 7).
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
During the year ended December 31, 1999, the Company issued 20,000
warrants to purchase shares of the Company's common stock at $5 per
share. In connection with this issuance, the Company recorded interest
expense of $60,000 as of December 31, 1999.
During the year ended December 31, 1999, in connection with the
$1,500,000 note payable, the Company entered into an agreement to issue
the issuer warrants to purchase 75,000 shares of the Company's common
stock at an exercise price equal to the lesser of $7.75 or the average
daily closing bid price for the 20 trading days immediately prior to
closing. The warrants are exercisable for seven years from closing and
contain a "cashless exercise" feature. Management does not consider the
fair market value of these warrants to be material. As such, no finance
charges have been recorded in the financial statements related to the
agreement for detachable stock purchase warrants.
During the year ended December 31, 1999, a previous employee of the
Company exercised his options to purchase 35,000 shares of the
Company's common stock at $5 per share for a total value of $175,000.
As payment for this exercise, the employee surrendered 28,845 shares of
the Company's common stock with a fair market value on the date of
exercise of $6.0669. In connection with this transaction, the Company
recorded treasury stock of $175,000 as of December 31, 1999.
During the year ended December 31, 1999, the Company recorded
subscriptions receivable of $10,000 for the purchase of 2,000 shares of
the Company's common stock.
NOTE 11 - STOCK-BASED COMPENSATION
Omnibus Stock Option Plan
In January 1997, the Board of Directors approved the adoption of an
Omnibus Stock Plan (the "Omnibus Plan"). The Omnibus 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 Omnibus 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 Omnibus 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.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Galveston's Steakhouse Corp. 1999 Stock Option Plan
In May 1999, the Board of Directors approved the adoption of a
non-qualified and incentive stock option plan (the "Galveston's Plan").
The Galveston's Plan, which was approved by the Company's stockholders
at the 1999 annual meeting, is intended to provide incentive to key
employees, officers, and directors of the Company who provide
significant services to the Company. There are 500,000 options
available for grant under the Galveston's 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 excisable less
than six months from the grant date. The exercise price of options
granted under the Galveston's 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.
Steakhouse Partners, Inc. Stock Option Plan
In July 1999, the Board of Directors approved the adoption of a
non-qualified and incentive stock option plan (the "Steakhouse Plan").
The Steakhouse Plan, which will be reported to the Company's
stockholders at the 2000 annual meeting, is intended to provide
incentive to key employees, officers, and directors of the Company who
provide significant services to the Company. There are 1,000,000
options available for grant under the Steakhouse 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
excisable less than six months from the grant date. The exercise price
of options granted under the Steakhouse 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.
Other Stock Options Issued Outside of the Plan
During the year ended December 31, 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.
During the year ended December 31, 1999, the Company issued an employee
20,000 stock options in exchange for $20,000, with $10,000 paid in
December 1999 and the remaining balance payable over a one-year period,
beginning December 1, 1999. The stock options are exercisable at $6.50
per share and approximated the fair value of the Company's common stock
at the date of issuance. As such, no compensation expense has been
recognized.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
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 31, 1999 and 1998:
1999 1998
----------- -----------
Net loss
As reported $(3,895,039) $(2,961,728)
Pro forma $(4,465,739) $(3,026,783)
Basic loss per common share
As reported $ (1.39) $ (1.39)
Pro forma $ (1.59) $ (1.42)
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
with the following weighted-average assumptions for the years ended
December 31, 1999 and 1998: dividend yields of 0% and 0%, respectively;
expected volatility of 30% and 45%, respectively; risk-free interest
rates of 6.2% and 4.6%, respectively; and expected lives of two and two
years, respectively. The weighted-average fair value of options granted
during the year ended December 31, 1999 for which the exercise price
equals the market price on the grant date was $0.91, and the
weighted-average exercise price was $6.25.
