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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the twelve week period ended March 19, 2002
/ / 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 small business issuer 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
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 / / No /X/
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 27, 2002: 3,356,522 shares of Common Stock
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
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FORM 10-Q
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at March 19,
2002 and December 25, 2001.................... 2-3
Condensed Consolidated Statements of Operations for
the twelve weeks ended March 19, 2002 and
March 20, 2001................................ 4
Condensed Consolidated Statements of Cash Flows for
the twelve weeks ended March 19, 2002
and March 20, 2001............................ 5
Notes to Condensed Consolidated Financial
Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 14
Item 2. Change in Securities................................ 14
Item 3. Defaults Upon Senior Securities..................... 14
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 14
Item 5. Other Information................................... 14
Item 6. Exhibits and Reports on Form 8-K.................... 14
SIGNATURES.................................................. 15
SECTION 302 CERTIFICATION................................... 15
1
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 19, 2002 AND DECEMBER 25, 2001
ASSETS
12 WEEKS 52 WEEKS
ENDED ENDED
MARCH 19, DECEMBER 25,
2002 2001
----------- ------------
(UNAUDITED) (AUDITED)
Current assets
Cash and cash equivalent............................. $ 2,375,951 $ 1,109,501
Accounts receivable, net of allowance for doubtful
accounts of $383,374 and $383,374................. 632,377 1,144,336
Inventories, net of allowance for obsolete
inventories of $45,805 and $45,805................ 2,807,596 3,386,563
Current portion of advances to officers, net of
allowance for doubtful accounts of $616,584 and
$616,584............................................. 277,016 277,016
Prepaid expenses and other current assets.............. 1,383,221 1,400,652
----------- -----------
Total current assets................................... 7,476,161 7,318,068
Property and equipment, net............................ 22,374,698 23,516,938
Deposits and other assets.............................. 381,815 387,684
Cash -- restricted under collateral agreements......... 1,488,998 1,488,189
----------- -----------
Total assets........................................... $31,721,672 $32,710,879
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 19, 2002 AND DECEMBER 25, 2001
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
12 WEEKS 52 WEEKS
ENDED ENDED
MARCH 19, DECEMBER 25,
2002 2001
----------- ------------
(UNAUDITED) (AUDITED)
Liabilities Not Subject to Compromise
Current liabilities
Current portion of convertible debt............... $ -- $ 1,100,000
Current portion of long-term debt................. -- 2,660,306
Current portion of capital lease obligations...... 28,350 330,817
Accounts payable.................................. 2,683,446 7,020,813
Accrued liabilities............................... 4,394,374 10,237,694
Accrued payroll costs............................. 2,771,490 3,226,499
----------- -----------
Total current liabilities.............................. 9,877,660 24,576,129
Long-term debt, net of current portion................. -- 2,000,000
Capital lease obligations, net of current portion...... 62,141 17,102,653
Deferred tax liability................................. 119,411 119,411
Deferred gain on sale-leaseback........................ -- 903,172
Deferred rent.......................................... -- 2,382,623
Liabilities subject to compromise...................... 36,210,983 --
----------- -----------
Total liabilities...................................... 46,270,195 47,083,988
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, Series B, Convertible, $0.001 par value
1,000,000 shares authorized
1,000,000 and 1,000,000 shares issued and
outstanding....................................... 1,000 1,000
Preferred stock, Series C, Convertible, $0.001 par value
1,750,000 shares authorized
1,750,000 and 1,750,000 shares issued and
outstanding....................................... 1,750 1,750
Common stock, $0.01 par value
10,000,000 shares authorized
3,386,522 and 3,386,522 shares issued and
outstanding....................................... 33,865 33,865
Treasury stock, 28,845 shares, at cost................. (175,000) (175,000)
Additional paid-in capital............................. 11,980,750 11,980,750
Accumulated deficit.................................... (26,390,888) (26,215,474)
----------- -----------
Total stockholders' equity (deficit)................... (14,548,523) (14,373,109)
----------- -----------
Total liabilities and stockholders' equity............. $31,721,672 $32,710,879
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
12 WEEKS 12 WEEKS
ENDED ENDED
MARCH 19, MARCH 20,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues............................................. $25,456,354 $28,557,826
