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 30, 2003
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 30, 2003):
$77,757,815
Aggregate market value of voting stock held by non-affiliates: $0.00
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
APPLICABLE TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
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: |X| YES |_| NO
Documents Incorporated by Reference:
Part III -- Proxy Statement to be issued in conjunction with Registrant's Annual
Stockholders' Meeting.
The index to exhibits is located on page 39.
TABLE OF CONTENTS
Item
PAGE
PART I
Item 1. Business..........................................................................1
Item 2. Properties.......................................................................23
Item 3. Legal Proceedings................................................................25
Item 4. Submission of Matters to a Vote of Security Holders..............................25
PART II
Item 5. Market for the Registrant's Common Equity Related Stockholder....................25
Matters and Issuer Purchases of Securities
Item 6. Selected Financial Data..........................................................27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................................28
Item 7a. Quantitative and Qualitative Disclosures about Market Risk .....................35
Item 8. Financial Statements and Supplementary Data......................................38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.....................................................38
Item 9a.Controls and Procedures..........................................................38
PART III
Item 10. Directors and Executive Officers of the Registrant .............................38
Item 11. Executive Compensation..........................................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management .................38
Item 13. Certain Relationships and Related Transactions .................................38
Item 14. Principal Accounting Fees and Services .........................................38
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................39
Signatures ..............................................................................42
Section 302 Certification ...............................................................45
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
On December 21, 1998, Steakhouse Partners, Inc. ("Steakhouse") consummated its
acquisition of Paragon Steakhouse Restaurants, Inc. and its subsidiaries
(together "Paragon", "PSR"), which then owned 78 steakhouse restaurants, and of
Pacific Basin Foods Inc., ("Pacific Basin"), a restaurant food distribution
company. Paragon is now a wholly owned subsidiary of Steakhouse (together
referred to as "Steakhouse Partners", the "Company", "we", "us" and "our").
As of March 30, 2004, the Company operates 25 full-service steakhouse
restaurants located in eight 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 $27.40 (including
alcoholic beverages) and its 25 restaurants serve almost 3.0 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 its concentration on high
quality USDA graded steaks and prime ribs distinguishes its restaurants from
competitors, which differentiation presents an opportunity for significant
growth upon completion of the reorganization process described below under
"Proceedings Under the Bankruptcy Code".
PROCEEDINGS UNDER THE BANKRUPTCY CODE
Effective December 31, 2003, (the "Effective Date") the Company confirmed a Plan
of Reorganization, which allowed it to achieve the benefits that motivated the
filings described below. By way of background, 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, Paragon also filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code in the Bankruptcy Court (together, the "Filing"). On October 11,
2002, Pacific Basin Foods, Inc., our wholly owned subsidiary, filed a petition
under Chapter 7 of the Bankruptcy Code in Bankruptcy Court.
The initial Filing was made in response to the maturing of certain notes
aggregating $1,734,285, which the Company was unable to pay. Throughout the
course of the Reorganization, the Company sought to retain core locations,
eliminate non-competitive leases, restructure its debt, and withdraw from
under-performing markets.
1
During the Reorganization, the Company continued to manage its properties and
operated its businesses as "debtors-in-possession" ("DIP") under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code.
As a consequence to the Filing, all pending litigation and claims against the
Company were stayed, and no party was permitted to take action to realize its
pre-petition claim, except pursuant to order of the Bankruptcy Code. While
enjoying the protection of this stay, the Company disposed of under performing
assets and sought third party participation in funding a plan. In July, 2003,
the Bankruptcy Court approved a DIP loan and the general terms pursuant to which
a plan of Reorganization would be approved, as more fully described below.
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
approved plan provides for no distribution to equity holders, but rather
provides for distribution of equity upon confirmation to the plan funder and
creditors, as more fully described below.
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 19, 2003, the Company's Plan of Reorganization was confirmed
by the Bankruptcy Court. Upon the effective date of the Plan of Reorganization,
the entire balance of the DIP facility of $5,000,000, including accrued
interest, became due and payable to Steakhouse Investors, LLC or its assignees
("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 Plan of Reorganization provides that the outstanding preferred
stock, common stock, stock options, and warrants of the Company before
confirmation be canceled. In addition, all of the Company's pre-petition
liabilities have been completely restructured by the Plan of Reorganization,
whereby the Company will be obligated to pay the following claims according to
the Plan as follows:
1. Priority tax claim in the amount of approximately $1,921,000 will be paid
over a four-year period from the Effective Date, with interest payable at a
rate of 6% per annum.
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. On December 31, 2003, the
Effective Date, the Company emerged from bankruptcy. All of the assets and
lease rights of the Torrance, CA restaurant were transferred in
satisfaction of such secured claim.
3. Unsecured claims estimated to be between $8,700,000 to $12,700,000 will be
paid as follows: (a) general unsecured claims in the amount of $8,000,000
to $12,000,000 are expected to receive recovery of 50% to 70% of their
allowed claims. We have paid creditors $1,000,000 in January 2004, and will
make 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. The note is non-interest-bearing and the last payment is
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 were paid an
estimated recovery of 50%. Each allowed claim was paid in January, 2004.
2
Finally, the Plan of Reorganization 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.
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. As a
result of the Filing, realization of certain of the Company' assets and
liquidation of certain of the Company' liabilities are subject to significant
uncertainty. Furthermore, the plan of reorganization materially changed the
amounts and classifications reported in the December 30, 2003 consolidated
financial statements, which did not give effect to any adjustments to the
carrying value or classification of assets or liabilities that were necessary as
a consequence of a 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.
3
OUR BUSINESS BACKGROUND
The steakhouse industry is expected to continue to expand over the next several
years. We believe that this industry is highly fragmented and, we believe we may
have the opportunity to grow our business by expanding one of Paragon's
brand-name step-up steakhouses, Carvers.
Our overall steakhouse operations have historically experienced 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 slowest, 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.
RESTAURANT CONCEPTS
All of our restaurants are positioned as destination restaurants that attract
loyal clientele. By the term "destination restaurants", we mean that our
restaurants are situated as the primary destination of our clientele, rather
than a destination or activity ancillary to another activity, such as shopping
or sight seeing. With one exception, our restaurants are full-service
steakhouses. 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
eighteen 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 11:30 a.m. on weekdays; most of these restaurants are closed
for lunch on weekends.
We currently operate in three distinctive steakhouse markets:
HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE AND MOUNTAIN JACK'S
We have 18 steakhouses operating under our core brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's, for which the average dinner check is
approximately $24.64 per guest. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and 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 core menu also features fresh fish, seafood, pasta and chicken in addition
to prime rib and steaks. A complete meal includes salad and a choice of two side
dishes including soup, choice of potato, and steamed vegetables. The menu also
includes appetizers and desserts. The restaurant menus have recently been
revised and expanded to respond to changing guest palates and diets, and 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.
4
CARVERS
We have 4 steakhouses operating in the upscale steakhouse-dining segment under
the Carvers brand name with an average dinner check per guest of slightly more
than $36.00. 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 (OTHER) CONCEPTS
We have 3 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. Two have menus
similar to the core menus, with additional feature items unique to their
communities and environment. The third, the Williamsburg Whaling Company,
features fresh seafood richly available in its colonial Williamsburg local.
Overall, the menus at these restaurants are different than the steakhouses and
enjoy an average dinner guest check of approximately $32.35. 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.
REORGANIZATION STRATEGY
Among others, the benefits of the reorganization have included the restructuring
of the Company debt, the improved Company's financial performance through
cost-reduction and restructuring of administrative overhead, and the ability to
raise money the selective sale of non-strategic restaurants and the commitment
of plan funding. Our goal for the future is to enhance our position in the
steakhouse restaurant industry by building through internal growth (Carvers) and
through the potential acquisition of steakhouse (step-up casual) restaurants. No
acquisitions are currently pending and there can be no assurance such
acquisitions will be made. Key components of this 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.
5
Our marketing efforts consist of local media advertising, diners club
participation and limited 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. Restaurant leadership teams also coordinate birthday
and anniversary programs, hotel relationships, catering outreach, and other
community-targeted guest relations programs.
Should we expand, our plan for each new restaurant would 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.
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. However, because of the age, reliability and serviceability
issues of our existing POS system, the Company will begin upgrading this
critical feature starting in 2004. The software and hardware vendors have been
selected, lab equipment has been ordered with testing and training following
shortly. Once everything has been proven and tested, the Company anticipates it
will take approximately eighteen months to convert all the units.
6
The management team for a typical steakhouse restaurant generally consists of
one general manager, one or two leaders 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 five to seven 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 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 Van Eerden 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 subsidiary was a wholesale food distributor serving
the restaurant industry. Its principal clients were Paragon and several small
regional chains. 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.
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.
7
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 employment and
wage laws governing such matters as working conditions, overtime and tip credits
and other employee matters. Significant numbers of our food service and
preparation personnel are paid at rates related to the federal minimum wage.
Government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could be detrimental to the
economic viability of our restaurants.
The development and construction of additional restaurants will be subject to
compliance with applicable zoning, land use and environmental regulations.
Management is not aware of any environmental regulations that have had a
material effect on us or our restaurants to date.
The Federal Americans With Disabilities Act (the "ADA") prohibits discrimination
on the basis of disability in public accommodations and employment. We seek to
cause that our restaurants will be in full compliance with the ADA, 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 30, 2003, we employed approximately 1,663 individuals, of which 160
occupy executive, managerial or clerical positions, and 1503 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.
8
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 our Joint Plan of Reorganization. Under the terms of
the Plan of Reorganization, 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 are expected to receive between $0.50 and $0.70 for each
dollar of allowable claim in the form of cash and a three-year note providing
for periodic payments.
If cash flow from operations is insufficient to satisfy the periodic payments
required to our creditors, deferred capital improvements and expansion, and we
are unable to raise additional funds it will seriously effect our ability to
meet our plan objectives, and we may be forced to liquidate the Company.
9
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 $4,851,281 for the fiscal year ended December 30, 2003; 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
and a net loss of approximately $3.9 million for the fiscal year ended December
26, 1999. As of December 30, 2003, we had an accumulated deficit of
approximately $37.7 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 including:
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 effected.
ADVERSE ECONOMIC CONDITIONS IN A LIMITED NUMBER OF STATES COULD HAVE A NEGATIVE
EFFECT ON OUR BUSINESS.
Our restaurants are located in 8 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.
10
IF WERE ARE UNABLE TO RESPOND TO THE RECENT OR ANY FUTURE MAD COW SCARE AND
ASSURE OUR CUSTOMERS THAT OUR RESTAURANTS AND BEEF ARE SAFE IT MAY NEGATIVELY
AFFECT OUR BUSINESS.
Our ability to be pro active and provide factual information to our customers
will be critical to maintaining our business. In the most recent outbreak of mad
cow disease, the affected animal was a Holstein cow from Washington State.
Typically Mad Cow has only been detected in animals five years and older. Our
customers must believe that all our meat is non-Holstein and comes from the
Midwest. We only use whole muscle beef that come from cattle that are 24-28
months old. Our approved vendors have controls in place to prevent cross
contamination (muscle meats versus brain, spinal cord and spleen material) of
these organs with any other cut of beef. Nevertheless, we cannot assure you that
every ounce of beef used at our Restaurants is safe.
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.
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.
11
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.
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.
OUR PRIOR BANKRUPTCY COULD HINDER OUR ABILITY TO NEGOTIATE EFFECTIVELY WITH
THIRD PARTIES AND COULD ADVERSELY AFFECT OUR OPERATIONS GOING FORWARD.
In February 2002 we, along with our wholly-owned subsidiary Paragon filed for
voluntary reorganization under Chapter 11 of the Bankruptcy Code. We officially
emerged from bankruptcy on December 31, 2003. However, our Chapter 11
reorganization and financial condition and performance could adversely affect
our operations going forward. Our bankruptcy filing had an adverse affect on our
credit standing with our lenders, certain suppliers and other trade creditors.
This can increase our costs of doing business and can hinder our negotiating
power with our lenders, certain suppliers and other trade creditors. The
failure to negotiate favorable terms could adversely affect our financial
performance. Though we have emerged from Chapter 11, the distribution of shares
to the general unsecured creditors is not complete as we continue to reconcile
the claims made by these creditors. Until this process is complete, we will
continue to incur expenses with respect to the reorganization process.
BECAUSE WE HAVE EXPERIENCED SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM,
IT MAY BE DIFFICULT FOR INVESTORS TO EVALUATE OUR PROSPECTS FOR IMPROVED
PERFORMANCE.
There have been a number of changes in our senior management team since our
emergence from bankruptcy. Our chief executive officer was appointed by the
Bankruptcy Court in July 2003. If our management team is unable to develop
successful business strategies, achieve our business objectives or maintain
effective relationships with employees, suppliers, creditors and customers, our
ability to grow our business and successfully meet operation and challenges
could be impaired.
12
IF WE LOSE OR ARE UNABLE TO OBTAIN KEY PERSONNEL, OUR ABILITY TO EFFECTIVELY
OPERATE OUR BUSINESS COULD BE HINDERED.
Our ability to maintain or enhance our competitive position will depend to a
significant extent on the efforts and ability of our executive and senior
management, particularly our chief executive officer. Our future success and our
ability to manage future growth will depend in large part upon the efforts of
our management team and on our ability to attract and retain other highly
qualified personnel. Competition for personnel is intense, and we may not be
successful in attracting and retaining our personnel. Our inability to retain
our current management team and attract and retain other highly qualified
personnel could adversely affect our results of operations and hinder our
ability to effectively manage our business.
WE FACE RISKS ASSOCIATED WITH CHANGES IN GENERAL ECONOMIC AND POLITICAL
CONDITIONS THAT EFFECT CONSUMER SPENDING.
We believe that the weak general economic conditions in effect in the United
States will continue through 2004. As the economy struggles, we are concerned
that our customers may become more apprehensive about the economy and reduce
their level of discretionary spending. We believe that a decrease in
discretionary spending could impact the frequency with which our customers
choose to dine out or the amount they spend on meals while dining out, thereby
decreasing our revenues. Additionally, the continued military responses to
terrorist attacks and our military operations abroad may exacerbate current
economic conditions and lead to further weakening in the economy. Adverse
economic conditions and any related decrease in discretionary spending by our
customers could have an adverse effect on our revenues and operating results.
OUR PROFITABILITY IS DEPENDENT IN LARGE MEASURE ON FOOD AND SUPPLY COSTS WHICH
ARE NOT WITHIN OUR CONTROL.
Our profitability is dependent in large measure on our ability to anticipate and
react to changes in food and supply costs. Various factors beyond our control,
including climatic changes and government regulations, may affect food costs.
Specifically, our dependence on frequent, timely deliveries of fresh beef,
poultry, seafood and produce subjects us to the risks of possible shortages or
interruptions in supply caused by adverse weather or other conditions, which
could adversely affect the availability and cost of any such items. We cannot
assure you that we will be able to anticipate or react to increasing food and
supply costs in the future. The failure to react to these increases could
materially and adversely affect our business and result of operations.
13
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.
Our strategy for expansion of our operations includes 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 our 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 Of zoning problems.
WE FACE RISKS ASSOCIATED WITH THE EXPANSION OF OUR OPERATIONS.
