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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-11331
PERFORMANCE INDUSTRIES, INC.
------------------------------------------------------
(Exact name of Registrant as Specified in its Charter)
OHIO 34-1334199
------------------------------ ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2701 E. CAMELBACK ROAD, SUITE 210
PHOENIX, ARIZONA 85016
-----------------------------------------------------
(Address of principal executive offices and zip code)
(602) 912-0100
--------------------------------------------------
(Registrant's telephone number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
-------------------------------
(Title of Class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Registrant's voting stock held by nonaffiliates as
of March 31, 1999 (based upon closing price) was $521,942.
At March 31, 1999, 2,211,183 shares of Registrant's Common Stock were
outstanding.
PART I
ITEM 1. BUSINESS
In 1997, the Company restructured its operations divesting itself of two
businesses, Factoring and Development. This will allow the company to
concentrate on its core business, Restaurants. Management believes this will
enable analysts to better understand the Company which may result in greater
stock activity.
PERFORMANCE RESTAURANTS GROUP, INC. (RESTAURANTS)
Restaurants was formed in 1993 to acquire six operating restaurants in
California. Four of the restaurants operate under the trade name Bobby McGee's
and are full service restaurants/nightclubs. The fifth was converted to a sports
bar-restaurant/nightclub concept operating under the trade name McGee's Grill.
In 1996, the Company sold one of the original Bobby McGee's locations.
In 1995, a restaurant was acquired in Scottsdale, Arizona. It is a full service
restaurant and bar operating under the trade name Buster's Restaurant Bar &
Grill.
In 1996, the Company acquired two Carlos Murphy's restaurants in San Diego,
California. In 1998, the Company entered into an operating lease for the two
Carlos Murphy's restaurants with an unrelated third party. Subsequently, one was
closed in 1998, and the other was sold in January 1999.
In October, 1998, the company purchased Steamers Genuine Seafood. It is an
upscale seafood restaurant located in the Biltmore Fashion Park in Phoenix, AZ.
The Bobby McGee's concept is a full service restaurant using costumed servers
and a lounge offering music and dancing at the same location. The restaurant
appeals to a wide range of diners as a special event restaurant. Diners come to
the restaurant to celebrate birthdays, anniversaries, graduations, and other
special occasions.
McGee's Grill was opened in 1994. It features pool tables and television screens
for the viewing of sports events and a limited menu for dinner and lunch in the
sports bar. The sports bar is combined with the more traditional nightclub
offered at other Bobby McGee's restaurants.
Buster's is a full service restaurant offering a variety of dishes including
seafood, steak and pasta dishes. Buster's is on the higher end of the casual
dining market.
Steamers is a full service restaurant offering a variety of dishes, but
featuring seafood. Steamers is on the higher end of the casual dining market.
PERFORMANCE FUNDING CORP. (FUNDING)
The Company sold the Factoring business to a third party related through common
management in August 1997. The Company believes the sale to have been on terms
at least as favorable as it would have received in an arms length transaction.
The sale allowed the Company to make available cash for use in the expansion of
its restaurant division when needed.
PERFORMANCE DEVELOPMENT CORP. (DEVELOPMENT)
CAMELBACK PLAZA DEVELOPMENT, L.C.
In December of 1997, the Company sold its interest in Camelback Plaza
Development, Inc. to Imprimis Partners II, the minority partner in the
Development. The Company received approximately $700,000. for its interest.
2
IXTAPA
The Company purchased land for development as a condominium complex. At the time
of purchase, the seller had committed to construction financing for the project.
As discussed further below, the Company has indefinitely delayed the project due
to the continuing financial situation in Mexico. Currently, the Company has the
property listed for sale with a broker.
A. COMPETITION
The restaurant business is highly competitive. Restaurants competes in the
restaurant business with a number of chains and restaurants owned by
substantially larger companies with greater financial resources than
Restaurants. Restaurants competes on the basis of name recognition, concept of
restaurants, location, quality of product and other intangible elements.
Restaurants believes that the costume concept, along with the adjoining
nightclub, offers a unique experience for the consumer that has a broad appeal.
Restaurants further believes its present locations offer a competitive advantage
over other areas.
B. TRADEMARKS AND PATENTS
The Company's registered trademark for Restaurants is an important factor in
marketing for this group due to the high degree of name recognition in its
geographical area and general market. The name Bobby McGee's is federally
trademarked.
C. ENVIRONMENTAL MATTERS
An investigation of environmental matters related to facilities and property
owned and leased by the Company was performed to determine contingencies that
may have affected the Company's emergence from Chapter 11. Certain reports
received by the Company have identified areas of environmental contamination and
potential environmental contamination. Management believes that certain
predecessors-in-interest may bear either full or partial liability for
remediation of affected areas. Certain predecessors-in-interest and governmental
agencies have been notified by the Company of the related possible liabilities.
In addition, the Company notified its insurance carriers of potential claims
under its general liability and property insurance coverage from prior years.
a) REYES AVENUE COMPTON, CA
This facility housed the manufacturing plant of the former Wheel business which
was sold in 1992.
In 1991, possible contamination at the site was discovered. The Richter Family
Trust, the owner of this facility, filed an action against the Company and
others in the U.S. District Court for the Central District of California and
served it on the Company in April 1995. The Company responded to the complaint
on its behalf and on behalf of Joe Hrudka as an officer of the Company. The
complaint seeks damages of an unspecified amount for environmental contamination
at the site under several theories. Currently, the action is stayed by
stipulation of the parties, so that further testing to determine the extent of
the contamination can be completed.
The Company tendered defense of the action to several insurance carriers under
policies in force for the periods when it owned and operated its wheel division
at the site. Two insurers have agreed to pay some legal costs of defending the
action under their policies, although they have reserved the right to ultimately
deny coverage.
ITEM 2. PROPERTIES
As of December 31, 1998, the Company and its subsidiaries leased a total of
approximately 89,050 square feet of restaurant, office, and other space for its
principal facilities. Management believes that the Company's and its
subsidiaries' facilities and equipment are modern and well maintained.
The locations and general description of the principal properties owned and
leased by the Company and its subsidiaries are as follows:
3
APPROXIMATE AREA
LOCATION PRIMARY FUNCTIONS IN SQUARE FEET LEASE EXPIRATION
- -------- ----------------- -------------- ----------------
Phoenix, Office 2,115 7/31/2000
Arizona
Scottsdale, Buster's Restaurant 9,123 4/31/2000
Arizona Bar & Grill
Phoenix, Steamers Genuine Seafood 7,827 5/01/2007
Arizona
Brea, Restaurant/Nightclub 11,000 6/30/2005
California
Burbank, Restaurant/Nightclub 11,000 6/30/2010
California
Burlingame, Restaurant/Nightclub 9,000 12/31/2006
California
Citrus Heights, Restaurant/Nightclub 10,600 9/14/2005
California
San Bernardino, Restaurant/Nightclub 10,500 11/13/2002
California
Las Vegas, Restaurant/Nightclub (1) 9,185 12/31/2005
Nevada
La Mesa, Restaurant/Nightclub (2) 8,700 12/31/2005
California
Ixtapa Raw Land 8,748 sq. meters Owned
(1) The property is currently subleased to an unrelated third party. The
Company is a guarantor of the lease.
(2) The property was sold on 1/19/99.
ITEM 3. LEGAL PROCEEDINGS
A. On January 6th, 1994, the Company filed an action in the Superior
Court of Arizona for the County of Maricopa to determine the fair cash
value of its shares held by shareholders who dissented from the sale
of the Exhaust business. The case was explained in detail in the 1997
10-K. The case was settled in 1998.