Cost of sales
Food and beverage.................................... 9,160,634 10,393,172
Payroll and payroll related costs.................... 8,714,253 9,022,533
Direct operating costs............................... 6,277,002 6,041,737
Depreciation and amortization........................ 794,932 832,968
----------- -----------
Total cost of sales.................................. 24,946,821 26,290,410
Gross profit......................................... 509,533 2,267,416
General and administrative expenses.................. 1,425,926 1,734,169
----------- -----------
Income (loss) before other income (expense).......... (916,393) 533,247
Other income......................................... 22,858 --
Interest income...................................... 11,756 --
Interest and financing costs......................... (593,564) (442,804)
----------- -----------
Total other (expense)................................ (558,950) (442,804)
Income (loss) before reorganization items and
provision for income taxes........................ (1,475,343) 90,443
Reorganization items:
Gain on disposal of property and equipment........ 1,536,578 --
Professional fees................................. (206,891) --
----------- -----------
Income (loss) before provision for income taxes...... (145,656) 90,443
Provision for income taxes........................... 29,758 43,127
----------- -----------
Net income (loss).................................... $ (175,414) $ 47,316
=========== ===========
Earnings per share
Basic............................................. $ (0.05) $ 0.01
=========== ===========
Diluted........................................... $ (0.05) $ 0.01
=========== ===========
Weighted-average shares outstanding
Basic............................................. 3,386,522 3,386,522
=========== ===========
Diluted........................................... 3,386,522 4,975,672
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
12 WEEKS 12 WEEKS
ENDED ENDED
MARCH 19, MARCH 20,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net income (loss)........................................... $ (175,414) $ 47,316
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization.......................... 794,932 832,968
Gain on disposal of rejected leases.................... (1,656,239) --
Decrease in operating assets........................... 1,108,357 102,248
Increase in liabilities subject to compromise.......... 36,210,983 --
(Decrease) in operating liabilities.................... (34,744,324) (2,932,853)
----------- -----------
Net cash provided by (used in) operating activities.... 1,538,295 (1,950,324)
Cash flows from investing activities
Purchases of furniture and equipment................... (64,699) (247,893)
----------- -----------
Net cash used in investing activities....................... (64,699) (247,893)
Cash flows from financing activities
Principal payments on debt and capital leases.......... (207,146) (350,850)
----------- -----------
Net cash used in financing activities....................... (207,146) (350,850)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 1,266,450 (2,549,067)
Cash and cash equivalents, beginning of period.............. 1,109,501 3,359,150
----------- -----------
Cash and equivalents, end of period......................... $ 2,375,951 $ 810,083
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements have been prepared by
the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission. The information furnished herein reflects all adjustments
(consisting of normal recurring accruals and adjustments), which are, in the
opinion of management necessary to fairly present the operating results for the
respective periods. Certain information and footnote disclosures normally
present in annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. The results of the twelve
week period ended March 19, 2002 are not necessarily indicative of the results
to be expected for the full year ending December 24, 2002. The Company reports
results quarterly with the three quarters having 12 weeks and the remaining
quarter having 16 weeks. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual report in Form 10K for the
year ended December 31, 2001.
GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, during the twelve weeks ended March 19, 2002 the Company maintained
a current ratio of 0.76-to-1, which arose from a working capital deficit of
$2,401,499. In addition the Company is currently in default of certain debt as
the Company did not make payments as the notes came due, and the Company failed
to meet certain financial covenants required by its lenders. The total amount of
debt that is currently in default is $3,234,285 of which $1,100,000 is
convertible debt and $2,134,285 is included in notes payable. If the Company is
unable to generate profits and unable to obtain financing for its working
capital requirements, it may have to curtail its business sharply or cease
business altogether.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to restructure its current
financing, to obtain additional financing, and ultimately to attain
profitability.
