UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the thirteen week period ended June 29, 2004
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
000-23739
(Commission file number)
STEAKHOUSE PARTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3248672
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10200 WILLOW CREEK ROAD, SAN DIEGO, CA 92131
(Address of principal executive offices)
(858) 689-2333
(Registrant's telephone number)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
APPLICABLE ONLY TO ISSUERS 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 Sections 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 ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of August 13, 2004: 4,500,000 shares of common stock (exclusive of
500,000 shares, committed but not issued, for the benefit of certain unsecured
creditors).
FORM 10-Q
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet for the Successor Company
as of June 29, 2004 and December 31, 2003 and for the
Predecessor Company as of December 30, 2003 .........................2-3
Condensed Consolidated Statements of Operations for the
Successor Company for the thirteen weeks ended June 29, 2004
and the Predecessor Company for the twelve weeks ended June 10,
2003 ..................................................................4
Condensed Consolidated Statements of Operations for the
Successor Company for the twenty-six weeks ended June 29, 2004
and the Predecessor Company for the twenty-four weeks ended
June 10, 2003 and as of December 31, 2003 .............................5
Condensed Consolidated Statements of Cash Flows for the
Successor Company for the twenty-six weeks ended June 29, 2004
and the Predecessor Company for the twenty-four weeks ended
June 10, 2003 and as of December 31, 2003 .............................6
Notes to Condensed Consolidated Financial Statements...................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk............25
Item 4. Controls and Procedures...............................................26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................26
Item 2. Changes in Securities and Use of Proceeds.............................26
Item 3. Defaults Upon Senior Securities.......................................26
Item 4. Submission of Matters to a Vote of Security Holders...................26
Item 5. Other Information.....................................................26
Item 6. Exhibits and Reports on Form 8-K......................................27
SIGNATURES....................................................................28
SECTION 302 CERTIFICATION
EXPLANATORY STATEMENT
On February 15, 2002, Steakhouse Partners, Inc. ("Steakhouse Partners", or the
"Company") and on February 19, 2002 Paragon Steakhouse Restaurants, Inc., our
wholly owned subsidiary, and its three subsidiaries (collectively, "Paragon,"
and together with Steakhouse Partners, the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the federal bankruptcy laws ("Bankruptcy
Code" or "Chapter 11") in the United States Bankruptcy Court for the Central
District of California ("Bankruptcy Court"). The Amended Joint Plan of
Reorganization (the "Plan") was confirmed on December 19, 2003, and became
effective on December 31, 2003 (the "Effective Date"). On October 11, 2002,
Pacific Basin Foods, Inc. ("Pacific Basin Foods") the Company's other wholly
owned subsidiary filed a petition under Chapter 7 of the Bankruptcy Code in the
Bankruptcy Court. In the condensed consolidated financial statements provided
herein, all results for periods prior to and including December 30, 2003 are
referred to as those of the "Predecessor Company" and all results for periods
including and subsequent to December 31, 2003 are referred to as those of the
"Successor Company". Due to the effects of the "fresh start" accounting, results
for the Predecessor Company and the Successor Company are not comparable (See
Note 1, "Basis of Presentation Reorganization" and "Fresh Start Accounting," of
the notes to condensed consolidated financial statements).
At this time, it is not possible to predict the effect of the Chapter 11
reorganization on our business. A more detailed description of the bankruptcy
filing and its effect on the Company is set forth in our Annual Report on Form
10-K for the fiscal year ended December 30, 2003, filed with the Securities and
Exchange Commission (the "SEC").
References in this report to the "Company", "Steakhouse Partners" and "we" or
similar or related terms refer to Steakhouse Partners, Inc. and its wholly owned
subsidiaries together, unless the context of such references requires otherwise.
1A
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 2004
ASSETS
Successor Successor | Predecessor
Company Company | Company
June 29, December 31, | December 30,
2004 2003 | 2003
---- ---- | ----
(Unaudited) (Audited) | (Audited)
Assets |
Current assets: |
Cash and cash equivalents $ - $2,205,221 | $ 2,205,221
Accounts receivable, net of allowance for doubtful |
accounts of $133,234 264,521 67,909 | 67,909
Inventory, net of allowance for obsolete inventories |
of $45,805 989,403 1,298,203 | 1,298,203
Prepaid expenses and other current assets 814,793 497,416 | 497,416
------------ ------------ | -----------
Total current assets 2,068,717 4,068,749 | 4,068,749
|
Property, plant and equipment, net 11,691,992 12,582,374 | 13,110,554
Liquor Licenses 688,000 688,000 | -
Deposits and other assets 178,881 103,407 | 103,407
Cash - restricted under collateral agreements - - | 480,496
|
Goodwill 18,788,006 18,881,786 | -
|
------------ ------------ | -----------
Total Assets $ 33,415,596 $ 36,324,316 | $17,763,206
============ ============ | ===========
The accompanying notes are an integral part of these financial statements.
2
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 2004
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Successor Successor Predecessor
Company Company Company
June 29, December 31, December 30,
2004 2003 2003
---- ---- -----
(Unaudited) (Audited) (Audited)
Liabilities and Stockholders' Deficit: |
Current liabilities: |
Current portion of long term debt $ 2,053,769 $ 2,058,222 | $ 5,137,118
Current portion of capital lease 232,939 258,918 | -
Accounts payable and other current liabilities 3,113,133 4,572,589 | 3,144,654
Accrued liabilities 5,034,388 4,779,828 | 6,693,183
Accrued payroll costs 973,210 1,473,853 | 1,473,853
------------ ------------ | ------------
Total current liabilities 11,407,439 13,143,410 | 16,448,808
|
Long-Term Debt 7,687,252 7,906,213 | 1,341,313
Long-Term capital leases 8,887,517 9,605,956 | -
Deferred rent 69,367 113,182 | -
Deferred tax liability - - | 119,411
------------ ------------ | ------------
Total liabilities not subject to compromise 28,051,575 30,768,761 | 17,909,532
------------ ------------ | ------------
Liabilities subject to compromise - - | 25,540,623
|
|
Stockholders' Equity (Deficit): |
Predecessor Company preferred stock |
$0.001 par value |
2,250,000 shares authorized |
0 shares issued and outstanding - - | -
|
Predecessor Company preferred stock |
Series B, Convertible $0.001 par value |
1,000,000 shares authorized |
1,000,000 shares issued and outstanding - - | 1,000
|
Predecessor Company preferred stock |
Series C, Convertible $0.001 par value |
1,750,000 shares authorized |
1,750,000 shares issued and outstanding - - | 1,750
|
Predecessor Company common stock |
$0.001 par value |
10,000,000 shares authorized |
3,386,522 shares issued and outstanding - - | 33,865
|
Successor Company preferred stock |
$0.001 par value |
5,000,000 shares authorized |
0 shares issued and outstanding - - | -
|
Successor Company common stock |
$0.001 par value |
15,000,000 shares authorized |
4,500,000 shares issued and outstanding 4,500 4,500 | -
|
Committed stock 555,555 555,555 | -
|
Predecessor Company treasury stock, 28,845 |
shares, at cost - - | (175,000)
|
Predecessor Company additional paid-in-capital - - | 12,100,750
Successor Company additional paid-in- |
capital 7,040,609 4,995,500 | -
Deferred Compensation (1,830,492) |
Accumulated deficit, since January 1, 2004 (406,151) - | (37,649,314)
------------ ------------ | ------------
Total Stockholder's Equity (deficit) 5,364,021 5,555,555 | (25,686,949)
------------ ------------ | ------------
|
Total liabilities and stockholders' equity (deficit) $ 33,415,596 $ 36,324,316 | $ 17,763,206
============ ============ ============
The accompanying notes are an integral part of these financial statements.
