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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 quarterly period ended June 11, 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 / X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity. As of October 17, 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 June 11,
2002 and December 25, 2001..................... 2-3
Condensed Consolidated Statements of Operations for
the twelve weeks ended June 11, 2002 and
June 12, 2001.................................. 4
Condensed Consolidated Statements of Operations for
the twenty-four weeks ended June 11, 2002 and
June 12, 2001.................................. 5
Condensed Consolidated Statements of Cash Flows for
the twenty-four weeks ended June 11, 2002 and
June 12, 2001.................................. 6
Notes to Condensed Consolidated Financial
Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 17
Item 2. Changes in Securities and Use of Proceeds........... 17
Item 3. Defaults Upon Senior Securities..................... 17
Item 4. Submission of Matters to a Vote of Security
Holders........................................ 17
Item 5. Other Information................................... 17
Item 6. Exhibits and Reports on Form 8-K.................... 17
SIGNATURES.................................................. 18
SECTION 302 CERTIFICATION................................... 18
1
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 11, 2002
(UNAUDITED)
ASSETS
24 WEEKS 52 WEEKS
ENDED ENDED
JUNE 11, DECEMBER 25,
2002 2001
----------- ------------
(UNAUDITED) (AUDITED)
Current assets
Cash and cash equivalents............................ $ 1,321,968 $ 1,109,501
Accounts receivable, net of allowance for doubtful
accounts of $383,374 and $383,374................. 662,492 1,144,336
Inventories.......................................... 3,085,839 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.............. 1,954,522 1,400,652
----------- -----------
Total current assets................................... 7,301,837 7,318,068
Property and equipment, net............................ 21,587,237 23,516,938
Deposits and other assets.............................. 377,030 387,684
Cash -- restricted under collateral agreements......... 1,515,291 1,488,189
----------- -----------
Total assets........................................... $30,781,395 $32,710,879
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 11, 2002
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
12 WEEKS 52 WEEKS
ENDED ENDED
JUNE 11, 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................. 259,236 2,660,306
Current portion of capital lease obligations...... 28,350 330,817
Accounts payable.................................. 2,556,504 7,020,813
Accrued liabilities............................... 5,530,496 10,237,694
Accrued payroll costs............................. 2,528,416 3,226,499
----------- -----------
Total current liabilities.............................. 10,903,002 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...................... 35,391,410 --
----------- -----------
Total liabilities...................................... 46,475,964 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.................................... (27,536,934) (26,215,474)
----------- -----------
Total stockholders' equity (deficit)................... (15,694,569) (14,373,109)
----------- -----------
Total liabilities and stockholders' equity (deficit)... $30,781,395 $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
JUNE 11, JUNE 12,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues............................................. $23,066,847 $27,094,712
Cost of sales
Food and beverage.................................... 8,170,389 9,854,383
Payroll and payroll related costs.................... 8,095,394 8,773,767
Direct operating costs............................... 5,268,594 5,964,856
Depreciation and amortization........................ 713,958 954,826
----------- -----------
Total cost of sales.................................. 22,248,335 25,547,832
Gross profit......................................... 818,512 1,546,880
General and administrative expenses.................. 975,786 1,860,709
----------- -----------
Loss before other (expense).......................... (157,274) (313,829)
Interest expense and financing costs, net............ (481,542) (566,516)
Legal Settlement..................................... -- (800,000)
Loss on disposal of fixed assets..................... (94,328) --
Other expense........................................ (13,034) --
----------- -----------
Total other (expense)................................ (588,894) (1,366,516)
----------- -----------
Loss before reorganization items and provision for
income taxes...................................... (746,178) (1,680,345)
Reorganization items:
Gain on disposal of property & equipment.......... 55,132 --
Professional fees................................. (425,000) --
----------- -----------
Loss before provision for income taxes............... (1,116,046) (1,680,345)
Provision for income taxes........................... 30,000 35,214
----------- -----------
Net loss............................................. $(1,146,046) $(1,715,559)
=========== ===========
Basic and diluted loss per share..................... $ (0.34) $ (0.51)
=========== ===========
Weighted-average shares outstanding.................. 3,386,522 3,386,522
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
24 WEEKS 24 WEEKS
ENDED ENDED
JUNE 11, JUNE 12,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues............................................. $48,523,201 $55,652,538
Cost of sales
Food and beverage.................................... 17,331,023 20,247,555
Payroll and payroll related costs.................... 16,809,647 17,796,300
