<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
____________ to ____________
Commission File Number 1-10576
GB FOODS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0403086
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
23 CORPORATE PLAZA, SUITE 246
NEWPORT BEACH, CALIFORNIA 92660
(Address of Principal Executive Office) (Zip Code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE (714) 640-6004
_____________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED:
------------------- --------------------
COMMON STOCK - $.08 PAR VALUE BOSTON STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
_____________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- ------
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant on January 31, 1997 was approximately $44,658,000 based upon the
closing price of the common stock, as reported on the Nasdaq Small Cap Market.
The number of shares of the common stock of the registrant outstanding on
January 31, 1997 was 6,440,414.
<PAGE>
PART I
All statements, other than statements of historical fact, included in this
Form 10-K, including without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," are, or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of GB Foods Corporation (the "Company") to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements contained in this Form
10-K. Such potential risks and uncertainties include, without limitation,
competitive pricing and other pressures from other restaurant operators,
economic conditions generally and in the Company's primary markets, consumer
spending patterns, perceived quality and value of the Company's products,
availability of capital, cost of labor, food costs, occupancy costs and other
risk factors detailed herein and in other of the Company's filings with the
Securities and Exchange Commission. The forward-looking statements are made as
of the date of this Form 10-K and the Company assumes no obligation to update
the forward-looking statements or to update the reasons actual results could
differ from those projected in such forward-looking statements. Therefore,
readers are cautioned not to place undue reliance on these forward-looking
statements.
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS.
The Company is engaged in the business of operating Mexican quick-service
restaurants under the trade name "The Green Burrito" at leased facilities in
Southern California and the sale and supervision of Green Burrito franchises.
The Company's strategic plan is to maintain a base of Company-owned and operated
restaurants ("Company Stores") in Southern California sufficient for training,
product development and testing, while developing additional Green Burrito
franchise restaurants through expansion of the Green Burrito free-standing and
dual-concept franchise businesses. As of December 31, 1996, there were 134
Green Burrito stores, including seven Company Stores and 127 stores owned by
franchisees or third parties ("Franchise Stores"), 84 of which were Green
Burrito dual-concept stores.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company is engaged in one industry segment. Financial information
concerning the Company's business is included and incorporated by reference in
Part II and Part IV of this Form 10-K.
(C) NARRATIVE DESCRIPTION OF BUSINESS.
GREEN BURRITO CONCEPT. The Green Burrito stores feature a menu of
traditional Mexican food items including burritos, tostadas, enchiladas, tacos,
gorditas, chili rellenos, appetizers, soft drinks and non-alcoholic Mexican
drinks. A variety of condiments, such as jalapeno peppers, hot sauce, and mild
and hot salsa, are available at self-serve salsa bars enabling customers to
spice and garnish their food according to individual tastes. In addition, the
Company has a Mexican breakfast menu, including huevos rancheros, breakfast
burritos, chorizo and egg burritos, tostadas rancheros and orange juice.
Although Green Burrito stores offer traditional Mexican food, the Company's
recipes are specially formulated to produce milder flavors than the flavors
typically associated with Mexican food. Emphasis is on serving substantial
portions of high-quality food using only top grade ingredients, including USDA
loin steak, USDA ground beef, USDA pork, grade "A" chicken meat, real cheddar
and Monterey Jack cheese, #1-long grain rice and triple-cleaned beans. The
Company believes the prices for its menu items give customers good value; entree
selections at Company Stores currently range in price from $.89 for a "super
value menu" item to $3.99 for a combination plate including two steak tacos,
salad, rice and beans. The most popular menu items include the "Big Ed"
burrito, a burrito weighing over two pounds consisting of steak, carnitas,
refried beans, rice, lettuce, tomato, guacamole, cheese and double tortillas at
a price of $4.59, and "wet burritos," consisting of refried beans, rice, cheese,
and a choice of steak, chicken, beef or pork covered with either green chili
sauce or enchilada sauce, and cheese, served
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with tortilla chips at a price of $3.99. The menu also features special family
prices which discount some of the menu items for large quantity orders.
The Company has established certain criteria which, if met, allow the sale
of alcoholic beverages for consumption on store premises with prior approval
from the Company. Several Franchise Stores serve alcoholic beverages; however,
the Company may rescind the right to serve alcoholic beverages on 30 days'
written notice if the criteria are not being met.
COMPANY STORES. As of December 31, 1996, the Company operates seven
Company Stores, six of which are wholly-owned and one of which is owned by a
limited partnership of which the Company is the general partner. See
"Properties" below. The wholly-owned Company Stores in Anaheim Hills, Corona,
Glendale, La Crescenta and Long Beach were purchased from franchisees in October
1990, December 1991, April 1994, November 1994 and December 1994, respectively.
The Company, as general partner of a store (Glendora) owned by a limited
partnership, receives 76% of the profits, subject to a non-cumulative preference
on cash distributions to the limited partner of $8,280 per annum against the
limited partner's 24% interest in the profits.
FRANCHISE PROGRAM. As of December 31, 1996, the Company had 127 operating
franchises, 84 of which were Green Burrito dual-concept restaurants. See "Green
Burrito Dual-Concept Stores" below. Since the inception of the franchise
program 44 franchise restaurants have been closed and the Company has reacquired
seven franchises, five of which are currently operated as Company Stores.
When the Company commenced its franchise expansion, the initial franchise
fee was $10,000. Under the current standard Franchise Agreement for a free-
standing franchise (the "Franchise Agreement"), franchisees pay an initial fee
of $25,000 for each site at the time the Franchise Agreement is signed. The
Company treats the initial franchise fee as fully earned for financial statement
purposes upon the opening of the Franchise store. Franchisees also pay a weekly
franchise royalty equal to the greater of 5% of gross Franchise Store revenues
or $300 per week for each Franchise Store. An advertising fund contribution
equal to the greater of 1.5% of gross Franchise Store revenues or $450 is due
monthly for each Franchise Store. The Company has developed a separate
Franchise Agreement for dual-concept franchise stores. Dual-concept franchisees
pay similar fees related to the sale of Green Burrito proprietary products and
related items. The Company may from time to time change the amount of the
franchise fee, the franchise royalty and the advertising fund contribution to be
charged to franchisees.
The Franchise Agreement for free-standing stores grants the franchisee the
right to operate a Green Burrito store at specified locations and obligates the
Company to perform training and certain other assistance in consideration of the
franchisee's payment of the franchise fees, the franchise royalty and the
advertising fund contribution. The term of the Franchise Agreement is 10 years,
subject to renewal by the franchisee for two additional five-year periods,
provided that, among other things, the franchisee has fulfilled all the terms
and conditions of the Franchise Agreement, enters into the then current
Franchise Agreement with the Company and pays a renewal fee equal to 5% of the
then current initial franchise fee. The Franchise Agreement requires
franchisees to purchase most equipment, food, supplies and products from sources
approved by the Company in order to maintain consistency and quality from store
to store.
GREEN BURRITO DUAL-CONCEPT STORES. Since 1992, the Company has pursued the
franchising of Green Burrito products alongside an existing quick-service
restaurant line thereby enabling one restaurant facility to offer two restaurant
concepts (the "dual concept"). The Company has entered into the following dual-
concept arrangements since 1992:
Arby's/Green Burrito. During August 1992, the Company issued a franchise
to an Arby's, Inc. ("Arby's") franchisee for a restaurant located in Long Beach,
California. The Arby's franchisee remodeled an existing Arby's unit to include
the Green Burrito dual-concept in the same facility. A second Arby's/Green
Burrito store, located in Santa Maria, California, opened in January 1994.
Carl's Jr./Green Burrito. During May 1995, the Company reached an
agreement with Carl Karcher Enterprises, Inc., the operator and franchisor of
Carl's Jr. restaurants, and CKE Restaurants, Inc., its parent company
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(hereinafter jointly referred to as "CKE"), pursuant to which CKE agreed to
convert a minimum of 40 CKE-owned Carl's Jr. restaurants per year into Carl's
Jr./Green Burrito dual-concept stores over a five-year period commencing July
15, 1995. In February 1997, the Company and CKE modified the agreement to
provide for the conversion of a minimum of 60 Carl's Jr. restaurants per year to
Carl's Jr./Green Burrito dual-concept stores. CKE also agreed to allow its
franchisees to convert their restaurants into Carl's Jr./Green Burrito dual-
concept stores. The initial term of the franchise agreements for CKE-owned
locations is 15 years with a 10-year renewal period. The franchise agreements
also allow for an early termination on a per-store basis if royalties payable to
the Company for such location are less than an average of $250 per month for any
calendar year. As of December 31, 1996, all Carl's Jr./Green Burrito stores
were in compliance with this requirement. As of December 31, 1996, there were 63
Carl's Jr./Green Burrito restaurants in operation in California and Arizona.
Rally's/Green Burrito. The Company executed a development agreement in
June 1995 with Rally's Hamburger's Inc. ("Rally's") for the development of
Rally's/Green Burrito dual-concept restaurants to be located primarily in the
Midwest. The Company also granted Rally's a conditional 10-year warrant to
purchase 1,000,000 shares of the Company's common stock at an exercise price of
$7.50 per share. In April 1996, the Company and Rally's executed an agreement
providing for the termination of the development agreement and the cancellation
of the outstanding warrant. As of December 31, 1996, all 14 of the Rally's dual-
concept stores had been closed.
WSMP/Green Burrito. During July 1995, the Company entered into a test-
store agreement with WSMP, Inc. ("WSMP"), a North Carolina-based food
manufacturing and restaurant company. WSMP restaurant operations include
company-owned and franchise units, primarily in the Southeast. The majority of
these restaurants are Western Steer units, including their traditional Western
Steer Family Restaurant and newer remodels known as Western Steer Steak, Buffet
and Bakery Restaurants. Prime Sirloin and Bennett's are the other two main
segments of the WSMP restaurant division. Pursuant to the test-store agreement,
six store locations were mutually selected for the test, four of which are still
currently operating. The test, as provided in the test-store agreement,
concluded on December 26, 1995. As of December 31, 1996, the parties had
evaluated the results of the test and determined not to progress to a formal
franchise relationship.
Hardee's/Green Burrito. During November 1995, the Company entered into a
test-store agreement with Hardee's Food System, Inc. ("Hardee's"). Pursuant to
the test-store agreement, 20 Hardee's store locations (14 in Tulsa, Oklahoma
area and six in Nebraska and / or Southeastern states) will be converted to
Hardee's/Green Burrito restaurants. As of December 31, 1996, fifteen Hardee's
dual-concept stores were in operation. The duration of the test, as provided in
the test-store agreement, will continue until July 1, 1997. In accordance with
the terms of the agreement, continued conversion of Hardee's stores after the
first 20 stores have been completed will be contingent upon the success and
consumer acceptance of the converted stores.
FRANCHISE PROMOTION. The Company is discussing arrangements for dual-
concept store franchises with other quick-service franchisors and intends to
pursue the sale of franchises to operators of free-standing restaurants as well
as operators of other franchises for dual-concept purposes.
COMPETITION. The quick-service restaurant industry is intensely
competitive in the attraction of consumers and franchisees and in obtaining
suitable sites for new stores. Some of the key competitive factors in the
restaurant industry are the quality and value of the food products offered,
quality of service, cleanliness, name identification, restaurant location, price
and attractiveness of facilities. The Company and its franchisees compete with
restaurants of all types in the local market areas surrounding individual stores
and particularly with quick-service restaurants and Mexican restaurants for a
share of the consumers' restaurant food dollars.
The Company believes its primary competition in the quick-service segment
of the restaurant industry is from established national quick-service restaurant
chains offering Mexican food, hamburgers, pizza, and chicken such as Taco Bell,
El Pollo Loco, Del Taco, Burger King, McDonalds, Wendy's, Pizza Hut and KFC.
These restaurants offer strong competition and have national name recognition
and greater advertising, financial, and other resources than the Company. These
competitors also have a far greater density of store sites and substantially
larger facilities. The Company also competes with local quick-service
restaurant chains and both quick-service and full-service "mom-and-pop"
restaurants in specific local markets.
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The Company believes that its product is distinguishable from its
competitors because (i) the Green Burrito menu is different than menus of most
Mexican quick-service restaurants; (ii) Green Burrito food is prepared with
high-quality, natural ingredients resulting in food quality comparable to a
full-service restaurant; and (iii) the Company generally has larger portioning
standards giving the customer a good value overall for the price.
FRANCHISE AND OTHER GOVERNMENTAL REGULATION. The restaurant industry is
subject to extensive federal, state' and local regulation governing, among other
things, health and sanitation standards, equal opportunity employment, minimum
wage and licensing for the sale of food. In addition, the Company is subject to
extensive federal and state regulations governing franchise operations and sales
which impose registration and disclosure requirements on franchisors in the
offer and sale of franchises and, in certain cases, dictating substantive
standards that govern the relationship between franchisor and franchisees.
Various federal and state labor laws govern relationships with employees,
including such matters as minimum wage requirements, overtime, and other working
conditions.
MATERIALS. The Company's ability to maintain consistent quality throughout
its restaurants depends in part upon the ability to acquire food products and
related items from reliable vendors in accordance with Company specifications.
The Company has no long-term contracts for any food items used in its
restaurants and the Company is not dependent upon any single source for
ingredients. All essential ingredients for the Company's specially-formulated
recipes, beverage products, and other supplies are available, or upon short
notice could be made available, from alternative qualified suppliers.
EMPLOYEES. On December 31, 1996, the Company had 87 employees, of whom 13
were employed in the corporate office and 74 were employed in the seven Company
Stores. Of the total employees in the Company Stores, 11 were employed as
salaried managers and 63 were employed as hourly food handlers. The Company has
never experienced a work stoppage and believes its employee relations to be
good. No employee of the Company is represented by a union.
ITEM 2. PROPERTIES.
The Company leases retail locations for its restaurant operations as
described below:
<TABLE>
<CAPTION>
Monthly Approximate Lease Optional Renewal
Location Rental Square Footage Expiration Date Period (years)
-------- -------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Anaheim Hills $ 3,465 2,100 January 2000 10
Corona 4,593 2,500 January 2001 10
Downey 3,475 1,000 January 1998 0
Glendale 2,729 1,470 May 2004 0
Glendora 2,109 1,000 April 1998 0
La Crescenta 3,338 1,400 September 1999 0
Long Beach 3,012 1,200 May 1998 5
-------
Total $22,721
=======
</TABLE>
The leases for the retail locations generally contain rent escalation
provisions, most of which are tied to increases in the consumer price index.