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.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
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 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
Omnibus 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 31, 1997 - $ - 225,000 $ 1.77
Granted 400,000 $ 3.15 75,000 $ 4.96
Forfeited (65,000) $ 3.13 - $ -
--------- --------
Outstanding at
December 31, 1998 335,000 $ 3.15 300,000 $ 2.57
Granted - $ - 20,000 $ 6.50
Exercised - $ - (35,000) $ 5.00
Forfeited - $ - (25,000) $ 5.00
--------- --------
Outstanding at
December 31, 1999 335,000 $ 3.15 260,000 $ 2.31
========= ========
Exercisable at
December 31, 1999 335,000 $ 3.15 180,000 $ 0.96
========= ========
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Stock Options (Continued)
<TABLE>
<CAPTION>
Galveston's Plan Steakhouse Plan
--------------------- --------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at
December 31, 1998 - $ - - $ -
Granted 519,999 $ 6.33 794,100 $ 6.82
Forfeited (7,500) $ 7.50 - $ -
--------- --------
Outstanding at
December 31, 1999 512,499 $ 6.32 794,100 $ 6.82
========= ========
Exercisable at
December 31, 1999 - $ - - $ -
========= ========
</TABLE>
The weighted-average remaining contractual life of the options
outstanding at December 31, 1999 is seven years. The exercise prices
for the options outstanding at December 31, 1999 ranged from $0.60 to
$12.50, and information relating to these options is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
-------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.60 - 4.96 575,000 515,000 6.7 years $ 2.66 $ 2.39
$ 4.97 - 9.50 1,306,599 - 10.0 years $ 6.53 $ -
$ 9.51 - 12.50 20,000 - 10.0 years $12.50 $ -
--------- ---------
1,901,599 515,000
========= =========
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (Continued)
Warrants
A summary of the Company's outstanding warrants and activity for the
years ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Weighted-
Shares Average
Under Exercise
Warrant Price
-------- --------
<S> <C> <C>
Outstanding at December 31, 1997 - $ -
Granted 382,521 $ 5.35
--------
Outstanding at December 31, 1999 and 1998 382,521 $ 5.35
========
Exercisable at December 31, 1999 382,521 $ 5.35
========
</TABLE>
The following table summarizes information about warrants outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-
Average
Warrants Warrants Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
$ 5.00 12,000 12,000 4 years
$ 5.15625 12,606 12,606 4 years
$ 5.28125 73,125 73,125 4 years
$ 6.00 169,790 169,790 4 years
$ 7.00 115,000 115,000 4 years
-------- --------
382,521 382,521
======== ========
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES
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 31, 1999 and 1998, rent expense was
$7,783,916 and $347,772, respectively.
Future minimum lease payments for all leases with initial or remaining
terms of one year or more at December 31, 1999 are as follows :
<TABLE>
<CAPTION>
Year Ending Capital Operating
December Leases Leases
----------- ----------- -----------
<S> <C> <C> <C>
2000 $ 1,368,584 $ 6,755,598
2001 985,964 6,525,458
2002 947,500 5,989,505
2003 969,563 5,293,345
2004 970,429 4,601,855
Thereafter 12,643,177 30,659,743
----------- -----------
Total minimum lease payments 17,885,217 $59,825,504
===========
Less amount representing interest 9,433,580
-----------
8,451,637
Less current portion 542,569
-----------
Long-term lease obligations $ 7,909,068
===========
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Self Insurance
The Company has self-insured retention insurance programs for general
liability 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 $2,499,339 at December 31, 1999 and are recorded in the
accompanying balance sheet. Included in the estimated liability is the
amount estimated to be payable with respect to existing claims for
workers' compensation during the period the Company was self-insured
for workers' compensation.
Other
At December 31, 1999 and 1998, the Company had outstanding commitments
to purchase inventory of approximately $1,770,000 and $3,100,000,
respectively. The inventory purchase commitments approximate market
value.
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.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
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.
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, plant, 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
============
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 13 - BUSINESS COMBINATION (Continued)
The following are the unaudited pro forma consolidated results of
operations for the year ended December 31, 1998 as though Paragon
Steakhouse Restaurants, Inc. had been acquired as of January 1, 1998:
Net sales $173,477,000
Net loss $ (6,187,000)
Basic and diluted loss per share $ (2.90)
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.
The accounting policies of the reportable segments are the same as
those described in Note 2. 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 years ended December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
--------------------------------------------
Food
Restaurant Service
Service Distribution Total
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $129,555,321 $ 38,245,252 $167,800,573
Income (loss) before other income
(expense) $ 786,151 $ (99,964) $ 686,187
Total assets $ 56,354,331 $ 6,726,282 $ 63,080,613
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 14 - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
1998
--------------------------------------------
Food
Restaurant Service
Service Distribution Total
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 5,601,800 $ 917,621 $ 6,519,421
Loss before other income (expense) $ (1,259,603) $ (601,490) $ (1,861,093)
Total assets $ 59,020,013 $ 8,426,964 $ 67,446,977
</TABLE>
NOTE 15 - INCOME TAXES
Significant components of the provision for taxes based on income for
the years ended December 31, 1999 and 1998 are as follows:
1999 1998
------- -------
Current
Federal $ - $ -
State 55,000 6,044
------- -------
55,000 6,044
------- -------
Deferred
Federal - -
State (44,613) -
------- -------
(44,613) -
------- -------
Provision for income taxes $10,387 $ 6,044
======= =======
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
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 31, 1999 and 1998 was as follows:
1999 1998
------ ------
Income tax provision 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) (39.0)
------ ------
Total 1.0% 1.0%
====== ======
Significant components of the Company's deferred tax assets and
liabilities for federal income taxes consisted of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
Deferred tax assets
Net operating losses $ 5,475,283 $ 6,378,000
Tax credit carryforwards 1,813,506 1,813,000
Asset valuation reserves 6,622,032 5,751,000
Property, plant, and equipment 1,624,075 1,627,000
Other 2,743,757 3,982,791
----------- ------------
Total deferred tax assets 18,278,653 19,551,791
----------- ------------
Deferred tax liabilities
Property, plant, and equipment (162,970) (208,000)
Other (287,850) (148,469)
----------- ------------
Total deferred tax liabilities (450,820) (356,469)
----------- ------------
17,827,833 19,195,322
Valuation allowance (17,990,803) (19,402,905)
----------- ------------
Net deferred tax liability $ (162,970) $ (207,583)
=========== ============
</TABLE>
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
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 $20,000,000, expiring in 2019.