Direct operating costs............................... 11,545,596 12,006,593
Depreciation and amortization........................ 1,508,890 1,787,794
----------- -----------
Total cost of sales.................................. 47,195,156 51,838,242
Gross profit......................................... 1,328,045 3,814,296
General and administrative expenses.................. 2,401,712 3,594,878
----------- -----------
Income (loss) before other income (expense).......... (1,073,667) 219,418
Interest expense and financing costs, net............ (1,075,106) (1,009,320)
Legal Settlement..................................... -- (800,000)
Loss on disposal of fixed assets..................... (94,328) --
Other income......................................... 21,580 --
----------- -----------
Total other (expense)................................ (1,147,854) (1,809,320)
----------- -----------
Loss before reorganization items and provisions for
income taxes...................................... (2,221,521) (1,589,902)
Reorganization items:
Gain on disposal of property & equipment.......... 1,591,710 --
Professional fees................................. (631,891) --
----------- -----------
Loss before provision for income taxes............... (1,261,702) (1,589,902)
Provision for income taxes........................... 59,758 78,341
----------- -----------
Net loss............................................. $(1,321,460) $(1,668,243)
=========== ===========
Basic and diluted loss per share..................... $ (0.39) $ (.49)
=========== ===========
Weighted-average shares outstanding.................. 3,386,522 3,386,522
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
24 WEEKS 24 WEEKS
ENDED ENDED
JUNE 11, JUNE 12,
2002 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities
Net loss.................................................... $(1,321,460) $(1,668,243)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization.......................... 1,508,890 1,787,794
Gain on disposal of rejected leases.................... (1,591,710) --
Write-down of accounts payables........................ -- (534,545)
(Increase) decrease in operating assets................ 503,889 (723,430)
Increase in liabilities subject to compromise.......... 35,391,410
(Decrease) in operating liabilities.................... (33,897,035) (1,118,177)
----------- -----------
Net cash provided by (used in) operating activities.... 593,984 (2,256,601)
----------- -----------
Cash flows from investing activities
Purchases of furniture and equipment................... (80,530) (329,077)
Change in restricted cash.............................. -- --
----------- -----------
Net cash used in investing activities....................... (80,530) (329,077)
----------- -----------
Cash flows from financing activities
Principal payments on debt and capital leases.......... (300,987) (823,593)
Bank overdraft......................................... -- 102,418
----------- -----------
Net cash used in financing activities....................... (300,987) (721,175)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 212,467 (3,306,853)
Cash and cash equivalents, beginning of period.............. 1,109,501 3,359,150
----------- -----------
Cash and cash equivalents, end of period.................... $ 1,321,968 $ 52,297
=========== ===========
The accompanying notes are an integral part of these financial statements.
6
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements 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
twenty-four week period ended June 11, 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 related footnotes included in the Company's Annual Report on Form
10-K for the year ended December 25, 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 June 11, 2002 the Company maintained a
current ratio of 0.67-to-1, which arose from a working capital deficit of
$3,601,165. 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 which is included in liabilities
subject to compromise. 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, and
three subsidiaries of Paragon Steakhouse Restaurants also filed for relief under
Chapter 11 of the Bankruptcy Code. The filing was made in connection with the
Company's inability to timely
7
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
pay certain notes aggregating $1,734,285. On October 11, 2002 Pacific Basin
Foods, the other wholly owned subsidiary of Steakhouse Partners, filed a
petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy
Court for the Central District in California.
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. Pacific Basin Foods ceased operating as of
its bankruptcy filing.
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. Management believes that the Official Creditors'
Committee will approve a bankruptcy plan in 2002, and the reorganization will be
complete by the beginning of 2003.
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 interests 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 its pre-petition obligations, including claims of landlords for
lease payments and employee wages and benefits in the ordinary course of
business.
Accounting Impact
As of the first quarter of 2002, the Company is 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 approved by
the Bankruptcy Court. Obligations of Pacific Basin Foods not covered by the
bankruptcy 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 bankruptcy 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 -- LOSS 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 excludes 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-
8
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
average number of common shares outstanding during the period. Common equivalent
shares are excluded from the computation if their effect is anti-dilutive. Net
loss per share amounts for all periods have been restated to conform to SFAS No.
