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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 2, 2003
/ / 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 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 / / 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 December 30, 2003: 3,386,522 shares of common stock
FORM 10-Q
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at September 2,
2003 and December 24, 2002.................... 2-3
Condensed Consolidated Statements of Operations for
the twelve weeks ended September 2, 2003
and September 3, 2002......................... 4
Condensed Consolidated Statements of Operations for
the thirty-six weeks ended September 2, 2003
and September 3, 2002......................... 5
Condensed Consolidated Statements of Cash Flows for
the thirty-six weeks ended September 2, 2003
and September 3, 2002......................... 6
Notes to Condensed Consolidated Financial
Statements.................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10-15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 16
Item 4. Controls and Procedures............................. 16-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 17
Item 2. Change 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................................... 19
EXPLANATORY STATEMENT
On February 15, 2002, Steakhouse Partners, Inc. and three subsidiaries of
Paragon Steakhouse Partners, Inc., our wholly owned subsidiary, filed voluntary
petitions for reorganization under Chapter 11 of the federal bankruptcy laws in
the United States Bankruptcy Court for the Central District of California
("Bankruptcy Court"). The filing was made in connection with our inability to
timely pay certain notes aggregating $1,734,285. As a debtor-in-possession,
Steakhouse Partners, Inc. is authorized to continue to operate as an ongoing
business, but may not engage in transactions outside the ordinary course of
business without the approval of the Bankruptcy Court, after notice and an
opportunity for a hearing. At this time, it is not possible to predict the
effect of the Chapter 11 reorganization on the business of Steakhouse Partners,
Inc., various creditors and security holders or when we will be able to exit
Chapter 11. Our future results are dependent upon our confirming and
implementing, on a timely basis, a plan of reorganization. A more detailed
description of the bankruptcy filing and its effect on Steakhouse Partners, Inc.
is set forth in Steakhouse Partners, Inc.'s Annual Report on Form 10-K for the
fiscal year ended December 30, 2003, filed with the Securities and Exchange
Commission on April 27, 2004.
1
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 2, 2003
(UNAUDITED)
ASSETS
36 WEEKS 52 WEEKS
ENDED ENDED
SEPTEMBER 2, DECEMBER 24,
2003 2002
------------ ------------
(UNAUDITED) (AUDITED)
Current assets
Cash and cash equivalent............................. $ 555,306 $ 2,750,673
Accounts receivable, net of allowance for doubtful
accounts of $133,374 and $133,374................. 199,263 829,909
Inventories, net of allowance for obsolete
inventories of $45,805 and $45,805................ 1,381,992 1,931,383
Prepaid expenses and other current assets.............. 1,066,793 847,727
----------- -----------
Total current assets................................... 3,203,354 6,359,692
Property and equipment, net............................ 15,520,244 18,313,773
Deposits and other assets.............................. 184,710 199,441
Cash -- restricted under collateral agreements......... 522,486 1,122,075
----------- -----------
Total assets........................................... $19,430,794 $25,994,981
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
STEAKHOUSE PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 2, 2003
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
36 WEEKS 52 WEEKS
ENDED ENDED
September 2, DECEMBER 24,
2003 2002
----------- ------------
(UNAUDITED) (AUDITED)
Liabilities Not Subject to Compromise
Current liabilities
Current portion of long-term debt................. 1,858,731 72,842
Accounts payable................................ 3,016,194 2,654,497
Accrued liabilities............................... 4,570,055 6,515,612
Accrued payroll costs............................. 1,800,525 2,521,852
Net liabilities of Pacific Basin Foods, Inc. in
Liquidation .................................... -- 1,057,463
----------- -----------
Total current liabilities.............................. 11,245,505 12,822,266
Long-term debt, net of current portion................. 1,643,064 2,115,643
Deferred tax liability................................. 119,411 119,411
Deferred gain on sale-leaseback........................ -- --
Deferred rent.......................................... -- --
----------- -----------
Total liabilities not subject to compromise............ 13,007,980 15,057,320
Liabilities subject to compromise...................... 27,616,684 31,833,329
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............................. 12,040,750 12,040,750
Accumulated deficit.................................... (33,096,235) (32,798,033)
----------- -----------
Total stockholders' equity (deficit)................... (21,193,870) (20,895,668)
----------- -----------
Total liabilities and stockholders' equity............. $19,430,794 $25,994,981
=========== ===========
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
SEPTEMBER 2, SEPTEMBER 3,
2003 2002
------------ ------------
(UNAUDITED) (UNAUDITED)
Revenues.......................................... $ 16,176,884 $ 20,499,712
Cost of sales
Food and beverage................................. 5,808,083 7,133,511
Payroll and payroll related costs................. 5,924,467 7,647,438
Direct operating costs............................ 3,828,875 5,118,405
Depreciation and amortization..................... 428,108 649,840
------------ ------------
Total cost of sales............................... 15,989,533 20,549,194
------------ ------------
Gross profit (loss)............................... 187,351 (49,482)
General and administrative expenses............... 894,359 1,053,251
------------ ------------
Loss before other expense......................... (707,008) (1,102,733)
Other income (expense)
Interest expense and financing costs, net......... (495,087) (522,794)
Other income...................................... 99,590 35,452
------------ ------------
Total other (expenses) ........................... (395,497) (487,342)
Loss before reorganization items, provision for
income taxes, and discontinued operations...... (1,102,505) (1,590,075)
Reorganization items:
Gain on disposal of property & equipment 624,672 769,797
