-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AOZinT1TPBTnUOCkJ7WHOJkvotDxW5wJ4IsIPa1YwbZvcZeVUN/NOFZ+4qTXeM0R AcXNXHGQV7MWmcPzbQGJqg== 0001012870-98-002397.txt : 19980915 0001012870-98-002397.hdr.sgml : 19980915 ACCESSION NUMBER: 0001012870-98-002397 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BARBEQUES GALORE LTD CENTRAL INDEX KEY: 0001047326 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 000000000 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: SEC FILE NUMBER: 333-37259 FILM NUMBER: 98709057 BUSINESS ADDRESS: STREET 1: 15041 STREET 2: BAKE PARKWAY #A CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7145972400 MAIL ADDRESS: STREET 1: 15041 BAKE PARKWAY A CITY: IRVINE STATE: CA ZIP: 92718 6-K 1 FORM 6-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________________ FORM 6-K REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 OR 15D-16 OF THE SECURITIES EXCHANGE ACT OF 1934 ______________________________ For the quarter ended July 31, 1998 BARBEQUES GALORE LIMITED ACN 008 577 759 327 Chisholm Road, Auburn, New South Wales, 2144, Australia Registrant's telephone number, including area code 61-2-9704-4177 -------------- [Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.] Form 20-F X Form 40-F ______________ ----------- ______________________________ [Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.] Yes _______________ No X ---------------- 1 FORM 6-K FOR THE QUARTER ENDED JULY 31, 1998 INDEX
PART 1. FINANCIAL INFORMATION Page No. -------- ITEM 1. Condensed Consolidated Balance Sheets as of July 31, 1998 and January 31, 1998 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended July 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 22 PART II. OTHER INFORMATION 23 ITEM 1. Legal Proceedings 23 ITEM 2. Changes in Securities and Use of Proceeds 23 ITEM 3. Default Upon Senior Securities 23 ITEM 4. Submission of Matters to a Vote of Security Holders 23 ITEM 5. Other Information 25 ITEM 6. Exhibits and Current Reports on Form 6-K 26 SIGNATURES
2 BARBEQUES GALORE LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ITEM 1. FINANCIAL STATEMENTS.
JANUARY 31, JULY 31, 1998 1998 ----------- ----------- (UNAUDITED) In A$ thousands, except share and per share data ASSETS Current assets: Cash and cash equivalents $ 166 $ 50 Accounts receivable, net of allowance of $387 at July 31, 1998 and $497 at January 31, 1998 9,862 8,960 Receivables from affiliates 143 - Inventories (Note 2) 43,030 56,412 Deferred income taxes 2,031 2,324 Prepaid expenses and other current assets 1,079 1,873 ---------- ---------- Total current assets $ 56,311 $ 69,619 Non-current assets: Receivables from affiliates 642 792 Property, plant and equipment, net of accumulated depreciation of $18,307 at July 31, 1998 and $16,741 at January 31, 1998 21,038 30,162 Goodwill, net of accumulated amortization of $338 at July 31, 1998 and $293 at January 31, 1998 1,507 1,462 Deferred income taxes 1,194 1,367 Other non-current assets 1,382 1,444 ---------- ---------- Total assets $ 82,074 $104,846 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank overdraft - 4,949 Accounts payable and accrued liabilities 16,648 20,532 Payables to related parties - 53 Payables to affiliates - 381 Current maturities of long-term debt 198 103 Current portion of obligations under capital leases 1,729 2,023 Income taxes payable 819 - ---------- ---------- Total current liabilities $ 19,394 $ 28,041 Non-current liabilities: Long-term debt 14,716 26,115 Obligations under capital leases, excluding current portion 3,405 4,684 Other long-term liabilities 632 908 ---------- ---------- Total liabilities $ 38,147 $ 59,748 ---------- ---------- Shareholders' equity: Ordinary Shares, $3.64 par value; 27,437,853 authorized shares; 4,541,652 shares issued and outstanding 16,532 16,532 Additional paid-in capital 24,554 24,204 Foreign currency translation adjustment 1,177 2,209 Retained earnings 1,664 2,153 ---------- ---------- Total shareholders' equity $ 43,927 $ 45,098 ---------- ---------- Total liabilities and shareholders' equity $ 82,074 $104,846 ========== ==========
3 BARBEQUES GALORE LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JULY 31, JULY 31, JULY 31, JULY 31, 1997 1998 1997 1998 ----- ---- ---- ---- (UNAUDITED) (UNAUDITED) In A$ thousands, except share and per share data Net sales $40,028 $54,433 $70,394 $91,177 Cost of goods sold, warehouse, distribution and occupancy costs 27,529 36,492 48,420 61,609 ------- ------- ------- ------- Gross profit 12,499 17,941 21,974 29,568 Selling, general and administrative expenses 11,930 15,273 21,728 27,735 Store pre-opening costs 95 282 209 429 Relocation and closure costs - - - 15 ------- ------- ------- ------- Operating income 474 2,386 37 1,389 Equity in income of affiliates, net of tax 138 138 188 234 Interest expense 881 446 1,760 834 ------- ------- ------- ------- (Loss) income before income taxes (269) 2,078 (1,535) 789 Income tax (benefit) expense (83) 802 (649) 300 ------- ------- ------- ------- Net (loss) income (186) 1,276 (886) 489 ======= ======= ======= ======= Basic earnings per share $(0.10) $0.28 $(0.48) $0.11 ======= ======= ======= ======= Diluted earnings per share $(0.10) $0.28 $(0.48) $0.11 ======= ======= ======= ======= Weighted average shares outstanding (in thousands) 1,844 4,542 1,844 4,542 ======= ======= ======= =======
4 BARBEQUES GALORE LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JULY 31, JULY 31, JULY 31, JULY 31, 1997 1998 1997 1998 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) In A$ thousands Cash flows from operating activities: Net (loss) income $ (186) $ 1,276 $ (886) $ 489 Non-cash charges, net 443 117 572 1,042 Changes in operating assets and liabilities Receivables and prepaid expenses (406) (1,481) (786) 99 Inventories (4,621) (9,009) (8,309) (13,256) Other assets (112) 566 (130) (24) Accounts payable and accrued liabilities (66) 3,243 1,075 4,997 ------- ------- ------- -------- Net cash used in operating activities (4,948) (5,288) (8,464) (6,653) ------- ------- ------- -------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment 75 - 75 11 Capital expenditures (1,461) (3,649) (1,565) (8,618) Loan repayments received - 135 50 97 ------- ------- ------- -------- Net cash used in investing activities (1,386) (3,514) (1,440) (8,510) ------- ------- ------- -------- Cash flows from financing activities: Repayment of long-term debt (5,177) (1,205) (6,389) (8,997) Proceeds from long-term debt 7,654 8,354 13,019 20,354 Initial public offering costs - (211) - (367) Bank overdraft proceeds 4,082 2,339 4,358 4,949 Principal payments under capital leases (231) (456) (588) (892) Dividend paid - - (499) - ------- ------- ------- -------- Net cash provided by financing activities 6,328 8,821 9,901 15,047 ------- ------- ------- -------- Effects of exchange rate fluctuations 6 - 6 - ------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents - 19 3 (116) Cash and cash equivalents at beginning of period 33 31 30 166 ------- ------- ------- -------- Cash and cash equivalents at end of period $ 33 $ 50 $ 33 $ 50 ======= ======= ======= ========
5 BARBEQUES GALORE LIMITED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States for interim financial information and Rule 10-01 of Regulation S- K. As a result, the information contained in these unaudited consolidated financial statements and footnotes is condensed from that which would appear in annual consolidated financial statements and does not contain all of the information and footnotes required by United States generally accepted accounting principals for complete financial statements. Accordingly, these condensed consolidated financial statements should be reviewed in conjunction with the audited consolidated financial statements and related notes contained in Amendment No. 1 to the Annual Report on Form 20-F/A (File No. 333-37259) for the fiscal year ended January 31, 1998, filed by Barbeques Galore Limited (the "Company") with the Securities and Exchange Commission (the "Commission") on May 20, 1998. The unaudited condensed consolidated financial statements as of July 31, 1998 and for the three and six months ended July 31, 1998 and 1997 include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the entire year. The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. 2 INVENTORIES The major classes of inventories are as follows:
JANUARY 31, JULY 31, 1998 1998 ----------- ----------- (UNAUDITED) In A$ thousands Finished goods $37,999 $50,807 Work in progress 1,328 1,664 Raw materials 4,222 4,334 ------- ------- 43,549 56,808 Less: Reserve for obsolescence (519) (393) ------- ------- $43,030 $56,412 ======= =======
3 EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of Ordinary Shares. Diluted earnings (loss) per share are computed by dividing net income (loss) available to holders of Ordinary Shares by the weighed average of Ordinary Shares and dilutive Ordinary Share equivalents for the period. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share, which specifies the computation, presentation and disclosure requirements for earnings per share. This statement is effective for both interim and annual reporting periods ending after December 15, 1997. 6 4 SUBSEQUENT EVENTS On September 1, 1998, Mr. Edgar Berner was appointed a director of the Company until the next annual general meeting, pursuant to Articles 65 (1) & (2) of the Company's Articles of Association, to fill the vacancy brought about by the resignation of Mr. Philip Gardiner, on August 13, 1998. 5 REGISTRATION STATEMENT ON FORM F-1 On June 12, 1998, pursuant to an agreement with certain holders of convertible notes (all of which were converted into Ordinary Shares in connection with the Company's initial public offering in the United States (the "IPO") in November 1997), the Company filed a Registration Statement on Form F-1 (the "Resale F-1") relating to a public offering, which was not underwritten, of up to 1,044,845 Ordinary Shares, each having a par value of A$3.64, and each represented by one American Depositary Share (each, a "Resale ADS"). All of the resale ADSs may be sold by certain shareholders of the Company. 997,926 of these Ordinary Shares were received upon the conversion of the convertible notes. The remainder of these Ordinary Shares are being registered voluntarily by the Company and are presently held by long-term shareholders of the Company who may wish to divest all or portion of their holdings in the Company. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" at the end of this section and elsewhere in (i) Amendment No. 1 to the Company's Annual Report on Form 20-F/A (File No. 333-37259) for the fiscal year ended January 31, 1998, filed with the Commission on May 20, 1998 and (ii) the Company's Registration Statement on Form F-1 filed with the Commission on June 12, 1998. Factors that could cause or contribute to such differences include those discussed herein as well as those included in the documents that the Company files from time to time with the Commission. OVERVIEW Barbeques Galore believes that it is the leading specialty retail chain of barbecue and barbecue accessory stores in Australia and the United States, based on number of stores and sales volume. The Company's belief is based on its years of experience in the barbecue retail industry as well as its contacts with other industry retailers, suppliers and trade associations. The Company opened its first store in Sydney, Australia in 1977 and opened its first U.S. store in Los Angeles in 1980. Barbeques Galore stores carry a wide assortment of barbecues and related accessories, a comprehensive line of fireplace products and, in Australia, home heating products, camping equipment and outdoor furniture. As of July 31, 1998, the Company owned and operated 33 stores in all six states in Australia and 41 stores (including three U.S. Navy concession stores) in nine states in the United States. In addition, as of such date, there were 46 licensed stores in Australia and seven franchised stores in the United States, all of which operate under the "Barbeques Galore" name. The Company derives its revenue primarily from four categories: Australian retail, United States retail (including royalties and sales to franchisees), Australian licensing (including license fees and sales to licensees) and Australian wholesale. For the six months ended July 31, 1998, these categories represented 30.2%, 56.7%, 5.9% and 6.7% respectively, of the Company's net sales for such period, representing a 8.0%, 58.8%, (6.5)% and 3.6% increase (decrease) over their respective net sales levels for the six months ended July 31, 1997. The Company believes the majority of its future growth will result from the continuing expansion of its U.S. retail business, primarily through the opening of new stores, and the refurbishment of its Australian store base. Through its vertically integrated operations, the Company manufactures a proprietary line of barbecues and home heaters for its retail stores and licensees as well as other barbecue and home heater products for its wholesale customers. RESULTS OF OPERATIONS The following table sets forth unaudited consolidated operating results of the Company as a percentage of net sales for the three and six months ended July 31, 1998 and 1997. Given the degree of seasonality to which the Company's business is subject, the Company's quarterly results and comparisons of such quarterly results to prior years' quarters are not necessarily indicative of future results. 8
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED JULY 31, JULY 31, JULY 31, JULY 31, 1997 1998 1997 1998 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold, warehouse, distribution and occupancy costs 68.8 67.0 68.8 67.6 ----- ----- ----- ----- Gross profit 31.2 33.0 31.2 32.4 Selling, general and administrative expenses 29.8 28.1 30.9 30.4 Store pre-opening costs 0.2 0.5 0.3 0.5 ----- ----- ----- ----- Operating income 1.2 4.4 0.0 1.5 Equity in income of affiliates, net of tax 0.3 0.2 0.3 0.2 Interest expense 2.2 0.8 2.5 0.9 ----- ----- ----- ----- (Loss) income before income taxes (0.7) 3.8 (2.2) 0.8 Income tax (benefit) expense (0.2) 1.5 (0.9) 0.3 ----- ----- ----- ----- Net (loss) income (0.5)% 2.3% (1.3)% 0.5% ===== ===== ===== =====
