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, 1997, there were 181 Green Burrito stores, including seven Company Stores and 174 stores owned by franchisees or third parties ("Franchise Stores"), 134 of which were Green Burrito dual-concept stores.
On July 22, 1997, Fidelity National Financial, Inc. ("Fidelity") purchased 1,000,000 shares of Common Stock of GB Foods Corporation (the "Company") from the former Chief Executive Officer and principal stockholder ("Controlling Shareholder"), for a purchase price of $5,000,000 cash. Fidelity also purchased Common Stock Purchase Warrants ("Warrants") from the Company's Controlling Shareholder pursuant to which Fidelity has the right to acquire 2,500,000 shares of the Company's Common Stock, of which 1,500,000 are immediately exercisable at $5.00 per share (the "$5.00 Warrants") and 1,000,000 are immediately exercisable at $7.00 per share (the "$7.00 Warrants"). The $5.00 Warrants were purchased for $600,000 cash and expire November 23, 2002; the $7.00 Warrants were purchased for $100,000 cash and expire May 1, 2005. Simultaneously with the closing of the transaction, Fidelity transferred 30,000 $5.00 Warrants to its investment advisor.
In a separate transaction, Fidelity also acquired 1,000,000 Warrants exercisable at $7.50 per share (the "$7.50 Warrants") from a law firm which has provided services to the Company. The purchase price of the $7.50 Warrants was $100,000 cash. The $7.50 Warrants expire May 1, 2005.
As a result of the purchase of the Shares and the Warrants, Fidelity beneficially owns 42.1% of the Company, based on 6,571,485 shares outstanding at December 31, 1997 and including the Warrants pursuant to which Fidelity has the right to acquire an additional 3,470,000 shares. In conjunction with the Fidelity purchases, three of the Company's Directors have resigned which included both the Chief Executive Officer and Chief Financial Officer of the Company. Key officers of Fidelity have filled the Director and Officer vacancies.
On December 12, 1997, the Company announced the execution of a letter of intent to acquire all the outstanding capital stock of Timber Lodge Steakhouse, Inc. ("TBRL"). TBRL is a public company traded on Nasdaq under the symbol TBRL and is the operator of the Timber Lodge Steakhouse family-style restaurants. As of
December 31, 1997, TBRL was operating a total of 16 restaurants which were located in the states of Minnesota, Wisconsin, Illinois, Western New York and South Dakota. TBRL's revenues and net income for the fiscal year ended January 1, 1997 were $20,637,000 and $983,000 respectively.
On January 20, 1998, the Company executed a definitive Agreement and Plan of Merger ("Merger Agreement") with TBRL, pursuant to which the Company will acquire one hundred percent of the outstanding capital stock of TBRL. The parties expect to close the transaction in April 1998. Under the terms of the agreement, each share of TBRL common stock will be converted into the right to receive .80 of a share of the Company's common stock together with cash in lieu of any fractional shares (the "Exchange Ratio"). In addition, the agreement has established a collar for the Exchange Ratio of $14.00 on the high end and $7.50 on the low end. If the Company's average closing common stock price during the ten day trading period ending on the second business day prior to the closing, ("Average Closing Stock Price"), exceeds the limits of the collar then the Exchange Ratio will be adjusted. If the Average Closing Stock Price is more than $14.00, the Exchange Ratio shall be reduced to a number (rounded to the nearest 1/10000) equal to the product of the Exchange Ratio multiplied by a fraction, the numerator of which is $14.00 and the denominator of which is the Average Closing Stock Price. If the Average Closing Stock Price is less than $7.50, the Company may elect to increase the Exchange Ratio to the number (rounded to the nearest 1/10000) determined by dividing $7.61 by the Average Closing Stock Price.
The Merger is subject to certain customary conditions, including (i) Fairness Opinions; (ii) approvals from the shareholders of the Company and TBRL; and (iii) the parties obtaining all regulatory approvals, including the Securities and Exchange Commission declaring effective a Registration Statement covering the shares of the Company's common stock to be issued in the Merger. The Merger is also subject to the purchase by TBRL from CKE Restaurants, Inc. ("CKE") (NYSE:CKR) or its affiliate of between twelve (12) and (20) JB's Restaurants for conversion to Timber Lodge Steakhouse restaurants. In this regard, CKE has agreed under the Merger Agreement to negotiate in good faith with TBRL to consummate such purchase and sale. In addition, Fidelity National Financial, Inc. (NYSE:FNF) has agreed under the Merger Agreement that, subject to the approval of the Merger by TBRL's shareholders, it will exercise currently outstanding warrants to purchase shares of the Company's common stock for a cash purchase price aggregating not less than $5,000,000. The Company plans to utilize such proceeds, in part, for the conversion of the JB's Restaurants acquired by TBRL into Timber Lodge Steakhouse restaurants.
