U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 29, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number: 0-23757
TAM RESTAURANTS, INC.
(Name of small business issuer in its charter)
Delaware 13-3905598
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1163 Forest Avenue, Staten Island, New York 10310
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (718) 720-5959
Securities registered under Section 12 (b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, $.0001 par value
(Title of class)
Redeemable Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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. [ ].
The Issuer's revenues for the fiscal year ended September 29, 1999 were
$19,192,882.
The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates was approximately $5,254,500, as at the close of
business on September 30, 1999.
The number of shares of Common Stock outstanding as of December 31, 1999 was
3,503,000.
Documents incorporated by reference: None
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TAM RESTAURANTS, INC.
FORM 10-KSB
TABLE OF CONTENTS
PART I
ITEM 1. Description of the Business ................................ 1
ITEM 2. Description of Property .................................... 9
ITEM 3. Legal Proceedings ..........................................10
ITEM 4. Submission of Matters to a Vote of Security
Holders ..................................................10
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters ...11
ITEM 6. Management's Discussion and Analysis of Plan of Operation ..11
ITEM 7. Financial Statements .......................................15
ITEM 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure ......................15
PART III
ITEM 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act ........................15
ITEM 10. Executive Compensation ....................................18
ITEM 11. Principal Stockholders ....................................21
ITEM 12. Certain Transactions ......................................23
ITEM 13. Exhibits, List and Reports on Form 8-K.....................25
Signatures ..........................................................26
Consolidated Financial Statements...................................F-1
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PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
The Company operates LUNDY BROS. RESTAURANT ("LUNDY'S), a high-volume,
casual, upscale seafood restaurant located in Brooklyn, New York, THE BOATHOUSE
IN CENTRAL PARK ("THE BOATHOUSE"), a multi-use facility featuring an upscale
restaurant and catering pavilion, located on the lake in New York City's Central
Park, and AMERICAN PARK AT THE BATTERY ("AMERICAN PARK"), a multi-use facility
featuring an upscale restaurant, catering floor, two outside patios and a fast
food kiosk, located at the water's edge in Battery Park, a New York City
landmark.
LUNDY'S
LUNDY'S is a high-volume, casual, upscale seafood restaurant located in
Brooklyn, New York. The Company opened LUNDY'S in December 1995, approximately
16 years after the original LUNDY'S restaurant closed. The original LUNDY'S, a
storied Brooklyn landmark, originally opened in 1934 and is believed to have
been the largest restaurant in the United States during the time it was open,
with seating capacity for approximately 2,400 guests. The building which LUNDY'S
occupies was declared a historic landmark building by the New York City
Landmarks Preservation Commission in 1992.
THE LUNDY'S CONCEPT
The LUNDY'S concept is designed to appeal to a broad range of guests by
serving generous portions of premium-quality seafood and other menu items and by
combining a grand dining experience with friendly and efficient service in a
high-energy environment. LUNDY'S commitment to offering its guests a casual,
exciting dining experience is highlighted by its "exhibition" kitchen where all
meals are cooked to order in view of its guests, a lobster pool from which
guests can select their lobsters, an experienced wait staff uniformed in crisp
white linen jackets which are knowledgeable about the preparation of seafood and
the history of LUNDY'S, a high wait staff-to-customer ratio to assure attentive
service and tables covered with multiple layers of colored linens and pristine
white butcher paper.
MENU
LUNDY'S menu features a wide variety of fresh seafood items, including
lobster, crab, shrimp, oysters, clams and daily fish specials, cooked to order
in a variety of ways: steamed, sauteed, broiled, grilled, blackened and fried.
In addition, LUNDY'S offers a selection of steaks, chicken dishes, pasta dishes,
pizzas, appetizers, chowders, salads and fresh-baked desserts. LUNDY'S also
offers full bar service, from which a variety of brand name alcohols, mixed
drinks, wines and beers, including selected micro-brewed beers, can be ordered,
at the bar or with table service. LUNDY'S feature menu selection is its "Shore
Dinner," which consists of a chowder or salad; steamed or baked clams, a whole
Maine lobster and chicken; fruit pie; and a beverage, for $22.95. The Company
believes that LUNDY'S is widely recognized for its "signature" biscuits,
chowders and apple, blueberry pies and its 60 item Sunday brunch buffet.
The menu mix has been carefully developed to balance the higher priced
items, such as lobster and fresh fish, with lower cost items, such as pizza and
pasta dishes. Dinner entrees range in price from $8.95 to $28.95 and the average
dinner check is approximately $33.00 per person.
DESIGN, DECOR AND ATMOSPHERE
LUNDY'S interior has been designed with a contemporary decor, rich
polished woods and granite surfaces, accented with copper, pottery,
brushed-stainless steel and earth tones, to impart "Old World" elegance and
comfort. LUNDY'S offers guests several seating selections in its multi-level
interior, which
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consists of an expansive, high-ceiling main dining area; a large upstairs dining
room which is also used for special events and to cater private functions; a
mezzanine level cigar room which overlooks the main dining area; and a 30-foot
long oyster and beverage bar; as well as outdoor seating.
FACILITY OPERATIONS
LUNDY'S occupies approximately 18,000 square feet and has a seating
capacity of approximately 730 seats. LUNDY'S is open for lunch and dinner, seven
days a week. On Sunday the restaurant features a Brunch Buffet from 11:00 am to
3:00pm.
In addition to the restaurant operations, LUNDY'S also houses a seafood
laboratory where seafood is tested to assure quality and freshness, and a gift
shop which carries a variety of "LUNDY'S" and "Brooklyn" themed merchandise,
such as T-shirts and other clothing, hats, plates and coffee and beer mugs, as
well as LUNDY'S chowders and sauces and seafood related products, such as
lobster bibs, crackers and forks.
THE BOATHOUSE
THE BOATHOUSE is a multi-use, lakeside facility which features an
upscale restaurant and catering pavilion, located on the lake in New York City's
Central Park.
Restaurant
THE BOATHOUSE restaurant, PARK VIEW AT THE BOATHOUSE ("PARK VIEW"),
provides customers a pleasurable dining experience in a comfortable, relaxed and
romantic atmosphere and primarily al fresco seating. The restaurant serves
eclectic American cuisine, under the direction of The James Beard Foundation's
Rising Star Chef Nominee John Villa, that changes according to season and
consumer trends. The menu is limited in scope to permit the greatest attention
to quality while offering sufficient breadth to appeal to a variety of taste
preferences. The restaurant also offers full bar service. Dinner entrees range
in price from $19.00 to $28.00 and the average dinner check is approximately
$44.00 per person.
PARK VIEW'S dining area occupies approximately 6,000 square feet of
space and has a seating capacity of approximately 225 seats, most of which are
covered, expanding approximately 150 feet alongside the Central Park lake. This
dining space is open from early March until early November. Part of PARK VIEW'S
dining space and other underutilized areas in the main building were winterized
during renovations to THE BOATHOUSE facility in fiscal 1998. This new dining
space is open from early November to early March and features two fire places
and seating for approximately 80 guests.
CATERING PAVILION
The catering pavilion is glass-enclosed, tented and heated. The
catering pavilion occupies approximately 4,600 square feet of space, is
surrounded by an english garden on two sides and resides a few feet from the
Central Park lake. The catering pavilion hosts private functions for up to 500
persons year round.
OTHER ATTRACTIONS
THE BOATHOUSE incorporates the following additional attractions:
-- COCKTAIL AREA. The cocktail area offers full bar service at an
approximately 21-foot long bar with waitress service and
features a jazz band performing five nights a week. As a
result of the renovations to THE BOATHOUSE facility the
cocktail area was increased its
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capacity to 200 persons, including 150 seats, and is open from
March through early November.
-- THE BOATHOUSE EXPRESS. THE BOATHOUSE EXPRESS is a
cafeteria-style convenience counter which serves specialty
sandwiches, salads, baked goods and juices, as well as
standard fast-food items, such as hamburgers, hotdogs, french
fries and sodas. THE BOATHOUSE EXPRESS has indoor and outdoor
seating available for approximately 75 persons year round.
-- CARTS AND KIOSKS. Approximately six to eight free standing
carts and kiosks are strategically located on the facility's
grounds offering a variety of food and beverage items, such as
fresh fruit drinks, New York-style pretzels, pita sandwiches
and espresso and cappuccino, from early March to early
November.
-- ROWBOAT AND BICYCLE RENTALS AND VENETIAN GONDOLA RIDES.
Approximately 110 rowboats are available for rental by the
hour on the Central Park lake and approximately 120 bicycles
are available for rental by the hour or day from early March
to early November. Additionally, Venetian gondola rides on the
lake are available from early March to early November.
-- MERCHANDISE COUNTER. The merchandise counter carries a variety
of THE BOATHOUSE and other Central Park and New York City
themed merchandised, including T-shirts, sweatshirts, hats and
coffee mugs, as well as sundry items.
-- SHUTTLE BUS. THE BOATHOUSE operates a shuttle bus which
transports guests between the facility and the Fifth Avenue
and 72nd Street entrance to Central Park. The shuttle bus runs
when the PARK VIEW restaurant is opened for dinner and during
special events at the catering pavilion.
The Company operates THE BOATHOUSE pursuant to a 15-year license
agreement with the City of New York Department of Parks and Recreation (the
"Parks Department"). Pursuant to the license agreement, the Company is required
to pay a fee to the Parks Department each license year (June 30 through the
following June 29) equal to the greater of (i) $90,000 (which increased to
$95,000 per year on June 30, 1999) or (ii) the sum of 13% of gross revenue from
food and merchandise sales and 16% of gross revenues (which increased to 17% on
June 30, 1999) from rowboat and bicycle rentals. The Company is required to
maintain certain minimum levels of insurance with respect to the facility. The
license agreement expires on June 29, 2000, provided that the Parks Department
may terminate the license upon ten days written notice so long as the
termination is not arbitrary or capricious. Revenues and profits generated by
THE BOATHOUSE are material to the Company's overall performance. Consequently,
the Company has been actively involved in negotiations for the renewal of the
license agreement since the third quarter of fiscal 1999.
AMERICAN PARK
AMERICAN PARK opened in May 1998 in historic Battery Park at the
southern tip of Manhattan in close proximity to New York's financial district.
AMERICAN PARK occupies approximately 18,300 square feet and has a seating
capacity of 725 persons.
AMERICAN PARK is designed with an urban mountain lodge motif,
incorporating natural fabrics, slate, stone, wood and brick with modern-style
furnishings, vibrant colors and designer lighting. Guests have panoramic views
of the New York City harbor and landmarks such as the Statute of Liberty, Ellis
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Island, Governor's Island and the downtown Manhattan skyline. AMERICAN PARK
offers seating selections in its main dining room, second floor dining room and
bi-level outdoor patios.
AMERICAN PARK'S restaurant serves contemporary American cuisine
featuring a variety of fresh fish, lobsters, large steaks and daily specials.
The "all day" menu is served year round in the 110 seat main dining room and
seasonally in the 150 seat upper-level outdoor patio.
AMERICAN PARK'S lower level patio, with a capacity of 140 seats,
extends to the water's edge and has a casual moderately priced bistro type menu
featuring appetizers, grille items, sandwiches, salads, a raw bar and selected
items from the main menu. Most of the items come from a separate kitchen on the
patio. The lower-level patio also features a bar with a capacity of 25 bar seats
and 55 persons standing and is used extensively during the cocktail hour and
features live entertainment during the summer.
AMERICAN PARK's second floor catering level is used to host private
parties, business meetings, conferences and weddings. The floor features a
spectacular panoramic view of the New York harbor and has a seating capacity of
300 persons.
The free-standing outdoor kiosk serves burgers, hots dogs, sandwiches,
snacks, cold beverages, beer, wine and fruit smoothies to tourists and park
visitors from April through October.
In December 1994, the Company entered into a license agreement with the
Parks Department to construct and operate, AMERICAN PARK, in Battery Park. The
Company is required to pay to the Parks Department a fee each license year
(November 1 through the following October 31) equal to the greater of (i)
$50,000 and (ii) 8% of gross receipts from the restaurant and 10% of gross
receipts from merchandise sales (increasing to 12% on November 1, 1999). The
Company is required to maintain a certain level of insurance. The license
agreement expires on October 31, 2015, provided, however, that the Parks
Department may terminate the license upon 30 days written notice.
STRATEGY
The Company's strategy is to initially develop and operate a limited
number of additional LUNDY'S restaurants. The Company intends to focus its
efforts in the New York City metropolitan area. The Company has limited
experience in expanding its operations and there can be no assurance that it
will be able to successfully do so.
The Company's strategy is to capitalize on what it perceives to be a
high consumer recognition of the LUNDY'S name in markets where there is a
significant percentage of the population which remembers and had visited the old
LUNDY'S restaurant. The Company anticipates that future LUNDY'S restaurants will
incorporate the LUNDY'S concept into the existing building architecture to give
each location the atmosphere of a long-standing restaurant.
The Company's long-term plans include seeking to capitalize upon the
LUNDY'S name by marketing food and related products by mail and internet, such
as chowders sauces, pies, cookbooks, lobster bibs, crackers and forks and
"LUNDY'S" and "Brooklyn" themed T-shirts and other clothing items, hats, plates
and coffee and beer mugs. In addition, in connection with its strategy, the
Company may seek to open additional, high-volume landmark type restaurants as
appropriate opportunities arise.