Professional fees................................. (506,827) (349,917)
Loss before provision for income taxes ------------ ------------
and discontinued operations.................... (984,660) (1,170,195)
Provision for income taxes........................ 30,000 30,000
------------ ------------
Loss before discontinued operations............... (1,014,660) (1,200,195)
Loss from discontinued operations,
net of income taxes............................ 0 (216,343)
------------ ------------
Net loss.......................................... $ (1,014,660) $ (1,416,538)
------------ ------------
Earnings (loss) per share
Basic and Dilutive (loss) from continuing
operations........................................ $ (0.30) $ (0.36)
============ ============
Basic and Dilutive (loss) from discontinued
operations........................................ $ -- $ (0.06)
============ ============
Basic and Dilutive (loss) per share $ (0.30) $ (0.42)
============ ============
Weighted-average shares outstanding
Basic.......................................... 3,386,522 3,386,522
============ ============
Diluted........................................ 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
36 WEEKS 36 WEEKS
ENDED ENDED
SEPTEMBER 2, SEPTEMBER 3,
2003 2002
------------ ------------
(UNAUDITED) (UNAUDITED)
Revenues.......................................... $ 54,106,361 $ 68,001,871
Cost of sales
Food and beverage................................. 19,317,549 23,822,815
Payroll and payroll related costs................. 19,274,392 23,868,995
Direct operating costs............................ 12,578,729 16,602,812
Depreciation and amortization..................... 1,343,348 2,089,905
------------ ------------
Total cost of sales............................... 52,514,018 66,384,527
------------ ------------
Gross profit...................................... 1,592,343 1,617,344
General and administrative expenses............... 3,339,089 3,329,690
------------ ------------
Loss before other income (expense)................ (1,746,746) (1,712,346)
Other income (expense)
Interest expense and financing costs, net......... (1,722,980) (1,627,531)
Loss on disposal of fixed assets.................. 0 (94,328)
Other income...................................... 189,119 57,032
------------ ------------
Total other income (expense)...................... (1,533,861) (1,664,827)
Loss before reorganization items, provision for
income taxes, and discontinued operations...... (3,280,607) (3,377,173)
Reorganization items:
Gain on disposal of property & equipment.......... 2,856,950 2,361,507
Professional fees................................. (842,008) (981,808)
------------ ------------
Loss before income taxes and discontinued
operations..................................... (1,265,665) (1,997,474)
Provision for income taxes........................ 90,000 89,758
------------ ------------
Loss before discontinued operations............... (1,355,665) (2,087,232)
Income(loss)from discontinued operations,
net of income taxes ........................... 1,057,463 (650,766)
------------ ------------
Net loss.......................................... $ (298,202) $ (2,737,998)
------------ ------------
Earnings (loss) per share
Basic earnings (loss) from continuing
operations........................................ $ (0.40) $ (0.62)
=========== ============
Basic earnings (loss) from discontinued
operations........................................ $ 0.31 $ (0.19)
=========== ============
Basic earnings (loss) per share $ (0.09) $ (0.81)
=========== ============
Diluted earnings (loss) from continuing
operations........................................ $ (0.30) $ (0.36)
=========== ============
Diluted earnings (loss) from discontinued
operations........................................ $ -- $ (0.06)
=========== ============
Diluted earnings (loss) per share $ (0.30) $ (0.42)
=========== ============
Weighted-average shares outstanding
Basic.......................................... 3,386,522 3,386,522
=========== ============
Diluted........................................ 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
36 WEEKS 36 WEEKS
ENDED ENDED
SEPTEMBER 2, SEPTEMBER 3,
2003 2002
------------ ------------
Net loss from continuing operations......................... $(298,202) $(2,087,232)
Net income (loss) from discontinued operations ............. 1,057,463 (650,756)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities
Depreciation and amortization.......................... 1,343,348 2,089,905
Gain on disposal of rejected leases.................... (2,856,950) (2,361,507)
(Increase) decrease in operating assets................. 3,449,433 657,876
Increase (decrease) in operating liabilities................ (2,586,651) (31,257,832)
Increase in liabilities subject to compromise............... (3,335,429) 33,623,247
----------- -----------
Net cash provided by (used in) continuing operating
activities.................................................. (4,284,451) 13,691
Net cash provided by discontinued
operating activities........................................ 0 37,174
----------- -----------
Net cash provided by (used in) operating activities......... (4,284,451) 50,865
----------- -----------
Cash flows from investing activities
Purchase of furniture and equipment......................... (112,782) (158,909)
Gain on disposal of property and equipment.................. 1,346,024 675,000
----------- -----------
Net cash provided by continuing investing activities........ 1,233,242 516,091
----------- -----------
Cash flows from financing activities
Proceeds from DIP financing ............................... 1,500,000 0
Principal payments in debt and capital leases............... (182,638) (185,236)
Payments on notes payable................................... (461,520) (184,052)
----------- -----------
Net cash used in continuing financing activities............ 855,842 (369,288)
Net cash (used in) discontinued financing
activities.................................................. 0 (23,627)
----------- -----------
Net cash used in financing activities....................... 855,842 (392,915)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (2,195,367) 174,041
Cash and equivalents, beginning of period................... 2,750,673 1,107,889
----------- -----------
Cash and equivalents, end of period......................... $ 555,306 $ 1,281,930
----------- -----------
----------- -----------
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
thirty-six week period ended September 2, 2003 are not necessarily indicative of
the results to be expected for the full year ending December 30, 2003. 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 24, 2002.
