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 24, 2002
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: | | YES |X| NO
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and 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 24, 2002):
$97,102,252
Aggregate market value of voting stock held by non-affiliates: $3,357
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 30, 2003.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court: | | YES |X| NO
Documents Incorporated by Reference:
The index to exhibits is located on page 27.
TABLE OF CONTENTS
Item
PAGE
PART I
Item 1. Business........................................................................1
Item 2. Properties.....................................................................12
Item 3. Legal Proceedings..............................................................13
Item 4. Submission of Matters to a Vote of Security Holders............................13
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................................13
Item 6. Selected Financial Data........................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .....................................................16
Item 7a.Quantitative and Qualitative Disclosures about Market Risk ....................24
Item 7b.Critical Accounting Policies...................................................24
Item 8. Financial Statements and Supplementary Data....................................25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................25
PART III
Item 10. Directors, Executive Officers of the Registrant ..............................26
Item 11. Executive Compensation........................................................26
Item 12. Security Ownership of Certain Beneficial Owners and Management ...............26
Item 13. Certain Relationships and Related Transactions ...............................26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..............27
Signatures ............................................................................30
Section 302 Certification .............................................................31
ITEM 1.
DESCRIPTION OF BUSINESS.
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.
BACKGROUND
Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we", "us" and
"our"), currently operates 50 full-service steakhouse restaurants located in
nine 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 $24.74 (including alcoholic beverages) and it
currently serves over 4.3 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 after
it has completed the reorganization process described below under "Bankruptcy
Filing".
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.
BANKRUPTCY FILING
On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon, a
wholly owned subsidiary of Steakhouse Partners, also filed for relief under
Chapter 11 of the Bankruptcy Code. The filing was made in connection with the
Company's inability to timely pay certain notes aggregating $1,734,285 (see
Notes 8 and 10 to the accompanying Consolidated Financial Statements). Pacific
Basin Foods, the other wholly owned subsidiary of Steakhouse Partners, on
October 11, 2002 ceased operations and filed under Chapter 7 of the United
States Bankruptcy Code. Steakhouse Partners and Paragon have and will continue
to manage their properties and operate their business as "debtors-in-possession"
under the jurisdiction of the Bankruptcy Court and in accordance with the
applicable provisions of the Bankruptcy Code. By filing under Chapter 11, the
Company is seeking to retain core locations, eliminate non-competitive leases,
restructure its debt, and withdraw from under-performing markets.
1
On December 19, 2003 the U.S. Bankruptcy Court Central District of California -
Riverside Division confirmed and the Official Creditor's Committee approved the
Joint Plan of Reorganization. Under the terms of the Plan as of the effective
date (December 31, 2003) the Debtor-in-Possession financing as provided for by
Steakhouse Investors, LLC. will convert to 90% of the common stock and the
balance of the Common Stock will be given to the unsecured creditors as partial
payment of their claims. The unsecured creditors should also receive between
$0.50 and $0.70 on the dollar cash payment in the form of a three-year note
providing for periodic payments. All existing Common Stock, stock options,
warrants and preferred stock will be cancelled as of the effective date.
Also the approved plan provides for the payment term(s) for all classes of
creditors. I-Dine (Secured) has stipulated to a note payable over 4 years plus
interest. Critical Capital (Secured) has agreed to a 6- year note, the first
three payable monthly interest only the last three principal and interest.
Priority taxes per applicable statute will have a four-year note principal and
interest. The unsecured creditors were broken down into two classes. The first
class was those creditors that were scheduled at less than $4,000. This class
would be paid at $0.50 on the dollar within 30 days of the effective date. The
second class was those $4,000 and greater. They would receive a $1.0 million
down payment, within 30 days of the effective date and a note for $5.0 million
payable over three years (periodic payments) with no interest.
Finally, the plan provided for the Company to assume 25 profitable restaurants
as its core. For all the other units, either the Company's leasehold interest
was sold or the leases were rejected as of the effective date. Any claims
associated with the rejected leases were provided for in the joint plan of
reorganization.
In connection with the Company emerging from bankruptcy protection we
implemented fresh-start accounting under the provisions of SOP 90-7. Under SOP
90-7, the reorganization fair value of the Company was allocated to its assets
and liabilities, its accumulated deficit was eliminated, and its new equity was
issued according to the Plan of Reorganization as if it were a new reporting
entity.
In accordance with fresh-start accounting, all assets and liabilities were
recorded at their respective fair market values upon emergence from Chapter 11.
Such fair values represented the Company's estimates based on independent
appraisals and valuations. Immaterial differences between estimated pre-petition
liabilities assumed by the Reorganized Company and the final settlement amounts
are recognized as they occur.
To facilitate the calculation of the enterprise value of the Reorganized
Company, the Company developed a set of financial projections. Based on these
financial projections and with the assistance of a financial advisor, the
enterprise value was determined by the Company, using various valuation methods,
including (i) a comparison of the Company and its projected performance to the
market values of comparable companies, (ii) a review and analysis of several
recent transactions of companies in similar industries to the Company, and (iii)
a calculation of the present value of the future cash flows under the
projections. The estimated enterprise value is highly dependent upon achieving
the future financial results set forth in the projections as well as the
realization of certain other assumptions, which are not guaranteed.
2
SOP 90-7 requires an allocation of the reorganization equity value in conformity
with procedures specified by APB 16, Business Combinations, as amended by SFAS
141, Business Combinations, for transactions reported on the basis of the
purchase method. The excess of reorganization value over fair value of net
assets ("goodwill") was approximately $18,900,000 as of December 31, 2003.
The accompanying Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates the continuation of operations,
realization of assets, and liquidation of liabilities in the ordinary course of
business. However, as a result of the bankruptcy filings, such realization of
certain of the Company's assets and liquidation of certain of the Company's
liabilities are subject to significant uncertainty. Furthermore, a plan of
reorganization could materially change the amounts and classifications reported
in the Consolidated Financial Statements, which do not give effect to any
adjustments to the carrying value or classification of assets or liabilities
that might be necessary as a consequence of a plan of reorganization. See Note 2
to the Consolidated Financial Statements included in this report.
The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including claims of landlords
for lease payments and employee wages and benefits in the ordinary course of
business.
OUR BUSINESS BACKGROUND
The steakhouse restaurant industry is expected to continue to expand over the
next several years. We believe that this industry is highly fragmented and,
assuming a successful reorganization under Chapter 11 of the United States
Bankruptcy Code, presents an excellent opportunity for us to grow our business
by expanding one of Paragon's brand-name step-up steakhouses, Carvers.
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. Our restaurants are full-service steakhouses (with two
exceptions). We hand-cut our steaks in-house from whole loins of beef for
superior freshness and taste. Prime rib is our "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.
Prime Rib and Steaks account for approximately 65.0% of our food revenue. Full
liquor, wine and bar service are available. Alcoholic beverage sales account for
approximately 18.8% 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; 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 37 steakhouses operating under the brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's for which the average dinner check is
approximately $23.00 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 classic special occasion 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, seafood, lamb and chicken in addition to
prime rib and steaks. A complete meal includes salad and a choice of side dishes
including choice of potato, and steamed vegetables. The menu also includes
appetizers and desserts. The Hungry Hunter's, Hunter's Steakhouse and Mountain
Jack's recently completed a menu revision designed to increase variety and
emotional value. The change included the addition of new appetizers, seafood,
specialty steaks, prime rib combinations and revisions to all plate
presentations.
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 220 seats and an average seating capacity of approximately 180 seats.
Unlike an 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.
CARVERS
We have 8 steakhouses operating in the upscale steakhouse-dining segment under
the Carvers brand name with an average dinner check per guest of slightly more
than $29.00. Carvers is a sophisticated, upper tier yet 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 slightly 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 freestanding 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. We are
currently developing the next generation lunch and dinner menus for Carvers.
UNIQUE CONCEPTS
We have 5 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 are also unique for which the average dinner check per guest is
$26.80. These restaurants typically have one or more banquet rooms.
We will continue our efforts to differentiate our restaurants by emphasizing
personal and attentive service, consistent high-quality, fresh products and
position in the mid-priced, full service steakhouse segment of the restaurant
industry.
4
REORGANIZATION STRATEGY
Management plans to restructure the Company's debt through the Chapter 11
reorganization process, improve the Company's financial performance through
cost-reduction and restructuring of administrative overhead, and raise money
through equity or the selective sale of non-strategic restaurants. Our goal for
the future is to enhance our position in the steakhouse restaurant industry by
building through internal growth (Carvers) and through the acquisition of
steakhouse (step-up casual) restaurants. Key components of our strategy include
leveraging established brands, achieving operating efficiencies and cost savings
through volume discounts on purchases, and efficiently penetrating new markets.
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, diners club
participation and discount coupons. Local advertising and couponing consists of
bulk mailers, freestanding 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. We also evaluate
local image advertising opportunities and are utilizing spot radio strategies in
affordable markets.
To promote local community awareness, each restaurant manager is encouraged to
become a part of the local community. Many restaurants host meetings with
community leaders to solicit local input about the restaurants' potential
community participation.
Once we begin to grow, our plan for each new restaurant will be to 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 a
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.
5
We also utilize 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, one or two assistant managers and a kitchen manager. Each
restaurant also employs a staff consisting of approximately 40 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 defines
operations and performance objectives for each restaurant and monitor
implementation. Senior management regularly visits various of our restaurants
and meets 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 strives to be responsive to the employees'
concerns.
PURCHASING
We purchase our food and beverage products from two UniPro Food Distributors;
Southwest Traders on the West Coast and Abbott Foods in the Mid-West. Food and
supplies are shipped directly to the restaurants, although invoices for
purchases are sent to the corporate support center for payment. Our emphasis on
high-quality food requires frequent deliveries of fresh food supplies.
PACIFIC BASIN FOODS
The Pacific Basin Foods subsidiary was a wholesale food distributor serving the
restaurant industry. Its principal clients were Paragon and several small
regional chains. In addition to the sale and distribution of food supplies to
restaurants, Pacific Basin Foods provided furniture, fixtures and equipment to
restaurants. As Paragon downsized and reduced the total number of restaurants
serviced by Pacific Basin Foods, the volume required to maintain its economic
feasibility also diminished. Therefore, on October 11, 2002 Pacific Basin Foods
ceased operations and filed under Chapter 7 with the United States Bankruptcy
Court for the Central District of California- Riverside Division.
6
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.
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 are 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 our
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.
7
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 review plans and specifications and make periodic inspections to ensure
continued compliance. 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 December 24, 2002, we employed approximately 2,637 individuals, of which 228
occupy executive, managerial or clerical positions, and 2,409 hold
non-managerial restaurant-related 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.
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 REORGANIZATION PLANS, OUR BUSINESS
OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED.
On February 15, 2002 Steakhouse Partners, Inc and on February 19, 2002 its
wholly owned subsidiary Paragon Steakhouse Restaurants, Inc. filed for federal
reorganization protection under Chapter 11. On December 19, 2003 the U.S.
Bankruptcy Court confirmed and the Official Creditor's Committee approved the
Joint Plan of Reorganization. Under the terms of the Plan as of the effective
date (December 31, 2003) the Debtor-in-Possession financing as provided for by
Steakhouse Investors, Inc will convert to 90% of the common stock and the
balance of the Common Stock will be given to the unsecured creditors as partial
payment of their claims. The unsecured creditors will also receive between $0.50
and $0.70 on the dollar cash payment in the form of a three-year note providing
for periodic payments.
If we are not successful in selling certain units and cash flow from operations
is insufficient to satisfy the periodic payments required to our creditors,
deferred capital improvements and expansion, it will seriously effect our
ability to meet our plan objectives and we may be forced to liquidate the
Company.
8
IF WE ARE NOT SUCCESSFUL IN OUR EXPANSION PLANS, OUR BUSINESS OPERATIONS AND OUR
ABILITY TO CONTINUE AS A GOING CONCERN COULD BE MATERIALLY ADVERSELY AFFECTED.
Long term, we intend to expand our operations through the construction of new
restaurant properties and/or acquisition of existing properties. 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.
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 and our ability to continue as a going
concern will be adversely affected. Even with a successful reorganization and
sufficient funds, plans to expand the Company's business may fail due to
construction delays or cost overruns, which 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.
Our growth may also strain our management and other resources. To manage our
growth, we must:
o maintain a high level of quality and service at our existing and
future restaurants;
o enhance our operational, financial and management expertise; and
o 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 significant losses since
inception. We may never generate profits. We incurred a net loss of
approximately $6,582,559 for the fiscal year ended December 24, 2002, a net loss
of approximately $16,710,000 for the fiscal year ended December 25, 2001, 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 24, 2002 we had an accumulated deficit of
approximately $32.8 million.
In order to operate profitably, we must:
o further improve operating margins at our existing restaurants while
investing in the units' infrastructure;
o successfully drive top line sales at each of our units; and
o capitalize on the general and administrative cost savings implemented
during the last fiscal year.
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:
9
o National and local health and sanitation laws and regulations;
o National and local employment and safety laws and regulations; and
o 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 9 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:
o the quality and value of the food products offered;
o the quality of service;
o the price of the food products offered;
o the restaurant locations; and
o the ambiance of facilities.
10
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, as well as the costs of the reorganization process. Our
dependence on frequent deliveries of fresh food supplies means that shortages or
interruptions in supply could materially and adversely affect our operations. In
addition, unfavorable trends or developments concerning the following factors
could adversely affect our results:
o inflation, food, labor and employee benefit costs; and
o 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.
SHAREHOLDERS WILL NOT BE ABLE TO RESELL THEIR STOCK.
Generally, under the provisions of the Bankruptcy Code, holders of equity
interests may not participate under a plan of reorganization unless the claims
of creditors are satisfied in full under the plan or unless creditors accept a
reorganization plan that permits holders of equity interest to participate. The
Joint Plan of Reorganization confirmed by the United States Bankruptcy Court and
approved by the Official Creditors Committee does not provide for full payment
to the creditors nor does it provide for the participation of holders of equity.