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SITE SELECTION
The choice of site selection is critical to the potential success of a
particular restaurant. As a result, the Company devotes a significant amount of
time and resources to identifying and analyzing potential sites. The Company
seeks to identify locations in close proximity to upscale high-traffic, suburban
residential neighborhoods, hotel complexes and/or urban business or
entertainment centers. The Company also seeks to identify large spaces in
tourist centers, such as government buildings, concession stands and offices in
municipal parks which are not utilized to their potential. Additionally, to the
extent opportunities arise, the Company seeks to identify waterfront locations,
which type of location the Company believes has a synergy with the LUNDY'S
concept and primarily seafood menu. The Company, however, has no commitments or
understandings with respect to any proposed location.
The Company generally seeks to lease properties with 12,000 to 20,000
square feet of total space and seating capacity for 400 to 750 persons. The
Company anticipates that three to six months will typically be required to open
a new LUNDY'S restaurant from the time a location is identified and a lease is
negotiated.
RESTAURANT OPERATIONS
MANAGEMENT AND EMPLOYEES
Each location's operations is managed by a general manager and managers
for certain operations of the location, such as kitchen, dining room (waiters
and busboys), office (administration) and catering. The number of employees at
each location fluctuates from season to season and depending upon the number of
catering events. Because some restaurant seating areas and certain other
operations at THE BOATHOUSE and AMERICAN PARK are not open year round, the
Company is required to hire new personnel annually for each unit. The Company
introduced a management bonus plan, for unit level management, which provides
bonuses based on the financial results of the managements' particular location.
SERVICE AND GUEST SATISFACTION
The Company believes that providing friendly, courteous, efficient
service is critical to the long-term success of each location. The Company will
attempt to recruit managers for future locations with significant experience in
the restaurant industry. The Company is constantly refining its training program
in anticipation of opening additional LUNDY'S restaurants to teach restaurant
managers to promote the Company's team-oriented atmosphere among restaurant
employees, with emphasis on preparing and serving food in accordance with strict
standards and providing friendly, courteous and attentive service. Each
location's staff is trained on site by location managers and other designated
employees. The Company believes that the selection and training of its location
managers and staff result in friendly, courteous, efficient guest service which
contributes to a pleasurable dining experience for the guest.
The Company monitors each location's service and guest satisfaction.
The Company maintains a guest service department which contacts several guests
from each location's previous night's reservation list to inquire about their
dining experiences. The guest service department also contacts each party which
utilizes the Company's catering services to obtain feedback about their
experiences. The Company also maintains a toll-free telephone line for guests to
call with complaints or suggestions about the Company's locations. All calls are
personally responded to by an executive officer of the Company. The Company
utilizes guest feedback to continually improve its service, update its menu
selections and otherwise improve its operations.
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PURCHASING
Obtaining a reliable supply of quality seafood and other food and
beverage items at competitive prices is critical to the Company's success. The
Company has formed long-term relationships with several seafood suppliers, fish
markets and operators of fishing boats. Each restaurant purchases its own supply
of food and beverage items through a central purchasing department which
maintains a list of approved suppliers. The Company regularly arranges to
purchase a fishing boat's day catch of lobsters and select fish, reducing its
price per pound and ensuring superior quality. The Company has a computerized
food purchasing and tracking system which maintains a current database of
suppliers and continuously updates supplier's pricing to enable its restaurants
to obtain the lowest prices available from Company-approved suppliers.
The Company believes its diverse menu selection reduces the risk and
minimizes the effect of the shortage of any seafood products. The Company has
been able to anticipate and react to fluctuations in food costs through selected
menu price adjustments, purchasing seafood directly from numerous suppliers,
fish markets and fishing boats and promoting certain alternative menu selections
(in response to availability and price of supply). To date, the Company
generally has not experienced any significant delays in receiving its food and
beverage inventories, restaurant supplies or equipment.
QUALITY CONTROL
The Company maintains a continuous inspection program for all of its
seafood purchases. Each shipment of seafood and other food items is inspected
for quality and weight by the restaurant steward. All food items must be
purchased from Company-approved suppliers. In addition, LUNDY'S houses a seafood
laboratory where shipments of seafood are randomly tested to assure quality.
The restaurants' management are responsible for properly training
employees and ensuring that the Company's restaurants are operated in accordance
with strict health and quality standards. Each restaurant employee is educated
as to the correct handling and proper characteristics of each product.
Compliance with the Company's quality standards are monitored by periodic
on-site visits and formal periodic inspections by management and third-party
food sanitation consultants. The Company believes that its inspection procedure
and its employee training practices assist the Company in maintaining high
standards of quality for the food and services it provides.
RESTAURANT REPORTING
The Company maintains financial and accounting controls for each
restaurant through a central point-of-sale, accounting and cash management
systems. Sales data is collected daily, and store managers are provided with
daily sales, cash and inventory information for their respective restaurants.
The point-of-sale, accounting and cash management systems enables both
store-level management and senior management to quickly react to changing sales
trends, better manage food, beverage and labor costs, minimize theft and improve
the quality and efficiency of accounting and audit procedures.
CATERING OPERATIONS
The Company's restaurants offer high-quality professional, on-premise
and off-premise catering services. Each restaurant provides its own catering
services and specially designs menus to the guests requirements. LUNDY'S
upstairs dinning room is used to cater private functions and has a capacity of
350 persons. In addition to catering private functions in the banquet area, The
Boathouse caters larger functions of up to 1,000 persons in the combined space
of the catering pavilion and restaurant. AMERICAN PARK can
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accommodate parties of up to 300 persons in its up upstairs catering space, up
to 780 persons for the entire facility and outdoor tents to accommodate another
400 persons.
During the years ended September 27, 1998 and September 29, 1999,
LUNDY'S catered 210 and 305 private functions, respectively, and THE BOATHOUSE
catered 298 and 297 private functions, respectively. In its first six months of
operations during the year ended September 27, 1998, AMERICAN PARK catered 89
private functions as compared with 200 private functions in its first full year
of operation ended September 29, 1999.
In April 1997, the Company entered into a five-year agreement with Bay
Cruises, LLC ("Bay Cruises") to act as exclusive caterer for all entertainment
cruises conducted by Bay Cruises from any location in the New York metropolitan
area. Bay Cruises conducted entertainment cruises from its Sheepshead Bay dock
from December 1996 through February 1998 when it ceased operation. In December
1998, the Company and Bay Casino, LLC ("Bay Casino"), the successor to Bay
Cruises, renegotiated the terms of the catering agreement by extending the
initial term of the agreement by a year with an option to the Company for an
additional five-year extension. Further, under the new agreement, the Company
will offer all beverage service in addition to food services on Bay Casino's
vessels. The Company will pay Bay Casinos a license fee of 15% of all food sales
and 25% of all beverage sales generated from the agreement. The Company will not
receive any revenues from such agreement unless and until Bay Casino resumes
operation of such cruises. On July 8, 1999, Bay Casino resumed operation under a
limited capacity ruling by the City of New York which limits the boat's
passenger count to 200 per cruise. Given the current capacity limitation the
Company does not expect to generate any significant revenues or profits from
this limited operation. Bay Casino has been working with the City of New York to
increase its limitation of passengers to match the boat's marine capacity of
600. Bay Casino believes it will be able to increase its capacity to 325 per
cruise in the first quarter of 2000 and ultimately 600 in late 2000 or early
2001.
ADVERTISING AND MARKETING
The Company employs a marketing strategy that seeks continuous visibility
and name recognition through the use of local radio, print and billboard
advertisements, as well as community events, for each restaurant. The Company
contracts with public relations and advertising agencies to more effectively
coordinate its advertising efforts. The Company also publishes and distributes a
newsletter which apprizes readers of upcoming events at the Company's
restaurants and recent celebrity guests, answers guests' food, wine and
restaurant etiquette questions and provides recipes.
Each restaurant engages in community-based promotions designed to
promote the restaurant and foster goodwill within the community. Each restaurant
participates in the Company's "make a dent with 10%" program whereby 10% of the
proceeds from three designated tables from the restaurant are donated to local
charities.
LUNDY'S, THE BOATHOUSE and AMERICAN PARK are high-profile locations
which host many special events and receive extensive press coverage. All three
units have been featured in several magazines, including Gourmet, Travel &
Leisure, The New York Times Magazine and New York Magazine, and have been the
subject of several television news stories. As a result, these restaurants
receive a great deal of publicity in addition to the publicity obtained from the
Company's advertising efforts.
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COMPETITION
The restaurant industry is intensely competitive with respect to price,
service, location and food quality and variety. There are many well-established
competitors with substantially greater financial and other resources than the
Company, as well as a significant number of new market entrants. Such
competitors include national, regional and local full-service casual dining
chains, many of which specialize in or offer seafood products, as well as single
location restaurants. Some of the Company's competitors have been in existence
for substantially longer periods than the Company, may be better established in
the markets where the Company's restaurants are or may be located and engage in
extensive advertising and promotional campaigns, both generally and in response
to efforts by competitors to open new locations or introduce new concepts or
menu offerings. The Company can also be expected to face competition from a
broad range of other restaurants and food service establishments which
specialize in a variety of cuisines.
INTELLECTUAL PROPERTY
The Company's business prospects will depend largely upon the Company's
ability to capitalize on favorable consumer recognition of the LUNDY'S name.
Although the Company holds a trademark registration for use of the LUNDY'S name
by the U.S. Patent and Trademark Office, there can be no assurance that the
Company's marks do not or will not violate the proprietary rights of others or
that the Company's marks would be upheld, or that the Company would not be
prevented from using its marks, if challenged, any of which could have an
adverse effect on the Company.
The Company previously entered into a settlement agreement with
Sheepshead Restaurant Associates, Inc. ("Sheepshead") to settle a dispute
relating to LUNDY'S trademark. As part of the settlement, Sheepshead agreed to
dismiss its petition for cancellation of the LUNDY'S trademark registration
previously granted to the Company. Additionally, the Company obtained all of
Sheepshead's alleged rights to the LUNDY'S marks and any goodwill associated
therewith. In consideration, the Company issued to the four principal
stockholders of Sheepshead an aggregate of 22,056 shares of unregistered common
stock and warrants to purchase an aggregate of 5,516 shares of common stock. The
Company further agreed (i) to pay a fee of $10,000 to Sheepshead upon the
opening, by the Company, of certain new restaurants with a seating capacity of
up to 150 persons, (ii) to open a new restaurant utilizing the LUNDY'S name by
September 1999, and (iii) to pay Sheepshead .75% of gross revenues in excess of
a minimum threshold (as determined by the seating capacity of the restaurant)
earned by any new restaurant established by the Company that utilizes the
LUNDY'S name. The settlement agreement further provides that if the Company is
unable to meet the requirement set forth in (ii) above, the rights claimed by
Sheepshead to the LUNDY'S trademark and acquired by the Company revert back to
Sheepshead. In November 1999, Sheepshead granted the Company a one year
extension on the requirement to open a new restaurant using the LUNDY'S name.
The Company also relies on trade secrets and proprietary know-how, and
employs various methods, to protect its concepts and recipes. However, such
methods may not afford complete protection and there can be no assurance that
others will not independently develop similar know-how or obtain access to the
Company's know-how, concepts and recipes. The Company does not maintain
confidentiality and non-competition agreements with all of its executives, key
personnel or suppliers. There can be no assurance that the Company will be able
to adequately protect its trade secrets.
GOVERNMENT REGULATION
The Company is subject to extensive state and local government
regulation by various governmental agencies, including state and local
licensing, zoning, land use, construction and environmental regulations and
various regulations relating to the sale of food and beverages, sanitation,
disposal of refuse and waste
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products, public health, safety and fire standards. The Company's restaurants
are subject to periodic inspections by governmental agencies to assure
conformity with such regulations. Difficulties or failure in obtaining required
licensing or other regulatory approvals could delay or prevent the opening of a
new restaurant, and the suspension of, or inability to renew, a license at an
existing restaurant would adversely affect the operations of the Company.
Restaurant operating costs are also affected by other government actions which
are beyond the Company's control, including increases in the minimum hourly wage
requirements, workers compensation insurance rates, health care insurance costs
and unemployment and other taxes.
The Federal Americans With Disabilities Act prohibits discrimination on
the basis of disability in public accommodations and employment. The Company's
restaurants are currently designed to be accessible to the disabled, and the
Company believes that it is in compliance with all current applicable
regulations relating to accommodations for the disabled.
The Company is subject 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. New York law currently provides that a vendor of alcoholic beverages may
be held liable in a civil cause of action for injury or damage caused by or
resulting from the intoxication of a minor (under 21 years of age) if the vendor
willfully, knowingly and unlawfully sells or furnishes alcoholic beverages to
the minor and knows that the minor will soon thereafter be driving a motor
vehicle. A vendor can similarly be held liable if it knowingly provides
alcoholic beverages to a person who is in a noticeable state of intoxication,
knows that person will soon thereafter be driving a motor vehicle and injury or
damage is caused by that person.
INSURANCE
The operation of restaurants subjects the Company to possible liability
claims from others, including customers, employees and other service providers
for personal injury (resulting from, among other things, contaminated or spoiled
food or beverages, accidents or injuries caused by intoxicated persons served
alcoholic beverages by a restaurant). The Company maintains insurance (with
coverage in amounts up to $2,000,000 per occurrence and $10,000,000 of umbrella
liability coverage), including insurance relating to personal injury, in amounts
which the Company believes to be adequate. The Company also maintains property
insurance for each location it operates in amounts it believes to be adequate.