The Company also has FICA tip tax credit carryforwards of
$1,813,506 for income tax purposes that expire through 2012.
NOTE 16 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 1999, the Company advanced $150,000
to officers of the Company.
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 completed a comprehensive review of its computer
systems to identify the systems that could be affected by ongoing Year
2000 problems. Upgrades to systems judged critical to business
operations have been successfully installed. To date, no significant
costs have been incurred in the Company's systems related to the Year
2000.
<PAGE>
STEAKHOUSE PARTNERS, INC.
(formerly GALVESTON'S STEAKHOUSE CORP.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
- -------------------------------------------------------------------------------
NOTE 17 - YEAR 2000 ISSUE (Continued)
Based on the review of the computer systems, management believes all
action necessary to prevent significant additional problems has been
taken. While the Company has taken steps to communicate with outside
suppliers, it cannot guarantee that they have all taken the necessary
steps to prevent any service interruption that may affect the Company.
NOTE 18 - SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 31, 1999, the Company paid off the $100,000
bridge loan. In addition, the put options related to this agreement
expired without being exercised (see Note 7).
Subsequent to December 31, 1999, the Company paid off the $250,000
loan. In addition, the put options related to this agreement expired
without being exercised (see Note 7).
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
10.38 Purchase and Sale Agreement between Paragon Steakhouse
Restaurants, Inc. and HS Realty Partners, L.P.
27.1 Financial Data Schedule
39
EXHIBIT 10.38
PURCHASE AND SALE AGREEMENT
PARAGON STEAKHOUSE RESTAURANTS
PARAGON STEAKHOUSE RESTAURANTS, INC.
("Seller")
HS REALTY PARTNERS, LP
("Buyer")
<PAGE>
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT ("Agreement") is entered into as of
February 25, 2000, by and between PARAGON STEAKHOUSE RESTAURANTS, INC., a
Delaware corporation and PARAGON OF MICHIGAN, INC., a Wisconsin corporation
(collectively, "Seller"), and HS REALTY PARTNERS, LP, a California limited
partnership ("Buyer"), and its assigns.
W I T N E S S E T H:
In consideration of the mutual covenants set forth herein, Seller and
Buyer agree as follows:
1. Conveyance of Properties. On the terms and subject to the conditions
set forth in this Agreement, at Closing, as hereinafter defined, Seller shall
sell, convey and assign to Buyer, and Buyer shall buy and accept from Seller,
subject to the Permitted Encumbrances, as hereinafter defined, the nineteen (19)
properties (individually a "Property" and collectively the "Properties") more
particularly described on Schedule 1, attached hereto, including:
(a) good and indefeasible title in fee simple to the land
("Land") on which each Property is located, together with all rights and
interests appurtenant thereto, including Seller's right, title, and interest in
and to all (i) adjacent streets, alleys, rights-of-way and any adjacent strips
or gores of real estate; (ii) buildings, structures and other improvements
located on the Land ("Improvements"); (iii) the equipment and other tangible
property owned by Seller and located in and used in connection with the
ownership, maintenance and operation of the Properties other than items bearing
the trade names or trade dress of Seller ("Personal Property"); and
(b) All (i) plans, drawings, specifications, surveys, and
other technical descriptions ("Plans and Specifications"), (ii) warranties
("Warranties"), and (iii) assignable licenses or permits including certificates
of occupancy ("Licenses").