On February 19, 1998, the Company entered into an Agreement and Plan of Reorganization (the "Agreement"), pursuant to which the Company shall acquire one hundred percent (100%) of the issued and outstanding capital stock of JB's Restaurants, Inc. ("JB's"), a wholly owned subsidiary of CKE. Under the Agreement, GBFC shall acquire JB's for one million (1,000,000) shares of GBFC Common Stock. GBFC and CKE anticipate that the acquisition will Close on or before March 1, 1998. At the Closing, the business of JB's shall be comprised of forty-eight (48) JB's company-owned restaurants, twenty (20) JB's franchise restaurants, and four (4) Galaxy diner restaurants. The acquisition is subject to certain conditions, including the satisfactory completion of due diligence, delivery by CKE and the approval by GBFC of certain disclosure schedules, the issuance of Fairness Opinions, approvals from the respective Boards of Directors of GBFC and CKE, regulatory approvals, the closing of the previously announced acquisition of twelve (12) JB's restaurants by Star Buffet, Inc., the upstream transfer by way of dividend of sixteen (16) JB's restaurants and certain other assets to CKE. It is the intent of the parties that the transaction qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.
(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 $.99 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 $4.69, 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 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, 1997, 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 76.1% 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 23.9% interest in the profits.
FRANCHISE PROGRAM. As of December 31, 1997, the Company had 174 operating franchises, 134 of which were Green Burrito dual-concept restaurants. See "Green Burrito Dual-Concept Stores" below. Since the inception of the franchise program 47 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 in accordance with their initial franchise agreement. 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 (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, 1997, all Carl's Jr./Green Burrito stores were in compliance with this requirement. As of December 31, 1997, there were 115 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, one of which is still currently operating. The test, as provided in the test-store agreement, concluded on December 26, 1995. As of December 31, 1997, 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. However, the test period has been informally extended as a result of the recent acquisition of Hardee's by CKE. The continued conversion of additional Hardee's stores will be contingent upon the success and consumer acceptance of the converted stores.
Long John Silvers/Green Burrito. During July 1997, the company executed a dual-concept franchise agreement with American Seafoods Partners ("ASP"), which is a wholly owned subsidiary of Restaurant Management Company ("RMC") a Franchisee operator of 120 Pizza Hut stores and 30 Long John Silver stores. One store was converted in LasVegas New Mexico and opened in September 1997. The continued conversion of additional Long John Silver dual-concept stores will be contingent upon the success and consumer acceptance of the converted store.
Texaco/CKE/Green Burrito. During October 1997, the Company executed a dual-concept franchise agreement with CKE and Texaco Refining and Marketing ("Texaco") where by they will co-develop 50 Carl's Jr./Texaco dual-brand locations including 15 branded with Green Burrito. The new locations will be developed in the Western United States over the next three years.
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.
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, 1997, the Company had 78 employees, of whom 12 were employed in the corporate office and 66 were employed in the seven Company Stores. Of the total employees in the Company Stores, 9 were employed as salaried managers and 57 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.
ITEM 2. PROPERTIES.
The Company leases retail locations for its restaurant operations as described below:
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 Anaheim, California in a 650 square foot facility which is leased through October 1998, at the rate of approximately $2,500 per month from CKE.
The Company is also the primary lessee of four 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 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. A 5,300 square foot facility which is leased through July 1998 at the rate of $9,300 per month and is subleased by the Company through the lease terms for an amount in excess of the Company's obligation
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
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.
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 December 31, 1997, the approximate number of record holders of the Company's common stock was 209; however, the Company believes that the number of beneficial owners exceeds 1,000 persons.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended December 31, 1997 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.
No dividends were paid or declared during the five years ended December 31, 1997.
ITEM 7.