Some of the leases also provide for payment of additional rent based on a
percentage of sales. No additional rents have been required pursuant to these
provisions.
All of the Franchise Stores are located in leased premises not owned by the
Company. Franchise Store leases typically run for five to 10 years with one or
two five-year renewal options. As a condition of the Franchise Agreement, each
lease for a Franchise Store must contain language granting an option to the
Company to assume the lease if the Agreement is terminated for any reason or if
the franchisee is in default under the lease.
The Company's principal executive office is located in Newport Beach,
California in a 5,300 square foot facility which is leased through July 30,
1998, at the rate of approximately $9,300 per month.
The Company is also the primary lessee of three facilities, formerly
occupied by the Company, which have been subleased to unrelated third parties. A
2,800 square foot facility in Newport Beach, California is leased through June
1998 with payments of approximately $5,200 per month and is subleased by the
Company through the lease term for approximately $4,800 per month. An 8,800
square foot facility also in Newport Beach, California is
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leased through September 2000 for payments of approximately $16,000 per month
and is subleased by the Company through the lease term for approximately $16,000
per month. A 20,000 square foot building in Anaheim, California is leased
through May 1998 for payments of approximately $9,200 per month, substantially
all of which is subleased by the Company through the lease term for
approximately $8,700 per month. The Company continues to utilize approximately
500 square feet of the Anaheim facility.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock trades on the Nasdaq Small Cap Market tier of
the Nasdaq Stock Market, under the symbol "GBFC." The Company's common stock is
also listed on the Boston Stock Exchange under the symbol "GBF." The following
table sets forth, for the calendar periods indicated, the high and low sales
price for the Company's common stock as reported on the Nasdaq Small Cap Market.
The prices represent quotations between dealers, without adjustment for retail
mark up, mark down or commission, and do not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
SALES PRICE
-----------
HIGH LOW
---- ---
<S> <C> <C> <C>
1995
----
1st Quarter 7 3/8 4 1/2
2nd Quarter 11 3/8 5 1/8
3rd Quarter 10 3/8 7 3/4
4th Quarter 10 6 3/4
1996
----
1st Quarter 10 5/8 6 7/8
2nd Quarter 10 3/8 6
3rd Quarter 8 1/2 5 3/4
4th Quarter 7 3/8 5 1/2
</TABLE>
The Company has not paid dividends on its common stock since its
incorporation and anticipates that, for the foreseeable future, earnings, if
any, will continue to be retained for use in its business. On January 31, 1997,
the approximate number of record holders of the Company's common stock was 252;
however, the Company believes that the number of beneficial owners exceeds 1,000
persons.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended December 31,
1996 is derived from the Consolidated Financial Statements of the Company. The
following information should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere in this report. The data has been adjusted to take into
account the discontinuance of the Commissary operations in the fourth quarter of
1992.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues $ 4,994 $ 6,599 $ 6,612 $ 5,469 $ 5,928
Total expenses excluding litigation
settlement and related costs (5,042) (7,716) (8,287) (6,351) (7,411)
Litigation settlements and related costs - (805) (2,869) (4,195) -
Loss from continuing operations (48) (1,922) (4,544) (5,077) (1,483)
Earnings from discontinued
commissary operations - - - - 157
Income (loss) on disposal of
commissary operations - - - 87 (340)
Net loss (48) (1,922) (4,544) (4,990) (1,666)
Net loss per share from
continuing operations (0.01) (0.31) (0.87) (1.03) (0.37)
Net loss per share (0.01) (0.31) (0.87) (1.01) (0.41)
Weighted average shares outstanding 6,356,287 6,161,244 5,208,008 4,941,145 4,033,219
Total assets 3,462 3,277 4,267 5,007 6,250
Long-term debt 15 25 8 11 45
</TABLE>
No dividends were paid or declared during the five years ended December 31,
1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
This discussion and analysis contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, which are subject to the "safe harbor" created by those sections. The
Company's actual future results could differ materially from those projected in
the forward-looking statements. The Company assumes no obligation to update the
forward-looking statements or such factors.
Comparison of the Year Ended December 31, 1996 to the Year Ended December
31, 1995. Total revenues from operations for the year ended December 31, 1996
were $4,994,000, a decrease of 24% from $6,599,000 earned in the comparable
period in 1995. Revenues for the years ended December 31, 1996 and 1995,
respectively, included $2,988,000 and $4,818,000 from restaurant operations,
$1,069,000 and $845,000 from royalties, $390,000 and $322,000 from franchise
fees, $349,000 and $305,000 from other sources, $105,000 and $89,000 from
interest income, and $93,000 and $220,000 from frozen food operations.
Revenues from restaurant operations for 1996 decreased 38% to $2,988,000
compared to $4,818,000 earned in 1995, as the result of a decrease in store-
operating months to 86 in 1996 from 144 in 1995. This decrease in store-
operating months is due to the sale of five Company stores in late 1995 and the
closure of one Company store in February of 1996. In addition, same-store sales
decreased 4%. Management believes same-store sales decreased primarily because
of increased competition from new fast-food restaurant openings in close
proximity to the Company stores. The Company anticipates revenues from
restaurant operations in 1997 to remain consistent with revenues from 1996. At
December 31, 1996 and 1995, respectively, seven and eight Company Stores were
open (including the one consolidated partnership-owned store in both years).
Revenues from franchise royalties increased 27% to $1,069,000 for the year
ended December 31, 1996 from $845,000 earned in the comparable period in 1995.
Royalties from dual-concept Franchise Stores range from 3% to 4% of Green
Burrito sales while royalties from free-standing Franchise Stores are typically
5% of sales. The following table is a summary of Franchise Store activity
during 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
DUAL-CONCEPT FRANCHISE STORES
Stores at beginning of year 41 5
Stores opened during year 59 37
Stores closed during the year (16) (1)
-------- --------
Stores at end of year 84 41
======== ========
Number of dual-concept
Franchise Store operating months 833 220
======== ========
Royalty income $387,000 $ 78,000
======== ========
FREE-STANDING FRANCHISE STORES
Stores at beginning of year 47 45
Stores closed during year (4) (3)
Stores purchased from Company by franchisee - 5
-------- --------
Stores at end of year 43 47
======== ========
Number of free-standing
Franchise Store operating months 532 540
======== ========
Royalty income $682,000 $767,000
======== ========
</TABLE>
Royalty income from dual-concept Franchise Stores for the year ended
December 31, 1996 increased $309,000, to $387,000 in 1996 from $78,000 earned in
1995, as the result of the increase in store operating months to 833 in 1996
compared with 220 in 1995. The increase in store operating months is the result
of a net increase of
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43 dual-concept franchise stores during 1996. The net increase of 43 dual-
concepts stores in 1996 is the result of 43 CKE openings plus 15 Hardee's
openings and one WSMP opening, less 14 Rally's closings and two WSMP closings.
However, the 15 Hardee's store openings are considered "test stores" and do not
earn royalties. Royalty income from free-standing Franchise Stores for the year
ended December 31, 1996 decreased $85,000 over the amount earned in 1995 as a
result of the reduction in store-operating months. The store operating months
decreased as a result of the closure of four stores. The Company anticipates
royalties earned from dual-concept Franchise Stores to grow in 1997 while
royalties earned in 1997 from free-standing Franchise Stores are anticipated to
remain comparable to 1996 royalties.
Revenues from franchise fees increased 21% to $390,000 for the year ended
December 31, 1996 from $322,000 earned in the comparable period in 1995,
primarily due to the opening of 59 dual-concept stores during 1996. Of the 59
dual-concept stores opened in 1996, 15 were considered test-stores and were not
required to pay a franchise fee and the balance paid franchise fees ranging from
$5,000 to $7,500 per store. At a minimum, the Company expects to earn franchise
fees in the year ended December 31, 1997 at a level comparable to 1996.
Revenues from other sources increased $44,000 to $349,000 for the year
ended December 31, 1996 from $305,000 earned in the comparable period in 1995.
Included in other revenue are volume incentives received from various vendors.
Also included in other revenue in 1995 is a non-recurring workers compensation
refund totaling $115,000.
Revenues from frozen food operations decreased 58% to $93,000 for the year
ended December 31, 1996 from $220,000 earned in the comparable period in 1995.
Late in the second quarter of 1995, the Company made a strategic decision to
discontinue its retail frozen burrito business for the time being while the
Company focuses on other growth plans. The Company is continuing to sell a
small quantity of frozen burritos through various channels, but is not actively
pursuing the development of this business.
On an aggregate basis, cost of sales from restaurant operations (food,
packaging, payroll and other employee benefits), expressed as a percentage of
sales, averaged 67% for both the years ended December 31, 1996 and 1995. Cost
of sales for the years ended December 31, 1996 and 1995, respectively, included
$1,132,000 and $1,795,000 from food and packaging and $880,000 and $1,443,000
from payroll and other employee benefits.
On an aggregate basis, occupancy and other operating costs (including
utilities, housekeeping, liability insurance, repairs and maintenance, and other
miscellaneous items), expressed as a percentage of sales, averaged approximately
28% for both the years ended December 31, 1996 and 1995. Occupancy and other
operating costs for the years ended December 31, 1996 and 1995 totaled $810,000
and $1,363,000, respectively.
The frozen foods division incurred operating costs of $81,000 and $228,000
resulting in income of $12,000 and a loss of $8,000 for the years ended December
31, 1996 and 1995, respectively.
General and administrative expense for the years ended December 31, 1996
and 1995 was $2,123,000 and $2,872,000, respectively, representing 43% and 44%
of total revenue for each respective year. The decrease in general and
administrative expenses is primarily the result of decreased legal and
accounting fees. During 1995 a large amount of legal and accounting fees were
incurred related to litigation settlements.
There were no litigation settlements and related costs for the year ended
December 31, 1996, compared with $805,000 for the comparable period in 1995.
In 1995, the Company incurred expenses of approximately $648,000 related to
certain settlements with non-litigating franchisees and incurred other legal
settlement costs totaling $157,000.
Comparison of the Year Ended December 31, 1995 to the Year Ended December
31, 1994. Total revenues from operations for the year ended December 31, 1995
were $6,599,000, a decrease of less than 1% from $6,612,000 earned in the
comparable period in 1994. Revenues for the years ended December 31, 1995 and
1994, respectively, included $4,818,000 and $4,817,000 from restaurant
operations, $845,000 and $783,000 from royalties, $322,000 and $63,000 from
franchise fees, $220,000 and $596,000 from frozen food operations, $89,000 and
$104,000 from interest income, and $305,000 and $249,000 from other sources.
9
<PAGE>
Revenues from restaurant operations for 1995 remained stable at $4,818,000
compared to $4,817,000 earned in 1994, despite an increase in store operating
months to 144 in 1995 from 125 in 1994, primarily because same store sales
decreased 12%. Management believes same-store sales decreased primarily because
of increased competition from new fast-food restaurant openings in close
proximity to the Company Stores. Consistent with its plan to reduce the number
of restaurants the Company owns and operates, the Company sold five Company
Stores to a franchisee in October 1995, will close one Company Store in February
1996, and is planning to sell two additional Company Stores in 1996. At
December 31, 1995 and 1994, respectively, eight and 13 Company Stores were open
(including the one consolidated partnership-owned store in both years).
Revenues from franchise royalties increased 8% to $845,000 for the year
ended December 31, 1995 from $783,000 earned in the comparable period in 1994.
Royalties from dual-concept Franchise Stores range from 3% to 4% of Green
Burrito sales while royalties from free-standing Franchise Stores are typically
5% of sales. The following table is a summary of Franchise Store activity
during 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
DUAL-CONCEPT FRANCHISE STORES
Stores at beginning of year 5 4
Stores opened during year 37 4
Stores closed during the year (1) (3)
-------- --------
Stores at end of year 41 5
======== ========
Number of Dual-concept
Franchise Store operating months 220 60
======== ========
Royalty income $ 78,000 $ 25,000
======== ========
FREE-STANDING FRANCHISE STORES
Stores at beginning of year 45 52
Stores opened during year - 1
Stores closed during year (3) (6)
Stores purchased by Company from franchisee - (2)
Stores purchased from Company by franchisee 5 -
-------- --------
Stores at end of year 47 45
======== ========
Number of Free-standing
Franchise Store operating months 540 599
======== ========
Royalty income $767,000 $758,000
======== ========
</TABLE>
Royalty income from free-standing Franchise Stores for the year ended
December 31, 1995 increased $9,000 over the amount earned in 1994 despite a
reduction in the number of store operating months of 59, primarily because
certain restaurants, which were on non-accrual status in 1994, were closed in
1995.
Revenues from franchise fees increased $259,000 to $322,000 for the year
ended December 31, 1995 from $63,000 earned in the comparable period in 1994,
primarily due to the opening of 37 dual-concept stores during 1995. Of the 37
dual-concept stores opened in 1995, four were considered test-stores and were
not required to pay a franchise fee and the balance paid franchise fees ranging
from $5,000 to $7,500 per store.
Revenues from frozen food operations decreased 63% to $220,000 for the year
ended December 31, 1995 from $596,000 earned in the comparable period in 1994.
Late in the second quarter of 1995, the Company made a strategic decision to
discontinue its retail frozen burrito business for the time being while the
Company focuses on other growth plans. The Company is continuing to sell a
small quantity of frozen burritos through various channels, but is not actively
pursuing the development of this business.
10
<PAGE>
Revenues from other sources increased $54,000 to $304,000 for the year
ended December 31, 1995 from $250,000 earned in the comparable period in 1994.
Included in other revenue in 1995 is a non-recurring workers compensation refund
totaling $115,000.
Cost of sales from restaurant operations (food, packaging, payroll and
other employee benefits), expressed as a percentage of sales, ranged from 64% to
75% and 64% to78% for the years ended December 31, 1995 and 1994, respectively.
Cost of sales for the years ended December 31, 1995 and 1994, respectively,
included $1.795,000 and $1,844,000 from food and packaging and $1,443,000 and
$1,580,000 from payroll and other employee benefits. On an aggregate basis,
cost of sales from restaurant operations, expressed as a percentage of sales,
decreased to 67% in 1995 from 71% in 1994, primarily because of improved labor
management.
Occupancy and other operating costs from restaurant operation (including
utilities, housekeeping, liability insurance, repairs and maintenance, and other
miscellaneous items), expressed as a percentage of sales, ranged from 21% to 39%
and 18% to 36% for the years ended December 31, 1995 and 1994, respectively.