THREE MONTHS ENDED JULY 31, 1998 (UNAUDITED) COMPARED TO THREE MONTHS ENDED JULY 31, 1997 (UNAUDITED) Net sales increased by approximately A$14.4 million, or 36.0%, to A$54.4 million for the three months ended July 31, 1998 from A$40.0 million for the three months ended July 31, 1997. Four new stores were opened in the United States during the three months ended July 31, 1998. In Australia no new store was opened nor was any store refurbished during this period. Comparable store sales increased 22.9% and contributed A$6.8 million to the increase in net sales. Comparable store sales increased 12.7% in the United States and 1.6% in Australia. The combined comparable store sales increase was impacted by an increase in the US$/A$ exchange rate of approximately 22.7% in that period. Increased sales of A$6.0 million also resulted from ten new stores which opened in the United States in the previous twelve months and which did not form part of the comparative store sales. The balance of the increased sales was primarily attributable to two new stores opened and one store refurbished in Australia which did not form part of comparable store sales, and increased wholesale revenues. Gross profit increased approximately A$5.4 million, or 43.5% to A$17.9 million for the three months ended July 31, 1998 from A$12.5 million for the three months ended July 31, 1997. Gross margin (gross profit as a percentage of sales ) increased to 33.0% during the three months ended July 31, 1998 from 31.2% during the comparable period in 1997. The increase in gross margin is mainly attributable to the reduced cost of goods purchased from Australia as a result of the weak Australian dollar and an increased Australian sales content in stores moving into their second year of operation. This was partially offset by the newer stores in the United States, the margins of which are typically lower in their first year of operation. Selling, general and administrative expenses (which exclude store pre-opening expenses) increased approximately A$3.3 million, or 28.0%, to A$15.3 million for the three months ended July 31, 1998 from A$11.9 million for the three months ended July 31, 1997. As a percentage of net sales, selling, general and administrative expenses decreased to 28.1% during the three months ended July 31, 1998 from 29.8% during the comparable period in 1997. This decrease was primarily due to a higher operating leverage from 9 the greater number of stores open in the United States in the second quarter of 1998 during a period when sales are at their seasonal high. This was partially offset by increased payroll costs related to the expansion of the infrastructure in the United States. Store pre-opening expenses increased by A$187,000 to A$282,000 due to the number and timing of United States' store opening expenditure. Operating income increased by A$1.9 million to A$2.4 million for the three months ended July 31, 1998 from A$474,000 for the three months ended July 31, 1997. This increase resulted mainly from an increase in profitability from the Company's U.S. operation. Income from affiliates was unchanged from A$138,000 in the three months ended July 31, 1998 compared to the three months ended July 31, 1997. Interest expense decreased by A$435,000 to A$446,000 in the three months ended July 31, 1998 from A$881,000 for the three months ended July 31, 1997. The decrease reflects the reduced debt requirements of the Company subsequent to the capital raising as a result of its IPO in November 1997. The Company's effective tax rate was 38.6% in the three months ended July 31, 1998 and 30.9% (benefit) in the three months ended July 31, 1997. The benefit in the comparable period in 1997 relates to a loss before tax. SIX MONTHS ENDED JULY 31, 1998 (UNAUDITED) COMPARED TO SIX MONTHS ENDED JULY 31, 1997 (UNAUDITED) Net sales increased by approximately A$20.8 million, or 29.5%, to A$91.2 million for the six months ended July 31, 1998 from A$70.4 million for the six months ended July 31, 1997. Five new stores were opened in the United States during the six months ended July 31, 1998. In Australia one new store was opened and no stores were refurbished during this period. Comparable store sales increased 19.7% and contributed A$10.1 million to the increase in net sales. Comparable store sales increased 11.7% in the United States and 3.9% in Australia. The combined comparable store sales increase was impacted by an increase in the US$/A$ exchange rate of approximately 20.5% in that period. Increased sales of A$7.3 million also resulted from ten new stores which opened in the United States in the previous twelve months and which did not form part of the comparative store sales. The balance of the increased sales was primarily attributable to two new stores opened and one store refurbished in Australia which did not form part of comparable store sales, and increased wholesale revenues. Gross profit increased approximately A$7.6 million, or 34.6% to A$29.6 million for the six months ended July 31, 1998 from A$22.0 million for the six months ended July 31, 1997. Gross margin (gross profit as a percentage of sales ) increased to 32.4% during the six months ended July 31, 1998 from 31.2% during the comparable period in 1997. The increase in gross margin is mainly attributable to the reduced cost of goods purchased from Australia as a result of the weak Australian dollar and an increased Australian sales content in stores moving into their second year of operation. This was partially offset by product sales mix in Australia and the United States, including the newer stores in the United States, the margins of which are typically lower in their first year of operation. Selling, general and administrative expenses (which exclude store pre-opening expenses) increased approximately A$6.0 million, or 27.6%, to A$27.7 million for the six months ended July 31, 1998 from A$21.7 million for the six months ended July 31, 1997. As a percentage of net sales, selling, general and administrative expenses decreased to 30.4% during the six months ended July 31, 1998 from 30.9% during the comparable period in 1997. This decrease was primarily due to a higher operating leverage from the greater number of stores open in the United States in the second quarter of 1998 during a period when sales are at their seasonal high. This was partially offset by increased payroll costs related to the expansion of the infrastructure in the United States. Store pre-opening expenses increased by A$220,000 to A$429,000 due to the number and timing of United States' store opening expenditure. 10 Operating income increased by A$1,352,000 to A$1,389,000 for the six months ended July 31, 1998 from A$37,000 for the six months ended July 31, 1997. This increase resulted mainly from an increase in profitability from the Company's U.S. operation. Income from affiliates increased by A$46,000 to A$234,000 in the six months ended July 31, 1998 from A$188,000 for the six months ended July 31, 1997. Interest expense decreased by A$926,000 to A$834,000 in the six months ended July 31, 1998 from A$1.76 million for the six months ended July 31, 1997. The decrease reflects the reduced debt requirements of the Company subsequent to the capital raising as a result of its IPO in November 1997. The Company's effective tax rate was 38.0% in the six months ended July 31, 1998 and 42.3% (benefit) in the six months ended July 31, 1997. The benefit in the comparable period in 1997 relates to a loss before tax. THE COMPANY'S STATE OF READINESS FOR YEAR 2000 ISSUES The Company established a Year 2000 compliance team in 1997, under the guidance of the Chief Financial Officer, which reports periodically to the Board of Directors and Audit Committee. To date, a full evaluation of potential Year 2000 risks has been completed and a comprehensive compliance program developed. While the Company cannot be certain that the consequences of Year 2000 compliance issues will not have a material effect on its business, results of operation or financial condition, it has established and is well advanced with, a rigorous program aimed at minimizing or negating any such effects. As part of the ongoing Year 2000 compliance process, the Company has examined the key risk areas and considered the degree of application to its business activities and future operations. Information Technology ("IT") Systems: In Australia, the Company is currently replacing its entire core IT system, along with the majority of peripheral hardware and software components such as personal computers, printers and desktop applications. The replacement core IT system has been certified Year 2000 compliant and should be operational by mid-1999. In the USA, the Company's recently installed computer system has been designed to avoid the occurrence of Year 2000 problems. Minor modifications and upgrades are currently being undertaken and full compliance is anticipated by the end of 1998. Non-IT Systems: As with any modern business operation, the Company expects that some degree of non-compliance will be identified in certain technology assets such as telephone systems, office equipment and security systems. All potential systems at risk have been identified and an inventory of equipment and the vendors involved, compiled. The Company is currently in the process of contacting these vendors to ascertain whether each item of equipment is Year 2000 compliant or, if necessary, what remedial action (and cost) is required to achieve compliance. Products: The Company's products do not utilize embedded technology and the risk, therefore, associated with holding or repairing non-compliant products, is negligible. The Company does not believe it will encounter any significant product warranty costs or obsolete inventory write-offs arising from Year 2000 issues. Third Party Relationships: The majority of the Company's customers and, therefore, revenue base, is from retail sales from which little credit risk arises. Those customers to whom credit facilities are provided are currently being contacted by mail questionnaire, to allow the Company to assess their state of readiness in relation to Year 2000 issues. This program is expected to be completed by the end of 1998. Further follow-up may be required in cases where the Company is not satisfied with a customer's level of compliance. 11 The Company is dependent on a large number of vendors from various countries for a significant proportion of its merchandise, parts and raw materials. While there are generally no long term purchase contracts, (and no vendor accounts for more than 5% of the Company's merchandise), its results from operations could be adversely affected by a disruption of supply from key vendors. It has been widely reported that such disruptions could occur if a vendor was to experience major Year 2000 compliance problems. A mail questionnaire program is also being conducted to assess the level of compliance of all current vendors. This program is expected to be completed by the end of 1998. Again, Company policy will be to discontinue supply arrangements with any vendor who is unable to demonstrate adequate compliance after mid-1999. The Company has also included service providers and other key business partners such as banks, telecommunication providers, transport and shipping companies in the compliance program. While the Company expects that most of this group is likely to achieve compliance, its status will be monitored for any adverse indications of risk to the Company. Costs to Address the Company's Year 2000 Issues Based on the preceding evaluation of the Company's state of readiness and having regard to the most likely outcomes in relation to each area of risk, the Company has estimated that the total cost to address Year 2000 issues will be approximately A$0.9 million. The vast majority of this estimate relates to the replacement of the Australian IT systems and also includes allowances for minor non-IT systems remediation. To date, less than A$0.2 million of the above estimate has been expended. There has been no material impact on the Company's results from operations to date. Risks of the Company's Year 2000 Issues The risks which the Company faces in relation to Year 2000 issues have been referred to above. Although the Company has no reason to expect that any significant third party impact will arise, given the compliance program now in place, no assurance can be made that the impact of these risk areas will not be greater than currently identified, nor that no other risk issues may arise. The Company is unable to estimate whether there will be any additional significant costs arising from Year 2000 issues. The Company's Contingency Plans for Year 2000 Issues At the present time the Company has not developed a detailed contingency plan. As the outcome of its compliance programs becomes known, the Company will re- evaluate the need for, and extent of, any contingency plans. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through cash flow from operations and bank borrowings. In November 1997, the Company completed its IPO, raising net proceeds of approximately US$13.8 million (approximately A$19.7 million). A portion of these funds have been used to fund (i) the repayment of approximately A$12 million (approximately US$8.4 million) of indebtedness incurred under the credit facility between the Company and the Australian and New Zealand Banking Group Limited ("ANZ"), and (ii) the repayment of approximately US$1.8 million, being all indebtedness outstanding as of the completion of the IPO in November 1997 under a term loan and revolving line of credit facility with Merrill Lynch Business Financial Services, Inc. ("Merrill Lynch"). The remaining US$3.6 million (approximately A$5.1 million) is being used to fund a portion of the Company's operations and investing activities and to continue the expansion of the Company's operations in the United States. The Company has used cash flows from operations in the six months ended July 31, 1998 and 1997 of 12 A$6.7 million and A$8.5 million, respectively. The cash used by operations primarily reflects the increase in inventory levels related to the Company's build-up of inventories and the increased number of stores in the United States. Net cash flows used in investing activities in the six months ended July 31, 1998 and 1997 were A$8.5 million and A$1.4 million respectively. The cash flows used in investing activities have resulted primarily from capital expenditures related to new store openings in the United States, store refurbishments in Australia and the acquisition of two properties as detailed hereafter. During the quarter ended April 30, 1998, the Company acquired a 45,000 square foot property for approximately A$3.5 million to relocate its enameling operations to the same facilities as its barbecue and home heater manufacturing operations adjacent to the Company's Australian headquarters. During the quarter ended July 31, 1998, the Company acquired a 60,000 square foot property near its Australian headquarters for its warehousing and distribution operations at a cost of approximately A$1.75 million, with an additional approximately A$1.25 million capital expenditure (including A$320,000 for racking) required to upgrade the facility before use. The Company anticipates that it will continue to incur significant capital commitments in connection with further expansion. The actual costs that the Company will incur in connection with the opening and refurbishment of future stores cannot be predicted with precision because such costs will vary based upon, among other things, geographic location, the size of the stores and the extent of remodeling required at the selected sites. The cash flows used in operations and investing activities have been largely sourced from long term borrowings under the ANZ and Merrill Lynch Facilities (defined below) and from the Company's IPO. At July 31, 1998 the Company had working capital of A$41.6 million. At July 31, 1998 the Company maintained minimal amounts in cash and cash equivalents, relying instead on undrawn facilities under its borrowing arrangements with ANZ and Merrill Lynch (the "ANZ Facility" and the "Merrill Lynch Facility," respectively). In June 1998, the Company and ANZ entered into the ANZ Facility, revised from a previous facility entered into in July 1994. The ANZ Facility is subject to annual review and modification, in accordance with standard Australian practice. Under this revised facility, the Company and its subsidiaries have access to a facility with ANZ with facilities up to A$49.8 million comprising a multi-purpose facility in principal amount of A$36.6 million, a trade finance facility in principal amount of A$11.0 million and a real property loan in principal amount of A$2.2 million. The ANZ Facility is secured by a first security interest over the Company's present and future Australian assets and a second security interest (subordinate to a lien under the Merrill Lynch Facility) in all the Company's assets in the United States. The ANZ Facility is further guaranteed by each subsidiary of the Company including The Galore Group (USA), Inc. and Barbeques Galore Inc. (referred to collectively as "Galore USA"). The property loan accrues interest at a rate of 9.6% per annum, and is secured by a registered first mortgage over the freehold property of the Company. In February 1995, Barbeques Galore Inc., the Company's U.S. operating subsidiary, entered into a five year credit facility with Merrill Lynch. As of July 31, 1998, such facility includes a term loan in aggregate principal amount of US$225,000 (the "Term Loan") and a revolving line of credit in aggregate principal amount of US$300,000 (the "Revolving Line," and collectively with the Term Loan, the "Merrill Lynch Facility"). Indebtedness under the Revolving Line and Term Loan accrues interest at the 30-day commercial paper rates plus 2.65%, and is payable monthly. The Merrill Lynch Facility is secured by a first security interest in all Galore USA present and future assets. The Merrill Lynch Facility is guaranteed by the Company and The Galore Group (USA), Inc., the parent of Barbeques Galore, Inc. The Company believes the proceeds raised from the IPO and the remaining ANZ and Merrill Lynch Facilities are sufficient to meet its presently anticipated working capital and capital expenditure requirements for at least the next twelve months. 13 RISK FACTORS The following are certain factors that should be considered in evaluating the business, financial conditions and results of operations of the Company. However, these factors should not be considered to be exclusive, and readers are urged to consider the statements made elsewhere herein. IMPLEMENTATION OF GROWTH STRATEGY The growth of the Company is dependent, in large part, upon the Company's ability to successfully execute its Company-owned store expansion program in the United States and its store refurbishment plan in Australia. Pursuant to the U.S. store expansion program, the Company opened 10 new stores in calendar 1997. The Company also currently intends to open approximately 15 new stores in the United States in calendar 1998, of which five have opened, six are under construction and the remaining four are in lease negotiation. The Company also currently intends to open 15 new stores in the United States in calendar 1999. The Company incurred capital expenditures relating to this program in the United States of approximately US$1.8 million in 1997 and expects to incur approximately US$2.5 million in each of calendar 1998 and 1999. Pursuant to the Company's Australian store refurbishment program, in calendar 1997, the Company remodeled five existing stores, opened one new store, relocated one store and closed one store. The Company intends to refurbish one store and relocate two stores and, in March, opened its one planned new store in calendar 1998. The Company further intends to refurbish two stores and relocate two stores in calendar 1999. The Company incurred capital expenditures relating to this program in Australia of approximately A$2.5 million in 1997 and expects to incur approximately A$1.5 million to A$2.5 million in each of calendar 1998 and 1999. The proposed expansion is substantially more rapid than the Company's historical growth. The success of these store expansion and refurbishment efforts will be dependent upon, among other things, the identification of suitable markets and sites for new stores, negotiation of leases on acceptable terms, construction or renovation of sites, receipt of all necessary permits and governmental approvals therefor, and, if necessary, obtaining additional financing for those sites. In addition, the Company must be able to hire, train and retain competent managers and personnel and manage the systems and operational components of its growth. There can be no assurance that the Company will be able to locate suitable store sites or enter into suitable lease agreements. In addition, there can be no assurance that, as the Company opens new stores in existing markets, these new stores will not have an adverse effect on comparable store net sales at existing stores in these markets. The failure of the Company to open new stores or relocate or remodel existing stores on a timely basis, obtain acceptance in markets in which it currently has limited or no presence, attract qualified management and personnel or appropriately adjust operational systems and procedures would adversely affect the Company's future operating results. The success of the Company's growth strategy may also depend upon factors beyond its immediate control. The Company has retained outside real estate consultants to assist in site selection and lease negotiations, and may depend, to an increasing extent, on the services of such consultants and other real estate experts as it accelerates the rate of new store expansion. The failure of any such consultants or experts to render needed services on a timely basis could adversely affect the Company's new store expansion. Similarly, changes in national, regional or local real estate and market conditions could limit the ability of the Company to expand into target markets or sites. As part of its growth strategy, the Company intends to open stores in new markets where it will not initially benefit from knowledge of local market conditions, pre-existing retail brand name recognition or marketing, advertising, distribution and regional management efficiencies made possible by its store networks in existing markets. Expansion into new markets may present operating and marketing challenges that are different from those encountered in the past by the Company in its existing markets. As a result of its expansion program and its entry into new markets, primarily in the United States, and its refurbishment program in Australia, the Company has experienced, and expects to continue to experience, 14 an increase in store pre-opening costs and refurbishment-related expenses. There can be no assurance that the Company will anticipate all of the challenges and changing demands that its expansion will impose on its management or operations, and the failure to adapt thereto would adversely affect the Company's implementation of its growth strategy. If the Company determined to, or was required to, close a Barbeques Galore store, the Company would attempt to sublet the vacated store space in order to cover ongoing lease costs. Even if the Company were able to sublet such store, the Company may incur significant costs in writing off leasehold improvements. In addition, the Company's proposed expansion plans will result in increased demand on the Company's managerial, operational and administrative resources. As a result of the foregoing, there can be no assurance that the Company will be able to successfully implement its growth strategies, continue to open new stores or maintain or increase its current growth levels. The Company's failure to achieve its expansion plan could have a material adverse effect on its future business, operating results and financial condition. EFFECT OF ECONOMIC CONDITIONS AND CONSUMER TRENDS The success of the Company's operations depends upon a number of factors related to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation. If existing economic conditions were to deteriorate, consumer spending may decline, thereby adversely affecting the Company's business and results of operations. Such effects may be exacerbated by the significant current regional concentration of the Company's business in Australia and the Pacific West and Southwestern U.S. markets. The success of the Company depends on its ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. The Company believes it has benefited from a lifestyle trend toward consumers spending more quality time together in outdoor family gatherings and social activities. Any change in such trend could adversely affect consumer interest in the Company's major product lines. Moreover, the Company's products must appeal to a broad cross-section of consumers whose preferences (as to product features such as colors, styles, finishes and fuel types) cannot always be predicted with certainty and may change between sales seasons. If the Company misjudges either the market for its merchandise or its customers' purchasing habits, it may experience a material decline in sales or be required to sell inventory at reduced margins. The Company could also suffer a loss of customer goodwill if its manufacturing operations or stores do not adhere to its quality control or service procedures or otherwise fail to ensure satisfactory quality of the Company's products. These outcomes may have a material adverse effect on the Company's business, operating results and financial condition. MANAGEMENT OF OPERATIONAL CHANGES The Company has identified a number of areas for improvement in its operations which will have a significant impact on the implementation of its growth strategy. The Company has, in recent years, replaced or upgraded its management information systems and integrated its central inventory management systems with point-of-sale terminals in Barbeques Galore stores, and currently plans to introduce automated replenishment of store inventory in Australia in the near term. In the United States, the Company is currently upgrading to the latest version of software by JDA Software Group Inc. ("JDA") and is using both outside consultants and the vendor to assist with the process. The total expected capital expenditure for such project is not expected to be significant. In addition, the Company intends to transfer its general ledger and accounts payable functions from its existing computer system to the above-mentioned JDA software system in the near future. The Company has substantially completed the relocation of its 15 enameling operations which are now operational, to the same facilities as its barbecue and home heater manufacturing operations adjacent to its Australian headquarters, with the in-line powder coating operation scheduled for completion in late September 1998. In addition, the Company rearranged the assembly, warehouse and Australian distribution operations to further improve its production flow, inventory control and distribution management. The relocation of the Company's enameling operations and related changes resulted in the incurring of approximately A$454,000 in costs (of which A$369,000) had already been accrued), required additional capital expenditures of approximately A$2.8m and the obtaining of a number of building, environmental and other governmental permits. In addition, as the Company expands into new regions or accelerates the rate of its U.S. store expansion, the Company may need additional warehouse capacity. In order to meet such needs, the Company intends to secure another distribution center or expand its current warehouse facilities in the United States or utilize public warehousing space, in each case depending on availability and cost at such time. There can be no assurance as to whether or when the Company will be able to effect its systems upgrades, enameling plant relocation plans, any expansion or replacement of distribution facilities, or any other necessary operational changes that may arise, or that the Company will not incur cost overruns or