Nevertheless, a partially or completely uninsured claim against the Company, if
successful, could have a material adverse effect on the Company.
EMPLOYEES
As of September 29, 1999, the Company employed 481 persons, of whom 58
were in management and 423 were in non-management restaurant operations.
Approximately 48 of those individuals were employed on a salary basis. The
Company believes its employee relations to be good. None of the Company's
employees is covered by a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 4,300 square feet of space in Staten
Island, New York for its executive offices from Frank Cretella, Chief Executive
Officer, President, a director and a principal stockholder of the Company. The
annual rent payable under the lease is currently $60,000.00 and increases by
1.5% per annum in January of each subsequent calender year. The lease expires
December 31, 2001.
-9-
<PAGE>
The Company believes that this lease is on commercially reasonable terms. In May
1999, the Company expanded its office space by 1,800 square feet to the current
4,300 square feet, in order to accommodate the Company's expansion.
The Company leases 17,505 square feet of space in Sheepshead Bay,
Brooklyn, New York, where LUNDY'S is located pursuant to a lease which expires
in 2014. The current annual rent payable under the lease is $318,506 during
1999. In December 1998 the Company completed renovations to one of the second
floor dining rooms making it better suited for handling private functions and
catering. This added 1,000 sq. ft. of space to the lease. The Company will began
paying annual rent of $16,296 on this addition space in march 1999. Upon the
expiration of the lease, the Company has two 10-year renewal options.
The Company leases an approximately 6,000 sq. ft. warehouse in Bayonne,
New Jersey, from Leisure Time Services, Inc., a company wholly-owned by Jeanne
Cretella, Vice President, a director and a principal stockholder of the Company.
The annual rent payable under the lease is currently $30,907 and Increases by
1.5% per annum in January of each subsequent calendar year. The lease expires in
December 2001. The Company believes that this lease is on commercially
reasonable terms. In December 1998, the Company agreed to sublease 1,000 sq. ft.
of the Bayonne warehouse to KA Industries for a rent of $740.83 per month. The
sublease is a month to month lease terminable upon 120 days notice by either
party. KA Industries is a wholly owned subsidiary of Kayne Anderson Investment
Management, Inc., an affiliate of a principal stockholder of the Company. The
Company believes that this sublease is on commercially reasonable terms.
The Company operates THE BOATHOUSE in Central Park, New York City
pursuant to a license from the Parks Department which expires in June 2000.
The Company operates AMERICAN PARK in Battery Park, New York City
pursuant to a license from the Parks Department which expires in 2015.
ITEM 3. LEGAL PROCEEDINGS
The operation of restaurants and rowboat and bicycle rentals subjects
the Company to potential claims from others, including customers, employees and
other service providers for personal injury (resulting from, among other things,
contaminated or spoiled food or beverages and accidents). The Company is a
defendant in several lawsuits arising in the ordinary course of its business
relating to personal injury claims by plaintiffs which are seeking damages
substantially in excess of the Company's assets and insurance coverage. The
lawsuits are being handled by the Company's insurance carriers. The Company is
vigorously defending each lawsuit and believes that such matters are adequately
covered by insurance or, if not so covered, are without merit or are of such
nature or involve such amounts that an unfavorable disposition would not have a
material adverse effect on the financial condition or operations of the Company.
However, since each lawsuit is in an early stage, there can be no assurance that
any of such actions will be resolved in favor of the Company or that the outcome
of any litigation or settlement will not have a material adverse effect on the
Company.
On or about July 13, 1998, an action was brought against the Company by
Acme Management ("Acme") in the Supreme Court of the State of New York, County
of Richmond, alleging that the Company owes to Acme $337,500 for "money had and
received." It is believed that this claim relates to a dispute between Acme and
a non-party which made a loan to the Company, which has since been repaid and/or
converted to equity. In December 1999 the action was dismissed without any
payment by the Company to Acme Management or any other party.
-10-
<PAGE>
In the ordinary course of business, the Company is a party to other
legal proceedings, the outcome of which, either singly, or in the aggregate, is
not expected to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 6, 1997, by written consent in lieu of a special
meeting pursuant to Section 228 of the Delaware General Corporation Law ("DGCL")
holders of 1,679,235 shares (approximately 67% of the issued and outstanding
Common Stock of the Company) consented to the adoption of the Company's 1997
Stock Option Plan and the reservation of 525,000 shares of Common Stock from the
authorized but unissued shares of the Company for issuance upon the exercise,
from time to time, of options to be granted under the plan.
On December 17, 1997, by written consent in lieu of a special
meeting pursuant to Section 228 of the DGCL, holders of 1,679,235 shares
(approximately 67% of the issued and outstanding Common Stock of the Company)
consented to the change of the Company's name to TAM Restaurants, Inc.
On December 17, 1997, by written consent in lieu of a special
meeting pursuant to Section 228 of the DGCL, holders of 1,679,235 shares
(approximately 67% of the issued and outstanding Common Stock of the Company)
consented to the 1-for 1.8135268 reverse stock split of the then issued and
outstanding Common Stock of the Company.
On May 28, 1999, at the Company's Annual Meeting of
Shareholders, the shareholders approved an amendment to the Company's 1997 Stock
Option Plan to increase the number of shares of Common Stock reserved for
issuance under the Plan from 525,000 to 1,250,000.
On May 28, 1999, at the Company's Annual Meeting of
Shareholders, the shareholders elected the Company's six directors for a term
expiring at the Annual Meeting of Shareholders to be held in 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Warrants are traded on the Nasdaq
SmallCap Market under the symbols "TAMR" and "TAMRW", respectively. The
Company's Registration Statement (SEC No. 333- 39937) registering the Common
Stock and Warrants was declared effective by the Securities and Exchange
Commission on February 10, 1998 and trading in the securities commenced on
February 10, 1998. The Common Stock was offered and sold to the public at $5.00
per share, and the Warrants were offered and sold at $.10 per Warrant. The high
and low closing bid price for the Common Stock below reflects the quotations for
the period in which trading in the Common Stock took place.
YEAR ENDED SEPTEMBER 29, 1999 HIGH LOW
----------------------------- ---- ---
First Quarter Ended December 31, 1998 $2 1/4 $1.95
Second Quarter Ended March 31, 1999 $2.63 $1.94
Third Quarter Ended June 30, 1999 $2.50 $1.16
Fourth Quarter Ended September 30, 1999 $1.50 $1.00
As of December 31, 1999 there were 3,503,000 shares of Common Stock
outstanding and held of record by approximately 53 stockholders. In addition,
the Company believes that there are in excess of
-11-
<PAGE>
300 beneficial owners of the Common Stock and Warrants whose shares are held of
record or in "street name".
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995: The statements which are not historical facts contained in
the Management's Discussion and Analysis of Plan of Operation and elsewhere in
this report on Form 10-KSB are forward- looking statements that involve a number
of known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, but are not
limited to, the risks related to the opening of new restaurants, including
capital requirements, continued popularity of existing and new restaurants,
seasonality and other risks detailed in the Company's filings with the
Securities and Exchange Commission. The words "believe". "expect", "anticipate",
"intend" and "plan" and similar expressions identify forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made.
OVERVIEW
The Company operates LUNDY'S, a high-volume, casual, upscale seafood
restaurant located in Brooklyn, New York, THE BOATHOUSE, a multi-use facility
featuring an upscale restaurant and catering pavilion, located on the lake in
New York City's Central Park, and AMERICAN PARK, a multi-use facility featuring
an upscale restaurant, catering floor, two outside patios and a fast food kiosk,
located at the water's edge in Battery Park. a New York City landmark.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 29, 1999 COMPARED TO YEAR ENDED SEPTEMBER 27, 1998
Sales for the fiscal year ended September 29, 1999 ("fiscal 1999") were
$19,192,882, an increase of $2,989,990, or 18.5%, as compared to $16,202,892 for
the year ended September 27, 1998 ("fiscal 1998"). The increase in sales is
attributable to a general increase in revenues at all locations and especially
the addition of a full years revenues at AMERICAN PARK (which opened in May
1998). The Company's food, liquor and other revenues accounted for 72.3%, 23.2%
and 4.5% of sales respectively for fiscal 1999 and 74.1%, 18% and 7.9% of sales,
respectively, for fiscal 1998.
Cost of sales for fiscal 1999 were $9,693,879, a decrease of $505,979
or 4.96%, as compared to $10,199,858 for fiscal 1998. The decrease in cost is
attributable to significant changes the Company instituted in the way it
operates its restaurants including management changes at LUNDY'S and AMERICAN
PARK, a tightening of purchasing specifications, and the implementation of menu
changes and stringent labor cost controls at all of the units. These programs
were continued in fiscal 1999 and have become part of the basic operating
philosophy of the Company.
Gross profit for fiscal 1999 was $9,499,003 or 49.5% of sales, as
compared to $6,003,034 or 37.0% of sales for fiscal 1998. The increase in gross
profit is attributable to significant changes the Company instituted in the way
it operated its restaurants including management changes at LUNDY'S and AMERICAN
PARK, a tightening of purchasing specifications, and the implementation of menu
changes and stringent labor cost controls at all of the units. These programs
were continued in fiscal 1999 and have become part of the basic operating
philosophy of the Company.
-12-
<PAGE>
Operating and administrative expenses for fiscal 1999 were $7,565,710
or 39.4% Of sales, as compared to $6,540,842 or 40.4% of sales for fiscal 1998.
Operating and administrative expenses for fiscal 1999 were higher primarily as a
result of the increased costs associated with being a public company, and the
costs associated with a full year's operation of AMERICAN PARK. Additionally, in
fiscal 1998 the company reduced operating and administrative expenses by $81,895
through management income fee received under the Company's operating agreement
with American Leisure. In fiscal 1999 no management fee income was received or
charged.
Other expenses for fiscal 1999 were $1,086,323, a decrease of $121,640
or 10.1%, as compared to $1,207,963 for fiscal 1998. Other expenses for fiscal
1999 consisted of $262,673 of interest expense, $485,053 of barter expense, a
non-recurring, non-cash charge of $308,083 relating to the original issue
discount associated with a $1,000,000 loan provided to the Company by Kayne
Anderson (defined below) and a non-recurring, non-cash charge of $30,257
associated with warrants issued to Frank Cretella, the Company's president,
director and principal stockholder, in conjunction with Mr. Cretella's
conversion of a note due him by the Company into preferred stock (defined
below). Other expenses for fiscal 1998 consisted of $380,716 of interest
expense, $653,587 of barter expense and a non-recurring, non-cash charge of
$173,660 relating to the original issue discount associated with a $1,000,000
loan provided to the company by Kayne Anderson (defined below).
As a result of the foregoing, loss from continuing operations for
fiscal 1999 was $301,344 as compared to a loss from continuing operations of
$2,229,202 for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have been and will continue to be
significant and its cash requirements have been exceeding its cash flow from
operations (at September 29, 1999, the Company had a working capital deficit of
$1,854,141), due to, among other things, costs associated with development,
opening and start-up costs of AMERICAN PARK and Park View at THE BOATHOUSE and
building a corporate infrastructure sufficient to support the Company's proposed
expanded operations. As a result, the Company has been substantially dependent
upon sales of its equity securities, loans from financial institutions and the
Company's officers, directors and stockholders and bartering transactions with
member dining clubs to finance a portion of its working capital requirements.
During fiscal 1999, net cash decreased by $138,670. Net cash provided
by operating activities was $783,862, compared to a net use of $2,332,461 in
fiscal 1998. This increase was primarily related to a decrease in net loss by
the Company of approximately $2,000,000 and increased depreciation and
amortization of approximately $550,000. Net cash used in investing activities
was $741,616, relating to the acquisition of furniture, fixtures and equipment
primarily at each of the Company's restaurants, expansion of the Company's
offices and investment in the Company's computer systems and software. Net cash
used in financing activities was $180,916, relating primarily to the repayment
of debt of $171,000 advances to affiliates and others of approximately $605,000,
Preferred Stock dividends paid of $54,000, offset by proceeds from barter
advances of 650,000.
During fiscal 1998, net cash decreased by $60,141. Net cash used in
operating activities was $2,332,461, net cash used in investing activities
was $1,982,934, relating to the acquisition of property and equipment primarily
for AMERICAN PARK, and net cash provided from financing activities was
$4,255,254, consisting primarily of long-term borrowings of $1,000,000 and net
proceeds of $3,637,249 from sales of equity securities, which was partially
offset by principal payments on long-term debt and capitalized lease obligations
of $516,211.
The Company enters into bartering agreements with member dining clubs
whereby member dining clubs advance cash to the Company in exchange for the
Company's agreement to provide to the clubs' members food and beverages at a
designated Company restaurant. The restaurant must permit the clubs' members to
purchase food and beverages at rates between 160% and 200% of the amount
advanced. Upon entering into the agreement, the Company records its obligation
to provide food and beverages at the amount of the advance it receives. Upon a
guest purchasing food or beverages, the Company records
-13-
<PAGE>
revenue for the amount of food and beverage purchased by the guest, and the
barter discount as a barter expense.
In October 1997, Kayne Anderson Non-Traditional Investments, L.P. and
ARBCO Associates, L.P., affiliates of Kayne Anderson Investment Management, Inc.
(collectively, "Kayne Anderson"), loaned the Company an aggregate of $1,000,000.