Occupancy and other operating costs for the years ended December 31, 1995 and
1994 totaled $1,363,000 and $1,221,000, respectively. On an aggregate basis,
occupancy and other operating costs, expressed as a percentage of sales,
increased to 28% in 1995 from 25% in 1994, primarily because of a decrease in
same-store sales which was previously discussed.
The frozen foods division incurred operating costs of $228,000 and $688,000
resulting in losses of $8,000 and $92,000 for the years ended December 31, 1995
and 1994, respectively.
General and administrative expense for the years ended December 31, 1995
and 1994 was $2,872,000 and $2,935,000, respectively, representing 44% of total
revenue for each respective year.
Litigation settlements and related costs for the year ended December 31,
1995 decreased $2,064,000 to $805,000 from $2,869,000 for the comparable period
in 1994. In 1995, the Company incurred expenses of approximately $648,000
related to certain settlements with non litigating franchisees and incurred
other legal settlement costs totaling $157,000. In 1994, the Company incurred
costs associated with the settlement of two lawsuits with current and former
franchisees, one of which was completed in February 1995 and one of which was
completed in February 1994.
Impact of Company Expansion Plans on Operations. The management of the
Company anticipates that continued expansion of the dual-concept restaurant
business will improve the Company's liquidity and profitability by generating
additional franchise fees and royalties. The Company anticipates that its
existing management will be able to supervise the additional franchise sales and
existing Franchise Stores, as well as manage the Company Stores without the
addition of significant personnel in the next 12 months.
Effect of Inflation. Food and labor costs are significant inflationary
factors in the Company's operations. Many of the Company's employees are paid
hourly rates related to the statutory minimum wage, therefore, increases in the
minimum wage increase the Company's costs. On October 1, 1996, the federal
statutory minimum wage was increased to $4.75 per hour. This increase in the
statutory minimum wage has not had a material impact on the Company's current
operations as the majority of the Company's hourly employees have been paid in
excess of the statutory minimum wage. At December 31, 1996, approximately 26 of
the Company's 63 hourly employees are paid the statutory minimum wage. On March
1, 1997 the California statutory minimum wage was increased to $5.00 per hour.
At March 1, 1997, approximately 42 of the 63 hourly employees are paid the
California statutory minimum wage. In addition, most of the Company's leases
require it to pay base rents with escalation provisions based on the consumer
price index, in addition to percentage rentals based on revenues, and to pay
taxes, maintenance, insurance, repairs, and utility costs, all of which are
expenses subject to inflation. The Company has been able to offset the effects
of inflation to date through small price increases and economies resulting from
the purchase of food products in increased quantities due to the increased
number of Green Burrito stores.
11
<PAGE>
Liquidity and Capital Resources. The Company's cash and short-term
investments increased $794,000 to $1,775,000 at December 31, 1996 compared to
$981,000 at December 31, 1995, due to increases in cash flow from operations and
issuances of common stock. Net cash provided by operating activities was
$265,000 in 1996 as compared to net cash used in operating activities of
$858,000 in 1995. The increase was attributed to improved operating results and
no litigation settlements in 1996.
Management believes the Company's cash, cash equivalents and short-term
investments will be sufficient to finance current and forecasted operations and
obligations. It is anticipated that long-term cash requirements will be funded
by the implementation of the Company's current expansion plans, which primarily
involve the expansion of the number of Green Burrito dual-concept stores through
franchising. These expansion plans are not anticipated to require significant
increases in personnel prior to achieving positive cash flow from such dual-
concept franchising efforts. It is anticipated that these expansion plans will
significantly improve the Company's cash flow from operations once they are
fully achieved. If the Company's expansion plans are neither completed nor
successful, the Company will rely on cash, cash equivalents and short-term
investments and will pursue other financing alternatives to fund operations
until such time as alternative expansion plans can be formulated and achieved.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements and Schedule:
<TABLE>
<S> <C>
Reports of Independent Certified Public Accountants............. 14
Consolidated Balance Sheets as of December 31, 1996 and 1995.... 16
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................ 17
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994.......................... 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................ 19
Notes to Consolidated Financial Statements...................... 21
Schedule II - Valuation and Qualifying Accounts................. 32
</TABLE>
Schedules not included above have been omitted because of the absence of
the conditions under which they are required or because the information
called for is shown in the consolidated financial statements or in the
notes thereto.
13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and
Shareholders of
GB Foods Corporation
We have audited the accompanying consolidated balance sheet of GB Foods
Corporation and its subsidiary (the "Company") as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of GB Foods
Corporation and its subsidiary as of December 31, 1996, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
We have also audited Schedule II of GB Foods Corporation and it's Subsidiary for
the year ended December 31, 1996. In our opinion, this schedule presents fairly,
in all material respects, the information required to be include therein.
GRANT THORNTON LLP
Irvine, California
February 21, 1997
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and
Shareholders of
GB Foods Corporation
We have audited the accompanying consolidated balance sheet of GB Foods
Corporation and its subsidiary (the "Company") as of December 31, 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1995. In
connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedule for each of the two
years in the period ended December 31, 1995. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1995, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. Also in our opinion,
the related consolidated financial statement schedule taken as a whole, presents
fairly, in all material respects, the information set forth therein.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
February 23, 1995
15
<PAGE>
GB FOODS CORPORATION
Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 753,601 $ 216,728
Short-term investments 1,020,893 763,830
Accounts receivable, net of allowance for doubtful
accounts of $75,613 in 1996 and $82,756 in 1995 185,465 191,971
Current portion of notes receivable 179,583 76,306
Other assets 81,003 125,841
------------ ------------
Total current assets 2,220,545 1,374,676
Equipment and improvements, net 739,005 1,268,290
Notes receivable, net 399,098 519,690
Other assets 103,448 114,061
------------ ------------
$ 3,462,096 $ 3,276,717
============ ============
LIABILITITES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt $ 10,538 $ 10,203
Accounts payable and accrued expenses 359,329 562,409
Accrued salaries, wages and employee benefits 109,649 109,199
Deferred franchise fees 12,500 80,000
------------ ------------
Total current liabilities 492,016 761,811
Long-term debt, less current installments 14,835 25,372
Minority interest in consolidated partnership 60,149 60,720
Commitments and contingencies
Shareholders' equity
Common stock, $.08 par value, authorized 50,000,000
shares; 6,440,414 and 6,284,684 shares issued and
outstanding in 1996 and 1995, respectively 515,232 502,774
Additional paid-in capital 15,770,983 15,268,714
Accumulated deficit (13,391,119) (13,342,674)
------------ ------------
Total shareholders' equity 2,895,096 2,428,814
------------ ------------
$ 3,462,096 $ 3,276,717
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
GB FOODS CORPORATION
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Restaurant operations $2,987,609 $ 4,818,483 $ 4,817,405
Royalties 1,069,190 845,059 782,503
Franchise fees 389,392 322,165 62,500
Frozen food operations 93,250 220,116 596,044
Interest 105,299 88,795 104,247
Other 348,939 304,354 249,611
---------- ----------- -----------
4,993,679 6,598,972 6,612,310
---------- ----------- -----------
Restaurant operating costs:
Food and packaging 1,132,226 1,794,864 1,843,763
Payroll and other employee benefits 879,830 1,442,601 1,580,466
Occupancy and other operating costs 810,437 1,363,245 1,221,131
Frozen food operating costs:
Food and packaging 78,787 218,375 399,254
Other operating costs 2,524 9,299 288,744
General and administrative 2,123,068 2,871,507 2,935,068
Litigation settlements and related costs - 804,753 2,869,123
---------- ----------- -----------
5,026,872 8,504,644 11,137,549
---------- ----------- -----------
Loss before minority interest in
consolidated partnership (33,193) (1,905,672) (4,525,239)
Minority interest in consolidated partnership (15,252) (16,774) (19,134)
---------- ----------- -----------
Net loss $ (48,445) $(1,922,446) $(4,544,373)
========== =========== ===========
Net loss per share $ (.01) $ (.31) $ (.87)
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
GB FOODS CORPORATION
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock
----------------------------
Number Litigation Deferred
of shares Amount settlements compensation
--------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 4,955,950 $ 396,476 $ 3,200,000 $ --
Issuance of common stock 400,000 32,000 (3,200,000) --
Issuance of common stock 315,606 25,248 -- (96,300)
Amortization of stock awards -- -- -- 44,125
Capital contribution -- -- -- --
Settlement of litigation -- -- 2,523,000 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1994 5,671,556 453,724 2,523,000 (52,175)
Settlement of litigation -- -- 648,000 --
Issuance of common stock 108,000 8,640 (648,000) --
Issuance of common stock 400,000 32,000 (2,523,000) --
Issuance of common stock
under stock option plans 105,128 8,410 -- --
Amortization of stock awards -- -- -- 52,175
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1995 6,284,684 502,774 -- --
Issuance of common stock
under stock option plans 155,730 12,458 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 6,440,414 $ 515,232 $ -- $ --
============ ============ ============ ============
<CAPTION>
Additional Total
paid-in Accumulated shareholders'
capital deficit equity
------------ ------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1993 $ 6,735,089 $ (6,875,855) $ 3,455,710
Issuance of common stock 3,213,623 -- 45,623
Issuance of common stock 1,615,488 -- 1,544,436
Amortization of stock awards -- -- 44,125
Capital contribution 216,000 -- 216,000
Settlement of litigation -- -- 2,523,000
Net loss -- (4,544,373) (4,544,373)
------------ ------------ ------------
Balance, December 31, 1994 11,780,200 (11,420,228) 3,284,521
Settlement of litigation -- -- 648,000
Issuance of common stock 639,360 -- --
Issuance of common stock 2,491,000 -- --
Issuance of common stock
under stock option plans 358,154 -- 366,564
Amortization of stock awards -- -- 52,175
Net loss -- (1,922,446) (1,922,446)
------------ ------------ ------------
Balance, December 31, 1995 15,268,714 (13,342,674) 2,428,814
Issuance of common stock
under stock option plans 502,269 -- 514,727
Net loss -- (48,445) (48,445)
------------ ------------ ------------
Balance, December 31, 1996 $ 15,770,983 $(13,391,119) $ 2,895,096
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
GB FOODS CORPORATION
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (48,445) $(1,922,446) $(4,544,373)
Adjustments to reconcile net loss to net
cash flows provided by (used in) operating activities:
Litigation settlements - 648,000 2,523,000
Stock issued in exchange for services - 39,130 633,500
Amortization of stock awards - 52,175 44,125
Provision for doubtful accounts 87,663 84,051 58,709
Depreciation and amortization 344,573 438,453 335,822
Minority interest in consolidated partnership 15,252 16,774 19,134
Loss on disposal of equipment and improvements 154,123 65,072 4,342
Changes in operating assets and liabilities:
Accounts and current notes receivable (100,209) (171,421) (113,940)
Due from officers - - 356,947
Other current assets 44,838 25,831 1,714
Non-current notes receivable 40,867 10,608 12,361
Other non-current assets (3,330) 9,079 (31,109)
Accounts payable and accrued expenses (203,080) (52,891) 202,426
Salaries, wages and employee benefits 450 (5,103) 18,874
Deferred franchise fees (67,500) (95,000) (102,500)
Litigation settlement payable - - (496,000)
----------- ----------- -----------
Net cash provided by (used in) operating activities 265,202 (857,688) (1,076,968)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from short-term investments 2,082,108 1,921,481 3,260,573
Purchases of short-term investments (2,339,171) (1,304,313) (2,326,458)
Proceeds from equipment and improvements 76,351 207,727 36,961
Expenditures for equipment and improvements (36,319) (494,241) (518,045)
----------- ----------- -----------
Net cash provided by (used in) investing activities (217,031) 330,654 453,031
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt - 31,098 9,645
Repayments of revolving line of credit
and long-term debt (10,202) (11,645) (14,676)
Proceeds from issuance of common stock
primarily under stock option plans 514,727 327,434 650,278
Capital contributions by former executives - - 216,000
Distributions to minority partner (15,823) (17,695) (14,622)
----------- ----------- -----------
Net cash provided by financing activities 488,702 329,192 846,625
----------- ----------- -----------
</TABLE>
(continued)
19
<PAGE>
GB FOODS CORPORATION
Consolidated Statements of Cash Flows - Continued
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Net increase (decrease) in cash and
cash equivalents 536,873 (197,842) 222,688
Cash and cash equivalents at beginning of year 216,728 414,570 191,882
----------- ----------- -----------
Cash and cash equivalents at end of year $ 753,601 $ 216,728 $ 414,570
=========== =========== ===========
Supplemental Information:
Cash paid during the year for:
Interest $ 2,719 $ 2,234 $ 1,122
Income taxes $ 1,600 $ 1,600 $ 1,600
Non-cash investing and financing activities:
Assets sold for notes receivable $ - $ 465,056 $ -
Issuance of common stock for assets of store $ - $ - $ 181,250
Issuance of common stock in satisfaction of
certain obligations $ - $ - $ 125,031
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
1. Organization and summary of significant accounting policies
-----------------------------------------------------------
Business activities
-------------------
GB Foods Corporation and its wholly-owned subsidiary GB Franchise
Corporation (the "Company") sell and supervise Mexican quick-service
franchise restaurants, primarily in Southern California, under the trade
name "The Green Burrito." The Company is currently expanding its franchise
business in certain regional markets throughout the country. The Company
also owns and operates a small number of Green Burrito restaurants in
Southern California.
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of GB Foods
Corporation, GB Franchise Corporation and an investment in a partnership-
owned restaurant in which the Company has a majority interest. All
significant intercompany balances and transactions have been eliminated.
Cash, cash equivalents and short-term investments
-------------------------------------------------
All highly liquid investments with an original maturity of three months or
less at the date of purchase are considered cash equivalents. Investments
with original maturities between three and 12 months are considered short-
term investments. Short-term investments, consisting of U.S. government
and agency securities, are classified as held to maturity and are carried
at cost which approximates market.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Long-lived assets
-----------------
Equipment and improvements are recorded at cost and depreciated over their
estimated useful lives, ranging from two to seven years, using the
straight-line method. Leasehold improvements are amortized over the lesser
of the estimated useful life of the related asset or the respective lease
term.
All of the Company's long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount may not be
recovered. If the sum of the expected future cash flows is less than the
carrying amount of the asset, a loss is recognized.
Advertising costs
-----------------
Advertising costs are charged to operations when incurred. Advertising
expense for the years ended December 31, 1996, 1995 and 1994 was $56,913,
$86,873 and $192,998, respectively.