The success of our business depends on our ability to expand the number of our
restaurants, either by developing or acquiring additional restaurants. Our
success also depends on our ability to operate and manage successfully our
growing operations. Our ability to expand successfully will depend upon a number
of factors, including the following:
-- the availability and cost of suitable restaurant locations for
development;
-- the availability of restaurant acquisition opportunities;
-- the hiring, training, and retention of additional management and
restaurant personnel;
-- the availability of adequate financing;
-- the continued development and implementation of management information
systems;
-- competitive factors; and
-- general economic and business conditions.
Increased construction costs and delays resulting from governmental regulatory
approvals, strikes, or work stoppages, adverse weather conditions, and various
acts of God may also affect the opening of new restaurants. Newly opened
restaurants may operate at a loss for a period following their initial opening.
The length of this period will depend upon a number of factors, including the
time of the year the restaurant is opened, the sales volume, and our ability to
control costs.
14
We may not successfully achieve our expansion goals. Additional restaurants that
we develop or acquire may not be profitable. In addition, the opening of
additional restaurants in an existing market may have the effect of drawing
customers from and reducing the sales volume of our existing restaurants in
those markets.
WE WILL NEED ADDITIONAL CAPITAL FOR EXPANSION.
The development of new restaurants requires funds for construction, tenant
improvements, furniture fixtures equipment training of employee permits, initial
franchise fees and other expenditures. We will require funds to develop
additional restaurants and to pursue any additional restaurant development or
restaurant acquisition opportunities that may develop.
In the future, we may seek additional equity or debt financing to provide funds
so that we can develop or acquire additional restaurants. Such financing may not
be available or may not be available on satisfactory terms. If financing is not
available on satisfactory terms we may be unable to expand our restaurant
operations. While debt financing will enable us to add more restaurants than we
otherwise would be able to add, debt financing increases expenses and is limited
as to availability due to our financial results and bankruptcy history, and we
must repay the debt regardless of our operating results. Future equity
fll1ancings could result in dilution to our stockholders.
WE DEPEND ON KEY FOOD PRODUCT DISTRIBUTORS.
We currently rely on two food product distributors Southwest Traders and Van
Earden. If either Southwest Traders or Van Earden is unable to continue
providing us with a high level of quality and dependability in the receipt of
our supplies, at the cost advantages resulting from our volume purchases, this
could have a material impact on our business.
We believe that all essential products are available from other national
suppliers as well as from local suppliers in the cities in which our restaurants
are located in the event we must purchase our products from other suppliers;
however, there can be no assurance that we will be able to match quality, price
or dependability of supply.
WE FACE COMMODITY PRICE AND AVAILABILITY RISKS.
We purchase energy and agricultural products that are subject to price
volatility caused by weather, market conditions and other factors that are not
predictable or within our control. Increases in commodity prices could result
in lower restaurant level operating margins for our restaurant concepts.
Occasionally, the availability of commodities can be limited due to
circumstances beyond our control. If we are unable to obtain such commodities,
we may be unable to offer related products, which would have a negative impact
on our profitability.
15
THE RESTAURANT INDUSTRY IS AFFECTED BY CHANGES IN CONSUMER PREFERENCES AND
DISCRETIONARY SPENDING PATTERNS THAT COULD FORCE US TO MODIFY OUR MENUS AND
CONCEPTS AND COULD RESULT IN A REDUCTION IN OUR REVENUES.
Consumer preferences could be affected by health concerns about the consumption
of beef, the primary item on our Hungry Hunter's, Hunter's Steakhouse, Mountain
Jack's, Carvers restaurants' menus, or by specific events such as the outbreak
or scare caused by "mad cow disease". If we were to have to modify the emphasis
on beef in our restaurants' menus we may lose customers who would be less
satisfied with a modified menu, and we may not be able to attract a new customer
base to generate the necessary revenues to maintain our income from restaurant
operations. A change in our menus may also result in us having different
competitors. We may not be able to successfully compete against established
competitors in the general restaurant market. Our success also depends on
various factors affecting discretionary consumer spending, including economic
conditions, disposable consumer income, consumer confidence and the United
States participation in military activities. Adverse changes in these factors
could reduce our customer base and spending patterns, either of which could
reduce our revenues and results of operations.
WE DEPEND UPON OUR SENIOR MANAGEMENT.
Our success depends, in large part, upon the services of our senior management.
The loss of the services of any members of our senior management team could have
a material adverse effect on our business.
INCREASE IN THE MINIMUM WAGE MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
AND FINANCIAL RESULTS.
A number of our employees are subject to various minimum wage requirements. The
federal minimum wage has remained at $5.15 per hour since September 1, 1997. Any
minimum wage increase may have a material adverse effect on our business,
financial condition, results of operations or cash flows.
THE FAILURE TO ENFORCE AND MAINTAIN OUR TRADEMARKS AND TRADE NAMES COULD
ADVERSELY AFFECT OUR ABILITY TO ESTABLISH AND MAINTAIN BRAND AWARENESS.
Our current operations and marketing strategy depend significantly on the
strength of trademarks and service marks. Our wholly owned subsidiary, Paragon
of Michigan, Inc. has registered, among others, the names Hungry Hunter's,
Mountain Jack's and Carvers. The success of our growth strategy depends on our
continued ability to use our existing trademarks and service marks in order to
increase brand awareness and further develop our branded products. Although we
are not aware of any infringing uses of any of the trademarks or service marks
that we believe could materially affect us; we cannot assure you that we will be
free from such infringements in the future.
The names "Hungry Hunter's", "Mountain Jack's" and "Carvers" represents our core
concept. The termination of our right to use this name or our failure to
maintain any of our other existing trademarks could materially and adversely
affect our growth and marketing strategies.
16
BECAUSE WE MAINTAIN A SMALL NUMBER OF RESTAURANTS, THE NEGATIVE PERFORMANCE
OF A SINGLE RESTAURANT COULD HAVE A SUBSTANTIAL IMPACT ON OUR OPERATING
RESULTS.
We currently own and operate 25 restaurants. Due to this relatively small number
of restaurants, poor financial performance at any owned restaurant could have a
significant negative impact on our profitability as a whole. The results
achieved to date by our relatively small restaurant base may not be indicative
of the results of a larger number of restaurants in a more geographically
dispersed area with varied demographic characteristics. We cannot assure you
that we will be able to operate our existing restaurants at higher sales levels
that generate equal or higher operating profits or increase the number or our
restaurants sufficiently to offset the impact of poor performance at any one
restaurant.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO SEASONALITY AND OTHER
FACTORS BEYOND OUR CONTROL.
Our business is subject to seasonal fluctuations, which may vary greatly
depending upon the region of the United States in which a particular restaurant
is located. In addition to seasonality, our quarterly and annual operating
results and comparable unit sales may fluctuate significantly as a result of a
variety of factors, including:
-- the amount of sales contributed by new and existing restaurants;
-- the timing of new openings;
-- increases in the cost of key food or beverage products;
-- labor costs for our personnel;
-- our ability to achieve and sustain profitability on a quarterly or
annual basis;
-- consumer confidence and changes in consumer preferences;
-- health concerns, including adverse publicity concerning food-related
illness;
-- the level of competition from existing or new competitors in the our
segment of the restaurant industry; and
-- economic conditions generally and in each of the market in which we are
located.
These fluctuations make it difficult for us to predict and address in a timely
manner factors that may have a negative impact on our results of operations.
17
WE COULD FACE LABOR SHORTAGES, INCREASED LABOR COSTS AND OTHER ADVERSE EFFECTS
OF VARYING LABOR CONDITIONS.
The development and success of our restaurants depend, in large part, on the
efforts, abilities, experience and reputations of the general managers and chefs
at such restaurants. In addition, our success depends in part upon our ability
to attract, motivate and retain a sufficient number of qualified employees,
including restaurant managers, kitchen staff and wait staff. Qualified
individuals needed to fill these positions are in short supply and the inability
to recruit and retain such individuals may delay the planned openings of new
restaurants or result in high employee turnover in existing restaurants. A
significant delay in finding qualified employees or high turnover of existing
employees could materially and adversely affect our results of operations or
business. Also, competition for qualified employees could require us to pay
higher wages to attract sufficient qualified employees, which could result in
higher, labor costs. In addition, increases in the minimum hourly wage,
employment tax rates and levies, related benefits costs including health
insurance, and similar matters over which we have no control may increase our
operating costs.
THE RESTAURANT INDUSTRY IS AFFECTED BY LITIGATION AND PUBLICITY CONCERNING FOOD
QUALITY, HEALTH AND OTHER ISSUES, WHICH CAN CAUSE GUESTS TO AVOID OUR
RESTAURANTS AND RESULT IN LIABILITIES.
Health concerns, including adverse publicity concerning food-related illness,
although not specifically related to our restaurants, could cause guests to
avoid our restaurants, which would have a negative impact on our sales. We may
also be the subject of complaints or litigation from guests alleging
food-related illness, injuries suffered on the premises or other food quality,
health or operational concerns. A lawsuit or claim could result in all adverse
decision against us that could have a material adverse effect on our business
and results of operations. We may also be subject to litigation which,
regardless of the outcome, could result in adverse publicity. Adverse publicity
resulting from such allegations may materially adversely affect us and our
restaurants, regardless of whether such allegations are true or whether we are
ultimately held liable. Such litigation, adverse publicity or damages could have
a material adverse effect on our business, competitive position and results of
operations.
18
COMPLIANCE WITH ENVIRONMENTAL LAWS MAY AFFECT OUR FINANCIAL CONDITION.
We are subject to various, federal, state and local environmental laws. These
laws govern discharges to air and water, as well as handling and disposal
practices for solid and hazardous wastes. These laws may also impose liability
for damages from and the costs of cleaning up sites of spills, disposals or
other releases of hazardous materials. We may be responsible for environmental
conditions or contamination relating to our restaurants and the land on which
our restaurants are located, regardless of whether we lease or own the
restaurant or land in question and regardless of whether such environmental
conditions were created by US or by a prior owner or tenant. The costs of any
cleanup could be significant and have a material adverse effect on our financial
position and results of operations.
WE FACE INCREASED EXPENDITURES OF TIME AND MONEY ASSOCIATED WITH COMPLIANCE WITH
CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE.
Keeping abreast of, and in compliance with, changing laws, regulations, and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations, and Nasdaq National Market
rules, has required an increased amount of management attention and external
resources. We remain committed to maintaining high standards of corporate
governance and public disclosure. As a result, we intend to invest all
reasonably necessary resources to comply with evolving standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue generating activities to
compliance activities.
RISKS RELATED TO OUR COMMON STOCK
SINCE OUR SHARES ARE THINLY TRADED AND TRADING ON THE PINK SHEETS MAY BE
SPORADIC BECAUSE IT IS NOT AN EXCHANGE, STOCKHOLDERS MAY HAVE DIFFICULTY
RESELLING THEIR SHARES.
Ours common stock is currently quoted on the Pink Sheets. The fact that our
common stock is not listed is likely to make trading its shares more difficult
for broker-dealers, shareholders and investors, potentially leading to further
declines in share price. An investor may find it more difficult to sell our
common stock or to obtain accurate quotations of the share price of its common
stock.
19
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
The market price of our common stock could fluctuate substantially due to a
variety of factors, including market perception of our ability to achieve our
planned growth, quarterly operating results of other companies, trading volume
in our common stock, dilution systemic to financing operations, changes in
general conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market price of securities issued by many companies
for reasons unrelated to their operating performance and could have the same
effect on our common stock.
In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted. Such
litigation, if initiated, could result in substantial costs, a material adverse
effect, and a diversion of management's attention and resources.
FAILURE OF OUR COMMON STOCK TO APPRECIATE IN VALUE COULD AFFECT OUR ABILITY TO
RAISE WORKING CAPITAL AND ADVERSELY IMPACT OUR ABILITY TO CONTINUE OUR NORMAL
OPERATIONS.
A prolonged period in which our common stock trades at current levels could
result in our inability to raise capital and may force us to reallocate funds
from other planned uses, which would have a significant negative effect on our
business plans and operations. If our stock price does not recover from its
current levels, there can be no assurance that we can raise additional capital
or generate funds from operations sufficient to meet our obligations. If we are
unable to raise sufficient capital in the future, we may not be able to have the
resources to continue our normal operations.
THE LARGE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AND THE
FACT THAT A RELATIVELY SMALL NUMBER OF INVESTORS HOLD OUR PUBLICLY TRADED COMMON
STOCK COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.
The market price of our common stock could fluctuate as a result of sales by our
existing stockholders of a large number of shares of our common stock in the
market or the perception that such sales could occur. A large number of shares
of our unregistered stock is eligible for public sale and our registered common
stock is concentrated in the hands of a small number of investors and is thinly
traded. An attempt to sell by a large holder could adversely affect the price of
our stock. These sales or the perception that these sales might occur could also
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate.
20
TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SECURITIES AND EXCHANGE
COMMISSION'S PENNY STOCK REGULATIONS WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO
BUY AND SELL 0UR STOCK.
The Securities and Exchange Commission has adopted regulations which generally
define "penny stock" to be any equity security that has a market price (as
defined) less than $5.00 per share or an exercise price of less than $5.00 per
share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
"accredited investors". The term "accredited investor" refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
21
NASD SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY
AND SELL OUR STOCK.
In addition to the "penny stock" roles described above, the National Association
of Securities Dealers (NASD) has adopted rules that require that in recommending
an investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules the NASD believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The NASD requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
WE DO NOT EXPECT TO DECLARE OR PAY ANY DIVIDENDS.
We have not declared or paid
any dividends on our common stock since our inception, and we do not anticipate
paying any such dividends for the foreseeable future.
ANTI-TAKEOVER PROVISIONS.
We do not currently have a shareholder rights plan
or any anti-takeover provisions in our By-laws. Without any anti-takeover
provisions, there is no deterrent for a take-over of our company, which may
result in a change in our management and directors.
OWNERSHIP OF APPROXIMATELY 47% OF OUR OUTSTANDING COMMON STOCK BY 5 STOCKHOLDERS
WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS.
A substantial majority of our capital stock is held by a limited number of
stockholders. 5 stockholders, including our officers and directors and parties
affiliated with or related to such persons or to us, own approximately 47% of
the shares of common stock outstanding. Accordingly, such stockholders will
likely have a strong influence on major decisions of corporate policy, and the
outcome of any major transaction or other matters submitted to our stockholders
or board of directors, including potential mergers or acquisitions, and
amendments to our Amended and Restated Certificate of Incorporation.
Stockholders other than these principal stockholders are therefore likely to
have little influence on decisions regarding such matters.
22
BECAUSE FRESH START REPORTING WILL MAKE FUTURE FINANCIAL STATEMENTS DIFFICULT TO
COMPARE WITH OUR HISTORICAL FINANCIAL STATEMENTS, IT MAY BE DIFFICULT FOR
INVESTORS TO MEASURE OUR FINANCIAL PERFORMANCE OR ASSESS OUR PROSPECTS FOR
GROWTH.