128 requirements.
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, and
three subsidiaries of Paragon Steakhouse Restaurants also filed for relief under
Chapter 11 of the Bankruptcy Code. On October 11, 2002 Pacific Basin Foods, a
wholly owned subsidiary of Steakhouse Partners, filed a petition under
Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the
Central District of California. As a consequence to the bankruptcy filings, all
pending litigation and claims against Steakhouse Partners, Paragon Steakhouse
Restaurants and Pacific Basin Foods are stayed, and no party may take action to
realize its pre-petition claims, except pursuant to an order of the Bankruptcy
Court.
NOTE 4 -- SUBSEQUENT EVENTS
As of October 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 October 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.
As previously reported on Form 8-K filed on October 16, 2002, the Company
announced that its wholly owned subsidiary, Pacific Basin Foods, Inc. filed for
protection under Chapter 7 of the United States Bankruptcy Code in the Central
District of California located in Riverside. The subsidiary ceased operations
effective as of the filing.
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.
9
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes for the twelve
weeks and twenty-four weeks ended June 11, 2002 included in this Report, and the
2001 consolidated financial statements and related notes. 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.
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. Management believes that the Official Creditors'
Committee will approve a bankruptcy plan by the end of 2002 and the
reorganization will be complete by the beginning of 2003.
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.
10
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.
As discussed below, on October 11, 2002, our subsidiary Pacific Basin Foods
filed a petition under Chapter 7 of the Bankruptcy Code.
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 and 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 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
Mid-west distribution center in Rantoul, Illinois and converted all Mid-west
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. On October 11, 2002 the Pacific Basin Food subsidiary
filed a petition under Chapter 7 of the Bankruptcy Code. The subsidiary ceased
operations as of the filing. A contract was signed with a UniPro Distributor,
Southwest Traders, Inc., to service the West Coast Restaurants.
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.
11
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.
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
$28.00 and $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.
12
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. 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
steakhouses, Carvers.
RESULTS OF OPERATIONS
Twelve Weeks Ended June 11, 2002 Compared to Twelve Weeks Ended June 12, 2001
Revenues for the twelve- week period ended June 11, 2002 decreased $4,027,865,
or 14.9%, from $27,094,712 for the twelve-week period ended June 12, 2001 to
$23,066,847 for the same period in 2002. Paragon Steakhouse Restaurants revenues
for the twelve-week period ended June 12, 2001 decreased $3,494,652, or 13.3%,
from $26,209,879 for the twelve-week period ending June 12, 2001 to $22,715,227
for the same period in 2002. The main factors for the decline in revenue were
the soft economy and the sale or closing of ten units that were in operation
during the twelve-week period ending June 12, 2001 prior to June 11, 2002.
Pacific Basin Foods revenues for the twelve- week period ended June 11, 2002
decreased $533,213, or 60.3%, from $884,833 for the twelve-week period ended
June 12, 2001 to $351,620 for the same period in 2002.
Food and beverage costs for the twelve- week period ended June 11, 2002
decreased $1,683,994, or 17.1%, from $9,854,383 for the twelve-week period ended
June 12, 2001 to $8,170,389. Food and beverage costs for the restaurants only as
a percentage of restaurant revenues was 35.1% for the twelve-week period ended
June 12, 2001 compared to 35.0% for the same period in 2002. In spite of the
revenue declines and bankruptcy related supply issues the Company maintained the
food and beverage cost relatively consistent year-to-year as a percentage of
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 June 11, 2002
decreased $678,373, or 7.7%, from $8,773,767 for the twelve-week period ended
June 12, 2001 to $8,095,394. Payroll and payroll related costs as a percentage
of revenues were 32.4% for the twelve-week period ended June 12, 2001 compared
to 35.1% for the same period in 2002. Payroll and payroll related costs for the
restaurants only were 34.3% of restaurant revenues for the twelve-week period
ended June 11, 2002 compared to 32.4% for the twelve-week period ended June 12,
2001. The principal reason for this increase as a percentage of revenue was the
need to retain a certain minimum staffing per unit to maintain guest services
and a positive dining experience despite a decrease in restaurant net revenues.