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, 1997 to the Year Ended December 31, 1996. Total revenues from operations for the year ended December 31, 1997 were $5,380,000, an increase of 8% from $4,994,000 earned in the comparable period in 1996. Revenues for the years ended December 31, 1997 and 1996, respectively, included $3,019,000 and $2,988,000 from restaurant operations, $1,229,000 and $1,069,000 from royalties, $409,000 and $390,000 from franchise fees, $495,000 and $349,000 from other sources, $143,000 and $105,000 from interest income, and $85,000 and $93,000 from frozen food operations.
Revenues from restaurant operations for 1997 increased 1% to $3,019,000 compared to $2,988,000 earned in 1996, as the result of an increase in same store sales. Store-operating months decreased to 84 in 1997 from 86 in 1996. The Company anticipates revenues from restaurant operations in 1998 to remain consistent with revenues from 1997. At December 31, 1997 and 1996, respectively, seven Company Stores were open (including the one consolidated partnership-owned store in both years).
Revenues from franchise royalties increased 15% to $1,229,000 for the year ended December 31, 1997 from $1,069,000 earned in the comparable period in 1996. 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 1997 and 1996.
Royalty income from dual-concept Franchise Stores for the year ended December 31, 1997 increased $192,000, to $579,000 in 1997 from $387,000 earned in 1996, as the result of the increase in store operating months to 1,291 in 1997 compared with 833 in 1996. The increase in store operating months is the result of a net increase of 50 dual-concept franchise stores during 1997. The net increase of 50 dual-concepts stores in 1997 is the result of 52 CKE openings plus 1 Long John Silver opening, less 3 WSMP closings. Royalty income from free-standing Franchise Stores for the year ended December 31, 1997 decreased $32,000 from the amount earned in 1996 as a result of the reduction in store-operating months. The store operating months decreased as a result of the closure of 3 stores. The Company anticipates royalties earned from dual-concept Franchise Stores to grow in 1998 while royalties earned in 1998 from free-standing Franchise Stores are anticipated to remain comparable to 1997 royalties.
Revenues from franchise fees increased 5% to $409,000 for the year ended December 31, 1997 from $390,000 earned in the comparable period in 1996, primarily due to the opening of 53 dual-concept stores during 1997 as compared to a net 44 openings in 1996. Although there were 59 openings in 1996, the 15 Hardee's store openings were considered "test stores" and did not pay any franchise fees. Franchise fees from dual-concept stores range from $5,000 to $7,500 per store. At a minimum, the Company expects to earn franchise fees in the year ended December 31, 1998 at a level comparable to 1997.
Revenues from other sources increased $145,000 to $494,000 for the year ended December 31, 1997 from $349,000 earned in the comparable period in 1996. Included in other revenue are volume incentives received from various vendors.
Revenues from frozen food operations decreased 9% to $85,000 for the year ended December 31, 1997 from $93,000 earned in the comparable period in 1996. 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 65% for December 31, 1997 and 67% for 1996. Cost of sales for the years ended December 31, 1997 and 1996, respectively, included $1,077,000 and $1,132,000 from food and packaging and $871,000 and $880,000 from payroll and other employee benefits. The favorable decrease in cost of sales was the direct result of lower food and packaging costs negotiated with vendors in 1997.
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 27% for both the years ended December 31, 1997 and 1996. Occupancy and other operating costs for the years ended December 31, 1997 and 1996 totaled $821,000 and $810,000, respectively.
The frozen foods division incurred operating costs of $76,000 and $81,000 resulting in income of $9,000 and $12,000 for the years ended December 31, 1997 and 1996 respectively.
General and administrative expense for the years ended December 31, 1997 and 1996 was $1,667,000 and $2,123,000, respectively, representing 31% and 43% of total revenue for each respective year. The decrease in general and administrative expenses is primarily the result of decreased corporate expenses relating to the change of control and relocation and downsizing of the corporate office and staff.
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 a 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 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. 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.
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 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 store 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.
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.
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 for the year ended December 31, 1996, compared with $805,000 for 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.
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. On March 1, 1997 the California statutory minimum wage was increased to $5.00 per hour and again increased on September 1, 1997 to $5.15 per hour. At September 1, 1997, approximately 20 of the 57 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.