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 thirty-six week period ended September 2, 2003, the
Company maintained a current ratio of 0.28-to-1, which arose from a working
capital deficit of $8,042,151. In addition, certain debt is in default 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. On February 15, 2002,
the Company filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code. If the Company is unable to generate profits and unable
to obtain financing for its working capital requirements, or is otherwise unable
to implement a plan acceptable to the Bankruptcy Court that recognizes its debt
obligation, 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, 2003. 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 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.
7
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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. The Company believes that the Bankruptcy Plan will be
approved by the creditors by December 2003, and the reorganization will be
completed by the end of 2003.
On July 28, 2003 the U.S. Bankruptcy Court Central District of California -
Riverside Division confirmed and the Official Creditor's Committee authorized
Steakhouse Partners, Inc and its wholly owned subsidiary, Paragon Steakhouse
Restaurants, to obtain post petition debtor-in-possession financing in the sum
of $5.0 million. Upon Confirmation, the financing will convert into 90% of the
common stock of the reorganized debtor and the remaining 10% to be issued to
certain creditors. Under the forthcoming plan, existing equity interests in the
debtor would be canceled upon confirmation. Per that order and the bylaws of the
debtor, effective July 30, 2003, A. Stone Douglass was appointed and performed
the duties of chief executive officer and president of the debtor.
On December 19, 2003 the U.S. Bankruptcy Court Central District of California -
Riverside Division confirmed approved the Joint Plan of Reorganization. Under
the terms of the Plan as of the effective date (December 31, 2003) the
Debtor-in-Possession financing as provided for by Steakhouse Investors, LLC.
will convert to 90% of the common stock and the balance of the Common Stock will
be given to the unsecured creditors as partial payment of their claims. The Plan
provides for general unsecured creditors to receive $6.0 million in cash and
notes, as well as, new common shares. The Plan estimates that the creditors
class will receive $0.50 - $0.70 for each dollar of allowed unsecured claim. All
existing Common Stock, stock options, warrants and preferred stock will be
cancelled as of the effective date.
Also the approved plan provides for the payment term(s) for all classes of
creditors. I-Dine (Secured) has stipulated to a note payable over 4 years plus
interest. Critical Capital (Secured) has agreed to a 6- year note, the first
three payable monthly interest only the last three principal and interest.
Priority taxes per applicable statute will have a four-year note principal and
interest. The unsecured creditors were broken down into two classes. The first
class was those creditors that were scheduled at less than $4,000. The general
unsecured creditors would be paid at $0.50 on the dollar within 30 days of the
effective date. The second class was those $4,000 and greater. They would
receive a $1.0 million down payment, within 30 days of the effective date and a
note for $5.0 million payable over three years (periodic payments) with no
interest.
Finally, the plan provided for the Company to assume 25 profitable restaurants
as its core. For all the other units, either the Company's leasehold interest
was sold or the leases were rejected as of the effective date. Any claims
associated with the rejected leases were provided for in the joint plan of
reorganization.
ACCOUNTING IMPACT
According to Statement of Position ("SOP") 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," the financial
statements of an entity in a Chapter 11 reorganization proceeding should
distinguish transactions and events that are directly associated with the
reorganization from those operations of the ongoing business as it evolves.
Accordingly, SOP 90-7 requires the following financial reporting and
accounting treatment:
o Balance Sheet - The balance sheet separately classifies liabilities
subject to compromise from liabilities not subject to compromise.
o Statement of Operations - Pursuant to SOP 90-7, revenues and
expenses, realized gains and losses, and provisions for losses
resulting from the reorganization and restructuring of the business
are reported in the statement of operations separately. Professional
fees are expensed as incurred.
o Statement of Cash Flows - Reorganization items are reported
separately within the operating, investing, and financing categories
of the statement of cash flows with respect to the financial
statements, or details of operating cash receipts and payments
resulting from the reorganization are disclosed in a supplementary
schedule.
NOTE 2 -- EARNINGS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share." Basic
earnings (loss) per share is computed by dividing income (loss) available to
common stockholders by the weighted-average number of common shares
outstanding. Diluted earnings (loss) per share is computed similar to basic
earnings (loss) per share except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares
were dilutive. Common equivalent shares are excluded from the computation if
their effect is anti-dilutive. The Company's common share equivalents consist
of stock options, warrants, convertible notes and convertible preferred stock.