The loans bear interest at the rate of 10% per annum, payable quarterly, and are
due May 31, 1999. Upon an event of default under the loans, the interest rate
increases to 15% per annum and the Company would be required to pay to Kayne
Anderson 50% of the operating profits from AMERICAN PARK on a monthly basis
until the loan is fully repaid. The loan is guaranteed by Frank Cretella,
President, Chief Executive Officer, a director and a principal stockholder of
the Company, and the guarantee is secured by a pledge of 200,000 shares of
Common Stock owned by Frank Cretella and Jeanne Cretella, Vice President, a
director and principal stockholder of the Company. As partial consideration for
the loans, the Company issued to Kayne Anderson warrants (the "KA Warrants") to
purchase 200,000 shares of Common Stock. The KA Warrants are exercisable at a
price of $5.00 per share (subject to adjustment under certain circumstances) and
are exercisable at any time until October 31, 2002. The Company will incur a
non-cash interest charge of $482,000 representing the original issue discount
relating to the promissory notes issued to Kayne Anderson over the life of the
promissory notes. In connection with the loan, the Company agreed to use its
best efforts to cause a representative designated by Kayne Anderson to be
elected to the Company's Board of Directors. Kenneth Harris has been elected a
director as Kayne Anderson's initial designee. In August 1998, the Company and
Kayne Anderson agreed to amend the loan agreement to extend the maturity date of
the loans to September 30, 1999. Under the terms of the amendment the Company
agreed to substitute 50% of THE BOATHOUSE operating profits for 50% of AMERICAN
PARK operating profits if the Company failed to repay the loan by September 30,
1999. On January 11, 2000, the Company and Kayne Anderson agreed to provide for
a refinancing thus waiving the effect of default of the existing loans into new
long-term loans aggregating an equal or larger amount. The new loans will not be
due prior to October, 2000 at the earliest. The definitive agreements for the
new loan have been negotiated and are anticipated to be executed in the next few
weeks.
In February 1998, the Company consummated an initial public offering
("the Public Offering") of 1,000,000 shares of Common Stock and 500,000 Warrants
for gross proceeds of $5,050,000. After payment of the underwriters discounts
and commissions and expenses of the Public Offering, net proceeds realized by
the Company were $3,637,249.
At the end of fiscal 1998 the Company had used its public offering
proceeds to fund operating losses, replenish working capital, construct american
park and renovate THE BOATHOUSE. The Company will need to raise additional
capital to implement its expansion plans. The Company is in the process of
finalizing negotiations to secure a direct equity investment of at least
$3,000,000 through the sale of authorized and unissued treasury common stock.
The Company is also in the final stages of negotiating long-term loans to
provide financing for the construction of additional LUNDY restaurants in the
metropolitan New York City area. The definitive agreements for both the equity
sale and the long-term financing have been negotiated and are anticipated to be
executed in the next few weeks.
On November 19, 1998 the Company's Board of Directors authorized the
designation of 150,000 shares of a series of preferred stock ("Series A
Preferred Stock) bearing a 10% cumulative dividend payable quarterly in cash,
convertible into Common Stock at anytime after issuance, at the holder's option,
at the rate of one share of Common Stock for each share of Series A Preferred
Stock, subject to adjustment under certain circumstances. The Series A Preferred
Stock is senior in rights and preferences to any subsequently designated series
and/or class of preferred stock and is entitled to one vote per share of Common
Stock into which the issued and outstanding shares of Series A Preferred Stock
is then convertible, on all matters submitted to a vote of the Company's
stockholders. Outstanding shares of Series A Preferred Stock are redeemable at
any time by the Company, at its option, at the redemption price of $5.00 per
share, upon timely notice of its intent to redeem.
-14-
<PAGE>
In December 1998, Frank Cretella converted $720,405 of indebtedness
owed by the Company to him into shares of Series A Preferred Stock at the ratio
of one share of Series A Preferred Stock for each $5.00 of indebtedness
outstanding. As an inducement to Mr. Cretella to convert the debt to equity, the
Company also issued Mr. Cretella 72,045 warrants to purchase the Company's
Common Stock at $6.00 per share.
SEASONALITY AND FLUCTUATIONS IN QUARTERLY OPERATING RESULTS.
The Company's business is seasonal. The bicycle, rowboat rentals and
outdoor dining at THE BOATHOUSE are open only March through November. The
catering facilities, indoor section of the Park View restaurant and the fast
food operation are opened year round, but at a substantially reduced sales
volume during the winter due to THE BOATHOUSE'S location in the middle of
Central Park.
The two outdoor patios at AMERICAN PARK and the fast food kiosk are
only open March through November and its location in Battery Park also restricts
winter sales potential. The indoor restaurant and catering level are open year
round.
LUNDY'S is a waterside location and attracts more guests during warmer
months. As a result, the Company's average weekly restaurant sales and operating
cash flow generally increases from April through October and decreases from
November through March.
The Company also expects that future quarterly operating results will
fluctuate as a result of the timing of and expenses related to the openings of
new restaurants (as the Company will incur significant expenses during the
months preceding the opening of a restaurant), as well as due to various
factors, including the seasonal nature of its business, weather conditions in
New York City, the health of New York City's economy in general and its tourism
industry in particular. Accordingly, the Company's sales and earnings may
fluctuate significantly from quarter to quarter and operating results for any
quarter will not necessarily be indicative of the results that may be achieved
for a full year.
YEAR 2000
By September 1999, the Company had carefully reviewed and upgraded all
of its management and information systems, using outside firms specializing in
networking, telecommunications, point-of-sale systems, accounting software and
associated products, in an effort to minimize any impact of the year 2000. The
Company has also received year 2000 readiness statements from all of its key
suppliers, vendors and support companies. To date the Company has not
experienced any difficulties with any of its systems or operations related to
the year 2000. The Company is monitoring the situation carefully and at this
time, management believes that the impact of the year 2000 will have no material
effect on its operations or financial results.
INFLATION
The effect of inflation on the Company has not been significant during
the last two fiscal years.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company appear herein
following Item 13 below. Commencing on Page F-1
-15-
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 29, 1999
F-1
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
2
INDEPENDENT AUDITORS' REPORT 3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheet 4
Statements of operations 5
Statements of changes in stockholders' equity 6
Statements of cash flows 7
Notes to consolidated financial statements 8-26
2
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
TAM Restaurants, Inc.
Staten Island, New York
We have audited the accompanying consolidated balance sheet of TAM Restaurants,
Inc. and Subsidiaries as of September 29, 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the two years in the period ended September 29, 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 consolidated financial position of TAM
Restaurants, Inc. and Subsidiaries as of September 29, 1999, and the results of
their operations and their cash flows for each of the two years in the period
ended September 29, 1999, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
New York, NY
December 29, 1999 except for Note 7(b)
which is as of January 11, 2000
F-3
<PAGE>
<TABLE>
<CAPTION>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
September 29, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT:
<S> <C>
Cash $ 82,814
Accounts receivable - net of allowance for doubtful
accounts of $15,000 731,362
Inventory 300,931
Prepaid expenses and other 309,792
Due from affiliates 448,124
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,873,023
PROPERTY AND EQUIPMENT - NET 5,900,942
OTHER ASSETS 539,064
NOTE RECEIVABLE - AFFILIATE 63,962
- -------------------------------------------------------------------------------
$ 8,376,991
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 154,977
Current portion of loans payable, related parties 92,377
Current portion of capitalized lease obligations 97,539
Accounts payable 1,551,760
Contract deposits payable 421,066
Accrued expenses and other 1,409,445
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 3,727,164
- -------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Deferred rent expense 352,301
Long-term debt - net of current portion 29,604
Loans payable, related parties - net of current portion 1,193,115
Capitalized lease obligations - net of current portion 115,655
Barter advances - net of current portion 417,880
- -------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 2,108,555
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 5,835,719
- -------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value,
1,000,000 shares authorized;
144,081 shares issued and
outstanding (redemption value $720,450) 14
Common stock, $.0001 par value,
19,000,000 shares authorized;
3,503,000 shares issued and
outstanding 350
Additional paid-in capital 7,977,623
Accumulated deficit (5,436,715)
- -------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,541,272
- -------------------------------------------------------------------------------
$ 8,376,991
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
Year ended
-----------------------------
September 27, September 29,
1998 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Sales $ 16,202,892 $ 19,192,882
Cost of sales 10,199,858 9,693,879
- -------------------------------------------------------------------------------
Gross profit 6,003,034 9,499,003
- -------------------------------------------------------------------------------
Operating and administrative expenses 6,540,842 7,565,710
Depreciation and amortization expense 553,431 1,148,314
- -------------------------------------------------------------------------------
Total operating expenses 7,094,273 8,714,024
- -------------------------------------------------------------------------------
Income (loss) from operations (1,091,239) 784,979
- -------------------------------------------------------------------------------
Other expenses:
Interest expense 380,716 292,930
Original issue discount amortization 173,660 308,340
Barter expense 653,587 485,053
- -------------------------------------------------------------------------------
Total other expenses 1,207,963 1,086,323
- -------------------------------------------------------------------------------
Net loss $ (2,299,202) $ (301,344)
===============================================================================
Net loss per common share - basic and diluted $ (.73) $ (.10)
===============================================================================
Weighted average number of common shares
outstanding - basic and diluted 3,129,426 3,503,000
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
YEARS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 29, 1999
- --------------------------------------------------------------------------------
Preferred stock Common Stock Additional
------------------------- --------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 28, 1997 -- $ -- 2,500,000 $ 250 $ 3,107,796 $(2,782,142)
Initial public offering of
common stock -- -- 1,000,000 100 3,637,149 --
Warrants issued in connection
with debt -- -- -- -- 482,000 --
Exercise of warrants -- -- 3,000 -- 30 --
Net loss -- -- -- -- -- (2,299,202)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1998 -- -- 3,503,000 350 7,226,975 (5,081,344)
Issuance of preferred stock on
debt conversion 144,081 14 -- -- 720,391 --
Value of five year warrants
issued on debt conversion -- -- -- -- 30,257 --
Preferred stock dividends paid -- -- -- -- -- (54,027)
Net loss -- -- -- -- -- (301,344)
- ------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29, 1999 144,081 $ 14 3,503,000 $ 350 $ 7,977,623 $(5,436,715)
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
Year ended
-------------------------------
September 27, September 29,
1998 1999
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,299,202) $ (301,344)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 553,431 1,148,314
Deferred rent expense 47,633 80,132
Amortization of warrants issued on debt conversion -- 30,257
Amortization of original issue discount 173,660 308,340
Deferred income (1,819) (6,000)
Increase in allowance for doubtful accounts 15,000 --
(Increase) decrease in:
Accounts receivable (388,154) (70,840)
Inventory (177,052) 80,827
Prepaid expenses and other 16,641 39,633
Other assets (552,051) (233,818)
Increase (decrease) in:
Accounts payable 439,879 589,057
Contract deposits payable 106,983 50,774
Accrued expenses (267,410) (931,470)
- ----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (2,332,461) 783,862
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,982,934) (741,616)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (advances) repayments of officer's loans 7,330 (24,833)
Loans receivable (3,060) --
Proceeds from long-term debt and warrants 1,000,000 --
Principal payments on long-term debt
and capitalized lease obligations (516,211) (170,682)
Repayments (advances) from affiliates and others 1,594 (581,374)
Preferred stock dividend paid -- (54,027)
Deferred stock offering costs 128,322 --
Proceeds from barter advances -- 650,000
Net proceeds from initial public
offering of common stock 3,637,249 --
Proceeds from exercise of warrants 30 --
- ----------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,255,254 (180,916)
- ----------------------------------------------------------------------------------------
NET DECREASE IN CASH (60,141) (138,670)
CASH, BEGINNING OF YEAR 281,625 221,484
- ----------------------------------------------------------------------------------------
CASH, END OF YEAR $ 221,484 $ 82,814
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF NATURE OF BUSINESS
SIGNIFICANT
ACCOUNTING TAM Restaurants, Inc. (the "Company") was incorporated
POLICIES under the laws of the State of Delaware in July 1996 under
the name TAM Restaurant Holding Corp. and changed its name
to TAM Restaurants, Inc. Effective September 29, 1996, the
Company acquired all of the outstanding capital stock of
TAM Restaurant Group, Inc., Bay Landing Restaurant Corp.
and Shellbank Restaurant Corp. The Company operates Lundy
Bros. Restaurant, ("Lundy's") a high volume, casual,
upscale seafood restaurant located in Brooklyn, New York,
The Boathouse in Central Park, ("Boathouse"), a multi-use
facility which features an upscale restaurant and catering
pavilion, located on the lake in New York City's Central
Park and American Park at the Battery ("American Park"), a
high-volume premium-quality restaurant located at the
water's edge in Battery Park (Manhattan). In addition, the
Company's restaurants offer high-quality professional,
on-premises and off-premises catering services.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ACCOUNTING PERIOD
The fiscal years for the consolidated financial statements
presented all consist of 52-week periods. References to
years relate to fiscal years rather than calendar years.
The Company reports on a 52/53 week year. For fiscal 1999
the Company changed its period end day from Sunday to
Wednesday in order to facilitate better cost controls and
streamline its reporting systems. As a result, fiscal 1999
includes three additional days of revenues and expenses
when compared to fiscal 1998. The change had no material
effect on the revenues and expenses reported in fiscal
1999.
F-8
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
REVENUE RECOGNITION
Revenue is recognized at the point of sale.