Liquidity and Capital Resources. The Company's cash and short-term investments increased $1,678,000 to $3,453,000 at December 31, 1997 compared to $1,775,000 at December 31, 1996, due to increases in cash flow from operations and issuances of common stock. Net cash provided by operating activities was $1,142,000 in 1997 as compared to $265,000 in 1996. The increase was attributed to improved operating results and collections of notes receivable.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements and Schedule:
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.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------
To the Board of Directors and Shareholders of GB Foods Corporation
We have audited the accompanying consolidated balance sheets of GB Foods Corporation as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of GB Foods Corporation as of December 31, 1997 and 1996, and the consolidated results of its operations and its consolidated cash flows for the years then ended in conformity with generally accepted accounting principles.
We have also audited Schedule II of GB Foods Corporation for the years ended December 31, 1997 and 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be included therein.
/s/ GRANT THORNTON LLP
Irvine, California January 30, 1998, except for Note 16 as to which the date is February 19, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------------------
To the Board of Directors and Shareholders of GB Foods Corporation
We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows of GB Foods Corporation and its subsidiary (the "Company") for the year ended December 31, 1995. In connection with our audit of the consolidated financial statements, we also have audited the consolidated financial statement schedule for the year 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 results of the Company's operations and their cash flows for the year 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.
/s/ CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California February 23, 1996
GB FOODS CORPORATION Consolidated Balance Sheets
ASSETS
The accompanying notes are an integral part of the consolidated financial statements.
GB FOODS CORPORATION Consolidated Statements of Operations
The accompanying notes are an integral part of the consolidated financial statements.
GB FOODS CORPORATION Consolidated Statements of Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995
The accompanying notes are an integral part of the consolidated financial statements.
GB FOODS CORPORATION Consolidated Statements of Cash Flows
(continued)
GB FOODS CORPORATION Consolidated Statements of Cash Flows - Continued
The accompanying notes are an integral part of the consolidated financial statements.
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, 1997, 1996 and 1995 was $55,347, $56,913, and $86,873, 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.
Basic and diluted net income (loss) per share --------------------------------------------- Net income (loss) per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which superseded APB Opinion No. 15. Net income (loss) per share for all periods presented has been restated to reflect the adoption of SFAS 128. Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
(continued)
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 $5,000 to $25,000 for each franchise restaurant pursuant to the respective franchise agreement.
Following is a summary of franchise store activity:
As of December 31, 1997, CKE Restaurants, Inc. (CKE) owned and operated 115 dual-concept franchise stores. Franchise revenues generated from the CKE dual-concept franchise stores were approximately $942,000 for the year ended December 31, 1997, which represented approximately 18% of total revenues.
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:
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
2. Notes receivable (continued) ----------------------------
Included in notes receivable at December 31, 1997 and 1996, is an installment note receivable totaling $384,197 and $454,829, 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, 1997 and 1996, is an installment note totaling $91,424 and $98,787, 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, 1997 and 1996.
3. Equipment and improvements --------------------------
Equipment and improvements, at cost, are as follows at December 31:
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 was comprised of notes payable to banks at interest rates ranging from 7% to 9%, which were collateralized by automobiles. All the notes were paid off during 1997.
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 23.9% interest in the profits of the store. GB-Glendora had net income of $48,910, $53,064 and $59,403 in 1997, 1996 and 1995, respectively.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
6. Income taxes ------------
A reconciliation between the actual income tax provision (benefit) and the federal statutory rate follows:
At December 31, 1997, the Company had a net operating loss carryforward for federal tax purposes of approximately $11,906,000 which, if unused to offset future taxable income, will expire between 2008 and 2012, and approximately $5,694,000 for state tax purposes which will expire if unused between 1999 and 2002.
A valuation allowance has been recognized for 1997 and 1996 to offset the related deferred tax assets due to the uncertainty of realizing any benefit therefrom. During 1997, 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, 1997 and 1996 are as follows:
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.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
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 the Company's former Chief Executive Officer and Chairman, 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.
On July 22, 1997, the Company exercised its right to redeem all the rights under the July 9, 1996 Stockholders Rights Agreement for an exercise price of $.001 per right or total consideration of $6,494.
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.
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 was 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.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
9. Issuance of common stock and common stock purchase warrants (continued) -----------------------------------------------------------------------
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 former President and Chief Executive Officer, the Company issued a common stock purchase warrant to its then 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.