3
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Predecessor
Company Company
Thirteen Weeks Twelve Weeks
ended June 29, ended June 10,
2004 2003
----------------------------------
(Unaudited) (Unaudited)
Core Restaurant Revenue, net 14,318,019 | 18,048,212
----------- | -------------
Total Revenues, net 14,318,019 | 18,048,212
|
Restaurant Costs of Sales |
Food and beverage 5,013,729 | 6,495,161
Personnel costs 4,665,332 | 6,370,768
Direct operating costs 3,064,029 | 4,152,537
Depreciation & amortization 306,464 | 420,537
----------- | -------------
Total Costs of Sales 13,049,554 | 17,439,003
Gross Profit 1,268,456 | 609,209
|
General & Administrative 1,210,448 | 1,005,563
----------- | -------------
Income (loss) before other income (expense) 58,017 | (396,354)
Other Income/(Expense) |
Interest income 10,745 | (18,081)
Interest expense (343,686) | (581,694)
----------- | -------------
Total other income (expense) (332,941) | (599,775)
|
Loss before reorganization items, and provision for |
income taxes (274,924) | (996,129)
|
Reorganization items: |
Gain on rejection and sale of property, plant |
and equipment, net - | 1,089,804
Professional fees - | (226,101)
----------- | -------------
Total reorganization items - | 863,703
|
Loss before provision of income taxes (274,924) | (132,426)
Provision for income tax 18,000 | 30,000
----------- | -------------
Net (Loss) (292,924) | (162,426)
=========== | =============
|
Basic and diluted earning (loss) per share (0.07) | (0.05)
=========== | =============
Weighted average shares, basic and diluted 4,500,000 | 3,386,522
=========== | =============
The accompanying notes are an integral part of these financial statements.
4
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Predecessor
Company Company
Twenty-six Twenty-four
Weeks Weeks
ended June 29, ended June 10, December 31,
2004 2003 2003
-----------------------------------------------------
(Unaudited) (Unaudited) (Audited)
Core Restaurant Revenue, net 27,932,075 | 37,929,477 -
Revenues earned on restaurants disposed |
During the period ended June 29, 2004, net 545,343 | - -
----------- | ------------- -----------
Total Revenues, net 28,477,418 | 37,929,477 -
|
Restaurant Costs of Sales |
Food and beverage - core restaurants 9,726,512 | 13,509,466 -
Food and beverage - disposed restaurants 260,197 | - -
Personnel costs - core restaurants 9,225,454 | 13,349,925 -
Personnel costs - disposed restaurants 374,031 | - -
Direct operating costs - core restaurants 5,663,104 | 8,749,854 -
Direct operating costs - disposed restaurants 182,780 | - -
Depreciation & amortization - core restaurants 621,965 | 915,240 -
Depreciation & amortization - disposed restaurants 10,094 | - -
----------- | ------------- -----------
Total Costs of Sales 26,064,137 | 36,524,485 -
Gross Profit 2,413,281 | 1,404,992 -
|
General & Administrative 2,225,877 | 2,444,730 -
----------- | ------------- -----------
Income (loss) before other income (expense) 187,404 | (1,039,738) -
Other Income/(Expense) |
Interest expense (655,209) | (1,227,893) -
Other income 105,641 | 89,529 -
----------- | ------------- -----------
Total other income (expense) (549,568) | (1,138,364) -
|
Loss before reorganization items, provision for |
income taxes, and discontinued operations (362,164) | (2,178,102) -
|
Reorganization items: |
Reorganization gain/(loss), net - | - 6,645,343
Gain on rejection and sale of property, plant |
and equipment, net - | 2,232,278 -
Professional fees - | (335,181) -
----------- | ------------- -----------
Total reorganization items - | 1,897,097 6,645,343
|
Loss before provision of income taxes and |
discontinued operations (362,164) | (281,005) 6,645,343
Provision for income tax 43,987 | 60,000 -
Income/(Loss) before discontinued operations (406,151) | (341,005) 6,645,343
Income from discontinued operations, net of |
income taxes of $850 - | 1,057,463 -
----------- | ------------- -----------
Net (Income)/Loss (406,151) | 716,458 6,645,343
=========== | ============= ===========
|
----------- | ------------- -----------
Basic and diluted earnings (loss) per share |
|
Earnings(Loss)from continuing operations $ (0.09) | $ (0.10) $ 1.56
|
=========== | ============= ===========
Earnings(Loss)from discontinued operations - | 0.31 -
=========== | ============= ===========
Basic and diluted earning (loss) per share (0.09) | 0.21 1.96
=========== | ============= ===========
Weighted average shares, basic and diluted 4,500,000 | 3,386,522 3,386,522
=========== | ============= ===========
The accompanying notes are an integral part of these financial statements.
5
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor | Predecessor
Company | Company
Twenty-six | Twenty-four
weeks | weeks
ended June 29, | ended June 10, December 31,
2004 | 2003 2003
------------------ | ------------- --------------
(Unaudited) | (Unaudited) Unaudited)
|
|
|
Net income (loss) from continuing operations $ (406,151) | $716,458 $ 6,645,343
Net income from discontinued operations - | 1,057,463 -
Adjustments to reconcile net income (loss) to net |
cash provided by (used in) operating activities |
Depreciation and amortization 608,404 | 915,240 -
Gain on disposal of rejected leases - | (2,232,278) -
Amortization of stock options issued below fair |
market value to employees 124,617 | - -
Non Cash reorganization item - | - (6,645,343)
Net liabilities of discontinued operation forgiven in |
Chapter 7 liquidation - | (1,057,463) -
Decrease in operating assets 43,417 | 2,635,266 -
|
(Decrease) in liabilities subject to compromise - | (2,419,497) -
(Decrease) in operating liabilities (2,382,207) | (2,109,165) -
----------- | ------------ ----------
Net cash (used in) continuing operating activities (2,011,920) | (2,493,976) -
Net cash provided by (used in) discontinued operating |
activities - | - -
|
Cash flows from investing activities |
Proceeds from the sale of P.P. & E 615,956 | - -
Purchases of furniture & equipment (333,978) | (87,951) -
----------- | ------------ ----------
Net cash provided by (used in) continuing investing |
activities 281,978 | (87,951) -
|
Cash flows from financing activities |
Principal payments on debt and capital leases (475,275) | (363,548) -
----------- | ------------ ----------
Net cash (used in) continuing financing activities (475,275) | (363,548) -
Net increase (decrease) in cash and cash equivalents (2,205,221) | (1,888,012) -
Cash and cash equivalents, beginning of period 2,205,221 | 2,750,673 -
----------- | ------------ ----------
Cash and cash equivalents, end of period - | 862,661 -
----------- | ------------ ----------
The accompanying notes are an integral part of these financial statements.