As of the effective date (December 31, 2003) Steakhouse Investors, Inc.
debtor-in-possession financing will convert to 90% of the common stock and the
balance will go to the unsecured creditors. At this time the existing equity
interests in the reorganized debtor will be cancelled.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDS IN A TIMELY MANNER OR ON ACCEPTABLE
TERMS OR THE PLAN OF REORGANIZATION IS UNSUCCESSFUL, WE MAY HAVE TO CURTAIL OR
SUSPEND CERTAIN OR ALL OF OUR OPERATIONS, WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION, RESULTS OF OPERATIONS 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 to
fund our deferred capital expense, we may have to curtail or suspend the
expansion of our operations and possibly terminate existing operations, which
could lead to overall lower revenues and adversely affect 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, which
could lead to the Company's inability to continue as a going concern.
11
ITEM 2. DESCRIPTION OF PROPERTY.
As of December 24, 2002, the Company leased all of its restaurant locations.
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 that require the Company to
pay the costs of insurance, taxes and maintenance. The Company intends to
continue to purchase restaurant locations where cost-effective. On July 19,
2000, the Company completed a sale and leaseback transaction with PS 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.
RESTAURANT LOCATIONS AS OF DECEMBER 24, 2002
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:
ARIZONA Oakland INDIANA NORTH CAROLINA
Phoenix Oceanside Indianapolis Raleigh
Tempe Pleasanton Lafayette
Yuma S. San Francisco
S. San Jose MICHIGAN OHIO
CALIFORNIA Sacramento Auburn Hills Sharonville
Bakersfield San Diego Clinton Township Independence
Concord Santa Rosa Grandville North Olmstead
Fairfield Temecula Kentwood
Fremont Thousand Oaks Lansing WISCONSIN
Lafayette Ventura Taylor Madison
Milpitas Troy
Modesto Portage
Traverse City
CARVERS LOCATIONS: Farmington Hills, Michigan UNIQUE FORMAL LOCATIONS:
Glendale, Arizona Beachwood, Ohio Folsom, California
Rancho Bernardo, California Centerville, Ohio Rancho Cordova, California
Roseville, California Sandy, Utah Riverside, California
Greenwood, Indiana South Bend, Indiana
Williamsburg, Virginia
The leases for the above locations have initial terms generally ranging from 10
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.
12
The Company's executive offices are located at 10200 Willow Creek Road, San
Diego, California 92131. The telephone number is (858) 689-2333. 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
During June 2002, Mr. Richard Lee, the Company's former Chief Executive Officer,
filed a claim with the Bankruptcy Court against the Company for approximately
$2,000,000, alleging, among other things, unpaid consulting fees and wrongful
termination. In 2003 the Company settled this claim for approximately $4,000
in a priority claim and $130,000 as an unsecured claim.
In the opinion of management, other than the bankruptcy filing described above,
there are no legal proceedings, which will have a material adverse effect on the
financial position or operating results of the Company. See Part I Item 1.
Description of Business--Bankruptcy Filing.
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 had been trading on the NASDAQ Small Cap Market
under the symbol "SIZL" from February 27, 1998, the date of the Company's
initial public offering to December 19, 2001 the day it was delisted. It is
currently traded over-the-counter on the Pink Sheets under the symbol
"SIZLQ.PK".
13
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:
Year ended December 31, 2000
HIGH LOW
First Quarter ................ $7.00 $4.50
Second Quarter................ 5.35 2.03
Third Quarter ................ 4.75 2.25
Fourth Quarter................ 7.22 2.75
Year ended December 31, 2001
HIGH LOW
First Quarter ................ $4.625 $2.375
Second Quarter................ 3.80 1.56
Third Quarter ................ 1.74 0.86
Fourth Quarter................ 0.99 0.28
Year ended December 31, 2002
HIGH LOW
First Quarter ................ $0.28 $0.01
Second Quarter................ 0.19 0.01
Third Quarter ................ 0.15 0.02
Fourth Quarter................ 0.10 0.00
HOLDERS
As of December 30, 2003 there were approximately 660 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 reorganization plan.
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended December 24,
2002 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 24, 2002, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations:
14
INCOME STATEMENT DATA:....... 2002 2001 2000 1999 1998*
----------- ------------ ------------ ------------ -----------
Revenues..................... $97,102,252 $110,684,409 $123,618,199 $129,555,321 $ 6,519,421
----------- ------------ ------------ ------------ -----------
COST OF SALES
Food and beverage.......... 33,886,807 38,480,981 43,119,602 45,295,172 2,569,457
Payroll and payroll
related costs.......... 34,312,955 36,719,587 39,504,498 43,119,394 2,001,542
Direct operating costs .... 24,297,312 27,259,432 25,843,817 28,276,325 1,441,367
Reserve on impairment of
property, plant,
and equipment.......... -- 6,581,527 388,868 -- --
Depreciation and
amortization........... 2,785,465 3,452,109 3,703,346 4,045,155 148,156
----------- ------------ ------------ ------------ -----------
Total cost of sales...... 95,282,539 112,493,636 112,560,131 120,736,046 6,160,522
----------- ------------ ------------ ------------ -----------
GROSS PROFIT (LOSS).......... 1,819,713 (1,809,227) 11,058,068 8,819,275 358,899
COSTS AND EXPENSES
General and administrative
Expenses................... 5,104,117 8,514,500 7,561,262 8,033,124 2,219,992
Legal Settlement -- 800,000 -- -- --
Reserve for advances
to officers............ 277,016 616,584 -- -- --
=========== ============ ============ ============ ===========
INCOME (LOSS) BEFORE OTHER
INCOME (EXPENSE) (3,561,420) (11,740,311) 3,496,806 786,151 (1,861,093)
OTHER INCOME (EXPENSE)
Gain on sale of property, -- -- 1,589,480 -- --
plant, and equipment ..
Interest income............ -- -- -- 22,069 68,495
Miscellaneous income....... 392,990 259,568 260,988 -- --
Interest and financing
costs ................. (2,327,903) (2,690,839) (3,524,994) (4,469,459) (844,961)
Forgiveness of
officer advances ...... -- -- (442,058) -- --
----------- ------------ ------------ ------------ -----------
Total other income
(expense) .............. (1,934,913) (2,431,271) (2,116,584) (4,447,390) (816,466)
----------- ------------ ------------ ------------ -----------
Income (loss) before
reorganization items,
provisions for income taxes,
and discontinued operations . (5,496,333) (14,171,582) 1,380,222 (3,661,239) (2,677,559)
----------- ------------ ------------ ------------ -----------
REORGANIZATION ITEMS
Gain on sale of property,
plant, and
equipment ............. 2,048,350 -- -- -- --
Professional Fees ......... (1,216,883) -- -- -- --
Idine settlement ......... (960,000) -- -- -- --
----------- ------------ ------------ ------------ -----------
Total reorganization items. (128,533) -- -- -- --
----------- ------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES AND
DISCONTINUED
OPERATIONS............... (5,624,866) (14,171,582) 1,380,222 (3,661,239) (2,677,559)
PROVISION FOR INCOME TAXES .. 129,758 148,341 53,419 4,816 6,044
----------- ------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE
DISCONTINUED
OPERATIONS............... (5,754,624) (14,319,923) 1,326,803 (3,666,055) (2,683,603)
DISCONTINUED OPERATIONS,
NET OF
INCOME TAXES OF
$850, $850 & $1,851...... (827,935) (2,396,821) (1,948,247) (228,984) (278,125)
----------- ------------ ------------ ------------ -----------
Net loss .................... $(6,582,559) $(16,716,744) $ (621,444) $ (3,895,039) $ (2,961,728)
=========== ============ ============ ============ ===========
EARNINGS (LOSS) PER SHARE
BASIC
Earnings (Loss) from
continuing operations ...... $ (1.70) $ (4.23) $ 0.39 $ (1.31) $ (0.80)
Loss from discontinued
operations ................. $ (0.24) $ (0.71) $ (0.58) $ (0.08) $ (0.46)
------- ------- ------- ------- -------
BASIC LOSS PER SHARE ........ $ (1.94) $ (4.94) $ (0.18) $ (1.39) $ (1.26)
DILUTED LOSS PER SHARE
Earnings (Loss) from
continuing operations....... $ (1.70) $ (4.23) $ 0.38 $ (1.31) $ (0.80)
Loss from discontinued
operations ................. $ (0.24) $ (0.71) $ (0.58) $ (0.08) $ (0.46)
------- ------- ------- ------- -------
DILUTED LOSS PER SHARE ...... $ (1.94) $ (4.94) $ (0.20) $ (1.39) $ (1.26)
SHARES USED TO CALCULATE
LOSS PER SHARE
Basic ....................... 3,386,522 3,386,522 3,369,022 2,802,186 2,350,578
Diluted ..................... 3,386,522 3,386,522 3,535,570 2,802,186 2,350,578
=========== ============ ============ ============ ===========
BALANCE SHEET DATE: 2002 2001 2000 1999 1998
----------- ------------ ------------ ------------ -----------
TOTAL ASSETS ................ $ 25,994,981 $ 31,000,321 $ 43,724,855 $ 57,243,510 $ 59,007,038
TOTAL DEBT,
EXCLUDING CAPITAL
LEASE OBLIGATIONS ....... $ 2,188,485 $ 5,760,306 $ 5,797,953 $ 26,115,608 $ 27,290,713
Stockholders' equity
(deficit) ............... $(20,895,668) $(14,373,109) $ 2,172,237 $ 2,501,346 $ 1,551,705
- --------------
*Steakhouse Partners, Inc. (aka Galveston Steakhouse Restaurants) acquired
Paragon Steakhouse Restaurants in December, 1998.
15
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, future results of operations,
financial position or reorganization plans 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 24, 2002 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
As of December 24, 2002 the Company operated 51 full-service steakhouse
restaurants located in nine states. The Company operates under the brand names
of Carvers, Hungry Hunter Steakhouse, Hunter Steakhouse, Mountain Jack's,
Mountain Jack's Steakhouse, Iguana Joe'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. On February 28, 2002 the Company
rejected nine (9) leases as part of the bankruptcy process and the
reorganization plan. As of December 2002, the Company had rejected or sold
sixteen (16) units. See notes 2 and 6 to the accompanying Consolidated Financial
Statements.
16
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. The Company plans to emerge from its
reorganization prior to focusing on any acquisitions.
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. The results of the Company
continued to improve until beginning second quarter 2001 when the economic
recession began to take affect on all of the units top line revenue. The decline
in revenue continued through the third period 2001 and was dramatically
accelerated with the events of September 11th.
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 California locations, which do not experience the same
seasonal changes in weather that occur at our Mid-west locations.
We had three (3) business units, which had separate management and reporting
infrastructures that offer different products and services. The business units
were 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
operated as Pacific Basin Foods, performed distribution of restaurant foods and
restaurant-related products for internal operations, as well as customers
outside our internal operations.
As Paragon downsized and reduced the total number of restaurants serviced by
Pacific Basin Foods, the volume required to maintain its economically feasible
also diminished. Therefore, on October 11, 2002 Pacific Basin Foods ceased
operations and filed under Chapter 7 with the United States Bankruptcy Court in
Riverside, California.
17
RESULTS OF OPERATIONS
52 Weeks Ended December 24, 2002 Compared to the 52 Weeks Ended December 25,
2001
Revenues for the year 52 weeks ended December 24, 2002 decreased $13,582,157 or
12.3% from $110,684,409 for the year ended December 25, 2001 to $97,102,252 for
the same period in 2002. Net revenue for Paragon Steakhouse Restaurants
decreased $13,509,978 or 12.3% from $109,731,118 for the fifty-two week period
ended December 25, 2001 to $96,221,140 for the same period in 2002. The decrease
is substantially attributable to the decrease in total operating units. Between
the filing date of bankruptcy and the end of 2002, sixteen (16) operating units
were closed and/or sold. The same store sales for those units that were still
open at the end of the year reflected a decline of 3.2% for the 52 weeks ended
December 24, 2002 versus the same period in 2001. Revenue from the Company's
only remaining original restaurant (Iguana Joe's) decreased $72,179 or 7.6% from
$953,291 for the fifty-two week period ended December 25, 2001 to $881,112 for
the same period in 2002. The decrease is the result of this unit being shut down
for approximately six weeks for remodeling and opening as a new concept Iguana
Joe's.
Food and beverage costs for the fifty-two week period ended December 24, 2002
decreased $4,594,174 or 11.9% from $38,480,981 for the fifty-two week period
ended December 25, 2001 to $33,886,807 for the same period in 2002. Food and
beverage costs as a percentage of restaurant revenues was 34.9% for the
fifty-two week period ended December 24, 2002 compared to 34.8% for the same
period in 2001. Even with the reduced volume at the unit level, the Company was
able to hold food costs consistent with the previous year without sacrificing
quality or quantity. This includes the cost of the transition from the Company
owned food distributor (Pacific Basin Foods) to two outside UniPro Distributors
(one in the West and one in the Mid-west) in October of 2002.
Payroll and payroll related costs for the fifty-two week period ended December
24, 2002 decreased $2,406,632 or 6.6% from $36,719,587 for the fifty-two week
period ended December 25, 2001 to $34,312,955 for the same period in 2002. The
total payroll and payroll related costs as a percentage of revenues were 35.3%
for the fifty-two week period ended December 24, 2002 compared to 33.2% for the
same period in 2001. The chief reason for this increase as a percentage
relationship to revenue is that the decrease in the restaurants net revenue was
slightly greater than the minimum staffing that is required per unit to maintain
guest services and a positive dining experience. Also contributing to the
increase is as a result of the bankruptcy, workman's compensation state run
insurance rates are approximately 50.0% higher than the normal premiums charged
by insurance agencies.
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, insurance 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 24, 2002 decreased $2,962,120
or 10.9% from $27,259,432 for the fifty-two week period ended December 25, 2001
to $24,297,312 for the same period in 2002. However, these costs as a percentage
of restaurant revenues were 25.0% for the fifty-two week period ended December
24, 2002 compared to 24.6% for the same period in 2001. The chief reason for
this increase as a percentage relationship to revenue is that the fixed or
indirectly variable nature of Direct operating costs does not allow for a
proportionate decrease in expenses versus revenue. Also contributing to the
increase is as a result of the bankruptcy general liability insurance rates are
almost 30.0% higher than the normal premiums.
