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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
------------------------
FORM 10 -K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 26, 2000
Commission File Number: 000-23739
STEAKHOUSE PARTNERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3248672
(State of Incorporation) (I.R.S. Employer I.D. Number)
10200 Willow Creek Road, San Diego, California 92131
(Address of principal executive offices and Zip Code)
(858) 689-2333
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: /X/ YES / / NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: /X/
Registrant's revenues for its most recent fiscal year (ended December 26, 2000):
$131,635,804.
Aggregate market value of voting stock held by non-affiliates: $5,093,720.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
3,386,522 common shares were outstanding as of December 26, 2000.
Documents Incorporated by Reference:
Part III -- Proxy Statement to be issued in conjunction with Registrant's Annual
Stockholders' Meeting.
The index to exhibits is located on page 20.
FORM 10-K
STEAKHOUSE PARTNERS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 26, 2000
TABLE OF CONTENTS
Item PAGE
PART I
Item 1. Business.......................................... 1
Item 2. Properties........................................ 9
Item 3. Legal Proceedings................................. 10
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 10
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..................... 10
Item 6. Selected Financial Data........................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 12
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk..................................... 16
Item 8. Financial Statements and Supplementary Data....... 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 17
PART III
Item 10. Directors, Executive Officers of the Registrant... 17
Item 11. Executive Compensation............................ 17
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................. 17
Item 13. Certain Relationships and Related Transactions.... 17
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 17
Signatures.................................................. 19
(i)
PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for
forward looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the projected
results. All statements other than statements of historical fact made in this
Annual Report on Form 10-K are forward looking. In particular, the statements
herein regarding industry prospects and future results of operations or
financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. Our
actual results may differ significantly from management's expectations.
Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we", "us"
and "our"), currently operates 65 full-service steakhouse restaurants located in
eleven states. The Company's restaurants specialize in complete steak and prime
rib meals, and also offer fresh fish and other lunch and dinner dishes. The
Company's average dinner check is approximately $23.00 (including alcoholic
beverages) and it currently serves over 6.8 million meals annually. The Company
operates principally under the brand names of Hungry Hunter's, Hunter's
Steakhouse, Mountain Jack's and Carvers. Company management believes that its
emphasis on quality service and the limited menu of its restaurants, with its
concentration on high quality USDA choice-graded steaks and prime ribs,
distinguishes the Company's restaurants and presents an opportunity for
significant growth.
On December 21, 1998, the Company consummated its acquisition of Paragon
Steakhouse Restaurants, Inc. ("Paragon"), which owned 78 steakhouse restaurants
and Pacific Basin Foods Inc., ("Pacific Basin") a restaurant food distribution
company. Paragon and Pacific Basin are now wholly owned subsidiaries of the
Company.
OUR BUSINESS BACKGROUND
The steakhouse restaurant industry is expected to continue to expand
substantially over the next five years. We believe that this industry is highly
fragmented and presents an excellent opportunity for us to grow our business
nationwide by expanding Paragon's brand-name steakhouses through the
construction of new Hungry Hunter's, Hunter's Steakhouse, Mountain Jack's and
Carvers restaurants and the acquisition of other, large regional steakhouse
chains.
RESTAURANT CONCEPTS
All of our restaurants are positioned as destination restaurants that
attract loyal clientele. By our use of the term destination restaurants, we mean
that we seek to establish our restaurants as the primary destination of our
clientele, rather than a destination or activity ancillary to another activity,
such as shopping or sight-seeing. All of our restaurants are full-service
steakhouses. Our restaurants feature only USDA Choice, midwestern corn-fed beef.
Unlike many of our competitors, we do not serve plastic-wrapped vacuum sealed
steaks but rather we hand-cut our steaks in-house from whole loins of beef for
superior freshness and taste. Prime rib is another "signature product" and is
the basis for our distinctive merchandising commitment to "The Best Prime Rib in
Town". Our prime rib, which is served in a herb crust, is slow roasted for seven
hours to enhance its flavor and tenderness. Portions are deliberately generous
and full liquor and bar service is available. Alcoholic beverage service
accounts for approximately 19% of our net sales.
Most of our restaurants are open daily from 4:30 p.m. to 9:30 p.m. on
weekdays and from 4:00 p.m. to 10:00 p.m. on weekends. Some restaurants are open
for lunch beginning at 11:00 a.m. on weekdays; but most of these restaurants are
closed for lunch on weekends.
We currently operate in three distinctive steakhouse markets.
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HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE AND MOUNTAIN JACK'S
We have 49 steakhouses operating under the brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's for which the average dinner check is in
the under $25.00 per guest range. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and have the
"look and feel" of a special restaurant. For this reason, we have been able to
position our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's
steakhouses as a step-above the lower ticket Outback and Lone Star restaurant
chains.
Our menu also features fresh fish and chicken in addition to steaks. A
complete meal includes salad and a choice of side dishes including baked potato,
french fries and steamed vegetables. The menu also includes appetizers and
desserts.
Our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's restaurants
are typically free-standing buildings with dinner seating capacities ranging
from 150 to 475 seats and an average seating capacity of approximately 220
seats. Unlike a typical Outback or Lone Star, our restaurants typically have one
or more banquet rooms to accommodate private parties and corporate events. The
bar in each restaurant is generally located adjacent to the dining room
primarily to accommodate customers waiting for dining tables and up to
approximately 30 additional diners at between six and nine tables.
We are currently developing the next generation of our classic steakhouse
concept under the names J. Dempsey's and H. Hunter Steakhouse. Each will
continue to be positioned as a step above the lower ticket Outback and Lone Star
Steakhouses.
CARVERS
We have 11 steakhouses operating in the upscale steakhouse dining segment
under the Carvers brand name with an average check per guest of slightly less
than $35.00. Carvers is a sophisticated, upper tier mid-priced restaurant
specializing in complete steak, chop, prime rib and seafood meals. Most Carvers
are divided into distinctive dining areas to provide greater intimacy. Prices at
the Carvers restaurants are higher than those of our other restaurants, but are
substantially lower than high-end steakhouses such as Morton's and Ruth's Chris.
Our Carvers restaurants are also typically housed in free-standing
buildings with dinner seating capacities ranging from 180 to 240 seats and an
average seating capacity of approximately 220 seats. The Carvers restaurants
also have one or more banquet rooms to accommodate private parties and corporate
events.
UNIQUE CONCEPTS
We have five unique formal restaurants housed in landmark buildings in
prime locations near or at tourist sites which also serve as the destination or
special occasion restaurant in their respective communities. The menu at these
restaurants is similar to Hungry Hunter's or Carvers and the average dinner
check per guest is between $25.00 and $35.00. These restaurants all have one or
more banquet rooms.
CORPORATE STRATEGY
We believe that a critical component to our success is to exceed the
expectations of each guest by providing a dining experience characterized by
high quality, personalized service and quality menu selections. We also believe
that ambiance, location and price-value relationship are keys to success in the
restaurant industry. We differentiate our restaurants by emphasizing the
following strategic elements:
* High-quality and attentive service.
* Consistent high-quality, fresh products achieved through careful
ingredient selection, generous food preparation and aging of steaks.
* Positioning in the mid-priced, full service steakhouse segment of the
restaurant industry.
* Strong emotional value through branding.
2
GROWTH STRATEGY
Our goal is to enhance our position as a leader in the steakhouse
restaurant industry by building through internal growth, licensing, and
acquisitions, a national network of steakhouse restaurants. Key components of
our strategy include the following:
* Leverage established brands. Paragon has been in the steakhouse business
since 1967 and we believe our Hungry Hunter's, Hunter's Steakhouse,
Mountain Jack's and Carvers brands are well established in the industry.
We plan to test the licensing of our brands with selected operators in
2001.
* Expand internal growth. We believe our management team has the ability to
recognize opportunities for further large steakhouse chain acquisitions
and the expertise to execute and improve on those acquisitions once they
are acquired. We believe our experienced management team can capitalize
on the fragmented nature of the successful steakhouse market.
* Operating efficiencies. We believe our integration strategy affords us
the ability to achieve operating efficiencies and cost savings through
volume discounts on purchases. Also, with our increasing size, we can
lower costs and better manage our expenses. We provide centralized
accounting functions and administrative functions to enhance our
efficiencies.
* Efficient penetration of new markets. We believe we avoid many of the
costs and risks associated with entering new geographic markets. We
consider the location of each restaurant to be critical to its long-term
success and management devotes significant effort to the investigation
and evaluation of potential sites. The site selection process focuses on
regional and trade area demographics, target population density,
household income and educational levels and traffic patterns, as well as
specific site characteristics such as visibility, accessibility, traffic
volume and the availability of adequate parking. We also review potential
competition and customer activity at other restaurants operating in the
area.
MARKETING
We rely principally on our commitment to customer service and excellent
price-value relationship to attract and retain customers. Accordingly, we focus
our resources on seeking to provide customers with high-quality and attentive
service, value and an exciting and vibrant atmosphere.
Our marketing efforts consist of local media advertising and couponing.
Local advertising and couponing consists of bulk mailers, free-standing
newspaper inserts and targeted direct mailers. We have also successfully offered
discounts to encourage more people to try our restaurants, as well as to
increase weekday customer counts.
To promote local community awareness, each restaurant manager is encouraged
to become part of the local community. Many restaurants host meetings with
community leaders to solicit local input about the restaurants' potential
community participation.
For each new restaurant, we conduct a pre-opening awareness program
beginning approximately two to three weeks prior to, and ending four to six
weeks after, the opening of a restaurant. A given program typically would
include special promotions, site signs, sponsorship of a fund-raising event for
a local charity to establish ties to local community leaders and increase
awareness of the new restaurant, and pre-opening trial operations, to which the
family and friends of new employees would be invited.
RESTAURANT OPERATIONS AND MANAGEMENT
We maintain quality and consistency in our restaurants through the careful
hiring, training and supervision of personnel and the establishment of standards
relating to food and beverage preparation, maintenance of facilities and conduct
of personnel. To achieve our service goals, each service employee completes an
extensive training program, which teaches employees to provide the level of
quality service that encourages guests to return and request the same server on
subsequent visits.
We maintain financial and accounting controls for each of our restaurants
through the use of centralized accounting and management information systems.
All levels of our management participate in the ongoing process of strategic and
financial planning and our systems are continuously refined to allow management
to compare actual results with budgets and projections.
3
We also utilize modern management information systems to allow timely
information analysis and response. Our computerized point-of-sale (POS) data
management system and related telecommunication equipment permits daily polling
of restaurant operations and rapid collection of sales data and cash management
information. Transaction level data is electronically transferred from each
restaurant location via POS systems on a daily basis. By consolidating
individual restaurant's sales, purchasing, payroll, operating expenses, guest
related statistics and other data, we can regularly monitor restaurant
operations. Management uses real-time information and control systems to reduce
labor costs, to maintain constant surveillance of inventory usage and to analyze
various aspects of restaurant operations including ideal food costs, sales mix,
labor minutes per meal, promotional programs, restaurant costs and general
marketing data.
The management team for a typical steakhouse restaurant generally consists
of one general manager, two assistant managers and a kitchen manager. Each
restaurant also employs a staff consisting of approximately 50 to 70 hourly
employees, many of whom work part-time. Typically, each general manager reports
directly to a District Leader, who each supervise eight to 12 restaurants, and
who, in turn, reports to our vice president of operations. Restaurant managers
complete an extensive training program during which they are instructed in areas
including food quality and preparation, customer satisfaction, alcoholic
beverage service, governmental regulations compliance, liquor liability
management and employee relations. Restaurant managers are also provided with an
operations manual relating to food and beverage preparation, all areas of
restaurant management and compliance with governmental regulations. Working in
concert with the individual restaurant managers, our senior management define
operations and performance objectives for each restaurant and monitor
implementation. Senior management regularly visit various of our restaurants and
meet with the respective management teams to ensure compliance with our
strategies and standards of quality in all respects of restaurant operations and
personnel development.
Each of our new restaurant employees participates in a training program
during which the employee works under the close supervision of a restaurant
manager, or an experienced key employee. Management continuously solicits
employee feedback concerning restaurant operations and strive to be responsive
to the employees' concerns.
PURCHASING
We purchase a major portion of our food and beverage products from our
wholly owned subsidiary, Pacific Basin Foods, at below market rates. Food and
supplies are shipped directly to the restaurants, although invoices for
purchases are sent to us for payment. Our emphasis on high-quality food requires
frequent deliveries of fresh food supplies.
PACIFIC BASIN FOODS
Our Pacific Basin Foods subsidiary is a wholesale food distributor serving
the restaurant industry. Its principal clients are Paragon and several small
regional chains. Pacific Basin Foods has warehouses located in Rantoule,
Illinois and in San Diego, California, from which it services its customers. In
addition to the sale and distribution of food supplies to restaurants, Pacific
Basin Foods provides furniture, fixtures and equipment to restaurants.
COMPETITION
Competition in the restaurant industry is increasingly intense. We compete
with other mid-priced, full service restaurants, which are not necessarily
steakhouse restaurants, primarily on the basis of quality of food and service,
ambiance, location and price-value relationship. We also compete with a number
of other steakhouse restaurants within our markets, including both locally owned
restaurants and regional or national chains. We believe that the quality of our
service, our well-regarded brands, attractive price-value relationship and
quality of food will enable us to differentiate ourselves from our competitors.
We also compete with other restaurants and retail establishments for sites. Many
of our competitors are well-established in the mid-priced dining segment and
certain competitors have substantially greater financial, marketing and other
resources than us. We believe that our ability to compete effectively will
continue to depend upon our ability to offer high-quality, mid-priced food in a
full service, distinctive dining environment.
4
GOVERNMENT REGULATION
Our restaurants are subject to numerous federal, state and local laws
affecting health, sanitation and safety standards, as well as to state and local
licensing regulation of the sale of alcoholic beverages. Each restaurant
currently has appropriate licenses from regulatory authorities allowing it to
sell liquor, beer and wine, and each restaurant has food service licenses from
local health authorities. We are required to renew these licenses annually. In
addition, these licenses may be suspended or revoked at any time for cause,
including violation by us or our employees of any law or regulation pertaining
to alcoholic beverage control, such as those regulating the minimum age of
patrons or employees, advertising, wholesale purchasing and inventory control.
Our failure to obtain or retain liquor or food service licenses would likely
have a material adverse effect on our operations. In order to reduce this risk,
each of our restaurants is expected to be operated in accordance with
standardized procedures designed to assure compliance with all applicable codes
and regulations. Difficulties in obtaining or failures to obtain the required
licenses or approvals could delay or prevent the development of a new restaurant
in a particular area. In certain states, there is a set number of alcoholic
beverage licenses available, but there is an active market through which new
licenses can be obtained at the then-applicable market price. The failure to
receive or retain, or a delay in obtaining, a liquor license in a particular
location could adversely affect our ability to obtain such a license elsewhere.
We are subject in certain states to "dram-shop" statutes, which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. We carry liquor liability coverage as part of its
comprehensive general liability insurance.
Our restaurant operations are also subject to federal and state minimum
wage laws governing such matters as working conditions, overtime and tip credits
and other employee matters. Significant numbers of our food service and
preparation personnel are paid at rates related to the federal minimum wage.
Government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could be detrimental to the
economic viability of our restaurants.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
Management is not aware of any environmental regulations that have had a
material effect on us or our restaurants to date.
The Federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. We intend to ensure
that our restaurants will be in full compliance with the Disabilities Act, and
we intend to review plans and specifications and make periodic inspections to
ensure continued compliance. Our current restaurants are designed to be
accessible to the disabled. We believe that we are in substantial compliance
with all current applicable regulations relating to restaurant accommodations
for the disabled. We do not anticipate that such compliance will require us to
expend substantial funds.
EMPLOYEES
At March 20, 2001, we employed 3,399 individuals, of which 291 occupy
executive or managerial positions, approximately 3,100 hold non-managerial
restaurant-related positions and the balance occupy clerical and office
positions. None of our employees is covered by a collective bargaining
agreement. We consider our relations with our employees to be good and have not
experienced any interruption of operations due to labor disputes.
5
RESTAURANT LOCATIONS AS OF MARCH 20, 2001
The following table sets forth the location of our existing Hungry
Hunter's, Hunter's Steakhouse, Mountain Jack's, Carvers restaurants and our
unique formal restaurants:
HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE, AND MOUNTAIN JACK'S LOCATIONS:
ARIZONA Oakland INDIANA NEVADA
Phoenix (2) Oceanside Indianapolis Las Vegas
Tempe Pleasanton Lafayette
Yuma S. San Francisco NORTH CAROLINA
S. San Jose MICHIGAN Raleigh
CALIFORNIA Sacramento Auburn Hills Traverse City
Anaheim San Diego Clinton Township
Bakersfield Santa Rosa Dearborn Heights OHIO
Concord Temecula Grandville Canton
Fairfield Thousand Oaks Kentwood Elyria
Fremont Ventura Lansing Independence
Lake Forest Taylor Middleburg Heights
Milpitas ILLINOIS Troy North Olmstead
Modesto Springfield Portage Toledo
WISCONSIN
Madison (2)
CARVERS LOCATIONS: Farmington Hills, Michigan UNIQUE FORMAL LOCATIONS:
Glendale, Arizona Henderson, Nevada Folson, California
Scottsdale, Arizona Beachwood, Ohio Rancho Cordova,
Rancho Bernardo, California Centerville, Ohio Riverside, California
Roseville, California Orem, Utah South Bend, Indiana
Greenwood, Indiana Sandy, Utah Williamsburg, Virginia
The leases for the above locations have initial terms generally ranging
from 20 to 35 years and, in certain instances, provide for renewal options
ranging from five to 25 years. Certain of these leases require additional
contingent rental payments by us if sales volumes at the related restaurants
exceed specified levels. Most of these lease agreements require payments of
taxes, insurance and maintenance costs by us.
Steakhouse Partners' executive offices are located at 10200 Willow Creek
Road, San Diego California 92131. The telephone number is (858) 689-2333.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Annual
Report should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks actually occur, our business,
financial condition and operating results could be materially adversely
affected.
IF WE ARE NOT SUCCESSFUL IN OUR EXPANSION PLANS, OUR BUSINESS OPERATIONS COULD
BE MATERIALLY ADVERSELY AFFECTED.
We intend to expand our operations through the construction of new
restaurant properties and conversion of acquired restaurant properties to our
restaurant brand names. We also intend to expand through the targeted
acquisition of one or more large restaurant chains. Our ability to open
additional restaurants will depend upon our ability to identify and acquire
available new construction sites or restaurant conversions at favorable prices.
We must also have sufficient available funds from operations or otherwise to
support this expansion.
6
If we cannot successfully construct new restaurant properties or convert
acquired restaurant properties to our established brands within projected
budgets or time periods, our business will be adversely affected. Construction
delays or cost overruns could be caused by numerous factors, such as shortages
of materials and skilled labor, labor disputes, weather interference,
environmental problems, and construction or zoning problems.
Also, if we are not successful in identifying suitable restaurant targets,
measuring the fair value of the restaurant targets, or operating the acquired
restaurants, our business will be adversely affected.
Our growth strategy may also strain our management and other resources. To
manage our growth, we must:
* maintain a high level of quality and service at our existing and future
restaurants;
* enhance our operational, financial and management expertise; and
* hire and train experienced and dedicated operating personnel.
WE HAVE INCURRED LOSSES FROM INCEPTION AND MAY NEVER GENERATE SUBSTANTIAL
PROFITS.
We were organized in May 1996 and have incurred losses from inception. We
may never generate profits. We incurred a net loss of approximately $621,000 for
the fiscal year ended December 26, 2000, a net loss of approximately $3.9
million for the fiscal year ended December 26, 1999 and a net loss of
approximately $3.0 million for the fiscal year ended December 29, 1998. As of
December 26, 2000 we had an accumulated deficit of approximately $9.5 million.
In order to operate profitably, we must:
* further improve operating margins at our existing restaurants;
* successfully expand our operations in a cost effective manner; and
* capitalize on the general and administrative cost savings implemented
during the last fiscal year.
THE COMPANY RECEIVED A NOTICE FROM THE NASDAQ SMALLCAP MARKET STATING THAT IT
MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET.
In November 2000, we received a notice from The Nasdaq SmallCap Market
indicating that we failed to meet Nasdaq's $2 million in net tangible assets
standard for continued listing on The Nasdaq Small Cap Market. A hearing has
been scheduled with Nasdaq to review that determination. At the hearing we plan
to present, among other things, this Annual Report on Form 10-K, which reflects
net tangible assets of approximately $2.2 million.
Delisting of Steakhouse Partner, Inc.'s common stock from The Nasdaq
SmallCap Market would cause the price of the common stock to drop and impair the
ability of holders to sell their shares. In addition, in order to be relisted on
Nasdaq if our stock is delisted, we would have to comply with the initial
listing requirements, which are substantially more onerous than the maintenance
standards. In the event our securities are delisted from Nasdaq, such delisting
would also adversely affect our ability to raise financing.
IF HOOF-AND-MOUTH DISEASE SPREADS TO THE UNITED STATES IT COULD HAVE A NEGATIVE
EFFECT ON OUR FINANCIAL RESULTS.
There has been a recent outbreak of hoof-and-mouth disease (also known as
foot-and-mouth disease) in Great Britain and France. If the disease spreads to
animals in the United States, it could have a negative effect on our financial
results by reducing the amount of beef consumption in the United States and/or
making meat more expensive at the market. Although hoof-and-mouth disease has
not occurred in the United States since 1929, there can be no assurance that
this most recent outbreak won't spread to the United States.
Hoof-and-mouth disease is a highly communicable virus that affects mainly
cows and pigs. An animal with hoof-and-mouth disease will develop a fever and
blisterlike lesions on its tongue, lips and between its hooves. Even if an
animal recovers, the disease will dramatically reduce the animal's ability to
produce milk and cause the animal to grow more slowly, thus making meat more
expensive at the market.
7
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR
OPERATING PERFORMANCE.
Our restaurant operations are subject to certain federal and state laws and
government regulations:
* National and local health and sanitation laws and regulations;
* National and local employment and safety laws and regulations; and
* Local zoning, building code and land-use regulations.
We cannot assure you that we will be able to fully comply with all such
laws and regulations. Failure to comply with any of these laws or regulations,
or the loss of our liquor licenses, would have a material adverse effect on our
business. In addition, each of our restaurants must obtain licenses from
regulatory authorities allowing it to sell liquor, beer and wine, and each
restaurant must obtain a food service license from local health authorities.
Each restaurant's liquor license must be renewed annually and may be revoked at
any time for cause. Liquor accounts for a large percentage of our sales and the
loss of this traffic would materially adversely impact our revenues.
We may be subject to "dram-shop" liability, which generally provides a
person injured by an intoxicated person with the right to recover damages from
an establishment that wrongfully served alcoholic beverages to the intoxicated
person. Although we carry liquor liability coverage as part of our comprehensive
general liability insurance, if we lost a lawsuit related to this liability, our
business could be materially harmed.
ADVERSE ECONOMIC CONDITIONS IN A LIMITED NUMBER OF STATES COULD HAVE A NEGATIVE
EFFECT ON OUR BUSINESS.
Our restaurants are located in 11 states, predominantly on the West Coast
and in the Great Lakes region. Adverse economic conditions in these regions
could have an adverse effect on our financial results. Each of our restaurants
represents a significant investment and long-term commitment which limits our
ability to respond quickly or effectively to changes in local competitive
conditions or other changes that could affect our operations.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH OUR COMPETITORS WE WILL NOT BE ABLE
TO INCREASE REVENUES OR GENERATE PROFITS.
Our ability to increase revenues and operate profitably is directly related
to our ability to compete effectively with our competitors. Many of our
competitors have been in existence longer than us, have a more established
market presence and have substantially greater financial, marketing and other
resources than us.
Key competitive factors include:
* the quality and value of the food products offered;
* the quality of service;
* the price of the food products offered;
* the restaurant locations; and
* the ambiance of facilities.
We compete with other steakhouse restaurants specifically and with all
other restaurants in general. We compete with national and regional chains, as
well as individually owned restaurants. The restaurant industry has few
non-economic barriers to entry. As our competitors expand operations,
competition from steakhouse restaurants with concepts similar to ours can be
expected to intensify. We cannot assure you that third parties will not be able
to successfully imitate and implement our concepts. Such increased competition
could adversely affect our revenues.
UNFORESEEN COST INCREASES COULD ADVERSELY AFFECT OUR POTENTIAL PROFITABILITY.
Our potential profitability is highly sensitive to increases in food, labor
and other operating costs. Our dependence on frequent deliveries of fresh food
supplies means that shortages or interruptions in
8
supply could materially and adversely affect our operations. In addition,
unfavorable trends or developments concerning the following factors could
adversely affect our results:
* inflation, food, labor and employee benefit costs; and
* rent increases resulting from rent escalation provisions in our leases.
We may be unable to anticipate or react to changing prices. If we cannot
modify our purchase practices or quickly or readily pass on increased costs to
customers, our business could be materially affected.
BECAUSE IT MAY BE DIFFICULT TO EFFECT A CHANGE IN CONTROL WITHOUT CURRENT
MANAGEMENT'S CONSENT, A POTENTIAL SUITOR WHO OTHERWISE MIGHT BE WILLING TO PAY A
PREMIUM FOR ACQUIRING US MAY DECIDE NOT TO ATTEMPT AN ACQUISITION OF STEAKHOUSE
PARTNERS.
Our executive officers, directors, and their affiliates beneficially own
1,579,462 shares of our common stock. This represents approximately 35.1% of the
common stock issued and outstanding. Our executive officers also collectively
own 1,000,000 shares of Series B Preferred Stock and 1,750,000 shares of Series
C Preferred Stock, each of which carries voting rights with our common stock on
a one vote per share basis. Such concentration of ownership and voting power may
have the effect of delaying, deferring or preventing a change in control of
Steakhouse Partners.
In addition, the board of directors has the authority to issue up to
2,250,000 additional shares of preferred stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
such stock without further shareholder approval. The rights of the holders of
common stock will be subjected to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. Issuance
of additional shares of preferred stock could have the effect of delaying,
deferring or preventing a change in control of Steakhouse Partners.
SHAREHOLDERS MAY NOT BE ABLE TO RESELL THEIR STOCK OR MAY HAVE TO SELL AT PRICES
SUBSTANTIALLY LOWER THAN THE PRICE THEY PAID FOR IT.
The trading price for our common stock has been highly volatile and could
continue to be subject to significant fluctuations in response to variations in
our quarterly operating results, general conditions in the restaurant industry
or the general economy, and other factors. In addition, the stock market is
subject to price and volume fluctuations affecting the market price for public
companies generally, or within broad industry groups, which fluctuations may be
unrelated to the operating results or other circumstances of a particular
company. Such fluctuations may adversely affect the liquidity of our common
stock, as well as the price that holders may achieve for their shares upon any
future sale.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS IN A TIMELY MANNER OR ON ACCEPTABLE
TERMS, WE MAY HAVE TO CURTAIL OR SUSPEND THE EXPANSION OF OUR OPERATIONS, WHICH
COULD LEAD TO OVERALL LOWER REVENUES AND ADVERSELY EFFECT OUR FINANCIAL RESULTS
AND PROSPECTS.
We currently do not have any firm commitments for additional financing. We
cannot be certain that additional financing will be available when and to the
extent required or that, if available, it will be on acceptable terms. If we are
unable to obtain additional funds in a timely manner or on acceptable terms, we
may have to curtail or suspend the expansion of our operations, which could lead
to overall lower revenues and adversely effect our financial results and
prospects. If adequate funds are not available on acceptable terms, we may not
be able to fund our expansion or respond to competitive pressures.
ITEM 2. DESCRIPTION OF PROPERTY.
As of March 24, 2001, the Company leased all of its restaurant locations
and five of the Company's restaurants were closed for renovation. Lease terms
are generally 10 to 35 years, with renewal options. All of the Company's leases
provide for a minimum annual rent and some leases provide for additional rent
based on sales volume at the particular location over specified minimum levels.
Generally, the leases are net leases which require the Company to pay the costs
of insurance, taxes and maintenance. The Company intends to continue to purchase
restaurant locations where cost-effective.
9
On July 19, 2000, the Company completed a sale and leaseback transaction
with RS Realty Partners, LP with respect to 19 of its properties, yielding net
proceeds of approximately $22 million. The Company utilized a majority of these
net proceeds to pay down a $20 million mortgage debt.
The Company's executive offices are located at 10200 Willow Creek Road, San
Diego, California 92131. The Company believes that there is sufficient office
space available at favorable leasing terms in the San Diego, California
metropolitan area to satisfy the additional needs of the Company that may result
from future expansion.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, there are no legal proceedings which will
have a material adverse effect on the financial position or operating results of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for shareholder approval during the fourth
quarter of the fiscal year covered by this Report.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Common Stock of the Company has been trading on the NASDAQ SmallCap
Market under the symbol "SIZL" since February 27, 1998, the date of the
Company's initial public offering.
The following table sets forth the range of high and low closing prices for
the Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
HIGH LOW
---- ---
Year ended December 31, 1999
First Quarter.............................. $ 8.63 $ 4.13
Second Quarter............................. 7.31 4.00
Third Quarter.............................. 9.25 6.07
Fourth Quarter............................. 7.375 4.875
HIGH LOW
---- ---
Year ended December 31, 2000
First Quarter.............................. $ 7.00 $ 4.50
Second Quarter............................. 5.35 2.03
Third Quarter.............................. 4.75 2.25
Fourth Quarter............................. 7.22 2.75
HOLDERS
As of March 25, 2001, there were approximately 470 record holders of the
Company's Common Stock.
DIVIDENDS
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the expansion of its business.
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not issue within the period covered by this Report any
securities which were not registered pursuant to the Securities Act of 1933, as
amended.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the three years ended December
31, 2000 has been derived from the Company's Consolidated Financial Statements.