B. On January 26, 1994, an action filed by Murray & Murray in the Court
of Common Pleas, County of Cuyahoga, State of Ohio, was served on the
Company and three former or present officers and/or directors of the
Company; Joe Hrudka, Tom Hrudka and Howard B. Gardner. This case was
settled in 1998.
C. In April 1995, the Company was served with an action filed by the
Richter Family Trust in the U.S. District Court for the Central
District of California against the Company and others for unspecified
damages for the remediation of the site of the Company's former wheel
manufacturing plant. The Company responded to the suit on its own
behalf and on behalf of Joe Hrudka, an officer and director of the
Company, who was sued personally. Currently, the case has been stayed
by stipulation of the parties, so that further testing can be
conducted on site to determine the extent of the contamination.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business, including product
liability claims. In the opinions of management, the ultimate
disposition of these matters will not have a material adverse effect
on the Company's consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth the range of high and low closing bid prices for
the Company's common stock as reported by the NASDAQ National Market System for
the past two calendar years: (1)
BID ASK
--- ---
1998
Quarter ended March 31, 1998 1 1 3/8
Quarter ended June 30, 1998 1 1 3/8
Quarter ended September 30, 1998 1 1 3/8
Quarter ended December 31, 1998 1 1 3/8
1997 (2)
Quarter ended March 31, 1997 5/8 1 3/8
Quarter ended June 30, 1997 5/8 1 3/8
Quarter ended September 30, 1997 3/4 1 5/8
Quarter ended December 31, 1997 3/4 1 5/8
(1) All quotations represent inter-dealer prices, without retail mark-up,
markdown or commission, and may not necessarily represent actual trades.
(2) Restated to reflect 4 for 1 reverse stock split effective June, 1996.
As of March 26, 1999, there were 766 holders of record of the Company's common
stock. No dividends have been declared since December 1984, nor does the Company
anticipate that any dividends will be declared in the foreseeable future.
The Company's shares are traded over the counter.
During 1996, the Company effected a 4 for 1 reverse stock split and an odd lot
tender offer. Approximately 8200 shares were tendered to the Company.
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data).
The Company's selected consolidated financial data has been prepared in
accordance with generally accepted accounting principles applicable to a going
concern, which principles, except as otherwise disclosed, assume that assets
will be realized and liabilities will be discharged in the normal course of
business.
The following table sets forth selected consolidated financial data of the
Company for the five years ended December 31, 1994 through 1998. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included elsewhere herein. The selected
consolidated financial data for the years ended December 31, 1994 through 1998
are derived from the audited financial statements of the Company.
YEAR ENDED DECEMBER 31
OPERATING RESULTS: 1994 1995 1996 1997 1998
- ------------------ ---- ---- ---- ---- ----
Net revenues $19,004 $21,598 $22,407 $22,029 $19,456
Net income (loss) $ 435 294 $(3,723) $(1,606) $ (483)
Net income (loss) per
common share $ .17 .12 $ (1.50) $ (.64) $ (.21)
Weighted average number
of common stock outstanding 2,458 2,489 2,486 2,472 2,309
5
YEAR ENDED DECEMBER 31
FINANCIAL POSITION: 1994 1995 1996 1997 1998
- ------------------- ---- ---- ---- ---- ----
Working capital
(deficiency) $ 574 $ 2,424 $ 1,118 $ 1,194 $ (721)
Total assets $24,108 $24,878 $21,971 $10,405 $ 9,397
Long term debt, excluding $ 5,962 $ 7,345 $ 8,950 $ 255 $ 58
current installments and
amount subject to compromise
Shareholders' equity $11,494 $13,061 $ 8,530 $ 6,212 $ 5,214
(deficiency)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATION
PERFORMANCE RESTAURANTS GROUP, INC.
Restaurants Gross Revenue were down in 1998 due to the closing and sale of
several units, $19,456,000 in 1998 vs. $22,029,000 in 1997. Revenue of those
units open for the entire year were up nominally.
The Company had a loss of $483,000 for the period ending December 31, 1998 as
compared to a loss of $1,606,000 for the same period in 1997. Included in 1998's
operational loss were losses of $338,000 from three restaurants, Las Vegas, La
Mesa and La Jolla all of which were disposed of in early 1999 as compared to a
loss on Las Vegas in 1997 of $65,000.
Cash flow from operating activities was $825,000 in 1998 vs. $49,000 in 1997.
Net cash flow was down $1,329,000 in 1998 because of the purchase of Steamers,
repayment of borrowings and purchase of treasury stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company has sufficient Cash flow to meet its current operating needs. The
slowest period for Restaurants is the late spring and summer when sales are
seasonally slow. During this period, the Company will use some of its cash
reserve for operations. Over the past several years, tighter costs control has
lessened the Company's reliance on cash reserves during this period.
In late 1998, the Company purchased Steamers Genuine Seafood Restaurant. This is
an upscale seafood restaurant that management believe is a concept that can be
expanded. We are looking at sites in Scottsdale along with the possibility of
the conversion of our Bobby McGee's restaurant at the Embassy Suites in
Burlingame, CA to a Steamers.
In the first quarter of 1999, the Company sold its Las Vegas and its La Mesa
locations, and closed its La Jolla location. It also plans on closing the San
Bernardino Bobby McGee's. The Company did not believe any of these locations
were worth the investment required to update the restaurants.
In addition, the Company is reviewing several new concepts for the two Bobby
McGee's in Southern California where sales have been trailing the other units.
No decision has been made on the type of concept, although management has
decided to make a change from its current operations. Several format changes are
being reviewed including a steakhouse, an american grill concept and a seafood
restaurant. A decision should be made in the second quarter and the conversion
completed by September, 1999.
Management believes, but there can be no assurance, that the expense of the
conversion of these two restaurants can be met from cash flow. Management
believes that most of the capital costs for expansion could be met through
6
financing by way of loans, seller carry backs and leases for furniture, fixtures
and equipment. If new restaurants are opened, the Company will use less of its
cash reserves to open the new restaurant and more financing where available.
Y2K ISSUE
The Company estimates it will cost $60,000 to upgrade the register systems at
the stores to be Y2K compliant. It is estimated that it will cost another
$20,000 to bring the Corporate office system in compliance. These changes are
expected to be completed before September.
The Company has been assured that its Payroll provider and all credit card
providers meet 2000 standards. Food and liquor suppliers that are online have
assured us they also meet 2000 standards. The Company does not expect any
disruptions in its business because of Y2K problems.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The independent auditors' report on the Consolidated Financial Statements and
Schedules listed in the accompanying index are filed as part of this report. See
Index to Audited Consolidated Financial Statements and Schedules on page 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company as of December 31, 1997 were
as follows:
NAME AGE POSITION
- ---- --- --------
Joe Hrudka 60 President
Edmund L. Fochtman, Jr.(1) 61 Vice President/CFO
Allen L. Haire(1) 56 Director
All Directors are elected annually by the Company's shareholders and hold office
until their successors are duly elected and qualified.
(1) Member of the Audit Committee
Joe Hrudka is the founder and principal shareholder of the Company. Since 1981
he has served as the Chairman of the Board and a Director. Mr. Hrudka has served
as Chief Executive Officer of the Company since November 1993. In 1997, he
assumed the additional position of President. In 1964, Mr. Hrudka founded the
original Mr. Gasket Company and served as Chairman of the Board and President
until the Company was purchased by W.R. Grace in 1971. He was then employed as a
Vice President of the Automotive Division of W.R. Grace from 1972 to 1974 and as
a consultant to W.R. Grace during 1975 and 1976. From 1977 until the formation
of the Company in 1981, Mr. Hrudka was a private investor. Mr. Hrudka had served
as a director of Action Products, Inc., from 1987, and served as Secretary of
Action Products, Inc., from October 1990 to May 1992. In November 1991, a
receiver was appointed by the Maricopa County Superior Court, State of Arizona,
to manage the assets of Action Products, Inc., at the request of a secured
party. Action's assets were sold in May 1992 by the receiver. Mr. Hrudka has
served as a Director of each of the subsidiaries since they have been formed.