18
Depreciation and amortization for the fifty-two week period ended December 24,
2002 decreased $666,644 or 19.3% from $3,452,109 for the fifty-two week period
ended December 25, 2001 to $2,785,465 for the same period in 2002. The main
reason for this decrease is the sale and/or rejection of sixteen (16) operating
units during the course of 2002.
General and administrative expenses for the fifty-two week period ended December
24, 2002 decreased $3,410,383 or 40.1% from $8,514,500 for the fifty-two week
period ended December 25, 2001 to $5,104,117 for the same period in 2002.
General and Administrative expenses as a percentage of restaurant revenues was
5.3% for the fifty-two week period ended December 24, 2002 compared to 7.7% for
the same period in 2001. The principal reasons for this decrease in expense are;
in 2001 a reserve for expenses associated with a consulting agreement
($539,409); adjusted officer compensation ($156,813); a reserve for consulting
fees for sale-leaseback ($175,000); a reserve for estimated payroll tax
liability relating to Richard M. Lee ($331,895); a reserve for sublease rent
(bad debt) for a unit rejected February 2002 ($93,357) versus 2002 when no
additional reserves or write-offs were required. In addition, 2002 was further
reduced by the reduction in work force implemented in conjunction with the
reorganization.
Total other income and interest expense, net for the fifty-two week period ended
December 24, 2002 decreased $496,358 or 20.4% from $2,431,271 for the fifty-two
week period ended December 25, 2001 to $1,934,913 for the same period in 2002.
The decrease is principally due to the reduction in interest expense chiefly the
result of filing for bankruptcy and the stay of certain interest expense.
Total reorganization items, net for the fifty-two week period ended December 24,
2002 was a loss of $128,533. The loss was chiefly the result of Legal and
Professional fees specifically associated with the bankruptcy ($1,216,883) and a
stipulated compromise with a secured creditor ($960,000). This was almost
totally offset from gains associated with the rejection of 15 leases and the
sale of the leasehold interest in 3 other units that totaled $2,048,350.
On October 11, 2002 Pacific Basin Foods ceased operations and filed for Chapter
7 with the United States Bankruptcy Court in Riverside, California. The
financial results have been adjusted to reflect the impact of the
discontinuation of Pacific Basin Foods. The total loss from the discontinued
operations was $827,935.
Net loss for the fifty-two week period ended December 24, 2002 decreased
$10,134,185 from $16,716,744 for the fifty-two week ended December 25, 2001 to
$6,582,559 for the same period in 2002. The decrease is principally due to in
2001 there were non-recurring expenses such as: asset impairment reserves
($6,581,000) for certain under performing assets and significantly higher
general and administrative expenses ($4,114,255) as a result of reserves for
loans; fees; insurance; taxes bad debt; as well as, a larger work force.
52 Weeks Ended December 25, 2001 Compared to the 52 Weeks Ended December 26,
2000
19
Revenues for the year 52 weeks ended December 25, 2001 decreased $12,933,790 or
10.5% from $123,618,199 for the year ended December 26, 2000 to $110,684,409 for
the same period in 2001. Net revenue for Paragon Steakhouse Restaurants
decreased $12,979,327 or 10.6% from $122,710,445 for the fifty-two week period
ended December 26, 2000 to $109,731,118 for the same period in 2001. The
decrease is substantially attributable to the economic recession compounded by
the events of September 11th. Revenue from the Company's only remaining original
restaurant (Galveston) increased $45,537 or 5.0% from $907,754 for the fifty-two
week period ended December 26, 2000 to $953,291 for the same period in 2001.
Food and beverage costs for the fifty-two week period ended December 25, 2001
decreased $4,638,621 or 10.8% from $43,119,602 for the fifty-two week period
ended December 26, 2000 to $38,480,981 for the same period in 2001. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 34.8% for the fifty-two week period ended December 25, 2001 compared to
34.9% for the same period in 2000. Even with the reduced volume at the unit
level the Company was able to hold food costs consistent with the previous year
without sacrificing quality or quantity.
Payroll and payroll related costs for the fifty-two week period ended December
25, 2001 decreased $2,784,911 or 7.0% from $39,504,498 for the fifty-two week
period ended December 26, 2000 to $36,719,587 for the same period in 2001.
Payroll and payroll related costs were 33.2% of restaurant revenues for the
fifty-two week period ended December 25, 2001 compared to 32.0% for the
fifty-two week period ended December 26, 2000. The major reason for this
increase as a percentage relationship to revenue is the decrease in the
restaurants net revenue was slightly greater than the minimum staffing that is
required per unit to maintain guest services and a positive dining experience.
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, insurance 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 25, 2001 increased $1,415,615
or 5.8% from $25,843,817 for the fifty-two week period ended December 26, 2000
to $27,259,432 for the same period in 2001. Direct operating costs for the
restaurants were 24.6% of restaurant revenue for the fifty-two week period ended
December 25, 2001 compared to 20.9% for the fifty-two week period ended December
26, 2000. The difference is primarily due to an increase in insurance reserves
required for current and estimated future liabilities ($464,107), versus a
self-insurance reserve reduction ($1,034,135) in 2000.
Reserve for impairment of property, plant, and equipment: During the year ended
December 31, 2001 events and circumstances in connection with continuing
operating losses of certain under-performing restaurants indicated that an
estimated $6,581,527 of property, plant and equipment of the Company were
impaired. The estimate of undiscounted cash flows indicates that such carrying
amounts are not expected to be recovered. We have recorded the current year's
impairment loss as a reserve as the amount reflects and estimated impairment
loss. We intend to finalize the actual impairment loss during the next fiscal
year as most (if not all) of these properties have/will be addressed in the
bankruptcy process.
20
Depreciation and amortization for the fifty-two week period ended December 25,
2001 decreased $251,237 or 6.8% from $3,703,346 for the fifty-two week period
ended December 26, 2000 to $3,452,109 for the same period in 2001.
General and administrative expenses for the fifty-two week period ended December
25, 2001 increased $953,238 or 12.6% from $7,561,262 for the fifty-two week
period ended December 26, 2000 to $8,514,500 for the same period in 2001.
General and Administrative expenses as a percentage of restaurant revenues was
7.7% for the fifty-two week period ended December 25, 2001 compared to 6.1% for
the same period in 2000. The principal reasons for this increase in expense are;
a reserve for expenses associated with a consulting agreement ($539,409);
adjusted officer compensation ($156,813); a reserve for consulting fees for
sale-leaseback ($175,000); a reserve for estimated payroll tax liability
relating to Richard M. Lee ($331,895); a reserve for sublease rent (bad debt)
for a unit rejected February 2002 ($93,357). The adjusted General and
administrative expense without these reserves and write-offs is $7,218,026 or
6.5% of restaurant revenues. This number was further reduced by the reduction in
work force implemented in conjunction with the reorganization.
Total other income and interest expense, net for the fifty-two week period ended
December 25, 2001 increased $314,687 or 14.9% from $2,116,584 for the fifty-two
week period ended December 26, 2000 to $2,431,271 for the same period in 2001.
The increase is principally due to in 2001 the Company's Paragon Subsidiary sold
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 in 2001 by the
forgiveness of $442,058 of advances to two officers.
Net loss for the fifty-two week period ended December 25, 2001 increased
$16,095,300 from $621,444 for the fifty-two week ended December 26, 2000 to
$16,716,744 for the same period in 2001. The increase is principally due to the
impact on operations from the economic recession and the September 11th tragedy
that significantly decreased revenues at the restaurants and the distributing
company. Also contributing to the increase were non-recurring expenses such as:
asset impairment reserves ($6,972,000) for certain under performing assets and
reserves for loans; fees; insurance; taxes and bad debt ($2,769,157).
Year Ended December 26, 2000 Compared to the Year Ended December 28, 1999
Revenues for the year ended December 26, 2000 decreased $5,937,122 or 4.6% from
$129,555,321 for the year ended December 28, 1999 to $123,618,199 for the same
period in 2000. The decrease is substantially attributable to the sale or
closure of 8 under performing Paragon and Galveston restaurants. This was
partially offset by a 4.1% increase in Paragon's same store sales from the
comparable fifty-two week period in 1999. 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 restaurant, subleasing another
and closing down a third pending its sale.
Food and beverage costs for the fifty-two week period ended December 26, 2000
decreased $2,175,570 or 4.8% from $45,295,172 for the fifty-two week period
ended December 28, 1999 to $43,119,602 for the same period in 2000. Food and
beverage costs for the restaurants only as a percentage of restaurant revenues
was 34.9% for the fifty-two week period ended December 26, 2000 compared to
35.0% 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.
21
Payroll and payroll related costs for the fifty-two week period ended December
26, 2000 decreased $3,614,896 or 8.4% from $43,119,394 for the fifty-two week
period ended December 28, 1999 to $39,504,498 for the same period in 2000.
Payroll and payroll related costs 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 major reason for this
decrease is the reduction in force expense and its proportionate effect on these
numbers.
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 $2,432,508 or 8.6% from
$28,276,325 for the fifty-two week period ended December 28, 1999 to $25,843,817
for the same period in 2000. These costs as a percentage of restaurant revenues
were 20.9% for the fifty-two week period ended December 26, 2000 compared to
21.8% for the same period in 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 $341,809 or 8.4% from $4,045,155 for the fifty-two week period
ended December 28, 1999 to $3,703,346 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), 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 $471,862 or 5.9% from $8,033,124 for the fifty-two week
period ended December 28, 1999 to $7,561,262 for the same period in 2000.
General and administrative expenses as a percentage of restaurant revenues was
6.1% for the fifty-two week period ended December 26, 2000 compared to 6.2% 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.
Total other income and interest expense, net for the fifty-two week period ended
December 26, 2000 decreased $2,330,806 or 52.4% from $4,447,390 for the
fifty-two week period ended December 28, 1999 to $2,116,584 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
forgiveness of $442,058 of advances to two officers.
22
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 (2) 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 additional training and recruitment for Paragon
Steakhouse.
LIQUIDITY AND CAPITAL RESOURCES
Our initial public offering was commenced on February 27, 1998. In addition to
the approximately $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 operating loss.
The Company had a cash and cash equivalents balance of $2,750,673 at December
24, 2002. During the year the Company maintained a current ratio of 0.49-to-1,
which arose from a working capital deficit of $5,405,111. In addition, as
described above, the Company is in default with secured financing as of December
31, 2001, and on February 15, 2002, the Company filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code. In addition to the
sale of selected assets in the reorganization process under Chapter 11, the
Company may need additional sources of financing during the next 12 months to
fund our reorganization plan. 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 reorganization plan
and may be required to sell core assets or dissolve the business. 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.
On August 13, 2003 the United States Bankruptcy Court in Riverside, California
entered the order approving the Debtor-in Possession financing of $5.0 million
available immediately. Per the terms of the financing agreement approved by the
court upon the effective date of the Company's Plan of Reorganization the loan
will convert to 90% of the Common Stock and the existing common stock of the
debtor will be canceled.
The Company has a cash and cash equivalents balance of $2,205,221 at December
30, 2003. During the year ended December 30, 2003, the Company maintained a
current ratio of 0.36 to 1, which arose from a working capital deficit of
$7,380,059 after adjusting for the Debtor in Possession note that converted to
equity upon plan confirmation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
23
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 24, 2002, 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.
ITEM 7B. CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 5 to our consolidated
financial statements. The following discussion addresses our most critical
accounting policies, which are those that are most important to the portrayal of
our financial condition and results, and that require significant judgment.
SELF-INSURANCE
In the past the Company was self-insured for certain losses related to general
liability and workers' compensation. The Company maintained stop loss coverage
with third party insurers to limit its total exposure. The self-insurance
liability represents and estimate of the ultimate cost of old claims incurred as
of the balance sheet date. The estimated liability is based upon analysis of
historical data and actuarial estimates, and is reviewed by the Company on a
quarterly basis to ensure that the liability is appropriate. If for any reason
in the final settlement of these old claims the results differ from our
estimates, our financial results could be impacted.
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. There gift
certificates do not carry an expiration date so if all outstanding gift
certificates are redeemed at once, our financial results (cash) would be
impacted.
PROPERTY, FIXTURES AND EQUIPMENT
Property, fixtures and equipment are recorded at cost. We expense repair and
maintenance costs incurred to maintain the appearance and functionality of the
restaurant that do not extend the useful life of any restaurant asset or are
less than $1,000. Depreciation is computed on the straight-line basis over the
following estimated useful lives:
Buildings and building improvements 20 years
Furniture and fixtures and equipment 5 years
24
Our accounting policies regarding property, fixtures and equipment include
certain management judgments and projections regarding the estimated useful
lives of these assets and what constitutes increasing the value and useful life
of existing assets. These estimates, judgments and projections may produce
materially different amounts of depreciation expense than would be reported if
different assumptions were used.
IMPAIRMENT OF LONG LIVED ASSETS
We assess the potential impairment of identifiable intangibles, long-lived
assets and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Recoverability of assets is measured
by comparing the carrying value of the asset to the future cash flows expected
to be generated by the asset. In evaluating long-lived restaurant assets for
impairment, we consider a number of factors such as:
a) Restaurant sales trends;
b) Local competition;
c) Changing demographic profiles;
d) Local economic conditions;
e) New laws and government regulations that adversely affect sales and
profits; and
f) The ability to recruit and train skilled restaurant employees.
If the aforementioned factors indicate that we should review the carrying value
of the restaurant's long-lived assets, we perform an impairment analysis.
Identifiable cash flows that are largely independent of other assets and
liabilities typically exist for land and buildings, and for combined fixtures,
equipment and improvements for each restaurant. If the total future cash flows
are less than the carrying amount of the asset, the carrying amount is written
down to the estimated fair value, and a loss resulting from value impairment is
recognized by a charge to earnings.