On July 22, 1997, Fidelity National Financial, Inc. ("Fidelity") purchased 1,000,000 shares of Common Stock of GB Foods Corporation (the "Company") from the former Chief Executive Officer and principal stockholder ("Controlling Shareholder"), for a purchase price of $5,000,000 cash. Fidelity also purchased Common Stock Purchase Warrants ("Warrants") from the Company's Controlling Shareholder pursuant to which Fidelity has the right to acquire 2,500,000 shares of the Company's Common Stock, of which 1,500,000 are immediately exercisable at $5.00 per share (the "$5.00 Warrants") and 1,000,000 are immediately exercisable at $7.00 per share (the "$7.00 Warrants"). The $5.00 Warrants were purchased for $600,000 cash and expire November 23, 2002; the $7.00 Warrants were purchased for $100,000 cash and expire May 1, 2005. Simultaneously with the closing of the transaction Fidelity transferred 30,000 Warrants with an exercise price of $5.00 to its investment advisor.
In a separate transaction, Fidelity also acquired 1,000,000 Warrants exercisable at $7.50 per share (the "$7.50 Warrants") from the aforementioned law firm which had provided services to the Company. The purchase price of the $7.50 Warrants was $100,000 cash. The $7.50 Warrants expire May 1, 2005.
As a result of the purchase of the Shares and the Warrants, Fidelity beneficially owns 42.1% of the Company, based on 6,571,485 shares outstanding at December 31, 1997 and including the Warrants pursuant to which Fidelity has the right to acquire an additional 3,470,000 shares. In conjunction with the Fidelity purchases, three of the Company's Directors have resigned which included both the Chief Executive Officer and Chief Financial Officer of the Company. Key officers of Fidelity have filled the Director and Officer vacancies.
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. On May 5, 1997, the Board of Directors extended the terms of the escrow through June 30, 1998.
Warrant transactions for 1997, 1996 and 1995 described above are as follows:
(continued)
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. During 1995, the Company granted options for the purchase of 44,000 shares of the Company's common stock to employees. The exercise price of the options were $5.75. As of December 31, 1997, 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, 1997, there are no remaining options available for grant under this plan.
Other options issued --------------------
On December 23, 1997, the Company granted an option for the purchase of 50,000 shares of the Company's common stock at its market price of $10.38 per share to an officer of the Company. The shares vest one year from the date of grant.
On August 26, 1997, the Company granted options for the purchase of 445,000 shares of the Company's common stock at its market price of $8.63 per share to officers and directors of the Company. The shares vest one year from the date of grant.
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. The officer resigned in July 1997 and the unvested shares were immediately vested. No options have been exercised.
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. The exercise price of the options ranged from $5.75 to $7.00.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
10. Stock-based compensation plans (continued) ------------------------------------------
Combined plan transactions for 1997, 1996 and 1995 for the ISOP's, NQSOP's, and other options described above are as follows:
The following information applies to options outstanding at December 31, 1997:
(continued)
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 options and warrants at the grant dates consistent with the method of SFAS No. 123, the Company's net earnings and earnings per share would have been:
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. 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 1997, 1996, and 1995:
Expected life (years)........... 3 - 10 Risk-free interest rate ........ 5.5% Volatility...................... 30% - 70%
The weighted fair value of options granted during the years ended December 31, 1997, 1996, and 1995 for which the exercise price approximated the market price on the grant date was $3.22, $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.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
11. Basic and diluted net income (loss) per share ---------------------------------------------
The following table illustrates the required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations.
12. 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. A director of the Company provided legal services to the Company valued at $55,261, $48,467 and $95,055 during 1997, 1996 and 1995, respectively.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
13. 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 1997, 1996, or 1995.
In October 1997, the Company relocated the Corporate office and signed a new one year lease. The old office has been subleased for an amount greater than the Company's current obligation.
As of December 31, 1997, future minimum rental payments and sublease income under all non-cancelable operating leases for years ending December 31 are as follows:
Rental expense under all agreements for the years ended December 31, 1997, 1996, and 1995 was $383,674, $489,046, and $624,787, respectively. Sublease rental income for the years ended December 31, 1997, 1996 and 1995 was $383,405, $167,556 and $115,163 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.
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.