INVENTORY
Inventory is stated at the lower of cost, first-in,
first-out, or market. Inventory consists of items used in
operations and items held for resale.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation
of equipment, furniture and fixtures and amortization of
leasehold improvements are provided using the
straight-line method for financial reporting purposes at
rates based on the following estimated useful lives:
Years
----------------------------------------------------------
Transportation equipment 5
Furniture and fixtures 5-7
Equipment 5-10
Leasehold improvements Remaining life of lease
==========================================================
Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are
capitalized. Expenditures for maintenance and repairs are
charged to expense as incurred.
TRADEMARKS
The name Lundy Bros. (registered July 9, 1996) and the
logo F.W.I.L. (registered December 17, 1996) are
registered with the United States Patent and Technical
Office. Each registration will remain in force for 10
years, subject to the filing of a Declaration of
Continuing Use between the fifth and sixth anniversaries
of the registration date. Included in other assets at
September 29, 1999 is $111,318 of net trademark costs.
F-9
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
BARTER ADVANCES
The Company has entered into various barter agreements,
which it uses as a source of financing. Under the
agreements, the Company is advanced cash in exchange to
provide food and beverage to the barter companies. For
every dollar advanced, the Company must return $1.60 to
$2.00 in food and beverage sales.
CONTRACT DEPOSITS PAYABLE
Contract deposits payable are deposits received for future
catering events. Revenue is recognized when these events
occur.
INCOME TAXES
The Company accounts for its income taxes using Statement
of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), which
requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or
taxable amounts and operating loss carryforwards. Deferred
tax expense or benefit is recognized as a result of the
changes in the assets and liabilities during the year.
Valuation allowances are established when necessary to
reduce deferred tax assets to amounts expected to be
realized.
RENT EXPENSE
The Company amortizes its rental space using the
straight-line method over the life of the lease.
ADVERTISING EXPENSES
Advertising expenses are charged to earnings when
incurred.
CONCENTRATION OF CREDIT RISK
The Company extends credit based on an evaluation of the
customer's financial condition, generally without
requiring collateral. Exposure to losses on receivables is
principally dependent on each customer's financial
condition. The Company monitors its exposure for credit
losses and maintains allowances for anticipated losses. No
individual customer is considered to be significant.
F-10
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NET EARNINGS (LOSS) PER SHARE
Basic earnings per share includes no dilution and is
computed by dividing income available to common
stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per
share reflect, in periods in which they have a dilutive
effect, the effect of common shares issuable upon exercise
of stock opinions, warrants and conversion of preferred
stock. Outstanding stock options, warrants and preferred
stock were antidilutive during the years ended September
27, 1998 and September 29, 1999.
The components of basic and diluted loss per share were as
follows:
<TABLE>
<CAPTION>
September 27, September 29,
Year ended 1998 1999
----------------------------------------------------------------------------
<S> <C> <C>
Net loss $(2,299,202) $(301,344)
Preferred stock dividends - (54,027)
----------------------------------------------------------------------------
Net loss available to common
stockholders $(2,299,202) $(355,371)
============================================================================
Weighted average number of common
shares outstanding - basic and diluted 3,129,426 3,503,000
============================================================================
Net loss per share - basic and diluted $ (.73) $ (.10)
============================================================================
</TABLE>
F-11
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of financial instruments including
cash, accounts receivable, accounts payable and short-term
debt approximated fair value as of September 29, 1999
because of the relatively short maturity of these
instruments. The carrying value of long-term debt
approximates the fair value for similar debt issues based
on quoted market prices or current rates offered to the
Company for debt of the same maturities. Due to the
unspecified payment terms, it was not practicable to
estimate the fair value of amounts due from affiliates.
The fair value of Barter advances due at September 29,
1999 was approximately $1,216,000.
STOCK-BASED COMPENSATION
The Company accounts for stock based compensation using
the intrinsic value method as permitted by SFAS No. 123
and will account for such transactions in accordance with
Accounting Principles Board ("APB") No. 25 and, as
required by SFAS No. 123, will provide pro forma
information regarding net income as if compensation costs
for the Company's stock plan had been determined in
accordance with the fair value method presented by SFAS
No. 123.
LONG-LIVED ASSETS
The Company accounts for long lived assets under the
provisions of SFAS No. 121 which requires, among other
things, an impairment loss on assets to be held and gains
or losses from assets that are expected to be disposed of
to be included as a component of income from continuing
operations before taxes on income.
RECENT ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, " Accounting for Derivative
Instruments and Hedging Activities," which requires
companies to recognize all derivatives as either assets or
liabilities in the assessment of financial position and
measure those instruments at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000.
The Company does not anticipate the new standard will have
any effect on its financial statements.
F-12
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. INVENTORY Inventory consisted of:
September 29, 1999
----------------------------------------------------------
Food and beverage $ 211,316
Liquor 72,091
Paper 3,736
Retail merchandise 13,788
----------------------------------------------------------
$ 300,931
==========================================================
3. PREPAID Prepaid expenses and other consisted of:
EXPENSES AND
OTHER September 29, 1999
----------------------------------------------------------
Income taxes receivable $ 143,782
Prepaid expenses 166,010
----------------------------------------------------------
$ 309,792
==========================================================
4. PROPERTY AND Property and equipment consisted of:
EQUIPMENT
September 29, 1999
----------------------------------------------------------
Transportation equipment and trailers $ 283,694
Furniture and fixtures 490,161
Equipment 1,807,099
Leasehold improvements 6,182,153
Assets acquired under capital leases 418,459
Computer software 186,561
----------------------------------------------------------
9,368,127
Less: Accumulated depreciation and
amortization 3,467,185
----------------------------------------------------------
$5,900,942
==========================================================
Depreciation and amortization expense totaled $553,431 and
$782,290 for the years ended 1998 and 1999, respectively.
F-13
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
5. OTHER ASSETS Other assets consisted of:
September 29, 1999
----------------------------------------------------------
Trademarks, net of accumulated
amortization of $7,725 $ 121,817
Refundable rent security deposits 165,548
Smallware, utensils, supplies 143,738
Other 107,961
----------------------------------------------------------
$ 539,064
==========================================================
6. ACCRUED Accrued expenses and other consisted of:
EXPENSES AND
OTHER
September 29, 1999
----------------------------------------------------------
Sales tax $ 209,770
Accrued rent and related taxes 442,863
Barter advances, current portion 343,051
Payroll, payroll taxes and benefits 350,781
Other 62,980
----------------------------------------------------------
$ 1,409,445
==========================================================
F-14
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. BORROWINGS The Company's loans outstanding consisted of:
September 29, 1999
----------------------------------------------------------
Loan from related party (a) $ 107,492
Loan payable from outside investment
firm bearing interest at 10% per
annum, payable quarterly, due
September 30, 1999 and subsequently
extended to October 2000 (see Note
10). An officer from the investment
firm is Chairman of the Board of
Directors. The loan is guaranteed
by a principal stockholder of the
Company and is secured by a pledge
of 200,000 shares of common stock
held by such stockholder. (b) 1,000,000
Installment loan payable in 60 monthly
payments of $3,187 to Brooklyn
Union Gas Company, including
interest at a rate of 10% beginning
December 1, 1995. The loan is
collateralized by equipment with a
net book value of $127,500. 41,950
Unsecured loans from private investors
bearing interest at rates from 8%
to 15% per annum, maturing at
various times through 2002. 126,571
Unsecured loan payable from related
parties, bearing interest of 10% to
15%, due June 2000. 178,000
Other 16,060
----------------------------------------------------------
1,470,073
Less: Current portion due within one year 247,354
----------------------------------------------------------
Long-term $1,222,719
==========================================================
F-15
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Maturities of long-term debt at September 29, 1999 are as
follows:
----------------------------------------------------------
2000 $ 247,354
2001 1,116,232
2002 6,675
2003 2,953
2004 3,175
Thereafter 93,684
----------------------------------------------------------
$1,470,073
==========================================================
-----------
(a) This loan is secured by the personal residence of a
stockholder. The mortgage bears interest at 7.25% and
is payable in 360 monthly installments of $853,
including interest and is due in 2024.
(b) Upon an event of default under this loan, the interest
rate increases to 15% per annum and the Company would
be required to pay to this related party 50% of the
operating profits from American Park on a monthly basis
until the loan is fully repaid. The Company was in
default of this agreement, however, the default has
been waived.
8. CAPITAL LEASE The Company leases equipment and various leasehold
OBLIGATIONS improvements under capital obligations leases.
The assets acquired under capital leases have a cost of
$418,459 and accumulated amortization of $228,679 as of
September 29, 1999. Amortization of the leased assets is
included in depreciation expense.
F-16
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following is a schedule, by year, of future minimum
lease payments under capitalized leases, together with the
present value of the net minimum lease payments at
September 29, 1999.
----------------------------------------------------------
Payments for the year ending:
2000 $110,020
2001 75,166
2002 52,923
2003 11,574
----------------------------------------------------------
Total minimum lease payments 249,683
Less: Amount representing interest 36,489
----------------------------------------------------------
Present value of net minimum lease payments 213,194
Less: Current portion 97,539
----------------------------------------------------------
Long-term lease obligations $115,655
==========================================================
9. COMMITMENTS AND The Company has entered into various lease and licensing
CONTINGENCIES agreements, which expire through 2016.
Certain of the Company's license and lease agreements
require the payment of rent based on a percentage of gross
receipts. Future minimum rental payments are approximately
as follows:
Year ending September
----------------------------------------------------------
2000 $ 512,000
2001 453,000
2002 408,000
2003 399,000
2004 407,000
Thereafter 5,245,000
----------------------------------------------------------
$7,424,000
==========================================================
F-17
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Rent expense, real estate taxes and common area charges
for the years ended September 27, 1998 and September 29,
1999 totaled $1,566,893 and $1,937,507, respectively. TAM
Restaurant Group, Inc. has a license agreement with the
Central Park Zoo. American Leisure (a related party owned
by the Chief Executive Officer) has assumed the operation
of the concession granted by such license agreement as a
result of a restructuring. However, TAM Restaurant Group,
Inc. was responsible as a primary concessionaire until
October 1998 when the license expired. The license
required payment of 39% of total sales as a licensing fee.
Sales for the years ended September 27, 1998 and September
29, 1999, relating to this license amounted to $1,261,311
and $-0-, respectively.
TAM Restaurant Group, Inc. is currently being audited by
New York State for sales and use taxes for the period
December 1, 1989 to June 28, 1993. The Company has accrued
$50,000 for additional taxes that may be due, exclusive of
interest and penalties, if any. As of January 2000, this
audit has not been completed.
Effective February 10, 1998, the Company entered into
three-year employment agreements with the Chief Executive
Officer and a Vice President, which are automatically
renewable and provide for an annual base compensation of
$175,000 and $75,000, respectively, and such bonuses as
the Board of Directors may from time to time determine.
In connection with a settlement agreement relating to the
Lundy's trademark, the Company opened a new Lundy's
restaurant in fiscal 1999. Additionally, the Company is
required to pay a fee of .75% of gross revenues in excess
of a minimum threshold (as determined by the seating
capacity of the restaurant), after the first year of
operations, earned by any new restaurant established by
the Company utilizing the Lundy's name. For the years
ended September 27, 1998 and September 29, 1999, no
amounts have been incurred under this agreement.
F-18
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. RELATED PARTY In March 1994, Leisure Time Services, Inc., which is
TRANSACTIONS owned by a stockholder of the Company, was formed to
purchase, repair and store equipment and supplies for the
Company, as well as to assist the Company in the
performance of special catering events. Rent paid by the
Company for each of the years ended 1998 and 1999 for
utilization of a warehouse was $30,000. As of September
29, 1999, included in the accompanying consolidated
balance sheet under the caption "note receivable -
affiliate" is $63,962, which was used to secure the title
on the New Jersey warehouse.
The balance of this loan is being repaid in equal monthly
installments of $1,996, including interest at 9.6% through
2006. Additionally, included in due from affiliates is
$24,155 of additional amounts due from Leisure Time
Services, Inc. with no specific repayment term.
In October 1996, the Company entered into a lease for its
corporate offices with its principal stockholders. The
lease expires in December 2001 and provides for annual
rental payments of approximately $38,000 plus real estate
taxes.
Additionally, the Company occasionally advanced monies to
officers of the Company. No terms of repayment or interest
rates have been determined on these advances. As of
September 29 1999, the balance in this account was
$120,377.
The Company is indebted to relatives of the principal
stockholder in the amounts of $178,000 as of September 29,
1999. The notes are unsecured and bear interest from 10%
to 15% per annum. Interest expense to these relatives was
approximately $28,000 for the years ended 1998 and 1999,
respectively.
For the years ended 1998 and 1999, the Company has reduced
operating expenses by $81,895 and $-0-, respectively,
representing management fee income from American Leisure.
At September 29, 1999, included in due from affiliates is
$199,043 due from American Leisure with no specific
repayment term. However, the amount was subsequently
repaid.
The principal stockholder has guaranteed up to $50,000 of
Barter advances due to a certain Barter company.
F-19
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In July 1996, the Company entered into a two-year
consulting agreement with its Chairman of the Board of
Directors, pursuant to which he has provided strategic
planning, restaurant operations, marketing and site
evaluation consulting services for a fee equal to $5,000
per month. The agreement is automatically renewable for
successive one-year periods, unless either party gives
written notice of its intention not to renew the agreement
at least 30 days prior to the end of the term or renewal
term. In addition, pursuant to the consulting agreement,
in March 1998, the Company paid $50,000 as payment for
consulting services rendered to the Company prior to
entering into the consulting agreement (see Note 7).