Judgments and estimates made by us related to the expected useful lives of
long-lived assets are affected by factors such as changes in economic conditions
and changes in operating performance. As we assess the ongoing expected cash
flows and carrying amounts of our long-lived assets, these factors could cause
us to realize a material impairment charge.
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.
25
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.
PART IV.
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.
26
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.
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.
27
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.
2. 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
28
REPORTS ON FORM 8-K
1. Form 8-K dated February 21, 2002 reporting that Steakhouse Partners, Inc and
its wholly owned subsidiary, Paragon Steakhouse Restaurants, filed a voluntary
petition for relief under chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy court for the Central District of California. The 8-K
also reported that the Company's Board of Directors eliminated the Chief
Executive Officer position, which had been held by Mr. Richard M. Lee. Mr. Hiram
J. Woo continued as President of the Company and is responsible for the
day-to-day operations. Finally, it was reported that for personal reasons Mr.
Mark K. Goudge resigned as a member of the Company's Board of Directors.
2. Form 8-K dated July 28, 2003 reporting that the United States Bankruptcy
Court in Riverside, California authorized Steakhouse Partners, Inc and its
wholly owned subsidiary, Paragon Steakhouse Restaurants, to obtain post petition
debtor-in-possession financing in the sum of $5.0 million. Upon Confirmation,
the financing will convert into 90% of the common stock of the reorganized
debtor and the remaining 10% to be issued to certain creditors. Under the
forthcoming plan, existing equity interests in the debtor would be canceled upon
confirmation.
3. Form 8-K dated August 19, 2003 reporting that the order of the United States
Bankruptcy Court in Riverside, California authorized Steakhouse Partners, Inc
and its wholly owned subsidiary; Paragon Steakhouse Restaurants to obtain post
petition debtor-in-possession financing was entered on August 13, 2003. Per that
order and the bylaws of the debtor, effective July 30, 2003, A. Stone Douglass
was appointed and will perform the duties of chief executive officer and
president of the debtor.
4. Form 8-K dated December 31, 2003 reporting that the Order was entered by the
United States Bankruptcy Court for the Central District of California -
Riverside Division confirming Steakhouse Partners, Inc and its wholly owned
subsidiary; Paragon Steakhouse Restaurants their Joint Plan of Reorganization.
Under the terms of the Order the Plan will become effective December 31, 2003,
and the debtor-in-possession financing, that was approved by the Court on August
13, 2003 will convert to 90% of the Common Stock. The balance of the Common
Stock will be distributed to the Unsecured Creditors as partial payment in
accordance with the Plan. Also, all existing Common Stock, Stock Options,
Preferred Stock and Warrants will be cancelled at that time.
29
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.
Dated: April 15, 2004 STEAKHOUSE PARTNERS, INC.
/s/
....................................
A. STONE DOUGLASS
President, Secretary, Director
(Principal executive officer and
principal financial and accounting
officer)
STEAKHOUSE PARTNERS, INC.
/s/
....................................
Joseph L. Wulkowicz
Chief Financial Officer, Assistant
Secretary (Principal financial
and accounting 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/ April 15, 2004
......................................................
Name A. STONE DOUGLASS
Title: President, Secretary and Director
/s/ TOM EDLER April 15, 2004
......................................................
Name: Tom Edler
Title: Co-Chairman of the Board of Directors
/s/ TOD LINDNER April 15, 2004
......................................................
Name: Tod Lindner
Title: Co-Chairman of the Board of Directors
............................................
30
CERTIFICATION*
I, ____________, certify that:
1. I have reviewed this annual report Form 10-K of Steakhouse Partners, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Dated: April 15, 2004 /s/
Name: A. STONE DOUGLASS
Title: President, Secretary and Director
(Serving as principal executive officer)
CERTIFICATION*
I, ____________, certify that:
1. I have reviewed this annual report Form 10-K of Steakhouse Partners, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Dated: April 15, 2004 /s/
Name: Joseph L. Wulkowicz
Title: Chief Financial Officer and
Assistant Secretary (Serving as principal
financial and accounting officer)
31
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001, AND 2000
F-1
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONTENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORT 1 - 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets 3 - 5
Consolidated Statements of Operations 6 - 7
Consolidated Statements of Stockholders' Equity (Deficit) 8 - 9
Consolidated Statements of Cash Flows 10 - 13
Notes to Consolidated Financial Statements 14 - 55
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Financial Statement Schedule 56
Valuation and Qualifying Accounts - Schedule II 57
F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
(Debtor-In-Possession)
We have audited the accompanying consolidated balance sheets of Steakhouse
Partners, Inc. (a Delaware corporation) and subsidiaries (Debtor-In-Possession)
as of December 31, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the three
years in the period ended December 31, 2002. These consolidated 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 auditing standards generally accepted
in the United States of America. 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 (Debtor-In-Possession) as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended
December 31, 2002, the Company maintained a current ratio of 0.54-to-1, which
arose from a working capital deficit of $5,405,111. In addition, the Company is
currently in default of certain debt as the Company did not make payments when
the notes came due. Furthermore, the Company failed to meet certain financial
covenants requirement by its lenders. The total amount of debt that is currently
in default is $3,625,870. In addition, during February 2002, the Company filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code. Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Successful completion of the Company's
transition, ultimately, to the attainment of profitable operations is dependent
upon obtaining adequate financing to fulfill its development activities and
achieving a level of sales adequate to support the Company's cost structure.
These factors, among others, as discussed in Note 4 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 4. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
F-3
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
(Debtor-In-Possession)
Page 2
As discussed in Note 2, on December 31, 2003, the Company's Plan of
Reorganization was confirmed by the United States Bankruptcy Court.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 17, 2003, except for
Notes 2, 14, 18, and 22, as
to which the date is
December 31, 2003
F-4
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
ASSETS
2002 2001
------------ ------------
Current assets
Cash and cash equivalents $ 2,750,673 $ 1,107,889
Accounts receivable, net of allowance for doubtful
accounts of $133,234 and $154,621 829,909 875,412
Inventories, net of allowance for obsolete inventories
of $45,805 and $45,805 1,931,383 2,268,421
Current portion of advances to officers, net of allowance
for doubtful accounts of $277,016 and $616,584 - 277,016
Prepaid expenses and other current assets 847,727 1,240,528
------------ ------------
Total current assets 6,359,692 5,769,266
Property, plant, and equipment, net 18,313,773 23,365,134
Deposits and other assets 199,441 377,732
Cash - restricted under collateral agreements 1,122,075 1,488,189
------------ ------------
Total assets $25,994,981 $31,000,321
============ ============
The accompanying notes are an integral part of these financial statements.
F-5
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
2002 2001
------------ ------------
Liabilities not subject to compromise
Current liabilities
Convertible debt $ - $ 1,100,000
Current portion of notes payable 72,842 2,660,306
Current portion of capital lease obligations - 302,467
Accounts payable 2,654,497 5,421,436
Accrued expenses 746,075 2,777,327
Unearned revenue 4,385,940 5,734,551
Reserve for self insurance claims 403,780 719,724
Sales and property taxes payable 979,817 841,017
Accrued payroll costs 2,521,852 3,063,360
------------ ------------
Total current liabilities 11,764,803 22,620,188
Secured exchangeable notes - 2,000,000
Notes payable, net of current portion 2,115,643 -
Capital lease obligation, net of current portion - 17,032,636
Deferred tax liability 119,411 119,411
Deferred gain on sale-leaseback - 903,172
Net liabilities of Pacific Basin Foods, Inc. in liquidation 1,057,463 315,400
Deferred rent - 2,382,623
------------ ------------
Total liabilities not subject to compromise 15,057,320 45,373,430
------------ ------------
Liabilities subject to compromise 31,833,329 -
------------ ------------
Commitments and contingencies
The accompanying notes are an integral part of these financial statements.
F-6
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT (Continued)
2002 2001
------------ ------------
Stockholders' deficit
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 3,386,522 shares issued
and outstanding 33,865 33,865
Treasury stock, 28,845 and 28,845 shares, at cost (175,000) (175,000)
Additional paid-in capital 12,040,750 11,980,750
Accumulated deficit (32,798,033) (26,215,474)
------------ ------------
Total stockholders' deficit (20,895,668) (14,373,109)
------------ ------------
Total liabilities and stockholders' deficit $25,994,981 $31,000,321
============ ============
The accompanying notes are an integral part of these financial statements.
F-7
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
2002 2001 2000
------------ ------------- --------------
Revenues $97,102,252 $110,684,409 $ 123,618,199
------------ ------------- --------------
Cost of sales
Food and beverage 33,886,807 38,480,981 43,119,602
Payroll and payroll related costs 34,312,955 36,719,587 39,504,498
Direct operating costs 24,297,312 27,259,432 25,843,817
Impairment of property, plant, and
equipment - 6,581,527 388,868
Depreciation and amortization 2,785,465 3,452,109 3,703,346
------------ ------------- --------------
Total cost of sales 95,282,539 112,493,636 112,560,131
Gross profit (loss) 1,819,713 (1,809,227) 11,058,068
General and administrative expenses 5,104,117 8,514,500 7,561,262
Legal settlement - 800,000 -
Reserve for advances to officers 277,016 616,584 -
------------ ------------- --------------
Income (loss) before other income
(expense) (3,561,420) (11,740,311) 3,496,806
------------ ------------- --------------
Other income (expense)
Gain on sale of property, plant, and
equipment - - 1,589,480
Miscellaneous income 392,990 259,568 260,988
Interest and financing costs (2,327,903) (2,690,839) (3,524,994)
Forgiveness of officer advances - - (442,058)
------------ ------------- --------------
Total other income (expense) (1,934,913) (2,431,271) (2,116,584)
------------ ------------- --------------
Income (loss) before reorganization
items, provision for income taxes,
and discontinued operations (5,496,333) (14,171,582) 1,380,222
------------ ------------- --------------
The accompanying notes are an integral part of these financial statements.
F-8
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
Reorganization items
Gain on disposition of property, plant,
and equipment, net and rejection of
related leases $ 2,048,350 $ - $ -
Loss on IDine settlement (960,000) - -
Professional fees (1,216,883) - -
------------ ------------- --------------
Total reorganization items (128,533) - -
------------ ------------- --------------
Income (loss) before provision for
income taxes and discontinued
operations (5,624,866) (14,171,582) 1,380,222
Provision for income taxes 129,758 148,341 53,419
------------ ------------- --------------
Income (loss) before discontinued
operations (5,754,624) (14,319,923) 1,326,803
Loss from discontinued operations, net
of income taxes of $850, $850, and $1,851 (827,935) (2,396,821) (1,948,247)
------------ ------------- --------------
Net loss $(6,582,559) $(16,716,744) $ (621,444)
------------ ------------- --------------
------------ ------------- --------------
Earnings (loss) per share
Basic
Earnings (loss) from continuing
operations $ (1.70) $ (4.23) $ 0.39
Loss from discontinued operations (0.24) (0.71) (0.58)
Basic loss per share $ (1.94) $ (4.94) $ (0.18)
------------ ------------- --------------
------------ ------------- --------------
Diluted
Earnings (loss) from continuing
operations $ (1.70) $ (4.23) $ 0.38
Loss from discontinued operations (0.24) (0.71) (0.58)
------------ ------------- --------------
Diluted loss per share $ (1.94) $ (4.94) $ (0.20)
------------ ------------- --------------
------------ ------------- --------------
Shares used to calculate loss per share
Basic 3,386,522 3,386,522 3,369,022
------------ ------------- --------------
------------ ------------- --------------
Diluted 3,386,522 3,386,522 3,535,570
------------ ------------- --------------
------------ ------------- --------------
The accompanying notes are an integral part of these financial statements.
F-9
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
Preferred Stock
---------------------------------------------
Series B, Convertible Series C, Convertible Common Stock
--------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount
--------- --------- -------- ---------- -------- --------
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 17,500 75
Issuance of warrants
in lieu of interest
Issuance of warrants
in accordance
with lien release
agreement
Issuance of stock
options for services
rendered
Purchase of stock
options
Cash payment on
subscriptions
receivable
Net loss
--------- --------- -------- ---------- -------- --------
Additional
Subscriptions Treasury Paid-In Accumulated
Receivable Stock Capital Deficit Total
------------ --------- ----------- ------------ -----------
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
in accordance
with lien release
agreement 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)
--------- --------- -------- ---------- --------
The accompanying notes are an integral part of these financial statements.