This data should be read in conjunction with Consolidated Financial Statements
and related Notes for the year ended December 31, 2000, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations:
INCOME STATEMENT DATA: 2000 1999 1998
---------------------- ------------ ------------ -----------
REVENUES............................................ $131,635,804 $167,800,573 $ 6,519,421
------------ ------------ -----------
COST OF SALES
Food and beverage................................. 50,030,402 79,928,345 2,569,457
Payroll and payroll related costs................. 41,253,070 46,093,086 2,001,542
Direct operating costs............................ 26,074,710 28,513,663 1,441,367
Depreciation and amortization..................... 3,927,687 4,213,750 148,156
------------ ------------ -----------
Total cost of sales............................ 121,285,869 158,748,844 6,160,522
------------ ------------ -----------
GROSS PROFIT........................................ 10,349,935 9,051,729 358,899
COSTS AND EXPENSES
General and administrative expenses............... 8,257,405 8,365,542 2,219,992
------------ ------------ -----------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE)......... 2,092,530 686,187 (1,861,093)
OTHER INCOME (EXPENSE)
Gain on sale of property, plant, and equipment.... 1,589,480 -- --
Interest income................................... -- 36,942 68,495
Miscellaneous income.............................. 271,821 -- --
Interest and financing costs...................... (3,524,994) (4,607,781) (884,961)
Impairment of property, plant, and equipment...... (388,868) -- --
Impairment of goodwill............................ (194,514) -- --
Forgiveness of officer advances................... (442,058) -- --
------------ ------------ -----------
Total other income (expense)................... (2,689,133) (4,570,839) (816,466)
------------ ------------ -----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT......... (596,603) (3,884,652) (2,677,559)
PROVISION FOR INCOME TAXES.......................... 24,841 10,387 6,044
------------ ------------ -----------
LOSS BEFORE EXTRAORDINARY LOSS ON DEBT
EXTINGUISHMENT.................................... (621,444) (3,895,039) (2,683,603)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT........... -- -- (278,125)
------------ ------------ -----------
NET LOSS............................. $ (621,444) $ (3,895,039) $(2,961,728)
------------ ------------ -----------
------------ ------------ -----------
BASIC AND DILUTED LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM................................ $ (0.18) $ (1.39) $ (1.26)
------------ ------------ -----------
------------ ------------ -----------
EXTRAORDINARY LOSS PER SHARE........................ $ -- $ -- $ (0.13)
------------ ------------ -----------
------------ ------------ -----------
BASIC AND DILUTED LOSS PER SHARE AFTER EXTRAORDINARY
ITEM.............................................. $ (0.18) $ (1.39) $ (1.39)
------------ ------------ -----------
------------ ------------ -----------
BALANCE SHEET DATA: 2000 1999 1998
------------------- ------------ ------------ -----------
Current assets. $ 8,917,182 $ 11,701,064 $12,219,301
TOTAL ASSETS........................................ $ 45,387,251 $ 63,080,613 $67,446,977
TOTAL DEBT, EXCLUDING CAPITAL LEASE OBLIGATIONS..... $ 5,797,953 $ 26,115,608 $27,290,713
Stockholders' equity.............................. $ 2,172,237 $ 2,501,346 $ 1,551,705
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Annual Report on Form 10-K are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. The
company's actual results may differ significantly from management's
expectations. The following discussion and the section entitled "Business --
Additional Factors That May Affect Future Results" describes some, but not all,
of the factors that could cause these differences.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and related footnotes for the
year ended December 26, 2000 included in this Annual Report. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
OVERVIEW
The Company currently operates 65 full-service steakhouse restaurants
located in 11 states. The Company operates under the brand names of Carvers,
Hungry Hunter Steakhouse, Hunter Steakhouse, Mountain Jack's, Mountain Jack's
Steakhouse, Red Oak, Texas Loosey's and Galveston's. On December 21, 1998, the
Company acquired Paragon Steakhouse Restaurants, Inc. ("Paragon"), which owned
78 steakhouses, of which five were closed, and Pacific Basin Foods, Inc., a
restaurant food distribution company. Prior to the acquisition of Paragon, the
Company owned and operated four restaurants.
The Company believes that its restaurants are well positioned in a high
quality, moderately priced segment of the restaurant industry. With the
acquisition of Paragon's Carvers restaurants, the Company has entered the
upscale restaurant market specializing in complete steak, chop, prime rib and
seafood meals. Our growth strategy is based on internal growth and growth
through acquisition. Internal growth focuses on improvement in same store sales
and construction of new restaurant properties. Acquisition growth focuses on
conversion of acquired restaurant properties to our steakhouse brand names and
the targeted acquisition of one or more large steakhouse chains.
To the extent we build steakhouses in new locations there is likely to be a
time lag between when the expenses of the startup are incurred and when the
newly constructed steakhouses are opened and begin to generate revenues, which
time lag could affect quarter-to-quarter comparisons and results.
Since acquiring Paragon in December 1998, one of the areas the Company has
focused on is reducing the operational, general and administrative expenses.
Prior to the acquisition, the general and administrative (including divisional)
expenses related to the restaurants operated by Paragon were approximately $9
million annually. During the first fiscal quarter of 1999, the Company
identified areas in which general and administrative expenses could be reduced
and the Company began immediately making the necessary changes to reduce these
expenses. During the second fiscal quarter of 1999, the Company began making the
necessary operational changes to improve quality, customer satisfaction and
reduce cost. The Company realized the full effect of the operational
improvements in the fourth fiscal quarter of 1999.
Our overall steakhouse operations tend to experience seasonal fluctuations,
with the fourth quarter and first quarter of each year being our strongest
quarters, reflecting both the Christmas season and the colder weather at our
Mid-west operations, and the third quarter being the weakest, as people tend to
eat less steak in restaurants in the summer months. This seasonality, however,
is less pronounced at our
12
California locations, which do not experience the same seasonal changes in
weather that occur at our Mid-west locations.
We have three business units, which have separate management and reporting
infrastructures that offer different products and services. The business units
have been aggregated into two reportable segments, restaurant services and food
service distribution, since the long-term financial performance of these
reportable segments is affected by similar economic conditions. The restaurant
services segment consists of two business units -- Paragon Steakhouse
Restaurants, Inc. and Steakhouse Partners, Inc. -- that operate specialty
restaurants around the country. Our food service distribution segment, which
operates as Pacific Basin Foods, performs distribution of restaurant foods and
restaurant-related products for internal operations, as well as customers
outside our internal operations.
Since our Pacific Basin Foods subsidiary is in the wholesale business of
providing food supplies to restaurants, its profit margin on sale of food
products to restaurants is significantly less than the margin that can be
obtained through restaurant sales. In addition, since Pacific Basin Foods
maintains a large inventory of food supplies to service its wholesale customers,
its business is more susceptible to the risk of inventory obsolescence than our
other business operations.
RESULTS OF OPERATIONS
Year Ended December 26, 2000 Compared to the Year Ended December 28, 1999
Revenues for the year ended December 26, 2000 decreased $36,164,769 or
21.6% from $167,800,573 for the year ended December 28, 1999 to $131,635,804 for
the same period in 2000. The decrease is entirely attributable to the sale or
closure of 8 under performing Paragon and Galveston restaurants and the loss of
Pacific Basin Foods' 2 largest external customers. This was partially offset by
a 4.1% increase in Paragon's same store sales from the comparable fifty-two week
period in 1999. Pacific Basin Foods revenues for the fifty-two week period ended
December 26, 2000 decreased $30,227,647 or 79.0% from $38,245,252 for the
fifty-two week period ended December 28, 1999 to $8,017,605 for the same period
in 2000. Revenue from the Company's original restaurants (Galveston) decreased
$1,585,713 or 63.6% from $2,493,467 for the fifty-two week period ended December
28, 1999 to $907,754 for the same period in 2000. The decrease was the result of
selling one, subleasing another and closing down a third pending its sale. Net
revenue for Paragon Steakhouse Restaurants increased 4.1% for the fifty-two week
period ended December 26, 2000 compared to the net revenue for comparable (64)
restaurants for the same fifty-two week period ended December 28, 1999.
Food and beverage costs for the fifty-two week period ended December 26,
2000 decreased $29,897,943 or 37.4% from $79,928,345 for the fifty-two week
period ended December 28, 1999 to $50,030,402 for the same period in 2000. Food
and beverage costs for the restaurants only as a percentage of restaurant
revenues was 38.0% for the fifty-two week period ended December 26, 2000
compared to 47.6% for the same period in 1999. The factors for this improvement
were operating efficiencies, menu simplification and a small price increase
partially offset by higher beef costs. The food and beverage costs of Paragon's
food distribution subsidiary, Pacific Basin Foods, Inc., were 86.2% of the food
distribution revenue for the fifty-two week period ended December 26, 2000
compared to 90.6% for the same period in 1999. The main reason for this
improvement was the replacement of larger less profitable external customers
with smaller more profitable ones. The total food and beverage cost which
includes the restaurants and the food distribution subsidiaries as a percentage
of total revenue was 38.0% for the fifty-two week period ended December 26, 2000
compared to 47.6% for the same period in 1999. The major reason for this
reduction is the decrease in the food distribution subsidiary's business and its
proportionate effect on these numbers.
Payroll and payroll related costs for the fifty-two week period ended
December 26, 2000 decreased $4,840,016 or 10.5% from $46,093,086 for the
fifty-two week period ended December 28, 1999 to $41,253,070 for the same period
in 2000. The total payroll and payroll related costs which includes the
restaurants and the food distribution subsidiaries as a percentage of revenues
were 31.3% for the fifty-two week period ended December 26, 2000 compared to
27.5% for the same period in 1999. The major reason for this increase is the
decrease in the food distribution subsidiary's business coupled with the
reduction in force expense and its proportionate effect on these numbers. The
food distribution subsidiary's payroll and payroll related costs typically ran
about 5.4% for the same period in 1999.
13
Payroll and payroll related costs for the restaurants only were 32.0% of
restaurant revenues for the fifty-two week period ended December 26, 2000
compared to 33.3% for the fifty-two week period ended December 28, 1999. The
decrease is principally due to the operational efficiencies and improvements
that management introduced in the second quarter of 1999 partially offset by an
increase in the minimum wage and higher non-recurring training expenses in 2000.
Direct operating costs include all other unit-level operating costs, the
major components of which are operating supplies, repairs and maintenance,
advertising expenses, utilities, rent and other occupancy costs. A substantial
portion of these expenses is fixed or indirectly variable. Direct operating
costs for the fifty-two week period ended December 26, 2000 decreased $2,438,953
or 8.6% from $28,513,663 for the fifty-two week period ended December 28, 1999
to $26,074,710 for the same period in 2000. These costs as a percentage of
restaurant revenues were 21.0% for the fifty-two week period ended December 26,
2000 compared to 22.0% for the same period in 1999. Direct operating costs for
the restaurants only were 19.4% of restaurant revenue for the fifty-two week
period ended December 26, 2000 compared to 20.4% for the fifty-two week period
ended December 28, 1999. The decrease is primarily due to the cost reduction
program and elimination of excessive coupon usage implemented during the first
half of 1999. This was partially offset by higher utility costs especially in
the California units, the operating lease portion of the sale leaseback and
investing more dollars in the Company's guest relations program in the second
half of the period.
Depreciation and amortization for the fifty-two week period ended December
26, 2000 decreased $286,063 or 6.8% from $4,213,750 for the fifty-two week
period ended December 28, 1999 to $3,927,687 for the same period in 2000. The
decrease is principally due to the sale of one non-performing Texas Loosey's
restaurant, five non-performing Paragon steakhouse restaurants (of which one was
already closed) this was partially off set by adjusting Paragon's asset base to
reflect the purchase price paid by Steakhouse Partners and new asset life.
General and administrative expenses for the fifty-two week period ended
December 26, 2000 decreased $108,137 or 1.3% from $8,365,542 for the fifty-two
week period ended December 28, 1999 to $8,257,405 for the same period in 2000.
General and administrative expenses as a percentage of restaurant revenues was
6.7% for the fifty-two week period ended December 26, 2000 compared to 6.5% for
the same period in 1999. The same percentage relationship to revenues is
principally due to non-recurring expenses associated with the acquisition of
Paragon not being incurred for the same period in 2000, as well as, the
reduction in force and other cost savings measures implemented by management in
the first half of 1999. These savings are partially offset by planned
investments in additional training programs and recruitment to develop and
improve the Company's District Leaders and General Managers, as well as,
additional consulting and management fees incurred for the reorganization of
Pacific Basin Foods and analysis of potential acquisition targets.
Total other income and interest expense, net for the fifty-two week period
ended December 26, 2000 decreased $1,881,706 or 41.2% from $4,570,839 for the
fifty-two week period ended December 28, 1999 to $2,689,133 for the same period
in 2000. The decrease is principally due to the Company's Paragon Subsidiary
selling two previously closed (prior to December, 1998) Mountain Jack's
Steakhouse in Warren and Harper Woods, MI for a gain of $1,274,702 plus the net
gain of selling three other locations. This was partially offset by the $583,382
write down of leasehold improvements and goodwill of Galveston's' Fullerton
location for asset impairment (subleased for final four years remaining on
original lease) and the forgiveness of $442,058 of advances to two officers.
Net loss for the fifty-two week period ended December 26, 2000 decreased
$3,273,595 or 84.0% from $3,895,039 for the fifty-two week ended December 28,
1999 to $621,444 for the same period in 2000. The decrease is principally due to
the operational improvements and labor efficiencies that management introduced
in the fifty-two week period ended December 28, 1999. Also contributing to the
decrease was non-recurring expenses associated with the acquisition of Paragon
not being incurred for the same period in 2000, as well as, the gain from
selling two previously closed Mountain Jack's Steakhouse in Warren and Harper
Woods, MI. This was partially offset by an executive bonus accrual, the major
restructuring and non-recurring charges of $684,112 at Pacific Basin Foods
(warehouse consolidation and the reduction of 47% of its workforce) and
additional training and recruitment for Paragon Steakhouse.
14
Year Ended December 28, 1999 Compared to the Year Ended December 29, 1998
Revenues for the year ended December 28, 1999 increased $161,281,152 or
2,474% from $6,519,421 for the year ended December 29, 1998 to $167,800,573 for
the same period in 1999. The increase is almost entirely attributable to the
acquisition of Paragon. Gross revenue for the restaurants purchased in the
Paragon acquisition increased by 3.3% for the year ended December 28, 1999
compared to the gross revenue for comparable restaurants for the same period in
1998.
Food and beverage costs for the year ended December 28, 1999 increased
$77,358,888 or 3,011% from $2,569,457 for the year ended December 29, 1998 to
$79,928,345 for the same period in 1999. Food and beverage costs for the
restaurants only as a percentage of restaurant revenues was 45.9% for the year
ended December 29, 1998 compared to 34.9% for the same period in 1999. The food
and beverage costs of Paragon's food distribution subsidiary, Pacific Basin
Foods, Inc., were 90.5% of the food distribution revenue for the year ended
December 28, 1999. The total food and beverage cost as a percentage of total
revenue was 47.6%, which includes the restaurants and the food distribution
subsidiary. The increase in the food and beverage costs at the restaurant level
is directly related to the acquisition of Paragon that carries traditional
steakhouse food and beverage costs, and higher meat prices experienced by the
restaurant industry in 1999.
Payroll and payroll related costs for the year ended December 28, 1999
increased $44,091,544 or 2,203% from $2,001,542 for the year ended December 29,
1998 to $46,093,086 for the same period in 1999. Payroll and payroll related
costs as a percentage of revenues were 30.7% for the year ended December 29,
1998 compared to 27.5% for the same period in 1999. The decrease in payroll
costs as a percentage of revenue is attributed to the cost cutting program
implemented by the Company in 1999. The Company believes that its labor cost is
in line with industry averages.