7
Edmund L. Fochtman, Jr., has been a Vice President of the Company from June,
1997. Prior to this, he was President of the Company from May, 1993. He was an
executive Vice President of the Company since January, 1992. He was Chairman of
the Board of Directors and Chief Executive Officer of Action Products, Inc., a
company engaged in manufacture and sale of fiberglass bodied mini-cars and sales
of other promotional products from October 1986 until January 1992. From 1984 to
1986, Mr. Fochtman was a private investor. From 1976 to 1984, he served as Vice
President of F.W. & Associates, Inc. In November 1991, a receiver was appointed
by the Maricopa County Superior Court, State of Arizona, to manage the assets of
Action Products, Inc., at the request of a secured party. Action's assets were
sold in May 1992 by the receiver. Mr. Fochtman was elected a Director of the
Company in June 1988 and as a director of each of the subsidiaries since 1993.
Allen L. Haire has been chairman and Chief Executive Officer of Enerco Technical
Products, a manufacturer of gas-fired infra-red heating equipment, since July
1984. He was a manufacturer's representative from 1977 to 1984. Mr. Haire was
elected a Director in June 1988.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein from the Company's
proxy statement to be filed pursuant to Regulation 14(a) under the Securities
Exchange Act of 1934, within 120 days from December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following tables sets forth the number and percentage of the outstanding
shares of common stock beneficially owned as of March 29, 1999, by the only
persons known to the Company to own beneficially more than 5% of the outstanding
shares of common stock.
NAME AND ADDRESS NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------- ------------------ --------
Joe Hrudka
2701 E. Camelback Rd., Suite 210 1,689,241 76%
Phoenix, AZ 85016
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Howard Gardner Consultants received $30,000. in 1996 from the Company for
consulting services on financial and general business matters. Howard B. Gardner
is a former officer and director of the Company. The fees are included in
selling, general and administrative expenses in the statement of operations.
A former Director of the Company, Jonathan Tratt, earned a 3% commission of
$90,000. from the sale of the Company's stock in its Mexican subsidiary during
1996. The commission is included in selling, general and administrative expenses
in the accompanying statement of operations. Of the commission earned, $45,000
was paid during 1996. During 1997, the Company received a discount of $4,500. on
the commission. The remaining balance of $37,500. was paid during 1997.
In August 1997, the Company sold its Factoring division to a new company
including two present directors and officers of the Company, Joe Hrudka and Ed
Fochtman, Jr. The sale was on terms at least as favorable as would have been
realized in a sale to unrelated third parties.
8
In December of 1997, the Company sold its interest in the Camelback Plaza
Development, L.C., to the other members of the limited liability company. The
Company had tried to sell the development for over a year and was unsuccessful
in finding a bona fide purchaser for the entire project. Management believes the
sale to be on terms at least as favorable as would have been realized in a sale
to unrelated third parties.
In 1997, the Company made two short term loans totaling $55,000. to Joe Hrudka.
Mr. Hrudka has repaid the loans.
In December, 1997, the Company purchased shares of stock in the Company from
Jonathan Tratt, a former director, for $126,425.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Operations - Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity - Years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements - Years
ended December 31, 1998, 1997 and 1996
(2) INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because the material is
not applicable or is not required as permitted by the
rules and regulations of the Commission, or the
required information is included in Notes to the
Consolidated Financial Statements.
(3) EXHIBITS:
Exhibit No.
- -----------
10.47 The following documents related to the sale of the Company's Exhaust
Division to Walker Manufacturing Company as filed with Notice of Annual
Meeting of shareholders dated November 8, 1994 and incorporated herein
by reference.
10.48 1993 Stock Option Plan of Performance Industries, Inc. filed with the
Company's Notice of Annual Meeting of shareholders dated November 8,
1993 and incorporated herein by reference.
10.49 Documents relating to its purchase of operating assets from Bobby
McGee's USA, Inc., effective December 20, 1993, which were filed with
the Company's report on Form 10-K for the period ended December 31,
1993, and are incorporated herein by reference.
9
10.50 The following documents relating to the purchase of the ground lease
for 2671 E. Camelback Road, Phoenix, Arizona, effective December 30,
1993, as filed with the Company's report on Form 10-K for the year
ended December 31, 1993, and are incorporated herein by reference:
10.51 Lease dated May 9, 1994, by and between Just for Feet, Inc. (Lessee)
and Camelback Development L.C. (Lessor) dated May 9, 1994 as filed with
the Company's report on Form 10-K for the year ended December 31, 1994,
and are incorporated herein by reference.
10.52 Lease dated June 30, 1994, by and between Blockbuster Music Retail,
Inc. (Lessee) and Camelback Plaza Development, L.C. (Lessor) as filed
with the Company's Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference.
10.53 Lease dated January 17, 1995 by and between Restaurants of America,
Inc. (Lessee) and Camelback Plaza Development, L.C. (Lessor), as filed
with the Company's Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference.
10.54 Design Build Lease Agreement dated December 18, 1992, by and between
Hard Rock Cafe Investors, Ltd., XIV (Lessee) and Imprimis Partners II
(Lessor) and amendment thereto dated September 26, 1994 as filed with
the Company's Report on Form 10-K for the year ended December 31, 1994
and incorporated herein by reference.
10.55 Offer to purchase Buster's Restaurant, Bar and Grill dated February 25,
1995, including a first assignment and Assumption of Lease and
landlord's consent dated March 15, 1995, by and between Mercado Del
Lago, L.L.C., Buster's & Company, Inc. and Performance Restaurants
Group, Inc., and lease dated the 20th of November 1989 by and between
Mercado Project Group, Inc., and lease dated the 20th of November 1989
by and between Mercado Project Limited (Lessor) and Buster's & Company,
Inc. (Lessee), and Bill of Sales dated March 15, 1995.
10.56 Documents from the Caliber Bank loan dated June 24, 1994, as amended
September 21, 1994.
- Restaurant Phase Construction Agreement, dated June 24,
1994.
- Restaurant Phase Promissory Note. - Irrevocable Letter of
Credit - $1,900,000.
- Environmental Indemnification Agreement.
- Amendment to Restaurant Phase Construction Loan Agreement,
Restaurant Phase Promissory Note, and Restaurant Phase Deed
of Trust, dated September 21, 1994.
- Restaurant Phase Leasehold Construction Deed of Trust and
Security Agreement with Assignment of Rents and Fixtures
Filing.
- Assignment of Hard Rock Cafe Lease.
- Retail Phase Construction Loan Agreement, dated June 24,
1994.
- Retail Phase Promissory Note.
- Amendment to Retail Phase Construction Loan Agreement,
Retail Phase Promissory note, and Retail Phase Deed of
Trust, dated September 21, 1994.
10
- Retail Phase Leasehold Construction Deed of Trust and
Security Agreement with Assignment of Rents and Fixtures
Filing.
- Assignment of Retail Leases.
As filed with the Company's Report on Form 10-K for the period ended December
31, 1994 and incorporated herein by reference.