Management has evaluated its current operations, and it has focused the
Company's efforts and developed plans to generate operating income to continue
the Company's operations through the year ended December 31, 2002.
Management's plans include the following:
1. Restructuring its long-term debt position.
2. Improving the Company's financial performance through cost-reduction and
restructuring of administrative overhead.
3. Raising money through equity or the selective sale of non-strategic
restaurants.
BANKRUPTCY FILING
On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon
Steakhouse Restaurants, a wholly owned subsidiary of Steakhouse Partners, also
filed for relief under Chapter 11 of the Bankruptcy Code. The filing was made in
connection with the Company's inability to timely pay certain notes aggregating
$1,734,285. Pacific
6
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Basin Foods, the other wholly owned subsidiary of Steakhouse Partners, has not
filed and remains outside of the bankruptcy code.
Steakhouse Partners and Paragon have and will continue to manage their
properties and operate their businesses as "debtors-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code.
By filing under Chapter 11, the Company is seeking to retain core locations,
eliminate non-competitive leases, restructure its debt, and withdraw from
under-performing markets. While management believes that the Official Creditors'
Committee will approve the bankruptcy plan in October 2002, and there
reorganization will be complete by the end of 2002.
It is the Company's intention to address all of its pending and future
pre-petition claims in a plan of reorganization. However, it is currently
impossible to predict with any degree of certainty how the plan will treat
pre-petition claims and the impact the bankruptcy filings and any reorganization
plan may have on the shares of preferred or common stock of the Company.
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.
While the Company believes the reorganization will be completed by the end of
2002, the formulation and implementation of a plan of reorganization could take
significantly longer, or may not be successfully completed.
The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including claims of landlords
for lease payments and employee wages and benefits in the ordinary course of
business.
Accounting Impact
Beginning in the first quarter of 2002, the Company will be required to follow
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Pursuant to SOP 90-7, the Company's
pre-petition liabilities that are subject to compromise will be reported
separately on the balance sheet at an estimate of the amount that will
ultimately be allowed by the Bankruptcy Court. Obligations of Pacific Basin
Foods not covered by the Filing will remain classified on the consolidated
balance sheet based upon maturity dates and actual costs incurred. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.
To date, the United States Bankruptcy Court in accordance with the applicable
provisions of the Bankruptcy Code, has approved the rejection of eight leases
and the termination after compromise of seven leases. Eleven additional leases
were renegotiated to improve unit profitability. Of the fifteen leases that were
rejected or terminated ten were under performing operating units and five were
units previously closed but still carrying lease obligations.
NOTE 2 -- EARNINGS PER SHARE
In 1997, the Financial Accounting Standard Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share exclude any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic earnings per
share is computed using the weighted-average number of common shares outstanding
during the period. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. Net earnings per share amounts for all periods
have been restated to conform to SFAS No. 128 requirements.
7
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 -- CONTINGENCIES
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.
On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon
Steakhouse Restaurants, a wholly owned subsidiary of Steakhouse Partners, also
filed for relief under Chapter 11 of the Bankruptcy Code. As a consequence to
the bankruptcy filings, all pending litigation and claims against Steakhouse
Partners and Paragon Steakhouse Restaurants are stayed, and no party may take
action to realize its pre-petition claims, except pursuant to order of the
Bankruptcy Court.
NOTE 4 -- SUBSEQUENT EVENTS
During April 2002, the Company's Board of Directors approved bonuses to certain
senior management in the amount of $227,500, which will become due and payable
upon the approval of the restructuring plan by the Company's creditors'
committee.