Direct operating costs include all other unit-level operating costs, the
major components of which are operating supplies, repairs and maintenance,
advertising expenses, utilities, and other occupancy costs. A substantial
portion of these expenses is fixed or indirectly variable. Direct operating
costs for the year ended December 28, 1999 increased $27,072,296 or 1,878% from
$1,441,367 for the year ended December 29, 1998 to $28,513,663 for the same
period in 1999. These costs as a percentage of restaurant revenues were 22.11%
for the year ended December 29, 1998 compared to 17.0% for the same period in
1999. The decrease is principally due to the acquisition of Paragon whose direct
operating costs as a percentage of revenue are less than those previously
experienced by the Company due to the economies of scales of operating more
restaurants.
Depreciation and amortization for the year ended December 28, 1999
increased $4,065,594 or 2,744% from $148,156 for the year ended December 29,
1998 to $4,213,750 for the same period in 1999. The increase is principally due
to the acquisition of Paragon, which significantly increased the depreciable
assets owned by the Company.
General and administrative expenses for the year ended December 28, 1999
increased $6,145,550 or 277% from $2,219,992 for the year ended December 29,
1998 to $8,365,542 for the same period in 1999. General and administrative
expenses as a percentage of revenues was 34.1% for the year ended December 29,
1998 compared to 5.0% for the same period in 1999. This increase in the dollar
amount of general and administrative expenses is principally due to the
acquisition of Paragon. The Company has significantly reduced its general and
administrative expenses throughout 1999. A majority of the reduction represents
salaries and benefits of employees who were terminated throughout the year, with
a significant reduction in the second fiscal quarter. The Company began to
realize a reduction in general and administrative expenses in the third and
fourth quarters.
Interest income, expense and financing costs, net, for the year ended
December 28, 1999 increased $3,754,373 or 460% from $816,466 for the year ended
December 29, 1998 to $4,570,839 for the same period in 1999. The increase is
principally due to an increase in outstanding indebtedness, which was assumed in
connection with the acquisition of Paragon and additional borrowings by the
Company in the fall of 1998 and spring of 1999.
Net loss net for the fifty-two week period ended December 28, 1999
increased $933,311 or 31.5% from $2,961,728 for the fifty-two week ended
December 29, 1998 to $3,895,039 for the same period in 1999. The increase is
principally due to the acquisition of Paragon and Pacific Basin Foods and the
15
increase in indebtedness partially offset by the operational improvements and
headcount reductions realized in the second half of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our initial public offering commenced on February 27, 1998. In addition to
the approximate $9.3 million raised by us in 1998 in equity and debt financing,
we raised $1.5 million under a promissory note in March 1999 and $4.0 million in
private placement equity offerings in June and July 1999. A significant portion
of the equity and debt financing raised in 1998 was used to pay the purchase
price and related transaction costs associated with the acquisition of Paragon
and to a lesser degree to fund the our operating loss.
The Company has a cash and cash equivalents balance of $3,359,150 at
December 26, 2000. Management of the Company believes that such cash and cash
equivalents together with anticipated cash from operations is sufficient to
cover the cost of operations for at least the next twelve months. In order for
the Company to expand its operations through the purchase or construction of new
restaurants, the Company may have to sell additional equity or debt securities
or obtain credit facilities.
Our operating activities for the year ended December 26, 2000 provided $3.4
million of cash. This was chiefly the result of the improvements in operations
and working capital for the year. In addition, the use of cash of approximately
$1.1 million for investing activities relates primarily to the capital purchase
of furniture and equipment for the steakhouses. This was more than offset by the
$2.0 million in net proceeds from the sale of several restaurants.
The major source of cash used in financing activities for the year ended
December 26, 2000 was for the repayment in total of a line of credit and debt of
$25.4 million. This was partially offset by the $22.0 million in proceeds for a
sale-leaseback of 19 company fee owned properties.
The cost of opening each new restaurant ranges from $1,200,000 to
$1,650,000 for the build-out of a brand-new facility and from $500,000 to
$750,000 for the conversion of an existing restaurant, which includes leasehold
improvements, furniture, fixtures, equipment, food and beverage inventory and
other start-up expenses. We lease restaurant and transportation equipment under
operating and capital leases. These leases have initial terms generally ranging
from five to seven years and require a fixed monthly payment, or in the case of
transportation equipment, additional payments on a per mile basis.
We may need additional sources of financing during the next 12 months. Any
required additional financing may not be available on terms favorable to us, or
at all. If adequate funds are not available on acceptable terms, we may be
unable to fund our growth strategy, including any potential additional
acquisitions, which could lower our revenues and increase the net loss, if we
achieve profitability in the future. If we raise additional funds by issuing
equity securities, shareholders may experience dilution of their ownership
interest and the newly issued securities may have rights superior to those of
the common stock. If we issue or incur debt to raise funds, we may be subject to
limitations on our operations.
We intend to continue our aggressive acquisition program with a combination
of cash, common stock and some debt used to finance the primary portion of
consideration. We expect the cash needed for these acquisitions to come from
additional financing facilities and potential debt or equity offerings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk. The Company's exposure to market risk is principally confined
to cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.
Interest Rate Sensitivity. As of December 26, 2000, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair value of these assets.
Foreign Currency Exchange Risk. The Company does not have any foreign
currency exposure because it currently does not transact business in foreign
currencies.
16
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements of Steakhouse Partners, Inc. and its
subsidiaries, including the notes thereto and the report of independent
accountants thereon, commence at page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item 10 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 will be in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
The following exhibits are filed as part of this Report:
3.1* Restated Certificate of Incorporation of the Company.
3.2* Certificate of Correction to Restated Certificate of
Incorporation of the Company.
3.3* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
3.4* By-Laws of the Company.
3.5* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
3.6* Certificate of Amendment to Restated Certificate of
Incorporation of the Company.
10.1* Galveston Steakhouse Corp. Omnibus Stock Plan.
10.2* Richard M. Lee Stock Option Agreement.
10.3* Hiram J. Woo Stock Option Agreement.
10.4** Merger Agreement dated August 31, 1998 by and among the
Company, Tri-Core Steakhouse, Inc., Paragon Steakhouse
Restaurants, Inc. and Kyotaru Co. Ltd.
10.5*** First Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri-Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
17
10.6*** Second Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri- Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
10.7*** Third Amendment to Merger Agreement dated August 31, 1998,
by and among the Company and Tri-Core Steakhouse, Inc., on
the one hand, and Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co., Ltd., on the other hand.
10.8**** Form of Securities Purchase Agreement by and between the
Company and each of JMG Capital Partners, L.P., Triton
Capital Investments Limited, and Barry Lebin.
10.9**** Form of Registration Rights Agreement by and between the
Company and each of JMG Capital Partners, L.P., Triton
Capital Investments Limited, and Barry Lebin.
10.10**** Form of Debenture issued to JMG Capital Partners, L.P.,
Triton Capital Investments Ltd and Barry Lebin.
10.11**** Form of Note Purchase Agreement by and between the Company
and Talisman Capital Opportunity Fund Ltd.
10.12**** Form of Secured Exchangeable Note issued to Talisman Capital
Opportunity Fund Ltd.
10.13**** Form of Warrant issued to Talisman Capital Opportunity Fund
Ltd.
10.14**** Form of Collateral, Pledge and Security Agreement by and
between the Company and Talisman Capital Opportunity Fund
Ltd.
10.15**** Loan and Security Agreement dated December 21, 1998 by and
between Pacific Basin Foods, Inc. and The CIT Group/Credit
Finance, Inc.
10.16**** Security Agreement dated December 21, 1998 by and between
the Company and The CIT Group/Credit Finance, Inc.
10.17**** Secured Continuing Guaranty dated December 21, 1998 executed
by the Company.
10.18**** Security Agreement (Intellectual Property) dated December
21, 1998 by and between the Company and The CIT Group/Credit
Finance, Inc.
10.19**** Grant of Security Interest (Trademarks) dated December 21,
1998 executed by the Company.
10.20***** Purchase and Sale Agreement between Paragon Steakhouse
Restaurants, Inc. and HS Realty Partners, LP
21.1****** List of Subsidiaries of Steakhouse Partners, Inc.
23.1****** Consent of Singer Lewak Greenbaum & Goldstein LLP.
- - ------------------
* Incorporated by reference from Registration Statement on
Form SB-2 (File #333-29093).
** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on September 14, 1998.
*** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on January 4, 1999.
**** Incorporated by reference from Registration Statement on
Form SB-2 (File #333-69137)
***** Incorporated by reference from Form 8-K, Current Report,
filed with the SEC on August 3, 2000.
****** Filed herewith
REPORTS ON FORM 8-K
1. Form 8-K dated July 19, 2000 reporting the sale-leaseback by Paragon
Steakhouse Restaurants, Inc., a wholly owned subsidiary of Steakhouse Partners,
Inc., of 19 of its restaurants.
18
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
STEAKHOUSE PARTNERS, INC.
/s/ RICHARD M. LEE
......................................
Richard M. Lee
Chairman of the Board of Directors
and Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report is
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
NAME AND CAPACITY DATE
----------------- ----
/s/ RICHARD M. LEE March 28, 2001
.......................................................
Name: Richard M. Lee
Title: Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
/s/ HIRAM J. WOO March 28, 2001
.......................................................
Name: Hiram J. Woo
Title: President, Secretary, Director
/s/ JOSEPH L. WULKOWICZ March 28, 2001
.......................................................
Name: Joseph L. Wulkowicz
Title: Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ TOM EDLER March 28, 2001
.......................................................
Name: Tom Edler
Title: Director
/s/ MARK W. GOUDGE March 28, 2001
.......................................................
Name: Mark W. Goudge
Title: Director
/s/ TOD LINDNER March 28, 2001
.......................................................
Name: Tod Lindner
Title: Director
19
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
21.1 List of Subsidiaries of Steakhouse Partners, Inc.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP
20
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2000, 1999, AND 1998
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 2000
- - -------------------------------------------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 2 - 4
Consolidated Statements of Operations 5 - 6
Consolidated Statements of Stockholders' Equity 7 - 8
Consolidated Statements of Cash Flows 9 - 12
Notes to Consolidated Financial Statements 13 - 45
SUPPLEMENTAL INFORMATION
Report Of Independent Certified Public Accountants
On Financial Statement Schedules 46
Valuation and Qualifying Accounts - Schedule II 47
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Steakhouse
Partners, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Steakhouse Partners,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 8, 2001
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- - -------------------------------------------------------------------------------------------------------------------
ASSETS
2000 1999
--------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 3,359,150 $ 1,590,467
Accounts receivables, net of allowance for doubtful accounts
of $116,851 and $61,264 722,766 3,498,401
Inventories 3,344,087 5,173,175
Prepaid expenses and other current assets 1,491,179 1,439,021
--------------- ----------------
Total current assets 8,917,182 11,701,064
PROPERTY, PLANT, AND EQUIPMENT, net 33,274,038 47,608,117
OTHER ASSETS
Advances to officers 893,600 150,000
Intangible assets, net 190,574 443,722
Deposits and other assets 946,111 1,568,207
Cash - restricted under collateral agreements 1,165,746 1,609,503
--------------- ----------------
TOTAL ASSETS $ 45,387,251 $ 63,080,613
=============== ================
The accompanying notes are an integral part of these financial statements.
2
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- - -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
--------------- ----------------
CURRENT LIABILITIES
Current portion of convertible debt $ 1,100,000 $ -
Current portion of long-term debt 2,697,953 22,434,042
Current portion of capital lease obligations 361,831 542,569
Line of credit - 2,775,435
Accounts payable 4,903,246 4,925,479
Accrued expenses 2,238,103 2,522,281
Unearned revenue 5,388,491 6,567,589
Reserve for self insurance claims 836,718 2,499,339
Sales and property taxes payable 1,256,197 1,261,181
Accrued payroll costs 2,486,597 3,089,052
--------------- ----------------
Total current liabilities 21,269,136 46,616,967
CONVERTIBLE DEBT, net of current portion - 1,100,000
SECURED EXCHANGEABLE NOTES 2,000,000 2,000,000
LONG-TERM DEBT, net of current portion - 581,566
CAPITAL LEASE OBLIGATIONS, net of current portion 17,468,625 7,909,068
DEFERRED TAXES 119,411 162,970
DEFERRED RENT 2,357,842 2,208,696
--------------- ----------------
Total liabilities 43,215,014 60,579,267
--------------- ----------------
COMMITMENTS AND CONTINGENCIES
The accompanying notes are an integral part of these financial statements.
3
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- - -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (CONTINUED)
2000 1999
--------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value
2,250,000 shares authorized
0 and 0 shares issued and outstanding $ - $ -
Preferred stock, Series B, Convertible, $0.001 par value
1,000,000 shares authorized
1,000,000 and 1,000,000 shares issued and outstanding 1,000 1,000
Preferred stock, Series C, Convertible, $0.001 par value
1,750,000 shares authorized
1,750,000 and 1,750,000 shares issued and outstanding 1,750 1,750
Common stock, $0.01 par value
10,000,000 shares authorized
3,386,522 and 3,369,022 shares issued and outstanding 33,865 33,690
Subscription receivable - (10,000)
Treasury stock, 28,845 shares, at cost (175,000) (175,000)
Additional paid-in capital 11,809,352 11,527,192
Accumulated deficit (9,498,730) (8,877,286)
--------------- ----------------
Total stockholders' equity 2,172,237 2,501,346
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,387,251 $ 63,080,613
=============== ================
The accompanying notes are an integral part of these financial statements.
4
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
REVENUES $ 131,635,804 $ 167,800,573 $ 6,519,421
---------------- --------------- ----------------
COST OF SALES
Food and beverage 50,030,402 79,928,345 2,569,457
Payroll and payroll related costs 41,253,070 46,093,086 2,001,542
Direct operating costs 26,074,710 28,513,663 1,441,367
Depreciation and amortization 3,927,687 4,213,750 148,156
---------------- --------------- ----------------
Total cost of sales 121,285,869 158,748,844 6,160,522
---------------- --------------- ----------------
GROSS PROFIT 10,349,935 9,051,729 358,899
COSTS AND EXPENSES
General and administrative expenses 8,257,405 8,365,542 2,219,992
---------------- --------------- ----------------
INCOME (LOSS) BEFORE OTHER INCOME (EXPENSE) 2,092,530 686,187 (1,861,093)
---------------- --------------- ----------------
OTHER INCOME (EXPENSE)
Gain on sale of property, plant, and equipment 1,589,480 - -
Interest income - 36,942 68,495
Miscellaneous income 271,821 - -
Interest and financing costs (3,524,994) (4,607,781) (884,961)
Impairment of property, plant, and equipment (388,868) - -
Impairment of goodwill (194,514) - -
Forgiveness of officer advances (442,058) - -
---------------- --------------- ----------------
Total other income (expense) (2,689,133) (4,570,839) (816,466)
---------------- --------------- ----------------
LOSS BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT (596,603) (3,884,652) (2,677,559)
PROVISION FOR INCOME TAXES 24,841 10,387 6,044
---------------- --------------- ----------------
LOSS BEFORE EXTRAORDINARY LOSS ON DEBT
EXTINGUISHMENT (621,444) (3,895,039) (2,683,603)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT - - (278,125)
---------------- --------------- ----------------
NET LOSS $ (621,444) $ (3,895,039) $ (2,961,728)
================ =============== ================
The accompanying notes are an integral part of these financial statements.
5
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
BASIC AND DILUTED LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM $ (0.18) $ (1.39) $ (1.26)
================ =============== ================
EXTRAORDINARY LOSS PER SHARE $ - $ - $ (0.13)
================ ================ ================
BASIC AND DILUTED LOSS PER SHARE AFTER
EXTRAORDINARY ITEM $ (0.18) $ (1.39) $ (1.39)
================ =============== ================
WEIGHTED-AVERAGE SHARES OUTSTANDING 3,369,022 2,800,805 2,135,241
================ =============== ================
The accompanying notes are an integral part of these financial statements.