Income taxes
------------
The Company recognizes income taxes using the liability method, under which
deferred tax assets and liabilities are determined based on the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. Deferred tax assets are reduced by a valuation
allowance when it is more likely than not that they will not be realized.
Net loss per share
------------------
Net loss per share is based on 6,356,287, 6,161,244 and 5,208,008, weighted
average shares outstanding for 1996, 1995 and 1994, respectively.
Outstanding stock options and warrants are considered common stock
equivalents. The assumed exercise of common stock equivalents would have
an anti-dilutive effect in 1996, 1995 and 1994 and therefore have not been
included in the number of weighted average shares outstanding for the net
loss per share calculation in any of the years presented.
(continued)
21
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
1. Organization and summary of significant accounting policies (continued)
-----------------------------------------------------------------------
Franchise revenues
------------------
Franchise royalties are recognized as earned on a monthly basis. For the
majority of the Franchise Stores currently in operation, they are required
to pay a weekly franchise royalty equal to the greater of 5% of gross
Franchise Store revenues or a minimum per week as specified in each
franchise agreement. The Company has developed a separate Franchise
Agreement for dual-concept franchise stores. Dual-concept franchisees pay
similar fees related to the sale of Green Burrito proprietary products and
related items. The Company may from time to time change the amount of the
franchise royalty fee charged to the franchisees.
The Company recognizes initial franchise fees when the related franchise
store commences operations. Initial franchise fees currently range from
$7,500 to $25,000 for each franchise restaurant pursuant to the respective
franchise agreement.
Following is a summary of franchise store activity:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Franchise stores at beginning of year 88 50 56
Franchise stores opened during year 59 37 5
Franchise stores closed during year (20) (4) (9)
Franchise stores purchased by Company - - (2)
Company stores sold to franchisee - 5 -
---- ---- ----
Franchise stores at end of year 127 88 50
==== ==== ====
</TABLE>
Stock-based compensation
------------------------
Statement of Financial Accounting Standard (SFAS) No. 123 "Accounting for
Stock-Based Compensation" was issued by the Financial Accounting Standards
Board (FASB) in October 1995, and is effective for transactions entered
into after December 15, 1995. SFAS No. 123 provides for companies to
recognize compensation expense associated with stock-based compensation
plans over the anticipated service period based on the fair value of the
award at the date of grant. However, SFAS No. 123 allows for companies to
continue to measure compensation costs as prescribed by APB Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees." The Company has
elected to continue its current policy, which is to account for stock-based
compensation plans under APB No. 25.
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 reported period. Actual results could differ from those
estimates.
2. Notes receivable
----------------
Notes receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes receivable $ 666,260 $ 710,158
Less allowance for doubtful notes (87,579) (114,162)
--------- ---------
578,681 595,996
Less current portion of notes receivable (179,583) (76,306)
--------- ---------
$ 399,098 $ 519,690
========= =========
</TABLE>
(continued)
22
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
2. Notes receivable (continued)
----------------------------
Included in notes receivable at December 31, 1996 and 1995, is an
installment note receivable totaling $454,829 and $500,000, respectively,
from a franchisee and current shareholder who purchased the assets of and
franchise rights to five Company-owned restaurants from the Company in
October 1995. The note bears interest at 8% per annum and requires
principal and interest payments of $8,009 until the note is paid in full in
October 2002. The note is collateralized by the assets of the related
restaurants and a pledge of company common stock.
Also included in notes receivable at December 31, 1996 and 1995, is an
installment note totaling $98,787 and $105,586, respectively. The note
arose when the Company sold the assets of its restaurant (located in
Paramount, California) and entered into a franchise agreement with the
purchaser of the assets for a franchise fee of $10,000. The note bears
interest at 8% per annum and is payable in monthly principal and interest
installments of $1,250 until paid in full in May 2006. The note is
substantially reserved as of December 31, 1996 and 1995.
3. Equipment and improvements
--------------------------
Equipment and improvements, at cost, are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Vehicles $ 124,644 $ 207,976
Equipment, furniture and fixtures 1,200,109 1,202,675
Leasehold improvements 884,884 952,723
----------- -----------
2,209,637 2,363,374
Less accumulated depreciation
and amortization (1,470,632) (1,095,084)
----------- -----------
Net equipment and improvements $ 739,005 $ 1,268,290
=========== ===========
</TABLE>
In October 1996, the Company signed a lease for a new Corporate office with
a commencement date of January 15, 1997. Consequently, the Company has
written off the leasehold improvements and built-in furniture at the old
Corporate office that had a net book value of $128,278 as of December 31,
1996.
In October 1995, the Company sold the assets of five Company-owned
restaurants and the franchise rights to operate the restaurants for $52,262
in cash and an installment note of $500,000. Included in the installment
note balance is an aggregate franchise fee of $50,000 for the five stores
related to the sales of the franchise rights by the Company to the
purchaser of the assets. The Company recorded a loss on the sales of the
assets of $31,414.
4. Long-term debt
--------------
Long-term debt at December 31, 1996 and 1995 is comprised of notes payable
to banks at interest rates ranging from 7% to 9%, which are collateralized
by automobiles. The aggregate maturities on all long-term debt for each of
the years ending December 31, 1997 through 1999 are $10,538, $10,412 and
$4,423, respectively.
5. Minority interest
-----------------
Green Burrito-Glendora #21, a California limited partnership ("GB-
Glendora") comprised of the Company and one other limited partner, owns and
operates a Green Burrito store located in Glendora, California. The
Company has controlling interest in GB-Glendora and accordingly, the
related assets, liabilities and results of operations are consolidated.
The limited partner's ownership interest in the store is recorded as
minority interest. The limited partner has a non-cumulative preference on
cash distributions of $8,280 per year against the limited partner's 24%
interest in the profits of the store. GB-Glendora had net income of
$53,064, $59,403, and $69,222 in 1996, 1995 and 1994, respectively.
(continued)
23
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
6. Income taxes
------------
A reconciliation between the actual income tax benefit and the federal
statutory rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ------------------ --------------------
Amount % Amount % Amount %
--------- ----- ---------- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Computed income tax
benefit at statutory
rate $ 16,000 34% $ 654,000 34% $ 1,545,000 34%
Operating loss with no
current tax benefit (16,000) (34%) (654,000) (34%) (1,545,000) (34%)
-------- --- --------- --- ----------- ---
Income tax benefit $ - - $ - - $ - -
======== === ========= === =========== ===
</TABLE>
At December 31, 1996, the Company had a net operating loss carryforward for
federal tax purposes of approximately $12,846,000 which, if unused to
offset future taxable income, will expire between 2008 and 2012, and
approximately $6,656,000 for state tax purposes which will expire if unused
between 1999 and 2002.
A valuation allowance has been recognized for 1996 and 1995 to offset the
related deferred tax assets due to the uncertainty of realizing any benefit
therefrom. During 1996, no changes occurred in the conclusions regarding
the need for a 100% valuation allowance in all tax jurisdictions.
Significant components of the Company's deferred tax assets as of December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net operating loss carryforwards $ 4,756,000 $ 4,960,000
Receivables and other reserves 65,000 139,000
Other 67,000 79,000
----------- -----------
4,888,000 5,178,000
Depreciation (325,000) -
Valuation allowance (4,563,000) (5,178,000)
----------- -----------
Net deferred tax assets $ - $ -
=========== ===========
</TABLE>
7. Litigation settlements
----------------------
In 1995, the Company issued 108,000 shares of Company common stock to
certain Green Burrito franchisees in exchange for a release of potential
claims against the Company, and, in certain instances, as recognition for a
reduction in the radius protection clause of the related franchise
agreements. Accordingly, the Company recorded a charge of $648,000 in the
year ended December 31, 1995.
Also in 1995, the Company concluded an agreement with certain Green Burrito
franchisees and former franchisees to settle all outstanding claims against
the Company and certain former officers and directors of the Company.
During 1995, the Company issued 400,000 shares of Company common stock to
the franchisees in full satisfaction of the settlement agreement. The
Company recorded a charge of $2,523,000 in the year ended December 31, 1994
related to this settlement agreement.
(continued)
24
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
7. Litigation settlements (continued)
----------------------------------
In 1994, the Company concluded an agreement with certain Green Burrito
franchisees and former franchisees to settle all outstanding claims against
the Company, certain former executives and certain former and current
directors in exchange for the payment of $3,480,000. The Company paid
$280,000 in cash and issued 400,000 shares of Company common stock to a
custodian who sold the shares during 1994 for $3,245,000 and disbursed
$3,200,000 to the franchisees in full satisfaction of the settlement
agreement. The remaining proceeds of $45,000 were paid to the Company in
accordance with the settlement agreement and used as working capital. In
addition, as part of the settlement agreement, ownership of an operating
franchise store located in La Crescenta, California was transferred to the
Company in November 1994.
Also in 1994, the Company paid a former franchisee $216,000 in settlement
of a claim against the Company. Concurrently, certain former officers and
directors made a capital contribution to the Company in the same amount.
8. Stockholder rights agreement
----------------------------
On July 9, 1996 the Company adopted a Stockholder Rights Agreement designed
to protect stockholders from abusive takeover tactics and to preserve for
stockholders the long-term value of the Company. The Rights Agreement was
not adopted in response to any effort to acquire control of the Company,
and the Board of Directors is not aware of any such effort.
Under the Stockholder Rights Agreement, the Company's stockholders (with
the exception of William M. Theisen, the Company's Chief Executive Officer,
his related interests, and current holders of warrants to purchase
1,000,000 or more shares of the Company's common stock) received one right
for each outstanding share of the Company's common stock. Each right
entitles its holder to buy one share of the Company's common stock at an
exercise price of $29. The Company can redeem the rights at $.001 each at
any time before a non-exempt person acquires 15% of the Company's common
stock. The rights will trade with, and are not detachable from, the
Company's common stock until the rights become exercisable.
The rights also become exercisable if a person or group (other than certain
exempt persons) acquires 15% or more of the Company's common stock or
announces a tender offer for 15% or more of the Company's common stock. If
such a person acquires 15% or more of the Company's common stock, each
right would then enable a Company stockholder to acquire such number of
shares of the Company's common stock having a market value of twice the
right's exercise price, or in effect, at a 50% discount to the market
price. If the Company were acquired by a merger or similar transaction
after such an event, each right would then enable a Company stockholder to
buy such number of shares of the acquiring company having a market value of
twice the right's exercise price, or in effect, at a 50% discount to the
market price.
The rights dividend distribution was made on August 1, 1996 payable to
eligible stockholders of record on August 1, 1996. The rights expire on
July 9, 2006.
9. Issuance of common stock and common stock purchase warrants
-----------------------------------------------------------
In May 1995, the Company authorized the issuance of three common stock
purchase warrants to acquire a total of 3,000,000 shares of Company common
stock. These three warrants were granted at an exercise price that
exceeded the closing market price of the Company's common stock on the
grant date. Each of these common stock purchase warrants is further
discussed below.
(continued)
25
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
9. Issuance of common stock and common stock purchase warrants (continued)
-----------------------------------------------------------------------
In May 1995, as partial consideration for legal services rendered in
connection with the negotiation of the settlement and development agreement
with Carl Karcher Enterprises, Inc. ("CKE"), the Company agreed to issue a
common stock purchase warrant to the law firm representing the Company.
The warrant had a purchase price of $100 and provides for the purchase of
1,000,000 shares of Company common stock at an exercise price of $7.50 per
share, exercisable after May 1, 1996 and expiring on April 30, 2005.
In May 1995, the Company authorized a common stock purchase warrant
agreement with Rally's Restaurants, Inc. ("Rally's") as part of the
consideration for entering into a development agreement with the Company.
The conditional warrant had a purchase price of $100 and provides for the
purchase of 1,000,000 shares of Company common stock at an exercise price
of $7.50 per share expiring June 7, 2005. Exercisability is contingent
upon Rally's compliance with the development agreement. In April 1996, the
Company and Rally's executed an agreement providing for the termination of
the development agreement. Consequently, the 1,000,000 common stock
purchase warrants that were granted to Rally's were canceled.
In May 1995, in recognition of extraordinary personal efforts in connection
with the negotiations of the settlement and development agreement with CKE,
and the development agreement with Rally's, and in accordance with the
incentive component of the Company's compensation philosophy for its
President and Chief Executive Officer, the Company issued a common stock
purchase warrant to its President and Chief Executive Officer. The warrant
had a purchase price of $100 and provides for the purchase of 1,000,000
shares of Company common stock at an exercise price of $7.00 per share
expiring May 1, 2005.
In December 1994, in recognition of extraordinary contributions to the
Company, the Company awarded its President and Chief Executive Officer
100,000 shares of Company common stock valued at approximately $633,500.
The Company entered into a stock agreement on November 23, 1992 whereby the
Company's current President and Chief Executive Officer acquired 1,000,000
shares of Company common stock for $3,062,500 in a private placement. In
addition, the same individual purchased for $200 common stock purchase
warrants to acquire an additional 2,000,000 shares of Company common stock
at $5 per share. The warrant has a duration of 10 years.
In conjunction with its 1990 initial public offering, the Company entered
into an escrow agreement with three former executives pursuant to which the
former executives deposited certain shares of the Company's common stock,
originally acquired by them in 1988, into an escrow account to be released
upon the achievement of certain income levels by the Company. These
restricted shares continue to be included in shares outstanding. As of
December 31, 1996, 178,571 shares were in the escrow account to be returned
to the Company for cancellation if the Company has not reported earnings of
$1,500,000 for any twelve-month period concluding with the twelve-month
period ending June 30, 1997.
Also in conjunction with its 1990 initial public offering, the Company sold
five-year warrants for $100 to purchase 165,625 shares of Company common
stock at a price of $3.60 per share. During the year ended December 31,
1995, 74,245 of these warrants were exercised and 4,093 expired and during
the year ended December 31, 1994, 87,287 of these warrants were exercised.
(continued)
26
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
10. Stock-based compensation plans
------------------------------
The Company has two stock option plans and from time-to-time grants other
nonstatutory options. Options are granted to eligible employees and
directors, officers and consultants who are actively involved in the
development of the business of the Company. Generally, the exercise price
of options granted approximates the fair market value of the Company's
common stock on the date of grant. Currently outstanding options become
exercisable either immediately or over a period of up to three years and
expire five-to-ten years after the grant date. The following provides
additional information on these plans and other options:
Incentive stock option plan
---------------------------
In 1989, the Board of Directors of the Company adopted an Incentive Stock
Option Plan ("ISOP"). Under the ISOP, all key employees, including
officers and directors (who are also employees) of the Company are eligible
to receive options to purchase up to an aggregate of 125,000 shares for any
one person. To be eligible to receive options under the ISOP, an employee
must have been a full-time employee in good standing with the Company for
one year. The total number of options authorized under the plan is
312,500. As of December 31, 1996, the Company has 77,555 options available
for future grant under the plan.
