Struggling Sea Galley Pays To Move Officer Here

Though the company is losing millions of dollars a year and faces multimillion-dollar liabilities, Sea Galley Stores Inc. of Lynnwood has agreed to pay one of its co-founders $400,000, plus unspecified interest, to move his family from Arizona.

As outlined in documents filed with the Securities and Exchange Commission, the deal calls for John Cox, who has been chief operating officer of the restaurant chain since 1991, to take that job permanently and stay for at least three years.

The arrangement was approved last year by Sea Galley's three-member board of directors. Cox is one of the three, but Jan Young, chairman, said Cox did not vote on the agreement.

Linked to the deal is an agreement giving Sea Galley a lucrative contract to manage a Flakey Jake's restaurant in Tempe, Ariz., which Cox operated before he became Sea Galley chief operating officer.

The contract gives Sea Galley 85 percent of the profits from the restaurant, which Young said is one of the most successful outlets that Sea Galley operates. The company runs 13 restaurants in Washington, Idaho, Alaska, Arizona and Wyoming.

Young said those profits will exceed the cost of the compensation agreement with Cox.

According to SEC filings, the Tempe restaurant averages $2.3 million in annual sales, and profits last year were estimated at $130,000.

However, Sea Galley has a history of creating executive compensation packages that come back to haunt the company.

Kim Krieg, a former Sea Galley president for just a year, received severance pay of $200,000 and an additional $53,000 for related real estate services, according to the SEC filings. Of the $253,000, Sea Galley paid $198,500 during 1991. The balance, on which the company paid 12 percent interest, was paid to Krieg last year.

The first $80,000 payment to Cox is due in July. If the company defaults on that payment, Cox has the right to demand immediate payment of the entire $400,000, according to SEC documents.

The documents say Cox's 1992 compensation from Sea Galley included $60,000 in salary, a $38,000 bonus and $6,000 for his board position. In 1991, Cox received a salary of $42,700 and a $6,000 fee for being a director, according to SEC filings.

Young defends the board's compensation arrangement with Cox. He said Cox has not yet received the $38,000 bonus from last year and will not take the money if it is not available.

The payout to Cox may become a moot point, however, if Sea Galley does not quickly solve numerous other financial problems, the most pressing of which is its seriously delinquent debt.

Since September 1991, the company has been in default on its subordinated debenture payments. The default allows the trustee to accelerate payment of the principal and interest, which is due in 1995. The amount currently due is $8.85 million.

Young said the chain is working to restructure the debt by increasing equity in the chain. To accomplish the restructuring, Sea Galley gained shareholder approval in January to increase its common stock from 10 million shares to 35 million shares.

Sea Galley is plagued by other troubles as well. Two years ago, the company planned to divest its last Ranch & Home store in Mount Vernon. However, the sale fell through because of ground-water contamination at the site.

That left Sea Galley facing property payments and cleanup costs estimated at $200,000, with additional carrying costs on the property of $327,000, according to SEC documents.

Sea Galley also remains liable for leases on some properties it sold to Kipper Acquisition Co., which operated the sites as The Keg restaurants. Kipper has since closed several of those locations.

In total the leases, which extend through 2009, represent a $14.55 million liability for Sea Galley, according to SEC filings. However, Young said The Keg closures have not cost Sea Galley any money. Despite the stated liability in SEC filings, Young said The Keg is responsible for paying the leases and so far it has done so on each closed site.

Sea Galley said it will close its restaurant in Lynnwood, but it hopes to open new restaurants later this year.

The Lynnwood site, leased by Sea Galley, is of interest to several other companies, said Young, who is president, chief executive officer and a director in addition to being chairman.

Though Sea Galley has steadily closed restaurants over the past few years, the company continues to open new locations, too.

For the quarter ended March 21, Sea Galley lost $354,000 on sales of $4.72 million, compared with a loss of $602,000 and sales of $4.72 million for the same quarter in 1992.

For the fiscal year ended Dec. 27, Sea Galley lost $3 million, or 92 cents per share, on sales of $21.8 million, compared with 1991 losses of $4.9 million, or $1.53 per share, on restaurant sales of $21.6 million.