6
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
PREFERRED STOCK PREFERRED STOCK
SERIES B, SERIES C,
CONVERTIBLE CONVERTIBLE COMMON STOCK
-------------------- ---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- --------- ---------- ---------- --------
Balance, December 31, 1997........... 1,000,000 $1,000 -- $ -- 825,000 $ 8,250
Issuance of common stock in
connection with initial
public offering.................... 1,250,000 12,500
Issuance costs.......................
Conversion of promissory notes....... 333,325 3,333
Issuance of common stock in lieu of
interest........................... 20,000 200
Interest from fixed conversion
features...........................
Extraordinary loss on debt
extinguishment.....................
Net loss.............................
--------- ------ --------- ---------- ---------- --------
Balance, December 31, 1998........... 1,000,000 1,000 -- -- 2,428,325 24,283
Issuance of common stock for services
rendered........................... 146,000 1,460
Issuance of common stock in lieu of
interest........................... 52,500 525
Issuance of common stock for cash in
connection with
private placements................. 705,197 7,052
Issuance costs.......................
Issuance of warrants in lieu of
interest...........................
Issuance of Series C convertible
preferred stock.................... 1,750,000 1,750
Purchase of stock options............
Exercise of stock options............ 35,000 350
Purchase of treasury stock...........
Issuance of common stock for
subscriptions receivable........... 2,000 20
Net loss.............................
--------- ------ --------- ---------- ---------- --------
Balance, December 31, 1999........... 1,000,000 $1,000 1,750,000 $ 1,750 $3,369,022 $ 33,690
Issuance of common stock in lieu of
interest........................... 17,5000 175
Issuance of warrants in lieu of
interest...........................
Issuance of warrants for services
rendered...........................
Issuance of stock options for
services rendered..................
Purchase of stock options............
Cash payment on subscriptions
receivable.........................
Net loss.............................
--------- ------ --------- ---------- ---------- --------
Balance, December 31, 2000........... 1,000,000 $1,000 1,750,000 $ 1,750 3,386,522 $ 33,865
========= ====== ========= ========== ========== ========
The accompanying notes are an integral part of these financial statements.
7
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ADDITIONAL
SUBSCRIPTIONS TREASURY PAID-IN ACCUMULATED
RECEIVABLE STOCK CAPITAL DEFICIT TOTAL
------------- --------- ----------- ----------- -----------
Balance, December 31, 1997........... $ -- $ -- $ 596,563 $(2,020,519) $(1,414,706)
Issuance of common stock in
connection with initial
public offering.................... 6,487,500 6,500,000
Issuance costs....................... (2,532,603) (2,532,603)
Conversion of promissory notes....... 1,201,167 1,204,500
Issuance of common stock in lieu
of interest........................ 99,800 100,000
Interest from fixed conversion
features........................... 378,117 378,117
Extraordinary loss on debt
extinguishment..................... 278,125 278,125
Net loss............................. (2,961,728) (2,961,728)
---------- --------- ----------- ----------- -----------
Balance, December 31, 1998........... -- -- 6,508,669 (4,982,247) 1,551,705
Issuance of common stock for
services rendered.................. 546,040 547,500
Issuance of common stock in lieu
of interest........................ 205,725 206,250
Issuance of common stock for
cash in connection with
private placements................. 4,318,948 4,326,000
Issuance costs....................... (306,820) (306,820)
Issuance of warrants in lieu of
interest........................... 60,000 60,000
Issuance of Series C convertible
preferred stock.................... 1,750
Purchase of stock options............ 10,000 10,000
Exercise of stock options............ 174,650 175,000
Purchase of treasury stock........... (175,000) (175,000)
Issuance of common stock for
subscriptions receivable........... (10,000) 9,980 --
Net loss............................. (3,895,039) (3,895,039)
---------- --------- ----------- ----------- -----------
Balance, December 31, 1999........... $ (10,000) $(175,000) $11,527,192 $(8,877,286) $ 2,501,346
Issuance of common stock in lieu of
interest........................... 90,200 90,375
Issuance of warrants in lieu of
interest........................... 60,000 60,000
Issuance of warrants for services
rendered........................... 38,960 38,960
Issuance of stock options for
services rendered.................. 73,000 73,000
Purchase of stock options............ 20,000 20,000
Cash payment on subscriptions
receivable......................... 10,000 10,000
Net loss............................. (621,444) (621,444)
---------- --------- ----------- ----------- -----------
Balance, December 31, 2000........... $ -- $(175,000) $11,809,352 $(9,498,730) $ 2,172,237
========== ========= =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
8
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (621,444) $ (3,895,039) $ (2,961,728)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 3,927,687 4,213,750 148,156
Gain on sale of property, plant, and equipment (1,589,480) - -
Reduction of self insurance reserve (1,210,713) - -
Impairment of property, plant, and equipment 388,868 - -
Impairment of goodwill 194,514 - -
Issuance of warrants for services rendered 38,960 - -
Issuance of warrants for interest 60,000 - -
Issuance of stock options for services
rendered 73,000 - -
Forgiveness of officer advances 442,058 - -
Interest paid with common stock 90,375 266,250 100,000
Interest charges on convertible debt - - 378,117
Non-cash bonuses paid to officers - - 406,256
Loss on debt extinguishment - - 278,125
Deferred taxes (43,559) (44,613) -
Issuance of common stock in exchange for
services rendered - 547,500 -
Adjustment to purchase price of Paragon
Steakhouse Restaurants, Inc. - 435,830 -
(Increase) decrease in
Accounts receivable 2,775,460 1,399,414 (1,126,342)
Advances to officers (1,185,658) (150,000) (226,517)
Inventories 1,829,088 382,114 235,998
Prepaid expenses and other current assets 211,383 (667,548) (8,864)
Intangible assets, net 58,634 - 183,438
Deposits and other assets 334,943 (300,135) (904,904)
Cash - restricted under collateral agreements - (78,074) -
Increase (decrease) in
Accounts payable (22,233) (3,942,613) (1,985,311)
Accrued expenses (284,178) (284,767) 269,740
Unearned revenue (1,179,098) 527,605 476,165
Reserve for self insurance claims (451,908) (8,652) 21,273
Sales and property taxes payable (4,984) (296,385) 134,659
Accrued payroll costs (602,455) (738,722) (492,168)
Deferred rent 149,146 161,976 (923)
---------------- --------------- ----------------
Net cash provided by (used in) operating activities 3,378,406 (2,472,109) (5,074,830)
---------------- --------------- ----------------
The accompanying notes are an integral part of these financial statements.
9
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment $ (1,057,148) $ (1,346,661) $ (355,846)
Proceeds from the sale of property, plant, and
equipment 1,981,963 - -
Change in restricted cash 443,757 - -
Acquisition of Paragon Steakhouse Restaurants,
Inc. and subsidiaries and Pacific Basin Foods,
Inc., net of cash acquired - - (2,054,596)
---------------- --------------- ----------------
Net cash provided by (used in) investing activities 1,368,572 (1,346,661) (2,410,442)
---------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 450,013 1,500,000 5,096,367
Principal payments on debt and capital leases (22,682,873) (2,005,900) (1,184,924)
Proceeds from sale lease-back 22,000,000 - -
Proceeds from issuance of stock - 4,327,750 6,500,000
Payment on subscription receivable 10,000 - -
Cash paid for offering costs - (306,820) (2,235,756)
Cash received on sale of stock options 20,000 10,000 -
Net borrowing (payments) on line of credit (2,775,435) 1,129,066 -
---------------- --------------- ----------------
Net cash provided by (used in) financing activities (2,978,295) 4,654,096 8,175,687
---------------- --------------- ----------------
Net increase in cash and cash equivalents 1,768,683 835,326 690,415
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,590,467 755,141 64,726
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,359,150 $ 1,590,467 $ 755,141
================ =============== ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 3,131,129 $ 4,266,122 $ 501,666
================ =============== ================
INCOME TAXES PAID $ 117,904 $ 10,387 $ 6,044
================ =============== ================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2000, the Company acquired an automobile of
$107,528 in exchange for a capital lease obligation.
The accompanying notes are an integral part of these financial statements.
10
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended December 31, 2000, the Company reclassified property,
plant, and equipment that was available for sale of $263,541 to prepaid expenses
and other current assets.
During the year ended December 31, 2000, the Company completed a sale lease-back
transaction, whereby it acquired $11,186,496 of capital lease obligations.
During the year ended December 31, 1999, the Company issued 52,500 shares of
common stock as payment of interest valued at $206,250.
During the year ended December 31, 1999, the Company issued 20,000 warrants as
payment of interest valued at $60,000.
During the year ended December 31, 1999, the Company issued 146,000 shares of
common stock in exchange for services rendered valued at $547,500.
During the year ended December 31, 1999, a previous employee of the Company
exercised his options to purchase 35,000 shares of the Company's common stock at
$5 per share for a total value of $175,000. As payment for this exercise, the
employee surrendered 28,845 shares of the Company's common stock with a fair
market value on the date of exercise of $6.0669 per share. In connection with
this transaction, the Company recorded treasury stock of $175,000 as of December
31, 1999.
During the year ended December 31, 1999, the Company recorded subscriptions
receivable of $10,000 for the purchase of 2,000 shares of the Company's common
stock.
During the year ended December 31, 1999, the Company settled a lawsuit for
approximately $1,313,000. In lieu of payment, the Company gave up three
restaurants with the same value.
During the year ended December 31, 1998, debt holders of the Company converted
$1,112,500 of promissory notes into 278,125 shares of the Company's common
stock.
During the year ended December 31, 1998, the Company relieved advances to
officers in the form of bonuses aggregating $406,256.
During the year ended December 31, 1998, the Company issued a note payable in
the amount of $600,000 as part of consideration for the purchase of Paragon
Steakhouse Restaurants, Inc. and subsidiaries.
During the year ended December 31, 1998, the Company issued 20,000 shares of
common stock in payment of interest valued at $100,000.
11
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- - --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended December 31, 1998, debt holders converted convertible
promissory notes in the amount of $92,000 into 55,200 shares of the Company's
common stock.
During the year ended December 31, 1998, the Company executed three promissory
notes aggregating $393,285 for the purchase of restaurants and their related
assets.
12
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 1 - COMPANY BACKGROUND AND OPERATIONS
Steakhouse Partners, Inc., a Delaware corporation, was incorporated on
June 3, 1996 under the name "Texas Loosey's Steakhouse & Saloon, Inc."
On December 19, 1996, the Board of Directors adopted a resolution to
change its name to "Galveston's Steakhouse Corp." Up until December 18,
1998, Galveston's Steakhouse Corp. owned two steakhouse restaurants and
operated two others in Southern California which together formerly
comprised all of the restaurants known as "Texas Loosey's Chili Parlor
& Saloon" ("Texas Loosey's").
Galveston's Steakhouse Corp. first acquired two Texas Loosey's
restaurants on August 19, 1996 pursuant to an Asset Purchase Agreement,
dated April 10, 1996, which was subsequently amended on November 1,
1998, and closed escrow on the remaining two Texas Loosey's restaurants
on May 1, 1999.
On December 21, 1998, Galveston's Steakhouse Corp. acquired Paragon
Steakhouse Restaurants, Inc. and subsidiaries (Paragon of Michigan,
Inc., Paragon of Nevada, Inc., and Paragon of Wisconsin, Inc.)
(collectively, "PSR") through its acquisition of all of the outstanding
capital stock of PSR. PSR owns and operates restaurants located
primarily throughout California, Arizona, and the Great Lakes Region.
PSR also owns Pacific Basin Foods, Inc. ("PBF"), a company engaged in
purchasing and selling food and other restaurant supplies to PSR and
nonaffiliated companies.
During the year ended December 31, 1999, Galveston's Steakhouse Corp.
changed its name to Steakhouse Partners, Inc.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
Steakhouse Partners, Inc. and subsidiaries, PSR and PBF (collectively,
the "Company"). Significant intercompany amounts and transactions have
been eliminated in consolidation.
Fiscal Year-End
The Company reports its operations on a 52-53 week fiscal year ending
on the Tuesday closest to December 31. For financial statement
purposes, the Company reports all years as ending December 31.
13
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenues and expenses during the reported periods.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks and
credit card receivables.
The Company maintains its cash deposits at numerous banks located
throughout the United States. Deposits at each bank are insured by the
Federal Deposit Insurance Corporation up to $100,000. As of December
31, 2000 and 1999, uninsured portions of the balances at those banks
aggregated to $4,724,382 and $3,106,886, respectively. The Company has
not experienced any losses in such accounts and believes it is not
exposed to any significant risk on cash and cash equivalents.
Accounts Receivable
Accounts receivable consist primarily of amounts due from customers.
The Company has provided for an allowance for doubtful accounts
totaling $61,264. Management believes this to be sufficient to account
for all uncollectible accounts.
Unearned Revenue
The Company sells gift certificates and recognizes a liability, which
is included in unearned revenue, for gift certificates outstanding
until the gift certificate is redeemed or considered to be
unredeemable.
Advertising and Promotional Costs
Advertising and promotional costs are charged to expense as incurred.
Advertising and promotional costs for the years ended December 31,
2000, 1999, and 1998 were $2,959,474, $2,647,008, and $63,129,
respectively.
Direct Operating Costs
Direct operating costs consist of those direct costs associated with
operating the restaurant locations, exclusive of depreciation and
amortization expense, and with costs associated with operating PBF's
warehouse operations.
14
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories
Inventories, consisting principally of food, beverages, and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or
market.
Property, Plant, and Equipment
Property, plant, and equipment, including leasehold improvements, are
recorded at cost, less accumulated depreciation and amortization.
Depreciation is provided using the straight-line method over the
estimated useful lives of the respective assets as follows:
Buildings 20 years
Furniture, fixtures, and equipment 5 years
Improvements to leased property are amortized over the lesser of the
life of the lease or the life of the improvements. Amortization expense
on assets acquired under capital leases is included with depreciation
and amortization expense on owned assets.
Maintenance and minor replacements are charged to expense as incurred.
Gains and losses on disposals are included in the results of
operations.
Intangibles
Intangibles consist of covenants not to compete and franchise
contracts. The covenants not to compete and franchise contracts are
being amortized over five years (the length of the contract).
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," the Company records impairment
losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired, and the
undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets. During the year ended
December 31, 2000, events and circumstances in connection with the
disposal of two restaurants indicated that $328,000 of intangible
assets of the Company were impaired. The Company's estimate of
undiscounted cash flows indicates that such carrying amounts are not
expected to be recovered. Accordingly, the Company recorded an
impairment loss of $194,514, which is included in other income and
expenses.
Deferred Rent
The leases on various facilities include certain rent relief and
scheduled increasing monthly payments thereafter. In accordance with
generally accepted accounting principles, the Company has accounted for
these leases to provide for even charges to operations over the lives
of the leases.
15
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment Reporting
The Company accounts for segments in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The Company's reportable segments are strategic business units that
offer different products and services (see Note 14).
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the implicit value based
method and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation.
Comprehensive Income
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include
foreign currency translation adjustments and unrealized gains and
losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did
not have any of the items of comprehensive income in any period
presented.