In December 1998 the Company entered into a licensing
agreement with KA Industries, an affiliate of a principal
stockholder of the Company, to market products bearing the
names Lundy's, The Boathouse, and Stork Club through KA
Industries' Mrs. Beasley's retail stores, third-party
catalogues and retail establishments. Pursuant to the
agreement, the Company is to receive a royalty on products
sold. Sales and royalties under this agreement for the
year ended September 29, 1999 were approximately $54,000.
In December 1998, the Company entered into an arrangement
with KA Industries to operate a commissary for a bakery.
In conjunction with the arrangement, the Company entered
into a month-to-month sublease of a portion of its Bayonne
warehouse at approximately $741 per month. In addition, KA
Industries advanced the Company $30,000 to make
modifications to the Bayonne warehouse with such advance
recaptured from rent and other charges due the Company
from KA Industries (see Note 7).
11. CAPITAL STOCK At September 29, 1999, there was an aggregate of 1,160,000
AND WARRANTS warrants outstanding at exercise prices between $5.00 and
$7.25 per share, expiring at various times through 2003.
In October 1997, as partial consideration for a loan, the
Company granted warrants to purchase 200,000 shares, at an
exercise price of $5.00 per share, expiring in October
2002. These warrants were valued at $482,000 and recorded
as a debt discount.
F-20
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
As part of its initial public offering in February 1998,
the Company offered and sold warrants (the "Public
Warrants") to purchase 500,000 shares, at an exercise
price of $6.00 per share, expiring in February 2003. Also
upon the consummation of its initial public offering, the
Company issued warrants to purchase 310,000 shares, which
are identical to the public warrants, upon the conversion
of an equal amount of outstanding warrants.
Additionally, during February 1998, the Company sold to
the underwriter of the initial public offering, warrants
to purchase 100,000 shares, at an exercise price of $6.00
per share and warrants to purchase 50,000 underlying
warrants at an exercise price of $0.12 per underlying
warrant. Each underlying warrant is exercisable at an
exercise price of $7.25 per share. These warrants expire
in February 2003.
The Board of Directors is authorized to fix the rights,
preferences, privileges and restrictions of any series of
preferred stock, including the dividend rights, original
issue price, conversion rights, voting rights, terms of
redemption, liquidation preferences and sinking fund terms
thereof, and the number of shares constituting any such
series and the designation thereof and to increase or
decrease the number of shares subsequent to the issuance
of shares of such series (but not below the number of
shares of such series then outstanding).
In November 1998, the Company's Board of Directors
authorized the designation of 150,000 share of series of
preferred stock ("Series A Preferred Stock") bearing a 10%
cumulative dividend payable quarterly in cash, convertible
into common stock at anytime after issuance, at the
holder's option, at the rate of one share of common stock
for each share of Series A Preferred Stock, subject to
adjustment under certain circumstances. The Series A
Preferred Stock is senior in rights and preferences to any
subsequently designated series and/or class of preferred
stock and is entitled to one vote per share of common
stock into which the issued and outstanding shares of
Series A Preferred Stock is then convertible, on all
maters submitted to a vote of the Company's stockholders.
Outstanding shares of Series A Preferred Stock are
redeemable at any time by the Company, at its option, at
the redemption price of $5.00 per share, upon timely
notice of its intent to redeem.
F-21
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In December 1998, the Company's Chief Executive Officer
converted $720,405 of indebtedness owed to him into
144,081 shares of Series A Preferred Stock and 72,045
warrants to purchase the Company's common stock at $6 per
share. The fair value of these warrants has resulted in a
charge of $30,357.
12. STOCK OPTION The Company has a stock option plan (the "Option Plan")
PLAN pursuant to which 1,250,000 shares of common stock have
been reserved for issuance upon the exercise of options
designated as either (i) incentive stock options ("ISOs")
under the Internal Revenue Code of 1986, as amended (the
"Code") or (ii) nonqualified options. ISOs may be granted
under the Option Plan to officers and employees of the
Company. Nonqualified options may be granted to
consultants, directors (whether or not they are
employees), employees or officers of the Company.
The purpose of the Option Plan is to encourage stock
ownership by certain directors, officers and employees of
the Company and other persons instrumental to the success
of the Company. The Option Plan is intended to qualify
under Rule 16b-3 under the Exchange Act, and is
administered by the Board of Directors. The Board, within
the limitations of the Option Plan, determines the persons
to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are
intended to be ISOs, the duration and rate of exercise of
each option, the option purchase price per share and the
manner of exercise, and the time, manner and form of
payment upon exercise of an option.
F-22
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company provides pro forma information regarding net
income and earnings per share as if compensation cost for
the Company's stock option plan had been determined in
accordance with the fair value method prescribed in SFAS
No. 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted average
assumptions: dividend yield of 0% for 1998 and 1999,
expected volatility of 46.1% for 1998 and 45.8% for 1999 ;
risk-free interest rates of 5.47% for 1998 and 4.46% for
1999; and expected lives of 5 years.
Under the accounting provisions of FASB Statement 123, the
Company's net loss and net loss per share would have been
the pro forma amounts indicated below:
Year ended September 27, September 29,
1998 1999
----------------------------------------------------------
Net loss:
As reported $(2,299,202) $(301,344)
Pro forma (2,611,763) (541,450)
Net loss per share
(basic and diluted):
As reported (.73) (.10)
Pro forma (.83) (.17)
==========================================================
F-23
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's stock option plan
as of September 29, 1999, and changes during the two years
then ended, are presented below:
Weighted average
Shares exercise price
----------------------------------------------------------
Outstanding at
September 28, 1997 - $ -
Granted 293,500 5.00
Exercised - -
Forfeited (48,625) 5.00
----------------------------------------------------------
Outstanding at
September 27, 1998 244,875 $5.00
Granted 231,000 2.00
Exercised - -
Forfeited (10,875) 5.00
----------------------------------------------------------
Outstanding at
September 29, 1999 465,000 $3.79
----------------------------------------------------------
Options exercisable at
September 27, 1998 130,437 $5.00
Options exercisable at
September 29, 1999 313,000 $3.71
----------------------------------------------------------
September September
Year ended 27, 1998 29, 1999
----------------------------------------------------------
Weighted average fair value
of options granted $2.13 $ .84
----------------------------------------------------------
F-24
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table summarizes information about stock
options outstanding at September 29, 1999.
<TABLE>
<CAPTION>
Options outstanding Options exercisable
----------------------------- ------------------------
Weighted
average Weighted Weighted
Range of Number remaining average Number of average
exercise outstanding contractual exercise exercisable exercise
prices at 9/29/99 life price at 9/29/99 price
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.50-to
$5.00 465,000 4.43 years $3.79 313,000 $3.71
==================================================================
</TABLE>
13. INCOME TAXES There is no current or deferred income tax expense for the
years ended 1998 and 1999.
The Company's deferred tax assets, deferred tax
liabilities and deferred tax asset valuation allowance are
as follows:
September September
27, 1998 29, 1999
----------------------------------------------------------
Deferred rent expense $ 128,000 $ 161,000
Net operating loss carryforward 1,476,000 1,529,000
Other 55,000 -
----------------------------------------------------------
Total deferred tax assets 1,659,000 1,690,000
Less: Valuation allowance 1,659,000 1,690,000
----------------------------------------------------------
Total deferred tax liabilities - -
----------------------------------------------------------
Net deferred tax asset - -
----------------------------------------------------------
For tax purposes, the Company has approximately $3,385,000
of net operating loss carryforwards as of September 29,
1999, which expire through 2011.
F-25
<PAGE>
TAM RESTAURANTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. PENDING The operation of restaurants and rowboat and bicycle
LITIGATION rentals subjects the Company to potential claims from
others, including customers, employees and other service
providers for personal injury (resulting from, among other
things, contaminated or spoiled food or beverages and
accidents). The Company is a defendant in several lawsuits
arising in the ordinary course of its business relating to
personal injury claims by plaintiffs which are seeking
damages substantially in excess of the Company's assets
and insurance coverage. The lawsuits are being handled by
the Company's insurance carriers. The Company is
vigorously defending each lawsuit and believes that such
matters are adequately covered by insurance or, if not so
covered, are without merit or are of such nature or
involve such amounts that an unfavorable disposition would
not have a material adverse effect on the financial
condition or operations of the Company. However, since
each lawsuit is in an early stage, there can be no
assurance that any of such actions will be resolved in
favor of the Company or that the outcome of any litigation
or settlement will not have a material adverse effect on
the Company.
In the ordinary course of business, the Company is a party
to other legal proceedings, the outcome of which, either
singly, or in the aggregate, is not expected to be
material.
15. CASH FLOW Cash paid for interest and income taxes is as follows:
DISCLOSURE
Year ended September 27, 1998 September 29, 1999
----------------------------------------------------------
Interest $380,716 $292,930
Income taxes 40,279 6,840
----------------------------------------------------------
Noncash transactions included the following:
For the year ended September 27, 1998, the Company entered
into new capital lease obligations of $221,135.
During the year ended September 29, 1999, the Company
transferred to an affiliate notes payable of $350,000.
F-26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following are the directors and executive officers of the Company:
NAME AGE POSITION
- ------------------------------ ------ ---------------------------------------
Frank Cretella................ 41 President, Chief Executive Officer
and Director
Jeanne Cretella............... 41 Vice President and Director
Anthony B. Golio.............. 39 Vice President
Kenneth L. Harris............. 57 Chairman of the Board
Peter J. Salvatore............ 62 Director
Barry E. Krantz............... 55 Director
Frank Argenziano.............. 52 Director
FRANK CRETELLA co-founded the Company's predecessor in 1981 and has
been President, Chief Executive Officer and a director of the Company since
inception.
JEANNE CRETELLA co-founded the Company's predecessor in 1981, and has
been Vice President, Secretary and a director of the Company since inception.
Ms. Cretella is the wife of Frank Cretella.
ANTHONY B. GOLIO has been Vice President of the Company since October
1997. In June 1996, Mr. Golio founded The Pineapple Group Inc., a consulting
company to the restaurant industry. From February 1994 until October 1996, Mr.
Golio was director of operations of Whiskey River Restaurant Group, a restaurant
holding company. From January 1991 through February 1994, Mr. Golio was Vice
President - Operations and Marketing of HMG, Inc., a restaurant holding company.
From 1988 to 1991, Mr. Golio was manager of guest services of the New York
Zoological Society. From 1984 to 1988, Mr. Golio was area manager of Chi-Chi's
Restaurants, Inc.
KENNETH L. HARRIS has been Chairman of the Board of the Company since
June 1997. Since March 1998, Mr. Harris has been a Senior Vice President and
Managing Director of Kayne Anderson Investment Management, Inc. Since January
1995, Mr. Harris has been President and Chief Executive Officer of Platinum
Restaurant Group, a management consulting firm. From February 1994 through
January 1995, Mr. Harris was Chief Operating Officer of HOB Entertainment, Inc.,
a theme restaurant company. From January 1975 through January 1994, Mr. Harris
was employed by W.R. Grace & Co. ("Grace") and its subsidiary, Restaurant
Enterprises Group, Inc. ("REGI"), most recently as President and Chief Executive
Officer of REGI's Dinnerhouse division.
PETER J. SALVATORE has been a director of the Company since February,
1998. Mr. Salvatore was managing director of Spear Leeds & Kellogg, an NASD
member firm, from March 1991 until 1999, when Mr. Salvatore retired from his
position as managing director of Spear Leeds & Kellogg.
BARRY E. KRANTZ has been a director of the Company Since February,
1998. Mr. Krantz has been an independent restaurant industry consultant since
August 1995. Mr. Krantz was Chief Operating Officer and
-16-
<PAGE>
a director of REGI from January 1989 through January 1994 when it was
sold by Grace to an investor group. From January 1994 to August 1995, Mr. Krantz
was President, Chief Operating Officer of Family Restaurants, Inc., the
successor of REGI. Mr. Krantz is currently a director of Sizzler International,
Inc. and Fresh Choice, Inc., both publicly traded companies in the restaurant
industry.
FRANK ARGENZIANO became a director of the Company on November 19, 1998.
in September 1999 Mr. Argenziano has been Chief Financial Officer of PSAM, a
member of the NASD. In 1989,Mr. Argenziano was Chief Financial Officer of
Paragon Capital Corporation, a member of the NASD. From 1970 to 1989, Mr.
Argenziano was employed at Schroder & Co. Inc., formerly Wertheim & Co. Inc.
All directors currently hold office until the next annual meeting of
stockholders and until their successors are duly elected and qualified.
Executive officers of the Company serve at the direction of the Board and until
their successors are duly elected and qualified. The Company reimburses
directors for reasonable travel expenses incurred in connection with their
activities on behalf of the Company but does not pay its directors any fees for
Board participation. Each outside Director is granted 5,000 options annually to
purchase Company common shares as compensation for services.
The Company has agreed that it will, for the period ending February 10,
2001, upon the request of the Underwriter, nominate and use its best efforts to
elect a designee of the Underwriter (which designee may change from time to
time) as a director of the Company or, at the Underwriter's option, appoint such
designee as a non-voting advisor to the Company's Board of Directors. In August
1998, the Underwriter exercised its right and designated Frank Argenziano to be
a member of the Board of Directors. Mr. Argenziano was elected to the Board of
Directors on November 19, 1998.
AUDIT COMMITTEE
The Board of Directors has established an audit committee comprised of
Kenneth Harris and Peter Salvatore. The audit committee is responsible for
making recommendations concerning the engagement of independent public
accountants, reviewing the plans and results of the audit engagement with the
independent public accounts, approving professional services provided by the
independent public accounts and reviewing the adequacy of the Company's internal
accounting contracts.