6
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of the Company as of
June 29, 2004 and for the thirteen and twenty-six weeks ended June 29, 2004 and
the twelve and twenty-four weeks ended June 10, 2003 have been prepared in
accordance with the instructions for Form 10-Q under the Securities Exchange Act
of 1934, as amended, and Article 10 of Regulation S-X under the Securities
Exchange Act of 1934, as amended. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations related to interim
financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Successor Company as of June 29, 2004, and the results of its operations for the
thirteen and twenty-six week periods ended June 29, 2004 and the twelve and
twenty-four weeks ended June 10, 2003, and its cash flows for the twenty-six
week period ended June 29, 2004 and the twenty-four weeks ended June 10, 2003,
respectively. The results for the thirteen and twenty-six-week periods ended
June 29, 2004 are not necessarily indicative of the expected results for the
full 2004 fiscal year or any future period.
The Successor Company reports results quarterly, with four quarters having
thirteen weeks. The Predecessor Company reported three periods of twelve weeks
each and one period of sixteen weeks. These condensed consolidated financial
statements should be read in conjunction with the financial statements and
related footnotes included in the Company's Annual Report on Form 10-K for the
year ended December 30, 2003 filed with the SEC.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates embedded in the condensed consolidated financial
statements for the periods presented concern the fair values of goodwill and the
fixed assets and other intangible assets and the estimated useful lives of
intangible assets.
In February 2002, the Debtors filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On October 11, 2002,
Pacific Basin Foods filed a petition under Chapter 7 of the Bankruptcy Code in
the Bankruptcy Court. The Plan was confirmed on December 19, 2003, and became
effective on the Effective Date. For financial reporting purposes, the Company
used an effective date of December 30, 2003. References in the balance sheet to
"Predecessor Company" refer to the Company prior to and including December 30,
2003. References in the balance sheet of the "Successor Company" refer to the
Company on and after December 31, 2003, after giving effect to the cancellation
of all outstanding securities of the Predecessor Company and the issuance of new
securities of the Successor Company in accordance with the Plan and
implementation of "fresh start" accounting. References in the statement of
operations and cash flows to the Predecessor Company refer to the Company prior
to and including December 31, 2003. References in the statement of operations
and cash flows to the Successor Company refer to the Company on and after
January 1, 2004. The events which occurred during fiscal year 2003 relating to
the Chapter 11 proceedings, the securities issued in accordance with the Plan,
and the "fresh start" accounting adjustments are described in "Company
Restructuring" and "Reorganization and Fresh Start Adjustments" below.
GOING CONCERN
The accompanying condensed 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 (Successor
Company) and December 30, 2003 (Predecessor Company), the Company maintained a
current ratio (current assets to current liabilities) of 0.31-to-1 and
0.25-to-1, respectively. In addition, during the years ended December 31, 2003
(Successor 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.
The condensed consolidated 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
ending December 28, 2004.
7
Management's plans include the following:
1. Restructuring its long-term debt position.
2. Improving the Company's financial performance through local marketing sales
generation, cost-reduction and restructuring of administrative overhead.
3. Raising money through equity or third party financing.
BANKRUPTCY FILING
COMPANY RESTRUCTURING
The Debtors filed for Chapter 11 reorganization under the Bankruptcy Code in
February 2002. From February 15, 2002 to December 30, 2003, the Debtors operated
their businesses as debtors-in-possession under Bankruptcy Court protection from
their creditors and claimants. Following approval by the creditors of the
Company entitled to vote on the Plan, on December 19, 2003, the Bankruptcy Court
entered an order confirming the Plan. As of the Effective Date, the Plan was
implemented and the reorganization of the Company was substantially completed.
PLAN INVESTORS
On August 13, 2003, the Company obtained and received Bankruptcy Court approval
for a $5,000,000 senior secured convertible debtor-in-possession financing
facility (the "DIP Loan") 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 Loan required
that the Company maintain certain financial covenants. The DIP Loan was
subsequently distributed on an in-kind basis to the members of Steakhouse
Investors, LLC. In addition, pursuant to the terms of the DIP Loan, the 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 principal amount of DIP Loan was converted
into 90% of the newly issued common stock of the Company in exchange for a full
and complete release of the Company's obligations under the DIP Loan other than
interest.
CONFIRMATION OF PLAN OF REORGANIZATION
The Company commenced a balloting and solicitation process with respect to the
Plan, which concluded December 3, 2003.
On the Effective Date the Company emerged from reorganization proceedings under
Chapter 11 of the Bankruptcy Code pursuant to the terms of the Plan.
Upon confirmation of the Plan on the Effective Date, the entire balance of the
DIP Loan, including accrued interest, became due and payable to Steakhouse
Investors. Accordingly, the members of Steakhouse Investors received, in the
aggregate, 4.5 million shares or 90% of the Company's newly issued common stock
in exchange for a full and complete release of the Company's obligations under
the DIP Loan, other than interest. The preferred stock, common stock, stock
options, and warrants of the Company outstanding before confirmation of the Plan
were all canceled on the Effective Date.
DISCHARGE OF LIABILITIES
On the Effective Date, all then-outstanding equity securities of the Company, as
well as a substantial amount of its pre-petition liabilities, were cancelled.
The newly authorized securities of the Company on the Effective Date pursuant to
the Plan, consisted of 15,000,000 shares of common stock and 5,000,000 shares of
new preferred stock. Of the shares of common stock authorized on the Effective
Date, 500,000 have been committed, but not issued, for the benefit of certain
unsecured creditors pursuant to the Plan in satisfaction of pre-petition claims,
and 4.5 million shares were issued to members of Steakhouse Investors in
exchange for $5,000,000 DIP Loan (other than interest).