10.57 Line of Credit Agreement dated July 19, 1995, by and between
Performance Funding Corp. and Capital Factors, Inc., and Guarantee of
Performance Industries, Inc. as filed with the Company's Report on Form
10-K for the year ending December 31, 1995 and incorporated herein by
reference.
10.58 Lease dated September 1, 1995, between Performance Restaurants of
Nevada, Inc. and 1030 East Flamingo, L.L.C. as filed with the Company's
Report on Form 10-K for the period ending December 31, 1995 and
incorporated herein by reference.
10.59 Second Amendment to Retail Phase Construction Loan Agreement dated
October 31, 1995 by and between Camelback Plaza Development, L.C. and
Norwest Bank as filed with the Company's Report on Form 10-K for the
year ending December 31, 1995 and incorporated herein by reference.
10.60 Tenth Amendment to Restaurant Phase Construction Loan Agreement dated
October 31, 1995, by and between Camelback Plaza Development, L.C. and
Norwest Bank as filed with the Company's Report on Form 10-K for the
year ending December 31, 1995 and incorporated herein by reference.
10.61 Cash Collateral Agreement by and between Performance Industries, Inc.,
and Norwest Bank dated October 31, 1995 as filed with the Company's
Report on Form 10-K for the year ending December 31, 1995 and
incorporated herein by reference.
10.62 Promissory Note, Deed of Trusts, Assignment of Lease and Rents by and
between the Camelback Plaza Development L.C. and Boston Capital
Mortgage dated as of November 1, 1996 for the sum of $7,250,000 on the
property of the subsidiary at 2621 E. Camelback Rd., Phoenix, AZ as
filed with the Company's Report on Form 10-K for the year ending
December 31, 1995 and incorporated herein by reference.
10.63 Stock Purchase Agreement, dated February 28, 1996, Letter Amendment
there to dated March 20, 1996, Letter Amendment there to dated July 15,
1996, and Deposit Escrow Agreement between Markwood L.L.C. as Buyer and
the Company as seller of stock in its wholly owned subsidiary
Fabricaciones Metalicas Mexicanas - S.A. as filed with the Company's
Report on Form 10-K for the year ending December 31, 1995 and
incorporated herein by reference.
22. Subsidiaries of the Registrant.
11
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 14, 1999 Performance Industries, Inc.
By: /s/ Joe Hrudka
------------------------------
Joe Hrudka
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 14th day of April, 1999, by the following persons
on behalf of the Registrant in the capacities indicated:
By: /s/ Joe Hrudka Chairman of the Board, President
-------------------------------- and Director
Joe Hrudka
By: /s/ Edmund L. Fochtman, Jr. Vice President, CFO and Director
--------------------------------
Edmund L. Fochtman, Jr.
By: /s/ Allen L. Haire Director
--------------------------------
Allen L. Haire
12
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
CONTENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT 14
CONSOLIDATED FINANCIAL STATEMENTS:
BALANCE SHEETS 15
STATEMENTS OF OPERATIONS 16
STATEMENTS OF SHAREHOLDERS' EQUITY 17
STATEMENTS OF CASH FLOW 18
NOTES TO FINANCIAL STATEMENTS 20
13
Board of Directors and Shareholders
Performance Industries, Inc.
Phoenix, Arizona
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Performance
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Performance
Industries, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
TOBACK CPAs, P.C.
Phoenix, Arizona
March 23, 1999
14
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
-------- --------
Current assets:
Cash and cash equivalents $ 1,486 $ 2,815
Accounts and other receivables, less allowance
for doubtful accounts of $27 and $14,
respectively (Note 4) 333 410
Receivables from sale of businesses, net of
allowance (Notes 3 and 4) 125 269
Factored accounts receivable, net of allowance for
doubtful accounts of $0 and $283, respectively
(Notes 4 and 13) 150 261
Inventories 289 313
Prepaid expenses and other current assets 212 227
Deferred income taxes (Note 12) 24 52
Real estate held for sale (Notes 5 and 8) 785 785
-------- --------
Total current assets 3,404 5,132
Deferred income taxes (Note 12) 1,278 1,239
Property and equipment (Notes 6 and 8) 3,770 3,097
Other assets (Note 7) 945 937
-------- --------
Total assets $ 9,397 $ 10,405
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations (Note 8) $ 1,205 $ 1,051
Accounts payable 579 637
Accrued employment costs 530 476
Accrued expenses and other current liabilities (Note 9) 764 666
Factored receivables reserve -- 61
Liabilities subject to compromise (Notes 10 and 18) 797 797
Foreign tax liability 250 250
-------- --------
Total current liabilities 4,125 3,938
Long-term debt and capital lease obligations, less
current portion (Note 8) 58 255
Commitments and contingencies (Notes 11, 17, 18 and 20)
Shareholders' equity:
Preferred stock, par value $1.00 per share;
authorized 100,000 shares; none issued -- --
Common stock, no par value; authorized 5,000,000
shares; issued 3,157,332 shares; outstanding
2,211,183 and 2,377,889, respectively
(Notes 14 and 15) 31,202 31,202
Accumulated deficit (22,228) (21,745)
-------- --------
8,974 9,457
Treasury stock at cost (Note 15) (3,760) (3,245)
-------- --------
Total shareholders' equity 5,214 6,212
-------- --------
Total liabilities and shareholders' equity $ 9,397 $ 10,405
======== ========
The accompanying notes are an integral
part of these consolidated financial statements.
15
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---------- ---------- ----------
Revenues $ 19,456 $ 22,029 $ 20,344
Cost of revenues (18,308) (20,753) (19,949)
Selling, general and
administrative expenses
(Note 19) (1,820) (2,131) (2,995)
Interest expense (19) (134) (156)
Other income (expenses), net 197 231 132
Loss on closure of restaurants
(Note 16) -- -- (1,795)
---------- ---------- ----------
Loss from continuing operations
before income taxes (494) (758) (4,419)
Income tax (expense) benefit (Note 12) 11 (318) (591)
---------- ---------- ----------
Loss from continuing operations (483) (1,076) (5,010)
Income (loss) from discontinued
operations (Note 13) -- (530) 1,287
---------- ---------- ----------
Net loss $ (483) $ (1,606) $ (3,723)
========== ========== ==========
Basic income (loss) per common share:
Continuing operations $ (.21) $ (.44) $ (2.02)
Discontinued operations -- (.21) .52
---------- ---------- ----------
Basic loss per common share $ (.21) $ (.65) $ (1.50)
========== ========== ==========
Average number of shares outstanding 2,309,451 2,472,649 2,486,086
========== ========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
16
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Common Stock Treasury Stock
------------------- ------------------- Other
Number Number Accumulated Comprehensive
Amount of shares Amount of shares Deficit Income
------ --------- ------ --------- ------- ------
Balance, January 1, 1996 $31,202 3,157,332 $(2,951) 667,802 $(16,416) $ 1,226
Net loss -- -- -- -- (3,723) --
Treasury stock purchased -- -- (25) 8,266 -- --
Holding loss on securities
available for sale, net
of income taxes of $127 -- -- -- -- -- (783)
------- --------- ------- ------- -------- -------
Balance, December 31, 1996 31,202 3,157,332 (2,976) 676,068 (20,139) 443
Net loss -- -- -- -- (1,606) --
Treasury stock purchased -- -- (269) 103,375 -- --
Holding loss on securities
available for sale, net of
income taxes of $72 -- -- -- -- -- (443)
------- --------- ------- ------- -------- -------
Balance, December 31, 1997 31,202 3,157,332 (3,245) 779,443 (21,745) --
Net loss -- -- -- -- (483) --
Treasury stock purchased
(Note 19) -- -- (515) 166,706 -- --
------- --------- ------- ------- -------- -------
Balance, December 31, 1998 $31,202 3,157,332 $(3,760) 946,149 $(22,228) $ --
======= ========= ======= ======= ======== =======
The accompanying notes are an integral
part of these consolidated financial statements.