14. Fair value of financial instruments -----------------------------------
The carrying amount of the Company's financial instruments approximates their estimated fair value at December 31, 1997 and 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.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
15. Recent Accounting Pronouncements --------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement, but requires that an enterprise display an amount representing total comprehensive income for the period covered by that financial statement. SFAS 130 requires an enterprise to (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Management has determined that the adoption of SFAS 130 will not have a material impact on the Company's financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends FASB Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the special disclosure requirements for previously unconsolidated subsidiaries. SFAS 131 requires, among other items, that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the revenues derived from the enterprise's products or services and major customers. SFAS 131 also requires that the enterprise report descriptive information about the way that the operating segments were determined and the products and services provided by the operating segments. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years to be restated. SFAS 131 need not be applied to interim financial statements in the initial year of application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. Management has determined that the adoption of SFAS 131 will not have a material impact on the Company's financial reporting.
16. Subsequent Events -----------------
On December 12, 1997, the Company announced the execution of a letter of intent to acquire all the outstanding capital stock of Timber Lodge Steakhouse, Inc. ("TBRL"). TBRL is a public company traded on Nasdaq under the symbol TBRL and is the operator of the Timber Lodge Steakhouse family-style restaurants. As of December 31, 1997, TBRL was operating a total of 16 restaurants which were located in the states of Minnesota, Wisconsin, Illinois, Western New York and South Dakota. TBRL's revenues and net income for the fiscal year ended January 1, 1997 were $20,637,000 and $983,000 respectively.
On January 20, 1998, the Company executed a definitive Agreement and Plan of Merger ("Merger Agreement") with TBRL, pursuant to which the Company will acquire one hundred percent of the outstanding capital stock of TBRL. The parties expect to close the transaction in April 1998. Under the terns of the agreement, each share of TBRL common stock will be converted into the right to receive .80 of a share of the Company's common stock together with cash in lieu of any fractional shares (the "Exchange Ratio"). In addition, the agreement has established a collar for the Exchange Ratio of $14.00 on the high end and $7.50 on the low end. If the Company's average closing common stock price during the ten day trading period ending on the second business day prior to the closing, ("Average Closing Stock Price"), exceeds the limits of the collar then the Exchange Ratio will be adjusted. If the Average Closing Stock Price is more than $14.00, the Exchange Ratio shall be reduced to a number (rounded to the nearest 1/10000) equal to the product of the Exchange Ratio multiplied by a fraction, the numerator of which is $14.00 and the denominator of which is the Average Closing Stock Price. If the Average Closing Stock Price is less than $7.50, the Company may elect to increase the Exchange Ratio to the number (rounded to the nearest 1/10000) determined by dividing $7.61 by the Average Closing Stock Price.
(continued)
GB FOODS CORPORATION Notes to Consolidated Financial Statements
16. Subsequent Events (continued) -----------------------------
The Merger is subject to certain customary conditions, including (i) Fairness Opinions; (ii) approvals from the shareholders of the Company and TBRL; and (iii) the parties obtaining all regulatory approvals, including the Securities and Exchange Commission declaring effective a Registration Statement covering the shares of the Company's common stock to be issued in the Merger. The Merger is also subject to the purchase by TBRL from CKE Restaurants, Inc. ("CKE") (NYSE:CKR) or its affiliate of between twelve (12) and (20) JB's Restaurants for conversion to Timber Lodge Steakhouse restaurants. In this regard, CKE has agreed under the Merger Agreement to negotiate in good faith with TBRL to consummate such purchase and sale. In addition, Fidelity National Financial, Inc. (NYSE:FNF) has agreed under the Merger Agreement that, subject to the approval of the Merger by TBRL's shareholders, it will exercise currently outstanding warrants to purchase shares of the Company's common stock for a cash purchase price aggregating not less than $5,000,000. The Company plans to utilize such proceeds, in part, for the conversion of the JB's Restaurants acquired by TBRL into Timber Lodge Steakhouse restaurants. The Chairman and Chief Executive Officer of Fidelity is also the Chairman and Chief Executive Officer of CKE.
On February 19, 1998, the Company entered into an Agreement and Plan of Reorganization (the "Agreement"), pursuant to which the Company shall acquire one hundred percent (100%) of the issued and outstanding capital stock of JB's Restaurants, Inc. ("JB's"), a wholly owned subsidiary of CKE. Under the Agreement, GBFC shall acquire JB's for one million (1,000,000) shares of GBFC Common Stock. GBFC and CKE anticipate that the acquisition will Close on or before March 1, 1998. At the Closing, the business of JB's shall be comprised of forty-eight (48) JB's company-owned restaurants, twenty (20) JB's franchise restaurants, and four (4) Galaxy diner restaurants. The acquisition is subject to certain conditions, including the satisfactory completion of due diligence, delivery by CKE and the approval by GBFC of certain disclosure schedules, the issuance of Fairness Opinions, approvals from the respective Boards of Directors of GBFC and CKE, regulatory approvals, the closing of the previously announced acquisition of twelve (12) JB's restaurants by Star Buffet, Inc., the upstream transfer by way of dividend of sixteen (16) JB's restaurants and certain other assets to CKE. It is the intent of the parties that the transaction qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended.