In addition, the Board of Directors approved termination payments equivalent to
a one-year base salary for certain senior management in the event that a change
in control of the Company terminates their employment. These amounts aggregate
to $455,000.
During June 2002, Mr. Lee the Company's former Chief Executive Officer filed a
claim with the Bankruptcy Court against the Company for approximately
$2,000,000, alleging, among other things, unpaid consulting fees and wrongful
termination. The Company believes this claim does not have merit and will
vigorously defend such position. The Company has not accrued any liabilities
related to this claim in the accompanying consolidated financial statements.
As of September 2002, the Company has negotiated the sale of two restaurant
leases and related property, plant, and equipment for gross proceeds of
$878,000. The property, plant, and equipment associated with such leases had a
net book value of approximately $476,000 and future minimum lease commitments of
$1,896,000 as of March 2002. The Company expects to record a net gain during the
year ended December 31, 2002 of approximately $400,000 in connection with such
sales.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. This Act
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about themselves so long as they identify
these statements as forward looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact made
in this Quarterly Report on Form 10-Q are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations
or financial position are forward-looking statements. Forward-looking statements
reflect management's current expectations and are inherently uncertain. The
company's actual results may differ significantly from management's
expectations. See the risk factors detailed in the Company's Form 10-K for the
fiscal year ended December 25, 2001 as well as other reports filed by the
Company with the Securities Exchange Commission.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes for the twelve
weeks ended March 19, 2002 included in this Report, and the audited consolidated
financial statements and related footnotes for the year ended December 31, 2001
included in the Company's Annual Report on Form 10-K for fiscal 2001. The
discussion of results, causes and trends should not be construed to imply any
conclusion that such results or trends will necessarily continue in the future.
Overview
BACKGROUND
Steakhouse Partners, Inc. ("Steakhouse Partners", the "Company", "we", "us" and
"our"), currently operates 53 full-service steakhouse restaurants located in ten
states. The Company's restaurants specialize in complete steak and prime rib
meals, and also offer fresh fish and other lunch and dinner dishes. The
Company's average dinner check is approximately $23.00 (including alcoholic
beverages) and it currently serves over 6.8 million meals annually. The Company
operates principally under the brand names of Hungry Hunter's, Hunter's
Steakhouse, Mountain Jack's and Carvers. 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 it has completed the reorganization process described
below under "Bankruptcy Filing".
On December 21, 1998, the Company consummated its acquisition of Paragon
Steakhouse Restaurants, Inc. ("Paragon"), which owned 78 steakhouse restaurants
and Pacific Basin Foods Inc., ("Pacific Basin") a restaurant food distribution
company. Paragon and Pacific Basin are now wholly owned subsidiaries of the
Company.
BANKRUPTCY FILING
On February 15, 2002 Steakhouse Partners filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California. On February 19, 2002 Paragon
Steakhouse Restaurants, a wholly owned subsidiary of Steakhouse Partners, also
filed for relief under Chapter 11 of the Bankruptcy Code. The filing was made in
connection with the Company's inability to timely pay certain notes aggregating
$1,734,285. Pacific Basin Foods, the other wholly owned subsidiary of Steakhouse
Partners, has not filed and remains outside of the bankruptcy code.
Steakhouse Partners and Paragon have and will continue to manage their
properties and operate their businesses as "debtors-in-possession" under the
jurisdiction of the Bankruptcy Court and in accordance with the applicable
provisions of the Bankruptcy Code.
9
By filing under Chapter 11, the Company is seeking to retain core locations,
eliminate non-competitive leases, restructure its debt, and withdraw from
under-performing markets. While management believes that the Official Creditors'
Committee will approve the bankruptcy plan in October 2002, and there
reorganization will be complete by the end of 2002.
It is the Company's intention to address all of its pending and future
pre-petition claims in a plan of reorganization. However, it is currently
impossible to predict with any degree of certainty how the plan will treat
pre-petition claims and the impact the bankruptcy filings and any reorganization
plan may have on the shares of preferred or common stock of the Company.