disruptions in its operations in connection therewith. The failure of the Company to effect these and any other necessary operational changes on a timely basis would adversely affect the ability of the Company to implement its growth strategy and, therefore, its business, financial condition and operating results. COMPETITION The retail and distribution markets for barbecues and the Company's other product offerings are highly competitive in both the United States and Australia. The Company's retail operations compete against a wide variety of retailers, including mass merchandisers, discount or outlet stores, department stores, hardware stores, home improvement centers, specialty patio, fireplace or cooking stores, warehouse clubs and mail order companies. The Company's manufacturing and wholesale operations compete with many other manufacturers and distributors throughout the world, including high-volume manufacturers of barbecues and home heaters. Barbeques Galore competes for retail customers primarily based on its broad assortment of competitively priced, quality products (including proprietary and exclusive products), convenience, customer service and the attractive presentation of merchandise within its stores. Many of the Company's competitors have greater financial, marketing, distribution and other resources than the Company, and particularly in the United States, may have greater name recognition than the Company. Furthermore, the lack of significant barriers to entry into the Company's segment of the retail industry may also result in new competition in the future. SEASONALITY; WEATHER; FLUCTUATIONS IN RESULTS The Company's business is subject to substantial seasonal variations which have caused, and are expected to continue to cause, its quarterly results of operations to fluctuate significantly. Historically, the Company has realized a major portion of its net sales and a substantial portion of its net income for the year during summer months and holiday seasons when consumers are more likely to purchase barbecue products, camping equipment and outdoor furniture. In anticipation of its peak selling seasons (late spring and early summer), the Company substantially increases its inventory levels and hires a significant number of part-time and temporary employees. In non-peak periods, such as late winter and early fall, the Company has regularly experienced monthly losses. Since the Company has historically derived a greater portion of its sales from its larger Australian store base, these seasonal trends have generally resulted in increased sales and income during the Australian summer months of November through January and substantially lower-than-average sales and income during the months of February, March, May and July. The Company believes this is the general pattern associated with its segment of the Australian retail industry and expects this pattern will continue in the future. Partially offsetting the effects of seasonality, the Company operates in both the Southern and Northern hemispheres, which have opposite seasons, and offers fireplace products and (in Australia) home heaters in the fall and winter months. However, sales of any of the Company's major product lines (in particular, home heaters) may vary widely in peak seasons depending on, among other things, prevailing weather patterns, local climate conditions, actions by competitors and shifts in 16 timing of holidays. The Company's quarterly and annual results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings, releases of new products and changes in merchandise mix throughout the year. The Company has in the past experienced quarterly losses, particularly in its fiscal first quarter, and expects that it will experience such losses in the future. Because of these fluctuations in operating results, the results of operations in any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year or any future quarter. If for any reason the Company's sales or gross margins during peak seasons or periods were substantially below expectations, the Company's quarterly and annual results would be adversely affected. RELIANCE ON SYSTEMS In the United States, the Company has installed a JDA Software Group Inc. ("JDA") system on an IBM AS400 platform, which allows it to manage distribution, inventory control, purchasing, sales analysis, warehousing and financial applications. The Company currently runs its general ledger and accounts payable applications on its pre-existing computer system, but intends to transfer these functions to the more powerful JDA system in the near future. At the store level, the Company has installed POS computer terminals as its cash registers in all stores. Each POS terminal is equipped with a bar code scanner for ease of product input and validation. Each store's transaction data is captured by its POS terminals and transferred into the main JDA system daily. The JDA system provides extensive reporting and inquiry capability at both the store and corporate levels, including daily transaction data, margin information, exception analysis and stock levels. Additionally, the system permits inventory and pricing updates to be electronically transmitted to the stores on a daily basis. In Australia, the existing Wang VS system is being replaced by a SUN Systems Ultra 60 running a UNIX environment. The Company has also installed a Microsoft NT Server for all its desktop applications which in the future will be the Microsoft suite of software. The Company's Head Office Information Systems process all distribution, warehouse management, inventory control, purchasing, merchandising, financial and office automation applications. Each store has PC-based Point of Sale registers which manage all sales transactions and store based purchasing transactions. At the end of each day's processing, the data from each register is consolidated onto one register which has an attached modem and which is polled daily to upload the data to the head office system. The Company relies upon its existing management information systems in operating and monitoring all major aspects of the Company's business, including sales, gross margins, warehousing, distribution, purchasing, inventory control, financial accounting and human resources. Any disruption in the operation of the Company's management information systems, or the Company's failure to continue to upgrade, integrate or expend capital on such systems, as its business expands, could have a material adverse effect upon the Company's business, operating results and financial condition. As the head office system was not able to handle dates beyond January 1, 2000 the Company has decided to replace its existing hardware and software rather than reworking the existing software to be Year 2000 compatible. See "Part I - Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - The Company's State of Readiness for Year 2000 Issues". The Company has appointed Berger Software, an Australian software house, specializing in distribution and warehousing management software to supply the main business application software. The new system will also handle financial accounting functions and the Company will also be integrating an Executive Information system to provide additional interrogation capabilities. The existing store Point of Sale software is Year 2000 compatible and runs in a DOS environment on stand alone store-based PCs, some of which will need replacement. The store systems will continue to be polled on a daily basis and the data transmitted back to head office, for loading into the new Berger software system, producing all the necessary management reporting. The Company expects that the Information Systems replacement and upgrade will require capital expenditures of approximately A$0.9 million. Work is currently underway and will be completed by mid 1999, although no assurance can be given that these issues can be resolved in a cost-effective or timely 17 manner or that the Company will not incur significant expense in resolving these issues. The Company's newly installed computer system in the United States has been designed to avoid the occurrence of such problems with the year 2000. DEPENDENCE ON KEY EMPLOYEES The Company's success is largely dependent on the efforts and abilities of its executive officers, particularly, Sam Linz, Chairman of the Board, Robert Gavshon, Deputy Chairman of the Board, John Price, Head of Research and Product Development and Director, and Sydney Selati, President of Barbeques Galore, Inc., the Company's U.S. operating subsidiary, and Director. These individuals have an average of 15 years of experience with the Company and have chief responsibility for the development of the Company's current business and growth strategies. L.D. "Chip" Brown's employment terminated on August 24, 1998 and Galore USA is now seeking a suitable replacement to take on the functions of Chief Operating Officer for the Company's U.S. operations. The Company does not have employment contracts with any of its executive officers. The loss of the services of these individuals or other key employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company's success is also dependent upon its ability to continue to attract and retain qualified employees to meet the Company's needs for its new store expansion program in the United States and its store refurbishment plans in Australia. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS; DEPENDENCE ON SIGNIFICANT VENDORS AND SUPPLIERS Barbeques Galore, with its headquarters, manufacturing, enameling, wholesale and non-U.S. store operations in Australia, transacts a majority of its business in Australia and obtains a significant portion of its merchandise, parts and raw materials from China, Taiwan, Indonesia, Thailand, Italy and other markets outside of the United States and Australia. There are risks inherent in doing business in international markets, including tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, political instability, expropriation, nationalization and other political risks, foreign exchange controls, technology export and import restrictions or prohibitions, delays from customs brokers or government agencies, seasonal reductions in business activity, subjection to multiple taxation regimes and potentially adverse tax consequences, any of which could materially adversely affect the Company's business, operating results and financial condition. The Company purchases certain of its finished inventory and manufacturing parts and all of its raw materials from numerous vendors and suppliers and generally has no long-term purchase contracts with any vendor or supplier. During the twelve months ended January 31, 1998, the Company purchased inventory from over 400 vendors in the United States, Australia and Asia. In such period, approximately 25% of the Company's merchandise purchases were obtained from the Company's ten largest vendors. Although no vendor accounted for more than 5% of the Company's merchandise purchases in such period (other than Horan's Steel Pty Ltd., an Australian steel distributor ("Horan's Steel"), and Bromic Pty Ltd., an Australian gas components importer ("Bromic")), the Company considers certain barbecue brands to be significant to its business, especially in the United States. In December 1997, the Company appointed Sheet Metal Supplies Pty Ltd as its steel supplier, to replace Horan's Steel, with full effect from May 1998. During the twelve months ended January 31, 1998, the Company purchased barbecue and home heater parts from over 50 suppliers in Asia, Australia and North America. Horan's Steel and Bromic supplied the Company with approximately 20% and 21%, respectively, of the Company's factory parts and raw material purchases and approximately 80% of the Company's factory parts and raw material purchases were obtained from the Company's ten largest suppliers. The Company's results of operations could be adversely affected by a disruption in purchases from any of these key vendors or suppliers or from volatility in the prices of such parts or raw materials, especially the price of steel, which has fluctuated in the past. In addition, some of the Company's key suppliers currently provide the Company with certain incentives, such as volume and trade discounts as well as other purchasing incentives. A reduction or discontinuance of these incentives could have an adverse effect on the Company. Although the Company believes that its relationships with its vendors and 18 suppliers are good, any vendor or supplier could discontinue selling to the Company at any time. PRODUCT LIABILITY AND GOVERNMENTAL AND OTHER REGULATION Many of the Company's products use gas and flame and, consequently, are subject to regulation by authorities in both the United States and Australia in order to protect consumers, property and the environment. For example, the Company's products and the personal use thereof are subject to regulations relating to, among other things, the use of fire in certain locations (particularly restrictions relating to the availability or frequency of use of wood heating in homes and barbecues in apartments), restrictions on the sale or use of products that enhance burning potential such as lighter fluid, restrictions on the use of gas in specified locations (particularly restrictions relating to the use of gas containers in confined spaces) and restrictions on the use of wood burning heaters. Compliance with such regulations has not in the past had, and is not anticipated to have, a material adverse effect on the Company's business, operating results and financial condition. Nonetheless, such regulations have had, and can be expected to have, an increasing influence on product claims, manufacturing, contents, packaging and heater usage. In addition, failure of a product could give rise to product liability claims if customers, employees or third parties are injured or any of their property is damaged while using a Company product. Such injury could be caused, for example, by a gas valve malfunction, gas leak or an unanticipated flame-up resulting in injury to persons and/or property. Even if such circumstances were beyond the Company's