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation, and disclosure of
revenue in financial statements. Changes in accounting to apply the
guidance in SAB No. 101 may be accounted for as a change in accounting
principle effective January 1, 2000. Management has not yet determined
the complete impact of SAB No. 101 on the Company; however, management
does expect that application of SAB No. 101 will not have a material
effect on the Company's revenue recognition and results of operations.
16
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," (an Interpretation of Accounting
Principles Bulletin Opinion No. 25 ("APB 25")) ("FIN 44"). FIN 44
provides guidance on the application of APB 25, particularly as it
relates to options. The effective date of FIN 44 is July 1, 2000, and
the Company has adopted FIN 44 as of that date.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Instruments and Certain Hedging Activities." This statement is not
applicable to the Company.
In June 2000, the FASB issued SFAS No. 139, "Rescission of FASB
Statement No. 53 and Amendments to Statements No. 63, 89, and 121."
This statement is not applicable to the Company.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125." This statement
is not applicable to the Company.
Revenue Recognition
Revenues are generally recognized when services are rendered.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
17
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Loss Per Share
The Company utilizes SFAS No. 128, "Earnings per Share." SFAS No. 128
replaced the previously reported primary and fully diluted loss per
share with basic and diluted loss per share. Unlike primary loss per
share, basic loss per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted loss per share is very
similar to the previously reported fully diluted loss per share. Basic
loss per share is computed using the weighted-average number of common
shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is anti-dilutive. As
such, basic and diluted loss per share are the same.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
The amounts shown for long-term debt also approximate fair value
because current interest rates offered to the Company for debt of
similar maturities are substantially the same.
Risk Concentrations
During the year ended December 31, 2000, the Company did not have any
risk concentrations. As of December 31, 1999, substantially all of the
Company's accounts receivable were generated from two customers and
were 46% and 36% of the Company's total accounts receivable.
Reclassifications
Certain amounts included in the prior years' financial statements have
been reclassified to conform with the current year presentation. Such
reclassification had no effect on reported net income.
18
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 3 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31 consisted of the
following:
2000 1999
--------------- ----------------
Land $ - $ 11,832,771
Buildings 11,951,328 24,137,881
Furniture, fixtures, and equipment 3,696,562 3,190,868
Leased property under capital leases 21,094,688 9,665,525
--------------- ----------------
36,742,578 48,827,045
Less accumulated depreciation and amortization 5,544,391 3,398,837
--------------- ----------------
31,198,187 45,428,208
Small kitchenwares 2,075,851 2,179,909
--------------- ----------------
TOTAL $ 33,274,038 $ 47,608,117
=============== ================
Depreciation and amortization expense was $3,927,687, $4,213,750, and
$148,156 for the years ended December 31, 2000, 1999 and 1998,
respectively.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets at December 31 consisted of the following:
2000 1999
--------------- ----------------
Goodwill $ - $ 313,000
Covenants not to compete 60,000 75,000
Franchise contract 145,000 145,000
Other 70,000 70,000
--------------- ----------------
275,000 603,000
Less accumulated amortization 84,426 159,278
--------------- ----------------
TOTAL $ 190,574 $ 443,722
=============== ================
19
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 5 - NOTE RECEIVABLE
To obtain a letter of credit for $2,600,000 required by one of the
Company's lessors, the Company placed a $500,000 deposit with the
issuer of the letter of credit on November 8, 1998. The Company in turn
was able to secure its deposit with the issuer of the letter of credit
with a non-negotiable promissory note that bears no interest. In
exchange for the letter of credit, the Company is required to pay to
the issuer $118,000 and issue 20,000 warrants annually on the
anniversary date of the letter of credit, pro rata for each year the
letter of credit is outstanding. Any money drawn on the letter of
credit will incur an interest charge of 12% per annum, and repayment of
the drawn down and interest charges are due within 90 days. The letter
of credit matures in five years from the date of issuance and is
callable after two years from the date of issuance by the Company upon
payments of amounts due to the issuer. The Company reduced the note
receivable by $118,000 during each of the years ended December 31, 2000
and 1999. The note receivable is included in deposits and other assets
in the accompanying balance sheet.
NOTE 6 - LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
2000 1999
--------------- ----------------
10.39% mortgage loan collateralized by the majority of the
Company's property, plant, and equipment, due in monthly
installments of principal and interest through September
2011. During the year ended December 31, 2000, the amount
was paid in full (see Note 7). $ - $ 19,618,578
Note payable to the former owner in the amount of $870,000,
bearing interest at 8% per annum from the original note
date (August 19, 1996). Monthly principal and interest
payments of $10,978 are due from February 19, 1998 through
July 19, 2001, with the remaining principal balance due
via a balloon payment on August
19, 2001. 707,048 778,303
20
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT (CONTINUED)
2000 1999
--------------- ----------------
Note payable in the amount of $600,000 bearing interest at
6.9% per annum from the original note date (December 21,
1998). The note has been executed and delivered pursuant
to and in accordance with the terms and conditions of the
business combination described in Note 13. The principal
amount of the note was due in one installment on December
21, 1999. Interest on the principal balance of this note
shall be due and payable quarterly. The Company is
currently in default on this
obligation. $ 403,077 $ 600,000
Note payable, dated December 21, 1998, due in one year,
bearing no interest (see Note 7). During the year ended
December 31, 2000, the
amount was paid in full. - 250,000
Bridge loan, dated December 21, 1998, due in one year, bearing
no interest (see Note 7). During the year ended December
31, 2000, the amount
was paid in full. - 100,000
Note payable, dated March 1, 1997, bearing interest at 11.25%
per annum with an original principal of $125,373 and
maturing in February 2000. The note required monthly
payments of $4,063 and was secured by the assets of two
restaurants. During the year ended December
31, 2000, the amount was paid in full. - 6,678
Note payable, dated March 1, 1997, bearing interest at 11.25%
per annum with an original principal of $230,997 and
maturing in July 2004. The note requires monthly payments
of $3,895 and is
secured by the assets of two restaurants. 74,445 162,049
21
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 6 - LONG-TERM DEBT (CONTINUED)
2000 1999
--------------- ----------------
Note payable, dated March 22, 1999, bearing interest at 12.5%
per annum with an original principal of $1,500,000. The
note requires monthly payments of $15,625 through February
2004 with the remaining principal balance due in a balloon
payment in March 2004. The note is secured by the assets
of two restaurants. The Company is currently in default on
this
obligation. $ 1,500,000 $ 1,500,000
Note payable, dated April 23, 2000, bearing interest at 7.22%
per annum with an original principal of $411,324. The note
requires nine monthly
payments of $47,165 through January 1, 2001. 13,383 -
--------------- ----------------
2,697,953 23,015,608
Less current portion 2,697,953 22,434,042
--------------- ----------------
LONG-TERM PORTION $ - $ 581,566
=============== ================
NOTE 7 - LINE OF CREDIT AND SECURED FINANCING
Line of Credit
On December 21, 1998, PBF entered into a $6,000,000 revolving line of
credit (the "Revolver") with a financing company. The Revolver bore
interest at prime, plus 1.25%. Borrowings and required payments under
the Revolver were based upon a formula utilizing accounts receivable
and inventories. The revolver was collateralized by substantially all
of PBF's tangible property and accounts receivable. The Company had
also pledged as additional collateral a $250,000 certificate of
deposit. The Revolver was used to pay down accounts payable and advance
funds to the Company and for working capital requirements. The terms of
the Revolver included specific financial covenants, restrictions on
loans to the Company and other affiliates, and maintenance of a
specified level of tangible net worth. During the year ended December
31, 2000, the Company terminated its line of credit with the financing
company. In connection with the termination, the Company received the
pledged collateral of $250,000 as a reduction to the outstanding line
of credit balance. As of December 31, 2000 and 1999, the outstanding
balance was $0 and $2,775,435, respectively.
22
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 7 - LINE OF CREDIT AND SECURED FINANCING (CONTINUED)
Line of Credit (Continued)
In order to obtain the $250,000 as collateral, the Company entered into
a $250,000 loan agreement on November 18, 1998 with an unrelated third
party, maturing one year from the date of the loan. In lieu of
interest, the Company agreed to immediately issue 50,000 shares of
common stock upon receipt by the Company of $250,000. These shares vest
pro rata over the course of one year from the date of issuance of the
letter of credit. The minimum vesting percentage is 25%, and the final
vesting percentage will be the actual number of days that the letter of
credit is outstanding divided by 360. If the loan balance is not paid
off by the maturity date, the Company will issue an additional 50,000
shares of common stock, pro rata for the days outstanding.
The share beneficiaries also have the ability to put or sell all of
their shares in this transaction back to the Company at $5 per share
over a 90-day window, beginning one year from the issuance date of the
letter of credit or beginning from the date of the termination of the
letter of credit, whichever is earlier. Any monies drawn on this letter
of credit will immediately become due and payable in full by the
Company, and interest will accrue on the any unpaid monies at an annual
interest rate of 12%. Any monies not paid after 30 days will be charged
at an annual interest rate of 18%. The loan is guaranteed by the
Company and personally guaranteed by the Company's Chairman of the
Board and President. In relation to this loan, the Company recorded
interest expense of $66,625 and $250,000 as of December 31, 2000 and
1999, respectively, for the issuance of common stock according to the
terms of this agreement. During the year ended December 31, 2000, the
Company paid the note in full. In addition, the put options related to
this agreement expired without being exercised.
Secured Financing
On August 30, 1997, PSR entered into a $22,624,000 secured mortgage
financing (the "Mortgage") with a financing company. Paragon Steakhouse
Restaurants, Inc. and one of its subsidiaries, Paragon of Michigan,
Inc., are liable for the repayment of such financing. The Mortgage
bears interest at 10.39% and is payable in 180 equal installments of
principal and interest, with the final installment due in September
2011. In 1997, the Company prepaid $626,779 of the mortgage, reducing
the original monthly payments of $248,545 to $241,470. The prepayment
was funded from the sale of a portion of the security. The Mortgage is
secured by substantially all of PSR's owned land, buildings, and the
improvements thereon. The Mortgage proceeds were used to refinance
existing debt, finance restaurant remodels, and pay fees and expenses
associated with the Mortgage. The terms of the Mortgage include
specific financial covenants, restrictions on obtaining other
financing, and limitations on payments to its parent.
23
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 7 - LINE OF CREDIT AND SECURED FINANCING (CONTINUED)
Secured Financing (Continued)
On April 30, 1997 and on May 28, 1997, the mortgage agreement was
amended primarily to modify the loan covenants. As of December 31,
1999, the Company was not in compliance with certain financial ratio
loan covenants and therefore has reclassified the entire loan balance
as current.
On July 19, 2000, PSR completed a sales-leaseback transaction of 19 of
its restaurants for $22,000,000. The Company used a majority of the
proceeds to pay off the secured mortgage. As of December 31, 2000 and
1999, the outstanding balance was $0 and $19,618,578, respectively
Bridge Loan
On December 9, 1998, the Company obtained a $100,000 bridge loan from
an unrelated third party, with a maturity date of one year from the
date of the agreement. In lieu of interest, the agreement calls for the
immediate issuance of 5,000 shares of common stock and 15,000 warrants
to purchase common stock at zero cost. These shares and warrants vest
pro rata over the course of one year from the date of receipt by the
Company of the $100,000. The minimum vesting percentage is 25%, and the
final vesting percentage will be the actual number of days until the
$100,000 is paid, divided by 360.
Upon the one-year maturity date and on each annual anniversary
thereafter, as long as the $100,000 balance owed remains unpaid, the
Company will issue an additional 20,000 shares of common stock, which
will vest immediately. In addition, those unpaid monies will accrue
interest after the one-year maturity date at an annual interest rate of
25%. The share beneficiaries also have the ability to put or sell all
their shares in this transaction back to the Company at $5 per share
over a 90-day window, beginning one year from the receipt of the
$100,000. The loan is guaranteed by the Company and personally
guaranteed by the Company's Chairman of the Board and President. In
relation to this loan, the Company recorded interest expense of $23,750
and $100,000 as of December 31, 2000 and 1999, respectively, for the
issuance of common stock in accordance with this agreement. During the
year ended December 31, 2000, the note was paid in full. In addition,
the put options related to this agreement expired without being
exercised.
24
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 8 - CONVERTIBLE DEBT
The Company issued convertible debt, as summarized below, payable to
various individuals, which is convertible at the option of the holder
into the Company's common stock. Interest at 6% per annum is payable on
a quarterly basis. If the note holders elect to convert their debt to
common stock, the conversion price for each share will equal 85% of the
average closing price of the Company's common stock for the five days
preceding the conversion date. There were no conversions to common
stock during the year ended December 31, 2000.
The terms associated with each series for the year ended December 31,
2000 are as follows:
2000 1999
--------------- ----------------
6% notes, due July 23, 2001 $ 100,000 $ 100,000
6% notes, due June 3, 2001 600,000 600,000
6% notes, due July 15, 2001 400,000 400,000
--------------- ----------------
TOTAL $ 1,100,000 $ 1,100,000
=============== ================
In accordance with generally accepted accounting principles, the
discount on the conversion feature of the above notes, arising from the
85% conversion feature, is considered to be interest expense and is
recognized in the statement of operations during the period from the
issuance of the debt to the time at which the debt becomes convertible.
NOTE 9 - SECURED EXCHANGEABLE NOTES
On September 29, 1998, the Company issued a secured exchangeable note
of $650,000, maturing on September 28, 2003. Interest on the note at
14.375% per annum based on a 360-day year will accrue from the date of
the note and is payable upon exchange of the note into common stock.
The coupon rate of the note increases by 2.25% every 360 days, up to a
maximum of 25%. At December 31, 2000, the interest rate was 18.88%. The
note may also be exchanged for the Company's common stock at an
exchange price equal to $4.65 or the average of the four low trades in
the primary market for trading of the Company's common stock over the
22 trading days immediately proceeding the exchange date, reduced by an
exchange discount. This note also provides warrants for the purchase of
73,125 shares of the Company's common stock at any time during the
period commencing on the date of the note through September 28, 2003 at
an exercise price per share equal to $5.28. The warrants may be
exercised whole or in part.
25
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 9 - SECURED EXCHANGEABLE NOTES (CONTINUED)
On December 21, 1998, the Company issued a secured exchangeable note of
$1,350,000, maturing on September 28, 2003. Interest on the note at 12%
per annum based on a 360-day year will accrue from the date of the note
and is payable upon exchange of the note into common stock. The coupon
rate of the note increases by 2.25% every 360 days, up to a maximum of
25%. At December 31, 2000, the interest rate was 16.5%. The note may
also be exchanged for the Company's common stock at an exchange price
equal to $5.50 or the average of the four low trades in the primary
market for trading of the Company's common stock over the 22 trading
days immediately proceeding the exchange date, reduced by an exchange
discount. This note also provides warrants for the purchase of
outstanding shares of the Company's common stock at any time during the
period commencing on the date of the note through September 28, 2003 at
an exercise price per share equal to $5.28125. The warrants may be
exercised whole or in part.
NOTE 10 - STOCKHOLDERS' EQUITY
Preferred Stock
On June 4, 1996, the Company issued 1,000,000 shares of convertible
preferred stock (Series B) to the Chairman of the Board and Chief
Executive Officer of the Company for services rendered. The preferred
stock has a par value of $0.001 per share and carries rights to vote
with the common stock as one class on a one-vote-per-share basis. The
preferred stock is convertible into the Company's common stock on a
one-for-one basis at the option of the holder at the earlier of eight
years following the closing date of the Company's initial public
offering ("IPO") or when the Company's annual net income equals or
exceeds $3,500,000.