EXECUTIVE COMMITTEE
The Board of Directors has established an executive committee comprised
of Kenneth Harris, Frank Cretella and Jeanne Cretella. The executive committee
meets on a monthly basis to review the Company's operating results pursuant to
directives of the Board of Directors and to make operating and strategic
decisions on items authorized by the Board.
REAL ESTATE COMMITTEE
The Board of Directors has established a real estate committee
comprised of Kenneth Harris, Barry Krantz and Peter Salvatore. The real estate
committee is responsible for reviewing proposed real estate transactions and
making recommendations to the Board of Directors with respect to specific
transactions.
COMPENSATION COMMITTEE
The Board of Directors has established a compensation committee
comprised of Kenneth Harris, Barry Krantz and Peter Salvatore. The compensation
committee is responsible for determining compensation for executive officers of
the Company, and for reviewing and presenting the Board of Directors with
proposed bonus grants, stock option grants and employment contracts.
-17-
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), requires the Company's officers and directors, and
persons who own more than 10% of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms
received by the Company, the Company believes that, during the year ended
September 27, 1998, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with except that
a Form 4 for Frank Cretella was filed late.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain compensation paid by the Company
during the fiscal years ended September 29, 1999, September 27, 1998 and
September 28, 1997 to Frank Cretella, its President and Chief Executive Officer
and certain compensation paid by the Company to Anthony B. Golio, its Vice
President for the fiscal years ended September 27, 1998 and September 29, 1999.
No other officer of the Company received compensation in excess of $100,000 for
any such fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
-------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATON
- --------------------------------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Frank Cretella
President and Chief Executive Officer 1999 $175,000 $ 0 $ 2,000
1998 $175,000 $ 0 $ 2,000
1997 $175,000(1) $ 0 $ 2,000
Anthony B. Golio
Vice President ....................... 1999 $130,000(2) $ 0 $ 0
1998 $102,445 $ 0 $ 0
<FN>
- --------------
(1) Mr. Cretella deferred approximately $25,000 of his salary from fiscal 1997
and such payment was made in fiscal 1998.
(2) Mr. Golio deferred a salary increase and back pay of approximately $13,200
from his salary in fiscal 1998, that amount was added to his base salary
in fiscal 1999.
</FN>
</TABLE>
-18-
<PAGE>
The following table provides information relating to stock options
awarded to each of the above- named executive officers during the year ended
September 29, 1999. All such options were awarded under the Stock Option Plan.
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1999
----------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES IN PRICE PER EXPIRATION
NAME AND PRINCIPAL POSITION GRANTED FISCAL 1999(1) SHARE(2) DATE
- --------------------------- ------- -------------- -------- ----
<S> <C> <C> <C> <C>
Frank Cretella
President and Chief Executive Officer..... 37,500 19% $1.75 1/10/2004
18,750(3) 10% $1.75 1/10/2005
18,750(4) 10% $1.75 1/10/2006
Anthony B. Golio
Vice President............................. 6,250 3% $1.75 1/10/2004
3,125(3) 1.5% $1.75 1/10/2005
<FN>
3,125(4) 1.5% $1.75 1/10/2006
- -----------------------
(1) The number of options granted to employees during fiscal 1999 used to
compute this percentage excludes options to purchase 48,625 shares of
Common Stock due the termination of such options pursuant to their terms.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock on the date of grant, as determined by the Board
of Directors.
(3) These options vest on the first anniversary of the date of grant provided
that the optionee is then employed by the Company.
(4) These options vest on the second anniversary of the date of grant provided
that the optionee is then employed by the Company.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
Effective February 10, 1998, the Company entered into three-year
employment agreements with Frank Cretella and Jeanne Cretella, which are
automatically renewable and provide for an annual base compensation of $175,000
and $75,000, respectively, and such bonuses as the Board of Directors may from
time to time determine. Each of the employment agreements requires the officer
to devote a majority of such officer's business time to the Company's business
and affairs and contains a provision that such officer will not compete or
engage in a business competitive with the current or anticipated business of the
Company during the term of the employment agreement and for a period of one year
thereafter. Each of the agreements also provides that if the officer is
terminated without cause (including as a result of a change in control), such
officer will be entitled to receive severance pay equal to the base compensation
through the term of the agreement, provided that if such officer is terminated
during the third year or the last year of any renewal term, such officer will be
entitled to receive additional compensation equal to the base compensation
received from the Company during the one-year period prior to the date of
termination.
CONSULTING AGREEMENT
In July 1996, the Company entered into a two-year consulting agreement
with Kenneth L. Harris, Chairman of the Board of the Company, pursuant to which
Mr. Harris (through Platinum Restaurant Group, a company wholly owned by Mr.
Harris) has provided strategic planning, restaurant operations, marketing and
site evaluation consulting services for a fee equal to $2,500 per month through
December 1997 and $5,000 per month thereafter. The agreement is automatically
renewable for successive one-year periods, unless either party
-19-
<PAGE>
gives written notice of its intention not to renew the agreement at least 30
days prior to the end of the term or renewal term. In addition, pursuant to the
consulting agreement, in March, 1998 the Company paid to Mr. Harris $50,000 as
payment for consulting services rendered to the Company prior to entering into
the consulting agreement.
1997 STOCK OPTION PLAN
In October 1997, the Company's stockholders approved a stock option
plan (the "Option Plan") pursuant to which 525,000 shares of Common Stock have
been reserved for issuance upon the exercise of options designated as either (i)
incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code") or (ii) nonqualified options. ISOs may be granted under the
Option Plan to officers and employees of the Company. Non-qualified options may
be granted to consultants, directors (whether or not they are employees),
employees or officers of the Company.
On May 28, 1999, at the Company's Annual Meeting of Shareholders, the
shareholders approved an amendment to the Company's 1997 Stock Option Plan to
increase the number of shares of Common Stock reserved for issuance under the
Plan from 525,000 to 1,250,000.
The purpose of the Option Plan is to encourage stock ownership by
certain directors, officers and employees of the Company and other persons
instrumental to the success of the Company. The Option Plan is intended to
qualify under Rule 16b-3 under the Exchange Act, and is administered by the
Board of Directors. The Board, within the limitations of the Option Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, and the time, manner and form of payment upon
exercise of an option.
ISOs granted under the Option Plan may not be granted at a price less
than the fair market value of the Common Stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting stock
of the Company). The aggregate fair market value of shares for which ISOs
granted to any employee are exercisable for the first time by such employee
during any calendar year (under all stock option plans of the Company and any
related corporation) may not exceed $100,000. Non-qualified options granted
under the Option Plan may not be granted at a price less than the fair market
value of the Common Stock on the date of grant. Options granted under the Option
Plan will expire not more than ten years from the date of grant (five years in
the case of ISOs granted to persons holding 10% or more of the voting stock of
the Company). All options granted under the Option Plan are not transferable
during an optionee's lifetime but are transferable at death by will or by the
laws of descent and distribution. In general, upon termination of employment of
an optionee, all options granted to such person which are not exercisable on the
date of such termination immediately terminate, and any options that are
exercisable terminate 90 days following termination of employment.
Effective as of February 10, 1998 the Company granted options under the
Option Plan to purchase an aggregate of 293,250 shares. Of such options, options
to purchase 75,000, 50,000, 35,000, and 25,000 shares were granted to Mr.
Cretella, Mrs. Cretella, Mr. Harris and Mr. Golio, respectively, at an exercise
price of $5.00 per share. Of the options granted to each of Mr. Cretella, Mrs.
Cretella, Mr. Harris and Mr. Golio, 50% vested immediately and the balance will
vest in increments of 25% of the shares covered thereby on each of the first and
second anniversaries of the date of grant, respectively. On November 19, 1998
the Board authorized the grant of 204,000 options under the Option Plan. Of such
options, options to purchase 75,000, 50,000, 17,500 and 12,500 were authorized
for granting to each of Mr. Cretella, Mrs. Cretella, Mr. Harris and Mr. Golio,
respectively, no earlier than five days after the date on which the Company
files its Form 10KSB for fiscal 1998. All of such options vest in increments of
50% on the date of grant and 25% on each of the first and second anniversaries
of the date of grant and are exercisable upon vesting at a price that is equal
to the closing bid price of the Company's Common Stock on the date of grant. The
options expire five years from the date of vesting, subject to earlier
termination.
-20-
<PAGE>
COMPENSATION TO DIRECTORS
Each outside director receives options to purchase 5,000 shares of the
Company's Common Stock for each year of service rendered as a member of the
Board of Directors. On November 19, 1998 the Board authorized that 5,000 options
under the Options Plan be granted to each of Messrs, Harris, Salvatore and
Krantz, on the date that is five days after the date on which the Company files
its Form 10KSB for fiscal 1998, for services rendered during fiscal 1998. On
November 19, 1998 the Board authorized that 5,000 options under the Option Plan
be granted to each of Messrs. Harris, Salvatore, Krantz and Argenziano on the
date of the Company's annual meeting of stockholders, for services to be
rendered during fiscal 1999. All options are non- qualified stock options, vest
in full on the date of grant and expire five years from date of grant.
Mr. Harris provided consulting services to the Company under the terms
of his consulting agreement. In fiscal 1999 he received compensation of $60,000.
INDEMNIFICATION AND EXCULPATION PROVISIONS
The Company's Certificate of Incorporation provides for indemnification
of officers and directors to the fullest extent permitted by Delaware law. In
addition, under the Company's Certificate of Incorporation, no director shall be
liable personally to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director; provided that the Certificate of
Incorporation does not eliminate the liability of a director for (i) any breach
of the director's duty of loyalty to the Company or its stockholders; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) acts or omissions in respect of certain unlawful
dividend payments or stock redemptions or repurchases; or (iv) any transaction
from which such director derives improper personal benefit. The Company has also
obtained directors and officers insurance.
ITEM 11. PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of December 21,
1998 (based on information obtained from the persons named below), relating to
the beneficial ownership of shares of Common Stock by: (i) each person or entity
who is known by the Company to own beneficially five percent or more of the
outstanding Common Stock, (ii) each of the Company's directors and (iii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) BENEFICIALLY OWNED BENEFICIALLY OWNED(2)
- ------------------------------------------------- ------------------ ---------------------
<S> <C> <C>
Frank Cretella................................... 2,039,566(3) 52.8%
Jeanne Cretella.................................. 2,039,566(3) 52.8
Richard A. Kayne (4)............................. 598,082(5) 15.5
KAIM Non-Traditional, L.P.
Offense Group Associates, L.P. (6)............... 193,898(7) 5.0
Peter J. Salvatore(8)............................ 289,371(9) 7.5
Kenneth L. Harris................................ 173,327(10) 4.5
Frank Argenziano (11)............................ 14,000(12) *
Barry Krantz..................................... 10,000(13) *
All directors and executive officers as a group 2,575,754(14) 66.7%
(seven persons).................................
-21-
<PAGE>
<FN>
- ----------------
* Less than 1%
(1) Unless otherwise indicated, the address for each named individual or group
is in care of TAM Restaurants, Inc., 1163 Forest Avenue, Staten Island, New
York 10310.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date of this
Prospectus have been exercised and converted. Assumes a base of
approximately 3,503,000 shares of Common Stock outstanding, before any
consideration is given to other outstanding options or warrants.
(3) Represents (i) 1,179,235 shares held jointly by Frank Cretella and Jeanne
Cretella, (ii) 500,000 shares held by trusts of which Mr. Cretella is a
co-trustee and Mr. and Mrs. Cretella's daughter is the beneficiary. Mr.
Cretella has sole voting and dispositive power over the shares held in the
trusts (iii) 128,750 shares of Common Stock issuable upon exercise of
options held by Frank Cretella, (iv) 87,500 shares of Common Stock issuable
upon exercise of options held by Jeanne Cretella, (v) 144,081 shares of
Common Stock issuable upon conversion of Series A Preferred Stock held by
Frank Cretella. Does not include (i) 56,250 shares of Common Stock issuable
upon exercise of options held by Frank Cretella, (ii) 37,500 shares of
Common Stock issuable upon exercise of options held by Jeanne Cretella,
(iii) Selling Securityholders' Warrants to purchase 4,724 shares of Common
Stock held by Jeanne Cretella and (iv) 72,040 shares of Common Stock
issuable upon exercise of a warrant held by Frank Cretella.
(4) The address for Richard A. Kayne and KAIM Non-Traditional, L.P. ("KAIM
N-T") is 1800 Avenue of the Stars, Second Floor, Los Angeles, California
90067.
(5) Based solely on a Schedule 13D, and amendments thereto, jointly filed with
the Securities and Exchange Commission by Mr. Kayne and KAIM N-T for which
each party reports shared voting and dispositive power over securities held
by several investment funds, including Offense Group Associates, L.P. (see
footnote (7) below), for which KAIM N-T acts as general partner and
investment advisor, except for one investment fund for which KAIM N-T acts
solely as investment advisor. Both parties report shared voting and
dispositive powers over a portion of the securities held under a 401(K)
plan of an affiliated entity. Mr. Kayne is an officer, director and
controlling stockholder of the company that acts as the general partner of
KAIM N-T. Includes 200,000 shares of Common Stock issuable upon exercise of
warrants held by two investment funds. Does not include 120,141 shares of
Common Stock issuable upon exercise of warrants held by the investment
funds.