control, the Company's business, operating results and financial condition could be materially adversely affected. In the event of such an occurrence, the Company could incur substantial litigation expense, receive adverse publicity, suffer a loss of sales or all or any of the foregoing. Although the Company maintains liability insurance in both Australia and the United States, there can be no assurance that such insurance will provide sufficient coverage in any particular case. In Australia, the limit of the Company's product liability coverage is A$50 million. In the United States, the Company's U.S. operating subsidiary is covered by a policy having general liability coverage limited at US$12 million and third party liability coverage limited at US$11 million. There is no assurance that certain jurisdictions in which the Company operates will not impose additional restrictions on the sale or use of the Company's products. In addition, the Company's barbecue and home heater manufacturing and enameling operations are subject to regulations governing product safety and quality, the discharge of materials hazardous to the environment, water usage, workplace safety and labor relations. The Company's distribution facilities are also subject to workplace safety and labor relations regulations. The Company believes that it is in substantial compliance with such regulations. The sale of certain products by the Company may result in technical violations of certain of the Company's leases which prohibit the sale of flammable materials in or on the leased premises. As a barbecue and barbecue accessories store, the Company sells lighter fluid, lighters, matches and similar products which may be considered flammable when in contact with open flame or activated. The Company does not store containers of gas for barbecue grills in its stores. The Company stores matches, lighters and the like in closed containers or in displays where the chance of activation is remote, and does not store such items near open flames. Over the Company's operating history, the Company's landlords have been made aware that the Company sells such products. To date, no landlord has terminated or threatened termination of any lease due to such sales. The foregoing regulations and restrictions could have a material adverse effect on the Company's business, operating results or financial condition. UNCERTAINTIES REGARDING MANUFACTURING AND DISTRIBUTION OF MERCHANDISE The Company manufactures a substantial portion of the barbecues and home heaters sold in its stores and distributes merchandise to Barbeques Galore stores primarily from its distribution centers located at its 19 headquarters in Australia and Irvine, California. Throughout the manufacturing process, the Company utilizes heavy machinery and equipment to produce and assemble barbecues and home heaters from parts and raw materials supplied from numerous third party suppliers. In distributing merchandise, the Company relies upon third party sea carriers to ship its manufactured products from Australia to the United States, as well as third party surface freight carriers to transport all its merchandise from its distribution centers and warehouses to stores. Accordingly, the Company is subject to numerous risks associated with the manufacturing and distribution of its merchandise, including supply interruptions, mechanical risks, labor stoppages or strikes, inclement weather, import regulation, changes in fuel prices, changes in the prices of parts and raw materials, economic dislocations and geopolitical trends. In addition, the Company believes that, while its distribution facilities are sufficient to meet Barbeques Galore's current needs, the Company may need another distribution center or larger facilities in the United States or Australia to support the further growth and expansion of stores. RISKS RELATED TO FRANCHISED AND LICENSED STORES As of July 31, 1998, there were 46 licensed stores in Australia and seven franchised stores in the United States, all of which are operated under the "Barbeques Galore" name by independent licensees or franchisees who purchase proprietary and other store products, and receive support services, from the Company. The licensees and franchisees operate such stores pursuant to agreements which typically permit licensees and franchisees to assign the agreements to their immediate family and provide the licensees and franchisees with exclusive geographical sales territories. The Company monitors its licensed and franchised stores to assure their conformity to Barbeques Galore's standards and image and requires the licensees and franchisees to comply with Barbeques Galore's merchandising and advertising guidelines. Although the Company believes that its licensees and franchisees are presently in substantial compliance with Company guidelines and that its license and franchise arrangements have not been problematic in any material respect in the past, serious or protracted failures by licensees or franchisees to adhere to Company standards could adversely affect customer loyalty and diminish the Company's brand name or reputation for quality products and services, and could require the Company to devote significant management attention and resources to enforcing its rights under such agreements. Conversely, if the Company fails to provide adequate support services or otherwise breaches its contractual obligations to any licensee or franchisee, such failure or breach could result in termination of, or litigation relating to, the relevant licensing or franchise agreement and the loss of fees and sales revenue thereunder. The licensing agreements in Australia are terminable at will (absent fraud) by the licensees only, generally upon sixty days' notice. CURRENCY FLUCTUATIONS The Company prepares its consolidated financial statements in Australian dollars, but a substantial portion of the Company's revenues and expenses are denominated in U.S. dollars and, to a lesser extent, other foreign currencies. Accordingly, the Company is subject to risks of currency exchange to the extent of currency fluctuations between the Australian dollar and the U.S. dollar or other currencies in which the Company transacts its business. This currency imbalance has resulted in, and may continue to result in, foreign currency transaction gains and losses. Prior to the current fiscal year, the Company's Australian operations have hedged a major portion of its imports against exchange rate fluctuations with respect to the Australian dollar. However, in its U.S. operations, the Company has not, and it currently does not, actively hedge against exchange rate fluctuations, although it may elect to do so in the future. Accordingly, changes in exchange rates may have a material adverse effect on the Company's net sales, cost of goods sold, gross margin and net income, any of which alone or in the aggregate may in turn have a material adverse effect on the Company's business, operating results and financial condition. Such currency issues could, thus, affect the market price for the ADSs. Although the Company does not anticipate paying any regular cash dividends on the Ordinary Shares or the ADSs in the foreseeable future, the above exchange rate fluctuations would affect the conversion into US dollars (for payment to holders of ADSs) by the Depositary of any cash dividends paid in Australian dollars on the Ordinary Shares represented by the ADSs. 20 RESTRICTIONS ON FOREIGN OWNERSHIP; ANTITAKEOVER RESTRICTIONS Under Australian law, foreign persons are prohibited from acquiring more than a limited percentage of the shares in an Australian company without approval from the Australian Treasurer or in certain other limited circumstances. These limitations are set forth in the Australian Foreign Acquisitions and Takeovers Act (the "Takeovers Act"). Under the Takeovers Act, as currently in effect, any foreign person, together with associates, is prohibited from acquiring 15% or more of the outstanding shares of the Company (or else the Treasurer may make an order requiring the acquiror to dispose of those shares within a specified period of time). In addition, if a foreign person acquires shares in the Company and as a result the total holdings of all foreign persons and their associates exceeds 40% in the aggregate without the approval of the Australian Treasurer, then the Treasurer may make an order requiring the acquiror to dispose of those shares within a specified time. The Company has been advised by its Australian counsel, Freehill, Hollingdale & Page, that under current foreign investment policy, however, it is unlikely that the Treasurer would make such an order where the level of foreign ownership exceeds 40% in the ordinary course of trading, unless the Treasurer finds that the acquisition is contrary to the national interest. The same rule applies if the total holdings of all foreign persons and their associates already exceeds 40% and a foreign person (or its associate) acquires any further shares, including in the course of trading in the secondary market of the ADSs. In addition, if the level of foreign ownership exceeds 40% at any time, the Company would be considered a foreign person under the Takeovers Act. In such event, the Company would be required to obtain the approval of the Treasurer for the Company, together with its associates, to acquire (i) more than 15% of an Australian company or business with assets totaling over A$5 million or (ii) any direct or indirect ownership interest in Australian residential real estate. In addition, the percentage of foreign ownership of the Company would also be included in determining the foreign ownership of any Australian company or business in which it may choose to invest. Since the Company has no current plans for any such acquisitions and only owns commercial property, any such approvals required to be obtained by the Company as a foreign person under the Takeovers Act will not affect the Company's current or future ownership or lease of property in Australia. However, there would be no material tax consequence to shareholders of the Company (including holders of ADSs) resulting from the Company being deemed a foreign person under the Takeovers Act. If all of the ADSs offered are acquired by foreign persons or their associates, then the level of foreign ownership of the Company's equity securities will be approximately 64.8%. The level of foreign ownership could also increase in the future if additional existing Australian investors decide to sell their shares into the U.S. market or if the Company were to sell additional Ordinary Shares or ADSs in the future. The Company has additionally provided that all stock options outstanding under the Company's Executive Share Option Plan at such time as the Company becomes subject to a takeover bid pursuant to which the offeror acquires at least thirty percent (30%) of the outstanding Ordinary Shares of the Company shall become immediately exercisable for a period of up to 120 days, measured from the date the Board notifies the optionee of the takeover bid. Similarly, the Company has provided that all stock options outstanding under the Company's 1997 Share Option Plan at such time as the Company is acquired by merger or asset sale pursuant to which such stock options are not assumed or replaced by the successor corporation shall become immediately exercisable for a period of one (1) year (or until the expiration of the stock option term, if earlier). There are 203,038 Ordinary Shares underlying stock options outstanding pursuant to the Executive Share Option Plan, which, barring acceleration, will become exercisable on February 1, 1999 and 184,600 Ordinary Shares underlying stock options granted concurrently with the Company's IPO, consummated on November 7, 1998, under the 1997 Share Option Plan, which, barring acceleration, will become exercisable in three equal installments on November 7, 2000, November 7, 2001 and October 7, 2002 according to the terms of the 1997 Share Option Plan. Pursuant to the appointment of Edgar Berner as a non-executive Director of the Company on September 1, 1998, options to purchase a total of 17,646 Ordinary Shares at a price of US$8.50 per Ordinary Share were granted by the Company under the 1997 Share Option Plan, exercisable in three equal installments on September 1, 2001, September 1, 2002 and August 1, 2003. Such investment restrictions and dilutive acceleration events could have a material adverse effect on the Company's ability to raise capital as needed and could make more difficult or render 21 impossible attempts by certain entities (especially foreign entities, in the case of the Takeovers Act) to acquire the Company, including attempts that might result in a premium over market price to holders of ADSs. The Memorandum and Articles of Association of the Company (collectively, the "Articles") contain certain provisions that could impede any merger, consolidation, takeover or other business combination involving the Company or discourage a potential acquiror from making a tender offer or otherwise attempting to obtain control of the Company. Provisions contained in the Articles, among other things, (i) in effect divide the Board of Directors of the Company into three classes, which serve for staggered three-year terms, (ii) provide that the shareholders may amend or repeal special resolutions, including changes to the Articles and extraordinary transactions, only by a vote of at least 75% of the votes cast at a meeting at which a quorum is present, (iii) require extended notice (of up to 21 days) for special resolutions considered by the Board of Directors, and (iv) authorize the Board of Directors, without any vote or action by shareholders of the Company, to issue, out of the Company's authorized and unissued capital shares, shares in different classes, or with special, preferred or deferred rights, which may relate to voting, dividend, return of capital or any other matter. Although the Company currently has no plans to issue any preferred shares, the rights of the holders of Ordinary Shares or ADSs will be subject to, and may be adversely affected by, the rights of the holders of any preferred or senior share that may be issued in the future. The issuance of any preferred or senior shares, and the other provisions of the Articles referred to above, could have the effect of making it more difficult for a third party to acquire control of the Company. Australian law requires the transfer of shares in the Company to be made in writing, and stamp duty at the rate of 0.6% is payable in relation to any transfer of shares. No stamp duty will be payable in Australia on the transfer of ADSs provided that any instrument by which the ADSs are transferred is executed outside Australia. In certain circumstances, nonresidents of Australia may be subject to Australian tax on capital gains made on the disposal of shares or ADSs. The rate of Australian tax on taxable gains realized by non-residents of Australia is 36% for companies. For individuals, the rate of tax increases from 29% to a maximum of 47%. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On November 3, 1997, the Company's Registration Statement on Form F-1 (File No. 333-37259) for its initial public offering became effective and on November 7, 1998, the Company began trading under this Registration Statement, selling 1,500,000 Ordinary Shares at US$11.00 per share. Except for approximately US$165,000 of expenses relating to the demand registration of 1,044,845 Ordinary Shares on Form F-1, filed with the Commission on June 12, 1998, all registration expenses, underwriting expenses and other related expenses relating to the IPO were incurred prior to the period to which this quarterly report on Form 6-K applies. The Company's net proceeds from the IPO were approximately A$19.7 million (approximately US$13.8 million). Certain selling shareholders also sold 200,000 Ordinary Shares at US$11.00 per share thereunder, and none of such proceeds were retained by the Company. The IPO was underwritten, with J.P. Morgan & Co. and SBC Warburg Dillon Read Inc. acting as co-managers. The Company's use of proceeds from its IPO in November 1997 is set forth in "Part I - - Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and incorporated by reference into Part II. See "Part II- Item 5- Other Information." ITEM 3. DEFAULT UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company convened a duly noticed annual general meeting of shareholders on June 26, 1998 at which a quorum was present. Mr. Sam Linz retired by rotation in accordance with the provisions of Article 63 of the Company's Articles of Association and being eligible, offered himself for re-election and was duly elected with 3,464,867 votes in favor, 0 votes against, and 0 abstentions. Mr. John Price retired by rotation in accordance with the provisions of Article 63 of the Company's Articles of Association and being eligible, offered himself for re-election and was duly elected with 3,464,867 votes in favor, 0 votes against, and 0 abstentions. Mr. Robert Gavshon, Mr. Gordon Howlett, Mr. Philip Gardiner and Mr. Sydney Selati continued in office as directors of the Company. ITEM 5. OTHER INFORMATION. On September 1, 1998, Mr. Edgar Berner was appointed a director of the Company until the next annual general meeting, pursuant to Articles 65 (1) & (2) of the Company's Articles of Association, to fill the vacancy brought about by the resignation of Mr. Philip Gardiner on August 13, 1998. On June 12, 1998, pursuant to an agreement with certain holders of convertible notes (all of which were converted into Ordinary Shares in connection with the Company's IPO), the Company filed a Registration Statement on Form F-1 (the "Resale F-1") relating to a public offering, which was not underwritten, of up to 1,044,845 Ordinary Shares, each having a par value of A$3.64, and each represented by one American Depositary Share (each, a "Resale ADS"). All of the resale ADSs may be sold by certain shareholders of the Company. 997,926 of these Ordinary Shares were received upon the conversion of the convertible notes. The remainder of these Ordinary Shares are being registered voluntarily by the Company and are presently held by long-term shareholders of the Company who may wish to divest all or portion of their holdings in the Company. 23 ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 6-K. (a) Exhibits EXHIBIT NUMBER ------ 10.1 Major Agreements relating to the Registrant's credit facility with Australia and New Zealand Banking Corporation Group Limited ("ANZ"), including the formal letter of offer from ANZ to Directors of the Company, dated May 25, 1998; resolutions of the Directors of Barbeques Galore Limited, dated June 26, 1998, approving the Letter of Offer from ANZ to the Company. 22.1(1) Materials distributed to shareholders with respect to the Company's Annual General Meeting to be held on June 26, 1998 at 9:30 a.m. (Sydney, Australia time), including (i) Notice of Annual General Meeting, (ii) form of proxy for holders of ADRs, which represent ADSs, which in turn, represent Ordinary Shares, (iii) form of proxy for holders of Ordinary Shares, (iv) letter dated May 27, 1998 from Mr. Sam Linz, Chairman of the Board, and Mr. Sydney Selati, President of the Company's U.S. operating subsidiary. _______________ (1) Previously filed as a part of Exhibit 22.1 to the Company's Report of Foreign Issuer on Form 6-K, filed with the Commission on June 15, 1998. (b) There were no current reports on Form 6-K filed during the quarter ended July 31, 1998. 24 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 OR 15D-16 OF THE SECURITIES EXCHANGE ACT OF 1934 BARBEQUES GALORE LIMITED (Registrant) By: /s/ Robert B. Gavshon ------------------------------ Robert B. Gavshon Executive Deputy Chairman Date: September 14, 1998 25 EX-10.1 2 MAJOR AGREEMENTS - AUSTRALIA & NEW ZEALAND EXHIBIT 10.1 [LETTERHEAD OF ANZ APPEARS HERE] 25 May, 1998 The Directors Barbeques Galore Limited 327 Chisholm Road Auburn NSW 2144 Dear Sirs, Following our recent discussions I am pleased to enclose our formal letter of offer. The attached documents include: . The LETTER OF OFFER - detailing the facilities, security and conditions. . A COPY of the LETTER OF OFFER - this copy is for you to sign and return to accept the offer. The covering customer information sheet details the steps you need to take to accept this offer and satisfy those things required before the facilities will be made available. . DRAFT EXTRACT OF MINUTES OF A MEETING OF DIRECTORS - this is an example of what is required for the minutes of a meeting of directors to approve acceptance of our offer. . GENERAL CONDITIONS - specifies the general conditions of use for ANZ facilities. . SPECIFIC CONDITIONS - details additional conditions specific to facilities which are part of this offer and for which Specific Conditions apply. For your information, clause 23 of the General Conditions clarifies the meaning of many of the words and legal expressions used in the documents. Any future changes will be covered by variation letters. Should you have any questions about the offer, please contact me on 9227 1705. I suggest you contact your solicitor for any detailed legal queries. To accept this offer please sign and return the copy of the letter of offer to me. Please note that this offer expires on 30 June 1998. Yours sincerely, /s/ Neil Shilbury /s/ Jason Mares NEIL SHILBURY JASON MARES SENIOR MANAGER MANAGER CORPORATE BANKING CORPORATE BANKING ================================================================================ LETTER OF OFFER TO BARBEQUES GALORE LIMITED GROUP DATED 25 MAY, 1998 AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED ACN 005 357 522 ================================================================================ - -------------------------------------------------------------------------------- LETTER OF OFFER - -------------------------------------------------------------------------------- ISSUING OFFICE: Corporate Banking Level 13, 20 Martin Place SYDNEY NSW 2000 We are pleased to offer the facilities set out below to Barbeques Galore Limited. The facilities made available are fully interchangeable between all companies listed as Participants. CUSTOMER ACN - -------- --- Barbeques Galore Limited 008 577 759 PARTICIPANTS - ------------ Barbeques Galore Limited 008 577 759 Vilbrent Pty Limited 002 055 567 Barbeques Galore Australia Pty Limited 001 354 454 Pricotech Leisure Brands Pty Limited 002 060 273 G.L.G. Australia Pty Limited 001 185 002 Park-Tec Engineering Pty Limited 001 387 382 Australian Enamellers Pty Limited 002 909 864 Galore Group Services Pty Limited 002 060 335 For the purposes of this offer document we will refer to the above Customer and Participants collectively as the Barbeques Galore Limited Group. The Facilities specified below are available to the Barbeques Galore Limited Group and for the sake of record we have detailed the facilities as per their current allocation. The provision of future variation offer documents will occur should your overall facilities be increased however movement between individual like facilities can occur at your discretion without the need of formal documentation. Each year at the specified annual review time we will provide an annual review letter of offer which will summarise the Barbeques Galore Limited Group allocation of facilities. SUMMARY OF FACILITIES A summary of facilities is as follows: FACILITY FACILITY LIMIT AUD BARBEQUES GALORE LIMITED GROUP A. Overdraft $ 2,400,000 B. Documentary Credit/Documents Surrendered/Fixed-Variable $20,000,000 Rate Commercial Bill Acceptance-Discount Facility C. Payroll $ 900,000 D. Encashment $ 50,000 E. Indemnity/Guarantee Facility $ 300,000 F. Foreign Currency Dealing Facility $ 2,500,000 G. Foreign Currency Settlement $ 3,000,000 H. Seasonal Trade $ 6,000,000 I. Fixed/Variable Rate Commercial Bill Acceptance/Discount $ 5,000,000 Facility J. Fixed/Variable Rate Commercial Bill Acceptance/Discount $ 3,450,000 Facility K. Lease Finance Facility $ 4,000,000 TOTAL $47,600,000 Details of the facilities are set out in the facilities schedule to this letter of offer. EXISTING SECURITY Details of existing security are set out in the security schedule on this letter of offer. FURTHER SECURITY The existing security held by us is to remain in full force and together with the further security now to be taken, will extend to cover the existing facilities currently being provided to you by us and the additional facilities in this letter. . Mortgage debentures (the "US DEBENTURES") over all the assets and undertaking of Barbeques Galore Limited and its subsidiaries in the United States or its equivalent security under the laws of the United States of America, as advised by our US legal advisers, ranking second to a mortgage debenture granted in favour of Merrill Lynch Business Financial Services Inc. 1. Cross Guarantee between all members of the Barbeques Galore Limited and including all your US subsidiaries. 2. A Deed of Priority between us and Merrill Lynch Business Financial Services Inc, in a form satisfactory to us, granting them a USD 1,000,000 priority. 3. First RM Freehold Charge over property at 45 Princes Road, Regents Park. This is to be accompanied by a professional valuation by JLW addressed to Australia and New Zealand Banking Group for mortgagee purposes and is to be acceptable to us. We will engage Gadens Ridgeway to prepare the necessary security documentation to complete our security position with such costs being for your account. The completion of item 1, 2 & 3 above is to be by 30/06/98. The security arrangements are governed by a security structure under which ANZ Capel Court Limited has been appointed security agent. And if requested by us you will complete the following: . Issuing and stamping of additional new debenture certificates in our favour; and . Completion of a Statutory Declaration which outlines the value of total assets in each Australian state to be completed each 6 month period ending May and January. OTHER CONDITIONS - ---------------- INTEREST ON CURRENT ACCOUNTS The interest rate applicable on creditor funds is currently based on the Calculated Cash Rate (CCR) less 0.50% pa. This rate fluctuates daily and can be verified in the interest rate section of the Australian Financial Review. INTEREST RATE ON EXCESSES AND OVERDUE AMOUNTS For the purposes of Clause 8 of the General Conditions, the applicable rate of interest is our Reference Rate (currently 7.95%) plus 2.0% pa. REVISED PRICING STRUCTURE We reserve our rights to reintroduce the pricing structure which was applicable to your facilities immediately prior to the issuance of this letter of offer should the Interest Cover covenant as detailed herein not be adhered to. NEGATIVE PLEDGE You undertake not to: create or permit an encumbrance over your assets or give any guarantee or indemnity or similar security to any third party for any obligation without our prior written consent. CAPITAL EXPENDITURE BUDGET Barbeques Galore Limited Group's annual capital expenditure budget is to be presented to us and approved by us prior to the commencement of the next financial year. You will not, without our prior written consent, spend or incur any capital expenses in aggregate in excess of $500,000 of your budget for that year. FINANCIAL PERFORMANCE COVENANTS For the avoidance of doubt, with respect to the financial covenants, "you" or "your" means Barbeques Galore Limited and all its subsidiaries. You shall observe the following financial performance covenants: . Shareholders Funds are not to fall below $40,000,000. . Current Ratio not to fall below 1.50:1 (being Total Tangible Current Assets divided by Total Current Liabilities). . Effective Gearing Ratio [being Total Liabilities divided by (Shareholders Funds less Intangible Assets)] to be less than 1.25:1 as at 31/01 and 1.50:1 as at 31/07. . Interest Cover (being EBIT divided by Gross Interest) to be at least 2.50:1. The verification of compliance of this covenant is to be made against the Group's last 12 months P&L statements. i.e. a rolling 12 month P&L statement. All financial covenants will be tested against 31/07 and 31/01 half-yearly accounts. The following definitions apply to the above financial covenants. "ACCOUNTING STANDARDS" means: (a) financial statements prepared in