All shares issued to members of Steakhouse Investors 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. As of the Effective Date, the Company is obligated to pay certain
pre-petition liabilities as follows:
1 Priority tax claim in the amount of approximately $1,921,004 will be
paid over a four-year period from the Effective Date with interest
payable at 6% per annum.
8
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
the Effective Date, all of the assets and lease rights of the Torrance,
California 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 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 newly issued common stock of the Company
and (b) convenience claims in the amount of approximately $700,000 will
be paid an estimated recovery of 50%. As of the date hereof, each
allowed claim has received its payment.
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, the Company 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 as
if it were a new reporting entity.
FRESH-START ACCOUNTING
The 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
Reorganization. Such fair values represented the Company's estimates based on
independent appraisals and valuations. Immaterial differences between estimated
pre-petition liabilities assumed by the Successor Company and the final
settlement amounts are recognized as they occur.
To facilitate the calculation of the enterprise value of the Company after the
Effective Date, 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.
9
A black line has been drawn in the accompanying condensed consolidated balance
sheet between December 30, 2003 and June 29, 2004 to distinguish between the
Predecessor Company and the Successor Company. The results of the interim
periods shown are for the Predecessor Company and are not considered as being
indicative of the results of operations that are expected for the full year.
These results will not be comparable to those of the Successor Company.
The adjustments for "fresh start" accounting were based upon the work of outside
appraisers, as well as internal valuation estimates using discounted cash flow
analyses, to determine the relative fair values of the Company's assets and
liabilities and are not expected to differ materially.
EARNINGS PER SHARE
Due to the Company's emergence from bankruptcy and the implementation of "fresh
start" reporting, the presentation of earnings per share is not meaningful for
the periods presented in the accompanying condensed consolidated financial
statements.
NOTE 2 -- EARNINGS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share." Basic earnings (loss)
per share is computed by dividing income (loss) available to common stockholders
by the weighted-average number of common shares outstanding. Diluted earnings
(loss) per share is computed similar to basic earnings (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. The
Company's common share equivalents consist of warrants.
NOTE 3 - COMMITMENTS & CONTINGENCIES
On April 16, 2004, the Company's Board of Directors confirmed the appointments
of Thomas A. Edler and Tod Lindner as members of the Compensation and Audit
Committees, and adopted the Company Code of Ethics. The Board of Directors also
ratified the decisions of the Compensation Committee to enter into employment
agreements with three executives for three-year terms and adopted the 2004 Stock
Option Incentive Plan, subject to shareholder approval.
The employment agreements require annual gross salary payments of $200,000,
$156,000 and $150,000 respectively, for the three executives each of whom may be
terminated without cause. However, in the event any agreement is terminated
without cause, the Company is obligated to pay twelve months salary to the
executive. The employment agreements also provide a set number of stock options
subject to shareholder approval of the 2004 Stock Incentive Plan and an
annual bonus for specific performance criteria, subject to the approval of the
Compensation Committee of the Board of Directors.
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 consequence of the bankruptcy filing of the Debtors and Pacific Basin
Foods, all pending litigation and claims against the Company were stayed. All
such claims were classified and treated pursuant the Plan.
NOTE 4 -- DISCONTINUED OPERATIONS
On October 11, 2002, Pacific Basin Foods, filed for protection under Chapter 7
of the Bankruptcy Code. Pacific Basin Foods ceased operations effective as of
the filing date. The Company's financial statements have been retroactively
adjusted to reflect the impact of the discontinuation of Pacific Basin Foods.
The results of operations of Pacific Basin Foods have been classified as
discontinued operations in the accompanying consolidated statements of
operations for the period ended March 18, 2003.
During February 2003, the Predecessor Company finalized the liquidation of
Pacific Basin Foods. 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 5 -- PROPERTY, PLANT AND EQUIPMENT
During the twenty-six weeks ended June 29, 2004, the Company negotiated the sale
of four restaurant leases and related property, plant and equipment for gross
proceeds of $615,956. The sale of these restaurants was conducted through the
Company's bankruptcy proceeding and was not finalized until February 2004. As a
result of the Company's adoption of "fresh start" accounting as of December 31,
2003, the gain realized by the Company in connection with this transaction has
been recorded as a reduction of goodwill.
10
NOTE 6 - EQUITY TRANSACTIONS
During the twenty-six weeks ended June 29, 2004, the Company granted a warrant
to purchase 150,000 shares of common stock to its secured claim note holder. The
warrant was granted in consideration of the Company's secured claim note holder
extending the payment terms of its secured claim in the amount of $1,535,000.
The warrant (i) is exercisable after November 1, 2004 (ii) has an exercise price
of $1.11 per share (iii) and expires six years from the date of issuance. The
Company has valued the warrants at $90,000, which represent the fair market
value of consideration received. The value of the warrants has been recorded as
a deferred financing cost, which will be amortized over six years, the extended
payment terms of the note.
During the twenty-six weeks ended June 29, 2004, the Company granted options,
which are subject to shareholder approval, to purchase in the aggregate 975,000
shares of common stock to employees with an exercise price of $1.11 per share.
One-third of the options become exercisable on the last day of each year
starting April 1, 2005. The Company recorded deferred compensation charge of
$1,404,000, in connection with the issuance as the exercise price of the stock
options was less than the fair market value of the Company's stock price as of
the date of grant. The Company will amortize the deferred compensation charge
over the vesting period of the options. As of June 30, 2004, the Company
expensed $78,000 of the deferred compensation charge.
During the twenty-six weeks ended June 29, 2004, the Company granted options to
purchase 100,000 shares of common stock to two members of its board of
directors, which are subject to shareholder approval, with an exercise price of
$1.11 per share. The options become exercisable on April 1, 2005. The Company
recorded deferred compensation charge of $144,000, in connection with the
issuance as the exercise price of the stock options was less than the fair
market value of the Company's stock price as of the date of grant. The Company
will amortize the deferred compensation charge over the vesting period of the
options. As of June 30, 2004, the Company expensed $24,000 of the deferred
compensation charge.
During the twenty-six weeks ended June 29, 2004, the Company granted options,
which are subject to shareholder approval, to purchase 250,000 shares of common
stock to one of its stockholders for services to be rendered over a period of
three years. The options have an exercise price of $1.11 per share. One-third of
the options become exercisable on the last day of each year starting April 1,
2005. The Company uses the fair value method to measure the value of stock-based
compensation issued to non-employees in accordance with SFAS 123 and EITF Issue
No. 96-18. In accordance with such pronouncements all transactions in which
goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, which ever is more
reliable measurable. In connection with the issuance, the Company determined
that the fair value of the stock options granted was a more reliable measure of
value than the value of consideration received. Using the Black-Scholes
option-pricing model the Company determined that the fair value of stock options
granted was $407,109, which has recorded deferred compensation. The Company will
amortize the deferred compensation charge over the vesting period of the
options. As of June 30, 2004, the Company expensed $22,617 of the deferred
compensation charge.