In accordance with the requirements of SOP 90-7, Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, we adopted fresh start reporting
effective December 31, 2004. Because SOP 90-7 required us to reset our assets
and liabilities to current fair value, our financial position, results of
operations and cash flows for periods ending after December 31, 2004 will not
be comparable to the financial position, results of operations and cash flows
reflected in our historical financial statements for periods ending on or prior
to December 31, 2004 included elsewhere in this prospectus. The use of fresh
start reporting will make it difficult to assess our future prospects based on
historical performance.
ITEM 2. PROPERTIES.
As of December 30, 2003, 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 if cash flow
permits. 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.
23
RESTAURANT LOCATIONS AS OF MARCH 30, 2004
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. All of our restaurants are located in space leased by us as set
forth below:
Year of
Approx- Expira-
imate tion of If All
Square Initial Options
Restaurant Name Location Footage Term Exercised
- --------------------------------------------------------------------------------
Carvers 8172 W. Bell Road, 8,500 2015 2025
Glendale, AZ
Mountain Jack's 1451 Opdyke Road 7,785 2020 2030
Aubur Hills, MI
Hungry Hunter 3580 Rosedale Highway 7,785 2020 2030
Bakersfield, CA
Carvers 1535 Miamisburg-Centerville 9,054 2016 2026
Centerville, OH
Cliffhouse of Folsom 9900 Greenback Lane 10,000 2014 2019
Folsom, CA
Hungry Hunter 2470 Martin Road 9,200 2011 2031
Fairfield, CA
Hungry Hunter 3201 Mt. Diablo Boulevard 6,700 2020 2030
Lafayette, CA
Mountain Jack's 4211 State Route 26E 8,122 2005 2020
Lafayette, IN
Hunter Steakhouse 2445 Hotel Circle 5,000 2031 2031
San Diego, CA
Hungry Hunter 3037 Sisk Road 6,747 2012 2022
Modesto, CA
Hunter Steakhouse 1221 Vista Way 5,500 2020 2030
Oceanside, CA
Carvers Creek 2711 Capital 9,578 2020 2030
Raleigh, NC
Carvers 1400 Eureka Road 8,008 2016 2026
Roseville, CA
Hungry Hunter 180 S. Airport Boulevard 5,820 2023 2043
South San Francisco, CA
Hungry Hunter 450 Bercut Drive 8,600 2020 2030
Sacramento, CA
Carvers 10720 S. Holiday Park Drive 8,006 2015 2025
Sandy, UT
Hungry Hunter 3785 Cleveland Avenue 8,800 2010 2020
Santa Rosa, CA
Mountain Jack's 22020 W. Eureka Road 6,700 2008 2013
Taylor, MI
Hungry Hunter 27600 Jefferson Avenue 7,737 2022 2032
Temecula, CA
Hungry Hunter 487 Moorpark Road 5,010 2008 2013
Thousand Oaks, CA
Tippecanoe Place 620 W. Washington 23,744 2020 2030
South Bend, IN
Mountain Jack's 5555 US 31 NOrth 17,000 2009 2019
Williamsburg, MI
Mountain Jack's 2360 Rochester Court 8,865 2020 2030
Troy, MI
Hungry Hunter 2046 E. Harbor Boulevard 4,290 2020 2030
Ventura, CA
Whaling Company 494 McLaws Circle 9,579 2020 2030
Williamsburg, VA
24
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.
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
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-- Proceedings Under the Bankruptcy Code.
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 Annual 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 quoted on the Pink Sheets under the symbol "SIZLQ.PK".
25
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
Year ended December 31, 2003 No Activity
SHAREHOLDERS
As of December 30, 2003 there were approximately 660 record holders of the
Company's Common Stock. Upon confirmation of the Joint Plan of Reorganization,
effective December 31, 2003, the entire balance of the DIP loan (described
above), 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 loan agreement other
than interest. The outstanding preferred stock, common stock, stock options, and
warrants of the Company before confirmation was canceled.
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.
26
RECENT SALES OF UNREGISTERED SECURITIES
The Company did not issue within the period covered by this Annual 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 30,
2003 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 30, 2003, and the Management's
Discussion and Analysis of Financial Condition and Results of Operations:
INCOME STATEMENT DATA:..... 2003 2002 2001 2000 1999
----------- ----------- ------------ ------------ -----------
Revenues................... $77,757,815 $97,102,252 $110,684,409 $123,618,199 $ 129,555,321
----------- ----------- ------------ ------------ -----------
COST OF SALES
Food and beverage........ 28,395,681 33,886,807 38,480,981 43,119,602 45,295,172
Payroll and payroll related costs 27,703,764 34,312,955 36,719,587 39,504,498 43,119,394
Direct operating costs .. 20,008,320 24,297,312 27,259,432 25,843,817 28,276,325
Reserve on impairment of
property, plant, and equipment -- -- 6,581,527 388,868 --
Depreciation and amortization 1,876,778 2,785,465 3,452,109 3,703,346 4,045,155
----------- ----------- ------------ ------------ -----------
Total cost of sales.... 77,984,543 95,282,539 112,493,636 112,560,131 120,736,046
----------- ----------- ------------ ------------ -----------
GROSS PROFIT (LOSS)........ (226,728) 1,819,713 (1,809,227) 11,058,068 8,819,275
COSTS AND EXPENSES
General and administrative
Expenses................. 4,711,199 5,104,117 8,514,500 7,561,262 8,033,124
Legal Settlement -- -- 800,000 -- --
Reserve for advances to officers -- 277,016 616,584 -- --
=========== =========== ============ ============ ===========
INCOME (LOSS) BEFORE OTHER
INCOME (EXPENSE) (4,937,927) (3,561,420) (11,740,311) 3,496,806 786,151
OTHER INCOME (EXPENSE)
Gain on sale of property, plant, -- -- -- 1,589,480 --
and equipment .........
Interest income.......... 8,830 -- -- -- 22,069
Miscellaneous income.... 179,143 392,990 259,568 260,988 --
Interest and financing costs (2,567,705) (2,327,903) (2,690,839) (3,524,994) (4,469,459)
Forgiveness of officer advances -- -- -- (442,058) --
----------- ----------- ------------ ------------ -----------
Total other (expense) (2,388,562) (1,934,913) (2,431,271) (2,116,584) (4,447,390)
----------- ----------- ------------ ------------ -----------
Income (loss) before reorganization
items, provisions for income taxes,
and discontinued operations (7,326,489) (5,496,333) (14,171,582) 1,380,222 (3,661,239)
----------- ----------- ------------ ------------ -----------
REORGANIZATION ITEMS
Gain on sale of property, plant,
and equipment ........... 3,515,564 2,048,350 -- -- --
Professional Fees (1,967,819) (1,216,883) -- -- --
Idine settlement -- ( 960,000) -- -- --
----------- ----------- ------------ ------------ -----------
Total reorganization items 1,547,745 (128,533) -- -- --
----------- ----------- ------------ ------------ -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND DISCONTINUED
OPERATIONS............ (5,778,744) (5,624,866) (14,171,582) 1,380,222 (3,661,239)
PROVISION FOR INCOME TAXES 130,000 129,758 148,341 53,419 4,816
----------- ----------- ------------ ------------ -----------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS............ (5,908,744) (5,754,624) (14,319,923) 1,326,803 (3,666,055)
INCOME (LOSS) BEFORE DISCONTINUED,
OPERATIONS NET OF
INCOME TAXES OF $850, $850 & $1,851 1,057,463 (827,935) (2,396,821) (1,948,247) (228,984)
----------- ----------- ------------ ------------ -----------
Net loss .................. $(4,851,281) $(6,582,559) $(16,716,744) $ (621,444) $ (3,895,039)
=========== =========== ============ ============ ===========
EARNINGS (LOSS) PER SHARE
BASIC
Earnings (Loss) from continuing operations $ (1.74) $ (1.70) $ (4.23) $ 0.39 $(1.31)
Earnings (Loss) from discontinued operations $0.31 $(0.24) $(0.71) $(0.58) $(0.08)
------- ------- ------- ------ -------
BASIC LOSS PER SHARE $(1.43) $(1.94) $(4.94) $(0.18) $(1.39)
DILUTED LOSS PER SHARE
Earnings (Loss) from continuing operations $ (1.74) $ (1.70) $ (4.23) $0.38 $ (1.31)
Earnings (Loss) from discontinued operations $0.31 $(0.24) $(0.71) $(0.58) $(0.08)
------- ------- ------- ------ -------
BASIC LOSS PER SHARE $(1.43) $(1.94) $(4.94) $(0.20) $(1.39)
SHARES USED TO CALCULATE LOSS PER SHARE
Basic 3,386,522 3,386,522 3,386,522 3,369,022 2,802,186
Diluted 3,386,522 3,386,522 3,386,522 3,535,570 2,802,186
=========== =========== ============ ============ ===========
BALANCE SHEET DATE: 2003 2002 2001 2000 1999
----------- ----------- ------------ ------------ -----------
TOTAL ASSETS .............. $ 17,763,206 $ 25,994,981 $ 31,000,321 $ 45,724,855 $ 57,243,510
TOTAL DEBT, EXCLUDING CAPITAL
LEASE OBLIGATIONS $ 6,478,431 $ 2,188,485 $ 5,760,306 $ 5,797,953 $ 26,115,608
Stockholders' equity (deficit) $(25,686,949) $(20,895,668) $(14,373,109) $ 2,172,237 $ 2,501,346
27
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 30, 2003 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 30, 2003 the Company operated 28 full-service steakhouse
restaurants located in eight states. The Company operates under the brand names
of Carvers, Hungry Hunter Steakhouse, Hunter Steakhouse, Mountain Jack's, and
Mountain Jack's Steakhouse. 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 first-day process and the reorganization plan. As of
December 2003, the Company had rejected or sold thirty-seven (37) units.
28
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
delay between when the expenses of the startup are incurred and when the newly
constructed steakhouses are opened and begin to generate revenues, which time
delay could affect quarter-to-quarter comparisons and results.
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 Midwest
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 Midwest 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 consisted 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.
29
As Paragon downsized and reduced the total number of restaurants serviced by
Pacific Basin Foods, the volume required to maintain its economical feasibility
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.
RESULTS OF OPERATIONS
53 Weeks Ended December 30, 2003 Compared to the 52 Weeks Ended December 24,
2002
Revenues for the fifty-three week period ended December 30, 2003 decreased
$19,344,437 or 19.9% from $97,102,252 for the year ended December 24, 2002 to
$77,757,815 for the same period in 2003. The decrease is substantially
attributable to the decrease in total operating units. Between the filing date
of bankruptcy (February, 2002) and the end of 2003, thirty-seven (37) operating
units were rejected, closed and/or sold. Partially offsetting the decrease in
revenue was the same store sales for those core units that were open at the end
of the year reflected an increase of 1.5% for the 53 weeks ended December 30,
2003 versus the same period in 2002.
Food and beverage costs for the fifty-three week period ended December 30, 2003
decreased $5,491,126 or 16.2% from $33,886,807 for the fifty-two week period
ended December 24, 2002 to $27,395,681 for the same period in 2003. Food and
beverage costs as a percentage of restaurant revenues were 36.5% for the
fifty-three week period ended December 30, 2003 compared to 34.9% for the same
period in 2002. The major reason for this increase was the record high beef
prices that affected the Company throughout the year but had its biggest impact
in the fourth quarter. The extremely high beef prices cost the Company over $1.2
million in 2003 versus the same period in 2002.
Payroll and payroll related costs for the fifty-three week period ended December
30, 2003 decreased $6,609,191 or 19.3% from $34,312,955 for the fifty-two week
period ended December 24, 2002 to $27,703,764 for the same period in 2003. The
total payroll and payroll related costs as a percentage of revenues were 35.6%
for the fifty-three week period ended December 30, 2003 compared to 35.3% for
the same period in 2002. The chief reason for this increase as a percentage
relationship to revenue 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 private insurance companies.
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-three week period ended December 30, 2003 decreased
$4,288,992 or 17.6% from $24,297,312 for the fifty-two week period ended
December 24, 2002 to $20,008,320 for the same period in 2003. However, these
costs as a percentage of restaurant revenues were 25.7% for the fifty-three week
period ended December 30, 2003 compared to 25.0% for the same period in 2002.
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 were almost 30.0% higher than the normal premiums.
Depreciation and amortization for the fifty-three week period ended December 30,
2003 decreased $908,687 or 32.6% from $2,785,465 for the fifty-two week period
ended December 24, 2002 to $1,876,778 for the same period in 2003. The main
reason for this decrease is between the filing date of bankruptcy and the end of
2003, thirty-seven (37) operating units were rejected, closed and/or sold.
30
General and administrative expenses for the fifty-three week period ended
December 30, 2003 decreased $392,918 or 4.7% from $5,104,117 for the fifty-two
week period ended December 24, 2002 to $4,711,199 for the same period in 2003.
General and Administrative expenses as a percentage of restaurant revenues was
6.1% for the fifty-three week period ended December 30, 2002 compared to 5.3%
for the same period in 2002. Even though in absolute dollars the Company
continues to reduce its administrative expenses, the chief reason for the
increase as a percentage relationship to revenue is that the fixed or indirectly
variable nature of general and administrative costs does not allow for a
proportionate decrease in expenses versus revenue. Further reviews of these
expense categories have begun as the Company has emerged from bankruptcy.
However with on going resolutions of bankruptcy related issues, a certain
additional level of administration is required for the near term.
Total other income and interest expense, net for the fifty-three week period
ended December 30, 2003 increased $453,649 or 23.4% from $1,934,913 for the
fifty-two week period ended December 24, 2002 to $2,388,562 for the same period
in 2003. The increase is principally due to the full year of interest charges
associated with the I-Dine Settlement, which was signed in July, 2002 and other
related bankruptcy activity.
Total reorganization items, net for the fifty-three week period ended December
30, 2003 was a gain of $1,547,745. This improvement was the result from gains
associated with the rejection and or sale of 22 units that totaled $3,515,564.
The gain was partially offset by the continued high Legal and Professional fees
specifically associated with the bankruptcy ($1,967,819).
Gain from discontinued operations for the fifty-three week period ended December
30, 2003 was $1,057,463. On October 11, 2002 Pacific Basin Foods ceased
operations and filed for Chapter 7 with the United States Bankruptcy Court in
Riverside, California. The Company had a net liability of $1,057,463 as of
December 24, 2002. As Pacific Basin Foods has legally and practically ceased
operations the net liability was recognized as one time income of discontinued
operations, net of taxes.
Net loss for the fifty-three week period ended December 30, 2003 decreased
$1,731,278 from $6,582,559 for the fifty-two week ended December 24, 2002 to
$4,851,281 for the same period in 2003. The decrease is principally due to the
net liability of Pacific Basin Foods being recognized as one time income of
discontinued operations, net of taxes ($1,057,463), as well as the net gain in
total reorganization items of $1,547,745.
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.
31
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.
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.
32
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
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 for the restaurants only 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.
33
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.
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).
34
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 $2,205,221 at December
30, 2003. During the year 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. In
addition, as described above, the Company was in default with secured financings
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. The
reorganization plan was contingent on the sale of selected assets and the
Company may need additional sources of financing. 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 and on December
19, 2003, the Company's Plan of Reorganization was confirmed by the Court. Upon
confirmation of the 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 in existence before the effective date were canceled.