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating costs for the
twelve-week period ended June 11, 2002 decreased $696,262, or 11.7%, from
$5,964,856 for the twelve-week period ended June 12, 2001 to $5,268,594. Direct
operating costs as a percentage of revenues were 22.0% for the twelve-week
period ended June 12, 2001 compared to 22.8% for the same period in 2002. Due to
the fixed nature of many of these components, management was not able to
decrease all the cost in proportion to the declining revenue, also contributing
to the increase was higher utility
13
costs especially in the California units and investing more dollars in the
Company's marketing programs.
Depreciation and amortization for the twelve-week period ended June 11, 2002
decreased $240,868, or 25.2%, from $954,826 for the twelve-week period ended
June 12, 2001 to $713,958. The decrease is principally due to the elimination of
fifteen under performing Paragon Steakhouse Restaurants. Of the fifteen leases
that were sold, rejected or terminated, ten were under performing operating
units and five were units previously closed but still carrying lease
obligations.
General and administrative expenses for the twelve-week period ended June 11,
2002 decreased $884,923, or 47.6%, from $1,860,709 for the twelve-week period
ended June 12, 2001 to $975,786. General and administrative expenses as a
percentage of restaurant revenues were 6.9% for the twelve week period ended
June 12, 2001 compared to 4.2% 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.
Interest expense and financing costs, net for the twelve-week period ended June
11, 2002 decreased $84,974 from $566,516 for the twelve-week period ended June
12, 2001 to $481,542. The decrease is due to the Paragon subsidiary selling,
rejecting or terminating a number of locations where capital interest expense
has been eliminated.
The net loss on reorganization related items is the result of legal fees
directly attributable to the bankruptcy process partially offset by the sale of
a liquor license from an expired lease in Scottsdale, Arizona.
Net loss net for the twelve-week period ended June 11, 2002 decreased $569,513
from $1,715,559 for the twelve-week period ended June 12, 2001 to $1,146,046.
The decrease is principally due to the elimination of fifteen under performing
assets and the reductions in general and administrative staffing, partially
offset by the high cost of the bankruptcy process. Pacific Basin Foods net loss
net for the twelve-week period ended June 11, 2002 increased $6,004 from
$185,429 for the twelve-week period ended June 12, 2001 to $191,433.
Twenty-four Weeks Ended June 11, 2002 Compared to Twenty-four Weeks Ended June
12, 2001
Revenues for the twenty-four week period ended June 11, 2002 decreased
$7,129,337, or 12.8%, from $55,652,538 for the twenty-four week period ended
June 12, 2001 to $48,523,201. The main factors for the decline in revenue were
the soft economy and that ten units in operation during the twenty-four week
period ending June 12, 2001 were sold, rejected or terminated prior to June 11,
2002. Paragon Steakhouse Restaurants revenue decreased 7.8% for the twenty-four
week period ended June 11, 2002 compared to the gross revenue for the same
twenty-four-week period ended June 12, 2001. Pacific Basin Foods revenues for
the twenty-four-week period ended June 11, 2002 decreased $440,199, or 30.1%,
from $1,461,241 for the twelve- week period ended June 12, 2001 to $1,021,042,
as their last major outside customer (Lyons) transferred its account to another
distributor.
Food and beverage costs for the twenty-four week period ended June 11, 2002
decreased $2,916,532, or 14.4%, from $20,247,555 for the twenty-four week period
ended June 12, 2001 to $17,331,023. The total food and beverage cost which
includes the restaurants and the food distribution subsidiary as a percentage of
total revenue was 35.7% for the twenty-four week period ended June 11, 2002
compared to 36.4% for the same period in 2001. In spite of 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. Subsequently, the
company has been able to find alternate vendors, renegotiate cash discounts and
adjust purchases for the restaurants to reduce overall cost.
14
Payroll and payroll related costs for the twenty-four week period ended June 11,
2002 decreased $986,653, or 5.5%, from $17,796,300 for the twenty-four week
period ended June 12, 2001 to $16,809,647. Payroll and payroll related costs as
a percentage of revenues were 34.6% for the twenty-four week period ended June
11, 2002 compared to 32.0% for the same period in 2001. Although in absolute
dollars payroll and payroll related costs decreased the principal reason for the
increase as a percentage relationship to revenue was the need to retain certain
minimum staffing per unit to maintain guest services and a positive dining
experience despite the decrease in restaurant net revenues.