GB FOODS CORPORATION
Schedule II VALUATION AND QUALIFYING ACCOUNTS
ITEM 9.
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 SaddingtonoCacciamatta), to Grant Thornton LLP.
ITEM 10.
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, 1997.
Director Name of Nominee Age Since Position with the Company - --------------- --- -------- ------------------------- William P. Foley, II 53 1997 Chairman and Director Andrew F. Puzder 47 1997 Chief Executive Officer and Director Frank P. Willey 44 1997 Director Bruce H. Haglund 46 1989 Director T.Anthony Gregory 59 1989 Director
William P. Foley, II became Chairman of the Board and a Director of the Company in July 1997. Mr. Foley is also Chairman of the Board and Chief Executive Officer of Fidelity, a company engaged in title insurance and related services. Mr. Foley is also the Chairman of the Board and Chief Executive Officer of CKE, a company engaged in the fast food business. He is also a member of the Boards of Directors of Rally's, Checkers, Data Works Corporation and Micro General Corporation.
Andrew F. Puzder became Chief Executive Officer and a Director of the Company in July 1997. Mr. Puzder also serves as an Executive Vice President and Chief Corporate Counsel for CKE. Mr. Puzder is also an Executive Vice President for Fidelity. Mr. Puzder has been with Fidelity since January 1995. From March 1994 to December 1994, he was a partner with the law firm of Stradling, Yocca, Carlson & Rauth. Prior to that, he was a partner with the law firm of Lewis, D'Amato, Brisbois & Bisgard, from September 1991 through March 1994, and he was a partner of the Stolar Partnership from February 1984 through September 1991.
Frank P. Willey became a Director in July 1997. He is also the President of Fidelity National Financial, Inc. and has been a director since February 1984. He was the General Counsel of Fidelity National Financial, Inc. from 1984 to January 1995. Mr. Willey also serves on the Boards of Directors of CKE, Southern Pacific funding Corporation, and Ugly Duckling Holdings, Inc.
Bruce H. Haglund has served as a Director of the Company since 1989. 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. He is also a director of Aviation Distributors, Inc.
T. Anthony Gregory has served as a Director of the Company since 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
Andrew F. Puzder, see "Directors" above.
Nicholas J. Caddeo, 51 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., 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.
Gary R. Nelson, 50 was appointed Executive Vice President, Chief Financial Officer in August 1997. Mr. Nelson also serves as the Senior Vice President of Mergers and Acquisitions for Fidelity National Title Insurance Company since 1992. Mr. Nelson previously served as the Senior Vice President, Chief Financial Officer and Treasurer of Fidelity National Financial, Inc. from 1988 to 1991. Mr. Nelson is a Certified Public Accountant.
M'Liss Jones Kane, 45 was appointed Vice President-Secretary in August 1997. Mrs. Kane also serves as the Senior Vice President Corporate Cousel and Corporate Secretary for Fidelity National Financial, Inc. since 1995. Mrs. Kane also serves as Corporate Counsel and Assistant Secretary of CKE. Mrs. Kane previously served as Vice President, General Counsel and Secretary of ICN Biomedicals, Inc. and subsequently in addition became Vice President, general Counsel of SPI Pharmaceuticals, Inc.
Carl A. Strunk, 59 was appointed Executive Vice President, Finance in December 1997. Mr. Strunk also serves as Executive Vice President , Chief Financial Officer for CKE. He also serves as the Executive Vice President, Finance for Fidelity National Financial, Inc. and has been with Fidelity since 1992. Mr. Strunk previously served as President of Land Resources Corporation from 1986 to 1991. Mr. Strunk is a Certified Public Accountant and is also a member of the Board of Directors of Micro General Corporation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the compensation of William P. Foley, II, the Company's Chairman of the Board and Director, Andrew F. Puzder, the Company's Chief Executive Officer, Nicholas J. Caddeo, the Company's Chief Operating Officer, and Gary R. Nelson, the Company's Chief Financial Officer, for each of the three years in the period ended December 31, 1997.