2. Earnest Money. Within three (3) business days of the date both Buyer
and Seller execute and deliver this Agreement, Buyer shall deliver to
LandAmerica 7557 Rambler Road, Suite 1200, Dallas, Texas 75231, Attn: John
Pettiette ("Title Company") $50.00 ("Non-Refundable Earnest Money") in
consideration for this Agreement and the Inspection Period, as hereinafter
defined. The Title Company shall immediately deliver the Non-Refundable Earnest
Money to Seller and the Non- Refundable Earnest Money shall be retained by
Seller in all events. In addition, the Buyer shall deposit $100,000.00 with
Title Company (the "Earnest Money"). The Earnest Money shall be deposited in
escrow or trust accounts that are interest-bearing, readily available, liquid
and federally insured to the full extent of the Earnest Money deposited therein
so that no portion of the Earnest Money shall ever be at risk. The Earnest Money
shall include any interest earned thereon. Title Company shall deliver the
Earnest Money only in accordance with this Agreement.
<PAGE>
3. Purchase Price.
(a) The purchase price (the "Purchase Price") for the
Properties shall be $22,000,000.00 payable in cash at Closing to or for the
benefit of Seller. The Purchase Price shall be allocated to each Property as set
forth on Schedule 2 hereto. The Purchase Price shall be paid to the Title
Company and distributed by the Title Company as designated by the closing
statement to be prepared by the Title Company and approved by Seller and Buyer.
The Purchase Price shall be credited by the Earnest Money (and any interest
earned thereon) to the extent delivered to Seller and shall be adjusted as
described in this Agreement.
(b) No proration shall be made of real estate and personal
property taxes, utility charges and maintenance expenses, since these expenses
are obligations of the Lessee pursuant to the Lease Agreements to be executed
between Buyer and Seller (as tenant) on the Closing Date. Rental payments under
the Lease Agreements shall be pro-rated as of the Closing Date.
4. Delivery of Documents by Seller. Seller has heretofore delivered to
Buyer, or will deliver to Buyer as soon as practicable following the date of
this Agreement, the following documents ("Documents"):
(a) Commitments for title insurance covering the fee estate in
the Land and the Improvements ("Title Commitment") from the Title Company,
setting forth the status of the title of the Land and the Improvements, showing
all matters of record affecting the Land and the Improvements, together with a
true, complete, and legible copy of all documents referred to in the Title
Commitment;
(b) A current "as built" survey, or recertified, existing
"as-built" survey with respect to each Property acceptable to the Title Company
to enable the Title Company to delete any exception for matters revealed by a
current survey ("Survey") of the Properties containing the certification set
forth on Exhibit G;
(c) Current phase I environmental survey with respect to each
Property (the "Environmental Reports");
(d) Balance sheet and income statements of Seller for its most
recent fiscal quarter, and to the extent such statements are available, the
previous three (3) years which separately identifies sales information with
respect to each Property (the "Financial Statements");
(e) Balance sheet and income statement of Guarantor (as
defined in the Lease Agreement), for calendar years 1998 and preliminary 1999;
(f) Inventory of Personal Property; and
<PAGE>
(g) Insurance binder or certificate of insurance covering each
Property and Improvements.
5. Right of Entry, Inspection, Termination.
(a) From the date hereof to the Closing Date, Seller shall
afford Buyer and its representatives a continuing right to inspect, at
reasonable hours, the Properties, Documents, and all other documents or data
pertaining to the Properties. Buyer shall indemnify and hold Seller harmless
from and against any loss, claim or liability arising or resulting from the
inspections made by Buyer. If for any reason Buyer is not satisfied with any
matter in the Documents or any matter in the information available to Buyer
concerning the Properties, Buyer, in its sole and absolute discretion may
terminate this Agreement and receive a refund of its Earnest Money by delivering
written notice to Seller by the date twenty (20) days following the later of (i)
the date of this Agreement or (ii) receipt by Buyer of the Documents set forth
on 4(a) through 4(e) (hereafter the "Inspection Period").
(b) Buyer's failure to terminate this Agreement by delivering
the notice by the time called for in Section 5(a) shall terminate Buyer's right
to terminate this Agreement under that Section.
6. Title. Buyer shall have the right, at any time during the Inspection
Period, to object in writing to any matters reflected by the Survey or the Title
Commitment. All matters to which Buyer objects, or which are listed as
requirements by the Title Company to issue the title insurance policy, are
"Non-Permitted Encumbrances". All matters to which such objection is not made
are "Permitted Encumbrances". Seller, at its sole cost and expense, shall have
the right, but not the obligation, to cure or remove all Non-Permitted
Encumbrances prior to Closing. If Seller does not cause all of the Non-
Permitted Encumbrances to be removed or cured prior to Closing, then this
Agreement shall automatically terminate on the date scheduled for Closing unless
Buyer delivers notice to Seller of its election to purchase the Properties
subject to the uncured Non-Permitted Encumbrances without any reduction in the
Purchase Price.