The table below represents a reconciliation of the Company's pro forma net
income giving effect to the estimated compensation expense related to stock
options that would have been reported if the Company utilized the fair value
method (in thousands, except per share data):
Thirteen weeks Twelve weeks
Ended Ended
June 29, 2004 June 10, 2003
---------------- ---------------
Net Loss
As reported $ (292,924) $ (162,426)
Stock based employee compensation cost, net of
related tax effects, included in reported
net loss $ 102,000 $ -
Stock based employee compensation cost, net of
related tax effects, that would have been
included in the determination of net loss if
the fair value method had been applied (112,751) (63,450)
Pro Forma Net Loss $ (303,675) $ (225,876)
Earnings per common share
Basic and diluted- as reported $ (0.07) $ (0.05)
Stock based employee compensation cost, net of
related tax effects, included in reported net loss $ 0.02 $ -
11
Stock based employee compensation cost, net of
related tax effects, that would have been
included in the determination of net loss
if the fair value method had been applied $ (0.02) $ (0.02)
Pro forma net loss $ (0.07) $ (0.07)
Twenty-six Twenty-four
Weeks Weeks
June 29, 2004 June 10, 2003
---------------- ---------------
Net Income (loss)
As reported $ (406,151) $ 716,458
Stock based employee compensation cost, net of
related tax effects, included in reported net loss $ 102,000 $ -
Stock based employee compensation cost, net of
related tax effects, that would have been
included in the determination of net loss if
the fair value method had been applied (112,751) (126,900)
--------------- --------------
PRO FORMA NET (LOSS) INCOME $ (416,902) $ 589,558
=============== ==============
Earnings per common share
Basic and diluted - as reported $ (0.07) $ 0.21
Stock based employee compensation cost, net of
related tax effects, included in reported net loss $ 0.02 $ -
Stock based employee compensation cost, net of
related tax effects, that would have been
included in the determination of net income(loss) if
the fair value method had been applied $ (0.02) $ (0.04)
Proforma $ 0.07 $ 0.17
NOTE 7 -- INCOME TAXES
Significant components of the provision for taxes based on income for the
thirteen weeks ended June 29, 2004 were as follows:
Current
Federal -
State $ 43,987
------------
43,987
------------
Deferred
Federal -
State 0
------------
0
------------
PROVISION FOR
INCOME TAXES $ 43,987
============
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 quarter ended June 29, 2004 is as
follows:
Income tax provision
computed at federal
statutory tax rate 34.0%
State taxes, net of
federal benefit (19.61)
Purchase Adjustment - Goodwill (31.55)
Increase in valuation
reserve and
other (12.54)
------------
TOTAL (29.70)%
============
12
The December 30, 2003, income tax disclosures have not been included, as the
amounts are not considered to be comparative as a result of change in ownership
resulting from the Company's emergence from bankruptcy and the Company's
adoption of fresh start accounting. The estimates used to calculate the tax
provision is not necessarily indicative of the expected results for the full
2004 fiscal year or any future period.
As a result of the Reorganization pursuant to the Plan, certain of the deferred
tax assets, liabilities, and valuation will be adjusted. All amounts will be
fully reserved for and presented accordingly in the financial statements.
The Company has remaining net operating loss carry-forwards, after carry-backs,
of approximately $3,949,995 for federal income tax and $1,053,332 for state
income tax, which will begin expiring in 2017.
The Reorganization of the Company on the Effective Date constituted a change of
ownership pursuant to Section 382 of the Internal Revenue Code. An ownership
change generally occurs if certain persons or groups increase their aggregate
ownership percentage in a corporation's capital 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
Successor Company's future ability to utilize 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.
NOTE 8 -- PRO FORMA STATEMENT OF OPERATIONS - CORE RESTAURANTS
The following table shows the operating performance of the core restaurants only
for the twelve and twenty-four weeks ended June 10, 2003 and the thirteen and
twenty-six weeks ended June 29, 2004.
Successor Company Predecessor Company
----------------- -------------------
Thirteen Twenty-six Twelve Twenty-four
Weeks Weeks Weeks Weeks
ended June 29, ended June 29, ended June 10, ended June 10,
2004 2004 2003 2003
------------------------- -----------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Core Restaurant Revenue, net 14,318,019 27,932,075 12,504,577 24,929,405
Restaurant Costs of Sales
Food and beverage - core restaurants 5,013,729 9,726,512 4,250,189 8,536,193
Personnel costs - core restaurants 4,665,332 9,225,454 4,102,362 8,221,476
Direct operating costs - core restaurants 3,064,029 5,663,104 2,534,103 5,081,480
Depreciation & amortization - core restaurants 306,464 621,965 313,149 606,798
----------- --------- ----------- ----------
Total Costs of Sales 13,049,554 25,237,035 11,199,803 22,445,947
Gross Profit 1,268,456 2,695,040 1,304,774 2,483,458
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q may 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. In February 2002, the Debtors filed voluntary petitions for
bankruptcy under Chapter 11 of the Bankruptcy Code. On the Effective Date, the
Debtors emerged from bankruptcy protection pursuant to the Bankruptcy Court's
confirmation of the Plan. The operation of the Company following emergence from
Bankruptcy Court protection involves risks and uncertainties, including
uncertainties associated with the ability of the Company to successfully emerge
from bankruptcy and disruptions to the Company's business relationships during
the restructuring process. Other risks and uncertainties include the strength of
the recovery of the U.S. economy, trends affecting the Company's financial
condition or results of operations, the Company's operating strategy and growth
strategy, potential acquisitions or joint ventures by the Company, litigation
affecting the Company, the timely development and market acceptance of new
products, the ability to provide adequate incentives to retain and attract key
employees, the impact of competitive products and pricing, and other risks which
are detailed in the herein under the heading "Risk Factors." For this purpose,
any statement contained herein that is not a statement of historical fact may be
deemed to be a forward-looking statement. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. The Company's actual results
may differ materially from those indicated by such forward-looking statements
based on the factors outlined above.
The following is management's discussion and analysis of certain significant
factors, which have effected the results of operations and should be read in
conjunction with the accompanying unaudited condensed consolidated financial
statements and notes thereto.
13
OVERVIEW
BACKGROUND
The Company, currently 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 $25.12 (including alcoholic beverages) and
it currently serves approximately 2.5 million meals annually. The Company
operates principally under the brand names of Hungry Hunter, Hunter Steakhouse,
Mountain Jack's and Carvers. The Company's management believes that its emphasis
on quality service and the limited menu of its restaurants, with its
concentration on high quality USDA choice-graded steaks and prime ribs,
distinguishes the Company's restaurants and presents an opportunity for
significant growth after its emergence from the reorganization process described
below under "Bankruptcy Filing".