8
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, 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 DISCONTINUED OPERATIONS
On October 11, 2002, the Company's wholly owned subsidiary, PBF, filed for
protection under Chapter 7 of the United States Bankruptcy Court in the Central
District of California, located in Riverside. The subsidiary ceased operations
effective as of the filing date. The Company's financial statements have been
retroactively adjusted to reflect the impact of the discontinuation of PBF.
The results of operations of PBF have been classified as discontinued operations
in the accompanying consolidated statements of operations for the periods ended
March 18, 2003 and March 19, 2002.
NOTE 5 -- SUBSEQUENT EVENTS
On December 19, 2003 the U.S. Bankruptcy Court confirmed the Joint Plan of
Reorganization. Under the terms of the Plan as of the effective date (December
31, 2003) the Debtor-in-Possession financing as provided for by Steakhouse
Investors, LLC will convert to 90% of the common stock and the balance of the
common stock will be given to the unsecured creditors as partial payment of
their claims. The Plan provides for general unsecured creditors to receive $6.0
million in cash and notes, as well as, new common shares. The Plan estimates
that the creditors class will receive $0.50 - $0.70 for each dollar of allowed
unsecured claim.
On December 31, 2003, the Company's joint plan of reorganization was confirmed
and the Company emerged from bankruptcy protection. In accordance with SOP 90-7
the Company implemented fresh-start accounting. Under SOP 90-7, the
reorganization fair value of the Company was allocated to its assets and
liabilities, its accumulated deficit was eliminated, and its new equity was
issued according to the Plan of Reorganization as if it were a new reporting
entity.
In accordance with fresh-start accounting, all assets and liabilities were
recorded at their respective fair market values upon emergence from Chapter 11.
Such fair values represented the Company's estimates based on independent
appraisals and valuations. Immaterial differences between estimated pre-petition
liabilities assumed by the Reorganized Company and the final settlement amounts
are recognized as they occur.
To facilitate the calculation of the enterprise value of the Reorganized
Company, the Company developed a set of financial projections. Based on these
financial projections and with the assistance of a financial advisor, the
enterprise value was determined by the Company, using various valuation methods,
including (i) a comparison of the Company and its projected performance to the
market values of comparable companies, (ii) a review and analysis of several
recent transactions of companies in similar industries to the Company, and (iii)
a calculation of the present value of the future cash flows under the
projections. The estimated enterprise value is highly dependent upon achieving
the future financial results set forth in the projections as well as the
realization of certain other assumptions, which are not guaranteed.
SOP 90-7 requires an allocation of the reorganization equity value in conformity
with procedures specified by APB 16, Business Combinations, as amended by SFAS
141, Business Combinations, for transactions reported on the basis of the
purchase method. The excess of reorganization value over fair value of net
assets ("goodwill") was approximately $18,900,000 as of December 31, 2003.
9
STEAKHOUSE PARTNERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 24, 2002 as well as other reports filed by the
Company with the Securities Exchange Commission. Factors that could cause actual
results to differ materially from these forward-looking statements include, but
are not limited to, the following:
General Factors
- general economic conditions,
- weather conditions, including those which affect buying pattern of our
customers,
- changes in consumer spending and our ability to anticipate buying
patterns and implement appropriate inventory strategies, competitive
pressures and other third party actions, ability to timely acquire
desired goods and/or fulfill labor needs at planned costs,
- ability to successfully implement business strategies and otherwise
execute planned changes in various aspects of the business, regulatory
and legal developments,
- our ability to attract, motivate and/or retain key executives and
associates,
- our ability to attract and retian customers, other factors affecting
business beyond our control.
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes for the
thirty-six weeks ended September 2, 2003 included in this Report, and the
audited consolidated financial statements and related footnotes for the year
ended December 24, 2002 included in the Company's Annual Report on Form 10-K for
fiscal 2002. 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 40 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 $24.74 (including alcoholic beverages) and it
currently serves over 3.0 million meals annually. The Company operates
principally under the brand names of Hungry Hunter's, Hunter's Steakhouse,
Mountain Jack's and Carvers. 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 is a wholly owned subsidiary of the Company.
BANKRUPTCY FILING
On February 15, 2002, Steakhouse filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court"). On February 19, 2002, PSR also filed voluntary petitions
for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
The Filing was made in response to certain notes aggregating $1,734,285, which
the Company was unable to pay. Steakhouse and PSR (collectively, the "Debtors")
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. The Company believes that the creditors committee will
approve the Bankruptcy Plan by December 2003, and the reorganization will be
completed by the end of 2003.