F-10
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31,
- --------------------------------------------------------------------------------
Preferred Stock
---------------------------------------------
Series B, Convertible Series C, Convertible Common Stock
--------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount
--------- --------- -------- ---------- -------- --------
Balance, December
31, 2000 1,000,000 $ 1,000 1,750,000 $ 1,750 3,386,522 $ 33,865
Issuance of warrants
in lieu of interest
Issuance of warrants
for services
Net loss
Balance, December
31, 2001 1,000,000 1,000 1,750,000 1,750 3,386,522 33,865
Issuance of warrants
in lieu of interest
Net loss
Balance, December
31, 2002 1,000,000 $ 1,000 1,750,000 $ 1,750 3,386,522 $ 33,865
Additional
Subscriptions Treasury Paid-In Accumulated
Receivable Stock Capital Deficit Total
------------ --------- ----------- ------------ -----------
Balance, December
31, 2000 $ - $(175,000) $11,809,352 $(9,498,730) $ 2,172,237
Issuance of warrants
in lieu of interest 60,000 60,000
Issuance of warrants
for services 111,398 111,398
Net loss (16,716,744) (16,716,744)
Balance, December
31, 2001 - (175,000) 11,980,750 (26,215,474) (14,373,109)
Issuance of warrants
in lieu of interest 60,000 60,000
Net loss (6,582,559) (6,582,559)
Balance, December
31, 2002 $ - $(175,000) $12,040,750 $(32,798,033) $(20,895,668)
============ ========= =========== ============ ============
F-11
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ -----------
Cash flows from operating activities
Net income (loss) from continuing operations $ (5,754,624) $(14,319,923) $ 1,326,803
Net loss from discontinued operations (827,935) (2,396,821) (1,948,247)
Adjustments to reconcile net loss from
continuing operations to net cash
provided by (used in) operating activities
Depreciation and amortization 2,785,465 3,452,109 3,703,346
Bad debt expense 68,896 93,357 -
Gain on disposal of rejected leases (1,276,496) - -
Loss on IDine settlement 960,000 - -
Gain on sale of property, plant, and
equipment - - (1,589,480)
Gain on sale of property, plant, and
equipment through bankruptcy (771,854) - -
Reduction of self insurance reserve - (248,966) (1,210,713)
Impairment of property, plant, and
equipment - 6,581,527 388,868
Impairment of intangible assets 170,715 194,514
Issuance of warrants for services
rendered - 111,398 38,960
Issuance of warrants in lieu of
interest 60,000 60,000 60,000
Issuance of stock options for
services rendered - - 73,000
Reserve for advances to officers 277,016 616,584 -
Forgiveness of officer advances - - 442,058
Interest paid with common stock - - 90,375
Default on loan for services rendered - 413,409 -
Deferred taxes - - (43,559)
Reduction of accounts payable
in connection with the settlement
of a lawsuit - (285,579) -
(Increase) decrease in
Accounts receivable (23,393) (415,543) (87,262)
Advances to officers - - (1,185,658)
Inventories 337,038 (163,064) 313,118
Prepaid expenses and other
current assets 684,440 663,038 154,086
F-12
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
Intangible assets, net $ - $ - $ 58,634
Deposits and other assets 178,291 542,427 312,929
Increase (decrease) in
Accounts payable 3,433,888 2,224,851 1,386,211
Accrued expenses 357,620 820,289 (381,012)
Unearned revenue (261,182) 346,060 (1,179,098)
Reserve for self insurance claims 295,742 (116,994) (451,908)
Sales and property taxes payable 138,800 (415,180) (4,984)
Accrued payroll costs (541,508) 665,160 (557,881)
Deferred gain on sale-leaseback (30,365) 903,172 -
Deferred rent 226,791 24,781 149,146
------------ ------------ -----------
Net cash provided by (used in) continuing
operating activities 316,630 (673,193) 52,246
------------ ------------ -----------
Net cash provided by discontinued operating
activities 742,063 1,046,577 3,197,750
------------ ------------ -----------
Cash flows from investing activities
Purchases of property, plant, and
equipment (273,791) (622,431) (957,630)
Proceeds from the sale of property,
plant, and equipment 1,083,014 - 1,981,963
Change in restricted cash 366,114 (322,443) 443,757
------------ ------------ -----------
Net cash provided by (used in) continuing
investing activities 1,175,337 (944,874) 1,468,090
------------ ------------ -----------
Net cash used in discontinued investing
activities - (8,309) (296,403)
------------ ------------ -----------
F-13
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from issuance of debt $ 80,000 $ - $ 450,013
Principal payments on debt and
capital leases (671,246) (1,272,121) (22,639,785)
Proceeds from sale-leaseback - - 22,000,000
Payment on subscriptions receivable - - 10,000
Cash received on sale of stock
options - - 20,000
------------ ------------ -----------
Net cash used in continuing financing
activities (591,246) (1,272,121) (159,772)
------------ ------------ -----------
Net cash used in discontinued financing
activities - (22,451) (2,818,523)
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents 1,642,784 (1,874,371) 1,443,388
Cash and cash equivalents, beginning
of year 1,107,889 2,982,260 1,538,872
------------ ------------ -----------
Cash and cash equivalents, end of year $ 2,750,673 $ 1,107,889 $ 2,982,260
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosures of cash
flow information
Interest paid $1,716,447 $3,131,129 $4,266,122
------------ ------------ -----------
------------ ------------ -----------
Income taxes paid $ 90,509 $ 117,904 $ 10,387
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosures of cash
flow information for reorganization
expenses paid in connection with the
Chapter 11 proceedings
Professional fees paid for services $ 1,216,883 $ - $ -
------------ ------------ -----------
------------ ------------ -----------
F-14
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
For the Years Ended December 31,
- --------------------------------------------------------------------------------
Balance, Additions Deductions Balance,
Beginning Charged to from End
of Year Operations Reserve of Year
--------- ------------ ------------ ---------
Allowance for doubtful
accounts
December 31, 2002 $ 154,621 $ 68,896 $ (90,283) $ 133,234
========== ========== =========== ==========
December 31, 2001 $ 61,264 $ 93,357 $ - $ 154,621
========== ========== =========== ==========
Reserve for impairment of
property, plant, and
equipment
December 31, 2002 $6,581,527 $ - $(6,581,527) $ -
========== ========== =========== ==========
December 31, 2001 $ - $6,581,527 $ - $6,581,527
========== ========== =========== ==========
Reserve for advances to
officers
December 31, 2002 $ 616,584 $ 277,016 $ (616,584) $ 277,016
========== ========== =========== ==========
December 31, 2001 $ - $ 616,584 $ - $ 616,584
========== ========== =========== ==========
F-15
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During the
year ended December 31, 2002, the Company completed the following:
o settled accounts payable in the amount of $151,952 with a vendor by
allowing the vendor to redeem the Company's gift certificates held as
collateral by the vendor.
o settled accounts payable in the amount of $2,047,429 with a vendor by
signing a note payable agreement for the same amount, bearing interest at
9% per annum.
o rejected 15 restaurant leases including rejection of several capital leases
and recorded a non-cash gain of $1,276,496.
o issued warrants to purchase 20,000 shares of common stock as payment of
interest valued at $60,000.
During the year ended December 31, 2001, the Company completed the following:
o issued warrants to purchase 20,000 shares of common stock as payment of
interest valued at $60,000.
o issued warrants to purchase 13,600 shares of common stock in exchange for
services rendered valued at $111,398.
During the year ended December 31, 2000, the Company completed the following:
o issued warrants to purchase 20,000 shares of common stock as payment of
interest valued at $60,000.
o acquired an automobile of $107,528 in exchange for a capital lease
obligation.
o reclassified property, plant, and equipment that was available for sale of
$263,541 to prepaid expenses and other current assets.
o completed a sale-leaseback transaction, whereby it acquired $11,186,496 of
capital lease obligations.
F-16
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 1 - COMPANY BACKGROUND AND OPERATIONS
Steakhouse Partners, Inc. ("Steakhouse"), 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.'s
name was changed to Steakhouse Partners, Inc.
NOTE 2 - BANKRUPTCY FILINGS
General
On February 15, 2002, Steakhouse filed a voluntary petition for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the Central District
of California (the "Bankruptcy Court").
On February 19, 2002, PSR also filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
The February 15, 2002 Filing was made in response to certain notes
aggregating $1,734,285, which the Company (as defined in Note 4) was
unable to pay (see Notes 9 and 11).
Steakhouse and PSR (collectively, the "Debtors") will continue to
manage their properties and operate their businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court
and in accordance with the applicable provisions of the Bankruptcy
Code.
F-17
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
General (Continued)
By filing under Chapter 11, the Company is seeking to retain core
locations, eliminate non-competitive leases, restructure its debt, and
withdraw from under-performing markets.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the continuation of
operations, realization of assets, and liquidation of liabilities in
the ordinary course of business. However, as a result of the Filing,
such realization of certain of the Debtors' assets and liquidation of
certain of the Debtors' liabilities are subject to significant
uncertainty. Furthermore, a plan of reorganization could materially
change the amounts and classifications reported in the consolidated
financial statements, which do not give effect to any adjustments to
the carrying value or classification of assets or liabilities that
might be necessary as a consequence of a plan of reorganization.
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations, including
claims of landlords for lease payments and employee wages and benefits
in the ordinary course of business.
Subsequent to the Filing, the Company commenced a balloting and
solicitation process with respect to the Plan of Reorganization, which
concluded in December 2003. On December 31, 2003, the Company's Plan of
Reorganization was confirmed by the Court.
Upon confirmation of the Bankruptcy Plan, effective December 31, 2003,
the entire balance of the DIP facility, including accrued interest,
became due and payable to Steakhouse Investors, LLC ("Steakhouse
Investors"), and Steakhouse Investors received 90% of the new common
stock of the reorganized company in exchange for a full and complete
release of the Company's obligations under the DIP agreement other than
interest. The outstanding preferred stock, common stock, stock options,
and warrants of the Company before confirmation will be canceled.
The Company's financial affairs will be completely restructured under
circumstances, whereby Steakhouse Investors will exchange its
$5,000,000 super-priority administrative claim for 90% of the newly
issued common stock in the reorganized company. In addition, all of the
Company's pre-petition liabilities will be completely restructured upon
confirmation of the Bankruptcy Plan, whereby the Company will be
obligated to pay the following obligations:
1. Priority tax claim in the amount of approximately $1,921,000
will be paid in the following manner at the option of the
Company: (a) in full on the effective date of the Bankruptcy
Plan or (b) paid over a six-year period from the date of
assessment with interest payable at 6% per annum.
F-18
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
General (Continued)
2. Secured claims in the amount of approximately $2,151,000 will
be paid as follows: (a) $1,535,000 will be paid in full over a
period of six years. Interest only will be paid over the first
three years, and the principal will be paid over the remaining
three years and (b) $616,000 will be deemed paid upon the
transfer of all of the assets and lease rights of one of the
Company's restaurants in Torrance, California.
3. Unsecured claims in the amount of approximately $8,700,000 to
$12,700,000 will be paid as follows: (a) general unsecured
claim in the amount of $8,000,000 to $12,000,000 will be paid
an estimated recovery of 50% to 70%. Each allowed claim will
receive its pro rata share of $1,000,000 within 30 days of the
effective date of the Bankruptcy Plan and payments under a
$5,030,000 note payable, which will be paid in the amount of
$500,000 on each April, August, and December of each year for
the next three years. In addition, on December 31, 2006, the
remaining unpaid balance of $530,000 becomes due. The note is
non-interest-bearing and due on or before December 2006. In
addition, the general, unsecured creditors will receive their
pro rata share of 500,000 shares of common stock, representing
10% of the new common stock of the Company and (b) convenience
claims in the amount of approximately $700,000 will be paid an
estimated recovery of 50%. Each allowed claim will receive its
payment within 30 days after the effective date of the
Bankruptcy Plan.
Accounting Impact
According to Statement of Position ("SOP") 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code," the financial
statements of an entity in a Chapter 11 reorganization proceeding
should distinguish transactions and events that are directly associated
with the reorganization from those operations of the ongoing business
as it evolves. Accordingly, SOP 90-7 requires the following financial
reporting and accounting treatment:
o Balance Sheet - The balance sheet separately classifies
liabilities subject to compromise from liabilities not subject to
compromise.
o Statement of Operations - Pursuant to SOP 90-7, revenues and
expenses, realized gains and losses, and provisions for losses
resulting from the reorganization and restructuring of the
business are reported in the statement of operations separately.
Professional fees are expensed as incurred.
F-19
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Accounting Impact (Continued)
o Statement of Cash Flows - Reorganization items are reported
separately within the operating, investing, and financing
categories of the statement of cash flows with respect to the
financial statements, or details of operating cash receipts and
payments resulting from the reorganization are disclosed in a
supplementary schedule.
Other Event
During June 2002, the former Chairman of the Board/President/Chief
Executive Officer of the Company filed a claim with the Bankruptcy
Court against the Company for approximately $2,000,000, alleging, among
other things, unpaid consulting fees and wrongful termination. During
2003, the Company settled this claim for approximately $134,000 of
which $4,000 was classified as a priority claim and $130,000 as an
unsecured claim.
NOTE 3 - DISCONTINUED OPERATIONS
On October 11, 2002, the Company's wholly owned subsidiary, PBF, filed
for protection under Chapter 7 of the United States Bankruptcy Court in
the Central District of California, located in Riverside. The
subsidiary ceased operations effective as of the filing date. The
Company's financial statements have been retroactively adjusted to
reflect the impact of the discontinuation of PBF.
The results of operations of PBF have been classified as discontinued
operations in the accompanying consolidated statements of operations
for the years ended December 31, 2002, 2001, and 2000.
The net sales and loss from discontinued operations for the years ended
December 31, 2002, 2001, and 2000 were as follows:
2002 2001 2000
---------------- --------------- ----------------
Net sales $ 1,114,675 $ 3,806,604 $ 8,017,605
Loss from discontinued operations $ 827,935 $ 2,396,821 $ 1,948,247
F-20
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of the discontinued operations at December
31, 2002 and 2001 consisted of the following:
2002 2001
--------------- ----------------
Accounts receivable $ 57,989 $ 270,536
Inventories 30,574 1,118,142
Prepaid expenses and other assets 43,562 55,711
Property, plant, and equipment, net 53,866 151,804
Other assets 114,366 114,365
--------------- ----------------
Total assets of discontinued operations 300,357 1,710,558
--------------- ----------------
Accounts payable 1,134,030 1,599,377
Accrued expenses 149,128 328,214
Capital lease obligations 74,662 98,367
--------------- ----------------
Total liabilities of discontinued operations 1,357,820 2,025,958
--------------- ----------------
NET LIABILITIES OF PBF IN LIQUIDATION $ (1,057,463) $ (315,400)
=============== ================
NOTE 4 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
on a going concern basis which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
As shown in the financial statements, during the year ended December
31, 2002, the Company maintained a current ratio of 0.54-to-1, which
arose from a working capital deficit of $5,405,111. In addition, as
discussed in Note 8 to the financial statements, certain debt is in
default as the Company did not make payments as the notes came due, and
the Company failed to meet certain financial covenants required by its
lenders. On February 15, 2002, the Company filed a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy Code. If
the Company is unable to generate profits and unable to obtain
financing for its working capital requirements, it may have to curtail
its business sharply or cease business altogether.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis, to restructure its current financing, to obtain
additional financing, and ultimately to attain profitability.
F-21
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 4 - GOING CONCERN (CONTINUED)
Management has evaluated its current operations, and it has focused the
Company's efforts and developed plans to generate operating income to
continue the Company's operations through the year ended December 31,
2003.