BANKRUPTCY FILING
In February 2002, the Debtors filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court. On October 11, 2002, Pacific
Basin Foods filed a petition under Chapter 7 of the Bankruptcy Code in
Bankruptcy Court.
The bankruptcy filings were 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.
During the reorganization, the Company continued to manage its properties and
operate its businesses as debtors-in-possession 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 the 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 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 Plan provided
for no distribution to equity holders, but rather provided for distribution of
equity upon confirmation to Steakhouse Investors, LLC ("Steakhouse Investors")
and creditors, as more fully described below.
In the Fall of 2003, the Company commenced a balloting and solicitation process
with respect to the Plan, which concluded in December 2003. On December 19,
2003, the Plan was confirmed by the Bankruptcy Court. Upon the Effective Date,
the entire balance of the DIP Loan of $5,000,000, including accrued interest,
became due and payable to Steakhouse Investors. Steakhouse Investors converted
the principal amount of the DIP Loan into 90% (4.5 million shares) of the newly
issued common stock of the Company in exchange for a full and complete release
of the Company's obligations under the DIP Loan except interest. The Plan
provided that all of the Company's preferred stock, common stock, stock options,
and warrants of the Company outstanding prior to the Effective Date be canceled.
In addition, all of the Company's pre-petition liabilities were completely
restructured by the Plan, whereby the Company is obligated to pay the following
claims according to the Plan as set forth below:
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.
Upon the Effective Date all of the assets and lease rights of the
Torrance, California 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. The Company has 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 newly issued common stock of the Company and
(b) convenience claims in the amount of approximately $700,000 were
paid an estimated recovery of 50%. As of the date hereof, each allowed
claim has received its payment.
14
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - SELECTED ITEMS AS A PERCENTAGE OF NET SALES
The following table sets forth, as a percentage of net sales for core
restaurants only (as stated in Note 8), certain items in the Company's condensed
consolidated statements of operations for the indicated periods:
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------- -------------------
THIRTEEN WEEKS TWENTY-SIX TWELVE WEEKS TWENTY-FOUR
ENDED WEEKS ENDED ENDED WEEKS ENDED
June 29, June 29, June 10, JUNE 10,
2004 2004 2003 2003
----------- ----------- ---------- ----------
Revenue 100.0% 100.0% 100.0% 100.0%
Discounts 2.3% 2.6% 2.6% 2.7%
Net Revenues 97.7% 97.4% 97.4% 97.3%
Cost of Sales
Food & Liquor costs 35.0% 34.8% 34.0% 34.2%
Personnel Costs 32.6% 33.0% 32.8% 33.0%
Direct Operating Cost 21.4% 20.3% 20.3% 20.4%
Depreciation 2.1% 2.2% 2.5% 2.4%
Gross Margin 8.9% 9.6% 10.4% 10.0%
General & Administrative 8.5% 8.0% 8.0% 9.8%
Interest Expense 2.4% 2.3% 4.7% 4.9%
Other 0.0% 0.8% (1.0%) (7.6%)
Net Income (Loss) (2.0%) (1.5%) (1.3%) 2.9%
Factors that have affected the results of operations for the thirteen-weeks and
twenty-six weeks of fiscal 2004 for the Company as compared to the twelve-weeks
and twenty-four weeks of fiscal 2003 for the Company are discussed below.
THIRTEEN WEEKS ENDED JUNE 29, 2004 COMPARED TO TWELVE WEEKS ENDED JUNE 10, 2003
Revenues for the thirteen-week period ended June 29, 2004 decreased $3,730,193
to $14,318,019 for the thirteen-week period in 2004 or 20.7% from $18,048,212
for the twelve-week period ended June 10, 2003. The chief reason for this
decline is Paragon sold or closed twenty units from the end of the first quarter
of 2003 to the end of the first quarter of 2004. However, the revenue for
Paragon's core restaurants increased $1,813,442 or 14.5% for the same periods as
described above. The chief reason for this increase was Paragon same-store sales
increased 4.7% for the 25 comparable core units in 2004 versus the same
thirteen-week period in 2003 and the change in the accounting year.
Food and beverage costs for the thirteen-week period ended June 29, 2004
decreased $1,481,432 to $5,013,729 for the thirteen-week period in 2004 or 22.8%
from $6,495,161 for the twelve-week period ended June 10, 2003. The chief reason
for this decline is Paragon sold or closed twenty units from the end of the
first quarter of 2003 to the end of the first quarter of 2004. Food and beverage
costs as a percentage of restaurant revenues for the core restaurants were 34.0%
for the twelve-week period ended June 10, 2003 compared to 35.0% for the
thirteen-week period in 2004. Food costs in relation to sales increased by 2.9%.
Beef, dairy and produce prices increased significantly during the period. The
Company is actively reviewing fundamentals to reducing food and beverage and
related costs over time without affecting the dining experience. The Company
also increased menu prices in June 2004 to improve profitability.
Payroll and payroll related costs for the thirteen-week period ended June 29,
2004 decreased $1,705,436 to $4,665,332 for the thirteen-week period in 2004 or
26.8% from $6,370,768 for the twelve-week period ended June 10, 2003. The chief
reason for this decline is Paragon sold or closed twenty units from the end of
the first quarter of 2003 to the end of the first quarter of 2004. Payroll and
payroll related costs for the 25 core restaurants remained relatively constant
to revenue between the two quarters just ended June 29, 2004 and same period
2003.
15
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expense, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating cost for the
thirteen-week period ended June 29, 2004 decreased $1,088,508 to $3,064,029 for
the thirteen-week period in 2004 or 26.2% from $4,152,537 for the twelve-week
period ended June 10, 2003. The chief reason for this decline is Paragon sold or
closed twenty units from the end of the first quarter of 2003 to the end of the
first quarter of 2004. These costs as a percentage of core restaurant revenues
were 20.3% for the twelve-week period ended June 10, 2003 compared to 21.4% for
the thirteen-week period in 2004. The chief causes for the increase were costs
associated with utilities, credit card fees, general insurance, marketing and
rent increases in a number of the stores during the period. To offset the
additional costs, the Company increased its menu prices in June 2004.
Depreciation and amortization for the thirteen-week period ended June 29, 2004
decreased $114,073 to $306,464 for the same period in 2004 or 27.1% from
$420,537 for the twelve-week period ended June 10, 2003. The decrease is
principally due to the sale or rejection of 20 restaurants. Depreciation for the
core restaurants remained relatively constant between the two quarters just
ended June 29, 2004 and same period 2003.