As a consequence to the Filing, all pending litigation and claims against the
Debtors are stayed, and no party may take action to realize its pre-petition
claims, except pursuant to order of the Bankruptcy Code. It is the Debtors'
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 Filing and any reorganization plan may have on the shares of preferred or
common stock of the Debtors. Generally, under the provisions of the Bankruptcy
Code, holders of equity interests may not participate under a plan of
reorganization unless the claims of creditors are satisfied in full under the
plan or unless creditors accept a reorganization plan that permits holders of
equity interest to participate. The formulation and implementation of a plan of
reorganization could take a significant period of time. The accompanying
10
consolidated financial statements have been prepared on a going concern basis,
which contemplates the continuation of operations, realization of assets, and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Filing, such realization of certain of the Debtors' assets and
liquidation of certain of the Debtors' liabilities are subject to significant
uncertainty. Furthermore, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated financial statements,
which do not give effect to any adjustments to the carrying value or
classification of assets or liabilities that might be necessary as a consequence
of a plan of reorganization. The Debtors received in February, 2002 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.
Subsequent to the filing, the Company commenced a balloting and solicitation
process with respect to the Plan of Reorganization, which concluded in December
2003. On December 19, 2003, the Company's Plan of Reorganization was confirmed
by the Court. Upon confirmation of the Plan, effective December 31, 2003, the
entire balance of the DIP facility, including accrued interest, became due and
payable to Steakhouse Investors, LLC ("Steakhouse Investors"), and Steakhouse
Investors received 90% of the new common stock of the reorganized company in
exchange for a full and complete release of the Company's obligations under the
DIP agreement other than interest. The outstanding preferred stock, common
stock, stock options, and warrants of the Company before confirmation will be
canceled. The Company's financial affairs will be completely restructured under
circumstances, whereby Steakhouse Investors will exchange its $5,000,000
super-priority administrative claim for 90% of the newly issued common stock in
the reorganized company. In addition, all of the Company's pre-petition
liabilities will be completely restructured upon confirmation of the plan,
whereby the Company will be obligated to pay the following obligations:
1. Priority tax claim in the amount of approximately $1,921,000 will be paid in
the following manner at the option of the Company: (a) in full on the
effective date of the Bankruptcy Plan or (b) paid over a six-year period
from the date of assessment with interest payable at a rate of 6% per annum.
2. Secured claims in the amount of approximately $2,151,000 will be paid as
follows: (a) $1,535,000 will be paid in full over a period of six years.
Interest only will be paid over the first three years, and the principal
will be paid over the remaining three years and (b) $616,000 will be deemed
paid upon the transfer of all of the assets and lease rights of one of the
Company's restaurants in Torrance, California.
3. Unsecured claims estimated to be between $8,700,000 to $12,700,000 will be
paid as follows: (a) general unsecured claim in the amount of $8,000,000 to
$12,000,000 will be paid an estimated recovery of 50% to 70%. The Company
will pay to the creditors $1,000,000 within 30 days of the effective date of
the Bankruptcy Plan and make payments under a $5,030,000 note payable, which
will be paid in the amount of $500,000 on each April, August, and December
of each year for the next three years. The note is non-interest-bearing and
due on or before December 2006. In addition, the general, unsecured
creditors will receive their pro rata share of 500,000 shares of common
stock, representing 10% of the new common stock of the Company and (b)
convenience claims in the amount of approximately $700,000 will be paid an
estimated recovery of 50%. Each allowed claim will receive its payment
within 30 days after the effective date of the Bankruptcy Plan.
On December 31, 2003, the Company's joint plan of reorganization was confirmed
and the Company emerged from bankruptcy protection. In accordance with SOP 90-7
the Company implemented fresh-start accounting. Under SOP 90-7, the
reorganization fair value of the Company was allocated to its assets and
liabilities, its accumulated deficit was eliminated, and its new equity was
issued according to the Plan of Reorganization as if it were a new reporting
entity.
In accordance with fresh-start accounting, all assets and liabilities were
recorded at their respective fair market values upon emergence from Chapter 11.
Such fair values represented the Company's estimates based on independent
appraisals and valuations. Immaterial differences between estimated pre-petition
liabilities assumed by the Reorganized Company and the final settlement amounts
are recognized as they occur.
To facilitate the calculation of the enterprise value of the Reorganized
Company, the Company developed a set of financial projections. Based on these
financial projections and with the assistance of a financial advisor, the
enterprise value was determined by the Company, using various valuation methods,
including (i) a comparison of the Company and its projected performance to the
market values of comparable companies, (ii) a review and analysis of several
recent transactions of companies in similar industries to the Company, and (iii)
a calculation of the present value of the future cash flows under the
projections. The estimated enterprise value is highly dependent upon achieving
the future financial results set forth in the projections as well as the
realization of certain other assumptions, which are not guaranteed.
SOP 90-7 requires an allocation of the reorganization equity value in conformity
with procedures specified by APB 16, Business Combinations, as amended by SFAS
141, Business Combinations, for transactions reported on the basis of the
purchase method. The excess of reorganization value over fair value of net
assets ("goodwill") was approximately $18,900,000 as of December 31, 2003.
11
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.
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. to 10:00 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 31 steakhouses operating under the brand names, Hungry Hunter's,
Hunter's Steakhouse and Mountain Jack's for which the average dinner check is
approximately $23.00 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 4 steakhouses operating in the upscale steakhouse-dining segment under
the Carvers brand name with an average check per guest of slightly less than
$29.00. 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.