Management's plans include the following:
1. Restructuring its long-term debt position.
2. Improving the Company's financial performance through
cost-reduction and restructuring of administrative overhead.
3. Raising money through equity or the selective sale of
non-strategic restaurants.
NOTE 5 - 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.
Revenue Recognition
Revenues are generally recognized when services are rendered.
Comprehensive Income
The Company utilizes Statement of Financial Accounting Standards
("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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and in banks and
credit card receivables.
F-22
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash Equivalents (Continued)
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, 2002 and 2001, uninsured portions of the balances at those banks
aggregated to $3,033,140 and $2,336,164, 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, which
management believes to be sufficient to account for all uncollectible
amounts.
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).
F-23
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangibles (Continued)
During the years ended December 31, 2001 and 2000, events and
circumstances in connection with continuing operating losses of certain
under-performing restaurants indicated that certain of the Company's
intangible assets were impaired. The Company's estimate of undiscounted
cash flows indicated that such carrying amounts were not expected to be
recovered. Accordingly, during the years ended December 31, 2001 and
2000, the Company recorded an impairment loss related to its intangible
assets of $170,715 and $194,514, respectively, which are included in
direct operating costs. Subsequent to the write-down, the Company did
not have any remaining intangible assets.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets.
If the assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
exceeds the fair value of the assets. As discussed in Notes 6 and 7,
during the year ended December 31, 2001, the Company recognized an
impairment loss against certain property, plant, and equipment and
intangible assets in connection with continuing operating losses of
certain under-performing restaurants.
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.
Deferred Rent
The leases on various facilities include certain rent relief and
scheduled increasing monthly payments thereafter. In accordance with
accounting principles generally accepted in the United States of
America, the Company has accounted for these leases to provide for even
charges to operations over the lives of the leases.
F-24
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Board ("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.
Fair Value of Financial Instruments
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 notes payable also approximate
fair value because current interest rates offered to the Company for
debt of similar maturities are substantially the same.
Advertising and Promotional Costs
Advertising and promotional costs are charged to expense as incurred.
Advertising and promotional costs for the years ended December 31,
2002, 2001, and 2000 were $2,440,220, $2,687,871, and $2,959,474,
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.
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.
F-25
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 5 - 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.
Segment Reporting
The Company previously accounted for segments in accordance with SFAS
131, "Disclosures about Segments of an Enterprise and Related
Information". The Company had three business units which had separate
management and reporting infra-structures that offered different
products and services. The business units had been aggregated into two
separate reportable segments (restaurant service and food service
distribution).
On October 11, 2002, the Company's wholly owned subsidiary, PBF, filed
for protection under Chapter 7 of the United States Bankruptcy Court.
As a result the Company has retroactively adjusted the financial
results of PBF (food service distribution) to be presented on a
liquidated basis. Segment reporting disclosures are not presented in
the accompanying financial.
Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 147, "Acquisitions of Certain Financial Institutions."
SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation
9 thereto, to recognize and amortize any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This
statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." In addition, this
statement amends SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. Management does not expect
adoption of SFAS No. 147 to have a material impact, if any, on the
Company's financial position or results of operations.
F-26
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment of
SFAS No. 123. SFAS No. 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. SFAS No.
148 will not have any impact on the Company's financial statements as
management does not have any intention to change to the fair value
method.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting and reporting for derivative
instruments and hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for derivative instruments and hedging activities entered
into or modified after June 30, 2003, except for certain forward
purchase and sale securities. For these forward purchase and sale
securities, SFAS No. 149 is effective for both new and existing
securities after June 30, 2003. Management does not expect adoption of
SFAS No. 149 to have a material impact on the Company's statements of
earnings, financial position, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that
embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments
entered into or modified after May 31, 2003 and otherwise will be
effective at the beginning of the first interim period beginning after
June 15, 2003.
F-27
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 2002 and 2001 consisted
of the following:
2002 2001
--------------- ----------------
Buildings $ 2,771,639 $ 11,681,350
Furniture, fixtures, and equipment 1,970,664 2,173,162
Leased property under capital leases 18,467,498 21,055,285
--------------- ----------------
23,209,801 34,909,797
Less accumulated depreciation and amortization 6,422,263 6,993,171
Less reserve for impairment - 6,581,527
--------------- ----------------
16,787,538 21,335,099
Small kitchen wares 1,526,235 2,030,035
--------------- ----------------
TOTAL $ 18,313,773 $ 23,365,134
=============== ================
Depreciation and amortization expense was $2,785,465, $3,432,250, and
$3,359,712 for the years ended December 31, 2002, 2001, and 2000,
respectively, excluding depreciation and amortization expense recorded
by the Company wholly owned subsidiary, PBF. Depreciation and
amortization expense recorded by PBF for the years ended December 31,
2002, 2001, and 2000 was $105,789, $376,940, and $224,341,
respectively.
During the year ended December 31, 2001, events and circumstances in
connection with continuing operating losses of certain under-performing
restaurants indicated that an estimated $6,581,527, of property, plant,
and equipment of the Company were impaired. The Company's estimate of
undiscounted cash flows indicates that this carrying amount is not
expected to be recovered. Accordingly, during the year ended December
31, 2001, the Company recorded impairment losses of $6,581,527.
On February 15, 2002, Steakhouse filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (see
Note 2). Under Chapter 11, the Company has the right to reject any
leases entered into by the Company before the bankruptcy filing date.
As of December 2002, the Company has rejected fifteen operating leases
related to closed and/or poorly performing restaurants. The property,
plant, and equipment associated with such leases had a net book value
of $1,694,100, deferred rent liabilities of $506,788, capital lease
obligations of $2,652,578, and future minimum lease commitments of
$11,083,226 as of December 31, 2002. The Company recorded a net gain
during the year ended December 31, 2002 of $1,276,496 in connection
with these rejected leases. In addition, the Company is in the process
of evaluating certain other leases, which it intends to either reject
or assume and assign.
F-28
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT (CONTINUED)
As of December 2002, the Company has negotiated the sale of three
restaurant leases and related property, plant, and equipment for gross
proceeds of $1,083,014. The property, plant, and equipment associated
with such leases had a net book value of $666,741, deferred rent
liabilities of $355,581 and future minimum lease commitments of
$2,927,749 as of December 31, 2002. The Company recorded a net gain
during the year ended December 31, 2002 of $771,854 in connection with
such sales.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets at December 31, 2002 and 2001 consisted of the
following:
2002 2001
--------------- ----------------
Covenants not to compete $ 60,000 $ 60,000
Franchise contracts 145,000 145,000
Other 70,000 70,000
--------------- ----------------
275,000 275,000
Less accumulated amortization 104,285 104,285
Less impairment loss 170,715 170,715
--------------- ----------------
TOTAL $ - $ -
=============== ================
During the years ended December 31, 2001 and 2000, events and
circumstances in connection with continuing operating losses of certain
under-performing restaurants indicated that certain intangible assets
were impaired. The Company's estimate of undiscounted cash flows
indicates that such carrying amounts are not expected to be recovered.
Accordingly, during the years ended December 31, 2001 and 2000, the
Company recorded amortization expense of $19,859 and $43,634,
respectively, and impairment losses of $170,715 and $194,514,
respectively, which are included in direct operating costs.
F-29
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 8 - 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 is non-interest-bearing. In
exchange for the letter of credit, the Company is required to pay to
the issuer $118,000 annually and annually issue warrants to purchase
20,000 shares of common stock 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.
In exchange for certain services rendered by an investor related to the
letter of credit, the Company is required to pay the investor $42,000
and issue annually warrants to purchase 13,600 shares of common stock
on the anniversary date of the letter of credit, pro rata for each year
the letter of credit is outstanding.
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, 2002 and 2001. The note receivable is included in deposits and
other assets in the accompanying balance sheet.
NOTE 9 - NOTES PAYABLE
Notes payable at December 31, 2002 and 2001 consisted of the following:
2002 2001
--------------- ----------------
Notepayable 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. The Company is
currently in default on this obligation as the Company did
not make the balloon payment when the note
came due. $ 612,461 $ 634,285
F-30
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE (CONTINUED)
2002 2001
--------------- ----------------
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 due to its failure to meet certain
financial requirements. $ 1,500,000 $ 1,500,000
Notepayable, dated May 24, 2001, bearing interest at 4.33%
per annum with an original principal of $446,530. The note
requires nine monthly
payments of $32,992 through February 2003. 61,056 112,612
Note payable, bearing interest at 15% per annum
with an original principal of $413,409. As a
result of non-payment, the note is currently
in default. 413,409 413,409
Notepayable, bearing interest at 11% per annum with an
original principal of $80,000. The note requires monthly
payments of $1,370 and is
due on August 1, 2009. 80,000 -
Notepayable, bearing interest at 9% per annum with an
original principal of $2,047,429. The note requires
monthly payments of not less than $22,000 starting January
1, 2004 and
is due on or before December 31, 2007. 2,047,429 -
--------------- ----------------
4,714,355 2,660,306
Less amounts subject to compromise 2,525,870 -
--------------- ----------------
Notes payable not subject to compromise 2,188,485 -
Less current portion, not subject to compromise 72,842 2,660,306
--------------- ----------------
LONG-TERM PORTION, NOT SUBJECT TO
COMPROMISE $ 2,115,643 $ -
=============== ================
F-31
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 10 - 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% per annum. 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.
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/President/Chief Executive Officer. In relation to this loan, the
Company recorded interest expense of $66,625 as of December 31, 2000
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.
F-32
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 10 - LINE OF CREDIT AND SECURED FINANCING (CONTINUED)
Secured Financing
On August 30, 1996, 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% per annum 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.
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 had reclassified the entire loan balance
as current.
On July 19, 2000, PSR completed a sale-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, the
outstanding balance was $0.
Bridge Loan
On December 9, 1998, the Company obtained a $100,000 bridge loan from a
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 warrants to purchase
15,000 shares of 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.
F-33
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 10 - LINE OF CREDIT AND SECURED FINANCING (CONTINUED)
Bridge Loan (Continued)
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 former Chairman of the
Board/President/Chief Executive Officer. In relation to this loan, the
Company recorded interest expense of $0 and $23,750 as of December 31,
2002 and 2001, 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.
NOTE 11 - 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 not any conversions to common
stock during the years ended December 31, 2002 and 2001.
The terms associated with each series for the years ended December 31,
2002 and 2001 are as follows:
2002 2001
--------------- ----------------
6% notes, due June 3, 2001 $ 600,000 $ 600,000
6% notes, due July 15, 2001 400,000 400,000
6% notes, due July 23, 2001 100,000 100,000
--------------- ----------------
1,100,000 1,100,000
Less amounts subject to compromise 1,100,000 -
--------------- ----------------
TOTAL AMOUNT NOT SUBJECT TO COMPROMISE $ - $ 1,100,000
=============== ================
F-34
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 11 - CONVERTIBLE DEBT (CONTINUED)
In accordance with accounting principles generally accepted in the
United States of America, 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.
The Company is currently in default on these obligations, as the
Company did not make payments as the notes came due.
NOTE 12 - 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, 2002, the interest rate was 23.38%. 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.
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, 2002, the interest rate was 21%. 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.
F-35
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 12 - SECURED EXCHANGEABLE NOTES (CONTINUED)
In connection with the bankruptcy filing, the secured exchangeable
notes were reclassified to liabilities subject to compromise.
NOTE 13 - DEFERRED GAIN ON SALE-LEASEBACK
During November 2001, PSR completed a sale-leaseback transaction on one
of its restaurants for $853,720. In connection with the transaction,
the buyer was required to remit $600,000 of the proceeds to an escrow
account to be used for future improvements on the restaurant by the
Company. This amount is included in cash - restricted under collateral
agreements.
The Company recorded a deferred gain in the amount of $903,172 on the
transaction and will amortize the gain over the life of the lease in
accordance with SFAS No. 28, "Accounting for Sales with Leasebacks." As
of December 31, 2002, the deferred gain amount is $872,807 and is
included in liabilities subject to compromise.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases land and building sites for its restaurant
operations. These leases have initial terms generally ranging from 10
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.
F-36
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 14 - 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, 2002 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ --------------- ----------------
2003 $ 4,352,671 $ 2,010,995
2004 3,955,422 1,913,290
2005 3,699,657 1,913,290
2006 3,577,970 1,943,354
2007 3,591,190 1,952,177
Thereafter 25,980,272 22,800,265
--------------- ----------------
$ 45,157,182 32,533,371
===============
Less amount representing interest 18,157,073
----------------
14,376,298
Less liabilities subject to compromise 14,376,298
----------------
LEASE OBLIGATIONS NOT SUBJECT TO
COMPROMISE $ -
================
In order to guarantee its subsidiary's performance under several
leases, the Company was obligated to post a letter of credit in the
amount of $2,600,000 in favor of the master lessor. Two of the
Company's officers arranged for a third party to purchase the letter of
credit in consideration of a loan to the third party of $500,000 to be
repaid without interest upon the expiration of the line of credit term.
The Company guaranteed the officers' performance under this agreement.
Additional payments of $118,000 and $42,000 were also due annually to
the third party and his broker, respectively, upon renewal of the line
of credit, pursuant to the arrangement with the third party. Subsequent
to December 31, 2002, the Company's contractual obligation to post a
letter of credit was not assumed in the Bankruptcy Plan approved by the
United States Bankruptcy Court effective December 31, 2003.
Under Chapter 11, the Company has the right to reject any lease entered
into by the Company before the bankruptcy filing date. During the year
ended December 31, 2002, the Company rejected 15 operating leases. The
liabilities related to these leases at December 31, 2002 are included
in liabilities subject to compromise or accounts payable based on the
nature of the claim. The rejected leases have been excluded from the
above schedule of future minimum payments.
F-37
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (Continued)
At the time of its bankruptcy filing, the Company was a party to
certain lease agreements with P.S. Realty Partners, L.P. On July 1,
2002, the Company entered into a settlement agreement with the
landlord, whereby several lease terms were modified or shortened. This
settlement was approved by the Bankruptcy Court on July 1, 2002.