Upon conversion, the holder of the preferred stock will be required to
pay to the Company, in cash, a conversion price per share equal to 150%
of the IPO price of the Company's common stock.
26
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
Preferred Stock (Continued)
The preferred stock carries no dividends prior to the second
anniversary of the closing date of the IPO, but thereafter, if the
above conversion test is satisfied, the preferred stock will
participate in any dividends declared on the Company's common stock, on
an "as converted" basis. In the event of a voluntary or involuntary
liquidation or dissolution of the Company prior to the second
anniversary of the closing date of the IPO, or subsequent to the IPO if
annual net profits of $3,500,000 have not been achieved, the holder of
the preferred stock would be entitled to the par value of $0.001 per
share, or $1,000 in the aggregate. In the event of a voluntary or
involuntary liquidation or dissolution of the Company subsequent to the
Company's achieving $3,500,000 in annual net profits, the holder of the
preferred stock would be entitled to share with the holders of the
Company's common stock, the assets of the Company, on an as converted
basis.
On July 26, 1999, the Company issued 1,750,000 shares of convertible
preferred stock (Series C) to the Chief Executive Officer and President
of the Company for services rendered. The preferred stock has a par
value of $0.001 per share and carries the right to vote with the common
stock as one class on a one-vote-per-share basis. The preferred stock
is convertible into the Company's common stock on a one-for-one basis
at the option of the holder at the earlier of March 2, 2006 or the date
the Company's annual net profits equal or exceed $4,200,000. Upon
conversion, the holder of the preferred stock will be required to pay
to the Company a conversion price per share equal to $8.53.
The shares of Series C may not be redeemed by the Company without the
unanimous consent of the holders. The preferred stock carries no
dividends prior to March 2, 2000, the second anniversary of the closing
date of the IPO, but thereafter, if the above conversion test is
satisfied, the preferred stock will participate in any dividends
declared on the Company's common stock, on an "as converted" basis. In
the event of a voluntary or involuntary liquidation or dissolution of
the Company prior to the second anniversary of the closing date of the
IPO, or any time thereafter if the conversion test is not satisfied,
the holder of the preferred stock would be entitled to the par value of
$0.001 per share, or $1,750 in the aggregate. In the event of a
voluntary or involuntary liquidation or dissolution of the Company
subsequent to the Company's achieving $4,200,000 in annual net profits,
the holder of the preferred stock would be entitled to share with the
holders of the Company's common stock, the assets of the Company, on an
as converted basis.
27
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock
During the year ended December 31, 1998, the Company completed an IPO
of its common stock. In connection with the IPO, the Company issued
1,250,000 shares of its $0.01 par value common stock at $5 per share
for total proceeds of $6,500,000. Stock issuance costs incurred related
to the IPO were $2,532,603.
During the year ended December 31, 1998, the Company negotiated the
conversion of certain promissory notes aggregating to $1,112,500 into
278,125 shares of the Company's common stock. The conversion rate of
the debt was provided at a discount for the debt holders in order to
elicit their conversion. The conversion resulted in a loss on debt
extinguishment of $278,125, which represents the difference between the
carrying value of the debt extinguishment and the fair market value of
the securities issued to extinguish the debt. In addition, holders of
promissory notes aggregating to $92,000 were converted into 55,200
shares of common stock worth $276,000 in the aggregate. The Company
recorded the difference between the note amount of $92,000 and the
conversion amount of $276,000 as interest expense upon the closing of
the IPO and the conversion of debt to common stock.
In connection with a private placement of the Company's common stock on
June 14, 1999, the Company issued 182,000 shares of its $0.01 par value
common stock at $5.50 per share for total proceeds of $1,001,000. Stock
issuance costs incurred in relation to this placement totaled $95,070.
In connection with a private placement of the Company's common stock on
June 16, 1999, the Company issued 181,818 shares of its $0.01 par value
common stock at $5.50 per share for total proceeds of $1,000,000. Stock
issuance costs incurred in relation to this placement totaled $70,000.
In connection with a private placement of the Company's common stock on
July 15, 1999, the Company issued 300,000 shares of its $0.01 par value
common stock at $6.75 per share for total proceeds of $2,025,000. Stock
issuance costs incurred in relation to this placement totaled $141,750.
In connection with a private placement of the Company's common stock on
July 21, 1999, the Company issued 41,379 shares of its $0.01 par value
common stock at $7.25 per share for total proceeds of $300,000.
During the year ended December 31, 1999, the Company issued 146,000
shares of common stock in exchange for services rendered valued at
$547,500.
28
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock (Continued)
During the year ended December 31, 1999, in connection with the
$1,500,000 note payable, the Company entered into an agreement to issue
the issuer warrants to purchase 75,000 shares of the Company's common
stock at an exercise price equal to the lesser of $7.75 or the average
daily closing bid price for the 20 trading days immediately prior to
closing. The warrants are exercisable for seven years from closing and
contain a "cashless exercise" feature. Management does not consider the
fair market value of these warrants to be material. As such, no finance
charges have been recorded in the financial statements related to the
agreement for detachable stock purchase warrants.
During the year ended December 31, 1999, a previous employee of the
Company exercised his options to purchase 35,000 shares of the
Company's common stock at $5 per share for a total value of $175,000.
As payment for this exercise, the employee surrendered 28,845 shares of
the Company's common stock with a fair market value on the date of
exercise of $6.0669 per share. In connection with this transaction, the
Company recorded treasury stock of $175,000 as of December 31, 1999.
During the year ended December 31, 1999, the Company recorded
subscriptions receivable of $10,000 for the purchase of 2,000 shares of
the Company's common stock. As of December 31, 2000, the Company
received cash for the subscriptions receivable of $10,000.
During the years ended December 31, 2000 and 1999, the Company issued
17,500 and 52,500 shares, respectively, of common stock in lieu of
interest payments on certain notes. In connection with these issuances,
the Company recorded interest expense totaling $90,375 and $206,250 as
of December 31, 2000 and 1999, respectively (see Note 7).
During the years ended December 31, 2000 and 1999, the Company issued
20,000 warrants annually to purchase shares of the Company's common
stock at $5 per share. In connection with these issuances, the Company
recorded interest expense of $60,000 as of both December 31, 2000 and
1999.
During the year ended December 31, 2000, the Company issued 20,000
warrants to purchase shares of the Company's common stock at $3 per
share in accordance with a lien release agreement. In connection with
the issuance, the Company recorded financing costs of $38,960 as of
December 31, 2000.
29
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock (Continued)
During the year ended December 31, 2000, the Company issued an employee
25,000 stock options in exchange for $20,000. The stock options are
exercisable at $6.50 per share and approximated the fair value of the
Company's common stock at the date of issuance. As such, no
compensation expense has been recognized. Subsequent to the issuance,
the options were canceled with the intention of being re-issued after a
waiting period of six months at an exercise price to be determined by
the Board of Directors.
NOTE 11 - STOCK-BASED COMPENSATION
Omnibus Stock Option Plan
In January 1997, the Board of Directors approved the adoption of an
Omnibus Stock Plan (the "Omnibus Plan"). The Omnibus Plan is intended
to provide incentive to key employees, officers, and directors of the
Company who provide significant services to the Company. There are
400,000 options available for grant under the Omnibus Plan. Options
will vest over a period of time as determined by the Board of Directors
for up to 10 years from the date of grant. However, no options may be
exercisable less than six months from the date of grant. The exercise
price of options granted under the Omnibus Plan will be determined by
the Board of Directors, provided that the exercise price is not less
than the fair market value of the Company's common stock on the date of
grant.
Galveston's Steakhouse Corp. 1999 Stock Option Plan
In May 1999, the Board of Directors approved the adoption of a
non-qualified and incentive stock option plan (the "Galveston's Plan").
The Galveston's Plan, which was approved by the Company's stockholders
at the 1999 annual meeting, is intended to provide incentive to key
employees, officers, and directors of the Company who provide
significant services to the Company. There are 500,000 options
available for grant under the Galveston's Plan. Options will vest over
a period of time as determined by the Board of Directors for up to 10
years from the date of grant. However, no options may be excisable less
than six months from the grant date. The exercise price of options
granted under the Galveston's Plan will be determined by the Board of
Directors, provided that the exercise price is not less than the fair
market value of the Company's common stock on the date of grant.
30
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
Steakhouse Partners, Inc. Stock Option Plan
In July 1999, the Board of Directors approved the adoption of a
non-qualified and incentive stock option plan (the "Steakhouse Plan").
The Steakhouse Plan provides incentive to key employees, officers, and
directors of the Company who provide significant services to the
Company. There are 1,000,000 options available for grant under the
Steakhouse Plan. Options will vest over a period of time as determined
by the Board of Directors for up to 10 years from the date of grant.
However, no options may be excisable less than six months from the
grant date. The exercise price of options granted under the Steakhouse
Plan will be determined by the Board of Directors, provided that the
exercise price is not less than the fair market value of the Company's
common stock on the date of grant.
Steakhouse Partners, Inc. 2000 Stock Option Plan
In March 2000, the Board of Directors approved the adoption of a
non-qualified and incentive stock option plan (the "Steakhouse 2000
Plan"). The Steakhouse 2000 Plan, which was approved by the Company's
stockholders at the 2000 annual meeting, is intended to provide
incentive to key employees, officers, and directors of the Company who
provide significant services to the Company. There are 5,000,000
options available for grant under the Steakhouse 2000 Plan. Options
will vest over a period of time as determined by the Board of Directors
for up to 10 years from the date of grant. However, no options may be
excisable less than six months from the grant date. The exercise price
of options granted under the Steakhouse 2000 Plan will be determined by
the Board of Directors, provided that the exercise price is not less
than the fair market value of the Company's common stock on the date of
grant.
Other Stock Options Issued Outside of the Plan
During the year ended December 31, 1998, the Company issued options to
one employee of the Company to purchase 75,000 shares of common stock.
The options were issued outside of any formal plan and vest ratably
over five years. The options are exercisable at $4.96 per share and
approximated the fair value of the Company's common stock at the
issuance date. As such, no compensation expense has been recognized in
the Company's financial statements.
During the year ended December 31, 1999, the Company issued an employee
20,000 stock options in exchange for $20,000, of which $10,000 was paid
in December 1999, and the remaining balance was paid during the year
ended December 31, 2000. The stock options are exercisable at $6.50 per
share and approximated the fair value of the Company's common stock at
the date of issuance. As such, no compensation expense has been
recognized.
31
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
Stock Options
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB Opinion No. 25 and related interpretations in accounting
for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock and
options issued to outside third parties. If the Company had elected to
recognize compensation expense based upon the fair value at the grant
date for awards under this plan consistent with the methodology
prescribed by SFAS No. 123, the Company's net loss and loss per share
would be reduced to the pro forma amounts indicated below for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
---------------- --------------- ----------------
Net loss
As reported $ (621,444) $ (3,895,039) $ (2,961,728)
Pro forma $ (813,716) $ (4,465,739) $ (3,026,783)
Basic loss per common share
As reported $ (0.18) $ (1.39) $ (1.39)
Pro forma $ (0.24) $ (1.59) $ (1.42)
For purposes of computing the pro forma disclosures required by SFAS
No. 123, the fair value of each option granted to employees and
directors is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions for the years ended
December 31, 2000, 1999, and 1998: dividend yields of 0%, 0%, and 0%,
respectively; expected volatility of 50%, 30%, and 45%, respectively;
risk-free interest rates of 6.3%, 6.2%, and 4.6%, respectively; and
expected lives of five, two, and two years, respectively. The
weighted-average fair value of options granted during the year ended
December 31, 2000 for which the exercise price was greater than the
market price on the grant date was $2.47, and the weighted-average
exercise price was $5.39.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
32
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
Stock Options (Continued)
A summary of the Company's stock option plans and changes in
outstanding options for the years ended December 31, 2000, 1999, and
1998 are as follows:
Omnibus Plan Outside of Plan
--------------------------------- ---------------------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------------- ---------------- --------------- ----------------
Outstanding at
December 31, 1997 - $ - 225,000 $ 1.77
Granted 400,000 $ 3.15 75,000 $ 4.96
Forfeited (65,000) $ 3.13 - $ -
--------------- ---------------
Outstanding at
December 31, 1998 335,000 $ 3.15 300,000 $ 2.57
Granted - $ - 20,000 $ 6.50
Exercised - $ - (35,000) $ 5.00
Forfeited - $ - (25,000) $ 5.00
--------------- ---------------
OUTSTANDING AT
DECEMBER 31, 1999
AND 2000 335,000 $ 3.15 260,000 $ 2.31
=============== ===============
EXERCISABLE AT
DECEMBER 31, 2000 335,000 $ 3.15 180,000 $ 0.96
=============== ===============
33
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
Stock Options (Continued)
Galveston's Plan Steakhouse Plan
--------------------------------- ---------------------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------------- ---------------- --------------- ----------------
Outstanding at
December 31, 1997
and 1998 - $ - - $ -
Granted 519,999 $ 6.33 794,100 $ 6.82
Forfeited (7,500) $ 7.50 - $ -
--------------- ---------------
Outstanding at
December 31, 1999 512,499 $ 6.32 794,100 $ 6.82
Granted - $ - 185,000 $ 5.60
Forfeited (80,000) $ 7.13 (120,000) $ 6.96
--------------- ---------------
OUTSTANDING AT
DECEMBER 31, 2000 432,499 $ 6.17 859,100 $ 6.54
=============== ===============
EXERCISABLE AT
DECEMBER 31, 2000 50,750 $ 6.12 731,100 $ 6.68
=============== ===============
Steakhouse 2000 Plan
Weighted-
Shares Average
Under Exercise
Option Price
--------------- ----------------
Outstanding at December 31, 1997, 1998, and 1999 - $ -
Granted 200,000 $ 5.20
---------------
OUTSTANDING AT DECEMBER 31, 2000 200,000 $ 5.20
===============
EXERCISABLE AT DECEMBER 31, 2000 - $ -
===============
34
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
Stock Options (Continued)
The weighted-average remaining contractual life of the options
outstanding at December 31, 2000 is seven years. The exercise prices
for the options outstanding at December 31, 2000 ranged from $0.60 to
$9.50, and information relating to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
------------------ --------------- --------------- --------------- --------------- ----------------
$ 0.60 - 6.00 1,182,499 549,750 5.7 years $ 4.13 $ 2.59
$ 6.01 - 9.50 904,100 747,100 8.6 years $ 6.79 $ 2.69
--------------- ---------------
2,086,599 1,296,850
=============== ===============
Warrants
A summary of the Company's outstanding warrants and activity for the
years ended December 31, 2000 and 1999 are as follows:
Weighted-
Shares Average
Under Exercise
Warrant Price
--------------- ----------------
Outstanding at December 31, 1997 - $ -
Granted 413,771 $ 6.02
---------------
Outstanding at December 31, 1998 and 1999 413,771 $ 6.02
Granted 40,000 $ 4.00
---------------
OUTSTANDING AT DECEMBER 31, 2000 453,771 $ 5.84
===============
EXERCISABLE AT DECEMBER 31, 2000 453,771 $ 5.84
===============
35
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
Warrants (Continued)
The following table summarizes information about warrants outstanding
at December 31, 2000:
Weighted-
Average
Warrants Warrants Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------------- ------------------ ------------------ ---------------------
$ 3.00 20,000 20,000 4.5 years
$ 5.00 63,250 63,250 4.0 years
$ 5.15625 12,606 12,606 3.0 years
$ 5.28125 73,125 73,125 3.0 years
$ 6.00 169,790 169,790 3.0 years
$ 7.00 115,000 115,000 3.0 years
------------------ ------------------
453,771 453,771
================== ==================
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases land and building sites for its restaurant
operations. These leases have initial terms generally ranging from 20
to 35 years and, in certain instances, provide for renewal options
ranging from five to 25 years. Certain of these leases require
additional (contingent) rental payments by the Company if sales volumes
at the related restaurants exceed specified levels. Most of these lease
agreements require payments of taxes, insurance, and maintenance costs
by the Company. The Company also leases restaurant and transportation
equipment under operating and capital leases. Those leases have initial
terms generally ranging from four to seven years and require a fixed
monthly payment or, in the case of transportation equipment, additional
payments on a per mile basis.