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.
While the Company believes the reorganization will be completed by the end of
2002, the formulation and implementation of a plan of reorganization could take
significantly longer, or may not be successfully completed.
The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain of their pre-petition obligations, including claims of landlords
for lease payments and employee wages and benefits in the ordinary course of
business.
Accounting Impact
Beginning in the first quarter of 2002, the Company will be required to follow
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Pursuant to SOP 90-7, the Company's
pre-petition liabilities that are subject to compromise will be reported
separately on the balance sheet at an estimate of the amount that will
ultimately be allowed by the Bankruptcy Court. Obligations of Pacific Basin
Foods not covered by the Filing will remain classified on the consolidated
balance sheet based upon maturity dates and actual costs incurred. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and
provisions for losses related to the Filing as reorganization items.
To date, the United States Bankruptcy Court in accordance with the applicable
provisions of the Bankruptcy Code, has approved the rejection of eight leases
and the termination after compromise of seven leases. Eleven additional leases
were renegotiated to improve unit profitability. Of the fifteen leases that were
rejected or terminated ten were under performing operating units and five were
units previously closed but still carrying lease obligations.
OUR BUSINESS BACKGROUND
Our overall steakhouse operations tend to experience seasonal fluctuations, with
the fourth quarter and first quarter of each year being our strongest quarters,
reflecting both the Christmas season and the colder weather at our Mid-west
operations, and the third quarter being the slowest, as people tend to eat less
steak in restaurants in the summer months. This seasonality, however, is less
pronounced at our California locations, which do not experience the same
seasonal changes in weather that occur at our Mid-west locations.
We have three business units, which have separate management and reporting
infrastructures that offer different products and services. The business units
have been aggregated into two reportable segments, restaurant services and food
service distribution, since the long-term financial performance of these
reportable segments are affected by similar economic conditions. The restaurant
services segment consists of two business units Paragon Steakhouse Restaurants,
Inc. and Galveston Steakhouse Restaurants that operate specialty restaurants
around the country. Our food service distribution segment, which operates as
Pacific Basin Foods, performs distribution of restaurant foods and
restaurant-related products for internal operations, as well as customers
outside our internal operations.
Since our Pacific Basin Foods subsidiary is in the wholesale business of
providing food supplies to restaurants, its profit margin on sale of food
products to restaurants is significantly less than the margin that can be
obtained through restaurant sales. In addition, since Pacific Basin Foods
maintains
10
a large inventory of food supplies to service its wholesale customers, its
business is more susceptible to the risk of inventory obsolescence than our
other business operations.
On June 17, 2002 the Pacific Basin Foods subsidiary closed its unprofitable
Midwest distribution center in Rantoul, Illinois and converted all Midwest
Paragon Restaurants to two members of the UniPro Foodservice Network; Abbott
Foods, Inc and EG Forrest Company. There was no interruption of service to the
Paragon restaurant units.
The steakhouse restaurant industry is expected to continue to expand over the
next several years. We believe that this industry is highly fragmented and,
assuming a successful reorganization under Chapter 11 of the United States
Bankruptcy Code, presents an excellent opportunity for us to grow our business
by expanding one of Paragon's brand-name step-up steakhouses, Carvers.
RESTAURANT CONCEPTS
All of our restaurants are positioned as destination restaurants that attract
loyal clientele. By our use of the term destination restaurants, we mean that we
seek to establish our restaurants as the primary destination of our clientele,
rather than a destination or activity ancillary to another activity, such as
shopping or sight seeing. Our restaurants are full-service steakhouses (with two
exceptions). We hand-cut our steaks in-house from whole loins of beef for
superior freshness and taste. Prime rib is our "signature product" and is the
basis for our distinctive merchandising commitment to "The Best Prime Rib in
Town". Our prime rib, which is served in a herb crust, is slow roasted for seven
hours to enhance its flavor and tenderness. Portions are deliberately generous.