General and administrative expenses for the thirteen-week period ended June 29,
2004 decreased $204,885 to $1,210,448 for the thirteen-week period in 2004 or
20.4% from $1,005,563 for the twelve-week period ended June 10, 2003. These
costs as a percentage of core restaurants revenues were 8.0% for the twelve-week
period ended June 10, 2003 compared to 8.5% for the same period in 2004. The
chief reason for the increase in general and administrative expense is
associated with the amortization of $124,000 of compensation expense in
connection with stock options granted in the money and additional audit and
legal expenses associated with the Company's filings not done during the
bankruptcy period as well as current SEC requirements.
Other income (expenses) for the thirteen-week period ended June 29, 2004
decreased $266,834 to $332,941 for the same period in 2004 or 44.5% from
$599,775 for the twelve-week period ended June 10, 2003. The chief reason for
this decrease was the restructuring of all the debt (except capital lease
interest) by the Company in accordance with the terms set forth in the Plan.
As reorganization items for the thirteen-week period ended June 29, 2004 were
included in "fresh start" accounting as an offset to Goodwill, there was no
effect on current period numbers. For the twelve-week period ended June 10, 2003
the reorganization items was a gain of $863,703,which resulted from the
rejection and sale of selected restaurants as part of our restructuring efforts.
Net loss for the thirteen-week period ended June 29, 2004 increased $130,498 to
a net loss of $292,924 for the thirteen-week period in 2004 from a net loss of
$162,426 for the twelve-week period ended June 10, 2003. The loss for the
thirteen-week period ended June 29, 2004 was chiefly the result of the
amortization of stock options expense and increases in beef, dairy and produce
prices.
TWENTY-SIX WEEKS ENDED JUNE 29, 2004 COMPARED TO TWENTY-FOUR WEEKS ENDED JUNE
10, 2003
Revenues for the twenty-six week period ended June 29, 2004 decreased $9,452,059
to $28,477,418 for the twenty-six week period in 2004 or 24.9% from $37,929,477
for the twenty-four week period ended June 10, 2003. The chief reason for this
decline is Paragon sold or closed twenty units from the end of the first quarter
of 2003 to the end of the first quarter of 2004. However, the revenue for
Paragon's core restaurants increased $3,002,670 or 12.0% for the same periods
described above. The chief reason for this increase was Paragon same-store sales
increased 4.4% for the 25 comparable core units in 2004 versus the same
thirteen-week period in 2003 and the change in the accounting year.
Food and beverage costs for the twenty-six week period ended June 29, 2004
decreased $3,522,757 to $9,986,709 for the twenty-six week period in 2004 or
26.1% from $13,509,466 for the twenty-four week period ended June 10, 2003. The
chief reason for this decline is Paragon sold or closed twenty units from the
end of the first quarter of 2003 to the end of the first quarter of 2004. Food
and beverage costs as a percentage of restaurant revenues for the core
restaurants were 34.2% for the twenty-four week period ended June 10, 2003
compared to 34.8% for the twenty-six week period in 2004. The chief cause of the
increase was beef, dairy and produce prices increased significantly during the
period. The Company is actively reviewing fundamentals to reducing food and
beverage and related costs over time without affecting the dining experience.
The Company also increased menu prices in June 2004 to improve profitability.
Payroll and payroll related costs for the twenty-six week period ended June 29,
2004 decreased $3,750,440 to $9,599,485 for the twenty-six week period in 2004
or 28.1% from $13,349,925 for the twenty-four week period ended June 10, 2003.
The chief reason for this decline is Paragon sold or closed twenty units from
the end of the first quarter of 2003 to the end of the first quarter of 2004.
Restaurant payroll and payroll related costs as a percentage of revenue for the
core restaurants was 33.0% for the twenty-four week period ended June 10, 2003
compared to 33.0% for the twenty-six week period in 2004. Payroll and payroll
related costs for the core restaurants remained relatively constant to revenue
between the two quarters just ended June 29, 2004 and same period 2003.
16
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expense, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating cost for the
twenty-six week period ended June 29, 2004 decreased $2,903,970 to $5,845,884
for the twenty-six week period in 2004 or 33.2% from $8,749,854 for the
twenty-four week period ended June 10, 2003. The chief reason for this decline
is Paragon sold or closed twenty units from the end of the first quarter of 2003
to the end of the first quarter of 2004. These costs as a percentage of core
restaurant revenues were 20.4% for the twenty-four week period ended June 10,
2003 compared to 20.3% for the twenty-six period in 2004. Direct operating costs
for the core restaurants remained relatively constant to revenue between the two
quarters just ended June 29, 2004 and same period 2003.
Depreciation and amortization for the twenty-six week period ended June 29, 2004
decreased $283,181 to $632,059 for the same period in 2004 or 30.9% from
$915,240 for the twenty-four week period ended June 10, 2003. The decrease is
principally due to the sale or rejection of 20 restaurants. Depreciation for the
core restaurants remained relatively constant between the two quarters just
ended June 29, 2004 and same period 2003.
General and administrative expenses for the twenty-six week period ended June
29, 2004 decreased $218,853 to $2,225,877 for the twenty-six week period in 2004
or 9.0% from $2,444,730 for the twenty-four week period ended June 10, 2003.
These costs as a percentage of core restaurants revenues were 9.8% for the
twenty-four week period ended June 10, 2003 compared to 8.0% for the same period
in 2004. The chief reason for the reduction in general and administrative
expense is staffing reductions (i.e., district leader in the Midwest, director
at corporate, purchasing manager, etc.) partially offset by the amortization of
$124,000 of compensation expense in connection with stock options granted in the
money.
Other income (expenses) for the twenty-six week period ended June 29, 2004
decreased $588,796 to $549,568 for the same period in 2004 or 51.7% from
$1,138,364 for the twenty-four week period ended June 10, 2003. The chief reason
for this decrease was the restructuring of all the debt (except capital lease
interest) by the Company in accordance with the terms set forth in the Plan.
As reorganization items for the twenty-six week period ended June 29, 2004 were
included in "fresh start" accounting as an offset to Goodwill, there was no
effect on current period numbers. For the twenty-four week period ended June 10,
2003 the reorganization items was a gain of $1,896,897.
There was no gain from discontinued operations for the twenty-six week period
ended June 29, 2004. Gain from discontinued operations for the twenty-four week
period ended June 10, 2003 was $1,057,463. On October 11, 2002 when Pacific
Basin Foods ceased operations and filed for Chapter 7 with the Bankruptcy Court.
The Company had a net liability of $1,057,463 as of December 24, 2002. As
Pacific Basin Foods had legally and practically ceased operations the net
liability was recognized as one time income of discontinued operations, net of
taxes.