7. Representations and Warranties. Seller hereby represents and
warrants to, and covenants with Buyer that:
(a) Seller has the full right, power, and authority to
execute, deliver, and perform this Agreement, and this Agreement, when executed
and delivered by Seller and Buyer, shall constitute the valid and binding
agreement of Seller, and shall be enforceable against Seller in accordance with
its terms.
(b) All requisite action on the part of Seller has been taken
by Seller in connection with making and entering into this Agreement and the
consummation of the purchase and sale provided for herein, and no consents or
approvals are required from any party which is not a party to this Agreement in
order to consummate such purchase and sale.
<PAGE>
(c) No attachments, execution proceedings, assignments for the
benefit of creditors, insolvency, bankruptcy, reorganization or other
proceedings are pending or, to the best of Seller's knowledge, threatened
against Seller, which would materially adversely affect the ability of Seller to
consummate the transactions contemplated by this Agreement.
(d) Seller has not received any written notice from
appropriate governmental authorities that any Property is in violation of any
applicable laws.
(e) Seller has not received any written notices from any
insurance company, board of fire underwriters or similar organization regarding
any defects in any Property.
(f) The Improvements and their use with respect to each
Property shall be in material compliance with all applicable zoning, building,
environmental, subdivision and other laws, rules, and regulations applicable
thereto, as well as any private restrictive covenants affecting each Property,
and shall be ready for use and occupancy, and all necessary certificates of
approval and occupancy shall have been issued and furnished by all authorities
having or claiming to have jurisdiction over the construction, use or occupancy
of the Improvements.
(g) Except for the Permitted Encumbrances, on the Closing
Date, Seller will convey to Buyer fee simple title to each Property free and
clear of all liens, restrictions, charges and encumbrances. Seller will convey
to Buyer good and marketable title to the Personal Property free and clear of
all liens, restrictions and encumbrances other than those set forth on Schedule
7(g). From the date hereof, and until the Closing or earlier termination of this
Agreement, Seller shall not sell, assign or create any right, title or interest
whatsoever in or to any Property or associated Personal Property or create any
liens, encumbrances or charge thereon without discharging the same at or prior
to the Closing Date.
(h) The Financial Statements are prepared in accordance with
generally accepted accounting principles, consistently applied, and will not
omit to state any fact or condition, the omission of which makes such statements
misleading.
(i) Except as disclosed on Schedule 7(i), Seller has no
knowledge of any litigation, or possible litigation, or of claims of any kind,
or of any facts or circumstances which may in any way adversely affect Seller or
any Property, including regulations of the Environmental Protection Agency and
any state regulatory body concerning the disposal of grease, hazardous waste,
petroleum, any underground storage tanks or any other hazardous materials.
(j) Seller has received no written notice of taking,
condemnation, betterment or assessment, actual or proposed, with respect to any
Property, except as may be disclosed on the Title Commitment
<PAGE>
All representations and warranties made in this Agreement
shall be deemed to be made on the date hereof and again on the Closing Date. It
shall be a condition of Buyer's obligation to close that all warranties and
representations made hereunder are true in all material respects on the Closing
Date. All such representations and warranties shall survive the Closing and
shall not be deemed to have merged into and be governed by the Closing Documents
for a period of one (1) year following the Closing Date. If Buyer discovers
prior to Closing, that any representation or warranty made in this Agreement is
not true in all material respects, then Buyer shall have the right, as its sole
and exclusive remedies, to either (i) terminate this Agreement in accordance
with Section 13 by delivering notice to Seller prior to the Closing Date, or
(ii) elect to purchase the Properties subject to such untrue warranty or
representation without any reduction in the Purchase Price. If Buyer discovers
after Closing that any representation or warranty made in this Agreement is not
true in all material respects, Buyer shall be entitled to exercise any and all
rights and remedies available at law or in equity as a result of any breach of
any of such representations or warranties, provided as a condition to Buyer's
right to do so, Buyer must exercise such remedies including the filing of any
suit or other action within two (2) years after the Closing Date.