Prime Rib and Steaks account for approximately 65.0% of our food revenue. Full
liquor, wine and bar service are available. Alcoholic beverage sales account for
approximately 18.0% of our net sales.
Most of our restaurants are open daily from 4:30 p.m. to 9:30 p.m. on weekdays
and from 4:00 p.m. to10:00 p.m. on weekends. Some restaurants are open for lunch
beginning at 11:00 a.m. on weekdays; most of these restaurants are closed for
lunch on weekends.
We currently operate in three distinctive steakhouse markets.
HUNGRY HUNTER'S, HUNTER'S STEAKHOUSE AND MOUNTAIN JACK'S
We have 40 steakhouses operating under the brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's for which the average dinner check is in
the under $25.00 per guest range. Many of these steakhouses have been in
business for over 25 years, and, as such, have loyal clientele and have the
"look and feel" of a classic special occasion restaurant. For this reason, we
have been able to position our Hungry Hunter's, Hunter's Steakhouse and Mountain
Jack's steakhouses as a step-above the lower ticket Outback and Lone Star
restaurant chains.
Our menu also features fresh fish, seafood, lamb and chicken in addition to
prime rib and steaks. A complete meal includes salad and a choice of side dishes
including choice of potato, and steamed vegetables. The menu also includes
appetizers and desserts. The Hungry Hunter's, Hunter's Steakhouse and Mountain
Jack's recently completed a menu revision designed to increase variety and
emotional value. The change included the addition of new appetizers, seafood,
specialty steaks, prime rib combinations and revisions to all plate
presentations.
Our Hungry Hunter's, Hunter's Steakhouse and Mountain Jack's restaurants are
typically free-standing buildings with dinner seating capacities ranging from
150 to 220 seats and an average seating capacity of approximately 180 seats.
Unlike an Outback or Lone Star, our restaurants typically have one or more
banquet rooms to accommodate private parties and corporate events. The bar in
each restaurant is generally located adjacent to the dining room primarily to
accommodate customers waiting for dining tables and up to approximately 30
additional diners.
11
CARVERS
We have 8 steakhouses operating in the upscale steakhouse-dining segment under
the Carvers brand name with an average check per guest of slightly less than
$35.00. Carvers is a sophisticated, upper tier yet mid-priced restaurant
specializing in complete steak, chop, prime rib and seafood meals. Most Carvers
are divided into distinctive dining areas to provide greater intimacy. Prices at
the Carvers restaurants are slightly higher than those of our other restaurants,
but are substantially lower than high-end steakhouses such as Morton's and
Ruth's Chris.
Our Carvers restaurants are also typically housed in freestanding buildings with
dinner seating capacities ranging from 180 to 240 seats and an average seating
capacity of approximately 220 seats. The Carvers restaurants also have one or
more banquet rooms to accommodate private parties and corporate events. We are
currently developing the next generation lunch and dinner menus for Carvers.
UNIQUE CONCEPTS
We have 5 unique formal restaurants housed in landmark buildings in prime
locations near or at tourist sites, which also serve as the destination or
special occasion restaurant in their respective communities. The menu at these
restaurants are also unique with the average dinner check per guest between
$28.00and $35.00. These restaurants typically have one or more banquet rooms.
We will continue our efforts to differentiate our restaurants by emphasizing
personal and attentive service, consistent high-quality, fresh products and
position in the mid-priced, full service steakhouse segment of the restaurant
industry.
REORGANIZATION STRATEGY
Management plans to restructure the Company's debt through the Chapter 11
reorganization process, improve the Company's financial performance through
cost-reduction and restructuring of administrative overhead, and raise money
through equity or the selective sale of non-strategic restaurants. In the short
term, we will reduce our organization in size as part of the reorganization
process. Assuming the Company is able to successfully reorganize under Chapter
11 of the United States Bankruptcy Code, our goal for the future is to enhance
our position in the steakhouse restaurant industry by building through internal
growth (Carvers) and licensing a network of steakhouse restaurants. Key
components of our strategy include leveraging established brands, achieving
operating efficiencies and cost savings through volume discounts on purchases,
and efficiently penetrating new markets.