17
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net loss $(483) $(1,606) $(3,723)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 823 699 1,020
Loss on settlement of receivables from
sale of business -- 88 99
Impairment loss on real estate held for sale -- 375 --
Loss on disposal of restaurants -- -- 1,795
Gain on sale of Mexican subsidiary -- -- (1,219)
Loss on sale of real estate subsidiary -- 916 --
Gain on sale of factoring subsidiary -- (3) --
Loss on investment in preferred stock -- 120 --
Loss on securities available for sale -- 207 --
Minority interest in loss from subsidiary -- (82) (43)
Loss on sale of property and equipment 94 92 70
Provision for allowance for doubtful accounts 131 88 416
Changes in assets and liabilities
(net of changes related to discontinued
operations):
Accounts receivable 64 (152) (94)
Factored accounts receivable, net of reserve 82 (7) 276
Inventories 24 15 (6)
Prepaid expenses and other current assets 15 (405) (305)
Other assets (8) 477 (321)
Accounts payable (58) (359) (260)
Accrued employment costs 54 (15) --
Foreign tax liability -- -- 250
Other current liabilities, net 98 (673) 205
Liabilities subject to compromise -- 43 --
Deferred income taxes (11) 231 548
---- ------ -------
Net cash provided by (used in)
operating activities 825 49 (1,292)
---- ------ -------
The accompanying notes are an integral
part of these consolidated financial statements.
18
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------- ------- -------
Cash flows from investing activities:
Changes in restricted cash $ -- $ 409 $ 1,358
Payments received on receivables from sale
of businesses 50 1,118 1,305
Investment in real estate -- -- (283)
Purchase of property and equipment (213) (466) (1,486)
Net proceeds from sale of:
Mexican subsidiary -- -- 837
Real estate operations -- 560 --
Factoring operations -- 513 --
Property and equipment 23 -- 147
Other assets held for sale -- -- 6
Payment for purchase of restaurant assets (1,100) -- (240)
Investment in preferred stock -- -- (120)
Loan to officer -- (55) (150)
Repayment of officer loan -- 55 150
Other, net (56) 166 (192)
Net cash (used in) provided by
investing activities (1,296) 2,300 1,332
------- ------- -------
Cash flows from financing activities:
Proceeds from borrowings -- -- 2,659
Repayments of borrowings (343) (401) (1,949)
Changes in treasury stock (515) (269) (25)
------- ------- -------
Net cash (used in) provided by
financing activities (858) (670) 685
------- ------- -------
Net increase (decrease) in cash and
cash equivalents (1,329) 1,679 725
Cash and cash equivalents, beginning
of year 2,815 1,136 411
------- ------- -------
Cash and cash equivalents, end of year $ 1,486 $ 2,815 $ 1,136
======= ======= =======
Supplemental Disclosure of Noncash Investing and Financing Activities
See notes to financial statements for noncash
investing and financing activities.
The accompanying notes are an integral
part of these consolidated financial statements.
19
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Performance Industries, Inc. (the Company) is the parent company of its
wholly-owned subsidiaries Performance Restaurant Group, Inc.
(restaurant company), Performance Funding Corp. (factoring company),
Performance Camelback Development Corp. (real estate company).
During 1997, Performance Funding Corp., (a factoring company) discontinued
its operations. The Company sold the majority of its factored
receivables to a related corporation (see Note 20). The Company
accounted for the disposition of these assets as discontinued
operations in 1997 (see Note 14).
Also during November 1997, Performance Camelback Development Corp. sold
its 72% interest in Camelback Plaza Development Corp., L.L.C. Camelback
Plaza Development Corp., L.L.C. owns and operates a retail and
restaurant property in Phoenix, AZ. The Company accounted for this
disposition as discontinued operations in 1997 (see Note 14).
TheCompany's continuing operations consist of restaurant locations in
Arizona and California.
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Performance
Industries, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions are eliminated in consolidation.
CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments with a maturity
of three months or less when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments.
The carrying amount of other financial instruments including accounts
receivable, receivables from sale of business, factored receivables and
current liabilities approximate the fair value of these instruments
because of the short-term nature of the instruments.
20
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:
The carrying amount of long-term debt approximates fair value because the
interest rates on debt are comparable to current market rates on debt
with similar terms.
ADVERTISING:
Advertising costs are charged to operations as incurred. The Company
incurred advertising expense of approximately $229,000, $334,000 and
$408,000 during 1998, 1997 and 1996, respectively.
ACCOUNTING ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and 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.
The Company's significant estimates relate to the realizability of certain
receivables, valuation of net deferred tax assets, estimates of
liabilities subject to compromise, and certain litigation
contingencies.
INVENTORY:
Inventory is stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method. Inventory consists of food
and beverages at restaurant locations.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and depreciated using the
straight-line method over the following estimated useful lives;
buildings, 35 years; machinery and equipment, furniture and fixtures
and vehicles, 5 to 10 years; land improvements, 10 years. Leasehold
improvements are depreciated over the term of the related lease.
21
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES:
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year end based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax benefit (expense) is the tax
receivable (payable) for the period and the change during the period in
deferred tax assets and liabilities excluding the tax effect on
unrealized holding gains on securities available for sale.
INVESTMENT IN REAL ESTATE:
Investment in real estate and real estate held for sale represents the
cost of certain real estate held for future development or sale.
INCOME (LOSS) PER COMMON SHARE:
Basic income (loss) per common share is based upon the weighted average
number of shares outstanding. The assumed exercise of employee stock
options does not result in material dilution.
RECLASSIFICATIONS:
Certain reclassifications have been made to the financial statements for
1996 and 1997 to conform to the financial statement classifications for
1998.
2. SECURITIES AVAILABLE FOR SALE:
During 1993, the Company invested $250,000 in the common stock of a
start-up airline company. In 1995, a portion of the stock became
marketable and was sold by the Company as a result of a public stock
offering by the airline.
During 1997, the airline filed petitions for relief under Chapter 11 of
the Federal bankruptcy laws. Subsequent to this filing, the airline
converted the filing to a Chapter 7 liquidation. As a result, the
Company realized a loss on the original investment in the common stock
of approximately $207,000 during 1997, which is included in other
income (expense) in the accompanying consolidated statements of
operations. Also, as a result of this liquidation, unrealized holding
gains associated with the airline stock of $515,000 were eliminated in
1997.
22
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RECEIVABLES FROM SALE OF BUSINESSES:
Receivables from sale of businesses consist of a note receivable from a
corporation with interest at 10%. Principal and interest payments were
due in monthly installments of approximately $120,000 through January
1998. The corporation suspended payments on the note until
clarification of a certain lease agreement related to real estate the
corporation acquired in the sale is resolved. The notes were paid in
full subsequent to December 31, 1998. (See Note 5)
4. ALLOWANCES FOR DOUBTFUL ACCOUNTS:
The changes in allowances for doubtful accounts are as follows (in
thousands):
1998 1997 1996
----- ----- -----
Balance at beginning of year $ 297 $ 576 $ 514
Additions charged to cost and expenses 131 88 416
Accounts written off (401) (163) (354)
Reduction of allowance credited to costs
and expenses -- (204) --
----- ----- -----
Balance at end of year $ 27 $ 297 $ 576
===== ===== =====
The allowances for doubtful accounts include allowances for accounts and
other receivables, receivables from sale of businesses, and factored
accounts receivable.