12
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 is $26.80.
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 acquisition. 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 September 2, 2003 Compared to Twelve Weeks Ended
September 3, 2002
Revenues for the twelve-week period ended September 2, 2003 decreased $4,322,828
or 21.1% from $20,499,712 for the twelve-week period ended September 3, 2002 to
$16,176,884 for the same period in 2003. The main factors for the decline in
revenue were the soft economy and the adverse effect of Chapter 11 on
operations, which resulted in a same store sales decline of approximately 2.4%.
Also contributing to the revenue decline was the sale or closing of thirteen
units that were in operation during the twelve-week period ending September 3,
2002 but ceased operations prior to September 2, 2003.
Food and beverage costs for the twelve-week period ended September 2, 2003
decreased $1,325,428 or 18.6% from $7,133,511 for the twelve-week period ended
September 3, 2002 to $5,808,083 for the same period in 2003. Food and beverage
costs for the restaurants only as a percentage of restaurant revenues was 34.8%
for the twelve-week period ended September 3, 2002 compared to 35.9% for the
same period in 2003. This 1.1% increase is chiefly the result of higher beef
prices, first experienced by our units in the second quarter of 2003. Beef
prices continued to rise (mostly as a result of supply and demand issues)
throughout the year peaking in October 2003.
Payroll and payroll related costs for the twelve-week period ended September 2,
2003 decreased $1,722,971 or 22.5% from $7,647,438 for the twelve-week period
ended September 3, 2002 to $5,924,467 for the same period in 2003. Payroll and
payroll related costs as a percentage of revenues were 37.3% for the twelve-week
period ended September 3, 2002 compared to 36.6% for the same period in 2003. In
spite of the additional costs associated with closing restaurants and bankruptcy
related issues, payroll and payroll related costs decreased as a percentage of
revenue as a result of eliminating a number of under performing operating units.
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 September 2, 2003 decreased $1,289,530 or 25.2% from
$5,118,405 for the twelve-week period ended September 3, 2002 to $3,828,875 for
the same period in 2003. Direct operating costs as a percentage of revenues were
25.0% for the twelve-week period ended September 3, 2002 compared to 23.7% for
the same period in 2003. In spite of the additional costs associated with
closing restaurants and bankruptcy related issues, direct operating costs
decreased as a percentage of revenue as a result of eliminating a number of
under performing operating units.
Depreciation and amortization for the twelve-week period ended September 2, 2003
decreased $221,732 or 34.1% from $649,840 for the twelve-week period ended
September 3, 2002 to $428,108 for the same period in 2003. The decrease is
principally due to the elimination of thirteen under performing Paragon
Steakhouse Restaurants.
13
General and administrative expenses for the twelve-week period ended September
2, 2003 decreased $158,892 or 15.1% from $1,053,251 for the twelve-week period
ended September 3, 2002 to $894,359 for the same period in 2003. General and
administrative expenses as a percentage of revenues was 5.1% for the twelve-week
period ended September 3, 2002 compared to 5.5% for the same period in 2003. The
decrease in absolute dollars is chiefly the result of a full twelve-week period
of senior management attrition and reductions in spending, specifically; travel,
consulting and temporary help. The reduction in senior management without
significant severance expense included: Vice-President of Real Estate and
Development, Vice-President of Marketing and a Mid-West district leader.
Interest expense and financing costs, net for the twelve-week period ended
September 2, 2003 decreased $27,707 or 5.3% from $522,794 for the twelve-week
period ended September 3, 2002 to $495,087 for the same period in 2003.
The net gain on reorganization related items $624,672 is the result of the
removal of assets and accumulated depreciation and capital lease obligations due
to the rejection or sale of two poorly performing units and the sale of a liquor
license, partially offset by legal fees directly attributable to the bankruptcy
process.
Net loss before discontinued operations net for the twelve-week period ended
September 2, 2003 decreased $185,535 or 15.5% from $1,200,195 for the
twelve-week period ended September 3, 2002 to $1,014,660 for the same period in
2003. The decrease is principally due to the gain on the disposing of property
and equipment (through rejection of the lease and/or lease termination ) of
under performing units and the reduction in general and administrative expenses.
Partially offsetting these decreases was higher beef costs and the high cost of
the bankruptcy process.
Thirty-six Weeks Ended September 2, 2003 Compared to Thirty-six Weeks Ended
September 3, 2002
Revenues for the thirty-six week period ended September 3, 2002 decreased
$13,895,510 or 20.4% from $68,001,871 for the thirty-six week period ended
September 3, 2002 to $54,106,361 for the same period in 2003. . The main factors
for the decline in revenue were the soft economy and the adverse effect of
Chapter 11 on operations, which resulted in a same store sales decline of
approximately 1.6%. Also contributing to the revenue decline was the sale or
closing of under performing operating units that were in operation during the
thirty-six week period ended September 3, 2002 but ceased operations prior to
September 2, 2003. The Company had 63 operating units when it filed for
bankruptcy on February 19, 2002.