accordance with generally accepted accounting principles in the United States ("US GAAP"); or (b) such other standards, principles and practices that we may otherwise agree to in writing from time to time. "EBIT" means earnings before income tax and before Gross Interest, being your gross income less costs and expenses incurred by you during the same period as disclosed by the profit and loss account excluding any income tax expense and Gross Interest. "INTANGIBLE ASSETS" means: (a) patents, patent rights, trademarks, trade names, franchises, copyrights, licenses, permits, goodwill, and other intangible assets classified as such in accordance with generally accepted Accounting Standards; and (b) all prepayments; and (c) future income tax benefits being the estimated amount of future saving in income tax likely to arise as a result of: (i) the reversal of timing differences; and (ii) the recoupment of carried forward tax losses, calculated in accordance with Accounting Standards. "GROSS INTEREST" means the aggregate of interest and amounts in the nature of interest incurred (including without limitation payments in the nature of interest under any finance leases) or paid or for which provision has been made during the relevant accounting period. "SHAREHOLDERS FUNDS" means the total consolidated net book value of your assets after all appropriate deductions in accordance with generally accepted Accounting Standards (including without limitation, reserves for doubtful receivable, obsolescence, depreciation and amortisation) LESS the consolidated liabilities (including tax and other proper accruals, and any deferred income) calculated in accordance with Accounting Standards. "TOTAL TANGIBLE CURRENT ASSETS" means, at any time, the aggregate of all your assets calculated on a consolidated basis which would be classified as current assets, in accordance with Accounting Standards, less Current Intangible Assets. "TOTAL CURRENT LIABILITIES" means, at any time, the aggregate of all your liabilities calculated on a consolidated basis which would be classified liabilities, in accordance with Accounting Standards. "TOTAL LIABILITIES" means the total of all your liabilities (including provisions, tax and other accruals, dividends declared or accrued but not paid, and any deferred income) calculated in accordance with Accounting Standards and computed on a consolidated basis. CERTIFICATE OF COMPLIANCE WITH FINANCIAL UNDERTAKINGS You must provide a certificate of compliance with the financial ratios specified in this letter, including reasonable details of the methodology used to calculate the ratios, and certify that all Financial Information provided to us gives a true and fair view of your financial condition and the result of your operations as at the date and in relation to the period in respect of which they were prepared. The certificate referred to in the preceding paragraph must be signed by one of your directors and by one other person, being a director or secretary. These certificates must be provided within 60 days of the half year to 31 July and 90 days of the full year end to 31 January. RETENTION OF TITLE Director's certificate confirming the actual Australian dollar level of your stock (or any part thereof) which is subject to any retention of title arrangement in favour of any third party. The certification referred to in the preceding paragraph must be signed by a Director and Chief Financial Officer and provided annually within 90 days of the 31 January year end balance date. CHANGE OF CONTROL If a change of control occurs it is an event of default unless waived by us. For the purposes of this agreement, a change of control occurs if, without our prior written consent, effective control of Barbeques Galore Limited or any surety or any of Barbeques Galore Limited's subsidiaries or any surety's subsidiaries is, in our opinion altered to any material extent from that subsisting at the date of our letter of offer and that alteration will in our opinion materially adversely affect your ability to comply with your obligations to us. "Effective control of a corporation means: (a) control of the composition of the board of directors of that corporation; (b) control of 40% or more of the voting rights attaching to shares in that corporation; (c) control of 40% or more of the issued share capital of that corporation". FINANCIAL MONITORING You agree to provide us with: . Your Form 20-F (US GAAP) audited financial statements as soon as they are available, but not later than 120 days after balance date. . Your quarterly Nasdaq financial reporting package with budget comparisons within 60 days of the quarter end. This package is to include balance sheet and profit & loss statement. Budget comparisons are also to include the Group's original full 12 month cash flow forecast against which the current actual cash flow can be compared. . Annual budget information upon Board ratification but not later than 60 days after the financial year end. . Statutory Declaration evidencing the Australian dollar level of assets held in each Australian state to be provided with annual audited accounts. . Any other information as required by ANZ. ANNUAL REVIEW The facilities are subject to annual review. The next review date will be on 16 June 1998. GENERAL CONDITIONS AND SPECIFIC CONDITIONS Our General Conditions (Second Edition 1995) apply to the facilities as well as any applicable Specific Conditions (Second Edition 1995) to the facilities. Both the General Conditions and any applicable Specific Conditions are enclosed with this letter of offer. CONDITIONS PRECEDENT Our obligations to make any facilities available is subject to our being satisfied that you have complied with Clause 4 of the General Conditions. VALUATIONS You agree that the properties listed in the attached security schedule and also the property at 45 Princes Road, Regents Park will be valued for us at least once each 3 years at your cost while facilities continue to be provided by us. Each valuation must be undertaken by a reputable licensed property valuer acceptable to us and must be addressed to Australia and New Zealand Banking Group Limited for mortgagee purposes and acknowledge that we are relying on the valuation provided. YEAR 2000 ISSUES In accordance with clause 6 of the General Conditions, we may require you to provide information on how you are dealing with risks associated with Year 2000 Issues. If, in our opinion, Year 2000 Issues may have a material adverse effect on: (i) your business, assets or financial position; or (ii) your ability to perform your obligations under any transaction documents, you agree that we may appoint an independent consultant as agreed with you, or if we can not agree then a consultant as selected by us, and at your cost to assess such risks and to gather such information as may reasonably be required. You also agree that if we do appoint an independent consultant, you will co-operate with the consultant and allow such assess to your business, including your information technology systems, as shall be reasonably necessary. Year 2000 Issues are any Issues which relate to the possible impact to your business of any fact or circumstance caused by the way dates and times are processed prior to or after 1/1/2000. OFFER PERIOD Our offer is available for acceptance until the close of business on 30 June 1998, unless otherwise extended by the Bank in writing. We may withdraw our offer at any time before you accept it if we become aware of anything which, in our opinion, adversely alters the basis on which we made our offer. ACCEPTANCE To accept this offer, please sign the duplicate of this letter of offer where indicated and return it to us at this office. Yours faithfully, /s/ Neil Shilbury /s/ Jason Mares - ----------------------- ----------------------- NEIL SHILBURY JASON MARES SENIOR MANAGER MANAGER CORPORATE BANKING CORPORATE BANKING - -------------------------------------------------------------------------------- FACILITIES SCHEDULE - -------------------------------------------------------------------------------- FACILITIES SCHEDULE to letter of offer dated 28 May, 1998. A. OVERDRAFT Gross Limit:$2,400,000 Facility limit: Net Limit: $2,000,000 The overdraft has been provided with set-off for interest purposes between accounts conducted by you with us. This arrangement is in place on the understanding that you acknowledge our right to apply the whole or part of any credit balances in any of your accounts held with us in payment of any debit balances of any of your accounts held with us. Termination date: Not before the next review date. Purpose: Working capital requirements. Interest rate: ANZ's reference rate (currently 7.95% pa) for amounts up to the facility limit. ANZ's reference rate is published weekly (usually each Monday) in the Australian Financial Review. Interest payment: Monthly in arrears on the first business day of each month, accruing daily starting on the first day of overdraft (interest is charged and payable monthly). Fees: Line fee: 0.05% pa on the highest facility limit recorded for your accounts. This fee is payable quarterly in arrears on the 15th day of each February, May, August and November, for the quarter ended January, April, July and October respectively. Set-off fee $150 per account per quarter. This fee is payable quarterly in arrears on the last day of the quarter ended January, April, July and October respectively. Transfer fee A daily transfer fee of $10.00 per transfer exists for transactions between the ODTD and STA with your main operating account. Prepayment: Prepayment or cancellation of the facility (in whole or in part) may be effected without penalty at any time at the election of the customer. Specific Conditions There are no Specific Conditions which apply to this facility. B. DOCUMENTARY CREDIT/DOCUMENTS SURRENDERED/FIXED-VARIABLE RATE COMMERCIAL BILL ACCEPTANCE-DISCOUNT FACILITY - FULLY INTERCHANGEABLE Facility limit: AUD $20,000,000 (For this purpose we will determine exchange rates to convert foreign currency amounts to the equivalent amounts in AUD). Termination date: Not before the next review date. Purpose: Establishment of documentary credits at sight or at term and refinance of trade documents. Condition precedent: You are only entitled to use the facility if we agree to the terms of your application and if you execute all documents required by us. Fees: Our standard fees apply to establishment and documentary handling of your documentary credits. Inward documents refinanced will be at the relative commercial bill rate plus a margin of 1.0% p.a. Specific Conditions Should the trade documents be refinanced via Fixed/Variable Commercial Bill Acceptance/Discount then the same terms, conditions and pricing are applicable as those detailed in Facilities H, I or J detailed herein. There are no other Specific Conditions which apply to this facility except that any drawing is to be refinanced on finance terms not exceeding 180 days including the term of the letter of credit. C. PAYROLL Facility limit: $900,000 Termination date: Not before the next review date. Purpose: Enable processing of payroll via ANZ OnLine. Specific Conditions: There are no Specific Conditions which apply to this facility. D. ENCASHMENT Facility limit: $50,000 Termination date: Not before the next review date. Purpose: Enable the encashment of cheques at various Branches. Fees: Establishment fee: $45 for each encashment arrangement. This charge is subject to variation at any time during the term of the facility. Renewal fee: $45 for each encashment arrangement. This charge is subject to variation at any time during the term of the facility. Specific Conditions: There are no Specific Conditions which apply to this facility. E. INDEMNITY/GUARANTEE FACILITY Facility limit: $300,000 Termination date: Not before the next review date. Purpose: Rental bonds Fee rate for each Bank Guarantee: 1.0% pa subject to a minimum fee of $80 per half year. The minimum fee is subject to variation at any time during the term of the facility. Fee payment: For each Bank Guarantee, the fee is payable on the date of drawdown and afterwards half yearly. Specific Conditions: Specific Conditions for the facility are enclosed. F. FOREIGN CURRENCY DEALING FACILITY Facility limit: AUD 2,500,000 (For this purpose we adjust the face value of the customer's obligation under each transaction by a multiplier (determined by us). The process includes conversion of any foreign currency amount to the equivalent amount in AUD). Termination date: Not before the next review date. Purpose: Spot and forward exchange dealing (including currency swaps). No pay away exposure except We do not assume any pay away exposure under under Foreign Currency Settlement this facility unless and to the extent that Facility limit: it links this facility with a Foreign Currency Settlement Facility. Except to that extent we can have no obligation to deliver currency under a contract until we are satisfied that counter funds have been lodged by you or on your behalf. Condition precedent: You may only enter into a foreign currency contract with us if we agree to the terms of the contract and if you execute all other documents required by us. Maximum contract term: The maximum term for a foreign currency dealing contract is 12 months. Specific Conditions: There are no Specific Conditions which apply to this facility. G. FOREIGN CURRENCY SETTLEMENT FACILITY Facility limit: AUD 3,000,000 (For this purpose we will determine the exchange rates to convert foreign currency amounts to the equivalent amounts in AUD). The facility is linked to the Foreign Currency Dealing Facility. The facility limit represents the extent to which we will assume pay away exposure, on any one settlement day, for foreign exchange contracts maturing on that day. Termination date: Not before the next review date. Purpose: To allow delivery of currency under foreign exchange contracts before we have received confirmation that counter funds have been lodged by you or on your behalf. Condition precedent: We will only assume pay away exposure for your obligation under a foreign exchange contract, if we have agreed to the terms of the contract and