Net loss for the twenty-six week period ended June 29, 2004 increased $1,122,409
to a net loss of $406,151 for the twenty-six week period in 2004 from a net gain
of $716,458 for the twenty-four week period ended June 10, 2003. The loss for
the twenty-six week period ended June 29, 2004 was chiefly the result of
operating and then disposing (timing issues as part of the Plan) of under
performing restaurants in the first quarter of 2004 and the increased
amortization of stock options and increases in beef, dairy and produce prices.
Restaurants disposed of in 2004 contributed a combined loss of $281,759. The
income for the twenty-four week period ended June 10, 2003 is entirely due to
recognizing the net liability of Pacific Basin Foods that remained on the
Company's books as of December 24, 2002 as a one-time income of discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a cash and cash equivalents balance of $0 at June 29, 2004. Our
operating activities for the twenty-six weeks ended June 29, 2004 used $2.0
million. Most of the cash was used to pay certain pre-petition liabilities in
accordance with the Plan. Without these payments, the Company believes that the
cash flow from operations should be more than sufficient to fund its operations
at current levels and fund its repayment obligations pursuant to the Plan during
the remainder of fiscal 2004. The Company's highest cash generation quarters
from operations are the second and fourth quarters. The Company expects to meet
its upcoming Plan payments through a combination of cash generated from
operations, borrowings, and equity sales.
However, to the extent the Company's estimates and assumptions are inaccurate
the Company may not have sufficient cash reserves to maintain its operations and
fund its obligations. In such event, the Company may need to seek additional
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 a 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.
17
The Company had a cash and cash equivalents balance of $2,205,221 at December
30, 2003. During the year ended December 30, 2003, the Company maintained a
current ratio (current assets to current liabilities) of 0.25 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.
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include
beef, dairy, food and labor costs. The Company's restaurant personnel are paid
at the federal and state established minimum wage levels and accordingly,
changes in such wage level affect the Company' s labor costs. As costs of food
and labor have increased, the Company will be seeking to offset those increases
through economies of scale and/or increases in menu prices, although there is no
assurance that such offsets will continue. To date, inflation has not had a
material impact on loss from operations.
CRITICAL ACCOUNTING POLICIES
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.
NEW REPORTING ENTITY AND ADOPTION OF FRESH START ACCOUNTING
The Company's emergence from Chapter 11 bankruptcy proceedings resulted in a new
reporting entity and adoption of fresh start reporting in accordance with
Statement of Position ("SOP") No. 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. The condensed consolidated financial
statements as of and for the quarter ended June 29, 2004 reflect reorganization
adjustments for the discharge of debt and adoption of fresh start reporting.
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 Successor Company and the final settlement amounts
are recognized as they occur.
To facilitate the calculation of the enterprise value of the Successor 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.
A black line has been drawn in the accompanying condensed consolidated balance
sheet between December 30, 2003 and June 29, 2004 to distinguish between the
Successor Company and the Predecessor Company. The results of the interim
periods shown are for the Predecessor Company and are not considered as being
indicative of the results of operations that are expected for the full year.
These results will not be comparable to those of the Successor Company.
These adjustments for "fresh start" accounting were based upon the work of
outside appraisers, as well as internal valuation estimates using discounted
cash flow analyses, to determine the relative fair values of the Company's
assets and liabilities and are not expected to differ materially.
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 an 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.
18
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. The 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.
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 a 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.
19
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION
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 and its
subsidiaries, 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 filings 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.
WE WILL NEED ADDITIONAL CAPITAL FOR EXPANSION.
The development of new restaurants requires funds for construction, tenant
improvements, furniture, fixtures, equipment, training of employees, 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
financings could result in dilution to our stockholders.
THE COMPANY MAY NOT HAVE SUFFICENT CASH RESERVES TO MAINTAIN ITS OPERATIONS AND
FUND ITS OPERATIONS AND FUND ITS OBLIGATIONS.
The Company may not have sufficient cash reserves to maintain its operations and
fund its obligations. In such event, the Company may need to seek
additional 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 a 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.
BECAUSE WE HAVE EXPERIENCED SIGNIFICANT CHANGES IN OUR SENIOR MANAGEMENT TEAM,
IT MAY BE DIFFICULT FOR INVESTORS TO EVALUATE OUR PROSPECTS FOR IMPROVED
PERFORMANCE.
Our chief executive officer was hired in July 2003. If our new 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
operational challenges could be impaired.
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 officers,
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.
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, 2003. 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, 2003 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, 2003 included elsewhere in this prospectus. The use of fresh
start reporting will make it difficult to assess our future prospects based on
historical performance.
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.
20
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.
OUR ABILITY TO EXECUTE OUR EXPANSION PLANS DEPENDS ON SECURING SUITABLE
LOCATIONS AT FAVORABLE PRICES.
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 or 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.
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 DEPEND ON KEY FOOD PRODUCT DISTRIBUTORS.
We currently rely on chiefly two food product distributors Southwest Traders and
VanEerden. If either Southwest Traders or VanEerden 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 RISK.
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.
21
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, Hunter 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.
INCREASES IN FEDERAL AND STATE STATUTORY MINIMUM WAGES COULD INCREASE OUR
EXPENSES, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Certain states have each increased their state minimum wages to a level that
significantly exceeded the Federal minimum wage. These recent increases in the
state statutory minimum wage and any future federal or state minimum wage
increases could raise minimum wages above the current wages of some of our
employees. As a result, competitive factors could require us to make
corresponding increases in our employees' wages. Increases in our wage rates
increase our expenses, which could adversely affect our results of operations.
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,
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", "Mountain Jack's" and "Carvers" represent 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.
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 of 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;
22
* 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.
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 an 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.
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.
Our common stock is currently quoted on the Pink Sheets. The fact that our
common stock is not listed is likely to make trading 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.
23
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 stock is eligible for public sale and our 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 common 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.
TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC'S PENNY STOCK REGULATIONS,
WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK.
The SEC 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.
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NASD SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY
AND SELL OUR STOCK.
In addition to the "penny stock" rules 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. Five 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 June 29, 2004, 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 market 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.
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ITEM 4. 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 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 and
principal financial 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.
Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company and its subsidiaries to disclose material information
otherwise required to be set forth in the Company's periodic reports.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence to the bankruptcy filings, all pending litigation and claims
against the Company through December 30, 2003 were stayed, and no party could
take action to realize its pre-petition claims, except pursuant to order of the
Bankruptcy Court. All pre-petition claims have been treated within the Plan.
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 operation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Effective as of April 29, 2004 the new trading symbol for the Company's common
stock is "STPK.PK"
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
31.2 Certification of Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
32.2 Certification of Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEAKHOUSE PARTNERS INC.
By: /s/ A Stone Douglass By: /s/ Joseph L Wulkowicz
................................... ........................................
A Stone Douglass Joseph L Wulkowicz
President, Secretary and Director Vice President and Chief Financial Officer
(Serving as principal executive (Serving as principal financial and
officer) accounting officer)
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