8. Closing. The closing ("Closing") of the sale of the Properties by
Seller to Buyer shall occur on the first business day ten (10) days after the
last day of the Inspection Period, or at such earlier date agreed to by Seller
and Buyer in writing (the date such Closing occurs is hereinafter referred to as
the "Closing Date"). Closing shall occur by mail, in escrow, in the offices of
the Title Company, 600 North Pearl Street, Suite 700, Dallas, Texas 75201 or at
another place and or time as mutually agreed upon by Seller and Buyer,
commencing at 10:00 o'clock a. m. on the Closing Date. At Closing:
(a) Buyer shall deliver to Seller (i) payment in accordance
with Section 3; (ii) executed Lease Agreements and memoranda of Lease; (iii)
License Agreement in the form of Exhibit H; (iii) evidence satisfactory to
Seller and the Title Company that the person executing documents on behalf of
Buyer has full right, power and authority to do so; and (iv) Lease Support
Agreement in the form of Exhibit I. Each party agrees to execute such other
documents as are reasonably necessary to carry out the conveyance to Buyer of
the Properties as set forth herein.
(b) Seller shall deliver or cause to be delivered to Buyer the
following ("Closing Documents"):
(i) Special Warranty Deed (or the form used in the local
jurisdiction for conveying property with special warranty of title),
in the form of Exhibit B, conveying to Buyer the Land and Improvements
subject to the Permitted Encumbrances; General Assignment in the form
of Exhibit C; Bill of Sale in the form of Exhibit D; IRC Section 1445
Certification in the form of Exhibit E; License Agreement in the form
of Exhibit H; CAL-FIRPTA Certification, for California Property
conveyances; all fully executed, sworn to, and acknowledged, as
appropriate, by Seller;
<PAGE>
(ii) Executed Lease Agreements for each Property
substantially in the form attached hereto as Exhibit F;
(iii) A memo of Lease for each Property;
(iv) Lease Support Agreement in the form of Exhibit I;
(v) Evidence satisfactory to Buyer and Title Company
that the person or persons executing the Closing Documents on behalf of
Seller have full right, power and authority to do so;
(vi) to the extent in the possession and control of
Seller, the originals of all Warranties, and Plans and Specifications;
and
(vii) UCC lien searches against Seller in the states where
each Property is located, its state of incorporation and principal
place of business, disclosing no liens against the Personal Property,
except for the equipment leases listed on Schedule 7(g).
(c) Seller shall pay for the costs of obtaining the Owner
Policies of Title Insurance for the Properties in the amount of the Purchase
Price, the costs of the Phase I Environmental Reports and updates thereto
(subject to the following sentence), the Surveys and all required updates
thereof and applicable deed stamp or transfer taxes. Buyer shall pay the costs
of obtaining the Title Commitments, recording costs, and if the Closing occurs,
one-half (1/2) of the costs incurred in obtaining updates to the Phase I
Environmental Reports. The parties shall share all escrow fees.
(d) Each of Seller and Buyer shall pay its own legal fees
incurred in connection with this Agreement; provided, however, that if a suit is
filed by Buyer or Seller alleging a breach hereof or default hereunder, the
non-prevailing party shall pay all reasonable legal fees of the prevailing party
resulting from such suit.
(e) Seller shall deliver to Buyer possession of the Properties
subject to the Lease Agreements.
9. Notices. Any notice provided or permitted to be given under this
Agreement must be in writing and may be served by depositing same in the United
States mail, addressed to the party to be notified, postage prepaid and
certified, with return receipt requested, by delivering the same in person to
such party, or by delivering the same by confirmed facsimile. Notice given in
accordance herewith shall be effective upon the earlier of receipt at the
address of the addressee or on the second (2nd) day following deposit of same in
the United States mail as provided for herein, regardless of whether same is
actually received. For purposes of notice, the addresses of the parties shall be
as follows:
<PAGE>
If to Seller: c/o Paragon Steakhouse Restaurants, Inc.
10200 Willow Creek Road
San Diego, California 92131
Telephone No. 858-689-2333
Facsimile No. 858-689-0211
If to Buyer: HS Realty Partners, LP
Attn: Rick Ronald
735 Montgomery Street, Suite 205
San Francisco, California 94111
Telephone No. (415) 616-5146
Facsimile No. (415) 616-5144
with a copy to: Richard S. Wilensky
Middleberg Riddle & Gianna
2323 Bryan Street, Suite 1600
Dallas, Texas 75201
Telephone No. 214-220-6334
Facsimile No. 214-220-0179
Either party may change its address for notice by giving ten (10) days prior
written notice thereof to the other party.
10. Commissions. Upon sale of the Properties to Buyer, Seller shall pay
a brokerage commission to PENTECH Capital Corporation. Buyer shall defend,
indemnify, and hold harmless Seller from any claim by any party claiming under
Buyer for any brokerage, commission, finder's, or other fees relative to this
Agreement or the sale of the Properties, and any court costs, attorneys' fees,
or other costs or expenses arising therefrom and alleged to be due by
authorization of Buyer. Seller shall defend, indemnify and hold harmless Buyer
from any claim by any party claiming under Seller for any brokerage, commission,
finder's, or other fees relative to this Agreement or the sale of the
Properties, and any court costs, attorneys' fees, or other costs or expenses
arising therefrom and alleged to be due by authorization of Seller.