Direct operating costs include all other unit-level operating costs, the major
components of which are operating supplies, repairs and maintenance, advertising
expenses, utilities, and other occupancy costs. A substantial portion of these
expenses is fixed or indirectly variable. Direct operating costs for the
twenty-four week period ended June 11, 2002 decreased $460,997, or 3.8%, from
$12,066,593 for the twenty-four week period ended June 12, 2001 to $11,545,596.
These costs as a percentage of restaurant revenues were 23.8% for the
twenty-four week period ended June 11, 2002 compared to 21.6% for the same
period in 2001. Due to the fixed nature of many of these components, management
was not able to decrease all the cost in proportion to the declining revenue,
also contributing to the increase was higher utility costs especially in the
California units and investing more dollars in the Company's marketing programs.
Depreciation and amortization for the twenty-four week period ended June 11,
2002 decreased $278,904 or 15.6% from $1,787,794 for the twenty-four week period
ended June 12, 2001 to $1,508,890. The decrease is principally due to the
elimination of fifteen under performing Paragon Steakhouse Restaurants. Of the
fifteen leases that were sold, rejected or terminated, ten were under performing
operating units and five were units previously closed but still carrying lease
obligations.
General and administrative expenses for the twenty-four week period ended June
11, 2002 decreased $1,193,166 or 33.2%, from $3,594,878 for the twenty-four week
period ended June 12, 2001 to $2,401,712 for the same period in 2002. General
and administrative expenses as a percentage of revenues was 5.0% for the
twenty-four week period ended June 11, 2002 compared to 6.5% for the same period
in 2001. 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.
Interest expense and financing costs, net for the twenty-four week period ended
June 11, 2002 increased by $65,786 or 6.1%, from $1,009,320 for the twenty-four
week period ended June 12, 2001 to $1,075,106. With interest expense remaining
relatively constant year-to-year the change is principally due to non-recurring
income items in 2001.
The net gain on reorganization related items is the result of the removal of
assets and accumulated depreciation and capital lease obligations due to the
first day rejection of closed or poorly performing units and the sale of a
liquor license, partially offset by legal fees directly attributable to the
bankruptcy process.
Net loss net for the twenty-four week period ended June 11, 2002 decreased
$346,783 from $1,668,243 for the twenty-four weeks ended June 12, 2001 to
$1,321,460. The decrease is principally due to the elimination of fifteen under
performing assets and the reductions in general and administrative staffing,
partially offset by the high cost of the bankruptcy process. Pacific Basin Foods
net loss for the twenty-four week period ended June 11, 2002 decreased $32,508
from $466,931 for the twenty-four week period ended June 12, 2001 to $434,423.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a cash and cash equivalents balance of $1,321,968 at June 11,
2002. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet
15
its obligations on a timely basis, to restructure its current financing, to
obtain additional financing, and ultimately to attain profitability.
The reorganization plan is contingent on the sale of selected assets and the
Company may need additional sources of financing. Any required additional
financing may not be available on terms favorable to us, or at all. If adequate
funds are not available on acceptable terms, we may be unable to fund our
reorganization plan and may be required to sell core assets or dissolve the
business. If we raise additional funds by issuing equity securities,
shareholders may experience dilution of their ownership interest and the newly
issued securities may have 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK. The Company's exposure to market risk is principally confined to
cash in the bank, money market accounts, and notes payable, which have short
maturities and, therefore, minimal and immaterial market risk.
INTEREST RATE SENSITIVITY. As of June 11, 2002, the Company had cash in checking
and money market accounts. Because of the short maturities of these instruments,
a sudden change in market interest rates would not have a material impact on the
fair market value of these assets.
FOREIGN CURRENCY EXCHANGE RISK. The Company does not have any foreign currency
exposure because it currently does not transact business in foreign currencies.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a consequence to the bankruptcy filings, all pending litigation and claims
against Steakhouse Partners, Paragon Steakhouse Restaurants and Pacific Basin
Foods are stayed, and no party may take action to realize its pre-petition
claims, except pursuant to an order of the Bankruptcy Court.
ITEM 2. CHANGES 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.
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
None
17
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 25, 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 25, 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.
18