SUMMARY COMPENSATION 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 $25,000 or 10% of such cash compensation. (2) Became Chairman of the Board and a Director in August 1997. (3) Became Chief Executive Officer in August 1997. (4) Became Chief Financial Officer in August 1997.
OPTIONS GRANTED IN FISCAL YEAR 1997
During the fiscal year ended December 31, 1997, non-qualified stock options were granted to William P. Foley, II, Andrew F. Puzder, Nicholas J. Caddeo and Gary R. Nelson at an exercise price of $8.63 per share, 150,000, 100,000, 25,000 and 50,000 shares respectively. The options vest at the end of one year from issuance.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1997 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, 1997 and the value of any in-the-money options, assuming that the value of the shares was $10.88, the fair market value of the Company's common stock on December 31, 1997.
COMPENSATION OF THE BOARD OF DIRECTORS
The members of the Board of Directors who are not employees 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. Effective August 1997, Members of the Board of Directors were granted an annual grant of 20,000 options per year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of December 31, 1997, 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 6,571,485 shares outstanding as of December 31, 1997.
(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.
(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, 1997 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, 1997 have been exercised.
(3) Unless otherwise indicated, the address of each stockholder listed is 1200 North Harbor Blvd., Anaheim, California 92803.
(4) Assumes 10,712,373 shares outstanding, including 6,571,485 shares currently outstanding and 4,140,888 issuable upon exercise of presently exercisable stock options and warrants held by the above-listed shareholders.
(5) Includes 3,470,000 shares issuable upon the exercise of presently exercisable warrants on the basis of 10,712,373 shares outstanding as set forth in footnote 4 above.
(6) Includes 500,000 shares issuable upon the exercise of presently exercisable warrants. Also includes 107,286 shares held by Gemini Aviation and Marine Services, Inc. which is a corporation wholly owned by Mr. Theisen.
(7) Includes 74,194 shares issuable upon the exercise presently exercisable nonstatutory stock options.
(8) Includes 89,194 shares issuable upon the exercise of presently exercisable nonstatutory stock options.
(9) Includes 7,500 shares issuable upon the exercise of presently exercisable incentive stock options.
(10) Excludes the 4,509,500 beneficial ownership of all Fidelity shares as controlled by William P. Foley, II.
(11) Includes an aggregate of 170,888 shares issuable upon the exercise of presently exercisable stock options and all the Fidelity shares as controlled by William P. Foley, II..
ITEM 13.
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.
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 1997 of $33,886.
PART IV
ITEM 14.
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...................34
3. Index to Exhibits
Exhibit 11 Calculation of Earnings per share.....................42
(b) Reports on Form 8-K
On July 22, 1997, the Company filed a Special Report on Form 8-K regarding a change of control which occurred on July 22, 1997 when Fidelity National Financial Inc. purchased 1,000,000 shares of the Company's common stock and 3,500,000 common stock purchase warrants.
On December 12, 1997, the Company filed a Special Report on Form 8-K announcing the execution of a Letter of Intent whereby the Company will acquire all the outstanding capital stock of Timber Lodge Steakhouses, Inc. a public company trading under the symbol TBRL on the Nasdaq Exchange.
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.
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/ Andrew F. Puzder ----------------------------- Andrew F. Puzder Chief Executive Officer
Date: February 19, 1998
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.
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. All rights were redeemed on July 22, 1997 (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.The Warrant was purchased by Fidelity on July 22, 1997 (7)(9) 10.13 Stock Option Agreement between the Company and George J. Kubat dated October 3, 1996 (8) 10.14 Fidelity Stock and Warrant Purchase Agreements dated July 22, 1997 (9) 10.15 Letter of Intent to acquire stock of Timber Lodge Steakhouse dated December 12, 1997 (10) 11 Computation of earnings per share 17 Board of Directors Letters of Resignation dated July 22, 1997 for William M. Theisen, George L. Kubat, and Michael J. Scherr (9) 21 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 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 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. (8) Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference (9) Filed with the Company's Report on form 8-K for July 22, 1997 and incorporated by reference (10) Filed with the Company's Report on Form 8-K for December 12, 1997 and incorporated by reference