The Company's financial affairs were completely restructured under circumstances
whereby Steakhouse Investors exchanged 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 were
completely restructured in accordance with the Plan.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market Risk. The Company's exposure to market risk is principally confined to
cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.
Interest Rate Sensitivity. As of December 30, 2003, 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.
35
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
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.
36
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.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
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 ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9a. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
required to be filed under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's President, who serves as the Company's principal executive officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
PART III.
ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANT
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.
CODE OF ETHICS
We have adopted a written Code of Ethics (the "Code of Ethics") that applies to
our principal executive officer and Chief Financial Officer, a copy of which is
attached as an exhibit to this Annual Report on Form 10-K. We maintian a copy on
our website; www.paragonsteaks.com and, printed copies of the Code of Ethics are
available to any shareholder that requests a copy. Any amendment to the Code of
Ethics or any waiver of the Code of Ethics will be disclosed on a current report
on Form 8-K promptly following the date of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 will be in the Company's definitive
proxy materials to be filed with the Securities and Exchange Commission and is
incorporated in this Annual Report on Form 10-K by this reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item 14 will be in our 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.
38
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
EXHIBITS
The following exhibits are filed as part of this Annual Report:
Exhibit
Number Description
- --------- -----------
3.1* Restated Certificate of Incorporation of the Company.
3.2* Certificate of Correction to Restated Certificate of Incorporation of
the Company.
3.3* Certificate of Amendment to Restated Certificate of Incorporation of
the Company.
3.4* By-Laws of the Company.
3.5* Certificate of Amendment to Restated Certificate of Incorporation of
the Company.
3.6* Certificate of Amendment to Restated Certificate of Incorporation of
the Company.
10.1* Galveston Steakhouse Corp. Omnibus Stock Plan.
10.2* Richard M. Lee Stock Option Agreement.
10.3* Hiram J. Woo Stock Option Agreement.
10.4** Merger Agreement dated August 31, 1998 by and among the Company,
Tri-Core Steakhouse, Inc., Paragon Steakhouse Restaurants, Inc. and
Kyotaru Co. Ltd.
10.5*** First Amendment to Merger Agreement dated August 31, 1998, by and
among the Company and Tri-Core Steakhouse, Inc., on the one hand, and
Paragon Steakhouse Restaurants, Inc. and Kyotaru Co., Ltd., on the
other hand.
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.
39
10.11**** Form of Note Purchase Agreement by and between the Company and
Talisman Capital Opportunity Fund Ltd.
10.12**** Form of Secured Exchangeable Note issued to Talisman Capital
Opportunity Fund Ltd.
10.13**** Form of Warrant issued to Talisman Capital Opportunity Fund Ltd.
10.14**** Form of Collateral, Pledge and Security Agreement by and between the
Company and Talisman Capital Opportunity Fund Ltd.
10.15**** Loan and Security Agreement dated December 21, 1998 by and between
Pacific Basin Foods, Inc. and The CIT Group/Credit Finance, Inc.
10.16**** Security Agreement dated December 21, 1998 by and between the Company
and The CIT Group/Credit Finance, Inc.
10.17**** Secured Continuing Guaranty dated December 21, 1998 executed by the
Company.
10.18**** Security Agreement (Intellectual Property) dated December 21, 1998 by
and between the Company and The CIT Group/Credit Finance, Inc.
10.19**** Grant of Security Interest (Trademarks) dated December 21, 1998
executed by the Company.
10.20***** Purchase and Sale Agreement between Paragon Steakhouse Restaurants,
Inc. and HS Realty Partners, LP
14.7****** Code of Ethics
21.1****** List of Subsidiaries of Steakhouse Partners, Inc.
31.1****** Certifcation of principal executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2****** Certifcation of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1****** Certifcation of principal executive officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2****** Certifcation of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* 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
40
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 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.
41
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 __, 2004
STEAKHOUSE PARTNERS, INC. STEAKHOUSE PARTNERS, INC.
/s/ /s/
------------------------ ---------------------------
A. STONE DOUGLASS JOSEPH L WULKOWICZ
President, Secretary, Director Chief Financial Officer,
(Serving as principal executive officer) Assistant Secretary
(Serving as 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 __, 2004
- ----------------------
Name A. STONE DOUGLASS
Title: President, Secretary and Director
(Principal Financial and Accounting Officer)
/s/ TOM EDLER April __, 2004
- ----------------------
Name: Tom Edler
Title: Co-Chairman of the Board of Directors
/s/ TOD LINDNER April __, 2004
- ----------------------
Name: Tod Lindner
Title: Co-Chairman of the Board of Directors
- ----------------------
42
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
REORGANIZED COMPANY
FOR THE YEAR ENDED DECEMBER 31, 2003 AND
PREDECESSOR COMPANY
(DEBTOR-IN-POSSESSION)
FOR THE YEARS ENDED DECEMBER 30, 2003, 2002, AND 2001
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITOR'S REPORT 1 - 2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets for Reorganized Company as of
December 31, 2003 and Predecessor Company (Debtor-in-
Possession) as of December 30, 2003 and 2002 3 - 6
Consolidated Statements of Operations for Reorganized Company
for the Year Ended December 31, 2003 and Predecessor
Company (Debtor-in-Possession) for the Years Ended December
30, 2003, 2002, and 2001 7 - 9
Consolidated Statements of Stockholders' Deficit for Reorganized
Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession) for the Years
Ended December 30, 2003, 2002, and 2001 10
Consolidated Statements of Cash Flows for Reorganized Company
for the Year Ended December 31, 2003 and Predecessor
Company (Debtor-in-Possession) for the Years Ended December
30, 2003, 2002, and 2001 11 - 15
Notes to Consolidated Financial Statements 16 - 61
SUPPLEMENTAL INFORMATION
Independent Auditor's Report on Financial Statement Schedule 62
Valuation and Qualifying Accounts - Schedule II 63
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Steakhouse
Partners, Inc. (a Delaware corporation) and subsidiaries (collectively, the
"Company") as of December 31, 2003 (Reorganized Company) and December 30, 2003
and December 31, 2002 (Predecessor Company, Debtor-in-Possession), and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the three years in the period ended December 30, 2003 (Predecessor
Company, Debtor-in-Possession). 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 as of December 31, 2003 (Reorganized Company) and December
30, 2003 and 2002 (Predecessor Company, Debtor-in-Possession), and the results
of their operations and their cash flows for each of the three years in the
period ended December 30, 2003 (Predecessor Company, Debtor-in-Possession) 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 years ended
December 31, 2003 (Reorganized Company) and December 30, 2003 (Predecessor
Company, Debtor-in-Possession), the Company maintained a current ratio of
0.31-to-1 and 0.25-to-1, respectively. In addition, during the years ended
December 31, 2003 (Reorganized Company) and December 31, 2002 (Predecessor
Company, Debtor-in-Possession), the Company had a working capital deficit of
approximately $9,000,000 and $12,400,000, respectively. 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-1
To the Board of Directors and Stockholders
Steakhouse Partners, Inc. and subsidiaries
Page 2
As discussed in Note 2 to the consolidated financial statements, on December 19,
2003, the United States Bankruptcy Court confirmed the Company's Plan of
Reorganization, which became effective December 31, 2003. Accordingly, the
accompanying financial statements have been prepared in conformity with the
American Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting for Entities in Reorganization." Under the Bankruptcy Code,
the Reorganized Company is reported as new entity with assets and liabilities
and a capital structure having carrying values not comparable with prior periods
(see Note 2).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 16, 2004
F-2
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
REORGANIZED COMPANY AS OF DECEMBER 31, 2003 AND
PREDECESSOR COMPANY (DEBTOR-IN-POSSESSION)
AS OF DECEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------
ASSETS
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, -----------------------------
2003 2003 2002
------------- ----------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 2,205,221 $ 2,205,221 $ 2,750,673
Accounts receivable, net of allowance for
doubtful accounts of $133,234 and
$383,374 67,909 67,909 829,909
Inventories, net of allowance for obsolete
inventories of $45,805 and $45,805 1,298,203 1,298,203 1,931,383
Prepaid expenses and other current
assets 497,416 497,416 847,727
------------- ----------- ------------
Total current assets 4,068,749 4,068,749 6,359,692
PROPERTY, PLANT, AND EQUIPMENT, net 12,582,374 13,110,554 18,313,773
LIQUOR LICENSES 688,000 - -
DEPOSITS AND OTHER ASSETS 103,407 103,407 199,441
CASH - RESTRICTED UNDER COLLATERAL
AGREEMENTS - 480,496 1,122,075
GOODWILL 18,881,786 - -
------------- ----------- ------------
TOTAL ASSETS $36,324,316 $17,763,206 $25,994,981
============= =========== ============
The accompanying notes are an integral part of these financial statements.
F-3
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
REORGANIZED COMPANY AS OF DECEMBER 31, 2003 AND
PREDECESSOR COMPANY (DEBTOR-IN-POSSESSION)
AS OF DECEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, ----------------------------
2003 2003 2002
------------- ----------- -----------
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities
Current portion of long term debt $ 2,058,222 $ 5,137,118 $ 72,842
Current portion of capital lease 258,918 - -
Accounts payable 4,572,589 3,144,654 2,654,497
Accrued expenses 189,691 1,596,858 746,075
Unearned revenue 3,932,122 3,932,122 4,385,940
Reserve for self insurance claims 72,716 578,904 403,780
Sales and property taxes payable 585,299 585,299 979,817
Accrued payroll costs 1,473,853 1,473,853 2,521,852
------------ ----------- -----------
Total current liabilities 13,143,410 16,448,808 11,764,803
Long term debt, net of current portion 7,906,213 1,341,313 2,115,643
Long term capital lease 9,605,956 - -
Deferred rent 113,182
Deferred tax liability - 119,411 119,411
Net liabilities of Pacific Basin Foods Inc.,
in liquidation - - 1,057,463
------------ ----------- -----------
Total liabilities not subject to
compromise 30,768,761 17,909,532 15,057,320
------------ ----------- -----------
LIABILITIES SUBJECT TO COMPROMISE - 25,540,623 31,833,329
------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES
The accompanying notes are an integral part of these financial statements.
F-4
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
REORGANIZED COMPANY AS OF DECEMBER 31, 2003 AND
PREDECESSOR COMPANY (DEBTOR-IN-POSSESSION)
AS OF DECEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT (CONTINUED)
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, ----------------------------
2003 2003 2002
------------- ----------- -----------
STOCKHOLDERS' DEFICIT
Predecessor Company preferred stock,
$0.001 par value
2,250,000 shares authorized
0 and 0 shares issued and
outstanding $ - $ -
Predecessor Company 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
Predecessor Company 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
Predecessor Company 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
The accompanying notes are an integral part of these financial statements.
F-5
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
REORGANIZED COMPANY AS OF DECEMBER 31, 2003 AND
PREDECESSOR COMPANY (DEBTOR-IN-POSSESSION)
AS OF DECEMBER 30, 2003 AND 2002
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT (CONTINUED)
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, ----------------------------
2003 2003 2002
------------- ----------- -----------
STOCKHOLDERS' DEFICIT (CONTINUED)
Reorganized Company preferred stock
$0.001 par value
5,000,000 shares authorized
0 and 0 shares issued and
outstanding $ - $ -
Reorganized Company common stock,
$0.001 par value
15,000,000 shares authorized
4,500,000 and 4,500,000 shares
issued and outstanding $ 4,500 - -
Committed stock 555,555 - -
Predecessor Company treasury stock,
28,845 and 28,845 shares, at cost - (175,000) (175,000)
Predecessor Company additional paid-in
capital - 12,100,750 12,040,750
Reorganized Company additional paid-in
capital 4,995,500 - -
Accumulated deficit - (37,649,314) (32,798,033)
------------ ----------- -----------
Total stockholders' deficit 5,555,555 (25,686,949) (20,895,668)
------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $36,324,316 $17,763,206 $25,994,981
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
for the Years Ended December 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Predecessor Company
December 30,
----------------------------------------------
2003 2002 2001
-------------- -------------- -------------
Revenues, net $ 77,757,815 $ 97,102,252 $ 110,684,409
------------ ------------ -------------
Cost of sales
Food and beverage 28,395,681 33,886,807 38,480,981
Payroll and payroll related costs 27,703,764 34,312,955 36,719,587
Direct operating costs 20,008,320 24,297,312 27,259,432
Impairment of property, plant,
and equipment - - 6,581,527
Depreciation and amortization 1,876,778 2,785,465 3,452,109
------------ ------------ -------------
Total cost of sales 77,984,543 95,282,539 112,493,636
Gross profit (loss) (226,728) 1,819,713 (1,809,227)
General and administrative
expenses 4,711,199 5,104,117 8,514,500
Legal settlement - - 800,000
Reserve for advances to
officers - 277,016 616,584
------------ ------------ -------------
Loss before other income
(expense) (4,937,927) (3,561,420) (11,740,311)
------------ ------------ -------------
Other income (expense)
Miscellaneous income 179,143 392,990 259,568
Interest and financing costs (2,567,705) (2,327,903) (2,690,839)
------------ ------------ -------------
Total other income (expense) (2,388,562) (1,934,913) (2,431,271)
------------ ------------ -------------
Loss before reorganization
items, provision for income
taxes, and discontinued
operations (7,326,489) (5,496,333) (14,171,582)
------------ ------------ -------------
The accompanying notes are an integral part of these financial statements.
F-7
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
for the Years Ended December 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Predecessor Company
December 30,
----------------------------------------------
2003 2002 2001
-------------- -------------- -------------
Reorganization items
Gain on rejection and sale of
property, plant, and
equipment, net $ 3,515,564 $ 2,048,350 $ -
IDine settlement - (960,000) -
Professional fees (1,967,819) (1,216,883) -
------------ ------------ -------------
Total reorganization items 1,547,745 (128,533) -
------------ ------------ -------------
Loss before provision for
income taxes and
discontinued operations (5,778,744) (5,624,866) (14,171,582)
Provision for income taxes 130,000 129,758 148,341
------------ ------------ -------------
Income (loss) before
discontinued operations (5,908,744) (5,754,624) (14,319,923)
Income (loss) from discontinued
operations, net of income taxes of
$850, $850, and $1,851 1,057,463 (827,935) (2,396,821)
------------ ------------ -------------
Net loss $ (4,851,281) $ (6,582,559) $ (16,716,744)
============ ============ =============
Earnings (loss) per share
Basic
Loss from continuing
operations $ (1.74) $ (1.70) $ (4.23)
Earnings (loss) from
discontinued operations 0.31 (0.24) (0.71)
------------ ------------ -------------
Basic loss per share $ (1.43) $ (1.94) $ (4.94)
============ ============ =============
Diluted
Loss from continuing
operations (1.74) (1.70) (4.23)
Earnings (loss) from
discontinued operations 0.31 (0.24) (0.71)
------------ ------------ -------------
Diluted loss per share $ (1.43) $ (1.94) $ (4.94)
============ ============ =============
The accompanying notes are an integral part of these financial statements.
F-8
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
for the Years Ended December 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Predecessor Company
December 30,
----------------------------------------------
2003 2002 2001
-------------- -------------- -------------
Shares used to calculate
loss per share
Basic 3,386,522 3,386,522 3,386,522
------------ ------------ -------------
Diluted 3,386,522 3,386,522 3,386,522
============ ============ =============
The accompanying notes are an integral part of these financial statements.