Results of Operations
Twelve Weeks Ended March 19, 2002 Compared to Twelve Weeks Ended March 20, 2001
Revenues for the twelve-week period ended March 19, 2002 decreased $3,101,472 or
10.9% from $28,557,826 for the twelve-week period ended March 20, 2001 to
$25,456,354 for the same period in 2002. Paragon Steakhouse Restaurants
same-store sales declined 9.2% for the 56 comparable units versus the same
period in 2001. Paragon's decrease in revenue reflects the soft economy, which
began to affect revenue in the second twelve- week period of 2001 and the
initial adverse effect of filing for voluntary reorganization under Chapter 11.
The Paragon decrease was partially offset by Pacific Basin Foods whose revenue
increased by $93,014 or 16.1% from $576,408 for the twelve-week period ended
March 20, 2001 to $669,422 for the same period in 2002. Most of that increase
was the result of an additional outside customer (Lyons).
Food and beverage costs for the twelve-week period ended March 19, 2002
decreased $1,232,538 or 11.9% from $10,393,172 for the twelve-week period ended
March 20, 2001 to $9,160,634 for the same period in 2002. Food and beverage
costs as a percentage of restaurant revenues was 35.5% for the twelve-week
period ended March 20, 2001 compared to 35.2% for the same period in 2002. In
spite of
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the revenue declines and bankruptcy related supply issues the Company maintained
the food and beverage cost relatively consistent year-to-year as a percentage
relations to revenue. Immediately after the bankruptcy filing many vendors
changed their terms and conditions in order to continue to do business with
Paragon. This included deposits, loss of discounts and higher prices.
Payroll and payroll related costs for the twelve-week period ended March 19,
2002 decreased $308,280 or 3.4% from $9,022,533 for the twelve-week period ended
March 20, 2001 to $8,714,253 for the same period in 2002. Payroll and payroll
related costs as a percentage of revenue were 31.6% for the twelve-week period
ended March 20, 2001 compared to 34.2% for the same period in 2002. The
principal reason for this increase as a percentage relationship to revenue is
the decrease in the restaurants net revenue was greater than the minimum
staffing that is required per unit to maintain guest services and a positive
dining experience.
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expense, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating cost for the
twelve-week period ended March 19, 2002 increased $235,265 or 3.8% from
$6,041,737 for the twelve-week period ended March 20, 2001 to $6,277,002 for the
same period in 2002. These costs as a percentage of revenues were 21.2% for the
twelve-week period ended March 20, 2001 compared to 24.7% for the same period in
2002. The increase is principally due to the revenue shortfall from Paragon
Restaurants without the proportionate reduction in expenses. Also contributing
to the year-to-year difference was a general liability self-insurance recovery
($248,966) in 2001.
Depreciation and amortization for the twelve-week period ended March 19, 2002
decreased $38,036 or 4.6% from $832,968 for the twelve-week period ended March
20, 2001 to $794,932 for the same period in 2002. The decrease is the result of
Pacific Basin Foods expensing the MIS system that was replaced by the current
system and written-off at the end of 2001.
General and administrative expenses for the twelve-week period ended March 19,
2001 decreased $308,243 or 17.8% from $1,734,169 for the twelve-week period
ended March 20, 2001 to $1,425,926 for the same period in 2002. These costs as a
percentage of revenues were 6.1% for the twelve-week period ended March 20, 2001
compared to 5.6% for the same period in 2002. The decrease in both absolute
dollars and percentage relationship to revenue is chiefly the result of the
combination of a reduction-in-force and senior management attrition prior to the
Chapter 11 filing. The reduction in senior management without significant
severance expense included: the chief executive officer, vice-president of
operations, three district leaders, a mid-west operations consultant, IS support
and a number of staff positions.