Non - qualified stock option plan
---------------------------------
In October 1989, the Company adopted a non-qualified stock option plan (the
"NQSOP") for directors who are not full-time employees of the Company and
individuals who act as consultants to the Company or who are actively
involved in the development of the business of the Company. The plan
provides for the issuance of a maximum of 125,000 shares of Company common
stock at the market price thereof on the date of grant. Each option
lapses, if not previously exercised or extended, on the tenth anniversary
of the date of grant or 90 days after the optionee has terminated
continuous activity with the Company. As of December 31, 1996, there are
no remaining options available for grant under this plan.
Other options issued
--------------------
In October 1996, the Company granted options for the purchase of 100,000
shares of Company common stock at $6.50 per share to an officer and
director of the Company, with 50,000 shares vesting immediately, and 50,000
shares vesting one year from the date of grant, provided that the officer
has remained with the Company in an executive position for one year. No
options have been exercised.
As more fully described in Note 9, the Company issued an option in the form
of a warrant to the CEO in May 1995, which provides for the purchase of
1,000,000 shares of the Company's common stock. The warrant expires on May
1, 2005. During 1995, the Company also granted options for the purchase of
260,000 shares of Company common stock to other directors, officers and
consultants that immediately vested.
(continued)
27
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
10. Stock-based compensation plans (continued)
------------------------------------------
Combined plan transactions for 1996, 1995 and 1994 for the ISOP's, NQSOP's,
and other options described above are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares (1) price Shares (1) price Shares (1) price
---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
January 1, 1,705,167 $6.17 426,224 $3.63 495,420 $3.46
Granted 100,000 6.50 1,304,000 6.95 - -
Canceled (1,667) 5.75 (2,000) 5.75 (2,502) 2.50
Exercised (169,417) 3.45 (23,057) 2.95 (66,694) 2.44
--------- --------- -------
Options outstanding
December 31, 1,634,083 $6.48 1,705,167 $6.17 426,224 $3.63
========= ========= =======
</TABLE>
The following information applies to options outstanding at December 31,
1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ------------------------------
Weighted
average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
outstanding (1) life (years) price exercisable (1) price
--------------- --------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Range of
exercise prices
$1.80 - $2.70 110,916 2 $2.14 110,916 $2.14
$2.71 - $4.05 42,500 4 3.38 42,500 3.38
$4.06 - $6.08 45,667 4 5.75 33,665 5.75
$6.09 - $7.00 1,435,000 7 6.92 1,385,000 6.94
--------- ---------
1,634,083 $6.47 1,572,081 $6.48
========= =========
</TABLE>
(1) The above tables do not include presently exercisable warrants to purchase
(a) 2,000,000 shares of the Company common stock at an exercise price of
$5.00 per share issued to the Company's current President and Chief
Executive Officer in conjunction with stock acquired in a private placement
in 1992 and (b) 1,000,000 shares of the Company common stock at an exercise
price of $7.50 per share issued to a law firm as partial consideration for
legal services in 1995 (see Note 9). These warrants are still outstanding
at December 31, 1996.
(continued)
28
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
10. Stock-based compensation plans (continued)
------------------------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock.
Had compensation cost for the plan been determined based on the fair value
of the options at the grant dates consistent with the method of SFAS No.
123, the Company's net earnings and earnings per share would have been:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Net loss
As reported $ (48,445) $(1,922,446)
Pro forma $(154,989) $(8,861,577)
Primary earnings per share
As reported (.01) (.31)
Pro forma (.02) (1.44)
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related
to grants made before 1995. In addition, potential deferred tax benefits
of approximately $18,000 in 1996 and $2,753,000 in 1995 have not been
reflected in the pro forma amounts due to the uncertainty of realizing any
benefit. The fair value of these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for 1996 and 1995:
<TABLE>
<S> <C>
Expected life (years)............... 3-10
Risk-free interest rate............. 5.5%
Volatility.......................... 30%-70%
</TABLE>
The weighted fair value of options granted during the years ended December
31, 1996 and 1995 for which the exercise price approximated the market
price on the grant date was $1.86 and $5.37, respectively.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
Management also believes that if the model took into consideration other
important factors, such as the block size of an option granted to an
individual, transferability restrictions on the sale of stock by CEO's or
directors, or other relevant factors, the fair value measurement of these
options would be substantially less.
11. Other related party transactions
--------------------------------
During 1994, an officer and director (who resigned his positions with the
Company in June 1994), purchased three existing Franchise Stores paying the
Company a $2,500 transfer fee for two of the stores and paying no transfer
fee for the third. The Company's standard transfer fee is $5,000. Further,
the royalty fee for one of these stores was waived by the Company from
September 1, 1994 through February 28, 1995, while the royalty fee for
another was waived from September 1, 1994 through August 31, 1995. The
third store pays the standard 5% royalty fee.
(continued)
29
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
11. Other related party transactions (continued)
--------------------------------------------
A director of the Company provided legal services to the Company valued at
$48,467, $95,055, and $71,001 during 1996, 1995 and 1994, respectively.
12. Commitments and contingencies
-----------------------------
The Company's executive offices and all properties used for restaurant
operations are leased under operating leases expiring on various dates
through 2001. Certain leases require payment of contingent rentals based
upon a percentage of restaurant sales. No contingent rentals were required
in 1996, 1995, or 1994.
As of December 31, 1996, future minimum rental payments and sublease income
under all non-cancelable operating leases for years ending December 31 are
as follows:
<TABLE>
<CAPTION>
Rental Sublease
Payments Income
----------- -----------
<S> <C> <C>
1997 $ 766,246 $ 353,338
1998 577,017 265,002
1999 358,284 246,488
2000 229,026 162,837
2001 15,816 -
---------- ----------
$1,946,389 $1,027,665
========== ==========
</TABLE>
Rental expense under all agreements for the years ended December 31, 1996,
1995, and 1994 was $489,046, $624,787, and $596,525, respectively.
Sublease rental income for the years ended December 31, 1996, 1995 and 1994
was $167,556, $115,163 and $71,200, respectively.
The Company sold five operating restaurants in 1995 and one in 1993 and
assigned the related leases to the respective purchasers. The Company
remains liable pursuant to the original lease agreements under the
respective leases in the event of a default by the purchasers. Following
is a summary of the Company's commitment pursuant to these leases.
<TABLE>
<CAPTION>
Rental
Payments
--------
<S> <C>
1997 $244,744
1998 210,028
1999 197,400
2000 152,900
2001 20,000
Thereafter 13,600
--------
$838,672
========
</TABLE>
The Company has not incurred expenses in any of the years presented related
to these assigned leases.
The Company is involved in legal proceedings, claims and litigation arising
in the ordinary course of business. Management believes that any resulting
liability should not materially affect the Company's financial position or
results of operations.
(continued)
30
<PAGE>
GB FOODS CORPORATION
Notes to Consolidated Financial Statements
13. Fair value of financial instruments
-----------------------------------
The carrying amount of the Company's financial instruments approximates
their estimated fair value at December 31, 1996. The fair value of cash
and cash equivalents was based on the carrying value of such assets. The
estimated fair value of short-term investments were based on quoted market
prices. The fair value of notes receivable and long-term debt, were
estimated based on discounted cash flows using market rates at the balance
sheet date. The use of discounted cash flows can be significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. The derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument.
31
<PAGE>
GB FOODS CORPORATION
Schedule II VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and Amounts at end
Description of period expenses written-off Other of period
----------- ---------- --------- ----------- ----- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts
and notes $ 196,918 $ 87,663 $ 88,457 $32,932 $ 163,192
========== ========== ======== ======= ==========
Allowance for deferred tax assets $5,178,000 $ (615,000) $ - $ - $4,563,000
========== ========== ======== ======= ==========
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts
and notes $ 242,455 $ 84,051 $129,588 $ - $ 196,918
========== ========== ======== ======= ==========
Allowance for deferred tax assets $4,476,000 $ 702,000 $ - $ - $5,178,000
========== ========== ======== ======= ==========
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts
and notes $ 244,881 $ 58,709 $ 61,135 $ - $ 242,455
========== ========== ======== ======= ==========
Allowance for deferred tax assets $2,740,000 $1,736,000 $ - $ - $4,476,000
========== ========== ======== ======= ==========
</TABLE>
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 28, 1996, the Company filed a Special Report on Form 8-K
reporting the change of its principal accountants from Cacciamatta Accountancy
Corporation (formerly known as Saddington.Cacciamatta), to Grant Thornton LLP.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The following sets forth certain information for each director of the
Company as of December 31, 1996.
<TABLE>
<CAPTION>
Director
Name of Nominee Age Since Position with the Company
--------------- --- ------- -------------------------
<S> <C> <C> <C>
William M. Theisen 51 1994 Chairman, Chief Executive Officer, and Director
George J. Kubat 51 1996 Chief Financial Officer and Director
Michael J. Scherr 53 1994 Director
Bruce H. Haglund 45 1989 Secretary and Director
T. Anthony Gregory 58 1989 Director
</TABLE>
William M. Theisen has served as Chairman of the Board, President, Chief
Executive Officer, and as a Director of the Company since June 1994. Since
1984, Mr. Theisen has been a private investor in Business Ventures, a privately-
held company.
George J. Kubat has served as a Director of the Company since April 1996,
and as Chief Financial Officer since July 1996. Mr. Kubat has acted as a
consultant to the Company from time to time since November 1992. Mr. Kubat is
currently the President and Chief Executive Officer of Phillips Manufacturing,
Inc., a company located in Omaha, Nebraska specializing in the manufacture of
drywall metals. From 1969 to 1992, Mr. Kubat worked in the Omaha office of
Coopers & Lybrand as a tax specialist and tax partner. Mr. Kubat also currently
serves as a director for three other public companies including American
Business Information, Inc., America First Companies L.L.C. and Sitel
Corporation.
Michael J. Scherr has served as a Director of the Company since June 1994.
Since 1984, Mr. Scherr has been an investment and asset manager of Business
Ventures, a privately-held company.
Bruce H. Haglund has served as the Secretary and Director of the Company
since 1989 and has also served as the Secretary of GB Franchise Corporation
since that time. Mr. Haglund is an attorney in private practice in Orange
County, California and has been a principal in the law firm of Gibson, Haglund &
Johnson since April 1994. He was a principal in the law firm of Phillips,
Haglund, Haddan & Jeffers from February 1991 to April 1994. From 1984 to
February 1991, he was a partner in the law firm of Gibson & Haglund, and from
1980 to 1984 was an associate with the firm. Mr. Haglund serves as secretary of
three other public companies including Aviation Distributors, Inc., Metalclad
Corporation and Renaissance Golf Products, Inc. He is also a director of
Aviation Distributors, Inc.
T. Anthony Gregory has served as a Director of the Company 1989. Since
1962, Mr. Gregory has owned and operated U.S. Customs Air Bonded Warehouse. In
June 1989, Mr. Gregory opened U.S. Customs Bonded Container and Freight Station,
and in August 1989 opened Custom Air Trucking Company. Mr. Gregory was Vice
President and Secretary of Equitable Saving & Loan Association, a holding
company for several savings and loan companies from 1963 to 1965.
Executive Officers
William M. Theisen, see "Directors" above.
Nicholas J. Caddeo, 50 has been an Executive Vice President and Chief
Operating Officer of the Company since August 1992. Prior to joining the
Company, he was employed for more than 20 years by Foodmaker, Inc.,
33
<PAGE>
the corporate operator of Jack-in-the-Box restaurants, serving as a Regional
Manager for the Los Angeles area from January 1985 to July 1992.
George J. Kubat, see "Directors" above.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation of William M. Theisen, the Company's Chief Executive Officer,
Nicholas J. Caddeo, the Company's Chief Operating Officer, and George J. Kubat,
the Company's Chief Financial Officer, for each of the three years in the period
ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
------------------- ----------------------
Name and Principal Position Year Salary Other(1) Stock Options
--------------------------- ---- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
William M. Theisen 1996 $ 50,000 0 0 0
Chairman, President and 1995 $100,000 0 0 0
Chief Executive Officer 1994 $ 50,000 0 $633,500 0
Nicholas J. Caddeo 1996 $ 82,800 $11,800 0 0
Chief Operating Officer 1995 $ 92,600 $11,205 0 0
and Executive Vice President 1994 $ 90,000 $ 8,291 0 0
George J. Kubat(2) 1996 $ 3,000 0 0 0
Chief Financial Officer
</TABLE>
(1) The remuneration described in the table does not include the cost to the
Company of benefit furnished to the named executive officer, including
premiums for health insurance and other personal benefits provided to such
individual that are extended to employees of the Company in connection with
their employment. The value of such benefits cannot be precisely
determined; however, the executive officer named above did not receive
other compensation in excess of the lesser of $50,000 or 10% of such cash
compensation.
(2) Became Chief Financial Officer in July 1996.
OPTIONS GRANTED IN FISCAL YEAR 1996
During the fiscal year ended December 31, 1996, 100,000 non-qualified stock
options were granted to George J. Kubat at an exercise price of $6.50 per share,
of these shares 50,000 vested in October 1996 and 50,000 will vest in October
1997, providing that George J. Kubat has remained with the Company in an
executive position for one year.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth the number of options, both exercisable and
unexercisable, held by each of the executive officers of the Company as of
December 31, 1996 and the value of any in-the-money options, assuming that the
value of the shares was $7.38, the fair market value of the Company's common
stock on December 31, 1996.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1996 December 31, 1996
Acquired on Value ---------------------------- ---------------------------
Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William M. Theisen (1) 0 0 1,000,000 0 $380,000 0
Nicholas J. Caddeo 0 0 55,000 2,500 $268,400 $12,200
George J. Kubat 0 0 100,000 50,000 $ 63,000 $44,000
</TABLE>
(1) Includes presently exercisable warrants to purchase 1,000,000 shares of the
Company's common stock at an exercise price of $7.00 per share granted in
May 1995. Does not include presently exercisable warrants to
34
<PAGE>
purchase 2,000,000 shares of the Company's common stock at an exercise
price of $5.00 per share granted to Mr. Theisen in November 1992 (the "1992
Warrants"), prior to his election as an officer and director of the Company
in June 1994. The value of the unexercised 1992 Warrants at December 31,
1996 was $4,760,000. See Note 9 of "Notes to Consolidated Financial
Statements" on pages 24 and 25.