F-9
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
- --------------------------------------------------------------------------------
Preferred Stock
--------------------------------------------------------
Series B, Convertible Series C, Convertible Common Stock
---------------------------- -------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------- ------------- ----------- ------------- ----------- -----------
Predecessor Company
Balance, December
30, 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
30, 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
30, 2002 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
30, 2003 1,000,000 $ 1,000 1,750,000 $ 1,750 3,386,522 $ 33,865
=========== =========== =========== =========== =========== ===========
Additional
Treasury Paid-In Accumulated
Stock Capital Deficit Total
----------- ----------- ----------- -----------
Predecessor Company
Balance, December
30, 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
30, 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
30, 2002 (175,000) 12,040,750 (32,798,033) (20,895,668)
Issuance of warrants
in lieu of interest 60,000 60,000
Net loss (4,851,281) (4,851,281)
----------- ----------- ----------- -----------
Balance, December
30, 2003 $(175,000) $12,100,750 $ (37,649,314) $ (25,686,949)
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-10
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
for the Years Ended December 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Predecessor Company
December 30,
--------------------------------------------
2003 2002 2001
------------- -------------- -------------
Cash flows from operating activities
Net income (loss) from continuing operations $ (5,908,744) $ (5,754,624) $ (14,319,923)
Net income (loss) from discontinued operations 1,057,463 (827,935) (2,396,821)
Adjustments to reconcile net loss from
continuing operations to net cash
provided by (used in) operating activities
Non-cash reorganization items - - -
Depreciation and amortization 1,876,778 2,785,465 3,452,109
Bad debt expense - 68,896 93,357
Gain on disposal of rejected leases (1,115,544) (1,276,496) -
Loss on IDine settlement - 960,000 -
Gain on sale of property, plant, and
equipment through bankruptcy (2,400,020) (771,854) -
Reduction of self insurance reserve - - (248,966)
Reserve for uncollectable deposits and
other assets 303,075 - -
Net liabilities of discontinued operations
forgiven in Chapter 7 liquidation (1,057,463) - -
Impairment of property, plant, and
equipment - - 6,581,527
Impairment of intangible assets 170,715
Issuance of warrants for services
rendered - - 111,398
Issuance of warrants in lieu of
interest 60,000 60,000 60,000
Reserve for advances to officers - 277,016 616,584
Default on loan for services rendered - - 413,409
Reduction of accounts payable
in connection with the settlement
of a lawsuit - - (285,579)
(Increase) decrease in
Accounts receivable 762,000 (23,393) (415,543)
Inventories 427,574 337,038 (163,064)
Prepaid expenses and other
current assets 571,534 684,440 663,038
Deposits and other assets 21,364 178,291 542,427
Increase (decrease) in
Accounts payable 274,984 3,433,888 2,224,851
Accrued expenses 850,783 357,620 820,289
Unearned revenue (453,818) (261,182) 346,060
Reserve for self insurance claims 175,124 295,742 (116,994)
Sales and property taxes payable (394,518) 138,800 (415,180)
Accrued payroll costs (1,047,999) (541,508) 665,160
The accompanying notes are an integral part of these financial statements.
F-11
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
for the Years Ended December 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Predecessor Company
December 30,
--------------------------------------------
2003 2002 2001
------------- -------------- -------------
Deferred gain on sale-leaseback $ - $ (30,365) $ 903,172
Deferred rent - 226,791 24,781
------------ ------------ -----------
Net cash provided by (used in) continuing
operating activities (5,997,427) 316,630 (673,193)
------------ ------------ -----------
Net cash provided by discontinued operating
activities - 742,063 1,046,577
------------ ------------ -----------
Cash flows from investing activities
Purchases of property, plant, and equipment (189,123) (273,791) (622,431)
Proceeds from the sale of property,
plant, and equipment 1,827,141 1,083,014 -
Change in restricted cash 41,579 366,114 (322,443)
------------ ------------ -----------
Net cash provided by (used in) continuing
investing activities 1,679,597 1,175,337 (944,874)
------------ ------------ -----------
Net cash used in discontinued investing
activities - - (8,309)
------------ ------------ -----------
Cash flows from financing activities
Proceeds from issuance of debt 5,000,000 80,000 -
Principal payments on debt and
capital leases (1,227,622) (671,246) (1,272,121)
------------ ------------ -----------
Net cash used in continuing financing activities 3,772,378 (591,246) (1,272,121)
------------ ------------ -----------
Net cash used in discontinued financing
activities - - (22,451)
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents (545,452) 1,642,784 (1,874,371)
Cash and cash equivalents, beginning
of year 2,750,673 1,107,889 2,982,260
------------ ------------ -----------
Cash and cash equivalents, end of year $ 2,205,221 $ 2,750,673 $ 1,107,889
============ ============ ===========
F-12
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
for the Years Ended December 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Predecessor Company
December 30,
--------------------------------------------
2003 2002 2001
------------- -------------- -------------
Supplemental disclosures of cash
flow information
Interest paid $ 1,668,361 $ 1,716,447 $ 3,131,129
------------ ------------ -----------
Income taxes paid $ - $ 90,509 $ 117,904
============ ============ ===========
Supplemental disclosures of cash
flow information for reorganization
expenses paid in connection with the
Chapter 11 proceedings
Professional fees paid for services $ 1,967,819 $ 1,216,883 $ -
============ ============ ===========
F-13
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
REORGANIZED COMPANY FOR THE YEAR ENDED DECEMBER 31, 2003 AND
PREDECESSOR COMPANY (DEBTOR-IN-POSSESSION)
FOR THE YEARS ENDED DECEMBER 30, 2003, 2002, AND 2001
- --------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES During the
year ended December 31, 2003, the Company completed the following:
o rejected six restaurant leases including rejection of several capital
leases and recorded a non-cash gain of $1,115,544.
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, 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.
F-14
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
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 owned Pacific Basin Foods, Inc. ("PBF"), a company which was
engaged in purchasing and selling food and other restaurant supplies to
PSR and nonaffiliated companies. As discussed in Note 3, on October 11,
2002 PBF filed for protection under Chapter 7 of the United States
Bankruptcy Court. PBF ceased operations effective as of the Filing
Date.
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 was unable to pay (see Notes
9 and 11).
F-15
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Plan Investors
On August 13, 2003, the Predecessor Company obtained and received Court
approval for a $5,000,000 senior secured convertible
debtor-in-possession financing facility (the "DIP Credit Facility")
from Steakhouse Investors, LLC ("Steakhouse Investors") for payment of
permitted pre-petition claims, working capital needs, letter of credit
and other general corporate purposes. The DIP Credit Facility required
that the Predecessor Company maintain certain financial covenants. In
addition, under the agreement, the Predecessor Company was required to
accrue interest at a rate of 6% per annum, which was capitalized on
each payment date and added to the outstanding principal until
confirmation. Upon confirmation of the plan, 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 Predecessor
Company's obligations under the DIP Credit Facility agreement other
than interest.
Confirmation of Plan of Reorganization
The Company commenced a balloting and solicitation process with respect
to the "Plan of Reorganization" (as hereinafter defined), which
concluded December 3, 2003.
On December 31, 2003 ("Effective Date") the Predecessor Company emerged
from reorganization proceedings ("Reorganized Company") under Chapter
11 of the federal bankruptcy laws pursuant to the terms of the Plan of
Reorganization.
Upon confirmation of the Plan of Reorganization on the Effective Date,
the entire balance of the DIP facility, including accrued interest,
became due and payable to Steakhouse Investors. Accordingly, Steakhouse
Investors received, 4.5 million or 90% of the new common stock of the
Reorganized Company in exchange for a full and complete release of the
Predecessor Company's obligations under the DIP Credit Facility
agreement other than interest. The outstanding preferred stock, common
stock, stock options, and warrants of the Predecessor Company before
confirmation were all canceled.
Discharge of Liabilities
On the Effective Date, all then-outstanding equity securities of the
Predecessor Company, as well as substantial amounts of its pre-petition
liabilities, were cancelled. The new authorized securities of the
Reorganized Company on the Effective Date pursuant to the Plan of
Reorganization, consisted of 15,000,000 shares of new common stock and
5,000,000 shares of new preferred stock. All of the shares of the new
common stock issued on the Effective Date were or will be distributed
pursuant to the Plan of Reorganization in satisfaction of pre-petition
claims, except for 4.5 million shares issued to Steakhouse Partners in
exchange for $5,000,000 DIP Credit Facility.
F-16
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Discharge of Liabilities (Continued)
All such shares were issued without registration under the Securities
Act of 1933 in reliance on the provision of Section 1145 of the
Bankruptcy Code and Section 4(2) of the Securities Act of 1933. In
addition, as part of the Plan of Reorganization an independent creditor
litigation trust ("Creditor Trust") was established for the benefit of
the Predecessor Company's pre-petition creditors.
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 $1,921,004 will
paid over a four-year period from the Effective Date with
interest payable at 6% per annum.
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. On December 31,
2003, the Effective Date, the Company emerged from bankruptcy.
All of the assets and lease rights of the Torrance, CA restaurant
were transferred in satisfaction of such secured claim.
3. Unsecured claims in the amount of approximately $8,700,000 to
$12,700,000 will be paid as follows: (a) general unsecured claims
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.
F-17
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
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.
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.
Upon emergence from bankruptcy, Steakhouse Partners implemented
fresh-start accounting under the provisions of SOP 90-7. Under SOP
90-7, the reorganization fair value of Steakhouse Partners 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.
Fresh-Start Accounting
The Reorganized Company adopted the provisions of fresh-start
accounting as of December 31, 2003. 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. As the
Predecessor Company's emergence from bankruptcy was December 31, 2003,
and the end of the Predecessor Company's fiscal year was December 30,
2003, there are no operations in the Reorganized Company presented as
of December 31, 2003.
F-18
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Fresh-Start Accounting (Continued)
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
$18,881,786 as of December 31, 2003.
The following table reflects the reorganization adjustments to the
consolidated balance sheet as of December 31, 2003:
Predecessor Reorganized
Company Company
December 30, Reorgan- Fresh Start December 31,
2003 ization Accounting (f) 2003
------------- ---------- ------------- ------------
ASSETS
Current assets
Cash and cash
equivalents $ 2,205,221 $ - $ - $2,205,221
Accounts receivable,
net 67,909 - - 67,909
Inventories, net 1,298,203 - - 1,298,203
Prepaid expenses and
other current assets 497,416 - - 497,416
------------- ------------ ------------- -------------
Total current assets 4,068,749 - - 4,068,749
------------- ------------ ------------- -------------
F-19
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Fresh-Start Accounting (Continued)
Predecessor Reorganized
Company Company
December 30, Reorgan- Fresh Start December 31,
2003 ization Accounting (f) 2003
------------- ---------- ------------- ------------
Property, plant, and
equipment
Building $ 2,020,748 $ - $ (2,020,748) $ -
Machinery and
equipment 2,121,433 - 596,067 2,717,500
Leasehold
improvement 688,351 - (688,351) -
Capital leases 13,682,442 - (3,817,568) 9,864,874
Smallwares 949,999 - (949,999) -
------------- ------------- --------------- --------------
19,462,973 - (6,880,599) 12,582,374
Less accumulated
depreciation and
amortization 6,352,419 - (6,352,419) -
------------- ------------- --------------- --------------
13,110,554 - (528,180) 16,651,123
------------- ------------- --------------- --------------
Other assets
Liquor license - - 688,000 688,000
Deposits and other
assets 103,407 - - 103,407
Cash - restricted
under collateral
agreements 480,496 (480,496) (d) - -
Goodwill - - 18,881,786 18,881,786
------------- ------------- --------------- --------------
TOTAL ASSETS $ 17,763,206 $ 480,496 $ 19,041,606 $ 36,324,316
============= ============= ================ ==============
F-20
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Predecessor Reorganized
Company Company
December 30, Reorgan- Fresh Start December 31,
2003 ization Accounting (f) 2003
------------- ---------- ------------- ------------
LIABILITIES NOT SUBJECT TO
COMPROMISE
Current liabilities
Current portion of long-
term debt $ 5,137,118 $ (5,000,000) (b) $ - $ 2,058,222
(137,118) (a)
2,058,222 (a)
Current portion of
capital lease - 258,918 (c) - 258,918
Accounts payable 3,144,654 1,427,935 (a) 4,572,589
Accrued expenses 1,596,858 (1,407,167) (d) - 189,691
Unearned revenue 3,932,122 - - 3,932,122
Reserve for self
insurance claims 578,904 (578,904) (d) 72,716
72,716 (a)
Sales and property taxes
payable 585,299 - - 585,299
Accrued payroll costs 1,473,853 - - 1,473,853
------------- ------------- --------------- --------------
Total current liabilities 16,448,808 (3,305,398) 13,143,410
Long term debt, net of
current portion 1,341,313 (1,341,313) (a) - 7,906,213
7,906,213 (a)
Long term capital lease,
net of current portion - 9,605,956 (c) - 9,605,956
Deferred rent 113,182 (e) - 113,182
Deferred tax liability 119,411 (119,411) (d) - -
------------- ------------- --------------- --------------
Total liabilities not subject to
compromise 17,909,532 16,164,627 - 30,768,761
------------- ------------- --------------- --------------
Liabilities subject to
compromise 25,540,623 (25,540,623)(a)(c) - -
------------- ------------- --------------- --------------
F-21
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Fresh-Start Accounting (Continued)
Predecessor Reorganized
Company Company
December 30, Reorgan- Fresh Start December 31,
2003 ization Accounting (f) 2003
------------- ---------- ------------- ------------
STOCKHOLDERS' DEFICIT
Predecessor Company
preferred stock,
Series B $ 1,000 $ - $ (1,000) $ -
Predecessor Company
preferred stock,
Series C 1,750 - (1,750) -
Predecessor Company
common stock 33,865 - (33,865) -
Reorganized Company
common stock - 4,500 (b) - 4,500
Reorganized Company
committed stock - 555,555 (a) - 555,555
Predecessor Company
treasury stock (175,000) - 175,000 -
Predecessor Company
additional paid-in
capital 12,100,750 4,995,500 (b) (12,100,750) 4,995,500
Reorganized Company
additional paid-in
capital - - - -
Accumulated deficit (37,649,314) (6,645,343) (a) (31,003,971) -
------------- ------------- --------------- --------------
Total stockholders' deficit (25,686,949) 12,200,898 19,041,606 5,555,555
------------- ------------- --------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 17,763,206 $ 480,496 $ 19,041,606 $ 36,324,316
============= ============= =============== ==============
F-22
NOTE 2 - BANKRUPTCY FILINGS (CONTINUED)
Fresh-Start Accounting (Continued)
(a) To record the discharge of pre-petition liabilities in the amount
of $25.5 million the restructured pre-petition liabilities
converted into notes payable in the amount of $9.9 million, in
accordance with the Plan of Reorganization.
(b) To record the conversion of DIP Financing in the amount
$5,000,000 to 4,500,000 shares of common stock upon emergence
from bankruptcy, in accordance with the Plan of Reorganization.