Food and beverage costs for the thirty-six week period ended September 2, 2003
decreased $4,505,266 or 18.9% from $23,822,815 for the thirty-six week period
ended September 3, 2002 to $19,317,549 for the same period in 2003. Food and
beverage costs for the restaurants only as a percentage of revenues was 35.7%
for the thirty-six week period ended September 2, 2003 compared to 35.1% for the
same period in 2002. This 0.6% increase as a percentage of revenue is chiefly
the result of higher beef prices, first experienced by our units in the second
quarter of 2003. Beef prices continued to rise (mostly as a result of supply and
demand issues) throughout the year peaking in October 2003.
Payroll and payroll related costs for the thirty-six week period ended September
2, 2003 decreased $4,594,603 or 19.2% from $23,868,995 for the thirty-six week
period ended September 3, 2002 to $19,274,392 for the same period in 2003.
Payroll and payroll related costs as a percentage of revenues were 35.6% for the
thirty-six week period ended September 2, 2003 compared to 35.1% for the same
period in 2002. This 0.5% increase as a percentage of revenue reflects the costs
associated with closing restaurants and bankruptcy related issues partially
offset by eliminating a number of under performing operating units.
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
thirty-six week period ended September 2, 2003 decreased $4,024,083 or 24.2%
from $16,602,812 for the thirty-six week period ended September 3, 2002 to
$12,578,729 for the same period in 2003. These costs as a percentage of revenues
were 23.2% for the thirty-six week period ended September 2, 2003 compared to
24.4% for the same period in 2002. . In spite of the additional costs associated
with closing restaurants and bankruptcy related issues, direct operating costs
decreased as a percentage of revenue as a result of eliminating a number of
under performing operating units.
Depreciation and amortization for the thirty-six week period ended September 2,
2003 decreased $746,557 or 35.7% from $2,089,905 for the thirty-six week period
ended September 3, 2002 to $1,343,348 for the same period in 2003. The decrease
is principally due to the rejection and/or sale of under performing operating
units. The Company had 63 operating units when it filed for bankruptcy on
February 19, 2002.
General and administrative expenses for the thirty-six week period ended
September 2, 2003 increased $9,399 or 0.3% from $3,329,690 for the thirty-six
week period ended September 3, 2002 to $3,339,089 for the same period in 2003.
General and administrative expenses as a percentage of revenues was 6.2% for the
thirty-six week period ended September 2, 2003 compared to 4.9% for the same
period in 2002. As absolute dollars remain constant year-to-year (as further
staffing decreases would not be fully realized until the third quarter) the
increase in percentage relationship to revenue is chiefly the result of the
decline in revenue.
13
Interest expense and financing costs, net for the thirty-six week period ended
September 2, 2003 increased $95,449 or 5.9% from $1,627,531 for the thirty-six
week period ended September 3, 2002 to $1,722,980 for the same period in 2003.
The net gain on reorganization related items of $2,856,950 is the result of the
removal of assets and accumulated depreciation and capital lease obligations due
to the rejection and/or sale of poorly performing units and the sale of a liquor
license, partially offset by legal fees directly attributable to the bankruptcy
process.
Gain from discontinued operations the thirty-six week period ended September 2,
2003 was $1,057,463. On October 11, 2002 Pacific Basin Foods ceased operations
and file for Chapter 7 with the United States Bankruptcy Court in Riverside,
California. The Company had a net liability of $1,057,463 as of December 24,
2002. As Pacific Basin Foods has legally and practically ceased operations the
net liability was recognized as one time income of discontinued operations, net
of taxes.
Net loss before discontinued operations net for the thirty-six week period ended
September 2, 2003 decreased $731,567 from $2,087,232 for the thirty-six week
ended September 3, 2002 to $1,355,665 for the same period in 2003. The decrease
is principally due to the gain on the disposing of property and equipment
(through rejection of the lease and/or lease termination ) of under performing
units and gain from discontinued operations. Partially offsetting these
decreases was higher beef costs and the high cost of the bankruptcy process.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a cash and cash equivalents balance of $555,306 at September 2,
2003. 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.
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.
On July 28, 2003 the United States Bankruptcy Court in Riverside, California
authorized Steakhouse Partners, Inc and its wholly owned subsidiary; Paragon
Steakhouse Restaurants to obtain post petition debtor-in-possession financing.
Per that order the Company was allowed to begin to borrow up to $5.0 million at
an annual rate of 6.0%. Also per that order and the bylaws of the debtor,
effective July 30, 2003, A. Stone Douglass was appointed and will perform the
duties of chief executive officer and president of the debtor.
The Company has a cash and cash equivalents balance of $2,205,221 at December
30, 2003. During the year ended December 30, 2003, the Company maintained a
current ratio of 0.36 to 1, which arose from a working capital deficit of
$7,380,059 after adjusting for the Debtor in Possession note that converted to
equity upon plan confirmation.
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
economics of scale and/or increases in menu prices, although there is no
assurance that such offsets will continue.
CRITICAL ACCOUNTING POLICIES
The following discussion addresses our most critical accounting policies, which
are those that are most important to the portrayal of our financial condition
and results, and that require significant judgment.