COMPENSATION OF THE BOARD OF DIRECTORS
The members of the Board of Directors who are not employees presently
receive $1,000 for their attendance in person at Board meetings and $500 if they
are present at a Board meeting telephonically. Members of the Board of
Directors have also received nonstatutory stock options in the past in
recognition of their service as members of the Board of Directors; however, no
options were granted to members of the Board of Directors for their service as
Board members in 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of December 31, 1996,
relating to the beneficial ownership of the Company's common stock by (i) all
persons known by the Company to beneficially own more than 5% of the outstanding
shares of the Company's common stock, (ii) each director, director nominee and
officer of the Company and, (iii) all officers and directors of the Company as a
group. Unless otherwise noted, each of the shareholders listed owns less than 1%
of the outstanding common stock of the Company. The Company had 6,440,414 shares
outstanding as of December 31, 1996.
<TABLE>
<CAPTION>
Name and Address of Number of Shares Percentage of Shares
Beneficial Owner (1) (2) (3) Beneficially Owned (1) Outstanding (4)
- ---------------------------- ---------------------- ---------------------
<S> <C> <C>
William M. Theisen (5) 4,269,826 38.8%
Ruben M. Rodriguez (6) (7) 521,514 4.7%
333 S. Ramsgate
Anaheim, CA 92807
T. Anthony Gregory (8) 142,713 1.3%
25651 Paseo de la Paz
San Juan Capistrano, CA 92675
Bruce H. Haglund (9) 115,794 1.1%
Nicholas J. Caddeo (10) 52,500 -
McGrath, North, Mullin & Kratz, P.C. (11) 1,000,000 9.1%
222 South Fifteenth Street
Omaha, Nebraska 68102
George J. Kubat (12) 120,000 1.1%
Michael J. Scherr (13) 53,800 -
10010 N. 84/th/ Street
Omaha, Nebraska 6812
All officers and directors 4,754,633 43.2%
as a group (6 persons) (14)
</TABLE>
(1) Unless otherwise noted, the Company believes that all shares are
beneficially owned and that all persons named in the table have sole voting
and investment power with respect to all shares of Company common stock
owned by them.
35
<PAGE>
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from December 31, 1996 upon the
exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days from December 31, 1996 have been exercised.
(3) Unless otherwise indicated, the address of each stockholder listed is 23
Corporate Plaza, Suite 246, Newport Beach, California 92660.
(4) Assumes 11,000,494 shares outstanding, including 6,440,414 shares currently
outstanding and 4,560,080 issuable upon exercise of presently exercisable
stock options and warrants held by the above-listed shareholders.
(5) Includes 3,000,000 shares issuable upon the exercise of presently
exercisable warrants. Does not include a total of 743,436 shares
beneficially owned by Mr. Rodriguez and other former officers and directors
of the Company, which shares are the subject of an irrevocable proxy in
favor of Mr. Theisen expiring in November 1997 (the "Theisen Proxy"). If
the shares subject to such irrevocable proxy were included, Mr. Theisen
would beneficially own 5,013,262 shares of 45.6% of the outstanding shares
(computed on the basis of 11,000,494 shares outstanding as set forth in
footnote 4 above).
(6) Includes 5,500 shares owned by the Rodriguez Maintenance Trust of which Mr.
Rodriguez is the trustee and over which Mr. Rodriguez has sole investment
and voting power, and 14,112 shares issuable upon the exercise of presently
exercisable nonstatutory stock options.
(7) Does not give effect to the terms of an escrow agreement among the Company,
Mr. Rodriguez and other former affiliates of the Company.
(8) Includes 74,194 shares issuable upon the exercise presently exercisable
nonstatutory stock options.
(9) Includes 89,194 shares issuable upon the exercise of presently exercisable
nonstatutory stock options.
(10) Represents 52,500 shares issuable upon the exercise of presently
exercisable incentive stock options.
(11) Includes 1,000,000 shares issuable upon the exercise of presently
exercisable common stock purchase warrants.
(12) Includes 100,000 shares issuable upon the exercise of presently exercisable
nonstatutory stock options.
(13) Includes 50,000 shares issuable upon the exercise of presently exercisable
nonstatutory stock options.
(14) Includes an aggregate of 3,365,888 shares issuable upon the exercise of
presently exercisable stock options and warrants. If the 743,436 shares
subject to the Theisen Proxy were included in the total for all officer and
directors as a group, the total shares would be 5,013,262 and the
percentage would be 45.6%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
General
The Company believes that the transactions hereunder were the result of arm's-
length negotiations, and the terms of each such transaction was no less
favorable to the Company as would have been available from an unaffiliated third
party. The transactions discussed below were negotiated either (i) before the
parties became affiliates; (ii) after the parties ceased to be affiliates; or
(iii) with a majority of a disinterested members of the Company's Board of
Directors. Furthermore, it is the policy of the Company that a majority of the
disinterested members of the Company's Board of Directors must approve related-
party transactions.
36
<PAGE>
Payments to Director for Professional Services
The law firm of Gibson, Haglund & Johnson, of which Mr. Haglund, the Company's
Secretary and a Director, is a principal, received compensation in the form of
legal fees for services rendered to the Company in 1996 of $48,467.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report on Form 10-K:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants... 14
Balance Sheets....................................... 16
Statements of Operations............................. 17
Statements of Shareholders' Equity................... 18
Statements of Cash Flows............................. 19
Notes to Financial Statements........................ 21
2. Schedule to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts....... 32
3. Index to Exhibits
See Item 14 (A) (3) below.
(b) Reports on Form 8-K
On October 28, 1996, the Company filed a Special Report on Form 8-K
reporting the dismissal of its principal accountants, Cacciamatta Accountancy
Corporation (formerly known as Saddington.Cacciamatta), and the appointment of
Grant Thornton LLP as the Company's new principal accountants.
SUPPLEMENTAL INFORMATION
An annual report and an information statement shall be furnished to the
security holders of the Company subsequent to the filing of this Form 10-K. The
Company shall furnish copies of the annual report to security holders and the
proxy statement to the Securities and Exchange Commission when it is sent to the
security holders.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GB FOODS CORPORATION
By: /s/ William M. Theisen
-----------------------
William M. Theisen
Chief Executive Officer
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 Date
- ---------- ----- ----
<S> <C> <C>
/s/ William M. Theisen Chief Executive Officer, March 31, 1997
- ----------------------- President, Director
William M. Theisen (Principal Executive Officer)
/s/ George J. Kubat Chief Financial Officer, March 31, 1997
- ----------------------- Director
George J. Kubat (Principal Financial and
Accounting Officer)
/s/ Bruce H. Haglund Secretary, Director March 31, 1997
- -----------------------
Bruce H. Haglund
/s/ Michael J. Scherr Director March 31, 1997
- -----------------------
Michael J. Scherr
/s/ T. Anthony Gregory Director March 31, 1997
- -----------------------
T. Anthony Gregory
</TABLE>
39
<PAGE>
GB FOODS CORPORATION
INDEX TO EXHIBITS
The following exhibits are being filed with this Annual Report on Form 10-K
and/or are incorporated by reference therein in accordance with the designated
footnote references.
3.1 Restated Certificate of Incorporation (3)
3.2 Bylaws of the Company, as amended (1)
4.1 Rights Agreement dated as of July 9, 1996 between GB Foods Corporation
and American Securities Transfer Incorporated (6)
10.1 Incentive Stock Option Plan and form of Non-qualified Stock Option
Agreement (1)
10.2 Non-qualified Stock Option Plan and form of Non-qualified Stock Option
Agreement (1)
10.3 Form of Franchise Agreement (7)
10.4 Form of Dual-concept Franchise Agreement (7)
10.5 Green Burrito-Glendora #21 Limited Partnership Agreement (1)
10.6 Operations Support Agreement between GB Foods, Inc. and GB Franchise
Corporation dated April 1, 1989 (1)
10.7 Office Lease between the Company and The Irvine Company dated July 1,
1994 (7)
10.8 Stock Purchase Agreement between William M. Theisen and the Company dated
October 29, 1992, including Amendment to Stock Purchase Agreement dated
November 4, 1992 and Second Amendment to Stock Purchase Agreement dated
November 23, 1992 (4)
10.9 Amended Warrant Agreement and Form of Warrant Certificate between the
Company and William M. Theisen dated November 23, 1992 (7)
10.10 Form of Irrevocable Proxy Agreement between Ruben M. Rodriguez, Gary A.
McArthur, and Robert V. Gibson, as "Stockholders," and William M. Theisen
(4)
10.11 Sub-Lease dated March 29, 1993 between the Company and T&J Sausage
Kitchen, Inc. (5)
10.12 Warrant agreement dated May 1, 1995 between the Company and McGrath,
North, Mullin & Kratz, P.C.
10.13 Stock Option Agreement between the Company and George J. Kubat dated
October 3, 1996
22 List of Subsidiaries of the Registrant (2)
27 Financial Data Schedule
(1) Filed with the Company's Registration Statement on Form S-18, dated August
21, 1990, and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990, and incorporated by reference.
(3) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1991, and incorporated by reference.
(4) Filed with the Company's Current Report on Form 8-K dated November 23,
1992, and incorporated by reference.
(5) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K for July 9, 1995 and
incorporated by reference.
(7) Filed with the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated by reference.
40
<PAGE>
EXHIBIT 10.12
GB FOODS CORPORATION
WARRANT AGREEMENT
THIS WARRANT AGREEMENT dated as of May 1, 1995, is entered into by and
among GB FOODS CORPORATION, a Delaware corporation, (the "Company"), and
McGRATH, NORTH, MULLIN & KRATZ, P.C., a Nebraska Professional Corporation (the
"Purchaser").
The Company proposes to issue to the Purchaser warrants as hereinafter
described (the "Warrants") to purchase up to an aggregate of ONE MILLION
(1,000,000) shares, subject to adjustment as provided in Section 8 hereof (such
1,000,000 shares, as adjusted, being hereinafter referred to as the "Shares") of
the Company's Common Stock, par value $0.08 (the "Common Stock"), each Warrant
entitling the holder ("Holder") thereof to purchase one share of Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth and for other good and valuable consideration, the parties
hereto agree as follows:
1. ISSUANCE OF WARRANTS: FORM OF WARRANT. On the date hereof (the "Closing
--------------------------------------
Date"), the Company hereby issues, sells and delivers the Warrants to the
Purchaser for an aggregate price One Hundred Dollars ($100.00). The form of the
Warrant and of the form of election to purchase Shares to be attached thereto
shall be substantially as set forth on the attachments hereto entitled "Warrant
Certificate." The Warrants shall be executed on behalf of the Company by the
manual or facsimile signature of the then present Chairman or Co-Chairman,
President or any Vice President of the Company, under its corporate seal,
affixed or in facsimile, and attested by the manual or facsimile signature of
the present or any future Secretary or Assistant Secretary of the Company.
2. REGISTRATION. The Warrants shall be numbered and shall be registered in a
------------
Warrant register (the "Warrant Register"). Subject to the provisions of Section
3, the Company shall be entitled to treat the registered holder of any Warrant
on the Warrant Register as the owner in fact thereof for all purposes and shall
not be bound to recognize any equitable or other claim to or interest in such
Warrant on the part of any other person, and shall not be liable for any
registration of transfer of Warrants which are registered or are to be
registered in the name of a fiduciary or the nominee of a fiduciary unless made
with the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration of transfer, or with such knowledge of
such facts that its participation therein amounts to bad faith. The Warrants
shall be registered initially in the name of the Purchaser.
3. WARRANTS TRANSFERABILITY LIMITED. The Warrants are expressly hereby made
--------------------------------
non-transferable and shall not be sold, transferred, assigned or hypothecated,
in part or in whole, except upon the liquidation and dissolution of the
Purchaser or the prior written consent of the Company. Any permitted transfer
will be allowed only upon delivery of the Warrant Certificate duly endorsed by
the Holder or by his duly authorized attorney or representative, or accompanied
by proper evidence of succession, assignment or authority to transfer and
contingent upon approval by the Board of Directors of the Company. Such
permitted transfer, of the Warrants shall be effective as of the date of such
endorsement or other proper evidence. In all cases of transfer by an attorney,
the original power of attorney, duly approved, or an official copy thereof, duly
certified, shall be deposited with the Company. Such permitted transfer of the
Warrants shall be effective as of the date of such endorsement or other proper
evidence. In all cases of transfer by an attorney, the original power of
attorney, duly approved, or an official copy thereof, duly certified, shall be
deposited with the Company. In case of transfer by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of their
authority shall be produced, and may be required to be deposited with the
Company in its discretion. Upon any registration of transfer, the Company shall
deliver a
Page 1 of Nine
<PAGE>
new Warrant or Warrants to the person entitled thereto. The Warrants may be
exchanged at the option of the Holder thereof for other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of shares of Common Stock upon surrender to the Company
or its duly authorized agent. The Company may require payment of the sum
sufficient to cover all applicable taxes and other governmental charges that may
be imposed in connection with any voluntary transfer, exchange or other
disposition of the Warrants. Notwithstanding the foregoing, the Company shall
have no obligation to cause Warrants to be transferred on its books to any
person, if such transfer would violate the registration provisions of Securities
Act of 1933, as amended (the "Act"), unless an exemption under the Act is
available therefor.
4. TERM OF WARRANTS; EXERCISE OF WARRANTS.
--------------------------------------
(a) Subject to Paragraph 4(d) below, each Warrant entitles the registered
owner thereof to purchase one Share at a purchase price of Seven Dollars
($7.00) per Share (as adjusted from time to time pursuant to the provisions
hereof, the "Exercise Price") at any time or from time to time the date of
this Agreement until 5:00 p.m., California time, May 1, 2005 (the "Warrant
Expiration Date"). The Exercise Price and the Shares issuable upon
exercise of Warrants are subject to adjustment upon the occurrence of
certain events, pursuant to the provisions of Section 8 of this Agreement.
Subject to the provisions of the Agreement, the Purchaser or a permitted
Holder shall have the right, which may be exercised as set forth in such
Warrants, to purchase from the Company and the Company shall issue and sell
to the Purchaser or such Holder the number of fully paid and nonassessable
Shares of Common Stock specified in such Warrants, upon surrender to the
Company, or its duly authorized agent, of such Warrants, with the form of
election to purchase attached thereto duly completed and signed, and upon
payment to the Company of the Exercise Price, as adjusted in accordance
with the provisions of Section 8 of this Agreement, for the number of
Shares in respect of which such Warrants are then exercised.