(c) To reclassify the capital lease obligations of the retained
restaurants upon emergence from bankruptcy in the amount of $9.9
million.
(d) To record discharge of post-petition accrued liabilities which
were restructured in accordance with the Plan of Reorganization
in the amount of $1.9 million and to write-off cash-restricted
under collateral agreements as collectability is in doubt.
(e) To straight-line rent of the retained restaurants.
(f) To adjust the carrying value of assets, liabilities, and
stockholders' equity to fair value, in accordance with
fresh-start accounting.
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
fiscal year ended 2003, the Predecessor Company settled this claim for
approximately $134,000 which was classified as an unsecured claim.
NOTE 3 - DISCONTINUED OPERATIONS
On October 11, 2002 (the "Filing Date"), the Predecessor Company's
wholly owned subsidiary, PBF, filed for protection under Chapter 7 of
the United States Bankruptcy Court ("Bankruptcy Court") in the Central
District of California, located in Riverside. The subsidiary ceased
operations effective as of the Filing Date. In February 2003, the
Bankruptcy Court approved the Chapter 7 Liquidation for PBF.
The results of operations of PBF have been classified as discontinued
operations in the accompanying consolidated statements of operations
for the fiscal years ended 2003 and 2002. The assets and liabilities of
the discontinued operations at fiscal year ended 2002 consisted of the
following:
F-23
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
Accounts receivable $ 57,989
Inventories 30,574
Prepaid expenses and other assets 43,562
Property, plant, and equipment, net 53,866
Other assets 114,366
--------------
Total assets of discontinued operations 300,357
--------------
Accounts payable 1,134,030
Accrued expenses 149,128
Capital lease obligations 74,662
--------------
Total liabilities of discontinued operations 1,357,820
--------------
NET LIABILITIES OF PBF IN LIQUIDATION $ (1,057,463)
==============
During February 2003, the Predecessor Company finalized the liquidation
of PBF. In connection with final liquidation the Company recorded a
gain in the amount of $1,057,463 during the year ended December 30,
2003, as the liabilities exceeded the assets.
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 years ended December
31, 2003 (Reorganized Company) and December 30, 2003 (Predecessor
Company, Debtor-in-Possession), the Company maintained a current ratio
of 0.31-to-1 and 0.25-to-1, respectively. In addition, during the years
ended December 31, 2003 (Reorganized Company) and December 30, 2003
(Predecessor Company, Debtor-in-Possession), the Company had a working
capital deficit of approximately $9,000,000 and $12,400,000,
respectively. 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.
F-24
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 4 - GOING CONCERN (CONTINUED)
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.
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,
2004.
Management's plans include the following:
1. Improving the Company's financial performance through
cost-reduction and restructuring of administrative overhead.
2. Raising money through placements of its equity securities or
obtaining a line of credit.
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of
Steakhouse Partners, Inc. and its subsidiary's, 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 Thursday closest to December 31. For financial statement
purposes, the Company reports all years as ending December 31 or (the
"fiscal year end"). As a result of the Company's emergence from
bankruptcy on December 31, 2003 the Predecessor Company's financial
statements were reported on the last day of the fiscal year which was
December 30, 2003, and the Reorganized Company's financial statements
were reported on December 31, 2003.
Revenue Recognition
Revenues are generally recognized when services are rendered.
F-25
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 the fiscal
years ended 2003 and 2002, uninsured portions of the balances at those
banks aggregated to $4,261,958 and $3,033,140, 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.
F-26
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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). During
the fiscal year ended 2001, events and circumstances in connection with
continuing operating losses of certain under-performing restaurants
indicated that certain of the Predecessor Company's intangible assets
were impaired. The Predecessor Company's estimate of undiscounted cash
flows indicated that such carrying amounts were not expected to be
recovered. Accordingly, during the fiscal year ended 2001, the
Predecessor Company recorded an impairment loss related to its
intangible assets of $170,715, which are included in direct operating
costs. Subsequent to the write-down, the Predecessor 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 7, during
the fiscal year ended 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.
F-27
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
(SFAS 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS
142.) SFAS 141 superseded APB Opinion No. 16, "Business Combinations."
The provisions of SFAS 141 require that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001; provide specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill; and, require that
unamortized negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141
also requires that upon adoption of SFAS 142, certain intangible assets
be reclassified into or out of goodwill based on certain criteria. SFAS
142 supersedes APB Opinion No. 17, Intangible Assets, and is effective
for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. The provisions of SFAS 142 prohibit the
amortization of goodwill and indefinite-lived intangible assets and
require that such assets be tested annually for impairment (and in
interim periods if events or circumstances indicate that the related
carrying amount may be impaired), require that reporting units be
identified for purposes of assessing potential impairments, and remove
the forty-year limitation on the amortization period of intangible
assets that have finite lives.
SFAS 142 requires that goodwill be tested for impairment using a
two-step process. The first step of the goodwill impairment test, used
to identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the
fair value of a reporting unit exceeds its carrying amount, goodwill of
the reporting unit is not considered to be impaired and the second step
of the impairment test is unnecessary. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the goodwill
impairment test must be performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test compares
the implied fair value of reporting unit goodwill with the carrying
amount of that goodwill. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a
business combination. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess. On December 31,
2003, in connection with the Reorganized Company's fresh start
accounting the Reorganized Company capitalized goodwill in the amount
of $18,881,786.
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.
F-28
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Stock-Based Compensation
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," an amendment of SFAS No. 123, 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.
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 fiscal years ended 2003, 2002
and 2001 were $1,660,764, $2,440,220, and $2,687,871 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.
F-29
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Net Loss Per Share
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common stockholders by
the weighted-average number of common shares outstanding. Diluted loss
per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive.
Common equivalent shares are excluded from the computation if their
effect is anti-dilutive. As such, basic and diluted loss per share is
the same.
Segment Reporting
The Predecessor 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 to be presented on a liquidated basis. Segment reporting
disclosures are not presented in the accompanying financial and the
operations of PBF are presented under the caption "Discontinued
Operations" in the accompanying financial statements.
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.
F-30
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncement
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." SFAS No. 145 updates, clarifies, and simplifies
existing accounting pronouncements. This statement rescinds SFAS No. 4,
which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. As a result, the criteria in Accounting
Principles Board No. 30 will now be used to classify those gains and
losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as
SFAS No. 4 has been rescinded. SFAS No. 44 has been rescinded as it is
no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting
practice. Management does not expect adoption of SFAS No. 145 to have a
material impact, if any, on the Company's financial position or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue 94-3, a liability for
an exit cost, as defined, was recognized at the date of an entity's
commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after
December 31, 2002 with earlier application encouraged. Management does
not expect adoption of SFAS No. 146 to have a material impact, if any,
on the Company's financial position or results of operations.
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.
F-31
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 5 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Management does not expect adoption of SFAS No. 150 to
have a material impact on the Company's statements of earnings,
financial position, or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." In the course
of business the Company has contractual guarantees in the form of
warranties. However, these warranties are limited and do not represent
significant commitments or contingent liabilities of the indebtedness
of others. This pronouncement is effective for financial statements
issued after December 15, 2002 and is not expected to have a material
impact on the Company's financial statements.
In December 2003, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities," an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." This pronouncement requires the
consolidation of variable interest entities, as defined, and is
effective immediately for variable interest entities created after
January 31, 2003, and for variable interest entities in which an
enterprise obtains an interest after that date. The Company does not
have any variable interest entities, and therefore, this interpretation
is not expected to have a material impact on the Company's financial
statements.
F-32
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consisted of the following:
Reorganized
Company Predecessor Company
December 31, Fiscal Years Ended
2003 2003 2002
------------- ------------- ------------
Buildings $ - $ 2,020,748 $ 2,771,639
Furniture, fixtures, and equipment 2,717,500 2,121,433 1,970,664
Leased property and buildings under
capital leases 9,864,874 14,370,793 18,467,498
------------ ------------- ------------
12,582,374 18,512,974 23,209,801
Less accumulated depreciation and
amortization - 6,352,419 6,422,263
------------ ------------- ------------
12,582,374 12,160,555 16,787,538
Small kitchen wares - 949,999 1,526,235
------------ ------------- ------------
TOTAL $ 12,582,374 $ 13,110,554 $ 18,313,773
============ ============= ============
Depreciation and amortization expense was $1,876,778, $2,785,465, and
$3,432,250 for the fiscal years ended 2003, 2002, and 2001,
respectively, excluding depreciation and amortization expense recorded
by the Company wholly owned subsidiary, PBF. Depreciation and
amortization expense recorded by PBF for the fiscal years ended 2003,
2002, and 2001 was $0, $105,789, and $376,940 respectively.
During the fiscal year ended 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 fiscal year ended
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 had the right to reject any
leases entered into by the Company before the bankruptcy filing date.
As of the fiscal years ended 2003 and 2002, the Company has rejected
six and fifteen operating leases, respectively, related to closed
and/or poorly performing restaurants.
F-33
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT (CONTINUED)
As of the fiscal years ended 2003 and 2002, the property, plant, and
equipment associated with such leases had a net book value of
$1,510,026 and $1,694,100, respectively, deferred rent liabilities of
$363,744 and $506,788, respectively, capital lease obligations of
$2,182,255 and $2,652,578, respectively. The Company recorded a net
gain during the fiscal years ended 2003 and 2002 of $1,115,544 and
$1,276,496, respectively, in connection with these rejected leases.
As of the fiscal years ended 2003 and 2002, the Company has negotiated
the sales of nine and three restaurant leases, respectively, and
related property, plant, and equipment for gross proceeds of $1,827,141
and $1,083,014. As of the fiscal years ended 2003 and 2002, the
property, plant, and equipment associated with such leases had net book
values of $1,319,716 and $666,741, deferred rent liabilities of
$109,054 and $355,581, respectively and capital lease obligations of
$2,080,258 and $0, respectively. The Predecessor Company recorded a net
gain during the fiscal years ended 2003 and 2002 of $2,400,020 and
$771,854 respectively, in connection with such sales.
NOTE 7 - INTANGIBLE ASSETS
Intangible assets at fiscal years ended 2003 and 2002 consisted of the
following:
2003 2002
--------------- ----------------
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 fiscal year ended 2001, 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
fiscal the years ended 2003, 2002 and 2001, the Predecessor Company,
recorded amortization expense of $0, $0 and $19,859, respectively, and
impairment losses of $0, $0 and $170,715, respectively, which are
included in direct operating costs.
F-34
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 8 - PREDECESSOR COMPANY NOTE RECEIVABLE
To obtain a letter of credit for $2,600,000 required by one of the
Predecessor Company's lessors, the Predecessor Company placed a
$500,000 deposit with the third party procurer of the letter of credit
on November 8, 1998. The Predecessor Company in turn was able
to secure its deposit with the third party procurer 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
was required to pay to the third party procurer $118,000 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 was outstanding. Any money drawn on the letter of
credit would have incurred an interest charge of 12% per annum, and
repayment of the amount 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 Predecessor Company was 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 was outstanding.
The letter of credit matured in five years from the date of issuance
and was callable after two years from the date of issuance by the
Predecessor Company upon payments of amounts due to the issuer. The
Predecessor Company reduced the note receivable by $74,670 and $118,000
during each of the fiscal years ended 2003 and 2002, respectively. The
remaining balance as of fiscal year ended 2003 was $0.
NOTE 9 - NOTES PAYABLE
Notes payable consisted of the following:
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, -----------------------
2003 2003 2002
------------- ---------- ----------
Priority Tax Claim
$1,921,004, paid over a four-year
period from
the Effective Date with
interest payable at 6%
per annum (see Note 6) $ 1,921,004 $ - $ -
Secured Claim
$1,535,000, paid over a six-year period,
only interest to be paid over the first three
years and the principal to be amortized
over the remaining three years. 1,535,000 - -
F-35
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE (CONTINUED)
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, -----------------------
2003 2003 2002
------------- ---------- -----------
Unsecured Claims
$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 notes payable, which will
be paid in the amount of $500,000 on
each April, August and December for
the next three years. In addition, on
December 31, 2006, the remaining unpaid
balance of $530,000 becomes due. $5,030,000 - -
Note payable to the former owner in the
amount of $870,000, bearing interest
at 8% per annum from the original note
date (August 19, 1996). Monthly
principal and interest payments of
$10,978 are due from February 19, 1998
through July 19, 2001, with the
remaining principal balance due via a
balloon payment on August 19, 2001.
The Predecessor Company was currently
in default on this obligation as the
Predecessor Company did not make the
balloon payment when the note came
due. Upon emergence, the note was
deemed paid upon the transfer of all
of its assets and lease rights of one
of the Company's restaurants in
Torrance, CA. - 612,461 612,461
F-36
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE (CONTINUED)
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, -----------------------
2003 2003 2002
------------- ---------- ----------
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
Predecessor Company is currently in
default on this obligation due to its
failure to meet certain financial
requirements. Upon emergence, this
note was classified as a Secured
Claim. $ - $ 1,500,000 $ 1,500,000
Note payable, dated May 24, 2003,
bearing interest at 3.77% per annum
with an original principal of
$427,673. The note requires nine
monthly payments of $31,018 through
February 2004. 61,130 61,130 61,056
Note payable, bearing interest at 15%
per annum with an original principal
of $241,200. As a result of
non-payment, the Predecessor Company
is currently in default on this
obligation. Upon emergence, the note
was classified as a unsecured claim. - 413,409 413,409
Note payable from related party,
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. 71,967 71,967 80,000
F-37
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 9 - NOTES PAYABLE (CONTINUED)
Reorganized Predecessor Company
Company Fiscal Years Ended
December 31, -----------------------
2003 2003 2002
------------- ---------- ----------
Note payable from DIP Credit Facility,
Bearing Interest at 6% per annum. Upon
emergence, the note was converted to
90% of the common stock of the
Reorganized Company. $ - $ 5,000,000 $ -
Note payable, bearing interest at
9% per annum with an original
principal of $2,047,429. The note
requires monthly payments of not less
than $34,450 starting April 1, 2005 and
is due on or before December 31, 2007 1,345,334 1,345,334 2,047,429
------------- ----------- -----------
9,964,435 9,004,301 4,714,355
Less amounts subject to compromise - 2,525,870 2,525,870
------------- ----------- -----------
Notes payable not subject to
compromise 6,478,431 2,188,485
Less current portion, not
subject to compromise 2,058,222 5,137,118 72,842
------------- ----------- -----------
LONG-TERM PORTION,
NOT SUBJECT TO COMPROMISE $ 7,906,213 $ 1,341,313 $ 2,115,643
============= =========== ===========
NOTE 10 - PREDECESSOR COMPANY CONVERTIBLE DEBT
The Predecessor Company issued convertible debt, as summarized below,
payable to various individuals, which was convertible at the option of
the holder into the Predecessor Company's common stock. Interest at 6%
per annum was payable on a quarterly basis. If the note holders had
elected to convert their debt to common stock, the conversion price for
each share would have been equal 85% of the average closing price of
the Predecessor Company's common stock for the five days preceding the
conversion date. There were no conversions to common stock during the
fiscal years ended 2003 and 2002.