For the years ended December 31, 2002, 2001, and 2000, rent expense was
$6,084,244, $7,131,747, and $6,902,051, respectively, excluding rent
expense incurred by the Company's wholly owned subsidiary, PBF. Rent
expense incurred by PBF for the years ended December 31, 2002, 2001,
and 2000 was $542,869, $987,783, and $1,029,555, respectively.
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 are included in cash - restricted under collateral agreements.
Estimated liabilities related to self-insurance were $1,015,466 and
$719,724 at December 31, 2002 and 2001, respectively, and are recorded
in the accompanying consolidated balance sheets. As a result of the
bankruptcy filing, the Company reclassified $611,686 of the
self-insurance reserve to liabilities subject to compromise as such
amounts represented pre-petition liabilities. 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.
Agreements
On October 14, 2002, the Company entered into a two-year distribution
agreement with Southwest Traders, Inc. ("Southwest") to be the lead
distributor for the Company. Per the agreement, Southwest will purchase
all existing PBF inventory at cost. In addition, payments of the
purchase price will be made through a 25% discount given by the
distributor by offsetting the cost of purchase orders placed by the
Company against the outstanding inventory purchase price still
outstanding. As of December 31, 2002, the remaining discounts to be
credit against future purchase orders was $169,637.
F-38
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Bonuses
In April 2002, the Company's Board of Directors approved bonuses to
certain senior management in the amount of $227,500, which will become
due and payable upon the approval of the restructuring plan by the
Company's creditors' committee. As of December 31, 2003, these
liabilities were not approved by the Court under the final Plan of
Reorganization.
Termination Payments
During the year ended December 31, 2002, the Board of Directors
approved termination payments equivalent to a one-year base salary for
certain senior management in the event that a change in control of the
Company terminates their employment. These amounts aggregate to
$455,000. As of December 31, 2003, these liabilities were not approved
by the Court under the final Plan of Reorganization.
Taxes
The Company is contingently liable for any unpaid federal and state
taxes owed by its former Chairman of the Board/President/Chief
Executive Officer in the event that such taxes have not been paid.
Management of the Company estimates its exposure to be in the range of
$1,000,000 to $1,250,000. The Company believes its exposure to such
liabilities to be remote and has not accrued any federal or state
withholding taxes in the accompanying consolidated financial
statements.
Litigation
During the year ended December 31, 2001, the Company settled a lawsuit
filed by several ex-employees of the Company in the amount of $800,000,
which is included in other income (expense). In addition, as of
December 31, 2001, the Company had made payments on the settlement of
$600,000, leaving an unpaid balance of $200,000. As of December 31,
2003, under the final Plan of Reorganization, the remaining unpaid
balance of $200,000 became an unsecured claim and will be paid as
discussed in Note 2.
On July 5, 2002, the Company entered into a settlement agreement with
IDine, whereby the Company will pay IDine $2,047,429 upon confirmation
of the Reorganization Plan by the Court, and IDine will dismiss its
prior claims. The Company has accrued $2,047,429 for this settlement,
which is included in long-term debt in the accompanying consolidated
balance sheet at December 31, 2002. In connection with this settlement
the Company recorded a gain in the amount of $960,000, which represents
the difference between the original liability due and the liability due
after settlement.
F-39
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation (Continued)
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.
As a result of the bankruptcy filings all pending litigation and claims
against the Company are stayed, and no party may take any action to
realize its pre-petition claims, except pursuant to an order of the
Bankruptcy Court.
NOTE 15 - LIABILITIES SUBJECT TO COMPROMISE
Under bankruptcy law, actions by creditors to collect indebtedness the
Company owes prior to the Petition Date are stayed and certain other
pre-petition contractual obligations may not be enforced against the
debtors. The Company received approval by the Court to pay certain
re-petition liabilities, including employee salaries and wages,
benefits, produce costs and other utilities. All pre-petition
liabilities have been classified as liabilities subject to compromise
in the consolidated balance sheet.
Adjustment to the claims may result from negotiations, payments
authorized by the Court, additional rejection of executor contracts
including leases, or other events. Pre-petition liabilities will be
outstanding until the bankruptcy process is completed, whereby the
ultimate number and amount of allowable claims can be ascertained.
Liabilities subject to compromise at December 31, 2002 consisted of the
following:
Convertible debt $ 1,100,000
Secured exchange note 2,000,000
Notes payable 2,525,870
Accounts payable 6,200,827
Reserve for self insurance 611,686
Capital lease obligations 14,376,298
Deferred gain on sale-leaseback 872,807
Deferred rent 1,756,969
Other accrued liabilities 2,388,872
----------------
TOTAL $ 31,833,329
================
F-40
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 15 - LIABILITIES SUBJECT TO COMPROMISE (CONTINUED)
The following is a reconciliation of the changes in Liabilities subject
to compromise for the period from the Petition Date through December
31, 2002:
Balance, Petition Date $ 38,205,485
Court order authorizing payments of salaries and
benefit, utilities, and payments to critical vendors (1,869,928)
Payments on workers compensation and general liability (152,517)
Adjustments to workers compensation and general
liability accrual 75,302
Payments on capital leases obligation (257,729)
Adjustments due to closed, rejected, or sold leases (3,563,451)
Settlement of IDine contract (781,633)
Other 177,800
----------------
BALANCE, END OF PERIOD $ 31,833,329
================
NOTE 16 - STOCKHOLDERS' EQUITY (DEFICIT)
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/President/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.
F-41
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 16 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Preferred Stock (Continued)
The preferred stock does not carry 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 Chairman of the Board/President/Chief
Executive Officer 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 does not carry
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.
Common Stock
During the year ended December 31, 2000, the Company issued 17,500 of
common stock in lieu of interest payments on certain notes. In
connection with this issuance, the Company recorded interest expense
totaling $90,375 as of December 31, 2000.
F-42
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 16 - STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Common Stock (Continued)
During the year ended December 31, 2000, the Company issued warrants to
purchase 20,000 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.
During the year ended December 31, 2000, the Company issued employee
stock options to purchase 25,000 shares of the Company's common stock
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, compensation expense has not 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. As of
December 31, 2002, these options had not been re-issued.
During the years ended December 31, 2002, 2001, and 2000, the Company
annually issued warrants to purchase 20,000 shares of the Company's
common stock at $5 per share. In connection with these issuances, the
Company recorded interest expense of $60,000 for the years ended
December 31, 2002, 2001, and 2000.
During the years ended December 31, 2001, and 2000, the Company
annually issued warrants to purchase 13,600 shares of the Company's
common stock at $5 per share. In connection with these issuances, the
Company recorded interest expense of $111,898 for the years ended
December 31, 2001 and 2000, respectively.
NOTE 17 - 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.
F-43
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - STOCK-BASED COMPENSATION (CONTINUED)
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.
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.
F-44
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - STOCK-BASED COMPENSATION (CONTINUED)
Other Stock Options Issued Outside of the Plan
During the year ended December 31, 1999, the Company issued an employee
stock options to purchase 20,000 shares of the Company's common stock
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, compensation expense has not been recognized.
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, 2002, 2001, and 2000:
2002 2001 2000
---------------- --------------- ----------------
Net loss
As reported $ (6,582,559) $ (16,716,744) $ (621,444)
Pro forma $ (6,774,831) $ (16,909,016) $ (813,716)
Basic loss per common share
As reported $ (1.94) $ (4.94) $ (0.18)
Pro forma $ (2.00) $ (5.00) $ (0.24)
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 year ended
December 31, 2000. (The Company did not issue any stock options during
the years ended December 31, 2002 and 2001.): dividend yield of 0%,
expected volatility of 50%, risk-free interest rate of 6.3%, and
expected life of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which do not have 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.
F-45
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - 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, 2002, 2001, and
2000 are as follows:
Omnibus Plan Outside of Plan
--------------------------------- ---------------------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------------- ---------------- --------------- ----------------
Outstanding,
December 31, 1999
and 2000 335,000 $ 3.15 260,000 $ 2.31
Forfeited - $ - (95,000) $ 5.81
--------------- ---------------
Outstanding,
December 31, 2001 335,000 $ 3.15 165,000 $ 0.60
Forfeited (201,000) $ 3.17 (82,500) $ 0.60
--------------- ---------------
OUTSTANDING,
DECEMBER 31, 2002 134,000 $ 3.13 82,500 $ 0.60
=============== ===============
EXERCISABLE,
DECEMBER 31, 2002 134,000 $ 3.13 82,500 $ 0.60
=============== ===============
F-46
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - 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,
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,
December 31, 2000 432,499 $ 6.17 859,100 $ 6.54
Forfeited (150,000) $ 5.84 (50,000) $ 5.20
--------------- ---------------
Outstanding,
December 31, 2001 282,499 $ 6.34 809,100 $ 6.62
Forfeited (85,087) $ 6.22 (484,050) $ 6.90
--------------- ---------------
OUTSTANDING,
DECEMBER 31, 2002 197,412 $ 6.39 325,050 $ 6.20
=============== ===============
EXERCISABLE,
DECEMBER 31, 2002 81,162 $ 6.00 255,050 $ 6.25
=============== ===============
Steakhouse 2000 Plan
----------------------------------
Weighted-
Shares Average
Under Exercise
Option Price
--------------- ----------------
Outstanding, December 31, 1998 and 1999 - $ -
Granted 200,000 $ 5.20
---------------
Outstanding, December 31, 2000 200,000 $ 5.20
Forfeited (200,000) $ 5.20
---------------
OUTSTANDING, DECEMBER 31, 2001 AND 2002 - $ -
===============
EXERCISABLE AT DECEMBER 31, 2002 - $ -
===============
F-47
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - STOCK-BASED COMPENSATION (CONTINUED)
Stock Options (Continued)
The weighted-average remaining contractual life of the options
outstanding at December 31, 2002 is 5.71 years. The exercise prices for
the options outstanding at December 31, 2002 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 - 6.00 403,912 286,162 3.66 years $ 3.76 $ 2,97
$ 6.01 - 9.50 335,050 266,550 7.61 years $ 6.65 $ 6.37
--------------- ---------------
738,962 552,712
=============== ===============
Warrants
A summary of the Company's outstanding warrants and activity for the
years ended December 31, 2002, 2001, and 2000 is as follows:
Weighted-
Shares Average
Under Exercise
Warrant Price
----------- ------------
Outstanding, December 31, 1999 427,371 $ 5.99
Granted 53,600 $ 4.25
---------------
Outstanding, December 31, 2000 480,971 $ 5.79
Granted 33,600 $ 5.00
---------------
Outstanding, December 31, 2001 514,571 $ 5.74
Granted 33,600 $ 5.00
---------------
OUTSTANDING, DECEMBER 31, 2002 548,171 $ 5.70
===============
EXERCISABLE AT DECEMBER 31, 2002 548,171 $ 5.70
===============
F-48
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 17 - STOCK-BASED COMPENSATION (CONTINUED)
Warrants (Continued)
The following table summarizes information about warrants outstanding
at December 31, 2002:
Weighted-
Average
Warrants Warrants Remaining
Exercise Price Outstanding Exercisable Contractual Life
------------------- ------------------ ------------------ --------------------
$ 3.00 20,000 20,000 3.50 years
$ 5.00 157,650 157,650 2.77 years
$ 5.16 12,606 12,606 2.00 years
$ 5.28 73,125 73,125 2.00 years
$ 6.00 169,790 169,790 2.00 years
$ 7.00 115,000 115,000 2.00 years
------------------ ------------------
548,171 548,171
================== ==================
Effective with confirmation of the Plan on December 31, 2003, all stock
options, stock option plans, and warrants were canceled.
NOTE 18 - INCOME TAXES
Significant components of the provision for taxes based on income for
the years ended December 31, 2002, 2001, and 2000 were as follows:
2002 2001 2000
---------------- --------------- ----------------
Current
Federal $ - $ - $ -
State 140,400 172,400 96,978
---------------- --------------- ----------------
140,400 172,400 96,978
---------------- --------------- ----------------
Deferred
Federal - - -
State (10,642) (24,059) (43,559)
---------------- --------------- ----------------
(10,642) (24,059) (43,559)
---------------- --------------- ----------------
PROVISION FOR INCOME TAXES $ 129,758 $ 148,341 $ 53,419
================ =============== ================
F-49
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONTINUED)
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, 2002, 2001, and 2000 was as follows:
2002 2001 2000
---------------- --------------- ----------------
Income tax provision computed at
federal statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of federal benefit (0.5) 2.2 (3.2)
Increase in valuation reserve and
other (87.0) (44.0) (35.0)
--------------- ------------- -------------
TOTAL (53.5)% (7.8)% (4.2)%
=============== ============= =============
Significant components of the Company's deferred tax assets and
liabilities for federal income taxes consisted of the following at
December 31, 2002 and 2001:
2002 2001
--------------- ----------------
Deferred tax assets
Net operating losses $ 16,386,754 $ 13,079,194
Tax credit carry-forwards 1,819,360 1,502,591
Asset valuation reserves 6,821,955 6,821,955
Property, plant, and equipment 4,472,450 4,332,583
Other 5,189,357 3,699,978
--------------- ----------------
Total deferred tax assets 34,689,876 29,436,301
--------------- ----------------
Deferred tax liabilities
Property, plant, and equipment (357,540) (744,459)
Other (750,700) (719,364)
--------------- ----------------
Total deferred tax liabilities (1,108,240) (1,463,823)
--------------- ----------------
33,581,636 27,972,478
Valuation allowance (33,701,047) (28,091,889)
--------------- ----------------
NET DEFERRED TAX LIABILITY $ (119,411) $ (119,411)
=============== ================
F-50
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONTINUED)
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 carry-forwards 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 carry-forwards. 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 carry-forwards, after
carry-backs, of approximately $44,470,000 for federal and $11,979,000
for state, which will begin expiring in 2017. Upon confirmation of the
bankruptcy plan, effective December 31, 2003, Steakhouse Investors
received 90% of the new common stock (as discussed in Note 2) which
constituted a change in ownership. As a result the Company's net
operating loss carry-forwards will be substantially reduced.