(b) The Purchase Price may be paid (i) in cash or by cashier's check
payable to the Company, (ii) by the surrender of Warrants owned by the
Purchaser or a permitted Holder having a Warrant Value (as defined below)
on the date of exercise equal to the Purchase Price, (iii) by the surrender
of shares of the Company's Common Stock in good form for transfer, owned by
the Holder and having a Fair Market Value (as defined below) on the date of
exercise equal to the Purchase Price, or (iv) any combination of the
foregoing. The term "Warrant Value" shall mean the difference between the
Exercise Price per share and the Fair Market Value (as defined below) per
share multiplied by the number of Warrants being surrendered. The term
"Fair Market Value" shall mean the average over the previous five (5)
trading days of the reported high and low sales price on the Nasdaq Small
Cap Market, the Nasdaq National Market System, or such other national
securities exchange on which the Company's shares may be traded, or if not
trading on the Nasdaq Small Cap Market, the Nasdaq National Market System,
or a national securities exchange, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any New York Stock
Exchange member firm selected from time to time by the Company for that
purpose.
(c) No adjustment shall be made for any dividends on any Shares issuable
upon exercise of a Warrant. Upon each surrender of Warrants and payment of
the Exercise Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Purchaser or the permitted Holder of such Warrants and in such name or
names as the Purchaser or such Holder may designate, a certificate or
certificates for the number of full Shares so purchased upon the exercise
of such Warrants, together with cash, as
Page 2 of 9
<PAGE>
provided in Section 9 of this Agreement, in respect of any fractional
Shares otherwise issuable upon such surrender. Such certificate or
certificates shall be deemed to have been issued and any person so
designated to be named therein shall be deemed to have become a holder of
record of such Shares as of the date of the surrender of Warrants and
payment of the Exercise Price as aforesaid; provided, however, that if, at
--------- --------
the date of surrender of such Warrants and payment of such Exercise Price,
the transfer books for the Common Stock or other class of securities
issuable upon the exercise of such Warrants shall be closed, the
certificates for the Shares shall be issuable as of the date on which such
books shall next be opened (whether before, on or after the Warrant
Expiration Date) and until such date the Company shall be under no duty to
deliver any certificate for such Shares; provided, further, however, that
--------- -------- --------
the transfer books of record, unless otherwise required by law, shall not
be closed at any one time for a period longer than five (5) days. The
rights of purchase represented by the Warrants shall be exercisable, at the
election of the Holder(s) thereof, either in full or from time to time in
part and, in the event that any Warrant is exercised in respect of less
than all of the Shares issuable upon such exercise at any time prior to the
Warrant Expiration Date, a new Warrant or Warrants will be issued for the
remaining number of Shares specified in the Warrant so surrendered.
(d) Notwithstanding any provision contained in this Agreement to the
contrary, the Warrants shall become immediately exercisable upon the
occurrence of any of the following events:
(i) The public announcement of any Organic Change (as defined in
Paragraph (g) at Section 8 hereinbelow);
(ii) The exercise of any warrants for stock of the Company, which
exercise is made by the Chairman and Chief Executive Officer
of the Company;
(iii) The written consent of the Chairman and Chief Executive
Officer of the Company; or
(iv) The termination of the Company's employment of William M.
Theisen, or his failure for any reason to serve as Chairman
and Chief Executive Officer of the Company.
5. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
----------------
any, attributable to the issuance of Shares upon the exercise of Warrants;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable solely in respect of any transfer involved in the
issue or delivery of any certificates for Shares in a name other than that of
the Purchaser or a permitted Holder of Warrants in respect of which such Shares
are issued.
6. MUTILATED OR MISSING WARRANTS. In case any of the Warrants shall be
-----------------------------
mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right of interest, but only
upon receipt of evidence reasonably satisfactory to the Company of such
mutilation, loss, theft or destruction of such Warrant and indemnity, if
requested, reasonably satisfactory to the Company. An applicant for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such other reasonable charges and expenses as the Company may prescribe.
Page 3 of 9
<PAGE>
7. RESERVATION OF SHARES, ETC. There have been reserved, and the Company
---------------------------
shall at all times keep reserved, out of the authorized and unissued Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the rights of purchase represented by the outstanding Warrants. American
Securities Transfer, Incorporated, transfer agent for the Common Stock (the
"Transfer Agent"), and every subsequent transfer agent, if any, for the
Company's securities issuable upon the exercise of the Warrants will be
irrevocably authorized and directed at all times until the Warrant Expiration
Date to reserve such number of authorized and unissued shares as shall be
required for such purpose. The Company will keep a copy of this Agreement on
file with the Transfer Agent and with every subsequent transfer agent for any
shares of the Company's securities issuable upon the exercise of the Warrants.
The Company will supply the Transfer Agent or any subsequent transfer agent with
duly executed certificates for such purpose and will itself provide or otherwise
make available any cash which may be distributable as provided in Section 9 of
this Agreement. All Warrants surrendered in the exercise of the rights thereby
evidenced shall be canceled, and such canceled Warrants shall constitute
sufficient evidence of the number of Shares that have been issued upon the
exercise of such Warrants. No shares of Common Stock shall be subject to
reservation in respect of unexercised Warrants subsequent to the Warrant
Expiration Date.
8. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES. The Exercise Price and
--------------------------------------------------
the number and kind of securities issuable upon exercise of each Warrant shall
be subject to adjustment from time to time upon the happening of certain events,
as follows:
(a) In case the Company shall (i) declare a dividend on its Common Stock in
shares of Common Stock or make a distribution in shares of Common Stock
(other than an issuance of Common Stock for valuable consideration), (ii)
subdivide its outstanding shares of Common Stock, (iii) combine its
outstanding shares of Common Stock in to a smaller number of shares of
Common Stock or (iv) issue by reclassification of its shares of Common
Stock other securities of the Company (including any such reclassification
in connection with the consolidation or merger in which the Company is the
continuing corporation), the number of Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Purchaser and any permitted Holder of each Warrant shall be entitled to
receive the kind and number of Shares or other securities of the Company
which he would have owned or have been entitled to receive after the
happening of any of the events described above, had such Warrant been
exercised immediately prior to the happening of such event or any record
date with respect thereto. An adjustment made pursuant to this paragraph
(a) shall become effective immediately after the effective date of such
event retroactive to immediately after the record date, if any, for such
event.
(b) No adjustment in the number of Shares purchasable hereunder shall be
required unless such adjustment would require an increase or decrease of at
least one percent (1%) in the number of Shares purchasable upon the
exercise of each Warrant; provided, however, that any adjustments which by
reason of this paragraph (e) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment but not later
than five (5) years after the happening of the specified event or events.
All calculations shall be made to the nearest one thousandth of a share.
(c) Whenever the number of Shares purchasable upon the exercise of each
Warrant is adjusted, as herein provided, the Exercise Price shall be
adjusted by multiplying the Exercise Price in effect immediately prior to
such adjustment by a fraction, of which the numerator shall be the number
of Shares purchasable upon the exercise of each Warrant immediately prior
to
Page 4 of 9
<PAGE>
such adjustment, and of which the denominator shall be the number of Shares
so purchasable immediately thereafter.
(d) For the purpose of this Section 8, the term "shares of Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement or (ii) any other class of stock
resulting from successive changes or reclassifications of such shares
consisting solely of changes in par value, or from no par value to par
value, or from par value to no par value.
(e) Whenever the number of Shares issuable upon the exercise of each
Warrant or the Exercise price of such Shares is adjusted, as herein
provided, the Company shall promptly mail by first class mail, postage
prepaid, to the Purchaser and/or each permitted Holder notice of such
adjustment or adjustments. The Company shall retain a firm of independent
public accountants (who may be the regular accountants employed by the
Company) to make any computation required by this Section 8 and shall cause
such accountants to prepare a certificate setting forth the number of
Shares issuable upon the exercise of each Warrant and the Exercise Price of
such Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which
such adjustment was made. Such certificate shall be conclusive as to the
correctness of such adjustment and the Purchaser and/or each permitted
Holder shall have the right to inspect such certificate during reasonable
business hours.
(f) Except as provided in this Section 8, no adjustment in respect of any
dividends shall be made during the term of a Warrant or upon the exercise
of a Warrant.
(g) If any capital reorganization, recapitalization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of the
Company's assets to another person or entity, or any other transaction
(collectively, an "Organic Change") shall be effected in such a way that
holders of shares of Common Stock shall be entitled to receive stock,
securities or assets with respect to or in exchange for shares of Common
Stock (such stock, securities or assets being hereinafter referred to as
"substitute property"), then, as a condition of such Organic Change, lawful
and adequate provision shall be made whereby the Purchaser and the
permitted Holder shall thereafter have the right to purchase and receive
upon the basis and upon the terms and conditions specified herein and in
lieu of the shares of Common Stock immediately theretofore purchasable and
receivable upon the exercise of the Warrants, such substituted property as
may be issued or payable with respect to or in exchange for a number of
outstanding shares of Common Stock equal to the number of shares of Common
Stock immediately theretofore purchasable and receivable upon the exercise
of the Warrants had such Organic Change not taken place. Further, in any
such case appropriate provision shall be made with respect to the rights
and interests of the Purchaser and the permitted Holder to the end that the
provision hereof (including without limitation provisions for adjustments
of the Exercise Price and of the number of shares purchasable and
receivable upon the exercise of the Warrants) shall thereafter be
applicable, as nearly as may be, in relation to any substituted property
thereafter purchasable and receivable upon the exercise of the Warrants.
The Company shall not effect any such Organic Change, unless prior to the
consummation thereof the successor entity (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing
the assets shall assume by written instrument approved by the board of
directors of the Company the obligation to deliver to the Holders such
substituted property as, in accordance with the foregoing provisions, the
Holders may be entitled to purchase and receive.
Page 5 of 9
<PAGE>
(h) Notwithstanding any adjustment in the Exercise Price or the number or
kind of shares purchasable upon the exercise of the Warrants pursuant to
this Agreement, certificates for Warrants issued prior or subsequent to
such adjustment may continue to express the same price and number and kind
of Shares as are initially issuable pursuant to this Agreement.
9. FRACTIONAL INTERESTS. The Company shall not be required to issue fractions
--------------------
of Shares on the exercise of Warrants. If more than one Warrant shall be
presented for exercise in full at the same time by the Purchaser or the same
permitted Holder, the number of Shares which shall be issuable upon the exercise
thereof shall be computed on the basis of the aggregate number of Shares
issuable on exercise of the Warrants so presented. If any fraction of a Share
would, except for the provisions of this Section 9, be issuable on the exercise
of any Warrant (or specified portions thereof), the Company shall purchase such
fraction for an amount in cash equal to the same fraction of the current market
price per share of Common Stock (determined as provided in Section 8(d) of this
Agreement) on the date of exercise.
10. REGISTRATION RIGHTS.
-------------------
(a) DEMAND REGISTRATION RIGHTS. The Company covenants and agrees with the
--------------------------
Purchaser and any other or subsequent Holders of the Registrable Securities
(as defined in paragraph (e) of this Section 10) that, upon written request
of the then Holder(s) of at least a majority of the Registrable Securities
under Warrants which were originally issued to the Purchaser, the Company
will file, from time to time as requested, as promptly as practicable and,
in any event, within ninety (90) days after receipt of such written
request, at the sole expense to the Purchaser and/or any other or
subsequent Holders of the Registrable Securities, a registration statement
(the "Registration Statement"), under the Act, registering or qualifying
the Registrable Securities for sale. The Company will use its best
efforts, through its officers, directors, auditors and counsel in all
matters necessary or advisable, to file and cause to become effective such
Registration Statement as promptly as practicable and of a period of two
(2) years thereafter to reflect in the Registration Statement financial
statements which are prepared in accordance with Section 10(a)(3) of the
Act and any facts or event arising that, individually, or in the aggregate,
represent a fundamental and/or material change in the information set forth
in the Registration Statement to enable the Purchaser or any permitted
Holders of the Warrants to, subject to Section 4, exercise such Warrants
and sell Shares, or to enable any holders of Shares to sell such Shares,
during said two-year period. The Holders may sell the Registrable
Securities pursuant to the Registration Statement without exercising the
Warrants.
(b) PIGGYBACK REGISTRATION RIGHTS. The Company covenants and agrees with
-----------------------------
the Purchaser and any subsequent Holders of the Registrable Securities that
if, at any time after the Warrants become exercisable, it proposes to file
a Registration Statement with respect to any class of equity or equity-
related security under the Act in a primary registration on behalf of the
Company and/or in a secondary registration on behalf of holders of such
securities and the registration form to be used may be used for
registration of the Registrable Securities, the Company will give prompt
written notice to the Holders of Registrable Securities (regardless of
whether some of the Holders shall have theretofore availed themselves of
the right provided in Section 10(a) of this Agreement) at the addresses
appearing on the records of the Company of its intention to file a
registration statement and will offer to include in such registration
statement to the maximum extent possible, subject to paragraphs (i) and
(ii) of this paragraph (b), such number of Registrable Securities with
respect to which the Company has received written requests for inclusion
therein within ten (10) business days after the Holder(s) receive
Page 6 of 9
<PAGE>
notice from the Company. All registrations requested pursuant to this
paragraph (b) are referred to herein as "Piggyback Registrations". This
paragraph is not applicable to a registration statement filed by the
Company with the Commission on Forms S-4 or S-8 or any successor forms
thereto.
(i) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
---------------------------------
includes an underwritten primary registration on behalf of such
Company and the underwriter(s) for such offering determines in good
faith and advises the Company in writing that in its/their opinion the
number of Registrable Securities requested to be included in such
registration exceeds the number that can be sold in such offering
without materially adversely affecting the distribution of such
securities by the Company, the Company will include in such
registration (A) first, the securities that the Company proposed to
sell and (B) second, the Registrable Securities requested to be
included in such registration, apportioned pro rata among the Holders
of Registrable Securities and (C) third, securities of the holders of
other securities requesting registration.
(ii) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration
-----------------------------------
consists only of an underwritten secondary registration on behalf of
holders of securities of the Company (other than pursuant to Section
10(a)), and the underwriter(s) for such offering advises the Company
in writing that in its/their opinion the number of Registrable
Securities requested to be included in such registration exceeds the
number which can be sold in such offering without materially adversely
affecting the distribution of such securities by the Company, the
Company will include in such registration (A) first, the securities
requested to be included therein by the holders requesting such
registration and the Registrable Securities requested to be included
in such registration, pro rata among all such holders on the basis of
the number of shares requested to be included by each such holder and
(B) second, other securities requested to be included in such
registration.