you have executed all documents required by us. Specific Conditions: There are no Specific Conditions which apply to this facility. H. VARIABLE RATE COMMERCIAL BILL ACCEPTANCE/ DISCOUNT FACILITY - SEASONAL TRADE Facility limit: $6,000,000 - available only between 1/7 and 31/01 of each year unless otherwise agreed. Termination date: Not before the next review date. Purpose: Working capital requirements during peak import/manufacturing periods. Yield rate: For each drawing of bills, our cost of funds rate quoted for the face value of the bills for the relevant tenor. Fees: Line Fee: 0.50% pa on the facility limit, payable quarterly in advance. Acceptance fee: For each drawing an amount equal to 0.50% pa on the amount of the drawing. Specific Conditions: Specific Conditions (Second Edition 1995) for the facility are enclosed. I. FIXED/VARIABLE RATE COMMERCIAL BILL ACCEPTANCE/DISCOUNT FACILITY Facility limit: $5,000,000 Termination date: 1 February 2001 Purpose: Purchase of capital equipment and any permanent working capital requirements. Yield rate: For each drawing of bills, our cost of funds rate quoted for the face value of the bills for the relevant tenor. Currently this facility is drawn to $2,150,000 at a rate of 8.60% p.a.maturing 06/05/99. Fees: Line Fee: 0.50% pa on the facility limit, payable quarterly in advance commencing on the date of acceptance of our offer. Acceptance Fee: For each bill, an amount equal to 0.50% pa on the face amount of the bill calculated on the tenor of the bill and payable on the drawdown date for the bill. Specific Conditions Specific Conditions (Second Edition 1995) for the facility are enclosed. J. FIXED/VARIABLE RATE COMMERCIAL BILL ACCEPTANCE/DISCOUNT FACILITY Facility limit: $3,450,000 Termination date: 1 February 2001 Purpose: Purchase of 45 Princes Road, Regents Park NSW. Yield rate: For each drawing of bills, our cost of funds rate quoted for the face value of the bills for the relevant tenor. Fees: Line Fee: 0.50% pa on the facility limit, payable quarterly in advance commencing on the date of acceptance of our offer. Acceptance Fee: For each bill, an amount equal to 0.50% pa on the face amount of the bill calculated on the tenor of the bill and payable on the drawdown date for the bill. Specific Conditions Specific Conditions (Second Edition 1995) for the facility are enclosed. K. LEASE FINANCE FACILITY Facility limit: $4,000,000 Termination date: Not before the next review date. Purpose: To fund plant and equipment and store fitout purchases. Subject to execution of Lease You are entitled to a lease only upon Acknowledgment acceptance by us, and execution by the parties (in the standard form provided by us), of a Lease Acknowledgment in terms of the Master Lease Agreement which constitute the Specific Conditions for the facility/leases already drawn under the facility before your acceptance of our offer. Specific Conditions Specific Conditions (Second Edition 1995) for the facility are enclosed. BARBEQUES GALORE LIMITED (ACN 008 577 759) Directors' Resolution made pursuant to Article 83 (1) We, being all the directors of BARBEQUES GALORE LIMITED at the time this document is last signed, are in favour of the following resolution: THAT THE DOCUMENTS NUMBERED 1-6 (the "Documents") AND THE LETTER OF OFFER DATED 25 MAY 1998 ("the Letter of Offer") AND THE SECURITIES NUMBERED 2-5 (the "Securities") AS SUMMARISED IN THE EXTRACTS OF BOARD MINUTES (ATTACHED HERETO FOR EASE OF REFERENCE) BE APPROVED IN THEIR ENTIRETY IN THE MANNER CONTEMPLATED BY THE AUSTRALIAN AND NEW ZEALAND BANKING GROUP LIMITED Director Date of Signing Sam Linz /s/ Sam Linz 26/6/98 ------------ --------------- Robert Gavshon /s/ Robert Gavshon 26/6/98 ------------------ --------------- John Price /s/ John Price 26/6/98 -------------- --------------- Gordon Howlett /s/ Gordon Howlett 26/6/98 ------------------ --------------- Philip Gardiner /s/ Philip Gardiner 26/6/98 ------------------- --------------- Sydney Selati _________________ _______________ BARBEQUES GALORE LIMITED (ACN 008 577 759) Directors' Resolution trade pursuant to Article 83(1) We, being all the directors of BARBEQUE GALORE LIMITED at the time this document is last signed, are in favour of the following resolution: THAT THE DOCUMENTS NUMBERED 1-6 (the "Documents") AND THE LETTER OF OFFER DATED 25 MAY 1998 ("the Letter of Offer") AND THE SECURITIES NUMBERED 2-5 (the "Securities") AS SUMMARISED IN THE EXTRACTS OF BOARD MINUTES (ATTACHED HERETO FOR EASE OF REFERENCE) BE APPROVED IN THEIR ENTIRETY IN THE MANNER CONTEMPLATED BY THE AUSTRALIAN AND NEW ZEALAND BANKING GROUP LIMITED. Director Date of Signing Sam Linz /s/ Sam Linz 26/6/98 ----------------------- --------------- Robert Gavshon /s/ Robert Gavshon 26/6/98 ----------------------- --------------- John Price /s/ John Price 26/6/98 ----------------------- --------------- Gordon Howlett ----------------------- --------------- Philip Gardiner ----------------------- --------------- Sydney Selari /s/ Sydney Selari 7/1/98 ----------------------- --------------- - -------------------------------------------------------------------------------- EXTRACT OF BOARD MINUTES - -------------------------------------------------------------------------------- BARBEQUES GALORE LIMITED A.C.N. 008 577 759 (the "COMPANY") EXTRACT OF MINUTES OF A MEETING OF DIRECTORS OF THE COMPANY HELD AT 327 CHISHOLM ROAD AUBURN NEW ZEALAND ON THE 1ST DAY OF JULY 1998 AT AM/PM AGREEMENT WITH AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (the "BANK") The following documents were tabled: 1. Letter of Offer dated 25 May 1998 from the Bank to the Customer in relation to certain facilities (the "Letter of Offer"); 2. the Bank's General Conditions (Section Edition 1995); 3. the Bank's Specific Conditions for Variable Rate Commercial Bill Acceptance/Discount Facility (Second Edition 1995); 4. the Bank's Specific Conditions for Fixed Rate Commercial Bill Acceptance/Discount Facility (Second Edition 1995); 5. the Bank's Specific Conditions for Indemnity/Guarantee Facility (Second Edition 1995); 6. the Bank's Specific Conditions for Lease Finance Facility (Second Edition 1995); (Documents 1-6 inclusive collectively are called the "Documents"). AFTER DUE DISCLOSURE OF ALL DISCLOSABLE INTERESTS IT WAS RESOLVED THAT: (a) each of the documents is approved for acceptance by execution or confirmation of acceptance by the means (as required by the Bank) substantially in the form produced at the meeting or with any additions, variations and amendments approved by an Authorised Representative; (b) the exercise of the Company's rights and the performance of its obligations under which each Transaction Document is approved; (c) each Authorised Representative of the Company is jointly and severally authorised to act fully and effectually on behalf of the Company in all dealings, matters and transactions with the Bank now or in the future, including: (i) to act in terms of and for the purposes of the Letter of Offer and any other documents relevant to the facilities; and (ii) to complete, execute, deliver, confirm, accept or otherwise effect the entry by the Company into any Transaction Document, including any documents supplemental to or varying a facility or in relation to new or additional facilities; and (iii) to complete, execute and deliver to the Bank on behalf of the Company any surety acknowledgment of changes in the facilities provided by the Bank to the Customers and any confirmation that any security, guarantees or indemnity given by the Company continues to secure facilities provided to the Customers despite any change in arrangements between the Bank and the Customers; (e) in these resolutions "Transaction Documents" has the same meaning as in the Bank's General Conditions and include the Documents; and (f) in these resolutions "Authorised Representative" means: (i) each person named in any Account Operating Authority (which has previously been given by the Company to the Bank) as being able to act severally on behalf of the Company; or (ii) if the Account Operating Authority does not permit each of the named persons to act severally, two or more persons named in that Account Operating Authority acting jointly in accordance with any restrictions contained in the Account Operating Authority; "Account Operating Authority" has the same meaning as in the Bank's General Conditions. I, David Glaser, certify that: *(1) I am a secretary of the Company; (2) this is a complete, correct and up to date copy of an extract from the minutes of a properly held meeting of the Board of Directors held on the date shown above; and (3) the resolutions described above were validly passed and have not been amended or revoked. DATED JULY 1, 1998 /s/ David Glaser ------------------------------ Signature *delete as appropriate - -------------------------------------------------------------------------------- EXTRACT OF BOARD MINUTES - -------------------------------------------------------------------------------- BARBEQUES GALORE LIMITED A.C.N. 008 577 759 (the "COMPANY") EXTRACT OF MINUTES OF A MEETING OF DIRECTORS OF THE COMPANY HELD AT 327 CHISHOLM ROAD AUBURN NEW ZEALAND ON THE 1st DAY OF JULY 1998 AT AM/PM SECURITIES IN FAVOUR OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (the "BANK") The following documents were tabled: 1. Letter of Offer dated 25 May 1998 from the Bank to Barbeques Galore Limited in relation to certain facilities (the "letter of offer"). Existing Securities 2 Refer attached Security Appendix detailing same. Further Securities 3. Mortgage debentures (the "US DEBENTURES") over all the assets and undertaking of Barbeques Galore Limited Group and its subsidiaries in the United States or its equivalent security under the laws of the United States of America, as advised by our US legal advisers, ranking second to a mortgage debenture granted in favour of Merrill Lynch Business Financial Services Inc. 4. Cross Guarantee between all members of the Barbeques Galore Limited Group and including all your US subsidiaries. 5. A Deed of Priority between us and Merrill Lynch Business Financial Services Inc, in a form satisfactory to us, granting them a USD 2,150,000 priority (which priority will reduce in accordance with the terms of the repayment arrangements under part of the facilities which it secures) in relation to our US Debentures. The Deed of Priority must have reduced to USD1,500,000.00 prior to any drawdown under the Standby Facility. (Documents 2-5 inclusive collectively are called the "Securities"). AFTER DUE DISCLOSURE OF ALL DISCLOSUABLE INTERESTS IT WAS RESOLVED THAT: (a) the Company acting in its own capacity agrees to provide the Securities to the Bank for the obligations to the Bank of the customers named in the Letter of Offer (the "customers"); (b) it was noted that: (i) under the Securities the Company is liable to the Bank for all moneys which the Customers may owe the Bank now or in the future (including, but not limited to, any money which may be owned to the Bank under the facilities referred to in the Letter of Offer); and (ii) the amount of this liability may exceed the amount of the facilities set out in the Letter of Offer. (c) each of the documents is approved for acceptance by execution or confirmation of acceptance by the means (as required by the Bank) substantially in the form produced at the meeting, together with all other deeds and documents (the "ancillary documents") which may be required by the Bank in order to give an effective security; (d) the exercise of the Company's rights and the performance of its obligations acting in its own capacity under each of the Securities and the ancillary documents is approved; (e) where the form of any of the Securities or the ancillary documents requires execution under the Common Seal of the Company, the Common Seal of the Company be affixed to the relevant document in accordance with the Articles of Association of the Company; (f) the directors first considered whether the execution of the Securities was of commercial benefit to the Company. Having decided that it was of commercial benefit to the Company to execute the Securities, the directors passed this resolution; and (g) each [Authorised Representative]/[director] of the Company is jointly and severally authorised on behalf of the Company to act fully and effectually in all dealings, matters and transactions with the Bank about the Securities now or in the future, including; (i) to act in terms of and for the purposes of the Securities and any other document relevant to the facilities provided by the Bank to the Customers; and (ii) to complete, execute and deliver to the Bank on behalf of the Company any acknowledgement of changes in the facilities provided by the Bank to the Customers (including increased or additional facilities) and any confirmation that the Securities and any other security, guarantee or indemnity which may be given by the company its own continue to secure facilities provided to the Customers despite any changes in arrangements between the Bank and the Customers; and (h) in these resolutions "Authorised Representative" means: (i) each person named in any Account Operating Authority (which has previously been given by the Company to the Bank) as being able to act severally on behalf of the Company; or (ii) if an Account Operating Authority does not permit each of the named persons to act severally, two or more persons named in that Account Operating Authority acting jointly in accordance with any restrictions contained in that Account Operating Authority; "Account Operating Authority" has the same meaning as in the Bank's General Conditions which are incorporated in the Letter of Offer. I, David Maurice Glaser, certify that: -------------------- (Insert Secretary's full name) *(1) I am a secretary of the Company; (2) this is a complete, correct and up to date copy of an extract from the minutes of a properly held meeting of the Board of Directors held on the date shown above; and (3) the resolutions described above were validly passed and have not been amended or revoked. DATED July 1, 1998 /s/ David Maurice Glaser - ------------------------ Signature *delete as appropriate. -----END PRIVACY-ENHANCED MESSAGE-----