11. Assigns. This Agreement shall inure to the benefit of and be
binding on the parties hereto and their respective heirs, legal representatives,
successors and assigns. This Agreement may not be assigned by either party
without the consent of the other party.
<PAGE>
12. Destruction, Damage or Taking Before Closing. In the event of
damage to or destruction of all or any portion of any Property by fire or other
casualty, Seller shall promptly notify Buyer. If Seller reasonably estimates
that $100,000.00 or less is required to be expended to repair or restore the
damaged or destroyed Property or portion thereof ("Repair Cost"), this Agreement
shall remain in full force and effect, and Seller shall, at its option, either
(i) repair such damage or destruction, or, if such damage or destruction has not
been repaired prior to Closing, (ii) require Buyer to take title to the
Property, assign to Buyer all available casualty insurance proceeds and
indemnify Buyer (in form and content satisfactory to Buyer) for all costs and
expenses of repair in excess of available insurance proceeds. If Seller
reasonably estimates that the Repair Cost exceeds $100,000.00, Buyer shall have,
as its sole and exclusive remedies, (i) the option to terminate this Agreement
with respect to the affected Property in accordance with Section 13 within ten
(10) business days after its receipt of notice from Seller as set forth above,
by notice in writing to Seller, in which event the Purchase Price shall be
reduced by the amount allocated to such Property on Schedule 2, or (ii) if Buyer
does not elect to terminate, this Agreement shall remain in full force and
effect, Buyer shall take title to the Property subject to such damage to or
destruction, with an assignment by Seller to Buyer of all available casualty
insurance proceeds. In the event of an eminent domain taking or the issuance of
a notice of an eminent domain taking with respect to all or any portion of any
Property, Seller shall promptly notify Buyer. Buyer shall have, as its sole and
exclusive remedies, (i) the option to terminate this Agreement with respect to
the affected Property in accordance with Section 13, in which event the Purchase
Price shall be reduced by the amount allocated to such Property on Schedule 2
within ten (10) business days after its receipt of such notice from Seller, by
notice in writing to Seller, or (ii) if Buyer does not elect to terminate this
Agreement, this Agreement shall remain in full force and effect, Buyer shall be
obligated to consummate this transaction for the full Purchase Price, and Buyer
shall be entitled to receive all eminent domain awards and, to the extent the
same may be necessary and appropriate, Seller shall assign to Buyer at Closing
Seller's rights to such awards.
13. Termination and Remedies.
(a) If Buyer fails to consummate the purchase of the
Properties pursuant to this Agreement for any reason other than termination
hereof pursuant to a right granted to Buyer in Sections 5, 6, 7, 12, or 16 then
Seller, as its sole and exclusive remedy, shall have the right to terminate this
Agreement by notifying Buyer thereof, in which case the Title Company shall
deliver the Earnest Money to Seller, whereupon neither party shall have any
further rights or obligations hereunder. Seller and Buyer hereby acknowledge and
agree they have included the provision for payment of liquidated damages
because, in the event of a breach by Buyer, the actual damages incurred by
Seller can reasonably be expected to approximate the amount of liquidated
damages called for, and because the actual amount of such damages would be
difficult if not impossible accurately to measure.
(b) If Seller fails to consummate the sale of the Properties
pursuant to this Agreement for any reason other than (i) termination hereof by
Buyer pursuant to Sections 5, 6, 7, or 12 or (ii) Buyer's failure to perform its
obligations hereunder, Buyer shall have the right, as its sole and exclusive
remedies, to either (x) terminate this Agreement by notifying Seller thereof, in
which case the Title Company shall deliver the Earnest Money to Buyer, whereupon
neither party hereto shall have any further rights or obligations hereunder, or
(y) enforce specific performance of Seller's obligation hereunder.
(c) If Buyer terminates this Agreement pursuant to a right
granted Buyer in Sections 5, 6, 7, 12, or 16 then the Title Company shall
deliver the Earnest Money to Buyer whereupon neither Buyer or Seller shall have
any further rights or obligations hereunder.