NOTE 19 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2002, 2001, and 2000, the Company
advanced $0, $0, and $1,185,658, respectively, to officers of the
Company. During the year ended December 31, 2002, and 2001, the Company
recorded an allowance for doubtful accounts related to certain officer
advances totaling $277,016 and $616,584, which are deemed
uncollectible. 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 years ended December 31, 2002, 2001 and 2000, the Company
paid its former Chairman of the Board/President/Chief Executive Officer
consulting fees for services rendered in addition to paying for certain
expenses incurred by the former Chief Executive Officer. As of December
31, 2002 and 2001, total amounts paid as consulting fees and expenses
paid on behalf of the officer were $45,530 and $825,680, respectively.
F-51
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
During the years ended December 31, 2002, 2001, and 2000, the Company
paid its former President consulting fees for services rendered in
addition to paying for certain expenses incurred by the former
President. As of December 31, 2002 and 2001, total amounts paid as
consulting fees and expenses on behalf of the officer were $249,669 and
$431,375, respectively.
During the year ended December 31, 2000, the Company entered into a
capital lease agreement for a vehicle for the former Chairman of the
Board/President/Chief Executive Officer of the Company. Related to this
transaction, the Company recorded property, plant, and equipment
totaling $176,863. As of December 31, 2002 and 2001, the capital lease
payable related to this vehicle totaled $83,213 and $83,213,
respectively. The lease agreement is for four years, and monthly
payments are $1,852. As a result of the bankruptcy filing, the
liability has been stayed, pending court approval. This amount has been
reclassified as liabilities subject to compromise in the accompanying
consolidated financial statements as of December 31, 2002. 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, 2001, the Company entered into a
operating lease agreement for a vehicle for the former Chairman of the
Board/President/Chief Executive Officer of the Company. The lease
agreement is for three years and monthly payments are $702.
During the year ended December 31, 2000, the Company entered into an
operating lease agreement for a vehicle for the former Chairman of the
Board/President/Chief Executive Officer of the Company. This lease
agreement is for 3.5 years, and monthly payments are $1,143.
During the year ended December 31, 2001, the Company unintentionally
misclassified the worker classification of its former Chairman of the
Board/President/Chief Executive Officer as an independent contractor
rather than an employee. In addition, during the year, the Company did
not issue 1099's for wages paid to its former Chairman of the
Board/President/Chief Executive Officer as required by Internal Revenue
Service guidelines. In connection with this misclassification, the
Company has accrued an estimated payroll tax liability of $332,000,
which includes both the employer's and employee's portion of the FICA,
SUI, and SDI taxes as well as penalties and interest of $125,000.
F-52
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 20 - FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 2001, the Company had the following
significant accounting adjustments:
1. A property, plant, and equipment impairment reserve of
$6,581,527 related to continuing operating losses of certain
under-performing restaurants was recorded. The Company's
estimate of undiscounted cash flows indicates that this
carrying amount is not expected to be recovered. Management of
the Company has not determined to which quarters in 2001 this
impairment relates.
2. A loan was issued in February 1998, bears interest of 15% per
annum, and is guaranteed by the Company. As a result of the
default, the lender has called the note and is exercising the
corporate guarantee. As of December 31, 2002, the Company has
accrued $413,409 related to the loan, which includes the
principal loan amount of $241,200 and unpaid interest of
$172,209. Management of the Company has not determined in
which quarters in 2001 this loan was defaulted.
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 was recorded.
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 in which quarters in 2000 this
write-down relates.
2. A reduction of $8,386,052 of capital lease obligations related
to a restatement of the sale-leaseback recorded. In July 2000,
the Company completed a sale- leaseback 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 sale-leaseback 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.
F-53
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables list the Company's quarterly financial information
for the years ended December 31, 2002, 2001, and 2000:
2002
--------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- ---------------- --------------- ----------------
Revenues $ 24,786,932 $ 22,715,227 $ 20,499,712 $ 29,100,381 $ 97,102,252
Gross profit (loss) $ 669,184 $ 997,645 $ (49,282) $ 202,366 $ 1,819,713
Loss before other
income
(expense) $ (661,647) $ 52,037 $ (1,102,733) $ (1,849,077) $ (3,561,420)
Income (loss) from
reorganization
items $ 1,329,687 $ (369,868) $ 419,880 $ (1,508,232) $ (128,533)
Income (loss) from
discontinued
operations $ (242,990) $ (191,433) $ (216,343) $ (177,169) $ (827,935)
Net income
(loss) $ (175,414) $ (1,146,046) $ (1,416,538) $ (3,844,561) $ (6,582,559)
Basic earnings
(loss) per share
from continuing
operations $ 0.02 $ (0.28) $ (0.36) $ (1.08) $ (1.70)
Basic earnings
(loss) per share
from discontinued
operations $ (0.07) $ (0.06) $ (0.06) $ (0.05) $ (0.24)
Basic (loss)
per share $ (0.05) $ (0.34) $ (0.42) $ (1.14) $ (1.94)
Diluted earnings
(loss) per share
from continuing
operations $ 0.02 $ (0.28) $ (0.36) $ (1.08) $ (1.70)
Diluted earnings
(loss) per share
from discontinued
operations $ (0.07) $ (0.06) $ (0.06) $ (0.05) $ (0.24)
Diluted (loss)
per share $ (0.05) $ (0.34) $ (0.42) $ (1.14) $ (1.94)
Common stock
trading range
High $ 0.440 $ 0.240 $ 0.190 $ 0.150 $ 0.440
Low $ 0.060 $ 0.010 $ 0.001 $ 0.001 $ 0.001
F-54
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
2001
--------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- ---------------- --------------- ----------------
Revenues $ 27,981,418 $ 26,209,879 $ 23,242,341 $ 33,250,771 $ 110,684,409
Gross profit (loss) $ 2,491,704 $ 1,668,935 $ 529,049 $ (6,498,915) $ (1,809,227)
Income (loss)
before other
income
(expense) $ 840,623 $ (2,766,566) $ (2,499,449) $ (7,314,919) $ (11,740,311)
Income (loss) from
discontinued
operations $ (281,582) $ (185,349) $ (386,147) $ (1,543,743) $ (2,396,821)
Net income
(loss) $ 47,316 $ (1,715,559) $ (1,969,838) $ (13,078,663) $ (16,716,744)
Basic earnings
(loss) per share
from continuing
operations $ 0.09 $ (0.46) $ (0.47) $ (3.39) $ (4.23)
Basic (loss)
per share
from
discontinued
operations $ (0.08) $ (0.05) $ (0.11) $ (0.47) $ (0.71)
Basic earnings
(loss) per share $ 0.01 $ (0.51) $ (0.58) $ (3.86) $ (4.94)
Diluted earnings
(loss) per share
from continuing
operations $ 0.09 $ (0.46) $ (0.47) $ (3.39) $ (4.23)
Diluted (loss)
per share
from
discontinued
operations $ (0.08) $ (0.05) $ (0.11) $ (0.47) $ (0.71)
Diluted earnings
(loss) per share $ 0.01 $ (0.51) $ (0.58) $ (3.86) $ (4.94)
Common stock
trading range
High $ 4.630 $ 3.800 $ 1.370 $ 0.640 $ 4.630
Low $ 2.310 $ 0.910 $ 0.500 $ 0.200 $ 0.200
F-55
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 21 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
2000
--------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- ---------------- --------------- ----------------
Revenues $ 30,430,255 $ 23,761,042 $ 29,356,693 $ 40,070,209 $ 123,618,199
Gross profit (loss) $ 3,804,941 $ (508,142) $ 1,572,324 $ 6,188,945 $ 11,058,068
Income (loss)
before other
income
(expense) $ 2,144,549 $ (2,292,107) $ (1,189,946) $ 4,834,310 $ 3,496,806
Income (loss) from
discontinued
operations $ (326,371) $ 98,567 $ (1,386,302) $ (334,141) $ (1,948,247)
Net income
(loss) $ 457,411 $ (489,126) $ (1,106,125) $ 516,396 $ (621,444)
Basic earnings
(loss) per share
from continuing
operations $ 0.24 $ (0.18) $ 0.08 $ 0.25 $ 0.39
Basic earnings
(loss) per share
from discontinued
operations $ (0.10) $ 0.03 $ (0.41) $ (0.10) $ (0.58)
Basic earnings
(loss) per share $ 0.14 $ (0.15) $ (0.33) $ 0.15 $ (0.18)
Diluted earnings
(loss) per share
from continuing
operations $ 0.19 $ (0.18) $ 0.06 $ 0.31 $ 0.38
Diluted earnings
(loss) per share
from discontinued
operations $ (0.09) $ 0.03 $ (0.39) $ (0.13) $ (0.58)
Diluted earnings
(loss) per share $ 0.10 $ (0.15) $ (0.33) $ (0.18) $ (0.20)
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
F-56
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 22 - SUBSEQUENT EVENTS
As of December 2003, the Company has negotiated a sale of four
restaurant leases and related property, plant, and equipment for gross
proceeds of $1,320,000. The property, plant, and equipment associated
with such leases had a net book value of $824,415, capital lease
obligations of $613,000, and future minimum lease commitments of
$3,352,789 as of December 2003. The Company expects to record a net
gain during the year ended December 31, 2003 of approximately
$1,168,000 in connection with such sales.
Subsequent to December 31, 2002, the Company rejected nine operating
leases related to closed and/or poorly performing restaurants. The
property, plant, and equipment associated with such leases had a net
book value of $767,330, capital lease obligations of $1,705,649, and
future minimum lease commitments of $5,475,306 as of December 31, 2003.
The Company expects to record a net gain during the year ended December
31, 2003 of approximately $938,000 in connection with these rejected
leases.
On August 13, 2003, the Company obtained and received Court approval
for a $5,000,000 senior secured convertible debtor-in-possession
financing facility (the "DIP Credit Facility") for payment of permitted
pre-petition claims, working capital needs, letter of credit and other
general corporate purposes. The DIP Credit Facility requires that the
Company maintain certain financial covenants. In addition, under the
agreement, the Company will be required to accrue interest, which will
be capitalized on each payment date and added to the outstanding
principal until confirmation. Upon confirmation of the plan, which
occurred on December 31, 2003, the DIP Credit Facility was converted
into 90% of the new common stock of the reorganized Company in exchange
for a full and complete release of the Company's obligations under the
DIP Credit Facility agreement other than interest.
As of December 2003, the Company borrowed approximately $5,000,000 on
the DIP Credit Facility.
During the first quarter of 2003, the Company finalized the liquidation
of PBF. As a result of PBF's liabilities exceeding their assets, the
Company anticipates recording a gain in the amount of $1,057,463.
On December 31, 2003, the Company's joint Plan of Reorganization was
confirmed, and the Company emerged from bankruptcy protection. In
accordance with SOP 90-7, the Company implemented fresh-start
accounting. Under SOP 90-7, the reorganization fair value of the
Company was allocated to its assets and liabilities, its accumulated
deficit was eliminated, and its new equity was issued according to the
Plan of Reorganization as if it were a new reporting entity.
F-57
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
- --------------------------------------------------------------------------------
NOTE 22 - SUBSEQUENT EVENTS (CONTINUED)
In accordance with fresh-start accounting, all assets and liabilities
were recorded at their respective fair market values upon emergence
from Chapter 11. Such fair values represented the Company's estimates
based on independent appraisals and valuations. Immaterial differences
between estimated pre-petition liabilities assumed by the Reorganized
Company and the final settlement amounts are recognized as they occur.
To facilitate the calculation of the enterprise value of the
Reorganized Company, the Company developed a set of financial
projections. Based on these financial projections and with the
assistance of a financial advisor, the enterprise value was determined
by the Company, using various valuation methods, including (i) a
comparison of the Company and its projected performance to the market
values of comparable companies, (ii) a review and analysis of several
recent transactions of companies in similar industries to the Company,
and (iii) a calculation of the present value of the future cash flows
under the projections. The estimated enterprise value is highly
dependent upon achieving the future financial results set forth in the
projections as well as the realization of certain other assumptions
which are not guaranteed.
SOP 90-7 requires an allocation of the reorganization equity value in
conformity with procedures specified by APB 16, Business Combinations,
as amended by SFAS 141, Business Combinations, for transactions
reported on the basis of the purchase method. The excess of
reorganization value over fair value of net assets ("goodwill") was
approximately $18,900,000 as of December 31, 2003.
F-58
SUPPLEMENTAL INFORMATION
F-59
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
(Debtor-In-Possession)
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 the 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.
Our report covering the basic financial statements indicates that there is
substantial doubt as to the Company's ability to continue as a going concern,
the outcome of which cannot presently be determined and that the financial
statements do not include any adjustments, that might result from the outcome of
this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
October 17, 2003, except for
Notes 2, 14, 18, and 22, as
to which the date is
December 31, 2003
F-60
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
VALUATION AND QUALIFYING ACCOUNTANTS - SCHEDULE II
For the Years Ended December 31,
Balance, Additions Deductions Balance,
Beginning Charged to from End
of Year Operations Reserve of Year
----------- ------------ ----------- -----------
Allowance for doubtful
accounts
December 31, 2002 $ 154,621 $ 68,896 $ (90,283) $ 133,234
---------- --------- ----------- ----------
December 31, 2001 $ 61,264 $ 93,357 $ - $ 154,621
---------- --------- ----------- ----------
Reserve for impairment of
property, plant, and
equipment
December 31, 2002 $6,581,527 $ - $(6,581,527) $ -
---------- --------- ----------- ----------
December 31, 2001 $ - $6,581,527 $ - $6,581,527
---------- --------- ----------- ----------
Reserve for advances to
officers
December 31, 2002 $ 616,584 $ 277,016 $ (616,584) $ 277,016
---------- --------- ----------- ----------
December 31, 2001 $ - $ 616,584 $ - $ 616,584
---------- --------- ----------- ----------
The accompanying notes are an integral part of these financial statements.
F-61
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
21.1 List of Subsidiaries of Steakhouse Partners, Inc.
F-62