5. INVESTMENT IN REAL ESTATE:
Investment in real estate included in the 1998 and 1997 consolidated
balance sheets is as follows:
1998 1997
---- ----
Real estate held for sale $785 $785
---- ----
$785 $785
==== ====
23
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT IN REAL ESTATE, CONTINUED:
Summaries of real estate transactions and related accumulated depreciation
are as follows (in thousands):
REAL ESTATE: 1998 1997
------- -------
Balance at beginning of year $ 785 $ 9,911
------- -------
Additions during the year:
Ground lease fees -- --
Tenant improvements -- --
------- -------
Total additions -- --
------- -------
785 9,911
Reductions during the year:
Cost of real estate sold -- (8,735)
Impairment loss -- (375)
Other -- (16)
------- -------
Total reductions -- (9,126)
------- -------
Balance at end of year $ 785 $ 785
======= =======
ACCUMULATED DEPRECIATION: 1998 1997 1996
------- ------- -------
Balance at beginning of year $ -- $ 430 $ 1,076
Additions during the year:
Depreciation -- 244 320
Reductions during the year:
Disposals -- (674) (966)
------- ------- -------
Balance at end of year $ -- $ -- $ 430
======= ======= =======
Real estate held for sale as of December 31, 1998 represents land in
Ixtapa, Mexico. The Company plans to sell the land and has discontinued
making payments on a note payable secured by the land (see Note 9).
Because the Company is in default on the note, the carrying cost of the
land has been reduced to the balance of the note plus accrued interest.
An impairment loss of $375,000 is included in other income (expense) in
the accompanying December 31, 1997 consolidated statement of
operations.
The Company's real estate subsidiary previously owned a 72% interest in a
retail and restaurant project in Phoenix, Arizona. The subsidiary
completed the project in 1995 and sold its interest in the project
during 1997.
24
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT IN REAL ESTATE, CONTINUED:
During 1996, the Company sold its stock in its Mexican subsidiary. The
subsidiary held an ownership interest in rental real estate in Mexico.
The operating income and losses and the gains and losses from the sale of
its real estate operations are included in discontinued operations in
the accompanying consolidated statements of operations for 1997 and
1996 (see Note 13).
6. PROPERTY AND EQUIPMENT:
The components of property and equipment consist of the following (in
thousands):
1998 1997
------- -------
Restaurant equipment $ 2,068 $ 1,785
Furniture and fixtures 765 692
Transportation equipment 438 438
Leasehold improvements 2,854 1,875
Equipment held under capital leases 219 219
------- -------
6,344 5,009
Less accumulated depreciation (2,574) (1,912)
------- -------
$ 3,770 $ 3,097
======= =======
7. OTHER ASSETS:
Other assets consist of the following (in thousands):
1998 1997
---- ----
Classic automobiles $ 206 $ 206
Deposits and other 122 136
Liquor licenses 176 191
Restaurant small wares 441 404
----- -----
$ 945 $ 937
===== =====
25
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations consist of the following (in
thousands):
1998 1997
------- -------
Note payable, Mexican corporation, with interest at
prime plus 3-7/8%, with monthly principal payments
of $6,000 plus interest through December 2006,
secured by real estate (see Note 6). The company
has discontinued making the required payments on
this note. As a result, the entire note balance has
been classified as current. $ 708 $ 708
Unsecured note payable, State of California, with
interest at 6%, with monthly principal payments of
$25,000 plus interest through June 1999
150 450
Note payable, with interest at 8% due October 1999,
secured by equipment of restaurant. 300 --
Capital lease obligations (Note 11) 105 148
------- -------
1,263 1,306
Less current portion (1,205) (1,051)
------- -------
$ 58 $ 255
======= =======
Cash paid for interest was approximately $35,000, $102,000, and $818,000
during 1998, 1997 and 1996, respectively.
All long term debt excluding capital leases is due during 1999.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
At December 31, 1998 and 1997, the components of accrued expenses and
other current liabilities consist of the following (in thousands):
1998 1997
---- ----
Gift certificates and advance
customer deposits $ 112 $ 106
Litigation settlements and estimated
claims (Note 17) 200 117
Product liability costs 69 66
Sales taxes payable 146 145
Other accruals 237 232
----- -----
$ 764 $ 666
===== =====
26
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LIABILITIES SUBJECT TO COMPROMISE:
From April 21, 1991 through May 4, 1993, Performance Industries, Inc.
(formerly Mr. Gasket Company) operated as debtor-in-possession under
the supervision of the Bankruptcy Court. In Chapter 11, the
shareholders' interests and substantially all liabilities as of the
filing date were subject to compromise.
Additions or deletions to the claims (liabilities subject to compromise)
may arise from the determination by the Bankruptcy Court or agreement
by parties in interest of allowed claims for contingencies and disputed
collateral and amounts. The Company continues to negotiate settlement
of the final claims outstanding. Liabilities subject to compromise at
December 31, 1998 and 1997 consist primarily of environmental
remediation and tax liabilities.
11. LEASES:
As lessee:
The Company's restaurant subsidiary leases eight restaurant locations
under operating leases including one restaurant location which was
closed during 1996. These leases expire at various dates through 2010
and require aggregate annual payments of approximately $1,360,000. The
leases also contain provisions for contingent rental payments ranging
from 3% to 9% of sales. During 1998 and 1997, the restaurants incurred
contingent rentals of approximately $349,000 and $331,000,
respectively.
The Company's restaurant subsidiary also leases certain equipment under
capital leases. The leases require aggregate monthly payments of
approximately $4,600 through May 2001.
The Company and its subsidiaries also lease their office space and two
warehouse facilities under operating leases. These leases require
aggregate monthly payments of approximately $9,000 and expire at
various dates through 2001.
27
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. LEASES, CONTINUED:
Future minimum lease payments for capital leases and noncancelable
operating leases as of December 31, 1998 are as follows (in thousands):
Capital Operating
leases leases
------ ------
1999 $ 58 $ 1,366
2000 49 1,215
2001 9 1,159
2002 -- 1,105
2003 -- 1,028
Thereafter -- 3,176
----- -------
116 $ 9,049
=======
Less amount representing interest (11)
-----
Present value of future minimum lease
payments on capital leases $ 105
=====
Rent expense for operating leases was approximately $1,582,000, $1,862,000
and $1,818,000 for 1998, 1997 and 1996, respectively.
12. INCOME TAXES:
The provision for income tax (expense) benefit consists of the following
(in thousands):
1998 1997 1996
----- ----- -----
Federal:
Current $ -- $ -- $ --
Deferred 10 (231) (548)
Foreign -- -- (250)
State and local 1 -- (2)
----- ----- -----
Total income tax (expense) benefit $ 11 $(231) $(800)
===== ===== =====
Allocated to:
Continuing operations $ 11 $(318) $(591)
Discontinued operations -- 87 (209)
----- ----- -----
$ 11 $(231) $(800)
===== ===== =====
28
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES, CONTINUED:
Foreign income taxes represent an estimate of the Mexican income tax on
the sale of the Company's Mexican subsidiary in 1996.