Other income (expenses) for the twelve-week period ended March 19, 2002
increased $116,146 or 26.2% from $(442,804) for the twelve-week period ended
March 20, 2001 to $(558,950) for the same period in 2002. With interest expense
remaining relatively constant year-to-year the change is principally due to
non-recurring income items in 2001, a licensing fee ($25,000) for Rancho Mirage
and the sale of leasehold interest ($95,000) in a parking lot.
The net gain on reorganization related items is the result of the removal of
assets, accumulated depreciation and capital lease obligations due to the first
day rejection of closed or poorly performing units partially offset by legal
fees directly attributable to the bankruptcy process.
Net loss for the twelve-week period ended March 19, 2002 increased $222,730 from
net income of $47,316 for the twelve-week period ended March 20, 2001 to a net
loss of $175,414 for the same period in 2002. The increase is principally due to
the shortfall in sales principally as a resulted of the continuing soft economy
and not being able to reduce all cost proportionately (production labor and
direct cost) to the decrease in revenue, partially offset by the reorganization
gain.
Liquidity and Capital Resources
The Company had a cash and cash equivalents balance of $2,375,951 at March 19,
2002. 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.
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The reorganization plan is contingent on the sale of selected assets and may
need additional sources of financing. Any required additional financing may not
be available on terms favorable to us, or at all. If adequate funds are not
available on acceptable terms, we may be unable to fund our reorganization plan
and may be required to sell core assets or dissolve the business. If we raise
additional funds by issuing equity securities, shareholders may experience
dilution of their ownership interest and the newly issued securities may have 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.
Impact of inflation
The primary inflationary factors affecting the Company's operations include 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence to the bankruptcy filings, all pending litigation and claims
against Steakhouse Partners and Paragon Steakhouse Restaurants are stayed, and
no party may take action to realize its pre-petition claims, except pursuant to
order of the Bankruptcy Court. See Note 3 to the Condensed Consolidated
Financial Statements included herein.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The total amount of debt that is currently in default is $3,234,285 of which
$1,100,000 is convertible debt and $2,134,285 is included in notes payable. See
Note 1 to the Condensed Consolidated Financial Statements included herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
Form 8-K filed on February 21, 2002 reporting that Steakhouse Partners, Inc.
and its wholly owned subsidiary; Paragon Steakhouse Restaurants filed a
voluntary petition for relief under chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy court for the Central
District of California. The 8-K also reported that the Company's Board of
Directors eliminated the Chief Executive Officer position, which had been
held by Mr. Richard M. Lee. Mr. Hiram J. Woo continues as President of the
Company and is responsible for the day-to-day operations. Finally, it was
reported that for personal reasons Mr. Mark K. Goudge resigned as a member
of the Company's Board of Directors.
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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/ HIRAM WOO
......................................
Hiram Woo
President, Secretary and Director
(Serving as principal executive
officer
and principal financial and
accounting officer)
Date: October 8, 2002
CERTIFICATION*
I, Hiram J. Woo, certify that:
1. I have reviewed this quarterly report Form 10-Q of Steakhouse Partners, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Dated: October 8, 2002
/s/ HIRAM J. WOO
- ---------------------------------------------
Name: Hiram J. Woo
Title: President, Secretary and Director
(Serving as principal executive officer
and principal financial and
accounting officer)*
On February 14, 2002, the Board of Directors of Steakhouse Partners, Inc.
eliminated the Chief Executive Officer position. Mr. Hiram J. Woo continues as
President of Steakhouse Partners, Inc. and is responsible for day-to-day
operations. Mr. Woo also serves as the Company's principal financial and
accounting officer; no officer holds the title of Chief Financial Officer.
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