(6) The address for Offense Group Associates, L.P. ("OGALP") is 1800 Avenue of
the Stars, Second Floor, Los Angeles, California 90067.
(7) Based solely on a Schedule 13D, filed with the Securities and Exchange
Commission by OGALP, reporting shared voting and dispositive powers over
the securities held by OGALP, an investment fund, together with KAIM N-T,
its general partner and investment advisor and Mr. Kayne, the officer,
director and controlling stockholder of the company that acts as the
general partner of KAIM N-T. Does not include 53,599 shares of Common Stock
issuable upon exercise of warrants held OGALP.
(8) The address for Mr. Salvatore is 35 Seagate Road, Staten Island, New York
10310.
-22-
<PAGE>
(9) Includes (i) 9,082 shares of Common Stock held by Peter and Gail Salvatore
Foundation, Inc., a trust of which by Mr. and Mrs. Salvatore are the
beneficiaries and (ii) 10,000 shares of Common Stock issuable upon exercise
of options to be granted to Mr. Salvatore. Does not include Selling
Securityholders' Warrants to purchase 88,191 shares of Common Stock.
(10) Includes (i) 110,282 shares owned jointly by Kenneth and Maureen Harris,
(ii) 5,000 shares owned by Maureen Harris, (iii) 48,125 shares of Common
Stock issuable upon exercise of options held by Mr. Harris and (iv) 10,000
shares of Common Stock issuable upon options to be granted to Mr. Harris.
Does not include (i) 2,500 shares of Common Stock issuable upon exercise of
warrants held by Mrs. Harris, and (ii) 17,500 shares of Common Stock
issuable upon exercise of options held by Mr. Harris. Mr. Harris is an
officer of an affiliate of KAIM N-T but does not have voting or dispositive
power over the Company's securities reported by KAIM N-T (see footnote (5)
above), and therefore disclaims any beneficial ownership of such
securities.
(11) The address for Mr. Argenziano is 7 Hanover Square, New York, New York
10004
(12) Represents 14,000 shares of the Company's Common Stock issuable upon
exercise of warrants held by Mr. Argenziano. Does not include 4,500 share
of the Company's Common Stock issuable upon exercise of warrants held by
Mr. Argenziano.
(13) Represents 10,000 shares of the Company's Common Stock issuable upon
exercise of options to be granted to Mr. Krantz.
(14) Includes an aggregate of 440,750 shares of Common Stock issuable upon the
exercise of options and warrants. Does not include an aggregate of 57,250
shares of Common Stock issuable upon exercise of options and warrants.
</FN>
</TABLE>
ITEM 12. CERTAIN TRANSACTIONS
Prior to January 1994, Ernest Cretella, father of Frank Cretella,
President, Chief Executive Officer, a director and a principal stockholder of
the Company, loaned the Company $100,000. In January 1994, Ernest Cretella
borrowed $125,000 from a bank, which was then loaned to the Company, and secured
the loan by mortgaging his personal residence. The Company repaid $50,000 of the
outstanding indebtedness owed to Ernest Cretella and the Company agreed to make
Ernest Cretella's mortgage payments to the bank. In September 1995, Ernest
Cretella converted the additional $50,000 principal amount of indebtedness owed
to him into 25,000 shares of Common Stock and 2,500 warrants. The Company
remains obligated to make Ernest Cretella's mortgage payments. In July 1996,
Ernest Cretella, loaned the Company an additional $55,000. Such loan bears
interest at the rate of 10% per annum, payable quarterly, and is due June 30,
2000.
In March 1994, the Company entered into a lease agreement to sublease
the space where LUNDY'S is located. Frank Cretella personally guaranteed the
Company's obligations to pay rent during the time which it occupies the leased
premises.
During 1994, Frank Cretella loaned the Company $12,500. In September
1996, Mr. Cretella borrowed $65,000 from the Company. During the year ended
September 28, 1997, Mr. Cretella repaid the $52,500 owed to the Company.
During 1995 and 1996, the Company borrowed an aggregate of $840,000
from Fleet Bank, N.A. Such loans were collateralized by the Company's principal
executive offices, which are owned by Mr. Cretella, the warehouse leased by the
Company and owned by Leisure Time Services, Inc. ("Leisure Time"), a company
owned by Jeanne Cretella, Vice President, director and a principal stockholder
of the Company, and Mr. and Ms. Cretella's personal residence, and guaranteed by
Mr. and Mrs. Cretella and Leisure Time. In June 1997, Mr. Cretella agreed to pay
to Fleet $640,000 as payment for the amount owed by the Company (approximately
$720,000 as of October 15, 1997). In August 1997, Mr. Cretella paid to Fleet
$140,000 as part of the settlement. Mr. Cretella paid the balance of the
principal owed to Fleet and the Company paid accrued interest of
-23-
<PAGE>
approximately $39,000 owed to Fleet in October 1997. As consideration for
repaying the loan, the Company issued to Mr. Cretella a promissory note in the
original principal amount of $720,405 which bears interest at the rate of 10%
per annum. Interest is payable in monthly installments of $6,003, with the
outstanding principal balance payable in November 2002 upon maturity of the
note. In December 1998, Mr. Cretella converted $720,405 of indebtedness owed to
him by the Company into 144,081 shares of Series A Preferred Stock. As further
inducement to Mr. Cretella to convert the debt to equity the Company also issued
to Mr. Cretella 72,040 warrants to purchase the Company's Common Stock at $6.00
per share. The Company received a fairness opinion with respect to this
transaction.
Prior to his employment by the Company, from October 1996 through
September 1997, Anthony Golio, Vice President of the Company, provided
consulting services to the Company through The Pineapple Group, Inc., a
restaurant consulting firm, wholly-owned by Mr. Golio, for which he was paid an
aggregate of $88,000. Such consulting services included organizational and
managerial training, labor and cost management, negotiating with vendors and
creating and restructuring management programs.
In June 1996, the Company borrowed $88,000 from Joseph De Giulio,
father of Jeanne Cretella. The loan bears interest at the rate of 10% per annum.
Interest is payable in monthly installments of $733 and the principal is due on
June 22, 2001.
In October 1996, the Company entered into a 10-year operating agreement
with American Leisure, a company wholly-owned by Frank Cretella, to manage the
food concessions at the Central Park Zoo and the Staten Island Zoo in New York
City for which the Company received a management fee equal to 5% of gross sales.
During the year ended September 27, 1998, the Company received $81,895 in fees
from American Leisure. At September 29, 1999, American Leisure owed the Company
$197,709, which has no specified repayment terms. Effective November 1998,
American Leisure no longer operated the food concession at the Central Park Zoo,
accordingly, the operating agreement is no longer in effect with respect to such
concession.
In October 1996, the Company loaned to leisure time $153,863, pursuant
to a note which is payable in monthly installments of $1,996.01, that bears
interest at a rate of 9.56% per annum and expires on October 1, 2006. At
September 29, 1999, leisure time owed the company an additional $25,413,
representing advances made during such fiscal year. The advances have no
specified repayment terms.
In October 1996, the Company entered into a lease agreement with Mr.
Cretella, pursuant to which the Company leases its executive offices in Staten
Island, New York. In May 1999 the Company expanded its office space increasing
the annual rent due under the lease to $60,000 annually, increasing by 1.5%
Commencing in January of each subsequent year. Total rent paid under the lease
in 1999 was $47,536.15. The lease expires on December 31, 2001. The Company
believes that this lease is on commercially reasonable terms.
In October 1996, the Company entered into a lease agreement with
Leisure Time, pursuant to which the Company leases a warehouse in Bayonne, New
Jersey. Annual rent under the lease was $30,907, during 1999, increasing by 1.5%
commencing in January of each subsequent year. The lease expires on December 31,
2001. The Company believes that this lease is on commercially reasonable terms.
In October 1997, Kayne Anderson Non-Traditional Investments, L.P. and
ARBCO Associates, L.P. affiliates of Kayne Anderson, loaned the Company an
aggregate of $1,000,000. The loans bear interest at the rate of 10% per annum
and are due May 31, 1999. The loan is guaranteed by Frank Cretella, President,
Chief Executive Officer, a director and a principal stockholder of the Company,
and the guarantee is secured by a pledge of 200,000 shares of Common Stock owned
by Frank Cretella and Jeanne Cretella, Vice President, a director and principal
stockholder of the Company. As partial consideration for the loans, the Company
issued to Kayne Anderson warrants (the "KA Warrants") to purchase 200,000 shares
of Common Stock. The KA Warrants are exercisable at a price of $5.00 per share
(subject to adjustment under certain circumstances) and are exercisable at any
time until October 31, 2002. In August, 1998 the Company and Kayne Anderson
agreed to amend the loan agreement whereby the maturity date of the loans was
extended to September 30, 1999. On January 11, 2000, the Company and Kayne
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<PAGE>
Anderson agreed to provide for a refinancing of the existing loans into new
long-term loans aggregating an equal or larger amount. The definitive agreements
for the new loan have been negotiated and are anticipated to be executed in the
next few weeks. Kayne Anderson is an affiliate of KAIM Non-Traditional, LP, a
principal stockholder of the Company.
In December 1998, the Company entered into a licensing agreement with
KA Industries, a wholly owned subsidiary of Kayne Anderson, to market products
bearing the names LUNDY'S, THE BOATHOUSE, and Stork Club through KA Industries'
"Mrs. Beasley's" mail order catalog and retail outlets. Pursuant to the
agreement the Company is to receive a royalty on products sold.
In December 1998, the Company agreed to sublease 1,000 sq. ft. of its
6,000 sq. ft. Bayonne warehouse to KA Industries, a wholly owned subsidiary of
Kayne Anderson, to operate a bakery. The sublease is a month to month lease at a
rent of $740.83 per month terminable upon 120 days notice by either party. In
conjunction with this transaction, KA Industries advanced $30,000 to the Company
to make modifications in the Bayonne warehouse to accommodate the bakery as well
as an in-house laundry and a lobster pound with such advance recaptured from
rent and other charges due the Company from KA Industries.
From time to time the Company has entered into equipment financing
leases which have been guaranteed by Mr. Cretella and/or Leisure Time.
Any future transactions with affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated parties and
will be approved by a majority of the independent and disinterested members of
the Board of Directors, outside the presence of any interested directors and, to
the extent deemed appropriate by the Board of Directors, the Company will obtain
stockholder approval or fairness opinions in connection with any such
transaction.
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<PAGE>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Financial Statements
See list of Financial Statements on F-1
(b) Reports on Forms 8-K and 8-K/A
The Company did not file any reports with the Securities and Exchange
Commission on Form 8-K for the year ended September 27, 1998.
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation, as amended, of the Registrant
(1).
3.2 Bylaws, as amended, of the Registrant (1).
4.1 Form of Registrant's Common Stock Certificate (1)
4.4 Form of registrant's Public Warrant Certificate (1).
10.1 License Agreement between TAM Restaurant Group, Inc.
(formerly TAM Concessions, Inc.) and City of New York
Department of Parks and Recreation, dated February 8, 1985,
as modified (1).
10.2 License Agreement between Shellbank Restaurant Corp. and City
of New York Department of Parks and Recreation, dated December
14, 1997 (1).
10.3 Lease by and between LUNDY'S Management Corp. and Bay Landing
Restaurant Corp. dated July 24, 1994, as amended (1).
10.4 Lease by and between Mr. Frank Cretella and the Registrant
dated October 1, 1996 (1).
10.5 Lease by and between Leisure Time Services and the Registrant
dated October 1, 1996 (1).
10.6 Management Agreement by and between the Registrant and American
Leisure Today, Inc., formerly MAT Operating Corp., dated
October 1, 1996 (1).
10.7 Loan Agreement by and between the Registrant and each of ARBCO
Associates, L.P. and Kayne Anderson Non-Traditional
Investments, L.P. dated as of October 31, 1997 (1).
10.8 Form of Employment Agreement between Registrant and Frank
Cretella (1).
10.9 Form of Employment Agreement between Registrant and Jeanne
Cretella (1).
10.10 1997 Stock Option Plan (1).
10.11 Promissory Note of the Registrant dated October 15, 1997 issued
to Frank Cretella (1).
(1) Incorporated by reference to the comparable exhibit filed with the
Company's Registration Statement on Form SB-2, and the amendments thereto,
SEC No. 333-39937.
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<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this amendment
to this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TAM RESTAURANT, INC.
Dated: January 12, 2000 By: /s/ FRANK CRETELLA
---------------------------
Frank Cretella
President, Chief Executive
Officer and Director
POWER OF ATTORNEY
In accordance with the requirements of the Exchange Act, this amendment
to this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE(S) DATE
- ---------- -------- ----
<S> <C> <C>
/S/ FRANK CRETELLA President, Chief Executive Officer and January 12, 2000
- ----------------------- Director
Frank Cretella
/S/ JEANNE CRETELLA Vice President and Director January 12, 2000
- -----------------------
Jeanne Cretella
/S/ ANTHONY B. GOLIO Vice President (Principal Financial and January 12, 2000
- ----------------------- Accounting Officer)
Anthony B. Golio
/S/ KENNETH L. HARRIS Chairman of the Board of Directors January 12, 2000
- -----------------------
Kenneth L. Harris
/S/ PETER J. SALVATORE Director January 12, 2000
- -----------------------
Peter J. Salvatore
/S/ BARRY E. KRANTZ Director January 12, 2000
- -----------------------
Barry E. Krantz
/S/ FRANK ARGENZIANO Director January 12, 2000
- -----------------------
Frank Argenziano
</TABLE>
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