<PAGE>
14. Miscellaneous. Each of Buyer and Seller agrees with the other that
it has no present intention to make any public announcement of the purchase and
sale transaction contemplated hereby or of any of the terms thereof, and shall
obtain the written consent of the other party prior to making any public
announcement; provided, however, each party shall be entitled, without the
consent of the other party, to make any disclosure required by law. Both Seller
and Buyer shall cooperate with one another and in a timely manner execute all
documents reasonably required to give effect to the purchase and sale provided
for herein. To the extent available, Seller shall provide all documentation
reasonably requested by Buyer after Closing in order to comply with Buyer's
disclosure and filing requirements under applicable securities laws and shall
execute all reasonable consents in connection therewith. If any provision of
this Agreement is adjudicated by a court having jurisdiction over a dispute
arising herefrom to be invalid or otherwise unenforceable for any reason, such
invalidity or unenforceability shall not affect the other provisions hereof.
This Agreement shall be governed and construed in accordance with the laws of
the State of California. This Agreement is the entire agreement between Seller
and Buyer concerning the sale of the Properties and no modification hereof or
subsequent agreement relative to the subject matter hereof shall be binding on
either party unless reduced to writing and signed by the party to be bound. The
provisions of Sections 3, 7 (for the time period specified), 8, 10 and 14 shall
survive Closing. Exhibits A-G attached hereto are incorporated herein by this
reference for all purposes. Time is of the essence in the performance of each
and every provision of this Agreement. In the event that the last day for taking
any action or serving notice under this Agreement falls on a Saturday, Sunday or
legal holiday, the time period shall be extended until the following business
day.
15. Bulk Sale Compliance. Buyer and Seller hereby waive compliance with
the notice provisions of any bulk sale statute in effect in the state in which
any Property is located.
16. Condition Precedent. Buyer shall be entitled to terminate this
Agreement and receive a refund of its Earnest Money if, on or before the Closing
Date, CS First Boston ("Lender"), the current holder of a first lien mortgage
against the Properties, does not extend financing to Buyer (i) in a principal
amount of not less than $17,000,000.00, (ii) at a 10.39% interest rate, (iii)
for a term of at least two (2) years, (iv) which provides for a partial release
of the mortgage lien against the Properties upon a loan prepayment equal to 125%
of the allocated value of the Property to be released from the mortgage lien,
(v) which caps the Lender's legal fees for which Buyer is responsible at
$50,000.00 and (vi) the documentation of such mortgage loan is reasonably
satisfactory to Buyer.
17. Date of Agreement. All references in this Agreement to "the date
hereof" or similar references shall be deemed to refer to the last date, in
point of time, on which all parties hereto have executed and received a fully
executed copy of this Agreement. This Agreement constitutes an offer by Buyer to
purchase the Properties on the terms and conditions and for the Purchase Price
specified herein. Unless sooner terminated or withdrawn by notice in writing to
Seller, this offer shall lapse and terminate at the close of Buyer's business
day ten (10) days following execution of this Agreement by Buyer, unless, prior
to such time, Seller has returned to Buyer one (1) fully executed copy of this
Agreement.
<PAGE>
IN WITNESS WHEREOF, Buyer and Seller have executed this Agreement as of
the date first set forth above.
BUYER:
HS REALTY PARTNERS, LP
By: SKYLINE PACIFIC PROPERTIES, LLC
By: /s/ Richard Ronald
Name: Richard Ronald
Title: Partner
SELLER:
PARAGON STEAKHOUSE RESTAURANTS, INC.
By: /s/ Hiram J. Woo
Name: Hiram J. Woo
Title: President
<PAGE>
The undersigned hereby executes this Agreement for the sole purpose of
(i) acknowledging receipt of the Earnest Money and the Non-Refundable Earnest
Money and (ii) to evidence its agreement to hold the Non-Refundable Earnest
Money and the Earnest Money in trust for the parties hereto in accordance with
the terms of this Agreement.
TITLE COMPANY:
LANDAMERICA
By: /s/ John K. Pettiette
Name: John K. Pettiette
Title: Vice President
Date of Execution: 2/25/00
Attachments:
Schedule 1 - Legal Description of the Properties
Schedule 2 - Allocation of Purchase Price
Schedule 7(g) Leased Personal Property
Schedule 7(i) Seller's Disclosure Schedule
Exhibit A - Personal Property
Exhibit B - Special Warranty Deed
Exhibit C - General Assignment
Exhibit D - Bill of Sale
Exhibit E - IRC Section 1445 Certification
Exhibit F - Lease Agreement
Exhibit G - Survey Certification
Exhibit H - License Agreement
Exhibit I - Lease Support Agreement
<TABLE> <S> <C>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1999
<PERIOD-START> DEC-30-1998
<PERIOD-END> DEC-28-1999
<CASH> 1,590,467
<SECURITIES> 0
<RECEIVABLES> 3,559,665
<ALLOWANCES> 61,264
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0
2,750
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