For the years ended December 31, 2000, 1999, and 1998, rent expense was
$7,931,606, $7,783,916, and $347,772, respectively.
36
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (Continued)
Future minimum lease payments for all leases with initial or remaining
terms of one year or more at December 31, 2000 were as follows:
Year Ending Capital Operating
December Leases Leases
------------- --------------- ----------------
2001 $ 2,276,305 $ 7,248,906
2002 2,235,433 6,732,090
2003 2,250,268 6,218,794
2004 2,251,135 5,531,771
2005 2,253,008 4,950,146
Thereafter 30,837,637 41,971,252
--------------- ----------------
Total minimum lease payments 42,103,786 $ 72,652,959
================
Less amount representing interest 24,273,330
---------------
17,830,456
Less current portion 361,831
LONG-TERM LEASE OBLIGATIONS $ 17,468,625
===============
Self Insurance
The Company has self-insured retention insurance programs for general
liability and employee health plans with varying deductibles and
certain maximum coverage under the Company's risk management program.
Amounts estimated to be payable with respect to existing claims for
which the Company is liable under its self-insured retention have been
accrued as liabilities. The Company is also required to maintain cash
deposits securing future payments under the programs and has entered
into an arrangement with the insurance companies, whereby they have
placed cash deposits into money market funds controlled by the
insurance companies and granted the insurance companies a security
interest in the cash deposits. These deposits have been recorded in the
other asset section of the balance sheet as "cash - restricted under
collateral agreements." Estimated liabilities related to self insurance
were $836,718 and $2,499,339 at December 31, 2000 and 1999,
respectively, and are recorded in the accompanying balance sheets.
Included in the estimated liability is the amount estimated to be
payable with respect to existing claims for workers' compensation
during the period the Company was self-insured for workers'
compensation.
37
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Other
At December 31, 2000 and 1999, the Company had outstanding commitments
to purchase inventory of approximately $1,504,000 and $1,770,000,
respectively. The inventory purchase commitments approximate market
value.
The Company is also contingently liable on operating leases of property
sold to third parties. The future minimum lease payments on these
properties aggregate $2,399,168 through December 2009.
Employment Agreements
The Company has entered into two, four-year employment agreements,
which expired on June 3, 2000, with officers of the Company. Aggregate
annual payments required under the agreement were $50,000 and $45,000
and increased to $100,000 and $80,000, respectively, at the close of
the Company's IPO. These employment agreements were not extended as of
December 31, 2000.
On December 15, 1998, the Company entered into a five-year employment
agreement with an executive of the Company. The agreement requires
annual gross salary payments of $80,000 and may be terminated without
cause. However, in the event the agreement is terminated, the Company
is obligated to pay six months' salary to the executive. During the
year ended December 31, 1999, the executive resigned from the Company.
As such, no additional compensation was due to the employee.
Litigation
The Company is periodically a defendant in cases involving personal
injury and other matters that arise in the normal course of business.
While any pending or threatened litigation has an element of
uncertainty, the Company believes that the outcome of any pending
lawsuits or claims, individually or combined, will not materially
affect the financial condition or results of operations.
NOTE 13 - BUSINESS COMBINATION
On December 21, 1998, the Company acquired all of the outstanding
shares of Paragon Steakhouse Restaurants, Inc., a company engaged in
the business of restaurant and food services, in exchange for cash and
notes payable. The total acquisition cost was $3,846,215. There was no
excess of total acquisition cost over fair value of the net assets
associated with the acquisition. As such, no goodwill has been recorded
on the records of the Company for this transaction.
38
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 13 - BUSINESS COMBINATION (CONTINUED)
The acquisition has been accounted for as a purchase, and the results
of operations of PSR since the date of acquisition (December 21, 1998)
are included in the consolidated financial statements.
A summary of the assets purchased in the business combination is as
follows:
Working capital deficit $ (40,428,669)
Property, plant, and equipment 50,715,926
Other assets 2,248,352
Other liabilities (8,689,394)
------------------
Total price 3,846,215
Cash acquired (1,191,519)
PURCHASE PRICE, NET OF CASH ACQUIRED $ 2,654,696
==================
The following are the unaudited pro forma consolidated results of
operations for the year ended December 31, 1998 as though Paragon
Steakhouse Restaurants, Inc. had been acquired as of January 1, 1998:
Net sales $ 173,477,000
Net loss $ (6,187,000)
Basic and diluted loss per share $ (2.90)
NOTE 14 - SEGMENT INFORMATION
The Company has three business units which have separate management and
reporting infra-structures that offer different products and services.
The business units have been aggregated into two reportable segments
(restaurant service and food service distribution) since the long-term
financial performance of these reportable segments is affected by
similar economic conditions. The restaurant service segment consists of
two business units - Paragon Steakhouse Restaurants, Inc. and Galveston
Steakhouse Restaurants - that operate specialty restaurants around the
country. The food service distribution segment performs distribution of
restaurant foods and restaurant-related products for internal
operations, as well as customers outside the Company's internal
operations.
39
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
The accounting policies of the reportable segments are the same as
those described in Note 2. The Company evaluates the performance of its
operating segments based on income from operations, before income
taxes, accounting changes, non-recurring items, and interest income and
expense.
Summarized financial information concerning the Company's reportable
segments is shown in the following tables for the years ended December
31, 2000, 1999, and 1998:
2000
-----------------------------------------------------
Food
Restaurant Service
Service Distribution Total
---------------- ---------------- ----------------
Revenues $ 123,618,199 $ 8,017,605 $ 131,635,804
Income (loss) before other income
(expense) $ 4,080,198 $ (1,987,668) $ 2,092,530
Total assets $ 42,920,025 $ 2,467,226 $ 45,387,251
1999
-----------------------------------------------------
Food
Restaurant Service
Service Distribution Total
---------------- ---------------- ----------------
Revenues $ 129,555,321 $ 38,245,252 $ 167,800,573
Income (loss) before other income
(expense) $ 786,151 $ (99,964) $ 686,187
Total assets $ 56,354,331 $ 6,726,282 $ 63,080,613
1998
-----------------------------------------------------
Food
Restaurant Service
Service Distribution Total
---------------- ---------------- ----------------
Revenues $ 5,601,800 $ 917,621 $ 6,519,421
Loss before other income (expense) $ (1,259,603) $ (601,490) $ (1,861,093)
Total assets $ 59,020,013 $ 8,426,964 $ 67,446,977
40
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 15 - INCOME TAXES
Significant components of the provision for taxes based on income for
the years ended December 31, 2000, 1999, and 1998 were as follows:
2000 1999 1998
---------------- --------------- ----------------
Current
Federal $ - $ - $ -
State 68,400 55,000 6,044
---------------- --------------- ----------------
68,400 55,000 6,044
---------------- --------------- ----------------
Deferred
Federal - - -
State (43,559) (44,613) -
---------------- --------------- ----------------
(43,559) (44,613) -
---------------- --------------- ----------------
PROVISION FOR INCOME TAXES $ 24,841 $ 10,387 $ 6,044
================ =============== ================
A reconciliation of the provision for income tax expense with the
expected income tax computed by applying the federal statutory income
tax rate to income before provision for income taxes for the years
ended December 31, 2000, 1999, and 1998 was as follows:
2000 1999 1998
---------------- --------------- ----------------
Income tax provision computed at
federal statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit (3.2) - -
Increase in valuation reserve and
other (35.0) (34.0) (34.0)
--------------- ------------- -------------
TOTAL (4.2)% - % - %
=============== ============= =============
41
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 15 - INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and
liabilities for federal income taxes consisted of the following at
December 31, 2000 and 1999:
2000 1999
--------------- ----------------
Deferred tax assets
Net operating losses $ 5,475,283 $ 5,475,283
Tax credit carryforwards 1,813,508 1,813,506
Asset valuation reserves 6,622,032 6,622,032
Property, plant, and equipment 1,592,008 1,624,075
Other 1,901,342 2,743,757
--------------- ----------------
Total deferred tax assets 17,404,173 18,278,653
--------------- ----------------
Deferred tax liabilities
Property, plant, and equipment (119,410) (162,970)
Other (359,366) (287,850)
--------------- ----------------
Total deferred tax liabilities (478,776) (450,820)
--------------- ----------------
16,925,397 17,827,833
Valuation allowance (17,044,808) (17,990,803)
--------------- ----------------
NET DEFERRED TAX LIABILITY $ (119,411) $ (162,970)
=============== ================
In February 1998, the Company raised gross proceeds of $6,250,000 in
additional capital through a public offering. As a result of bringing
in additional stockholders, there may be a substantial annual
limitation on the use of net operating loss carryforwards for both
federal and state tax purposes. In general, an ownership change occurs
when the major stockholders, which includes groups of stockholders of
the Company, have increased their ownership by more than 50 percentage
points. If there has been an ownership change, section 382 of the
Internal Revenue Code places a limitation on the amount of income that
can be offset by net operating loss carryforwards. The section 382
limitation is the product of multiplying the Company's value (at the
time of the ownership change) by the highest federal long-term
tax-exempt rate for the month of the change or the two preceding
months. The amount of the potential limitation, if any, is yet to be
determined.
The Company has remaining net operating loss carryforwards, after
carry-backs, of approximately $30,000,000, expiring in 2020.
42
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 16 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2000, 1999, and 1998, the Company
advanced $1,185,658, $150,000, and $150,000, respectively, to officers
of the Company. During the year ended December 31, 2000, the Company
recorded a forgiveness of officer advances totaling $442,058.
An officer has personally guaranteed the leases of two of the Company's
California locations, as well as trade accounts payable with certain of
the Company's vendors.
During the year ended December 31, 2000, the Company paid its Chief
Executive Office and President consulting fees for services rendered in
addition to paying for certain expenses incurred by the Chief Executive
Officer. As of December 31, 2000, total amounts paid as consulting fees
and expenses paid on behalf of the officers were $895,294.
During the year ended December 31, 2000, the Company entered into a
capital lease agreement for a vehicle for the Chief Executive Officer
of the Company. Related to this transaction, the Company recorded
property, plant, and equipment totaling $176,863. As of December 31,
2000, the capital lease payable related to this vehicle totaled
$89,572. The lease agreement is for four years, and monthly payments
are $1,852. In connection with the purchase of the vehicle, the Company
paid $69,335 for certain improvements to the vehicle.
During the year ended December 31, 2000, the Company entered into two
operating lease agreements for two vehicles for the President of the
Company. These lease agreements are for six months and 3.5 years, and
monthly payments are $666 and $1,143, respectively.
NOTE 17 - OTHER UNUSUAL ADJUSTMENTS
During the fourth quarter of 2000, the Company had the following
significant accounting adjustments:
1. A write-down of $1,210,713 for the self-insurance reserve to
reduce the liability of open claims related to the Company's
general liability self insurance program. Management has
identified that a significant amount of the adjustment relates
to an accumulation of adjustments related to not reducing its
insurance reserves as claims are settled or closed. Management
attributes these adjustments to being unable to receive
specific actuarial and open claims reports from the
self-insurance administrator. Management of the Company has
not determined which quarters in 2000 the above relates.
43
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 17 - OTHER UNUSUAL ADJUSTMENTS (CONTINUED)
2. A reduction of $8,386,052 of capital lease obligations related
to a restatement of the sales lease-back. In July 2000, the
Company completed a sales lease-back on 19 properties
previously owned by the Company. The Company recorded the
entire lease as a capital lease in accordance with SFAS No.
13, "Accounting for Leases." Subsequently, the Company
determined that the land portion of the sales lease-back was
inappropriately booked as a capital lease and reduced the
liability. As a result of the restatement, the lease payments
on the land have been determined to be operating leases.
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables list the Company's quarterly financial information
for the years ended December 31, 2000 and 1999:
2000
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- ---------------- --------------- -----------------
Revenues $ 37,077,011 $ 30,470,886 $ 26,659,247 $ 37,428,660 $ 131,635,804
Gross profit $ 3,256,295 $ 1,881,975 $ 1,321,251 $ 3,890,414 $ 10,349,935
Income (loss)
before other
income
(expense) $ 1,463,584 $ (25,681) $ (494,911) $ 1,149,538 $ 2,092,530
Net income
(loss) $ 457,411 $ (489,126) $ (1,106,125) $ 516,396 $ (621,444)
Basic earnings
(loss) per share $ 0.14 $ (0.15) $ (0.33) $ 0.16 $ (0.18)
Diluted earnings
(loss) per share $ 0.10 $ (0.15) $ (0.33) $ 0.20 $ (0.18)
Common stock
trading range
High $ 7.000 $ 5.188 $ 6.938 $ 4.875 $ 7.000
Low $ 4.875 $ 3.000 $ 2.250 $ 2.813 $ 2.250
44
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- - --------------------------------------------------------------------------------
NOTE 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
1999
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- ---------------- --------------- -----------------
Revenues $ 40,376,282 $ 37,866,137 $ 37,457,661 $ 52,100,493 $ 167,800,573
Gross profit $ 1,788,969 $ 1,275,821 $ 1,261,491 $ 4,725,448 $ 9,051,729
Income (loss)
before other
income
(expense) $ (703,692) $ (821,236) $ 40,741 $ 2,170,374 $ 686,187
Net income
(loss) $ (1,596,005) $ (2,043,323) $ (1,054,765) $ 799,054 $ (3,895,039)
Basic earnings
(loss) per share $ (0.65) $ (0.78) $ (0.33) $ 0.37 $ (1.39)
Diluted earnings
(loss) per share $ (0.65) $ (0.78) $ (0.33) $ 0.37 $ (1.39)
Common stock
trading range
High $ 8.630 $ 7.310 $ 9.250 $ 7.375 $ 9.250
Low $ 4.130 $ 4.000 $ 6.070 $ 4.875 $ 4.000
45
SUPPLEMENTAL INFORMATION
46
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 8, 2001
47
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
FOR THE YEARS ENDED DECEMBER 31,
- - -------------------------------------------------------------------------------------------------------------------
Additions Additions
Balance, (Deductions) (Deductions) Balance,
Beginning Charged to from End
of Year Operations Reserve of Year
--------------- ---------------- --------------- ----------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
DECEMBER 31, 2000 $ 61,264 $ 55,587 $ - $ 116,851
=============== ================ =============== ================
DECEMBER 31, 1999 $ 34,801 $ 28,495 $ (2,032) $ 61,264
=============== ================ =============== ================
DECEMBER 31, 1998 $ - $ 34,801 $ - $ 34,801
=============== ================ =============== ================
48