F-38
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 10 - PREDECESSOR COMPANY CONVERTIBLE DEBT (CONTINUED)
The terms associated with each series for the fiscal years ended 2003
and 2002 were as follows:
2003 2002
--------------- ----------------
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 1,100,000
--------------- ----------------
TOTAL AMOUNT NOT SUBJECT TO COMPROMISE $ - $ -
=============== ================
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, was considered to
be interest expense and was 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 Predecessor Company was in default on these obligations, as the
Predecessor Company did not make payments as the notes came due.
Upon emergence, all convertible debt of the Predecessor Company was
reclassified as an Unsecured Claim.
NOTE 11 - PREDECESSOR COMPANY SECURED EXCHANGEABLE NOTES
On September 29, 1998, the Predecessor Company issued a secured
exchangeable note of $650,000, maturing on September 28, 2003. Interest
on the note was at 14.375% per annum based on a 360-day year and
accrued from the date of the note and was payable upon exchange of the
note into common stock. The coupon rate of the note increased by 2.25%
every 360 days, up to a maximum of 25%. At fiscal year end, the
interest rate was 25%. The note could have been exchanged for the
Predecessor 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 Predecessor Company's common stock over the 22 trading days
immediately proceeding the exchange date, reduced by an exchange
discount.
This note also provided warrants for the purchase of 73,125 shares of
the Predecessor 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 could have been
exercised whole or in part.
F-39
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 11 - PREDECESSOR COMPANY SECURED EXCHANGEABLE NOTES (CONTINUED)
On December 21, 1998, the Predecessor Company issued a secured
exchangeable note of $1,350,000, maturing on September 28, 2003.
Interest on the note was at 12% per annum based on a 360-day year and
accrued from the date of the note and was payable upon exchange of the
note into common stock. The coupon rate of the note increased by 2.25%
every 360 days up to a maximum of 25%. At fiscal year ended 2002, the
interest rate was 23.25%. The note could have been exchanged for the
Predecessor 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 Predecessor Company's common stock over the 22 trading days
immediately proceeding the exchange date, reduced by an exchange
discount.
This note also provided warrants for the purchase of outstanding shares
of the Predecessor 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 could have
been exercised whole or in part.
In connection with the bankruptcy filing, the secured exchangeable
notes were reclassified to liabilities subject to compromise.
Upon emergence, all secured notes of the Predecessor Company were
classified as Unsecured Claims as part of Plan of Reorganization.
NOTE 12 - PREDECESSOR COMPANY 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
Predecessor Company. This amount was included in cash - restricted
under collateral agreements.
The Predecessor Company recorded a deferred gain in the amount of
$903,172 on the transaction and amortized the gain over the life of the
lease in accordance with SFAS No. 28, "Accounting for Sales with
Leasebacks." As of the fiscal year ended 2003, the Predecessor Company
entered into a compromising agreement to dispose the restaurant. As
such, part of the deferred gain in the amount of $600,000 was offset
against the proceeds in the escrow account, while the remaining
$272,807 was recognized as income from reorganization items.
F-40
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Leases
The Predecessor Company leased land and building sites for its
restaurant operations. These leases had 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 required
additional (contingent) rental payments by the Predecessor Company if
sales volumes at the related restaurants exceed specified levels. Most
of these lease agreements required payments of taxes, insurance, and
maintenance costs by the Predecessor Company.
The Reorganized Company has assumed all such leases with the same terms
as the Predecessor Company that have not been rejected as of December
31, 2003. The Reorganized Company will operate 25 leases as of December
31, 2003.
The Predecessor Company also leased restaurant and transportation
equipment under operating and capital leases. Those leases had initial
terms generally ranging from four to seven years and required a fixed
monthly payment or, in the case of transportation equipment, additional
payments on a per mile basis.
The Reorganized Company has assumed all such leases with the same terms
as the Predecessor Company that have not been rejected as of December
31, 2003.
Future minimum lease payments for all leases with initial or remaining
terms of one year or more at December 31, 2003 were as follows:
Year Ending Operating Capital
December 31, Leases Leases
------------ ------------ ------------
2004 $ $ 3,186,629 $ 1,380,711
2005 2,886,528 1,380,711
2006 2,805,681 1,410,775
2007 2,805,681 1,419,598
2008 2,754,085 1,419,598
Thereafter 23,163,593 14,421,004
------------ ------------
$37,602,196 21,432,396
Less amount representing interest 11,567,523
------------ ------------
9,864,874
Less current portion 258,918
------------
LONG-TERM PORTION 9,605,956
============
F-41
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases (Continued)
In order to guarantee its subsidiary's performance under several
leases, the Predecessor 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 Predecessor 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 Predecessor 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 fiscal year end
2003, the Predecessor 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 Predecessor Company had the right to reject any
lease entered into by the Predecessor Company before the bankruptcy
filing date. During the fiscal years ended 2002 and 2003, the
Predecessor Company rejected fifteen and six operating leases,
respectively. The liabilities related to these leases at fiscal year
end 2003 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.
At the time of its bankruptcy filing, the Predecessor Company was a
party to certain lease agreements with P.S. Realty Partners, L.P. On
July 1, 2002, the Predecessor 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 fiscal years ended 2003, 2002, and 2001, rent expense was
$4,736,240, $6,084,244, and $7,131,747, respectively, excluding rent
expense incurred by the Predecessor Company's wholly owned subsidiary,
PBF. Rent expense incurred by PBF for the fiscal years ended 2003,
2002, and 2001 was $0, $542,869, and $987,783, respectively.
Self Insurance
The Predecessor 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 Predecessor Company is liable under its
self-insured retention have been accrued as liabilities.
F-42
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Self Insurance (Continued)
The Predecessor 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 $1,159,782 and $1,015,466 at fiscal years ended 2003 and 2002,
respectively, and are recorded in the accompanying consolidated balance
sheets. As a result of the bankruptcy filing, the Predecessor Company
reclassified $580,878 and $611,686 for the fiscal years ended 2003 and
2002, respectively, 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 Predecessor Company was self-insured
for workers' compensation.
Upon emergence from the bankruptcy, the Reorganized Company has
written-off all liabilities related to self insurance according to the
Plan of Reorganization. In addition, the Company has determined that
the collectability of cash-restricted under collateral agreement is in
doubt and has written the balance off.
Agreements
On October 14, 2002, the Predecessor Company entered into a two-year
distribution agreement with Southwest Traders, Inc. ("Southwest") to be
the lead distributor for the Predecessor 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 Predecessor Company against the outstanding
inventory purchase price still outstanding. As of fiscal year ended
2003 and 2002, the remaining discounts to be credit against future
purchase orders was $0, and $169,637, respectively.
Bonuses
In April 2002, the Predecessor Company's Board of Directors approved
bonuses to certain senior management in the amount of $227,500, which
would become due and payable upon the approval of the restructuring
plan by the Predecessor Company's creditors' committee. As of fiscal
year ended 2003, these liabilities were not submitted or approved by
the court under the final Plan of Reorganization.
F-43
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Termination Payments
During the fiscal year ended 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
Predecessor Company terminates their employment. These amounts
aggregate to $455,000. As of the fiscal year ended 2003, these
liabilities were not submitted or approved by the court under the final
Plan of Reorganization.
Litigation
During the fiscal year ended 2001, the Predecessor Company settled a
lawsuit filed by several ex-employees of the Predecessor Company in the
amount of $800,000, which is included in other income (expense). In
addition, as of the fiscal year ended 2001, the Predecessor 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 Predecessor 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 Predecessor Company has accrued
$2,047,429 for this settlement, which is included in long-term debt in
the accompanying consolidated balance sheet at fiscal year ended, 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. During
the fiscal year ended 2003, the Predecessor Company made payments in
the amount of $702,095 to IDine, reducing the note payable as of fiscal
year ended 2003 to $1,345,334. The remaining balance has been included
as notes payable of the Reorganized Company in the accompanying
financial statements.
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.
F-44
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 14 - LIABILITIES SUBJECT TO COMPROMISE
Under bankruptcy law, actions by creditors to collect indebtedness the
Predecessor Company owes prior to the Petition Date are stayed and
certain other pre-petition contractual obligations may not be enforced
against the debtors. The Predecessor Company received approval by the
Court to pay certain pre-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 order, additional rejection of executor
contracts including leases, or other events. Pre-petition liabilities
were outstanding until the bankruptcy process was completed, whereby
the ultimate number and amount of allowable claims was ascertained, as
discussed in Note 2.
Liabilities subject to compromise at December 30, 2003 consisted of the
following:
Convertible debt (see note 10) $ 1,100,000
Secured exchange note (see note 11) 2,000,000
Notes payable (see note 9) 2,525,870
Accounts payable (see note 2 - discharge of liabilities) 5,795,988
Reserve for self insurance (see note 13 - self insurance) 580,878
Capital lease obligations (see note 13 - leases) 9,864,874
Deferred gain on sale-leaseback (see note 12) -
Deferred rent (see note 2) 1,284,141
Other accrued liabilities (see note 2) 2,388,872
----------------
TOTAL $ 25,540,623
================
The following is a reconciliation of the changes in Liabilities subject
to compromise for the period from the Petition Date through December
30, 2003:
Balance, Petition Date $ 38,205,485
Court order authorizing payments of salaries and
benefit, utilities, and payments to critical vendors (2,274,767)
Payments on workers compensation and general liability (183,325)
Adjustments to workers compensation and general liability accrual 75,302
Payments on capital leases obligation (500,467)
Adjustments due to closed, rejected, or sold leases (8,304,965)
Adjustment to deferred gain on sale-leaseback (872,807)
Settlement of IDine contract (781,633)
Other 177,800
----------------
BALANCE, END OF PERIOD $ 25,540,623
================
F-45
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 15 - PREDECESSOR STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
On June 4, 1996, the Predecessor Company issued 1,000,000 shares of
convertible preferred stock (Series B) to the Chairman of the
Board/President/Chief Executive Officer of the Predecessor Company for
services rendered. The preferred stock had a par value of $0.001 per
share and carried rights to vote with the common stock as one class on
a one-vote-per-share basis. The preferred stock was convertible into
the Predecessor 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 Predecessor Company's initial public offering
("IPO") or when the Predecessor 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 Predecessor Company, in cash, a conversion price per share
equal to 150% of the IPO price of the Predecessor Company's common
stock.
The preferred stock did not carry dividends prior to the second
anniversary of the closing date of the IPO, but thereafter, if the
above conversion test had been satisfied, the preferred stock would
have participated in any dividends declared on the Predecessor
Company's common stock, on an "as converted" basis. In the event of a
voluntary or involuntary liquidation or dissolution of the Predecessor
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
Predecessor Company subsequent to the Predecessor Company's achieving
$3,500,000 in annual net profits, the holder of the preferred stock
would have been entitled to share with the holders of the Predecessor
Company's common stock, the assets of the Predecessor Company, on an as
converted basis.
On July 26, 1999, the Predecessor Company issued 1,750,000 shares of
convertible preferred stock (Series C) to the Chairman of the
Board/President/Chief Executive Officer of the Predecessor Company for
services rendered. The preferred stock had a par value of $0.001 per
share and carried the right to vote with the common stock as one class
on a one-vote-per-share basis. The preferred stock was convertible into
the Predecessor 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
Predecessor 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 Predecessor Company a conversion price per share equal to
$8.53.
F-46
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 15 - PREDECESSOR STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Preferred Stock (Continued)
The shares of Series C may not be redeemed by the Predecessor Company
without the unanimous consent of the holders. The preferred stock did
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 had been satisfied, the preferred stock would have participated in
any dividends declared on the Predecessor Company's common stock, on an
"as converted" basis. In the event of a voluntary or involuntary
liquidation or dissolution of the Predecessor 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 have been 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 Predecessor Company
subsequent to the Predecessor Company's achieving $4,200,000 in annual
net profits, the holder of the preferred stock would have been entitled
to share with the holders of the Predecessor Company's common stock,
the assets of the Predecessor Company, on an as converted basis. Upon
emergence, all preferred securities of the Predecessor Company were
cancelled.
The Reorganized Company has authorized the issuance of 5,000,000 shares
of preferred stock, which may be issued from time to time in one or
more series by the Board of Directors. In addition, the Board is
authorized to set the rights, preference, privileges, and restrictions
of these shares, including dividends rights, conversion rights, voting
rights, and liquidation preferences. These shares may have rights
senior to those of the Company's common stock holders. As of December
31, 2003, the Company did not have any preferred shares outstanding.
Common Stock
During the fiscal year ended 2000, the Predecessor Company issued
employee stock options to purchase 25,000 shares of the Predecessor
Company's common stock in exchange for $20,000. The stock options were
exercisable at $6.50 per share and approximated the fair value of the
Predecessor Company's common stock at the date of issuance. As such,
compensation expense was not 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 the fiscal year ended 2003, these options
had not been re-issued.
During the fiscal years ended 2003, 2002, and 2001, the Predecessor
Company annually issued warrants to purchase 20,000 shares of the
Predecessor Company's common stock at $5 per share. In connection with
these issuances, the Predecessor Company recorded interest expense of
$60,000 for the fiscal years ended 2003, 2002, and 2001.
During the fiscal year ended 2001, the Predecessor Company issued
warrants to purchase 13,600 shares of the Predecessor Company's common
stock at $5 per share. In connection with these issuances, the
Predecessor Company recorded interest expense of $111,898 for the
fiscal year ended 2001.
F-47
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - PREDECESSOR COMPANY 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 was intended
to provide incentive to key employees, officers, and directors of the
Predecessor Company who provide significant services to the Predecessor
Company. There were 400,000 options available for grant under the
Omnibus Plan. Options vested 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 could be exercisable less than six months from the date of
grant. The exercise price of options granted under the Omnibus Plan
were determined by the Board of Directors, provided that the exercise
price is not less than the fair market value of the Predecessor
Company's common stock on the date of grant.
Galveston's Steakhouse Corp. 1999 Stock Option Plan
In May 1999, the Board of Directors approved the adoption of a
non-qualified and incentive stock option plan (the "Galveston's Plan").
The Galveston's Plan, which was approved by the Predecessor Company's
stockholders at the 1999 annual meeting, were intended to provide
incentive to key employees, officers, and directors of the Predecessor
Company who provide significant services to the Predecessor Company.
There were 500,000 options available for grant under the Galveston's
Plan. Options vested 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 could be exercisable less than six months from the grant date.
The exercise price of options granted under the Galveston's Plan were
determined by the Board of Directors, provided that the exercise price
is not less than the fair market value of the Predecessor 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 Predecessor Company who provide significant services
to the Predecessor Company. There were 1,000,000 options available for
grant under the Steakhouse Plan. Options vested 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 could be exercisable less than six
months from the grant date. The exercise price of options granted under
the Steakhouse Plan were determined by the Board of Directors, provided
that the exercise price is not less than the fair market value of the
Predecessor Company's common stock on the date of grant.
F-48
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - PREDECESSOR COMPANY STOCK-BASED COMPENSATION (CONTINUED)
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 Predecessor
Company's stockholders at the 2000 annual meeting, was intended to
provide incentive to key employees, officers, and directors of the
Predecessor Company who provide significant services to the Predecessor
Company. There were 5,000,000 options available for grant under the
Steakhouse 2000 Plan. Options vested 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 could be exercisable less than six months
from the grant date. The exercise price of options granted under the
Steakhouse 2000 Plan were determined by the Board of Directors,
provided that the exercise price is not less than the fair market value
of the Predecessor Company's common stock on the date of grant.