The following is a reconciliation between the income tax (expense) benefit
from continuing operations and income taxes calculated at the statutory
federal income tax rate of 34% for continuing operations (in
thousands):
1998 1997 1996
------- ------- -------
Income tax benefit at statutory rate $ 168 $ 247 $ 1,502
Foreign and state income taxes 20 -- (252)
Tax effect of valuation allowance
on deferred tax assets (162) (212) (1,841)
Reduction of net operating loss and
tax credit carryforwards net of
valuation allowance (15) (353) --
----- ----- -------
Income tax (expense) benefit from
continuing operations $ 11 $(318) $ (591)
===== ===== =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carry forwards. Significant components of
the Company's net deferred tax assets consist of the following (in
thousands):
1998 1997
------- -------
Current deferred tax assets (liabilities):
Reserves not currently deductible $ 168 $ 373
Valuation allowance (144) (321)
------- -------
Net current deferred tax asset $ 24 $ 52
======= =======
Non-current deferred tax assets (liabilities):
Difference between book and tax bases of assets $ 967 $ 703
Contribution carryforwards 27 27
Capital loss carryforwards 82 82
Net operating loss carryforwards 7,989 7,971
General business credit carryforwards 66 66
------- -------
9,131 8,849
Valuation allowance (7,853) (7,610)
------- -------
Net non-current deferred tax asset $ 1,278 $ 1,239
======= =======
29
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES, CONTINUED:
The Company has recorded a net deferred tax asset as of December 31, 1998
of $1,302,000 primarily reflecting the benefits of net operating loss
carryforwards. Realization is dependent upon generating sufficient
taxable income prior to the expiration of the carryforwards. Although
realization is not assured, management believes it is more likely than
not that all of the net deferred tax asset will be realized. The amount
of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during
the carryforward period are reduced. During 1998 and 1997, the Company
lost the benefit of a portion of its state net operating loss
carryforwards and general business credits due to reaching the
expiration date of the carryforwards.
The Company has available at December 31, 1998, federal net operating loss
carryforwards and unused general business credits, which may provide
future tax benefits as follows (in thousands):
Unused Unused federal
federal net general
Year of operating loss business
expiration carryforwards credits
---------- --------------- --------------
2003 $ -- $ 37
2005 2,585 --
2006 3,866 --
2007 7,015 --
2008 2,967 --
2009 3,917 29
2010 1,231 --
2011 489 --
2012 534
2013 691 --
------- ----
$23,295 $ 66
======= ====
The-Company has net operating carryforwards for state income tax purposes
of approximately $1,700,000 which expire from 2000 through 2003.
13. DISCONTINUED OPERATIONS:
During 1997, the Company sold its real estate operations and its factoring
business. As a result, net sales, costs of sales, income and expenses
related to those segments have been recorded as discontinued operations
in the accompanying consolidated statements of operations. The sales of
the businesses are described below.
30
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. DISCONTINUED OPERATIONS, CONTINUED:
REAL ESTATE OPERATIONS:
In November 1997, the Company sold its 72% interest in Camelback Plaza
Development Corp., L.L.C., to the minority shareholders. The net cash
sales price for its 72% interest was $709,000. The significant assets
disposed of by the Company for which the subsidiary held an ownership
interest included rental estate with a carrying value of approximately
$8,000,000. Along with the real estate acquired, the associated note
payable of approximately $7,200,000 was assumed by the buyer.
Camelback Plaza Development had gross rental revenue of approximately
$1,142,000 and $801,000 for the years ending December 31, 1996 and
1995, respectively. For the eleven months prior to the sale in 1997,
Camelback Plaza Development had gross rental revenues of $934,000.
Percentage rental income earned was approximately $84,000, $173,000 and
$80,000 for 1997, 1996 and 1995, respectively. Any income or loss from
operations is included in income (loss) from discontinued operations.
During 1996, the Company sold its stock in its Mexican subsidiary,
Fabricaciones Metalicas Mexicanas, S. A. (FMMSA). The total sales price
for the shares was $3,000,000, including $1,000,000 in cash and a note
receivable of $2,000,000 (See Note 4). The significant assets disposed
of by the Company for which the subsidiary held an ownership interest
included rental real estate with a carrying value of approximately
$1,500,000. The gain on the sale, net of selling costs, was
approximately $1,200,000 for 1996 and is included in income (loss) from
discontinued operations.
For the seven months prior to the sale in 1996, FMMSA had gross rental
revenue of approximately $384,000 and income from operations before
income taxes of approximately $219,000. The income from operations is
included in income (loss) from discontinued operations.
FACTORING:
In August 1997, the Company discontinued operating its factoring
subsidiary and sold substantially all of the net assets of its
factoring business, including factored accounts receivable, equipment
and intangible assets, to a related company, Performance Funding,
L.L.C. (see Note 19). The buyer also assumed the obligations of the
factoring business upon sale. The net selling price was approximately
$513,000 in the form of cash. At December 31, 1998, factored accounts
receivables remaining were approximately $150,000. The buyer has agreed
to collect the remaining receivables for a 5% collection fee based on
payments collected.
31
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. DISCONTINUED OPERATIONS, CONTINUED:
FACTORING, CONTINUED:
Revenues of the factoring operation were approximately $508,000 for 1996.
Revenues for the eight months prior to the sale in 1997 were
approximately $400,000. The income (loss) from the operation of the
factoring business is included in income (loss) from discontinued
operations.
The caption "Income (loss) from discontinued operations" in the
accompanying consolidated statements of operations for the years ended
December 31, 1997 and 1996 consists of the following (in thousands):
1997 1996
------- -------
(Loss) income from operations of real estate
subsidiaries, net of income tax $ (118) $ 360
(Loss) gain on sales of real estate subsidiaries,
net of income tax (670) 1,053
Income (loss) from operations of
factoring subsidiaries, net of income tax 255 (126)
Gain on the sale of factoring operations 3 --
------- -------
$ (530) $ 1,287
======= =======
14. STOCK OPTION PLANS:
The Company has a stock option plan which provides for a maximum of
500,000 shares of common stock that may be issued to employees,
directors, or consultants of the Company and its subsidiaries.
The option price for options granted to eligible employees must be at
least 100% of the fair market value of the stock at the time the
options are granted. The option price for options granted to
non-employees is determined by the Board of Directors. Options granted
to employees are not exercisable after ten years. Restrictions on the
time to exercise options given to non-employees are set forth in the
options agreements.
At December 31, 1998, all outstanding options were exercisable and 200,000
shares were available for future grant. The weighted average remaining
contractual life of the outstanding options is approximately seven
years.
32
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION PLANS, CONTINUED:
A summary of transactions with respect to the stock option plan follows:
Number Range of Weighted average
of shares exercise prices exercise price
--------- --------------- ----------------
Balance at January 1, 1997 437,500 $.88 to $.96 $.90
Issued --
Exercised --
Cancelled (137,500) $.88 $.88
-------
Balance at December 31, 1998 300,000 $.88 to $.96 $.91
=======
15. REVERSE STOCK SPLIT:
During 1996, the Company approved a one-for-four reverse stock split of
its issued and outstanding common stock. In conjunction with the
reverse stock split, the Company also approved an offer to purchase
shares of the Company's stock held by shareholders with holdings of
less than 100 shares. The Company purchased 8,266 treasury shares in
1996 as a result of the offer.
16. RESTAURANT CLOSURES:
During 1996, the Company opened a new restaurant in Las Vegas, Nevada. The
Company incurred total costs of approximately $1,500,000 related to the
restaurant, including leasehold improvements, restaurant equipment and
pre-opening costs. The Company also has a lease obligation for the
restaurant building which requires annual payments totalling
approximately $180,000 per year through December 2005. Operations of
the restaurant included sales of approximately $809,000 and losses of
approximately $360,000 during 1996. In October 1996, management
determined that the location could not generate sufficient revenue to
become a profitable operation and closed the restaurant. Accordingly,
the Company recorded a loss resulting from the closure of the
restaurant of approximately $1,255,000 in 1996. At December 31, 1996,
management estimated future costs of the disposal for additional rental
liabilities to be $80,000. These costs are included in the recorded
loss on closure of restaurants. Additional costs incurred during 1997
were approximately $100,000 related to the Las Vegas restaurant and are
included in selling, general and administrative expenses in the
accompanying consolidated statement of operations. Subsequent to
December 31, 1998, the Company sold the remaining assets associated
with the Nevada location for $475,000 which approximates the remaining
book value of the assets disposed of (See Note 11).