SELF-INSURANCE
In the past the Company was self-insured for certain losses related to general
liability and workers' compensation. The Company maintained stop loss coverage
with third party insurers to limit its total exposure. The self-insurance
liability represents and estimate of the ultimate cost of old claims incurred as
of the balance sheet date. The estimated liability is based upon analysis of
historical data and actuarial estimates, and is reviewed by the Company on a
quarterly basis to ensure that the liability is appropriate. If for any reason
in the final settlement of these old claims the results differ from our
estimates, our financial results could be impacted.
UNEARNED REVENUE
The Company sells gift certificates and recognizes a liability, which is
included in unearned revenue, for gift certificates outstanding until the gift
certificate is redeemed or considered to be unredeemable. There gift
certificates do not carry an expiration date so if all outstanding gift
certificates are redeemed at once, our financial results (cash) would be
impacted.
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PROPERTY, FIXTURES AND EQUIPMENT
Property, fixtures and equipment are recorded at cost. We expense repair and
maintenance costs incurred to maintain the appearance and functionality of the
restaurant that do not extend the useful life of any restaurant asset or are
less than $1,000. Depreciation is computed on the straight-line basis over the
following estimated useful lives:
Buildings and building improvements 20 years
Furniture and fixtures and equipment 5 years
Our accounting policies regarding property, fixtures and equipment include
certain management judgments and projections regarding the estimated useful
lives of these assets and what constitutes increasing the value and useful life
of existing assets. These estimates, judgments and projections may produce
materially different amounts of depreciation expense than would be reported if
different assumptions were used.
IMPAIRMENT OF LONG LIVED ASSETS
We assess the potential impairment of identifiable intangibles, long-lived
assets and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Recoverability of assets is measured
by comparing the carrying value of the asset to the future cash flows expected
to be generated by the asset. In evaluating long-lived restaurant assets for
impairment, we consider a number of factors such as:
a) Restaurant sales trends;
b) Local competition;
c) Changing demographic profiles;
d) Local economic conditions;
e) New laws and government regulations that adversely affect sales
and profits; and
f) The ability to recruit and train skilled restaurant employees.
If the aforementioned factors indicate that we should review the carrying value
of the restaurant's long-lived assets, we perform an impairment analysis.
Identifiable cash flows that are largely independent of other assets and
liabilities typically exist for land and buildings, and for combined fixtures,
equipment and improvements for each restaurant. If the total future cash flows
are less than the carrying amount of the asset, the carrying amount is written
down to the estimated fair value, and a loss resulting from value impairment is
recognized by a charge to earnings.
Judgments and estimates made by us related to the expected useful lives of
long-lived assets are affected by factors such as changes in economic conditions
and changes in operating performance. As we assess the ongoing expected cash
flows and carrying amounts of our long-lived assets, these factors could cause
us to realize a material impairment charge.
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 September 2, 2003, the Company had cash in
checking and money market accounts. Because of the short maturities of these
instruments, a sudden change in market interest rates would not have a material
impact on the fair market value of these assets.
FOREIGN CURRENCY EXCHANGE RISK. The Company does not have any foreign currency
exposure because it currently does not transact business in foreign currencies.
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ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports
required to be filed under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's President, who serves as the Company's principal executive officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
PART 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
On December 19, 2003 the U.S. Bankruptcy Court confirmed approved the Joint Plan
of Reorganization. Under the terms of the Plan as of the effective date
(December 31, 2003) the Debtor-in-Possession financing as provided for by
Steakhouse Investors, LLC will convert to 90% of the common stock and the
balance of the Common Stock will be given to the unsecured creditors as partial
payment of their claims. The Plan provides for general unsecured creditors to
receive $6.0 million in cash and notes, as well as, new common shares. The Plan
estimates that the creditors class will receive $0.50 - $0.70 for each dollar of
allowed unsecured claim. All pre-existing Common Stock, stock options, warrants
and preferred stock will be cancelled as of the effective date.
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
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(b) Reports on Form 8-K.
1. Form 8-K dated December 31, 2003 reporting that the Order was entered by the
United States Bankruptcy Court for the Central District of California -
Riverside Division confirming Steakhouse Partners, Inc. and its wholly owned
subsidiary, Paragon Steakhouse Restaurants the Joint Plan of Reorganization.
Under the terms of the Order the Plan will become effective December 31, 2003,
and the debtor-in-possession financing, that was approved by the Court on August
13, 2003 will convert to 90% of the Common Stock. The balance of the Common
Stock will be distributed to the Unsecured Creditors as partial payment in
accordance with the Plan. Also, all pre-existing Common Stock, Stock Options,
Preferred Stock and Warrants will be cancelled at that time.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEAKHOUSE PARTNERS INC.
BY: /S/ A Stone Douglass BY: /S/ Joseph L Wulkowicz
....................................... .....................................
A Stone Douglass Joseph L Wulkowicz
President, Secretary and Director Chief Financial Officer and Assistant
(Serving as principal executive Secretary
officer) (Serving as principal financial and
accounting officer)
Date: April 27, 2004
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