(c) OTHER REGISTRATION RIGHTS. In addition to the rights above provided,
-------------------------
the Company will cooperate with the then Holders of the Registrable
Securities in preparing and signing any registration statement, in addition
to the registration statements discussed above, required in order to sell
or transfer the Registrable Securities and will supply all information
required therefor, but such additional registration statement, shall be at
the then Holders' cost and expense; provided, however, that if the Company
-------- -------
elects to register or qualify additional shares of Common Stock, the cost
and expense of such registration statement will be pro rated between the
Company and the Holders of the Registrable Securities according to the
aggregate sales price of the securities being issued.
(d) All registration expenses (as hereinafter defined) in connection with a
Demand or Piggyback Registration shall be borne by the Company and all
selling expenses (as hereinafter defined) in connection with a Demand or
Piggyback Registration shall be borne by the Holders. The term
"registration expenses" shall mean all expenses, except selling expenses,
incurred by the Company in complying with the registration rights granted
in this Section 11, including all registration, qualification, and filing
expenses; printing expenses; escrow fees; fees and disbursements of counsel
for the Company, blue sky fees and expenses; and fees and disbursements of
the Company's independent auditors. The term "selling expenses" shall mean
all underwriting discounts and selling commissions, if any, applicable to
the Registrable Securities and expenses of counsel for the Holders. All
selling expenses shall be borne by the
Page 7 of 9
<PAGE>
Holders in an amount equal to their pro rata share of the Registrable
Securities included in the Registration Statement.
(e) For purposes of this Section 10, (i) the term "Holder" shall be holders
of Shares, and (ii) the term "Registrable Securities" shall mean the
Shares, if issued.
11. VOTING RIGHTS. Nothing contained in this Agreement or in any of the
-------------
Warrants shall be construed as conferring upon the Holders thereof the right to
vote or to receive dividends or to consent or to receive notice as shareholders
in respect of the meetings of shareholders or the election of directors of the
Company or any other matter, or any rights whatsoever as shareholders of the
Company.
12. NOTICES.
-------
(a) Any notice pursuant to this Agreement to be given or made by the Holder
of any Warrant and/or the holder of any Share to or on the Company shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed as follows or to such other address as the Company may designate
by notice given in accordance with this Section 12, to the Purchaser and
any permitted Holders of Warrants and/or the holders of Shares:
GB FOODS CORPORATION
23 Corporate Plaza, Suite 240
Newport Beach, California 92660
Attention: Corporate Secretary
Notices or demands authorized by this Agreement to be given or made by the
Company to or on the Purchaser and any permitted Holder of any Warrant
and/or the holder of any share shall be sufficiently given or made (except
as otherwise provided in this Agreement) if sent by first-class mail,
postage prepaid, addressed to the Purchaser or such Holder or such holder
of Shares at the address of the Purchaser or such Holder or such holder of
Shares as shown on the Warrant Register or the books of the Company, as the
case may be.
(b) If at any time prior to the expiration of the Warrants and their
exercise, any of the following events shall occur:
(i) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend
or distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained
earnings, as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(ii) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefore; or
(iii) a dissolution, liquidation or winding-up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety
shall be proposed; or
Page 8 of 9
<PAGE>
(iv) there shall be any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the
Company with another entity;
then, in any one or more of said events, the Company shall give written
notice of such event at least twenty (20) days prior to the date fixed as a
record date or the date of closing the transfer books for the determination
of the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, options or warrants, or
entitled to vote on such proposed dissolution, liquidation, winding up or
sale. Such notice shall specify such record date or the date of closing
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in
connection with the declaration or payment of any such divided or
distribution, or the issuance of any convertible or exchangeable securities
or subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding-up or sale.
13. GOVERNING LAW. This Agreement and each Warrant issued hereunder shall be
-------------
governed by and construed in accordance with the substantive laws of the State
of Delaware. The Company hereby agrees to accept service of process by notice
given to it pursuant to the provisions of Section 12.
14. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
GB FOODS CORPORATION
By: /s/ William M. Theisen
-------------------------------------
Its: President
------------------------------------
MCGRATH, NORTH, MULLIN & KRATZ, P.C.
By: /s/ Bruce C. Rohde
-------------------------------------
Its: President
------------------------------------
Page 9 of 9
<PAGE>
EXHIBIT 10.13
GB FOODS CORPORATION
NON-STATUTORY
STOCK OPTION AGREEMENT
THIS NON-STATUTORY STOCK OPTION AGREEMENT, hereinafter referred to as the
"Option" or the "Agreement," is made as of the 3rd day of October, 1996, between
GB FOODS CORPORATION, a Delaware corporation (hereinafter referred to as the
"COMPANY") and GEORGE KUBAT (the "OPTIONEE"), whose current business address is:
Phillips Manufacturing, 4601 South 76th Circle, Omaha, Nebraska 68127.
1. GRANT OF OPTION. The Board of Directors of the COMPANY hereby grants
an option on 100,000 shares of common stock of the COMPANY ("Common Stock") to
the OPTIONEE at the price and in all respects subject to the terms, definitions
and provisions of the Agreement.
2. OPTION PRICE. The option price is $6.50 per share.
3. TERM OF OPTION; VESTING. This Option is exercisable as follows:
50,000 shares may be exercised at any time after the grant of this Option until
5:00 P.M. (California time) on October 3, 2001; the remaining 50,000 shares may
be exercised at any time after October 3, 1997 until 5:00 P.M. (California time)
on October 3, 2001, provided that at October 3, 1997 OPTIONEE is an executive
officer of the COMPANY. However, in the event of a change of control of the
Company resulting in the election of any three directors other than the
constituent directors on the date of this Agreement, whether by merger,
acquisition, issuance of shares of Common Stock to a new stockholder(s), or
otherwise, and OPTIONEE is terminated as an executive officer prior to October
3, 1997, the unvested options shall become immediately exercisable and fully
vested. In the event of the death of the OPTIONEE less than one year prior to
the expiration of this Option, the expiration date of this Option shall be
extended to one year from the date of the death of the OPTIONEE.
4. EXERCISE OF OPTION.
4.1 Right to Exercise. During the lifetime of the OPTIONEE, the
Options shall be exercisable only by the OPTIONEE in whole or in part in
accordance with the terms of this Agreement. In the event of the death of the
OPTIONEE, this Option may be exercised by the executors, administrators,
personal representatives, and heirs of the OPTIONEE and by any successor trustee
of a trust to which this Option may have been transferred.
Page 1
<PAGE>
4.2 Method of Exercise. This Option shall be exercisable by a
written notice which shall:
(a) State the election to exercise the Option, the number of
shares in respect of which it is being exercised, the person in whose name the
shares are to be issued (if the shares are issued to individuals), the names,
addresses and Social Security Numbers of such persons; and
(b) Contain such representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as are
required by law may be satisfactory to the COMPANY's counsel; and
(c) Be signed by the person or persons entitled to exercise the
Option and, if the Option is being exercised by any person or persons other than
the OPTIONEE, be accompanied by proof, satisfactory to counsel for the COMPANY,
of the right of such person or persons to exercise the Option.
(d) Be accompanied by a payment for the purchase price of those
shares with respect to which the Option is being exercised in the form of a
certified or bank cashier's or teller's check or paid in accordance with the
provisions of Section 4.4 below. The certificate or certificates for shares of
Common Stock as to which the Option shall be exercised shall be registered in
the name of the person or persons exercising the Option.
4.3 Restrictions on Exercise. As a condition to his exercise of
this Option, the COMPANY may require the person exercising this Option to comply
with applicable laws or regulations.
4.4 Alternative Forms of Payment of the Purchase Price. In
addition to payment of the purchase price of those shares with respect to which
the Option is being exercised in cash, as specified in Section 4.3 (d) above,
the purchase price of the shares with respect to which the Option is being
exercised may be paid (i) by forgiveness of indebtedness owed by the COMPANY to
the OPTIONEE; (ii) by delivery to the COMPANY of shares of Common Stock of the
COMPANY equal in value, based on the "fair market value" (as hereinafter
defined), to the exercise price; (iii) by reducing the number of shares to be
delivered to the OPTIONEE upon exercise of the option by such number of shares
of Common Stock equal in value, based on the "fair market value" (as hereinafter
defined), to the exercise price; or (iv) by the delivery, concurrently with such
exercise, of a properly executed exercise notice for the option and irrevocable
instructions to a broker promptly to deliver to the
Page 2
<PAGE>
COMPANY the purchase price for the shares with respect to which the Option is
being exercised or from the proceeds of a loan being secured by the option
shares. The term "fair market value" shall mean the average over the previous
five trading days of the reported closing sales price on the Nasdaq Small Cap
Market, the Nasdaq National Market System, or such other national securities
exchange on which the COMPANY's shares may be traded, or if not trading on the
Nasdaq Small Cap Market, the Nasdaq National Market System, or a national
securities exchange, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
selected from time to time by the COMPANY for that purpose.
5. TRANSFERABILITY OF OPTION. This Option may be not transferred, except
to a trust established for the benefit of the OPTIONEE or by will or the laws of
descent or distribution, and may be exercised during the lifetime of the
OPTIONEE only by the OPTIONEE. In the event of the death of the OPTIONEE prior
to the exercise of this Option, this Option may be exercised only by the
executors, administrators, personal representatives, or heirs of the OPTIONEE or
by any successor trustee of a trust to which this Option may have been
transferred.
6. STOCK SUBJECT TO THE OPTION. The COMPANY shall set aside 100,000
shares of the Common Stock which it now holds as authorized and unissued shares.
If the Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased shares which were subject thereto
shall be free from any restrictions occasioned by this Option Agreement. If the
COMPANY has been listed on a stock exchange, the COMPANY will not be required to
issue or deliver any certificate or certificates for shares to be issued
hereunder until such shares have been listed (or authorized for listing upon
official notice of issuance) upon each stock exchange on which outstanding
shares of the same class may then be listed and until the COMPANY has taken such
steps as may, in the opinion of counsel for the COMPANY, be required by law and
applicable regulations, including the rules and regulations of the Securities
and Exchange Commission, and state blue sky laws and regulations, in connection
with the issuance or sale of such shares, and the listing of such shares on each
such exchange. The COMPANY will use its best efforts to comply with any such
requirements forthwith upon the exercise of the Option.
7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. If all or any portion of
the Option is exercised subsequent to any stock dividend, split-up,
capitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, separation, reorganization, or other similar
change or transaction of or by the COMPANY, as a result of which shares of any
class shall be issued in respect of outstanding shares of the class covered by
the Option or shares of the class covered by the Option shall be changed into
the same or a different number of shares of the same or another class or
Page 3
<PAGE>
classes, the person or persons so exercising such an Option shall receive, for
the aggregate option price payable upon such exercise of the Option, the
aggregate number and class of shares equal to the number and class of shares he
or she would have had on the date of exercise had the shares been purchased for
the same aggregate price at the date the Option was granted and had not been
disposed of, taking into consideration any such stock dividend, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, separation, reorganization, or other similar
change or transaction; provided, however, that no fractional share shall be
issued upon any such exercise, and the aggregate price paid shall be
appropriately reduced on account of any fractional share not issued. Provided,
however, any shares which are issued at or about this option price or pursuant
to a warrant or options whose exercise price is at or above the exercise price
provided in the agreement shall not be considered to be diluted for the purpose
of this agreement and no adjustment will be made.
8. NOTICES. Each notice relating to this Agreement shall be in writing
and delivered in person or by certified mail to the proper address. Each notice
shall be deemed to have been given on the date it is received. Each notice to
the COMPANY shall be addressed to it at its principal office, at 1100 Newport
Center Drive, Suite 200, Newport Beach, California 92660, to the attention of
the Secretary of the COMPANY. Each notice to the OPTIONEE or other person or
persons then entitled to exercise the Option shall be addressed to the OPTIONEE
or such other person or persons at the OPTIONEE's address set forth in the
heading of this Agreement. Anyone to whom a notice may be given under this
Agreement may designate a new address by notice to that effect.
9. BENEFITS OF AGREEMENT. This Agreement shall inure to the benefit of
and be binding upon each successor of the COMPANY. All obligations imposed upon
the OPTIONEE and all rights granted to the COMPANY under this Agreement shall be
binding upon the OPTIONEE's heirs, legal representatives, and successors. This
Agreement shall be the sole and exclusive source of any and all rights which the
OPTIONEE, his heirs, legal representatives, or successors may have in respect to
the Plan or any options or Common Stock granted or issued thereunder, whether to
him, or herself, or to any other person.
10. RESOLUTION OF DISPUTES. Any dispute or disagreement which should
arise under, or as a result of, or in any way relate to, the interpretation,
construction or application of this Agreement will be determined by the Board of
Directors of the COMPANY. Any determination made hereunder shall be final,
binding, and conclusive for all purposes.
Page 4
<PAGE>
IN WITNESS WHEREOF, the COMPANY and the OPTIONEE have caused this Agreement
to be executed as of the day, month and year first above-written.
COMPANY: GB FOODS CORPORATION
a Delaware corporation
By: /s/ WILLIAM M. THEISEN
--------------------------
WILLIAM M. THEISEN,
Chairman of the Board
By: /s/ BRUCE H. HAGLUND
---------------------------
BRUCE H. HAGLUND,
Secretary
(CORPORATE SEAL)
OPTIONEE: /s/ GEORGE KUBAT
-----------------------------
GEORGE KUBAT
Page 5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GB FOODS
CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 753,601
<SECURITIES> 1,020,893
<RECEIVABLES> 365,048
<ALLOWANCES> 75,613
<INVENTORY> 0
<CURRENT-ASSETS> 2,220,545
<PP&E> 2,209,637
<DEPRECIATION> 1,470,632
<TOTAL-ASSETS> 3,462,096
<CURRENT-LIABILITIES> 492,016
<BONDS> 14,835
0
0
<COMMON> 515,232
<OTHER-SE> 2,379,864
<TOTAL-LIABILITY-AND-EQUITY> 3,462,096
<SALES> 3,080,859
<TOTAL-REVENUES> 4,993,679
<CGS> 2,023,974
<TOTAL-COSTS> 5,026,872
<OTHER-EXPENSES> 15,254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (48,445)
<INCOME-TAX> 0
<INCOME-CONTINUING> (48,445)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,445)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