33
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RESTAURANT CLOSURES, CONTINUED:
The Company entered into a new sublease agreement for the Nevada location
subsequent to year end. Approximate minimum future rentals to be
received on this sublease are as follows:
1998 $ 180,000
1999 180,000
2000 180,000
2001 180,000
2002 180,000
Thereafter 345,000
----------
Total minimum future rentals $1,245,000
==========
During 1996, the Company also closed a restaurant in San Ramon, California
due to the inability of the restaurant operation to generate positive
cash flow. Operations of the restaurant included sales of approximately
$925,000 and losses of approximately $144,000 during 1996. The Company
recorded a loss related to the closure of the restaurant of
approximately $540,000 in 1996. During 1997, the Company sold its
interest in the restaurant property for $50,000 and the buyer assumed
the lease commitment related to the property.
17. LITIGATION:
In November 1993, certain shareholders dissented from the sale of one of
the Company's automotive products business. As a result, the company
filed an action to obtain a determination of the "fair cash value" of
shares held by those shareholders as of November 28, 1993, as if the
sale had not occurred. The Company settled with the majority of the
dissenting shareholders during 1995 for $.75 a share. The remaining
dissenting shareholders, who hold 461,500 shares, were entitled to
payment of "fair cash value" of the shares within 30 days of the
determination of the value by the court. The Company acquired the stock
of the remaining dissenting shareholders in 1998 for $458,000.
In another matter, an insurance carrier has filed an action against the
Company alleging that Company representatives failed to notify the
insurance carrier of a product liability claim in a timely manner. The
accident occurred in 1990 and the carrier voluntarily paid out
approximately $1,700,000 in benefits to settle the claim in January
1996. Management believes the action to be without merit and intends to
vigorously defend the suit.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business, including product liability claims
and employment disputes.
34
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. LITIGATION, CONTINUED:
Accrued liabilities at December 31, 1998, include approximately $200,000
for potential litigation settlements on various claims (see Note 9). In
the opinion of management, any additional liabilities related to legal
actions will not have a material adverse effect on the Company's
consolidated financial condition.
18. COMMITMENTS AND CONTINGENCIES:
ENVIRONMENTAL MATTERS:
An investigation of environmental matters related to facilities and
property previously owned and leased by the Company was performed
during 1992 to determine contingencies that would affect the Company's
emergence from Chapter 11. Certain reports received by the Company
identified areas of environmental contamination and potential
environmental contamination. Management believes that certain
predecessors-in-interest may bear either full or partial liability for
remediation of affected areas. Certain predecessors-in-interest and
governmental agencies were notified by the Company of the related
possible liabilities. In addition, the Company notified its insurance
carriers of potential claims under its general liability and property
insurance coverage from prior years.
Locations reviewed for potential environmental liability included the
following:
MANUFACTURING FACILITY IN CALIFORNIA:
This facility housed the manufacturing plant of a wheel business formerly
owned by the Company. All assets at this facility were sold and the
buyer vacated the premises in a prior year.
An environmental survey was conducted in the fall of 1991. Two areas for
further investigation were identified. Further investigation in the
spring of 1992 disclosed ground contamination and possible seepage into
groundwater. Management believed the contamination to have existed
prior to its purchase of the business in 1982 and has notified its
predecessor-in-interest. The Company has accrued the estimated minimum
remediation costs of approximately $500,000. These costs are included
in liabilities subject to compromise in the accompanying consolidated
balance sheets.
All appropriate county, state and federal agencies were notified regarding
contamination at this site. To management's knowledge, no response was
made by any notified governmental agency nor was the facility inspected
by any such agency. However, the Company may, at a later date, be
ordered to undertake further testing and/or remediation at the
location.
35
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENCIES, CONTINUED:
WAREHOUSING AND OFFICE FACILITY IN OHIO:
In 1990, potential contamination was discovered at this location.
Consultants were retained to perform testing and investigation of the
site to determine the extent of the contamination. In compliance with
bankruptcy statutes, rules and regulations regarding the
dischargeability of claims, in January 1993, the Company notified the
Ohio Environmental Protection Agency (EPA) of contamination at the
site. Environmental studies performed determined that the contamination
is confined to the site with no evidence of migration to groundwater or
surrounding properties. Management estimated the costs of remediation
to be as much as $5,600,000. The Company believed that a former
owner/operator of the site, which is a Fortune 500 company, caused the
contamination. The Company negotiated an agreement with the former
owner/operator regarding indemnification for the costs of remediation.
The agreement required that remediation costs be shared by the Company,
the Fortune 500 company and the successor to the Company as owner of
the property. The Company's responsibility with respect to the
agreement was to pay remediation costs and to guarantee payment of
costs by the successor related to certain clean-up areas. The Company's
continuing obligation is the guarantee of the payment by the current
owners of the final clean-up costs.
19. RELATED PARTY TRANSACTIONS:
Howard Gardner Consultants received $30,000 in 1996 from the Company for
consulting services on financial and general business matters. Howard
B. Gardner is a former officer and director of the Company. The fees
are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations.
A Director of the Company earned a 3% commission of $90,000 from the sale
of the Company's stock in its Mexican subsidiary during 1996. The
commission is included in selling, general and administrative expenses
in the accompanying consolidated statement of operations. Of the
commission earned, $45,000 was paid during 1996. During 1997, the
Company received a discount of $4,500 on the commission. The remaining
balance of $37,500 was paid during 1997.
During 1997, the Company approved a short term loan of $55,000 to the
principle shareholder. The loan was repaid to the Company prior to
December 31, 1997. During 1996, the Company approved a short term loan
of $150,000 to the principle shareholder, which was repaid to the
Company during 1996.
36
PERFORMANCE INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. RELATED PARTY TRANSACTIONS, CONTINUED:
As discussed in Note 14 the Company sold the majority of its assets of
Performance Funding Corp to Performance Funding, L.L.C., for a gain of
approximately $3,000. Members of Performance Funding L.L.C. include the
Chairman and President of the Company, and the Vice President of
Operations and CFO. Additionally, Performance Funding, L.L.C. is
subleasing an office from the Company on a month-to-month basis for
$180 a month.
During 1997, the Company purchased approximately 49,000 shares of the
Company's stock from a Director of the Company for $2.60 per share.
20. BUSINESS ACQUISITION:
During September 1998 the Company's restaurant subsidiary acquired the net
assets of a restaurant located in Phoenix, Arizona. The purchase price
of the restaurant was $1,400,000, of which $1,100,000 was paid in cash
and the remaining $300,000 in the form of a note payable. The purchase
was accounted for using the purchase method of accounting. The purchase
price in excess of the book value of the assets acquired was allocated
to the property and equipment acquired based upon its fair value. The
Company also assumed the lease obligation associated with the
restaurant.
21. IMPACT OF YEAR 2000 ISSUE (UNAUDITED):
The Company has conducted a review of its computer systems to identify
computer programs that could be affected by the Year 2000 issue, and
has developed a remediation plan to resolve the problem.
The issue is whether the computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail.
Management estimates the cost of further remediation to be approximately
$80,000.
37