Other Stock Options Issued Outside of the Plan
During the fiscal year ended 1999, the Predecessor Company issued an
employee stock options to purchase 20,000 shares of the Predecessor
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
fiscal year ended 2000. The stock options were exercisable at $6.50 per
share and approximated the fair value of the Predecessor Company's
common stock at the date of issuance. As such, compensation expense was
recognized.
Stock Options
The Predecessor 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.
F-49
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - PREDECESSOR COMPANY STOCK-BASED COMPENSATION (CONTINUED)
Stock Options (Continued)
If the Predecessor 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 Predecessor Company's net loss and loss per share would be reduced
to the pro forma amounts indicated below for the fiscal years ended
2003, 2002, and 2001:
2003 2002 2001
------------- ------------- ---------------
Net loss
As reported $ (4,851,281) $ (6,582,559) $ (16,716,744)
Stock based employee net of
related tax effects, that would
have been included in the - - -
determination of net loss if the
fair value method if the fair value
method had been applied (192,272) (192,272) (192,272)
------------ ------------- -------------
PRO FORMA $ (5,043,553) $ (6,774,831) $ (16,909,016)
============ ============= =============
Basic loss per common share
As reported $ (1.43) $ (1.94) $ (4.94)
Pro forma $ (1.49) $ (2.00) $ (5.00)
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 Predecessor Company did not issue any stock
options during the fiscal years ended 2003 and 2002.): 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 Predecessor 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-50
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - PREDECESSOR COMPANY STOCK-BASED COMPENSATION (CONTINUED)
Stock Options (Continued)
A summary of the Predecessor Company's stock option plans and changes
in outstanding options for the fiscal years ended 2003, 2002, and 2001
are as follows:
Predecessor Company
-----------------------------------------------------------
Omnibus Plan Outside of Plan
------------------------ -----------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------- ----------- --------- -----------
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
Forfeited (134,000) $ 3.13 (82,500) $ 0.60
--------- --------
OUTSTANDING,
DECEMBER 31, 2003 - $ - - $ -
========= ========
EXERCISABLE,
DECEMBER 31, 2003 - $ - - $ -
========= ========
Predecessor Company
-----------------------------------------------------------
Omnibus Plan Outside of Plan
------------------------ -----------------------
Weighted- Weighted-
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
--------- ----------- --------- -----------
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
Forfeited (132,412) $ 6.07 (325,050) $ 6.20
--------- --------
OUTSTANDING,
DECEMBER 30, 2003 65,000 $ 7.04 - $ -
========= ========
EXERCISABLE,
DECEMBER 30, 2003 16,250 $ 7.04 - $ -
========= ========
F-51
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - PREDECESSOR STOCK-BASED COMPENSATION (CONTINUED)
Stock Options (Continued)
The weighted-average remaining contractual life of the options
outstanding at fiscal year ended 2003 was 7.61 years. The exercise
prices for the options outstanding at fiscal year ended 2003 ranged
from $5.50 to $7.50, 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
---------- ------------- ------------- ------------- ------------- --------------
$ 5.50 - 7.50 65,000 16,250 7.61 years $ 7.04 $ 7.04
Warrants
A summary of the Predecessor Company's outstanding warrants and
activity for the fiscal years ended 2003, 2002 and 2001 is as follows:
Predecessor Company
----------------------------
Weighted-
Shares Average
Under Exercise
Warrant Price
------------- ------------
Outstanding, December 31, 2001 514,571 $ 5.74
Granted 33,600 $ 5.00
-------
Outstanding, December 31, 2002 548,171 $ 5.70
Granted 33,600 $ 5.00
-------
OUTSTANDING, DECEMBER 30, 2003 581,771 $ 5.66
-------
EXERCISABLE AT DECEMBER 30, 2003 581,771 $ 5.66
=======
F-52
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 16 - PREDECESSOR COMPANY STOCK-BASED COMPENSATION (Continued)
Warrants (Continued)
The following table summarizes information about warrants outstanding
at fiscal year ended 2003:
Weighted-
Average
Warrants Warrants Remaining
Exercise Price Outstanding Exercisable Contractual Life
-------------- ----------- ----------- ----------------
$3.00 20,000 20,000 3.50 years
$5.00 191,250 191,250 1.77 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
-------- --------
581,771 581,771
======== ========
Effective with confirmation of the Plan on December 31, 2003, all
stock options, stock option plans, and warrants were canceled.
NOTE 17 - INCOME TAXES
Significant components of the provision for taxes based on income for
the fiscal years ended 2003, 2002 and 2001 were as follows:
Predecessor Company
Fiscal Years Ended
-----------------------------------------------
2003 2002 2001
-------------- -------------- -------------
Current
Federal $ - $ - $ -
State 132,400 140,400 172,400
-------------- -------------- -------------
132,400 140,400 172,400
-------------- -------------- -------------
Deferred
Federal - - -
State (2,400) (10,642) (24,059)
-------------- -------------- -------------
(2,400) (10,642) (24,059)
-------------- -------------- -------------
PROVISION FOR
INCOME TAXES $ 130,000 $ 129,758 $ 148,341
============== ============== =============
F-53
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 17 - 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 fiscal
years ended 2003, 2002, and 2001 was as follows:
Predecessor Company
Fiscal Years Ended
-----------------------------------------------
2003 2002 2001
-------------- -------------- -------------
Income tax provision
computed at federal
statutory tax rate 34.0% 34.0% 34.0%
State taxes, net of
federal benefit (2.3) (0.5) 2.2
Increase in valuation
reserve and
other (34.4) (35.6) (44.0)
----------- ----------- -----------
TOTAL (2.7)% (2.1)% (7.8)%
=========== =========== ===========
Significant components of the Company's deferred tax assets and
liabilities for federal income taxes consisted of the following at the
fiscal years ended 2003 and 2002:
Predecessor Company
Fiscal Years Ended
-------------------------------
2003 2002
-------------- --------------
Deferred tax assets
Net operating losses $ 20,253,875 $ 16,386,754
Tax credit carry-forwards 1,189,360 1,819,360
Asset valuation reserves 461,897 6,821,955
Property, plant, and equipment 4,599,518 4,472,450
Other 4,551,374 5,189,357
-------------- --------------
Total deferred tax assets 31,056,024 34,689,876
-------------- --------------
Deferred tax liabilities
Property, plant, and equipment (357,540) (357,540)
Other (331,376) (750,700)
-------------- --------------
Total deferred tax liabilities (688,916) (1,108,240)
-------------- --------------
30,367,108 33,581,636
Valuation allowance (30,486,519) (33,701,047)
-------------- --------------
NET DEFERRED TAX LIABILITY $ (119,411) $ (119,411)
============== ==============
F-54
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 17 - INCOME TAXES (CONTINUED)
As a result of the reorganization certain of the deferred tax assets,
liabilities, and valuation will be adjusted. All amounts will be fully
reserved for.
The Predecessor Company has remaining net operating loss
carry-forwards, after carry-backs, of approximately $55,550,000 for
federal and $16,990,000 for state, which will begin expiring in 2017.
The reorganization of the Company on the Effective Date constituted an
ownership change under Section 382 of the Internal Revenue Code. An
ownership change generally occurs if certain persons or groups increase
their aggregate ownership percentage in a corporations' stock by more
than 50 percentage points in the shorter of any three-year period or
the period beginning the day after the day of the last ownership
change. Section 382 may apply to limit the Reorganized Company's future
ability to any remaining NOL's and tax credits generated before the
ownership change and certain subsequently recognized "built-in" losses
and deductions, if any, existing as of the date of the ownership
change.
F-55
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 18 - RELATED PARTY TRANSACTIONS
During the fiscal years ended 2003, and 2002, the Predecessor Company
recorded an allowance for doubtful accounts related to certain officer
advances totaling $0 and $277,016, which are deemed uncollectible.
An officer had personally guaranteed the leases of two of the
Predecessor Company's California locations, as well as trade accounts
payable with certain of the Predecessor Company's vendors.
During the fiscal year ended 2002, the Predecessor 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 fiscal
years ended 2003 and 2002, total amounts paid as consulting fees and
expenses paid on behalf of the officer were $0 and $45,530,
respectively.
During the fiscal year ended 2002, the Predecessor Company paid its
former President consulting fees for services rendered in addition to
paying for certain expenses incurred by the former President. As of
fiscal years ended 2003 and 2002, total amounts paid as consulting fees
and expenses on behalf of the officer were $0 and $249,669,
respectively.
During the fiscal year ended 2000, the Predecessor Company entered into
a capital lease agreement for a vehicle for the former Chairman of the
Board/President/Chief Executive Officer of the Predecessor Company.
Related to this transaction, the Predecessor Company recorded property,
plant, and equipment totaling $176,863. As of fiscal years ended 2003
and 2002, the capital lease payable related to this vehicle totaled
$83,213 and $83,213, respectively. The lease agreement was for four
years, and had monthly payments for $1,852. This amount has been
reclassified as liabilities subject to compromise in the accompanying
consolidated financial statements as of fiscal year ended 2003. During
the fiscal year ended 2002, in connection with the purchase of the
vehicle, the Predecessor Company paid $69,335 for certain improvements
to the vehicle. As of fiscal year end 2003 this liability has been
stayed and was not approved by the court under the final Plan of
Reorganization.
During the fiscal year ended 2001, the Predecessor Company entered into
a operating lease agreement for a vehicle for the former Chairman of
the Board/President/Chief Executive Officer of the Predecessor Company.
The lease agreement was for three years and had monthly payments for
$702. As of fiscal year ended 2003 this liability has been stayed and
was not approved by the court under the final Plan of Reorganization.
During the fiscal year ended 2000, the Predecessor Company entered into
an operating lease agreement for a vehicle for the former Chairman of
the Board/President/Chief Executive Officer of the Predecessor Company.
This lease agreement is for 3.5 years, and monthly payments are $1,143.
During the fiscal year ended 2001, the Predecessor 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 Predecessor 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 Predecessor 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. Upon emergence from
bankruptcy, the Reorganized Company has written off payroll tax
liability of $332,000 in accordance with the Plan of Reorganization.
The Predecessor Company was also 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 Predecessor Company estimated its
exposure to be in the range of $1,000,000 to $1,250,000. The
Predecessor Company believed its exposure to such liabilities to be
remote and did not accrued any federal or state withholding taxes in
the accompanying consolidated financial statements.
F-56
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 19 - OTHER UNUSUAL ADJUSTMENTS
During the fourth quarter of 2001, the Predecessor 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 Predecessor
Company's estimate of undiscounted cash flows indicates that
this carrying amount is not expected to be recovered.
Management of the Predecessor 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 Predecessor Company. As a
result of the default, the lender has called the note and is
exercising the corporate guarantee. As of December 31, 2003,
the Predecessor 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 Predecessor
Company has not determined in which quarters in 2001 this loan
was defaulted.
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables list the Company's quarterly financial information
for the fiscal years ended 2003, 2002, and 2001:
2003
--------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- --------------- --------------- ----------------
Revenues $ 19,881,265 $ 18,048,212 $ 16,176,884 $ 23,651,454 $ 77,757,815
Gross profit (loss) $ 795,783 $ 609,209 $ 187,351 $ (1,819,071) $ (226,728)
Loss before other
income
(expense) $ (643,384) $ (396,354) $ (707,008) $ (3,191,181) $ (4,937,927)
Income (loss) from
reorganization
items $ 1,033,394 $ 863,703 $ 117,845 $ (467,197) $ 1,547,745
Income (loss) from
discontinued
operations $ 1,057,463 $ - $ - $ - $ 1,057,463
Net income
(loss) $ 878,884 $ (162,426) $ (1,014,660) $ (4,553,079) $ (4,851,281)
Basic earnings
(loss) per share
from continuing
operations $ (0.05) $ (0.05) $ (0.30) $ (1.34) $ (1.74)
F-57
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
2003
--------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- --------------- --------------- ----------------
Basic earnings
(loss) per share
from
discontinued
operations $ 0.31 $ - $ - $ - $ 0.31
Basic (loss)
per share $ 0.26 $ (0.05) $ (0.30) $ (1.34) $ (1.43)
Diluted earnings
(loss) per share
from continuing
operations $ (0.05) $ (0.05) $ (0.30) $ (1.34) $ (1.74)
Diluted earnings
(loss) per share
from
discontinued
operations $ 0.31 $ - $ - $ - $ 0.31
Diluted (loss)
per share $ 0.26 $ (0.05) $ (0.30) $ (1.34) $ (1.43)
Common stock
trading range
High $ 0.120 $ 0.000 $ 0.000 $ 0.000 $ 0.120
Low $ 0.010 $ 0.000 $ 0.000 $ 0.000 $ 0.000
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)
F-58
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
2002
--------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- --------------- --------------- ----------------
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
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)
F-59
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTE 20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
2001
--------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- --------------- --------------- --------------- ----------------
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 $ 0.07 $ (0.46) $ (0.47) $ (3.39) $ (4.23)
Diluted (loss)
per share
from
discontinued
operations $ (0.06) $ (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
NOTE 21 - SUBSEQUENT EVENTS
As of January 2004, the Reorganized Company has negotiated a sale of
six restaurant leases and related property, plant, and equipment for
gross proceeds of $763,499. The Company expects to record a net gain
during the year ended December 31, 2004 of approximately $763,000 in
connection with such sales.
On February 14, 2004, the Reorganized Company negotiated a purchase
commitment with one of its vendors. The agreement allows the
Reorganized Company to purchase up to 125 cases of prime rib per week
at $74.23 per case. The purchase commitment relates to normal business
operations and expires on December 31, 2004.
F-60
SUPPLEMENTAL INFORMATION
F-61
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
March 16, 2004
F-62
STEAKHOUSE PARTNERS, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS - SCHEDULE II
Reorganized Company for the Year Ended December 31, 2003 and
Predecessor Company (Debtor-in-Possession)
for the Years Ended December 30, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Balance, Additions Deductions Balance,
Beginning Charged to from End
of Year Operations Reserve of Year
------------ ------------ ------------ -------------
Allowance for doubtful
accounts
December 31, 2003 $ 154,621 $ 68,896 $ (90,283) $ 133,234
========== =========== ========== ==========
December 30, 2002 $ 61,264 $ 93,357 $ - $ 154,621
========== =========== ========== ==========
December 30, 2001 $ 61,264 $ - $ - $ 61,264
========== =========== ========== ==========
Reserve for impairment of
property, plant, and
equipment
December 31, 2003 $6,581,527 $ - $ - $6,581,527
========== =========== ========== ==========
December 30, 2002 $ - $6,581,527 $ - $6,581,527
========== =========== ========== ==========
Reserve for advances to
officers
December 31, 2003 $ 616,584 $ 277,016 $(893,600) $ -
========== =========== ========== ==========
December 30, 2002 $ - $ 616,584 $ - $ 616,584
========== =========== ========== ==========
F-63
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
21.1 List of Subsidiaries of Steakhouse Partners, Inc.